Taxable Income Flashcards
Constructive Receipt Rule
Cash basis TP should recognize income in the year when ACTUALLY or CONSTRUCTIVELY received - Amount is readily available - Actual receipt is not subject to substantial restrictions
Tax Benefit Rule
Requires the TP to include an exp reimbursement in income if the expense was deducted in a prior year.
Interest Income
Taxable, unless for municipal (state and local) Bonds - Gain on sale of muni bonds - TAXABLE - Interest income always taxed when received
Bond Amortization
Premium (CYMM): Constant Yield Maturity Method - Reduces basis of bond - Amortization offsets interest income Discount (EIRM): Effective Interest Rate Method - Increases interest income - Amount paid is less than face value
Dividend Income
Taxed at LTCG Rate Income taxed in the following order: - Dividend income to the extent of E&P - Reduction of basis in stock - Capital gain after basis is reduced to zero Stock dividends on common stock - NOT taxable Stock dividends on pref stock - TAXABLE
Other Income (Divorce)
Alimony –> Income Child Support –> Not Income Property Transfers –> Not taxable
Other Income - Damages and Insurance Benefits
Excluded from income: - payment for physical injury and work comp - Benefits from accident & health policies - Benefit from disability policies - Medical Ins premiums paid by employer - Benefits of LT care insurance Included in income: - Unemployment compensation - Payment for non-physical injury - Punitive damages
Other Income - Annuities
Each payment is part income, part return of capital (non taxable). Formula: Excluded portion = (Cost of Annuity / Expected Return) x Payment Excluded until basis is recovered, then taxable if annuitant dies before total cost is recovered; Unrecovered portion is a deduction on TPs return
Income Exclusions
Prizes and Awards: excluded if you pay directly to a non-profit or gov org, and didn’t solicit receipt Scholarships: Funds used to pay tuition, books, fees, supplies and equip excluded Life Insurance proceeds: proceeds due to death excluded Gifts and Inheritances: Excluded from income of recipient (intent of donor determines if a gift) Forgiveness of debt: excluded if a gift
Social Security Benefits
Typically Excluded, unless provisional income (PI) exceeds specified amount, 85% may be included in income PI = AGI + tax-exempt income + 50% SSB PI compared to base amounts: MFJ 44k Not taxed 50% taxed 85% taxed single 34k
Cash Method of Income Recognition
- No Account Receivable (accrual only) - No inventory (accrual only) - Unearned income recognized in the year rec’d - Can defer if it matches fin reporting method Rental Income - prepaid rent taxed when rec’d - lease deposits not income if they must be returned These entities cannot use the cash method 1. Regular C corps 2. P’ships w/ corp partners 3. Tax Shelters Unless: - Annual gross receipts
Uniform Capitalization Method
- Manufacturers, Retailers, Wholesalers - Must capitalize direct and indirect costs Except: small personalty dealer (
Change in Accounting Method
Voluntary - spread over 4 years begining in year of change (
Short Year Returns
- Annualize the period income 2. Determine tax liability for annualized period 3. Pro-rate back to the partial year term
Employee Benefits: Fringe
Business Reimbursements: under an accountable plan - NOT income Life Insurance - policies up to $50k not income; after $50k, follow IRS tables Health Insurance - premiums paid by employer, not taxable LT Care - premiums paid my employer, not income Disability - premiums paid by TP, not deductible Disability Benefits rec’d when TP paid premium, not income Disability Premium paid by employer - TP has no income, employer can deduct Benefits rec’d if employer paid - TP has income
