R1 Individuals- M3 - Gross Income Part 2 Flashcards
1. Business Income or Loss Schedule C 2. Rental Income or Loss 3. Income or Loss from Flow Through Business 4. Excess Business Limitations
How are Foreign travel expenses deductible for Business?
If PRIMARY PERSONAL in nature (e.g., a vacation), NO ALLOWABLE DEDUCTIONS FOR TAX (e.g., round-trip airfare) ,even if the taxpayer was involved in business activities while in the foreign country. only direct related expenses like seminar and accomodation during the days of seminar.
Prepaid Rent/ Advance Rent
INCOME when received even for an ACCRUAL BASIS TAXPAYER. So if amount received is for last months rent for a long term lease, the same is considered reportable taxable income on the year it was received even if NOT YET EARNED.
Perle, a dentist, billed Wood $600 for dental services. Wood paid Perle $200 cash and built a bookcase for Perle’s office in full settlement of the bill. Wood sells comparable bookcases for $350. What amount should Perle include in taxable income as a result of this transaction?
The income is based on the value in money or fair value of property received by Perle, not the $600 billed.
ANSWER IS $ 550.
The $200 cash received plus the $350 fair value of the bookcase received must be included in income by Perle, for a total of $550.
Self employment activity Basics
Self employment activity allows deductions for related expenses BUT SALARY PAID TO OWNER is not included as income as 100% of the net self-employment activity is taxable to her.
SALARY is considered a draw and is not an allowable business deduction against the gross income of the self-employment activity.
UNICAP
Uniform Capitalization Rules
The UNICAP rules require a taxpayer to capitalize all direct costs and certain indirect costs properly allocable to property produced or property acquired for resale.
BUSINESS MEALS
ONLY 50% DEDUCTIBLE
What is the golden rule for Deductibility of an expense?
It should be ORDINARY and NECESSARY FOR THE BUSINESS for it to be DEDUCTIBLE.
So Illegal fees and parking fines are not considered deductible business expense
ADJUSTMENTS TO GROSS INCOME RELATED TO SELF EMPLOYMENT INCOME
1/2 of Self employment Tax
self employed health insurance
self employed retirement SEP IRA $ 69k or 20% of SE NE
State and local taxes for Business are not part of Gross income but as ITEMIZED DEDUCTION
Self employment tax formula
Net earnings= 92.35% X Gross income (net of business expenses)
SE Tax= SE Income X 15.3%
Medicare= 2.9%
SSS Up to $ 168,600= 12.4%
Total %= 15.3%
Earnings from self-employment are subject to BOTH INCOME TAX
Not considered Self employment:
Income from capital gains, interest, dividends, and other income that is not considered “earned” income.
They are not self earned income
S corporation
In an S corporation, the income is passed through to the shareholder and included in taxable income whether or not it is actually distributed.
Distributions to shareholders of an S corporation up to the extent of their contribution is not TAXABLE being a Return of Capital
S Corporation or GP paying its shareholder/ partner for services rendered. How will that expense be reported?
A shareholder in an S corporation can be an employee of the corporation.
The individual shareholder-employee would receive a salary for the services rendered to the S corporation; therefore, the payments should be classified as deductible wages reportable on Form W-2.
Unlike S corporations, a partner in a partnership cannot be an employee of the partnership, so a partner cannot receive a salary for the services rendered. Instead, the partnership gives the partner a guaranteed payment as compensation for the services rendered. Guaranteed payments are reported on the partner’s Schedule K-1 and included in ordinary income on the partner’s individual income tax return, rather than being reported as wages.
Interest on Series EE savings bonds is tax-exemptability
When certain conditions are met. Which of the following statements is true regarding the exclusion of Series EE savings bond interest?
I. Interest is used to pay for higher education of taxpayer, a spouse, or dependents
II. Eligible higher education expenses are reduced by tax-free scholarships
III. The taxpayer is over age 24 when the bonds are issued
IV. The bonds are acquired after 1989
V. The interest exclusion is subject to a phase-out
Puerto Rico Bond interest
Interest on obligations of a possession of the United States, such as Puerto Rico, is tax-exempt.
