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Taxes Set 2


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Wash Sales
deals with the sale of stocks and bonds
Rules for Wash Sales
1. If stocks or bonds are sold at a loss and w/n 30 days the same stock or bond is purchased, the loss cannot be recognized 2. The 30 day period must be 30 days before the sale at a loss and 30 days after the sale
Wash Sales, If loss is not recognized? Or only part of loss is denied recognition?
3. Any loss not recognized is added to the AB of stock after repurchased 4. If all stock is not repurchased, oly part of the loss is denied recognition
What is tax free of a sale of principal residence?
Req met, 250,000(S,HH,MFS) and 500,000(MFJ) is tax free
What is a principal residence?
Must have kitchen and bathroom facilities, spend more then 1/2 the year there
What are principal residence requirements?
Must live in the residence as yor uprincipal residence for at least 2 year sout the 5 years before the sale
What is the principal residence exception?
If you fail to meet 2 year requirement b/c of an event beyond your control, may be able to exclude some gain. Death, disability, trnaser by employer. Gain excluded = 250,000 or 500,000 x (#of months princpal residence/24 months)
What are gians on involuntary conversions?
such as replacement insurance. Gain realized = Insruance proceeds - AB property (Losses are recognized)
If gain on the Involuntary conversion is on business or investment property⬦
If you use it w/n 2 years of the year of the IC, the gain does not have to be recognized. The replacement must be of similar use.
What if not all insurance from Involuntary conversion is used?
gain recognized = lesser of unused insurance or gain realized
What is the AB of the replacement property of an involuntary conversion?
cost of replace - unrecgonized gain(=gain realized - gain recognized)
Gains on sale using the installment method(collect in installments)
Gain realized is recognized as installments are collected. Gain realized = amt realized -AB Gain recognized = gain realized x (installment rec'd / selling price)
What is gross income from a trade, business, or profession?
Soley owned trades or businesses. Owner must materially participate, taxpayer must prove that they are engaged in a business and not a hobby.
For gross income from soley owned trade/business, what is materially particpating and what does it do?
Any loss on sch C can offset any gross income on the ron tof form 1040 from salary, ect⬦ Treated as negative GI, If the loss elimnates other income, result can be a net operating loss that can be carried back 1 year and carried forward 20 years
for gross income from soley owned trade/business, what if a hobby?
revenue unreduced by expenses must be reported as GI. Expenses will be a misc ID which are only ded = (expenses - 2% of AGI) No losses are allowed, expenses deducted to amount of revenue = GI
How do you prove an activity is a business and not a hobby?
Show that you operate like a business in your industry(training, location, hours, address, phone) Or Invoke the presumptive rule(invoke in 1st year, have profits in business in any 3 out of 5 consecutive years, opens audit exporsure for 5 years rather tahn 3 years
Gross Profits =
Sales - COGS
adjusted basis of inventory sold
Inventory AB =
direct and indirect costs
Uniform Capitalization Rules
all direct costs and all indirect costs except those related to selling, advertising, and distribution out must be added to inventory AB Mixed costs = indirect costs that effect SAD and also affect mfr or service component of the business
In Uniform Capitaliztion, what do you do with mixed costs?
Must prorate these costs b/n SAD and mfr/service compenent of the business
Expenses of Trade,Business,Profession, what is deductible?
Must be from ordinary, necessary, reasonable related to business and paid or incurred in the tax year. Payments to expedite a legal activity and ordianry expenses of an illegal activity are DED
What expenses of trade, business, profession are NOT deductible?
Expenses contrary to the public good(penalties and fines, bribes to public officials, grease payments(paying a public official anything), Expenses incurred to generate tax exempt income(interest paid on a loan to invest on a municipal bond, premiums paid on key officier life insurance)
Business Investigation Expenses if related to same line of business
the expenses are deductible whether you open or not. Must be ded. In current year. Keep a log, meals are only 50% deductible
Business Investigation Expenses if NOT related to same business
If you don't acquire the business, NO DED If you do acquire it and total does not exceed $50,000 then 1st $5000 is ded in current year. If toal exceeds $50,000, the 5000 is reduced⬦ 5000 - (total exp - 50,000)
Business Investigation Expenses not expensed
amount not expenses if capitalized and amoritzed (cost capitalized/180 months) x # months of peration of the activity in tax year. Amortized is deductible
What are start-up costs?
