Chapter 6 Flashcards
accounting periods
calendar, fiscal, or short-period tax years
accounting methods
accounting methods
hybrid methods
A method of accounting that involves the use of both the cash and accrual methods of accounting. The tax law permits the use of a hybrid method, provided the taxpayer’s income is clearly reflected by the method.
the primary reporting mechanism for additional taxes
Form 1040, Schedule 2
Kiddie Tax
tax on the unearned income of minor children and certain students
Nanny Tax
Payroll taxes paid by a taxpayer that employs certain household workers
net investment income tax
The ACA imposed a 3.8 percent Medicare tax on certain net investment income of individuals that have net investment income or modified adjusted gross income above the annual statutory threshold amounts.
fiscal year
An annual accounting period which does not end on December 31, a calendar year-end. An example of a fiscal year is July 1 through June 30.
Almost all individuals file tax returns using a
calendar-year accounting period
income or loss from partnerships and S corporations is passed through on
Schedule K-1
income or loss from partnerships and S corporations is passed through to
the owners and taxed on the owners’ personal tax returns
Partnerships and S corporations are not___ but are___.
taxable entities; reporting entities
Partnerships and corporations must use a specified
Fiscal Year end for tax reporting
Corporations can generally choose any
fiscal year-end for tax purposes
A corporations ___ & ___ must match the fiscal year end for taxes
books;records
Year end must always be
the last day of a month
short periods
Accounting periods less than one year
If taxpayers have a short year other than their first or last year of operations, they are required to
annualize their taxable income to calculate the tax for the short period
The tax liability is calculated at __% for the annualized period and allocated back to the short period
21%
Omoto Corporation obtains permission to change from a calendar year to a tax year ending August 31. For the short period, January 1 through August 31, 2019, the corporation’s taxable income was $40,000. What is their short period tax?
$8400
Annualization
income for period x 12/operating months.
21% x annualized income
annualized income x 12/operating months= short period tax
The tax law requires taxpayers to report taxable income using the method of accounting
regularly used by the taxpayer in keeping his or her books, provided the method clearly reflects the taxpayer’s income.
accrual method
Revenue is accounted for when it is earned. Typically, revenue is recorded before any money changes hands. Unlike the cash method, the accrual method records revenue when a product or service is delivered to a customer with the expectation that money will be paid in the future. Expenses of goods and services are recorded despite no cash being paid out yet for those expenses.
cash basis accounting
Revenue is reported on the income statement only when cash is received. Expenses are only recorded when cash is paid out. The cash method is mostly used by small businesses and for personal finances.
wages, interest and dividend income, capital gains, and personal deductions are accounted for on ___ _____ for individuals
cash basis
if an individual has schedule C income, they can report using the _____ or ___ methods
accrual/hybrid
If a taxpayer has two businesses, they can use ___
different methods of accounting for each
Tax rules require cash basis taxpayers to always use the accrual basis for
prepayments of interest
accrual basis taxpayers who receive certain types of prepaid income, such as rent in advance, must generally recognize the income on
cash basis
Taxpayers make an election to use an accounting method when
they file an initial tax return and use that method
To change methods, taxpayers must
obtain permission from the IRS.
Regular corporations, partnerships that have a regular corporation as a partner, and tax-exempt trusts with unrelated business income are generally prohibited
from using the cash method. However, this requirement does not apply to farming businesses, qualified personal service corporations, and entities with average annual gross receipts of $26 million or less
to prevent abuse of tax systems between relatives
the tax law contains provisions that govern related-party transactions
two types of transactions between related parties restricted
Sales of property at a loss
Unpaid expenses and interest
Section 267
Part of the tax code restricting relatives
When property is sold for a loss to a relative
the seller cannot claim the loss (disallowed)
When property is sold for a loss to a relative, and then that relative sells it at a gain later,
they can claim the income, less the prior relative’s disallowed loss
When property is sold for a loss to a relative, and then that relative sells it at a loss later,
no deduction for disallowed loss is available
When property is sold for a loss to a relative, and then that relative sells it at a gain less than the prior loss later,
the disallowed loss offsets the gain entirely
Ficus Corporation, an accrual basis taxpayer, is owned by Bill, an individual who uses the cash method of accounting for tax purposes. On December 31, Ficus Corporation accrues interest expense of $10,000 on a loan from Bill, but the interest is not paid to him. Ficus Corporation ____ deduct the $10,000 until the tax year in which it is actually paid to Bill.
may not
related parties under Section 267 are
Family, a greater than 50% owner of a business, two companies under the same umbrella, Trusts, corporations, some charities.
