R1 Flashcards
How is the salary paid to an owner of a sole proprietorship treated for Gross income?
NOT included in GI –> treated as a “draw” to business against GI
In a transaction of services (noncash income –> Painter provides services for accountant to provide services) what is the amount of income to be reported?
The fair market value of property or services received
What are the rules for the mom and pop exception of a PAL? (ex. actively participates w/ AGI 120k, Rental RE loss of $40k)
MOM and pop exception = Can deduct up to $25k of PAL on non passive income Loss IF
1. Actively participate in Rental RE AND
2. Owns 10% of RE
P/O = 25k is reduced by 50% of Excess AGI > 100K. IF AGI > 150 –> no deduction allowed
EX) Actively participates in Rental RE, owns 10% –>
AGI limit –> 120 - 100 = 20 *50% = 10k
P/O = 25k max - 10k limit = 15k of 40k can be offset
What type of interest is taxable vs non taxable?
Taxable interest = from general investment accounts, int from federal obligations, Federal income tax refund, state income tax refund
NONtaxable = int received from state obligations and municipal bonds (state and local bonds)
Is inheritance received taxable?
No
How is interest paid in advance recorded by cash basis taxpayer recorded?
Interest must be paid AND incurred in order to be deducted
Under Section 263A - what are the types of costs/expenses capitalized?
Capitalize Product costs NOT Period Expenses
Product costs = DM, indirect materials, Factory OH
Period expenses = G&A expenses, selling expenses, R&D expense, Marketing expense
What is the test in order to claim a Qualifying Child as a dependent? (CARES)
Close Relative - Taxpayer’s descendent, Sibling, or descendent of sibling
Age - Under 19 OR 24 and FT student (5 months during tax year)
Residency & Filing req - live with taxpayer for more than half the year, Citizen of US OR resident of US, Canada or Mexico and cannot file a joint return (unless no tax liability)
Eliminate Gross income test - no limit on dependent Gross income
Support - QC must not contribute more than half of his or her own support
What is the test to claim a Qualifying Relative as a dependent? (SUPORT)
Support - Taxpayer must provide more than half of the dependents support
Under Gross income limitation - Dependents Gross income must be under $4,700
Precludes dependent filing joint return - unless no tax liability (if relative files return and have to pay tax –> cant claim dependent)
Only citizens of US, Mexico or Canada
Relative - all of QC + Parents, Grandparents, aunt, uncle
OR
Taxpayer lives with the dependent for the whole year (for non relative)
What is the test to determine if someone should file as single or married on tax return?
Check status as of 12/31 (if not married –> Single, if divorce at y/e –> single)
What is the difference between Head of Household and Qualifying Widower?
Head of household (HALF) –> not married, has dependent relative (not girlfriend) that lives with taxpayer for HALF the year. Only parents can be dependents if they do NOT live with you
Widower (WHOLE) - can use for first two full taxable years after spouse dies and dependent child lives with taxpayer for WHOLE year
What is the exclusion amount for employer reimbursement of college tuition expenses?
Up to $5,250 of pmts from employer on behalf of employee for education (graduate or undergraduate)
What amount of scholarships is taxable vs non taxable income
Taxable = room and board
Nontaxable = Tuition, fees, books, and supplies
What is the difference between workers compensation and unemployement?
Workers comp = NONtaxable
Unemployment = Taxable
What is the rule in order to calc the exclusion on sale of personal residence? (basis = 150k, Sale 450k, lived 2/5 years, single)
Taxpayer must own/use home as person residence for 2/5 years prior to sale
Exclusion = $250k (S), 500k(MFJ)
Ex.
Sales 450 - 150 basis = 300 Gain - 250k (single exclusion) = $50 Gain taxable
When are life insurance proceeds not taxable?
When received bc of the death of the insured (not taxable to beneficiary)
What is the tax benefit rule?
If individual rec refund from PY return and used STD deduction –> refund is NOT taxable
If individual rec refund from PY and used Itemized deduction –> refund IS taxable
ONLY up to the amount that itemized deductions exceed std deduction
What is the difference between the divorce/child support rules in 2018 and before vs 2019 and after?
2018 and before = alimony is taxable, child support not taxable
2019 and after = both not taxable
hint- if it says “support drops to $6K after child is 18” –> 6k is alimony
When making a Charitable Contribution - if services/goods are received as a result of the contribution, what is the amount to be deducted? (i.e. Donation = $150, Services rec in exchange = $100)
The amount to be deducted is the Amount Contributed in excess of the FMV of goods/services received
i.e. Donation (150) - Services (100) = 50 Deduction
What is the deduction for business meals and what are the 3 requirements?
Deduction limited to 50% of the meal
Requirements
1. Meal must be ord and necessary to taxpayers business
2. Meal must be reasonable amount - not lavish or extravagant
3. Taxpayer must be present at the meal with current or potential client, customer, or business contact
What is the deduction for a business gift to the client?
What is the special rule if tickets are given to the client?
Business gift = $25 deduction
If tickets are gift –>
1. IF taxpayer is attending –> NOT deductible
2. IF taxpayer does NOT attend –> $25 gift
What are the requirements for the Surviving spouse requirement?
- Can be claimed for two years after death
- required presence of a dependent child(more than half the year)
How much of life insurance premiums are deductible to the employee?
