Determining Gross Income

1. DeterminingGross Income Chapter 3

2. What is Gross Income? Code Section 61(a) defines gross income as �except as otherwise provided in this subtitle, gross income means all income from whatever source derived...�

3. Gross Income There is a presumption that unless there is a specific exclusion for an item of income, then it must be included in Gross Income. See CIR v. Glenshaw Glass Co., 348 U.S. 426, 1955 U.S. LEXIS 1508 (1954)

4. What is Income? Gross income is realized income that is not excluded Realization takes place when arm�s length transaction occurs (sale of goods) Taxable income is gross income less all deductions

5. Tax vs. Financial Accounting Goals are not the same Financial accounting seeks to provide information that decision makers find useful Tax reporting seeks to collect revenue equitably Differences fall into two categories Temporary or timing differences Permanent differences

6. Temporary Differences Arise when income is taxed either before or after it is accrued for accounting purposes Example: prepaid rent generally is taxable when received but is only included in financial accounting income as it is earned Create a deferred tax asset or deferred tax liability on financial statements

7. Permanent Differences Income that is not taxed but is reported for financial accounting purposes Example: municipal bond interest generally is not taxed but is recorded as income in financial accounting records

8. Form of Receipt Income is not limited to cash. The amount of income from �in-kind� receipts is equal to the FMV of the property or services

9. The recovery of capital is not taxed.

10. Return of Capital Principle Basis = amount invested in an asset Basis can be recovered tax-free If the taxpayer�s return is more than basis, the taxpayer has a gain If taxpayer�s return is less than basis, the taxpayer has a loss

11. Investment Alternatives Investments yielding appreciation Tax deferred until gain is recognized Gain is frequently taxed at lower capital gains rates Investments yielding annual income Interest income is taxed annually at the marginal tax rate for ordinary income; dividends taxed annually but currently at lower capital gains rates

12. The Tax Year Calendar year Individuals S corporations and partnerships have restrictions on allowable tax years, so usually use a calendar year Fiscal year 12-month period ending on month other than December 52-to-53 week year (ends on same day) Corporations freely select tax year