REG03

Question 1

Does prepaid rent count as income when received even if the lessor uses the accrual method of accounting?

Answer 1

Yes, prepaid rent is income when received even if the lessor uses the accrual method of accounting.

Question 2

If provisional income > the adjusted base amount (ABA), then up to what % of SS benefits is taxable?

Answer 2

For 2018, up to 85% of Social Security benefits may be taxable.
The taxable portion of SS benefits will depend upon the amount of provisional income (PI) in relation to the base amount (BA) and the adjusted base amount (ABA).

Question 3

When are prizes and awards made primarily in recognition of charitable, scientific, & educational achievement excluded from gross income?

Answer 3

Excluded from GI only if the recipient was selected without any action, is not required to render substantial future services as a condition of receiving the prize or award, and assigns it to charity.

Question 4

What amount of gain under Sec. 453 is recognized in the year of sale if payments are to be made?

Answer 4

Is the proportion of the payments received in the year that the gross profit bears to the total amount the seller will ultimately collect from the buyer.
(GP / Sale Price) x Amount Received in Yr 1

Question 5

What is not taxable interest income out of these; interest on federal income tax refund,
interest on state income tax refund, interest on federal government obligations, interest on state government obligations?

Answer 5

Interest on state government obligations only

Question 6

If a taxpayer receives a state refund and claims the standard deduction is
it included in taxable income?

Answer 6

No, to the extent the expense did not reduce federal income taxes in the earlier year, the recovery is excluded from income because of the standard deduct in lieu of itemizing and claiming the state income tax deduction.

Question 7

Is interest on state income tax refunds included in taxable income if the standard deduct was claimed?

Answer 7

Yes, interest on state income tax refunds is not excludable. Included in taxable income.

Question 8

Are maintenance and separation payments to a former spouse income to the payee if the divorce was executed after 2018?

Answer 8

Regardless of the requirements to qualify as alimony, for divorces executed after 2018, maintenance and separation payments to a former spouse are NOT deductible by the payor or income to the payee.

Question 9

If an alimony agreement refers to payments of $3,000 but will decrease to $2,000 after a child achieves the age of majority, what amount is considered alimony?

Answer 9

Only the $2,000 because the $1,000 is considered child support because it is contingent on the child’s age.

Question 10

Do taxpayers have to include in gross income amounts actually received if the taxpayer has unrestricted claim to the amounts, regardless of the taxpayer’s accounting method?

Answer 10

Yes

Question 11

Would you exclude receipt of loan funds from gross income for income tax purposes?

Answer 11

Yes, loan funds is not treated as gross income for income tax purposes because it is to be repaid with taxable dollars.
Interest paid on personal loans and repayments of principal are neither excludable nor deductible.

Question 12

Are proceeds of a life insurance excluded from gross income? What about interest earned on proceeds?

Answer 12

By reason of death of the insured are excluded from gross income.
Interest earned on proceeds is gross income to the beneficiary. The amount of each payment in excess of the death benefit prorated over the period of payment is interest income.

Question 13

When are improvements made by a lessee on the lessor’s property excluded from gross income?

Answer 13

Improvements made by a lessee on the lessor’s property are generally excluded from gross income unless they are made in lieu of rent.

Question 14

Are dividends on insurance policies excluded from gross income?

Answer 14

Yes, excluded from gross income to the extent cumulative dividends do not exceed cumulative premiums. The dividend is treated as a reduction in the cost of the insurance.

Question 15

When is warranty expense deductible on the tax return?

Answer 15

Warranty expense is not deducted on the tax return until paid.

Question 16

When are tips included in income?

Answer 16

Tips receive special treatment, an employee who receives $20 or more in tips in a month must report the total tips to the employer by the 10th day of the next month. These tips are treated as paid when the report is made to the employer.

Question 17

Can a taxpayer whose residence is damaged or destroyed and who must temporarily occupy another residence exclude from gross income any insurance payment received?

Answer 17

Yes, the exclusion is limited to the excess of actual living expenses incurred by the taxpayer over the normal living expenses of the taxpayer would have incurred during the period.
GI = Insurance Check - (actual expenses - Typical expenses)

Question 18

Will an employee have income tax consequences on the grant date or the exercise date of an incentive stock option?

Answer 18

An employee will have no income tax consequences on the grant date or the exercise date of an incentive stock option if that employee cannot dispose of the stock within 2 years after the grant date or within 1 year after the exercise date and the employee is employed on the grant date until 3 months prior to the exercise date.

Question 19

Are contributions to a political party or candidate deductible?

Answer 19

Contributions to a political party or candidate are not deductible.

Question 20

How do you calculate the net earnings from self-employment?

Answer 20

The NI per books + the salary that was drawn + federal income taxes paid.
The NI from self-employment is reduced by the employer portion (7.65%) of the self-employment tax rate This reduction is calculated as follows:
NI from self-employment x employer rate (0.0765)

Question 21

What can a taxpayer deduct related to a vehicle for business use and what is the 2018 standard mileage rate?

Answer 21

The taxpayer may either deduct the portion of actual operating cost of the automobile attributed to business use or compute the deduction based on the standard mileage rate. For 2018, the standard mileage rate is $0.545 per mile.

Question 22

What is excluded from gross income?

Answer 22

Excluded = contributions to accident or health plans made by an employer on behalf of the employee. The cost of group term life insurance paid by the employer up to $50,000. Payments up to $5,250 per year made to reimburse an employee for educational expenses to cover expenses for undergraduate and graduate courses.

Question 23

Does Social Security apply to self-employed persons?

Answer 23

Yes, they must pay a tax on self-employment income (15.3% on the first $128,400 and 2.90% on all other wages in 2018).

Question 24

How do you calculate the self-employment tax?

Answer 24

Taxpayers may reduce their NI from self-employment by the product of the employer’s portion of the self-employment tax rate (7.65%) x the NI from self-employment. Then multiply remaining NI x 15.3%.

Question 25

When can advance rental payments be deducted by the lessee?

Answer 25

Advance rental payments may be deducted by the lessee only during the tax periods to which the payments apply.

Question 26

Can organization expenses are incurred in the formation of the partnership be amortized and for how long?

Answer 26

The partnership may elect to amortize organization expenses over a period of not less than 180 months. Fees related to preparing the partnership agreement are organization expenses, but the expenses related to the issuance or sale of partnership interests (syndication fees) are specifically excluded.

Question 27

Do rental expenses for rental property have to be allocated between personal and rental use?

Answer 27

yes. the property must be rented for at least 15 days to qualify as business use. In addition, if the taxpayer uses the residence for personal use more than either 14 days or 10% of the days it is rented, the deductions are further limited.

Question 28

Is sales taxes on the purchase of $50K of EQ used in the business deductible?

Answer 28

No, Section 164(a) provides that taxes not listed but paid or accrued in a trade or business may be deducted, except that any tax not listed that is paid or accrued with respect to a property purchase is treated as part of the cost of the property. So, the sales tax on the equipment must be capitalized and only deducted as depreciation over the recovery period of the asset.