If a check for rental income is delivered in December but returned for insufficient funds, when must the income be reported?

Income from rental activities is typically reported when it is actually received or made available to the taxpayer, in a process known as the cash basis of accounting. In this scenario, the check for rental income is received in December but is returned due to insufficient funds.

Under the cash basis, income is not recognized until it is collected and available for use. Since the check bounced and did not provide actual cash, the income cannot be recognized in the year it was received—December. Instead, it must be reported in the following tax year, once the funds are actually collected or if the check is replaced with a valid payment.

This ensures that taxpayers are not accounting for income that they do not truly possess, which maintains consistency with the fundamental principle of recognizing income only when it can be realized in cash or cash equivalents.