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Is Retainer Deposit Always Income When Received for Cash Basic Company?
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Victor Roberts
Dec 18, 2015, 2:52:51 PM12/18/15
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I am a consultant and operate a small Cash Basis company. I received a
retainer deposit from a client for work that was to be done in 2015,
but has now been delayed to 2016, with the a strong possibility that
the matter will be settled in 2016 and I will have to return all or
part of the retainer.
I had thought that the deposit is taxable income in 2015 since I
operate on a Cash Basis. However, in conducting some research on the
best way to handle this in Quickbooks, I ran across many conflicting
opinions. Some people believe that this is not income in 2015 since
it is refundable. Others state that the deposit is definitely income
in the year received for all Cash Basis taxpayers.
What is the sense of this group?
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retainer deposit from a client for work that was to be done in 2015,
but has now been delayed to 2016, with the a strong possibility that
the matter will be settled in 2016 and I will have to return all or
part of the retainer.
I had thought that the deposit is taxable income in 2015 since I
operate on a Cash Basis. However, in conducting some research on the
best way to handle this in Quickbooks, I ran across many conflicting
opinions. Some people believe that this is not income in 2015 since
it is refundable. Others state that the deposit is definitely income
in the year received for all Cash Basis taxpayers.
What is the sense of this group?
--
To reply via e-mail:
replace xyz with vdr in the Reply to: address..
--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2011) - All rights reserved. >>
<< ------------------------------------------------------- >>
Stuart Bronstein
Dec 19, 2015, 9:36:52 AM12/19/15
to
"D. Stussy" <sp...@spam.org> wrote:
> "Victor Roberts" wrote
> I am a consultant and operate a small Cash Basis company. I
> received a retainer deposit from a client for work that was to be
> done in 2015, but has now been delayed to 2016, with the a strong
> possibility that the matter will be settled in 2016 and I will
> have to return all or part of the retainer.
>
> I had thought that the deposit is taxable income in 2015 since I
> operate on a Cash Basis. However, in conducting some research on
> the best way to handle this in Quickbooks, I ran across many
> conflicting opinions. Some people believe that this is not income
> in 2015 since it is refundable. Others state that the deposit is
> definitely income in the year received for all Cash Basis
> taxpayers.
> =======
>
> Cash basis: Yes, because you have the "income" in hand. Note
> that if you don't do the work and return it later, you may be
> entitled to a "claim of right" deduction or a business
> "return/allowance."
To me, if it is a retainer and any unused money has to be refunded,
it is more in the nature of a loan or security - it remains the
client's money until it is earned by the consultant.
As a result, I would only recognize tax in 2015 for the amount of
money actually earned during that year.
--
Stu
http://DownToEarthLawyer.com
> "Victor Roberts" wrote
> I am a consultant and operate a small Cash Basis company. I
> received a retainer deposit from a client for work that was to be
> done in 2015, but has now been delayed to 2016, with the a strong
> possibility that the matter will be settled in 2016 and I will
> have to return all or part of the retainer.
>
> I had thought that the deposit is taxable income in 2015 since I
> operate on a Cash Basis. However, in conducting some research on
> the best way to handle this in Quickbooks, I ran across many
> conflicting opinions. Some people believe that this is not income
> in 2015 since it is refundable. Others state that the deposit is
> definitely income in the year received for all Cash Basis
> taxpayers.
>
> Cash basis: Yes, because you have the "income" in hand. Note
> that if you don't do the work and return it later, you may be
> entitled to a "claim of right" deduction or a business
> "return/allowance."
To me, if it is a retainer and any unused money has to be refunded,
it is more in the nature of a loan or security - it remains the
client's money until it is earned by the consultant.
As a result, I would only recognize tax in 2015 for the amount of
money actually earned during that year.
--
Stu
http://DownToEarthLawyer.com
Victor Roberts
Dec 28, 2015, 12:21:33 PM12/28/15
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Alan
Dec 28, 2015, 12:56:57 PM12/28/15
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On 12/18/15 9:31 PM, D. Stussy wrote:
> "Victor Roberts" wrote in message
> news:89i87b1rpcc9bskps...@4ax.com...
> payments don't matter.
