Publications

• 30 Second Ideas
• Accounting Updates
• Alerts
• Articles
• Business Surveys
• Construction Edge
• Healthcare Edge
• Insurance Edge
• Legal Talent
• Manufacturing Edge
• Not-for-Profit Edge
• Quick Links & Good Ideas
• SEC Edge
• Strategy Insights Blog
• Surviving the Upturn
• Tax Highlights

Cash Advances Might Not Be Taxable on Receipt When in Exchange for Volume Purchase Commitments for Accrual Basis Taxpayers

Businesses sometime enter into agreements with vendors who grant exclusive supplier status for a period of years. This is a common practice for many restaurants and retailers. In return, the vendor usually advances a payment that might be contingent on the client meeting certain minimum purchase requirements. For tax purposes, when is the advanced payment received recognized as income?

A taxpayer receiving advance payments from vendors who grant exclusive supplier status can defer income recognition if the agreement states that the cash advances are in exchange for volume purchase commitments and are subject to pro-rata repayment if the volume commitments are not met. Once this is agreed to, the cash advance can be recognized as income via a reduction of the cost of inventory purchased over time. In other words, as the taxpayer purchases goods for which it has volume obligations, it can subtract pro-rata portions of the advance cash discounts from what it pays. If the agreement does not provide for repayment if the volume commitment is not met, the IRS will likely argue that the advance payment is taxable in the year it is received.

For more information, please contact Amanda Zhong at 312-980-3324 or your Blackman Kallick representative.

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.