The Concepts of Income
and Deductions
Tx 8030
Lecture Overview
Income
Gross Income
Taxable Income
Deductions
Pre-Lecture Quiz
ABC, Inc. receives (pays) the following amounts:
Bank loan
$ 8
Stock sale (paid $5 on Jan. 1)
9
Service fees
6
Business expenses
(2)
Increase in asset values
3
Municipal bond interest
1
For the current calendar year, determine:
Economic income
Accounting income (i.e., net income)
Income (for tax purposes)
Gross income
Taxable income
Answers to Quiz
Economic Income
Accounting Income
$12
9
Income for Tax Purposes
11
Gross Income
10
Taxable Income
8
What Is Income?
Economist defines as increase in _________
Accountant demands ____________ event
Tax law blends two income __________
Income is any increase in ________ that has been
__________.
Landmark Decision
Receipts are income when they are “undeniable
accessions to ________, clearly ________, and over
which the taxpayers have complete __________.”
CIR v. Glenshaw Glass (S.Ct., 1955)
Income Does Not Include
___________ Amounts
Returns of _________
Key Income Concepts
Receipts
(cash and noncash)
Borrowed Amounts
(nontaxable)
Income
(realized wealth)
Return of Capital
(nontaxable)
Quiz: Economic Income
ABC, Inc. receives (pays) the following amounts:
Bank loan
$ 8
Stock sale
4
Service fees
6
Business expenses
(2)
Increase in asset values
3
Municipal bond interest
1
Economic Income
Quiz: Accounting Income
ABC, Inc. receives (pays) the following amounts:
Bank loan
$ 8
Stock sale
4
Service fees
6
Business expenses
(2)
Increase in asset values
3
Municipal bond interest
1
Accounting Income
Quiz: Income
ABC, Inc. receives (pays) the following amounts:
Bank loan
$ 8
Stock sale
4
Service fees
6
Business expenses
(2)
Increase in asset values
3
Municipal bond interest
1
Income for Tax Purposes
Authority to Tax “Income”
“The Congress shall have power to lay and
collect taxes on ________, from whatever
sources derived, without apportionment among
the several States and without regard to any
census or enumeration.”
16th Amendment to U.S. Constitution
What Is Gross Income?
“Except as otherwise provided in this subtitle,
gross income means all income from whatever
source derived…”
Section 61(a)
Key Income Concepts
Receipts
(cash or noncash)
Borrowed Amounts
(nontaxable)
Income
(realized wealth)
Excluded Income
(nontaxable)
Return of Capital
(nontaxable)
Gross Income
(taxable)
Quiz: Gross Income
ABC, Inc. receives (pays) the following amounts:
Bank loan
$ 8
Stock sale
4
Service fees
6
Business expenses
(2)
Increase in asset values
3
Municipal bond interest
1
Gross Income
What Is Taxable Income?
Taxable income is “gross income minus the
deductions allowed….”
Section 63(a)
Quiz: Taxable Income
ABC, Inc. receives (pays) the following amounts:
Bank loan
$ 8
Stock sale
4
Service fees
6
Business expenses
(2)
Increase in asset values
3
Municipal bond interest
1
Taxable Income
General Deduction Authority
Expense
Trade or business
Investment
Personal
Loss
Trade or Business Expenses
“There shall be allowed as a deduction all
_________ and _________ expenses paid or
incurred during the taxable year in carrying
on any trade or business….”
Section 162(a)
Landmark Decision
“We accept the fact that to be engaged in a
trade or business, the taxpayer must be
involved in the activity with ________ and
_________ and that the taxpayer’s primary
purpose for engaging in the activity must be
for income or profit.”
CIR v. Groetzinger (S.Ct., 1987)
Investment Expenses
“In the case of an individual, there shall be
allowed as a deduction all the ordinary and
necessary expenses paid or incurred during the
taxable year-(1) for the __________ or collection of income;
(2) For the management, conservation, or
maintenance of property held for the
___________ of income….”
Section 212
Trade or Business Loss
“In the case of an individual, the deduction
under subsection (a) shall be limited to
(1) losses incurred in a _____ or ________;
(2) losses incurred in any transaction entered
into for ______, though not connected with a
trade or business….”
Section 165(c)(1), (2)