FIT III
Election to expense assets section and what it allows Applies to what Basis reduction Examples (5)
**179 permits TP to elect to write off up to 1,020,000 mil in 2018 acquisition cost of tangible personal property used in a trade or business and limited improvements to buildings (computer software, improvement property, roof, heating, ventilation, AC); doesn't apply to production of income the amounts expensed reduce the basis of the property before additional first-year depreciation and standard MACRS recovery is computed computer software, improvement property, roof, HVAC, not production of income
2 limitations to section 179 deduction Additional first year depreciation
1. 2.5 mil limitation: the amount is reduced by the amount of property placed in service in excess of 2.5 mil in 2018 2. taxable income limitation: cannot exceed the taxable income from any trade or business; expensed amount in excess of taxable income ceiling is carried forward to future taxable years 100% of tangible property with less than a 20 year life
Section 183 9 factors for determining if it is a hobby or not
1. businesslike manner or not 2. expertise of TP or advisors 3. time and effort expended 4. expectation that the assets of the activity appreciate in value 5. TP previous success in conducting similar activities 6. history of income or losses from the activity 7. relationship of profits earned to losses incurred 8. financial status of TP (substantial other income indicates it may not be for profit) 9. elements of personal pleasure or recreation in the activity
3 items excluded by statute from classification as trade or business
1. charitable contributions or gifts 2. illegal bribes, kickbacks, certain treble damage payments 3. fines and penalties
Hobby expenses must be deducted in the following order (3) From 2018-2025...
1. deductible under code sections without regard to nature of activity like property tax and home mortgage 2. deductible if activity had been engaged for profit only if they don't affect AB (maintenance, utilities, supplies) 3. depreciation, amort, depletion (ALL DEDUCTED BELOW THE LINE I THINK) miscellaneous itemized deductions are not deductible
3 reasons why a deduction for AGI is more valuable than from AGI (rather have above than below)
1. from can be lost if the taxpayer does not itemize 2. reduce AGI and increase several itemized deductions that subject to a floor based on AGI 3. many states that piggyback onto the FIT start with federal AGI; deductions for can reduce state income taxes, often significantly
Like-kind exchange requirements How to find new basis with a wash sale and holding period
1. held for productive use or investment: property transferred in (personal use doesn't qualify) 2. mandatory nature: postponement of recognition of realized gain/loss is mandatory; must structure transaction sot hat statutory requirements of rule 1031 are not satisfied or wish to avoid this postponement to recognize a loss new basis is the cost to purchase plus the disallowed loss; holding period is from your original stock purchase, not the new purchase date
3 requirements for casualties to occur What is not a casualty
1. identifiable: can show what destroyed/caused it 2. damaging to property: includes car accident only if damage was not caused by negligence 3. sudden, unexpected, and unusual in nature: swift not gradual, not anticipated, nonrecurring progressive deterioration: erosion due to wind or rain and decline in value; dead tree that eventually falls
Definition of capital asset: all except the following (4) Treatment of 1231 vs. short term vs. long term
1. inventory or property held for sale in ordinary course of business 2. accounts and note receivable 3. depreciable property or real estate used in a business 4. certain copyrights: person whose efforts led to the copyright or creative work has ordinary asset 1231 losses are immediately deductible as ordinary and gains are treated as LTCG taxed at favorable rate NLTCG taxed at favorable rate, and NLTCL can deduct 3,000 and carry forward Can deduct 3,000 from AGI for NSTCL and rest is carried forward; NSTCG are ordinary income and fully includible
Exception to lobbying disallowance (3)
1. local legislation of city and counties 2 activities devoted solely to monitoring legislation 3. de minimis exception for annual in-house expenditures not exceeding 2,000
Section 1244 allows ordinary loss treatment on the disposition of stock if Limit
1. must be shareholder in a small business corp ($1 mil or less of capital) 2. ordinary deduction is limited to 50,000 per year or 100,000 for married taxpayers
TP buys ring for 6,000 that is worth 10,000. On 10/10/19 it is stolen and your insurance policy gives you 10,000 cash. Buy new ring for 2,000
10,000 - 6,000 = 4,000 recognize 4,000 postpone 0 new basis: 2,000
TP has STCG net of 25,000. STCL of 50,000. LTCG of 40,000. LTCL of 60,000. Also a 1231 gain of 200,000 and 1231 loss of 100,000. What do we do? AGI is 200,000. Also STCG of 75,000, STCL of 100,000, LTCG 55000, LTCL 52000, 1231 gain of 60000, 1231 loss of 90000. What is net gain or loss and the new AGI
100,000 1231 gain is also a LTCG then LTCG becomes net of 140,000-60,000 = 80,000 then net of 80,000 - 25,000 = 55,000 net LTCG 1231 loss of 30000 and deduct it immediately so you have STCL of 25000 and LTCG of 3000 NSTCL of 22000; can deduct 3000 (max) and the remaining is a NSTCL carryforward AGI becomes 167,000 (200 - 30 - 3)
2,000,000 cash for oils reserves and estimate you need 1 million barrels. What method is this.
2 mil/1 mil = $2 dollar cost per barrel each time you take a barrel out; percentage
Item Date Acquired Date Sold Cost Sales Price Blue stock (10 shares) 11/10/17 03/12/18 $ 3,000 $ 6,000 Purple stock (100 shares)12/13/16 05/23/18 36,000 32,000 Beige stock (50 shares) 12/14/13 07/14/18 13,000 14,500 Red stock (100 shares) 06/29/17 05/18/18 26,000 27,000 Black stock (100 shares) 05/15/17 10/18/18 67,000 67,800 Gray stock (100 shares) 04/23/16 10/18/18 AGI? Do a form 8949?
34,000 + 1,500 NSTCG + 2,300 = 37,800
On October 15, 2019, Jon purchased and placed in service a used car. The purchase price was $38,000. This was the only business use asset Jon acquired in 2019. He used the car 80% of the time for business and 20% for personal use. Jon used the regular MACRS method. Calculate the total cost recovery deduction Jon may take for 2019 with respect to the car.
38,000 * .05 (5 year mid-quarter convention) = 1,900 less .2 * 1900 = 1,520
Accrual basis TP sells on credit for 100,000 (generates accounts receivable). 2 years later TP collects 60,000 of it due to customer bankruptcy. What method takes the bad debt expense 2 years later. What if you're a cash basis TP Consequence****
40,000 using direct write off method; allowance method you guess certain % take 0 into income when sale is made; 2 years later you realize the income and nothing in terms of bad debt; 60,000 is then included in income only take bad debt expense when accrual
Nell, single and age 38, had the following income and expense items in 2019: Nonbusiness bad debt $ 6,000 Business bad debt 2,000 Nonbusiness long-term capital gain 4,000 Nonbusiness short-term capital loss 3,000 Salary 50,000 Interest income 3,000 Determine Nell's AGI for 2019.
50,000 + 3,000 - 2,000 -6,000 - 3,000 + 4,000 = NSTCL - 3,000 = 48,000 AGI
Salary income $60,000 Net rent income 6,000 Dividend income 3,500 Payment of alimony (divorce finalized in March 2019) 12,000 Mortgage interest on residence 9,900 Property tax on residence 1,200 Contribution to traditional IRA 5,000 Contribution to United Church 2,100 Loss on the sale of real estate (held for investment) 2,000 Medical expenses 3,250 State income tax 300 Federal income tax 7,000 AGI? Standard or itemize?
