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ACCT-4021EL Lecture Notes - Lecture 11: Property Income

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plumbee368
3 Dec 2018
School
Laurentian
Department
Accounting
Course
ACCT-4021EL
Professor
Kayla Levesque

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Document Summary

Registrants to an rrsp plan are able to deduct the contributions made in the year and also within the first 60 days of the following year. The income earned within the rrsp plan is not taxed until the funds withdrawn. If funds are borrowed to contribute to an rrsp the interest paid on borrowed funds is not deductible. All amounts withdrawn from the plan must be included into income except for amounts withdrawn under the home buyers plan and the. All contributions made to the spousal or common law rrsp plan will be deductible to the contributor. However, if the amounts are withdrawn by the spouse within 2 years of the contribution, the amounts will be attributed back to the contributor and taxed on their return. The act imposes restrictions on the amounts that can be contributed to an rrsp plan and be deducted in a specified year.

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Related Questions

You work for an organization in Nova Scotia and your manager,Jessica Boyer, has asked you to prepare a memo detailing theremittance responsibilities and legal consequences ofnon-compliance with statutory remittance requirements.

studing material :

Employers are responsible for registering and maintaining apayroll program account with the Canada Revenue Agency. Theemployer will remit the statutory deductions withheld from theemployees’ remuneration for Canada Pension Plan (CPP)contributions, Employment Insurance (EI) premiums, and federal andnon-Québec provincial income taxes, along with the employerportions of CPP and EI to this account.
In Trust

Statutory deductions are deemed to be held in trust for theReceiver General for Canada. This means the amounts withheld fromemployees, along with the employer’s portion, must be kept separatefrom the operating funds of the business and cannot be part of anestate in liquidation, assignment, receivership, or bankruptcy.Employers who make their own government remittances, as opposed tohaving them remitted by a service provider, must separate all CPPcontributions, EI premiums and income tax withholdings, along withany employer portion, from the organization’s regular bank account.All statutory deductions and contributions must be held in aseparate payroll account until the remittance is made to theReceiver General.

Remitter Type

An organization’s remittance frequency depends on its averagemonthly withholding amount for the second preceding calendar year.For example, the withholding amount for 2017 will depend on theemployer’s average monthly withholding amount made in 2015.Employers may apply to the Canada Revenue Agency to have theiraverage monthly withholding amount for the current or previous yearused instead of the second preceding year. This would beadvantageous if the employer’s payroll for the previous year waslower than the payroll for the second preceding year.

Remittance Schedule

Once an employer has been advised by the CRA what type ofremitter they are, a schedule, based on that type, is used todetermine when the remittances are due to the CRA. The payment forthe first three types of remitters – quarterly, regular, andaccelerated threshold 1 – is due by a specified date based on thepayroll cheque/deposit date. The remittance for acceleratedthreshold 2 remitters is due three business days after the end ofthe weekly period, established by the CRA, in which the payrollcheque/deposit date falls. In all cases, the payroll cheque/depositdate is the date when the money is paid to the employee or directlydeposited in their bank account. The period end date, the payrollprocessing date and the date the pay statement is handed to theemployee are all irrelevant in determining the remittance date.

Penalties and Interest Charges

The CRA may assess a penalty of up to 10% of the required amountof CPP contributions, EI premiums and income taxes due for lateremittances (20% on the second and later occurrences). An employerwho withholds the statutory deductions but does not remit them, orfails to deduct the required deductions will be subject to a 10%penalty for the first occurrence on the amount that should havebeen deducted and remitted (20% on the second and lateroccurrences). The penalties for late remittances are asfollows:
 3% if payment is late 3 business days or less
 5% if payment is late 4 or 5 business days
 7% if payment is late 6 or 7 business days
 10% if payment is 8 or more business days late Normally thepenalty is only applied to the part of the amount that the employerfails to remit that is more than $500.00, however the CRA may applythe penalty to the total amount if the failure to remit, or thelate remittance, was made knowingly or under circumstances of grossnegligence. Again, special attention is required at the end of theyear if producing any manual cheques after the final pay period forthe year has been processed

First discussion question

Read the belowAICPA article.

President Barack Obama releasedhis last proposed budget, for the government’s 2017 fiscal year,on Tuesday February 9. Itcontains tax provisions affecting education, health care, andretirement, as well as proposing extensive changes affectingbusinesses. Many of the changes and areas should now be familiar toyou - Sec. 179, reducing tax benefits for high-income taxpayers,simplified accounting for small businesses, incentives to bringjobs back to America, and last week's discussion of foreign earnedincome for corporations.

