Mod 35 Individual Taxation Pt. 2 Flashcards
Material participation vs. active participation
Material participation involves more hours than active participation
NOL may be carried back…
Carried forward…
Carried back 2 years
And carried forward 20 years
An NOL carryback is first made…
To second preceding year
Taxpayer may elect for NOL…
Not to carry back, only to carry forward 20 years
Losses and credits from passive activities may generally only be used…
Offset income from passive activities
Passive losses may not be used to offset…2
1 active income
2 portfolio income
3 examples of active income
1 wages
2 salaries
3 professional fees
4 examples of portfolio income
1 interest
2 dividends
3 annuities
4 royalties
Passive income:
Loss from partnership which individual does not participate in may be offset against…
Income from limited partnership
Losses and credits from passive activities apply to…5
1 individuals 2 estates 3 trusts 4 closely held C corporations 5 personal service corporations
Closely held C corporations, distinguishing characteristic
1 five or fewer shareholders owning more than 50% of stock
Personal service corporation is an incorporated service business with…
More than 10% of its stock owned by shareholder employees
Passive activity is 3
1 trade or business where taxpayer doesn’t materially participate
2 rental activity
3 limited partnership interest
If there is insufficient passive activity income to absorb passive activity losses…
Excess losses are carried forward indefinitely
If there is insufficient passive activity income in subsequent years to fully absorb the loss carry forwards, the unused losses from passive activity may be deducted when…2
1 Activity that gave rise to unused losses is disposed of
2 in fully taxable transaction
Rental activity, special rule permits
Individual to offset $25,000 of income that is not from passive
activities
by losses or credits from rental real estate if actively participates
In rental real estate activity
Rental activity, the $25,000 is phased out
By 50% AGI in excess of $100,000
AGI is computed for phase out of $25,000 of income that is not from passive activities before including…1
Deducting 1
Excluding 1
1 including taxable social security
2 deducting IRA contributions
3 exclusion of interest of series EE bonds used for higher education
What does MACRS stand for?
Modified Accelerated Cost Recovery System
MACRS is mandatory for most property…
Placed in service after 1986
MACRS:
Salvage value is…
Completely ignored under MACRS
MACRS:
The method of cost recovery and the recovery period are…
The same for both new and used property
MACRS:
5 year, 200% class applies to…4
1 computers
2 equipment
3 machinery
4 cars + trucks
MACRS:
7-year, 200% class, applies to…
Furniture and fixtures
MACRS:
27.5 year, straight line class includes…
Residential rental property
Residential rental property depreciated over 27.5 years straight line is building or structure with…
80% or more of its rental income from dwelling units
MACRS:
39 year, straight line class includes…2
1 Non residential property or
2 class life of less than 27.5 years
Averaging convention
Compute depreciation in first year or year disposed
MACRS:
Personal property is treated as placed in service or disposed of at…
Midpoint in year, resulting in half year depreciation
MACRS:
Mid quarter convention must be used if…
More than 40% of all personal property is placed in service during
Last quarter of taxpayer’s taxable year
MACRS:
Real property is treated as placed in service or disposed of…
In middle of month (half month depreciation)
Bonus (additional first year) depreciation is equal to…
50% of adjusted basis of qualified property
Bonus (additional first year) depreciation:
Qualifying property is property acquired after…
December 31, 2007 and placed in service before 2014 or 2015
Bonus (additional first year) depreciation:
Qualified property includes new MACRS property with a…
Recovery period of 20 years or less
Bonus (additional first year) depreciation:
Qualified property includes we MACRS property and 3 other things
1 tangible personal property
2 off shelf computer software
3 qualified leasehold property
Bonus (additional first year) depreciation:
Original use of qualified property must…2
1 begin with taxpayer and
2 property’s business use must exceed 50%
Bonus depreciation is computed before…
2) but after…
Before MACRS depreciation
2) after amount expensed under Sec. 179
Bonus (additional first year) depreciation:
There is no…
No annual dollar limit on amount of bonus depreciation that can be
Taken
2 situations where NOLs occur
1 loss on schedule C (sole proprietor)
3 casualty loss on schedule A
Bonus depreciation is not affected by…2
1 short tax year or
2 date during year property was placed in service
Bonus depreciation deduction and regular MACRS on bonus depreciation property are…
Allowed in full for AMT purposes
Leaseholds are depreciated…
Over 15 years using straight line method
Self employment tax is on…2
1 social security
2 Medicare
Self employment tax is computed on what form?
Schedule S/E
A self employed individual has 2 choices for medical insurance premiums
1 deduct 100% medical insurance premiums to arrive at AGI
2 can subtract medical insurance premiums in computing self employment tax
IRAs:
You can have…
2) what is the max contribution to both?
Both traditional and Roth
2) $5,500 or $6,500
Can contribute to Roth IRA as long as…
Person is alive
If you roll over a traditional IRA into a Roth…2
1 contributed deductibles and earnings are taxable
2 no 10% penalty
What date is an individual required to open and fund a 2014 IRA by?
