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Scenario

Let's say I was given a check from an LLC on December 15 that was written to my LLC on that same day, and I cash it on January 15 the following year.

Question

Will I have to claim the income for the origin year or the origin year +1? eg. 2017/2018

This question has been answered which prompted a more detailed version which can ve seen here for a more detailed version of the same question.

mhoran_psprep
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Jacksonkr
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    Is this a paycheck from your employer, or a check for your business from a customer? – Ben Miller Nov 30 '17 at 01:26
  • @BenMiller Good question, let's say it's from a client LLC to a sole-proprietor LLC which I own. – Jacksonkr Nov 30 '17 at 01:28
  • When you say "given", do you mean that you have the check actually in your possession (or somewhere that you can access it at will)? – chrylis -cautiouslyoptimistic- Nov 30 '17 at 15:17
  • @chrylis As to not add any additional details to this question, I've posted a follow up question with more details here – Jacksonkr Nov 30 '17 at 18:31
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    One problem with all the answers. The Post Office is a delivery AGENT, but for which party? If the recipient instructed the check to be mailed, then the Post Office (or other carrier) is an agent for the recipient. When the recipient's agent gets possession (deposited in a mailbox, postmarked), then the recipient has received it by agency. – George West Dec 10 '22 at 00:31

1 Answers1

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If your business operates on a cash basis (and it probably does), then income is governed by a doctrine known as constructive receipt. From IRS Pub 538:

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....

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.

In the case of a check, you have constructive receipt of the check when you receive it, not when you cash it or deposit it. In your example, the income would belong to tax year 2017.

