Presentation is loading. Please wait.

Presentation is loading. Please wait.

©2003 South-Western College Publishing, Cincinnati, Ohio CHAPTER 3 Business Expenses & Retirement Plans.

Published byDebra Kelley Modified over 9 years ago

Similar presentations

Presentation on theme: "©2003 South-Western College Publishing, Cincinnati, Ohio CHAPTER 3 Business Expenses & Retirement Plans."— Presentation transcript:

1 ©2003 South-Western College Publishing, Cincinnati, Ohio CHAPTER 3 Business Expenses & Retirement Plans

2 © 2003 South-Western College PublishingTransparency 3-2 Objective Be familiar with the tax rules for rental property and vacation homes

3 © 2003 South-Western College PublishingTransparency 3-3 Rental Income/Expenses rNet Rental Income or Loss is part of Gross Income <Report on Schedule E rVacation Homes - must allocate expenses, if both personal and rental use of residence <Residence defined as anything providing shelter and accommodations for eating/sleeping (therefore ‘residence’ can be houseboat, mobile home, etc.) rPersonal use is: 1. Use by taxpayer or taxpayer’s family 2. Any use by party who doesn’t pay FMV rent 3. Reciprocal agreement use

4 © 2003 South-Western College PublishingTransparency 3-4 Homes With Dual Use as Rental and Personal rThree Categories <Primarily Personal use ÙRented for < 15 days <Primarily Rental use ÙRented > 15 days and personal use does not exceed greater of 14 days or 10% of total vacation days <Dual uses of property ÙRented > 15 days and personal use does exceed greater of 14 days or 10% of rental days

5 © 2003 South-Western College PublishingTransparency 3-5 Primarily Personal Use rTreated as a personal residence rRent income is not taxable <Mortgage interest/taxes reported on Form 1040, Schedule A <Other expenses are nondeductible

6 © 2003 South-Western College PublishingTransparency 3-6 Primarily Rental Property rMust allocate expenses between rental and personal use, based on <Rental days / Total days used = Rental % <Expenses x % = Deductions rIf rental loss, can deduct against other income, subject to passive loss rules rPersonal % of mortgage interest and real estate taxes always included on Schedule A

7 © 2003 South-Western College PublishingTransparency 3-7 Dual Use Property rAllocate expenses between rental and personal based on <# of rental days / total days used = Rental % rDeduct rental expenses up to amount of rental income only, as follows <Taxes and interest (can calculate % as Rental days/365 - thereby taking more to Schedule A) <Utilities/maintenance (only allowed up to amount of rental income) <Depreciation (only up to remaining rental income) rAny loss can be carried forward

8 © 2003 South-Western College PublishingTransparency 3-8 Example of Rental/Personal Use Facts: Ski cabin Personal use = 25 days Rental use = 50 days Income = $10,000 Taxes = $ 1,500 Interest = $ 3,000 Utilities = $ 2,000 Insurance =$ 1,500 Snow removal =$ 2,500 Depreciation =$12,000 Step 2: taxes/interest = $4,500 x 50/75 = $3,000 deduction on E Step 3: other expenses = $6,000 x 50/75 = $4,000 deduction on E Step 4: depreciation = $12,000 x 50/75 = $8,000 but limited to $3,000 ($10,000 - 3,000 - 4,000 = $3,000) because dual use property can’t create a loss situation Step 5 = What amount goes to Schedule A? (4,500 – 3,000 = $1,500) Step 6 = What is the loss carry- forward? (8,000 – 3,000 =$5,000) Step 1: personal use is > 14 days or 10% of rental (5 days); therefore, does exceed the greater number and this is dual use property

9 © 2003 South-Western College PublishingTransparency 3-9 Objective Understand the general treatment of passive income and losses

10 © 2003 South-Western College PublishingTransparency 3-10 Passive Loss Limitations rRule: When taxpayer is not actively involved in an activity – losses are “passive” and may not be deducted in excess of passive gains, but <Loss can be carried forward and deducted in future years, or <Can deduct when property is sold rReport on Form 8582

11 © 2003 South-Western College PublishingTransparency 3-11 rRental property, by nature, is passive <Special Rule: If taxpayer rents real estate as a profession, he/she is not subject to passive loss limitations Passive Loss Limitations

