DEDUCTING EXPENSES AND 1099s

Larry, I moved my business at the end of 2009. I needed to upgrade the space I had leased, and called the general contractor I had used in the past. I knew he was no longer in that business, but I asked him if he could recommend someone else to do this small job. He called a few days later and said he had someone, and he would charge me $18k for the work I needed done. I agreed and the new person came that evening along with my friend (the ex-contractor) to evaluate. We agreed to the 18K and the work proceeded the following week with me funding the materials as we went along. All of the receipts were passed from the new contractor to my "friend" --- I had offered to pay my friend for the finders fee,of course, but we had no formal amount (I was thinking $2,000-2,500) nor did we have a written contract. I know this was very foolish of me, but this man had become a friend socially as well as in the workplace, we had done volunteer projects in the community together, and had shared our business concerns over coffee many times over the past 6 years, so I was comfortable with his ethics.

As it turns out, he charged me $5,000 for the finders fee (nothing I can do about that) -but he also had the 2nd contractor give him all of the receipts for the job, even those that were charged to my AMEX bill. At the end of the project (and during the course of it as well) I kept asking for the receipts for my income tax purposes. He would never bring them to me. At the end of 2009 he put a 1099 on the 2nd contractor, but refused to give me his own Social Security number. I am livid as well as disappointed. How do I write off my expenses without receipts and how do I let the IRS know about his income without his social security number? I know the deadline was Jan 30th of this year, but I can't budge this information from the man. I want to handle this correctly so I don't get stuck with the taxes on this amount. The job ran over, by the way, and I paid $24,500 for the materials and work.

Thank you,

Brad

Bad luck Brad. I thought that if they had been corporations you would not have been required to send a 1099. You really have two questions:

First, regarding deducting your expenses:

You need to discuss this with the person that is preparing your return. If I were preparing the return I would still deduct the expenses even though you do not have documentation. If you are not audited - no problem. If the IRS does pay a visit then you would have to show your cancelled checks and credit card receipts. You could even go to the various vendors and request copies of the invoices. Additionally, if you were audited the auditor could request the records from the two contractors. That would get their attention.

Second, regarding the 1099’s:

There are a couple of things you could do. First you could submit the 1099’s and put in the ID number that the vendor would not provide. The second option is to just not send them a 1099. The penalty for not submitting a 1099 is $50, up to $100 per 1099 so it would not be real devastating.

Third, you mentioned that the one contractor was a friend of yours. In the future, choose your friends wisely.

Again, check with the person preparing your return. He or she is the one that has to sign and take some responsibility for what is on the return. Best of luck. I hope this helped.

Larry Kopsa CPA