Review Flashcards

Question

R1 Individual Tax

Answer 1

Business expenses - cost of goods sold is expense when sold; business meals and entertainment (50%); interest expnese on business loans (interest expnse paid in advance by a cash basis taxpayer cannot be deducted until the tax year/period to which the interest relates).

Answer 2

Nondeductible business expenses - salaries paid to the sole proprietor, federal income tax, personal expenses

Answer 3

Health insurance of sole proprietor is not reported on schedule C, it is reported as an adjustment to arrive at AGI

Answer 4

The CPA exam often attempts to confuse the candidate by providign personal itemized deductions as expenses of a sole proprietorship. It is important to only subtract business expenses from business income. Expenses that qualify as itemized deductions and/or other adjustments are deducted elsewhere on the personal income tax return.

Answer 5

Net business income is taxable - income tax and federal self-employment (S/E) tax adjustment is allowed for one-half (which is 7.65% up to $115,500 of self-employment income)

Answer 6

Net taxable loss is 2-year carryback and 20-year carryforward

Answer 7

Uniform capitalization rules - guidelines with respect to capitalizing or expensing certain costs in connection with the acquisition of property . Costs requird to be capitalized include direct materials, direct labor (e.g. compenation, vacation pay, and payroll taxes), and applicable indirect costs (i.e. those to which an allocation must be applied, such as factory overhead). Costs that are not required to be capitalized include selling, advertising, and marketing expenses, certain general and admin expenses, research, and officer compensation not attributed to production services.

Answer 8

For inventory, even a sole proprietor will be required to apply the following rules: capitalized as inventory (direct materials, direct labor, factory overhead); period expense (selling, general, admin, research & development)

Answer 9

Unless an exemption exists for a taxpayer or a contract, longer-term contracts must be accounted for using the percentae-of-compoletion method to determine taxable income for a particular contract.

Answer 10

Certain contracts are exempt from the requirements long-term contract income recognition for tax purposes and may use other medthods (e.g. completed contract method) to calculate their taxable income under the contract for regular income tax purposes. These include: small contractors, home construciton contractors, a long-term construciton contract that includes land and hwere less than 10% of th etotal contract costs relates to teh actual construcion of property on the land; services performed by architects, engineers, designers, construction management advisors, and software implementaiton personnel related to the long-term project; services performed under warranty and maintenace agreements relate to the long-term contract.

Answer 11

IRA income - cannot be withdrawn until the 59 1/2 and required withdrawal is 70 1/2; taxed at ordinary income; roth IRA are nontaxable; penalty 10% + regular income

Answer 12

Exceptions to IRA penatlty tax (HIM DEAD) - home buyer 1st time $10k; insurance (medical) unemployed with twelve consecutive weeks of unemployment compensation or self employed; medical in excess of 10% of AGI; disability; education; and Death

Answer 13

Annuities - treat like depreciation; the investment amoutn is divided by a factor representing the number of months over which the investment will be recovered. Live longer than actuarial payout period (payment over annuity period is taxable); death before full recovery (unrecovered portion is deductible as a miscelaneous deduction not subject to the 2% of AGI)

Answer 14

Rental income (schedule E) - rental real estate, royalties, partnerships and limited liability company (schedule K-1), S Corp ( schedule K-1), estates (schedule K-1); trusts (schedule K-1)

Answer 15

Basic formula to determine rental income/loss - gross rental income + prepayment rental income + rent cancellation payment + improvement in-lieu-of rent (at FMV) - = net rental income/loss

Answer 16

Rental of vacation home - less than 15 days then rental income is excluded; rented more than 15 days (expense must be prorated) and rental use expenses are deductibe only to the extent of rental income. No rental loss allowed.

Answer 17

Passive activity loss (PALs) includes rental activities, interest in limited partnerships, S corporations,and most tax shelters. A net passive activity loss ay not be educted against wages, salaries, and other active income or against portfolio (interest and dividiends) or capital gains income. Expenses related to passive activities can be deducted only to the extent of income from all passive activiees.

Answer 18

Nondeductible PALs can be carry forward without any limit unused passive activity losses held in suspsension. Suspeded losses are used to offse passive income in future years. If still unused, it becomes fully tax deductible in the eyar the proerpty is disposed of (sold).

Answer 19

PAL (disallowed net loss) exception - mom and pop exception $25,000 and "active" in participating/managing and own more than 10%; carryforward indefinitely and 2 years after death. Phase-out starting at $100k and reduced by 50% of $25k and completely phased out at $150k.

