diff --git a/_pages/1-minor-p5279.md b/_pages/1-minor-p5279.md index d8aa93e..040cb8b 100644 --- a/_pages/1-minor-p5279.md +++ b/_pages/1-minor-p5279.md @@ -1,9 +1,12 @@ --- layout: post -title: minor-p5279.pdf +title: Becoming as EA.pdf --- -**Your Pathway to Becoming an Enrolled Agent** +> This is an outline not detailed! +{: .block-warning } + +**A Pathway to Becoming an Enrolled Agent** - Obtain a Preparer Tax Identification Number (PTIN) - Pass the Special Enrollment Examination (SEE) @@ -12,9 +15,11 @@ title: minor-p5279.pdf **About the exam** -- Part 1 Individuals; Part 2 Businesses; & Part 3 Representation, Practices & Procedures. -- Each exam contains 100 multiple-choice questions & is 3.5 hours. -- Exam is offered May - February. +- Part 1 Individuals +- Part 2 Businesses +- Part 3 Representation, Practices & Procedures +- Each exam contains 100 multiple-choice questions & is 3.5 hours +- Exam is offered May - February **www.prometric.com/see** diff --git a/_pages/p17.chapter.1.md b/_pages/p17.chapter.1.md new file mode 100644 index 0000000..6d5592d --- /dev/null +++ b/_pages/p17.chapter.1.md @@ -0,0 +1,53 @@ +--- +layout: post +title: p17.chapter.1.pdf +--- + +# Chapter 1: Filing and Paying Business Taxes + +## Introduction +- Overview of the business taxes you may have to pay and the forms required. +- Discusses taxpayer identification numbers (TINs). + +## Identification Numbers +1. **Social Security Number (SSN):** Generally used as the taxpayer identification number (TIN) for individuals. +2. **Individual Taxpayer Identification Number (ITIN):** Issued to nonresident and resident aliens who are not eligible to obtain an SSN. +3. **Employer Identification Number (EIN):** Required if you have employees or file pension or excise tax returns. + +## Income Tax +1. **Requirement to File:** If net earnings from self-employment were $400 or more, or if other filing requirements are met. +2. **Filing Forms:** Use Form 1040 or 1040-SR with Schedule C attached. +3. **Electronic Filing (IRS e-file):** Benefits include accuracy, security, and faster refunds. + +## Self-Employment (SE) Tax +1. **Purpose:** Social security and Medicare tax for individuals who work for themselves. +2. **Requirement to Pay:** Required if net earnings from self-employment are $400 or more. +3. **Rate:** SE tax rate is 15.3%, with a portion deductible on Schedule 1 (Form 1040). + +## Employment Taxes +1. **Types:** Include social security, Medicare, federal income tax withholding, and federal unemployment tax (FUTA). +2. **Forms to File:** Forms 941 or 944 for reporting. + +## Excise Taxes +1. **Applicable Situations:** If you manufacture, sell certain products, operate certain businesses, or receive payment for specific services. +2. **Forms:** Use Form 720, Quarterly Federal Excise Tax Return, or Form 2290, Heavy Highway Vehicle Use Tax Return. + +## Information Returns +1. **When Required:** If you make or receive payments in your business. +2. **Forms to File:** Form 1099-MISC for miscellaneous payments, Form 1099-NEC for nonemployee compensation, and Form 8300 for cash payments over $10,000. + +## Going Out of Business Checklists +1. **Final Forms to File:** Checklist of forms needed if going out of business, including Schedule C, Form 4797, Form 941, and others. + +--- + +# Chapter 1 Quiz Questions + +1. **What identification number should a sole proprietor use if they do not have employees?** + - **Answer:** Social Security Number (SSN). + +2. **What is the self-employment tax rate for 2023?** + - **Answer:** 15.3%. + +3. **Which form is used to report nonemployee compensation of $600 or more?** + - **Answer:** Form 1099-NEC. diff --git a/_pages/p17.chapter.2.md b/_pages/p17.chapter.2.md new file mode 100644 index 0000000..53008de --- /dev/null +++ b/_pages/p17.chapter.2.md @@ -0,0 +1,57 @@ +--- +layout: post +title: p17.chapter.2.pdf +--- + +# Chapter 2: Accounting Periods and Methods + +## Introduction +- Discusses the selection and use of an accounting period and an accounting method for your business. + +## Accounting Periods +1. **Definition:** The time frame in which you calculate your taxable income. +2. **Types of Accounting Periods:** + - **Calendar Year:** January 1 through December 31. + - **Fiscal Year:** 12 consecutive months ending on the last day of any month except December. +3. **Changing Your Accounting Period:** + - Requires IRS approval through Form 1128, Application to Adopt, Change, or Retain a Tax Year. + - Some changes can be made without IRS approval if specific conditions are met. + +## Accounting Methods +1. **Definition:** A set of rules used to determine when and how to report income and expenses. +2. **Types