Constructive receipt is an accounting concept that determines when income must be taken, for accounting purposes. Usually constructive receipt comes into question the end of an accounting period. Constructive receipt is determined by when the recipient of the income had control over it. An individual or company is considered to have control over income when it is credited to that person or company.
According to IRS (Publication 538), income is constructively received when an amount is credited to your account or made available to you without restriction, even if you don't have possession of it. For example, if an agent is holding the money for you, it has been considered to be received by you, even if the money is not in your bank account. The IRS goes on to note that, "Income is not constructively received if your control of its receipt is subject to substantial restrictions or limitations."
Constructive receipt is an important concept when timing business income and expenses at the end of the calendar year. Read more about how constructive receipt applies in several examples of end-of-year tax timing.
Here are two examples that might help explain this concept:
- A business receives a check in payment from a customer on December 30, but doesn't deposit that payment check until January 1. Since the business had control over the check in December, it is considered to have received the funds in December.
- A dividend is declared and mailed to stockholders in December, but they don't receive it until January. Since the dividend is legally under the control of the stockholders in December, they are considered to have received it in December.