Tax Lawyer's Blog

When you have a tax law that comprises more than 80,000 pages of complex text, you are going to have thousands of tax terms and concepts.

I did some research and have determined (unscientifically, of course) that the following 7 ubiquitous tax concepts are the most important:

Claim of Right - The receipt of cash or other assets that are not excludible from taxable income under some other section of the Internal Revenue Code must be included in taxable income in the year in which the taxpayer first has a claim of right with respect to the cash or other assets. In other words, the year in which a taxpayer can say “this asset belongs to me and if someone tries to take it from me I have the right to sue them,” it must be includible in income.

Basis – You can’t be a competent tax professional and not have a solid understanding of the concept of basis. Yet we have encountered quite a few so-called tax pros who lack even a moderate grasp of this concept. My recommendation to young tax accountants, tax lawyers and budding tax students is that they commit themselves to a thorough understanding of basis in all its tax law incarnations.

Deferral- When the layman thinks of tax planning he usually thinks of tax savings. However, by far the great majority of tax planning strategies involve not the saving of tax dollars but the deferral of tax liabilities to a future date. The good tax pro understands two things about tax deferrals: 1) Because of effect of inflation, the payment of one dollar in taxes a year from now costs a taxpayer less than the payment of one dollar in taxes now; and 2) the deferral of income from a year in which the taxpayer has high marginal tax rate to a year in which the taxpayer has a lower marginal tax rate results in actual tax savings (deferring a tax deduction from a low rate tax year to a high rate tax year will likewise generate real tax savings).

Depreciation - Most assets decline in value after they are purchased. Depreciation is the mechanism by which taxpayers may claim deductions for the ratable loss in value of purchased (and placed in service) assets. The IRS and the Department of Treasury have issued detailed guidelines and rules that must be followed to determine the methods in and periods over which capitalized assets must be depreciated.

Capitalization – Some expenditures may be deducted in the year in which they are made, others must be capitalized and then depreciated or amortized over their useful lives. Whether and when a particular expenditure must be capitalized is the subject of many tax laws, regulations, revenue rulings and tax opinions. Again, a current deduction is generally of greater value to the taxpayer than is the deferral (through depreciation or amortization) of the deduction to future tax years.

Character of Income – Not all income is equal. At least for now, capital gains are taxed at lower rates than ordinary income. The determination of whether income received is capital gain or ordinary income is a very important part of what a good tax preparer is called upon to do. In addition, a good tax planner (if consulted early enough) can help a taxpayer structure a transaction in a way that will generate capital gain rather than ordinary income.

Tax Benefit Doctrine – Typically, insurance proceeds that are paid to a taxpayer for a sustained loss are not taxable. However, if you obtained a deduction for the payment of an expense in year 1 and in year 2 are reimbursed or recover some or all of that expenditure, you must include the reimbursement or recovery in year 2. In other words, because you obtained a tax benefit in year 1 through the claiming of a tax deduction, you must return that benefit in a later year if you recover some or all of the expenditure you claimed in the earlier year.

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