60,000 + 3,500 + 6,000 - 5,000 - 2,000 standard: 12,200 itemize: 1,200 + 9,900 + 2,100 + 300 = 13,500
Elisa and Clyde operate a retail sports memorabilia shop. For the current year, sales revenue is $55,000 and expenses are as follows: Cost of goods sold $21,000 Advertising 1,000 Utilities 2,000 Rent 4,500 Insurance 1,500 Wages to Boyd 8,000 Elisa and Clyde pay $8,000 in wages to Boyd, a part-time employee. Because this amount is $1,000 below the minimum wage, Boyd threatens to file a complaint with the appropriate Federal agency. Although Elisa and Clyde pay no attention to Boyd's threat, Chelsie (Elisa's mother) gives Boyd a check for $1,000 for the disputed wages. The retail shop is the only source of income for Elisa and Clyde. Calculate Elisa and Clyde's AGI. Can Chelsie deduct the $1,000 payment on her tax return? Explain. How could the tax position of the parties be improved?
AGI = 55,000 - 21,000 - 1,000 - 2,000 - 4,500 - 1,500- 8,000 = 17,000 can't deduct bc that Elisa and Clyde's obligation related to their business can improve if Chelsie made gift to one of them or loaned 1,000 so they can deduct
Single Income Salary $43,000 Rental of vacation home (rented 60 days, used personally 60 days, vacant 245 days) 4,000 Municipal bond interest 2,000 Dividend from General Electric 400 Expenses Interest on home mortgage 8,400 Interest on vacation home 4,758 Interest on loan used to buy municipal bonds 3,100 Property tax on home 2,200 Property tax on vacation home 1,098 State income tax 3,300 State sales tax 900 Charitable contributions 1,100 Tax return preparation fee 300 Utilities and maintenance on vacation home 2,600 Depreciation on rental portion of vacation home 3,500 Calculate Chee's taxable income for the year. If Chee has any options, choose the method that maximizes his deductions.
AGI: 43,000 + 400 Itemize: 8,400 + 2,200 + 3,300 + 4,893 + 1,100 = 19,893 Taxable = 23,507 4893: income 4,000 less taxes and interest (60/365 * 5,856) 963 - 3,037 less utilities and maintenance = remainder of 1737 less depreciation = net income of 0; so 5856-963 = 4893 3,300 includible becuase it exceeds state sales taxes paid of 900
TP buys ABC stock on 5/11/18 for 10,000. Company goes bankrupt on 3/2/19 and stock is completely worthless. What do you do.
AR 0, less AB 10,000, realize and recognize 10,000 STCL except that it is worthless so it is deemed as worthless as of 12/31/19 so it is a LTCL
Tara gives up real estate w/ FMV of 1 million and adjusted basis of 450,000. Her property is subject to 50,000 property. Doug gives up land worth 700,000 and basis 400,000. He also gives xyz stock with FMV of 250,000 and basis 210,000. Do Tara first
AR 1 mil AB 450,000 Realized 550,000 Recognize 300,000 Postpone 250,000 New basis building: 450,000 Stock: 250,000 AR 1 mil AB 660,000 (include mortgage) Realize 340,000 Recognize 0 Postpone 340,000 New basis: 660,000
On October 15, 2019, Jon purchased and placed in service a used car. The purchase price was $38,000. This was the only business use asset Jon acquired in 2019. He used the car 80% of the time for business and 20% for personal use. Jon used the regular MACRS method. Calculate the total cost recovery deduction Jon may take for 2019 with respect to the car.
Even though the car is a used car, it is eligible for additional first-year depreciation, if available. Cost Regular MACRS percentage (mid-quarter convention); Exhibit 8.4 Costrecoverybutsubjecttothe§280Flimitation Recovery limit [limited to $18,000 ($10,000 + $8,000)*] Less: Personal usage (20% × $1,900) MACRS cost recovery $38,000 × 5% $ 1,900 $ 1,900 (380) $ 1,520 *These cost recovery limits are indexed annually. The 2018 amounts are used.
Taxes tha cannot be deducted (8) 2 types of interest can be deducted as itemized
FIT, gasoline tax, luxury and excise tax, sales tax, SS tax, hidden tax, gift tax, estate tax home mortgage interest and investment interest are deductible subject to limitations
Deductions allowed for individuals (3)
Losses incurred in a trade or business. Losses incurred in a transaction entered into for profit. Losses caused by fire, storm, shipwreck, or other casualty or by theft.
TP has NOL of 100,000 in 2019. 2020 taxable income is 50,000. In 2021 TI is 120,000 what do you do. Section 1244
Taxable income is 10,000 because you can deduct up to 80% of your taxable income; your NOL carry-forward then is 60,000 80% is 96,000 but that exceeds 60,000 so you only deduct that and then have 0 NOL small business stock: loss on this is an ordinary loss and doesn't apply to gains; 50,000-100,000 deduction depending on status
Cost method: On January 1, 2019, Pablo purchases the rights to a mineral interest for $1,000,000. At that time, the remaining recoverable units in the mineral interest are estimated to be 200,000. If 60,000 units are mined and 25,000 are sold this year, what is cost depletion. And what is the depletion per unit? What if the estimate is incorrect and we go back to see recoverable units is 400,000 in 2020 and 30,000 are sold.
The depletion per unit is $5 ($1,000,000 adjusted basis ÷ 200,000 estimated recoverable units). 25,000* 5 = 125,000 depletion per unit is 2.1875 (1,000,000-125,000/400,000) depletion is 65,625 (that * 30,000)
Tobias has a brokerage account and buys on the margin, which resulted in an interest expense of $20,000 during the year. Income generated through the brokerage account was as follows: Municipal interest$ 50,000Taxable dividends and interest 350,000 How much investment interest can Tobias deduct?
Tobias can deduct only the interest expense attributable to taxable income. The interest attributable to the municipal interest income is not deductible. Thus, only $17,500 ($350,000/$400,000 × $20,000) is deductible.
Worthlessness of securities
a loss deduction is permitted (section 165) for securities that have become worthless during the year; treated as a capital loss and is deemed to have occurred on last day of the year
What is the millionaire's provision Applies to who and what is the limit New/old rule
a statutory dollar limit on the deduction for executive compensation (CEO and 4 other most compensated officers or CEO and CFO and 3 others); limits the amount the employer can deduct for the taxable COMPENSATION of a covered executive to 1 million annually publicly held corporations with a ceiling of $1 million per covered executive per annual tax year compensation agreed to prior to 11/2/17 this provision only applies to salary; after this date, it applies to salary and performance based compensation like bonus and commission
TP purchased Lyft stock for $500,000 early in year, now at end of year the FMV is $350,000. On 12/1/19 he sells it for $350,000 then purchases same stock next day for $352,000. What is this called? How do you account for your sale of it? What would basis be after buying for $352,000? Why?
