1
Q
What items are NOT a deductible expense on Schedule C?
A
The following are NOT deductible expenses:
- Wages paid to owner - considered a draw, not an expense
- Business meals are only 50% deductible, can’t deduct the entire amount
- Health insurance for owner - not deducted on Schedule C, 100% is an adjustment FOR AGI
- Business bad debt loss (allowance) - direct write-off only for accrual basis taxpayer
- State income taxes - not deducted on Schedule C, itemized deduction
- Investment expenses
- Custodial fees for self-employed retirement accounts
2
Q
What is the rule with deducting foreign airfare?
A
If foreign travel is primarily personal in nature (e.g., vacation), none of the travel expenses (e.g., round-trip airfare) incurred will be allowable business deductions, even if the taxpayer was involved in business activities while in the foreign country.
3
Q
What is the rule regarding deducting interest?
A
Interest that is prepaid is deductible in the tax year to which, and to the extent that the interest is allocable, i.e., as it accrues. This allocation is required even by cash basis taxpayers.
4
Q
What items appear on Schedule B?
A
- Interest income
- Dividend income
5
Q
What items appear on Schedule E?
A
- Net rental real estate income or loss
6
Q
What items appear on Schedule D?
A
- Capital gains and losses
- Net capital losses can be deducted from ordinary income up to $3,000 [Individuals]
- Net capital losses are carried back 3-years and forward 5-years [Corporations]
- Net capital losses can only offset capital gains; CANNOT create a net operating loss
- Capital losses CANNOT reduce taxable income; unused capital losses can be carried back or forward
- Capital losses carried back or forward ALWAYS treated as Short-Term
7
Q
What items appear on Schedule A?
- Itemized deductions
A
- Charitable contributions [cash subject to 60% limitation, carried forward only for 5 years]
- Medical and dental expenses
- Casualty and theft losses
- Home mortage interest
- SALT
- RE taxes
8
Q
What items appear on Form 1065?
[Partnership/ LLC]
A
- Business income
- Business expenses
- Ordinary business income or loss
- Guaranteed payments to partners
- Partner’s health insurance premiums (included as part of guaranteed payments)
- Retirement plan contributions for EE’s
9
Q
What items appear on Schedule K and K-1?
A
- Ordinary business income or loss
- Guaranteed payments to partners
- Net rental real estate income or loss
- Interest income
- Dividend income
- Capital gains and losses
- Net Section 1231 gain (loss)
- Charitable contributions
- Section 179 expense deduction
- Investment interest expense
- Partner’s health insurance premiums (included as part of guaranteed payments)
- Retirement plan contributions for Partners
- Tax credits (reported by partnership but claimed by partners)
10
Q
What are examples of itemized deductions?
A
Itemized deductions are deductions FROM AGI. Once AGI is calculated, then these deductions are subtracted from AGI:
- State income taxes [$10k max]
- Real estate tax on personal residence [$10k max]
- Personal property tax on personal automobile
- Current year state and city income taxes withheld
- Medical [7.5% of AGI max]
- Mortgage Interest [$750k max]
- Charity [50% of AGI for property, 60% of AGI for cash, 30% of AGI if LTCG contribution “i.e. stock”]
- Casualty [Lower of decline in FMV or basis. Less: insurance reimb., $100 floor per casualty, 10% of AGI limit]
- Gambling losses [Limit up to winnings]
- Employee business travel expenses [100% meal costs at restaurants, meals + lodging “away from home overnight”]
11
Q
What is the gifted property basis rule for gains and losses?
A
Donor’s rollover cost basis = Rollover cost = NBV - this means that property acquired as a gift generally retains the cost basis of the donor at the time of gift and basis is increased by gift taxes paid.
Exception: Lower FMV at date of gift than rollover basis
Example: If Donor Basis = $5,000; Lower FMV at Date of Gift = $3,000
* If sell higher than $5,000 - use “Donor’s Basis”
* If sell lower than $3,000 - use “Lower FMV at Date of Gift”
* If sell between $3,000 and $5,000 - use actual “Sales Price” as basis and NO gain or loss
12
Q
How do you calculate Gain/Loss REALIZED in Like-kind exchanges?
A
Amount realized [FMV of real property received + Boot received]
- Adjusted basis of property given up
- Boot paid
- Liability assumed
= Gain/ Loss REALIZED
Note 1: Gain realized is recognized to the extent of boot [non-like-kind property] received. If there is both debt relief + debt assumed, the debt is netted together [net the debt]
Note 2: Net debt relief = Boot received
Note 3: Net debt assumed = Boot paid
13
Q
How do you calculate Loss RECOGNIZED in Like-kind exchanges?
A
Realized loss is never RECOGNIZED in like-kind exchanges; therefore, it is $0.
Instead, the realized loss [the deferred loss] is ADDED to the FMV of the new property RECEIVED
14
Q
How do you calculate basis of NEW property received in a Like-kind exchange?
A
FMV of property RECEIVED
- Deferred gain
+ Deferred loss
= Basis of new property
Note 1: Gain is recognized to the extent of BOOT received. The deferred gain is the gain amount that is in excess of boot received.
Note 2: Boot received is considered cash and net mortgage RELIEVED.
Note 3: Boot received triggers gain recognition.
Note 4: If no boot received, then entire realized gain is DEFERRED, which means it is subtracted from FMV of property received to arrive at basis.
15
Q
What is MARCS 5-year property?
A
- Automobiles
- Light trucks
- Typewriters
- Copiers
- Duplicating equipment
- Delivery van
- Computers
16
Q
What is the charitable contribution deduction?
A
Charitable contribution deduction is limited to 10% of taxable income BEFORE the following deductions:
- Charitable contribution
- DRD
- Capital loss carry back
- Net operating loss carryback
Total income [TI] = taxable income + dividends received. Compare charitable amount to 10% x TI; deduction is the LESSER of the two amounts. Calculate DRD and Taxable Income = TI - [lessor of charitable contribution or 10% x TI] - DRD
17
Q
What is section 1250 property?
A
- Depreciable real property (buildings) used in a trade or business for > 1 year.
- Gain on sec. 1250 property is recaptured Sec. 1250 gain to the extent of SL Accumulated Depreciation.
- Any excess gain is Section 1231.
18
Q
What is Section 1231 property?
A
- Sec. 1231 assets are depreciable personal property and REAL property used in a business and held for over 12 months
- For example, land held for 18 months
- If sec. 1231 gains exceed 1231 losses, net gain is treated as LTCG
- If sec. 1231 losses exceed 1231 gains, loss is deductible as an ordinary loss
- Sec. 1231 lookback provision - 1231 gains must be offset by 1231 losses going back 5 years that have NOT been recaptured. Gains that can be “absorbed” by previous 1231 losses are treated as ordinary income. Remaining amounts are treated as a 1231 gain.
19
Q
How do you calculate Gain RECOGNIZED in Like-kind exchanges?
A
Gain Recognized = LESSOR of realized gain and boot received.
Realized gain:
FMV of real property received
+ Boot received
- Adjusted basis of property given up
- Boot paid
- Liability assumed
= Gain REALIZED
Note 1: Gain realized is recognized to the extent of boot [non-like-kind property] received. If there is both debt relief + debt assumed, the debt is netted together [net the debt]
Note 2: Net debt relief = Boot received
Note 3: Net debt assumed = Boot paid
20
Q
How do you calculate a Partner’s basis in a partnership interest?
A
Cash contributed
+ Adjusted basis of property contributed
+ FMV of services rendered
+ Liabilities assumed by new/incoming partner
- Liabilities assumed from other partners
= Partner Basis in partnership interest
21
Q
What is Section 1245 property?
A
- Section 1245 property is equipment used in a trade or business for more than 1 year.
- Any gain is section 1245 ordinary income to the extent of prior depreciation taken on asset [total accumulated depreciation].
22
Q
What is the 2023 IRA contribution limit for unmarried individuals?
A
Under Age 50:
* $6,500 or Earned income (lessor of)
Age 50 and over:
* $7,500 or Earned income (lessor of)
23
Q
What is the 2023 IRA contribution limit for married individuals?
A
Under Age 50:
* $13,000 ($6,500 each) or Earned income [lessor of]
Age 50 and over:
* $15,000 ($7,500 each) or Earned income [lessor of]
24
Q
What is 2023 AGI phase-out for employer-sponsored retirement plans?
A
- Unmarried = $73k to $83k
- Married filing jointly = $116k to $136k
25
What is the 2023 AGI phase-out for employer-sponsored retirement plans - Special Rule?
