I live and do business in Ohio. I take deposits that are refundable. A customer orders, gives me a deposit, then I build a custom item for him, which sometimes takes more than 1 year. When the item is complete he pays the remainder and has the option to reject the custom item and get a full refund, with no final sale. Also he can cancel at any point and get his deposit back. So my question is: When do I report the deposit as income on a cash basis? Do I report the deposit as income in the year that I receive the deposit and just record the rest in the next year? The other very important part to this question is when do I charge and remit sales tax on the sale to the state of Ohio? If I get a $500 deposit in May and have to pay sales tax in June, do I remit any sales tax to the state on that deposit, or do I wait until (perhaps year later) and remit sales tax on the whole sale? Do I report the $500 deposit as income for that 6 months I receive it in, but exempt it from tax, or?
The issue is whether or not you have access, or as one court has ruled, dominion over the income.
If you have complete use of the money placed on deposit then you must determine that it is constructively received and there for will have to include it as income in the year received.
Since you are on cash accounting, the balance of payments if any, are claimed as income in the year received.
If you then have to refund the deposit, because the terms of the contract are fulfilled or not fulfilled (conditional), then you have to account for that as a refund in your schedule C or business expenses, on the date you refund it.
The only way you can avoid paying taxes on the refundable deposit is if the money were held in an escrow account where you did not have access to or dominion over the money, until the escrow officer disbursed the money to you upon terms of contract.
But, this means you do not have the money as part of your business operations.
A good way to test this premise is to ask: is the deposit treated as part of cash flow. Do you use the money to invest, buy product, supplies, etc? AND if not, could you. That is, is it available for you if you needed it?
Great clear answer. I just need a tiny clarification on the state sales tax issue. If I receive a $500 deposit do I just go ahead and charge the 6.75% sales tax on the $500 deposit at the time of receipt and then just charge sales tax on the remainder when it is collected? I just want to be absolutely sure. Thanks so much.
In Ohio, you pay sales tax on gross receipts.
In the case of refundable deposits, for personal or tangible property, and services.
The sales tax for the entire purchase is collected at the time the contract is consummated. In this instance the contract is the agreement to purchase and it is consummated with the payment of the deposit.
This means you figure the tax for the total purchase and collect it at the time the refundable deposit is made.
So the question is, what happens if you have to repay the deposit, to actually refund it.
You would refund the deposit and sales tax. You include this in the sales tax return at the end of the year in which you make the refund. (or appropriate quarterly estimated sales tax return).
According to the Ohio department of revenue, if the price of the sale changes, you make the adjustment when the product is delivered.
Take a car sale for example. (This is the most obvious example). A person purchases a car for delivery on a particular date. The sales contract is written up assessing sales tax for the purchase as contracted, regardless of when the car is paid for. A deposit toward the car was made, and the balance would be paid when the loan is approved. Now comes the customer to pick up the vehicle later, and since the original contract, has added a stereo, undercoating, etc. The dealer then re-invoices the car showing the original contract price and sales tax, then he lists the additional add-ons; or he invoices the add on separately. Whichever method is used, the add-ons or additional pricing is added, with its concurrent sales tax.
It would be done similarly to your situation. Through the course of creating the product for your customers, they make changes. Those changes will add to the price. When you deliver the product, you would include an invoice that itemizes the deposit, the original sales tax, and then the additional price for modifications and the additional sales tax listed separately.
That line would be labeled on the invoice as words to the effect;
Art Project Piece 1200.00
Sales tax @ 7% 84.00
Balance Due: 684.00
Changes and modifications 300 dollars
Sales Tax @ 7% 21
Total additional charges 321
Final balance due: 1005.00