Cash Basis Taxpayer - Customer Prepayment for Services To Be Rendered

[duanecpa]

Is there an exception to recording as income for a cash basis taxpayer a deposit in 2012 for services to be rendered by the S-Corp in 2013?
Citatations please.

[DaveinTexas]

This sounds like an exam question but I'll bite

From the IRM section 4.42.4.2 this section is related to investment income but lists a general statement that might just apply:
#21. Ordinarily, income received, even though unearned, is includible in gross income.

Also see Constructive receipt IRC Section 1.451-2(a)

Sorry, neither are cites that would plead the case that the deposit is not income. And yet, here's another one: If a taxpayer has an unrestricted right to demand the payment of an amount, he is in constructive receipt of that amount whether or not he makes the demand and actually receives the payment, as stated in Treasury Regulations section 1.451-2.

I found some court cases that ignored the constructive receipts but usually the payer and recipient of the funds should have a contract in place that does not allow for early payments (until contract is finished) but I assume no such contract exists.

Good luck with your search, let us know if you find something.

[duanecpa]

Update to Customer Prepayment for Services to be Rendered

The client is cash basis - the customer to this client wants to pay for 5 quarters of services that will be rendered in 2012 but mostly in 2013 - they want to pay all of the amount for 2012 and 2013 in 2012. Is there a way to not include the 'unearned' portion of the 2013 services to be rendered from income in 2012 even though 100% of the money has been received in 2012?

I don't find any exclusion to the received or constructively received for a cash basis tax payer. Perhaps one or more of you have run across this situation in your own practice.

Thank you.

[Burke]

The income for a cash basis taxpayer is reportable when received. Period.

[oceanlovin'ea]

agree

Cash basis taxpayer includes payments received at the time they are received. It doesn't matter when the work is done. Get the money in 2012 record as income in 2012.

Linda, EA