1 Flashcards
What are the conditions to have lease improvement included in income?
Lease improvement must be paid in place of rent
When can a C corp use cash method?
Qualified service Corp / 5 million of annual gross receipt (no inventories for sale) / 1 million of annual gross receipt
What are the conditions to accrue expense?
Need to meet all event test (existence + accuracy) and economic performance test (actually provided) + paid 2 month 1/2 after year-end
Individual tax : what are the thresholds for charity contribution
50% of AGI (5 years CF) / 30% of AGI for capital gain property
What are the characteristics of Keogh plan
Contribution Max : 53’000 or 100% earned income (business gross income - deductions - 1/2 S.E. tax - contribution)
Alimony decrease check
“1 X
2 Y
3 Z
if Y>= Z+15’000 -> Recapture
If X>= (Y+Z)/2+15’000-> recapture (gross income + deduction)”
Give characteristic of Child Care credit
“Age limit : 13
3’000/6’000
20%-35% (above 15’000 decrease of 1% every 2’000)
“
Give characteristic of Earned income credit
“Age : 19 / 24
Head of household”
Give characteristic of Child tax credit
“Age limit : 17
1’000
Phase-out 110'000 Compute indent (round up) and multiply by 50"
What kind of pty is subject to half year / Quarter convention
Property
What kind of pty is subject to mid-month convention
Realty
Give characteristics of Section 179
“Max is 500’000
Phase-out dollar for dollar above 2’000’000
Separately stated item (potentially deductible)”
Which entities are eligible for passive activities?
Individuals/ estate/ trusts ./ closely held C corp /PSC
Give RUPA / RULPA difference in income distribution of a partnership
RUPA (general) => Equally / RULPA (limited) => Proportion
What are the conditions of negotiability for instruments?
Writing / Signed / unconditioned / Certain in money / On demand or definite time / word of negociation (bearer/order)
What is the sginature requirement when ther are multiple payees
All must sign (Joint) / Any of them can sign (alternative)
Promise instruments
Note / Certificate of deposit
Order instruments
Check/ draft
Primary parties of negotiable instruments
“Notes : payor /debtor
CD : Bank
Checks : Bank (once certified)
Draft : Drawee”
Secondary parties of negotiable instruments
”
CD : Indorser
Checks : Drawer / Indorser
Draft : Drawer / Payee”
Requirement for attachment of interest
Writing (unless possession of collateral) / Signed by DEBTOR / description of collateral / Value given / have right in collateral
Requirement for perfection
“Filing :names of debtor / secured party / description of collateral
Automatic (PMSI in CONSUMER GOODS)
Possession”
Buyer in ordinary course : priority?
Free of secured party’s interests (even if he knows)
Buyer not in ordinary course : priority?
“Perfecter vs Buyer => Perfected
Secured credit vs buyer =>buyer (unless know)”
How avoid tax penalty
90% (PY) / 100% CY (110% if AGI above 150’000) (lesser of)
What are the characteristics of a tax preparer?
Receives compensation
Deduction for trad. IRA contrib
At least 50 and lesser of 6’500 / 100% contribution + if participant in employer qualif. Plan, there is a phase-out
Partner’s share of partnership income reported in 1065 sched K-1 : where reported?
Schedule E
Lodging expenses : where reported?
Schedule C
Home Equity line: where reported?
Schedule C (if used for Business)
Gambling loss : where reported?
Itemized (not 2%)
Union dues : where reported?
Itemized (2%)
Give characteristics of Kiddie Tax
“Deduction : lesser of 1050 or EARNED income+350
Taxed at parent rate : Unearned income >2’100”
Adjusｔment AGI
“Medical expenses (if older than 65 because rate is 7.5% for regular tax)
Incentive stock options (FMV-cost)
State tax (full)
Income tax (full)
Home equity line (full if not used to improve home)
2% itemized (full)”
How are considered distributive share of S corp?
They are considered as not SE
What impact on the number of dependent during the year of death?
Dead person can still be accounted for exception
What is the tax treatment of pension benefits paid exclusively by employer?
Fully taxable
Give characteristics of S.E tax
“Medicare : SE+wages * 2.9%
Social security : (118,500 - wages)*12/4%
If S.E. * 92.35% >400 -> SE tax is assessed”
Give characteristics of payroll tax
“Medicare : 1.45%
Social security : first 118’500 are taxed at 6.2%
There is also hospital insurance of 0.9% if wages are above 200K/250K”
What happens if tax withheld is > max for a year?
Excess as credit against income tax (if from 2 or more employers)
Explain phase-out of lifetime credit
Excess/20’000 * credit
Tax personal / business use : which treatment?
Personal = schedule A / business : schedule E
Interest income on mortgage loans : which treatment?
Schedule B (interest and dvd)
What is the tax basis of account receivables under cash basis?
0 tax basis
How are treated loss from non business bad debt?
Short term capital loss
How are treated loss from 1244 stock?
Ordinary loss (50’000/ 200’000) form 4797 and over threshold form D
How are treated loss foreign income tax?
Form 1116 or schedule A
Basis of shareholder ?
Adjusted basis - part assumed by group
Basis of Corp?
Adj basis + gain
Basis for charity contribution
Computed before DVD deduction and contribution
DRD computation
DRD limited to losswest % of taxable income (reduced for charity) or rate*DVD
AMTI : amortization property : number of years
“39 vs 40 if before 31 December 1998
Otherwise, same”
TAX AMTI adjustment
"TAX / AMTI Depreciation : 200% vs 150% Pty before 12/31/98 : 39 vs 40 70% DRD : same (adj for ACE though) State bonds : same Charity : same"
Distribution of dividend treatment (shareholder)
DVD/gain/income to the extent of E&P / basis = basis-excess E&P
Distribution of dividend treatment (Corp)
gain = FMV - basis
Treatment of guaranteed payments
Does not reduce basis of partner. Recognized in loss
What is the treatment of foreign charity?
no deduction allowed. It reduces the basis
Liquidation other than money : treatment?
“No gain recognition. Limited to basis pre-distribution.
GAIN ONLY WHEN MONEY, AND ORDER IS CASH FIRST”
Treatment of receivables
Receivables are hot assets -> ordinary income
28%/25%/15% : categories?
28% : collectible / 25% : depreciated building / 15% : residual gain
Penalties for under-reporting of taxes
“Negligence : 20% of undertax amount
Will/ Fraud : 75%”
Filing failure penalty
5%/month and max is 25%
Payment failure penalty
0.5% / month and max is 25%
Penalties for tax preparers
50% or 1’000 (negligence) / 5’000 (willfull)
Preferable transfer
90 days within filing /1 year if insider + antecedent debt + gain
Section 1250
realty - 25% (depreciatiion STRAIGHT LINE) if not DEPRECIABLE 1231 (if DEPRECIABLE 1231 - ordinary income)/ Rest : 1231 gain
Section 1245
pty - ordinary income / rest 1231 gain
Office expenses
“Order =
1- Deductible anyway (MTG/Real estates taxes) -> proportion biz non biz reported in schedule C and A
2- Cash expenses (insurance, repairs, utilities, cleaning) -> proportion in C
3- Depreciation : full to the limit of net income”
Way of acceptance of offer
Ship conforming goods, prompt promise, non conforming goods WITHOUT notice of accomodation
Passing of Risk of loss for non merchant
On Tender
Silence of merchant
if MERCHANT and no objection for 10 days -> acceptance
Disclosure of client name
Not possible if bankrupt
Casualty loss
“Lower of FMV decrease / basis
- assurance
- 100
- 10% AGI”
Rule 504
12 month period / notification 15 days / general solliciation allowed
Rule 505
12 month period / notification 18 days
Rule 506
12 month period / notification 14 days
What is recognized as wages?
“Bonus/ vacation/tips
but Travel exp/ employee insurance premium => not wages”
Stock dividend treatment
Excluded except if can elect stock/pty
The Privity approach of Ultramares v. Touche
“Accountant is liable only to those with whom he or she is in privity of contract, i.e., the client, or third-party beneficiaries of the contract.
Under ultramare plaintiff does not recover if he is not part of contract
“
The Restatement “Limited Class” approach
“An accountant is liable to a limited class of nonclients where the accountant knows:
- The information being supplied to the client will be given to, or is for the benefit and guidance of, a limited group of third persons.
- The information will influence those third persons in a specific transaction or type of transaction.
Under restatement, the plaintiff does not recover if he was not identified (no need to be namely identify)”
The Reasonable Foreseeability approach
“An accountant is liable to whomever he or she can reasonably foresee may use the financial statements he or she certifies or prepares.
- This view imposes the same scope of liability for negligent accountants as applies in any other type of negligence suit. It also applies the same basic scope of liability as exists in fraud cases against accountants.
- Very few jurisdictions still use the reasonable foreseeability approach.
Under reasonable foreseeability, plaintiff does not recover if client mislead on intended user (this is for X, but gives to Y) “
Exceptions disclosure of confidential information
“1. GAAP calls for disclosure
- An enforceable subpoena or summons has been issued
- An ethical examination is being conducted
- A peer review requires disclosure
- Disclosure is to other firm members on a ““need to know”” basis
CPAs may reveal the names of clients without client consent, unless such disclosure releases confidential information. “
What is the timing to present a check after which drawer is discharged from liability in case of bank failure?
