Final Note Sheet Flashcards
Qualifying Child Tests
relative abode >1/2 of year age < 19 and < 24 for a full time student support > 1/2 US citizen Joint return
Qualifying Relative Test
relative GI < 3800 support > 1/2 US citizen or Canada or mexico joint return
Tax Equation
Income (broadly conceived) Less: Exclusions Gross income Less: Deductions for adjusted gross income Adjusted gross income Less: The greater of— Total itemized deductions or standard deduction Less: Personal and dependency exemptions Taxable income Tax on taxable income Less: Tax credits Tax due (or refund)
Income
all income
exclusions
Accident insurance proceeds Annuities (cost element) Bequests Child support payments Cost-of-living allowance (for military) Damages for personal injury or sickness Gifts received Group term life insurance, premium paid by employer (for coverage up to $50,000) Inheritances Interest from state and local (i.e., municipal) bonds Life insurance paid upon death Meals and lodging (if furnished for employer’s convenience) Military allowances Minister’s dwelling rental value allowance Railroad retirement benefits (to a limited extent) Scholarship grants (to a limited extent) Social Security benefits (to a limited extent) Unemployment compensation (to a limited extent) Veterans’ benefits Welfare payments Workers’ compensation benefits
gross income items
Alimony Annuities (income element) Awards Back pay Bargain purchase from employer Bonuses Breach of contract damages Business income Clergy fees Commissions Compensation for services Death benefits Director’s fees Dividends Embezzled funds Employee awards (in certain cases) Employee benefits (except certain fringe benefits) Estate and trust income Farm income Fees Gains from illegal activities Gains from sale of property Gambling winnings Group term life insurance, premium paid by employer (for coverage over $50,000) Hobby income Interest Jury duty fees Living quarters, meals (unless furnished for employer’s convenience) Mileage allowance Military pay (unless combat pay) Partnership income Pensions Prizes Professional fees Punitive damages Rents Rewards Royalties Salaries Severance pay Strike and lockout benefits Supplemental unemployment benefits Tips and gratuities Travel allowance (in certain cases) Treasure trove (found property) Wages
deductions for AGI
• Expenses incurred in a trade or business.
• One-half of self-employment tax paid.
• Unreimbursed moving expenses.
• Contributions to traditional Individual Retirement Accounts (IRAs) and certain
other retirement plans.
• Fees for college tuition and related expenses(education).
• Contributions to Health Savings Accounts (HSAs).
• Penalty for early withdrawal from savings.
• Interest on student loans.
• Excess capital losses.
• Alimony payments.
Itemized Deductions
Medical expenses in excess of 7.5% of AGI
State and local income or sales taxes
Real estate taxes
Personal property taxes
Interest on home mortgage
Investment interest (to a limited extent)
Charitable contributions (within specified percentage limitations)
Casualty and theft losses in excess of 10% of AGI
Miscellaneous expenses (to the extent the total exceeds 2% of AGI)
Union dues
Professional dues and subscriptions
Certain educational expenses
Tax return preparation fee
Investment counsel fees
Unreimbursed employee business expenses (after a percentage reduction
for meals and entertainment)
Nondeductible Expenses
• Personal living expenses, including any losses on the sale of personal use property. • Hobby losses. • Life insurance premiums. • Expenses incident to jury duty. • Gambling losses (in excess of gains). • Child support payments. • Fines and penalties. • Political contributions. • Certain passive losses. • Funeral expenses. • Expenses paid on another’s behalf. • Capital expenditures.
Standard Deduction
Filing Status 2012 2011 Single $ 5,950 $ 5,800 Married, filing jointly 11,900 11,600 Surviving spouse 11,900 11,600 Head of household 8,700 8,500 Married, filing separately 5,950 5,800
Standard Deduction of a Dependant
limited to the greater of 950 or the sum of the individuals earned income plus 300 unless it exceeds the standard deduction
Surviving Spouse rules
The joint return rates also apply for two years following the death of one spouse, if
the surviving spouse maintains a household for a dependent child. The child must
be a son, stepson, daughter, or stepdaughter who qualifies as a dependent of the
taxpayer.
abandoned spouse rules
taxpayer can files as head of household or single if
•The taxpayer does not file a joint return.
• The taxpayer paid more than one-half the cost of maintaining his or her
home for the tax year.
• The taxpayer’s spouse did not live in the home during the last six months of
the tax year.
• The home was the principal residence of the taxpayer’s son, daughter, stepson,
stepdaughter, foster child, or adopted child for more than half the year,
and the child can be claimed as a dependent.
assignment of income doctrine
says that income earned from personal services must be attributed to the person who earned it
annuity table is on
pg 4-32
Exclusion of annuity formula
(Investment/expected return) * annuity payment = exclusion amount
note: expected return = monthly pmt * 12 * annuity table factor
accrual basis
if checks are received in the current year but are deposits for future services then it isn’t included in income until next year
constructive receipt doctrine
income isn’t recognized unless it is:
• The amount is made readily available to the taxpayer.
