Ch 5 - Framework for Income Recognition

Question 1

Form of Receipt

Answer 1

Income can be received in various ways: cash, property, services, debt forgivenss, canceled payment of expenses

Taxpayer must include fair market value of property or services received in return as income

Question 2

Realized Income

Answer 2

The income has been earned

Ex: Employees worked hours

Question 3

Recognized Income

Answer 3

Income included in the calculation of calculation of taxable income

Ex: When the empployee recevies their paycheck

Question 4

What are the 3 conditions for Income Recognition?

Answer 4

• Increase in wealth
• Realization
• No specific exclusion

Question 5

Treasure Trove Principle

Answer 5

income can be recognized even if a service hasn’t been performed
- taxpayer who unexpectedly finds property and can legally keep it must include the fair market value of the property as taxable income once ownership becomes undisputed

Question 6

What are the 4 judicial doctrines covered in this chapter?

Answer 6

• constructive receipt doctrine
• tax benefit rule
• claim of right doctrine
• assignment of income doctrine

Question 7

Constructive Receipt Doctrine

Answer 7

• Cash-basis taxpayer must include income in period during which they have access to the money, even if not received
• substantial limitations or restrictions cannot exist

Ex: employee has access to paycheck in december, but chose not to get it until January. Wages must be included in December year

Question 8

Tax Benefit Rule

Answer 8

Taxpayer must include an expense reimbursement in income if the expense was deducted in a prior period and reduced the taxpayer’s taxable income

Ex: state income tax deducted in previous year, next year they get tax refund. Tax refund must be stated in year received to extent they received a tax benefit from the deduction

Question 9

Claim of Right Doctrine

Answer 9

• Taxpayer must include income in the year acquired, even if they may have to return it later
• Is allowed a deduction in following year to extent the money is returned
• If later repayment occurs, deduction can be generated in year of repayment

Question 10

Assignment of Income Doctrine

Answer 10

income is taxed to individual who earned the income, even if the funds are directed to be paid to someone else

Question 11

For what types of activities should cash method be typically used for?

Answer 11

• personal activities
• ex: exmployee wages recognized when received
• investment activities
• ex: investor recognizes interest and dividend income when received

Question 12

What is the threshhold for using cash method to report business income from a sole proprietorship?

Answer 12

avg gross receipts over previous 3 years < $29 million

Question 13

What is the threshhold for using accrual method to report business income from a sole proprietorship?

Answer 13

avg goss receipts over previous 3 years > $29 million

Question 14

In which business types can a taxpayer alwas elect to use the accrual method?

Answer 14

• sole proprietorships
• rental real estate or royalties
• farming

Question 15

Separate Property

Answer 15

assets owned before marriage or acquired by gift or inheritance while married

Question 16

Community Property

Answer 16

• property acquired during marriage unless by gift or inheritance
• each spose owns equally

Question 17

What is a sole proprietorship?

Answer 17

• unincorporated business that has only one owner
• unlimited liability: taxpayer is responsible for paying all debts of business

Question 18

When are prepaid rental revenues taxable?

Answer 18

• In the period received (regardless of accrual or cash basis method)
• including refundable security deposits