Question

Answer these question using this book

( please mention the paragraph number right next to each answer!!!)

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 5: Gross Income-Exclusions; Chapter 6: Deductions: 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.

Answer 1

1) Defined the income as defined by the courts

      Court defined income as "the gain derived from the capital ,from labour, or from both combined

2) generally when does a cash basis taxpayer recognize income

      A cash basis taxpayer realize income  in the tax year you receive it, and deduct expenses in the tax year in which you pay the expenses

3) generally when does a accrual basis taxpayer recognize income

       Under theaccrual method, you generally report income in the tax year you earn it, regardless of when payment is received

4) definition the term exclusion

      Tax exemption is a monetary exemption which reduces taxable income. Tax exempt status can provide complete relief from taxes, reduced rates, or tax on only a portion of items

5) is interest income earned on state or local government bond always tax exempt? explain

       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

6) Define term gross income ?

       Gross income, also known as gross pay, is an individual's total pay before taxes or other deductions

7) what are the four categories of tax deductions for individual taxpayer?

• Home mortgage interest,
• State and local income taxes,
• Real estate taxes, and
• Charitable contributions.

Common miscellaneous itemized deductions, subject to the 2% AGI floor include:

• Tax preparation fees,
• Unreimbursed expenses that you incur as an employee,
• Losses on traditional or Roth IRAs, and
• Legal fees related to producing taxable income.

8) What is the primary difference between a trade or business and a non business activity?

       Business is An organization or economic system where goods and services are exchanged for one another or for money . Business categories are reserved for allocating tax-deductible Income and Expenses on the Schedule C as specified by the IRS.

     non-business activity might involve an organisation providing free advice to members. In the absence of any taxable supplies, this is anon-business activity for VAT purposes. It is a non-private activity because it is an activity which forms part of the organisation's overall objectives

9) Generally when does a cash basis taxpayer take a tax deduction?

      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 todo so is not a valid deduction, even for a cash basis taxpayer.

10)A cash basis taxpayer cannot deduct certain items when they are paid . which items are they and how they are treated?

       Cash basis taxpayers cannot report receivables as income, nor deduct promissory notes as payments. expenses paid in advance may not be deducted; instead, the IRS allows the taxpayer to capitalize certain costs. in the case of an individual, State and local income, war profits, and excess profits taxes are not allowable as a deduction.
Under the conference agreement, no deduction is allowed with respect to (1) an activity generally considered to be entertainment, amusement or recreation, (2) membership dues with respect to any club organized for business, pleasure, recreation or other social purposes, or (3) a facility or portion thereof used in connection with any of the above items. As a result, the provision repeals the present-law exception to the deduction disallowance for entertainment, amusement, or recreation that is directly related to (or, in certain cases, associated with) the active conduct of the taxpayer’s trade or business (and the related rule applying a 50 percent limit to such deductions

11) Generally when does a accrual basis taxpayer take a tax deduction?

      Accrual Basis. A method of accounting that reflects expenses incurred and income earned for Income Tax purposes for any one year. ... Any expenses that they may take as deductions when computing taxable income must be due at the time the deduction is taken.

12) generally how must a taxpayer substantiate deductions in an adult before the IRS?

        Unrelated adult dependents may qualify if they lived with you for the entire tax year as a member of your household, and you must have provided at least half of their support. Related adult dependents include children, parents, grandchildren, stepchildren, foster children, full and half siblings, sons or daughters in-law, stepparents, grandparents, mothers or fathers in-law and blood aunts, uncles, nieces and nephews. An adult dependent cannot be a qualifying child for you or another person for tax purpose

13). what are the two types of credits and briefly describe difference in each federal tax?

     Businesses can reduce their tax liability with deductions and credits. The IRS allows businesses to deduct expenses that are considered ordinary and necessary for that line of business, and it provides credits to encourage specific business activities.
Some common business deductions and credits include the following:

Cost of Goods Sold: The amount spent to purchase inventory, including products purchased for resale, raw materials, freight, storage, labor and 1must be capitalized.

Capital Expenses: Major expenses for ongoing business assets, including startup costs and improvements, must be capitalized. However, up to $5,000 in startup costs can be deducted in the year the business is opened.

Rent: The cost of leasing a place of business is tax deductible.

Interest: The cost of borrowing money for business activities can be deducted.

Employees' Pay: The salaries and wages paid to employees are tax deductible. So are retirement contributions for employees, directors and officers.

Taxes: Business taxes paid to state, local and foreign tax authorities are tax deductible.

14) Liist the non refundable credits available to individual who do not own a business?

The most commonly claimed tax credits are non-refundable. Examples are:

• The Saver's Credit
• Lifetime Learning Credit (LLC)
• Adoption Credit
• Child and Dependent Care Credit
• Foreign Tax Credit (FTC)
• Mortgage Interest Tax Credit
• Elderly and Disabled Credit
• Residential Energy Efficient Property Credit
• General Business Credit (GBC)
• Alternative Motor Vehicle Credit
• Credit to holders of tax credit bonds

15) ist the refuntable credits available to individual who donot own a business?

Here are some examples of refundable tax credits:

• Additional Child Tax Credit
• Earned Income Tax Credit (EITC)
• Health Coverage Tax Credit
• Small Business Health Care Tax Credit