Tax Final

Mike started a calendar year business on September 1st of this year by paying 12 months rent on his shop at $1,000 per month. What is the maximum amount of rent that Mike can deduct this year under each type of accounting method?

$12,000 under the cash method and $4,000 under the accrual method

Define a guaranteed payment in a partnership. How will the partnership and the individual partner account for a guaranteed payment

A guaranteed payment is a fixed amount paid to the partners for their services provided regardless of the partnership's profit or loss. Partners account for it as self-employment income and the partnership can deduct it as a business expenses. It also reduces partner's basis

Why are these pass through entities concerned about possible changes in the corporate Tax code

A reduction in tax rates typically increases profitability.

Gain recaptured under Depreciation Recapture rules for a machine would be correctly classified as

Section 1245 Gain

What is meant by separately stated items that appear on a Schedule K-1

Separately stated items have the ability to impact different taxpayers differently. The amounts shown on a schedule k-1 are based on your investment in the partnership or s corporation. Some examples included interest income, dividend income, and capital gains/losses

Contrast the tax effects of "expensing a cost" versus "capitalizing a cost"

The tax effects of capitalizing a cost is deducting it as it accrues or as the money is received/paid. You are only allowed to deduct what you have earned. Expensing a cost is being able to deduct the cost in full and benefit from the tax deductions in the current period.

A firm cannot change its tax year without formally requesting and receiving permission from the IRS

True

In cash flow terms, current deductions are worth more than future deductions

True

Jethro, a cash method, calendar year taxpayer, paid $10,000 in December of 2012 for work to be performed in January 2013. The company will deduct this amount for tax purposes for 2012

True

The company has $10,000 of interest income from New York state bonds that are included in book income, but should be excluded from taxable income

True

Define a pass through entity and provide three examples of this type of entity

a pass through entity is an entity that does not pay taxes on their income because it passes through to the individual owners responsible. General partnerships, limited partnerships, and LLC's are taxed by subchapter K. S corps are tax by subchapter S

Activities that usually do not create nexus under PL 86-272

advertising campaigns carrying free samples only for display or distribution owning or furnishing automobiles to salespersons passing inquiries or complaints on to the home office checking customers' inventories for reorder maintaining a sample or display room for two weeks or less during the year soliciting sales by an in-state resident employee, provided that the employee does not maintain a place of business in the state, including an office in the home

Permanent book-tax differences

arise from items that are income or deductions during the year for either book purposes or for tax purposes but not both. do not reverse over time, so over the long-run the total amount of income or deductions for the items is different for book and tax

Which of the following is a true statement about accounting for business activities? a) an overall accounting method can only be adopted with the permission of the Commissioner b) An Overall accounting method is initially adopted on the first return filed for the business c) The cash method can only be adopted by individual taxpayers d) The accrual method can only be adopted by corporate taxpayers e) none of these are true

b) An Overall accounting method is initially adopted on the first return filed for the business

Economic nexus

does not require physical presence states claim that they can provide an infrastructure of phone and internet connections to consumers that nonresident companies use to solicit business. Good reason-increases revenue for that state Bad reason - file a tax return in every state, unconstitutional

Which of the following expenses are completely deductible? a) $1,000 spent on compensating your brother for a personal expense b) $50 spent on meals while traveling on business c) $2,000 spent by the employer on reimbursing an employee for entertainment d) all of these expenses are fully deductible e) none of these expenses can be deducted in full

e) none of these expenses can be deducted in full

Activities usually sufficient to establish nexus

making repairs or providing maintenance collecting delinquent accounts; investigating creditworthiness installation or supervision of installation conducting training classes, seminars, or lectures for persons other than sales personnel providing engineering services approving or accepting orders repossessing property picking up or replacing damaged or returned property hiring, training, or supervising personnel other than sales employees maintaining a sample or display room longer than two weeks carrying samples for sale owning, leasing, maintaining or using any real estate, parts department, employment office, purchasing office, warehouse, telephone answering service consigning property to any person maintaining an office for an employee, including office in home

According to the Internal Revenue Code 162, deductible business expenses must be one of the following? a) minimized b)incurred for the production of investment income c)personal and justifiable d)ordinary and necessary e)appropriate and measureable

d) ordinary and necessary

Colbert operates a catering service on the accrual method. In November of year 1 Colbert received a payment of $9,000 for 18 months of catering services to be rendered from December 1st of year 1 through May 31st year 3. When must Colbert recognize the income if his accounting methods are selected to minimize income recognition?