a wash sale amount realized 350,000, less adjusted basis 500,000 is realized loss of 150,000 that is not recognized (deductible loss); basis would be $502,000 due to recovery of capital doctrine cannot deduct if you repurchase same stock within 30 days; if after that date, the entire realized loss is deductible
Cost recovery if 179 taken first for 5 year asset Same thing for 7 year Advice 24% bracket and elects 179 for 7 year asset. PV of tax savings for both assets w 6% discount rate Same facts but not 179 on either asset
a. 5-year class property Immediate expense deduction under § 179 7-year class property Immediate expense deduction under § 179 ($520,000 − $200,000) MACRS cost recovery [($420,000 − $320,000) × 0.1429] Total deduction b. 7-year class property Immediate expense deduction under § 179 5-year class property Immediate expense deduction under § 179 MACRS cost recovery [($200,000 − $100,000) × 0.20] Total deduction $200,000 320,000 14,290 $534,290 $420,000 100,000 20,000 $540,000 c. The deduction for the year would be $5,710 larger ($540,000 − $534,290) if § 179 expense was first allocated to the 7-year class property (i.e., the longer lived asset). Therefore, she should elect to expense the 7-year property (the furniture) first. d. The present value of the tax savings is $146,491. Year 5-Year 7-Year Asset Asset Total Tax Savings (@ 24%) $129,600 $120,000 $420,000 32,000 0 32,000 19,200 0 19,200 11,520 0 11,520 11,520 0 11,520 1 2 3 4 5 6 7000 8000 $540,000 5,760 0 5,760 Total $200,000 $420,000 $620,000 $148,800 NPV $146,490.76 e. If Lori chooses not to use the § 179 expense election, the present value of the tax savings generated from using MACRS deductions is $130,520. As the present value of the tax savings from using the § 179 deduction on the 7-year asset is $15,971 greater ($146,491 less $130,520), Lori should expense the 7-year asset. 7,680 4,608 2,765 2,765 1,382 Year 5 6 7 8 5-Year 7-Year Asset Asset 40,000 $ 60,018 Total Tax Savings (@ 24%) $100,018 64,000 102,858 166,858 38,400 73,458 111,858 23,040 52,458 75,498 23,040 37,506 60,546 11,520 37,464 48,984 37,506 37,506 18,732 18,732 Total $200,000 $420,000 $620,000 $ 4,496 $148,800 1 $ 2 3 4 24,004 40,046 26,846 18,120 14,531 11,756 9,001 NPV $130,520.14
Tab exchanges real estate used in his business along with stock for real estate to be held for investment. The stock transferred has an adjusted basis of $45,000 and a fair market value of $50,000. The real estate transferred has an adjusted basis of $85,000 and a fair market value of $190,000. The real estate acquired has a fair market value of $240,000. What is Tab's realized gain or loss? His recognized gain or loss? The basis of the newly acquired real estate?
a. Realized gain = $110,000 [$105,000 (gain on like-kind property) + $5,000 (gain on property given up that is not like-kind)]. b. Recognized gain = $5,000 (on property given up that is not like-kind). c. New basis = $135,000 [$240,000 (fair market value of new real estate) − $105,000 (postponed gain on the like-kind property)].
Bad debts above or below line How to calculate casualty loss if you don't file claim for insurance proceeds
above lesser of change in FMV or AB; less proceeds if you file claim (lesser of change in FMV or AB minus the deductible amount would be proceeds)
When you have self-employment tax what do you do Determining new basis on like-kind exchange (maybe do 13.79 again)
after computing taxable income, add the full amount of self-employment tax (not 50%) to this amount then subtract credits to get your refund/payable subtract gain from FMV; add loss to FMV
Wash sale rule
also looks 30 days back from sales date: if you bought same amount before selling your original it is a wash
Amortizable section 197 intangibles Examples 2 types of intangibles Goodwill is subject to Tax purposes amortization
amortized ratably over 15 year period beginning in month it is acquired goodwill, going concern value, franchises, trademarks, trade names finite ones like patent are amortized while goodwill is infinite and isn't impairment test that measures value; only taken loss if it goes down before your cost 15 year straight line amortization in month it is acquired
Olaf lives in the state of Minnesota. In 2019, a tornado hit the area and damaged his home and automobile. Applicable information is as follows: Item Adjusted Basis FMV before FMV after Insurance Proceeds Home $350,000 $500,000 $100,000 $280,000 Auto 60,000 40,000 10,000 20,000 Because of the extensive damage caused by the tornado, the President designated the area a Federal disaster area. Olaf and his wife, Anna, always file a joint return. Their 2018 tax return shows AGI of $180,000 and taxable income of $140,000. In 2019, their return shows AGI of $300,000 and taxable income (exclusive of the casualty loss deduction) of $220,000. Determine the amount of Olaf and Anna's loss and the year in which they should take the loss.
amount of loss before 10% limitation: 70,000 home + 10,000 auto = 80,000 - 100= 79,900 loss on last years: 79,900 - 18,000 (10% * 180,000) = 61,900 this year: 79,900 - 30,000= 49,900 2018 benefit will be at rate of 22% with taxable of 78,100 (140-61.9); 2019 will be 24% bc of taxable of 170,100 (220-49,900). this means tax savings of 13,618 in 2018 and 11,976 in 2019 (rate * 61,900 or 49,900) so take it on 2018
TP buys ring for 6,000 that is worth 10,000. On 10/10/19 it is stolen and your insurance policy gives you 10,000 cash. What if you get ring worth 10,000
amount realized 10,000 less basis 6,000 realized gain of 4,000 recognize 0 due to involuntary conversion adjusted basis: 10,000 - 4,000 postponed = 6,000
Have building purchased for 3 million that has depreciated 600,000 and has a FMV of 5 million. Trades it for building with FMV of 1.5 million with 3.5 million cash.
amount realized 5 million less adj basis 2.4 million realized gain of 2.6 million recognized gain of 2.6 million postponed of 0 new basis: 1.5 million
Buy 100 shares for $110 that equals 11,000 On 12/5/19 he buys 50 more shares that equals 8,000. He then on 12/15/19 sells original 100 for 9,000. DO WASH SALE PROBLEM IN BOOK INSTEAD
amount realized 9,000 less AB of 11,000 realized loss of 2,000 recognized loss of 1,000 because only 1,000 is a wash sale (had 100 then bought 50 more; 100 would be entire wash sale) new basis: 4,000 (half of the 50 equaling 8,000) + 1,000 non wash sale
Susan sells it for $15,000 Sells it for 60,000 What about $50,000
amount realized is 15,000 less adj basis of 35,000 is a realized loss of 20,000 and a recognized loss of 20,000 realize 60,000, basis is 55,000, realized gain is 5,000 realize 50,000, basis is 50,000, no gain or loss
TP owns building with FMV of 3 million and adjusted basis of 1.3 million. Receive building worth 4 million and has mortgage of 1 million. Gains and new basis?
amount realized: 4 million less adjusted basis 2.3 million realize gain 1.7 million recognize 0 bc we didn't receive boot postponed gain is 1.7 million FMV - postponed gain 4 million - 1.7 million = 2.3 million
How to calculate percentage depletion
based on a specified percentage provided for in the code, and it varies in accordance with the type of mineral interest involved apply the rate to the gross income from the property and it cannot exceed 50% of taxable income from property before allowance for depreciation Special rules apply to certain oil and gas wells under § 613A (e.g., the 50% ceiling is replaced with a 100% ceiling, and the percentage depletion may not exceed 65% of the taxpayer's taxable income from all sources before the allowance for depletion).
