Miscellaneous Flashcards

Question

Paul was laid off from his job last month. This month he drew $800 in unemployment benefits. Is this included in Pauls' gross income?

Answer 1

Yes, it is included in his gross income.

Answer 2

Scenario 1- The $4k is included in Becky's gross income, since the employer paid for the policy and the pay is for sick leave (not for medical expenses). Scenario 2- Becky does not have to include any of the $4k, since she paid for the premiums herself.

Answer 3

The value is excluded from the employee's gross income IF: Meals are: 1. Furnished by the employer (not third-party restaurant), 2. On the employer's business premises (premises where employee works), AND 3. For employer's convenience (not employee's); assumed to be convenient if >50% of employees receive meals from employer. Cash meal allowance is ineligible bc employer did not "furnish" meal.

Answer 4

The value is excluded from the employee's gross income IF: Lodging is : 1. Furnished by the employer (not third-party), 2. On the employer's business premises (premises where employee works) 3. For employer's convenience (not employee's); AND 4. Employee is REQUIRED to accept the lodging as a condition of employment (no option) Cash allowance is ineligible bc employer did not "furnish" lodging.

Answer 5

Dividends are includible up to accumulated E&P ("retained earnings"). Distributions that exceed E&P are treated as NON-TAXABLE recovery of capital, and reduce SH's stock basis. Once SH's basis is reduced to 0, any subsequent distributions are INCLUDED in gross income as capital gains.

Answer 6

Not included in SH gross income if the stock is pro rata (equal based on stock ownership). If SH has OPTION of receiving stock OR cash, then SH will recognize income regardless of what is chosen (constructive receipt rule).

Answer 7

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$100 = dividend income $350 = return of capital (not included in gross income) $550 = capital gains income

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Answer 8

The value of fringe benefits is INCLUDED in employee's gross income as compensation for services, BUT... Certain "qualifying" fringe benefits are specifically excluded or partially excluded from gross income. Examples of QUALIFYING fringe benefits for which employers CANNOT discriminate (have to offer it to everyone in order for the value to be excludible): - Dependent care * Up to $5k of care costs paid for by employer can be excluded. - Athletic facilities * Value of use of athletic facilities located on EMPLOYER PREMISES can be excluded if open ONLY to employees and their families (not a public gym that happens to be in employer's building). - Educational assistance * Educational assistance for under grad and grad edu is excludible, but the exclusion amount is limited per year. Includes tuition, fees, books and supplies (not room/board) - Adoption expenses * Employee adoption expenses paid or reimbursed by employer are excludible; there's a limited exclusion amount per year. Exclusion phases-out as AGI increases. - Cafeteria / flexible benefits plans * Allows employees to accept lower cash compensation in return for employer agreeing to pay certain costs without employee recognizing income (but you have to use the funds, or you lose it). - No additional cost services * Services provided to employee at no additional cost to employer are non-taxable if: (a) Employe receives services (not property) (b) Employer incurs no sub'l additional cost in providing the services, and (c) Services offered are within line of biz in which employee works - Qualified employee discounts * Excludible if: (a) Discount doesn't exceed gross profit on property (cannot exceed cost), Or 20% of customer prices on services; And (b) Item discounted is from same line of biz in which employee works. However, discount isn't available for realty or investment property. Examples of QUALIFYING fringe benefits for which employers CAN discriminate (don't have to offer it to everyone in order for the value to be excludible): - Working condition fringe * Not taxable if employee could have deducted cost of item if she had paid for it herself (e.g. annual dues to professional org; professional subscriptions) - De minimus fringe (really small, like fridge, occasional dinner money when working late; copy machine use) - Qualified transportation * Can be paid directly by employer or as reimbursement; * Encourage mass transit commuting (transit pass, qualified parking, transportation in commuter highway vehicle) * Note: There are value limits on each of the above. - Qualified retirement planning services * Value of any retirement planning advice or info provided by employer who maintains a qualified retirement plan is excluded from income.

Answer 9

Fines for speeding, smelly load, and not having proper permits = NOT deductible Part-time employee and gas reimbursement = deductible ordinary and necessary expense; Bribe to city council member = NOT deductible;

Answer 10

5. None of the above

Answer 11

5. Both monitoring legislation and spending less than $2,000 for your in-house employee to lobby a federal official

Answer 12

4. The non-lobbying portion that is for a trade not in your line of business

Answer 13

Reasonable

Answer 14

4. Salaries paid to employees after a new business opens

Answer 15

180 months

Answer 16

1. In the year paid or incurred (depending on accounting method)

Answer 17

1. All the expenses are deductible in the year paid or incurred (depending on accounting method)

Answer 18

4. Investigates opening a car rental next door, but decides not to pursue it

Answer 19

All of the $28k, since he is already in that line of business. It doesn't matter whether he goes through with the new business or not.