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Ben Miller
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  • What if said check is sent to a P.O. box which is only picked up monthly? This is the actual case, and it’s picked up by someone else. – Jacksonkr Nov 30 '17 at 03:30
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    @Jacksonkr You theoretically have access to the PO Box every day, right? The check has been "made available to you without restrictions," and leaving it in the PO Box won't change that. Having someone else retrieve the mail won't change it, either, as that would be "you authoriz[ing] someone to be your agent and receive income for you." – Ben Miller Nov 30 '17 at 03:51
  • I live 1600 miles away and only access the box when I’m there. I have a signed check coming in the mail before jan 1st so I’m trying to figure out what to do with it. – Jacksonkr Nov 30 '17 at 04:15
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    @Jacksonkr: You should maybe edit your question to clarify that. That is the type of wrinkle on "constructive receipt" that I've always been curious about myself. – BrenBarn Nov 30 '17 at 05:32
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    @Jacksonkr, Rather than adding that information to this question, I'd suggest a new question with that specific information & make the new question explicitly about that. This question could be canonical for check date/constructive receipt (an important concept). Making that edit would A) partially invalidate this answer (generally against policy), & B) make the question more specific/less useful to others. Having an additional question which covers the specific case (e.g. being 1600 miles away/unable to receive the check), in addition to this one, would be beneficial to future readers. – Makyen Nov 30 '17 at 07:35
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    @Jacksonkr, trying to play lawyer with such excuses is sure to raise red flags in a audit. The IRS doesn't play these games You should really consult a tax professional who can go to bat for you with the IRS, but this is playing with fire if you try this on your own. – Ron Maupin Nov 30 '17 at 07:39
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    Keep in mind that the customer, since they are a business, will be telling the IRS that they sent in December $x to your LLC. The IRS will be expecting to see that money accounted for in your income statements. – mhoran_psprep Nov 30 '17 at 11:17
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    @Jacksonkr and everyone else: The 1600 miles is completely irrelevant to the IRS. It is the OP's choice to use a PO Box so far away from where he lives. There are obvious solutions to his dilemma (use a different PO Box, have someone check the box more often and mail the check, move closer, etc). Even if he does none of these and doesn't get the check until mid Jan, it's still not a big deal, as he probably won't have filed his 2017 taxes yet. I would not recommend writing a new question just for this. – Ben Miller Nov 30 '17 at 11:35
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    @BenMiller : Presumably if the customer mails the check on 2017-12-20 and it gets stuck in the Christmas rush so that it isn't delivered until 2018-01-05, then the IRS will be entirely happy with the income being constructively received in 2018? (Which also means the income would be received in the month after the customer reports spending it.) – Martin Bonner supports Monica Nov 30 '17 at 15:30
  • @BenMiller answered the question as it was originally asked, which closes this question. As for the legalities of the distance I fully plan to follow the check written date because that's when the client will have filed the transfer. If I do end up posting a follow up question I'll leave the url in an edit to my original question for those who may be interested. – Jacksonkr Nov 30 '17 at 15:32
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    There was a case where a lottery winner could have picked up his winnings on 12/31, but didn't want to drive to the office that day, so he waited until January. He tried to argue with the IRS that he hadn't received the money until he picked it up. The IRS ruled that he could have driven in Dec. if he wanted to, he just chose not to, so he had constructively received the winnings in the earlier tax year. In that case the taxpayer didn't even have the choice of where the lottery office was located, unlike the OP who chose to locate the PO box 1600 miles away. – stannius Nov 30 '17 at 17:18
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    @BenMiller There's case law that says that having to make a special trip to get the funds is a substantial restriction. In this specific case though, the trip would have taken several hours and there was no gamesmanship involved nor any undue delay. A tax year boundary just happened to fall in the few days. There lots more on the wiki page. – David Schwartz Nov 30 '17 at 21:48
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    @DavidSchwartz Which case are you talking about? – Ben Miller Nov 30 '17 at 22:02
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    There's still a lots of edge cases that come up with checks, which this answer really wouldn't answer for me. What if you receive a check when the banks are closed (e.g. evening or Sunday), and it's Dec. 31? What if you receive a check but when you try to cash it it takes a few days and Jan. 1 passes between then? Heck, what if the bank puts the check on a hold in the meantime? And hell, what if the check bounces the first time? Did you have possession of the funds the first time or the second time? etc. – user541686 Dec 01 '17 at 01:21
  • @DavidSchwartz: It would be cool if you could answer the other question with some of that info. – BrenBarn Dec 01 '17 at 07:19
  • @Mehrdad Some of those situations are covered by existing case law, some of them are not. (And to Ben Miller -- I couldn't find the case. I searched.) – David Schwartz Dec 01 '17 at 08:47
  • @DavidSchwartz I added some references to my other answer that refute the assertion made in your comment. – Ben Miller Dec 03 '17 at 13:19
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    @BenMiller Those references all assume that there are no significant limitations or obstacles to you accessing the funds in that tax year. I'm talking about cases where there are. See, for example, Baxter v. Comissioner which refutes your claim that "you have constructive receipt of the check when you receive it". (Though that wasn't the case I was thinking of, unfortunately.) Search the ruling for, "The Tax Court erred in not recognizing the substantial restrictions preventing Baxter's exercise of control here". – David Schwartz Dec 04 '17 at 17:38
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    @DavidSchwartz In that case, Baxter was required to drive to the payer's location on Saturday Dec 30 to pick up the check directly from the payer, and if he did so, he would not have been able to deposit it until Jan 1. In our scenario, OP has already told the payer to send the payment to his PO Box. I don't think this is comparable. – Ben Miller Dec 04 '17 at 17:48
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    @BenMiller I agree. I'm responding to the false generalities in your answer, not the specific case. For example, you said, "you have constructive receipt of the check when you receive it" and that is definitely not true if there are substantial limitations on your ability to access the funds in the tax year. In that case, he had the check available for his pick up but no way to access the funds that tax year. – David Schwartz Dec 04 '17 at 17:53
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    @DavidSchwartz Understood, but in Baxter, I would argue that he hadn't received it yet. If I owe you money, and I say, "Come to me and get it," have you already received my payment at that moment? In any case, my answer is in response to the text in the question: "I was given a check... on Dec 15" – Ben Miller Dec 04 '17 at 18:00
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    @BenMiller Yes, you have. Otherwise, you could just not come and get it for however long you wanted, defeating the entire point of the constructive receipt doctrine. The question is whether there are significant obstacles to your ability to access the funds that tax year, not where the check is or who has it. – David Schwartz Dec 04 '17 at 18:03