Say that a U.S. person is a sole proprietor, and pays a contractor to do some work to support his business. This would normally count as a business expense, deductible on the U.S. person's taxes. But the contractor is hired on an online freelance marketplace that puts the funds in escrow, and doesn't finish the work before the end of tax year 2022, so the money isn't released from escrow until 2023.

Does the payment of funds to the freelance marketplace (which puts them into escrow) count as a deductible business expense for tax year 2022?

1 Answer 1


Depends if you pay tax on a cash or accruals basis

If cash, it’s when you spend the money. If accruals, it’s when you become liable for the expense (i.e. when the contractor gets the money). It is equivalent to paying a deposit.

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