BA 128A-1 Review Session II

1. BA 128A-1 Review Session II • Review Chapter 7,8,9,10,11,12 • Problems I7-55,I8-43,I9-50,I10-28, I11-48,56, I12-31 • Questions • Good Luck!

2. Chapter 7 - Charitable Contributions • Need to know the nature of the donation • Qualifying organization • Public charity • Private nonoperating foundation • Nature of the property, ordinary income property, capital gain property or cash • Capital Gain property - capital assets held > 1year , otherwise become ordinary income property • Ordinary income property, property contributed to private non-operating foundation, unrelated use property to public charity - contribution = FMV- capital gain recognized (ie adjusted basis)

3. Charitable Contributions • Limitations • Overall total = 50% of AGI • Ordinary income property + cash to public charity - 50% of AGI • Capital Gain property to any charitable organization - 30% of AGI • Any property to private nonoperating foundation limited to 30% of AGI, capital gain property - lesser of 20% of AGI or 30% of AGI reduced by contributions of capital gain property donated to a public charity

4. Chapter 8 - Losses and passive activities • Sale or exchange - • personal use asset - loss is not deductible • capital assets/section 1231 assets - capital loss • seizure or condemnation - same treatment • Abandonment, worthless securities - ordinary loss • Demolition - no loss recognized, basis is reduced

5. Passive activities • Any rental activity, trade or business where taxpayer does not materially participate • Passive loss deduct up to passive income, net each activity first • If passive activity is disposed of, suspended losses can net against active income but suspended losses need to net against other passive activities gain/loss first before applying to active income

6. Rental activities • If taxpayer actively participate and own at least 10% of the value of activity, allow $25000 of the income to net against active income but passive gain/loss has to net against other passive activities first before applying to active income • Subject to phase-out

7. Casualty loss • only allowed to deduct up to adjusted basis Bus/investment Personal Total destruction adjusted basis smaller of adjusted Basis or reduction in FMV Partial destruction smaller of --------> ad. Basis or <------------ reduction in FMV • casualty loss on business and investment property that generate rents or royalties are for AGI, losses on other investment property are misc. itemized deduction.

8. Other losses • Bus bad debt - ordinary loss • Personal bad debt - ST capital loss • NOL • Adjust back other deductions • plus non-bus capital loss deduction • plus non-business deductions e.g. personal exemption and standard/itemized deduction • minus non business income like dividend/interest income and non business LTCGM

9. Chapter 9 Employee Reimbursed Expenses • Reimbursed employee expenses • accountable plan - substantiation, excess is returned to employer - not include in GI and not deductible, if excess is not return, include in income • not accountable plan - include in GI, expenses deducted as misc. itemized deduction • Unreimbursed employee expenses - deductible from AGI - misc. itemized deduction

10. What is deductible • Travel expenses - transportation, meals and lodging. Meals - 50%, has to be away from tax home • Automobile expenses - standard vs. actual • Entertainment expenses - 50% • Moving expenses - for AGI deduction • Education expenses • Office in home expenses • Deferred compensation • Qualified plans - exclusive for employees, not discriminating and other vesting and funding requirements • Employer can deduct contribution and employee not taxed on earnings from contributions until withdrawn • Traditional IRA $2000 deductible for AGI - subject to salary limit

11. Chapter 10 - Depreciation • For assets/property used in trade or business or held for production of income • Personal use property • Personal property - equipment, vehicles, furniture • Real Property - land and structure permanently attached to the land • ACRS • Personal property - ACRS table or straight line, half year convention for 3,5,10,15 recovery period, all assets treated as if acquired in the mid point of the year, no cost recovery in the year of sale/disposition • Real property - residential/nonresidential real property used in trade or business or held for the production of income, recovery periods 15.18.19 years for different property acquired at different dates P I10-6 • After 6/22/84, mid month convention is used, half-year is used before the date • Can elect to use st. line

12. MACRS - personal property • Personal property - half year convention, conversion to straight line if yields larger amount, amount reduced by half in year of disposition, recovery period is 3,5,7,10,15 years • Requires the use of mid-quarter if aggregate basis of all personal property in service in the last 3 months > 40% of the cost of all personal property placed in service during the tax year • Disposal calculation needs to be consistent, half year or quarter • May elect straight line

13. MACRS - real property • Residential - 27.5 years recovery period, 80% of income has to derive from dwelling purpose • Non-residential, 39 years • mid-month • Straight line

14. Section 179 • Apply only to tangible personal business property • $18500 in 1998 in year of acquisition • Not applied to real estate • Election made on annual basis • Limitations • cannot be related party transaction • Phase out >$200,000 property acquired $ for $ • Cannot exceed taxpayer’s income

15. Amortization • Straight line • Apply to goodwill & other purchased intangibles • Research and experimental expenditures • Start-up expenditures and others • Section 197 acquisition of business • R&E expenditures - election - expense in the year occurred, defer/amortized the costs. If no election - capitalized

16. Long Term Contracts • Construction of property/good that cannot be completed within the tax year period after it has begun • Methods to account for income • % of completion - (according to % of work completed) • (costs incurred in the year/total estimated costs)* total profit • completed contract method - (income reported in year contract is completed) • modified % of completion - (if cost is hard to estimate, recognized income until 10% of costs incurred) • Look back interest adjustments (compare to actual costs)

17. Installment Sale • Installment sale - at least 1 payment is received after close of the taxable year in which the disposition occurs. • Formula • compute gross profit- selling price - (adjusted basis + selling expenses) • determine contract price - greater of gross profit or selling price minus mortgage assumed • Gross profit % = gross profit/contract price • gain reported = principal received during year * gross profit %

18. Imputed Interest • Installment basis contract with no interest or low rate of interest • IRS apply rate according to fed government rate on borrowed funds • If principal < $2.8 million, interest rate limited to 9%, related party rate limited to 6%