1
Q
What are the three categories of assets?
A
Ordinary Assets
Section 1231 Assets
Capital Assets
2
Q
Ordinary Assets
A
- inventory, AR, NR
- depreciable property and realty used in a trade or business that have been owned for a year or less
- copyrights and musical, artistic, and literary works if held by the person that created the work
3
Q
Section 1231
A
depreciable property and realty used in a trade or business that has been owned for more than a year
- excludes capital assets, inventory, accounts receivable, copyrights, and government publications
4
Q
Capital Assets
A
property held for investment or personal use, patents, goodwill
5
Q
What are the four categories of acquired property?
A
Real Property
Personal
Intangible
Natural
6
Q
Realized gain or loss
A
Amount Realized
Adjusted basis (-)
= Realized Gain/Loss
7
Q
Sale or disposition
A
sales, exchanges, trade ins, casualties, condemnations, thefts and retirements
8
Q
How do you compute realized amount? (4 step process) e
A
- Cash received (+)
- FMV of property or any services rendered received (+)
- Liabilities assumed by the buyer reduced by debts of buyer assumed by seller (-)
- Selling expenses
9
Q
Recognized gain/loss
A
the realized gain/loss included in the taxable income
10
Q
Adjusted basis
A
Cost or acquisition basis of the property
+ capital improvements (not repairs)
- depreciation, amortization, and depletion
cost includes liabilities or expenses connected with the acquisition
+ includes any liabilities or expenses connected with the acquisition
- basis is determined by cost which includes all the expenditures required to place an asset in service such as installation, transportation, testing, and taxes
11
Q
Donee’s basis for gifts
A
Gain = adjusted basis of the donor
Loss = lower of FMV at date of gift or adjusted basis of donor
Depreciable basis = gain basis
- basis is increased by gift tax by the donor due to appreciation of property
12
Q
Gift Tax Adjustment Basis Formula
A
(Unrealized appreciation / FMV - annual exclusion * gift tax paid) +adjusted basis
13
Q
Tax effects for the basis of gifts
A
- Gain is recognized only if the donee sells property for more than the gain basis
- Loss is recognized only if donee sells property for less than the loss basis
- If property sold in between gain or loss basis, no gain or loss is recognized
14
Q
Holding period of gifted property
A
- if gain basis is used then the holding period of the property of the donee includes the holding period of the donor
- if loss basis is used then the holding period of donee begins on the date of the gift
15
Q
Inheritances basis and holding period
A
- basis of the property acquired from a decedent is the FMV at the date of the death or the FMV of the alternate valuation date (6 months after the date of the death) if that date is selected by the executor as the valuation date
- Holding period is deemed to be long term
- FMV rule is N/A to appreciated property acquired by the decedent as a gift within 1 year before if such property then passes from the donee-decedent to the original donor or donor’s spouse.
- The basis of such property to the original donor (or spouse) will be the adjusted basis of the property to the decedent immediately before death.
16
Q
Property converted from investment to business personal use
A
Gain basis = adjusted basis
Loss basis and depreciable basis = lower of adjusted basis or FMV on date of conversion
17
Q
Losses for the sale of assets utilized for personal use are not deductible but gains for personal use are recognized
A
True
18
Q
Capital Asset
A
All assets except inventory, AR, depreciable assets and realty, used in a business creative works or miscellaneous assets
19
Q
Long term capital gain
A
Preferential rates (individuals only) taxed at a maximum of 15% and may be reduced to 0%; can be 20% for the highest
20
Q
Short term capital gain
A
Ordinary rates
21
Q
Capital loss (individuals)
A
If the combination of net short term and net long term gains and losses is negative then individuals can deduct this capital loss upto $3K a year
22
Q
Capital loss (corporations)
A
Corporation can only use net capital loss to offset net capital gain net income.
