Cheat Sheet - Summary Tax Accounting

Deductions for AGI- Alimony paid , Business related xps, Self employment related xps, Education related xps Itemized Deductions –Personal, Medical bills , Property tax , Interest on home loans -For AGI deductions are beneficial to: 1) taxpayers who don’t itemize can still take for AGI deductions 2) Helps with eligibility for some deductions/credits (the lower, the more eligible you are) 3) Can increase deductible amounts (when floor limit) Cash Method -expenses are general deductible when paid -Exceptions:  Capital expenditures – depreciated  Prepaid expenses are only deductible when o Prepayment is required, counts if paid early to get discount o Delivery/performance cannot be any longer than next tax year Accrual method -Expenses are deductible when incurred -Exceptions  Deductions cant be based on estimates (bad debt, etc) Business Deductions 1) Ordinary- normal/usual for industry 2) Necessary- helpful for business (meals in personal service industry) 3) Reasonable- amount is not excessive under the circumstance Investigating Expenses -Apply to new business/expansion -Hiring of lawyers/CPAs -Surveys/research -Travel to new locations -If for new expansion: deductible when paid/incurred -If for brand new business: expenses will never be deductible if never enters new business  If enters: 1) immediate deduction of up to $5000 in Xps in 1st year and 2) any portion not in 1st year is amortized over 180 months o Max deduction is phased out $ for $ by excess of expenses over $50000 Disallowed deductions Expenses contrary to public policy , Political contributions , Most lobbying expenses, Excessive executive compensation, Related party losses , Expense related to tax exempt income, Personal expenses Net Operating Loss- Carryback 2 years, then carry forward 20 years Casualty Losses -Loss to property resulting from an identifiable event that: - Sudden: not gradual or swift -unexpected: ordinarily unanticipated -unusual: extraordinary or non recurring -deduction is allowed in the year of the casualty (or prior yr if President declares a disaster) Theft Losses -Loss resulting from robbery, larceny, embezzlement -Deductions allowed in year the theft is discovered Business Asset -Ordinary deduction (for AGI) -complete destruction = adjusted basis -partial destruction = lower of AB or decline in value Nonbusiness Asset -Itemized deduction -$100 per event reduction -10% of AGI floor limit -Lower of adjusted basis or decline in value -Amount of loss- insurance recovery Business Debts- deduction allowed for complete or partial worthlessness Ordinary loss for AGI -Nonbusiness bad debt = short term capital loss -max deduction in any 1 year =$300 Non business debts- deduction is always allowed for complete worthlessness, -short term capital loss  deduction is limited to capital gains +3000 Social Security tax- 12.4% on up to $118,500 of earnings Medicare tax- 2.9% of what a person earns Employee -Get a W-2 -Non taxable benefits are provided by company -Individuals prefer employee status -company pays ½ SS and Medicare Tax -Unreimbursed employee expenses = misc itemized deductions Independent Contractor-self employed -own supplies/equipment, set own schedule, paid by the job -Get a 10-99 -Receive few/no benefits -Pay all SS/Medicare tax -Expenses = FOR AGI deduction Transportation Expenses -Includes auto, parking, tolls, taxis, buses -Commuting expenses are not deductible -Examples of deductible transportation 1) transportation between work stations 2) transportation from home to temporary work 3) work related education Automobile Expenses -Operating Cost  Gas, maintenance, repairs, insurance, registration, depreciation  Can’t switch to automatic -Automatic Mileage  54 cents per business mile  can’t use : Uber, rental car company, more than 5 cars used for business Travel Expenses -Transportation, airfare, lodging, 50% of meals, incidental expenses -Taxpayer must be away from home, absence must be temporary (sub. Longer than normal workday, temporary = less than 1 yr) -Airfare  domestic- deductible if trip is primarily for business, more than half day = business day  international- airfare is allocated between business & personal days, 60% business= 60% deducted Airfare is fully deductible if less than 25% are business days  Business days = actual business days, travel days, weekends/holidays if both preceding & succeeding