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What is gross income?
All income from whatever source derived, including compensation for services, income derived from business, business from dealings in property, interest, Rents, rolayties, dividends, alimony, annuties, life insurance income, pensions, discharge of indebtedness./ An accession to wealth, clearly realized, over which the taxpayer has control.
How do you tax compensation other than cash?
Fair market value for property received, fair market value for services taken in payment,
What is the rule for compensating an employee with discounted property?
If an employee received discounted property as compensation for services, the difference between the amount paid and the fair market value is gross income.
What happens when you make a bargain purchase?
If the purchase was made at arms length, you do not have gross income. The tax will eventually come out of the lower basis you have in the property.
How do you calclulate gain and loss in dispositions of property?
Amount Realized - adjusted basis is your gain or loss.
What is amount realized in property?
all money received plus the fair market value of all property received
How do you determine adjusted basis in property?
Cost + capital expenditures (improvements, not repairs) - depreciation = adjusted basis
What is tax cost basis?
When you received property as compensation for services, your basis is the amount of income you reported on your taxes for that transaction.
What is the principal residence exception?
Gross income shall not include gain from the sale or exchange of property, if during the 5 year period ending on the date of the sale or exchange, such property has been owned and used by the taxpayer as the taxpayer's principal residence for periods aggregating 2 years or more.
How is principal residence determined?
usually, the residence used the majority of the year. Factors to consider include time spent, where they are employed, where they're registered to vote, where they have a driver's license, what address they list on their taxes. You can only have one principal reisdnece at a time.
How often may you use the principal residence exception? What's the monetary cap?
Once every 2 years. 250000, spouses can combine to 500000
Is a loan an assession to wealth?
No, you have an obligation to repay, you've not really gained anything.
What is the difference between advance payments for tax purposes?
advance payment has no obligation to repay, must pay taxed immediately. deposit has possible obligation to repay, can rate it seasonably over the life of the payment.
What are the exceptions to discharge of indebtedness income?
Bankruptcy, taxpayer is insolvent. If you become solvent when your debt is discharged, you get taxed on any amount over solvent you are placed (whack a mole)
What is the rule for discharge as compensation
The discharge from indebtedness exclusions do not apply, simply classified as ordinary gross income.
What is the rule for gifts?
Gifts are ordinarily not gross income. In order to actually qualify as a gift, it must be given with detached and disinterested genorisotiy, which the transferro expects nothign in return.
What is the basis in gifted property?
If it's given after a gain, then basis is donor's basis. If given after a loss, then it depends on what the donee does with it. If sells for less than fmv at time of gift, basis is fmv at time of gift. If sells for more than original basis, then basis is donor's original basis. If in between fmv at time of gift and donor's original basis, no gain or loss.
What is the rule for part gifts, part sales?
Transferor's gain and loss are caluclated like normal, gains must be reported, losses can't be. Transferor takes a basis in the property equal to the greater of the amount paid of the donee's basis.
What is the basis in property received by inheritence?
Fair makert value at date of decedent's death
What is the limitation on gifts being tax free?
Any income derived from the tax is taxable (e.g. dividends or interest)
What is the rule for life insurance?
gross income does not include amounts received under a life insurance contrac, if paid by the reason fo death of the insured. Any post death accrued interest is taxable, however.
How are annuity's taxed?
You take the total amount beyond the face value, and pay a prorated share over the years it is to be paid.
What is the meritorious achivement prize tax exception
- 1. In recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement.
- 2. recipient was selected without any action on his part to enter the contest or proceeding
- 3. the recipient is not required to render substantial future services as a condition oto receiving the prize or award.
- 4. The prize or award is transferred by th recipient to a governmental unit or charitable organization pursuant to a designation made by the recipient.
What is the employee gift exception?
Must be for length of serivce or safety only. Employer to employee, tangible personal property, awarded as part of a meaningful presentation
What is the qualified scholarship exception?
Any amount received for a scholarship or fellowship to the extent that the invididual used it for qualified tuition and related expenses. Enrollment in a qualified educational organization, fees, books, supplies, equiopment for courses, etc. Does not include room and board.
What are the tax rules for business or property damages?
Lost profits damages received are taxed as the profits would have been. recovery for property damageis measured against basis in the property to determine amoutnt realized.
What is the rule for personal injury?
Amounts received (other than punitive damages) on account of personal injury or physical sickness are not taxable. Emotional distress is not treated as a physical injury.
What are the fringe benefit exceptions?
Meals and lodging furnished for the conveneince of the employer, No additonal cost service, qualified employee discounts (aggregate sales minus cost/aggregate sales gives gross profit margin, amount you can discount without tax), De minimis fringe benefit (coffee, donuts, pencils, etc)
What are the requirements for a business expense?
- Must be an expense, ordinary, necessary, paid or incurred in the taxable year, must be paid or incurred carrying on a trade or business.
- Ordinary- Usual or customary
- Necessary-appropriate or helpful
- For salaries, they must be reasonable.
When is clothing deductible?
When it's of a type specifically required as a condition of employment, not adaptable to general usage as ordinary clothing, and not so worn.
What is a trade or business?
Any activity done with continuity and regularity for the primary purpose to make a profit. Can't be sporadic, a hobby or amusement.
