constructive receipt of income
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.
Under 26 C.F.R. § 1.451-2, income is not considered constructively received if it is subject to substantial limitations or restrictions.
- For example, a stock grant that is awarded today but is not available until next year is not considered constructively received.
- However, a check received today is constructively received (even if it is not cashed) because the recipient has immediate access to the funds.
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 reviewed in July of 2022 by the Wex Definitions Team]
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