Gross Income: Inclusions and Exclusions for REG
Understanding what constitutes gross income is fundamental for the REG section of the CPA exam. This module will break down the core principles of income recognition, focusing on what is included and what is specifically excluded by tax law.
Defining Gross Income
Gross income is defined broadly by the Internal Revenue Code (IRC) as 'all income from whatever source derived,' unless specifically excluded. This means that any economic benefit received by a taxpayer, whether in cash, property, or services, is generally considered taxable income.
Common Inclusions in Gross Income
Many common forms of income are included in gross income. These are the building blocks of a taxpayer's total income before deductions.
The realization principle, which requires an economic benefit to be realized through a transaction.
Key inclusions typically include:
| Income Type | Description | Example |
|---|---|---|
| Wages, Salaries, and Tips | Compensation for services rendered. | Annual salary, bonuses, tips received from customers. |
| Interest Income | Earnings from lending money or holding debt instruments. | Interest from savings accounts, bonds, or loans. |
| Dividend Income | Distributions of a corporation's earnings to its shareholders. | Dividends from stocks. |
| Business Income | Profits from operating a trade or business. | Net income from a sole proprietorship or partnership. |
| Rental Income | Income derived from leasing property. | Rent collected from tenants. |
| Gains from Property Sales | Profit realized from selling assets. | Selling stock for more than its purchase price. |
| Alimony Received (for divorce agreements executed before 2019) | Payments made to a former spouse. | Periodic payments received from an ex-spouse. |
Exclusions from Gross Income
Tax law provides specific exclusions to encourage certain activities or provide relief. These items, while economic benefits, are not subject to taxation.
Key Exclusions
Some of the most common and important exclusions include:
This diagram illustrates the fundamental distinction between income that is included in gross income and income that is excluded. The broad definition of gross income encompasses almost all economic benefits, but specific statutory provisions carve out certain items as non-taxable. Understanding these carve-outs is critical for accurate tax calculation. The diagram visually separates these two categories, highlighting common examples within each.
Text-based content
Library pages focus on text content
Key exclusions include:
Remember the effective dates for alimony! The tax treatment changed significantly for agreements executed after December 31, 2018.
The Importance of Source and Character
Beyond simply identifying income, its source (U.S. vs. foreign) and character (ordinary vs. capital) are crucial for determining tax treatment. For the REG exam, focus on the general principles of inclusion and exclusion first, then delve into these nuances as they apply to specific income types.
No, interest from U.S. Treasury obligations is generally exempt from state and local income taxes, though it is taxable at the federal level.
Learning Resources
The official IRS guide to federal income tax, providing comprehensive details on what is taxable and what is not.
A video tutorial explaining the fundamental concepts of gross income inclusions and exclusions relevant to the CPA REG exam.
An article from Investopedia that clearly defines taxable income and contrasts it with tax-exempt income, offering practical examples.
The foundational legal text defining gross income according to the Internal Revenue Code.
Details the tax exclusion for life insurance proceeds paid on account of the death of the insured.
Explains the tax treatment of gifts and inheritances, which are generally excluded from gross income.
A guide from the U.S. Securities and Exchange Commission explaining the differences between taxable and tax-exempt bonds.
A study guide specifically tailored for the CPA REG exam, covering key concepts of gross income.
NerdWallet provides a clear explanation of taxable income and how it's calculated, including common inclusions and exclusions.
IRS Revenue Procedure outlining the changes to alimony taxation for divorce or separation instruments executed after December 31, 2018.