Qualifying property: eligible for cost recovery if (5)
business or income producing property limited life for depreciable property: subject to wear, tear property basis: for depreciation is adjusted cost basis relevant date to begin depreciating an asset is the date an asset is placed in service if personal use assets are converted to business or income producing use, the basis for cost recover and for loss is lower of adjusted basis or FMV at time property was converted
Cost depletion Percentage How to choose Why do you amortize or depreciate assets
can be used on any wasting asset (only one allowed for timber); deplete on natural resources allowable but subject to several limitations, particularly gas and oil calculate both and use one that results in higher deduction to recover costs
Amos is a self-employed tax attorney. He and Monica, his employee, attend a tax conference in Dallas sponsored by the American Institute of CPAs. The following expenses are incurred during the trip: Amos Monica Conference registration $ 900 $900 Airfare 1,200 700 Taxi fares 100 -0- Lodging in Dallas 750 300 Amos pays for all of these expenses. Calculate the effect of these expenses on Amos's AGI. Would your answer to part (a) change if the American Bar Association had sponsored the conference? Explain.
can deduct all of these since they are for trade/business no because still in his line of business as tax attorney
Section 121 exclusion treatment Requirements for this (3)
can exclude 250,000 if single or 500,000 if MFJ of a realized gain on your income from the sale of a principal residence if you meet these criteria 1. principal residence for 2 years during 5 year period ending on sale 2. this exclusion can only be used once every 2 years 3. there are 3 exceptions to these requirements above a. change in place of employment: must be principal residence when this occurs b. health: must have physician recommendation for change in residence for treatment or personal care c. other unforeseen circumstances: involuntary conversion of residence, death of qualified individual, cessation of employment that results in eligibility for unemployment comp, divorce or legal separation, multiple births from same pregnancy
Itemized deductions include
certain business related and certain personal expenditures 1. business related include 212 expenses related to production of income & unreimbursed employee business expense 2. personal expenditures: charity, medical expenses, mortgage interest, property taxes, state income taxes, personal casualty loss
Can you deduct sales tax? Different computations on a return when you have positive QBI
choice of that or state income negative there is no self-employment tax but there is where you can deduct 50% with positive QBI above the line; then a deduction for QBI right before taxable income (QBI-deduction-your carryforward loss *.2)
Section 212 Examples for landlord Schedule E Schedule C
deduct any ordinary and necessary investment expense utilities, repairs, insurance, maintenance, mortgage interest production of income business
Hobby expenses and section Exception Code way for determining if it is a hobby or not Where does hobby income go Where do hobby deductions go
deductible to the extent of hobby income (section 183) can overcome this exception if TP shows conclusively that the activity is not a hobby; if you have profit in 3 of 5 or 2 of 7 it is not a hobby if it does not show a profit in at least three of five consecutive years, burden is shifted to IRS to show activity is a hobby (or 2 of 7 for activities involving horses) line 21: other income which increases your AGI some are itemized like property and home mortgage once something becomes a hobby, you take it off schedule c; owning horses like Pitino would be
What is qualified business income Does not include Other 212 deductions Section 162 expenses
deduction allowed for noncorporate taxpayers (sole proprietorship, partnership, s corp) above the line: lesser of 20% of qualified business income or 20% of taxable income before this deduction less any net capital gain specified trade or services most are for AGI: allows deductions for ordinary and necessary expenses incurred for production of income, management of property held for production of income, expenses paid in connection with refund of any tax (rent and royalty income); investment interest expense is from AGI deduction for all ordinary and necessary expenses incurred in carrying trade or business; key determination is to make sure it is not a hobby (falls under trade or business)
Health insurance premiums Dividends paid Self employment tax Alimony agreements before 2019 Charitable contributions are deductible as long as they are to
deduction for AGI (above the line) include in ordinary income separate from your gain/loss calculations 50% of your calculation is deducted for AGI deducted for AGI charitable ORGANIZATIONS
Allison acquires 5 year asset on February 1, 2019 for 80,000. Recap her two options. What if she sells it in 2021 for 50,000.
expense all of it immediately since it is less than 1.02 million above the line take MACRS to expense each year in accordance with table if electing 179, you can realize a gain of 50,000 since your basis is 0 basis decreases each year based on how much you expense; so subtract that sum from your basis to find your realized gain (the year you sell take .5 depreciation)
Who are related parties Related party transactions: Jim sells stock to sister with adjusted basis of $55,000 for the FMV of $35,000. Explain dual basis if sister sells it
family, corporation individual owns more than 50% stock Jim amount realized is $35,000, realized loss is $20,000, adjusted basis if $55,000; recognized loss is 0 since it is related party he can't deduct it selling it at a loss (below 35,000) means her basis will be 35,000), selling it at a gain (above 55,000) means 55,000 is her basis, in between 35 and 55 is no recognized gain or loss
Above or below the line: Self-employed and contribute to pension plan Sole proprietor taking client to dinner to discuss new business Payment of professional dues not reimbursed by employer Teacher who purchases supplies for her classroom that are not reimbursed
for AGI not deductible not from 2018-2025 for AGI
You're deciding which asset to immediately expense 179, what do you do
if it's five year first, subtract the full amount of that and then the remaining amount from the second asset to use up all the expense you are electing then, take full cost of second asset, subtract how much of it you are expensing, and multiply that by the MACR amount in year 1 add these three numbers
179 and the mid-quarter convention explanation
if you place more than 40% in the last quarter of the year, you must use the mid-quarter convention and depreciate using special MACR table if you use 179 on the asset in the last quarter of the year, the mid-quarter convention does not apply and you may be able to deduct more
Limit on charitable contributions Medical expenses Personal casualty losses
in excess of 20% 30% or 50% of AGI can't be deducted (ceiling) expenses up to 10% of AGI are not deductible (floor?) reduced by a 100 floor per casualty and 10% of AGI floor per tax year
Review of special holding period rules: Nontaxable exchanges Carryover of another taxpayer's basis Certain disallowed loss transactions Inherited property
includes the holding period of the former asset when its nontaxable, former owner's holding period carries over to new owner if the basis carries over when realized losses are disallowed, holding period does not carry over treated as more than one year no matter how long property is held by heir (automatically long-term)
TP's method of accounting determines when Cash method Credit card purchases
income and expenses are recognized expense is deducted when it is actually paid with cash or other property; prepaid expense subject to 12 month rule deductible immediately bc you pay the store immediately but then owe the bank
The "economic" or "business" loss is what the law intended to allow as a net operating loss (NOL) sometimes helps to understand the adjustments to taxable income necessary to arrive at the NOL, as well as the recomputation of tax liability for the year(s) to which the loss is carried. NOL can be and carried forward on schedule C how long
indefinitely to offset income in other taxable years; only have one if your C loss exceeds all other forms of income
Can't take 179 if Why is NOL put in
it will create a loss/you're in loss position Offset it because they allowed more deductions
Amount of loss for business property: completely destroyed partially destroyed effect of insurance recovery
loss is adjusted basis at time of destruction loss is lesser of adjusted basis or difference between FMV before and after event the amount of loss for either one of these is reduced by any insurance recovery
Sale of personal/principal residence rules Requirement and purpose 4 deductible losses Single TP purchases personal residence for 200,000. They sell it for 500,000... Equation for postponed gain
