Chuck's Appliance Service is an appliance dealer and service company in Glendale, CA. Chuck's is a calendar year, accrual method taxpayer. About 50% of Chuck's revenues come from the sale of appliances and about 50% comes from service calls. In addition to servicing the appliances of customers who purchased from Chuck's, Chuck's also services appliances that were purchased elsewhere.

On the sales side, Chuck's typically accrues income when an appliance is delivered to a customer. In most cases, after the appliance is delivered, Chuck's sends the customer a bill. About 10% of sales end up being returned within the 30 day money back period, and about 5% of the accounts receivable are typically uncollectible. Chuck's accountants advise that for financial accounting purposes, Chuck's will only be permitted to "book" 85% of its sales, after taking into account the estimated returns and uncollectible accounts.

In some cases, customers walk into the store and special order a particular model. Chuck's requires a 20% deposit with the balance due when the appliance is delivered. Sometimes it takes up to six months for the appliance to arrive. Because Chuck's has to return the 20% deposit if the appliance never comes in, the accountants book all income when the appliance is delivered.

On the service side, Chuck's has different types of arrangements depending on the customer. For ordinary residential customers, Chuck's bills for service calls within 30 days after the call occurs. Customers have 60 days to pay the bill. For commercial customers such as apartment buildings, Chuck's has two different arrangements. For the flat fee arrangement, landlords pay Chuck's a flat fee in December of the previous year in exchange for Chuck's agreeing to take care of all service needs that arise during the year. Under the fee for service arrangement, landlords pay Chuck's a fixed amount as a retainer during December of the previous year, and then Chuck's keeps track of the amount due from each service call it makes during the year. At the end of the year, Chuck's provides a comprehensive bill for the landlord to review. If the landlord approves, he can either write a new check to Chuck's, or apply the retainer amount paid during the previous December to the bill.

For the x1 taxable year, Chuck's faced a property tax reassessment. Chuck's received the bill in December x0 with payments due in February and May x1. Chuck's paid the bills on those dates under protest, as it does not believe the reassessment is appropriate. Chuck's filed an appeal in January x1, which is still pending.

Because Chuck's signed on so many new landlords for flat fee service contracts in December x0, they leased 4 new trucks under a 3 year lease contract beginning in January x1. They pay $1500/month under the contract.

 

What are the tax consequences?