Mailbox Rule in Business

There is one tax rule that confuses business owners and it relates to the year-end practice of paying bills and receiving compensation for receivables. This is referred to as the ‘Mailbox Rule’. This is strictly a tax issue for cash basis taxpayers. I’m here to set the record straight! 

Before you can appreciate the rule, you must understand the function of cash basis over accrual basis of taxation. I strongly encourage you to read: Tax-Basis-of-Accounting-Accrual-or-Cash before proceeding with this article.  If you are already aware of the difference, then most likely, you are a cash basis business operation. Your goal by December 31 of each year is to reduce the tax implications based on income. How do you reduce your tax obligation? 

Well, simply put, you pay all your bills as much as you have cash available. The difficulty with this is the desire of management to issue bonuses to staff related to the Christmas holidays. Bonuses are deductible for cash basis employers, but often the employer fails to pay the associated payroll taxes. Pay those taxes by December 31 too. 

How does the mailbox come into play with paying your bills? It is simple; the payment must be in the mailbox and post marked by December 31 in order for you as the business owner to take the expense as a deduction. It isn’t good enough to just print the check and reduce the bank account ledger, you ‘MUST INSERT A STAMPED ENVELOPE INTO THE MAILBOX’. Of course, don’t forget to insert the check 🙂 . This is a rule under the Internal Revenue Service Code. Internal Revenue Code Section 7502(a)(1) sets forth the regulation as follows: 

“If any return, claim, statement, or other document required to be filed, or any payment required to be made, within a prescribed period or on or before a prescribed date under authority of any provision of the internal revenue laws is, after such period or such date, delivered by United States mail to the agency, officer, or office with which such return, claim, statement, or other document is required to be filed, or to which such payment is required to be made, the date of the United States postmark stamped on the cover in which such return, claim, statement, or other document, or payment, is mailed shall be deemed to be the date of delivery or the date of payment, as the case may be.” 

The rule was originally created to address the timely filing of tax forms such as the annual tax return. However, it is used to address the issue of proper deduction related to calculating the tax implication for cash basis taxpayers. 

On the flip side of this, is of course the receipt of the check from a customer.  If the customer’s check arrives prior to December 31, that dollar amount must be included in revenue for tax purposes. It doesn’t matter whether or not you deposit the funds into the business account. The receipt even on December 31 is considered ‘Constructive Receipt’, i.e. you have control over the money. Does it count if the customer post marks his check on December 31 and you receive it after January 1?  

Answer: In most cases, NO. You didn’t have actual receipt by year end nor did you have constructive receipt. Therefore, you are not obligated to include in your cash basis income the amount of the payment from that customer. However, you may want to consider including this income if this particular customer issues a Form 1099 to you or your business and includes this dollar value in the Form 1099. You may be able to get by not including it by taking several precautionary steps. One example is to scan in the envelope to electronic files which identifies the mailing date of December 31. This way the IRS will accept your exclusion. But make sure it is definitely included in your following year tax return. You should use reconciliation schedules to demonstrate proper compliance with the law. 

There are other situations whereby the income must be included. One example is when the check is held by a third party agent such as in legal cases or in real estate. By law, this is considered constructive receipt and therefore taxable. I know you don’t like it; but that’s the rule. Other examples include an attempt by the Postal Service to deliver a certified check to your business on the 31st and you were closed that day for New Year’s Eve. By prior court cases, it is considered constructive receipt and therefore inclusive in your calendar year income.  

I had one client believe if he just didn’t go to his mailbox to get his mail then he didn’t have to include the income in his income for that year. Didn’t work! 

As a business owner utilizing the cash basis of tax reporting, you need to understand the ‘Mailbox Rule’ promulgated by the Internal Revenue Service and the justice system via court cases. Act on Knowledge.

Value Investing

Do you want to learn how to get returns like this?

Then learn about Value Investing. Value investing in the simplest of terms means to buy low and sell high. Value investing is defined as a systematic process of buying high quality stock at an undervalued market price quantified by intrinsic value and justified via financial analysis; then selling the stock in a timely manner upon market price recovery.

There are four key principles used with value investing. Each is required. They are:

  1. Risk Reduction – Buy only high quality stocks;
  2. Intrinsic Value – The underlying assets and operations are of good quality and performance;
  3. Financial Analysis – Use core financial information, business ratios and key performance indicators to create a high level of confidence that recovery is just a matter of time;
  4. Patience – Allow time to work for the investor.

If you are interested in learning more, go to the Membership Program page under Value Investing section in the header above. 

Join the value investing club and learn about value investing and how you can easily acquire similar results with your investment fund. Upon joining, you’ll receive the book Value Investing with Business Ratios, a reference guide used with all the decision models you build. Each member goes through three distinct phases:

  1. Education – Introduction to value investing along with terminology used are explained. Key principles of value investing are covered via a series of lessons and tutorials.
  2. Development – Members are taught how pools of investments are developed by first learning about financial metrics and how to read financial statements. The member then uses existing models to grasp the core understanding of developing buy/sell triggers for high quality stocks.
  3. Sophistication – Most members reach this phase of understanding after about six months. Many members create their own pools of investments and share with others their knowledge. Members are introduced to more sophisticated types of investments and how to use them to reduce risk and improve, via leverage, overall returns for their value investment pools.

Each week, you receive an e-mail with a full update on the pools. Follow along as the Investment Fund grows. Start investing with confidence from what you learn. Create your own fund and over time, accumulate wealth. Joining entitles you to the following:

  • Lessons about value investing and the principles involved;
  • Free webinars from the author following up the lessons;
  • Charts, graphs, tutorials, templates and resources to use when you create your own pool;
  • Access to existing pools and their respective data models along with buy/sell triggers;
  • Follow along with the investment fund and its weekly updates;
  • White papers addressing financial principles and proper interpretation methods; AND
  • Some simple good advice.

Value Investment Club

Please Signup
Username can not be left blank.
Please enter valid data.
This username is already registered, please choose another one.
This username is invalid. Please enter a valid username.
First Name
First Name can not be left blank.
Please enter valid data.
This first name is invalid. Please enter a valid first name.
Last Name
Last Name can not be left blank.
Please enter valid data.
This last name is invalid. Please enter a valid last name.
Website (URL)
Website (URL) can not be left blank.
Invalid URL
Invalid URL
Email Address
Email Address can not be left blank.
Please enter valid email address.
Please enter valid email address.
This email is already registered, please choose another one.
Password can not be left blank.
Please enter valid data.
Please enter at least 6 characters.
    Strength: Very Weak
    Select Your Payment Gateway
    How you want to pay?
    Payment Summary

    Your currently selected plan : , Plan Amount :
    , Final Payable Amount: