R1 Flashcards
Computation of Income General Rule
IRC: compensation and wages
Taxable = Income is FMV = Basis is FMV Nontaxable = Income is NONE = Basis is NBV
Accrual Method
Revenue is taxable when earned
accordance w GAAP
Cash Method
Recognition when revenue is received in cash or FMV property
Types of Income
Ordinary
Portfolio
Passive– only passive loss can offset passive income
Capital– sales of capital assets create capital gains/losses
Partially Taxable Fringe Benefits
Premiums above the first $50,000 of coverage are taxable income
calculated from IRS table
Nontaxable Fringe Benefits
- Life Insurance Proceeds (but the interest is taxable)
- Accident, Medical, and Health Insurance paid by employer ***
- De Minimis Fringe Benefits
- Meals and lodging
- Employer Payment of Employee’s Educational Expenses up to $5,250 is excluded from income
- Qualified Tuition Reductions
- Qualified Employee
- Qualified Pension, Profit-Sharing, and Stock Bonus Plans (withdrawal is taxable)
- Flexible Spending Arrangements
Flexible Spending Arrangements
Pretax deposits into employee’s account elected by employee
Forfeit funds not used w/i 2 1/2 months after year end
Tax-exempt Interest Income
IRC: Allowance of deductions
- State and Local Government Bonds/Obligations
- Bonds of a US Possession
- Series EE when used to pay for higher education (reduced by tax-free scholarships)
phase out: when modified AGI > 77,550 for single/HoH & 116,300 for MFJ - Veterans Administration Insurance
Unearned Income of Child Under 18 (kiddie tax)
net unearned income of dependent child under 18 (or 24 student) is taxed at parent’s higher rate
- net unearned income = total unearned income - standard deduction of 1,050 - another 1,050 taxed at child rate
Forfeited Interest
ADJUSTMENT
penalty for early withdrawal of savings
Dividend Income Tax Rates
15% - most taxpayers
0% - low income tax payers
20% - high income taxpayers
Tax-Free Distributions
- Return of Capital (No E&P)
- Stock Split
- Stock Dividend (unless cash or property was an option)
- Life Insurance Dividend
Capital Gain Distribution
TAXABLE
Distributions of a corp that has no E&P and shareholder already recovered the entire basis (return of capital)
Is State and Local Tax Refund taxable?
if itemized deduction in prior year, state or local refund is taxable
if standard deduction (1040EZ) in prior year, nontaxable
Divorce Payments
Alimony - income to spouse receiving - deductible by contributing spouse Child Support - paid off before alimony - nontaxable to spouse receiving - not deductible by contributing spouse Property Settlements - nontaxable to spouse receiving - not deductible by contributing spouse
Schedule C Nondeductible Expenses
- Salaries paid to sole proprietor
- Federal Income Tax
- personal portion of:
automobile, travel, vacation
personal meals and entertainment
interest expense
state and local tax (itemized deduction on sched A)
health insurance of sole proprietor (adjustment) - bad debt expense of cash basis taxpayer
- charitable contributions
Schedule C Expenses
- COGS
- salaries and commission paid to other
- state and local business taxes
- office expenses
- actual auto expenses for business
- depreciation of business assets
- interest expense on business loans (must be incurred and paid)
- employee benefits
- legal and professional services
- bad debts for accrual basis taxpayer only
Net Business Income or Loss (Schedule C)
Net Business Income is TAXABLE (2 taxes) 1. income tax 2. Federal self-employment tax Net Business Loss (NOL) - deduct against other sources of income - carryback 2 carryforward 20
Uniform Capitalization Rules
Capitalized as Inventory - DM - DL - factory OH Period Expense - SGA - R&D ** more R1-30
Long-Term Contracts
-% of completion required for nonexempt LT contracts
- exemptions:
small contractors
home construction
services by architects, engineers, designers, construction management advisors, and software implementation personnel
services performed under warranty and maintenance agreements
% of completion method income recognition
- Cost to Cost Method
ratio of total costs incurred divided by total expected costs to be incurred - Gross Income Recognition
multiply the cost to cost ratio ^ by total contract price and subtract amount of income that was recognized in prior years
Farming Income
R1-36
Cash Basis and Accrual Method
IRA Income
Traditional Deductible IRA - withdrawal taxed Roth IRA - withdrawal nontaxable Traditional Nondeductible IRA - principal: nontaxable - accumulated earnings: taxable Penalty Tax 10% if withdrawn before 59 1/2
Exceptions to Penalty Tax
HIM DEAD Home buyer: 1st time, $10,000 max Insurance (medical): a) unemployment compensation for 12 weeks b) self-employed Medical expenses > 10% AGI Disability Education And Death
Annuities
