Under the cash method, you not only report income in the year it is actually received, you also report income in the year it is constructively received.
Constructive receipt refers to income that you do not have physical possession of but it has been made available to you without restriction. In other words, you have constructive receipt of income when you have control over such income.
Using an Agent
An agent is someone you designate or hire to act on your behalf for some specific purpose. If you designate an agent to receive funds on your behalf, you are considered to have received the funds on the date the agent receives them.
Examples of Constructive Receipt of Income
- Interest credited to your account at year-end:
- Interest of $100 is credited to your checking account on December 30, 2014.
- You withdraw the $100 January 3, 2015.
- Include the $100 in your 2014 gross income, the year constructive receipt took place.
- You authorize an agent to receive a payment on your behalf:
- You perform services for a client December 1, 2013
- You bill the client $300
- You go out of town and won't return until January 7, 2014
- You authorize your friend Bob to act as your agent to receive the payment. Your client is aware of this arrangement.
- Bob receives the payment December 30, 2013
- You deposit the $300 on January 8, 2014
- You must Include the $300 in your 2013 gross income, when Bob received the payment.
- You tell a client to postpone sending you a payment until the following tax year:
- On December 23, 2013 your client tells you that a $500 payment is ready for you any time you want it.
- You tell your client to hold off sending it to you until January 5, 2014 (the following tax year).
- You must include the $500 in your 2013 gross income, the year it was constructively received. Simply requesting to have your client hold the check does not change the fact that the funds were available to you without restriction and therefore, constructive receipt of income has taken place.
- Cancellation of debt (also referred to as forgiveness of debt):
- You owe a creditor $1,000.
- You don't have the funds to pay the creditor.
- During December 2013, the creditor cancels the debt because it is considered uncollectible.
- The cancellation was not intended as a gift.
- You must include the canceled debt of $1,000 in your 2013 gross income. The cancellation of debt is considered constructive receipt of income.
Deferred Payment Contract
If you sell an item under a deferred payment contract that calls for payment in a future year, there is no constructive receipt in the year of sale. However, if the sales contract states that you have the right to the proceeds of the sale from the buyer at any time after delivery of the item, then you must include the sales price in income in the year of the sale, regardless of when you actually receive payment.
- You are a farmer who uses the cash method and a calendar tax year. You sell grain in December 2014 under a bona fide arm's-length contract that calls for payment in 2015.
- You include the proceeds from the sale in your 2015 gross income since that is the year payment is received. However, if the contract states that you have the right to the proceeds from the buyer at any time after the grain is delivered, you must include the sales price in your 2014 income, regardless of when you actually receive payment.
Direct Payments and Counter-Cyclical Payments
If you received direct payments or counter-cyclical payments under Subtitle A or C of the Farm Security and Rural Investment Act of 2002, you will not be considered to have constructively received a payment merely because you had the option to receive it in the year before it is required to be paid.
- Return to the Tax Basics for Startups Table of Contents to find related links.