Description Notes: The Assignment must be submitted on Blackboard (WORD format only) via allocated folder.

Description\n \n\n\n\n\n\n\n\n Notes:\n \n\n\n The Assignment must be submitted on Blackboard (WORD format only) via allocated folder.\n \n\n Assignments submitted through email will not be accepted.\n \n\n Students are advised to make their work clear and well presented; marks may be reduced for poor presentation. This includes filling your information on the cover page.\n \n\n Students must mention question number clearly in their answer.\n \n\n\n Late submission\n \n will NOT be accepted.\n \n\n Avoid plagiarism, the work should be in your own words, copying from students or other resources without proper referencing will result in ZERO marks. No exceptions.\n \n\n All answered must be typed using Times New Roman (size 12, double-spaced) font. No pictures containing text will be accepted and will be considered plagiarism).\n \n\n Submissions\n \n without this cover page\n \n will NOT be accepted.\n \n\n\n Q1. Explain formula for individual’s income tax and business entities. (five marks)\n \n\n Answer:\n \n\n Q2. Arrange relative tax liability by filing status from lowest to highest? (2.5 marks)\n \n\n Answer:\n \n\n Q3. Contrast concepts of Income from accounting , economic and tax perspectives.( use your own words ) (five marks)\n \n\n answer\n \n\n Q4. Idinify Items that are not Income under US income tax law. ? (2.5 marks)\n \n\n Answer:\n \n\n\n\n|\n‫كلية العلوم االدارية والمالية‬\n‫مكتب العميد‬\nAssignment 2\nDeadline: 12/11/2022 at 23.59 pm\nCourse Name: Tax AND Zakat\nAccounting\nCourse Code: ACCT 422\nStudent’s Name:\nSemester Summer Semester\nCRN:\nStudent’s ID Number:\nAcademic Year: First Semester 1444 H\nFor Instructor’s Use only\nInstructor’s Name: Dr. Salah Oraby\nStudents’ Grade: Marks Obtained\n/Out of 15 marks\nLevel of Marks: High-Middle-Low\nNotes:\n• The Assignment must be submitted on Blackboard (WORD format only)\nvia allocated folder.\n• Assignments submitted through email will not be accepted.\n• Students are advised to make their work clear and well presented; marks\nmay be reduced for poor presentation. This includes filling your\ninformation on the cover page.\n• Students must mention question number clearly in their answer.\n• Late submission will NOT be accepted.\n• Avoid plagiarism, the work should be in your own words, copying from\nstudents or other resources without proper referencing will result in\nZERO marks. No exceptions.\n• All answered must be typed using Times New Roman (size 12, doublespaced) font. No pictures containing text will be accepted and will be\nconsidered plagiarism).\n• Submissions without this cover page will NOT be accepted.\n1\n|\n‫كلية العلوم االدارية والمالية‬\n‫مكتب العميد‬\nQ1. Explain formula for individual’s income tax and business entities. (five\nmarks)\nAnswer:\nQ2. Arrange relative tax liability by filing status from lowest to highest? (2.5\nmarks)\nAnswer:\nQ3. Contrast concepts of Income from accounting , economic and tax\nperspectives.( use your own words ) (five marks)\nanswer\nQ4. Idinify Items that are not Income under US income tax law. ? (2.5 marks)\nAnswer:\n2\nACCT422 – Tax& Zakat Accounting\nChapter 1 – Introduction to the Taxes System in Saudi Arabia; Persons Subject to Income Tax\nArticle 1: Definitions\n•\nArticle 1 includes definitions for use when using interpreting the income tax law\n•\nEach word will carry the meaning beside it unless the context indicates otherwise\n•\nPlease refer to the meanings throughout the course\nArticle 2: Persons Subject to Taxation\n•\nA resident capital company\n•\nA resident non-Saudi natural person who conducts business in the Kingdom\n•\nA non resident who conducts business in the Kingdom through a permanent establishment\n•\nA non resident with other taxable income from sources within the Kingdom\n•\nA person engaged in the field of natural gas investment\n•\nA person engaged in the field of oil and hydrocarbons production\nArticle 3: Concept of Residency\n•\nA natural person is considered a resident if he meets any of the following conditions:\n He has a permanent place of residence in the Kingdom and resides in the Kingdom for a\ntotal period of not less than 30 days\n He resides in the Kingdom for a period of not less than 183 days in the taxable year\n•\nA company is considered a resident in the Kingdom during the taxable year if it meets any of the\nfollowing conditions:\n It is formed in accordance with the Companies Law\n Its central management is located in the Kingdom\nArticle 4: Permanent Establishment\n•\nA permanent establishment of a non resident consists of the permanent place of the non resident’s\nactivity through which it carries out business, including business carried out through its agent\n•\nThe following are considered a permanent establishment:\n Construction sites, assembly facilities, and supervisory activities connected therewith\n Installations or sites used for surveying for natural resources including drilling equipment\nand ships used for surveying\n A fixed base where a non resident natural person carries out business\n A branch of a non resident company licensed to carry out business in the Kingdom\n•\nA place is not considered a permanent establishment of a non resident in the Kingdom if it is used\nfor the following purposes:\n Storing, displaying, or delivering goods belonging to the non resident\n Keep a stock of goods belonging to the non resident for the purpose of processing by\nanother person\n Purchasing goods for the sole purpose of collection of information for the non resident\n Carrying out other activities of preparatory nature for the interests of the non resident\n•\nA place is not considered a permanent establishment of a non resident in the Kingdom if it is used\nfor the following purposes:\n•\nDrafting contracts for signature in connection with loans, delivery of goods or technical services\n•\nPerforming any series of activities stated in the above list\nArticle 5: Source of Income\n•\nArticle 5 lists 10 primary sources of income that are considered accrued in the Kingdom\n•\nThe place of payment of the income shall not be taken into account in determining its source\n•\nA payment made by a permanent establishment of a non resident in the Kingdom is considered as if\npaid by a resident company\nArticle 6: Tax Base\n(a) The tax base of a resident capital company is the shares of non-Saudi partners in its taxable income\nfrom any activity from sources within the Kingdom minus expenses permitted under this law\nSources – Expenses\n(b) The tax base of a resident non-Saudi natural person is his taxable income from any activity from\nsources within the Kingdom minus expenses permitted under this law\nSources – Expenses\n(c) The tax base of a non resident who performs an activity within the Kingdom through a permanent\nestablishment is his taxable income arising from or related to the activity of such establishment minus\nexpenses permitted under this law\nIncome – Expenses\n(d) the tax base of each natural person is determined separately\n(e) the tax base of a capital company is determined separately of its shareholders or partners\nArticle 7: Tax Rates\n•\n(a) the tax rate of the tax base is 20 percent (20\\%) for each of the following:\n•\nA resident capital company\n•\nA non Saudi resident natural person who conducts business\n•\nA non resident person who conducts business in the Kingdom through a permanent\nestablishment\n•\n(b) the tax rate of the tax base for a taxpayer engaged only in natural gas investment activities is 30\npercent\n•\n(c) the tax rate of the tax base for a taxpayer engaged in the production of oil and hydrocarbon\nmaterials is 85 percent\nChapter 2 – Taxable Activity and Tax-Exempt Incomes; Deductions and Losses\nArticle 8: Income subject to Tax\nTaxable income is the gross income including all revenues, profits, and gains of any type and of any form\nof payment resulted from carrying out an activity minus exempted income\nArticle 9: Gains and losses on disposal of assets.\n(a) The gain or loss from the disposal of an asset is the difference between the compensation received\nand its cost base\n(b) No gain or loss on disposal of a depreciable asset is taken into account other than what is stated in\nArticle 17 of this Law.\n(c) In determining taxable income, a natural person may not take into account gain or loss on disposal of\nan asset that is not for use in the activity\n(d) The cost base of an asset purchased, produced, manufactured, or constructed by the taxpayer is the\namount paid or incurred by the taxpayer in cash or in kind in the process of acquiring the asset.\n(e) Where a taxpayer disposes of part of an asset, the cost base is apportioned between the part\nretained and the part disposed of in accordance with their market value at the time of purchase\n(f) Expenses incurred to alter or improve a non-depreciable asset are added to the cost base of the\nasset.\n(g) The compensation value for disposal of an asset against assets in kind is based on the\nmarket value of those assets in kind, including exemption from debt on the asset\n(h) Where a taxpayer disposes of an asset by gift or inheritance, the disposer is treated as\nhaving received compensation equal to the market value at the time of disposal (unless\nparagraph (i) applies.\n(i) If an asset disposed of is encumbered by debt exceeding its market value, the taxpayer\ndisposing of the asset is treated as having received compensation equal to the value of the debt\n(j) In determining tax base, no gain or loss is taken into account on an involuntary disposal of an\nasset, to the extent that the compensation value is used to purchase of the same kind of asset\nwithin one year of the disposal.\n(k) The cost base of a replacement asset described in (j) is determined with reference to the\ncost base of the replaced asset\n(l) Where an asset owned by a taxpayer is converted to personal use or ceases to be used in the\ngeneration of income, the taxpayer is deemed to have disposed of the asset for its market\nvalue, with the recognition of the gain but not the loss.\nArticle 10: Exempt Income\nThe following types of income are exempt from income tax;\n(a) Capital gains realized from the disposal of securities traded in the Stock Market in the\nKingdom in accordance with restrictions specified in the regulations\n(b) Gains resulting from disposal of property other than assets used in the activity.\nArticle 11: Donations\nIn determining the tax base of each taxpayer, a deduction is allowed for donations paid during\nthe taxable year to public agencies or philanthropic societies licensed in the Kingdom which are\nnon profit organizations and are allowed to receive these donations.\nArticle 12: Expenses related to earning income\nAll regular and necessary expenses of earning taxable income, paid or accrued, incurred by the\ntaxpayer during the taxable year are deductible in determining the tax base, with the exception\nof outlays of a capital nature and expenses according to Article 13 of this law.\nArticle 13: Non Deductible Expenses\nNo deduction is allowed for the following;\n(a) Expenses not connected with the earning of taxable income\n(b) Any amounts paid to a shareholder, partner or any of their relatives, which constitute\nsalaries, wages, awards or the like, or which do not satisfy the conditions for\ntransactions among independent parties\n(c) Recreation expenses\n(d) Expenses of a natural person for personal consumption\n(e) Income tax paid in the Kingdom or another country\n(f) Fines and financial penalties paid or payable to any party in the Kingdom\n(g) Bribes or similar amounts considered a criminal offense.\nArticle 14: Bad Debts\n(a) A taxpayer my deduct bad debts arising from the sales of goods or services that have\nbee previously declared as taxable income of the taxpayer\n(b) A bad debt may be deducted when stricken off the taxpayer’s books, when there is\nsuitable evidence proving the impossibility of collecting it as specified in the regulations\nArticle 15: Reserves and Allocations\n•\nNo reserves or allocations may be deducted except allocations of doubtful debts for banks\n•\nThe regulations shall determine the rules and restrictions specifying such allocations\nArticle 16: Research and Development Expenses\n•\nResearch and development expenses connected with the earning of taxable income may be\ndeducted\n•\nExpenses for the purchase of land or equipment used for research and development may\nnot be deducted\n•\nSuch equipment shall be subject to depreciation under Article 17 of this Law\nArticle 17: Depreciation\n•\nDepreciation is explained in Article 17 paragraphs (a) through (l)\n•\nTerms and classifications are detailed in the Article to provide extensive guidance\nArticle 18: Expenses of Asset Repair and Improvement\n(a) Expenses incurred by the taxpayer for the repair or improvement of depreciable assets in\neach group may be deducted\n(b) The amount of expenses deductible in accordance with paragraph (a) for each year shall not\nexceed 4\\% of the balance of the value of the group at the end of that year\n(c) The amount exceeding the limit in paragraph (b) will be added to the balance of the value of\nthe group\nArticle 19: Expenses for Geological Surveying and Preliminary Work for the Extraction of Natural\nResources\n(a) Expenses of this Article are deducted in the form of amortization at the depreciation\nrates determined in paragraph (b) of Article 17\n(b) This Article also applies to expenses of intangible assets incurred by the taxpayer\nChapter 3 – Employee Expenses and Deferred Compensation; Accounting Periods and\nMethods\nArticle 20: Contributions to an authorized retirement fund\n•\nContributions to an Authorized Retirement Fund\n(a) An Employer’s contributions to an authorized retirement fund established in accordance with\nthe laws of the Kingdom may be deducted in favor of the employee\n(b) the deduction allowed in paragraph (a) of this article shall not exceed 25\\% of each\nemployee’s income, prior to calculating the employer’s contribution\n(c) The employee’s contributions to an authorized retirement fund may not be deducted\nArticle 21: Carrying forward losses\n(a) a net operating loss may be carried forward to the taxable year following the year in which\nthe loss is incurred. The carried forward loss shall be deducted from the tax base of the\nfollowing taxable years until the cumulative loss is fully offset. The regulations shall specify the\nmaximum limits allowed to be annually deducted.\n(b) a net operating loss is equal to the excess of the deductions allowed under this Chapter\nwhich are in excess of the taxable income for the taxable year\n(c) to calculate the net operating loss for a natural person, the deductions and income for\nactivity only shall be taken into consideration\nArticle 22: Taxable Year\n(a) The taxable year is the State’s fiscal year.\n(b) a taxpayer may use a twelve month period other than the one specified in paragraph (a) of\nthis Article as a taxable year, in accordance with the restrictions specified in the regulations\n(c) see Article 22 for further explanation of about a short year and a long year in accordance\nwith the regulations\n(d) Groups of related companies as defined in Article 64 of this Law, shall use the same taxable\nyear.\nArticle 23: Method of Accounting\n(a) A taxpayer’s method of accounting must clearly reflect the taxpayer’s income.\n(b) The gross income and expenses of a resident company, and any other taxpayer who keeps or\nis required by law to keep commercial books according to the accounting principles generally\naccepted in the Kingdom, are determined according to such books after adjustments of the\naccounts so as to conform to the rules of this Law\n(c) For taxation purposes, a natural person may record his transactions on a cash or accrual\nbasis. However, if his gross income from business for a taxable year exceeds the amount\nspecified in the regulations, he must use the accrual method in all succeeding taxable years.\n(d) A company which keeps or is required by Law to keep commercial books must record income\nand expenses on an accrual basis. Otherwise, it may for taxation purposes, use either the cash\nor accrual method.\n(e) Except for a change from the cash basis to the accrual basis required in accordance with\nparagraph (c) or (d) of this Article, a taxpayer may change its method of accounting upon\nobtaining the Department’s consent.\n(f) If a taxpayer changes his method of accounting, it must perform adjustments to items of\nincome and deduction, or to debt or any other items in the taxable year following the change, so\nthat no item is omitted, or included more than once.\nArticle 24: Cash-Basis Accounting\nA taxpayer who uses the cash basis method in its books and records shall register the received income\nwhen received or made available, and the paid expenses when paid\nArticle 25: Accrual-Basis Accounting\n(a) A taxpayer who uses the accrual method shall record income and expenses when they are due\n(b) An amount becomes payable to the taxpayer when the taxpayer is entitled to receive it, even if\npayment is postponed or pain in installments\n(c) An amount becomes payable by the taxpayer when all the facts determining liability have\noccurred\nChapter 4 – A Guide to Accounting Zakah Part 1\nIntroduction\n•\nZakah is a duty that must be fulfilled by all “capable” Muslims for it constitutes one of the\nfive pillars of Islam.\n•\nThis premise is taken for granted by all Muslims; scholars as well as common people\nThe most important questions are:\n•\nHow should a Muslim pay Zakah?\n•\nWhat is the right way to pay Zakah?\nBooks of Fiqh (Islamic Jurisprudence) provide directions and details for this task\n•\nTo calculate alms (Zakah) on money for individuals and companies, an accountant needs\na guide to help him in defining the items of assets, on which alms are due\n•\nThe accountant also needs to know how to assess the liabilities which should be\nreduced from assets for alms in order to reach the alms category and calculate the alms\nwhich are due to be paid\nFirst Essay: Accountancy Rules and Equations for Alms on Money\n1. The annual rule\n•\nAlms are calculated according to the lunar year. Counting starts when the amount of\nmoney attains the Nisab (the minimum amount on which alms should be paid)\n•\nThis includes all kinds of alms except alms on agriculture, fruits, mineral assets and Rikaz\n(metals found in the earth)\n2. The rule of the independence of each year\n•\nEach alms year is an independent one, and alms on a given amount of money should not\nbe more than once in the same year.\n•\nDuality should be avoided\n3. The rule of actual or assumed growth\n•\nActual or assumed growth of an amount of money is a condition for any alms to be\ngiven from this money.\n•\nTherefore alms are not due on fixed assets or things for personal use. This is because\nthe condition of actual or assumed growth would not be met.\n4. The rule of capacity for obligation\n•\nAlms are due on money which is abounding (more than basic needs). No alms are due\nfor little amounts of money.\n•\nThe amount of money should reach the Nisab. This guarantees that only those who\nhave the capacity of paying will be obliged to pay.\n5. The rule of calculating alms on the total and the net amounts\n•\nFor every kind of money or activity there is a rule for calculating alms which are due on it. Some\nare calculated in relation to the total amount and others are calculated in relation to the net\namount.\n6. The rule of grouping monies of the same kinds\n•\nIt is permissible to group cash money of wealth to cash money available from offers of\ncommerce and other gained cash money so that for all these monies there would be\none Nisab and one alms year.\n•\nHowever, it is not permissible to group different kinds of money. For example, cattle,\ncash available from commercial operations, and agriculture and fruits should not be\ngrouped in one lump sum and the alms paid on them.\n7. The rule of evaluating according to the current value of the market\n•\nEvaluating cash money of wealth and cash money from offers of commerce to define\nthe alms due should be according to the current value at the time of paying alms\n•\nThey should not be evaluated according to historic value, cost or market, whichever is\nless\nThe equations of calculating alms on money\n1. Receptacle of alms money = alms assets – liabilities which are due to be paid at that moment\n2. Alms assets = assets which meet the conditions of obligatory alms\nThe conditions of obligatory alms are:\na. It should be full ownership\nb. Growth (actual or assumed)\nc. Completion of the year (except alms on agriculture, fruits, mineral wealth, or\nminerals of the earth\nd. No other kind of alms has been paid on the same assets within the same year\ne. Assets should abound basic needs\nf. It should not include a debt which is due at the time\ng. It should reach the minimum obligatory amount (Nisab)\n3. Short term liabilities = short term liabilities which are due payment and in which the\nconditions of decision are filled\na. Liabilities should be related to the activity\nb. Due payment during coming year\nc. Legally permissible\n4. The amount due for alms (Nisab)= 85 grams of pure gold evaluated according to current\nprice\n5. The amount of alms due = the receptacle of alms money once it reached the Nisab X the\nprice of alms\n6. The price of alms = varies according to the kinds of money and activity. The range is\n2.5\\% to 20\\%.