30 days
What happens if transfer of an instrument is nto signed by transferor
Transfer warranty applies only to the immediate transferee and there is no contract signature liability
What characteristic must the 3 parties of a draft possess?
completely different function (being a guarantor is not)
What are the conditions to be a HDC
the holder must take the instrument for value (payment of an anteceded debt is value), take the instrument in good faith (usually, honesty in fact and thus, unless unusual circumstances, assumed), take the instrument without notice the instrument is overdue, or has been previously dishonored, or of any claim or defense.
What is the effect of a special endorsement?
Drawers guarantees upon proper presentment and proper notice of dishonor that she will pay the instrument to a subsequent holder.
What are he type of notice preventing to become HDC?
the instrument is overdue, has been previously dishonored, the instrument contains forgery, or a claim or defense to payment exists.
What happens if HDC doesn’t pay the full promise?
HDC is HDC to the extent of portion paid
What is a negotiable instrument?
“A negotiable instrument is a writing signed by the maker or drawer giving an unconditional promise or order to pay a sum certain in money on demand or at a definite time payable to order or bearer.
Example : bill of lading gives holder to receive goods-> not a negociable instrument”
What is a bill of lading?
gives the holder a right to receive goods from a common carrier
What must be present for a security interest to attach?
“Underlying debt/obligation;
Either a security agreement or possession of the collateral by the creditor; and
Debtor must have interest in the property. “
What is a PMSI
A purchase money security interest is taken by a party who advanced value to the debtor to enable the debtor to acquire rights in the collateral.
What are the criteria for enfoceable securit agreement?
in writing, signed and authenticated by the debtor, and it includes an adequate description of the collateral.
Is automatic perfection rule applicable to equipment?
no
Does PMSI for inventory require filing to be perfected?
Yes
What is a letter of credit
“A letter of credit is not governed by Article 3 - Negotiable Instruments, but under a separate Article - article 5 of the Uniform Commercial Code. A letter of credit is not a negotiable instrument (a note, certificate of deposit, draft, or a check).
Generally a letter of credit is not transferable unless so stated in the letter of credit or by operation of the law.
Domestic letters of credit are revocable and international letters of credit are irrevocable unless otherwise stated or agreed.
Unless stated to the contrary, letters of credit expire one year after date of issue; but if the stated duration is ““perpetual,”” the letter expires five years after its date or date of issue.
”
What kind of information is required on a wharehouse receipt?
A warehouse receipt to be effective as a title to goods held by a warehouse company, the warehouse receipt must contain the location of the warehouse where the goods are stored, and an indication to the warehouse company whether the goods are to be delivered to any holder (a bearer document), a specified person (consignee) or his/her order (an order document), or a specified person (a nonnegotiable document). Generally also required are date and issue number, signature of the warehouse manager and if owner, rates, and description of the goods.
“Usually, the first security interest to be perfected has top priority.
There is an exception, though, for a purchase money security interest, or a purchase money security interest : what is it ?”
A purchase money security interest in noninventory collateral has priority if it is perfected before the debtor takes possession or within 20 days thereafter. (ie priority over security interest attached before)
What is the highest form of Land ownership?
A fee simple estate gives the owner the right to sell, will, mortgage, and lien the property.
Explain warranty of title
Applicable to Merchant / Non Merchant. Must be in writing and disclaimed in specific language
Explain warranty for fitness for particular purpose
Seller knows buyer’s needs and buyers relie on seller
What happens when seller justifiably withholds delivery of goods and buyer made deposit/payment?
No liquidated damage clause. The seller may keep 500 or 20% of purchase price (lesser of)
List express warranty
“Affirmation of fact / promises
Description of goods
Conformity to sample or models “
List implied warranty
“Fitness for purpose
Merchantability
Usage of trade”
What can you do when you reasonably believe that other party will not perform?
Can request in writing assurance of performance
What is writ of attachment
Property is seized so there is something to pay if creditor win judgement
Does a surety in agreement needs to be in writing?
Yes
what happens to debt before filing and due to negligence?
They are discharged
in case of sale and artisan/mechanic liens what is required to be done?
Notification of sell is required
When can a surety be discharged?
Death/incapacity
List priority order for unsecured creditor in bankruptcy
“Support payment
Trustee/administration fees
obligation created after filing and before settlement
Payroll (within 180 days of petition)
Individual deposit on consumer goods non received
Taxes”
Under the JOBS Act, what cannot a foreign company do?
Use the crowdfunding exemption
What are the benefits of an EGC?
” While most benefits accruing to EGCs have to do with reduced regulatory burdens in the five years after going public, these two benefits accrue during the IPO process (Confidential review of its registration statement by the SEC, Reduced requirement for audited financial statements.). Another benefit is more publicity, such as analyst research published by an investment bank that is part of the underwriting syndicate.
Need not comply with SOX 404(b) requirement of audit for internal controls.
Need not comply with new PCAOB rules.
Reduced disclosure regarding executive compensation
“
What is the ceiling for crowdfunding exemption?
1 million
What is the max amount one can invest in crowdfunded ventures during the course of a single year?
100’000
What is the condition allowing general sollicitation for Rule 506 and 505?
“General solicitation will be allowed under Rule 506 (and 505) Reg D offerings only if the issuer takes reasonable steps to insure that it sells only to accredited investors. If it does not engage in general solicitation, the issuer can sell to up to 35 unaccredited investors under Reg. D.
“
What are the requirement for the registration statement of non-exempt securities?
a description of the security, how the corporation will use the proceeds from the sale, a description of the registrant’s business and management, and a financial statement. These disclosures are meant to assist investors in evaluating risk.
What must prove plaintiff to succeed in 1933 case?
Material misstatement and suffer a loss
What are the time restraint to bring a claim in 1933?
Brings a civil action within one year of the discovery of the omission and within three years of the offering date.
Which are the companies exempted from 1933 registration?
securities of charities, government entities, banks, savings and loans, and farmers’ co-operatives. Some issues by insurance companies are exempt, but only if the issuing company is a state-regulated company. Otherwise, an insurance company’s issues must be registered.
Give definition of security
There was an investment of money in a common enterprise (all parties would either make or lose money, depending on the outcome), with an expectation of profit to be derived primarily by the actions of others.
Describe rule 147 of 1933
If an offering is made by an issuer who resides in the state, and the offering is made entirely to residents of that state, then registration is unnecessary. There are important requirements contained in Rule 147 that must be met, including that 80% of the funds raised must be used in the state.
What must prove plaintiff to succeed in 1934 case?
prove reliance on the false statements; (s)he must have suffered a loss BECAU.S.E OF THE FALSE STATEMENT.
Is the condition of being an alcoholic is protected by the ADA?
The condition of being an alcoholic is protected by the ADA.
What does affect social security benefits?
Social security benefits are meant to provide retirement and disability benefits. Investment income and pension income are consistent with being retired, and will not affect Social Security benefits. It is persons earning salaries, fees, and wages who face the possibility of reduced benefits, as they are still earning sums by working and therefore are not truly retired. Director’s fees are earned actively by working, rather than passively.
What is Social security benefits including?
The Social Security Act of 1935 created an insurance program that covers a variety of items, including disability, retirement, payments to divorced spouses, and Medicare payments. Medicaid payments are provided out of a separate fund.
What must an employer due for FICA?
” An employer must either deduct FICA taxes or pay them for ALL employees.
“
On which power is based 1934?
“The entire 1934 Act is based on Congress’ power to regulate interstate commerce, derived from the commerce clause of the Constitution.
If the transaction does not affect interstate commerce in some way, the federal government has no authority to regulate the transaction.”
What are the time restraint to bring a claim in 1934?
Within two years of when he should have discovered the fraud and within five years of the fraud.
What are the characteristics of non-contributory pension plans?
If an employee puts wages or other compensation into a pension plan, it is called a “contribution.” Non-contributory plans are funded entirely by the employer, and not at all by the employees. Such plans are increasingly rare.
What happens if employees complain to OSHA of unsafe working conditions?
If employees complain to the OSHA of unsafe working conditions, an inspection is more than justified.
Which benefits does Workers’ Compensation laws provide
“Burial expenses.
The cost of prosthetic devices.
Monthly payments to surviving dependent children.
The benefits given will not necessarily be equal to an employee’s full pay. (S)he will receive payment for all medical bills and will receive disability benefits while away from the job. However, there is no guarantee that the disability benefits match the worker’s normal wage.”
Explain requirement to be subject to FUTA
“A return must be filed under FUTA if there are ANY employees during a substantial portion of the year.
If a full OR part-time employee is around for over 20 weeks in a given year, a return must be filed.”
What is Unemployment tax payable under the Federal Unemployment Tax Act (FUTA)?
A tax-deductible employer’s expense. Although these taxes are not deducted from employee paychecks as are FICA taxes, they are still a very real expense to the employer. As such, they are deductible by the employer for federal income-tax purposes.
What is rate limit for overall payment made by the employer?
The key is that the overall payments made by the employer should not exceed the overall federal unemployment tax rate of 6.2%.
When does a patent expires?
The patent would expire 20 years from the date of filing
Are abstract idea patentable?
No
When does copyright expires?
A copyright lasts for the life of the author, plus 70 years.
What does a merger of two public corporations usually require?
” A formal plan of merger.
An affirmative vote by the holders of a majority of each corporation’s voting shares.
Approval by the Board of Directors of each corporation.”
What are the rights of a shareholder?
“Shareholders have the right to vote on many important corporate changes, including amendments to the articles of incorporation, dissolution, sale of all or substantially all of the corporation’s assets, and mergers & consolidations.
