Revenue Ruling 79-65: When to Report Credit Card Income

For businesses operating on a cash-basis accounting method, understanding when to report income is a key part of tax compliance. A common question for merchants is whether income from a credit card sale is recognized when the customer pays, or when the money arrives in the business’s bank account. The Internal Revenue Service (IRS) addresses this directly in Revenue Ruling 79-65, which clarifies that the timing of income recognition is tied to the transaction date, not when payment settles.

The Core Principle of the Ruling

Revenue Ruling 79-65 establishes that for a taxpayer using the cash method of accounting, income from a credit card sale must be reported in the year the transaction occurs, not the year the payment is received from the bank. The ruling treats the credit card slip or electronic authorization as a payment, finalizing the transaction between the customer and the merchant at that moment.

Consider a retail store that makes a sale on December 31st. The customer pays with a credit card, and the transaction is approved. Due to bank processing times and the New Year’s holiday, the funds from this sale are not deposited into the store’s bank account until January 3rd of the following year. According to the ruling, the income from this sale must be included in the gross income for the year ending December 31st.

This principle prevents taxpayers from deferring income into a future tax year due to payment processing delays. The transaction is considered complete once the merchant has a legally enforceable right to the funds from the credit card issuer, and the short delay in settlement is viewed as an administrative detail.

Rationale and the Concept of Constructive Receipt

The foundation of Revenue Ruling 79-65 lies in a tax doctrine known as “constructive receipt.” This principle, outlined in Treasury Regulation 1.451-2, states that income is taxable to a cash-basis taxpayer in the year it is credited to their account, set apart for them, or otherwise made available so they may draw upon it at any time. The income does not need to be in the taxpayer’s physical possession to be recognized for tax purposes. Constructive receipt applies when the taxpayer has an unrestricted right to the funds.

When a customer pays with a credit card, the merchant’s position changes significantly. The moment the charge is authorized, the merchant no longer has a claim against the customer; instead, they gain an unconditional and legally enforceable right to payment from the credit card issuing bank. This claim against the bank is treated as the equivalent of cash because it can be converted into cash in the ordinary course of business, even if there is a brief processing delay.

This situation is distinct from one where the doctrine of constructive receipt would not apply. For example, if a customer simply gives a merchant a personal IOU or a verbal promise to pay in the future, this does not constitute constructive receipt. In that case, the merchant has no immediate, unrestricted right to the funds from a third-party financial institution. The claim is still against the individual customer, and its value is not guaranteed, meaning the income is not reported until the cash is actually received.

Application to Different Payment Methods

The principles underpinning Revenue Ruling 79-65 extend to most modern forms of electronic payment. Debit card transactions are treated in the same manner, making the income reportable on the date of the transaction, not the date of settlement.

This same logic applies to payments processed through third-party settlement organizations like PayPal, Square, or Stripe. When a customer pays through one of these platforms, the merchant’s account with the third-party network is credited at the time of the transaction. This credit represents an unrestricted right to the funds, and income is recognized at this point, not when the final transfer to the business’s bank account is completed.

Conversely, certain payment methods do not fall under this immediate recognition rule. A post-dated check is not considered payment until the date on the check arrives and it successfully clears the bank. Similarly, a promissory note from a customer is not a cash equivalent, so income is only reported when the note is actually paid.