[jeff]

Welcome to the Q4 2017 CPA Exam Study Group for REG. 🙂

Introduce yourselves and let your fellow NINJAs know when you plan to take your REG exam.

The Five Steps (NINJA Framework): https://www.another71.com/pass-the-cpa-exam/

[Sandy]

@mashloum

I felt the same way so that I changed my exam from 12/6 to 1/6.
Just to give myself more time to review videos and notes again.

[CPADream]

Hi all,

I have a question about Estate if anyone can help.

When a decedent passed away in the middle of the year. How should you report the following item in form 1040 or 1041?

1. Quarterly interest (death happen in the middle of the quarter)
2. Dividend (declared but not yet received on death date)
3. Loan (repayment + interest received after death)

Thank you!

[joonpark1212]

As I'm in the final review stage, I have a topic which I would like to go over with ya'll.
It's regarding the treatment on some of the benefits partners and S Corp shareholders owning over 2% shares receives.
My summary thus far on the benefits such as Health Insurance, Life Insurance, EMPLOYEE BENEFIT PROGRAMS, PENSION/PROFIT SHARING PLANS are as follows:

<Shareholders owning over 2% shares in S Corporation>
Health Insurance and Life Insurance Premiums paid by S Corp flows through to the shareholder. So S Corp cannot deduct this amount calculating business ordinary income.
Employee benefit programs paid by S Corp included as income to the shareholder. S Corp can deduct in calculating business ordinary income.
Pension/Retirement plans contribution by S Corp is not an income for the shareholder. S Corp fully deducts pension contributions.

<Partners in Partnership> Reminds me much of Self-Employed and Sole proprietorship
Health Insurance and Life Insurance premiums paid by Partnership is to be included as income(Guaranteed Payment). So Partnership can deduct this amount as Guaranteed Payment.
Employee benefit programs does not apply for partners.
Pension/Retirement plans contributions flow through to partner. So, Partnership cannot deduct this amount.

Would anyone would like to provide their thoughts? The CPA reviews might not go this deep, but everytime I go over the tax forms it bothered me so wanted to share.

[AR]

Hi All,

Another question from Ninja whose solution does not make sense to me. Could anyone please provide a solution in clearer terms? The question and solution are as follows:

Destry, a single taxpayer, reported the following on his U.S. Individual Income Tax Return (Form 1040):

Income:

Wages $5,000
Interest on savings account 1,000
Net rental income 4,000

Deductions:

Personal exemption $ 4,000
Standard deduction 6,300
Net business loss 16,000
Net short-term capital loss 2,000

What is Destry's net operating loss that is available for carryback or carryforward?

A.
$7,000 Correct
B.
$9,000
C.
$15,700
D.
$16,000

Solution: The interest income (nonbusiness income) is offset by nonbusiness expenses, up to the amount of nonbusiness income. The standard deduction is a nonbusiness expense for this purpose. The net capital loss (nonbusiness) is only deductible to the extent it is offset by nonbusiness capital gains. Personal exemptions and unused personal deductions are added back to taxable income in arriving at net operating losses so they do not increase the carryback or carryforward. The net business loss must be offset by wages and rental income for this year. Wages of $5,000 plus net rental income of $4,000 minus the loss of $16,000 equals a net operating loss carryback or carryforward of $7,000.

Also, is there a handy step by step process to arrive at NOL give a set of incomes and losses?

Thank you folks!

[AR]

A general question about amount of preparedness needed for REG: I have my exam on January 7. I have only done Income taxation of individuals so far, and am not fully confident with this module. I intend to finish taxation (property, corporations, entity) in the next 10 days, and then spend rest of my time on remaining modules. Do you guys think this is doable? How many hours/day are ideally needed. I cannot postpone the exam date any further. If I fail, I will have to take it again. TIA.

[Sandy]

@CPADream

I think the idea is to understand the concept of Income in respect of decedent (IRD)
The income earned before death and received after death.
And it goes on both form 706 and 1041.
For interest, the IRD should be accrued from last payment to the date of death.
For dividend, if it's declared but not yet received before death, it should be IRD.
For loan repayment, it should go on form 1041. ( need to verify)

[Sandy]

@AR

The question is about net operating loss.
Only the business related income and expense needed to be put into consideration.
First of all, you need to identify whether it's considered related to business.
Income related to business: wages, rental income, self employment income, unemployment compensation, business income from S corp or partnership, ordinary gain from the sale of business property.

