$10000 of unpaid contract work. Is it a refund?

February 1, 2009 4:52 PM

2008 tax question- I'm yet to be paid a large amount of money from a contracting gig last year, and doubt that I ever will receive the amount. How might this affect my self-employment taxes?

I was doing contract work for a company last year on a project that ultimately went very bad for them. In the end, they still owed me about $10000 for that work. The business owner promised his honor or something that he would do whatever he could to pay that sum at some point, but I'm not expecting it any time soon, or at all.

So, to get to the point, there is a section in the Self-employment tax deal that has you write down any refunds or rebates you gave to customers. Since I never expect to receive the money, could I some-how grant the company a "refund" or something, call the debts even with them, and then put this amount into the refund field in my taxes?

If so, what kind of documentation would I need to do this?

I should also clarify that I am on amicable terms with this company, and they feel very bad about the situation themselves. We all feel bad about it together, so I have no intention of doing anything legally nasty to them. If I needed help from them to do this, they would probably oblige (unless it really messed up their taxes).

Any ideas? I'd be happy to provide more info on the situation as needed...

posted by localhuman to work & money (7 comments total)

No. The tax benefit is that you never got paid, and therefore don't have to pay taxes on what you never got.

You can't write it off as a loss (probably*) or count it towards a 'refund' because no money changed hands.


*As I remember it you can write it off as a loss if you provided goods you never got paid for (but not services. And possibly if you you the accrual method of accounting. I'd say that if you're doing tens of thousands of dollars of contracting you should visit a tax professional. Well worth the money.
posted by Ookseer at 5:12 PM on February 1

Ookseer is right in his small print: as we're talking about a figure which could potentially produce thousands of dollars in liability or deduction depending on how this works, you can definitely afford a tax professional. And I don't mean H&R Block or some other nonsense preparer. Get thee to a lawyer or CPA. This will probably cost you a couple hundred bucks, but again, given your revenue this is probably needed anyways. You can even deduct what you pay.
posted by valkyryn at 6:39 PM on February 1

Since I never expect to receive the money, could I some-how grant the company a "refund" or something, call the debts even with them, and then put this amount into the refund field in my taxes?

Absolutely not.

However, you might could write it off as a bad debt (probably not a business loss), but as others have already said, see a professional about this.
posted by Sidhedevil at 8:25 PM on February 1

Do you use accural accounting?

If NO, then you need not worry. You're not going to get the cash, so you have no tax liability.

If YES, you should currently have $10,000 in your "Accounts Receivable" account, which is revenue for last year. If you didn't already write this off, you owe taxes on it for this year. Off the top of my head, I can't recall if you can retroactively write this off or whether you will need to take the tax hit and write it off in 2009.

Whenever you do get to write it off, you just call it 'Bad Debt' (you should have an account in whatever software you use for this, which, if you're using accrual accounting, you better have).

If you don't know which method you use, and nobody else is doing your books, then you're using the cash method and you don't have to worry about reporting the income -- and you can also write off any expenses you incurred in the process of doing this work as a business loss.
posted by odragul at 8:53 PM on February 1

Assuming you're on a cash-basis, as odragul mentions, you only pay taxes on income actually received in the calendar year. This means that even if you perform the work in December 2008, if you received a check in January 2009, it would reflect against your 2009 taxes.

The fact that you're not expecting a payment at all doesn't particularly matter in this case, in that it's unlikely you can write it off as a loss if it were a service, as mentioned above. But then, that's something you want to see somebody who actually knows tax stuff on.
posted by disillusioned at 9:59 PM on February 1

This isn't a deductible bad debt unless you already reported this as income and paid taxes on it.

See Pub. 334, and a fuller discussion in Pub. 535 Ch. 10 [pdf].

If you haven't yet filed your '08 taxes, just file them without this income (which you didn't receive in '08 anyway). Since it never goes in as income, it never comes out as an expense (although all other ordinary and necessary expenses such as equipment and mileage remain deductible).

there is a section in the Self-employment tax deal that has you write down any refunds or rebates you gave to customers. Since I never expect to receive the money, could I some-how grant the company a "refund" or something, call the debts even with them, and then put this amount into the refund field in my taxes?

You're being a bit vague here. First of all, are you aware that self-employment tax is the equivalent of FICA (Social Security contributions), and not income tax? There is no such field on Schedule SE. I'm concerned you may be misusing terminology and misunderstanding how to do your business taxes. Expenses such as rebates are on Schedule C, Profit or Loss from Business. If your trouble is this basic, I do recommend a tax professional (and not, alas, H&R Block or any other quickie preparation service, but a person who will sit down with you and explain stuff in detail).

To be perfectly clear, unless you pay yourself a salary (FICA withholding inclusive), you need to file both Schedule C and Schedule SE. The former determines your income for Form 1040, the latter determines your FICA contribution.

If so, what kind of documentation would I need to do this?

If you HAD previously counted it as an accounts receivable amount, then you could deduct it as an expense, but only after demonstrating that it is uncollectable/worthless. That probably means using a collection agency or getting a court judgement.

Barring that, your best bet would be to settle with the client and supply a written agreement. But anything they pay you would be income to report, and anything you forgive would be a 1099-C to them (so they can report the forgiven debt as income).
posted by dhartung at 8:52 AM on February 2

thanks every one! I think I'll be seeing a tax specialist about this.
posted by localhuman at 9:41 AM on February 2