TaxProTalk.com

Has anyone every heard of a professional service firm being on the accrual basis and at the same time utilizing the deferred revenue account.

I had a professional explain to me how he keeps his books on the accrual method but at the same time has a large amount in the deferred revenue account as a liability come tax time. He bills all of his 12/31 engagements in mid November and many clients pay him prior to 12/31 so they can get the tax deduction (I am assuming most are cash basis or just paying their bills within 30 days). The professional then justifies putting those funds in the deferred revenue account because he can not start the engagement until after the year end. His company is a 12/31 year end and they do a lot of pension plan audits so maybe that is how they justify it.

Is this legit if the services are not offered until after the year end? I am going to assume all fees are refundable if client wants to switch

I would not assume refund is due if cancelled. I would want that confirmed, in writing, of course.

Most professional services firms are cash basis. A minority use the nonaccrual experience method. Having said that, as long as he is accrual and following the one-year deferral rules of Rev Proc 2004-34, this shouldn't be an issue.

Agreed Mr. Coddington