constructive receipt of income

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Constructive receipt of income is a tax term which determines when a cash-basis taxpayer has received income. Constructive receipt of income occurs when a party obtains income that is not yet physically received but has been credited to the taxpayer's account and over which they have immediate control. The taxpayer is liable to pay taxes on all income constructively received.

As per 26 Code of Federal Regulations § 1.451-2, any income received which is subject to substantial limitations or restrictions does not qualify as constructive receipt of income. 

  • For example, a grant of company stock which, while notified of the grant today, will not be available until next, does not qualify as constructive income. 
  • On the other hand, a check received today which is not cashed for a year does qualify as constructive receipt of income on the day it is received because the receiver has the ability to cash it immediately.

Per Hornung v. Commissioner, income is to be included in the taxable year in which it is actually or constructively received. For businesses following the cash method of accounting, this fact may cause income constructively received to be subject to a different tax bracket than it would have, had it been received later. 

Notably, businesses that follow Generally Accepted Accounting Principles (GAAP) or other method of accrual accounting do not need to consider constructive receipt of income.

[Last updated in July of 2022 by the Wex Definitions Team]