Someone please school me

[ILLMAS]

And don't worry, I was still part of the breed when nuns would spank kids. Let's say Sean (1040) guy and his friend Shawn (1120) both know the beer making industry. Sean donated his time to Shawns' beer making business, both agreed on a nominal amount and Shawn wrote a thank you for the donation letter exactly how non-profit write it. Now Sean comes to you with this letter, how would you prepare his tax return?

This is just a hypothetical question.

Thanks

[rfassett]

Not sure where you are going with this, but it is a complete non-tax event for the 1040 - unless this some sort of quasi 1099 thing.  Same thing for the 1120, actually.

[ILLMAS]

For this scenario, a 1099 was issued.

[MsTabbyKats]

What box on the 1099?

[ILLMAS]

7

[ILLMAS]

I am afraid Sean is going to get hit with SE tax, itemize the "donation amount" and Shawn would have to increase his income by the donated amount.

[MsTabbyKats]

I'm not seeing where it's a donation. Sean did some work....and was compensated. I'd do a C.

Edited February 12, 2015 by MsTabbyKats

[jklcpa]

He didn't receive any funds thought, right?   Sean-the-beer-expert has no donation because there is no value placed on one's time. Shawn-the-1120S-guy got the benefit of free advice as far as I can see, and no 1099 should have been issued.   The nun would hit your wrist with a ruler. 

[Richcpaman]

Don't forget all the beer....

[ILLMAS]

I am going to take a wild guess that Sean did actually get paid, and somehow Shawn was advised to issue a donation letter to Sean to offset the 1099 amount minus "donation amount" = zero profit. Or that's what they were thinking they can do.

Actually I never got hit with the ruler, just spanked and shaken violently lol

Edited February 12, 2015 by ILLMAS

[jklcpa]

The 1120S beer company isn't a charitable organization, so no deduction is allowed.

 

My sister tells me she spent a lot of time in the coat closet at Catholic school. That was the nun's version of sitting a child in the corner. Me, I missed out on that and attended public school. 

[ILLMAS]

I agree, thanks.

[rfassett]

The only other thing I could think of is that Sean, through his sweat equity, has earned a vested interest in the 1120 and that paper you have is showing what they agreed his efforts were worth. That scenario would usually be run through payroll with a W-2 issued thereby establishing Sean's basis in his interest in the 1120. Running this scenario on a 1099 risks the recipient (Sean) taking deductions from the gross amount thereby tainting the basis number. I would say that if this IS the case, do not record any expenses against the 1099 income.

Either way, I believe you have some more questions to run by your client.

If this IS an effort to take an itemized deduction for a charitable contribution, you not only have questions for your client, it is also time to do some educating.

[Pacun]

NO donation involved for the worker. The person or entity receiving the free advice should report the FMV of that service as income.

 

Technically that letter that he received, it is salary to the worker. He is getting a benefit when he shows that letter to you or to his friends, so he should pay taxes on that amount. What benefit he gets? He gets the benefit that he is a good guy because he donated time and he also gets the benefit that you know he can make beer, that he is a beer expert, and you might want to be his friend because he will make beer and you will get it for free.

 

This is a barter transaction and trust me, people claim they don't get a benefit but they do. A few years down the road the "employer" will take the "worker" to lunch or more. No free lunch.

Edited February 12, 2015 by Pacun

[Catherine]

Don't forget all the beer....

That's just Quality Control checks, not a benefit.