3.3 - Gross Income Flashcards
What is gross income?
- All income from whatever source derived, except as otherwise provided
Identify types of income included in gross income
- Compensation for services
- Fees
- Commissions
- Fringe benefits
- Gains from property dealings
- GI from business interest
- Rents
- Royalties
- Dividends
- Alimony & separate maintenance payments
- Annuities
- Income from life insurance
- Pensions
- Endowment contracts
- Discharge from indebtedness
- Prepaid rent
Is there a deferral of income for services performed in subsequent years? If so, how long is the deferral?
Yes, 1 year deferral of income
Is income received in advance considered gross income?
Yes
What is the timing of income based on?
the accounting method used
How does the “hybrid method” or modified cash basis accounting method affect the timing of income?
- Allows a business to use cash method for portion of business not required to be on the accrual method
How does the “cash method” affect the timing of income?
- Income included when constructively received
Define “constructive receipt” under the cash method of accounting
- When income is made available so taxpayer may draw upon it at anytime
- No limitations
- Credited to account
- Made available
How does the “accrual method” affect the timing of income?
- Reports income when all events have occurred fixing the right to receive & the amount can be determined
- Generally required when there are inventories
How does compensation for services impact gross income?
- All compensation is GI
- Form of payment is irrelevant
How does compensation for services impact gross income when compensation is in the form of property instead of cash?
compensation or gross income equals the FMV of property
How does a director of a corporation account for compensation?
Director is considered to be….
- self-employed & included in GI
When is prepaid income taxable?
in year of receipt
Are there any exceptions to when prepaid income is taxable?
- Prepaid income taxable in year of receipt
- Exceptions
- Inventory
- Service & non-service
- 1-year deferral
- Exceptions
Identify the 6 forms or types of investment income
- gains,
- interest,
- rents,
- royalties,
- dividends or
- dividend reinvestment plans (DRP)
How is the increase of the FMV in a dividend reinvestment plan reported?
as ordinary income
What is the gain on disposition when it comes to investment income?
Net increase in value
How is income received taxed under a claim of right doctrine?
- Income received under a claim of right doctrine & w/o restrictions on its use is taxed in the year received although right is not fixed & taxpayer may be required to return it
What is a claim of right doctrine?
U.S. law that causes a taxpayer to recognize income if they receive the income even though they do not have a fixed right to the income and may have to return it
Provide an example explaining the “claim of right doctrine”
You are retired and receive pension income in 2009 only to have the pension administrator send you a letter in 2013 stating that they overpaid you in 2009 and you now have to repay the excess distribution. You were taxed on the 2009 payment and now that you have to repay the monies in 2013, you can take a credit or deduction on your current year taxes.
How does alimony payments impact gross income?
- Included in GI of recipient & deducted from GI of the payor
How are alimony payments allocated if they are less than what was agreed or ordered to pay?
- 1st considered to be child support & then alimony
What are the (6) stipulations to payments being considered alimony?
- Paid in cash
- Pursuant to written divorce instrument
- Terminated at death
- Not designated as “other than alimony”
- Not paid to member of same household
- Not paid to spouse filing jointly
Are payments made to 3rd parties considered alimony payments?
Yes
How do annuities affect gross income?
- Included in GI, less the cost of the annuity tax free
How does the cost or conributions to a pension plan affect the gross income of retirees?
- Retirees can recover their cost or contribution to their pensions tax free
- Excess included in GI
How does life insurance affect gross income?
- Proceeds received due to death are excluded from GI
- Interest paid on proceeds of policy retained by insurance company
What is Subpart F income and how does it affect gross income?
- Qualified income from Controlled Foreign Corporations (CFC) is included in income for U.S. shareholder
Define a Controlled Foreign Corporation (CFC) in the case of Subpart F income
foreign corporation owned by >50% U.S. shareholders
Define a U.S. shareholder in the case of a Controlled Foreign Corporation (CFC)
- U.S. person with 10% or more voting-ownership in the CFC
Define a U.S. person in the case of a Controlled Foreign Corporation (CFC)
- U.S. citizen, resident alien, domestic corporation, partnership, estate or trust
Calculate amount realized
Total money received and to be received
+ FMV property received and to be received
+ Amount of liabilities txfr with property
- Selling expenses
= Amount realized
Calculate gain or loss realized
Amount realized
- Adjusted basis
= Gain (loss) realized
What is adjusted basis?
Amount of capital invested in the property and not yet recovered by tax benefit (depreciation)
Calculate adjusted basis
Basis on acquisition (cost)
+ Debt on property
+ or - Adjustments to basis (depreciation, improvements)
= Adjusted Basis
