Tax Brackets
What is the formula for calculating the effective/average tax rate?
Total Taxes / Total Taxable Income
What is the tax deadline for the following (assume a calendar year for all entities 12/31):
Partnerships
Sole proprietorships
C Corps
S Corps
Individuals
Partnerships: 3/15
Sole proprietorships (on individual return): 4/15
C Corps: 4/15
S Corps: 3/15
Individuals: 4/15
Case facts: The Marginal tax rate is 32%. The effective tax rate is 18%. The amount of tax-deductible items is $17,000. The amount of nondeductible items is $5,000.
What is the impact on taxable income from each of the items above? How much would the tax savings be for each? What is the after tax-cost of each?
Deductible items: Taxable income would be $17K less. Tax savings would be $17K * 32% = $5,440. After-tax cost would be $17K - $5,440 = $11,560
Non-deductible items: Taxable income no effect. Tax savings would be 0. After-tax cost would be $5,000
Name one of the primary sources of tax law.
Internal Revenue Code
U.S. Constitution & Tax Treaties
Legislative History (e.g. Joint Committee Reports)
Court Cases (those appealable to your circuit court of appeals or the federal circuit)
Treasury Regulations
Revenue Rulings & Revenue Procedures
IRS Announcements & Notices (published in IRB)
What are the definitions of permanent and temporary book-to-tax differences and give one example of each?
Permanent differences arise when income is recorded for book purposes but never recognized for tax purposes. Examples: life insurance proceeds, municipal bond interest, Fines, 50% Meals, ect.
Temporary differences arise from timing differences between GAAP and tax. The cumulative amount of the income or deduction is the same, but recognition occurs in different periods for GAAP compared to tax. Ex. Prepaid rental income, Accrued bonus/vacation, Depreciation, Bad Debt Expense, Warranty Expense, unearned revenue, ect.
What is the name of the tax rate that we use when making tax planning decisions and/or determining the after-tax impact of deductions? Where is this rate found?
Marginal tax rate, found in the tax brackets by using the taxpayer's taxable income (Last bracket utilized for the taxpayer's taxable income amount)
What are the quarterly estimated payment deadlines for a calendar year taxpayer?
Q1 - 4/15
Q2 - 6/15
Q3 - 9/15
Q4 - 1/15 (Of following year)
In 2023, Marshall had AGI of $160,000 and paid federal income tax of $28,000. In 2024, he expects to have AGI of $100,000 and pay $14,000 in taxes. Calculate the 2024 estimated tax safe harbors for Marshall.
2023 AGI>150K:
PY taxes ($28K) * 110% = $30,800
CY expected taxes ($14K) * 90% = $12,600
Remember we are estimating ahead, so AGI threshold is always from prior year (2023)
What are the business loss limitation thresholds for 2024?
Single, HoH, MFS: $305K
MFJ: $610K
Carl is a dentist and owns a dental practice. He is a cash basis taxpayer and performed dental services in December 2024 the patients paid for those services with checks at the time of service. Carl did not deposit the checks into his business bank account until Jan 5th. When is the income taxable to Carl?
Carl has constructive receipt of the money when the patients gave him the checks. Thus, the amount is taxable to Carl in 2024. The fact that he chose not to deposit them into the bank (i.e. cash the checks) until Jan is irrelevant.
Galileo (single) has taxable income of $457,167 using the 2024 tax brackets below, what is his income tax?
Income Tax Rate
$0 - $11,600 10%
$11,601 - $47,150 12%
$47,151 - $100,525 22%
$100,526 – $191,950 24%
$191,951 - $243,725 32%
$243,726 - $609,350 35%
$609,351 and up 37%
11,600 - 0 = 11,600 * 10% = 1,160
47,150 - 11,600 = 35,550 * 12% = 4,266
100,525 - 47,150 = 53,375 * 22% = 11,742.50
191,950 - 100,525 = 91,425 * 24% = 21,942
243,725 - 191,950 = 51775 * 32% = 16,568
457,167 - 243,725 = 213,442 * 35% = 74,704.70
Total Taxes = 130,383.20
If an individual filed a tax return extension, by what date are their tax payments due (assume a calendar year taxpayer)?
4/15, the extension is for filing purposes, not tax payment purposes.
Note: The filing extension is 6 months, so extension filing due date would be 10/15
Ukulele Ukelele Ukelele is a corporation. In their first year of business, 2023, they had net losses of $300K. In the subsequent years of business, they had income of $50K, $200K, and $300K for 2024, 2025, and 2026, respectively. What is the company's taxable income for 2026?
