3/29 test Flashcards
What is the formula for amount realized in like kind exchanges?
FMV new property + Boot received - Boot paid - Adj basis of property given.
What debts cannot be discharged in bankruptcy?
Debt incurred through fraudulent representations by the debtor to the creditor. Debts arising from intentional torts.
Under the Sales Article what sales by a manufacturer are automatically perfected?
Perfection is automatic for PMSI consumer goods. Purchase Money Security Interest. Sales made direct to consumers.
How do S Corp distributions differ from C Corp distributions?
S Corp distributions are non taxable and reduce the shareholder basis. C Corp distributions are a dividend to the extent of current then accumulated E&P. Then beyond E&P it is a return of capital that reduces the basis.
For both S Corp and C Corp excess beyond basis is a capital gain.
For M-1 Schedule, Reconciliation of Income per books with income per return, what are expenses not deductible?
Life insurance premiums,
What is the gain or loss recognized by the taxpayer in like kind exchanges?
The lesser of the amount realized or the boot received. Do not net boot received with boot paid if they are not the same. IE debt and property.
What is the basis of the new property in like kind exchanges?
New basis = Adj basis of old property + Gain Recognized - Boot received + Boot paid
Income generally excluded from UBI
Rent from real property, Gains from property not held for sale, Research by University, college, hospital, Interest, Dividends, other investment income.
Exclusion for rent does not apply if services are provided to occupant.
What are elements of valid consideration in a contract.
Doing something you are not legally obligated to do, giving up something you are not legally obligated to do.
A mere promise is no consideration.
Elements of the 90 day letter from IRS
Taxpayer either pay the deficiency or file a petition with US Tax Court.
Process is audit examination, proposed adjustments, 30 day letter, pay or appeal, 90 day letter, pay or court.
What is the basis for property exchange with a corporation for stock?
Corporation with use the rollover basis.
When creating a partnership when would the partner recognize a gain?
If the debt against property contributed exceeds basis.
Accrual method accounting is required for what entities?
Tax shelters, C Corp that average more than 26 mil over 3 years, manufacturers.
Compensation included on W-2 for employee?
Wages, FMV of bonus received (cash or stock), bargain element of nonqualified stock option.
Can a Surety compel the creditor to collect from debtor?
No, Surety has no authority to compel creditor to collect from the debtor or proceed against collateral.
In chapter 11 bankruptcy what must be done before court will approve reorganization plan?
Administration expenses paid in full, at least one impaired class accepted plan, plan does not discriminate unfairly (fair and equitable to all classes).
No trustee unless fraud or gross mismanagement.
Earnings invested in US property calculation
Average basis at each quarter - adj basis of preceding year.
(Q1 + Q2 + Q3 + Q4)/4 - PY end = Earnings invested in US property
C Corp treatment of capital losses
Capital losses are carried back 3 and forward 5 years. Capital losses are limited to the extent of taxable income. It cannot create a net operating loss.
Parol evidence rule
Prohibits evidence of prior oral or written agreements that contradict the terms of the signed contract.
Prohibits prior written agreements that vary the terms of a fully integrated contract.
In bankruptcy, an creditor’s committee consists of
Unsecured creditors
Retirement savings contribution credit
Nonrefundable credit for contributions up to $2,000 to either a traditional or Roth IRA
A composition of creditors
Agreement between debtor and creditor that the creditors will settle for less that amounts owed. Limited to those who participate in the composition.
Assignment for the benefit of creditors
Debtor’s property is transferred to trustee. Trustee sells property and pays creditors. There is no discharge of debt unless Trustee can pay in full.
General discharge in bankruptcy will be denied if
Debtor failed to keep adequate books.
Purchased shares, later the company redeemed. How to treat the amount of income.
Capital gain, long-term if over one year.
What is the MACRS life for non residential property
39 years, mid month convention
Regarding common law, what are some details regarding acceptance
When is acceptance specified
Mail box rule, offeree can accept upon dispatch by reasonable means
Offer open vs acceptance received by
Method of acceptance
Not following the rules of acceptance is a counter offer.
