ch4tax1 - Taxation of Business Entities Gross Income Text...

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C4 - 1 Taxation of Business Entities Gross Income Text: Chapter 4
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C4 - 2 Learning Objectives Explain the concepts of gross income and realization. Understand when the cash, accrual, and hybrid methods of accounting are used and how they are applied. Identify who should pay the tax on an item of income. Understand that statutory authority is required to exclude an item from gross income. Determine the extent to which receipts must be included under the tax benefit rule. Describe certain specific rules that apply to below-market loans, municipal bond interest, leasehold improvements, life insurance proceeds and discharge of indebtedness. Describe basic tax consequences of property transactions.
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C4 - 3 Questions Related to Income What: What is income? When: In which tax period is the income recognized? Who: Who is taxed on the income?
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C4 - 4 Gross Income Definition: Gross income includes all income from whatever source derived , unless specifically excluded by the Code. Concept is interpreted broadly by the courts Taxability of income generally follows the realization principle Income is recognized (taxed) when realized. Mere appreciation in wealth (economic income) is not considered realized income. Income is recognized whether it is in the form of cash, or “in-kind” (i.e., property or services)
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C4 - 5 Specific Rules Related to Income § 61(a) provides an all-inclusive definition of income. §§ 71-90 provide specific rules for determining gross income from certain sources. §§ 101-150 provide specific rules that exclude items from gross income.
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C4 - 6 Gross Income - Inclusions Examples of items specifically mentioned in Section 61(a): Compensation for services, including fees, commissions, fringe benefits, and similar items Gross income derived from business Gains derived from dealings in property Interest, rents, royalties, dividends, annuities Alimony Pensions
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C4 - 7 Gross Income - Inclusions Examples of gross income inclusions NOT mentioned in Section 61(a): Prizes, awards, gambling winnings Illegal income Unemployment compensation (2009 – partially excluded) Imputed interest on below-market loans Insurance and court awards (lost income and back pay) Compensatory damages (nonphysical injury) Punitive damages (always) Severance pay Tips and gratuities
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C4 - 8 Gross Income – Exclusions Examples of items specifically excluded by tax code: Gifts and Inheritances received Life Insurance Proceeds paid at death Scholarships and Fellowships Amounts received for personal physical injury or physical sickness Child support payments Employee fringe benefits (paid by employer) Life insurance (limited) Medical insurance Social security benefits (limited) Welfare payments Interest on state and local government obligations
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ch4tax1 - Taxation of Business Entities Gross Income Text...

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