Pick a few of the proposals youagree with, plus several you disagree with, and discuss thereasons?

Second Final Question<

First, there is no such thing asa tax "loophole" - they are called deductions. Remember that ALLincome is taxable, unlessspecifically excluded by law. And ALL expenses are disallowedunless specifically included by law.

We have a tax system that triesto modify taxpayer behavior by changing the tax rates on income,and by allowing or disallowing certain types of deductions. But ourtax system is not collecting enough revenue to cover governmentexpenditures. Some think corporations are paying too much, but ifthey don't pay, then the individual taxpayer has to pay. However,as we now know, the individual taxpayer already carries themajority of the tax burden, and if the wealthiest don't pay theirfair share, the middle and lowest earners have to pay. The bottomline is someone has to pay - the question is how to make thatequitable. Is it as simple as having a flat tax forindividuals?

AICPAARTICLE

President’s budget proposes manytax changes By Alistair M. Nevius, J.D. February 9, 2016President Barack Obama released hislast proposed budget, for the government’s 2017 fiscal year, onTuesday. It contains tax provisions affecting education, healthcare, and retirement, as well as proposing extensive changesaffecting businesses. The budget presents a wish list of changesthe administration would like to see enacted; however, theRepublican-held Congress is unlikely to support much of thepresident’s plan. Among the many proposed tax changes are thefollowing: Earned income tax credit The budget proposes expandingthe Sec. 32 earned income tax credit for taxpayers who do not havea qualifying child (including noncustodial parents). The amount ofthe credit available to these taxpayers would increase to roughly$1,000. The credit would also be made available to workers who areages 21–24 and ages 65 and 66. It also would create a newsecond-earner tax credit of up to $500 for married couples in whichboth spouses work. The credit would be phased out for couples whoseadjusted gross income (AGI) exceeded $120,000. Child and dependentcare credit The budget would essentially triple the amount of thechild and dependent care credit to $3,000 per child for familieswith children under the age of 5. It would also increase thephasedown limit so that it does not apply to taxpayers with annualAGI of less than $120,000. (The credit is currently phased down fortaxpayers with AGI above $15,000.) However, the budget would alsoeliminate flexible spending accounts for child care expenses.Education credits The budget proposes folding the Sec. 25A lifetimelearning credit into the American opportunity tax credit. It wouldalso expand the American opportunity tax credit to make itavailable for five years and refundable up to $1,500. (Currently,it is available for four years and is refundable up to $1,000.)Pell Grants would be exempt from taxation and from the Americanopportunity tax credit calculation, and student loan forgivenesswould no longer be considered to result in taxablecancellation-of-debt income. Community colleges The budget wouldcreate a new $5,000 tax credit—called the community collegepartnership tax credit—for employers that help community collegesfill their investment shortfalls and that hire qualifying communitycollege graduates. President’s budget proposes many tax changesPage 1 of 4http://www.journalofaccountancy.com/news/2016/feb/budget-proposes-many-tax-changes-201613856.html2/10/2016 The budget calls for funding of a program calledAmerica’s College Promise that would create a federal-statepartnership to make two years of community college free. Retirementsavings The proposed budget includes a number of proposals that aredesigned to increase access to retirement plans and to makeportability of retirement savings and benefits easier. Theseinclude requiring employers with more than 10 employees that do notoffer a retirement plan to automatically enroll their employees inan IRA. Businesses with fewer than 100 employees would get taxcredits of up to $4,500 for offering automatic IRA enrollment.Reducing tax benefits for high-income taxpayers The budget wouldlimit the value of certain deductions and exclusions from AGI andall itemized deductions. The proposal would reduce to 28% of thevalue of the specified exclusions and deductions that wouldotherwise reduce a taxpayer’s taxable income in the 33%, 35%, or39.6% tax brackets. The definition of net investment income wouldbe expanded to include gross income and gain from any trades orbusinesses of an individual that is not otherwise subject toemployment taxes. The budget also proposes an implementation of theso-called Buffett rule (called a “Fair Share Tax” in the budget),which would require high-income taxpayers to pay at least a 30% taxrate (after charitable contributions). Capital gains tax Under thebudget, the maximum capital gains tax rate would increase to 28%(inclusive of the 3.8% net investment income tax). It would alsoeliminate basis step-ups on gifts and bequests by treatingtransfers of appreciated property