Topics to Remember Details for Flashcards
(18 cards)
QBI Deduction Rules
QBI deduction is 20% of qualified business income and cannot exceed 50% of W-2 wages or 25% of W-2 wages plus 2.5% of unadjusted basis of qualified property
Cannot exceed 20% of taxable income without regard to QBI deduction and net capital gain
Excludes service businesses unless under $383,900 (MFJ) or $191,950 for everyone else
Permanent differences
Tax-exempt interest on state and local bonds
Key-person life insurance premiums and proceeds
Nondeductible meals and entertainment
Political contributions
Fines and penalties
Temporary differences
Depreciation and amortization
Receipt of prepaid income
Accrued expenses that fail the all-events test
Net capital losses
Bad debts *(allowance vs direct write-offs)
Excess business loss limitation
$610,000 for married $305,000 for others
excess business losses are not deductible in the current year, carry forward and are treated as part of the taxpayer’s net operating loss carryforward in subsequent years
subject to the 80% limit on NOL deduction
Half-year depreciation
the general assumption for personalty
not in the tables for the year of disposal
Mid-quarter depreciation
applies if more than 40% of personalty acquired in a year is placed in service during the fourth quarter
Mid-month depreciation
Depreciation for realty
one half of month depreciation is allowed for the month in which the property is disposed of (not built into IRS table)
Depreciation lengths
3 years - Small manufacturing tools, racehorses and breeding hogs, special handling devices used in food manufacturing
5 years - Cars, trucks, busses, helicopters, computers, typewriters, duplicating equipment, breeding and dairy cattle, cargo containers, new farming machinery and equipment
7 years - Office furniture and fixtures, railroad cars and locomotives, most machinery and equipment
10 years - Single-purpose agricultural and horticultural structures; assets used in petroleum refining, vessels, barges, and other water transportation equipment; fruit- or nut-bearing trees and vines
15 years - Certain building improvements; land improvements such as fencing, roads, sidewalks, bridges, irrigation systems, and landscaping; telephone distribution plants; pipelines; billboards; and service station buildings
20 years - Certain farm buildings, municipal sewers
25 years - Commercial water utility property
27.5 years - Residential rental real property (duplexes and apartments)
39 years - Nonresidential real property (office buildings, factories, and warehouses)
50 years - Railroad grading or tunnel bore
Depreciation for passenger automobiles
5 year MACRS depreciation
$12,200 in year one, $19,500 in year two, $11,700 in year 3, and $6,960 for all years following
Installment sale
Permits deferral of gain until cash is received
Gross Profit Percentage (GP%) can be used to calculate the gain recognized in the year of sale and each subsequent year by multiplying it with the cash received during the year
GP%=Gain RealizedSale Price
Does not apply to interest received on an installment note
Section 1231 Assets
real and depreciable/amortizable properties used in a business and held long-term
Examples
Machinery
Furniture
Equipment
Section 1231 treatment
netting process, best of both worlds, capital gains are capital, capital losses are ordinary
if there is a previous section 1231 gain in the last 5 years then the future gains are ordinary income
MFJ or MFS requirements
if married on the last day of the year
or if widowed during the year, if kids then for the next 2 years - surviving spouse
If spouse incomes are similar, single rates generate lower overall tax (marriage penalty)
If spouse incomes are dissimilar, married rates generate lower overall tax (marriage bonus)
MFJ rates apply to Surviving Spouse status - a widow/widower with a dependent child for two years after the death of spouse
MFS - less favorable than single rates
HOH requirements
used if the taxpayer maintains a home for either a child (need not be dependent) or dependent relative
Single requirements
default filing status for unmarried individuals
List the four steps for computing individual taxable income.
- Calculate total income
Total income - total salary, wages, fringe benefits, and net business income from sole proprietorship or partnership or S corporation
Investment income - interest, dividends, capital gains, rental income - Calculate adjusted gross income (AGI)
Total income - specific above-the line deductions
Important because many deduction and credits are limited by reference to AGI - Subtract standard deduction or itemized deductions
Subtract the greater of allowable itemized deductions or standard deduction
MFJ = $29,200
MFS = $14,600
HOH = $21,900
Single = $14,600
MFJ, MFS and blind or over 65 is another $1,550 per person
HOH or Single and blind or over 65 is another $1,950
Dependent on another return = limited to the greater of $1,300 or earned income plus $450
Only a minority of people itemize
Can move expenses around so every other year has greater itemized deductions to be greater than the standard deduction
Itemized deduction may have limited or no effect on taxable income
Whether something is an above the line or itemized deduction changes from year to year depending on the tax policy
4. Subtract the QBI deduction amount
20% * qualified business income
QBI is income earned through a sole proprietorship, partnership, or S corporation less certain deductions including deduction for self-employment tax
Types of court
Tax Court - no jury, but don’t have to pay the tax prior
District Court - jury, but do have to pay the tax prior
For taxpayers with a claim of less than 50,000 there is a small claims tax court
trials cost a lot of time and money, IRS tries to avoid going to court
UDIPTA Calculation
UDITPA: Uniform Division of Income for Tax Purposes Act
UDITPA formula: Sales Factor + Payroll Factor + Property Factor3=State Apportionment %
Sales Factor: Gross receipts from sales to in-states customersTotal gross receipts from sales
Payroll Factor: Compensation paid to employees working in-stateTotal compensation
Property Factor: Cost of real or tangible personal property located in-stateTotal cost of such property
Over ½ of the states double-weight sales to favor in state businesses
Some states only consider sales factor
