Deferred Income for a Single-Person LLC reported on 1099-MISC

[ninsights]

I'll use made up numbers for my example.

In 2019, a client paid my single-person LLC business $30,000.  $10,000 was for services performed in 2019 and the remaining $20,000 is deferred revenue to be earned in 2020.

In QuickBooks, this was recorded as deferred revenue so it isn't in my 2019 total. I am now looking to do the equivalent deferral in TurboTax because the client sent me a 1099-MISC for 2019 in the amount of $30,000.

I have entered this 1099-MISC as $30,000 in TurboTax for 2019. How do I now tell TurboTax that $20,000 of that is deferred to tax year 2020?

Thank you.

[KathrynG3 · Accepted solution]

You should not adjust your 1099-MISC. Technically, you must realize the full $30,000 receipt now. Tax returns are nearly always submitted "cash basis," which means cash is king. You received it, so you must report it.

Next year, when you perform the services, you do not have to report more income. You are referring to "accrual basis" accounting, which is when a company has receivables and payables. The accrual basis is useful for management purposes to better evaluate cash flow and profit margins.

In QuickBooks, when you run a Profit and Loss report, adjust it. At the top of the report where you can customize the report, look for the radio button to convert it from Accrual to Cash.

[ninsights]

When I run the QuickBooks Profit and Loss report for 2019, on a cash basis, it does not include the deferred revenue/customer deposit in the total net income. That's why I was thinking that I need to add something else in TurboTax to account for the customer deposit.

I have entered the entire amount of the 1099-MISC into TurboTax, but without something else to account for the customer deposit, my net income in TurboTax is higher than what the net income report (cash basis) in QuickBooks shows me. 

[KrisD15 · Accepted solution]

Maybe it's QuickBooks that needs to be adjusted. Is the 30,000 deposit sitting in an "Income" account? 

I completely understand what you are saying. You have not yet earned this as income, you did not produce a product yet, and you cannot report the expenses you will incur against this income.

But that's not the way the IRS sees it. You sold a promise for 30,000, so you need to pay tax on that 30,000.

Hopefully this will even out for you next year when you report the expenses, but not this income. 

Going forward, if this causes a financial burden, try to time the deposits so that  they don't overlap the calendar year. 

[ninsights]

I think it may be QuickBooks. When I received the payment, I set up an account in QuickBooks called "Customer Deposits." When I earn some of that by performing services, I create the first line of an invoice as the amount of work performed, say, $5,000. Then I add a second line on the invoice using the customer deposits account and enter negative $5,000. That works well for tracking how much I still owe the customer in services, but it does seem that this set-up is giving me an incorrect cash-basis report in Quickbooks.

I'm not sure what to do about that other than to remember to subtract that revenue from my 2020 income since I will have paid the taxes on the full amount in 2019.

[DavidS127]

You report the cash your received as taxable income, unless you are approved by the IRS to use the accrual basis for your Schedule C reporting.

For tax purposes, you must use the same accounting method to figure your taxable income and keep your books.  If you have been using cash basis for your Schedule C in prior years, you must request a change to use accrual basis using IRS Form 3115. See the IRS section on Accounting Methods at this link to IRS Publication 334 for more details and t....

You can set up your QuickBooks for either cash or accrual basis reporting.  In the scenario you described, the QuickBooks is reporting accrual basis and doesn't report the deferred income until earned.  Note that in the settings for the profit and loss report, you can change the selection to "cash" basis to see a cash basis profit and loss report.

[Dave161]

Are you sure ? What about  this: 

https://smallbusiness.chron.com/tax-rules-deferred-revenue-64998.html

And this:

"Under the cash method, you generally report income in
the tax year you receive it, and deduct expenses in the tax
year in which you pay the expenses.
Under the accrual method, you generally report income
in the tax year you earn it, regardless of when payment is
received. You deduct expenses in the tax year you incur
them, regardless of when payment is made."

https://www.irs.gov/pub/irs-pdf/p538.pdf 

[DianeW777]

If I assume you are on the cash basis of accounting, the income is reported in the year received as indicated in the previous comments, no exceptions.  If you want to change to the accrual method you must file Form 3115 to request that change as noted by @DavidS127.

• IRS Instructions for Form 3115

The information in IRS Publication 538, states the following:

• You do not need to obtain IRS approval to choose the initial accounting method. You must, however, use the method consistently from year to year and it must clearly reflect your income. This means the first return filed.  When a tax return is filed, and if it is on the cash basis, (most taxpayers), a change request is required.  

The best way to defer income is to not collect it in advance when it will overlap tax years. Please provide more clarification if this does not address your concerns.

[Edited: 01/10/2022 | 1:35p PST]

[Dave161]

Thanks @DianeW777 

I guess my question was a little different, I haven't decided on accounting method, leaning towards accrual - I collect a subscription fee to a "netflix" like service, some pay a monthly but some pay a quarterly and annual up front. 
If I collected $120 for annual subscription in October - can I report $30 in this tax year and $90 in the next tax year ? I also pay the video creators on a monthly basis per how many subscribers we had that month.

[DianeW777]

No.  You would report all income received on the cash accounting method if that is your method. and deduct all expenses actually paid.

On the accrual method you would report all income received and then accrued as of the last day of your tax year (usually December 31st for calendar year taxpayers).  This means that anything owed and collectible to you (your SMLLC)  on December 31st is considered income whether or not you have received it.  The expenses work the same way, deduct anything paid and then all expenses you are liable for on the last day of your tax year, whether or not paid..

Because your single member LLC is taxed as a sole proprietorship, then you would have the same accounting method unless you request a change.  The IRS  treats your LLC as a disregarded entity.  They make determination of your accounting method based on the first tax return you ever filed.

The IRS That means that, even though it's legally a separate entity from your person, you and your small business are one and the same for income tax purposes and file the same income tax return.

Generally, unless otherwise provided, a taxpayer must secure the IRS's consent before changing its accounting method. You must file Form 3115 under the non-automatic change procedures during the tax year for which the change is requested, unless otherwise provided by published guidance.

I wanted to include this IRS link on the topic of Advance Payments/Income.  It shows the results and decisions about reporting income received in advance of service and may help you compare to your circumstances.

@Dave161 

[Edited: 01/11/2022 | 6:17a PST]

[Dave161]

Thank you @DianeW777 and @KathrynG3 

I understand what you are referencing but what about deferred earnings ? 

This article states that 

"With the accrual method, you report revenue in the tax year it's earned, even if payment is received in an earlier year"

https://smallbusiness.chron.com/tax-rules-deferred-revenue-64998.html

So for IRS revenue reporting purposes if I get paid for a subscription this year but I give service using this upfront money for the next 12 month - it is my understanding that I report revenue only for what I gave service for (e.g. 3 months in this tax year and 9 month in the next tax year). ?