Unused net capital losses are short term capital losses and they can be carried back 3 years and forward 5 years
There is no preferential rate for long term capital gains
23
Q
3.8% surtax
A
- joint filers with over $250K AGI
- single head hours with over $200K AGI
- 3.8% tax applies to the lesser of net investment income or the excess of AGI over AGI thresholds
- applies to qualified dividends, passive interest, rent, royalties, and flow through income that is passive
24
Q
Qualifying Small Business Stock
A
- stock of a small business corporation less than 50M that is held in stock for more than 5 years
- the maximum gain eligible for the exclusion is the greater of 10x the taxpayer’s basis or $10M
- exclusion percentage is 50% before 2/18/09
- exclusion percentage is 75% before 2/17/09 and before 9/28/10
25
Qualifying Small Business Stock
- stock of a small business corporation less than 50M that is held in stock for more than 5 years
- the maximum gain eligible for the exclusion is the greater of 10x the taxpayer's basis or $10M
- exclusion percentage is 50% before 2/18/09
- exclusion percentage is 75% after 2/17/09 and before 9/28/10
- applies to industries within technology, manufacturing, retail, wholesale
26
Qualifying Small Business Stock
- stock of a small business corporation less than 50M that is held in stock for more than 5 years
- the maximum gain eligible for the exclusion is the greater of 10x the taxpayer's basis or $10M
- exclusion percentage is 50% before 2/18/09
- exclusion percentage is 75% after 2/17/09 and before 9/28/10
- applies to industries within technology, manufacturing, retail, wholesale
27
Section 1244 Losses
- first $50K loss will be treated as ordinary loss
- individual selling the stock must be the original owner of the stock
- total capitalization of the corporation cannot exceed $1M at the time stock is issued
28
Mutual Funds
Long term gains on schedule D
| Short term capital gain shown as dividend income on form 1099-D
29
Stocks and Bonds
Date of purchase for stocks and bonds is the trade date not the settlement date
Trade date is the day that the purchase or sale actually occurs
Settlement date is the day the stock is delivered or that the payment is actually made
30
Personal Casualty Theft or Losses
- if gains exceed losses then all gains and losses are treated as capital gains and losses, short term or long term depending on the holding period
- if losses exceed gains, the losses offset gains and are an ordinary reduction from AGI to the extent in excess of 10% AGI
- net losses are deductible only if they incurred as part of the disaster
31
Section 1245
- All depreciable properties other than buildings
- gain is recognized as ordinary income to the extent that depreciation was taken, gain in excess is treated as a section 1231 gain
- no recapture required if there was a loss
- loss is recognized as a section 1231 loss
- depreciation includes cost recovery, depreciation, section 179 immediate expensing, first year bonus depreciation, and amortization of section 197 intangibles
32
Section 1250
- Applies to buildings, depreciable real property
- applies only when an accelerated depreciation method is used (Year 1987 or later) and property is sold as a gain
- Does not apply when property is disposed as a loss
- Gain is the excess of accelerated taken over straight line treated as ordinary income which is known as additional depreciation
- the excess is a 1231 gain
- buildings owned by individuals have a special 25% tax (un-recaptured 1250 gains) to the extent of accumulated straight line depreciation
33
What are the exceptions to 1245 and 1250?
- Gifts (recapture potential carries over to donee).
- Death (recapture potential is eliminated; does not carry over to one who inherits the property).
- Charitable transfers (potential recapture reduces charitable contribution deduction).
- Certain tax-free exchanges (i.e., like-kind and involuntary conversion). (Recapture potential carries over to the property received in the exchange.) Realized gain is recognized to the extent of boot received (like-kind exchange) or amount not reinvested (involuntary conversion).
