Commissions and IRS

[Plasun]

I am a newbie and considering buying a route. The seller currently pays commission to the location owners. It is paid in cash. How would I treat that commission from a tax perspective?

 

I understand that a 1099 is not customary (the yearly commission to each owner is smaller than $600, which I believe is the lower limit for 1099 to be required). I also understand that it is the location owner's responsibility to report his income, and frankly I could care less if he does. For my own part though, I want to have clean books and be able to face IRS anytime.

 

Should I report the total gross income and then deduct the commission - or just pretend that the income never existed in my books, i.e. like we split the cash even before I got it in my hands? I heard it is customary to do the latter. In the end IRS would get the same amount from me, so I am not cheating anyone either way, it is just a matter of which way is correct.

 

If I have to report the full amount, how do I document the deduction for commission? Do I have to ask for receipts every time (won't fly I think) or can I just deduct it based on what the contract says?

 

[havending]

For any tax questions use a pro.

They will show you how to report each gross dollar. And how to properly deduct commission ( rent ). And other expense. The IRS works off gross income then deductions just like personal taxes. It's just more complex in a business.

[AZVendor]

You will treat commissions as an expense to the business that is deducted from gross sales.  If you pay on the spot, then you have every right to require them to sign a receipt showing how much you paid them.  This will protect you from IRS scrutiny.  If the location balks at that, remind them that as long as the commissions don't go over $600 in a year there will be no 1099 to the IRS so they can do what they want with the money.  You however, as a business owner, have to adhere to properly business accounting principles and therefore you require a receipt.  If you pay by check to any location, then that will be your receipt. 

 

As always, run this by your accountant.