ACC 4328 - Exam 2 (Chapt 6,7,8,9,10) Linda Campbell

Who can and cannot deduct their business expenses?

Employees CANNOT deduct their unreimbursed business expenses, while self-employed individuals CAN deduct their business expenses for

How do flow through entities work?

Expenses and losses incurred by a flow-through entity pass through to the entity owners, who typically report these amounts on Schedule E, then Schedule 1, line 5, and then combine with other items and include on form 1040 (page 1) line 8

The IRS would most likely apply the arm's length transaction test to determine which of the following?

Reasonableness of an expenditure.

Alternative Minimum tax formula

Regular Taxable Income + Standard deduction if taxpayer deducted the standard deduction in computing regular taxable income +/- other Adjustments = AMT Income - AMT exemption amount (if any) = TAX BASE FOR AMT x amt rate = TENTATIVE MINIMUM TAX - Regular tax = AMT *Technically, some of these adjustments are referred to as preference items and some are referred to as adjustments. We refer to all of these items as adjustments for simplicity's sake

Wheres the net income or loss from Schedule C transferred to?

Schedule 1, line 3, and then combined with other items and included on Form 1040 (page 1), line 8

on what form is partnership income on?

Schedule E

May taxpayers deduct Hospitals and long-term Care Facilities?

Taxpayers may deduct the costs of actual medical care whether the care is provided at hospitals or other long-term care facilities

True or false: Personal nonrefundable credits should be applied to a taxpayer's tax liability before other types of credits. After personal nonrefundable credits, any business credits should be used followed by all personal refundable credits.

True ; Reason: The correct order is as follows: personal nonrefundable credits, business credits, and finally, personal refundable credit

A taxpayer who's claimed on another return as someones dependent cannot always fully deduct their standard amount

True because if the taxpayer being claimed files their own return because they work and they make more than the standard amount their deduction will only be lowered by $1,000 or so;

Accounting for Taxable income

We've learned to identify: - Business gross income and - Deductible expenses Now we need to match income and deductions to a specific period - Accounting methods match income and expense to a specific period

Does trade or business activity require a relatively high involvement or effort from the taxpayer? And what about investment activities do they require effort?

Yes, it does No, investment activities do not require effort

Are legal fees deductible for business expenses for tax purposes?

Yes, legal fees are deductible but fines, penalties, entertainment expenses are not

Is there a format or gains for netting your taxes?

Yes, the Capital gain/loss Netting process Separates gain or losses into categories and tells which goes in which section

What is involved with Investment activities?

investment activities involve investing in property for appreciation or for income payments

Whats the Standard deduction for individuals claimed as a dependent on another return?

the 2022 standard deduction is the greater of: (1) $1,150 OR (2) $400 plus earned income not to exceed the standard deduction amount of those who are not dependents

Define arm's length transaction

transaction between unrelated taxpayers ; they negotiate for their own benefit

(Chapt 8) For Federal Tax Computation what is regular tax computation dependent upon,?

1. - Filing status (MFS, MFJ, Qualifying widow or surviving spouse, Head of Household, Single) - Progressive tax rates ^Tax rate schedules ^Tax tables 2. Tax brackets or marginal tax rates on ordinary income - 10%, 12%, 22%, 24%, 32%, 35% and 37% 3. Marriage penalty or benefit - who is likely to have penalty? (both spouses receive income) - who is likely to have benefit? (one spouse receives income) 4. Exceptions to the basic tax computation - Long term capital gains (net capital gains generally taxed at preferential rates but can be as high as 28%) (2 different tax rates on one gain is possible) - Dividends ( qualified dividends can be taxed at preferential rates) (2 different tax rates on one dividend is possible) 5. Kiddie Tax - Net unearned income taxed at parents marginal rate (Net unearned income = unearned income in excess of $2,300). ( The amount a parent places in a child's name like investment income interest, dividends, stock etc.. considered passive income) - Applies if Child is under 18 at yr end ; Child is 18 at yr end but earned income not greater than half of child's support OR Child is over 18 but under 24 at yr end, is a full time student during the yr and child's earned income not greater than half of cild's support (excluding scholarships)

Define Alternative minimum tax, who is most likely to pay it and why? What items are commonly added back to regular income to find AMT income?

