REG: Chapter 9 Flashcards
Business Income and Expenses
How are advance and prepayments reported as business expenses for a cash basis business?
- The entire prepayment is not deductible in the year paid
- The expense must be allocated over the period of time for the purpose of the payment
Exception
* If the contract is for 12 months or less and does not extend to the next taxable year, then the taxpayer can deduct the expense
Business Income and Expenses
What is reported on Schedule C of the Form 1040?
Information for Self-Employeed Business Owners and sole proprietorships
* Revenue/Losses
* Expenses
* Meal and dining expenses
* Profit or loss from business
* Foreign Real Property Taxes
* Unincorporated business tax
* Payroll Taxes
* Taxes based on fixed assets
Custodial fees related to a Keogh plan are not reported on Schedule C, as they are deducted in order to determine AGI
Business Income and Expenses
What is the maximum deduction available for business gifts?
- $25 per person
- Business gifts that are tickets to event are considered entertainment and are not deductible
Exceptions
* The cost to the taxpayer does not exceed $4
* The name of the taxpayer is imprinted
* Signs and display racks to be used on the business premises
* Achievement awards are not subject to the $25/person limitation
Business Income and Expenses
How is a deduction for personal services actually rendered to an employee reported?
- The deduction is based on the FMV of the property given to the employee
- The property must be transferable and not at substantial risk for forfeiture
Business Income and Expenses
What are the various tests used to determine whether household income can be treated as rental income/loss?
Personal Residence Test
* Residence rented out less than 14 Days? Yes
* The rental activity may result in a loss
Rental Use Property Test
* Residence rented out more than 14 days? Yes
* Personal use of residence is used either more than the greater of 14 days or 10% of the days it is treated as a rental property? No
Hybrid Use Property Test
* Residence rented out more than 14 days? Yes
* Personal use of residence is used either more than the greater of 14 days or 10% of the days it is treated as a rental property? Yes
* The rental activity may not result in a loss
Business Income and Expenses
What is the Primary Personal-Use Residence Test?
- A residence that is rented less than 15 days during the tax year is treated as personal residence
- Any income earned from the rent is not reported
- Any expenses associated with the residence while it was rented
Business Income and Expenses
What is the Minimum Rental Use test?
- The property must be rented for at least 15 days to qualify as a business use
- The property is not used more than the greater of 14 days or 10% of the days it is treated as a rental property
- A taxpayer is required to report any income and expenses from the rental property
- The taxpayer is allowed to report a net loss from the rental activity
Business Income and Expenses
How is business income calculated for a company that is an illegal business?
- The business income is adjusted based on the cost of merchandise
- All other business expenses related to the sale of the illegal product is not deductible
Business Income and Expenses
How are bad debts reported on Schedule C?
- The specific write-off method must be used when reporting bad debts
- The trade receivable is deductible to the extent of its worthlessness, or what was actually written off
- The allowance method is not allowed
- A partial bad debt it not deductible
Business Income and Expenses
How are start-up expenses reported as a business deduction?
- $5,000 of start-up costs are deductible in the year the business started
- The $5,000 amount is offset by the total start-up costs less a maximum amount of $50,000
- The remaining amount is amortized over a 15 year period
Example
* Start-up Costs in 12/1/x1: $52,300
* Amount deducted in x1: $2,700 ($5,000 - ($52,300 - 50,000)
* Amortized Amount: $276 [($52,300 - $2,700)/(1/12)]
Business Income and Expenses
When are expenses considered capital expenditures?
- Adds value to the property
- Extends the life of the asset
- Adapted to be used for a different use
- Freight paid on new equipment
- Rewiring a building
- Adds value of the business (i.e. eliminating competition)
FICA and FUTA Taxes
What are the percentages deducted from wages?
SSI
* 6.2% of the first $160,200 for employer
* 6.2% of the first $160,200 for employee
Medicare
* 1.45% for Employer
* 1.45% for employee
FUTA
* Is deducted by the employer only
* 6% of the first $7,000 for each employee
FICA and FUTA Taxes
What are the different tiers for witholding FICA?
**Tier 1: **
* Wages from $0-$160,200
* Wages x 6.2% Social Security
* Wages x 1.45% Medicare
Tier 2:
* Wages from $160,200 - $200,000
* Employee’s wages x 1.45% Medicare
Tier 3:
* Above $200,000 to earned income
* Employee’s wages x 1.45% Medicare
* Employee’s wages x 0.9% Additional Medicare
FICA and FUTA Taxes
How are medical and hospital reimbursements by the employer treated?
- Medical and hospital expenses that are reimbursed by the employer are not considered part of gross income
- They are not subject to FICA or FUTA tax