• The taxpayer’s actual receipt is not subject to substantial limitations or
restrictions.
Interest on bonds
is allocated to the owner based on the time that they owned it during the year
child support payments
payments from child support are not reported as income or are they deductible
group term life insurance
first 50000 in protection is excluded and anything over is taxed per 1000 multiplied by the monthly factor in the uniform premium table on 4-34
ex: 250000 is covered 250000-50000=200000/1000=200.3=6012=720 is taxable
medical insurance premiums
from the employer and employee are excluded
gift
given out of love affection
scholarship income
portion used for books and tuition is nontaxable, but part used for room and board is taxable
completely destroyed property
if it is completely destroyed then you can deduct the basis of a business use asset
personal use losses
non deductible
partial destruction of property(damaged)
A different measurement rule applies for partial destruction of business property
and income-producing property and for partial or complete destruction of personal
use property. In these situations, the loss is the lesser of the following:
• The adjusted basis of the property.
• The difference between the fair market value of the property before the event
and the fair market value immediately after the event.
Punitive damages
punitive damages are thus included in gross income.
Taxation of damage awards
Breach of contract (generally loss of income) Taxable.
Property damages Recovery of cost; gain to the extent of the excess over basis. A loss
is deductible for business property and investment property to
the extent of basis over the amount realized. A loss may be
deductible for personal use property (see discussion of casualty
losses in Chapter 7).
Personal injury
Physical All compensatory amounts are excluded unless previously
deducted (e.g., medical expenses). Amounts received as
punitive damages are included in gross income.
Nonphysical Compensatory damages and punitive damages are included in
gross income.
no-additional-cost service
• The employee receives services, as opposed to property.
• The employer does not incur substantial additional cost, including forgone
revenue, in providing the services to the employee.
• The services are offered to customers in the ordinary course of the business
in which the employee works.53
qualified employee discount
• The exclusion is not available for real property (e.g., a house) or for personal
property of the type commonly held for investment (e.g., common stocks).
• The property or services must be from the same line of business in which the
employee works.
• In the case of property, the exclusion is limited to the gross profit component of
the price to customers.
• In the case of services, the exclusion is limited to 20 percent of the customer
price.55
qualified transportation fringes
- Transportation in a commuter highway vehicle between the employee’s residence
and the place of employment. - A transit pass.
- Qualified parking.
- Qualified bicycle commuting reimbursement.
qualified parking
• Parking provided to an employee on or near the employer’s business premises.
• Parking provided to an employee on or near a location from which the
employee commutes to work via mass transit, in a commuter highway vehicle,
or in a carpool.
tax benefit rule
the taxpayer must include the reimbursement
in income up to the amount of the deductions that decreased taxable
income in the earlier year.
investigation expenses
If the taxpayer is in a business that is the same as or similar to that being investigated,
all investigation expenses are deductible in the year paid or incurred.
When the taxpayer is not in a business that is the same as or similar to the one
being investigated, the tax result depends on whether the new business is acquired. If
the business is not acquired, all investigation expenses generally are nondeductible.38
E X A M P L E 1 9 Lynn, a retired merchant, incurs expenses in traveling from Rochester, New York, to
California to investigate the feasibility of acquiring several auto care centers. If no acquisition
takes place, none of the expenses are deductible. n
If the taxpayer is not in a business that is the same as or similar to the one being
investigated and actually acquires the new business, the expenses must be capitalized
as startup expenses. At the election of the taxpayer, the first $5,000 of the
expenses can be immediately deducted. Any excess expenses can be amortized
over a period of 180 months (15 years). In arriving at the $5,000 immediate deduction
allowed, a dollar-for-dollar reduction must be made for those expenses in
excess of $50,000.
Hobby Losses
If an individual can show that an activity has been conducted with the intent to
earn a profit, losses from the activity are fully deductible. The hobby loss rules
apply only if the activity is not engaged in for profit.
Hobby expenses are deductible
only to the extent of hobby income
The Regulations stipulate that the following nine factors should be considered
in determining whether an activity is profit-seeking or is a hobby:41
• Whether the activity is conducted in a businesslike manner.
• The expertise of the taxpayers or their advisers.
• The time and effort expended.
• The expectation that the assets of the activity will appreciate in value.
• The taxpayer’s previous success in conducting similar activities.
• The history of income or losses from the activity.
• The relationship of profits earned to losses incurred.
• The financial status of the taxpayer (e.g., if the taxpayer does not have substantial
amounts of other income, this may indicate that the activity is
engaged in for profit).
• Elements of personal pleasure or recreation in the activity.
presumptive rule of 183
The Code provides a rebuttable presumption that an activity is profit-seeking if the
activity shows a profit in at least three of any five prior consecutive years.
hobby loss deduction order
Amounts deductible under other Code sections without regard to the nature
of the activity, such as property taxes and home mortgage interest.
