Chapter 3 Business Income amp Expenses Part I Income Tax Fundamentals 2010 edition Gerald E Whittenburg Martha AltusBuller Student Copy 2010 Cengage Learning Rental IncomeExpenses Net Rental IncomeLoss is part of gross income ID: 287895
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2010 Cengage Learning
Chapter 3Business Income & Expenses Part I
Income Tax Fundamentals 2010 edition
Gerald E. Whittenburg
Martha Altus-Buller
Student CopySlide2
2010 Cengage Learning
Rental Income/ExpensesNet Rental Income/Loss is part of gross income
Report on Schedule E - Part I
Report on Schedule C if provide service to tenants exceeding customary level
Vacation Homes
If both personal and rental use of residence, must allocate expenses
Deductions limited based on period of time residence used for personal vs. rentalSlide3
Passive loss rule
- When taxpayer has minimal or no involvement in an activity, generated losses are considered “passive” and may not be deducted in excess of passive gains, however:Loss can be carried forward and deducted in future years
or
Can be deducted when investment is sold
Examples of passive activities
Limited partnershipsRental real estate
2010 Cengage Learning
Passive Loss LimitationsSlide4
Two types of bad debts
Business bad debts are ordinary deductionsThose that arise from trade/business These are deductible
Non-business bad debts
are short-term capital losses, which are netted against other capital gains and losses
Report on Schedule D
Subject to $3,000/year loss limitation (discussed in Chapter 8 in more detail)
2010 Cengage Learning
Bad DebtsSlide5
NOLs are losses resulting from business and casualty items only
First, carry it back two years and then forward twentyFile amendments for prior years (1040X) or1045 (for quick claim for refund)
or
May make an irrevocable election to forgo carry back, then carry forward
But must elect this in year of loss
American Recovery & Reinvestment Act provides relief for businesses that incurred an NOL in 2008. It allows them to elect to carry back the NOL to the most beneficial year between 2003 and 2006 (or carry it forward and forego carry back).
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Net Operating Losses (NOL)Slide6
2010 Cengage Learning
Types of Individual
Retirement
Accounts
Traditional IRA
Deduction
for AGI when certain criteria metDistributions in retirement are taxable
Roth IRANo current deduction
Distributions in retirement are nontaxableSlide7
Roth or traditional IRA contribution limited to lesser of:
100% of earned income or$5,000Spouse with no earned income will be able to contribute up to $5,000For 2009, taxpayers and spouses age 50 and over can contribute an additional $1,000/year (called “catch-up provision”)
2010 Cengage Learning
Contributing/Deducting - IRA
Can make contributions up through April 15, 2010 for 2009Slide8
Participants must meet minimum age and years of service requirements
Retirement plan geared towards self-employed individualsTax free contributions are limited to lesser of 20% of net earned income (before Keogh deduction) or $49,000Net earned income includes business profits if significantly generated from taxpayer’s personal servicesMust reduce net earned income by ½ self-employment tax for contribution calculation
2010 Cengage Learning
Keogh PlanSlide9
2010 Cengage Learning
Simplified Employee Pension
(SEP)
Same dollar limits as Keogh plans, but contributions made to SEP-IRA
IRA account with higher funding limits
Participants must meet minimum age and years of service requirements
Pay early withdrawal penalty if receive distributions prior to age 59.5Must start drawing by age 70.5Slide10
Contributions by an employer to qualified retirement plans are tax deductible
Employee contributions are pre-tax Tax on earnings is deferred
To achieve qualified plan status, an employer-sponsored retirement plan must
Be for
exclusive benefit
of employees
Be nondiscriminatoryHave certain
participation and coverage requirements Comply with
minimum vesting
requirements
Meet
uniform distribution
rules
Limitations on contributions to/benefits from qualified plans
Defined contribution
– annual addition to employee’s account can’t exceed lesser of 25% of compensation or $49,000
Defined benefit
– annual benefit can’t exceed lesser of $195,000 or average compensation for the highest three consecutive years
2010 Cengage Learning
Qualified Retirement PlanSlide11
§401(k) Employee chooses to
defer some compensation into planDefer means to forego current compensation - the reduction goes into a qualified retirement planEmployees choose % of wages to contribute to planNot to exceed $16,500/year for all salary reduction plans $22,000/year if 50 or olderAn employer may match to encourage participation, this is excludable from income
When distributions occur, contributions/earnings taxable
2010 Cengage Learning
Limitations on
Certain Qualified PlansSlide12
Beginning in 2006, employers allowed to set up Roth §401(k) plan
Employees may defer same annual amount as traditional 401(k), but with no reduction in current taxable incomeWithdrawals/earnings generally tax free upon distribution Expected to be popular with high income taxpayers because no AGI phase-out and much higher annual contribution than a Roth IRA
2010 Cengage Learning
Roth §401(k)Slide13
Credit to
encourage low-income taxpayer participation in retirement savingsTax credit for percentage of retirement plan contribution based upon AGICredit equal to 50%, 20% or 10% of contribution
See chart on page 3-22
Credit is direct deduction from income taxes payable
2010 Cengage Learning
Low Income Retirement Plan
Contribution CreditSlide14
Designed for use by employers with less than 100 employees
SIMPLE-IRAEmployees can defer up to $11,500 per year into SIMPLE-IRA or $14,000 if 50 or older
Employer must either:
Match employees’ contributions
dollar for dollar 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)
Contributions are fully vested when made; first 2 years early withdrawals are subject to 25% penalty
2010 Cengage Learning
Savings Incentive Match Plan for Employees
-
SIMPLE