Paying bills using a bank’s bill-pay system (Short version of post)

[Roland Slugg]

When is a late-December 2016 payment of a business expense or tax deductible item considered paid if it’s paid by a check mailed by a bank’s bill-pay system on December 28th, 29th or 30th 2016 but is dated and is expected to arrive at the payee’s address three business days later, on January 3rd, 4th or 5th 2017?

[arlo]

bank bill pay system

Good question Roland. Have same problem Father (cash basis) writes check in December with December Date and gives it to son who is on cash basis but holds the check until 2017. What is father to do?

[TAXNJ]

In short date of (on) check would be year of check whether you mail it or bank mails it

[taxea]

I'm going with the date he issues the check is the date the payee has constructive receipt of the payor wants to expense it in the current year.

[FEDUKE404]

Wells Fargo online bill pay method

Within the past year or two, my bank started debiting my account the day the funds "left" my account and not the date of "payment" or when the check was cashed.

For most major businesses, such as utilities, there is only a one or two day delay. Bank debits account on 10th, and the funds reach payee's computer on 11th or 12th via electronic transfer.

For a paper check, such as would exist for smaller businesses or even payment to a friend, the bank debits my account on the 10th and the paper check is sent through the mail with something like a 17th payment date guaranteed. The date shown on the check is also the 10th. (The paper check can be viewed online, in the same way I can view any personal check I have written myself.)

It's awkward, but not much I can do about it short of locating my check book and sending pieces of paper via snail mail with all the risks therein.

FE

[Snaggletooth]

Effective when Initiation process is complete

Banks love to sit on money, and weekends give them an excuse to hold it even longer. A large bank can have millions in its coffers with millions more coming in every day before the prior batch empties.

If a payer makes all arrangements to pay and his funds are released (or committed) at the close of business of the payer's day, that should be the effective date of the payment. Unless the receiving party is related to the taxpayer, it should not the payer's concern whether the recipient counts it in revenue in the same year or not.

The only time a payer should be in trouble is a very common practice of backdating checks to 12/31 of the previous year. Auditors can disallow when it is obvious from skipped check numbers or from long delays in cashing a check that the payer has done this. Another telltale sign is a business account showing a negative balance in the reconciled checkbook balance.

Electronic banking is creating all manner of opportunities for financial institutions to make money, and I'm not against the profit, but more and more companies are insistent on pre-authorized drafts, and it will eventually get to the point where people will lose control of their own money. I suppose this is off-topic so I won't alarm the readers any more than I have...

[JohnH]

I'm also with the "deduct it when the draft its issued" crowd. Doesn't really matter when the recipient cashes the draft or paper check (within reason, of course), and provided funds are available in the account.

This matter of when the draft or paper check is deducted from the account is interesting. My business account is with Wells Fargo and our personal account is with our credit union. Virtually all our transactions in both accounts are by electronic bill-pay and we write maybe one or two paper checks monthly. The WF transactions post to the account the day of payment, whereas the CU transactions post the day they clear. I think reconciling is much easier if the transactions post the day of payment vs the day of clearance. I know WF is using the "float" via their method, but from a personal financial perspective I'm already assuming the money is gone when the transaction is initiated anyhow.

[Rapid Robert]

Wow, the short version got way more responses.

[David1980]

When I pay a bill through my bank's system I can specify a future date for payment. It also will not let me choose a payment date earlier than it can deliver. If I try scheduling a payment today (Jan 2) to something that requires a mailed check it won't let me choose a date earlier than Jan 6 for the payment.

My bank does not draft my account until the date the payment was scheduled.

Let's say on December 31st I log in and schedule a payment for March 1st. No question that's 2017. What if I intentionally schedule it for January 15th? Same, I feel. What if I log in and schedule for the earliest date that it will let me - say it lets me do January 4th, 2017 for payment date. I would treat that as a 2017 payment.

For me the decision is due to the bank very clearly indicating a future date of payment, with a future date of withdrawal. If the bank let me schedule a payment for the same day and I was able to schedule the payment for 12/31 I would treat it as 2016.

[taxea]

Again, if you use bill pay from your bank and your intent is to pay the bill the date you input the payment to your account then I would consider it paid on that date unless you know there are insufficient funds in the account to cover the check or you instruct the back of a future date to make the payment.

[FEDUKE404]

A bit more

When I pay a bill through my bank's system I can specify a future date for payment. It also will not let me choose a payment date earlier than it can deliver. If I try scheduling a payment today (Jan 2) to something that requires a mailed check it won't let me choose a date earlier than Jan 6 for the payment.

My bank does not draft my account until the date the payment was scheduled.

Let's say on December 31st I log in and schedule a payment for March 1st. No question that's 2017. What if I intentionally schedule it for January 15th? Same, I feel. What if I log in and schedule for the earliest date that it will let me - say it lets me do January 4th, 2017 for payment date. I would treat that as a 2017 payment.

For me the decision is due to the bank very clearly indicating a future date of payment, with a future date of withdrawal. If the bank let me schedule a payment for the same day and I was able to schedule the payment for 12/31 I would treat it as 2016.

If you schedule a payment "in the future" the bank will debit your account on the date you select. They will ALSO let you know when the funds will reach the recipient. For electronic payments (most payments now), that is usually no more than one or two days. For a paper check, they "guarantee" the check will arrive at the recipient's postal address, normally with a one-week window. Regardless of what choice you make, your bank account is debiting the funds the date you select the payment to occur. Could be today, could be six weeks from now. But there is NO "float" as in the good ole days.

From a tax standpoint, this is a clear call. You have made a payment by having the funds removed from your account on the date you select. When the recipient receives the funds and/or cashes the check is irrelevant (except to the recipient!).

For each payment initiated, my bank shows two dates: "send on" is the starting date and "deliver by" is the supposed receipt date of the funds. The latter is a "two business days" gap for electronic transfers and normally a "five business days" gap for delivery of a paper check.

FE