Chapter 2

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Example: Martina and Fran each own 50% of the stock of Card Corporation. During the current year, Card Corporation had a taxable income of $80,000 and paid a total of $20,000 in dividends. What are the tax effects of Card Corporation's income and dividend distributions" "

separate and distinct taxable entity, Corp MUST PAY TAX ON $80,000 of TAXABLE INCOME. Martina and Fran -Must Include $10,000 in Dividends in Taxable Income Calculations. -Dividend Payments are not Deductible Double taxation occurs on the Dividens -Once when included as income by CORPORATION" "

Under Realization and its construct and doctrines, Outline the Constructive Receipt?

... "A modification that prevents cash basis taxpayers from "turning their backs" on income. Realization is deemed to have occurred if -A taxpayer is aware an amount is available, -The amount is unconditionally available (even without physical possession), and -Receipt of the amount is within the taxpayer's control. Recognizes income when earned on Accrual Basis Taxpayer recognizes inome when received on Cash Basis Cash basis taxpayers deemed to be in receipt of income credited to accounts, otherwise Made Unconditionally available to them **Physical Possession of cash not received to be taxed Interest income taxed on day credited to savings account, regardless when taxpayer withdraws it"

Illustrate the organization under which Entity "

1) Trusts -Mix of taxable and Conduit Entity; arrangement where Trustee manages assets for benefit of another, --to the Beneficiary 2) Relationship B/W partnerships and Subchapter S corporations -Corp is recognized as entity Separate from owner, Owner Commit and ADD personal transactions for Tax purposes -Owner of corporation includes income on individual tax return only on Salary they received from CORP 3) S Corp -Pay no Tax on income, Income reports on owners TAX RETURN, Tax Paid based on Owners Taxable income, Along with other Income and Deductions. " "

Under ARMS LENGTH TRANSACTIONS, Define the Relaed Party Relationships and Set of Related Party Provisions for SELF DEALING?" "

1) individuals and Families 2) Individuals and Corp (Partnerships) if individual owns more than 50% of Corporation (Partnership 3)Coporation and partnerships if same person owns more than 50% of both Corporation and Partnerships --Typically involves, as effort, for constructive ownership rules Individuals might reduce direct ownership in Corp/Partnerships by distributing among family members, other corporations or partnerships that they control. System which individual is deemed to indirectly have interest actually owned by another identity.

Under Accounting Concepts, Explain Annual Accounting Period Constructs and Doctrines for Tax Benefit Rule? " "

A transaction must be realistic in an ordinary sense and not contrived merely to avoid tax. Any Deduction taken prior year, recovered in subsequent year, reported on income in year recovered, to extent Tax benefit is received from deductions

Under Accounting Concepts, Explain Annual Accounting Period Concept? "

All entities report results of operations on annual basis, each taxable year is to stand on its own, apart from other tax years Tax year of: -Calendar --- Which ends on December 31 -Fiscal -- end last on any month taxpayer chooses. Accounting Method is -Cash Basis --- Taxed on income received and take deductions as they are paid --Accrual Basis --- Report income earned and take deductions incurred, without regard to actual receipt of Cash PMT. GAAP, matches income to the effort ***Matters for Taxpayers selecting accounting methods" "

Explain All Inclusive Income? "

All income Received is taxable unless provision of the law specifically excludes it so it is a WEALTH ENHANCEMENT --Unless Specific Provision found in tax law that excludes item of question from taxation" "

Under Entity Concept, Explain the ASSIGNMENT of Income Doctrine? "

All income earned from services provided by an entity or property owned by an entity are to be taxed to that entity Does not relieve owner of income property tax; Still imposed on person who earns income. Exceptions of building transfers and taxes --Only legaly way is owner to legally transfer ownership to entity Ex: Sage is a self-employed electrician. She deposits all cash payments she receives in a bank account in her son's name. Sage does not have use of the funds; however, she is required to include the amount of the cash payments in her gross income. "

Example of Pay as you Go General Concept: Giovanna is a machinist who works for Adilia Company. During the current year, she earned $32,500 and had $2,850 of federal income tax withheld from her paycheck. In filing her return, Giovanna's actual tax was determined to be $3,000. How much tax must Giovanna pay when she files her return for the current year?

