Use LEFT and RIGHT arrow keys to navigate between flashcards;
Use UP and DOWN arrow keys to flip the card;
H to show hint;
A reads text to speech;
54 Cards in this Set
- Front
- Back
|
Gross Income |
All income from trade or business gross sales (receipts) -cost of goods sold (COGS) +other GI (ie rentals) =GI from business |
|
|
Cost of Goods Sold (COGS) |
beginning inventory +inventory purchased during year -year-end inventory =COGS |
|
|
Business Expenses must be __________ + ________ |
Ordinary and necessary |
|
|
regular expense |
taxpayer devotes a substantial amount of business time to this activity |
|
|
Determine if hobby is actually a business (rules) |
not engaged in for profit is a hobby. if the activity results in profit in any 3 of 5 consecutive tax years the activity is presumed not to be a hobby |
|
|
ordinary expense
|
the expense normally occurs or is likely to occur in connection with businesses similar to the one operated by the taxpayer claiming the deduction
expenditures need not occur frequently |
|
|
necessary expense |
the expenditure must be appropriate and helpful in developing or maintaining the trade or business |
|
|
rental payments (self-employment deduction) |
advance rental payments may be deducted by the lessee only during the tax periods to which the payments apply including cash method taxpayers, except if the rental prepayments don't exceed a year |
|
|
entertainment and meals deduction |
includes recreation, vacations, trips, and furnishing a hotel, food and beverages or the like to a customer or a member of his/her family |
|
|
entertainment and meals club dues |
club dues for social gatherings are never deductible due to professional clubs are deductible if they are paid for business reasons and the principal purpose is professional (not entertainment) |
|
|
entertainment and meals must be _________ or ____________ the active conduct of a trade or business
|
directly related or associated with |
|
|
directly related |
means that business is actually conducted during the entertainment period |
|
|
associated with |
means that entertainment must occur directly before or after a business discussion |
|
|
meals and entertainment deduction limit |
50% taxpayer or employee of taxpayer must be present for deduction to be valid |
|
|
travel (deductions not allowed for...) |
1. travel that is primarily personal in nature 2. travel expenses of the spouse unless -bona fide business purpose for the spouse's presence -the spouse is an employee -expenses would otherwise be deductible 3. commuting between home and work 4. attending investment meetings 5. travel as a form of education |
|
|
lodging deduction (not traveling away from home) |
1. allowed if all the facts and circumstances indicate lodging is for carrying on a taxpayer's trade or business. whether the taxpayer incurs an expense because of a bona fide condition or requirement of employment imposed by the taxpayer's employer. 2. safe harbor rule |
|
|
safe harbor rule (traveling deduction) |
1. lodging is necessary for the individual to participate fully in or be available for a bona fide business meeting, conference, training activity, or other business function 2. lodging doesn't exceed 5 days, and doesn't occur more frequently than once per quarter 3. employee's employer requires the employee to remain at the activity overnight 4. lodging is not lavish under the circumstances and does not provide a significant element of personal pleasure, recreation or benefit |
|
|
Foreign Travel |
Expense must be allocated between time spent on the trip for business and time spent for pleasure |
|
|
Foreign Travel- no allocation necessary.... |
1. trip is for no more than 1 week and 2. personal vacation was not the major consideration or 3. the personal time spent on the trip was less than 25% of the total time away from home |
|
|
Automobile Expense |
actual expense (service, repairs, gas, etc.) or standard mileage rate ($.575 per mile) and parking fees, tolls, etc |
|
|
Taxes Deduction |
taxes paid in trade or business occupational license taxes |
|
|
Sales Tax |
Treated as part of the property's cost deductible through depreciation if capital or expensed with the cost of the property |
|
|
property tax |
tax on real and personal property is an itemized deduction for individuals (not schedule C) tax on business property is a business expense local improvements - tax assessed for local benefit that tend to increase the value of real property are added to the property's adjusted basis and are not currently deductible |
|
|
income tax |
state and local taxes and NOT deductible on schedule C deductible as a personal itemized deduction not subject to the 2% exclusion federal income taxes are generally not deductible |
|
|
Itemized deduction of state/local taxes |
either: general state and local sales tax or state income taxes |
|
|
employment taxes |
employer may deduct employer portion of FICA and FUTA taxxes self-employed person is allowed a deduction for the employer's portion of the FICA taxes paid to arrive at his/her AGI |
|
|
FICA Taxes Employee Percentages |
6.2% on first $118,500 1.45% (no cap) Additional .9% on high-income earnings ($200K single, $250K MFJ, $125K MFS) |
|
|
insurance expense |
paid or incurred during the year is deductible cash method- can't deduct premium before it is paid prepaid insurance- must be amortized over the period of coverage |
|
|
Bad Debts Deduction |
worthless debt is deductible only to the extent of adjusted basis in the debt cash-basis taxpayer has not basis in A/R and generally has no deduction for bad debts must use specific write off method for tax purposes |
|
|
business bad debt |
one incurred or acquired in connection with the taxpayer's trade or business 1. partially worthless business debts may be deducted to the extent they are worthless and specifically written off 2. business bad debt is treated as an ordinary loss |
