Margaret CPA in OH Posted April 6, 2011 Report Share Posted April 6, 2011 I don't have the documents yet but a small contractor was paid only $3000 of an $8900 roofing repair job. This didn't even cover the materials let alone the sub to help. The client decided she didn't want to pay the balance, called another roofer who claimed the work was bad. She sued contractor, gave new roofer the job. Contractor lost and had to pay $7000 to client. I'm thinking the attorney fees are deductible but not the judgment, correct? Contractor then fell off another roof and has been out to work since May of last year but I still think he's out of luck on this. Thanks for insights. Quote Link to comment Share on other sites More sharing options...
Pacun Posted April 6, 2011 Report Share Posted April 6, 2011 I always say this... a little event can change your life for ever. If he did a good job for the lady, maybe he would be OK and working. Back to your question... I think Legal Fees are "professional fees" and the $7K is "returns and allowances" if there were no punitive damages. Quote Link to comment Share on other sites More sharing options...
Margaret CPA in OH Posted April 6, 2011 Author Report Share Posted April 6, 2011 Thanks, Pacun. I will look at the documents to see the description of the $7000. Quote Link to comment Share on other sites More sharing options...
kcjenkins Posted April 6, 2011 Report Share Posted April 6, 2011 Since he had to pay her $4K more than she had paid him, I'd be looking carefully to see what part of that was 'punitive damages'. Some of it might be the other guys legal fees, but if any of it was punitive damages, those can not be deducted. Quote Link to comment Share on other sites More sharing options...
jainen Posted April 6, 2011 Report Share Posted April 6, 2011 >>if any of it was punitive damages, those can not be deducted<< Can you cite some authority for that, kc? Penalties paid to a government agency for violation of law are a different matter, but payments related to a contractual relationship, even if due to non-performance, are generally deductible. Margaret, be sure to 1099 the homeowner because that is taxable income to her. In fact even punitive damages related to a physical injury are taxable income, so you know that everything he paid is a legitimate business expense. But tell the guy to find another line of work. Obviously he is not a very good roofer. Quote Link to comment Share on other sites More sharing options...
Margaret CPA in OH Posted April 6, 2011 Author Report Share Posted April 6, 2011 Thanks, Jainen, the 1099 is a good idea. I do still have to see the documents but feel better knowing there may be some small good come of this. The client will have to find another line of work, anyway. He still is not able to work from his accident and is trying to get disability of some sort. Now it's an insurance issue because the insurance agent led them to believe he was covered for accidents so he didn't pay for himself for worker's comp. Agent now denies. I suspect that these folks didn't read/couldn't understand the policy and didn't ask. They are really struggling with <$10,000 in income and 3 little kids at home. Quote Link to comment Share on other sites More sharing options...
kcjenkins Posted April 6, 2011 Report Share Posted April 6, 2011 Jainen, just the 'reasonable and necessary' part, no specific cite. I agree that most of it should be deductible, but generally, courts hold that punitive damages are only granted for acts that are not within the scope of normal activities for the business. And thus, not, IMHO, 'reasonable and necessary' for the business. I've heard that argument from an auditor, and could not find a good basis to object to the logic. Although I'm always willing to learn, so if you know a way around that, please tell me. On the other hand, after reading this, I may have to rethink my position. Seems like logic is not enough, when judges rule this way. My link Quote Link to comment Share on other sites More sharing options...
jainen Posted April 6, 2011 Report Share Posted April 6, 2011 >> punitive damages are only granted for acts that are not within the scope of normal activities for the business<< That sounds right. I don't think it applies here, though. In most states punitive damages only happen in personal injury cases. This looks like a Small Claims property case awarding actual damages to the $7000 max. It would not have any allocation as to the type of damages. Quote Link to comment Share on other sites More sharing options...
Margaret CPA in OH Posted April 6, 2011 Author Report Share Posted April 6, 2011 I will be happy to share the details when I see the documents so we all can discuss more intelligently with facts but it is interesting to learn from the back and forth here. Thanks, folks! Quote Link to comment Share on other sites More sharing options...
Pacun Posted April 6, 2011 Report Share Posted April 6, 2011 I will be happy to share the details when I see the documents so we all can discuss more intelligently with facts but it is interesting to learn from the back and forth here. Thanks, folks! That late 1099-misc should make his day after he was beaten in court. Make sure you make it for the 7K since she should have issued him a 1099-misc for 3K. Quote Link to comment Share on other sites More sharing options...
Gail in Virginia Posted April 6, 2011 Report Share Posted April 6, 2011 Just a thought, but one possible reason that the amount awarded was larger than a simple refund of the amount that he was paid might be that it was based on what the second roofer billed to correct whatever issues he found with the first roofers work. And that would not be considered punitive, but compensatory. Not saying, just guessing at possibilities. Quote Link to comment Share on other sites More sharing options...
kcjenkins Posted April 6, 2011 Report Share Posted April 6, 2011 I agree, Gail, and that would clearly be deductible as a business expense. And, as I mentioned, part of the judgment is probably the other side's legal fees, and that is deductible. So none of it may be punitive. And based on that recent case, I think you could make a decent argument for deducting even any punitive amount, if there is such. Quote Link to comment Share on other sites More sharing options...
Margaret CPA in OH Posted April 6, 2011 Author Report Share Posted April 6, 2011 Stay tuned - I'll find out and let y'all know. Quote Link to comment Share on other sites More sharing options...
Catherine Posted April 6, 2011 Report Share Posted April 6, 2011 I learn SO much here -- thank you all! And good luck to you, Margaret. And to your client -- who knows; perhaps he was a good roofer who had one job go bad. After all, haven't we all here, tax pro's all, had a return go bad for bizarre and unforeseen reasons? I had one a couple years ago where SO many things went wrong it was not funny. It was 95% the client's fault (the last 5% being mine for not pushing harder after instance #1), answering clearly-stated questions in ways that were flat-out incorrect or deceptive -- but they were convinced that I was a charlatan. Quote Link to comment Share on other sites More sharing options...
jainen Posted April 6, 2011 Report Share Posted April 6, 2011 >>a good roofer who had one job go bad<< TWO jobs, as I recall from the original post. Personally, I don't see any reason to ask for any more documents from this poor guy. Give him the deduction--if the IRS has a question there will be time enough to answer it. Quote Link to comment Share on other sites More sharing options...
Pacun Posted April 7, 2011 Report Share Posted April 7, 2011 >>a good roofer who had one job go bad<< TWO jobs, as I recall from the original post. Personally, I don't see any reason to ask for any more documents from this poor guy. Give him the deduction--if the IRS has a question there will be time enough to answer it. I agree with Jainen... two jobs in a row went bad for him. He also did a bad job securing a good insurance for his dangerous job. Quote Link to comment Share on other sites More sharing options...
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