Chapter 12 Tax Credits & Payments Flashcards
1
Q
are paid to the taxpayer even if the amount of the
credit (or credits) exceeds the taxpayer’s tax liability
A
refundable credits
2
Q
are not paid if they exceed the taxpayer’s tax liability
A
Nonrefundable credits
3
Q
The child care credit is nonrefundable or refundable?
A
nonrefundable
4
Q
Some nonrefundable credits, such as the _____ _____ _____, are subject to carryover
provisions if they exceed the amount allowable as a credit in a given year.
A
foreign tax credit
5
Q
Other nonrefundable credits, such as the _____ _____ _____ (refer to Example 5),
are not subject to carryover provisions and are lost if they exceed the limitations.
A
child care credit
6
Q
Define general business credit
A
is composed of a number of other credits, each of
which is computed separately under its own set of rules.1 The general business
credit combines these credits into one amount to limit the amount of business
credits that can be used to offset a taxpayer’s income tax liability.
7
Q
Two special rules apply to the general business credit
A
First, any unused credit is
carried back 1 year, then forward 20 years. Second, for any tax year, the general business
credit is limited to the taxpayer’s net income tax reduced by the greater of:2
• The tentative minimum tax. This amount relates to the alternative minimum
tax. See Chapter 15.
• 25 percent of net regular tax liability that exceeds $25,000
8
Q
is the regular tax liability reduced by certain nonrefundable
credits (e.g., credit for child and dependent care expenses, foreign tax credit).
A
Net regular tax liability
9
Q
Floyd’s general business credit for the current year is $70,000. His net income tax is E X A M P L E 7
$150,000, the tentative minimum tax is $130,000, and Floyd’s net regular tax liability is
$150,000. He has no other tax credits. Floyd’s general business credit allowed for the
tax year is computed as follows.
A
Net income tax $ 150,000
Less: The greater of
: $130,000 (tentative minimum tax)
: $31,250 [25% × ($150,000 − $25,000)] (130,000)
Amount of general business credit allowed for tax year $ 20,000
Floyd now holds $50,000 ($70,000 − $20,000) of unused general business credits
that may be carried back or forward to other tax years.
10
Q
What type of method is applied to the carrybacks, carryovers, and utilization of credits
earned during a tax year
A
FIFO method. The oldest credits are used first in determining the amount
of the general business credit. The FIFO method minimizes the potential for loss of
a general business credit benefit due to the expiration of credit carryovers, because
the earliest years are used before the current credit for the taxable year.
11
Q
is intended to discourage businesses from moving from older,
economically distressed areas (e.g., inner cities) to newer locations and to encourage
the preservation of historic structures
A
rehabilitation expenditures credit
12
Q
Rate of credit for rehabilitation expenses for Nonresidential buildings and residential rental property,
other than certified historic structures, originally
placed in service before 1936
A
10%
13
Q
Rate of credit for rehabilitation expenses for Nonresidential and residential certified historic
structures
A
20%
14
Q
Recapture Calculation for Rehabilitation Expenditures
Credit.
A
Use table 12.1 on page 12-7
15
Q
Juan spent $60,000 to rehabilitate a building (adjusted basis of $40,000) that had been
placed in service in 1932. He is allowed a ________ credit for rehabilitation
expenditures.
A
$6,000 (10% × $60,000)
16
Q
Juan then increases the basis of the building by
A
$54,000 [$60,000
(rehabilitation expenditures) − $6,000 (credit allowed)].
17
Q
If the building were a historic
structure, the credit allowed would be
A
$12,000 (20% × $60,000),
18
Q
and the building’s
depreciable basis would increase by
A
$48,000 [$60,000 (rehabilitation expenditures) −
$12,000 (credit allowed)].
19
Q
To qualify for the credit, buildings must be substantially rehabilitated. A building
has been substantially rehabilitated if qualified rehabilitation expenditures exceed
the greater of:
A
- the adjusted basis of the property before the rehabilitation expenditures, or
- $5,000.