of Accounting Methods:** + - **Cash Method:** + - Income is reported in the year it is received. + - Expenses are deducted in the year they are paid. + - **Accrual Method:** + - Income is reported in the year it is earned, regardless of when it is received. + - Expenses are deducted in the year they are incurred, regardless of when they are paid. + - **Special Methods:** + - Combination of cash and accrual methods, with special rules applying to certain types of income and expenses. +3. **Changing Your Accounting Method:** + - Requires filing Form 3115, Application for Change in Accounting Method. + - Automatic consent procedures are available for some changes, eliminating the need for IRS approval. + +## Inventories +1. **Requirement to Use:** If your business holds inventory, you generally must use an accrual method for purchases and sales. +2. **Valuing Inventory:** + - **Cost Method:** Based on the cost of items in inventory. + - **Lower of Cost or Market (LCM) Method:** Inventory is valued at the lower of its cost or market value. + - **Retail Method:** Estimates the value of inventory by reducing the retail selling price by the mark-up percentage. + +## Material Participation +1. **Definition:** Involvement in the operation of your business to a degree that is regular, continuous, and substantial. +2. **Passive Activity Rules:** If you do not materially participate, your business income may be classified as passive, subject to special rules and limitations. + +--- + +# Chapter 2 Quiz Questions + +1. **What is the main difference between the cash method and the accrual method of accounting?** + - **Answer:** The cash method reports income and expenses when received or paid, while the accrual method reports income and expenses when earned or incurred. + +2. **Which form must be filed to request a change in your accounting method?** + - **Answer:** Form 3115, Application for Change in Accounting Method. + +3. **When is a business generally required to use the accrual method for inventory?** + - **Answer:** When the business holds inventory for sale. diff --git a/_pages/p17.chapter.3.md b/_pages/p17.chapter.3.md new file mode 100644 index 0000000..72acda2 --- /dev/null +++ b/_pages/p17.chapter.3.md @@ -0,0 +1,59 @@ +--- +layout: post +title: p17.chapter.3.pdf +--- + +# Chapter 3: Income + +## Introduction +- Provides guidance on what constitutes business income and how it should be reported. + +## Gross Receipts +1. **Definition:** Total income received from all sources before any expenses are deducted. +2. **Types of Gross Receipts:** + - **Sales of Products or Services:** Includes cash, checks, credit card payments, and the fair market value of property or services received. + - **Sales Returns and Allowances:** Reductions in sales for returned goods or allowances for damaged goods. + - **Cancellations of Debt:** Certain types of debt forgiveness may be considered income. +3. **Bartering Income:** + - **Definition:** Exchange of goods or services without money, which must be included in gross receipts. + - **Reporting:** Must report the fair market value of goods or services received. + +## Cost of Goods Sold (COGS) +1. **Definition:** Direct costs attributable to the production of goods sold by a business. +2. **Calculating COGS:** + - **Beginning Inventory:** Value of inventory at the start of the year. + - **Purchases:** Cost of inventory bought during the year. + - **Labor Costs:** Wages paid to workers directly involved in producing goods. + - **Materials and Supplies:** Costs for items used in the manufacturing process. + - **Ending Inventory:** Value of inventory at the end of the year. + - **Formula:** COGS = Beginning Inventory + Purchases + Labor Costs + Materials and Supplies - Ending Inventory. +3. **Impact on Gross Income:** + - COGS is subtracted from gross receipts to determine gross profit. + +## Other Income +1. **Types of Other Income:** + - **Interest and Dividends:** Income from investments. + - **Rents:** Income from leasing property. + - **Royalties:** Income from intellectual property. + - **Bad Debts Recovered:** Money received from debts that were previously written off as uncollectible. +2. **Reporting Other Income:** + - Reported on Schedule C or other applicable tax forms. + +## Income from Personal Services +1. **Definition:** Earnings from work performed, including fees, wages, and other compensation. +2. **Reporting Personal Services Income:** + - Must include all forms of compensation, including cash and the fair market value of goods or services received in exchange for personal services. + +## Non-Taxable Income +1. **Types of Non-Taxable Income:** + - **Gifts and Inheritances:** Generally not taxable. + - **Life Insurance Proceeds:** Excluded from income in most cases. + - **Certain Fringe Benefits:** Some employer-provided benefits are non-taxable. +2. **Exclusions:** Specific rules govern the exclusion of certain types of income from taxation. + +--- + +# Chapter 3 Quiz Questions + +1. **What must be included in gross receipts when bartering?