Question

Ethan uses the cash method of accounting and a calendar year he received the following payments from clients a check from clients #1 in the amount of 1091on December 26 2018 deposited December 24 2018 an electronic payment of 1968 from clients #3 made and deposited on January 2 2019 for service rendered on December 16 2018 cash in the amount of 292 received December 9 2018 from client #4 which he forgot to deposit until January 12 2019 when should Ethan report this income

Answer 1

IRS rules for recognizing income when taxpayer uses the cash basis of accounting are as follows :

INCOME should be recorded earlier of received or Constructively received. (receiving a check is example of constructive receipt)

In given case

1. Ethan has to recognize the income of $ 1091 when deposited into the bank dated 24th December 2018.   (refer see rule received or constructively received. )

2. Payment of $1968 received from client 3 should be recognized in next year as payment received and deposited in 2nd January 2019. As per cash basis performance of service is not basis for recognizing income.

3. Cash receipt of $292 from client 4 must be recognized as income in 2018 because Ethan has received the income. Non deposit of cash into bank is not criteria in recognize of income