BUSINESS - BUSINESS TAXATION

Question 1

BUSINESSES may deduct 50% of the amount of business meals if:

Answer 1

Must be an ordinary and necessary expense.

Meals must not be lavish or extravagant,

Taxpayer must be present at the meal.

Current or potential customer, client, consultant, or similar business contact.

Food and entertainment are purchased or identified separately on receipt.

Question 2

MEALS FOR EMPLOYEES are deductible when:

Answer 2

Provided to employees through eating facility and for employers convenience. 50% deductible.

Employee are traveling. 50% deductible.

During the company holiday party. 100% deductible.

Question 3

Meal Example 01:

Taxpayer A invites Person B, a business contact, to a baseball game. A purchases tickets for A and B to attend the game. While at the game, A buys hot dogs and drinks for A and B.

What can be deducted and why?

Answer 3

The game is nondeductible entertainment.

Food purchased separately is deductible (50%).

Question 4

Meal Example 02:

Taxpayer C invites Person D, a business contact, to a basketball game. C purchases tickets for C and D to attend the game in a suite, where they have access to food and beverages. The cost of the basketball game tickets, as stated on the invoice, includes the food and beverages.

What can be deducted and why?

Answer 4

The game is nondeductible entertainment.

Food is nondeductible since it is not purchased or stated separately.

Question 5

Meal Example 03:

Taxpayer C invites Person D, a business contact, to a basketball game. C purchases tickets for C and D to attend the game in a suite, where they have access to food and beverages. The cost of the basketball game tickets does NOT include the food and beverages.

What can be deducted and why?

Answer 5

Separately stated food cost is deductible by 50%.

Question 6

START UP COSTS defined

Answer 6

Costs related to creating an active trade or business, or investigating the creation or acquisition of an active trade or business.

An ANALYSIS or survey of potential markets, products, labor supply, transportation facilities, etc.,

ADVERTISMENTS for the opening of the business,

SALARIES and WAGES for employees who are being trained and their instructors,

TRAVEL and other necessary costs for securing prospective distributors, suppliers or customers,

SALARIES and FEES for executives and consultants, or for similar professional services.

Question 7

ORGANIZATIONAL COSTS

Answer 7

Include any costs of creating a corporation that are INCURED BEFORE the end of the first tax year.

The costs of TEMP DIRECTORS

The costs of ORG MEETINGS,

State INCORPORATION FEES, and

The cost of LEGAL SERVICES related to starting the business.
____________________

NOTE: The cost of issuing and selling stock is an example of what is NOT an organizational cost that can be amortized

Question 8

START UP AND ORGANIZATIONAL DEDUCTIONS

Answer 8

A corporation can elect to deduct up to $5,000 of business start-up and up to $5,000 of organizational costs paid.

Any remaining costs must be amortized over a period of 15 years.

The company may start expensing or amortizing these costs from the date that the business started operations.

For each category, the $5,000 initial deduction is reduced by the amount of total costs that exceed $50,000. $1 reduction for every $1 of excess costs.

If the total costs are $55,000 or more, the initial deduction is reduced to zero. $55,000 – $50,000 = $5,000 excess.

Question 9

START UP DEDUCTIONS - Example 01

Polina opened a bakery on October 22, 20X6. Polina incurred $4,500 of start-up expenses before the bakery opened.

What can she deduct from her start-up costs?

Answer 9

Because her total start-up expenses were less that the $5,000 allowable deduction for the first year, Polina can deduct the full $4,500 on her first-year Schedule C as “Other Expenses.” None of these start-up costs need to be amortized.

Question 10

START UP DEDUCTIONS - Example 02

Polina opened a bakery on October 22, 20X6. Polina incurred $23,000 of start-up expenses before the bakery opened.

What can she deduct from her start-up costs?

Answer 10

Polina can claim $5,000 as a current deduction because total start-up costs were less than $50,000. The remaining $18,000 of start-up costs will be amortized over the 180-month period, starting with October 20X6, when her business opened. The monthly amount is $100. In 20X6 Polina can claim a total of $5,300 in start-up expenses. This is the $5,000 plus 3 months of amortization.

Question 11

START UP DEDUCTIONS - Example 03

Polina opened a bakery on October 22, 20X6. Polina incurred $53,000 of start-up expenses before the bakery opened.