** + - **Answer:** The diff --git a/_pages/p17.chapter.4.md b/_pages/p17.chapter.4.md new file mode 100644 index 0000000..34402d4 --- /dev/null +++ b/_pages/p17.chapter.4.md @@ -0,0 +1,94 @@ +--- +layout: post +title: p17.chapter.4.pdf +--- + +# Chapter 4: Business Expenses + +## Introduction +- Discusses various types of business expenses that can be deducted from gross income to determine taxable income. + +## Business Expenses +1. **Definition:** Ordinary and necessary costs of carrying on a trade or business. +2. **Ordinary Expense:** Common and accepted in your trade or business. +3. **Necessary Expense:** Helpful and appropriate for your business, though not necessarily indispensable. + +## Cost of Goods Sold (COGS) +1. **Definition:** Direct costs of producing the goods sold by your business. +2. **Components of COGS:** + - **Inventory Costs:** Cost of materials and supplies used in production. + - **Labor Costs:** Wages paid to workers directly involved in production. + - **Overhead:** Costs indirectly tied to production, such as utilities and rent. + +## Capital Expenses +1. **Definition:** Costs of purchasing assets that have a useful life beyond the tax year. +2. **Types of Capital Expenses:** + - **Business Start-Up Costs:** Expenses incurred before the business begins operation. + - **Improvements:** Costs to increase the value or extend the life of business property. + - **Assets:** Purchases such as buildings, machinery, and equipment. + +## Personal versus Business Expenses +1. **Mixed-Use Property:** + - Expenses related to property used for both personal and business purposes must be divided based on the proportion of business use. +2. **Non-Deductible Personal Expenses:** + - Personal living or family expenses are not deductible as business expenses. + +## Business Use of Your Home +1. **Eligibility Requirements:** + - Part of your home must be used regularly and exclusively for business. +2. **Deductible Expenses:** + - Includes mortgage interest, rent, utilities, repairs, and depreciation related to the business portion of your home. +3. **Simplified Option:** + - Allows a standard deduction of $5 per square foot of business use, up to 300 square feet. + +## Business Use of Your Car +1. **Standard Mileage Rate:** + - Deduct a fixed rate for each mile driven for business purposes. +2. **Actual Expense Method:** + - Deduct the actual expenses of operating the vehicle, including gas, oil, insurance, repairs, and depreciation. + +## Employee Pay +1. **Wages and Salaries:** + - Amounts paid for services performed by employees. +2. **Bonuses and Commissions:** + - Additional compensation provided to employees. +3. **Employee Benefit Programs:** + - Costs for programs such as health insurance, retirement plans, and education assistance. + +## Rent Expense +1. **Deductible Rent:** + - Rent paid for property you use in your trade or business. +2. **Restrictions:** + - Rent paid in advance must be deducted in the year to which it applies, not when paid. + +## Interest +1. **Types of Deductible Interest:** + - Interest on loans used for business purposes, including mortgages and business loans. +2. **Limitations:** + - Interest related to personal expenses or for tax-exempt income is not deductible. + +## Taxes +1. **Deductible Taxes:** + - State, local, and foreign taxes related to business operations. + - Employment taxes, including social security and Medicare taxes, paid on behalf of employees. +2. **Non-Deductible Taxes:** + - Federal income taxes and penalties are not deductible. + +## Insurance +1. **Deductible Insurance Premiums:** + - Insurance that is ordinary and necessary for your business, including liability, malpractice, and workers' compensation insurance. +2. **Life Insurance Premiums:** + - Premiums for life insurance where you are directly or indirectly the beneficiary are not deductible. + +--- + +# Chapter 4 Quiz Questions + +1. **What criteria must be met for a business expense to be deductible?** + - **Answer:** The expense must be both ordinary and necessary for the business. + +2. **What is the simplified option for the home office deduction?** + - **Answer:** The simplified option allows a standard deduction of $5 per square foot of business use, up to 300 square feet. + +3. **Can you deduct federal income taxes as a business expense?