• Amounts deductible under other Code sections if the activity had been
engaged in for profit, but only if those amounts do not affect adjusted basis.
Examples include maintenance, utilities, and supplies.
• Amounts that affect adjusted basis and would be deductible under other
Code sections if the activity had been engaged in for profit.43 Examples
include depreciation, amortization, and depletion.
These deductions are deductible from AGI as itemized deductions to the extent
they exceed 2 percent of AGI. If the taxpayer uses the standard deduction rather
than itemizing, all hobby loss deductions are wasted.
primarily personal use rental home
If the residence is rented for fewer than 15 days in a year, it is treated as a personal
residence. The rent income is excluded from gross income, and mortgage interest
and real estate taxes are allowed as itemized deductions, as with any personal residence.
Primarily Rental Use
If the residence is rented for 15 days or more in a year and is not used for personal
purposes for more than the greater of (1) 14 days or (2) 10 percent of the total
days rented, the residence is treated as rental property.46 The expenses must be
allocated between personal and rental days if there are any personal use days during
the year. The deduction of the expenses allocated to rental days can exceed
rent income and result in a rental loss. The loss may be deductible, subject to the
at-risk and passive activity loss rules
Personal/Rental Use
If the residence is rented for 15 days or more in a year and is used for personal purposes
for more than the greater of (1) 14 days or (2) 10 percent of the total days
rented, it is treated as a personal/rental use residence. The expenses must be allocated
between personal days and rental days. Expenses are allowed only to the
extent of rent income.
and the remaining loss is carried forward as a passive loss
losses between related parties
The Code provides for the disallowance of any “losses from sales or exchanges of
property … directly or indirectly” between related parties.
Freida sells common stock with a basis of $10,000 to her son, Bill, for its fair market E X A M P L E 3 5
value of $8,000. Bill sells the stock several years later for $11,000. Freida’s $2,000 loss is
disallowed upon the sale to Bill, and only $1,000 of gain ($11,000 selling price −
$8,000 basis − $2,000 disallowed loss) is taxable to him upon the subsequent sale.
personal casualty loss floor
The amount of the loss for personal use property must be further reduced by a
$100 per event floor and a 10 percent-of-AGI aggregate floor.
Calculation of the Domestic Production Activities Deduction
9%*lesser of Qualified activities income (QPAI) or
Taxable (or modified adjusted gross) income
or alternative minimum taxable income
modified
adjusted gross income
substituted for taxable income.34
The taxable income limitation is determined after the application of any net
operating loss (NOL) deduction for the tax year
Moving expenses
deductible for moves in connection with the commencement
of work at a new principal place of work.19 Both employees and self-employed individuals
can deduct these expenses. To be eligible for a moving expense deduction,
a taxpayer must meet two basic tests: distance and time.
distance:
To meet the distance test, the taxpayer’s new job location must be at least 50 miles
farther from the taxpayer’s old residence than the old residence was from the former
place of employment.
time:
To meet the time test, an employee must be employed on a full-time basis at the
new location for 39 weeks in the 12-month period following the move. If the taxpayer
is a self-employed individual, he or she must work in the new location for 78
weeks during the next two years. The first 39 weeks must be in the first 12 months.
The time test is disregarded if the taxpayer dies, becomes disabled, or is discharged
Qualified Moving expenses
• Moving household goods and personal effects.
• Traveling from the former residence to the new place of residence.
traveling includes lodging, but not meals, for the taxpayer and members
of the household.20 The taxpayer can elect to use actual auto expenses (no depreciation
is allowed) or the automatic mileage method. In this case, moving expense mileage is
limited in 2012 to 23 cents per mile for each car. The automatic mileage rate for 2011 was
divided between 19 cents (for the first six months) and 23.5 cents per mile (for the last six
months).
not included:
In addition to meals while en route, the moving expense deduction does not
include the following costs:
• New car tags and driver’s licenses.
• Loss on the sale of a residence or penalty for breaking a lease.
• Forfeiture of security deposits and loss from disposing of club memberships.
• Pre-move house-hunting expenses.
• Temporary living expenses.
education expenses
ordinary and necessary business expenses provided the expenses are incurred for
either of two reasons:
• To maintain or improve existing skills required in the present job.
• To meet the express requirements of the employer or the requirements
imposed by law to retain his or her employment status.
not deductible these are not deductible:
• To meet the minimum educational standards for qualification in the taxpayer’s
existing job.
• To qualify the taxpayer for a new trade or business.
classification of education expenses
Education expenses include books and supplies, tuition, and transportation (e.g.,
from the office to night school) and travel (e.g., meals and lodging while away from
home at summer school).
deduction for qualified tuition and related expenses.
