From the Financial Hotline
By: Financial Hotline
Fall 2026 (Vol. 44, No. 3)
Q: Can you explain how deferring tax on advance payments works?
A: For federal income tax purposes, advance payments generally must be reported as taxable income in the year received. This treatment always applies if your business uses the cash method of accounting for tax purposes. However, if your business uses the accrual method, it may qualify for favorable tax deferral treatment.
Accrual-basis businesses can elect to postpone including all or part of an eligible advance payment in taxable income until the year after it’s received. To qualify, among other requirements, an advance payment must:
- Be at least partially included in revenue for a later year according to the business’s applicable financial statement (AFS) or, if there’s no AFS, be treated as earned in a later year, and...
- Be received for goods, services or other eligible items listed in IRS guidance.
If your accrual-basis business receives eligible advance payments in 2026, you potentially can elect to defer reporting some or all of that income until 2027 for federal tax purposes.
The AFS Requirement. An AFS can be an audited financial statement used for credit or financial reporting purposes, certain reports submitted to federal or state agencies, or a filing with the Securities and Exchange Commission, such as a Form 10-K or annual report.
If your business doesn’t have an AFS and elects the deferral method, the advance payment generally must be included in taxable income in the year received to the extent your business treats it as earned that year. Any remaining amount is included in income the following year.
Identifying Eligible Payments. Advance payments that may qualify for deferral include payments for services, goods, gift cards, intellectual property and computer software licenses, warranty contracts, and subscriptions. Certain other payments may also qualify under IRS guidance.
However, rents (with some exceptions), certain insurance premiums, payments for financial instruments and some service warranty contracts aren’t eligible.
Timing Is Key. The rules surrounding the tax treatment of advance payments can be complex.
Q: I am single. Do I still need an estate plan?
A: If you are single with no children, an estate plan can help ensure your wishes will be carried out and important decisions remain in trusted hands.
Without a will, state intestacy laws generally determine who inherits assets. While beneficiary designations may control certain accounts, assets without beneficiary designations or joint ownership typically pass according to state law. For singles with no children, state law may call for assets to be distributed to relatives such as parents, siblings, aunts and uncles, or cousins. If no relatives can be located, assets may pass to the state.
For wealthier singles, there are also estate tax considerations. Singles with significant assets should consider estate planning techniques such as trusts to help minimize taxes. Additionally, powers of attorney can allow someone you trust to handle financial matters and make medical decisions on your behalf if you become incapacitated.
Q: What are the new IRS Mileage Rates and when do they take effect?
A: Due to rising fuel costs, the IRS has increased the 2026 cents-per-mile rates for calculating certain vehicle deductions. Effective July 1, 2026, the standard mileage rate for the business use of a car, SUV, van, pickup truck or panel truck is 76 cents per mile, up from 72.5 cents per mile for the first half of the year. The revised rate for medical and eligible moving purposes is 23.5 cents per mile, up from 20.5 cents per mile. For charitable driving, the 14 cents per mile rate remains unchanged. These rates apply to gasoline and diesel-powered vehicles as well as electric and hybrid ones. To protect your deduction, keep detailed mileage records.
Q: Is it true that making a loan to my family could potentially be considered a gift for tax purposes?
A: Yes, making a personal loan to a family member or friend can create unexpected tax issues. If the loan carries little or no interest, the IRS might treat all or part of it as a taxable gift under the below-market loan rules. To help pass muster with the IRS, your loan should be backed by a written promissory note that includes the interest rate, a schedule showing dates and amounts for interest and principal payments, and the security or collateral, if any. Charge an interest rate that equals or exceeds the applicable federal rates set by the IRS. They potentially change each month.