Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

CPA Exam- Reg > Chapter 1 > Flashcards

Chapter 1 Flashcards

1
Q

Taxable Income Formula

A 
Gross Income
- Adjustments
=Adjusted Gross Income (AGI)
-Standard Deduction or Itemized Deduction (The greater of)
- Exemptions
=Taxable Income
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Tax Due or Refund Formula

A 
Taxable Income
- Federal Income Tax
- Other Taxes
-Payments
= Tax due or refund
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What affects Gross Income?

A
  • Wages
  • Interest
  • Dividends
  • State Tax Refunds
  • Alimony Received
  • Business Income
  • Capital Gain/Loss
  • IRA Income
  • Pension and Annuity
  • Rental Income/Loss
  • K-1 Income/Loss
  • Unemployment Compensations
  • Social Security Benefits
  • Other Income
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What is the 2016 dollar amount per exemption?

A

$4,050

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

A child is a qualifying child of the taxpayer if the child satisfies the following:

A
  • Close Relative
  • Age Limit
  • Residency and filing requirements
  • Eliminate Gross Income Test
  • Support Test Changes
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

A qualifying relatives can be claimed as a dependent if the following is satisfied:

A

• Support Test
• Under Exemption Amount of Taxable Gross Income
• Precludes Dependent Filing a Joint Return
• Only Citizens of the United States or Residents of the US, Mexico, or Canada
• Relative
OR
• Taxpayer lives with the Individual (if nonrelative) for the whole year

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

There is an increased standard deduction (not an additional exemption) for being:

A
  • Old (age 65 or older)

* Blind

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Filing Status- Single

A

Single OR legally separated as of Dec 31

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Filing Status- Married Filing jointly

A

must be married at the end of the year, living together in a recognized common law marriage, or married and living apart (but not legally separated or divorced)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Exceptions to filing Married Filing Jointly

A
  1. cannot file if divorced during year.

2. If one spouse dies during the year, a joint return may be filed.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Married Filing Separately

A

If only one spouse has income for the year

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Qualifying Widow(er)

A

must have dependent child. Can file for 2 taxable years following the year of death of spouse unless remarries

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Head of Household

A
  1. Not married, legally separated, or has lived apart from spouse for the last six months of the year
  2. Not a qualifying widor
  3. Not a non-resident alien
  4. Has a dependent child, parent, or relative for more than half the taxable year.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

A divorced custodial parent is entitled to the head of household status even if the custodial parent has waived his/her right to the dependency exemption by completing

A

a Form 8332

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Dependent Parent

A

not required to live with taxpayer. Taxpayer contributes over half the cost of upkeep for parent

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Dependent Relative

A

must live with taxpayer.

Note that cousins, foster parents, and unrelated dependents do not qualify

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

A married taxpayer filing separately may claim their spouse’s personal exemption if both of the following tests are met:

A
  1. The taxpayer’s spouse has no gross income

2. The taxpayer’s spouse was not claimed as a dependent of another taxpayer

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Phase-out of Personal Exemptions

A

reduces exemptions by 2% for every $2,500 ($1,250 for MFS) or portion thereof by which adjusted gross income exceeds (dollar amounts will be given on exam)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

Multiple Support Agreements

A

Where 2 or more taxpayers contribute more than 50% to the support of a person but none of them individually contributes more than 50%. Contributes may decide claim amongst themselves.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

In order to qualify for a Multiple Support agreement:

A
  1. must contribute
    more than 10% of the person’s support in addition to meeting the other dependency tests
  2. The joint contributors are required to file a multiple support declaration (Form 2120)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

A person may not be claimed as a dependent unless the dependent’s gross income is less than

A

$4,050 (the exemption amount for 2016)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

Nontaxable Income

A
  1. Social Security
  2. Tax-exempt interest income (sate and municipal interest income)
  3. Tax-exempt scholarships
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

Definition of Gross Income

A

All income from whatever source derived, unless specifically excluded (drug money)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

Is income computed in FMV or NBV?

A

FMV

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

In order to be taxable, a gain must

A

Be both realized and recognized
realization- requires the accrual or receipt or a change in form or nature of investment
Recognition- the realized gain must be include4d on the tax return

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

Accrual Method

A

revenue is taxable when earned

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

What are the characterizations of income?