\nChapter 5 – A Guide to Accounting Zakah Part 2\nSecond Essay; Executive Measures for Calculating Alms for Individuals and Companies\nAlms on money should be calculated according to the following steps:\n1. Defining the date completing the year. Varies according to the circumstances of the\nalms giver\n2. Different monies owned by the alms giver should be assessed at the end of the year\naccording to the rules of alms\n3. Assessment of liabilities (deductions) which ae due to be decided upon, from alms\nmoney according to the rules of Zakah\n4. Defining the receptacle of alms by the deduction of due liabilities from alms money.\nAccording to the following equation:\nThe receptacle of alms = alms assets minus due liabilities\n5. Defining and assessing the amount of Nisab according to the kind of money, the kind of\nactivity, and the kind of alms. Nisab differs according to the kind of alms (on what will\nthe alms money be spent).\n6. A comparison should be made between the receptacle of alms defined in step 4 with\nNisab defined in step 5 so as to know whether alms are due or not. If the receptacle\nreaches the Nisab then alms would be due.\n7. Define the amount which should be taken from the receptacle of alms, which\naccountants term as the percentage or price of alms. See Guide for specifics on types\nand amounts of alms.\n8. Calculate the amount of alms by multiplying the amount of the receptacle by the\namount of the price (percentage) of alms. The result should be the amount of due alms.\n9. Defining who pays the due alms are as follows;\na. For individuals and personal establishments; the individual or owner should pay the\ndue alms.\nb. For partnerships; the amount of due alms should be divided between the partners\naccording to the percentage of his share\nc. For investment companies; the amount of due alms should be divided on the\nnumber of shares.\n•\nEach investor then pays alms according to his shares.\nd. For partnerships of labor and capital;\n•\nThe labor pays alms according to his share of profits\n•\nThe financier pays alms on capital and the profit less the laborer’s share\n10. Revenue from alms should be distributed according to its due activities and persons in\nthe light of the rules of Islamic Law.\nAlms money should be spent on the following:\n1. The poor\n2. The needy\n3. Those who work in administering alms\n4. Those whose hearts have been recently reconciled to the Truth\n5. To free slaves\n6. Those who are in debt\n7. In the Path of Allah\n8. The wayfarers\nIn order to calculate alms on money, an accountant needs the following tools and methods:\n1.\nGeneral balance (financial situation) made on the date of calculating alms\n2. Final accounts for the ended year on which alms are to be calculated\n3. Clarification concerning the balance and the final accounts\n4. The price of gold at the time when paying alms is due in order to calculate the Nisab.\n5. Different monies possessed by the alms giver should be grouped if of the same kind\n6. Different contemporary fatwas concerning alms\n7. The Guide for calculating alms\n8. Other accountancy tools and methods which may be useful for calculating alms\nChapter 6 – A Guide to Accounting Zakah Part 3\nSimplified Accountancy Forms\n•\nThese forms are meant to be used as a guide for accountants when assessing the receptacle\nof alms and when advising the alms giver whether he is an owner of a personal\nestablishment or a partner with others in a private company or a shareholder in an\ninvestment company\nAccountancy form to assess and calculate alms on wealth in cash\n•\nThe receptacle of alms on cash wealth includes banknotes, coins, silver, gold money and\ningots of gold, current accounts in banks and investment accounts\n•\nThe Nisab for cash wealth is 85 grams of pure gold, or its equivalent in cash, or 595 grams of\npure silver\n•\nThe Islamic Commission for Research has recommended to use the Nisab in gold.\nThe assessment and calculation steps are as follows:\na. Define the time when alms are due, (Al-Hawl), which starts from the time when the\namount of money reaches Nisab\nb. Define all items of cash wealth, on which alms must be paid (alms assets)\nc. Assess all items of cash wealth according to market value at the time when alms is\ndue\nd. Settle all due liabilities on the alms giver from his cash wealth so that to know the\nreceptacle of alms\ne. Compare between the receptacle of alms and the Nisab, if the receptacle reaches\nthe Nisab, then alms is due to be paid.\nf. Calculate the amount of alms by multiplying the receptacle by the price of alms,\nwhich is 2.5\\%.\ng. See form on page 29 of Guide\nAccountancy form to assess and calculate alms on goods for trading and industrial activities\n•\nWhat is meant by goods for trading is anything which is to be bought or sold with the\nintention of trading to earn a profit\n•\nNo alms are due on goods obtained for personal use\nThe assessment and calculation steps are as follows:\na. Define the end of the alms year, which is the same date as the end of the financial\nyear for an establishment or company\nb. Define and assess the elements of alms assets such as goods, etc.\nc. Define and assess the elements of immediate current liabilities which are due for\npayment from the alms assets\nd. Define the receptacle of alms by deducting item (c) from item (b) and add any\nearned money\ne. Define the amount of the Nisab, and then compare with the receptacle of alms\nf. Calculate the amount of alms. If the receptacle reaches the Nisab, then alms should\nbe paid as 2.5\\% if lunar year and 2.577\\% if solar year.\ng. See form on page 32 in Guide\nAccountancy form to assess and calculate alms on agriculture and fruits\n•\nAgriculture is anything that comes out of the earth and is planted by seeds from which man,\nanimal, and bird feed\n•\nFruits is everything which trees carry which is to be eaten\n•\nAlms on agriculture and fruits are due at the time of harvest or collecting\n•\nIf an area of land produces more than one crop within the year, its owner should pay alms\non each crop separately.\nThe following are the steps of assessing the alms on agriculture and fruits:\na. Measure the total production of the land either by production or by cash\nb. Define the expenses on the production, if the opinion adopted is that which says\nthat expenses should be deduced as far as they do not exceed the third, which is\nthe opinion of the Sixth Fiqh Seminar of Barakah.\nc. Define the receptacle of alms by deducing item (b) from item (a).\nd. Define the amount of Nisab, which is the equivalent to 5 Awsaq, or the\nequivalent to 50 Egyptian Kaylah, or 653 kg of wheat or the average food for\nmost people\ne. Calculate the amount of alms:\na. In the case of watering by cost alms = receptacle of alms X 5\\%\nb. In the case of watering without cost, alms = receptacle of alms X 10\\%\nSee form on page 35 of the Guide\nAccountancy form to assess and calculate alms on cattle\n•\nCattle includes camels, cows, and sheep\n•\nAlms are due only if they are bred for multiplication and not used as animals of burden\n•\nNisab for alms on cattle differs according to the kind of species\n•\nFor camels it is five, for sheep it is forty, whereas for cows it is thirty\n•\nRefer to Fiqh books for more details\nThe following are the steps of assessing the alms on cattle:\na. Define the number of cattle deducing the working animals and the ones ready for trade\nb. Compare the number with Nisab, If it is less than Nisab then no alms are due.\nc. Define the category the number falls into, in order to define the amount of alms due\nd. Define the alms due according to tables in Fiqh books\nSee form on page 37 in the Guide\nAccountancy form to assess and calculate alms on mineral and marine wealth and minerals in\nthe earth\n•\nMineral and marine wealth include anything of value which is brought out from the earth\nor the bottom of rivers, seas, or oceans\n•\nMinerals in the earth (Rikaz) are treasures which are buried in the earth\nThe following are the steps for defining the receptacle of alms on mineral and marine wealth:\na. Define the net production from the earth or sea, on which alms must be paid\nb. Compare the net production with the Nisab (85 grams of gold) in he case of minerals of\nwealth. For Rikaz there is no Nisab.\nc. Calculate the amount of alms, if the receptacle reaches the Nisab, on the basis of 2.5\\%\nfor minerals and 20\\% for Rikaz\nSee form on page 39 of the Guide\nAccountancy form to assess and calculate alms on revenue of investment assets\n•\n•\nInvestment assets are any assets which remain fully owned whilst revenue from investing\nthem are re-occurring, such as real estate, cars, and others\nNo alms are due on the assets, however alms are due on the revenues once they reach\nNisab after deducing actually paid expenses and debts\nReceptacle of alms on investment assets is calculated according to the following steps:\na. Define the total annual revenue at the end of the year\nb. Define all expenses of getting the revenue\nc. Deduce the expenses from the total revenue to get net revenue\nd. Deduce currently due debts which the alms giver must pay\ne. The net of all of the above should be added to any cash and trade goods owned by the\nalms giver in which no alms were paid at the end of the year to ascertain the receptacle\nof alms\nf. Compare the receptacle (e) with the Nisab which is the equivalent to 85 grams of gold, if\nthe receptacle reaches the Nisab, then alms should be calculated on the basis of 2.5\\%,\nwhich is the chosen opinion of the present guide.\nSee form on page 42 of the Guide.\nAccountancy form to assess and calculate alms on revenue from work\n•\n•\nThis category includes wages, salaries, income from freelance work and won money\nAlms must be paid on what remains of this money at the end of the year by adding it to\nother monies owned by the alms giver when calculating the Nisab and the alms year\nThe steps to define the receptacle of alms and calculate what is due at the end of the year are:\na. Define what remains from the revenue at the end of the year after deducing what is\npaid from cost of basic need and after paying outstanding debts\nb. Compare step (a) to Nisab (85 grams of gold) to know whether alms are due or not\nc. Calculate the amount of alms if the receptacle reaches the Nisab on the basis of 2.5\\%\nSee form on page 44 of the Guide\nSee page 45 of the guide to determine alms on freelance work\nSee page 46 for form for freelance work\nACCT422 – Tax& Zakat Accounting\nChapter 2 – Determination of Tax\nFormula for Individual Income Tax\nGross income – Exclusions = Gross Income (after exclusions)\nGross Income (after exclusions) – Deductions for AGI = Adjusted Gross Income (AGI)\n•\nTax rate schedules, std. deduction, personal exemptions, & other amounts are adjusted for inflation.\nActual amount paid\n‫مبلغ معياري بموجب القانون‬\n‫األكبر من االثنين‬\nAdjusted Gross Income (AGI) – Deductions from AGI→ 1- Greater of\nitemized deductions OR standard ded.\n2- Personal and dependency exemptions\n= Taxable Income\nTaxable Income X Tax rate or rates = Gross tax\nGross tax – Credits and prepayments = Net tax payable OR refund due\nDeductions from Adjusted Gross Income\n•\n•\n•\n•\n•\n•\nItemized deductions\nStandard deduction\nPersonal exemptions\nDependency exemptions\nChild credit\nMaking work pay credit and social security tax reduction\nBashaier\nItemized Deductions\nSee Table 6 for partial list\no\no\no\no\no\no\n•\n•\nMedical expenses\nTaxes\nInvestment and residential interest\nCharitable contributions\nPersonal casualty and theft losses\nMiscellaneous deductions\nOnly claim itemized deductions if total greater than std. deduction\nSome items limited by varying percentages of adjusted gross inc.\no Medical expenses\no Casualty losses\no Miscellaneous itemized deductions\nStandard Deduction\n•\n•\n•\n•\nVaries based on:\no Filing status, age, and vision\no $6,100 – $12,200 in 2013\n▪ Increase over 2012 to adjust for inflation\nIncrease std. ded. if elderly &/or blind\nUsed when std. ded. > itemized ded.\nLimited std. ded. in certain situations\nPersonal Exemptions\n•\n•\nGenerally, each taxpayer allowed one\no Unless claimed as dependent on another return\no $3,900 in 2012\nAdditional allowed for spouse on joint return\nBashaier\nDependency Exemptions\nRequirements for All Dependents\n•\n•\n•\n•\nHave a qualifying identification number\nMeet a citizenship test\nMeet a separate return test\nNot themselves claim another person as a dependent\nAdditional Requirements for Qualifying Children\n•\n•\n•\n•\nRelationship test\nAge test\n• < 19 or full-time student < 24\nAbode test\n• Live w/taxpayer > ½ of year\nSupport Test\n• Dependent provides < ½ own support\nAdditional Requirements for Other Relatives\n•\n•\n•\nRelationship test\n• Related to or live w/taxpayer whole yr\nGross income test\n• Dependent’s gross inc. < exemption amt.\nSupport test\n• Taxpayer provides > ½ support\nDetermining the Amount of Tax\n•\n•\n•\n•\n•\n•\n•\n•\nFiling status\nJoint return\nSurviving spouse\nHead of household\nSingle taxpayer\nMarried filing a separate return\nAbandoned spouse\nDependents with unearned income\nBashaier\nFiling Status\n•\nMarried filing jointly\n• Marital status on last day of tax year\n• Common law marriages recognized\n• Spouses must be U.S. citizens or residents\n• Federal Defense of Marriage Act of 1996 defines marriage as between a man and a woman\n▪ Same-sex couples cannot file a joint federal return, but may file joint state return\nin some states\n•\nSurviving spouse\n• Files as married filing jointly\nHead of household\n• Unmarried and maintains home in which dependent lives > ½ yr\n•\n•\n•\n•\nMarried filing separately\nSingle – taxpayers not in other categories\nRelative tax liability by filing status from lowest to highest\n• Married filing jointly\n• Surviving spouse\n• Head of household\n▪ Includes abandoned spouse\n• Single\n• Married filing separately\nBashaier\nChapter 3 – Gross Income: Inclusions\nConcepts of Income\n•\n•\n•\nEconomic concepts of income\nAccounting concepts\nTax concept of income\nEconomic Concepts of Income\n•\n•\nWealth that flows to individuals\nChanges in value in individuals’ wealth\no Unrealized gains\no Gifts & inheritances considered income\nAccounting Concepts of Income\n•\n•\n•\nValues are measured by a transaction approach\nIncome realized as result of completed transactions\nUse historical cost\nTax Concept of Income\n•\n•\n•\n•\nConditions to make income taxable\nAdministrative convenience\nWherewithal to pay\nGross income defined\nConditions to Make Income Taxable\n▪\n▪\n▪\nEconomic benefit to taxpayer\nIncome must be realized\n• Earnings process complete\nIncome must be recognized\nAdministrative Convenience\n▪\n▪\nEconomic concept is considered too subjective\nObjectivity achieved at price of equity\nWherewithal to Pay\n▪\nA tax should be collected when the taxpayer can most easily pay\nGross Income Defined\n▪\nSection 61(a) defines gross income\n• “all income from whatever source derived,” including (but not limited to)\nthe following items:\n• Compensation, income derived from business, gains from dealings in\nproperty, interest, rents, royalties, dividends, alimony, annuities, life\ninsurance, pensions\nBashaier\n▪\n▪\nForm of receipt\n• Gross income not limited to cash\n• §1.61-1a, income may be “realized in any form, whether in money,\nproperty, and services”\nIndirect economic benefit\n• Items indirectly benefiting taxpayers excluded from gross income\nAllocating Income between Married People\n▪\n▪\nCommon law property system\n• Used in 42 states\n• Income taxed to person who earns it or who owns the income-producing\nproperty\no Joint income comes from jointly owned property\nCommunity property states\n• All income deemed to be earned equally by spouses except income from\nseparate property\n• Separate property of each spouse\no Property owned prior to marriage\no May be community income or separate income, depending on state\nof residence\nBashaier\nWhen Is Income Taxable?\n•\n•\n•\n•\nCash method\nAccrual method\nHybrid method\nSee Topic Review 1\nCash Method\n▪\n▪\n▪\nCash receipts and disbursements\n• Used by most individuals, and most non-corp. bus. with no inventory\nConstructive receipt\n• Report inc. in year actually received\no Check received after banking hours\no Bond interest coupons that have matured but not redeemed\nNo constructive receipt if\n• It is subject to substantial limitations\n• Payor does not have funds necessary to make payment\n• Amount is unavailable to taxpayer\nAccrual Method\n▪\n▪\nReport income in year income earned\n• Right to income\n• Amount can be determined with reasonable accuracy\nPrepaid income\n• Generally taxable when received\n• Exceptions in Rev. Proc. 2004-34\nHybrid Method\n▪\n▪\nAccrual method for purchases and sales\nCash method in computing all other income and expenses\nBashaier\nItems of Gross Income\n•\n•\n•\n•\n•\n•\n•\n•\n•\n•\n•\n•\nCompensation\nBusiness income\nGains from dealings in property\nInterest\no Series EE bond interest exception\nRents and royalties\nDividends\nAlimony and separate maint. pmts.\nPensions and annuities\nIncome from life insurance and endowment contracts\nInc. from discharge of indebtedness\nIncome passed through to taxpayer\nOther items of gross income\nDividends\n•\n•\n•\n•\n•\n•\n•\nIncluded in shareholder gross inc.