All Units

Question 1

How is basis determined in a gift transaction with fair value?

Answer 1

1. If FV ≥ Donor Adjusted Basis then Donee basis = Donor’s Adj Basis
2. If FV (on gift date) ≤ Donor’s Adj Basis then
   2a. Loss Basis - The FMV (at the date of the gift) is used if the property is transfered at a loss
   2b. Gain Basis - The donor’s basis is used if the property is later transfered at at gain
3. If Donor’s basis (at date of gift) > Transfer Price > FMV then no gain/loss

Question 2

What are the uniform capitalisation rules and what basis its use exempted?

Answer 2

The uniform capitalization rules require the costs for construction (manufacture) of real or tangible personal property to be used in trade or business and costs of producing or acquiring property for sale to customers (retail) to be capitalized.

Exemption: [Property is acquired for resale AND Sum( Gross Receipts for past 3 years) < $10m

Question 3

How do you calculate an entity’s Sec. 179 deduction?

Answer 3

Min (500,000 - (excess costs over $2.01m); Taxable income)

NB: Can be carried forward indefinitely.

Question 4

How do you calculate gain on an installment sale?

Answer 4

Gain = Gross Profit % x Payments received for year

Gross Profit % =(Selling Price - selling cost - Adj. Basis)/(Selling Price - Debt assumed)

Question 5

Caddo Corporation is owned by three engineers, all of whom are employed by the corporation. It primarily performs civil engineering activities with respect to construction projects. During the current year, Caddo Corporation earned $150,000 of taxable income. Caddo has not elected to be taxed under Subchapter S.What rate will their tax liability be calculated on and what kind of business entity are they?

Answer 5

Caddo Corporation is a personal service corporation.Sec. 448(d)(2) defines a personal service corporation as a corporation substantially all of the activities of which involve the performance of services in the field of health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting, and whose stock is owned by employees who perform the services.

Under Sec. 11(b)(2), the taxable income of a personal service corporation is taxed at a flat rate of 35%.

Question 6

During the current year, Webster Corporation repurchased 2,000 shares of its $1 par common stock in the open market for $5,000. Webster later resold 1,000 of these treasury shares to new shareholders when the stock was selling for $4 per share. Webster will report a gain (loss) on its current-year tax return of?

Answer 6

No gain is recognised.Under Sec. 1032(a), a corporation recognizes no gain or loss on the receipt of money or other property in exchange for its own stock, including treasury stock. Therefore, Webster should not report any gain.

Question 7

How do you determine the shareholder’s basis/gain for stock when a transfer of property is done to a corporation?

Answer 7

• *IF** ownership for one/more persons ≥ 80%
• *THEN** Gain = 0.
• *IF** Property Liability > Adj. Basis of contibuted property
• *THEN** Gain = Adj. Basis - Liability.

Shareholder gain = Adj. Basis - Boot received.

Boot received = Cash + Liability relief + FMV Property other than the stock.

Question 8

How do you determine the corporation’s Basis in property transferred to it?

Answer 8

Corporation Basis = Shareholder’s Adj. Basis + Sharesholder’s gain

Question 9

How is Earnings and Profits calculated?

Answer 9

E&P = Taxable Income + Positive Adj - Negative Adj

Positive Adj.

1. Transactions not recognised in taxable income
2. Transactions enable the corporation to make higher dividends

Negative Adj.

1. Non deductible items
2. Recognised deferred income

Question 10

If additional stocks are received by a shareholder what is the cost basis and gain/loss?

Answer 10

Corporation recognises no gain/loss on distribution of own stock.

When a taxpayer receives non-taxable stock rights, the cost basis of the rights is determined by allocating part of the basis of the stock on which the distribution was made. If the fair market value of the rights at the time of the distribution is less than 15% of the fair market value of the stock held at that time, the allocation is elective, but no allocation is made unless the stock rights are sold or exercised.

Question 11

How is a shareholder’s basis in property received in a nonliquidating distribution determined?

Answer 11

Shareholders basis is generally FMV of property received.

IF liabilities of property

1. < FMV of property THEN shareholders basis = FMV
2. > FMV of property (and shareholders assumes liability) THEN shareholders basis = Liability

Question 12

How are cash distributions to shareholders allocated? (Questions involving E&P)

Answer 12

The amount of a distribution is a dividend to the extent, first, of any current E&P and, then, of any accumulated E&P. When distributions during the year exceed current E&P, pro rata portions of each distribution are deemed to be from current E&P.

Accumulated E&P is then allocated to distributions in chronological order.

If the Acc.E&P is negative then only to extent of the current E&P can be dividends.

Question 13

Where are proceeds from farm line of credit reported?

Answer 13

Trick Question:
Proceeds from a farm line of credit are essentially the principal of a loan. Loan principal is not income due to the requirement to repay the amount.

