Taxation 3300
Recovery Basis for Personal Use Assets Converted to Business or Income-Producing Use
Basis for cost recovery and for loss is lower of • Adjusted basis or • Fair market value at time property was converted Losses that occurred prior to conversion can not be recognized for tax purposes through cost recovery losses that occurred while the property was held for personal are nondeductible
Cost Recovery Allowed or Allowable
Basis in an asset is reduced by the amount of cost recovery that is allowed and by not less than the allowable amount If the taxpayer does not claim any cost recovery on property during a particular year, the basis of the property still is reduced by the amount of cost recovery that should have been deducted (the allowable cost recovery).
Statements on Standards for Tax Services
- Do not take questionable position on client's tax return in hope of it not being audited - Client's estimates may be used if reasonable - Try to answer every question on the tax return (even if disadvantageous to client) - Upon discovery of an error in prior year tax return, advise client to correct
canons of taxation
- Equality - Convenience - Certainty - Economy
Three alternatives are available for R&E expenditures
- Expense in year paid or incurred, - Defer and amortize over period of 60 months or more, or - Capitalize (deductible when project abandoned or worthless) Tax credit of 20% of certain R&E expenditures is available
If owner of life insurance policy cancels the policy and receives the cash surrender value
- Gain must be recognized to extent amount received exceeds premiums paid on policy - Loss is not recognized
Statute of Limitations for deficiency assessment by IRS(when you owe taxes)
- Generally 3 years from the later of the due date(April 15) or the filing date of the return - For material (more than 25%) omissions of gross income, time period is 6 years - No statute if no return filed or fraudulent return filed
beneficiaries of estates and trusts
- Generally, taxed on the income earned by the estates or trusts that is actually distributed or required to be distributed to them - Any income not taxed to the beneficiaries is taxable to the estate or trust
If an activity is not engaged in for profit, the hobby loss rules apply
- Hobby expenses are deductible only to the extent of hobby income
Tax research involves
- Identifying and refining the problem - Locating the appropriate tax law sources - Assessing the validity of the tax law sources - Arriving at the solution or at alternative solutions with due consideration given to nontax factors
Cafeteria Plans : if cash is taken vs if nontaxable benefit is taken
- If cash is chosen, the amount received is taxable - If a nontaxable benefit is chosen, the benefit remains nontaxable
Individuals will generally have nonbusiness bad debts unless:
- In the business of loaning money, or - Bad debt is associated with the individual's trade or business
Domestic Production Activities Deduction : Eligible taxpayers include
- Individuals, partnerships, S corporations, C corporations, cooperatives, estates, and trusts • For a pass-through entity (e.g., partnerships, S corporations), the deduction flows through to the individual owners • For sole proprietors, a deduction for AGI results
Regulations
- Issued by U.S. Treasury Department - Provide general interpretations and guidance in applying the Code
Secondary Sources
- Legal periodicals - Treatises - Legal opinions - General Counsel Memoranda, and - Written determinations • In general, secondary sources are not authority
Amount of loss and its deductibility depends on whether
- Loss is from nonpersonal (business or production of income) or personal property - Loss is partial or completely destroyed
Two exceptions to the support test
- Multiple support agreements - Children of divorced parents
If reasonable prospect of full recovery:
- No casualty loss is permitted - Deduct in year of settlement any amount not reimbursed
Section 1244 stock: Loss deduction limitation
- Ordinary loss treatment (per year) is limited to $50,000 ($100,000 for MFJ taxpayers) • Loss in excess of per year limit is treated as capital loss
Interest on Series EE U.S. Savings Bonds may be excluded from income if
- Proceeds used to pay for qualified higher educational expenses - Bonds issued after 12/31/89, and - Bonds issued to person at least 24 years old Exclusion is phased-out once modified AGI exceeds threshold amount
Mid-month Convention
- Property placed in service at any time during a month is treated as if it was placed in service in the middle of the month - Example: Business building placed in service April 25 is treated as placed in service April 15
FUTA taxes
- Provides funds for state unemployment benefits - In 2015, rate is 6% on first $7,000 of wages for each employee - Administered jointly by states & Fed govt - Tax is paid by employer -credit is allowed (as high as 5.4%)
qualifying relative
- Relationship - Gross income - Support - Joint return and nonresident alien tests ( The citizenship or residency tests)
Unearned income
- Taxable interest - Dividends - Capital gains - Rents - Royalties - Pension and annuity income, and - Unearned income from trusts
Effect of NOL in carryback year
- Taxpayer must recompute taxable income and the income tax - All limitations and deductions based on AGI must be recomputed • Exception - charitable contribution deduction - Determined without regard to any NOL carryback but with regard to any other modification affecting AGI - All credits limited by or based on the tax liability must be recomputed
Primary sources of tax law
- The Constitution - Legislative history materials - Statutes - Treaties - Treasury Regulations - IRS pronouncements, and - Judicial decisions IRS considers only primary sources to constitute substantial authority
statute of limitations : two categories involved relate to the statute of limitations applicable to:
- The assessment of additional tax deficiencies by the IRS - Claims for refunds by taxpayers two categories
The kiddie tax does not apply if
- The child has earned income that exceeds half of his or her support, - If the child is married and files a joint return, or - If both parents are deceased
If a receivable has been written off
- The collection of the receivable in a later tax year may result in income being recognized - Income will result if the deduction yielded a tax benefit in the year it was taken
Troubled Asset Relief Program
- The deduction for compensation paid to a covered executive is limited to $500,000 - Covered employees include the CEO, the CFO, and the three other most highly compensated officers
Dividends from foreign corporations are eligible for qualified dividend status only if:
- The foreign corporation's stock is traded on an established U.S. securities market, or - The foreign corporation is eligible for the benefits of a comprehensive income tax treaty between its country of incorporation and the United States
Types of Domestic production gross receipts that qualify for the DPAD:
- The lease, license, sale, exchange, or other disposition of qualified production property manufactured, produced, grown, or extracted in the U.S. - Qualified films largely created in the U.S. - The production of electricity, natural gas, or potable water - Construction (but not self-construction) performed in the U.S. - Engineering and architectural services for domestic construction
Items specifically excluded from this definition include
- The sale of food and beverages prepared by a taxpayer at a retail establishment and - The transmission or distribution of electricity, natural gas, or potable water
A special rule applies if the now-unmarried parents live apart for the last six months of the year, and:
- They would have been entitled to the dependency exemption had they been married and filed a joint return - They have custody (either jointly or singly) of the child for more than half of the year The special rule grants the dependency exemption(s) to the noncustodial parent if the divorce (or separate maintenance) decree so specifies or if the custodial parent issues a waiver on Form 8332.2
Common Deductions for Adjusted Gross Income
- Trade or business expenses - Reimbursed employee business expenses - Deductions from losses on sale or exchange of property - Deductions from rental and royalty property - Alimony - One-half of self-employment tax paid - 100% of health insurance premiums paid by a selfemployed individual - Contributions to pension, profit sharing, annuity plans, IRAs, etc. - Penalty on premature withdrawals from time savings accounts or deposits - Moving expenses
trial courts (courts of original jurisdiction)
- U.S. Tax Court: Regular - U.S. Tax Court: Small Cases Division - Federal District Court - U.S. Court of Federal Claims
Statutory penalties may be levied on tax return preparers for
- Understatement of tax liability based on a position that lacks a realistic possibility of being sustained - Willful attempts to understate tax - Failure to exercise due diligence in determining eligibility for, or the amount of, the earned income tax credit
State Income Tax characteristics
- With few exceptions, all states require some form of withholding procedures - Most states use as the tax base the income determination made for Federal income tax purposes • Some states apply a flat rate to Federal AGI • Some states apply a rate to the Federal income tax liability - Referred to as the "piggyback" approach to state income taxation
Itemized deductions : partial list
- medical expenses(deductible only to the extent they exceed 10 percent of AGI, 7.5% if age ≥ age 65) - Certain taxes and interest - Charitable contributions (may not exceed 50 percent of AGI) - Casualty Losses (in excess of 10% of AGI) Miscellaneous expenses (to the extent the total exceeds 2% of AGI) Union dues Professional dues and subscriptions Certain educational expenses Tax return preparation fee Investment counsel fees Unreimbursed employee business expenses (after a percentage reduction for meals and entertainment) - Deductions for expenses related to • The production or collection of income, and • The management of property held for the production of income - Certain miscellaneous itemized deductions (in excess of 2% of AGI)
casualty loss
- only damage applied to the taxpayer's property is deductible -not caused by the taxpayer's willful act or willful negligence -progressive deterioration is not a casualty
SCHOLARSHIPS
-Intended to provide exclusion treatment for education related benefits that cannot qualify as gifts but are not compensation for services -An amount paid to or for the benefit of a student to aid in pursuing a degree at an educational institution -A scholarship recipient may exclude from gross income the amount used for tuition and related expenses (fees, books, supplies, and equipment required for courses), provided the conditions of the grant do not require that the funds be used for other purposes -Amounts received for room and board are taxable
imputed interest income
-Interest is imputed, using Federal government rates, when a loan does not carry a market rate of interest - Imputed interest = Interest expense for borrower/ interest income for lender - loaner is deemed to have given (a gift) the borrower the imputed interest the borrower did not pay. -Interest expense imputed to borrower may be deductible
§ 179 : Annual limitations
-Expense limitation of $500,000 for 2015 is reduced by amount of § 179 property placed in service during year that exceeds $2 million. -Election to expense cannot exceed taxable income (before § 179) of taxpayer's trades or businesses • Any amount expensed under § 179 over taxable income limitation may be carried over to subsequent year(s) • Amount carried over still reduces basis currently
deductions from adjusted gross income
-Greater of Itemized deductions or Standard deduction -Personal and dependency exemption
Deductible amount depends on basis in bad debt
-If the debt arose from the sale of services or products and the face amount was previously included in income, that amount is deductible. -If the taxpayer purchased the debt, the deduction is equal to the amount the taxpayer paid for the debt instrument.
compensation for services
-If the payments or benefits are received as compensation for services (past or present), the fact that the recipient is a student generally does not render the amounts received nontaxable
Medical Reimbursement Plans
-Instead of providing the employee with insurance coverage for hospital and medical expenses, the employer may agree to reimburse the employee for these expenses. -amounts received through the insurance coverage (insured plan benefits) are excluded from income -Similarly, benefits received under a self-insured plan can be excluded from the employee's income if the plan does not discriminate in favor of highly compensated employees.
disaster area losses
-casualties sustained in an area designated as a disaster area by the President of the United States -taxpayer may elect to treat the loss as having occurred in the taxable year immediately preceding the taxable year in which the disaster actually occurred. -rationale for this exception is to provide immediate relief to disaster victims in the form of accelerated tax benefits -10%- of-AGI floor is determined by using the AGI of the year for which the deduction is claimed.
Educational Savings Bonds: Qualified higher education expenses
-consist of tuition and fees paid to an eligible educational institution for the taxpayer, spouse, or dependent. -If the redemption proceeds (both principal and interest) exceed the qualified higher education expenses, only the portion of the interest used for qualified higher education expenses will qualify for exclusion treatment -Qualified higher education expenses / (Principal and interest) X Interest
long-term care insurance
-covers expenses such as the cost of care in a nursing home -treated the same as accident and health insurance benefits -does not recognize income when the employer pays the premiums -individual who purchases his or her own policy can exclude the benefits from gross income. -The exclusion for long-term care insurance is not available if it is provided as part of a cafeteria plan or a flexible spending plan
If only partial recovery is expected,
-deduct in year of loss any amount not covered - Remainder is deducted in year claim is settled
Accrual Method Requirements : When are expenses deductible?
-deduction cannot be claimed until (1) all of the events have occurred to create the taxpayer's liability and (2) the amount of the liability can be determined with reasonable accuracy. -economic performance test is met only when the service, property, or use of property giving rise to the liability is actually performed for, provided to, or used by the taxpayer.
bad debt
-deduction is permitted only if income arising from the creation of the account receivable was previously included in income -No deduction is allowed if taxpayer is on the cash basis since no income is reported until the cash has been collected(was never recognized as income) -taxpayer must satisfy the IRS that the debt is partially worthless and must demonstrate the amount of worthlessness
Accident and Health Insurance Benefits
-depends on whether the policy providing the benefits was purchased by the taxpayer or the taxpayer's employer
depletion
-depreciation applicable to natural resources -deduction for adjusted gross income -
In the case of gift of stock to charities, dividends are taxable to
-dividend income should be included in the gross income of the donee (the owner at the record date). -same as if sold
Investigation expenses
-expenses paid or incurred to determine the feasibility of entering a new business or expanding an existing business -include such costs as travel, engineering and architectural surveys, marketing reports, and various legal and accounting services
In the case of a gift of stock, dividends are taxable to
-if a donor makes a gift of stock to someone(e.g, a family member) after the declaration date but before the record date, the Tax Court has held that the donor does not shift the dividend income to the donee
Rental of Vacation Homes : Personal/Rental Use
-if the residence is rented for 15 days or more in a year and is used for personal purposes for more than the greater of (1) 14 days or (2) 10 percent of the total days rented. -Expenses are allowed only to the extent of rent income - Allocation of expenses to personal and rental
accounting income
-income is not recognized until it is realized Income is not realized when an individual creates assets for his or her own use (no exchange)
Compensatory damages
-intended to compensate the taxpayer for the damages incurred. -Compensatory damages received on account of physical personal injury or physical sickness are excludible • Includes amounts received for loss of income associated with the physical personal injury or physical sickness -amounts on emotional distress are NOT excluded
Treasury Decisions
-issued by the Treasury Department to promote new Regulations, amend or otherwise change existing Regulations, or announce the position of the Government on selected court decisions
imputed interest income: Exceptions
-no interest on GIFT loans of $10,000(exemption) or less unless the loan proceeds are used to purchase income-producing property(limitation applies instead) -$10,000 exemption also applies to compensation-related and corporation-shareholder loans (No exemption if principal purpose of loan is tax avoidance)
Working Condition Fringes
-not required to include in gross income the cost of property or services provided by the employer if the employee could deduct the cost of those items if he or she had actually paid for them. -working condition fringes can be made available on a discriminatory basis and still qualify for the exclusion.
CORPORATE DISTRIBUTIONS TO SHAREHOLDERS
-payment to a shareholder with respect to his or her stock -distributions are taxed as dividends to shareholders only to the extent the payments are made from either the corporation's current earnings and profits (similar to net income per books) or its accumulated earnings and profits (similar to retained earnings per books) Dividends in excess of E&P are treated: -as a nontaxable recovery of capital and reduce the shareholder's basis in the stock. -Once the shareholder's basis is reduced to zero, any subsequent distributions are taxed as capital gains - As nontaxable return of capital to extent of stock basis (which is reduced) - As capital gain to extent in excess of basis
Employee Death Benefits
-payments to a deceased employee's surviving spouse, children, or other beneficiaries -If the decedent had a nonforfeitable right to the payments (e.g., the decedent's accrued salary), the amounts are generally taxable to the recipient as if the employee had lived and collected the payments.
Section 162
-permits a deduction for all ordinary and necessary expenses paid or incurred in carrying on a trade or business -deducted for AGI -include reasonable salaries paid for services, expenses for the use of business property, and part of self-employment taxes paid
Deferral of Advance Payments for Services
-permits an accrual basis taxpayer to defer recognition of income for advance payments for services to be performed after the end of the tax year of receipt. -The portion of the advance payment that is earned in the current year is included in income in the year of receipt -The portion that relates to services to be performed after the tax year of receipt is included in gross income in the subsequent tax year. Defers income from future services in the year of receipt, the entire remaining income is recorded in the next year.