A deduction for AGI is allowed for qualified tuition and related expenses involving
higher education (i.e., postsecondary). The deduction is the lesser of the qualifying
amount spent or the maximum amount allowed by
table:
Single $ 65,000
& $4,000
Married 130,000
Single 65,001
to 2,000
80,000*
Married 130,001
to 2,000
160,000*
Qualified tuition and related expenses include whatever is required for
enrollment at the institution. Usually, student activity fees, books, and room
and board are not included.30
• The expense need not be employment related, although it can be.
• The deduction is available for a taxpayer’s spouse or anyone who can be
claimed as a dependent and is an eligible student.
• The deduction is not available for married persons who file separate returns.
• To avoid a “double benefit,” the deduction must be coordinated with other
education provisions (e.g., American Opportunity and lifetime learning credits).
Along this same line, no deduction is allowed for a taxpayer who qualifies
as another’s dependent.31
• The deduction for AGI classification avoids the 2 percent-of-AGI floor on miscellaneous
itemized deductions. As noted later in the chapter, this is the fate
suffered by other education-related employee expenses.
charitable contribution
gift made to a qualified organization.
Benefit Received Rule
When a donor derives a tangible benefit from a contribution, he or she cannot
deduct the value of the benefit.
An exception to this benefit rule provides for the deduction of an automatic percentage
of the amount paid for the right to purchase athletic tickets from colleges
and universities.39 Under this exception, 80 percent of the amount paid to or for
the benefit of the institution qualifies as a charitable contribution deduction.
non deductible items, for charitable contributions
• Dues, fees, or bills paid to country clubs, lodges, fraternal orders, or similar
groups.
• Cost of raffle, bingo, or lottery tickets.
• Cost of tuition.
• Value of blood given to a blood bank.
• Donations to homeowners associations.
• Gifts to individuals.
• Rental value of property used by a qualified charity.
service
unreimbursed charitable expenses
deductible. For example, the cost of a uniform (without general utility) that is
required to be worn while performing services may be deductible, as are certain outof-
pocket transportation costs incurred for the benefit of the charity. In lieu of these
out-of-pocket costs for an automobile, a standard mileage rate of 14 cents per mile is
allowed.40 Deductions are permitted for transportation, reasonable expenses for
lodging, and the cost of meals while away from home that are incurred in performing
the donated services. The travel expenses are not deductible if the travel involves
a significant element of personal pleasure, recreation, or vacation.
qualified organizations
To be deductible, a contribution must be made to one of the following organizations:
42
• A state or possession of the United States or any subdivisions thereof.
• A corporation, trust, community chest, fund, or foundation that is situated in
the United States and is organized and operated exclusively for religious,
charitable, scientific, literary, or educational purposes or for the prevention
of cruelty to children or animals.
• A veterans’ organization.
• A fraternal organization operating under the lodge system.
• A cemetery company.
time of deduction
A charitable contribution generally is deducted in the year the payment is made.
property donated valued
at fair market value
documentation for charitable contributions included classification of contributions
Documentation and Substantiation Requirements for Charitable Contributions
Cash gifts : A deduction is allowed only if the taxpayer has a proper receipt (e.g., bank
record such as a canceled check or written statement from the charity)
showing the name of the charitable organization and the date and
amount of the contribution.
: A written statement from the charity is required if a payment is for more
than $75 and is partly a contribution and partly for goods or services. The
statement must provide an estimate of the value of the goods and services
received by the donor.
Noncash gifts (e.g., household items) : A receipt from the charity must be kept for any gift of property other than
money. Clothes or other household items are deductible if they are in
“good used condition or better” at the time of the gift.
: If the items are not in good used condition or better and their value is $500
or more, a deduction is allowed if a “qualified appraisal” is included with
the return.
Used automobiles : The deduction is generally limited to the amount the charity receives on
the sale of the car. The taxpayer should obtain a statement from the
charity documenting the sales price of the automobile. However, FMV may
be deducted if it is $500 or less.
Cash or noncash gifts of $250 or more : Written acknowledgment from the charity (or certain payroll records in the
case of gifts made by payroll deductions) is required to deduct a single cash
or property contribution of $250 or more. The acknowledgment must
include the amount of money and a description of any other property
contributed, whether the charity provided any goods or services in return
for the contribution, and a description and estimated value of the goods or
services provided.
Noncash gifts of more than $500 : Additional substantiation (e.g., how the property was acquired and its
basis) is required on the tax return if donated noncash property is valued at
more than $500. Qualified appraisals may be required if noncash
contributions exceed $5,000 in value.
Antiques, paintings, jewelry, and other
“tangible personal property”
: The deduction is equal to the property’s appreciated FMV only if the charity
puts the property to “a use related to its tax-exempt purpose.” Otherwise,
the deduction is limited to the property’s cost. The taxpayer should obtain a
statement from the charity documenting the property’s use.
Limitations on Charitable Contribution Deduction
• If the qualifying contributions for the year total 20 percent or less of AGI, they
are fully deductible.
