Unit 6: Other Business Deductions and Credits Flashcards
NOLs arising in 202 and beyond may on be carried:
Forward, they no longer can carryback a net operating loss
A NOL deduction cannot exceed more than
80% of taxable income
However, losses generated prior to 208 are not subject to the 80% limitation.
Rules: NOLs arising in 2018-2020
- 5-year carryback period
- Unlimited carryforward period
- NOL deduction is limited to 100% of taxable income
Rules: NOLs in 2021, 2022, and beyond
- No carrybacks are permitted
- All losses must be carried forward (unlimited)
- NOL deduction is limited to 80% of taxable income
Rules: NOLs for farmers
-Farmers are allowed a 2-year carryback and an unlimited carryforward period
Rules: NOLs for Casualty insurance companies
- Allowed a 2-year carryback
- NOL carryforward is limited to 20 years and the 80% limitation does apply
Can partnerships and S corporations use NOLs?
Generally not, but their partners and shareholders may have an NOL due to the pass-through of these business losses.
1139
Used by a C corporation to apply for an NOL refund
1045
Used by individuals, estates, and trusts to apply for an NOL refund
For an individual, estate, or trust to have a NOL, the loss must be caused by:
- A trade or business that results in an overall loss
- Casualty or theft losses
- Losses from rental property
- Moving expenses
- Farming expenses
The following items are not allowed when figuring an NOL:
- Capital losses in excess of capital gains
- The exclusion of gain from the sale of qualified small business stock
- A net operating loss from another year ( a carryback or a carryforward)
- A SE taxpayer’s contribution to their own retirement plan.
Excess business losses of noncorporate taxpayers are subject to an annual limit of:
$270,000 0r $540,000 MFJ
461
Limitation on Business Losses
- Is used to figure the excess business loss that is reported on a taxpayer’s return. Excess business losses must be carried forward, and are treated as a net operating loss to the following year.
199A has two components:
QBI Component: This component of the deduction equals 20% of qualifying business income from a domestic business operated as a sole proprietorship, or through a partnership, S corporation, trust, or estate
QBI: Qualified items of income, gain, deduction, and loss include:
- Only items effectively connected with the conduct of a trade or business within the United States
- Only items included or allowed in determining taxable income for the year
QBI does not include:
- Wages
- Capital gains
- Interest and dividend income
- Hobby income
- Non-taxable income, (such as muni bond interest)
- Rental income where the owner is not engaged in a bonafide real estate “trade or business”. Any guaranteed payment from a partnership for services rendered with respect to the trade or business
- Reasonable compensation paid to an S corporation shareholder
- Income earned by a C corporation.
QBI: Safe Harbor rule for rental real estate income (three tests):
- The taxpayer maintained separate books and records for each enterprise
- At least 250 hours of rental services are performed per year by owners, employees, contractors, or agents for the enterprise;
- The taxpayers maintain sufficient, contemporaneous records, including time reports, logs, or similar documents, regarding the following: hours of all services performed; description of all services performed; dates on which such services we performed; and who performed the services.
199A: SSTB Limitation
This limitation is based on the type of trade or business activity
199A: Wage & Property Limitation
For a non-SSTB business whose income exceeds the phaseout ranges, the 20% deduction against QBI is limited to the greater of:
- 50% of allocable W-2 wages paid by the business, or
- 25% of W-2 wages, plus 2.5% of the unadjusted basis immediately after acquisition (UBIA) of all qualified property
199A: Qualified property includes the original unadjusted basis of depreciable, tangible property that:
- Is held by the business and available for use at the close of the taxable year (i.e., the asset is not sold or disposed of during the year)
- Has a remaining depreciable period. The term “depreciable period” means that (1) its regular depreciable life has not ended prior to the end of the tax year of the business or (2) if it has not been more than 10 years since it was first placed in service
What is UBIA?
Unadjusted basis immediately after acquisition
SSTB De minimis rule #1
If a business’ gross receipts are less than $25 million, and less than 10% of the gross receipts are from the performance of services in a specified service trade or business, then the trade or business is not considered a specified service trade or business, and thus the owner(s) of the business are not subject to the SSTB limitation
SSTB De minimis rule #2
If a business’ gross receipts are more than $25 million, and less than 5% of the gross receipts are from the performance of services in a specified service trade or business, then the trade or business is not considered an SSTb, and owner(s) of the business are not subject to the SSTB limitation
What is GBC
General Business Credit
3800
Used to report the general business credit
GBC: Carryover period
1 year back
20 years forward
GBC: The order in which the credits are used in any tax year is:
-. Carryforward to that year, using the ones that were generated the earliest
- The general business credit earned in that year, and
- The carryback to that year.
