Income Basket

What Is an Income Basket?

An income basket is a category of income as defined by the U.S. tax code.

Each category, or basket, represents a different source of income. Baskets may operate at a net gain or a net loss individually. However, a loss in one basket may not be used to offset taxable gains from another

How an Income Basket Works

Income baskets are a collection of types of income grouped together to make analysis of the group easier.

The basket concept can help taxpayers understand which sources of income are providing them with gains and which with losses. Without the use of baskets, this process can be more difficult.

One income basket defined by the IRS is passive income. Passive income includes rent collected on rental properties, dividends, royalties, and gains from sales and exchanges of securities.

Another "basket" is category 901(j) that specifically applies to an individual, estate, or trust who paid or accrued certain foreign taxes to a foreign country or U.S. possession seeking to claim the foreign tax credit.

Income Baskets in Business

Corporations use income baskets to separate the income they make domestically and the income they generate from foreign countries. Income generated in a foreign country and taxed in that country may be eligible for a foreign tax credit (FTC). To receive this credit, companies must "basket" their earnings.

The Tax Cuts and Jobs Act of 2017 introduced two new baskets for corporations' foreign income: The Global Intangible Low Taxed Income (GILTI) basket and the foreign branch basket. How these baskets affect the collection of taxes is not important here. The point is that different types of income have been classified by the government into "baskets," and these baskets receive different types of tax treatment.

Income Baskets for Individuals

A person may have a regular salaried job that pays them $70,000 per year. They don’t take any losses on that job, because any expenses they incur are paid for by their company.

However, this person has also decided to invest their money in a small business startup to earn some extra money. They invest $10,000 in the startup. In the startup’s first year, the business grosses $10, 000. There were a lot of upfront costs to get the business started, so the company is only able to pay back investors $5,000 this year. The taxpayer had a net loss of $5,000 on that investment this year. At the end of the year, this taxpayer has had a net income of $65,000. This represents their salary minus the loss from the investment.

Overall, the taxpayer made money this year. However, if they wanted to look at their finances to assess where their money comes from and how to make more money next year, they can look at the returns on their baskets individually. If they did this, they would see that their general income netted them $70,000, while their investment in a startup had a net loss of $5,000.