JD <spam[at]jdoblie.com> wrote:
- quote -

I own a very small C Corporation and we use cash basis. I
think that the preference for accrual basis applies only to
C Corporations above a certain size.

--
Vic Roberts
Replace xxx with vdr in e-mail address.

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jo wrote:

- quote -

LLC or a Sole proprietorship????

2) As a general rule corporations are required to use
accrual. If you are an individual you are required to use
the cash basis of accounting.

So the answer is It depends.....

Jerry Doblie
14045 Sunnyside Ave N
Seattle, WA 98133
206-365-0143

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"jo" <phillysleuth[at]verizon.net> wrote:

- quote -

I own a single-employee C Corporation. I am also the single
employee. I am not a tax pro, but my accountant is. I
operate the Corporation on Cash Basis. I often spend money
on the behalf of my clients in one tax year and do not get
reimbursed until the next. The amounts can be rather large
as these expenses include T&L, and one year included T&L for
a trip to Japan that was incurred late one year and
reimbursed the next.

Al expenses incurred during a year, including reimbursable
expenses, are considered to be expenses for the year in
which the expenses were paid.

I use QuickBooks and all Reimbursed Expenses, whether they
are reimbursed in the year they were incurred or the
following year, are considered by QB to be "income." The
reason why QB treats these reimbursed expenses as income is
that I set up the accounts that hold the reimbursed expenses
as type "income" under the advice of my accountant.

When my accountant takes my QB file and prepares our
corporate tax return he lists Reimbursed Expenses as Other
Income on line 10 of my Form 1120 (with an attached
explanatory statement) and lists Expenses such as legal
fees, travel, etc that do not have specific lines on Form
1120 on Line 26 as Other Deductions, again with an
explanatory statement that lists the expenses by category.

It really doesn't matter if my Reimbursed Expenses for one
year exceed my Expenses for that same year though this has
never happened. One reason why not is that the Expense
category includes both reimbursable and non-reimbursable
expenses. For example, for 2005 my reimbursed T&L was
greater than my T&L (due to that trip to Japan in late 2004)
but my total Expenses were still greater than my Reimbursed
Expenses.

As far as I can determine, this is all normal for cash basis
taxpayers.

--
Vic Roberts
Replace xxx with vdr in e-mail address.

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jo wrote:
(snipped....)

- quote -

Well, mother always told me, it's not nice to fight. Later
on all I heard was "make love, not war." (and this when I
was a warrior)
Then later, all I heard was "make love." anyway.....

Since I, too, an a genealogist and can relate to all the
researching expenses you have, If I were to do some of it
part time, or even full time, and considering
reimbursements and billing hourly fees are not large
amounts, I would simply account for everything on a cash
basis. Any funds received from clients is income when
obtained, and any expenditures are expenses in same year.
It's the old KISS principle. (there I am back to make
love, not war!)

ChEAr$,
Harlan Lunsford, EA n LA

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All of the expenses you've listed would be your own ordinary
and necessary business expenses, and are unlikely to be
treated as amounts advanced by you to your clients. As
such, you should deduct them when you pay them rather than
capitalizing them and using them as an offset to the income
you eventually receive.

Only if a client specifically asked you to drive to Library
A and make a copy of a document the client has specifically
identified (e.g., the probated will of President Abraham
Lincoln), and to then send that copy to the client via a
particular delivery service (e.g., please send it to me
overnight via FedEx), would there be any sort of legitimate
argument that those expenses were advances to your client
and should be offset against any income you receive rather
than being deducted when paid. However, even in the case I
just described, that argument is a weak one and the better
argument is still the one that those expenses are yours
alone and should be deducted when paid rather than saved up
and offset against the income you receive in the future.
The basic reason being that, even though these are costs
incurred in carrying out your client's specific instructions
(rather than incurred based on your best judgment about how
to reach the goal the client wants), these expenses are
still no different in kind or character from the ordinary
garden variety expenses you incur in carrying on your trade
or business of genealogy research. As such, the more
conservative position to take is that such expenses are
deductible when paid.

About the only situation where the argument that you should
not immediately deduct your expenses is where a client asks
you to go and buy a unique item for them. For example, if a
client told you that she knew that the original probated
will of Abraham Lincoln was being sold at auction and asked
you to go and buy it for her, the cost to you of bidding and
paying for the will would not be an immediately deductible
cost but would instead be an advance to the client in the
nature of a loan, and would be offset against the money the
client eventually pays you rather than being deducted when
paid.

