Solo business, Schedule C question
January 29, 2016 11:40 AM   Subscribe

As I consultant, when I travel on client business, I pay for travel with a card and the client reimburses me (on top of my fee). Likewise with other expenses -- I buy a projector for use on a project, client keeps projector and reimburses me as above. So do I include such reimbursement amounts in both my income and expenses on Schedule C?
posted by LonnieK to Work & Money (10 answers total) 1 user marked this as a favorite
I think so? That is what I do (and what my tax guy does). I do a lot of public speaking and often the check I get for speaking also includes reimbursements for travel and other things on top of my honorarium. I claim this all as income and then itemize out my expenses.
posted by jessamyn at 11:57 AM on January 29, 2016

this is what your tax person is for.
posted by lescour at 12:41 PM on January 29, 2016

I use my credit card to buy online media for clients and am reimbursed for it.

It's treated as a pass-thru expense in my Quickbooks and doesn't show up anywhere on my taxes.

I should say, my Accountant doesn't use it in any way when he does my taxes. I'm an S-corp.
posted by bricksNmortar at 1:03 PM on January 29, 2016

Yes, you include everything a client pays you in gross receipts on line 1. (That is why it is called the gross). This is because the client is probably going to include that reimbursement on the 1099-MISC that they send you. If your reported gross receipts are less than the client reports on the 1099, you are heading for audit trouble. Even if they don't include expense reimbursement on the 1099, you still have to explain a deposit into your account that does not appear anywhere on your return.

The safest way to do this is always report all money received from a client and then deduct the appropriate expenses. That way your gross receipts on line 1 is at least equal or greater than what appears on your 1099s.
posted by JackFlash at 2:10 PM on January 29, 2016

If you provide receipts, there's business purpose, etc - in other words, if it meets the accountable plan tests - then the reimbursements do not get reported on a 1099. If you don't meet the accountable plan rules, then it goes on a 1099.

See Publication 463. The relevant issue is whether it's excludible as a working condition fringe. Your CPA will understand those rules if you bring it to her attention.
posted by jpe at 6:45 PM on January 29, 2016

BTW, the gatekeeper here is the client, so you should talk to them about how they report these things.
posted by jpe at 6:56 PM on January 29, 2016

Response by poster: Not incorporated. Will check whether 1099 includes reimb. amounts. Thx all.
posted by LonnieK at 7:25 PM on January 29, 2016

BTW, the gatekeeper here is the client, so you should talk to them about how they report these things.

And this is the important point. You don't get to choose. The client may or may not include reimbursed expenses on the 1099-MISC. If they do, then you need to report it on your Schedule C and deduct the expenses explicitly.

The way this works is that the expense has to explicitly appear on somebody's tax return, either you or your client, or it cannot be deducted. So if the contractor provides adequate expense receipts to the client, then the client has the receipts to support the expense deduction, they give you a (usually separate) check for the reimbursement and they won't put it on the 1099 they issue to you.

On the other hand, it is perfectly acceptable for you to keep the expense receipts yourself and just bill the client for in bulk for expenses as a part of your fee. In that case the client sends you a 1099 that includes the reimbursement as part of your fee and then you make the deduction on your Schedule C.

So it depends on how your client operates. The simple rule is that if the reimbursement amount is included on the 1099 you receive, then include it in your gross income and deduct the expenses. If the reimbursement is not on your 1099, then don't report the reimbursement as income and don't deduct the expenses.
posted by JackFlash at 8:37 PM on January 29, 2016

I agree that if the client is including these amounts on the 1099, you absolutely must include in your income and, unless you want to pay unnecessary taxes, you also include it in your expenses. However, I think JackFlash is wrong in suggesting that if the client doesn't include it in the 1099 it would somehow prevent you from including in your income (although I am far from expert on this).

With 1099s for things like dividend and interest, where the IRS matches the 1099 from the lenders filing against your reported income and they need to match exactly. With Schedule c income, the IRS doesn't see the line items - you just need to make sure your total exceeds theirs so there is no problem if you report more income than is on the 1099.

On the other hand, there are rules about allowable travel expenses. If for some odd reason a client paid you more than you were allowed to deduct, then I'm pretty sure the IRS would want to see that excess treated as income (which would naturally happen if you report the payment as income and the actual allowed deduction as the expense). Assume the income and expenses match (which normally they would do) there would be no net change in your taxable income and so it has no impact on the taxes owed either way you do it.

I am also inclined to think that in case of audit, having all the money that travels through your business account show up on the books would be a good thing (but that is just my own sense, having never been involved in such an audit.)
posted by metahawk at 10:34 PM on January 29, 2016

On the other hand, there are rules about allowable travel expenses. If for some odd reason a client paid you more than you were allowed to deduct, then I'm pretty sure the IRS would want to see that excess treated as income

The contractor doesn't care what the client is allowed to deduct and likewise the client doesn't care what the contractor is allowed to deduct.

It's quite straight forward. Either the client expenses it or the contractor expenses it, but not both. In any case neither the client nor the contractor cares about the other's deductibility.

If the contractor simply bills the client for expenses, then the fee includes the expenses, the client reports all of it as income on the 1099 and the contractor deducts whatever portion of that is eligible for deduction to the contractor. The client doesn't care about the contractor's deductibility because they have paid them in full for their expenses.

In the other case, the contractor presents detailed expense receipts to the client and the client pays them exactly that amount. The reimbursement doesn't appear on the 1099. The client, using the contractor's supplied receipts, then deducts whatever portion of the expenses that are eligible to the client. The contractor doesn't care about the client's deductibility because they have been fully reinbursed for expenses.
posted by JackFlash at 11:11 PM on January 29, 2016 [1 favorite]

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