§ 179 expensing
-permits the taxpayer to elect to write off up to $500,000 of the acquisition cost of tangible personal property(personalty) used in a trade or business - Cannot use § 179 for most realty or production of income property -Amount expensed reduces depreciable basis -Any elected § 179 expense is taken before additional first-year depreciation is computed. -The base for calculating the remaining standard MACRS deduction is net of the § 179 expense and any additional first-year depreciation
EMPLOYER-SPONSORED ACCIDENT AND HEALTH PLANS
-premiums are deductible by the employer and excluded from the employee's income. -Amounts received from insurance are not taxable when received for medical care OR for permanent loss of body part or function for coverage of employee, spouse, and dependents -Payments that are a substitute for salary (e.g., related to the period of time absent) are included in gross income. -Payments for expenses that do not meet the Code's definition of medical care must be included in gross income -Amounts received for medical expenses deducted on a prior return must be included in gross income
Group Term Life Insurance
-premiums on the first $50,000 of group term life insurance protection are excludible from the employee's gross income -benefits of this exclusion is available only to employees, not proprietors and partners
community property system
-property owned jointly by a married couple -all property is deemed either to be separately owned by the spouse or to belong to the marital community
Reasonableness with respect to business transactions
-question of fact -Transactions between the shareholders and the closely held company may result in the disallowance of deductions for excessive salaries and rent expense paid by the corporation to the shareholders -If excessive payments for salaries and rents are closely related to the percentage of stock owned by the recipients, the payments are generally treated as dividends(NOT deductible). -Result : excess amount is not allowed as a deduction
economic income
-rejected by Supreme court -the fair market value of the individual's net assets (assets minus liabilities) at the beginning and end of the year (change in net worth). -Change in net worth is added by the value of the goods and services that person actually consumed during the period
Simplified Method for Annuity Distributions from Qualified Retirement Plans
-required for annuity distributions from a qualified retirement plan The portion of each annuity payment that is excluded as a return of capital is the employee's investment in the contract divided by the number of anticipated monthly payments in accord to table(stating how long a certain aged person is expected to live) - cost of plan / # of payments expected = exclusion amount
Unemployment Compensation
-sponsored and operated by the states and Federal government to provide a source of income for people who have been employed and are temporarily (hopefully) out of work -TAXABLE in full
Alimony and Separate Maintenance Payments
-support payments for when couples divorce or separate ( legal obligation to support the other spouse) -deductible(deductions for AGI) by payor and are includible in the gross income of recipient
Example
Brian's new sailboat was completely destroyed by fire in 2015. Its cost and fair market value were $15,000. Brian's only claim against the insurance company was on a $10,000 policy and was not settled by year-end. The following year, 2016, Brian settled with the insurance company for $8,000. Brian is entitled to a $5,000 deduction in 2015 ($15,000 less $10,000) and a $2,000 deduction in 2016. If Brian held the sailboat for personal use, the $5,000 deduction in 2015 is reduced first by $100 and then by 10% of his 2015 AGI. The $2,000 deduction in 2016 is reduced by 10% of his 2016 AGI (see the following discussion on the $100 and 10% floors).
Deferral of Advance Payments for Goods Example
Brown Company will ship goods only after payment for the goods has been received. In December 2015, Brown received $10,000 for goods that were not shipped until January 2016. Brown can elect to report the income for tax purposes in 2016, assuming that the company reports the income in 2016 for financial reporting purposes
Deductions for AGI vs. Deductions from AGI
Business vs non-business income generating expenses/ personal
estate tax
If imposed on right to pass property at death levied on the estate of the decedent
inheritance tax
If imposed on right to receive property from a decedent
additional first-year depreciation
-taxpayers can take an additional 50 percent cost recovery in the year QUALIFIED property is placed in service -After the additional first-year depreciation is calculated, the standard MACRS cost recovery allowance is calculated by multiplying the cost recovery basis (original cost recovery basis less additional first-year depreciation) by the percentage that reflects the applicable cost recovery method and convention (basis for disposal as well) -A taxpayer may elect not to take additional first-year depreciation.
Cash Method : when are expenses deductible?
-the expenses of cash basis taxpayers are deductible only when they are actually paid with cash or other property - note / promise to pay doesn't count -payment can be made with borrowed funds
Dividends are taxed to who?
-the person who is entitled to receive them—the shareholder of record as of the corporation's record date. -if a taxpayer sells stock after a dividend has been declared but before the record date, the dividend generally will be taxed to the purchaser.(purchased before ex-dividend date)
The corporation must meet certain requirements for the loss on § 1244 stock to be treated as an ordinary—rather than a capital—loss
-total amount of money and other property received by the corporation for stock as a contribution to capital (or paid-in surplus/ APIC) does not exceed $1 million -The $1 million test is made at the time the stock is issued Major requirement is limit of $1 million of capital contributions / value of stock outstanding
Annuity insurance
-typically an insurance company that invests the amounts received from the annuitant, and the income earned serves to increase the cash value of the annuity -pay the annuitant a cash value if the annuitant cancels the contract. -No income is recognized by the annuitant at the time the cash value of the annuity increases because the taxpayer has not actually received any income -The income is not constructively received because, generally, the taxpayer must cancel the policy to receive the increase in value
modified adjusted gross income (MAGI)
-used to determine taxable amount of benefits -the taxpayer's adjusted gross income from all sources (other than Social Security) plus the foreign earned income exclusion and any tax-exempt interest income
Single Filing Status include those :
-who is unmarried -separated from spouse by a divorce decree -separate maintenance agreement and does not qualify for another filing status
Adjusted Gross Income
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Capitalization versus Expense
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Exclusion is phased-out once modified AGI exceeds threshold amount
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Exclusions
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Original Issue Discount : effective interest rate method
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Reporting Procedures
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Unit of Property (UOP)
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basic standard deduction
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recovery periods under ADS
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MACRS : eligible personalty (and certain realty) is recovered over the life period of
3, 5, 7, 10, 15, or 20 years
Example 4 Explained
30,000 x 1/2 x .192 because it's happening in the 3rd year. The 1/2 which is already in the percentage applies only to the first and last year. The third year is not adjusted for half year.
Ltr.Rul. 201314038
38th ruling issued in the 14th week of 2013
LOSSES OF INDIVIDUALS
An individual may deduct the following losses under § 165(c): • 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. -taxpayer suffering losses from damage to nonbusiness property can deduct only those losses attributable to fire, storm, shipwreck, or other casualty or theft.
Taxable part of annuity
Annuity payment per year - Exclusion amount
Amortization
Can claim amortization deduction on § 197 intangibles - Use straight-line recovery over 15 years (180 months) beginning in month intangible is acquired regardless of actual life time
Determining the amount of the deduction if an activity is deemed to be a hobby
Can only deduct expenses to extent of income from activity (i.e., cannot deduct hobby losses) Expenses are deductible from AGI
Form 1040EZ
Can't be used if : • Taxpayer claims any dependents; • Taxpayer (or spouse) is 65 or older or blind; or • Taxable income is $100,000 or more.
Tax rates
For 2015 the tax rates are 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%
Group Term Life Insurance : Amount to be included in Gross Income
For each $1,000 of coverage in excess of $50,000, the employee must include the amounts in gross income. = ((Life insurance amount - 50,000) / 1,000) x % from table x 12 months For each $1,000 of coverage in excess of $50,000, the employee must include the amounts indicated in table in gross income
Prepaid Income
For financial reporting purposes under accrual accounting, advance payments received from customers are reflected as prepaid income and as a liability of the seller. For tax purposes, the prepaid income often is taxed in the year of receipt
Treatment of Net Capital Loss
For individual taxpayers, net capital loss can be used to offset ordinary income of up to $3,000 ($1,500 for married persons filing separate returns). -If a taxpayer reports both short- and long-term capital losses, the short-term category is used first to arrive at the $3,000. -Excess capital losses are carried over to the next tax year - When carried over, capital losses retain their classification as short- or long-term
Social Security Benefits
If a taxpayer's income exceeds a specified base amount, as much as 85 percent of Social Security retirement benefits must be included in gross income. Taxability based on taxpayer's modified adjusted gross income (MAGI)
Revenue Procedure vs Revenue Ruling
A Revenue Procedure is an official statement of a procedure that affects the rights or duties of taxpayers under the law, while a Revenue Ruling is the conclusion of the IRS on how the law is applied to a specific set of facts. Generally, a Revenue Ruling states the IRS position, whereas a Revenue Procedure provides return filing or other instructions concerning the IRS position. For example, a Revenue Ruling holds that taxpayers may deduct certain automobile expenses, and a Revenue Procedure provides that taxpayers entitled to deduct these automobile expenses may compute them by applying certain mileage rates in lieu of determining actual operating expenses
canons of taxation : equality
Each taxpayer enjoys fair treatment by paying taxes in proportion to his or her income level. Ability to pay a tax is one of the measures of how equitably a tax is distributed among taxpayers
Fringe benefits: Adoption assistance programs
Employee adoption expenses paid or reimbursed by employer are excludible • Exclusion limited to $13,400 in 2015 • Exclusion phases-out as AGI increases from $201,010 to $241,010
Moving Expenses
Employer payment or reimbursement of employee's qualified moving expenses is excludible
Fringe benefits: Educational assistance programs / Qualified employer-provided educational assistance
Employer-provided educational assistance for undergraduate and graduate education is excludible • Exclusion limited to $5,250 per year • Includes tuition, fees, books, and supplies
Statutory penalties may be levied on tax return preparers for(Procedural Matters):
Failure to : • Provide copy of return to taxpayer • Sign the return as preparer • Keep copies of returns • Maintain a client list
Rental of Vacation Homes :Primarily Personal Use
If the residence is rented for fewer than 15 days in a year, it is treated as a personal residence. -The rent income is excluded from gross income, and mortgage interest and real estate taxes are allowed as itemized deductions, as with any personal residence -No other expenses (e.g., depreciation, utilities, and maintenance) are deductible
If the taxpayer is in a business the same as or similar to that being investigated
If the taxpayer is in a business that is the same as or similar to that being investigated, all investigation expenses are deductible in the year paid or incurred. • The tax result is the same whether or not the taxpayer acquires the business being investigated
Income Taxes
Imposed at the Federal, most state, and some local Income taxes generally are imposed on individuals, corporations, and certain fiduciaries (estates and trusts) Federal income tax base is taxable income (income less allowable exclusions and deductions)
Excise taxes
Imposed at the Federal, state, and local levels Restricted to specific items - Examples: gasoline, tobacco, liquor
Bankruptcy example
In Example 3, assume that Kay filed for personal bankruptcy in 2014 and that the debt is a business debt. At that time, Ross learned that unsecured creditors (including Ross) were ultimately expected to receive 20 cents on the dollar. In 2015, settlement is made, and Ross receives only $150. He should deduct $800 ($1,000 loan - $200 expected settlement) in 2014 and $50 in 2015 ($200 balance - $150 proceeds).
Exception to OID
Series E and EE bonds(U.S saving bonds) or to obligations with a maturity date of one year or less from the date of issue. However, a cash basis taxpayer may elect to recognize the interest when earned(however, will have to do the same for all bonds owned at the time and acquired after)
Personal services : Services of an Employee
Services performed by an employee for the employer's customers are considered performed by the employer. Thus, the employer is taxed on the income from the services provided to the customer, and the employee is taxed on any compensation received from the employer
Stock Dividends
Shareholder has merely received additional shares that represent the same total investment Stock dividends (e.g., common stock issued to common shareholders) are not taxable - If shareholder has the option to receive stock or cash, individual realizes gross income whether he or she receives stock or cash(value of the stock received, not cash rejected).
Tax Rate Schedule Method
Taxable income range , Tax is ( a flat rate + % of the amount over flat number)
value added tax
Taxes the increment in value as goods move through production & manufacturing stages to the market • Paid by the producer and reflected in the selling price of the goods
Exclusion ratio example
Taxpayer pays $10,000 for annuity that will pay $1,000 a year For lifetime (life expectancy = 15 years) Exclusion ratio =.667 Years 1-15: $333 taxable and $667 excludable Lifetime payments and taxpayer lives 18 years • Years 1-15: $333 taxable and $667 excludable • Years 16-18: $1,000 taxable each year Lifetime payments and taxpayer lives 10 years • Years 1-10: $333 taxable and $667 excludable, and $3,330 deduction on final return
In the case of total worthlessness
a deduction is allowed for the entire amount in the year the debt becomes worthless.
canons of taxation : economy
a good tax system involves only nominal collection costs by the government and minimal compliance costs on the part of the taxpayer.
Rental of Vacation Homes
a loss of property that is not used primarily for rental purposes is not deductible. Only a break-even situation is allowed; no losses can be deducted
Personal exemptions for couples filing separately
a married taxpayer cannot claim an exemption for his or her spouse unless the spouse has zero gross income and is not claimed as the dependent of another taxpayer
General sales taxes
a rate on all retail sales
Deferral of Advance Payments for Goods
a taxpayer can elect to defer recognition of income from advance payments for goods if the method of accounting for the sale is the same for tax and financial reporting purposes.
cost of repairs
acceptable as a method of establishing the loss in value provided: • The repairs are necessary to restore the property to its condition immediately before the casualty. • The amount spent for such repairs is not excessive. • The repairs do not extend beyond the damage suffered. • The value of the property after the repairs does not, as a result of the repairs, exceed the value of the property immediately before the casualty.
Section 197 intangibles
acquired goodwill, going-concern value, trademarks, trade names, etc
Property Taxes
aka ad valorem taxes Based on the value of the asset imposed on realty and on personalty, or assets other than land and buildings used exclusively by states and their local political subdivisions, such as cities, counties, and school districts Deductible
Percentage depletion
aka statutory depletion uses a specified percentage provided by the Code The rate is applied to the gross income from the property, but in no event may percentage depletion exceed 50 percent of the taxable income from the property before the allowance for depletion (100 percent for certain oil and gas wells)
Legislative regulations
allow the Treasury Department to determine the details of law • Congress has delegated its legislative powers and these cannot generally be overturned
5-year carryback period and a 20-year carryover period
allowed for a farming loss To determine the amount of the carryback and carryover, a farming loss for any taxable year is treated as a separate NOL for such year and applied after the remaining portion of the NOL for the year is taken into account.
research and experimental expenditures : Deferral and Amortization Method
amortized ratably over a period of not less than 60 months A deduction is allowed beginning with the month in which the taxpayer first realizes benefits from the experimental expenditure (which may be different from when expenses are incurred) -The election is binding, and a change requires permission from the IRS. - amount of deduction is determined by how many months of benefit of the year / 60 months - used when a company does not have sufficient income to offset the research and experimental expenses (dont want to create net operating loss carryovers that might not be utilized) and if the taxpayer expects higher tax rates in the future
Compensation for Personal Injury
amount received is intended "to make the injuried party whole as before the injury. It follows that if the damages payments received were subject to tax, the after-tax amount received would be less than the actual damages incurred and the injured party would not be "whole as before the injury. Hence, a distinction is made between compensatory damages and punitive damages.
Allowable cost recovery
amount that could have been taken under the applicable cost recovery method
Tax Base
amount to which the tax rate is applied
Personal services : Services of a Child
amounts earned must be included in the child's gross income. This result applies even though the income is paid to other persons (e.g., the parents).
Presumptive Rule of § 183
an activity is profit-seeking/ business if the activity shows a profit in at least three of the previous five tax years( 2 out of 7 years for horses) -If satisfy rule, IRS bears the burden of proving that the activity is personal rather than business-related Otherwise, taxpayer has burden to prove that it is profit-seeking
use tax
an ad valorem tax, usually at the same rate as the sales tax states that impose sales taxes also charge a use tax on items purchased in other states but used in their jurisdiction
If a taxpayer receives reimbursement for a casualty loss sustained and deducted in a previous year
an amended return is not filed for that year. Instead, the taxpayer must include the reimbursement in gross income on the return for the year in which it is received to the extent the previous deduction resulted in a tax benefit
sudden event
an event that is swift and precipitous and not gradual or progressive.
accrual method
an item is generally included in gross income for the year in which it is earned, regardless of when it is collected. -earned when (1) all events have occurred that fix the right to receive such income(when services and title of property are delivered) and (2) the amount to be received can be determined with reasonable accuracy
Expected Return
annual amount to be paid to the annuitant multiplied by the number of years(life expectancy of life) the payments will be received
Income
any increase in wealth does not include a return of capital or the receipt of borrowed funds
Constructive ownership
anything owned by one's related are deemed to be owned by the taxpayer for purposes of applying the loss and expense deduction disallowance provisions(like stock)
Circuit Court of Appeals
appealing a trial court decision
Exclusion of group term life insurance applies only to
applies only to term insurance (protection for a period of time but with no cash surrender value) and not to ordinary life insurance (lifetime protection plus a cash surrender value that can be drawn upon before death).