• If the qualifying contributions are more than 20 percent of AGI, the deductible
amount may be limited to 20 percent, 30 percent, or 50 percent of AGI,
depending on the type of property given and the type of organization to
which the donation is made.
• In any case, the maximum charitable contribution deduction may not exceed
50 percent of AGI for the tax year.
Ordinary income property
any property that, if sold, will result in the recognition
of ordinary income
deduction is equal to the fair
market value of the property less the amount of ordinary income that would have
been reported if the property were sold.
Capital gain property
any property that would have resulted in the recognition of
long-term capital gain or § 1231 gain if the property had been sold by the donor.46
As a general rule, the deduction for a contribution of capital gain property is equal
to the fair market value of the property.
exceptions for charitable contributions
If capital gain property is contributed to a private nonoperating foundation, the
taxpayer must reduce the contribution by the long-term capital gain that would
have been recognized if the property had been sold at its fair market value. The
effect of this provision is to limit the deduction to the property’s adjusted basis.
A second
exception applying to capital gain property relates to tangible personalty.
Tangible personalty is all property that is not realty (land and buildings) and does
not include intangible property such as stock or securities. If tangible personalty is
contributed to a public charity such as a museum, church, or university, the charitable
deduction may have to be reduced. The amount of the reduction is the longterm
capital gain that would have been recognized if the property had been sold
for its fair market value. In general, the reduction is required if the property is put
to an unrelated use.
A third
exception applying to capital gain property disallows a deduction for the
appreciation on several types of intellectual property. Patents, certain copyrights,
trademarks, trade names, trade secrets, know-how, and some software are subject
to this rule, which limits the contribution to the lesser of the taxpayer’s basis in the
property or the property’s fair market value.
50% ceiling on contributions
Contributions made to public charities may not exceed 50 percent of an individual’s
AGI for the year. Excess contributions may be carried over to the next five
years. The 50 percent ceiling on contributions applies to public charities such as
churches; schools; hospitals; and Federal, state or local governmental units. The 50
percent ceiling also applies to contributions to private operating foundations and
certain private nonoperating foundations.
Thirty Percent Ceiling
A 30 percent ceiling applies to contributions of cash and ordinary income property
to private nonoperating foundations that are not 50 percent organizations. The 30
percent ceiling also applies to contributions of appreciated capital gain property to
50 percent organizations unless the taxpayer makes a special election (see below).
In the event the contributions for any one tax year involve both 50 percent and 30
percent property, the allowable deduction comes first from the 50 percent property.
Twenty Percent Ceiling
A 20 percent ceiling applies to contributions of appreciated capital gain property
to private nonoperating foundations that are not 50 percent organizations.
contribution carry over
Contributions that exceed the percentage limitations for the current year can be
carried over for five years.
Deductibility of Personal, Student Loan, Mortgage, and Investment Interest
Personal (consumer) interest No Includes any interest that is not qualified residence interest, qualified
student loan interest, investment interest, or business interest.
Examples include interest on car loans and credit card debt.
Qualified student loan interest Yes Deduction for AGI; subject to limitations.
Qualified residence interest on
acquisition indebtedness
Yes Deductible as an itemized deduction; limited to indebtedness of
$1 million.
Qualified residence interest on
home equity indebtedness
Yes Deductible as an itemized deduction; limited to indebtedness equal
to lesser of $100,000 or FMV of residence minus acquisition
indebtedness.
Investment interest (not related
to rental or royalty property)
Yes Itemized deduction; limited to net investment income for the year;
disallowed interest can be carried over to future years. See
Chapter 11 for a complete discussion of investment interest.
Investment interest (related to
rental or royalty property)
Yes Deduction for AGI; limited to net investment income for the year;
disallowed interest can be carried over to future years. See
Chapter 11 for a complete discussion of investment interest.
investment interest
expense is now limited to net
investment income for the year.
Investment income
gross income from interest, dividends (see below), annuities,
and royalties not derived in the ordinary course of a trade or business.
not included
The following types of income are not included in investment income unless the
taxpayer elects to do so.
• Net capital gain attributable to the disposition of (1) property producing the
types of income just enumerated or (2) property held for investment purposes.
• Qualified dividends that are taxed at the same marginal rate that is applicable
to a net capital gain.
Unreimbursed Employee Expenses
Unreimbursed employee expenses are treated in a straightforward manner. Meals
and entertainment expenses are subject to the 50 percent limit. Total unreimbursed
employee business expenses are usually reported as miscellaneous itemized
deductions subject to the 2 percent-of-AGI floor
investment interest
expense is now limited to net
investment income for the year.
Investment income
gross income from interest, dividends (see below), annuities,
and royalties not derived in the ordinary course of a trade or business.
not included
The following types of income are not included in investment income unless the
taxpayer elects to do so.
