Becker Outline Flashcards
When must an individual taxpayer file a tax return?
An individual taxpayer must file a return if their income is equal to or greater than the sum of:
The regular standard deduction (except for married filing separately); plus
The additional standard deduction amount for taxpayers age 65 or older and/or blind (except for married persons filing separately).
What is a key requirement for a taxpayer to qualify as a surviving spouse with a dependent child?
The taxpayer must have a dependent child living with them for the entire year to qualify as a surviving spouse with a dependent child.
What is the key difference between the qualifying surviving spouse and head-of-household statuses regarding the time a dependent must live with the taxpayer?
A qualifying surviving spouse with a dependent child requires the dependent to live with the taxpayer for the entire year, while head-of-household status requires the dependent to live with the taxpayer for more than half the year.
What is the qualifying Child test?
CARES acronym
Close Relative
Age Limit: under 19 or under 24 if full time student
Residency: a child must live in the same place as the taxpayer for over half the year
Eliminate Gross Income Test
Support Test: taxpayble must contribute over half of their support
What is the Qualifying Relative test?
SUPORT acronym
Support test: taxpayer supports person by greater than 50%
Under Gross Income Limitation: Qualifying relative’s gross income is less than $5,050
Precludes Dependent filing a joint return
Only Citzens of the U.S or Residents of the US, Mexico, or Canada
Relative
Taxpayer lives with the individual (if non-relative) for the whole year
What is a multiple support agreement, and what is the requirement for a taxpayer to claim a dependent under this agreement?
A multiple support agreement occurs when two or more taxpayers collectively provide more than 50% of a person’s support, but no single taxpayer contributes more than 50%. To claim the person as a dependent, one of the contributors must provide more than 10% of the support, and all contributors must agree on who will claim the dependent.
What is the difference between realized income and recognized income?
Realized income is the income that a taxpayer earns from any transaction or event, regardless of whether it has been received or not. It is income that has been earned but may not yet be taxed.
Recognized income is the portion of realized income that is subject to taxation in the current period. It is the income that must be reported on the taxpayer’s tax return.
When are traditional IRA distributions not subject to the 10% early withdrawal penalty?
Traditional IRA distributions are not subject to the 10% penalty if:
You are 59½ or older.
You are disabled.
The distribution is used for qualified higher education expenses.
The distribution is used to pay for a first-time home purchase (up to $10,000).
The distribution is part of a series of substantially equal periodic payments.
The distribution is used for medical expenses exceeding 7.5% of AGI or for health insurance premiums while unemployed.
When are state and local tax refunds taxable?
State and local tax refunds are taxable only if you itemized deductions in the prior year and the refund provided a taxable benefit.
What is the difference between alimony and child support in terms of taxability?
Alimony is taxable to the recipient and deductible by the payer if the divorce agreement was executed on or before December 31, 2018.
Child support is not taxable to the recipient and is not deductible by the payer, regardless of the divorce agreement date.
How is unemployment compensation taxed, and how does it differ from workers’ compensation?
Unemployment compensation is taxable and must be reported as income.
Workers’ compensation is nontaxable and does not need to be reported as income.
How is the taxable portion of Social Security income determined?
The taxable portion of Social Security income depends on Modified Adjusted Gross Income (MAGI), which includes AGI, tax-exempt interest, and 50% of Social Security benefits:
Lower income: Social Security income may be nontaxable.
Middle income: Up to 50% of Social Security benefits may be taxable.
Higher income: Up to 85% of Social Security benefits may be taxable.
How is income reported for a decedent in the year of death?
The decedent’s income is reported on the final tax return as if they were still alive, with the taxable period ending on the date of death.
Income earned or received after death is reported on the federal estate tax return for the decedent.
How is the value of prizes and awards treated for tax purposes?
The fair market value (FMV) of prizes and awards is taxable income. However, there is a limited exclusion for certain awards if specific conditions are met, such as being awarded for scientific, literary, or charitable achievements and if the recipient does not have the option to receive cash instead.
How are gambling winnings and losses treated for tax purposes?
Gambling winnings are fully taxable and must be reported as income.
Gambling losses are deductible only to the extent of gambling winnings and must be claimed as an itemized deduction. Net losses are not allowed.
How is Cancellation of Debt (COD) income treated for tax purposes?
If a lender cancels a borrower’s debt, the amount of the canceled debt is generally included in the borrower’s income. However, there are exceptions where COD income may not be taxable, such as in cases of bankruptcy, insolvency, or certain qualified student loan forgiveness programs.
Are scholarships and fellowships taxable, and what factors determine their taxability?
Scholarships and fellowships may be partially taxable. The taxability depends on:
Type of student: Scholarships are tax-free if used for qualified education expenses by degree candidates.
