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Gross Income Concepts and Inclusions

This chapter discusses various concepts and inclusions related to gross income for taxpayers. Topics include recognizing income from certificates of deposit, deferring advance payments for services, recognizing income from S corporations, imputed interest rules, annuity income, and Social Security benefits.

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Gross Income Concepts and Inclusions

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  1. Chapter 4 Gross Income: Concepts and Inclusions 1

  2. Responder Question TRUE/FALSE A taxpayer purchased a certificate of deposit for $900 on July 1, 2012 that will pay $1,000 upon its maturity on June 30, 2014. The taxpayer must recognize a portion of the income in 2012, regardless of whether the taxpayer uses the cash basis or the accrual basis of accounting.

  3. Responder Question TRUE/FALSE A taxpayer purchased a certificate of deposit for $900 on July 1, 2012 that will pay $1,000 upon its maturity on June 30, 2014. The taxpayer must recognize a portion of the income in 2012, regardless of whether the taxpayer uses the cash basis or the accrual basis of accounting. ANS: T The difference between the issue price of $900 and the amount due at maturity of $1,000 is “original issue discount” that must be amortized. The amortized amount is added to gross income each year the certificate is held.

  4. Responder Question TRUE/FALSE An accrual basis taxpayer can defer all advance payments for services until the services are performed if the method of accounting for the services is the same for tax and financial reporting purposes.

  5. Responder Question TRUE/FALSE An accrual basis taxpayer can defer all advance payments for services until the services are performed if the method of accounting for the services is the same for tax and financial reporting purposes. ANS: F The income from advance payments for services received by an accrual basis taxpayer cannot be deferred beyond the tax year following the year of receipt. The scenario described in the question relates to advance payments for goods received by an accrual basis taxpayer.

  6. Responder Question TRUE/FALSE Jake is the sole shareholder of an S corporation that earned $50,000 in 2012. The corporation had excess cash accumulated in prior years and therefore actually distributed $75,000 to Jake in 2012. Jake is required to recognize $75,000 of income from the S corporation in 2012.

  7. Responder Question TRUE/FALSE Jake is the sole shareholder of an S corporation that earned $50,000 in 2012. The corporation had excess cash accumulated in prior years and therefore actually distributed $75,000 to Jake in 2012. Jake is required to recognize $75,000 of income from the S corporation in 2012. ANS: F Jake is taxed on his share of the income earned by the S corporation of $50,000 ($50,000 x 100%). The additional $25,000 he received as a distribution was from earnings taxed in previous years.

  8. Responder Question TRUE/FALSE In the case of a below-market gift loan for which there is no exception to the imputed interest rules, the lender is deemed to have received interest income even though no interest is charged and collected.

  9. Responder Question TRUE/FALSE In the case of a below-market gift loan for which there is no exception to the imputed interest rules, the lender is deemed to have received interest income even though no interest is charged and collected. ANS: T The imputed interest rules treat the lender as though he or she charged interest but then forgave the amount due (a gift).

  10. Responder Question TRUE/FALSE Susan purchased an annuity for $120,000. She is to receive $15,000 each year and her life expectancy is 12 years. If Susan collects under the annuity for 13 years, the entire $15,000 received in the 13th year must be included in her gross income.

  11. Responder Question TRUE/FALSE Susan purchased an annuity for $120,000. She is to receive $15,000 each year and her life expectancy is 12 years. If Susan collects under the annuity for 13 years, the entire $15,000 received in the 13th year must be included in her gross income. ANS: T At the end of the 12th year, Susan’s basis for the annuity is $0.

  12. Responder Question TRUE/FALSE The amount of an individual’s salary withheld and paid into the Social Security program reduces the amount of benefits received that must be included in gross income after the individual reaches retirement age.

  13. Responder Question TRUE/FALSE The amount of an individual’s salary withheld and paid into the Social Security program reduces the amount of benefits received that must be included in gross income after the individual reaches retirement age. ANS: F The gross income from Social Security benefits is based on a formula that is not related to the amount an individual has paid into the Social Security program.

  14. If you have any comments or suggestions concerning this PowerPoint Presentation for South-Western Federal Taxation, please contact: • Dr. Donald R. Trippeer, CPA • trippedr@oneonta.edu • SUNY Oneonta

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