Chapter 3
Gross Income,
Inclusions
Learning Objectives
? Explain the difference between
economic,accounting,and tax
concepts of income
? Explain the principles used to
determine who is taxed on a
particular item of income
Learning Objectives
? Determine when a particular item
of income is taxable under both the
cash and accrual methods of
accounting
? Apply the rules of sec,61(a) to
determine whether such items as
compensation,dividends,alimony,
and pensions are taxable
Concepts Of Income
ECONOMIC
– wealth that
flows to
individuals
– changes in value
in individuals’
wealth
? unrealized gains
? gifts &
inheritances are
considered
income
ACCOUNTING
– values are
measured by a
transaction
approach
– income realized
as a result of
completed
transactions
– use historical
cost
Tax Concept Of Income
? The tax concept of
income has adopted the
accountant’s concept of
income,
? The reasons for this
generally relates to
– Administrative
convenience concept &
– Wherewithal to pay
concept
Tax Concept Of Income
? Administrative
convenience concept
– the economic concept
is considered too
subjective,
– Objectivity is
achieved at the price
of equity,
Tax Concept Of Income
? Wherewithal to
pay concept
– A tax should be
collected when
the taxpayer
can most easily
pay,
Gross Income Defined
? Section 61(a) defines gross income
as,all income from whatever source
derived,” including (but not limited to)
the following items,
– Compensation for services,fees,
commissions,and similar items
– Gross income derived from business
– Gains from dealings in property
– Interest
Gross Income Defined
– Rents
– Royalties
– Dividends
– Alimony and separate maintenance
agreements
– Annuities
– Life insurance and endowments
– Pensions
– Income from discharge of indebtedness
– Distributive share from partnership
– Income in respect of a decedent
– Income from an interest in an estate or
trust
Gross Income Defined
? Gross income is not limited to
amounts received in the form of
cash,
? Reg,Sec,1.61-1a,income may
be,realized in any form,
whether in money,property,and
services.”
To Whom Is Income
Taxable?
? Assignment of
income
– Supreme Court
in Lucas vs,Earl
ruled that
individual is
taxed on the
earnings from
his or her
personal
services,
To Whom Is Income
Taxable?
? Allocating
income between
Married People
– Community
Property
– Common Law
? Earnings of a
minor child are
taxed to the
child,
When Is Income Taxable?
? Taxpayer’s accounting
method
– Cash method is used by most
individual taxpayers and most non-
corporate businesses that do not
have inventory,
When Is Income Taxable?
? Constructive receipt - a taxpayer
must report income in the year in
which it is actually received,
– A check received after banking
hours
– Interest credited to a bank
savings account
– Bond interest coupons that have
matured but have not been
redeemed,
When Is Income Taxable?
? It is not considered to be
constructively received if,
– It is subject to substantial
limitations
– The payor does not have the
funds necessary to make
payment,
– The amount is unavailable to
the taxpayer.,
When Is Income Taxable?
? There are exceptions to
the basic rule,
– Interest on Series E or EE
Savings Bonds
– Special rules apply to
farmers and ranchers
Accrual Method
? Report income in the year
income is earned
– Right to income
– Amount can be determined with
reasonable accuracy
? Prepaid income
– Generally taxable
Hybrid Method
? Accrual method for purchases
and sales
? Cash method in computing all
other income and expenses
ITEMS OF GROSS
INCOME Sec,61(a)
? Compensation
? Business income
? Gains from
property
? Interest
? Rents & royalties
? Dividends
? Alimony & separate
maintenance
ITEMS OF GROSS
INCOME
Sec,61(a)
? Pensions &
annuities
? Life insurance &
endowment
contracts
? Discharged
indebtedness
? Income passed
through to
taxpayer
Other Items Of Gross
Income
? Prizes and
Awards
? Gambling
Winnings
? Treasure Finds
Other Items Of Gross
Income
? Illegal income
– Ransom
– Bookmaking
– Sale of narcotics
– Bribes
? Unemployment
compensation
? Social Security
benefits
Social Security Benefits
? The portion of
social security
benefits depends
on the taxpayer’s
provisional
income
? See page 3-23 for
formula,
Other Items Of Gross
Income
? Insurance
proceeds
? Court awards
? Recovery of
previously
deducted amounts
(State income tax
refunds if taxpayer
itemized the
previous year)
? Claim of right
Tax Planning
Considerations
? Shifting income
from family
members who
are in a high tax
bracket to
family members
who are in low
tax brackets
? Alimony
? Prepaid income
Tax Planning
Considerations
? Tax-exempt or
tax deferred
bonds
? Savings bonds
interest
? Deferred
compensation
Compliance And
Procedural
Considerations
Form 1040 – Wages,Salaries and tips
Schedule B – Interest and Dividends
Schedule C – Business Income
Schedule D – Capital gains
Schedule E – Rents and Royalties
Schedule F – Farm Income
