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CPA REG > R1 > Flashcards

R1 Flashcards

1
Q

Computation of Income General Rule

IRC: compensation and wages

A 
Taxable = Income is FMV = Basis is FMV
Nontaxable = Income is NONE = Basis is NBV
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2
Q

Accrual Method

A

Revenue is taxable when earned

accordance w GAAP

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3
Q

Cash Method

A

Recognition when revenue is received in cash or FMV property

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4
Q

Types of Income

A

Ordinary
Portfolio
Passive– only passive loss can offset passive income
Capital– sales of capital assets create capital gains/losses

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5
Q

Partially Taxable Fringe Benefits

A

Premiums above the first $50,000 of coverage are taxable income
calculated from IRS table

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6
Q

Nontaxable Fringe Benefits

A
  • 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
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7
Q

Flexible Spending Arrangements

A

Pretax deposits into employee’s account elected by employee

Forfeit funds not used w/i 2 1/2 months after year end

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8
Q

Tax-exempt Interest Income

IRC: Allowance of deductions

A
  • 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
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9
Q

Unearned Income of Child Under 18 (kiddie tax)

A

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

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10
Q

Forfeited Interest

A

ADJUSTMENT

penalty for early withdrawal of savings

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11
Q

Dividend Income Tax Rates

A

15% - most taxpayers
0% - low income tax payers
20% - high income taxpayers

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12
Q

Tax-Free Distributions

A
  • Return of Capital (No E&P)
  • Stock Split
  • Stock Dividend (unless cash or property was an option)
  • Life Insurance Dividend
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13
Q

Capital Gain Distribution

A

TAXABLE

Distributions of a corp that has no E&P and shareholder already recovered the entire basis (return of capital)

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14
Q

Is State and Local Tax Refund taxable?

A

if itemized deduction in prior year, state or local refund is taxable
if standard deduction (1040EZ) in prior year, nontaxable

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15
Q

Divorce Payments

A 
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
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16
Q

Schedule C Nondeductible Expenses

A
  • 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
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17
Q

Schedule C Expenses

A
  • 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
18
Q

Net Business Income or Loss (Schedule C)

A 
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
19
Q

Uniform Capitalization Rules

A 
Capitalized as Inventory
- DM
- DL
- factory OH
Period Expense
- SGA
- R&D
** more R1-30
20
Q

Long-Term Contracts

A

-% 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

21
Q

% of completion method income recognition

A
  1. Cost to Cost Method
    ratio of total costs incurred divided by total expected costs to be incurred
  2. Gross Income Recognition
    multiply the cost to cost ratio ^ by total contract price and subtract amount of income that was recognized in prior years
22
Q

Farming Income

A

R1-36

Cash Basis and Accrual Method

23
Q

IRA Income

A 
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
24
Q

Exceptions to Penalty Tax

A 
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
25
Q

Annuities

A

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)

26
Q

Rental Income Formula

A 
Gross Rental Income
\+ prepaid rental income
\+ rent cancellation payment
\+ improvement in lieu of rent
- rental expenses
= rental income or loss
27
Q

Rental of Vacation Home

A

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

28
Q

Passive Activity Losses

A
  • 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

29
Q

Mom and Pop Exception

A

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
30
Q

Real Estate Professional Exception

A

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

31
Q

Unemployment Compensation

A

Taxable

worker’s comp- not taxable

32
Q

Social Security Income

IRC: Social Security Benefit

A

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)

33
Q

Taxable Miscellaneous Income

IRC: Items specifically included in gross income

A
  • 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
34
Q

Partially Taxable Miscellaneous Items

A

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
35
Q

Nontaxable Miscellaneous Items

A
  • 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)
36
Q

Nonqualified Options (employee stock options)

A
  • 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
37
Q

Qualified Options (employee stock options)

A

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
38
Q

Incentive Stock Option (ISO)

A
  • 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
39
Q

Employee Stock Purchase Plans (ESPP)

A
  • 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
40
Q

Insolvency

A

Insolvent if liabilities > FMV of assets

41
Q

Calculating Self Employment (Schedule C) Net Earnings

A

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

42
Q

Schedule E

A

Passive Activity

  • use for Rental Income
  • S corps (K-1)
  • Partnerships and LLC (K-1)
  • Estates (K-1)
  • Trusts (K-1)

CPA REG (11 decks)

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