Pre Study Materials

Question 1

Up to what amount is student loan interest deductible?

Answer 1

Student loan interest is only deductible up to $2500
Phaseout for income on deductibility is $75,00 - $90,000

Question 2

Who can be included for the family Tax Credit?

Answer 2

• It is a $500 credit for those who would qualify as a a dependent.
• Can include children over the age of 17 who are college students, and others who meet the definition of an independent

Question 3

Who qualifies for the Child Tax Credit?

Answer 3

$2,000 credit for each dependent UNDER 17. Includes stepchildren and foster children.
-Married people must file MFJ to get credit
-Eligible children are: under 17, a US citizen, and claimed as dependent on the tax return.
-Up to $1600 is refundable
-Subject to AGI limits

Question 4

How does the Child & Dependent Care Credit work?

Answer 4

-Must have employment-related care costs for either:
*Dependendent under the age of 13, or handicapped dependent or spouse.

-Credit amount is 20% * eligible costs if AGI is over 43k.
* Expenditures that qualify are lesser of actual costs or $3,000 for one individual , $6,000 for two or more.
- Can be up to 35% if lower AGI.

Question 5

Below market Loans and Imputed Interest

Answer 5

$0-$10,000 loan = Imputed interest of $0
$10,001 - $100,000 = Lesser of
*Net Investment Income,
Interest calculated using AFR (applicable federal rate) less interest calculated using stated rate of loan
**If borrower’s Net investment income is less than $1000, $0 imputed interest.

Greater than $100,000
*Interest calculated using AFR less interest calculated using stated rate of the loan

Question 6

Business Travel Deductibility

Answer 6

For a domestic trip, the travel is only deductible if the trip is primarily for business. The hotel and meals are deductible for the days the traveller did work.

Question 7

Capital Improvements as medical deduction

Answer 7

General rule is: expense is less the increase in value to the home as an eligible deduction. Certain improvements are not reduced by increase in home value: exit ramps, widening of hallways, and lowering of bathroom fixtures but not elevators.

Question 8

Deducting Investment interest expense

Answer 8

It is limited to net investment income.

Question 9

Personal residence interest deduction limit

Answer 9

It is limited to the first $750,000 of indebtedness

Question 10

Deductions on donations to a charity for Public Charities

Answer 10

Ordinary income - lesser of basis or FMV - 50% of AGI ceiling
Cash - 60% of AGI ceiling
LTCG property - either FMV or Basis - 30% of AGI if FMV, 50% of AGI if basis
LTGC tangible property related unrelated use - Lesser of FMV or Basis - 50% of AGI

Question 11

Charitable contributions from IRAs

Answer 11

Limited to $100,000 (lessened by ira contributions after 70 1/2)
Owner myst be 70 1/2 before making them

Question 12

AMT add backs

Answer 12

*Accelerated depreciation for real and personal property
- Real property depreciation in excess of 40 year straight line
- Personal property, depreciation inexcess of 150% declining balance method
* Standard deduction if itmeized deductions are not used
* Itemized deductions not allowed for AMT

Question 13

AMT Preference Items

Answer 13

1. Percentage Depletion
   
   • Amount of % depletion taken for regular tax in excess of the adjusted basis of the property at the end of the year is a preference item.
2. INtangible drilling costs
   
   • AMT requires 10 yr amortization.
   • Preference is excess of regular tax deduction over AMT amount
3. Interest on private activity bonds
   
   • This interest is not taxable for regular tax purposes, but is included in income for AMT purposes.,

Question 14

Failure to File penalty

Answer 14

accrues at 5% / month up to 25%
- if fraudulent, it increases to 15% / month up to 75%.
-If filed more than 60 days late, minimum failure to file penalty is $485 or the amount of tax due.

Question 15

Failure to pay penalty

Answer 15

accrues at a rate of .5% per month up to 25%
- If assesed failure to file and failure to pay, the failure to file penalty is reduced by thte failure to pay penalty.

Question 16

Estimated tax due dates

Answer 16

April 15th, June 15th, September 15th, and January 15th.

