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Legal way to defer money so can't be taxed?

Discussion in 'Business Operations' started by tiedeman, Nov 9, 2004.

  1. tiedeman

    tiedeman LawnSite Fanatic
    from earth
    Messages: 8,745

    Ok, question for all you people before I go talk to my accountant tomorrow. One of my customers is going to pre-pay to me here at the end of this month or next month for next year. Approx $12,000. What is a good legal way that I can put this money for I won't get taxed over $1800 dollars? I have thought about putting it into a retirement fund, but also how soon after the first of the year can I dip my fingers into the honey pot to take some of the money out?

    Please those that only know what they are talking about respond. I need some ideas and a game plan before going in to talk to my accountant.
  2. fastlane

    fastlane LawnSite Senior Member
    Messages: 347

    I do the paper work when the job is finished. I deposit the "down payment" when I get it.
  3. Mueller Landscape Inc

    Mueller Landscape Inc LawnSite Senior Member
    Messages: 489

    This will depend on what setup you have for your company; sole prop, s-corp. LLC. Simple solution for this year is to deposit the money after the start of the new year or buy something you need now with the money.

    As you said, your accountant will be the knowledgeable person to ask.
  4. Randy Scott

    Randy Scott LawnSite Bronze Member
    Messages: 1,915

    Sorry for responding without knowing the answer you need, but I don't get the question?

    Your customer is paying you in advance for services rendered, correct? You're paying taxes on that no matter what you do with it. Right? You take money from a customer, create an invoice to apply it to, and you pay the state and feds their (unearned) amount, wouldn't you? I'm confused as to your question. Is there a different way to handle pre-payments? Sooner or later you're going to have to pay the appropriate taxes I would think. Unless the person gives you cash, it's going to be traceable to somebody, and any deposit over $10K usually creates questions within any banking type situation I thought.
  5. tiedeman

    tiedeman LawnSite Fanatic
    from earth
    Messages: 8,745

    that is what I don't know, do I have to pay the state and federal taxes, or is there a way around it with something like this. Maybe I can find a back door or something That is why I thought that I would ask some of you
  6. dvmcmrhp52

    dvmcmrhp52 LawnSite Platinum Member
    from Pa.
    Messages: 4,205

    There's always a back door, it just depends on where you are at and where you want to be on many levels.
    You and your accountant know your particular situation best,
    and of course conscience does play a role............... payup :D

    HOOLIE LawnSite Gold Member
    Messages: 3,981

    Couldn't you just hold the check until Jan 1? That's what my old boss did, although none of them were for 12k. Hopefully the funds would still be available by then.
  8. Little o

    Little o LawnSite Member
    Messages: 23


    You are can probably record the money collected as a deposit, because it is for services not yet provided. Set up a balance sheet liability called customer prepaid. Debit Cash and Credit the new liability account. As the services are rendered, you will reverse the Debit the liability account and Credit the Income account the appropriate fraction.

    The only hangup you may have is that somewhere in the IRS code is that you have to claim your income recognition method. (ie. Cash or Accrual).
    Run it by the accountant.

    Hope that helps.

  9. DFW Area Landscaper

    DFW Area Landscaper LawnSite Silver Member
    from DFW, TX
    Messages: 2,116

    Cash the check immediately. If you hold it til the end of the year, you never know, it may bounce or something.

    Cashing a check and realizing income are not at all equal. The customer might call you back on the 3rd of January and say "You know, I changed my mind. I want a refund."

    You recognize the revenue when you do the work next year. Therefore, you pay the taxes on that revenue next year, not this year, even though you've already been paid.

    Record the payment as a liability in Quickbooks. If you use statements, just apply the payment to his account. As you do work on the customer's account next year, apply the pre-pay to the balance due.

    DFW Area Landscaper
  10. boonhogganbeck

    boonhogganbeck LawnSite Member
    Messages: 45

    Hi, I'm a CPA and I'll throw in my 2 cents. It really depends on your method of accounting as someone else pointed out. If you are a cash basis tax payer then it's taxable when received. If you are an accrual basis taxpayer it's taxable when earned. If you are cash basis, you would likely ask that they not pay you until January, if payment is for the calendar year. If accrual, then credit an unearned revenue liability with a corresponding debit to cash. The liability is debited to revenue ratably over the next year (as the revenue is earned). This is just a nutshell explanation and you should really talk this over with your own accountant. In case you decide to wait until the first of the year to collect the payment (assuming you are a cash basis tax payer) hold off on cashing the check.

    Good luck - talk to your CPA!!

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