Answer 20

Bubba is not already in this line of business, however he did ultimately go through with starting up the new business. So, if he makes the election: $5,000 ($53,000 - $50,000) = $2k immediate expense deduction Remaining $51k is amortized straight line over 180 months, or $51k / 180 = $283.33 / month x 6 months (July - Dec) = $1.7k Total current year deduction = $3.7k

Answer 21

* Is the activity conducted in a businesslike manner (separate bank account and accounting records)? * Does the taxpayer have expertise in the area? * How much time the taxpayer spends on the activity? * Will the activity be worth more after the taxpayer has engaged in it?

Answer 22

None of the above; they are all presumed to be a trade or business.

Answer 23

* Cost of goods sold AND otherwise deductible itemized deductions

Answer 24

Nondeductible

Answer 25

* For AGI deductions

Answer 26

14 days or less.

Answer 27

5. All of the above

Answer 28

3. Rented 140 days and used personally for 15 days

Answer 29

1. For AGI deductions

Answer 30

$4,000 Calculation: 4/12 * ($9k + $3k) = $4k

Answer 31

$12,000 Calculation: 4/5 * ($5k + $10k) = $12k

Answer 32

$9k of the $16k depreciation expense Calculation: $25,000 (rental income) Less: Tier 1 deductions (4/12 * ($9k + $3k)) = $4k Less: Tier 2 deductions (4/5 * ($5k + $10k)) = $12k = $9k

Answer 33

$9,600 Calculation: Above the line, FOR AGI deduction = (4/5) * ($9k + $3k) = $9,600 Below the line deduction = $12,000 (original expense amount) - $9,600 (FOR AGI tier 1 deduction) = $2,400

Answer 34

$8,000 Calculation: Tier 1 expenses under Bolton = (4/12) * ($9,000 + $3,000) = $4,000 Below the line deduction = $12,000 (original expense amount) - $4,000 (FOR AGI tier 1 deduction) = $8,000

Answer 35

Below the line deductions.

Answer 36

Primarily personal use

Answer 37

Number of employees

Answer 38

$12,000 Calculation: 4/5 * ($15k) = $12k

Answer 39

Yes. Above the line deductions can be taken even if TP does not itemize. Examples of FOR AGI deductions (IRC Sec. 212): (1) Business Activities ("ordinary & necessary") * Trade or business expenses (sole proprietorship) (Schedule C) * Rental property, royalties, partnerships, S Corps (Schedule E) * Farming (Schedule F) Note: The summary (net profit/loss) from each activity appears on the face of Form 1040. Note: A "trade or business" expense is an expense in pursuit of profit (not personal expense). Distinction w/ hobby is impt. Note: Capital expenditures have to be deducted over time (aka depreciated). (2) Specific activities that are Subsidized * Education expenses * Student loan interest paid * Contribution to an IRA (individual retirement account) Note: Expenses paid in connection with the determination, collection, or refund of any tax are also deductible FOR AGI (e.g. fee paid to accountant for handling tax). Note: Expenses related to tax-exempt income are nondeductible (e.g. fees paid to investment manager for managing tax exempt municipal bond interest). Note: No deduction for lobbying expenditures or political contributions. BUT, taxpayers conducting illegal activities can still deduct COGS and biz expenses.

Answer 40

Income (broadly conceived) Minus: Exclusions (income not subject to tax) = Gross Income Minus: Deductions FOR AGI = AGI Minus: FROM AGI deductions (1) Greater of: (a) Standard deduction or (b) Itemized deductions, AND (2) Qualified Business Income Deduction = Taxable Income Times (x): Tax rates = Income tax liability Minus: Nonrefundable tax credits (e.g. Child Tax Credit, Dependent Care Credit) Plus: Other taxes (e.g. AMT, self-employment taxes) = Total tax Minus: Refundable credits (e.g. Additional Child Tax Credit, Earned Income Credit) Minus: Prepayments (e.g. estimated tax payments, tax withheld, extension payment) = Taxes due (or refund)

Answer 41

Form 1040 Schedule A Itemized deductions include: * Medical expenses (up to 10% of AGI) * Certain state and local taxes (up to $10k) * Contributions to qualified charities * Certain personal interest expenses (e.g. mortgage interest and investment interest) * Personal casualty losses in federally declared disaster areas (Some AGI thresholds or caps apply)

Answer 42

1. CASH METHOD Expenses deducted WHEN PAID (with cash, prop, services). Note: Only small businesses, farms, personal service corps, and certain partnerships can use the cash method. Exception: Current deduction for capital expenditures not allowed (capitalized and depreciated, though some portion may be allowed immediately). Exception: Prepaid items are NOT deductible currently IF they expire or can be consumed beyond the end of year AFTER payment. Prepaid items failing the 1-year rule must be prorated and deducted when they apply. 2. ACCRUAL METHOD Expenses deducted when incurred. Two tests available: (a) All Events Test Deduction when all events have occurred to create the TP liability, and the amt of liability can be determined w/ reasonable accuracy. (b) Economic performance test Accrued services, property or use of prop giving rise to the liability can only be deducted when the service, prop or use of prop has actually been performed, provided or used. Note: Recurring Item Exception (exception to economic performance test, so deduction allowed): * If item is recurring, AND * It is immaterial or accruing results in better reflection of income, AND * All events test is met, AND * Economic performance occurs w/n a reasonable period of time, but not later than time of return filing or 8.5 months after end of tax year, whichever occurs earlier. Note: Reserves for estimated expenses are not deductible. E.g. Warranty Reserves or Allowance for Doubtful Accounts are not deductible under US tax rules.