Question 17

Accuracy - related penalty

Answer 17

20% and applies to any underpayment due to negligence or disregard of rules, regulations, or substantial understatement of income tax.

• Substantially understated is the understatement of tax exceeds the greater of 10% of the correct tax or $5,000.
• Fraud penalty is 75% of the tax underpayment

Question 18

Private Letter Ruling

Answer 18

A ruling from the IRS on how it will reat a proposed transaction. It is binding on hte IRsa for the taxpayer that requests it.

Question 19

U. S . Tax Court

Answer 19

No payment of tax is necessaryin order to bring a claim before the US tax court.
Trial by jury not available.

Small Tax Case division handles deficiencies under $50,000 at the taxpayer’s request.
Appeals are to US court of appeals.

Question 20

US Court of Federal Claims

Answer 20

Sits only in Washington DC
ONly hears claims against the USA
Tax must be paid prior to proceed in this forum
Appeals are to US court of appeals for the Federal Court

Question 21

US District Court

Answer 21

Tax Deficiecies must be paid
US District court is only forum that allows a jury
This court is bound by decisions of its appeals court and the US supreme court

Question 22

US Court of Appeals

Answer 22

thre aere 12 Circuit courts, located throughout the US
The US court of appeals handles appeals from tax court and district court
The court of appeals of one region is not bound to follow the decisions of the court of appeals in another region

Question 23

US Supreme Court

Answer 23

Decisions are binding on taxpayers and IRS
They review cases if:
* there is a conflict btwn circuit courts
* an important and recurring problem in ta law administration is involved
* many tax payers are involved
* the decision of a lower court conflicts with long-standing practice or regulations

Question 24

Depreciation begins when…

Answer 24

You place the decpreciable property into service.
ex. A house is ready to rent out in July. House is considered placed in service in July, even if it is not actually rented at that time.

Question 25

Property is retired from service when….

Answer 25

*It is sold or exchanged
* is converted to personal use
*is abandoned
*is transferred to a supplies or scrap account
* is destroyed

Question 26

Accelerated Cost Recovery System (ACRS) and Modified…(MACRS)

Answer 26

Assets subject to wear, tear and obsolescense
Must have a determinable usefule life and
Are tangible personalty or realty
**MACRS may be used to depreciate most property.

Question 27

Straight Line Method of Depreciation

Answer 27

Allows tax payer to deduct the same amount of depreciation each year over useful life of property

Calculation: Subtract the salvage value, if any from basis
*the balance is the total depreciation you can take over the useful life of the property.
*Divide the balance by the number of years in the useful life. This gives you the yearly depreciation deduction.

***If in first year, you use the property for less than a full year, you must prorate your depreciation deduction for the number of months in use.

Question 28

Section 197 intangibles

Answer 28

You must amortized these costs. INtangible property, such as certain computer software, that is not section 197 intangible property, can be depreciated if it meets certain requirements

Question 29

When you can depreciate computer software

Answer 29

When it was not included in the larger purchase of a business.

You can depreciate it if:
It is readily available for purchase by general public
It is subject to a nonexclusive license
It has not been substantially modified.

If it meets those test, you can depreciate it using straight line method over a life of 36 months.

Question 30

ACRS

Answer 30

Accelerated recover system - Depreciation based on recovery periods instead of useful life. These periods are pre-determined by IRS.

MACRS replaced this in 1986.

Question 31

MACRS - Property you cannot depreciate

Answer 31

Property placed into service prior to 1987
Certain property owned or used in 1986
Intangible property
Films, video tapes, recordings
Certain corporate or partnership property acquired in a nontaxable transfer
Property you elected to exclude from MACRS

Question 32

Two MACRS depreciation systems

Answer 32

General Depreciation System (GDS) and the Alternative Depreciation System ( ADS)

Question 33

ADS must be used on …

Answer 33

Listed property used 50% of less in qualified business use
Any tangilbe property used mostly outside of USA
Any tax - exempt property
Any tax-exempt bond - financed property
All property sued mostly ina farming biz and placed in service in any tax year during which an election no to apply the uniform capitalization farming rules to certain farming costs is in effect
Any property imported from a foreign country w/ trade restrictions or engages in other discriminatory acts.