$500 is recognized in year 1 and $8,500 in year 2

Progressive tax system

(income) rate goes up as income goes up

Regressive tax system

(sales) rate stays constant as income goes up

List the eligibility requirements in order to report as an s-corp

100 shareholder limit must be US citizen or legal alien citizens one class of stock - common family members count as 1 all shareholders must agree on the election You must file form 2553 before the 15th day of the third month of the tax year

Clyde operates a sole proprietorship using the cash method. This year Clyde made the following expenditures: $480 to US Bank for 12 months of interest accruing on a business loan from September 1st of this year through August 31st of next year $600 for 12 months of property insurance beginning on July 1 of this year What is the maximum amount Clyde can deduct this year?

760

Describe all the circumstances in which an s corporation's election can be involuntarily terminated

An s corporation can be involuntarily terminated if it fails to meet requirements of if it has passive income greater than 25 percent and corporate earnings and profits for three consecutive years

List three legal entities and compare and contrast them in terms of a) the liability protection they offer their owners and b) their tax classifications

Corporation - separate taxpaying entity which means that it pays tax on the income of the business. Provide limited liability which means that the entity is responsible not the owners A LLC - limited liability, flow-through entity is an entity who's income flows to the owner/individuals taxes Sole proprietorship - flow through entity, does not provide limited liability. The owner is responsible for the liabilities of the company

Temporary book-tax differences

Depreciation expense Gain or loss on disposition of depreciable assets Bad debt expense Unearned rent revenue Deferred compensation Organizational expenses and start-up costs Warranty expense and other estimated expenses UNICAP

State the Tax authority provided by each of the three branches of the US government

Executive - IRS, revenue bulletins, procedures Legislative - Tax code; highest form of tax authority Judicial - Tax court, uses information for similar cases

High Roller's Inc purchased theater tickets for its out of town clients. If this is treated as bona fide entertainment expenses, the entire amount paid for the tickets may be deducted from taxable income

False

Dunning is the sole shareholder of a c corpoartion she formed last year. If she elects s corporation status this year on february 1, when will the election become effective and why? what if she made the election on march 14

If she elects on February 1 or March 14 the elections will be effective january 1 on this year because she meets the requirements since the beginning of the year and made the election before march 15

Permanent book-tax differences examples

Interest income from municipal bonds Death benefit from life insurance on key employees Interest expenses on loans to acquire investments generating tax-exempt income Life insurance premiums for which corporation is beneficiary Meals and entertainment expenses Fines and penalties and political contributions Domestic production activities deduction

Explain the reasons why the MACRS system is considered to be an accelerated system of cost recovery

MACRS is accelerated because it takes a lot of depreciation up front and it shortens the asset's lives

What is the difference between a general partnership and a limited partnership

a general partnership means that the partners are responsible for the actions of the partnership. Debt is allocated based on their investment in the company. A limited partnership is not responsible but must have one general partner which is fully responsible. Debt is allocated all to the general partner

Which of the following is a true statement? a) Interest expense is not deductible if the loan is used to purchases municipal bonds b) Insurance premiums are not deductible if paid for "key man" life insurance c) one half of the cost of business meals is not deductible d) all of these are true e) none of these are true

d) all of these are true

The after - tax cost of a deductible expense _____ as the taxpayer's marginal income tax rate increases

decreases

Vertical equity

greater income, greater tax liability

Temporary book-tax differences

reverse over time such that over the long-term, corporations recognize the same amount of income or deductions for the items on their financial statements as they recognize on their tax returns. arise because the income or deduction items are included in financial accounting income in one year and in taxable income in a different year.

Horizontal equity

same income pays same tax

Nexus

tax presence sufficient connection between a business and a state that subjects the business to the state's tax system