Federal Income Tax Outline

Federal Income Tax Outline: GROSS INCOME - § 61 Gross Income: o “all income from whatever source derived”  compensation for services, interst, rent, dividends, business profits, and gains on the sale of property  in kind payments = non- cash payments  income:  1) employer paying your income taxes  2) meals and lodging IF intent is for compensation o exception: part of the job  3) employer loans that are either interest free or below market loan  4) below market purchases: income = difference between the price paid and the market value of the goods - exception: fringe benefits o §132 Fringe Benefits  1) no additional cost services:  requirements: o service must be given to all employees o service is the same as is offered to the consumer o employer doesn’t incur any additional costs for providing the service  2) employee discounts for property:  requirements: o exclusion may not exceed the “gross profit percentage” of the price at which the property is sold to customers  3) employee discounts for services:  requirements: o can’t be more than 20%  4) de minimis  requirements: o really small value (i.e. using copy machine) so it’d be a pain in the asse to do accounting  5) athletic facilities - exclusions from gross income: some wealth assets or consumption assets are not considered gross income o requirements: limited to a certain amount (i.e. capped) ( § 101-135) (i.e. employee death benefits) ADJUSTED GROSS INCOME: - § 62 Adjusted Gross Income - Formula: AGI = Gross income – cost of services sold - AGI is used primarily to LIMIT the amount of certain deductions TAXABLE INCOME: - § 63 Taxable Income - Formula: Taxable income= gross income – all deductions allowed - Taxable income = tax base DEDUCTIONS: Note: classifications of deductions depends on how readily they can be used by the taxpayer - § 151-152 EXEMPTIONS: o personal exemptions for taxpayers and their dependents  limited to your tax bracket, mostly for middle class  married above 150G and single above 100G  you get 2G off if you have less income than listed above - § 261-280 “above the line” deductions: o non-employee business expenses, reimbursed employee business expenses, alimony  limits: always available o § 62-a-1 Trade or business deductions:  §162 trade or business expenses: definition: ordinary and necessary in conducting a trade or business  §62: bonuses are deductible (see problem p. 215) o cannot be a relative AND can’t be more than what Rent in a plush business district  rent is deductible: Welch v helvering: Can be deducted if its ORDINARY (NOTE: reasonableness will not be touched because IRS has no comments on what taxpayers construe as reasonable the other employees receive) and WATCHOUT for sweetheart deals  ANALYSIS:  Is it ordinary? If NOT ordinary, no deduction o we don’t care about whether rent or salary is reasonable/compulsion to keep expenses down:  factors:1) Breakdown between Payor and decision maker2) Related parties3) disguising personal consumption  expenses relating to preparation for new job:  rockefeller 75-129 rev rule:  you can get a deduction if its NOT changed from an old trade or business to a new one  ANALYSIS: look at trade or business it has to be the same business look at tasks and acitivies and say if they are similar or different sally : clerk, position looking for is lawyersame trade or bueinses? Yes  NOTE: cannot be a capital expense or it will NOT be deductible! If The benefit will extend beyond the taxable year then it is NOT deductible  maintenance deduction rule:  162: maintain and repairs are deductible o maintenance doesn’t add value maintaining is for running business (because it doesn’t add value)  162: advertising: not capital because will only last one year and any extra’s are considered “goodwill”  replacement is deductible  cleaning products: deductible because they may last longer than a year but impossible to keep track of  wages are deductible o exception; wages that are for the production of a capital asset are capital and NO deduction o same thing with wages for repair of capital asset (hypo with not painting six months later, NOT deductible because it was in relation to it earlier) - §168 costs incurred in producing income (such as assets) are deductible: o requreiemnt: 1) must be used for trade or business, 2) must be a depreciable asset o adjusted basis o §168-e: expected useful life (see chart on page 167)  7 years is the general property class life for property with nonspecific assignment  non-residential real property and residential real property  straight line (equal depreciation thorugh the years thorugh the life of the asset) is used with non-residential real property and residential real property  formula: take the cost of the asset and the cost of the asset at the end of the years and figure out what the % of depreciation is (i.e. starts at 275k and ends at 0). o Take that percentage and divide it by the number of years of the assets “useful life”. That total is the % per year you deduct from the asset o Multiply the value of the asset by the % deducted per year and you get the amount you deduct from income tax Or use his formula: PERIOD: 168-C/METHOD: 168-b-3-B straight line method/CONVENTION:n 168-d2-B: half year, for real property for