Question 34

Know the GDS property classifications

Answer 34

3 year, 5 year, 7 year, 27.5 year, 39 year

Question 35

3 year property (GDS)

Answer 35

*Tractor Units for over the road use
*any race horse over 2 yrs old when placed in service
*any other horse (not racehorse) over 12 yrs old when placed in service
*Qualified rent to own property

Question 36

5 Year Property (GDS)

Answer 36

*Autos, taxis, busses
*Computers and periperal equipment
*Any property used in research / experimentation
*Breeding Cattle and dairy cattle
*Appliances, carpet, furniture, used in residential real estate
*Certain geothermal , solar, wind energy property

Question 37

7 Year Property (GDS)

Answer 37

*Office Furniture and fixtures
*Agricultural machinery
*Any property w/o class life and has not been designated in another class
*Certain motorsports entertainment complex property
*Any natural gas gathering line placed after 4/11/05.

Question 38

10 year property (GDS)

Answer 38

*Vessels, barges, tugs, and similar water transportation equipment
*any single purpose agricutulral or horticultural structure
*Any tree or vine bearing fruits or nuts

Question 39

15 year property (GDS)

Answer 39

*Certain improvements made to land or added to it (ex ehrubbery, fences, roads, bridges)
*Any retail motor fuels outlet, i.e. convenience store
*Any municipal wastewater treatment plant
*any qualified leasehold improvement property prior to 2008
*Any qualified restaurant property palced before 2008
*Initial clearing and grading land improvements for gas utility
*Electric transmission property after 2005
*Any natural gas distributions line after 2005

Question 40

20 year property (GDS)

Answer 40

*Farm Buildings (other than single purpsoe ag or horticultural structures)
*Municipal sewers not classified as 25 yr property
*Initial clearing and grading land improvements for electric utility transmission

Question 41

25 year property (GDS)

Answer 41

This class is water utility property

Question 42

27.5 year property (GDS)

Answer 42

Residential rental property
*Any building or structure, like rental home, including mobile home, if 80% or more of its gross rental income for hte tax year is from dwelling units.
*If taxpayer occupies any part of the building or structure for personal use, its gross rental income includes the fair rental value of the part the taxpayer occupies

Question 43

39 year property (GDS)

Answer 43

Non residential real estate property.
*This is section 1250 property, such as an office building, store, or warehouse, that is neither residential rentl property nor property w/ a class life of less than 27.5 years.

Question 44

Mid Month Convention under MACRs

Answer 44

Non residential real property and residential rental property use the mid-month convention

Method used for real estate. Means that when a property begins depreciation, it counts from the midpoint of the month.
It means one half a month counts when it begins and on half month counts when it is disposed of.

Question 44

Mid Quarter Convention

Answer 44

Use this if the mid-month does not apply and the total depreciable basis of MACRS property you placed in service during the last 3 months fo the tax year are more than 40% of the total depreciable bases of all macrs property.

Question 44

Half Year convention

Answer 44

Under this, you treat all property placed in svc or disposed of during a tax year as placed in or disposed of at the midpoint of the year.

**This is the default for personal property placed into service.

Question 45

Section 179 assets

Answer 45

Can elect to immediately expense up to $1,160,000 of business tangible property placed in service that year.
Cannot use section 179 for realty or production of income property.
Amount expensed reduces basis
Cost recovery available on remaining basis.

Deduction is the lesser of:
*Property placed in service (PPS)
*Taxable Income (TI)
*Threshold of $1,160,000 phased out for PPS > 2,890,000

Question 46

Common forms of Legal Entities

Answer 46

*Sole proprietorship
* Partnership
* Limited Liability Partnership
*Corporation
*Limited Liability Corporation

Question 47

Selecting correct entity includes considering…

Answer 47

*Ease adn cost of formation
*Complexity of mfmt and governance
*How transferability and dissolution are achieved
*LIability protection for owners’ personal assets
*Reporting requirements and taxation

Question 48

Sole Proprietor

Answer 48

*Arises when an individual engages in business for profit
*Can operate under the name of owner or it can conduct business under a trade or fictitious name
*No filings are reqd w/ Secretary of State and no annual filings are requried.
* There is no transfer of assets to the entity b/c the entity is a legal extension of the proprietor

Formation is easy and inexpensive, may be req’d to obtain a business licesense.
*If they are collecting sales tax, it must register w/ state or local taxing authority.

