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2010 Cengage Learning 2010 Cengage Learning

2010 Cengage Learning - PowerPoint Presentation

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2010 Cengage Learning - PPT Presentation

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

cengage 2010 income learning 2010 cengage learning income retirement contributions plan year ira years carry qualified 000 contribution tax earned roth loss

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Slide1

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).

2010 Cengage Learning

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