Internal Revenue Code/Taxable Income

For example a company may decide to purchase asset or reduce obligations out of its retained earnings. In most cases retained income does reflect the dividend policy of the company because the board will decide either to reinvest such profit or to pay them out to stockholders. The retained earning I taxable at corporate tax rate as well as pay as you earn (PAYE) on the shareholder share of profit if any. Recognized income This model is the basis of matching and accrual concept. These concepts both takes into account the accounting period in which expenses has been incurred or revenue has been recognized. According to the principle revenues are recognized when they are realizable that is usually by the time goods are transferred or services are rendered. Therefore it does not matter when cash is received. On the other hand expenses are matched to the period they relate to. Examples are: accrued revenue, and deferred revenue. Return of capital doctrine This doctrine protects some part of investment proceeds from taxation for instance if Mr. Y invested $20,000 there after sold the investment and realized $20,500 only $5,000 would be valid for taxation. The initial outlay is protected from tax. It can also be called capital gain. however it should not be mistaken with the return on capital which measures the rate of return. Constructive receipt Normally this concept is used to determine the gross income of cash basis tax-payer. Unlike actual receipt this concept does not require the physical ownership of goods which income relates (Murphy, K. amp. Higgins, 2011). Income is said to successively receive if the money are available to the taxpayer with no significant limitations For instance, if a taxpayer gets imbursement of some sort of pledges this will translate to tax timing reasons. Tax benefit rule This rule is highly based on how tax credit or tax liability a taxpayer is entitled to is when computing income tax. The deductions done in the preceding year are recovered in subsequent year and are reported as income in the year it is recovered in such a way that a tax benefit is recorded from such deduction. Under this rule the local or state tax refund may not be entirely taxable if the is a claim of unused tax credit. Wherewithal to pay doctrine The doctrine recognizes the period which the taxpayer has the capacity to pay his /her tax on the income earned. In this case the Review commission does not wait for the dispute to be solved before taxing the income (Cordes, J. 2005). Consequently the delay attracts the risk that the tax will become uncollectible in future. Atypical example. landlords normally require tenants to pay their in advance which is know as prepaid rent. Therefore the tax on such deposit is deferred because some time the rent may be returned to the tenant. Return of capital doctrine mostly favor the taxpayer whereas Wherewithal to pay doctrine is most beneficial to internal revenue service. Section 2 Itemized deductions are viable expenses which are required by individual taxpayer on their income tax returns in line to diminish their taxable income (Meldman, amp. Sideman, 2006). Itemized should go beyond the established average deduction before the taxpayer is given any benefit from such deductions. These deductions reflect on social policies by providing incitements such as paying huge medical bills. This come from those who have retired and have high income fro savings and pension fund. The other deduction is home mortgage interest which is provided to help in stimulating the

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