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My friend is in an interesting situation. He paid in advance to a worker in December, but it doesn't look like the worker will finish the job. The worker is willing to refund the money, but in January. That puts my friend in dilemma - he wanted to write this off as business expense for 2012. Is it okay to write this as business expense for year 2012 and show it as income for year 2013? How do refunds involving multiple financial years really work?

He asked the worker if he'll be showing this as his income for year 2012? He was like "No! I'm going to refund it anyway in 2013!".

The friend hasn't incorporated yet or anything.

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up vote 1 down vote accepted

Get the worker put it in writing, and deduct it in December under constructive receipt rules. The fact that you're getting the actual cash in January isn't significant as long as you've secured the payment. Verify this with a tax adviser, but that's what I would do.

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The thing is he needs to pay other workers too, and if he would have had this cash in possession, he would have paid other workers and saved on tax on that amount. Now, it looks like he'll have to pay tax on this amount this year. Is there any way around this? – user1831003 Dec 29 '12 at 22:59
@user1831003 loan cash to the business, pay employees, get the money, repay self. I'm sure he can spare a $100 for a CPA consultation on this matter. – littleadv Dec 30 '12 at 0:55
@littleadv The friend isn't incorporated so no need to mess with a loan to the business because he is the business entity. – stoj Dec 30 '12 at 13:56
@stoj its just for accounting, doesn't matter how you call it really. – littleadv Dec 31 '12 at 5:04

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