The bottom line is: all of the expenses you've described so
far are your own ordinary and necessary business expenses
and are highly unlikely to be treated as advances to your
clients in the nature of loans. As such, you should be
deducting those costs when you incur them and not saving
them up (i.e., capitalizing them) and offsetting them
against the payment you ultimately receive from the client
for work done.

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- quote -

The amounts we are talking about are what accountants have
told me in the past are laughingly "immaterial". However I
still would like to do it the proper way. The nature of my
(very small part time business) is genealogy research. The
expenses I speak of are necessary to provide the service to
the client. For instance, I must drive the the City
Archives, park at a meter, look at microfilm for two hours(
that part is straight service), and hopefuly find a birth,
marriage or death certificate to copy from the film. I
can't walk to the C.A.-- inconvenient and impossible for me
to lug research materials with me even it were not
inconvenient because I have a chronic pain disability.

I work in about 2 hr intervals , and parking runs about $2.
Copying a document can be $1.50- up, depending on how many
pages. Sounds like nothing, but it adds up over the course
of an extended family project. There are also somewhat
larger copying costs for documents like newer marriages and
wills-- can be $20, $2 per page, or other variations.
Documents are the core of my business so all expenses in
getting them are agreed to be the client's responsibility.

However, I also copy what I get for the client for myself; I
treat that as just the cost of doing business.

It would be nice if I were organized enough to get the
billing out perfectly timed so that client payments would
wash these reimbursible expenses in the same year but that
never happens. So, experts, what should a small potatoes
business person like myself do? I imagine the IRS would say
"cash basis"===> write it off this year and take income next
year, but I also imagine if I talked to two different
agents, I'd get two different opinions. The bottom line is
the totals are so little that the IRS would probably not
care a bit how I did it, but I'm trying to grow the business
and make everything very professional, neat, clean,
perfectly organized and accounted for. Can we "fight" about
it some more<g> ?? I do appreciate you guys chiming in on
this on my behalf.

jo

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My corporate client has this situation in his business. He
has a separate category of income "Reimbursement of Project
Costs" on his income line. He books the reimbursement
payments whenever they come in. He has a separate category
of expenses "Direct Project Costs" which he bills for and
deducts as they are incurred. These costs are part of Cost
of Goods Sold along with Direct Project Labor. We don't
worry about whether the costs are reimbursed in the same
year they are incurred. It all washes out eventually. His
clients are major engineering firms and government agencies
so payment is not in doubt.

Is your corporate client on the long term contract method
with regard to these projects, or not?

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My corporate client has this situation in his business. He
has a separate category of income "Reimbursement of Project
Costs" on his income line. He books the reimbursement
payments whenever they come in. He has a separate category
of expenses "Direct Project Costs" which he bills for and
deducts as they are incurred. These costs are part of Cost
of Goods Sold along with Direct Project Labor. We don't
worry about whether the costs are reimbursed in the same
year they are incurred. It all washes out eventually. His
clients are major engineering firms and government agencies
so payment is not in doubt.

Linda Dorfmont E.A., CFP, CSA

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- quote -

While the contingency fee discussion has gone on elsewhere,
I'll answer it here since it concerns Jo's question.

The general rule is that litigation expenses a lawyer pays
for a client are advances on behalf of the client in the
nature of a loan, and thus are not deductible by the lawyer
when paid. As a corollary, if the lawyer subsequently
receives reimbursement in another year, the amount of the
reimbursement is not included in the lawyer's income for
that subsequent year. If the lawyer is not reimbursed by
the client, the lawyer is entitled to a deduction for a
worthless debt for the year in which the lawyer can
establish that the debt is worthless (i.e., that recovery
from the client cannot be had).

If the lawyer is working on contingency, the same rule
applies; the advanced costs are treated as loans to the
client and are not deductible by the lawyer when paid. If
the client loses, and thus is not obligated to pay the
lawyer any amount, then the advanced costs become worthless
debts in the year in which the matter closes without
recovery.

For a general discussion of these matters, see, e.g., Canelo
v. Commissioner, 53 T.C. 217 (1969); see also, PLR 9432002
(3/30/1994).

The exception to this is where the lawyer works on a gross
fee contract under which the lawyer bears the litigation
costs and such costs are not to be reimbursed out of any
recovery and the lawyer takes as a fee a portion of the
gross recovery. In that case, litigation costs paid by the
lawyer are deductible by the lawyer when paid. See Boccardo
v. Commissioner, 56 F.3d 1016 (9th Cir. 1995).