Answer 43

No and no. Note: Membership dues to trade associations and other groups that are used for lobbying are potentially non-deductible. Take a pro-rata approach: Deductions permitted for dues that do not relate to such activities. Exceptions for businesses: * Expenses paid for monitoring legislation are deductible (only "influence" isn't). * De minimis (<= $2k) in-house lobbying expenditures for otherwise non-deductible lobbying is permitted. But, as soon as you cross $2k, then the entire amount is not deductible.

Answer 44

Closely Held Corps * For closely held corporations, exec compensation is deductible per usual as long as it is "reasonable". Public Corps * Deduction for compensation of CEO, CFO and 3 other highest compensated officers is limited to $1M each.

Answer 45

It depends. If already engaged in that type of biz, then the expenses are deductible whether or not biz is eventually entered / acquired. If NOT already engaged in that type of biz, then deductibility depends on whether biz is entered acquired: 1. If not entered/acquired: Expenses are not deductible. 2. If entered / acquired: Can immediately deduct $5k w/ balance amortized straight-line over 180 months. Dollar for dollar reduction of $5k deduction for amounts >$50k.

Answer 46

A hobby is an activity NOT entered into for profit. Motive is personal pleasure. For hobbies: * Income is includible in gross income; * Expenses are not deductible. - --> Exception: COGS for manufacturing are deductible (only COGS; not other expenses, like rent, etc.). Factors to determine whether hobby or biz: * Businesslike (separate bank accounts; biz plan, etc.) * Expertise of TP * Time and effort * Asset appreciation expected? * Previous success? * History of income / loss * Profits vs. losses * Financial status of TP * Recreation Note: Presumptive Rule: If activity has profit for 3/5 yrs (or 2/7 if horses), the activity is presumed to be a trade or biz rather than hobby. It's a rebuttable presumption (burden shifted to IRS to prove otherwise).

Answer 47

* If ONLY personal use property: If used only for personal purposes, the only types of expenses that are deductible are limited to what's available on Schedule A, related to mortgage interest and property taxes, IF TP itemizes. Note: If you own a property and rent it out, you'd report the income and expenses on Schedule E. In this case, the expenses related to maintaining the property would be deductible. However, what if you run into the situation where it's a little bit of both? What if, for example, you own a vacation home on the beach. Perhaps you use it for two months during the summer, but also rent it out for two months. There are costs associated with maintaining the beach home. You might pay for it to be professionally cleaned, for lawn maintenance, insurance, and utilities. How much of these costs are deductible for tax purposes? 3 possible tax treatments for expenses related to properties. - ----- Primarily PERSONAL use ------ * Definition: Rented <= 14 days * Treatment: No gross income recognized for rentals; no expenses deductible; * The only expenses that are deductible are the typical Schedule A expenses of home mortgage interest and property taxes if you itemize. ------ Primarily RENTAL use ------ * Definition: Rented > 14 days and is NOT used for personal purposes more than the greater of: (i) 14 days, or (ii) 10% of total days rented. * Treatment: TP can deduct all expenses allocated to rental use, even if loss. * Examples of deductible expenses: maintenance costs like cleaning, supplies, utilities, depreciation- all deductible against rental inc), even if there is a loss (which would be deductible against the prop Owner’s other income). * Side note: There may be some limits here, known as passive loss limitations. ------ MIXED Rental AND Personal use ------ * Definition: • Prop rented more > 14 days, and • Personal use is >14 days or 10% of days rented (whichever is greater). * Treatment: TP must allocate rental expenses against rental income and only deduct rental expenses TO THE EXTENT OF rental income. Expenses must be classified into 3 Tiers: * Tier 1: Expenses that’d otherwise be deductible on Sched A if owner itemizes (e.g. mortgage interest & property taxes) * Tier 2: Expenses incurred for rental activity that does not affect property basis. Ex: non-capital opEx, like insurance, supplies, advertising, maintenance, cleaning, real estate broker fees. Expenses NOT included in Tier 2 are capital expenses related to depreciation of prop or equipment (e.g. refrigerators, washing machines, etc.). • Tier 3: Depreciation expenses (aka expenses that affect basis) Tiers 1, 2 and 3 expenses related to the rental activity are deductible FOR AGI. The personal portion of Tier 1 expenses that do not pertain to the rental activity are deductible FROM AGI, IF TP itemizes. Note that you can only deduct expenses FOR AGI that are related to the rental portion of the properties' activity. So the question now is how does the TP allocate the costs between rental and personal days? Tier 1 For tier 1 expenses only, that is, mortgage interest and property taxes, 2 methods are allowed. ``` • The IRS method: # days rented / (# days rented + # days personal use) ``` ``` • Bolton method (Bolton vs. Commissioner, 9th Cir.) # days rented / 365 ``` Tier 2 & 3 • IRS method: # days rented / (# days rented + # days personal use) CALCULATION: • Gross Income from rental activity • Minus: Tier 1 expenses (using IRS method or Bolton method) • If net rental income is positive, then… • Minus: Tier 2 expenses (IRS method) • If rental income is positive… • Minus: Tier 3 expenses (IRS method) Note: Rental expenses cannot create net rental losses for mixed personal and rental use properties. In other words, losses cannot offset TP’s other income (although they are carried forward indefinitely to offset future rental income). Impact of choosing Bolton vs. IRS method for Tier 1 expenses: • The share of Tier 1 expenses deductible FOR AGI will be smaller under the Bolton method than under the IRS method. So why would a taxpayer want to do that? Why would they choose the Bolton method? Well, if a TP knows that she will be itemizing expenses, then in effect, the taxpayer might be indifferent whether the Tier 1 expenses are allocated FOR or FROM AGI. The deduction will reduce gross income one way or another. Where this does matter is that if the net rental income that is left over after having deducted Tier 1 expenses is now relatively higher, because the Bolton method did not allocate very many expenses to Tier 1, then there's more net rental income against which to claim Tiers 2 and 3 expenses against.

