What is Constructive Receipt of Income?
What is Constructive Receipt?
Constructive receipt is an accounting concept that determines when income must be taken, for accounting purposes. Usually constructive receipt comes into question the end of an accounting period. Constructive receipt is determined by when the recipient of the income had control over it. An individual or company is considered to have control over income when it is credited to that person or company.
Constructive Receipt in Business Taxes
According to IRS (Publication 538), income is constructively received when an amount is credited to your account or made available to you without restriction, even if you don't have possession of it.
For example, if an agent is holding the money for you, it has been considered to be received by you, even if the money is not in your bank account. The IRS goes on to note that, "Income is not constructively received if your control of its receipt is subject to substantial restrictions or limitations."
Constructive Receipt at the End of a Year
Constructive receipt is an important concept when timing business income and expenses at the end of the calendar year. Here are some more examples of how constructive receipt works in end-of-year tax timing:
- Employee paychecks. If a check is in an employee's bank account before the end of the year, it's considered pay for that year, even if the employee
- Other income. If you receive an interest payment or other income before the end of a year, it's available to you, and you must count it as income in that year. That's the case even if you don't put the amount in your own bookkeeping system.
- Pre-payments. These payments, on insurance policies, for example, are considered payments in the year the check is dated.
- Other payments. In the same way, if you make a payment at the end of a year, even if it isn't due yet, the payment is considered in that year.
Examples of How Constructive Receipt Works
Here are two examples that might help explain this concept:
- A business receives a check in payment from a customer on December 30, but doesn't deposit that payment check until January 1. Since the business had control over the check in December, it is considered to have received the funds in December.
- A dividend is declared and mailed to stockholders in December, but they don't receive it until January. Since the dividend is legally under the control of the stockholders in December, they are considered to have received it in December.
Constructive Receipt in Accrual Accounting
Constructive receipt doesn't apply in accrual accounting. In accrual accounting, income is counted when the work is done and the bill is sent to the customer, and expenses are counted when they are incurred (when the bill is received). There is no cash changing hands in this case.
- Constructive ownership
- Constructive notice