1
Q
Like-Kind Exchanges calculation of Realized gain, Recognized gain, Deferred gain/loss, and basis of property received
A
Realized gain = (FMV of everything received) - (NBV of everything given up)
Recognized gain = The lesser of Realized Gain or Boot RECEIVED. If there is not boot, then no gain is recognized.
Deferred gain/loss = Gain realized - Gain recognized
Basis of property received = FMV of property received - Deferred gain + Deferred loss
2
Q
What property does and does not qualify for like-kind exchange?
A
Real property used in a trade or business or held for investment that is exchanged for other real property used in trade or business or held for investment.
Personal property, inventory, and investment securities do not qualify.
3
Q
Installment sale steps:
A
- Gross Profit = Sales price - Adjusted Basis
- Gross profit percentage = Gross profit / Sales price
- Gain recognized (taxable income) = Cash collections (excluding interest) x Gross profit percentage
4
Q
Sales that do not qualify for installment sale gain deferral:
A
Sales of:
-Inventory
-Stocks or securities traded on an open market
-Sales at a loss
-Depreciation recapture property
5
Q
Capital Assets definition and tax treatment when sold
A
Property (real or personal) held by the taxpayer for investment or personal use (NON-BUSINESS ASSETS)
Treated as capital gains/losses when sold
6
Q
Noncapital Assets definition and tax treatment when sold
A
Business-use assets
Treated as ordinary gains/losses when sold, but some may be capital or ordinary (Ex. 1231, 1245, 1250)
7
Q
How are Net 1231 losses vs. gains treated for taxes?
A
Losses are treated as ordinary losses. They are fully deductible, unlike the $3,000 limitation for individuals or capital gains limitations for capital losses.
1231 gains are treated as capital gains, but may be treated as ordinary income for 5-year look-back rule
8
Q
Section 1231 Look-Back Rule
A
When a taxpayer has a net Section 1231 gain for the year, the taxpayer must first “look back” to see if there were any net Section 1231 losses deducted as ordinary losses during the previous 5 YEARS.
If so, the taxpayer must recapture this ordinary treatment by treating the current year net Section 1231 gain as ordinary income.
9
Q
Section 1245 property definition and examples
A
Subset of 1231 property
Depreciable PERSONAL property used in a trade or business for more than 12 months
Ex. Vehicles, computers, machinery, and equipment.
10
Q
Section 1250 property definition and examples
A
Subset of 1231 property
Depreciable REAL property used in a trade or business for more than 12 months
Ex, Warehouse, office building, NOT Land
11
Q
Individual Taxpayer Flowchart of Gain or Loss from Section 1231, Section 1245, and Section 1250 Assets
A
If Loss, Land, or Section 1250 property, it joins the Section 1231 pool.
If Section 1245 property, depreciation recapture of lesser of gain recognized or accumulated depreciation. The rest goes to 1231 pool.
If 1231 pool is negative, it is an ordinary loss
If 1231 pool is positive, split into two categories: Unrecaptued Section 1250 gain and Regular net Section 1231 gain
Unrecaptured Section 1250 gain is the lesser of recognized gain for each 1250 asset sold at a gain or accumulated depreciation for each Section 1250 asset sold at a gain.
Apply 5-year lookback rule to unrecaptured 1250 gain. Cancellations are ordinary income, the remaining are taxed at 25%
Regular net Section 1231 gain is gain remaining after removing unrecaptured Section 1250 gain.
Apply the remaining lookback to the 1231. Any cancellations are ordinary income and the rest are taxed at 0/15/20% LTCG rate.
12
Q
Corporate Taxpayer Flowchart of Gain or Loss from Section 1231, Section 1245, and Section 1250 Assets
A
If Loss or Land, it joins the Section 1231 pool.
If Section 1245 property, depreciation recapture of lesser of gain recognized or accumulated depreciation. The rest goes to 1231 pool.
If Section 1250 property, depreciation recapture of 20 PERCENT of lesser of gain recognized or accumulated depreciation. The rest goes to 1231 pool.
If 1231 pool is negative, it is an ordinary loss
If 1231 pool is positive, apply look-back rule. Cancellations are ordinary income, the remains are capital gain.
13
Q
What types of relatives are related parties?
A
Ancestors, spouses, and lineal descendants (father, son, brother, grandfathers)
Aunts/nephews aren’t lineal because you move to the side on the family tree.
No in-laws or step relationships
14
Q
What type of related-party transaction gains are taxed as capital gains?
A
Sales of non-depreciable property (Ex. land) between all related parties except spouses and an individual and a 50%+ controlled corporation or partnership
15
Q
Holding period and basis for when related party property is sold to an unrelated property.
A
Holding period is always the related-party transaction date
If sold higher, use relative’s basis to determine gain
If sold between, no gain or loss
If sold lower, use purchase price to determine loss
16
Q
Three examples of loans affected by imputed interest rules:
A
- Gifts
- Compensation-Related Loans
- Corporation-Shareholder Loans
17
Q
Rules relating to amount of imputed interest loans
A
If <$10,000, No imputed interest is calculated
If >$10,000 and <$100,000, imputed interest is limited to the amount of the borrower’s net investment income for the year. (If <1,000, then 0)
If >$100,000, no limits on imputed interest
18
Q
The following realized gains are either deferred or excluded from taxable income (not recognized):
A
HIDE IT
-Homeowner’s exclusion
-Involuntary conversion
-Divorce property settlement
-Exchange of like-kind property
-Installment sale
-Treasury capital and stock
19
Q
Homeowner’s Exclusion definition, rules, and amount
A
Exclusion on the gain on the sale of a taxpayer’s personal principal residence
To qualify, a taxpayer must have owned and used the property as a principal residence for 2 or more years during the 5 years before selling it. Periods don’t have to be continuous.
If one spouse doesn’t qualify, must use single amount.
Exclusion may be reduced because of nonqualified use
$250,000 for single, $500,000 for MFJ
20
Q
Hardship provision of the Homeowner’s Exclusion definition and calculation
A
Taxpayers may be eligible for a reduced exclusion if the sale is due to a change in employment (new employment must be 50+ miles away from residence sold), health, or other unforeseen circumstances AND either the exclusion has been claimed within the previous 2 years or the taxpayer fails to meet the ownership and use requirements.
(Number of months of qualifying ownership / 24 months) x maximum exclusion available to the taxpayer based on filing status
21
Q
Nonqualified use provision of the Homeowner’s Exclusion definition and calculation
A
A nonqualified use is any use of the home other than use as a principal residence (Ex. renting)
If a taxpayer has a nonqualified use, the portion of the gain attributable to the nonqualified use is not eligible for the exclusion. Does not include time after the house is sold to allow for sale of the home.
