Accounting Periods and Methods
Which of the following would be considered a fiscal tax year?
08/01/2021 – 07/31/2022
A fiscal year is 12 consecutive months ending on the last day of any month except December 31st.
An employer who must file Form 941, and does not use a reporting agent can do so by which method?
By mail
Form 941, Employer's Quarterly Federal Tax Return, may be filed by mail or electronically using e-file. A taxpayer may use the Electronic Federal Tax Payment System (EFTPS) to make payments; however, returns are filed through the IRS e-file program.
Which of the following is NOT a true statement regarding business bad debts?
Cash-basis taxpayers can take a deduction for amounts never received or collected.
If someone owes the taxpayer money that the taxpayer is unable to collect, then the taxpayer has a bad debt. The taxpayer does not have to wait until a debt is due to determine whether it is worthless. A debt becomes worthless when there is no longer any chance the debtor will pay the amount owed. Generally, a business bad debt is one that comes from operating a business. A taxpayer may claim a bad debt deduction only if the amount owed to the taxpayer was previously included in gross income. This applies to amounts owed to the taxpayer from all sources of taxable income, including sales, services, rents, and interest.
Which of the following credits is not part of the General Business Credit?
Credit for prior year minimum tax
A taxpayer calculates the credit for prior year minimum tax on Form 8801. All of the other credits mentioned are part of the general business credit, calculated on Form 3800.
Which of the following entities is subject to the passive activity rules at the entity level?
Closely held corporations.
There are two kinds of passive activities.
Passive activity rules do not apply to Partnerships, S Corporations or Grantor Trusts but may apply to the individual partners, shareholders or beneficiaries.
Basil Company, a cash basis taxpayer, had the following activity during 2021:
What is the correct amount of income to be reported for 2021?
$1,050,000
Under the cash method, you include in your gross income all items of income you actually or constructively receive during the tax year. If you receive property and services, you must include their fair market value (FMV) in income. Basil must report income of $1,050,000 ($1,000,000 collected sales + $50,000 collections on 2018 receivable) for 2021 for the income actually received.
An employee who does not have a Social Security Number _____.
Must apply for one if eligible and can work without one while waiting for one to be assigned.
An employee who is legally eligible to work in the United States can apply for a Social Security Number and/or card by completing Form SS-5. The employee can work while the application is pending; the employer should mark the appropriate spot on the W-2 applied for. An ITIN is not a substitute for a SSN. An ITIN is a taxpayer identification number that is available to resident and nonresident aliens who are not eligible for U.S. employment and need identification for other tax purposes.
You operate a business and file your tax return on a calendar-year basis. You bought a fire insurance policy on your building effective November 1, 20X0, and paid a premium of $1,200 for 2 years of coverage. How much can you deduct on your 20X0 return?
$100
Under the general rule you may not deduct prepaid expenses covering a period of more than 12 months. You must capitalze the pre-paid "asset" and deduct a portion of the payment in the year to which it applies.
Expenses such as insurance are generally allocable to a period of time. You can deduct insurance expenses for the year to which they are allocable. Therefore, only 2 months of the fire insurance premiums can be deducted in 20X0.
Is there a tax credit available to small employers who establish a qualified retirement plan for their employees?
Yes, there is one credit of up to $5,000 for each of the first three years of establishment.
An employer may be able to claim a tax credit for part of the ordinary and necessary costs of starting a SEP, SIMPLE, or qualified plan. The credit equals 50% of the cost to set up and administer the plan and educate employees about the plan, up to a maximum of $5,000 per year for each of the first 3 years of the plan. Some employers will use Form 8881, Credit for Small Employer Pension Plan Startup Costs.
A partnership has $1,000 of nonrecourse liabilities and $500 of recourse liabilities. The recourse liabilities are attributable to Karen who is a 50% partner. Karen contributed property with a fair market value of $400 and an adjusted basis of $250 for her interest in the partnership. The first year of business the partnership incurred a $4,000 loss. How much of this loss, if any, may Karen deduct on her tax return?
$750
Karen's share of Partnership loss is $2,000. The amount she has at risk in the partnership limits her deduction to $750. Her at-risk amount includes her basis of $250 plus $500 in recourse liabilities for a total at risk amount of $750.
A partner's share of a recourse liability equals his or her economic risk of loss for that liability. A partner has an economic risk of loss if that partner or a related person would be obligated (whether by agreement or law) to make a net payment to the creditor or a contribution to the partnership with respect to the liability if the partnership were constructively liquidated.
The J&M partnership paid liability insurance on its building of $2,200 for the year 2021. This represents a premium for one year. J&M also prepaid fire insurance premiums of $2,400. The premium paid was for 2021 and 2022. What is the amount of insurance that J&M may deduct for 2021?
$3,400
You cannot deduct expenses in advance, even if you pay them in advance. This rule applies to any expense paid far enough in advance to, in effect, create an asset with a useful life extending substantially beyond the end of the current tax year. Expenses such as insurance are generally allocable to a period of time.
An expense a taxpayer pays in advance is deductible only in the year to which it applies, unless the expense qualifies for the 12-month rule. Under the 12-month rule, a taxpayer is not required to capitalize amounts paid to create certain rights or benefits for the taxpayer that do not extend beyond the earlier of the following:
In this case, it is not specified that the partnership applies the 12-month rule. If the taxpayer has not been applying the 12-month rule to the expenses paid in advance, the taxpayer must obtain prior approval from the IRS before using the 12-month rule.
The general rule is that the expense the taxpayer pays in advance is deductible only in the year to which it applies. Therefore in this case application of the general rule is presumed and only half of the fire insurance premiums can be deducted in 2021.
What are employment trust fund taxes?
The employee's share of FICA and the income tax that the employer withheld.
A trust fund tax is money withheld from an employee's wages for income tax and FICA, which the employer is supposed to hold in trust until the employer pays it to the U.S. Treasury. It is the employee's money.
Tom Thumb owned a greenhouse that was built on leased land. He used the greenhouse 100% for business. During the current year, the greenhouse was totally destroyed by a hurricane (a federally declared disaster). The greenhouse cost $500,000 to build, had a fair market value of $300,000 and accumulated depreciation of $50,000 when it was destroyed. Tom received $250,000 from his insurance company to reimburse him for the loss. Tom's adjusted gross income for the current year is $54,000. What is the amount of Tom's deductible business loss on the greenhouse?
$200,000
If a taxpayer has business or income-producing property, such as rental property, and it is stolen or completely destroyed, the decrease in FMV is not considered. The loss is the taxpayer's adjusted basis in the property minus the salvage value, insurance, and other reimbursements. Losses on business property (other than employee property) and income-producing property are not subject to the AGI limits like personal-use property.
Tom's adjusted basis on the greenhouse was $450,000 ($500,000 cost – $50,000 accumulated depreciation). Tom received an insurance reimbursement of $250,000 which would be subtracted from his adjusted basis to determine the loss. Tom's loss is $200,000 ($450,000 adjusted basis – $250,000 insurance proceeds).
Rob and George own an office building that was built in 1975. They opened a tax return business and made numerous renovations to the building to bring it into compliance with the Americans with Disabilities Act. They had gross receipts of $750,000 dollars and ten full-time employees during the year. They spent $15,000 in eligible access expenditures. What is the current year Disabled Access Credit?
$5,000
If you make your business accessible to persons with disabilities and your business is an eligible small business, you may be able to claim the disabled access credit. If you choose to claim the credit, you must reduce the amount you deduct or capitalize by the amount of the credit. The credit is 50% of the first $10,000 spent on qualified expenses.
Which of the following is NOT a potential limitation on S corporation or partnership losses?
Excess business income limitations
There are four potential limitations on S corporation and partnership losses. These limitations, in the order in which they apply, are the basis rules, the at-risk limitations, the passive activity limitations, and the excess business loss limitations.
Which of the following accounting methods is not an acceptable method of reporting income and expenses?
If you use the cash method for figuring your income, you can use the accrual method for figuring your expenses.
Generally and except as otherwise required, you can use any combination of cash, accrual, and special methods of accounting if the combination clearly reflects your income and you use it consistently. However, the following restrictions apply:
ABC Corporation pays John Peters a base salary on the first of each month. Mr. Peters is single and claims one withholding allowance. In January, he is paid $1,000. Using the wage bracket tables, ABC properly withholds $21 from this amount. In February, Mr. Peters is paid his salary of $1,000 plus a commission of $2,000, which ABC includes with his regular wages. How should ABC calculate the withholding from these amounts?
ABC should calculate the withholding based on the total of $3,000.
If a commission is paid together with regular wages for an employee for whom the employer regularly withholds income tax, the employer can add the supplemental wages to the concurrently paid regular wages. The commission is also subject to FICA withholding and FUTA tax.
Medford owns a small consulting firm. The company is incorporated and operates as an accrual basis taxpayer. In January of the current year, the firm did work for a client and accepted a note for $60,000 plus interest at a 10 percent annual rate in lieu of immediate payment. After exactly six months, the client went bankrupt and the note was judged to be worthless. That was the only account judged to be worthless during the year. At the end of the year, for financial reporting purposes, the company estimated its bad debt expenses as $69,000 which increased the allowance for doubtful accounts to a balance of $71,000. What is the amount of the bad debt expense deduction that this business is entitled to report for tax purposes?
$60,000 if the company has not accrued interest on the note.
For an accrual basis taxpayer, the amount of bad debt expense that is deductible is the amount actually written off. Anticipated or estimated amounts cannot be deducted.
