Additional Notecards 1 Flashcards
Regulation D requires that the issuer take reasonable steps to:
see that the purchasers of the exempt offering are not underwriters and are buying for investment
Regulation D: Rule 504
Securities up to 1,000,000 sold in a 12 month period
Only to accredited investors
Notify SEC within 15 days of the first sale of securities
*general solicitaiton allowed under 504
Regulation D: 506
Private placement of an unlimited dollar amount of securities
Private placement is appropriate under 506
35 nonacreddited investors who are sophisticated. unlimited accredited
notify SEC within 15 day rule
Regulation D: 505
Up to 5,000,000
Sold during 12 month period
up to 35 nonaccredited investors
SEC notificaiton in 15-day requirement
Main distinction between subchater S corporations and subchapter C corporations:
tax treatment
A C Corporation can contract in its own name with:
shareholders and third parties
If the corporation goes public
There are substantial costs of compliance with federal securities laws
May be suject to hostile takeover
Statutory close corporation status allows:
shareholders to have limited liability
De facto corporation
Formed in fact but has not been formed properly under the law
De jure corporation
Has been formed correctly in compliance with the incorporation statute
A corporation and a limited partnership may be crated only under:
a state statute and each must file a copy of its organizational document with the proper governmental body
Authorized stock
Amount permitted to be issued in the Articles of Incorporation
Stated capital
Number of shares issued * par value
Earned surplus (retained earnings)
Cumulative amount of income (net of dividends) retained by the corporation during its existence or since a deficit was properly eliminated
Capital surplus
Entire surplus - earned surplus
net assets
excess of total assebs over total debts
surplus
excess of net assets over stated capital
Noncumulative preferred stock
If the dividend is passed, it will never be paid
Callable (redeemable) stock
May be redeemed at a fixed price by the corporation
Debenture is instrument for long-term ________ debt
unsecured
Bond is instrument for long-term _______ debt
secured
A corporation my resell what shares without regard to par value
treausury shares
Illegal acts
violation of statute or public policy
ultra vires acts
mrely beyond the scope of the corporate powers
Corporations and crimes
Corporations can be found liable for crimes
directors can face prison sentences for crimes committed by their corporations
employees can be found guilty of crimes they commit while working for their corporation
Business judgment rule
As long as director is acting in good faith he will not be liable for errors in judgment unless he is negligent
How can the Articles of Incorporation be ammended?
By the shareholder’s vote…not by board of directors
Who selects the officers?
directors
Corporation may indemnify directors:
true
Who elects the directors?
shareholders
Preemptive right of shareholders
Right to subscribe to new issues of stock (at fair market value) so that a stockholder’s ownership will not be diluted without the opportunity to maintain it
Merger
Union of two corporations where one is absorbed by other
Consolidation
Joining of two (ore more) corporations into a single new corporation
Short form merger
Parent corp is acquiring subsidiary of which the parent owns 90% ore more of the subsidiary
No vote required by either the parent or subsidiary shareholders
Majority shareholders owe a fiduciary duty to their corporation
TRUE
Derivative action
When a shareholder, or group of shareholders, sue on behalf of the corppration a director or corporate officer for damages caused to the corporation
Dissociation
When a partner is no longer affiliated with the partnership
Dissolution
The process of ending a partnership
Limited partner is not allowed:
to participate in the running of the business
Winding up
the liquidation of a partnership
Ultra vires (latin)
An action that goes beyond the power or the authority of the corporation.
Such actions violate the fiduciary duty of obedience
general standard of care for a bailee
reasonable care
standard a common carrier is held to as a bailee
strict liability
Are common carriers liable for acts of theft by unknown people?
yes
computer software:
is generally copywrightable
What protects computer technology rights?
