Are contracting fees paid to a prime contractor tax deductible?

Question

Are fees paid to a prime contractor to allow our company to receive a contract under one of their existing contracts deductible? For example, we submit a bid to the prime contractor for $120,000 to perform the project. The prime contractor receives this $120,000 from the government for the services we are performing, but only gives us a subcontract for $100,000 to perform what we have estimated would take $120,000. Is this $20,000 "fee" we are having to pay this prime contractor a business expense and tax deductible?

Thanks,

Answer 1

No, reaffirming Bostonianinmo's answer, you may not deduct the $20,000 "fee" you "pay" the primary contractor.

Here is the reasoning...

If you declare $120,000 (not $100,000) of gross revenue and, then, deduct the $20,000, it will still result in a net subcontract of $100,000.

In effect, you already deducted the $20,000 by declaring the lesser amount (120,000 - 20,000), and you may not deduct the $20,000, a second time.

More simply, and in practice, you will just declare the gross amount that you receive for the subcontract, or $100,000.

Phil
http://www.phillipfostercpa.com/accounting.html

Answer 2

You would only report what you are paid, $100,000

If you bid $120,000 on the project, why are you only getting paid $100,000? The general contractor is hiring YOU and I don't understand why you are paying a "fee." They should be marking up your price in their bid to make a profit on the job.

Answer 3

No, but you only received $100k, so that's all the income that you report. The net effect is the same.