Topics to Remember Details for

Question 1

QBI Deduction Rules

Answer 1

QBI deduction is 20% of qualified business income and cannot exceed 50% of W-2 wages or 25% of W-2 wages plus 2.5% of unadjusted basis of qualified property
Cannot exceed 20% of taxable income without regard to QBI deduction and net capital gain
Excludes service businesses unless under $383,900 (MFJ) or $191,950 for everyone else

Question 2

Permanent differences

Answer 2

Tax-exempt interest on state and local bonds
Key-person life insurance premiums and proceeds
Nondeductible meals and entertainment
Political contributions
Fines and penalties

Question 3

Temporary differences

Answer 3

Depreciation and amortization
Receipt of prepaid income
Accrued expenses that fail the all-events test
Net capital losses
Bad debts *(allowance vs direct write-offs)

Question 4

Excess business loss limitation

Answer 4

$610,000 for married $305,000 for others
excess business losses are not deductible in the current year, carry forward and are treated as part of the taxpayer’s net operating loss carryforward in subsequent years
subject to the 80% limit on NOL deduction

Question 5

Half-year depreciation

Answer 5

the general assumption for personalty
not in the tables for the year of disposal

Question 6

Mid-quarter depreciation

Answer 6

applies if more than 40% of personalty acquired in a year is placed in service during the fourth quarter

Question 7

Mid-month depreciation

Answer 7

Depreciation for realty
one half of month depreciation is allowed for the month in which the property is disposed of (not built into IRS table)

Question 8

Depreciation lengths

Answer 8

3 years - Small manufacturing tools, racehorses and breeding hogs, special handling devices used in food manufacturing
5 years - Cars, trucks, busses, helicopters, computers, typewriters, duplicating equipment, breeding and dairy cattle, cargo containers, new farming machinery and equipment
7 years - Office furniture and fixtures, railroad cars and locomotives, most machinery and equipment
10 years - Single-purpose agricultural and horticultural structures; assets used in petroleum refining, vessels, barges, and other water transportation equipment; fruit- or nut-bearing trees and vines
15 years - Certain building improvements; land improvements such as fencing, roads, sidewalks, bridges, irrigation systems, and landscaping; telephone distribution plants; pipelines; billboards; and service station buildings
20 years - Certain farm buildings, municipal sewers
25 years - Commercial water utility property
27.5 years - Residential rental real property (duplexes and apartments)
39 years - Nonresidential real property (office buildings, factories, and warehouses)
50 years - Railroad grading or tunnel bore

Question 9

Depreciation for passenger automobiles

Answer 9

5 year MACRS depreciation
$12,200 in year one, $19,500 in year two, $11,700 in year 3, and $6,960 for all years following

Question 10

Installment sale

Answer 10

Permits deferral of gain until cash is received
Gross Profit Percentage (GP%) can be used to calculate the gain recognized in the year of sale and each subsequent year by multiplying it with the cash received during the year
GP%=Gain RealizedSale Price
Does not apply to interest received on an installment note

Question 11

Section 1231 Assets

Answer 11

real and depreciable/amortizable properties used in a business and held long-term
Examples
Machinery
Furniture
Equipment

Question 12

Section 1231 treatment

Answer 12

netting process, best of both worlds, capital gains are capital, capital losses are ordinary
if there is a previous section 1231 gain in the last 5 years then the future gains are ordinary income

Question 13

MFJ or MFS requirements

Answer 13

if married on the last day of the year
or if widowed during the year, if kids then for the next 2 years - surviving spouse
If spouse incomes are similar, single rates generate lower overall tax (marriage penalty)
If spouse incomes are dissimilar, married rates generate lower overall tax (marriage bonus)
MFJ rates apply to Surviving Spouse status - a widow/widower with a dependent child for two years after the death of spouse
MFS - less favorable than single rates

Question 14

HOH requirements

Answer 14

used if the taxpayer maintains a home for either a child (need not be dependent) or dependent relative

Question 15

Single requirements

Answer 15

default filing status for unmarried individuals

Question 16

List the four steps for computing individual taxable income.

Answer 16

1. Calculate total income
   Total income - total salary, wages, fringe benefits, and net business income from sole proprietorship or partnership or S corporation
   Investment income - interest, dividends, capital gains, rental income
2. Calculate adjusted gross income (AGI)
   Total income - specific above-the line deductions
   Important because many deduction and credits are limited by reference to AGI
3. Subtract standard deduction or itemized deductions
   Subtract the greater of allowable itemized deductions or standard deduction
   MFJ = $29,200
   MFS = $14,600
   HOH = $21,900
   Single = $14,600
   MFJ, MFS and blind or over 65 is another $1,550 per person
   HOH or Single and blind or over 65 is another $1,950
   Dependent on another return = limited to the greater of $1,300 or earned income plus $450

Only a minority of people itemize
Can move expenses around so every other year has greater itemized deductions to be greater than the standard deduction
Itemized deduction may have limited or no effect on taxable income
Whether something is an above the line or itemized deduction changes from year to year depending on the tax policy
4. Subtract the QBI deduction amount
20% * qualified business income
QBI is income earned through a sole proprietorship, partnership, or S corporation less certain deductions including deduction for self-employment tax

Question 17

Types of court

Answer 17

Tax Court - no jury, but don’t have to pay the tax prior
District Court - jury, but do have to pay the tax prior
For taxpayers with a claim of less than 50,000 there is a small claims tax court
trials cost a lot of time and money, IRS tries to avoid going to court

Question 18

UDIPTA Calculation

Answer 18

UDITPA: Uniform Division of Income for Tax Purposes Act
UDITPA formula: Sales Factor + Payroll Factor + Property Factor3=State Apportionment %
Sales Factor: Gross receipts from sales to in-states customersTotal gross receipts from sales
Payroll Factor: Compensation paid to employees working in-stateTotal compensation
Property Factor: Cost of real or tangible personal property located in-stateTotal cost of such property
Over ½ of the states double-weight sales to favor in state businesses
Some states only consider sales factor