Author Topic: Want to apply check as 2017 income  (Read 4239 times)

Mighty-Dollar

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Want to apply check as 2017 income
« on: October 27, 2016, 08:49:12 PM »
I receive a rent check on the 25th of every month. For my December check, if I wait to cash it on January 1st, can I apply all of it or all but 7 days of it as 2017 income? Or would the IRS say "that's a no no"?

Goldielocks

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Re: Want to apply check as 2017 income
« Reply #1 on: October 27, 2016, 09:12:26 PM »
For self employment (and rental) income, that your report on your personal tax return, you should be able to report it on a cash basis.   You can claim that you did not receive the check until January 1st when you walked it to the bank.


Then someone would need to prove otherwise.

Of course, the 100% correct way is to report it on Dec 25th or the actual day you received it, if later... so you could ask your tenant to hold it until January 1st when you will come by in person to pick it up.

Mighty-Dollar

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Re: Want to apply check as 2017 income
« Reply #2 on: October 27, 2016, 10:48:38 PM »
"Self employment"? It's my entire home residence that I'm renting for a while. I am not incorporated. Does that qualify as self employment?

Cathy

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Re: Want to apply check as 2017 income
« Reply #3 on: October 27, 2016, 11:16:46 PM »
The question posed by the original post has a simple answer.

If the taxpayer uses cash accounting and the taxpayer actually receives a check that is not subject to substantial restrictions on December 25, 2016, then the taxpayer must treat the amount as received in 2016, provided that the check is honoured if later presented (whether or not that is in 2016). Kahler v. Commisioner, 18 TC 31 (1952). "The fact that [a taxpayer] did not deposit the check into his ... bank account is immaterial." Hill v. Commissioner, TC Memo 2010-268 at *17. Asking the tenant to delay tendering the check is also ineffective to delay receipt of income. "A taxpayer may not deliberately turn his back upon income and thus select the year for which he will report it." Hamilton National Bank of Chattanooga v. Commissioner, 29 BTA 63, 67 (1933).

If the taxpayer uses accrual accounting, then the analysis is even simpler. In this case, the amount must be included in income "when all the events have occurred that fix the right to receive the income and the amount of the income can be determined with reasonable accuracy", 26 CFR 1.446-1(c)(ii)(A), namely on December 25, 2016.

CareCPA

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Re: Want to apply check as 2017 income
« Reply #4 on: October 28, 2016, 07:02:57 AM »
I receive a rent check on the 25th of every month. For my December check, if I wait to cash it on January 1st, can I apply all of it or all but 7 days of it as 2017 income? Or would the IRS say "that's a no no"?
You can do whatever you want, but I don't think that's what you meant by the question.
The proper way is to report it in the year of receipt (constructive receipt, technically). To do otherwise, especially now that you knowledge to the contrary, could potentially be fraud.

terran

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Re: Want to apply check as 2017 income
« Reply #5 on: October 28, 2016, 07:17:29 AM »
What the above posters are talking about is Constructive Receipt of the income: see https://www.irs.gov/publications/p538/ar02.html

Quote from: IRS
Constructive receipt.   Income is constructively received when an amount is credited to your account or made available to you without restriction. You need not 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.

In other words, the question is not whether you had possession of the check or whether you deposited the check, the question is whether you could have had possession of the income in 2016 had you wanted to, or whether that decision was out of your control (like it was mailed, but still in the postal system until Jan 1, 2017).

Something I'm not sure about and would be interested to know from those more informed than I is whether it's a question of possession of the check, or of the actual money in the sense that if you received the check on a Sunday December 31st, have you constructively received payment in that year or the next given that no bank would be available to deposit the check until the following year?

CareCPA

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Re: Want to apply check as 2017 income
« Reply #6 on: October 28, 2016, 07:23:50 AM »
What the above posters are talking about is Constructive Receipt of the income: see https://www.irs.gov/publications/p538/ar02.html

Quote from: IRS
Constructive receipt.   Income is constructively received when an amount is credited to your account or made available to you without restriction. You need not 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.

In other words, the question is not whether you had possession of the check or whether you deposited the check, the question is whether you could have had possession of the income in 2016 had you wanted to, or whether that decision was out of your control (like it was mailed, but still in the postal system until Jan 1, 2017).

Something I'm not sure about and would be interested to know from those more informed than I is whether it's a question of possession of the check, or of the actual money in the sense that if you received the check on a Sunday December 31st, have you constructively received payment in that year or the next given that no bank would be available to deposit the check until the following year?