Often, one corporation can buy all or substantially all of the assets of another company without there being any large qualitative change in the life of the purchasing corporation. Therefore, when a large corporation gobbles up the assets of a smaller corporation, the shareholders of the large buyer do not have the right to vote on the transaction. There would be a much greater impact on the life of the selling corporation and its shareholders would therefore have the right to vote on the transaction. “
Explain derivative suit
Shareholders may also file derivative lawsuits against persons who have injured the corporation. A shareholder’s derivative suit is so named because the shareholder is not suing for an individual injury done to him/her but, instead, for an injury done to the corporation. The shareholder stands in the proverbial shoes of the corporation to bring an action to remedy an injury done to it. A shareholder who sued to force payment of dividends, to enforce a right to inspect records, or to compel dissolution, would most likely be suing to redress an injury done to him/her individually. Such an injury is remedied through an individual lawsuit brought on the shareholder’s own behalf, not a derivative lawsuit brought on the corporation’s behalf. This is why Choices A, B, and C are not correct. However, an ultra vires act would likely injure the corporation itself, which is why it is the most logical candidate for a derivative suit and why Choice D is the best answer.
What type of dividend are includable in the gross income of the recipient taxpayers in the year of receipt?
CASH dividends. Stock dividends are taxable upon their sale.
What needs to be met for transaction between partner and partnership to be permissible?
Transactions between a partner and the partnership are permissible if requirements of notice and fairness are met.
Which information must articles of incorporation include?
” The articles of incorporation must include (1) the name of the corporation; (2) the number of shares it is authorized to issue; (3) the street address of its registered office and the name of its agent at that address; and (4) the name and address of each incorporator.
“
Explain the look back provision for 1231 assets
The lookback provision states that the net Section 1231 gains must be offset by net Section 1231 losses from the five preceding tax years that have not previously been recaptured. The lookback provision states that the net Section 1231 gains must be offset by net Section 1231 losses from the five preceding tax years that have not previously been recaptured.
Explain like-kind property exchange
“When a taxpayer exchanges property for ““like-kind”” property, no gain or loss is generally recognized. However, if boot is received, gain is recognized to the extent of boot received in the exchange. The exchanges of real estate for ““like-kind”” real estate qualify for non-recognition under the ““like-kind”” exchange rules.
”
list individuals recognized as related parties
A taxpayer’s brothers and sister (whole and half blood), spouse, ancestors and lineal descendants are considered related parties. A taxpayer’s in-laws are not considered members of his/her family.
What is the length of the statutory amortization period for a covenant not to compete
The statutory amortization period for a covenant not to compete that is related to a business acquisition is 15 years.
Explain Section 179 section
Property purchased for use in active trade or business is considered Code-Section 1245 property. Code-Section 1245 property is eligible for the Code-Section 179 election. Under this election, taxpayers may expense a statutory amount of the cost of property used by the taxpayers in active trade or business (to the extent of business income, the remaining is carried over)). The Code-Section 179 deduction is limited to the amount of taxable income originating from the trade or business in which the property is used and is reduced dollar-for-dollar when the taxpayer places qualifying tangible personal property in service that exceeds $200,000.
“Kaitlin owns a computer that she uses for business, investment, and personal use, as follows:
Personal use. 25%
Investment use. 30%
Business use. 45%
Will Kaitlin’s use qualify her to use accelerated or straight-line depreciation, and what percentage of the asset’s basis qualifies to be depreciated?
”
A computer qualifies as listed property, and MACRS accelerated depreciation can be claimed for listed property only if the business use of the asset exceeds 50% of the total use. Since Kaitlin’s business use is 45%, she does not meet the 50% test and must use straight-line (ADS) depreciation. However, she can depreciate both the business and investment use of the asset, so 75% of the asset’s basis qualifies to be depreciated.
What are the conditions for a partnership to be able to use cash method
Partnerships can use the cash method regardless of the amount of gross receipts as long as none of the partners are C corporations.
“The Uniform Capitalization Rules of Code Sec. 263A apply to retailers whose average gross receipts for the preceding three years exceed what amount?
“
The Uniform Capitalization Rules do not apply to small personal property dealers. Small personal property dealers are defined as those with $10 million or less in gross receipts during the preceding three years.
When nonaccounting plan is selected, how are treated reimbursement of business expenses?
Since this is not an accountable plan, all reimbursements are included in the employee’s income ($400 x 12 months = $4,800) and all employee deductions will be 2% miscellaneous itemized deductions.
“Blake, a single individual age 67, had a 2015 adjusted gross income of $60,000 exclusive of social security benefits. Blake received social security benefits of $8,400 and interest of $1,000 on tax-exempt obligations during 2015. What amount of social security benefits is excludable from Blake’s 2015 taxable income?
“
"PI = AGI + tax-exempt interest + 50% (SSB) PI = $60,000 + $1,000 + 50% (8,400) = $65,200.
Since PI ($65,200) exceeds Base Amount 2 ($34,000), then the taxable amount of SSB is the lesser of:
.85 x SSB ($8,400) = $7,140, or
.85 x [PI - BA2; $65,200 - $34,000) = $26,520, plus the lesser of
amount included based on the 50% formula (50% x $8,400) = $4,200, or
$4,500 (unless married filing joint, then $6,000), which provides $26,520 + $4,200 = $30,720 for part b of the formula.
Thus, the amount included in income is the lower of $7,140 or $30,720, so the amount excluded is $1,260 ($8,400 - $7,140).
“
Which cost must be capitalized under the uniform capitalization rules?
Manufacturers and certain retailers and wholesalers are required to use the uniform capitalization rules to capitalize direct and indirect costs allocable to property they produce and for property they purchase for resale. Marketing, selling, advertising, and distribution expenses are not required to be capitalized. Storage costs are required to be capitalized to the extent that they can be traced to an off-site storage or warehouse facility. Those storage costs attributed to an on-site facility are not required to be capitalized.
What is the amount of income realized by a taxpayer from services rendered?
“The amount of income realized by a taxpayer from services rendered equals the sum of the amount of cash received and the fair market value of any property received.
”
What are the expense deductible for illegal activities?
Cost or merchandise only
What is the treatment of cost covering 12 montha for cash basis taxpayer?
pro-rata temporis
What is the treatment of charitable contributions in connection with admission to an entertainment event?
charitable contributions in connection with admission to an entertainment event
Treatment of legal fees?
Most legal expenses incurred in attempts to produce or collect taxable income or paid in the association with the determination, collection, or refund of any tax are usually deductible as an itemized deduction subject to the 2 percent of adjusted gross income floor.
What are the cost considered while determining tax payer contribution to household
For head of household filing status, the following costs are considered in determining whether the taxpayer has contributed more than one-half the cost of maintaining the household: rent; mortgage interest; taxes; insurance on the home; repairs; utilities; and food eaten in the home. The following costs may not be considered: clothing; education; medical treatment; vacations; life insurance; transportation; rental value of home owned by taxpayer; and the value of services provided by the taxpayer or a member of the taxpayer’s household.
When can an individual’s losses on transactions entered into for personal purposes be deductible
An individual’s losses on transactions entered into for personal purposes are only deductible if the losses qualify as casualty or theft losses. If the losses originated due to a trade or business, individuals also may deduct losses originating from transactions entered into for profit.
“Destry, a single taxpayer, reported the following on his 2015 U.S. Individual Income Tax Return Form 1040:
Income:
Wages $ 5,000
Interest on savings account 1,000
Net rental income 4,000
Deductions: Personal exemption $ 4,000 Standard deduction 6,300 Net business loss 16,000 Net short-term capital loss 2,000
What is Destry’s net operating loss that is available for carry back or carry forward?
“
“$7,000 is correct.
Wages $ 5,000 Interest on savings account 1,000 Net rental income 4,000 Net business loss (16,000) Net short-term capital loss ( 2,000) AGI ( 8,000) Deductions: Personal exemption $ 4,000 Standard deduction 6,300 Taxable Loss (18,300)
Adjustments to arrive at NOL carry back or carry forward (Use Form 1045, Schedule A for calculation purposes.)
$18,300 TAXABLE LOSS
Plus $ 4,000 Personal exemption, Destry cannot deduct his personal exemption.
Plus $5,300 Adjustment for deductions that are not connected to a trade or business or employment, such as the standard deduction of $6,300 reduced by the non-business income of $1,000 interests from savings.
Plus $ 2,000 Short term capital loss as adjusted by business capital gains and losses (-0-).
($ 7,000) Correct carry back or forward
“
What accounting method must be used by C corp to account for bad debts?
“Corporations other than certain financial institutions are required to use the direct charge-off method in accounting for bad debts. Certain financial institutions are allowed to use the reserve method.
Under the direct charge-off method, corporations may claim a deduction once a specific business debt becomes partially or wholly worthless and a specific nonbusiness debt becomes wholly worthless.”
Define AMT
“The alternative minimum tax ensures that all taxpayers share the tax burden fairly by preventing taxpayers with substantial income from avoiding significant tax liability. The alternative minimum tax equals the excess (if any) of the tentative minimum tax over the regular tax. In computing a taxpayer’s alternative minimum taxable income, several adjustments and preferences are made to a taxpayer’s taxable income before personal exemptions.
Adjustments are a substitution of an amount used in computing alternative minimum tax for an amount used computing regular tax. Preferences involve the addition of the difference between alternative minimum tax and regular tax treatments. There are numerous adjustments and preferences, including depreciation adjustments and preferences. Charitable contributions of appreciated capital gain property are not preference items.