Services provided: If services are required as part of the scholarship or fellowship, it may be taxable.
Use of funds: Funds used for non-qualified expenses, such as room and board, are taxable.
How are life insurance proceeds treated for tax purposes?
Life insurance proceeds are generally nontaxable. However, the interest income element of a deferred payout is taxable.
How are gifts and inheritances treated for tax purposes by the beneficiary?
Gifts and inheritances are generally not taxable to the beneficiary.
What is the deduction limit for business meals on Schedule C?
Business meals are 50% deductible on Schedule C.
Can bad debts be deducted on Schedule C, and if so, under what conditions?
Bad debts that are actually written off can be deducted if the taxpayer uses the accrual basis of accounting.
What are the limitations on deducting interest expense for business loans on Schedule C?
Interest expense on business loans is limited to business interest income + 30% of Adjusted Taxable Income (ATI) + floor plan financing interest. This limitation does not apply if average gross receipts for the prior three years are $30 million or less (2024). Prepaid interest can be deducted if the accrual method is used.
What expenses are considered nondeductible on Schedule C?
Nondeductible expenses include personal expenses, business entertainment, federal taxes, and salaries paid to the sole proprietor.
Are self-employment taxes deductible on Schedule C?
Self-employment (S/E) taxes are not deductible on Schedule C. However, a deduction for one-half of S/E taxes is allowed as an adjustment to AGI (also see Schedule SE).
How are business losses treated on Schedule C?
A business with a loss may deduct the loss against other sources of income, subject to overall excess business loss and net operating loss (NOL) limitations.
What is the “three-of-five-year presumption” for determining if an activity is a business or hobby?
If an activity is profitable for three of the past five years, it is presumed to be a business. The burden of proof then shifts to the IRS to prove that the activity is not a business.
How is income and expense from a hobby treated for tax purposes?
Income generated from a hobby is taxable and must be reported as income.
Expenses related to a hobby are not deductible if the activity is not engaged in for profit.
Where should income from a hobby be reported on a tax return?
Income from a hobby should be reported on Schedule 1 (Form 1040), Line 8, which is for “Other Income.”
How is prepaid rent or a nonrefundable deposit treated for tax purposes?
Prepaid rent or a nonrefundable deposit is taxable when received.
What are the tax rules for renting out a personal residence for less than 15 days versus 15 days or more?
If the rental period is less than 15 days: Rental income is not taxable, and expenses related to the rental are not deductible.
If the rental period is 15 days or more: Rental income must be reported, and expenses related to the rental can be deducted, subject to specific rules.
Where is rental income or loss reported on a tax return?
Rental income or loss is reported on Schedule E (Form 1040), which includes details about rental properties and related expenses.
How is income, gains, losses, and deductions from partnerships, LLCs, and S corporations treated for tax purposes?
Income, gains, losses, and deductions “flow through” to individuals from these entities and are reported on the individual’s tax return.
How are items of income from flow-through entities reported on an individual’s tax return?
Items of income from flow-through entities are reported as ordinary business income or separately stated items.
What types of self-employment income are included for a taxpayer involved in a partnership?
A taxpayer’s self-employment income includes guaranteed payments received from partnerships and shares of ordinary business income from partnerships, provided the taxpayer is actively involved in the partnership’s operations.
Does a shareholder in an S Corporation pay self-employment tax on business income from the S Corporation?
No, a shareholder in an S Corporation does not pay self-employment tax on a share of business income from the S Corporation.
Why not?
What are the limitations on the deduction of flow-through business losses?
Tax Basis Limitation: Losses are suspended until the tax basis in the flow-through entity ownership interest is reinstated. Any remaining suspended losses are lost when the owner disposes of the interest.
Excess Business Loss Limitation: Applies to combined sources of business income and loss; only up to a certain amount of combined losses can be deducted (2024: $610,000 MFJ, $305,000 all other taxpayers). Excess business losses are carried forward as a net operating loss (NOL).
What is the maximum annual contribution to an IRA for 2024, and is there an additional contribution for individuals aged 50 or older?
For 2024, the maximum annual contribution to an IRA is the lesser of earned income or $7,000. An additional $1,000 contribution is allowed if age 50 or older.
Can a nonworking spouse contribute to an IRA, and how is this possible?
Yes, a nonworking spouse can contribute to an IRA based on the working spouse’s earnings. The contribution limits and rules are the same as for the working spouse. Taxable alimony (from a pre-2019 divorce agreement) counts as earned income for this purpose.
What is the additional standard deduction for blind and/or elderly taxpayers for 2024?
For 2024, taxpayers who are blind or age 65 and older are eligible for an additional standard deduction. The amount of the additional deduction is $1,850 for single or head of household filers and $1,500 for married taxpayers filing jointly or separately. If both blind and elderly, the amounts are combined.