Ryan runs a manufacturing business employing several people with young children. These employees require daycare as both parents work. He decided that, in order to make it easier for his employees to come to work each day, he would allocate some of the unused space in his manufacturing facility to a child care facility. He incurred $20,000 in qualified childcare facility expenditures. He had no qualified childcare resource and referral expenditures and had no pass through credits. What is Ryan's credit?
$5,000
The credit is 25% of the qualified childcare facility expenditures plus 10% of the qualified childcare resource and referral expenditures paid or incurred during the tax year. The credit limit is $150,000/yr. Ryan's credit is $5,000, 25% of the $20,000 in qualified childcare facility expenditures.
Matthews is a 40 percent partner in the WestBrook Partnership. Matthews has a tax basis (capital share) in the partnership of $45,000. Matthews has not loaned the partnership any money but is responsible for her share of the debts. The partnership has $100,000 in assets and $60,000 in liabilities. This year, the partnership reported an ordinary business loss of $120,000. What amount of that loss can Matthews deduct on her individual income tax return this year?
$48,000
A partner can deduct the ownership percentage of any partnership ordinary business loss but only up to the person’s “at-risk balance”. The “at-risk balance” is the tax basis in the partnership capital account ($45,000) plus any loans to the partnership ($0) plus the owner’s share of the debts of the business (40% of $60,000 = $24,000). Here, the “at-risk balance” is a total of $69,000. That is more than this partner’s percentage of the loss. The partner can deduct the entire 40 percent of the $120,000 ordinary business loss or $48,000.
Julio is an accrual basis taxpayer. He shipped $350 worth of merchandise to Roland on December 31, 20X1. Julio sent Roland an invoice January 7, 20X2 that was payable in 30 days. On February 3rd, Roland notified Julio that he was filing bankruptcy and could not pay. Roland never paid the invoice. When does Julio record the $350 in income?
December 31, 20X1, the date when he shipped the merchandise to Roland.
Under the accrual method, an amount is includable in income when all events occur that fix the right to receive the income. Recognition occurs on the earliest of the date the required performance takes place, or payment is due, or payment is received and the amount can be determined with reasonable accuracy. The taxpayer earns the right for payment on the date of shipment.
What are the consequences for a business taxpayer who is required to use EFTPS for federal tax deposits but fails to do so?
The taxes not deposited via EFTPS are subject to a 10% penalty.
Certain business taxpayers are required to use EFTPS for federal tax deposits. The penalty for failure to use EFTPS when required is 10% of the amounts subject to electronic deposit requirements but not deposited using EFTPS. The IRS prefers that even taxpayers who are not subject to this requirement use EFTPS for making federal tax deposits.
Joe, a cash basis taxpayer, owned and operated a business. He began having difficulty paying his business debts in late 20X0. Joe owed Gail, his computer consultant, $2,200 for services rendered at his business and $500 for non-business services rendered at his home. In 20X1, Gail forgave the entire debt of $2,700. Joe is neither bankrupt nor insolvent. What amount will Joe be required to include in income on his tax return for 20X1?
$500
Generally, if a debt you have a legal obligation to repay is canceled or forgiven you must include the canceled amount in your income.
The cancellation is not income if it is intended as a gift. This question does not indicate Gail's intent on making a gift to Joe, therefore Joe must include $500 in his income on his personal income tax return relating to the non-business bad debt.
Joe, a cash basis taxpayer, would be able to deduct the business expense of paying $2,200 to Gail. If you use the cash method of accounting, you don't realize income from the cancellation of debt if the payment of the debt would be a deductible expense. He does not have income from the cancellation of this debt because the payment of the debt would be deductible. This applies only to the cash method of accounting, because under the accrual method the deduction occurs when Gail performs the services and has right to receive payment.
The Investment Credit includes:
The rehabilitation credit and the qualifying advanced coal project credit.
The investment credit is the total of the rehabilitation, energy, qualifying advanced energy project, qualifying advanced coal project and qualifying gasification project credits.
Uma is engaged in a not-for-profit activity. The income and expenses of the activity are as follows: Gross income $3,300 Less Expenses:
The amount of allowable depreciation for the machine only is:
$100
It is indicated that Uma is engaged in a not-for-profit activity.
If a taxpayer's activity is not carried on for profit, deductions are taken in the following order and only to the extent stated in the three categories. If the taxpayer is an individual, these deductions may be taken only if the taxpayer itemizes.
As depreciation is a category 3 deduction, the total of all of the expenses prior to figuring the allowable depreciation deduction is $3,000 ($600 + $1,000 + $500 + $600 + $300). Gross income from the activity is $3,300, therefore only $300 can be allocated to depreciation between the automobile and machinery ($3,300 income - $3,000 expenses before depreciation = $300).
The machinery depreciation expense is 1/3 (300 / 900 = 1/3) of the total depreciation so the depreciation allowable for the machinery would be $100 (1/3 x 300 = 100).