Taxation for Decision Makers, 2012 Edition

chapter 3

Determining Gross Income

CHAPTER OUTLINE

Setting the Stage—An Introductory Case

What Is Income?

When Is Income Recognized?

Who Recognizes the Income?

Sources of Income

Exclusions

Jurisdictional Issues

Expanded Topics—Special Methods

Revisiting the Introductory Case

Summary

Key Terms

Test Yourself

Problem Assignments

Answers to Test Yourself

Gross income includes income from all sources unless a specific provision in the tax law excludes it. Certain types of income may be excluded from gross income for social, economic, or political reasons. Taxes, however, are not levied on gross income but on taxable income, which is gross income (net of exclusions) less allowable deductions. This chapter focuses on determination of those items included in gross income and identification of the period in which they are included (recognized).

Income for tax purposes is not the same as financial statement income, because tax policy has different objectives than generally accepted accounting principles. A number of basic tax principles affect the determination of gross income, including the realization principle, the return of capital principle, the doctrine of constructive receipt, and the claim of right. In addition, the period in which income is recognized is determined by the taxpayer's method of accounting. Identifying the period in which income is recognized is important because a taxpayer's marginal tax rate may change, the tax laws may change, and the time value of money may affect ...