Gross Income - General Concepts and Interests

Question 1

What is a general rule about income and tax?

Answer 1

All income is considered to be taxable unless the income is specifically excluded by the tax law.

Question 2

Is “income” limited to cash? What is an example of non cash income?

Answer 2

No. Bartering (exchange) - something of value received.

Question 3

What is constructive receipt?

Answer 3

A requirement that a cash basis TP to include the value of property in income in the period in which the right to the property is acquired. Considered as income.

Question 4

What are 2 criteria for constructive receipt?

Answer 4

Income has been constructively received if;

• The amount is readily available to TP, and
• Actual receipt is NOT subject to substantial restrictions.

Question 5

What is assignment of income?

Answer 5

Income is always taxed to the individual who earned the income. Can’t be assigned to others.

Question 6

What is tax benefit rule?

Answer 6

A TP must include an expense reimbursement (refund) in income if the expense was deducted in a prior period and the deduction reduced the TP’s taxable income.

Question 7

What is an example of tax benefit rule?

Answer 7

Interest pmt.

Question 8

What is claim of right doctrine?

Answer 8

TP must include property in income in the period in which an apparent claim to the property materializes (even if the potential of receiving the income is challenged).

Question 9

Claim of right doctrine: What must TP do if the income ended up not being received?

Answer 9

Generates a deduction, but does not influence the earlier recognition of the income.

Question 10

Interest income: Is all interest income taxable? Any exception?

Answer 10

Yes.
Except for municipal interest, which is interest paid on bonds owned by state/local governments or those owned by US (ex: Puerto Rico). (Federal ones taxable).

Question 11

Interest income: Is interest earned from mutual fund that came from the funds own municipal bonds taxable? What about gain from the sale of municipal bonds?

Answer 11

No.

Yes.

Question 12

Interest income: When is prepaid interest income taxed?

Answer 12

When received.

Question 13

Interest income: What are examples of the sources of interest income?

Answer 13

• United States Treasury notes and bonds.
• Federal and state tax refunds.
• Mortgages.

Question 14

What is series EE bonds?

Answer 14

Face value and interest both paid at maturity.

Question 15

When is the interest from series EE bonds taxed?

Answer 15

At maturity or elect to tax annually.

Question 16

What are 4 criteria for tax exclusion for the interest from series EE bonds?

Answer 16

• Owner (must be sole owner/joint with spouse) of the bond is at least 24 yrs.
• Proceeds used to pay higher education expenses (tuition and fees) in the year of redemption.
• Higher education expenses are for TP, spouse, dependents.
• Exclusion is phased-out at higher income level.

Question 17

If a TP buys a taxable bond at a premium, is it taxable? Exception?

Answer 17

Yes.

TP can elect to amortize the premium.

Question 18

Premium on bonds amortized: what does amortization do to the basis of the bond? To Interest income? What is the method used to amortize?

Answer 18

Reduce the basis.
Offset interest income.
Constant yield to maturity method.

Question 19

Must TP amortize the premiums on tax-exempt bonds? Is the amortization deductible?

Answer 19

Yes.

No because interest income is not taxed.

Question 20

What method is it used to amortize bond discount? What does amortization affect interest income?

Answer 20

Effective interest rate method.

Increases interest income.

Question 21

Bond discount amortization: When is the discount taxed if it’s short-term bonds?

Answer 21

At maturity as ordinary income for cash basis TP.

As earned for accrual basis TP.

Question 22

If interest rate for loans is not at least equal to Applicable Federal Rate, what will be assumed?

Answer 22

The borrower pays the current market rate of interest to the lender.

Question 23

Interest free and below market loans: What are 3 tax implications (will result in)?

Answer 23

Results in;

• Compensation income if the borrower is an employee.
• Dividend income if the borrower is a shareholder.
• a gift in most other cases.

Question 24

Interest free and below market loans: What are 2 exceptions?

Answer 24

• Less than $10,000.
• If less than $100,000, deemed interest is limited to the borrower’s investment income on the loan proceeds. The investment income is deemed to be 0 if $1,000 or less.

Question 25

When a corporation makes a charitable donation using FMV, what is the amount included in gross income?

Answer 25

FMV - must be the same as the basis used for donation.

Question 26

If an amount of income has been accrued on the basis of a reasonable estimate with the exact amount to be determined at a later date, how should any difference between the estimate and exact amount be handled?

Answer 26

To be included in income or deducted in the year when the exact amount can be determined.