Unit 6. Other Business Dedcutions and Credits Flashcards
Net operating Loss
Option to carryforward indefinitely , but not carryback
NOL deduction cannot exceed 80% of taxable income
Losses prior 2018 are not subject to 80% limit and subject to carryback of 5 years
Exceptions to NOL
Noncorporate Farmers have a 2 year carryback. Can elect to waive it. The election is irrevocable.
Property and casualty insurance companies allowed a 2 year carryback. But their carryforward is limited to 20 years and the 80% limitation doesn’t apply
Carryback the NOL by filing an amended tax return
Can partnerships and S corporations use NOL?
No, but their partners and shareholders can due to pass-through of the losses too
What form is for Tentative Refund (carryback) of individuals, estate or trusts
Form 1045
How NOL applied is the taxpayer is self-employed
NOL doesn’t change the amount of self-employment tax to any of the years it is carried forward to
What form is for Tentative Refund (carryback) of C corporations?
Form 1139, filed no later than 31 December
What form to attach in order to make an election to waive the carryback?
Form 1120
What is an annual limit for business losses of noncorporate taxpayers
$270,000 (540,000 for MFJ)
What is Section 199A Qualified Business Income Deduction?
Allows a deduction for individuals, estates and trusts up to 20% of qualified business income. This deduction expires in 2025. Available only to US businesses.
How to claim for QBI deduction?
To fill out Form 8995 or Form 8995-A
Two components of QBI deduction
QBI Component - 20% of taxable income
REIT/PTP component (The real estate investment trust (REIT) or publicly traded partnership (PTP) )
What is Qualified Business Income
Only itemsconnected with a business within the US (incl Puerto Rico)
Only items included in determining taxable income for the year
What is not included in QBI?
- employee wages
- capital gains
- interest and dividend income
- hobby income
- non-taxable income
- rental income where the owner is not engaged in a boda-fide real estate
- reasonable compensation paid to an S shareholder
income earned by a C Corporation
What is a Safe Harbour Rule for rental activities
To qualify for the safe harbor 250 hours or more must be provided per year
Also should meet the test:
- maintain separate books and records for each enterprise
- 250 hours or more
- sufficient records (logs, hours, description of all services)
Doesn’t apply to property partially used for the personal residence and to NNN leases (triple net leases - a commercial lease where the lessee pays rent and utilities as well as three other types of property expenses: insurance, maintenance, and taxes)
199A Deduction Limitation Threshold
Pre-QBI should be below:
MFJ - 340,100 - 440,100
All others - 170,050 - 220,050
If a pre-QBI is above the threshold then there are some limitations. What limitations
1) Specified Service Trade or Business (SSTBs)
2) Wage and Property Limitation
SSTB
If the taxpayers income is above the threshold and the business is SSTB then the deduction is completely disallowed
Which business is not included in SSTB?
Architecture and engineering
Wage and Property Limitation
If pre-QBI > threshold and not SSTB then
QBI deduction = 50%* wages if grater 25% of wages+2.5%*unadjusted tax basis of certain depreciable business property
What is qualifying wages for QBI
Wages + amounts paid to tax-defereed retirement plan
Qualified property
is held by business at the close of the taxable year
has a remaining depreciable period (wasn’t more than 10 years)
land and intangible assets are not included
What does UBIA stand for?
Unadjusted Basis Immediately after Acquisition
SSTB de Minimis Rule #1
if gross receipts < 25 million and <10% of gross receipts in SSTB business => not subject to SSTB limitation
SSTB de Minimis Rule #2
if gross receipts > 25 million and <5% of gross receipts in SSTB business => not subject to SSTB limitation
Why credits are more valuable than deductions?
Because they are subtracted directly from a business tax liability
What is GBC
General Business Credit (Form 3800)
applied on FIFO basis
can be forwarded up to 20 years
Investment Credit
Claimed on Form 3468
Available to business that engage in specific projects on their property:
- rehabilitation credit
- energy credit
- qualifying advanced coal
- qualifying gasification
- q advanced energy project
Work Opportunity Tax Credit
when hire specific employee groups:
- unemployed veterans
temporary assistance for need families
food stamp recipients
designated community residents
vocational rehabilitation referred ind
ex-felons
supplemental security income recipients
summer youth employees
q long-term unemployment recipient
calculated on Form 5884 and reported on Form 3800
Disabled Access Credit
Expenses incurred to provide access to persons with disabilities - 50% of all expenses up to $5,000. First 250 dollars os expenses are subtracted from calculation.
Business should have <1 million receipts and less than 30 employees
Credit for Employer Social Security and Medicare Taxes on Employee Tips
Used in restaurant business (FICA tip Credit)
- having tips for serving food and beverage
- pay employer SS and Medicare taxes on these tips
Form 8846
Credit = amount of employer’s SS and medicare taxes paid - tips used t o meet federal minimum wage rate (5.15)
What is FMLA Leave
Credit for Paid family and Medical Leave = percentage of wages they pay to employees while they are on family and medical leave
Should be at last 2 weeks of leave
rate of payment >50% of wages
The employee must have earned < 78000 (60% of HSE 130,000 in 2021)
The credit has a lookback provision (the prior year)
What is Small Employer Health Insurance Premiums
Refundable credit to small employers to encourage them to offer their employees health insurance:
- < 25 fulltime employees
- annual wage of q employees < 58,000
- >50% premium costs paid by employer
-coverage through the SHOP marketplace
Credit can be claimed only for max two consecutive years
It is refundable - paid even if the employer doesn’t have income
R&D Credit
develop new or improve business processes
develop of commercial software
new drugs
100% is credited if R&D done by itself and 65% if outside
Credit for Employer-Provided Child Care Facilities and Services
25% of childcare facility expenditures +10% child care resource
Max limit is 150,000 per tax year
no discrimination to HCE
Credit for Small Employer Pension Plan Startup Costs and Auto-enrollment
50% of startup costs for those who established retirement plan
Max $500 per year for the first credit year and each of the following two tax year
Must:
<100 employees
>1 plan participant who is non HCE
Foreign Tax Credit for Corporations
Income Taxes paid in foreign countries
Form 1118
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