Respond 9

Question 1

Passive activity losses, generally, can only be used to offset passive activity income. However, in certain circumstances, activities that would generally be considered a passive activity may not be subject to the passive activity loss rules. One exception is related to an individual that is not in the rental real estate business but has a rental real estate activity. This taxpayer is permitted to deduct against other income up to $25,000 of passive rental real estate activities. However, certain limitations apply.

What is/are the limitation(s) and how it will impact the taxpayer?

A client indicates that he may be over the AGI limit in the coming year as a result of a bonus and fears he will lose his deduction related to his loss on rental property activity. What happens to the losses incurred by his rental property activity if he is over the AGI limit?

What will the taxpayer need to do to deduct the losses that were previously not allowed?

Respond to this… The limitations on the exception of having a passive activity that is not subject to the passive activity loss rule would be that the rental real estate losses would need to be applied against other net passive income (Pope, Thomas R., 2016.) The $25,000 limit described above only applies to the total of deductions and credits says, the textbook.  This limitation would affect the taxpayer because they would have a tax liability equal to the amount of the credit. If it exceeds the $25,000 from more than one activity it would need to be dispersed the activities ( Pope, Thomas R., 2016.) For the taxpayer to deduct the losses that were previously not allowed, they would have to wait until the subsequent years. According to the textbook, the previously disallowed deductions would need to be carried over. 

Pope, Thomas.,R (2016.) Prentice Hall's Federal Taxation 2016. Prentice Hall. Chapter 8: Losses and Bad Debts. 

Question 2

You have been hired as an accounting professor at a local community college. One of the lectures you need to write is on the topic of intangible assets. You want to be sure that your students don't have as hard a time grasping the concept of intangible assets as you did.

What would be the key points of your lecture? What types of problems or examples would you present to your students? Support your response using examples.

Respond to this… Making people understand intangibles can be a difficult prospect. As a professor starting at a bunch of 20 something’s, I would try to relate it to something they would know, the cloud. Cloud computing is an intangible to most people. They save documents, trade pictures and conduct meetings through this service though nobody ever touches the product. Another way to relate to the students is by using a law office as an example. The attorneys perform a service for their clients, and when that attorney moves to another firm they bring those clients with them, the client list can be more valuable than the actual attorney. That makes the attorney more valuable to the new firm. The clients they can bring into the fold may increase the revenue to the firm, it's not just the type of law they practice. Other examples of intangibles would be copyrights on books and music, trademarks, and name recognition. There are many ways to explain the intangible world, whether they understand that world is another matter; especially when it comes to attempting to account for that intangible. It would be a simple matter to over or undervalue such a thing, and great care should be taken when dealing with these objects.

Question 3

Companies can return retained earnings to investors or let it accumulate within the company. What are some circumstances / reasons for returning a portion of the retained earnings, and what are some circumstances / reasons for letting it accumulate? Relate your comments to how investors view such options.

Respond to this…Corporations can use retained earnings to either pay off debt or to reinvest in the company. Both of these will allow for the corporation to improve its future earning potential. There is a portion of accumulated earnings that are called retention funds, which are used to pay for continuing company operations. Generally, companies will set retention funds aside to ensure having money to cover the cost of ongoing operations.

When a company retains earnings rather than paying off dividends, shareholders do not get an immediate return on their investment. Generally, short-term investors choose not to invest in companies that retain earnings. For long-term investors, this would be an ideal choice because there is the potential for higher earnings in the future through debt reduction which allows a company to get rid of future interest payments and invest in equipment that can improve a company’s performance.

Another thing to be mindful of is if a corporation has more than $250,000 accumulated retained earnings, the money is subject to a retained earnings tax.

Reference

http://smallbusiness.chron.com/accumulated-retained-earnings-20683.html