Question

Determine the effects of the following on a cash basis taxpayer’s gross income for 2019 and 2020.

a. On the morning of December 31, 2019, the taxpayer received a $1,500 check from a customer. The taxpayer did not cash the check until January 3, 2020.

b. The same as part (a), except the customer asked the taxpayer not to cash the check until January 3, 2020, after the customer’s salary check could be deposited.

c. The same as part (a), except that the check was not received until after the bank had closed on December 31, 2019.

Answer 1

Answer (a):

On the morning of December 31, 2019, the taxpayer received a $1,500 check from a customer.

Since check is 'cash equivalent':

$1,500 has to be included in taxpayer’s gross income for 2019.

Taxpayer's gross income for 2019 increases by $1,500.

No affect in taxpayer's gross income of 2020.

Answer (b):

Customer asked the taxpayer not to cash the check until January 3, 2020. As there is restrictive conditions placed on check, the check is not cash equivalent for 2019.

Hence:

There is no effect on cash basis taxpayer’s gross income for 2019.

Taxpayer’s gross income for 2020 will increase by $1,500

Answer (c):

The check was not received until after the bank had closed on December 31, 2019. This check of $1,500 cash equivalent even if it is received after the bank had closed on December 31.

Taxpayer's gross income for 2019 increases by $1,500.

No affect in taxpayer's gross income of 2020.