Tax Accounting Test 2
Code Section 212
"In the case of an individual, there shall be allowed as a deduction all the ordinary and necessary expenses incurred during the taxable year." - For the production or collection of income - For the management, conservation, or maintenance of property held for the production of income In connection with the determination, collection, or refund of any tax
Section 179 expensing election
"Taxpayer can elect to deduct up to $1.05 million of property. - applies to equipment mostly --- Not available for real property --- Not available for property used in rental activity - Can apply property-to-property Deduction limitations: Ceiling: 1.05 mil Phase - 2.59 and 3.63 million. Cannot reduce income from activity below zero
Code Section 162
"There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business." -Must be ordinary and necessary -An expense of the payor's trade or business during the year -Reasonable in amount For personal Services actually rendered.
Post 2021 treatment of R&E expenditures
- Cost incident to development of improvement of a product - Includes costs of obtaining a patent - Alternative Treatments -- Expense in the year paid or incurred -- Deferred and amortized R&E Expensing - must be elected first year of such expenses - Must continue to use for subsequent years - Not allowed for tax years beginning after 12/31/21.
Section 1244 Stock requirements
- Loss Treatment is limited to stock owned by original purchaser who acquire the stock from the corporation. - Must be "Small business corporation" - Corp must meet requirements for its stock to qualify. - Doesn't apply to gains
Gifts and inheritance are excluded when
- Made out of affection, respect, admiration, charity, or like impulses. - If the transfer is voluntary without adequate consideration. - It is not intended to be for services rendered.
Employer - provided health insurance is excludible...
- Premiums deductible to employer - Cost of insurance not taxable to the employee ---Benefits received not usually taxable
Amortization of Section 197 intangibles
- Straight-line recovery of 15 years ---- Beginning month the asset is required - acquired goodwill and covenants not to compete - Trademarks, copyrights, franchises, patents.
Excess business loss limitations
- Suspended and modified due to COVID CARES ACT. - TCJA prohibited carryback of net operating losses --- NOL Carryback reinstated in early 2020 --- Can amend 2018 and 2019 returns filed before CARES act. Previously defined as business losses in excess of: - $500,000 MFJ - $250,000 for all others - Amounts adjusted annually for inflation
Meals and lodging are excludible when...
-Furnished by the employee - On the employer's business premises - for the convenience of the employer - Lodging excluded only if required
Section 1244 Amount of Ordinary loss treatment
1244 provides $50,000(single) and $100,000(MFJ) of ordinary loss - limit applied per year - loss in excess of limit is capital
NOL carryback (2018-2020) and carryforward (post-2020) rules
2018 - 2020 could only carryforward NOLs - Could only offset 80% of taxable income for the carryover year Now can carryback up to 5 years - Can offset 100% of taxable income for the carryback years
De minimis, no added cost fringe benefits, other fringe benfits, the discounts not below cost are exludble
All have different numbers, de minimas are benefits too small to account for because it would be impractical.
Qualified Tuition plans ...
Amounts contributed must be used to pay qualified higher education expenses.
Start - up expenditures
Any amount: (A) paid or incurred before the day on which the active trade or business begins, in anticipation of such activity becoming an active trade or business, and (B) which, if paid or incurred in connection with the operation of an existing active trade or business would be allowable as a deduction for the taxable year in which paid or incurred. Amortized over 180-month period - Taxpayer may elect to expense up to $5,000 ----Phased out if total start-up expenses amount to $50,000 - Consider a new restaurant training cooks and bartenders and servers
Scholarships.....
Are nontaxable to the extent of tuition and related expenses. amounts received for room and board are taxable
Treat of business and non-business bad debts
Business Bad Debts - Accrual basis - Direct write-off method only - If Cash Basis (no write-offs) - Partial write-off allowed - Treated as ordinary loss in year incurred. Non-business bad debts - Debt unrelated to trade of business - Treated as a short-term capital loss -- Limited to $3,000 net loss -- No deduction for partial worthlessness
Casualty loss and events that are not casualties
Casualty loss: - Fire, storm, shipwreck, etc. -- Identifiable event that is --- Sudden --- Unexpected --- Unusual Not Casualties: - Losses resulting from a decline in value rather than an actual loss of the property - Disease - Insect Damage
Disallowed business expenses
Charitable contributions, Illegal bribes and kickbacks, fines and penalties.
Casualty loss for complete and partial destruction of business property
Complete destruction of business property - Adjusted Basis (NBV) Partial destruction of business property - Adjusted Basis - Decline in FMV, if less Partial or complete destruction of personal use property - Adjusted Basis - Decline in FMV, if less
Bonus Depreciation
Deduct 100% of cost of qualifying property in year acquired - No annual maximum amount - No phase-out - Not limited to income from activity Qualifying property - Most property with a recovery period of 20 years or less - Can now be used on new and used property Required, unless election made to NOT expense
Life insurance death proceed are excludible, if cashed in, taxable to extent in excess of premiums paid in ....
Employee Death Benefits and Whole Vs. Term life insurance policies.
