Instructor – Howard Godfrey Professor of Accounting-UNC Charlotte Click speaker for voice.

Chapter 1.An OverviewForm 1040Updated January 16, 2011.Slides are not numbered – If you print six slides per page, read left to right, then down to next line of slides.C11-Chp-01-Form 1040-Sound-PP-2010-File-3File 3 - Adjusted Gross Income

This PowerPoint presentation is divided into multiple files, because adding sound causes the file size to be much bigger. This is File 3. Slides with sound show a yellow picture of a speaker. Choose slideshow. You can click on the speaker and hear some explanation from instructor.

Instructor – Howard Godfrey Professor of Accounting-UNC Charlotte Click speaker for voice.

Note, I usually cover the material in this slide presentation over a period of weeks, and there are some details here that I probably never get around to covering in a normal semester. • However, it is difficult to make a presentation like this one without explaining many of the details and relationships. • So please work with me on this presentation, keeping in mind that I do not expect anyone to remember all that is in this presentation by simply reviewing the slides and listening. • We will cover some of this material over & over this semester, and you will (in time) know it.

Please review the following two documents before viewing this presentation. • Handout C11-Chp-01-3-Tax Problem and Return Preparation. • Form 1040 and Schedule A.Available for download at www.IRS.gov • Also have your Code book.

Now suppose Pam is divorced and she paid alimony to her former husband in the amount of $12,000. Income for her former spouse? §71 Form 1040, line 11. Deduction for Pam? §215 Form 1040, line 31(a)

Page 1. Alimony

Now a word about Terminology Title 26 of the Federal Law is the complete Internal Revenue Code. Please look at page 2 of code book (after roman numerals). The Title is “Internal Revenue” Page 1-1064 [HUGE] Regs. are next. Subtitle Acovers Income taxes Sec. 1 - [Pages 1 – 870] Subtitle B: estate and gift tax – 2001+, Subtitle C : Employment taxes-3101+ Under Subtitle A, Chapter 1covers Normal Taxes and SurtaxesChapter 1 is huge. Goes through page 851. Under Chapter 1, there are many subchapters (A-W), most students have heard of Subchapter S (sections 1361+). Sub-C(big for us) Note Subchapter A – Determination of tax liability (rates, credits, taxes-first 59 sections) We are working with Subchapter B- Computation of taxable income(pg 123 –Parts I to XI, Sec. 61-291 ) for all entities Next subchapter is Subchapter C-starting with Sec. 301 and covering corporate organization, reorganization, dividends, liquidations, etc.

SEC. 62. Adjusted Gross Income Defined. (a) General Rule. For purposes of this subtitle, the term “adjusted gross income” means, in the case of an individual, gross income minus the following deductions: (1) Trade and business deductions.The deductions allowed by this chapter (other than by part VII of this subchapter) which are attributable to a trade or business carried on by the taxpayer, if such trade or business does not consist of the performance of services by the taxpayer as an employee. (2) Certain trade and business deductions of employees.(A) Reimbursed expenses of employees. The deductions allowed by part VI ( section 161 and following) which consist of expenses paid or incurred by the taxpayer, in connection with the performance by him of services as an employee, under a reimbursement or other expense allowance arrangement with his employer. The fact that the reimbursement may be provided by a third party shall not be determinative of whether or not the preceding sentence applies.

Sec. 161. Allowance of Deductions. In computing taxable income under section 63, there shall be allowed as deductions the items specified in this part, subject to the exceptions provided in part IX (sec. 261 and following, relating to items not deductible).

Sec. 162. Trade or Business Expenses (a) In General. There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including (1) a reasonable allowance for salaries or other compensation for personal services actually rendered; [But see sec. 162(n) not 161(n)] (2) traveling expenses(including amounts expended for meals and lodging other than amounts which are lavish or extravagant under the circumstances) while away from home in the pursuit of a trade or business; and …..

Sec. 212. Expenses for Production of Income In the case of an individual, there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year (1) for the production or collection of income; (2) for the management, conservation, or maintenance of property held for the production of income; or (3) in connection with the determination, collection, or refund of any tax.

Lets apply tax law. Pam is a CPA. She spends about $2,000 per year on CPA license fees and required continuing education courses. Option 1. She has received a job offer from one corporation for a salary of $98,000 and an expense allowance of up to $2,000 for employee expenses. Option 2. Another corporation will pay her as salary of $100,000, with no expense allowance. Which is better for her?

Continue preceding slide. What is her AGI under option 1, if she spends $2,000 on expenses and receives full reimbursement under an accountable plan? $98,000. What is her AGI under option 2, if she spends $2,000 on expenses and does not receive a reimbursement? $100,000. Her potential deduction of $2,000 is reduced by 2% of AGI. Sec. 62 & 67

Now, please move to File 4 of this series that covers itemized deductions, etc.

End

Instructor – Howard Godfrey Professor of Accounting-UNC Charlotte Click speaker for voice.