REG Ch 1.

Question 1

What is the inclusion of social security benefits in gross income?

Answer 1

The amount of SS benefits that is taxed depends on whether the combined income (AGI +interest on tax exempt bonds+50% of the SS benefits) is GREATER than a threshold amount.

If LESS, the amount taxed is the Lesser of:

1: 50% of the Benefits OR
2: 50% of the excess of the combined income over the threshold

If GREATER, the amt taxed is the LESSER of:

1. amount calculated above + 85% of the excess of the combined income over the threshold OR
2. 85% of the benefits

85% OF THE BENEFITS IS THE MOST THAT CAN BE INCLUDED IN GROSS INCOME

Question 2

What interest is tax exempt?

Answer 2

1. State and local government bonds/obligations
2. Series E. E. (used to pay for higher education) - phaseouts
3. Veterans Administration insurance

Question 3

What interest is taxable?

Answer 3

All, unless specifically listed as non-taxable:

1. federal, industrial development, corporate bonds
2. FMV of premiums received for opening a savings account
3. interest paid by the federal or state government for Late Payment of a tax refund is taxable.
4. For certain taxpayers and certain bonds, the amortization of a BOND PREMIUM is an offset (Reduction) to the interest received and a Reduction to the bond’s basis, and the amortization of a BOND DISCOUNT is an Addition to the interest received and an Addition to the bond’s basis.

Question 4

How is Prepaid Rent treated for income tax purposes?

Answer 4

Prepaid Rent is income when Received (for both cash and accrual taxpayers).

Question 5

How is Prepaid Interest treated for income tax purposes?

Answer 5

Prepaid interest is Prorated for the duration of the loan, regardless of when the interest was received (for both cash and accrual).

Question 6

What are the Types of Property that the Uniform Capitalization Rules apply to?

Answer 6

Real or Tangible Property:

1. Produced for Use
2. Produced for Sale
3. Acquired for Resale (taxpayer’s annual average gross receipts for the preceding 3 years must exceed $10 Mil).

Question 7

What are the Costs related to inventory that need to be capitalized under the Uniform Capitalization Rules?

Answer 7

Direct Materials
Direct Labor
Factory OH (Applicable Indirect Costs: depreciation and amortization, insurance, supervisory wages, spoilage and scrap, utilities, design expenses, repair and maintenance, rental of equipment and facilities (including offsite storage), some administrative costs, costs of bonus and other incentive plans, and indirect supplies and other materials (including costs to repackage for goods acquired for resale)).

Question 8

What are the rules for the Rental Income/Expenses for a vacation home rented LESS than 15 days?

Answer 8

If home is rented for LESS than 15 days, DO NOT INCLUDE income. Mortgage interest and real estate taxes are itemized deductions on Sch. A. Vacation home is treated as a personal residence (1st and 2nd home ONLY). The effect on AGI is ZERO.

Question 9

What is the formula for calculating the basic Net rental income or loss?

Answer 9

Gross rental income
\+Prepaid rental income
\+Rent cancellation payments
\+Improvements in lieu of rent 
(Rental Expenses)
-------------------------------------------
= Net Rental Income/(Loss)

Question 10

What is passive activity?

Answer 10

Any activity that the taxpayer does not materially participate.

Question 11

What is the Mom and Pop rule?

Answer 11

Taxpayers who own more than 10% of rental activity