Simkovic, Fall 2016
Federal Income Tax – OUTLINE
Tax Rate assumptions for class problem and EXAM (UNLESS otherwise indicated):
35% for ordinary income and short term capital gain (STCG),
28% for long term capital gain (LTCG) on collectibles
25% for unrecaptured depreciation on real property held for more than one year
15% on remaining LTCGs
**When using an asset for a fraction of business purpose, you can deduct that portion which is used for the business purpose (i.e. the sample exam question).
TERMS AND DEFINITIONS
Tax Base: whatever we are imposing the tax on
Important b/c the rules are in relation to the item being taxed.
EX. the Tax Base for income tax, is income.
Income Tax: tax on income
Important b/c
How do we determine tax on income?
Determine income, then multiply income by the tax rate.
Taxable income “times” tax rate
Income: any increase in wealth
i.e. compensation, dividend, sell property for gain
Taxable Income:
Income “minus” deductions
Gross Income: All income from whatever source derived
Adjusted Gross Income(AGI): gross income minus certain expense, typically business expenses
Only for individuals
Normative Deductions:
Income “In-Kind” = non-cash income
Ex. receiving property for services rendered
Deductions: stuff you subtract from gross income
i.e. expenses
Itemized Deductions:
Standard Deductions: flat amount that varies with marital status, that taxpayers may deduct regardless of whether or not you incurred any underlying expense to justify it.
Exemption: normally taxable, but there is an exception (for policy objectives)
Note: different from deductions
Excluded: not considered income to begin with
Gain: when the increase in value of an asset is realized
Price of property sold “minus” price previously paid
Amount Realized: price property is sold for
Basis: the cost of that property, or what you paid for it
SO……….. Amount Realized “minus” Basis
Appreciation: when the value of an asset increases
Loss: excess of Basis over the Amount Realized
Basis Recovery: money received to balance against cost of property
Adjusted Basis: Basis increase, or decrease, to reflect subsequent expenditures attributable to the asset
EX. A car bought for $1000, then improve car for $200
Hence, Basis goes from $1000 to $1200
Realization: capture the appreciation or depreciation
Deductions:
Allowance and disallowance of certain deductions
Business Expenses???? Expenses created in the production of investment income
Generally, personal expenses are not deductible.
Except, interest of mortgage payments.
Itemized Deductions:
What could be income?
What is Income?
Income is
OR — Income = saving + consumption
Hags Simons Formula? For defining income.
Capitalization:
Expenses incurred in the production of income, can NOT be deducted immediately in the year incurred or accrued, and are capitalized.
Meaning they are added to the taxpayers….????
Depreciation: (tangible property) recovery of capital expenditures over ……??
Amortization: (intangible property)
The TIME-VALUE of Money
Capital Gains: gains that result from….
Long-term Capital Gain:
Capital Loses:
Progressive Tax Rate:
Tax Brackets
Flat Tax Rate:
Marginal Tax Rate: the rate that applies to additional dollars of taxable income, and therefore is the rate that affects tax decisions at the margin.
Marginal Rate tells you how much an additional dollar of income or deduction will change your tax liability.
(p. 24) for Example
Average Tax Rate: the total tax liability divided by income.
Credit: Dollar for dollar reduction on your tax liability
Deduction: reduces the income that will taxed
Tax Benefit:
Tax Liability:
Refundable Credit:
Taxable Year:
Corporations can generally choose a different start and stop of their taxable year, as long as it’s a year.
Two Methods of ACCOUNTING (p. 26)
Cash Method (we only deal with Cash Method, b/c the course is on Individual Fed Inc tax)
When you actually receive or pay it
Accrued Method
When you are entitled to income or expense
GROSS INCOME = (WHAT IS INCOME?)
CLASS NOTES
Section 1 imposes an income tax on taxable income
Section 63 tells us what taxable income is
Adjusted Gross Income
Section 61 tells us what Gross Income is
Income = consumption + saving
NOTE = For “de minimis fringe” it must be “OCCASSIONAL BASIS”
Regulation 132-6(d)(2)(A)
ANALYSIS
IS it income under § 61?
If so, is it Excludable under another section?
Business expenses are deductible
Ex. § 132(a)(3) – Working Condition Fringe
Revenue Rule 63-77
Gross Income
The Definition of Gross Income
§61 (most important section) of the code defines Gross Income broadly as “all income from whatever source derived.”
§§ 71-90 = additional items specifically INCLUDED in gross income
§§ 101-150 = specifically EXCLUDE certain items from gross income.
Haig-Simmons: gains or increases in wealth over a particular period regardless of whether spent on consumption or saved
Glenshaw Glass Case: (THE DEFINITION) = 3 PARTS
undeniable accessions to wealth, clearly realized, and over which taxpayers have complete dominion.
The Realization Requirement
Generally, realization does NOT occur UNTIL a provider of services or a seller of property has fulfilled all the material steps on her side of a bargain.
Principle of accounting that has important tax application; essentially determines the proper timing of taxation by telling us when a gain should be recorded.
Statutory Exclusions from Gross Income
Code contains numerous provisions EXCLUDING particular kinds of receipts from Gross Income. – IRC §§ 101-150
§102- Excludes gifts; discharge of indebtedness is EXCUSED IF it occurs in a bankruptcy or w
under §61(a)(1).
NO-Additional-Cost-Services & Qualified Employee Discounts
§132(b)- A no-additional cost service is a service provided to an employee which the employer ordinarily provides to customers and which it is able to provide to the employee at no additional substantial cost, including foregone revenue. This service MUST be in the line of business in which the employee works.
§132(c)- A qualified employee discount is similar but is a reduction in the retail price given to an employee; similar restrictions. (based on employer’s gross profit percentage)
NO MORE than 20% discount
no-additional cost services and qualified employee discounts, are subject to non-discrimination rules of §123(j)
NON-DISCRIMINATION Rule (p.102) = If Fringe Benefit is offered to Officers/Dir., then the property or service MUST be provided on the same terms to each member of a group of employees defined under a reasonable classification which does NOT discriminate in favor of officers/Dir.
Includes subsidized eating facilities, qualified tuition reductions = §117(d); §274(e)(4)
Working Condition & De Minimis Fringe Benefits
§132(d)- A working condition fringe is a benefit given to an employee which if the employee paid for the benefit would entitle the employee to a deduction, such as reimbursement for business travel, expenses, and depreciation on an employee owned auto used for the employer’s business.
MUST BE “for the benefit of the employer.”
§132(e)- A De Minimis fringe is a benefit so small that it is not worth accounting for.
Reg. 1.132-6
Working condition fringes AND de minimis fringes are NOT subject to the NON-discrimination rules of §123(j)
OTHER RANDOM FRINGE BENEFIT EXCLUSIONS
Athletic Facilities – EXCLUSION for the value of on-premises athletic facilities provided and operated by an employer for the use of its employees. [§123(j)(4)]
BUT subject to NON-discrimination RULE.
Transportation Costs, Moving Expenses, Retirement planning services, Military
RELATIVES & Disable Employees; Surviving Spouse of deceased employees = §132(h)…. (p.107)
NOTE: IF Fringe Benefit is INCLUDED in employee’s gross income…
Basic Rule is that FAIR MARKET VALUE (Reg. §1.61-2(d))
FMV = “the amount that an individual would have to pay for the particular fringe benefit in an arm’s length transaction.” (Reg. §1.61-21(b)(2))