4/15/15
Leasehold improvement costs made by lessee generally must be recovered over the…
MACRS recovery period of underlying property without regard to
Lease term
Qualified leasehold improvement property includes improvements to qualified…3
1 nonresidential real property
2 restaurant property
3 retail improvement property
Leasehold improvements are depreciated over a 15 year period using the straight line depreciation and…2
1 half year convention or
2 mid quarter convention
Upon expiration of a lease, any unrecovered adjusted basis in abandoned leasehold improvements is…
Treated as a loss
Sec. 179 expense election, in which taxpayer may elect to…2
1 Treat cost of qualifying depreciable property as expense
2 rather than a capital expenditure
Sec. 179 expense applies to…2
1 Tangible personal property acquired by purchase from an
unrelated party
2 not real estate
Sec. 179 expense election:
The maximum cost that can be annually expensed is…
2) reduced dollar for dollar for…
$500,000
2) amounts exceeding $2 million
Business start up costs 4 examples
1 survey of potential markets
2 expenses of securing prospective distributors/suppliers
3 advertising
4 employee training
Business start up costs are deductible in year paid or incurred if…
Taxpayer is currently in similar line of business as start up business
If not in similar line of business and new business is not acquired by taxpayer…
Start up costs are not deductible
If not in similar line of business and new business is acquired by taxpayer…
Start up costs must be capitalized
Amortization:
For startup costs a tax payer may elect to…
Deduct up to $5,000 in year business begins
Deduction of $5,000 for business startup costs is phased out…
Dollar for dollar if startup costs exceed $50,000
For startup business costs, the remaining expenditures, after the $5,000 deduction, are…2
1 Deducted ratably over 180 month period
2 starting in first month business begins
Research and experimental expenses may be amortized…
Over 60 months or more
Research and experimental expenses may be amortized. Alternatively they may be…2
1 Expensed at election of taxpayer
2 if done so for year such expenses are first incurred and paid
Intangible assets for which the Cod does not specifically provide for amortization are…
Amortizable over their useful lives
Most acquired intangible assets are to be amortized over a…
15 year period, beginning month it is acquired
Section 197 applies to most intangibles acquired either in…2
1 stand alone transactions or
2 as part of acquisition of trade or business
An amortizable sec. 197 intangible is any qualifying intangible asset which is acquired by taxpayer and which is…
Held in connection with conduct of trade or business
Qualifying intangibles include…5
1 goodwill 2 government licenses and permits 3 franchises 4 trademarks 5 trade names
Certain assets qualify as Sec. 197 intangibles only if acquired in connection with the acquisition of a trade or business. These include…
Covenants not to compete
Above the line deductions
Taken from gross income to determine adjusted gross income
A self employed individual can deduct…
Deduct 50% of self-employment taxes in arriving at AGI
Self employed individual can deduct 100% of…
Premiums for medical insurance
Self employed individual can deduct 100% of of the premiums for medical insurance for the…4
1 individual
2 spouse
3 dependents
4 child under age 27 at close of tax year
Deduction for medical insurance premiums can also be…
Subtracted in computing individual’s self employment tax
Moving expenses, distance from former residence and new job must be…
At least 50 miles
Following a move, the employee must be employed at least…
39 weeks out of 12 months following the move
Maximum deduction for individual’s contribution to IRA in 2013
$5,500
For married taxpayers filing a joint return put to $5,500 can be deducted for contributions to IRA of…2
1 each spouse, even if one spouse isn’t working
2 provided combined earned income of each spouse is at least
amount contributed to IRA
IRA catch up contributions
Individual age 50 or over can contribute and deduct an extra
$1,000 to IRAs/yr.
$6,500
IRA penalty
10% penalty on early withdrawals before 59.5 years old
10% penalty does not apply to amounts withdrawn for…4
1 qualified higher education expenses
2 first time home buyer expenses ($10K limit)
3 distributions to unemployed for health insurance premiums
4 distributions where medical expenses exceed 7.5% of AGI
Contributions to Roth IRA are…
Not deductible
Eligibility for a Roth IRA
There are threshold limitations for AGI
Traditional IRA contributions can’t be made after…
Age 70.5
Qualified distributions from Roth IRA are…
1 not included in gross income
2 not subject to 10% early withdrawal penalty
Qualified distribution from Roth IRA is a distribution that is made…
After 5 year period beginning with first tax year contribution was
made
Qualified distribution of Roth IRA, 4 possible ones
1 after age 59.5
2 beneficiary after individuals death
3 after individual becomes disabled
4 first time home buyer (spouse, children, grandchildren up to 10K)
For tax year beginning before 2010, tax payers with AGI of less than $100,000 could convert assets in traditional IRAs to roths without…
2) Although the deemed…
Paying 10% tax on withdrawals
2) distribution of IRA assets is included in income
For IRAs (traditional and Roth) For tax years beginning after December 31, 2009, the…
AGI and filing status limitations are eliminated
For IRAs (traditional and Roth) For tax years beginning after December 31, 2009, the AGI and filing status limitations are eliminated, allowing…
Higher income tax payers to convert traditional IRAs to Roths
Self-employed are either…2
1 individual who files schedule C or
2 general partner
Limited partner is considered…
An investor (not self-employed)
Self-employed:
Keogh plan is a retirement plan where…2
1 contributions are limited
2 contributions are deducted
A loan to a related party to pay for eduction is…
Not a qualified education loan
Deductible medical expenses:
1 insurance premiums
2 policy for dental
3 prescription drugs
Accident and disability premiums are…
Not deductible
Cosmetic surgery is usually not deductible, what are 2 conditions to make it deductible?