20
Q
Qualified rehabilitation expenditures do not include the cost of
A
acquiring a building,
the cost of facilities related to a building (such as a parking lot), and the cost
of enlarging an existing building.
21
Q
is based on a holding period requirement of five years and is
added to the taxpayer’s regular tax liability in the recapture year. The recapture
amount also is added to the adjusted basis of the property for purposes of determining
gain or loss realized upon disposition.
A
rehabilitation expenditures
credit recapture
22
Q
The portion of the credit recaptured is a specified percentage of the credit that
was taken by the taxpayer. This percentage is based on`
A
the period the property was
held by the taxpayer, as shown in Table 12.1
23
Q
was enacted to encourage employers to hire individuals
from one or more of a number of targeted and economically disadvantaged
groups.7 Examples of such targeted persons include qualified ex-felons, high-risk
youths, food stamp recipients, veterans, summer youth employees, and long-term
family assistance recipients.
A
work opportunity tax credit
24
Q
Work Opportunity tax credit is computed by?
A
generally is equal to 40 percent of the first $6,000 of wages (per eligible
employee) for the first 12 months of employment. If the credit is taken, the
employer’s tax deduction for wages is reduced by the amount of the credit.
25
For an employer to qualify for the 40 percent credit, the employee must what 2 things?
1) be
certified by a designated local agency as being a member of one of the targeted
groups and (2) have completed at least 400 hours of service to the employer. If an
employee meets the first condition but not the second, the credit rate is reduced to
25 percent provided the employee has completed a minimum of 120 hours of service
to the employer.
26
In January 2012, Green Company hires four individuals who are certified to be members
of a qualifying targeted group. Each employee works 800 hours and is paid wages of
$8,000 during the year. Green Company’s work opportunity credit is
$9,600 [($6,000 ×
40%) × 4 employees]. If the tax credit is taken, Green must reduce its deduction for
wages paid by $9,600. No credit is available for wages paid to these employees after their
first year of employment.
27
The credit for qualified summer youth employees is allowed on wages for services
during what period
any 90-day period between May 1 and September 15
28
Computation of the Work Opportunity Tax Credit: Qualified Summer
Youth Employees. For qualified summer youth employees The maximum wages
eligible for the credit are
3,000 per summer youth employee.
29
A qualified summer youth employee must be age
16 or 17 on the hiring date. In addition,
the individual’s principal place of abode must be within an empowerment
zone, enterprise community, or renewal community.
30
Computation of the Work Opportunity Tax Credit: Long-Term
| Family Assistance Recipient
The credit is equal to 40 percent of the first $10,000 of qualified wages paid to
an employee in the first year of employment, plus 50 percent of the first $10,000 of
qualified wages paid in the second year of employment, resulting in a maximum
credit per qualified employee of $9,000 [$4,000 (year 1) + $5,000 (year 2)].
31
For long-term family assistance recipient a tax credit is available to employers that are ?
hiring individuals who have been long-term
| recipients of family assistance welfare benefits.
32
n general, long-term recipients are
| those individuals who are
certified by a designated local agency as being a member
of a family receiving assistance under a public aid program for at least an 18-month
period ending on the hiring date.
33
The family assistance credit is available for qualified
| wages paid in what times
first 2 years of employment
34
So what were the 3 different work opportunity tax credits that each had different computations?
General one
Qualified Summer Youth Employees
Long-Term Family Assistance Recipient
35
The research activities credit is the sum of three components:
an incremental research activities credit, a basic research credit, and an
energy research credit
36
How do you calculate the Incremental Research Activities Credit
The incremental research activities credit is 20 percent of the excess of qualified
research expenses for the taxable year over the base amount
37
In general, research expenditures qualify if
the research relates to discovering
technological information that is intended for use in the development of a new
or improved business component of the taxpayer.
38
expenses for research that is performed in-house (by taxpayer or employee) are
qualify fully.
39
If the
research is conducted by persons outside the taxpayer’s business (e.g., by a thirdparty
contractor), how much qualifies for the credit?
only 65 percent of the amount paid qualifies for the credit.
