ACCY 269 Chapter 8 & 9
Arnold has a tax liability of $700. He has a refundable tax credit of $1,000, and his employer withheld $900 in federal income tax from Arnold's pay. What is the amount of Arnold's tax refund?
$1,200 refund
Montgomery & Company are accounting for their bad debts. The company uses the accrual method of accounting. During the current year, M&C has $42,000 in accounts receivable. The estimated bad debts for the period is $2,000 using the allowance method of accounting for uncollectible accounts. The amount of accounts actually written off during the period is $1,700. What is the amount of bad debt expense that can be deducted for tax purposes? Multiple choice question.
$1,700 - M&C must use the direct write-off method for tax purposes.
Sheri's only source of income for the year is a salary of $40,000. She is not married and has three dependent children who are not eligible for the child tax credit. Sheri's tax liability is $1,795 before any credits or prepayments are applied. She had $2,000 withheld from her salary. After applying the earned income credit, what is the amount of Sheri's refund?`````
$2,955 refund
Allie's only source of income for the year is wages from a part-time job of $9,000. She is not married and has one dependent child. Allie has no tax liability and she had no income tax withheld by her employer. What is the amount of Allie's earned income credit?
$3,060
Carol's AMT base is $250,000. Of this amount, $35,000 represents long-term capital gain income from investments that had a preferential rate for regular tax purposes of 15%. Calculate her tentative minimum tax resulting from AMT calculations Multiple choice question.
$61,328
Ben's tax information is as follows: AGI for 2022 = $101,000 Withholding for 2022 = $5,600 Total tax for 2022 = $10,400 Total tax for 2021 = $11,750 How much per quarter must Ben pay in estimated taxes to avoid a penalty? Multiple choice question.
$940 per quarter
Henrich is a single taxpayer. In 2022, his taxable income is $482,500. What are his income tax and net investment income tax liability in each of the following alternative scenarios? Use Tax Rate Schedule, Dividends and Capital Gains Tax Rates for reference. a. All of his income is salary from his employer. Assume his modified AGI is $520,000.
(482,500 - 215,950) x 35% +49335.50 = 142,628 income tax 3.8% of the lesser of 1. net investment income 2. excess of mag over 200,000 (he single) 320,000 0 he has o net investment income tax
Matt hired Apex Services to repair his business equipment. On November 1 of this year, Matt paid $2,000 for the repairs that he expects to begin in early March of the next year .- What amount of the cost of the repairs can Matt deduct this year if he uses the cash method of accounting for his business? - What amount of the cost of the repairs can Matt deduct this year if he uses the accrual method of accounting for his business? - What amount of the cost of the repairs can Matt deduct this year if he uses the accrual method and he expects the repairs to be done by early February? - What amount of the cost of the repairs can Matt deduct this year if he uses the cash method of accounting and he expects the repairs to be done by early February?
- 2,000 under cash -cannot deduct anything - 31/2 month test so 2,000 - 2,000
In December, Rick asked his retired father, Lee, to help him finish a landscaping job. By the end of 2021, Rick owed Lee$2,000 of (reasonable) compensation for his efforts, which he paid in January 2022. What amount of this compensation may Rick deduct and when may he deduct it if Rick uses the accrua lmethod and Lee uses the cash method?
- rick will deduct 2,000 dollars in 2022 because lee uses the cash method
alternative minimum tax rate
-26% on the first$206,100 ( indexed for inflation annually) of AMT base for all taxpayers other than MFS (103,050) -28% percent on AMT base in excess of $206,100 (indexed for inflation annually) for all taxpayers other than the MFS (103,050 for MFS) -LTCGs and qualified dividends are taxed at the same preferential rate as they were taxed for regular tax purposes
Business deductions
-Taxpayers are allowed to deduct all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. • Ordinary and Necessary- An ordinary expense is an expense that is normal or appropriate for the business under the circumstances. • Does not need to be typical or repetitive in nature - A necessary expense is an expense that is helpful or conducive to the business activity , but the expenditure need not be essential or indispensable. • The "ordinary and necessary" requirements are applied on a case-by-case basis, and while the deduction depends on individual circumstances, the IRS is often reluctant to second-guess business decisions.
typical ordinary and necessary business expenses
-advertising car and truck expenses depreciation employee compensation and benefits insurance interest legal fees office expenses rent repairs supplies travel utilities wages
Lifetime learning credit -nonrefundable
-applies to the cost of tuition and fees for any course of instruction to acquire or improve a taxpayer's job skills -includes the cost of professional or graduate school tuition -amount of the credit 20% of eligible expenses up to an annual maximum of 10,000 of eligible expenses (2,000 max) -calculated per taxpayer -phased out like above
American Opportunity Tax Credit - 40% refundable
-available for students in their first four years of postsecondary education -to qualify students must be enrolled in a qualified postsecondary education institution at least half time -amount of the credit 100% of the first 2,000 eligible expenses +25% of the next 2,000 of eligible expenses ( maximum 2,500 of tuition, fees, course materials) -to be eligible for 2021 credit taxpayers must pay the eligible expenses in 2021 for any academic period beginning in 2021 or in the first 3 months of 2022 -applied on a per student bases -the credit is phased out pro rate for taxpyaers with AGI %80,000and 90,000
employment and self-employment taxes
-fica taxes ( social security and medicare tax) -social security tax rate is 12.4% on the tax base (limited to 147,000) -mediare tax rate is 2.9% on the tax base -additional medicare tax of .09 excess of 200,000 (125 MFS, 250 MFJ)
net investment income equals the sum of
-gross income from interest, dividends, annuities, royalties, and rents -income from a trade or business that is a passive activity or a trade or business of trading financial instruments or commodities -net gain from disposing of property -less the allowable deductions that are allocable to the items above
Child and Dependent Care Credit
-help taxpayers pay the cost of providing care for their dependents to allow taxpayers to work or look for work -amount of the credit is based on the amount of the taxpayer's expenditures to provide care for one or more qualifying persons. -a qualifying person includes (1) A dependent under the age of 13 and 2. a dependent or spouse who is physically or mentally incapable of caring for herself or himself and who lives in the taxpayer's home for more than half the year -eligible expenses: amounts paid for household services and care of a qualifying individual that are incurred to enable the taxpayer to be employed the amount of expenditure eligible for the vredit: the least of the following three amounts 1. the total amount of dependents care expenditures for the year 2. 3,000 for one qualifying person or 6,000 for 2 or more qualifying persons 3. the taxpayers earned income ( married taxpayers must file a joint tax return and the amount of earned income for purposes of the dependent care credit limitation is the earned income of the lesser-earning spouse
self-employed taxes
-must pay entire FICA tax burden on their self-employment earnings steps to determine taxes 1. compute the amount of the taxpayers' net income from SE activities that is subject to SE taxes ( generally net income from schedule c) 2. multiply the amount from step 1 by 92.35% ( the product is called net earnings from self-employment 3. compute the social security tax (12.4% multiplied by the lesser of 1. the taxpayer's net earnings from self-employment or b. 147,000 4. compute the medicare tax 2.9% multiplied by the net earnings from self-employment 5. compute the additional medicare tax -0.9% multiplied by the greater of 1. zero or 2. net earnings from self-employment less 200,000
Additional taxes
-net investment income tax 3.8% of the lesser of -net investment income or -the excess of modified AGI over (250,000 for MFJ) (125,000 MFS) 200,000 for all other taxpayers
ALTERNATIVE MINIMUM TAX
-targeted at high-income taxpayers who are benefiting from or are perceived to be benefiting from the excessive use of tax preference items -in general terms, the AMT is a tax on an alternative tax base meant to more closely reflect economic income than the regular income tax base -taxpayers must pay the AMT only when the tax on the AMT base exceeds their regular tax liability
Tax Credits
-tax credits reduce a taxpayers tax liability dollar-for-dollar -tax credits can be either nonrefundable or refundable -a nonrefundable credit may reduce a taxpayer's gross tax liability to zero, but if the amount of the credit exceeds the amount of the taxpayers gross tax liability, the credit in excess of the gross tax liability is not refunded to the taxpayer -refundable credits in excess of a taxpayers gross tax liability are refunded to the taxpayer
child tax credit
-to be eligible for the child tax credit, the child must be under 17 must be a US citizen, and must be a dependent of the taxpayer -the child tax credit is 2000 per child the dependent tax credit is 500 for non-qualifying child dependents
kiddie tax
-to reduce parents ability to shift unearned income to childrem -generally applies to any child who is under age 19(or under 24 if a full-time student) and has unearned income of more than 2,300 in 2022 - does not apply if -the child has earned income that exceeds half of his or her support -the child is married and files a joint return -if both parents are deceased
12 month rule to determine whether to capitalize or expense payments
-when a business prepays business expenses, it may immediately deduct the prepayment if 1. the contract period does not last more than a ear and 2. the contract period does not extend beyond the end of the taxable year following the tax year in which the taxpayer makes the payment. -if the prepaid if expense does not meet both these criteria, the business must capitalize and amortize the prepaid amount
Darcy received $2,000 in qualified dividends this year and has ordinary income of $20,000. Assuming Darcy has no other taxable income, the tax rate will be assessed on the $2,000 dividend is %.
