[leglock]

If you are keeping books for a cash basis business like a law firm and the firm receives a 5000 retainer that is Refundale, For book and tax purposes, upon receipt would you NOT recognize it as income (much like a refundable security deposit)?

[M.O.D.]

On an accrual basis it is not income until earned, like a customer deposit for a future purchase.

But on a cash basis, you would be hard pressed to not consider it income for book and tax purposes, because all cash counts, and there is no accrual. If you have to return it then it reduces the cash income in that future period.

But I don't know the exact IRS regulations on this.

Most service firms use some kind of modified cash basis not completely cash basis.

BA Mathematics, UC Berkeley
Certificates in CPA and EA preparation, College of San Mateo
CMA I 420, II 470
FAR 91, AUD Feb 2015 (Gleim self-study)

[leglock]

I was conflicted bc with a returnable security deposit on a rental, it is not income when received even if cash basis, so a retainer seemed like it might have similar treatment with it being returnable.

[M.O.D.]

Is this a theoretical question or a test question?

I don't know of a cash business that could run rentals with deposits. As soon as you have inventory type transactions, AR, AP, etc, you are in modified basis.

BA Mathematics, UC Berkeley
Certificates in CPA and EA preparation, College of San Mateo
CMA I 420, II 470
FAR 91, AUD Feb 2015 (Gleim self-study)

[rzrbkfaith]

I would agree with @M.O.D. I believe you have to recognize this as income if you are cash basis. Unlike a refundable security deposit, a retainer is an advance payment for services to be provided.

AUD - 99
BEC - 97
REG - 91
FAR - 1/8/16

[leglock]

just a theoretical question. i read in the becker book that the proper treatment of a refundable security deposit on a security deposit is to not show it is income (due to the fact it is refundable) even when cash basis.

[Author]

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