Fed Tax 6

Front 1

1.On January 2 of the current year for $300,000 depreciator purchases new equipment for use in her business the purchase is made from an unrelated person. The equipment has a 6 year class life and is 5 year property. Depreciator plans to use the equipment for seven years, and expects it to have a salvage value of $30,000 at the end of that time. Depreciator is a single, calendar year taxpayer, and he uses the equipment only in her business.
In the following problems compute the depreciation deduction with respect to the equipment in each year of its use and Depreciator’s adjusted basis for the property each year.

a). Depreciator elects under what section to use the straight line method for the equipment and all other property in its class placed in service during the year? Then Compute the depreciation

Back 1

§168(b)(5)

An election under paragraph (2)(c) or (3)(D) may be made with respect to 1 or more classes of property for any taxable year and once made with respect to any class shall apply to all preopery in such class placed in service during the year. Such an election is irrevocable.

Depreciation = (Adjusted Basis)(Method)(1/Recovery Period)(Convention)

Dep= (AB)(MET)(1/RP)(CONV)

Year 1 = $300K *(1)(1/5)(1/2) = $30K deduction = $270k basis

Year 2 = 60k deduction = $210 basis

Year 3 = 60k deduction = 150k basis

Year 4 = 60k deduction = 90k basis

Year 5 = 60k deduction = 30k basis

Year 6 take remaining basis of 30k

Front 2

1. On January 2 of the current year for $300,000 depreciator purchases new equipment for use in her business the purchase is made from an unrelated person. The equipment has a 6 year class life and is 5 year property. Depreciator plans to use the equipment for seven years, and expects it to have a salvage value of $30,000 at the end of that time. Depreciator is a single, calendar year taxpayer, and he uses the equipment only in her business.
In the following problems compute the depreciation deduction with respect to the equipment in each year of its use and Depreciator’s adjusted basis for the property each year.

b). Depreciator uses the accelerated ACRS method provided by what section of the code?§

Back 2

168(a) Accelerated cost recovery system
Except as otherwise provided in this section, the depreciation deduction provided by section 167(a) for tangible property shall be determined by using:

(1) The applicable depreciation method

(2) The applicable recovery period, and

(3) the applicable convention

Depreciation = (Adjusted Basis)(Method)(1/Recovery Period)(Convention)

Dep= (AB)(MET)(1/RP)(CONV)

Year 1 = $300K *(2)(1/5)(1/2) = $60K deduction = $240k basis

Year 2 = 240K*(2)(1/5)=96k deduction = $144K basis

Year 3 = 144k*(2)(1/5)=57,600 deduction = 150k basis

Year 4 = 57,600*(2)(1/5)=34,560 deduction = 51,840 basis

Year 5 = $51,840 / 1.5 years = 34,560 deduction = basis 17,280

Year 6 take remaining basis of 17,280

Front 3

§168(b)(1)

Back 3

Except as otherwise provided in paragraph (2) and (3) the applicable depreciation method is –

(A) The 200 percent declining balance method.

(B) Switching to strait line method for the 1st taxable year for which using the straight line method with respect to the adjusted basis as of the beginning of such year will yield a larger allowance.

Front 4

§168(b)(2)

Back 4

150 percent declining balance method in certain cases. Paragraph 1 shall be applied by substituting “150 percent” for “200 percent” in case of-

A)Any 15 year or 20 year property

B)Any property used in a farming business

C)Any other property other than property described in paragraph 2 with respect to which the taxpayer electus under paragraph (5) to have the provisions of this paragraph apply.

Front 5

§168(b)(3)

Back 5

Property to which the straight line method applies. The applicable deprecation method shall be the straight line method in the case of the following property.

A)Nonresidential real property

B)Residential Rental Property

C)Any railroad grading or tunnel bore

D)Property with respect to which the taxpayer elects under paragraph 5 to have the provisions of this paragraph apply

E)Property described in subsection (e)(3)(D)(ii)

Front 6

§168(b)(4)

Back 6

Salvage value treated as zero – salvage value shall be treated as zero

Front 7

§168(c)

Back 7

Applicable recovery period – For purposes of this section the applicable recovery period shall be determined in accordance with the following table:

Water utility district – 25 years

Residential Rental Property – 27.5 years

Nonresidential real property – 39 years

Any railroad grading or tunnel bore – 50 years

Front 8

§168(d)1

Back 8

Except as otherwise provided in this subsection, the applicable convention is the half year convention.

