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Becker Regulation 1 Flashcards

1
Q

Under what accounting basis are individual tax returns prepared?

A

Cash Basis.

Note: This basis is NOT allowed for Corporations, Partnerships with a C-Corp partner, or for inventories.

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2
Q

For 2014, what is the amount of the Personal Exemption?

A

2014: $3,950

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3
Q

In the year of death, may the surviving spouse claim the exemption for the deceased spouse?

A

Yes, if the taxpayer is filing married filing jointly - along with spouses exemption too. The taxpayer may claim their exemption and the deceased spouses too.

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4
Q

What is the Becker Qualifying Child acronym and what does it stand for.

A

CARES.

Close Relative
Age Limit
Residency and Filing Requirements
Eliminate Gross Income Test
Support Test Changes
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5
Q

What is the Becker Qualifying Relative acronym and what does it stand for.

A

SUPOR or T
Support (over 50%) test
Under specific amt of taxable gross inc (SS Inc is not taxable)
Precludes dependent filing a joint return test
Only citizens of US/Canada Test
Relative Test
OR
Taxpayer lives w individual entire year test

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6
Q

Characterization of Income: Ordinary, Portfolio, Passive, Capital

A

Ordinary: wages, refunds, alimony, IRA/pension, Self Employment, and gambling

Portfolio: Interest Inc, DV income.

Passive: Rental income plus beneficiaries of Trust & Investments in Pships, LLCs and S Corp

Capital: Sales of Capitals assest create Capital G/L

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7
Q

What are guaranteed payments to a partner?

A

Reasonable compensation paid to a partner for services rendered (or use of capital) w/o regard to the partner’s ratio of income. It is subject to S/E tax

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8
Q

How is the calculation for Life Insurance permiums partially paid by an employer done?

A

The first $50,000 is non-taxable to the employee. Premiums above are taxable income on the employees W-2, It is calculated using IRS tables (200,000 less 50,000 *2.76 / 1000 = $414)

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9
Q

What items are Taxable Interest Income?

A

Federal bonds
Corporate Bonds
Premiums recvd for opening a savings account (FMV)
Part of Installment Sales proceeds
Interest paid by Fed or State gov for late payment of a refund
Some taxpayers for bond premium amort or bond discount

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10
Q

What items are Tax Exempt Interest Income?

A

State/Local Gov Bonds/Obligations
Bonds of a US Possession
Series EE (US Savings Bond)
Veterans Admin Insurance

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11
Q

What items are Tax Free Distributions?

A

Return of Capital
Stock Splits
Stock DV
Life Insurance DV

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12
Q

When is a State/Local Tax refund non taxable?

A

When the Standard Deduction not the Itemized Deduction is used in the prior year.

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13
Q

What amount may be excluded from an employees income for Employer paid Ed expense?

A

Up to $5,250

applies to graduate and undergraduate level ed

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14
Q

Name the sources of DV income and their character

A

E&P Current = Distrib by CY end
E&P Accu = Distrib Date
Return of Capital = No E&P
Capital G Distrib = No E&P/No Basis

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15
Q

What are the taxable amounts for cash and prop to a shareholder?

A

Cash: Amount Recvd
Property:FMV

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16
Q

What items are included in Business Gross Income?

A

Cash : Amt recvd
Property: FMV
Cancellation of Debt

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17
Q

What percentage of Business meal and entertainment expenses is allowed as a deduction

A

50%

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18
Q

What Bad Debt Method is allowed for a taxpayer?

A

Direct Write off only.

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19
Q

Name the non-deductible expenses for Business Sched C

A

Salaries paid to the sole proprietor (considered a draw)
Fed inc tax
Personal portions of: Auto exp, travel exp
Meal and Entertainment
Interest exp (report on sched A if applicable)
State and local tax expense (report on sched A)
Health insurance if the Sole Proprietor (report as an adj to arrive at AGI)
Bad Debt of Cash basis txpyr who never reported the income
Charitable Contrib (reported on Sched A item ded)

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20
Q

Name the 2 taxes on Net Business Income

A

Income Tax & Federal Self Employment Tax.
S/E Adj allowed = 7.65% up to $115,500 + 1.45% over $115,500 (this allows the sole prop to “deduct” the emp portion from gross tax income on Sched C.
All S/E income is subj to Medicare Tax: 2.9% up to $115,500; Soc Sec Tax: 12.4% up to $115,500 (total: 15.3%)

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21
Q

How is the carry forward of Net Operating Losses handled?