Married taxpayers who are considered single under the abandoned spouse rules
are allowed to use the head-of-household rates.
legal fees incurred in connection with a criminal defense
are deductible only if the crime is associated with the taxpayer's trade or business or income-producing activity
Benefits collected under an accident and health insurance policy purchased by the taxpayer
are excludible even if the payments are a substitute for income
Personal legal expenses
are not deductible
bona fide loan
arises from a debtor-creditor relationship based on a valid and enforceable obligation to pay a fixed or determinable sum of money
three-year carryback period
available for any portion of an individual's NOL resulting from a casualty or theft loss Small businesses with NOLs from Presidentially declared disasters
dependency exemption
available for one who is either a qualifying child or a qualifying relative 4000 per qualifying
hybrid method
combination of the accrual method and the cash method. -Generally, the hybrid method is used when inventory is an income-producing factor. -accrual method for determining sales of inventory and cost of goods sold. -cash method for all other income and expenses (e.g., services and interest income).
deduction for the loss of property that is part business and part personal
computed separately for the business portion and the personal portion
Foreign earned income
consists of the earnings from the individual's personal services rendered in a foreign country (other than as an employee of the U.S. government).
nonbusiness bad debt provisions are not applicable to
corporations. It is assumed that any loans made by a corporation are related to its trade or business.
Allowed cost recovery
cost recovery actually taken
Limits on Cost Recovery for Automobiles
cost recovery allowed is the lesser of the MACRS amount or the recovery limitation. • Limits are for 100% business use - Must reduce limits by percentage of personal use • Limit in the first year includes any amount the taxpayer elects to expense under § 179
Form of Receipt
could be anything of value beyond cash
Memorandum decisions
deal with situations necessitating only the application of already established principles of law not binding precedents
When to Deduct Casualty Losses
deducted in the year the loss occurs -no casualty loss is permitted if a reimbursement claim with a reasonable prospect of full recovery exists. -If the taxpayer has a partial claim, only part of the loss can be claimed in the year of the casualty, and the remainder is deducted in the year the claim is settled
business bad debt
deductible as an ordinary loss in the year incurred
Operating costs
deductible as trade or business expenses
domestic production activities deduction (DPAD)
deduction based on the income from manufacturing activities
Personalty(or personal property)
defined as any asset that is not realty includes furniture, machinery, equipment, and many other types of assets not personal use property(which can be both realty and personalty) movable unlike realty(fixed to the land)
Incidence of tax
degree to which the tax burden is shared by taxpayer
Amounts Received under an Obligation to Repay
deposited or borrowed funds is not a taxable event.
Annuity : Exclusion Amount
determination of nontaxable return of capital. the amount that is excluded from income(non-taxable) = (Investment/Expected Return) X Yearly Annuity Payment
Cost depletion
determined by using the adjusted basis of the asset which is divided by the estimated recoverable units of the asset (e.g., barrels and tons) to arrive at the depletion per unit. This amount then is multiplied by the number of units sold (not the units produced) during the year to arrive at the cost depletion allowed
Gross Income
does not include unrealized gains
assignment of income
does not shift the liability for the tax income belongs to the person whom performs the services.
unearned income vs earned
earned - income unearned - dividends, capital gains, interest
Tax liability is computed using
either the Tax Table method or the Tax Rate Schedule method
First FEDERAL individual income tax
enacted in 1861 repealed after civil war
Qualified Transportation Fringes
encompass the following transportation benefits provided by the employer to the employee: 1. Transportation in a commuter highway vehicle between the employee's residence and the place of employment. 2. A transit pass. 3. Qualified parking. 4. Qualified bicycle commuting reimbursement. 130 per month for 1 , 2 250 FOR 3
Purpose of federal tax law : Social
encourage socially desirable behavior that provides benefits that government might otherwise provide
revenue neutrality
every new tax law that lowers taxes must include a revenue offset that makes up for the loss
qualified tuition program : If refunded(doesnt go to college)
excess of the amount refunded over the amount contributed by the parent is included in the parent's gross income.
Accelerated Death Benefits
exclusion treatment is available for insured taxpayers who are either terminally ill or chronically ill gain on cash surrender or transfer of life insurance policy by terminally or chronically ill individual is excludible.
Long term care insurance : statutory limitations
exists for : • Premiums paid by the employer. • Benefits collected under the employer's plan. • Benefits collected from the individual's policy.
research and experimental expenditures : Expensed in the year paid or incurred (Expense Method)
expense all of the research and experimental expenditures incurred in the current year and all subsequent years consent of the IRS is not required if the method is adopted for the first taxable year in which such expenditures were paid or incurred The election is binding, and a change requires permission from the IRS.
Expenses and Interest Relating to Tax-Exempt Income
expenses incurred for production of income is deducted, but disallows as a deduction the expenses of producing tax-exempt income. Interest on any indebtedness used to purchase or hold tax-exempt obligations also is disallowed
startup expenditures
expenses must be capitalized when a taxpayer is not in a business that is the same as or similar to the one being investigated and actually acquires the new business - May elect to deduct the first $5,000 of expenses currently - Any excess expenses can be amortized over a period of not less than 180 months (15 years) - In arriving at the $5,000 immediate deduction allowed, a dollar-for dollar reduction must be made for those expenses in excess of $50,000 subtracted by any excess over 50k
Section 212 : deduction for AGI
expenses related to rent and royalty income professional fees paid to determine tax liability for a sole proprietor Expenses paid in connection with the determination, collection, or refund of taxes related to the income of sole proprietorships, rents and royalties, or farming operations
Prizes and Awards
fair market value of prizes and awards(exception of scholarships) must be included in gross income TV giveaway prizes, magazine publisher prizes, door prizes, and awards from an employer to an employee in recognition of performance
Ordinary gains / losses
fully taxable / deductible result from sale or exchange of inventory, a/r , depreciable property or ones used in business
Bankruptcy
generally an indication of at least partial worthlessness of a debt. Bankruptcy may create worthlessness before the settlement date. If this is the case, the deduction may be taken in the year of worthlessness
Corporation
generally must pay tax on its income
Investment earnings arising from the reinvestment of life insurance proceeds
generally subject to income tax Often the beneficiary will elect to collect the insurance proceeds in installments. The annuity rules are used to apportion the installment payment
Progressive Tax
higher rate of tax applies as the tax base increases.
constructive receipt doctrine : rationale
if the income is available, the taxpayer should not be allowed to postpone the income recognition.
Realty
includes land and buildings permanently affixed to the land
qualified property
includes most types of new property other than buildings - Property that is used but new to the taxpayer does not qualify
Residential rental real estate
includes property where 80 percent or more of the gross rental revenues are from nontransient dwelling units (e.g., an apartment building). cost recovery period for residential rental real estate is 27.5 years - Hotels, motels, and similar establishments are not residential rental property
Personal Services
income from personal services must be included in the gross income of the person who performs the services.
Series E and EE Bonds
income is generally deferred until the bonds are redeemed or matured. Series E bonds previously could be exchanged within one year of their maturity date for Series HH bonds, and the interest on the Series E bonds could be further deferred until maturity of the Series HH bonds
Form 1065
information return filed for partnerships : serves to provide the data necessary for determining the character and amount of each partner's distributive share of the partnership's income and deductions
constructive receipt doctrine examples
interest accrues monthly, must recognize it every month even if you dont withdraw it.
educational savings bonds
interest on these bonds are excluded from gross income to help aid families pay for educaiton.
Startup expenditures example
investigation costs of $52,000, she acquires the auto dealership on October 1, 2015. Tina may immediately deduct $3,000 [$5,000 - ($52,000 -$50,000)] and amortize the balance of $49,000 ($52,000 - $3,000) over a period of 180 months. For calendar year 2015, therefore, Tina can deduct $3,817 [$3,000 + ($49,000 x 3/180)].
Section 212 : deduction from AGI
investment-related expenses (e.g., safe deposit box rentals) are deductible as itemized deductions attributable to the production of investment income.
Regular decisions
involve novel issues not previously resolved by the court.
The Appellate Process
involves a determination of whether the trial court applied the proper law in arriving at its decision(not facts unless blatantly wrong).
Election to Forgo Carryback
irrevocably elect not to carry back an NOL to any of the prior years This election must be made by the due date (including extensions) for filing the taxpayer's return for the year in which the NOL occurred. would be to the taxpayer's advantage to use the NOL to offset income in years when the tax rate is high rather than use it when the tax rate is relatively low.
The determination of marital status
is made at the end of the taxable year, except when a spouse dies during the year. Spouses who enter into a legal separation under a decree of divorce or separate maintenance before the end of the year are considered to be unmarried at the end of the taxable year
The key date for the commencement of depreciation
is the date an asset is placed in service, not purchase date
Qualified production activities income (QPAI)
is the excess of domestic production gross receipts over the sum of: - Cost of goods sold attributable to such receipts - Other deductions, expenses, or losses that are directly allocable to such receipts - A share of other deductions, expenses, and losses that are not directly allocable to such receipts or another class of income QPAI is determined on an item-by-item basis—not on a division-by-division or a transaction-by-transaction basis. Because all items must be netted in the calculation, the final QPAI amount can be either positive or negative The effect of the netting rule is to preclude taxpayers from selecting only profitable product lines or profitable
correspondence audit
issue is minor
Revenue Procedures
issued in the same manner as Revenue Rulings but deal with the internal management practices and procedures of the IRS.
Temporary:regulation
issued when guidance needed quickly • Same authoritative value as final regulations must also be issued as Proposed Regulations and automatically expire within three years after the date of issuance .Temp. Reg. § 1.337(d)-2T
If qualified production activities income (QPAI) cannot be used in a particular year due to the taxable income limitatio
it is lost forever.
If group term life insurance discriminates in favor of key employees (e.g., officers)
key employees are not eligible for exclusion In such a case, the key employees must include in gross income the greater of: • The actual premiums paid by the employer, or • The amount calculated from the Uniform Premiums table
Theft losses
larceny, embezzlement, and robbery -computed like other casualty losses (discussed in the following section), but the timing for recognition of the loss differs. -deducted in the year of discovery, not the year of the theft -If in the year of the discovery a claim exists (e.g., against an insurance company) and there is a reasonable expectation of recovering the adjusted basis of the asset from the insurance company, no deduction is permitted -If only partial recovery is expected, deduct in year of loss any amount not covered -gain may be recognized if recovery > adjusted basis.
Foreign earned income: exclusion amount
limited to $100,800 for 2015 Exclusion amount = $100,800 x days in foreign country / 365 days in the year - For married persons, both with foreign earned income, the exclusion is computed separately for each spouse - The tax on taxable income after the foreign earned income exclusion is calculated using the tax rate that would apply if the excluded foreign earned income were included in gross income
Business and Nonbusiness Losses
limited to losses incurred in a trade or business or in a transaction entered into for profit also are allowed to deduct losses that are the result of a casualty- fire , storm, etc ( itemized deduction)
Technical Advice Memoranda (TAMs)
little power -like letter rulings, but deals with completed transactions.
casualty loss requirements
loss resulting from an event that is (1) identifiable; (2) damaging to property; and (3) sudden, unexpected, and unusual in nature - only damage applied to the taxpayer's property is deductible -not caused by the taxpayer's willful act or willful negligence -progressive deterioration is not a casualty
decline in value of property
losses resulting from a decline in value rather than an actual loss of the property No loss was allowed where the taxpayer's home declined in value as a result of a landslide that destroyed neighboring homes but did no actual damage to the taxpayer's home
interpretive Regulations
rephrase what is in Committee Reports and the Code Hard to get overturned
Leased Automobiles
reports an inclusion amount in gross income to prevent avoidance of luxury auto and other limitations by leasing -inclusion amount is computed from an IRS table for each taxable year for which the taxpayer leases the automobile inclusion amount is based on the fair market value of the automobile; it is prorated for the number of days the auto is used during the taxable year. The prorated dollar amount then is multiplied by the business and income-producing usage percentage. The taxpayer deducts the lease payments, multiplied by the business and income-producing usage percentage.
Annuity
require the purchaser (the annuitant) to pay a fixed amount for the right to receive a future stream of payments -amounts over initial investment of the annuity is included in gross income (cash value - initial investment)
specific charge-off method
required for taxpayers (other than certain financial institutions) -A taxpayer using the specific charge-off method may claim a deduction when a specific business debt becomes either partially or wholly worthless or when a specific nonbusiness debt becomes wholly worthless -Deduct as ordinary loss in the year when debt is partially or wholly worthless.
a claim of right doctrine
requires the taxpayer to recognize the income in the year of receipt if payment is received before the dispute is settled.
related-party transactions
restrictions on these transactions to prevent endless possibilities for engaging in financial transactions that produce tax savings with no real economic substance or change For example, to create an artificial loss, a wife could sell investment property to her husband at a loss and deduct the loss on their joint return
Amount realized
selling price - costs of disposition
Common law states
separate property / income
Standard Deduction
specified by Congress and depends on the filing status of the taxpayer -includes the basic standard deduction and the additional standard deduction
INTEREST ON CERTAIN STATE AND LOCAL GOVERNMENT OBLIGATIONS
state and local government bonds(municipal bonds) are exempted from Federal income taxation - exemption doesn't apply to gains on the sale of tax-exempt securities.
gift splitting
taxation rule that allows a married couple to split a gift's total value as if each contributed half of the amount increases the number of annual exclusions available and allows the use of the nondonor-spouse's unified transfer tax credit
If activity is entered into for profit
taxpayer can deduct expenses for AGI even in excess of income from the activity losses INCLUDING EXPENSES INCURRED from the activity are fully deductible.
Substantiation Requirements
taxpayer has the burden of providing proof for its claims on deductions, etc.
Tax court : Plaintiff and defendant
taxpayer is normally the plaintiff (or petitioner), and the Government is the defendant (or respondent). If the taxpayer wins and the Government appeals as the new petitioner (or appellant), the taxpayer becomes the new respondent.
Marital status is determined as of
the last day of the tax year When a spouse dies during the year, marital status is determined as of the date of death
Tax avoidance
the legal minimization of tax liabilities and one goal of tax planning
Measuring the Amount of Loss : partial destruction of business property and income-producing property
the lesser of the following: • The adjusted basis of the property • The difference between the fair market value of the property before the event and the fair market value immediately after the event (usually less from damages) -LESS insurance proceeds for both
Measuring the Amount of Loss : partial or complete destruction of personal use property
the lesser of the following: • The adjusted basis of the property • The difference between the fair market value of the property before the event and the fair market value immediately after the event(usually less from damages) -LESS insurance proceeds for both
Tax research
the method by which an interested party determines the best solution to a tax situation
On the Employer's Business Premises
the place of employment of the employee the closer the place to the business, the most likely it is eligible.
Proportional Tax
the rate of tax remains constant for any given income level excise taxes, general sales taxes, and employment taxes (FICA and FUTA).
personal casualty gain
the recognized gain from a casualty or theft of personal use property Insurance proceeds > Loss
Automobiles and Other Listed Property Not Used Predominantly in Business
the straight-line method under the alternative depreciation system (see Section 8-3e) is required - Such property does not qualify for additional first-year depreciation The straight-line method is used even if, at some later date, the business usage of the property increases to more than 50 percent. In that case, the amount of cost recovery reflects the increase in business usage.
If the listed property is predominantly used for business
the taxpayer can use the MACRS tables to recover the cost If 50% test is met, then allowed to use statutory percentage method of cost recovery with some limitations
To deduct legal expenses
the taxpayer must be able to show that the origin and character of the claim are directly related to a trade or business; an income-producing activity; or the determination, collection, or refund of a tax(FOR AGI) -Personal legal expenses are not deductible. -All other deductible legal expenses are deductible from AGI(fees for tax advice relative to the preparation of an individual's income tax return)
Fringe benefits: child care services
the value of child and dependent care services paid for by the employer and incurred to enable the employee to work is excluded -cannot exceed $5,000 per year ($2,500 if married and filing separately). -For a married couple, the annual exclusion cannot exceed the earned income of the spouse who has the lesser amount of earned income. -For an unmarried taxpayer, the exclusion cannot exceed the taxpayer's earned income.
