Gross income
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Gross income is commonly defined as the amount of a company's or a person's income before all deductions or any taxpayer’s income, except that which is specifically excluded by the Internal Revenue Code, before taking deductions or taxes into account. For a business, this amount is pre-tax net sales less cost of sales. "Gross income" in accordance to the IRS, is defined in the Internal Revenue Code 61. There are exceptions to this definition under Sections 101-140 of the Internal Revenue Code. Each of these sections excludes a particular type of inflow if it meets the criteria stated.
For the purpose of a company's description of an employee's income, the term annual earnings may be used because a person may have other sources of taxable income in a year, apart from what is earned from the employer. For instance, cashing out an RRSP results in additional income that must be claimed as part of total world income.
Further description of the items included in gross income per the IRS, are in Part II of the Internal Revenue Code. Items specifically excluded from gross income are listed in Part III.
The U.S. Supreme Court has stated that Gross income can be seen as an undeniable succession to wealth which requires an inflow of cash, noncash property, services, or even psychic satisfaction in excess on a taxpayer’s return of actual capital. Realization for tax purposes requires severance and dominion and control. Severance means that the gain must be legally or physically separable from the producer of the gain. Dominion and control means that the gain is readily available for the taxpayer’s separate use.
Three Methods for determining when an inflow is included in gross income are the cash method, the accrual method, and the hybrid method. Under the cash method system a taxpayer reports gross income at the time of actual receipt of actual cash or cash equivalence. The accrual method requires taxpayers to report income when the recipient has a legal right to the gain, when the amount of the gain is reasonably certain to determine, and when the ultimate receipt is reasonably certain. The final method is the hybrid method which combines the cash method and the accrual method.
[edit] Accession
An undeniable accession to wealth requires an inflow of cash, noncash property, services, or other satisfaction in excess of the initial capital invested. For example, if David purchases a suitcase for $300 in October and sells it in November for $400, he has received gross income of $100 (the $400 received minus his $300 basis). This is also true for services. If Claire performs medical services worth $300 for her childcare provider, and in exchange receives $425 of childcare at no cost, her income is $125 (the $425 worth of value received minus her $300 basis).
[edit] Realization
Realization involves two components: severance, and dominion and control. Severance means that the gain is physically separable from the producer of the gain. For example, Sarah owns a house for which she paid $150,000 in 1995. In 2003, Sarah still owns the house buts its fair market value has increased to $400,000. Sarah does not realize the $250,000 increase because it is not physically separable from the house.
Dominion and control means that the amount is available for immediate use, benefit, or disposal by the taxpayer.