Proprietor has 100 % interest in the proprietorship assets and income

Capital is limited to resources of the proprietor including ability to borrow.

**LIability is an issue, proprietor is legally liable for the debts and torts of his sole prop

Question 49

Sole Proprietor income taxation and payroll

Answer 49

cost is low b/c proprietor simply adds a Schedule C to his form 1040.
* Uses ssn to conduct business, unless they hire employees, then they use EIN.

*Must pay unemployment on employees, but not on himself.
*They pay self-employment tax (upt to 15.3%) on his own earnings and 1/2 fo social security taxes for employees.

*Net profit is carried over to 1040.

Question 50

Calculation for self-employed individual’s contribution to Keogh plan

Answer 50

1. Calculate self-employment tax: Calculate the self-employed individual’s contribution rate:
   Net Self-Employment Income times: 92.35 (accounts for ss and medicare)

This equals Net earnings subject to Self Employment tax
Times: 12.4% upt to 160,200
Plus: 2.9% on all income
Equals: SELF EMPLOYMENT TAX

Self Employed Contribution rate = Contribution Rate to others / 1+ Contribution rate to othters)

2. Calculate the self -employed individuals contribution:

Net Self Employement income
Less 1/2 SE tax
equals : Adjusted Net SE Income
times: SE contribution rate
equals: SE Individual’s Qualified Plan Contribution

Question 51

Advantages and Disadvantages of Sole Proprietorship

Answer 51

Advantages:
*Easy to form
* Simple to operate
* Easy to sell business assets
*Few administrative hurdles
*Income is generally passed through to the owner on Schedule C form 1040

Disadvantages:
*Generally have limited sources to capital
*Unlimited liability
*NO guarantee of continuity beyond the proprietor
* Business income is subject to self-employment tax

Question 52

General Partnership

Answer 52

*Amount of capital usually determines ownership interest, but if a situation is different, when one partner brings ideas and the other money - there should be a written partnership agreement that clarifies interests and partner’s distributive share of profits and losses.

Question 53

GP liability

Answer 53

Co owner partners share the risks and rewards of the business. Partner’s personal assets can be seized to satisfy partnership obligations

Question 54

GP management / operations

Answer 54

The are generally managed equally by all partners; though it is possible to name a “Managing Partner”.
*Employees are eligible for wide variety of tax-free fringe benefits i.e. health care - but not partners.
Partners can participate in company-sponsored retirement plan, but have the same limitations as proprietors w/ calculations

Question 55

GP Taxation

Answer 55

*Not subject to entity level taxation
*Partnerships file a form 1065, including Schedule K.
Income and losses passed along on form 1065 K-1 regardless of whether the income is distributed to partners in form of cash.
*All partnership business net income is subject to SE tax up to 15.3 percent.
*Must obtain Federal Employer Id Number (FEIN)

Question 56

GP tax ramifications on formation

Answer 56

When partner contributes cash or property to partnership, no gain or loss is recognized and these contributions become their basis.

If a partner contributes services, partner must recognize ordinary income for the value of their services. The amount of income recognized becomes the partner’s basis in their partnership interest.

Question 57

GP Tax ramifications on Business Operations

Answer 57

Partnership must file form 1065 though they still pay tax at entity level
Each partners’s share of income and expense items is then reported on form 1065, schedule k1
*Partner’s adjusted basis is adjusted each yearto reflect allocation of income and expense.
*Partner’s basis is increased by his share of income, and decreased by his share of losses, distributions, nondeductible expenses.

Question 58

GP Tax ramifications of withdrawals or distributions

Answer 58

Withdrawal is treated as a return of capital and generally is not taxable. HOwever, it does reduce their basis.

Once partner’s basis is reduced to zero, any additional withdrawals will result in a capital gain for the partner.