** + - **Answer:** No, federal income taxes are not deductible as a business expense. diff --git a/_pages/p17.chapter.5.md b/_pages/p17.chapter.5.md new file mode 100644 index 0000000..199aa5d --- /dev/null +++ b/_pages/p17.chapter.5.md @@ -0,0 +1,47 @@ +--- +layout: post +title: p17.chapter.5.pdf +--- + +# Chapter 5: Net Operating Losses (NOLs) + +## Introduction +- Explains what a Net Operating Loss (NOL) is, how it is calculated, and how it can be used to reduce taxable income in other years. + +## What is a Net Operating Loss? +1. **Definition:** Occurs when a business's allowable tax deductions exceed its gross income. +2. **Sources of NOL:** Can arise from operating losses, casualty and theft losses, and certain other deductions. +3. **Non-Deductible Items:** Capital losses, personal exemptions, and nonbusiness deductions are generally not included in calculating an NOL. + +## Carrybacks and Carryforwards +1. **Carryforward:** An NOL can be carried forward to future tax years to offset income. +2. **Carryback:** Before the Tax Cuts and Jobs Act (TCJA), NOLs could be carried back to prior years to claim a refund. Post-TCJA, carrybacks are generally not allowed. +3. **Election to Waive Carryback:** Taxpayers may elect to waive the carryback period and only carry the NOL forward. + +## Figuring an NOL +1. **Calculating NOL:** + - Start with taxable income before exemptions. + - Subtract nonbusiness income and add nonbusiness deductions. + - Adjust for NOL deductions from prior years. +2. **Adjustments to Income:** Certain adjustments, like nonbusiness deductions, may need to be made to the income to figure the NOL. + +## How to Claim an NOL Deduction +1. **Form to Use:** Use Schedule A of Form 1045 or Form 1040 to claim an NOL deduction. +2. **NOL Carryforward:** Report the NOL carryforward on Form 1040, Schedule 1, in the year it is applied. + +## Example of an NOL +1. **Illustrative Example:** Provides a detailed example of how an NOL is calculated, including adjustments and the steps to carry it forward or back. +2. **NOL Deduction in Future Years:** Explains how the NOL deduction reduces income in subsequent years. + +--- + +# Chapter 5 Quiz Questions + +1. **What is a Net Operating Loss (NOL)?** + - **Answer:** An NOL occurs when a business's allowable tax deductions exceed its gross income. + +2. **Can NOLs still be carried back to prior years under the current tax law?** + - **Answer:** Generally, NOLs cannot be carried back under the current tax law due to changes made by the Tax Cuts and Jobs Act (TCJA). + +3. **Which form is used to claim an NOL deduction?** + - **Answer:** Use Schedule A of Form 1045 or Form 1040 to claim an NOL deduction. diff --git a/_pages/p17.chapter.6.md b/_pages/p17.chapter.6.md new file mode 100644 index 0000000..cae9f83 --- /dev/null +++ b/_pages/p17.chapter.6.md @@ -0,0 +1,54 @@ +--- +layout: post +title: p17.chapter.6.pdf +--- + +# Chapter 6: Figuring Gross Profit + +## Introduction +- Provides detailed instructions on how to calculate gross profit, which is essential for determining taxable business income. + +## Gross Profit +1. **Definition:** Gross profit is the amount left after subtracting the cost of goods sold (COGS) from total sales. +2. **Formula:** Gross Profit = Net Sales - Cost of Goods Sold. + +## Net Sales +1. **Definition:** Total sales minus returns, allowances, and discounts. +2. **Sales Returns and Allowances:** + - **Sales Returns:** Products returned by customers. + - **Allowances:** Reductions in the selling price due to defects or issues with the goods sold. +3. **Sales Discounts:** + - Cash discounts given to customers as an incentive for early payment. + +## Cost of Goods Sold (COGS) +1. **Components of COGS:** + - **Beginning Inventory:** Value of inventory at the start of the year. + - **Purchases:** Cost of goods bought during the year for resale. + - **Labor Costs:** Direct wages paid to workers involved in production. + - **Materials and Supplies:** Costs for raw materials used in manufacturing. + - **Ending Inventory:** Value of inventory at the end of the year. +2. **Calculating COGS:** + - COGS = Beginning Inventory + Purchases + Labor Costs + Materials and Supplies - Ending Inventory. + - This calculation is critical for accurately determining gross profit. + +## Gross Profit Margin +1. **Definition:** The ratio of gross profit to net sales, expressed as a percentage. +2. **Formula:** Gross Profit Margin = (Gross Profit / Net Sales) * 100. +3. **Importance:** Used to assess the profitability of a business by indicating how much profit is generated from sales after accounting for COGS. + +## Example of Figuring Gross Profit +1. **Illustrative Example:** Provides a step-by-step calculation of gross profit, including adjustments for returns, allowances, and discounts. +2. **Application:** Demonstrates how to apply the gross profit formula and calculate the gross profit margin. + +--- + +# Chapter 6 Quiz Questions + +1. **What is the formula for calculating gross profit?