GR: investment amount / # of months investment will be recovered = factor
this factor is excludable from each # of months ^
- live longer than actual payout: excess is fully taxable
- death before full recovery: unrecovered portion is miscellaneous itemized deduction on final income tax return (not subject to 2% AGI floor)
Rental Income Formula
Gross Rental Income \+ prepaid rental income \+ rent cancellation payment \+ improvement in lieu of rent - rental expenses = rental income or loss
Rental of Vacation Home
Rented < 15 days
- rental income is excluded from income
- treated as personal residence
- mortgage interest and real estate taxes allowed as itemized deductions
- depreciation, utilities, and repairs not deductible
Rented > 15 days
- expenses must be prorated b/w personal and rental use
- utilities, depreciation, and repairs prorated between time property is used
- rental use expenses are deductible only to extent of rental income
Passive Activity Losses
- PAL only deducted to extent of passive activity income
- carryforward w/o ay time limit
- if unused, losses can be fully tax deductible in year property is disposed of or sold
- Mom and Pop exception
- real estate professional exception
Who is Subject to PAL
- individuals, estates, trusts, personal service corporations, and closely held C corps
Mom and Pop Exception
for PALs
- may deduct up to 25,000
- phase out: 25,000 is reduced by 50% of excess of taxpayer’s AGI > 100,000 (so completely eliminated when 150,000+)
- excess carried forward indefinitely
Real Estate Professional Exception
for PALs
- if >50% of taxpayer’s personal service is real estate and
- performs > 750 hours of service in real estate
then rental activity not passive and NOL instead that can be deducted against other income
Unemployment Compensation
Taxable
worker’s comp- not taxable
Social Security Income
IRC: Social Security Benefit
based on excess provisional income (AGI + tax exempt interest + 50% SS) over:
low income: no SS benefits are taxable (below single: 25,000/MFJ 32,000)
middle income: 50% SS taxable 25,000-34,000
upper income: 85% SS taxable (income over singe: 34,000/MFJ 44,000)
Taxable Miscellaneous Income
IRC: Items specifically included in gross income
- Prizes and Awards (unless didn’t enter and assigns directly to government or charity)
- Gambling winnings (losses are itemized deduction up to gambling winnings)
- business recoveries
- punitive damages received and personal reputation awards
Partially Taxable Miscellaneous Items
scholarships and fellowship grants excludable only up to amounts spent on tuition, fees, books, and supplies
- made to degree-seeking student
- no services performed as condition
Nontaxable Miscellaneous Items
- Life Insurance Proceeds (but interest income is fully taxable)
- gifts & inheritances (interest is taxable)
- medicare benefits
- workers compensation
- personal injury or illness award
- accident insurance (if premiums were paid)
- foreign earned income exclusion (up to 101,300) if pass 1 of these tests
a. bona fide residence test (resident for entire year)
b. physical presence test (present for 330 days)
Nonqualified Options (employee stock options)
- if readily ascertainable value, ordinary income and taxable when granted (basis: readily ascertainable value)
- if no readily ascertainable value, ordinary income taxed at exercise date (basis: FMV at exercise - option price)
- employer deduction when employee reports income
Qualified Options (employee stock options)
2 types: ISO & ESPP
- not taxable as compensation
- no employer deduction bc not compensation
- capital gain/loss when sold
- must be held at least 2 years from grant and 1 year from exercise
- have to remain employee until 3 months before exercise
Incentive Stock Option (ISO)
- exercise price can’t be less than FMV at grant
- employee can’t own >10% voting power
- can exercise up to 100,000 ISOs a year
- excess of FMV over purchase price on exercise date is preference for AMT
Employee Stock Purchase Plans (ESPP)
- exercise price can’t be less than 85% of lesser of:
a) FMV of stock at grant
b) FMV of stock at exercise - can’t own >5% voting power
- must be exercised w/i 27 months
- EXCEPTION to capital gain/loss when sold:
if option price is less than FMV at grant, then ordinary income is recognized as lesser of:
a) diff b/w FMV when sold and exercise price or
b) diff b/w FMV at grant and exercise price
Insolvency
Insolvent if liabilities > FMV of assets
Calculating Self Employment (Schedule C) Net Earnings
Self Employment Tax = 12.4% for SS + 2.9% for Medicare = 15.3% total (50% adjustment)
total amount of SE income * 92.35% = net earnings from SE income
Schedule E
Passive Activity
- use for Rental Income
- S corps (K-1)
- Partnerships and LLC (K-1)
- Estates (K-1)
- Trusts (K-1)