6 month extension of time to file
via filing Form 4868 no later than due date of return Excuses a taxpayer from penalty for failure to file, not from penalty for failure to pay If more tax is owed, extension request (Form 4868) should be accompanied by check for balance of tax due
Indication of Theft / complete casualty
when FMV = 0 after casualty happens (before casulty , FMV > 0)
Tax Treaties
with foreign countries to render mutual assistance in tax enforcement and to avoid double taxation Neither a tax law nor a tax treaty takes general precedence - When there is a direct conflict, the most recent item will take precedence A taxpayer must disclose on the tax return any position where a treaty overrides a tax law • There is a $1,000 penalty per failure to disclose for individuals ($10,000 for corporations)
Example of Code Citation
§ 2(a)(1)(A) - § = Abbreviation for "Section" - 2 = section number - (a) = subsection - (1) = paragraph designation - (A) = subparagraph designation
HSA: Monthly deductible amount is limited to the lesser of:
» One twelfth of the annual deductible under a high deductible plan or » $3,350 for self-only coverage ($6,650 for family coverage)
child tax credit
• $1,000 tax credit is allowed for each dependent child under the age of 17 - Qualifying child includes stepchildren and eligible foster children
Social Security Benefits 1st base
• $32,000 for married taxpayers who file a joint return. • $0 for married taxpayers who do not live apart for the entire year but file separate returns. • $25,000 for all other taxpayers.
Exclusion of benefits received from long term care insurance policy is limited to the greater of:
• $330 in 2015 for each day patient receives long-term care • The actual cost of the care The greater of is then reduced by any amounts received from other third parties (e.g., damages received/Medicare)
Social Security Benefits 2nd base
• $44,000 for married taxpayers who file a joint return. • $0 for married taxpayers who do not live apart for the entire year but file separate returns. • $34,000 for all other taxpayers.
If MAGI plus one-half of Social Security benefits exceeds the first set of base amounts but not the second set, the taxable amount of Social Security benefits is the lesser of the following:
• .50(Social Security benefits). • .50[MAGI + .50(Social Security benefits) - first base amount].
qualifying child : Abode Test
• A qualifying child must live with the taxpayer for more than half of the year - Temporary absences from the household due to special circumstances (e.g., illness, education) are not considered(exceptions meaning they will still meet the test)
For the Convenience of the Employer
• A restaurant requires its service staff to eat their meals on the premises during the busy lunch and breakfast hours. • A bank furnishes meals on the premises for its tellers to limit the time the employees are away from their booths during the busy hours. • A worker is employed at a construction site in a remote part of Alaska. The employer must furnish meals and lodging due to the inaccessibility of other facilities.
A narrow exception permits a prize or an award to be excluded from gross income if all of the following requirements are satisfied
• The prize or award is received in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement (e.g., Nobel Prize, Pulitzer Prize, or faculty teaching award). • The recipient transfers the prize or award to a qualified governmental unit or nonprofit organization. • The recipient was selected without any action on his or her part to enter the contest or proceeding. • The recipient is not required to render substantial future services as a condition for receiving the prize or award In addition : Employee achievement awards of tangible personal property made in recognition of length of service or safety achievement (400 per year, 1600 for qualified plan award)
Congress chose to exempt life insurance proceeds for the following reasons:
• For family members, life insurance proceeds serve much the same purpose as a nontaxable inheritance. • In a business context (as well as in a family situation), life insurance proceeds replace an economic loss suffered by the beneficiary.
Nondiscrimination Provisions
• For no-additional-cost services, qualified employee discounts, and qualified retirement planning services - If the plan is discriminatory in favor of highly compensated employees, these key employees are denied exclusion treatment - Non-highly compensated employees can still exclude these benefits from income
General rule : Tax return must be filled if
• General Rule: Tax return must be filed if gross income is ≥ the sum of the standard deduction and exemption amount • ASD for blind(only 65+ age) does not apply for this determination
Exception to the HH Requirements
• HH may be claimed if taxpayer maintains a separate home for his or her parents - At least one parent must qualify as a dependent
Gains and Losses from Property Transactions : Formula
• In order for gains (losses) to be recognized (included in gross income), they must be realized: -Realized gain(loss)= Amount realized - adjusted basis
qualifying child : Tiebreaker Rules
• In situations where a child may be a qualifying child for more than one person - Tiebreaker rules specify which person has priority in claiming the dependency exemption
Limitations on the Standard Deduction for Individuals Who Can Be Claimed as Dependents
• Individual claimed as dependent has a BSD in 2015 limited to the greater of: - $1,050 or - $350 plus earned income (but not exceeding normal BSD) • ASD amount(s) still available
Litigation is recommended only as a last resort because of
• Legal costs involved • Uncertainty of the final outcome
Educational assistance program does not cover
• Meals, lodging, and transportation costs • Educational payments for courses involving sports, games, or hobbies
The § 179 amount eligible for expensing in a carryforward year is limited to the lesser of
• The statutory dollar amount ($500,000 in 2015) reduced by the cost of § 179 property placed in service in excess of $2,000,000 (in 2015) in the carryforward year, or • The business income limitation in the carryforward year.
qualifying child : Support Test
• To be a qualifying child, the individual must not be self-supporting - Cannot provide more than one-half of his or her own support which includes food, shelter, clothing, toys, medical and dental care, education (taxpayers don't have to support!) - In the case of a full-time student, scholarships are not considered to be support
Head of Household (HH) Filing Status
• Must be unmarried as of end of year or an abandoned spouse • Must pay more than half the cost of maintaining a household which is the principal home of a dependent for > half of tax year - A dependent must satisfy either the qualifying child or the qualifying relative category • A qualifying relative must also meet the relationship test
In developing an oil or gas well, the producer typically makes four types of expenditures.
• Natural resource costs. • Intangible drilling and development costs. • Tangible asset costs. • Operating costs.
Kiddie Tax
• Net unearned income (NUI) of a child is taxed at parents' rate - Child must be under age 19 at end of year (or under age 24 if a full-time student) - If unearned income > 2,100 NUI generally equals unearned income less $2,100 (1050 x 2 )
Classes of Nontaxable Employee Benefits
• No-additional-cost services. • Qualified employee discounts. • Working condition fringes. • De minimis fringes. • Qualified transportation fringes. • Qualified moving expense reimbursements. • Qualified retirement planning services.
Reimbursement for expenses incurred
• Not income, unless the expense was deducted - Damages that are a recovery of the taxpayer's previously deducted expenses are generally taxable under the tax benefit rule
Deductible legal expenses associated with the following are deductible for AGI:
• Ordinary and necessary expenses incurred in connection with a trade or business. • Ordinary and necessary expenses incurred in conjunction with rental or royalty property held for the production of income.
Deductible legal expenses associated with the following are deductible for AGI
• Ordinary and necessary expenses incurred in connection with a trade or business. • Ordinary and necessary expenses incurred in conjunction with rental or royalty property held for the production of income. All other deductible legal expenses are deductible from AGI
Employee death benefits to existing spouse may be excludible as a gift if:
• Paid to surviving spouse or children (not employee's estate) • Employer derived no benefit from payments • Surviving spouse and children performed no services for employer • The decedent had been fully compensated for services rendered. • Payments were made pursuant to a board of directors' resolution that followed a general company policy of providing payments for families of deceased
Phaseout of Exemptions
• Personal and dependency exemptions are phased out by 2% for each $2,500 by which the taxpayer's AGI exceeds the following threshold amounts - For a married taxpayer filing separately, the phaseout is 2% for each $1,250
Letter rulings
• Provide guidance to taxpayer on how a transaction will be taxed before proceeding with it - Issued for a fee upon a taxpayer's request - Describe how the IRS will treat a proposed transaction • Apply only to the taxpayer who asks for and obtains the ruling Limited to restricted, preannounced areas of taxation
Surviving Spouse Filing Status
• Same tax rate brackets as married, filing jointly • File as surviving spouse for 2 years after death of spouse if taxpayer maintains a household for a dependent child - For the year of death, surviving spouse is treated as being married • Thus, a joint return can be filed if the deceased spouse's executor agrees (joint return rates)
qualifying relative : The joint return
• Taxpayer is not permitted dependency exemption if dependent files a joint return with spouse unless: - Filing solely for refund of tax withheld - No tax liability exists for either spouse on separate returns - Neither spouse is required to file return
qualifying relative: Support Test
• Taxpayer must provide more than 50% of the qualifying relative's support - Only amounts spent are considered in the support test - Scholarships are not considered in the support test
income is constructively received—under the following conditions:
• The amount is made readily available to the taxpayer. • The taxpayer's actual receipt is not subject to substantial limitations or restrictions.
qualifying child : relationship
• The child must be the taxpayer's: - Son or daughter - Stepson or stepdaughter - Brother or sister - Stepbrother or stepsister - Half brother or half sister, or - A descendant of such individual (e.g., grandchildren, nephews, nieces) • A child who has been adopted, or whose adoption is pending, qualifies • A foster child may also qualify TOWARDS YOUNG PEOPLE
qualifying child : Age Test
• The child must be under age 19 or under age 24 in the case of a student -An individual cannot be older than the taxpayer claiming him or her as a qualifying child - Individuals who are disabled are not subject to the age test
Amortizable startup expenditures generally must satisfy two requirements.
• The creation of an active trade or business, • The investigation of the creation or acquisition of an active trade or business, or • Any activity engaged in for profit in anticipation of such activity becoming an active trade or business. Second, the expenditures must be the kinds of costs that would be currently deductible if connected with an existing trade or business in the same field as that entered into by the taxpayer
Whether Investigation expenses are tax deductible depends on:
• The current business, if any, of the taxpayer. • The nature of the business being investigated. • The extent to which the investigation has proceeded. • Whether the acquisition actually takes place.
Qualified Employee Discounts Requirements
• The exclusion is not available for real property (e.g., a house) or investment property (e.g., common stocks). • Item discounted is from same line of business in which employee works • Discount exclusion cannot exceed gross profit on property or 20% of the customer price on services • Benefit is offered on nondiscriminatory basis
An exception to the economic performance requirements allows certain recurring items to be deducted if all of the following conditions are met:
• The item is recurring in nature and is treated consistently by the taxpayer. • Either the accrued item is not material or accruing it results in better matching of income and expenses. • All of the events have occurred that determine the fact of the liability, and the amount of the liability can be determined with reasonable accuracy. • Economic performance occurs within a reasonable period (but not later than 8.5 months after the close of the taxable year)
alternative depreciation system (ADS)
• To calculate the portion of depreciation treated as an alternative minimum tax (AMT) adjustment for purposes of the corporate and individual AMT • To compute depreciation allowances for property for which any of the following is true : • Used predominantly outside the United States. • Leased or otherwise used by a tax-exempt entity. • Financed with the proceeds of tax-exempt bonds. • Imported from foreign countries that maintain discriminatory trade practices or otherwise engage in discriminatory acts
Political Contributions and Lobbying Activities Exceptions
• To influence local legislation(e.g., city and county governments). • Activities devoted solely to monitoring legislation. •de minimis exception is provided for annual in-house expenditures (lobbying expenses other than those paid to professional lobbyists or any portion of dues used by associations for lobbying) if such expenditures do not exceed $2,000. - If greater than $2,000, none can be deducted
Children of Divorced or Separated Parents
• Under the general rule, the parent having custody of the child for the greater part of the year (i.e., the custodial parent) is entitled to the dependency exemption - General rule does not apply if • A multiple support agreement is in effect • Custodial parent issues a waiver in favor of the noncustodial parent
Some considerations of loans between related parties:
• Was a note properly executed? • Was there a reasonable rate of interest? • Was collateral provided? • What collection efforts were made? • What was the intent of the parties?
questions to determine whether an item qualifies as a trade or business expense:
• Was the use of the particular item related to a business activity? expense. • Was the expenditure incurred with the intent to realize a profit or to produce income? • Were the taxpayer's operation and management activities extensive enough to indicate the carrying on of a trade or business?
§ 62
classify various deductions as deductions for AGI
Multiple Losses : the floors
$100 is apply for each event 10% of AGI is applied once for all events ( add up all losses - 10% of AGI)
Accounting income: For realization to occur
(1) an exchange of goods or services must take place between the accounting entity and some independent, external party and (2) in the exchange, the accounting entity must receive assets that are capable of being objectively valued.
accounting method
(1) the cash receipts and disbursements method, (2) the accrual method, (3) the hybrid method
exclusion ratio
(investment/ expected return)
Calculating remaining NOL after carryovers
- After using the NOL in the initial carryover year, the taxpayer must determine how much NOL remains to carry to other years
alternative depreciation system (ADS),
- Alternative minimum tax (AMT) - Assets used predominantly outside the U.S. - Property owned by the taxpayer and leased to tax exempt entities - Earnings and profits Generally, use straight-line recovery without regard to salvage value - For AMT, 150% declining balance is allowed for personalty - Half-year, mid-quarter, and mid-month conventions still applyy
Assets eligible for cost recovery / MACRS
- Assets used in a trade or business or for the production of income - Assets subject to wear and tear, obsolescence, etc. - Assets that have a determinable useful life or decline in value on a predictable basis - Assets that are tangible personalty or realty
Revenue Rulings : validity
- Carry less weight than Regulations - Not substantial authority in court disputes
Cash Method Requirements : capital expenditures
- Cash basis and accrual basis taxpayers cannot take a current deduction for capital expenditures except through amortization, depletion, or depreciation over the life of the asset -an expenditure that creates an asset having a useful life that extends substantially beyond the end of the tax year must be capitalized
Judicial sources : validity
- Consider the level of the court and the legal residence of the taxpayer - Tax Court Regular decisions carry more weight than Memo decisions • Tax Court does not consider Memo decisions to be binding precedents • Tax Court reviewed decisions carry even more weight - Circuit Court decisions where certiorari has been requested and denied by the U.S. Supreme Court carry more weight than a Circuit Court decision that was not appealed - Consider whether the decision has been overturned on appeal
Recovery of the cost of business or income producing assets is through:
- Cost recovery or depreciation: tangible assets - Amortization: intangible assets - Depletion: natural resources
Dividends that not qualified includes
- Dividends from certain foreign corporations, - Dividends from tax-exempt entities, and - Dividends that do not satisfy the holding period requirement
FICA taxes : Social Security/medicare rate
-6.2% in 2015 on income of up to a maximum of $118,500 of wages -The Medicare rate is 1.45% on all wages -0.9% tax is imposed on earned income above $200,000(single)/250,000 (MFJ) 3.8% tax is imposed on investment income -Applies when modified AGI exceeds $200,000 (single filers) or $250,000 (MFJ)
Special Limitation
-A $25,000 limit applies for the § 179 deduction when the luxury auto limits do not apply. -in effect for sport utility vehicles (SUVs) with an unloaded GVW rating of more than 6,000 pounds and not more than 14,000 pounds
qualified tuition program
-A program that allows college tuition to be prepaid for a beneficiary. -Amounts(earnings of the contributed funds) contributed must be used to pay qualified higher education expenses(tuition, fees, books, supplies, room and board, and equipment) -The earnings of the contributed funds, including the discount on tuition charged to participants, are not included in Federal gross income provided the contributions and earnings are used for qualified higher education expenses. -ARRTA of 2009 extends the definition to include computers and computer technology, including software that provides access to the Internet
S corporation
-A small business corporation may elect to be taxed similarly to a partnership -shareholders report their share of the corp's income and deductions for the year, even if not actually distributed -The shareholders, rather than the corporation, pay the tax on the corporation's income
Is child support gross income?
-A taxpayer does not realize income from the receipt of child support payments made by former spouse because the money is used for the child's benefit. -The payor is not allowed to deduct the child support payments because the payments are made to satisfy the payor's legal obligation to support the child
Property Settlements after divorce
-A transfer of property other than cash to a former spouse under a divorce decree or agreement is not a taxable event. -No deduction or recognized gain or loss for transferor -No gross income recognized for transferee and has a cost basis equal to the transferor's basis.
Deduction Criteria for § 162 and § 212 : ordinary
-An expense is ordinary if it is normal, usual, or customary in the type of business conducted by the taxpayer and is not capital in nature -An expense need not be recurring to be deductible as ordinary. For example, a business may be in a situation that is a very rare occurrence and incur an expense. If other businesses in a similar situation are likely to incur a similar expense, then the expense can be ordinary, even though it is not recurring.
Depletion Methods
-Cost depletion can be used on any wasting asset (and is the only method allowed for timber). --Percentage depletion is subject to a number of limitations, particularly for oil and gas deposits. -Depletion should be calculated both ways, and the method that results in the larger deduction should be used. -the taxpayer can use cost depletion in one year and percentage depletion in the following year.
