Year-End Receipts and the Cash Method: What Counts in 2024?
Dana is a calendar-year, cash-basis graphic designer who operates as a sole proprietor. In late December 2024, several items cross her desk. A client's $14,000 check is dated December 31, 2024, and mailed that day, but Dana receives it on January 3, 2025, and deposits it January 6. On December 20, another client tells Dana she can wire a $9,000 project bonus immediately; Dana asks her to hold it until January, and the client pays on January 8, 2025. On December 28, Dana receives a $5,000 retainer for a January branding project; the retainer is refundable if the client cancels, but Dana can spend it immediately. Dana also owns Series EE savings bonds purchased in 2019; their redemption value rose $1,200 during 2024, and she has never elected to report the increase annually. Dana uses the cash method and has no other timing elections in place. She asks which amounts belong in 2024 gross income.
1. Which of the four items-the $14,000 check, the $9,000 bonus, the $5,000 retainer, and the $1,200 bond increase-are includible in Dana's 2024 gross income? Explain the timing rule for each.
Read the worked answer
Cash-method taxpayers report income when it is actually or constructively received.
- $14,000 check: A check is income when received, not when dated or mailed. Dana received it January 3, 2025, so it is 2025 income. If she had received it in 2024 but merely delayed deposit, it would be 2024 income.
- $9,000 bonus: No constructive receipt. The client had not credited the funds, set them aside, or given Dana unrestricted access; Dana asked for deferral before payment, and the client agreed. A mere promise to pay is not income. It is 2025 income when paid.
- $5,000 retainer: Included in 2024. An advance payment for services is income when received under the cash method, even if refundable, because Dana can use it without restriction. It is not a trust deposit.
- $1,200 EE bond increase: Not included. Series EE interest is generally reported at redemption or maturity unless the owner elects under §454 to report the increase annually. Dana made no election.
Thus, only the $5,000 retainer is 2024 gross income from these items.
2. How would the analysis change if the client had credited the $9,000 bonus to Dana's account on December 31, 2024, but Dana did not withdraw it until January?
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If the client had credited the $9,000 to Dana's account on December 31, 2024, the result changes. Constructive receipt occurs when income is credited, set apart, or otherwise made available so that the taxpayer can draw on it without restriction. Dana's failure to withdraw the funds would not defer income. The $9,000 would be 2024 income. Similarly, if the $14,000 check had arrived December 31, 2024, it would be 2024 income even if deposited in January. The retainer result is unchanged. The EE bond result is unchanged absent a §454 election.
3. What election could Dana make for the savings bonds, and what are its consequences?
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Section 454 allows Dana to report the annual increase in Series EE bond redemption value as interest each year. The election applies to all Series EE bonds she then owns and to bonds acquired later; it can be revoked only with IRS consent. It would spread the $1,200 and future increases into income annually, but it does not change the 2024 result unless timely made. A late election may be available under §9100 relief if she can show reasonable cause, but that is not automatic.