Day 766
DIET
Went to outback steak house with my friends. Got the 11 OZ house sirloin, sweet potato, and potato soup. Honestly, I make a much better meal than outback. Finished the night with some Apple Pie Ben and Jerry's Ice Cream!
EXERCISES
Feeling tired so took today off.
EXTRA ACTIVITIES
None.
COMMENTS
CPA review till I went out to eat and grocery shopping to stock up on meat!
INTERESTING CPA TIDBITS OF THE DAY
Net operating loss (NOL) is another finicky creature that confuses me. The general rule is that this loss can be carried back 2 years and forward 20 years. To calculate the actual NOL, we first start with Negative Taxable Income. We then proceed to add back personal exemptions, excess capital losses over capital gains and excess non-business deductions over non-business income. The rationale behind net operating losses is to include only business related expenses.
- Let's dissect the equation. Starting with personal exemptions, this is obviously something we add back because it is personal.
- Excess of non-business deductions over non-business income. This means we took more personal deductions than we made income for. This is logical to add back since NOL focuses only on business deductions. Non-business deductions include the standard deduction and SEP retirement plan contributions. Non-business income include dividends, interest, capital gains.
- Finally, excess capital losses over capital gains must be added back. I am not entirely sure about why this is not included but my rationale is that they somehow classify these losses are purely personal in nature. This is something I just need to remember.
We can safely ignore casualty losses (even personal), rental losses, salary, rent as business related activities. These things trip me up. Another thing to remember is that we are only including the EXCESS in the above equations.
A new election can carry back losses up to five years instead of 2, but this is limited to only t0 50% of the year's income. This is phased out for firms with greater than 15 million gross reciepts and those receiving an infusion of federal money.
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Switching gears to interest and refunds. These two things ALWAYS trip me up.
For refunds we do not need to include federal income tax refunds in our income because we are NEVER allowed to take a deduction. For state income tax refunds, we MUST include it in our income IF our previous year's itemized deduction exceeds our standard deduction. This makes sense, if itemized, we took a deduction in a previous year. If we never itemized, we do not need to include this into our income.
For interest we need to include everything except interest from tax exempt vehicles and U.S. possession bonds.
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Slightly related to interest, we sometimes purchase bonds at discount or at a premium. Let's think of the tax consequences of these logically.
With a discount bond. We are purchasing the instrument for LESS than face value. This usually happens if the coupon rate is less than current interest rates. This means you generate less interest for the bond. Overtime, the bond value approaches the face value. This means we are increasing the bond basis. In tax, we logically increase basis as we recognize tax. Thus, we must include the interest in gross income.
With a premium bond. We are purchasing the instrument for MORE than face value. This usually happens if coupon rate is greater than current interest rates. This means you generate more interest for the bond. Overtime, the bond value approaches the face value. This means we are decreasing the basis. This means we can offset interest income. A note to make is that this follows the current year method. [Needs revision]
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One of my friends asked a really good question on the discussion boards of our CPA review class. I thought I would think through his problem. He asked... "What is the difference between casualty loss and involuntary conversion?" Here is what I answered, flushed out a tiny bit.
We know that casualty losses can be essentially four categories. Personal property is separately netted for gains and losses.
Partial Damage Personal = Lesser of (Decrease in FMV or Adjusted Basis of Property) minus insurance minus $500 dollar floor PER PERSONAL casualty minus 10% AGI (if loss). There is no 10% AGI limit if it is a gain.
Complete Damage Persona l = Lesser of (Decrease in FMV or Adjusted Basis of Property) minus insurance minus $500 dollar floor PER PERSONAL casualty minus 10% AGI (if loss). There is no 10% AGI limit if it is a gain.
Partial Damage Business = Lesser of (Decrease in FMV or Adjusted Basis of Property) minus insurance. [Unsure, can't find documentation]
Complete Damage Business = Adjusted basis of property minus any insurance reimbursement.
Involuntary Conversions refer to condemned property. Destruction, theft, and seizure are also classified as involuntary conversions but these are generally deductible as casualty losses above. For our purposes, we will focus on condemned property. We usually see the replacement of property within 2 years of a realized gain or 3 years for condemned business or investment real property.
While we recognizes casualty LOSSES are itemized deductions. (If a gain does occur, we net the gains and losses and then everything is treated as a capital gain or loss) We typically see involuntary conversions (in problems) as GAINS since we get more insurance reimbursement than what it costs us to replace the property. Think of this more as a property transaction. We can't take involuntary conversion losses because these are personal. For involuntary conversion problems, we focus more on the basis of the new property or the gain resulting from the purchase of the replacement property.