Answer 48

4. Driving from the taxpayer's home to the taxpayer's regular place of business

Answer 49

3. Nondeductible

Answer 50

4. Actual expenses or the standard mileage rate

Answer 51

4. How the employer would prefer the worker be classified.

Answer 52

2. Self-employment tax

Answer 53

Schedule C of 1040 They are generally FOR AGI deductions.

Answer 54

If an EMPLOYEE: * Biz/employer must withhold payroll taxes and pay the employer's share of those payroll taxes. * Biz/employer must pay unemployment ins tax, and might be required to provide the employee with certain fringe benefits, e.g. health care coverage. * Unreimbursed expenses are NOT deductible. For example transportation costs employee pays can't be deducted to calculate AGI. If INDEPENDENT CONTRACTOR / self employed: * Biz only has to provide worker with 1099 Miscellaneous at the end of the year. * Instead of payroll taxes being split between employer and employee and totally withheld by the employer, the self-employed individual is responsible for all payroll taxes. * Can deduct biz expenses as FOR AGI deductions. (Whereas an employee that incurs biz-related expenses and is not reimbursed by their employer cannot deduct these expenses). FACTORS to determine whether Employee vs. Independent Contractor: * Control - --> Is person subject to the will and control of another re what jobs shall be done and how it shall be done? * Tools / Place of Work - --> Who provides? * Payments - --> Time spent (salary) vs. task/project performed?

Answer 55

It depends. Business-related Deductions: • Local transportation expenses: Ordinary and necessary costs of traveling from one workplace to another, within TP’s tax home (general area where TP conducts biz). Ex: Uber fares, taxi fares, auto expenses (maintenance), tolls, parking. = Deductible if they’re incurred in the course of a trade or biz. BUT: Commuting from home to a permanent workplace and back is not deductible. So for example, a self-employed individual cannot deduct the cost of driving from his home to his workplace. However, once he is at his workplace, he can deduct any transportation costs while there other than the costs of returning home. There are a few exceptions to the idea that there's no deduction for commuting. These generally all relate to temporary work locations. So first, a self-employed individual can deduct the cost of commuting to a temporary work site that is located outside of the metropolitan area where the taxpayer lives and normally works. So for example, if a self-employed person normally works in Chicago, Illinois, but must travel to Indianapolis, Indiana daily for several weeks for business, then those daily travel cost from the taxpayer's home in Chicago to the temporary worksite in Indianapolis would be deductible. Second, if a self-employed taxpayer has one or more regular work locations away from the taxpayer's residence, the TP can deduct the daily transportation expenses for traveling to a temporary work location in the same trade or business regardless of location. So for example, if a self-employed architect regularly works out of his office but occasionally visits the construction sites of ongoing projects, here the cost of commuting from his home to his office would still be non-deductible. However, he would be able to deduct the cost of traveling from his home to any of the work sites that he visited. This would be deductible because he has a regular work location and his temporary site visits are related to the same trade or business. Under this exception, it doesn't matter whether those construction sites are inside or outside of his metro area. Third, if a self-employed taxpayer has two or more business locations, the cost of traveling between those business locations would be deductible. So for example, a self-employed individual owns a restaurant and it has two locations. The cost of traveling between location one and location two for business purposes would be deductible. Finally, if a self-employed taxpayer's regular place of business is their home, then any transportation costs they incur related to the trade or business will be deductible. So, if a self-employed taxpayer operates their business out of their home, the cost of traveling away from their home for business are deductible. Now that we've discussed when transportation expenses are deductible, how much is deductible especially if for example, the self-employed taxpayer uses his or her own car? Their first option is to use ACTUAL expenses of the vehicle plus depreciation. So this would be the cost of gas, insurance, and maintenance plus the allowance for depreciation. If the taxpayer uses the car for both business and personal use, then the portion of the expenses related to personal use would be non-deductible. As an alternative to the actual expense method, a taxpayer can select an easier simplified method, which is the AUTOMATIC MILEAGE METHOD or the standard mileage rate. With this method, the taxpayer simply multiplies the number of business miles driven by a flat rate set by the IRS every year. This rate is supposed to account for the cost of gas, maintenance, and depreciation. In addition to the automatic mileage rate, you can still deduct any parking fees or tolls paid. Regardless of which method the taxpayer chooses, the taxpayer must keep adequate records regarding the business usage of the vehicle. For example, taxpayer should keep a travel log noting the business purpose and mileage driven for each trip, and if actual expenses are used, the taxpayer needs to keep track of their receipts.