12 © 2003 South-Western College PublishingTransparency 3-12 rWhen taxpayer is actively involved in rental activity (screens tenants, repairs and maintains property, etc.) <May take up to $25,000 of rental loss against ordinary income <The $25,000 loss capability is reduced by 50 cents for each $1 AGI exceeds $100,000 <Doesn’t apply to Real Estate Limited Partnerships Passive Loss Limitations - Rental Real Estate Exception

13 © 2003 South-Western College PublishingTransparency 3-13 Rental Loss Exception Example Taxpayer actively participates in rental activity that has a rental loss of $20,000. AGI before the loss is $118,000. What amount of the rental loss can be claimed? $118,000 - $100,000 = $18,000 excess, thus $25,000 allowable loss is reduced: $25,000 - ($18,000 x 50%) = $16,000 Only $16,000 of the rental loss can be deducted.

14 © 2003 South-Western College PublishingTransparency 3-14 Objective Know the tax treatment of various deductions for AGI

15 © 2003 South-Western College PublishingTransparency 3-15 Bad Debts rIf income was included in past - worthlessness of a debt is deductible up to basis Q: Can a cash basis taxpayer deduct a bad debt? A: No, because revenue was never included in income

16 © 2003 South-Western College PublishingTransparency 3-16 rTwo types of bad debts <Business bad debts are fully deductible (for partial or full worthlessness) - reported on Schedule C <Non-business bad debts are short term capital losses, which are netted against other capital gains and losses - reported on Schedule D Ùneed to show bona fide debtor/creditor relationship and have proof (for example, bankruptcy proceedings) Ùcan use specific write-off only (no estimates) and any future recovery would be income Bad Debts

17 © 2003 South-Western College PublishingTransparency 3-17 Inventories rLIFO, FIFO, and Specific Identification are all acceptable for calculating cost of inventory <Choose one method and apply consistently rIf LIFO is used for tax, LIFO must also be used for financial statement purposes rForm 970 used to elect LIFO <Why do most companies choose LIFO?

18 © 2003 South-Western College PublishingTransparency 3-18 Net Operating Losses (NOL) rNOLs result from business and casualty losses only <Taxpayer may carry loss back 2 years and file amendments for prior years (1040X) or 1045 (for quick refund), or may elect to carry forward 20 years ÙMay make an irrevocable election to forgo carry back, but must elect this in year of loss <NOLs from 2001 or 2002 carry-back 5 years ÙPre 8/97 NOLs are carried back 3 years and forward 15 <Enter NOLs on line 21 of the Form 1040 as a negative number

19 © 2003 South-Western College PublishingTransparency 3-19 Objective Know the current treatment of Individual Retirement Accounts (IRAs)

20 © 2003 South-Western College PublishingTransparency 3-20 Kinds of IRAs rRegular IRAs (deduction for AGI) rNondeductible IRAs (regular IRAs, but taxpayers cannot deduct because AGI exceeds requirements) rRoth IRAs rEducational “IRAs” (covered in Chapter 5)

21 © 2003 South-Western College PublishingTransparency 3-21 Regular IRAs rContributions may be deducted for AGI rEarnings are not taxed until distribution <Must begin taking distributions by age 70.5 and can’t begin before age 59.5 Ù10% penalty plus income tax for early withdrawal 7.5% of AGI rCan make contributions up to tax return due date (through April 15, 2003 for 2002 deduction)

22 © 2003 South-Western College PublishingTransparency 3-22 Deductibility of Contributions rIf neither spouse is in a qualified plan at work (e.g., 401(k)), may deduct up to $3,000 per year per person <A spouse with no earned income will be able to contribute up to $3,000 annually to an IRA <Taxpayers age 50 and over may add an additional $500 <If both spouses are in qualified plans, the phase out for deductibility is based on filing status (see tables in text)

23 © 2003 South-Western College PublishingTransparency 3-23 rIf one spouse is in a qualified plan: <That spouse’s deduction is phased out based on AGI (see tables in book) $150,000 MFJ rEven if deductibility is phased out, can still make a nondeductible IRA contribution <Important to track, because some distributions may be tax free return of capital (if taxpayers had nondeductible contributions due to phase outs above) Deductibility of Contributions