(Period of nonqualified use / total period of time the taxpayer owned the property)
22
Q
Involuntary Conversions definition and rules
A
Nonrecognition treatment is given to gains realized on involuntary conversions of property (Ex. Theft, destruction, condemnation)
No gain is recognized when other similar property is received to replace the involuntarily converted property OR all insurance or condemnation proceeds are reinvested in similar property
If the taxpayer does not reinvest all the insurance or condemnation proceeds in similar property (within 2 years), gain will be recognized to the extent of the amount not reinvested (deferred gain)
23
Q
Basis in replacement property for involuntary conversions
A
The basis of similar property acquired by reinvestment of insurance or condemnation proceeds is the cost of such property decreased by the amount of any gain not recognized (deferred) on the involuntary conversion.
24
Q
Unrelated Business Income (UBI) definition
A
Income from a 501(c)(3) organization that may be subject to income tax. It is income that is:
-Derived from an activity that constitutes a trade or business;
-Regularly carried on; and
-Not substantially related to the organization’s tax-exempt purpose
25
Unrelated Business Income (UBI) examples/non-examples
Examples: Hospital gift shop (selling merch not related to the mission)
Non-examples: Dividends, royalties, interest, annuities, rent from real property (unless personal services also provided), bingo games, activity where substantially all the work is performed by unpaid volunteer workers.
26
What type of business entity must a 501(c)(3) be?
Must be organized as a corporation, LLC, unincorporated association, or trust
27
Grantor trusts definition and example(s)
Trusts in which the grantor retains certain ownership powers or control over the property transferred to the trust. A common example is a revocable living trust, which assigns assets while the grantor is still alive.
28
Non-grantor trusts and example(s)
Separate taxpaying entities. Trust income is taxable either to the trust or to the beneficiaries, depending on the amount of distributions to the beneficiaries, the type of income, and the type of trust. Examples include simple and complex trusts.
29
Simple Trust requirements
Non-grantor trust
1. Required to distribute all of its income to beneficiaries annually;
2. Cannot make distributions from trust principal (corpus); and
3. Cannot make distributions (contributions) to charitable organizations
30
Complex Trust requirements
Non-grantor trust
1. Does not distribute all of its income to beneficiaries annually;
2. Makes distributions from trust principal (corpus); and
3. Makes distributions (contributions) to charitable organizations
31
Trust Accounting Income (TAI) includes:
Taxable and nontaxable income, NO Capital gains/losses (allocated to corpus), and trustee fees as stipulated in agreement
32
Trust exemption amounts:
Simple trust: $300 exemption
Complex trust: $100 exemption
33
Nondeductible trust administration expenses =
Total trust administration expenses x (Nontaxable income / trust accounting income)
34
Trust taxable income formula
Trust taxable gross income (including capital gains)
- Deductible trust expenses (based on formula)
-------------------------------
Adjusted total income
- Exemption amount ($100/$300)
-------------------------------
Trust taxable income before income distribution deduction
(income distribution deduction) (lesser of total distributions to beneficiaries or trust DNI)
-------------------------------
Trust taxable income
35
Trust Distributable Net Income (DNI) Formula
Trust taxable income (before income distribution deduction)
+ Exemption
- Capital gains allocated to corpus
+ Capital losses allocated to corpus
+ Tax-exempt interest
- Expenses allocated to tax-exempt interest
-------------------------------
Distributable net income (DNI)
*Includes both taxable and nontaxable income and expenses, including 100% of trust admin. expenses, but generally excludes capital gains and losses
36
A beneficiary of a complex or simple trust must include in income:
The taxable amount of distributions received, but only to the extent of the trust's DNI
37
Nonstatutory Stock Options with Readily Determinable Value tax effects on each date
Grant Date: Recognize ordinary income of the readily determinable value
Vesting Date: Same as Grant Date if income wasn’t recognized at grant date
Exercise Date: No taxation, holding period begins. BASIS = Exercise price + income recognized at grant date
Date stock is sold: Capital gain (loss); short-term or long-term depending on holding period
Date options expire if not exercised: Capital Loss = FMV of options previously taxed at date of grant; short-term or long-term depending on holding period
38
Nonstatutory Stock Options without Readily Determinable Value tax effects on each date
Grant Date: No tax consequences
Vesting Date: No tax consequences
Exercise Date: Recognize ordinary income = Bargain element (FMV of stock - exercise price). Holding period begins, BASIS = FMV of stock when stock option is exercised.
Date stock is sold: Capital gain (loss); short-term or long-term depending on holding period
Date options expire if not exercised: Capital Loss = Price paid for options (if any); short-term or long-term depending on holding period
39
Statutory Stock Options tax effects on each date
Grant Date: No tax consequences
Vesting Date: No tax consequences
Exercise Date: No taxable income, BASIS = exercise price, holding period requirements: 2 years after grant date + 1 year after exercise date
Date stock is sold: If holding period is met: Long-term capital gain (loss)
If holding period isn't met:
Gain: ordinary income = bargain element (FMV of stock when exercised - exercise price); any excess gain is capital gain
Loss: Capital loss
Date options expire if not exercised: Capital Loss = Price paid for options (if any); short-term or long-term depending on holding period
40
What are the examples of Statutory Stock Options
Incentive Stock Options (ISOs) and Employee Stock Purchase Plans (ESPP)
41
Incentive Stock Options (ISOs)
A right that's given to an employee to buy stock in the company at a discount
Option exercise price must NOT be less than the FMV of the stock on the grant date
Not allowed for employees with >10% voting power
2 years after grant date, 1 year after exercise date holding requirements
42
Employee Stock Purchase Plans (ESPP)
A type of plan that allows employees to purchase company stock at a discounted price. Participating employees contribute to the plan through payroll deductions.
Option exercise price may NOT be less than the LESSER of 85 percent of the FMV of the stock when granted or exercised.
Not allowed for employees who own 5% OR MORE voting power
2 years after grant date, 1 year after exercise date holding requirements
43
Restricted Stock definition and taxation
An employee receives actual shares of the employer's stock, rather than an option to purchase the employer's stock at a discounted rate.
Employee is restricted from selling the stock until the vesting date when the restrictions lapse. The employee recognizes ordinary compensation income for the FMV of the stock on the day it vests and the restrictions lapse.
44
Restricted Stock Units (RSUs) definition and taxation
Not actual shares of the employer stock; they are a promise to give an employee a specified number of unrestricted shares of employer stock on the vesting date.