Who is eligible to have medical expenses deducted, and what are some of the key rules for deducting these expenses?
Medical expenses can be deducted for:
The taxpayer, their spouse, and dependents.
Special dependent rule: There is no gross income test and no joint return test for medical purposes.
Types of deductible expenses: Includes medicines, prescriptions, doctor visits, medical/accident insurance, disability costs, etc. (after insurance reimbursement).
Deduction floor: Can deduct eligible expenses only to the extent that they exceed 7.5% of AGI (Adjusted Gross Income).
What types of state, local, and foreign taxes are deductible, and what are the limitations?
Taxpayers can deduct:
Real estate taxes
Personal property taxes
Either income taxes or sales taxes (but not both), up to a combined total of $10,000.
Nondeductible Taxes:
Federal taxes
Inheritance taxes
Business taxes
Rental property taxes
What are the rules for deducting casualty losses, and what are the applicable floors
Casualty losses are deductible only if they occur in a federally declared disaster area.
Deduction Amount: The deductible amount is the lesser of the fair market value (FMV) or the adjusted basis of the property.
Floors for Deductible Amount:
$100 per casualty: Subtract $100 from each individual casualty loss.
10% of AGI floor: After the $100 per casualty deduction, the remaining total casualty losses must exceed 10% of AGI to be deductible.
What are the rules for deducting charitable contributions, and what are the AGI limitations?
Types of Contributions:
Cash: Fully deductible up to 60% of AGI.
Long-Term Capital Gain (LTCG) Property: Deductible at fair market value (FMV) up to 30% of AGI.
Ordinary Income Property: Deductible at the lesser of adjusted basis or FMV, up to 50% of AGI.
Non-Deductible Contributions:
No deduction for contributed services (other than out-of-pocket expenses).
Deduction is reduced by the value of any consideration received.
Carryforward: Excess contributions over the AGI limit can be carried forward for up to five years.
What is the Section 199A Qualified Business Income (QBI) deduction
Section 199A provides a deduction of up to 20% of QBI for eligible flow-through businesses, including sole proprietorships, partnerships, S corporations, and some trusts and estates.
What is the difference between a Qualified Trade or Business (QTB) and a Specified Service Trade or Business (SSTB)?
QTB: Any trade or business that qualifies for the full QBI deduction.
SSTB: Certain service businesses (e.g., health, law, accounting) with income limits affecting their eligibility for the deduction.
What is Qualified Business Income (QBI)?
QBI is the net amount of income, gain, deduction, and loss from any qualified trade or business conducted in the U.S. It excludes investment income, capital gains/losses, and reasonable compensation to owners.
What is the basic calculation for the QBI deduction for taxpayers with income below the threshold?
The deduction is 20% of QBI, and applies fully to both QTBs and SSTBs if taxable income is below the threshold.
What is the taxable income threshold for the QBI deduction in 2024
In 2024, the taxable income threshold for the QBI deduction is $364,200 for Married Filing Jointly (MFJ) and $182,100 for all other taxpayers. Taxpayers below this threshold can claim the full 20% deduction on QBI.
What is the W-2 wage limitation for the QBI deduction for taxpayers above the threshold?
For taxpayers above the income threshold, the QBI deduction is limited to the lesser of:
20% of QBI, or
The greater of:
50% of W-2 wages paid by the business, or
25% of W-2 wages plus 2.5% of UBIA of qualified property.
What portion of the Child Tax Credit is refundable in 2024?
A portion of the Child Tax Credit is refundable up to $1,600 per qualifying child in 2024, depending on the taxpayer’s earned income.
What is the Earned Income Tax Credit (EITC), and is it refundable?
The Earned Income Tax Credit (EITC) is a refundable tax credit designed to help low- to moderate-income individuals and families, particularly those with children. The credit amount is based on income, filing status, and the number of qualifying children.
What happens when excess Social Security is withheld by two or more employers?
If excess Social Security is withheld by two or more employers, the excess amount is refundable when filing a tax return.
What percentage of the American Opportunity Tax Credit (AOTC) is refundable?
40% of the American Opportunity Tax Credit (AOTC) is refundable, up to $1,000 of the maximum $2,500 credit per eligible student.
Are W-2 withholdings refundable?
Yes, W-2 withholdings are refundable if they exceed the tax liability of the taxpayer, resulting in a refund of the overpaid amount.
When does the underpayment penalty apply, and how can it be avoided?
The underpayment penalty applies if a taxpayer owes $1,000 or more at year-end. It can be avoided if tax prepayments for the year are at least:
90% of the current year’s tax liability, or
100% of the prior year’s tax liability (110% if AGI exceeds $150,000).