Question 59

Summary of Advantages and Disadvantages of Partnerships

Answer 59

Advantages:
* More sources of initial capital than proprietorships
*Usually have more management resources available
*Have fewer administrative burdens than corporations
*Income and losses are generally passed through to the partners for tax purposes

Disadvantages:
*Transfer of interests is more difficult than for proprietorships
*Unlimited liability
*Partnershp income tax and basis adjustment can be complex
*Business net income is subject to self - employment tax
*Partners are entitled to few tax-free fringe benefits that are generally available to employees.

Question 60

Limited Partnerships

Answer 60

Associations of two or more persons as co-owners to carry on a business for profit except one or more of the partners have limited participation in management fo the venture and thus limited risk exposure.
There is usually at least one general partner.

Question 61

Limited Partners taxation

Answer 61

Not usually subject to self employment tax since they are passive.
*Entity files form 1065 and issues Schedule K-1 to both its general and limited partners

Question 62

Limited Partnership advantages and disadvantages

Answer 62

Advantages:
*Favorable pass -through partnership taxation status
*Flexibility in structuring ownership interests
*Limited partners are not personally liable for the debts and obligations for the limited partnership as long s they do not engage in management.

Disadvantages:
*Must file with the state to register
*In most states, general partners are liable for debts and other obligations of the limited partnership
*Losses for limited partners are generally passive losses.

Question 63

Limited Liability Partnership (LLP)

Answer 63

A hybrid entity that provides partial liability protection to its members

Usually accountants, attys and doctors who practice together.
Partners enjoy liability protection from acts of partners but are liable for their own.

Question 64

LLP Advantages and Disadvantages

Answer 64

Advantages:
*Favorable pass through partnership taxation status available.
*Flexibility in structuring ownership interests
* Partners can insulate themselves from the acts of other partners

Disadvantages:
*Required to file with the state to register
*Unlimited liability for own acts of malpractice.

Question 65

Family Limited Partnerships (FLP)

Answer 65

A special type of partnership whose primary purpose of transferring assets to younger generations using annual exclusions and valuation discounts for minority interests and lack of marketability.

Question 66

FLP formation

Answer 66

Usually a family member donates highly appreciated property and takes a small (one percent) general and a large (99 percent) limited partnership interest.

Question 67

FLP Taxation

Answer 67

FLPs are taxed as a partnership and entity files form 1065 and k1 to both general and limited partners. GP may be corporation or an individual.

Question 68

FLP ADV / Disadvantgages

Answer 68

Advantages:
* Control retained by senior family members
*Valuation discounts are available for minority interests
* Annual exclusion gifts are generally used to transfer interests to family members
*Some creditor protection
*Restrictions can be placed on transferability of LP intersts fo junior faimly members
*FLP is commonly used as an estate planning strategy

Disadvantages
*Atty setup fees and costs
*Periodic valuation costs
*Operational requirements
*Potential IRS challenges regarding valuations and discounts.

Question 69

Limited Liability Companies (LLC) - Formation

Answer 69

Formed the same way as corporations. They are chartered entities w/ sec of state in state of organization. Charter Document is called “Articles of Organization” and state requires entity to have a resident agent. State will require annual filings.

Question 70

LLC - liability

Answer 70

LLC ind owners are protected from personal liability for the LLC’s debts and obligations unless they personally guarantee such obligations.
Protection is not absolute depending on courts considering “piercing the veil” and alter ego concepts

Question 71

LLC - management

Answer 71

LLC is managed by virtue of an operating agreement. Similar to corporate bylaws and may be amended.
It specifies how and who will manage the LLC, how interests may be transferred, etc.

Question 72

LLC Taxation

Answer 72

An LLC w a single member / owner is disregarded entity for tax purposes. The owner must file a Schedule C 1040 for the LLC

An LLC w/ 2 or more members can elect to be taxed as a partnership (1065 w K1), an S corp (1120S with K1), or a c corp (1120 w w2 income for owners)

Question 73

C Corp

Answer 73

Legal entities formed by one or more individuals : there are C corps and S corps. S corps are simply C corps with a special tax election

Question 74

C Corp formation

Answer 74

created by filing a charter document w/ state of incorporation called “Articles of Incorporation”. The articles require a corporation to disclose its name, number of shares, and purpose of corporation.