34
Land
Gains are always 1231 gains since land is not depreciable
35
Sale of Business Personalty Long Term
Treated as ordinary income unless sold for an amount greater than the purchase price
36
Section 291
Section 1245 - Section 1250 Recapture excess amount * 20%
37
Casualty Gains and Losses -1231
- Net casualty and theft gains and losses on business property held for more than a year
* if losses > gains = ordinary losses/gains and don't net them with other 1231 gains/losses
* if gains>losses, then combined with other 1231 gains/losses and treated as a net long term capital gain
38
Summary of Gains and Losses on business property
1. separate gains and losses into 4 categories
- ordinary gains and losses
- section 1231 casualty theft gains and losses
- section 1231 other than casualty
- gains and losses on capital assets other than casualty
2. Depreciation recapture - gain is treated as ordinary income to the extent of 1245, 1250, and 291
3. if casualty and theft, net 1231 gains/losses
losses>gains = ordinary treatment
gains>losses = combined with gains/losses in #4 below
4. losses>gains = ordinary treatment
gains>losses = LTCG except for the 5 most recent tax years
39
1231 Netting
- net gain is a LTCG and ordinary income
- losses are ordinary loss
- lookback provision applies that gains must be offset by losses from the 5 preceding tax years that have not been previously recaptured
40
Cost Recovery Rules
1. 200% or 150% declining balance is used for personalty (tangible asset that can be moved not fixed to land) and straight line is used for realty (land and other assets affixed to such as buildings)
2. Personalty - mid year (unless more than 40% is acquired in the last quarter where you would use mid quarter)
Realty - mid month
41
3 years (200%) half year
Certain manufacturing tools and tractor units for use over the road and race horses
42
5 years (200%) half year
- automobiles and light duty trucks
- computers, assets in high tech
- office equipment
- appliances, furnitures, carpets, etc. used in rental real estate
- machinery or equipment used in farming business
43
7 years (200%) half year
- most equipment and machinery
- office furniture and fixtures
- used farm equipment and machinery
44
150% for personalty
- land improvements
| - 15 year and 20 year property used in farming business
45
Leasehold improvements
MACRS and uncovered adjusted basis is treated as a loss
46
Qualified improvement Property
recovered over 15 year period using straight line and half year convention (unless mid quarter convention applies)
47
Residential Realty
27.5 year straight line
48
Non residential realty
39 year straight line mid month
49
Bonus Depreciation
100% for qualified property unless taxpayer elects not to do so
- property must be acquired by an unrelated taxpayer
- qual. property is new and used tangible property with a recovery period of less than or equal to 20 years, computer software, and qualified improvement property. Qualified improvement property is improvements to the interior of nonresidential property that is made after the building is placed in service
50
Section 179 Election
to expense a limited amount of tangible personalty if used in a trade activity
- not applicable to income producing property (rental) or realty
- Max amount expensed in any year is limited to the lesser of business income or $1,020,000 for 2019 ($1,000,000 for 2018).
- The Section 179 expense cannot exceed the income from the business, reduced for all expenses except Section 179. Any election to expense in excess of the business income limit is carried forward (indefinitely) and used in a year when income is sufficient.
- The Section 179 election is phased out (dollar for dollar) if qualified assets purchased exceed $2,550,000 for 2019 ($2,500,000 for 2018).
- A carryforward is not allowed if the Section 179 deduction is reduced due to the excess purchase provision.
- The taxpayer can revoke the Section 179 election in later years as long as the return is still eligible to be amended.
- If property for which Section 179 has been collected is converted to nonbusiness use, the Section 179 and MACRS deductions claimed in excess of what would have been allowed if Section 179 had not been elected must be recaptured as income.
51
Depletion
timber, mineral, oil, gas, and other natural resources
1. Cost Method - divides adjusted basis (cost -depreciation) by recoverable units * number of units sold
2. Percent Method - uses specific % of gross income from the property
52
Intangible Assets Ammortization
180 months - trademarks, tradename, goodwill, customer list
53
Organization and Start up expenses
$5K may be deducted, $5K is reduced by the expenses incurred that is over $50K
- expenses not deducted must be capitalized over 180 months
- election must be filed within the first corporate tax return
- syndication expense must be capitalized
- org. expenses are legal services incident to organization, accounting services, organizational meetings of directors and shareholders, and fees paid to incorporate. They must be incurred before the end of the taxable year when the business begins (but they do not have to be paid, even if on a cash basis).
54
Patents and Copyrights and pollution control/research exp and covenant not to compete
17 years - patents
50 years - copyrights
60 months - pollution control/research exp
15 years - covenant not to compete
55
How are losses and gains recognized in like kind exchanges?
- Losses are never recognized
| - Gains are recognized to the extend of the lesser of the boot receives or realized gain
56
What is non-qualifying property?