0
On December 1 of the current year, Rhianna pays $2,400 for a 12-month advertising contract that will begin on March 1 of next year. Rhianna uses the cash method of accounting for her business. How much will Rhianna be able to deduct in the current year?
0
Sasha is a self-employed taxpayer. They recently spent $1,800 for airfare to travel to Italy. What amount of the airfare is deductible in each of the following alternative scenarios? a. Sasha's trip was entirely for personal purposes.
0
b. On the trip, Sasha spent nine days on personal activities and one day(s) on business activities.
0
b. The policy begins on February 1 of year 1 and extends through January 31 of year 2.
0
b. What amount of deduction for bad debt expense can William claim this year if he uses the cash method?
0
In 2022, Sheryl is claimed as a dependent on her parents' tax return. Her parents report taxable income of $550,000 (married filing jointly). Sheryl did not provide more than half her own support. What is Sheryl's tax liability for the year in each of the following alternative circumstances? a. She received $9,300 from a part-time job. This was her only source of income. She is 16 years old at year-end.
0 9,300 + 400 = 9,700
Example• Courtney's AGI (and modified AGI) is $187,000, and her investment income consists of $321 of taxable interest, $700 of dividends, and $5,000 of rental income. How much net investment income tax will Courtney owe? • Assume that Courtney's AGI (and modified AGI) is $225,000.How much net investment income tax will Courtney owe?
0 because her agi is too low 321 + 700 + 5,000 = 6,021 3.8% of the lesser of 6021 or 25,000 6021 x 3.8% = 229
b. Her AMTI is $1,182,600.
1. 1,182,600 2.exemption 118,100 3. phased out 1,079,800 4. 1 - 3 1,182,600-1,079,800 = 102,800 25% 4 x 5 102,800 x 25% = 25,700 2-6 118,100 -25,700 = 92,400
b. Elaine's AGI is $166,000.
1. 2360 ( LOOK ABOVE) 2. 166,000 3. 160,000 4. 6,000 5. 20,000 6. 6,000 / 20,000 = 30% 7. 2360 x 30% = 708 8. 2360 - 708 = 1652
Courtney's only income for the year is her $18,000 in net self-employment income from her weekend consulting business.What amount of self-employment taxes and additionalMedicare tax would Courtney be required to pay on thisincome?
1. 92.35% x 18,000 = 16,623 2. 16,623 x 12.4 = 2061 3. 16623 x 2.9% = 482 = 2543
In 2022, Sheryl is claimed as a dependent on her parents' tax return. Her parents report taxable income of $550,000 (married filing jointly). Sheryl did not provide more than half her own support. What is Sheryl's tax liability for the year in each of the following alternative circumstances? he received $9,300 of interest income from corporate bonds she received several years ago. This is her only source of income. She is 16 years old at year-end.
1. 9300 2. 1,150 3. 8150 4. 7000 5. 2450 6. 115 7. 2565
b. Zach is 29 years old and his AGI is $11,700.
1. earned income 11,700 2. max credit 7,320 3. 7.65% 5. 560 6. 9160 7. greater of agi or eaned income - phase out threshold 11,700 - 9,160 = 2,540 8. phase out percentage 15.30% 9. 7 x 8 388.62
list the order in which taxpayers with multiple credits hsould apply them against their gross tax
1. personal nonrefundable credits 2. business credit 3. refundable credit
Chris has taxable income of $123,000. A portion of this income is from capital gains and should receive preferential tax treatment. List the steps below in the order in which they should occur for Chris to be able to determine his overall tax liability. Instructions
1. split taxable income into the portion taxed at preferential rates versus the portion taxed at ordinary rates 2. compute the tax separately on each type of income, using the tax rate schedule on the portion taxed at ordinary rates 3. add the tax on the income subject to preferential rates to the tax on the income subject to ordinary rates.
Sarah is a cash-method, calendar-year taxpayer, and she is considering making the following cash payments related to her business. Calculate the after-tax cost of each payment assuming she is subject to a 37 percent marginal tax rate \a. $4,500 payment for next year's property taxes on her place of business.
100 - 37 4,500 x 63%
Olga is married and files a joint tax return with her husband. What amount of AMT exemption may she deduct under each of the following alternative circumstances? Her AMTI is $396,500.
118,100
The starting point for determining the alternative minimum tax is: Multiple choice question.
12.4 -social security tax rate 2.9% medicare tax rate on the tax base up tp $200,000 ( for single taxpayers) 3.8% medicare tax rate on the tax base above $200,000 (for single taxpayers) 15% this rate does not apply to either ss or medicare taxes
Josh borrowed $87,000 from First State Bank using his business assets as collateral. He used the money to buy City of Blanksville bonds. Over the course of a year, Josh paid interest of $13,300 on the borrowed funds, but he received $12,000 of interest on the bonds.
13,300 IS DISALLOWED
b. Assume Brooke works for Company A for half of 2022, earning $58,000 in salary, and she works for Company B for the second half of 2022, earning $108,000 in salary. What is Brooke's FICA tax obligation for the year?
147,000 x 6.2% =9114 166,000 x 1.45% = 2407 = 11,521
This year, Amy purchased $2,000 of equipment for use in her business. However, the machine was damaged in a traffic accident while Amy was transporting the equipment to her business. Note that because Amy did not place the equipment into service during the year, she does not claim any depreciation or cost recovery expense for the equipment. a. After the accident, Amy had the choice of repairing the equipment for $1,800 or selling the equipment to a junk shop for $300. Amy sold the equipment. What amount can Amy deduct for the loss of the equipment?
1700
d. Sasha's trip was entirely for business purposes.
1800
c. This year Josh paid $23,400 to employ the mayor's son in the business. Josh would typically pay an employee with these responsibilities about $19,200, but the mayor assured Josh that after his son was hired, some city business would be coming his way.
19,200
Julie paid a day care center to watch her two-year-old son while she worked as a computer programmer for a local start-up company. What amount of child and dependent care credit can Julie claim in 2022 in each of the following alternative scenarios? . Julie paid $2,200 to the day care center, and her AGI is $52,000 (all salary).
2,200 x 20%
In 2022, Janet and Ray are married filing jointly. They have five dependent children under 18 years of age. Janet and Ray's taxable income is $2,400,000 and they itemize their deductions as follows: state income taxes of $10,000 and mortgage interest expense of $25,000 (acquisition debt of$300,000). What is Janet and Ray's AMT?