** + - **Answer:** Gross Profit = Net Sales - Cost of Goods Sold. + +2. **How is the gross profit margin calculated?** + - **Answer:** Gross Profit Margin = (Gross Profit / Net Sales) * 100. + +3. **Which components are subtracted from total sales to determine net sales?** + - **Answer:** Sales returns, allowances, and discounts are subtracted from total sales to determine net sales. diff --git a/_pages/p17.chapter.7.md b/_pages/p17.chapter.7.md new file mode 100644 index 0000000..e32018b --- /dev/null +++ b/_pages/p17.chapter.7.md @@ -0,0 +1,59 @@ +--- +layout: post +title: p17.chapter.7.pdf +--- + +# Chapter 7: Sales + +## Introduction +- Discusses how to report sales income, including sales of goods and services, and the tax treatment of different types of sales. + +## Sales of Goods and Services +1. **Reporting Sales:** Sales income must be reported on your tax return, typically on Schedule C for sole proprietors. +2. **Types of Sales Income:** + - **Sales of Goods:** Income from selling physical products. + - **Sales of Services:** Income from providing services rather than physical products. + +## Sales Returns and Allowances +1. **Definition:** Reductions in sales revenue due to returned goods or allowances granted to customers. +2. **Accounting for Returns:** Must be deducted from gross receipts to determine net sales. +3. **Recording Sales Returns:** Ensure that returns and allowances are accurately recorded to reflect the true income of the business. + +## Installment Sales +1. **Definition:** Sales where payments are received in installments over time, rather than in a single payment. +2. **Tax Treatment of Installment Sales:** + - **Reporting Income:** Income is recognized as payments are received. + - **Installment Sale Method:** Allows the deferral of income reporting until payments are actually received. + - **Form to Use:** Report installment sales on Form 6252, Installment Sale Income. +3. **Interest on Installment Sales:** Interest received on installment sales must be reported as ordinary income. + +## Special Rules for Certain Sales +1. **Related Party Sales:** + - **Definition:** Sales made to related parties, such as family members or related businesses. + - **Tax Treatment:** Special rules apply to prevent tax avoidance through related party sales. +2. **Depreciable Property:** + - **Definition:** Property that loses value over time and for which depreciation has been claimed. + - **Recapture of Depreciation:** If sold, the depreciation previously claimed must be recaptured as income. + - **Form to Use:** Report the sale and depreciation recapture on Form 4797, Sales of Business Property. + +## Reporting Sales +1. **Form 1040, Schedule C:** Report sales income, returns, and allowances on Schedule C. +2. **Form 8949 and Schedule D:** Use these forms to report sales of capital assets. +3. **Form 4797:** Report sales of business property and recapture of depreciation. + +## Example of Sales Reporting +1. **Illustrative Example:** Provides a detailed example of how to report sales income, including installment sales, related party sales, and sales of depreciable property. +2. **Application:** Demonstrates the correct forms and calculations to use when reporting various types of sales. + +--- + +# Chapter 7 Quiz Questions + +1. **How are installment sales reported for tax purposes?** + - **Answer:** Installment sales are reported on Form 6252, with income recognized as payments are received. + +2. **What must be done when depreciable property is sold?** + - **Answer:** The depreciation previously claimed must be recaptured as income, reported on Form 4797. + +3. **What is deducted from gross receipts to determine net sales?