Same as restricted stock awards, employees recognize ordinary compensation income for the FMV of the stock on the vesting date.
45
Stock Appreciation Rights (SARs)
Employees do not receive actual shares of employer stock. The employee receives a payment equal to the difference between the FMV of the stock on the exercise date and the FMV on the date the SAR was granted by the employer.
The employee recognizes ordinary compensation income for the amount of the cash payment when the SAR is executed.
46
Alternative minimum taxable income formula
Regular taxable income
+/- Adjustments
+ Tax preferences
-----------------------------
Alternative minimum taxable income
47
AMT Adjustments:
PANIC (+/-) TS (+ only)
-Passive activity losses are added back, or recalculated
-Accelerated depreciation
-Net operating loss of the individual taxpayer must be recomputed
-Installment method may not be used by a dealer for property sales
-Contracts (long-term): difference between the percentage-of-completion method and completed-contract method
-Taxes: itemized deduction, net of taxable tax refunds
-Standard deduction, if claimed
48
Taxes not included in tax adjustments for AMT
Charitable contributions, home mortgage, and acquisition indebtedness
49
AMT Tax preferences:
PPP (Always added back)
Private activity bond tax-exempt interest income (on certain bonds)
“Percentage depletion” deduction (excess over adjusted basis of property)
Pre-1987 placed in service property excess accelerated depreciation over straight-line depreciation
50
Flexible Spending Account (FSA)
Allows an employee to receive a pretax reimbursement for qualified medical expenses and/or qualified dependent care expenses.
Funded through voluntary salary reduction.
Contributions are excluded from you gross income
Reimbursements may be tax free if used for qualified expenses
Must use the money within the plan year. If that doesn't happen, employer can either offer 2.5 month grace period of $660 carry over.
51
Health Savings Accounts (HSAs)
Tax-deferred savings account, very much like an IRA. Allows the taxpayer to set aside money on a pre-tax basis to pay for qualified medical expenses.
Carryover unlike FSAs
Taxpayers may only contribute to an HSA if they insured under a high-deductible health plan (HDHP)
52
Health Savings Account (HSA) withdrawal information
Amounts withdrawn from an HSA to pay for qualified medical expenses of an account beneficiary are not includable in the beneficiary's gross income
Withdrawals not used to pay qualified medical expenses are includable in gross income and subject to an additional 20% tax if the taxpayer is <65 years old.
53
Difference between individuals and corporations for estimated tax payments
An individual must pay a penalty for underpayment of estimated tax payments unless:
-<$1,000 of tax is owed;
-or the taxpayer paid the lesser of 90% of current years tax or 100% (110% if AGI > $150,000) of prior year's tax
Corporations use 100% of the current year estimated liability, unlike the 90% used by individuals
Corporations can also use the annualized method.
54
Loss Limitation Hurdles and level taxed
1. Tax basis limitation (Entity)
2. At-risk limitation (Entity)
3. Passive activity loss (PAL) limitation (Individual)
4. Excess business loss limitation (Individual)
55
Tax Basis Limitation Rules
Loss limited by tax basis.
Losses in excess are suspended until tax basis is reinstated in future years, and is carried forward indefinitely.
Any suspended losses when owner disposes of the interest are LOST.
Applies to all activities regardless of participation.
56
At-Risk Limitation Rules
Limited by at-risk basis, which is the tax basis excluding the partner's share of nonrecourse debt other than qualified nonrecourse financing. For S corps, this should be the same as tax basis unless the shareholder takes out a non recourse loan to the S corp
Excess loss is suspended until at-risk basis is reinstated and is carried forward indefinitely
Any loss remaining when interest is disposed of can be offset against any gain from selling the interest.
Applies to all activities regardless of participation.
57
Passive Activity Loss (PAL) Limitation
Can only be offset against total passive activity income. Cannot be offset against active or portfolio income.
Excess is suspended and carried forward indefinitely to offset future passive activity income.
Any remaining when activity is disposed of can be offset against ANY type of income.
58
Categories of income and examples
1. Active: Salaries, wages, guaranteed payments, business income/loss from activities involving material participation.
2. Passive: Income/loss from activities involving non material participation, rental real estate, income/loss for a limited partnership interest
3. Portfolio: Interest, dividends, annuities, royalties, capital gains/losses
59
Mom-and-Pop Exception
An individual taxpayer may deduct up to $25,000 of net passive activity losses attributable to rental real estate and apply AGAINST ORDINARY INCOME if the taxpayer:
-Actively participates in making management decisions for the rental real estate activity; and
-Owns at least 10% of the rental real estate activity
Reduced by 50% of excess AGI over $100,000 (Eliminated at $150k)
Limited by tax basis and at-risk basis
60
What happens if a taxpayer is considered a real estate professional and how is that determined?
If the taxpayer is a real estate professional, rental real estate activities are considered to be active rather than passive, and the PAL limitation does not apply
Rules:
-More than 50% of the taxpayer's personal services during the year are performed in the real estate business; and
-Performs more than 750 hours of services in real estate businesses during the year.
61
Excess Business Loss limitation
Occurs when Your total business deductions (from all trades or businesses) exceed your business income + a threshold amount.
If the net loses are larger than the threshold amounts ($626,000 MFJ, $313,000 Single) is carried forward as an NOL to offset future income. Subject to 80% of future taxable income limitation.
62
Annual Exclusion for gifts
Donor may exclude the first $19,000 of gifts made to each donee.
If married and gift-splitting, it is $38,000 per donnee (19k for each spouse)
63
Gifts with unlimited gift tax exclusion
Payments made directly to an educational institution for tuition
Payments made directly to a health care provider for medical care
Transfers between spouses (May not be a terminable interest in the property unless the the donee spouse is entitled to all income)
Charitable Contributions (Non-taxable but not all are deductible)
64
Gifts that do not qualify for the annual exclusion
Future interest gifts (Gifting assets and later getting the property back, distributed at some future time, trust income distributed at some future time)
Incomplete gifts. It is either conditional (requires conditions to be met) or revocable (donor reserves the right to revoke the gift or change the beneficiaries)
65
Gifts of non cash property are valued at
FMV of the property at the date of the gift if long-term capital gain property (Ex. Investment assets, personal-use assets)
Lower of FMV or NBV if Ordinary Income Property (Ex. Inventory, short-term assets)
66
Charity deduction limitations for individuals
Public Charities: Cash (60% AGI), Ordinary Income property (50%), Long-term capital gain property (30%)
Private Operating Foundations: Cash (60% AGI), Ordinary Income property (50%), Long-term capital gain property (30%)
Private Non-operating Foundations: Cash (30% AGI), Ordinary Income property (30%), Long-term capital gain property (20%)
67
For SEP IRA plans, earned income is defined as
net self-employment earnings reduced by one-half of the self-employment tax
68
Defined Benefit Plan
Employer-sponsored retirement plan that promises employees a specified monthly benefit at normal retirement age.
