How to handle 1099-K with accrual accounting method for small business?

This is a common issue with accrual accounting! You're handling the deposits correctly - with accrual accounting, you only recognize revenue when you've earned it (when you deliver the furniture), not when you receive payment. The 1099-K reflects all payments processed, regardless of when you actually "earn" the income for tax purposes. It doesn't distinguish between deposits for future work and payments for completed projects. You should absolutely report the 1099-K on your return because the IRS receives a copy. Then make an adjustment to reflect your actual accrual-based income. In most tax software, there's a section for "reconciling" 1099-K amounts where you can explain the difference. The key is documenting everything clearly - keep detailed records showing which payments were deposits for projects not completed until 2026. Not reporting the 1099-K at all would be more likely to trigger correspondence from the IRS than properly reporting it with adjustments.

After struggling with a similar situation in my event planning business (also accrual-based with lots of deposits), I found an incredible solution with https://taxr.ai that saved me hours of frustration and probably thousands in potential overpayment. I uploaded my 1099-Ks and my business records showing which payments were deposits versus completed services, and their AI system automatically generated a perfect reconciliation report that showed exactly how to report everything correctly. The report even included specific recommendations for how to enter everything in my tax software with the proper offsetting entries. What impressed me most was that they explained exactly which IRS regulations applied to my situation and provided documentation I could keep with my tax records in case of questions. Their review also caught a couple of deductions I was missing! Definitely worth checking out for small business owners dealing with these 1099-K headaches.

I was the skeptic who commented above but I have to follow up. I decided to try taxr.ai last weekend and it was seriously impressive. I've been fighting with this exact 1099-K vs accrual accounting issue for my construction business. The system asked very specific questions about my deposits and when projects were completed, then gave me step-by-step instructions for reconciling everything in TurboTax. It created a detailed schedule showing which payments on my 1099-K were for completed projects vs. deposits for future work, and exactly how to document it all. The best part was it automatically generated an "audit ready" explanation statement that explains why my reported income doesn't match the 1099-K total. After three years of stressing about this issue, I finally feel confident that I'm reporting everything correctly AND can explain it if questioned. Definitely recommend for anyone using accrual accounting with payment processors.

If you're worried about an audit from this 1099-K issue, I can tell you from personal experience that getting through to the IRS to explain this kind of situation is nearly impossible these days. I tried calling for THREE WEEKS straight about a similar issue last year (contractor with deposits) and could never get through. I finally discovered https://claimyr.com and honestly couldn't believe how well it worked. You can see a demo at https://youtu.be/_kiP6q8DX5c but basically they handle the impossible phone wait times for you. I actually got to speak with an IRS agent who confirmed exactly how to handle this 1099-K vs accrual accounting situation without raising red flags. The agent explained that this is extremely common and as long as you properly report the 1099-K and document the reconciliation clearly, it's not an audit trigger. They even told me exactly what supporting documentation to keep. Saved me hours of frustration and stress!

OK I have to admit I was completely wrong about Claimyr. After posting that skeptical comment, I was still struggling with this exact accrual vs. 1099-K issue for my photography business and couldn't get answers anywhere. Got desperate and tried the service. Within 90 minutes I was literally talking to an IRS agent! The agent confirmed that I should absolutely report the 1099-K that was filed (since the IRS already has it), then make an adjustment on Schedule C Part V with a clear note explaining the accrual accounting difference. They specifically told me this is common and NOT an automatic audit trigger as long as it's properly documented. The agent even suggested keeping a simple spreadsheet showing which deposits on the 1099-K were for services not completed until 2026. Apparently the IRS sees this all the time with service businesses using accrual accounting. Huge relief to get this straight from the source! Would have never gotten through on my own.

I'm a bookkeeper for several small businesses and see this issue constantly. Here's my 2 cents: Always report the 1099-K exactly as issued. The IRS computer systems will automatically flag a missing or altered 1099-K amount. The proper way to handle this is: 1) Report the full 1099-K amount where indicated 2) Make an adjustment on Schedule C to subtract the portion representing unearned revenue (deposits for future work) 3) Maintain a clear reconciliation showing which amounts were for completed projects vs. future work 4) Keep those unearned deposits properly tracked as a liability on your balance sheet Most importantly, be consistent! If you're using accrual accounting, make sure all your books follow accrual principles, not just when it benefits you.

i think a lot of the answers here are overcomplicating things. i ran into this exact problem with my etsy shop where i take deposits months before i make custom items. what i did was just report the 1099-K amount on schedule C where it asks for it, but then i adjusted my gross receipts to match what i actually earned under accrual. turbotax let me do this without any issues. been doing it this way for 3 yrs and never had a problem or got audited. just keep good records showing which deposits are for 2026 work vs completed 2025 sales. that's all you really need.

As someone who's been through this exact situation with my consulting business, I can confirm that Jacob's approach is correct and much simpler than it might seem at first. You absolutely should report the 1099-K amount exactly as issued - the IRS matching system will flag any discrepancies there. The key is understanding that reporting the 1099-K doesn't mean you're taxed on that full amount. You report it, then make the appropriate adjustments to reflect your actual accrual-based income. Most tax software handles this smoothly - there's usually a reconciliation section where you can explain the difference. What really helped me was creating a simple spreadsheet showing: - Total 1099-K amount - Amount for completed projects (actual 2025 income) - Amount for deposits on future work (not 2025 income) This becomes your supporting documentation. I've never been audited, but having that clear paper trail gives me peace of mind. The IRS sees this situation constantly with service businesses, so as long as you're consistent with accrual accounting principles and can document the difference, you're handling it correctly. Don't overthink it - report the 1099-K, adjust to your actual earned income, and keep good records. That's really all there is to it.