Mod 35 Individual Taxation part 1 Flashcards
None left in an account is taxable in…
Medical savings account (MSA)
A medical savings account is similar to…
An IRA, but for health care only
Qualified plan is…
Offered to all employees
Moving expenses, what categories are taxable or not?
Qualified moving expenses are nontaxable
Nonqualified moving expenses are taxable
Qualified moving expenses, 3 items that are nontaxable when reimbursed by employer
1 cost of moving your goods
2 cost of moving family (pets)
3 insurance on goods
NonQualified moving expenses, 3 items that are taxable when reimbursed by employer
1 premoving house hunting trips
2 closing costs (sell home)
3 reimbursed meals
Damages for loss of income/wages is…
Taxable
Exclusions
Income items which are not included in gross income
Deductions
Amounts subtracted from income to arrive at AGI or taxable income
Property settlement
Division of capital received in divorce
Life insurance proceeds, if proceeds are received in installments, amounts received…
In excess of pro rata part of face amount are taxable
2 instances where life insurance proceeds are taxable
1 proceeds paid for reasons other than death
2 obtained by beneficiary in exchange for valuable consideration
Life insurance obtained by beneficiary in exchange for valuable consideration. What is taxable?
All proceeds obtained in excess of cost
Certain employee benefits are…
Excluded
Group term life insurance premiums, where premiums paid by employer…2
1 Up to $50,000 of insurance coverage are excluded
2 premiums for anything after that are taxable to employee
Group term life insurance premiums are excluded completely if beneficiary is…2
1 employer
2 qualified charity
Accident and health benefits provided by employer are excluded if…2
1 permanent injury or loss of bodily function
2 reimbursement for medical care of employee, spouse or
dependents
Qualified adoption expenses, when are they excluded?
Who are they excluded by?
Incurred by employer in connection with employee’s adoption of
child
Excluded by employee
Employee fringe benefits are…
Generally excluded
Workers compensation is…2
Fully excluded if received for occupational sickness or injury
And paid under workers comp act
Damages for physical injury and sickness are…
2) exception
Excluded
2) punitive damages not excluded
Gifts, devices or inheritances are…
2) what is taxable after inheritance?
Excluded
2) rents and interest generated from property after inheritance is
Taxable
Stock dividends 2
1 generally excluded from income
2 FMV of stock received is included in income of distribution
Health Savings Account 3 advantages
1 Contributions made by employee deductible to arrive at AGI
2 employee withdrawals are nontaxable
3 money left in account nontaxable
3 bonds excluded from taxation
1 private activity bonds
2 municipal bonds
3 sports complex bonds
U.S. Obligations are taxable, this includes…2
1 treasury bond
2 treasury note
Interest in refund is…
Taxable
Contribution to political campaign is…
Not deductible
Acquisition indebtedness
Principal you took out to acquire primary and secondary residence
Debts discharged in bankruptcy are…
Generally nontaxable
What is the form for a partnership return ordinary income/loss?
Form 1065
What is the form for a S corporation return ordinary income/loss?
