Exempt income is considered to be specific amounts of income in which the federal revenue tax is not deducted from them. The IRS decides the kinds of earnings that are except the income tax and the circumstances under which they are except . The categories of earnings which are exempted from the income tax include;
S Corporate Earnings
Generally, an S corporation is exempt from paying tax on the income that it gets. Instead, the losses, credits, income, and deductions of the business are passed to the stockholders on the basis of the individual’s pro-rata share. Investors are expected to state their shares of the things in their returns. However, an S corporation is expected to submit the return on the Form 1120S that is on the U.S Income Tax Return for the S Company. It is meant to indicate the outcomes of the company’s transactions for the year and also the things of deductions, credits, and income that have an effect on the personal income tax deductions for the shareholders.
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Partnership Income
In general terms, a partnership is not an entity that is taxable. The gains, deductions, credits, income, and losses of the partnership are distributed to the various associates on the basis of individuals’ distributive share of the items (Ault, 2010). The distributive shares of the partners’ deductions, income, losses, credits, and gains are mainly on the basis of the partnership agreement. Each partner is expected to report their distributive share of the items in their returns even if they have not been dispersed to them. Nevertheless, the distributive portion of the loss of the partnership is narrow to the adjusted base of their interest at every year-end when the partnership experienced negative profits. It is worth noting that even if the partnership returns are not subjected to tax, there is a need to fill the information return on the Form 1065 which is on the U.S. Return of Partnership Income. It aims at showing the operations of the partnership in a specific year and also the things that need to be passed to the partners.
Stock Appreciation Rights
A stock appreciation right that has been granted by the employer should not be included in the taxable income until when the employee exercises the right.
Minimum Benefits
In cases where the employer provides the employee with a service or product, and the costs are too minor that it seems to be irrational for the business to indicate the benefit then the value is excluded in the taxable revenue. In many instances, the amount of benefits that include cab fares, discounts at the cafeterias, and company treats are excluded in the taxable revenue (Hopkins, 2008).
Holiday Gifts
Gifts provided by the employer which include things such as ham and turkey, or other items that are nominal value during holidays then they are exempt from the taxable income. However, it does not include cash or other items that can be exchanged for cash as they need to be included in the price of the gift as additional wages or salary despite the sum that is involved.
Employees Discounts
In cases where the employer sells services or a property to the employee at a discount then the amount can be excluded in the taxable income. However, the exclusion only relates to the discounts received on services and goods that are accessible to the clients during the normal course of business where the employee operates. It does not apply to the discounts on the properties that are held for investments such as bonds or real property
In conclusion, it is evident that there are various forms of tax-exempt income that are available to employees in any business and there are conditions that need to be available for the exemption to apply.
References
Ault, H. J., Arnold, B. J., & Gest, G. (2010). Comparative income taxation: A structural analysis . Alphen aan den Rijn, The Netherlands: Kluwer Law International.
Hopkins, B. R. (2008). IRS audits of tax-exempt organizations: Policies, practices, and procedures . Hoboken, NJ: John Wiley & Sons.
