Hillary is a cash-basis calendar-year taxpayer. During the last week of December she received a letter containing a $5,000 check for services rendered. Which of the following is a true statement?

Question

Quizplus · Accepted Answer

Under the cash-basis accounting method, income is recognized in the year it is received. In this case, Hillary received the $5,000 check during the last week of December, so she must recognize it as income in that same year. The fact that she did not cash the check until the following year does not matter; what matters is that she had the ability to use the funds at the end of the year. This is known as the constructive receipt doctrine. Therefore, the correct answer is (C) Hillary is taxed on the $5,000 of service income in the year she receives the check.

Hillary Is a Cash-Basis Calendar-Year Taxpayer