1 correct a defect from an accident
2 paid out of pocket
If you don’t have income subject to state withholding then…
You must pay estimated payments
You can deduct estimated state cash payments made in what time period?
Made within the tax year
Foreign real estate taxes are deductible as long as…
U.S. had a treaty with that country
A Coverdell Education Savings Account is…2
1 An education IRA
2 for elementary, secondary and post secondary education
Contributions can be made to a Coverdale Education Savings Account of up to…2
1 $2,000 per beneficiary
2 until beneficiary reaches age 18
Coverdell Education Savings Account:
Contributions and withdrawals
Contributions not deductible
Withdrawals to pay cost of education are tax free
Coverdell Education Savings Account:
Any earnings of an education IRA that are not used to pay a beneficiary’s education expenses must…2
1 be included in distributee’s gross income and
2 are subject to 10% penalty tax
Coverdell Education Savings Account:
Eligibility is…
Phased out to high AGI
Simplified employee pension plan (SEP) 2
1 deductible to arrive at AGI
2 employees don’t need to file for this plan
Savings incentive match plan for employees (SIMPLE) 2
1 contributed by self-employed
2 deductible to arrive at AGI
Deduction for interest on eduction loans, how long can you deduct?
Can deduct interest as long as loan exists
For qualified education loans an individual can deduct interest up to…
$2,500
Deduction for interest on qualified education loans is not available if…
Individual is claimed as dependent on another taxpayer’s return
Qualified education loan is any debt incurred to pay for the qualified higher education expenses of…2
1 the taxpayer, spouse or dependents
2 must relate to period student was enrolled at least half time basis
Qualified education expenses include…4
1 tuition
2 fees
3 room
4 board
Deduction for interest on education loans is…
Phased out
For 2007 through 2013, individuals are allowed to…
Deduct higher education expenses in arriving at AGI
Qualified tuition and related expenses applies to tuition and fees, not…
Not text book expenses
Qualified tuition and related expenses means tuition and fees required for…
Enrollment of taxpayer, taxpayer’s spouse, dependent at post secondary institution
If a taxpayer takes an American Opportunity credit or lifetime learning credit with respect to a student, the qualified higher education expenses of that student for the year are…
Not deductible
Penalties for premature withdrawals from time deposits
Penalty paid to bank is tax deductible
Alimony or separate maintenance payments are…
Deducted above the line
Jury duty pay…
Remitted to employer is deductible to arrive at AGI
Costs involving discrimination suits:
What is deductible on behalf of an individual in connection with any action involving claim of unlawful discrimination (age, sex, race)?
Attorneys fees and court costs are deductible to arrive at AGI
Costs involving discrimination suits:
The amount of deduction is limited to…
Amount of settlement/judgement included in gross income for year
Expenses of elementary school teachers
U reimbursed paid out of pocket for supplies up to $250
Medical and dental expenses paid by tax payer for himself, spouse or dependent are deductible in year of payment if…
Not reimbursed by insurance or employer
Removal of structural barriers
Deductible expenses for physically handicapped individuals
Deductible medical expenses:
Fees for…3
Doctors, dentists, psychiatrists, etc.
Deductible medical expenses:
Meals and lodging 2
1 meals and lodging provided by hospital during medical treatment
2 provided during treatment for drug/alcohol addiction
Deductible medical expenses:
Medical + hospital…
Insurance premiums
Deductible medical expenses:
Prescribed…
Medicines and insulin
Deductible medical expenses:
Transportation for…
Needed medical care
Deductible medical expenses:
Special items and equipment including…2
Crutches, motorized wheelchair, etc.
Items not deductible for medical expenses…4
1 bottled water
2 maternity cloths
3 diaper service
4 funeral + burial service
Income taxes that are deductible
1 state
2 local
3 foreign
Income tax that is not deductible…
Federal
In states with no state tax, you can deduct…2
1 Sales tax from receipts or IRS tables
2 can deduct sales tax from purchase of boat or motor vehicle in
Addition to tables
Real property taxes are deductible for…3
1 State
2 local
3 foreign
For real property taxes to be deductible you must…2
1 own property
2 pay real estate taxes
Personal property, which are deductible?2
1 state and local deductible
2 foreign is not deductible
If personal property taxes are based on…
Weight, they are deductible
