[NYSCPA]

Facts:

Client A of attorney has $5,000 retainer balance as of 12/1/19. Attorney issues December 2019 invoice for $2,000 in February of 2020 to Client A. When do I recognize the income for the attorney? When invoiced in 2020, or on the invoice date of 12/31/19? Note that the Attorney is on the cash basis, which means I should recognize when cash is “received”, the caveat of having the funds held in IOLA account is giving rise to this question.

All responses are appreciated.

[aaronmo]

I think this is a case where as long as you're consistent, and do it the same way for transactions, you – could – go either way. I would argue that the more “correct” answer, because they have the cash for constructive receipt, is the date of services.

[fsugirl2005]

The attorney didn't invoice the $2000 until February 2020 which means the cash won't be received until 2020. If under cash basis, you can't recognize something that doesn't technically exist at year-end. Of course, accrual basis is the opposite.

My claim to fame: I have done attorney bookkeeping in the past.

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[aaronmo]

Again – I think you can make an argument either way, but invoice date is optional.

Thinking in terms of constructive receipts, if the service was performed 2019, and the cash was available whenever they invoiced, including in 2019, I think it's a 2019 service.

Real world, I don't think which way you go matters as much as doing it consistently.

(I'm giving a tax answer)

[aaronmo]

I was curious about the answer and asked around…

This was a response I received…indicating that the entire retainer is gross income in 2019:

The tax answer to your attorney retainer fee is governed by Tax Code IRC 61 and long standing tax doctrine of constructive receipts for cash basis accounting, tax elections and reporting methods. So more facts may turn attorney income taxability depending on additional details to be determined, qualifying as exceptions to the tax rules.

Here's the law- IRC Code § 61-Gross income defined (a)Except as otherwise provided…, gross income means all income from whatever source derived, including (but not limited to) the following items:
(1) Compensation for services, including fees, commissions, fringe benefits, and similar items;
(2) Gross income derived from business

Therefore from limited details automatically, your attorney includes $10,000 December retainer in 2019 gross income especially when billing issued out next tax January 2020 legal invoice say $2000.

1- Cash basis method taxes upon receipt 2019, despite deposited into client escrow account with few restrictions…details omitted not qualifying for income recognition

2- Those costs associated in December performing client services would be deductible 2019 reducing attorney ‘s net taxable income

3- More information like receipt of 1099 misc or 1099 NEC issued to lawyers make the $10k legal retainer reportable 2019 and exceptional restrictions, complying with tax rules

https://www.law.cornell.edu/uscode/text/26/61

[Tncincy]

@Aaron, this is really good information. It has nothing to do with me, but I appreciate and acknowledge your research efforts.

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[NYSCPA]

Thank you all for your responses, they are greatly appreciated. That you for the reference and research @Aaron!

[aaronmo]

NYS – others disagreed with the above (and i think I likely disagree with the retainer as revenue as well). A big part of it will come down to the agreement between client and firm, as well as the practice of the firm in when they take the cash and record revenue…if the client approves before the retainer is debited, that would change the constructive receipts approach.

I still think the key issue is consistency.

When in doubt, Same As Last Year!

[NYSCPA]

@Aaronmo, I definitely disagree with the notion of booking the retainer as income. I “correctly” record that as a liability, because until it is earned, if the client fires my client, then that money is returned to them, which I actually had to deal with in late 2019.

I don't move money from the IOLA account to the operating account until the client is invoiced (to me this is when the revenue is earned because this is when attorney has “access” to the cash). But also to me, this is one of those gray areas where I could attempt to argue either way, depending on the potential benefit to my client.

[Author]

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