To allow for timing differences resulting in adjustments to the taxpayer’s minimum tax basis, the alternative minimum tax credit may be claimed to reduce a taxpayer’s regular tax liability to account for the timing differences.
The credit is given only for adjustments resulting from timing differences.
This credit may be carried forward indefinitely. “
How are considered social benefit received in the income test for qualifying relative?
Not considered income
What is the treatment of rent loss in which tax payer actively participates?
“The rental loss is allowed since $25,000 of rental loss is allowed if actively participates in the rental real estate activity and his modified AGI does not exceed $100,000.
If excess : reduced by excess*50% (Passive activity losses normally only may be used to offset passive activity income. Rental activities are considered passive activities, regardless of the level of participation by the taxpayer.
However, a natural person is allowed an allowance for offsetting up to $25,000 of nonpassive income with passive losses resulting from rental activities, provided certain conditions are met. The person must own at least 10 percent of the rental activity and must have actively participated.)
“
When are interest of HEL authorized itemisation for AGI?
Proceeds must be used not used for principal residence
What happens when passive activity is sold?
In the year that a passive activity is sold the suspended passive losses are released and can offset all types of income.
What is the phase out amount for American Opportunity?
160’000
What is the goodwill period of amortization?
15 years
Basis of a corp in a land?
Adjusted basis + gain (gain = lesser of boot or FMV-adj basis)
When is the gain for a shareholder recognized on a corporate formation?
On a corporate formation, gain is recognized to the extent that the liabilities assumed by the corporation exceed the basis in the assets contributed by the shareholder.
What are the refundable credit?
Certain tax credits can result in a refund, even if the individual had no income tax liability. Tax credits resulting in a refund are credits for earned income, tax withheld, excess social security tax withheld, and excise tax for certain nontaxable uses of fuels and light weight diesel vehicles.
Explain M-1 reconciliation
“The purpose of Schedule M-1 of Form 1120, U.S. Corporation Income Tax Return is to reconcile book income (loss) with income per the return. Certain items need to be added to and subtracted from book income to reconcile with income per the tax return. Federal income taxes; excess capital losses over capital gains; income subject to tax not recorded on the books; and expenses recorded on the books not deducted on the return must be added to book income. Income recorded on the books but not included on the return, including tax-exempt interest, and deductions on the return not charged against the books must be subtracted from book income.
Both the interest incurred on loan to carry U.S. obligations and the provision for state corporation income tax are deductible for GAAP. and for income tax purposes. Hence, since both of the expenses would be included in book income and in income per the return, there is no difference to reconcile and, as a result, neither expense would appear on the Schedule M-1 of Form 1120, U.S. Corporation Income Tax Return.
“
Which requirement must be met by married taxpayer to be eigible for earned income credit?
A married taxpayer must file as married filing jointly to qualify for the earned income credit.
Explain computation of foreign tax
“The foreign tax credit is the lower of:
1) foreign tax paid, or
2) U.S. tax x foreign taxable income / worldwide taxable income
“
Explain AET
“The accumulated earnings tax is a penalty tax imposed on corporations that accumulates earnings and profits for the purpose of avoiding income tax for its shareholders. The accumulated earnings tax is equivalent to 20 percent of the corporation’s accumulated taxable income.
Accumulated taxable income is composed of taxable income adjusted downward for federal income and excess profits taxes, charitable deduction in excess of the ceiling, net capital gains and losses, and taxes of foreign countries and U.S. possessions and upward for certain corporate deduct
When calculating the accumulated earnings tax, corporations are given a credit, the accumulated earnings credit, of $250,000 ($150,000 for certain service corporations) plus dividends paid within the first 2 1/2 months of the corporation’s tax year less accumulated earnings and profits at the end of the preceding tax year.
“
Explain PHC test
“For the personal holding company (PHC) tests, interest earned on tax-exempt obligations is excluded from PHC income. PHC income consists of: dividends; interest; annuities; rents; mineral, oil and gas royalties; copyright and patent royalties; produced film rents; compensation for more than 25 percent use of corporate property by shareholders; amounts received under personal services contracts; and amounts received from estates and trusts.
Domestic and foreign corporations satisfying the personal holding company stock ownership and income tests are personal holding companies. The stock ownership test is satisfied if, at some time during the corporation’s tax year, 50 percent or more of the corporation’s stock was directly or indirectly owned by five or fewer individuals. Acme Corp. only has two shareholders, satisfying the stock ownership test.
The income test is satisfied if 60 percent or more of the corporation’s adjusted ordinary gross income is personal holding company income. Personal holding company income consists of: dividends; interest; annuities; rents; mineral, oil and gas royalties; copyright and patent royalties; produced film rents; compensation for more than 25 percent use of corporate property by shareholders; amounts received under personal services contracts; and amounts received from estates and trusts.
Since all of Acme Corp.’s income comes from investments, all of the corporation’s income is consider personal holding company income and, as a result, the corporation satisfies the income test.
Since Acme Corp. satisfies the stock ownership and income tests, it is a personal holding company. To be a regulated investment company, the corporation would have needed to be registered with the SEC and elect for such treatment, items not present in this case.
“
What is the basis for distribution of land (for shareholder)
For dividends, the amount distributed is the fair market value of the property received less any liabilities assumed by the shareholder, or $35,000 ($38,000 − $3,000). Fox would have $35,000 of dividend income since earnings and profits is at least this amount. However, the basis in the property received as a taxable dividend is always the fair market value of the property, or $38,000.
What is the effect of distribution of appreciated property?
The distribution of appreciated property increases a corporation’s earnings and profits increase by the amount of the difference between the distributed property’s fair market value and the corporation’s adjusted basis in the distributed property.
Explain Small corp exemption test
In the first year of a corporation’s existence it is automatically exempt from the AMT (Yes). Widget’s first testing window to determine if it is subject to the AMT in Year 2 is just Year 1 gross receipts of $6,000,000. Since this exceeds the $5,000,000 threshold for the first three-year testing window (or portion thereof), Widget is NOT exempt from the AMT in Year 2. Once the small corporation exemption test is failed, then the corporation is NOT exempt for all future tax years, so the answer is NO for Years 3 and 4 also.
Are S corporation eligible for filing as affiliated group?
No
Or are treated liquidation distribution for sharehorderl?
“In a complete liquidation, shareholders generally recognize capital gains and losses from corporate distributions. The amount of assets received by a shareholder is treated as full payment in exchange for the stock.
The capital gain or loss recognized by a shareholder equals the total distribution less the shareholder’s basis.
“
Define private foundation
A private foundation is a tax-exempt organization which receives less than one-third of its annual support from its members and the general public. Therefore, public charities that solicit broad public support do not meet this definition.
What is the treatment of stock received in framework of reorganisation
If taxpayer receives stocks or securities under a plan of reorganization from a corporation included in the reorganization, the taxpayer does not recognize a gain or loss from the transaction. However, if the taxpayer receives boot, the transaction is taxable up to the amount of the boot.
Are reorganisation taxable?
“Corporate reorganizations generally are tax-free for both shareholders and the corporation.
“
Type A reorganisation?
” Type A: Merger or Consolidation, which qualifies for tax-free treatment for both shareholders and the corporation.
“
Type B reorganisation?
Type B: Stock for Stock transaction, the reorganization is tax-free.
Is gain on stock liquidation of subsidiary by parent recognized？
If stock of a subsidiary is liquidated by its parent company, any realized gain on the transaction is, in general, not recognized.
How are treated distribution in complete liquidation by shareholder? (type of gain)
Shareholders of a distribution in complete liquidation of a corporation receive capital gain or loss treatment just as if they hold their stock.
Does a partner recognize gain on the sale of his interests?
If a partner sells or exchanges his/her partnership interest and the partnership has either unrealized receivables or substantially appreciated inventory, the partner recognizes an ordinary gain to the extent that the amount realized by the partner due to the unrealized receivables or substantially appreciated inventory is greater than the partner’s basis in the items.
When Carr sold his partnership interest in Allen, Baker and Carr, the partnership had unrealized receivables. The amount realized by Carr due to the unrealized receivables was $140,000, the partnership’s total unrealized receivables of $420,000 multiplied by Carr’s one-third ownership interest.
Carr does not have any basis in the unrealized receivables (indicating that none of the receivables have been collected). Hence, Carr must report an ordinary gain of $140,000, the $140,000 realized by Carr due to the unrealized receivables less Carr’s basis in the receivables, which is zero.
how is computed the amount realized on a sale of interest by a partner?
In computing the amount realized from the sale of a partner’s interest in the partnership, the partner must consider their share of the partnership’s liabilities along with the cash or value of property received. Thus, Carr’s share of the partnership’s liabilities, $20,000 (= $60,000 in total liabilities multiplied by Carr’s one-third interest in the partnership), must be included in determining the amount realized by Carr.
Therefore, the total amount realized by Carr on the sale of his partnership interest is $174,000, the sum of the $154,000 in cash received and Carr’s $20,000 share of the partnership’s liabilities.
This response incorrectly implies that Carr realized an amount equal the cash received less Carr’s capital account’s balance. This is the amount subject to income tax, but not the amount realized.
how are treated payment to retiring partner in exchange of interests?
Payments received by a retiring partner from the partnership in exchange for the partner’s interest in the partnership receive similar treatment to the receipt of a liquidating distribution. Thus, the retiring partner recognizes income only to the extent that “money” received exceeds the partner’s basis in the partnership interest. The assumption of a partner’s liabilities is viewed as being a “money” payment.
when is gain recognized on partnership distribution?
if it is CASH and exceed basis
what is the basis when distribution in kind is performed in partnership?