2024: NOL Max: 50K * 80% = 40K, Taxable income was $10K, Carry forward NOL of $260K
2025: NOL max: 200K * 80% = 160K, Taxable income was $40K, Carry forward NOL of $100K
2026: NOL max: 300K * 80% = 240K (however only $100K NOL remaining), Taxable income was $200K, No Carry forward NOL
What are the 3 rules listed in class for NOLs?
1. Carry forward NOLs and do not expire
2. NOLs can offset up to 80% of taxable income each year
3. Carryback NOLs not permitted
Under the accrual method, what are the 2 rules for recognizing income for tax purposes?
What are some exceptions?
What are some exceptions to the exceptions? (I.e. Not Exceptions)
Accrual method - tax income recognized:
1. All events have occurred to fix the taxpayer’s right to receive the income, and
2. The amount can be determined with reasonable accuracy
Exceptions: Prepayments for services, Prepayment for sales of inventory
Not Exceptions: Prepaid Rent, Insurance premiums, warranty contracts
Agamemnon has taxable income of $87,000 and pays tax of $21,750. Menelaus has taxable income of $30,000 and pays tax of $7,500. This tax rate structure is: Regressive, Progressive, or Proportionate
Proportionate
Which of the following is not used in calculating the underpayment penalty and interest?
A) The amount of the underpayment
B) The underpayment amount from a prior year that was subsequently paid off
C)The period when the underpayment was due and underpaid
D)The interest rate for underpayments, published quarterly by the IRS
B) The underpayment amount from a prior year that was subsequently paid off
Norbert is considering taking one of two alternate projects.
–Project A will yield $50,000 and $70,000 revenue, and $50,000 and $20,000 of expenses, in 2024 and 2025 respectively.
–Project B will yield $70,000 and $100,000 in revenue, and $40,000 and $70,000 of expenses, in 2024 and 2025 respectively.
Norbert expects to be in the 22 percent tax bracket this year and the 12 percent tax bracket next year. Calculate the NPV of Norbert’s after-tax income from both projects and which he should pick, assuming that the income is fully taxable and assuming a discount rate of 6 percent.
Project A NPV = $39,160
Project B NPV = $56,896
Note: Go with project B, higher NPV
What are the rules for a cash basis taxpayer hoping to deduct prepaid rent expense in the year paid?
12-month rule: Cash basis taxpayers may fully deduct prepaid expense if it meets two requirements:
1.Benefit lasts 12 months or less, and
2.Does not extend beyond the end of the following tax year
Note: If prepaid expense doesn’t meet both tests, it must be capitalized. Expensed following the accrual method (i.e. deducted over each period the expense is incurred.)
Chester Copperpot married Mrs. Copperpot in 2024. They will file MFJ tax return for 2024 with a 32% marginal tax rate, and a 17% average tax rate. If they are considering taking an additional nondeductible expense of $5,000, how much would this save the Copperpots in taxes?
Zero, it is a non-deductible expense.
Note: If it was a deductible expense use the Marginal rate * Deductible expense = Tax savings
What is the penalty for a tax preparer taking an unreasonable tax position on a tax return?
Greater of $1,000 or 50% of compensation received for preparing the return.
Note: Can avoid certain preparer penalties if there is reasonable basis for a position and it is disclosed
Horatio is considering taking on a construction project which will take 5 years. He and the client have agreed on a fee of $100K, with $10,000 of the fee payable now and $90,000 payable on completion of the project (i.e., 5 years from now). Horatio expects to be in the 32 percent tax bracket this year and the 35 percent tax bracket in future years. Calculate the NPV of Horatios’s after-tax income from this project, assuming that the income is fully taxable and assuming a discount rate of 9 percent.
Year 0: Pre-tax=10K; After-tax = $6,800
Year 5: Pre-tax=90K; After-tax = $58,500
$58,500/ (1.09)5 = $38,021
Total After-Tax NPV =$44,821
What is the general statute of limitations for the IRS to audit your tax return filing? What are the 2 exceptions?
3 years for the later of the actual filing date or 4/15
Exception 1: Gross income omitted exceeding >25% then 6 years
Exception 2: No limit if return is fraudulent
As an accrual basis taxpayer, what are the tax rules for accrued expenses and expense recognition (i.e. the all events test)? Provide an example.
3 requirements:
1. The expense is fixed;
2. The expense can be determined with reasonable accuracy; and
3. Economic performance has occurred (when service, property, or use of property is provided)
Example: Pampas Corp, an accrual basis taxpayer, hired a consultant to perform an engagement at a contract price of $15,000. The consultant performed the work in December 2024 and Pampas paid the consultant in January 2025.