loss never recognized because it is considered personal use gains can exclude 250,000 from GI or 500,000 for MFJ at date of sale taxpayer must have owned and used as a principal residence for at least two years during the five year period ending on the date of sale; can't just abuse law by fixer upper business property, investment property/production of income, casualty loss, gambling to extent of winnings amount realized is 500,000 less 200,000 is realized gain of 300,000. Exclude 250,000 and include 50,000 in income realized gain- recognized
1231 assets Gain and losses when selling these What is section 1245 depreciation recapture
machinery and equipment used in a trade or business that is subject to depreciation or real estate that is used in a trade or business whether or not it is depreciable; anything used in ordinary course of business gain is always a long term capital gain with a beneficial tax rate; loss is ordinary and can offset against ordinary income unlike capital losses; both are good reclassification of income
To be deductible under section 162 or 212, any expense must be For compensation services 162 to be deducted, it must be
necessary: prudent businessperson would incur the sam expense and the expense is expected to be appropriate and helpful in the TP's business; helpful and appropriate in carrying on trade or business, not indispensable (courts) ordinary: normal, usual, or customary in the type of business conducted by the TP and not capital in nature; doesn't have to be recurring though; common and accepted practice (courts) reasonable: not excessive in the circumstances (courts); owner pays family more than others; IRS can adjust so that profit goes up and business pays more
STCL of 10,000 and STCG of 8,000. LTCL of 15,000 and LTCG of 9,000. What schedule do you use and what goes on it
net STCL 2,000 net STCL of 6,000 deduct all 2,000 then 1,000 more you have net LTCL carry-forward of 5,000 factor the 5,000 carry-forward on it
30,000 1231 gain and 22,000 1231 loss; what do you do What schedule if LTCG 20,000 gain and 26,000 loss: Overall concept
net it for 8,000 LTCG which is good schedule D 6,000 ordinary loss that is deductible always net them: LTCG if gain at all; ordinary if loss at all
Is interest on loan used to buy municipal bonds deductible How to figure out everything in regards to vacation home
no because it is TAX EXEMPT INCOME; interest on others would be deductible start with income
TP purchases 2 piece of equipment. 1/15/19 buy 10,000 and 12/30/19 90,000. Can you use mid quarter convention rule?
no because more than 40% was bought in last quarter; must use 2/15 because it is midpoint of first quarter and then 11/15/19 for the other one
Elisa and Clyde pay $8,000 in wages to Boyd, a part-time employee. Because this amount is $1,000 below the minimum wage, Boyd threatens to file a complaint with the appropriate Federal agency. Although Elisa and Clyde pay no attention to Boyd's threat, Chelsie (Elisa's mother) gives Boyd a check for $1,000 for the disputed wages. The retail shop is the only source of income for Elisa and Clyde. Can Chelsie deduct this and how could everyone's situation improve
no she cannot deduct because it is Elisa and Clyde's obligation related to their business Chelsie gifts 1,000 to Elisa and Clyde or loaned 1,000 to them; they could deduct it if they paid it to Boyd
Excess business loss and how to calculate it Her proprietorship generates gross income of $320,000 and deductions of $600,000, resulting in a loss of $280,000. The large deductions are due to the acquisition of equipment and the use of immediate expense and additional first-year depreciation to deduct all of the costs associated with the acquisitions. What if she is married?
noncorporate taxpayers only: not deductible; take gross income and if deductions are less there is no issue; exceeding it means you have loss that is limited; 255,000 for all statuses except 510,000 MFJ; start with total deductions and subtract income, then deduct depending on your status; that deduction is above line and the rest is carried forward NOL start with 600,000 total deductions, less income, less 255,000 is excess business loss of 25,000 that is carried forward; only 25,000 can't be deducted 600,000 - 320,000 - 510,000 = negative number so no excess business loss; this means all 280,000 can be deducted
Interest on loan to buy municipal bonds deductible or not Tax preparation fees
not because it is tax exempt; interest on others would be not deductible
Lobbying expenses to influence Federal legislation, high-ranking public officials (examples of these also) Membership dues of trade associations and other groups that are used for lobbying
not deductible; President, VP, cabinet, 2 most senior officials in each agency of the executive branch disallowed unless the dues are for something not related to lobbying
How to use federal disaster area (personal casualty loss) and apply AGI rule How to figure out which year to apply this on return since you get choice of this year or past Do Ch. 7 #33 again and #39
once you've calculated the casualty loss the way you know how to do, yo must subtract 10% of AGI from that to get the actual loss subtract total loss calculated for each year from taxable income to get your new taxable income; check which marginal bracket you will be in and multiply the total loss by this rate to find tax savings and greater one is one you choose
Why is interest on money borrowed to purchase tax-exempt securities not deductible What code does to combat this Business income expense limitation NFL has 20,000,000 business interest expense, 50,000,000 taxable income and 1,000,000 business interest expense
one could borrow money, deduct it on his tax return, and invest the proceeds in tax-exempt securities disallows as a deduction the expenses of producing tax-exempt income and any indebtedness incurred or continued to purchase or carry tax-exempt obligations business interest income plus 30% of adjusted taxable income .3 * 20,000,000 = 15,000,000 + 1,000,000 = 16,000,000 expense; remaining 4 million of business interest expense is carried forward
Amount of casualty loss for personal use property and when can yo eve do this Effect of insurance recovery Per event reduction Itemized deduction for loss exceeding 10% of AGI What happens if it is deemed progressive deterioration
only for federal disaster area; treatment is same for completely and partially destroyed: lesser of adjusted basis or difference in FMV before and after; these are taken as itemized while business is an above the line deduction loss is reduced by insurance recovery or any insurance that could have been recovered if a timely claim had been filed amount reduced by insurance must be further reduced by 100 per event floor amount in the per event reduction are an itemized deduction only to the extent they exceed 10% of AGI; meaning that you take your calculation and subtract 10% of AGI there is a decline in value rather than a loss
Are legal fees associated with criminal defense deductible Can you deduct expenses related to an illegal business Difference between professional and in-house lobbying
only if associated with trade/business/production of income yes if they are ordinary, necessary and reasonable can deduct in house up to 2,000 per year (de minimis) but not professional at all; once it exceeds 2,000, nothing can be deducted at all
Do you recognize boot How much to recognize Gifting of boot Exception
only if there is a realized gain; not loss because it is not like-kind lower of the amount of gain realized or the amount of boot received normally does not trigger recognition recognize gain or loss if the adjusted basis of the boot transferred is not equal to its FMV
g 2019. Data on these property dispositions are as follows: Asset Cost Acquired Accumulated Depreciation Sold for Sold on Rack $100,000 10/10/15 $62,000 $85,000 10/10/19 Forklift 35,000 10/16/16 23,000 5,000 10/10/19 Bin 87,000 03/12/18 34,000 60,000 10/10/19 amount and character of recognize/gain of each amount treated as LTCG
ordinary income of 54,000 due to 2 gains and a 1231 loss that is deductible no net 1231 gain, so none
General vacation home rule Portionof otherwise deductible not deducted against rental income is Personal use rule Rental use rule Personal/rental use: itemized rule and do #46-49 on Ch. 6
otherwise deductible expenses (property tax/mortgage) are offset against rental income; other expenses are deductible to extent of remaining rental income deductible as an itemized if rented for fewer than 15 days a year, it is a personal residence; rent income excluded and only mortgage and property are deductible rented for more than 15 and not used for personal for more than greater of 14 days or 10% of total days rented, it is rental property; expenses allocated between each rented 15+ and personal more than greater of whatever it is both; deducted in same order as if it was a hobby; split it into two columns by $ of use and can't deduct mortgage can itemize the sum of the itemized ordinarily less your deduction for that
Short term gain 50,000 and long term loss 40,000; Short loss 35,000 and long gain 20,000 TP has short term capital loss of 20,000 and long term capital loss of 15,000. TP would want to deduct 3,000 from what, but the rule states what TP STCL of 5,000 and STCG of 3,000.
