Constructive Receipt Tax Rules Every Lawyer Should Know
By Robert W. Wood1
Constructive receipt is a fundamental tax concept that can have a broad and frightening impact. According to the Internal Revenue Service ("IRS"), you have income for tax purposes when you have an unqualified, vested right to receive it. Asking for payment later does not change that.2 The idea is to prevent taxpayers from deliberately manipulating their income.
The classic example is a bonus check available in December, but which the employee asks to hold until January 1. Normal cash accounting suggests that the bonus is not income until paid. The employer tried to pay in December, and made the check available. That makes it income in December, even though it is not collected until January.
Constructive receipt is an issue only for cash method taxpayers like individuals. Accrual basis taxpayers (like most large corporations) have constructive receipt built into the accrual method. The accrual method says you have income when all events occur that fix your right, if the amount can be determined with reasonable accuracy.3