Explaining a Loan/Services Rendered in an Audit

Nov 10, 2009 5 Replies
P

I am currently going through an audit with the IRS. The accountant I have been using ended up screwing up my taxes, so I went into the audit representing myself. Obviously not the best choice, I realize now. I've done a decent job so far. We are down to only two more issues that I need to explain. The one I have a question about is as follows>



I was a sole proprietor at the time. I made a loan to one of my 1099 employees in the amount of $6,350. She used that money for business purposes. I drew the money from my personal line of credit, because I couldn't get a business line because the business had not been around for long enough (from what I remember). I deposited the money into my business checking account, and then transferred her the money. Throughout that year, so performed a number of services for me, for which she would have received payment, but instead of payment I just knocked off the amount she owed me for the loan. I have invoices for the services rendered, but we did not write up an agreement for the loan.



I am trying to write off the $6,350, not as a loan (since it was repaid by services rendered), but as payment for the services rendered. My auditor wants to treat it as a personal loan, and doesn't want to let me write it off.



Any thoughts on my situation? It seems like I should be able to write this off, but I am not sure how to explain it in a way that the auditor will accept.


Thanks for all the help anyone can give me!



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A

I agree with you. If I understand this correctly, you made a loan that was paid back in what I will call a "barter" exchange. You should have issued to her a 1099-MISC for the $6350 in compensation you paid her. That $6350 is tax deductible on Line

11 of the Schedule C as long as you issued the 1099. There's no loss on any loan.
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H

If I read it right, the girl's services only involved a portion of the

6350$, not entire amount. Hence she should have received a 1099misc for that total, with the balance of the 6350 written off as non business bad debt.

ChEAr$, Harlan Lunsford, EA n LA

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R

However, the loan will probably be continued to be paid off next year and maybe the following year. Not sure what the terms of the loan are. As long as the loan is still going on, it can't be written off as a business bad debt. I would think there would be a little bit written off each year on Schedule C.

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A

I interpreted "but instead of payment I just knocked off the amount she owed me for the loan." to mean the loan was paid off.

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H

You're right on that point. Now it sounds like he paid her in excess of

6350 for her services.

So he should have given her a 1099misc for the entire amount which would have cinced the business deduction and treated the "loan" merely as advanced payments for her services.

If done this way, correctly, no "loan" would have existed, and auditor would not now be seeking to disallow it's writeoff.

ChEAr$, Harlan Lunsford, EA n LA

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