Tax Question - accrual vs cash and all events test vs earliest of test (payment, job)

[FloridaEagle]

Hypothetically if a person contracted to do a job for someone, was paid, but had not done the work yet, does the contractor have to report it as income for that tax year or the year where he actually does the work? Example:

In October 2010 Tom gets a contract to build a fence. The client pays him for the work but the weather becomes too cold to dig the holes or whatever so he doesnt begin work on the fence until springtime. On Toms tax 2010 return must he report the payment as income even though he did not do the work in 2010?

Thanks

[wigirl920]

Originally Posted by FloridaEagle

Hypothetically if a person contracted to do a job for someone, was paid, but had not done the work yet, does the contractor have to report it as income for that tax year or the year where he actually does the work? Example:

In October 2010 Tom gets a contract to build a fence. The client pays him for the work but the weather becomes too cold to dig the holes or whatever so he doesnt begin work on the fence until springtime. On Toms tax 2010 return must he report the payment as income even though he did not do the work in 2010?

Thanks

The income is taxable in the year that you received it. In your example, Tom would have to claim that as income for 2010 even if he didn't finish the job until a later year.

*Posting this response based on the OP's other thread about his one-time side job as an independent contractor, and under the assumption that he is "Tom" and operating on a cash basis.

[e_cuyler]

It depends on Tom's basis of accounting. If he uses the cash basis, which is the basis that most individuals use, he would report the income in the year that he got the money, whether he had earned it or not.

However, if Tom used the accrual basis, which is what a lot of companies use, he would report it in the year that he earned the income, that is, the year he performed the work. If Tom routinely performs services on account or pays his bills likewise, he is most likely on the accrual basis. It's more likely though, that he's a cash basis taxpayer unless he's running a pretty large operation.


The IRS is strict about changing your basis of accounting, it can be done, but you can't just switch it whenever you want. You also can't do something like request that clients delay payment from one year to another year for tax purposes. If the client is ready to pay you, you're considered to have "constructively received" the income at that point.

[CTR36]

When you receive the money that's when you report it.
Most people are cash basis. You would fall into that category.