REG - Tax - Individual Flashcards
What is the allowed year end and method of accounting for a S corp to change to a C corp?
An S corp generally may use a calendar year, it may request permission from the IRS to have a fiscal year if it can establish a valid business purpose.
A C corp can elect to use either a calendar year or a fiscal year as its annual accounting period.
C corps are generally not allowed to use the cash method of accounting. An exception that permits cash method for C corp is a qualified personal service corp, or if the C corp for every year has avg gross receipts of $5M or less for any prior 3 year period and does not have inventories.
What is MACRS?
What is the depreciation method that must be used for regular tax purposes to determine the MACRS depreciation deduction for nonresidential real property?
Example: Aug 1, 2011 purchase office bldg for 264k incl 30k land
Modified Accelerated Cost Recovery System (MACRS) is the current tax depreciation system in the United States. Under this system, the capitalized cost (basis) of tangible property is recovered over a specified life by annual deductions for depreciation. The lives are specified broadly in the Internal Revenue Code. The Internal Revenue Service (IRS) publishes detailed tables of lives by classes of assets. The deduction for depreciation is computed under one of two methods (declining balance switching to straight line or straight line) at the election of the taxpayer, with limitations.
Straight line method over 39 years for nonres real property. Use midmonth convention (property is treated as placed in service at midpoint in the month place in service). 264-30 for deprec basis. 4.5 months total deprec. MACRS dedn is 2250 total for 2011.
What is included to calculate the tax deductible medical expenses?
Includes dentist and eye doctor fees and cost of contact lenses.
No deduction is allowed for cosmetic surgery since not for personal injury or to correct a cogenital deformity. No deduction for premiums on disability income policy.
A disability income policy is not considered medical insurance because pmts are not based on the amount of medical expenses incurred.
How are real estate tax deductions handled?
Example: $1200 for 2011 but sold 4 months before pmt due
When real estate is sold, the real estate tax deductions is apportioned between the seller and the buyer according to the number of days in the real property tax year that each holds the property.
90/365 X 1200 = $296
Thus $296 is deducted on Sched A of Form 1040 for real estate taxes in the year.
For a self employed consultant, what should and should not be deducted to report self employment income? Salary drawn by consultant Estimated federal income taxes paid Malpractice insurance premiums Cost of attending professional seminar
The salary is not deductible as she is not an employee and federal income taxes are not deductible.
The other two are deductible.
What is a Keogh plan and how do you calculate earned income for a sole proprietor?
A self employed individual may contribute to a qualified retirement plan call ed a Keogh plan. The max contribution to a Keogh profit sharing plan is the lesser of $49k or 100% of earned income.
Earned income is net earnings from self employment (business gross income less allowable business deductions) reduced by the deduction for half of the self employment tax and the deductible Keogh contribution itself.
What happens when an accrued item is determined in the next year to be a different amount? Example: 2010 - properly accrued 10k as a reasonable estimate and 2011 - exact amount was 12k
The 2k difference can be included in the 2011 income tax return.
If an amount is included in gross income on the basis of a reasonable estimate, and it is later determined that the exact amount is more, then the additional amount is included in income in the tax year in which the determination of the exact amount is made.
Note under the accrual method, income is generally reported in the year earned.
What is subject to the Uniform Capitalization Rules of Code Sec 263A? What are exceptions?
Uniform capitalization (UNICAP) rules generally require that all costs incurred in manufacturing or constructing real or personal property, or in purchasing or holding property for sale, must be capitalized as part of the cost of the property. Costs that are excepted from UNICAP rules are research and experimental expenditures, mine development and exploration costs, and the costs incurred by a freelance writer, photographer, or artist whose personal efforts create the product. Also excepted are the costs of small retailers and wholesalers who acquire personal property for resale if the retailer's or wholesaler's average gross receipts for the preceding three tax years do not exceed 10M$. However, the warehousing costs incurred by a manufacturing company with $12M in annual gross receipts do not fall within these exceptions and thus are subject to UNICAP rules.
What are rules regarding education IRA (Coverdell Education Savings Account)?
Deductibility? Annual limit? Phaseout? Beneficiary age limit?
Contributions to an education IRA are not deductible, but withdrawal of earnings will be tax free if used to pay the qualified education expenses of the designated beneficiary.
The max annual amount that can be contributed to an education IRA is limited to $2k but the annual contribution is phased out for single taxpayers with modified AGI between 95k and 110k, and for married taxpayers with modified AGI between 190k and 220k.
Contributions cannot be made to an education IRA after the date on which the designated beneficiary reaches age 18.
What is the benefit of the Qualifying widow with dependent child status? When is it available?
By filing under this status, it will enable her to use the joint return standard deduction and joint return tax rate schedule. This filing status is available for the two taxable years following the year of a spouse’s death if
1 - the surviving spouse was eligible to file a joint return in the year of the spouse’s death
2- does not remarry before the end of the current tax year
3- the surviving spouse pays over 50% of the cost of maintaining a household that is the principal home for the entire year of the surviving spouse’s dependent child.
Under cash basis how do you get net income for the year?
Cash received from patients and third party reimbursers during the year and deduct salaries and other expenses paid in the year. Do not include year end bonuses paid in next year.
What happens in LIFO in a period of rising prices compared to FIFO?
LIFO would benefit a taxpayer in periods of rising prices because recently incurred high costs flow through to COGS while previously low costs incurred remain in EI. Compared to FIFO, LIDO increases COGS, decreases EI, decreases GP, taxable income, and current tax liability.
What is used to calculate net rental income?
Rent, depreciation, fuel and util, repairs, insurance
Lease cancellation, tenant left improvements
Under cash basis, take rent received less fuel and utilities, less deprec, less repairs to rental unit, less insurance = net rental income
Include lease cancellation payment in income.