Answer 56

5. None of the above (i.e., they are all deductible)

Answer 57

3. The expenses of the taxpayer (but not the spouse) that would have been otherwise deductible.

Answer 58

4. All of it

Answer 59

Def: Expenses while away from tax home ON BUSINESS. Tax home = place of biz, post, etc. - ---> Need not be 24-hr period, but must be "substantially longer than ordinary work day". - ---> Must be away from tax home for a temporary period (not temp if such period >1 year). Can include: * Transportation (e.g. airfare) * Lodging * Portion of meals * Miscellaneous. If TP's spouse/dependent joins you: * Purpose for travel must serve a bona fide biz purpose, and expenses must otherwise be deductible. * No deduction for spouse/dependent travel unless an employee. If traveling for education (learn something), are travel expenses deductible??? ---> Travel as a form of edu is not deductible. HOWEVER, if you must travel to attend classes or seminars, travel can be deductible. If you travel for biz AND pleasure, are travel expenses deductible? Does it matter if travel is in US vs. foreign??? ---> If USA: If primary purpose is BIZ, travel is fully deductible. If primary purpose is PLEASURE, no deduction for travel, but other expenses (e.g. lodging, etc.) associated w/ BIZ days are deductible. ---> If Foreign jurisdiction: Must allocate btwn personal/biz days, UNLESS: Trip is 7 days or less, OR < 25% of time was for personal purpose, OR TP has no sub'l control over arrangements for the trip. Note on counting travel days vs. biz days: Weekends, holidays, intervening days = biz IF the day before AND after is a biz day.

Answer 60

---- BUSINESS BAD DEBT EXPENSE ---- Let's first cover business bad debt expenses- * Bad debts are deductible FOR AGI deductions. * Def of bad debt: An account receivable arising from credit sales that becomes worthless. A bad debt deduction is permitted ONLY if income arising from the receivable was previously included in income. No deduction if TP uses cash method (for obvious reasons). How to deduct- * Deduct in year when debt is partially OR wholly worthless; * If debt previously deducted as partially worthless becomes totally worthless in future yr, only the remainder not previously deducted can be deducted in the future year. * In the case of total worthlessness, deduction is allowed for entire amount in year debt becomes worthless. Amount deductible- * If debt is from SALE of services or goods and face amount was previously included in income, then that amount is deductible. * If TP PURCHASED the debt (e.g. factoring), deduction is equal to amount paid for debt instrument. In order to deduct a bad debt, the specific charge off method must be used. That is, the business owner must identify the specific customer, and determine that the customer will not pay. TP biz owners cannot estimate how much of her credit sales will go uncollected, and then deduct that estimate. In general, for tax purposes estimates or reserves aren’t allowed for deductions. The next question is, how much can the business owner deduct? The deductible amount depends on the basis in the bad debt. That is, what's the ownership stake or the capital that the business owner is entitled to in the A/R? If the debt is from the sale of services or goods, and the face amount was previously included in income, then that amount is deductible. For example, if I sell a customer a $100 worth of goods, and the customer doesn't pay me, then I can write off the basis that I have in the accounts receivable or $100. Generally speaking, taxpayers establish basis when they purchase something or pay tax on something. If the taxpayer purchased the A/R (e.g. factoring), then the deduction is equal to the amount paid for the debt instrument. For example, if I pay $10,000 to purchase $15,000 of a hospital's receivables, and then I cannot collect the $15,000, then my deduction is limited only to the $10,000 capital that I invested to purchase the receivables. ---- PERSONAL Bad Debt Expense ---- Non-biz bad debts are debts unrelated to TP's trade or biz. Deduct as short-term capital loss in year that the amount of worthlessness is known with certainty. ** No deduction allowed for PARTIAL worthlessness of a nonbiz bad debt. ** Deduction for net capital losses is FOR AGI, but limited to $3k per year. Can carry forward the remainder. Note: If related party (e.g. relative, partnership, etc.): Loan is generally treated as gift unless a bona fide debt relationship based on a valid and enforceable obligation to pay a fixed determinable sum of money (facts and circumstances determine whether gift or loan).

Answer 61

Probably not. Based on the facts, it sounds more like a gift than a loan.