Question 14

Where is bank interest on a business account reported for a farm/self employed person?

Answer 14

The interest is not “Farm Income”; therefore, it is reported on line 8a “taxable interest” of the income tax return (1040).

Question 15

Are roth IRA accounts contributions deductible?

Answer 15

Roth IRA contributions are not deductible and therefore, not reported. They are also not taxable.

Question 16

Were are late payment penalities on payroll taxes reported?

Answer 16

Any fines or penalties paid to the government are not deductible by any taxpayer

Question 17

French Treats, a small bakery, had $52,300 of start-up expenses and earned $7,000 of revenue during December (the month that business began). Calculate Net Profit

Answer 17

$4,024.

Deduction: = $5,000 - MAX (Start up cost - $50,000; 0)

Yearly amortization =
Costs left to Amortize
180 x # of months in operation.

Question 18

Is property insurance deductible on an individuals tax return?

Answer 18

No. Only Schedule C (Profit/Loss from a business)

Question 19

How would a repair to a furnace be allocated for a self employeed person who uses 10% of house for business?

Answer 19

The self-employed individual uses 10% of his home as his primary place of business.

A repair to a furnace applies to the whole home, including the home office. The expenses attributable to the business portion of his home are deductible on his Schedule C since it is his primary place of business.

None of it is deductible on Schedule A since repairs for personal property do not qualify as an itemized deduction for tax purposes.

Question 20

How are cash discounts treated when calculating COGS?

Answer 20

If discounts are added to income then don’t subtract.

Otherwise subtract cash discounts.

Question 21

How many times per year should tax be paid?

How are tax installments calculated?

Answer 21

Four.

25% of MIN:

1. 100%* of PY filed return
2. 90% of the current year tax
3. 90% of annualised current year’s tax (when income uneven

* 110% when PY AGI > 150,000 (75,000 MFS)

NB:

Question 22

What amount of tax liability is required to file a return?

Answer 22

$1,000

NB: Withholding Tax counts as prepaid Tax.

Question 23

How is charitable contributions deducted for cash payments made to a registered charity?

Answer 23

MIN (Cash donation; 50% of AGI)

Question 24

How are educator expenses treated in an tax return?

Answer 24

They are an “above the line” deduction (AGI adjustment).

$250 per individual.

Any excess can be an itemised deduction subject to the 2% AGI limit of the total of all applicable expenses.

Question 25

How are state income taxes paid for a PY return in the current year return?

Answer 25

They are deductible in the current year’s tax return.

Question 26

How are life insurance premiums and self-employed health insurance treated?

Answer 26

Self-employed health insurance is an adjustment to AGI.

Life insurance premiums are subject to the 10% of AGI limit (7.5% for individuals 65 and over)

Question 27

How is tax liability determinated for an individual?

Answer 27

[Gross Income -

Less: MAX (Itemised Ded; Std. Ded)

Less: Personal Exemp

= Gross Tax Liability

Net Tax Liability = (Gross Tax Liability x Tax Rate) - Credits

Question 28

Which entities do the at-risk rules not apply to?

Answer 28

A closely held corporation for which 50% or more of its gross receipts are from equipment leasing.

Question 29

How is gross income calculated for a business to determine if the 25% statute of limitation rule?

Answer 29

For a trade or business, gross income means the total of the amounts received from the sale of goods before deductions and cost of goods sold.

I.e. Gross receipts + capital gains etc.

Question 30

An employee who has had Social Security tax withheld in an amount greater than the maximum for a particular year may claim:

Answer 30

The excess as a credit against income tax, if that excess resulted from correct withholding by two or more employers.

Question 31

What are the types of tax planning techniques?

Answer 31

The three most basic and common types of tax planning are

1. Timing of income recognition,
2. Shifting of income among taxpayers and jurisdictions, and
3. Conversion of income among high and low rate activities.

The timing technique accelerates or defers recognition of income and/or deductions. Because election of depreciation methods accelerate or defer the depreciation deduction, it is a timing strategy.

Income shifting typically relates to moving income and therefore the accompanying tax liability from one family member to another who is subject to a lower marginal rate or moving income between entities and their owner(s). When a taxpayer hires a family member subject to a lower marginal rate (typically one of the taxpayer’s children), the taxpayer, in essence, shifts income, reducing the overall (i.e., global) family tax liability.

Question 32

In Year 1, a taxpayer sold real property for $200,000, receiving $100,000 at closing and $100,000 plus accrued interest at the prime rate in the next year. The buyer also assumed a $50,000 mortgage on the property. The taxpayer’s adjusted basis was $75,000, and the taxpayer incurred $10,000 of selling expenses.

If this transaction qualifies for installment sale treatment, what is the gross profit on the sale?