Form 1120S
3 items recorded on schedule E
1 supplemental income
2 rents
3 royalties
Constant yield to maturity is…
Method used to amortize bonds
Child support is…2
Not taxable and not deductible
Series EE US savings bonds Accrued interest redeemed by taxpayer is excluded from gross Income to extent that…
proceeds are used to finance higher education for taxpayer, spouse,
or dependents
Series EE US savings bonds, for higher education exclusion to apply:
Bonds must be issued after December 31, 1989 to an individual…
Age 24 or older
Series EE US savings bonds, for higher education exclusion to apply:
Purchaser of bonds must be…
Sole owner or joint owner with his spouse
Series EE US savings bonds, for higher education exclusion to apply:
Married tax payers must…
File a joint return to qualify for exclusion
Series EE US savings bonds, for higher education exclusion to apply:
Redemption proceeds must be used to…
Pay qualified higher education expenses at accredited institution
Or vocational school
Degree candidate can exclude amount of scholarship or fellowship that is used for…5
1 tuition 2 course related fees 3 books 4 supplies 5 equipment
Scholarships and fellowships that are taxable…
1 teaching
2 research
Scholarships and fellowships:
Non degree students may…
Not exclude any part of scholarship or fellowship grant
Political contributions received by candidates campaign funds are…2
1 excluded from income
2 but included if put to personal use
Acquisition indebtedness discharge
1 excluded up to $2 million
2 reduces basis (but not below $0)
Lease improvements:
Increase in value of property due to improvements made by lessee is excluded from lessor’s income unless improvements are…
Made in lieu of fair value rent
Property received as compensation is included…
In income at FMV on date of receipt
Interest included in income:
Earnings from…3
1 savings and loan associations
2 mutual savings banks
3 credit unions
Interest included in income:
Interest on…3
1 bank deposits
2 corporate or US gov bonds
3 treasury bills
Alimony tax treatment 2
1 included in recipient’s gross income and
2 deductible toward AGI by payor
In order for payment to be considered alimony payment must:
Be made pursuant of…
Pursuant of decree of divorce or written separation instrument
In order for payment to be considered alimony payment must:
Be made in…2
1 cash and
2 received on behalf of payee’s spouse
In order for payment to be considered alimony payment must:
Terminate upon…
Death of recipient
In order for payment to be considered alimony payment must:
Not be made to…2
1 member of same house at time of payments
2 person whom filing a joint return with
In order for payment to be considered alimony payment must:
Not be characterized in…
Decree or written instrument as other than alimony
Alimony recapture may occur if…
Payments sharply decline in second or third years
Alimony recapture is accomplished by making the payor…
report recaptured alimony from first and second Years as income in
the third year
Alimony recapture allows the payee to…
Deduct the amount of recapture in the third year
If wife is entitled to child support of $9,000 and alimony of $40,000 and only gets paid $10,000 by her ex, how is the money allocated on the ex wife’s tax return?
The first $9,000 of payments is nontaxable child support
And the remaining $1,000 is taxable alimony
If you pay attorney a fee to collect alimony…
It is deductible on schedule A
Lottery winnings 2
1 reported as other income
2 can deduct cost of tickets up to winnings
Lottery winnings, can deduct lottery deductions up to winnings if…
Itemized deductions on schedule A are used
Tax benefits rule
1 state refund is taxable if itemized deductions are used
2 nontaxable if standard deduction is used
Child support tax treatment of to payee and payor
Not gross income to payee
Not deductible to payor
If a specified amount of alimony is to be reduced upon the happening of some contingency relating to a child then…
Amount equal to specified reduction will be treated as child
support rather than alimony
the maximum amount of social security benefits taxable to high income tax payers…
Up to 85%
Income in respect of a decedent, define 3
1 income that would have been income of decedent before death
2 but was not includible in income under decedent’s method of accounting
3 taxable
Income in respect of a decedent is like a…
Receivable collected after death
Taxable income includes fees received by…5
1 executor 2 administrator 3 director 4 for jury duty 5 precinct election board duty
Income from discharge of indebtedness…
Is taxable unless specifically excluded
Prizes and awards are…
Generally taxable
Prizes and awards received for religious, charitable, scientific, educational, artistic, literary or civic achievement can be excluded only if recipient, was selected…
without action on his part
Prizes and awards received for religious, charitable, scientific, educational, artistic, literary or civic achievement can be excluded only if recipient, is not required to…
Not required to render substantial future services
Prizes and awards received can be excluded only if recipient, designates that the prize or award is to be transferred by payor to…4
1 governmental unit
2 tax exempt charity
3 educational or
4 religious organization
Prizes and awards received, that are non taxable are…2
1 excluded from recipient’s income but
2 no deduction is allowed for transferred amount
Employee achievement awards are excluded from employee’s income if…2
1 Cost to employer of award does not exceed amount allowable by deduction
2 generally $400 to $1,600
Unemployment compensation must
Generally be included in gross income
Personal service corporation define
Doesn’t provide good for sale, just services
With an estate, the administrator must…
File certain returns when a person dies
C corps file form…
Form 1120
When a company has inventory…
It generally uses the accrual basis
When does an accrued expense before 12/31/14, have to be paid on that date instead of 3/15/15?
