What if most of the income on the 1099NEC is unearned in the tax year. I cannot report it as income as it's a liability but, the government will see that as income.

[paul27]

How is this question not already answered as it's as common as it gets with service based businesses. I have income that was not yet earned using accrual method. What do i do as the IRS and state will see this large amount, but I cannot take the money as income until i preform the services.

UPDATE: the money is in an iolta account. to earn that money, new expenses arise. If i claim the money without earning it, there are not expenses and my income would be greatly overstated. I'm talking like 100 grand overstated. when the money is earned, various things must be purchased from government and it wipes out the money in reserve. how then i can claim this not earned income as income? and why is there no place in turbo tax to offset this?

[FangxiaL]

If you have unrestricted access to that income, your client has prepaid you for your future service. You are required to pay tax on the income you received. 

[pk]

@paul27  if you use accrual method of accounting  ( I don't a lot about that ), one would have to assume that you recognize the income as they accrue and not as  cash received.  Because the issue  becomes the  entity that gave you the contract and the 1099-NEC, has booked it in their books  ( and probably take a reserve  for early ' 22  disbursement ) and therefore  it shows on their book as amount expensed  and hence 1099-NEC to you.  Since you are accrual account, you also need to show that this is received/ booked  for tax purposes.  You therefore have an income that is already taxed at your current year rate and next tax year you do not account for this amount again , neither does the entity --- essentially both parties holding the amount in a performance escrow account.

Does that make sense ?

[ee-ea]

Make an entry for "Not constructively received "to subtract the future income.

“Income although not actually reduced to a taxpayer's possession is constructively received by him in the taxable year during which it is credited to his account, set apart for him, or otherwise made available so that he may draw upon it at any time, or so that he could have drawn upon it during the taxable year if notice of intention to withdraw had been given. However, income is not constructively received if the taxpayer's control of its receipt is subject to substantial limitations or restrictions."

[paul27]

it sits in an iolta account until it is earned... some of it may have to be given back if not needed...that's joke here, reporting income that is not income. That money can only be touched as needed to perform a duty that may not even be in the current tax year.

[paul27]

turbo asks for 1099NEC info and that has gone to the fed and state. then it asks for 1099 misc and general income or 1099K, etc.

Accrual accounting says that income being held, in an iolta account mind you, is a liability, a payable and not income. WE are asked if we use accrual accounting. That money received is untouchable until needed. It's hardly income as i cannot use it to pay expenses, it must remain there until i use to perform a job then it is earned. Some of that may have to be given back. And it may not even pertain to the calendar year in which it was received. Therefore, my gross income is being vastly overstated. What gets me, there is no clear run down of this in turbo tax...it's like a whole industry's issue is missing from turbo tax. keep in mind, earning that income generates new expenses...so by claiming it as income without the expenses (as i have not yet earned it)...makes my taxes massive. Wow, I'm going to have to get an accountant next year...

[paul27]

No, it's in iolta and i can't touch it until used to perform a task which makes it earned.

[paul27]

Never heard of this, where in turbo tax do i enter this? expenses? it's not an expense.

[pk]

@paul27 , while agreeing with @ee-ea  , I understand your predicament --- the monies reported on 1099-NEC is in an escrow account ( IOLTA ), shows on your books as receivables and you have no incurred expenses to show against it.

1. while I am not accountant, because you are using accrued accounting, you could enter the  expected/planned expenses as paybles in your books --- this will allow a fair taxing ( to the extent  currently planned ). It will be copacetic with the contractees books.

2. The other way would be ignore the 1099-NEC -- ( not the best way ), wait for the IRS to send you a CP2000 notice of unreported income and then explain to them that this 1099-NEC amount was being held in an escrow account  and really constructively received  ( because the restrictions of perform or lose  clause ).

No matter which way you go , the fact that the entity has reported this income ( which I think is in error ) on a 1099-NEC , IRS will assume that this is income and must be taxed.

Hope this helps

pk