Employer bears the investment risk associated with the performance of the plan.
69
Defined Contribution Plan
Employer-sponsored retirement plan that does not promise a specific benefit payment to an employee upon retirement. Instead, they have individual accounts to which the employee and/or the employer contribute.
Employee bears the investment risk
The most common type is a 401k
70
Treatment of a nonqualified Roth 401k distribution
It is allocated pro rate between principal (contributions) and earnings based on relative amounts in the account at the time of the distribution.
71
Penalty for premature distributions for a 401k plan
10% penalty tax if taken out before age 59 and 1/2
Exceptions: MADDD TED (Different than IRA exceptions)
M - MEDICAL exp in excess of % AGI floor
A - ADOPTION/bird of child within one year of birth
D - DISABILITY not temporary
D - DIVORCE
D - DISASTER
T - TERMINAL illness of death of account owner
E - EMERGENCY expense up to $1000 per year
D - DOMESTIC abuse victims (lesser $10k or 50% of retirement)
72
Required Minimum Distributions (RMDs)
Taxpayers are required to start taking required minimum distributions (RMDs) from traditional 401k plans by April 1 of the year after the later of:
-The year the employee reaches age 73
-The year the employee terminates employment with the plan sponsor
Does not apply to Roth 401k plans
Penalty for failure is 25% but can be reduced to 10% if failure is corrected in timely manner.
73
IRA Contribution Limits
Unmarried:
Under age 50- $7,000 or earned income
Age 50 and older- $8,000 or earned income
Married:
Under age 50- $14,000 ($7,000 each) or earned income of married couple
Age 50 and older- $16,000 ($8,000 each) or earned income of married couple
Earned income INCLUDES ALIMONY prior to 2019
74
A qualified distribution is a distribution from a Roth IRA that:
1. Is made at least five years after the first day of the year in which the taxpayer made his or her first contribution to the Roth IRA, and
2. Meets on of the following requirements:
-Taxpayer is age 59.5 or older
-Taxpayer is disabled
-Taxpayer is a first-time homebuyer
-Distribution is made to a beneficiary after the taxpayer's death.
75
Taxable or nontaxable for principal (contributions) and earnings for each:
-Nondeductible traditional IRA distribution
-Deductible traditional IRA distribution
-Qualified Roth IRA distribution
-Nonqualified Roth IRA distribution
Nondeductible traditional IRA distribution: Principal (contributions)- Nontaxable, Earnings- Taxable
Deductible traditional IRA distribution: Principal (contributions)- Taxable, Earnings- Taxable
Qualified Roth IRA distribution: Principal (contributions)- Nontaxable, Earnings- Nontaxable
Nonqualified Roth IRA distribution: Principal (contributions)- Nontaxable, Earnings- Taxable
76
Simplified Employee Pension (SEP) IRA
Self-employed Retirement Plan that is EMPLOYER funded only
No additional catch-up contributions for taxpayers age 50 or older are allowed for SEP IRAs.
77
Savings Incentive Match Plan for Employees (SIMPLE) IRA
Self-employed Retirement Plan that is funded by EMPLOYEE AND EMPLOYER
Additional catch-up is allowed for taxpayers age 50 or older.
78
Solo 401k
Self-employed Retirement Plan only available for self-employed taxpayers with no full-time employees
Additional catch-up is allowed for taxpayers age 50 or older.
79
Immediate Annuity
Purchased with a single payment, and in exchange for that payment, the taxpayer receives income payments for a fixed period of time, or a lifetime.
Do not have an accumulation phase and begin payouts immediately
80
Deferred Annuity
Receives a series of payments (deposits) over time in exchange for a promised future benefit of income payments (Like an IRA).
Two phases: Accumulation phase and payout phase. May be identified as fixed, variable, or an equity-indexed deferred contract.
81
Describe the two primary types of investment risk
Nonsystematic risk- Risk that is unique to a certain industry or company. Does not affect an entire "system." Investors can protect against it by diversifying investments.
Systematic risk- Risk that affects the entire system such as the capital markets or the economy as a whole. (Ex. Currency risk, inflation risk, sociopolitical risk) Investors can protect against it by investing in derivatives that provide gains to the investor when the market declines or short selling.
82
Describe the two primary types of bonds
Corporate Bonds- A company issues a bond rather than seeking bank loans for debt financing. The interest is subject to both federal income tax and state income tax. Federal bonds are taxed the same.
Municipal Bonds- States and municipalities issue municipal bonds to finance the construction of specific projects. Exempt from federal and most state and local taxes. Safer than corporate bonds because taxes hep fulfill the pledge under the bonds indenture.
83
Differences between prepaid tuition plans and educational savings plans
Prepaid Tuition Plan: Guaranteed to increase in value at the same rate as college tuition increases. Low-risk, tax-advantaged investment. Exempt rom federal income tax and may be exempt from state and local income taxes. Risk to the owner is the potential that the beneficiary may choose a school in a different state than the one from which the plan was purchased.
Educational Savings Plan: No guaranteed benefit, invested in the stock market and is subject to market conditions. Beneficiary does not have access to the funds.
84
Describe the 4 types of control risk
Risk Avoidance: Action is taken to remove the risk (Instead of purchasing a beach residence, rent one to avoid the risk)
Risk Reduction: Action is taken to reduce the severity of the risk to an acceptable amount. (Sprinkler system, security system)
Risk Retention: Action is taken to absorb all risk internally and not transfer any risk to an insurance company (Self-insurance)
Risk Transfer: Action is taken to reduce the severity of the risk by transferring, or sharing, risk (usually with an insurance company) (Purchase an insurance contract)
85
4 types of control risk related to severity and frequency
Low Severity, Low Frequency: Risk Retention
Low Severity, High Frequency: Risk Reduction
High Severity, Low Frequency: Risk Transfer
High Severity, High Frequency: Risk Avoidance.
86
Long-term care insurance
Provides a benefit to individuals who are either cognitively impaired or who are unable to perform to of the activities for daily living.
Picks up where Medicare leaves off.
