Basic 1099 question

Sometimes clients pay business expenses personally for xyz reason. Usually it's meals or office. These are captured at year end. New situation - payment made to a lawyer personally. So no 1099 was done in January. Is a 1099 required to take the deduction if the business did not pay it directly? if so, who is payer on the 1099?

Is the payor an employee, or a partner in a partnership, or a shareholder of a corporation? Is the payor making a capital contribution to the business to cover an expense of the business?

The payor is a shareholder. The credit side would be capital contribution to cover an expense of the business, yes.

Business should issue the 1099. A 1099 is not required in order to claim the deduction...but the business should still issue it.

Thank you. Why is a 1099 not required?

1099 is required for information reporting purposes. A deduction under section 162 doesn’t require a 1099.

But he asked "why?"

A deduction under section 162 doesn’t require a 1099.

But he asked "why?"

Yes.. why is it not required even though it's required for reporting purposes? Is it not required for reporting purposes if paid personally by the shareholder?

The provisions for deduction allowance are not tied to information reporting, potentially the company is violating information reporting rules only.

I thought the question was (paraphrasing) “is a 1099 required to make the payment deductible”

A: No, an ordinary and necessary business expense is deductible under section 162. Filing a 1099 is not a requirement under section 162.

However, a 1099 is still required to be filed by the business under the normal 1099 rules.

Let's end the pain. A 162 deduction is not dependent on showing there was a 1099. I don't know why, other than Congress has not required it. I know W-2s and 1099a go back to the '39 Code, but have no idea whether tying them to a deduction was ever considered.

Is it not required for reporting purposes if paid personally by the shareholder?

What do you mean by "personally"?

If it is paid in the course of your client's trade or business, whether it comes from the business bank account, your client's personal bank account, or his mason jar buried in the back garden, it needs to be reported on a 1099-MISC assuming the threshold is met.

If the payment is personal in nature, or for a mere investment (not a trade or business), then no 1099 is required.

IRC Sec 6041(a).

Maybe this conversation is incomplete without mentioning that IRS agents have proposed to disallow the deduction on audit. And I think they do this because the audit is open and it’s some how easier for them than going through the motion of slapping the failure to report penalty on them.

Also 1099 reporting is evidence of an expense. Without which you have to be rocksolid on substantiation of payment and purpose of an expense.

Also 1099 reporting is evidence of an expense. Without which you have to be rocksolid on substantiation of payment and purpose of an expense.

Is the inverse also true? That with which one does NOT have to be rock solid on substantiation of payment and purpose?

If that is not also true, can't we then infer that 6041(a) has nothing to do with the allowance or disallowance of 162 expenses? That substantiation needs to be maintained regardless of 1099 reporting?

I don't think you can make that inference. What I'm explaining is the basis for an auditor's disallowance. A deduction under 162 is subject to the ordinary and necessary hurdles. This is often easily established, or rocksolid, however it also heavily litigated. When questions of deductibility are at issue. The taxpayer is going to argue that his payment to Dr. Strange is deductible because he received some business coaching that put his head on straight allowing him to go forth and make profits. The IRS is going to say that Dr. Strage is the taxpayer's therapist and that the payment was for medical care, and not a business expense, and and to prove it the taxpayer didn't file forms 1099 becaues on January 31, XX he, himself (the taxpayer), did not view the payments as a business expense. Perhaps the Code section 6041 has nothing to do with 162, but in every instance of the Code where a determination is made on the basis of all the facts and circumstances it may.

In addition, I didn't mention it above in my example, but if you want to file 1099s under audit it doesn't have the same affect, because its self serving. Hence that's the IRS basis for disallowing expenses. It's not about the IRS saying "I'm not going to allow this because you didn't do that".

Is it not required for reporting purposes if paid personally by the shareholder?

What do you mean by "personally"?

If it is paid in the course of your client's trade or business, whether it comes from the business bank account, your client's personal bank account, or his mason jar buried in the back garden, it needs to be reported on a 1099-MISC assuming the threshold is met.

If the payment is personal in nature, or for a mere investment (not a trade or business), then no 1099 is required.

IRC Sec 6041(a).

It was paid by the shareholder's personal bank account. So it was not caught in January. Now that the business tax return is being filed, the shareholder says oh don't forget about these business expenses I paid on behalf of the business. The 1099 issue comes up after the due date. So, is the 1099 required for reporting purposes? And if so, then do you list the business or the individual as the Payer?

It seems clear that it is not required for deduction.