taxation final – Flashcards

true

the basis of the asset must be reduced by the amount of cost recovery that should have been deducted

no. real property does not enter into the 40% test to determine whether the midquarter convention must be used.

if the midquarter convention applies, the property is treated as though it were disposed of at the midpoint of the quarter

seven year cost recovery deduction macrs cost recovery {$130000 x 14.29 (table 8.1)}= $18577

answer - midquarter 2011 cost recovery is (macrs cost recovery [75000 x 0.0357 (table 8.2)] $2678 2012 macrs cost recovery [$75,000 x (.2755 x (2.5/4))] $12914

e none of the above

a. $25,716.

$14,710 macrs cost recovery office (100000 x 14.29)=14290 computer (80000 x .25)=

yep

contact lenses, travel expenses to obtain treatment at the mayo clinic, fees for an alcohol rehabilitation program, medical insurance premiums. code defines medical expenses as expenditures for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body."

david deducts 100% of the premium for agi, whereas joan includes the premiums in computing her itemized medical expense deduction.

a. her principal residence plus one of the other residences b. consolidating the three mortgages into two mortgages

No

A) a capital asset, the fiar market value B) ordinary income property, her basis in

a. $2400 ( the $2400 contributed to a qualifed health savings account) b. $4100 Physician bills, dentist bills, and hospital expenses 7500 less reiumbursement (2100) equals unreiumbursed expenses $5400 health insurance premiums $3000 prescription medicine and drugs 1700 equal toal medical expenses = 10,100 less: 7.5% of (80000 AGI) 6000 equal deductible medical expenses =$4100

a. included overpayment, jan 2011, april 2011, june 15, 2011, sept 15 2011, sept 2011. not included Jan 2012. b. 1800+2250+2250+2250+1200 = $9750

a) yes b.) no c) $240,000?

a. medical expenses [25000 - (7.5% x 315000)] 1375 state and local income taxes 4300 real estate taxes 3705 home mortgage interest 4400 charitable contributions 3800 casualty loss [38000 - (10% x 315000)] 800 equals total itemized deductions = $24880

chapter 14

• Capital v. Ordinary

•Short term - held one year or less: taxed as ordinary gain •Long term - held > one year: taxed at 5/15% •Must net s/t items together and l/t items together. • If s/t and l/t gain, tax as indicated above • If s/t gain and l/t loss, net together. If net result = s/t gain, taxed as ordinary income. If net result = l/t loss, max. = $3,000 and c/f balance. • If s/t loss and l/t gain, net together. If net result = l/t gain, tax at 5/15%. If net result = s/t loss, max. = $3,000 and c/f balance. • If s/t loss and l/t loss, net together. Max. loss = $3,000 and c/f balance. • EXCEPTION: No loss allowed on sale of personal use asset (but, still must recognize gain)

• DEFINITION: none in code - go to 1221(a) which defines what is NOT a capital asset • Inventory or property held primarily for sale to customers in the ordinary course of business • A/R and Notes Receivable • Depreciable property or real estate used in a business

• Acquired asset as a gift - carryover basis - tack on holding period of original owner • Acquired asset via inheritance - basis = FMV at date of death - holding period = long term • Asset in like-kind exchange - tack on holding period of original asset

• Taxed as l/t capital gains: 5/15%

dunno

final review

$450000 [200000 with respect to the equipment and $250000 with respect to the qualifying leasehold improvements]

the tax deduction for the cost or other basis of an intangible asset over the asset's estimated useful life. examples of amortable intangibles include patents, coprights, and leasehold interests. the intangible goodwill can be amortized for income tax purposes over a 15 year period.

the process by which the cost or other basis of a natural resource is recovered upon extraction and sale of the resource. The two ways to determine the depletion allowance are the cost and percentage methods. under cost depletion, each unit of production sold is assigned a portion of the cost or other basis of the interest. this is determined by dividng the cost or other basis by the total units expected to be recovered. under percentage depletion, the tax law provides a special percentage factor for different types of minerals and other natural resources. this percentage is multiplied by the gross income from the interest to arrive at the depletion allowance.

chapter 9

Business expenses for self-employed persons are deductible for AGI Unreimbursed business expenses for employees are generally deductible from AGI subject to 2% of AGI floor Person is classified as an employee if: Subject to will and control of another with respect to what shall be done and how it shall be done Another furnishes tools or the place of work Income based on time spent rather than task performed