1. AMT is a tax based on an alternative more inclusive tax base than regular taxable income. - Meant to ensure that taxpayers are paying some minimum level of tax 2. Taxpayers with large amounts of capital gains are most likely to pay it 3. Items commonly added back to regular taxable income in computing AMT income (plus adjustments) - Tax-exempt interest from private activity bonds - State and local income taxes (subject to $10,000 limit) - Real property taxes (subject to $10,000 limit)

Choosing or Changing an Accounting Method

1. Accounting methods are generally adopted by use. - A permissible method is adopted by using and reporting the method for one year. - An impermissible method is adopted by using and reporting the method for two years. 2. Generally, method changes require IRS permission. - Some changes are automatic. - Permission is necessary to correct the use of an impermissible method.

Accrual - Prepaid Income

1. Advance payments for goods and services - Allowed to defer recognition for one year unless income is earned or recognized for financial records. - Not applicable to payments relating to rent or interest income. - This is an accounting method election that cannot be changed without the permission of the IRS.

Accruing Business Expenses

1. All-events test - All events have occurred to establish the liability to pay. - The amount is determinable with reasonable accuracy. - Reserves for future liabilities not allowed. 2. Economic performance has occurred

what are accounting periods

1. Annual period - Full tax year is 12 months long. - Short tax year is < 12 months. 2. Year-ends - Calendar year ends 12/31. - Fiscal year-end depends upon choice: § Last day of a month (not December) § 52/53-week year-end is the same day of a specific month

Define Passive Activity Limitation?

1. Applied after tax basis and at-risk limitations 2. Losses from "passive activities" may only be deducted to the extent the taxpayer has income from passive activities or when the passive activity is sold. 3. A passive activity is a trade, business, or rental activity in which the taxpayer does NOT materially participate. - Participants in rental real estate and limited partners are generally considered to be passive participants. - All other participants are considered passive unless their involvement is "regular, continuous, and substantial." - Seven factors for testing material participation

Define Business Tax Credit

1. Business Tax Credits - Promote certain behaviors - If credit exceeds gross tax, carry back one year and carry forward 20 years. - Foreign Tax Credit §Nonrefundable; carry back one year and carry forward up to 10 years.

What are profit motivated activities classified as? And what is it part of?

1. Business activities 2. Investment activities Part of "directly related business activities"

What are some Non-refundable personal?

1. Child Tax Credit - $2,000 for each qualifying child under age 17 at end of year who is claimed as taxpayer's dependent §Partially refundable (fully refundable in 2021); - $500 for each other qualifying dependent §Not refundable - Phase-out amount, not percentage - Additional $1,000 child tax credit for 2021 only (additional $1,600 for children under age 6); §Subject to separate phase-out 2. Child and Dependent Care Credit - Dependent under age of 13 (or disabled dependent) - A married couple must file jointly to claim the credit. - Amount of credit is based on amount of taxpayer's expenditures to provide care for one or more qualifying persons - Percentage qualifying expenditures §Maximum qualifying expenditures: $3,000 for one qualifying person, $6,000 for two or more §Credit Care percentage depends on AGI §Higher qualifying expenditures, credit percentages, and phase-outs apply in 2021

What are some Business income and deductions?

1. Deductions must be directly connected to business activity. 2. Business expenditures must be both ordinary and necessary to be deductible. - Ordinary and necessary means conducive to profit generation. - Reasonable in amount means not extravagant.

Explain employee versus Independent contractor

1. Determining whether taxpayer is employee or independent contractor - Primary question: who has control over how, when, where work is performed? 2. Tax differences - Amount of FICA or self-employment taxes payable - Deductibility of expenses §For AGI §From AGI §Employer portion of self-employment taxes

What are Business Interest Limitation?

1. Does not apply to any taxpayer with average annual gross receipts of $27 million or less for the prior three taxable years. 2. Business interest expense deduction is limited to: - Business interest income plus - 30 percent of the adjusted taxable income

Define Capital Expenditures

1. Does the expenditure provide future benefit (beyond this year)? - If so, capitalize rather than deduct. 2. 12-month rule for prepaid expenses 1. Deduct if benefit < 12 months and benefits do not extend beyond end of next tax year. - Does not apply to interest expense. - Difficult to apply for accrual taxpayers because economic performance is also required.

What are some refundable Personal?

