[Anonymous]

So im doing my review and i came across this and realized that i have no clue how to determine the difference between the two. I dont have much experience so i havent been exposed to this stuff. Im not able to find a good explanation in the Becker book nor online. Is there a way to easily distinguish what categorizes something as principal vs income? Or do i just have to memorize the table given in the Becker book. Any help would be appreciated 😀

[barelystayingsane]

I was also very confused by the table at first, but after studying it a little, I think I figured it out. Hopefully I can break it down for you. The annuities are just like what Gearty talked about in R1 regarding how you “depreciate” the annuity principal over the remaining life of the annuitant, so part of the distribution is taxable income and part is non-taxable principal. The same idea applies here. That's why there's a check in the Apportion column.

The bond row threw me off for a while (and I think it's why I was so confused by the table at first), because I assumed receipts from bonds would be the interest income, but that's just receipt of bond principal. Row 12 is where the interest comes in. Again it's apportioned because part of the interest income is going to be bond amortization (principal) and actual cash received (income).

For the third row, business profit is obviously going to be income, but I looked at loss the same way as looking at loss from the perspective of the at-risk rule of a partnership/S Corp. The loss is not income, but rather a reduction in basis, which in this case, is the principal.

I just worked my way down the table until I understood the rationale behind each of them. I think it helped that I have already taken FAR, because the ideas behind a lot of these were similar to what you learn for FAR but you will still be able to master it! A few of them I just had to memorize (like eminent domain proceedings, etc.). If you have any questions about specific ones or if my explanation wasn't clear, let me know!

[Author]

Replies