Fall into one of the following categories: Transportation Travel Moving Education Entertainment Other Transportation expense defined Very limited, only from job site to job site and commuting to/from temporary work place Commuting from home to work and back is nondeductible Exceptions: Additional costs incurred to transport heavy tools Employees with more than one job

Travel expense defined Expenses while "away from tax home" overnight on business Includes transportation, lodging, 50% meals, and miscellaneous expenses Travel expense defined Restrictions on Travel Expenses Convention travel expenses No deduction for travel unless directly related to taxpayer's trade or business Example: Doctor attending out-of-town seminar on estate planning would not have deductible travel expenses Restrictions apply to the deductibility of travel expenses of the taxpayer's spouse or dependent Generally, accompaniment by the spouse or dependent must serve a bona fide business purpose, and The expenses must be otherwise deductible Education travel expenses Travel as a form of education is not deductible Example: Spanish language professor traveling to Spain to work on the language would not have deductible travel expenses Example: Spanish history professor traveling to Spain to study historical documents available only in Spanish museums would have deductible travel expenses

Deductible for moves in connection with the commencement of work at a new principal place of work Two tests must be met for moving expenses to be deductible Distance test Time test Distance from old home to new job must be at least 50 miles farther than from old home to old job New home location not relevant for decision Example of Distance Test Gail lived 20 miles from her old job Gail's new job is 75 miles from her old home Gail meets the distance test Moving Expenses - Time Test Taxpayer must be full-time employee for 39 weeks in the 12-month period following the move, or Self-employed must work in new location for 78 weeks during the next two years following the move 39 of the weeks must be in the first 12 months Test waived if die, disabled, discharged, or transferred If time test not met during taxable year, two alternatives: Take the deduction in year moved. If test is not met in following year, either: Include the amount deducted in gross income in the following year, or File amended return for year of move Alternatively, wait until time test is met and then file amended return for year of move

''Qualified'' moving expenses include reasonable expenses of: Moving household goods and personal effects to new locationUnreimbursed moving expenses are deductible for AGI Reimbursement or payment by employer: For qualified moving expenses, amount is excluded from gross income, but no deduction for related expenses For nonqualified moving expenses, amount is included in gross income and no deduction is allowed Expenses of travel for taxpayer and family to new location Lodging Actual auto costs (not depreciation) or mileage rate of $.19 per mile for each car in 2011 Meals are not deductible as moving expense

Even though this is her first job, Morgan will be entitled to a moving expense deduction. This presumes that she is not reimbursed by Kite Corporation for these expenses. Education expenses of an employee are deductible if they are incurred: To maintain or improve existing skills, or To meet express requirements of the employer or requirements imposed by law to retain employment status The mileage on her car (at the rate of 19 cents per mile) also is allowed. Her deduction is for AGI and can be claimed even if she chooses the standard deduction option.

Education expenses include: Tuition Books Supplies Transportation Travel (including lodging and 50% meals) A deduction is allowed for AGI for qualified tuition and related expenses involving higher education (i.e., postsecondary)

Qualified tuition and related expenses include whatever is required for enrollment Usually, student activity fees, books, room and board are not included Expenses need not be work related Deduction is not available for married persons filing separately After starting her new job, Morgan enrolls in the night program of a local law school. Although Morgan does not plan to practice law, she feels that a law degree would advance her career. Except for the tuition she pays (see the discussion of § 222), none of her expenses relating to the education will be deductible

Deductions are very restricted due to abuse possibilities Deductible amount allowed: 50% of meals and entertainment costs including related taxes, tips, cover charges, parking fees, and room rental fees....100% of transportation costs Amounts cannot be lavish or extravagant Beginning in 1998, the 50% cutback for meals is eased for certain, very limited, types of employees The 50% cutback rule has a number of exceptions, such as: Situations where full value of meals or entertainment is included in income Meals and entertainment are provided in a subsidized eating facility or where the de minimis fringe benefit rule is met Employer-paid recreational activities for employees e.g., the annual Christmas party or spring picnic Entertainment expenses are classified as either: Directly related to business Actual business meeting or discussion occurs during meal or entertainment Associated with business Meal or entertainment that directly precedes or follows business meeting or discussion