\nResults in double taxation\no Earnings taxed at corporate level\no Earnings taxed at shareholder level when distributed as a dividend\no C corps allowed a 70, 80, or 100\\% div. rec. deduction based on ownership \\%\n▪ Relief from multiple levels of taxation\nIndividuals taxed up to 20\\% on dividends\no Reduces effects of double taxation\no Must hold stock for at least 60 days\nDistributions to extent they are out of corporate E&P\nStock dividends\no Not taxable\no Basis in stock allocated to new shares\nCapital gain dividends\no Taxed at long-term capital gain rates\nConstructive dividends\no Taxed as regular dividends\nBashaier\nAlimony and Separate Maintenance Payments\n•\n•\n•\nOnly receipt of alimony is taxable\no Alimony is deductible by one who pays\nChild support not taxable\nProperty settlement not taxable\nPensions and Annuities\n•\nIncome portion of annuity taxable\no Investment portion is excluded\nIncome Passed Through to Taxpayer\n•\nIncome from flow-through entities taxed directly to owners\no Income from partnership\no Income from S corporation\no Income in respect of a decedent\no Income from an estate or trust\no Income from ETF, RIC, or REIT\nOther Items of Gross Income\n•\n•\n•\n•\n•\n•\n•\nPrizes, awards, gambling winnings, and treasure finds – taxable\nIllegal income – taxable\nUnemployment compensation – taxable\nSocial security benefits – up to 85\\% taxable\nInsurance proceeds & court awards\no Special rules apply\nRecovery of previously deducted amounts – taxable\nRevenue received that is disputed must still be reported as income\no Previously reported income that is subsequently refunded is deductible\nBashaier\nChapter 4 – Gross Income: Exclusions\nItems that Are Not Income\n•\n•\n•\n•\nUnrealized income\nSelf-help income\nRental value of personal-use property\nSelling price of property\nUnrealized Income\n▪\nExample:\n• Land valued at $20,000 beginning of year appreciates to $45,000 at end of\nyear\no The $25,000 increase in value is unrealized income and not taxable\nSelf-Help Income\n▪\nThe amount saved is not subject to tax\n• Cleaning your own carpet\n• Repairing your car\nSelling Price of Property\n▪\nOnly gain on sale of property is taxable\no Selling price – Basis in property = Gain on sale of property\nMajor Statutory Exclusions\n•\n•\n•\n•\n•\n•\n•\n•\n•\n•\n•\nGifts and inheritances\nLife insurance proceeds\nAwards for meritorious achievement\nScholarships and fellowships\nDistributions from qualified tuition programs\nPayments for injury and sickness\nEmployee fringe benefits\nForeign-earned income exclusion\nIncome from the discharge of a debt\nExclusion for gain from small business stock\nOther exclusions\nBashaier\nLife Insurance Proceeds\n•\n•\n•\nPaid by reason of death\no Generally non-taxable\nPolicy surrendered not for death\no Excess of proceeds over the premiums paid taxable to recipient\nDividends on life insurance and endowment policies non-taxable\no Considered return of premiums paid\nAwards for Meritorious Achievement\n•\nAwards for religious, charitable, scientific, etc. are not taxable if ALL criteria are met:\no Did not enter contest\no Is not required to perform substantial future services\no Designates a qualified charitable organization to receive the payment\nScholarships and Fellowships\n•\nScholarships excluded for degree candidates used for qualified tuition and related expenses\no Required for courses of instruction at an educational institution\n▪ Tuition, fees, books, supplies, equipment\no Not room and board\nDistributions from Qualified Tuition Programs: §529 Plans\n•\n•\nNo tax on earnings while in §529 plan\nExclusion for distributed earnings if used by beneficiary for qualified tuition and related expenses\no Tuition, fees, books, supplies, equipment, AND\no Room and board if ≥ half-time student\nPayments for Injury and Sickness\n•\n•\nInjury includes physical and mental\no Medical expense pmts. for emotional distress excluded if expenses attributable to a physical\ninjury\nDisability income policy is non-taxable if purchased by taxpayer\no Taxable if purchased by employer\nBashaier\nForeign-Earned Income Exclusion\nEligible Taxpayers\n•\nU.S. citizens subject to U.S. income tax on worldwide income\no Subject to double taxation if foreign income taxed by foreign country\no Foreign tax credit (FTC) mitigates double taxation\nExclusion Amount\n•\nForeign-earned income exclusion alternative to FTC\no May exclude up to $97,600 of foreign earned income\no Add’l exclusion for foreign housing costs\n▪ Foreign housing costs in excess of $15,616\n▪ Max housing exclusion is $13,664\nResidency Tests\n•\nTo qualify for foreign-earned income exclusion\no Must be bonafide resident of foreign country(ies) for entire taxable year,\nOR\no Physical presence in foreign country for 330 days during a 12-month period\nIncome from the Discharge of a Debt\n•\nGenerally, taxpayer may have to include amount of debt forgiveness in gross income\no Exceptions: nontaxable situations\n▪ Discharge occurs in bankruptcy\n▪ Discharge occurs when taxpayer is insolvent\nOther Exclusions\n•\n•\n•\n•\n•\n•\n•\n•\n•\n•\n•\nGain from sale of personal residence\nAnnuities paid to survivors of public safety officers\nCertain military-related payments\nHousing allowance for ministers\nCampus housing\nFoster care payments\nRural letter carrier’s allowance\nRoth IRA distributions\nEducation IRA distributions\nPersonal foreign currency gains\nSee Table 2\nBashaier\nChapter 6 – Deductions and Losses\nClassifying Deductions\nfor Adjusted Gross Income\n•\n•\n•\nTaxpayer benefits from deduction even if she claims the std. deduction\nReducing AGI: +/- benefits for t/p\n▪ + Many deductions and credits phased out above certain AGI thresholds\n▪ + Reduces AGI floors for certain categories of itemized deductions\n▪ -Reduces certain deduction ceilings\nMost common deductions for AGI\n▪ Trade or business expenses\n▪ IRAs and qualified pension contributions\n▪ Alimony\n▪ Losses on sale of bus/invest property\n▪ Moving expenses\n▪ Int. paid on qualified education loans\n▪ ½ of self-employment tax\n▪ Health insurance paid by self-employeds\nfrom Adjusted Gross Income\n•\nItemized deduction only will have tax benefit if total deductions exceed the taxpayer’s\nstandard deduction\n▪ Deduct the higher of the standard deduction or sum of itemized deductions\nCriteria for Deducting Bus. & Investment Expenses\n•\n•\n•\n•\n•\nBusiness or investment requirement\nOrdinary expense\nNecessary expense\nReasonable expense\nExpenses and losses must be incurred directly by the taxpayer\nBashaier\nBusiness or Investment Activity\n•\n•\n•\n•\n•\nActivity engaged in for profit\no Use facts and circumstances test\nTrade or business (ToB) vs. investment classification\no ToB losses are ordinary losses\n• ToB expenses are for AGI\no Investment losses are capital\n• Invest. exp are from AGI\n• Subject to 2\\% of AGI floor\nLosses and expenses related to rents and royalties are for AGI deductions\nLegal and accounting fees\n• For AGI deduction for ToB if incurred in ordinary course of business\n▪ Fees related to taxes also for AGI for ToB\nNonbusiness fees related to taxes from AGI deduction subject to 2\\% of AGI floor\nOrdinary Expense\n•\nOrdinary expense requirements\n• Reasonable in amount\n• Bear reasonable proximate relationship to income-producing activity or property\n• Must be customary or usual course of a particular industry or business community\nNecessary Expense\n•\nAn expense is considered necessary if it is “appropriate and helpful” in the taxpayer’s business\nReasonable Expense\n•\nProblems often occur with salaries for shareholder-employees of closely held businesses\nExpenses and Losses Must Be Incurred Directly by the Taxpayer\n•\nGenerally, a taxpayer cannot take a deduction for a loss or expense of another person\nBashaier\nWhen an Expense Is Deductible .. Cash Method\n•\nGenerally deductible when actually paid\n•\nPrepaid expenses\n•\n•\nNo current deduction if expenditure creates an asset with a life substantially beyond end of\ntax year\n▪ Exception for prepaid rent if prepmt ≤ 1 year and lease requires the prepmt\nPrepaid interest\n•\n•\nAmortize over period of loan to which interest charge is allocated\nPoints deductible over life of loan\n▪\nPoints paid in connection w/purchase or improvement of a principal residence are\ncurrently deductible\nWhen an Expense Is Deductible .. Accrual Method\n•\nAllowed to deduct exp. in period in which exp. accrue under all-events test & economic\nperformance test\no All-events test (AET) met\n▪ Amount of liability is established\n▪ Amount of liability is determined with reasonable accuracy\no\nEconomic performance test (EPT) is met when EP deemed to occur\n▪\nException for recurring liabilities\n•\n•\n•\n•\nAll-events test met\nEPT occurs w/in 8½ mo (or a reasonable period) after close of tax year\nExp. consistently treated as incurred in tax yr.\nItem not material, or better matching w/AET\nBashaier\nChapter 7 – Itemized Deductions\nMedical Expenses\n•\n•\n•\nQualified individuals\nQualified medical expenses\nAmount and timing of deduction\nQualified Individuals\n•\n•\nMedical exp. paid for taxpayer, taxpayer’s spouse, or dependent\n• Certain dependency test failures do not disqualify dependent\n▪ Failing to meet gross income limit\n▪ Failing joint return test\nNoncustodial parent may claim deduction for dependent\nQualified Medical Expenses\n•\n•\n•\n•\n•\n•\nDiagnosis, cure, mitigation, treatment, or prevention of disease\nTransportation\n• $0.24/mile std. mileage rate\n• If overnight, includes\n▪ Meals (50\\%) & lodging (≤ $50)\nCost of living in institutions\nCapital expenditures\n• Excess of cost over amount by which value of home increases\nMedical insurance premiums\n• Includes qualified L-T care premiums\nNo cosmetic surgery\n• Unless treats illness or promotes proper body function\nAmount and Timing of Deduction\n•\n•\n•\nDeductible in year paid for qualified medical exp. exceeding 10\\% of AGI\n• 7.5\\% for taxpayers > 65 until 2016\nMedical insurance reimbursements\n• Only unreimbursed portion deductible\nSelf-employeds may deduct health insurance as a for AGI deduction\nBashaier\nTaxes\n•\n•\n•\n•\n•\n•\n•\n•\n•\nDefinition of a tax\nDeductible taxes\nState and local income taxes\nState and local sales taxes\nNondeductible taxes\nPersonal property taxes\nReal estate taxes\nSelf-employment tax\nNondeductible taxes\nDefinition of a Tax\n•\nMandatory assessment levied under authority of a political entity for purpose of raising revenue\nused for public or governmental purposes\nDeductible Taxes\n•\n•\n•\n•\n•\nState, local, & foreign real prop. taxes\nSome state and local personal prop. taxes\nForeign, state &, local income, war profits, and excess profit taxes\nState & local sales tax election\nEnvironmental tax\nNondeductible Taxes\n•\n•\nTaxes imposed by the Federal gov’t generally not deductible\nExceptions\n• Employer’s share of Social Security tax\n▪ Deductible by employer as bus. expense\n• Federal import tariffs & excise taxes\n▪ Deductible if for business or production of income\nCharitable Contributions\n•\n•\n•\n•\nQualifying organizations\nType of property contributed\nDeduction limitations\nApplication of carryovers\nQualifying Organizations\n•\n•\n•\n•\nU.S., D.C., state, or U.S. possession\nA post or organization of war vets\nDomestic fraternal society, or order, or association\nPublic Charities\n• Churches, educational Institutions, hospitals, medical schools\nBashaier\nType of Property Contributed\n•\n•\n•\nContribution of long-term capital gain property\n• Generally FMV\n▪ Use adjusted basis if\n• Contributed to private nonoperating foundation\n• Unrelated use by charitable organization\n• Certain intangibles\nContribution of ordinary inc. prop.\n• Value generally adjusted basis\n• Exception for C corp donation of certain inventory\n▪ FMV – (50\\% x [ordinary inc. if sold])\nContribution of services\n• Only out-of-pocket and transportation expenses deductible\nDeduction Limitations\n•\n•\n•\n•\n•\n50\\% of AGI limitation\n• Applies to public charities\n30\\% of AGI limitation\n• Contributions of capital gain property\n20\\% of AGI limitation\n• Capital gain property contributed to private nonoperating foundations\nOrder of deductions\n•\n50\\% property\n•\n30\\% property\n•\n20\\% property\nCombined contributions cannot exceed 50\\% of AGI\nCasualty and Theft Losses\n•\n•\nIndividuals can deduct casualty or theft loss on personal-use property as an itemized deduction\nSee Chapter 8\nMiscellaneous Itemized Deductions\n•\n•\n•\n•\nCertain employee expenses\nExpenses to produce investment income\nCost of tax advice\nSee Chapter 9\nBashaier\nCertain Employee Expenses\n•\nUnreimbursed employee business expenses\n• Include travel, transportation, dues to professional organizations, cost of job hunting\n• Generally misc. itemized deductions subject to a 2\\% of AGI floor\nExpenses to Produce Investment Income\n•\n•\nExpenses to produce investment income other than rents or royalties\nMiscellaneous itemized deductions subject to 2\\% of AGI floor\n• Investment interest NOT subject to the 2\\% of AGI floor\nCost of Tax Advice\n•\n•\nIncludes\n• Tax return preparation fees\n• Appraisal fees in determining amount of casualty loss\n• Accountant fees for representation in a tax audit\nMiscellaneous itemized deduction subject to 2\\% of AGI floor\nBashaier\nChapter 8 – Losses and Bad Debts\nTransactions that May Result in Losses\n•\n•\n•\n•\n•\nSale or exchange of property\nExpropriated, seized, confiscated, or condemned property\n• Treat as sale or exchange\nAbandoned property\nWorthless securities\nDemolition of property\n• Add to basis of land\nSale or Exchange of Property\n•\n•\nAmount realized includes liability transferred to buyer\n• Qualified residence exception\n▪ No gain on transfer AND no discharge of indebtedness income\nSelling costs\n• Deducted in year incurred for inv.\n• Reduction of amt realized for noninv.\nAbandoned Property\n•\n•\nOrdinary loss if business or investment property\nNondeductible if personal property\nWorthless Securities\n•\n•\nSecurities must be completely worthless\nCapital loss on last day of tax year\nClassifying the Losses on Taxpayer’s Tax Return\n•\n•\nOrdinary vs. capital loss\nDisallowance possibilities\nBashaier\nOrdinary vs. Capital Loss\n•\n•\n•\nBased on of type of property and type of transaction involved\n§1231 property\n• Net §1231 loss is an ordinary loss\n• Includes real or depreciable property used in a trade or business and held for more than one\nyear\n§1244 stock\n• Loss on sale of §1244 stock ordinary\n▪ Limited to $50K ($100K MFJ)\n▪ Excess loss is a capital loss\n• §1244 stock qualifications\n▪ ≤ 50\\% of gross receipts from passive sources during prior 5 tax years, AND\n▪ Contributions to capital and paid-in surplus ≤ $1M at time of issue\nCasualty and Theft Losses\n•\n•\n•\n•\n•\n•\n•\nCasualty defined\nTheft defined\nDeductible amount of casualty loss\nLimits on personal-use property\nNetting casualty gains and losses on personal-use property\nCasualty gains and losses attributable to business and investment property\nTiming of casualty loss deduction\nCasualty Defined\n•\n•\nA casualty loss results from an identifiable event that was sudden, unexpected, or unusual\nQualifying casualties include fire, flood, hurricane, tornado, and hail\nTheft Defined\n•\n•\nGenerally, criminal intent and violation of state law required to meet definition of theft\nIncludes larceny, embezzlement, robbery, blackmail, extortion, and ransom\nDeductible Amount of Casualty Loss\n•\nGenerally decline in FMV due to casualty\n• For partial destruction loss is lesser of decline in FMV or adjusted basis\n• Total destruction of business or investment property amount of loss is adjusted basis\nLimitations on Personal-Use Property\n•\nTwo limitations\n• Losses sustained in each separate casualty reduced by $100, AND\n• Sum of all net casualty losses reduced by 10 \\% of taxpayer’s AGI\nBashaier\nNetting Casualty Gains and Losses on Personal-Use Property\n•\n•\nLosses reduced by insurance reimbursement\nCasualty losses must be netted against casualty gains prior to applying 10\\% of AGI limitation\n• Net casualty loss subject to 10\\% limitation\nCasualty Gains & Losses Attributable to Business & Investment Property\n•\n•\nFor AGI deduction\n• Investment property must be used to generate rents or royalties\n• Losses on other investment property are miscellaneous itemized deductions NOT subject to\n2\\% of AGI floor\nIf property held 12 months\nOvernight requirement\n•\n•\nMust be reasonable for taxpayer to be away overnight\nShort rest stops on long day-trip not considered overnight\nBusiness vs. Pleasure\n•\n•\nTravel to and from destination\no If trip primarily personal, no deduction\no If trip primarily business, all travel to and from destination deductible\nOther travel-related expenses\no Allocated to business and personal activities\nTransportation Expenses\n•\n•\n•\nDefinition and classification\nTreatment of automobile expenses\nReimbursement of automobile expenses\no Excess expenses over reimbursement deductible as 2\\% misc itemized deductions\nDefinition and Classification\n•\n•\n•\n•\nCommuting costs generally nondeductible personal expenses\nCommuting costs between multiple jobs for same taxpayer deductible\nTransportation costs from employee’s regular work site to temporary one deductible\nCommuting costs between home and temporary work site deductible if taxpayer has regular place\nof business\nTreatment of Automobile Expenses\n•\n•\nStandard mileage rate $0.565/mile\no Not available if use ≥ 2 vehicles\no Does not include parking and tolls\nActual expenses\no Includes gas, oil, maintenance and repairs, insurance, and depreciation\no Based on ratio [Bus. miles]/ [Total miles]\nBashaier\nOffice in Home Expenses\nGeneral Requirements\n•\nOffice used on exclusive and regular basis and ONE of following\no Office used as principal place of business for any ToB\n▪ Includes doing administrative work if no other fixed location available\no Place for meeting clients in normal course of business\no Located in separate structure\n•\nAn employee must also prove that the home office is for the convenience of the employer\no\nNot just appropriate or helpful for the employee\nDeduction and Limitations\n•\nCategories of expenses\no Expenses directly related to office\no Expenses indirectly related to office\n▪ Expenses related to whole home\n▪ Prorate based on square footage or other method\no Total expenses cannot create loss\n•\nOrder of expense deductions\n1. Expenses not related to home office\n2. Expenses directly related to home office\n3. Pro-rata portion of indirect expenses\n▪\nE.g., mortgage, interest, utilities\n•\nDisallowed expenses carried forward to future year\n•\nOptional safe harbor to determine amount of deductible home office expenses per Rev.\nProc. 2013-13\no\n$5 multiplied by\n[sq. ft. of space for qualified use]\n▪\nLimited to 300 sq. ft.\n•\n$1,500 maximum deduction\nBashaier\nChapter 11 – Accounting Periods and Methods\nAccounting Periods\n•\n•\n•\n•\n•\nFiscal year is any 12-month period other than calendar year\nPartnerships, S corps, and PSCs\no Generally must have same tax year as majority owners (> 50\\% ownership)\nRequired payments and fiscal years\nChanges in the accounting period\nReturns for periods of < 12 months\nRequired Payments and Fiscal Years\n•\n•\nC corporations, other than PSCs, can choose any fiscal year\nPartnerships, S corps, and PSCs can choose a fiscal year if deferral is 3 months or less (§444 election)\nChanges in the Accounting Period\n•\n•\nGenerally need IRS approval to change accounting period\nMust establish substantial business purpose to change accounting period\nReturns for Periods of Less than 12 Months\n•\n•\nTaxpayer’s first or final return\no No annualization of income required\nChange from one accounting period to another\no Annualization required\nOverall Accounting Methods\n•\n•\n•\n•\nOverall accounting method for one trade or business not needed to be used in a second trade or\nbusiness\nCash receipts and disbursements method\nAccrual method\nHybrid method\nCash Receipts and Disbursements Method\n•\n•\n•\n•\n•\nReport income for the tax year in which payments are received\nGenerally deduct exp. in year paid\no Prepaid exp. capitalized and amortized if benefits extend beyond tax year\nMust capitalize fixed assets and recover through depr. or amort.\nMost individuals and many service businesses use the cash method\nCannot use cash method in a business where inventory is material income-producing factor\no Small business exception – see hybrid method\nBashaier\nAccrual Method\n•\n•\nReport income under all-events test and economic performance test\no All events test\n▪ Taxpayer’s right to receive inc. & amount determined w/reasonable accuracy\no Economic performance test\n▪ Property or services actually rendered by other party\nDeduction is met when liability established and amount of expense can be determined with\nreasonable accuracy\nHybrid Method\n•\nUse accrual method for sales and purchases, but may use cash method for other income and\nexpenses\no Small business exception\n▪ Businesses with inventory whose annual gross receipts for 3 prior years ≤ $1M may\nuse cash method for sales and accrual method for cost of goods sold\nInventories\n•\n•\nUniform capitalization rules (UNICAP)\no Required for taxpayers whose average gross receipts for 3 prior years >$10M\no Must capitalize some period costs\nIf using LIFO for tax\no Must also use LIFO for financial acctg.\nChange in Accounting Methods\n•\n•\n•\n•\nAccounting period chosen by using for first year in which it is applicable\no IRS approval required to change methods\no May change to LIFO method without IRS approval\nAmount of change\no Due to timing of income and deduction recognition due to changes between cash and\naccrual methods\nReporting the amount of the change\no The amount\no Change voluntary or involuntary\no Any specific statutory mandates\nMust obtain IRS consent\nBashaier\n\nPurchase answer to see full\nattachment

APA paper format

The American Psychological Association (APA) format is a widely used style for writing academic papers in the social sciences. The APA format provides specific guidelines for formatting papers, including margins, font size and type, spacing, and the use of headings. These guidelines ensure that papers written in the APA format are visually consistent and easy to read.

In the APA format, papers are typically double-spaced and written in 12-point Times New Roman font. The margins should be 1 inch on all sides, and the text should be left-aligned. Headings are used to organize the paper into sections, with different levels of headings used to indicate the hierarchy of information.

In-text citations are an essential aspect of the APA format, and they must be included whenever information from an outside source is used in the paper. The reference page is also an important component of an APA paper, as it lists all of the sources used in the paper. The reference page should be formatted according to the APA guidelines, including the use of a hanging indent for each reference and the use of italics for book titles.

In conclusion, the APA format is a widely used style for writing academic papers in the social sciences. It provides specific guidelines for formatting papers, including margins, font size and type, spacing, and the use of headings. By following the APA format, students can ensure that their papers are visually consistent, easy to read, and meet academic standards.