What is the Net Investment Income (NII) tax, and when does it apply?
The additional Net Investment Income (NII) tax is 3.8% of the lesser of:
Net investment income, or
The excess of AGI over $250,000 for Married Filing Jointly (MFJ) or $200,000 for other taxpayers.
Investment income includes portfolio income (interest, dividends, long-term capital gains) and passive income from business and rental activities.
What is the adjusted basis and holding period for purchased property?
The initial basis is the purchase price, and the adjusted basis is the initial basis minus accumulated depreciation. The holding period begins when the property is acquired.
What is the general rule for the basis and holding period of gifted property?
The donee uses the donor’s basis and holding period. If the FMV at the date of the gift is lower and the property is later sold at a loss, the basis is the FMV at the date of the gift, and the holding period begins on the gift date.
What is the basis and holding period for inherited property?
The basis is the FMV at the date of death (or alternate valuation date, if elected). The holding period is automatically considered long-term, regardless of how long the property is held.
When should property be capitalized rather than expensed?
Property with a useful life of more than one year must be capitalized.
When are improvements to property capitalized?
Improvements are capitalized if they better the property, extend its useful life, restore its value or use, or adapt it to a new or different use.
When are repairs and maintenance expensed?
Repairs and maintenance are expensed if they do not add value or extend the property’s useful life.
What is the rule for expensing materials and supplies?
Materials and supplies are expensed if they cost $200 or less or are consumed within one year.
What is the De Minimis Rule for expensing low-cost property items?
If a taxpayer has a policy of expensing low-cost personal property items for financial accounting purposes:
With an AFS: Can expense items costing no more than $5,000.
Without an AFS: Can expense items costing no more than $2,500.
What is the tax basis for property converted from personal to business use for depreciation purposes?
The tax basis for depreciation is the lesser of:
The original cost basis plus improvements, or
The FMV on the date of conversion.
What is the tax basis for property converted from personal to business use for gain/loss purposes?
For a gain: The tax basis is the adjusted basis at the date of sale.
For a loss: The tax basis is the lesser of the adjusted cost or FMV at the date of conversion, minus any accumulated depreciation.
What is the general rule for the basis of intangible property?
The initial basis of intangible property is the cost or purchase price. The adjusted basis is the initial basis minus accumulated amortization.
How are organizational costs and start-up costs handled for tax purposes?
The first $5,000 of organizational costs and the first $5,000 of start-up costs can be expensed.
Any amounts over $5,000 are amortized over 15 years.
How is the gain or loss on the disposition of an asset calculated?
Gain or loss is calculated as the amount realized minus the adjusted basis of the asset sold.
What constitutes the amount realized in a disposition?
Amount realized includes:
Cash received,
FMV of property and/or services received,
Debt assumed by the buyer,
Minus selling expenses.
What is the adjusted basis of an asset?
The adjusted basis is generally the original basis minus accumulated depreciation.
What defines a capital asset?
Capital assets are assets held for investment purposes and personal use assets.
What constitutes noncapital assets?
Noncapital assets include:
Inventory,
Accounts receivable,
Trade/business use assets (both real property and personal property).
How is the holding period for capital gains and losses categorized?
Short-term capital gain or loss (STCG or STCL): Held for one year or less.
Long-term capital gain or loss (LTCG or LTCL): Held for more than one year.
What are the tax rates for net capital gains?
Net STCG: Taxed at ordinary income tax rates.
Net LTCG: Taxed at preferential rates of 0%, 15%, or 20%.
Gain on sale of collectibles and QSBS: Taxed at a maximum rate of 28%.
How are net capital losses treated?
Deduct up to $3,000 of net capital loss ($1,500 if married filing separately).
The net STCL is deducted before the net LTCL.
Any excess loss is carried forward indefinitely, retaining its ST or LT character.
What is the netting process for capital gains and losses?
Gains and losses are netted within each tax rate group:
Short-term ordinary tax rate group,
Long-term 0/15/20 percent tax rate group,
Long-term 28 percent tax rate group.
How are capital losses treated for C corporations?
Capital losses can only offset capital gains.
Net capital losses are carried back three years and then forward five years to offset net capital gains within the carryback/carryforward window.
What types of losses are nondeductible
Wash Sale Losses: Disallowed if securities are repurchased within 30 days before or after the sale date.
Related Party Losses: Generally disallowed.
Personal Losses: No deduction allowed for losses on personal-use assets.
What is the MACRS depreciation system used for personal property?
Five-year class: Vehicles, computers, copiers.
Seven-year class: Furniture, machinery, equipment.
Fifteen-year class: Qualified improvements to the interior of an existing nonresidential building.
Convention: Use the half-year convention unless more than 40% of personal property is purchased in the last quarter of the year (then use the mid-quarter convention).
