![]() ![]() They are both important, but they are two different things. That’s right – Rule 1 is about your ability to prove your expense Rule 2 is about the IRS tax enforcement to your contractors. Rule 2: Sending a Form 1099 to the IRS so they can cross-check that your contractor reported the payment on his tax return.Proof can be direct (a check) or indirect (recreating what you did and who you paid). You just need to prove you paid the expense in the operation of your business. Nothing in Section 162 or Cohan requires a Form 1099 to be issued for a subcontractor labor expense to be deducted. So proving the expense was paid (as required by Section 162 of the Internal Revenue Code) can be by check, or not. IRS auditors do not like indirect evidence. ![]() ![]() Direct evidence is better, but indirect evidence is allowable and permissable. In other words, you can have direct evidence of the expense (your check with the notation in the memo portion proving the expense), or indirect evidence (recreating how many contractors the job entailed, how many hours they worked, and what their hourly wage was). Tax Court – allows you to recreate evidence to prove an expense. 1930).Ĭohan – which is followed both by the IRS and the U.S. These are evidentiary problems, but they are solved by application of the case of Cohan v. A check to the contractor proves the payment (it is best if the check has a notation in the memo portion, notated along the lines of “labor for Smith job,” but that’s not absolutely necessary, just good practice for the future.)Īnd it’s even okay if you paid in cash, not by check. In the case of subcontractor labor, you would need to show the IRS auditor that the work the contractor performed was done in the ordinary course of your business and was necessary to it, and then prove that you paid the contractor. Section 162 of the Internal Revenue Code allows a deduction for ordinary and necessary business expenses that are paid or incurred during a year.
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