Qualifying expenses for adoption credit
Legal and agency fees. Medical expenses do not qualify.
General rules in the formation of a corporation
No gain or loss recognized by corp for issuing stock in exchange for property.
Basis in property for corp is greater of NBV or debt assumed
Generally non taxable for shareholders if no boot
Boot is cash received or relief from liability above basis
What is required when admitting a new or replacement partner
Unanimous consent
A partner may assign their share of interest without consent but that person only has rights to profits. No voting.
What is the QBI phase in range
164,900 - 214,900
What is the QBI deduction calculations if the taxpayer is in phase out range
Tentative QBI deduction: QBI income x 20%
Wage limitation: wages x 50%
A - B = excess amount
Phase in percentage: inc bfor deduction - 164,900 / 50k
Excess x phase in percentage= reduction amount
Tentative - reduction= QBI deduction
In regards to creditors, a partners interest in partnership property
Cannot be assigned to individual creditors and cannot be subject to attachment by a partner’s individual creditors.
A partner sells their interest for cash and relief of debt. What is their gain or loss
Amount realized (cash+relief) - basis = gain
What is the calculations for amortization of startup costs
Phase in 50,000 to 55,000
Can deduct 5,000 immediately if below 50k. The remainder is over 180 months.
Above 50k the 5k is reduced $ for $.
The charitable deduction for property contributed is limited to
The lesser of 30% of AGI or 50% of AGI less cash contributions
QBI losses can be offset by
Losses can be allocated to businesses with income. Allocated based on % of income. This will reduce the tentative QBI deduction.
Regarding gift exclusion future interests are
Not eligible for gift exclusion
Which parties will an accountant who negligently prepares a client’s financial report be liable?
To any party or third party who the accountant knows or should foresee will rely on the accountants work.
What method are large corporations required to use for deduction of bad debts?
Direct charge off method. Write off as debts become worthless.
What is the accuracy related penalty on underpayments.
The penalty to the taxpayer is 20% of the understatement.
If the accuracy related penalty is due to the taxpayer and not the preparer no penalty to the preparer.
How is the limitation for 179 deduction calculated.
Maximum depreciation is 1,050,000. Phase out begins 2,620,000. Qualified property above the phase out reduced the 1,050,000 $ for $.
Requirements for an Incentive Stock Option
Less that 10% shareholder, Option price less than FMV at grant date, held for at least two years.
What are the requirements for an Employee Stock Purchase Plan
Less that 5% shareholder, option price is greater than 85% of the stock price when granted, held for at least two years, held for at least one year after exercise date.
Subrogation is
The right of a surety to collect against the debtor after they have paid the obligations. They assume the creditors rights.
A cash basis taxpayer reports income when
It is constructively or actually received in cash or property.
A taxpayer rents their primary residence for 10days, do they need to include it in income
No, less than 15 days are not required to include rental income.
When do you deduct self employment tax and self employment health insurance
They are adjustments after AGI
Attachment of a security interest requires
Value given by creditor
Debtor has rights to collateral
Written agreement or creditor takes possession
The sale of accounts receivable is included in what article of the UCC
Article 9
Net operating losses for a corporation are carried
2018 - 2020 Back 5 years and forward indefinitely
2021 and beyond 0 back, forward indefinitely. 80% of income limitation
Child and dependent care credit is
20 to 50% of expenses to care for qualifying persons. 8,000 one, 16,000 more than one.
Under 13, disabled dependent, or disabled spouse.
Both parents work.
Section 1231 rules
Loss - taken against ordinary income
Gain - must be more than one year, treated like cap gain
Must look back 5 years to offset any losses taken against ordinary income
How do you calculate the SEP IRA deduction
Lesser of
20% of SE inc minus one half SE tax
58,000
Does a creditor have to collect against the debtor before going against the surety
No,
Guarantors vs creditors, creditors must collect
Against the debtor before collecting against guarantors.
