Book 4 Flashcards
Income Source Doctrines
Business Purpose Doctrine - has to achieve valid business purpose
Substance over form - look through legal formalities to see substance of transaction
Assignment of income - Fruit of the tree
Tax Benefit rule - cannot receive tax write-off and deduction or money back
Constructive receipt - if it is available it is income
IRD Sources
- Rents accrued and not paid
- IRA or QP’s
- Salary earned not paid
- DC, Tax-deferred earnings
- Installment notes / annuity payments
- Characteristics of above income stay the same for the beneficiary
Imputed interest rules
$100,000
$10,000
$1,000
Provisional Income
AGI from all sources + 50% of SS income + Tax-exempt interest + excluded foreign income
SE Tax
reduce net earnings from self employment by 7.65% (or x 92.35)
DBO Plans
Fully taxable - simply a cash fringe benefit, not LI
Litigous Damages
- Compensatory Damages - arising out of personal injury are tax-free
- Taxable if wage, sex, race case
- Punitive Damages - only Tax-free if wrongful death
*
Non-Viatical Sale
Adjusted basis IS reduced by cost of insurance to determine gain
SE TAX - Below TWB
Multiply SE Income by .1413
SE Tax - Above TWB
- SE Income x .9235
- Subtract TWB from step 2 and multiply by 2.9%
- Multiply TWB by .153
- Add 2 + 3 together
Alimony
Must be in cash
Must not extend beyond payors death
Does not specify these are NOT alimony
Not members of the same household
payments made directly to spouse or third party for spouse benefit
Vacation Home breakdown
- Rented less than 15 days
- Tax-free
- Rental Use - Rented at least 15 days per year and is not used for personal use more than 14 days or 10% of rental days
- Can deduct loss up to $25K - phaseout applies
- reported on Schedule E
- Mixed Use - Rented at least 15 days per year and used greater than 14 days of 10% of rental days
- Deduct expenses
- cannot deduct loss (from expenses) currently, but can carry forward
- Schedule E
Related Party Losses
Can deduct loss amount up to gain amount if needed when sold in an arms-length transaction - original seller loses deductibility
Bad Debts
TP: Must identify the bad debt, deduction allowed in the year it becomes worthless
Corp: Only allowed for accrual accounting - only can deduct for income previously recognized
Section 1244
Allows ordinary loss treatment if the loss is sustained by an individual who acquires securities DIRECTLY from the Corp.
Limited to $50K - any excess is capital loss
Limited to $1M in capital for stock at time of issue
Home Office Deduction
- Simplified: $5/sq. Foot of the home used for max of 300 ft, $1500
- Regular: Percentage of home used for business is deducted/depreciated - but subject to recapture on home sale
Investment Interest
Deductions limited to Net taxable investment Income: Interest, dividends, royalties, annuities
carryover deduction allowed
Casualty Loss
Must be in a FDCZ - Amount of loss is limited to Adjusted basis or Decline in FMV
Reduced by 10% AGI and then another $100 deductible
Donations to Charity
- Cash = 60% AGI
- Lesser or AB or FMV
- OI Property - 50%
- Unrelated use - 50%
- FMV or Basis Election
- Intangibles
- Related Use
- Real Property
- FMV = 30%
- Basis = 50%
*
Material Participation Tests
- Complete more than 500 hours of service
- 100 hours and equal to or more than everyone else
- constitute all participation?
- MP in five of last ten years
1.
Qualifying Relative / Child
- Relative
- support does not include TF income or SS
- gross income must be less than $4,300
- Child
- Under age 19
- student under age 24
*
MACRS
- Real Estate
- Non-residential = 39 year life
- Residential = 27.5 year life
- Half-month convention used
- Tangible Personalty
- half-year convention used
- 3, 5, 7, 10 = 200% declining balance
- 15 & 20 = 150%
- Midquarter convention
- if more than 40% of equipment is placed in service, then Midquarter convention applies to all
Capital expenditures
Cost must be capitalized and depreciated over the properties useful life
Add value to property, substantially prolong life, renovating or improving property
Section 197
Intangible assets under section 197 are amortized over 15 years
Depletion methods
- Natural resources (except land) are subject to depletion
- Cost depletion - Asset basis is divided by estimated total number of units then multiplied by units sold
- Percentage depletion - Statutory percentage applied to gross income (max 50%)
- Once you choose one, it is for all others!
