Constructive Receipt

Constructive receipt is a tax term mandating that an individual or business must pay taxes on income despite the fact that it has not been physically received. An individual is considered to be in constructive receipt of income when they have the ability to control or utilize the funds, even if they do not have direct possession of them, or if it is guaranteed they will have the ability to draw upon the funds in the future. A business is said to be in constructive receipt if the business has the ability to use the money without restriction or if it has been deposited into the business' account. Constructive receipt of income prevents taxpayers from deferring tax on income or compensation they have not yet utilized or spent.

The doctrine of constructive receipt applies to employees that use the cash-basis method of accounting. It does not apply to the accrual method of accounting.

As an example, an employee who received a paycheck at the end of one year must report it as income that year, even if he or she didn't deposit the check until after the new year. This doctrine also stipulates that receipt of funds by an agent is considered to be received by the principal at that time as well.