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Step Transaction Doctrine – Paul Gaulkin CPA

Trust

The step transaction doctrine means that two or more transactions are mutually dependent so that only the overall end result is significant for tax purposes. This means that, two or more steps, significant in themselves, if view in isolation, may be disregarded altogether or consolidated into one transaction. The Supreme Court has stated that “if one transaction is to be characterized as a ‘first step’, there must be a binding commitment to take the later steps.” The step transaction doctrine … Read more

Earnings & Profits for Dividend Distributions – Paul Gaulkin CPA

chairs in board room

Although earnings and profits (E&P) have a significant impact in determining the tax status of dividend distributions, the term is not defined inside the Internal Revenue Code. Code Section 312 does provide an indication of how certain transactions will affect E&P, but it does not specifically define what E&P actually is. Defining Earnings and Profits Earnings and profits is basically a tax term. It has some similarities to retained earnings, but it is not equal to it. E&P is a … Read more

Statutory Requirements Regarding Alimony – Paul Gaulkin CPA

alimony judgment money

There are basically five statutory requirements for a taxpayer to claim money transferred to them as alimony payments. If divorce or separate instrument characterizes a payment as “alimony” but fails to satisfy the five requirements under Code Section 71, the payment will not be treated as alimony for federal income tax purposes, regardless of what it is considered under state law. These fix requirements include: 1. Payment must be made in cash 2. Paid to or on behalf of spouse … Read more

Qualified Employee Discount Exclusion – Paul Gaulkin CPA

50 percent discount picture

Certain employee discounts provided to employees on the selling price of qualified property or services of the employer are excludable from gross income. The main rule in this provision is that in order for the discount to be excludable, it must be available to employees on a non-discriminating basis. Discount Ceiling The employee discount may not exceed the gross profit percentage normally offered by the employer to customers. In the case of qualified services, the excludable amount cannot exceed 20 … Read more

Assignment of Income Doctrine Definition & Guide – Paul Gaulkin CPA

Income drawn on chalkboard

The assignment of income doctrine basically is defined as income that is taxed to the individual who earned it, even if the right to the income has been transferred to another individual prior to recognition. This means that compensation, interest, rents, dividends, and other forms of income usually must be included in the gross income of the recipient even if the income was transferred to another individual. Assignment of Income Doctrine A tax problem arises when an individual attempts to … Read more

Classifying Domestic Production Gross Receipts – Paul Gaulkin CPA

bar code saying made in usa

Domestic production gross receipts are defined under Code Section 199(c)(4) to include gross receipts from the following sources: 1. Any sale, exchange or other disposition, or any lease, rental or license, of qualifying production property that was manufactured, produced, grown or extracted by the company in whole or in significant capacity within the United States. Usually qualifying production property includes tangible personal property, computer software, and sound recordings. 2. Any sale, exchange or disposition, or any lease, rental or license, … Read more

IRS Material Participation Rules – Paul Gaulkin CPA

white clock with black numbers

A passive activity is defined as “any activity which involves the conduct of a trade or business, and in which the taxpayer does not materially participate” according to Code Section 469(c)(1). Also included in the definition are rental activities, without regard to the extent of taxpayer participation. This basically excludes trade or business activities in which a taxpayer does materially participate are not passive activities. In terms of real estate activities, these are generally considered to be passive no matter … Read more

Like Kind Three Party Exchanges – Paul Gaulkin CPA

different size buildings

In the event a taxpayer is unable to find a party with who to have a like kind exchange because the party whose property the taxpayer seeks wants to sell for cash instead of doing a trade. A three party exchange is basically a way for the taxpayer to still carry out a like kind exchange but with three instead of two people. Finding Third Party If the taxpayer can find a purchaser who is willing to pay cash and … Read more

Hybrid Method of Accounting – Paul Gaulkin CPA

Balancing the Accounts

The main type of accounting methods that the IRS allows a taxpayer to take advantage of are the cash method and accrual method of accounting. It is a general misconception that a taxpayer must utilize one method or the other method, but this is not true. A taxpayer has the option to use a combination of permissible accounting methods. Hybrid Method Restrictions For example, the accrual method, which must be used for purchases and sales of inventory, may be combined … Read more

Like Kind Exchange Qualifying Property – Paul Gaulkin CPA

night time office complex

A like kind exchange is an exchange of investment or business property that qualifies for non recognition of gain or loss. The main reason that the taxpayer does not have to recognize any gain or loss is because it is assumed that they will be in the same economic position after the exchange is completed. Qualifying Property Qualifying property for a like kind exchange must be held either for productive use, in a trade or business capacity or as an … Read more