Kalmia Corporation is owned 70 percent by Jim and 30 percent by Kathy. Jim and Kathy are unrelated to each other. Since Jim owns over 50 percent of the corporation, he is deemed to be a related party to the corporation. As a result, if Jim sells property to the corporation at a loss, the loss will be _____. Since Kathy is not related to the corporation, the rules of Section 267 ___ to Kathy.
disallowed; don’t apply
common constructive ownership rules
taxpayers are deemed to own stock owned by certain relatives and related entities
A taxpayer is deemed to own
all the stock owned by his or her spouse, brothers and sisters (whole or half), ancestors, and lineal descendants. his or her proportionate share of stock owned by any partnership, corporation, trust, or estate in which he or she is a partner, shareholder, or beneficiary any stock owned directly or indirectly by a partner
ABC Corporation is owned 40 percent by Andy, 30 percent by Betty, and 30 percent by Chee. Betty and Chee are married to each other. For purposes of related-party rules, Andy is ___ related party to the corporation since he does not own more than 50 percent of the corporation. Betty & Chee _____ related shareholders both to _____ and the ______ because they own __% of the company
not a; are; each other; the company; 60%
Robert owns 40 percent of R Corporation and 40 percent of T Corporation. T Corporation owns 60 percent of R Corporation.
Robert owns __ percent of R corporation (direct ownership% x constructive ownership%)
Since Robert is deemed to own __ percent of R Corporation, he is ___ party to R Corp.
64;64;a related
Tax cuts often involve
temporary provisions designed to stimulate the economy
cuts are often paid for with
the expiration of many of the favorable tax provisions toward the end of the budget window.
Tax reform represents
a long-term change in the method by which taxes are applied or calculated.
kiddie tax applies to
children who are ages 18 or younger and full-time students ages 19 through 23 at the end of the year, who have at least one living parent, and who have “net unearned income” of more than $2,200 for 2019
kiddie tax is computed as
trust & estate tax
kiddie tax brackets
0-2600 10%
2600-9300 $260+24%
9300-12750 $1868+35%
>12750 $3075.5+37%
kiddie taxable income is divided into
earned income and unearned income
child’s taxable income
total earned & unearned income less standard deduction (the greater of 1100 or earned income + 350)
Net unearned income is
unearned income less $2,200
Unearned income is income that is not derived from
wages, salaries, or similar compensation or income from a trade or business (interest, dividends, capital gains
Earned taxable income is
the residual amount of taxable income after reduction by NUI (in other words, taxable income less NUI)
tax on the NUI is calculated at_____ rates and the tax on ETI is calculated at the rates ___
trust and estate;applicable to the child’s filing status
kiddie tax is reported on
form 8615
parents may elect to include
child’s gross income on the parents’ tax return
requirements for parents to include children’s gross income on their return are:
The child’s gross income is from interest and dividends only.
The gross income is more than $1,100 and less than $11,000 (or 10 times the lower amount).
No estimated tax has been paid in the name of the child and the child is not subject to backup withholding.
election to include the income of a minor child on the parents’ return is recorded on
Form 8814
alternative minimum tax (AMT)
Designed to prevent wealthy taxpayers (but now applicable to many taxpayers) from taking advantage of tax write-offs to pay little or no tax. Computed by calculating both regular tax and AMT and generally paying whichever tax is larger.
taxpayers must pay the alternative minimum tax if
AMT tax liability is larger than their regular tax liability
AMT is calculated on form
6251
AMT adjustments
Items excluded from the computation of regular taxable income but required to be added to compute alternative minimum taxable income.
AMT preferences
Items excluded from the computation of regular taxable income but required to be added to compute alternative minimum taxable income.
adjustments are
timing differences that arise because of differences in the regular and AMT tax calculations (e.g., depreciation timing differences),
references are
pecial provisions for the regular tax that are not allowed for the AMT (e.g., state income taxes
pecial provisions for the regular tax that are ___ for the AMT (e.g., state income taxes
not allowed
The deductions for property tax, state income tax, and other taxes allowed as itemized deductions for regular tax are ___for AMT.
not allowed
Depreciation is generally calculated over a ___ for AMT, sometimes using a different method
longer life
Net operating losses are calculated differently for AMT and often result in____ when they are present.
an adjustment
State income tax refunds are ___ income for AMT since the state income tax deduction is ___ for AMT.