Both copyright law and patent law
Copyright is valid when author puts work in:
tangible form
Duration of copyright
Life plus 70 years
Tenancy in common
A concurrent interest with no rights of survivorship (interest passes to heirs)
Joint tenancy
A concurrent interest with all rights of ownership going to the surviving joint tenants
Easement
Right to enter another’s land and use it in a limited way
ex. utility companies
Tenancy by default
Not a recognized interest in real estate
Marketable title
one tht is reasonably free from doubt
Quitclaim deed
Conveys only whatever interest in land the grantor has
Recording a deed
gives constructive notice to the world of grantee’s ownership
Notice-type statute
A good-faith purchasers, whether she records or not, wins over previous purchaser who did not record before that subsequent purchase
Race-notice statute
The subsequent bona fide (good faith) purchaser wins over a previous purchaser only if he also records first
example:
X sells some property to Y and then to Z, a good-faith purchaser. After the sale to Z, Y records the purchase and then Z. Y wins in a state having a race-notice statute, Z wins in a state havinga notice-type statute
Under a race statute
The first to record the deed wins
Adverse possession
Possessor of land who was not owner may acquire title if he holds it for the statutory period
Necessary elements of adverse possession
- open and notorious posession
- hostile possesion
- actual possession
- continuous possession
- exclusive possession
Take subject to the mortgage
The buyer accepts NO liability for mortgage and seller is still primarily liable
Novation and mortgages
Occurs when purchaser assumes mortgage and mortgagee (lender) releases in writing the seller from the mortgage
Right of redemption (foreclosure)
Affords mortgagor one last chance the redeem property
Pays off loan within statutory period
Tenancy at will
Property is leased for indefinite period of time
If premises of apartment building are destroyed:
No fault of either party, then contract is terminated
Constructive eviction
Allowing conditions which make property unusuable if lessor is liable for condition of premises
Bailor
Party who gives her goods to another to hold
Deed
A written instrument tha transfers ownership of real property
Fair use doctrine
Allows copyrighted material to be used without paying royalties
education, news, other not-for-profit purposes
Mortgagee
The party with the security interest in the real property
Tenancy by the entirety
A type of co-ownership of real property that is only available to married couples.
Helps to protect the property from claims of individual creditors
Title insurance
Insures against defects of title of the real property
What kind of forms of tenancy will be created if a tenant stays in possession of the leased premises without the landlord’s consent, after the tenant’s one-year written lease expires?
Tenancy at sufferance
What rights are given to a lessee of residual property?
Covenant of quiet enjoyment
An implied warranty of habitability
When does a mortgagor hae a right to redeem the mortgage property
After default and before a judicial sale by payment of all principal and interest due on mortgage note
Only if all mortgages are paid in full prior to judicial sale
X owns a building and assigns the rents to Y
The rents remain taxable to X, even though the rents are received by Y
Exclusions vs. deductions
Exclusions are income items which are not included in gross income
Deductions are amounts that are subtracted from income to arrive at adjusted gross income or taxable income
Deductions for AGI (above the line)
amounts deducted from gross inome to arrive at AGI
Itemized deductions (below the line)
amounts deducted from adjusted gross income to arrive at taxable income
Mr. Jones purchased an annuity contract for 3,600 that will pay him 1,500 per year beginning 2014. His expected return under the contract is 10,800.
Mr. Jone exclusion ratio is 3,600/10,800 = 1/3
Mr. Jones will exclude 1,500 x 1/3 = 500 and include 1000 in gross income
Group term life insurance premiums paid by employer
Are excluded (cost of up to $50,000 of insurance coverage is excluded)
Meals and lodging furnished for the convenience of the employer on employer’s premises
are excluded
Employer provided educational assitance (tuition books fees) derived from an employer’s qualified educational assistance program
excluded up to maximum of 5,250 a year
Employer payments to an employee for dependent care assistance
excluded from an employee’s income for maximum exclusion of 5,000 per year
Qualified adoption expenses
If paid by employer excluded from employee’s gross income
maximum exclusion is 13,190 for each child
Worker’s compensation
Fully excluded if received for an occupational sickness or injury and is paid under a worker’s compensation act or statute
Punitive damages generaly:
included in gross income
Cafeteria plans
Employer sponsored benefit packages that offer employees a choice between taking cash and receiving qualified benefits
Employees may select their own menu beneifts
If an employee chooses qualified benefits, they are excluded from the employee’s gross income
If an employee chooses cash, it is includible in gross income
state and municipal bond interest income
EXCLUDED
Interest on U.S. obligations
Included in income
Series EE US savings bonds
(savings bonds for higher education)
That are redeemed by the taxpayer is ecluded from gross income to the extent the redemption proceeds are used to finance the higher education of the taxpayer, taxpayer’s spouse, or dependents
During 2014, a married taxpayer redeems Series EE bonds receiving 6,000 of principal and 4,000 of accrued interest. Assuming qualified higher educaiton expenses total 9,000
Acrued interest of 3,600 (9,000/10,000 x 4,000) can be ecluded from gross income
Interest on state and federal incoem tax returns
included
interest on federal obligations
included
interest on state obligations
excluded!