• Net capital gain attributable to the disposition of (1) property producing the
types of income just enumerated or (2) property held for investment purposes.
• Qualified dividends that are taxed at the same marginal rate that is applicable
to a net capital gain.
Unreimbursed Employee Expenses
Unreimbursed employee expenses are treated in a straightforward manner. Meals
and entertainment expenses are subject to the 50 percent limit. Total unreimbursed
employee business expenses are usually reported as miscellaneous itemized
deductions subject to the 2 percent-of-AGI floor
domestic travel
If the business/pleasure trip is from one point in the United States to
another point in the United States, the transportation expenses are deductible only
if the trip is primarily for business. If the trip is primarily for pleasure, no transportation
expenses qualify as a deduction.
Foreign Travel
Transportation
expenses must be allocated between business and personal unless (1) the taxpayer
is away from home for seven days or less or (2) less than 25 percent of the time was
for personal purposes. No allocation is required if the taxpayer has no substantial
control over arrangements for the trip or the desire for a vacation is not a major
factor in taking the trip.
Ticket Purchases for Entertainment
A deduction for the cost of a ticket for an entertainment activity is limited to the
face value of the ticket. This limitation is applied before the 50 percent rule. The
face value of a ticket includes any tax. Under this rule, the excess payment to a
scalper for a ticket is not deductible. Similarly, the fee to a ticket agency for the
purchase of a ticket is not deductible.
Expenditures for the rental or use of a luxury skybox at a sports arena in excess
of the face value of regular tickets are disallowed as deductions. If a luxury skybox
is used for entertainment that is directly related to or associated with business, the
deduction is limited to the face value of nonluxury box seats. All seats in the luxury
skybox are counted, even when some seats are unoccupied.
The taxpayer may also deduct stated charges for food and beverages under the
general rules for business entertainment. The deduction for skybox seats, food,
and beverages is limited to 50 percent of cost.
reimbursed expenses
The classification of employee expenses depends on whether they are reimbursed
by the employer under an accountable plan. If so, then they are not reported by
the employee at all.
nonaccountable plan
reimbursement is reported as income
Placed in Service Requirement
The key date for the commencement of depreciation is the date an asset is placed
in service.
Personalty depreciation life classification
3-year Tractor units for use over the road.
Any horse that is not a racehorse and is more than 12 years old at the time it is placed in service.
Any racehorse that is more than 2 years old at the time it is placed in service.
Breeding hogs.
Special tools used in the manufacturing of motor vehicles, such as dies, fixtures, molds, and patterns.
5-year Automobiles and taxis. Light and heavy general-purpose trucks. Buses. Trailers and trailer-mounted containers. Typewriters, calculators, and copiers. Computers and peripheral equipment. Breeding and dairy cattle. Rental appliances, furniture, and carpets.
7-year Office furniture, fixtures, and equipment.
Breeding and work horses.
Agricultural machinery and equipment.
Railroad track.
10-year Vessels, barges, tugs, and similar water transportation equipment.
Assets used for petroleum refining or for the manufacture of grain and grain mill products, sugar and
sugar products, or vegetable oils and vegetable oil products.
Single-purpose agricultural or horticultural structures.
15-year Land improvements.
Assets used for industrial steam and electric generation and/or distribution systems.
Assets used in the manufacture of cement.
Assets used in pipeline transportation.
Electric utility nuclear production plant.
Municipal wastewater treatment plant.
20-year Farm buildings except single-purpose agricultural and horticultural structures.
Gas utility distribution facilities.
Water utilities.
Municipal sewer.
half-year convention
MACRS views property as placed in service in the middle of the first year
additional first-year depreciation
The provision allows for an additional 50 percent cost recovery in
the year the asset is placed in service for qualified property:
all new property except for buildings
mid-quarter convention
If more than 40 percent of the value of property other than eligible real estate (see
Realty: Recovery Periods and Methods for a discussion of eligible real estate) is placed
in service during the last quarter of the year,
% are shown in table 8.2
2012
Mid-Quarter Convention Depreciation Total Depreciation
February 15 $200,000 × .35 (Table 8.2) $ 70,000
July 10 $400,000 × .15 60,000
December 5 $600,000 × .05 30,000
$160,000
2013
Mid-Quarter Convention Depreciation Total Depreciation
February 15 $200,000 × .26 (Table 8.2) $ 52,000
July 10 $400,000 × .34 136,000
December 5 $600,000 × .38 228,000
$416,000
mid-month convention
Regardless
of when during the month the property is placed in service, it is deemed to have
been placed in service at the middle of the month.
Section 179 (Election to Expense Certain Depreciable Business Assets)
permits the
taxpayer to elect to write off up to $139,000 in 2012 of the acquisition cost of tangible
personal property used in a trade or business.