87
Return on investment (ROI) =
(Investment sales price - cost of investment) / (Cost of investment)
88
After-tax rate of return (ATRR) =
Return on Investment (ROI) x (1 - Tax Rate)
89
What should not be put into a living trust?
Retirement Accounts (Due to possible complications with early withdrawal penalties).
90
A net capital loss carryback cannot be carried back to a year if
it creates or increases a net operating loss (NOL) for that year.
91
NOL year rules:
NOLs generated before 2018: Can offset 100 percent of a future year’s taxable income, but can only be carried forward 20 years.
NOLs generated in 2018, 2019, and 2020: Can be carried forward indefinitely. Can offset 100% of taxable income for 2019 and 2020.
NOLs generated 2021 and beyond: Can be carried forward indefinitely. Can only offset 80% of taxable income
92
Section 382 Ownership Change Rules
When one or more "5-percent shareholders" increase their aggregate ownership of the loss corporation's stock by more than 50% over the lowest stock percentage owned by those shareholders during the testing period, the deduction of pre-change loss corporation NOLs against taxable income each year after the ownership change is limited to the Section 382 limitation amount.
Any unused Section 382 limitation is carried forward and increases the next year's limitation amount.
93
Section 382 limitation amount =
Fair market value of the loss corporation's stock immediately before the ownership change multiplied by the federal long-term, tax-exempt rate.
94
Corporation shareholder's Basis in Common Stock Formula:
Cash Contributed
+ FMV of services contributed
+ NBV of property contributed
+ Gain recognized by shareholder (boot)
- FMV of boot received
- Liabilities assumed by the corp.
---------------------------
Shareholder's basis in common stock
*If negative, gain recognized, and shareholder’s basis becomes zero
95
Name the corporation distribution sources, their order, and each one's type of income to shareholder and effect on shareholder stock basis
1. Current earnings and profits: Taxable dividend, no effect on shareholder stock basis
2. Accumulated earnings and profits: Taxable dividend, no effect on shareholder stock basis
3. Stock basis (return of capital): No income to shareholder, reduction of shareholder stock basis
4. Distributions in excess of E&P and stock basis: Taxable capital gain, no effect on shareholder stock basis because it is $0
96
How are current and accumulated earnings and profits matched to multiple dividends in a year?
Current earnings and profits are allocated on a pro rata basis to each distribution, regardless of the actual date of the distributions
Accumulated earnings and profits are applied in chronological order, beginning with the earliest distribution
97
Taxable amount for cash dividends, property dividends, and stock dividends
Cash dividends: amount received
Property dividends: FMV of property received
Stock dividends: Not taxable unless the shareholder has a choice of receiving cash or other property.
98
Proportional vs. Disproportional Stock Redemption
Stock Redemptions occur when a corporation buys back stock from its shareholders
Proportional: Taxable dividend income. The corporation either redeems or cancels the stock pro rate for all shareholders.
Disproportional: Treated as taxable capital gain/loss to shareholder. There has been a meaningful reduction in the shareholder's ownership interest.
99
Liquidation vs. Reorganization when it comes to Chapter of Bankruptcy, Affect on business activities, corporate consequence, and shareholder consequence.
Liquidation: Chapter 7, business activity completely ceases, corporate is taxable, shareholder is taxable.
Reorganization: Chapter 11, business activity continues, corporate is nontaxable, shareholder is nontaxable
100
Section 1244 Small Business Stock Details
When a corporation's stock is sold or becomes worthless, an original stockholder can be treated as having an ordinary loss (fully tax deductible) instead of a capital loss.
Or, if they hold it for more than five years, they may generally exclude 100 percent of the gain on the sale or exchange of the stock
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Examples of those denied the privilege of filing a consolidated tax return
FIRES
Foreign corporations
Insurance companies
Real estate investment trusts (REITs)
Exempt organizations
S corporations
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Affiliated group requirements for consolidation
An affiliated group means that a common parent directly owns:
-80% or more of the voting power of all outstanding stock; and
-80% or more of the value of all outstanding stock of each corporation
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Section 482 Study
A document justifying a taxpayer's pricing methods by comparing it to allowable pricing methods set forth in the U.S. Treasury.
OR
A document justifying the same thing but by establishing that the pricing method would clearly reflect income.
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Advance Pricing Agreement
An agreement between a taxpayer and government to avoid or resolve transfer pricing disputes by outlining things like the transfer pricing method and comparables.
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Permanent establishment applies when a corporation:
-Conducts business in a foreign country on a regular basis;
-Has a permanent location in a foreign country; and
-Operates the corporation's business through the foreign location
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Foreign Branch vs. Foreign Subsidiary
Foreign Branch:
-Extension of a domestic corporation, not a separate legal entity.
-Profits/losses are taxed in full when earned.
Foreign Subsidiary:
-Separate legal entity, incorporated under the laws of the foreign host country.
-Income earned is not taxed until earnings are brought back to the United States in the form of a dividend.
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Items of income that should be treated as sources of income from within the United States:
DRIPSGUDS
Dividends
Rents & Royalties
Interest
Personal Services
Social Security Benefits
Guarantees
Underwriting income
Disposition of U.S. Real Property interest
Sale or exchange of Inventory property
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Worldwide Tax System vs. Territorial Tax System
Worldwide: Used by the U.S. Citizens and residents are generally subject to tax on their worldwide income.
Territorial: Used by some foreign nations. Citizens and residents are only taxed on income earned inside the country's borders.
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Foreign Tax Credit definition, calculation, and rules
Primary mechanism for mitigating double taxation. Allows U.S. taxpayers to take a credit for income taxes paid to a foreign government
Foreign Tax Credit limitation = Pre-credit U.S. tax on total taxable income x (Foreign source income / Total taxable income)
Foreign tax credit is the lesser of the limitation shown above or the foreign taxes paid.
There is a separate foreign tax credit for passive, general, foreign branch, and global intangible low-taxed income. Each are added to get the total FTC. The formula is changed replacing "foreign source income" with the separate category of foreign income.
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Foreign Dividends Received Deduction requirements
A U.S. corporation only is allowed to exempt foreign-source dividend payments from U.S. taxation by taking a 100% dividends-received deduction against such income if it owns 10% or more of the dividend-paying foreign corporation.
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U.S. anti-deferral regimes that result in the current taxation of foreign-source income:
1. Passive foreign investment company regime
2. Controlled foreign corporation rules/Subpart F regime
Subpart F rules supersede the PFIC rules.
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Passive Foreign Investment Company Requirements
Must meet one of the two tests:
1. 75% or more of the foreign corporation's gross income is passive.