Costs incurred AFTER the business is acquired but BEFORE operations begin. Include hiring, training, advertisng, market stuides, property taxes. Follow same 5000 rule and amortization rules used for BIE however if in same line of business, you expense them.
Bad Debt Expense - is allowance allowed?
no allowance for bad debt permitted for tax
Bad debt Expense, when can you deduct it?
Must have evidence that the debt is uncollectible. (declare chapter bankruptcy, someone dies, made repeated attempts to collect unsuccessfully)
Differnece between personal and business bad debts
business are deductible as soon as you have evidence. Personal bad debts are always STCL. If cash basis business, any debts not collectible for services, rent, or sales are not tax deductible
Involuntary Conversion Losses, Total Losses =
Insurance proceeds - AB Property = deduction
Involuntary Conversion Losses, Partial Losses:
Insurance proceeds - (lesser of: part of AB destroyed or Reduction in FMV (before-after))
Legal Fees
Must be related to business to be deductible, fees to determien taxable income of business are ded on Sch C, Divorces are NOT deductible
Political Contributions
politcal contributions are NEVER tax deductible
Lobby Costs
if paid to influence legislation/legislator - NOT deductible. Only deductible if to influence local legislation
Political Contributions and Lobby Costs - In Kin
less then $2000 for year deductible, product or service of your business (bakery donates cake)
Business Gifts
Deductible up to $25 per customer per year
Promotional Items
must have name or logo on it and cost per item is <= 4
Entertainment Expenses
50% of cost of entertainment is deductible, meals, tickets to events, parking - Must discuss business immediately after entertainment, keep a log
Transportation Costs
Costs of going from one business location to a 2nd business locationa
Transportation Costs - how to deduct?
Actual or Mileage, actual = plains,trains, cars, gas, oil, insurance, maintance, parking, tolls, registration. Mileage = 48.5 cents per mile
Transportation Costs if home office?
all trips to clients are tax deductible
Transportation Costs, 1st trip day is beyond normal mileage
full amoutn is tax deductible
Transportation Exp. Of Employees
treatment depends on wheter the employer has an accountable plan(must be written, employees submit expense report, excess given back to employer) If reimbursements>=expenses, employee does not do anything. If < expenses treat unreimburses portion as misc ID
Transportation Exp of employees if no accountable plan
any reimbursemen tme be GI, total expense = MISC ID
Travel Expenses
Costs incurred when you are away from your business home long enough to recquire rest of sleep, meals and incidentals 50%, travel cannot exceed 1yr, if receive a perdien w/n amounts allowed for region, do not have to keep track of exp.
Writing of the costs of assets used in a trade or business - depreciation & ammortization =
real & tangible assets/intangible, depltion of natural resources
What assests can be written off under MACRS?