24 © 2003 South-Western College PublishingTransparency 3-24 Roth IRA rContributions, lesser of $3,000 or earned income for year, are nondeductible <Taxpayers 50 or older may add $500 <Phase outs for AGI from $95,000 to $110,000 for single and $150,000 to $160,000 for MFJ rQualified distributions are tax free as long as Roth IRA was open for 5 years and if: <Distribution is made after age 59.5 or due to a disability <Distribution is used for a first time home buyer

25 © 2003 South-Western College PublishingTransparency 3-25 Catch-Up Contributions rContribution limits will gradually increase each year through 2008 rTaxpayers over age 50 will be able to make catch-up contributions of $500 per year

26 © 2003 South-Western College PublishingTransparency 3-26 Objective Understand the general rules for qualified retirement plan contributions

27 © 2003 South-Western College PublishingTransparency 3-27 Keogh Plan rFor self employed individuals rTax free contributions are limited to lesser of 20% of earned income or $40,000 <Cannot take distributions prior to age 59.5 <Must begin distributions by age 70.5

28 © 2003 South-Western College PublishingTransparency 3-28 Qualified Retirement Plan rQualified retirement plan - primarily deferred compensation not to exceed $11,000/year for all salary reduction plans (includes Section 401(k) plans) <Taxpayers 50 and older may defer $12,000 maximum <Employee isn’t taxed on earnings in account or amount contributed by employer rTo achieve qualified plan status, the plan must: <Be for the exclusive benefit of employees <Be nondiscriminatory <Have certain participation and coverage requirements <Have uniform distribution rules <Have minimum vesting requirements

29 © 2003 South-Western College PublishingTransparency 3-29 Qualified Retirement Plan rFunding a deferred compensation plan <Employee can contribute <Employer may match and will be allowed a deduction for the amount contributed <Maximum contribution is $11,000 ($12,000 if 50 or older) or 15% of gross wages Ùreduce max $ for $ for any other salary reduction plan for employee Ùmaximum will increase by $1,000 each year from 2003 to 2006 <10% excise tax is charged on excess contributions rWhen pensions are distributed, taxpayer gets 1099R

30 © 2003 South-Western College PublishingTransparency 3-30 Plan 1Plan 2 Direct Transfer Rollovers rNo backup withholding necessary because $ goes right from one plan to another rUnlimited number of direct transfers per year Taxpayer

31 © 2003 South-Western College PublishingTransparency 3-31 Plan 1 Taxpayer Plan 2 Distribution Rollovers rTaxpayer has 60 days to get 100% of the $ from one plan to another r20% backup withholding is mandatory, so taxpayer must make up the 20% withholding and then wait until year end to get refund on 1040 rUnlimited number of rollovers allowed per year

32 © 2003 South-Western College PublishingTransparency 3-32 Savings Incentive Match Plan for Employees (SIMPLE Plans) rDesigned for use by employers with less than 100 employees <Can be SIMPLE-IRAs or part of 401(k) <Great plan for employers to maximize retirement contributions rEmployee may elect % of gross wages to contribute (up to $7,000 per year; $7,500 if age 50 or older) rEmployer must either: <match employees’ contributions $ for $ up to 3% of gross wages, or <contribute 2% of gross wages of all employees who make over $5,000 per year (even if they don’t elect salary deferral)

33 © 2003 South-Western College PublishingTransparency 3-33 Examples of SIMPLE Example 1 Sue makes $70,000 and chooses 8% of her salary; therefore, she makes a $5,600 SIMPLE contribution through salary reduction. Her employer matching = $2,100 ($70,000 x 3% maximum match) Example 2 John has a small computer consulting business and has a salary of $5,000. He can contribute 100% of this to his SIMPLE. The employer matching is $5,000 x 3% = $150; for a combined SIMPLE contribution = $6,150

34 © 2003 South-Western College PublishingTransparency 3-34 The End

Download ppt "©2003 South-Western College Publishing, Cincinnati, Ohio CHAPTER 3 Business Expenses & Retirement Plans."

Similar presentations

Chapter 8 Losses and Bad Debts. Learning Objectives Identify transactions that may result in losses Determine the proper classification for losses Calculate.

Chapter 8 Losses and Bad Debts. Learning Objectives Identify transactions that may result in losses Determine the proper classification for losses Calculate.
8-1 ©2011 Pearson Education, Inc. Publishing as Prentice Hall.

8-1 ©2011 Pearson Education, Inc. Publishing as Prentice Hall.
©2015, College for Financial Planning, all rights reserved. Session 10 403(b) and 457 Catch-Ups CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL.