A

The excess business loss not used against other sources of income is permitted to be carried back 2 years and forward for 20 years.

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22
Q

What types of property does the Uniform Capitalization Rules apply?

A

Produced for Use in Trade/Bus (Real or personal)
Produced for Sale to customers (manuf inventory)
Acquired for resale (Real or personal. E.g. retailer’s inventory.
Limited to businesses w/ avg gross receipts greater than 10 mill over a 3 year period)

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23
Q

Under the Unif Cap Rules which costs are required to be capped?

A

Direct Materials
Direct Labor (compens, vaca pay, payroll taxes)
FOH (indirect costs)

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24
Q

Name examples of Indirect costs which are capitalized under the Unif Cap Rules.

A 
Utilities
warehousing costs
repairs & maint
indirect labor (supervisory)
rents
storage
deprec & amort
insurance
pension contrib
engineering & design
repackaging
spoilage & scrap
admin supplies.
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25
Q

Which costs are not to be capitalized under the Unif Cap Rules?

A

SG&A
R&D
Officer Compensation

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26
Q

For tax purposes, what method must be used for income recog of Long Term Contracts?

A

Percentage of Completion Method

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27
Q

For a cash basis farmer, are inventories of produce, livestock etc considered inventory in a business sense ?

A

No.
* Example: Bob is a cash basis sole proprietor farmer, he spends $2100 on feed for livestock. Bob may deduct all $2100 on his return, bc he is not required to consider inventory.

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28
Q

For a cash basis farmer, what is included in gross income?

A

Cash and the value of all other items recvd from the sale of produce & livestk that has been RAISED by the farmer

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29
Q

For a accrual basis farmer (corps, pships) must inventories be used and maintained? Id so, what methods are used?

A

Yes*
Methods include:
Cost
LCM
Farm Price Method (market cost less disposition)
Unit-Livestock-Price Method (uses a value for each livestk class at a std unit price for animals in each class)

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30
Q

For a accrual basis farmer how is gross profit calculated?

A 
Accrual Gross Profit = 
YE inventories
\+ sales proceeds
less (BOY Inventories)
less (cost of invent purchased)
31
Q

What is the basic formula for determining the G/L on disposition of property?

A

Gain or Loss Realized =
Amount Realized
less (adj Basis of Asset Sold)

32
Q

How is the tax calculated for early withdrawal of IRA money (trad deductible IRA distrib)?

A

If a person withdraws IRA funds before age 59 1/2, the tax is calculated using the marginal tax rate/ordinary tax rate plus 10% penalty.

33
Q

Are distrib/benes for Roth IRAs taxable?

A

No. All benes received are non-taxable

34
Q

What portion of Traditional Non-Deductible IRAs is taxable and non taxable?

A

Accumulated Earnings are taxable when withdrawn.
All principle is non-taxable.
When withdrawal is made, the amount must be prorated between contrib and non-contrib portions.

35
Q

What are the exceptions to the IRA penalty tax?

A 
HIMDEAD
H Homebuyer (1st time up to 10,000)
I Insurance (medical)
M Medical (in excess 10% AGI)
D Disability (perm or indef)
E Education (tuition, books fees)
AND
D Death

**remember you still have to pay regular tax

36
Q

What items are placed on Sched E?

A 
Supplemental income/loss including:
Rental real estate
Royalties
Pships & LLCs (from sched K-1)
S-corps (Sched K-1)
Estates (Sched K-1)
Trusts (Sched K-1)
37
Q

What is the basic formula to determine Net Rental Income/Loss?

A 
Net Rental Income/Loss=
Gross Rental Income
\+Prepaid Rental Income
\+Rental Cancellation Payments
\+Improvement in Lieu of Rent
less(Rental Expenses)
38
Q

If a residence is rented for less than 15 days how is it treated?

A

As a personal residence

39
Q

For rental/personal resid expense proration, how are Taxes/Interest prorated vs Utilites/Depreciation calculated?

A

Taxes/Interest is prorated over 12 mos (rental period/tot annual amt pd)
while Utilities/Dep prorated over the rental period (rental pd/tot annual usage)

40
Q

May rental expenses exceed rental income?