Special rule = Married taxpayer is NOT active participant in an employer retirement plan, but spouse is:
* Married filing jointly = $218k to $228k [couple's AGI]
* Married filing separately = $0 to $10k [each spouse subject to limitation - Participant and nonparticipant]
26
What are rules around personal use property (i.e., personal furniture)?
* No Recognized gains or losses on personal-use property.
* No deduction allowed for losses on sale of personal-use property.
* Holding period is N/A because no gain or loss is recognized.
27
What are rules around the same stock purchased and sold within 30 days?
[ONLY applies to losses]
* The same stock purchased and sold within 30 days is called a wash sale
* No Recognized loss on wash sales; instead, repurchased stock basis is calculated and the disallowed loss [realized loss from the sale] is ADDED to the basis
* Wash sale rule applies to losses NOT gains
* Formula for calculating Realized Gain/Loss = Sale Proceeds - Basis
* Formula for calculating Recognized Gain/Loss = Realized Gain/Loss - Deferred
* In a wash sale, the deferred amount is the disallowed loss that gets added to basis
Note: In a wash sale, the same purchase transaction within days 30 of sale resulting in a loss, may result in the purchase of shares that is less than # of shares sold. In this case, a portion of the loss will be deferred (not recognized)
28
What are rules around related party transactions pertaining to gains, losses, and holding period?
* Gains from related party transactions are RECOGNIZED
* Losses from related party transactions are NEVER recognized
* Holding period is N/A for related party transaction losses because losses are NOT recognized
29
What are rules around related party transactions pertaining to basis?
* Selling price to unrelated party [if selling price is HIGHER than RP basis] then; taxpayer Basis = RP's basis. Recognized gain will be the same as realized gain. Holding period is based on when taxpayer acquired the property.
* Selling price to unrelated party [if selling price is BETWEEN RP basis and purchase price from RP] then; taxpayer Basis = Selling price to unrelated party. No gain or loss recognized; holding period does not apply because no gain/loss is recognized.
* Selling price to unrelated party [if selling price is LOWER than RP basis] then; taxpayer Basis = Purchase price from RP. Recognized loss will be the same as realized loss. Holding period is based on when taxpayer acquired the property.
30
What are rules around multiple stock sales in the same year?
* Realized loss/gain will need to be calculated for each stock sale
* Realized capital loss/gain need to be calculated
* Net LT and ST capital loss/gain; if capital loss then $3,000 can be recognized and the remaining can be carryforward indefinitely [for individual taxpayers]
* C-corporations - no distinction between ST and LT capital gains and losses. C-corporations can ONLY offset capital losses against capital gains; net capital losses can be carried BACK 3 years and FORWARD 5 years.
* Holding period is based on netting of capital gain/loss as to whether it takes the form as ST or LT
31
What items are a deduction for AGI?
* Above the line deductions
* Deductions to arrive at AGI
* Deductions for AGI
* Deductible as a deduction toward AGI on Form 1040
Deductions for AGI are items that lower your gross income to arrive at AGI:
* 50% of SE tax
* Alimony paid before 2019
* Educator expenses
* Trade or business expense
* Rent or royalty expenses
* 100% of medical insurance premiums (for self-employed)
* Contributions to retirement plans
* Contributions to HSAs
* Student loan interest (limited to $2,500)
* Penalty on early withdrawal of savings
* Attorney fees paid in discrimination + whistle-blower cases
32
How do you prepare a Schedule M1 reconciliation?
Net Income/Loss [per books]
+ Federal income tax [per books]
+ Excess capital losses over gains
+ Income subject to tax NOT recorded on books [installment sales, rent received in advance]
+ Expenses recorded on books NOT on tax return [book depreciation, meals in excess of 50% allowance, Allowance for doubtful accts (increase), warranty accrual, goodwill impairment per books, pension expense accrued, penalties]
- Income recorded on books NOT on tax return [tax-exempt interest, life insurance proceeds]
- Deductions on return NOT charged against book income [tax depreciation, contribution carryover, section 179 deduction, direct bad debt write-offs, actual warranty costs, amortization or org cost, goodwill amortization per return, pensions paid]
= Taxable Income [per return]
Note: Taxable income per page 1 of tax return, BEFORE DRD and NOL carryforward deduction.
33
Is employer reimbursement of college tuition expenses included in income?
* Maximum of $5,250 can be excluded from gross income for payments made by an employer on behalf of an employee for an employee's educational expenses.
For example, if employer reimbursed employee $8,000 of college tuition expenses, $5,250 is Nontaxable and $2,250 is taxable.
34
What portion of a scholarship should be included in gross income?
* Scholarships for degree-seeking student are excludable from income only up to amounts actually spent on tuition, fees, books, and supplies.
* Amounts used to pay for other items [i.e., room and board] or retained by the recipient is TAXABLE.
35
Would a taxpayer include in current gross income for their federal return a state income tax refund from prior year?
* State or local income tax refund received in a subsequent year is NOT taxable if taxes paid did NOT result in tax benefit in PY.
* If taxpayer used standard deduction in PY; no tax benefit received because taxpayer did not deduct state income taxes on federal return.
* If taxpayer had itemized deductions in PY; then taxpayer would have deducted state income taxes on federal return and a tax benefit would have been received. In this case, taxpayer would include PY state income tax refund as gross income in current year.
36
Should a taxpayer include in gross income a prize won in a raffle drawing?
* Yes. The FMV of prizes and awards is INCLUDED in taxable income.
* Limited exception exists when taxpayer selected for an award without entering a contest and assigns award directly to a charity.
37
Should a taxpayer include damage awards received as compensation for non-physical injuries or illnesses in taxable gross income?
* Damages received as compensation for NON-physical injuries or illnesses [i.e., damages received for emotional distress] are INCLUDED in gross income.
* Damages received as compensation for personal [PHYSICAL] injuries are EXCLUDED from gross income.
38
How do you calculate total taxable amount for annuities?
1st: Need original investment in fixed annuity [contract cost]
2nd: Need to calculate the Expected value of the annuity = Monthly payment amount x # of months per contract
3rd: Calculate Exclusion ratio = Original investment/ Expected value
4th: Calculate Taxable portion of each annuity payment = 100% - Exclusion ratio
5th: Calculate total payments received in CY
6th: Calculate taxable amount = Total payment x Taxable portion %
39
What makes a contract void?
* Fraud in the execution - party did not know they were signing a contract
* Physical coercion (or the threat) - type of duress
* Contracting with a person under guardianship
* Contracting with a person adjudicated mentally incompetent
40
What parties can’t be petitioned to involuntary bankruptcy?
* Farmers
* Nonprofit charities
41
What are the steps in calculating casualty loss AFTER consideration of threshold limitations?
1. Calculate the LESSOR of decrease in FMV [before and after casualty] AND adjusted basis.
2. Subtract insurance proceeds received from step #1.
3. Subtract $100 floor [applied to each SEPERATE casualty loss] from the economic loss calculated in step #2.
4. Subtract AGI threshold applied to ALL casualty losses in the aggregate [10% of AGI]
Note: The $100 reduction applies to each SEPERATE casualty loss, while the reduction for 10% of AGI applies to casualty losses in AGGREGATE.
42
What entities are NOT eligible for Chapter 11 bankruptcy?
* Banks
* Insurance companies
* Generally no trustee
Note: Chapter 11 bankruptcy is a "reorganization" for the business or individual to stay in business. It must be approved by CREDITORS that make up 2/3rds of claims. The court must also approve the plan.
43
Who can file Chapter 13 bankruptcy?
* Only for individuals
* Always a trustee
* Corporations and Partnerships CANNOT file
Note: Chapter 13 bankruptcy allows for adjustment of debts of individual based on regular income. Allows individual to keep property and catch up on missed payments. There are unsecured and secured debt limits with Chapter 13; if individual debts exceed this limit, then they must file for Chapter 11.
44
What are items that CAN'T be discharged in bankruptcy?
* Alimony and child support
* Student loans
* Federal tax liens (unpaid taxes)
* Debt acquired through false representations or fraud
45
What priority does a creditor with a PERFECTED security interest in collateral have over other creditors?
* Creditor with a security interest that is UNPERFECTED
* Unsecured creditors
* Lien creditors [interest perfected BEFORE lien attached]
* Judgement liens [interest perfected BEFORE judgment lien attached]
46
Who takes priority and wins?
* Purchase money security Interest [PMSI] creditor vs.
