Exam Preparation Comprehensive Notes

Overview of the Exam and Grading

• Grades seen in Canvas reflect a 20-point curve.

• Your actual performance is 20 points lower than what appears in Canvas.

• An average will be curved at the end of the semester based on quizzes and homework scores.

Importance of Quantitative Reasoning

• The exam focuses on quantitative skills that are essential for understanding materials.

• Emphasis on AAC (Academic Advisory Council) value numerics and quantitative reasoning.

• Importance of understanding over memorization.

Exam Problem Walkthroughs

1. Fast Eddy's Organizational Expenses Example

• Total incorporation cost: $8,000

• Organization costs:

  • Cost per item: $2.48

  • Total: $11.12

• Amortization under Section 248: $5,000

• Remaining organization expenses: $79.20

• Amortized monthly expense:
  $\text{Monthly} = \frac{79.20}{180} = 0.44$

• Expense recognized after 7 months:
  $0.44 \times 7 = 3.08$

2. Deduction Limitations Example - Reese

• Reese's Financials:

  • State and Local Taxes: $12,000

  • Mortgage Interest: $8,500 (mortgage: $400,000)

  • Church Donations: $12,000

• AGI: $120,000

• Deductions:

  • Deductible taxes: $10,000 (SALT cap)

  • Entire mortgage interest deductible.

  • Cash contribution limit: 60% of AGI = $72,000

3. Medical Expenses Example - Christina

• Christina's Financials:

  • Total Medical Expenses: $120,000

  • Reimbursed: $105,000

  • AGI: $150,000

• Deductible medical expenses calculation:

  • Net unreimbursed: $15,000

  • Deduction floor: $7.5\% \times 150,000 = 11,250$

  • Maximum allowed: $15,000 - 11,250 = 3,750$

Understanding Itemized Deductions

• Importance of knowing limits on itemized deductions (SALT, mortgage interest, charitable contributions).

• Cash contributions: Limited to 60% for qualified charities

• Use reasoning to determine the maximum deduction allowed.

Business Income Calculation Example - Fast Eddy's

• Income before tax: $200,000

• QBI Deduction Calculation:

  • 20% of income:
    $200,000 \times 20\% = 40,000$

• Limits due to W-2 wages:

  • 50% of wages calculation:
    $40,000 \times 0.50 = 20,000$

Tax Calculations and Income Recognition

1. Tax credits: Reduce liability dollar for dollar, not taxable income.

2. Long term capital gains recognition: Require holding period.

3. Characterization of income: Must categorize various income types (ordinary income, qualified dividends, etc.).

Key Topics for Final Exam Preparation

• Expect conceptual questions on business entities and corporate taxation.

• Review dispositions and characterization of income as key areas for the exam.

• Practice applying quantitative reasoning when solving problems.

Additional Tips

• Use sample problems to practice calculations and recognition of deductions.

• Remember the limits imposed by current tax laws (Tax Cuts and Jobs Act).

• Be familiar with capital gains tax brackets and how they affect tax liability.

Conclusion

• Approach upcoming revisions with a focus on quantitative reasoning and conceptual understanding. Be prepared for similar problem types and calculations as previously seen in coursework.

• Regular practice and clarification of complex concepts will aid retention and mastery of the material.