Income Tax Flashcards
What is the primary source of all tax law?
Internal Revenue Code
What is a source for all tax law? (They are not laws in and of themselves.)
Treasury Regulations
What are hobby loss rules?
The tax law presumption that any activity generating net income (profit) in three out of five consecutive years is a business (not a hobby).
A Hobby gives no tax benefits
When is an individual required to file taxes from self-employment?
An individual is required to file if net earnings from self-employment are at least $400
When are estimated taxes due?
April 15, June 15, September 15, and January 15.
What are the tax forms? 1040, 1040X, and 1041?
1040 - individual income tax
1040X - Amendment
1041 - estates and trusts
What is the penalty for a frivolous return?
$5000. A frivolous return is one that omits information necessary to determine the taxpayers tax liability.
What is the accuracy related (negligence) penalty?
The penalty is 20% of the under payment attributed to the negligence.
What is the penalty for fraud?
The penalty is 75% of the portion of a tax under payment attributable to fraud.
What are the penalties for failure to pay and failure to file?
Failure to Pay - .5% per month the taxes unpaid with a maximum of 25%
Failure to File - 5% of the tax due each month with a maximum of 25%
How much estimated taxes should you pay to avoid the penalty?
90% of the current years tax liability or 100% of the prior years liability.
(if the prior years AGI exceeded 150,000 - then 110% of last year‘s tax liability or 90% of this year‘s tax liability whichever is less)
(if you owe 4100 and pay 4000, you don’t pay the penalty because you paid 90% of this year‘s tax liability)
Married filing separately, HOH, MFJ, and qualifying widow filing status?
Married filing separately - big difference in income and one qualifies for itemized deductions.
HOH - an unmarried taxpayer that has dependents and provides more than 50% of their child’s support.
Qualifying widower - Always file married filing jointly in the year spouse dies. Then qualifying widower for two years after death As long as you have a qualifying child and you do not remarry.
Inclusions for gross income
Ordinary dividends – schedule B, taxable interest – schedule B
business income and losses – schedule C
capital gains and losses – schedule D real estate – schedule E
punitive damages (except wrongful death)
Wages salaries tips
IRA distributions
pensions and annuities
alimony received divorce before 2019 unemployment income
taxable Social Security
Exclusions
Gifts
Inheritance
Child support
Municipal bond interest
Workers Compensation
Compensatory damages
Are room and board taxable income?
Yes. Room and board are taxable income to student. Tuition and books are not.
Are disability insurance premiums taxable?
No they are tax free
How much investment interest can you deduct?
You can deduct your investment income from your investment interest. (Qualified dividends will not be treated as ordinary income so you cannot count them as investment income)
- You have to opt out of long-term capital gain treatment to count it as investment income
Investment interest is paid on property held for INVESTMENT. such as purchasing a home mortgage (not personal residence) or purchasing treasuries, GNMAs, zeros, etc.
What is a marginal tax rate?
Marginal tax rate is the percentage applying to the last dollar of taxable income.
Kiddie tax?
First 1150 is tax free, the next 1150 is tax at 10%, anything more is tax up parents tax rate
- if child has both earned and unearned income the standard deduction is greater of 1150 unearned income or earned income plus $400 but no more than the single person standard deduction ($12,950)
Can you claim personal exemptions?
No
Dependent care expense credit? (Child care credit)
20% of expenses up to $3000 for one kid or $6000 for two kids.
(You can only claim 20% up to 3000 (1 kid) or 6000 (2 kids) even if daycare costs are higher than that
Child tax credit
$2000 for each child under 17. This is a refundable credit up to 1400 per child. It is reduced at 20,000 (single) and at 400,000 (MFJ)
(Children, step children, and foster children)
What is the cash method of accounting?
Firms realize revenue from services performed in the year the payment is received regardless of when services are performed
Businesses cannot use cash method if they carry inventory.
What is the accrual method of accounting?
Firms realize revenue when the services are performed regardless of one payment is received
Accrual method is mandatory if business carries inventory AND averages 25 million in revenues during prior three years
What is an installment sale?