Question 75

C Corp dividend received deductions based on ownership percentages

Answer 75

Less than 20% = 50% DRD
At least 20, less than 80% = 65% DRD
At least 80% (affiliated corporations) = 100%

Question 76

Personal Service Corporation

Answer 76

Defined as a C Corporation in which substantially all of the activities involve the performance of services in teh fields of health, law, engineering, architecture, accounting, actuarial science, consulting, and substantially all stock is owned by employees.

Taxed at a flat rate of 21%

Question 77

Tax ramifications for withdrawals from a corporation

Answer 77

Double taxation of dividends paid by corporation to shareholders.

Double taxation occurs b/c income is taxed at the corporate level and then subsequently taxed again at the individual level b/c dividends are included in the individual’s income.

Question 78

S Corporations

Answer 78

Normally created by forming a C Corporation and then filing an “S” election w/ the IRS.

Cannot have more than 100 shareholders
Ownership restricted to US citizens or residents, estates, trusts, and charitable organizations
Insurance companies, domestic international sales corporations (DISCs), and certain financial institutions are not eligible for S Corporation status.
*Only allowed one class of stock - however one class my have voting rights and shares w/ no voting rights.

Question 79

ESBT Trust (electing small business trust)

Answer 79

one of the trusts that can own an s corporation

Question 80

Corporation management

Answer 80

Corporations are managed by one or more oficers appointed by a board of directors.

Question 81

S Corporation income

Answer 81

passed through to investors and not taxed at corporate level.

Question 82

Personal Holding Company

Answer 82

defined in IRC as section 452. A corporation is a personal holding company if:
1) At least 60% of the corporation’s adjusted ordinary gross income for the tax year is from dividends, interest, rent, and royalties.

2) At any time during the last half fo the tax year, more than 50% in value of the corporations outstanding stock is owned, directly or indirectly by 5 or fewer people.

Question 83

Taxation on Group Term Insurance - Section 79

Answer 83

The first $50,000 of coverage is not taxable to the employee (applies once per employee)
* The cost of excess coverage is determined by Uniform Premium Table 1.
* Employee contributions are subtracted to arrive at taxable income.
Ex
(150k provided gtl - $50,000) / 1,000 * .10 ( or what is provided on uniform table) * 12 (months) = taxable amount

Question 84

Home Basis

Answer 84

Additions to structure or adding a pool would count.
Replacing a roof would add to the basis as well

Repairing a roof or painting a home would not increase the basis.

Question 85

Ownership in S Corporation …

Answer 85

*Can be US citizens OR US residents, estates, certain trusts, and charitable organizations
*Vote for board of directors at annual shareholder’s meeting
*Receives K-1 annually in order to prepare a personal income tax return
*Reports on personal income tax return a pro rata share of corporate profit or loss

Question 86

Investigating a New Line of Business

Answer 86

If a new line of business is purchased and it is in a different line of business as the current trade or business operation, the costs of investigation are recouped by capitalizing the expenses and amortizing it ratably over a 60 - month period.

If not purchased - not deductible.

It is often overlooked by taxpayers.

Question 87

Dependent Care Credit conditions

Answer 87

Taxpayer must provide over 1/2 cost of maintaining the household, which is also the principal residence of the child

Child must be a dependent

If married, both parents must work or go to school

Question 88

Section 121 Primary Home exemption

Answer 88

*Requires that to qualify for the exemption client has
1) Owned and
2) Used as a principal residence for two years out of the past 5 years.

$250k single, 500k MFJ

The limit is pro-rated, NOT THE GAIN from the sale of property

Question 89

Student Loan deductibility

Answer 89

$2500 of the interest paid as an ADJUSTMENT TO INCOME is the limit that can be taken

Question 90

Adoption Credit

Answer 90

It is limited to the least of:
1) Qualifying adoption expenses
2) Adoption credit of $15,950 for 2023
3) amount of tax due

Question 91

Deducting State income or Sales tax

Answer 91

State income or sales tax (whichever is higher) and real estate taxes are deductible as itemized deductions, but are capped at $10,000 TOTAL.