The basis to a partner of property distributed “in kind” in complete liquidation of the partner’s interest is the adjusted basis of the partner’s interest reduced by any cash distributed to the partner in the same transaction.
This response indicates that the partner assumes the fair market value of the property received in the transaction.
List separately stated items for partnership
Certain items are separately stated on a partnership’s income tax return and, as a result, are not included in the ordinary income of a partnership. These items are directly passed through to the partners and included on the partners’ income tax return.
The separately stated items are composed of: charitable contributions; dividends; short-term capital gains and losses; long-term capital gains and losses; Code Section 1231 gains and losses; income, gains, losses, deductions and credits specially allocated under the partnership agreement; nonbusiness production of income expenses; income, gains and losses from the sale of unrealized receivables and appreciated inventory; bad debt, prior taxes and delinquency amounts recovered; taxes of foreign nations and U.S. possessions eligible for the foreign tax credit; intangible drilling and development expenses; mining exploration expenses; and soil and water conservation expenses. Guaranteed payments to partners are treated as salary payments.
Thus, the payments are deductible from the partnership’s ordinary income.
What type of gain is recognized on exchange of services for interests in partnership?
When an individual contributes services to a partnership for a capital interest in the partnership, the individual reports taxable income equal to the fair market value of the transferred capital interest.
Capital interests received are treated as guaranteed payments, which means the capital interest is viewed a salary payment and, as such, reported as ordinary income by the partner.
Since the fair market value of the partnership’s net assets is $100,000 and Kelly contributed services for a 10 percent interest in the partnership, Kelly must recognize $10,000 of ordinary income. This response incorrectly indicates that the gain Kelly recognizes is a capital gain rather than ordinary income.
Explain transfer or risk of loss and title when non conforming goods are sent
Risk of loss remains to seller, and title pass to buyer
Explain what a seller should do if buyer withdraws from contract
Seller should look for appropriate remdy such as trying to sell the goods to someone else and sue for damages if amount collected is below original contract
What are the conditions to qualify as an HDC?
To qualify as a holder in due course, an individual must be a holder of a properly negotiated negotiable instrument, give value for the instrument, and take the instrument in good faith and without notice that it is overdue, has been dishonored, or that any person has a defense or claim to it.
Explain shelter provision
When a negotiable instrument is negotiated from a holder in due course to a second holder, the second holder usually acquires the rights of a holder in due course through the shelter provision. The shelter provision applies to holders who have not previously held the instrument with knowledge of any defenses.
Explain race notice
Under a notice-race recording statute, a subsequent mortgagee (lender) who loans money without notice of the previous mortgagee and records the mortgage first has priority over that previous mortgagee. Once a mortgagee records, this gives constructive notice to any subsequent parties who then cannot obtain priority over the one who recorded. ( The first BFP to record the deed takes title. )
Explain race status
First person to record the deed holds title to the land and takes possession clear of any subsequently recorded liens or transfers.
Explain notice status
The last BFP (a buyer who does not know of any problems with the land) to take title from the grantor holds the actual title.
Sale of mortgage to a buyer :
what happens when buyer buys subject to mortgage?
Subject to the mortgage – Title to the realty passes to the buyer with the buyer making payments to the mortgagor. The mortgagee still has a lien on the realty, and can hold the mortgagor liable on the mortgage note (unless released by mortgagee) if there is a default, but the mortgagee cannot hold the buyer personally liable.
Explain thresholds for basis of tax position
a. A position is unreasonable if there is no substantial authority (less than 40% chance of being sustained) for the position.
b. A position is unreasonable if it is disclosed yet there is no reasonable basis (less than 20% chance of being sustained) for it.
c. If the position relates to a tax shelter, it is unreasonable unless it is more likely than not (MLTN) (less than 50% chance) that the position will be sustained.
Automatic expulsion from the AICPA
Automatic expulsion from the AICPA without a hearing results when a member has been convicted or received an adverse judgment for:
- Committing a felony
- Willfully failing to file a tax return
- Filing a fraudulent tax return on own or client’s behalf
- Aiding in preparing a fraudulent tax return for a client
Revocation of certificate by a state board of accountancy also leads to automatic expulsion.
Explain consructive fraud
In a constructive fraud case, gross negligence (sometimes referred to as recklessness) acts as a substitute for intentional deception. Ordinary negligence or carelessness is not serious enough to act as a substitute for intent.
Explain accoutant’s express agreement
Accountants’ duties arise from:
A.
Express agreement of the parties –
- In a written engagement letter
- An oral agreement may also be enforceable.
Differences Between Fraud and Negligence Causes of Action
Differences Between Fraud and Negligence Causes of Action
Fraud/Negligence
Plaintiff must prove bad intent or recklessness Yes No
Plaintiff must prove carelessness No Yes
Plaintiff must prove proximate cause Yes Yes
Plaintiff can recover compensatory damages Yes Yes
Plaintiff can recover punitive damages Yes No
Contributory negligence is a defense No Yes
All reasonably foreseeable persons may recover Yes No
Explain Ultramare
The Privity approach of Ultramares v. Touche – Accountant is liable only to those with whom he or she is in privity of contract, i.e., the client, or third-party beneficiaries of the contract.
1. Rationale -- Whereas plaintiffs suing for fraud, recklessness, or gross negligence may recover simply by being reasonably foreseeable victims of the fraud, courts adopting the privity approach are worried about accountant liability for simple carelessness extending to an indeterminate class for an indeterminate time and for an indeterminate amount. Therefore, they limit liability to the client and third parties expressly mentioned in the engagement letter.
- Fact – A substantial number of jurisdictions have adopted the privity approach either through judicial decision or by legislation.
Explain The Restatement “Limited Class” approach
An accountant is liable to a limited class of nonclients where the accountant knows:
- The information being supplied to the client will be given to, or is for the benefit and guidance of, a limited group of third persons.
- The information will influence those third persons in a specific transaction or type of transaction.
Explain The Reasonable Foreseeability approach
An accountant is liable to whomever he or she can reasonably foresee may use the financial statements he or she certifies or prepares.
- This view imposes the same scope of liability for negligent accountants as applies in any other type of negligence suit. It also applies the same basic scope of liability as exists in fraud cases against accountants.
- Very few jurisdictions still use the reasonable foreseeability approach.
Individual taxation : to what is the rate of 30% is applied for charitable contribution?
Deductions for contributions of long-term capital gain property (when the gain is not to be reduced) to organizations in Section a. above are limited to 30% of adjusted gross income; but, taxpayer may elect to reduce all appreciated long-term capital gain property by the potential gain and not be subject to this 30% limitation.
Can portfolio income be used to net passive loss?
no
To what extent are Payments to qualified organizations for goods or services deductible?
Payments to qualified organizations for goods or services are deductible to the extent the amount paid exceeds the fair market value of benefits received.
What should be excluded from NOL?
The following cannot be included in the computation of a NOL:
(1) Any NOL carryforward or carryback from another year
(2) Excess of capital losses over capital gains. Excess of nonbusiness capital losses over nonbusiness capital gains even if overall gains exceed losses
(3) Personal exemptions
(4) Excess of nonbusiness deductions (usually itemized deductions) over nonbusiness income
(a) The standard deduction is treated as a nonbusiness deduction.
(b) Contributions to a self-employed retirement plan are considered nonbusiness deductions.
(c) Casualty losses (even if personal) are considered business deductions.
(d) Dividends and interest are nonbusiness income; salary and rent are business income.
Which methods is(are) available to the CPA to compute the required annual payment of estimated tax for the current year in order to make timely estimated tax payments and avoid the underpayment of estimated tax penalty
The use of the adjusted seasonal installment method is available to corporations, but is not available for individuals
kiddie tax : Threshold when only unearned income?
The threshold amount is subject to change because it is indexed for inflation, but it is normally twice the amount of the applicable standard deduction for a dependent who has only unearned income
individual tax: Life insurance proceeds paid by reason of death treatment
Life insurance proceeds paid by reason of death are excluded from income if paid in a lump sum or in installments. If the payments are received in installments, the principal amount of the policy divided by the number of payments is excluded each year.
Explain education IRA
Contributions to an education IRA are not deductible, but withdrawals of earnings will be tax-free if used to pay the qualified education expenses of the designated beneficiary. The maximum annual amount that can be contributed to an education IRA is limited to $2,000, but the annual contribution is phased out for single taxpayers with modified AGI between $95,000 and $110,000, and for married taxpayers with modified AGI between $190,000 and $220,000. Contributions cannot be made to an education IRA after the date on which the designated beneficiary reaches age 18.
UNICAP excempted cost
Among the costs that are excepted from the UNICAP rules are research and experimental expenditures, mine development and exploration costs, and the costs incurred by a freelance writer, photographer, or artist whose personal efforts create the product. Also excepted from the UNICAP rules are the costs of small retailers and wholesalers who acquire personal property for resale if the retailer’s or wholesaler’s average gross receipts for the preceding three tax years do not exceed $10 million.
Are deduction allowed for the premiums on the disability income policy
no deduction is allowed for the premiums on the disability income policy. A disability income policy is not considered medical insurance because payments are not based on the amount of medical expenses incurred.
6-year statute of limitations applies if gross income omitted from the return exceeds 25% of the gross income reported on the return: base of computation?
