Question: if I don’t issue a contractor a 1099-MISC for their work, will I lose the ability to take a tax deduction for that payment on my business tax return?
Answer: NO!!! But sometimes IRS auditors will try to take this position.
Discussion
There are two separate issues here. One is the ability to take a deduction; the other is the requirement to issue a 1099.
The ability to take a deduction comes from Section 162, where (for a business) all “ordinary and necessary” deductions are allowed.
To take the deduction, you would need to be able to prove the expense. So invoices, canceled checks, bank statements, etc.
And if you don’t have any of those, you’d probably still get at least a partial deduction by estimating (using the Cohan rule).
Note that nowhere is “issuing a 1099” a requirement for taking a deduction.
Issuing 1099s is a separate issue. Not issuing a 1099 to a contractor can come with penalties — currently up to $270 per form (or $550 if the IRS thinks you “intentionally disregarded” the rules).
The Bottom Line
Not issuing a 1099 might open you up to being penalized, but it will not affect your ability to deduct the expense.
What if the IRS Says “No” to the Deduction?
I present on 1099s multiple times a month, so I talk to a lot of tax pros. I have heard from multiple accountants and tax preparers who have told me they have worked on audits where the IRS auditor has taken the position of “no 1099 was issued, so no deduction is allowed.”
VARIATION: A few tax pros have told me they’ve encountered auditors have said they’ll allow a deduction of $599 but no more (the 1099 reporting threshold is $600).
Either way, the IRS auditors here are wrong and you/your accountant/your tax preparer should fight the IRS on this.