When a buyer makes payments to the seller over time they may be entitled to recognize the capital gain over the life of the note rather than be recognized entirely in the year of sale.
- Exceptions - you can’t do this if the property is a publicly traded security, sold at a loss, or sold to a related party who then in turn sells the property within two years of the original purchase date.
If tax payer makes an installment sale of tangible personal property, all depreciation recapture up to amount of gain must be reported as income and the year of disposition
S corp
A corporation that elects to pass corporate income, losses, deductions, and credits to its shareholders.
- they can produce passive income to investors who do not materially participate
If they pass through and come to the sausage treated as K-1 investment income not self-employment tax which is 7.65% not the 14.13%
What entities may not claim a net operating loss?
S Corps and partnerships (flows to to individual loss)
FIFO method
This method of inventory valuation reflects current cost on balance sheet
Use LIFO if company wants to reduce taxes in an inflationary period
Net operating loss (NOL)
NOL can now be carried forward indefinitely. Carrybacks of NOLs are no longer allowed.
S corps and partnerships cannot claim NOL, but sole prop. can claim.
Starting in 2018 only 80% of offset is allowed. the rest can be carried forward
What is a qualified business income deduction?
Businesses may qualify to deduct up to 20% of qualified business income from AGI for each pass through business (So proprietorships, partnerships, other pass through business). This is net income for each business they own.
Any negative amount as carry forward to the next taxable year
Section 1244 qualified small business stock
A 1244 business is a C or S Corp. that was initially capitalized with no more than $1 million. A $100,000 loss per year can be ordinary rather than a capital loss.
Example - 1244 loss can be a $100,000 loss and 3,000 capital loss. Without 1244 he would still take the $3000 capital loss but $97,000 carry forward.
S corp
Shareholders limited to 100.
The basis equals cash plus direct loans made by the shareholder to the corporation
Must be a domestic corp
Must be US citizen or permanent resident alien.
Qualified trust can be a shareholder
Shareholders can issue only a single class of outstanding common stock (no preferred), but the common stock can be voting and/or non-voting.
S Corp versus a regular (C) corp?
High salary paid to the owners do not affect S Corp. status. The IRS would not reclassify salary as dividends, but may
try to re-classify excessive compensation as a constructive dividend in a regular corporation.
They can both offer pension plans and offer both voting and nonvoting shares.
C corp. does not allow pass through of losses.
Limited partnership
THIS IS NOT A LIMITED LIABILITY PARTNERSHIP
The limited partners are liable for partnership that only to the extent of the capital contributions to the partnership. However, there must be one general partner who would have unlimited.
But if a limited partner is an active participant, he or she forfeits limited liability for partnership debt.
Sole proprietorship
A sole proprietorship exposes person to unlimited personal liability.
Taxable income or losses are reported on schedule C.
If a business owner borrows money for business purposes relating to the sole proprietorship the interest on the debt is deductible on schedule C.
Losses can be applied against income earned in the same year
General Corporation
A corporation may retain profits as a separate tax entity. Retained earnings are not immediately taxable. A regular corporation can be owned by an unlimited number of stockholders with no eligibility requirements.
How to choose type of business ownership based on risk?
Choose sole proprietorship or partnership if it’s risk free. If it’s a risky entity choose an S Corp., limited liability company, or limited partnership. 
What tax return does a partnership have to file
1065, but this is just for informational purposes. Each partner includes in their own return the distributed share of partnership income or loss that has reported on the K-1 form.
what business types are conduit entities
S corporations, LLC’s, sole proprietors, General partnership, and limited partnership.
C corps may not pass losses through to their shareholders
How is personal service corporation (PSC) taxed?
Any income retained by a PSC is tax at a flat 21%. These are businesses such as doctors dentist accountants lawyers engineer.
A PSC with accumulated earnings exceeding 150,000 will be exposed to a 20% accumulated earnings tax. A regular corp can accumulate $250,000. This tax is in addition to the regular corporate tax rate.
C corp
Is a separate taxing entity
