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Deductions against a sign on bonus

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  • Deductions against a sign on bonus

    Hello there,

    I am new to the WCI community but excited to learn!

    I am trying to finish up taxes for 2021 with my partner and am wondering what can be written off as a tax-deductible expense for my sign on bonus. Specifically, I received a 24k sign on bonus in Jan of 2021 for a contract I signed in Oct of 2020. My move from UT > WV, which occurred in Dec 2020 was NOT reimbursed by my employeer. If I am categorizing this as an IC, it seems like I could state that my "business" expenses occurred in 2020 but were not profitable until 2021. (From my basic understanding of the IRS book, it seems like this a question of cash v accrual method of accounting, though again, I am new to this). Can I deduct mileage, contract attorney, and airbnb costs accrued in fall of 2020, tax free against my sign on bonus? Sign on bonus was paid out as a 1099-MISC. I am planning on doing the employer only portion of a solo 401k off the net earnings as I maxed out my 2021 403b.

    Thank you for all your help! I apologize for the seeming redundancy though have not seen this specified on the forum (or after combing though the internet).

  • #2
    This is not a redundant question. In fact, I think it is a very good and thought-provoking question.

    Individuals are, by default, cash basis, so that’s a strike. However, I think it would be acceptable to treat a % of those expenses as “start-up” costs and deduct the amount you allocate to offset the bonus. You are allowed up to $5k deduction for SOC as long as long as the total does not exceed $50k. Understand, though, that these costs apply to the new job per se, not just the sign-on bonus, so you will have to make a judgment call as to how to allocate and I’m not going there, up to you and your CPA.

    One thought is that, if your atty helped you negotiate a higher sign-on bonus, I would consider a higher % of his/her fee allocable to start-up costs. Fwiw, this is a suggestion I would be willing to argue with the IRS on behalf of a client in event of an audit, or I would not recommend it.

    Welcome to the forum and best of luck with your new position!
    Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087


    • #3
      Thank you very much! Sounds like the year is less of an issue than the actual costs that I am deducting