Book 4 Pages 121-200 Flashcards
personal use assets and most investments assets are classified as ____ assets
capital
true or false?
losses from personal use assets are deductible
false
true or false?
losses from investment assets are deductible
true
are accounts and notes receivable capital assets?
no
are copyrights and creative works capital assets ?
no
is inventory a capital asset?
no
is depreciable property or real estate a capital asset?
no
true or false?
the day you acquire the assets is used in determining the holding period for tax purposes
false
true or false?
they day you dispose of the assets is used in determining the holding period for tax purposes
true
the top rate for long term capital gains and dividends is ____% for taxpayers with incomes in the _____% tax bracket
20% ; 39.6%
For taxpayers who’s ordinary income is taxed at below 25%, their long term capital gains and dividends will be taxed at ____%
0%
corporations have a limited option to carry back capital losses for ____ years and carry forward losses for ____ years
3 ; 5
what is Harry’s adjusted basis if he bough a home with $20,000 cash and a mortgage of $80,000?
$100k
depreciation, casualties, and theft are known as ____ _____
capital recoveries
cost of capital improvements made to the property by the taxpayer
capital additions
a purchase of an item for less than its FMV from an employer by an employee
bargain purchase
under a bargain purchase, how do you calculate how much will be included in an employee’s income for the year?
take the FMV and subtract the purchase price
how do you calculate a donee’s adjusted basis if gift tax was paid by the donor?
donor’s adjusted basis + [unrealized appreciation / (FMV - donor’s annual exclusion amount used for the gift)] x gift tax paid
true or false?
when appreciated property is gifted the donor’s holding period carries over to the donee
true
true or false?
when appreciated property is gifted to someone else, the donee’s basis will equal the donor’s old basis
true
Bill received an acre of land as a gift from his father. When the gift was made the land had a FMV of $700k. His father purchased the land four years ago for $800k and paid gift tax of $100k. What happens if Bill sells the land one week after receiving it for $850k?
$850 - $800 = $50k long term gain
Bill gets to use his father’s basis of $800k and his father’s holding period of four years. The gift tax paid does not get added to basis for gifted property that has loss value.
Key points: when gifted property is sold for a gain you get to use the donor’s basis and holding period
Bill received an acre of land as a gift from his father. When the gift was made the land had a FMV of $700k. His father purchased the land four years ago for $800k and paid gift tax of $100k. What happens if Bill sells the land one week after receiving it for $550k?
$150k of short term capital loss
if gifted property is sold for a loss then you use the FMV on the date of the gift as your basis, which is $700k in this case, and then your holding period starts at the time you receive the gift, so since Bill received the gift 1 week ago it is short term
Bill received an acre of land as a gift from his father. When the gift was made the land had a FMV of $700k. His father purchased the land four years ago for $800k and paid gift tax of $100k. What happens if Bill sells the land one week after receiving it for $730k?
there would be no gain or loss
if gifted property is sold for a price between the original basis and the FMV on date of the gift, there will be no gain or loss realized
Martin and Mary owned, as joint tenants with rights of survivorship, land that they purchased for $60k. At the date of Mary’s death the property had a FMV of $100k. Local law states that joint tenants each have a half interest in the income for jointly held property. What is Martin’s basis in the property?
original interest in property = 50% of $60 = $30k
interest received at Mary’s death = 50% of $100k = $50k
total interest/basis for Martin today = $30k + $50k = $80k
Joey gives property to his father in the current year that has a FMV of $7k on the date of the gift. No gift taxes were paid. Joey had an adjusted basis of $2,300. Joey’s father dies at the end of the current year and bequeaths the property back to Joey within one year of the date of gift. What is Joey’s basis in the property?
$2,300
true or false?
the related party rule for disallowed losses includes cousins
false
Dave sells stock to his for $70 on January 1, 2017. Dave’s adjusted basis was $100 and Dave purchased the stock on February 4, 2003. On June 2, 2017, his son sells the stock to an unrelated party for $115. What are the tax consequences of this transaction?
