Referral Fees

[GTS1101]

Anyone else offering referral fees to customers. If a client refers someone to me I will give them $20 off their tax preparation. If they refer someone after they have their taxes done I plan on sending them a rebate check after tax season. I started thinking about this and was concerned that this would be taxable income to my clients. I was thinking of treating the amount of the rebate up to their tax prep fee as a rebate of their tax prep fee and then anything above would be taxable income? Is that to much of a stretch? Just curious as to how any of you handle this type of situation. My clients are very excited to get rebate checks and some have said if I get $20 unlimited give me a whole bunch of business cards. I will send you a lot of business.

GTS1101.

[JG EA]

I think you are on the right track with the rebate side of it. And this following wouldn't apply if in the same year.

Tax benefit rule. You must include a recovery in your income in the year you receive it up to the amount by which the deduction or credit you took for the recovered amount reduced your tax in the earlier year. For this purpose, any increase to an amount carried over to the current year that resulted from the deduction or credit is considered to have reduced your tax in the earlier year.

However, I was thinking about the "extra" amount over also. Would this be a gift from you to your client and if so would it be limited to $25? (Over and above the rebate that is.)
The reason I was wondering is a local shop gave a percentage of a repair job as a rebate (but no part of it came out of pocket because the other insurance company covered it). Is this taxable to us? And why don't I know immediately? And then I wondered did the shop count it as a rebate - but how, since the other insurance company paid for it? And if not that did they count it as advertising? (Too much to be a gift deduction.) I'm not trying to misdirect but maybe someone will have a great idea that will answer your question.

[erchess]

I don't have a cite but here is what I do

I give someone ten percent off their next bill for every referral, subject to a limit of ten credited referrals per year. This is not a publicized part of the deal but if someone gives me ten or more referrals I also have food delivered during or after the preparation or take them out after the return is done.

Tax consequences

I report the value of their discount up to the cost of the return as income on line 21 of their return for the year in which they receive the discount. I call it a kickback because that is what I believe it is.

I report the ordinary cost of their return as taxable income on my return for the year in which I do their return for free or at a discount.

I report the cost of the meal as "Meals and Entertainment " on my Sch C. Since the normal topic of discussion the whole meal is this year's and next year's taxes for them I don't think that is a problem. I don't think any part of the non deductible half can be counted as a business gift although my Dad disagrees. I tell him that is why it is good that I prepare his taxes and mine instead of his preparing his and mine the way we used to do a long time ago.