Invoice billed in 2006 to be paid in 2007, when is it counted as income?

Question

I have a one-man manufacturing business. I made and billed a job in December. Quickbooks shows it as income for 2006 but I haven't been paid yet. Must I claim it as income for 2006 or can I wait and claim as income in 2007?

Answer 1

That DEPENDS!

If you are a cash-basis taxpayer, you report income as you receive payment.

If you are an accrual basis taxpayer, you report income as it is sold, regardless of when you get paid.

If you don't KNOW which one you are on, you should get a an ENROLLED AGENT or CPA to help you, because this determination is a basic part of your business accounting. Certain businesses are required to be on one or the other method. Basically, if you are in manufacturing, you are likely on the accrual basis, so it would be 2006 income.

Not only do you have to deal with the income aspect, but also you need to determine your Cost of Goods Sold, including Section 263 expenses (costs relating to manufacturing).

Being in manufacturing, you may also qualify for some of the new credits (and a lot of CPAs overlook this stuff). For example, the domestic production credit may be available to you!

WealthBuilder
Enrolled Agent / Tax Specialist

Answer 2

It depends on the accounting standards. However, I personally, would count it as an expense in 2006--because of the money/resources I used to generate the invoice. After I get paid in 2007, I would then include it as income in 2007 in my statement of financial performance/income statement/profit-loss statement.

Answer 3

It depends on the method of accounting that you use. Also, once you choose a method of accounting, you have to stick to it. You can't change from a cash basis to an accrual basis on a whim.

Basically, cash basis accounting recognizes revenues and expenses when they are paid while accrual base accounting recognizes revenues and expenses when they are incurred.

To answer your question, if its a cash basis, then recognize the expenses in 2006 or 2007 depending on when they paid and recognize the revenue as you receive it in 2007 and later if not completely paid in 2007. If its on an accrual basis, then claim the revenue and expenses in 2006.

Answer 4

You can only count as income when the customers have actually paid the invoices whether it's 2007, 2008 or beyond. Otherwise what'd happen to bad accounts?

In accounting, you can count accounts receivable as current asserts but not income until they're paid. Read the article in the link below.

Answer 5

Tom T need a basic accounting class. Accounts receivable become assets at the same time the income is recognized. Assuming your business uses accrual basis accounting, income is recognized when earned, not when collected. I recommend asking a CPA how to handle your business. Cash basis accounting recognizes income when received. This is the method most individuals use.

Answer 6

Yes, 2007

Answer 7

You can claim it as income in 2007. If it's over $600 and you're working with a place that sends a 1099, they'll send it in 2007.