Relationships between the courts : Decisions of one court impact on others
-District Courts, the Tax Court, and the Court of Federal Claims must abide by the precedents set by the Court of Appeals. -A particular Court of Appeals need not follow the decisions of another Court of Appeals. -All courts, however, must follow the decisions of the U.S. Supreme Court
partnership
-Each partner reports distributive share of partnership income and deductions for the partnership's tax year ending in or with the partner's tax year. -The income must be reported by each partner in the year it is earned, even if such amounts are not actually distributed to the partners. -Because a partner pays tax on income as the partnership earns it, distributions are treated under the recovery of capital rules(actual distributions are not included in gross income).
DEDUCTIBLE EXPENSES: Personal Expenses
-Expenditures that are incurred in one's personal life are not deductible unless a specific Code section authorizes the deduction -generally are not related to the production of income, are usually deductions from AGI and, in some cases, must be less than (or greater than) a certain percentage of the AGI.
Income from Annuities
-No income is recognized by the annuitant at the time the cash value of the annuity increases because the taxpayer has not actually received any income -not constructively received because taxpayer must cancel the policy to receive the increase in value (the increase in value is subject to substantial restrictions). -upon cancelling contract, the gain in value of the annuity (excess money received) is included in the gross income(ex. invested 1,000, got 1200, include 200)
imputed interest income: Limitations
-On loans of $100,000 or less between individuals, the imputed interest cannot exceed the borrower's net investment income for the year (gross income from all investments less the related expenses). -No imputed interest if net investment income is $1,000 or less -Limitations don't apply if a principal purpose of a loan is tax avoidance. APPLIES IN GENERAL, NOT FOR ONLY INCOME PRODUCING ASSETS Between individuals ONLY
community property system : separate income
-Property may be held separately by a spouse if it was acquired before marriage or received by gift or inheritance following marriage -separate property produces separate income that the owner-spouse must report on his or her Federal income tax return.
Loans between Related Parties
-Related party (individuals) bad debts are generally suspect and may be treated as gifts -raise the issue of whether the transaction was a bona fide loan or a gift. -must determine whether advances between related parties are gifts or loans -no deduction for gifts
small business stock / Section 1244 Stock
-Sale or worthlessness of § 1244 stock results in ordinary loss rather than capital loss for individuals -possible to receive an ordinary loss deduction if loss is sustained on small business stock -loss could arise from a sale of the stock or from the stock becoming worthless.
Workers' Compensation
-State workers' compensation laws require the employer to pay fixed amounts for specific job-related injuries. - Although may be payment for loss of wages, workers' compensation is specifically excluded from gross income
Related party transactions : losses
-The Code disallows any "losses from sales or exchanges of property directly or indirectly" between related parties. A right of offset is created equal to the disallowed loss. -When the property is subsequently sold to a nonrelated party, any gain recognized is reduced by the right of offset (can be lost if not used in subsequent sale or exchange to unrelated party) -A loss can also be disallowed even if the asset is sold to an unrelated party. This occurs if a related party repurchases the asset on or near the same day and the two sales were prearranged
Exception to separate income
-The laws of Texas, Louisiana, Wisconsin, and Idaho distinguish between separate property and the income it produces -Separate property may produce community income (income from separate property belongs to the community and taxed one half for each spouse)
nonbusiness bad debt
-a debt unrelated to the taxpayer's trade or business either when it was created or when it became worthless -Deduct as short-term capital loss in year amount of worthlessness is known with certainty The maximum amount of a net short-term capital loss that an individual can deduct against ordinary income in any one year is $3,000
Punitive damages
-amounts the person who caused the harm must pay to the victim as punishment for outrageous conduct -not intended to compensate the victim, but rather to punish the party who caused the harm. -punitive damages may actually place the victim in a better economic position than before the harm was experienced. Thus, punitive damages are included in gross income.
The amortization election for startup expenditures allows the taxpayer to deduct the lesser of
1) the amount of startup expenditures with respect to the trade or business or (2) $5,000, reduced, but not below zero, by the amount by which the startup expenditures exceed $50,000. Any startup expenditures not deducted are amortized ratably over a 180-month period, beginning in the month in which the trade or business begins.
If MAGI plus one-half of Social Security benefits exceeds the second set of base amounts, the taxable amount of Social Security benefits is the lesser of 1 or 2 below:
1. .85(Social Security benefits). 2. Sum of: a. .85[MAGI +. 50(Social Security benefits) - second base amount], and b. Lesser of: • Amount included through application of the first formula. • $4,500 ($6,000 for married filing jointly).
The allowable exemption amount can be determined with the following steps.
1. AGI - threshold amount = excess amount. 2. Excess amount / $2,500 = reduction factor [rounded up to the next whole number (e.g., 18.1 = 19)] x 2 = phaseout percentage. 3. Phaseout percentage (from step 2) x exemption amount = phaseout amount. 4. Exemption amount - phaseout amount = allowable exemption deduction
ITEMS SPECIFICALLY INCLUDED IN GROSS INCOME
1. Alimony and Separate Maintenance Payments 2. Income from Annuities 3.Prizes and Awards 4. Group Term Life Insurance 5. Unemployment Compensation 6.Social Security Benefits
INCOME FROM DISCHARGE OF INDEBTEDNESS Exceptions
1. Creditors' gifts. 2. Discharges under Federal bankruptcy law. 3. Discharges that occur when the debtor is insolvent. 4. Discharge of the farm debt of a solvent taxpayer. 5. Discharge of qualified real property business indebtedness . 6. A seller's cancellation of the buyer's indebtedness. 7. A shareholder's cancellation of the corporation's indebtedness. 8. Forgiveness of certain loans to students. 9. Discharge of indebtedness on the taxpayer's principal residence that occurs between January 1, 2007, and January 1, 2015, and is the result of the financial condition of the debtor In situations 2, 3, 4, 5, and 9, the Code allows the debtor to reduce his or her basis in the assets by the realized gain from the discharge shareholder's cancellation of the corporation's indebtedness to him or her (situation 7) usually is considered a tax-free contribution of capital to the corporation by the shareholder. Thus, the corporation's paid-in capital is increased, and its liabilities are decreased by the same amount.79
The imputed interest rules apply to the following types of below-market loans
1. Gift loans (made out of love, affection, or generosity). 2. Compensation-related loans (employer loans to employees). 3. Corporation-shareholder loans (a corporation's loans to its shareholders). 4.Tax avoidance loans
Legislative Process For Tax Bills
1. House Ways and Means Committee 2. Consideration by House of Representatives 3. Senate Finance Committee 4. Consideration by the Senate (disagreement > Joint of Conference Committee > Consideration by House and Senate ) 5. Approval or veto by President 6. Incorporation into code (if approved)
Categories of Deductions
1. Investment/production of income (§ 212) 2. Trade or business (§ 162) 3. Personal (various sections)
Gross income consists of
1. Personal services 2. Income from Property 3.Income Received by an Agent 4. ncome from Partnerships, S Corporations, Trusts, and Estates 5. Income in Community Property States
Requirements for Alimony
1. The payments are in cash. (clearly distinguishes alimony from a property division.) 2. The agreement or decree does not specify that the payments are not alimony. (This allows the parties to determine by agreement whether the payments will be alimony.) 3. The payor and payee are not members of the same household at the time the payments are made. (This ensures the payments are for maintaining two households.) 4. There is no liability to make the payments for any period after the death of the payee.
Personal/rental use deduction steps
1. expenses that are deductible anyway (e.g., real estate taxes and mortgage interest) must be deducted first 2.If a positive net income results, expenses, other than depreciation, that are deductible for rental property (e.g., maintenance, utilities, and insurance) are allowed next. 3. Depreciation is allowed for any positive balance that remains. 4. Any disallowed expenses allocable to rental use are carried forward and used in future years subject to the same limitations
If an audit results in an assessment of additional tax : taxpayer have the option of
1. settlement 2.appeal via the Appeals Division of the IRS (settle all disputes based on the hazard of litigation (i.e., probability of favorable resolution, if litigated)
Kiddie Tax : Determine total liability ( tax on own income + kiddie tax)
1.Find net unearned income 2.Include in parent's taxable income, find difference between taxes due for them and yourself. 3. Find tax at your own rate ( AGI - std deduction - net unearned income = nonparental taxable income x rate = tax) 4. Add kiddie tax + own tax
MACRS personalty 3, 5, 7, 10 yrs
200% DB switchover to straight-line depreciation when appropriate
Exceptions Applicable to Accrual Basis Taxpayers
1.Prepaid Income
The Federal tax law is the vehicle for accomplishing many objectives of the nation such as
1.Revenue 2.Economy 3.Social 4.Equity(fairness) 5.Political 6.Ease of administration 7. Courts
Taxation of Net Capital Gain : Long-term gains (held for more than one year) - Certain depreciable realty used in a trade or business
25%
Taxation of Net Capital Gain : Long-term gains (held for more than one year) - Collectibles
28%
MACRS personalty 15 , 20 years
150% DB switchover to straight-line depreciation when appropriate
First Federal corporate income tax enacted in
1909
Internal Revenue Code
1939, 1954, 1986
negligence penalty
20 percent is imposed if any of the underpayment was for intentional disregard of rules and regulations without intent to defraud. The penalty applies to just that portion attributable to the negligence.
Tax credit for RE expenditures
20% of certain R&E expenditures is available The law also provides a credit for increasing research expenses over what the expense amount was in a base year or years
All other long-term capital gains
20%, 15%, or 0% 0 percent rate applies only if the taxpayer's regular tax rate is 15 percent or less. The 20 percent rate applies if the taxpayer's regular tax rate is 39.6 percent. All other taxpayers use the 15 percent rate on long-term capital gains.
Federal Budget Receipts
46%-individual income 32%-social insurance taxes 13%-corporation excise/other- 9%
Calculation of the Domestic Production Activities Deduction
9% × Lesser of : 1.Qualified production activities income (QPAI) 2.Taxable (or modified adjusted gross aka MAGI) income or alternative minimum taxable income
MAGI (modified adjusted gross income)
= AGI (excluding Social Security) + foreign earned income exclusion + tax exempt interest
Adjusted basis
= cost at acquistion + capital additions - dep/cost recovery
statute of limitations
A federal or state statute setting the maximum time period during which a certain action can be brought or certain rights enforced.
Individuals Not Eligible for the Standard Deduction
A married individual filing a separate return where either spouse itemizes deductions. A nonresident alien.
Compensation for property destroyed
A payment for damaged or destroyed property is treated as an amount received in a sale or exchange of the property. Thus, the taxpayer has a realized gain if the damages payments received exceed the property's basis
Filing Requirements for self-employed
A self-employed individual with net earnings of $400 or more from a business or profession must file a tax return regardless of the amount of gross income
Kiddie Tax : Two options for computing the tax
A separate return may be filed for the child • The tax on net unearned income (referred to as the allocable parental tax) is computed as though the income had been included on the parents' return - Form 8615 is used to compute the tax
Community Property Spouses Living Apart
A spouse (or former spouse) is taxed only on his or her actual earnings from personal services if the following conditions are met • The individuals live apart for the entire year. • They do not file a joint return with each other. • No portion of the earned income is transferred between the individuals. CONCLUSION : No allocation of community income for some spouses living apart for entire year and filing separately
What qualifies as a student?
A student is a child who, during any part of five months of the year, is enrolled full time at a school or government-sponsored on-farm training course
canons of taxation : certainty
A tax structure is good if the taxpayer can readily predict when, where, and how a tax will be levied. Individuals and businesses need to know the likely tax consequences of a particular type of transaction.
casualty loss for damage to insured personal use property
A taxpayer is not permitted to deduct a casualty loss for damage to insured personal use property unless a timely insurance claim is filed with respect to the damage to the property. This rule applies to the extent that any insurance policy provides for full or partial reimbursement for the loss.
QPAI example
A taxpayer manufactures pants and shirts with the following QPAI results: $5 for one pair of pants and a negative $2 for one shirt. Because the two items are netted, the QPAI amount that controls is $3 ($5 - $2).
Personal Casualty Gains and Losses
A taxpayer who has both gains and losses for the taxable year must first net (offset) the personal casualty gains and personal casualty losses(long term with short term) If the gains exceed the losses, the gains and losses are treated as gains and losses from the sale of capital assets. If personal casualty losses > personal casualty gains, all gains and losses are treated as ordinary items. The gains—and the losses to the extent of gains—are treated as ordinary income and ordinary loss in computing AGI. Losses in excess of gains are deducted as itemized deductions to the extent the losses exceed 10 percent of AGI
Partial List of Exclusions from Gross Income
Accident and health insurance proceeds Annuities (cost element) Bequests Child support payments Cost-of-living allowance (for military) Damages for personal injury or sickness Gifts received Group term life insurance, premium paid by employer (for coverage up to $50,000) Inheritances Interest from state and local (i.e., municipal) bonds Life insurance paid upon death Meals and lodging (if furnished for employer's convenience) Military allowances Minister's dwelling rental value or allowance Railroad retirement benefits (to a limited extent) Scholarship grants (to a limited extent) Social Security benefits (to a limited extent) Veterans' benefits Welfare payments Workers' compensation benefits
Interest income from property
According to the IRS, interest accrues daily. Therefore, the interest for the period that includes the date of the transfer is allocated between the transferor and transferee based on the number of days during the period that each owned the property
property acquisitions are grouped by the quarter they were acquired for cost recovery purposes
Acquisitions during the first quarter are allowed 10.5 months (three and one-half quarters) of cost recovery; the second quarter, 7.5 months (two and one-half quarters); the third quarter, 4.5 months (one and onehalf quarters); and the fourth quarter, 1.5 months (one-half quarter
Hobby defined
Activity not entered into for profit • Personal pleasure associated with activity • Examples: raising horses, fishing boat charter
Transfer for Valuable Consideration example
Adam pays premiums of $4,000 for an insurance policy in the face amount of $10,000 upon the life of Beth and subsequently transfers the policy to Carol for $6,000. Upon Beth's death, Carol receives the proceeds of $10,000. The amount Carol can exclude from gross income is limited to $6,000 plus any premiums she paid subsequent to the transfer.
Revenue Agent's Report (RAR)
After the audit, a Revenue Agent's Report (RAR) is issued summarizing the findings which can result in a: - Refund (tax was overpaid) - Deficiency (tax was underpaid), or - No change (tax was correct) finding
Other Housing Exclusions : educational institution
An employee of an educational institution may be able to exclude the value of campus housing provided by the employer. Generally, the employee does not recognize income if he or she pays annual rents equal to or greater than 5 percent of the appraised value of the facility. If the rent payments are less than 5 percent of the value of the facility, the deficiency must be included in gross income
Unit of Property (UOP)
All costs incurred in acquiring or producing a Unit of Property (UOP) are included in its cost, except for employee compensation and overhead costs. includes all related expenditures incurred before the date the asset is placed in service, even if these expenditures would be repairs if incurred after the asset was placed in service.
Flexible spending plans
Allow employees to accept lower cash compensation in return for employer agreeing to pay certain costs without the employee recognizing income Called a use or lose plan since reduction in pay cannot be recovered if covered expenses are less than expected
Abandoned Spouse
Allows married taxpayer to file as Head of Household rather than married person filing separately if taxpayer: - Does not file a joint return - Paid > half the cost of maintaining his/her home for the tax yr - Spouse did not live in the home during the last 6 months of tax year - Home was principal residence of taxpayer's child for > half of year and can claim child as a dependent
qualifying relative: Relationship Test
Also included are the following relatives: - Lineal ascendants (e.g., parents, grandparents) - Collateral ascendants (e.g., uncles, aunts) - Certain in-laws (e.g., son-, daughter-, father-, mother-, brother-, and sister-in-law) • also includes unrelated parties who live with the taxpayer (i.e., they are members of the same household) for the entire tax year.