1. Earned Income Credit - Negative income tax (credit exceeds tax after considering nonrefundable personal) - Must have earned income - Must have at least one qualifying child or satisfy age requirements and not a dependent of another 2. Individual Recovery Credit - Credit only applies in 2021 - $1,400 credit for eligible taxpayers ($2,800 for married taxpayers filing joint) plus $1,400 for each dependent. - Subject to phase-out - Taxpayers not required to repay excess advance payment - If taxpayer receives a lower advance payment than allowed, taxpayer can claim the additional amount allowed as a credit on their 2021 tax return.

Explain Employment FICA taxes

1. Employee - Must pay FICA taxes on compensation from employer (6.2 percent Social Security tax rate; 1.45 percent Medicare tax rate; .9 percent additional Medicare tax rate on salary or wages in excess of $200,000 [$125,000 for married filing separately; $250,000 married filing jointly]) - $147,000 limit applies to Social Security portion. - Multiple employers during year 2. Employer - Pays FICA tax on employee's compensation (6.2 percent Social Security tax rate; 1.45 percent Medicare tax rate) - Withholds FICA tax from employee's paycheck

What are some Accounting Methods?

1. Financial and Tax Accounting Methods - In reporting financial statement income, businesses have incentives to select accounting methods permissible under GAAP that accelerate income and defer deductions. - In contrast, for tax planning purposes, businesses have incentives to choose accounting methods that defer income and accelerate deductions. 2. Permissible "overall" methods - Cash: recognize income when received - Accrual: recognize income when earned or received (whichever is first generally) 3. Large corporations and partnerships with corporate partners must use accrual. - Taxpayers that satisfy the gross receipts test can elect the cash method.

Inventory flow assumptions

1. First-in, first-out (FIFO) 2. Last-in, first-out (LIFO) - Same method for financial and tax records - "Book-tax conformity" requirement - Generates lowest taxable income in time of inflation 3. Specific identification

(Chapt 9) Whats in gross receipts test?

1. Gross receipts cannot exceed $27 million for the 3-year period preceding the current year. - Businesses without 3 years of data use the period for which gross receipts are available. - Gross receipts for short years must be annualized by multiplying by 12 and dividing the produce by the number of months in the short period. - Tax shelters never qualify under the gross receipts test.

What is Net Investment Income Tax? (additional tax)

1. Imposed on higher income taxpayers they are required to pay 3.8 percent tax on net investment income. Usually on the lesser of: - Net investment income e.g., interest, dividends, annuities, royalties, rents (unless derived from a trade or business then net investment tax doesn't apply). - Income from business thats Passive activity income, net gains from disposing of property, - less the related allowed deductions applied to the others OR - Excess of modified AGI over $250,000 (MFJ), $125,000 (MFS), and $200,000 (all others).

Accrual income

1. Income is recognized when earned or received. - All-events test—recognize income when all the events have occurred that fix the right to receive such income and - The amount can be determined with reasonable accuracy 2. Recognize on the earliest of these dates: - Complete service or sale - Payment is due - Payment is received

Cash method

1. Income recognized when actually or constructively received. 2. Expenses recognized when paid. 3. Pros and cons - Flexible - Simple and relatively inexpensive - Poor matching of income and expense - Can use accrual for some accounts (hybrid) - Can be used by taxpayers who satisfy the gross receipts test

Inventories

1. Inventories must generally be accounted for under the accrual method if sales of goods constitute an income-producing factor. - Sales and purchases must be recorded using the accrual method. - The "hybrid" method applies to cash method taxpayers with inventory who use accrual for sales and purchases. - Taxpayers that qualify under the gross receipts test can opt to treat purchases of goods for sale as non-incidental materials or use the financial reporting inventory method.

What is investment Expense AND investment interest expense?

1. Investment expenses - Expenses (other than interest) incurred to generate investment income - Not deductible 2. Investment INTEREST expense - Interest expense on loans used to acquire investments - Deductible as an itemized deduction - Limited to taxpayer's investment income - Carry over indefinitely Are NOT allowed to deduct interest expense for amount borrowed to buy tax-exempt income

Fully explain Portfolio Income: Capital Gains and losses. The types of investments, capital assets etc..