The rationale for the difference is that, in the net fee
contingency case (i.e., where costs are deducted out of the
recovery and the net is then split between the lawyer and
the client), the lawyer has an "expectation of repayment"
that renders the litigation costs in the nature of loans,
and as such are not deductible until the year in which that
expectation is defeated, e.g., by losing the case. In the
gross fee contingency case, however, the lawyer has no
"expectation of repayment" when the litigation costs are
paid. In that instance, the economic expenditure is borne
by the lawyer ab initio, and is deductible when paid;
alternatively, one could think of it as a "debt" that
immediately becomes worthless, I suppose.

In terms of the client, if the client is unconditionally
obligated to reimburse the lawyer (i.e., no contingencies
exist), then the client will have income from discharge of
indebtedness if the lawyer is never reimbursed and
ultimately properly writes the advanced costs off as a bad
debt.

On the other hand, if the lawyer is working on a contingency
fee basis under which advanced costs are reimbursed only out
of any recovery, the client will not have any income from
discharge of indebtedness if the case is lost and the lawyer
becomes entitled to a bad debt deduction. In this case,
because of the contingent fee, the client's obligation to
pay the costs is contingent on there actually being a
recovery; until there is a recovery, the client is not under
any obligation to pay a sum certain, and therefore does not
owe a debt. See, e.g., Zarin v. Commissioner, 916 F.2d 110
(3rd Cir. 1990)(gambler's agreement to pay gambling debt
unenforceable under state law therefore no income from
discharge of indebtedness).

So, if a lawyer takes a case on the usual contingency fee
basis, where the lawyer advances costs and is reimbursed out
of the gross amount recovered, if any, the lawyer cannot
deduct the costs as paid. If there is a recovery, the
lawyer is reimbursed, and the client is entitled to a
deduction at the time the recovery is actually or
constructively received.

If there is no recovery, the lawyer can deduct the costs
paid when the matter is closed; however, the client does not
have any income from discharge of indebtedness because there
was no unconditional debt since the condition precedent -
winning a recovery - never occurred.

However, ordinary sorts of costs associated with the general
operation of a law firm are generally deductible when paid
by the lawyer, even if the lawyer then bills the client for
those costs. For example, the costs of on-line research,
photocopying, word-processing, and the like. See, e.g., PLR
9432002 (3/30/1994).

The difference between the treatment of litigation expenses,
such as filing fees, deposition fees, and the like, and
ordinary office costs, is that in the first case, these
expenses are costs imposed on the client, and, unless the
lawyer is operating under a gross fee agreement, are borne
by the client. On the other hand, the costs of operating a
law firm are general, do not relate to the particular client
in any real way, and are not costs that are normally imposed
on the client. For example, the fee for filing a paper in
court is imposed on the person for whom the paper is filed,
not on the person doing the filing. On the other hand, the
cost of the paper used to draft that document is, generally,
imposed on the person who typed it up, and the fact that the
typist may determine his fee for typing based in part on the
cost to him of the paper is irrelevant - when the typist
paid for the paper, he was not paying that cost on behalf of
the person for whom he typed the document.

There is, of course, a middle ground; if, for example, the
typist and the client agreed before hand that the typist
would go out and buy a certain type of paper to use in
typing the document, then the typist might be regarded as
acting as the client's agent when he bought the paper, in
which case he paid the expense on behalf of the client.
Technically, the typist would not be permitted to deduct the
cost of the paper when paid, and would not have any
offsetting income when he was later reimbursed; however, if
he was never reimbursed, he would then have a bad debt
deduction.

In your case, the expenses that you mentioned, parking fees,
copying, mileage, etc, are more analogous to the general
costs of operating a law firm than they are to the sorts of
court costs and other litigation expenses that lawyers
typically pay on behalf of their clients.

In other words, even though you are acting as your client's
agent when you go to the local library to do some research,
the research is the activity you're doing on behalf of the
client, but paying the parking meter is not; i.e., incurring
that expense was not a necessary part of the service you
were performing for the client - you could have walked to
the library instead, or driven to a non-metered space and
walked from there.

As such, the better argument appears to be that you should
treat your parking, copying, and similar expenses as
business expenses that are deductible by you when paid, and
include the gross amount of your fee in income when received
from the client.

On the other hand, if you incur a significant expense in
order to acquire something that the client specifically
asked you to get, and incurring that expense was a necessary
precondition to obtaining the thing sought - for example, a
client asks you to buy an old family painting from a third
party for the client - then that expense should be treated
as an amount paid on behalf of the client, i.e., as an
advance in the nature of a loan to the client, should not be
deducted when paid, and should instead be offset against the
reimbursement you receive later on. In that case, and
particularly if the payment and the reimbursement occur in
different tax years, make sure that you keep really good
records, because the IRS gets really snitty if it thinks
someone is trying to hide income by not reporting it.

