The Basics of a Constructive Receipt

A constructive receipt verifies taxable income an individual has earned even if he or she has not received the income yet. This is generally applicable to anyone who is using a cash accounting method, meaning he or she may invoice or otherwise bill for services rendered one year but not receive a paycheck for that invoice until the next year. The individual cannot defer or neglect to pay taxes on this sum in any way. Instead, the tax is due just as if the money had already been received.

Basics of Constructive Receipt

A constructive receipt is not a physical receipt that many people think of when they hear the term "receipt." Rather, "constructive receipt" is tax terminology that concerns any income that has been earned but not yet paid out. As a US taxpayer, anytime you earn income, you will owe taxes on the income. This applies to wages and investments as well as real estate sales. As soon as you are aware that you have officially earned an income, you owe taxes on that income, even if it has not yet been delivered. A constructive receipt simply mandates the amount that you owe. You will pay taxes through constructive receipt to the IRS, and your tax account will be credited for the earned sum. When you eventually receive the income, you will have already paid taxes on that income, and you will not owe anything further.

Utilizing Constructive Receipt Strategies

If you are a freelance professional or independent contractor or you own your own business, it is likely that you will have to use the constructive receipt method at some point in your tax filing. Anytime you send a bill out late in the year, you run the risk of not receiving payment until the next year. The good news is that you have until April of the year following the year you billed for your services in order to pay the taxes. It is also important to remember that constructive receipt can apply to an individual paying quarterly estimated taxes, not just annual taxes. The US tax system is a "pay as you go" system. This means that you must make payments at least four times a year or face a penalty. Each time you make a payment, you owe based on the amount you billed this quarter, regardless of whether it has been received at the time you cut your tax check. 

Paying Taxes on Constructive Receipts

Since you have already paid taxes on income prior to receiving it through the constructive receipt mandate, you will not have to pay at the time that the income is paid out. If the actual earned income differs from the amount reported in any way, you could be eligible for a refund, or you could owe more. For example, if the business you billed goes bankrupt before paying, you never receive your income, and you can then adjust your reported income to receive a refund. If, on the other hand, the business pays interest because it has waited too long to pay, you will owe more, and you will have to adjust this way as well.

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