REG 1 Flashcards
1
Q
What does realization require?
A
The accrual or receipt of cash, property, or services, or a change in the form or the nature of the investment (a sale or exchange).
2
Q
What does recognition mean?
A
Record. Must be included in the tax return.
3
Q
What portion of life insurance premiums paid by an employer for an employee are tax free?
A
- The first $50,000 is tax free.
- Premiums above the first $50,000 are taxable income to the recipient, usuall reported on the W-2.
4
Q
Are life insurance benefits taxable? What about related interest?
A
- life insurance benefits (paid because of death or terminal illness) are excluded from gross income.
- Related interest is fully taxable.
5
Q
Are accident, medical, and health insurance premiums paid by an employer taxable?
A
- They are excludable from the employee’s income when the employer paid the insurance premiums.
- Amounts paid to the employee under the polic are includable in income unless such amounts are: 1. Reimbursement for medical expenses actually incurred by the employee, or
2. Compensation for the payment loss or loss of use of a member or function of the body.
6
Q
Are de minimis fringe benefits taxable?
A
- No. Ex. Employee;s personal use of a company computer.
7
Q
Are meals and lodging paid by an employer included in the employee’s gross income?
A
- No. As long are for the convenience of the employer on the employer’s premises. Also, lodging must be required as a condition of employment.
8
Q
Are employer payment of employee’s education expenses include in gross income? If so, are there limits?
A
- Yes
- Up to 5250 may be exlcuded.
9
Q
When are qualified pensions, profit-sharing, and stock bonus plans taxable? Nontaxable?
A
- Payments made by employer (put into trust account) are nontaxable.
- Benefits received (withdraw/get money) are taxable.
10
Q
What are flexible spending arrangements? Are they taxable? Can they be lost?
A
- Flex spending arrangements are plans that allow employees to receive a pre-tax reimbursement of certain (specified) incurred expenses.
- Yes, employees can elecy to have up to $2,600 deposited into a felixble spending account designated for them.
- Funds must be forfeited if not used within 2.5 months after the year-end (use it or lose it).
11
Q
Is interest income taxable?
A
- All interest income is taxable unless it is specifically included.
12
Q
What kinds of interest income are reportable but not taxable?
A
- State and local government bonds/obligations
- Bonds of a U.S. possession
- Series EE Bonds
- Forefeited interest (adjustment) (Penalty on withdrawal from savings).
13
Q
What are series EE bonds? Is there a phase-out?
A
- Education Expense
- Yes, there is a phase-out that starts when AGI exceeds an indexed amount.
14
Q
What is forefeited interest?
A
- A penalty for early withdrawal of savings. The bank credits the interest to the taxpayer’s account and then, in a separate transaction, removes certain interest as a penalty for withdrawing the funds before maturity.
15
Q
When are dividends taxable?
A
When they represent distributions of a corporation’s earnings and profits.
16
Q
What are qualified dividends?
A
Dividends paid by domestic or certain qualifying foreign corporations.
17
Q
What are the tax rates for qualified dividends?
A
- Most taxpayers pay 15%
- Low income taxpayers (those in 10%/15% ordinary income brackets) pay 0%
- High income taxpayers (in the 39.6% ordinary income bracket) pay 20%.
18
Q
Are stock dividends taxable? What is a taxpayers basis in stock dividends?
A
- No. Unless cash or other property is an option.
- Same stock = Original basis is divided by total shares.
- Different stock = Original basis allocated based on the relative FMV of the different stock.
19
Q
What capital gain distributions? Are they taxable?
A
- Distributions by a corporation that has no earning and profits, and for which the shareholder has recovered his or her entire basis, are treated as taxable gross income.
20
Q
Schedule B deals with?
A
Interest and ordinary dividends.
21
Q
Are state and local tax refunds taxable? What about interest earned from a late refund?
A
- It depends. If you itemized the previous year they are. If you received the standard deduction they are not.
- Interest earned on late refunds are fully taxable.
22
Q
How is alimony taxed?
A
- Alimony is dedictonle for the taxpayer making the payments.
- Alimony is taxable as ordinary income by the person receiving the alimony.
23
Q
How is child support to the ex-spouse receiving the money taxed?
A
- They are nontaxable.
24
Q
Can you make alimony payments before child support is fulfilled?
A
- Payments to an ex-spouse as alimony will be treated as child support if the child-support obligation is not fulfilled.
25
What are property settlements? Are they taxable?
-Property settlements are lump sum payments or property received in a divorce settlement that are neither tax deductible expenses (for the payor) or taxable income (for the recipient).
26
Where is business income reported on the 1040?
Schedule C
27
Where is farm income reported on the 1040?
Schedule F
28
Where are gains and loss on the disposition of property reported?
Schedule D
29
How is gain/loss calculated?
