Cash basis accounting method and timing...?

oboero2 · ‎December 17, 2021

I have a question about when to include certain sales and when not to include certain sales in a given tax year.

I have a C-corporation, and I use cash basis for accounting method.

I run an ecommerce store on a small online platform(kind of like eBay), and after each online orders are complete, it will be marked as "amount payable" and the platform gives me a choice when I want to have that amount deposited to my bank account. This means I could decide to transfer only small part of the amount if I wanted to.

But that leaves me with two difference dates, one is the day the order was marked as "amount payable," and the other is the date that the money was actually transferred to my bank.

Which date should I use when reporting tax?

And if the latter date is the date that I should use, if I do well in a given year, could I decide to deposit only part of the sales to make it look like there were less sales and therefore pay less tax that year? Would this create any kind of complication when being audited by IRS? Thanks.

Rustler · ‎December 18, 2021

You are asking about the legal concept of agency. The web site is acting as your agent, when it accepts payment that is the same as you accepting payment, the same date. You do not have a choice as to what date to enter as receiving it. The best common example of agency is the USPS and the IRS. You tax return is accepted as of the date the USPS gets it, not the date it finally gets to the IRS.

QB only does accrual accounting, it reports on a modified cash basis if you require it.

Rainflurry · ‎December 18, 2021

You must report it as income in the tax year when it is "made available to you without restriction". Look up "constructive receipt". The IRS does not like income shifting and, yes, it would cause issues if audited.

oboero2 · ‎December 18, 2021

Thank you for your reply. Well, after I request the platform to have the money transferred to my bank account, there is a 5 day waiting period before the platform actually initiates the deposit, because the platform only deposits money every 5 days, and I must send the deposit request at least 5 days before the actual deposit date. Would this money in platform still be considered income when it becomes "amount payable"?

oboero2 · ‎December 18, 2021

Thank you for your reply. Yes, deciding the "amount payable" in this case is whether constructive receipt or not, seems to be the key.

The thing is, after it becomes "amount payable" and I request the platform to have the money transferred to my bank account, there is a 5 day waiting period before the platform actually initiates the deposit, because the platform only deposits money every 5 days, and I must send the deposit request at least 5 days before the platform deposits the funds. Would this money in platform still be considered income when it becomes "amount payable"?

I really am not trying to shift any income, I am just genuinely confused and lost as what to do.

Rainflurry · ‎December 18, 2021

Below is the federal tax regulation on constructive receipt. I am not an attorney but "set apart for him" in the first sentence would seem to indicate that funds set aside for you, but not deposited, probably constitute constructive receipt.

§ 1.451-2 Constructive receipt of income.

(a) General rule. Income although not actually reduced to a taxpayer's possession is constructively received by him in the taxable year during which it is credited to his account, set apart for him, or otherwise made available so that he may draw upon it at any time, or so that he could have drawn upon it during the taxable year if notice of intention to withdraw had been given. However, income is not constructively received if the taxpayer's control of its receipt is subject to substantial limitations or restrictions. Thus, if a corporation credits its employees with bonus stock, but the stock is not available to such employees until some future date, the mere crediting on the books of the corporation does not constitute receipt. In the case of interest, dividends, or other earnings (whether or not credited) payable in respect of any deposit or account in a bank, building and loan association, savings and loan association, or similar institution, the following are not substantial limitations or restrictions on the taxpayer's control over the receipt of such earnings:

(1) A requirement that the deposit or account, and the earnings thereon, must be withdrawn in multiples of even amounts;

(2) The fact that the taxpayer would, by withdrawing the earnings during the taxable year, receive earnings that are not substantially less in comparison with the earnings for the corresponding period to which the taxpayer would be entitled had he left the account on deposit until a later date (for example, if an amount equal to three months' interest must be forfeited upon withdrawal or redemption before maturity of a one year or less certificate of deposit, time deposit, bonus plan, or other deposit arrangement then the earnings payable on premature withdrawal or redemption would be substantially less when compared with the earnings available at maturity);

(3) A requirement that the earnings may be withdrawn only upon a withdrawal of all or part of the deposit or account. However, the mere fact that such institutions may pay earnings on withdrawals, total or partial, made during the last three business days of any calendar month ending a regular quarterly or semiannual earnings period at the applicable rate calculated to the end of such calendar month shall not constitute constructive receipt of income by any depositor or account holder in any such institution who has not made a withdrawal during such period;

(4) A requirement that a notice of intention to withdraw must be given in advance of the withdrawal. In any case when the rate of earnings payable in respect of such a deposit or account depends on the amount of notice of intention to withdraw that is given, earnings at the maximum rate are constructively received during the taxable year regardless of how long the deposit or account was held during the year or whether, in fact, any notice of intention to withdraw is given during the year. However, if in the taxable year of withdrawal the depositor or account holder receives a lower rate of earnings because he failed to give the required notice of intention to withdraw, he shall be allowed an ordinary loss in such taxable year in an amount equal to the difference between the amount of earnings previously included in gross income and the amount of earnings actually received. See section 165 and the regulations thereunder.

(b) Examples of constructive receipt. Amounts payable with respect to interest coupons which have matured and are payable but which have not been cashed are constructively received in the taxable year during which the coupons mature, unless it can be shown that there are no funds available for payment of the interest during such year. Dividends on corporate stock are constructively received when unqualifiedly made subject to the demand of the shareholder. However, if a dividend is declared payable on December 31 and the corporation followed its usual practice of paying the dividends by checks mailed so that the shareholders would not receive them until January of the following year, such dividends are not considered to have been constructively received in December. Generally, the amount of dividends or interest credited on savings bank deposits or to shareholders of organizations such as building and loan associations or cooperative banks is income to the depositors or shareholders for the taxable year when credited. However, if any portion of such dividends or interest is not subject to withdrawal at the time credited, such portion is not constructively received and does not constitute income to the depositor or shareholder until the taxable year in which the portion first may be withdrawn. Accordingly, if, under a bonus or forfeiture plan, a portion of the dividends or interest is accumulated and may not be withdrawn until the maturity of the plan, the crediting of such portion to the account of the shareholder or depositor does not constitute constructive receipt. In this case, such credited portion is income to the depositor or shareholder in the year in which the plan matures. However, in the case of certain deposits made after December 31, 1970, in banks, domestic building and loan associations, and similar financial institutions, the ratable inclusion rules of section 1232(a)(3) apply.

Topics

Training

Community

Resources

Cash basis accounting method and timing...?