Interest on a possession of the US (puerto rico commonwealth bonds)
tax exempt!
Scholarship used for room and board
included in income
Amounts received that represent payment for teaching or research
included in income
Bonafide residence test
US citizen who is a foreign resident for an uniterrupted period that inlcudes an entire taxable year
Physical presence test
US citizen or resident present in a foreign country for at least 330 full days in any 12 month period
An individual who elects to exclude the housing cost amount can exclude only the lessor:
- housing cost amount attributable to employer-provided amounts
- individual’s foreign earned income for the year
Lease improvements and gross income
A lessor excludes from income any increase in the value of the property caused by improvements by lessee unless in lieu of rent
Life insurance premiums paid by employer
Must be included in an employee’s gross income except for group term life insurance coverage of 50,000 or less
Tips
Included in income:
- if 20 dollars or less do not have to be reported to employer but included in individual income
- if 20 dollars or more be included in income and notify employer by 10th day of following month
Interest on Us obligations
included
Interest on tax refunds
INCLUDED
Imputed interest from interest-free and low-interest loans
included or excluded?
included
Alimony
Included in recipient’s gross income and is deductible toward AGI by the payor
- made pursuant to a decree of divorce
- made in cash and received by or on behalf of the payee’s spouse
- terminate upon death of the recipient
Alimony recapture
May occur if payments sharply decline in the second or third years.
This is accomplished by making the payor report the recaptured alimony from the first and second years as income
- recapture for the second year occurs to the extent that the alimony paid in the second year exceeds the 3rd year alimony by more than 15,000
- recapture for the first year occurs to the extent that the alimony paid in the first year exceeds the average alimony paid in the second year (reduced by the recapture for that year) and third year by more than 15,000
Child support
Not treated as alimony
Child support is not gross income to the payee and is not deductible by the payor
If both alimony and child support are required, but less is paid than required:
amounts are first allocated to child suppport, with any reminader allocated to alimony
If a specified amount of alimony is to be reduced upon the happening of some contingency relating to a child
then an amount equal to the specified reduction will be treated as child support rather than alimony
Social security
Up to 50% of social security may be included in gorss income
AGI + tax exempt income + 50% of ss benefits
- threshold 25,000 for all other taxpayers
Take lesser of 50% of benefits
or 50% of excess of the taxpayer’s provisional income over the base amount
Social security benefits for taxpayers with higher income
up to 85% of it is included
Rule of thumb with Social security benefits and including them
Fully excluded by low-income tax payers (income less than 25,000)
85% of benefits ust be included in gross income by high-income taxpayers (income greater than 60,000)
Income in respect of a decdent
Must be included in gross income by the person who receives it
Nonqualified stock option
Included in income when received if option has determinable FMV
ordinary income to employee
Prizes and awards are generally:
taxable
Employee achievement awards
Are excluded from an employee’s income if the cost to the employer of the award does not exceed the amount allowable as a deduction (generally 400 - 1600)
A refund will be excluded from gross income if an individual:
did not itemize deductions for the year the item was paid
Gambling winnings
included in gross income
unemployment compensation
must generally be included in gross income
52-53 week year
Annual period always ending on the same day of the week
C corporation may adopt
any taxable year
personal service corporation must adopt
calender year
S corporation must adopt a
calender year
Trust must adopt a
calender year
Change a taxable year
Substantial business purpose and IRs approval are required
test: taxpayer receives at least 25% of gross receipts in last 2 months of selected year and this has happended 3 consecutive years
Cash method
Recognizes income when first received or constructively received
Expenses are deductible when paid
Constructive receipt means that an item is unqualifiedly available without restriciton (interest on bank deposit is income when credited to account)
An entity if every year it has average annual gross receipts of $5 million or less for any prior 3 year period and does not have inventories for sales to customers
can use cash method
Small business taxpayer with annual gross receipts of $1 million or less for any prior 3 year period
can use cash method
When is expense deductible for accrual method
All events have occured that establish the fact of the liability and the amount can be determined with reasonable accuracy
Not satisified until economic performance has taken place
Recurring items of expense
Exception to the economic perforance rule
Treats recurring items of expense as incurred in advance of economic performance provided
Rents and royalties received in advance:
are included in gross income in the year received under both the cash and accrual methods
Security deposits
Included in income when not returned to tennant
An amount called a “security deposit” that ay be used as final payment of rent is considered to be advance rent and included in income when received
gifts or inherritance
specifically excluded from gross income
What if you receive cash and property or service??
