Flashcards in Income tax - General Deck (58):
C corp required accounting method?
What taxpayers permitted to use the cash method?
C corp generally required to use accrual method. the cash method cannot generally be used if inventories are necessary to clearly reflect income.
Taxpayers permitted to use the cash method include a qualified personal service corporation, and an entity (other than a tax shelter) if for every year it has average gross receipts of $5 million or less for any prior three‐year period and does not have inventories.
Based on the uniform capitalization rules, what expenses are not required to be capitalized?
The uniform capitalization rules to capitalize direct and indirect costs allocable to property they produce and for property they purchase for resale.
Marketing, selling, advertising, and distribution, on-site storage expenses are not required to be capitalized.
. Those storage costs attributed to an off‐site facility are required to be capitalized
Entity have inventory. What accounting method required?
The accrual method of tax reporting is mandatory for an entity when there are Inventory.
Entity have account receivable for serviced rendered. Is it required to use accrual accounting method?
Constructively received income included or not in cash - basis taxpayer
Included. Constructively received means that an item of income is unqualifiedly available without restriction (e.g., interest resulting from a savings account is reported as income for the year in which the interest is credited to the account)
“Earned income” is defined as net self‐employment earnings reduced by what?
“Earned income” is defined as net self‐employment earnings reduced by what deductible Keogh contribution and one‐half of the self‐employment tax.
Rent received $27,000 in 2016 covering periods 2017-2019. What amount of rent revenue should be reported on t2016 tax return? Taxpayer is accrual basis
On tax purposes, income is earned when
1) all the events have occurred to attach the taxpayer's right to receive the income and
2) the amount of income can be determined with reasonable accuracy. Cash based taxpayers report income when it is actually received or constructively received (i.e., in the taxpayer's control). Since all the events have occurred to attach Ral Corp.'s right to receive the income and the amount of income can be determined with reasonable accuracy, the corporation must report $27,000 in rental revenue for 2016. It is irrelevant that the rental revenue covers the following years.
A 33‐year‐old taxpayer withdrew $30,000 (pretax) from a traditional IRA. The taxpayer has a 33% effective tax rate and a 35% marginal tax rate. What is the total tax liability associated with the withdrawal?
Use marginal tax rate + 10% penalty because early withdrawal.
What type of entity have the most flexibility to choose the calendar year?
A C corporation has the most flexibility since it can elect to use a calendar year or any fiscal year. In contrast, a partnership generally must use the same tax year as used by its partners in order to prevent the deferral of income to partners that would otherwise result. Similarly, S corporations and personal service corporations must generally adopt a calendar year unless the entities can establish a business purpose for having a different tax year.
Social security benefit taxability
Blake, a single individual age 67, had a 2016 adjusted gross income of $60,000 exclusive of social security benefits. Blake received social security benefits of $8,400 and interest of $1,000 on tax‐exempt obligations during 2016. What amount of social security benefits is excludable from Blake's 2016 taxable income?
Recapture rule applied for alimony that end in 3 year and third year payment reduced at least $15,000 over the first three year.
Tim and Nicole Wendler were divorced in 2014. Under the terms of their divorce decree, Tim paid alimony to Nicole at the rate of $60,000 in 2014, $25,000 in 2015, and nothing in 2016. What amount of alimony recapture must be included in Tim's gross income former 2016?
Special rules require recapture of deductions and income if alimony payments decline more than $15,000 over the first three years after the divorce.
2nd yr alimony
-3rd yr alimony
1st yr alimony - [(Adj 2nd alimony + 3rd alimony)/2]-15,000 = Recapture #2
The total recapture is $10,000 + $37,500 = $47,500.
In 2015, Brun Corp. properly accrued $10,000 for an income item on the basis of a reasonable estimate. In 2016, Brun determined that the exact amount was $12,000. Which of the following statements is correct?
Under the accrual method, income generally is reported in the year earned. If an amount is included in gross income on the basis of a reasonable estimate, and it is later determined that the exact amount is more, then the additional amount is included in income in the tax year in which the determination of the exact amount is made. Here, Brun properly accrued $10,000 of income for 2015, and discovered that the exact amount was $12,000 in 2016. Therefore, the additional $2,000 of income is properly includible in Brun’s 2016 income tax return.
Minimum amount of deductible contribution to IRA regardless of the proportional phase out rule.
