I have an Internet marketing company. We charge a flat fee to manage our clients' Internet marketing. The client provides us with a budget to spend on his behalf. I want to know if we can setup a Client Trust Fund or Escrow account for our clients to deposit the budget money into and withdraw from to pay for the advertising. All of the advertising is currently being paid by my credit cards used solely for this purpose and I keep a ledger for each client already. Any funds left in the client's account at the end of his contract is returned to the client.

The problem I am having is that I have been paying taxes on my clients' money. This has forced me to take out a loan simply to pay the taxes. Believe it or not, I have asked 2 accountants, 1 tax lawyer and the IRS and no one can give me an answer.

PS: Every month each client is provided with a full report on how much of his ad budget has been spent, where it was spent and how much is left in his account.

Smith21000

for clarification purposes why are you paying taxes on your clients money? This money should act as a retainer of funds not as any type of income. The only income should be the flat fee your charging. Maybe I'm missing something here but please try and clarify.

mawells

That was MY questions exactly! I asked my accountant - in fact I asked 2 accountants and they said that I had to pay taxes on this money because it is receipts. So, I'm saying why wouldn't I just put this money into an escrow account and keep it out of my general funds and can I do that?

(Currently the funds are mixed in with our general operating funds - but I keep separate ledgers so I know exactly how much belongs to each client. I'd be more than willing to open a checking account specifically for my clients' ad money and disperse the funds amongst each client accordingly.)

Oh yeah, and the ad budget money is invoiced as a separate line item so moving it to a trust account would not be a problem.

CaptainForest

I believe the government taxes on receipt of cash. So since you are receiving all the cash upfront, you must pay for it now, and get to deduct it later.

I am moving this question to the TAX forum so ATE can better answer your question as he is our resident Tax Expert.

Smith21000

Most likely your entity is some type of flow-through (LLC, 1120S, 1065, Sole etc.) and you or your tax advisor has chosen to be taxed on a cash basis, therefore accelerating the payment of taxes and delaying your deductions in your situation. The IRS allows you to change methods and maybe a accrued method would be advantages to you in order to better match your clients expenses with your customers receipts. I can ask a few colleagues and try to get back to you shortly.

mawells

Thanks, I guess I missed that there was a tax section.

mawells

As I think about this, it occurs to me that this money is being taxed twice. I'm paying taxes on it and Google, MSN or Yahoo is paying taxes on it - for them it IS income. For me, I'm just a pass-thru managing my clients' funds.

AtlantaTaxExpert

Unfortunately, this issue exceeds my level of expertise.

Sorry!