A 
No. Rental expenses are deductible only to extent of rental income.
Example
Tot Rental Inc=6000
Tax/Int=$1000
Utiliites=$3200
Dep=4800
Total Exp=$9000
 Limit to $6000 bc exp can't exceed amount of income
41
Q

To what extent may PALs/PA expenses be deducted?

A

Expenses related to PALs can only be deducted to the extent of income from all Pas. PALs can only offset passive activity income.

42
Q

What happens to unused PALs?

A

Suspended losses are used to offset future passive income. PALs carry forward indefinitely and become fully deductible in year of disposal.

43
Q

Taxpayers subject to the PAL rules include:

A 
Individuals
Estates
Trusts
PSC
Closely help Corps.
44
Q

What conditions must be met to meet the PAL Exception?

A

Mom and Pop Exception - if taxpyr is actively managing/participating to the rental real estate annually and own more than 10% of the rental activity.

45
Q

What amount of deduction does the PAL exception allow?

A

$25,000 up to $100,000 AGI.
Over $100,000 - reduce allowance by 50% over 100,000
Over 150,000 - lose 100% of allowance.

46
Q

Which is tax free - Unemployment Compensation or Worker’s Compensation?

A

Worker’s Compensation

47
Q

Is there an exception to the PAL disallowance?

A

Yes,
If the taxpayer is a real estate professional with more than 50% + service performance in real property bus and taxpyr performs 750+ hours svc during year

48
Q

What is provisional income for SS income?

A

AGI + tax-exempt interest + 50% SS benes.
Taxpyrs must include in income
the lesser of
50%(85%) of SS recvd
OR
50%(85%) of excess provisional income over the threshhold

49
Q

What are the 5 categories of SS tax?

A

Low Income = No SS benes are taxable
(inc below 25,000/32,000)

Lower Middle Income = Less that 50% SS benes taxable

Middle Income = 50% SS benes are taxable
(inc over 25,000/32,000)

Upper Middle Income = Between 50% and 85% SS benes are taxable

Upper Income = 85% SS benes are taxable
(income over 34,000/44,000)

50
Q

What is MAGI?

A 
Modified Adj Gross Income.
MAGI is AGI that adds back:
Excluded Foreign earned income
Excluded Foreign Housing Income
Excluded Series EE Bonds Interest
Excluded Student Loan Interest
Excluded Employer Paid Adoption Expenses
Deducted contributions for an regular IRA
51
Q

When is a business recovery considered income?

A

If the damage award is compensation for lost profit, the award is income.

52
Q

When are punitive damages considered taxable income?

A

Fully taxable if received in a business context or for loss of personal reputation. Individuals in a personal injury case that awards damages has taxable income except when there is a wrongful death case where state law has limited wrongful death awards to punitive damages only.

53
Q

Are Medicare Benefits taxable?

A

Excluded from taxation if benefits are received under the SS Act

54
Q

Explain the Foreign earned Income Exclusion.

A

Taxpyrs working abroad may exclude from income up to $99,200 of their foreign earned income.

To qualify the citzen must meet the Bona Fide Residence Test (resident for entire year) or the Physical Presence test (330 days out of any consecutive 12 mo pd, start at any date).

Note: The exclusion cannot exceed the txpyrs foreign housing excl (max $29,760/30% of 99,200).Plus the amt excl is used to determine the inc tax rate (&AMT rate) for the txpyr for the yr. The excl inc could cause other inc to be taxed at higher rates, as if the excl inc were taxable.

55
Q

What are the types of Employee Stock Options?

A

Qualified and Non-Qualified

56
Q

What are Qualified Stock Options?

A

Incentive Stock Option (ISO)*Employee Stock Purchase Plans (ESPP)

57
Q

What is an ISO?

A

A stock option granted to a key employee and is a right to purchase the stock at discount.

58
Q

What are the requirements of an ISO?

A

ISO must be granted under a plan, apprvd by SH and sets out # of shares & who
Must be granted w/in 10 yrs of plan date (earlier of adopted or approved)
Opt must be exrcsd w/in 10 yrs of grant date
Exercise Price cannot be < FMV Stock @ grant date
Empl may NOT own 10%+ voting pwr
Stk must be held at least 2 yrs after grant date and at least 1 year after exerc date
Empl must remain empl from date granted until 3 mos b4 opt exrcsd

59
Q

What is the basis of the Stock for an ISO?

A

Exercise Price + amt pd for the option

60
Q

What are the tax ramifications of an ISO to an employee?