1. Investments held for appreciation potential (investments increase in value over time): -Growth stocks - Land, Mutual funds - Other assets (precious metals, collectibles etc..) - Gains deferred for tax purposes - Generally taxed at preferential rates - Special loss rules apply 2. These types of investments are generally investments in Capital assets. 3. Capital asset is any asset other than: - Asset used in trade or business - Accounts or notes receivable acquired in business from sale of service or property - Inventory 4. The following are NOT capital assets: - Asset used in trade or business and holding period is less than one year - Accounts or notes receivable acquired in business from sale of services or property

Full define At-Risk Limitation

1. Losses may not exceed an investor's amount at risk in the activity. (no recourse) - Excess loss carried forward until event occurs to create additional amount at risk. 2. At-risk amount calculated like tax basis except: - May not include investor's share of debt she is not responsible to repay - However, usually include investor's share of mortgage debt secured by real estate because it is "qualified non-recourse financing"

What are some Tax Basis limitation? What are the effect the tax basis increase & when tax basis decreases?

1. Losses may not exceed an investor's tax basis (how much you paid for investment) in the activity. (if it does occur you can add more cash in tax basis to increase it OR co-signing debt in your name) (cannot deduct more than you have) - Excess loss carried over until event occurs to create more tax basis. 2. Increases to tax basis - Cash invested - Share of undistributed income - Share of debt 3. Decreases to tax basis - Cash distributions Prior-year losses

Sale of Business assets?

1. Losses on Dispositions of Business Property - Recognized losses are deductible. - Losses on sales to related parties are not deductible by the seller. - Casualty losses are limited to lesser of decline in value (repair cost) or basis. - Basis is amount of loss if business asset is completely destroyed.

Business expenses with personal benefits

1. No business deduction for purely personal expenditures 2. Mixed motive? - Primary motive for some expenditures (all or nothing) § Business travel (away from home overnight) - Otherwise, allocate deduction to business portion § Arbitrary percentage (50 percent meals) §Basis for allocation (mileage or time) 3. Record keeping - Document business purpose

Why invest in assets yielding interest or dividends?

1. Non-tax factors - Risk - Diversification - Others

define Passive Activity Income and losses

1. Passive Investments - Typically an investment in a partnership, S corporation, or direct ownership in rental real estate (renting houses) - Ordinary income from these investments is taxable annually as it is earned. - Ordinary losses MAY be deducted currently if able to overcome (don't have to pass each one BUT each can play a huge role in stopping you from deducting losses): §Tax-basis limitation §At-risk limitation §Passive loss limitation

Choosing an Accounting period

1. Proprietorships—same as proprietor's year-end 2. C corporations and individuals—choice made on first tax return and is consistent with book accounting period 3. Flow-through entities—a "required" tax year - Match to owners' period (multiple owners for partnerships so this can be complicated)

Fully explain Portfolio Income: Dividends, the types of dividends..

1. Qualified dividends - Dividends must be paid by domestic or certain foreign corporations that are held for a certain length of time. - subject to preferential tax rate . 15% generally . 0% if income < maximum 0% threshold . 20% if income > maximum 15% threshold . After-tax rate of return assuming 8 percent before-tax rate of return (.08(1 - .15)= 6.8) 2. Non-qualified dividends: taxed as ordinary income

What are tax credits?

1. Reduce tax liability dollar-for-dollar 2. Consist of three categories - Nonrefundable personal - Refundable personal - Business

Explain Employment and Self-Employment Taxes (additional taxes)

1. Self-employed taxpayers - Responsible for entire FICA tax (employee and employer share and additional Medicare tax) - Tax base is net earnings from self-employment (generally, net Schedule C income and multiply by .9235). - Same $147,000 limit applies to Social Security portion. 2. If net earnings from self-employment < $400, no self-employment tax. 3. How does the $147,000 Social Security earnings limit apply when receiving both wages and self-employment earnings in the same year? - Wages use up limit first—favorable or unfavorable for taxpayer? Why?

Define sole proprietorship, partnership, and C corporation.

1. Sole proprietorship: Revenues and expenses are reported directly on the owner's tax return and the profit (or loss) is subject to both individual income and self employment taxes. 2. Partnership: Entity files a tax return but the profit or loss flows through to owners' individual income tax returns. 3. C corporation: Income is taxed at the entity level rather than flowing through to the owner(s).