Description\n \n\n\n\n\n\n\n\n Notes:\n \n\n\n The Assignment must be submitted on Blackboard (WORD format only) via allocated folder.\n \n\n Assignments submitted through email will not be accepted.\n \n\n Students are advised to make their work clear and well presented; marks may be reduced for poor presentation. This includes filling your information on the cover page.\n \n\n Students must mention question number clearly in their answer.\n \n\n\n Late submission\n \n will NOT be accepted.\n \n\n Avoid plagiarism, the work should be in your own words, copying from students or other resources without proper referencing will result in ZERO marks. No exceptions.\n \n\n All answered must be typed using Times New Roman (size 12, double-spaced) font. No pictures containing text will be accepted and will be considered plagiarism).\n \n\n Submissions\n \n without this cover page\n \n will NOT be accepted.\n \n\n\n Q1. Explain formula for individual’s income tax and business entities. (five marks)\n \n\n Answer:\n \n\n Q2. Arrange relative tax liability by filing status from lowest to highest? (2.5 marks)\n \n\n Answer:\n \n\n Q3. Contrast concepts of Income from accounting , economic and tax perspectives.( use your own words ) (five marks)\n \n\n answer\n \n\n Q4. Idinify Items that are not Income under US income tax law. ? (2.5 marks)\n \n\n Answer:\n \n\n\n\n|\n‫كلية العلوم االدارية والمالية‬\n‫مكتب العميد‬\nAssignment 2\nDeadline: 12/11/2022 at 23.59 pm\nCourse Name: Tax AND Zakat\nAccounting\nCourse Code: ACCT 422\nStudent’s Name:\nSemester Summer Semester\nCRN:\nStudent’s ID Number:\nAcademic Year: First Semester 1444 H\nFor Instructor’s Use only\nInstructor’s Name: Dr. Salah Oraby\nStudents’ Grade: Marks Obtained\n/Out of 15 marks\nLevel of Marks: High-Middle-Low\nNotes:\n• The Assignment must be submitted on Blackboard (WORD format only)\nvia allocated folder.\n• Assignments submitted through email will not be accepted.\n• Students are advised to make their work clear and well presented; marks\nmay be reduced for poor presentation. This includes filling your\ninformation on the cover page.\n• Students must mention question number clearly in their answer.\n• Late submission will NOT be accepted.\n• Avoid plagiarism, the work should be in your own words, copying from\nstudents or other resources without proper referencing will result in\nZERO marks. No exceptions.\n• All answered must be typed using Times New Roman (size 12, doublespaced) font. No pictures containing text will be accepted and will be\nconsidered plagiarism).\n• Submissions without this cover page will NOT be accepted.\n1\n|\n‫كلية العلوم االدارية والمالية‬\n‫مكتب العميد‬\nQ1. Explain formula for individual’s income tax and business entities. (five\nmarks)\nAnswer:\nQ2. Arrange relative tax liability by filing status from lowest to highest? (2.5\nmarks)\nAnswer:\nQ3. Contrast concepts of Income from accounting , economic and tax\nperspectives.( use your own words ) (five marks)\nanswer\nQ4. Idinify Items that are not Income under US income tax law. ? (2.5 marks)\nAnswer:\n2\nACCT422 – Tax& Zakat Accounting\nChapter 1 – Introduction to the Taxes System in Saudi Arabia; Persons Subject to Income Tax\nArticle 1: Definitions\n•\nArticle 1 includes definitions for use when using interpreting the income tax law\n•\nEach word will carry the meaning beside it unless the context indicates otherwise\n•\nPlease refer to the meanings throughout the course\nArticle 2: Persons Subject to Taxation\n•\nA resident capital company\n•\nA resident non-Saudi natural person who conducts business in the Kingdom\n•\nA non resident who conducts business in the Kingdom through a permanent establishment\n•\nA non resident with other taxable income from sources within the Kingdom\n•\nA person engaged in the field of natural gas investment\n•\nA person engaged in the field of oil and hydrocarbons production\nArticle 3: Concept of Residency\n•\nA natural person is considered a resident if he meets any of the following conditions:\n He has a permanent place of residence in the Kingdom and resides in the Kingdom for a\ntotal period of not less than 30 days\n He resides in the Kingdom for a period of not less than 183 days in the taxable year\n•\nA company is considered a resident in the Kingdom during the taxable year if it meets any of the\nfollowing conditions:\n It is formed in accordance with the Companies Law\n Its central management is located in the Kingdom\nArticle 4: Permanent Establishment\n•\nA permanent establishment of a non resident consists of the permanent place of the non resident’s\nactivity through which it carries out business, including business carried out through its agent\n•\nThe following are considered a permanent establishment:\n Construction sites, assembly facilities, and supervisory activities connected therewith\n Installations or sites used for surveying for natural resources including drilling equipment\nand ships used for surveying\n A fixed base where a non resident natural person carries out business\n A branch of a non resident company licensed to carry out business in the Kingdom\n•\nA place is not considered a permanent establishment of a non resident in the Kingdom if it is used\nfor the following purposes:\n Storing, displaying, or delivering goods belonging to the non resident\n Keep a stock of goods belonging to the non resident for the purpose of processing by\nanother person\n Purchasing goods for the sole purpose of collection of information for the non resident\n Carrying out other activities of preparatory nature for the interests of the non resident\n•\nA place is not considered a permanent establishment of a non resident in the Kingdom if it is used\nfor the following purposes:\n•\nDrafting contracts for signature in connection with loans, delivery of goods or technical services\n•\nPerforming any series of activities stated in the above list\nArticle 5: Source of Income\n•\nArticle 5 lists 10 primary sources of income that are considered accrued in the Kingdom\n•\nThe place of payment of the income shall not be taken into account in determining its source\n•\nA payment made by a permanent establishment of a non resident in the Kingdom is considered as if\npaid by a resident company\nArticle 6: Tax Base\n(a) The tax base of a resident capital company is the shares of non-Saudi partners in its taxable income\nfrom any activity from sources within the Kingdom minus expenses permitted under this law\nSources – Expenses\n(b) The tax base of a resident non-Saudi natural person is his taxable income from any activity from\nsources within the Kingdom minus expenses permitted under this law\nSources – Expenses\n(c) The tax base of a non resident who performs an activity within the Kingdom through a permanent\nestablishment is his taxable income arising from or related to the activity of such establishment minus\nexpenses permitted under this law\nIncome – Expenses\n(d) the tax base of each natural person is determined separately\n(e) the tax base of a capital company is determined separately of its shareholders or partners\nArticle 7: Tax Rates\n•\n(a) the tax rate of the tax base is 20 percent (20\\%) for each of the following:\n•\nA resident capital company\n•\nA non Saudi resident natural person who conducts business\n•\nA non resident person who conducts business in the Kingdom through a permanent\nestablishment\n•\n(b) the tax rate of the tax base for a taxpayer engaged only in natural gas investment activities is 30\npercent\n•\n(c) the tax rate of the tax base for a taxpayer engaged in the production of oil and hydrocarbon\nmaterials is 85 percent\nChapter 2 – Taxable Activity and Tax-Exempt Incomes; Deductions and Losses\nArticle 8: Income subject to Tax\nTaxable income is the gross income including all revenues, profits, and gains of any type and of any form\nof payment resulted from carrying out an activity minus exempted income\nArticle 9: Gains and losses on disposal of assets.\n(a) The gain or loss from the disposal of an asset is the difference between the compensation received\nand its cost base\n(b) No gain or loss on disposal of a depreciable asset is taken into account other than what is stated in\nArticle 17 of this Law.\n(c) In determining taxable income, a natural person may not take into account gain or loss on disposal of\nan asset that is not for use in the activity\n(d) The cost base of an asset purchased, produced, manufactured, or constructed by the taxpayer is the\namount paid or incurred by the taxpayer in cash or in kind in the process of acquiring the asset.\n(e) Where a taxpayer disposes of part of an asset, the cost base is apportioned between the part\nretained and the part disposed of in accordance with their market value at the time of purchase\n(f) Expenses incurred to alter or improve a non-depreciable asset are added to the cost base of the\nasset.\n(g) The compensation value for disposal of an asset against assets in kind is based on the\nmarket value of those assets in kind, including exemption from debt on the asset\n(h) Where a taxpayer disposes of an asset by gift or inheritance, the disposer is treated as\nhaving received compensation equal to the market value at the time of disposal (unless\nparagraph (i) applies.\n(i) If an asset disposed of is encumbered by debt exceeding its market value, the taxpayer\ndisposing of the asset is treated as having received compensation equal to the value of the debt\n(j) In determining tax base, no gain or loss is taken into account on an involuntary disposal of an\nasset, to the extent that the compensation value is used to purchase of the same kind of asset\nwithin one year of the disposal.\n(k) The cost base of a replacement asset described in (j) is determined with reference to the\ncost base of the replaced asset\n(l) Where an asset owned by a taxpayer is converted to personal use or ceases to be used in the\ngeneration of income, the taxpayer is deemed to have disposed of the asset for its market\nvalue, with the recognition of the gain but not the loss.\nArticle 10: Exempt Income\nThe following types of income are exempt from income tax;\n(a) Capital gains realized from the disposal of securities traded in the Stock Market in the\nKingdom in accordance with restrictions specified in the regulations\n(b) Gains resulting from disposal of property other than assets used in the activity.\nArticle 11: Donations\nIn determining the tax base of each taxpayer, a deduction is allowed for donations paid during\nthe taxable year to public agencies or philanthropic societies licensed in the Kingdom which are\nnon profit organizations and are allowed to receive these donations.\nArticle 12: Expenses related to earning income\nAll regular and necessary expenses of earning taxable income, paid or accrued, incurred by the\ntaxpayer during the taxable year are deductible in determining the tax base, with the exception\nof outlays of a capital nature and expenses according to Article 13 of this law.\nArticle 13: Non Deductible Expenses\nNo deduction is allowed for the following;\n(a) Expenses not connected with the earning of taxable income\n(b) Any amounts paid to a shareholder, partner or any of their relatives, which constitute\nsalaries, wages, awards or the like, or which do not satisfy the conditions for\ntransactions among independent parties\n(c) Recreation expenses\n(d) Expenses of a natural person for personal consumption\n(e) Income tax paid in the Kingdom or another country\n(f) Fines and financial penalties paid or payable to any party in the Kingdom\n(g) Bribes or similar amounts considered a criminal offense.\nArticle 14: Bad Debts\n(a) A taxpayer my deduct bad debts arising from the sales of goods or services that have\nbee previously declared as taxable income of the taxpayer\n(b) A bad debt may be deducted when stricken off the taxpayer’s books, when there is\nsuitable evidence proving the impossibility of collecting it as specified in the regulations\nArticle 15: Reserves and Allocations\n•\nNo reserves or allocations may be deducted except allocations of doubtful debts for banks\n•\nThe regulations shall determine the rules and restrictions specifying such allocations\nArticle 16: Research and Development Expenses\n•\nResearch and development expenses connected with the earning of taxable income may be\ndeducted\n•\nExpenses for the purchase of land or equipment used for research and development may\nnot be deducted\n•\nSuch equipment shall be subject to depreciation under Article 17 of this Law\nArticle 17: Depreciation\n•\nDepreciation is explained in Article 17 paragraphs (a) through (l)\n•\nTerms and classifications are detailed in the Article to provide extensive guidance\nArticle 18: Expenses of Asset Repair and Improvement\n(a) Expenses incurred by the taxpayer for the repair or improvement of depreciable assets in\neach group may be deducted\n(b) The amount of expenses deductible in accordance with paragraph (a) for each year shall not\nexceed 4\\% of the balance of the value of the group at the end of that year\n(c) The amount exceeding the limit in paragraph (b) will be added to the balance of the value of\nthe group\nArticle 19: Expenses for Geological Surveying and Preliminary Work for the Extraction of Natural\nResources\n(a) Expenses of this Article are deducted in the form of amortization at the depreciation\nrates determined in paragraph (b) of Article 17\n(b) This Article also applies to expenses of intangible assets incurred by the taxpayer\nChapter 3 – Employee Expenses and Deferred Compensation; Accounting Periods and\nMethods\nArticle 20: Contributions to an authorized retirement fund\n•\nContributions to an Authorized Retirement Fund\n(a) An Employer’s contributions to an authorized retirement fund established in accordance with\nthe laws of the Kingdom may be deducted in favor of the employee\n(b) the deduction allowed in paragraph (a) of this article shall not exceed 25\\% of each\nemployee’s income, prior to calculating the employer’s contribution\n(c) The employee’s contributions to an authorized retirement fund may not be deducted\nArticle 21: Carrying forward losses\n(a) a net operating loss may be carried forward to the taxable year following the year in which\nthe loss is incurred. The carried forward loss shall be deducted from the tax base of the\nfollowing taxable years until the cumulative loss is fully offset. The regulations shall specify the\nmaximum limits allowed to be annually deducted.\n(b) a net operating loss is equal to the excess of the deductions allowed under this Chapter\nwhich are in excess of the taxable income for the taxable year\n(c) to calculate the net operating loss for a natural person, the deductions and income for\nactivity only shall be taken into consideration\nArticle 22: Taxable Year\n(a) The taxable year is the State’s fiscal year.\n(b) a taxpayer may use a twelve month period other than the one specified in paragraph (a) of\nthis Article as a taxable year, in accordance with the restrictions specified in the regulations\n(c) see Article 22 for further explanation of about a short year and a long year in accordance\nwith the regulations\n(d) Groups of related companies as defined in Article 64 of this Law, shall use the same taxable\nyear.\nArticle 23: Method of Accounting\n(a) A taxpayer’s method of accounting must clearly reflect the taxpayer’s income.\n(b) The gross income and expenses of a resident company, and any other taxpayer who keeps or\nis required by law to keep commercial books according to the accounting principles generally\naccepted in the Kingdom, are determined according to such books after adjustments of the\naccounts so as to conform to the rules of this Law\n(c) For taxation purposes, a natural person may record his transactions on a cash or accrual\nbasis. However, if his gross income from business for a taxable year exceeds the amount\nspecified in the regulations, he must use the accrual method in all succeeding taxable years.\n(d) A company which keeps or is required by Law to keep commercial books must record income\nand expenses on an accrual basis. Otherwise, it may for taxation purposes, use either the cash\nor accrual method.\n(e) Except for a change from the cash basis to the accrual basis required in accordance with\nparagraph (c) or (d) of this Article, a taxpayer may change its method of accounting upon\nobtaining the Department’s consent.\n(f) If a taxpayer changes his method of accounting, it must perform adjustments to items of\nincome and deduction, or to debt or any other items in the taxable year following the change, so\nthat no item is omitted, or included more than once.\nArticle 24: Cash-Basis Accounting\nA taxpayer who uses the cash basis method in its books and records shall register the received income\nwhen received or made available, and the paid expenses when paid\nArticle 25: Accrual-Basis Accounting\n(a) A taxpayer who uses the accrual method shall record income and expenses when they are due\n(b) An amount becomes payable to the taxpayer when the taxpayer is entitled to receive it, even if\npayment is postponed or pain in installments\n(c) An amount becomes payable by the taxpayer when all the facts determining liability have\noccurred\nChapter 4 – A Guide to Accounting Zakah Part 1\nIntroduction\n•\nZakah is a duty that must be fulfilled by all “capable” Muslims for it constitutes one of the\nfive pillars of Islam.\n•\nThis premise is taken for granted by all Muslims; scholars as well as common people\nThe most important questions are:\n•\nHow should a Muslim pay Zakah?\n•\nWhat is the right way to pay Zakah?\nBooks of Fiqh (Islamic Jurisprudence) provide directions and details for this task\n•\nTo calculate alms (Zakah) on money for individuals and companies, an accountant needs\na guide to help him in defining the items of assets, on which alms are due\n•\nThe accountant also needs to know how to assess the liabilities which should be\nreduced from assets for alms in order to reach the alms category and calculate the alms\nwhich are due to be paid\nFirst Essay: Accountancy Rules and Equations for Alms on Money\n1. The annual rule\n•\nAlms are calculated according to the lunar year. Counting starts when the amount of\nmoney attains the Nisab (the minimum amount on which alms should be paid)\n•\nThis includes all kinds of alms except alms on agriculture, fruits, mineral assets and Rikaz\n(metals found in the earth)\n2. The rule of the independence of each year\n•\nEach alms year is an independent one, and alms on a given amount of money should not\nbe more than once in the same year.\n•\nDuality should be avoided\n3. The rule of actual or assumed growth\n•\nActual or assumed growth of an amount of money is a condition for any alms to be\ngiven from this money.\n•\nTherefore alms are not due on fixed assets or things for personal use. This is because\nthe condition of actual or assumed growth would not be met.\n4. The rule of capacity for obligation\n•\nAlms are due on money which is abounding (more than basic needs). No alms are due\nfor little amounts of money.\n•\nThe amount of money should reach the Nisab. This guarantees that only those who\nhave the capacity of paying will be obliged to pay.\n5. The rule of calculating alms on the total and the net amounts\n•\nFor every kind of money or activity there is a rule for calculating alms which are due on it. Some\nare calculated in relation to the total amount and others are calculated in relation to the net\namount.\n6. The rule of grouping monies of the same kinds\n•\nIt is permissible to group cash money of wealth to cash money available from offers of\ncommerce and other gained cash money so that for all these monies there would be\none Nisab and one alms year.\n•\nHowever, it is not permissible to group different kinds of money. For example, cattle,\ncash available from commercial operations, and agriculture and fruits should not be\ngrouped in one lump sum and the alms paid on them.\n7. The rule of evaluating according to the current value of the market\n•\nEvaluating cash money of wealth and cash money from offers of commerce to define\nthe alms due should be according to the current value at the time of paying alms\n•\nThey should not be evaluated according to historic value, cost or market, whichever is\nless\nThe equations of calculating alms on money\n1. Receptacle of alms money = alms assets – liabilities which are due to be paid at that moment\n2. Alms assets = assets which meet the conditions of obligatory alms\nThe conditions of obligatory alms are:\na. It should be full ownership\nb. Growth (actual or assumed)\nc. Completion of the year (except alms on agriculture, fruits, mineral wealth, or\nminerals of the earth\nd. No other kind of alms has been paid on the same assets within the same year\ne. Assets should abound basic needs\nf. It should not include a debt which is due at the time\ng. It should reach the minimum obligatory amount (Nisab)\n3. Short term liabilities = short term liabilities which are due payment and in which the\nconditions of decision are filled\na. Liabilities should be related to the activity\nb. Due payment during coming year\nc. Legally permissible\n4. The amount due for alms (Nisab)= 85 grams of pure gold evaluated according to current\nprice\n5. The amount of alms due = the receptacle of alms money once it reached the Nisab X the\nprice of alms\n6. The price of alms = varies according to the kinds of money and activity. The range is\n2.5\\% to 20\\%.\nChapter 5 – A Guide to Accounting Zakah Part 2\nSecond Essay; Executive Measures for Calculating Alms for Individuals and Companies\nAlms on money should be calculated according to the following steps:\n1. Defining the date completing the year. Varies according to the circumstances of the\nalms giver\n2. Different monies owned by the alms giver should be assessed at the end of the year\naccording to the rules of alms\n3. Assessment of liabilities (deductions) which ae due to be decided upon, from alms\nmoney according to the rules of Zakah\n4. Defining the receptacle of alms by the deduction of due liabilities from alms money.\nAccording to the following equation:\nThe receptacle of alms = alms assets minus due liabilities\n5. Defining and assessing the amount of Nisab according to the kind of money, the kind of\nactivity, and the kind of alms. Nisab differs according to the kind of alms (on what will\nthe alms money be spent).\n6. A comparison should be made between the receptacle of alms defined in step 4 with\nNisab defined in step 5 so as to know whether alms are due or not. If the receptacle\nreaches the Nisab then alms would be due.\n7. Define the amount which should be taken from the receptacle of alms, which\naccountants term as the percentage or price of alms. See Guide for specifics on types\nand amounts of alms.\n8. Calculate the amount of alms by multiplying the amount of the receptacle by the\namount of the price (percentage) of alms. The result should be the amount of due alms.\n9. Defining who pays the due alms are as follows;\na. For individuals and personal establishments; the individual or owner should pay the\ndue alms.\nb. For partnerships; the amount of due alms should be divided between the partners\naccording to the percentage of his share\nc. For investment companies; the amount of due alms should be divided on the\nnumber of shares.\n•\nEach investor then pays alms according to his shares.\nd. For partnerships of labor and capital;\n•\nThe labor pays alms according to his share of profits\n•\nThe financier pays alms on capital and the profit less the laborer’s share\n10. Revenue from alms should be distributed according to its due activities and persons in\nthe light of the rules of Islamic Law.\nAlms money should be spent on the following:\n1. The poor\n2. The needy\n3. Those who work in administering alms\n4. Those whose hearts have been recently reconciled to the Truth\n5. To free slaves\n6. Those who are in debt\n7. In the Path of Allah\n8. The wayfarers\nIn order to calculate alms on money, an accountant needs the following tools and methods:\n1.