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Lecture Taxation of individuals and business entities 2015 (6/e) - Chapter 5: Gross income and exclusions

After completing this chapter, students will be able to: Apply the concept of realization and explain when taxpayers recognize gross income, understand the distinctions between the various sources of income, including income from services and property, apply basic income exclusion provisions to compute gross income. | Chapter 5 Gross Income and Exclusions Learning Objectives Apply the concept of realization and explain when taxpayers recognize gross income Understand the distinctions between the various sources of income, including income from services and property Apply basic income exclusion provisions to compute gross income Realization and Recognition of Income Gross Income: Taxpayers report realized and recognized income on their tax returns for the year Income that is excluded or deferred is not included in gross income. Excluded income is never taxed Deferred income is taxed when recognized in a subsequent year. What Is Included in Gross Income? Definition of gross income for tax purposes §61(a) – “gross income means all income from whatever source derived” Reg. §1.61-(a) – “includes income realized in any form, whether in money, property, or services” Taxpayers recognize gross income when (1) they receive an economic benefit (2) they realize the income, and . | Chapter 5 Gross Income and Exclusions Learning Objectives Apply the concept of realization and explain when taxpayers recognize gross income Understand the distinctions between the various sources of income, including income from services and property Apply basic income exclusion provisions to compute gross income Realization and Recognition of Income Gross Income: Taxpayers report realized and recognized income on their tax returns for the year Income that is excluded or deferred is not included in gross income. Excluded income is never taxed Deferred income is taxed when recognized in a subsequent year. What Is Included in Gross Income? Definition of gross income for tax purposes §61(a) – “gross income means all income from whatever source derived” Reg. §1.61-(a) – “includes income realized in any form, whether in money, property, or services” Taxpayers recognize gross income when (1) they receive an economic benefit (2) they realize the income, and (3) the tax law does not provide for exclusion or deferral What Is Included in Gross Income? Economic Benefit Borrowed funds represent a liability, not gross income Realization Principle Taxpayer engages in a transaction with another party Transaction results in a measurable change in property rights Recognition Realized income is assumed to be recognized absent a deferral or exclusion provision What Is Included in Gross Income? Other Income Concepts Form of Receipt – Does it Matter? Return of capital principle The cost of an asset is called tax basis Return on capital means the tax basis is excluded when calculating realized income. Return of capital does not represent an economic benefit Gain from the sale or disposition of an asset is included in realized income Other Income Concepts Recovery of amounts previously deducted Individuals typically claim deductions in the year paid. Deductions may sometimes be reimbursed or refunded in a subsequent year. Tax .