What are some limitations for Capital Loss deductions? What are the Rules on personal use assets, capital losses from sales to related parties, AND wash sale rule?

1. Special rules apply to the sale of personal-use assets. -Gains are taxable as capital gains. -Losses are not deductible. 2. Capital LOSSES from sales to "RELATED PARTIES" (family members, relatives, best-friend, business associate, business customer etc..) are not deducted currently. - The related party may eventually be able to deduct all, a portion, or none of the disallowed loss on another sale of the property that they sell to someone on their own 3. The "wash sale" rule disallows the loss on stocks sold IF the taxpayer purchases the same or "substantially identical" stock within a 61-day period centered on the date of sale. (timing of selling stock and buying another of the same) (basically selling your loss stock and noticing the price is going up and rebuying it - (not allowed.. especially similar stocks) (you can still buy it tho just after the rule ... below) - 30 days before the sale - The day of sale - 30 days after the sale 4. Intended to ensure that taxpayers cannot deduct losses from stock sales while essentially continuing their investment

What are Tax planning strategies for Capital Assets?

1. Tax planning strategies - Hold capital assets for more than a year .(Taxed at preferential rate) .(Tax deferred) -Loss harvesting .($3,000 offset) against ordinary income .(Offset other (short-term) capital gains) -Must balance tax with non-tax factors .(What happened to the stock market in 2008?) .Or, pandemic effects of 2020?

Explain some Prepayments and Filing Requirements

1. Taxes must be paid as you go. - Withholdings §Treated as made equally throughout the year - Estimated tax payments (required only if withholdings are insufficient to meet taxpayers tax liability) §Due on April 15, June 15, and September 15 of the current year and January 15 of the following year 2. Underpayment Penalties - Can be avoided if withholding and estimated tax payments equal or exceed 2 Safe-harbor provisions: §90 percent of current tax liability or §100 percent of previous-year tax liability (110 percent for individuals with AGI greater than $150,000)

Economic performance

1. Taxpayer provides goods or services - Performance occurs as taxpayer provides goods or services. 2. Taxpayer receiving goods or services - Performance occurs as goods are provided or - Payment is made and economic performance is otherwise expected within three and a half months of payment. 3. Payment liabilities are performed when paid. 4. Interest and rent occur ratably.

Fully explain what Portfolio Income: Interest and dividends is? How its taxed, the interest it consists of / Dividends etc.

1. Usually taxable when received 2. Interest from bonds, CDs, savings accounts - ordinary income taxed at ordinary rate unless municipal bond interest - Interest from U.S. treasury bonds not taxable by states 3. Dividends on stock - Typically taxed at preferential capital gains rate if held for more than 1 yr

Some Nonrefundable personal (continuation)

3. American opportunity tax credit (AOTC) - For first four years of postsecondary education (high-school) - For eligible expenses and institutions only - Applied per student §Taxpayer, taxpayer's dependents, third parties on behalf of taxpayer's dependents §Amounts paid by dependents treated as paid by taxpayer. - 100 percent of first $2,000 of eligible expenses and 25% of next $2,000 (maximum credit is $2,500) - Phase-out based on AGI - 40 percent of credit is refundable (subject to restrictions).

Explain some Prepayments and Filing Requirements (continuation)

3. Underpayment Penalties - Applied on quarterly basis §90%/4 = 22.5% of current-year liability must be paid in by deadline, or §100%/4 = 25% of previous year's liability must be paid in by deadline (110% for taxpayers with AGI > $150,000). - Penalty based on amount of underpayment at each quarter × federal short-term rate + 3%. 4. Filing Requirements - Individual taxpayers are required to file a tax return only if their gross income exceeds certain thresholds, which vary based on the taxpayer's filing status and age. 5. Due dates - April 15 - Extend filing up to six months § May not extend due date for paying taxes.

Nonrefundable personal (continuation)

4. Lifetime learning credit: - Eligible expenses (tuition) for any course of instruction to acquire or improve taxpayer's job skills §Includes professional or graduate school §Includes continuing education - Applied per taxpayer §MFJ return is one taxpayer. - credit equal to 20 percent of up to $10,000 of eligible expenses (maximum of $2,000) - Phase-out based on AGI 5. Education credits: - If deduct for AGI education expenses for someone, no education credit allowed for that person §Could take American opportunity tax credit for one dependent and for AGI deduction for another

Where are Alimony payments & Contributions to qualified retirement accounts deductible?