For AGI vs From AGI
For AGI - can be claimed even if taxpayer doesn't itemize - Important in determining the amount of certain itemized deductions - certain itemized deductions are limited to amounts in excess of specified percentages of AGI. - For example: Alimony payments, trade or business expenses, student loan interest, etc. From AGI - Must exceed the standard deduction to provide any tax benefit. - called itemized deductions
General depreciation system(GDS) and alternative depreciation system(ADS)
General depreciation system - A general depreciation system using the declining balance method to depreciate personal property. Alternative depreciation system - An ADS has a depreciation schedule with a longer recovery period that generally better mirrors the asset's income streams than declining balance depreciation. If the taxpayer elects to use an alternative depreciation system, they must apply it to all property of the same class placed in service during the same year.
Hobby Loss Rules
Hobby: Activity not entered into for profit - Personal pleasure associated with activity ---Hobby expenses are deductible only to the extent of the hobby income Factors to decide if activity is hobby - Factors to consider whether if an activity is a hobby: Whether the activity is conducted in a businesslike manner - The expertise of the TP or their advisors - The time and effort expended - The expectation that the assets of the activity will appreciate in value - The TP'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 TP ( 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 Presumptive rule of Code Section 183 - If activity shows profit in 3 out of 5 years, the activity is presumed to be a trade or business rather than a personal hobby
Rule when business usage drops below 50%
If used less than 50% must use the straight-line method for depreciation
Tax Benefit Rule
If you deducted expenses in one year and it gets refunded back to you in another year you have to pick it up as income.
Discharge of indebtedness if bankrupt or to extent insolvent, but reduce tax attributes
Income from the forgiveness of debt is taxable. Certain situations get special treatment.
Limitation on the deductibility of personal casualty loss: presidentially declared, $100 per event, 10$ of AGI
Intent is to limit to catastrophic losses
Municipal bond interest...
Interest from municipal bonds is tax exempt
Vacation home rental rules
Less than 15 days: No gross income recognized from rentals and no deductible rental expenses - Mortgage interest and real estate taxes treated as if on personal residence - 15 or more days: treatment depends on amount of personal use less than 15 personal days: - If rented for 15 days or more and personal use days NOT more than the great of the 14 days or 10% of fair rental days - allocate expenses between personal and rental days if there are any personal use days during the year - Can deduct allocated rental expenses even if loss results More than 15 days personal: - treated similarly to hobby - Rental expenses deducted in 3 step process 1. property Taxes/Mortgage Interest 2. Out of Pocket Expenses 3. Depreciation
Compensation for injuries excluded if for loss of physical productive capacity and associated suffering....
Loss of income, expenses incurred, property destroyed, personal injury. Loss of income taxed the same as the income replace If expense was deducted then damages are taxable.
Section 267 loss/deduction rules
Losses, expenses, and interest with respect to transactions between related taxpayers. No deduction shall be allowed in respect of any loss form the sale or exchange of property, directly or indirectly, between persons specified in any of the paragraphs of subsection.
MACRS realty lives residential and commercial
Most real property recovered using the straight-line method - Residential real estate: 27.5 years ----Doesn't include hotels or motels - Non-residential real estate: 39 years Mid-Month Convention: - One half month's cost recovery is allowed for the month the property is placed in service. - So, if a calendar year taxpayer places MACRS real estate in service on June 2 of the current tax year, it will be able to deduct six and one-half months of cost recovery. June 15 to December 31. *
Ordinary, Necessary, reasonable in amount
Ordinary = common and accepted in your trade or business Necessary = helpful and appropriate in your trade or business Reasonable in Amount = depends on the case Trade or business = conducted with the continuity and regularity and has the primary purpose of making profit.
Passenger vehicle (Luxury auto) limits; Significance of 6,000 pounds.
Passenger Automobile Cost Recovery Limits $10,800 first year 16,100 second year $9,700 third year $5,760 for each succeeding tax year until cost is recovery Bonus depreciation limited to an additional $8,000 in year 1 A vehicle will avoid classification of passenger automobiles if it is above 6,000 pounds(unloaded), or unloaded is below 6,000 pounds but when loaded is above. This would be classified as a truck or van by its manufacturer
SUV limit $25,000 Section 179
SUV are not considered passenger automobiles and are not subject to luxury limitations - However, in 2021, a $26,200 limit applies for the Section 179 deduction when the luxury auto limits do not apply. - The limit is in effect for SUVS with an unloaded GVW rating of more than 6,000 pounds and not more than 14,000 pounds.
MACRS personality lives and methods 3,5,7,10,15 years; half-year convention, mid-quarter convention
Under MACRS, the cost of an asset is recovered over a period that generally is shorter than the economic life of an asset. - Double declining balance is used for the 3,5,7, and 10 year classes - Cost recovery for the 15 and 20 year classes is based on the 150 percent declining - balance method. Half - year convention: - Cost recovery in the year the asset is placed in service, as well as the year it is removed from service, is based on the assumption that the asset was used for exactly one half of the year, allowing a half-year of cost recovery. Mid-quarter convention: - Applies when more than 40% of the cost of property other than real estate is place in service during the last quarter of the year - If the mid-quarter convention applies, property acquisitions are grouped by the quarter of the acquisition.
Foreign earned income if bona fide resident or 330 days physical presence
a. Income up to $107,600 from personal services rendered in a foreign country can be either: i. Included in taxable income and then claim a credit for foreign taxes paid ii. Excluded from U.S. gross income