2. 50% or more of the foreign corporation's assets are passive assets
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Controlled foreign corporation (CFC) Requirements
-More than 50% of its stock is owned by U.S. shareholders
-A U.S. shareholder is any U.S. person owning at least 10% of the foreign corporation's stock.
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Global Intangible Low-Taxed Income Tax (GILTI)
A minimum tax imposed on certain low-taxed income that is intended to reduce the incentive to relocate CFCs to low-tax jurisdictions.
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Transition Tax
A one-time tax on the previously untaxed foreign earnings of a CFC, consistent with the TCJA's change to a territorial-based tax system.
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Base Erosion and Anti-Abuse Tax (BEAT)
A minimum tax on large U.S. corporations with a significant amount of deductible payments to related foreign affiliates. This provision is a means to eliminate the tax advantage that would result from these payments, as they reduce the U.S. tax base.
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Foreign-derived intangible income (FDII)
Double out, income relating to business with people outside of the U.S. and services/property used outside of the U.S.
Excludes related parties.
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Interest charge domestic international sales corporation (IC-DISC)
A set of provisions that enables domestic manufacturing corporations that export goods to reduce their tax liability by permitting a tax-deductible commission to be paid to an IC-DISC. Since the IC-DISC is tax-exempt, no income is recognized on these commissions, thereby reducing the tax liability of the corporation as a whole.
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Withholding tax regimes for foreign persons' nonbusiness income:
1. Fixed, Determinable, Annual, or Periodic Income (FDAP)
2. Foreign Account Tax Compliance Act of 2010 (FATCA)
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Fixed, Determinable, Annual, or Periodic Income (FDAP)
Deals with the withholding on foreign persons' investment-type income (Dividends, interest, royalties)
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Foreign Account Tax Compliance Act of 2010 (FATCA)
Deals with withholding tax on foreign entities for failure to provide information to U.S. recipients.
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Mark-to-Market Regime
Imposed on covered expatriate individuals who renounce their U.S. citizenship and satisfy on of the following three tests:
Tax Liability Test
Net Worth Test
Compliance Test
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Formula and details for after tax costs/savings
For income items, choose the lower number
For expense items, choose the higher number
Pre-tax Income x Marginal tax rate = Tax costs x Discount Factor = PV of tax costs
Pre-tax Expense x Marginal tax rate = Tax savings x Discount Factor = PV of tax savings
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Important note for using NOLS from before and after 2018
Deduct the 2018 ones before calculating the 80% of taxable income.
Also, use the oldest NOLs first
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Annualized method of estimated tax payments definition and calculation
Used when income is not expected to be earned evenly across quarters.
1st quarter: 25% of last year's tax liability
2nd quarter: (Q1 income x 12/3 x 50% x 21%) - Q1 payment
3rd quarter: (Q1&2 income x 12/6 x 75% x 21%) - Q1&2 payments
4th quarter: (Q1,2,&3 income x 12/9 x 100% x 21%) - Q1,2,&3 payments
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List the three taxes that may be imposed if an S corporation was previously taxed as a C corporation
LIFO Recapture Tax
Built-in Gains Tax
Tax on Passive Investment Income
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LIFO Recapture Tax
For S corps that were previously taxed as a C corp
Excess of inventory computed using the FIFO method over the inventory computed using the LIFO method.
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Built-in Gains Tax
For S corps that were previously taxed as a C corp
Occurs when the FMV of a corporate asset exceeds the NBV. Tax only applies if property is sold within 5 years, resulting in tax on all property.
The tax is 21% of the lesser of:
-Recognized built-in gain for the current year
-Total net unrealized built-in gain at S election less net unrealized built-in gains recognized in previous years; or
-Taxable income of the S corp if it were a C corp
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Tax on Passive Investment Income
For S corps that were previously taxed as a C corp
21% tax on the lesser of net income or passive investment income if the following two tests are met:
1. The S corp has accumulated C corp earnings and profits
2. Passive investment income exceeds 25% of total gross receipts
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S Corp Shareholder Stock Basis Formula
Initial stock basis (cash, NBV property, FMV services)
+ Additional contributions
+ Income items (ordinary, ss, tax-exempt)
- Distributions to shareholders (cash, FMV property)
- Loss/deduction items (ordinary, ss, nondeductible expenses)
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Ending basis in S corp stock
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Major difference between S corp and partnership stock basis
S corporation shareholders do not include any S corporation debt in their stock basis.
They have a separately stated debt basis.
Neither can be reduced below zero and debt basis is reinstated first
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What happens when an S corp shareholder sells their interest?
It is allocated to shareholders on a per-share, per-day basis
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Accumulated Adjustments Account (AAA)
The accumulated earnings and profits during the years a corporation is an S corp.
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Increase/decrease rules for AAA
Increased by ordinary or separately stated income and gain items (other than tax-exempt income)
Decreased by ordinary or separately stated losses and deductions, nondeductible expenses (other than expenses related to tax-exempt income), and distributions.
Distributions may not reduce AAA below zero, but other items can.
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Other Adjustment Account (OAA)
An account that is designed to keep a cumulative record of items that affect S corporation shareholders' stock basis but do not affect AAA
Basically AAA but including tax-exempt items.
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S corp with no C corp E&P nonliquidating distributions to shareholders order, tax result, and treatment.
1. Distribution to extent of AAA; Not subject to tax, reduces basis in stock; S corporation profits (already taxed)
2. To extent of OAA; Not subject to tax, reduces basis in stock; Nontaxable income/related expenses
3. To extent of stock basis; Not subject to tax, reduces basis in stock; Return of capital
4. In excess of stock basis; Taxed as long-term capital gain (if stock held for > one year); Capital gain distribution
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S corp with C corp E&P nonliquidating distributions to shareholders order, tax result, and treatment.
1. Distribution to extent of AAA; Not subject to tax, reduces basis in stock; S corporation profits (already taxed)
2. To extent of C corp E&P; Taxed as a dividend, does not reduce basis in stock; Prior C corporation taxable dividend distribution (double taxed)
3. To extent of OAA; Not subject to tax, reduces basis in stock; Nontaxable income/related expenses
4. To extent of stock basis; Not subject to tax, reduces basis in stock; Return of capital
5. In excess of stock basis; Taxed as long-term capital gain (if stock held for > one year); Capital gain distribution
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What are the events where S corporation status is terminated?
