What is Constructive Receipt?

Constructive receipt is a doctrine used by the Internal Revenue Service (IRS) that requires individuals and businesses to pay income taxes on their earnings even if the earnings have not been received. When the IRS applies the constructive receipt, whether an individual or business possesses the income does not matter, rather, what is put into consideration is that the individual has control over the income and how they are utilized. Hence, when an individual or business is in the constructive receipt, they have to pay taxes on income that are under their control, even if they are yet to be received.

How Does Constructive Receipt Work?

The constructive receipt is a doctrine that determines when an individual or company should account for income for tax purposes, this period is often towards the end of the year. This doctrine imposes income taxes on individuals and businesses, regardless of whether they are in possession of the income or not. Constructive receipt is not applicable to businesses that use the accrual accounting method. The IRS considers constructive receipt in this light: Income although not actually reduced to a taxpayer's possession is constructively received by him in the taxable year during which it is credited to his account, set apart for him, or otherwise made available so that he may draw upon it at any time, or so that he could have drawn upon it during the taxable year if notice of intention to withdraw had been given. However, income is not constructively received if the taxpayer's control of its receipt is subject to substantial limitations or restrictions.