A
  1. Ordinary 2. Portfolio 3. Passive (rental income & royalties, Beneficiaries of trusts & investments in partnerships, LLCs and S corps) 4. Capital
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
28
Q

Ordinary Income

A

salaries, wages, state and local tax refunds, alimony, IRA and pension income, self employment income, unemployment compensation, social security, prizes, taxable portion of scholarships, gambling income

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
29
Q

Portfolio Income

A

income a taxpayer would earn on his portfolio of assets, such as interest and dividends

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
30
Q

Passive Income

A

taxpayer did not actively participate (only passive losses may offset passive income, and a net passive loss is not deductible on the tax return).

a) Rental Income and Royalties- exception is for real estate professionals
b) Beneficiaries of trusts and investments in Partnerships, LLCs, and S corps- placed on a Schedule K

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
31
Q

Capital Income

A

Sales of capital assets create capital gains and losses (a capital asset is any personal or business property).

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
32
Q

Partially taxable fringe benefits

A

Premiums paid by employer on a group-term life insurance policy is not income to employees for up to the first $50,000 of coverage per employee. Premiums above $50,000 of coverage is taxable income to the recipient and included in W-2 wages.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
33
Q

Life insurance proceeds

A

are nontaxable. Interest income earned on deferred payout arrangements is fully taxable.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
34
Q

Employer payment of employee’s educational expenses

A

Up to $5,250 are nontaxable. Applies to both undergrad and grad level education

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
35
Q

Qualified Pension, Profit-Sharing, and Stock Bonus Plans

A
  1. Payments made by employer - are non taxable and not income to the employee at time of contribution
  2. Benefits received- are taxable to the employee the year the amount is distributed or made available to the employee
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
36
Q

Flexible Spending Arrangements

A

Section 125 employee flexible benefit plan. Allows employees to receive a pre-tax reimbursement of carnation incurred expenses (Pretax deposits into employee’s account)

37
Q

Pretax deposits into employee’s account

A

employees have the ability to elect to have part of salary (up to $2,550 for 2016) deposited pretax into spending account. Employees forfeit funds not used within 2.5 months after year end are forfeited

38
Q

Taxable Interest Income

A

interest from federal bonds, corporate bonds, prizes from opening a savings account, interest from late payment of tax refund for federal or state

39
Q

Tax-Exempt interest income

A
  1. state and local bond interest 2. Series EE (educational expenses)
40
Q

Series EE

A

(US Savings Bond) Educational Expenses. Tax Exempt when: 1. it is used to pay for higher ed (reduced by tax-free scholarships) of the taxpayer, spouse, or dependents 2. there is a tax payer or joint ownership (spouse) 3. The taxpayer is over age 24 when issued 4. the bonds are acquired after 1989

41
Q

Unearned Income of a child under 18

A

(kiddie tax) net unearned income of a dependent child under 18 (or 24 and doesn’t provide over half support and is a full time student) is taxed at the parent’s higher tax rate.

2106 child's 
unearned income            Tax Rate
0-$1,050                            0%
$1,051-$2,100                    Child's
$2,101+                               Parents
42
Q

Tax rates (2016) for taxable dividends

A

15% Most taxpayers
0% Very low income taxpayers
20% High Income taxpayers

43
Q

Tax-Free Distributions

A
  1. Return of Capital- when a company distributes funds that has no profits
  2. Stock Split- will allocate the original basis over the total number of shares held after the split
  3. Stock Dividend- unless shareholder has an option to receive cash or other property
  4. Life Insurance Dividend- caused by ownership of insurance with a mutual company (premium return)
44
Q

Capital Gain Distribution

A

Distribution by a corporation that has on earnings and profits. The shareholder has recovered their entire investment. It is treated as taxable gross income

45
Q

State and Local Tax Refunds

A

Itemized in prior year- is taxable

Standard Deduction used in prior year- nontaxable state or local refund

46
Q

To be deemed Alimony/Spousal Support under tax law:

