RIVERSIDE COMMUNITY COLLEGE
ACCOUNTING 63
INCOME TAX ACCOUNTING
INCOME SOURCES BY CLASS OF INCOME
Kevin E. Murphy
Income Sources
Earned Wages
Income Tips, commissions, bonuses
Income from sole proprietorship-either
the active conduct of a trade or
business of the rendering of
services
Income from illegal activities-
gambling, drug dealing,
racketeering, etc.
Unearned Income from investments-interest,
Income dividends, rental income, royalty
income, income from annuities,
gains (losses) from the sale of
Investments
Income from investment in Conduit
entities
Transfers Prizes and awards
from Others Unemployment compensation
Social Security benefits
Alimony received
Imputed Below market-rate loans
Income Payment of expense by others
Bargain purchases
RIVERSIDE COMMUNITY COLLEGE
INSTRUCTOR: FRANCISCO RANGEL
FEDERAL INCOME TAX
Major Problems
Assignment of Income
What is a receipt?
Definition of income from rents
and royalties
Capital recovery on annuities
Calculation of gain (loss)
Income from conduit entity
Exception for prizes and awards
given to charity
Exception for employee awards for
length of services or safety
Calculation of taxable portion of
Social Security benefits
Front loading of alimony payments
to disguise a property settlement
Child support payments disguised
as alimony
Exceptions for below-market rate
loans
Gifts vs. Compensation for
payment of expenses by others
Compensatory nature of bargain
purchase
1
 RIVERSIDE COMMUNITY COLLEGE
ACCOUNTING 63 INSTRUCTOR: FRANCISCO RANGEL
INCOME TAX ACCOUNTING FEDERAL INCOME TAX

CLASSIFICATIONS OF DEDUCTIONS OF AN INDIVIDUAL

Exditure
Expenditures

Profit-motivated Personal
business expense expense

Trade or Expense Specifically Nondeductible

business for the allowed personal
expense production itemized expense
of income deduction

RIVERSIDE COMMUNITY COLLEGE 2

RIVERSIDE COMMUNITY COLLEGE
ACCOUNTING 63 INSTRUCTOR: FRANCISCO RANGEL
INCOME TAX ACCOUNTING FEDERAL INCOME TAX

INCOME EXCLUSIONS BY CATEGORY

Kevin E. Murphy
Exclusions Major Problems
Donative Gifts What is a gift?
Inheritances No exclusion for future earnings on
Items Life insurance proceeds amounts excluded for gifts,
Scholarships inheritances, life insurance
Death benefits proceeds
Only direct costs of education
excludable for scholarships
Employment- Foreign earned income Nondiscrimination requirement for
Employer-provided benefits most benefits
related Pension plan payments Each benefit has specific
Exclusions Group term life insurance requirements and/or limitations
Health/accident insurance
Meals and lodging
No additional cost services
Employee discounts
Working-condition fringes
De minimis fringes
Child care
Athletic facilities
Educational assistance
Employee benefit plans
Cafeteria plans
Flexible benefits/salary reduction plans

Returns of Worker’s compensation Payments for lost income-wage

Damages for personal injury continuation/disability payments
Human Payments from employee-purchased Payments for punitive damages
Capital health/accident plan Tax benefit rule for medical
Payments from employer provided expenses reimbursed in a year
health/accident insurance for medical subsequent to education
expenses deduction

Investment- Municipal bond interest Taxability of gain on disposition of

Stock dividends tax-exempt
related Discharge of indebtedness-insolvent debtor securities/nontaxable dividend
exclusions Discharge of indebtedness-qualified real shares
property business indebtedness Cash option on stock dividend
Improvement by a lessee Insolvent debtors who become
solvent after discharge of debt
Improvements made in lieu of rent

RIVERSIDE COMMUNITY COLLEGE 3

RIVERSIDE COMMUNITY COLLEGE
ACCOUNTING 63 INSTRUCTOR: FRANCISCO RANGEL
INCOME TAX ACCOUNTING FEDERAL INCOME TAX

INCOME EXCLUSIONS BY INTERNAL REVENUE CODE SECTION

Sec. 101 Certain death benefits

Sec. 102 Gifts and inheritances
Sec. 103 Interest on state and local bonds
Sec. 104 Compensation for injuries or sickness
Sec. 105 Amounts received under accident and health plans
Sec. 106 Contributions by employer to accident and health plans
Sec. 107 Rental value of parsonages
Sec. 108 Income from discharge of indebtedness
Sec. 109 Improvements by lessee on lessor’s property
Sec. 111 Recovery of tax benefit items
Sec. 112 Certain combat pay of members of the armed forces
Sec. 115 Income of states, municipalities, etc.
Sec. 117 Qualified scholarships
Sec. 118 Contributions to the capital of a corporation
Sec. 119 Meals or lodging furnished for the convenience of the employer
Sec. 120 Amounts received under group legal services plans
Sec. 121 One-time exclusion of gain from sale of principal residence by individual who has
attained age 55
Sec. 122 Certain reduced uniformed services retirement pay
Sec. 123 Amounts received under insurance contracts for certain living expenses
Sec. 125 Cafeteria plans
Sec. 126 Certain cost-sharing payments
Sec. 127 Educational assistance programs
Sec. 129 Dependent care assistance programs
Sec. 130 Certain personal injury liability assignments
Sec. 131 Certain foster care payments
Sec. 132 Certain fringe benefits
Sec. 133 Interest on certain loans used to acquire employer securities
Sec. 134 Certain military benefits
Sec. 135 Income from United States savings bond used to pay higher education tuition and
fees
Sec. 136 Energy conservation subsidies provided by public utilities

RIVERSIDE COMMUNITY COLLEGE 4

 RIVERSIDE COMMUNITY COLLEGE
ACCOUNTING 63 INSTRUCTOR: FRANCISCO RANGEL
INCOME TAX ACCOUNTING FEDERAL INCOME TAX

INCOME TAX CONCEPTS

General Income Accounting Deduction

Concepts Concepts Concepts Concepts

Ability to Pay All-Inclusive Entity Legislative Grace

Income, exclusions, Income Taxable/Conduit
deduction, losses, tax, Assignment of income Business Purpose
credits Legislative Grace
Capital asset- Annual Capital Recovery
Progressive rate Capital gains and Basis
Structure losses Accounting Period Capital expenditure
Accounting method
Administrative Capital Recovery
Convenience Basis Tax benefit rule

Standard deduction Realization Substance over form

Claim of right
Arm’s-Length Constructive receipt
Transaction
Related party Wherewithal to pay

Constructive Ownership

Pay as You Go
Withholding
Estimated tax
payments

RIVERSIDE COMMUNITY COLLEGE 5

 RIVERSIDE COMMUNITY COLLEGE
ACCOUNTING 63 INSTRUCTOR: FRANCISCO RANGEL
INCOME TAX ACCOUNTING FEDERAL INCOME TAX

I.R.C VIOLATIONS WITH PENALTIES FOR TAX RETURN PREPARERS

Understatement of taxpayer’s liability due to unrealistic positions

Understatement of taxpayer’s liability due to willful or reckless conduct
Failure to furnish a copy of a return to the taxpayer
Failure to sign a return
Failure to furnish identifying information
Failure to retain a copy or a list of returns prepared
Failure to file correct information returns
Negotiation of tax refund check
Improper disclosure or use of information on taxpayer’s return
Organizing (or assisting in doing so) or promoting and making or furnishing statements with
respect to abusive tax shelters
Aiding and abetting an understatement of tax liability
Aiding or assisting in the preparation of a false return

RIVERSIDE COMMUNITY COLLEGE 6