Chapter 5: Gross Income and Exclusions

Chapter 5: Gross Income and Exclusions

1. Realization Principle

   • Income is realized when a taxpayer engages in a transaction with another party and the transaction results in a measurable change in property rights

2. Gross Income

   • All income from whatever source derived unless excluded by law

3. Taxpayers must receive an economic benefit to have gross income

   • Examples of economic benefit
     • Compensation for services, proceeds from property sales, and income from investments or business activities

4. Accrual method

   • Income is generally recognized when earned and expenses are generally deducted in the period when liabilities are incurred

5. Cash method

   • Taxpayers recognize income in the period they receive it, no matter when they actually earn it