1. >50% of shareholders consent to a voluntary revocation
2. S corp fails to meet any of the qualifications
3. Excess passive income: >25 % of the corporation's gross receipts are from passive investment income for 3 consecutive years (Only applies if the S corp has prior C corp E&P)
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In the absence of an election to adopt an annual accounting period, the required tax year for a partnership is:
A tax year of one or more partners with a more than 50% interest in profits and capital.
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Partnership interest consists of
Capital interest: A right to share in the net assets of the partnership when it liquidates.
and
Profits interest: A right to share in the future profits or losses of the partnership.
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Partner's Tax Basis in Partnership Interest ("Outside Basis") formula and details
Beginning Capital Account (Cash, FMV services, NBV assets - liability transferred to other partners)
+ % All income (Ordinary, SS, T-E)
- % All losses/deductions (Ordinary, SS, T-E)
+ Partner's share of partnership liabilities (recourse and nonrecourse)
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Partner's tax basis in partnership interest
Same as S corp shareholder's initial stock basis but includes share of partnership liabilities
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Allocation of Partnership Debt to Partners
Type of owner; Recourse Debt; Nonrecourse Debt
General partner; Yes (personal liability); Based on profit-sharing ratio
Limited partner; Only if personal guarantee; Based on profit-sharing ratio
LLC member; Only if personal guarantee; Based on profit-sharing ratio
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Holding period for a partnership interest
If the property contributed was previously was a capital asset or Section 1231 asset in the hands of the partner, the partner's holding period includes the holding period of the property contributed.
If the property is an ordinary income asset (ex. inventory), the holding period begins on the date the property is contributed to the partnership.
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Partnership's Basis in Contributed Property ("Inside Basis")
The partnership's basis in the contributed property is the contributor's basis (NBV) (plus any gain recognized by the incoming partner, if a special election is made)
The partnership's holding period includes the time held by the partner regardless of type of property.
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Related party details for partnerships
Losses between a controlling partner (>50%) and their controlled partnership from the sale or exchange of property are not allowed
Gains between the two are treated as taxable ordinary income if the property is not a capital asset in the hands of the transferee.
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Nonliquidating partnership payments to a retired partner are treated as
Ordinary income to the recipient and deductions to the partnership.
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Three ways in which a partner may liquidate a partnership interest:
1. Complete withdrawal (liquidating distribution)
2. Sale of partnership interest
3. Retirement or death
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Partnership liquidating distribution rules if just multiple hot assets are received
The partner's basis in the partnership is allocated to the assets only if the inside basis is greater than the outside basis.
If the outside basis is greater than the inside basis, the partner recognizes a loss and the partner's basis in the assets are the same as the basis in the hands of the partnership.
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Partnership liquidating distribution rules if multiple assets (hot assets and land) and inside basis > outside basis
1. Assign a basis to all assets equal to the partnership's basis
2. Adjust the basis of any assets in the last property category (other property, or hot assets if no other property) that have depreciated in value down to fair market value.
3. Allocate any basis in the partnership interest remaining after Step 2 among all the assets in the last property category based on relative adjusted basis of the assets after the Step 2 adjustment.
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Partnership liquidating distribution rules if multiple assets (hot assets and land) and outside basis > inside basis
If only hot assets are distributed, recognize a loss
1. Assign a basis to all assets equal to the partnership's basis in the assets.
2. Adjust the basis of any assets in the last property category (other property) that have appreciated in value up to FMV.
3. Allocate any basis in the partnership interest remaining after Step 2 among all the assets in the last property category based on relative FMV.
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Sale of Partnership Interest Gain/Loss formula
Partner’s outside basis (including liabilities) - (Cash received + FMV of property received + Relief from share of partnership liabilities) = gain or loss
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Section 754 Election and Section 743(b) adjustment definitions
Partnerships have the option to make a Section 754 election when there is a transfer of a partnership interest and there is a difference between a partner's share of inside basis in the partnership assets and the partner's outside basis in their partnership interest
Section 743(b) basis adjustment is the difference between the purchase price and the partner's share of the partnership's inside basis of the assets. Makes the transferee have an inside basis equal to outside basis. Only required if there is a difference of $250,000 or more.
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Entity type most favored involving contribution of appreciated property by owners
Favors partnerships or sole proprietorships because the taxpayer is not required to meet the 80% rule
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Section 743(b) adjustment formula
Difference between
Purchase price + Share of partnership debt (outside basis); and
% basis of partnership's assets (inside basis)
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What business entity has the most flexibility in choosing an accounting period?
C corporations
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Entity type most favored involving taxation of business entity income
C corp is most advantageous if earnings are not distributed to shareholders as dividends and/or if the individual tax rates are higher than the C corp 21%.
Flow-through entity is more advantageous if the business does distribute earnings as dividends and/or the individual tax rates are lower than the 21%.
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Tax treatment for LLC
2 or more owners: Default treatment is partnership
One owner:
-If the owner is an individual, the default treatment is a Schedule C sole proprietorship
-If the owner is not an individual, the income/loss is included in the owner's taxable income
However, any unincorporated entity can elect to be treated as C corp/S corp
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Entity type most favored involving deduction of business entity losses
Flow-throughs are favored because they can flow through losses to the owner-taxpayer and offset income from other sources at the individual level. Partnerships have the edge over S corps because their basis is bigger which allows them to deduct more losses.
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Entity type most favored involving operating (nonliquidating) distributions to owners
Favors partnerships, especially if it is a distribution of appreciated property
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Entity type most favored involving compensation and qualifying fringe benefits
C corps are the most advantageous because they can deduct half of the SS and Medicare taxes and fringe benefits are nontaxable for employees.
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Entity type most favored involving liquidating distributions to owners
Favors partnerships if appreciated property, favors corporations if depreciated property because losses can be recognized at the time of the distribution.
