impairment related work expenses

[rtf7]

I am disabled but do a limited amount of work for an S Corp. For years I have deducted as impairment related work expenses (IRWE) various items/services I need to be able to work.

Last year one of the impairment services for which I contracted was not provided, so I refused to pay. This resulted in legal action being taken against me.

Are my legal costs of defense also deductable as IRWE? The IRWE is a desirable categorization since it is not subject to the 2% limitation on Schedule A.

[Burke]

Not sure I understand the situation. Did you contract to provide some type of services and then not perform them? Why? So you were sued for non-performance of the contract? If so, then legal expense is not deductible.

[erchess]

Two Responses

To Burke- He contracted to pay for some sort of impairment related service that would have helped him work but he didn't pay because the service was not provided. He got sued for non payment. My take would be that the lawsuit expenses are not deductible but I would like other opinions.

To Original Poster - I sent you a Private Message. Hope it helps you.

[DaveO]

If the suit was in the normal course of his contracting business it may be an ordinary and necessary expense. The details seem a little vauge. What service did he contract for? Why did the company not provide it? What remedy did either party seek before the suit was filed? Without knowing more details I would tend to agree that it's non-deductible but could be swayed the other way if the facts supported it.

[David1980]

so I refused to pay. This resulted in legal action being taken against me.

Not sure I understand. Let me "guess" and you tell me if I'm right?

You are A. Company that you contract for is B. Company you refused to pay is C (C is not B, right?).

A contracts for B. A needs an item from company C to do that work. A agrees to buy item from company C - expects company B to pay the bill.

Company B doesn't pay the bill. A refuses to pay C. C sues A.

Would that be correct?

[rtf7]

Many thanks for the replies so far.

Sounds like I may have simplified the original question too much. Here are more details:

I (party A) was unable to work for my S Corp (party B) because a disability accommodation was refused by party C. Consequently, I hired someone to assist me (party D), but they did not perform the promised services, so I was still unable to work. So, I refused to pay this assistant (party D).

Lacking disability accomodation from party C, and assistance from party D, the S Corp (party B) paid for disability barrier removal so I could work. I was able work again until party D sued me, claiming non payment.

I have expenses defending against party D's suit, and dealing with the suit consumed my limited work time such that I could not work for the S Corp (party B) for many months, resulting in losses.

Due to illness and being homebound, I have little ability to defend against wrongdoing from parties C and D, and recover from them. So, I'm left to recording the expenses/losses on tax forms. What is the best allowed way? Seems to me all that has happened follows from impariment-related work issues, and thus should be deducted as IRWEs.

[erchess]

My Two Cents

If your S Corp actually spent money (even borrowed money as in a Credit Card or loan) and if this spending exceeds income the the S Corp has a loss to carry to your 1040 where it only helps you if you have taxable income for it to reduce or eliminate. I believe that unused S Corp Losses would give you a Net Operating Loss. That can be carried back either two or three years (I forget which) if you wish and then if you don't carry it back or if there is unused loss after you do, then it may be carried forward for I believe fifteen years. The bottom line is that S Corp Losses are only useful if you at some point have taxable income for the S Corp Losses to offset.

I am beginning to think that your lawsuit may have been in the ordinary course of business as someone else suggested. It sounds like you paid the expenses out of your pocket rather than going through the S Corp. Someone else needs to tell us how you claim the deduction if I'm right. If you paid the legal expenses through the Corp then you simply deduct them on the 1120S.

If you are a low income person you might be able to arrange through the State Bar for a lawyer to take your case pro bono publico, that is, free or at the very least on a contingency basis which would mean that the lawyer gets only his or her expenses plus a percentage of what you collect. In my area there are many lawyers who will come to you if you have a good reason why it is very difficult for you to go to them.

[David1980]

I'm thinking this is involved enough to get a local tax professional and/or attorney involved. Yes, try to find someone doing probono work if you're low income.

I'm not convinced that party D's lawsuit would be considered impairment related work expense. You may have hired D to do work you couldn't because of an impairment related work issue but D isn't impaired and isn't suing for impairment. Sounds like D is sueing for failure to pay, but D failed to meet the contracted oblitation (so what's the contract say for non-performance?)

So in a nutshell, I think this is beyond the scope of free internet advice. No doubt you can get advice but with so many variables you'll probably get 5 answers from 5 people and be lucky if 1 of those answers is correct (much less know which one it is.)

[S T]

rtf7

It would seem that you are not a tax professional, and you have already gleaned a lot of information from this Board,

I think now is the time for you to take your information to a CPA or EA in your area! You wil not receive the correct answers here, not because we don't know, but due to the fact that we do not have the knowledge of all of the facts and circumstances related to your question. We can not conduct a personal interview with you and ask the multitude of questions that arises in preparing a tax return, that we sign our "Paid Preparer Name" to.

As tax professionals on this board, we ask questions, examine, research, and many other aspects, before a taxpayer's return is completed and filed.

You need to do likewise with your knowledge and interviewing a tax professional to prepare your return! as accurately as possible!

Sandy

[rtf7]

Thanks for the ideas and advice. I can see this is a complex tax area.

I recently lost the lawsuit because I was too ill to obtain legal help or defend myself in court. I had counted on the services of the assistant so I could work, and so she knew in detail my disbility's limitations, and unfortunately therefore how to take advantage of them.

The S Corp has existed for 20 years and reguarly posted profits until the recent few years when there have been losses arising from the refused disability accomodations and barrier removal costs. If in tax year 2008 it pays the legal action costs, that will turn a small gain into another loss. That will make losses in 3 of the past 5 years, so I worry that will cause the IRS to recategorize it as a hobby.

I'm not talking huge income numbers here. Sales on the order of $10,000 per year is about all I can muster for the S Corp these days. Hiring accountants who will visit becomes impractical, for example $750 last year, and I ended up correcting him about the disability tax code. Hence my reason to seek info here.

Does anyone see a way (such as via deductions) to ease the burden for losses due to my being unable to work for the S Corp due to being occupied by the lawsuit? Many thanks for everyone's input.

[David1980]

Does anyone see a way (such as via deductions) to ease the burden for losses due to my being unable to work for the S Corp due to being occupied by the lawsuit? Many thanks for everyone's input.

There's no tax deduction for being unable to do work. Rather you simply don't have any income to report thus the tax return is that much lower. If you're asking will this allow you to have 3 years of losses without being reclassified as a hobby the answer is a strong maybe. I think you have a case that the losses were due to unusual situations. 3 of 5 is really more of a guideline than a firm rule anyway.