Answer 32

$165,000

Gross profit equals the contract price minus the cost of goods sold. The contract price equals $250,000 ($200,000 for the property + $50,000 assumed mortgage), and the cost of goods sold equals $85,000 ($75,000 adjusted basis + $10,000 selling expenses). Therefore, the gross profit on the installment sale equals $165,000 ($250,000 – $85,000).

Question 33

Pierre, a pizza delivery person, received tips totaling $1,000 in December Year 1. On January 5, Year 2, Pierre reported this tip income to his employer in the required written statement.

At what amount, and in which year, should this tip income be included in Pierre’s gross income?

Answer 33

$1,000 in Year 2.

Normally, a cash-basis taxpayer includes income when received. However, tips receive special treatment. An employee who receives $20 or more in tips in a month (as a result of working for one employer, and not combined from several jobs) must report the total tips to the employer by the 10th day of the next month. These tips are treated as paid when the report is made to the employer. Since Pierre properly reported his December Year 1 tips to his employer in January Year 2, the tips are not included in gross income until Year 2.

Question 34

How do you calculate gross profit recognised in the first year using the percentage of completion method?

Answer 34

Total Estimated Gross Profit =

Contract Price - Estimated total costs.

Total costs to date/ Est. Total cost = % Complete.

% Complete x Gross Profit = Amount Recognised

Question 35

A taxpayer is not required to obtain the permission of the Commissioner of Internal Revenue to change from the:

Answer 35

Accrual method to the installment method of reporting income.

The general rule is that to change an accounting method the taxpayer must obtain the permission of the IRS. In general, the installment method of reporting income may be used by a taxpayer without the permission of the IRS.

Question 36

How much of an employee’s wages are subject to federal unemployment taxes?

Answer 36

Under Sec. 3306(b)(1), wages are taxed for federal unemployment taxes up to $7,000 for each employee. Wages earned in excess of $7,000 are not subject to federal unemployment taxes.

Question 37

What are the requirements for the earned income credit?

Answer 37

A taxpayer can be eligible for the Earned Income Credit by having a qualifying child or meeting three qualifications:

1. The individual must have his or her principal place of abode in the United States for more than one-half of the taxable year;
2. (S)he must be at least 25 years old and not more than 64 years old at the end of the taxable year; and
3. The individual can’t be claimed as a dependent of another taxpayer for any tax year beginning in the year the credit is being claimed.

A 22-year-old who is married to an 18-year-old without a qualifying child does not meet the requirements for the Earned Income Credit.

Question 38

How is basis determined in a inheritance transaction?

Answer 38

Property received by inheritance (bequeathed) has a basis equal to the FMV on the date of death or 6 months after if the executor elects the alternate valuation date for the estate tax return.

Question 39

What decreases the basis of property?

Answer 39

Basis must be reduced by the larger of the amount of depreciation allowed or allowable (even if not claimed).

A return of capital is a tax-free distribution that reduces a stock’s basis by the amount of the distribution. If a shareholder’s basis has been reduced to zero because of a tax-free return of capital, any excess amounts received are treated as a capital gain.

The basis of the replacement property from an involuntary conversion is reduced by any gain not recognized and any loss recognized.

Question 40

What is the MARCS depreciation rate for real property? i.e. Residential and non residential

Answer 40

Residential rental property: 27.5 SL (straight line)

Nonresidential: 39 years SL

NB: Mid month convention apply i.e. start date for depreciation is from mid month.

Question 41

What are capital assets?

Answer 41

Capital assets are all property held by a taxpayer not excluded by the IRC. Among the items excluded are accounts receivable, depreciable property, and real property used in a trade or business. The investment in U.S. Treasury bonds is a capital asset.

Question 42

On February 16, Year 1, Fred Samson purchased 100 shares of Oscar Corporation stock at $40 per share. On July 28, Year 5, he sold the 100 shares at $25 per share. On August 10, Year 5, his wife purchased 50 shares of Oscar Corporation at $30 per share. These are the only capital asset transactions by the Samsons during Year 5. In computing his taxable income for Year 5, Fred may deduct, from his ordinary income of $15,000, a capital loss in the amount of

Answer 42

Fred sold 100 shares of stock on July 28, and his wife subsequently purchased 50 shares of the same corporation’s stock on August 10. Consequently, 50 of the shares Fred sold are not eligible for the capital loss deduction because this would be considered a wash sale (spouses are treated as the same taxpayer for this purpose). Under Sec. 1091, a wash sale occurs when substantially the same securities are purchased within 30 days of being sold for a loss. A capital loss deduction is available for the other 50 shares. The sale of 50 shares resulted in a $750 loss. The full amount of the loss is deductible.

Sales price (50 × $25)

$ 1,250

Less: adjusted basis (50 × $40)

(2,000)

Long-term capital loss

$ (750)