What is the MACRS depreciation system used for real property?
27.5-year class: Residential rental property.
39-year class: Nonresidential real property.
Method: Straight-line.
Convention: Mid-month convention.
What are the limits and conditions for the Section 179 deduction for 2024?
Maximum Allowance: $1,220,000.
Phase-Out Threshold: Deduction is reduced dollar-for-dollar by the amount of qualifying property purchased that exceeds $3,050,000.
Limitation: Deduction is limited to taxable income before the Section 179 deduction.
What are the rates and timing for bonus depreciation for personal property and qualified real property improvements from 2024 to 2027?
2024: 60%
2025: 40%
2026: 20%
2027: 0%
Claiming Order: Claimed after the Section 179 expense deduction (if elected) but before the regular MACRS depreciation deduction.
What are the amortization rules for various intangibles and costs?
General Rule: 180 months straight-line for most intangibles.
Research Expenses: Amortized over 60 months.
Copyrights and Patents: Amortized over their useful lives.
Debt Issuance Costs: Amortized over the term of the loan.
Business Organization and Start-up Costs:
Expense up to $5,000 each (reduced dollar-for-dollar if costs exceed $50,000 each).
The remainder is amortized over 180 months.
What accounting method must C corporations with average annual gross receipts exceeding $30 million for the prior three tax years use in 2024?
They must use the accrual method of accounting.
What is the limit on the deduction for compensation paid to the top five executives of a publicly held company?
A publicly held company cannot deduct compensation in excess of $1,000,000 paid to the top five executives.
What is the deadline for employee bonuses paid by an accrual basis taxpayer to be deductible?
Employee bonuses must be paid by 2.5 months after year-end to be deductible.
How are bad debts treated for accrual basis and cash basis taxpayers?
Accrual Basis Taxpayers: Required to use the direct write-off method for tax purposes (the allowance method is used for financial accounting purposes).
Cash Basis Taxpayers: Bad debts are generally not deductible, except for uncollectible checks that have been deposited.
What is the limitation on the deduction for business interest expense for taxpayers with average annual gross receipts exceeding $30 million for the prior three tax years in 2024?
The deduction is limited to the sum of:
Business interest income,
30 percent of adjusted taxable income (ATI),
Floor plan financing interest expense.
Disallowed interest expense can be carried forward indefinitely.
What is the limitation on the deduction for charitable contributions for C corporations, and how is excess treated?
The deduction is limited to 10 percent of taxable income before the charitable contributions (CC) deduction, the dividends-received deduction (DRD), and any capital loss carryback. Excess contributions over the limit can be carried forward for five years.
How does tax treatment differ from GAAP treatment for the following items?
Organizational Expenditures
Start-up Costs
Goodwill and Intangibles
Life Insurance Premiums
Meals and Entertainment
Penalties and Fines
Taxes
Political and Lobbying Expenses
Organizational Expenditures: Deduct $5,000 immediately and amortize the excess over 180 months.
Start-up Costs: Deduct $5,000 immediately and amortize the excess over 180 months.
Goodwill and Intangibles: Amortize over 15 years.
Life Insurance: Premiums for key employees where the corporation is the beneficiary are not deductible; if the employee is the beneficiary, it’s deductible as a fringe benefit.
Meals and Entertainment: Business meals are 50% deductible; entertainment expenses are not deductible.
Penalties and Fines: Not deductible.
Taxes: Federal, state, and local payroll taxes are deductible; federal income taxes are not. Foreign income taxes can be used as a credit.
Political and Lobbying Expenses: Not deductible.
How do the tax treatments of capital gains and losses differ between C corporations and individuals?
C Corporations:
No $3,000 deduction for net capital losses.
Capital gains are taxed at the ordinary corporate tax rate.
Net capital losses can be carried back three years and carried forward five years.
Individuals:
Can deduct up to $3,000 of net capital losses.
Capital gains are taxed at preferential rates (0%, 15%, or 20%, with a maximum of 28% for collectibles).
Net capital losses are carried forward indefinitely and retain their character as short-term or long-term.
What are the key rules for the Dividends-Received Deduction (DRD) and its limitations?
Ownership Percentages & DRD Rates:
0% to <20% Ownership: 50% DRD
20% to <80% Ownership: 65% DRD
80% or More Ownership: 100% DRD
Limitation:
DRD equals the lesser of:
50% (or 65%) of dividends received, or
50% (or 65%) of taxable income (before DRD, NOL carryforward, or capital loss carryback).
Special Rule:
If taking the full DRD will create an NOL, take the full DRD without regard to the DRD taxable income limitation.
What are the key differences between Schedule M-1 and Schedule M-3, and when is Schedule M-3 required?