- inventory
- partnership interests
- stocks, bonds, and notes
- certificates of trust or beneficial interest
- other securities or evidence of indebtedness interest
- personalty (e.g. machinery)
- taxable
57
Like kind exchanges
- only realty
- no personalty
- not taxable, non recognition of gains or losses
- business property can be exchanged for investment property
- land can be exchanged for building
- if located outside of US cannot be exchanged for within US
- no gain or loss recognized on endowment, life, annuity contracts, and allow taxpayers to obtain better insurance
58
Mortgage relief in like exchange
- can be netted by what is assumed, any loss is netted on amount realized but cannot be netted on the boot recieved
59
How do you calculate the basis of like kind exchange?
FMV of property received
- Postponed gain
+ Postponed Loss
OR
Adjusted basis of property given
+Gain Recognized
+ Boot given (debt assumed, cash given)
- Boot received (debt relief, cash received)
60
What is the basis of non like kind exchange?
FMV of property received
61
How do you calculate realized gain on like kind exchange?
FMV of property received
+ liability assumed of old
- adjusted basis of old
- liability assumed of new
62
Involuntary conversions
applies to business investment and personal use
only gains are deferred and losses are recognized
- result of the destruction (complete or partial), theft, seizure, casualty (an unexpected, unavoidable outside influence like a storm, fire, or shipwreck, or condemnation of property); or sale or exchange under threat or imminence of condemnation of the taxpayer's property (eminent domain).
- condemnation is threat by the government
63
Replacement time period
- replacement must be made within 2 years the gain is realized
- extended by three years if it is a business realty
64
What is the formula for involuntary conversion
```
Amount realized from conversion
– Adjusted basis of old property
Realized gain/loss
Amount realized from conversion
– Cost of replacement property
Recognized gain, limited to realized gain
```
65
How do you recognize gain on non like exchange
realized gain
66
Wash Sales
- Losses from the sale of securities are not recognized if similar securities are purchased within 30 days of sale
- does not apply to gains
- taxpayer takes basis of the new securities from the cost + deferred loss from the wash sale
67
Loss related Parties
Losses from the sale of business investment property to related parties are not recognized and losses from the sale of use of personal properties are never recognized
68
Related Parties
- Members of a family (spouse, children, grandchildren/descendants, parents, brothers and sisters, and grandparents/ancestors).
- An individual and a corporation in which the individual owns, directly or indirectly, more than 50% in value of the corporation's outstanding stock.
- A partner and a partnership in which the partner owns, directly or indirectly, more than 50% of the capital interests or profits interests in such partnership.
- Beneficiaries of estates and trusts can also be treated as related parties.
(aunts uncles inlaws (can be dependents though) are not related parties)
holding period begins on date of purchase of property from related party
69
Payments to related partiesa
accrual method to deduct accrued interest owed to a related cash method payee
- no deduction is allowed until the year the amount is actually paid
70
The related party rules are not applicable to the sale of personal use property because these losses are not deductible under any circumstances. The only time a loss on personal use property is deductible is if the disposition qualifies as a personal casualty. (T/F)
True
71
Short sale
- treated as a constructive sale on the day of the short sale
- taxpayer sells shares identical to what he/she owns
- eliminate risk of loss, and opportunity for gain
- losses are deferred until the short sale is closed
72
Sale of Principal Residence
- exclusion of gains every two years
- single can exclude $250K if ownership and use test is met
- married can exclude $500K if either the taxpayer or spouse meets ownership test or both meet use test
- depreciation must be recaptured on the sale (any depreciation is a capital gain)
- as long as the business portion is not a separate building, business and personal don't need to be separately allocated
- if sale occurs after death of spouse, surviving spouse can exclude $500K but joint couple exclusion must be passed on the date of the death
- exclusion will not apply if the property was not used as a principal residence for 40% of the 5 year testing period
- limitation does not apply if the non-qualified use occurred after principal use of residence
73
Ownership and Use Test
- residence must be owned and used by the taxpayer as a principal residence for at least two of the preceding five years (ownership and use tests)
- doesn't have to be continuous
- short/temp absences, foreign services, are ignored
- if taxpayer dies, exclusion doesn't apply to surviving if deceased taxpayer remarries before the date of the sale
Regulation - CPA Excel
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