2,400,000 + 10,000 = 2,410,000 no exemption AMT base 2,410,000 tentative minimum tax 206,100 X 26% + [(2,410,000 - 206,200) * 28* 679,678 regular tax liability (2,400,000 -647,850 x 32%) +174,253.6 822, 549 AMT 0
The lifetime learning credit is equal to % of eligible expenses up to an annual maximum of of eligible expenses in one year.
20%, 10,000
Baxter and Bailey use the married filing jointly filing status on their tax return. They incurred $4,000 in undergraduate tuition for Bailey to finish her degree. She was in her fifth year and graduated in May. Baxter started graduate school in August. They spent $8,000 in tuition for his education. What is the amount of their lifetime learning credit?
2000
c. Suppose that after the accident, Amy could not replace the equipment so she had the equipment repaired for $2,300. What amount can Amy deduct for the loss of the equipment?
2000
Alex purchased a personal lawn mower to use for mowing his lawn and the lawns at his rental properties. The depreciation expense for the mower was $300. At the end of the season, he documents that he used the mower 70% for his rental properties and 30% for personal purposes. How much can he deduct as a business expense? Multiple choice question.
210
During the busy part of the year, Rick could not keep up with all the work. Therefore, he hired four part-time employees and paid them the market rate of $10 an hour to mow and trim lawns. When things finally slowed down in late fall, Rick released his four part-time employees. Rick paid a total of $22,000 in compensation to the four employees. Rick still needed some extra help now and then, so he hired his brother, Tom, on a part-time basis. Tom performed the same duties as the prior part-time employees. However, Rick paid Tom $25 per hour because Tom is a college student and Rick wanted to provide some additional support for Tom's education. At year-end, Tom had worked a total of 100 hours and received $2,500 from Rick. What amount can Rick deduct for the compensation he paid to his employees?
22,00 ( 10 x 100) = 23,00 deductible compensation expense 15 extra pay will be considered an extra gift
The kiddie tax will NOT apply to a child whose net unearned income is equal to or less than $.
2300
On December 1 of the current year, Jonathon pays $2,400 for a 12-month advertising contract that begins immediately. If Jonathon uses the cash method of accounting for his business, he will be able to deduct $ 2400Blank 1Blank 1 2400 , Correct Unavailable in the current year.
2400
Steve's tentative minimum tax (TMT) for 2022 is $241,100. a. What is his AMT if his regular tax is $225,400?
241,100 - 225,400 15,700
The AMT is calculated by multiplying the first $206,100 of the AMT base by % and multiplying the AMT base in excess of $206,100 by %. Long-term capital gains are taxes at rates for alternative minimum tax.
26, 28, preferential
In 2022, Elaine paid $2,800 of tuition and $640 for books for her dependent son to attend State University this past fall as a freshman. Elaine files a joint return with her husband. What is the maximum American opportunity tax credit that Elaine can claim for the tuition payment and books in each of the following alternative situations? AGI 83,200
2800 + 640 = 3440 3440 - 2000 = 1440 x 25% 2000 + 360 = 2360 SHE IS BELOW THE PHASE OUT THRESHOLD
b. Julie paid $5,500 to the day care center, and her AGI is $52,000 (all salary).
3,000 x .20 =600
For certain taxpayers, a tax of % may be assessed on net investment income.
3.8
Tim and Sandy have a ten-year-old daughter. During 2022, they spent $7,000 on childcare expenses at a daycare center and paid $1,500 in childcare expenses to Sandy's sister. Their child and dependent care credit will be calculated based on a maximum limit of $ in childcare expenses.
3000?
Taxpayers with substantial gross receipts are generally limited to deducting no more than percent of their adjusted taxable income, plus their business interest income, as a business interest deduction.
30q
Denis and Debbie are married and file jointly. They have two children, ages 10 and 12, that qualify for the child tax credit. Their 2022 AGI for the current year is $142,000. The amount of their child tax credit is $
4000 2000 each
This year William provided $4,200 of services to a large client on credit. Unfortunately, this client has recently encountered financial difficulties and has been unable to pay William for the services. Moreover, William does not expect to collect for his services. William has "written off " the account and would like to claim a deduction for tax purposes. a. What amount of deduction for bad debt expense can William claim this year if he uses the accrual method?
4200
. $4,200 for property taxes payable on her factory.
4200 both
Suppose Rick acquires business equipment this year for$5,000, but a fire damages the equipment shortly after it is acquired and before it can be placed in service. After the fire the equipment was worth $3,500 and insurance reimbursed Rick for $1,000. What would be the amount of his business casualty loss? - Suppose that the fire completely destroyed the equipment. What would be the amount of Rick's business casualty loss?
5,000 - 3,500 = 1500 1,000 - 1,500 = (500) 1,000 - 5,000 = (4,000)
In 2022, Zach is single with no dependents. He is not claimed as a dependent on another's return. All of his income is from salary, and he does not have any for AGI deductions. What is his earned income credit in 2022 in the following alternative scenarios? . Zach is 29 years old, and his AGI is $5,700.
5,700 x 7.65= 436
Due to the personal enjoyment element involved with business meals not purchased from a restaurant, taxpayers may only deduct % of the actual cost.
50
same as above her 46,000 of taxable income includes $3,000 of qualified dividends
5527 43,000 at ordinary 3,000 at 15%
lacy is a single taxpayer in 2022 her taxable income is 46,000. What is her tax liability in each of the following alt situations all of her income is salary from her employer
5737
Brooke, a single taxpayer, works for Company A for all of 2022, earning a salary of $58,000. What is her FICA tax obligation for the year?
58,000 x 6.2% 58,000 x 1.45%
b. $5,800 to reimburse the cost of meals at restaurants incurred by employees while traveling for the business.
5800 /2 =2900 5800 - (2900 x 37%) 1073
c. $6,200 for football tickets to entertain out-of-town clients during contract negotiations.
6200
Rick paid a $300 registration fee for a 3-day course in landscape design (Rick conducts a landscaping business). The course was held in upstate New York (Rick paid $625 for airfare to attend) and he spent four days away from home. He spend the last day sightseeing. During the trip, Rick paid $150 a night for three nights' lodging, $50 a day for meals at restaurants, and $70 a day for a rental car. What amount of these travel-related expenditures may Rick deduct as business expenses? - Assume Rick stayed in New York for 10 days, spending 3 days at the seminar and 7 days sightseeing. What amount could he deduct?
625 + (150 x 3) + (50 x 3) + (70 x 3) = 1,435 business travel 300 for business expense can not deduct transportation (150 x 3) + (50 x 3) + (70 x 3) =810 300 education expense
c. On the trip, Sasha spent seven days on business activities and three day(s) on personal activities.
7/10 X 1800 = 1260
Assume the original facts in the example except Rick traveled to London for 10 days, spending 6 days at the seminar and 4 days sightseeing. What amount could he deduct?
700 x 6/10 = 420 420 + (150x6) + (50x 6) + (70 x 6) = 300 education expenses
In January of year 0, Justin paid $7,000 for an insurance policy that covers his business property for accidents and casualties. Justin is a calendar-year taxpayer who uses the cash method of accounting. What amount of the insurance premium may Justin deduct in year 0 in each of the following alternative scenarios? Note: Leave no answers blank. Enter zero if applicable. a. The policy covers the business property from April 1 of year 0 through March 31 of year 1.
7000
b. Suppose that after the accident, Amy repaired the equipment for $800. What amount can Amy deduct for the loss of the equipment?
800
c. Justin pays $8,200 for a 24-month policy that covers the business from April 1, year 0, through March 31, year 2.
9/24 x 8200 = 3075
Arnold has a tax liability of $700. He has a nonrefundable tax credit of $1,000, and his employer withheld $900 in federal income tax from Arnold's pay. What is the amount of Arnold's tax refund? Multiple choice question. $1
900
Which of the following individuals would not be subject to the kiddie tax assuming they have unearned income. Multiple choice question.
