Federal Taxation: Income

Question 1

How are federal and state refunds handled as taxable income?

Answer 1

Not reportable as income to the extent that the amount refunded does not reduce the tax from the previous year (refer to Tax Benefit Rule).

Question 2

Describe the Tax Benefit Rule

What taxes does the Tax Benefit Rule apply to

Answer 2

Recoveries of taxes previously deducted should be reported as income during the year of recovery.

This rule applies to: state income tax, personal property taxes, real property taxes, state sales and use tax, state corporation franchise tax, stamp taxes, federal excise tax, customs duties, and farmland preservation credits.

Question 3

U.S. Series EE Bonds interest income exclusions

• 2 rules for ownership
• 2 Qualified higher education expenses
• Expenses incurred by whom (3)
• Eligible expenses decreased by 4 things

Answer 3

1) Purchaser must make purchase after turning 24; 2) Purchaser must be sole owner of the bonds (or joint owner with spouse).
1) Tuition and 2) Fees
1) Self, 2) Spouse, 3) Any claim as eligible dependent
1) Qualified scholarships, 2) Education expenses to exempt organization, 3) Waiver of tuition and fees through state program, 4) Educational allowance deductible by tax code

Question 4

Which accounting method must a C Corporation use?

What is the exception?

Answer 4

Accrual method

May use cash method if annual revenues are less than $5M for previous 3 years. Once $5M test fails, must always use accrual method.

Question 5

Which organizations cannot use cash method of accounting?

Answer 5

1. Corporations (unless qualified personal service corps) with receipts >$5M
2. Partnership with a C Corporation as partner
3. Tax shelters

Question 6

Uniform Capitalization Rules do not apply to what organization?

Answer 6

Small personal property dealers

Those with less that $10M receipts in preceding 3 years

Question 7

Which accounting method can partnerships use?

Answer 7

Partnerships can use whichever accounting method it desires regardless of receipts unless one of partners is a corporation.

Question 8

For tax purposes, how is income earned? (2)

Answer 8

1. All events have occurred to attach the taxpayers right to receive income
2. The amount of income can be determined with reasonable accuracy