Deductions Flashcards
John Budd is the sole stockholder of Ral Corp., an accrual basis taxpayer engaged in wholesaling operations. Ral’s retained earnings at January 1, 2015 amounted to $1,000,000.
For the year ended December 31, 2015, Ral’s book income, before federal income tax, was $300,000. Included in the computation of this $300,000 were the following:
Dividends received on 500 shares of stock of a taxable domestic corporation that had 1,000,000 shares of stock outstanding (Ral had no portfolio indebtedness) $ 1,000
Loss on sale of investment in stock of unaffiliated corporation (this stock had been held for two years; Ral had no other capital gains or losses) (5,000)
Keyman insurance premiums paid on Budd’s life (Ral is the beneficiary of this policy) 3,000
Group term insurance premiums paid on $10,000 life insurance policies for each of Ral’s four employees (the employees’ spouses are the beneficiaries) 4,000
Amortization of cost of acquiring a perpetual dealer’s franchise (Ral paid $48,000 for this franchise on July 1, 2015, and is amortizing it over a 48-month period) 6,000
Contribution to a recognized, qualified charity (this contribution was authorized by Ral’s board of directors in December 2015, to be paid on January 31, 2016) 75,000
On December 1, 2015, Ral received advance rental of $27,000 from a tenant for a three-year lease commencing January 1, 2015 to cover rents for the years 2016, 2017, and 2018. In conformity with GAAP, Ral did not include any part of this rental in its income statement for the year ended December 31, 2015.
What amount should Ral deduct for keyman and group life insurance premiums in computing taxable income for 2015?
$4,000 - A taxpayer may not deduct life insurance premiums in which the taxpayer is directly or indirectly the beneficiary. Hence, Ral Corp. may not deduct the $3,000 in keyman insurance premiums that it paid on Budd’s life because the corporation is the beneficiary. However, a taxpayer may deduct the group term life insurance premiums if the insured employee or his/her beneficiaries would get the insurance proceeds. Thus, Ral Corp. may deduct the $4,000 in group term insurance premiums paid on the $10,000 life insurance policies for each of Ral Corp.’s four employees.
Cole earned $3,000 in wages, incurred $1,000 in unreimbursed employee business expenses, paid $400 as interest on a student loan, and contributed $100 to a charity. What is Cole’s adjusted gross income?
$2,600 - The unreimbursed employee business expenses and charitable contribution are itemized deductions, so these do not affect the computation of adjusted gross income. AGI equals the $3,000 of wages less student loan interest of $400, or $2,600
Hall, a divorced person and custodian of her 12-year old child, filed her 2015 federal income tax return as head of a household. She submitted the following information to the CPA who prepared her 2015 return:
Hall paid the following expenses in 2015 pertaining to the home that she owns: realty taxes, $3,400; mortgage interest, $7,000; casualty insurance, $490; assessment by city for construction of a sewer system, $910; interest of $1,000 on a personal, unsecured bank loan, the proceeds of which were used for home improvements. Hall does not rent out any portion of the home.
The $910 sewer system assessment imposed by the city in 2015 is
A. Allowed with the realty taxes as an itemized deduction for taxes. B. Allowed as an itemized deduction subject to the 2% of adjusted gross income floor. C. Deductible in arriving at adjusted gross income. D. Not deductible in 2015.
D - Assessments for public improvements, that tend to increase the value of the taxpayer’s property (whether or not the value actually increases), generally, are not deductible. However, assessments may be deducted to the extent that the taxpayer can prove the assessment is allocable to maintenance.
Since Hall cannot prove that any of the assessment for the sewer system is allocable to maintenance, the assessment is not deductible
An individual taxpayer earned $10,000 in investment income, $8,000 in noninterest investment expenses, and $5,000 in investment interest expense. How much is the taxpayer allowed to deduct on the current-year’s tax return for investment interest expenses?
$2,000 - Investment interest expense is deductible to the extent of net investment income. Net investment income is defined as investment income ($10,000) less noninterest investment expenses ($8,000), or $2,000. So, $2,000 of the $5,000 of investment interest expense is deductible as an itemized deduction. The remaining $3,000 is carried over, indefinitely, and deducted in a year that has sufficient net investment income
Matthews was a cash basis taxpayer whose records showed the following:
2015 state and local income taxes withheld $1,500
2015 state estimated income taxes paid December 30, 2015 $400
2015 federal income taxes withheld $2,500
2014 state and local income taxes paid April 15, 2016 $300
What total amount was Matthews entitled to claim for taxes on her 2015 Schedule A of Form 1040?
$1,900 - Certain state and local taxes are deductible as an itemized expense during the year in which the taxes were actually paid. Deductible taxes include income and real property. State and local fees are not deductible. Federal income taxes also are not deductible.
During 2015, Matthews paid $1,500 in state and local income taxes withholding and $400 in state estimated income taxes. Thus, she is entitled to claim $1,900 for taxes on her 2015 Schedule A of Form 1040. Matthew’s 2015 state and local income taxes paid on April 15, 2016 will be deductible on her 2016 tax return because these taxes were not actually paid in 2015.
Hall, a divorced person and custodian of her 12-year old child, filed her 2015 federal income tax return as head of a household. She submitted the following information to the CPA who prepared her 2015 return:
The divorce agreement, executed in 2013, provides for Hall to receive $3,000 per month, of which $600 is designated as child support. After the child reaches 18, the monthly payments are to be reduced to $2,400 and are to be continued until remarriage or death. However, for the year 2015, Hall received a total of only $5,000 from her former husband. Hall paid an attorney $2,000 in 2015 in a suit to collect the alimony owed.
