A customer is holding disputed retainage. Do I report the whole invoice as income?
Disputed Retainage and Cash-Method Income. A specific owner scenario, the facts that change the answer, and the records needed for a tax review.
By AE Tax Advisors Team · Updated October 28, 2026
A cash-method review asks when payment was actually or constructively received, while an accrual-method review can produce a different timeline. An invoice alone does not settle the timing of disputed retainage.
A specific business-owner situation
A contractor completes work in December, but the customer withholds a contractual amount pending defect review. The contractor has not received the money and cannot draw it. Distinguish a genuine unresolved right from money made available but voluntarily left untouched.
Illustrative example, not a client result.
What to establish before filing
- Confirm the filed tax method and contract terms.
- Document the dispute and restrictions on payment.
- Track resolution and eventual receipt separately.
Which fact changes the answer?
Funds available on demand differ from an amount the customer can still refuse under an unresolved claim. Supply the advisor with actual access and acceptance facts rather than only the invoice date.
A mistake to avoid
Writing off retainage as bad debt after never including it in income can create an unsupported deduction.
Records that support the decision
- Contract.
- Retainage calculation.
- Dispute correspondence.
- Payment and acceptance records.
The decision to document
Ask for a contract-level timing conclusion and maintain the balance until resolved. Reconcile later settlements to the amount originally recognized, if any.
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Related questions
- A customer paid my business loan directly instead of paying our invoice. Is that still revenue?
- A customer paid to end a multiyear service contract. Is that payment capital gain?
Sources and editorial context
General educational information prepared with AI assistance. No individual professional review is claimed. Apply the relevant tax-year rules to the actual records. Editorial policy · AI disclosure.