The fair debt collection practices act allows what for collection services using improper practices
Sue for damages
Under the uniform fraudulent conveyance act what are indications of fraudulent conveyance
Debtor remains in possession Secret, undisclosed conveyance Debtor retains equitable benefit Transfer to insider Transfer was substantially all assets Became insolvent after transfer
Are S corp distributions included in income
No
Guaranteed payments to a partner for services without regard for ratio of ownership
Are subject to self employment income tax.
Calculations for forming a corporation
Realized
Recognized
Shareholder basis for stock
Corp basis for property
Realized - FMV contributed minus basis.
Recognized - 0 for qualifying section 351, or boot received
Shareholders Basis in stock - carryover or basis + gain recog - cash received
Corp basis - carryover basis + gain recog by shareholder
In a partnership fees for late payment of taxes
Are nondeductible but reduce partner’s basis.
What expenses can be deducted against investment income
Investment interest expenses
Cannot deduct non interest investment expenses
A partner buys a portion of another partners interest, what is the calculation for new basis
Purchase price -old basis x new interest % =Basis adjustment \+Old basis =New basis
Charitable contributions not paid by the end of the year are still deductible if
Board approval
Paid before 3.5 months after tax year
Company owns land with a parking lot and shed on it. The parking lot and shed are defined as
Section 1231 property as they are depreciate property or real estate property used in business
Personal service and personal holding companies must include 100% of dividends received from unrelated corps
Yes, included in gross income
Gains on the sale from illegal activity can deduct
Cost of merchandise
Cannot deduct business expenses
What type of businesses are qualified trade businesses
Rental real estate
Coffee shop
Gift shop
Bookstore
A restaurant is neither a QTB or SSTB
Gift of remainder interest is
Taxable income, calculated as FMV - value of interest for primary recipients
A partnership without a specific duration
A partnership at will
Partner inherited a million dollars, how much can they give their spouse tax free
Up to 11,700,000 lifetime exclusion.
What are the regulations governing practice before the IRS
Circular 230
Avoid advising improper tax position
Provide info unless priveleged
Conflict of interest
Situations that would result in a tax return preparer penalty
Aids or abets tax evasion Endorse or negotiate refund Takes unreasonable position Failed to furnish return copy Failed to sign Failed to provide PTIN Failed to file correct info Promote abusive tax shelter
What are $50 TRP penalties
Failure to provide client copy
Failure to sign
Failure to retain copy
Failure to file correct info
What are $545 TRP penalties
Endorse or negotiate refund
Failure to determine Earned Income Credit
What are $1000 TRP penalties
Take unreasonable position
Promote abusive tax shelter
Aiding and abetting understatement
Unauthorized disclosure
Penalty for fraud and false statements
Up to 100,000 and 3 years in prison
Penalty for fraudulent returns
Up to 10,000 and one year in prison
The role of the state boards of accountancy is to
Govern CPAs
Impose penalties
General audit and appeals process
Select returns to audit Agent issues report Negotiate No agreement, 30 day letter. Pay or file petition with appellate No agreement with appellate 90 day letter 90 days to pay or file with tax court, district court or claims court
What is appropriate disclosure for a tax position
When taking a tax position that needs a basis of authority to be legal.
What are the levels of substantiation
Reasonable basis >20% must add disclosure
Realistic possibility >33% AICPA
Substantial authority>40% IRS
More likely than not >50% tax shelter
Non-filing penalty for taxpayer
5% per month up to 25% of tax due
Tax payer doesn’t owe if no liability or due refund
Non-payment or late penalty
.5% per month up to 25%.