Club dues Generally not deductible Exception: Clubs formed for public service and community volunteerism (e.g., Kiwanis, Rotary)Business gifts Business gifts of tangible personalty with a value of $25 or less per person per year are deductible Incidental costs (e.g., gift-wrapping) are not included in the cost of the gift in applying the limit If the value is $4 or less (e.g., pen with company name) then not subject to $25 limit Gifts to employers or superiors are not deductible Business entertainment expenses incurred at club are still deductible (50%) Ticket purchases for entertainment Amounts paid in excess of face value of ticket are not deductible Limitation on deductibility of luxury skybox expenditures

Expenses are deductible from AGI as miscellaneous itemized deductions subject to the 2% of AGI limitation If employee could have received, but did not seek, reimbursement for whatever reason, none of the employment-related expenses are deductible

Miscellaneous itemized deductions subject to the 2% of AGI limitation Certain miscellaneous expenses must be added together and the amount in excess of 2% of taxpayer's AGI is deductible from AGI (i.e., itemized deduction reported on Sch. A) Examples of Miscellaneous Itemized Deductions Subject to 2% Floor Most reimbursed expenses under a nonaccountable plan Unreimbursed employee expenses Section 212 expenses not related to rents and royalties Tax return preparation fee Hobby expenses Investment expenses (except interest and taxes) Impairment-related work expenses of handicapped individuals Gambling losses to the extent of winnings Certain terminated annuity payments

Dr. Cliff Payne purchases and places in service in his dental practice the following fixed assets during the current year:In addition, during the current year, Dr. Payne purchased another personal residence for $300,000 He converts his original residence to rental property. He also purchased a condo for $170,000 near his office that he is going to rent. Has Dr. Payne correctly calculated the depreciation expense for his dental practice? Will he be able to deduct any depreciation expense for his rental properties? Office furniture and fixtures $ 70,000 Computers and peripheral equipment 67,085 Dental equipment 475,000 Using his financial reporting system, he concludes that the depreciation expense on Schedule C of Form 1040 is $91,298. Office furniture and fixtures ($70,000 X 14.29%) $10,003 Computers and peripheral equipment ($67,085 X 20%) 13,417 Dental equipment ($475,000 X 14.29%) 67,878 $91,298

Recovery of the cost of business or income-producing assets is through: Cost recovery or depreciation: tangible assets Amortization: intangible assets Depletion: natural resources Basis in an asset is reduced by the amount of cost recovery that is allowed and by not less than the allowable amount Allowed cost recovery is cost recovery actually taken Allowable cost recovery is amount that could have been taken under the applicable cost recovery method If no cost recovery is claimed on property The basis of the property must still be reduced by the amount that should have been deducted i.e., The allowable cost recovery If personal use assets are 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

MACRS characteristics: MACRS Personalty . Statutory lives: 3, 5, 7, 10 yrs 15, 20 yrs Method: 200% DB 150% DB Convention: Half Yr or Mid-Quarter DB = declining balance with switch to straight-line Straight-line depreciation may be elected

General rule for personalty Assets treated as if placed in service (or disposed of) in the middle of taxable year regardless of when actually placed in service (or disposed of) Example Purchased and placed an asset in service on March 15 (Tax year end is December 31) Treated as placed in service June 30 Six months cost recovery in year 1 (and year disposed of, if within recovery period)

50% additional first-year depreciation has been allowed for several years The Small Business Jobs Act of 2010 extended additional first-year depreciation for one more year Effective for qualified property acquired and placed in service before January 1, 2011 Most recently, the Tax Relief Act of 2010 extended additional first-year depreciation for 2011 Increases the percentage from 50% to 100% Effective for qualified property placed in service after Sept. 8, 2010 and before Jan. 1, 2012 The Act also extends additional first-year depreciation for 2012, but at the 50% rate Effective for qualified property placed in service after Dec. 31, 2011 and before Jan. 1, 2013 Additional first-year depreciation allows an additional percentage (50% or 100%) of cost recovery in year asset is placed in service Qualified property includes most types of new property other than buildings Property that is used but new to the taxpayer does not qualify

