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Ch.

6
California vs. Texas both 50/50 marital income, but
what owned before marriage belongs exclusively to
that one person in CA
Changed from calendar year end to different
year end
Annualize the income $income x (yr#mo./ #mo.) =
Tax on the annualized income 15% x 1st $50,000 =
25% x 2nd $25,000 =
34% x 3rd $25,000 =
Total the tax
Step 3: Short period tax =
$Total tax x
(#mo./12)
Cash Basis Taxpayer net income
Prepaid rent/interest you will pretend like youre
accrual basis taxpayer
Sales income - Less Expenses:
Other than rent and interest
Portion of prepaid rent before Dec. last day
(rent paid/#mo.)
Interest do not include
= Net Income
~IRA contribution paid in cash c.yr for 2014 is
deductible if for 2013
~Prepayment of interest for 2014 is not deductible
for 2013
Accrual Basis taxpayer net income
All expenses are treated as accrual expense. Prepaid
interest/rent treated as cash basis income
Sales income: Other than rental + Rental
Expenses: Other than rental + Rental (rent
prepaid/#mo.) x mo. elapses
= Net Income
Depreciation
[Cost - Section 179 depr. exp = Depreciable $
- Bonus depr. 50% = Depr $ - Regular depr = Depr $
X MACRS %]
Straight-line
Cost basis/(#yrs x mo./yr) x
#mo. left in c.year
Straight-line MACRS
Cost basis X annual % rates
from straight-line table
Accelerated MACRS
Cost basis X annual % rate
from accelerated
depreciation table
Straight-line Real Property
Use #mo. to find
rate, X cost basis
Asset MACRS Depr. Life
Use asset life
Bonus Depreciation
Can take 50% deduction on cost on new/original use
property placed into service in 2013
Election to expense under Section 179
Deduction

Applies to both new and used property. Must be


personal property (not real estate) placed in service
in 2013, and used in business.
Max of $500,000 expensed (limited to taxpayers
income)
Election to expense:
XX
Depreciation on automobile:
Bonus plus regular depreciation =
(50% cost basis) + [20% AD MACRS x (other
half of cost basis)], but limited to income
= Total depreciation
Listed Property Section 179
*Special election expense not allowed
Must use straight-line depr. for cars, buses, boats,
personal use/enjoyment, computers, other
peripheral equipment
Limitation on Depreciation of Automobiles
Year 1 - $11,160 bonus $8,000 (or $3,160 if electing
out of bonus depr.)
Year 2 5,100 Year 3 3,050, Year 4+ -1,875
Intangible Assets Section 197
15-yr life claimed despite actual estimated useful life
goodwill, going concern value, license,
permit, covenant not to compete, franchise,
trademark, know how, work force in place
Exclusions not covered under section 197 and
therefore amt will be amortized under regular
amortization rules
interests in corp, partnership, trust or estate,
interests in land, comp software readily
available for purchase by public, interest in
film, sound recordings, self created
start amortizing in month of purchase
Related Parties Section 267
Transactions of 1) sales of property at a loss, 2)
unpaid expenses and interest to related parties are
restricted
when property is later sold to unrelated
party, the disallowed loss will offset gain of
sale. If property is sold later to an unrelated
party at less than the related party
transaction there is now a realized loss,
which can be deducted subject to any capital
loss limitations
Family, corp. and individual who directly/indirectly
owns more than 50% of said corp. EX. Robert
owns forty of T, and forty of R, T owns sixty of R,
Robert owns (forty X sixty) + forty direct interest =
sixty four%

receivable, certain copyrightsliterary, musical,


govt. publications
assets excluded from capital assets generate
ordinary income or loss
Long-term = > year, short team gain/loss = < year
Net capital gains/losses= Net long term + net short
term
Long-term capital gains are treated as qualified
dividends and taxed that way.
Adjusted Basis.
=cost basis + improvements depreciation
Recomputed Basis
Adjusted basis + depreciation ( improvements?)
Inherited capital asset (i.e. stock)
Selling price cost basis = gain/loss If gain, the
inheritors basis = grandpas cost basis. If loss the
inheritors basis = the lesser of grandpas basis or
FMV on date of gift. There is only a difference in cost
basis on gain/loss when FMV < grandpas adjusted
basis. If stock is sold for an amt. between grandpas
basis and FMV to date no gain/loss is recognized on
the sale.
Sells house for cash/note receivable find
taxable gain
Gain/loss=cash(selling price) received + note amt. +
mortgage adjusted basis.
[Amt realized on salecash(selling price) +
mortgage transfer costs]
Installment Sale Method
Gross Profit % = Gross Profit/Contract Price *change
calc to 4 dec.
[Gross Profit=Total Gain]
Gross Profit = (cash Selling price + note receivable +
mortgage*do not include interest) - adjusted basis
[other selling costs/exp.]
Contract Price = note receivable + selling price in
cash (not included mortgage)
Installment Sale Income = Cash payments received
during year X Gross Profit %
Calculate amt. of Deduction for Capital Loss
The amt. of individuals taxpayers net capital loss is
limited to $3,000 annually. Unused capital losses
may be carried forward indefinitely
Personal-Use Assets
Not tax deductible
Calculate tax liability with income and capital
gains/losses
Income net loss/gain
Gains on Section 1231not capital assets
May be treated as long-term capital gain. Includes:
Depreciable or real property used in business, land
Capital Asset All property owned by taxpayer,
EXCEPT: Depreciable property and real estate used in timber, coal, iron, livestock, crops.
trade or business section 1231, inventory, accounts

When losses > gains, all gains are treated as


ordinary income and all loses are fully deductible as
ordinary losses.
Ordinary Income under Section 1245
= lesser of recomputed basis adjusted basis; or
selling price adjusted basis
Casualty Gain/LossDestroyed by Fire
When Insurance reimbursement > casualty loss =
gain
If losses > gains, the excess loss is treated as
itemized deduction on Sch. A, and Limited of 10%
AGI

If gains > losses, net short term and long-term


gains/losses. The resulting amts. are included w/
other capital gains/losses
To calculate loss Take lesser of adjusted basis or
FMV Insurance Reimbursement $100 floor
To calculate gainInsurance reimbursement
adjusted basis
Net losses and gains; if net gain each gain/loss is
treated as capital gain/loss; If net loss treated as
itemized deduction Sch. A,etc.
Completely destroyed no insurance=ordinary loss
Recapture = depreciation

It is your responsibility to know the following:


Maximum section 179 election to expense: $500,000
Maximum Exclusion on sale of personal residence:
$250000 (single); $500000 (married)
Maximum Capital loss deduction: $3000/year

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