Answer 20

Unemployment compensation is included in gross income. Workers' compensation is tax-free

Answer 21

Social security income - low (belwo S-$25k or MFJ $32K) not taxable; middle income taxed at 50% (S $25k and MFJ $32k); upper income = 85% of social security benefits are taxable (income over S $34k/MFJ $44k)

Answer 22

Gambling winnings and losses - winnings are included in gross income; losses are deductible in schedule A as an itemized dedutcion, but the amout is not subject ot the 2% of AGI limitaitons on misc itemized deductions.

Answer 23

Punitive damages are fully taxable as ordinary income if received in a business context or for loss of personal reputation.

Answer 24

Partiall taxable misc items - scholarships and fellowships - room and board and services required are taxable

Answer 25

Nontaxable misc items - life insurance proceeds (interest income is taxable); gift and inheritances for giver; medicare benefits; workers' compensation; personal injury or illness award; accident insurance - premiums paid by taxpayer; foreign earned income exclusion

Answer 26

Employee stock options - a nonqualified option is taxed when granted if the option has a readily ascertainable value when granted. Otherwise, the option is taxed when exercised.

Answer 27

Definition of readily ascertainable value = taxable when granted; if the option is traded in the market and has a value; the option is transferable; the option is exercisable immediately in full when it is granted; there are no conditions or restrictions that would have a significant effect on the value; the fair value of the option privilege is readily ascertainable

Answer 28

Employee taxation - readily ascertainable value = taxable at grant

Answer 29

Employee taxation - without readily ascertainable value = taxed at exercise

Answer 30

Employer taxation = deduct in same year that employee reports income

Answer 31

Incentive stock options (ISO) granted to key employees and is a right to purcase the stock at a discount.

Answer 32

ISO taxation to employee - generally there is no taxation of the option as compensation. Basis of the stock is the exercise price plus any amount paid for the option (if any)

Answer 33

Employer taxation = no tax deduction; generally an employer does not receive a tax deduction for an ISO because it is not considered compensation income to the employee.

Answer 34

Employee stock purchase plan (ESPP) - for employee not taxable as compensation and capital gain and loss when sold. Exception when option price is less than FMV of the stock on the grant date, then ordinary income is recognized as the lesser of the difference of teh FMV of the stock when sold and the exercise price, or the difference between the exercise price and the FMV of the stock on teh grant date.

Answer 35

ESPP Employer taxation = no deduction

Answer 36

Adjustment for AGI includes - educator's expenses, IRA, student loan interest, tuition & fee deduction, HAS, movin expenses, one-half self employment FICA, self-employed health insurance, self-employed retirement, interest withdrawal penalty, alimony paid, attorney fees paid in certain whistle-blower cases, domestic prodution activies deduction

Answer 37

The CPA exam will often refer to "adjustments" as "deductions to arrive at AGI"

Answer 38

Educator expense - eligible educators can deduct up to $250 of qualified expenses paid or up to $500 if filing jointly. An eligible educator is someone who has worked at least 900 hours durign a school year (i.e. teacher, instructor, counselor, principal aide)

Answer 39

No IRA deduction for rich (S: $60k-$70k or joint $96k-$116k) or in another qualified plan

Answer 40

IRA dedution is $5,500 or individual's compensation (lesser of)

Answer 41

IRA phased out between $181,000-$191,000 (2014)

Answer 42

Phase-out income limits for IRAs (modified adjusted gross income) : single between $114,500 to $129,000; joint filers between $181,000 to $191,000; mariield filing separately from $0 to $10,000

Answer 43

Coverdell educational savings account $2,000 per beneficiary (lots of grandchildren), tax-free accumulation of earnings, tax-free distributions (withdrawals); time limit ntil beneficiary reaches 30 years; when benefits are distributed to beneficiaries then it's taxable and assessed a 10% penalty; the balance can be rolled over to another family membe of the taxpayer, tax free rollover is permitted, no 10% penalty is assessed

Answer 44

American opportunity or lifetime learning credit - a taxpayer can claim the american opportunity credit or lifetime learning credit for a tax year and also excldue from gross income amounts distributed from coverdell education savings account

Answer 45

The adjustment for education loan interest is limited to $2,500; any excess or disallowed is personal nterest and not deductible

Answer 46

Archer medical savings account (MSA) contribution - typically used when HSA is unavailable since HSA are more flexible; no new archer MSA could be established after the year 2007; qualified participants are self employed individuals or employee of a small business (less than 50); these accounts were designed to be and must be used in conjunction with a high deductible ($3,250 single/$6,550 family) health insurance plan. the maximum out of pocket expenses limit for 2014 is $4,350 single/$8,000 family.

