I was paid a few hundred dollars to review a few textbooks. I submitted an invoice in Dec 2016, and received payment in Jan 2017. When I pay taxes on this income, does that count towards 2016 or 2017?
The context of my question is US federal taxes.
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3Taxes are on money received in a year. If the check wasn't cut until 2017, the income goes on your 2017 return. There was a recent question about a check received in 2016 but deposited in 2017, I'm not sure what the answer is in that case, but I'd expect it goes on the 2016 return. (I am not a tax professional, consult one of your own, etc.) – Kevin Mar 06 '17 at 08:07
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@Kevin - With respect to the check received in 2016, but not deposited until 2017, the term you should research is "constructive receipt". While there could, arguably, be some corner cases (search, or ask a specific question), if you could have deposited the check and had access/control of the money in 2016, then the income was in 2016. – Makyen Mar 06 '17 at 18:39
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@Makyen thanks for the info. I was actually referring to a question I saw here a few days ago: (http://money.stackexchange.com/q/76927/13817) – Kevin Mar 07 '17 at 18:34
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If your business is operating on an accrual basis, the income would be counted as occurring in 2016.
If your business is operating on a cash basis, the income would be counted as occurring in 2017.
If you don't know what that means, you are probably using a cash basis for your business, which means income and expenses take place when you actually receive or incur them. According to cash-based principles, if you receive the check in 2017, that is when you report the income.
For more information, see Accounting Methods in Publication 538. In summary, you can choose both as an individual and as a business which accounting method you want to use, and it is not trivial to change it. Cash basis on a calendar year is more or less the default, and is recommended unless you have a specific reason for doing something else.
Ben Miller
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1The U.S. tax code reports on a cash basis. While you are right about accruals (and the like), that is only to be concerned with financial reporting. – Liam Mar 06 '17 at 16:55
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15@Liam, You are incorrect. US Taxes can be done on either an accrual or a cash basis. For individuals, nearly everyone reports on a cash basis. As Ben Miller has stated, if you don't know you are reporting on an accrual basis, it is nearly certain you are reporting on a cash basis. Your comment is somewhat self-contradictory. Income taxes are fundamentally about financial reporting. I'm not sure how you consider them not to be. – Makyen Mar 06 '17 at 18:32
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1I must be the exception. I was reporting on the accrual basis because my records were kept in accrual basis and I didn't know what it was called for years. – Joshua Mar 06 '17 at 19:07
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I was wrong in my opinion of a person not being able to choose between the accrual and cash basis, for that I apologize. But to comment on your statement, the line is not self-contradictory. Financial statements are not for income taxes, financial statements are for internal analysis that provide convenience to management. My first line, though, follows the IRS publication 334 chapter 2, assuming that the person was filing under the cash basis, they can not change unless he/she fills out a Form 3115 to change accounting methods. – Liam Mar 06 '17 at 21:22
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Having researched this in the past, I believe natural persons (the kind with blood and hair) must operate on cash and cannot choose accrual. Imagine if you could and he didn't pay you. You earned and billed in 2016 so you'd pay taxes in 2016 on the phantom income. That's gone until you formally write off the debt. Which would trigger a taxable event for the deadbeat! And he might sue you to dispute the billing to avoid paying taxes on it! Complicateder and complicateder! – Harper - Reinstate Monica Mar 07 '17 at 07:01
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Pub 538 addresses some of the concerns here in the comments. I've added a little to my answer to explain. – Ben Miller Mar 07 '17 at 12:52
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I have a tiny side business, tiny as in I make hundreds of dollars per year. I have to file a Schedule C for that income, and it asks whether I am using a cash or accrual basis. I am a flesh and blood person. Perhaps for your personal income, as opposed to business income, you must use a cash basis. – Jay Mar 08 '17 at 07:23
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@harper If you are on an accrual basis, then yes, you would have to declare income when you bill the customer. If he doesn't pay, at some point you write off the debt as an expense, i.e. subtraction from your income. Whether the right-off generates a taxable event for the other person depends on whether HE is on a cash or accrual basis. I don't know what would happen if someone refused to accept such a write-off. I'd think that would be rare as it would mean he is no longer liable for the debt. – Jay Mar 08 '17 at 07:26