\nGeneral balance (financial situation) made on the date of calculating alms\n2. Final accounts for the ended year on which alms are to be calculated\n3. Clarification concerning the balance and the final accounts\n4. The price of gold at the time when paying alms is due in order to calculate the Nisab.\n5. Different monies possessed by the alms giver should be grouped if of the same kind\n6. Different contemporary fatwas concerning alms\n7. The Guide for calculating alms\n8. Other accountancy tools and methods which may be useful for calculating alms\nChapter 6 – A Guide to Accounting Zakah Part 3\nSimplified Accountancy Forms\n•\nThese forms are meant to be used as a guide for accountants when assessing the receptacle\nof alms and when advising the alms giver whether he is an owner of a personal\nestablishment or a partner with others in a private company or a shareholder in an\ninvestment company\nAccountancy form to assess and calculate alms on wealth in cash\n•\nThe receptacle of alms on cash wealth includes banknotes, coins, silver, gold money and\ningots of gold, current accounts in banks and investment accounts\n•\nThe Nisab for cash wealth is 85 grams of pure gold, or its equivalent in cash, or 595 grams of\npure silver\n•\nThe Islamic Commission for Research has recommended to use the Nisab in gold.\nThe assessment and calculation steps are as follows:\na. Define the time when alms are due, (Al-Hawl), which starts from the time when the\namount of money reaches Nisab\nb. Define all items of cash wealth, on which alms must be paid (alms assets)\nc. Assess all items of cash wealth according to market value at the time when alms is\ndue\nd. Settle all due liabilities on the alms giver from his cash wealth so that to know the\nreceptacle of alms\ne. Compare between the receptacle of alms and the Nisab, if the receptacle reaches\nthe Nisab, then alms is due to be paid.\nf. Calculate the amount of alms by multiplying the receptacle by the price of alms,\nwhich is 2.5\\%.\ng. See form on page 29 of Guide\nAccountancy form to assess and calculate alms on goods for trading and industrial activities\n•\nWhat is meant by goods for trading is anything which is to be bought or sold with the\nintention of trading to earn a profit\n•\nNo alms are due on goods obtained for personal use\nThe assessment and calculation steps are as follows:\na. Define the end of the alms year, which is the same date as the end of the financial\nyear for an establishment or company\nb. Define and assess the elements of alms assets such as goods, etc.\nc. Define and assess the elements of immediate current liabilities which are due for\npayment from the alms assets\nd. Define the receptacle of alms by deducting item (c) from item (b) and add any\nearned money\ne. Define the amount of the Nisab, and then compare with the receptacle of alms\nf. Calculate the amount of alms. If the receptacle reaches the Nisab, then alms should\nbe paid as 2.5\\% if lunar year and 2.577\\% if solar year.\ng. See form on page 32 in Guide\nAccountancy form to assess and calculate alms on agriculture and fruits\n•\nAgriculture is anything that comes out of the earth and is planted by seeds from which man,\nanimal, and bird feed\n•\nFruits is everything which trees carry which is to be eaten\n•\nAlms on agriculture and fruits are due at the time of harvest or collecting\n•\nIf an area of land produces more than one crop within the year, its owner should pay alms\non each crop separately.\nThe following are the steps of assessing the alms on agriculture and fruits:\na. Measure the total production of the land either by production or by cash\nb. Define the expenses on the production, if the opinion adopted is that which says\nthat expenses should be deduced as far as they do not exceed the third, which is\nthe opinion of the Sixth Fiqh Seminar of Barakah.\nc. Define the receptacle of alms by deducing item (b) from item (a).\nd. Define the amount of Nisab, which is the equivalent to 5 Awsaq, or the\nequivalent to 50 Egyptian Kaylah, or 653 kg of wheat or the average food for\nmost people\ne. Calculate the amount of alms:\na. In the case of watering by cost alms = receptacle of alms X 5\\%\nb. In the case of watering without cost, alms = receptacle of alms X 10\\%\nSee form on page 35 of the Guide\nAccountancy form to assess and calculate alms on cattle\n•\nCattle includes camels, cows, and sheep\n•\nAlms are due only if they are bred for multiplication and not used as animals of burden\n•\nNisab for alms on cattle differs according to the kind of species\n•\nFor camels it is five, for sheep it is forty, whereas for cows it is thirty\n•\nRefer to Fiqh books for more details\nThe following are the steps of assessing the alms on cattle:\na. Define the number of cattle deducing the working animals and the ones ready for trade\nb. Compare the number with Nisab, If it is less than Nisab then no alms are due.\nc. Define the category the number falls into, in order to define the amount of alms due\nd. Define the alms due according to tables in Fiqh books\nSee form on page 37 in the Guide\nAccountancy form to assess and calculate alms on mineral and marine wealth and minerals in\nthe earth\n•\nMineral and marine wealth include anything of value which is brought out from the earth\nor the bottom of rivers, seas, or oceans\n•\nMinerals in the earth (Rikaz) are treasures which are buried in the earth\nThe following are the steps for defining the receptacle of alms on mineral and marine wealth:\na. Define the net production from the earth or sea, on which alms must be paid\nb. Compare the net production with the Nisab (85 grams of gold) in he case of minerals of\nwealth. For Rikaz there is no Nisab.\nc. Calculate the amount of alms, if the receptacle reaches the Nisab, on the basis of 2.5\\%\nfor minerals and 20\\% for Rikaz\nSee form on page 39 of the Guide\nAccountancy form to assess and calculate alms on revenue of investment assets\n•\n•\nInvestment assets are any assets which remain fully owned whilst revenue from investing\nthem are re-occurring, such as real estate, cars, and others\nNo alms are due on the assets, however alms are due on the revenues once they reach\nNisab after deducing actually paid expenses and debts\nReceptacle of alms on investment assets is calculated according to the following steps:\na. Define the total annual revenue at the end of the year\nb. Define all expenses of getting the revenue\nc. Deduce the expenses from the total revenue to get net revenue\nd. Deduce currently due debts which the alms giver must pay\ne. The net of all of the above should be added to any cash and trade goods owned by the\nalms giver in which no alms were paid at the end of the year to ascertain the receptacle\nof alms\nf. Compare the receptacle (e) with the Nisab which is the equivalent to 85 grams of gold, if\nthe receptacle reaches the Nisab, then alms should be calculated on the basis of 2.5\\%,\nwhich is the chosen opinion of the present guide.\nSee form on page 42 of the Guide.\nAccountancy form to assess and calculate alms on revenue from work\n•\n•\nThis category includes wages, salaries, income from freelance work and won money\nAlms must be paid on what remains of this money at the end of the year by adding it to\nother monies owned by the alms giver when calculating the Nisab and the alms year\nThe steps to define the receptacle of alms and calculate what is due at the end of the year are:\na. Define what remains from the revenue at the end of the year after deducing what is\npaid from cost of basic need and after paying outstanding debts\nb. Compare step (a) to Nisab (85 grams of gold) to know whether alms are due or not\nc. Calculate the amount of alms if the receptacle reaches the Nisab on the basis of 2.5\\%\nSee form on page 44 of the Guide\nSee page 45 of the guide to determine alms on freelance work\nSee page 46 for form for freelance work\nACCT422 – Tax& Zakat Accounting\nChapter 2 – Determination of Tax\nFormula for Individual Income Tax\nGross income – Exclusions = Gross Income (after exclusions)\nGross Income (after exclusions) – Deductions for AGI = Adjusted Gross Income (AGI)\n•\nTax rate schedules, std. deduction, personal exemptions, & other amounts are adjusted for inflation.\nActual amount paid\n‫مبلغ معياري بموجب القانون‬\n‫األكبر من االثنين‬\nAdjusted Gross Income (AGI) – Deductions from AGI→ 1- Greater of\nitemized deductions OR standard ded.\n2- Personal and dependency exemptions\n= Taxable Income\nTaxable Income X Tax rate or rates = Gross tax\nGross tax – Credits and prepayments = Net tax payable OR refund due\nDeductions from Adjusted Gross Income\n•\n•\n•\n•\n•\n•\nItemized deductions\nStandard deduction\nPersonal exemptions\nDependency exemptions\nChild credit\nMaking work pay credit and social security tax reduction\nBashaier\nItemized Deductions\nSee Table 6 for partial list\no\no\no\no\no\no\n•\n•\nMedical expenses\nTaxes\nInvestment and residential interest\nCharitable contributions\nPersonal casualty and theft losses\nMiscellaneous deductions\nOnly claim itemized deductions if total greater than std. deduction\nSome items limited by varying percentages of adjusted gross inc.\no Medical expenses\no Casualty losses\no Miscellaneous itemized deductions\nStandard Deduction\n•\n•\n•\n•\nVaries based on:\no Filing status, age, and vision\no $6,100 – $12,200 in 2013\n▪ Increase over 2012 to adjust for inflation\nIncrease std. ded. if elderly &/or blind\nUsed when std. ded. > itemized ded.\nLimited std. ded. in certain situations\nPersonal Exemptions\n•\n•\nGenerally, each taxpayer allowed one\no Unless claimed as dependent on another return\no $3,900 in 2012\nAdditional allowed for spouse on joint return\nBashaier\nDependency Exemptions\nRequirements for All Dependents\n•\n•\n•\n•\nHave a qualifying identification number\nMeet a citizenship test\nMeet a separate return test\nNot themselves claim another person as a dependent\nAdditional Requirements for Qualifying Children\n•\n•\n•\n•\nRelationship test\nAge test\n• < 19 or full-time student < 24\nAbode test\n• Live w/taxpayer > ½ of year\nSupport Test\n• Dependent provides < ½ own support\nAdditional Requirements for Other Relatives\n•\n•\n•\nRelationship test\n• Related to or live w/taxpayer whole yr\nGross income test\n• Dependent’s gross inc. < exemption amt.\nSupport test\n• Taxpayer provides > ½ support\nDetermining the Amount of Tax\n•\n•\n•\n•\n•\n•\n•\n•\nFiling status\nJoint return\nSurviving spouse\nHead of household\nSingle taxpayer\nMarried filing a separate return\nAbandoned spouse\nDependents with unearned income\nBashaier\nFiling Status\n•\nMarried filing jointly\n• Marital status on last day of tax year\n• Common law marriages recognized\n• Spouses must be U.S. citizens or residents\n• Federal Defense of Marriage Act of 1996 defines marriage as between a man and a woman\n▪ Same-sex couples cannot file a joint federal return, but may file joint state return\nin some states\n•\nSurviving spouse\n• Files as married filing jointly\nHead of household\n• Unmarried and maintains home in which dependent lives > ½ yr\n•\n•\n•\n•\nMarried filing separately\nSingle – taxpayers not in other categories\nRelative tax liability by filing status from lowest to highest\n• Married filing jointly\n• Surviving spouse\n• Head of household\n▪ Includes abandoned spouse\n• Single\n• Married filing separately\nBashaier\nChapter 3 – Gross Income: Inclusions\nConcepts of Income\n•\n•\n•\nEconomic concepts of income\nAccounting concepts\nTax concept of income\nEconomic Concepts of Income\n•\n•\nWealth that flows to individuals\nChanges in value in individuals’ wealth\no Unrealized gains\no Gifts & inheritances considered income\nAccounting Concepts of Income\n•\n•\n•\nValues are measured by a transaction approach\nIncome realized as result of completed transactions\nUse historical cost\nTax Concept of Income\n•\n•\n•\n•\nConditions to make income taxable\nAdministrative convenience\nWherewithal to pay\nGross income defined\nConditions to Make Income Taxable\n▪\n▪\n▪\nEconomic benefit to taxpayer\nIncome must be realized\n• Earnings process complete\nIncome must be recognized\nAdministrative Convenience\n▪\n▪\nEconomic concept is considered too subjective\nObjectivity achieved at price of equity\nWherewithal to Pay\n▪\nA tax should be collected when the taxpayer can most easily pay\nGross Income Defined\n▪\nSection 61(a) defines gross income\n• “all income from whatever source derived,” including (but not limited to)\nthe following items:\n• Compensation, income derived from business, gains from dealings in\nproperty, interest, rents, royalties, dividends, alimony, annuities, life\ninsurance, pensions\nBashaier\n▪\n▪\nForm of receipt\n• Gross income not limited to cash\n• §1.61-1a, income may be “realized in any form, whether in money,\nproperty, and services”\nIndirect economic benefit\n• Items indirectly benefiting taxpayers excluded from gross income\nAllocating Income between Married People\n▪\n▪\nCommon law property system\n• Used in 42 states\n• Income taxed to person who earns it or who owns the income-producing\nproperty\no Joint income comes from jointly owned property\nCommunity property states\n• All income deemed to be earned equally by spouses except income from\nseparate property\n• Separate property of each spouse\no Property owned prior to marriage\no May be community income or separate income, depending on state\nof residence\nBashaier\nWhen Is Income Taxable?\n•\n•\n•\n•\nCash method\nAccrual method\nHybrid method\nSee Topic Review 1\nCash Method\n▪\n▪\n▪\nCash receipts and disbursements\n• Used by most individuals, and most non-corp. bus. with no inventory\nConstructive receipt\n• Report inc. in year actually received\no Check received after banking hours\no Bond interest coupons that have matured but not redeemed\nNo constructive receipt if\n• It is subject to substantial limitations\n• Payor does not have funds necessary to make payment\n• Amount is unavailable to taxpayer\nAccrual Method\n▪\n▪\nReport income in year income earned\n• Right to income\n• Amount can be determined with reasonable accuracy\nPrepaid income\n• Generally taxable when received\n• Exceptions in Rev. Proc. 2004-34\nHybrid Method\n▪\n▪\nAccrual method for purchases and sales\nCash method in computing all other income and expenses\nBashaier\nItems of Gross Income\n•\n•\n•\n•\n•\n•\n•\n•\n•\n•\n•\n•\nCompensation\nBusiness income\nGains from dealings in property\nInterest\no Series EE bond interest exception\nRents and royalties\nDividends\nAlimony and separate maint. pmts.\nPensions and annuities\nIncome from life insurance and endowment contracts\nInc. from discharge of indebtedness\nIncome passed through to taxpayer\nOther items of gross income\nDividends\n•\n•\n•\n•\n•\n•\n•\nIncluded in shareholder gross inc.\nResults in double taxation\no Earnings taxed at corporate level\no Earnings taxed at shareholder level when distributed as a dividend\no C corps allowed a 70, 80, or 100\\% div. rec. deduction based on ownership \\%\n▪ Relief from multiple levels of taxation\nIndividuals taxed up to 20\\% on dividends\no Reduces effects of double taxation\no Must hold stock for at least 60 days\nDistributions to extent they are out of corporate E&P\nStock dividends\no Not taxable\no Basis in stock allocated to new shares\nCapital gain dividends\no Taxed at long-term capital gain rates\nConstructive dividends\no Taxed as regular dividends\nBashaier\nAlimony and Separate Maintenance Payments\n•\n•\n•\nOnly receipt of alimony is taxable\no Alimony is deductible by one who pays\nChild support not taxable\nProperty settlement not taxable\nPensions and Annuities\n•\nIncome portion of annuity taxable\no Investment portion is excluded\nIncome Passed Through to Taxpayer\n•\nIncome from flow-through entities taxed directly to owners\no Income from partnership\no Income from S corporation\no Income in respect of a decedent\no Income from an estate or trust\no Income from ETF, RIC, or REIT\nOther Items of Gross Income\n•\n•\n•\n•\n•\n•\n•\nPrizes, awards, gambling winnings, and treasure finds – taxable\nIllegal income – taxable\nUnemployment compensation – taxable\nSocial security benefits – up to 85\\% taxable\nInsurance proceeds & court awards\no Special rules apply\nRecovery of previously deducted amounts – taxable\nRevenue received that is disputed must still be reported as income\no Previously reported income that is subsequently refunded is deductible\nBashaier\nChapter 4 – Gross Income: Exclusions\nItems that Are Not Income\n•\n•\n•\n•\nUnrealized income\nSelf-help income\nRental value of personal-use property\nSelling price of property\nUnrealized Income\n▪\nExample:\n• Land valued at $20,000 beginning of year appreciates to $45,000 at end of\nyear\no The $25,000 increase in value is unrealized income and not taxable\nSelf-Help Income\n▪\nThe amount saved is not subject to tax\n• Cleaning your own carpet\n• Repairing your car\nSelling Price of Property\n▪\nOnly gain on sale of property is taxable\no Selling price – Basis in property = Gain on sale of property\nMajor Statutory Exclusions\n•\n•\n•\n•\n•\n•\n•\n•\n•\n•\n•\nGifts and inheritances\nLife insurance proceeds\nAwards for meritorious achievement\nScholarships and fellowships\nDistributions from qualified tuition programs\nPayments for injury and sickness\nEmployee fringe benefits\nForeign-earned income exclusion\nIncome from the discharge of a debt\nExclusion for gain from small business stock\nOther exclusions\nBashaier\nLife Insurance Proceeds\n•\n•\n•\nPaid by reason of death\no Generally non-taxable\nPolicy surrendered not for death\no Excess of proceeds over the premiums paid taxable to recipient\nDividends on life insurance and endowment policies non-taxable\no Considered return of premiums paid\nAwards for Meritorious Achievement\n•\nAwards for religious, charitable, scientific, etc. are not taxable if ALL criteria are met:\no Did not enter contest\no Is not required to perform substantial future services\no Designates a qualified charitable organization to receive the payment\nScholarships and Fellowships\n•\nScholarships excluded for degree candidates used for qualified tuition and related expenses\no Required for courses of instruction at an educational institution\n▪ Tuition, fees, books, supplies, equipment\no Not room and board\nDistributions from Qualified Tuition Programs: §529 Plans\n•\n•\nNo tax on earnings while in §529 plan\nExclusion for distributed earnings if used by beneficiary for qualified tuition and related expenses\no Tuition, fees, books, supplies, equipment, AND\no Room and board if ≥ half-time student\nPayments for Injury and Sickness\n•\n•\nInjury includes physical and mental\no Medical expense pmts. for emotional distress excluded if expenses attributable to a physical\ninjury\nDisability income policy is non-taxable if purchased by taxpayer\no Taxable if purchased by employer\nBashaier\nForeign-Earned Income Exclusion\nEligible Taxpayers\n•\nU.S. citizens subject to U.S. income tax on worldwide income\no Subject to double taxation if foreign income taxed by foreign country\no Foreign tax credit (FTC) mitigates double taxation\nExclusion Amount\n•\nForeign-earned income exclusion alternative to FTC\no May exclude up to $97,600 of foreign earned income\no Add’l exclusion for foreign housing costs\n▪ Foreign housing costs in excess of $15,616\n▪ Max housing exclusion is $13,664\nResidency Tests\n•\nTo qualify for foreign-earned income exclusion\no Must be bonafide resident of foreign country(ies) for entire taxable year,\nOR\no Physical presence in foreign country for 330 days during a 12-month period\nIncome from the Discharge of a Debt\n•\nGenerally, taxpayer may have to include amount of debt forgiveness in gross income\no Exceptions: nontaxable situations\n▪ Discharge occurs in bankruptcy\n▪ Discharge occurs when taxpayer is insolvent\nOther Exclusions\n•\n•\n•\n•\n•\n•\n•\n•\n•\n•\n•\nGain from sale of personal residence\nAnnuities paid to survivors of public safety officers\nCertain military-related payments\nHousing allowance for ministers\nCampus housing\nFoster care payments\nRural letter carrier’s allowance\nRoth IRA distributions\nEducation IRA distributions\nPersonal foreign currency gains\nSee Table 2\nBashaier\nChapter 6 – Deductions and Losses\nClassifying Deductions\nfor Adjusted Gross Income\n•\n•\n•\nTaxpayer benefits from deduction even if she claims the std. deduction\nReducing AGI: +/- benefits for t/p\n▪ + Many deductions and credits phased out above certain AGI thresholds\n▪ + Reduces AGI floors for certain categories of itemized deductions\n▪ -Reduces certain deduction ceilings\nMost common deductions for AGI\n▪ Trade or business expenses\n▪ IRAs and qualified pension contributions\n▪ Alimony\n▪ Losses on sale of bus/invest property\n▪ Moving expenses\n▪ Int. paid on qualified education loans\n▪ ½ of self-employment tax\n▪ Health insurance paid by self-employeds\nfrom Adjusted Gross Income\n•\nItemized deduction only will have tax benefit if total deductions exceed the taxpayer’s\nstandard deduction\n▪ Deduct the higher of the standard deduction or sum of itemized deductions\nCriteria for Deducting Bus. & Investment Expenses\n•\n•\n•\n•\n•\nBusiness or investment requirement\nOrdinary expense\nNecessary expense\nReasonable expense\nExpenses and losses must be incurred directly by the taxpayer\nBashaier\nBusiness or Investment Activity\n•\n•\n•\n•\n•\nActivity engaged in for profit\no Use facts and circumstances test\nTrade or business (ToB) vs. investment classification\no ToB losses are ordinary losses\n• ToB expenses are for AGI\no Investment losses are capital\n• Invest. exp are from AGI\n• Subject to 2\\% of AGI floor\nLosses and expenses related to rents and royalties are for AGI deductions\nLegal and accounting fees\n• For AGI deduction for ToB if incurred in ordinary course of business\n▪ Fees related to taxes also for AGI for ToB\nNonbusiness fees related to taxes from AGI deduction subject to 2\\% of AGI floor\nOrdinary Expense\n•\nOrdinary expense requirements\n• Reasonable in amount\n• Bear reasonable proximate relationship to income-producing activity or property\n• Must be customary or usual course of a particular industry or business community\nNecessary Expense\n•\nAn expense is considered necessary if it is “appropriate and helpful” in the taxpayer’s business\nReasonable Expense\n•\nProblems often occur with salaries for shareholder-employees of closely held businesses\nExpenses and Losses Must Be Incurred Directly by the Taxpayer\n•\nGenerally, a taxpayer cannot take a deduction for a loss or expense of another person\nBashaier\nWhen an Expense Is Deductible .. Cash Method\n•\nGenerally deductible when actually paid\n•\nPrepaid expenses\n•\n•\nNo current deduction if expenditure creates an asset with a life substantially beyond end of\ntax year\n▪ Exception for prepaid rent if prepmt ≤ 1 year and lease requires the prepmt\nPrepaid interest\n•\n•\nAmortize over period of loan to which interest charge is allocated\nPoints deductible over life of loan\n▪\nPoints paid in connection w/purchase or improvement of a principal residence are\ncurrently deductible\nWhen an Expense Is Deductible .. Accrual Method\n•\nAllowed to deduct exp. in period in which exp. accrue under all-events test & economic\nperformance test\no All-events test (AET) met\n▪ Amount of liability is established\n▪ Amount of liability is determined with reasonable accuracy\no\nEconomic performance test (EPT) is met when EP deemed to occur\n▪\nException for recurring liabilities\n•\n•\n•\n•\nAll-events test met\nEPT occurs w/in 8½ mo (or a reasonable period) after close of tax year\nExp. consistently treated as incurred in tax yr.