A child who is 19 at year end, a part-time student, and claimed as a dependent on his parents' tax return.
Charlie's regular tax liability is $43,695. His tentative minimum tax is $58,304. He doesn't have any tax credits. What is the amount of Charlie's alternative minimum tax (AMT) and how much will he actually pay in tax for the current year?
AMT: $14,609; Tax: $58,304 AMT: in this case was tentative minimum tax - regular tax liability
accounting periods
After identifying a business's taxable income and deductible business expenses, it is necessary to identify the period in which income and deductions are to be measured. • Businesses must report their income and deductions over a fixed accounting period or tax year. • Three types of tax years- A calendar year ends on December 31 - A fiscal year ends on the last day of a month other than December- A 52/53-week year (e.g., a fiscal year that ends on the last Saturday in July each year or ends on the Saturday closest to the end of July)
Under which of the following conditions may a taxpayer use the cash method to account for inventory? Multiple choice question.
Annual gross receipts for the three-year period prior to the current year do not exceed $27 million.
What are the rules concerning reporting periods for tax purposes? Multiple choice question.
Business must report their income and deductions for a full 12 month year, unless special circumstances apply.
Which of the following statements is correct when describing the accounting methods used for tax versus financial reporting? Multiple choice question. All reporting requirements for GAAP are permissible methods of reporting for tax purposes. Taxable income and financial reporting income should equal the same amount. Businesses must use the same accounting method for tax purposes that they use for financial reporting purposes. Businesses have an incentive to maximize financial reporting income, but minimize taxable income.
Businesses have an incentive to maximize financial reporting income, but minimize taxable income.
Overall Accounting Method
Businesses must choose an overall method of accounting to track and report their business activities for tax purposes .• The method must clearly reflect income and be applied consistently. • Although businesses are generally free to choose either the cash or accrual method, C corporations and partnerships with C corporation partners are generally required to use the accrual method if they do not qualify as a small business under the gross receipts test.
Accrual Income
Businesses using the accrual method of accounting generally recognize income when they meet the all-events test .• All-events test for income- Businesses recognize income when (1) all events have occurred that determine or fix their right to receive the income and (2) the amount of the income can be determined with reasonable accuracy .- Assuming the amount of income can be determined with reasonable accuracy ,businesses meet the all-events requirement on the earliest of the following three dates: • When they complete the task required to earn the income• When the payment for the task is due from the customer • When the business receives payment for the task- Alternatively, the all-events test is deemed to be satisfied when an income itemis recognized on an applicable financial statement.
accrual method
Businesses using the accrual method to determine taxable income follow rules similar to GAAP with two basic differences. - First, the requirements for recognizing taxable income tend to be structured to recognize income earlier than the recognition rules for financial accounting .- Second, the requirements for accruing tax deductions tend to be structured to recognize less accrued expenses than the recognition for tax purposes .Financial accounting tends to bias against overstating income, while tax accounting rules for accrual-method businesses tend to bias against understating income
inventories
Businesses where sales are an income-producing factor must elect an inventory method and account for sales and purchases under the accrual method. - Taxpayers who meet the gross receipts test, however, can account for sales either under the method used for financial reporting or as nonincidental materials.
Which of the following statements is INCORRECT regarding the requirements to meet the economic performance test under the various ways a liability can arise? Multiple choice question.
Certain liabilities, such as rebates, refunds, and workers compensation payments, can be deducted when incurred regardless of when payment is made.
Which of the following expenses is NOT included with deductible business travel expenses?
Charlie paid $50 to attend a play during his 3-day business trip.
Which of the following expenses is NOT included with deductible business travel expenses? Multiple choice question.
Charlie paid $50 to attend a play during his 3-day business trip.
Christina's taxable income is $35,000. Charlie's is $50,000, and Chris' is $500,000. Each of these taxpayers additionally earned $1,000 of long term capital gain income in 2022. All of the taxpayers file as single. Which of the following answers is correct regarding the amount of tax liability assessed on the capital gain
Chris will pay $200 in tax.
Danielle's Diamonds is a jewelry store that is owned and operated as a sole proprietorship by Danielle Dawkins that averages $40 million in gross receipts. Danielle uses the cash method of accounting for tax reporting. Which of the following statements is correct for Danielle's business?
Danielle must use the accrual method for reporting gross profit even though she uses the cash method of accounting for everything else.
Choose the types of income that qualify as net investment income for the purposes of assessing the Net Investment Income tax. (Check all that apply.) Multiple select question. Income from a trade or business that is a passive activity Tax-exempt interest income Distributions from qualified retirement plans Dividend income Self-employment income Interest income Excluded gain on sale of a personal residence
Dividend income interest income Income from a trade or business that is a passive activity
How are the employees' portions of FICA tax liabilities paid? Multiple choice question.
Employers withhold the amounts from the employees' paychecks.
limitations of business deductions
Expenditures against public policy- Examples: Fines, penalties, bribes, kickbacks • Political contributions and lobbying costs • Capital expenditures - Whether a business uses the cash or the accrual method of accounting, it must capitalize expenditures for tangible assets such as buildings, machinery, equipment, furniture, and similar property that have useful lives of more than one year .- For tax purposes, businesses recover the cost of capitalized tangible assets either by immediate expensing (when allowed by law) or through depreciation .- Businesses also capitalize the cost to create or acquire intangible assets such as patents and goodwill, and then recover these costs either through amortization or upon disposition of the assets.
limitations on business deductions
Expenses associated with the production of tax-exempt income • Personal expenditures - Exception: education expenses incurred by self-employed taxpayers to pay for the education to maintain or improve skills required by the individual in an existing trade or business• Mixed-motive expenditures - Entertainment expenses are generally not deductible.- Business meals: deduction limited to 50% of the cost of the meal • For 2021 and 2022 the cost of food and beverages are 100% deductible for business meals as long as the expense is for food or beverages provided by a restaurant .- Travel and Transportation • Transportation expenses related to the direct cost of transporting the taxpayer to and from business sites are deductible. (Commuting expenses are not deductible) .- Taxpayers can deduct actual costs or use the standard mileage method (56 cents per mile).
A business may have a tax year that is shorter than a full 12 months during its year in business or its year in business.
FIRST LAST
accounting methods
Generally speaking, the taxpayer's accounting methods determine the tax year in which a business recognizes a particular item of income or deduction. - Affect the timing of when a taxpayer reports income and deductions• Financial and tax accounting methods - Business have incentives to select accounting permissible under GAAP that accelerate income and defer deductions .- In contrast, for tax planning purposes, businesses have incentives to choose accounting methods that defer income and accelerate deductions .- Tax laws generally require businesses to use the same accounting methods for tax purposes that they use for financial accounting purposes
Which of the following choices is INCORRECT when defining the gross income of a business? Revenues from renting property is included in gross profit for rental businesses. Gross income from a business includes gross profit from inventory sales. Gross income for a business may be calculated as sales less returns and discounts. Gross income for a service business can be calculated as income from services provided.
Gross income for a business may be calculated as sales less returns and discounts.
medicare tax
Helps pay medical costs for qualifying individuals
limitations on business deductions - travel and transportations
In contrast to transportation expenses, travel expenses are only deductible if the taxpayer is away from home overnight while traveling .• When a taxpayer travels solely for business purposes, all of the costs of travel are deductible (but only 50% of meals unless provided by a restaurant). -combines business and pleasure travel - domestic, transportations expenses deductible only if the trip is primarily for business -meals, lodging, and other expenses, allocated between business and personal days - foreign travel, transportation expenses: allocated between business and personal days unless (the taxpayer is away from home for 7 days or less or less than 25% of the time was for personal purposes) - if the trip is primarily for pleasure, no transportation charges are deductible. -meals lodgins and other expenses, allocate dbetween business and persopnal days
business gross income
In most respects, the rules for determining business gross income are the same as for determining gross income for individuals. Gross income includes "all income from whatever source derived."• Gross profit from inventory sales, income from services provided to customers, and income from renting property to customers
self-employment tax
Includes the employer and employee portion of FICA taxes
filing requirements
Individual taxpayers are required to file a tax return only if their gross income exceeds certain thresholds, which vary based on the taxpayer's filing status and age. In general the thresholds are simply the applicable standard deduction amount for the different filing statuses
When is an individual required to file a tax return?