Dave will not be able to claim the $30 loss from selling the stock to his son. His son will have a $15 gain.
occurs if the taxpayer sells or exchanges stock or securities for a loss and within 30 days before or after the date of the sale or exchange, acquires similar securities
wash sale
Tiffany purchased 100 shares of ABC Corp stock for $28k on January 1st of last year. In the current tax year, she sold 30 shares for $8,000. Twenty nine days earlier, she had purchased 30 shares for $7,500. What are the consequences of these transactions?
she will not have a realized loss, calculated as follows:
Sold for $8k
basis of amount sold = ($28k / 100 = $280 per share) then $280 per share x 30 shares = $8,400
realized loss = $400 but because of wash sale this gets wiped out
her basis in the new shares is $7,900 - calculated as follows:
purchase price of new shares = $7,500
Added postponed loss from wash sale = $400
Total basis = $7,900
if converting personal property to business property or income producing property the basis for a loss is the _____ of the property’s _____ on the date of the conversion or the adjusted basis
lower ; FMV
what is the basis for gain if converting personal property to business property or income producing property?
the property’s adjusted basis
any sale of property in which the seller will receive at least one payment after the close of the tax year in which the sale occurs
installment sales
allows the taxpayer to spread out the gain from a sale as the payments are received
installment sale
Mike sold a 40 acre lot of land for $500k on January 1. The land had in adjusted basis of $300k. The agreement specified a down payment of $100k, with the remaining $400k sales price to be paid over a 5 year note term at 10% interest. What is the gross profit from the sale and what is the gross profit percentage?
gross profit = $200k
($500k - $300k)
gross profit percentage = 40%
($200k / $500k)
how do you calculate the gross profit percentage from a sale?
(total contract price - adjusted basis) / total contract price
Mike sold a 40 acre lot of land for $500k on January 1. The land had in adjusted basis of $300k. The agreement specified a down payment of $100k, with the remaining $400k sales price to be paid over a 5 year note term at 10% interest. What percentage of the down payment is capital gain and what percentage is return of basis?
capital gain = $40k capital gain
($100k x 40%) - the 40% is the gross profit percentage
return of basis = $60k
($100k - $40k cap gain)
Mike sold a 40 acre lot of land for $500k on January 1. The land had in adjusted basis of $300k. The agreement specified a down payment of $100k, with the remaining $400k sales price to be paid over a 5 year note term at 10% interest. Mike received a note payment of $120k in the first year of which $40k represented accrued interest. What percentage of the note payment in year 1 is capital gain, what percentage is return of basis and what percentage is ordinary income?
$40k is ordinary income
$32k is cap gain
($80k x 40%) - 40% is the gross profit percentage
$48k is return of basis
Gina has been watching the market carefully and decides that Pearl Computer is not going to make its target quarterly income. In anticipation that the stock price will decline Gina sells 100 shares of Pearl Computer stock (borrowed from her broker) for $10k. In 60 days she repurchases 100 shares for $8k and repays the broker. How much did Gina make on this transaction?
$2k
property received in an exchange that is not like-kind property
boot
true or false?
cash received in an exchange is considered to be boot
true
true or false?
liabilities received by the other party in an exchange are considered boot
true
if you receive boot you must recognize any ____ but cannot recognize any ____
gain ; loss
section ____ involves like kind exchanges
1031
Bob exchanged investment land with an adjusted basis of $35k and received another parcel of land with FMV of $50k plus $12k in cash. What are the consequences of this transaction?
FMV of property received = $50k Cash (boot) received = $12k Amount realized = $62k Less adjusted basis of old property = $35k Total realized gain = $27k Recognized gain = $12k
For recognized gain you choose the lesser of the realized gain or boot received
Bob exchanged investment land with an adjusted basis of $55k and received land with a FMV of $50k. Bob’s land had a $15k mortgage. What are the consequences of this transaction?
FMV of property received = $50k
Mortgage Transferred to other owner = $15k
Amount Realized = $65k
Less adjusted basis of original land = $55k
Total realized gain = $10k
Recognized Gain = $10k
since the realized gain is less than the boot received ($15k mortgage) the realized gain becomes the recognized gain
how to calculate basis of like kind property swap
adjusted basis of currently held property
+ adjusted basis of boot given (if property then FMV)
+ Gain recognized
- FMV of boot received
- loss recognized
what is the new basis for Tom if he swaps a like kind property with adjusted basis of $50k and FMV of $80k for another property with FMV of $80k?
$50k + $80 + no gain - $80k - no loss = $50k
Craig trades in a truck (adjusted basis of $6k) for a new truck with FMV of $5,200 and also receives $1,000 cash. What is his new basis?
$6k - $1,000 + ($6,200 - $6,000) = $5,200
the $6,200 - $6,000 is the recognized gain. Because Craig received a truck with FMV of $5,200 plus $1,000 of cash his gain is $6,200 - his original adjusted basis
if like kind property is exchanged between related parties how long must they hold onto the new property to satisfy a true like kind exchange?
two years
results from destruction, theft, seizure, requisition, condemnation, or sale or exchange under threat or imminence of requisition or condemnation of the taxpayer’s property
involuntary conversion (section 1033)
allows a taxpayer who incurs an involuntary conversion to postpone recognition of gain realized from the conversion
section 1033
true or false?
under section 1033 if the amount reinvested in replacement property equals or exceeds the amount realized the realized gain is recognized
false
true or false?
