Federal Income Tax

Federal income tax is the largest contributor of revenue to the federal budget. Income tax law is complex, especially when applied to businesses. It is critical for businesses to have an understanding of these laws and how they will affect the business' tax liability and bottom line. A tax attorney can assist your business with understanding and complying with federal income tax laws.

Sources of Tax Law

The Sixteenth Amendment to the US Constitution gave Congress the power to tax income from "whatever source derived." All residents and businesses are subject to the federal income tax. The Internal Revenue Code (IRC) is the main source of federal tax law. It is found in Title 26 of the US Code and is administered by the Internal Revenue Service (IRS). Title 26 of the Code of Federal Regulations provides guidance and explanations on IRC provisions. IRS regulations, rulings and policy statements and federal tax court decisions also shape federal income tax law.

What is Income?

In general, all "income" is subject to federal tax. However, the IRC does not specifically define "income" and it may have differing meanings. Gross income is generally defined as all income from whatever source derived, including:

• Pay for services such as wages, fees and commissions
• Interest earned
• Business income
• Royalties
• Rent payments
• Alimony
• Income from life insurance
• Endowment
• Pensions
• Income from a decedent
• Discharge of debt
• Income from an estate or trust
• Income from illegal activities

26 U.S.C. §61. The IRC also includes several exceptions to gross income, including the following:

• Any contribution to the capital of the corporation (26 U.S.C. §118(a))
• Employer-provided coverage under an accident or health plan (26 U.S.C. §106(a))
• The value of any meals or lodging given to an employee by an employer for the convenience of the employer (26 U.S.C. §119(a))
• Fringe benefits given to an employee if the fringe benefit qualifies as a: no-additional-cost service, qualified employee discount, working condition fringe, de minimis fringe, qualified transportation fringe, qualified moving expense reimbursement, qualified retirement planning services or qualified military base realignment and closure fringe (26 U.S.C. §132)

Adjusted gross income is gross income less certain allowable deductions, but before standard or itemized deductions and personal exemptions. 26 U.S.C. §62. Taxable income is defined in 26 U.S.C. §63 as gross income minus the deductions allowed by that chapter of the IRC. Essentially, it is the income on which the taxpayer will be taxed.

Conclusion

Determining a business' taxable income can be a complex task. IRC provisions and IRS regulations are generally not easy to understand and apply. An attorney practicing in the area of tax law can advise your business on federal income tax issues.

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