Individuals must file a tax return when their gross income exceeds certain amounts based on their filing status and age.
Under what circumstances may a cash-method business be allowed to use the cash method to account for inventory? (Check all that apply.) Multiple select question. It is primarily a retail business and average gross receipts for the past three years HAVE exceeded $27 million annually. It is primarily a service business and average gross receipts for the past three years HAVE exceeded $27 million annually. It is primarily a service business and average gross receipts for the past three years have NOT exceeded $27 million annually. A cash-method business can always use the cash method to account for gross profit. It is primarily a retail business and average gross receipts for the past three years have NOT exceeded $27 million annually.
It is primarily a service business and average gross receipts for the past three years have NOT exceeded $27 million annually. It is primarily a retail business and average gross receipts for the past three years have NOT exceeded $27 million annually.
Josh and Michael are related for tax purposes. Josh is self-employed and has an accrual-basis sole proprietorship. Michael is a cash-method taxpayer. Josh hired Michael to help him complete a construction project. At the end of the year, Josh owed Michael $700 for work performed during December. Josh paid Michael the $700 on January 2. When will Josh be able to deduct the wage expense and when will Michael have to include the $700 in gross income? Multiple choice question.
Josh must wait to deduct the expense until Michael includes it in gross income. Michael will include the $700 in the year he receives it.
Which of the following business expenses are deductible for tax purposes? (Check all that apply.) Multiple select question. Contributions to the governor's reelection campaign Legal fees incurred to defend the business in a lawsuit Traffic fines incurred by an over-the-road truck driver Depreciation expense on a building used to store company vehicles Advertising cost for ads placed in the local newspaper Interest expense paid on loans to purchase tax-exempt secuities
Legal fees incurred to defend the business in a lawsuit Depreciation expense on a building used to store company vehicles Advertising cost for ads placed in the local newspaper
Limitations on business deductions -business interest deductions
Limitation on business interest deductions - To limit the extent to which a business utilizes debt to avoid income taxes- Business interest: an amount that is paid, received, or accrued as compensation for the use or forbearance of money under the terms of an instrument or contractual arrangement - The amount of the deduction is, in general, limited to the sum of1) Business interest income and2) 30% of the adjusted taxable income of the taxpayer for the taxable year - The limitation does not apply to a business that qualifies as a small business under the $26 million gross receipts test
Limitations on business deductions - losses on dispositions of business property / business casualty losses
Losses on dispositions of business property - Businesses are generally allowed to deduct losses incurred when selling or disposing of business assets. - However, the tax law generally limit the deduction of business losses when property is sold to a related person.• Business casualty losses- When business assets are stolen, damaged, or completely destroyed by a force outside the control of the business (casualties) - Businesses deduct casualty losses in the year the casualty occurs or, in the case of theft, the year the theft is discovered. - When the asset is completely destroyed:• Amount of loss = the amount of insurance proceeds (amount realized) - the adjusted tax basis of the asset - When the asset is not completely destroyed• Amount of loss = the amount of insurance proceeds - the lesser of (1) adjusted tax basis or (2) decline in the value of the asset due to the casualty
Choose the following statement that is INCORRECT regarding Social Security and Medicare taxes? Multiple choice question. Low-income taxpayers are exempt from paying Social Security and Medicare taxes on their wages. The Social Security tax rate is 12.4% of wages up to a maximum wage amount. There is no wage cap (maximum wage limitation) for Medicare taxes. Single taxpayers will pay an increased rate of Medicare tax when their tax base exceeds $200,000.
Low-income taxpayers are exempt from paying Social Security and Medicare taxes on their wages.
When a married couple's tax liability is smaller using the married filing jointly status than it would have been if both individuals were unmarried and filed as single, the difference in the tax liability is called a(n) .
MARRIAGE BENEFIT
Which of the following statements BEST describes the treatment of medical expenses for alternative minimum taxable income?
Medical expenses are deductible for AMTI, subject to a 10% of AGI floor for all taxpayers regardless of age.
b. Josh purchased a piece of land for $50,000 in order to get a location to expand his business. He also paid $5,400 to construct a new driveway for access to the property.
O
d. Josh paid his brother, a mechanic, $5,550 to install a robotic machine for Josh's business. The amount he paid to his brother is comparable to what he would have paid to an unrelated person to do the same work. Once the installation was completed by his brother, Josh began calibrating the machine for operation. However, by the end of the year, he had not started using the machine in his business.
O
Which of the following statements is correct regarding the deductibility of business meals purchased in a restaurant when a taxpayer is traveling for business? Multiple choice question. The cost of meals is fifty percent deductible if the taxpayer is away from home overnight. One hundred percent of the cost of meals is deductible if the taxpayer is going to be away from home overnight. One hundred percent of the cost of meals is deductible only if there is a business associate with the taxpayer. The cost of meals is NOT deductible because a taxpayer would have to eat whether they were home or away from home.
One hundred percent of the cost of meals is deductible if the taxpayer is going to be away from home overnight.
Business deductions - reasonable in amount
Ordinary and necessary business expenses are deductible only to the extent they are reasonable in amount. (An expenditure is not reasonable when it is extravagant or exorbitant.) - Generally, the courts and the IRS test for extravagance by comparing the amount of the expense to a market price or an arm's length amount. An amount is reasonable if it is within the range of amounts typically charged int he market by unrelated persons.
social security tax
Provides basic pension coverage for the retired and disabled
alternative minimum tax formula
Regular Taxable Income +/- Adjustments + Tax Preferences = alternative minimum taxable income - AMT Exemption = Tax Base for AMT x AMT = TMT - Regular Income Tax = AMT - paid in addition to regular tax exhibit 8-2
If a company uses a cash method of accounting, which of the following statements will be true? (Check all that apply.) Multiple select question. Expenditures for prepaid interest expense are deducted when paid. Revenue is recognized when cash is received no matter when the sale actually took place. Payments received in a noncash form (such as property or services) are NOT included in gross income. Prepaying expenses other than interest can result in an immediate tax deduction if the prepayment will be used up within 12 months.
Revenue is recognized when cash is received no matter when the sale actually took place. Prepaying expenses other than interest can result in an immediate tax deduction if the prepayment will be used up within 12 months.
Which of the following individuals would NOT be subject to the kiddie tax? Multiple choice question. Shelby is a 17 year old, full-time student who does NOT provide half of her own support. She has $3,000 in babysitting income. Zach is a 16 year old, full-time student who does NOT provide half of his own support He has $3,000 in capital gain income. Tyler is an 18 year old, part-time student who does NOT provide half of his own support. He has $3,000 in interest income. Tori is a 20 year old, full-time student who does NOT provide half of her own support. She has $3,000 in dividend income this year.
Shelby is a 17 year old, full-time student who does NOT provide half of her own support. She has $3,000 in babysitting income.
ANt exemption
TO HELP ENSURE THAT MOST TAXPAYERS AREN'T REQUIRED TO PAY THE AMT CONGRESS ALLOWS TAXPAYERS TO DEDUCT AND AMT EXEMPTION AMOUNT TO DETERMINE THEIR AMT BASE
accrual income
Taxation of advance payments (Unearned income) - Taxpayers using the cash method include these payments in gross income in the year the payment is received .- When an accrual-method taxpayer must include unearned income ingross income depends on the type of income.• Interest and rental income - must be recognized immediately upon receipt • For other types of income, accrual-method businesses can elect to defer recognition of unearned income for one year.
