UARK ACCT 3843 EXAM 2 WITH CORRECT SOLUTIONS!!
Three categories of deductions for AGI - ANSWER>>1. Directly related to business
activities. Activities must either be profit motivated or personal.
2. Indirectly related to business activities.
3. Deductions subsidizing specific activities.
Profit motivated activities - ANSWER>>1. business activities (high involvement)
2. Investment activities (appreciation for income payments)
Trade/Business Activities - ANSWER>>must be: directly connected, ordinary and
necessary, reasonable in amount (not extravagant)
Schedule C - ANSWER>>like a mini income statement used to measure/report self
employment business income (income that you actually go out and "do" something to
earn it). Subject to self employment tax which is basically the employer's side of social
security and Medicare. The net income or loss does to schedule 1.
Schedule E - ANSWER>>used to report passive income. This income is either rental
income you receive because you own rental property or a royalty payment you receive.
Not subject to to additional self employment tax (like on schedule C) so that is why it is
reported differently. Essentially, this is income that you receive but don't actually work
for. Net income or loss goes to schedule 1.
Flow through entities gain/loss goes on schedule E and then to schedule 1.
Schedule F - ANSWER>>used by self employed farmers to report their income and
expenses from their farming businesses. The IRS says, You are in the business of
,farming if you cultivate, operate, or manage a farm for profit either as an owner or
tenant. A farm includes livestock, dairy, poultry, fish, fruit, and truck farms. It also
includes plantations, ranches, ranges, and orchards." Schedule F is only used by
farmers who are considered to be sole proprietors. Also reports federal disaster
payments and money received from agricultural programs. Net farm income goes to
1040 schedule 1.
Excess business loss limitation - ANSWER>>Schedule E
excess business loss: lesser of business deductions over business gross income
OR
$250,000 ($500,000 MFJ)
excess business loss is carries forward as net operating loss.
Form 4797 - ANSWER>>records the sale of business property (assets used in business
such as a warehouse). If assets are held for longer than 1 year and are sold at a gain or
loss, they get capital treatment on this form. They are then combined with investment
capital gains and losses on Schedule D. If assets are held for shorter than 1 year, they
are treated as ordinary gains/losses.
Schedule D - ANSWER>>Tax form 1040 Schedule D is used to report capital gains for
the purpose of income tax. A capital gain is any profit made from the sale of an
investment for more than the purchase price.
Because assets used in business activities (such as a warehouse) are not purchased for
the sake of investment, their gain or loss in first calculated on Form 4797, then added to
schedule D.
Limit for net capital loss - ANSWER>>net capital loss is deducted for AGI but limited to
$3,000 each year
, Shown on schedule D then goes to 1040
Losses in excess of the $3,000 limit are carried forward indefinitely.
Ordinary gain or loss - ANSWER>>if asset is held for <1, the gain or loss is ordinary.
This is recorded in form 4797, then moved to Schedule 1 1040.
What is deductible for AGI? - ANSWER>>educator expenses, certain business
expenses, health savings account, moving expenses for members of armed forces,
deductible part of self employment tax, self employed SEP, self employed health
insurance, penalty on early withdrawal of savings, alimony paid, IRA deduction, student
loan interest deduction
Self employed health insurance deduction - ANSWER>>not on schedule C: deduct FOR
AGI
To qualify for the deduction, you must meet two requirements:
1. You Have No Other Health Insurance Coverage: You may not take the self-employed
health insurance deduction if you are eligible to participate in a health insurance plan
maintained by your employer or your spouse's employer.
2. You Have Business Income: You may deduct only as much as you earn from your
business. If your business earns no money or incurs a loss, you get no deduction. If you
have more than one business, you cannot combine the income from all your businesses
for purposes of the income limit. You may only use the income from a single business
you designate to be the health insurance plan sponsor. (limited to self employment
income BUT excess premiums can be itemized deductions on Schedule A.)