as a sale, so that the donor or deceased owner wouldrealize a capital gain on the transfer. The budget would also taxcarried interests at ordinary income tax rates instead of ascapital gain. Corporate tax reform The budget would cut thecorporate tax rate to 28%. It would also impose a 19% minimum taxon foreign earnings, which would be imposed when the earnings areearned. As a transition to the minimum tax, previously untaxedforeign income would be subject to a one-time 14% tax. The budgetwould also provide further rules against earnings stripping andcorporate inversions. Incentives to bring jobs to the United StatesThe budget proposes to provide a tax credit equal to 20% ofeligible expenses to businesses that reduce or eliminate a line ofbusiness currently conducted overseas and start up, expand,or otherwise move the same trade orbusiness to the United States. Sec. 179 expensing The budgetproposes increasing the maximum Sec. 179 expensing limitation to $1million and to index it for inflation (the phaseout threshold wouldremain $2 million, indexed for inflation). Simplified accountingfor small business President’s budget proposes many tax changesPage 2 of 4http://www.journalofaccountancy.com/news/2016/feb/budget-proposes-many-tax-changes-201613856.html2/10/2016 The proposed budget would create a uniform small businessaverage annual gross receipts threshold of $25 million for allowingexceptions from certain accounting rules. Eligible businesses wouldbe allowed to use the cash method, avoid the uniform capitalizationrules, and use an inventory accounting method that either conformsto their financial accounting method or otherwise properly reflectsincome. Startup expenses Under the budget proposal, the limit ondeductible startup expenses would be increased to $20,000 (from$5,000). This amount would be reduced (but not below zero) by theamount by which those expenditures exceed $20,000 (currently$50,000). Research credit The budget would do away with the currentbifurcated Sec. 41 research credit, under which eligible taxpayerscan claim either a 20% regular credit or a 14% simplified credit.Instead, the budget proposes to create a single formula with acredit worth 18%. Increase intobacco tax The budget would increase taxes on tobacco to fund aninitiative to expand access to preschool and to expand homevisiting programs by nurses, social workers, and otherprofessionals. Clean energy The budget would simplify, expand, andmake permanent several tax incentives for clean energy investment.It would also create two new tax credits to provide an incentivefor commercial deployment of carbon capture, utilization, andstorage. The budget would also eliminate $4 billion a year in taxsubsidies to oil, gas, and other fossil fuel producers. Cadillactax The budget proposes changes to the Sec. 4980I excise taxon high-cost employer-sponsored health coverage (known as theCadillac tax). The Cadillac tax has been the focus of repealefforts in Congress, and the recently enacted ConsolidatedAppropriations Act, 2016, P.L. 114-13, postponed its effective dateto 2020. (It was originally scheduled to take effect in 2018.)Under the proposal, the threshold above which the tax applies wouldbe modified to be equal to the greater of the current law thresholdor the average premium for a marketplace gold plan in each state.This is designed to protect employers from paying the tax justbecause they are in a high-cost state. Estate tax The budgetproposes to revert the estate tax to its form in 2009, with a 45%tax rate, a $3.5 million exclusion amount for estate andgeneration-skipping transfer tax purposes, and a $1 million gifttax exclusion (with no indexing for inflation). The budget wouldalso expand the property subject to the new basis reportingconsistency requirement under Sec. 1014(f) to include propertyeligible for the estate tax marital deduction and gifts required tobe reported on a federal gift tax return. Oil tax President’sbudget proposes many tax changes Page 3 of 4http://www.journalofaccountancy.com/news/2016/feb/budget-proposes-many-tax-changes-201613856.html2/10/2016 The budget proposes a $10.25-per-barrel “fee” on oil. TheOffice of Management and Budget estimates that this provision wouldraise $319 billion over 10 years.

—Alistair Nevius([email protected] (mailto:[email protected])) is the JofA’seditor-in-chief, tax. © 2016 American Institute of CPAs - AllRights Reserved View comments (1)

What is the net Form W-2 wages?

What is miscellaneous income?

What is Schedule B income (Interest anddividends)?

What is Schedule C net income (Businessincome)?

What is Schedule D net income (Capital gains andlosses)?

What is Schedule E depreciation (Rentalproperty)?

What is Schedule E net income (Rental income & Sub-Sincome)?

What is the total “For AGI” deductions?

What is Adjusted Gross Income?

What is the Schedule A deduction for taxes?

What is the Schedule A deduction for interestexpense?

What is the Schedule A deduction for charitablecontributions?

What is the Schedule A total itemizeddeductions?

What is the total personal and dependentexemptions?

What is taxable income?

