I am a sole proprietor of an advertising business. In 2009 I was awarded a state contract for $40,000. $20,000 of this was for advertising during 2009 fiscal year and $20,000 in 2010 fiscal year. I received 2 checks from the client... 1 in Sept '09 for FY2009 and 1 in Dec '09 for FY2010. I recently received a 1099 Misc form for the entire $40,000 in 2009 even though the funds allocated for 2010 have not been used yet. How do I report half of the total in my 2009 taxes and half in my 2010 taxes?

Entire $40,000 is your income in 2009 if you use cash accounting.