A
  1. Payments must be legally required following a written divorce or separation agreement
  2. Payments must be in cash (or equivalent)
  3. Payments cannot extend beyond the death of the payee-spouse
  4. Payments cannot be made to members of the same household
  5. Payments must not be designated as anything other than alimony
  6. The spouses may not file a joint tax return
47
Q

Child Support

A

Nontaxable; payments for alimony and child support must fulfill child support payment first if it falls short

48
Q

Property Settlements

A

Nontaxable; if a divorces provides a property settlement, the spouse gets no deduction for payments made, and the payments are not included in the gross income of the spouse receiving the payment

49
Q

Self employed profit or loss from business is recorded on schedule:

A

C or C-Ez

50
Q

Self employed- business meal and entertainment expenses

A

can be deducted at 50%; 100% may be deducted if it is a charitable contribution

51
Q

Interest expense on business loans

A

interest expense paid in advance by a cash basis taxpayer cannot be deducted until the tax year/period to which the interest relates

52
Q

Nondeductible expenses for self employed listed on schedule C

A
  1. salaries paid to the sole proprietor
  2. federal income tax
  3. Any portion used for personal expenses
  4. Bad debt expenses of a cash basis taxpayer (who never reported the income)
  5. Charitable contributions (reported as an itemized deduction on Schedule A)
  6. Health insurance premiums for a sore proprietor (although not reported as an expense, it is reported as an adjustment to arrive at AGI)
53
Q

2 taxes on net business income

A
  1. Income tax

2. Federal self-employment tax

54
Q

Net Taxable Loss

A

A business with a loss may deduct the loss against other sources of income. When a loss exceeds these amounts, the excess net operating loss is allowed as a carryover. Taxpayer may chose to 1. 2-year carry-back or 2. 20 year carry-forward

55
Q

Uniform Capitalization Rules

A

applies to all business enterprises that meet the criteria for implementation (including sole proprietorships, partnerships, and corporations)

56
Q

Uniform Capitalization rules apply to the following:

A
  1. Produced for Use- tangible personal property produced by the taxpayer for use in their business
  2. Produced for Sale- tangible property produced by the taxpayer for sale to their customers (ex: manufacture’s inventory)
  3. Acquired for Resale- tangible property acquired by taxpayer for resale (retailer’s inventory) Note: does not apply if the taxpayer’s average gross receipts for the previous 3 years exceeds $10million annually
57
Q

Capitalized as inventory:

A

Direct materials
Direct labor
Factory overhead

58
Q

Period Expense (expenses not capitalized)

A

Selling
General
Administrative
Research and Development

59
Q

Long-term contracts

A

contract that is incomplete at the end of a tax year in which it was started and relates to the manufacture, installation, building, or construction of real or personal property

60
Q

Percentage of completion method

A

required for tax for nonexempt long-term contracts

61
Q

Exemptions from the requirements for long-term contract income recognition

A
  1. Small contractors- projects that are expected to last no more than 2 years and are performed by a taxpayer who has average annual gross receipts not exceeding $10million for the past 3 yrs
  2. Home contraction contractors- where at least 80% of the total contract costs are related to the construction or rehabilitation of certain buildings (not including hotels)
  3. A long-term construction contract that includes land and where less than 10% of the total contract costs relates to the actual construction of property on the land
  4. Services performed by architects, engineers, designers
  5. Services performed under warranty and maintenance agreements related to the long-term contract
62
Q

Production period defined:

Start date & End date

A

start date: the date on which the contractor incurs costs (other than the start-up engineering, design costs that are excluded from cost allocation)
end date: date on which the work under the contract is complete or on the date the taxpayer has incurred at least 95% of the total costs expected under the contract

63
Q

Cost-to-Cost method

A

a ratio of the total cumulative costs incurred to date at the end of the tax year divided by the total expected costs to be incurred under the contract; This ratio provides a total “percentage-complete” amount for the contract as of the end of the tax year.

64
Q

Farming Income

A

income from farming activities is treated the same as income from other business activities. On schedule F

65
Q

Farming Income - cash basis

A

most farmers use. Inventories of produce, livestock are not considered

66
Q

Farming income- accrual method

A

is required for certain corporate and partnership farmers. Inventories must be maintained and taken at the start and end of tax year.

