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Retainers

 
 
Howard Kaikow
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      08-04-2004, 05:54 AM
Is a retainer fully taxable in the year in which the
retainer is received?

Or, is the taxable part of the retainer only that part of
the retainer against which there have been fees/expenses
charged?

Does it matter whether any unused part of the retainer will
be returned at the end of a project if all fees and expenses
have been paid?

--
http://www.standards.com/; See Howard Kaikow's web site.

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John H. Fisher
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      08-05-2004, 08:09 PM
"Howard Kaikow" <(E-Mail Removed)> writes:

> Is a retainer fully taxable in the year in which the
> retainer is received?
>
> Or, is the taxable part of the retainer only that part of
> the retainer against which there have been fees/expenses
> charged?
>
> Does it matter whether any unused part of the retainer will
> be returned at the end of a project if all fees and expenses
> have been paid?


If you receive advance commissions or other amounts for
services to be performed in the future and you are a cash
method taxpayer, you must include these amounts in your
income in the year you receive them.

If you repay unearned commissions or other amounts in the
same year you receive them, reduce the amount included in
your income by the repayment. If you repay them in a later
tax year, you can deduct the repayment as an itemized
deduction on your Schedule A (Form 1040), or you may be able
to take a credit for that year.

"Jack" - John H. Fisher - (E-Mail Removed)
Philadelphia, Pa - Atlantic City, NJ - West Wildwood, NJ
My Newsgroups & Boards at: http://members.aol.com/TaxService/index.html

Where Ignorance is bliss, 'tis folly to be wise!=

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BRaskinCPA
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      08-05-2004, 08:28 PM
> Is a retainer fully taxable in the year in which the
> retainer is received?
>
> Or, is the taxable part of the retainer only that part of
> the retainer against which there have been fees/expenses
> charged?
>
> Does it matter whether any unused part of the retainer will
> be returned at the end of a project if all fees and expenses
> have been paid?


Generally, a retainer is fully taxable in the year it is
received. Expenses incurred are deducted as ordinary
business expenses.

You should contact a professional in your area so that
he/she can do the research necessary to answer the second
part of the question.

Bruce Raskin, CPA
(E-Mail Removed)
Small Business and Individual Tax and Accouting Services

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Howard Kaikow
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      08-07-2004, 08:01 AM
>> Is a retainer fully taxable in the year in which the
>> retainer is received?
>>
>> Or, is the taxable part of the retainer only that part of
>> the retainer against which there have been fees/expenses
>> charged?
>>
>> Does it matter whether any unused part of the retainer will
>> be returned at the end of a project if all fees and expenses
>> have been paid?


> If you receive advance commissions or other amounts for
> services to be performed in the future and you are a cash
> method taxpayer, you must include these amounts in your
> income in the year you receive them.
>
> If you repay unearned commissions or other amounts in the
> same year you receive them, reduce the amount included in
> your income by the repayment. If you repay them in a later
> tax year, you can deduct the repayment as an itemized
> deduction on your Schedule A (Form 1040), or you may be able
> to take a credit for that year.


The retainer is just to cover my rear for certain types of
work.

For example, depositions/testimony/etc. in a court case in
which I would be consulting. It's really hard to collect
after the deed is done, so advance payment is needed.

--
http://www.standards.com/; See Howard Kaikow's web site.
"John H. Fisher" <(E-Mail Removed)> wrote:

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Stuart Bronstein
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      08-10-2004, 07:46 AM
Howard Kaikow wrote:

>>> Is a retainer fully taxable in the year in which the
>>> retainer is received?
>>>
>>> Or, is the taxable part of the retainer only that part of
>>> the retainer against which there have been fees/expenses
>>> charged?
>>>
>>> Does it matter whether any unused part of the retainer will
>>> be returned at the end of a project if all fees and expenses
>>> have been paid?


>> If you receive advance commissions or other amounts for
>> services to be performed in the future and you are a cash
>> method taxpayer, you must include these amounts in your
>> income in the year you receive them.


I don't necessarily agree. If the money is not actually
earned when paid, and might be returned to the extent it is
unearned, I think of it more as a loan.

> The retainer is just to cover my rear for certain types of
> work.
>
> For example, depositions/testimony/etc. in a court case in
> which I would be consulting. It's really hard to collect
> after the deed is done, so advance payment is needed.


I put advance payments in my trust account. When I withdraw
that money to pay for my time, that's when I acknowledge it
for tax purposes. Up to that point it is still the client's
money and I don't have any more than custody of it.

