CTEC 20 Hour Continuing Education eBook

Part 1 Ethics

Ethics 

This chapter will explain how to determine who qualifies as a tax return preparer, what representation rights a preparer has, how that individual is bound by the Circular 230 guidelines, and what it means for a tax preparer to behave ethically and responsibly.

Part 2 Federal Tax Law 

Income 

The IRS has the authority to tax all income from whatever source it is derived. This includes compensation for services, gains from dispositions of property, interest and dividends, rent and royalties, pensions and annuities, gambling winnings, and even illegal activities. All such income a person receives is collectively referred to as “worldwide income.” However, not all money or property is taxable or subject to tax. This chapter will cover the different types of taxable and nontaxable income and show you where and how to report such wages on a professionally prepared tax return. A tax professional must recognize the different kinds of taxable income, tax-exempt income, and other income included in Schedule 1, line 21, and must know how to figure out the taxable percentage on Social Security benefits.

Tax Credits and Payments 

A nonrefundable tax credit reduces the amount of tax liability that may have to be paid. Unlike a deduction, which reduces the amount of income that is subject to taxation, a credit directly reduces the tax itself. There are two types of credits: nonrefundable, which cannot reduce tax liability below zero, and refundable, which can reduce tax liability below zero, resulting in the need for a refund.

Other Taxes 

This chapter provides an overview of miscellaneous taxes from the Form 1040 and reported on Schedule 2 that a taxpayer might be assessed. This includes excess Social Security tax, additional taxes on IRAs, the Alternative Minimum Tax, and household employment taxes. 

Schedule C 

This chapter encompasses how the sole proprietor reports income. Sole proprietorship is the most popular business structure. A sole proprietorship is indistinguishable from its owner, and all income earned is reported by the owner. Schedule C is the reporting tool for most sole proprietors. Covered in the course is line by line instruction to complete the Schedule C.

Schedule E

Rental income is any payment received for the use or occupation of real estate or personal property. The payment that is received is taxable to the taxpayer and is generally reported on Schedule E. Each Schedule E can report three properties. If the taxpayer has more than three properties, additional Schedule E’s would be used. Schedule E is not used to report personal income and expenses. The taxpayer should not use Schedule E to report renting personal property, that is not a business. To report other income, use Schedule 1, lines 8 – 24b.

Schedule F

Income received from the operation of a farm or from rental income from a farm is taxable. Farmers determine their taxable income from farming and related activities by using Schedule F. Profit or loss from farm income is first reported on Schedule F and then “flows” to Form 1040, Schedule 1, line 6. This course covers basic farm income and expenses.

Depreciation

Depreciation is an annual deduction that allows taxpayers to recover the cost or other basis of their business or investment property over a certain number of years. Depreciation is an allowance for the wear and tear, decline, or uselessness of a property and begins when a taxpayer places property in service for use in a trade or business. The property ceases to be depreciable when the taxpayer has fully recovered the property’s cost or other basis or when the property has been retired from service, whichever comes first. Depreciation is reported on Form 4562.

Part 3 Updates

Tax Updates

This course covers the annual inflation adjustments of standard deductions, tax rates, and refundable and nonrefundable credits. This course will have information on how the pandemic has changed tax season and other important events. Learn the latest changes on the regulations regarding qualified business income (QBI) and changes. Changes to Form 1040 and the schedules will be discussed and so much more. Additional topics include:

• ARPA
• CARES Act
• SECURE Act
• Families First Coronavirus Act
• Annual Inflation Adjustments
• Disaster relief changes

Part 4 California Tax Law

Compiling Taxpayers Information

The California tax return does not follow the federal return line-by-line, as established by the following: 

• California subtracts the exemption amount from the tax owed. 
• California did not conform to the TCJA with respect to not being able to claim an exemption for dependents. 
• California begins by gathering the taxpayer’s and spouse’s personal information. 
• If the couple’s status is a registered domestic partner (RDP) or same sex married couple (SSMC), you will enter the spouse’s information on Form 540. 

The information needed to complete the state return is:

• First and last name as found on SSN or ITIN.
• Address (including city, state, and zip).
• Date of birth.
• Prior name (if the taxpayer or spouse filed a prior California return with a different last name).

California does not conform to most of the federal Tax Cuts and Jobs Act changes. A tax practitioner needs to understand state tax law to make sure that the taxpayer is receiving all the credits and paying the correct amount of tax.

Income

Although California does not conform to certain provisions of the Internal Revenue Code, it does conform in the following ways: 

• The “general rule.”
• The “simplified general rule,” or the “safe harbor method.”
• IRA rollovers.
• Roth IRAs.
• Archer MSAs.
• Coverdell ESAs.
• Current-year IRA deductions.
• Lump-sum credits received by federal employees.

Tax Credits and Payments

Although a variety of California tax credits are available to help the taxpayer reduce their tax liability, California does not conform to all the credits that can be claimed on the federal return. This chapter will cover FTB Form 540, lines 40-48. California refers to this section as “Special Credits”. A tax preparer is responsible for ensuring (to the best of his or her knowledge) that the taxpayer is filing a true and accurate return by asking the client detailed questions and doing as much research as necessary.

Other Taxes

The Franchise Tax Board (FTB) is the agency responsible for collecting state personal income taxes in California. The revenues FTB collects are placed in the state’s general fund to help pay for items, such as roads, parks, law enforcement, and schools. California’s state income tax system is based on the principle of voluntary compliance. Voluntary compliance is a system of taxation that relies on individual citizens to properly report their income, calculate their tax liability, and file their tax returns timely.

State personal income tax, like federal income tax, is a tax imposed on wages, tips, interest, dividends, pensions, capital gains, and other types of income. First imposed in 1936, state personal income tax is the largest single source of revenue in California. Personal income tax is based on the amount of taxable income that people receive annually. Taxable income is less than total income, due to tax deductions.

This lesson is a brief overview of other California taxes that a taxpayer might pay as well as the types of penalties a taxpayer may pay and why. 

To renew your registration all CRTPs must…

• Complete 20 hours (10 hours federal tax law, 3 hours federal tax update, 2 hours of ethics and 5 hours for California tax law) of continuing tax education each year
• Maintain a valid PTIN from the IRS
• Maintain a $5,000 tax preparer bond
• Renew the registration by October 31st of each year with a $33 fee
  • If the deadline is missed, complete your late renewal by January 15 with an additional $55 late fee.