Question

In the current year Jose, a cash basis taxpayer, was offered $5 million for signing a professional baseball contract. He countered asking that he receive $1,100,000 a year for 5 years beginning in the current year. The team accepted the counteroffer. In accordance with the contract Jose received $1,100,000 in the current year. For tax purposes, how much income is he treated as constructively receiving in the current year?

Answer 1

The Internal Revenue Service allows small businesses and individual tax payers to choose between the cash method and the accrual method for reporting income and expenses on their tax returns. To qualify as an individual cash basis according to the IRS, the average annual gross receipts for the past three years prior to tax year,must be less than $1 million.All items of income that are actually or constructively received during the tax year are included in the taxpayer’s gross income.
According to the Internal Revenue Service (IRS), income is constructively received when an amount is credited to the taxpayer’s account or made available to him or her without restriction, regardless of whether s/he has possession of the funds. For instance, if an agent is authorized to receive income on behalf of a taxpaying entity, the taxpayer is considered to have received the money when the agent receives it or an employee shall have to be said the receipt of salary if s/he has received the cheque even if the same had not been deposited jnto ban.Whereas in case of accrual method revenue shall become taxable as and when they are accrued that is, received or receivable.
In the given case Mr. Jose who uses cash basis reporting method shall be said to have a taxable receipt of $11 million which is the amount constructively recei ed as rest of of contract amount has not yet been physically received by anyone in the current tax year. In the next year he will be required to opt for accrual basis of reporting as the gross receipts of previous year ie.$11m shall exceed the threshold more than the phreshold and entire sum of $(11m * 4yrs)44million will become taxable.