Although Giovanna's actual tax is $3,000, she has already paid in $2,850 through withholding. Therefore, she has to pay only $150 ($3,000 - $2,850) when she files her current year's return. By having Giovanna with PAY AS YOU GO, The Tax System encourages Voluntary Compliance; SPREADING Tax Burder Over Period of Time during which income is being Earned." Accounting Concepts "Explain effect of accounting Concepts, have such concepts provide guidance in determining item of income should be included in Gross Income, when expense item is deductible?"

EXAMPLES OF CAPITAL RECOVERY: Earl purchases 100 shares of ABC Company's common stock at a total cost of $1,000. When he sells the stock, one lot of 50 shares is sold for $600 and the other 50 shares are sold for $300. What are the tax effects of these sales? " "

Because there are two separate sales of the stock at different prices, each sale must be considered separately. Each 50-share lot has a basis of $500 (half the $1,000 purchase price). The lot sold for $600 results in a $100 ($600 - $500) taxable gain. That is, Earl has recovered $100 more than he invested in the 50 shares. -The 50 shares sold for $300 result in a loss of $200 ($300 - $500). Note that a loss is nothing more than invested capital that has not been recovered. Because of the capital recovery concept, we recognize gains only when the recovery from the disposition of an asset is greater than the amount invested in the asset. A loss results when all the capital invested in an asset is not recovered upon its disposition. Earl buys 100 shares at $10 each Sale 1: 50 shares (cost = $500) sold for $600 Gain of $100 Sale 2: 50 shares (cost = $500) sold for $300 Loss of $200 "

CONSTRUCTS: How is a Sole Proprietorship Treated?" "

Books Kept Separate and distinct from personal Transactions of owner. Income Tax Attributes of business reported on Owner's Return, - Conduit Entity " "

Tell me how do constructs, doctrines, and concepts provide Overall Guidance on tax treatments or items Affecting Taxable income?" "

Both Constructs and Doctrines Interpretation is to apply the concepts Example is annual Accounting Period Concept -Requires all income tax entities to report results on annual basis

Under Accounting Concepts, Explain Annual Accounting Period Constructs and Doctrines for Substance Over Form Doctrine? " "

Congress have consistently held taxpayers under no legal obligations to pay more tax than law prescribes it. Doctrine states taxability of transaction is determined by reality of transaction rather than some appearance. Applies of elements of whether transaction has economic substance. Most are made at arm's length B/W two Parties Neither which stands to benefit Mutual manipulation of transactions. A transaction must be realistic in an ordinary sense and not contrived merely to avoid tax Example: Jacee "hired" her 4-year old son as office manager for her real estate firm. When she filed her federal tax return she deducted $20,000 as Salary Expense for him. The IRS disallowed the deduction when they examined her return " Income Concepts Describe Income Concepts and explain how they aid determining which items constitute gross income for tax purposes

What are the Costs and deductions under Administrative Conveniance General Concepts?" "

Cost is generally TIME and Effort for Taxpayers to accumulate into what is Necessary to implement Concept Deductions for Individuals, tax law lets individuals take deductions for certain personal expenditures --Lets Taxpayers take Stand. Deduction to deduct actual Allowable Deductions"

Why is Gift Tax not worth for IRS Tax Collection?

Cost of Gov't is difficult to track each gift if UNDER $50,000, SO NOT WORTH TRACKING from GOVT

Example of Income Concepts:Assume that Aardvark Corporation policy is to mail its annual dividend checks to shareholders so that the checks arrive on or before December 31 of each year. Alana has been a shareholder of Aardvark for 5 years. Alana's dividend check arrives in her mailbox on December 31 of Year 1.However, Alana is out of town to visit relatives for the holiday and does not return until January 4 of Year 2, at which time she deposits the check in her checking account. In what year is the dividend taxable to Alana?" "

Because the dividend is made annually, Alana is aware that the check is coming. She is taxed on the dividend in Year 1 because it is available to her on December 31 and she knew that the check was coming."

