Too Cute?

[sd4524]

My first year in business and i have a question. Right now I have a few checks on my desk from commercial customers. Not small 1-2 man companies. They are both software companies that own their own building- so they have lots of money coming in and out every month. I was thinking of holding onto these checks and cashing them in January.
Is this a bad practice and disruptive to their book-keeping? Both are great customers. The amount is small to them but can make a difference to a one man show like me If I can wait to pay taxes on it for another 15 months.
On monday I am finishing a job for a homeowner and should get a check for $3500. I was thinking of bringing it up to them. "Do you mind If I cash this check next year? It would help with my taxes." I hate to do something like that to a homeowner near Christmas so I would ask them first.
What do other companies do as far as far as year end buying? Buy material in bulk? Pay for advertising for next year?

 

[Fulthrotl]

My first year in business and i have a question. Right now I have a few checks on my desk from commercial customers. Not small 1-2 man companies. They are both software companies that own their own building- so they have lots of money coming in and out every month. I was thinking of holding onto these checks and cashing them in January.
Is this a bad practice and disruptive to their book-keeping? Both are great customers. The amount is small to them but can make a difference to a one man show like me If I can wait to pay taxes on it for another 15 months.
On monday I am finishing a job for a homeowner and should get a check for $3500. I was thinking of bringing it up to them. "Do you mind If I cash this check next year? It would help with my taxes." I hate to do something like that to a homeowner near Christmas so I would ask them first.
What do other companies do as far as far as year end buying? Buy material in bulk? Pay for advertising for next year?

well, the businesses will prolly 1099 you, so you might as well deposit now.

i just had a company want to pay me up front for some work, to get it in this years expenses.... just cut a check....

i've had people load the front end for as much as 20K... and then in may of the next year, it feels like you are
working for free....

something to consider about this sort of thing.

 

[sd4524]

yes they are both going to 1099 me. Does that mean it goes on this year even if I cash it in January. Time to email my accountant.

 

[ptonsparky]

I always figured that it is income whenever I get the check. Not when it is cashed or deposited. Let us know what ypur accountant says.

 

[ceb58]

No way would I hold a check from a personal account that long. Sometimes you are lucky if the check clears the next day let alone 3-4 weeks later.

 

[gadfly56]

15 months??? It would be in the bank in 15 hours, tops!! The only reason to delay would be if you expect large expensible outlays next year and you don't want to carry deductions forward for the next two or three years (I forget the exact time period for this). And if they are going to 1099 it, I'm pretty sure your taxes returns had better show income commensurate with the checks for the time period they were cut, or something close (next quarter, tops).

 

[sd4524]

Ceb58- I think I agree, hence the title of this thread. You just never know what can happen.
Gadfly- My thinking was that if I cash it in January then I would pay taxes on that income in April 2013. If I cash it in December, I pay taxes in April 2012. This year has been pretty good. Next year could be better or worse. I could buy a house next year, might set up LLC or InC, I'm not really sure what I will be trying to do next December.

Right now I know I will be taxed on any money I make in December and have been advised to spend as much cash as possible and still feel comfortable spending.

 

[480sparky]

AFAIK, the invoice date you submitted to your customer is what the IRS considers the day you received the income.

 

[hurk27]

AFAIK, the invoice date you submitted to your customer is what the IRS considers the day you received the income.

And trying to claim tax's next year on work you did this year could possibly be considered Tax fraud in IRS's eyes

 

[GUNNING]

Big mistake

Big mistake

Deposit the check.

Don't know what the other circumstances are and do not care. If they go bankrupt while you are diddling the books you are out cold.

One of the primary purposes of being in business is to collect the money. That is not negotiable. You have a fiduciary responsibility to act responsibly. Buy a new van before the end of the year or invest in other tax incentives that will benefit the business. Waiting to cash the check is a short sighted strategy. It is a mistake.

 

[Dennis Alwon]

AFAIK, the invoice date you submitted to your customer is what the IRS considers the day you received the income.

It really depends if you are doing a cash system of accounting or an accrued system. The cash system, which many small businesses are, will only count the money when it is in your account or the check is cashed. IRS has no way of knowing when you received the check.

The accrued system counts the money based on when the bill is sent to the customer-- accounts receivable becomes part of the takes you pay as well as accounts payable. When I had a big bill to send in December I would wait till January to send it out. When I did the cash system and received a large check in December I waited till January to deposit it. It will not affect the other company.

 

[ksmith846]

It really depends if you are doing a cash system of accounting or an accrued system. The cash system, which many small businesses are, will only count the money when it is in your account or the check is cashed. IRS has no way of knowing when you received the check.

