FSU TAX 4001 - Chapter 3 Gross Income: Inclusions

Unformatted text preview:

Chapter 3 Gross Income: InclusionsEconomic, Accounting, and Tax Concepts of Incomeo Economico Income = consumption + change in wealtho Unrealized gains, as well as gifts and inheritances are incomeo Adjusts for inflation in measuring incomeo Accountingo Income measured by a transaction approach Usually when it s realized in a transactiono Recognize (report) income, expenses gains, and losses that have been realized as a result of a completed transactiono Believe economic concept is too subjective for financial reporting Therefore, traditionally used historical costo Realization upon: Change in form or substance of a taxpayer’s property, and Transaction with a second partyo Taxo Three conditions for an amount to be taxable  Must be economic benefit• Not limited to cash payments Income must be realized• Generally occurs when earnings process complete and transaction with another party takes place that permits the objective measure of the income Must be recognized• Some items not taxable because of provisions in the law• Law also contains exclusions that exempt specific types of incomeo A need for objectivityo Wherewithal-to-pay concept Tax should be collected when taxpayer is in best position to pay it Prepaid income subject to taxation at time it is collected, rather than earned• At time of collection, taxpayer clearly has the cash available to pay taxo Gross income defined: income from whatever source derived All sources are presumed to be taxable unless there is a specific exclusion in the law IRS does not have to prove an item is taxable• Taxpayer must prove the item of income is excluded Not limited to amount received in cash• May be “realized in any form, whether in money, property, or services”• Depends on whether taxpayer receives an economic benefit• Rule covers barter transactionso Each party is taxed on value of the property or services received in the exchangeo In general, cost basis of property given up in barter transaction can be subtracted from value of property received to arrive at taxable amount Frequently, an employer may make an expenditure in which its employees may incidentally or directly benefit• Excludible if it is made to serve business needs of employer and benefit to employee is secondary and incidental • Instances when not taxable = fringe benefitsTo Whom is Income Taxable?Assignment of Incomeo An individual is taxed on the earnings from his/her personal serviceso Agreement to assign income does not permit person to avoid being taxed on incomeo Income from property is taxed to the owner of the propertyo To transfer income from property, taxpayer must transfer ownership of property itselfAllocating Income between Married Peopleo Income allocated between husband and wife depending on state of residenceo Generally taxed to individual who earns income, either through labor or capitalo Generally the only joint income in a common law state is income from jointly owned propertyIncome of Minor Childreno Earnings of a minor child are taxed to the child regardless of the state’s property law systemo Unearned income of a child under 24 may be taxed at parents’ rate if it is higher than child’so Alternatively, parents may elect to include child on their returno Individual who earns income is the one that is taxed on itWhen is Income Taxable?o IRS has power to change accounting method used by taxpayer if, in the opinion of the IRS, the method being used does not clearly reflect incomeo Regulations require taxpayers to use accrual method for determining purchases and sales when taxpayer maintains inventoryo Cash Methodo Used by most individuals and small businesseso Income reported in year taxpayer actually or constructively receives income rather than year the income is earnedo Can be received by taxpayer or taxpayer’s agento Can be inform of cash, other property, or serviceso An accounts receivable or other unsupported promise is considered to have no value Therefore, no recognition until cash is collectedo Reporting prepaid income can have harsh results Not offset by related deductions Income taxed before expense incurred, may not have enough cash to pay expense when incurredo Constructive receipt Means: income made available to taxpayer so he/she may draw upon it at any time Not constructively received if tax payer’s control is subject to substantial limitations or restrictions Prevents taxpayers from deferring income otherwise available by “turning back on it” Cannot defer income recognition by refusing to accept payment till later taxable year Not constructively received if:• Subject to substantial limits/restrictions• Payor doesn’t have funds to make payment• Amount unavailable to taxpayer Exceptions to basic rule that taxpayer report when constructively received• Interest on Series E and EE US savings bonds need not be reported till final maturity date• Special rules for farmers and ranchers• Small taxpayer exceptions for inventoryo Hybrid Methodo Combination of cash and accrual methodso Most often used by small businesses that maintain inventory and are required to use accrual method for purchase and sale of goods Use cash method for other items because it is simpler and may provide greater flexibility for tax planningItems of Gross Income o Compensationo Payment for personal serviceso Included salaries, wages, fees, commissions, tops, bonuses, and specialized formso The fact that services are part-time, one time, seasonal, or temporary is immaterialo Are exclusions for variety of employer-provided fringe benefits Group term life insurance premium  Health and accident insurance premium Employee discount Contributions to retirement plans Educational benefitso Limited exclusion applicable to foreign earned incomeo Business incomeo In case of businesses that provide services, gross business income is total amount receivedo Manufacturing, merchandising, and mining, gross income is total sales less cost of goods soldo Gross income for tax purposes comparable to gross profit for financial accounting purposeso Cost of goods sold treated as return of capital and therefore not incomeo Gains from dealings in propertyo Gains realized from property transactions included in gross income unless non-recognition rule applieso Taxpayer my deduct cost of property to arrive at gain from property transactiono Losses not offset from gains

View Full Document

FSU TAX 4001 - Chapter 3 Gross Income: Inclusions

Download Chapter 3 Gross Income: Inclusions
Our administrator received your request to download this document. We will send you the file to your email shortly.
Loading Unlocking...

Join to view Chapter 3 Gross Income: Inclusions and access 3M+ class-specific study document.

We will never post anything without your permission.
Don't have an account?
Sign Up

Join to view Chapter 3 Gross Income: Inclusions 2 2 and access 3M+ class-specific study document.


By creating an account you agree to our Privacy Policy and Terms Of Use

Already a member?