NOT a business deduction.. its a personal deduction.
Three categories of deductions for AGI - ANSWER>>1. Directly related to business
activities. Activities must either be profit motivated or personal.
2. Indirectly related to business activities.
3. Deductions subsidizing specific activities.
Profit motivated activities - ANSWER>>1. business activities (high involvement)
2. Investment activities (appreciation for income payments)
Trade/Business Activities - ANSWER>>must be: directly connected, ordinary and
necessary, reasonable in amount (not extravagant)
Schedule C - ANSWER>>like a mini income statement used to measure/report self
employment business income (income that you actually go out and "do" something to
earn it). Subject to self employment tax which is basically the employer's side of social
security and Medicare. The net income or loss does to schedule 1.
Schedule E - ANSWER>>used to report passive income. This income is either rental
income you receive because you own rental property or a royalty payment you receive.
Not subject to to additional self employment tax (like on schedule C) so that is why it is
reported differently. Essentially, this is income that you receive but don't actually work
for. Net income or loss goes to schedule 1.
Flow through entities gain/loss goes on schedule E and then to schedule 1.
Schedule F - ANSWER>>used by self employed farmers to report their income and
expenses from their farming businesses. The IRS says, You are in the business of
,farming if you cultivate, operate, or manage a farm for profit either as an owner or
tenant. A farm includes livestock, dairy, poultry, fish, fruit, and truck farms. It also
includes plantations, ranches, ranges, and orchards." Schedule F is only used by
farmers who are considered to be sole proprietors. Also reports federal disaster
payments and money received from agricultural programs. Net farm income goes to
1040 schedule 1.
Excess business loss limitation - ANSWER>>Schedule E
excess business loss: lesser of business deductions over business gross income
OR
$250,000 ($500,000 MFJ)
excess business loss is carries forward as net operating loss.
Form 4797 - ANSWER>>records the sale of business property (assets used in business
such as a warehouse). If assets are held for longer than 1 year and are sold at a gain or
loss, they get capital treatment on this form. They are then combined with investment
capital gains and losses on Schedule D. If assets are held for shorter than 1 year, they
are treated as ordinary gains/losses.
Schedule D - ANSWER>>Tax form 1040 Schedule D is used to report capital gains for
the purpose of income tax. A capital gain is any profit made from the sale of an
investment for more than the purchase price.
Because assets used in business activities (such as a warehouse) are not purchased for
the sake of investment, their gain or loss in first calculated on Form 4797, then added to
schedule D.
Limit for net capital loss - ANSWER>>net capital loss is deducted for AGI but limited to
$3,000 each year
, Shown on schedule D then goes to 1040
Losses in excess of the $3,000 limit are carried forward indefinitely.
Ordinary gain or loss - ANSWER>>if asset is held for <1, the gain or loss is ordinary.
This is recorded in form 4797, then moved to Schedule 1 1040.
What is deductible for AGI? - ANSWER>>educator expenses, certain business
expenses, health savings account, moving expenses for members of armed forces,
deductible part of self employment tax, self employed SEP, self employed health
insurance, penalty on early withdrawal of savings, alimony paid, IRA deduction, student
loan interest deduction
Self employed health insurance deduction - ANSWER>>not on schedule C: deduct FOR
AGI
To qualify for the deduction, you must meet two requirements:
1. You Have No Other Health Insurance Coverage: You may not take the self-employed
health insurance deduction if you are eligible to participate in a health insurance plan
maintained by your employer or your spouse's employer.
2. You Have Business Income: You may deduct only as much as you earn from your
business. If your business earns no money or incurs a loss, you get no deduction. If you
have more than one business, you cannot combine the income from all your businesses
for purposes of the income limit. You may only use the income from a single business
you designate to be the health insurance plan sponsor. (limited to self employment
income BUT excess premiums can be itemized deductions on Schedule A.)
NOT a business deduction.. its a personal deduction.
