Federal Taxation II: More about Income Flashcards
Realization
Event that triggers taxation of income… difficult to define precisely
Return of Capital
Not income.
Cost of goods/property sold.
Gross Income
Amount of realized income after eliminating deferred/ excluded income
Tax Shelter
Legal way of minimizing investor’s taxable income.
- Entity other than C-Corp
- Ownership interests have been offered for sale
- Offering required to be registered with fed/state security agencies.
Qualified personal service corp
Corp that exists if:
- substantially all activity is services in health, law, engineering, architecture, accounting, actuarial science, performing arts or consulting
- at least 95% of its stock is owned by the employees performing the services
Hybrid Method of accounting
Business w/ inventory must use accrual to report purchases and sales.
Hybrid if rest of accounts are kept using cash basis.
Uniform Capitalization Method
Mfg and some retailers/wholesalers must capitalize direct/indirect costs allocable to property they produce or buy for resale.
Costs are allocated to ending inv and property sold during the year (usually increasing basis of inventory)
Long-term contract special rule: Percentage of Completion
Gross profit from a project recognized over time period it takes to complete project.
Long-term contract special rule: Completed Contract Method
Gross profit deferred until production is complete.
Only usable by:
- $10m or less in preceding 3 yrs
- Home construction contractors
- Contract where less than 10% of total costs relate to actual construction of property on land
Prepaid interest, rents, royalties (when taxed?)
Usually taxed when received
Short Tax Year (e.g. 5 months)
- multiply income by 12/5 to annualize
- compute corporate tax liability on the full 12 months
- multiply that amount by 5/12 to prorate for short tax year
Cafeteria Plan Requirements (5)
- all participants employees
- may choose b/w 2 or more benefits
- required to make elections among the benefits
- plan must be in writing with certain specified info
- plan may not provide deferred income except for 401k
Taxation of Employee Benefits (general rule)
Any benefit received by an employee included in gross income unless specific provision excludes the benefit
When are disability benefits taxable?
- When the policy is paid for by the taxpayer: benefits NOT income
- When policy paid for by employer: benefits ARE income
Life Insurance Premiums
Not income if group-term life paid by employer. Exclusion limit = $50K.
Employee premiums are income if whole-life.
Health Insurance Premiums
Not income if paid by employer
Self-employed health insurance premiums
Can deduct 100% for self, spouse, dependents.
Deduction cannot exceed net earnings from self-employment
Personal Expenses paid by employer
Always income
Food and Lodging
Not income if:
- for convenience of employer
- provided in kind on the employer’s premises (not cash for meals)
- employer must require employee to accept lodging as a condition of employment (must also be on premises)
Working Condition Benefit
Benefit provided by employer that would be deductible if paid by employee
De Minimus fringes
Excluded b/c benefits are small in value/infrequent (coffee)
No additional cost services
Excluded when provided to employee, spouse, dependents by employers at no substantial additional cost (airline empty plane seats)
Employee discounts
Excluded if not excessive (20% of value of services or av. gross profit % on merch)
Nominal gifts
Excluded up to $25 as long as not cash/gift certificates
Safety/Length of Service Awards
Excluded, subject to $400 limit (non-qualified plan) or $1600 limit (qualified)
- can’t be cash
- only given b/c of safety/length of service
- no more than once every 5 yrs
Transportation and Parking
Excluded up to limits:
$130/month for trans
$250/month for park
(2015)
Accountable plan
When employees are reimbursed for business expenses, determination of taxability depends on accountable plan:
- YES: not taxable
- NO: included in income and 2% misc itemized deduction
Stock Option Key Dates (3)
- Grant date - date option granted to employee
- Exercise date - date option is exercised & stock is purchased
- Sale date - date stock is sold
Nonqualified stock options
- No income recognized when option granted
- On exercise date, employee income = (FMV-Exercise Price) x # of share exercised.
a. employer receives salary deduction for same amt
b. employee has basis in stock = FMV
Incentive stock options
No income recognized when option granted/exercised.
Consequences when stock is later sold vary.
Retirement Savings
Contributions made by employer (sometimes employee) not subject to tax until withdrawn from plan
Qualified Pension Plan
Contributions of salary to “qualified” pension plans deferred until distributions
Traditional IRA
Contributions deductible to limit of $5,500 (2014).
Withdrawals taxed as income in year of withdrawal.
Modified AGI
AGI + IRA deduction + domestic production activities deduction + student loan interest + foreign earned income/housing cost exclusion + exclusion for employer-provided adoption assistance
Roth IRA
Contributions are not deductible
Withdrawals may be tax exempt
Conversion of traditional to roth IRA
Can be done, but it is a taxable event
