Income Tax Concepts chapter (2)

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)

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 1 Jan to 31 Dec) 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. - 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)

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 (verification) concept States that no income is recognized for tax purpose (included in taxable income) until it has been realized by the taxpayer

Case (12): ( with Individual Self Assessment Form) The following information have been taken from the tax self assessment for taxpayer: Mr. Omar. Revenues: - Monthly salary from part time job: 2,300 NIS - revenue for his trading shop : 33,000 NIS (annual) - Revenue from legal consulting office: 58,000 NIS - Gift from non governmental organization 7,000 NIS Expenses: - Cost of good sold:15,000 NIS - Salaries for the trading shop:12,000 NIS - Salaries for the legal consulting office :10,000 NIS - Expenses related to legal consulting office: 19,000NIS - Personal living cost :8,000 NIS - Depreciation for car and furniture (shop ): 4,000 NIS

Additional information: - The main activity of Mr. Omar is his shop. - The taxpayer live in Gaza - Gift is nontaxable income - The tax officer accepted 60% of legal office expenses - The tax officer accepted 20% of depreciation - The taxpayer is married and has two sons, one of them university student, his parent and grandmother depending on him. - He paid tax prepayments during the year: 1700 NIS - The exchange price for dollar = 4 NIS * Required: 1- Calculate the annual income tax. And determine the tax to paid, or to refund. And determine the tax to paid, or to refund.

Answer : - Annual salary from part time job = 2300*12 = NIS - Profit for his trading shop = 33,000 NIS - Revenue from legal consulting office= 58,000 NIS - Gift from non governmental organization= 7,000 NIS - Total income = NIS - Nontaxable income =7,000 NIS Total of taxable income NIS / 4 =29650$ Deductions: - Cost of good sold =15,000 NIS - Salaries for the trading shop = 12,000 NIS - Salaries for the legal office = 10,000 NIS - Expenses related to legal office =11,400 NIS (19000*60%) - Depreciation for car and furniture = 800 NIS (4000*20%) Total of deductions = 49,200 NIS / 4 = 12,300$

Exemption: - Resident = 3000$ - Wife = 500$ - Son = 500$ - University student = 2500$ - Parent 500*2 = 1000$ - Grandmother = 0$ ? Total of exemption = 7500$ Net taxable income 9,850$ 9800*8% = 788$ Tax prepayment 425$ ( 1700 NIS/4 ) Tax payment = 788 – 425 = 363$