A 6-year statute of limitations applies if gross income omitted from the return exceeds 25% of the gross income reported on the return. For this purpose, gross income of a business includes total gross receipts before subtracting cost of goods sold and deductions. Thus, a 6-year statute of limitations will apply to Thompson if he omitted from gross income an amount in excess of ($400,000 + $36,000) × 25% = $109,000.
AMTI adjustment
Example of adjustments include
a. For real property placed in service after 1986 and before 1999, the difference between regular tax depreciation and straight-line depreciation over 40 years.
b. For personal property placed in service after 1986, the difference between regular tax depreciation using the 200% declining balance method and depreciation using the 150% declining balance method (switching to straight-line when necessary to maximize the deduction)
c. For long-term contracts, the excess of income under the percentage-of-completion method over the amount reported using the completed-contract method
d. The installment method cannot be used for sales of dealer property
e. The medical expense deduction is computed using a 10% floor (instead of the 7.5% floor that might have been used for regular tax)
f. No deduction is allowed for home mortgage interest if the loan proceeds were not used to buy, build, or improve the home
g. No deduction is allowed for personal, state, and local taxes, and for miscellaneous itemized deductions subject to the 2% floor for regular tax purposes
h. No deduction is allowed for personal exemptions and the standard deduction
What cost are included in support cost of dependent
Taxpayer must furnish over one-half of support.
(a) Includes food, clothing, FMV of lodging, medical, education, recreation, and certain capital expenses.
(b) Excludes life insurance premiums, funeral expenses, nontaxable scholarships, income and social security taxes paid from a dependent’s own income.
25’000 offset for actively management in real estate?
a special rule permits an individual to offset up to $25,000 of income that is not from passive activities by losses from a rental real estate activity if the individual actively participates in the rental real estate activity. However, this special $25,000 allowance is reduced by 50% of the taxpayer’s AGI in excess of $100,000 and is fully phased out when AGI exceeds $150,000.
explain 1244 stock
Sec. 1244, (1) the shareholder must be the original holder of stock, and an individual or partnership; (2) the stock can be common or preferred, voting or nonvoting; (3) the amount of ordinary loss is limited to $50,000 ($100,000 on joint return); (4) the corporation during the 5-year period before the year of loss received less than 50% of its total gross receipts from royalties, rents, dividends, interest, annuities, and gains from sales or exchanges of stock or securities; and (5) the corporation’s aggregate amount of money and adjusted basis of other property received for stock as a contribution to capital and paid-in surplus does not exceed $1,000,000.
destruction of business property
If business property is completely destroyed, the amount of casualty loss deduction is the property’s adjusted basis immediately before the casualty, less any insurance reimbursement. Note that the “$100 floor” and “10% of adjusted gross income” limitations that apply to nonbusiness casualty losses of individuals do not apply to business casualty losses.
Corporation treatement of distribution of appreciated property
If a corporation makes a nonliquidating distribution of appreciated property to a shareholder, the corporation must recognize gain just as if the property were sold at its fair market value.
Distribution of property in complete liquidation
Generally, a corporation will recognize gain or loss on the distribution of its property in complete liquidation just as if the property were sold to the distributee for its fair market value.
The allowable credit for foreign income taxes formula
The allowable credit for foreign income taxes is subject to an overall limit of
Foreign TI
Worldwide TI × (US tax)
Alternative minimum taxable income (after exemption) $110,000
AMT foreign tax credit 5,000
Regular federal income tax (net of foreign tax credit) 4,500
AMT liability?
The corporation’s tentative minimum tax ($110,000 × 20%) = $22,000 would be reduced by the $5,000 AMT foreign tax credit and $4,500 of regular federal income tax, resulting in an alternative minimum tax (AMT) liability of $12,500.
Explain test for PHC
A personal holding company is any corporation (except certain banks, financial institutions, and similar corporations)
(1) During anytime in the last half of the tax year, five or fewer individuals own more than 50% of the value of the outstanding stock directly or indirectly, and
(2) The corporation receives at least 60% of its adjusted ordinary gross income as “personal holding company income” (e.g., dividends, interest, rents, royalties, and other passive income)
ACE adjustment
The ACE adjustment is equal to 75% of the difference between ACE and pre-ACE alternative minimum taxable income (AMTI). The ACE adjustment can be positive or negative, but a negative ACE adjustment is limited in amount to prior years’ net positive ACE adjustments.
constructive dividend
If a corporation sells property to a shareholder for less than fair market value, the shareholder is considered to have received a constructive dividend to the extent of the difference between the fair market value of the property and the price paid.
PHC tax
The personal holding company (PHC) tax is self-assessed by a corporation filing a Schedule PH along with its regular Form 1120 tax return. The PHC tax may be imposed if more than 50% of a corporation’s stock is owned by 5 or fewer individuals, and 60% or more of the corporation’s adjusted ordinary gross income is PHC income. The penalty tax is assessed against undistributed PHC income, which may be reduced by dividend distributions.
For the current year, Atkinson, Inc. had gross business income of $160,000 and dividend income of $100,000 from unaffiliated domestic corporations that are 20%-owned. Business deductions for the current year amounted to $170,000. What is Atkinson’s dividends-received deduction for the current year?
The DRD (normally 80% of dividends from unaffiliated corporations 20%-owned) may be limited to 80% of TI before the DRD, except when the full 80% DRD creates or increases a net operating loss.
Gross business income $ 160,000 Dividend income 100,000 $ 260,000 Less business deductions (170,000) Taxable income before DRD $90,000 DRD ($90,000 × 80%) (72,000) Taxable income $18,000
Since the full deduction (80% × $100,000 = $80,000) would not create a NOL, the limitation applies.
The requirement is to determine the proper treatment for qualifying research and experimentation expenditures.
A taxpayer can elect to deduct qualifying research and experimentation expenditures as a current expense if the taxpayer so elects for the first taxable year in which the expenditures are incurred. Otherwise, the taxpayer must capitalize the expenditures. Then, if the capitalized costs are not subject to depreciation (because there is no determinable life), the taxpayer can amortize them over a period of 60 months or longer beginning with the month in which benefits from the expenditures are first realized.
tax basis for the land received in a corporate distribution.
A shareholder’s tax basis for property received in a corporate distribution will be the property’s fair market value
The requirement is to determine the amount of loss recognized by Prime Corporation on the nonliquidating distribution of property to shareholders.
Although a gain would be recognized if the property had been appreciated, no loss can be recognized on nonliquidating corporate distributions to shareholders.
NOL computation for corporation
A corporation’s net operating loss is computed the same way as its taxable income.
(a) The dividends received deduction is allowed without limitation.
(b) No deduction is allowed for a NOL carryback or carryover from other years.
(c) A NOL is generally carried back two years and forward twenty years to offset taxable income in those years. However, a three-year carryback is permitted for the portion of a NOL that is attributable to a presidentially declared disaster and is incurred by a small business corporation (i.e., a corporation whose average annual gross receipts are $5 million or less for the three-tax-year period preceding the loss year).
(d) A corporation may elect to forego carryback and only carry forward twenty years.
Effect of DRD on NOL
It inreases NOL
Explain built in tax
A C corporation that makes an S election is subject to a corporate level tax of 35% on its net recognized built-in gain if the gain is attributable to its net unrealized built-in gain as of the first day of its S status and the gain is recognized within 10 years after the effective day of its S election.
Determination of tax liability
tax liability is the greater of (1) its regular tax liability, or (2) its tentative minimum tax, increased by its personal holding company tax.
Sales tax treatment?
In 2015 sales taxes are not deductible as an itemized deduction
Federal tax : deductible?
no
State benefit : included or excluded from gross income?
State disability benefits are excluded from gross income.
Pierce corporate veil
Rarely happens but may occur if
(1) Corporation used to perpetrate fraud (e.g., forming an undercapitalized corporation)
(2) Owners/officers do not treat corporation as separate entity
(3) Shareholders commingle assets, bank accounts, financial records with those of corporation
(4) Corporate formalities not adhered to
Merger
Union of two corporations where one is absorbed by other
(1) Surviving corporation issues its own shares (common and/or preferred) to shareholders of original corporations
Consolidation
Joining of two (or more) corporations into a single new corporation
b. All assets and liabilities are acquired by the new company
c. New corporation is liable for debts of old corporations
Requirements to accomplish a merger or consolidation
Boards of both corporations must prepare and submit plan to shareholders of both corporations
b. Approval of board of directors of both companies
c. Shareholders of both corporations must be given copy or summary of merger plan
d. Majority vote of shareholders of each corporation
e. Surviving corporation gets all assets and liabilities of merging corporations
f. Dissatisfied shareholders of subsidiary may dissent and assert appraisal rights, thereby receiving the FMV of their stock
To receive this right of appraisal, shareholder must
(a) File objection to merger
(b) Vote against merger
(c) Make written demand that corporation purchase stock at appraised price
Transactions of a corporation with director(s) or other corporation in which director(s) has interest are valid as long as at least one of the following can be established
Transactions of a corporation with director(s) or other corporation in which director(s) has interest are valid as long as at least one of the following can be established
1] Conflict of interest is disclosed or known to board and majority of disinterested members approve of transaction
2] Conflict of interest is disclosed or known to shareholders and those entitled to vote approve it by a majority
3] Transaction is fair and reasonable to corporation
Investment interest expense deductibility threshold
Investment interest expense is deductible as an itemized deduction to the extent of net investment income
Life insurance premiums for employee benefit
Since the employer is not the beneficiary this is a taxable fringe benefit to the employee and is deductible by the employer. It is not a key-man policy since the company is not the beneficiary.
in a jurisdiction having an accountant-client privilege statute, the CPA generally may not turn over workpapers without the client’s permission : exceptions?
in a jurisdiction having an accountant-client privilege statute, the CPA generally may not turn over workpapers without the client’s permission. It is allowable to do so, however, for use in a quality review under AICPA authorization or to be given to the state CPA society quality control panel.