In fact, if you do an income offset in a later year because
it is a reimbursement of an expense paid on behalf of a
client in an earlier year, you should seriously consider
attaching a Form 8275, Disclosure Statement, to your return
for the year of reimbursement in order to CYA against the
assertion of penalties. If you guess wrong and the income
offset is denied (and it's too late to amend the earlier
return to claim a deduction), then at least you have a good
claim that you weren't negligent and therefore shouldn't be
penalized.

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- quote -

That had not been my understanding, but I had never
specifically researched that issue. A brief look at the
cases shows that the rule (advances to clients with the
expectation of repayment are not deductible) applies to cash
basis taxpayers.

In Herrick v. Commissioner, 63 T.C. 562 (1975) the
contingent fee lawyer paid his taxes on a cash basis. The
court held that he had to treat advances to clients as loans
and not as ordinary and necessary business expenses in the
year the payments were made.

This is apparently the rule at least in the 5th Circuit,
Hughes & Luce v. Commissioner, 70 F.3d 16 (5th Cir. 1995),
and the 9th Circuit, see Boccardo v. Commissioner, 56 F.3d
1016 (9th Cir. 1995).

Stu

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Stuart A. Bronstein wrote:
- quote -

Stu,

I was all settled in with your advice until "Shyster" (I think
that is the last poster's nickname) said that this only applies
to accrual based businesses. He maintains that as a cash
basis business, I must treat them as expenses this year and
income when they are reimbursed. Can you comment? Now I'm
betwixt an between.

jo

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Costs incurred in 2006 that will not be reimbursed until
2007 should, as a general rule, be deducted in 2006 by a
cash-basis taxpayer. Under the general rule of
deductibility, the cost has been incurred in 2006 and any
deduction therefore is allowable only for the year in which
incurred.

Under the tax benefit rule, amounts received as
reimbursement in 2007 are included in income for 2007,
effectively offsetting the deduction claimed for 2006.

This does, in fact, produce a bit of a distortion in the
"true reflection of income" principle because your net
taxable income is understated for 2006 and overstated for
2007; however, the distortion is generally relatively benign
and is usually outweighed by the record-keeping and
administrative complexities that would arise if the incurred
expense were carried over until reimbursement was received.

To the extent that a cost is incurred and then reimbursed in
the same tax year, the items are generally netted against
each other, and only the excess reported as either a
deductible expense or as income.

The analogy to expenses an attorney advances to a client is
probably inapt in this case. Generally, under state law, a
lawyer is not permitted to pay the costs of representation
for the client, which costs remain the client's obligation.
The lawyer may, however, advance those costs to the client
provided that such advancement is made with the
understanding that the client remains ultimately responsible
for any unpaid costs and is required to repay such amounts
to the lawyer.

In other words, under applicable state law, the lawyer
really is loaning those funds to the client and is not
paying an expense that is properly part of the lawyer's cost
of doing business and merely adding those costs to the
amount of compensation the client owes to the lawyer.

It should also be noted that other expenses that lawyers
typically bill their clients for do not fall under this
"loan" theory, e.g., per-page costs for printing and copying
draft documents in the course of representing a client in
structuring a transaction. These costs are properly costs
incurred by the lawyer directly as a cost of doing business,
for which the client is not primarily liable, and are
deductible when incurred (for a cash basis lawyer); any
subsequent reimbursement, if occurring in a later tax year,
is treated under the tax benefit rule as income in that
later year.

In general, the costs described by the OP are her own costs
of doing business, not expenses for which the client is
primarily liable but as to which the OP has agreed to
advance the necessary funds to the client to pay such costs.

As a result, the OP should be claiming the deduction for
such costs in the year in which incurred, and should be
including in income any reimbursement received in a later
tax year.

To the extent that a cost and the related reimbursement
occur in the same tax year, the OP should net the two
amounts and only report the excess cost as a deduction, or
the excess reimbursement as income.

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sethb[at]panix.com (Seth Breidbart) wrote:
- quote -

I don't specifically know how the IRS wants to treat clients
when they lose. But I don't see that their position is
inconsistent. From the client's standpoint, it's a
contingent debt. They owe it if they win.

From the standpoint of the lawyer they're saying that the
money spent on out of pocket costs might be paid back, so
they are not deductible when paid. I suppose they might be
deductible by the client if they were business expenses, but
that would be seldom or never the case.

- quote -

One would think. But that's not the IRS position.

