Flashcards in Individual Taxation Deck (123):
Cash Basis. Note: This basis is NOT allowed for Corporations, Partnerships with a C-Corp partner, or for inventories.
*Investment penalties for early withdrawal
*Self-employed medical insurance premiums
*Self-Employment Tax (approx. 50%)
*Student loan interest (can't be another taxpayer's dependent)
*Tuition - can't take AOC/Lifetime Learning Credit for same expense
*Attorney fees in discrimination lawsuit
Investment interest expense in excess of investment income
Excess Section 179
Passive Activity Losses
Can carry forward indefinitely
Carry forward to next year.
Use in any year is limited to taxable income.
Can be carried forward 5 years.
It can be carried forward indefinitely.
It may be applied against future *regular* income tax, but not against future AMT tax liability.
$3,000 net capital loss can be taken in each year, the rest is carried forward indefinitely.
The loss retains its character (STCL or LTCL).
Corporate capital loss carryovers may be carried back 3 years and forward 5 years. Individual capital losses are carried forward indefinitely.
Individual capital loss carryovers retain their character (STCL or LTCL). Corporate loss carryovers are carried forward as STCL only.
Gross Profit / Contract Price
Contract Price = Sales Price - Liability assumed by buyer
$25 per person for gifts
Service awards up to $400
They may only offset active business income.
Note: W2 wages are considered active business income.
Only passive income such as rental income or limited partnership income.
Note: Wages are ACTIVE (cannot be offset by passive) and Interest/Dividends are PORTFOLIO (cannot be offset by passive)
Neither. They are portfolio income.
For depreciation when 40% or more of all purchases occur in 4th quarter.
15 year straight line (S/L)
Up to $5,000
Amortized over 180 months
Reduced dollar-for-dollar by amount over $50,000
On Schedule A:
Amounts in excess of 10% of AGI may be deducted
Accident or disability insurance premiums are not deductible.
Must be a citizen of North America
Must live with you, or if they do not, must be mother/father or a relative closer than a cousin.
Benefactor must provide more than 50% support to the beneficiary.
Foreign INCOME and REAL ESTATE taxes are deductible.
Foreign personal property taxes are NOT deductible.
Foreign tax assessments are not deductible- they are added to the basis.
Gross investment income - investment expense in excess of 2% of AGI = net investment income
Investment interest expense in excess of net investment income is deductible.
Investment interest expense on tax-free securities is not deductible.
They are deductible if they represent prepaid interest on purchase of a new home or improving a home.
Refinance points are amortized over the life of the mortgage.
Deducted at fair market value (FMV), up to 30% of AGI
Deduction is taken for adjusted basis in the property, up to 50% of AGI.
No. It decreases the fair market value (FMV) of the property.
Take the lower of either A) Decrease in FMV or B) Basis in property (call this number GROSS LOSS)
GROSS LOSS - insurance proceeds received - $100 - 10% of AGI = Deductible casualty loss
Deductible in excess of 2% of AGI
Continuing Education - if required to keep your job
50% Meals and entertainment
Tax prep fees
Legal fees to collect alimony
Appraisal fees to value casualty loss of charitable contributions
Investment Interest Expense
Must be resident of North America
Under age 19, or under age 24 if a student
Must be citizen of North America
Must live with you, unless mother/father or relative closer than a cousin
You must provide more than 50% support to the individual
Child's unearned income
- early withdrawal penalties
- Greater than $1,000 or child's itemized deduction related to unearned income
= Amount taxed at parents' rate
Yes, if they each own a small business. All non-business income is cash basis.
15.3% of net earnings from self-employment
(Note: executor of an estate is NOT self-employment income)
A tax credit which takes the taxpayer's tax owed on the return below zero, resulting in a refund to the taxpayer.
Earned Income Credit (EIC), American Opportunity Credit and the Additional Child Tax credit.
Note: the REGULAR child tax credit is NOT refundable.
American Opportunity Credit - per student
Lifetime Learning Credit - per taxpayer
Note: The American Opportunity Credit is refundable.
The lesser of:
90% of current year's total tax
100% of prior year's total tax
110% of prior year's total tax (if AGI is $150,000 or more)
Deductible: Costs incurred to PRESERVE soil/water
Non-deductible: Costs incurred to drain wetlands or prep for irrigation (i.e. improve land)
3 years, generally
6 years if 25% or more of gross income was omitted
The clock starts on the LATER of the due date or the filing date of the return.
There is NO STATUTE OF LIMITATIONS for either fraud or failure to file a required return.
