Income Tax

Question 1

Acquisition Costs (Taxpayer must capitalize “Include in basis” rather than deduct as an expense certain costs & recovered through depreciation).

Answer 1

+ Sales Tax
+ Freight/Shipping
+ Installation
+ Legal Fee’s
+ Commissions

These All Increase Basis

DOES NOT INCREASE BASIS:
Ongoing property expenses (utilities and property taxes)

A Mortgage does not decrease the basis of the property.

Question 2

Gifts

Answer 2

Basis of an asset acquired by gift is generally the donor’s basis.

Exception: Use FMV of date of gift. (When donee’s basis is less than the donors basis. Furthermore, in the event that that the donor gifts appreciated property and pays gift tax… only a portion of gift tax paid may be added to the basis.

Question 3

Adjusted Basis (+ Adjustments - Adjustments)

Answer 3

Original Basis in property

Cost Basis
+ any any capitalized costs
- any cost recovery deductions (amortization, depletion, or commissions/fee’s all increases the basis)

+ adjustments (acquisition expenditures or improvements)

• adjustments (depreciation deductions and section 179 deduction)

NOTE: Repairs ARE NOT an increase in basis. Repairs are are always dedicated annually as expenses.

Question 4

Original Cost Basis

Answer 4

Where calculation of basis begins.

Taxpayer original funds used to make investment
+ plus any improvements, legal fee’s, and permits to build
= FMV at the time received.

Question 5

Like-Kind Exchange (Substituted Basis)

Answer 5

“Non Taxable Property Exchange of Qualifying Property”

Property’s PMV
- Any deferred Gain
+ Any postponed Loss

Question 6

Personal Expenditures

Life Insurance
Home Insurance
Home Maintenance costs

Answer 6

Not Deductable

Question 7

Currently Deductible Expenditures (Section 162)

Management
Repairs (that do not add value)

Answer 7

Deductible in year incurred

Question 8

Capital Expenditure (Improvements)

Answer 8

Recovery/Depreciation Cost over periods of years

New Roof

Cannot add value or extend the useful life or adapt the machine to another purpose.

Question 9

Property Eligible for Capital Recovery Include…

Answer 9

Real Property
Personal Property
Intangibles used in trade or business

Must have a deterrable useful life and be subject to a decline in FMV

Not depreciable = Inventory or property held for sale to customers in course of business is not depreciable.

Question 10

MACRS

Answer 10

Includes:

1. Bonus Depreciation
2. Accelerated Depreciation
3. Straight Line Depreciation
4. Section 179 Expensing

Know 4 useful lives:
- Autos, light trucks, machinery, computers (1254 property) = 5 Years
- Office Furniture, fixtures (1245 property) = 7 Years
- Residential rental property = 27.5 years (straight line)
- Commercial property = 39 years (Straight line)

Must use half convention (x 1/2) to get first year on both straight and 200%.

Question 11

Mid Quarter Convention

Answer 11

Used to reduce the benefits of the half-year convention for personal property - NOT real property placed in service late in the year of acquisition.

If the total basis of depreciable property placed in service during last 3 months EXCEEDS 40% of the total basis of all depreciable property… taxpayer uses Mid Quarter Convention.

Question 12

Intangible Assets (Section 197) Amortization over life period 15 years

Answer 12

Goodwill
Trademarks
covenants
copyrights
patents

Question 13

Taxable Income (Husband participates in 401k, wife does not have one)

Answer 13

GROSS INCOME
+ 150,000 Paul’s Gross Income
- 22,500 to his 401k
+ 32,000 Stacey’s Gross Income
+ 100 Interest
+ Gifts Received

AGI
ABOVE THE LINE DEDUCTIONS
- 6,500 Her IRA (his is not deductible)*
= 153,100 AGI
———————————————-
- Below the line deductions (standard deduction or itemized)… (10,000 State Income Tax & RE taxes SALT… capped at $10,000)
-11,100 Qualified mortgage interest
- 4,517.50 Medical expense in excess of 7.5% of AGI
- 5,500 Charitable
- Personal and dependency exemptions (after TCJA expires)

= 121,982.50 TAXABLE INCOME

• Credits
  + Other taxes
• Prepayments
  = refund or additional tax due

First check income threshold deductibility for IRA’s** 116k - 136k MFJ (82k Single)
**Paul uses the 116k-136k phase out, Stacey uses the spousal 218k-228k phase out
***Itemized deductions equal $31,117.50 versus the standard deduction of $27,700 in 2023.

Question 14

Penalties

Answer 14

75% fraud
frivolous 5,000
negligence 20%

on about due/owe. not interest.

Failure to pay .5 per month
failure to file 5%

both max at 25%

Question 15

Gross Income (12)

Answer 15

Wages/Salaries/Tips
Ordinary Dividends (qualified dividends but taxed differently)
Schedule C Net Income
Taxable interest
IRA Distributions
Pensions & Annuities
Alimony Received Pre Divorce 2019
Unemployment Income
Taxable Social Security

Business Income & Losses
Capital Gains
Real Estate
Puniative Damages (except wrong death)

Question 16

Gross Income EXCLUSIONS

Answer 16

Gifts
Inheritances
Child Support
Muni Income
Workers Compensation
Compensatory Damages

Question 17

AGI

Answer 17

AGI = Gross income less adjsutments:

Adjustments:

IRA Contributions
Student Loan interest (2500 max deduction)
Keogh or SEP
Self Employment Tax (.07065)
Certain alimony paid
100% self employment health insurance
moving expenses
penalty for early withdraw
health savings account
4000 education expenses

Question 18

MAGI

Answer 18

AGI +

tax exempt interest
non taxable social security
student loan interest

• MAGI often used surrounding tax exempt interest in determining whether social security benefits are taxable.

Question 19

Itemized Deductions to calculate taxable income?

Answer 19

Medical, Dental, Qualified LTC >7.5% Floor AGI
Mortgage insurance qualified residence <100,000 AGI
Home Mortgage interest
Charitable gifts
investment interest
casualty looses

state & local, sales taxes
personal property
real estate taxes

All three SALT 10,000 limit.

Question 20

Tax Return Waterfall

Answer 20

Gross
AGI
Taxable Income (x percentage bracket)
Taxable Calculation (less credit plus other taxes)
Tax Liability (less quarterly payments and withholding)
Net Tax Due or Refund

Question 21

Fringe Benefits

Answer 21

Health insurance premiums paid for self employed, partners, and more than 2% owners…. S Corp = taxable income. 100% is deductible.

Does not include disability insurance premiums.

insurance premiums your employer pays on a group life policy over 50k death benefit (if the plan is non discriminatory) are TAXABLE>