My 1099-Misc includes income that was received in a subsequent year, what must I do?
Its very simple, report the entire amount included on the 1099-Misc on your Schedule C as gross income. Then include an item in income as an adjustment of $5,000 to offset the gross income (that is, as a negative amount). Then, make a comment Note 1, and explain in detail that this is an adjustment to the 1099-Misc income, and represents payments that were received in 2008. Therefore, being a cash basis taxpayer and following the rules of "Constructive Receipt", you are correctly going to include that adjustment as income on the 2008 Tax Return.
This happens all the time, corporations mail payments to consultants who do not deposit these checks as either they are on vacations or do not receive these checks by Dec 31st, year end.
Therefore, you are correct in your treatment of this adjustment provided you first include the entire amount reported on the 1099-Misc and show an adjustment of $5,000 plus include an explanation of this adjustment.