Accrual Method
- Prepaid income - taxed in the year of receipt, cannot be deferred
- Deferral of advanced payments for goods
- Deferral of advanced payments for services
Gift tax basis calc
[Appreciation / (FMV - annual exclusion) ) x Gift tax paid] + Basis
1031
Like kind exchange with domestic real property
Have 45 days to identify property after property surrendered
property must be received 180 days or by tax return
1033
- Similar in use
- Functional Use - must be same as old property
- Taxpayer use - used in similar endeavors
- Time limitation
- 2 year period from end of taxable year
- 3-years if condemnation of property used in trade or business
- Non-recognition
- immediate conversion - mandatory
- Conversion into money - elective
Section 1231
1245 - all depreciable personal property, patents, copyrights, and leaseholds - OI
1250 - All depreciable real property 25% unless marginal rate is lower
Installment notes - 1231 gain recognized first!
1231 has five year lookback recapturing some gain to the amount of losses taken
Section 1244
Losses are ordinary losses up to $50,000 per year and $100 for MFJ - excess is capital losses
Gains from sale are capital gains
Section 1202
Section 1202, also called the Small Business Stock Gains Exclusion, is a portion of the Internal Revenue Code (IRC) that allows capital gains from select small business stock to be excluded from federal tax. Section 1202 of the IRS Code only applies to qualified small business stock acquired after Sept. 27, 2010, that is held for more than five years. The amount of gain excluded under Section 1202 is limited to a maximum of $10 million or 10 times the adjusted basis of the stock.
Before Feb. 18, 2009, this provision of Section 1202 excluded 50% of capital gains from gross income. To stimulate the small business sector, the American Recovery and Reinvestment Act increased the exclusion rate from 50% to 75% for stocks purchased between Feb. 18, 2009, and Sept. 27, 2010.3 For small business stocks that are eligible for the 50% or 75% exclusion, a portion of the excluded gain is taxed as a preference item that incurs an additional 7% tax called Alternative Minimum Tax (AMT).
AMT Preference Items
- Tax Preference Items are always positive adjustments
- Percentage depletion in excess of basis
- tax-exempt interest on certain private activity bonds (not 2009-2010)
- Some 1202 Stock (not after 9/27/2010)
Dividends Received Deduction
- 0-20
- 50%
- 20-80
- 65%
- 80-100
- 100%
C Corp Taxes
-
Personal Holding Company Tax
- Discourage individuals using Corps for tax avoidance
- PHC if it meets these
- Ownership - 50% owned by five or fewer people
- 60% of the OI is passive income
- Multiply undistributed PH income by 20%
-
Personal Service Corporation Tax
- 95% of stock held by active or retired employees and are in the PSC fields
- Taxed at flat rate of 21%
-
Accumulated earnings Tax
- accumulated earnings beyond “reasonable needs”
- Taxed at flat rate of 20%
S Corp Things
2% + Owner is a partner
If the above, then accident and health insurance premiums are deductible by Crop and gross income for gross income
Once class of stock, domestic holders, no partenership owners, etc.
Taxes due by 3/15 for K-1
S-Corp Taxes
- Built i Gains Tax
- S corps used to be C-corps
- highest corporate income tax rate to built-in gains
- LIFO Recapture tax
- S Corps used to be C-corps
- Excess inventory valuation of under FIFO over inventory valuation over LIFO
- OI Tax rate
- Net Passive Income Tax
- more than 25% of gross receipts is passive income
Dsitribution to Bene’s
Bene is taxed on amount = distribution deduction - this retains its character
Simple Trust will issue K-1 / require payments each year
IRS Penalties
- Failure to File - 5% / month up to 25%
- if 60 days late, payment is lesser of $210 or 100% unpaid tax
- If for fraudelnt reason, penalty is increased to 15%/month
- Failure to Pay
- .5% for max of 25% (50 months)
- If both occur, FTF is reduced by FTP
- Negligence / accuracy penalty
- Flat 20%
Innocent Spouse Relief
-
Innocent Spouse
- did not know
-
Relief by separation of liability
- no longer married / separated household and did not know
-
Equitable relief
- does not qualify for the above
- must be attributable to other spouse - the erroneous act
