Enrolled Agent Exam - businesses
True or false: Foreign income you earned from wages or self-employment or any source
from anywhere in the world is taxable for American citizens and most residents with
certain exceptions - ANS-True
First exception for excluding foreign income - ANS-An American residing outside the
U.S. for most of the year can exclude $104,800 (2018; adjusted annually for inflation) on
your income taxes
These are the two caveats of being Able to exclude foreign income as an American
living outside the U.S. - ANS-1. Must pay social security tax on all your foreign earnings
and 2. you must pay income tax on any foreign investment income you make while
living outside the country
2nd exception to paying foreign income tax - ANS-if you pay taxes in another country on
income not covered by the foreign tax exclusion, you may get a tax credit in the U.S. for
the taxes you paid abroad.
Examples of things that are not considered income - ANS-gifts and inheritance, prize
and lottery winnings, fringe benefits, return of capital, loans, consignments
Gifts and Inheritances - ANS-Individuals may receive property as gifts or from a
decedent's estate (an inheritance)
While the receipt of property is most certainly real income to the recipient, the value of
gifts and inheritances are excluded from gross income because these transfers are
subject to the Federal Gift and Estate tax
What types are fringe benefits are considered taxable? - ANS-vacation pay, bonuses,
etc.
T/F Getting back what you put into a business doesn't have any tax consequences -
ANS-true
T/F if the business has to pay back a loan, it's not considered income - ANS-True
These are goods held by your business that belong to others and are neither income
nor inventory - ANS-consignments
, What is one of the most common forms of tax shelters? - ANS-Rental property
How does the rental property tax shelter work? - ANS-Cash and non cash deductions,
interest, depreciation, and insurance exceed rental income
T/F with rental properties, any appreciation of the property is not taxable until the
property is sold - ANS-true
Telltale signs of tax schemes - ANS-transactions with tax reduction motives that have
minimal or no economic sense, usually promise large tax deferrals, deductions or write
offs beyond investment costs, often more complicated than people would like to admit
Moral of Tax schemes - ANS-don't buy in if they don't have a reasonably good chance
of turning a profit - with tax savings as a bonus
Theory behind Alternative Minimum tax - ANS-If someone who takes a lot of tax
deductions or tax credits should still have to pay a minimum amount of income taxes.
True or false: All taxpayers must figure their income tax under both the regular
(marginal) tax rates and the AMT rates and pay whichever is less. - ANS-false
________ is figured by adding back to taxpayers' income many of the exemptions,
deductions and credits that lowered their taxable income in the regular system -
ANS-Alternative minimum tax
Ways Alternative minimum tax is triggered - ANS-NOL deductions in a business,
interest deductions on home equity loans, large itemized deductions for SALT, foreign
tax credits, passive income or loss, certain installment of sale income, unreimbursed
employee expenses, exemptions for dependents, Child & education tax credits, interest
income on certain tax-exempt bonds, exercise of incentive stock options
These types of expenses might be hard to prove to IRS auditors - ANS-cash expenses
With Cash expenses, small items such as tips, shared transit, waitress tips, parking lots,
postage, etc may be okay, but this might trigger suspicion - ANS-purchase of larger
items
In order for an expense to qualify as deductible, the expense must be: - ANS-ordinary
and necessary for the business, not extravagant, and primarily for business (not
personal)
True or false: Foreign income you earned from wages or self-employment or any source
from anywhere in the world is taxable for American citizens and most residents with
certain exceptions - ANS-True
First exception for excluding foreign income - ANS-An American residing outside the
U.S. for most of the year can exclude $104,800 (2018; adjusted annually for inflation) on
your income taxes
These are the two caveats of being Able to exclude foreign income as an American
living outside the U.S. - ANS-1. Must pay social security tax on all your foreign earnings
and 2. you must pay income tax on any foreign investment income you make while
living outside the country
2nd exception to paying foreign income tax - ANS-if you pay taxes in another country on
income not covered by the foreign tax exclusion, you may get a tax credit in the U.S. for
the taxes you paid abroad.
Examples of things that are not considered income - ANS-gifts and inheritance, prize
and lottery winnings, fringe benefits, return of capital, loans, consignments
Gifts and Inheritances - ANS-Individuals may receive property as gifts or from a
decedent's estate (an inheritance)
While the receipt of property is most certainly real income to the recipient, the value of
gifts and inheritances are excluded from gross income because these transfers are
subject to the Federal Gift and Estate tax
What types are fringe benefits are considered taxable? - ANS-vacation pay, bonuses,
etc.
T/F Getting back what you put into a business doesn't have any tax consequences -
ANS-true
T/F if the business has to pay back a loan, it's not considered income - ANS-True
These are goods held by your business that belong to others and are neither income
nor inventory - ANS-consignments
, What is one of the most common forms of tax shelters? - ANS-Rental property
How does the rental property tax shelter work? - ANS-Cash and non cash deductions,
interest, depreciation, and insurance exceed rental income
T/F with rental properties, any appreciation of the property is not taxable until the
property is sold - ANS-true
Telltale signs of tax schemes - ANS-transactions with tax reduction motives that have
minimal or no economic sense, usually promise large tax deferrals, deductions or write
offs beyond investment costs, often more complicated than people would like to admit
Moral of Tax schemes - ANS-don't buy in if they don't have a reasonably good chance
of turning a profit - with tax savings as a bonus
Theory behind Alternative Minimum tax - ANS-If someone who takes a lot of tax
deductions or tax credits should still have to pay a minimum amount of income taxes.
True or false: All taxpayers must figure their income tax under both the regular
(marginal) tax rates and the AMT rates and pay whichever is less. - ANS-false
________ is figured by adding back to taxpayers' income many of the exemptions,
deductions and credits that lowered their taxable income in the regular system -
ANS-Alternative minimum tax
Ways Alternative minimum tax is triggered - ANS-NOL deductions in a business,
interest deductions on home equity loans, large itemized deductions for SALT, foreign
tax credits, passive income or loss, certain installment of sale income, unreimbursed
employee expenses, exemptions for dependents, Child & education tax credits, interest
income on certain tax-exempt bonds, exercise of incentive stock options
These types of expenses might be hard to prove to IRS auditors - ANS-cash expenses
With Cash expenses, small items such as tips, shared transit, waitress tips, parking lots,
postage, etc may be okay, but this might trigger suspicion - ANS-purchase of larger
items
In order for an expense to qualify as deductible, the expense must be: - ANS-ordinary
and necessary for the business, not extravagant, and primarily for business (not
personal)
