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I am a sole proprietor. I invoice a client monthly. They pay the invoiced amount, less $20, which is a charge back to me for a processing fee.

How do I account for this on my tax return/accounting statements so that the IRS (principally) would be happy?

Do I record the actual invoiced amount, say, $8,000 and then a $20 expense (neither of which show in my bank statements?)

Or, do I simply record the amount deposited, $7,980, as income and forget about the charged back fee? This matches my bank statement, but not my invoice.

It seems that in either case, there will be missing documentation.

Thanks.

Grant Lindsay
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2 Answers2

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If you're a cash-based taxpayer then you only recognize the income you've actually received.

If you're accrual tax payer, then you recognize the income invoiced.

How you deal with the missing $20, if you're accrual basis, depends on why they're missing. If they just decided to not pay it - then it's accounts receivable, until you either sue them to recover, or they declare bankruptcy, or you find another way to write it off (talk to your licensed tax adviser about the legal ways to write unrecoverable debts off). If the fee is something you've agreed to, then you write it down as an expense, provided they provide you with documentation and your contract supports the fee.

While you don't need to account for it if you're cash-based, I suggest you check the legality of their actions nonetheless. Talk to your lawyer.

littleadv
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The $20 is not kept by the customer -- they pay the full amount and the $20 fee is taken by the bank or processor, right?

If so, you can record processing fees in a separate expense account in your books. If you're using software like Quickbooks, this is pretty easy to set up. Come tax time, your income is the full $8000, and the processing fee will offset $20 as a business expense, so you would include both on your tax return. The net result is the same as if you just recorded the $7980 as income and didn't list the expense. The idea is that your invoices match your books and bank statements and you still deduct your expenses.

Rocky
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