Here Today, Gone Tomorrow: Income Taxation of Cash Flow Reversals

Individuals and firms sometimes receive money that they are required to partially or fully repay in a later year. If the initial receipt is subject to income tax, how should the income tax system treat the subsequent repayment? Conversely, individuals and firms sometimes make payments for which they later receive reimbursement (or a refund from the initial recipient). If the initial outlay is deductible under the income tax, how should the income tax system treat the subsequent reimbursement? Both situations, which can generally be analyzed symmetrically, involve cash flows that are later reversed.

It seems plausible that the income tax system should account for the cash fl ow reversal in some manner. An additional question arises, however, if the taxpayer’s marginal income tax rate changes between the time of the initial cash flow and the time of its reversal. Should the adjustment for the cash flow reversal then be based on the reversal year's tax rate or the tax rate at which the initial cash flow was recognized?

Click here to view this document as an Adobe Acrobat PDF.

Alan D. Viard is a resident scholar at AEI.

Also Visit
AEIdeas Blog The American Magazine
About the Author

 

Alan D.
Viard

What's new on AEI

Making Ryan's tax plan smarter
image The teacher evaluation confronts the future
image How to reform the US immigration system
image Inversion hysteria
AEI on Facebook
Events Calendar
  • 01
    MON
  • 02
    TUE
  • 03
    WED
  • 04
    THU
  • 05
    FRI
Wednesday, September 03, 2014 | 9:00 a.m. – 10:30 a.m.
From anarchy to Augustus: Lessons on dealing with disorder, from Rome’s first emperor

We invite you to join us for two panel discussions on how Augustus created order from chaos 2,000 years ago, and what makes for durable domestic and international political systems in the 21st century.

Wednesday, September 03, 2014 | 12:00 p.m. – 1:30 p.m.
Multiple choice: Expanding opportunity through innovation in K–12 education

Please join us for a book launch event and panel discussion about how a marketplace of education options can help today's students succeed in tomorrow's economy. Attendees will receive a complimentary copy of the featured book.

Thursday, September 04, 2014 | 12:00 p.m. – 1:30 p.m.
How conservatives can save the safety net

Please join us for a luncheon event in which our panel will discuss what conservatives can learn from how liberals talk and think about the safety net and where free-market economics, federalism, and social responsibility intersect to lift people out of poverty.

No events scheduled this day.
No events scheduled this day.
No events scheduled today.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.