Stu

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Stuart A. Bronstein <spamtrap[at]lexregia.com> wrote:
- quote -

So the IRS claims that from X's point of view, the payment
is a loan to Y, but from Y's point of view, there is no
debt? Is the IRS allowed to get away with such an
inconsistent position?

- quote -

It seems to me the lawyer is paying out money in Year 1 in
hopes (expectation) of receiving more money in Year 2; since
the payments are "ordinary and necessary business expenses"
I'd think they'd be deductible for a cash-basis taxpayer.

Seth

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sethb[at]panix.com (Seth Breidbart) wrote:
- quote -

Under the contract there's no debt if they lose, so probably
not.

I imagine that in that case the lawyer could treat it as an
expense at the time it is clear that it won't be paid back,
similar to an option expiring.

Stu

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Stuart A. Bronstein <spamtrap[at]lexregia.com> wrote:

- quote -

But if they lose the case, the client doesn't have to pay
anything. Is that treated as cancellation of debt income?

Seth

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Stuart A. Bronstein wrote:
- quote -

Thanks,Stu and Moderator. As I interpret what you're
saying, it matches what my inclination was. Right? (another
reason to never just import Quicken figures into Turbo Tax).

Now I could complicate this by mentioning that it may happen
that someone stiffs me. It hasn't happened yet, but I
operate on such a flimsy basis of trust with people all over
the country that it is entirely possible. I can think of one
who currently is a prime candidate. In that case, am I
right that the reimbursible expense I incurred would become
an actual expense next year.

Many/most of my colleagues do get retainers, and I
occasionally ask for up front money if I know I'm going to
have to shell out a lot of money for a particular document
("lot" doesn't come near what the rest of you in "real"
businesses consider a lot<g> ). I just seem to do well with
a very casual and trusting style of business so far (it's
very small,part time since I'm on disability). Asking for
retainers on one hand seems more professional, but on the
other hand, these people don't know me at all, except for my
presence on certain genealogy research internet lists, so
they would have to trust sending money to a stranger. I
imagine unused retainers could also add their own brand of
complication at year end. As long as I don't get stiffed
by anyone and know how to treat the expected reimbursed
expenses, I'll continue as is.

Related: What's the best way to handle them in Quicken H &B?
Should/can I transfer them to an A/R account just for the
year end period and transfer them back to an expense (if
that's possible) next year, so that when they ARE
reimbursed, the expense washes and doesn't go negative? If
I'm not being clear, feel free to ask.

jo

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"jo" <phillysleuth[at]verizon.net> wrote:

- quote -

Contingent fee lawyers run into this problem a lot. The IRS
says that you have to treat the expenses as loans to the
client. So there is no deduction when the expense is made,
and no income when it is paid back.

Stu

Moderator:
In the case of "jo", it would help to work against a
retainer which may be difficult to get.

There is a worse problem in accrual accounting where
billings and retainers become revenue in the period in
which they occur.


<< ================================================== ===== > << The foregoing was not intended or written to be used, > << nor can it used, for the purpose of avoiding penalties > << that may be imposed upon the taxpayer. > << > << The Charter and the Guidelines for submitting posts > << to this newsgroup as well as our anti-spamming policy > << are at www.asktax.org. > << Copyright (2006) - All rights reserved. > << ================================================== ===== >

My clients reimburse minor expenses I incur while doing
genealogy research for them (parking, reproduction..).
Until I invoice them and receive payment, these expenses
appear on my [Quicken] records as categories under Office
Expenses, not as A/R, since I'm on an cash basis. So what
should I do with these expenses that are on my records
across the year end boundary because I haven't invoiced for
them yet?

If I use Quicken's P/L report, they act like any other
expense and offset income. But when i get reimbursed for
them in 2007, those expense categories will be credited,
making it look like I earned income in an expense category
(I've always assumed that's what a negative expense
becomes).

Intuitively, what feels right is to back out any of these
reimbursible expenses on my records, perhaps not in Quicken,
but when doing my Schedule C. Is this proper treatment?
We aren't talking big numbers here. The total amount in the
Parking expense category right now is about $30 and other
reimbursibles are in the same range. I'd just like the
solution to be simple and legal<g
Thanks, jo

<< ================================================== ===== > << The foregoing was not intended or written to be used, > << nor can it used, for the purpose of avoiding penalties > << that may be imposed upon the taxpayer. > << > << The Charter and the Guidelines for submitting posts > << to this newsgroup as well as our anti-spamming policy > << are at www.asktax.org. > << Copyright (2006) - All rights reserved. > << ================================================== ===== >