[jeff]

Welcome to the Q2 2015 CPA Exam Study Group for REG.

“Death and Taxes” – Individual Tax for the CPA Exam

Posted by Another71 on Monday, November 24, 2014

Free NINJA: https://www.another71.com/cpa-exam-study-plan/

Jeff Elliott, CPA (KS) | Another71 | NINJA CPA | NINJA CMA | NINJA CPE

[Gabe]

@ok thanks! So just the business costs, ignoring deductions and exemptions. The answer calculation was really long and convoluted.

CPA, CFE
CISA- Experience will be completed by August 2016

[Gabe]

@cpr deducted? Do you have an example?

CPA, CFE
CISA- Experience will be completed by August 2016

[Anonymous]

Expenses can be deducted ONLY when expensed and incurred. So you can't prepay 10 years worth of rent and deduct it all in year 1. It wasn't incurred!

[okcpa2015]

@cprv19 I think you might be including the “constructive receipt doctrine” for taxable income with deductions.

Prepaid rent received is included in income as for a cash basis taxpayer in the period it is received as long as it would not have to be potentially returned in the future.

Deductions do not follow the same logic. Another example would be prepaid interest expense. If a calendar year cash basis tax payer prepaid 12 months worth of interest on July 1, the would only be able to deduct 6 months of interest in the current year.

FAR - 91
REG - 88
AUD - 98
BEC - 88

[Anonymous]

I've seen “Prepaid rent may not be deducted by either a cash-basis or an accrual-basis taxpayer. To do so would violate the requirement that the taxpayer’s method of accounting must clearly reflect income [Sec. 446(b)]. ”

I've also seen “An expenditure that creates an asset having a useful life extending substantially beyond the close of the taxable year is not deductible [Reg. 1.461-1(a)].”

That second one makes me think what if it wasn't substantially beyond the close of the tax year? Then they can deduct it?

I know that if it's rent being paid wayyyyyy in the future u can only deduct whats applicable to that year and if u are the one receiving it you do the same and only include in income what's applicable to that year.

But is there a scenario where someone just pays a couple of months rent ahead of time for example January and February where a cash basis taxpayer can go ahead and deduct it?

Does it work the other way around where if u receive rent in advance for just a couple months is it included income? I feel like i have seen somewhere that both cash basis and accrual basis taxpayers have to include rental income in gross income whether or not it was for that year.

[OnlyBelieve]

Suppose you provide 75% of your mother-in-law's support during the year and you are filing as head of household. Is she required to live with you in order for you to qualify to claim her?

AUD - DONE
BEC - DONE
REG - 04/04
FAR - 05/30

[Gabe]

@cprv I know which question you're talking about- for security deposits? So, the landlord receives rent for the first and last month of rent (which could be years from now) so he includes both in gross income. However, it was received in the current tax year.

@only HofH only requires half year (think head=half, while widowers require whole year)…so, yes, if your MIL lived with you for half the year, you supported her 75%, then you could claim her. Note as HofH, you must not be married to qualify.

CPA, CFE
CISA- Experience will be completed by August 2016

[Gabe]

Here's an example cprv:

Pierce Corp., an accrual-basis, calendar-year C corporation, had the following receipts in 2014:

Year 2015 advance rental payments for a lease ending in 2016 $250,000

Lease cancellation payment from a 5-year lease tenant 100,000

Pierce had no restrictions on the use of the advance rental payments and renders no services in connection with the rental income. What amount of gross income should Pierce report on its 2014 tax return?

Answer: $350k

Prepaid rents (but not refundable deposits) are treated as income when received, even by an accrual basis taxpayer. Consideration for cancellation of a lease is deemed a substitute for lease payments. Therefore, the cancellation payment is also treated as taxable income when received.

Regulation Section 1.61-8(b)

CPA, CFE
CISA- Experience will be completed by August 2016

[jstay]

anyone else testing around 5/15? I wanna see where im at and how im doing. its a retake, so far I have went through the chapters and made index cards (didn't the first time). next week starts hardcore studying and ill start the mcq again(did a little this weekend). 7.5 weeks to go, is this enough??

[Gabe]

jstay- I'd say that is more than enough time…maybe too much? I am also doing a re-take..started studying again in February, so roughly 7 weeks and if I could test sooner, I would. There comes a point where you start forgetting stuff. You could always start studying and see how you feel in a few weeks..maybe you feel prepared, maybe you feel like you need more time. To me, 7.5 weeks (especially since you went through all the chapters already) for a re-take is a lot of time.

CPA, CFE
CISA- Experience will be completed by August 2016

[jstay]

thanks yeah, honestly I probably tend to overkill it with these exams. also 3.5 weeks of the 7 is going to be vacation time where im doing nothing but studying. thanks that helped me realize I still have time. I just feel like cause I haven't kicked into overdrive yet that im not going to have enough time

[Gabe]

@jstay I did the same thing. “kicked into overdrive” little early 🙂 now I am going back and really looking at details. Especially since you have 3.5 weeks of pure studying, I would definitely move it up, but that's just me- like I said, see how you feel in a few weeks.

CPA, CFE
CISA- Experience will be completed by August 2016

[Gabe]

Beckler & Associates, CPAs, audited and gave an unqualified opinion on the financial statements of Queen Co. The financial statements contained misstatements that resulted in a material overstatement of Queen's net worth. Queen provided the audited financial statements to Mac Bank in connection with a loan made by Mac to Queen.

Beckler knew that the financial statements would be provided to Mac. Queen defaulted on the loan. Mac sued Beckler to recover for its losses associated with Queen's default.

Which of the following must Mac prove in order to recover?

I. Beckler was negligent in conducting the audit.

II. Mac relied on the financial statements.

I only.

II only.

Both I and II.

Neither I nor II.

Would this be considered ordinary negligence?

CPA, CFE
CISA- Experience will be completed by August 2016

[OnlyBelieve]

Gabe- i thought the same way half year=Head of household. Check out ninja sim #5. It says your mother-in-law and parents do not have to live with you. I get the parents part. Can anyone explain the mother-in-law part?

AUD - DONE
BEC - DONE
REG - 04/04
FAR - 05/30

[Gabe]

@only ah the wording is misleading…the MIL is not considered for head of household status, the fact that she is married and hasn't seen/lived with her husband in 6 months and has a qualifying child does that.

The MIL is used for exemption purposes…in that case, she does not have to live with her.

Check out R1-9 vs R1-11

CPA, CFE
CISA- Experience will be completed by August 2016

[Author]

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