A taxpayer whose AGI is not above the applicable phase‐out range can make a $200 deductible contribution regardless of the proportional phase‐out rule. This $200 minimum applies separately to taxpayer and taxpayer’s spouse
Cafeteria plan characters
Cafeteria plans allow employees to select from a menu of fringe benefits and cash and not include the value of the nontaxable benefits in their gross income. The requirements of cafeteria plans are:
1) all participants must be employees;
2) participants may choose between two or more benefits composed of cash or qualified benefits;
3) participants are required to make elections among the benefits;
4) the plan must be in writing and have certain specified information;
5) the plan may not provide participants with deferred income, except for under 401(k) plans.
This response states that under cafeteria plans participants may select their own menu of benefits.
She received $25,000 in cash, a painting valued at $10,000, and the use of his beach house, valued at $3,000. What amount of gross income should she report as alimony?
Alimony must be received in cash so the painting and beach house do not qualify.
Accountable Plans vs Non-accountable plans
When employees are reimbursed for business expenses, the determination if this is taxable depends on whether the employee has an accountable plan.
If employee business expenses are reimbursed under an accountable plan, then the reimbursement is not taxable (for FICA or income tax) and the employee gets no deduction for the expense. Technically, the tax law requires the reimbursement to be included as income and the employee's deduction is for AGI. Since this always nets to zero, the IRS allows the income and deduction to not be reported.
If the expenses are reimbursed, but not under an accountable plan, the reimbursement must be included in income (for FICA and income tax) and the deduction is a 2% miscellaneous itemized deduction.
For a plan to be accountable:
Must substantiate all expenses to be reimbursed; and
Excess reimbursements must be returned to the employer.
I.e. : Under a nonaccountable plan. Easel does not require employees to provide proof of expenses and allows employees to keep any amount not spent. Under the plan, Mel, an Easel employee for a full year, gets $400 per month for business automobile expenses. At the end of the year Mel informs Easel that the only business expense incurred was for business mileage of 12,000 at a rate of 30 cents per mile, the IRS standard mileage rate at the time. Mel encloses a check for $1,200 to refund the overpayment to Easel. What amounts should be reported in Mel's gross income for the year?Since this is not an accountable plan, all reimbursements are included in the employee's income ($400 x 12 months = $4,800).
Bond premium vs Bond discount
Amortize bond premium -> reduce bond's basis
Amortize bond discount - > increase bond's basis
Loss on small business stock sec. 1244
In order to deduct an ordinary loss on sale or worthlessness of stock under Sec. 1244, (1) the shareholder must be the original holder of stock, and an individual or partnership; (2) the stock can be common or preferred, voting or nonvoting; (3) the amount of ordinary loss is limited to $50,000 ($100,000 on joint return); (4) the corporation during the 5‐year period before the year of loss received less than 50% of its total gross receipts from royalties, rents, dividends, interest, annuities, and gains from sales or exchanges of stock or securities; and (5) the corporation’s aggregate amount of money and adjusted basis of other property received for stock as a contribution to capital and paid‐in surplus does not exceed $1,000,000.
What property can be used in Like-kind exchange ?
All realty property is considered like-kind property.
& Investment property (investment property in like kind exchange have to be in the same type. i.e. Stock for stock, antiques (hold for investment) for antiques. exchange will be non‐taxable if it qualifies under the like‐kind exchange rules.
Gift basis rule for gain and loss
vs. Inheritance basis
Gain basis = giver's basis
Loss basis = lower of FMV (at giving) or Giver's basis
If the sale price is between gain basis and loss basis no gain or loss recognize
I.e. A gifted her son stocks. A's basis in stock is $100, FMV at gifting is $150. Later stocks are sold for $120, no gain or loss recognized. If stock sold for $160, gain is $60 ($160 - $100). If sold for $90, loss $10.
Inheritance basis = step up basis.
How long a business asset be owned to be a section 1231 asset?
a business asset must be owned for more than one year to be a Section 1231 asset.
Sale of stock between related taxpayer. Disallowed to what limit?
Losses are disallowed on the sale of property between related taxpayers, including a parent and their child. Any gain later realized by the related transferee on the subsequent disposition of the property is not recognized to the extent of the transferor's disallowed loss
How many years a covenant not to compete be amortized for?
The statutory amortization period for a covenant not to compete that is related to a business acquisition is 15 years.
