Q:

Subject: 1099-MISC

 

Hi Kerry,

 

My daughter is a salaried employee.  During the past year she received reimbursement for work-related travel expenses via an allowed mileage rate.  She just received a 1099-MISC reporting the total of the reimbursed amounts as if it were compensation.  The amount is too small to be deducted as an employee expense.  My tax software wants to treat this as taxable income which hardly seems fair or appropriate.  What should she do?  Thanks.

 

I forgot to mention that the amounts are being reported under Block 7, Non-employee expenses.

A:

She needs to list all of her personally incurred out of pocket business related expenses, including appropriate miles on her car  on Form 2106.  The reimbursements received should be reported on Line 7 in the appropriate columns.  As the Step 3 portion of the 2106 will show, if she received more in reimbursements than her expenses were, the excess amount only will have to be shown as income on Line 7 of her 1040.  If her net expenses were higher than the reimbursements, that excess will be entered on Schedule A.

If she doesn’t have enough deductions to itemize and uses the standard deduction, she should still include the 2106 and Schedule A with her 1040 just to show IRS that the amount from the 1099-MISC has been reported in the proper place (Line 7 of the 2106).  If these schedules aren’t included with the 1040, IRS could very easily mistake the 1099-MISC amount as unreported income and send your daughter a bill for taxes on that in a few years’ time, plus interest and penalties.  I have seen that happen on several occasions.

Your daughter should really be working with a professional tax advisor to make sure she is claiming all of the out of pocket business expenses to which she is entitled.

I hope this helps.

Kerry Kerstetter

Q:

Subject: Income recognition problem

 

Hi Kerry,

I love your blog, esp. the cartoons, and I had a question for you. I run

a website where I earn affiliate income and I use the cash accounting

method (where you recognize income when it’s paid, not when the work is

performed) with my sole proprietorship. My problem is that the program

will recognize monies paid out on Dec. 31st via check as part of my

earnings in 2006 on the 1099 and I didn’t know if I had to as well and

whether that discrepancy would be a problem.

 

Thanks,

A:

I’m assuming that you’re referring to how to handle a check to you that was printed on 12/31/06, but not actually received by you until sometime in early January 2007. 

By not having constructive or actual receipt of the money, you are correct that you do not have to pay tax on it on your 2006 income tax return, even if the payor has reported it to IRS as 2006  income. The way I have long handled this very common situation is to include the full 1099 amount on the Schedule C line for gross revenues and then on a line below that, enter a negative amount for the check not received until 2007, with a description of what happened.  This way, the IRS computer will match the 1099 amount and the actual amount of income you are paying tax on will be accurate.

You then need to be sure to make the same kind of adjustment in the opposite direction on your 2007 Schedule C.  You need to add the January 2007 payment received to the 2007 1099 amount. 

You really should be  addressing issues such as this with your own personal professional tax advisor.  If you don’t have one, you should know how I feel about that if you have been reading my blog for any length of time.

Good luck.  I hope this helps.

Kerry Kerstetter

Follow-up:

Hi Kerry,
Thank you so very much for the response and you understood my poorly explained question perfectly! And yes, after reading your blog for several months, I do know your stance on hiring a professional and I have considered it – I just haven’t gotten all my docs together so I have been putting it off.

Thanks again and if you ever have blog related questions, feel free to shoot me an email 🙂