What is Constructive Receipt?

For cash-method taxpayers, income is generally reported when it is actually or constructively received. Constructive receipt applies when an amount is credited to your account, set apart for you or otherwise made available so that you could draw on it at any time. The IRS describes the rule in Publication 538.

Examples

• A check received on December 30 but not deposited until January 3 is generally income in December
• Interest credited to a business savings account in December is December income, even if not withdrawn
• Funds available in a payment processor or marketplace account that you can withdraw are generally received, even if you leave them there

When it does not apply

Income is not constructively received if your control of it is subject to substantial restrictions or limitations. For example:

• A customer who mails payment that arrives in January has not made it available in December
• Funds held in a reserve by a payment processor that you cannot access are generally not yet available

Why it matters

Constructive receipt prevents cash-method businesses from shifting income into the next year simply by delaying deposits. Holding checks in a drawer at year end does not defer the income.

Year-end bookkeeping

At year end we review undeposited checks, payment processor balances and other funds available to you, so income is reported in the right year. Compare with cash method accounting and accrual accounting, and see our year-end close checklist.

Related terms

• Accrual Accounting: Accrual accounting records income when it is earned and expenses when they are incurred, regardless of when cash moves.
• Cash Method Accounting: The cash method records income when money is received and expenses when they are paid.

Browse more definitions in the small business glossary.