Question 92

REFUNDABLE TAX CREDITS

Answer 92

The Earned Income Credit is refundable.

The American Opportunity Credit and Child Tax credit may be partially refundable.

Question 93

AMT Credit

Answer 93

CANNOT be used to offset a taxpayer’s future alternative minimum tax liability

AMT Credit is available to corporation regardless of whether the AMT liability arose from a deferral or exclusion item.

AMT credit for INDIVIDUALS is only available for AMT liabilities created due to deferral Items.

Question 94

Deductions For - Deductions taken from Gross to Arrive at AGI

Answer 94

• Trade or Business Expenses
• Deductions from Losses on Sale or Exchange of Property
  -Deductions from rental and royalty property
  -Alimony payments (divorces prior to 12/31/2018)
  -One-half self employment tax paid
  -100% of health insurance paid by a self-employed individual
  -Contributions to pension, profit sharing, annuity plans, IRAs
  -Penalty on premature w/ds from time savings accounts or deposits
  -Interest on student loans
  -Health Savings Accounts
  -Teacher Expense Deductions (up to $300 deduction for qualified expenses for primary and secondary education professionals)

Question 95

Above Line Deductions - Trade or Business Expense

Answer 95

These must be ORDINARY, NECESSARY, AND REASONABLE
- Incurred in conduct of business
- Not deductible since 2017

Question 96

Above Line Deductions - Alimony

Answer 96

If prior to 2018…
Deduction available to payor and recipient is taxed.
Alimony is…
Payed in cash
-Pursuant to a divorce or separation instrument
-Does not extend beyond the death of payee
-Is not “excess alimony payments”
-Not between spouses filing jointly
-Alimony recieved is earnd income for IRA purposes

What is not alimony:
-Elective non-alimony payments
-Any payments that could extend beyond the recipient’s life
-Child support
-Rent free occupancy of home

Question 97

Above Line Deductions - For SELF EMPLOYED INDIVIDUALS

Answer 97

Education Expenses
-if incurred to imporve existing skills or
-To meet the requirements of employer, profession, licensing, or state law
**NOT deductible if they are:
-To meet minimum educational standards for existing job or
-To find a new job
Education expenses include:
-Tuition, Books, Supplies, Transportation, Travel (including lodging and 50% meals)

BUSINESS GIFTS
Gifts of a tangible personalty with a value of $25 or less plus wrapping
- If value is $4 or less and name of business appears on item, considered advertising
-Gifts to employers or superiors are not deductible.

ENTERTAINMENT EXPENSES
NO deduction for entertaintment, 50% deduction for meals.

HOME OFFICE EXPENSES
-Only deductible for self - empoloyed, no longer for W2 people.

Question 98

BELOW LINE Itemized Items

Answer 98

-Deductions are allowed based on legislative grace.
Include
-Medical Expenses
-Contributions to Qualified Charitable Organizations
-Certain State or Local Taxes
-Casualty Losses
-Certail Personal Interest Expense
-Qualified Business Income
-Miscellaneous Itemized Deductions not subject to 2% floor.

Question 99

BELOW THE LINE - Medical Expenses (in excess of 7.5% AGI)

Answer 99

• taxpayers can deduct expenditures for themselves or their dependents that are not reimbursed. Eligible expenses include:
  *Prescriptions
  *Noncosmetic surgeries
  *Some Qualified LTC services
  *Insurance premiums including schedule for long term care policies
  *Tuition for special, medically necessary schools (school for deaf / blind)
  *Capital expenditures on advise of physician
  -to the extent the FMV value of property is not increased
  
  • for handicapped entrances and railings, there is no increased value test (NOT ELEVATORS)

Question 99

BELOW THE LINE DEDUCTIONS - Contributions to Charities

ORDINARY INCOME PROPERTY - Short Term Cap Gain Property and ALL Loss Property

Answer 99

Lesser of Basis or FMV

Ceiling
50% of AGI for Public Charities
30% of AGI for Private Charities

Question 99

BELOW THE LINE DEDUCTIONS - Cash

Answer 99

Ceiling
60% of AGI for Public Charities
30% of AGI for Private Charities

Question 99

BELOW THE LINE DEDUCTIONS - Certain State and Local Taxes

Answer 99

Taxpayers may deduct property taxes (real estate and ad valorem) - only US property
-may deduct state income tax paid, or state and local sales tax.
-Taxes are capped at $10,000 total

