Question

Under the cash method, a taxpayer includes in his or her gross income all items of income actually or constructively received during the tax year. If he or she receives property and services, the taxpayer must include what amount in income?

Answer 1

A cash method is an accounting method that reports income when constructively received and expenses when paid.

A tax payer includes an item in come when it is actually or constructively received. Under Section 461 a, a cash basis taxpayer generally reports income only in the year of actual receipt. Constructive receipt is same as actual receipt and it occurs when payment is made available to the taxpayer without restriction.

Under the cash method, a taxpayer accounts for an item of income when:

1. Constructive receipt of cash occurs.

2. Cash is actually received.

3. An equivalent of cash is actually received.

Under the cash method, a taxpayer includes all items of income in gross income, actually or constructively received during the tax year. If he receives property and services, the taxpayer must include fair market value in income.

The taxpayer have constructive receipt of income when an amount is made available without restriction. The taxpayer donot need to have possession of it. The taxpayer cannot postpone taking possession of similar property from one tax year to another to aboid paying tax on the income. He must report the income in the year the property is received or made available without restiction.