** + - **Answer:** Sales returns and allowances are deducted from gross receipts to determine net sales. diff --git a/_pages/p17.chapter.8.md b/_pages/p17.chapter.8.md new file mode 100644 index 0000000..f1b9c8a --- /dev/null +++ b/_pages/p17.chapter.8.md @@ -0,0 +1,81 @@ +--- +layout: post +title: p17.chapter.8.pdf +--- + +# Chapter 8: Dispositions of Business Property + +## Introduction + +- Provides information on how to report the sale, exchange, or other disposition of business property, including the tax implications of such transactions. + +## Types of Dispositions + +1. **Sales:** Transfer of property for money or other compensation. +2. **Exchanges:** Swapping one property for another, often involving like-kind exchanges. +3. **Involuntary Conversions:** Property is destroyed, stolen, or condemned, and insurance or other compensation is received. +4. **Abandonments:** Voluntarily giving up ownership of property without receiving any payment. +5. **Foreclosures and Repossessions:** Property is taken back by the lender due to nonpayment of a debt. + +## Calculating Gain or Loss + +1. **Amount Realized:** The total amount received from the disposition of the property, including cash, fair market value of other property, and any liabilities assumed by the buyer. +2. **Adjusted Basis:** The original cost of the property, plus improvements, minus depreciation and other deductions. +3. **Gain or Loss Formula:** Gain or Loss = Amount Realized - Adjusted Basis. +4. **Reporting Gain or Loss:** Gains or losses must be reported on tax forms, depending on the type of property and disposition. + +## Section 1231 Property + +1. **Definition:** Depreciable property and real estate used in a trade or business, held for more than one year. +2. **Tax Treatment of Gains and Losses:** + - **Net Gains:** Generally treated as long-term capital gains, which may be taxed at a lower rate. + - **Net Losses:** Treated as ordinary losses, which can be deducted against other income. + +## Section 1245 and 1250 Property + +1. **Section 1245 Property:** + - **Definition:** Depreciable personal property, such as machinery and equipment. + - **Depreciation Recapture:** Any gain on the sale of Section 1245 property is treated as ordinary income to the extent of depreciation previously claimed. +2. **Section 1250 Property:** + - **Definition:** Depreciable real property, such as buildings. + - **Depreciation Recapture:** The portion of the gain attributable to depreciation claimed in excess of straight-line depreciation is recaptured as ordinary income. + +## Installment Sales of Business Property + +1. **Definition:** Sale of business property where at least one payment is received after the tax year of the sale. +2. **Reporting Installment Sales:** + - **Form 6252:** Used to report installment sales and determine the portion of each payment that is taxable. + - **Interest:** Any interest received on installment payments must be reported as ordinary income. + +## Like-Kind Exchanges + +1. **Definition:** Exchange of business or investment property for another property of like kind. +2. **Tax Deferral:** Gains on like-kind exchanges are generally deferred until the new property is sold. +3. **Reporting Like-Kind Exchanges:** + - **Form 8824:** Used to report like-kind exchanges and calculate any potential taxable gain. + +## Involuntary Conversions + +1. **Definition:** Occurs when property is destroyed, stolen, condemned, or disposed of under threat of condemnation. +2. **Tax Treatment:** If the insurance or other compensation received is less than the adjusted basis, a loss is recognized. If it exceeds the adjusted basis, a gain is recognized. +3. **Replacement Property:** If replacement property is acquired within a certain period, the gain can be deferred. + +## Foreclosures and Repossessions + +1. **Definition:** Occurs when property is taken back by the lender due to nonpayment of a debt. +2. **Tax Implications:** + - **Recourse Debt:** The borrower remains personally liable for the debt, and the property’s fair market value is compared to the debt to determine gain or loss. + - **Nonrecourse Debt:** The borrower is not personally liable, and the full amount of the outstanding debt is treated as the amount realized. + +--- + +# Chapter 8 Quiz Questions + +1. **What form is used to report like-kind exchanges?** + - **Answer:** Form 8824 is used to report like-kind exchanges. + +2. **How is a gain on Section 1245 property treated for tax purposes?** + - **Answer:** A gain on Section 1245 property is treated as ordinary income to the extent of depreciation previously claimed. + +3. **What is the tax treatment of a loss resulting from an involuntary conversion when the compensation received is less than the adjusted basis?