What is the tax on ordinary income?

What is the tax on long-term capital gain (loss) andqualified dividends?

What is the self-employment tax?

What is the kiddie tax?

What is the balance due or (refund)?

Answer above questions with the factsbelow:

Paul Turner is single and has two children, Allen and Lee Ann,from his previous marriage. Allen lives with Paul and Paul providesmore than half of his support. In the current year, Allen earned$300 of interest income and $5,000 working at a fast-foodrestaurant. Allen graduated from high-school in December 2015 andwas not a registered student during 2016. Lee Ann lives with hermother, Wilma (Lee Ann lived with Wilma for all of the currentyear). Wilma provides more than half of Lee Ann's support. Paulpays “alimony” of $400 per month to Wilma. The payments are tocontinue until Lee Ann reaches age 18, when they will be reduced to$250. Paul uses the cash method of accounting and a calendar yearfor reporting. Paul's birthday is May 31, 1975. Allen's birthday isOctober 5, 1998. Lee Ann's birthday is December 1, 2002. Paulprefers to report any “kiddie tax” on his tax return.

Paul is employed as a nuclear engineer with Atom SystemsConsultants, Inc. (ASCI). Paul's pay stubs indicate that he had$7,320 withheld in federal taxes, $4,987 in state taxes. He earned$80,000 of wages subject to employee Social Security taxes andMedicare taxes. ASCI has an extensive fringe benefits program forits employees.

Paul earned salary of $82,500 (before subtracting his 401(k) andflexible spending plan contributions). He contributed $6,500 to his401(k) account, and he contributed $2,600 to his flexible spendingaccount.

ASCI paid $497 of whole life insurance premiums to cover Paul'spersonal whole life insurance policy. ASCI also paid health clubdues of $825 to a nearby health club on Paul's behalf.

Taking advantage of ASCI's educational assistance program,during the fall Paul enrolled in two graduate engineering classesat a local college. ASCI paid his tuition, fees, and othercourse-related costs of $5,300.

Paul received free parking in the company's security garage thatwould normally cost $200 per month.

Paul manages the safety program for ASCI. In recognition of hissuperior handling of three potential crises during the year, Paulwas awarded the Employee Safety Award on December 15. The cashaward was $400.

On January 15, of the current year, Paul's father died. From hisfather's estate, he received stock valued at $30,000 (father’sbasis was $12,000) and his father's house valued at $95,000(father’s basis in the house was $55,000).

Paul owns several other investments and received the followinginformation reports for the current tax year:

Form 1009-Div:

General Dynamics – Gross qualified dividends - $400

Form 1099-Int

New Jersey Economic Development bonds – Gross interest -$300

IBM bonds – Gross interest - $600

State of Nebraska bonds – Gross Interest - $200

Form 1098-Mortgage InterestStatement

Sunbelt Credit Union – Mortgage interest - $7,100

Northeast Bank – Home-equity loan interest - $435

Form K-1 Grubstake Mining andDevelopment:

Distribution to shareholder - $1,000

Ordinary income (1% of $200,000) - $2,000

In addition to the investments discussed above, Paul owns 1,000shares of Grubstake Mining & Development common stock.Grubstake is organized as an S corporation and has 100,000 sharesoutstanding. Grubstake reported taxable income of $200,000 and paida distribution of $1.00 per share during the current year. Pauldoes not materially participate in Grubstake's activities.

Paul slipped on a wet spot in front of a computer store lastJuly. He broke his ankle and was unable to work for two weeks. Heincurred $1,300 in medical costs, all of which were paid by theowner of the store. The store also gave him $1,000 for pain andsuffering resulting from the injury. ASCI did not pay his salaryduring the two weeks he missed because of the accident. However,ASCI's disability insurance plan paid him $1,500 in disability payfor the time he was unable to work. Under this plan, ASCI pays thepremiums of $500 for the disability insurance as a taxable fringebenefit. The disability plan premiums and the disability benefitpayments were not included in Paul’s W-2 wages reported inparagraph 3.

Paul received a Form 1099-B from his broker for the sale of thefollowing securities during the current year. The adjusted basisamounts were reported to the IRS.

Security

Sale Date

Purchase Date

Sales Price

CommissionPaid Sale

His Basis

Nebraska bonds

03/14/16

10/22/07

$2,300

$200

$1,890

Cassill Corp

(500 shares)

10/20/16

02/19/12

$8,500

$425

$9,760

In addition to the taxes withheld from his salary, he also madetimely estimated federal tax payments of $175 per quarter andtimely estimated state income tax payments of $150 for the firstthree quarters. The $150 fourth-quarter state payment was made onDecember 28 of the current year. Paul would like to receive arefund for any overpayment.

