THEORY QUESTIONS One of the objectives of this course is to prepare you to do re

Question

THEORY QUESTIONS One of the objectives of this course is to prepare you to do research in an ever-changing tax environment. The answers to the below questions can be found in your text in Chapter S: Gross Income-Exclusions; Chapter 6: Ded uctions: General Concepts and Trade or Business Deductions; Chapter 9: Tax Credits, Prepayments, and Alternative Minimum Tax; or Chapter 13: Tax Accounting. 1. Define the term "income," as defined by the courts. 2. Generally, when does a cash basis taxpayer realize income? 3. Generally, when does an accrual basis taxpayer realize income? 4. Define the term "exclusion." 5. Is interest income earned on state or local government bonds always tax-exempt? Explain. 6. Define the term "gross income." 7. What are the four categories of tax deductions for individual taxpayers? 8. What is the primary difference between a trade or business and a nonbusiness (investing) activity? 9. Generally, when does a cash basis taxpayer take a tax deduction? 10. A cash basis taxpayer cannot deduct certain items when they are paid. Which items are they and how must they be treated? 11. Generally, when does an accrual basis taxpayer take a tax deduction? 12. Generally, how must a taxpayer substantiate deductions in an audit before the IRS. 13. What are the two types of credits and briefly explain the difference in each. 14. List the nonrefundable credits available to individuals who do not own a business. 15. List the refundable credits available to individuals who do not own a business

Explanation / Answer

1.Income. The return in money from one's business, labor, or capital invested; gains, profits, salary, wages, etc. The gain derived from capital, from labor or effort, or both combined, including profit or gain through sale or conversion of capital.Bouvier's Law Dictionary defines"income" as "The gain which proceeds from property, labor, or business; it is applied particularly to individuals; the income of the government is usually called revenue.

2. The Cash method computes income by deducting actual cash expenses for the accounting period from actual cash receipts

3. The accrual method allocates receipts and disbursements to the accounting period in which it is earned or consumed, regardless of time of receipt or payment

4. Exclusions are the items which are seperately shown in income or expense or neither included as well. An item or eventuality specifically not covered by an insurance policy or other contract.

5.Treasury securities issued by the U.S. government pay interest that is tax exempt at the state and local levels, but not the federal level. According to the Internal Revenue Service (IRS), interest on a state or local government obligation may be tax-exempt even if the obligation is not a bond.Under present federal income tax law, the interest income you receive from investing in municipal bonds is free from federal income taxes.* In most states, interest income received from securities issued by governmental units within the state is also exempt from state and local taxes.

6. Gross income, is an individual's total pay before taxes or other deductions. ... For companies, gross income can also be known as gross profit. In this case, a company's gross income is the revenue from all sources minus the costs of goods sold (COGS).

7.These are some of the deductions for individuals House rent allowance,Health Insurance premiums, Charitable gifts, Looking for work, Self employed social Security

8. Trade is part of business activity and business is a term used for all the activities performed by a business enterprise. This includes three basic activities of buying, manufacturing and selling. Trade is the buying and selling of products or goods. and business is dealing in any activity to earn profit either by selling or buying of goods and services but for the sake of profit.

9. For federal income tax purposes, cash basis taxpayers generally can take into account amounts representing allowable deductions in the taxable year in which paid. However, prepaying a 2018 liability or expense in 2017 without an obligation to do so is not a valid deduction, even for a cash basis taxpayer.

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