As you may know, constructive receipt is when under the cash basis of accounting. You recognize income when it’s received and expenses when they are paid. Under accrual, you recognize income when you earn it and expenses when they incur.
There is a lot of misunderstanding surrounding constructive receipt of income. For example, in my office I close the office in late December, put my mail on hold, and when I come back in and have received a few checks, the question is: Did I constructively receive that income or can I wait until the following year to claim it? I wait until the following year.
As you may know, constructive receipt requires individual or business tax payments on income despite the fact that the money has not yet been received in actuality. What matters instead is that the recipient of the income is able to control or utilize that money even when it is not in hand, for instance being able to spend funds deposited from a check before it has cleared.
A Practical Example
Say that an employee received a paycheck at the end of the year. For tax purposes, this person must report the amount of the paycheck as earned income for that year, even if they did not actually deposit the check until after the New Year.
What matters here is not that the individual actually received the benefit of spending or depositing that money, but that they possessed the capacity to do so — even if they delayed or forwent that capacity in real life.
A business is said to be in constructive receipt if the business has the ability to use the money without restriction or if it has been deposited into the business's account. In terms of income, when there is constructive receipt of income, this means that taxpayers cannot pay their taxes on income or compensation that has not been spent yet.
Safe to say, constructive receipt of income can be a little confusing. Going back to the example of my practice, I put my mail on hold and could never have received the income even if I wanted to.
Constructive receipt of income prevents taxpayers from deferring tax on income or compensation they have not yet utilized or spent. Just some thoughts to consider as we dig further into tax season.