What can she deduct from her start-up costs?

Answer 11

Because the expenses exceed $50,000, Polina must reduce the initial year $5,000 deduction by $1 for every $1 of start-up costs over $50,000. Thus, the $5,000 amount is reduced to $2,000. Polina will amortize the remaining $51,000 ($53,000 - $2,000) over 180 months. The monthly amortization amount is $283 ($51,000/180).

In Polina’s first year, the amount of start-up costs expensed is $2,850. This is the $2,000 of expensed costs and 3 months of amortization.

Question 12

CHARITABLE CONTRIBUTIONS DEDUCTIONS

Answer 12

A corporation’s allowed deduction for charitable contributions is 10% of taxable income.

The taxable income calculation is done WITHOUT taking into account the CHARITABLE DEDUCTION and DIVIDEND RECEIVED DEDUCTIONS and any net operating losses or capital loss carrybacks.

Any contribution that is not currently deductible because of the 10% limit can be carried forward for a period of up to 5 years.

The 10% is based on income, so it’s variable. As income changes, the deductible amount is adjusted.

Question 13

Describe the AUTHORIZATION OF CHARITABLE CONTRIBUTIONS process and provide the date the payment must be made.

Answer 13

Contributions that are authorized by the board of directors during a tax year are assumed to have been paid in that tax year if payment is made by the 15th day of the 3rd month (March 15) of the following tax year.

At the end of 20X1, if the board authorizes a contribution, it must be paid out by March 15.

Question 14

CONTRIBUTION OF SAMPLES

Answer 14

If a company donates sample products to a charity, samples it received without cost to the company, it must include in its income any amount that is deducted as a charitable contribution.

This creates a net effect of $0 for tax purposes.

Question 15

KEYMAN LIFE INSURANCE

Answer 15

Premiums paid on Keyman life insurance policies are not tax deductible if the company is the beneficiary of the policy.

Similarly, the proceeds from these policies are not included in taxable income if they are received.

Question 16

Are premiums for LIFE INSURANCE POLICIES PAID ON BEHALF OF REGULAR EMPLOYEES deductible?

Answer 16

The premiums are deductible up to $50,000.

Question 17

What is the intention of BUSINESS TAX CREDITS as designed by the US Congress?

Answer 17

There are numerous business credits available to corporations to reduce their taxes.

These credits are designed by the US Congress to encourage targeted business activity through preferential treatment in the tax code.

Question 18

Examples of BUSINESS TAX CREDITS you need to know (3 Categories, F, PYMT, GBC)

Answer 18

1. Foreign tax credit
2. Credit for prior year minimum tax
3. General business credit (there are 24 listed in the study book.)

General business credits are reported on Form 3800.

Question 19

Net Operating Loss - Rules of the Road

Answer 19

Corporations may use a net operating loss to offset taxable income in future periods.

Carry forward indefinitely.

Deduction limited to 80% of taxable income. (2018 and later)

Question 20

Earlier Net Operating Losses - Prior to 2018 TCJA ammendments

Answer 20

NOLs arising in taxable years beginning before 2018 remain subject to prior law.

Not subject to the 80-percent limitation and are able to be carried back for a period of two years, or carried forward for up to 20 years.

Question 21

Calculating NOL

Answer 21

The net operating loss is essentially the net loss for the company.

CASUALTY OR THEFT LOSSES may be included as part of the net operating loss.

The DIVIDENDS RECEIVED DEDUCTION is calculated without the limitations to a percent of taxable income.

The corporation may NOT deduct any carryovers from other years.

CAPITAL LOSS CARRYOVERS may NOT be used in year with a net operating loss.

The same is true of CHARITABLE CONTRIBUTIONS CARRYOVERS.

Normally no deduction for charitable contributions is allowed in a loss year because charitable contributions are limited to a percentage of net income.

Question 22

Capital Losses

What is the Carryback and Carryforward?

Does FIFO apply?

Answer 22

Corporate capital losses may NOT be used to offset ordinary income.

Capital losses that are not used to offset capital gains in the current period may be carried back for three periods or forward for five years to offset capital gains in those periods.

Capital losses are used on a FIFO basis.

