Module 3

Question 1

Nondeductible Expenses on Schedule C

Answer 1

1. Salaries paid to Sole proprietor
2. Federal Income Tax
3. Personal Portion of expenses (auto ,meals . etc.)
   State and local tax - itemized deduction on
   schedule A
   Health Insurance of a sole proprietor - Adjustment
   to arrive at AGI
4. Bad debt expenses on a cash basis taxpayer
5. Charitable Contributions - Itemized deduction-
   schedule A

Question 2

Net Business Income Tax

Answer 2

Two taxes:
1. Income Tax
2. Federal self-employment tax:
     92.35% * Self-employment income = X
      X * 15.3% = federal self-employment tax

Question 3

Net Taxable Loss

Answer 3

2 - Year carryback
20 - Year carryforward

Taxpayer may use the loss as carryforward only

Question 4

Uniform Capitalization Rules

Answer 4

Apply to the following:

1. Produced for Use: Real or tangible property produced by the taxpayer for use in his or her trade of business
2. Produced for Sale: Real or tangible property produce by the taxpayer for sale
3. Acquired for Resale: Does not apply if the taxpayer’s average gross receipts for the preceding 3 years do not exceed 10,000,000 annually

Question 5

Cost required to be capitalized - UNICAP

Answer 5

1. Direct materials
2. Direct labor
3. Indirect Costs
   1. Utilities
   2. Warehousing Costs
   3. Repairs
   4. Maintenance
   5. Indirect labor
   6. Rent
   7. Storage
   8. Depreciation
   9. Amortization
   10. Insurance
   11. Pension Contribution
   12. Engineering and design
   13. Repackaging
   14. Spoilage and scrap
   15. Administrative Supplies

Question 6

Costs not required to be capitalized - UNICAP

Answer 6

1. Selling
2. Advertising
3. Marketing expenses
4. General and Administrative expenses
5. Research
6. Officer Compensation

Question 7

Long-Term Contracts

Answer 7

A contract that is incomplete at the end of the tax year in which it was started and relates to the manufacturer, installation, building, construction of real and personal property.
They must follow two methods:
1. % of Completion Method
2. Completed contract method

Question 8

All Long-Term Contracts must follow the % of completion method unless and exception is met

Answer 8

Exemptions:
1. Small Contractors - Projects that do not last more than 2 years and their annual gross receipts not exceed $10 million for the 3 years that precede the tax year.

2. Home construction contractors - 80% of the contracts are related to dwelling units and its on a transient basis

Question 9

% of completion method income recognition formula

Answer 9

Cost to date / Estimated total cost = xx%

xx% * Contract Amount - prior income recognized

Question 10

Farming Income -Schedule F

Answer 10

1. Cash basis
2. Accrual basis
   
   • Inventory valuation
     a. Cost
     b. Lower of cost of market
     c. Farm-price method
     d. Unit Livestock price method
   • Gross profit = Value of inventory at year end + proceeds received from the sales during the year - the value of inventory at the beginning of the year - the cost of inventory purchased during the year

Question 11

Rental Income or Loss

Answer 11

Schedule E 
Gross rental Income 
Prepaid rental Income
Rent Cancellation payment
Improvements in lieu of rent

Question 12

Rented fewer than 15 days

Answer 12

Rental Income excluded

Question 13

Rented 15 or more days

Answer 13

Rented 15 or more days and
Personal Use:
More than 14 days or
More than 10% of the rental days
Property will be treated as personal/rental residence
Expenses will be prorated between personal and rental use: Mortgage Interest and taxes are based on based on months rented divided by 12 months

Other related expenses are deducted based on the percentage rented or for personal use.
2 months rented, 1 month personal use = 2/3

Question 14

Nonresidence (Rental Property)

Answer 14

Losses deducted only to the extent of passive income

Active participant = can deduct up to $25,000 of rental loss against nonpassive income

Question 15

Tax planning

Answer 15

1. Defer Taxable income

2. Accelerate tax deductions