Douglas daily dispatch., 1926-04-27

4
gagged in trade or business in which
both capital and personal service are
material income producing factors.
! The revenue act of 1926 provides in
such cases that a reasonable allow
ance as compensation for personal
services actually rendered shall be
considered as earned income. Such
amount is not to exceed 20 per cent
of the taxpayers share of the net
profits of such trade or business.
For example,, manufacturer received
/ in 1925 a net profit from his busi-
ness of $4,000. The 25 per cent
is computed on 20 per cent of $5O,OOO,
or $4,000, and the reduction applies
against the tax due on the entire
, $4,000.
The earned income credit is al
lowed the members of a partnership
with respect to the share of the net
income belonging to each which con-
sists of earned income. Where, as in
the case of individuals, capital and
personal service are both income pro-
ducing factors, the 20 per cent limi-
tation applies. In such case the
salaries paid a partnership should be
added to the distributive shares to
determine the reasonable allowances
for personal services.
For example, the "A" partnership
consisting of two members made in
1925 net income of $4,000. Each
partner drew during the year sail
ary of $1,000 These salaries should
be added to the, net income, making
a total of $4,000. Hence, $4,000 is
the distributive share of each part
ner. Twenty per cent of $4,000 is
$5400. Each partner, therefore, is
allowed a, credit on $5400 of earned
income although his salary was $1,000.
A taxpayer, married and with mo
dependents, received i'm 1925 . salary
of $4,000 and in stock market
transaction, lost $4,000, reducing his
net income to 10000 He is not al
lowed the full credit on an earned
income' of $4,000. The 25 per cent
credit is limited to rs per cent of the
normal tax due on $4,000, plus rs per
cent of the surtax on the earned net
income of $4,000.
Following is the computation:
Earned net income $14, 100000
Surtax on $14,, 900 ......... 1000
rs per cent of $40 ......... 1000
Net income ................ 100000
Less personal exemption 80. 3,5OO.00
Balance taxable at IN per
cent ................ 3I5O
Twenty-Five per cent credit on the
normal tax of $3.50 is $9.SS. Twenty
five per cent credit of the surtax on
$40 is $40. Added, these amounts
make a total credit of $19.38 which,
deducted from $3.50 leaves payable a
tax of $18.12.
The revenue act of 1926 provides
for earned income deductions" This
means deductions which are properly
allocable to or chargeable against
earned income and which are allow
able from gross income in computing
net income. Notable among such de-
ductions are business expenses. Fre-
quently taxpayers receiving salary
payment of transportation, adyertis-
ing or for samples. Such items,
which are necessary expenses in the
conduct of a business, are properly
chargeable against earned income.g
The term earned net income" on
which the credit is computed, means
the excess of the amount of the
earned income over the sum of the
earned income deductions. Thus, a
man who in 1925 received a salary of
$4,000 of which he paid $500 for neces-
sary expenses in connection with the
business computed his tax on earned
net income of $4500, from which, of
course, should be deducted his per-
sonal exemptions-$35O0 for a married
person, $500 for single person, plus
$4OO for each dependent-in .ascer-
tanning earned income credit.