Question 23

Capitol Losses - Example

Answer 23

Polina Corp. had a $10,000 short-term capital gain and a $23,000 long-term capital loss in 20X7. The resulting net capital loss of $13,000 is NOT deductible in the current year. Instead, the loss is carried back to 20X4 and may be used to offset capital gains in 20X4. If there are no capital gains in 20X4, it may be used in 20X5 or 20X6.

If there are no capital gains in the previous three years, it may be carried forward for up to five years.

When it is used, it will be treated as a SHORT-TERM capital loss, even though a long-term loss created the original carryback.

Question 24

NET OPERATING LOSS - Example

Answer 24

In 2019, Marcus Corp. had $250,000 of gross income from business operations and $310,000 of allowable business expenses. Marcus Corp. also received $100,000 in dividends from a U.S. corporation. Marcus Corp. is able to take a 65% dividend received deduction, which would normally be limited to 65% of its taxable income before the deduction.

Marcus Corp. calculates its NOL as follows:

Gross Income = $350K (Business Income + Dividends)

Minus Expenses ($310K)

Minus Dividend Rec’d Deduction ($65K) - there is no limitation for the NOL calculation

= NOL ($25K)

Question 25

Generally, you must file Form 1095-C by ___________ if filing on paper.

Answer 25

February 28th

Question 26

What are the rules regarding profits to determine if an activity is a business, or just a hobby?

Answer 26

Taxpayers are generally presumed to be engaged in a business if the operation earns a profit in any three of the most recent five years including the tax year in question.

Otherwise it is considered a hobby.

This is to avoid taxpayers engaging in all sorts of “hobby” activity and claiming losses year after year.

Question 27

Material Participation consists of:

Answer 27

• participation for more than 500 hours during the tax year
• participation by taxpayer is substantially all of the participation in the activity
• the taxpayer participated more than 100 hours during the tax year, and at least as much as any other individual

Question 28

What is the maximum gift value that is deductible to a person in the tax year?

Answer 28

A deduction is not available for business gifts made in excess of $25 to a person during the tax year.

Question 29

What is the credit for Child Care provided by a company, in percentage of child care facility expenditures.

Answer 29

The credit is 25% of the qualified childcare facility expenditures plus 10% of the qualified childcare resource and referral expenditures paid or incurred during the tax year. The credit limit is $150,000/yr.

Question 30

Describe what Child Care Resource and Referral Services do.

Answer 30

Child Care Resource and Referral Services help parents locate and choose quality child care by providing referrals to local child care providers, info on state licensing requirements, availability of child care subsidies, and other info.

An employer can receive a 10% credit for providing these services.

Question 31

What form is the credit for Prior Year Minimum Tax calculated on?

Answer 31

Form 8801

Question 32

NET OPERATING LOSS

Answer 32

An Excess Business Loss. The amount by which the total deductions from TP’s trades are MORE than the total gross income or gains from TP’s trades PLUS the Threshold Amount.

The Threshold Amount for 2019 is $255,000.

And $510,000 for MFJ filers.

Question 33

Threshold Amount in relationship to NOL

Answer 33

The Maximum Net Loss a TP, other than a Corp, may deduct is $255,000 ($510,000 for MFJ).

And this Excess Business Loss is NOT ALLOWED for the taxable year.

Question 34

What are the Deduction 3 Categories if an activity is NOT carried on for profit. (ie. Hobby, Sport, or Recreation)

Answer 34

Cat 01 - Deductions for personal or business activities are allowed in FULL. Also, for individuals, all nonbusiness deductions such as Home Mortgage Interest, Taxes, and Casualty Losses are deducted on Schedule A of Form 1040.

Cat 02 - Next. deduct Expenses that would be allowable if the activity were for profit. (i.e.. Rent, labor, wages, travel, transport, etc.)

Cat 02 is Limited to total Gross Income minus expenses in Cat 01.

Cat 03 - deductions that lead to basis adjustments.

Cat 03 allows for deductions which lead to Basis Adjustments (e.g. depreciation, amortization and casualty losses not deductible in Cat 01.

Cat 3 is also Limited to Gross Income minus Cat 01 and Cat 02 expenses.

Depreciation must be allocated to each depreciable asset.

Keep in mind that a TP can no longer claim any MISC itemized deductions that are subject to the 2%-of-adjusted-gross-income limitation.