Accounting and Tax Services
Oct 07

Repayment or compensation? When does intent occur?

Here is a common scenario – the physician-owner takes out money from his or her medical practice for one reason—then later decides to characterize it differently. For example, the physician takes out a distribution and then changes it to an expense reimbursement. Or he or she might turn a paycheck into a loan repayment. Well here’s a court case where owners of a business did exactly that; it is a good lesson about proper accounting and tax treatment:

 

The case: W was one of several owners of a corporation for which he performed personal services. All the owners had lent money to the corporation. The corporation issued a 1099-MISC to W, reporting $27,574 of self-employment income and paid that amount to him. W initially reported the amount as self-employment income, but did not pay self-employment taxes.

 

Subsequently, W had his employer (the corporation he partly owned) issue a corrected 1099 reporting $0 of self-employment income and filed an amended tax return characterizing the payment as a loan repayment from the corporation.

 

The decision: For the IRS. Whether a payment is compensation or something else is determined by the parties’ intent at time of payment. The corporation reported the payment as self-employment income, and the taxpayer reported it as wages on his tax return. Only after being told that it would be better from a tax standpoint to characterize the payment as a loan repayment did the taxpayer ask the employer to issue a corrected 1099 and change how the payment was characterized. The parties could have agreed in advance that the payment would be related to the loan, but they were not free to change it after forming the initial intent. [Wilson v. Commissioner, T.C. Summ. Op. 2008-114]

About Reed Tinsley, CPA

As a top advisor to physicians, I help increase practice profits by delivering hands-on, expert medical accounting/tax support, practice counsel, and revenue-building strategies. Read more →