When is reported revenue misleading?

Fred’s question:

In the supporting statement for a Schedule C, I found a line labeled "Nominee Distribution to XYZ Partners, Inc". What is this?

Linda says:

The term "Nominee" is used when a company or person receives a 1099, and therefore has to report revenue or income, that really does not relate to them.

Usually on Schedule B

You see it much more often on Schedule B. As an example, if I am on my mother's bank account but it is her account, and for some reason the bank sends the 1099 for interest to me with my social security number on it, I have a problem. The IRS thinks it is mine so I cannot just ignore it and report it on her return.

So, I report it on mine, and then subtract it off as "Nominee Interest". I also would be required to issue a 1099 Nominee Interest to my Mother with a copy to the IRS. She would then report the interest on her return and all would be well.

Why on Schedule C?

I have not seen Nominee Distribution on a Schedule C before but I am guessing that the business received a 1099 for Non-employee Compensation that should have been issued to the corporation they listed. If my guess is right, they reported the revenue but subtracted the same amount in the expenses, washing it out. Since this is a Schedule C, it could be that the reporting entity it is a one-owner LLC and the named Corporation is related.

How does that make revenue misleading?

In this case, the revenue reported includes the revenue later backed out by virtue of the "nominee distributions". If you are paying attention only to the bottom line, it is not misleading. You can get the wrong impression, though, if

• you are comparing revenue from one year to another or several other years
• they do not both have similar amounts of nominee income/distributions
• the amount of nominee revenue/distributions is significant

While we are on the subject of misleading revenue...

The most common reason revenue on a business tax return (and Schedule C certainly is that) is when the return is on the cash basis. Differences between the years may be related solely to variations in the balance in accounts receivable, in other words, whether they have built up the accounts receivable balance and therefore, are reporting less revenue than they earned. There is nothing wrong with that. But it can be misleading if you do not notice it is cash-basis.

More on Schedule C and the impact of Cash vs Accrual Basis

Schedule C is covered in our virtual training on tax return analysis. So is the difference between cash and accrual basis. Need to dive in? Click here to get more info and join our virtual tax return analysis class.

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