\nItem not material, or better matching w/AET\nBashaier\nChapter 7 – Itemized Deductions\nMedical Expenses\n•\n•\n•\nQualified individuals\nQualified medical expenses\nAmount and timing of deduction\nQualified Individuals\n•\n•\nMedical exp. paid for taxpayer, taxpayer’s spouse, or dependent\n• Certain dependency test failures do not disqualify dependent\n▪ Failing to meet gross income limit\n▪ Failing joint return test\nNoncustodial parent may claim deduction for dependent\nQualified Medical Expenses\n•\n•\n•\n•\n•\n•\nDiagnosis, cure, mitigation, treatment, or prevention of disease\nTransportation\n• $0.24/mile std. mileage rate\n• If overnight, includes\n▪ Meals (50\\%) & lodging (≤ $50)\nCost of living in institutions\nCapital expenditures\n• Excess of cost over amount by which value of home increases\nMedical insurance premiums\n• Includes qualified L-T care premiums\nNo cosmetic surgery\n• Unless treats illness or promotes proper body function\nAmount and Timing of Deduction\n•\n•\n•\nDeductible in year paid for qualified medical exp. exceeding 10\\% of AGI\n• 7.5\\% for taxpayers > 65 until 2016\nMedical insurance reimbursements\n• Only unreimbursed portion deductible\nSelf-employeds may deduct health insurance as a for AGI deduction\nBashaier\nTaxes\n•\n•\n•\n•\n•\n•\n•\n•\n•\nDefinition of a tax\nDeductible taxes\nState and local income taxes\nState and local sales taxes\nNondeductible taxes\nPersonal property taxes\nReal estate taxes\nSelf-employment tax\nNondeductible taxes\nDefinition of a Tax\n•\nMandatory assessment levied under authority of a political entity for purpose of raising revenue\nused for public or governmental purposes\nDeductible Taxes\n•\n•\n•\n•\n•\nState, local, & foreign real prop. taxes\nSome state and local personal prop. taxes\nForeign, state &, local income, war profits, and excess profit taxes\nState & local sales tax election\nEnvironmental tax\nNondeductible Taxes\n•\n•\nTaxes imposed by the Federal gov’t generally not deductible\nExceptions\n• Employer’s share of Social Security tax\n▪ Deductible by employer as bus. expense\n• Federal import tariffs & excise taxes\n▪ Deductible if for business or production of income\nCharitable Contributions\n•\n•\n•\n•\nQualifying organizations\nType of property contributed\nDeduction limitations\nApplication of carryovers\nQualifying Organizations\n•\n•\n•\n•\nU.S., D.C., state, or U.S. possession\nA post or organization of war vets\nDomestic fraternal society, or order, or association\nPublic Charities\n• Churches, educational Institutions, hospitals, medical schools\nBashaier\nType of Property Contributed\n•\n•\n•\nContribution of long-term capital gain property\n• Generally FMV\n▪ Use adjusted basis if\n• Contributed to private nonoperating foundation\n• Unrelated use by charitable organization\n• Certain intangibles\nContribution of ordinary inc. prop.\n• Value generally adjusted basis\n• Exception for C corp donation of certain inventory\n▪ FMV – (50\\% x [ordinary inc. if sold])\nContribution of services\n• Only out-of-pocket and transportation expenses deductible\nDeduction Limitations\n•\n•\n•\n•\n•\n50\\% of AGI limitation\n• Applies to public charities\n30\\% of AGI limitation\n• Contributions of capital gain property\n20\\% of AGI limitation\n• Capital gain property contributed to private nonoperating foundations\nOrder of deductions\n•\n50\\% property\n•\n30\\% property\n•\n20\\% property\nCombined contributions cannot exceed 50\\% of AGI\nCasualty and Theft Losses\n•\n•\nIndividuals can deduct casualty or theft loss on personal-use property as an itemized deduction\nSee Chapter 8\nMiscellaneous Itemized Deductions\n•\n•\n•\n•\nCertain employee expenses\nExpenses to produce investment income\nCost of tax advice\nSee Chapter 9\nBashaier\nCertain Employee Expenses\n•\nUnreimbursed employee business expenses\n• Include travel, transportation, dues to professional organizations, cost of job hunting\n• Generally misc. itemized deductions subject to a 2\\% of AGI floor\nExpenses to Produce Investment Income\n•\n•\nExpenses to produce investment income other than rents or royalties\nMiscellaneous itemized deductions subject to 2\\% of AGI floor\n• Investment interest NOT subject to the 2\\% of AGI floor\nCost of Tax Advice\n•\n•\nIncludes\n• Tax return preparation fees\n• Appraisal fees in determining amount of casualty loss\n• Accountant fees for representation in a tax audit\nMiscellaneous itemized deduction subject to 2\\% of AGI floor\nBashaier\nChapter 8 – Losses and Bad Debts\nTransactions that May Result in Losses\n•\n•\n•\n•\n•\nSale or exchange of property\nExpropriated, seized, confiscated, or condemned property\n• Treat as sale or exchange\nAbandoned property\nWorthless securities\nDemolition of property\n• Add to basis of land\nSale or Exchange of Property\n•\n•\nAmount realized includes liability transferred to buyer\n• Qualified residence exception\n▪ No gain on transfer AND no discharge of indebtedness income\nSelling costs\n• Deducted in year incurred for inv.\n• Reduction of amt realized for noninv.\nAbandoned Property\n•\n•\nOrdinary loss if business or investment property\nNondeductible if personal property\nWorthless Securities\n•\n•\nSecurities must be completely worthless\nCapital loss on last day of tax year\nClassifying the Losses on Taxpayer’s Tax Return\n•\n•\nOrdinary vs. capital loss\nDisallowance possibilities\nBashaier\nOrdinary vs. Capital Loss\n•\n•\n•\nBased on of type of property and type of transaction involved\n§1231 property\n• Net §1231 loss is an ordinary loss\n• Includes real or depreciable property used in a trade or business and held for more than one\nyear\n§1244 stock\n• Loss on sale of §1244 stock ordinary\n▪ Limited to $50K ($100K MFJ)\n▪ Excess loss is a capital loss\n• §1244 stock qualifications\n▪ ≤ 50\\% of gross receipts from passive sources during prior 5 tax years, AND\n▪ Contributions to capital and paid-in surplus ≤ $1M at time of issue\nCasualty and Theft Losses\n•\n•\n•\n•\n•\n•\n•\nCasualty defined\nTheft defined\nDeductible amount of casualty loss\nLimits on personal-use property\nNetting casualty gains and losses on personal-use property\nCasualty gains and losses attributable to business and investment property\nTiming of casualty loss deduction\nCasualty Defined\n•\n•\nA casualty loss results from an identifiable event that was sudden, unexpected, or unusual\nQualifying casualties include fire, flood, hurricane, tornado, and hail\nTheft Defined\n•\n•\nGenerally, criminal intent and violation of state law required to meet definition of theft\nIncludes larceny, embezzlement, robbery, blackmail, extortion, and ransom\nDeductible Amount of Casualty Loss\n•\nGenerally decline in FMV due to casualty\n• For partial destruction loss is lesser of decline in FMV or adjusted basis\n• Total destruction of business or investment property amount of loss is adjusted basis\nLimitations on Personal-Use Property\n•\nTwo limitations\n• Losses sustained in each separate casualty reduced by $100, AND\n• Sum of all net casualty losses reduced by 10 \\% of taxpayer’s AGI\nBashaier\nNetting Casualty Gains and Losses on Personal-Use Property\n•\n•\nLosses reduced by insurance reimbursement\nCasualty losses must be netted against casualty gains prior to applying 10\\% of AGI limitation\n• Net casualty loss subject to 10\\% limitation\nCasualty Gains & Losses Attributable to Business & Investment Property\n•\n•\nFor AGI deduction\n• Investment property must be used to generate rents or royalties\n• Losses on other investment property are miscellaneous itemized deductions NOT subject to\n2\\% of AGI floor\nIf property held 12 months\nOvernight requirement\n•\n•\nMust be reasonable for taxpayer to be away overnight\nShort rest stops on long day-trip not considered overnight\nBusiness vs. Pleasure\n•\n•\nTravel to and from destination\no If trip primarily personal, no deduction\no If trip primarily business, all travel to and from destination deductible\nOther travel-related expenses\no Allocated to business and personal activities\nTransportation Expenses\n•\n•\n•\nDefinition and classification\nTreatment of automobile expenses\nReimbursement of automobile expenses\no Excess expenses over reimbursement deductible as 2\\% misc itemized deductions\nDefinition and Classification\n•\n•\n•\n•\nCommuting costs generally nondeductible personal expenses\nCommuting costs between multiple jobs for same taxpayer deductible\nTransportation costs from employee’s regular work site to temporary one deductible\nCommuting costs between home and temporary work site deductible if taxpayer has regular place\nof business\nTreatment of Automobile Expenses\n•\n•\nStandard mileage rate $0.565/mile\no Not available if use ≥ 2 vehicles\no Does not include parking and tolls\nActual expenses\no Includes gas, oil, maintenance and repairs, insurance, and depreciation\no Based on ratio [Bus. miles]/ [Total miles]\nBashaier\nOffice in Home Expenses\nGeneral Requirements\n•\nOffice used on exclusive and regular basis and ONE of following\no Office used as principal place of business for any ToB\n▪ Includes doing administrative work if no other fixed location available\no Place for meeting clients in normal course of business\no Located in separate structure\n•\nAn employee must also prove that the home office is for the convenience of the employer\no\nNot just appropriate or helpful for the employee\nDeduction and Limitations\n•\nCategories of expenses\no Expenses directly related to office\no Expenses indirectly related to office\n▪ Expenses related to whole home\n▪ Prorate based on square footage or other method\no Total expenses cannot create loss\n•\nOrder of expense deductions\n1. Expenses not related to home office\n2. Expenses directly related to home office\n3. Pro-rata portion of indirect expenses\n▪\nE.g., mortgage, interest, utilities\n•\nDisallowed expenses carried forward to future year\n•\nOptional safe harbor to determine amount of deductible home office expenses per Rev.\nProc. 2013-13\no\n$5 multiplied by\n[sq. ft. of space for qualified use]\n▪\nLimited to 300 sq. ft.\n•\n$1,500 maximum deduction\nBashaier\nChapter 11 – Accounting Periods and Methods\nAccounting Periods\n•\n•\n•\n•\n•\nFiscal year is any 12-month period other than calendar year\nPartnerships, S corps, and PSCs\no Generally must have same tax year as majority owners (> 50\\% ownership)\nRequired payments and fiscal years\nChanges in the accounting period\nReturns for periods of < 12 months\nRequired Payments and Fiscal Years\n•\n•\nC corporations, other than PSCs, can choose any fiscal year\nPartnerships, S corps, and PSCs can choose a fiscal year if deferral is 3 months or less (§444 election)\nChanges in the Accounting Period\n•\n•\nGenerally need IRS approval to change accounting period\nMust establish substantial business purpose to change accounting period\nReturns for Periods of Less than 12 Months\n•\n•\nTaxpayer’s first or final return\no No annualization of income required\nChange from one accounting period to another\no Annualization required\nOverall Accounting Methods\n•\n•\n•\n•\nOverall accounting method for one trade or business not needed to be used in a second trade or\nbusiness\nCash receipts and disbursements method\nAccrual method\nHybrid method\nCash Receipts and Disbursements Method\n•\n•\n•\n•\n•\nReport income for the tax year in which payments are received\nGenerally deduct exp. in year paid\no Prepaid exp. capitalized and amortized if benefits extend beyond tax year\nMust capitalize fixed assets and recover through depr. or amort.\nMost individuals and many service businesses use the cash method\nCannot use cash method in a business where inventory is material income-producing factor\no Small business exception – see hybrid method\nBashaier\nAccrual Method\n•\n•\nReport income under all-events test and economic performance test\no All events test\n▪ Taxpayer’s right to receive inc. & amount determined w/reasonable accuracy\no Economic performance test\n▪ Property or services actually rendered by other party\nDeduction is met when liability established and amount of expense can be determined with\nreasonable accuracy\nHybrid Method\n•\nUse accrual method for sales and purchases, but may use cash method for other income and\nexpenses\no Small business exception\n▪ Businesses with inventory whose annual gross receipts for 3 prior years ≤ $1M may\nuse cash method for sales and accrual method for cost of goods sold\nInventories\n•\n•\nUniform capitalization rules (UNICAP)\no Required for taxpayers whose average gross receipts for 3 prior years >$10M\no Must capitalize some period costs\nIf using LIFO for tax\no Must also use LIFO for financial acctg.\nChange in Accounting Methods\n•\n•\n•\n•\nAccounting period chosen by using for first year in which it is applicable\no IRS approval required to change methods\no May change to LIFO method without IRS approval\nAmount of change\no Due to timing of income and deduction recognition due to changes between cash and\naccrual methods\nReporting the amount of the change\no The amount\no Change voluntary or involuntary\no Any specific statutory mandates\nMust obtain IRS consent\nBashaier\n\nPurchase answer to see full\nattachment
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Description     Notes:        The Assignment must be submitted on Blackboard (WORD format only) via allocated folder.         Assignments submitted through email will not be accepted.         Students are advised to make their work clear and well presented; marks may be reduced for poor presentation. This includes filling your information on the cover page.         Students must mention question number clearly in their answer.          Late submission          will NOT be accepted.         Avoid plagiarism, the work should be in your own words, copying from students or other resources without proper referencing will result in ZERO marks. No exceptions.         All answered must be typed using Times New Roman (size 12, double-spaced) font. No pictures containing text will be accepted and will be considered plagiarism).         Submissions           without this cover page          will NOT be accepted.        Q1. Explain formula for individual’s income tax and business entities. (five marks)       Answer:       Q2. Arrange relative tax liability by filing status from lowest to highest? (2.5 marks)       Answer:       Q3. Contrast concepts of Income from accounting , economic and tax perspectives.( use your own words ) (five marks)       answer       Q4. Idinify Items that are not Income under US income tax law. ? (2.5 marks)       Answer:   |‫كلية العلوم االدارية والمالية‬‫مكتب العميد‬Assignment 2Deadline: 12/11/2022 at 23.59 pmCourse Name: Tax AND ZakatAccountingCourse Code: ACCT 422Student’s Name:Semester Summer SemesterCRN:Student’s ID Number:Academic Year: First Semester 1444 HFor Instructor’s Use onlyInstructor’s Name: Dr. Salah OrabyStudents’ Grade: Marks Obtained/Out of 15 marksLevel of Marks: High-Middle-LowNotes:• The Assignment must be submitted on Blackboard (WORD format only)via allocated folder.• Assignments submitted through email will not be accepted.• Students are advised to make their work clear and well presented; marksmay be reduced for poor presentation. This includes filling yourinformation on the cover page.• Students must mention question number clearly in their answer.• Late submission will NOT be accepted.• Avoid plagiarism, the work should be in your own words, copying fromstudents or other resources without proper referencing will result inZERO marks. No exceptions.• All answered must be typed using Times New Roman (size 12, doublespaced) font. No pictures containing text will be accepted and will beconsidered plagiarism).• Submissions without this cover page will NOT be accepted.1|‫كلية العلوم االدارية والمالية‬‫مكتب العميد‬Q1. Explain formula for individual’s income tax and business entities. (fivemarks)Answer:Q2. Arrange relative tax liability by filing status from lowest to highest? (2.5marks)Answer:Q3. Contrast concepts of Income from accounting , economic and taxperspectives.( use your own words ) (five marks)answerQ4. Idinify Items that are not Income under US income tax law. ? (2.5 marks)Answer:2ACCT422 – Tax& Zakat AccountingChapter 1 – Introduction to the Taxes System in Saudi Arabia; Persons Subject to Income TaxArticle 1: Definitions•Article 1 includes definitions for use when using interpreting the income tax law•Each word will carry the meaning beside it unless the context indicates otherwise•Please refer to the meanings throughout the courseArticle 2: Persons Subject to Taxation•A resident capital company•A resident non-Saudi natural person who conducts business in the Kingdom•A non resident who conducts business in the Kingdom through a permanent establishment•A non resident with other taxable income from sources within the Kingdom•A person engaged in the field of natural gas investment•A person engaged in the field of oil and hydrocarbons productionArticle 3: Concept of Residency•A natural person is considered a resident if he meets any of the following conditions: He has a permanent place of residence in the Kingdom and resides in the Kingdom for atotal period of not less than 30 days He resides in the Kingdom for a period of not less than 183 days in the taxable year•A company is considered a resident in the Kingdom during the taxable year if it meets any of thefollowing conditions: It is formed in accordance with the Companies Law Its central management is located in the KingdomArticle 4: Permanent Establishment•A permanent establishment of a non resident consists of the permanent place of the non resident’sactivity through which it carries out business, including business carried out through its agent•The following are considered a permanent establishment: Construction sites, assembly facilities, and supervisory activities connected therewith Installations or sites used for surveying for natural resources including drilling equipmentand ships used for surveying A fixed base where a non resident natural person carries out business A branch of a non resident company licensed to carry out business in the Kingdom•A place is not considered a permanent establishment of a non resident in the Kingdom if it is usedfor the following purposes: Storing, displaying, or delivering goods belonging to the non resident Keep a stock of goods belonging to the non resident for the purpose of processing byanother person Purchasing goods for the sole purpose of collection of information for the non resident Carrying out other activities of preparatory nature for the interests of the non resident•A place is not considered a permanent establishment of a non resident in the Kingdom if it is usedfor the following purposes:•Drafting contracts for signature in connection with loans, delivery of goods or technical services•Performing any series of activities stated in the above listArticle 5: Source of Income•Article 5 lists 10 primary sources of income that are considered accrued in the Kingdom•The place of payment of the income shall not be taken into account in determining its source•A payment made by a permanent establishment of a non resident in the Kingdom is considered as ifpaid by a resident companyArticle 6: Tax Base(a) The tax base of a resident capital company is the shares of non-Saudi partners in its taxable incomefrom any activity from sources within the Kingdom minus expenses permitted under this lawSources – Expenses(b) The tax base of a resident non-Saudi natural person is his taxable income from any activity fromsources within the Kingdom minus expenses permitted under this lawSources – Expenses(c) The tax base of a non resident who performs an activity within the Kingdom through a permanentestablishment is his taxable income arising from or related to the activity of such establishment minusexpenses permitted under this lawIncome – Expenses(d) the tax base of each natural person is determined separately(e) the tax base of a capital company is determined separately of its shareholders or partnersArticle 7: Tax Rates•(a) the tax rate of the tax base is 20 percent (20\\%) for each of the following:•A resident capital company•A non Saudi resident natural person who conducts business•A non resident person who conducts business in the Kingdom through a permanentestablishment•(b) the tax rate of the tax base for a taxpayer engaged only in natural gas investment activities is 30percent•(c) the tax rate of the tax base for a taxpayer engaged in the production of oil and hydrocarbonmaterials is 85 percentChapter 2 – Taxable Activity and Tax-Exempt Incomes; Deductions and LossesArticle 8: Income subject to TaxTaxable income is the gross income including all revenues, profits, and gains of any type and of any formof payment resulted from carrying out an activity minus exempted incomeArticle 9: Gains and losses on disposal of assets.(a) The gain or loss from the disposal of an asset is the difference between the compensation receivedand its cost base(b) No gain or loss on disposal of a depreciable asset is taken into account other than what is stated inArticle 17 of this Law.(c) In determining taxable income, a natural person may not take into account gain or loss on disposal ofan asset that is not for use in the activity(d) The cost base of an asset purchased, produced, manufactured, or constructed by the taxpayer is theamount paid or incurred by the taxpayer in cash or in kind in the process of acquiring the asset.(e) Where a taxpayer disposes of part of an asset, the cost base is apportioned between the partretained and the part disposed of in accordance with their market value at the time of purchase(f) Expenses incurred to alter or improve a non-depreciable asset are added to the cost base of theasset.(g) The compensation value for disposal of an asset against assets in kind is based on themarket value of those assets in kind, including exemption from debt on the asset(h) Where a taxpayer disposes of an asset by gift or inheritance, the disposer is treated ashaving received compensation equal to the market value at the time of disposal (unlessparagraph (i) applies.(i) If an asset disposed of is encumbered by debt exceeding its market value, the taxpayerdisposing of the asset is treated as having received compensation equal to the value of the debt(j) In determining tax base, no gain or loss is taken into account on an involuntary disposal of anasset, to the extent that the compensation value is used to purchase of the same kind of assetwithin one year of the disposal.