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Recognizing Income – Cash Basis

Course: Income Tax Planning
Lesson 3: Accounting of Gross Income

Student Question:

The first example in “Recognizing Income” about not recognizing the check payment until it can actually be cashed seems contradictory to the CFP Board question below which states that income is included when a check is RECEIVED. Any clarification you can provide here?

Thanks.

Jay

Coursework Example:

Let’s suppose you are paid with a check on December 31, but the check is dated January 8 of the following year. Do you recognize it as income for the current year?

  • Yes
  • No (correct answer)

CFP Example

Board Released Question

A cash basis taxpayer includes income from a service business when:

  • The services are performed
  • The client is invoiced for the services
  • The client’s check is deposited in the bank
  • The client’s check is received (correct answer)

 


Instructor Response:

Hi Jay-

Very good question here. Glad you spotted this. So, the difference between the two examples is that the Board example just talks about receiving a check, which you would have to assume is dated for that day because it doesn’t state otherwise. That’s one thing to be careful about in CFP Board questions – never assume anything not provided in the question. In our example, we have stated the check was post-dated. Now it becomes about when do I have a right to that check? While it’s in hand in December, it is clearly not available to us until January and, therefore, we have no right to that payment until then. So, when answering our question, the correct answer should be “No.”

Does that help to clarify?

Dan