Accounting Methods and Gross Income

Question 1

Is charging an expense to a third-party credit card treated as a cash expense?

Answer 1

Yes, charging an expense to a third-party credit card is treated as a cash expense.

Question 2

For a cash method taxpayer, receipt or constructive receipt by an agent is imputed to the principal?

Answer 2

Cash method taxpayers recognize income when cash is actually received, a cash equivalent is actually received, or cash or its equivalent is constructively received. Any of these conducted by an agent of the taxpayer is imputed as income to the taxpayer.

Question 3

With two exceptions, a taxpayer that maintains inventory must use the accrual method with regards to purchases and sales?

Answer 3

A taxpayer that maintains inventory must generally use the accrual method with regard to purchases and sales. Exceptions to this rule are qualifying taxpayers who satisfy the gross receipts test and qualifying small business taxpayers who satisfy the gross receipts test.

Question 4

Change of tax year generally does not require IRS consent. However, a short tax year return is then required.

Answer 4

Changes in the tax year of a taxpayer generally require the consent of the IRS. In the year the change is made, a short tax year return is required.

Question 5

The IRC (Internal Revenue Code) defines gross income (GI) as all income from whatever source derived except as otherwise provided.

Answer 5

The Internal Revenue Code (IRC) defines gross income (GI) as all income from whatever source derived except as otherwise provided. Section 61(a) enumerates types of income that constitute gross income. The following list is not exhaustive: compensation for services, gross income derived from business, gains derived from dealings in property, interest, rents, royalties, dividends, alimony and separate maintenance payments, annuities, income from life insurance and endowment contracts, pensions, income from discharge of indebtedness, distributive share of partnership gross income, income in respect of a decedent (income earned but not received before death), and income from an interest in an estate or trust.

Question 6

All compensation for personal services is gross income.

Answer 6

All compensation for personal services is gross income. The form of payment for services is irrelevant. Gross income of an employee includes any amount paid by an employer for a liability (including taxes) or expense of the employee. Income from self-employment is included in gross income.

Question 7

In computing gain on disposal of investment property, historical cost indicates the amount of capital invested in the property and not yet recovered by tax benefit (i.e., depreciation)

Answer 7

In computing gain on disposal of investment property, adjusted basis indicates the amount of capital invested in the property and not yet recovered by tax benefit (i.e., depreciation).

Question 8

Rent is income from the operation of a business, not from an investment.

Answer 8

Rent is income from an investment, not from the operation of a business. A bonus received by a landlord for granting a lease is gross income. A lessee’s refundable deposit intended to secure performance under the lease is not income to the lessor. Value received by a landlord to cancel or modify a lease is gross income.

Question 9

Amounts received as dividends are a return of capital.

Answer 9

Amounts received as dividends are ordinary gross income. A dividend for purposes of taxable income generally is any distribution of money or other property made by a corporation to its shareholders with respect to their stock out of earnings and profits. Any distribution in excess of earnings and profits (both current and accumulated) is considered a recovery of capital and is not taxable. These distributions in excess of E&P reduce basis. Once basis is reduced to zero, any additional distributions are capital gains and are taxed as such.

Question 10

Alimony and separate maintenance payments are included in the gross income of the recipient (payee) and are deducted from the gross income of the payor.

Answer 10

Alimony and separate maintenance payments are included in the gross income of the recipient (payee) and are deducted from the gross income of the payor. A payment is considered to be alimony (even if paid to a third party) when it is paid in cash, paid pursuant to a written divorce or separation instrument, not designated as other than alimony, terminated at death of recipient, not paid to a member of the same household, and not paid to a spouse with whom the taxpayer is filing a joint return. Property settlements are not treated as alimony.

Question 11

Discharge of indebtedness is never gross income.

Answer 11

Discharge of indebtedness can result in gross income. Gross income includes the cancelation of indebtedness when a debt is canceled in whole or part for a consideration. If a creditor gratuitously cancels a debt, the amount forgiven is treated as a gift.

Question 12

A partner’s share of partnership income is included in the partner’s gross income, whether distributed or not.

Answer 12

A partner’s share of partnership income is included in the partner’s gross income, whether distributed or not. An owner’s pro rata share of S corporation income is also included, whether distributed or not.

Question 13

All gambling winnings are gross income.

Answer 13

All gambling winnings are gross income. Gambling losses are deductible only to the extent of winnings and only as a miscellaneous itemized deduction. Gambling losses over winnings for the taxable year cannot be used as a carryover or carryback to reduce gambling income from other years.

Question 14

Social Security benefits are generally taxable.

Answer 14

Social Security benefits are generally not taxable unless additional income is received. The gross income inclusion is dependent upon the relation of provisional income (PI) to the base amount (BA) and the adjusted base amount (ABA).

