Income Tax Concepts chapter (2)

3-Arm’s-length transaction concepts: See page 49 look Example (5) page 50)

4-Pay- as-You-Go Concept * Pay- as-You-Go Concept requires taxpayers to pay tax as they generate income. * This concept is implemented through withholding of tax. * The withholding provisions require employers to withhold amounts from each employee's paycheck to pay the tax on the income in that check. * This minimize the probability of a taxpayer facing a huge tax bill at the end the year. * Note that the taxpayer might pay too much tax through this process. In such cases the government simply refunds the excess tax that has been paid. (look Example (6) page 51) (look Example (6) page 51)

Accounting concept: 1-Entity concept According to the entity concept, each tax unit must keep separate and report the result of its operations separate and apart from other tax units. And there is no relation between the entity and its liability for the owner’s responsibility. In other words (the loss of entity does not reach there personal property) (look Example (7),(9),(10),(11) page )

2-Annual accounting period concept: The annual accounting concept state that all entities must report the result of their operations on an annual basis and that each taxable year is to stand on its own, apart from other tax year. The two basic types of accounting period are calendar year (normal year from Jan 1 to Dec 31) and the fiscal years which end on the last day of any other month the taxpayer chooses. Note: The most choice is the calendar of year.

3-Accounting method: - The two allowable methods are the cash basis of accounting and the accrual basis of accounting. -In cash basis: Taxpayers using the cash are taxed on income as it is received and take deductions as they are paid. -In contrast, accrual basis :taxpayers report their income as it is earned and take deductions as they are incurred, without regard to the actual receipt or payment of cash. Palestinian income tax law apply accrual basis. (article 4) (look Example (14)&(15) page 55 )

4-Income concepts Income concepts determine what are the components of taxable income, explain why one type of income is taxed differently than other income, and establish the period in which income is to be reported. 5-All-inclusive income concept Under this concept, all income received is considered taxable unless some specific provision can be found in the tax law that excludes some items from taxation. 6-Realization concept States that no income is recognized for tax purpose (included in taxable income) until it has been realized by the taxpayer