REG 9 Flashcards
When can passive activity losses be used against income other than passive income?
In the year that a passive activity is sold the suspended passive losses are released and can offset all types of income. Therefore, the $40,000 current loss and $10,000 suspended loss from partnership B can both be used to offset the other income ($50,000 + $20,000 - $40,000 - $10,000 = $20,000).
Smith has an adjusted gross income (AGI) of $120,000 without taking into consideration $40,000 of losses from rental real estate activities. Smith actively participates in the rental real estate activities. What amount of the rental losses may Smith deduct in determining taxable income?
Since Smith actively participates in the rental real estate activity he can deduct up to $25,000 of rental losses. However, this deduction is reduced once modified AGI exceeds $100,000. Smith has $20,000 of excess AGI ($120,000 − $100,000) so he loses $10,000 ($20,000 × 50%) of the deduction. Of the $40,000 of losses, he can deduct $15,000 ($25,000 − $10,000). The remaining $25,000 of losses is suspended.
Jim and Kay Ross contributed to the support of their two children, Dale and Kim, and Jim’s widowed parent, Grant. For 2015, Dale, a 19-year old full-time college student who lives at home when not at college, earned $4,500 as a baby-sitter.
Kim, a 23-year old bank teller, earned $12,000. Kim provided more than 50% of her support during 2015. Grant received $5,000 in dividend income and $4,000 in nontaxable social security benefits.
Grant, Dale, and Kim are U.S. citizens and Grant and Dale were over one-half supported by Jim and Kay.
How many exemptions can Jim and Kay claim on their 2015 joint income tax return?
For a taxpayer to claim an individual as an exemption on his tax return, the individual must be a qualifying child or qualifying relative. Kim is not a qualifying child or a qualifying relative because she provides over 50% of her own support. Therefore, no one can claim her as a dependent.
Dale is a qualifying child and can therefore be claimed as a dependent. He meets the relationship, age, residence (lives at home for more than half the year; time at college counts as home), joint return, and citizen test.
Grant does not qualify as a qualifying relative because he fails the gross income test. His gross income exceeds the personal exemption amount for 2015 of $4,000.
Hence, Jim and Kay may take an exemption for Dale and, including themselves, take a total of three personal exemptions.
On their joint tax return, Sam and Joann had adjusted gross income (AGI) of $150,000 and claimed the following itemized deductions:
Interest of $15,000 on a $100,000 home equity loan to purchase a motor home
Real estate tax and state income taxes of $18,000
Unreimbursed medical expenses of $15,000 (prior to AGI limitation)
Miscellaneous itemized deductions of $5,000 (prior to AGI limitation).
Both Sam and Joann are less than 65 years old. Based on these deductions, what would be the amount of AMT add-back adjustment in computing alternative minimum taxable income?
The following amounts are added back to taxable income to compute AMT income:
Interest because proceeds were not used for principal residence $15,000
Taxes 18,000
Medical expenses (no adjustment since 10% of AGI threshold applies for regular tax also) -0-
2% miscellaneous itemized deductions (deducted $5,000 - (2% x $150,000) for regular tax) 2,000
Total add-back $35,000
What is AMT (Alternative Minimum Tax)?
The alternative minimum tax ensures that all taxpayers share the tax burden fairly by preventing taxpayers with substantial income from avoiding significant tax liability. The alternative minimum tax equals the excess (if any) of the tentative minimum tax over the regular tax. In computing a taxpayer’s alternative minimum taxable income, several adjustments and preferences are made to a taxpayer’s taxable income before personal exemptions.
Adjustments are a substitution of an amount used in computing alternative minimum tax for an amount used computing regular tax. Preferences involve the addition of the difference between alternative minimum tax and regular tax treatments. There are numerous adjustments and preferences, including depreciation adjustments and preferences. Charitable contributions of appreciated capital gain property are not preference items.
2% miscellaneous itemized deductions are not allowed for AMT purposes
What is the basis for the child and dependent care credit?
The credit percentage begins at 35% if AGI is less than $15,000, and is reduced by 1% for each $2,000 increment (or part) in AGI above $15,000. The minimum dependent care credit is 20%. Therefore, this statement is false.
Mr. and Mrs. Alexander have two dependent children, one of whom (Cal) is a freshman in college during 2015. Tuition and fees paid for Cal during 2015 total $15,000. The Alexanders also paid $10,000 in 2015 for their 14 year old daughter, Kaitlin, to attend a private high school. The Alexanders file a joint tax return for 2015 and report adjusted gross income of $150,000. Cal is a full-time student and enrolled in a degree program. What is the Alexander’s Hope/American Opportunity Tax Credit for 2015?
The credit is computed as 100% of the first $2,000 and 25% of the next $2,000 of qualified educational expenses, for a total of $2,500. This credit does not begin phasing out in 2015 for married filing joint returns until AGI reaches $160,000. The credit applies only to post-secondary expenses so the tuition for Kaitlin does not qualify.
Foreign income taxes paid by a corporation
May be claimed either as a deduction or as a credit, at the option of the corporation.