The accrued system counts the money based on when the bill is sent to the customer-- accounts receivable becomes part of the takes you pay as well as accounts payable. When I had a big bill to send in December I would wait till January to send it out. When I did the cash system and received a large check in December I waited till January to deposit it. It will not affect the other company.

I agree.....depends on how you do your accounting. We keep that bank account balance as low as possible in December.

Now if you did your accounting on an Accural basis, then your Accts Receivables count as current money and have to be included in your end of the year balance.

Cash system is just that....however much cash you have in the bank. Most cash accounting companies commonly hold checks until January of the next year.

 

[kwired]

I always figured that it is income whenever I get the check. Not when it is cashed or deposited. Let us know what ypur accountant says.

How do you prove when you did get the check?

AFAIK, the invoice date you submitted to your customer is what the IRS considers the day you received the income.

Depends on if you are using a cash or accrual accounting system.

Same goes for your expenses. If you want to pay bills due in January in December to increase your expenses for the previous year then by all means do so if you are using a cash based accounting system. You can even wait until DEC 31, to write the checks and not drop them in the mail until Jan 1.

If the IRS audits you are they going to look at every single entity you do business with, unless there is significant evidence to do some deeper investigation into wrondoing? Probably not. Chances are you will do the same thing again the next year, kind of makes you on track anyway with your total income and expenses.

If I receive a check on Dec 31 in the mail how am I going to prove I received it on Dec 31 and not Jan 2, unless I deposit it on Dec 31? What if I was vacationing on Dec 31 and did not pick up my mail that day?

A lot of companies records probably show higher expense in December as well as higher income in January, except maybe retailers that sell a lot in December because of Christmas.

 

[zbang]

AFAIK, the invoice date you submitted to your customer is what the IRS considers the day you received the income.

I think this only true if you do accrual accounting, and very few small businesses do. If your books are cash-based, the income happens when you actually receive the money; the check in this case. OTOH, I'm not a CPA, but that's what he told me.

 

[kwired]

I think this only true if you do accrual accounting, and very few small businesses do. If your books are cash-based, the income happens when you actually receive the money; the check in this case. OTOH, I'm not a CPA, but that's what he told me.

With cash based accounting it is when you recieved the money, but for the most part your paper trail to prove when it was received is your deposit slip, unless they want to investigate the person who paid you also. Now take potentially hunderdes of customers that may have paid you over the year, they are not going to investigate all of them without good reason.

 

[LEO2854]

My first year in business and i have a question. Right now I have a few checks on my desk from commercial customers. Not small 1-2 man companies. They are both software companies that own their own building- so they have lots of money coming in and out every month. I was thinking of holding onto these checks and cashing them in January.
Is this a bad practice and disruptive to their book-keeping? Both are great customers. The amount is small to them but can make a difference to a one man show like me If I can wait to pay taxes on it for another 15 months.
On monday I am finishing a job for a homeowner and should get a check for $3500. I was thinking of bringing it up to them. "Do you mind If I cash this check next year? It would help with my taxes." I hate to do something like that to a homeowner near Christmas so I would ask them first.
What do other companies do as far as far as year end buying? Buy material in bulk? Pay for advertising for next year?

Cash all the checks now, why wait? ,Are you planning to have a slower year next year?

What will you do if they raise the rates next year ?

 

[kwired]

Cash all the checks now, why wait? ,Are you planning to have a slower year next year?

What will you do if they raise the rates next year ?

Next years rates are likely already decided, you just need to know where to look for them.

 

[sd4524]

Thanks for all the responses. Funny the range of responses you get when you ask electricians questions about accounting.
Spending extra money in December and putting off income untill January is a pretty common practice with all businesses. It is not "diddling the books" or fraud. There is a certain amount of risk with it. If you do it every december you can save some money.

My main concern was with upsetting a customer by holding their check so long. I would bet these companies use the accrual method. I use cash method. I think i will hold the checks but any checks from residential customers or small businesses get cashed asap.

 

[kwired]

Thanks for all the responses. Funny the range of responses you get when you ask electricians questions about accounting.
Spending extra money in December and putting off income untill January is a pretty common practice with all businesses. It is not "diddling the books" or fraud. There is a certain amount of risk with it. If you do it every december you can save some money.

My main concern was with upsetting a customer by holding their check so long. I would bet these companies use the accrual method. I use cash method. I think i will hold the checks but any checks from residential customers or small businesses get cashed asap.

I don't understand why it will upset your customer. If they are on a cash method they took their expense the day they cut the check. If they are on an accrual method they took their expense the day they entered your bill in their records whether the check was cut that day or not.

 

[sd4524]

I thought if I held it till next year it might throw them off somehow. i was wrong.