Answer 47

Moving expenses - deductible if new place of business and his old residence is at least 50 greater than his old residence was from his former principal place of work. For example, if commuting distance is at least 50 miles or more then eligible. 39 week stay during the 12 month period immediately following his arrival. Self-employed person must work full-time at least 78 weeks during the 24-month period after arrival to meet the test. Only direct moving costs are allowd - travel and lodging of taxpayer and family, transportation expenses at 23.5 cents per mile for 2014; tolls and parking, transportation of household goods and personal effects to the new location.

Answer 48

The CPA exam frequently includes the following items in moving expense questions (these items are nondeductible) - meals, pre-move house hunting, expense of breaking a lease, temporary living expenses

Answer 49

Tax on self-employment (social security 50 percent) - you pay both halves boss and employee; income tax and social secuirty/medicare tax; 50% of the self-employed social security /medicare tax is deductible to arrive at adjusted gross income

Answer 50

Self-employed health insurance (100% deductible) not deductible on schedule C

Answer 51

Keogh (Profit sharing) Plans - a self-employed taxpayer subject to the self-employment tax is generally allowed to set up a Keogh plan. The maximum annual deductible amount is limited to the lesser of $53k (2016) or 25% net (Keogh/self-employed) earnings

Answer 52

Keogh Plan net earnings calculation - business income - = net business income - - = Keogh net earnings x 25%

Answer 53

Hint: 25% of self employment after the Keogh deduction is equivalent of 20% (25% / 125%) of self-employment income before the keogh deduction. Example: gross self-employement income $100,000 x 20% = maximum allowed deduction $20,000

Answer 54

An additional standard deduction for the elderly and/or blind. The standard deduction for a taxpayer who is age 65 or over or blind is increased by an additonal amount.

Answer 55

Qaulified deductible medical expenses 10% of AGI

Answer 56

Nondeductible taxes - federal taxes (including social security), inheritance taxes for state, business (on schedule C) and rental property taxes (on Schedule #)

Answer 57

Educational loan interest max $2,500

Answer 58

Charitable contribution is cash or FMV of property at the time the contribution is made; maximum allowed is cash = 50% of AGI and FMV property = 30% of AGI for gifts and long term capital gain property to public charities; general property - lesser of basis of FMV

Answer 59

Carryover of excess charitable contributions - 5 years

Answer 60

Casualty and theft losses - 10% of AGI test and $100 deduction before the 10% calc

Answer 61

Casualty loss must be sudden or unexpected; termite damage is not casualty loss because it occurs over time; casualty loss for nonbusines property cannot be deducted unless (1) an insurance claim was filed or (2) the losses are not covered by insurance

Answer 62

Educational expenses are deductible (misc expenses) if they either maintain or improve the skill needed by the individual in his or her trade or business; or meet the express requirements of the individual's employer retention of this job.

Answer 63

Misc expenses include - unreimbursed bsuienss expenses; travel, meals, and lodging; educational expenses; uniforms; business gifts; business use of home; employment agency fees; expenses of investors - safe deposit box and investment advice; subscriptions to professional journals; tax preparation fee; debit card convenience fees incurred to pay income tax; activities not engaged in for profit (hobbies)

Answer 64

Other miscelaneous deductions (no 2% AGI test) - gambling losses; federal estate tax paid on income in respect of a decedent

Answer 65

Child and dependent care credit - 20% to 35% of eligible expenditures; one dependent $3,000 and $6,000 for two or more; a qualifying child under 13, any disabled dependent, a spouse who is disabled; eligible expenses - babysitter, nursery school, day care, not grammer school; maximum credit (35%) AGI of $15k or less; min 20% maximum is $600 (20% of $3,000) and $1,200 for 2 or more children (20% of $6,000)

Answer 66

Credit for elderly and/or permanently disabled - 15% of eligible income to individuals who are 65 years of age or older; or under 65 and retired due to permanent disability; $5,000 for single, $5,000 for married; example $5,000 - (1/2 over $7,500) = balance x 15% = credit (note joint is $7,500)

Answer 67

American Opportunity credit - first four years of post-secondary (college) education; credit is equalt o (max credit of $2,500 in 2014); 100% of the first $2,000 in 2014 of qualified expenses plus 25% of the next $2,000 in 2014 of expenses paid during the year. Per student basis, multiple kids ok.

Answer 68

Lifetime learning credit ($2,000 max per year) - unlimited number of years; 20% up to $10,000; phase out S $54k and $108k joint; full phase out $64k ($128k)

Answer 69

Adoption credit limitis $13,190 (2014) phase-out $197,880 - $237,880 (2014); all reasonable and necessary expenses, cost and fees; credit is not available for adopting the child of a spouse; medical expenses do not qualify as eligible expenses; the credit is claimed for years after the payment is made until the adoption is final, at which point expenses paid in the year it becomes final are claimed in that year.

Answer 70

Foreign tax credit is the lesser of foreign taxes paid or [taxable income from all foreign operations / (taxable income + exemptions *) ] x U.S. tax = foreign tax credit limit

Answer 71

Excess FICA (2 or more employers) refunded

Answer 72

Regular taxable income +/- Adjustments + Preferences =Alternative Minimum Taxable Income =Alternative Minimum Tax Base x Tax Computation =Tentative AMT Tax =Tentative Minimum Tax =Alternative Minimum Tax

Answer 73

The CPA exam has focused the majority of their questions concerning individual alternative minimum tax on the following four areas: 1. The exemption formula 2. Distinguishing "adjustments" from "preferences" 3. The AMT credit carryforward period (against regular tax) 4. Credits - available to reduce AMT (not regular tax)

Answer 74

AMT exemption is $53,900 (2016) less 25% for single filers ($119,700 threshold) and $83,800 less 25% for joint filers ($159,700 threshold)

Answer 75

AMT example: Full exemption $83,800 AMTI $256,500 Threshold ( $159,700) Excess over threshold $96,800 x x 25% ( $24,200) Exemption $59,600

Answer 76

AMT Adjustments: items 1-5 are "timing differences"; items 6-10 are items that may be included in deductions for regular tax purposes but not for AMT puroses and will only increase AMTI. P Passive activity losses A Accelerated depreciation (post 1986 purchase) N Net operating loss of the indiviual taxpayer I Installment income of a dealer C Contracts - percentage completion versus completed contract T* Tax "deductions" I* Interest deductions on some home "equity loans" M* Medical deductions (limited to excess over 10% AGI; adjustment for taxpayers age 65 and over) M* Miscellaneous deductions not allowed E* Exemptions (personal) and standard deductions

Answer 77

Tax preference items (always "add-backs" P * Private activity bond interest income (on certain bonds) P * Percentage depletion the excess over adjusted basis of property P Pre-1987 accelerated depreciation

Answer 78

Credit for Prior Year Minimum Tax (AMT credit) Certain allowable AMT paid in a taxable year may be carried over as a credit to subsequent taxable years. It may only reduce tax, not future alternative minimum tax The carryforward is forever AMT created from certain permanent differences cannot be carried forward as part of he "credit." Therefore, if AMT is paid because of these items, it is never recovered. (identified by an asterick)

Answer 79

Home mortgage is ok (not added back for AMT) but home equity interest is added back; charity is not an add-back for AMT

Answer 80

AMT credits (FACCE): Foreign tax credit Adoption credit Child tax credit Contributions to retirement plans credit Earned income credit

Answer 81

Statue of limitations three years from the later of: a. The due date of the return; or b. The date the return is filed (including amended returns) 25% understatement of gross income Six years from the laterof: a. The due date of the return; or b. The date the return is filed Fraud and false returns = bank robber = forever

Answer 82

Refunds for individuals: Refund claim is the later of: 3 years later from the date the return was filed or the original due date of the return; or 2 years fromt eh time the tax was paid (if not when the return was filed)

Answer 83

Bad debts, worthless securities = bad luck = 7 years 7 years from the later of: a. The due date of the return; or b. The date the return is filed

Answer 84

Estimated tax requirement if $1,000 or more in tax liability: a. 90% of current year's tax; or b. 100% of last year's tax Penalty for failure to pay estimated taxes unless tax is under $1,000

Answer 85

A tax preparer should make a resonable effort to obtain from the taxpayer the information necessary to provide appropraite answers to all questions on a tax return. Should make a resonable effort to answer all questions. Failure to answer a question may result in an incomplete return or a penalty. Reasonable grounds for omission i.e. not easily obtainable and insignificant, undertainty,

Answer 86

Tax preparer generally, no responsibility to verify information provided by the taxpayer.