An auditor is responsible for reviewing for material subsequent events until which event?
The auditor is responsible for reviewing for material subsequent events through the effective date of the registration statement.
Joint liability
In a state that applies joint liability, both the accountant and management are liable up to the full amount of the obligation. If management has no funds, the entire amount may be collected from the accountant.
Several liability
In a state that applies several (proportionate liability), the accountant and management are only obligated to pay their respective share of the damages based on the degree of responsibility for the losses.
Joint and several liability.
In a state that applies joint and several liability, each of the parties are responsible for the full amount of the obligation but may seek to get reimbursement from the other parties. Most state courts apply joint and several liability.
Treatment of Amounts received for noncompetition agreements
Amounts received for noncompetition agreements are taxed as ordinary income in the year received.
wash sales
Wash sale occurs when stock or securities (or options to acquire stock or securities) are sold at a loss and within thirty days before or after the sale, substantially identical stock or securities (or options to acquire them) in the same corporation are purchased.
- Wash sale loss is not deductible, but is added to the basis of the new stock.
- Wash sale rules do not apply to gains.
Sale exchange of property with related parties
(1) Transferee’s basis is cost; holding period begins when transferee acquires property.
(2) On a later resale, any gain recognized by the transferee is reduced by the disallowed loss (unless the transferor’s loss was from a wash sale, in which case no reduction is allowed).
(3) Related taxpayers include
(a) Members of a family, including spouse, brothers, sisters, ancestors, and lineal descendants
(b) A corporation and a more than 50% shareholder
(c) Two corporations which are members of the same controlled group
(d) A person and an exempt organization controlled by that person
(e) Certain related individuals in a trust, including the grantor or beneficiary and the fiduciary
(f) A C corporation and a partnership if the same persons own more than 50% of the corporation, and more than 50% of the capital and profits interest in the partnership
(g) Two S corporations if the same persons own more than 50% of each
(h) An S corporation and a C corporation if the same persons own more than 50% of each
Sheri received jewelry as a gift from her aunt, Amy. At the time of the gift, the jewelry had a fair market value of $54,000 and an adjusted basis of $19,000. This was the only gift that Sheri received from Amy during 2014. If Amy paid a gift tax of $8,000 on the transfer of the gift to Sheri, what tax basis will Sheri have for the jewelry?
A donee’s basis for gift property is generally the same as the donor’s basis, increased by any gift tax paid that is attributable to the property’s net appreciation in value. The amount of gift tax that can be added is limited to the amount that bears the same ratio as the property’s net appreciation bears to the amount of taxable gift. For this purpose, the amount of gift is reduced by the $14,000 annual exclusion that is allowable with respect to the gift. Thus, Sheri’s basis is $19,000 + [$8,000 ($54,000 − $19,000) / ($54,000 − $14,000)] = $26,000.
Like-kind gain recognition
In a like-kind exchange of property held for investment, a realized gain ($17,000 in this case) will be recognized only to the extent of unlike property (i.e., boot) received
Loss on transaction entered into for personal purposes : deduction?
An individual’s losses on transactions entered into for personal purposes are deductible only if the losses qualify as casualty or theft losses.
David Price owned machinery which he had acquired in 2013 at a cost of $100,000. During 2015, the machinery was destroyed by fire. At that time it had an adjusted basis of $86,000. The insurance proceeds awarded to Price amounted to $125,000, and he immediately acquired a similar machine for $110,000. What should Price report as ordinary income resulting from the involuntary conversion for 2015?
the realized gain from involuntary conversion of $39,000 ($125,000 insurance proceeds − $86,000 adjusted basis) is recognized only to the extent that the insurance proceeds are not reinvested in similar property. This results in a recognized gain of $15,000 ($125,000 − $110,000). Because the machinery was Sec. 1245 property, this recognized gain of $15,000 is recaptured as ordinary income to the extent of the $14,000 of depreciation previously deducted, while the remaining $1,000 is classified as Sec. 1231 gain.
What can be considered Sec 1231
Sec. 1231 property generally includes both depreciable and nondepreciable property used in a trade or business or held for the production of income if held for more than 12 months. Specifically excluded from Sec. 1231 is inventory and property held for sale to customers, as well as accounts and notes receivable arising in the ordinary course of a trade or business. Additionally, copyrights, literary, musical, and artistic compositions held by a taxpayer whose personal efforts created such property are excluded from Sec. 1231.
Capital loss for corporation
Sec. 1231 property generally includes both depreciable and nondepreciable property used in a trade or business or held for the production of income if held for more than 12 months. Specifically excluded from Sec. 1231 is inventory and property held for sale to customers, as well as accounts and notes receivable arising in the ordinary course of a trade or business. Additionally, copyrights, literary, musical, and artistic compositions held by a taxpayer whose personal efforts created such property are excluded from Sec. 1231.
Basis asset received in like kind
basis of an asset received in a like-kind exchange where boot was received is
Basis of asset given up $3,000
Less boot received − 500
Plus gain recognized + 300
Basis of asset received $2,800
Sec 1231 non recaptured
Sec. 1231 gain must be treated as ordinary income to the extent of the taxpayer’s nonrecaptured net Sec. 1231 losses for its 5 preceding tax years.
Since the nonrecaptured net Sec. 1231 losses for 2012 and 2013 total ($15,000 + $20,000) − $5,000 = $30,000, only $10,000 of the $40,000 net Sec. 1231 gain for 2015 will be treated as long-term capital gain.
Like kind exchange
an exchange of business or investment property for property of a like-kind
(1) Does not apply to property held for personal use, inventory, stocks, bonds, notes, intangible evidences of ownership, and interests in a partnership
(2) Property held for business use may be exchanged for investment property or vice versa.
(3) Like-kind means “same class of property.”
(a) Real property must be exchanged for real property; personal property must be exchanged for personal property within the same General Asset Class or within the same Product Class. For example
1]
2]
3] Land held for investment exchanged for apartment building
Real estate exchanged for a lease on real estate to run 30 years or more
Truck exchanged for a truck
(b) Exchange of personal property for real property does not qualify.
(c) Exchange of US real property for foreign real property does not qualify.
A noncorporate taxpayer can generally exclude ??% of the capital gain resulting from the sale of qualified small business stock held more than five years
A noncorporate taxpayer can generally exclude 50% of the capital gain resulting from the sale of qualified small business stock held more than five years.
treatment of worthless securities
worthless securities generally receive capital loss treatment. However, if the loss is incurred by a corporation on its investment in an affiliated subsidiary corporation (80% or more ownership), the loss is generally treated as an ordinary loss.
Replacement period for destroyed, damaged, or stolen property
For destroyed, damaged, or stolen property, the replacement period ends 2 years after the close of the taxable year in which the gain is first realized.
Start of hodling periof of capital asset (partnership)
The holding period for a partnership interest that is acquired through a contribution of property depends upon the nature of the contributed property. If the contributed property was a capital asset or Section 1231 asset to the contributing partner, the holding period of the acquired partnership interest includes the period of time that the capital asset or Sec. 1231 asset was held by the partner.
Distribution in partnership - treatment
Partnership recognizes no gain or loss on a distribution.
2. If a single distribution consists of multiple items of property, the distributed property reduces the partner’s basis for the partnership interest in the following order:
a. Money,
b. Adjusted basis of unrealized receivables and inventory, and
c. Adjusted basis of other property.
separated item partnership
These special items are listed separately on Schedule K of the partnership return and include
(a) Capital gains and losses
(b) Sec. 1231 gains and losses
(c) Charitable contributions
(d) Foreign income taxes
(e) Sec. 179 expense deduction for recovery property
(f) Interest, dividend, and royalty income
(g) Interest expense on investment indebtedness
(h) Net income (loss) from rental real estate activity
(i) Net income (loss) from other rental activity
Transactino between partners
Although gains and losses incurred in sales transactions between a partnership and its partners are generally recognized, a loss is disallowed if incurred in a transaction between a partnership and a partner owning (directly or constructively) more than a 50% capital or profits interest. Since Lydia’s partnership interest does not exceed 50%, she realizes and recognizes a long-term capital loss of $9,000 − $4,000 = $5,000 from the sale of stock.
Non liquidating distribution of partnership interest
Gain will be recognized by a distributee partner in a nonliquidating distribution if the amount of money received exceeds the partner’s basis for the partnership interest. Additionally, gain or loss may be recognized by a distributee partner if a nonliquidating distribution is disproportionate with respect to the partner’s interest in partnership property. A distribution is disproportionate if the partner receives more than the partner’s share of unrealized receivables and substantially appreciated inventory, and in return relinquishes a share in other assets, or receives more than the partner’s share in capital and Sec. 1231 assets, and in return, relinquishes an interest in the partnership’s unrealized receivables and substantially appreciated inventory.
Recognition of loss for a person who owns (directly or constructively) more than a 50% part
Recognition of loss is disallowed on a sale or exchange between a partnership and a person who owns (directly or constructively) more than a 50% partnership interest.
income when a capital interest in a partnership is received as compensation for services rendered.