67
Q

Following methods of inventory valuation for farming are accepted by the IRS:

A
  1. Cost
  2. Lower cost or market
  3. Farm price method- inventory is valued at the market prices less the disposition costs
  4. Unit-livestock-price method- uses a value for each livestock class at a standard unit price for animals within the class
68
Q

Formula for determination of net rental income or loss:

A

Gross rental income+Prepaid rental income+ rent cancellation payment+ improvement in lieu of tent
- rental expenses
= net rental income or net rental loss

69
Q

For a house to be considered rental of Vacation Home, what must happen?

A
  1. rented for more than 15 days AND is used for personal purposes for more than 14 days or more than 10% of the rental days
    Expenses must be prorated between personal and rental use
70
Q

How many days for a home to be treated as personal residence and how is it recorded?

A

Less than 15 days per year. Rental income is excluded from income and are allowed as itemized deductions. Depreciations, utilities and repairs are not deductible

71
Q

Nondeductible Passive Activity Losses

A

Carry forward without any time limit unused passive activity losses held in suspension
1. suspended losses are used to offset passive income in future yrs
2. If still unused, suspended losses become fully tax deductible in the year the property is disposed of (sold)
see pg 43

72
Q

Mom and Pop Execution

A
  1. May deduct up to $25,000 (per year) of net passive losses attributable to rental real estate
  2. Any excess would be carried forward indefinitely as an unused passive activity loss
  3. The $25,000 is reduced by 50% of the excess of the taxpayers AGI over $100,000. Eliminated at $150,000
73
Q

Passive Activity Losses (PALs) deductibility

A

a net loss may not be deducted against wages, salaries, and other active income

74
Q

Real Estate Professionals

A

Not Passive activity if more than 50% of the taxpayers services are performed in real property business. Can fully deduct losses form the rental activities against other income

75
Q

Are low income, lower middle income, middle income, upper middle income, or upper income taxed?

A

Low income (less than $25K single; $32k MFJ) Not taxed
Lower middle income- Less than 50% are taxed
Middle income- (over $25k single, $32k MFJ) 50% are taxable
Upper Middle Income- between 50-80% taxable
Upper Income (over $34K single, $44k MFJ) 85% taxable

76
Q

Punitive Damages

A

awarded by juries to punish wrong doer. Fully taxable. Not taxable if in a wrongful death case where state law has limited wrongful death awards to punitive damages only

77
Q

Life Insurance Proceeds

A

excluded from the gross

78
Q

Foreign- Earned Income Exclusion

A

Taxpayers working abroad may exclude from the gross income up to $101,300 of their foreign-earned income.

79
Q

For a taxpayer to qualify for exclusion, they must satisfy:

A

Bona Fide Residence Test
-Must have been a resident of a foreign country for an entire taxable year
AND
Physical Presence Test: requires that the taxpayer be present in the foreign country for 330 full days out of any 12-consecutive-month period

80
Q

2 types of employee stock options are:

A

Nonqualified options

Qualified options

81
Q

Nonqualified employee stock option

A

Taxed when granted if the options has a readily ascertainable value when granted. Otherwise, the option is taxed when exercised

82
Q

Definition of Readily Ascertainable Value

A

If the option is traded on an established market, it will have a readily ascertainable value. Otherwise, it will only have a readily ascertainable value if all conditions are met:
1. Option is transferable
2. The option is exercisable immediately in full when it is granted
3. There are no conditions or restrictions that would have a significant effect on the value
The fair value of the option privilege is readily ascertainable

83
Q

Nonqualified stock option Employee taxation- without readily ascertainable value

A

Taxed when exercised

84
Q

Nonqualified stock option Employee taxation- with readily ascertainable value

A

taxed on grant date. No taxation on date of exercise

85
Q

2 types of qualified stock options

A

Incentive Stock Options (ISO) and Employee Stock Purchase Plans (ESPP)

86
Q

Incentive Stock Options

A

Usually granted to a key employee and is a right to purchase the stock at a discount

87
Q

Qualified Stock Options- Employee Taxation

A

not taxed

88
Q

Qualified Stock Options- Employer Taxation

A

No tax deduction

CPA Exam- Reg (2 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions