TBS Flashcards
Must a cashier check be payable to order or bearer to be negociable?
A cashier’s check is an actual check and thus does not have to be payable to order or to bearer.
Must Certificates of deposit be payable to order or bearer?
Certificates of deposit, unlike checks, must be payable to order or to bearer.
When is a check not payable on demand?
Normally a check is demand paper. However, when it is postdated, it is not payable until that date.
When was The $5,000 employee death benefit exclusion repaled?
The $5,000 employee death benefit exclusion was repealed for decedents dying after August 20, 1996.
Give ordering rules for how basis is adjusted at the end of the tax year
The tax law provides ordering rules for how basis is adjusted at the end of the tax year, as follows:
- Increase basis for all income items
- Decrease basis for distributions
- Decrease basis for all loss items
Sales income $ 100,000 Interest income 9,000 Municipal interest income 6,000 Section 1231 gain 9,000 Cost of goods sold 70,000 Advertising expense 4,000 Supplies expense 4,000 Depreciation expense 4,000 Taxes 9,000 Charitable contributions 2,100 Life insurance premium on partners' lives (proceeds to partnership) 3,000 guaranteed payment of $12,000 for 2014. Sophie received a $15,000 cash distribution Recourse 30'000 Basis 20'000 1/3 of interests
Give split for adjusted basis
Interest income 9,000 Municipal interest income 6,000 Section 1231 gain 9,000 Charitable contributions 2,100 Life insurance premium on partners' lives (proceeds to partnership) 3,000 => 1/3 of all amount
ordinary income (loss) Sales income $100,000 Cost of goods sold (70,000) Advertising expense (4,000) Supplies expense (4,000) Depreciation expense (4,000) Taxes (9,000) Guaranteed payment (12,000) Total Ordinary loss (3,000) =>1.3 of total
Dividend = as is
How much deduction is applicable to dividend received from a 35%-owned domestic corporation?
Dividends received from a 35%-owned domestic corporation would be eligible for an 80% dividends received deduction.
How is A lease cancellation payment treated?
A lease cancellation payment is treated as rent and must be fully included in income when received.
Capital gain/loss / Operating Income / Distribution Income : how are they treated on the personal income tax return of shareholder/partner accounding to Corporation and other form of entities (S corp, partnership, etc.)?
Capital gain/loss : for corp, only owner’s capital transaction (ex, sell of investment)
For other entities : capital net gain/loss + owner transaction (limit of 3’000 if loss)
Operating income : for corp 0
For other entities : full amount
Distribution income : for corp, full amount if corp has at least the amount distributed
Other entities : 0
In case of multiple suport agreement filed what is the minimum % to claim dependency?
10%
Lucas itemized for federal income tax purposes in 2013. Refund from 2013 Alabama state income taxes paid of $250 : which amount of income must be recognized
Since Lucas itemized in 2013 he received a tax benefit for the state income taxes paid that year. The tax benefit rule provides that if an item deducted in a previous year is recovered in the current year, the recovery is included in income only to the extent that the deduction provided a tax benefit in the year of deduction. (Tax Benefit Rule)
On December 28, 2014, a customer from his home repair business offered to pay Lucas $2,200 for work completed, but Lucas deferred receipt until 2015 : which amount of income must be recognized?
Constructively received since Lucas could have accepted payment with no substantial restrictions on the use of the funds. The constructive receipt doctrine provides that if income is made available without substantial restrictions or limitations, it is deemed received to a cash basis taxpayer and taxed currently. (Constructive Receipt Doctrine)
On December 1, 2014, Lucas rented his condominium. The new tenants paid $750 for December, an additional $750 for the last month’s rent (non-refundable) on the contract, and a $500 deposit (refundable) : which amount of income must be recognized?
The December rent and the rent prepaid for the last month of the contract are included in income. Prepaid rental income is included in income when received unless it is potentially refundable. (Prepaid Income)
Lucas owns a $1,000, 12% General Electric bond that pays interest semiannually on December 1 and June 1. He had bought the bond for $1,000 in 2012. On September 1, 2014, he sold the bond for $1,230 which included $30 of accrued interest.
GE Bond: $60 of interest income for June 1 payment. $30 of interest income from June 1 to August 31. $200 gain on sale ($1,200 - basis of $1,000).
Interest income accrued to the date of sale is included in income. The remaining proceeds are applied against the adjusted basis in the bond (capital recovery) to determine the gain or loss on sale. (Recovery of Capital Doctrine/Interest Income Accrual)
While jogging in August, Lucas found $300 cash on the sidewalk which he kept
Included in income under the treasure trove rule. All increases in wealth are included in gross income unless a specific exclusion exists. Therefore, this “treasure trove” is included in income. (Broad Based Income Definition)
Lucas purchased ABC stock in January 2014 for $2,000. At December 31, 2014, the stock is now valued at $800. Lucas sells the stock on December 31 to take his tax loss for the year, but repurchases the stock on January 2, 2015 for $820 because he believes the stock will rebound.
Loss is disallowed under the wash sale rule since he repurchased ABC stock within 30 days of selling it. The loss from securities sold at a loss is not recognized if a similar security is purchased within 30 days (either before or after) the sale of the security. (Wash Sales)
Lucas sued his employer this year for age-discrimination and was awarded $100,000 in an out-of-court settlement.
Discrimination award: Age-discrimination is considered a non-physical injury so the payment is included in income. Damages received due to non-physical injuries are included in income. (Damages - nonphysical)
USC Corporation, an accrual basis corporation, was organized during 2014 and incurred the following expenses:
Attorneys’ fees for organizing the corporation $20,000
Training costs paid to employees before opening the business $54,000
Fees paid to an underwriter to sell shares to new investors $10,000
USC began business operations on April 1, 2014. It is a calendar-year corporation.
Part A : Using the chart below, compute the amount of organizational expenses related to these costs that will appear on USC’s 2014 tax return.
Expenses incurred in connection with the organization of a corporation are known as organizational expenses. Typical organizational expenses are legal services incident to organization, accounting services, organizational meetings of directors and shareholders, and fees paid to incorporate. They must be incurred before the end of the taxable year that business begins (but they do not have to be paid, even if on the cash basis).
$5,000 of these expenses may be deducted, but the $5,000 is reduced by the amount of expenditures incurred that exceed $50,000. Expenses not deducted must be capitalized, and amortized over 180 months, beginning with the month that the corporation begins its business operations. An election can be filed to forego the deduction and amortization.
Total organization expenses are the $20,000 paid to the attorneys. $5,000 of these expenses can be deducted. The remaining $15,000 can be amortized over 180 months beginning in the first month that business begins (April). Therefore, they can be amortized for nine months in 2014, for a deduction of $750 ($15,000/180 months x 9 months).
Total Organization Expenses 2014 Deduction (no amortization) 2014 Amortization Expensed
A: Total Organization Expenses
B: 2014 Deduction (no amortization)
C: 2014 Amortization Expensed
A B C
$20000 $5000 $750
USC Corporation, an accrual basis corporation, was organized during 2014 and incurred the following expenses:
Attorneys’ fees for organizing the corporation $20,000
Training costs paid to employees before opening the business $54,000
Fees paid to an underwriter to sell shares to new investors $10,000
USC began business operations on April 1, 2014. It is a calendar-year corporation.
Part B: Using the chart below, compute the amount of start-up expenses related to these costs that will appear on USC’s 2014 tax return.
Start-Up expenses are expenses that would usually be deducted as ordinary and necessary business expenses, but they cannot be deducted because the business has not yet opened for business. $5,000 of these expenses may be deducted, but the $5,000 is reduced by the amount of expenditures incurred that exceed $50,000. Expenses not deducted must be capitalized, and amortized over 180 months, beginning with the month that the corporation begins its business operations. An election can be filed to forego the deduction and amortization.
Total start-up expenses are the $54,000 paid for training before business operations begins. Only $1,000 of these expenses can be deducted because the total start-up expenses exceed the $50,000 threshold by $4,000 ($54,000 - $50,000 = $4,000 reduction in the original $5,000 deduction). The remaining $53,000 can be amortized over 180 months beginning in the first month that business begins (April). Therefore, they can be amortized for nine months in 2014, for a deduction of $2,650 ($53,000/180 months x 9 months). A: Total Organization Expenses B: 2014 Deduction (no amortization) C: 2014 Amortization Expensed A B C $54000 $1000 $2650
Ben and LeeAnn Green have two children, MaryAnn and Skip, who are ages 10 and 16, respectively, at the end of 2014. MaryAnn and Skip are qualified dependents of the Greens. They also have a niece, Kayleigh (age 12), who lives with them and qualifies as a dependent. AGI for 2014 is $129,070.
Included in the AGI of $129,070 is salary for Ben of $100,000 and for LeeAnn of $12,000.
Compute the Green’s child tax credit for 2014. Phase-out of the child tax credit begins at AGI of $110,000 for taxpayers filing married joint ($75,000 for single).
Number of eligible individuals
Credit before phase-out
Reduction in credit due to AGI
Child credit allowed
Number of eligible individuals 3
Credit before phase-out 3000
Reduction in credit due to AGI 1000
Child credit allowed 2000
The child tax credit is $1,000 per qualifying child in 2014. Qualifying children must be less than 17 and meet the same definition as is used for the dependency rules. Therefore, the Green’s will receive a credit for Kayleigh because she is a niece.
Before phase-out, the Greens credit is $3,000 (3x $1,000). The credit is reduced by $50 for each $1,000 (or part thereof) of excess AGI. Phase-out of credit begins at AGI of $110,000 for taxpayers filing married joint ($75,000 for single). Note that these thresholds are NOT indexed for inflation so you should know them for the exam.
Excess AGI is $19,070 ($129,070 - $110,000). $19,070 divided by $1,000 provides 19.07 increments, which is increased to 20 (any portion of a $1,000 increment counts as a full increment). Therefore, the Greens lose $1,000 of their credit (20 x $50). Their final credit is $2,000.
Retainer fees received from clients : which schedule?
All trade or business income and deductions of a self-employed individual are reported on Schedule C—Profit or Loss from Business. Retainer fees received from clients is reported in Schedule C as trade or business income.
Oil royalties received.: which schedule?
Income derived from royalties is reported in Schedule E—Supplemental Income and Loss. Schedule E also is used to report the income or loss from rental real estate, partnerships, S corporations, estates, and trusts.
Interest income on general obligation state and local government bonds. : which schedule?
Interest from general obligation state and local government bonds is tax-exempt and is excluded from gross income.
Interest on refund of federal taxes: which schedule?
The interest income on a refund of federal income taxes must be included in gross income and is reported in Schedule B—Interest and Dividend Income. The actual refund of federal income taxes itself is excluded from gross income.
Death benefits from term life insurance policy on parent.: which schedule?
Life insurance proceeds paid by reason of death are generally excluded from gross income. Here, the death benefits received by Green from a term life insurance policy on the life of Green’s parent are not taxable.
Interest income on U.S. Treasury bonds.: which schedule?
Interest income from U.S. Treasury bonds and treasury bills must be included in gross income and is reported in Schedule B—Interest and Dividend Income.
Share of ordinary income from an investment in a limited partnership reported in Form 1065, Schedule K-1.: which schedule?
A partner’s share of a partnership’s ordinary income that is reported to the partner on Form 1065, Schedule K-1 must be included in the partner’s gross income and is reported in Schedule E—Supplemental Income and Loss.
Taxable income from rental of a townhouse owned by Green.: which schedule?
The taxable income from the rental of a townhouse owned by Green must be included in gross income and is reported in Schedule E—Supplemental Income and Loss.
Prize won as a contestant on a TV quiz show.: which schedule?
A prize won as a contestant on a TV quiz show must be included in gross income. Since there is no separate line on Form 1040 for prizes, they are taxable as other income on Form 1040.
Payment received for jury service.: which schedule?
Fees received for jury duty represent compensation for services and must be included in gross income. Since there is no separate line for jury duty fees, they are taxable as other income on Form 1040.
Dividends received from mutual funds that invest in tax-free government obligations.: which schedule?
An investor in a mutual fund may receive several different kinds of distributions including ordinary dividends, capital gain distributions, tax-exempt interest dividends, and return of capital distributions. A mutual fund may pay tax-exempt interest dividends to its shareholders if it meets certain requirements. These dividends are paid from the tax-exempt state and local obligation interest earned by the fund and retain their tax-exempt character when reported by the shareholder. Thus, Green’s dividends received from mutual funds that invest in tax-free government obligations are not taxable.
Qualifying medical expenses not reimbursed by insurance.: which schedule?
Qualifying medical expenses not reimbursed by insurance are deductible in Schedule A as an itemized deduction to the extent in excess of 10% of adjusted gross income.
Personal life insurance premiums paid by Green.: which schedule?
Personal life insurance premiums paid on Green’s life are classified as a personal expense and not deductible.
Expenses for business-related meals where clients were present: which schedule?
All trade or business expenses of a self-employed individual are deductible on Schedule C—Profit or Loss from Business. However, only 50% of the cost of business meals and entertainment is deductible. Therefore, Green’s expenses for business-related meals where clients were present are partially deductible in Schedule C.
Depreciation on personal computer purchased in 2013 used for business.: which schedule?
The deduction for depreciation on listed property (e.g., automobiles, computers, and property used for entertainment etc.) is computed on Form 4562—Depreciation and Amortization. Since Green’s personal computer was used in his business as a self-employed consultant, the amount of depreciation computed on Form 4562 is then deductible in Schedule C—Profit or Loss from Business.