** + - **Answer:** A loss is recognized when the compensation received from an involuntary conversion is less than the adjusted basis of the property. diff --git a/_pages/p17.chapter.9.md b/_pages/p17.chapter.9.md new file mode 100644 index 0000000..3675990 --- /dev/null +++ b/_pages/p17.chapter.9.md @@ -0,0 +1,82 @@ +--- +layout: post +title: p17.chapter.9.pdf +--- + +# Chapter 9: Basis of Assets + +## Introduction +- Explains how to determine the basis of various types of assets, which is essential for calculating gain or loss on the sale, exchange, or other disposition of property. + +## Basis of Property +1. **Definition:** The amount of your investment in property for tax purposes, which is used to calculate depreciation, amortization, and gain or loss on disposition. +2. **Original Basis:** + - **Purchased Property:** Generally, the cost of the property plus any amounts paid for improvements and expenses related to the purchase. + - **Inherited Property:** Generally, the fair market value (FMV) of the property on the date of the decedent's death. + - **Gifted Property:** Generally, the donor's adjusted basis at the time of the gift, with some adjustments. +3. **Adjusted Basis:** + - **Increases to Basis:** Include the cost of improvements, legal fees, and certain assessments. + - **Decreases to Basis:** Include depreciation, casualty and theft losses, and certain credits and deductions. + +## Cost Basis +1. **Cost Basis of Purchased Property:** + - **Includes:** Purchase price, sales tax, freight, installation, and other costs associated with acquiring the property. + - **Excludes:** Financing costs such as interest on loans. +2. **Special Rules:** + - **Real Property:** Costs of buildings and land should be allocated separately. + - **Business Start-Up Costs:** Certain start-up costs can be added to the basis of the property. + +## Basis Other than Cost +1. **Inherited Property:** + - **General Rule:** The basis is the fair market value (FMV) on the date of the decedent's death. + - **Alternative Valuation Date:** If elected, the FMV on the alternate valuation date can be used. +2. **Gifted Property:** + - **General Rule:** The basis is the donor's adjusted basis at the time of the gift, unless the FMV is less than the donor's adjusted basis. + - **Special Rule for Losses:** If the FMV is less than the donor's adjusted basis, the basis for determining loss is the FMV. +3. **Property Received in Exchange:** + - **Like-Kind Exchanges:** The basis of the new property is generally the same as the basis of the property exchanged, with adjustments for any additional money paid or received. + +## Adjusted Basis +1. **Increases to Basis:** + - **Improvements:** Costs of improvements that add to the value of the property or extend its life. + - **Assessments:** Government assessments for local improvements. + - **Restoration Costs:** Costs to restore property after a casualty loss. +2. **Decreases to Basis:** + - **Depreciation:** Deduction for wear and tear, deterioration, or obsolescence. + - **Casualty and Theft Losses:** Losses deducted from the basis after an event that damages or destroys the property. + - **Exclusions, Credits, and Rebates:** Various tax benefits that reduce the basis. + +## Basis of Certain Assets +1. **Real Property:** + - **Land and Buildings:** Basis must be allocated between the land and the buildings; land cannot be depreciated. + - **Easements:** The sale of an easement reduces the basis of the affected property. +2. **Business Assets:** + - **Inventory:** The basis is generally the cost of the inventory items. + - **Depreciable Property:** The basis is the cost minus any depreciation claimed. +3. **Intangible Assets:** + - **Goodwill:** If acquired as part of a business purchase, the basis is the purchase price allocated to goodwill. + - **Patents and Copyrights:** The basis is generally the cost to create or purchase the patent or copyright. + +## Basis in Special Situations +1. **Property Changed from Personal to Business Use:** + - The basis is the lesser of the FMV at the time of conversion or the adjusted basis of the property. +2. **Partnership Interests:** + - The basis is the amount of money contributed to the partnership, plus the partner's share of partnership liabilities. +3. **S Corporation Stock:** + - The basis is the original cost of the stock, adjusted for items such as income, losses, and distributions. + +## Example of Basis Calculation +1. **Illustrative Example:** Provides a detailed example showing how to calculate the basis of property, including adjustments for improvements, depreciation, and casualty losses. + +--- + +# Chapter 9 Quiz Questions + +1. **How is the basis of inherited property generally determined?** + - **Answer:** The basis of inherited property is generally the fair market value (FMV) on the date of the decedent's death. + +2. **What adjustments can increase the basis of property?** + - **Answer:** The basis of property can be increased by improvements, government assessments, and restoration costs. + +3. **What is the basis of property converted from personal to business use?** + - **Answer:** The basis of property converted from personal to business use is the lesser of the FMV at the time of conversion or the adjusted basis of the property.