days are actual business days Meals & Entertainment -50% of the cost is deductible -Requirements: Must be directly related to business, or associated to business (prior to or after business discussion) Business gifts = $25 per person per year Accountable- reimburse occurs only after employee submits receipts, xp reports,. Unreimbursed xps are misc itemized dedcutions, no GI for reimbursement Non accountable- reimbursed w/o receipts, allowance account. Reimbursement included in GI Moving Expenses -work related change in job location for new job or transfer -for AGI, no max amount -Qualified moving expenses – costs of moving, transportation (19 cents/mile), lodging, Not meals, not house hunting expenses In order to deduct: 1) Distance test- commute must be incr by @ least 50 mi 2) Time test- employee must stay 39 out of 52 weeks of 1st yr at new job. Self employed = 78 out of 104 weeks Tuition/Fees -For AGI deduction -Tuition, Fees, Books - Max deduction = 4000 per tax return, not person - 4000 if AGI is ≤ 65000 (single) or 130000 (MFJ) -2000 if 65000 ≤ AGI < 80000 (single) 130000 ≤ AGI <16000 (MFJ) - No deduction of greater than 80000/160000 or MFS - Cannot take even if taking standard deduction, cannot take if you are claimed as a dependent Work related education -Must maintain/improve existing skills or be required by employer or by law (usually not undergrad, MBA is considered work related) -tuition, fees, books, transportation/travel -misc itemized deduction (2% of AGI floor) Medical Expenses -10% of AGI floor (7.5% if taxpayer is > 65 years old) -Qualified expenses: prevention, diagnonsis, treatment, cures, prescriptions, transportation (19 cents per mile), lodging, health insurance if you pay - cannot deduct cosmetic surgery (exceptions = birth defect, accident, etc) -cannot deduct if insurance pays -can deduct for self, spouse, dependents Taxes- 2 categories can deduct -State/local income tax or sales tax (larger of the two) - Cannot deduct federal, medicare, or social security -Property taxes:  Real- more common, unlimited # of properties  Personal: loss common, any tangible/physical property ( some states tax cars) Interest -Usually not deductible -Investment interest: limited to net investment income -Qualified residence interest: home loans on 2 residences -acquisition indebtedness- purchase, build, or substantially improve home (usually mortgage) o -interest on 1 million of aggregation balances if combo of residences >$1 mil cannot deduct at all -home equity indebtedness – equity = FMV – acq indebtedness - Doesn’t matter what money is spent on, home is collateral Charitable Contributions -Contributions to qualified organizations -Tax deduction max = 50% of AGI -Need proof -Capital gain property (investments, personal use) -capital assets held > 1 yr -If sold, would have realized gain - If donated, deduction amount is fair market value -Can deduct FMV of stock -AGI limit 30% because not paying taxes on increase in value -Ordinary income property -held < 1 yr, depreciated -ordinary property inventor -deduction amount is adjusted basis (cost) or FMV if lower -transportation = 14 cents per mile -cannot deduct the value of your time Itemized Deductions -gambling losses: deduct up to the amount of winnings included in gross income -casualty theft losses on non business asset = $100 per event and 10% of AGI floor limit -misc itemized deductions: unreimbursed employee expenses, work related education, tax preparation, investment expenses (subject to 2% of AGI floor limit) Tax liability (based on taxable income) -Witholdings/estimated tax payments - Tax Credits Tax due/refund Withholdings forms for employees -Form W-4 – completed by employees - Used by employer to determine tax withheld -Form W-2 – issued by employer to employee - includes taxable income, taxes withheld -Required prepayment to avoid underpayment penalty. Must be the smaller of: -90% of current year tax liability -100% of prior year tax Employer pays tax Self employed = pay all the tax, tax base =92.35% of net self employment earnings Phaseout Limitation applies to: taxes, mortgage interest, charitable contributions, unreimbursed employee xps, all other 2% xps Not limited: medical xps, investment interest expense, nonbusiness casualty and theft loss, gambling losses Must reduce by the lesser of: 1) 3% of amount that AGI exceeds threshold or 2) 80% of deductions affected by limit