A taxpayer receiving a check on December 31st will typically have questions as to whether the funds in question can be counted as income for the current tax-year. In a related scenario, questions are raised as to whether a taxpayer can deduct an expense paid out by check on the last day of the year.

The good news is that taxpayers will generally receive expense deductions for checks that are written on the last day of the year. Still, the facts and circumstances on some such disbursements could lead the IRS to challenge these types of deductions.

Taxpayers, defined as cash basis taxpayers, receiving checks on the last day of the tax-year will be subject to any applicable tax burdens on those funds, unless there is some sort of cogent restriction on the use of the check or the funds. However, if the check turns out to be bad, the taxpayer would not be obliged to claim the funds as income during the tax-year the bad check was received in.

A cash basis taxpayer is defined as a person reporting income and deductions in the basis of when funds are received and/or when funds are paid out. This is the opposite of an accrual basis taxpayer, who recognizes income as accounts receivable when the transaction is complete, and recognizes expenses as accounts due at the time they are incurred.

Under the doctrine of constructive receipt, the funds need to be available to the taxpayer for immediate use and enjoyment. Subsequently, if a check is mailed to a taxpayer during the last week of the year, but the taxpayer does not receive it until the first day of the new year or later, it will not be treated as income received in the old-year. It is not considered income until the taxpayer actually receives it. However, taxpayers that are capable of collecting a check and choose not to show up and claim it until the new year, will see those funds counted as income for the old-year, as will taxpayers who have had checks received by agents acting on their behalf.

A taxpayer selling an item and agreeing, even orally, that the money is to be received at some future date is not subject to constructive receipt. This permits taxpayers to arrange for sales thoughtfully and schedule the receipts of funds at times beneficial to both the sellers and the buyers.

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