We intend to pay a relatively significant fee to hire a consulting firm prior to year end. Obviously, much of the actual services will be performed in the year to follow. However, without seeing the final contract, I'm certain that this fee will be non-refundable. We can stand to benefit
Expensing consulting fees on retainer
Answers
I hope you are not going to pay a significant portion of the consulting agreement up front. I might even argue that very little of the estimated fee should be paid before any services are delivered.
In my mind any payments made in excess of services delivered is a prepaid asset on the balance sheet. Tax treatment would follow book treatment.
Anon
if this is an arms length deal, then it seems to be really naively negotiated, as per Jack's comment above. Do you file taxes on a cash or accrual basis? If cash basis, then your net cash position is still negative after tax.
However, is there is some linkage between the consulting firm and the person in your company wanting to hire the firm?
-Do some research (or ask someone to dig around for you).
-Does the consulting firm "need the cash" and is your company basically extending them some interest free finance?
For book purposes, you should be putting this in a prepaid until the services are rendered. I am not sure of your taxing jurisdiction, but not sure it is worth the scrutiny/
I appreciate the input. Because we have had a very successful year, I have urged the owners to consider speeding up near term expenses in the current calendar year if practical to reduce taxes. It's a legit and arms length transaction, but I did explain that this transaction would not have the impact of lowering taxable income this year unless I could argue a portion of fees were indeed earned. It is certainly non-refundable, but I haven't had much experience with retainer fees so went fishing for advice. Thanks all!
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Accounting