Is Retainer Deposit Always Income When Received for Cash Basic Company?

I had thought that the deposit is taxable income in 2015 since I operate on a Cash Basis. However, in conducting some research on the best way to handle this in Quickbooks, I ran across many conflicting opinions. Some people believe that this is not income in 2015 since it is refundable. Others state that the deposit is definitely income in the year received for all Cash Basis taxpayers.

What is the sense of this group? ====== Cash basis: Yes, because you have the "income" in hand. Note that if you don't do the work and return it later, you may be entitled to a "claim of right" deduction or a business "return/allowance."

Accrual basis: No, because you haven't billed for the work. Actual payments don't matter.

To me, if it is a retainer and any unused money has to be refunded, it is more in the nature of a loan or security - it remains the client's money until it is earned by the consultant.

As a result, I would only recognize tax in 2015 for the amount of money actually earned during that year.

Thank you to you both.

I agree with D. Stussy. Unless there are substantial restrictions on the use of the funds received, it is income in the year received. In other words, if you have unfettered use of the money you received, it is income in 2015.

I "second" your comment. I had a go-around with the IRS on this issue MANY years ago and their view at the time was that if the cash receipts were commingled with your general/unrestricted funds, they were most likely taxable in the year of receipt. They suggested that to avoid this result the funds would need to be placed in a segregated account (escrow account, etc.), but even in that case a non-taxable outcome wasn't guaranteed.

========== I would disagree and stand by my answer above, because he said "cash basis" accounting. He has the amount "in hand" and has use of it.

I would agree with Mr. Bronstein if the taxpayer were "accrual basis" (with a set of formal books with which to track the retainer). Also typically, retainers are deposited to a separate bank account than where gross receipts go. Attorneys use a "client trust account" for the purpose of retainers on hand.

This has nothing to do with accounting. It specifically depends on the terms of the agreement, and how strong the taxpayer's claim is to the money in his hand.

If you receive money as a loan, it is not taxed. If you receive money as a deposit, it is not yours, it has not been earned, and it has to be paid back (except to the extent that it is earned later).

If the retainer agreement says that the consultant has to return any money that is not earned, it is no more his than a loan would be. He is, in effect, taking a possessory security interest in the other person's money.

Does a pawn shop recognize income at the moment someone drops off collateral that is worth more than the loan given in exchange? Of course not - the income is not recognized until either the customer pays interest or the property is sold to satisfy the lien.

I don't see why it would be any different in this case.