Question 15

All reimbursements for moving expenses are excluded from gross income.

Answer 15

Qualified reimbursements are excluded from gross income. If the reimbursement is not for qualified moving expenses, it is included in gross income.

Question 16

If an employer transfers property to an employee at less than its fair market value, the difference may be income to the employee.

Answer 16

If an employer transfers property to an employee at less than its fair market value, the difference may be income to the employee.

Question 17

Proceeds of a life insurance policy paid by reason of the death of the insured are excluded from gross income.

Answer 17

Proceeds of a life insurance policy paid by reason of the death of the insured are excluded from gross income. The exclusion is allowed regardless of form of payment or recipient. Interest earned on proceeds (after death of the insured) is gross income to the beneficiary. The amount of each payment in excess of the death benefit prorated over the period of payment is interest income.

Question 18

All income from an annuity contract is taxable as ordinary income.

Answer 18

Taxpayers are permitted to recover the cost of the annuity (the price paid) tax free. The nontaxable portion is calculated as follows:

1) Calculate the expected return. This is equal to the annual payment multiplied by the expected return multiple (life expectancy determined from an actuarial table).
2) The exclusion ratio is equal to the investment in the contract (or its cost) divided by the expected return.
3) The current exclusion is calculated by multiplying the exclusion ratio by the amount received during the year.

Question 19

Gifts are excluded from the gross income of the recipient.

Answer 19

The IRC provides for exclusion from the gross income of the recipient the value of property acquired by gift. Voluntary transfers from employer to employee are presumed to be compensation, not gifts.

Question 20

Certain prizes and employee achievement awards may qualify for exclusion from the employee’s gross income.

Answer 20

Certain prizes and employee achievement awards may qualify for exclusion from the employee’s gross income. An award recipient may exclude the FMV of the prize or award if

1) The amount received is in recognition of religious, scientific, charitable, or similar meritorious achievement;
2) The recipient is selected without action on his or her part;
3) The receipt of the award is not conditioned on substantial future services; and
4) The amount is paid by the organization making the award to a tax-exempt organization (including a governmental unit) designated by the recipient.

Question 21

Amounts received by an individual as scholarships or fellowships and used for required tuition or fees, books, supplies, or equipment are included in gross income.

Answer 21

Amounts received by an individual as scholarships or fellowships are excluded from gross income to the extent that the individual is a candidate for a degree from a qualified educational institution, and the amounts are used for required tuition or fees, books, supplies, or equipment (not personal expenses).

Question 22

Payments to a holder of a debt obligation incurred by a state or local governmental entity are generally exempt from federal income tax.

Answer 22

Payments to a holder of a debt obligation incurred by a state or local governmental entity are generally exempt from federal income tax. Exclusion of interest received is allowable even if the obligation is not evidenced by a bond, is in the form of an installment purchase agreement, or is an ordinary commercial debt. After August 15, 1986, these obligations must be in registered form. The exclusion applies to obligations of states, the District of Columbia, U.S. possessions, and political subdivisions of each of them.

Question 23

Gross income includes benefits specified that might be received in the form of disability pay, health or accident insurance proceeds, workers’ compensation awards, or other “damages” for personal physical injury or physical sickness.

Answer 23

Gross income does not include benefits specified that might be received in the form of disability pay, health or accident insurance proceeds, workers’ compensation awards, or other “damages” for personal physical injury or physical sickness.

Question 24

A pro rata distribution of common stock to common stock shareholders is excluded from gross income, while all other stock dividends are included in gross income?

Answer 24

The general rule is that a pro rata distribution of common stock to common stock shareholders is excluded from gross income, while all other stock dividends are included in gross income.

Question 25

The value of improvements made by the real property lessee is excludable by the lessor unless the lessee provided the improvements in lieu of rent?

Answer 25

The value of improvements made by the real property lessee is excludable by the lessor unless the lessee provided the improvements in lieu of rent. Income realized by the lessor from the improvements subsequent to termination of the lease is included. Additionally, amounts received by a retail lessee as cash or rent reductions are not included in gross income if used for qualified construction or improvements to the retail space.

Question 26

Gross income includes amounts recovered during the tax year that did not provide a tax benefit in the prior year?

Answer 26

Gross income includes items received for which the taxpayer DID receive a tax benefit for in a prior year. Amounts recovered during the tax year that did not provide a tax benefit in the prior year are excluded.

Question 27

A taxpayer may exclude up to $250,000 ($500,000 for married taxpayers filing jointly) of realized gain on the sale of any residence.

Answer 27

A taxpayer may exclude up to $250,000 ($500,000 for married taxpayers filing jointly) of realized gain on the sale of a PRINCIPAL/PRIMARY residence.