Answer 62

1. A for AGI deduction

Answer 63

3. A short-term capital loss (that also reduces AGI)

Answer 64

1. Cash method

Answer 65

4. Only if they were previously included in taxable income AND a specific customer is identified and a specific amount is deemed uncollectible

Answer 66

4. A non-deductible gift

Answer 67

3. Section 199A

Answer 68

2. A from AGI deduction

Answer 69

4. Specified service business income is excluded AND the deduction is limited to (a) 50% of wages or (b) 25% of wages + 2.5% of certain qualifying property

Answer 70

1. Partnerships 2. Sole proprietorship 4. S-Corporations

Answer 71

The QBI deduction is a 20% deduction for individuals who have qualified biz income (QBI), typically from pass-through entities (S Corp, LLC, Partnership) or a sole proprietorship. * QBI does not include non-biz interest, dividends, and capital gain/loss, nor does include compensation (e.g. wages). It is a FROM AGI deduction; does not matter matter if TP also has the standard deduction or itemizes deductions. LIMITATIONS: The amount of the deduction will be the LESSER of: * 20% of TP's QBI from all qualified trades/businesses; OR * 20% of excess of the TP's total taxable income over net capital gain. Also, 2 additional imitations apply to TP's with taxable income above threshold ($157,500 Single or $315k MFJ in 2018): * Limitations phase-in over $50k ($100k MFJ) * Amounts indexed for inflation ---> For TPs above the threshold amount, QBI does NOT include income earned from a "specified service biz" (e.g. lawyer, accountant, fin services, athlete, health, consulting, etc.). ---> For TPs above the top end of the phase-out range, the QBI deduction is limited to the greater of: (a) 50% of the W-2 wages relating to the qualified biz, or (b) 25% of the W-2 wages + 2.5% of the unadjusted basis of qualified property (generally depreciable property used in biz for the depreciable life or 10 years, whichever is greater).

Answer 72

QBI Deduction = 20% x the lesser of ( ($12M) or (taxable income ($10M) - net capital gain ($0)). So, QBID = 20% x $10M = $2M Check whether there is a limitation (aka a max cap applied to QBID)... QBI is limited to $2M, which is 50% x $4M wages since Natalie's income is above the threshold of ~ $157.7k in 2018. We don't need to calculate the alternative cap (25% of W2 wages + 2.5% of property), since the wage test (50% x $4M) = $2M, which covers the QBI deduction amount needed.

Answer 73

2017 and earlier: 2-year carryback & 20-year carryforward 2018 and later: Indefinite carryforward

Answer 74

4. A for AGI deduction

Answer 75

4. Nondeductible

Answer 76

What happens if a business has expenses that exceed income for the year? The business generates a Net Operating Loss or NOL. A NOL in one-year can offset taxable income in other years indefinitely, up to 80% of taxable income (these rules apply to NOLs created on and after 2018. In general, the only thing that can create a NOL is a loss from a trade or business, or losses from certain foreign government confiscations. Personal losses and deductions if they exceed personal income, cannot create a NOL. So if your standard deduction or itemized deductions are greater than your income for the year, you cannot create a personal NOL which you can then use to offset future income. For a NOL created before 2018, the rule was that the loss was carried back two years and then carried forward 20 years. So for example, a loss in 2017 would first be carried back to 2015, then to 2016 and then will carry forward into 2018 and onward until it was all used up or expired after 20 years. What happens if you have multiple NOLs? How do you know which one to use? You use the oldest ones first. Taxpayer should want to use the oldest NOLs first, because the oldest NOLs are going to be the ones that are pre-2018 NOLs, ones that would be subject to expiration. Plus, these older NOLs have the added benefit of not facing that 80% of taxable income limitation that NOLs created in 2018 and later will face.

Answer 77

A casualty loss is a loss resulting from sudden or unusual events like a storm, a fire, a shipwreck or a theft. BUSINESS PROPERTY If the casualty loss relates to a business, the loss which is NET of any insurance proceeds or other reimbursements is going to be deductible as a FOR AGI deduction. PERSONAL PROPERTY Prior to 2018, casualty losses related to personal use property for example your home, your car, or your personal computer could have been deductible as an itemized deduction subject to some limitations. But, with TCJA personal casualty losses are non-deductible UNLESS they occur in a federally declared disaster area. So if your house floods as a result of a hurricane and the hurricane results in your area being declared a federally declared disaster area, then your loss is deductible (but there are limitations). But if your house floods because of a storm that isn't strong enough to warrant a federal disaster declaration, then the loss you sustain on your home would be non-deductible.

