REG 1 Module 3

Question 1

Are salaries paid to the sole proprietor deductible?

Answer 1

No - considered a draw

Question 2

Is federal or state income tax deductible?

Answer 2

Federal - no

State - yes

Question 3

Are state and local taxes reported as an itemized deduction or on Schedule C?

Answer 3

Itemized

Question 4

Where do you report health insurance of a sole proprietor?

Answer 4

Adjustment for AGI, not on Schedule C

Question 5

Is bad debt for a cash or accrual basis taxpayer deductible?

Answer 5

Cash basis - No

Accrual basis - Yes

Question 6

Where do you report your charitable contributions? (Schedule A or C)

Answer 6

Schedule A

Question 7

What are two taxes on net business income?

Answer 7

Income tax and Federal self-employment tax

Question 8

What is the medicare and social security tax amount?

Answer 8

Medicare - 2.9

Social Security - 12.4

Question 9

How is the SE tax calculated?

Answer 9

Calculated on 92.35% of self-employment income

then you take that amount and multiply by 15.3%

Question 10

How is net taxable loss treated?

Answer 10

Deduct loss against other source of income, when it exceeds that amount it’s allowed as a carryover:

1) 2-year carry back
2) 20-year carry forward

Question 11

How is a residence treated if it’s rented fewer than 15 days?

Answer 11

Personal - excluded from income

Question 12

How is a residence treated if it’s rented for 15 or more days?

Answer 12

If it’s rented for 15 or more days and used for personal purposes for the greater of:
i) more than 14 days
ii) more than 10% of the rental days
it is treated as personal/ rental residence.

Expenses must be prorated
Mortgage interest and property taxes - based on annual period
Rest of expenses - based on usage
* You are able to deduct personal part of interest and taxes but not other expenses. (on Schedule A)

Question 13

How do you treat a rental loss (rented more than 15 days)?

Answer 13

You can never show a loss (carryover to next years)

Question 14

How do you treat prepaid interest for a cash basis taxpayer?

Answer 14

Prorate for the month that they paid, can’t deduct full prepaid amount at once. (same for accrual)

Question 15

True or False: Ordinary income from an S Corporation is subject to SE tax.

Answer 15

False - taxable on their own individual tax return

ordinary income from partnership may be subject to SE tax

Question 16

True or False: Guaranteed payments from services rendered to a partnership are subject to SE tax.

Answer 16

True

Question 17

What is the difference between cash and accrual basis gross taxable income calculation?

Answer 17

Cash Basis - Gross taxable income is the amount collected from customers (Beg A/R and End A/R does’ matter)

Accrual Basis - Gross taxable Income = Beg A/R + Sales - - Cash Collections

Question 18

When do Uniform Capitalization Rules apply?

Answer 18

Real or tangible personal property:

• Produced for Use
• Produced for Sale
• Acquired for Resale: does not apply if gross receipts for three years do not exceed $10,000,000 annually

Question 19

What is included in net rental income?

Answer 19

Gross Rental Income
\+ Prepaid Rental Income 
\+ Rent cancellation payments
\+ Improvements in lieu of rent
(Rental Expense)

• Security deposit not included

Question 20

True or False: Airfare is an allowable business deductible if on vacation if the taxpayer was involved in a business activity while on the trip.

Answer 20

False

Question 21

How are payroll taxes for the business owner treated and for employees?

Answer 21

Yourself: 50% are deductible for AGI - (NOT on Sch. C)
Employees: 100% are deductible on Sch. C

Question 22

When would you forgo a carry back on a net taxable loss and it carry forward instead?

Answer 22

You would do this if there are higher marginal tax rates in the future so that you can have a higher benefit. (low marginal tax rates in the carry back high in the future)