Optional Straight-line Election
Although MACRS requires straight-line depreciation for all eligible real estate, the taxpayer may elect to use the straight-line method for depreciable personal property• May elect straight-line rather than accelerated depreciation on personalty placed in service during year - Use the class life of the asset for the recovery period - Use half-year or mid-quarter convention as applicable - Election is made annually by class of property
Writ of Certiorari
Appeal to the Supreme Court (RARE)
Trial courts appeals
Appeals from tax court and district court > U.S Court of Appeals for circuit in which taxpayer resides Appeal from Court of federal claims > Court of Appeals for the Federal Circuit
Taxation of Net Capital Gain : Short-term gains (held for one year or less)
Applicable rate for ordinary income (e.g., 39.6%) same rate as tax bracket
occupational fees
Applicable to various trades or businesses • e.g., liquor store license, taxicab permit, fee to practice a profession
Mid-Quarter Convention
Applies when more than 40% of personalty(ignoring real estate) is placed in service during the last quarter of year Assets treated as if placed into service (or disposed of) in the middle of the quarter in which they were actually placed in service (or disposed of)
No-Additional-Cost Services
Are nontaxable if: • Employee receives services (not property) • The employer does not incur substantial additional cost, including forgone revenue, in providing the services to the employee. • Services offered are within line of business in which employee works / services are offered to customers in the ordinary course of the business • Benefit is offered on nondiscriminatory basis -extends to the employee's spouse and dependent children and to retired and disabled former employees -exclusion is not allowed to highly compensated employees unless the benefit is available on a nondiscriminatory basis
alimony recapture
As a further safeguard against a property settlement being disguised as alimony, special rules apply if payments in the first or second year exceed $15,000. In the third year, the payor must include the excess alimony payments for the first and second years in gross income, and the payee is allowed a deduction for these excess alimony payments
IRS relation with the state
Because of tie-ins to the Federal return, states may be notified of changes made by the IRS upon audit of a Federal return - In recent years, the exchange of information between the IRS and state taxing authorities has increased
EMPLOYEE FRINGE BENEFITS
Benefits other than wages and salary that are provided to employees by the employer -Excluded from gross income e.g., group term life insurance, accident and health insurance, and meals and lodging
Capital gains / losses
Capital gains are taxable, and capital losses are netted against them, resulting in a net capital gain or loss Special tax rates apply to most capital asset sales, but an individual cannot deduct a capital loss that results from the sale of a personal use asset. Net capital losses of individuals are deductible for AGI up to $3,000 yearly
When Casualty & Theft Is Deductible
Casualties: year in which loss is sustained - Exception: If declared "disaster area" by President, can elect to deduct loss in year prior to year of occurrence • Thefts: year in which loss is discovered
tax authorities
Code Section > Legislative Regulation > Recent Temporary Regulation > Interpretive Regulation > Proposed Regulation > Revenue Ruling > Letter Ruling Code > Regulations > Revenue Rulings > Letter Rulings > determination letters
Exceptions To Cash Receipts Method
Constructive receipt Original Issue Discount Amounts Received under an Obligation to Repay
Federal corporate income tax
Corporate Taxable Income = Income - Deductions - Does not require the computation of adjusted gross income - Does not provide for the standard deduction or personal and dependency exemptions - All allowable deductions are business expenses
research and experimental expenditures
Costs for the development or improvement of an experimental model, plant process, product, formula, invention, or similar property depreciation on a building used for research may be a research and experimental expense costs of obtaining a patent
intangible drilling and development costs (IDCs)
Costs incurred in making the property ready for drilling, such as the cost of labor in clearing the property, erecting derricks, and drilling the hole,
Loss on business property/income producing property vs personal
Ded for AGI vs from AGI
Exceptions to prepaid income rule
Deferral of Advance Payments for Goods Deferral of Advance Payments for Services
qualifying relative : The citizenship or residency tests
Dependent must be a U.S. citizen or a resident of U.S., Canada, or Mexico for some part of the calendar year in which the taxpayer's tax year begins - An exception provides that an adopted child need not be a citizen or resident of the U.S. (or a contiguous country) as long as his or her principal residence is with a U.S. citizen
NOL example
Example of NOL carryovers - Ken has a NOL for 2015 - Ken must carryover his NOL in the following order: • Carryback to 2013 then 2014, then carryforward to 2016, 2017, ..., 2035 - Ken can elect to just carryforward his NOL • Carryover would be to 2016, 2017, ..., 2035
2 million: Section 179 example
Example: In 2015, taxpayer placed in service $2,015,000 of § 179 property. - The § 179 expense limit is reduced to $485,000 • [$500,000 - ($2,015,000 - $2,000,000)]
One year rule for prepaid expenses
Exception to the treatment of capital expenditures -asset that will expire or be consumed by the end of the tax year following the year of payment are deductible entirely in year paid(the one-year rule for prepaid expenses) -The payment must be required, not a voluntary prepayment, to obtain the current deduction under the one-year rule. -demonstrate that allowing the current deduction will not result in a material distortion of income. -will be allowed if the item is recurring or was made for a business purpose rather than to manipulate income
Life insurance proceeds
Exempt income to beneficiary if paid solely due to death of insured(including premiums). -Relationship to decedent not determinative
Personal/Rental Use allocation
Expenses must be allocated between personal and rental days before the limits are applied. The courts have held that real estate taxes and mortgage interest, which accrue ratably over the year, are allocated on the basis of 365 days. The IRS allocates real estate taxes and mortgage interest on the basis of total days of use. Other expenses (e.g., utilities, maintenance, depreciation) are allocated on the basis of total days used To find personal itemized deductions. Subtract total mortgage interest and estate taxes by rental portion of it.
Employment Taxes
FICA AND FUTA
additional standard deduction
For taxpayers age 65 or older and/or legally blind One for taxpayers who are blind or 65 or older Two additional standard deductions are allowed for a taxpayer who is age 65 or over and blind
Deduction Criteria for § 162 and § 212 : reasonableness
For § 212 deductions, the law requires that expenses bear a reasonable and proximate relationship to (1) the production or collection of income or to (2) the management, conservation, or maintenance of property held for the production of income
Related party transaction example
Freida sells common stock with a basis of $10,000 to her son, Bill, for its fair market value of $8,000. The $2,000 realized loss is not recognized, which creates a $2,000 right of offset. Bill sells the stock several years later for $11,000. Freida's previously disallowed loss is used by Bill, and only $1,000 of gain ($11,000 selling price - $8,000 basis - $2,000 right of offset) is taxable to him upon the subsequent sale.
SCHOLARSHIPS: Timing Issues
Frequently, the scholarship recipient is a cash basis taxpayer who receives the money in one tax year but pays the educational expenses in a subsequent year. The amount eligible for exclusion may not be known at the time the money is received. In that case, the transaction is held open until the educational expenses are paid
half-year convention
General rule for personalty -MACRS views property as placed in service in the middle of the asset's first year or when disposed of. -Assets treated as if placed in service (or disposed of) in the middle of it's first taxable year regardless of when actually placed in service (or disposed of) -this means that taxpayers must wait an extra year to recover the full cost of depreciable assets. That is, the actual write-offs are claimed over 4, 6, 8, 11, 16, and 21 years
Compensation for a loss of income
Generally , reimbursement for a loss of income is taxed the same as the income replaced - Exceptions exist related to personal injury
Statute of Limitations: refund claim by taxpayer
Generally 3 years from date return filed or 2 years from date tax paid, whichever is later Income tax returns that are filed early are deemed to have been filed on the date the return was due
Cafeteria Plans
Generally, if an employee is offered a choice between cash and some other form of compensation, the employee is deemed to have constructively received the cash even when the noncash option is elected. Thus, the employee has gross income regardless of the option chosen. An exception to this constructive receipt treatment -Under such a plan, the employee is permitted to choose between cash and nontaxable benefits (e.g., group term life insurance, health and accident protection, child care).
Exceptions to recognizing g/l of property
Generally, losses on the sale or disposition of personal use property are not recognized but gain will be taxable
Political Contributions and Lobbying Activities
Generally, no business deduction is allowed for payments made for political purposes or for lobbying The disallowance also applies to a pro rata portion of the membership dues of trade associations and other groups that are involved in lobbying activities
...
Green Corporation begins business on August 1, 2015. The corporation incurs startup expenditures of $53,000. If Green elects amortization under § 195, the total startup expenditures that Green may deduct in 2015 is computed as follows. Deductible amount [$5,000 - ($53,000 - $50,000)] - $2,000 Amortizable amount {[($53,000 - $2,000)/180] x 5 months} - 1,417 Total deduction - $3,417
acquiescence/ nonacquiescence
IRS agree/disagree with result of a court case
bad debt example
If Tracy is an accrual basis taxpayer, she includes the $8,000 in income when the services are performed. When she determines that Pat's account will not be collected, she deducts the $8,000 as a bad debt expense. If Tracy is a cash basis taxpayer, she does not include the $8,000 in income until payment is received. When she determines that Pat's account will not be collected, she cannot deduct the $8,000 as a bad debt expense because it was never recognized as income
tax benefit rule
If taxpayer claims a deduction for an item in one year and in a later year recovers all or a portion of the prior deduction, the recovery is included in gross income - Amount included in income is limited to the amount for which a tax benefit was received no income is recognized upon the recovery of a deduction, or the portion of a deduction, that did not yield a tax benefit in the year it was taken
How net unearned income is taxed
If the amount of net unearned income is positive, the net unearned income is taxed at the parents' rate, even if the parents did not transfer the income to the child. The child's remaining taxable income is taxed at the child's rate. (Income - net unearned income) If net unearned income is zero (or negative), the child's tax is computed using only the child's rate.
How to determine if alimony or child support
If the amount of the payments would be reduced upon the happening of a contingency related to a child (e.g., the child attains age 21 or dies), the amount of the future reduction in the payment is deemed child support
Change from Predominantly Business Use
If the business use percentage of listed property falls to 50 percent or less after the year the property is placed in service, the property is subject to cost recovery recapture After the business usage of the listed property drops below the more-than-50% level, the straight-line method is used for the remaining life of the property
research and experimental expenditures : Capitalized.
If the costs are capitalized, a deduction is not available until the research project is abandoned or is deemed worthless
Effect of Intangible Drilling Costs on Depletion
If the costs are capitalized, the basis for cost depletion is increased. If expensed, reduce taxable income from property( affects limitation of 50% of income)
disaster area losses : Filing timing of tax returns
If the due date, plus extensions, for the prior year's return has not passed, a taxpayer makes the election to claim the disaster area loss on the prior year's tax return. If the disaster occurs after the prior year's return has been filed, it is necessary to file either an amended return or a refund claim.
Life insurance - Transfer for Valuable Consideration
If the policy is transferred for valuable consideration, the insurance proceeds are includible in the gross income of the transferee to the extent the proceeds received exceed the amount paid for the policy by the transferee plus any subsequent premiums paid
Rental of Vacation Homes :Primarily Rental Use
If the residence is rented for 15 days or more in a year and is not used for personal purposes for more than the greater of (1) 14 days or (2) 10 percent of the total days rented, the residence is treated as rental property
When and Where to File
Tax return of an individual is due on or before the 15th day of the 4th month after taxpayer's year end - Most individuals are calendar year taxpayers, thus, due date is April 15 • May obtain a 6 month extension of time to file
Itemized deductions : what kind of expenses are deducted?
In addition to these personal expenses, taxpayers are allowed itemized deductions for expenses related to (1) the production or collection of income and (2) the management of property held for the production of income. expenses incurred in connection with an income-producing activity that does not qualify as a trade or business Ex . stocks , dividends
Tax formula for individuals
Income Less: Exclusions Gross Income Less : Deductions Adjusted gross income Less: greater of itemized deductions or standard deduction Less: personal and dependency exemptions Taxable income Tax on taxable income Less: tax credits Tax due
Formula for Federal Income Tax on Individuals
Income (broadly defined) Less: Exclusions (income that is not subject to tax) Gross income (income that is subject to tax) Less: Certain deductions (usually referred to as deductions for adjusted gross income) Adjusted gross income Less: The greater of certain personal and employee deductions (usually referred to as itemized deductions) or The standard deduction (including any additional standard deduction) and Less: Personal and dependency exemptions Taxable income Tax on taxable income Less: Tax credits (including Federal income tax withheld and other prepayments of Federal income taxes) Tax due (or refund)
INCOME FROM DISCHARGE OF INDEBTEDNESS
Income from the forgiveness of debt is taxable A transfer of appreciated property (fair market value is greater than adjusted basis) in satisfaction of a debt is an event that triggers the realization of income. The transaction is treated as a sale of the appreciated property followed by payment of the debt. Foreclosure by a creditor is also treated as a sale or exchange of the property. Have to recognize gains
Income Received by an Agent
Income received by the taxpayer's agent(person working with the taxpayer) is considered to be received by the taxpayer. A cash basis principal must recognize the income at the time it is received by the agent(doesn't matter when tax payer receives the income)
Computing NOL amount
Individual must start with taxable income and add back: 1. Personal and dependency exemptions 2. NOLs from other years 3. Excess nonbusiness capital losses 4. Excess nonbusiness deductions 5. Excess business capital losses
IRS: Interest
Interest accrues on the taxes due starting from the due date of the return and interest is paid on refunds if not received within 45 days of when the return was filed (returns filed early are deemed to have been filed on the due date)
Field audit
Involves examination of numerous items reported on the return and is conducted on premises of taxpayer or taxpayer's representative
Stock 1244 example
Iris, a single individual, was looking for an investment that would give some diversity to her stock portfolio. A friend suggested that she acquire some stock in Eagle Corporation, a new startup company. On July 1, 2013, Iris purchased 100 shares of Eagle Corporation for $100,000. At the time Iris acquired her stock from Eagle Corporation, the corporation had $700,000 of paid-in capital. As a result, the stock qualified as § 1244 stock. On June 20, 2015, Iris sold all of her Eagle stock for $20,000. Because the Eagle stock is § 1244 stock, Iris has a $50,000 ordinary loss and a $30,000 longterm capital loss.
Leased Automobiles:slides
Leased autos subject to inclusion amount rule - Using IRS tables, taxpayer has gross income equal to each lease year's inclusion amount - Purpose is to prevent avoidance of cost recovery dollar limits applicable to purchased autos by leasing autos Amount on IRS x months/365 x business use %
Corporation-shareholder
Lender - Interest income, Dividend paid Borrower - Interest expense, Dividend income
Compensation-related loans
Lender- Interest income, Compensation expense Borrower-Interest expense,Compensation income
Gift loans
Lender- Interest income, Gift made Borrower- Interest expense, Gift received
National sales tax
Levied on the final sale of goods and services • Collected from consumer, not from businesses as with VAT
Franchise taxes
Levied on the right to do business in the state
determination letters
Like letter rulings in provide guidance on the application of the tax law - Issued by Area Director at taxpayer's request - Usually involve completed transactions as opposed to proposed - Not published • Made known only to party making the request
Married Filing Separately Filing Status
Married but not filing a return with spouse and not abandoned spouse
most common type of nonbusiness bad debt
Loans to relatives or friend
worthless securities
Loss on worthless securities is deductible in the year they become completely worthless -stock, bonds, notes, or other evidence of indebtedness issued by a corporation or government -These losses are capital losses deemed to have occurred on the last day of the year in which the securities became worthless -By treating the loss as having occurred on the last day of the taxable year, a loss that would otherwise have been classified as short-term (if the date of worthlessness was used) may be classified as a long-term capital loss
community property system : community income
Louisiana, Texas, New Mexico, Arizona, California, Washington, Idaho, Nevada, and Wisconsin -each spouse is taxed on one-half of the income from property belonging to the community(when married but file separate returns) Typically income from personal services(e.g., salaries, wages, and income from a professional partnership)
MACRS-Realty
Method: Straight-line Convention: Mid-month Statutory lives: 27.5 yrs / 31.5 yrs or 39 yrs
To qualify for foreign earned income exclusion
Must be : • A bona fide resident of the foreign country (or countries). • Present in a foreign country (or countries) for at least 330 days during any 12 consecutive months.
Carryback and Carryover Periods
Must carryback to 2 prior years, then carryforward to up to 20 future years • May make an irrevocable election to just carryforward •When there are NOLs from two or more years, use on a FIFO basis
net operating loss (NOL)
NOLs from any one year can be offset against taxable income of other years intended as a form of relief for business income and losses
Gifts
NONTAXABLE to donee IF: - Transfer is voluntary without adequate consideration(of equal value) or compensation therefrom , and - Made out of affection, respect, admiration, charity, or donative intent
Property Settlements example
Paul transfers stock to Rosa as part of a divorce settlement. The cost of the stock to Paul is $12,000, and the stock's value at the time of the transfer is $15,000. Rosa later sells the stock for $16,000. Paul is not required to recognize gain from the transfer of the stock to Rosa, and Rosa has a realized and recognized gain of $4,000 ($16,000 - 12,000) when she sells the stock
Rental property allocation of expenses
NOT USING 14 DAYS BUT THE AMOUNT OF DAYS USED FOR PERSONAL, THE 14 DAYS IS ONLY FOR DETERMINING IF THE PROPERTY IS PRIMARILY RENTAL OR NOT -expenses must be allocated between personal and rental days if there are any personal use days during the year(% used as personal / rental) -real estate taxes(property taxes) allocated to the personal days are deductible as an itemized deduction -the mortgage interest allocated to the personal days cannot be deducted because the property is not a qualified residence -deduction of the expenses allocated to rental days can exceed rent income and result in a rental loss( deductible subjected to at risk and passive activity loss) -Other expenses such as dep, utilities, and maintenance are still not deductible for personal use.