3468
Used to claim the investment credit
Rehabilitation Credit:
Designed to encourage businesses to restore or preserve an older building or one that qualifies for historic status. A 20% credit for qualified expenditures applies to rehabilitation costs incurred on certified historic structures. The credit must be claimed ratably over a 5-year period beginning when the structure is placed in service
Energy Credit:
Designed for businesses that use certain types of alternative energy, such as solar, or geothermal energy and shale oil production
Qualifying advanced coal project credit:
This is for businesses that generate electricity using coal, while still reducing carbon dioxide emissions
Qualifying gasification project credit:
The credit is for qualifying gasification projects that combine coal, petroleum residue, biomass, or other materials with steam under high pressure to create synthetic gas while reducing carbon dioxide emissions
Qualifying advanced energy project credit:
The is a 30% credit of the qualified investment in certain renewable energy projects.
In general, a business cannot claim the investment credit for property that is:
- Used outside the United States
- Used by a governmental unit or foreign entity
- Used by a tax-exempt organization
- Used for lodging or in the furnishing of lodging
- Any property that has already been expensed under section 179
Work Opportunity Tax Credit: 10 targeted groups:
- Unemployed Veterans (including disabled veterans)
- Temporary Assistance for needy families (TANF) recipients
- Food stamp recipients
- Designated community residents (Those living in empowerment zones)
- Vocational rehabilitation referred individuals
- Ex-felons
- Supplemental security income recipients
- Summer youth employees (living in empowerment zones)
- Qualified long-term unemployment recipient
How is the WOTC reported;
Calculated on 5884
Reported on 3800
Disabled Access Credit: Calculations
50% of expenditures over $250, not to exceed $10,250, for a maximum benefit of $5,000
Disabled Access Credit: Rules
Nonrefundable
To be eligible, a business must have gross receipts of $1 million or less or had no more than 30 full-time employees during the preceding tax year.
Credit for Employer SS and Medicare Taxes on Employee Tips: Requirements
- Have employees who received tips from customers for serving food or beverages, and
- Have paid employer SS and Medicare taxes on these tips
FMLA Credit: Employer requirements:
Employers must have a written policy in place that meets certain requirements, including providing:
-At least two weeks of paid family and medical leave (annually) to qualifying employees who work full-time (or prorated for employees who work part-time), and
- The policy must require a rate of payment of at least 50% of the employee’s normal wages
FMLA Credit Amounts:
- An employer can claim a credit of 12.5% if the rate of payment is 50% of normal wages
- An employer can claim a credit of 25% if the rate of payment is 100% of normal wages
FMLA Credit: Income threshold:
If an employee earns more than $78,000 per year, the employer cannot claim the credit for them.
Credit for Small Employer Health Insurance Premiums Requirements
- The employer must have fewer than 25 full-time employees
- Average annual wages of qualifying employees must be less than $58,000
- The employer must pay at least 50% of the employee’s premium costs
- The employer must offer coverage through the SHOP marketplace in order to qualify
The R&D credit is allowed to offset
AMT, in addition to regular income tax
R&D credit: Qualified research activities?
- Technological research to develop new or improved business processes, or improve product reliability or quality
- Development of commercial software in connection with the taxpayer’s trade or business activity
- Research incurred by a pharmaceutical company to introduce a new drug or develop a new piece of technology
R&D Credit: Costs of qualifying research
- If done by employer = 100%
- If outsourced: 65%
Credit for Employer-Provided Child Care Facilities and Services: Main points
- Credit is 25% of the qualified facility expenses plus 10% of the qualified child care resource and referral expenditures paid or incurred during that tax year
- Maximum credit of $150,000
Credit for Small Employer Pension Plan Startup Costs and Auto-Enrollment: Main Points
- Credit is 50% of qualifying costs
Employers may be eligible for this credit if:
- The business had 100 or fewer employees who received at least $5,000 in compensation in the preceding year
- THe business had at least one plan participant who was a non-highly compensated employee
