My LLC has a job that received downpayment for a job, but no work was completed in 2007, I need tax advice?

We received a very large downpayment which is 50% of the total job in 2007, but planning, zoning and construction delays have kept us from moving forward. The work will most likely be completed in 2008. I am confused about how to show this payment (taxable income, retainer, etc.) This is being held for materials only, so I do not want to have it taxed as it will be difficult for us to fund the project. Any tax advice?
I'm looking at section 460 of IRS code and wanted to know if this is applicable and how I would apply this.
Thanks,

You need to consult your CPA. There are ways to defer it to this year, but it's too complicated to explain here.

If you're on the cash accounting method it's part of your gross receipts for 2007 and is taxable. There's no way around that, sorry.

If you're on the accrual method you can carry it as a deposit on your balance sheet until you realize the income from the project.

is your LLC being taxed as a corporation or as a partnership?

what accounting method was your LLC using in prior years, cash or accrual?


what you want to do is use accrual accounting for 2007. If you were previously using cash accounting for this business, you can only change with permission of the commissioner. If the business is new, you elect accrual accounting with your first tax return.

being in a business that, by its nature, often receives cash deposits before the work is begun should have tipped your accountant off that accrual accounting is the better choice.

[percentage of completion accounting, frequently used in construction firms, is a form of accrual accounting.]

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another way to accomplish the same thing would have been to set up an escrow account [at the bank] and, in your contract, to have had all deposits paid into the escrow account and to permit [in the contract] only payments for materials and prepatory work out of the account.

this would have kept the LLC from having received the funds and thus from having potentially taxable cash receipts.