pay ST rate on 10,000 loss is short term and can deduct 3,000 long term but have to take it from short term and carry-forward 17 can deduct all of it
Public policy limitation Examples Political contributions Lobbying expenses
payment that is in violation of public policy is not necessary, and therefore not deductible nondeductible items: bribes and kickbacks, fines and penalties paid to government not deductible and no tax credit current law restricts ability to deduct these
Most common denominator in determining whether an activity is a trade or business 3 questions to ask whether an item qualifies as a trade or business expense
profit motive because there is no one definition for these terms despite the code, regulations, and courts all trying to arrive at one 1. was the use of a particular item related to a business activity 2. was expenditure incurred with intent to realize profit or produce income 3. were TP's operation and management activities extensive enough to indicate the carrying on of a trade or business
Original ACRS rules New MACRS rules 5 year MACR table you taken ore depreciation year 2 than year 1; why?
property placed in service after 12/31/80 and before 1/1/87 these rules apply recovery periods for cost recoveries were lengthened only take half year depreciation in year 1 then full for 4 years then .5 year 6; deemed placed into service on July 1st no matter what in first year
ACRS How was MACRS designed (3) Tax law changes since 1980 IRC allows depreciation, cost recovery, amortization, and depletion why Point of the mid-quarter convention Purpose of implementing 179 (2)
property put in from 1981-1986; shortened depreciable lives and allowed accelerated depreciation methods encourage investment, improve productivity, simplify tax law (depreciated over life shorter than economic life); longer than ACRS years to reduce annual deduction widened gap between depreciation for financial reporting purposes and cost recovery for tax purposes they reflect the recovery of capital doctrine: assets acquired benefit more than one accounting period to stop people from placing large amounts into service at end of year where they can receive half year depreciation deduction; reduces cost recovery in acquisition year and defers it encourage investments in capital assets and reduce related compliance costs
What is boot When is boot used TP must Principal difference between investment and trade/business
property which is not like-kind property; an addition asset - cash, car, boat, stock - that is given to equal the amount that is received by both parties - it is a non like-kind asset. to effect an exchange where the values of the like-kind property exchanged are not equal recognize gain on boot received exerting less effort than you would in a trade or business
MACRS half year convention Mid quarter convention
provides for a half-year of cost recovery in the first year and a half-year of cost recovery in the last year if more than 40% of value of property other than real estate is placed in service during the last quarter, the mid quarter convention applies
MACRS classifications of property
provides recovery periods from 3-20 years for personal assets 3-10 year property is based on 200% declining balance method with a switchover to SL when it yields a larger amount with salvage assumed to be 0 15-20 year property based on 150% declining balance with same SL switchover
TP buys ring for 6,000 that is worth 10,000. On 10/10/19 it is stolen and your insurance policy gives you 10,000 cash. Buy new ring for 9,000.
realize 10,000 less basis 6,000 realize 4,000 recognize 1,000 postponed 3,000 new basis: 9,000 - 3,000 = 6,000
TP buys ring for 6,000 that is worth 10,000. On 10/10/19 it is stolen and your insurance policy gives you 10,000 cash. Buy new ring for 11,000. When do you have to purchase a replacement by?
realize 10,000 less 6,000 = 4,000 recognize 0 postponed = 4,000 basis = 7,000 if trade or business, within 3 years of last day of taxable year if personal use, it is 2 years
You have building worth 4 million and trade it for one worth 3.7 million. with basis of 1.2 million. You obviously won't accept, so you also receive 300,000 in cash.
realize 4 mil less adj basis 12 realized gain of 2.8 million recognize 300,000 postpone 2.5 million new basis: 3.7 - 2.5 = 1.2 million
TP purchases factory for business. Bought it for 2 million. Today, depreciation has brought that down to 1.2 million. The FMV is also 8 million. It is exchanged for a building worth 4 million. What is amount realized, and recognized gain or loss? Also new basis? What is built in gain
realize 4 million less adjusted basis of 1.2 million realized gain of 2.8 million recognize 0 postponed gain is 2.8 million FMV of acquired property - postponed gain + postponed loss which = 1.2 million difference between AR and AB
Purchased building worth 5 million. It has depreciated 2.1 million. Paid million cash and took mortgage of 4 million. Mortgage balance is 400,000. FMV is 6 million. You acquire building worth 5.1 million. Assumption of debt is 400,000, so the remaining 500,000 received is stock.
realize 6 million less basis 2.9 million realized gain of 3.1 million recognize 900,000 postpone 2.2 million new basis for building: 2.9 million new basis for stock: 500,000
TP bought equipment for 6,000. Depreciation of 4,000 for adjusted basis of 2,000. Sell asset for 6,000. What happens... Sell it for 3,000... Sell for 7,500... (unrealistic) Sell for 1500
realize 6,000, less 2,000 basis, realize 4,000 gain; this is treated as ordinary income realize 3,000, less 2,000 basis, realize and recognize 1,000; treated as ordinary income realize 7500, less 2,000, realize and recognize 5500; treat 4000 as ordinary income and the remaining 1500 as 1231 gain realize 1500, less 2000, 500 realized and recognize loss; treated as 1231 as deductible bc its business property
Tim has building worth 700k with adjusted basis of 540k. Trades with Tina's building of 600k worth and basis of 400k and xyz stock worth 100k and adjusted basis of 40,000. What is built in gain
realize 700k less basis 540k = realized gain 160k recognize 100k, postpone 60k new basis of building: 600k - 60k = 540k of stock: 100k realize 700k less basis 440k = realized gain of 260k recognize 60k to extent of stock sale postpone 200k new basis: 500k your fmv -your adjusted basis
Sheila sells land to Elane, her sister, for the fair market value of $40,000. Six months later when the land is worth $45,000, Elane gives it to Jacob, her son. (No gift tax resulted.) Shortly thereafter, Jacob sells the land for $48,000. Assuming that Sheila's adjusted basis for the land is $24,000, what are Sheila's and Jacob's recognized gain or loss on the sales? Assuming that Sheila's adjusted basis for the land is $60,000, what are Sheila's and Jacob's recognized gain or loss on the sales?
realize and recognize 16,000 realize and recognize 8,000 realize 20,000 and recognize 0 related parties realize and recognize 8,000
Tab exchanges real estate used in his business along with stock for real estate to be held for investment. The stock transferred has an adjusted basis of $45,000 and a fair market value of $50,000. The real estate transferred has an adjusted basis of $85,000 and a fair market value of $190,000. The real estate acquired has a fair market value of $240,000. What is Tab's realized gain or loss? His recognized gain or loss? The basis of the newly acquired real estate?