Business lodging expenses, while out of town.: which schedule?
Lodging expenses while out of town on business are an ordinary and necessary business expense and are fully deductible by a self-employed individual in Schedule C—Profit or Loss from Business.
Subscriptions to professional journals used for business.: which schedule?
The cost of subscriptions to professional journals used for business are an ordinary and necessary business expense and are fully deductible by a self-employed individual in Schedule C—Profit or Loss from Business.
Self-employment taxes paid.: which schedule?
An individual’s self-employment tax is computed in Schedule SE and is added as an additional tax in arriving at the individual’s total tax liability. A portion of the computed self-employment tax is then allowed as a deduction on Form 1040 in arriving at adjusted gross income.
Qualifying contributions to a simplified employee pension plan.: which schedule?
Qualifying contributions to a self-employed individual’s simplified employee pension plan are deductible on page 1 of Form 1040 to arrive at adjusted gross income.
Election to expense business equipment purchased in 2013.: which schedule?
For 2013, Sec. 179 permits a taxpayer to elect to treat up to $500,000 of the cost of qualifying depreciable personal business property as an expense rather than as a capital expenditure. In this case, Green’s election to expense business equipment would be computed on Form 4562—Depreciation and Amortization, and then would be deductible in Schedule C—Profit or Loss from Business.
Qualifying alimony payments made by Green.: which schedule?
Qualifying alimony payments made by Green to a former spouse are fully deductible on Form 1040 to arrive at adjusted gross income.
Subscriptions for investment-related publications.: which schedule?
The costs of subscriptions for investment publications are not related to Green’s trade or business, but instead are considered expenses incurred in the production of portfolio income and are reported as miscellaneous itemized deductions in Schedule A—Itemized Deductions. These investment expenses are deductible to the extent that the aggregate of expenses in this category exceed 2% of adjusted gross income.
Interest expense on a home-equity line of credit for an amount borrowed to finance Green’s business.: which schedule?
The nature of interest expense is determined by using a tracing approach (i.e., the nature depends upon how the loan proceeds were used). Since the interest expense on Green’s home-equity line of credit was for a loan to finance Green’s business, the best answer is to treat the interest as a business expense fully deductible in Schedule C—Profit or Loss from Business.
Interest expense on a loan for an auto used 75% for business.: which schedule?
The interest expense on a loan for an auto used by a self-employed individual in a trade or business is deductible as a business expense. Since Green’s auto was used 75% for business, only 75% of the interest expense is deductible in Schedule C—Profit or Loss from Business. The remaining 25% is considered personal interest expense and is not deductible.
Loss on sale of residence.: which schedule?
The loss resulting from the sale of Green’s personal residence is not deductible because the property was held for personal use. Only losses due to casualty or theft are deductible for personal use property.
During 2013, Dale received a $30,000 cash gift from her aunt : amount of income/loss to be recognized
($0) Amounts received as a gift are fully excluded from gross income.
Dale contributed $3,500 to her traditional Individual Retirement Account (IRA) on January 15, 2013. In 2013, she earned $60,000 as a university instructor. During 2013 the Cumacks were not active participants in an employer’s qualified pension or annuity plan.: amount of income/loss to be recognized
($3,500) The maximum deduction for contributions to a traditional IRA by an individual at least age 50 is the lesser of $6,500, or 100% of compensation for 2013. Since the Cumacks were not active participants in an employer’s qualified pension or annuity plan, there is no phaseout of the deduction based on AGI
In 2013, the Cumacks received a $1,000 federal income tax refund.: amount of income/loss to be recognized
($0) Since federal income taxes are not deductible in computing a taxpayer’s federal income tax liability, a refund of federal income taxes is excluded from gross income.
During 2013, Frank, a 50% partner in Diske General Partnership, received a $4,000 guaranteed payment from Diske for services that he rendered to the partnership that year.: amount of income/loss to be recognized
($4,000) Guaranteed payments are partnership payments to partners for services rendered or for the use of capital without regard to partnership income. A guaranteed payment is deductible by the partnership, and the receipt of a guaranteed payment must be included in the partner’s gross income, and is reported as self-employment income in the computation of the partner’s self-employment tax.
In 2013, Frank received $10,000 as beneficiary of his deceased brother’s life insurance policy.: amount of income/loss to be recognized
($0) The proceeds of life insurance policies paid by reason of death of the insured are generally excluded from the beneficiary’s gross income.
