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Week3.LectureNotes.127A.F07

Week3.LectureNotes.127A.F07 - MGMT 127A CLASS THREE Fall...

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MGMT 127A CLASS THREE – Fall 2007 Gross Income, For AGI Deductions (Introduction) I. GROSS INCOME A. Defined : Income from whatever source derived - Includes more than just cash (property, services, meals, etc.) B. Must be realized AND recognized (give example of Municipal Bond income or taxable exchange) C. TAX YEAR : Must be realized/recognized during the elected tax year: 1. Calendar Year : Most individuals, S corporations 2. Fiscal Year : If business (often a corporation) can show a “business purpose” (e.g. 25% or more of income in last 2 months of fiscal year) D. Timing of Recognition : Depends on Reporting Method When recognized? CASH ACCRUAL INCOME When Actually/ Constructively Received When Earned DEDUCTION When Paid When Incurred ( if paid no later than 3/15 of following year ) E. ACCRUAL ISSUES… 1. Income reported the year it is earned : 2 prong test Events occur to establish right to receive Amount can be calculated with reasonable accuracy 2. How is prepaid income handled on accrual basis….largely same as cash basis…..but EXCEPTIONS: 1
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advance payment for goods [ TP can defer so long as tax & financial accounting methods are same ] advance payment for services [accrual TP can defer recognition of income for advance payment that relates to svcs to be performed after end of tax year ] The portion of payment that relates to services performed after the end of the tax year is reported in the year following year of receipt. F. GROSS INCOME INCLUSIONS VS. EXCLUSIONS 1. SEE INCOME INCLUSIONS / EXCLUSIONS CHART 2. Alimony and Separate Maintenance payments (deductible by payor and included as GI to payee) Alimony (paid under divorce decree) = (1) cash, (2) agreement does not say that not alimony, (3) not members of same
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