I was required to post a bond of $1000 to the state tax department in order to receive a sales tax permit. I will get this back in two years. Is this expense deductible?

[kwatson]

If it is, how is the returned bond handled at that time? Would it be income?

[Coleen3 · Accepted solution]

Yes and yes. It is a cost of doing business in the present, but once it is refunded to you, it is no longer an expense and must be recorded as "other income" with an explanation.

[kwatson]

Thank you! It was paid out of personal funds, but it's still "other income"? Just clarifying for 2019's return.

[Coleen3]

I assume you have a Schedule C. Do you keep a separate bank account for it? You should. If not, since you and your Sole Proprietorship are virtually one and the same, then maybe. Did you pay because you had insufficient profit? If you are putting your own cash into the "business", then you have the possibility of mistaking it for income. If you have insufficient profit, just forget the expense and reimbursement.

[kwatson]

Thank you again, this business was a start up this year, so personal funds were used for those expenses. Paid just after my start up date, so it's not a start up cost. I'll just plan for the return "income" in two years. I need all the deductions I can legally take this year.