Cost basis of new property in involunteery exchange is new acquired property basis or the one being replaced?
Dawson, Inc.'s warehouse (with an adjusted tax basis of $75,000) was destroyed by fire. The following year, Dawson received insurance proceeds of $195,000 and acquired a new warehouse for $167,000. Dawson elected to recognize the minimum gain possible. What is Dawson's basis in the new warehouse?
Interest from qualified education loan is deducted in the front page of form 1040 or itemized deduction.
The interest expense on a qualified education loan is deductible in the computation of an individual’s adjusted gross income(front page of 1040). A qualified education loan is a loan whose proceeds are used to pay the qualified education expenses (e.g., tuition, fees, room and board, books, supplies) of the taxpayer, spouse, or anyone who was a dependent when the loan was taken out. The maximum annual deduction is limited to $2,500 and is reduced by modified adjusted gross income in excess of $60,000 if single, head of household, or a qualifying widow(er); $120,000 if married filing jointly. Here, since the unmarried individual’s adjusted gross income is only $25,000, all $1,000 of interest is deductible to arrive at adjusted gross income.
How to deduct nonbusiness theft loss on tax return. How muc each loss should be in excess of to be deducted?
Nonbusiness theft losses are deductible to the extent that each loss is in excess of $100, and the taxpayer’s net nonbusiness casualty and theft losses exceed 10% of AGI. Thus, Frank can deduct $1,000 [ ($2,000 − $100) − (10% × $10,000)].
$25,000 allowance for passive loss starting to phase out at how much of AGI and totally phase out at how much of AGI
If MAGI = $110,000, the $25,000 allowance is reduced by $5,000 to a $20,000 maximum allowance. Once MAGI exceeds $150,000, the special allowance is no longer available.
Donation deduction of appreciated property that would resulted in long term capital gain subject to how many % of AGI.
For appreciated property is contributed to charity, the amount of contribution is generally the property’s FMV if the property would have resulted in a long‐term capital gain if sold. Since the land was purchased as an investment for $14,000 in year 1, a sale in year 13 would have resulted in a LTCG. As a result, the amount of Taylor’s charitable contribution is the land’s FMV of $25,000, which would then be subject to a 30% of AGI limitation. However, since Taylor had $90,000 of AGI, all $25,000 of land contribution would be allowed as an itemized deduction for year 13.
Due to club deductible expense for business or not
Only due to chamber of commerce, union due and professional association is deductible. Due to club is nondeductible.
Moving expense deductible requirements
- The new work place at least 50 miles away from old residence
- The taxpayer is full time employed staying at least 39 weeks within 12 months following the move. If self-employed, 78 weeks within 24 months.
What moving expenses are not deductible ?
Indirect moving expenses such as premove house hunting, temporary living expenses, and meals while moving are not deductible.
Does passive activity limitation apply to closely held C corp and personal service corp?
The passive activity limitations apply to individuals, estates, trusts, closely held C corporations, and personal service corporations
Receive $500 income from jury duty and have to submit that income back to employer. How to report that jury duty.
Report jury duty as other income and also deduction to arrive at AGI.
House got fired. The adjusted basis $150,000.
FMV before fire $200,000
FMV after fire $180,000
What the casualty loss before any limit for tax deduction?
The amount of a personal casualty loss is the lesser of (1) the adjusted basis of the property ($150,000), or (2) the decline in the property’s fair market value resulting from the casualty ($200,000 − $180,000 = $20,000). Thus, Cole’s casualty loss before consideration of the "$100 floor" or the 10% of adjusted gross income limitation is $20,000.
How to report income and expense from hobby
Income from a hobby is reported as other income on the front page of Form 1040. Deductions such as travel expenses are 2% miscellaneous itemized deductions, and expenses can be deducted only to the extent of revenues.
Patrick's pet break the vase worth $500, value before and after the incident is $550 and $450. How much can be deducted as casualty loss.
A casualty is the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual. Deductible casualty losses may result from earthquakes, tornadoes, floods, fires, vandalism, auto accident, etc. However, a loss due to the accidental breakage of household articles such as glassware or china under normal conditions is not a casualty loss. Neither is a loss due to damage caused by a family pet.
Can special assessment for installation of a sewer system in the town itemized deducted as property tax?
The special assessment is not deductible, but would be added to the basis of the residence.
Charitable deduction disallowed carry forward for how many years.
