How to handle 1099-K with accrual method for my boutique design business?

What you're describing is a common issue with payment processors and the accrual method. You're handling the deposits correctly - under the accrual method, you only recognize income when you've earned it by completing the service, not when you receive the money. For your tax return, you should definitely report the 1099-K amount and then make an offsetting adjustment. This is because the IRS automatically matches 1099 forms with your tax return. If you don't report it, you'll likely get an automatic notice asking about the discrepancy. When you enter the adjustment in TurboTax, make sure you label it clearly as "1099-K adjustment for deposits received but not earned under accrual method." Keep detailed records that show exactly which payments were for services performed in the current year versus deposits for future work. This should include client contracts, invoices showing deposit amounts, and a reconciliation showing how you calculated the difference.

I had this EXACT same problem with my event planning business! Spent hours trying to figure it out until I found taxr.ai (https://taxr.ai) which helped me understand how to properly document the difference between my payment processor reports and my actual accrual income. Their system helped me organize all my deposits for future events separate from completed work, and even generated a reconciliation report that explained the exact difference between my 1099-K and actual taxable income. Basically showed me how to create a paper trail that would satisfy the IRS if I ever got questioned about it.

Just wanted to follow up after trying taxr.ai for my situation. It was actually super helpful! The system automatically flagged all my transactions that looked like deposits based on their timing and helped me properly categorize everything. The best part was it generated this detailed reconciliation report that clearly showed why my 1099-K was higher than my actual taxable income. I showed this to my tax preparer and she was really impressed with how thoroughly it documented everything. She said it was exactly what would be needed if the IRS ever questioned the discrepancy. Turns out I was way overthinking this whole accrual accounting thing!

I had similar issues with payment processors. After spending literally HOURS on hold with the IRS trying to get clarification (seriously, I called 14 times and never got through), I finally used https://claimyr.com to get me connected to an actual human at the IRS. You can see how it works here: https://youtu.be/_kiP6q8DX5c The IRS agent I spoke with confirmed exactly what others are saying here - you SHOULD report the 1099-K amount on your return and then make an offsetting adjustment for the deposits that haven't been earned yet. She specifically mentioned that they're seeing lots of similar situations with small business owners using payment processors.

Just wanted to follow up about that Claimyr service. I was totally skeptical but after another failed morning trying to reach the IRS about my 1099-K question, I gave it a shot. It actually worked! Got a call back in about 2 hours and was connected to an IRS agent. The agent confirmed that the approach others mentioned here is correct - report the 1099-K amount and make an offsetting adjustment for deposits not yet earned under accrual accounting. She advised keeping detailed records showing exactly which payments were for services performed in the current year versus deposits for future work. Honestly can't believe I wasted so many hours trying to call them directly before this.

I'm a bookkeeper for several small businesses who use accrual accounting. Here's what we do: 1) Always report the full 1099-K amount on Schedule C 2) On Schedule C Part V, include an explanation of the difference 3) Keep a detailed spreadsheet showing: - Client name - Date payment received - Amount received - Project completion date - Tax year revenue should be recognized The IRS computer systems automatically match 1099 forms to your return. If you don't report it, you'll 100% get a letter asking why. But properly documenting the adjustment is totally legitimate and accepted accounting practice.

Has anyone had an actual audit triggered by this situation? I'm in the same boat with my consulting business. My CPA says it's fine but I'm still nervous about the big difference between my 1099-K and actual income.