Most of the advice given in the tax blogosphere is good. However, I saw this posted today:
My business had a really profitable month. Do you have any ideas on last minute expenses to help lower my taxable income?
Depending on how many purchases you want to make, you could consider office furniture or computer equipment. Alternatively if you are looking for something cheaper, you could pay your January office rent early, or any other major bills such as your telephone service fee. On the other hand, you could defer some of your income until next year by waiting until after the end of the month to cash a check or two. [emphasis added]
The first part of the answer is generally good. In most cases, making a purchase of a major piece of equipment, especially if you can utilize Section 179 Depreciation, is an excellent way to lower your taxable income. And there’s nothing wrong with paying some bills early (if you’re a cash basis taxpayer). However, the last sentence is just bad advice because of constructive receipt.
The doctrine of constructive receipt governs when income is considered received. Section 1.451-2 of the Income Tax Regulations states, in part:
(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.
…[A] taxpayer will be found to be in constructive receipt of income where the taxpayer had an unrestricted right to receive the income, the taxpayer was able to collect it, and the failure to receive it resulted from the exercise of the taxpayer’s own choice. [citations omitted]
If you receive a check in 2009 but let it age in your office until 2010 it’s still income in 2009 because you deliberately chose not to cash the check.
If you have an unexpectedly good December and can take Section 179, buy the new computer (I’m getting one on Wednesday). Get a new desk (I got that yesterday). Pay a bill or too early if you’re a cash-basis entity. But don’t hold onto the check until 2010.