Premiums on $50K of coverage are nontaxable
Premiums in excess of $50K are taxable
What is a multiple support agreement?
When no 1 person contributes over 50% to an individual support, multiple people can claim –> MIN amount has to be over 10%
What are the characteristic of a qualified Roth IRA distribution?
- Made at least 5 years after the tax payer made the first contribution into the Roth IRA And either
A. at least 59 1/2
B. Disabled
C. First time homebuyer (max $10k)
D/ Deceased
What amount of Roth IRA are taxable?
contributions from Roth IRA are never taxable
Distributions are nontaxable IF a qualified distribution
What type of income is a Guaranteed payment (active, passive, or portfolio)
Is this business OR nonbusiness income?
Active and Nonbusiness (think of salary)
What is the max business loss for a single person in the year and how do you calc the deductible business loss?
289,000
Total biz loss - $289000 = NOL CFWD
Total Biz loss - NOL CFWD = Deductible biz loss
How much is added to the std deduction IF:
Single and 65/blind
Single AND both 65 AND Blind
Married and 65/blind
Married and BOTH 65 AND BLIND
- $1,850
- $3,700
- One blind/65 = $1500, both blind/65 = $3,000
- Both 65 AND blind = $6000
What are 2 types of Earned income?
W-2 Wages
Schedule C Sole Proprietorship
What are 2 types of portfolio income?
Interest and dividends
What are two types of Passive Income?
Rental RE
business where taxpayer does NOT participate
What is the exception rule for when to include prizes in Taxable income?
if never take possession of prize and give the full benefit to charity
What are 7 most common deductions to arrive at AGI? (SHAMPOO)
- Student costs (including educator and loan int)
- Health insurances paid by self employed - HSA
- Alimony paid-on divorce agreements prior to 12/31/2018
- Moving expenses for military ONLY
- Penalty on early withdrawal of savings
- One half of SE tax
- Old Age/Retirement Contributions IRA ($6,500)
If there is a loss on Schedule C –> how will SE tax be calculated?
IT WILL NOT –> SE tax is only calculated if income
When are contributions/distributions to a traditional IRA deductible and taxable to the taxpayer?
contributions are deductible when made and distributions are taxable with withdrawn @ ord income
If taxpayer if 50+ –> what is the impact of deduction of contributions to IRA
they are able to deduct up to $7.5K of contributions instead of $6.5
What is the exception to the traditional IRA deduction
Normal can deduct up to $6.5k per person
if 50+ can deduct up to 7.5K contribution per person
** Can only deduct of the amount of contribution LESSOR Of:
- Earned income (Wages, Salary, SE income, alimony)
- Contribution during year
What are the characteristics of a Roth IRA:
how are contributions treated?
How are distributions treated?
How are earnings taxed?
What is the max amount of contributions per year? any exceptions?
contributions are NOT Taxable
Distributions are tax free as long as tax payer has waited 5 years after distribution and 59 1/2
Max is $6.5K /13 MFJ LESS amt put into traditional IRA
Earnings are tax free
50 and older can contribute $7.5K
What are the characteristics of a Coverdell Education Savings account IRA?
How are contributions treated?
How much can be contributed?
What are the restrictions on this distributions?
No tax deduction for contribution
$2k max per year per beneficiary
Child must be under 18 to get tax benefit as tax free for edu expenses
Match the following with their related Schedule on the 1040:
- Itemized deduction
- Rental income/loss
- Business income
- Schedule A
- Schedule E
- Schedule C
For income to be taxable on a tax return - what two characteristics must be present?
Must be Realized AND recognized
What amount of damages/awards from personal reputation cases are taxable?
ALL –> including punitive
What are the 4 main rules of PAL?
- PAL can only be offset against passive activity income NOT ord income
- Nondeductible PALs are suspended and CFWD to be used in future years without any time limit
- Any remaining suspended PALs become fully deductible in the year asset/business is sold
- Exceptions
a. RE professional –> can deduct PAL from ord income
b. Tax payer is at least 10% owner and active in mgmt –> can deduct $25k . (P/o at AGI 100 - 150k)
Is social security income taxable?
NO
What is a recourse liability? What is the impact of tax basis and at risk basis?
any liability for which the partner has personal liability (increase partners tax basis and at risk basis)
What is a nonrecourse liability?
liability which the partner has NO Personal liability (increase Partners tax basis NOT partners At risk basis EXCEPT if there is a non recourse debt secured by real prop –> allocated to all partners)
What increases a partners tax basis?
Both recourse and nonrecourse liabilities
What increases a partners at-risk basis?
Recourse liabilities NOT nonrecourse liability (unless exception)
What are the 4 hurdles in order to deduct a partnership loss?
- Tax basis limitation (applies to any pship loss)
- At-risk basis limitation (applies to any pship loss)
- Passive activity (applies ONLY TO passive activities –> limited partners)
- Excess business losses: $250k(single)/$500k(MFJ) on aggregate biz loans
What is combined to calc if the biz loss limitation is applicable?
Add up all business losses and gains (active and passive) –> If loss > $289k then applicable.
Total biz loss - 289k = X (amount disallowed)
Total income - total CFWD loss + X = Taxable income