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Contribution of property for interest (C,S,P,SP)
Corporation- "No Gain/loss is recognized if the following two conditions have been met:
1. Immediately after the transaction, those shareholders contributing property must own at least 80 percent of the voting stock and 80 percent of the nonvoting stock (Shareholders who contribute only services are NOT COUNTED)
2. Transfer of property must be solely in exchange for stock (No receipt of BOOT) Exception: Gain recognized if liabilities assumed > basis"
S corp- Same as C corp
Partnership- No Gain/Loss recognized (No 80%/Boot rule). Exception: Gain recognized if liabilities assumed > basis
Sole Prop- Nontaxable Event
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Basis of property entity receives (C,S,P,SP)
Corporation- NBV
S corp- NBV
Partnership- NBV
Sole Prop- NBV
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Contribution of services for interest (C,S,P,SP)
Corporation- Recognize the FMV of the interest as ordinary income
S corp- Same as C corp
Partnership- Recognize the FMV of the interest as ordinary income
Sole Prop- Nontaxable Event
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Sale of contributed property (C,S,P,SP)
Corporation- Gain/loss recognized by corporation based on NBV from contributor
S corp- Gain/loss allocated among shareholders
Partnership- Special allocation of built-in gains to contributing partner. Post-contribution gain.losses are allocated among all the partners
Sole Prop- Gain/loss recognized by owner
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Nonliquidating Property Distributions (C,S,P,SP)
Corporation- Property distribution is valued at FMV. Corporation recognizes a gain on distribution of appreciated property, but NO losses. If cash exceeds basis, gain is recognized by shareholder
S corp- Same as C corp
Partnership- Valued at NBV (generally nontaxable). No gain/loss recognized by partner or partnership. Basis in property is limited by a lesser partnership basis (after cash distributions and hot assets). If cash exceeds basis, gain is recognized by partner.
Sole Prop- Nontaxable event
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Liquidating Distributions (C,S,P,SP)
Corporation- Corporation recognizes gain or loss on the difference between FMV and NBV of the property distributed. Shareholders recognize capital gain.loss on the difference between FMV and stock basis.
S corp- Same as C Corp
Partnership- No gain/loss recognized. Partner's basis in the partnership interest after cash is subtracted becomes the basis in the distributed property (must zero-out). Gain is only recognized when money > outside basis
Sole Prop- Nontaxable event
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Taxation of business entity income (C,S,P,SP)
Corporation- Taxed at entity level when earned, taxed again at owner level when distributed as dividends
S corp- Allocated among shareholders, taxed once at individual level when earned
Partnership- Allocated among partners, taxed once at invidiual level when earned, NOT when distributed
Sole Prop- Taxed once at individual owner level when earned
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Self-employment tax (C,S,P,SP)
Corporation- No
S corp- No
Partnership- Yes, if active partner
Sole Prop- Yes
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Net investment income tax (C,S,P,SP)
Corporation- No, unless shareholder receives passive income in excess of $200,000 ($250,000 MFJ)
S corp- Yes, if passive shareholder
Partnership- Yes, if passive partner
Sole Prop- No
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QBI deduction by owner (C,S,P,SP)
Corporation- No
S corp- Yes, if qualifications met
Partnership- Yes, if qualifications met
Sole Prop- Yes, if qualifications met
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Deductibility of business entity losses (C,S,P,SP)
Corporation- NOL limitations
S corp- Basis, PAL, and excess business loss limitations
Partnership- Basis, PAL, and excess business loss limitations
Sole Prop- PAL and excess business loss limitations
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Owner compensation (C,S,P,SP)
Corporation- Salary
S corp- Salary
Partnership- Guaranteed Payment
Sole Prop- None
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Qualifying fringe benefits (C,S,P,SP)
Corporation- Nontaxable to shareholder-employee
S corp- Nontaxable if own 2% or less; taxable if own > 2%
Partnership- Taxable to partner; guaranteed payment
Sole Prop- None
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Hot Assets definition
Assets that result in ordinary income when sold, including inventory and unrealized receivables
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What happens when you "actively participate" in rental real estate?
It is still considered a passive activity
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Property nonliquidating distributions for C/S corps important note
Property distributions at a gain increase Current E&P before distributions and flow through to the shareholders
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Tax treatment for individual capital losses vs. corporate capital losses
Individual capital losses can offset Income or Gains for $3,000. They cannot be carried back and can be carried forward indefinitely
Corporate capital losses cannot offset income or gains. They can be carried back 3 years and carried forward 5 years.
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Current year foreign earned income exclusion amount
$130,000
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When are liabilities added to a partnership basis?
When they are new liabilities assumed
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Important note on 1231 SIMs
Don’t include depreciation recapture amount in ordinary gain column of a simulation
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Who does 291 apply to?
291 does not apply to sole proprietorships, S corps, etc.
ONLY C corps
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What is and isn't used in calculating the excess business loss limitation (with examples)?
Included: Aggregate business income and losses (both active and passive business activities).
Ex. Independent contractor income, rental real estate income, ordinary business income
Excluded: Nonbusiness income.
Ex. SALARY (wages), dividends, and interest income
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How do liabilities attached to property affect liquidating distributions for C/S corps?
Liabilities attached to distributed property in a C or S corp liquidation affect the shareholder's tax result (e.g., gain), but do not reduce corporate-level gain or adjust the shareholder’s basis in the property received (FMV).
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IMPORTANT Reminder for 80% boot rule
The 80% rule is tested and then the boot rule is tested. Even if over 20% receive boot, the 80% rule can still be used
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What retirement plan can an employer not contribute to on behalf of the employee?
Traditional IRA
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Stock basis is adjusted annually, as of the last day of the S corporation year, in the following order:
1. Increased for income items;
2. Decreased for distributions;
3. Decreased for non-deductible expenses; and
4. Decreased for items of loss and deduction.
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Like-Kind Exchange Treatment when boot is both given and received
They are not netted like they are for debt relief/assumption. They are treated separately (gain realized is limited by boot RECEIVED only)
Netting boots only happens when they are the same type (cash-to-cash or liability-to-liability)
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Recourse debt vs. nonrecourse debt definitions
Recourse Debt- The borrower (or partner) is personally liable for the debt. The lender can go after personal assets if the debt isn’t repaid.
Nonrecourse Debt- The borrower is not personally liable. The lender can only seize the collateral (like property) securing the loan — no personal assets are at risk.
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Examples of recourse debt vs. nonrecourse debt vs. QNF
Recourse: Accounts payable, loan from partner to partnership.
Nonrecourse: Secured property loans
QNF: Loans secured by specifically REAL ESTATE MORTGAGES
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Difference between a partnership selling property to a partner and distributing property to a partner.
When the partnership sells property, the gain or loss from the sale flows through to the partners and affects their basis. However, the basis in the partnership interest is not directly reduced by the net book value (NBV) of the property sold. Instead, the partners' basis changes by their share of the gain or loss recognized on the sale.
Distributions of property to partners: When the partnership distributes property to a partner, the partner’s basis in their partnership interest is reduced by the adjusted basis (NBV) of the property distributed (or by cash received). This is because the partner is receiving an asset from the partnership, so their basis in the partnership interest decreases accordingly.
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Treatment for losses on the sale of a personal residence
Non deductible (WRaP)
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Homeowner's Exclusion nonqualified use formula
Portion of gain not eligible for exclusion = period of nonqualified use divided by total period the taxpayer owned the property
