USA Contract Adjustment- Reporting After Year Closes (accrual)

[Rainbow5]

In 2016 a Corporate Return was filed reporting the original contract amount (accrual basis filer), however since the filing of the return an issue arise where customer/vendor entered into an agreement to adjust the contract amount due to some disagreements, where vendor is now having to pay the customer a sum of money.

With this being the case if the settlement states an "Adjustment to Contract" would there be any issues with amending the 2016 Corporate Returns to reduce the original income reported?

 

[Drmdcpa]

Why amend the return? That is a drawback to using the accrual basis of accounting. Proper procedure would be to make the adjustment in the period the information is known.

To give you a more common example, an accrual basis taxpayer performs under a contract and issues invoices before close of the tax year. Thus income is recognized that year.

Next year the recievable is deemed uncollectible. The solution is not to amend the prior year's return. Rather take the bad debt in the year it becomes known to be a bad debt.

The accrual method sometimes requires paying tax on income not yet collected or never to be collected. It is why many small businesses do not use the accrual method until or unless they are required to.