REG Concepts Needing Review

Question 1

Inventory practices NOT used for tax purposes:

Answer 1

1. Deducting a reserve for price changes or an estimated amount for depreciation in the value of the inventory
2. Taking work in process or other parts of the inventory at a nominal price or less than its full value
3. Omitting part of the stock on hand
4. Using a constant price or nominal value for so-called normal quantity of materials or goods in stock
5. Including stock in transit, shipped either to or by the taxpayer, the title to which the taxpayer does not hold
6. Separating direct production costs into fixed and variable production cost classifications and then allocating only the variable costs to cost of goods produced, while treating fixed costs as period costs that are currently deductible (the direct cost method)
7. Treating all or almost all indirect production costs (whether fixed or variable) as period costs that are currently deductible (the prime cost method)

Question 2

Some acceptable practices to use for tax purposes:

Answer 2

1. Specific-cost-identification method (cost method).
2. Retail method used with the FIFO method.
3. Lower-of-cost-or-market method.

Question 3

Standard inventory methods:

Answer 3

Question 4

Purchase merchandise costs:

Answer 4

Cost = Purchase price - Trade discounts + Handling charges

Question 5

Percentage-of-completion method

Answer 5

Question 6

When can the completed-contract method be used?

Answer 6

Only for :

1. Home construction projects, or
2. Small business with gross receipts $29 million or under for the 3 preceding years and projects that take 2 years or less to complete

Question 7

Calculate deductible warranty expense:

Answer 7

Question 8

Taxpayers that use the accrual accounting method:

Answer 8

1. C corporations,
2. Partnerships that have a C corporation as a partner,
3. Trusts that are subject to the tax on unrelated income, and
4. Tax shelters.

Any entity that is not a tax shelter and has average gross receipts of not more than $29 million may also use the cash method of accounting. An entity meets the $29 million gross receipts test if the annual gross receipts for the 3 tax years ending with the prior tax year do not exceed $29 million.

Question 9

Who can qualify for tax-exempt status?

Answer 9

To qualify for tax-exempt status, an organization must be a corporation, community chest fund, or foundation. An individual or a partnership cannot qualify.

Question 10

Installment method:

Answer 10

Question 11

Installment method tidbits:

Answer 11

Depreciation is deducted from initial asset cost if it is unrecaptured undered Sec. 1250.

Under Sec. 1245 depreciable property then the depreciation is fully recaptured in the year of sale regardless of payments received.

Question 12

Donations to allowed organizations that are tax deductable:

Answer 12

1. Corporations organized under an Act of Congress
2. All 501(c)(3) organizations except those testing for public safety
3. Cemetery companies (for the general care of the cemetery, not a specific plot)
4. Cooperative hospital service organizations
5. Cooperative service organizations of operating educational organizations
6. Child-care organizations

Question 13

A private foundation becomes a public charity when?

Answer 13

More than a third of support from members and the general public.

Question 14

A charitable, religious, or scientific organization is presumed to be a private foundation unless it either?

Answer 14

Is a church, or has annual gross receipts under $5,000 or

Notifies the IRS with Form 1023 within 27 months from the end of the month it was organized that it’s no longer a private foundation

Question 15

Unrelated business income (UBI) tax return (Form 990-T) is required?

Answer 15

From an exempt-organization that has at least $1,000 of gross income used in computing the UBI tax for the tax year.

Gross income = Gross receipts - COGS

Question 16

What are the exceptions for exempt organizations to participate in lobbying?

Answer 16

No substantial part of activities of an exempt organization operated exclusively for scientific purposes may be attempts to influence legislation or a political candidacy. However, most organizations can elect to replace the substantial part of activities with a lobbying expenditure limit. An organization that exceeds the lobbying expenditure limit will be subject to an excise tax of 25% of the excess amount.

Question 17

Advances on commissions:

Answer 17

Commissions received in advance are included in gross income in the year received if the taxpayer has an unrestricted claim to such amounts.

If any portions are repaid in the same year then they are deducted from gross income.

Question 18

Ways to lose exempt status:

Answer 18

1. Net earning cannot be disbursed or benefit any private shareholders (organizations).
2. Engage in prohibited transactions.
3. 35% or more of receipts come from other sources than membership fees, dues, and assessments.

Question 19

A simple trust has the following characteristics:

Answer 19

1. It requires current distribution of all its income
2. It requires no distribution of the res (i.e., principal, corpus)
3. It allows no charitable contributions

Question 20

Gross income from self-employment business that sells products or commodities.

Answer 20

Question 21

Business meals and travel expense deductions:

Answer 21

Question 22

Start-up and organizational costs:

Answer 22

Up to $5,000 start-up and/or organizational costs can be deducted. Anything over $5,000 is capitalized and amortized over 180 months beginning in the month business begins.

Question 23

FICA