|
|
nonbusiness bad debt |
debt other than incurred or acquired in connection with the taxpayer's trade or business 1. investments are not treated as a trade or business 2. partially worthless nonbusiness bad debt is not deductible 3. wholly worthless nonbusiness bad debt is treated as a short-term capital loss |
|
|
Loan Costs |
costs of business borrowing is generally deductible over the period of the loan interest is deductible when paid (includes prepayment penalties, points) Points must be amortized |
|
|
business gifts |
deduction is limited to $25 per recipient per year $25 limit doesn't apply to incidental items costing $4 each or less husband and wife are treated as one taxpayer,even if they file separate tax returns and have independent business relationships with the recipient |
|
|
Employee Achievement Awards |
Up to $400 of the cost of the achievement award is deductible for all nonqualified plan awards Up to $1,600 for the cost of the achievement award is deductible for all qualified plan awards |
|
|
Start-Up and Organization Costs |
Can deduct up to $5,000 for start-up costs and $5,000 for organizational costs in the taxable year the business begins. Any excess costs over $5,000 are capitalized and amortized proportionally over a 180-month period beginning with the month in which the active trade or business beings 1st year deduction is phased out if the start-up costs are between $50K and $55K. |
|
|
vacant land deduction |
interest and taxes paid on vacant land are deductible |
|
|
medical reimbursement plans |
cost of such a plan is deductible by the employer |
|
|
political contributions |
Generally not deductible expense in connection with appearances before and communications with any local council with respect to legislation of direct interest to the taxpayer is deductible up to $2,000 of direct cost of such activity at the state or federal level is deductible (if costs exceed $2K than the de minimis exception is entirely unavailable) |
|
|
intangibles |
capitalized amortization is allowed if the intangible has a determinable useful life |
|
|
tax-exempt income deduction |
expenditure relating to producing tax-exempt income is not deductible ex. interest on a loan used to purchase tax-exempt bonds |
|
|
public policy |
trade or business expenditure that is ordinary, necessary, and reasonable may be nondeductible if allowing the deduction would disrupt public policy examples: -fines/penalties paid to government for violation of the law -illegal bribes/kickbacks -two-thirds of the damages for violation of federal antitrust laws -expenses of dealers in illegal drugs (adjustment to gross receipts is permitted for the cost of the merchandise) |
|
|
capital expenditures |
acquiring or improving property that will have a useful life of longer than 1 year if depreciable- cost is recovered through depreciation no depreciable- cost might be recovered at the time of disposition |
|
|
business use of home |
portion of home must be used exclusively and regularly as 1. principal place of business for trade or business of taxpayer 2. place of business that is used by patients, clients or customers in the normal course of the taxpayer's trade or business 3. separate structure that is not attached to the dwelling unit that is used in the taxpayer's trade or business |
|
|
2 Exceptions of exclusive use test (business use of home) |
1. retail/wholesale- sole location of his/her business is the home. ordinary and necessary business expenses allocable to an identifiable space used regularly for inventory or product sample storage by a taxpayer in the active pursuit of his/her trade or business are deductible 2. day care- business portion of home is used to offer qualifying day care |
|
|
Limits of Business Use of Home Deductions |
1. gross income derived from the use, minus 2. deductions related to the home , allowed regardless of business or personal use (interest or taxes), minus 3. deductions allocable to the trade or business for which the home office is use that are not home office expenses (employee compensation), minus 4. home office expenses other than depreciation, minus 5. depreciation related to home office (limited to remaining gross income) |
|
|
Simplified calculation (Home office deduction) |
$5/square foot up to 300 square feet, for max deduction of $1,500 |
|
|
Rental Property Income |
Reported on Schedule E |
|
|
Rental Property (does/doesn't) generally qualify for section 179 deduction |
doesn't |
|
|
Rental Property exceptions to qualify for section 179 deduction |
deduction for leasehold improvement property, restaurant property, and retail improvement property |
|
|
minimum rental use test (vacation home or rental) |
property must be rented for more than 14 days during the year for deductions to be allowable |
|
|
minimum personal use test (vacation home or rental) |
vacation home rules apply when taxpayer used the residence for personal purposes for greater of more than 14 days or more than 10% of the number of days for which the residence is rented |
|
|
When residence is rented for less than ____ days, rental income _______ need to be reported. Any corresponding expenses cannot be deducted |
15 doesn't |
|
|
residence is deemed to have been used by taxpayer for personal purposes if the home is used by.... |
1. the taxpayer for personal purposed, by any other person who owns an interest in the rental property or by relatives or either (if taxpayer rented or tried to rent the property for 12 or more consecutive months -days used don't count as personal days) 2. any individual under a reciprocal arrangement whether or not rent is charged 3. any individual, unless a fair rental is charges 4. if taxpayer spends substantially full-time repairing or maintaining the rental property, such time doesn't count |
|
|
To claim rental property deductions |
must pass both minimum rental use and minimum personal use test |