Include:
Cash
+ FMV of Cash or services
Award for civic achievement
Can be exclude from gross income only if:
recipient was selected without any action on his/her behalf
Not required to render substnatial future services as a condition of receiving the award
Designates that the awar be directly transferred by payor to a governmental unit or a tax exempt charitable, educiational or religious organizattion
Advance rental payments and lease cancellation payments
Both included in income when received
Cash basis taxpayer should report gross income:
for the year in which income is either actually or constructively received, whether in cash or in property
Inventory is generally valued at:
cost or market
whichever is lower
All ordinary (customary and not a capital expenditure) and necessary (appropriate and helpful) expenses:
incurred in a trade or business are deductible
Busines expenses must be reasonable
If salaries are excessive, they may be disallowed as a deduction to the extent unreasonable
Uniform capitalization rules (UNICAP)
all costs incurred in manfg or constructing real or personal property must be capitalized as part of the cost of the property
ex. interest must be capitalized if debt is incurred to finance the construction or production of property
Business meals, entertainment and travel
Receipts must be maintained for all lodring expenditures and for other expenditures of $75 or more
except for transportation expenditures where receiepts are not readily available
50% reduction rule
The amount of the otherwise allowable deduction for business meals or entertainment must be reduced by 50%
What kind of dues are deductible?
professional organizations, business leagues, trade associations, chambers of commerce
Transportatin and travel expenses
Deductible if incurred in the active conduct of a trade or business
Deductions for business gifts are limited to:
$25 per recipient each year
Gifts of tangible personal property costing $400 or less
are deductible if awarded as an employee achievement award for length of service or safety achievement
Gifts of tangible property costing $1600 or less
are deductible if awarded as an employee achievement award under a qualified plan for length of service or safety achivement
Bad debts
Generally deducted in the year they become worthless
Nonbusines bad debt Can only be deducted
- total worthless
- as a short-term capital loss
Deduction of hobby expenses are limited to:
the amount of hobby gross income
Hobby expenses are deductible as itemized deductions in the following order:
a. first deduct taxes, interest, and casualty losses pertaining to the hobby
b. then other hobby operating expenses are deductible to the extent they do not exceed hobby gross income reduced by the amounts deducted in a. Out of pocket expenses are deducted before depreciation. These hobby expenses are aggregated with other miscellaneous itemized deductions that are subject to the 2% of AGI floor.
When is an activity presumed to be for profit:
if it produces a net profit in at least 3/5 consecutive years
2/7 for horses
Uniform capitalization method must be used by:
Manufactuers of tangible personal property
Retailers of personal property with over 10 million in average annual gross receipts for 3 preceeding years
UNICAP and inventory
If no exceptions met
All costs incurred in purchasing or holding inventory for resale must be capitalized
ex. purchasing, handling, processing, repacking and assembly, and off-site storage
*service costs are immediately deductible*
Earl Cook, who worked as a machinist for Precision Corp loaned Precision 1,000 in 2011. Cook did not own any of Precision’s stock and the loan was not a condition of Cook’s employment by Precision. In 2014, Precision declared bankruptcy and Cook’s note receivable from PRecision became worthless. What loss can Book claim on his 2014 income tax return?