From https://www.irs.gov/publications/p334/ch02.html
"Checks.    Receipt of a valid check by the end of the tax year is constructive receipt of income in that year, even if you cannot cash or deposit the check until the following year. "

Proud Foot

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Re: Want to apply check as 2017 income
« Reply #7 on: October 28, 2016, 08:48:08 AM »
It looks like you have already gotten good answers to your question.  Is there a reason why you want to count the income in 2017 rather than 2016?

robartsd

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Re: Want to apply check as 2017 income
« Reply #8 on: October 28, 2016, 09:03:20 AM »
If the rent is due on the first, but the tenant simply likes to send it early, you could ask the tenant to post date the check to the due date. If the rent is due on the 25th, then legally it is 2016 income. If you use cash accounting and the tenant is late, that could delay the income; however, as a tenant, I would not be comfortable paying my rent late on an informal request from the landlord.

I imagine that the OP is expecting to drastically reduce domestic income in 2017 (first year of retirement, moved abroad, etc.); thus moving the income to 2017 may reduce the marginal tax rate paid on it.

Mighty-Dollar

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Re: Want to apply check as 2017 income
« Reply #9 on: October 28, 2016, 03:02:26 PM »
It looks like you have already gotten good answers to your question.  Is there a reason why you want to count the income in 2017 rather than 2016?
Good question. My tenant is going to be moving out after the last check. No rent income in 2017 if this last check is applied to 2016. So if I have deductions (expenses) that occur in January I may be left with no way to deduct. I am not renting the house after they move out.

Also my income for 2016 will be way higher than for 2017. I am testing this out in TurboTax now, but would I save money by reducing a very high income bracket in 2016 in exchange for a higher but still very low income bracket in 2017? I normally make about 35K per year. Just in 2016 I'll be making an additional 75K. So I could flip it around in 2017 to 38K in 2017 / 72K in 2016. Maybe it's a zero sum game?

Quote
Kahler v. Commisioner, Hill V. Commissioner
Thanks Cathy! That explains it well. Seems like my only option is to ask tenants to get on a new payment schedule, paying on the first. Most landlords do this to begin with.
« Last Edit: October 28, 2016, 03:04:10 PM by Mighty-Dollar »

Roboturner

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Re: Want to apply check as 2017 income
« Reply #10 on: October 28, 2016, 03:05:54 PM »
just have the tenant post date the check Jan 1, and win?

TomTX

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Re: Want to apply check as 2017 income
« Reply #11 on: October 28, 2016, 04:51:12 PM »
Cathy always gives such nice, thorough replies.

Mighty-Dollar

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Re: Want to apply check as 2017 income
« Reply #12 on: October 28, 2016, 06:20:54 PM »
I just crunched the numbers in TurboTax. I'll be saving over $1,000 if I can move these January rent days to 2017.  I'm gonna ask my tenants if they'll accept the new rent due date of the 1st of every month.

TomTX

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Re: Want to apply check as 2017 income
« Reply #13 on: October 28, 2016, 06:58:53 PM »
I just crunched the numbers in TurboTax. I'll be saving over $1,000 if I can move these January rent days to 2017.  I'm gonna ask my tenants if they'll accept the new rent due date of the 1st of every month.

I expect they would. Most people are happy paying later...

If they're not immediately happy, you could offer to reduced the rent $25 or something as an incentive.

Mighty-Dollar

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Re: Want to apply check as 2017 income
« Reply #14 on: October 28, 2016, 08:31:28 PM »
A simpler way would be to ask my tenants if they'll agree to make their Dec 25th rent check for just the 7 days of December. Then pay for the 25 days of January on January first in a SEPARATE check. I would throw them a bone of some sort in consideration. I wonder if the IRS would mind that?

Cathy

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Re: Want to apply check as 2017 income
« Reply #15 on: October 28, 2016, 09:54:59 PM »
I cannot comment on any specific situation, but generally speaking you are entering into an extremely complicated (and contentious) area of tax law when you propose to restructure your arrangement with the tenant for the purpose of reducing your federal tax liability. I hinted at this issue above with my citation to Hamilton National Bank of Chattanooga, supra.

Under certain circumstances, a transaction can be disregarded for federal tax purposes if the transaction lacks "economic substance". See generally, e.g., AD Investment 2000 Fund v. Commissioner, TC Memo 2015-223 at *23; Palm Canyon X Investments v. Commissioner, TC Memo 2009-288 at *41. The general rule is now partially (but not entirely) codified at 26 USC § 7701(o)(1), which reads as follows:

     In the case of any transaction to which the economic substance doctrine is relevant, such transaction shall be treated as having economic substance only if—
(A) the transaction changes in a meaningful way (apart from Federal income tax effects) the taxpayer’s economic position, and
(B) the taxpayer has a substantial purpose (apart from Federal income tax effects) for entering into such transaction.