Pollock v. Farmers' Loan and Trust Co
New Federal individual income tax enacted found to be unconstitutional 1894
Meals and Lodging
Not taxable if : -Meals and/or lodging are furnished by employer • On employer's business premises • For convenience of employer • In the case of lodging, the employee is required to accept the lodging as a condition of employment.
Failure to pay
Penalty is 0.5% per month up to a max of 25%
Revenue Rulings
Officially issued by National Office of IRS - Provide specific interpretations and guidance in applying the Code - Like regulations but less legal force than Regulations Do not have the force and effect of law.
EXAMPLE 18
On September 1, 2015, Emma places in service listed 5-year recovery property. The property cost $10,000. She elects not to take any available additional first-year depreciation. If Emma uses the property 40% for business and 25% for the production of income, the property is not considered as predominantly used for business. The cost is recovered using straight-line cost recovery. Emma's cost recovery allowance for the year is $650 ($10,000 x .10 65%). If, however, Emma uses the property 60% for business and 25% for the production of income, the property is considered as used predominantly for business. Therefore, she may use the statutory percentage method. Emma's cost recovery allowance for the year is $1,700 ($10,000 x. 20 85%).
imputed interest income: Loans of $10,000 or less but used for income-producing property
On loans of $100,000 or less between individuals, the imputed interest cannot exceed the borrower's net investment income for the year (gross income from all investments less the related expenses). -No imputed interest if net investment income is $1,000 or less -Limitations don't apply if a principal purpose of a loan is tax avoidance.
Tiebreaker Rules : None of the persons is the parent
Person with highest AGI
Additional list of itemized deductions
Personal property taxes Real estate taxes State and local income or sales taxes Interest on home mortgage Investment interest
Trial courts : Jury trial
Only District Court
Section 1244 stock : original purchaser
Only individuals who acquired the stock from the corporation are eligible to receive ordinary loss treatment under§ 1244
Only certain losses can create NOL
Only losses from trade or business operations, casualty and theft losses, or losses from foreign government confiscations can create a NOL No nonbusiness (personal) losses or deductions may be used in computing NOL except personal casualty and theft losses
DPAD example
Opal, Inc., manufactures and sells costume jewelry. It also sells costume jewelry purchased from other manufacturers. During 2015, Opal had a profit of $200,000 (QPAI) from the sale of its own manufactured jewelry and a loss of $50,000 from the sale of the purchased jewelry. Based on this information, Opal's QPAI is $200,000 and its taxable income is $150,000 ($200,000 - $50,000). Opal's DPAD becomes $13,500 [9% of the lesser of $200,000 (QPAI) or $150,000 (taxable income)]. Assume that Opal also has an NOL carryover from 2014 of $300,000. As taxable income for 2015 is zero ($200,000 - $50,000 - $300,000), there is no DPAD.
Ordinary loss vs capital loss
Ordinary loss is fully (100%) deductible in the year the loss is incurred and is not subject to an annual deduction limit. Therefore, an ordinary loss that exceeds $3,000 provides a greater tax benefit in the tax year the loss is incurred than a capital loss that exceeds $3,000 in the same tax year.
FICA taxes
Paid by both an employee and employer Includes medicare(1.45% on all wages) / Social Security ( 6.2% in 2015 on a maximum of 118,500 of wages) - A spouse employed by another spouse is subject to FICA - Children under the age of 18 who are employed inparent's unincorporated trade or business are exempt from FICA
Tiebreaker Rules : One of the persons is the parent
Parent
Tiebreaker Rules : Both persons are the parents, and the child lives with each the same period of time
Parent with the higher adjusted gross income (AGI)
Tiebreaker Rules : Both persons are the parents, and the child lives with one parent for a longer period.
Parent with the longer period of residence
Qualified dividends
Partial relief from double taxation is provided by taxing qualified dividends received by individuals at the same rate as capital gains • Individuals otherwise subject to the 10% or 15% tax rates in 2015 pay 0% tax on qualified dividends received • 25, 28, 33, or 35 percent tax rates pay a 15% tax • 39.6% = 20% tax
Disallowance of Personal Expenditures
Section 262 states that "except as otherwise expressly provided in this chapter, no deduction shall be allowed for personal, living, or family expenses -tax advice is however deductible
List of items that are always recognized in the year received rather than when earned
Prepaid rents or prepaid interest income
Proposed regulation
Prop.Reg.§ 1.2 preview of final regulations • Do not have force and effect of law
FICA taxes : Sole proprietors and independent contractors
Rates are twice that applicable to an employee (12.4% for Social Security and 2.9% for Medicare) The tax is imposed on net self-employment income up to a base amount of $118,500 for 2015 The new .9% tax addition to Medicare also covers situations involving high net income from self employment. also 3.8 on investment income when income exceeds 200,000/ 250,000
Flexibile spending plans: To avoid forfeiture of unpaid amounts
Recently issued IRS rules allow a 2 ½ month grace period (until the 15th day of the 3rd month after the end of the plan year) to use the funds for qualified expenses
Internal Revenue Service(IRS)
Responsible for enforcing the Federal tax laws Audits small percentage of returns filed
Original purchaser example
Return to the facts of The Big Picture on p. 7-1. On March 8, 2015, Martha purchases what she believes is § 1244 stock from her friend Janice for $20,000. On November 2, 2015, she sells the stock in the marketplace for $12,000. Because Martha purchases the stock from Janice and not the corporation, the stock is not § 1244 stock to Martha. As a result, Martha has an $8,000 short-term capital loss.
Example : $100 and 10% floor
Rocky, who had AGI of $30,000, was involved in a motorcycle accident in 2015. His motorcycle, which was used only for personal use and had a fair market value of $12,000 and an adjusted basis of $9,000, was completely destroyed. He received $5,000 from his insurance company. Rocky's casualty loss deduction is $900 [$9,000 basis -$5,000 insurance recovery - $100 floor - $3,000 (10%x $30,000 AGI)]. The $900 casualty loss is an itemized deduction (from AGI).
16th Amendment
Sanctioned both Federal individual and corporate income taxes
Section 1244 : losses vs gains
Section 1244 does not apply to gains. If § 1244 stock is sold at a gain, the Section is not applicable and the gain is capital gain..
Scholarships : Disguised Compensation
Some employers make scholarships available solely to the children of key employees to provide a nontaxable fringe benefit to the executives by making the payment to the child in the form of an excludible scholarship BUT includible in the gross income of the parent-employee
State Income :decoupling
Some states ''decouple'' from select tax legislation enacted by Congress - State may not be able to afford the loss of revenue resulting from such legislation
A holding period requirement must be satisfied for the special rates to apply
Stock on which the dividend is paid must have been held for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date
Courts high to low ranking
Supreme Court > Circuit Court of Appeals > Tax Court(reg decisions) > Tax Court( Memorandum decisions) > US court of Federal claims > US District Courts > Small Cases Division
Statutory Framework for Deducting Losses of Individuals
TEXTB
Federal customs duties
Tariffs on certain imported goods
Trial courts : Payment of deficiency
Tax Court, you dont have to pay tax due Other courts, you have to pay and sue for refund
Trial courts : Number of judges
Tax court - 19 Court of Federal Claims - 16 U.S. District Court - varies Many cases will be heard and decided by one of the 19 regular judges (entire court only if important)
Trial courts : Jurisdiction
Tax court - Nationwide Court of Federal Claims - Location of Taxpayer U.S. District Court - Nationwide
Trial courts : Types of disputes
Tax court - Tax cases only U.S. District Court- Most criminal and civil issues Court of Federal Claims- Claims against the U.S
Trial courts : Location
Tax court -Nationwide ( based in Washington but judges can move ) U.S. District Court- one in each state Court of Federal Claims- only based in Washington
Severance Taxes
Tax on natural resources extracted by states
Federal Gift Taxes
Tax on the right to transfer assets during a person's lifetime/ The person who makes the gift is taxed Taxable gift = FMV of gift less annual exclusion less marital deduction (if applicable) Federal gift tax provides an annual exclusion for donors of $14,000 per donee unified transfer credit is applicable
Death Taxes
Tax on the right to transfer property or to receive property upon the death of the owner Fair market value of the property transferred at the time of death(or 6 months after) = tax base Tax is generally based on relationship of heir to decedent. The more closely related the heir, the lower the rates imposed and the greater the exemption allowed.
When the taxpayer is not in a business the same as or similar to that being investigated
Tax result depends on whether new business is acquired If not, investigation expenses generally are nondeductible
Form 1040
Taxpayers who itemize deductions from AGI cannot use Form 1040A, but must file Form 1040 (the long form).
recovery recapture
The amount required to be recaptured and included in the taxpayer's return as ordinary income is the excess cost recovery.
Disallowance of Deductions for Capital Expenditures
The Code specifically disallows a deduction for "any amount paid out for new buildings or for permanent improvements or betterments made to increase the value of any property or estate. -Incidental repairs and maintenance of the property are not capital expenditures and can be deducted as ordinary and necessary business expenses(restoring the asset to its original condition) Amounts are capitalized • Asset may be subject to depreciation (or cost recovery), amortization, or depletion
Fed gov vs state gov in death taxes
The Federal government imposes only an estate tax while many state govs imposes both estate and inheritance taxes.
W-2 wages relation with DPAD
The deduction cannot exceed 50% of an employer's W-2 wages paid to employees engaged in qualified production activities If no W-2 wages are paid, no DPAD will be allowed
What is meant by furnished?
The Supreme Court held that a cash meal allowance was ineligible for the exclusion because the employer did not actually furnish the meals.
amortization
The amount of the deduction is determined by amortizing the adjusted basis of such intangibles over a 15-year period beginning in the month in which the intangible is acquired The 15-year amortization period applies regardless of the actual useful life of an amortizable § 197 intangible. self-created intangibles are not § 197 intangibles
Personal and Dependency Exemptions In Year Of Death
The amount of the exemption is not reduced due to the taxpayer's death Personal exemption allowed on joint return for spouse who dies during the year
R/E : AMortization esxample
The benefits from the project will be realized starting in March 2017. If Gold Corporation elects a 60-month deferral and amortization period, there is no deduction prior to March 2017, the month benefits from the project begin to be realized. The deduction for 2017 is $10,867, computed as follows: Salaries ($25,000 + $18,000) $43,000 Materials ($8,000 + $2,000) 10,000 Depreciation ($6,500 + $5,700) 12,200 Total $65,200 $65,200 x (10 months/60 months) =$10,867
Deduction Criteria for § 162 and § 212 : Necessary
The courts have held that an expense is necessary if a prudent businessperson would incur the same expense and the expense is expected to be appropriate and helpful in the taxpayer's business.
court of original jurisdiction
The dispute is first considered by a court of original jurisdiction (known as a trial court) with any appeal (either by the taxpayer or the IRS) taken to the appropriate appellate court.
Health Savings Account (HSA)
The employer purchases a medical insurance plan with a high deductible then make contributions to the employee's HSA(e.g., the employee is responsible for the first $2,600 of the family's medical expenses) The employer can make contributions each month up to the maximum contribution of 100 percent of the deductible amount - Withdrawals from HSA are excludible to the extent used for qualified medical expenses
Timing of expense recognition : Cash Method Requirements
The expenses of cash basis taxpayers are deductible only when they are actually paid with cash or other property -Note or promise to pay doesn't qualify but borrowed funds do.
Why Mid Quarter convention?
The half-year convention arises from the simplifying presumption that assets generally are acquired at an even pace throughout the tax year. However, Congress was concerned that taxpayers might defeat that presumption by placing large amounts of property in service during the last quarter of the taxable year (and, by doing so, receive a half-year's depreciation on those large, fourth-quarter acquisitions).
Methods of Accounting
The method of accounting affects when deductions are taken - Cash: expenses are deductible only when paid - Accrual: expenses are deductible when incurred • Apply the all events test and the economic performance test - Exception to the economic performance test for recurring items
Income from Property
The owner of the tree(property) has control over the fruit(income); therefore, the owner of the property should pay tax on the income the property produces. is taxable to the owner of the property Assignment of income is not permitted
Compensation for Damages
The tax consequences of the receipt of damages depend on the type of harm the taxpayer has experienced. (1) a loss of income (2) expenses incurred (3) property destroyed (4) personal injury.
Domestic Production Activities Deduction : Net operating loss
The taxable income limitation is determined after the application of any net operating loss (NOL) deduction for the tax year Thus, a company with an NOL carryforward for a tax year is ineligible for the DPAD if the carryforward eliminates current taxable income. Further, a taxpayer that has an NOL carryback may lose part or all of the DPAD benefit for that year As taxable income is reduced by the NOL carryback, there is a corresponding reduction in the DPAD.
foreign earned income exclusion
The taxpayer can elect either (1) to include the foreign income in his or her taxable income and then claim a credit for foreign taxes paid or (2) to exclude the foreign earnings from his or her U.S. gross income(foreign earned income exclusion)
alternative depreciation system (ADS) usage
The taxpayer must use the half-year or the mid-quarter convention, whichever is applicable, for all property other than eligible real estate. The mid-month convention is used for eligible real estate.
reserve method
used by certain financial institutions
Expenses Relating to an Illegal Business
The usual expenses of operating an illegal business (e.g., a gambling operation) are deductible - However, deduction for fines, bribes to public officials, illegal kickbacks, and other illegal payments are disallowed
Measuring the Amount of Loss : If business property or property held for the production of income (e.g., rental property) is completely destroyed
Theft or complete casualty the loss is equal to the adjusted basis of the property at the time of destruction - Adjusted basis in property less insurance proceeds
Transfer for Valuable Consideration : Exceptions
These exceptions permit exclusion treatment for transfers to the following: 1. The insured under the policy. 2. A partner of the insured. 3. A partnership in which the insured is a partner. 4. A corporation in which the insured is an officer or a shareholder. 5. A transferee whose basis in the policy is determined by reference to the transferor's basis.
accelerated death benefits are available only to
These exclusions for the terminally ill and the chronically ill are available only to the insured. Thus, a person who purchases a life insurance policy from the insured does not qualify. Only the seller who is illed is allowed to exclude gain. Not the purchaser
modified adjusted gross income
used for individual (a sole proprietorship) QPAI (profit) - loss /expenses
Deductions for Adjusted Gross Income
To arrive at AGI above-the-line deductions • Expenses incurred in a trade or business. • Part of any Federal self-employment tax paid. • Unreimbursed moving expenses. • Contributions to traditional Individual Retirement Accounts (IRAs) and certain other retirement plans. • Fees for college tuition and related expenses. • Contributions to Health Savings Accounts (HSAs). • Interest on student loans. • Excess capital losses. • Alimony payments.
Determination of Net Capital Gain
To arrive at a net capital gain, capital losses are taken into account. The capital losses are aggregated by holding period (short-term and long-term) and applied against the gains in that category. If excess losses result, they are shifted to the category carrying the highest tax rate. A net capital gain occurs if the net long-term capital gain (NLTCG) exceeds the net short-term capital loss (NSTCL).
Expenditures Incurred for Taxpayer's Benefit or Taxpayer's Obligation
To be deductible, an expense must be incurred for the taxpayer's benefit or arise from the taxpayer's obligation No deduction is allowed for payment of another taxpayer's expenses One exception to this disallowance rule is the payment of medical expenses for a dependent
Pro rata portion of interest ex
Tracy's redemption proceeds from qualified savings bonds during the taxable year are $6,000 (principal of $4,000 and interest of $2,000). Tracy's qualified higher education expenses are $5,000. Because the redemption proceeds exceed the qualified higher education expenses, only $1,667 [($5,000/$6,000) x $2,000] of the interest is excludible.