realized gain of 110,000 recognize 5,000 from gain on stock (not like-kind); postpone 105,000 basis = 240,000-105,000 = 135,000
Determine the realized, recognized, and postponed gain or loss and the new basis for each of the following like-kind exchanges. Adjusted Basis of Old Asset Boot Given Fair Market Value of New Asset Boot Received a. $ 7,000 $ -0- $12,000 $4,000 b. 14,000 2,000 15,000 -0- c. 3,000 7,000 8,000 500 d. 15,000 -0- 29,000 -0- e. 10,000 -0- 11,000 1,000 f. 17,000 -0- 14,000 -0-
realizeg 9,000 rec 4,000 post 5,000 new basis 7,000 1,000, 0, 1,000, 16,000 1500, 0, 1500, 9500 2000, 1000, 1000, 10000 3000, 0, 3000, 17000
What goes on schedule E Aubry, a cash basis and calendar year taxpayer, decides to reduce his taxable income for 2019 by buying $65,000 worth of supplies for his business on December 27, 2019. The supplies will be used up in 2020. Can Aubry deduct the expenditure for 2019
rental income and expenses ordinarily yes, but probably not as he is trying to manipulate tax; if seller was going out of business then yes because he'd be motivated by other reasons
Involuntary conversion Voluntarily
result of the partial or complete destruction, theft, seizure, requisition, condemnation, or sale under threat or imminence of requisition or condemnation of the taxpayer's property, eminent domain sale under own will
Worthless securities and section 1244 stock get what treatment What does this do What effect does this have
sale or exchange treatment treats a security that has become worthless as a sale or exchange that occurs on the last day of the tax year might convert what would have been a short term capital loss into a long term capital loss
Nonbusiness Business
schedule C STCL and might be deductible if you itemize fully deductible as ordinary loss above line
How do you figure out someone's QBI QBI deduction is lesser of
schedule C income - self employment tax deduction - self employed health insurance deduction 20% of your QBI or 20% of taxable income minus dividend and capital gain income
What 2 types of gain are there What are short-term gains taxed at; long term TP has 2 pieces of stock. Microsoft has FMV of 150k adj basis of 100k and IBM shares have FMV 125k and adj basis of 200k. Sold today. What do you do on return.
short term within 1 year of holding and long-term your ordinary rate (max of 37%); taxed at 0-15-20% depending on your marginal rate capital gain of 50,000 then capital loss of 75,000 net capital loss of 25,000 that is recognized deduct 3,000 max and other 22,000 is subject to capital loss carryforward
Worthless securities provision TP had spouse who started business and put 600,000 into it called ABC Corp. Became worthless and sold stock for 0. Only loss for year, how much is deducted.
small business incorporated under 1 mil can deduct 50,000 or 100,000 as MFJ if going bankrupt and becoming worthless AR 0, AB 600,000, realized and recognize loss of 600,000 deduct 100,000 treated as ordinary, 500,000 is capital loss 103,000 is deducted overall
Percentage method: CarrollCo reports gross income of $100,000 and other property-related expenses of $60,000 and uses a depletion rate of 22%. CarrollCo's depletion allowance is determined as follows:
start with GI 100,000 less expenses (60,000) TI = 40,000 can subtract lesser of .22 * 100,000 or .5 * 40,000 (can't exceed 50% of TI) less 20,000 TI after depletion = 20,000
How much rental income and deductions to include if it is rental and residential rules? Do Ch. 6 #50 again Does something happen if state income tax does not exceed sales tax paid?
start with rental income, then deduct in hobby order first sum your property and mortgage expense, then multiply by the time rented and deduct then utilities and maintenance are deducted: days rented/DAYS USED * amount and deduct deduct others like depreciation until hitting 0 if it goes below zero, there is no income to be included can take itemized deduction: sum together property and mortgage expense; subtract the vacation portion (days rented/365 * expense)
Problem where someone can sell stock at a loss in one year or half and half and wants to limit AGI for both, what do you do? CH. 7 #32 if you want to redo it
start with salary, subtract ordinary loss (limited to 50,000 or 100,000) then the rest is netted against LTCG, can deduct 3,000 and carry rest forward
Limitation on personal casualty loss
subtract 10% of AGI
What if someone wants to use some of their 179 expense but not all of it. How do you find total deduction? Does 179 include real property Any 179 in excess of business income is
subtract the expense you want from what you place into service; multiply this amount by the MACR amount in year one NO carried forward indefinitely
TP has equipment 3 year for 1 million and 7 year for 1 million. Important to remember with hobbies and miscellaneous deductions
take 179 and can deduct 1,020,000 so you take it on 7 year beneficially, then can deduct remaining 20,000 on the other. So you have 980,000 remaining divided by 3 year life is 326,666.33. Then divide in half again for year 1 and it is 163,333. you can still deduct otherwise deductible, but remaining are miscellaneous
TP house partially destroyed. Had FMV of 300,000 that changed to 100,000. AB of 150,000. Insurance is 80,000. Occurs on 1/5/19. On 6/2/19 someone steals tv worth 700 with basis of 1000. Another painting worth 2000 with basis 1500, and sofa worth 2100 and basis of 2500. AGI is 100,000.
take lesser of change in FMV and AB: 150,000 deduct 80,000 = 70,000 deduct 100 = 69,900 lesser of all 3 stolen: 4,300 deduct 100 = 4200 add these together = 74,100 subtract 10% AGI of 10,000 can deduct 64,100
TP has business truck with basis of 80,000 and FMV is 75,000 that is destroyed in storm. FMV drops to 50,000. There is 10,000 insurance Truck destroyed completely in fire with FMV of 60,000 and AB of 72,000.
take lesser of change in FMV or AB: 25,000 less insurance; not less 100 in businesses of 10,000 equals 15,000 casualty loss which would decrease AB:fixing it improves AB take adjusted basis and deduct it fully
TP has car destroyed by fire. Insurance repays him 10,000, FMV is 15,000 and AB is 20,000. His AGI is 100,000. What do you do
take lower of basis or FMV: 15,000 subtract insurance proceeds: 10,000 subtract 100 per casualty event equals 4900 has to exceed 10% of AGI, which it does, so we deduct 10,000 (10% of AGI) and casualty loss of 0
How to figure out if you can deduct medical expenses as itemized? Do Ch. 6 #34 again
take your AGI * 10% and subtract it from your expenses; if it's negative, you can't deduct
1245 recapture on 1231 assets: applies to what but not what \ TP purchased equipment for 50,000 in trade or business that is 1231 because equipment is depreciated. Take 20,000 depreciation lowering basis to 30,000. You sell it for 35,000. Sell for 51,000. Sell for 27,000.