Stu

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TaxSrv
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      08-10-2004, 08:05 AM
"Howard Kaikow" wrote:

> ...
> The retainer is just to cover my rear for certain types of
> work.
>
> For example, depositions/testimony/etc. in a court case in
> which I would be consulting. It's really hard to collect
> after the deed is done, so advance payment is needed.


See this ABA link, regarding client trust accounts:

http://www.abanet.org/genpractice/co.../su96boot.html

Another potential downside not mentioned in the article is
deductibility to the client, so this may be more commonly
done in personal injury cases and the like, where the fees
are unlikely to be deducted. Where it is a deductible legal
fee, then both parties end up dealing with paperwork so the
proper year of deduction and amount can be documented. And
that further presumes that the contractual arrangement is
worded such that it deductible by the client as you expend
the funds, else the client's deduction could be deferred too
and in greater amount than the "net" income is deferred for
you.

It also seems there should be enough money involved to
warrant any bank fees on an additional checking account(s),
which reduce the economic benefit of deferring tax on some
of the advance to maybe no more than the following year,
depending upon the probable length of the litigation.

Fred F.

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MTW
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      08-10-2004, 08:24 AM
Howard Kaikow wrote:

> For example, depositions/testimony/etc. in a court case in
> which I would be consulting. It's really hard to collect
> after the deed is done, so advance payment is needed.


Assuming you are a "cash basis" taxpayer, it would be
taxable when received. Labeling it "refundable" will likely
not change that unless at the time of payment there is a
substantial likelihood (not simply a remote contingency)
that a refund will occur (and, even then, I'm not so
sure...).

MTW

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Howard Kaikow
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      08-15-2004, 07:29 PM
"TaxSrv" <(E-Mail Removed)> wrote:

> See this ABA link, regarding client trust accounts:
>
> http://www.abanet.org/genpractice/co.../su96boot.html
>
> Another potential downside not mentioned in the article is
> deductibility to the client, so this may be more commonly
> done in personal injury cases and the like, where the fees
> are unlikely to be deducted. Where it is a deductible legal
> fee, then both parties end up dealing with paperwork so the
> proper year of deduction and amount can be documented. And
> that further presumes that the contractual arrangement is
> worded such that it deductible by the client as you expend
> the funds, else the client's deduction could be deferred too
> and in greater amount than the "net" income is deferred for
> you.
>
> It also seems there should be enough money involved to
> warrant any bank fees on an additional checking account(s),
> which reduce the economic benefit of deferring tax on some
> of the advance to maybe no more than the following year,
> depending upon the probable length of the litigation.


The bottom line is there are no guarantees on what the IRS
would rule.

IMHO, the tax laws should distinguish between refundable and
non-refundable advances. A refundable advance is clearly a
liability, not income.

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Stuart Bronstein
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      08-17-2004, 01:53 PM
Howard Kaikow wrote:
> "TaxSrv" <(E-Mail Removed)> wrote:


>> Another potential downside not mentioned in the article is
>> deductibility to the client, so this may be more commonly
>> done in personal injury cases and the like, where the fees
>> are unlikely to be deducted.


> The bottom line is there are no guarantees on what the IRS
> would rule.
>
> IMHO, the tax laws should distinguish between refundable and
> non-refundable advances. A refundable advance is clearly a
> liability, not income.


The IRS has gotten the courts to go along with treating
payments by lawyers before they get paid, as loans to the
client, so not deductible, even if repayment doesn't happen
for several years.

It seems to me reasonable to claim that in the inverse case,
when the client makes advance (and refundable) payments to
the lawyer, it should also be treated as a loan, with no tax
effect until it is either earned or spent by the lawyer.

Stu

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Howard Kaikow
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      08-19-2004, 09:40 PM
"Stuart Bronstein" <(E-Mail Removed)> wrote:
> Howard Kaikow wrote:
>> "TaxSrv" <(E-Mail Removed)> wrote:


>>> Another potential downside not mentioned in the article is
>>> deductibility to the client, so this may be more commonly
>>> done in personal injury cases and the like, where the fees
>>> are unlikely to be deducted.


>> The bottom line is there are no guarantees on what the IRS
>> would rule.
>>
>> IMHO, the tax laws should distinguish between refundable and
>> non-refundable advances. A refundable advance is clearly a
>> liability, not income.


> The IRS has gotten the courts to go along with treating
> payments by lawyers before they get paid, as loans to the
> client, so not deductible, even if repayment doesn't happen
> for several years.
>
> It seems to me reasonable to claim that in the inverse case,
> when the client makes advance (and refundable) payments to
> the lawyer, it should also be treated as a loan, with no tax
> effect until it is either earned or spent by the lawyer.


Yes, that's my position.
But "reasonable", heck we are talking about our Uncle Sam.

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