Schedule M-1:
Part of Form 1120 (C Corporation federal income tax return).
Reconciles book income to taxable income.
Schedule M-3:
A more detailed version of Schedule M-1.
Distinguishes between temporary and permanent differences.
Required if the company’s total assets are $10 million or greater.
When are estimated tax payments due for corporations, and what are the payment requirements for large versus non-large corporations?
Due Dates:
15th day of the 4th, 6th, 9th, and 12th months of the fiscal year.
Payment Requirements:
Non-Large Corporations: Pay the lesser of 100% of the current year’s tax or 100% of the preceding year’s tax.
Large Corporations: Must pay 100% of the current year’s tax. (A large corporation is defined as having taxable income of $1 million or more in any of its three preceding tax years.)
What is the General Business Credit (GBC), and how is it limited?
Includes: Various credits, such as the research and development tax credit.
Limitation: Limited to net income tax less 25% of net regular tax liability above $25,000.
Carryforward/Carryback: Unused credit can be carried back one year and carried forward 20 years.
How is the Research and Development (R&D) Tax Credit calculated, and how does it relate to the General Business Credit (GBC)?
Calculation: 20% of the increase in qualified research expenditures over a defined base amount.
Limitation: Subject to the overall GBC limitation.
How does the Foreign Tax Credit work for U.S. corporations, and what are the carryforward and carryback rules?
Credit or Deduction: U.S. corporations can choose to either take a credit or a deduction for foreign taxes paid or accrued.
Credit Details: If the credit is elected, it can be used to offset U.S. income tax liability on foreign source income.
Carryforward/Carryback: Unused foreign tax credits can be carried back one year and carried forward 10 years.
What is the accumulated earnings tax, and what are the thresholds for C corporations and personal service corporations?
Imposed On: C corporations with accumulated (retained) earnings in excess of $250,000 if funds are improperly retained.
Personal Service Corporations: Only entitled to $150,000 of accumulated (retained) earnings.
What defines a Personal Holding Company (PHC), and what additional tax is imposed?
Ownership: More than 50 percent owned by five or fewer individuals.
Income Composition: At least 60 percent of adjusted ordinary gross income consists of net rent, interest, royalties, and dividends (NIRD mnemonic).
Additional Tax: An extra 20 percent tax is imposed on PHC net income not distributed.
What are the rules for carrying back and forward Net Operating Losses (NOLs) for different years?
Pre-2018 NOLs: Carry back 2 years and carry forward 20 years.
NOLs for 2018, 2019, and 2020: Carry back 5 years and carry forward indefinitely.
NOLs for tax years after 2020: No carryback; carry forward indefinitely.
Carryforward Limitations:
Pre-2018 NOLs: Can offset 100% of future year’s taxable income.
Post-2017 NOLs: Can only offset 80% of taxable income after deducting any pre-2018 carryforwards.
What are the eligibility requirements for a corporation to qualify as an S corporation?
Qualified Domestic Corporation: Must be a U.S. corporation.
Eligible Shareholders: Only individuals, estates, certain trusts, qualified retirement plans, and 501(c)(3) charities.
Shareholder Limit: Maximum of 100 shareholders; family members can be treated as one shareholder.
One Class of Stock: Only one class of stock is allowed (differences in voting rights among common stock shares are permitted).
What are the requirements and deadlines for electing S corporation status?
Consent Required: All shareholders (both voting and nonvoting) must consent to the election by signing Form 2553.
Effective Date:
Filed by March 15: Effective date is January 1 of the current year.
Filed after March 15: Effective date is January 1 of the following year.
Note: After the election is made, the consent of new shareholders is not required.
How can S corporation status be terminated?
Voluntary Revocation: Majority of stockholders consent to terminate. Effective date follows election rules (January 1 of the current or next year).
Failure to Meet Eligibility: Immediate termination if the corporation no longer meets eligibility requirements.
Excess Passive Income: Termination occurs at the beginning of the fourth year if more than 25% of gross receipts come from passive income for three consecutive years, and the corporation has C corporation earnings and profits.
What happens with short tax years if an S corporation revokes its election or fails to meet requirements?
Allocation: Split the tax year based on the number of days as an S corporation and as a C corporation.
Close Books: Alternatively, close the books on the date of conversion to determine tax liabilities.
How long must a corporation wait to reelect S corporation status after termination?
The corporation must wait five years after the year of termination to reelect S corporation status.
Is an active S corporation shareholder’s share of ordinary business income subject to self-employment tax?
No, unlike partnerships, an active S corporation shareholder’s share of ordinary business income is not subject to self-employment tax.
What are some common separately stated items for S corporations?