(k) The cost base of a replacement asset described in (j) is determined with reference to thecost base of the replaced asset(l) Where an asset owned by a taxpayer is converted to personal use or ceases to be used in thegeneration of income, the taxpayer is deemed to have disposed of the asset for its marketvalue, with the recognition of the gain but not the loss.Article 10: Exempt IncomeThe following types of income are exempt from income tax;(a) Capital gains realized from the disposal of securities traded in the Stock Market in theKingdom in accordance with restrictions specified in the regulations(b) Gains resulting from disposal of property other than assets used in the activity.Article 11: DonationsIn determining the tax base of each taxpayer, a deduction is allowed for donations paid duringthe taxable year to public agencies or philanthropic societies licensed in the Kingdom which arenon profit organizations and are allowed to receive these donations.Article 12: Expenses related to earning incomeAll regular and necessary expenses of earning taxable income, paid or accrued, incurred by thetaxpayer during the taxable year are deductible in determining the tax base, with the exceptionof outlays of a capital nature and expenses according to Article 13 of this law.Article 13: Non Deductible ExpensesNo deduction is allowed for the following;(a) Expenses not connected with the earning of taxable income(b) Any amounts paid to a shareholder, partner or any of their relatives, which constitutesalaries, wages, awards or the like, or which do not satisfy the conditions fortransactions among independent parties(c) Recreation expenses(d) Expenses of a natural person for personal consumption(e) Income tax paid in the Kingdom or another country(f) Fines and financial penalties paid or payable to any party in the Kingdom(g) Bribes or similar amounts considered a criminal offense.Article 14: Bad Debts(a) A taxpayer my deduct bad debts arising from the sales of goods or services that havebee previously declared as taxable income of the taxpayer(b) A bad debt may be deducted when stricken off the taxpayer’s books, when there issuitable evidence proving the impossibility of collecting it as specified in the regulationsArticle 15: Reserves and Allocations•No reserves or allocations may be deducted except allocations of doubtful debts for banks•The regulations shall determine the rules and restrictions specifying such allocationsArticle 16: Research and Development Expenses•Research and development expenses connected with the earning of taxable income may bededucted•Expenses for the purchase of land or equipment used for research and development maynot be deducted•Such equipment shall be subject to depreciation under Article 17 of this LawArticle 17: Depreciation•Depreciation is explained in Article 17 paragraphs (a) through (l)•Terms and classifications are detailed in the Article to provide extensive guidanceArticle 18: Expenses of Asset Repair and Improvement(a) Expenses incurred by the taxpayer for the repair or improvement of depreciable assets ineach group may be deducted(b) The amount of expenses deductible in accordance with paragraph (a) for each year shall notexceed 4\\% of the balance of the value of the group at the end of that year(c) The amount exceeding the limit in paragraph (b) will be added to the balance of the value ofthe groupArticle 19: Expenses for Geological Surveying and Preliminary Work for the Extraction of NaturalResources(a) Expenses of this Article are deducted in the form of amortization at the depreciationrates determined in paragraph (b) of Article 17(b) This Article also applies to expenses of intangible assets incurred by the taxpayerChapter 3 – Employee Expenses and Deferred Compensation; Accounting Periods andMethodsArticle 20: Contributions to an authorized retirement fund•Contributions to an Authorized Retirement Fund(a) An Employer’s contributions to an authorized retirement fund established in accordance withthe laws of the Kingdom may be deducted in favor of the employee(b) the deduction allowed in paragraph (a) of this article shall not exceed 25\\% of eachemployee’s income, prior to calculating the employer’s contribution(c) The employee’s contributions to an authorized retirement fund may not be deductedArticle 21: Carrying forward losses(a) a net operating loss may be carried forward to the taxable year following the year in whichthe loss is incurred. The carried forward loss shall be deducted from the tax base of thefollowing taxable years until the cumulative loss is fully offset. The regulations shall specify themaximum limits allowed to be annually deducted.(b) a net operating loss is equal to the excess of the deductions allowed under this Chapterwhich are in excess of the taxable income for the taxable year(c) to calculate the net operating loss for a natural person, the deductions and income foractivity only shall be taken into considerationArticle 22: Taxable Year(a) The taxable year is the State’s fiscal year.(b) a taxpayer may use a twelve month period other than the one specified in paragraph (a) ofthis Article as a taxable year, in accordance with the restrictions specified in the regulations(c) see Article 22 for further explanation of about a short year and a long year in accordancewith the regulations(d) Groups of related companies as defined in Article 64 of this Law, shall use the same taxableyear.Article 23: Method of Accounting(a) A taxpayer’s method of accounting must clearly reflect the taxpayer’s income.(b) The gross income and expenses of a resident company, and any other taxpayer who keeps oris required by law to keep commercial books according to the accounting principles generallyaccepted in the Kingdom, are determined according to such books after adjustments of theaccounts so as to conform to the rules of this Law(c) For taxation purposes, a natural person may record his transactions on a cash or accrualbasis. However, if his gross income from business for a taxable year exceeds the amountspecified in the regulations, he must use the accrual method in all succeeding taxable years.(d) A company which keeps or is required by Law to keep commercial books must record incomeand expenses on an accrual basis. Otherwise, it may for taxation purposes, use either the cashor accrual method.(e) Except for a change from the cash basis to the accrual basis required in accordance withparagraph (c) or (d) of this Article, a taxpayer may change its method of accounting uponobtaining the Department’s consent.(f) If a taxpayer changes his method of accounting, it must perform adjustments to items ofincome and deduction, or to debt or any other items in the taxable year following the change, sothat no item is omitted, or included more than once.Article 24: Cash-Basis AccountingA taxpayer who uses the cash basis method in its books and records shall register the received incomewhen received or made available, and the paid expenses when paidArticle 25: Accrual-Basis Accounting(a) A taxpayer who uses the accrual method shall record income and expenses when they are due(b) An amount becomes payable to the taxpayer when the taxpayer is entitled to receive it, even ifpayment is postponed or pain in installments(c) An amount becomes payable by the taxpayer when all the facts determining liability haveoccurredChapter 4 – A Guide to Accounting Zakah Part 1Introduction•Zakah is a duty that must be fulfilled by all “capable” Muslims for it constitutes one of thefive pillars of Islam.•This premise is taken for granted by all Muslims; scholars as well as common peopleThe most important questions are:•How should a Muslim pay Zakah?•What is the right way to pay Zakah?Books of Fiqh (Islamic Jurisprudence) provide directions and details for this task•To calculate alms (Zakah) on money for individuals and companies, an accountant needsa guide to help him in defining the items of assets, on which alms are due•The accountant also needs to know how to assess the liabilities which should bereduced from assets for alms in order to reach the alms category and calculate the almswhich are due to be paidFirst Essay: Accountancy Rules and Equations for Alms on Money1. The annual rule•Alms are calculated according to the lunar year. Counting starts when the amount ofmoney attains the Nisab (the minimum amount on which alms should be paid)•This includes all kinds of alms except alms on agriculture, fruits, mineral assets and Rikaz(metals found in the earth)2. The rule of the independence of each year•Each alms year is an independent one, and alms on a given amount of money should notbe more than once in the same year.•Duality should be avoided3. The rule of actual or assumed growth•Actual or assumed growth of an amount of money is a condition for any alms to begiven from this money.•Therefore alms are not due on fixed assets or things for personal use. This is becausethe condition of actual or assumed growth would not be met.4. The rule of capacity for obligation•Alms are due on money which is abounding (more than basic needs). No alms are duefor little amounts of money.•The amount of money should reach the Nisab. This guarantees that only those whohave the capacity of paying will be obliged to pay.5. The rule of calculating alms on the total and the net amounts•For every kind of money or activity there is a rule for calculating alms which are due on it. Someare calculated in relation to the total amount and others are calculated in relation to the netamount.6. The rule of grouping monies of the same kinds•It is permissible to group cash money of wealth to cash money available from offers ofcommerce and other gained cash money so that for all these monies there would beone Nisab and one alms year.•However, it is not permissible to group different kinds of money. For example, cattle,cash available from commercial operations, and agriculture and fruits should not begrouped in one lump sum and the alms paid on them.7. The rule of evaluating according to the current value of the market•Evaluating cash money of wealth and cash money from offers of commerce to definethe alms due should be according to the current value at the time of paying alms•They should not be evaluated according to historic value, cost or market, whichever islessThe equations of calculating alms on money1. Receptacle of alms money = alms assets – liabilities which are due to be paid at that moment2. Alms assets = assets which meet the conditions of obligatory almsThe conditions of obligatory alms are:a. It should be full ownershipb. Growth (actual or assumed)c. Completion of the year (except alms on agriculture, fruits, mineral wealth, orminerals of the earthd. No other kind of alms has been paid on the same assets within the same yeare. Assets should abound basic needsf. It should not include a debt which is due at the timeg. It should reach the minimum obligatory amount (Nisab)3. Short term liabilities = short term liabilities which are due payment and in which theconditions of decision are filleda. Liabilities should be related to the activityb. Due payment during coming yearc. Legally permissible4. The amount due for alms (Nisab)= 85 grams of pure gold evaluated according to currentprice5. The amount of alms due = the receptacle of alms money once it reached the Nisab X theprice of alms6. The price of alms = varies according to the kinds of money and activity. The range is2.5\\% to 20\\%.Chapter 5 – A Guide to Accounting Zakah Part 2Second Essay; Executive Measures for Calculating Alms for Individuals and CompaniesAlms on money should be calculated according to the following steps:1. Defining the date completing the year. Varies according to the circumstances of thealms giver2. Different monies owned by the alms giver should be assessed at the end of the yearaccording to the rules of alms3. Assessment of liabilities (deductions) which ae due to be decided upon, from almsmoney according to the rules of Zakah4. Defining the receptacle of alms by the deduction of due liabilities from alms money.According to the following equation:The receptacle of alms = alms assets minus due liabilities5. Defining and assessing the amount of Nisab according to the kind of money, the kind ofactivity, and the kind of alms. Nisab differs according to the kind of alms (on what willthe alms money be spent).6. A comparison should be made between the receptacle of alms defined in step 4 withNisab defined in step 5 so as to know whether alms are due or not. If the receptaclereaches the Nisab then alms would be due.7. Define the amount which should be taken from the receptacle of alms, whichaccountants term as the percentage or price of alms. See Guide for specifics on typesand amounts of alms.8. Calculate the amount of alms by multiplying the amount of the receptacle by theamount of the price (percentage) of alms. The result should be the amount of due alms.9. Defining who pays the due alms are as follows;a. For individuals and personal establishments; the individual or owner should pay thedue alms.b. For partnerships; the amount of due alms should be divided between the partnersaccording to the percentage of his sharec. For investment companies; the amount of due alms should be divided on thenumber of shares.•Each investor then pays alms according to his shares.d. For partnerships of labor and capital;•The labor pays alms according to his share of profits•The financier pays alms on capital and the profit less the laborer’s share10. Revenue from alms should be distributed according to its due activities and persons inthe light of the rules of Islamic Law.Alms money should be spent on the following:1. The poor2. The needy3. Those who work in administering alms4. Those whose hearts have been recently reconciled to the Truth5. To free slaves6. Those who are in debt7. In the Path of Allah8. The wayfarersIn order to calculate alms on money, an accountant needs the following tools and methods:1.General balance (financial situation) made on the date of calculating alms2. Final accounts for the ended year on which alms are to be calculated3. Clarification concerning the balance and the final accounts4. The price of gold at the time when paying alms is due in order to calculate the Nisab.5. Different monies possessed by the alms giver should be grouped if of the same kind6. Different contemporary fatwas concerning alms7. The Guide for calculating alms8. Other accountancy tools and methods which may be useful for calculating almsChapter 6 – A Guide to Accounting Zakah Part 3Simplified Accountancy Forms•These forms are meant to be used as a guide for accountants when assessing the receptacleof alms and when advising the alms giver whether he is an owner of a personalestablishment or a partner with others in a private company or a shareholder in aninvestment companyAccountancy form to assess and calculate alms on wealth in cash•The receptacle of alms on cash wealth includes banknotes, coins, silver, gold money andingots of gold, current accounts in banks and investment accounts•The Nisab for cash wealth is 85 grams of pure gold, or its equivalent in cash, or 595 grams ofpure silver•The Islamic Commission for Research has recommended to use the Nisab in gold.The assessment and calculation steps are as follows:a. Define the time when alms are due, (Al-Hawl), which starts from the time when theamount of money reaches Nisabb. Define all items of cash wealth, on which alms must be paid (alms assets)c. Assess all items of cash wealth according to market value at the time when alms isdued. Settle all due liabilities on the alms giver from his cash wealth so that to know thereceptacle of almse. Compare between the receptacle of alms and the Nisab, if the receptacle reachesthe Nisab, then alms is due to be paid.f. Calculate the amount of alms by multiplying the receptacle by the price of alms,which is 2.5\\%.g. See form on page 29 of GuideAccountancy form to assess and calculate alms on goods for trading and industrial activities•What is meant by goods for trading is anything which is to be bought or sold with theintention of trading to earn a profit•No alms are due on goods obtained for personal useThe assessment and calculation steps are as follows:a. Define the end of the alms year, which is the same date as the end of the financialyear for an establishment or companyb. Define and assess the elements of alms assets such as goods, etc.c. Define and assess the elements of immediate current liabilities which are due forpayment from the alms assetsd. Define the receptacle of alms by deducting item (c) from item (b) and add anyearned moneye. Define the amount of the Nisab, and then compare with the receptacle of almsf. Calculate the amount of alms. If the receptacle reaches the Nisab, then alms shouldbe paid as 2.5\\% if lunar year and 2.577\\% if solar year.g. See form on page 32 in GuideAccountancy form to assess and calculate alms on agriculture and fruits•Agriculture is anything that comes out of the earth and is planted by seeds from which man,animal, and bird feed•Fruits is everything which trees carry which is to be eaten•Alms on agriculture and fruits are due at the time of harvest or collecting•If an area of land produces more than one crop within the year, its owner should pay almson each crop separately.The following are the steps of assessing the alms on agriculture and fruits:a. Measure the total production of the land either by production or by cashb. Define the expenses on the production, if the opinion adopted is that which saysthat expenses should be deduced as far as they do not exceed the third, which isthe opinion of the Sixth Fiqh Seminar of Barakah.c. Define the receptacle of alms by deducing item (b) from item (a).d. Define the amount of Nisab, which is the equivalent to 5 Awsaq, or theequivalent to 50 Egyptian Kaylah, or 653 kg of wheat or the average food formost peoplee. Calculate the amount of alms:a. In the case of watering by cost alms = receptacle of alms X 5\\%b. In the case of watering without cost, alms = receptacle of alms X 10\\%See form on page 35 of the GuideAccountancy form to assess and calculate alms on cattle•Cattle includes camels, cows, and sheep•Alms are due only if they are bred for multiplication and not used as animals of burden•Nisab for alms on cattle differs according to the kind of species•For camels it is five, for sheep it is forty, whereas for cows it is thirty•Refer to Fiqh books for more detailsThe following are the steps of assessing the alms on cattle:a. Define the number of cattle deducing the working animals and the ones ready for tradeb. Compare the number with Nisab, If it is less than Nisab then no alms are due.c. Define the category the number falls into, in order to define the amount of alms dued. Define the alms due according to tables in Fiqh booksSee form on page 37 in the GuideAccountancy form to assess and calculate alms on mineral and marine wealth and minerals inthe earth•Mineral and marine wealth include anything of value which is brought out from the earthor the bottom of rivers, seas, or oceans•Minerals in the earth (Rikaz) are treasures which are buried in the earthThe following are the steps for defining the receptacle of alms on mineral and marine wealth:a. Define the net production from the earth or sea, on which alms must be paidb. Compare the net production with the Nisab (85 grams of gold) in he case of minerals ofwealth. For Rikaz there is no Nisab.c. Calculate the amount of alms, if the receptacle reaches the Nisab, on the basis of 2.5\\%for minerals and 20\\% for RikazSee form on page 39 of the GuideAccountancy form to assess and calculate alms on revenue of investment assets••Investment assets are any assets which remain fully owned whilst revenue from investingthem are re-occurring, such as real estate, cars, and othersNo alms are due on the assets, however alms are due on the revenues once they reachNisab after deducing actually paid expenses and debtsReceptacle of alms on investment assets is calculated according to the following steps:a. Define the total annual revenue at the end of the yearb. Define all expenses of getting the revenuec. Deduce the expenses from the total revenue to get net revenued. Deduce currently due debts which the alms giver must paye. The net of all of the above should be added to any cash and trade goods owned by thealms giver in which no alms were paid at the end of the year to ascertain the receptacleof almsf. Compare the receptacle (e) with the Nisab which is the equivalent to 85 grams of gold, ifthe receptacle reaches the Nisab, then alms should be calculated on the basis of 2.5\\%,which is the chosen opinion of the present guide.See form on page 42 of the Guide.Accountancy form to assess and calculate alms on revenue from work••This category includes wages, salaries, income from freelance work and won moneyAlms must be paid on what remains of this money at the end of the year by adding it toother monies owned by the alms giver when calculating the Nisab and the alms yearThe steps to define the receptacle of alms and calculate what is due at the end of the year are:a. Define what remains from the revenue at the end of the year after deducing what ispaid from cost of basic need and after paying outstanding debtsb. Compare step (a) to Nisab (85 grams of gold) to know whether alms are due or notc. Calculate the amount of alms if the receptacle reaches the Nisab on the basis of 2.5\\%See form on page 44 of the GuideSee page 45 of the guide to determine alms on freelance workSee page 46 for form for freelance workACCT422 – Tax& Zakat AccountingChapter 2 – Determination of TaxFormula for Individual Income TaxGross income – Exclusions = Gross Income (after exclusions)Gross Income (after exclusions) – Deductions for AGI = Adjusted Gross Income (AGI)•Tax rate schedules, std. deduction, personal exemptions, & other amounts are adjusted for inflation.Actual amount paid‫مبلغ معياري بموجب القانون‬‫األكبر من االثنين‬Adjusted Gross Income (AGI) – Deductions from AGI→ 1- Greater ofitemized deductions OR standard ded.2- Personal and dependency exemptions= Taxable IncomeTaxable Income X Tax rate or rates = Gross taxGross tax – Credits and prepayments = Net tax payable OR refund dueDeductions from Adjusted Gross Income••••••Itemized deductionsStandard deductionPersonal exemptionsDependency exemptionsChild creditMaking work pay credit and social security tax reductionBashaierItemized DeductionsSee Table 6 for partial listoooooo••Medical expensesTaxesInvestment and residential interestCharitable contributionsPersonal casualty and theft lossesMiscellaneous deductionsOnly claim itemized deductions if total greater than std. deductionSome items limited by varying percentages of adjusted gross inc.o Medical expenseso Casualty losseso Miscellaneous itemized deductionsStandard Deduction••••Varies based on:o Filing status, age, and visiono $6,100 – $12,200 in 2013▪ Increase over 2012 to adjust for inflationIncrease std. ded. if elderly &/or blindUsed when std. ded. > itemized ded.Limited std. ded. in certain situationsPersonal Exemptions••Generally, each taxpayer allowed oneo Unless claimed as dependent on another returno $3,900 in 2012Additional allowed for spouse on joint returnBashaierDependency ExemptionsRequirements for All Dependents••••Have a qualifying identification numberMeet a citizenship testMeet a separate return testNot themselves claim another person as a dependentAdditional Requirements for Qualifying Children••••Relationship testAge test• < 19 or full-time student < 24Abode test• Live w/taxpayer > ½ of yearSupport Test• Dependent provides < ½ own supportAdditional Requirements for Other Relatives•••Relationship test• Related to or live w/taxpayer whole yrGross income test• Dependent’s gross inc. < exemption amt.Support test• Taxpayer provides > ½ supportDetermining the Amount of Tax••••••••Filing statusJoint returnSurviving spouseHead of householdSingle taxpayerMarried filing a separate returnAbandoned spouseDependents with unearned incomeBashaierFiling Status•Married filing jointly• Marital status on last day of tax year• Common law marriages recognized• Spouses must be U.S. citizens or residents• Federal Defense of Marriage Act of 1996 defines marriage as between a man and a woman▪ Same-sex couples cannot file a joint federal return, but may file joint state returnin some states•Surviving spouse• Files as married filing jointlyHead of household• Unmarried and maintains home in which dependent lives > ½ yr••••Married filing separatelySingle – taxpayers not in other categoriesRelative tax liability by filing status from lowest to highest• Married filing jointly• Surviving spouse• Head of household▪ Includes abandoned spouse• Single• Married filing separatelyBashaierChapter 3 – Gross Income: InclusionsConcepts of Income•••Economic concepts of incomeAccounting conceptsTax concept of incomeEconomic Concepts of Income••Wealth that flows to individualsChanges in value in individuals’ wealtho Unrealized gainso Gifts & inheritances considered incomeAccounting Concepts of Income•••Values are measured by a transaction approachIncome realized as result of completed transactionsUse historical costTax Concept of Income••••Conditions to make income taxableAdministrative convenienceWherewithal to payGross income definedConditions to Make Income Taxable▪▪▪Economic benefit to taxpayerIncome must be realized• Earnings process completeIncome must be recognizedAdministrative Convenience▪▪Economic concept is considered too subjectiveObjectivity achieved at price of equityWherewithal to Pay▪A tax should be collected when the taxpayer can most easily payGross Income Defined▪Section 61(a) defines gross income• “all income from whatever source derived,” including (but not limited to)the following items:• Compensation, income derived from business, gains from dealings inproperty, interest, rents, royalties, dividends, alimony, annuities, lifeinsurance, pensionsBashaier▪▪Form of receipt• Gross income not limited to cash• §1.61-1a, income may be “realized in any form, whether in money,property, and services”Indirect economic benefit• Items indirectly benefiting taxpayers excluded from gross incomeAllocating Income between Married People▪▪Common law property system• Used in 42 states• Income taxed to person who earns it or who owns the income-producingpropertyo Joint income comes from jointly owned propertyCommunity property states• All income deemed to be earned equally by spouses except income fromseparate property• Separate property of each spouseo Property owned prior to marriageo May be community income or separate income, depending on stateof residenceBashaierWhen Is Income Taxable?