Examples of Capital recovery Deduction: Amy Corporation, a cash basis taxpayer, purchases a computer to use in its consulting business. Amy pays $15,000 for the computer, which it expects to be able to use in its business for at least 5 years. When can Amy Corporation deduct the $15,000 investment in the computer?" "

Because the use of the computer extends beyond the end of the year of purchase, Amy cannot deduct the entire $15,000 in the current year, even though it is on the cash basis. Amy Corporation must capitalize the $15,000 cost and deduct it over its tax life through depreciation deductions Depreciation Deduction taken on Computer, investment recovered against current period income -Basis must be reduced whenever part of investment recovered through tax deduction"

Example 3: Karina is a machinist for Silver Marine Company. At nights and on weekends, she repairs washing machines and dryers. During the current year, Karina's income from her repair business was $10,000, and she incurred $3,500 in expenses to produce this income. She also earned a salary of $30,000 from Silver Marine and had $400 in interest income from a savings account. How should Karina treat these items on her tax return? " "

IT is a SOLE PROPRIETORSHIP like a CONDUIT ENTITY Accounting -Keep Results of the Repair Business Separated from other TAXBLE Transactions Calculations -Business Income of $10,000 and Business Expense of $3,500 result in ($10,000 - $3,500) == Income fo $6,500 from Repair Business"

Examples of Business Purpose Deduction: Assume that instead of renting the house out, Roger lets his drivers stay in the house during rest periods between trucking runs. How should the house be treated?

In this case, the use of the house is related to his trucking business. Therefore, the house is considered a trade or business asset and is accounted for under the rules for trade or business assets.

What is the Ability to pay Concept? "

It is TAX should be based on an amount that a taxpayer can afford to pay. Constructs used are DEDUCTIONS, EXCLUSIONS (Depend on individual situation), Credits, Progressive tax rates Charged based on income and affordability. Credit is given if unable to pay TAX INCOME

Example of ABILITY TO PAY: Jerry and Jody hae a total income of $65,000. Jerry's Allowable deductions are $20,000 and Jody's Allowable Deductions are $35,000. Discuss the Ability to PAY CONCEPT" "

Jody's Allowable deductions of $35,000 > Jerry's Allowable Deductions of $20,000. Thus, Jerry Has HIGHER GREATER ABILITY TO PAY TAXES. Allowable deductions in Income Tax Bases recognizes Taxpayer's ability to pay

Capital Recovery Example: The Stephanie Partnership purchases some land in Year 1 for $20,000. The land is held until Year 5, when it is sold for $30,000. What deductions can the partnership take on the land and when can it take them?

Land is not a depreciable asset because it has no determinable life, so no capital recovery deductions are allowed until the land is sold. In Year 5, Stephanie recognizes a gain of $10,000 from the sale of the land. That is, the $20,000 basis is deducted from the $30,000 selling price.

Example of Administative Conveniance: Bravo Company Provides Break Room for its employees. Free Coffee is provided to the employees there at a cost of Bravo of ten cents per cup. Leroy is an employee of Bravo Company who drinks three cups of coffee in break room on average day. Is Leroy taxed on Free Coffee he receives fom Bravo Company

Leroy Receives income when he drinks FREE COFFEE provided by employer. -Compensation Bravo provides to employees. Cost of each employee's Tracking on consumption of COFFEE, with Gov't involved including free coffee in each income, >> Additional Tax would have been collected. THUS, LEROY IS NOT TAXED ON FREE COFFEE WHY DAFUG IS WORTH IRS COLLECTION

Examples of Wherewithal to pay: Assume that Sadie, the landlord, is an accrual basis taxpayer. She receives the first and last months' rent on the 1-year lease in December of Year 1. In which year(s) should the $1,000 first and last months' rent receipts be taxed?" "

Under the accrual method of accounting used in financial accounting, Sadie is deemed to have earned only the December rent in Year 1; the $500 advance receipt for the last month's rent is not recognized until it is earned in Year 2. Application of the wherewithal-to-pay concept causes the entire $1,000 received in December to be taxed in Year 1. That is, the $500 advance receipt for the last month's rent that will not be earned until next year is available for Sadie to use to pay her taxes and should be taxed at the time she receives it" Deduction Concepts Discuss Deduction Concepts and how such concepts affect what may be deducted for income tax proposals?

