Accounting & Bookkeeping & Small Business Forum

[trarob]

I posted this in the tax forum as well. Looking for feedback on how to handle correcting his transactions. I have already informed my client that going forward we have to do his books treating the subcontractor like a subcontractor only.

I have a client who has subcontractors for various jobs. The subcontractor also work on other projects not related to my client. My client is currently taking the total owed to the subcontractor and subtracting out the cell phone bill he pays for the subcontractor. The subcontractor does not use the cell phone for just my client's business. My client then claims the total charges for all the cell phones on his tax return which has raised a red flag with the IRS. I told my client that he should personally not pay the cell phone bill and have the subcontractors pay their share because they use it for more than just his company. He should only claim his portion of the cell phone on his taxes. Also he should not reduce the amount owed to the subcontractor. My questions are: 1. I'm I advising my client correctly. 2. How should I make the adjustments (should I file an amended return with the correct amounts for cell phone and send corrected 1099s to all the subcontractors with the higher amount) 3. Advise the subcontractors they should also file an amended with the higher income claim the cell phone expense. This client's files go back to 2005 in which we are looking to correct. I just acquired this client so I did not keep his books or do his taxes for prior years.

[Richard Noot]

trarob wrote: I posted this in the tax forum as well. Looking for feedback on how to handle correcting his transactions. I have already informed my client that going forward we have to do his books treating the subcontractor like a subcontractor only.

I have a client who has subcontractors for various jobs. The subcontractor also work on other projects not related to my client. My client is currently taking the total owed to the subcontractor and subtracting out the cell phone bill he pays for the subcontractor. The subcontractor does not use the cell phone for just my client's business. My client then claims the total charges for all the cell phones on his tax return which has raised a red flag with the IRS. I told my client that he should personally not pay the cell phone bill and have the subcontractors pay their share because they use it for more than just his company. He should only claim his portion of the cell phone on his taxes. Also he should not reduce the amount owed to the subcontractor. My questions are: 1. I'm I advising my client correctly. 2. How should I make the adjustments (should I file an amended return with the correct amounts for cell phone and send corrected 1099s to all the subcontractors with the higher amount) 3. Advise the subcontractors they should also file an amended with the higher income claim the cell phone expense. This client's files go back to 2005 in which we are looking to correct. I just acquired this client so I did not keep his books or do his taxes for prior years. 1. No you are NOT advising your client correctly. He should be giving a 1099 for the full amount paid and NOT taking any deduction for the use of any portion of the cell bill. You should amend all 1099(s) to reflect the correct amount. As far a question number 3 is concerned you should NOT advise the subcontractors to amend their returns. The filing of a correct tax return is not your responsibility but theirs. In fasct they should of correctly filed their returns independent of what your 1099 was.

[trarob]

You mentioned I am NOT advising my client correctly. What am I NOT advising correctly on. I did advise my client to NOT reduce the total the subcontractor should be getting and to begin making the subcontractor pay their cell bill on their own. I re-read my statement and it states that in my statement. So can you tell me what portion you feel I am NOT advising correctly so I have a better understanding of what you are thinking. It sounds like your advice is the same as what I am advising my client.

[Richard Noot]

trarob wrote: You mentioned I am NOT advising my client correctly. What am I NOT advising correctly on. I did advise my client to NOT reduce the total the subcontractor should be getting and to begin making the subcontractor pay their cell bill on their own. I re-read my statement and it states that in my statement. So can you tell me what portion you feel I am NOT advising correctly so I have a better understanding of what you are thinking. It sounds like your advice is the same as what I am advising my client. I was refering to the following statement.

I told my client that he should personally not pay the cell phone bill and have the subcontractors pay their share because they use it for more than just his company. He should only claim his portion of the cell phone on his taxes.

The subcontractor should be paying 100% and no deduction should be taken on your clients return. I am assuming that the contractor is indeed a contractor and not an employee. If he is in fact a employee then a w2 should be issued for the non related business use of the cell phone.

Some states consider construction or improvement workers as employees unless they have purchased an employee exemption certificate regardless of whether or not they provide their own expenses.

[trarob]

My client and the subcontractors have a cell phone account together. He pays the full bill and deducts it on his tax return. He also reduces the subcontractors payment by the amount of the cell phone bill for that month. I might not have stated that clearly. I am advising my client to only pay his cell phone bill with his business account and only deduct his cell phone bill on his tax return. I did advise him not to reduce the subcontractor's payment. Leave their payment amounts and the full amount owed and allow them to pay their own cell phone bill.