The opening words of this provision indicate that the rule applies if it is "relevant", but the statute does not say when this rule is "relevant", although it does say that (if otherwise "relevant") the rule applies to individuals for "transactions entered into in connection with a trade or business or an activity engaged in for the production of income" (which seemingly would include the rental of property). 26 USC § 7701(o)(5)(B). Neither the statute nor the judicial opinions are "a model of clarity", United States v. Coplan, 703 F 3d 46, 91 (2nd Cir 2012), and there is significant debate over when this rule is "relevant" (within the meaning of the opening words of the provision). See, e.g., Andy Grewal, Economic Substance and the Supreme Court, Tax Notes, Vol 116, No 11 at *969 (2007) (arguing that economic substance is relevant only if a particular statute makes it relevant, and not otherwise).

To be on the safe side, it may be a good idea to be able to articulate, and to document, why the proposed transaction meets the conjunctive test of 26 USC § 7701(o)(1), quoted above, even if economic substance is not a relevant issue (and I express no view on whether it is a relevant issue). I also express no view on whether any of the proposed transactions discussed in this thread would meet the conjunctive test.
« Last Edit: October 29, 2016, 10:21:23 AM by Cathy »

Mighty-Dollar

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Re: Want to apply check as 2017 income
« Reply #16 on: October 28, 2016, 11:41:37 PM »
Landlords routinely require rent to be paid on the 1st of the month because it's easy to remember the 1st and because pay checks come in at the end of the month.

Vilgan

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Re: Want to apply check as 2017 income
« Reply #17 on: November 02, 2016, 11:13:35 AM »
In your shoes, I would just refrain from checking my mail for a week. Have the post office hold it or some such. Then when it is delivered in January you aren't committing fraud.

Cathy

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Re: Want to apply check as 2017 income
« Reply #18 on: November 02, 2016, 08:10:53 PM »
In your shoes, I would just refrain from checking my mail for a week. Have the post office hold it or some such.

This type of idea was discussed in my first post in this thread, and unfortunately it doesn't work. If the delay that pushes receipt of the check into 2017 is caused by "only the [taxpayer's] own volition" in not accepting the check, then the check is still treated as though it were received in 2016, not 2017. Kunze v. Commissioner, 19 TC 29, 32 (1952) (internal quotation marks and citation omitted), aff'd without opinion 203 F 2d 957 (2nd Cir 1953). The taxpayer's "own deliberate act" that causes the check to be received later is not effective to delay receipt of income for tax purposes. Commissioner v. Fox, 218 F 2d 347, 349 (3rd Cir 1954).
« Last Edit: November 02, 2016, 11:15:09 PM by Cathy »

jwright

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Re: Want to apply check as 2017 income
« Reply #19 on: November 03, 2016, 08:13:39 AM »
It looks like you have already gotten good answers to your question.  Is there a reason why you want to count the income in 2017 rather than 2016?
Good question. My tenant is going to be moving out after the last check. No rent income in 2017 if this last check is applied to 2016. So if I have deductions (expenses) that occur in January I may be left with no way to deduct. I am not renting the house after they move out.

Also my income for 2016 will be way higher than for 2017. I am testing this out in TurboTax now, but would I save money by reducing a very high income bracket in 2016 in exchange for a higher but still very low income bracket in 2017? I normally make about 35K per year. Just in 2016 I'll be making an additional 75K. So I could flip it around in 2017 to 38K in 2017 / 72K in 2016. Maybe it's a zero sum game?

Quote
Kahler v. Commisioner, Hill V. Commissioner
Thanks Cathy! That explains it well. Seems like my only option is to ask tenants to get on a new payment schedule, paying on the first. Most landlords do this to begin with.

You will still be able to deduct expenses incurred while renting the property during 2107 even if the income was received in 2016.  That's part of cash basis.  You deduct expenses when paid.

Goldielocks

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Re: Want to apply check as 2017 income
« Reply #20 on: November 03, 2016, 12:40:36 PM »
I wanted to add that despite a certain "flexible" thinking on my part, the year this happened to me (where the following year I was to receive little income and current year had higher taxes)..  moving a single month's rent made little difference, so there was no point..

Instead..
I simply adjusted when I spent expenses and front loaded purchase of management supplies and cleaning tools into December, for on-going use.   

Also, on another rental, I adjusted how much depreciation I claimed in a year to offset income (you don't have to claim the max depreciation every year in Canada if you don't want to).  As the property was APPRECIATING, the taxes at the sale date were therefore less when I did not claim the maximum amount in prior years.

CareCPA

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Re: Want to apply check as 2017 income
« Reply #21 on: November 03, 2016, 12:44:40 PM »
...
Also, on another rental, I adjusted how much depreciation I claimed in a year to offset income (you don't have to claim the max depreciation every year in Canada if you don't want to).  As the property was APPRECIATING, the taxes at the sale date were therefore less when I did not claim the maximum amount in prior years.
As most here probably know, but I wanted to mention to be safe, the rules for depreciation in the US are different than this.
But that can be incredibly beneficial, so it's cool that Canada allows that.