40
George incurs the following research expenditures:
In-house wages, supplies, computer time $50,000
Paid to Cutting Edge Scientific Foundation for research 30,000
George’s qualified research expenditures are
$69,500 [$50,000 + ($30,000 × 65%)].
41
Beyond the general guidelines described above, the Code does not give specific
examples of qualifying research. However, the credit is not allowed for research that
falls into certain categories, including the following
• Research conducted after the beginning of commercial production of the
business component.
• Surveys and studies such as market research, testing, or routine data collection.
• Research conducted outside the United States (other than research undertaken
in Puerto Rico or possessions of the United States).
• Research in the social sciences, arts, or humanities
42
Jack, a calendar year taxpayer, incurs qualifying research expenditures of $200,000 at
the beginning of the year. If Jack’s base amount is $100,000, the incremental research
activities credit is
$20,000 [($200,000 − $100,000) × 20%].
43
Qualified research and experimentation expenditures are not only eligible for
the 20 percent credit, but they also can be deducted in the year incurred.13 In this
regard, a taxpayer has two choices
• Use the full credit and reduce the expense deduction for research expenses
by 100 percent of the credit.
• Retain the full expense deduction and reduce the credit by the product
of 100 percent of the credit times the maximum corporate tax rate
(35 percent).
44
are
allowed an additional 20 percent credit for basic research payments made in excess
of a base amount. This credit is not available to individual taxpayers.
Corporations (other than S corporations or personal service corporations)
45
Basic research
| payments are amounts paid in cash to a
qualified basic research organization, such
as a college or university, or a tax-exempt organization operated primarily to conduct
scientific research.
46
is any original investigation for the advancement of scientific knowledge
not having a specific commercial objective
basic research
47
Orange Corporation pays $75,000 to a university for basic research. Orange’s base E X A M P L E 1 7
amount for the basic research credit is $50,000. The basic research activities credit
allowed is
$5,000 [($75,000 − $50,000) × 20%].
48
This credit was designed to stimulate additional energy research.
energy research credit
49
How do you calculate the energy research credit?
The credit is 20
| percent of the amounts paid
50
To encourage building owners to make available affordable housing for lowincome
individuals, Congress has made a credit available to owners of qualified
low-income housing projects. What credit is it?
Low-Income Housing Credit
51
More than any other, ____ ___ _____ _____ ___ is influenced by nontax factors.
For example, the property must be certified by an appropriate state or local
agency. These credits are issued based on a nationwide allocation of congressional
funding.
the low-income housing credit
52
The low income housing credit is based on?
The credit is based on the qualified basis of the property. The qualified basis
depends on the number of units rented to low-income tenants
53
tenants are low income tenants if?
their income does not exceed a specified percentage of the area
median gross income.
54
The low income housing credit is determined by?
multiplying the qualified basis
by a credit rate. The credit is allowed over a 10-year period, as long as the property
continues to meet the required conditions
55
Sarah spends $1 million to build a qualified low-income housing project that is completed
on January 1 of the current year. The entire project is rented to low-income
families. The credit rate for property placed in service during January is 7.67%.16 Sarah
claims a credit of
$76,700 ($1,000,000 × 7.67%) in the current year and in each of the
following nine years.
56
is designed to encourage small businesses to make their
| facilities more accessible to disabled individuals.
disabled access credit
57
How is disabled access credit calculated?
The credit is
calculated at the rate of 50 percent of the eligible expenditures that exceed $250
but do not exceed $10,250. Thus, the maximum amount for the credit is $5,000
($10,000 × 50%)
58
The disabled access credit is available to?
The credit is available for any eligible
| access expenditures paid or incurred by an eligible small business
59
An eligible small business is
one that during the previous year either had gross
receipts of $1 million or less or had no more than 30 full-time employees. An eligible
business can include a sole proprietorship, partnership, regular corporation, or
S corporation.
60
Eligible access expenditures include
reasonable and necessary amounts that are paid
or incurred to make certain changes to facilities. These changes must involve the
removal of architectural, communication, physical, or transportation barriers that
would otherwise make a business inaccessible to disabled and handicapped individuals.