Employer Payments to Employees
Transfers from an employer to an employee cannot be excluded as a gift May be excludible under other provisions, e.g., employee achievement awards Victims of a qualified disaster who are reimbursed by their employers for living expenses, funeral expenses, and property damage can exclude the payments from gross income
global system
U.S. citizen is generally subject to tax on his or her income regardless of its economic origin possibility of double taxation: the same income would be taxed in the United States and in the foreign country
Example of child support
Under the divorce agreement, Matt is required to make periodic alimony payments of $500 per month to Grace. However, when Matt and Grace's child reaches age 21, marries, or dies (whichever occurs first), the payments will be reduced to $300 per month. Grace has custody of the child. Because the required contingency is the cause for the reduction in the payments, from $500 to $300, child support payments are $200 per month and alimony is $300 per month.
modified accelerated cost recovery system (MACRS)
Under this method, the cost of an asset is recovered over a predetermined period that generally is shorter than the useful life of the asset or the period that the asset is used to produce income Used for personalty and certain realty Straight-line depreciation may be elected instead
Kiddie tax : Net unearned income
Unearned income Less: $1,050 Less: The greater of • $1,050 of the standard deduction or • The amount of allowable itemized deductions directly connected with the production of the unearned income Equals: Net unearned income
Tax Research Tools
Used to crucial part of the research process is the ability to locate appropriate sources of the tax law
Office audit
Usually restricted in scope and conducted in facilities of IRS
Qualified Retirement Planning Services
Value of any retirement planning advice or information provided by employer who maintains a qualified retirement plan is excluded from income
Fringe benefits: athletic facilities
Value of use of athletic facilities located on employer premises can be excluded
reasonable prospect of recovery doctrine : $100 and 10%-of-AGI Floors
When a nonbusiness casualty loss is spread between two taxable years because of the reasonable prospect of recovery doctrine, the loss in the second year is not reduced by the $100 floor However, the loss in the second year is still subject to the 10 percent floor based upon the taxpayer's second-year AGI
Qualified Employee Discounts
When employer sells to employee goods or services cheaper than for customers, the discount is realized in gross income. However, qualified employee discount , can be excluded from the gross income of the employee
Farm Property
When tangible personal property is used in a farming business, the cost of the asset generally is recovered under MACRS using the 150 percent declining-balance method MACRS straight-line method is required for any tree or vine bearing fruits or nuts. -usual recovery periods (27.5 years and 39 years) for real property
Accrual method : if contested
Where the taxpayer's right to the income is contested (e.g., when a contractor fails to meet specifications), the year in which the income is subject to tax depends upon whether payment has been received
The Flat Tax
Would replace the current graduated income tax with a single rate
Why is gain recognized for cancelled insurance policy?
because the general exclusion provision for life insurance proceeds applies only to life insurance proceeds paid upon the death of the insured.
De Minimis Fringes
benefits that are so small that accounting for them is impractical. If for business, exclusion allowed.
The distinction between a business bad debt and a nonbusiness bad debt is important
business bad debt is deductible as an ordinary loss in the year incurred, whereas a nonbusiness bad debt is always treated as a short-term capital loss
If asset is not used predominantly for business
business use does not exceed 50% - Must use straight-line method - If business use falls to 50% or lower after year property is placed in service, must recapture excess cost recovery Adjusted basis x Business use+ Income producing * Straight line rate
For listed property to be considered as predominantly used in business
business use must exceed 50% • Use of asset for production of income is not considered in this 50% test • However, both business and production of income use percentages are used to compute cost recovery * Personal % is ignored for calculations In determining the percentage of business usage for listed property, a mileage-based percentage is used for automobiles. For other listed property, one employs the most appropriate unit of time (e.g., hours) for which the property actually is used (rather than its availability for use).
realty and personalty vs personal use property
business use/incomeproducing property vs personal use Cost recovery deductions are not allowed for personal use assets
Qualified tuition waivers or reductions
by nonprofit educational institutions are excluded from income for their employees - Generally limited to undergraduate tuition waivers - Exception for graduate teaching or research assistants
Are scholarships excluded as gifts?
cannot be excluded as gifts because conditions attached to the receipt of the funds mean that the payments were not made out of "detached generosity.
Recovery of Capital Doctrine
cannot be taxed on principal amount(capital) invested sellers can reduce their gross receipts (selling price) by the adjusted basis of the property sold to determine the amount of gross income
Tangible asset costs
capitalized and recovered through depreciation (cost recovery).
Carryback
carried first to the second prior year and then to the immediately preceding tax year (or until used up). NOL in 2015, carryback to 2013,then 2014 FIFO basis
Judicial Citations
case name, volume number, reporter series, page or paragraph number, court (where necessary), and year of the decision
personal casualty loss
casualty or theft loss of personal use property after the application of the $100 floor.
chronically ill
certified as being unable to perform without assistance certain activities of daily living. no gain is recognized if the proceeds of the policy are used for the long-term care of the insured.
short-term capital loss : maximum amount
maximum amount of a net short-term capital loss that an individual can deduct against ordinary income in any one year is $3,000
Section 212 allows deductions for ordinary and necessary expenses paid or incurred for the following:
may be for AGI or from AGI. • The production or collection of income. • The management, conservation, or maintenance of property held for the production of income. • Expenses paid in connection with the determination, collection, or refund of any tax
Tax Table Method
may not be used when taxable income exceeds $100,000 Range (at least , but less than) , then it tells you the exact tax liability amount
Excessive Executive Compensation :publicly held corporations
millionaires' provision limits the amount the employer can deduct for the taxable compensation of a covered executive to $1 million annually (for each executive) PEO,PFO,
qualifying child
must meet the relationship, abode, age, and support tests
Procedural Regulations
neither establish tax laws nor attempt to explain tax laws housekeeping-type instructions indicating information that taxpayers should provide the IRS, as well as information about the internal management and conduct of the IRS itself.
Small Cases Division
no appeal ,informal (no lawyer needed) limited to cases involving amounts of $50,000 or less no precedential value more timely but less expensive option
Accrual method : If income is contested and payment hasn't been received
no income is recognized until the claim is settled.
Inheritances
nontaxable to beneficiary on the federal level Income earned on gifts or inheritances is taxable under normal rules
Partnership : type of entity
not a separate taxable entity.
Drug dealers
not allowed a deduction for ordinary and necessary business expenses incurred in their business. In arriving at gross income from the business, however, dealers may reduce total sales by the cost of goods sold
Reduction for $x and x%-of-AGI Floors
only for PERSONAL assets. -The amount of the loss for personal use property must be further reduced by a $100 per event floor and a 10%-of-AGI aggregate floor. -$100 floor applies separately to each casualty and applies to the entire loss from each casualty (e.g., if a storm damages both a taxpayer's residence and automobile, only $100 is subtracted from the total amount of the loss). The losses are then added together, and the total is reduced by 10 percent of the taxpayer's AGI. The resulting loss is the taxpayer's itemized deduction for casualty and theft losses
Trial courts : Number of courts
only one Court of Federal Claims and only one Tax Court, but there are many Federal District Courts
if a business debt previously deducted as partially worthless becomes totally worthless in a future year
only the remainder not previously deducted can be deducted in the future year.
Realized gains/losses are classified as either
ordinary or capital
Startup expenditures
partially amortizable by using a § 195 election. must make this election no later than the due date of the return for the taxable year in which the trade or business begins(otherwise, capitalized)
Who is considered an employee?
partner is not an employee, the exclusion does not apply to a partner
Expenses against Public Policy
payment in violation of public policy is not a necessary expense and is not deductible -Bribes and kickback -Fines and penalties paid to a government for violation of law. - Two-thirds of the treble damage payments made to claimants resulting from violation of the antitrust law
failure to file a tax return
penalty of 5 percent per month up to a maximum of 25 percent is imposed on the amount of tax shown as due on the return any fraction of a month counts as a full month During any month in which both the failure to file penalty and the failure to pay penalty apply, the failure to file penalty is reduced by the amount of the failure to pay penalty.
terminally ill
person whom a medical doctor certifies as having an illness that is reasonably expected to cause death within 24 months. Gain is excluded completely from income.
territorial system
person's income is taxed only in the country in which the income was earned
Reg. § 1.2
prefix 1 designates the Regulations under the income tax law Refers to Regulations under Code § 2
Final Regulations categories
procedural, interpretive, or legislative
QPAI vs taxable income
profit from manufacturing profit of manufacturing - any related losses
progressive deterioration
progressive deterioration (such as erosion due to wind or rain) is not a casualty because it does not meet the suddenness test disease and insect damage
the cash receipts method
property or services received are included in the taxpayer's gross income in the year of actual or constructive receipt by the taxpayer or agent, regardless of whether the income was earned in that year. -income received need not be reduced to cash in the same year - all is needed is a cash equivalent at FMV (notes, check) - Promise to pay / A/R doesn't count (DEFERRED until collected)
Foreign Earned Income : housing
reasonable housing costs in excess of a base amount may be excluded from gross income
wherewithal to pay
recognizes the inequity of taxing a transaction when the taxpayer lacks the means with which to pay the tax.
Unified Transfer Tax Credit
reduces or eliminates the estate tax liability for certain estates available for gifts too Offsets tax on $5.43 million of the tax base($2,117,800 credit)
Purpose of federal tax law : Economic
regulate the economy and encourage certain behavior and businesses considered desirable
exclusion ratio applies until
the annuitant has recovered his or her investment in the contract -Once the investment is recovered, the entire amount of subsequent payments is taxable(e.g. lives longer than life expectancy). -If the annuitant dies before recovering the investment, the unrecovered cost (adjusted basis/excludable part) is deductible in the year the payments cease (usually the year of death)
Excessive Executive Compensation : closely held corporations
the compensation of shareholder-employees of closely held corporations is subject to the reasonableness requirement
In cases where the property is not predominantly used for business
the cost is recovered using the straight-line method
Original Issue Discount
the difference between the amount due at maturity and the original amount of the loan is actually interest which is to be reported when earned(when accrued) rather than received (regardless of accounting method)
Excess cost recovery
the excess of the cost recovery deduction taken in prior years using the statutory percentage method over the amount that would have been allowed if the straight-line method had been used since the property was placed in service
fruit and tree metaphor
the fruit (income) must be attributed to the tree from which it came (person). Income from personal services is taxable to the person who performs the services
Tax evasion
the illegal minimization of tax liabilities
If interest is charged on the loan, but is less than the Federal rate
the imputed interest is the difference between the amount that would have been charged at the Federal rate and the amount actually charged
Accrual method : Income subjected to a potential refund claim
the income is reported in the year of sale and a deduction is allowed in subsequent years when actual claims accrue
QUALIFIED ABLE PROGRAMS
to assist individuals who became blind or disabled before age 26. Contributions to the account must be in cash and may not exceed the annual gift tax exclusion for the year ($14,000 for 2015). Contributions to the account are not deductible. -The tax benefit of an ABLE account is that its earnings are not taxable. - Distributions from the account also are not taxable provided they do not exceed the qualified disability expenses of the designated beneficiary.
Partial List of Gross Income Items
• Alimony • Annuities (income element) • Awards • Back pay • Bargain purchase from employer • Bonuses • Breach of contract damages • Business income • Clergy fees • Commissions • Compensation for services • Death benefits • Debts forgiven • Director's fees • Dividends • Embezzled funds • Employee awards (in certain cases) • Employee benefits (except certain fringe benefits) • Estate and trust income • Farm income • Fees • Gains from illegal activities • Gains from sale of property • Gambling winnings • Group term life insurance, premium paid by employer (for coverage over $50,000) • Hobby income • Interest • Jury duty fees • Living quarters, meals (unless furnished for employer's convenience) • Mileage allowance • Military pay (unless combat pay) • Notary fees • Partnership income • Pensions • Prizes • Professional fees • Punitive damages • Rents • Rewards • Royalties • Salaries • Severance pay • Strike and lockout benefits • Supplemental unemployment benefits • Tips and gratuities • Travel allowance (in certain cases) • Treasure trove (found property) • Wages
Multiple support agreements
• Allows one member of a group providing > 50% of support to claim individual even though no one person provides > 50% support - Eligible parties must provide > 10% of support - Each eligible party must meet all other dependency requirements
personal exemptions
• Amounts - 2015: $4,000 per exemption - 2014: $3,950 per exemption • Personal and dependency exemptions - One per taxpayer (two personal exemptions when married, filing jointly) and for each dependent • Exception: Individual claimed as dependent by another taxpayer does not receive a personal exemption
Hobbies order of deductions
• Amounts deductible under other Code sections without regard to the nature of the activity, such as property taxes and home mortgage interest. • Amounts deductible under other Code sections if the activity had been engaged in for profit, but only if those amounts do not affect adjusted basis. Examples include maintenance, utilities, and supplies. • Amounts for depreciation, amortization, and depletion The last two categories of deductions are deductible from AGI as itemized deductions to the extent they exceed 2 percent of AGI(misc itemized deductions)
Certain taxpayers may not use the Tax Table method including:
• An individual who files a short period return • Individuals whose taxable income exceeds the maximum (ceiling) amount in the Tax Table • An estate or trust
listed property includes
• Any passenger automobile. • Any other property used as a means of transportation. • Any property of a type generally used for purposes of entertainment, recreation, or amusement. • Any computer or peripheral equipment, with the exception of equipment used exclusively at a regular business establishment, including a qualifying home office. • Any other property specified in the Regulations.
Related parties
• Brothers and sisters (whether whole, half, or adopted), spouse, ancestors (parents and grandparents), and lineal descendants (children and grandchildren) of the taxpayer. • A corporation owned more than 50 percent (directly or indirectly) by the taxpayer. • Two corporations that are members of a controlled group. • A series of other complex relationships between trusts, corporations, and individual taxpayers.
Capital Assets
• Capital assets are defined as any property other than: - Inventory, - Accounts Receivable, and - Depreciable property or real property used in a business Most personal use assets rather than for business owned by individuals are capital assets - Losses on these assets are not deductible Examples : assets held for investment, collectibles, personal items
millionaries provision doesn't include
• Certain performance-based compensation • Payments to qualified retirement plans • Payments excludible from gross income
Section 162 excludes the following items from classification as trade or business expenses:
• Charitable contributions or gifts. • Illegal bribes and kickbacks and certain treble damage payments. • Fines and penalties.
Deductible Personal Expenses
• Contributions to qualified charitable organizations. • Medical expenses. • Certain state and local taxes. • Personal casualty losses. • Certain personal interest. • Legal fees, but only if they relate to the determination of a tax liability.
qualifying relative: Gross Income Test
• Dependent's gross income must be less than the exemption amount ($4,000 for 2015)
Some payments are frequently referred to as dividends but are not considered dividends for tax purposes
• Dividends received on deposits with savings and loan associations, credit unions, and banks are actually interest (a contractual rate paid for the use of money). • Patronage dividends paid by cooperatives (e.g., for farmers) are rebates made to the users and are considered reductions in the cost of items purchased from the association. The rebates are usually made after year-end (after the cooperative has determined whether it has met its expenses) and are apportioned among members on the basis of their purchases. • Mutual insurance companies pay dividends on unmatured life insurance policies that are considered rebates of premiums. • Shareholders in a mutual investment fund are allowed to report as capital gains their proportionate share of the fund's gains realized and distributed. The capital gain and ordinary income portions are reported on the Form 1099 that the fund supplies its shareholders each year.
Filing Requirements for Dependents
• Earned income only and gross income that is more than the total standard deduction (including any additional standard deduction) that the individual is allowed for the year. • Unearned income only and gross income of more than $1,050 plus any additional standard deduction that the individual is allowed for the year. • Both earned and unearned income and gross income of more than the larger of $1,050 or the sum of earned income plus $350 (but limited to the applicable basic standard deduction), plus any additional standard deduction that the individual is allowed for the year.
Nine factors should be considered in determining whether an activity is profit-seeking or is a hobby
• Whether the activity is conducted in a businesslike manner. • The expertise of the taxpayers or their advisers. • The time and effort expended. • The expectation that the assets of the activity will appreciate in value. • The taxpayer's previous success in conducting similar activities. • The history of income or losses from the activity. • The relationship of profits earned to losses incurred. • The financial status of the taxpayer (e.g., if the taxpayer does not have substantial amounts of other income, this may indicate that the activity is engaged in for profit). • Elements of personal pleasure or recreation in the activity.
Married Filing Jointly
• are Married as of last day of taxable year, or • Spouse dies during taxable year
Transaction Taxes
•Excise taxes •General sales taxes •Severance taxes
If a satisfactory settlement is not reached on administrative appeal, the taxpayer can litigate in:
•Tax Court • Federal District Court, or • Court of Federal Claims