The $2,000 legal fee that Hall paid to collect alimony should be treated as
A. A deduction in arriving at adjusted gross income.
B. An itemized deduction subject to the 2% of adjusted gross income floor.
C. An itemized deduction not subject to the 2% of adjusted gross income floor.
D. A nondeductible personal expense.
B - Most legal expenses incurred in attempts to produce or collect taxable income or paid in the association with the determination, collection, or refund of any tax are usually deductible as an itemized deduction subject to the 2 percent of adjusted gross income floor.
Legal expenses attributable to the collection of alimony or tax advice related to the divorce and to either doing or keeping a taxpayer’s job also are deductible as an itemized deduction subject to the 2 percent of adjusted gross income floor.
Thus, the $2,000 legal fee that Hall paid to collect alimony may be deducted as an itemized deduction subject to the 2 percent of adjusted gross income floor.
Deet, an unmarried taxpayer, qualified to itemize deductions.
Deet’s adjusted gross income was $40,000 and he made a $1,500 substantiated cash donation directly to a needy family. Deet also donated art, valued at $11,000, to a local art museum. Deet had purchased the art work two years earlier for $2,000.
What was the maximum amount of the charitable contribution allowable as an itemized deduction on Deet’s income tax return?
$11,000 - The $1,500 donation to the needy family is incorrect. The family is not a qualified charitable organization. Because the artwork was held over two years, it is capital gain property and Deet can use FMV of $11,000 for the value of his charitable contribution to the art museum.
Stein, an unmarried taxpayer, had adjusted gross income of $80,000 for the year, and qualified to itemize deductions. Stein had no charitable contribution carryovers and only made one contribution during the year.
Stein donated stock, purchased seven years earlier for $17,000, to a tax-exempt educational organization. The stock was valued at $25,000 when it was contributed.
What is the amount of charitable contributions deductible on Stein’s current year income tax return?
$24,000 is correct. Although Stein can deduct the fair market value (FMV) of $25,000 for the stock contributed, the deduction is limited to 30% of his AGI, $80,000.
Smith, a single individual, made the following charitable contributions during the current year. Smith’s adjusted gross income is $60,000.
Donation to Smith’s church $5,000
Art work donated to the local art museum. Smith purchased it for $2,000 four month’s ago. A local art dealer appraised it for 3,000
Contribution to a needy family. 1,000
What amount should Smith deduct as a charitable contribution?
$7,000 - The $5,000 to the church qualifies for current deduction. The $1,000 to the needy family does not qualify because the needy family is not a qualified charitable organization. The donated artwork contribution is considered ordinary income property (held less than 1 year) and amount of deduction is the fair market value of the property reduced by ordinary income or short-term capital gain that would be recognized if the property was sold ($3,000 − $1.000 = $2,000). Also, the total contribution is less than the AGI limitation on contributions
Schedule C of form 1040
To report income or loss from a business you operated or a profession you practiced as a sole proprietor. ORDINARY, NECESSARY, AND REASONABLE EXPENSES
ex. cogs, rent expense, liability insurance
Schedule A of form 1040
Required in any year you choose to itemize your deductions. The schedule has seven categories of expenses: medical and dental expenses, taxes, interest, gifts to charity, casualty and theft losses, job expenses and certain miscellaneous
Non deductible expenses
insurance premiums on personal property, federal income taxes paid, Roth IRA contributions, sales taxes
NOT REPORTED ON FORM 1040
Abe Architect owns his own architectural consulting firm. During the current year he incurred the following expenses related to meetings with clients and potential clients:
Meal expenses $2,000
Dues to Five-Star Country Club $5,000
Greens fee for playing golf with clients $1,500
Tickets to Super Bowl (face value = $1,000) $3,500
What is the amount of deductible expenses for the current year related to these expenditures?
$2,250 - Dues are not deductible. All of the other expenses are deductible but subject to the 50% limitation for meals and entertainment. Note that the deduction for the Super Bowl tickets is limited to the face value of the tickets, before the 50% limitation. The allowable deduction is $2,250 (($2,000 + $1,500 + $1,000) x 50%)
Schedule E
Income derived from royalties is reported in Schedule E—Supplemental Income and Loss. Schedule E also is used to report the income or loss from rental real estate, partnerships, S corporations, estates, and trusts.
Destry, a single taxpayer, reported the following on his 2015 U.S. Individual Income Tax Return Form 1040:
Income:
Wages $ 5,000
Interest on savings account 1,000
Net rental income 4,000
Deductions: Personal exemption $ 4,000 Standard deduction 6,300 Net business loss 16,000 Net short-term capital loss 2,000
What is Destry’s net operating loss that is available for carry back or carry forward?
$7,000 - Wages $ 5,000 Interest on savings account 1,000 Net rental income 4,000 Net business loss (16,000) Net short-term capital loss ( 2,000) = AGI ( 8,000) Deductions: Personal exemption $ 4,000 Standard deduction 6,300 Taxable Loss (18,300)
Adjustments to arrive at NOL carry back or carry forward (Use Form 1045, Schedule A for calculation purposes.)
$18,300 TAXABLE LOSS
Plus(addback) $ 4,000 Personal exemption, Destry cannot deduct his personal exemption.
Plus(addback) $5,300 Adjustment for deductions that are not connected to a trade or business or employment, such as the standard deduction of $6,300 reduced by the non-business income of $1,000 interests from savings.
Plus $ 2,000 Short term capital loss as adjusted by business capital gains and losses (-0-).
($ 7,000) Correct carry back or forward