What can you do with start up expenditures?
start up expenditures are amounts paid in connection with investinging thte ccreation and acqusition of an active trade or business, creating an active trade or business, or any activity engaged in for profiti atnd the production of income before the day on which the active business begins, in andicipation of such an activity becoming an active business, which if paid or incurred in connection with the operation of an existing business would be allowable as a deduction. You have to elect to deduct, must do so ratibly over 180 months, must deduct the lesser of the amount of expenditures or 5000 reduced by the amount by which the expenditures exceed 50000 in the first year, the rest prorated out.
What is a capital expenditure?
any amount spent to consturct or substnatially improve an asset having a useful life that extends substantially beyond the currrent tax year.
What is the rule for advertising?
currently deductible, exceptions are permanent physical structures lasting more than one year, those must be capitalized.
What assets are depreciable?
Those used for business or investment, subject to wear, tear, or obsolescence.
What is the recovery period?
How long an asset's depreciation is stretched out. e.g. 5 years, 7 years, etc.
What is the general depreciation method?
200% declining balance switching to straight line for the first taxable year fo rwhich straight line with respect to adjusted basis will yield a larger allowance. Always straightline nonresidnetial real property and residnetial rental property.
What is the straight line method for depreciation?
depreciable cost of the asset divided by years in recovery peroid = annual depreciation allowance
What are the 3 different conventions?
- Mid-month- service in the middle of the month bought (buildings)
- Half year - placed into serice in the middle of the year bought (equipment)
- Mid-quarter: not important
What is bonus depreciation?
optional 25,000 of depreciation you can use in the first year, reduced by a dollar for every dollar in excess of 500,000 of property placed into service during the year.
What is amortization?
intangible property cost recovery, includes goodwill, licenses, intelletual property, franchises, covenants not to compete. Recovered ratably over 180 months beginning in the month teh intangible is placed into service.
What are the rules for investment expenses?
can deduct ordinary and necessary for production or collection of income, for management, conservation, or maintenance of property, in connection with determination , collection, or refund of any tax.
What are the rules for losses?
losses are only deductable if incurred in a trade or business, or in any transaction entered into for profit though not connected with a trade or business.
What is the rule for conversion from personal use to income producing property.
conversion occurs at time property actually becomes used in an income producting way (e.g. first day of rental) Basis is the lesser of FMV at the time of conversion or adjusted basis at tme of conversion.
What are the rules for transactions between related persons?
no member of your family (by blood or spouse) can claim a loss when selling property to you. Same rules applies to corporation in which you own more than 50% of stock. Basis becomes FMV at time of purchase.
what kind of interest is deductible?
interest paid on indebtedness attribuatible to a trade or business, investment interest, qualified residence interest.
When is a charitable donation deductable?
- (1) be made to or for the use of a “qualified recipient”;
- (2) constitute a transfer of property made with no expectation of return benefit;
- (3) actually be paid to the recipient;
- (4) not exceed certain percentage limitations; and
- (5) satisfy certain substantiation requirements.
what is the charity earmarking rule?
when you give to a charity, you may not designate an individual that the money is to be given to. that makes it non-deductible.
What is a return benefit?
if you get something that isn't of nominal value for your donation, it's not deductible.
What is the rule for donation of property?
- donated property is for the FMV, no gain because it's not a realization event.
- With bargain sales to charity, rule is AB apportioned to sale is AB x (AR/FMV), the rest is deductible contribution.
What is the limitation on charitable contributions?
may not exceed 50% of adjusted gross income. amounts exceeding can be carried forward for 5 years.
What are the 3 types of assets?
Capital: given preferental rate, good for gains, bad for losses.
hotchpot: gains trated as capital, losses as ordinary
Ordinary: losses have no limitations, gains at normal rate.
What is the tacking rule for gifts?
you are considered to have owned it for as long as you have and as long as the previous owner had it. If received by inheritence, you are automatically deemed to have owned it for over a year.
What is the limitation on capital losses?
Capital gains and 3000 dollars, excess carried over to next year.
What is a capital asset?
- everything that isn't
- inventory, real property –lots for sale, depreciable property used in trade or business, real property used in trade or business, accounts receivable, supplies.
- Sir Lard
What property constitutes hotchpot?
depreciable property or land held for more than one year at the time of sale or exchange.
What is depreciation recapture?
Gains on property due to depreciation deductions rather than appreciation must be recaptured as ordinary income.
Explain installment sale and the rule attached to it
- Installment sale is when you're selling an item and receiving payments in more than one taxable year, execept for sales of inventory and recapture.
- Gain recognized = Payment x ((Gross profit (i.e. eligible gain)/(AR – Qualifying Debt)
What is like kind exchange?
When you receive the same kind of property that you are giving away, as long as you are using the property for investment or business and the property you gave away was used for investment or business, then you don't realize anything on the exchange.
What is boot?
Property received in a like kind exchange in addition to the like kind property received. Must recognize gain to the lesser of boot or gain realized. No recognition of loss in like kind exchange.
What is the rule for involuntary conversions?
when your property is converted against your will,and you receive an insurance payment, if you put the money into the same kind of thing that was converted, you don't have to recognize gain.
What is the rule for assignment of income.
The person who has the tree pays the taxes, not the person getting the fruit. If you have control over the invesetment, you are taxed on all of it.
What is the kiddie tax?
Unearned income from a child must be paid at their parents highest tax rate
What are the alimony requirements?
Cash, on behalf of spouse, under divorce or seperation instrument, must not be designated as one excludible from gross income, must not be in same household, no obligation after death.
Is chold support gross income? is it deductible?
no and no.
What is the rule of transfers of property between spouses indicdnet ot divorce?
treated as a gift, no gain or loss regonized.
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