[Richard Noot]

Your client can only deduct the cost if he keeps records of all use of the cell phone. If use falls below 50% he will then have to recapture any deduction that was taken.

[RobJ]

Richard Noot wrote: Your client can only deduct the cost if he keeps records of all use of the cell phone.
Presumably, he has the bill outlining "all use" of the cell phone if it's his account and he gets the bill.

Richard Noot wrote: If use falls below 50% he will then have to recapture any deduction that was taken.
Huh?

[Richard Noot]

Richard Noot wrote: If use falls below 50% he will then have to recapture any deduction that was taken.
Huh?[/quote]

cell phones are listed property which means that the cost can not be expensed but has to be depreciated. If the calls fall below 50% on a rolling basis, then the depreciation has to be recovered as additional income. Ex 2005 business use is 55% 2006 business use is 55% 2007 business use is 55% 2008business use is34%. 55+55+55+34=199.
199/4=49.75% since the business use has dropped below 50% for all 4 years the depreciation taken for the 4 years has to be included in income.
The crux of this is that detailed log records need to be kept of ALL phone calls made. If they are not the IRS can disallow all cell phone usuage to 0% The IRS

[dp1903]

In regards to cell phones being "listed property" as defined by the IRS, that is true. Listed property is subject to special rules for depreciation. The cell does have to be depreciated, you can not expense it in the year of purchase, as far as I know.

You have to keep adequate enough records of its use for all purposes so that you can reasonably determine the client's business use percentage of the phone. If you can not establish sufficient records then the IRS could disallow any depreciation for it. If you keep records and use it more than 50% for business use in your business you can take a section 179 deduction and a special depreciation allowance for the first year and you can use the IRS' "GDS" depreciation tables. If, in any year, business use falls to 50% or below then you must "recapture" or include on your tax return as income the difference between the "GDS" depreciation deduction taken in prior years and the "ADS" depreciation which would have been allowed for those years. Also you must include in income any 179 deduction taken and special depreciation deduction taken in a prior year.

There may be several ways to determine what amount of your client's monthly usage charges are for his business. One way would be if the calls are itemized by cost per call. Another way is to take the business percentage use for the year, assuming you have kept adequate records, times the total usage charges for the year.

Obviously this gets to be a can of worms. Make the subcontractors buy their own cell phones and pay their own monthly usage fees. They can bill your client for the their expense of the phone for his business along with other materials being billed to him and keep track of their own usage if it is not used exclusively for business. That way all you have to do is issue 1099s to the subcontractors. Have the boss keep track of his own cell phone use, business and personal, and take the appropriate business percentage use against depreciation and monthly service fees on his return or have him buy a cell used for business exclusively so you can claim 100% business use.

Filing amended returns means changing the amount of revenue and/or expenses claimed on tax returns. This also could mean these revenues/expenses also need to be changed in your accounting system, if the amount is considered material in nature. Since revenues/expenses are closed out to the Owner's Equity account annually, the Owner's Equity account may need to be adjusted by an amount equal to the adjustments made on all the amended returns. The opposite side of this transaction would go to an expense or income account as of January 1 of the year the amended returns are filed. It may be advisable to consult a CPA on this.

[Ingmar]

Why won't your client do this in the future:

1. Pay the amounts owed for the work the subcontractors do, without subtracting anything at all.
2. Stop paying the phonebills of the subcontractors.
3. Have the subcontractors send him a periodic, specified invoice regarding the phonecosts.

This will keep everything very transparent. Also it will prevent your client paying out phonecosts that where not made for his assignments, the phonerecords will have to be clarified here then though.
Last but not least, the IRS can put up all the color flags they want, your client has the documentation to prove that the costs he deducted are indeed all business related to HIS/HER business.

[dp1903]

I came across this info today. It looks like that if the cell phone is used exclusively for business that it is NOT considered listed property and you DO NOT have to keep track of all usage. In this case, it would make sense to me to EXPENSE the cost of the cell phone itself rather than capitalize it in most cases, assuming the cost is $500 or less. A section 179 deduction would accomplish this.

http://www.irs.gov/pub/irs-pdf/i1040sc.pdf

See page C-4, right column under "Exceptions".


Quote: Last but not least, the IRS can put up all the color flags they want, your client has the documentation to prove that the costs he deducted are indeed all business related to HIS/HER business.

