Paying off debt with Services -
11/6/09
at 3:26 AM
What are the tax consequences if a taxpayer pays off debt in the form of services?
Example: A owes B $5,000, but A pays off the $5,000 by working in B's office. Can the debt be satisfied when payment is done in the form of services?... and thus no cancellation of debt income?
>>$5,000 as wages/office expense (debit expense) and reduction of receivable (credit receivable).<<
I agree in principle, but the accounting might be more complicated if the debt is owed to B as an individual and repaid by services to "B's office" as a business entity. Otherwise there would be a big loophole allowing personal cash flow to be recategorized as a business expense.
Of course there could be all kinds of complications depending upon the facts. The original post did not indicate a third party or entity involved so I did not account for a third party.
However, as in your example, B's office receiving services would not actually relieve the debt unless B's office reimbursed B as an individual that owns the debt. Therefore, B's office would have to show payment to B on behalf of A, effectively crediting the expense effecting a zero result on B's business.
Amounts considered as services provided by A would still have to be reported as A's income for tax purposes.
I thought "B's office" would get a deduction for what it pays to somebody for the debtor, A, having worked there. But B's office gets no income to report. That's not a "zero result" where I come from.
And there's still the question of who's gonna pony up *money* for the payroll/employment taxes *if* the services rendered by A are "in the nature of employment."
B still holds the receivable -
11/10/09
at 12:55 AM
>>"B's office" would get a deduction for what it pays to somebody for the debtor<<
In the original post "B's office" is not paying anybody anything. My concern is that if there is a separate business entity (including a sole proprietorship), B could channel personal transactions through the business.
For example, suppose B sold a $5000 car to A. If A gives him money, B has $5000 but no car, there is no debt, and that's the end of it. If A works it off, B has the services but no car and no debt and that's the end (assuming the car's basis exceeded $5000 or value of services).
But if A works it off for a business entity, the value of the services is further deductible as wages. And can you see that B still holds the receivable unless it is transferred to the business as income?
RE: B still holds the receivable -
11/10/09
at 6:46 AM
Assume nothing that's not stated. Who's to say that "B's office" isn't just a place where B *works*, and that B doesn't own the business or even a piece of the business. Like A shows up instead of B where B usually works [A would be wearing a B mask, I guess] and does B's work there for a while as a way of repaying B for what he owes him...? This does satisfy the *stated* facts of the OP doesn't it?
>>This does satisfy the *stated* facts of the OP doesn't it?<<
It does. And OldJack agrees in saying, "there could be all kinds of complications depending upon the facts."
Many of my posts on this and other forums are a challenge to avoid assumptions and continue the interview until all relevant facts can be analyzed. That's easy to say on November 10, maybe not so easy on April 10.
Well Jainen, we know you are just a shrewd old fart that wants to make us all think before we do something stupid. But, you don't have to always make us look stupid. :)
OJ, maybe he just wants to make us think, *after* we make *ourselves* look stupid. I'm quite accomplished in that arena. Why, just the other day, when my lady friend was taking a shower...
RE: Paying off debt with Services -
11/7/09
at 12:00 PM
And if the services performed to pay off the debt are performed by the debtor as an *employee* of the creditor, then there may be a W-2 to be prepared *and* payroll/employment taxes to be paid. IRS expects cash/money/check for these taxes; they're not in the habit of letting you *work off* your tax liabilities.
See, what I'm saying here is that it's not a "tax-free" deal since barter is taxable, and it's not a *cash-free* deal either; somebody may have to come up with cash to pay the employment taxes to the IRS. And oh yeah, some to pay to the state, too...
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