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Expensing consulting fees on retainer

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 tax wise by incurring the expense this year. Can I justify this or is this for certain a prepaid to be expensed as services provided?

Answers

Jack Judd
Title: Retired
Company: Retired
(Retired, Retired) |

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.

Len Green
Title: Performance Improvement Consultant and E..
Company: Haygarth Consulting LLC
LinkedIn Profile
(Performance Improvement Consultant and ERP Strategist, Haygarth Consulting LLC) |

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?

Topic Expert
Patrick Dunne
Title: Chief Financial Officer
Company: Milk Source
(Chief Financial Officer, Milk Source) |

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/risk to pull the expense forward to 2013. Put it in prepaids, but don't prepay a significant portion of the contract. You have to be saving a lot in order to justify paying this up front.

Anonymous
(Accounting Manager) |

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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