Deduction related to business: net business loss, state income tax related to business, moving expense, educator expense, deduction for self employment insurance, rental loss, loss on sale of business property, bad debt expense

Second, calculate the NOL
5000+4000-16000= -7000

Therefore, we have NOL $7000

[AR]

Thank you Sophie. That is helpful.

[CPADream]

Thank you Sophie for the answer. That's what I understand from Wiley simulation explanation. However, a few weeks ago when I emailed Becker this question. Their respond was individual should be consider “Cash basis”. Therefore, anything that was not received by the decedent even thought it was earned prior death should be put onto 1041. So confused 🙁

[Sandy]

@joonpark1212

The material from Roger CPA and Wiley CPA says that
“the health and insurance premiums and other fringe benefits paid by S corp on behalf of a more than 2% shareholder employee are deductible by the S corp as compensation and included on the shareholder's gross income on Form-W2. ”

I didn't verify but it's different from your perspective.
I don't know which one is correct.

[mashloum]

Falcon is a calendar year S corp owned equally by two shareholders Jennifer and Marvin. Falcon reports its income and expenses on the accrual method of accounting. Falcon has always been an S corporation and has no debt. Falcon's controller has provided information for the completion of Falcon's Year 4 Form 1120S.
Questions : 1) Falcon's Year 4 Ordinary Business Income (loss) to be reported on Form 1120S? – answer was 440,000 please explain how 2) Sum of Falcon's year 4 separately stated items of taxable income and deductible expense to be reported on Form 1120S , Schedule K , Shareholder's Pro Rata Share Items : Answer was (24,000) please explain how 3) Falcon's Year 4 nondeductible expenses : (2,000) –> please explain how 4) Falcon's December 31, Year 4 Accumulated Adjustment Account balance (apparently this was a really hard one) –> answer was 484,000 5) Jennifer's shareholder tax basis at December 31, Year 4 —> answer was 252,000 need help as to how
Falcon Income Statement : Sales, less returns and allowances of 2,000 : 1,200,000 COGS : 500,000 Gross profit : 700,000 Salaries and wages : 170,000 , Repairs and Maintenance : 10,000 Depreciation Expense : 8,000 , Charitable Contributions : 5,000 Payroll Taxes : 15,000 , Penalties and Fines : 2,000, Business Insurance : 9,000 , Rent Expense : 36,000 Total expenses : 255,000 , Income Before Other Income (expense) : 445,000 Other Income (expense) : Bank interest income : 1,000 Capital Loss on Sale of Land : (20,000) Total Other Income (expense) : (19,000) Net Income : 426,000
Falcon's Accumulated Adjustment Account Balance at January 1, Year 4 : 100,000 Total Distributions to shareholders during year 4 (distributed equally) : 30,000 Jennifer's tax basis at January 1 , Year 4 : $60,000 Marvin's tax basis at January 1, Year 4 : $75,000
**MACRS depreciation expense for the year was 20,000
1.) Sales: 1,200,000
Less: COGS: 500,000
Repairs: 10,000
Salaries: 170,000
Payroll: 15,000
Insurance: 9,000
MACRS: 20,000
Rent Exp: 36,000
760,000

440,000
2.) Charity: (5,000)
Bank interest: 1,000
Sale Capital Loss (20,000)
(24,000)
3.) Penalties are non-deductible (2,000)
4.) AAA Beginning 100,000
Add: Ord. Income 440,000
Sub: Distributions (30,000)
Nondeductible Exp (2,000)
Sep. Stated (24,000)
484,000
5.) Basis Jan. 1 60,000
Add: Ord income 220,000 (440,000 * 0.5)
Sub: Dist Share (15,000) (30,000 * 0.5)
Nondeductible (1,000) (2,000 * 0.5)
Sep Stated (12,000) (24,000 * 0.5)
252,000

