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Barbara
Barbara, Enrolled Agent
Category: Tax
Satisfied Customers: 2820
Experience:  18+ years of experience in tax preparation; 25+ years of experience as a real estate/corporate paralegal.
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A couple years ago, an employer was unable to pay me after

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A couple years ago, an employer was unable to pay me after I had performed my job. So, he gave me a promissory note that said that I will be paid in 5 years from then.

Does this promissory note count as taxable income received for my work? Basically, do I need to pay taxes?

From my research, it seems that I can defer the tax if I meet 409A requirements. But it seems like 409A only applies if you set up this plan in advance. Can I still get the benefits of 409A if they set up a 409A plan retroactively?

Welcome and thank you for giving me the opportunity to assist you with your tax question.

 

Receipt of a promissory note for work performed does not constitute taxable income. You do not report the income until it is actually received.

 

As to the Section 409A part of your question, this does not pertain to your circumstances.

 

Please let me know if I can assist you further. Thank you.

Barbara and other Tax Specialists are ready to help you
Customer: replied 3 years ago.

Can you provide more clarification to your answer?


 


1. Gross income is not limited to cash received. "It includes income realized in any form, whether money, property, or services. (26 CFR 1.61). Promissory note would fit the definition of property.


 


2. Seems like something would be taxable under #1 above unless it can meet the requirements of a 409A


 


Please clarify.

Thank you for your follow-up questions.

 

As to your #1, a promissory note is not considered property. Generally, a promissory note is simply a "promise" to pay a certain amount of money within a specified time period.

 

As to your #2, Section 409A does not pertain to your circumstances. It is a means to defer income. You are not deferring income. You haven't received any income and it is not ready to be paid to you.

 

Income is not reportable for taxable purposes until it is actually received. In other words, you have not received anything except a piece of paper from your employer that says you will be paid in 5 years. Once he pays you the money that he owes you, you will report that as income in the year it is received.

 

Please let me know if you require further clarification. Thank you and best regards.

Customer: replied 3 years ago.
Isn't a promissory note a financial instrument? Aren't financial instruments considered property?

A promissory note is a financial instrument, but financial instruments are not property.

 

Some examples of property would be a house, a car, etc.

Customer: replied 3 years ago.
Ok thanks but can you give me the IRS code citation that says what property is or is not?
I do not believe there is an actual IRS code that defines property, but I will research this and get back to you later this evening. Thank you.
Customer: replied 3 years ago.
My initial find is that property can be real property, tangible, or intangible property. Promissory note would be intangible property. Can you clarify?

You are correct regarding the types of property. A promissory note would not be intangible property. The IRS list for intangible property is as follows:

 

Intangible Property is property that has value but cannot be seen or touched. It includes things such as:

  1. Goodwill.
  2. Going concern value.
  3. Workforce in place.
  4. Business books and records, operating systems, or any other information base, including lists or other information concerning current or prospective customers.
  5. A patent, copyright, formula, process, design, pattern, know-how, format, or similar item.
  6. A customer-based intangible.
  7. A supplier-based intangible.
  8. Any item similar to items (3) through (7).
  9. A license, permit, or other right granted by a governmental unit or agency (including issuances and renewals).
  10. A covenant not to compete entered into in connection with the acquisition of an interest in a trade or business.
  11. Any franchise, trademark, or trade name.
  12. A contract for the use of, or a term interest in, any item in this list.

My point of reference is http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Intangibles

 

Thank you.

Hi, Jonathan.

 

To further clarify, the promissory note you have is a promise to pay you money (tangible property) for services you performed within a specified period of time. As it stands right now, all you have is a piece of paper that specifies that fact. Therefore, that promissory note (piece of paper) is not considered to be real, tangible or intangible property.

 

Thank you.

Hi, Jonathan.

 

Please let me know if you require further clarification or information.

 

Thank you and best regards.

Hi, Jonathan.

If I have provided you with all of the information you need, please take a moment to rate my answer to you since that is an important part of being an expert on JustAnswer and the only way I receive credit for my answer.

If you have additional follow-up questions, please come back to me, and I will be happy to assist you.

Thank you.

Hi, Jonathan.

 

Please let me know if I can assist you further. I understand some customers are experiencing difficulties rating answers to questions. If that is the case, please let me know. If not, please take a moment to rate my answer to you so I may receive credit for my answer.

 

Thank you.

Hi, Jonathan.

 

Just a short note to thank you for the "excellent" rating. It is most appreciated. If you have any questions in the future, please feel free to put "for bkb1956" in the subject line, and I will be happy to assist you. Recommendations to family and friends are also always appreciated.

 

Thanks again, and best regards.

 

Barb