Question

No Hand Writing or Pictures (Tax Accounting):

1, Explain the different concepts of income from accounting, economics and taxation perspectives Explain the different concepts of income from accounting, economics and taxation perspectives .

2. What is the difference between deductions for and deductions from adjusted gross income AGI under US tax law? Give two examples of each deduction.

3. To make income taxable, income must be realized and recognized. Explain in your own words the difference between income realization and income recognition, then provide a short numerical example to indicate the difference.

Answer 1

1.

Differentiation Criteria	As per Accounting	As per Economics	As per Taxation
Definition	It is said to be excess of revenue over expenses	It is the sum of money received in consideration for the services rendered or goods sold.	The taxation laws describes income as an inclusive definition and covers Profits & Gains from business or profession Capital Gains Salaries & Wages Passive income like income from investments, dividends, rental income
Recognition Criteria	Recognizes only realized income.	Recognizes both realized and unrealized income	Recognized basis the time in which it is earned.
Example	A piece of land brought in say 20x1 at $10000 And the market value of the land in say 2010 $100000. As per the recognition criteria, the $90000 will be not be recognized in the financial statement.	A piece of land brought in say 20x1 at $10000 And the market value of the land in say 2010 $100000. As per the recognition criteria, the $90000 will be recognized even though the land is actually not sold.	A piece of land brought in say 20x1 at $10000 And the market value of the land in say 2010 $100000. As per the recognition criteria, the $90000 will be recognized in the tax statement if the land is sold. However the indexed cost of acquisition will go to reduce the cost of land and not the actual purchase cost.

2.

Differentiation Criteria	Deductions FOR AGI	Deductions FROM AGI
Definition	This means gross income from all sources less list of deductions specified to arrive at the AGI	This means from the computed AGI, the deductions are made as per Federal Tax Laws to arrive at the Taxable Income
Example of Deductions	Alimony paid Tuition Fees paid	Medical Expenses Certain State & Local Taxes

3.

Differentiation Criteria	Realized Income	Recognized Income
Definition	Income is recognized only when the actual cash inflow happens.	Income is recognized as soon the transaction takes place.
Accounting Terminology	Cash Basis of Accounting	Accrual Basis of Accounting
Point of Taxation	Realized gain refers to actual amount of money earned in the sale of asset.	Under capital gains, the federal tax laws considers the difference value of the asset and its sale price.
Example	A stock of Apple Inc. sold at $10000. Brokerage paid is $50 The realized income as per Federal Tax Laws is $9950.	If the Apple Inc. Stock was purchased for $1000 and the sale price is $9950, then the recognized income is $8850 for tax purposes