Can I classify this as deferred revenue somehow?

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guitarguy
Posts: 1766
Joined: Mon Dec 20, 2010 4:10 pm

Can I classify this as deferred revenue somehow?

Post by guitarguy » Thu Dec 06, 2018 11:28 am

Hi all...I have a tax question that I'm having trouble finding a straight answer to.

On my Schedule C (side hustle as a musician) for the past several years I've claimed all income in the years I received it, regardless if it was a payment for services performed at that time, or a deposit for a booking that took place the following year. So...from what I read...a cash based system as opposed to an accrual based system (I think I'm understanding that correctly).

However, in 2018, our business has seen a significant uptick in deposits submitted for performances occurring in 2019 (good problem) that will leave me with taxes due on $14k of "extra" income for services to be rendered in 2019 (bad problem). I'm on the hook for the taxes on all of this income by my current accounting method...even though not all of it will be mine down the road when the work is completed and the other band members are paid. Until then, the deposit money just sits in an account untouched.

In years past, our deposit amounts were on the smaller side (around $5k) so I've just bit the bullet on this and then it was offset by my taking a low profit/income on those bookings when the services were performed, however this year with such a large jump in this deposit income...it's throwing off my taxes by a good amount and I'm nervous about paying penalties/etc if I end up owing $3k in taxes when it's all said and done.

Could this deposit income be deferred to my 2019 taxes somehow? I actually would like to defer only a portion of it if possible...as we've made some major investments in gear and stuff this year to help offset it.

IMO it could be considered a liability (?) because if for some reason we are unable to deliver and perform as we've been contracted to do, I would owe a refund of this money to the client.

Is there anything I can do here?

Please let me know if any clarification or additional information is needed...but would greatly appreciate some advice!

megabad
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Joined: Fri Jun 01, 2018 4:00 pm

Re: Can I classify this as deferred revenue somehow?

Post by megabad » Thu Dec 06, 2018 1:04 pm

The way you have worded your proposal, it sounds illegal in my non-lawyer opinion (seek professional advice). You typically want to make plans for business tax efficiency before you have a tax issue, not after. If you use cash accounting methods, you can negotiate with customers to ensure that business activity finalizes and is legally completed in 2019. You typically cannot "remove" payments in hindsight because of tax consequences. Other common ways to reduce tax liabilities is to incur deductible expenses in one year (legitimately). Are there expenses for this billed work in 2019 that could be incurred and deducted now?

sawdust60
Posts: 56
Joined: Tue Jul 17, 2018 12:06 pm

Re: Can I classify this as deferred revenue somehow?

Post by sawdust60 » Thu Dec 06, 2018 11:03 pm

Regarding the deposits:
-----------------------------
You should be able to defer the advance payments now that the deposits have become significant. But if you don't want to defer all the deposits, you will need to determine a method to define which portions to defer, such as the portion which would be refundable as well as the portion which will be needed to cover the costs of the event. It might also be a good year to start having a CPA do your tax return.

from Pub 538, accrual method:
. . . if you receive advance
payments for certain services you agree to perform by the
end of the next tax year, you can elect to postpone including
the advance payment in income until the next tax year.
. . .

also see form 3115: Application for Change in Accounting Method

Regarding: we've made some major investments in gear ...
-------------------------------------------------------------------------
Another place a CPA could help setup depreciation schedules, etc.

JGoneRiding
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Joined: Tue Jul 15, 2014 3:26 pm

Re: Can I classify this as deferred revenue somehow?

Post by JGoneRiding » Thu Dec 06, 2018 11:31 pm

I think you are looking at either/or but not both.

I sort of do this with rentals, get deposits, but the money is legally not considered mine until I claim against it on move out. So I claim damages against the deposits and that as income in the year of move out and the refunded amount is never reported.

So if the deposits are refundable you could report that part in the year it is officially yours, but if 100% of the deposit is refundable if you fail to deliver then you couldn't report any of it this year (couldn't split just to make your taxes better)

Also i would split it out now by the percentage that belongs to each person or i would set up the band as an llc or the like and this money is the LLC's money and you pay taxes on the year the llc distributes

I not a tax specialist and have my own odd tax issue this yrar!

guitarguy
Posts: 1766
Joined: Mon Dec 20, 2010 4:10 pm

Re: Can I classify this as deferred revenue somehow?

Post by guitarguy » Fri Dec 07, 2018 7:52 am

Thanks for the info guys!

After reading up on changing to an accrual method, needing to update to much more complicated books, file form 3115, etc...I'm thinking that I might just be better off to bite the bullet this year and move forward from there.

My (fairly confident) prediction is this type of growth will not continue year over year...so my tax situation should be back to normal after 2018.

Also as far as I've read...I shouldn't owe any penalties if I incur a tax bill this year due to a significant increase in income since our withholding this year should definitely be more than our tax last year (we ended up with a refund).

So maybe I just bite the bullet this year and be done with it...

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celia
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Re: Can I classify this as deferred revenue somehow?

Post by celia » Fri Dec 07, 2018 1:08 pm

guitarguy wrote:
Thu Dec 06, 2018 11:28 am
I'm on the hook for the taxes on all of this income by my current accounting method...even though not all of it will be mine down the road when the work is completed and the other band members are paid. Until then, the deposit money just sits in an account untouched.
I hope that you are aware that if you pay your other band members over $600 for the year, you need to file a tax form for each of them.
https://www.irs.gov/businesses/small-bu ... ontractors

And they are supposed to file some form with you before doing the work that shows their identifying info, including contact info and tax id. (I can't find it at the moment.)

Why not start 2019 by doing this correctly?

guitarguy
Posts: 1766
Joined: Mon Dec 20, 2010 4:10 pm

Re: Can I classify this as deferred revenue somehow?

Post by guitarguy » Fri Dec 07, 2018 1:13 pm

celia wrote:
Fri Dec 07, 2018 1:08 pm
guitarguy wrote:
Thu Dec 06, 2018 11:28 am
I'm on the hook for the taxes on all of this income by my current accounting method...even though not all of it will be mine down the road when the work is completed and the other band members are paid. Until then, the deposit money just sits in an account untouched.
I hope that you are aware that if you pay your other band members over $600 for the year, you need to file a tax form for each of them.
https://www.irs.gov/businesses/small-bu ... ontractors

And they are supposed to file some form with you before doing the work that shows their identifying info, including contact info and tax id. (I can't find it at the moment.)

Why not start 2019 by doing this correctly?
LOL. I'm aware. I file a number of 1099s each year for the band and crew members.

And the form they need to fill out is a W-9.

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