A

No tax of the option as compensation
Any G/L on a subseq sale of stk is capital (ordinary if outside holdg pd parameters).
Option Lapse - no deduction allowed bc not originally taxed
Emp may exercise up to 100,000 in ISOs annually. Over 100,000 treated as Non Qual Opt
Excess FMV exerc date less Purch price is a Preference item for AMT

61
Q

What are the tax ramifications of an ISO to an employer?

A

No tax deduction recvd bc it is not considered compensation income to employee.

62
Q

What are the requirements of an ESPP?

A

Empl may not have 5%+ votg power
Empl must be full-time
Opt price may NOT be < than lesser of 85% of FMV when granted or 85% of FMV when exercised
Opt cannot be exercd more than 27 mos after grant date
Empl may not purch $25,000/yr+
Must be held 2 yrs after grant date and 1 yr after exercise date after exercd.
Must remain empl from grant date to 3 mos b4 opt exercsd

63
Q

What are the tax ramifications of an ESPP to an employee?

A

Generally no taxation as compensation.
The basis of stock is Exercise Price + amt pd for the option. Any G/L on subeq sale is capital.
If holdg pd req are not met, any G is ordinary up the amt that stk’s FMV on exerc date exceeds opt price.
If options lapse, no deduct avail bc not taxed in first place.

64
Q

What happens if the Option Price is less than the FMV of stk on grant date for an ESPP?

A

Ordinary Income is recog as the lesser of the difference in the
FMV of the stk when sold and exercise price
OR
difference between exercise price and FMV of stk on grant date

65
Q

What are the tax ramifications of an ESPP to an employer?

A

Employer does not recv tax deduction bc the ESPP is not considered compens inc to employee.

66
Q

For Non Qualified Employee Stock Options, what is the definition of Readily Ascertainable Value?

A

Value of the option as traded on an established market
OR

All of the following are met:
Opt is transferable
Opt exerc immediately when granted
No conditions/restrictions to effect value
FV of opt privilege is readily ascertainable.

67
Q

For Non Qualified Emp Stk Options, what is the Employee Taxation (Readily Ascertainable Value)?

A

Empl recog ordinary income in value opt amt in yr granted.
If there is a cost, then ord inc is value opt less cost.
No taxation on date of exercise
Basis of stock is exercise price +any amt previously taxed on grant date.
Holding period begins on grant date
Any sale could result in Cap G/L
Options lapse - there is Cap L based on value of opts previously taxed.

68
Q

For Non Qualified Emp Stk Options, what is the Employee Taxation (Without Readily Ascertainable Value)?

A

If no ascertainable value - Taxable event is on the exercise date.
Empl recog Ordinary Income based on FMV of stk purch less amts paid for opt.
Basis = actual exercise price - ord inc recog.
Future sale of stock could result in Cap G/L
Holdg Pd begins w/ exercise date
Option Lapse - no tax consequences

69
Q

For Non Qualified Emp Stk Options, what is the Employer Taxation?

A

An employer may deduct the value of the stk opt as a business expense in the yr that the employee is reqd to recog the option as ordinary income.

70
Q

Who must file a tax return?

A

A txpyr must file if income is equal or greater than the sum of
Personal Exempt
+regular std ded
+additional std ded amt for txpyrs over 65 or blind.

Exceptions - others who must file include:
Indiv w/ net earnings $400
Indiv who can be claimed as dep on another’s return
Indiv who have unearned inc and gross inc pf $950+
Indiv who recv advanced pmts of EIC must file.

71
Q

What is the Individual taxpyrs filing due date?

A

April 15th

A 6 mos extension is allowed to October 15th but pmt remains due on the Apr 15th

72
Q

What are the qualifications to select Qualifying Widow(er) (Surviving Spouse) w/ Depend Child?

A

Txpyr’s spouse died in one of 2 previous years and txpyr did not remarry
Taxpyr has a child who can be claimed as a dep
Child lived in txpyr home for entire tax year
Txpyr paid over 50% to keep home for child
Txpyr could have filed a joint return in yr of spouse death

73
Q

What are the qualifications to select Head of Household?

A

Indiv is not married, is legally separated, or is married but lived apart for last 6 mos of year
Indiv is not a qualifying widow(er)
Indiv is not a non-resident alien.
Indiv maintains home for 6mos+ for these people:
Dependent daughter or son (adopted , step and descend)
Father or Mother - not req to live with indiv
Dependent Relative - must live w/ txpyr

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