Accounting for Agriculture: Using Constructive Receipts February 27, 2018
If you work in agriculture, something like this has likely happened to you at some point. In mid-December you send out an invoice for custom work you did for a neighbor. As you patiently wait for the check to arrive in the mail, time moves forward. January 1 rolls around and like the excellent bookkeeper you are, you finalize the prior year’s books so you are ready to file taxes. Then on January 28 the unthinkable happens. Your neighbor sends a payment for the invoice you mailed him, but it is dated December 31. He backdated the check. What do you do? You may think you need to go back and adjust all your prior year closing transactions to account for this payment. If you’re a cash-basis taxpayer though, there is a different way to manage this.
When you read “constructive receipt,” the first thing that pops into your mind is probably some devious backhanded record keeping. That is not at all what a constructive receipt is. Constructive receipt is a rule in which cash basis businesses account for payments when time is a factor. If you want to read the full text, see section 1.451-2 of the Internal Revenue Service code. Following is an abridged version and how to use it in your record keeping.
If you do not have access to the payment, receipt of that payment can be postponed until you do have access. In our example the check was backdated to December; however, the grower did not have the ability to cash and use that check until January. Under constructive receipt you can claim that payment as January income. Just make sure you keep the envelope it came in as a supporting document showing the date postmarked. The key to using a constructive receipt is understanding when the amount was made available to you without restriction.
Not Constructive Receipts
Remember, as noted above, use of constructive receipts requires that you do not have the ability to cash and use the check. Receiving a payment in the mail on December 31 and waiting to record it as January income is not an allowed reason to delay income until the following year. Under that situation you had the payment in the proper period, and it was available for business use. It must be recorded as December income.
Agent transactions are another issue. For example, you call and give your brother the authorization to act as your agent and receive income for you. He was to drive out and collect $10,000 for a tractor sold on auction. He did that, driving out to receive cash from the buyer on December 28. When he returns, he hands you the cash on January 3. Even though the cash was not in your personal hands, your brother was acting as your agent. The $10,000 he received needs to be reported in December.
If you use the cash basis method of accounting, consider using constructive receipt instead. Even if you receive a 1099 for the prior year with the income in question included, constructive receipt applies. Your tax preparer will be able to help when a 1099 is involved. Just remember the key to all constructive receipts is understanding when the amount was made available to you without restriction.