Understanding constructive receipt of income under cash basis
The method of accounting you use largely determines when you get to take deductions and have to recognize (and pay tax on) income. Most individuals and small businesses use the cash basis method of accounting. This method is based on the notion that you haven’t earned income for tax purposes until you actually receive the money, and you haven’t incurred an expense until you actually pay the money. In other words, you record income only when the money is received and expenses only when they are actually paid.
If you receive a payment in your business that is subject to restrictions placed by the payor, those funds may not be taxable income until the year in which those restrictions are lifted. A key factor is whether the recipient has “unfettered control” over the funds upon receipt. Each taxpayer must look at all facts and circumstances before determining what year it should be taxable in.
For help in determining your taxable income, contact a ShindelRock tax professional.