Which of the following statements is correct regarding the deductibility of self-employment taxes? Multiple choice question. Taxpayers are allowed to deduct the employer portion of their self-employment taxes FROM AGI. Taxpayers are allowed to deduct the employer portion of their self-employment taxes FOR AGI. Taxpayers are allowed to deduct the employee portion of their self-employment taxes FOR AGI. Taxpayers are allowed to deduct the employee portion of their self-employment taxes FROM AGI.
Taxpayers are allowed to deduct the employer portion of their self-employment taxes FOR AGI.
Evan incurred education-related expenditures related to his self-employment job. Under which of the following circumstances will Evan NOT be allowed to deduct these expenditures as a BUSINESS expense?
The course or courses qualify Evan for a new trade or business.
Which of the following statements is INCORRECT regarding the child and dependent care credit in 2022? Multiple choice question. The credit completely phases out for high income taxpayers. The minimum dependent care credit is 20% of qualifying expenditures Expenditures for care within the home can qualify for credit. The qualifying expenditures are limited to the earned income of the lesser-earning spouse, if married.
The credit completely phases out for high income taxpayers.
Which one of the following statements is correct regarding an asset that is used for both business and personal purposes?
The deductible business expense is determined by prorating the expenses based on the percentage of time it is used for business.
Allison purchased equipment that cost $100,000 for use in her business. She expects the equipment to be useful for the business for the next 8 years. Which of the following choices correctly describes the tax treatment of the cost of the equipment?
The equipment should be capitalized and depreciated according to the tax code.
For tax calculation purposes, the kiddie tax base is the child's net unearned income. The net unearned income is defined a
The lesser of (1) the child's gross unearned income minus $2,300 or (2) the child's taxable income
Which of the following criteria is NOT required for a meal to be considered a tax-deductible business meal? Multiple choice question. The meal must be eaten on the business premises. The amount must be reasonable under the circumstances. The meal must be directly associated with the active conduct of the business. The taxpayer or an employee of the taxpayer must be present for the meal.
The meal must be eaten on the business premises.
How does the accrual method for tax reporting differ from the accrual method for financial reporting?
The reporting rules tend to be structured to recognize less accrued expenses for tax purposes than for financial accounting purposes.
accounting periods
The rules for determining the tax years available to the business depend on whether the business is a sole proprietorship, a flow-through entity, or a C Corporation sole proprietorship - use a calendar year-end to report their business income on their tax returns flow-through-entities - generally must adopt tax years consistent with the owners tax years -c coproations - generally allowed to select a calendar, fiscal, or 52/53 week-year-end
The all-events test generally requires businesses receiving advance payments for services to recognize the income when they receive the payment, rather than when they perform the service. Which of the following statements is INCORRECT regarding this rule?
The tax authorities give the business the option to report the income in the current year or defer it to the period in which the revenue is earned.
The all-events test generally requires businesses receiving advance payments for services to recognize the income when they receive the payment, rather than when they perform the service. Which of the following statements is INCORRECT regarding this rule? Multiple choice question. The tax authorities give the business the option to report the income in the current year or defer it to the period in which the revenue is earned. For financial accounting, the prepayment is recorded as a liability and not recognized as income until the service is performed. This rule holds for prepayment of interest or rent. The IRS provides an exception that allows the recognition of the advance payment of services to be deferred to the tax year following the prepayment.
The tax authorities give the business the option to report the income in the current year or defer it to the period in which the revenue is earned. Select a concept resource to continue.
Limitations on accruals
The tax laws prevent an accrual-method business from accruing (and deducting) an expense for a liability owed to a related person using the cash method until the related person recognizes the income associated with the payment related persons - family members, including parents, siblings, and spouses -shareholders, and c corporations when the shareholder owns more than 50% of the corporations stock -owners of partnerships and s corporations no matter the ownership percentage
Which of the following choices is NOT correct regarding deductible transportation expenses for a taxpayer using her personal vehicle for business purposes? Multiple choice question. The taxpayer can deduct a standard mileage rate based on business miles driven. The taxpayer can deduct the business portion of the actual costs of operating the vehicle plus depreciation. The taxpayer can deduct the business portion of the vehicle operating costs, plus depreciation, plus a standard mileage rate based on business miles. The taxpayer can NOT deduct the costs of commuting from her home to her regular place of business.
The taxpayer can deduct the business portion of the vehicle operating costs, plus depreciation, plus a standard mileage rate based on business miles.
Which of the following choices are advantages to the taxpayer of choosing the cash-method of tax reporting rather than the accrual-method? (Check all that apply.) Multiple select question. There is more flexibility to time the recognition of income and deductions. It is required for C corporations and partnerships with corporate partners unless they meet certain size requirements. Bookkeeping is easier. The cash method provides a better matching of revenues and expenses.
There is more flexibility to time the recognition of income and deductions. Bookkeeping is easier.
accrual deductions
To claim a tax deduction for an accrued expense, the expense must meet two tests: (1) an all-events test and (2) an economic performance test .- All-events test: the events that establish the liability giving rise to the deduction must have occurred and the amount of the liability must be determinable with reasonable accuracy.- Economic Performance test: 9/3 exhibit
Sonny incurred the following expenses last month in his self-employment business: Khaki pants and a blue button-down shirt to wear to work; tuition for a course in marketing to improve his current job skills as a fashion designer; and groceries so that he could take his lunch to work. Which of these expenses is/are deductible business expenses? Multiple choice question.
Tuition for the marketing course
Inventories - uniform capitalization (unicap), inventory cost-flow method
Uniform Capitalization (UNICAP)- Large businesses that account for inventories capitalize certain direct and indirect costs associated with inventories. (However, businesses that qualify as a small business under the gross receipts test need not apply UNICAP rules.) - The UNICAP rules require businesses to allocate to inventory the costs they incur inside the production facility and the costs they incur outside the facility to support production (or inventory) activities.• Inventory cost-flow methods - Once a business determines the cost of its inventory, it must use an inventory cost-flow method (FIFO, LIFO, or specific identification) to determine its cost of goods sold .• Tax laws require that a business can use LIFO for tax purposes only if it also uses LIFO for financial reporting purposes.
During the current year, Barry (single taxpayer) has taxable income of $60,000. Of that amount, $10,000 is long-term capital gain. How will Barry calculate the tax on his income?1
Use the tax rate schedule to calculate tax on $50,000; multiply the capital gain income of $10,000 by 15%; then add the two amounts together.
Which of the following statements are correct regarding the requirements to meet the economic performance test under the various ways a liability can arise? (Check all that apply.) Multiple select question. When a business agrees to provide services to another party, the expenses incurred for those services cannot be deducted until the payment is made. When a business agrees to pay another party for services, the deduction is taken as the other party provides the services. When a business prepays on a lease or rental agreement, the deduction is taken when the payment is made. Certain liabilities, such as rebates, refunds, and workers compensation payments, must be deducted when paid regardless of when the liability arises.
When a business agrees to pay another party for services, the deduction is taken as the other party provides the services. Certain liabilities, such as rebates, refunds, and workers compensation payments, must be deducted when paid regardless of when the liability arises.
Bad Debt Expense
When accrual method businesses sell a product or a service on credit, they debit accounts receivable and credit sales revenue for both financial and tax purposes. • For tax purposes, when business determine which specific debts are uncollectible, they are entitled to a deduction. (Direct write-off method) • Business using the cash method of accounting are not allowed to deduct bad debt expense because they do not include receivables in taxable income.
When is a business expense deemed to be reasonable in amount?