Realty or personalty(machines, trucks, cars, equipment⬦) used in trade or business, tangible, determinable life, to extent that you use it, handle realty and personalty separatly
MACRS & Realty
Buildings and improvements, Must determien if bldg is residential rental(27.5yrs) or non-residental rental(39 yrs) If multi use & at least 80% is rent from residential, then 100% of cost is residential
Calculate MACRS on buildings
take cost appropriate table, 27.5 or 39. Go down to year of depreciation, across to the month place in service, Find % x cost = deduction - Each year after uses the same column, if building is disposed of early pro-rate it. Macrs for year x (# of full months used in yr/12) + 1/2 month disposed of
Calculate macrs on personalty
Determine the life category of asset (3,5,7 ect..) Take cost to appropriate table, down to yr of deduction, find percentage % x cost = deduction each year after go down to yr & use same process, if asset disposed of early, calculate macrs for yr x 1/2 = ded
Mid-Quarter Convention
If more then 40% of your personalty is place in service in the last 3 months of the tax year, cannot use the 1/2 year tables, use mid-quarter tables To find = (assets in last 3 months/total non-realty for year)
Calculate Mid-Quarter Convention
go to appropriate class life, down to year of deduction across to quarter place in service, find % x cost = ded If disposed of early: calculate macrs for yr x (# of full quarter used that year/4) + 1/2
MACRS on cars and light trucks
Annual automobile limits, calculate MACRS on cara, compare to annual limit and deduct lower of the two (2960 yr 1, 4700 yr 2, 2850 yr 3, 1675 each year after) limits are pro-rated if used less then 100% of the time. In year asset is disposed of, do not mulityply by 1/2
MACRS on Suv
excess of 6000 pountds, annual limits do not apply if 3 rows of seats and seats at least 9
Sec 280F - listed property
Rules apply to any entertainment, communication, recreation, transportation property used 1/2 time or less in your buiness. Must use straight-line depreciation for the life of the asset applying 1/2 year or mid-quarter convention
Sec 179 expensing
Aimed at small businesses - place in servce <= 420,000 of non-realty during the year. 105,000 costs of assets place in service that year can be expenses. If cost > 105,000 excess can be recovered by MACRS
Sec 179 expensing - applys to what assets?
Non-realty, used > 1/2 time in business, SUV over 6000 lbs (only 25,000 can be expensed under sec 179), better to use longer lived assets If more then 420,000 on non-realty placed in service, lose $1 exp for each 1 over 420,000
Sec 179, when is it deducted?
last tax deduction on Sch C, even after depreciation. Cannot cause or increase a net operating loss, any exp not deducted can be CF and used as long as the limit for the year is not exceeded
Amortization - Intangibles
Copyrights, patents, subscription lists, covenants not to compete, goodwill
Amortization - Intangibles - how are they deducted?
Generall using straight-line over 15 years, (cost/15) = ded
Amortization - Intangibles - purchased goodwill
if a business is pruchased after 8/13/93, purchased goodwill can be amortized over 180 months. Cannot begin amortization untill operations beging Goodwill = (cost of business - FMV of all assets)
Depletion - natural resources
Calculate cost depletion + % depletion and deduct higher of two Cost depletion = (Remaining AB/Remaining units of NR) x units sold % depletion = statutory % x gross income from the NR but limited to (50% x net income(GI-related exp) from the NR) % continues as long as you expect something from resource, cost depletion stops when AB = 0
1/2 self employment tax - ded for AGI
tax = .153 x self employment income (.124 for SS x 1st 90,000 of income & .029 for medicate) 1/2 of the SE tax is ded. On front of 1040
Medical Insurance for self employed - ded for AGI
100% cost of med insurance for self-employed persons and family is ded for AGI. Must also provide for qualified employees age 21 and full time at least 1 year. If spouse can cover you, cannot deduct insurance
Keogh Accounts - self employeed retirements plans - ded for AGI
can contribute and deduct up to 20% income up to a max of 42,000 ded - Has some restrictions Must also cover any qualifed employee (equal % x employees GI contributed to employee's pension plan, equal % = (amount contributed to Keogh acct/self employement income(max of 200,000)
Moving expenses
costs of moving incurred as a result of a change in employement, must pass requirements of distance test & time test
Moving expenses - requirements
Distance test - new job must be 50 miles farther from your old residence than your old job was from your old residence / Time test - Must be employeed FT in new location for at least 39 weeks of next 52 weeks following the move. If self employeed must be 78 out 104, take ded in yr of move in you'll meet req in next year
Moving expenses - fail req, b/c event beyond your control
If fail time test it is waived if it is transfer, disability, death, ect⬦
Moving expenses - Qualifying costs
Cost of moving household goods, moving fees, renting truck, packing boxes, papers, pens, animal cage, storage up to 30 days / cost of moving self and family - one way distance for each car, lodging, NO meals, up to 30 days lodging in residence not yet ready, reimbursements reduce deduction

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