Answer 78

4. Qualify the taxpayer for a new trade or business

Answer 79

1. A for AGI deduction for self-employed taxpayers

Answer 80

2. Nondeductible

Answer 81

2. Nondeductible

Answer 82

2. Lifetime Learning Credit

Answer 83

Educational expenses are a deductible business expense IF they are incurred to maintain or improve existing skills or to meet the express requirements of the employer or requirements imposed by law to retain employment status. The types of expenses are deductible here include tuition, books and supplies, as well as the cost of transportation, travel and 50% of the meals while you're traveling for the course. However, the cost of any education that qualify a taxpayer for a new trade or business are not deductible. For ex, if a self-employed CPA decided to attend law school part-time at night to improve his tax knowledge those educational cost would be non-deductible bc law school qualifies someone to be a lawyer which is a new trade or business, even if the CPA does not plan to practice as a lawyer. Conversely if a self-employed CPA were to take part-time classes and a Master of Accountancy program to improve their knowledge these will likely be deductible as that degree would improve the CPAs existing knowledge and skills, but it would not qualify the CPA for a new trade or business. Now back to minimum requirements, the cost of meeting the minimum educational requirements for trade or business are not deductible. So the cost of an accountant study pass CPA exam or for an attorney to pass a bar exam would be non-deductible. However, once the minimum requirements are met for the first time, future educational expenses to meet increased requirements are deductible expenses to retain employment. For ex, suppose a hospital has employed a nurse for many years at the time the nurse was hired they only held a bachelor's degree, which was the minimum education required for the position at that time. Subsequently the min requirements to be a nurse at that hospital increase to holding a master's degree. Since the nurse already met the minimum requirements once, the hospital would be able to deduct the educational cost of the master's degree for the nurse. However, the cost of obtaining a master's degree for a new nurse who had not previously met the minimum educational requirements would not be deductible. As a reminder, the Tax Cuts and Jobs Act suspended the deduction for unreimbursed employee expenses. So from tax year 2018 - 2025 an employee who spends money on educational expenses and is not reimbursed by their employer is not going to be able to deduct those unreimbursed expenses on their tax return. However, the expenses may qualify for a tax benefit under a different provision for non-business educational costs. For ex: The American Opportunity credit or the Lifetime Learning Credit. The American Opportunity Credit is a $2,500 tax credit per student for college education. The credit is equal to 100% of the first $2,000 in qualifying expenses and 25% of the next $2,000 in qualifying expenses. Up to 40 percent of the credit is refundable, meaning not only can it reduce your tax bill to zero, but it can also generate a refund. The American Opportunity Credit is only available for the first four years of undergraduate education. The Lifetime Learning Credit is a non-refundable tax credit up to $2,000 per TP for undergraduate or graduate education. The credit is computed as 20% of the first $10,000 of qualified education expenses. Qualified expenses for both credits include tuition and academic fees required for enrollment or attendance at an eligible education institution which includes most colleges. One point of difference is that in general textbooks count for the American Opportunity Credit, but not the Lifetime Learning Credit as a qualified expense. For both credits, all qualified expenses must be reduced by any tax-exempt scholarships or fellowships received. Both the American Opportunity Credit and the Lifetime Learning Credit are phased out for higher-income taxpayers once their AGI reaches a certain threshold.

Answer 84

American Opportunity Credit (AOC) * A $2,500 credit per student (100% of first $2k in qualified expenses and 25% of the next $2k). * Up to 40% is refundable * Qualified expenses: - ---> Tuition and required academic fees (does not include non-academic fees like student activity or athletic fees). - ---> Books, supplies and equipment Lifetime Learning Credit (LLC) * $2k NON-refundable tax credit per TP (20% of the first $10k in qualified expenses). * Qualified expenses: - ---> Tuition and required academic fees (does not include non-academic fees like student activity or athletic fees). - ---> Books, supplies and equipment IF they take the form of a required academic fee that must be paid to the University. BOTH AOC and LLC phase out: * Both credits phase-out over a $10k range ($20k MFJ) start at: ----> AOC: $80k ($160k MFJ); NOT adjusted for inflation. ----> LLC: $58k ($116 MFJ) for 2019; adjusted for inflation.

Answer 85

1. A for AGI deduction for self-employed taxpayers

Answer 86

4. All of the above are requirements.

Answer 87

5. 100% While most entertainment expenses are nondeducttible and most meals are 50% deductible, there is an exception for social events primarily for the benefit of employees. These expenses are 100% deductible.

Answer 88

4. Nondeductible

Answer 89

2. A for AGI deduction with no floor

Answer 90

3. $15,000

Answer 91

3. $150,000

Answer 92

5. All of the above

Answer 93

1. If the work location is outside the taxpayer's metro area; 3. If the work location is inside the taxpayer's metro area, they have a regular place of business away from their home, and the temporary work location is related to the same trade or business;

