Converting receivable to note

[Hamacher]

I have a client that owes me a large sum of money. His companies are slowly failing. He has agreed to convert the receivable to a note. I am also going to put a lien on some of his real-estate.

I'm a cash basis tax payer. Technically by converting the receivables to a note I am probably suppose to report it all as income. Correct? I hate to pick up the income because to be honest, I doubt I will ever see a penny but figured this is better than nothing.

What are your thoughts?

[BOB W]

I have a client that owes me a large sum of money. His companies are slowly failing. He has agreed to convert the receivable to a note. I am also going to put a lien on some of his real-estate.

I'm a cash basis tax payer. Technically by converting the receivables to a note I am probably suppose to report it all as income. Correct? I hate to pick up the income because to be honest, I doubt I will ever see a penny but figured this is better than nothing.

What are your thoughts?

Since nobody was answering I think my first thought was correct....There would be no change to income just because a Receivable is changed to a Note. What would make you think that?

[jimmcg]

I have a client that owes me a large sum of money. His companies are slowly failing. He has agreed to convert the receivable to a note. I am also going to put a lien on some of his real-estate.

I'm a cash basis tax payer. Technically by converting the receivables to a note I am probably suppose to report it all as income. Correct? I hate to pick up the income because to be honest, I doubt I will ever see a penny but figured this is better than nothing.

What are your thoughts?

Still holding paper whether it be an invoice or note. No change in economic substance therefore no taxable income. I know some people in Pittsburg who will make them an offor they cannot refuse but their fees are hefty.

[MAJ]

Lean on me brother...

If it's a hefty amount go for the Lean... It's solid -
Of course tack on fees associated.

If his companies are failing he's going to have to cash in something.

Now, Forget Pittsburgh.. I'm from Jersey... The Wife is from Newark and her Last name ends in a vowel..... And, as I recall Tony Soprano was no where near Pittsburgh in ANY Episode!!

It's all about results baby....

[Hamacher]

Thanks for the response

Since nobody was answering I think my first thought was correct....There would be no change to income just because a Receivable is changed to a Note. What would make you think that?

That is what I thought originally, then I had a CPA down the road suggest that it would become taxable. So it got me thinking, maybe he's right. I did a little research and couldnt find a difinitive answer. Obviously a decrease in receivables usually involves an increase in income but I could find nothing about converting to a note. Anyhow... that is why I asked. Thanks for the response.

On a side note - How does everyone deal with collections? I have a problem with wanting to help everyone. I know sometimes I may not get paid but most of the time I do. This particular client is my oldest client. Paid very well at first but then starting having money problems. He didn't pay me because he didn't want to. He simply did not have the money. His businsesses are now failing and he has been dealing with cancer for over a year.

I'm located in Michigan. The economy is very poor and I'm finding it harder and harder to manage my receivables. I do a lot of bookkeeping for my clients. I've started to require that they be paid in full before I prepare returns. I've actually had several clients that have left because of it. For others it's worked well. It's just always an unpleasant conversation.

[AJsTax]

Hamacher,

Let's go back to basic accounting for a minute. If you are as you said a cash basis taxpayer there is no recognition of income until there is constructive receipt of money (or goods, etc) and is available for your use. Your receivables have no bearing on your taxable income. Except, of course, if they were not still in receivables your income would be higher.
I have worked for a short time for one CPA that was very insistant on paying the bill. If one month was late, he was on the phone; if it became 2 months past due he refused to accept any more work until paid in full. and every client had an engagement letter with the costs for the year spelled out. He did not seem to keep very many small business clients, but did make a decent income.
The office I work at now is almost too much the other way, he will bend over backwards to help clients and will wait forever to get paid. and gets caught sometimes.
I have suggested to him and will to you, why not accept credit cards and let them owe the bank for that instead of you?? I know they come with a large cost but the rewards of lower receivables will make up for it. In today's market having to make up even a couple thousand in lost billings is very difficult.
just my 2 cents worth..(may only be worth 1 cent in today's market!!)

[BOB W]

You always have to stay in control of you work efforts as compared to your money collections. Refusing to do work or firing a client should be a business level descission without emotions. NO PAY, NO WORK. You have to walk away from some.

[jimmcg]

You always have to stay in control of you work efforts as compared to your money collections. Refusing to do work or firing a client should be a business level descission without emotions. NO PAY, NO WORK. You have to walk away from some.

As a wise man once said "you got to know when to hold em and you got to know when to fold em."

[JohnH]

Another wise person on this forum once said:
"If I'm going to work for free I'd just as soon take the time off."
(I love that one)

[equinecpa]

I feel your pain on the receivables - some of my very best payers are rapidly becoming my worse. I'd love to see what others are doing to control receivables.

I have implemented a new policy -new clients pay on delivery...I haven't gone there with my existing clients but if the trend amongst them continues, I will be instilling that. As John said, I'd rather have the time off if I'm not getting paid - or work on someone else's account that will pay me. For those who have gone to payment on delivery only -how have you converted existing customers?

I have quite a few accounts receivable that are all but "dead". I know longer do work for them - do you pursue collecting these accounts? Are call it water on the bridge and expend your efforts on work that will pay? Has anyone tried sending settlement offers to old accounts in an effort to get some kind of payment??

I also have two clients who left unhappy this year (-trust me I won't miss them -they were the kind that take forever to get accurate information together, gave me conflicting information etc. I had to redo large portions of each of their returns etc). Both had rather large bills and both remain unpaid - I delivered their returns to them because previously though they were PIA they paid. Now they don't...what to do?