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Posted by Stuart A. Bronstein on January 3, 2007, 10:30 pm
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sethb@panix.com (Seth Breidbart) wrote:
>> sethb@panix.com (Seth Breidbart) wrote:
>>> But if they lose the case, the client doesn't have to pay
>>> anything. Is that treated as cancellation of debt income?
>> Under the contract there's no debt if they lose, so probably
>> not.
> So the IRS claims that from X's point of view, the payment
> is a loan to Y, but from Y's point of view, there is no
> debt? Is the IRS allowed to get away with such an
> inconsistent position?
I don't specifically know how the IRS wants to treat clients
when they lose. But I don't see that their position is
inconsistent. From the client's standpoint, it's a
contingent debt. They owe it if they win.
From the standpoint of the lawyer they're saying that the
money spent on out of pocket costs might be paid back, so
they are not deductible when paid. I suppose they might be
deductible by the client if they were business expenses, but
that would be seldom or never the case.
> It seems to me the lawyer is paying out money in Year 1 in
> hopes (expectation) of receiving more money in Year 2; since
> the payments are "ordinary and necessary business expenses"
> I'd think they'd be deductible for a cash-basis taxpayer.
One would think. But that's not the IRS position.
Stu
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Posted by jo on December 29, 2006, 8:52 pm
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Stuart A. Bronstein wrote:
>> My clients reimburse minor expenses I incur while doing
>> genealogy research for them (parking, reproduction..).
>> Until I invoice them and receive payment, these expenses
>> appear on my [Quicken] records as categories under Office
>> Expenses, not as A/R, since I'm on an cash basis. So what
>> should I do with these expenses that are on my records
>> across the year end boundary because I haven't invoiced for
>> them yet?
> Contingent fee lawyers run into this problem a lot. The IRS
> says that you have to treat the expenses as loans to the
> client. So there is no deduction when the expense is made,
> and no income when it is paid back.
>
> Stu
>
> Moderator:
> In the case of "jo", it would help to work against a
> retainer which may be difficult to get.
>
> There is a worse problem in accrual accounting where
> billings and retainers become revenue in the period in
> which they occur.
Thanks,Stu and Moderator. As I interpret what you're
saying, it matches what my inclination was. Right? (another
reason to never just import Quicken figures into Turbo Tax).
Now I could complicate this by mentioning that it may happen
that someone stiffs me. It hasn't happened yet, but I
operate on such a flimsy basis of trust with people all over
the country that it is entirely possible. I can think of one
who currently is a prime candidate. In that case, am I
right that the reimbursible expense I incurred would become
an actual expense next year.
Many/most of my colleagues do get retainers, and I
occasionally ask for up front money if I know I'm going to
have to shell out a lot of money for a particular document
("lot" doesn't come near what the rest of you in "real"
businesses consider a lot<g>). I just seem to do well with
a very casual and trusting style of business so far (it's
very small,part time since I'm on disability). Asking for
retainers on one hand seems more professional, but on the
other hand, these people don't know me at all, except for my
presence on certain genealogy research internet lists, so
they would have to trust sending money to a stranger. I
imagine unused retainers could also add their own brand of
complication at year end. As long as I don't get stiffed
by anyone and know how to treat the expected reimbursed
expenses, I'll continue as is.
Related: What's the best way to handle them in Quicken H &B?
Should/can I transfer them to an A/R account just for the
year end period and transfer them back to an expense (if
that's possible) next year, so that when they ARE
reimbursed, the expense washes and doesn't go negative? If
I'm not being clear, feel free to ask.
jo
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<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
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<< Copyright (2006) - All rights reserved. >>
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Posted by Shyster1040 on January 3, 2007, 10:49 pm
Please log in for more thread options Costs incurred in 2006 that will not be reimbursed until
2007 should, as a general rule, be deducted in 2006 by a
cash-basis taxpayer. Under the general rule of
deductibility, the cost has been incurred in 2006 and any
deduction therefore is allowable only for the year in which
incurred.
Under the tax benefit rule, amounts received as
reimbursement in 2007 are included in income for 2007,
effectively offsetting the deduction claimed for 2006.