* Perfected secured party [PSP] in inventory
PMSI wins if:
* Perfected BEFORE delivery
* Notifies PSP BEFORE delivery
47
Who takes priority and wins?
* Purchase money security Interest [PMSI] creditor vs.
* Perfected secured party [PSP] in NON-inventory (i.e., equipment or fixtures)?
PMSI wins if:
* Perfected within 20 days of delivery
48
Who takes priority and wins?
* Perfected secured party [PSP] vs.
* Perfected secured party [PSP]
* PSP that PERFECTED first wins
49
Who takes priority and wins?
* Perfected secured party [PSP] vs.
* Lien creditor/ Lienholder [LC]
* The first to ATTACH wins
50
Who takes priority and wins?
* Perfected secured party [PSP] vs.
* Secured party [SP]
* PSP wins
51
Who takes priority and wins?
* Secured party [SP] vs.
* Secured party [SP]
* The first to ATTACH wins
52
Who takes priority and wins?
* Secured party [SP]
* Unsecured party [UP]
* SP wins
53
Who takes priority and wins when a debtor moves to a new jurisdiction?
* Creditor with a security interest has 4 months to file a financing agreement in new jurisdiction
* Until the 4 months passes, previous filed security interest has superiority [even against another security interest in new jurisdiction]
* AFTER 4 months, if oldest security interest has not been filed, then oldest properly filed security interest become superior
54
What entities are NOT eligible for Chapter 7 bankruptcy?
* Credit unions
* Banks
* Insurance companies
* Railroad companies
* Small business investment companies
Note: Chapter 7 is a liquidation bankruptcy, can be voluntary or involuntary, means test to determine whether debtor can pay debts, anyone can file, don’t need to be insolvent or have certain # of creditors.
55
What are AGI limitations on charitable contributions for 60%?
* Cash - for Public charities and Private operating foundations
Note 1: Church is a type of public charity
Note 2: Remaining contribution in excess of 60% of AGI limit can be carried forward up to 5 years.
56
What are AGI limitations on charitable contributions for 50%?
* Ordinary income property - for Public charities and Private operating foundations
Note: Stock held for 1 year of less = ordinary income property. Amount deductible is LESSOR OF property adjusted basis or FMV at contribution date.
57
What are AGI limitations on charitable contributions for 30%?
* Cash - for private Non-operating foundations
* Ordinary income property - for private Non-operating foundations
* LTCG property - for Public charities and Private operating foundations
Note 1: Remaining contribution in excess of 30% of AGI limit can be carried forward up to 5 years.
58
What are AGI limitations on charitable contributions for 20%?
* LTCG property - for private Non-operating foundations
59
How should an employee recognize income from a Nonqualified stock option plan?
* Employees receiving a nonqualified stock option must recognize as Ordinary income the value of the option if traded on an established market:
Option price per share x # of shares
60
When are gains from an incentive stock option recognized?
* Gain on incentive stock is NOT recognized until the sale occurs:
Stock price when sold = purchase price x # of shares
61
How do you calculate Tax Basis per share?
Tax basis per share = Total tax basis / # of shares
62
How do you calculate Total tax basis?
Total tax basis = # of shares purchased x Stock price
63
How do you calculate Tax Basis of shares sold?
Tax basis of shares sold = Tax basis per share x shares sold
64
What is Donee's basis in gifted property?
[General Rule]
General rule:
* FMV > NBV at time of gift = use Rollover basis - [property has APPRECIATED in value]
* Donee's basis = Donor's basis (NBV)
* Donee’s beginning holding date = Donor’s holding date
65
What is the beginning date of holding period for gifted property?
[General Rule]
General rule:
* Donee's beginning holding date = Donor's holding date
* To determine holding period, compare Sale date and Donor's holding date; if less than or equal to 1 year = Short-Term. If > 1 year = Long-Term
66
What is Donee's basis in gifted property?
[Exception]
* FMV < NBV at time of gift = Basis + holding period depends on future price of stock - [property has DEPRECIATED in value]
* Donor's Basis [NBV] > FMV at gift date = Exception applies
There are three (3) scenarios:
1. If future sale price of stock > Donor's Basis [NBV]; use this as basis [Gain] + Rollover holding date
2. If future sale price of stock < FMV at gift date; use FMV as basis [Loss] + Gift Date for holding period
3. If future sale price of stock is BETWEEN Donor's Basis [NBV] and FMV at gift date = No Gain or Loss + Holding date unnecessary. This means that the selling price IS the basis. Compare the donor’s purchase date and the gift date to determine the Holding period
67
What is Shareholder’s basis in stock received?
Basis of transferred property
+ Gain RECOGNIZED
- Boot received
- Liabilities ASSUMED by corporation [debt relief]
= Shareholder basis in corporation stock
68
What are the Dividends Received Deduction [DRD] amounts?
* Corporation owns < 20%; DRD = 50%
* Corporation owns 20% - 80%; DRD = 65%
* Corporation owns > 80%; DRD = 100%
Note 1: S-Corps NOT eligible for DRD
Note 2: If a question states “unrelated domestic corporation” it’s assumed that corporation owns less than 20% stock, and DRD = 50%
Note 3: DRD is lesser of: 1. 50% or 65% of dividends received OR 2. 50% or 65% of taxable income w/o regard to the DRD, NOL carry-forward, capital loss carry back
Note 4: Do not take DRD personally, PSCs + PHCs NOT eligible for DRD
69
What are capital assets?
* Capital assets are assets that are NOT business assets or 1231 assets
* Assets held as investments
* Stocks, bonds, real estate + goodwill of a corporation
70
What is Donee's/ Decedent's basis in Inherited property?
* For inherited stock, use a "stepped-up" basis to FMV
* NBV is NOT needed; only care about FMV at time of death
* If no alternative valuation date selected; use FMV as Basis per share
* If alternate valuation date is elected; DON'T use FMV; use share price as of alternate valuation date
* Alternate valuation date is the EARLIER of 6 months OR date of distribution/sale of property. Only available if its use LOWERS entire gross estate + estate tax
* Holding period for ALL inherited property = ALWAYS long-term
* All capital gains on sale of inherited property = Long-term - [does not matter how long property was held]
71
What are the rules regarding exclusion of gain on sale of personal principal residence?
* Gain on sale of personal principal residence may be eligible for exclusion from gross income
* Losses from sale of personal principal residence = NOT deductible
* Exclusion = $500k MFJ; $250k Single, MFS, and HOH
* Must own + used property as principal residence for 2 yrs.+ during 5-year period ending on sale date
72
What is the Hardship provision?
* If sale of residence is due to a change in place of employment, health or other unforeseen circumstance taxpayer may prorate the exclusion
* Change in place of employment requires new work location to be at least 50 miles farther from home sold than old work location
* Hardship exclusion is $250k [1/2 of $500k full exclusion] from sale of personal residence
73
What is the Nonqualified use provision?
* Nonqualified use is any use of home other than use as a principal residence
* Nonqualified use does NOT include any portion of the 5-year period ending on sale date after last date home was used as a principal residence
* Portion of gain attributed to nonqualified use is NOT eligible for exclusion
* Portion of gain NOT eligible for exclusion = Period of nonqualified use / Total property ownership period
74
What are losses that are NOT deductible?
Mnemonic: WRaP them up and throw them away!
Losses that are NOT deductible:
W = Wash sale - if stock sold at loss + repurchased within 30 days; loss is DISALLOWED and will be deferred. It is ADDED back to shares repurchased within 30 days.
R = Related party transactions
P = Personal losses
75
What is depreciation recapture?
* The amount personal property sold for over NBV up to the original cost
* Taxed as ordinary income
* General rule: NO depreciation recapture for real property owned by individuals
76
What are MACRS 5-year property items?
* Computers
* Delivery van
* Automobiles
* Light trucks
* Typewriters
* Copiers
Note 1: Remember Electronics + vehicles are 5-year.
Note 2: Use half-year convention. Half-year convention built into first + last year MACRS rates. If property disposed of before last year, full MACRS rate must be multiplied by 50%.
Note 3: 200% Declining balance method used for recovery period.
77
What are MACRS 7-year property items?
* Computer desk
* Office furniture
* Fixtures
* Machinery
* Equipment and property with no ADR midpoint classification
* Railroad track
Note 1: Furniture + equipment are 7-year
Note 2: Use half-year convention. Half-year convention built into first + last year MACRS rates. If property disposed of before last year, full MACRS rate must be multiplied by 50%.
Note 3: 200% Declining balance method used for recovery period.
