Final answer:
Constructive receipt is a tax principle dictating that individuals are taxed on income when it is made available to them, but there are restrictions such as control and availability, deferral options, and conditions on income receipt.
Step-by-step explanation:
The concept of constructive receipt is an important principle in taxation, where income is considered received by the taxpayer when it is credited to their account or made available to them without any substantial restrictions, not necessarily when it is actually in hand. There are several restrictions on the concept of constructive receipt:
- A person cannot be in constructive receipt of income if they do not have control of it or if it is subject to substantial limitations or restrictions.
- An individual may defer income to a later tax year by making an election before the income is available, which prevents constructive receipt in the earlier year.
- Income is not subject to constructive receipt if the receipt of income is conditioned upon the performance of a substantial amount of future services.
These principles ensure that individuals and businesses are only taxed on income that they have the ability and right to use.