When it is not extravagant
Chester and Co.'s tax reporting year end is on the last Friday in June every year. This year end schedule is known as which of the following?
a 52/53 week year end`
Gross receipts test for determining small businesses
a business that qualifies as a small business under a gross receipts test is exempt from certain complex accounting provisions for each year in which it meets the test -a business meets the gross receipts test for 2021 if its average annual gross receipts for the three prior taxable years does not exceed $26 million -gross receipts: include total sales, amounts received for services and income from investments
Andrews and Co.'s tax reporting year end is on March 31 every year. This year end schedule is known as which of the following
a fiscal year end
earned income credit
a refundable credit designed to help offset the effect of employment taxes on compensation paid to low-income taxpayers and to encourage lower income taxpayers to seek employment. -available for qualified individuals who have earned income for the year -those who have at least one qualifying child -those who do not have a qualifying child for the taxpayer year but who live in the US for more than half the year aare at least 25 years old but younger than 65 years old at the ned of the year, and are not a dependent of another taxpayer -2021 the minimum age is reduced to 18 and the max age is eliminated
In reporting financial statement income, businesses have incentives to select accounting methods that accelerate and defer . In reporting taxable income, businesses have incentives to select accounting methods that accelerate and defer .
accelerate income defer deductions defer income, accelerate deductions
In early fall, Rick contracted with a dozen homeowners to landscape their yards. Rick agreed to do the work for an aggregate of $11,000. Rick and his crew started in the fall and completed the jobs in December of this year. However, he didn't mail the bills until after the holidays and didn't receive any payments until the following January. When must Rick recognize the income from this work?
accrual method - this year cash method - next year when he received it
In late November 2021, Rick received a $7,200 payment inadvance from a client for monthly landscaping services fromDecember 1, 2021, through November 30, 2023 ($300 amonth for 24 months). When must Rick recognize the incomefrom the advance payment for services?
accrual method- 300 in 2021, 6,900 in 2022 cash method - recognize all in 2021
For accrual-method businesses, bad debt expense is recognized using the Blank______ method for financial accounting and is deducted using the Blank______ method for tax purposes.
allowance , write-off
The tax was implemented to make sure that taxpayers who were generating income pay some income tax, rather than disproportionately benefiting from tax advantaged items.
alternative minimum
Which of the following tax provisions was implemented to ensure that the taxpayer pays some level of income tax, despite the disproportionate use of tax preference items to reduce regular taxable income?
alternative minimum tax
The credit can only be used for a student's first four years in a qualified postsecondary education institution, while the credit can be used for any course of instruction whether or not it's in the first four years of a qualified post-secondary education.
american opportunity lifetime learning
b. $4,200 for new office furniture. The furniture was delivered on May 15 of next year.
both 0
Employees cannotBlank 1Blank 1 cannot , Correct Unavailable deduct their unreimbursed business expenses, while self-employed individuals can deduct their business expenses forBlank 2Blank 2 for , Correct Unavailable AGI.
cannot, for
c. $765 lease payment received from the Men's Club this year for renting Jeremy's trailer last year. Jeremy billed the club last year, but recently he determined that the Men's Club would never pay him, so he was surprised when he received the check.
cash - 765 accrual - 0
b. $1,120 from the Ladies' Club for leasing the trailer from December of this year through March of next year ($280 per month).
cash -1120 accrual - 1120
Rebecca is a calendar-year taxpayer who operates a business. She made the following business-related expenditures in December of this year. Indicate the amount of these payments that she may deduct this year under both the cash method of accounting and the accrual method of accounting. a. $3,900 for an accountant to evaluate the accounting system of Rebecca's business. The accountant spent three weeks in January of next year working on the evaluation.
cash -3900 accrual-3900
Jeremy is a calendar-year taxpayer who sometimes leases his business equipment to local organizations. He recorded the following receipts this year. Indicate the extent to which these payments are taxable income to Jeremy this year if Jeremy is (1) a cash-method taxpayer and (2) an accrual-method taxpayer. a. $1,400 deposit from the Ladies' Club, which wants to lease a trailer. The club will receive the entire deposit back when the trailer is returned undamaged.
cash method - 0 accrual method - 0
Choose the deductions that reduce both regular taxable income and AMTI. (Check all that apply.) Multiple select question. Real property taxes paid on principal residence Charitable contributions Home mortgage interest State income tax
charitable contributions home mortgage interest
Although there are exceptions, a taxpayer or business using the cash method of accounting recognizes revenue when property or services are actually or received and recognizes deductions when the expense is .
constructively, paid
Which of the following accounting methods is NOT acceptable for tax reporting?
credit method
A tax creditBlank 1Blank 1 credit , Correct Unavailable reduces a taxpayer's tax liability dollar for dollar. A tax deductionBlank 2Blank 2 deduction , Correct Unavailable reduces taxable income, resulting in a tax savings that is dependent on the taxpayer's marginal tax bracket.`
credit, deduction
In addition to the all-events test, an accrual-basis business must meet a(n) test with respect to a liability before the corresponding expense can be deducted for tax purposes.
economic performance
employee vs. independent contractors
employee - share the fica burden with employer -cannot deduct unreimbursed business expenses independent contractor -pay the entire FICA taxes -deduct business expenses as deductions for AGI -responsible for paying their estimated tax liability
To help ensure that low-income taxpayers are NOT required to pay the alternative minimum tax, AMTI is reduced by a(n) amount to determine the alternative minimum tax base.
exemption
adjustments for AMT
exhibit 8-3
True or false: Self-employed taxpayers pay the employee portion of the FICA tax burden through self-employment taxes, but they are exempt from paying the employer portion.
false
True or false: The term tax bracket refers to the average tax rate that is applied to an individual's taxable income.
false
True or false: There is no underpayment penalty assessed if the taxpayer chooses to pay nothing throughout the year, but sends in just enough of an estimated payment at year-end to meet the safe harbor rules. True false question.True
false
True or false: The term tax bracket refers to the average tax rate that is applied to an individual's taxable income. True false question.
false each separate range of income subject to a different tax rate is referred to as a tax bracket
Individual taxpayers are required to file a tax return only if their gross income exceeds certain thresholds which vary based on: (Check all that apply.) Multiple select question. Filing status Prior year tax liability Amount of earned income Age
filing statue, age
Self-employed taxpayers may deduct the employer portion of their self-employment taxes (for/from) AGI.
for
How do self-employed independent contractors deduct their business expenses?`
for AGI against business income
There is one tax infraction that incurs a penalty calculated as 15% of the amount of tax owed per month with a maximum penalty of 75%. What violation incurs this level of penalty? Multiple choice question.
fraudulent failure to life
Rhonda is currently in the 12 percent tax bracket. She reports a $400 tax deduction. How will this deduction affect her tax liability? Multiple choice question.
her tax liability will decrease by $48
self- employment taxes
if an individual who is self-employed also receives wages subject to the FICA tax from working as an employee of another organization, the amount of the Social Security portion on which the self-employment tax is computed is reduced look at example problems 1.
