Question

2 Year Project & Reporting Taxes with Accrual Method

Forum|Forum|5 years ago
February 18, 2021
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Our LLC partnership got a large production project that will span from Fall 2020 to Fall 2022, with the final product delivered in Fall 2022. We were paid up-front in 2020, creating the budget for the project, however the funds will not be used immediately but over the course of the 2 years of the project until the production is completed.

We had been advised by an accountant to switch to the accrual method of accounting, and subsequently report the income when the work is completed and all expenses can be taken into account. We're expecting a 1099 soon for the amount paid in 2020, do we simply keep that in our records and report that revenue in 2022 along with expenses incurred in the production from now to then?

TurboTax Business Windows

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DavidD66

I agree with the accountant to that told you switch to the accrual method. Otherwise your going to have a large profit in 2020 (a So, what does that mean? According to the Journal of Accountancy:

CASH VERSUS ACCRUAL METHOD

Under the cash method of accounting, items of income are generally included in taxable income when actually or constructively received, and a deduction is allowed when expenses are paid. The accrual method of accounting generally recognizes items of income upon the earlier of (1) when cash is received, or (2) when all the events have occurred that fix the right to receive the income, and the amount of the income can be determined with reasonable accuracy (Sec. 451). Taxpayers using the accrual method generally cannot deduct items of expense before (1) all events have occurred that fix the obligation to pay the liability; (2) the amount of the liability can be determined with reasonable accuracy; and (3) economic performance has occurred (Sec. 461).

But you can't just switch to the accrual method. You have to ask the IRS for permission (it's really just a formality in your case). Again, from the Journal of Accountancy:

A change in method of accounting requires the consent of the IRS, which is generally obtained by filing Form 3115, Application for Change in Accounting Method. The form is filed under either "automatic" or "advance consent" procedures. Consent is deemed granted when filing under the automatic procedures if the request is attached to a timely filed federal tax return and filed in duplicate with the IRS in Covington, Ky. All automatic accounting method changes are published in a revenue procedure, which is updated and reissued periodically with revisions and additional automatic method changes. The current list of automatic method changes may be found in Rev. Proc. 2018-31.

I suggest you retain someone that understand accrual based accounting to help you with your bookkeeping and tax preparation.

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