Under Realization and its construct and doctrines, Outline the claim of right? "

Realization does not occur until an amount has been received without restriction---Include year that you received it Applies when the taxpayer received payment but there is a restriction the taxpayer's right to keep some or all of it If income realized, under CLAIM OF right and repayment b/C of annual accounting period. When taxpayer receives amounts with use restricted in same manner, those amounts not realized until restriction removed **If taxpayer ha clear obligationss to repay amount received, Taxpayer does not RECEIVE CLAIM OF RIGHT to amount, Not Taxable on Receipt." "

Under Income Concepts, What is the Wherewithal-to-Pay? "

Receipt of other assets form and relief from debt, considered form of receipts which tax can be paid Tax law allows him to defer recognition of gain until dispose new building in transaction that gives them cash, with which is to pay tax Acceleration of income recognition by accrual basis, recognizes income in tax year, where income earned Tax should be recognized and paid when the taxpayer has the resources to pay. Constructs used: Like Kind Exchanges Ex: Car with a basis of $1,000: Trade into dealer for $1,500 New car costs $5,000 Only pay $3,500 Unrealized Gains until sale, you are TAXED -Old Car Traded for new Car as Like Kind Echanges which is exempt from gain and treatment Prepaid income to accrual concept which delays recognized income." "

What is Capital Recovery Deduction?

While certain expenditures may be deducted, expenditures made to purchase long-term assets are capitalized and recovered over time through depreciation. Amount of investment is asset is ""ASSETS BASIS"" Amount invested in item, cost, is maximum amount Deducted in Determining Taxable income Capital Expenditures --Usefulness extends substantially beyond end of tax year which expenditures is made Depreciation is the Basis (amount paid on asset) --Car is used more than year, has useful life of service, breaks down COST of Car over USEFUL LIFE from YEAR 1 TO YEAR 4 Constructs used: -Basis -Capital expenditures"

What is the Arm's Length Transaction General Concept?

Transaction B/W Related Parties must REFLECT ECONOMIC REALITY Constructs Used -Related Party Provisions -Constructive Ownership Rules Gaby sells 100 shares of IBM stock to her brother for $10,000. The shares had originally cost Gaby $12,000. Gaby is not allowed to use the $2,000 loss from the sale to reduce her taxable income

How does Ability to PAY CONCEPT affect Taxation? "

1) Income Tax Base is Net Net Income # then Gross Figure such as Total Income Received Tax Base Recognizes different deduction levels incurred taxpayers as well as different levels of income 2) Uses Progressive Tax Rate Structure -Should be noted its undermined by provisions that exclude certain types of income from Tax Base -Taxpayers has income subject to tax because of allowable exclusion, Taxpayer being taxed of less than ability to pay

Under Sole Proprietoship, What are two important aspects of income Manipulation Prevention?" "

1) NO COMMINGLING TRANSACTIONS, owners cannot turn nondeductible personal items into deductible business expenses -Requires owners to identify two types of interest for each entity, deduct them to rules to that entity. -No Split means all deducted interest, Average owners would get no deduction for interest on personal Debts 2) With exception of 20% Reduction for QBI from pass through entities, Not useful in income shifting strategies -Conduit entity paid tax on separate income, taxpayers arrange afairs into multitude of conduit entities -Income shifting by using conduits is not effective - Tax laws require TAXABLE Entities aggregate results of all income Producing activities, Contain Positive Elements. " "

Examples of Realization of Income Concepts: Assume that in example 24, Earl purchases the 100 shares of ABC common stock on July 2 of Year 1. On December 31 of Year 1, the 100 shares have a fair market value of $1,200. The first lot of 50 shares is sold for $600 on February 5 of Year 2. As of December 31 Year 2, the remaining 50 shares have a fair market value of $400. What is Earl's recognized income from the stock in Year 1? in Year 2? " "

