Interesting senario

[NotEasy]

Taxpayer switched her cell phone plan in 2010. Because she did not fulfill the term of the plan, her former service provider charged her $800 as penalty. But the vendor of her new service provider reimbursed her for the penalty. However, they also gave her a 1099-MISC and marked the $800 reimbursement as 'non-employee compensation' in box 7.

How would you report this situation on her tax return?

[appelman]

I'd call it other income, line 21.

Unless, that is, she is deducting the $800 as a business expense. You might ask the company to issue a revised 1099-misc showing the income in Box 3, but that may be futile. Lacking that, you may want to do a disclosure describing the income and stating that it was misidentified on the 1099.

[NotEasy]

Unless, that is, she is deducting the $800 as a business expense. You might ask the company to issue a revised 1099-misc showing the income in Box 3, but that may be futile. Lacking that, you may want to do a disclosure describing the income and stating that it was misidentified on the 1099.

I am thinking that even though she paid the $800 to her former service provider and did not pocket the money, it is still not deductible to her. The reason is that she was definitely not in a business and, therefore, it should be considered personal expense which is not deductible. So she would have to recognize the $800 reimbursement as income. But she should not pay FICA on it because it is not earned income. Are we on the same page?

[Gary2]

I am thinking that even though she paid the $800 to her former service provider and did not pocket the money, it is still not deductible to her. The reason is that she was definitely not in a business and, therefore, it should be considered personal expense which is not deductible. So she would have to recognize the $800 reimbursement as income. But she should not pay FICA on it because it is not earned income. Are we on the same page?

I agree.

If the company that issued the 1099-MISC doesn't correct it after being asked calmly, I'd encourage the client to complain loudly through whatever communication paths exist - customer satisfaction, etc. I hear about too many cases of box 7 reports that belong in box 3, and the cell phone companies should be able to afford the proper professionals to get this right.

[taxea]

Personal or business this is a reimbursement...Post it on the return and make an adjustment to take it out. Be sure to include a statement of explanation. The IRS instructions do include information on how to deal with a 1099 issued in error. It is too bad that they don't have a code in box 7 for reimbursement....this isn't any different than an insurance reimbursement.

On the other hand the IRS could look at it as a non-deductible personal expense in which case she just has to bite the bullet and pay tax on the reimbursement.

Was it a 1099c?

[ChEAr$]

Personal or business this is a reimbursement...Post it on the return and make an adjustment to take it out. Be sure to include a statement of explanation. The IRS instructions do include information on how to deal with a 1099 issued in error. It is too bad that they don't have a code in box 7 for reimbursement....this isn't any different than an insurance reimbursement.

On the other hand the IRS could look at it as a non-deductible personal expense in which case she just has to bite the bullet and pay tax on the reimbursement.

Was it a 1099c?

Was just about to say that i disagreed with others that it was taxable income, but now my Hawaii colleague makes the point.

However, how do you report it on line 20 and then "back it out" ? where?

No, I would make it a paper return, mail it in with a well written explanation justifying why
1. it is not se income and 2. why it is not taxable, since the new company's "reimbursement" was simply a reduction of future costs to get client to switch.

[Gary2]

2. why it is not taxable, since the new company's "reimbursement" was simply a reduction of future costs to get client to switch.

This occurred to me, but can it qualify as a rebate on a purchase if the purchase hasn't been paid for? Also, what are the obligations to return the money if the client backs out of the new company's contract?

Would the company even bother with the expense of issuing the 1099 if they thought they could get away with treating it as a rebate on a purchase?

[ChEAr$]

This occurred to me, but can it qualify as a rebate on a purchase if the purchase hasn't been paid for? Also, what are the obligations to return the money if the client backs out of the new company's contract?

Would the company even bother with the expense of issuing the 1099 if they thought they could get away with treating it as a rebate on a purchase?

I don't think the phone company knows diddly about proper use of the 1099 misc, since they used box 7.

[Burke]

I don't think the phone company knows diddly about proper use of the 1099 misc, since they used box 7.

I don't either. I would certainly question them about why it was issued in the first place. I look at it as a rebate, myself, as an incentive to switch companies. OP said "reimbursed" the TP. Does this mean they actually wrote her a check? Credited her account? Require forfeiture of any or all of the amount if she cancels with new company?

[Jiggers]

I don't think the phone company knows diddly about proper use of the 1099 misc, since they used box 7.

Neither does our local electric co-op.

A few years back they offered cash rebates for installing energy efficient air conditioners.

Client installed one in his home. For personal use only.

Come the next January, 1099MISC arrived for the amount of the rebate.

I called their "top notch" accountant who I knew. I found out that he was a high-paid "top notch" accountant that didn't know diddly either.

He wouldn't void the 1099, so I showed it on line 21 adding and then backing out the amount. I attached a schedule that showed:
1099MISC from Electric Co-op 700.00
Rebate of A/C Cost -700.00
------------
Taxable 0.00

With an explanation of what this was. Of course this was back in the days of paper returns. Client never heard from the IRS.

How many receive 1099's for the cash rebate received on their vehicles?

[JG EA]

I agree with others that if not business then not taxable. I would count it like a Patronage Dividend. Taxable if a business ONLY because the business took a deduction for the full price. i.e. in and out on the books.

[Burke]

He wouldn't void the 1099....................

You might have reminded him that there is a $50 penalty for filing a 1099 with incorrect consequential information. Intentional disregard (which would be the case, IMO, when it is brought to their attention with documentation) brings a fine of $100 per. How many of us just take the easy way out and work around the situation?

[Gary2]

Is it possible to have a rebate on something that has neither been paid for nor delivered? Isn't there a difference depending on whether the $800 is paid at the beginning of the contract with the new provider, or only after the client has been with them for whatever time frame is called for by the new contract?

Suppose the client treats the $800 as non-taxable now, and subsequently the new contract is canceled in six months, for whatever reason. If the client doesn't repay the $800, does it then become income in 2012? What type of income?