Chapter 4. Gross Income Flashcards
Income (broadly defined)
Includes all of the taxpayer’s income, both taxable and nontaxable
Exclusions
Certain types of income are excluded form the income tax base.
Gross Income
“except when otherwise provided intros subtitle, gross income means all income from whatever source derived.
deductions
Generally all ordinary and necessary trade or business expenses are deductible by tax paying entities. (cogs, salaries, wages, operating expenses, r and d, interest, taxes, depreciation, amortization, and depletion.
Taxable income
determined by subtracting deductions from gross income The tax rates are then applied to determine the tax rate. Tax prepayments and a wide variety of credits are subtracted from the tax to determine the amount due to the federal government or the refund due to the taxpayer.
Economic income
determined by the change (increase/decrease) int he fair market value of the entity’s assets (net of liabilities) from the beginning to the end of the year.
Windfall income
essentially wealth that you happen upon. Taxable because anything that increases net worth is income and any that that decreases net worth is deductible.
How can income be realized? (forms)
- Cash
- Services
- meals
- accommodations
- stock or other property
Taxable year
Basic component of our tax system. taxpayer generally uses the tax year to report gross income. Fiscal year is allowed is the taxpayer maintains adequate books and records.
Cash receipts method
property or services received are included n the tax-payers gross income in the year of actual or constructive receipt by the taxpayer or agent, regardless of whether the income was earned in that year. All that is necessary for income recognition is that property or services received be measurable by fair market value.
What taxpayers are not permitted to use the cash method of accounting?
Accrual basis must be used to report income for;
- Corporations (other than s corporations)
- partnerships with a corporate partner (other than and S corporation)
- Business taxpayers that carry inventories
- tax shelters
What businesses can still use the cash method?
- A farming business
- a qualified personal service corporation (regardless of gross receipts level)
- a corporation or partnership with a corporate partner that is not at a tax shelter, whose average annual gross receipts for all prior three year periods are $5 million or less
- Certain small taxpayers that carry inventories.
Accrual method
An item is generally included in gross income fort he year in which it is earned, regardless of when he income is collected.
Income is earned when
- all events have occurred that fix the right to receive the income
- the amount to be received can be determined with reasonable accuracy
Hybrid method
To simplify record keeping, some taxpayers account for inventory using the accrual method but use the cash method for all other income and deduction items (primarily used by small businesses when the cash method otherwise is not available.
Constructive receipt
Income that has not actually been received by the taxpayer is taxed as though it had been received- the income is constructively received -under the following conditions;
- the amount is made readily available to the taxpayer
- the taxpayer’s annual receipt is not subject to substantial limitations or restrictions.
rationale: if the income is available, the taxpayer should not be allowed unilaterally to postpone income recognition. (can’t refuse to accept payment until a later date)
original issue discount
The difference between the amount due at maturity and the amount of the original loan is actually interest, but is referred to as original issue discount.
The code requires the original issue discount to be reported when it is earned, regardless of the taxpayer’s accounting method. Interest earned is calculated by the effective interest rate method.