78
What is the general rule for taxable events and basis?
* Event = Taxable
* Income = FMV
* Basis = FMV
79
What is the general rule for Non-taxable events and basis?
* Event = Nontaxable
* Income = None
* Basis = NBV
80
How do you calculate detailed alternative computation of basis to shareholder?
Adjusted basis of transferred property
+ Cash contributed
+ FMV services rendered
+ Gain recognized by shareholder
- Cash received
- Liabilities assumed by corporation
- FMV of non-money boot received
= Basis of common stock
81
How long is residential realty [houses + apartments + rental homes] depreciated using MACRS?
27.5 years
Note 1: Use mid-month convention
Note 2: Use SL depreciation
Note 3: One half-month taken in month property placed in service
Note 4: One half-month taken in month property is disposed
Note 4: 150% Declining balance method used for recovery period.
82
How long is Non-residential realty [office building] depreciated using MACRS?
39 years
Note 1: Use mid-month convention
Note 2: Use SL depreciation
Note 3: One half-month taken in month property placed in service
Note 4: One half-month taken in month property is disposed
Note 4: 150% Declining balance method used for recovery period.
83
What advantage does section 1231 losses have for corporations?
* Classified as ordinary and can offset ordinary income
84
What are rules regarding section 1231 gains?
* Section 1231 gains can usually be classified as capital gains; however, there is a concept known as the 1231 5-year look back rule
* Rule: If any 1231 losses were taken as ordinary losses in last 5 years, any new section 1231 gains must first be used to “pay back” previous 1231 losses, so new 1231 gains will be classified as ordinary.
* Once “pay back” is complete, any additional 1231 gains are classified as capital gains.
85
Does depreciation recapture apply to sale of stocks?
* Depreciation recapture does NOT apply to stock because stock is a capital asset
* Therefore; for any sale of stock, section 1231 rules do NOT apply
Note: Depreciation recapture and section 1231 only apply to long-term [held > 1 year] business use assets
86
What are rules and advantages of section 1231?
Section 1231 Rules:
* Applies to depreciable real and personal property
* Used in business
* Held for more than 1 year [does NOT apply to short-term business property]
1231 Advantages:
* Gains: 1231 gains are taxed at lower capital gain rates [for Individuals; NOT corporations as they get taxed at the same rate for ST and LT gains]
* Losses: 1231 losses can offset ordinary income, even for C Corps, but 5-year Lookback rule applies
Summary:
Section 1231 is broken down into the following:
* PP&E - use section1245 for individuals and Corporations
* Real Estate - C Corporations use section 291; Individuals use section 1250
87
Summary of sale of business property depreciation recapture example
Summary: Business sold property that they held for > 1 year; this is considered long-term business property and section 1231 applies
* Sales price: $60,000
* Original cost: $104,000
* Adjusted basis: $56,000
1231 Loss = If business property sold for LESS THAN $56,000; this would be a 1231 loss
Depreciation recapture = If business property sold BETWEEN $56,000 and $104,000
1231 Gain = If business property sold for GREATER THAN $104,000
Total gain = 1231 gain + Depreciation recapture
Depreciation recapture = Original cost - NBV
1231 Gain = Sale price - Original cost
1231 Loss = Sale price - NBV
88
What are the rules for Section 291?
Section 1231 is broken down into the following:
* PP&E - use section 1245 for individuals and Corporations
* Real Estate - C Corporations use section 291; Individuals use section 1250
* Section 291 depreciation recapture applies to depreciable real property sold at a gain
Steps for determining Section 291 gain:
* Step 1: Select LESSER of the accumulated depreciation or gain on sale
* Step 2: First 20% of step 1 amount is depreciation recapture; remaining is 1231 gain
89
If a shareholder donates property for shares and control group owns GREATER THAN 80%, how much tax is owed?
* Tax-free [non-taxable transaction]
* No gain or loss recognized by the shareholder or corporation as long as there is no Boot
* Boot received could be cash or cancelation of debt
90
What is a shareholder basis when there is a NON-taxable transfer into the newly formed corporation?
* When there is a non-taxable transfer, the basis in the new shares = NBV of property
* No tax = NBV
* Non-taxable = use the NBV for basis
* When NO mortgage is involved; NBV of donated/contributed property = Basis
91
What is a corporation basis when there is a NON-taxable transfer into the newly formed corporation by a shareholder?
* When NO mortgage is involved; corporation basis = NBV of donated/contributed property by the shareholder
92
If a shareholder donates property for shares and control group owns GREATER THAN 80% AND a MORTGAGE is assumed, how much tax is owed?
* If NBV is GREATER OR EQUAL than mortgage assumed = No taxable gain to shareholder
* If mortgage assumed > NBV = difference is TAXABLE gain to shareholder
93
What is a shareholder basis when they donate property into a newly formed corporation with a mortgage assumed > NBV?
* Shareholder basis in new shares = $0
94
What is a corporation basis in property that they assume in a newly formed corporation?
* Basis for Corporation in a mortgage that they ASSUME is GREATER of NBV and mortgage assumed
95
What is a shareholder REALIZED GAIN in a newly formed corporation?
* Realized = FMV [what I get] - NBV [what I give]
96
What is a shareholder RECOGNIZED GAIN in a newly formed corporation?
* When forming a new corporation, if control group represents AT LEAST 80% ownership, any property exchanged for shares is a NON-TAXABLE transaction as long as there is no BOOT received [cash or cancelation of debt]
* NO boot received = $0 RECOGNIZED GAIN
* If NBV is GREATER THAN liability assumed by corporation = No Boot
* If boot received = RECOGNIZED GAIN = Amount of boot received
* If boot received = Cancelation of debt = Liability assumed by corporation - NBV - cash contributed by shareholder = Recognized gain - Need to subtract out what we gave the corporation
97
What is a shareholder tax basis in stock of a newly formed corporation?
NBV
+ Cash contributed to corporation
- Liability assumed by corporation
+ Gain recognized
- Boot received
= Shareholder basis
Note 1: Must ADD cash CONTRIBUTED to corporation in the NBV
Note 2: Must SUBTRACT liability that corporation assumes from shareholder
Note 3: Must ADD gain recognized and SUBTRACT boot received; but these cancel out as the recognized gain = boot received
Note 4: If liability assumed by corporation is GREATER THAN NBV = $0 Basis; because you can't have a negative basis
98
What is a Corporation’s tax basis in Non-cash property received from shareholder?
* Rule: Corporation basis will be GREATER OF: NBV of property and Liability assumed
Note 1: Must ADD boot paid by corporation [received by shareholder] to the NBV amount
Note 2: Must SUBTRACT cash paid to corporation [paid by shareholder] from the NBV amount
99
What are organizational capitalization rules?
* Organizational costs are costs to form a corporation or partnership
* Legal fees to obtain corporate charter
* Legal advice on formation + transfer of assets
* Accounting and legal fees organizational costs
* Costs are required to be capitalized and amortized
* Business can expense up to $5,000 of organizational costs
* Dollar-for-dollar phase-out if > $50,000
* Org costs not expenses; amortized SL over 180 months
100
What are start-up cost capitalization rules?
* Start-up costs are costs to form a corporation or partnership
* Costs to secure prospective distributors, suppliers or customers
* Advertising, prospective client, and training start-up costs
* Promotional items for opening business
* Consulting fees
* Repairs
* Utilities
* Travel costs to investigate possible
* Costs to recruit, interview and hire EE’s
* Costs are required to be capitalized and amortized
* Business can expense up to $5,000 of organizational costs
* Dollar-for-dollar phase-out if > $50,000
* Org costs not expenses; amortized SL over 180 months
101
What are the Net Operating Loss (NOL) carry-back and carry-forward rules PRIOR to 2018 [2017 and earlier]?
* NOLs can be carried-back 2 years and carried-forward 20 years
* NOL carry-forwards can offset 100% of future taxable income
102
What are the Net Operating Loss (NOL) carry-back and carry-forward rules for 2018, 2019 and 2020?
* NOLs for 2018, 2019, and 2020 can be carried-back 5 years and carried-forward forever
* NOL carry-forwards can offset: 1) 100% of taxable income for 2018, 2019 & 2020; 2) 80% of taxable income for 2021 and future years AFTER deducting pre-2018 NOL carry-forwards
103
What are the Net Operating Loss (NOL) carry-back and carry-forward rules for 2021 and into the future?