- Alimony payments are deductible FOR AGI to maintain equity if paid pursuant to a divorce or separation agreement executed before 2019 - Contributions to a qualified retirement account are deductible FOR AGI to encourage savings

(Chapt 7) What are some Investment rate of return on return?

- Before-tax rate of return on investment - After-tax rate of return on investment

What are some "Business & Investment activities" FOR AGI deductions?

- Business activities: self employed business expenses - Investment activities: rental and royalty expenses

Where are Rental & Royalty expenses claimed? And what activity are they?

- Claimed for FOR AGI (above the line) - Could either be an investment or trade activity depending on facts - Taxpayers report expenses and revenue on Schedule E and transfer the net income or loss from Schedule E to Schedule 1, line 5, and then combine with other items and include on Form 1040 (page 1), line 8

Define Charitable Contributions?

- Contribution of money or property must be made to a qualified domestic charity - Special rules apply to charitable contributions of property depending on the type of property 1. Capital gain property 2. Ordinary income property It has Charitable Contribution Deduction Limitations

What are Deductions for Individual Retirement Accounts?

- Deductible contributions to traditional IRAs are FOR AGI deductions. Deduction amt depends on a number of factors - Distributions from traditional IRAs are taxed as ordinary income and early distributions (before age 59 1/2) are subject to 10% penalty - Nondeductible contributions can be made. On distribution, the taxpayer is taxed on the earnings generated by nondeductible contributions but not on the actual nondeductible contributions.

Deduction for Qualified Business Income

- Deduction is limited to qualified trade or business 1. excludes specified service trade or business (except for taxpayers with taxable income below $170,050; #340,100 joint returns; $170,050 MFS) 2. Deduction is subject to wage limitation and taxable income limitation

What does "after-tax" rate of return on investment depend on?

- Depends on WHEN investment income is taxed (relates to timing tax planning strategy) - Depends on THE RATE at which the income is taxed (relates to the conversion tax planning strategy)

(Chapt 6) What are the 3 categories of deductions FOR AGI?

- Directly related to business activities - Indirectly related to business activities - Subsidizing (aid in the purchase of) specific activities

What is Excess Business Loss Limitation?

- Excess business loss is excess of aggregate (group of several elements) business deductions over the sum of aggregate business gross income or gain plus $270,000 ($540,000 for MFJ taxpayers) - Excess business loss is not deductible but is carried forward

What are some statutory limits on Business expense deductions?

- Expenditures against Public Policy 1. No deduction for fines, bribes, lobbying, or political contributions - Expenditures that benefit a business for longer than 12 months should be capitalized - Expenses Relating to Tax-Exempt Income 1. Interest on loan where proceeds invested in municipal bonds 2. Key employee insurance premiums - Capital Expenditures - Personal Expenditures - Limitation on Business Interest Deductions - Losses on Dispositions of Business Property

Separate from AGI deduction for charitable contributions in 2021

- For taxpayers who do not itemize their deductions - Up to $300 of cash charitable contributions ($600 for married taxpayers filing jointly) to qualified charitable organizations

When are distributions from a Health Savings Accounts (HSA) tax free? When is it taxed? Whats the penalty for early withdrawal of savings?

- If they pay for qualified medical expenses of the taxpayer, spouse, and dependents. - Otherwise they are taxed as ordinary income, (and subject to an additional 20% tax unless the taxpayer is disabled, age 65 or older or deceased) - Penalty reduces the taxpayers net interest income to the amount actually received

What are Deductions for Health Savings Accounts?

- Individuals covered by a high deductible health plan with no other health coverage can set aside amounts for payment of qualified medical and dental expenses for the taxpayer, spouse, and dependents - For 2022, high deductible health plans have a minimum annual deductible of $1,400 for self-only coverage ($2,800 for family coverage) and the maximum annual deductible and other out-of-pocket expenses cannot exceed $7,050 for self only coverage - For 2022, individuals can contribute up to $3,650 for self-only coverage (7,300 for family coverage) to a HSA and deduct these contributions for AGI. Individuals age 55 or older at the end of the tax year may contribute and deduct an additional $1000 annually

Define UNICAP

- Inventory (purchased or produced) must be accounted for using tax version of "full absorption" rules. - Indirect costs are allocated to inventories (not expensed). - Costs of selling, advertising, and research need not be capitalized. - Not required for businesses that qualify under the gross receipts test.

