In response to our post on when is a deposit income, we had a reader write in the following:
"In regard to today’s blog: I have a tenant who , over the years, mails his rent that is due Jan 1 in the previous Dec. Obviously he is deducting the rent as a "prepay". I always deposit the check in Jan and count it in that year’s income. If one of us is audited, which one of us will get the penalty?"
As usual with tax law, the answer to this question is "It Depends'. Actually, unless the tenant and the landlord are related parties, neither party will be at risk with regards to an audit.
A cash basis taxpayer can write and mail a check by December 31 and be able to deduct the payment in that year. If the landlord receives the check in the next year, it is income in that year. You want to be careful to document this if the check is dated too soon the previous year. For example a check dated the 29th to the 31st would probably be OK, if it is dated the 25th or sooner, you might have some issues on an audit, but as long as you document when you receive it, you should be fine.
If the tenant and landlord are related parties, then the tenant is not able to deduct the check until the landlord picks up the check as income. Related parties are usually family members or entities controlled by the same people. For example, if a corporation which is owned by a farmer, writes a rent check to the farmer for their land rent, the check is not deductible until the farmer reports it as income.