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Stephen G.
Stephen G., Sr Income Tax Expert
Category: Tax
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Experience:  Extensive Experience with Tax, Financial & Estate Issues
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I recently did some work for a family member at the end of

Customer Question

I recently did some work for a family member at the end of 2016. He is a subcontractor and does remodeling. On the jobs that I worked on I also spent fairly large amounts of money on partially funding the projects. These were basically cash loans that he did repay but through a few company checks in addition to the wages for labor performed. My question is how do I avoid paying taxes on my own money in light of the fact that it was not all wages for labor? I also have received a 1099-MISC from him for 2016 which includes the total amount, that being wages plus loans. Do I request a new 1099-MISC reflecting only wages? or can I file the form he has given me and exclude the loans as not taxable? That seems a bit difficult seeing as they were cash loans with no record of the "agreement"
Submitted: 8 months ago.
Category: Tax
Expert:  Stephen G. replied 8 months ago.

Hello, my name is***** goal is to give you a complete & accurate answer. I am working on your request now & I will respond as soon as possible.

Customer: replied 8 months ago.
Thank you for your help Stephen. I would really appreciate a timely answer.
Expert:  Stephen G. replied 8 months ago.

Basically, there are two options, with the first one being the best from your standpoint.

1. Ask for a Corrected 1099 to exclude the loan repayments. (This is the correct way to handle it, as far as the IRS is concerned.)

2. It may be that your family member is reflecting the loan re-payments to you as well as the expenditures made with the original loans as expense on his tax returns, so you may run into some resistance about fixing the 1099s, or it may be a simple bookkeeping mistake made by whomever prepares the 1099s.

If you are unable to get the 1099 corrected, then what I would do is to report the Gross Amount reflected on the 1099 and show the amount that is a return of your loans as a line item reduction on your Schedule C. For example, you could enter the loan repayments on Line 2, Returns & Allowances, which is a subtraction from the Gross Amount on Line 1. If you are filing a paper return, you could enter in the space to the left of Line 2, "Loan repayments included on 1099-MISC in Line 1". If you are filing electronically, the system you are using may not allow that type of explanation; in that case just enter the repayments on Line 2 and if the IRS questions it, you can provide that explanation.

If your family member does not want to or will not correct the 1099-MISC, you may want to point out that when you subtract the repayments from the 1099 figure on your tax return, it is likely that the IRS will question it and you'll have no alternative expect to provide the explanation that the loan repayments were included in the 1099 figure in error by him.

Let me know if you have any follow-up questions.

Please remember to rate my response as that is the only way I will receive credit for assisting you today.

Thanks very much,

Steve G.

Customer: replied 8 months ago.
He believes that the cash loans were in fact my own business expenses and that i am a subcontractor since he has given me a 1099-MISC. Of course this is not true because i was only doing him a favor by giving him a cash loan with only a verbal agreement, but is there a way to write it off as a business expense like he says? Or do i need the reciepts and invoices which i gave to him for his records in order to do so and avoid trouble with the IRS? Is it truly my own business expense?
Expert:  Stephen G. replied 8 months ago.

I guess I'm not 100% certain as to what went on.

Are you saying that rather than loaning him cash you purchased materials and supplies for the job which he reimbursed you for?

Were these materials for items you worked on yourself or did they involve more than just your labor that worked with those materials. You were reimbursed for the expenditures you made based upon the original invoices representing your purchases in your name or the name of your business?

Steve G.

Customer: replied 8 months ago.
I was laid off in October so to supplement my income until I gain employment i agreed to help him on some jobs that he contracted. I am not nor have i ever been a subcontractor but to answer your question, yes i purchased materials for a job that he contracted. He did not have sufficient funds to obtain the needed materials. I paid cash that i withdrew from my personal bank account directly to another contractor for for his own up front costs for labor that he performed and i had no part in. I also used a debit card from the same account at a local home depot because again he didn't have sufficient funds for said materials. For those materials purchased at the Home Depot i did personally handle as part of my labor. I am not sure wether it is more accurate to call it reimbursement or a loan for the fact that i have made personal loans in both manners in the past for others. I guess i am not completely sure what reimbursement is in the eyes of the law.
Expert:  Stephen G. replied 8 months ago.

Well, you may not have been acting in the capacity of a subcontractor in the past, but it sounds like you have been here. I mean your relative did not treat you as an employee and he issued a 1099 so for that relationship, you are functioning as a subcontractor.

Well, it really doesn't matter how you treat it as long as you treat things consistently and as long as only the net flows to the bot***** *****ne so that you aren't paying both income taxes and self-employment taxes on the 1099 income that doesn't represent your labor.

What I would probably do if I were preparing a Schedule C for you (which I'm not nor can I do so through this discussion forum), is that on the expenditures that you handled as a matter of convenience (for the upfront labor costs), I would treat those reimbursements in the manner I suggested above by reflecting those reimbursements to you as a reduction of the 1099 figures on line 2 of Schedule C. In terms of the expenditures for the Home Depot merchandise I would reflect those reimbursements as expenses on Part III, lines 38, 40 & 42 which then carries to Part I, line 4.

That's the best advice I can give you at this point, as it appears that your family member has decided not to amend your 1099 as I suspected, for whatever reason. Funny how some of the worst problems come up when family is involved. At least if the IRS were to get interested, you can pretty much be certain that they will be checking out your relative and he can't say that you didn't warn him about the potential consequences.

Also, as an aside, make sure that you also complete Schedule SE to compute the self-employment tax on the net income from your sub-contracting activities. If your W2 income for the work your performed as an employee exceeded the Social Security wage base for 2016, all you will owe is the Medicare portion of the Social Security tax as there is no wage/earnings cap on that portion of the tax.

Steve G.

Expert:  Stephen G. replied 8 months ago.

I see that you have had a chance to see my last response.

Do you have any follow-up questions?

If not, I would appreciate it if you would take a moment and rate my response as that is the only way I will receive credit for assisting you.

Thanks very much,

Steve G.