What are the FROM AGI deductions for "Itemized Deductions"?

- Medical expenses - Hospitals and Long-Term Care Facilities - Taxes (sales , state taxes) - Interest (Home mortgage interest, Investment interest) - Charitable contribution - Other itemized deductions

What are other Itemized deductions?

- Not deductible: unreimbursed employee business expenses, tax preparation fees, investment expenses, and hobby expenses - Deductible: gambling losses and expenses to the extent of gambling income, casualty and theft losses on investment property, and unrecovered cost of a life at death

Define portfolio AND passive investments. How is it different?

- Portfolio (ownership of a stock, bond, or other financial asset with the expectation that it will earn a return or grow in value over time, or both) losses deferred until investment is sold - Passive investment losses MAY be deducted annually

What items can be deducted from "FOR AGI" ?

- Rental & royalty Expenses - Flow-Through Entities (expenses and losses incurred by them) - Losses from business assets (net capital loss for $3000) - Health Insurance Deduction by Self-Employed taxpayers - Self-employment Tax deduction - Deductions for Individual Retirement Accts - Deductions for Health Savings Accounts - Alimony - Contributions to qualified retirement account - Deduction for interest on qualified education loans

What Itemized deductions payments for TAX may individuals deduct?

- State, local and foreign income taxes - State and local real estate taxes on property held for personal or investment purchases - State and local personal property taxes that are assessed on the value of the specific property - Sales tax deduction: state and local sales taxes can be deducted in lieu of state and local income taxes - The total itemized deduction for state and local taxes is limited to $10,000 ($5,000 MFS). The deduction for foreign income taxes is not subjected to this.

How is Bunching itemized Deductions done?

- Tax benefit can be gained by implementing simple timing tax planning strategies (for taxpayers with itemized deductions that fall short of the standard deduction amount and thus do not produce any tax benefit) -The basic strategy consists of shifting itemized deductions into one year such that the amount of itemized deductions exceeds the standard deduction for the year, and then deducting the standard deduction in the next year (or vice versa).

What kind of losses can be deducted FOR AGI?

- Taxpayers disposing of trade or business assets at a LOSS are allowed to deduct the loss for AGI - Losses from investment assets (called capital assets) are offset against capital gains - If capital losses exceed capital gains, this is called a net capital loss - A net capital loss is deducted FOR AGI but limited to $3,000 (losses in excess of $3,000 are carried forward to subsequent yeaars)

Whats the itemized deductions for Interest?

- Two itemized deductions for interest expense: 1. Deduction of investment interest is limited to a taxpayers net investment income 2. Any investment interest in excess of the net investment income limitation carries forward to the subsequent year - Home mortgage interest 1. Interest on acquisition indebtedness of $1 million if incurred before Dec 16, 2017. 2. Interest on acquisition indebtedness of $750,000 if incurred after dec 15, 2017. - Individuals can deduct interest paid on acquisition indebtedness secured by a qualified residence (taxpayers principal residence and one other residence) - Acquisition indebtedness is any debt secured by a qualified residence that is incurred in acquiring, constructing, or substantially improving the residence.

What is Deduction for interest on qualified education loans?

- Up to $2,500 of interest on education loans is deductible FOR AGI - The interest deduction is phased out for taxpayers with AGI exceeding $70,000 ($145,000 filing jointly) - The deduction is eliminated for taxpayers with AGI exceeding $85,000 ($175,000 filing jointly)

What is Health Insurance Deduction by Self-Employed taxpayers?

- deduction provides equity with employees who receive health insurance as a qualified fringe benefit - Self-employed taxpayers can claim personal health insurance premiums for the taxpayer, taxpayers spouse, taxpayers dependents, and the taxpayers children under age 27 as DEDUCTIONS for AGI, but only to the extent of the self employment income derived from the specific trade or business

What must trade or business expenses be?

- directly connected to the business activity - ordinary and necessary for the activity (e.g. appropriate and helpful for generating a profit) - reasonable in amount (not extravagant)

What is Self-Employment tax deduction?