••••Cash methodAccrual methodHybrid methodSee Topic Review 1Cash Method▪▪▪Cash receipts and disbursements• Used by most individuals, and most non-corp. bus. with no inventoryConstructive receipt• Report inc. in year actually receivedo Check received after banking hourso Bond interest coupons that have matured but not redeemedNo constructive receipt if• It is subject to substantial limitations• Payor does not have funds necessary to make payment• Amount is unavailable to taxpayerAccrual Method▪▪Report income in year income earned• Right to income• Amount can be determined with reasonable accuracyPrepaid income• Generally taxable when received• Exceptions in Rev. Proc. 2004-34Hybrid Method▪▪Accrual method for purchases and salesCash method in computing all other income and expensesBashaierItems of Gross Income••••••••••••CompensationBusiness incomeGains from dealings in propertyInteresto Series EE bond interest exceptionRents and royaltiesDividendsAlimony and separate maint. pmts.Pensions and annuitiesIncome from life insurance and endowment contractsInc. from discharge of indebtednessIncome passed through to taxpayerOther items of gross incomeDividends•••••••Included in shareholder gross inc.Results in double taxationo Earnings taxed at corporate levelo Earnings taxed at shareholder level when distributed as a dividendo C corps allowed a 70, 80, or 100\\% div. rec. deduction based on ownership \\%▪ Relief from multiple levels of taxationIndividuals taxed up to 20\\% on dividendso Reduces effects of double taxationo Must hold stock for at least 60 daysDistributions to extent they are out of corporate E&PStock dividendso Not taxableo Basis in stock allocated to new sharesCapital gain dividendso Taxed at long-term capital gain ratesConstructive dividendso Taxed as regular dividendsBashaierAlimony and Separate Maintenance Payments•••Only receipt of alimony is taxableo Alimony is deductible by one who paysChild support not taxableProperty settlement not taxablePensions and Annuities•Income portion of annuity taxableo Investment portion is excludedIncome Passed Through to Taxpayer•Income from flow-through entities taxed directly to ownerso Income from partnershipo Income from S corporationo Income in respect of a decedento Income from an estate or trusto Income from ETF, RIC, or REITOther Items of Gross Income•••••••Prizes, awards, gambling winnings, and treasure finds – taxableIllegal income – taxableUnemployment compensation – taxableSocial security benefits – up to 85\\% taxableInsurance proceeds & court awardso Special rules applyRecovery of previously deducted amounts – taxableRevenue received that is disputed must still be reported as incomeo Previously reported income that is subsequently refunded is deductibleBashaierChapter 4 – Gross Income: ExclusionsItems that Are Not Income••••Unrealized incomeSelf-help incomeRental value of personal-use propertySelling price of propertyUnrealized Income▪Example:• Land valued at $20,000 beginning of year appreciates to $45,000 at end ofyearo The $25,000 increase in value is unrealized income and not taxableSelf-Help Income▪The amount saved is not subject to tax• Cleaning your own carpet• Repairing your carSelling Price of Property▪Only gain on sale of property is taxableo Selling price – Basis in property = Gain on sale of propertyMajor Statutory Exclusions•••••••••••Gifts and inheritancesLife insurance proceedsAwards for meritorious achievementScholarships and fellowshipsDistributions from qualified tuition programsPayments for injury and sicknessEmployee fringe benefitsForeign-earned income exclusionIncome from the discharge of a debtExclusion for gain from small business stockOther exclusionsBashaierLife Insurance Proceeds•••Paid by reason of deatho Generally non-taxablePolicy surrendered not for deatho Excess of proceeds over the premiums paid taxable to recipientDividends on life insurance and endowment policies non-taxableo Considered return of premiums paidAwards for Meritorious Achievement•Awards for religious, charitable, scientific, etc. are not taxable if ALL criteria are met:o Did not enter contesto Is not required to perform substantial future serviceso Designates a qualified charitable organization to receive the paymentScholarships and Fellowships•Scholarships excluded for degree candidates used for qualified tuition and related expenseso Required for courses of instruction at an educational institution▪ Tuition, fees, books, supplies, equipmento Not room and boardDistributions from Qualified Tuition Programs: §529 Plans••No tax on earnings while in §529 planExclusion for distributed earnings if used by beneficiary for qualified tuition and related expenseso Tuition, fees, books, supplies, equipment, ANDo Room and board if ≥ half-time studentPayments for Injury and Sickness••Injury includes physical and mentalo Medical expense pmts. for emotional distress excluded if expenses attributable to a physicalinjuryDisability income policy is non-taxable if purchased by taxpayero Taxable if purchased by employerBashaierForeign-Earned Income ExclusionEligible Taxpayers•U.S. citizens subject to U.S. income tax on worldwide incomeo Subject to double taxation if foreign income taxed by foreign countryo Foreign tax credit (FTC) mitigates double taxationExclusion Amount•Foreign-earned income exclusion alternative to FTCo May exclude up to $97,600 of foreign earned incomeo Add’l exclusion for foreign housing costs▪ Foreign housing costs in excess of $15,616▪ Max housing exclusion is $13,664Residency Tests•To qualify for foreign-earned income exclusiono Must be bonafide resident of foreign country(ies) for entire taxable year,ORo Physical presence in foreign country for 330 days during a 12-month periodIncome from the Discharge of a Debt•Generally, taxpayer may have to include amount of debt forgiveness in gross incomeo Exceptions: nontaxable situations▪ Discharge occurs in bankruptcy▪ Discharge occurs when taxpayer is insolventOther Exclusions•••••••••••Gain from sale of personal residenceAnnuities paid to survivors of public safety officersCertain military-related paymentsHousing allowance for ministersCampus housingFoster care paymentsRural letter carrier’s allowanceRoth IRA distributionsEducation IRA distributionsPersonal foreign currency gainsSee Table 2BashaierChapter 6 – Deductions and LossesClassifying Deductionsfor Adjusted Gross Income•••Taxpayer benefits from deduction even if she claims the std. deductionReducing AGI: +/- benefits for t/p▪ + Many deductions and credits phased out above certain AGI thresholds▪ + Reduces AGI floors for certain categories of itemized deductions▪ -Reduces certain deduction ceilingsMost common deductions for AGI▪ Trade or business expenses▪ IRAs and qualified pension contributions▪ Alimony▪ Losses on sale of bus/invest property▪ Moving expenses▪ Int. paid on qualified education loans▪ ½ of self-employment tax▪ Health insurance paid by self-employedsfrom Adjusted Gross Income•Itemized deduction only will have tax benefit if total deductions exceed the taxpayer’sstandard deduction▪ Deduct the higher of the standard deduction or sum of itemized deductionsCriteria for Deducting Bus. & Investment Expenses•••••Business or investment requirementOrdinary expenseNecessary expenseReasonable expenseExpenses and losses must be incurred directly by the taxpayerBashaierBusiness or Investment Activity•••••Activity engaged in for profito Use facts and circumstances testTrade or business (ToB) vs. investment classificationo ToB losses are ordinary losses• ToB expenses are for AGIo Investment losses are capital• Invest. exp are from AGI• Subject to 2\\% of AGI floorLosses and expenses related to rents and royalties are for AGI deductionsLegal and accounting fees• For AGI deduction for ToB if incurred in ordinary course of business▪ Fees related to taxes also for AGI for ToBNonbusiness fees related to taxes from AGI deduction subject to 2\\% of AGI floorOrdinary Expense•Ordinary expense requirements• Reasonable in amount• Bear reasonable proximate relationship to income-producing activity or property• Must be customary or usual course of a particular industry or business communityNecessary Expense•An expense is considered necessary if it is “appropriate and helpful” in the taxpayer’s businessReasonable Expense•Problems often occur with salaries for shareholder-employees of closely held businessesExpenses and Losses Must Be Incurred Directly by the Taxpayer•Generally, a taxpayer cannot take a deduction for a loss or expense of another personBashaierWhen an Expense Is Deductible .. Cash Method•Generally deductible when actually paid•Prepaid expenses••No current deduction if expenditure creates an asset with a life substantially beyond end oftax year▪ Exception for prepaid rent if prepmt ≤ 1 year and lease requires the prepmtPrepaid interest••Amortize over period of loan to which interest charge is allocatedPoints deductible over life of loan▪Points paid in connection w/purchase or improvement of a principal residence arecurrently deductibleWhen an Expense Is Deductible .. Accrual Method•Allowed to deduct exp. in period in which exp. accrue under all-events test & economicperformance testo All-events test (AET) met▪ Amount of liability is established▪ Amount of liability is determined with reasonable accuracyoEconomic performance test (EPT) is met when EP deemed to occur▪Exception for recurring liabilities••••All-events test metEPT occurs w/in 8½ mo (or a reasonable period) after close of tax yearExp. consistently treated as incurred in tax yr.Item not material, or better matching w/AETBashaierChapter 7 – Itemized DeductionsMedical Expenses•••Qualified individualsQualified medical expensesAmount and timing of deductionQualified Individuals••Medical exp. paid for taxpayer, taxpayer’s spouse, or dependent• Certain dependency test failures do not disqualify dependent▪ Failing to meet gross income limit▪ Failing joint return testNoncustodial parent may claim deduction for dependentQualified Medical Expenses••••••Diagnosis, cure, mitigation, treatment, or prevention of diseaseTransportation• $0.24/mile std. mileage rate• If overnight, includes▪ Meals (50\\%) & lodging (≤ $50)Cost of living in institutionsCapital expenditures• Excess of cost over amount by which value of home increasesMedical insurance premiums• Includes qualified L-T care premiumsNo cosmetic surgery• Unless treats illness or promotes proper body functionAmount and Timing of Deduction•••Deductible in year paid for qualified medical exp. exceeding 10\\% of AGI• 7.5\\% for taxpayers > 65 until 2016Medical insurance reimbursements• Only unreimbursed portion deductibleSelf-employeds may deduct health insurance as a for AGI deductionBashaierTaxes•••••••••Definition of a taxDeductible taxesState and local income taxesState and local sales taxesNondeductible taxesPersonal property taxesReal estate taxesSelf-employment taxNondeductible taxesDefinition of a Tax•Mandatory assessment levied under authority of a political entity for purpose of raising revenueused for public or governmental purposesDeductible Taxes•••••State, local, & foreign real prop. taxesSome state and local personal prop. taxesForeign, state &, local income, war profits, and excess profit taxesState & local sales tax electionEnvironmental taxNondeductible Taxes••Taxes imposed by the Federal gov’t generally not deductibleExceptions• Employer’s share of Social Security tax▪ Deductible by employer as bus. expense• Federal import tariffs & excise taxes▪ Deductible if for business or production of incomeCharitable Contributions••••Qualifying organizationsType of property contributedDeduction limitationsApplication of carryoversQualifying Organizations••••U.S., D.C., state, or U.S. possessionA post or organization of war vetsDomestic fraternal society, or order, or associationPublic Charities• Churches, educational Institutions, hospitals, medical schoolsBashaierType of Property Contributed•••Contribution of long-term capital gain property• Generally FMV▪ Use adjusted basis if• Contributed to private nonoperating foundation• Unrelated use by charitable organization• Certain intangiblesContribution of ordinary inc. prop.• Value generally adjusted basis• Exception for C corp donation of certain inventory▪ FMV – (50\\% x [ordinary inc. if sold])Contribution of services• Only out-of-pocket and transportation expenses deductibleDeduction Limitations•••••50\\% of AGI limitation• Applies to public charities30\\% of AGI limitation• Contributions of capital gain property20\\% of AGI limitation• Capital gain property contributed to private nonoperating foundationsOrder of deductions•50\\% property•30\\% property•20\\% propertyCombined contributions cannot exceed 50\\% of AGICasualty and Theft Losses••Individuals can deduct casualty or theft loss on personal-use property as an itemized deductionSee Chapter 8Miscellaneous Itemized Deductions••••Certain employee expensesExpenses to produce investment incomeCost of tax adviceSee Chapter 9BashaierCertain Employee Expenses•Unreimbursed employee business expenses• Include travel, transportation, dues to professional organizations, cost of job hunting• Generally misc. itemized deductions subject to a 2\\% of AGI floorExpenses to Produce Investment Income••Expenses to produce investment income other than rents or royaltiesMiscellaneous itemized deductions subject to 2\\% of AGI floor• Investment interest NOT subject to the 2\\% of AGI floorCost of Tax Advice••Includes• Tax return preparation fees• Appraisal fees in determining amount of casualty loss• Accountant fees for representation in a tax auditMiscellaneous itemized deduction subject to 2\\% of AGI floorBashaierChapter 8 – Losses and Bad DebtsTransactions that May Result in Losses•••••Sale or exchange of propertyExpropriated, seized, confiscated, or condemned property• Treat as sale or exchangeAbandoned propertyWorthless securitiesDemolition of property• Add to basis of landSale or Exchange of Property••Amount realized includes liability transferred to buyer• Qualified residence exception▪ No gain on transfer AND no discharge of indebtedness incomeSelling costs• Deducted in year incurred for inv.• Reduction of amt realized for noninv.Abandoned Property••Ordinary loss if business or investment propertyNondeductible if personal propertyWorthless Securities••Securities must be completely worthlessCapital loss on last day of tax yearClassifying the Losses on Taxpayer’s Tax Return••Ordinary vs. capital lossDisallowance possibilitiesBashaierOrdinary vs. Capital Loss•••Based on of type of property and type of transaction involved§1231 property• Net §1231 loss is an ordinary loss• Includes real or depreciable property used in a trade or business and held for more than oneyear§1244 stock• Loss on sale of §1244 stock ordinary▪ Limited to $50K ($100K MFJ)▪ Excess loss is a capital loss• §1244 stock qualifications▪ ≤ 50\\% of gross receipts from passive sources during prior 5 tax years, AND▪ Contributions to capital and paid-in surplus ≤ $1M at time of issueCasualty and Theft Losses•••••••Casualty definedTheft definedDeductible amount of casualty lossLimits on personal-use propertyNetting casualty gains and losses on personal-use propertyCasualty gains and losses attributable to business and investment propertyTiming of casualty loss deductionCasualty Defined••A casualty loss results from an identifiable event that was sudden, unexpected, or unusualQualifying casualties include fire, flood, hurricane, tornado, and hailTheft Defined••Generally, criminal intent and violation of state law required to meet definition of theftIncludes larceny, embezzlement, robbery, blackmail, extortion, and ransomDeductible Amount of Casualty Loss•Generally decline in FMV due to casualty• For partial destruction loss is lesser of decline in FMV or adjusted basis• Total destruction of business or investment property amount of loss is adjusted basisLimitations on Personal-Use Property•Two limitations• Losses sustained in each separate casualty reduced by $100, AND• Sum of all net casualty losses reduced by 10 \\% of taxpayer’s AGIBashaierNetting Casualty Gains and Losses on Personal-Use Property••Losses reduced by insurance reimbursementCasualty losses must be netted against casualty gains prior to applying 10\\% of AGI limitation• Net casualty loss subject to 10\\% limitationCasualty Gains & Losses Attributable to Business & Investment Property••For AGI deduction• Investment property must be used to generate rents or royalties• Losses on other investment property are miscellaneous itemized deductions NOT subject to2\\% of AGI floorIf property held 12 monthsOvernight requirement••Must be reasonable for taxpayer to be away overnightShort rest stops on long day-trip not considered overnightBusiness vs. Pleasure••Travel to and from destinationo If trip primarily personal, no deductiono If trip primarily business, all travel to and from destination deductibleOther travel-related expenseso Allocated to business and personal activitiesTransportation Expenses•••Definition and classificationTreatment of automobile expensesReimbursement of automobile expenseso Excess expenses over reimbursement deductible as 2\\% misc itemized deductionsDefinition and Classification••••Commuting costs generally nondeductible personal expensesCommuting costs between multiple jobs for same taxpayer deductibleTransportation costs from employee’s regular work site to temporary one deductibleCommuting costs between home and temporary work site deductible if taxpayer has regular placeof businessTreatment of Automobile Expenses••Standard mileage rate $0.565/mileo Not available if use ≥ 2 vehicleso Does not include parking and tollsActual expenseso Includes gas, oil, maintenance and repairs, insurance, and depreciationo Based on ratio [Bus. miles]/ [Total miles]BashaierOffice in Home ExpensesGeneral Requirements•Office used on exclusive and regular basis and ONE of followingo Office used as principal place of business for any ToB▪ Includes doing administrative work if no other fixed location availableo Place for meeting clients in normal course of businesso Located in separate structure•An employee must also prove that the home office is for the convenience of the employeroNot just appropriate or helpful for the employeeDeduction and Limitations•Categories of expenseso Expenses directly related to officeo Expenses indirectly related to office▪ Expenses related to whole home▪ Prorate based on square footage or other methodo Total expenses cannot create loss•Order of expense deductions1. Expenses not related to home office2. Expenses directly related to home office3. Pro-rata portion of indirect expenses▪E.g., mortgage, interest, utilities•Disallowed expenses carried forward to future year•Optional safe harbor to determine amount of deductible home office expenses per Rev.Proc. 2013-13o$5 multiplied by[sq. ft. of space for qualified use]▪Limited to 300 sq. ft.•$1,500 maximum deductionBashaierChapter 11 – Accounting Periods and MethodsAccounting Periods•••••Fiscal year is any 12-month period other than calendar yearPartnerships, S corps, and PSCso Generally must have same tax year as majority owners (> 50\\% ownership)Required payments and fiscal yearsChanges in the accounting periodReturns for periods of < 12 monthsRequired Payments and Fiscal Years••C corporations, other than PSCs, can choose any fiscal yearPartnerships, S corps, and PSCs can choose a fiscal year if deferral is 3 months or less (§444 election)Changes in the Accounting Period••Generally need IRS approval to change accounting periodMust establish substantial business purpose to change accounting periodReturns for Periods of Less than 12 Months••Taxpayer’s first or final returno No annualization of income requiredChange from one accounting period to anothero Annualization requiredOverall Accounting Methods••••Overall accounting method for one trade or business not needed to be used in a second trade orbusinessCash receipts and disbursements methodAccrual methodHybrid methodCash Receipts and Disbursements Method•••••Report income for the tax year in which payments are receivedGenerally deduct exp. in year paido Prepaid exp. capitalized and amortized if benefits extend beyond tax yearMust capitalize fixed assets and recover through depr. or amort.Most individuals and many service businesses use the cash methodCannot use cash method in a business where inventory is material income-producing factoro Small business exception – see hybrid methodBashaierAccrual Method••Report income under all-events test and economic performance testo All events test▪ Taxpayer’s right to receive inc. & amount determined w/reasonable accuracyo Economic performance test▪ Property or services actually rendered by other partyDeduction is met when liability established and amount of expense can be determined withreasonable accuracyHybrid Method•Use accrual method for sales and purchases, but may use cash method for other income andexpenseso Small business exception▪ Businesses with inventory whose annual gross receipts for 3 prior years ≤ $1M mayuse cash method for sales and accrual method for cost of goods soldInventories••Uniform capitalization rules (UNICAP)o Required for taxpayers whose average gross receipts for 3 prior years >$10Mo Must capitalize some period costsIf using LIFO for taxo Must also use LIFO for financial acctg.Change in Accounting Methods••••Accounting period chosen by using for first year in which it is applicableo IRS approval required to change methodso May change to LIFO method without IRS approvalAmount of changeo Due to timing of income and deduction recognition due to changes between cash andaccrual methodsReporting the amount of the changeo The amounto Change voluntary or involuntaryo Any specific statutory mandatesMust obtain IRS consentBashaierPurchase answer to see fullattachment
APA paper format
The American Psychological Association (APA) format is a widely used style for writing academic papers in the social sciences. The APA format provides specific guidelines for formatting papers, including margins, font size and type, spacing, and the use of headings. These guidelines ensure that papers written in the APA format are visually consistent and easy to read.
In the APA format, papers are typically double-spaced and written in 12-point Times New Roman font. The margins should be 1 inch on all sides, and the text should be left-aligned. Headings are used to organize the paper into sections, with different levels of headings used to indicate the hierarchy of information.
In-text citations are an essential aspect of the APA format, and they must be included whenever information from an outside source is used in the paper. The reference page is also an important component of an APA paper, as it lists all of the sources used in the paper. The reference page should be formatted according to the APA guidelines, including the use of a hanging indent for each reference and the use of italics for book titles.

It is important to note that the APA format is not just a matter of style, but it is also a way of communicating research findings and ideas. The use of the APA format helps to ensure that the information presented in a paper is clear, concise, and easy to understand.
In conclusion, the APA format is a widely used style for writing academic papers in the social sciences. It provides specific guidelines for formatting papers, including margins, font size and type, spacing, and the use of headings. By following the APA format, students can ensure that their papers are visually consistent, easy to read, and meet academic standards.

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