Building Improvement and Its Implication on Gross Income - Essay Example

Running head: Gross Income GROSS INCOME of the _________________________________ ID No _____ Program: _________________________________________ (course or educational curriculum) Specialization: ____________________________________________ Faculty Mentor/Professor: Name of school ___________________________________________ Abstract Gross income includes, among others, leasehold improvements that benefit the owner or lessor or that extends the life of the property where such improvements are introduced. If the condition is absent, there is no legal basis to include the improvements in the gross income of the owner. Gross Income Under universal standards, personal income taxation is generally based on gross earnings from which allowable costs and expenses are deducted. Income tax rates then bear to the difference in order to determine the income tax liability of the individual. This is true in the jurisdiction of the United States of America as well as in the other old civilizations like England and China. Gross income includes almost everything that a person earns under the sun. Anything that gives monetary benefit to the taxpayer must be included as part of his gross income although there are those which can be excluded as exceptions like retirement privileges and state welfare benefits in certain territories. A full-time employee has his salaries and wages to declare as gross income, together with the other payments from the employer like allowances, bonuses, commissions and incentives. Upon the other hand, an independent or self-employed business entrepreneur has to declare as gross earnings all sales, service fees and other receipts from customers and clients. There are likewise instances where an employee earns salaries and wages and, at the same time, does business on the side. In the latter case, the taxpayer has to declare both his earnings as an employee and as a businessman. It is important to determine the sources of earnings which must constitute gross income because the latter is the first and primordial basis of reckoning and collecting taxes which come in varied forms. Under the principle of pay-as-you-earn, methods of withholding taxes are put in place for timely collection. In the case of workers and employees, a certain percentage is deducted out of salaries, wages and other benefits and a reconciliation is made at the end of the year to determine whether the employee or worker still owes the taxing government or it is the latter which has to refund the former for over deductions. The same is true with businesses. There are rules and regulations on withholding taxes for sales or receipts which are either final or subject to year-end reconciliations. As outlined above, gross income is a very significant item in personal taxation. For that reason, it is necessary to know what must or should be included as part of gross income. Property owners or landlords realize earnings or income substantially from payments of rentals due for the use of the assets from lessees or tenants who utilize the leased premises for their specific purposes and intentions. Basically, rentals received from lessees comprise the earnings of the owner which necessarily are paid in cash or money. However, there are situations where rental payments come in other forms like goods and services. An illustration may be given. X owns an unfinished building which can be completed by spending one hundred thousand dollars more. Being short of funds, X advertises the real property for lease. Y is interested. In order to perfect and consummate the contract, the condition is that Y will finish the building and rent it for one year at ten thousand dollars per month from January to December. In short, Y does not pay the first ten months of the lease supposedly for one hundred thousand dollars. This is so because Y has to apply the ten months rental to the one hundred thousand dollars which he has to spend in completing the building. This will mean that X will only receive in cash the rentals for November and December at ten thousand dollars per month or for the total of twenty thousand dollars. To summarize, X will receive as rentals the total of one hundred twenty thousand dollars for the whole twelve-month period composed of (a) the cost of completion initiated by Y for one hundred thousand dollars and (b) the twenty thousand dollars in cash for November and December. The issue for resolution in this paper is how to treat a building improvement and its implication on gross income. Going to the given problem, if William is to report on an annual basis, his tax return must indicate a total gross income of eleven thousand dollars at one thousand dollars per month. The twelve months period could not be completed because the taxpayer has to waive the sum of one thousand dollars which is equivalent to a one month rent which meant that he therefore only received the rental payments for eleven months. He is not required to include as part of his gross income the wiring facility or paraphernalia which was introduced into the building by Lester, the tenant, amounting to four thousand dollars. The new introduction did not improve the building as far as William is concerned. As a matter of fact, it was for the specific purpose of Lester as it will be used in operating the specialized equipment of the latter. There is also no showing that the wiring accessory will extend the life of the building which can be capitalized and subsequently expensed via depreciation. While it is true that Lester spent four thousand dollars in installing the wires, it did not give any benefit to William. As a matter of fact, he (William) decided to forego one month rental income just to keep Lester and the consideration for it was that Lester will be the one to shoulder the cost of the wiring which means that his earnings were reduced resultant of the wiring installation. It is true that the landlord has to include as rental income assets or services which he receives from the tenant and which will have the fair market value of the property or services as basis. (Rental Property and the Tax Gap. IRS.gov. [internet]). In the case at bar, the wiring equipment or accessory does not have any value to William. As mentioned above, it was even a cost to him in exchange for one month rent. It would mean therefore that the law on the inclusion of property or services received from the tenant is not absolute. There are exceptions and the wiring improvement in the problem is one of those although, as a general rule, electrical items can be added to the capital value of the building. (Capitalization & Depreciation for Capital Assets. Category: Financial Related Entries. Save University of New York. [internet]). Also, the wirings can possibly reduce the value of the property of William in the future because, for instance, if the new lessee does not wish to have the wiring, William may possibly reduce the rental value or he has to incur expenses for the removal of the wires. As provided for in Reg. Sec. 1.109-1, the value the improvements to realties must be considered gross income if the lessee or tenant has introduced the same in exchange of the agreed rent. However, the said regulation has to be qualified. In CIR v. G. H. Cunningham [2 AFTR 2d 5511, 58-2 USTC 9771 (9th Cir., 1958)], it was enunciated by the court that in instances where the improvements did not increase the value of the property, no gross income has been earned. Hence, there is nothing to add to the gross income in those cases. In sum, the amount of four thousand dollars representing the cost of the wiring does not have to be included in the gross income of William and all he has to declare is the total rental for eleven months at one thousand dollars per month or eleven thousand dollars. References Capitalization & Depreciation for Capital Assets. Category: Financial Related Entries. Save University of New York. [internet] Accessed November 11, 2009. Available at: < http://www.suny.edu/sunypp/documents.cfm?doc_id=559:> Rental Property and the Tax Gap. IRS.gov. [internet] Accessed November 11, 2009. Available at: < http://www.irs.gov/newsroom/article/0,,id=172596,00.html>. Read More