* NOLs CANNOT be carried-back but can be carried-forward forever
* NOL carry-forwards can offset 80% of taxable income for 2021 and future years AFTER deducting pre-2018 NOL carry-forwards
Note: Use the oldest NOLs first [if possible], then use the more recent NOLs
104
How are distributions from a C corporation treated?
* 1st - Distributions are treated as a DIVIDEND to the extent of the corporation's earnings and profits [E&P]
* 2nd - Once earnings and profits are distributed, distribution is treated as a NON-TAXABLE RETURN OF CAPITAL to the extent of shareholder stock basis
* 3rd - Once shareholder stock basis is reduced to zero, shareholder recognizes a CAPITAL GAIN for any remaining distribution from the C corporation that is in excess of both the corporation's E&P and shareholder's stock basis
105
Does a non-taxable stock dividend affect a shareholder's basis?
* No
* Note: If a shareholder receives a stock dividend and they do NOT have a choice to receive cash or other property; the dividend is a NON-TAXABLE stock dividend
106
What is the rule for using the MACRS Half-year convention?
* MACRS half-year convention is used UNLESS more than 40% of depreciable personal property is placed in service in the last quarter of the year
* Under MACRS half-year convention; ONLY one-half [50%] of the otherwise allowable depreciation is deductible in the year of sale
107
How do you calculate MACRS basis?
* MACRS Depreciation basis = Cost - Section 179 election
* Year 1 MACRS Depreciation = MACRS Depreciation basis x % from MACRS table based on asset type
108
What is the rule for using the MACRS mid-quarter convention?
* MACRS mid-quarter convention is used when GREATER THAN 40% of personal property assets were placed in service in the LAST quarter
109
What are rules for Section 179 deduction?
* Maximum allowance = $1.220M
* Maximum reduced dollar-for-dollar if property exceeds $3.050M
* Bonus depreciation = 60% of property after Section 179 is claimed (2024)
* Section 179 deduction is NOT allowed in year in which there is a net operating loss AND it can't be used to create a loss; therefore, it is suspended and must be carried forward to a future year where profit is earned
* Section 179 rules do NOT apply to land
* Exception: Buildings do not qualify for Sec. 179 deduction, but “qualified improvement property” does
* “Qualified improvement property” is improvements to the interior of NON-RESIDENTIAL real property (i.e, office building). An apartment building would NOT qualify
* Qualified improvements MUST be placed in service AFTER date the building was placed in service. If so, then the improvement qualifies for the Sec. 179 deduction
110
How are profits & losses shared in a General partnership absent an agreement?
* Under the Revised Uniform Partnership Act (RUPA), absent an agreement to the contrary, partners' share EQUALLY in profits regardless of how much work they perform on behalf of the partnership and regardless of the relative amounts of contributions to capital made by each partner
111
If a shareholder donates services for shares and control group owns GREATER THAN 80%, how much tax is owed?
* The shareholder would NOT count toward the 80% test because they received stock for services rendered
* Shareholder basis in corporate stock would be FMV of stock received and FMV of services rendered
112
What is the rule regarding a Partner’s basis in property of a Non-liquidating distribution?
* Basis of property received in a distribution, other than in liquidation of a partner's interest, will generally be the same as the basis in the hands of the partnership immediately PRIOR to distribution
* The basis of property in the hands of the partner CANNOT exceed the basis of the partner partnership interest reduced by the amount of money distributed to the partner in the same transaction
113
What is the rule regarding class of stock an S corporation is allowed to have?
* S corporation may ONLY have one class of stock. A difference in voting privileges [i.e., voting and nonvoting common stock] does not constitute another class of stock, and they are combined for S election [and revocation] purposes
114
What is the rule regarding revocation of an S corporation?
* Election for an S corporation is revoked on the date when OVER 50% of the shareholders elect to revoke: Total shareholders filing consent to revoke / Total # of shareholders
* If percentage of shareholders election to revoke S corporation is LESS THAN 50% = S corporation election is NOT terminated
115
What are items added reconciling Taxable income to Book income?
The following are ADDED to Taxable income to arrive at Book income:
* Life insurance proceeds - part of Book income but tax exempt
* MACRS depreciation - taken for tax income
116
What are items subtracted reconciling Taxable income to Book income?
The following are SUBTRACTED from Taxable income to arrive at Book income:
* Provision for federal income tax - expense for Book income
* Fines - part of Book income, NOT taxable income
* SL depreciation - subtract since included in Book income
117
What are items subtracted reconciling Book income to Taxable income?
The following are SUBTRACTED from Book income to arrive at Taxable income:
* Life insurance proceeds - Book income but tax exempt
* MACRS depreciation - what you use for tax income
118
What are items added reconciling Book income to Taxable income?
The following are ADDED to Book income to arrive at Taxable income:
* Provision for federal income tax - expense in getting to Book income
* Fines - reduced book income but NOT tax income
* SL depreciation - to remove, included in Book income
119
What type of items would terminate a S corporation's "S status"?
* S corporation shareholder sells shares of stock to a related party solely owned C corporation - C corporations CAN’T be shareholders of an S corporation
* S corporation shareholder sells shares of stock to a partnership in which the shareholder is a 50% general partner - Selling shares to a partnership will cause S corporation to terminate
* S corporation shareholder sells shares of stock to a related party who is a Canadian citizen - For S corporation shareholders, MUST be US citizen or residing in the USA
120
What is distribution order, tax result, and treatment of a S corporation with C corporation Earnings and Profits (E&P)?
1st - Distribution: To extent of Accumulated adjustments account (AAA); Tax result: NOT subject to tax, reduces basis in stock; Treatment: S corporation profits
2nd - Distribution: To extent of C corporation E&P; Tax result: Taxed as a dividend, does NOT reduce basis in stock; Treatment: Old C corporation taxable dividend
3rd - Distribution: To extent of basis of stock; Tax result: NOT subject to tax, reduces basis in stock; Treatment: Return of capital
4th - Distribution: In excess of basis of stock; Tax result: Taxed as LTCG; Treatment: Capital gain distribution
121
Does S corporations recognize loss on Non-liquidating distributions?
* S corporations DO NOT recognize loss on distributions of property in a Non-liquidating operating distribution
122
Does S corporations recognize gain on Non-liquidating distributions?
* S corporations recognize gain on appreciated property as though property was sold just prior to distribution
123
What are examples of separately stated items?
1. Section 179 expense [Deductible]
2. Charitable contributions [Deductible]
3. Federal built-in gains tax [Non-deductible]
4. Contributions to Keogh pension plan for partners [Not deductible by partnership]
5. Interest income
6. Rental income
Note 1: Deductible separately stated expenses DECREASE S corporation AAA equity account
Note 2: Ordinary business income INCREASES S corporation AAA equity account
Note 3: Taxable separately stated income INCREASES S corporation AAA equity account
Note 4: Non-deductible separately stated expenses DECREASES S corporation OAA equity account [not AAA]
Note 5: AAA = Accumulated Adjustments Account; AEP = Accumulated Earnings & Profit; OAA = Other Adjustments Account
124
What are examples of items that are NOT deductible or taxable?
1. Municipal bonds interest expense [Non-deductible]
2. Late filing penalty [Non-deductible]
3. Municipal bond interest income [Non-taxable]
Note 1: Non-deductible separately stated expenses DECREASES S corporation OAA equity account [not AAA]
Note 2: Non-taxable separately stated income INCREASES S corporation OAA equity account [not AAA]
Note 3: AAA = Accumulated Adjustments Account; AEP = Accumulated Earnings & Profit; OAA = Other Adjustments Account
125
What are things that DECREASE a Partner’s basis in a partnership?
* Distributions
* Proportionate share of expenses + losses
* DECREASES in liabilities
* Partnership payment of fines + penalties
126
What are things that INCREASE a partner’s basis in a partnership?
* Contributions of property
* Proportionate share of income - municipal bond interest income
* Proportionate share of INCREASES in liabilities
127
In a Limited Partnership, who is responsible for partnership RECOURSE debt [trade accounts payables]?
* The General partner in the Limited Partnership is responsible for 100% of partnership recourse debt
* General partner has personal liability for debts of partnership + bear economic risk of loss
128
In a Limited Partnership, who is responsible for partnership Non-recourse debt [land]
* The General partner and Limited partner are responsible for the Non-recourse debt based on their ownership percentage
Note: If Limited partner loans Partnership money, the Limited partner bears 100% of the economic risk of loss. This is a personal loan so all of the debt is allocated to the Limited partner, NOT General partner
129
What items do NOT affect a Parrner’s basis in a partnership?
