To prepare income tax returns for individual and self-employed taxpayers, tax return preparers are called to show a basic competency on topics related to the tax treatment of income and assets. In this article I explore the content of that basic competency.The treatment of the topics income and assets is one of the most comprehensive in the RTRP competency exam outline. It represents 22 percent of the content of the test material. That is easy to understand because the tax treatment of "income" is at the core of the income tax preparation industry. But also because the tax treatment of income and assets has several crucial aspects to consider in a tax return preparation process in which general rules have innumerable exceptions to be aware of. So, it is not surprising that tax the return preparer will be highly tested in these topics in the RTRP competency exam.
What the examiners expect you to know about this topic? As in most competency or certification exams, you are expected to master the basic regulations related to each topic the candidate is tested on, both conceptually and from a practical point of view. So, know the big picture of the conceptual framework for a topic and be able to apply it to specific tax situations.
Because the registered tax return preparer exam focuses on the Form 1040, what we are referring to here applies to incomes for employees and for the self-employed; it does not include the income analysis of any type of corporations. Thus, the examiners will expect the RTRP candidate to master the basics of the tax treatment of at least the following type of income:Income from personal service sources (employee compensation) Income from property - interest, dividend (ordinary and qualified), rental income and royalty Income from partnerships, S-Corporations, trusts, and estates (form k-1)Small business income and expenses - (self-employed income) Gain and losses from transactions in propertiesIncome specifically included in gross income in Sections 71-90 of the IRC- Internal Revenue Code
Regarding any type of income, the distinction between a taxable and non-taxable income is at the core of a tax preparer competency. A general rule is that all types of income from all sources are subject to income tax unless they are specifically exempted by law. In order to determine the taxable income for a period, tax preparers also must have mastered on same degree the several inclusion and exclusion of income specifically established in the Internal Revenue Code.In addition to the above general rule related to income, another important concept about income, from the income tax perspective, is that income implies an increase in wealth, recognized for tax purposes only upon realization. This concept of income as a net amount brings in place the several items of deductions, personal exemptions and credits used in determining the taxable income for a tax period. For example: in a property transaction (the sale of a property) gross income is the net amount resulting by sub tracting the adjusted basis of the property sold from the gross proceeds of the sale. This is the concept called as "recovery of capital" established by the Supreme court and it says ""In any property transaction, recovery of capital means that the taxpayer will be taxed only on the portion of income that exceeds the capital invested and only after recovery of that capital"
Regarding the tax treatment of assets or properties, there are several rules that are the basis of tax return preparation. First, when preparing an individual return, the Form 1040 end result is a financial position (cash flow) and not an economic position (balance sheet). Thus, asset come into play when they are the object of some transaction that increased taxpayer's wealth (income) and a result can be determined (gain or loss).
Basic sub-topics of the tax treatment of assets can be: 1) adjusted basis determination; 2) capital recovery methods (depreciation); 3) types of assets and gain/loss (ordinary, capital, Section 1231) among others.
The analysis of income and gross income also requires from a professional tax return preparer a thorough understanding of other related concepts such as: general and special rules of filing information; filing status rules, fiscal tax period of inclusion of the income and expenses, the accounting method rules used to compute income and expenses, etc.
Treatment of income and assets is a main topic of the registered tax return preparer test. So, it will demand special attention from candidates to the exam. In articles that will follow we will continue to present a brief analysis of other topics included in the outline for the Registered Tax Return Preparer competency examination.
Visit our blog: /blog
iAutoblog the premier autoblogger software
No comments:
Post a Comment