Evening star., 1932-03-10
Your Income Tax
No. 10.
Earned Income in Business.

A taxpayer engaged in a trade or
business IN which he has invested capi-
tai and TO which he deyotes time and
attention also is given Consideration
In computing the tax on earned income
10 Wnlch the rs per cent credit ap-
piles. The revenue act, where capital
ana personal services are material in
come-producing factors, provides that
reasonable allowance for uersonaI
services shall be considered as earned
income. Such allowance is not TO ex-
eeed 20 per cent of the taxpayers
share OF the net profits of the trade or
business: For example. taxpayer re-
celved In 1881 from a business In
Whlcn ootn capital and personal serv-
Ice were material income producing
factors a net profit of $25,000. The rs
per cent credit Is computed on 40 per
cent of s25, 900, or S.. 600. The amo,Int
payable Is the tax on s25,000 less IS
per cent OF the tax on $1,000.
Each member of professional part
nership Is entitled to the Is per cent
credit when it Is shown that his share
OF the net fees truly represents COM
pensation for personal services ac-
tually rendered. If such share should
:epresent only return Oh capital in
vested by a partner, or gain derived
through the employment Of assistants
to DO the actual work, 1t is not CLASH
ned as earned income to the taxpayer
unless the total amount Of his net In
come Is less than 5000.
In the case OF professional man,
physician, lawyer, accountant, engi-
neer, dentist, etc. whose income Is de-
rived from personal services actually
rendered and not employment of capi-
tai. the 20 per cent limitation does not
apply. For example, If a physician
had total fees of $25 900 and necessary
ofhce expenses, salaries for assistants,
etc, Of $1,000, the difference of s18,-
O00 would represent earned income.
The physician may. have deducted for
himself a salary Of $4,000 in arriving
at the $1,000 expense. If 50, this amount
should be added to the $4,000, thus
rejecting a total professional net In
come to himself of s2l 900, all Of which
Is subject to the IS per cent earned
income credit.
two Of the terms used in the income
tax aw, namely gross income" and
net income" should be noted partic-
ulariy, irasmuch as they are vitality
important to the whole subject Of the
income tax.
Gross income includes In general al,
income from any source whatever, uf-
less exempt from tax by law Net
income, upon which the tax Is assessed.
Is gross income less the deductions al
lowed under the statute. Such dedue-
tions include business and professional
expenses, such as salaries, pensions
and bonuses to employees, taxes;
losses. interest paid, bad debts, depre-
citation, depletion, contributions, etc.
Failure to understand deductions
against gross income and credits
against net income has resulted in nu-
merous errors on the part Of taxpayers.
Having arrived at the net income,
the next step Is to deduct the personal
exemption-$1, 500 for single persons,
$500 for married persons and heads
Of families, plus the $400 credit for
each dependent, etc. The normal tax
is computed on the remainder at the
rate Of 1 y per cent on the first $4,000,
8 per cent on the next $4,000 and
per cent on the balance.
The gross income of the usual btisi-
ness consists of the gross profits on
sales plus any income from invest
ments and incidental or outside opera
tions or sources The return must
show the gross sales, purchases and
cost of goods sold. To reflect income
correctly, inventories are necessary at
the beginning and end OF each taxable
year.