Do not include lease improvements since they were not required in lieu of rent.
What are tax preferences vs adjustments to regular taxable income for alternative minimum tax purposes on tax return?
Personal exemption, itemized deduction for personal property taxes, charitable contribution of capital gain property, net long term capital gain, excess of accelerated deprec over st line deprec on real property placed in service prior to 1987, tax exempt interest from City of Chicago general obligation bonds
Preferences consist of excess deprec on real property
Adjustments include personal exemption and personal property taxes.
A provides medical services to B for 1k. B pays 500 and provides landscaping services which is valued at 350 for settlement of the bill. What amount is included in gross income?
An exchange of services for property or services is sometimes called bartering. A taxpayer must include in income the amount of cash and the FMV of property or services received in exchange for the performance of services. So 850 is included in gross income.
How much of the cost of group term life insurance provided by an employer must be included in an employee’s income? How much of the premium is taxable to employee? Example - covered by 90k policy where employer pays entire cost at $1 per $1000 of coverage.
It is included in employee’s income to the extent of the cost of life insurance coverage in excess of 50k. The excess coverage is 90k-50k = 40k. At a cost of $1/1000, the amount taxable to employee is 40$.
What are the rules for the child tax credit?
Individual taxpayers are permitted to take a tax credit based solely on the number of their dependent children under age 17.
The amount of credit is $1k per qualifying child.
The credit phases out when modified adjusted gross income exceeds specified thresholds.
How are tax deficiencies found in prior years treated?
Interest on tax deficiency, additional federal income tax, late filing penalty, negligence penalty
The interest on the tax deficiency is considered personal interest and is not deductible.
The additional federal income tax, the late filing penalty, and the negligence penalty are not deductible.
How do you calculate allowable net medical expense deduction? Example: adjusted gross income of 35k
Drugs prescribed $300, health insurance premiums 750, doctors fees 2250, eyeglasses 75 and reimbursement for doctor fees of 500.
Add drugs + medical insurance premiums + doctor fees - reimbursement + eyeglasses= 2875 less 7.5% of AGI (35k), 2625 = 250$ for medical expense deduction for the year
How do you calculate adjusted gross income for a self employed taxpayer?
Given gross income, self employment tax paid, health insurance, alimony, contribution to traditional IRA.
Gross income less deduction for 50% of self employment taxes paid, a deduction for 100% of health insurance premiums, alimony paid to a former spouse, and the contribution to a traditional IRA = AGI
What amounts are included in gross income for employee injured in the course of employment? Workers comp, reimbursement from employer’s accident and health plan for medical expenses paid by employee, damages for personal physical injuries
- All three amounts are excluded from gross income. Benefits received as workers comp and comp for damages for personal injuries are always excluded from gross income. Amounts received from an employer’s accident and health plan as reimbursement for medical expenses are excluded provided the med expenses were not previously deducted as itemized deductions.
What amount is taxable for alimony in a tax return? Example - payee spouse receives mortgage pmts that will terminate upon payee spouse death
In order to be treated as alimony, a pmt must be made in cash and be received by or on behalf of the payee spouse. Cash pmts must be required to terminate upon the death of the payee spouse to be treated as alimony. Thus, the mortgage pmts are treated as alimony.
How do you calculate an individual’s AMTI? Ex: real property taxes, home mortgage interest on loan to purchase residence, misc dedns in excess of 2% of AGI
Certain itemized deductions are not deductible in computing an individual’s AMTI (alternative minimum taxable income). No AMT dedn is allowed for state, local, and foreign income taxes, real and personal property taxes, and misc itemized dedns subject to the 2% of AGI floor.
Therefore, add back the real property tax and misc dedns to gross income before personal exemption to arrive at AMTI before AMT exemption.
What are the rules regarding a traditional IRA for individuals under the age of 50?
A taxpayer whose AGI is not above the applicable phaseout range can make a $200 deductible contribution regardless of the proportional phaseout rule. This 200$ minimum applies separately to taxpayer and taxpayer’s spouse.
If neither the taxpayer nor the taxpayer’s spouse is an active participant in an employer sponsored retirement plan or a Keogh plan, there is no phaseout of IRA deductions.
Total IRA contributions are subject to the $5k or 100% of compensation limit.
A taxpayer who is partially or totally prevented from making deductible IRA contributions can make nondeductible IRA contributions.
How is a state income tax refund handled? 50k adjusted gross income last year and claimed itemized dedns of state income taxes paid last year of 5.5k. Itemized dedn amount, exceeded standard dedn available for last year by 1150, was fully deductible and not subject to limits. Current year, he recieved 1.5k state tax refund relating to prior year.
A state income tax refund must be included in gross income for the current year under the tax benefit rule to the extent that the refunded amount was deducted in a prior year and the dedn provided a benefit by reducing the taxpayer’s federal income tax for the prior year.
In example, the itemized dedn for state income tax of 5.5k provided a benefit only to the extent that it exceeded the standard dedn that was otherwise available to him. Only 1150 of the 1500 refund is included in gross income for current year.
How many exemptions can be claims on a return?
Married couple has student and part time working daughter, blind son with no income, and support for wife’s father, a citizen and resident of Peru.
A married couple is entitled to one exemption each. They are entitled to one exemption for a qualifying child (child did not provide more than half of her own support, and is a FT student under 24).
An exemption can be claimed for a qualifying relative (they provided more than half of his support, and his gross income was less than 3.7k)
No exemption is allowed for the father as he was neither a US citizen or resident of US, Canada, or Mexico. There is no additional exemption for being age 65 or older.
Total 4 exemptions on joint tax return.
