How the IRS Determines Taxpayers’ Source and Application of Funds

07 December,2022

Sources of funds

Sources of funds are the various ways the taxpayer acquires money during the year. Examples of sources of funds include:

  • Decrease in cash-on-hand, in bank account balances (including personal and business checking and savings accounts), and decreases in accounts receivable,
  • Increases in accounts payable,
  • Increases in loan principals and credit card balances,
  • Taxable and nontaxable income, and
  • Deductions which do not require funds such as depreciation, carryovers and carrybacks, and adjusted basis of assets sold.

Application of funds

Application of funds are ways the taxpayer used (or expended) money during the year. Examples of applications of funds include:

  • Increases in cash-on-hand,
  • increase in bank account balances (including personal and business checking and savings accounts),
  • business equipment purchased,
  • real estate purchased, and personal assets acquired,
  • Purchases, business expenses,
  • Decreases in loan principals and credit card balances, and
  • Personal living expenses.

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