I agree with D. Stussy. Unless there are substantial restrictions on the
use of the funds received, it is income in the year received. In other
words, if you have unfettered use of the money you received, it is
income in 2015.
> "Victor Roberts" wrote in message
> news:89i87b1rpcc9bskps...@4ax.com...
> I am a consultant and operate a small Cash Basis company. I received a
> retainer deposit from a client for work that was to be done in 2015,
> but has now been delayed to 2016, with the a strong possibility that
> the matter will be settled in 2016 and I will have to return all or
> part of the retainer.
>
> I had thought that the deposit is taxable income in 2015 since I
> operate on a Cash Basis. However, in conducting some research on the
> best way to handle this in Quickbooks, I ran across many conflicting
> opinions. Some people believe that this is not income in 2015 since
> it is refundable. Others state that the deposit is definitely income
> in the year received for all Cash Basis taxpayers.
>
> What is the sense of this group?
> retainer deposit from a client for work that was to be done in 2015,
> but has now been delayed to 2016, with the a strong possibility that
> the matter will be settled in 2016 and I will have to return all or
> part of the retainer.
>
> I had thought that the deposit is taxable income in 2015 since I
> operate on a Cash Basis. However, in conducting some research on the
> best way to handle this in Quickbooks, I ran across many conflicting
> opinions. Some people believe that this is not income in 2015 since
> it is refundable. Others state that the deposit is definitely income
> in the year received for all Cash Basis taxpayers.
>
> What is the sense of this group?
> =======
>
> Cash basis: Yes, because you have the "income" in hand. Note that if
> you don't do the work and return it later, you may be entitled to a
> "claim of right" deduction or a business "return/allowance."
>
> Accrual basis: No, because you haven't billed for the work. Actual
>
> Cash basis: Yes, because you have the "income" in hand. Note that if
> you don't do the work and return it later, you may be entitled to a
> "claim of right" deduction or a business "return/allowance."
>
> payments don't matter.
I agree with D. Stussy. Unless there are substantial restrictions on the
use of the funds received, it is income in the year received. In other
words, if you have unfettered use of the money you received, it is
income in 2015.
MTW
Dec 28, 2015, 7:10:21 PM12/28/15
to
On Monday, December 28, 2015 at 9:56:57 AM UTC-8, Alan wrote:
> I agree with D. Stussy. Unless there are substantial restrictions on the
> use of the funds received, it is income in the year received. In other
> words, if you have unfettered use of the money you received, it is
> income in 2015.
I "second" your comment. I had a go-around with the IRS on this issue MANY years ago and their view at the time was that if the cash receipts were commingled with your general/unrestricted funds, they were most likely taxable in the year of receipt. They suggested that to avoid this result the funds would need to be placed in a segregated account (escrow account, etc.), but even in that case a non-taxable outcome wasn't guaranteed.
> I agree with D. Stussy. Unless there are substantial restrictions on the
> use of the funds received, it is income in the year received. In other
> words, if you have unfettered use of the money you received, it is
> income in 2015.
Stuart Bronstein
Jan 2, 2016, 5:20:04 PM1/2/16
to
>
> I would disagree and stand by my answer above, because he said
> "cash basis" accounting. He has the amount "in hand" and has use
This has nothing to do with accounting. It specifically depends on
the terms of the agreement, and how strong the taxpayer's claim is to
the money in his hand.
If you receive money as a loan, it is not taxed. If you receive
money as a deposit, it is not yours, it has not been earned, and it
has to be paid back (except to the extent that it is earned later).
If the retainer agreement says that the consultant has to return any
money that is not earned, it is no more his than a loan would be. He
is, in effect, taking a possessory security interest in the other
person's money.
Does a pawn shop recognize income at the moment someone drops off
collateral that is worth more than the loan given in exchange? Of
course not - the income is not recognized until either the customer
pays interest or the property is sold to satisfy the lien.
I don't see why it would be any different in this case.
> I would agree with Mr. Bronstein if the taxpayer were "accrual
> basis" (with a set of formal books with which to track the
> retainer). Also typically, retainers are deposited to a separate
> bank account than where gross receipts go. Attorneys use a
> "client trust account" for the purpose of retainers on hand.
--
Stu
http://DownToEarthLawyer.com
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