Two additional limitations apply to the amount deductible under § 179. First, the
ceiling amount on the deduction is reduced dollar for dollar when § 179 property
placed in service during the taxable year exceeds $560,000 in 2012. Second, the
amount expensed under § 179 cannot exceed the aggregate amount of taxable
income derived from the conduct of any trade or business by the taxpayer.
Order of Depreciation
- 179 Exp
- 50% basis
- MACRS
Listed property
includes the following:
• Any passenger automobile.
• Any other property used as a means of transportation.
• Any property of a type generally used for purposes of entertainment, recreation,
or amusement.
• Any computer or peripheral equipment, with the exception of equipment used
exclusively at a regular business establishment, including a qualifying home office.
• Any other property specified in the Regulations.
Automobiles and Other Listed Property Used Predominantly in Business
For listed property to be considered as predominantly used in business, its business
usage must exceed 50 percent.
passenger automobile
any four-wheeled vehicle manufactured for use on public
streets, roads, and highways with an unloaded gross vehicle weight (GVW) rating of
6,000 pounds or less.
cost recovery deductions for passenger automobiles:
Date Placed
in Service First Year Second Year Third Year Fourth and Later Years
2012*
2010–2011 $3,060 $4,900 $2,950 $1,775
2009 $2,960 $4,800 $2,850 $1,775
Also an extra 8000 can be used for new property in the first year
Special Limitation on vehicles that aren’t passenger automobiles 6000-14000 lbs
The American Jobs Creation Act of 2004 (AJCA) placed a limit of $25,000 on the
§ 179 deduction for certain vehicles not subject to the statutory dollar limits on cost
recovery deductions that are imposed on passenger automobiles.
Property that fails the 50% business use test must be depreciated over
straight line
selling half year convention property requires you to only take half of the years depreciation
10000.1152.5
alternative depreciation system (ADS)
• Used predominantly outside the United States.
• Leased or otherwise used by a tax-exempt entity.
• Financed with the proceeds of tax-exempt bonds.
• Imported from foreign countries that maintain discriminatory trade practices
or otherwise engage in discriminatory acts.
• To compute depreciation allowances for earnings and profits purposes
disposal of assets using the mid month convention
if it is in February you would take original basis * table * 1.5
passive losses
deducted against passive income
aggregate losses
allocate them according to the percentage of loss from each passive activity
suspended passive losses
are carried over to be deducted the next year, but they reduce the basis
Refundable and Non refundable credits
Refundable Credits
Taxes withheld on wages
Earned income credit
Nonrefundable Credits
Credit for child and dependent care expenses
Credit for elderly or disabled
Adoption expenses credit
Child tax credit*
Education tax credits**
Credit for certain retirement plan contributions
Foreign tax credit
General business credit, which includes the following:
• Tax credit for rehabilitation expenditures
• Work opportunity tax credit
• Research activities credit
• Low-income housing credit
• Disabled access credit
• Credit for small employer pension plan startup costs
• Credit for employer-provided child care
*The credit is refundable to the extent of 15 percent of the taxpayer’s earned income in excess of
$13,000 for 2012. Parents with three or more qualifying children may compute the refundable
portion using an alternative method.
**Forty percent of the American Opportunity credit is refundable.
child tax credit
To be eligible for the
credit, the child must be under age 17, a U.S. citizen, and claimed as a dependent
on the taxpayer’s return. A portion of the credit is refundable.
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. The
credit is phased out by $50 for each $1,000 (or part thereof) of AGI above the threshold
amounts.35 Because the maximum credit amount available to taxpayers depends
on the number of qualifying children, the income level at which the credit is phased
out completely also depends on the number of children qualifying for the credit.
credit for child and dependent care expenses
To be eligible for the 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.
Generally, married taxpayers must file a joint return to obtain the credit.
In addition, out-of-thehome
expenses incurred for an older dependent or spouse who is physically or
mentally incapacitated qualify for the credit if that person regularly spends at least
eight hours each day in the taxpayer’s household.
Child care payments to a relative are eligible for the credit unless the relative is
a child (under age 19) of the taxpayer.
In general, the credit is equal to a percentage of unreimbursed employment-related
expenses up to $3,000 for one qualifying individual and $6,000 for two or more
individuals.
if your expenses exceed the allowed credit then you must take the allowed credit and multiply it by your percentage
Over
But Not
Over
Applicable Rate
of Credit
$ 0 $15,000 35%
15,000 17,000 34%
17,000 19,000 33%
19,000 21,000 32%
21,000 23,000 31%
23,000 25,000 30%
25,000 27,000 29%
27,000 29,000 28%
29,000 31,000 27%
31,000 33,000 26%
33,000 35,000 25%
35,000 37,000 24%
37,000 39,000 23%
39,000 41,000 22%
41,000 43,000 21%
43,000 No limit 20%
American Opportunity credit
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.
