Question

The roof of your corporation’s office building recently suffered some damage as the result of a storm. You, the president of the corporation, are negotiating with a carpenter who has quoted two prices for the repair work: $600 if you pay in cash (“folding money”) and $700 if you pay by check. The carpenter observes that the IRS can more readily discover his receipt of a check. Thus, he hints that he will report the receipt of the check (but not the cash). The carpenter holds another full-time job and will do the work after hours and on the weekend. He comments that he should be allowed to keep all he earns after regular working hours. Evaluate what you should do.

Answer 1

You should pay by check only. It is because payment through check will get accounted for as a business expense and you will be able to claim a deduction for it on the corporation's income tax return as per applicable rules and regulations. So you will automatically save some amount of tax because of this expenditure if it gets paid by check. It is clear from the information provided in the question that carpenter is not going to provide any invoice/bill for his services in case he is paid through cash (as he wishes to avoid his tax liability related to this repair work). Therefore, in the absence of any such document, it might not be possible for you to substantiate such an expenditure and record it as a business expense in your books of accounts. Also, it is ethical for you to ensure that another taxpayer doesn't avoid his/her tax liabilities in order to save some amount of money. Further, if there is some problem with the work done by the carpenter, you will not be able to take any action against him in the absence of a bill or proof of payment.