A taxpayer must recognize income when a capital interest in a partnership is received as compensation for services rendered. The amount of income to be reported is the fair market value of the partnership interest received
When can’t a secured party retain collateral?
The secured party cannot retain the collateral if it is consumer goods and the debtor has paid 60% or more of the obligation. In such a case, the debtor is entitled to a compulsory disposition of the goods.
Buyer in ordinary course of business
Buyers in the ordinary course of business take free of any security interest whether perfected or not (be sure to know this one)
(1) In general, buying in the ordinary course of business means buying from inventory of a person or company that normally deals in those goods
(2) Buyer has priority even if s/he knows that security agreement exists
(3) Purpose is to allow purchasers to buy from merchants without fear of security agreements between merchants and other parties
EXAMPLE: S, a dealer in stereos, obtained financing from L by securing the loan with her inventory in stereos. B purchases one of the stereos from that inventory. B takes free of the security interest that L has in the inventory of S whether it is perfected or not.
Distinguish between buyers in the ordinary course of business and the subsequent bona fide purchasers from consumers
Distinguish between buyers in the ordinary course of business and the subsequent bona fide purchasers from consumers
(1) The latter defeats only a purchase money security interest in consumer goods (perfection on attachment) unless filing takes place–applies to sale by consumer to consumer
(2) The former applies whether buyer is consumer or not but seller is dealer in those goods
EXAMPLE: See previous example. The result is the same whether or not B was a consumer when he bought in the ordinary course of business from S.
EXAMPLE: Refer again to the same example using S, L, and B. Now let’s add on one more security interest in that B is buying the stereo on credit from S and for his own personal use. Attachment has occurred. There is perfection by attachment because between B and S, it is a purchase money security interest in consumer goods. If B sells the stereo to N, his neighbor, for consumer use, then N takes free of the perfected security interest (unless S had filed or N had notice of the security interest).
Artisan’s liens
the UCC states that when a person in the ordinary course of business furnishes services or materials for goods subject to a security interest, an artisan’s lien on such goods, which arises under state law, takes priority over prior perfected security interests unless the statute expressly provides otherwise.
If collateral consists of claims (e.g., receivables), the secured party has the right of collection from third parties
a. Secured party may notify third party to pay secured party directly
b. Secured party must account for any surplus and debtor is liable for any deficiency
c. Secured party may deduct his/her reasonable expenses
Secured party may retain collateral already in his/her possession or may take possession or control from debtor
a. May do so him/herself if s/he can without breach of the peace
b. Otherwise, s/he must use judicial process to foreclose on collateral
c. Secured party has duty to take reasonable care of collateral in his/her possession
(1) Expenses to protect collateral are responsibility of debtor
If secured party proposes to satisfy obligation by retaining the collateral, s/he must
a. Send written notice to debtor
b. Must notify other secured parties (who have sent written notice of their interest), unless consumer goods
c. Can only retain consumer goods if debtor has paid less than 60% of the purchase price or obligation
(1) If 60% or more has been paid, secured party must sell collateral within ninety days after taking possession or be liable to the debtor unless debtor waives this right to sale after the default
Secured party may sell collateral
a. May be a public or a private sale
b. Must use commercially reasonable practices—this right cannot be waived by debtor
c. Must sell within a reasonable time
d. Must notify debtor of time and place of public sale or time after which private sale will occur unless collateral is perishable, threatens to decline in value, or is type sold on a recognized market
(1) Must also notify other secured parties (who have sent written notice of their interest) unless collateral consists of consumer goods
e. Secured party may buy at any public sale and also at a private sale if rights of debtor protected
f. Subordinate claims are entitled to any surplus
(1) Debtor is entitled to surplus (if any) after all claims and expenses are paid or is liable for deficiency (if any)
Debtor has right to redeem collateral before secured party disposes of it by paying
a. Entire debt, and
b. Secured party’s reasonable expenses
Most remedies can be varied by agreement if reasonable
a. Provision that secured party must account for any surplus to debtor cannot be varied by agreement
Good-faith purchaser (i.e., for value and with no knowledge of defects in sale) of collateral takes free of debtor’s rights and any secured interest or lien subordinate to it
a. Receives debtor’s title
b. If sale was improper, remedy of debtor is money damages against secured party who sold collateral, not against good-faith purchaser
document of title
documents of title (i.e., the negotiable warehouse receipts) merely represent the goods, thus a perfected security interest in the warehouse receipts (by taking possession of the documents) is also a perfected security interest in the goods covered by the documents.
constructive trust
Constructive trust arises when person who takes legal interest in property cannot enjoy beneficial interest without violating some established (legal) principle
- Therefore, the court converts legal owner into trustee for the party who is entitled to beneficial enjoyment
- Arises by operation of law as remedial device
- Imposed whenever court determines that one who acquired title to property is under duty to transfer it to another person because acquisition was by fraud, duress, mistake, etc. or because the holder of title would be unjustly enriched if s/he were permitted to retain it
EXAMPLE: S conveys property to A, but B fraudulently changes conveyance to his own name. Therefore, the court will impose a constructive trust whereby B is deemed to hold the property in trust for A.
Agency coupled with an interest
Agency coupled with an interest—agent has an interest in subject matter through a security interest
(a)
For example, mortgagee with right to sell property on default of mortgagor
1]
Agreement stipulating agent is to receive profits or proceeds does not by itself create an agency coupled with an interest
(b)
Principal does not have the power to terminate agency coupled with an interest
(c)
Actually not an agency relationship because one who creates this relationship surrenders power—fact patterns may still use terms of principal and agent
A federal estate tax return filing threshold
For 2015, an executor must file a federal estate tax return (Form 706) if the gross estate of a decedent exceeds $5.43 million. If a decedent made lifetime taxable gifts such that the decedent’s tax credit was used to offset gift tax, the $5.43 million exemption amount must be reduced by the exemption equivalent of the unified credit that was used.
Composition/assignment of creditors
A composition of creditors occurs when creditors make an agreement with each other to accept less than the full debts as full satisfaction of those debts. Once the debtor performs under the agreement, the debts are discharged, so this generally causes a release of the debtor from its debts. However, an assignment for the benefit of creditors does not generally cause the release of the debtor from it debts. In this case the creditors do not have to agree to the assignment. The debtor assigns its assets to a trustee who sells the assets for cash. The cash is then paid out to creditors who agree to accept a stipulated amount to release their claims. The assignment itself, however, does not cause the claims to be released because at that point the creditors have not agreed to do so.
Corporate distribution property : amount of distribution equals?
For corporate distributions of property, the amount of the distribution equals the fair market value of the property reduced by any liabilities attached to the property that are assumed by the shareholder.
The basis of property received from a corporation as a dividend is always?
The basis of property received from a corporation as a dividend is always the property’s fair market value.
Distribution of appreciated property by corporation
When a corporation distributes appreciated property it is treated as if the property is sold and any gain (but not losses) must be recognized.
Corporate distributions are treated as dividends and taxed as dividend income (ordinary income) to the extent of?
Corporate distributions are treated as dividends and taxed as dividend income (ordinary income) to the extent of the shareholder’s share of corporate earnings and profits.
When is gain recognized on partnership distribution?
The only time that gain is recognized on a partnership distribution is if the cash distributed exceeds the partner’s basis in his partnership interest.
Partnership gain/loss on distribution?
The partnership never recognizes gain or loss on a distribution.
ordinary income in sales of partnership
hot assets
How A corporation’s net operating loss is computed ?
A corporation’s net operating loss is computed the same way as its taxable income.
(a) The dividends received deduction is allowed without limitation.
(b) No deduction is allowed for a NOL carryback or carryover from other years.
(c) A NOL is generally carried back two years and forward twenty years to offset taxable income in those years. However, a three-year carryback is permitted for the portion of a NOL that is attributable to a presidentially declared disaster and is incurred by a small business corporation (i.e., a corporation whose average annual gross receipts are $5 million or less for the three-tax-year period preceding the loss year).
(d) A corporation may elect to forego carryback and only carry forward twenty years.
In determining how much a corporation can deduct for life insurance premiums, it is important to note who the beneficiary is…
In determining how much a corporation can deduct for life insurance premiums, it is important to note who the beneficiary is. Life insurance premiums on the life of a corporate officer are not deductible when the corporation will receive the proceeds upon the death of the officer, since these proceeds will be nontaxable. However, when the beneficiary is someone other than the corporation, the premiums will be deductible by the corporation
Corporate tax liability?
Tan’s tax liability is the greater of (1) its regular tax liability, or (2) its tentative minimum tax, increased by its personal holding company tax.
PHC tax
The personal holding company (PHC) tax may be avoided by dividend payments sufficient to reduce undistributed personal holding company income to zero. The dividends which may reduce undistributed PHC income include dividends paid during the taxable year, dividends paid within 2 1/2 months after the close of the year, dividend carryover, and consent dividends, which are hypothetical dividends treated as if paid on the last day of the corporation’s taxable year. A company may avoid PHC tax liability for a previous year by payment of a deficiency dividend within 90 days of a “determination” by the IRS that the corporation was a PHC for a previous year.
The elements needed by a plaintiff to prove negligence against a defendant (including a CPA) are proof of …
The elements needed by a plaintiff to prove negligence against a defendant (including a CPA) are proof of the standard of due care, breach of that standard of due care, injury, and cause including both cause-in-fact and proximate cause.
