Income Tax

Question 1

FICA Tax Amount Employee Pays

Answer 1

6.2% on the first $142,800 + 1.45% on the TOTAL if above $142,800

Example
W-2 income = $150,000 6.2% x $142,800 = $8,853.60 + 1.45% x $150,000 = $2,175 TOTAL FICA = $11,028.60

Question 2

Installment Sale Calculation of Gain

Answer 2

Profit / Total Contract Price = Gross Profit %

Question 3

C corporation Advantages

Answer 3

• Separate tax entity (uses IRS Form 1120)
• Dividend received deduction (50% exclusion)
• Sale of stock to unlimited number of investors
• Can provide non-qualified deferred comp
• Limited Liability
• Continuity of life

Question 4

PSC’s Personal Service Corporation

Answer 4

• A closely held C corporation that is owned and funded by fees from professionals who perform certain services (HALE)
• Cannot pass earnings or losses to shareholders
• Any income retained is tax at a flat 21%

Question 5

S Corporation Characteristics & Tax Keys

Answer 5

• Conduit entity
• Pension Plan
• 100% of Medical, Dental, and LTC insurance deductible for > 2% owners
• Losses up to basis
• All shareholders must consent to election

*Remember S Corp requirements*
100 shareholder max
One share class of stock (common)
Must be domestic
No foreign shareholders

Question 6

Limited Liability Corporation Characteristics and Tax Keys

Answer 6

• Conduit entity
• Provides limited liability (like a corporation)
• Losses up to basis (like a partnership)

Question 7

Limited Partnership Characteristics & Tax Keys

Answer 7

• Conduit Entity
• Must have at least 1 general partner
• Limited Partners CANNOT actively participate in the business
• Limited Partners are only responsible for Partnership debt up to their capital investment.
• Losses up to basis

Question 8

Sole Proprietorship Characteristics & Tax Keys

Answer 8

• Conduit entity
• Pension Plan (Keogh)
• 100% of medical, dental, and LTC deductible for owner
• Lack of continuity

Question 9

Partnership Characteristics & Tax Keys

Answer 9

• Conduit entity
• Pension Plan (Keogh)
• 100% of medical, dental, and LTC deductible for owners
• Lack of continuity
• Losses up to basis

Question 10

Original Basis

Answer 10

• A Taxpayer’s investment in any asset or property right.

*Basis is increased by:

• Legal Fees
• Commissions
• Sales Tax
• Freight
• Improvements

*Basis NOT increased by:

• Repairs
• Real Estate Taxes
• Normal business operating expenses

***Improvements must always be capitalized
***Repairs are always deducted as expenses

Question 11

Adjusted Basis

Answer 11

Cost recovery deductions are an allowance for the exhaustion and wear&tear of property used in a trade or business or held for the production of income.

Question 12

Rental Home Max personal use

Answer 12

Personal use cannot exceed the LONGER of:

• 14 days

Or

• 10% of the rental use
  (ex: 300 rental days = 30 days for personal use)

Question 13

Rental of Principal Residence

Answer 13

Rental income EXCLUDED if rented less than 15 days during taxable year

Question 14

FORM 1040 FLOWCHART

Answer 14

Question 15

Gross Income Inclusions

Answer 15

• Wages
• Taxable Interest (Schedule B)
• Ordinary Dividends (Schedule B)
• Business Income or Losses (Schedule C)
• Real Estate (Schedule E)
• Alimony Received (Pre-2019)
• Taxable Social Security
• IRA Distributions
• Pensions & Annuties
• Unemployment Income
• Punitive Damages

Question 16

Adjustments For AGI

Answer 16

***For AGI is above the line. Deductions to Gross income to arrive at AGI.

MAIN ADJUSTMENTS THAT ARE TESTED

• IRA, Keogh, SEP Contributions
• 1/2 Self Employment Tax (.07065)
• Alimony Paid (Pre-2019 Divorce)
• Self Employment Health Insurance

