Chapter 4. Gross Income Flashcards

1
Q

Income (broadly defined)

A

Includes all of the taxpayer’s income, both taxable and nontaxable

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Exclusions

A

Certain types of income are excluded form the income tax base.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Gross Income

A

“except when otherwise provided intros subtitle, gross income means all income from whatever source derived.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

deductions

A

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.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Taxable income

A

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.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Economic income

A

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.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Windfall income

A

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 well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

How can income be realized? (forms)

A
  1. Cash
  2. Services
  3. meals
  4. accommodations
  5. stock or other property
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Taxable year

A

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.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Cash receipts method

A

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.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What taxpayers are not permitted to use the cash method of accounting?

A

Accrual basis must be used to report income for;

  1. Corporations (other than s corporations)
  2. partnerships with a corporate partner (other than and S corporation)
  3. Business taxpayers that carry inventories
  4. tax shelters
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What businesses can still use the cash method?

A
  1. A farming business
  2. a qualified personal service corporation (regardless of gross receipts level)
  3. 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
  4. Certain small taxpayers that carry inventories.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Accrual method

A

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

  1. all events have occurred that fix the right to receive the income
  2. the amount to be received can be determined with reasonable accuracy
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Hybrid method

A

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.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Constructive receipt

A

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;

  1. the amount is made readily available to the taxpayer
  2. 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)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

original issue discount

A

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.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

amounts received under an obligation to repay

A

In borrowing the taxpayer’s assets and liabilities increase by the same amount, so no income is realized when the borrowed funds are received.

18
Q

Prepaid income (Special rules for accrual basis taxpayers)

A

Prepaid income is taxed in the year of receipt

19
Q

Deferral of advanced payment for goods (Special rules for accrual basis taxpayers)

A

Generally, an accrual basis taxpayer can elect to defer recognition of income from advance payments for goods if the method of accounting for the sale is the same for tax and financial reporting purposes.

20
Q

deferral of advanced payments fro services (Special rules for accrual basis taxpayers)

A

When payments are received for services that will be performed in a later tax year, an accrual basis taxpayer can defer for one year the recognition of income for the services that will be performed later. This method of acct. ,ay also be used for advanced payments received for goods, as well as licensing of intellectual property, and the sale, lease, or license of software.

Advanced payment for prepaid rent or prepaid interest, however are always taxed in the year of receipt.

21
Q

Personal services (Income sources)

A

Principle of taxation that income from personal services must be included in the gross income of the person who performs the services.

Fruit and tree metaphor: the fruit (income) must be attributed to the tree from which it came (the services).

This metaphor is simply stating that the ASSIGNMENT OF INCOME to another party does not shift the liability for the tax

22
Q

Services of an employee (Income sources)

A

Performances performed by an employee for the employee’s customers are considered performed by the employer. Thus, the employer is taxed on the income from the services provided to the customer, and the employee is taxed on the compensation received from the employer.

23
Q

Income form property (Income sources)

A

Income earned from property is included in the gross income of the owner of the property.

Often income producing property is transferred after income from the property has accrued, but before the income is recognized under the transferor’s method of accounting.

24
Q

Interest from property (Income sources)

A

according to the tax law, interest accrues daily therefore interest for the period that includes the date of an asset transfer is allocated between the transferee based on the number of days during the period that each owned the property.

25
Q

Dividends

A

A corporation is taxed on its earnings, and the shareholders are taxed on the dividend paid to them from the corporation’s after tax earnings

Partial relief from the double taxation of dividends has been provided that qualified dividends are taxed at the same marginal rate that is applicable to a net capital gain. distributions that are not qualified dividends are taxed at the rates that apply to ordinary income.

26
Q

Holding period requirement

A

A holding period requirement must be satisfied for a lower tax rate to apply. Stock that pays the dividends must be held for 60 days during the 121 day period beginning 60 days before the ex dividend date.

The purpose of this requirement is to prevent the taxpayer from buying the stock shortly before the dividend is paid, receiving the dividend, and then selling the stock at a short term capital loss after the stock goes ex dividend.

27
Q

What classifies a dividend as a dividend?

A

A distribution by a corporation to its shareholders is classified as a dividend only if it is paid from the entity’s earnings and profits (E&P). If the distribution is not made from E&P, it is treated as a return of the shareholder’s investment and generally is not taxed at the time of distributions.