Front 9

§168(d)2

Back 9

Real property. In the case of-

A)Nonresidential real property,

B)Residential rental property, and

C) Any railroad grading or tunnel bore

The applicable convention is the mid month convention

Front 10

§168(d)3

Back 10

Special rule where substantial property placed in service during the last 3 months of taxable year-

A) In general – except as provided in regulations if during any taxable year

i) The aggregate bases of property to which this section applies placed in service during the last 3 months of the taxable year , exceed

ii)40 percent of the aggregate bases of property to which this section applies placed in service during such taxable year,

The applicable convention for all property to which this section applies placed in service during shuch taxable year shall be the mid-quarter convention.

Front 11

§168(d)3(B)

Back 11

§168(d)3(A) doesn't apply to nonresidential real, residential rental, and railroad property.

Front 12

§168(d)(4)(A)

Back 12

Half-year convention – the half year convention is a convention which treats all property placed in service during any taxable (or disposed of during any taxable year) as placed in service (or disposed of) on the midpoint of such taxable year.

Front 13

§168(d)(4)(B)

Back 13

Mid-month convention – the mid-month convetion is a convention which treats all property placed in service during any month or disposed during any month as placed in service or disposed on the midpoint of such month.

Front 14

§168(d)(4)(C)

Back 14

Mid-quarter convention the mid quarter convention is a convention which treats all property placed in service during any quarter of a taxable year or disposed of during any quarter of a taxable year as placed in service or disposed of on the midpoint of such quarter.

Front 15

§211

Back 15

There shall be allowed deduction specified in this part but subject to exceptions.

Additional itemized deducitons

Front 16

§215(a)

Back 16

§215(a) Alimony payments one may take deductions for the amount paid as alimony or separate maintenance payments.

These deductions are above the line as stated in §62(a)(10)

Front 17

§215(b)

Back 17

(b) alimony or separate maintenance payments defined in §71

These deductions are above the line as stated in §62(a)(10)

Front 18

§71(a)

§61(a)8

Back 18

Alimony or separate maintenance payments included in GI

Front 19

§71(b)

Back 19

1) cash

i) §1.71-Tb A-5 anything that is not cash is not alimony.

(1)(A) received by spouse

(1)(A) under divorce or separation agreement

Front 20

§121(a)

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GI shall not include gain from sale of property if
a) during 5 year period property owned and used for 2 years (aggregation) as principal residence

(1) Reg §1.121-1(b)(2) [defines principal residence] uses majority of time

Front 21

§121(b)

Back 21

Limitations (1)Single Return 250K (2) Joint Return 500K

Front 22

§121(b)(3)(a)

Back 22

cannot use (a) if already used in previous 2 years

Front 23

§25A(a)

Back 23

Shall be allowed a credit the sum of (1) Hope Scholarship Credit, plus (2) Lifetime Learning Credit.

Front 24

§62(a)

Back 24

(1) AGI means GI (-) the following deductions
(A) Ex. (1) Trade and business deductions - "deductions allowed by this chapter"
(i) This does not permit any deductions yet it tells you where you can take the deductions and that a deduction will reduce AGI.
(B) Called above the line deductions
(i) Above the line is preferable because AGI is used to compute other taxes

Front 25

§63(a)

Back 25

Taxable income

(a) For those whom itemize their deductions

(A) Taxable income is GI minus deductions allowed in this chapter [see §62]

Front 26

§63(b)

Back 26

(b) For those whom do not itemize their deductions

(A)Taxable income means AGI minus standardized deductions AND personal exceptions.

Front 27

§162(a)

Back 27

a) Requirements

(A) Ordinary AND

(i)Common or frequent occurrence

(a) Need not happen every day but need previously arise in trade .