Examples of qualifying projects include installing ramps, widening doorways,
and adding raised markings on elevator control buttons.
61
eligible expenditures
do not include amounts that are paid or incurred in connection with any facility
that first was placed in service after
November 5, 1990
62
Red, Inc., an eligible business, makes $11,000 of capital improvements to business E X A M P L E 1 9
realty that had been placed in service in June 1990. The expenditures are intended to
make Red’s business more accessible to the disabled and are considered eligible expenditures
for purposes of the disabled access credit. The amount of the credit is
$5,000
| [($10,250 − $250) × 50%].
63
The credit for small employer pension plan startup costs is available for eligible
employers at a rate of?
the rate of 50 percent of qualified startup costs
64
An eligible employer
| is one with
fewer than 100 employees who have earned at least $5,000 of compensation
65
Qualified startup costs include
ordinary and necessary expenses incurred in
connection with establishing or maintaining an employer pension plan and retirement-
related education costs
66
The maximum credit a year for small employer pension plan startup costs is?
500 over 3 years. So 1500 total.
67
The credit for employer-provided child care is limited to?
limited annually
to $150,000, is composed of the aggregate of two components: 25 percent of qualified
child care expenses and 10 percent of qualified child care resource and referral
services.
68
Qualified child care expenses include
the costs of acquiring, constructing, rehabilitating,
| expanding, and operating a child care facility.
69
Child care resource and referral
| services include
amounts paid or incurred under a contract to provide child care
resource and referral services to an employee.
70
consistently
has been justified as a means of providing tax equity to the working poor. In
addition, the credit has been designed to reimburse the taxpayer for certain other
Federal taxes, such as the gasoline and Social Security taxes. Further, the credit is
intended to encourage economically disadvantaged individuals to become contributing
members of the workforce
earned income credit
71
The earned income credit is determined by
multiplying a maximum amount of
| earned income by the appropriate credit percentage
72
Generally, earned income
| includes
employee compensation and net earnings from self-employment but
excludes items such as interest, dividends, retirement benefits, nontaxable employee
compensation, and alimony/child support
73
If a taxpayer has children, the credit percentage
| used in the calculation depends on the number of qualifying children?
True
74
Eligibility for the credit depends not only on the taxpayer meeting the earned
income and AGI thresholds (shown in the IRS tables), but also on whether he or
she has a
qualifying child
75
In addition to being available for taxpayers with qualifying children, the earned
income credit is available to certain
workers without children. However, this provision
is available only to taxpayers ages 25 through 64 who cannot be claimed as a
dependent on another taxpayer’s return.
76
Willa, age 20, reports earned income for the year of $6,000. She is single and has E X A M P L E 2 3
no children. Willa qualifies for earned income credit?
False. Willa does not qualify for an earned income credit until she reaches
age 25 because she has no children
77
the tax credit for the elderly or disabled is available to
| the following.
Taxpayers age 65 or older.
• Taxpayers under age 65 who are retired with a permanent and total disability
and who have disability income from a public or private employer on account
of the disability.
78
A person generally is considered permanently and totally disabled
if
he or she is unable to engage in any substantial gainful activity due to
a physical or mental impairment for a period of at least 12 months (or lesser
period if the disability results in death)
79
The maximum allowable credit for elderly or disables is?
$1,125 (15% × $7,500 of qualifying income),
but the credit is less for a taxpayer who receives Social Security benefits or records
AGI exceeding specified amounts. Most taxpayers receive Social Security benefits
or report AGI high enough to reduce the base for the credit to zero. In addition,
because the credit is nonrefundable, the allowable credit cannot exceed the taxpayer’s
tax liablity.
80
explain foreign tax credit
Individual taxpayers and corporations may claim a tax credit for foreign income
tax paid on income earned and subject to tax in another country or a U.S. possession.
