1099-NECs on Cash Basis vs Books on Accrual Method

Accounting Exec · ‎April 05, 2024

I am new to the tax preparation world and have a question that I can't figure out the answer to. I need to figure out what to do when 1099-NECs are on a cash basis vs financial statements are on an accrual basis. Here is the situation:

Client received 1099-NECs from clients that made payments for services in 2023 and also that prepaid all of 2024. The client is on a cash basis, so they reported all amounts paid on their 1099-NEC. The taxpayer records his books on the accrual basis, so the total income on the books is lower than the 1099-NEC totals.

Not sure how to correctly put this on the Schedule C so that the numbers work out the way they are supposed to.

Please help!

Accounting Exec · ‎April 06, 2024

I am going to reply to myself based on answers I've been given by other tax professionals who have actually dealt with this in case someone is also looking for an answer.

If you were given 1099-NECs that include prepayments which cause your accrual basis revenue to be lower than the total 1099-NECs, you should include all 1099-NECs, then include an adjustment in your tax software to get your revenue down to your accrual basis revenue.

One you've done that, you will want to include a note in your tax return (possibly on Form 8275) to explain why there was a difference.

The IRS understands that there are differences between cash and accrual basis businesses, so as long as you have an explanation for the variation between those two types of records that makes sense, you should not get too much push back if any at all.

Hope this helps anyone with the same issue, and if anyone has any other approach that they like to take, please leave your feedback.

Cheers!

View solution in original post

DebSheenD · ‎April 05, 2024

Good day to you, @Accounting Exec.

To better understand your concern, can you please confirm the product that you're using?

That being said, I recommend reaching out to your accountant for professional advice when entering transactions on Schedule C . If you're not affiliated with one, you can utilize our Find an Accountant tool to look for one in your area.

You may also want to generate 1099 reports in QuickBooks to view who needs 1099s, payment totals, and other details. Here is a guide to help you: Create 1099 reports in QuickBooks.

If you have any further questions or concerns regarding 1099 NEC, please don't hesitate to contact us. We're available to assist you at any time.

Accounting Exec · ‎April 05, 2024

Thank you for your attempted response, but it seem as though you didn't read my question before answering. If anyone else has advise, please help me know what you do when filing a return with the issue described above.

JoanaC · ‎April 05, 2024

Let me assist you with your 1099 Form, @Accounting Exec.

Schedule C will report the total income earned by the contractor for services provided in 2023, regardless of whether some payments for those services were received in advance (prepayments).

I recommend consulting an accountant when entering the entries to ensure the prepayment is reflected accurately on Schedule C and other relevant tax forms. They will be able to guide you on the most appropriate way to account for this discrepancy based on your specific circumstances.

I'd also like to know which QuickBooks product you're using so we can provide a specific resolution.

I'll be sharing these articles for you to know more about 1099 forms:

If you still have questions about your payroll forms. I'll be more than happy to assist you. Take care, and have a great day!

Accounting Exec · ‎April 06, 2024

I am going to reply to myself based on answers I've been given by other tax professionals who have actually dealt with this in case someone is also looking for an answer.

If you were given 1099-NECs that include prepayments which cause your accrual basis revenue to be lower than the total 1099-NECs, you should include all 1099-NECs, then include an adjustment in your tax software to get your revenue down to your accrual basis revenue.

One you've done that, you will want to include a note in your tax return (possibly on Form 8275) to explain why there was a difference.

The IRS understands that there are differences between cash and accrual basis businesses, so as long as you have an explanation for the variation between those two types of records that makes sense, you should not get too much push back if any at all.

Hope this helps anyone with the same issue, and if anyone has any other approach that they like to take, please leave your feedback.

Cheers!

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1099-NECs on Cash Basis vs Books on Accrual Method