residential real or non residential real something, its mid month/168-c: residential rental property 27.5 years/bought it in march: year 1 deprecition: under mid month convention she put it in service march 15th. Year 1: 9.5/12 because of the mid year connection Equation: number of months in use (mid month convention)/ total months (12) * 1/number of years (27.5) * amount of cost of property = depreciation - Year 2: 12/12 becaues it has been in use for a full year and its - whenever you place the property into service, you calculate it based on the middle of that month until the following year example from book: #3: 3 grand for former tenant rights can be deductible under 162 amortized over the period of two years = = = = = = = - 179 property: must be tangible property which is PERSONAL property o 179-a: if it’s a section 179 property you can treat it as an expenews presently deductible o 179 property is defined: any tangible property to which 168 applies which is 1245 property  179 tangible property which is 1245 property  tangible= get your hands on it other than a paper representation  this is NOT tangible - 1245: for purposes of this section, any property that is subject to deprectiation in 167 or personal property - 179 property can be deducted from expenses not to exceed the amount of the income if its 1245 property (tangible, in your hands, property expense) §179 deduction of tangible personal property acquired by purchase for use in the active dcondut of a trade or business. (limits here: - limit #1: see page 195 chart on top of code book - limit #2: expensed amount cannot exceed 200k. (§179-b-2) - limit #3: cant deduct more than you make (income) for that year §179-b-2 NOTE: that you can STILL depreciate half year convention o depreciation method/accelerated declining balance  large amounts are paid off in earlier years and smaller amounts in later years o amount taxpayer expects to realize #2: a-b- ( 283) chart on p. 301 basis begin of yr. Yr depreciation 25G 20g 12 1 2 3 basis end of year 20G 12G 7120 sale basis 20% 5G 32% of 25=8g 4800 2,400 9,600 * all the way to year 6 (even though it’s a five year depreciation) why until year 6 if it’s a five year depreciaton? Because of the mid year convention. 2-b: If she sells the computer in year 3, she will get half of the depreciation 2-c: mid quarter year convention vs. half year convention (so tax payers don’t take adnatage) equation: last quarter/ entire year (see if its greater than) 40% computer purchased in January: 0/25G computer purchased in December 25g/25G greater than 40%. Because its greater than 40% then you do a quarter convention rule: 168-d-3 you need four charts for this when you do mid quarter you do thre month depreciation intervals. When you do mid year conventions, you get 6 months until October you can take a half year convention 2-d: 179: she takes a 179 election: authorizes an additional deduction of 24G for the year 2002. Liz can elect and “expense the cost” so her first year deduction she would take a 24G and she has 1G left over With the 1G left over, that becomes her basis. She then takes (depending on what convention she is in) she can take 20% of that (200 o Year 20 deduction 32% or 320 o Year 3: 192 o Yr 4 115 o Yr 5 115 o Yr 6 58 Limits on 179 eectoin: limitation is reduced by 200G NOTE: 179 doesn’t have the limits on the fourth quarter like the mid quarter deductions. I.e. o Regardless of how it gets in, December, july or January, its still going to be mid year. - NOT deductible as part of capital asset: - clearing title, acquiring title, legal consultation about purchasing, improvements to add value  § 195: startup expenditures: start up expenses (195) - any amount paid or incurred in connection with an act or trade or business or investigating trade or buseinss - investigating - creating - activity engaged in in the trade or business BEFORE the trade begins o BEFORE act of trade begins o If he is in a new business everything is deductible AND  NOTE: you can elect to : 11G/60 3 years  § 263: capital expense. NOT DEDUCTIBLE: Amount paid for franchise: Magic words: The benefit will extend behyond the taxable year - §212: PROFIT SEEKING BUT NOT A TRADE OF BUSINESS: o 212: management, conservation, maintenance held for the production of income or n connection with collection, determination of tax. o Personal expenses: NOT DEDUCTIBLE/Non-personal ARE deductible  Deductibe: Tax returns, lawyers fee, - §165 bad debts - §165 losses: o you can deduct for losses in T/B or 212 stuff entered into to for the production of business o NOTE: § 167 and 168 Depreciation Deductions:  a-1: depreciation for property used in T or B (these are 162 activities)  a-2: depreciation for property held for production of income (these are 212 activities) o § 63- c Itemized Deductions: o medical expenses, home interest deduction (things itemized on income tax paperwork)  Limits: can do an itemized deduction only if the sum of the itemized deduction exceeds the standard deduction § 67 Miscellaneous itemized deductions (MIDS): o any other itemized deduction that is NOT listed o limits: you can only get 2% of your AGI o hypo: single taxpayer has AGI of 50G and MID of 2.5G. taxable income? TI= 50G – [2.5G- 2% x 50G] = 50G – [2.5-1] = 50g – 1.5 = 49.5G - -