- employers deduct the Social Security and Medicare taxes they pay on employee salaries - Self-employed individuals are required to pay self-employment tax in lieu of Social security tax. This tax represents both the employees and the employers share of the Social Security and Medicare taxes. - Self- employed taxpayers are allowed to deduct the employer portion of the self employment tax they pay to compensate for employers deducting their portion of Social Security.

Even when motivated primarily by profit, business activities are distinguished from what?

- from investment activities

What does "Directly related to Business Activities" mean?

- taxpayers are allowed to deduct expenses incurred to generate business income - For tax purposes, activities are either profit motivated or motivated by personal objectives - Profit motivated activities are classified as 1. Business activities, 2. Investment activities

Can taxpayers deduct Medical Expenses?

- taxpayers may deduct medical expenses incurred to treat themselves, their spouse, and their dependents - Qualifying medical expenses include unreimbursed payments for care, prevention, diagnosis or cure of injury, disease, or bodily function - Taxpayers using personal automobiles for medical transportation purposes may deduct a standard mileage allowance (18 cents per mile in 2022) in lieu of actual costs

Where are business 1. Expenses, and Revenues generated from the same activity, claimed ?

1- On Schedule C 2- revenues from the same activity are also reported on the same Schedule C

Fully explain Portfolio Income: Capital Gains and losses. The types of investments, capital assets etc. (continuation...)

4. Sale of capital assets generates capital gains and losses: - Specific identification vs FIFO - Long-term if capital asset held more than a year - Short-term if capital asset held for year or less 5. Capital gains: - Net short-term capital gains are taxed at ordinary rates - Generally net capital gains (net long-term capital gains in excess of net short-term capital losses) are taxed at a maximum preferential rate of 0, 15, or 20 percent, depending on the taxpayer's filing status and income -Certain gains from the sale of depreciable real estate held long term are taxed at a maximum rate of 25 percent (unrecaptured §1250 gain). - Long-term capital gains from collectibles and qualified small business stock are taxed at a maximum rate of 28 percent. 6. Capital losses: - Individuals (including MFJ) can deduct up to $3,000 of net capital loss against ordinary income. (Remainder carries over indefinitely to subsequent years)

Explain some Prepayments and Filing Requirements (continuation)

6. Late Filing Penalty - 5 percent of tax owed per month up to 25 percent if not fraudulent; 15 percent of tax owed per month up to 75 percent if fraudulent - No penalty if no tax is owed as of the due date. 7.Late Payment Penalty - If don't pay entire tax owed by due date of return §.5 percent of the tax owed for each month (or fraction of a month) that the tax is not paid 8. If the late filing penalty and late payment penalty both apply in the same month, the late filing penalty for the month (and its corresponding maximum penalty) is reduced by the .5 percent late payment penalty for the month

What are some "Business activities & Investment activities" that are NOT DEDUCTIBLE?

Business activities: Unreimbursed employee business expenses Investment activities: Other investment expense

What are the rules concerning reporting periods for tax purposes?

Business must report their income and deductions for a full 12 month year, unless special circumstances apply.

Which of the following accounting methods is NOT acceptable for tax reporting?

C. Credit method Accrual method Cash method Credit method Hybrid method

Fully explain what "Testing for Material Participation" means

Individuals are generally considered material participants for the activity if they meet any one of these tests: 1. The individual participates in the activity more than 500 hours during the year. 2. The individual's activity constitutes substantially all of the participation in such activity by all individuals, including non-owners. 3. The individual participates more than 100 hours during the year, and the individual's participation is not less than any other individual's participation in the activity. 4. The activity qualifies as a "significant participation activity" (more than 100 hours spent during the year) and the aggregate of all "significant participation activities" is greater than 500 hours for the year. 5. The individual materially participated in the activity for any 5 of the preceding 10 taxable years. 6. The individual materially participated for any three preceding years in any personal service activity (personal services in health, law, accounting, architecture, etc.) 7. Taking into account all the facts and circumstances, the individual participates on a regular, continuous, and substantial basis during the year.

What are some "Investment activities" FROM AGI deductions?

Investment interest expense

Define Medical Expense Deduction Limitation?

It is limited to the amount of unreimbursed qualified medical expenses paid during the year (no matter when the services were provided) reduced by 7.5 percent of the taxpayers AGI.

are MFS taxpayers eligible for the Interest on qualified education loan deduction?

No