1,000 short term capital loss
NOL may be carried back____ and forward_____
carried back two years
First made to second preceeding year
carried forward twenty years
*taxpayer can elect not to carry back and only carry forward
Small business
Any trade or business with average annual gross receipts of $5 million or less for the 3 year tax period preceding the loss year
Deduction for net capital loss in NOL
NO
deduction for personal and dependency exemptions for NOL
NO
Business use of home….to be deductible:
A portion of the home must be used exclusively and regularly as the principal place of business
or as a meeting place for patients, clients, or customers
optional safe harbor method for deductinb business use of home expenses
$5 x square footage devoted to business use
limited to business gross income less business expenses
Loss deductions incurred in a trade or business, or in the production of income, are limited to the amount the taxpayer has________
“at risk”
Losses and credits from passive activities
May generally only be used to offset income from passive activities
CANNOT offset active income (wages, salaries, professional fees) or
CANNOT offset portfolio income (interest, dividends, annuities, royalties)
Passive activity loss example
Can offset passive activity loss with income from limited partnership
Closely held C corporation
5 or fewer shareholders owning more than 50% of stock
Personal service corporation
An incorporated service business with more than 10% of its stock owned by shareholder-employees
Passive activity
Any activity that involves the conduct of a trade or business in which the taxpayer does not materially participate, any rental activity, and any limited partnership interest
Warehouser (bailee)
only liable when negligent
Patent infringement includes both:
purposeful and inadvertent use of the patent
Parties are legally allowed to discover a trade secret through:
independent reverse engineering
Cash method not allowed for:
Accounting for purchase and sales of inventory
C corporations or partnerships with a C Corporation partner
Tax Shelters
Business with average gross receipts > 5,000,000
Interest on Series EE bonds
Exclunded from income if:
redemption proceeds are used to finance the higher education of the taxpayer, spouse, or dependents
Dividends excluded from income
Nontaxable stock dividends
Distributions received from an S corporation
Dividends on a life insurance policy
Dividends received from mutual funds investing in tax-exempt bonds
Stock on which dividend is paid:
must be held for > 60 days during the 121 day period beginning 60 days before the ex-dividend date
Nonrefundable deposits for rent
included in income
State tax refunds if orginially claimed as an itemized deduction
included in income
Alimony received in cash provided the payments will terminate upon recipient’s death
included in income
unemployment compensation
included in income
Federal tax refunds
excluded from incme
Moving expenses that are deductiblr
Airfares
Shipping and temporary storage
Cost of traveling and transportation to new location
Rent and Royalty Expenses
DMPI
Depreciation
Mortgage Interest
Property Taxes
Insurance and Maintenance
Any real estate activity is:
a passive activity
Rental and royalty properties are considered:
passive activties
Self employment and retiremant plan contributions
May deduct up to lesser of 52,000 or 100% of earned income
Traditonal IRA contributions
deduct up to 5,500 plus additional 1000 if 50 or over
Education Savings Accounts (ESA)
Contribute up to 2,000 for each beneficiary
not deductible
distributions not taxable if used for qualified higher education expenses
Jury duty deduction
When employer pays regular salary to employee during jury duty
employee recognizes both salary and jury duty fees as income
portion of jury duty fees remitted to employer are deducted in calculating AGI
Additonal standard deduction allowed when:
Taxpayer is 65 or older
Spouse is 65 or older
Taxpayer is blind
Spouse is blind
Maximum deduction for charitable contributions
50% of AGI
30% if appreciated capital gain property
*nondeductible amounts may be carried forward up to 5 years
Gambling losses to extent of winnings
can be an itemized deduction
Deductible investment expenses
Safe-deposit box rent
Subscriptions to investment periodicals
Fees paid to financial advisors
Cost of collecting income
*included in miscellaneous expenses
State and local taxes are:
deductible
NOL from casualty and theft losses
Can carry back 3 years instead of normal 2 years
Qualifying Child Requirements
RASH
Relationship - child stepchild, sibling (or descentnt of any)
AGe - under 19 or under 24 if full time student