Although the shares gain $200 in value as of December 31 Year 1, Earl still holds the shares and has not realized the increase in value. Therefore, the change in value does not result in a recognition of income in Year 1. -He realizes the $100 gain from the sale of the first 50 shares in Year 2 and reports it in that year. The loss in value of $100 as of December 31 Year 2, has not been realized, so Earl cannot deduct this loss in value until he realizes it through sale Earl buys 100 shares at $10 each: End of Yr 1: Value has gone up by $200, no sale made --> $200 unrealized gain Sale 1: 50 shares (cost = $500) sold for $600 --> Gain of $100 in Yr 2 --Realized gain and recognize return on calendar year End of Yr 2: Value has gone down by $100, ----no sale made --> $100 unrealized loss; ""I dont Care, no tax payment applies"" "

Examples of Capital Recovery Deduction: Amy Corporation takes depreciation on its computer at $3,000 per year. the end of 5 years, when total depreciation taken has amounted to $15,000, it sells the computer for $5,000. What is Amy Corporation's gain or loss on the sale of the computer " "

Amy Corporation's gain is $5,000. When the computer is sold, it has no capital investment remaining in the computer because it has deducted the entire $15, 000 cost against income during the 5 years it used the computer. Note that if the basis were not reduced for the depreciation deductions taken, Amy Corporation would have a loss of $10,000 ($5,000 − $15,000) on the sale. Allowing the corporation to deduct a $10,000 loss and $15,000 of depreciation would result in a total deduction of $25,000. This would be a violation of the capital recovery concept, which limits deductions to the amount invested in an asset. Straight Line Depreciation: $15,000 / 5 year useful life = $3,000 depreciation per year

Explain Capital Recovery? "

An asset purchased, all investments in asset recorded to determine amount of profit (Loss) made upon disposition of asset Amount invested in asset is the BASIS A taxpayer may recover all invested capital before income is taxed. Constructs used: -Basis -Gains and Losses Example -Nash sold 200 shares of common stock for $2,000. Because he had paid $800 for the shares, he is required to report only $1,200 as income. ---First $800 is BASIS, REQUIRED TO REPORTED $1200 OF TAXABLE INCOME " "

What is Legislative Grace Deduction?

Any deduction allowed is the result of specific acts of Congress which are applied and interpreted strictly Must be approached with philosophy that nothing deductible unless provision in tax law allows deduction.

What is Business Purpose Deduction?

Any deduction allowed is the result of specific acts of Congress which are applied and interpreted strictly Must be approached with philosophy that nothing deductible unless provision in tax law allows deduction. Only expenditures made in order to generate income and for a purpose other than tax avoidance will be deductible. Examples: -Trade or business expenses -Investment expenses Personal expenses are disallowed Exceptions: --Itemized deductions --Exemption amounts Note that transaction entered into profit and for additional profit from tax savings associated with deductibility of expenditures related to transaction -Tax Law allows individuals deduct certain personal expenditures from AGI ---Include medical, home mortgage interest, income and property taxes, charitable contributions -Distinguishing from profit motivated activities is generally fairly easy track Trade or business activity from income production is difficult"

Examples of Business Purpose Deduction: Peter pays $1,000 for a new couch for his home. Is this a personal expenditure?

As long as the couch is not used in Peter's trade or business or is not held as an investment by Peter, its use is personal and no deduction would be allowed for the purchase of the couch.

Explanation of Capital Recovered Deduction, above Example? "

Assert Adjusted Basis is the amount of unrecovered investment in it after considering increases/decreases in original amount invested in asset Deduction for Expenditure take place in 1) In period paid or incurred 2) Over useful life of expenditure 3) Open disposition of asset created by expenditure When benefit of expenditures doesnt extend beyond end of current tax year, expenditures deducted in incurred year (accrual basis) or paid (Cash Basis) Normal recurring expenditures made to produce income being generated, Expenditures benefit more than tax year must be capitalized ---> Created asset depreciated in nature cost recovered by Depreciation deductions over useful tax life --->Long lived assets dont depreciate, recovered through amortization over useful life of asset"

Example: Steen, Inc., is in the carpet-cleaning business. In December of Year 1, Steen cleans Gary's business office and bills him $200. Gary pays Steen in January of Year 2. Explain Annual Accounting Period Concept?" "