Amount Realized - Adjusted basis of assets sold = Gain or loss realized.
30
Generally, at what age can IRA Income be withdrawn? At what age are required distributions required?
- 59 1/2
| - 70 1/2
31
When are IRA distributions taxable, nontaxable, partially taxable?
- Traditional deductible IRA.
- Roth IRA.
- Traditional nondeductible IRA.
1. Principle is non taxable.
2. Accumulated earnings are taxable when withdrawn.
32
Generally, what are the penalties for early withdrawal?
- 10%
33
What are the exceptions to early withdrawal penalties?
HIM DEAD
- Home buyer (first time), $10,000 maximum exclusion applies if the dist is used to buy a first home (within 120 days of dist).
- Insurance (medical) for self employed (within 12 consecutive weeks of unemployment compensation) and Self-employed (who are otherwise eligible for unemployment comp).
- Medical expenses in excess of 10% of AGI
- Disability (permanent or indefinite disability, but not temporary disability).
- Education: College tuition, books, fees, etc...
- And
- Death
34
How are annuities taxed?
- Treat investment (paid) as depreciation.
- The investment amount is divided by a factor representing the number of months over which the investment will be recovered. This factor is based on the age of the annuitant at the start of the payout period. Factors range from 360 for starting ages under 56 to 160 for starting ages over 70.
35
What happend if you live longer than the actual annuity pay period? Shorter?
- Further payments are fully taxable?
| - Treated as a miscellaneous itemized deduction.
36
Where is rental income reported?
Schedule E
37
Is unemployment income taxable?
Yes
38
Is workman's comp taxable?
No
39
Are social security benefits taxable?
Depending on income.
- Low income peoples' SS is not taxable.
- Low middle income <50%
- Middle Income 50%
- Upper middle income 50%>85%
- Upper income >85%
40
Are prizes and awards taxable? If so, can they nontaxable?
- The FMV of prizes and awards are taxable income.
- They can be nontaxable if the winner is selected without entering a contest and assigns the award directly to a governmental unit or charitable organization.
41
Are gambling winnings taxable? How are losses treated?
- Winnings are included in gross income.
| - Losses may only schedule A be deducted to the extent of winnings.
42
When are business recoveries taxable?
- when they are made as compensation for lost profits.
43
Are scholarships taxable?
Not when received by a degree-seeking student only up to amounts spent on tuition, fees, books, and supplies (not room and board).
44
Are life insurance proceeds taxable?
No, only related interest earned is taxable.
45
Are gifts and inheritences taxable?
Gifts and inheritences are not taxable to the recipient.
46
Are medicare benefits taxable?
No
47
Are physical injury or illness awards taxable?
No
48
Are accident insurance payments received taxable?
Not if all the premiums were paid by the taxapayer.
49
Schedule C is used for people who are?
Self-Employed
50
How is business income calculated?
Gross business income - Business Exp = Profit/Loss
51
When can interest expense on business loans be deducted?
When it is incurred AND paid.
52
On Sch C, what method must be used for inventory?
- Accrual
53
What are the two taxes on business income?
- Income tax
| - Federal self-employment tax (must be paid as employee and employer).
54
What is another term for self-employment tax?
- Social security tax
55
What two things can a business do with a net taxable loss in excess of other income?
- 2 Year carryback
| - 20 year carryforward
56
What do uniform capitalization rules primarily apply to?
- Inventory
57
What are the costs that shouldn't be capitalized?
- Selling, advertising, marketing, certain general & admin, research, and officer compensation.
58
How is income from long-term contracts to be treated?
- % of completion method is required for nonexempt long-term contracts.
59
Who is exempt from using the % of completion method?
- Small contractors and home construction contractors.
60
What is the start date and end date of the production period?
Start date = contractor incurrs cost
| End date = contract complete
61
Calculate the % earned.
% Earned = Cost incurred / Total Exp Cost = Work Done / Total Work
62
Can a schedule C business change accounting methods?
With the permission of the IRS
63
Calculate Net Rental Income/Loss
Gross rental income + prepaid rental income + rent cancellation of debt + improvement in lieu of rent - Rental Expenses = Net rental income or net rental loss.
64
What are the two basic tax strategies,assuming that the taxpayer's rate remains constant?
- Defer taxable income
| - Accelerate tax deductions
65
What is passive income? What is the most common form of passive income?
- Income produced by an activity that the taxpayer did not materially participate in.
- Rental income and royalties
66
What are the three factors limiting losses?
1. Tax Basis
2. At-risk Basis
3. Passive loss limitations.
67
What is tax basis? How does it limit losses?
- Taxpayer's investment in the asset adjusted for items such as income and debt.
- Any losses not deducted in the current year because of tax basis limitation are carried forward until the taxpayer generates more tax basis to absorb the loss.