Limited if non-filing penalty also applies
Accuracy penalty for taxpayer
20% of tax due
Waived if reasonable basis or substantial authority
Hierarchy for tax authority
Constitution/ congress
IRS internal revenue code
US Treasury regulations
Judicial - Supreme Court, appeals, district, tax court, fed claims
To recover from a CPA, under common law, a client must prove
Duty of care
Breach of duty
Losses
Causation
To recover against the CPA, a third party must prove the CPA
Had a duty of care
Breached that duty of care
Breach was a direct cause of loss
Prove loss suffered
Situations when CPA can legally disclose confidential information
GAAP disclosure Subpoena Peer review Ethics review Firm member on the engagement
Types of agency
General agent - broad authority
Universal Agent - handle affairs in absence
Power of attorney - usually specific matters
Special agent - specific or designated instances
Independent contractor - given authority, limited
Express authority vs apparent authority
Express given by principal. Apparent implied through actions of principal.
Contract termination based on parties
One party ends agreement
Fulfillment of agreement
Time frame passes
Mutual end
If termination by party, principal has duty to notify third parties.
Termination based on operation of law
Death of principal or agent Insanity of principal Bankruptcy of principal Bankruptcy of agent if compromises ability Change of law
Proper formation of a contract needs
Offer - invitation is not an offer
Acceptance -
Consideration
Lack of defenses
Types of contracts
Express contract - oral or written, simple
Implied - formed by actions, intent
Quasi - court imposed
Bilateral - both sides make promise
Unilateral - in exchange for a performance
Partially executed - one side has performed
Valid - legally formed
Void - illegal or lacks legal purpose
Voidable - valid but can be void
Unenforceable - court would not enforce
Ways a contract can be discharged
Duty - failure of conditions, mutual, novation, accord & satisfaction
Law - statute of limitations, bankruptcy, impossibility, death or insanity, destruction, illegal
Performance - both parties complete
Material - one side violation, other not req to perform
Personal satisfaction - must be stipulated in contact
Remedies for breach of contracts
Sue for damages - monetary, punitive, compensatory
Mitigation of damages - if you can replace, do
Specific performance - only when money won’t do
Recision - back to original positions
Reformation - rewritten
Bankruptcy and insolvency
Chapters and general rules
Ch 7 - liquidation, voluntary or involuntary, abuse test, no banks, insurance, railroad
Ch 11 - re-organization, court supervised, voluntary or involuntary, must be approved by 1/2 of creditors with at least 2/3 amount owed.no banks
Ch 13 - adjustment of debt, voluntary, no corporations,
What is the calculation for the taxable portion of life insurance proceeds
Amount received per year
-(benefit/ total years)
=Taxable portion
Insurance premiums to pay if you become sick or injured
Not deductable
The ultramares rule limits the accountants liability for negligence to
Parties in privity
Intended third parties
Merely foreseen parties cannot recover
What is not a category of income for foreign tax credit limitations?
Foreign-derived intangible income.
The categories are general, passive, foreign branch, and global intangible.
Corp A owns 100% of a foreign corp. What statements are correct.
It is a Controlled foreign corp, income earned is subject to immediate tax.
CFC is more than 50% ownership.
It is not a foreign branch, foreign branches are unincorporated.
Debtors’ rights in regards to personal property and SS benefits
Federal law does not allow creditors to garnish SS
Federal law controls what assets can be sold.
State law does not govern either.
After the period for statute of limitations expires the contract
is now barred from judicial remedies. The contract is unenforceable but is not invalid or void.
How is the depreciation method chosen for partnership property
The partnership chooses, may be any method approved by IRS
Life insurance expense on officers where corp is the owner and beneficiary
Are not tax deductible
Foreign income eligible for a 100% dividends received deduction
From a foreign corp to a 10% or more US corp shareholder
Shareholder of a controlled foreign corp is considered a US shareholder if
Shareholder owns at least 10% of the stock value OR voting stock
What property is available for bonus depreciation
New or used business property with a less that 20 year life.
Foreign income taxes paid by a corp may be
claimed either as a deduction or credit, corp decides
Filing an automatic stay of actions in bankruptcy
Stops collections on wages. Does not stop collection on alimony.
Preparer willful understatement of tax liability penalty
Greater of 5,000 or 75% of fee
Deduction for an individual taxpayer for interest on investment indebtedness is
Limited to the taxpayer net investment income