To be eligible for the American Opportunity credit, a student must
take at least one-half of the full-time course load for at least one academic term at
a qualifying educational institution.
credit amount is phased out, beginning when the
taxpayer’s AGI (modified for this purpose) reaches $80,000 ($160,000 for married
taxpayers filing jointly). The reduction is equal to the extent to which AGI exceeds
$80,000 ($160,000 for married taxpayers filing jointly) as a percentage of a $10,000 phaseout range ($20,000 for married taxpayers filing jointly). As a result, the credit
is eliminated completely when modified AGI reaches $90,000 ($180,000 for married
taxpayers filing jointly)
can be calculated per dependant
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.
is phased out, beginning when the taxpayer’s
AGI (modified for this purpose) reaches $52,000 ($104,000 for married taxpayers
filing jointly).43 The reduction is equal to the extent to which AGI exceeds
$52,000 (or $104,000) as a percentage of a $10,000 ($20,000 for married filing
jointly) phaseout range. The credit thus is eliminated when AGI reaches $62,000
($124,000 for married filing jointly).
calculated per taxpayer
Gift Basis Rules if No Gift Tax Is Paid
• If the donee disposes of gift property in a transaction that results in a gain, the
basis to the donee is the same as the donor’s adjusted basis.36 The donee’s basis
in this case is referred to as the gain basis. Therefore, a realized gain results if the
amount realized from the disposition exceeds the donee’s gain basis.
• If the donee disposes of gift property in a transaction that results in a loss, the
basis to the donee is the lower of the donor’s adjusted basis or the fair market
value on the date of the gift. The donee’s basis in this case is referred to as
the loss basis. Therefore, a realized loss results if the amount realized from the
disposition is less than the donee’s loss basis.
Corporate Income Tax Rates
Over— But Not Over— Of the Amount Over— $ –0– $ 50,000 15% $ –0– 50,000 75,000 $ 7,500 + 25% 50,000 75,000 100,000 13,750 + 34% 75,000 100,000 335,000 22,250 + 39% 100,000 335,000 10,000,000 113,900 + 34% 335,000 10,000,000 15,000,000 3,400,000 + 35% 10,000,000 15,000,000 18,333,333 5,150,000 + 38% 15,000,000 18,333,333 — 35% —
current tax expense
Pretax book income ! Schedule M–1/M–3 adjustments Taxable income before NOLs − NOL carryforwards Taxable income × Applicable tax rate Current tax expense (provision) before tax credits − Tax credits Current tax expense (tax provision)
dividends
taxed at 15%
guaranteed payment
can be deducted
partnership
salaries paid to partners are not deductible
SCorps and Ccorps
can deduct salaries and fringe benefits
general partner
• the partner has personal liability for partnership debts by virtue of status as a
partner,
• the partner can enter into contractual relationships on behalf of the partnership,
or
• the partner works more than 500 hours in the partnership’s trade or business
during the tax year.
self employment income
pro rata share of the partnership’s net income times 92.35%
Self Employment tax deduction
allowed to deduct 1/2 of 15.3% or 7.65% on individual tax return
social security tax
6.2% for the first 106800 of salary and 1.45% on all of her salary
employee social security
is not deductible to the employee
Scorp social security
Employee pays the amount they should have paid and the Scorp matches it, Scorp can deduct it as an ordinary business expense
partnership debt
takes away from the property basis but adds to the basis of the partners by their percentage.
transfer of property to a corporation
for stock is non taxable
corporation distribution of property
cannot recognize a loss when it is nonliquidating to the shareholders basis you can when it is liquidating
Scorps distribution of property
can recognize gains on nonliquidating but not losses and it can recognize gains and losses on liquidating distributions of property
child owner employee taxes
child can receive income tax free up to the standard deduction 5800
partners report 179 depreciation separately when calculating operating income
it is cut in half and subject to the 500000 annual limit
tax exempt interest
reported on the return but excluded from gross income
Sole shareholder closely held corporation
passive income can be deducted to the amount of active income
donors gain basis
donors adjusted basis + ((unrealized appreciation/taxable gift) * gift tax paid)
taxable gift = FMV - 13000
Like-kind exchanges
Section 1031 provides for nontaxable exchange treatment if the following requirements
are satisfied:60
• The form of the transaction is an exchange.
• Both the property transferred and the property received are held either for
productive use in a trade or business or for investment.
• The property is like-kind property.
boot
The receipt of boot will trigger recognition of gain if there is realized gain. The
amount of the recognized gain is the lesser of the boot received or the realized gain
(realized gain serves as the ceiling on recognition).
Emily and Fran exchange machinery, and the exchange qualifies as like kind under
§ 1031. Because Emily’s machinery (adjusted basis of $20,000) is worth $24,000 and Fran’s
machine has a fair market value of $19,000, Fran also gives Emily cash of $5,000. Emily’s
recognized gain is $4,000, the lesser of the realized gain ($24,000 amount realized −
$20,000 adjusted basis = $4,000) or the fair market value of the boot received ($5,000).
