Income Tax

Question 1

Major tax services

Answer 1

Research Institute of America (RIA) & Commerce Cleaning House 9CCH) are publishers of reference books on federal income tax & can NOT be cited

Question 2

Hobby Loss

Answer 2

Income is reportable

Any activity generating profit 3 out of 5 consecutive years is a business and NOT a hobby

Horse profits is 2 out of 7 consecutive years

Question 3

Filing Requirements

Answer 3

1. Individual
2. Dependents
3. Children under 24 (kiddie tax)
4. Self employed
5. Aliens

Question 4

Audit Representation

Answer 4

Attorney, CPA, enrolled agent/actuary

Question 5

Gross Income (inclusions & exclusions)

Answer 5

Inclusions
- punitive damages
- alimony received divorced BEFORE 2019

Exclusions
- child support
- workers compensation
- compensatory damages

Question 6

Investment Interest

Answer 6

Interest paid on indebtedness for property held for investment, generally margin interest.

Max deduction is net investment income

Question 7

Investment Income

Answer 7

Interest, non qualified dividends, royalties and short term gains

Question 8

Investment Advisor Fees

Answer 8

Repealed

Question 9

Misc & Home Office Deduction

Answer 9

Miscellaneous: suspended 2018-2025

Home Office: suspended

• MUST be self employed, no other fixed location and conduct administrative or management activities
• Limited to net income, cannot create a loss

Question 10

Child Standard Deduction
(earned/unearned income)

Answer 10

Greater of $1,250 unearned income OR earned income + $400

Question 10

Meals & Entertainment

Answer 10

Meals: if business is actually being conducted and not “lavish or extravagant”

• business meals convenience of employer and for employee while traveling are 50% deductible

Entertainment: tickets to sporting & cultural events no longer deductible

Question 11

FICA Taxes

Answer 11

Employee AND employer each pay (6.2% + 1.45%) 15.3% up to W-2 earnings of $160,200

After $160,200 each pay Medicare taxes 1.45%, 2.9% total unlimited

Question 12

Installment Sales
(calculation of gain)

Answer 12

Gain recognized = cash received x gross profit percentage

profit/total contract price = gross profit percentage

Question 13

Inventory Valuation

Answer 13

In inflationary periods:

FIFO
- Increase earnings
- Greater tax liability
- Current cost inventory

LIFO
- Reduced earnings
- Deferral of taxes
- Understate inventory

Question 14

Section 1244

Answer 14

Qualified Small Business Stock

• C or S corporation initially capitalization no more than $1MM
• Loss of $50,000 ($100,000 joint return) ordinary loss vs capital loss

Question 15

Personal Service Corporation
(PSC)

Answer 15

Any income retained taxed flat rate of 21%

Health (doctors, dentist, etc)
Accounting, Architectural, Actors
Law
Engineering

Question 16

Conduit Entities

Answer 16

Sole Prop: Interest paid on borrowed money for business deductible unlimited

Partnership: Loss deductible up to basis

S Corp: Bank loans NOT included in basis

LLC: Treated as partnership regardless number of members

Question 17

Basis

Answer 17

Increased by
- legal fees
- commissions
- sales tax
- freight
- improvements

NOT repairs, real estate taxes or normal business expenses

Question 18

Gift/Sale Basis

Answer 18

Gain: FMV > basis, use basis

Loss: FMV < basis, use FMV

Sales price > basis = gain
Sales price between basis & FMV no gain/loss
Sales price < FMV = loss

Question 19

179 Deduction

Answer 19

Business may expense up to $1,160,000 of qualifying property in year of acquisition

Can NOT create a loss

Question 20

Tax on Passive Activity

Answer 20

Deduct loss to extent of income generated by another passive activity

2 Types
1. Rentals, real estate & equipment, and royalties
2. Do NOT materially participate (LP, Partnership, S corp, LLC)

Question 21

Material Participation vs Active Participation

Answer 21

Material: Involved in operation of activity on a regular continuous and substantial basis

Active: bona fide involvement in management decisions
- May deduct up to $25,000 from real estate. AGI phase out $100,000-$150,000

Question 22

Charitable Contribution by Business

Answer 22

Corporation may NOT deduct > 10% taxable income

Gift of inventory: deduct basis + 1/2 unrealized appreciation
- may NOT > 2x basis
- MUST be for ill, needy or care of infants

Question 23

Child Tax Credit

Answer 23

Tax credit of $2,000 for each qualifying child (son, daughter, step or foster child) under age 17.

MAGI phase out $400,000 MFJ, $200,000 single

Question 24

Refundable Tax Credits

Answer 24

Child tax credit Earned income credit

Question 25

Business is profitable

Answer 25

C Corporation 1. Separate tax entity using flat 21% 2. Dividend-received deduction of 50% Personal Service Corporation (PSC) - No graduated tax rates (flat 21%)

Question 26

Risk-free entity business has losses

Answer 26

Risk-free entity Sole Proprietorship 1. Pension plan (Keogh) 2. 100% of medical, dental & LTC insurance deductible for owner 3. Lack of continuity Partnerships 1. Same as sole prop PLUS losses up to basis

Question 27

Risky business has losses

Answer 27

Risky entity (needs limited liability) S Corporation 1. Pension plan 2. 100% of medical, dental & LTC insurance deductible for 2% owner 3. Losses up to basis 4. Special requirements - no more than 100 shareholders - must be a domestic corporation - shareholders must be U.S. citizens or residents - all shareholders must be consent to election Limited Liability Corporation 1. Limited liability (like a corporation) 2. Losses up to basis (like partnership) Limited Partnership 1. Limited partners CANNOT actively participate in business 2. Losses up to basis

Question 28

Qualified Business Income (QBI)

Answer 28

Net income (profit) from a pass-through business Individuals who earn income through pass-through businesses may qualify to deduct up to 20% of their QBI from each pass-through business they own. If net QBI is zero or less, then no pass-through deduction is available for that tax year. However, any loss may be carried forward to the next year and is deducted against any QBI for that year. ANY business less than $364,200 joint taxable income = Yes Greater than $464,200 joint taxable income AND personal service = NO Greater than $464,200 joint taxable income AND other business = Maybe

Question 29

Adjusted basis

Answer 29

Cost basis less cost recovery (deductions)

Question 30

Schedule H

Answer 30

Household employees

Question 31

Vacation Home

Answer 31

Personal use cannot exceed the longer of 14 days or 10% of rental days. Otherwise, treated as rental property for tax purposes

Question 32

Alimony Recapture

Answer 32

Excess alimony payment is the amount that exceeds the normal payment by $15,000

Question 33

Foreign tax credit

Answer 33

May operate either as deduction or as a credit

Question 34

Like Kind Property

Answer 34

Real estate is now the **ONLY** property eligible