Bounced Checks Under the Cash Method

Under the cash method, if you receive a check that bounces, don't include it in gross income until it is honored by the bank or a replacement check is issued and clears the bank.

Example:

  • You're a sole proprietor on a calendar year (year ends December 31).
  • On December 15, 2014 you receive a $2,500 check from a customer and deposit it.
  • On December 18, 2014 the check bounces.
  • You redeposit it December 23, 2014 and it bounces again.
  • You file your 2014 income tax return early during March 2015. You still have not received a replacement check.
  • You finally receive a replacement check of $2,500 on April 10, 2015 and it clears the bank

Result:

  • You exclude the $2,500 from your 2014 gross income since the cash was never actually received in 2015.

You must include the replacement check of $2,500 in your 2015 gross income because the payment was actually received in 2015.

Receiving Advance Payments Under the Cash Method

Under the cash method you include prepayments of income in the year the prepayment is received.

Renting Real Property:

If you rent a house or office space, include prepaid rent in your gross income in the year payment is received, no matter what method of accounting you use.

Real Estate Dealers:

If you're a real estate dealer, use Schedule C or C-EZ to report income. If you're not a real estate dealer use Schedule E to report rental income.

Renting Personal Property:

If you rent personal property, such as equipment, vehicles, tools, etc., advance rental payments are reported in the year received, no matter what method of accounting you use.

If you're in the business of renting personal property use Schedule C or C-EZ to report rental income.

Guaranty or Warranty Contracts Under the Cash Method:

You generally cannot postpone reporting income you receive under a guarantee or warranty contract.

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