Question 100

BELOW THE LINE DEDUCTIONS - Long Term Cap Gain Property
-Stocks, Bonds
-Real Property
-Tangible Personalty (related use)

Answer 100

Either FMV or Adjusted Basis

Public Charities:
30% ceiling of AGI if FMV
50% ceiling of AGI if Basis

For Private Charities:
20% of Basis only

Question 101

BELOW THE LINE DEDUCTIONS - Tangible Personalty (Unrelated Use)

Answer 101

Lesser of Adjusted Basis of the FMV

Ceiling of 50% of AGI for Public Chariites
20% for Private

Question 102

Trust Tax Return

Answer 102

-MUST BE Calendar Year

Question 103

Royalties

Answer 103

in general are taxed as ordinary income, but royalties in connection with any publicationof the person;s work are earned income.

Question 104

Section 1231 5-year Look-Back Rule:

Answer 104

The 5 year lookback rule essentially forces taxpayer to net 1231 losses and gains over a five - year period.

Question 104

Dependent Rules

Answer 104

Must meet relationship requirement as a qualifying relative and must provide more than 10% of support. If more than one person provides more than 10% of support, then for one of them to claim, the otehr must sign a statemetn agreeing not to claim exemption on dependent in that year.

Question 105

Choosing entity S vs C Corp

Answer 105

C Corporations retain income.
S Corporations hold no retained earnings since all profits or losses are passed through to its owners.

Question 106

Insurance reimbursements of Casualty losses

Answer 106

Can reduce the loss amount to the taxpayer.
They aren’t included in AGI , and the losses cannot be deducted

Question 107

5 dependency tests

Answer 107

1) Gross Income Test
2) Support Test
3) Not a Qualifiying Child
4) Citizenship test (US, Canada, or Mexico
5) Joint Filing TEst

Question 108

Active Real Estate Deduction Rules

Answer 108

For active participants, up to $25,000 of passive losses from real estate may be deducted form nonpassive income.

The limit of $25,000 is reduced by ONE HALF of the maount the taxpayer’s AGI exceeds $100,000.

Question 109

Adjustments to Income

Answer 109

Consider them an addition to income.

Question 110

Bargain Element on NQSOs

Answer 110

Bargain element is reported as w2 income, and employer receives deduction.

Question 111

Cash Basis vs Accrual

Answer 111

Companies beneath 27 mm in gross receipts can use either. Companies over must use accrual

Question 112

Qualified Dependent Test

Answer 112

Five Elements:
Gross income
Support
Member of household / family
Citizenship or residence
Joint return

Question 113

Constructive Reciept

Answer 113

• The cash method of accounting recognized income when recieved. Contsructive reciept is whene the taxpayer has the right to the money, although they are not in possession thereof.
  A secular trust constructively belongs to the beneficiary therefore constructive reciept applies

Question 114

Child care Credit

Answer 114

Applies to expenses not to exceed $3000 onr one and $6000 for two or more children.
BAsed on AGI, the max allowable credit is 20% of total costs (up to 6k max)

$6,000 x 20% = $1200

Question 115

Losses from limited partnership cannot be used to offset income from a master limited partnership

Answer 115

true

Question 116

Deducting Long Term Care Insurance

Answer 116

Amount of premiums paid is included in the medical expense deduction for total expenditures exceeding 7.5% of AGI
Policy must be gguaranteed reneweable or non cancelable.

Question 117

Section 1250 Gain

Answer 117

applies to the realized gain on real property where the accelerated method was used. The gain is the excess of acclerated over Straight ling (ACRS). Section 1250 gain is taxed as ordinary income. Under current law, MACRS only straight line depreciation of real property is used.

Question 118

Passive losses where there is no material participation

Answer 118

Are governed under the passive loss rules. There needs to be other passive activity income to offset the loss. If not, it is not currently deductible.