It is treated as a STCL
Refunds must be claimed within 3 years of the return due date or within 2 years of being paid, whichever is later.
Premiums paid by an employer for coverage in excess of $50,000 per employee are includable in income.
When they are not in return for services rendered,
The money is used *only* for tuition and books
Note: Scholarships for room and board are includable in income.
State & municipal bond interest
US EE Savings Bond interest (note: HH bond interest is taxable)
S-corporation (actually distributions)
Up to 85%
Payments made to make you whole are NOT taxable (i.e. to pay for losses of property, body parts or earning ability)
Any payments for punitive damages ARE taxable.
No - similar to an award for damage to make a person whole.
Alimony IS taxable.
Child support and divorce property settlements are NOT taxable.
NO, they are not deductible. However tax benefits are available through the adoption CREDIT.
2nd Year: (3rd year - 2nd year - $15,000)
1st Year Alimony Paid
- Avg alimony paid in 2nd & 3rd years
- Recapture from 2nd year
=1st Year Alimony Recapture
Total Recapture = 1st Year Recapture + 2nd Year
Can be carried back 2 years
If any left, can be carried forward 20 years.
Traditional IRA = deductible
Roth IRA = not deductible
They must be married at the end of the year.
If one spouse dies, they must be married at the end of the year.
Must have a dependent child
Must provide more than 50% of the child's support
Must live with them more than 50% of the year
Must have a dependent child.
Essentially gets MFJ status for the year of death + 2 tax years
What is the primary objective of accounting?
To measure income
What is the most authoritative set of accounting pronouncements?
The FASB Codification
All pronouncements fall under the Codification umbrella
What are the 2 Levels of Authority within the FASB codification?
Authoritative and Non-Authoritative
How does managerial accounting differ from financial accounting?
Managerial Accounting has a timeliness focus
Managerial Accounting is not required to follow GAAP
Which financial reports are required to be filed with the SEC?
Form 10K - Annual and Audited
Form 10Q - Quarterly and Reviewed
What is the focus of financial reports for individual companies?
Focus is on the needs of users to help them make decisions and assessments about the company
Does not make assessments of the economy
What are the Primary Constraints of Financial Reporting?
Cost vs. Benefit
What are the Secondary Constraints of Financial Reporting?
Consistency - Year vs. Year
Comparability - Company vs. Company
What are the Qualitative Characteristics of Financial Reporting?
Relevance & Faithful Representation
Relevance - Makes a difference to the user
Predictive Value - Future Trends
Confirming Value - Past Predictions
Materiality - Could affect User Decisions
Completeness - Nothing omitted that would impact the decision-making of a user
Neutrality - Information is presented is without bias
Free from Error - No material errors or omissions
What are the Enhancing Qualitative Characteristics of Financial Reporting?
Comparability Verifiability Timeliness and Understandability
Comparability - Allows users to compare different items among various periods
Verifiability - Different people would reach a similar conclusion on the information presented
Timeliness - Information is made available early enough to impact the decision making of users
Understandability - Information is easy to understand
How does Conservatism affect the recording of accounting transactions?
When an estimate is necessary due to uncertainty conservatism chooses the best option that won't overstate the financial position of the company
What is an accrual?
Earned (Revenue) or Incurred (Expense) but no Cash Receipt/Outlay yet
What is a deferral?
Cash Receipt/Outlay but not Earned (Revenue) or Incurred (Expense)
What is recognition in accounting?
When an item is recorded and included in the financial statements
Describe fair value with respect to an asset
The price you would receive if you sold the asset
Assumes asset is at its highest and best value
Assumes asset is sold at its most advantageous market to get the best price possible
What market assumptions are made in a fair value assessment?
Buyer and Seller are not Related
Buyer and Seller are Knowledgeable
Buyer and Seller are able to transact - i.e. This isn't a hypothetical transaction for Fair Value measurement purposes. The buyer actually does have the $10M to purchase the asset you're trying to value at $10M
Buyer and Seller are both motivated to buy/sell
What items are included in a Level 1 input in the fair value hierarchy?
Price quotes or market prices
For example NYSE or NASDAQ
What items are included in a Level 2 valuation input?
What items are included in Level 3 inputs of the fair value hierarchy?
Unobservable inputs such as assumptions or forecasts
Lowest priority for valuation
What are acceptable valuation techniques for fair value?
Market approach - uses market transactions and prices to value the asset
Income approach - uses present value discounts earnings
Cost approach - uses replacement cost to value the asset
What are current assets?
Inventory or Assets expected to be converted or consumed during a business' operating cycle
Deferred Gross Profit on Installment Sales (Contra Asset)
Receivables expected to be collected in 12 months or less
What are current liabilities?
