The Concepts of Income and Deductions Tx 8030

Lecture Overview  Income  Gross Income  Taxable Income  Deductions

Pre-Lecture Quiz ABC, Inc. receives (pays) the following amounts: Bank loan$ 8 Stock sale (paid $5 on Jan. 1) 9 Service fees 6 Business expenses (2) Increase in asset values 3 Municipal bond interest 1 For the current calendar year, determine: Economic income Accounting income (i.e., net income) Income (for tax purposes) Gross income Taxable income

Answers to Quiz Economic Income$12 Accounting Income 9 Income for Tax Purposes 11 Gross Income 10 Taxable Income 8

What Is Income?  Economist defines as increase in _________  Accountant demands ____________ event  Tax law blends two income __________  Income is any increase in ________ that has been __________.

Landmark Decision Receipts are income when they are “undeniable accessions to ________, clearly ________, and over which the taxpayers have complete __________.” CIR v. Glenshaw Glass (S.Ct., 1955)

Income Does Not Include  ___________ Amounts  Returns of _________

Key Income Concepts

Quiz: Economic Income ABC, Inc. receives (pays) the following amounts: Bank loan $ 8 Stock sale 4 Service fees 6 Business expenses (2) Increase in asset values 3 Municipal bond interest 1 Economic Income

Quiz: Accounting Income ABC, Inc. receives (pays) the following amounts: Bank loan$ 8 Stock sale 4 Service fees 6 Business expenses (2) Increase in asset values 3 Municipal bond interest 1 Accounting Income

Quiz: Income ABC, Inc. receives (pays) the following amounts: Bank loan$ 8 Stock sale 4 Service fees 6 Business expenses (2) Increase in asset values 3 Municipal bond interest 1 Income for Tax Purposes

Authority to Tax “Income” “The Congress shall have power to lay and collect taxes on ________, from whatever sources derived, without apportionment among the several States and without regard to any census or enumeration.” 16th Amendment to U.S. Constitution

What Is Gross Income? “Except as otherwise provided in this subtitle, gross income means all income from whatever source derived…” Section 61(a)

Key Income Concepts

Quiz: Gross Income ABC, Inc. receives (pays) the following amounts: Bank loan$ 8 Stock sale 4 Service fees 6 Business expenses (2) Increase in asset values 3 Municipal bond interest 1 Gross Income

What Is Taxable Income? Taxable income is “gross income minus the deductions allowed….” Section 63(a)

Quiz: Taxable Income ABC, Inc. receives (pays) the following amounts: Bank loan$ 8 Stock sale 4 Service fees 6 Business expenses (2) Increase in asset values 3 Municipal bond interest 1 Taxable Income

General Deduction Authority Trade or business Investment Personal Expense Loss

Trade or Business Expenses “There shall be allowed as a deduction all _________ and _________ expenses paid or incurred during the taxable year in carrying on any trade or business….” Section 162(a)

Landmark Decision “We accept the fact that to be engaged in a trade or business, the taxpayer must be involved in the activity with ________ and _________ and that the taxpayer’s primary purpose for engaging in the activity must be for income or profit.” CIR v. Groetzinger (S.Ct., 1987)

Investment Expenses “In the case of an individual, there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year-- (1) for the __________ or collection of income; (2) For the management, conservation, or maintenance of property held for the ___________ of income….” Section 212

Trade or Business Loss “In the case of an individual, the deduction under subsection (a) shall be limited to (1) losses incurred in a _____ or ________; (2) losses incurred in any transaction entered into for ______, though not connected with a trade or business….” Section 165(c)(1), (2)