Income Tax Income Tax ConceptsConcepts

chapter (2)chapter (2)

Accounting conceptAccounting concept::

11--Entity conceptEntity conceptAccording to the entity concept, each tax unit must keep According to the entity concept, each tax unit must keep separate and report the result of its operations separate separate and report the result of its operations separate and and apartapart from other tax unitsfrom other tax units..

And there is no relation between the entity and its liability And there is no relation between the entity and its liability for the owner’s responsibility. In other words (the loss of for the owner’s responsibility. In other words (the loss of entity does not reach there personal property)entity does not reach there personal property)

22--Annual accounting period conceptAnnual accounting period concept::

The annual accounting concept state that all entities The annual accounting concept state that all entities must report the result of their operations on an must report the result of their operations on an annual basis and that each taxable year is to stand on annual basis and that each taxable year is to stand on its own, its own, apartapart from other tax year from other tax year..

The two basic types of accounting period are calendar The two basic types of accounting period are calendar year (normal year 1 Jan to 31 Dec) and the fiscal year (normal year 1 Jan to 31 Dec) and the fiscal years which end on the last day of any other month years which end on the last day of any other month the taxpayer choosesthe taxpayer chooses..

Note: The most choice is the calendar of yearNote: The most choice is the calendar of year..

33--Accounting methodAccounting method::

- -The two allowable methods are the cash basis of The two allowable methods are the cash basis of

accounting and the accrual basis of accountingaccounting and the accrual basis of accounting . .

- -Taxpayers using the cash are taxed on income as it is Taxpayers using the cash are taxed on income as it is received and take deductions as they are paidreceived and take deductions as they are paid . .

In contrast, accrual basis taxpayers report their income as In contrast, accrual basis taxpayers report their income as it is earned and take deductions as they are incurred, it is earned and take deductions as they are incurred, without regard to the actual receipt or payment of without regard to the actual receipt or payment of cashcash . .

Palestinian income tax law apply accrual basis. Palestinian income tax law apply accrual basis. (article 4)(article 4)

44--Income conceptsIncome concepts

Income concepts determine what are the components of taxable Income concepts determine what are the components of taxable income, explain why one type of income is taxed differently than income, explain why one type of income is taxed differently than other income, and establish the period in which income is to be other income, and establish the period in which income is to be reportedreported..

55--All-inclusive income conceptAll-inclusive income conceptUnder this concept, all income received is considered taxable unless Under this concept, all income received is considered taxable unless some specific provision can be found in the tax law that excludes some specific provision can be found in the tax law that excludes some items from taxationsome items from taxation..

66--Realization (verification) conceptRealization (verification) conceptStates that no income is recognized for tax purpose (included in States that no income is recognized for tax purpose (included in taxable income) until it has been realized by the taxpayertaxable income) until it has been realized by the taxpayer

Case (12): ( with Individual Self Assessment Form)Case (12): ( with Individual Self Assessment Form) The following information have been taken from the tax self The following information have been taken from the tax self assessment for taxpayer: Mr. Omarassessment for taxpayer: Mr. Omar..

RevenuesRevenues::

- -Monthly salary from part time job: 2,300 NISMonthly salary from part time job: 2,300 NIS

- -revenue for his trading shop : 33,000 NIS (annual)revenue for his trading shop : 33,000 NIS (annual)

- -Revenue from legal consulting office: 58,000 NISRevenue from legal consulting office: 58,000 NIS

- -Gift from non governmental organization 7,000 NISGift from non governmental organization 7,000 NIS

ExpensesExpenses::

- -Cost of good sold:15,000 NISCost of good sold:15,000 NIS

- -Salaries for the trading shop:12,000 NISSalaries for the trading shop:12,000 NIS

- -Salaries for the legal consulting office :10,000 NISSalaries for the legal consulting office :10,000 NIS

- -Expenses related to legal consulting office: 19,000NISExpenses related to legal consulting office: 19,000NIS

- -Personal living cost :8,000 NISPersonal living cost :8,000 NIS

- -Depreciation for car and furniture (shop ): 4,000 NISDepreciation for car and furniture (shop ): 4,000 NIS

Additional informationAdditional information::

- -The main activity of Mr. Omar is his shopThe main activity of Mr. Omar is his shop..

- -The taxpayer live in GazaThe taxpayer live in Gaza

- -Gift is nontaxable incomeGift is nontaxable income

- -The tax officer accepted 60% of legal office expensesThe tax officer accepted 60% of legal office expenses

- -The tax officer accepted 20% of depreciationThe tax officer accepted 20% of depreciation

- -The taxpayer is married and has two sons, one of them The taxpayer is married and has two sons, one of them university student, his parent and grandmother university student, his parent and grandmother depending on himdepending on him..

- -He paid tax prepayments during the year: 1700 NISHe paid tax prepayments during the year: 1700 NIS

- -The exchange price for dollar = 4 NISThe exchange price for dollar = 4 NIS

* *RequiredRequired::

11 - -Calculate the annual income taxCalculate the annual income tax..

And determine the tax to paid , or to refundAnd determine the tax to paid , or to refund..

AnswerAnswer: : - -Annual salary from part time job = 2300*12Annual salary from part time job = 2300*12

= =2760027600 NISNIS - -Profit for his trading shop = 33,000 NISProfit for his trading shop = 33,000 NIS

- -Revenue from legal consulting office= 58,000 NISRevenue from legal consulting office= 58,000 NIS - -Gift from non governmental organization= 7,000 NISGift from non governmental organization= 7,000 NIS

- -Total income =125600 NISTotal income =125600 NIS - -Nontaxable income =7,000 NISNontaxable income =7,000 NIS

Total of taxable income 118600 NIS / 4 =29650$Total of taxable income 118600 NIS / 4 =29650$DeductionsDeductions::

- -Cost of good sold =15,000 NISCost of good sold =15,000 NIS - -Salaries for the trading shop = 12,000 NISSalaries for the trading shop = 12,000 NIS

- -Salaries for the legal office = 10,000 NISSalaries for the legal office = 10,000 NIS - -Expenses related to legal office =11,400 NIS Expenses related to legal office =11,400 NIS

(19000*60%)(19000*60%) - -Depreciation for car and furniture = 800 NIS (4000*20%)Depreciation for car and furniture = 800 NIS (4000*20%)

Total of deductions = 49,200 NIS / 4 = 12,300$Total of deductions = 49,200 NIS / 4 = 12,300$

ExemptionExemption::

- -Resident = 3000$Resident = 3000$

- -Wife = 500$Wife = 500$

- -Son = 500$Son = 500$

- -University student = 2500$University student = 2500$

- -Parent 500*2 = 1000$Parent 500*2 = 1000$

- -Grandmother = 0$Grandmother = 0$? ?

Total of exemption = 7500$Total of exemption = 7500$

Net taxable income 9,850$Net taxable income 9,850$

98009800**8%8% = = 788$788$

Tax prepayment 425$ ( 1700 NIS/4 )Tax prepayment 425$ ( 1700 NIS/4 )

Tax payment = 788 – 425 = Tax payment = 788 – 425 = 363$363$