Ch4 - Chapter 4 Gross Income: Concepts and Inclusions 4.1...

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Chapter 4 Gross Income: Concepts and Inclusions 4.1 Gross Income ● Definition: Gross income includes all income from whatever source derived, unless specifically excluded under the Code ● Concept is interpreted broadly by the courts ● Taxability of income follows the realization principle from accounting ----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” cash equivalents (i.e., property or services) ---The amount of income from “in-kind” receipts is equal to the FMV of the property or services ● Income does not include recovery of the taxpayer’s capital investment 4.2 Year of inclusion 1) Accounting Periods ●Taxable year is generally a 12-month period ---Taxable year for most individual taxpayers is the calendar year ---Fiscal year can be elected if taxpayer maintains adequate records ♦ Fiscal year is a 12-month period ending on the last day of a month other than December Example : July 1 to June 30 2) Accounting Methods ● There are 3 primary methods of accounting for tax purposes: --- Cash receipts and disbursements method --- Accrual method --- Hybrid method ● In addition to overall accounting methods, taxpayers may choose (elect) tax treatment for various transactions, for example ---Taxpayers can elect to use the installment method ---Certain contractors may elect to use either the percentage of completion method or the completed contract method Cash Receipts Method ● Income is recognized in the year it is actually or constructively received in cash or cash equivalent ● An amount is constructively received when it is set aside and made available to taxpayer without substantial restrictions ●Example - Constructive receipt ---An employer issued a bonus check to an employee on December 31st but asked her to hold it for a few days until the company could make deposits to cover the check.
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♫ The income was not constructively received on December 31 since the issuer did not have sufficient funds in its account to pay the debt. Exceptions To Cash Receipts Method ● Original Issue Discount (OID) interest is taxable when earned rather than when interest is received ●Series E and EE bonds are not subject to the OID rules ---However, a cash basis taxpayer may elect to recognize the interest when earned Accrual Method ●Income is recognized in the year that it is earned regardless of when it is collected ●Income is earned when: ---All events have occurred that fix taxpayer’s right to the income, and ---The amount can be determined with reasonable accuracy ● The accrual method is required for determining purchases and sales when inventory is an income-producing factor ● Claim of right doctrine ---Requires amounts received to be included in income even though the amount is in dispute and might be returned to the payor at a later date ---If payment has not been received, no income is recognized until the claim is
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Ch4 - Chapter 4 Gross Income: Concepts and Inclusions 4.1...

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