1099 contractor - from cash to accrual with IRS

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Topic Author
andooz
Posts: 18
Joined: Tue Aug 26, 2008 3:02 am

1099 contractor - from cash to accrual with IRS

Post by andooz »

A bit of an advanced tax topic. I was a contract worker in 2020 but wasn’t paid at all until 2021, so I don’t have a 1099 for 2020. No W2 wages either. I want to declare that contract income in 2020 (not 2021) for a couple reasons*. Note I started doing 1099 work in 2019, and on my 2019 Schedule C, I declared that I used the cash basis. fwiw I'm a sole proprietor LLC doing hourly business consulting with no inventory; very plain vanilla.

*Reasons for wanting to declare this income in 2020: 1. I’ll be in a low tax bracket in 2020 and a high one in 2021. 2. I want to make 2020 contributions to my IRA and existing Solo 401k, and thus need this earned income; can max both in 2021 without the income in question

Q1 - Do I have to complete the Form 3115 to switch from cash to accrual method, or is there another way to legally get this income taxed in 2020 / accomplish my goals?

Q2 - If I must complete Form 3115, it seems like I’d use DCN reason 122 (cash >> accrual), right?

Q3 - On Form 3115 I’m calculating a 481(a) adjustment of zero because if I apply the accrual method to my 2019 return, there’d be no change to my income (ie no receipts or expenses cusped across years). Does my rationale / zero adjustment seem reasonable?

Thanks for any suggestions / guidance.
Topic Author
andooz
Posts: 18
Joined: Tue Aug 26, 2008 3:02 am

Re: 1099 contractor - from cash to accrual with IRS

Post by andooz »

Talking to myself: could I state on Sched C that my 2020 business was ‘started’ in 2020 - allowing me to declare a new reporting method - accrual - compared to the cash method I showed in 2019?

Rationale *for* this approach:
a. My business client in 2019 was a former W2 employer, while my 2020 client was new & unrelated entity.
b. My 2020 consulting services were of a different nature than my 2019 services. Both were business consulting, but different services.
c. I had a period of unemployment between the two businesses - and took some coursework to train for my new 2020 services.
d. I started a LLC in 2020 for my 2020 consulting; in 2019 I had no LLC. In both years I’m taxed as a pass-through unincorporated sole proprietor fwiw.

Rationale *against* this approach:
1. My EIN number is the same in 2019 and 2020. Unsure if this matters to IRS for switching methods. This EIN was used for creating my Solo 401k plan; I file my 1040/Sched C using my SSN.

Any thoughts on this approach?

If permissible, this route has the advantage of avoiding the complicated and flag-raising Form 3115. But if Form 3115 is recommended, I’d appreciate any thoughts on the 3Qs in my original post. Thanks.
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