R1 Flashcards
Computation of Income General Rule
IRC: compensation and wages
Taxable = Income is FMV = Basis is FMV Nontaxable = Income is NONE = Basis is NBV
Accrual Method
Revenue is taxable when earned
accordance w GAAP
Cash Method
Recognition when revenue is received in cash or FMV property
Types of Income
Ordinary
Portfolio
Passive– only passive loss can offset passive income
Capital– sales of capital assets create capital gains/losses
Partially Taxable Fringe Benefits
Premiums above the first $50,000 of coverage are taxable income
calculated from IRS table
Nontaxable Fringe Benefits
- Life Insurance Proceeds (but the interest is taxable)
- Accident, Medical, and Health Insurance paid by employer ***
- De Minimis Fringe Benefits
- Meals and lodging
- Employer Payment of Employee’s Educational Expenses up to $5,250 is excluded from income
- Qualified Tuition Reductions
- Qualified Employee
- Qualified Pension, Profit-Sharing, and Stock Bonus Plans (withdrawal is taxable)
- Flexible Spending Arrangements
Flexible Spending Arrangements
Pretax deposits into employee’s account elected by employee
Forfeit funds not used w/i 2 1/2 months after year end
Tax-exempt Interest Income
IRC: Allowance of deductions
- State and Local Government Bonds/Obligations
- Bonds of a US Possession
- Series EE when used to pay for higher education (reduced by tax-free scholarships)
phase out: when modified AGI > 77,550 for single/HoH & 116,300 for MFJ - Veterans Administration Insurance
Unearned Income of Child Under 18 (kiddie tax)
net unearned income of dependent child under 18 (or 24 student) is taxed at parent’s higher rate
- net unearned income = total unearned income - standard deduction of 1,050 - another 1,050 taxed at child rate
Forfeited Interest
ADJUSTMENT
penalty for early withdrawal of savings
Dividend Income Tax Rates
15% - most taxpayers
0% - low income tax payers
20% - high income taxpayers
Tax-Free Distributions
- Return of Capital (No E&P)
- Stock Split
- Stock Dividend (unless cash or property was an option)
- Life Insurance Dividend
Capital Gain Distribution
TAXABLE
Distributions of a corp that has no E&P and shareholder already recovered the entire basis (return of capital)
Is State and Local Tax Refund taxable?
if itemized deduction in prior year, state or local refund is taxable
if standard deduction (1040EZ) in prior year, nontaxable
Divorce Payments
Alimony - income to spouse receiving - deductible by contributing spouse Child Support - paid off before alimony - nontaxable to spouse receiving - not deductible by contributing spouse Property Settlements - nontaxable to spouse receiving - not deductible by contributing spouse
Schedule C Nondeductible Expenses
- Salaries paid to sole proprietor
- Federal Income Tax
- personal portion of:
automobile, travel, vacation
personal meals and entertainment
interest expense
state and local tax (itemized deduction on sched A)
health insurance of sole proprietor (adjustment) - bad debt expense of cash basis taxpayer
- charitable contributions
Schedule C Expenses
- COGS
- salaries and commission paid to other
- state and local business taxes
- office expenses
- actual auto expenses for business
- depreciation of business assets
- interest expense on business loans (must be incurred and paid)
- employee benefits
- legal and professional services
- bad debts for accrual basis taxpayer only
Net Business Income or Loss (Schedule C)
Net Business Income is TAXABLE (2 taxes) 1. income tax 2. Federal self-employment tax Net Business Loss (NOL) - deduct against other sources of income - carryback 2 carryforward 20
Uniform Capitalization Rules
Capitalized as Inventory - DM - DL - factory OH Period Expense - SGA - R&D ** more R1-30
Long-Term Contracts
-% of completion required for nonexempt LT contracts
- exemptions:
small contractors
home construction
services by architects, engineers, designers, construction management advisors, and software implementation personnel
services performed under warranty and maintenance agreements
% of completion method income recognition
- Cost to Cost Method
ratio of total costs incurred divided by total expected costs to be incurred - Gross Income Recognition
multiply the cost to cost ratio ^ by total contract price and subtract amount of income that was recognized in prior years
Farming Income
R1-36
Cash Basis and Accrual Method
IRA Income
Traditional Deductible IRA - withdrawal taxed Roth IRA - withdrawal nontaxable Traditional Nondeductible IRA - principal: nontaxable - accumulated earnings: taxable Penalty Tax 10% if withdrawn before 59 1/2
Exceptions to Penalty Tax
HIM DEAD Home buyer: 1st time, $10,000 max Insurance (medical): a) unemployment compensation for 12 weeks b) self-employed Medical expenses > 10% AGI Disability Education And Death