[mashloum]

Your client, Lina Madhuri, travels locally as a self employed IT consultant. Lina bought a new vehicle at the beginning of year 1 at a cost of $20,000. Lina did not elect to expense the vehicle under Section 179 or take bonus depreciation. The vehicle is not subject to listed property limitations. The depreciable life of this vehicle is 5 years, and Lina uses MACRS to calculate the depreciation for income tax purposes. Lina sold the vehicle on December 31, year 2, for $18,000. There were no other vehicle or equipment purchases in year 1. The applicable IRS standard mileage rate for business use was 58.5 cents per mile for both year 1 and year 2.

Additional information:
Lina incurred the following travel expenses:
Expenses Year 1 Year 2
Gasoline 5000 7000
Insurance 4000 4000
Repairs 3000 2000
Parking tickets 500 400
Speeding tickets 550 650

Lina drove the following miles in the vehicle for years 1 and 2:
Mileage Year 1 Year 2
Personal 5000 8000
Business 15000 24000
Total 20000 32000

MACRS Half-Year Convention Table for 5-year recovery period
Year 1: 20%
Year 2: 32%

The following questions pertain to Year 2 amounts:
1. What is the vehicle expense deduction using the standard mileage rate?
2. What is the business vehicle expense using the actual expense method, ignoring depreciation?
3. What is the depreciation deduction?
4. What is the remaining basis before sale using the actual expense method since purchase?

Answers:
1. $14,040
2. $9,750
3. $2,400
4. $14,600

I understand the first one questions, however, the solution only provides the amounts, so how to calculate answers 2, 3 and 4. Please help!

[56_Moves]

@mashloum your 2nd question:
2) What is the business vehicle expense using the actual expense method, ignoring depreciation?
Gas $7,000 + Insurance $4,000 + Repairs $2,000 = $13,000 (The tickets are not deductible).
Business use 24,000 miles / Total use 32,000 = 75%
$13,000 X 75% = $9,750.

3) What is the depreciation deduction?
Basis of vehicle $20,000 X 32% (MACRS 2nd year) = $6,400
$6,400 / 2 (have to use half year in year of disposition) = $3,200
$3,200 X 75% (Business use) = $2,400.

4) What is the remaining basis before sale using the actual expense method since purchase?
Basis of vehicle $20,000 X 20% (MACRS 1st year) = $4,000
2nd year of depreciation = $3,200 (per answer to question 3)
Total depreciation before calculating business portion is $4,000 + $3,200 = $7,200
$7,200 X 75% (Business use) = $5,400
$20,000 (Basis of vehicle) – $5,400 (Accumulated Depreciation) = $14,600 (Remaining Basis before sale)

Hope this helps.

[pcunniff]

Does anyone remember the cool off periods for a gov employee who is part of the tax law change? I think its 1 year for most, but forgot and can't find in the book when the cool off is FOREVER.

If anyone remembers where this is stated in CPA wiley Excel – please let me know!

[pcunniff]

@joonpark1212

Aren't pension distributions passed down to the individual K-1s and are NOT deductible? Not sure if there is a special election for this, but i think they are. I agree with everything else on the 2% test. Also, shareholders owning LESS than 2% have fringe benefits as DEDUCTIBLE by the S-corp to add to your list.

<Partners in Partnership> Reminds me much of Self-Employed and Sole proprietorship
Health Insurance and Life Insurance premiums paid by Partnership is to be included as income(Guaranteed Payment). So Partnership can deduct this amount as Guaranteed Payment. AGREED. To be included in ordinary income to the individual partner. My question to you would be, after it is separately stated, would the life insurance premiums flow to the face of the 1040 under ordinary income and health insurance premiums to schedule A after the K-1? Testing you on what you think.

Employee benefit programs does not apply for partners. Agreed, this is an ordinary deduction on the face of the 1065.
Pension/Retirement plans contributions flow through to partner. So, Partnership cannot deduct this amount. This I'm not sure i agree with you on as it is stated on line 18 of the 1065. I will have to look this up, but I know they flow through to the partners. You are half right for sure on this.

[Author]

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