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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 28430
Experience:  Taxes, Immigration, Labor Relations
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A theater partnership was awarded a grant work that

Customer Question

A theater partnership was awarded a grant for a work that will be produced in 2015 and 2016 and shown starting jan 2017. The 1099 was issued in 2014. How do I show this was an advanced payment, all the money will be spent on the production in 2015 and
2016. Is there an attached statement to explain why the income is not being booked at this time for full disclosure on a partnership return? Similar to the 8275 on the personal return?
Submitted: 1 year ago.
Category: Tax
Expert:  Lev replied 1 year ago.
We may not treat that advanced payment as not taxable.Most individuals and many sole proprietors with no inventory use the cash method because they find it easier to keep cash method records. Under the cash method, include in your gross income all items of income you actually or constructively receive during your tax year. If you receive property or services, you must include their fair market value in income. Generally, you report an advance payment for services to be performed in a later tax year as income in the year you receive the payment. However, if you receive an advance payment for services you agree to perform by the end of the next tax year, you can elect to postpone including the advance payment in income until the next tax year. However, you cannot postpone including any payment beyond that tax year. You must file Form 3115 to obtain IRS approval to change your method of accounting for advance payment for services.For some additional details - see following publication page 11http://www.irs.gov/pub/irs-pdf/p538.pdfExample 3. You own a dance studio. On October 1, 2012, you receive payment for a one-year contract for 48 one-hour lessons beginning on that date. You give eight lessons in 2012. Under this method of including advance payments, you must include one-sixth (8/48) of the pay-ment in income for 2012, and five-sixths (40/48) of the payment in 2013, even if you do not give all the lessons by the end of 2013.Another way to handle the situation - to use the accrual method of accounting.Under the accrual method of accounting, generally you report income in the year it is earned and deduct or capitalize expenses in the year incurred. The purpose of an accrual method of accounting is to match income and expenses in the correct year.
Customer: replied 1 year ago.
How do i make that election? There is a 1099 for 2014, how do i show that we are postponing claiming the income on the partnership return in this scenario:Generally, you report an advance payment for services to be performed in a later tax year as income in the year you receive the payment. However, if you receive an advance payment for services you agree to perform by the end of the next tax year, you can elect to postpone including the advance payment in income until the next tax year. However, you cannot postpone including any payment beyond that tax year.
Expert:  Lev replied 1 year ago.
Election is made on Form 3115
See form here
http://www.irs.gov/pub/irs-pdf/f3115.pdf
The issue is that you need to obtain IRS approval.
.
See Schedule B—Change to the Deferral Method for Advance Payments
Specific details may be found in
Regulations section 1.451-5.
http://www.gpo.gov/fdsys/pkg/CFR-2012-title26-vol6/pdf/CFR-2012-title26-vol6-sec1-451-5.pdf
and Rev. Proc. 2004–34
http://www.unclefed.com/Tax-Bulls/2004/rp04-34.pdf
That would be relatively complex filing and if you do not have prior experience you might want to have a local CPA helping with filing that form.
Sorry - there is no simple answer.
Customer: replied 1 year ago.
That does sound complicated. This is the first year filing as a partnership so we can elect to use the accrual method. That would eliminate the need to change accounting methods. Does the income still get listed on the return to acknowledge the 1099-misc and state that it will be income in the following year?
Expert:  Lev replied 1 year ago.
That is correct - you choose an accounting method when you file your first tax return.
Then - you must use the same accounting method from year to year.
See Regulations section 1.451-1(a) for details.
You will only list income recognized under accrual method.
Long-term contracts (except for certain real property construction contracts) must generally be accounted for using the percentage of completion method described in section 460. See section 460 and the underlying regulations for rules on long-term contracts.
https://www.law.cornell.edu/uscode/text/26/460
and here
http://www.irs.gov/irb/2003-41_IRB/ar14.html