Tax-payers face multiple regulations and rules that subject them to inevitable consequences or benefits, constructive receipt doctrine being one of them. Constructive receipt is responsible for reporting taxable income, more specifically under the cash-basis system of accounting. The most crucial distinction of constructive receipt is that it is solely applicable in cash accounting situations, without using it in accrual accounting situations. For such reason, the constructive receipt doctrine may significantly impact a cash-basis individual’s taxable income.
To precisely perceive the constructive receipt, it is critical to define it for further comprehension. Thus, a constructive receipt is a taxable obligation requiring individuals or businesses to pay taxes on income in cases when the money has not yet been acquired (Hayes, 2021). Such specialty allows the tax-payers to use the money even without its actual existence on the account, however only applicable to cash base individuals.
The constructive receipt doctrine was initially created to prevent tax-payers from freely choosing the time of income return instead of selecting the period of reducing its possession (Paul v. Hornung, 1967). The implication of such legislation significantly benefits taxpayers as it allows them to draw upon funds that do not yet exist. The doctrine impacts the income so that it does not allow to pay a person’s taxes on income or compensation that has not been spent yet. Thus, constructive receipt performs as a defensive mechanism against deficiency, allowing to spend income that has not been previously received.
The constructive receipt is a unique strategy for tax-payers, which must be thoroughly researched to avoid unfavorable outcomes. Certain factors may result in the ineffectiveness of such a method, one example being the accrual method of accounting (Hayes, 2021). In such an instance, the chosen method results in different income determinations. Furthermore, the control factor significantly affects the doctrine, as the income is not constructively received if the tax-payer is subject to considerable limitations or restrictions (Paul v. Hornung, 1967). Therefore, despite numerous pieces of evidence, the tax-payers must precisely identify their appliance to constructive receipt doctrine.
References
Hayes, A. (2021). Constructive Receipt Definition. Investopedia.
Paul v. Hornung, petitioner v. commissioner of internal revenue, respondent., (United States Tax Court. 1967).