I think we already established that the costs deducted were NOT all business related since the cell phones were used by the subcontractors for other businesses as well. In addition, if you take out, i.e. reimburse yourself, for the cost of the cell phone usage from what you pay a subcontractor then you have no legitimate business expense deduction for any of the cell phone usage. [/quote]

[Richard Noot]

came across this info today. It looks like that if the cell phone is used exclusively for business that it is NOT considered listed property and you DO NOT have to keep track of all usage. In this case, it would make sense to me to EXPENSE the cost of the cell phone itself rather than capitalize it in most cases, assuming the cost is $500 or less. A section 179 deduction would accomplish this.


You are incorrect. First granted a cell phone might not be listed property but this is true only if it is used 100% for business. This is extremely unlikely.

Secondly Contrary to what you have stated, even if it is used 100% usage has to be kept track of. The IRS is not going to take your word that you did not make even one personal phone call.

[dp1903]

Quote: I came across this info today. It looks like that if the cell phone is used exclusively for business that it is NOT considered listed property and you DO NOT have to keep track of all usage. In this case, it would make sense to me to EXPENSE the cost of the cell phone itself rather than capitalize it in most cases, assuming the cost is $500 or less. A section 179 deduction would accomplish this.

http://www.irs.gov/pub/irs-pdf/i1040sc.pdf

See page C-4, right column under "Exceptions".


First of all, if the cell phone is used EXCLUSIVELY for business, it is NOT listed property, see the Exceptions on Page C-4 of the link I provided. Second, ONLY LISTED PROPERTY usage must be kept track of, NOT PROPERTY USED EXCLUSIVELY FOR BUSINESS. Therefore, if the cell phone, camera, computer, land line telephone, video equipment, etc. is exclusively for business, then...........IT'S EXCLUSIVELY FOR BUSINESS, i.e. no need to keep track of usage since it is all for BUSINESS.

I disagree, Richard, that it is highly unlikely that a cell phone or any other type of device normally defined as listed property would be used exclusively for business. On the contrary, who the heck wants to have to keep track of a devices usage? Therefore, I would and will use one exclusively for business when I become self-employed. If the IRS doesn't want to take my word for it, then the burden of proof is on them to prove otherwise. The quote below is from the instructions for schedule C of Form 1040.

"EXCEPTIONS. Listed property does not include photographic, phonographic, communication, or video equipment used exclusively in your trade or business or at your regular business establishment."

If the equipment is not listed property and is used only for business there is no need to keep track of its usage. If you disagree, Richard, show me where in the IRS code it states otherwise, not just your personal opinion.

[Richard Noot]

If the equipment is not listed property and is used only for business there is no need to keep track of its usage. If you disagree, Richard, show me where in the IRS code it states otherwise, not just your personal opinion


This is not a personal opinion but fact. I strongly suggest you take a basic course in tax preparation for small businesses. This will answer any questions you have.

[dp1903]

Quote: f the equipment is not listed property and is used only for business there is no need to keep track of its usage. If you disagree, Richard, show me where in the IRS code it states otherwise, not just your personal opinion


This is not a personal opinion but fact. I strongly suggest you take a basic course in tax preparation for small businesses. This will answer any questions you have.

No, it is not fact, it your personal opinion. I have shown you, out of the IRS code, that my opinion is based upon the code. Yours is not. As I said, show me where the IRS requires you to keep track of usage of ANY equipment when it is used exclusively for business. The FACT is there is no requirement FROM FEDERAL LAW.

I've worked for two publicly held companies doing all types of accounting work, assisted with audits, and worked for 2 private companies doing accounting. In the last 3 years I have worked two seasons for Jackson Hewitt, the second season as a manager and I've been through their basic and advanced tax courses achieving the highest GPA of all classes both years.

From reading your posts, Richard, my guess is that you are like me, a perfectionist. We want everyone to dot every i and cross every t, it doesn't matter that we are speaking of minutia in relation to the big picture. I used to have to balance a company's books to the penny and if I couldn't it frustrated me to no end. I used to watch like an obsessive person if all meals and entertainment had reciepts AND the purpose for them was stated on the receipts. Any variation from perfection wasn't allowed. I used to insist that small immaterial items like petty cash be done perfectly. IF it wasn't it frustrated greatly. I've changed. Use common sense instead. In a PERFECT WORLD everything would be done perfectly and we would be in TOTAL CONTROL. Well, it's not a perfect world, but a very imperfect one and we only have control over ourselves and sometimes not even that.

Your opinion is your opinion, Richard, and I respect that. But in this instance I respectfully disagree with you. My opinion is different and you'll have to live with that.

I would suggest you call the IRS. I'm sure they will verify what I have said.