Tax Accounting

During the year, Addison is involved in the following transactions. What are the possible Federal income tax effects of these transactions? 1. Lost money gambling on a trip to a casino. 2. Helped pay for her neighbor Howie's dental bills. Howie is a good friend who is unemployed. 3. Received from the IRS a tax refund due to Addison's overpayment of last year's Federal income taxes. 4. Paid a traffic ticket received while double parking to attend a business meeting. 5. Contributed to t...

Emily purchased a building to store inventory for her business. The purchase price was $760,000. Emily also paid legal fees of $300 to acquire the building. In March, Emily incurred $2,000 to repair minor leaks in the roof (from storm damage earlier in the month) and $5,000 to make the interior suitable for her finished goods. What is Emily's cost basis in the new building? - $765,300 Meg O'Brien received a gift of some small-scale jewelry manufacturing equipment that her father had used f...

Cost Recovery - common term used to describe the process by which businesses allocate the cost of their fixed assets over the time period in which the assets are used. Cost Basis - businesses may begin using the asset in their business (cost basis) once they begin using the asset in their business (place it in service) Adjusted basis or tax basis - The amount of an asset's cost that has yet to be recovered through cost recovery deductions. Can be computed by subtracting the accumulated de...

Progressive tax structure - the tax rate increases as the tax base increases Proportional tax structure - the tax rate remains the same regardless of the tax base Regressive tax structure - the tax rate decreases as the tax base increases Marginal tax rate - the proportion of tax paid on the next dollar of income Average tax rate - the percentage of total tax paid on the amount of the tax base Tax formula - total income - exclusions = gross income - deductions for AGI = AGI - dedu...

Three categories of deductions for AGI? - 1. Directly related to business activities 2. Indirectly related to business activities 3. Deductions subsidizing specific activities DIRECTLY Related to Business Activities? - Taxpayers are allowed to deduct expenses incurred to generate business income For tax purposes activities are either what? - 1. profit-motivated 2. motivated by personal objectives Profit-motivated activities are classified as what? - 1. Business activities (called "...

1. Investment Overview: •Before-tax rate of return on investment • After-tax rate of return on investment • Depends on when investment income is taxed -Relates to timing tax planning strategy -Depends on the rate at which the income is taxed -Relates to the conversion tax planning strategy 2. Portfolio versus passive investments: •Portfolio losses deferred until the investment is sold • Passive investment losses may be deducted annually 3. Portfolio Income: Interest a...

What sources of income is included in business income? - Gross profit from inventory sales, income from services provided to customers, and income from renting property If a taxpayer's "business" activity doesn't meet the for-profit requirement, how is it treated? - As a hobby and expenses are deducted as a misc itemized deduction (subject to the 2% of AGI floor) Business expenditures must be both _______ and ________ to be deductible - Ordinary and necessary What is an ordinary exp...

Which of the following choices is NOT a form of a tax prepayment? A. An overpayment of taxes in the prior year that was applied as an estimated payment for the current year. B. Income tax withheld from a taxpayer's salary or wages by an employer C. Estimated tax payments the taxpayer made directly to the IRS D. A tax refund received in the current year for the prior year: D. A tax refund received in the current year for the prior year T/F A taxpayer may deduct the greater of his standard d...

What is the broad definition of gross income? - All income from whatever source derived, unless excluded by law. Includes income realized in any form, whether in money, property, or services Taxpayers must received ______ to have gross income? - Economic benefit - receive an item of value What is the realization principle? - Income is realized when (1) a taxpayer engages in a transaction with another party, and (2) the transaction results in a measurable change in property rights What d...