Q:

Any advice on the taxability of customer deposits/prepayments received by an S corp on the cash basis? Example: customer deposit received in 12/04 for a service to be performed in 1/05.  Does it make any difference whether the customer's check is placed in a drawer or deposited in a bank account?

A:

For any business operating under the cash basis of accounting, income is reported in the year in which the money is received or you in any other way have constructive receipt of it.  Whether it's actually deposited into your bank account or not isn't relevant. 

Keeping the check in your drawer isn't the only way undeposited funds could be taxable income.  Another example would be a customer down the street from you who tells you he has a check waiting for you to pick up in December.  Technically, that is income for December even if you don't actually pick it up until January because you could have taken the money, meeting the IRS's definition of "constructive receipt."

So, in your specific example, that money will be taxable on your 2004 1120S.  What you may want to do is spend it on deductible things by midnight on 12/31/04 in order to cancel out as much of that income as possible.

Good luck.  I hope this clears up this issue for you.  

Kerry Kerstetter

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/26/2004 09:09:00 PM Send this post: