Constructive receipt is a key concept in U.S. tax law that defines when income is considered received by a taxpayer for tax reporting purposes. According to the Internal Revenue Service (IRS), income is constructively received in the taxable year during which it is credited to the taxpayer’s account, set apart for them, or otherwise made available so they can draw upon it at any time.
This principle applies even if the taxpayer has not actually taken possession of the income. For example, if a paycheck is available for pickup on December 31 but the taxpayer does not physically collect it until January 2, it is still considered received in the prior tax year if there were no substantial restrictions on accessing the funds.
Understanding constructive receipt is essential for taxpayers using the cash method of accounting, where income is reported when received rather than when earned. It prevents taxpayers from deferring income to later tax years by simply delaying actual receipt of available funds.
Examples of Constructive Receipt
- Dividend Payments: If a company issues dividends and deposits them into a brokerage account on December 31, the investor has constructively received the dividends in that tax year, even if they do not withdraw the funds immediately.
- Business Income: For a business that invoices customers with payments due, if the payment is made available before year-end and the business can access it, the income is considered constructively received.
Exceptions and Restrictions
The IRS notes that income is not constructively received if the taxpayer’s control of its receipt is subject to substantial limitations or restrictions. These can include legal barriers, contractual limitations, or an arrangement to receive the income at a later date.
Why Constructive Receipt Matters
Taxpayers need to be aware of the constructive receipt doctrine to properly time income reporting and avoid unintended tax liabilities or penalties. For example, year-end planning often involves checking when income is accessible to ensure it is reported in the correct tax year.
Related Topics
- Cash Method: The accounting basis closely related to the constructive receipt principle.
- IRS Form 12153: Useful for appealing IRS decisions related to tax assessments.
For more detailed guidance, refer to IRS Publication 538, which discusses accounting periods and methods, including constructive receipt. You can also visit IRS.gov for authoritative tax information.
References:
- Investopedia. “Constructive Receipt.”
- IRS Publication 538: Accounting Periods and Methods, 2024.