* Guaranteed payments - these are a deduction of the partnership in calculating ordinary business income [already deducted in ordinary business income amount], but does NOT otherwise affect the recipient partner's basis in their partnership interest
* Purchase of land for investment - does not affect the income of the partnership and has NO effect on a partner's basis
130
How are partnership sale transactions to partners treated?
* If the partnership sells property to a partner that has LESS THAN 50% ownership in the partnership, they are NOT considered a related party; therefore gains and losses flow through to the individual partners [on their K1's]
* If the partnership sells property to a partner that has GREATER THAN 50% ownership in the partnership, they ARE considered a related party. Related party losses are disallowed. HOWEVER, each partner basis in their partnership interest will be DECREASED by the partner's share of the disallowed loss
131
How are retirement plan contributions for employees treated in a partnership?
* Retirement plan contributions for employees are included as a deduction in the ordinary business income calculation
132
How are retirement plan contributions for partners treated in a partnership?
* Retirement plan contributions for partners [i.e., Keogh pension plan] are included on Schedule K of the partnership income tax return as a separately stated item
133
How are charitable contributions for partners treated in a partnership?
* Charitable contributions do NOT appear on page 1 of Form 1065, they are NOT part of the ordinary business income calculation
* They are included on Schedule K as a separately stated item
134
What items automatically terminate actual authority by operation of law?
Actual authority is automatically terminated, by operation of law upon any of the following events:
* Death of principal or agent - however death of principal does not terminate agency until agent receives notice of principal death
* Incapacity of principal
* Discharge of bankruptcy of principal
* Failure to acquire necessary license
* Destruction of subject matter of agency
* Subsequent illegality
135
What items are included as ordinary business income?
The following items are included as ordinary business income on I/S:
* Sales
* Cost of sales
* Salaries + wages [EXCLUDING partners]
* Depreciation of machinery + equipment
* Contributions to pension plans [EXCLUDING partners]
136
What items are considered guaranteed payments?
* Guaranteed payments to partners
* Partners' health insurance premiums
137
Is Recourse partnership debt included in a partner's Tax basis and At-risk basis?
* Tax basis = Yes - if General partner or personal guarantee
* At-risk basis = Yes - if General partner or personal guarantee
138
Is "Qualified non-recourse financing" partnership debt included in a partner's Tax basis and At-risk basis?
* Tax basis = Yes
* At-risk basis = Yes
Note: Qualified non-recourse financing debt = mortgage, which is added to Tax basis and At-risk basis
139
Is "Other Non-recourse debt" partnership debt included in a partner's Tax basis and At-risk basis?
* Tax basis = Yes
* At-risk basis = No
140
How are suspended losses from insufficient Tax basis treated when a partner disposes their partnership interest?
* When a partner disposes their partnership interest, any suspended losses due to insufficient tax basis disappear
141
How are suspended losses from insufficient At-risk basis treated when a partner disposes their partnership interest?
* When a partner disposes their partnership interest, any suspended losses due to insufficient At-risk basis can be used to reduce any gain from sale of partnership interest
* Any remaining At-risk suspended loss disappears
142
What will cause dissolution of a partnership?
If the following occurs and remaining partners do NOT vote to continue, the partnership will dissolve:
* Bankruptcy of a partner
* Death of a partner
* Wrongful disassociation of a partner
143
What are fundamental changes to a corporation structure?
Fundamental changes to a corporation structure require approval by majority of shareholders following BOD:
* Amending articles of incorporation
* Dissolving the corporation
* Selling substantially all of corporation’s assets
144
How are property distributions different between a S corporation and Partnership?
* Property distributions are better on partnerships [NBV] vs S corporation [Gain = FMV - NBV is included in income]
* If property appreciates, corporation will have to pay a gain at the corporate level, which creates income at the corporate level. If its an S corporation, there will be more income that flows through to the individual shareholder
* For a partnership, no gain or loss is recognized at the partnership level. The distribution [not any income] will flow through to the individual partner at NBV
* In summary, more income will flow through to the individual shareholder vs. a partner
145
How is compensation different between a S corporation and Partnership?
* S corporation compensation = employee compensation for shareholders. Shareholder receives a salary [W2] and does NOT pay both portions of SE tax
* Partnership compensation = self employment [guaranteed payment] for partners. Guaranteed payments are subject to SE tax
146
What is the recommended type of entity for a S Corporation or Partnership?
Owners who expect to generate profits should operate as a S corporation or Partnership when:
* No distributions; Low individual income tax bracket; Desire to have income to pass through
* Distributions; Highest tax bracket; Lower tax rate vs at the C corporation effective rate
* Distributions; Lowest tax bracket; Lower tax rate vs at the C corporation effective rate
Owners who expect to generate losses should operate as a S corporation or Partnership when:
* Generate losses
* Middle tax bracket
* Can use the losses on individual level [use NOLs to offset taxable income]
147
What is the recommended type of entity for a C corporation?
Owners who expect to generate profits should operate as a C corporation when:
* No distributions
* High individual tax bracket
* Better to tax at corporate level
148
Who can a taxpayer make unlimited gifts to?
Taxpayer can make UNLIMITED gifts to the following [$17,000 annual exclusion does NOT apply]:
* Spouse
* Charity
* Universities
* Hospitals
149
Does failing to provide requested information to IRS violates Circular 230?
The following situation violates Circular 230:
* Client being audited requested by IRS to provide records about client personal stock investments; for which client does not have. CPA does not prepare client tax return + does not have records; however CPA knows person who has records; CPA does not inform IRS auditor of the person that has the records.
* CPA violated duties as they did not inform IRS of who had records. Circular 230 requires CPA to "promptly notify the requesting IRS employee and provide any information that the practitioner has regarding the identity of any person who the practitioner believes may have possession or control of the requested information." The CPA is required to make "reasonable inquiry of his or her client"
150
Does providing Non-privileged information to IRS against client direct instructions violates Circular 230 regulations governing practice before the IRS?
The following situation DOES NOT violate Circular 230:
* Client being audited requested by IRS auditor to provided non privileged information; client refuses to provide information + instructs CPA to NOT provide information; CPA provides requested information against client instructions.
* CPA did not violate duties as Circular 230 requires CPA to "promptly submit records or information in any matter before the IRS unless the practitioner believes in good faith and on reasonable grounds that the records or information are privileged"
151
Does failing to provide records to client violates Circular 230?
The following situation violates Circular 230:
* Client appealed IRS audit and hired another CPA for representation; Client refused to pay CPA for services + requested copy of all tax records related to tax return; CPA provided client with copies of tax returns and attachments; but refused client request for access to all records; State law allows practitioners to retain client records in case of fee dispute
* CPA violated duty as they did not provide client with reasonable access to review and copy all records
* Circular 230 requires "a practitioner must...promptly return all records of the client" and if state laws allows practitioner to retain client records in case of fee dispute, "the practitioner need only return those records that must be attached to the taxpayer's return...reasonable access to review and copy any additional client records"
152
What situations are a contingent fee allowed under Circular 230?
Circular 230 provides that a practitioner may NOT charge a contingent fee for services rendered in connection with any matter before the IRS. HOWEVER, a contingent fee is allowable only in three situations:
1. IRS examination or audit
2. Claim for credit or refund of interest and/or penalties
3. Judicial proceeding arising under IRC
Note 1: Per Circular 230, contingent fee includes "any fee arrangement...the practitioner will reimburse the client...in the event that a position taken on a tax return is challenged by the IRS"
Note 2: CPA may charge a contingent fee related with IRS examination of or challenge to an original tax return
Note 3: CPA may charge a contingent fee related to services rendered in connection to a claim for credit or refund filed solely in determination of statutory interest or penalties assessed by the IRS
153
What is the Tax Return Preparer [TRP] penalty for understatement of tax liability due to unreasonable position?
* TRP penalty for understatement of tax liability due to an unreasonable position = GREATER OF $1,000 or 50% of income preparer received preparing the return
* Maximum term of imprisonment = 0 years [civil rather than a criminal penalty]
154
What is the Tax Return Preparer [TRP] penalty for willful attempt to understate tax liability?
* TRP penalty for understatement of tax liability due to willful or reckless conduct = GREATER OF $5,000 or 75% of income preparer received preparing the return
* Maximum term of imprisonment = 0 years [civil rather than a criminal penalty]
155
What is the Tax Return Preparer [TRP] penalty for aiding and abetting an understatement of tax liability?