26 As an alternative, a taxpayer may claim a deduction instead of a credit.27 In
most instances, the foreign tax credit (FTC) is more advantageous because it provides
a direct offset against the U.S. tax liability
81
How do you compute the foreign tax credit?
The FTC allowed is the lesser of the foreign taxes imposed or the FTC overall limitation,
which is equal to the Federal income tax paid on the double-taxed income (so just us tax rate times income
82
How much expenses qualify for adoption expenses credit?
In 2012, up to $12,650 of costs incurred to adopt an eligible child qualify for the
credit
83
An eligible child is one who is:
* under 18 years of age at the time of the adoption or
| * physically or mentally incapable of taking care of himself or herself.
84
A married couple
| must file a joint return to claim the adoption expenses credit?
True
85
```
The amount of the adoption expense credit that otherwise is available is phased out for taxpayers
whose AGI (modified for this purpose) exceeds
```
$189,710 in 2012, and the credit is
| completely eliminated when AGI reaches $229,710.
86
Assume the same facts as in the previous example, except that Sam and Martha’s AGI E X A M P L E 2 7
is $214,710 in 2012. As a result, their available 2012 credit is reduced from $12,650 to
$4,744 {$12,650 − [$12,650 × ($25,000/$40,000)]
87
If AGI exceeds 189,710 The credit is calculated by
reducing the allowable amount (determined without this reduction) by the allowable
credit multiplied by the ratio of the excess of the taxpayer’s AGI over $189,710
to $40,000
88
provisions allow individual taxpayers to take a tax credit based
solely on the number of their qualifying children
child tax credit
89
Maximum credit available for child tax credit is?
The maximum credit available is $1,000 per child.34 The available credit is phased out
for higher-income taxpayers beginning when AGI reaches $110,000 for joint filers
($55,000 for married taxpayers filing separately) and $75,000 for single taxpayers.
90
The credit for child and dependent care expenses is a
specified
percentage of expenses incurred to enable the taxpayer to work or to seek employment.
Expenses on which the credit for child and dependent care expenses is
based are subject to limitations.
91
To be eligible for the child and dependent care expense credit, an individual must have either of the following.
• A dependent under age 13.
• A dependent or spouse who is physically or mentally incapacitated and who
lives with the taxpayer for more than one-half of the year.
92
Education Tax Credits
| Two credits, the
American Opportunity credit and the lifetime learning credit
93
he American Opportunity credit and the lifetime learning credit,39 are
available to
help qualifying low- and middle-income individuals defray the cost of higher education
94
The education credits are available for qualifying tuition and related expenses
incurred by students pursuing
undergraduate or graduate degrees or vocational training
95
Books and other course materials are eligible for the
American Opportunity credit
| but not the lifetime learning credit
96
Room and board are eligible for both credits
False. Room and board are ineligible for both credits.
97
The American Opportunity credit permits a maximum credit of
$2,500 per year (100
percent of the first $2,000 of tuition expenses plus 25 percent of the next $2,000 of
tuition expenses) for the first four years of postsecondary education
98
The lifetime
| learning credit permits a credit of
20 percent of qualifying expenses (up to $10,000
per year) incurred in a year in which the American Opportunity credit is not claimed
with respect to a given student.
99
Generally, the lifetime learning credit is used for
| individuals who are
beyond the first four years of postsecondary education.
100
Both education credits are available for qualified expenses incurred by a
taxpayer,
| taxpayer’s spouse, or taxpayer’s dependent.
101
Therefore, taxpayers who claim an education credit
may not deduct the expenses, nor may they claim the credit for amounts that are
otherwise excluded from gross income (e.g., scholarships, employer-paid educational
assistance)?
True
102
The Internal Revenue Code contains a variety of credits for businesses and individuals
to encourage the conservation of natural resources and the development of
energy sources other than oil and gas. Exhibit 12.2 provides a summary of several
of the more important
energy tax credits
103
Taxpayers may claim a nonrefundable credit for certain retirement plan contributions
based on eligible contributions of up to
$2,000 to certain qualified retirement
| plans, such as traditional and Roth IRAs and § 401(k) plans
104
for certain retirement plan contributions sometimes referred to as the “saver’s credit,” is intended to
encourage lower- and
middle-income taxpayers to contribute to qualified retirement plans. The benefit
provided by this credit is in addition to any deduction or exclusion that otherwise
is available due to the qualifying contribution.
