Allocation of Income Flashcards
Who’s income is taxed?
Income must be taxed to he or she who earns it. This is sometimes referred as the Assignment of income.
Associate in law firm ABC that wins the season White Sox tickets asks the firm to transfer the tickets to his dad. Does he still report as income?
Yes, he still earned them, seen as a gift to dad.
Who is taxed for property income?
Income from property (investment income) is taxed to he or she who owns the property.
Donald Trump has rented a penthouse apartment to Madonna, and asks Madonna to send the rent check directly to his daughter Tiffany. Does Donald have any income from the rental payments? What about Tiffany?
Yes to Donald, its taxable to him. Tiffany-no, probably a gift.
What is the cash method of accounting?
A cash method taxpayer reports income when she receives payment and takes deductions for eligible expenses when she makes a payment.
Kris sees his lawyer in Nov in year 1 and receives a bill on Dec 1. He paid the bill on Jan 2 of year 2. If lawyer uses cash method, when does she report income?
For cash method, its when the payment is actually or constructively received, so here in year 2.
What if Kris was sent the bill on Dec 1, called lawyer on Dec 10 and said the check was ready to pick up at his office, using cash method?
In this case, the payment was constructively received, so lawyer would include it in gross income of year 1
What is constructive receipt?
A taxpayer has constructive receipt when funds or property are credited to her account, set apart, or otherwise made available so that she may draw upon them.
What is the rule for income in respect of decedent?
If a cash basis taxpayer is entitled to income, and payment is received by the estate after the decedent’s death, the executor must report the income on estate’s tax return
What is the accrual method of accounting?
An accrual method taxpayer reports income when all events have occurred that fix the right to receive it, and then the amount can be determined with reasonable accuracy.
On March 1 of year 1, Mary entered into a binding contract to sell her little lambs for $2,000, she delivered them and payment is for April 1. Mary dies March 15. Buyer makes payment to the executor on April 1. Should the $2000 reflect on Mary’s final income tax return for the months that she was alive?
No, cash method payment never received, so it would be in the ESTATE’S tax return, not Mary’s.
On March 1 of year 1, Mary entered into a binding contract to sell her little lambs for $2,000, she delivered them and payment is for April 1. Mary dies March 15. Buyer makes payment via check to Mary on March 10. Should the $2000 reflect on Mary’s final income tax return for the months that she was alive?
Yes, money was received constructively during life, so it would be included in her final income tax return.
When does an accrual method taxpayer take deductions?
They take deductions when all events have occurred that establish the fact of liability, and when the amount can be determined with reasonable accuracy.
Kris goes to see his lawyer in Nov of Year 1, receives bill in Dec of year 1, does not pay until Jan 2 of Year 2. If the lawyer is using accrual method of accounting, which year does he report this bill for?
Year 1. All events occurred in year 1, service occurred, bill amount known, etc.
H, an accrual basis taxpayer, contracted in March of year 1 with a consultant for a quality review of its operations. The report was delivered in Dec of year 1, and payment in Feb of year 2. For which year is he entitled to a deduction?
This would be an ordinary business expense, deductible in year 1.