tangible personal property and not real estate (don't worry about depreciation recapture) AR 35,000 AB 30,000 Realize 5,000 Recognize 5,000 as ordinary income (marginal rate) instead of LTCG due to depreciation recapture (0-15-20); real estate would be 1231 gain instead AR 51,000 AB 30,000 Realize 21,000 Recognize 20,000 as ordinary (accumulated depreciaiton) and 1,000 as 1231; would be 1231 gain in real estate AR 27,000 AB 30,000 Realize and recognize 3,000 bc trade/business
TP bad business debt has 50,000 loan and max to receive is 30,000. But then in 2020 you receive 35,000. What to do in 2020. Nonbusiness
tax benefit rule: include 5,000 in income after deducting 20,000 in 2019 deduct nothing then 15,000
Section 1245 provision*** Depreciation includes Reasons for section 1245
the portion of recognized gain from the sale or exchange of property that represents allowable deprecation is treated as ordinary income; all depreciation is subject to recapture rules regardless of method used; any gain relating to the extent of accumulated depreciation needs to be recaptured as ordinary income cost recovery and immediate expensing to prevent dual benefits from depreciation deductions and long-term capital gain treatment
Business bad debt and treatment Partial worthlessness Loan amount for business bad debt has balance of 100,000. 3rd party says max amount paid will be 70,000. What bad debt expense can you take? Business you can take it as time goes, nonbusiness can't deduct until fully settled
there is a proximate relationship between the debt and the lender's trade or business treated as an ordinary loss with no limitations on deductibility can be recognized 30,000
If it is both vacation and residential, you can deduct
to the extent of rental income; all else must be included in income if you profit
4 categories of deductions for adjusted gross income
trade and business deductions excess capital losses and other losses on sale or exchange of property other than personal use property (casualty loss on business property) section 212 deductions allowed only if attributable to rent and royalty income deduction for qualified business income also contributions to HSAs, federal self-employment 50%, IRA/retirement plans, old alimony, interest on student loans
What are qualifying dividends and how do you treat them Is 1231 loss above or below line When going on a trip for work, all expenses are deductible above the line as long as what
treat them as ordinary income that appear above the line and increase AGI 1231 losses are treated as also ordinary losses that are fully deductible above the line it is related to your line of business: must be accounting conference if you're an accountant and not a sports one
Small business stock treatment for worthlessness of securities Limits Requirement Qualifying taxpayers
treated as ordinary loss to be offset against ordinary income the ordinary loss is limited to 50,000 or 100,000 for MFJ total amount of money and other property received by the corporation for stock as a contribution to capital does not exceed 1 mil; test is made when stock is issued shareholder must be an individual and must have got stock from the corporation
Nonbusiness bad debt and treatment Partial worthlessness
unrelated to trade or business when it was created or became worthless treated as a short term capital loss; if you have no capital gains, it can only offset 3,000 of ordinary income per year partially worthless bad debt cannot be deducted; you have to wait and recognize the net amount of the loss upon final settlement
Related parties: family to family, then recipient sells it for a loss; sells for a gain; if sold between those two amounts what is AB When it is primarily rental property, what is critical thing to remember with deductions (2)
use purchase price as basis use family member adjusted basis what you sell it for ignore capital expenditures can itemize property taxes (percentage of personal use * property tax) and deduct above the line your other expenses that offset income
Residential rental real estate cost recovery; and what is considered residential Non-residential property placed in service after 5/12/93 All real estate uses what
uses a SL method over a 27.5 year recovery period; property for which 80% or more of the gross rental revenues are from non-transient dwelling units and hotels wouldn't count SL method over 39 year period depreciated using a mid-month convention; assumes it is placed into service at this time
How do you calculate cost depletion Similar to 2 allowed methods for depletion
using adjusted basis of asset divide it by the estimated recoverable units of the asset to get depletion per unit (barrels, tons etc.) multiply this by the # of units sold not produced to get cost depletion to be taken units of production method for calculating depreciation cost and percentage
Determining bad debts if a TP sells goods or services on credit and the AR becomes worthless Compared to accounting treatment Effect on cash basis TP
usually 1% OF SALES goes to allowance for doubtful accounts (allowance method: big guess usually matching principle) a bad debt deduction is permitted unless he/she uses the cash method tax uses the specific charge-off method that does not properly match income and expenses does not get a bad debt deduction for uncollectible AR since sales have not been included in income (credit sales)
What do you do if you have dependent children deduction (see 14 or 7 EC) Do 14.73 again, 6.50, go back in notebook and do 8.41d&e with facts from notes
would get dependent tax credit if passing all tests
Dimond Manufacturing places the following assets in service during 2019. All are 5-year class assets, and they are the only assets Dimond placed in service during the year. 4/3/19: 873,000 7/7/19: 232,000 10/22/19: 1,045,000 Do it if you elect 179 on last one
write off 1,020,000 of 1,040,000 so the balance will be 873, 232, 25 so the mid quarter would not apply at this point cost recovery is 1,020,000 + the remaining balance of the other 3 * .2 = 1,246,000
TP loans 50,000 which creates NP. If someone defaults do you take bad debt expense. Schedule D above or below line
yes above: capital losses
Can you personally deduct IRA contributions What about an individual loss on sale of real estate (not business) Divorce agreements before 2019
yes above the line yes above the line deductible above the line I think and includible
Purchase building for 2.6 million by putting cash down of 400,000 and the remaining 2.2 million with a mortgage. Current adjusted basis is 2.1 million dollars, and mortgage has outstanding basis of 800,000, and FMV is 4 million. Trade it for building with FMV of 3.2 million. What is the effect of assuming their 800,000 debt?
you basically paid them cash bc they don't owe it anymore amount realized 4 million less basis of 2.1 million realized gain of 1.9 million recognize 800,000 postpone 1.1 million new basis: 3.2 - 1.1 = 2.1 million
What is capitalization Vs. expense Do a problem on this: Stan purchased a prime piece of land located in an apartment-zoned area. Stan paid $500,000 for the property, which had an old but usable apartment building on it. He immediately had the building demolished at a cost of $100,000. The $500,000 purchase price and the $100,000 demolition costs must be capitalized, and the basis of the land is $600,000. Because land is a nondepreciable asset, no deduction is allowed.
you can capitalize by deducting depreciation or cost recovery over a depreciable life when an expenditure is for a tangible asset that has an ascertainable life (land not subject to this) if expenditure is for an intangible asset, the capitalized expenditure can be amortized if it has ascertainable life or not. They are amortized over 15 years using SL method. (goodwill is an example: take its value and divide by 15 per year)
Why like-kinds are beneficial What is important to remember in a like-kind exchange 3 requirements
you can dispose an asset and acquire a replacement without generating a current tax liability that the gain or loss is postponed; not lost 1. need to transfer trade or business property for trade/business prop (investments included) 2. must give up real estate and receive real estate [buildings and land] (foreign real estate generally not allowed to be used); used to be able to include personal property 3. cannot trade inventory - what you sell in the ordinary course of your business
You have brokerage account and buy on the margin that generates interest expense of 20,000. You generate income of 50,000 municipal interest and 350,000 of taxable dividends and interest. How much can you deduct?
you can't deduct interest on municipal bonds, so you have to divide taxable dividends and interest by the total income generate, and multiply that by interest expense 350/400 * 20 = $17,500 deductible
Explain the 2,550,000 limitation on section 179 You put into service 2,600,000 in 2019 Why would you choose not to use any of the 179 amount?
you cannot claim a 179 deduction if you place into service 3,570,000 of qualifying property (1,020,000 + 2,550,000); must subtract the amount over 2,550,000 from 1,020,000 to find the election 2,600,000- 2,550,000 = 50,000 1,020,000 - 50,000 = 970,000 deduction allowed total cost recovery: placed into service - deduction * MACR rate + your deduction if you expect your marginal rate to increase in the future, so you would defer deductions