The Internal Revenue Service uses a complex definition to identify capital expenditures (assets). A capital expenditure is not deductible as an expense in the tax year purchased; the taxpayer or entity must use depreciation, amortization or depletion to obtain deductible value on the entity’s return.
The first Form 1040 in 1914 was a mere 5 lines of information. Today, the Internal Revenue Code spans 5 volumes with over 700 pages each in 8 point font. This doesn’t include the associated regulations. This section covers income tax and how the small business entrepreneur deals with proper filing and the associated deadlines.
When a product or investment is sold, the seller must realize a gain or loss from the transaction. The actual sale or transaction will trigger the gain or loss realized. In effect, the receipt of cash sets the threshold for a ‘REALIZED’ amount. Unrealized gains or losses are potential i.e. on paper transactions.
The Sixteenth Amendment to the Constitution of the United States gives authority to Congress to tax income. The Internal Revenue Service defines revenue via a term ‘Gross Income’. In Chapter 26 of the Federal Code (Chapter 26 is the Internal Revenue Code) Section 61, Congress defines gross income as “… all income from whatever source derived…”. This means even the penny you pick up off the ground is considered income.
Within the family of corporations, the Internal Revenue Service (IRS) grants tax free status to S-Corporations. It is strictly an IRS term. In the IRS code, there are several subchapters pertaining to corporations; Subchapter S identifies and regulates S-Corporations. In essence, S-Corporations are a pass through entity meaning that all income, losses, credits and special deductions are pass-through to the stockholders of the company.
A K-1 is a reporting tool to the Internal Revenue Service. It is used by Partnerships, S-Corporations and Trusts to report the taxpayer’s share of income, deductions, and credits. A K-1 is similar to Form W-2 or 1099 in that the information provided informs the taxpayer of what has been reported to the Internal Revenue Service.