Our business is setup as a disregarded entity and requires that a customer provide a refundable deposit to use our service. The deposit can be used to purchase items or will be returned to the customer. Are the deposits considered taxable income?

ANSWER

The BIDaWIZ Team's Answer:

The answer depends on how you use the deposits and your access to the money. Specifically, if you have complete use of the money placed on deposit, then it is constructively received and reported as taxable income. If you then have to refund the deposit, then you have to account for that as a refund on your Schedule C of your Form 1040. The only way you can avoid paying taxes on the refundable deposit is if the money were held in an escrow account where you did not have access to the money, until the escrow officer disbursed the money to you.