(B) Necessary AND

(i) Appropriate and helpful [via ordinary business judgment]

(C) Expense [as opposed to capital expenditure] AND

(D) Paid or incurred in taxable year AND

(E) Carrying on Trade or Business

Front 28

§162(a)2

Back 28

(a)(2) traveling expenses

A) Away from home

(B) In the purist of a trade or business

(C) Cannot be lavish

(2) Nature of §162 - Above the line deduction

Front 29

§263

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Capital Expenditures [no deduction shall be allowed]
a) Requirements
(1) New buildings or permanent improvements made to increase value.
(2) That which adds value

Front 30

§1.162-4

Back 30

Repairs - do not add value or prolong life but keep it in an ordinary operating condition. [IF not a repair → Capital Expenditure]
(1) Midland - modifications due to new flaws deductible, yet if property bought with problem, it would be a capital expenditure.
b) INDOPCO - costs associated with corporate acquisition not business expense because its adding to value.
(1) Standard - will the proposed deductible item be of value next year?
(A) If YES → Capital Expenditure.
c) Repair or Improvement Problems
(1) There is much wiggle room, use §1.162-4 to see which one. Make an argument and support it through the use of code and/or case law.

Front 31

§195(a)

Back 31

Start-Up Expenditures

(a) Except as otherwise provided, no deduction will be allowed

Front 32

§195(b)1

Back 32

(b)(1) Allowance of deduction

(b)(1)(A) shall be allowed the year the active trade or business begins the lesser of

(b)(1)(A)(i) amount OR (ii) 5K (-) amounts in excess of 50K AND

(b)(1)(B) remainder is amortized over 180 months (15 years)

(b)(2) If business fails before amortization ends the rest is deducted then

(c) definitions (1) start up means (A) paid (i)-(ii) investigating creation (B) if paid when in business it is deductible under §162 (need meet this statute)
(i) Includes, carrying on trade or business, expense, paid, ect.

Front 33

§162(a)(2)

Back 33

Traveling Expenses Deductible

[meals lodging] Cannot be lavish, away from home, pursuit of business (beneficial to employer)[still must satisfy the realm of requirements under §162(a)]

Front 34

§165(a)

Back 34

Losses there shall be allowed as a deduction any

(1)Loss sustained during the taxable year

(2)Not compensated for by insurance

(3)Amount allowed

Front 35

§165(b)

Back 35

b) Limitation on losses for individuals; loss limited to

(1)Losses incurred in a trade or business

(2)Losses incurred in any transaction entered into for profit, not connected with trade or business.

(3)Instant losses (fire, storm, casualty, theft)

Front 36

§67

Back 36

2% Floor on Miscellaneous Itemized Deductions; Individual allowed deductions on following only if they exceed 2% of AGI.
(1) List includes exceptions (miscellaneous itemized deductions other than)
(A) §162 NOT on list → subject to §67 [2% Floor]
b) Pick greater of standardized or itemized.

Front 37

§212

Back 37

Expenses for the Production of Income [there shall be allowed a deduction]
(1) For the ordinary and necessary expenses
b) For the production or collection of income
c) For the management conservation, or maintenance of property held for the production of income
d) In connection with the determination, collection, or refund of any tax.
(1) ALL §212 is below the line and subject to 2% rule.

Front 38

§164(a)

Back 38

(a) shall be allowed as a deduction for taxable year paid or accrued
(1) (a)(1)- (5) List of all taxes
(A) (a) Flush - additionally one can get trade or business activity tax unless it is in connection with acquiring or selling property. [in that case made adjustments to basis or amount realized]

Front 39

§164(b)(5)

Back 39

(b)(5) Sales tax may be deductible in the alterative and via (H) is determined under tables via IRS 600. (not little receipts)

Front 40

§ 217(a)

Back 40

Moving Expenses [above the line via §62(a)(17)

(a) there shall be allowed as a deduction
a) Moving expenses/ paid or incurred
b) In connection with commencement of work
c) As employee or self-employed

Front 41

§151(a)

Back 41

Allowance of Deduction for Personal Exceptions

(a) Allowance of deduction for personal exception {just allows it}

Front 42

§152

Back 42

Dependent
a) (a) dependent means (1) qualifying child OR (2) qualifying relative
b) (b)(1) if individual is dependent, they cannot claim other dependents
c) (b)(2) if married, not dependent if joint return.