Deck 3 Flashcards Preview

Regulation > Deck 3 > Flashcards

Flashcards in Deck 3 Deck (19)

How are payments applied pursuant to a divorce?

First to child support (nontaxable), then any remaining is paid as alimony/spousal support (income)


Gross income includes:

Cash (amount received), property (FMV), and cancellation of debt


Nondeductible expenses include:

Salaries paid to the sole proprietor, federal income tax, personal expenses, bad debt expense of a cash basis taxpayer, charitable contributions


What are the two types of taxes on net business income?

Income tax and federal self-employment tax


Net taxable loss carryback and carryforward rules:

Carryback 2 years and carryforward 20 years


Cost-to-cost method to determine percentage under the percentage of completion method for recognizing income:

This is a ratio of the total cumulative costs incurred to date at the end of the tax year divided by the total expected costs to be incurred under the contract


What method (cash basis/accrual method) do farmers normally use?

Cash basis


Gain or loss realized on disposition of property =

Amount realized - adjusted basis of assets sold = gain or loss realized


General rule for individual retirement accounts (IRA)

Taxable when withdrawn; retirement money cannot be withdrawn until the individual reaches the age of 59.5


Roth IRA

benefits received are nontaxable


Passive activity losses (PALs)

Net passive activity loss may not be deducted against wages, salaries, and other active income; carryforward without any time limit


Exception for Passive Activity Losses (Mom and Pop Exception)

Taxpayers may deduct up to $25,000 (per year) of net passive losses; must be "Active"


Nontaxable miscellaneous items

Life insurance proceeds, gifts and inheritances, medicare benefits, workers' compensation, personal (physical) injury or illness award, accident insurance


When are non qualified stock options taxed?

Taxed when granted if the option has a readily ascertainable value when granted. Otherwise, the option is taxed when exercised


Employer taxation rule

Deduct in the same year that the employee reports income


Type of qualified stock options

1. Incentive stock options (ISO); 2. Employee stock purchase plans (ESPP)


Incentive stock options (ISO)

Usually granted to a key employee and is a right to purchase the stock at a discount; Employee taxation is not taxable as compensation; employer does not receive a tax deduction for an ISO


Employee Stock Purchase Plans (ESPP)

May grant options to employees to purchase stock in the corporation; employee taxation is not taxable as compensation; employer does not receive deduction


Basis of stock =

Exercise price plus any amount paid for the option