Applies when more than 40% of personalty is placed in service during 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) Business with 12/31 year end purchased and placed in service the following used 5-year class assets: Asset 1: on 3/28 for $50,000, and Asset 2: on 12/28 for $100,000 More than 40% placed in service in last quarter; therefore, mid-quarter convention used: Asset 1: $50,000 × (.20 × 200% × 10.5/12) = $17,500, or $50,000 × 35% (Table 8.2) = $17,500 Asset 2: $100,000 × (.20 × 200% × 1.5/12) = $5,000, or $100,000 × .05 (Table 8.2) = $5,000

MACRS characteristics: MACRS Realty Residential Rental Nonresid. Realty Statutory lives: 27.5 yrs 31.5 yrs or 39 yrs Method: Straight-line Convention: Mid-month Residential rental real estate Includes property where 80% or more of gross rental revenues are from nontransient dwelling units e.g., Apartment building

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

Expenses are deductible from AGI as miscellaneous itemized deductions subject to the 2% of AGI limitation If employee could have received, but did not seek, reimbursement for whatever reason, none of the employment-related expenses are deductible

Most reimbursed expenses under a nonaccountable plan Unreimbursed employee expenses Section 212 expenses not related to rents and royalties Tax return preparation fee Hobby expenses Investment expenses (except interest and taxes)

Answer: Contribution ceiling is the smaller of $5000 (or $10,000 for spousal IRA) or 100% of compensation. However if the tax paper is an active participant in qualified plan, the traditional IRA deduction limitation is phase out proportionately between certain AGI ranges. Roth IRA are subject to income limits The maximum annual contribution of $5,000 is phased out beginning at AGI of $107,000 for single taxpayer, the phase-out range is $15,000 for single taxpayers Joey exceed $109,000 his contribution to the Roth IRA will be reduced. The $667 reduction is computed as follow: $109,000 - $107,000 = $4,000. $2,000 / $15,000 * $5,000 = $667. His contribution to the Roth IRA is $4,333 ($5,000 - $667)

Gambling loss and Uniform dry cleaning Expense incurred in applying for the CFO position of a grocery chain. Taxpayer, an auditor with a CPA firm, did not get the job Cost of Visual Aid prepared by a college professor for use in a graduate seminar

Cost of safety shoes Taxpayer is self -employed Expense incurred by the taxpayer, a member of the Vermont National Guard, two day training

Club Dues for the Coronado Club Taxpayer a Lawyer uses the luncheon club exclusively for business, Cost noncredit for CPA review program taxpayer is Graduate from the business school.

48 week x 5 days = 240 days x 18 miles = 4,320.

Anthony can Deduct $6,200 all related expense to the job search from AGI (subject to a 2% AGI Limitation, and the Moving Expense $7,936 as deduction a FOR AGI Packing and moving $7,100 + $380(Lodging) + $456 (Mileage 2400 miles * 0.19) = $7,936

John is single and is employed as pharmacist. During 2011, he spends $2,300 ($2,100 for tuition and $200 for books) to take a course in herbal supplement at a local university. His MAGI is $70,000. Under section 222 qualifies a deduction is $2,000. Not allowed under section 222 is $300. The Maximum amount of the deduction is reduced MAGI exceed the $65,000 but less than $80,000, so his deduction is limited to $2,000. The $100 not allowed for tuition under Section 222 plus the $200 for book would be allowed as a deduction from AGI

6. Business Entertainment Snipe associates paid $70,000 for a 20 seat skybox. Regular seats to these games cost $200 each. At one game, an employee of Snipes entertained 18 clients Snipes furnished food and beverage for the event at a cost of $1,000. The game was preceded by a bona fide business discussion, and all expense are adequately substantiated Snipe can deduct $2,500::::: Explanation: cost of seats ($200 x 20) $4,000 + food beverage $1,000 = $5,000 total entertainment Less: 50% ($2,500) = Total Deduction is $2,500 If there was no bona fide business discussion either proceeding or after the event, there is NO entertainment option. Therefore, the business GIFT IS the only available deduction

...

Yes. They are treated differently because the loss in value of Carol's stock is the result of a sale which qualifies as a disposition, but the loss in value of Dave's stock is simply a decline in value.