not considered;not allowed
Interest from specified private activity bonds is____ for regular tax purposes, but is ___ for AMT.
not taxed ; taxable
To reduce the chances of subjecting a greater number of taxpayers to the AMT,
an exemption amount is permitted as a deduction against AMT income
AMT Exmption Thresholds
MFJ exemption 111700
MFJ Threshold 1020600
S/HOH Exemption 71700
S/HOH Threshold 510300
MFS Exemption 55850
MFS Threshold 510300
AMT Exemption Amount reduced at
25c/dollar by which the taxpayers AMT income exceeds the threshold amounts
For 2019, the alternative minimum tax rates for calculating the tentative minimum tax are ___ % of the first $___ ($___ for married taxpayers filing separately), plus ___ on amounts above the threshold
26% of 194800; 97400; 28%
household workers
Employees hired to work at specific tasks within a household, including child care, cleaning, meal preparation, and household administration. The payment of household workers generally subjects the taxpayer to a requirement to withhold or pay related payroll taxes. See Nanny tax.
Household employers are not required to pay ____taxes on cash payments of less than ____ paid to any household employee in a calendar year.
FICA ;$2,100
Household employers must also withhold ____ ____ if requested by the employee and are required to pay ____ if more than $1,000 in cash wages are paid to household employees during any calendar quarter.
income taxes;FUTA
federal unemployment tax rate is _% of an employee’s wages up to $____
6%; $7000
Self Employment tax rate
double FICA 12.4% OASDI 2.9% Medicare- same limits apply.
workers not subject to FICA taxes on wages paid for work in the home:
The taxpayer’s spouse
The taxpayer’s father or mother
The taxpayer’s children under 21 years of age
Anyone who is under age 18 during the year, unless providing household services is his or her principal occupation (being a student is considered an occupation for purposes of this requirement)
Under the nanny tax provisions, household employers only have to report FICA, federal income tax withholding, and FUTA tax __
once a year.
Taxpayers who have nonhousehold worker(s) in addition to household worker(s) can elect to report any FICA taxes and withholding on Forms
941 and 940 with their regular employees.
Also, at the close of a tax year, taxpayers must file Form_____ and Form ___ with the Social Security Administration for each household employee who earned $2,100 or more in cash wages subject to FICA tax or had federal income taxes withheld from wages.
W2A; W3
IRS Publication 926
All about Household workers
Net investment income tax rate
3.8% addl medicare tax
Net investment income tax applies to
individuals with modified AGI over $250,000 for joint filers ($125,000 if married filing separate) and $200,000 for single filers
Modified AGI is
adjusted gross income increased by certain foreign earned income amounts
3.8% tax is applied to these types of income
Interest and dividends
Royalties
Annuities
Net rental income, with some exceptions
Passive activities
Most gains on the sale of capital and other assets
3.8% tax is not applied to these types of income
Tax-exempt interest
Excluded gain on the sale of a principal residence
Distributions from retirement plans and individual retirement accounts
Wages and self-employment income (earned income); however, this income may be subject to a 0.9 percent Medicare tax
Deductions allowed in arriving at net investment income subject to tax include
State income taxes reasonably allocated to the investment income
Investment interest expense
net investment income tax is reported on
8960
Additional medicare tax
.9% applied to wages over
250000(MFJ)
125000(MFS)
200000(S/HOH/QW)
additional medicare has no
upper limit
there is ___ employer match for additional medicare
no
Additional Medicare is calculated on Schedule __ and reported on form ____
SE; 8959
Additional Medicare is withheld on all employees over $_____ regardless of ____
200,000; Filing status
Self-employed taxpayers generally report earnings on Schedule _, Schedule _, and Schedule _ in the case of earned royalty income and partnership income passed through on Schedule __
C, F, E, K1
for high income self employed taxpayers
The 0.9 percent Medicare tax is___ as part of the computation of the deductible self-employment tax adjustment for AGI shown on the front page of Form 1040.
not allowed
for high income self employed taxpayers
A loss from self-employment ___ offset gains from another self-employment enterprise by the same individual. In the case of married individuals, a loss incurred by one spouse ___ offset the income earned by the other self-employed spouse for purposes of the 0.9 percent Medicare tax. This is ___ for the 2.9 percent Medicare tax on self-employment income because the 2.9 percent Medicare tax of each spouse is required to be computed ____.
may; may; not true; separately
for high income self employed taxpayers
Losses from self-employment ___ allowed to offset salary or wages for purposes of the 0.9 percent Medicare tax
are not
