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Deferred revenue and customer advance payments
A customer deposit creates a timing question: cash has arrived, but work may remain. Keep the contract and performance record beside the deposit ledger, and review tax treatment separately with your CPA.
This guide describes common bookkeeping practice, not a legal or regulatory requirement.
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General information, not legal or tax advice.
Track what the customer has paid for
As common bookkeeping practice, maintain a customer-by-customer schedule of deposits, work completed, refunds and amounts still awaiting recognition. Connect each receipt to the agreement or invoice. This makes it easier to explain an advance balance when the bank account has already spent some of the cash.
Distinguish a book liability from taxable income
Publication 538 generally includes advance payments in income in the year received. It describes an accrual-method election permitting qualifying deferral, with no postponement beyond the following tax year. Recording a customer-deposit liability in the books does not by itself make that election or settle eligibility.
Sources: IRS Pub 538
Review earned and unearned portions
Under the non-AFS deferral method described by the IRS, the earned portion enters gross income in the year received and the remaining portion in the subsequent tax year. Give your CPA the service dates and contract status supporting that split, including changes or cancellations that affect the obligation.
Sources: IRS Pub 538
Keep the election decision with the tax adviser
IRS guidance says the election continues until consent to revoke and identifies Form 3115 for changing the method for service advances. Publication 334 also limits postponement to the next tax year. Maintain the adviser’s instructions with the deposit schedule so future closes follow the approved treatment.
Sources: IRS Pub 538; IRS Pub 334 (for 2025 returns)
Sources: track what the customer has paid for
Keep customer deposits accounted for
Tidwell helps reconcile the books and organize supporting schedules for your business decisions. We work with your CPA on tax questions and the financial records they need.