28
Q

Income received by an agent (Income sources)

A

Income received by the taxpayer’s agent is considered to be received by the taxpayer. A cash basis principal must recognize the income at the time it is received by the agent

29
Q

Imputed interest on below-market loans (specific items of gross income)

A

Imputed interest is calculated using rates that the federal government pays on new borrowings and is compounded semiannually. (adjusted monthly) three federal rates;

Short term (not over three years)
mid-term (over three but not over 9)
long term (over nine)

If interest is charged on the loan but is less than the federal rate, the imputed interest is the difference between the amount that would have been charged at the federal rate and the amount actually charged.

30
Q

Tax benefit rule

A

generally, if a tax payer obtains a deduction for an item in one year and in a later year recovers all or a portion of their prior deduction, the recovery is include in gross income the year received.

Limits income recognition when a deduction does not yield a tax benefit in the year it is taken.

31
Q

Interest on certain state and local government obligations (specific items of gross income)

A

The current exempt status applies solely to state and local government bonds. Thus, income received from the accrual of interest on a condemnation award or an overpayment of state tax is fully taxable. Nor does the exemption apply to gains on the sale of tax exempt securities.

Although the code excludes from federal gross income the interest on state and local government bonds, the interest paid on US government bonds is not excluded from the federal tax base.

32
Q

Improvements on leased property (specific items of gross income)

A

any improvements made to the leased property are excluded from the landlord’s gross income unless the improvement is made to the property in lieu of rent

33
Q

Life insurance proceeds (specific items of gross income)

A

life insurance proceeds paid to the beneficiary because of the death of the insured are exempt from income tax. Because;

  1. for family members , life insurance proceeds serve much the same purpose as a nontaxable inheritance
  2. in a business context, (and family) life insurance proceeds replace and economic loss suffered by the beneficiary.
34
Q

Exceptions to exclusion treatment

A

The income tax exclusion applies only when the insurance proceeds are received because of the death of the insured. If the owner cancels the policy and receives the cash surrender value, he or she must recognize gain to the extent of the excess of the amount received over the cost of the policy.

35
Q

Exceptions to the consideration Rule

A

These exceptions permit exclusion treatment for transfers to the following parties. The first three exceptions facilitate the use of insurance contracts to fund buy-sell agreements

  1. A partner of the insured
  2. Apartnership in which the insured is a partner
  3. a corporation in which the insured is an officer or shareholder
  4. a transferee whose basis in the policy is determined by reference to the transferor’s basis, such as a gift to a transfer due to divorce
  5. insured party under the policy
36
Q

Investment earnings arising from the reinvestment of life insurance proceeds

A

They are subject to income tax. Interest portion of each installment is included in gross income

37
Q

Income from discharge of indebtedness (specific items of gross income)

A

gross income is usually generated when a creditor cancels borrower’s debt.

38
Q

reduction in debt is excluded in these situations

A
  1. creditor’s gift
  2. Discharge that occur when the debtor is insolvent
  3. discharge under federal bankruptcy law
    4.discharge of the farm debt of a solvent taxpayer
  4. discharge of qualified real property business indebtedness
  5. Seller’s cancellation of buyer’s indebtedness
  6. A shareholders cancellation
    of a corporations indebtedness
  7. Forgiveness of certain loans to students
  8. discharge of acquisitions idebteedness on the taxpayer’s principal residence that occurs after 2006 and before 2015, and is the result of financial condition of the debtor
39
Q

Creditors’ gift

A

If the creditor reduces the debt as an act of love, respect or generosity, the debtor has simply received a nontaxable gift

40
Q

Insolvency and bankruptcy

A

cancellation of indebtedness income is excluded when the debtor is insolvent (i,e the debtors liabilities exceed the fair market value of the assets) or when the cancellation of debt results from a bankruptcy proceeding.

The debtor must decrease certain tax benefits (capital loss carry forwards, net operating loss carryforwards, some tax credits and suspended passive losses) by the amount of excluded.

41
Q

Capital gains and losses

A

Page 29

42
Q

Shareholder cancellation

A

If a shareholder cancels the corporations indebtedness to him or her and receives nothing in return, the cancellation usually is considers a contribution to capital to the corporation