Charitable contributions in excess of the 50% limitation are carried forward for up to 5 years
Frank Lanier is a resident of a state that imposes a tax on income. The following information pertaining to Lanier’s state income taxes is available:
Deficiency assessed and paid in 2016 for 2014:
The interest $100 not included as tax in itemized deduction.
Birthday present is included or not in determining the total support of a dependent?
Which of the credits is a combination of several tax credits to provide uniform rules for the current and carryback‐carryover years?
General tax credit combine several credit for business,
credit provides uniform rules for carryback‐carryover years. The general business credit may be carried back for 1 year, then forward for 20 years.
Work opportunity tax credit max amount per employee
The work opportunity tax credit is calculated on the amount of wages paid per eligible employee during the first year of employment. The maximum credit is $2,400 per eligible employee which equal to 40% of first $6,000 per resident
Qualified expenditure and
answer is corrThe requirement is to determine the proper treatment for qualifying research and experimentation expenditures. A taxpayer can elect to deduct qualifying research and experimentation expenditures as a current expense if the taxpayer so elects for the first taxable year in which the expenditures are incurred. Otherwise, the taxpayer must capitalize the expenditures. Then, if the capitalized costs are not subject to depreciation (because there is no determinable life), the taxpayer can amortize them over a period of 60 months or longer beginning with the month in which benefits from the expenditures are first realized.
Corp exception to use cash method vs accrual
his answer is correct. C corporations generally are not entitled to use the cash method and instead must use the accrual method of accounting. One exception to this rule permits a C corporation that is a qualified personal service corporation to use the cash method regardless of gross receipts. A second exception permits a C corporation to use the cash method if for every year it has average annual gross receipts of $5 million or less for any prior 3‐year period, provided it does not have inventories for sale to customers. A third exception permits a C corporation to use the cash method if it has average annual gross receipts of $1 million or less for any prior 3‐year period.
Type b reorganization
To get info for other type
Type B reorganization must be stock for stock, and only voting stock of the acquiring firm, or its parent, is permitted. Acquiring must also control target after the acquisition.
Worthless stock treated as sale in the last day of the year
Involuntary conversion. Gain deferred vs non-deferred
to add info
Investment asset that is not inventory and deprecable property used in business. i.e stocks, bond
ST capital gain/ loss and LT capital gain loss: Order to offset
1. ST capital loss first offset against any short-term gains that would be taxable at the ord income rates (assumably the highest rate), then LT gain 28% rate group, then 25% group, then 15% group.
2. LT capital loss from 28% first offset against net gain from 25% rate group and then against net gain from 15% rate group. 3. If there are LT capital loss from 15 rate group, first offset net gain from 28% then 25% rate group.
Loss results from exchange transactions between related parties i.e. parents and children, etc... are disallowed
i.e. Alice's dad sold her 10 shares of abc stock for $100, his basis in stock was $120. Alice later sold those shares for $110. Alice's gain is $10 - , but she can reduce the gain (not below zero) by the loss her father could not deduct ($20). Therefore, Alice realizes zero gain.
To deduct Sec. 179 for fixed asset purchased in the current year. Three criteria to meet.
Fixed assets purchased for use in business and not allowed to purchase from related parties. Sec. 179 deduction is not allowed to cause a loss to business. Bonus depreciation or regular depreciation should be used instead.
Under MACRS of depreciation for property placed in service after 1986, salvage value ...
is ignored in when calculating the depreciation when applying the double declining ratio. However, it will affect the total depreciation taken in total.
Intangible recovery period.
Intangible such as goodwill, licenses, franchises, trademarks and covenants not to compete may be amortized using the straight line over peirod of 15 years
Home sale gain exclusion exceptions
When unforeseen situation happened like job move, sickness or death, the exclusion will be prorated.
The couple live more than two year in the home before one spouse passed away on 1/1/Y3, the surviving spouse sold the home in 1/1/Y4 for a gain of $500,000. How much home exclusion the taxpayer can use?
$500,000. Because the couple met the use test of 2 years. And the sale happened with 2 years after the date of dead of one spouse.
Basis in 1031 exchange
Basis of property received:
Basis of the old property
Plus: Boot paid & Gain recognized
Less: Boot received
Non-liquidating distribution of property when FMV lower than basis.
FMV < basis resulted as a loss when distributing but these loss is not recognized