In August of the current year, he received a federal refund of$60 and a state tax refund of $200 related to the tax returns hefiled for the prior year. His itemized deductions for the prioryear were $18,430.

Paul found a renter for his father's house on August 1. Themonthly rent is $400, and the lease agreement is for one year. Thelease requires the tenant to pay the first and last months' rentand a $400 security deposit. The security deposit is to be returnedat the end of the lease if the property is in good condition. OnAugust 1, Paul received $1,200 from the tenant per the terms of thelease agreement. In November, the plumbing froze and several pipesburst. The tenant had the repairs made and paid the $300 bill. InDecember, he reduced his rental payment to $100 to compensate forthe plumbing repairs. Paul provides you with the followingadditional information for the rental in the current year.

Propertytaxes $720

Other maintenanceexpenses 285

Insuranceexpense 495

Managementfee 350

Depreciation (to becomputed) ?

Local practice is to allocate 10percent of the fair market value of the property to the land. (See¶8 for basis information.) Paul makes all decisions with respect tothe property.

Paul paid $2,050 in real estate taxes on his principalresidence. The real estate tax is used to pay for town schools andother municipal services.

Paul drives a 2013 Acura TL. His car registration fee (based onthe car year) is $50 and covers the period 1/1/16 through 12/31/16.In addition, he paid $280 in property tax to the state based on thebook value of the car.

In addition to the medical costs presented in ¶11, Paul incurredthe following unreimbursed medical costs:

Dentist $ 310

Doctor 390

Prescriptiondrugs 215

Over-the-counterdrugs 140

Optometrist 125

Emergency room charges 440

LASIK eyesurgery 2,000

Chiropractor 265

On April 1, Paul took advantage of low interest rates andrefinanced his $75,000 home mortgage with her original lender. Thenew home loan is for 15 years. He paid $215 in closing costs and$1,600 in discount points (prepaid interest) to obtain the loan.The house is worth $155,000, and Paul's basis in the house is$90,000. As part of the refinancing arrangement, he also obtained a$10,000 home-equity loan. He used the proceeds from the home-equityloan to reduce the balance due on her credit cards. Paul receivedseveral Form 1098 statements from her bank for interest paid by himin the current year. Details appear below. (See also ¶9)

Primary homemortgage $7,100

Home-equityloan 435

Creditcards 498

Carloan 390

On May 14 of the current year, Paul contributed clothing to theSalvation Army. The original cost of the clothing was $740. He hassubstantiation valuing the donation at $360. In addition, he madethe following cash contributions and received a statement from eachof the following organizations acknowledging his contribution:

LarkinCollege $800

UnitedWay 152

First MethodistChurch 790

Amos House (homelessshelter) 200

Local Chamber ofCommerce 100

On April 1 of the current year, Paul's house was robbed. Heapparently interrupted the burglar because all that's missing is anantique brooch he inherited from his grandmother (June 12, 2005)and $300 in cash. Unfortunately, he didn't have a separate rider onher insurance policy covering the jewelry. Therefore, the insurancecompany reimbursed him only $500 for the brooch. His basis in thebrooch was $6,000, and its fair market value was $7,500. Hisinsurance policy also limits to $100 the amount of cash that can beclaimed in a theft.

Paul sells real estate in the evening and on weekends(considered an active trade or business). He runs his business froma rental office he shares with several other realtors. Paul hasbeen operating in a business-like way since 2003 and has alwaysshown a profit. He had the following income and expenses from hisbusiness:

Commissionsearned $21,250

Expenses:

Advertising 2,200

Telephone 95

Real estate license 130

Rent 6,000

Utilities 600

He has used his Acura TL in his business during the currentyear. During the year, he properly documented 5,000 business miles.The total mileage on his car (i.e., business-use and personal-usemiles) during the year was 15,000 miles. Paul elects to use thestandard mileage method to calculate his car expenses. He spent $45on tolls and $135 on parking related to the real estatebusiness.

Paul's company has an accountable expense reimbursement plan foremployees from which Paul receives $12,000 for the followingexpenses:

Airfare $4,700

Hotel 3,400

Meals 2,000

Car rentals 600

Entertainment 900

Incidentals 400

Total 12,000

During the current year, Paul also paid $295 for businesspublications other than those paid for by his employer and $325 fora local CPA to prepare his tax return for the prior year.