* TRP penalty for aiding and abetting the understatement of tax liability by a noncorporate taxpayer = $1,000
* Maximum term of imprisonment = 0 years [civil rather than a criminal penalty]
Note: Penalty applies to any person who aids or assists in, or advises with respect to, the preparation of a return, and knows or reasonably should know that the return will result in an understatement of tax liability of another person
156
What is the Tax Return Preparer [TRP] penalty for willful delivery of false or fraudulent returns?
* Criminal penalty for willful delivery of false or fraudulent returns may be imposed on any person who willfully delivers or discloses to IRS any return or other document that he or she knows is fraudulent or false as to any material matter
* Maximum penalty = $10,000 and/or
* Maximum term of imprisonment = 1 year
157
What is the Tax Return Preparer [TRP] penalty for willful subscribe of return under penalties of perjury?
Criminal penalty for fraud and false statements may be imposed on any person who willfully makes and subscribes any return or other document that contains or is verified by a written declaration that it is made under penalties of perjury that he or she does not believe to be true and correct as to every material matter
Maximum penalty = $100,000 [for noncorporate taxpayer] and/or
Maximum term of imprisonment = 3 years
158
What is the Tax Return Preparer [TRP] penalty for accuracy-related penalty on underpayments?
* TRP penalty for understatement of tax liability attributable to negligence or careless, reckless, or intentional disregard of tax rules and regulations = $0
* Maximum penalty = $0
* Maximum term of imprisonment = 0 years
Note: Accuracy-related penalty is imposed on TAXPAYER, not the TRP
159
What is the Failure-to-File penalty?
* 5% of amount of tax due for each month [maximum 25%]
* Tax return GREATER THAN 60 days late, minimum penalty INCREASES to LESSOR OF $450 or 100% tax due
* No tax due = NO Failure-to-File penalty
* If Failure-to-File + Failure-to-Pay penalty due = Failure-to-File reduced by amount of Failure-to-Pay penalty
160
What is the Failure-to-Pay penalty
* 0.5% [one-half of 1 percent] per month
* Maximum = 25% of unpaid tax
* No penalty if AT LEAST 90% of tax paid by UNEXTENDED due date + balance is paid by extended due date
161
What options are available to a taxpayer in the U.S. Tax Court Small Cases Division?
* Taxpayer may litigate WITHOUT first having paid the disputed tax in full
* No jury trial; just a judge that decides
* No ability to appeal; have to accept judge decision
* Decision of court may NOT be used as precedent in future cases
* Judge is a tax law specialist
* Taxpayer can represent themselves in court
162
What options are available to a taxpayer in the Regular U.S. Tax Court?
* Taxpayer may litigate WITHOUT first having paid the disputed tax in full
* No jury trial; just a judge that decides
* Losing party may appeal the decision to the U.S. Court of Appeals
* The decision of court may be used as precedent in future cases
* Judge is a tax law specialist
* Taxpayer can represent themselves in court
163
What options are available to a taxpayer in the U.S. District Court?
* Taxpayer may request a jury trail; not just tax cases, applies to all cases
* Taxpayer MUST pay disputed tax in full before litigation; pay in advance then file for a refund
* Losing party may appeal the decision to the U.S. Court of Appeals
* The decision of court may be used as precedent in future cases
* Taxpayer can represent themselves in court
164
What options are available to a taxpayer in the U.S. Court of Federal Claims?
* Taxpayer MUST pay disputed tax in full before litigation; pay in advance then file for a refund
* No jury trial; just a judge that decides
* Losing party may appeal the decision to the federal Circuit Court of Appeals; not just tax cases, applies to all cases
* The decision of court may be used as precedent in future cases
* Taxpayer can represent themselves in court
165
What are key elements about the Parol evidence rule?
* Prior or contemporaneous statements that contradict the writing are INADMISSIBLE
* Subsequent statements that contradict [or change a term] are ADMISSIBLE
* Applies to prior or contemporaneous oral agreements that contradict the terms of final written agreements
166
What is a rule of thumb for Section 1245 personal property rules regarding depreciation recapture?
* Loss = Section 1231 loss; net 1231 loss treated as Ordinary Loss
* Ordinary income = Gain to extent of accumulated depreciation, and net 1231 gain to the extent of UNRECAPTURED net 1231 losses in previous 5 years
* Capital gain = Net Section 1231 gain AFTER depreciation recapture and 5-year look back
167
When can a RECOGNIZED gain occur in a Non-liquidating [Current distribution] distribution to a partner?
* A recognized gain will ONLY happen if a partner receives MORE cash than basis they have in the partnership
168
When can a RECOGNIZED loss occur in a Non-liquidating [Current distribution] distribution to a partner?
* A recognized loss will NOT happen in a current distribution
169
What is Modified Adjusted Gross Income [MAGI]?
MAGI = AGI + Tax-exempt interest + 50% of Social security benefits
170
What is the maximum deductible business loss allowed?
MFG = $578k
Other taxpayers = $289k
Note: Combined business loss for the year in excess of threshold amount is carried forward as a NOL.
171
Who can a CPA provide their work papers to without client consent or a lawful subpoena?
CPA is prohibited from showing work papers to anyone without clients permission EXCEPT:
1. Lawful subpoena.
2. Prospective purchasers, as long as the prospective purchasers do not disclose the confidential information.
3. Quality control panel.
4. AICPA/State Trial Board.
5. Court proceedings.
6. When GAAP requires disclosure of such information in the financial statements.
Note: CPA would need permission from client before providing work papers to the IRS and FASB.
172
When are personal casualty and theft losses deductible?
Personal casualty and theft losses are ONLY deductible if they occur in a federally declared disaster area.
173
What taxes paid are Non-deductible?
* Federal income
* Social Security
* Medicare
* Federal estate and gift
* Other
174
What are Non-refundable tax credits?
Non-refundable tax credits can reduce a taxpayer’s tax liability to $0, but not below:
* Child and Dependent Care Credit
* Education Credits [American Opportunity Tax Credit]
* Foreign Tax Credit
* Elderly and permanently disabled credit
* Retirement savings contribution credit
* General business credit
* Adoption credit
175
What are Refundable tax credits?
Refundable tax credits can reduce a taxpayer’s liability to $0 and excess amount is refunded:
* Earned Income Tax Credit
* Child Tax Credit [to extent refundable as the Additional Child Tax Credit]
* Health Coverage Tax Credit
* American Opportunity Credit [40% refundable]
* Federal income tax withheld [Form W-2]
* Excess Social Security tax paid
176
What is the Business Interest Expense deduction?
Business interest expense deduction limited to sum of:
Business interest income
+ 30% of adjusted taxable income [ATI]
+ Floor plan financing expense
* ATI = Taxable business income for year EXCLUDING all interest income and interest expense.
* Floor plan financing = debt used to acquire motor vehicles held for sale/lease. Debt secured by acquired inventory.
* Disallowed business interest expense can be carried forward indefinitely
* Limitation does not apply to taxpayers with gross receipts of $30M or less for prior 3 taxable years.
177
What is a Qualified Trade or Business (QTB)?
QTBs are the following:
* 20% deduction for eligible "flow-through" U.S. entities with qualifying business income (QBI)
* Individuals, Partnerships, S Corps, most LLCs + trusts
* Deduction is taken "below the line" or from AGI [NOT an adjustment!]
* Must be conducted in the United States
* Must NOT involve direct services in a field identified as a specified service trade or business (SSTB)
* QTB is ANY business other than a SSTB
* Examples of QTB’s: Rental real estate, Coffee shop, Gift shop, Bookstore, Engineering firm, Architectural services, Manufacturing company
* SSTBs - Health, law, accounting, actuarial science, performing arts, consulting, athletics and financial services
178
How do you calculate the Tentative Qualified Business Income (QBI) deduction?
Tentative QBI deduction = Qualified business income x 20%
Note: Qualified business income = ordinary business income
179
How do you calculate Taxable income before QBI deduction?
Business income
+ Salary
+ Guaranteed payment
= AGI
Less: Standard deduction
= Taxable income before QBI deduction
180
What is a Specified Service Trade or Business (SSTB)
SSTBs are the following types of businesses:
* Health
* Law
* Accounting
* Actuarial science
* Performing Arts
* Consulting
* Athletics
* Financial services
181
What are the Section 199A QBI deduction limitations categories based on Taxable Income?
QBI deduction limitation for Taxable Income categories:
* Category #1: Less than or equal to $191,950 [Single; double amt. for MFJ]
* Category 2: Greater than $241,950 [Single; double amt. for MFJ]
182
How do you calculate the Section 199A QBI deduction limitation for Category #1?