Accrual methods for tax tend to overstate and understate relative to accrual methods for financial accounting. (Enter only one word per blank.) =
income, revenue, deductions, expenses
For financial reporting purposes, an advance payment for services is NOT recorded as a revenue, but rather recorded as a(n) . It will be recognized as a revenue when it is earned. For tax reporting purposes, an advance payment is taxed immediately because the payment meets the - test. However, there is an exception which allows the prepaid income to be recognized in the following the receipt if certain conditions are met.
liability, all-events, year
Alex and Alecia used the married filing jointly filing status when they prepared their tax return. During the current year, their joint tax liability totaled $9,300. If they were not married and had both filed as single, Alex would have had a $3,900 tax liability, and Alecia would have had a $5,000 tax liability. What is the term used for the $400 difference in their tax liability?
marriage penalty
Joyce, a single parent, lives in an apartment with her two minor children(ages 8 and 10), whom she supports. Joyce earns $33,000 during 2022. She uses the standard deduction and files as head of household. Calculate the amount, if any, of Joyce's earned income credit.
maximum credit: 6,164 phase out (33,000-20,130 x 21.06%) = 2,710 6164 - 2710 = 3454
The term is used to describe an expense that is helpful or conducive to a business activity.
necessary
Which one of the following terms does the Internal Revenue Code use to describe deductible business expenses? Multiple choice question.
necessary
A 3.8% tax is imposed on the of certain taxpayers whose modified adjusted gross income exceeds a certain threshold.
net investment income
Self-employed persons pay FICA taxes on the entire earnings from their business while employees pay FICA taxes on .
net self- employment wages, salary
b. Fantasia, head of household, with gross income of $17,000.
not required
c. Ken and Barbie, married taxpayers with no dependents, with gross income of $22,100.
not required
d. Dorothy and Rudolf, married taxpayers, both age 68, with gross income of $24,000.
not required
e. Janyce, single taxpayer, age 73, with gross income of $13,000.
not required
The term is used to describe an expense that is normal or appropriate for the business under the circumstances.
ordinary
All and expenses that are reasonable in amount and incurred in carrying on a trade or business are deductible for tax purposes.
ordinary, necessary
The basis for requiring employers to withhold taxes from employees' pay and requiring periodic estimated tax payments from taxpayers with income not subject to withholding is known as the: Multiple choice question.
pay-as-you-go-basis
Ordinary and necessary business expenses are deductible only to the extent they are in amount.
reasonable
For 2022, taxpayers with average annual gross during the prior 3 years of million dollars are not subject to the business interest deduction limitation.
receipts, sales, revenue, 27
The starting point for determining the alternative minimum tax is:
regular tax income
For the following taxpayers, determine if they are required to file a tax return in 2022. Problem 8-80 Part a (Algo) a. Ricko, single taxpayer, with gross income of $17,100.
required
On July 1 this year, Rick paid $1,200 for a 12-month insurance policy that covers his business property from accidents and casualties from July 1 of this year through June 30 of next year. How much of the $1,200 expenditure may Rick deduct this year if he uses the cash method of accounting for his business activities? - Suppose the insurance policy was for 12 months, but the policy ran from February 1 of next year through January 31 of the following year. How much of the expenditure may Rick deduct this year if he uses the cash method of accounting for his business activities?
rick can deduct the entire policy the 12 month rule is satisfied - this year he can not deduct anything it extends too far
Match the business entity with the tax form used to report taxable income. Instructions Schedule c - individual income and self-employment taxes form 1065 - partnerships form 1120S - corporations form 1120 c corporations
schedule c - sole proprietorship form 1065 - partnership form 1120S - s corporation form 1120 - c corporation
Terri, age 16, is a dependent of her parents in 2022. During theyear, Terri earned $5,000 in interest income and $3,000 frompart-time jobs. If Terri's parents report taxable income of$100,000 on their joint return (no qualified dividends orcapital gains), what is Terri's tax liability for 2022?
sd: greater of 1,150 or ( earned income + 400) 5,000 + 3,000 - 3,400 = 4,600 taxable income net unearned income = 5,000 - 2,300 = 2,700 (2,300 is the normal deduction and is taxed at her parents rate) 4600 -2700 = 1900 (2,700x 22) = (1,900 x 10%) -=784
Sole proprietors and independent contractors pay - taxes on their net profit which represents both the employee and employer component of FICA and Medicare.
self employments
independent contractors rather than employee status
set her own working hours work part time works for more than one firm realize either a profit or a loss from the activities -perform work somewhere other than on an employer's premises -work without frequent oversight
Match the entity with the statement that describes the tax treatment of that entity. Instructions Sole proprietorship Partnership C corporation
sole proprietorship - Revenues and expenses are reported directly on the owner's tax return and the profit (or loss) is subject to both individual income and self employment taxes. partnership - Entity files a tax return but the profit or loss flows through to owners' individual income tax returns. c corporation - Income is taxed at the entity level rather than flowing through to the owner(s).
employee FICA tax paybale
tax base: employee salary -social security tax: 6.2% (on tax base up to 147,000 -medicare tax 1.45% -additional medicare tax 0.9 same as above -employers withhold the employees' FICA tax liabilities from the employees' paychecks
Each separate range of income subject to a different tax rate is referred to as a(n) .
tax bracket
employee vs. self-employed ( independent contractor)
the IRS stipulates that an employer / employee relationship exists when the party for whom services are performed has the right to direct or control the individual performing the services
Which of the following choices is NOT considered deductible transportation expenses?
the cost of driving from home to work
taxpayer prepayments
the income tax must be paid on a pay-as-you-go basis. this means it must be prepaid via withholding from salary or through periodic estimated tax payments during the tax year -underpayment penalties -when taxpayers fall behind on their tax prepayments they may be subject to an underpayment penalty -to help taxpayers who may not be able to predict their earnings for the year and to provide some margin of error for those who can, the tax laws provide some safe-harbor provisions -a taxpayer who does not satisfy either of the safe-harbor provisions can compute the underpayment penalty owed using form 2210 -the underpayment penalty is determined by multiplying the federal short-term interest rate plus 3 percentage points by the amount of tax underpayment per quarter -taxpayers are not subject to underpayment penalties if they had no tax liability in the previous year, or if their tax payable is less than $1,000 after subtracting their withholding amounts (but not estimated payments)
preferential tax rates for capital gains and dividends
to determine the tax liability, split income into the portion that is subject to the preferential rate and the portion taxed at the ordinary rates and compute the tax separately on each type of income. Sum of these taxes is the taxpayer's regular tax liability
True or false: In order to deduct travel expenses (as opposed to transportation expenses), the taxpayer must be away from home on a trip of sufficient duration to require sleep or rest.
true
True or false: The AMT exemption amount phases out for higher income taxpayers resulting in a higher alternative minimum tax base for those individuals. True false question.
true
True or false: The economic performance test generally requires that underlying activity generating the liability has occurred in order for the associated expense to be deductible.
true
Which of the following expenses will qualify for the American Opportunity Credit in the current year? (Check all that apply.) Multiple select question. Tuition for a term beginning in January is paid in December of the current year. Textbooks and required lab fees are paid in the current year. Tuition is billed during December of the current year for the term beginning in January. Payment is made in January. Housing fees are paid in the current year. Parking permit is paid in the current year.
tuition, fees, course materials tuition for a term beginning in January is paid in December of the current year
Safe Harbor Provision
under these provisions taxpayers can avoid underpayment penalties if their withholdings and estimated tax payments equal or exceed one of the following two safe harbors: 1. 90% of their current tax liability or 2. 100% of their previous-year tax liability (110% for individuals with agi greater than 150,000)
Taxpayers may be subject to a(n) if they have taxes due and have NOT met the safe harbor provisions.
underpayment penalty
net unearned income
unearned income less than $2,300 if the amount of net unearned income is positive an amount of taxable income up to the net unearned income is taxed at the parent' marginal tax rate, and the remaining taxable income is taxed at the child's rate
The purpose of the "kiddie tax" is to prevent parents from shifting income to their dependent children who may be subject to a lower tax rate.
unearned, investment, net unearned
Which one of the following types of income is NOT part of net investment income for purposes of calculating the Net Investment Income tax? Multiple choice question. Veteran's benefits Passive activity income Interest income Annuity income
veteran's benefits
The income tax is paid on a pay-as-you-go basis through or tax payment
witholdings, estimate
Cash Method
• A business using the cash method of accounting- Recognizes revenue when property or services are actually or constructively received - Recognizes deductions when the expense is paid • However, a business must generally capitalize prepaid interest and other prepayments that create tangible or intangible assets
