Ch 3 Flashcards
(61 cards)
Economic income
Income = consumption + change in wealth
Unrealized gains, gifts and inheritances are income
Economists adjust for inflation
Gross income
All income from whatever source derived
Accounting income
Measured by transaction approach, it’s measured when
Realized in a transaction
Use historical costs as measurement instead of unconfirmed
Estimates of change in market value
Accounting income: realization
Occurs when tax payer sells property
3 conditions for amounts of income to be taxable?
1 must be economic benefit
2 income must be realized
3 income must be recognized as taxable
Administrative convenience
The economic concept of income is too subjective to
determine taxable income
There is need for objectivity in determining tax
Wherewithal to pay concept, ex.
Tax should be collected when taxpayer is in best position
To pay tax
Ex. A tax payer that sold property for cash is in better
Position to pay tax than one that holds property that
Increases in value
Why should taxpayers who are using the cash method of accounting be required to include in gross income the value of property or services received?
If they were not required, many taxpayers would arrange
Their financial affairs so they would receive property and
Services instead of cash
Why is income in a form different from cash difficult to track?
Valuation isn’t as easily determined
Indirect economic receipt, example with employees
Is this taxable for employees?
Security guard patrol employers plant protect employees
Not taxable for employees
Who is responsible for paying tax on income from property?
The owner of the property
For federal tax purposes, Income is allocated between husband and wife depending on…
State of residence
How many states follow common law property system?
How many follow community property system?
41 follow common law
9 follow community property system
How is income taxed under common law property system?
Income is taxed to individual who earns the income through
Labor or capital
Joint income in common law state
Income from jointly owned property
Community income
Considered to belong equally to spouses
1) Separate property
2) Can it occur in community property states?
1 all property owned before marriage and gifts, inheritances,
Acquired after marriage
The year in which the income is taxed depends on the taxpayer’s…
Name 3?
Accounting method
1 cash receipts and disbursements method
2 accrual method
3 hybrid method
Cash receipts and disbursements method
Who uses this method?
Income reported in year taxpayer receives rather than year
Income is earned
Used by most individual taxpayers and many small
businesses
Constructive receipt
Income made available to taxpayer so he can draw upon
It at any time
Small tax payer exception for inventory
Following tax payers at exempt from maintaining inventories
And can use cash method
Taxpayers that have avg. annual gross receipts of $1 million
Or less for prior 3 years ($10 million if principal business is
Not sale of inventory)
When is prepaid income taxable
In year of receipt
Accrual method
When is income considered earned?
Taxpayers report income in year it is earned
Income is considered earned when all events have occurred
To fix right to receive income
Income can be determined with Accuracy
Hybrid method accounting
Combination of cash and accrual methods
Use accrual method for purchase and sale of goods
And cash method for everything else
