What is Constructive Receipt?

Constructive receipt is a tax term mandating that an individual or business must pay taxes on income despite the fact that it has not been physically received.

An individual is considered to be in constructive receipt of income when they have the ability to control or utilize the funds, even if they do not have direct possession of them, or if it is guaranteed they will have the ability to draw upon the funds in the future.

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' 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.

How Constructive Receipt Works

Constructive receipt doctrine applies to employees that use the cash-basis method of accounting. It does not apply to the accrual method of accounting.

Constructive receipt occurs in cash accounting situations, but it does not apply or occur with the use of accrual accounting situations.

The IRS in Publication 538 describes constructive receipt as: “an amount [that] is credited to your account or made available to you without restriction.”

Taxpayers must include any income on their taxes based on the year that income was constructively received, even if they don’t have possession of the funds. 

As an example, an employee who received a paycheck at the end of one year must report it as income that year, even if he or she didn't deposit the check until after the new year.

Constructive receipt of income prevents taxpayers from deferring tax on income or compensation they have not yet utilized or spent.

This doctrine also stipulates that receipt of funds by an agent is considered to be received by the principal at that time as well.