Yes you can deduct this expense. You better be able to document that you spent it and that is was spent demoing the property. Either you must treat them as an employee or you must send them a 1099. IRS has a tests as to what constitutes an employee. In this case you are probably OK considering them contractors and send them 1099s.
If you send them 1099s then you would likely need no other proof that the expense was for a business purpose.
Yep, and your friends will be happy about the 30-40% tax bill. Then again, hard to 1099 them with no w-9/ss# info, and no check/receipt.
Yes, it's a legitimate business expense, with them as independent contractors.
And yes, you're supposed to send every contractor you use a 1099, but in the real world, it's not always possible to be perfect about that. No set of books is going to be perfect. Tax laws are so voluminous, and the real world is complex enough, that any judgment call could be questions. What you're mainly trying to do is avoid an audit, and have a reasonable basis for all your decisions if you do get audited.
We put expenses like that down as Day Labor. Loads of contractors use day labor for cash. If it's a minor part of your expenses, you're probably fine. If it's a ton of cash expenditures and starts to look like potential fraud, then you're probably not fine.
@Timothy VanWingerden Sounds like a deductible expense. Cash is still a valid form of payment. :)
Cash just makes it a little harder to document the payment if you're ever audited. But it's not insurmountable.
As for the 1099, you always could 1099 someone if you want to be safe and help document that you paid them, but if you only paid them $1,000 total as you said (as in something like $250 each to 4 friends or $500 each to 2 friends) then you shouldn't have to as you're only required to issue a 1099 when you pay someone over $600.
And not to make this too confusing for you, but if you're a landlord (as opposed flipper or someone more actively engaged in real estate), it's a grey area whether you even need to file 1099's at all. I could get into more detail about that but I won't since it wasn't your question. Here's an article that touches on it though: Small Landlords Not Required To File Form 1099.
Yes, it is certainly deductible, based on your description.
$1,000 is not a huge amount to worry about, as far as an IRS audit goes. If you establish your credibility on other items, the IRS will usually give you the benefit of the doubt on small stuff like this. Especially if you keep a bookkeeping system where all expenses, including this one, are recorded.
That said, if you do have to prove this expense to the IRS, you have to prove two parts.
1. You did pay it. With cash, it's very difficult to prove. The 2nd best proof would be an invoice or a receipt signed by your friend. Can be a hand-written note on a 3x5 index card "paid $400 cash to Joe Smith for manual labor on 123 Shady St. demo" - signed and dated by Joe. (The best one is to avoid cash, of course.) One step further, if this note matches a cash withdrawal from your business account - then you have a solid win.
2. Your friend(s) included it in income and paid taxes on it. Yes, they have to, by law. You want to drop your taxable income by $1,000 - but someone else has to pick it up and pay taxes on it. The IRS seldom raises this issue - but they absolutely can. If you paid less than $600 per person per year (as would be in your case splitting $1k between two guys) - then you don't need to do anything, except be convincing. For example, claiming that you paid $10k cash - $500 to each of 20 guys - will not fly far. Above $600, you need to get their SSN and issue them 1099s, thus forcing them to pay taxes. Make sure you can find new friends after that.
It would be a deduction but it is near impossible to prove you paid anyone with cash. An invoice or receipt will help but if you have other issues the auditor is unlikely to trust this. There was a recent court case where a taxpayer lost deductions because they couldn't prove they paid them.
I pay NOBODY in cash. If they won't take a check they won't get my business. What they do from there is their own business. As mentioned, 1099 requirements start at $600. On larger jobs I tell them I will need a W9 form prior to paying them and at final payment I need a lien waver form signed.
A friend of mine was put though the ringer when he was audited at his clean out business. He paid everyone in cash, too many transactions to even try to reconcile and here we are 8 years later and he still owes the IRS...
To add to what @John Woodrich said about cash in general - yes, avoid it.
It is possible to win a battle with the IRS when you paid cash, but it is not easy. I have won such battles for my clients who paid cash, but I have over 20 years of experience fighting the IRS, and my help was not cheap. Don't put yourself into this situation.
As I said before, $1k is not a big deduction though.