ACC 317 Week 9 Discussion (Advanced Federal Taxation)


Example 1

Rent is a source of income that requires the application of the source rules to determine how and where the income is identified and recognized. The location of the rental property generating the income determines if the income is U.S. income or if it is foreign income.

As far as deductions for source income – taxpayers may be required to allocate or apportion allowable deduction to gross income from each geographical source to determine taxable income from U.S. and foreign sources. Allocate is defined as the process of associating a deduction with a specific item(s) of gross income for purposes of computing foreign source taxable income. Apportion is defined as calculating the amount of a deduction that is associated with a specific item(s) of gross income for purposes of computing foreign-source taxable income.

The language the IRC provides to describe how to allocate U.S. and foreign source gross income deductions is broad. Matching is done based on factual relationship, meaning deductions that can be easily identified or tried to a relatable source income are considered definitely related deductions. Those that are not are considered not definitely related deduction and are allocated to all gross income. First, taxpayers must allocate to the class(es) of gross income, they were incurred to produce. Then they apportion the deduction between foreign and U.S. gross income using a method that reflects the factual relationship between the deduction and the grouping of gross income.

Example 2

Source of Income

Salaries - Salaries are a source of income that is determined by where the service is performed. This pay is a part of the income as it is the compensation one receives in exchange for providing labor. This source of income is the exchange for proving a good or service through investing capital. Income is received in the form of wages or salaries. This form of income is subject to taxation. Salaries are part of the taxable income and tax bracket, and marginal tax rates are based on taxable income, not gross income.

Sources of deduction

Donations - A deduction is an expense that can be subtracted from an individual's gross income to reduce the amount that is subject to income tax. It is an allowable deduction. An example is a donation to any charity that is eligible to claim as a deduction; hence this donation will reduce the taxable income by the amount you donated. The standard seductions for 2019 and 2020 are almost double the previous amounts. A tax deduction reduces taxable income, and it should not be confused with a tax credit that reduces the amount of taxes owed.