Cash Basis Taxpayer -customer overpayments

[equinecpa]

I'm working on an S-corp return where the client has quite a few client overpayments showing in their receivables. These overpayments are ultimately refunded- but not always in the same year. The overpayments result from deposits made for a shipping container which are refunded if the shipping container is returned.

I'm thinking since this is cash received I need to call it income and then take the deduction the following year? Is this correct? It'll make reconciling books to tax a real pain each year but I don't see a way around it.

If this were an error on their client's part ie a true overpayment not a deposit at all, would it still be income when received?

The client uses Quickbooks and it is not treating these items as income. I'm thinking the simple way of updating the client records would be to journal entry in the income with a list of client names and then reversing that entry the following year?

The client turned sole proprietorship business into an LLC electing to file as an S-corporation on 01/01/09. Does the client have the option of switching to accrual basis in 2009 since for tax purposes it's a new entity?

[Nashville]

Accrual Basis

The client turned sole proprietorship business into an LLC electing to file as an S-corporation on 01/01/09. Does the client have the option of switching to accrual basis in 2009 since for tax purposes it's a new entity?

I'm having a problem in following your "switching" language.

Are you filing the client's first tax return from 01/01/09 to 12/31/09? I think you can file under any accounting method you wish for the first year without "switching" because you have not yet established an accounting method. Your "switching" may have reference to an election on the SS-4, but I believe you can indicate an accrual method if you wish on the very first tax return and you are not bound by the SS-4.

However, once having filed your first return, you are then bound as to an accounting method and future returns can change only with IRS consent.

[equinecpa]

The client operated this business as a sole proprietorship thru 12/31/08. He organized as an LLC effective 01/01/09 and elected S-corp status. So I'm thinking brand new entity so they can choose cash or accrual -I"m just wondering if there is any overriding provision for businesses that were formerly another entity.

[Maribeth]

If the "deposits" are going to be refunded after a certain period of time, why would you not consider them to be a current liability and shown as such on the balance sheet. Not income, just a customer deposit.

This method of accounting for the deposits would be the same under a cash or an accrual method.

Maribeth

[JohnH]

I was thinking along those same lines. Might also be a good idea to segregate the funds in a separate "Deposits" account rather than comingling them with operating funds. Then write deposit refund checks back out of the account and write checks over to the operating account when the deposit is forfeited by the customer. More or less along the lines of a trust account.

[BHoffman]

Agree with Maribeth and JohnH. I also have this happen periodically and handle it exactly the way Maribeth described. Current liability.

[taxxcpa]

Deposits

If the "deposits" are going to be refunded after a certain period of time, why would you not consider them to be a current liability and shown as such on the balance sheet. Not income, just a customer deposit.

This method of accounting for the deposits would be the same under a cash or an accrual method.

Maribeth

Debit cash & credit Deposits as Maribeth correctly advised. If you MAKE a deposit like a utility deposit, it would be a Rewceivable, not an expense. ACCOUNTING 101.

[equinecpa]

Debit cash & credit Deposits as Maribeth correctly advised. If you MAKE a deposit like a utility deposit, it would be a Rewceivable, not an expense. ACCOUNTING 101.

LOL..I have Accounting 101 under my belt...I'm not asking about proper accounting treatment but proper tax treatment, two entirely different things.

From the IRS website for cash basis taxpayers" Prepaid income, such as compensation for future services, is generally included in your income in the year you receive it. However, if you use an accrual method of accounting, you can defer prepaid income you receive for services to be performed before the end of the next tax year. In this case, you include the payment in your income as you earn it by performing the services. "

My scenario I painted in my original post was not quite correct. My customer ships semen -the fee for shipping expenses for the first shipment is included in their stud fee and paid before shipment. They also collect the fee for a 2nd shipment at the time they collect the stud fees. If a 2nd shipment is not required, they refund the 2nd fee. So the fee may or may not be refunded.

So is this prepaid services? Or is it a deposit? Income or not?

[BHoffman]

This sort of sounds like a contingent fee. I have no idea if it relates to semen, but attorneys must report contingent fees when received.

[JohnH]

Looks like the account name should be "Semen Deposits".
I'd sure like to be there the first time the business is audited - hand the auditor the chart of accounts, without comment, the sit back and see how long it takes him to start asking for clarifications.