68
What is at-risk basis?
- "At-risk" represents the taxpayer's economic risk in the activity.
69
What can passive activity losses be deducted against?
- Income from all passive activities (on a pro rata basis).
70
How long can passive losses be carried forward?
- There is no time limit.
71
When do suspended losses become fully tax deductible?
- In the year the property is sold.
72
When can unused passive losses from an activity be used to offset the taxpayer's active income in the same activity?
- When the taxpayer becomes an material participant in the passive activity, unused passive losses can be used to offset the taxpayer's active income in the same activity.
73
What is the exception to passive activity loss rules?
- You can deduct "net loss"
74
What two conditions must be met for rental activity losses to be deductible?
- Mom and Pop Exception
| - Real Estate Professional Exception
75
What is the Mom and Pop exception?
- $25,000 and "active".
- Tax payer's may deduct (per year) up yo $25,000 of net passive losses attributable to rental real estate annually if the individuals are actively participating/managing and own at least 10% of the rental activity.
76
What happens to the Mom and Pop excess?
- It is carried forward indefinitely as an unused passive activity loss.
- The $25,000 allowance is reduced by 50% of the excess of the taxpayer's AGI over $100,000. The allowance is eliminated completely when AGI exceeds $150,000.
77
What is the real estate professional exception? What qualifies someone as a real estate professional?
- If rental activites are not deemed as passive, the taxpayer can fully deduct losses from the rental activities against other income.
- 2 Requirements to be real estate professional:
1. More than 50% of taxpayers services during year are performed in real property business
2. Taxpayer performs more than 750 hours of services in real property businesses during the year.
78
What is the maximum deduction of individual taxpayers realizing net long-term or short-term capital losses can make against other types of gross income (not capital gains)?
- $3,000
| - If a husband and wife file separately, the loss deduction is limited to half.
79
What happens to excess net capital losses?
- They are carried forward for an unlimited time until exhausted. It maintains its character as short-term and long-term in future years.
80
Name the four flow-through entities.
1. Partnership
2. S Corp
3. Sole Proprietorship
4. C Corp
81
Where is partnership income/loss reported?
-On a K-1, then to Schedule E
82
Calculate net business income or loss for a partnership.
Business income - business expenses - guaranteed payments = Net business incoem or loss.
83
Where is S Corp income and loss reported?
On a k-1, then to schedule E.
84
How are allocations of separately reported items made to shareholders?
On a per-share, per-day basis.
85
What is the S Corp and Partnership Self-employment Tax Difference for Payment for services?
- In a partnership payment for services are allowable tax deductions to the partnership and treated as self-employment income to the partner.
- In an S Corp, shareholders are treated like employees for tax purposes. The S Corp must pay the employer share of payroll taxes and the shareholder pays the employee portion of the payroll taxes.
86
What is the S Corp and Partnership Self-employment Tax Difference for distributive share of income or loss?
- For a general partner of a partnership, net earnings from self-employment include the partner's distributive share of the income ot loss from the trade or business.
- The allocated income from an S corp is not subject to self-employment tax but is only subject to the shareholder's personal income tax.
87
Is income distributed to beneficiaries of estates and trusts taxable?
Yes, up to distributed net income (DNI) (max amount taxable to beneficiary, if distributed to them).
88
When is a nonqualified option taxable?
When granted if the option has a readily ascertainable value at the time of the grant.
89
What is readily ascertainable value?
- If the option is traded on an established market.
- If not, the option must be:
a. transferrable
b. exercisable immediately in full when it is granted.
c. Ther are no conditions or restrictions that would have a significant effect on the value.
d. the fair value of the option privilege is readily ascertainable.
90
If there is a readily ascertainable value, when does the employee recognize ordinary income?
- When granted.
| - no taxation on the date of exercise.
91
If there is not a readily ascertainable value, when does the employee recognize ordinary income?
- At exercise, based on the fmv of the stock purchased less amounts paid for the option.
92
When can an employer deduct the value of the stock option as a business expense?
- In the same year that the employee is required to recognize the option as ordinary income.
93
What are the two kinds of qualified options?
1. Incentive stock options (ISOs)
| 2. Employee stock purchase plans (ESPP)
94
What are incentive stock options?
Usually granted to a key employee and is a right to purchase the stock at a discount.
95
When is a ISO taxable to the employee?
- As net taxable income as compensation (when granted or exercised)
- As capital gain/loss when sold.
96
When is a ISO taxable to the employer?
- No tax deduction
97
What are ESPPs?
- An ESPP may grant options to employees to purchase stock in the corporation.
98
How are ESPPs taxable to employees?
- Not taxable income as compensation (when granted or exercised).
- Capital gain/loss when sold.
99
How are ESPPs taxable to employers?
-No tax deduction.
