cash basis - 2023 vs. 2024

[msf22305]

I have a small contractor business, operated on a cash basis method. I've been informed that one of our clients is going to pre-pay us her 2024 bill, so she can take it off of her 2023 taxes. The check will be mailed to us approximately December 27, so it seems unlikely we will receive and cash it before the end of the year. 

I would like to defer claiming the income until the 2024 tax year. (Even if the check does arrive before 12/31, we will hold it until the new year.) Is that an acceptable practice? Will it cause problems if she files a 1099 for tax year 2023, but we don't cash the check or claim the income until tax year 2024? 

[Anonymous_]

As a cash basis taxpayer, you are required to report the income as soon as you have access to the proceeds (the payment is made available to you).

In short, you can't delay cashing the check until after the end of the year and then report the income in 2024.

[VolvoGirl]

If you get a 1099 for it you can report it as income for 2023 and then make an offsetting entry to move it to 2024.   Add an entry on schedule C line 27a Other Expenses for the amount you received in 2024 and say like Income not received until next year. And be sure to enter it on your next year's return as General Income not received on a 1099NEC.

[Anonymous_]

Income

Under the cash method, you include in your gross income all items of income you actually or constructively received during the tax year. If you received property and services, you must include their fair market value (FMV) in income.

Constructive receipt.

Income is constructively received when an amount is credited to your account or made available to you without restriction. You do not need to have possession of it. If you authorize someone to be your agent and receive income for you, you are considered to have received it when your agent receives it. Income is not constructively received if your control of its receipt is subject to substantial restrictions or limitations.

Example.

You are a calendar year taxpayer. Your bank credited, and made available, interest to your bank account in December 2021. You did not withdraw it or enter it into your books until 2022. You must include the amount in gross income for 2021, the year you constructively received the interest income.

You cannot hold checks or postpone taking possession of similar property from one tax year to another to postpone paying tax on the income. You must report the income in the year the property is received or made available to you without restriction.

[Opus 17]

In this example, it depends on when the check arrives in your mailbox.  If it arrives between 12/28-12/30, it is 2023 income.  If it arrives in the mailbox on 1/2/24 or after, then it is 2024 income to you (even if it is a 2023 expense for the payer).  

Can you ask the payer to put the check in the mail on Friday the 29th?  That would probably prevent you from receiving it in 2023. 

Also note, if the check is post-dated (for example, the check is dated 1/2/24) then it is 2024 income to you no matter when you receive it, but it is also a 2024 expense for the person who sent it (because it can't legally be deposited until 2024, so you haven't received it until it's valid, but the payer hasn't spent it until it's valid.)

[Mike9241]

@Opus 17 asking the payor to hold the check, wouldn't the IRS take the position that you have control and it's taxable in 2023? 

[Anonymous_]

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@Mike9241 wrote:

........asking the payor to hold the check, wouldn't the IRS take the position that you have control and it's taxable in 2023? 

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Yes; that would constitute constructive receipt (i.e., the payor is holding the check as an agent). 

[TANGERINETWIST]

It depends on when you recieve it.  Do you check your mail every day?  I would not until after January 1st.  🙂

 The IRS doesnt check your mail.  They do not know when you received it.  

[Carl]

There's a thing referred to as "constructive receipt". If you receive the check on or before Dec 31 of the tax year, then it's reported as income for that tax year. Doesn't matter when you actually cash it or deposit it to your business account.
I've a pretty good idea why you're inquiring about it, as it's more to keep the book keeping simple for each tax year, than it is a tax issue. I generally don't issue any invoices for my services after Dec 15th, and will wait until the next year to invoice my clients. I don't like billing someone in one tax year, and then recording the payment in the next year. I prefer to close out my books for a tax year with everything balanced and no carry overs.