Reg - Individual Tax 6 Flashcards
personal service corporation
a corporation
(1) whose principal activity is the performance of personal services and
(2) such services are substantially performed by owner-employees
how are gains computed under the installment method?
the amount to be reported in each year is:
(Gross Profit / Total Contract Price) x Amount Received in Year
What is the statute of limitations for an incorrect return?
normally 3 years after the return is filed or if later, the due date of the return.
A 6 year limitation applies if the gross income omitted from the return exceeds 25% of the gross income reported on the return
how is the depreciable basis of a business property determined?
by the cost of the building
land is not depreciable and neither are real estate taxes (although the taxes are deductible as an ordinary business expense)
are gambling losses deductible from AGI?
yes, as a miscellaneous deduction to the extent of winnings, not subject to the 2% of AGI floor if a taxpayer itemizes deduction.
On August 1, 2016, Graham purchased and placed into service an office building costing $264,000 including $30,000 for the land. If Graham is a calendar-year taxpayer, what is Graham’s MACRS deduction for the office building for 2016?
The MACRS deduction for nonresidential real property must be determined using the midmonth convention (i.e., property is treated as placed in service at the midpoint of the month placed in service) and the straight-line method of depreciation over a 39-year recovery period. Here, the $264,000 cost of the office building must first be reduced by the $30,000 allocated to the land, to arrive at a basis for depreciation of $234,000. Since the building was placed in service on August 1, the midmonth convention results in 4.5 months of depreciation for 2016. The MACRS deduction for 2016 is [$234,000 × (4.5 months) / (39 × 12 months)] = $2,250.
How much of the self-employment tax may a self-employed individual deduct?
1/2 of the self employment tax paid
how much of the premiums for medical insurance may a self-employed individual deduct?
100% for the individual, spouse, dependents, and any child of the taxpayer under age 27 at the close of the tax
is an interest forfeiture penalty for making a premature withdrawal from a time savings account deductible?
yes
it should be deducted from gross income in arriving at adjusted gross income in the year in which the penalty is incurred
Ryan and Christine Holm, filing a joint tax return for the current year, had a tax liability of $5,000 based on their tax table income and three exemptions. Ryan and Christine had earned income of $15,000 and $5,000, respectively. In order for Christine to be gainfully employed, the Holms incurred the following employment-related expenses for their 5-year old son, Toby:
Payee Amount
Alpine Day Care Center $ 900
Mulford Home Cleaning Service 700
Cindy Holm, babysitter (Ryan’s mother) 1,100
Assuming that the Holms do not claim any other credits against their tax, what is the amount of the child care tax credit they should report on their current year tax return?
This answer is correct. The credit is from 20% to 35% of certain dependent care expenses limited to the lesser of (1) $3,000 for one qualifying individual, $6,000 for two or more; (2) taxpayer’s earned income or spouse’s if smaller; or (3) actual expenses. The $900 paid to the Alpine Day Care Center qualifies, as does the $1,100 paid to Cindy Holm. Payments to relatives qualify if the relative is not a dependent of the taxpayer. Since Ryan and Christine Holm only claimed three exemptions, Cindy was not their dependent. The $700 paid to Mulford Home Cleaning Service does not qualify since it is completely unrelated to the care of their child. The credit is 35% if AGI is $15,000 or less, but is reduced by 1 percentage point for each $2,000 (or portion thereof) of AGI in excess of $15,000 (but not reduced below 20%). As the Holms had AGI of $20,000, the 35% maximum credit is reduced by 3 percentage points to 32% ($20,000 − $15,000/$2,000 = 2.5). Since qualifying expenses were $2,000, the Holms’ credit is 32% × $2,000 = $640.