Support - child must not provide more than 1/2 of support
H - child must live with taxpayer for more than 1/2 of year
Qualifying Relative
4 addtional requirements
not qualifying child
gross income less than 3950 exemption
support - taxpayer must provide more than half of dependent’s support
related than taxpaer (closer than cousin) or live in taxpayer’s household for a year
Credit for Elderly or Disabled
Allowed for individuals with low income who are over 65 or permanently disabled
Child Tax Credit
May be claimed for each child under 17
Credit $1,000 per child, but reduced for high-income taxpayers
American Opportunity Credit
May be claimed for first 4 years of postsecondary education
Credit equals 100% of first 2,000 of tuition and fees plus 25% of next 2,000
Maximum credit 2,500 per qualified famliy member
Lifetime Learning Credit
May be claimed for tuition and fees not elibilbe for amer opp credit
credit equals 20% of first 10,000 of tuition and fees
Maximum credit 2,000 per family
Medicare tax
1.45% paid by both on 100% of wages
increased by 0.9% for wages in excess of 200,000
FICA tax
6.2% paid by both on wages up to base amount (117,000 for 2014)
Self employment tax
Net earnings from self employment x 15.3%
capped at 117,000
50% of self employment tax is deduction for AGI
AMT paid
is allowed as a credit (minimum tax credit) that can be carried forward to reduce future regular tax liability
AMTI is reduced by exemption amount
82,100 for joint filers
52,800 for individuals
41,050 married filing separately
Resulting baseamount x tax rate = tentative minimum tax
26% x first 182,500
28% x rest
Tax payments include:
Excess pyaroll taxes withheld
Federal income taxes withheld
Estimated tax payments
Penalities for late payment of taxes unless
underpayment of year < 1,000
payments >= 90% of current year’s liability
Taxes paid >= 1100% of prior year’s liability
Married couples have 2 choices
Married filing jointly
Married, filing separately
*must be married as of last day of year
**or date of death if one spouse died during the year
Charitable contributions
No carryback
5 year carryforward
Net operating losses
2 year carryback
20 year carryforward
*3 year carryback for theft and casualty or small business federal disaster losses
Net capital losses carryback/forward
corporations - 3 years carryback and 5 years carryforward
individuals - no carryback and indefinitely carryforward
investment interest - individuals
no carryback
indefinitely carried forward
net passive losses - individual
no carryback
indefinitely carried forward, or deducted when investment sold
net gambling losses - individuals
no carry back
no carryforward
Schedule A
itemized deuctions
Schedule B
Interest and Dividend Income
Schedule C
Profit or Loss from business
Schedule E
Supplemental income and loss
Schedule D
Capital Gains and Losses
Form 4797
Sale of Business Property
Schedule 1116
Foregin Tax Credit
Who must file?
individuals with:
Gross income > personal exemption + standard deduction
Net earnings from self-employment >= $400
Gross income > personal exemption (if married filing separately)
Claims for refunds: overstatement of income on original return
Amended return on form 1040X
Must file within 3 years from when return was filed, or two yerars from payment of tax, whichever is later
Return filed early is treated as filed on due date
Statute of Limitations for Taxes
Time IRS has to impose additional taxes and penalties on taxpayer
Statute of limitations for taxes: simple negligence
3 years
Statute of limitations for taxes: gross income exclusion >= 25% of income on return
6 years
Statute of limitations for taxes: fraud or failure to file
no limit
Recovery Period for Section 1250 property
27.5 years for residentialy real property
39 years for nonresidential real property
Mid-month convention for 1250 depreciation property
Year of purchase and year of sale
Assumed purchased or sold in middle of month of transaction
1/2 month’s depreciation taken regardless of date of transaction
Depreciable personal property 1245 recovery period
Equipment, office furniture and fixtures = 7 years
Cars, light trucks, computers, and office equipment - 5 years
small tools - 3 years
Half year convention for 1245 property
Generally required
Assumes assets acquired or sold in middle of tax year
Half-year’s depreciation taken in year of acquisition and in year of sale
Mid-Quarter Convention
Must be used if >40% of all personal property placed in service during last 3 months of year
- assumes assets acquird or sold in midle of quarter in which transaction occurs
- results in 1/8 of annual deduction if property placed in service during last quarter of year