A. carryover B. Fair market value for property received by gift, there is a carryover basis. if no gift tax is paid, then albert's adjusted basis is the $7000. For inherited property, the basis is a new basis. (fmv on the date of the decedent's death, unless the executor of the estate elects the alternate valuation date and amount). the 55000 adjusted basis for Robin's Walmart shares appears to be the fmv of the stock at the date of her aunt's death.

A. No. a taxpayers personal residence is a personal use asset, therefore a realized lss from the sale of a personal residence is not recognized. , since its a personal use asset, the realized loss on the sale is disallowed and cant be recognized. B. satisfies, would. A realized gain from the sale of a personal residence is subject ot taxation. however a favorable relife from recognition of gain is provided in the form of the 121 exclusion. under this provision, a taxpayer can exclude up to $125000 of realized gain on the sale. to qualify for exclusion, the residence must have been owned, and used by the taxpayer as the principal residence for at least 2 years during the five year period ending on the date of the sale. As samantha satisfies the 121 requirements, she would be able to exclude the $120000 realized gain.

Personal; are not

No

ARE NOT

No. She cannot net them against each other because they are both gains.

answers: $11000; long term capital gain. his gain of $11000 (236000-$225000) is a long term capital gain.

elaine has a net long term capital gain of $14000 and a net short term capital loss of $4000. As a result, she has a net capital gain of $10000. net long-term capital gain (22000 long term capital gain - 8000 long term loss) = 14000 net short term capital loss ($19000 short term gain - $23000 short term loss) =($4000) equals net capital gain = 10000

dear ms case. the purpose of this letter is to discuss the result of your stock transactions for 2011. You had $14000 of longterm capital gains and $4000 of short term capital losses. subtracting the $4000 of losses from the $14000 of gains results in a $10000 net long term capital gain. the $10000 net long term capital gain and the details of your stock transaction will be reported on the schedule d attached to your form 1040. the $10000 net capital gain qualifies for alternative tax and will be taxed at a 15% rate rather than at your marginal tax rate of 35%.

Step 1 - Determine Classification of Property • Classified by Recovery Period • Personalty - 3, 5, 7, 10, 15, 20 years - See Exhibit 8.1 • Realty Residential: 27.5 years Non-residential (commercial): 31.5 or 39 years (depends when the property was placed in service) Step 2 - MACRS Depreciation • Personalty- 3, 5, 7, 10 year property =200% Declining Balance* • Personalty- 15, 20 year property =150% Declining Balance* • Realty = Straight Line * Taxpayer may elect Straight Line method for Personalty. Step 3 - Determine Convention • Personalty - General Rule: half-year convention • Personalty - Exception to GR: mid-quarter convention o More than 40% of the value of property other than Realty is placed in service during the fourth quarter • Realty - mid-month convention Step 4 - Additional First Year Depreciation • 50% in the year the asset is placed in service (for qualified property placed in service before 1/1/13) • NEW RULE: additional first-year depreciation increases to 100% on property placed in service after 9/8/10 and before 1/1/12 • Must be new property Step 5 - Section 179 = election to write-off asset in year one • Ceiling amount = $500,000 in 2010 and 2011; $125,000 in 2012; $25,000 after 2012 • Ceiling amount is reduced dollar-for-dollar when property placed in service exceeds $2 million; phaseout begins at $500,000 in 2012 and $200,000 after 2012 • Section 179 is taken before the 50% additional first-year depreciation is calculated • 179 amount cannot exceed taxable income

II. Calculation of Gain Amount Realized (selling price) Cash + FMV of other assets received + note receivable + mortgage or other liability assumed + Expenses paid by buyer on behalf of seller (including real estate taxes) - Commissions - Legal fees Less: Adjusted Basis Cost + Improvements (example: streets, sewers to improve land and legal costs associated with them) - Depreciation Equals: Gain or (Loss)

• EXCEPTION: section 121 - Sale of Personal Residence - up to $250,000 ($500,000 if MFJ) of gain may be excluded if certain requirements are met • EXCEPTION: section 1031 - like-kind-exchange - up to 100% of gain may be deferred

• Allocation problems - purchase land and building - must allocate purchase price • Acquired asset as a gift - carryover basis • Acquired asset via inheritance - FMV at date of death • Conversion of property from personal use to business use - lower of Adjusted Basis or FMV at date of conversion

• Sale between related parties - section 267 (See Ch. 6)