R: Rental real estate income/loss
I: Interest and other portfolio income
P: Portfolio income (Dividends, Royalties)
C: Charitable contributions
A: Section 179 Allowance (expense deduction)
R: Royalties (part of portfolio income)
S: Section 1231 gain or loss
What is the below-the-line deduction available for qualified business income from an S corporation?
A 20% deduction on qualified business income (QBI) from an S corporation, as part of the Section 199A deduction. It’s subject to limitations based on taxable income, W-2 wages paid by the business, and the unadjusted basis of qualified property.
How are fringe benefits treated for employee shareholders owning more than 2 percent of an S corporation?
For employee shareholders owning more than 2 percent of an S corporation, the cost of fringe benefits is not deductible by the S corporation unless the benefits are included in the employee shareholder’s W-2 income.
How is a shareholder’s basis in S corporation stock calculated?
Initial stock basis
A: contributions
A: Income/gain items
– Distributions to shareholders
– Nondeductible expenses
– Loss/deduction items
Ending basis in S-corp
What is the tax basis limitation for S corporation shareholders?
Tax basis limitation = Stock basis + Debt basis
Loss in excess of tax basis is suspended until tax basis is reinstated (reinstated to debt basis first, then stock basis).
Suspended losses due to insufficient tax basis are carried forward indefinitely.
Any suspended losses remaining when the shareholder disposes of stock are lost.
What is the Accumulated Adjustments Account (AAA) in an S corporation?
Increased by:
Ordinary business income
Separately stated income/gain items (excluding tax-exempt income)
Decreased by:
Ordinary business losses
Separately stated losses and deductions
Nondeductible expenses
Distributions
Is a partnership subject to income tax?
No, a partnership is not subject to income tax. It files an informational return (Form 1065 with Schedules K and K-1), reporting partnership income, expenses, and each partner’s distributive share.
How are LLCs taxed based on their ownership and election choices?
Multiple Owners: Taxed as a partnership.
Single Owner: Taxed as a sole proprietorship (Schedule C) if the owner is an individual; included in the corporation’s taxable income if the owner is a C corporation.
Election Option: An LLC can elect to be taxed as a C Corporation by filing Form 8832.
What are private foundations?
Private foundations are Section 501(c)(3) organizations that:
Primarily make grants to other charitable organizations and individuals.
Must have special provisions in their governing documents to qualify as tax-exempt.
What are public charities?
Public charities are Section 501(c)(3) organizations that:
Include entities like churches, universities, and hospitals.
Are not subject to the same rules and restrictions as private foundations.
What is the difference between allocation and apportionment?
Allocation: Refers to assigning nonbusiness income to the state where it should be taxed (usually the state of commercial domicile or residence).
Apportionment: Refers to the process of dividing business income among states based on a formula (usually involving property, payroll, and sales).
How is income apportioned to a state?
Income is apportioned based on the apportionment factor, which is a formula involving the corporation’s percentage of property, payroll, and sales in the state. This is applied to the portion of income that is apportionable business income.
What type of income is generally allocated?
Allocable items of income are “nonbusiness” income, which does not relate to the primary business activities of the corporation within the state.
Who can represent a taxpayer before the IRS under Subpart A?
Attorneys
Certified Public Accountants (CPAs)
Enrolled Agents (EAs)
Enrolled Actuaries
Enrolled Retirement Plan Agents
Registered Tax Return Preparers
Other persons allowed in limited circumstances
When can a practitioner charge a contingent fee before the IRS?
A contingent fee is allowed in three situations:
Examination of, or challenge to, an original tax return (or amended return or refund claim in limited circumstances)
Claim solely for a refund of interest and/or penalties
Judicial proceeding arising under the IRC
What are the rules for the return of client records?
General Rule: Practitioners must promptly return all client records necessary for the client to comply with federal tax obligations. They may keep copies of the returned records.
Fee Dispute Exception: If state law allows, practitioners may retain records in case of a fee dispute but must provide the client access to review and copy the retained records.
What are the conditions under which a practitioner can represent multiple clients before the IRS despite a conflict of interest?
A practitioner may represent clients despite a conflict of interest if:
The practitioner reasonably believes they can competently represent each client.
Each affected client waives the conflict of interest and gives informed consent.
The consent is confirmed in writing within 30 days.
When can a practitioner petition for reinstatement before the IRS after being disbarred or suspended?
A practitioner can petition for reinstatement:
After five years following disbarment or suspension.
Or immediately after the expiration of a suspension period if it is shorter than five years.
What is the definition of a “tax return preparer”?
A “tax return preparer” is any person who:
Prepares for compensation, or employs others to prepare for compensation, any tax return required under the IRC.
Prepares any claim for a refund of tax imposed by the IRC
Who is not considered a “tax return preparer”?
