Acct 308 Chap4 lesson

Acct 308 Chap4 lesson - CCH Federal Taxation Comprehensive...

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CCH Federal Taxation Comprehensive Topics Chapter 4 Gross Income ©2005, CCH INCORPORATED 4025 W. Peterson Ave. Chicago, IL 60646-6085 800 248 3248 http://tax.cchgroup.com
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CCH Federal Taxation Comprehensive Topics 2 of 40 Accounting Income Income, from the accounting point of view, is the excess of revenues over the costs incurred in producing those revenues. The emphasis for the accountant is on completed transactions. All gains must be “realized” before they are includible in income. Chapter 4, Exhibit 1a
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CCH Federal Taxation Comprehensive Topics 3 of 40 Accounting Income Accrual method—income is recognized when a transaction is consummated, even if cash or property has not yet been received. Cash method—income is recognized only when cash or property is received. Chapter 4, Exhibit 1b
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CCH Federal Taxation Comprehensive Topics 4 of 40 Economic Benefit Doctrine This doctrine answers the question “What is income?” Any amount of compensation granted or paid to the individual for services rendered, be it cash, bonus, profit sharing, compensation in kind, or any ingenious method of payment, must be included in gross income. Gross income is defined under the Code as “all income from whatever source derived.” Thus, taxable income may consist of cash, receivables, property, land, or any other form of economic benefit. Chapter 4, Exhibit 2
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CCH Federal Taxation Comprehensive Topics 5 of 40 Constructive Receipt Doctrine This doctrine answers the question “When is it taxable income?” Generally, any compensation granted to an individual to which the individual has an absolute right is regarded as constructively received income. Where the individual has only a conditional right, the courts hold that no present income was received. Accrual basis taxpayers are not affected by this doctrine because they recognize income the moment it is “earned.” Chapter 4, Exhibit 3
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6 of 40 Compensation vs. Gift Example FACTS: Grandma offers 16-year-old Billy $10,000 if he quits smoking and playing pinball over the next five years. He does, and upon attaining the age of 21, she pays him $10,000. QUESTION: Is the $10,000 received by Billy taxable income or a gift? SOLUTION: The $10,000 is taxable income since there were strings attached. The facts and circumstances dictate whether something received is taxable compensation or a tax-free gift (Code Sec. 102(a)). Compensation. Taxable income arises if the value of property received by a payee - taxpayer was intended by the payor as a return of some value. Gift. Generally, the value of property received by a taxpayer is a tax-free gift if it arises from a “detached and disinterested generosity.” ( Duberstein, 60-2 USTC ¶ 9515.) Simply put, there must be no strings attached. Chapter 4, Exhibit 5
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Acct 308 Chap4 lesson - CCH Federal Taxation Comprehensive...

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