Assume that both Steen, Inc., and Gary are cash basis taxpayers. Although Steen earns the $200 during Year 1, it is not taxed on the $200 until payment is received in Year 2. Similarly, Gary takes the deduction for the carpet-cleaning expense in Year 2 when he makes the payment" "

Example of Income Concepts: Aardvark Corporation mails its annual dividend checks to shareholders on December 31 of Year 1. Alana receives her dividend check on January 4 of Year 2. In what year is the dividend taxable to Alana? " "

Because Alana does not have any control over the dividend check and does not have unrestricted use of the check until she receives it on January 4 of Year 2, she is taxed on the dividend in Year 2. Although she knows that the check is coming, it is not available for use as of December 31 in Year 1." "

Example of Arm's Length Transaction: Bo, the sole shareholder of Shoe Company, owns a shoe-stretching machine for which he paid $15,000 and that is worth $18,000. He sells the machine to Shoe Company for $5,000. Can Bo deduct the loss on the sale of the machine to Shoe Company?

Because BO was Negotiating with HIMSELF - Sold the machine to SHOE Comp. NOT ARMS LENGTH; Not Allowed to deduct Loss on sale. 1) Effect is that losses on sales to Related Parties are always DISALLOWED Even if transaction is made at Arm's Length and Price reflects Fair Market Value. SN: Sold to Own Company, No Tax Deduction"

Example of TAX BENEFIT RULE: Rayson Corporation is an accrual basis taxpayer selling widgets for cash and on account. Late in Year 1, Rayson sells $500 worth of widgets on account to Tom. In Year 2, before any payment is made to Rayson, Tom is sentenced to 20 years in prison for embezzlement. How should the corporation account for this series of events? " "

Because Rayson Corporation is on the accrual basis, it includes the $500 sale to Tom as income in the year of the sale, Year 1. The tax law does not generally allow taxpayers to use the allowance method of accounting for bad debts, so Rayson must wait until it determines that Tom's debt is worthless to take a bad debt deduction. Going to jail for 20 years is enough evidence that Tom won't pay the debt, so Rayson should take a bad debt deduction of $500 in Year 2. The recognition of the bad debt in Year 2 stems from the annual accounting period concept requirement that the events of each tax year stand alone. ---Rayson Corporation does not go back to amend the income reported in Year 1" "

Examples of Business Purpose Deduction: Roger owns Gould Trucking Company. The physical layout of the company's location includes an office building, a parking lot for his trucks, and a maintenance shop. During the current year, Roger purchases the house next door to his trucking company and rents it out to individuals unrelated to the trucking company. Is the house an investment activity or part of his trucking business"

Because Roger purchased the house to produce rents, which is an investment activity unrelated to his trucking business, it is considered an investment activity. He must account for the house and any related expenses under the rules for investments, not as part of his trade or business of trucking.

Examples of Business Purpose Deduction: Peter purchases a couch for the reception area of his optometry practice. What is the proper treatment of the couch?

Because providing a place for clients to sit while they wait is something that businesses normally do, the couch is properly classified as related to his trade or business of optometry. Peter can therefore take the deductions allowed for the couch."

Example of Income Concepts: At the meeting of the board of directors of Gould Company on December 12 of Year 1, the board awards bonuses to all officers in the amount of 5% of their annual compensation. The bonuses are to be paid in December. Samantha, the controller of Gould Company, requests that her bonus not be paid until January of Year 2. In what year is Samantha taxed on the bonus? " "

Because the board made the bonus unconditionally available to Samantha in December, s he is in constructive receipt of the bonus in Year 1 and is taxed as if she received the bonus in that year. " "

Example of All inclusive Income: Felicia is a tax accountant with Oil Rich Company. Alice is a plumber. Both are cash basis taxpayers. Felicia had a problem with her plumbing that Alice fixed. The normal charge for this service would have been $300. However, Alice agreed to waive her fee in exchange for some tax advice from Felicia relating to her business. Does either Felicia or Alice have taxable income from this agreement? " "

Both Felicia and Alice have income from rendering services, Alice from the plumbing repair and Felicia from the provision of tax advice. Although income was never reduced to cash by either party, both received something of value in exchange for their services. Alice should report the $300 as income when she receives the promised tax advice. Felicia should report $300 of income when Alice fixes her plumbing. TRADE SERVICES, NO CASH WAS EXCHANGED"

How do concepts Provide Overall Guidance on tax treatments or items Affecting Taxable income?" "

Definition: Broad Principle that provides guidance on the income tax treatment fo transactions ---Broad covering many TRANSACTIONS"

How do Doctrines Provide Overall Guidance on tax treatments or items Affecting Taxable income?"