105
credit for certain retirement plan contributions table is on 12-25
.
106
Credit Table is on page 12-26
.
107
The ________ usually is responsible for withholding the employee’s share of FICA
(commonly referred to as the Social Security tax) and appropriate amounts for
income taxes.
employer
108
The FICA tax has two components
Social Security tax (old age, survivors, and disability
insurance; rate 6.2 percent) and Medicare tax (hospital insurance; rate 1.45
percent). Both the employer and the employee pay the tax at these rates
109
is the amount of tax (including any AMT and self-employment tax)
an individual expects to owe for the year after subtracting tax credits and income
tax withheld
estimated tax
110
Any individual who has estimated tax for the year of $1,000 or more
in excess of withholdings must make quarterly estimated tax payments.47 No penalty
applies if the taxpayer had a zero tax liability for the preceding tax year and
the preceding tax year was a taxable year of 12 months and the taxpayer was a U.S.
citizen or resident for the entire preceding tax year.
First, the required annual payment is computed. This is the smaller of:
• Ninety percent of the tax shown on the current year’s return.
• One hundred percent of the tax shown on the preceding year’s return (the
return must cover the full 12 months of the preceding year). For 2009, the
100 percent requirement is reduced to 90 percent for income from a small
business (AGI is less than $500,000; fewer than 500 employees). If the AGI on
the preceding year’s return exceeds $150,000 ($75,000 if married filing separately),
the 100 percent requirement is increased to 110 percent.
111
Who is subject to self-employment tax?
Individuals with net earnings of $400 or more from
| self-employment are subject to it
112
For 2012, the selfemployment
| tax is
10.4 percent of self-employment earnings up to $110,100 (for
the Social Security portion) plus 2.9 percent of the total amount of self-employment
earnings (the Medicare portion).
113
Net earnings from self-employment include
gross income from a trade or business
less allowable trade or business deductions, the distributive share of any partnership
income or loss derived from a trade or business activity, and net income from
rendering personal services as an independent contractor.
114
For tax years beginning after 2012, an additional .9 percent Medicare tax is
imposed on wages received in excess of $250,000 for married taxpayers filing a joint
return ($125,000 if married filing separately) and $200,000 for all other taxpayers.
50 Unlike the general 1.45 percent Medicare tax on wages, the additional
tax on a joint return is on the combined wages of the employee and the employee’s
spouse. As a result, the Medicare tax rate will be:
1. 1.45 percent on the first $200,000 of wages ($125,000 on a married filing separate
return; $250,000 of combined wages on a married filing joint return), and
2. 2.35 percent (1.45% + .9%) on wages in excess of $200,000 ($125,000 on a
married filing separate return; $250,000 of combined wages on a married filing
joint return).
115
the tax rate for the Medicare tax on self-employment income is:
1. 2.9 percent on the first $200,000 of net earnings from self-employment
($125,000 on a married filing separate return; $250,000 on a married filing
joint return), and
2. 3.8 percent (2.9% + .9%) on net earnings from self-employment in excess of
$200,000 ($125,000 on a married filing separate return; $250,000 on a married
filing joint return).
116
For tax years beginning after 2012, an additional 3.8 percent Medicare tax is
imposed on the unearned income of individuals, estates, and trusts.51 For individuals,
the tax is 3.8 percent of the lesser of:
1. Net investment income, or
2. The excess of modified adjusted gross income over $250,000 for married taxpayers
filing a joint return ($125,000 if married filing separately) and
$200,000 for all other taxpayers.52
117
The 3.8 percent additional Medicare tax on unearned income is in addition to the
additional .9 percent Medicare tax on wages or self-employment income. Taxpayers
who generate both high wages (or self-employment income) and high investment
income may be subject to both taxes?
True