A person is not considered a “tax return preparer” if they:
Merely furnish typing, reproducing, or other mechanical assistance.
Prepare a return or claim for a refund for their employer.
Prepare a return or claim for a refund for another person as a fiduciary (e.g., trustee, executor).
What are the types of audits conducted by the IRS?
Correspondence Audits: Address information or mathematical errors or matching issues.
IRS Office Audits: Conducted at an IRS office.
Field Audits: Conducted at the taxpayer’s home or place of business.
What is the process and timeline for appealing an IRS adjustment?
30-Day Appeal Request: Taxpayer has 30 days to request an administrative appeal with an IRS appeals officer (appeals conference).
90-Day Letter: If no appeal is requested or no agreement is reached, a 90-day letter (notice of deficiency) is issued.
90-Day Response: Taxpayer has 90 days to pay the deficiency or file a petition with the U.S. Tax Court.
What is the U.S. Tax Court, and what are its key features?
Specialized Trial Court: Hears only federal tax cases (income, estate, gift, or certain excise taxes).
Filing: Taxpayer is not required to pay the disputed tax to file a petition.
Judges: Tax experts; no jury trials.
Small Cases Division: Available for small tax cases (decision not appealable, summary opinion cannot be cited as precedent).
What are the U.S. District Courts, and what is required to file a case there?
General Trial Courts: Hear a wide range of cases, including tax disputes.
Filing: Taxpayer must pay the disputed tax liability before suing the IRS for a refund.
Judges: Not necessarily tax experts; jury trials are an option.
What is the U.S. Court of Federal Claims and its jurisdiction?
Nationwide Court: Jurisdiction over most claims for money damages against the United States, including tax refunds.
Filing: Taxpayer must pay the disputed tax and sue the IRS/federal government for a refund.
Judges: No jury trials.
Decisions: Follows the federal Court of Appeals, not the geographic U.S. Courts of Appeals.
What are the U.S. Courts of Appeals, and what do they do?
First Level of Federal Appellate Courts: Hear appeals from the U.S. District Courts within their federal judicial circuit.
What is the role of the Supreme Court of the United States in the federal judicial system?
Highest Court: The last level of appeal in the federal judicial system.
What are the defenses available to avoid or reduce tax penalties?
Not Frivolous Position: The position taken is not frivolous.
Reasonable Basis Standard: At least a 20% chance of succeeding.
Substantial Authority Standard: More than a 40% chance of succeeding.
More-Likely-Than-Not Standard: Greater than a 50% chance of succeeding.
How can disclosing uncertain tax positions help a taxpayer?
Disclosure can help avoid understatement penalties.
What must a taxpayer show to generally avoid any penalty?
Reasonable Cause: Had reasonable cause to support the tax return position.
Good Faith: Acted in good faith.
No Willful Neglect: Did not have willful neglect.
When does interest begin to accrue on penalties and underpaid tax?
Penalties: Interest begins to accrue from the tax return due date (or extended due date).
Underpaid Tax: Interest begins to accrue from the date the tax was due, regardless of extensions to file.
What tax authorities can be relied on as “substantial authority”?
Internal Revenue Code (IRC): Federal tax laws enacted by Congress.
Treasury Regulations: Official interpretations of the IRC by the U.S. Treasury Department.
Revenue Rulings: IRS interpretations of tax laws on specific factual situations.
Private Letter Rulings: Written determinations by the IRS for specific taxpayers on their unique circumstances.
Court Cases: Judicial decisions interpreting tax laws and regulations.
Who must file an FBAR, and under what conditions?
A U.S. person must file an FBAR if they:
Have a financial interest in, signature, or other authority over a financial account maintained with a financial institution outside the U.S.
The aggregate value of these foreign accounts exceeds $10,000.
What are the bases for civil actions in tax malpractice?
Civil actions for tax malpractice are based on:
Contract Principles: Breach of contract.
Tort Principles: Negligence, constructive fraud (gross negligence), and actual fraud.
What is breach of contract in the context of tax malpractice?
Definition: If a CPA does not fulfill the terms of the engagement, the client can hold the CPA liable for breach of contract.
Requirement: Contract liability generally requires privity, so only a party to the contract can sue under a contract theory.
What is negligence in the context of tax malpractice?
Definition: A CPA owes a duty to their client not to perform work negligently. If negligence occurs, the CPA can be held liable for damages.
Standard of Care: The CPA must exercise the same skill and care expected of ordinarily prudent CPAs under similar circumstances.
Elements of Negligence: Duty, breach of duty, injury, causation, and damages.
Duty Owed:
General Rule: To clients and any person or foreseeable class of persons the CPA knows will rely on their work.
Minority Rule: Only to persons in privity of contract (clients) and intended third-party beneficiaries.