This does, in fact, produce a bit of a distortion in the
"true reflection of income" principle because your net
taxable income is understated for 2006 and overstated for
2007; however, the distortion is generally relatively benign
and is usually outweighed by the record-keeping and
administrative complexities that would arise if the incurred
expense were carried over until reimbursement was received.
To the extent that a cost is incurred and then reimbursed in
the same tax year, the items are generally netted against
each other, and only the excess reported as either a
deductible expense or as income.
The analogy to expenses an attorney advances to a client is
probably inapt in this case. Generally, under state law, a
lawyer is not permitted to pay the costs of representation
for the client, which costs remain the client's obligation.
The lawyer may, however, advance those costs to the client
provided that such advancement is made with the
understanding that the client remains ultimately responsible
for any unpaid costs and is required to repay such amounts
to the lawyer.
In other words, under applicable state law, the lawyer
really is loaning those funds to the client and is not
paying an expense that is properly part of the lawyer's cost
of doing business and merely adding those costs to the
amount of compensation the client owes to the lawyer.
It should also be noted that other expenses that lawyers
typically bill their clients for do not fall under this
"loan" theory, e.g., per-page costs for printing and copying
draft documents in the course of representing a client in
structuring a transaction. These costs are properly costs
incurred by the lawyer directly as a cost of doing business,
for which the client is not primarily liable, and are
deductible when incurred (for a cash basis lawyer); any
subsequent reimbursement, if occurring in a later tax year,
is treated under the tax benefit rule as income in that
later year.
In general, the costs described by the OP are her own costs
of doing business, not expenses for which the client is
primarily liable but as to which the OP has agreed to
advance the necessary funds to the client to pay such costs.
As a result, the OP should be claiming the deduction for
such costs in the year in which incurred, and should be
including in income any reimbursement received in a later
tax year.
To the extent that a cost and the related reimbursement
occur in the same tax year, the OP should net the two
amounts and only report the excess cost as a deduction, or
the excess reimbursement as income.
<< ======================================================= >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
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<< Copyright (2006) - All rights reserved. >>
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Posted by jo on January 11, 2007, 1:19 am
Please log in for more thread options Stuart A. Bronstein wrote:
>> My clients reimburse minor expenses I incur while doing
>> genealogy research for them (parking, reproduction..).
>> Until I invoice them and receive payment, these expenses
>> appear on my [Quicken] records as categories under Office
>> Expenses, not as A/R, since I'm on an cash basis. So what
>> should I do with these expenses that are on my records
>> across the year end boundary because I haven't invoiced for
>> them yet?
> Contingent fee lawyers run into this problem a lot. The IRS
> says that you have to treat the expenses as loans to the
> client. So there is no deduction when the expense is made,
> and no income when it is paid back.
Stu,
I was all settled in with your advice until "Shyster" (I think
that is the last poster's nickname) said that this only applies
to accrual based businesses. He maintains that as a cash
basis business, I must treat them as expenses this year and
income when they are reimbursed. Can you comment? Now I'm
betwixt an between.
jo
<< ======================================================= >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ======================================================= >>
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Posted by Stuart A. Bronstein on January 12, 2007, 2:47 am
Please log in for more thread options >> Contingent fee lawyers run into this problem a lot. The IRS
>> says that you have to treat the expenses as loans to the
>> client. So there is no deduction when the expense is made,
>> and no income when it is paid back.
> I was all settled in with your advice until "Shyster" (I think
> that is the last poster's nickname) said that this only applies
> to accrual based businesses. He maintains that as a cash
> basis business, I must treat them as expenses this year and
> income when they are reimbursed. Can you comment? Now I'm
> betwixt an between.
That had not been my understanding, but I had never
specifically researched that issue. A brief look at the
cases shows that the rule (advances to clients with the
expectation of repayment are not deductible) applies to cash
basis taxpayers.
In Herrick v. Commissioner, 63 T.C. 562 (1975) the
contingent fee lawyer paid his taxes on a cash basis. The
court held that he had to treat advances to clients as loans
and not as ordinary and necessary business expenses in the
year the payments were made.
This is apparently the rule at least in the 5th Circuit,
Hughes & Luce v. Commissioner, 70 F.3d 16 (5th Cir. 1995),
and the 9th Circuit, see Boccardo v. Commissioner, 56 F.3d
1016 (9th Cir. 1995).
Stu
<< ======================================================= >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ======================================================= >>
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