©2015, College for Financial Planning, all rights reserved. Session (b) and 457 Catch-Ups CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL.
McGraw-Hill/Irwin ©The McGraw-Hill Companies, Inc. 2010 Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without.

McGraw-Hill/Irwin ©The McGraw-Hill Companies, Inc Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without.
Federal Income Taxation Lecture 6Slide 1 Taxpayers using the Cash Method of Accounting  Only assets actually received during the calendar year are taxable.

Federal Income Taxation Lecture 6Slide 1 Taxpayers using the Cash Method of Accounting  Only assets actually received during the calendar year are taxable.
Agenda 3/8 BA 128A Questions from lecture Review Chapter 8 &9 Assignment - I8-42,51,59 I9-51,56 Additional problems - I9-61,69.

Agenda 3/8 BA 128A Questions from lecture Review Chapter 8 &9 Assignment - I8-42,51,59 I9-51,56 Additional problems - I9-61,69.
Highlights of Your Company Retirement Plan. 2 Eligibility Who Is Eligible for the Plan? You can join the Plan when you are age age or older and have completed.

Highlights of Your Company Retirement Plan. 2 Eligibility Who Is Eligible for the Plan? You can join the Plan when you are age age or older and have completed.
Retirement Savings and Deferred Compensation

Retirement Savings and Deferred Compensation
Chapter 05 Itemized Deductions “A person should be taxed according to his means” --The Talmud Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights.

Chapter 05 Itemized Deductions “A person should be taxed according to his means” --The Talmud Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights.
Real Estate Investment Chapter 8 Single-Family Dwellings and Condominiums © 2011 Cengage Learning.

Real Estate Investment Chapter 8 Single-Family Dwellings and Condominiums © 2011 Cengage Learning.
Solid Finances Sponsors MSU Extension This program is made possible by a grant from the FINRA Investor Education Foundation through a partnership with.

Solid Finances Sponsors MSU Extension This program is made possible by a grant from the FINRA Investor Education Foundation through a partnership with.
©2015, College for Financial Planning, all rights reserved. Session 9 IRAs–Traditional Deductions and Roth Contributions CERTIFIED FINANCIAL PLANNER CERTIFICATION.

©2015, College for Financial Planning, all rights reserved. Session 9 IRAs–Traditional Deductions and Roth Contributions CERTIFIED FINANCIAL PLANNER CERTIFICATION.
Chapter 4 Business Income & Expenses Part II

Chapter 4 Business Income & Expenses Part II
1 © 2007 ME™ - Your Money Education Resource™ See page 127  Defined Benefit: monthly check for remainder of life Even better if it: increases each year.

1 © 2007 ME™ - Your Money Education Resource™ See page 127  Defined Benefit: monthly check for remainder of life Even better if it: increases each year.
©The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin Chapter 5 Itemized Deductions “A person should be taxed according to his means.” The Talmud.

©The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin Chapter 5 Itemized Deductions “A person should be taxed according to his means.” The Talmud.
Personal Income Tax Mary B Pearson, CPA Assistant Professor of Accounting.

Personal Income Tax Mary B Pearson, CPA Assistant Professor of Accounting.
1 Retirement Planning and Employee Benefits for Financial Planners Chapter 9: IRAs and SEPs.

1 Retirement Planning and Employee Benefits for Financial Planners Chapter 9: IRAs and SEPs.
McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 11 Retirement and Other Tax-Deferred Plans and Annuities.

McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 11 Retirement and Other Tax-Deferred Plans and Annuities.
Chapter 4 Business Income & Expenses Part II Income Tax Fundamentals 2012 Gerald E. Whittenburg Martha Altus-Buller 2012 Cengage Learning.

Chapter 4 Business Income & Expenses Part II Income Tax Fundamentals 2012 Gerald E. Whittenburg Martha Altus-Buller 2012 Cengage Learning.
Chapter 4 Business Income & Expenses Part II Income Tax Fundamentals 2013 Student Slides Gerald E. Whittenburg Martha Altus-Buller Steven Gill 2013 Cengage.

Chapter 4 Business Income & Expenses Part II Income Tax Fundamentals 2013 Student Slides Gerald E. Whittenburg Martha Altus-Buller Steven Gill 2013 Cengage.

Similar presentations

Ads by Google