Developed by Big Courts, coming through a court case, which came from case law

What is an entity? "

Each Tax entity must keep separate records and report operations separately,

Explain Legislative Grace? "

Means congress can grant exclusion from income, exclusion taken in narrowest sense Tax Relief -Special Treatment for certin types of income; Most incoem received and allowable losses incurred by Taxpayers are added to income tax return of taxpayer -Capital assets are any assets not a receivable, inventory, real, or depreciated property used in trade/business or intangible assets Capital Gains and Capital Losses -Must be Separated from other gains/losses; aggregated through prescribed netting procedure. -15% on net long term capital gains -$3000 net capital loss deducted from individual's tax next year Any tax relief provided is the result of specific acts of Congress which are applied and interpreted strictly. Constructs used: --Exclusions, deductions and credits --Special classifications such as capital assets"

How do constructs Provide Overall Guidance on tax treatments or items Affecting Taxable income?"

Mechanism developed to implement the concept

EXPLAIN REALIZATION INCOME CONCEPTS? "

No income is recognized as taxable income until it has been realized by the taxpayer. Doctrines used: -Claim of Right Doctrine ----Applies to both accrual and cash basis taxpayers -Constructive Receipt Doctrine ----Applies only to cash basis taxpayers Taxpayers accounting method resides money problems --Reaization occurs when Arms length Transaction takes place Until you sell stock, lock in, not realy $$ yet as it can dissapear--UNREALIZED REALIZED when sold, fixed, done, RECOGNIZED - Include as taxable income" "

Depreciation Calculation for Example? "

Not $3000 Depreciated; Taken as $15,000 on Year 5. $15,000 - $5000 = $10,000 Loss on Sale. Lowers the basis to avoid loss.

Under Realization and its construct and doctrines, Claim of Right Example: Pamela rented her garage apartment to Mahlon and collected $450, the first-month's rent, in advance. She also collected $500 as a security deposit that she will return to Mahlon if he doesn't damage the apartment. " "

She must report only $450 as income because she has no claim of right to the $500 No Claim of Right so she repays money on Security Deposit"

Examples of Wherewithal to pay: Sadie, a landlord and a cash basis taxpayer, enters into a 1-year lease agreement with Bob, a tenant, on December 1. The agreement calls for a monthly rent of $500, with payment of first and last months' rents upon signing. In addition, Bob is required to pay a $100 cleaning deposit that is to be returned at the end of the lease if the property is returned in good condition. What are the tax effects for Sadie of receiving the $1,100?

The first and last months' rents are taxable when received. Sadie is on a cash basis and has an unrestricted right to the use of the rent payments. However, she must return the cleaning deposit at the end of the lease if Bob abides by its terms. Because of this restriction, Sadie does not have a claim of right to the cleaning deposit when she receives it, and it is not taxed at that time. If Sadie keeps all or part of the deposit at the end of the lease, it is included in her income at that time." "

Example 15: Assume that in example 14, both Steen, Inc., and Gary are accrual basis taxpayers. Explain Annual Accounting Period Concept?" "

Steen must include the $200 in the year in which it was earned, Year 1, and Gary takes his deduction in the year the carpet-cleaning expense is incurred, Year 1. Assume that Steen, Inc., is on the cash basis and Gary is on the accrual basis of accounting. Steen does not include the $200 in income until it is received in Year 2. Gary deducts the carpet-cleaning expense in the year incurred, Year 1. " "

Define tthe Pay as you GO General Concept? "

