tax accounting review

Sources of Revenue for Federal Govt. Individual Income taxes 48% Social Security 35% Corporate taxes 9% Other 8% Objectives of federal income tax:  Economic > Promoting certain activities > Social > Tax reform  Taxable Gift Exclusion: Up to $15,000 per person annual exclusion imposed on the donor for transfers of property considered to be a taxable gift. Marginal Tax Rate- amount you get taxed for the next dollar you make (brackets) Average Tax Rate- computed by dividing the total tax liability by the amount of taxable income AGI- how much your income will be taxed based off what bracket you’re in. (total income you report that is subject to income tax) FICA Tax: Imposed on employees and is comprised of two parts:  the old age survivors and disability act (OASDI) 6.2% up to $132,900 Medicare or hospital insurance (HI) 1.45% on first $200,000 Property, State, and Real Estate Tax- limited to $10,000 or $5,000 for MFS. Also, estate taxes for income in respect of a descendant. Most estates are not subject to the federal estate tax because of generous credit and deduction? provisions, such as the unified tax credit and the unlimited marital deduction. The unified tax credit equivalent for 2019  is $11,400,000. This means? that, at a? minimum, for decedents dying in 2019?, no estate of $11,400,000 or less will be subject to the federal estate tax.  Deductions include marital deductions, funeral and administrative expenses, and debt payments Social Security Tax: maximum tax rate is 85% Standard Deductions:  Single and Married Filing Separately $12,200 Married Filing Jointly $24,400 Head of Household $18,350 Add $1,300 to the standard deduction if with elderly or blind ($2,600 if both) with a maximum of 5,200 for married filing jointly Head of Household: you must have a dependent living with you and provide over half the support for them Exception: you can claim someone who does not live with you, but you provide over half of their support Components of Gross Income: Income from whatever source derived, all accessions to wealth are considered income unless specifically excluded, Includes FMV of goods or services received in barter transactions Wages Business Gross Income Gains from Property Sales Interest Rents Royalties Dividends Alimony through 12/31/18 Annuities Life Insurance Proceeds Pensions COD (cancellation of debt) Income Partnership Income IRD (income in respect of descendant) Trust/Estate Income Audits: a self-employed business owner is more likely to get audited than a person who works at a University who gets a W-2 Letter/ Correspondence Audits: automated letter to taxpayer if the reporting document (W-2 or 1099s) do not match the reported income 1% of tax returns are selected for audit based on DIF score In Person Audits: taxpayers will work with the IRS agents at either an IRS office or the taxpayer’s place of business Married Vs. Divorced: this depends on the finalization of the divorce if you are officially divorced at the end of the year then you file as single, but if not then you have to file as married Tax Concept of Income:  Economic Benefit which is not limited to cash, but can be company stock Realization of income occurs when the earning process is complete and a transaction with another party takes place that permits an objective measure of income Recognition of income income must be recognized and there are some items that are not taxable because of special provisions in the tax law Certain real estate changes and corporate reorganizations are not taxable because of statutory nonrecognition rules Cash Basis Accounting: Income is generally recognized when actually or constructively received (not when earned). Income can be in the form of cash, property, or services. Noncash items are valued at Fair Market Value (FMV). This is used by many small businesses. Usually taxed when received vs when earned Constructive Dividend: are both shareholders and employees of a corporation An unreasonable salary paid to a shareholder An unreasonable salary paid to the daughter of a shareholder A payment by a corporation of a shareholder’s debt A payment by a corporation of a shareholder’s personal expense Series EE Savings Bonds: a type of savings bond that can be excluded if the taxpayer meets the following criteria Purchased after 1989 by a taxpayer 24 or older Must be purchased not a gift Proceeds must be used for tuition and fees. These are first reduced by scholarships, veteran benefits, and educational credits If married must file jointly Series EE Savings Bond: Exclusion is completely phased out after taxpayer’s Modified Adjusted Gross Income (MAGI) > $96,100 (single) or $151,600 (MFJ). If qualified educational expenses < Series EE principal + interest, then only part of the interest is excluded Excluded EE Interest x Qualified Educational Expenses/ EE interest + principal Alimony: agreements after 12/31/18 are not deductible or includable, but agreements made prior to 1/1/19 are deductible and includable Payments must be in cash Incident to divorce, separation, or written agreement Payments terminate when the payee dies Clearly designated as alimony Agreement made between people in separate households Rental Income: Add first and last month’s rent to find total gross income for the year if they pay before they move in (not security deposit). For calculating gross income  Add rent for number of months rented + damages (withheld from deposit) + unpaid rent = total gross income Rent and royalty income is included in gross income Security deposits are not income if they are refundable Improvements by lessee are not includable into taxpayer’s income unless improvements were done in lieu of rent Taxpaying Entities: Individuals C Corporations (are subject to double taxation) Flow-Through Entities (not taxed on an entity level): Sole proprietorships Partnerships S Corporations (only taxed once) Trusts - can be taxed on an entity level or as a flow through LLCs or LLPs Flow-Through Entities- may deduct 20% of income from QBI (the net income from business activities that doesn’t include investment income). Tax Calculations for C corps- Total income - exclusions = Gross Income     Gross Income - business deductions = Taxable Income C-Corps. are taxed on corporate income and dividends to shareholders (this is where double taxation comes into play)  C-Corps. Account for only 9% of US tax revenue they also cause double taxation on the same income 1st level of tax may be mitigated by paying shareholder-employees salaries and bonuses 2nd level tax may be mitigated by dividends received deduction C-Corps. Can exclude between 50-100% of dividends under the dividends-received deduction (DRD) Tax Calculation for Corporations: Total Income - Exclusions = Gross Income - Business Deductions = Taxable Income *Determination of Taxable Income & Tax Due:equation for 1040        Total Income Exclusions