Gross Income,
Inclusions
Learning Objectives
? Explain the difference between
economic,accounting,and tax
concepts of income
? Explain the principles used to
determine who is taxed on a
particular item of income
Learning Objectives
? Determine when a particular item
of income is taxable under both the
cash and accrual methods of
accounting
? Apply the rules of sec,61(a) to
determine whether such items as
compensation,dividends,alimony,
and pensions are taxable
Concepts Of Income
ECONOMIC
– wealth that
flows to
individuals
– changes in value
in individuals’
wealth
? unrealized gains
? gifts &
inheritances are
considered
income
ACCOUNTING
– values are
measured by a
transaction
approach
– income realized
as a result of
completed
transactions
– use historical
cost
Tax Concept Of Income
? The tax concept of
income has adopted the
accountant’s concept of
income,
? The reasons for this
generally relates to
– Administrative
convenience concept &
– Wherewithal to pay
concept
Tax Concept Of Income
? Administrative
convenience concept
– the economic concept
is considered too
subjective,
– Objectivity is
achieved at the price
of equity,
Tax Concept Of Income
? Wherewithal to
pay concept
– A tax should be
collected when
the taxpayer
can most easily
pay,
Gross Income Defined
? Section 61(a) defines gross income
as,all income from whatever source
derived,” including (but not limited to)
the following items,
– Compensation for services,fees,
commissions,and similar items
– Gross income derived from business
– Gains from dealings in property
– Interest
Gross Income Defined
– Rents
– Royalties
– Dividends
– Alimony and separate maintenance
agreements
– Annuities
– Life insurance and endowments
– Pensions
– Income from discharge of indebtedness
– Distributive share from partnership
– Income in respect of a decedent
– Income from an interest in an estate or
trust
Gross Income Defined
? Gross income is not limited to
amounts received in the form of
cash,
? Reg,Sec,1.61-1a,income may
be,realized in any form,
whether in money,property,and
services.”
To Whom Is Income
Taxable?
? Assignment of
income
– Supreme Court
in Lucas vs,Earl
ruled that
individual is
taxed on the
earnings from
his or her
personal
services,
To Whom Is Income
Taxable?
? Allocating
income between
Married People
– Community
Property
– Common Law
? Earnings of a
minor child are
taxed to the
child,
When Is Income Taxable?
? Taxpayer’s accounting
method
– Cash method is used by most
individual taxpayers and most non-
corporate businesses that do not
have inventory,
When Is Income Taxable?
? Constructive receipt - a taxpayer
must report income in the year in
which it is actually received,
– A check received after banking
hours
– Interest credited to a bank
savings account
– Bond interest coupons that have
matured but have not been
redeemed,
When Is Income Taxable?
? It is not considered to be
constructively received if,
– It is subject to substantial
limitations
– The payor does not have the
funds necessary to make
payment,
– The amount is unavailable to
the taxpayer.,
When Is Income Taxable?
? There are exceptions to
the basic rule,
– Interest on Series E or EE
Savings Bonds
– Special rules apply to
farmers and ranchers
Accrual Method
? Report income in the year
income is earned
– Right to income
– Amount can be determined with
reasonable accuracy
? Prepaid income
– Generally taxable
Hybrid Method
? Accrual method for purchases
and sales
? Cash method in computing all
other income and expenses
ITEMS OF GROSS
INCOME Sec,61(a)
? Compensation
? Business income
? Gains from
property
? Interest
? Rents & royalties
? Dividends
? Alimony & separate
maintenance
ITEMS OF GROSS
INCOME
Sec,61(a)
? Pensions &
annuities
? Life insurance &
endowment
contracts
? Discharged
indebtedness
? Income passed
through to
taxpayer
Other Items Of Gross
Income
? Prizes and
Awards
? Gambling
Winnings
? Treasure Finds
Other Items Of Gross
Income
? Illegal income
– Ransom
– Bookmaking
– Sale of narcotics
– Bribes
? Unemployment
compensation
? Social Security
benefits
Social Security Benefits
? The portion of
social security
benefits depends
on the taxpayer’s
provisional
income
? See page 3-23 for
formula,
Other Items Of Gross
Income
? Insurance
proceeds
? Court awards
? Recovery of
previously
deducted amounts
(State income tax
refunds if taxpayer
itemized the
previous year)
? Claim of right
Tax Planning
Considerations
? Shifting income
from family
members who
are in a high tax
bracket to
family members
who are in low
tax brackets
? Alimony
? Prepaid income
Tax Planning
Considerations
? Tax-exempt or
tax deferred
bonds
? Savings bonds
interest
? Deferred
compensation
Compliance And
Procedural
Considerations
Form 1040 – Wages,Salaries and tips
Schedule B – Interest and Dividends
Schedule C – Business Income
Schedule D – Capital gains
Schedule E – Rents and Royalties
Schedule F – Farm Income