Answer 94

3. Classes to study for the CPA exam

Answer 95

3. Nondeductible

Answer 96

4. All of the above

Answer 97

Business-related meals, entertainment, and home office expenses. As a reminder, employees are not allowed to deduct the unreimbursed employee expenses. So, these expenses to the extent they are deductible, are only going to be deductible by businesses. Right now we're going to talk about these expenses in the context of a self-employed individual. **** Meals: 50% deductible **** ----> As long as (i) it isn’t lavish or extravagant under the circs, and (ii) an employee is present (can’t just give client $$ to go eat)) Transportation costs (e.g. to/from meal): 100% deductible *** Entertainment expenses: 0% deductible since TCJA *** ----> Examples of entertainment expenses: a country club membership; tickets to concerts, sporting events; golf; etc. ----> Exceptions: Expenses for recreational and social activities primarily for the benefit of employees are 100% deductible for meals AND entertainment (e.g. annual company party; team building; etc.). Note: Professional dues, e.g. paid to a trade or biz org are 100% deductible, unless a part of that due is for lobbying. **** Home Office **** For a portion of the cost of a home office to be deductible, the office must be used exclusively and on a regular basis as the principal place of business or place of business used by customers. A principal place of business is where are the taxpayer conducts administrative and management activities and there is no other fixed location where the taxpayer conducts the activity. Limitations: ----> Home office expenses are limited to the gross income generated in the business activity minus the expenses unrelated to the use of the home (e.g. operating expenses). If this net income is positive, then the taxpayer would be eligible for the home office deduction. But they can only deduct as much as there is a net income left. If the home office expenses exceed net business income, then these are disallowed in the current year and carried forward indefinitely and can be deducted in future years, but subject to the same limitations. ----> Once the taxpayer knows how much they can deduct in the current year, their home office expenses are deductible in three tiers. You keep moving down the tiers, until you exhaust your allowable deduction amount. Then the remainder if any, becomes the carried forward. * First, the taxpayer will deduct expenses related to the home, that would otherwise be deductible even if the home office wasn't there (e.g. mortgage interest and prop taxes). But instead of these expenses being deducted on Schedule A as an itemized deduction, they would be deductible on Schedule C as a FOR AGI deduction. * Second, the taxpayer would deduct other operating expenses like utilities, phones, Internet, security, lawn care, home maintenance, and insurance. * Third, a taxpayer would be able to take depreciation deductions related to the Home Office portion of the home. The deductible portion is going to be pro-rated between the portion of your home used for business and the portion of the home that you live in. So for example, if 20% of the square footage of your home is being used by the Home Office, then 20% of your home mortgage interests, property taxes, home maintenance, heating utilities, etc., would be deductible as the home office expense. Alternatively, if you don’t want to keep track of actual expenses, there is an optional simplified method, where you can just multiply your Home Office square footage by a set dollar amount. But, this usually results in a smaller deduction than the actual expenses.

Answer 98

4. Insulin

Answer 99

4. All of the above

Answer 100

5. All of the above

Answer 101

5. All of the above

Answer 102

4. Food consumed en route because the medical facility was over six hours away

Answer 103

Itemized deductions are PERSONAL expenditures deductible FROM AGI, such as: * Medical * Taxes * Interest * Charity Note: Itemized deductions provide a tax benefit only to the extent that they, in total, exceed the standard deduction. Itemized deductions are reported on Schedule A.

Answer 104

Personal medical expenses are generally a FROM AGI Itemized deduction reported on Schedule A. They are deductible only to the extent of UNREIMBURSED expenses that in total exceed 7.5% of AGI. So, for ex if a TP's AGI is $100k, then the first $7,500 of medical expenses would be NON-deductible. But any amount in excess of $7.5k would be an itemized deduction. What qualifies as a medical expense? * For the diagnosis, cure, mitigation, treatment, prevention of disease, or * The purpose of affecting any structure or function fo the body of the TP, spouse, or dependents. -- Examples of qualifying medical expenses: * Transportation and lodging to/from medical care: ----> Mileage: $0.18 / mile ----> Lodging: $50 / person, per night ----> Tolls ----> Parking Note: Meals en route are NOT deductible. * Physician visits (physical, mental, dental) * Hospital * Physical therapy * Prescription drugs and insulin * Special equipment (e.g. wheelchairs; artificial limbs; crutches) * Insurance premiums * Rehab programs * Weight loss programs for obesity * Glasses; contacts * Hearing aids * Nursing home expenses (including meals and lodging) IF the primary reason is medical. If it's personal (e.g. nowhere to go), then only specific medical costs qualify. * Special school: Expenses deductible for mentally or physically disabled individual. Allowed if principle reason for attendance is the school's special resources. Cost of tuition, meals, and lodging is allowed as a deduction. * Capital medical expenditures: e.g. pools, air conditioners, dust elimination systems, elevators, etc. Deemed medically necessary by physician, used primarily by patient. - ---> Normally, the cost would just be an adjustment to home "basis" and be nondeductible. HOWEVER, if a capital expenditure for PERMANENT improvement or made for operation and maintenance of an improvement, then may qualify as a medical expense. Deductible only to the extent that the cost exceeds the increased value in the home. Exception: removal of structural barriers to home of disabled person is deemed to add no value, so full amount is a qualifying medical expense. For ex, let's say you're putting in a swimming pool for a severely arthritic TP costs $50k. However the increase in the home's value is only $30k. In this case, $30k would go to the home basis, and $20k could be a medical deduction (to the extent that it exceeds 7.5% of AGI. ----- Examples of expenses that DO NOT qualify ---- * General health (vitamins, gym membership) * Non prescription drugs * Unnecessary cosmetic surgery. * Funeral expenses * Diapers * Maternity clothes * Energy drinks * Massage