What is Constructive Receipt?
You check your bank account on December 31st and see a bonus payment sitting there. You haven't touched it yet - haven't transferred it, haven't spent it, haven't even really thought about it. But guess what? The IRS considers that income received in the current tax year, not next year when you actually do something with it.
That's constructive receipt in action. It's a tax rule that says income counts as received when it's available to you, not when you physically take possession of it. Sounds simple, but it trips up a lot of people, especially around year-end when timing matters for tax purposes.
The Basic Idea
Constructive receipt means income is considered received when it's credited to your account or made available to you without substantial restrictions. You don't have to actually withdraw it, spend it, or even acknowledge it. If it's there and you can access it, it counts.
The IRS uses this rule to prevent people from delaying income recognition just by not picking up checks or not withdrawing money from accounts. You can't avoid taxes by simply ignoring income that's available to you.
Think of it this way: if someone hands you a check and you can cash it anytime, that's constructive receipt. The money is yours, even if you leave the check in your desk drawer for three months. The IRS doesn't care that you haven't cashed it yet - they care that it was available to you.
Common Examples
The most common situation is year-end bonuses. Your employer cuts a bonus check on December 28th and puts it in your mailbox or makes it available for pickup. Even if you don't pick it up until January 5th, that bonus counts as income for the year it was made available - December, not January.
Same thing with interest income. If your bank credits interest to your savings account on December 31st, that interest is income for that tax year, even if you don't withdraw it until the following year. The bank statement shows it was credited, so it's constructively received.
Dividend payments work the same way. When a company declares and pays a dividend, it's income in the year it's paid, not when you decide to reinvest it or withdraw it from your account.
For freelancers and contractors, if a client pays you via direct deposit on December 30th, that's income for December, even if you don't check your account until January. The money is in your account and available to you. This is especially important to understand when organizing receipts for taxes, since the timing of when income is received affects which tax year it belongs to.
When It Doesn't Apply
There are some situations where constructive receipt doesn't kick in, and those exceptions matter.
If income is subject to substantial restrictions or limitations, it's not constructively received until those restrictions are removed. For example, if your employer puts a bonus in an account but you can't access it until a specific future date due to company policy, that's not constructive receipt until that date arrives.
Another exception is when you don't have control over when the income becomes available. If someone promises to pay you but hasn't actually made the payment available yet, that's not constructive receipt. The key is availability - if you can't actually get the money, it doesn't count.
Deferred compensation plans often have restrictions that prevent constructive receipt. If your employer contributes to a retirement account on your behalf but you can't access it until retirement, that's not constructively received income. The restrictions are substantial enough that the IRS doesn't consider it available to you.
Why This Matters for Taxes
The timing of when income is received determines which tax year it belongs to. If you're trying to manage your tax liability, understanding constructive receipt helps you plan better.
Say you're a freelancer and a client pays you $10,000 on December 31st via direct deposit. That's income for the current tax year, even if you don't touch it until January. You can't delay recognizing it just by not spending it.
This becomes especially important around year-end. If you're trying to push income into the next year to lower your current year's tax bill, you need to make sure the payment isn't actually available to you until after January 1st. Simply not cashing a check that's already been issued won't work.
For businesses, constructive receipt affects when you recognize revenue. If you've completed work and the client has paid you, that's income, regardless of whether you've deposited the check or transferred the money. The IRS wants income recognized when it's earned and available, not when you decide to move it around.
How to Handle It
The best approach is to recognize income when it's actually available to you, not when you decide to do something with it. If a payment hits your account, that's income. If a check is available for pickup, that's income. Don't try to game the system by delaying recognition.
Keep good records of when payments are actually made available to you. Bank statements showing deposit dates, email confirmations of payments, and records of when checks were issued all help establish when constructive receipt occurred.
If you're trying to defer income to the next tax year, you need to make sure the payment isn't actually available until after December 31st. That means not issuing checks until January, not making direct deposits until January, and not making funds available in accounts until January. Simply not cashing something that's already available won't work.
For businesses, this means being careful about when you make payments available to contractors or employees. If you want something to count as next year's income, don't make it available until after the new year starts.
Common Mistakes
The biggest mistake people make is thinking they can delay income recognition just by not touching money that's available to them. That's not how it works. If it's in your account or available for pickup, it's income.
Another mistake is not understanding when restrictions are substantial enough to prevent constructive receipt. Not all restrictions count - they need to be real limitations on your ability to access the funds. A company policy that says "don't cash this until next month" isn't a substantial restriction if you could still cash it if you wanted to.
Some people also confuse constructive receipt with actual receipt for other purposes. Just because something isn't constructively received for tax purposes doesn't mean it's not income for other reasons. The tax rules are specific, and other situations might have different timing requirements.
For Self-Employed and Small Businesses
If you're self-employed or run a small business, constructive receipt affects when you recognize income from clients. When a client pays you, that's income in the year the payment is made available, not when you invoice or when you decide to recognize it.
This is especially important for cash-basis taxpayers, which most small businesses are. Cash-basis means you recognize income when you receive it, and constructive receipt determines when that "receipt" happens.
If you're trying to manage your tax liability by timing income, you need to coordinate with clients about when payments are actually made available. Simply invoicing later doesn't help if the payment is available in the current year.
Keep detailed records of when payments are received. Bank deposit dates, payment platform transaction dates, and check dates all matter. If there's ever a question about when income was received, these records prove when constructive receipt occurred. For payments through platforms like PayPal, the transaction date shown in your account is typically when constructive receipt occurs, as the funds are available to you at that point (though PayPal's payout schedule may affect when you can actually withdraw funds).
The Bottom Line
Constructive receipt is the IRS saying "if it's available to you, it's income, regardless of whether you've touched it." The timing of when income is available determines which tax year it belongs to, and you can't avoid this by simply ignoring money that's available to you.
The key is understanding when income is actually available versus when it's subject to real restrictions. If you can access it, it's constructively received. If there are substantial limitations preventing access, it's not.
For most people, this means recognizing income when payments hit accounts or checks are available, not when you decide to do something with the money. Keep good records, understand the timing rules, and don't try to game the system by delaying recognition of available income.
It's not the most exciting tax concept, but understanding constructive receipt helps you stay compliant and avoid issues with the IRS. When in doubt, recognize income when it's available to you, not when you decide to use it.