Others (Less Tested)

• $2,500 Student Loan Interest
• HSA Contributions
• Early Withdrawal Penalties Paid
• Moving Expenses (Active Military Only)

Question 17

Adjustments From AGI

Answer 17

***From AGI is below the line. These are the deductions from AGI that get you to Taxable Income.

• Standard Deduction
• Itemized Deductions (Schedule A)
  -Medical, Dental , LTC (more than 7.5% of AGI)
  -Real Estate Taxes (part of $10k combined)*
  -State, Local, & Sales Taxes (part of $10k combined)*
  -Home Mortgage Interest
  -Chariable Gifts
  -Investment Interest Expense
  *(limited to net investment income)
  *(LTCG only included if you opt-out of LTCG treatment)

Question 18

Entertainment, Meals, and Travel
Expense Deductibility

Answer 18

• Entertainment = 0%
• Meals = 50%
• Travel = 100%

Question 19

SELF EMPLOYMENT TAX CALUCLATION FACTOR

Answer 19

.1413

Question 20

Tax Credits

Answer 20

• Child & Dependant Care (non-refundable)
• $3,000 for 1 dependant
• $6,000 for 2 or more dependants
• Use 20% of allowable expense on the exam
• Child Tax Credit (Partially Refundable)
• $2,000 for each child under age 17 (Phaseout applies)
• Adoption Credit (non-refundable)
• Credit claimed in the year the adoption is finalized
• Elderly & Disabled Credit (non-refundable)
• Must be age 65 and totally diabled
• Foreign Tax Credit (non-refundable)
• Can choose as a credit or a deduction for foreign taxes paid
• Earned Income Credit (refundable)
• for certain people who work and have income below a certain amount.

Question 21

Refundable vs Non-Refundable Tax Credits

Answer 21

• Refundable - Can generate a tax refund
• Non-Refundable - Cannot generate a tax refund, can only reduce tax liability to zero

Question 22

BUSINESS ENTITIES FLOW ROAD MAP

Answer 22

Question 23

Non- Publicly Traded Partnerships

Answer 23

​ARE A PASSIVE ACTIVITY

• Referred to as RELPs (Real Estate Limited Partnerships)
• Passive activity loss (PALs) may not be used to reduce portfolio income, compensation, or business income.
• Can only be used to offset income from other non-public limited partnerships (called Passive Income Generators or PIGs)
• Netting of gains and losses done on Schedule E

Question 24

Passive Activity & At-Risk Rules

Answer 24

• A Passive activity is a trade or business in which the taxpayer does not “materially participate”.
• Dedcutions for losses to passive investors is limited.

Question 25

Publicly Traded Partnerships (PTPs)

Answer 25

PTPs ARE A PASSIVE ACTIVITY

• Referred to as Master Limited Partnerships (MLPs)
• A Partnership is publicly traded if the interest are traded on an established securities market or tradable on a secondary market.
• Income from a PTP may not be sheltered by passive losses from any other source.
• PTP Income is portfolio income (security income) and is reported on Schedule B.
• Losses from a PTP may not be used to offset passive income from other sources.

-Net losses must be carried forward and can only be used to offset losses from that same partnership (cannot escape the “circle”)

​

Question 26

Material Participation

Answer 26

(Exceptions to the passive activity rules)

A taxpayer will be treated as materially participating in an activity only if the taxpayer is involved in the operation of the activity on a regular, continuous, and substantial basis.

Question 27

Active Participation

Answer 27

(Exception to the passive activity rules)

Active participation is a less demanding standard than material participation.

It merely requires bona fide involvement in management decisions.

A limited partner may never be an active participant.

*Note: Active participation can produce income or loss, reported on Schedule E

Question 28

QBI (Qualified Business Income) Deduction

Answer 28

A deduction of up to 20% of qualified business income from passthrough entities such as Sole Proprietorships, Partnerships, S Corps, LLCs, and more.

*Subject to phaseouts*