If own more than 50% of stock directly or indirectly
If you own more than 50% of stock either directly or indirectly, you must…
Accrue expense and pay at end of year
Own directly
I own it myself
Own indirectly
My wife owns it
Cash basis taxpayer should report gross income for year in which income is either…2
1 actually or constructively received
2 whether in cash or in property
Special rules:
Prepaid expenses 2
1 treat as accrual basis
2 write off expense as it expires
Special rules:
Income received in advance is…
Taxed when received
Gross profit equation
Gross profit = sales - cost of sales
Contract price equation
Contract price = selling price - liability assumed by buyer
Installment method income formula
Income = (gross profit/total contract price) x amount received in year
Under the completed contract method, when is income recognized?
Don’t recognize income until contract is completed
When your company manufactures inventory, the foreman salaries and employee salaries are…2
1 charged to inventory account
2 they aren’t charged as salary expense
Reserve method (AKA allowance method) 2
1 estimates bad debt expense
2 not generally allowed in taxation
The reserve method is allowed and reduces taxation for…3
1 banks
2 savings and loan co.
3 financial institutions
A taxpayer establishes an accounting period by…
Filing first tax return
A taxpayer who doesn’t keep books (ex. An employee with wage income) must…
Use calendar year accounting period
Taxable year:
C Corporations (other than personal service corporations)
May adopt any taxable year that it chooses
Taxable year:
Personal service corporation
Generally must adopt calendar year
Taxable year:
Sole proprietor
Must use same taxable year for business as used for personal
Return
Taxable year:
Partnership is a pass through entity and generally must use…
Same tax year as used by its partners owning more than 50%
Of partnership income and capital
Taxable year:
S-Corporation is a pass through entity and generally must…
Adopt calendar year
Partnerships and S-corporations may be permitted to…
Use different taxable year if there is substantial business purpose
Taxable year:
Estate
May adopt any taxable year for its income tax return that it chooses
Taxable year:
Trust (other than charitable and tax exempt trusts)
May adopt a calendar year
Tax accounting methods commonly used
Cash or accrual methods
Cash method recognizes income when…2
1 first received or constructively received
2 received in cash or property
Under the cash method when are expenses deductible?
Expenses deductible when paid
Constructive receipt, define
Example
Item is unqualifiedly available without restriction
Ex. Interest on bank deposit is income when credited to account
Under the cash method, expenses are generally deductible when paid:
Payment by check is considered payment as long as…
Check is honored by the bank
Under the cash method, expenses are generally deductible when paid:
Payment by credit card is…
Considered payment at time of charge
The cash method can generally not be used if…5
1 inventories necessary to reflect income 2 C corporations 3 partnerships with C corp partner 4 tax shelters 5 certain tax-exempt trusts
Cash method can be used by…3
1 qualified personal service corp
2 $5 million or less in sales entity
3 small business tax payer
Qualified personal service corporations have no…
No inventory
Cash method can be used by an entity (other than a tax shelter) if for every year it has average gross receipts of $5 million or less for…2
Any prior 3 year period and has no inventories
Small business tax payer
Average annual gross receipts of $1 million or less for any prior
3 years
What 2 areas must the small business tax payer use the accrual method for?
1 account for inventories
2 purchase and sale of merchandise
A small business taxpayer with revenues between $1-10 million is eligible for cash method if meets any of the following requirements:
Principal business is not…6
1 retailing 2 wholesaling 3 manufacturing 4 mining 5 publishing or 6 sound recording
A small business taxpayer with revenues of $1-10 million is eligible for cash method if meets any of the following requirements:
Principal business activity is… 2
1 provision of services or
2 custom manufacturing
Accrual method is used by tax payers (other than small business taxpayers) for…
Purchases and sales when inventories are required to clearly reflect income
Installment method applies to…2
1 gains (not losses) from disposition of property
2 where at least one payment is received after year of sale
The installment method does not change…
Does not change the character of the gain to be reported (ordinary,
Capital, etc.)
