Income Taxes

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.

Capital Expenditures – IRS Definition

Capital Expenditures

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.

Realized and Unrealized Gains or Losses

Realized and Unrealized Gains

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.

Internal Revenue Service – Definition of Revenue

Definition of Revenue

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.

Passive Income

Passive Income

Passive income is a form of earning money without materially participating in the activity from which the income is derived. There are two definitions for the reader to understand. There is the common business definition and the tax code definition. 

What is an Audit?

An audit is defined as a methodical examination. Audits are grouped into two principal sets – financial and organizational compliance (usually related to licensure). For the small business entrepreneur, it is almost unheard of for them to have an organizational compliance audit.

What is an S-Corporation?

S-Corporations

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.

What is a K-1?

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.