Accounting method decision to be made

[DebitThatCreditThis]

New client for 2023 (S Corp in existence since 2019). Manufacturer that receives "Customer Deposits" aka preorder payments. Currently sitting as a liability on the books (and tax return) with over $1M balance as of 2022. Books are kept on accrual basis. Their tax return is cash basis.

Being that the TR is cash basis, it should have been recognized as revenue. I think we should file for a change in accounting method (form 3115) and change from cash to accrual. Would that allow the client to continue treating the prepayments as a liability?

[TaxGuyBill]

Manufacturer that receives "Customer Deposits" aka preorder payments ...Being that the TR is cash basis, it should have been recognized as revenue.

I think we should file for a change in accounting method (form 3115) and change from cash to accrual. Would that allow the client to continue treating the prepayments as a liability?

Are the "deposits" refundable? If so, they are not income until they become non-refundable.

You said the "books" are treating it as a liability, and that the "books" are on accrual. Staying with Cash or changing to Accrual for the tax return won't change how the books are done, so that won't change anything in that regard.

[DebitThatCreditThis]

Are the "deposits" refundable? If so, they are not income until they become non-refundable.

You said the "books" are treating it as a liability, and that the "books" are on accrual. Staying with Cash or changing to Accrual for the tax return won't change how the books are done, so that won't change anything in that regard.

Yep, book method was probably an unnecessary detail. I hope they are refundable. Will inquire. If they are not, what am I looking at down the line here? Also, should add, it doesn't help that they also have A/R and A/P on the return.

[DebitThatCreditThis]

Confirmed, non-refundable...

[Snaggletooth]

There is a doctrine of "constructive receipt" which forces revenue to be recognized irrespective of whether books are cash or accrual.

I can't think of a good way to state such a situation, but it is applicable when the deposit is extremely unlikely to ever be refunded or credited to a future event.

[BOB W]

There is an accounting method called Hybrid Accounting where you treat all sales and cost of goods sold items (included in AR and AP only) and cash basis for all other expenses.

I wouldn't be surprised if that is what they are doing and calling it accrual basis.