Client has been in business for many years doing a commercial rental through an S corp, and has always accounted for security deposits as rental income and for deposit refunds as a reduction in income. This treatment was mirrored on the books and on the return.
It seems to me they've adopted a method of accounting. The closest analogue I can find to this situation is the treatment of Commodity Credit loans as loans instead of income, DCN 1 and Section 2.01 of Rev. Proc. 18-31. I'm thinking the method of accounting applies to all deposit amounts (as opposed to each deposit individually), no automatic change is available, and a change would be done on the cutoff basis if implemented.
Opinions?
Also, assuming I'm correct about all of that, what would you do in this situation? The cost of obtaining a non-automatic consent would be $2,800 to the corporation. The result would be that about $12,000 of deposits that could be received over maybe five years or so wouldn't be taxable income, and the taxpayer is at a marginal rate of 33.3% federal + state. How would you approach advising the client about this issue? Would you consider changing the method without obtaining consent?