R1 M3 - Gross Income: Part II Flashcards
(14 cards)
Expenses:
- State and local business taxes paid
- Bad debt direct write off
- Legal and Professional Services
- Interest exp on business loan (Interest exp paid in adv by cash basis taxpayer cannot be deducted until the tax year/period to which the interest relates). The business interest expense deduction is limited to the sum of:
-Business interest income.
-30% of adjusted taxable income (ATI; and)
-Floor plan financing interest expense
Nondeductible Expenses (on Schedule C)
- Salaries paid to the sole proprietor
- Federal Income Tax
- Entertainment Expenses
- Personal portion of:
- Automobile, travel and meal exp
- State & Local tax exp
- Interest Exp (relates to invest interest/ mortgage interest)
Remember the foreign travel rule has to be specific for business to be deducted as business expense
Earning from Self-employment are subject to the income tax as well as federal self-employment tax.
Rented fewer than 15 Days
If the residence is rented for fewer than 15 days per year, it is treated as personal residence.
The rental income is excluded from income, mortgage interest (first or second home) and real estate tax are allowed as itemized deduction (Sch A).
Depreciation, utilities and repairs are not deductible
Rented 15 or More Days
If the residence is rented for 15 or more days, and is used for personal purposes for the greater of (i) more than 14 days or (ii) more than 10% of the rental days, it is treated as a personal/rental residence.
Expenses must be prorated between personal and rental use (utilities, insurance, depreciation and etc).
The basic formula for determination of net rental income or loss follows:
What are flow through entity? What types of flow-through entity?
Flow through are income, gains, deduction, and losses that are taxed and transferred over to the owner’s schedule k-1.
- Partnership
- S corporation
- LLC
Guaranteed payment to partners is deductible on Form 1065 to get to ordinary income
On Schedule K-1, guaranteed payment are taxed as ordinary income to the partner’s individual tax
List of separately stated items
** S corporation**
A shareholder in an S corporation can be an employee of the corporation. The individual shareholder-employee would receive a salary for the services rendered to the S corporation; therefore, the payments should be classified as deductible wages reportable on Form W-2.
Partnership
Unlike S corporations, a partner in a partnership cannot be an employee of the partnership, so a partner cannot receive a salary for the services rendered. Instead, the partnership gives the partner a guaranteed payment as compensation for the services rendered. Guaranteed payments are reported on the partner’s Schedule K-1 and included in ordinary income on the partner’s individual income tax return, rather than being reported as wages
Task Based Simulation
Richard Norton is required to pay self-employment tax based on the net profits of his Schedule C business. For purposes of this task, assume that Richard had a net profit of $105,000 from the business for Year 3 and $1,000 of interest income from the business bank account. Also assume that the maximum earnings from self-employment for the Social Security tax are $168,600 for Year 3. Assume the following rates: 12.4 percent for Social Security and 2.9 percent for Medicare.
What is the amount of self-employment income?
Net earnings from self-employment?
Self-employment tax?
Adj for self-employment tax paid?
105,000
- Only 92.35 percent of the amount of business income on row 1 is defined as net earnings from self-employment. The 92.35 percent is built into Schedule SE. $105,000 × 0.9235 = $96,968.
- The full amount of net earnings from self-employment on row 2 is below the Social Security maximum for the year of $168,600 (2024). Therefore, the entire amount is subject to the full 15.3 percent tax (12.4 percent Social Security and 2.9 percent Medicare). $96,968 × 0.153 = $14,836.
4.Self-employed taxpayers are allowed to take a deduction as an adjustment on Form 1040 for 50 percent of the self-employment tax paid. $14,836 × 50% = $7,418.
For purposes of the self-employment tax, what are the net earnings from self-employment?
- Sole proprietorship income on Schedule C
- Income from a general partnership from Schedule K-1
(Note that Income as a limited partner from a limited partnership from Schedule K-1 is not included is not a net earnings from self-employment)
Which of the following would preclude a taxpayer from deducting student loan interest expense?
A. The taxpayer is taken as a dependent of another taxpayer. B. The total amount paid is $1,000. C. The taxpayer is married filing jointly with AGI of $120,000. D. The taxpayer is single with AGI of $55,000.
Explanation
Choice “A” is correct. This deduction is not allowed if the taxpayer is a dependent of another taxpayer.
Choice “B” is incorrect. There is a limitation of $2,500 on the deduction. $1,000 is well below this limit, so it is all deductible.
Choice “C” is incorrect. $120,000 of AGI is below the MFJ phase-out for the student loan interest expense adjustment.
Choice “D” is incorrect. $55,000 of AGI is below the single phase-out for the student loan interest expense adjustment.
Which of the following would preclude a taxpayer from deducting student loan interest expense?
A. The taxpayer is married filing jointly with AGI of $135,000. B. The taxpayer claims a dependent on his or her income tax return. C. The total amount paid is $1,000. D. The taxpayer is single with AGI of $110,000.
Explanation
Choice “D” is correct. $110,000 of AGI is above the current year student loan interest expense AGI limitation for a single taxpayer.
Choice “A” is incorrect. $135,000 of AGI is below the current year student loan interest expense AGI limitation for a married taxpayer.
Choice “B” is incorrect. This deduction is not allowed if the taxpayer is a dependent of another taxpayer. But there is no requirement that the taxpayer cannot have a dependent of his or her own.
Choice “C” is incorrect. There is a limitation of $2,500 on the deduction. $1,000 is well below this limit, so it is all deductible.
For tax years beginning after December 31, 2020, a net operating loss cannot be carried back, but can be carried forward indefinitely.
