A customer funded project escrow that we cannot withdraw yet. Is it our income?
Customer Project Escrow and Business 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
Escrow funding is not automatically income to every party named in the project. Determine ownership, restrictions and release conditions, then apply the recipient's accounting method to its actual rights.
A specific business-owner situation
A client puts a project's budget into an independent escrow account. The contractor receives payments only after milestones are approved and cannot withdraw the balance. The amount funded and the amount the contractor is entitled to receive may differ.
Illustrative example, not a client result.
What to establish before filing
- Identify the escrow beneficiary and control rights.
- Document milestone approval and release dates.
- Separate client funds from receipts available to the business.
Which fact changes the answer?
An account labeled escrow but controlled freely by the contractor differs from an independent arrangement with real restrictions. Give the advisor the actual signature and withdrawal provisions.
A mistake to avoid
Reporting only releases without examining unrestricted access can be just as problematic as treating all escrow funding as immediate receipts.
Records that support the decision
- Escrow agreement.
- Project contract.
- Milestone approvals.
- Escrow and bank statements.
The decision to document
Request a rights-and-release timeline supporting the income method. Reconcile each release to the relevant invoice and any retained client property.
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Related questions
- A customer paid for my services with used equipment. What do I report?
- A customer is holding disputed retainage. Do I report the whole invoice as income?
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.