Liabilities that will use current assets during the present operating cycle
What is an accrued liability?
Expense that has been incurred but not paid
Example: rents payable
What is a deferred revenue?
A type of current liability
Payments that have been received but cannot be recorded as revenue yet
Example: Tenant pre-pays rent - Landlord still must perform to earn it and is a liability until this happens
When are revenues recognized?
When they have been earned; i.e. company has performed
What is a gain?
Increase in equity from an activity or event that is not central to the main activities of the business
Can be operating or non-operating
What is a loss?
Decrease in equity from an activity or event that is not central to the main activities of the business
Can be operating or non-operating
What is an operating cycle?
Average time it takes to turn materials or services into Cash
What is the present value of future cash flows?
Valuation method - the current value of a future amount of money using a specific interest rate
What is historical cost?
How much an asset cost - (net of depreciation and amortization)
What is replacement cost?
How much it would cost to reacquire an asset today (Entrance Cost)
What is a market cost?
The sale price of an asset (Exit Cost)
What is Net Realizable Value?
Sale Price of an Asset - Selling/Disposal Fee
When is royalty income recognized? How is it recognized?
Recognized when earned
If the royalty % is applied against net sales then subtract the estimated return amount from the gross sales first and then apply the royalty rate
When is revenue recognized in an installment sale?
Revenue recognized upon receipt of cash
Only used when cash collection is uncertain
What is deferred gross profit?
Gross Profit that can't be recognized until cash is received
D.GP : Gross Profit % x Accounts Receivable
Pay attention to the year if GP% varies
What is the cost recovery method?
No revenue recognized until all costs are recovered from purchase of the asset
Most conservative method of revenue recognition when collection of sale price is uncertain
What is subscription revenue? How is it recorded?
Payment has been received but performance is not complete.
As company performs revenue is recognized.
Recorded as a Deferred Revenue (Liability) on Balance Sheet
How are franchise revenues recorded?
Franchisor - Startup franchise fee revenue deferred until substantial performance
Franchisee - Costs are deferred until corresponding revenue is recognized
How do you calculate sales revenue starting from cash basis income?
Sales (i.e. Customer Payments)
+ Ending Accounts Receivable
- Beginning Accounts Receivable
: Sales Revenue on an Accrual Basis
How do you calculate COGS starting from Cash Basis?
Cash Remitted (i.e. paid)
+Increase in Accounts Payable
-Increase in Inventory
:COGS on an Accrual Basis
How are discontinued operations reported? When are they used?
Reported Net of Tax after Continuing Operations but before Extraordinary Items
Company decides to cease operating a segment of its business
Includes Income (or loss) from the period plus the gain (or loss) from disposal
What qualifies as an extraordinary item? How is it recorded?
Both unusual AND infrequent
Reported Net of Tax after Discontinued Operations
Note: Usual *or* Infrequent Items are reported as part of Continuing Operations
What is constant dollar accounting?
Adjusts assets to reflect a consistent level of purchasing power due to inflation
Uses the Consumer Price Index (CPI)
When are expenses recognized?
When they are incurred. Accrue if not yet paid.
What are accrued expenses?
Those incurred but not paid.
Product costs - Expenses should be matched with associated revenues as they are recognized (sales commission on a used car sale)
Period costs - Expenses amortized and recognized with the passage of time
When should impaired assets be written down to fair value and expensed?
What major items should be classified under General & Administrative (G&A) expenses?
Office staff salaries
Note: Sales staff salaries and portions of the building assigned to Sales should be allocated to Selling Expense not G&A
What are business start-up costs?
One-time costs for opening a new business
Expensed as they are incurred
When is interest *not* expensed?
Interest on projects (software) for internal use is not expensed but is instead capitalized
What are the major components of Comprehensive Income?
Net Income + Other Comprehensive Income (OCI):
Cumulative accounting adjustments
Non-owner changes in equity
What items are considered cumulative accounting adjustments?
Foreign Currency Translation Adjustments
Unrealized gains on AFS Securities
Minimum Pension Liability adjustment for defined benefit plans
What is the purpose of a reclassification adjustment?
Avoids double counting items that were included in both Net Income and OCI
Example: AFS Securities previously included in OCI are now sold at a loss and reported on the Income Statement
Where is Comprehensive Income reported?
Reported in a Single or Combined Income Statement
What disclosures on accounting policies are required in financial statements?
Accounting Principles used
Basis of Consolidation
Inventory Pricing Methods
Amortization of Intangibles