Example:
* Taxable deduction BEFORE QBI deduction = $50k
* Net capital gains = $5k
* QBI = $40k
Note: Category #1 is when TI before QBI deduction is LESS than $191k (single + all other filing status) or $383k (MFJ)
There are three (3) steps to calculating the QBI deduction limitation:
Step 1: Calculate Tentative QBI deduction = QBI x 20% = $40k x 20% = $8k
Step 2: Calculate OVERALL LIMIT = TI before QBI deduction - Net Capital gains x 20% = [$50k - $5k[ x 20% = $9k
Step 3: Take the LESSOR of Tentative QBI deduction and Overall limit = $8k
$8K is the QBI deduction
Note 1: QBI deduction is the SAME for QTBs and SSTBs - same application to both
Note 2: If QTB or SSTB - Full 20% QBI deduction
183
How do you calculate the Section 199A QBI deduction limitation for Category #2?
Example:
* Taxable income BEFORE QBI deduction = $240k
* Net capital gains = $0
* QBI = $100k
* Taxpayer share of QTB W2 wages = $30k
* Taxpayer share of QTBs UBIA of qualified property = $80k
Note: Category #2 is when TI before QBI deduction is MORE than $241k (single + all other filing status) or $483k (MFJ)
Step 1: Determine whether the business is a QTB or SSTB; If SSTB no QBI deduction. If QTB follow steps below:
Step 2: Calculate Tentative QBI deduction = QBI x 20% = $100k x 20% = $20k
Step 3: Calculate full W2 Wage + Property Limitation: GREATER OF
A. W2 wages x 50% = $30k x 50% = $15k
B. [W2 wages x 25%] + [UBIA of qualified property x 2.5%] = [$30k x 25%] + [$80k x 2.5%] = $9,500
C. $15k is the full wage and property limitation
Note: This is the only step of calculation where you take the "Greater Of"
Step 4: Take the LESSOR of Tentative QBI deduction ($20k) and the full W2 Wage + Property Limitation ($15k)
Step 5: Calculate OVERALL LIMIT = TI before QBI deduction - Net Capital gains x 20% = [$240k - $0] x 20% = $48k
Step 6: Take the LESSOR of [Tentative QBI deduction and the full W2 Wage + Property Limitation] and Overall Limit = $15k
Note: For Total Section 199A QBI deduction, it is the LESSOR of combined QBI deductions and 20% of TI in excess of net capital gain
$15k is the Section 199A QBI deduction
Note 1: If QTB - Full W-2 wage + property limitation applies
Note 2: If SSTB - No QBI deduction allowed
184
What items are deductible on Schedule A as an Itemized deduction?
* Cash charitable contribution [subject to 60% of AGI limitation, can be carried forward 5 years]
* Investment interest expense [deductible to extent of NII, investment int. expense > net investment income can be carried forward indefinitely]
* Real estate taxes [personal, principal and secondary residences deductible in full; however total deduction, including property taxes, limited to $10k]
* Out-of-pocket expenses incurred performing donated services [subject to 60% of AGI limitation]
185
What items are NOT deductible on Form 1040?
* Payment for homeowner's insurance premium, considered a personal expense
* Value of services donated (even if to qualitied charity) is NOT deductible
186
What percentage are cash contributions to a qualifying charitable organization deductible?
* Cash contributions to a qualifying charitable organization are 100% deductible
187
What is the allowable deduction for contributions of ordinary income property to a qualifying charitable organization?
Example: Donation of a bedroom set that cost $15k and worth 5k to Goodwill.
Allowable deduction = LESSER of property FMV or Cost Basis
FMV = $5k
Cost = $15k
Allowable deduction = $5k because it is the lesser value.
Note: Ordinary income property is any property OTHER THAN appreciated LTCG property.
188
Are deductions allowed for services provided to a qualifying charitable organization?
No.
189
What is the allowable deduction for contributions of appreciated LTCG property to a qualifying charitable organization?
Example: Donation of a painting worth $12MM that cost $2MM. AGI = $5MM
Allowable deduction = FMV and subject to 30% of AGI limitation
FMV = $12MM
Limitation = 30% x $5MM = $1.5MM
Allowable deduction = $1.5MM; the remaining $10.5MM [$12MM - $1.5MM] can be carried forward for 5 years
Note: Cost basis is irrelevant when property is appreciated LTCG property.
190
How do you calculate income tax on Form 1040?
Income tax calculation:
1. Separate ordinary versus capital gain income
* Capital Gain income = Qualified dividends from Form 1099-DIV + Capital gains
* Ordinary income = Total Income (Line 15 of Form 1040) - Capital Gain income
2. Calculate the capital gains tax (need to use tax rate schedule) - Multiply capital gains by the appropriate tax rate
3. Calculate the ordinary income tax = Ordinary income x TR
191
What is a nonaccountable plan?
For an Non-accountable plan, any amounts received by an employee from their employer must be reported as wages on their W-2.
Gross amount received is reported as income
192
What is the charitable contribution limit for C corporations?
Charitable contribution limit for C corporations is 10% of taxable income before the contributions.
193
What is the effect of a 2-for-1 stock split on basis?
* 2-for-1 stock split DOUBLEs the number of shares and REDUCES the price-per-share by half.
* For example, if a taxpayer purchased 50 shares of an investment at $50/share; total basis = $2,500. If the company issued a 2-for-1 stock split; the total number of shares would be 100, price-per-share of $25, and total basis = $2,500.
* Stock splits do NOT impact basis.
194
What are situations where an express warranty will be created?
Express warranty arises from the following:
* Any statement of fact or promise made by the seller
* Any description of the goods made by the seller
* Any sample or model shown by the seller
195
What is an express warranty?
An express warranty is the following:
* Can be made by any seller (not limited to merchants)
* May be oral or written
* Must be a part of the basis of the bargain (i.e., made at a time when it could have played some part in the buyer's decision to buy)
196
Absent an agreement, how are profits divided among members of an LLC?
If there is no agreement, LLC profits are divided among members in proportion to their CONTRIBUTIONS.
197
What is the depreciation basis for assets that are converted from personal to business use?
* LESSOR of cost or FMV at conversion
198
What depreciation basis can you use for assets converted to business property?
* MACRS
199
What assets are NOT eligible for bonus depreciation?
The following assets are NOT eligible for bonus depreciation:
* Assets converted from personal to business use
* Assets acquired from related parties
* Assets received as a gift
* Inherited property
200
What assets are eligible for bonus depreciation?
* New or used business property with a depreciable life of 20 years or less
* For these assets, MACRS and Bonus depreciation is calculated:
Bonus depreciation = Basis/Purchase price x 60% (bonus depreciation %)
+ MACRS basis (Basis/Purchase price - bonus depreciation)
201
What is the Tax Return Preparer [TRP] penalty for failing to furnish a copy of a tax return or refund claim to taxpayer?
* $60 for each failure
* Max penalty = $30,000
202
What is the Tax Return Preparer [TRP] penalty for neglecting to sign a tax return or refund claim?
* $60 for each unsigned return
* Max penalty = $30,000
203
What is the Tax Return Preparer [TRP] penalty for omitting their PTIN on a tax return or claim?
* $60 per omission
* Max penalty = $30,000
204
What is the Tax Return Preparer [TRP] penalty for not retaining a copy or list of a tax return or claim they prepared?
* $60 for each failure to retain
* Max penalty: $30,000
205
What is the Tax Return Preparer [TRP] penalty for neglecting to file the correct information on tax return?
* $60 for each incorrect filing
* Max penalty = $30,000
206
What is the Tax Return Preparer [TRP] penalty for endorsing or negotiating a check payable to another person?
* $600 for each improper endorsement or negotiation
207
What is the Tax Return Preparer [TRP] penalty for not determining a taxpayer’s eligibility for specific tax benefits?
* $600 for each failure to determine eligibility
208
What is the Tax Return Preparer [TRP] penalty for organizing or selling abusive tax shelters?
* 50% of gross income earned from activity
* Gross valuation overstatement - penalty = LESSOR: $1,000 or gross income earned
209
What is the Tax Return Preparer [TRP] penalty for assisting in understating another person tax liability on their tax return?
* $1,000 for regular returns
* $10,000 for corporate tax returns
210
What is the Tax Return Preparer [TRP] penalty for making an unauthorized disclosure or use of information provided preparing a tax return?
* $250 for each unauthorized disclosure or use (capped at $10,000/yr)
* Linked to identity theft crime - penalty = $1,000 (max = $50,000)
