Chapter 5 NoteSheet

Chapter 5 NoteSheet - CHAPTER 5 Gross Income and Exclusions...

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CHAPTER 5- Gross Income and Exclusions Gross Income: all income from whatever source derived unless excluded by law. Gross income includes income realized in any form, whether in money, property, or services. Recognize Gross Income: (1) they receive an economic benefit (2) they realize the income (3) no tax provision allows them to exclude or defer the income from gross income for that year Realization Principle: income is realized when (1) taxpayer engages in a transaction with another party and (2) the transaction results in a measurable change in property rights Other income concepts: form of receipt, recovery of amounts previously deducted, return of capital principle Return of Capital Principle: when receiving a payment for property, taxpayers are allowed to recover the cost of the property tax free. Also, when taxpayers sell property, they are allowed to reduce the sale proceeds by their unrecovered investment in the property to determine the realized gain from the sale. When the tax basis exceeds the sale proceeds, the return of capital principle generally applies to the extent of the sale proceeds. Recovery of Amounts Previously deducted: If the refund is made for an expenditure deducted in a prior year, then under the tax benefit rule, the refund is included in gross income to the extent that the prior deduction produced a tax benefit When to recognize income? Accounting Methods- most large corps use accrual method and most individuals use cash method, Constructive Receipt Doctrine: must realize and recognize income when it is actually or constructively received Community Property Systems: income earned from services by one spouse is treated as though it was earned equally by both spouses and property acquired by either spouse during the marriage is community property and treated as though it is owned equally by each spouse. Property that a spouse bring to the marriage is treated as that spouses separate property Types of Income: Income from services (earned income) and income from property (unearned income). Income from property may include gains/losses from the sale of property, dividents, interest, rent, royalties, and annuities. Annuity:
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This note was uploaded on 02/22/2011 for the course BMGT 323 taught by Professor Pfeiffer during the Spring '08 term at Maryland.

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Chapter 5 NoteSheet - CHAPTER 5 Gross Income and Exclusions...

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