Tax Payers are required to pay tax as they generate income. Constructs Used -Withholding are from PAYROLL TAXES -Estimated Tax Payments ----> Guessing how much you made each quarter Burdensom for taxpayers who cant save money when Estimating exact $ at Exact Due DAte owed. -Concept is the solution through withholdings Payments to get TAX CREDITS, and MINIMIZING TAX BILL. All required to make quarterly estimated tax payment to meet estimated tax payments requirements. "

Example 2: Assume the same facts as in example 7, except that Card Corporation is an S corporation. What are the tax effects of Card Corporation's income and dividend distributions? " "

The $80,000 of income flows through to the owners and is included on their tax returns. CARD CORPORATION -pays no income tax Martina and Fran -must include $40,000 in income on her individual tax return -With $80,000 taxed to owners, Dividends paid are NOT TAXED AGAIN to owners.---PASS THROUGH ENTITIES ----Dividends considered repayment of their investments that reduces amount invested in corp STOCK" "

What is Administrative Convenience GENERAL CONCEPT? "

The Benefit derived from concept, construct, or doctrine, should always exceed cost of implementation Constructs used are Standard Deductions Amounts, and Fringe Benefits Exclusions

Discuss operations of US income Tax system? "

The Federal Income Taxation is based on a System of Rules Developed around general CONCEPTS and specific EXCEPTIONS Key Takeaway: once you understand the unifying concepts, you can apply them to almost every aspect of the system

Examples of Business Purpose Deduction: Jill owns an automobile that has a basis of $8,000. She sells the automobile for $5,000. How much of the $3,000 loss can Jill deduct on her tax return?

The deductibility of the loss depends on the use of the automobile. If Jill uses the automobile in a business, the loss would be fully deductible. However, if the use of the automobile were purely personal, no loss on the sale would be allowed.

CONSTRUCTS: Explain the Difference CONSTRUCTS

W Taxable Entity and Conduit Entity?" "/Those liable for tax payment. Must pay tax based on the taxable income - Taxable Entity Nontaxable reporting, tax attributes of income income, deductions, losses, credits, of entity. Two types are PARTNERSHIPS and SUBCHAPTER S CORPORATIONS. -Nontaxed, figure out income, passes of entity and then to owner, owners pay at own level. -All Conduits owned by one or more taxable income ---CONDUIT ENTITY "

Example of Administative Conveniance: Tara Believes that she probaby does not have a significant amount of allowable personal deductions in 2019. Even if she searches her records, she figures it's unlikely she can document more than $12, 200, The 2019 Standard Deduction for aSingle Taxpayer Explain and discuss the Administrative Conveniance Concept? " "

When electing to DEDUCT $12,200 STANDARD DEDUCTION -Relieves her of having to document small amount of allowable personal deductions, and GOV'T incurs no cost to ensure that deductions are correct When taxpayers' allowable personal deductions are ~~~ Allowable Standard Deduction, -More Conveniant for them to deduct Allowable Standard Deduction than spend alot of time trying to document deductions, providing little savings MESSAGE: Helps with Administrators limiting small expenses.

Examples of Business Purpose Deduction: Assume that Jill sells the automobile for $9,000, resulting in a $1,000 gain. Is the gain taxable in all cases?

Yes, the gain would be taxed even if it were used for purely personal purposes. Remember that the all-inclusive income concept requires that all income be taxed unless specifically excluded by the tax law. There is no exclusion in the tax law for income from the sale of personal use assets. Determining general expenditures from category tax laws apply to the the category -Business Expenses limited by reasonableness of when income production subject to limitation on taxpayer's income -Losses incurred in trade or business fully deductible, sale of personal use of assets are not deductible Standard Deduction allowance unique to taxpayers -Does not apply to other tax entities, taking deductions based on business purpose concept."

Example of Constructive Receipt: Gale is a self-employed handyman. Tracy, one of his customers, brought a check for $250 on December 30 of Year 1, to pay for work Gale had finished. Gale asked her to mail the check instead, so he could check "delivery time What is the report?

ale must report the $250 as income in Year 1 even if the check isn't delivered until Year 2 Timing issue applies before payment is received. Applies to only cash basis to Taxpayers" "


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