The foreign tax credit is the lower of:
1) foreign tax paid ($39,000), or
2) U.S. tax x foreign taxable income / worldwide taxable income
$96,000 x $120,000 / $300,000 = $38,400
In 2015, Stone, a cash basis taxpayer, incorporated her CPA practice. No liabilities were transferred. The following assets were transferred to the corporation:
Cash (checking account) $ 500
Computer equipment Adjusted basis 30,000
Fair market value 34,000
Cost 40,000
Immediately after the transfer, Stone owned 100% of the corporation’s stock. The corporation’s total basis for the transferred assets is
When a shareholder transfers property to a corporation, the corporation takes the shareholders basis in the property.
Stone’s basis of the property transferred into the corporation was $30,500, the adjusted basis of the computer equipment ($30,000) plus the cash ($500).
Hence, the corporation’s basis in the property also would be $30,500.
In 2015, Starke Corp., an accrual-basis calendar year corporation, reported book income of $380,000. Included in that amount was $50,000 municipal bond interest income, $170,000 for federal income tax expense, and $2,000 interest expense on the debt incurred to carry the municipal bonds.
What amount should Starke’s taxable income be as reconciled on Starke’s Schedule M-1 of Form 1120, U.S. Corporation Income Tax Return?
The purpose of Schedule M-1 of Form 1120, U.S. Corporation Income Tax Return is to reconcile book income (loss) with income per the return. Certain items need to be added to and subtracted from book income to reconcile with income per the tax return.
Federal income taxes; excess capital losses over capital gains; income subject to tax not recorded on the books; and expenses recorded on the books not deducted on the return must be added to book income. Income recorded on the books but not included on the return, including tax-exempt interest, and deductions on the return not charged against the books must be subtracted from book income.
This response correctly subtracts the tax-exempt municipal bond interest from and adds federal income tax and interest expense on the debt to carry the municipal bonds to book income.
For the year ended December 31, 2015, Kelly Corp. had net income per books of $300,000 before the provision for Federal income taxes. Included in the net income were the following items:
Dividend income from an unaffiliated domestic taxable corporation (taxable income limitation does not apply and there is no portfolio indebtedness) $50,000
Bad debt expense (represents the increase in the allowance for doubtful accounts) 80,000
Assuming no bad debt was written off, what is Kelly’s taxable income for the year ended December 31, 2015?
If a C corporation owns less than 20 percent of a domestic corporation, 70 percent of dividends received or accrued from corporation may be deducted. A C corporation owning 20 percent or more but less than 80 percent of a domestic corporation may deduct 80 percent of the dividends received or accrued from the corporation. Similarly, C corporation owning 80 percent or more of a domestic corporation may deduct 100 percent of the dividends received or accrued from the corporation. However, the dividend received deduction is limited to a percentage of the taxable income of the corporation, unless the corporation sustains a net operating loss. If the corporation has a net operating loss, the dividend received deduction may be taken without limiting the deduction to a percentage of the corporation’s taxable income.
Since Kelly Corp. is not affiliated with the corporation paying the dividends, it owns less than 20 percent of the corporation paying the dividends and, as a result, may take a 70 percent (or $35,000) dividend received deduction. Bad debts are deductible with no percentage limitation. However, Kelly Corp. cannot take a deduction for its bad debt expense because no bad debt was actually incurred. Instead, the expense represents an increase in allowances for doubtful accounts. The corporation’s bad debt expense must be added back to net income.
Hence, Kelly Corp.’s taxable income is $345,000 - net income of $300,000 minus dividend received deduction of $35,000 and plus the bad debts expense of $80,000.
On January 2 of this year, BIG, an accrual basis, calendar-year C corporation, purchased all of the assets of a sole proprietorship, including $300,000 of goodwill. Current-year federal income tax expense of $110,100 and $7,500 for goodwill amortization (based upon 40 year amortization period) were deducted to arrive at Big’s book income of $239,200. What is Big’s current-year taxable income (as reconciled on Schedule M-1)?
The purpose of Schedule M-1 of Form 1120, U.S. Corporation Income Tax Return is to reconcile book income (loss) with income per the return. Federal income tax is not deductible for tax purposes so it must be added back to book income, giving $349,300 ($239,200 + $110,100). The goodwill is amortized over 15 years for tax purposes, or $20,000 per year ($300,000/15 years). Thus, the book goodwill amortization is added back and the tax good will is deducted. This results in taxable income of $336,800 ($349,300 + $7,500 - $20,000).
Robin, a C corporation, had revenues of $200,000 and operating expenses of $75,000. Robin also received a $20,000 dividend from a domestic corporation and is entitled to a $14,000 dividend-received deduction. Robin donated $15,000 to a qualified charitable organization in the current year. What is Robin’s contribution deduction?
Taxable income before dividends and contributions is $125,000 ($200,000 - $75,000). The 10% of taxable income limitation for C corporations uses taxable income BEFORE the dividends received deduction, which is $145,000. Thus, the charitable contribution limitation is $14,500 ($145,000 x 10%).
Taxable income before dividends $125,000
Dividends 20,000
Taxable income before special deductions $145,000
Charitable contributions (14,500)
Taxable income after charitable deduction $130.500
Dividends-received deduction (14,000)
Taxable income $116,500
Which of the following cannot be amortized for tax purposes?
Stock issuance costs are a syndication cost. Therefore, they are not deductible.