Installment method is required unless…
Taxpayer makes negative election to report full amount as gain in
year of sale
The installment method cannot be used for…2
1 property held for sale in ordinary course of business
2 can’t usually use installment method when you sell inventory
3 exceptions when installment method can be used in the ordinary course of business
1 time share units
2 residential lots
3 property used or produced in farming
Installment method cannot be used for sales of…
Stock or securities traded on established securities market
Formula for amount of gain reported each year under installment method
Reported gain =
(gross profit/total contract price) x amount received in year
Percentage completion method can be used for…
Contracts that are not completed within year they are started
Percentage of completion method recognizes income each year based on…
Percentage of contract completed that year
Gross income for business equation
Gross income = sales - COGS + other income
Business Income Deductions:
In computing cost of goods sold, inventory is generally valued at…
Cost or market, which ever is lower
Business Income Deductions:
In computing cost of goods sold, 3 valuation methods that can be used
1 specific identification
2 FIFO
3 LIFO
Business Income Deductions:
In computing cost of goods sold, use of LIFO 2
1 if LIFO is used for taxes, it must also be used on books
2 lower of cost or market can’t be used with LIFO
All ordinary, necessary expenses incurred in…
Trade or business are deductible
Ordinary
Customary and not capital expenditure
Necessary
Appropriate and helpful
What does UNICAP stand for?
Uniform capitalization rules
Uniform capitalization rules (UNICAP) generally require that all costs incurred…
Both direct and indirect in certain areas must be capitalized
As part of cost of property
What areas of costs must costs be capitalized under Uniform capitalization rules (UNICAP) 2
1 in manufacturing or constructing real/personal property or
2 in purchasing or holding property for sale
Uniform capitalization rules (UNICAP):
These costs become part of…2
1 basis of property and
2 are recovered through depreciation and amortization
Uniform capitalization rules (UNICAP):
These costs when included in inventory are recovered through…
Cost of good sold as offset to selling price
Uniform capitalization rules (UNICAP):
Rules apply to…
1 Inventory
2 non inventory property produced/held for sale to customers
Uniform capitalization rules (UNICAP):
Rules apply to assets or improvements to assets constructed by a taxpayer for the taxpayer’s…2
1 own use in trade or business or
2 an activity engaged in for profit
Uniform capitalization rules (UNICAP):
Taxpayers subject to rules are required direct costs and indirect costs that benefit the assets produced or acquired for resale including…3
1 general
2 administrative
3 overhead costs
Uniform capitalization rules (UNICAP):
Interest must be capitalized if…
1 debt is incurred or
2 continued to finance construction or production of real property
Uniform capitalization rules (UNICAP):
These rules do not apply to small retailers and wholesalers who have average annual gross receipts of 3 years that…
Do not exceed $10 million
Uniform capitalization rules (UNICAP):
Interest must be capitalized if the debt is incurred or continued to finance the construction or production of real property, property with recovery period of 20 years, property that takes more than 2 years to produce it property with a production period exceeding…
One year and cost exceeding $1 million
Uniform capitalization rules (UNICAP):
UNICAP rules do not apply to…3
1 advertising
2 selling
3 research
Mine development and exploration costs, property held for personal use, freelance authors, photographers and artists whose personal efforts create products…
UNICAP rules do not apply
Business meals, entertainment and travel, what percent gets deducted?
Business meals and entertainment = 50% deduction
Business travel = 100% deduction
Deductions for business gifts are limited to…
2) and must not…
$25
2) must not have advertising nature
Bad debts are generally deducted in…
Year they become worthless
Business bad debt, define
One that is incurred in trade or business of lender
Business bad debts must be…
1 on an accrual basis
2 can write off when uncollectible
Nonbusiness bad debt (not incurred in trade or business) can only be deducted…2
1 if totally worthless
2 can only write off as short term capital loss