under section 1033 if the amount reinvested in replacement property is less than the amount realized, the realized gain is recognized to the extent of proceeds not reinvested
true
states that the taxpayer’s use of replacement property and of the involuntarily converted property must be the same
functional use test
states that owner-investor’s properties must be used in similar endeavors as the previously held properties
taxpayer use test
normally the taxpayer has a ___ year period from the end of the taxable year in which any gain is realized from the involuntary conversion to replace the property
2
condemnation real property used in a trade or business held for investment has a ____ year period in which any gain is realized from the involuntary conversion
3
true or false?
if converting to replacement property, nonrecognition of realized gain is mandatory
true
true or false?
if converting to into money, nonrecognition of realized gain is elective
true
if converting property into money, what is the basis of the replacement property?
property’s cost less postponed gain
if converting to replacement property, what is the basis of the replacement property?
the same as the converted property
Bill had some property condemned by the state of Louisiana. The property had an adjusted basis of $26k. Bill received $31k from the state for the property. Bill just realized a gain of $5k and bought a new property that was similar to his old property for $29k. What gain must Bill recognize and what is his new basis?
He must recognize $2k in gain ($31k - $29k)
and his new basis is $26k calculated as follows:
purchase price of new property = $29k
unrealized gain from conversion = $3k ($29k - $26k)
Basis = $26k
under a 1031 exchange the recognized gain is the lesser of ____ received or _____
boot received ; realized gain
under a 1033 exchange the recognized gain is equal to the _____
amount realized but not reinvested in the new property
how to calculate the deferred gain under a 1031 exchange
realized gain - recognized gain
how to calculate the deferred gain under a 1033 exchange
realized gain - recognized gain
how to calculate the new basis in a 1031 exchange
FMV of property received - deferred gain
how to calculate the new basis in a 1033 exchange
FMV of property at acquisition - deferred gain
how to calculate the realized gain in a 1031 exchange
FMV of all property received - adjusted basis of all property given up
how to calculate the realized gain in a 1033 exchange
amount realized - adjusted basis of old property
under an involuntary conversion of personal residence, if the conversion is a condemnation, the realized loss is _____
not recognized
under an involuntary conversion of personal residence, if the conversion is a casualty, the realized loss is _____
recognized but subject to the personal casualty loss limitations
under an involuntary conversion of personal residence, if the conversion is a condemnation, the realized gain _____
can be postponed under section 1033 or excluded under section 121
under an involuntary conversion of personal residence, if the conversion is a casualty, the realized gain is _____
can be postponed under section 1033
for a home to qualify for the section 121 exclusion the home must have been used as a principal residence for at least ___ of the ___ years before the sale
2 ; 5
under section 121 does the home have to be used for 2 consecutive years out of the last 5?
no just two years in general
the section 121 gain exclusion can be used ___ every ____ years
once ; 2
how much does the section 121 gain exclusion allow you to exclude?
$250k for sinlge and $500k for MFJ
section 121 exclusion applies to ____
the sale of a personal residence
Gloria, a single taxpayer, sold her condominium in Seattle because she has a new job in Detroit. On the sale date, she had owned the condo for 18 months. What is the maximum Gloria can exclude from the gain of the sale?
$250k x (18/24) = $187,500
24 is the two year test and because Gloria sold because of change in employment she qualifies for a partial exclusion
Gloria, a single taxpayer, sold her condominium in Seattle. She had lived in the condo for two years but only owned it for 1 year. She rented it for a year before she purchased it. What is the maximum Gloria can exclude from the gain of the sale?
$250k x (12/24) = $125k
Merrily and Wallace get married and Wallace moves into the house that Merrily has been using as her principal residence for 6 years. Nine months later, Wallace gets a big promotion and the couple has to move to another city. They realize a gain on the sale of their residence = $700k. How much can the couple exclude on their tax return?
Merrily can exclude a full $250k because she lived there for a full 6 years but Wallace can only exclude $93,750 because he only lived there for 9 out of the last 24 months. Total exclusion = $343,750
*important to note that if the couple just moved within in the same city and no employment change was involved then only Merrily’s $250k would be excluded because Wallace does not qualify for a partial exclusion since the move wasn’t for employment change
true or false?
you can recognize a loss when selling your personal residence
false
a surviving spouse can qualify for the $500k exclusion if the sale occurs no later than ___ years after the other spouse’s death and the other section 121 requirements are met
2
if a business is disposing of depreciable and/or real property any loss is treated as an _____ loss and deductible ____ AGI
ordinary ; for
i.e. above the line
includes depreciable property and real property (e.g. buildings and equipment) used in a trade or business and held for more than one year.
section 1231
true or false?
section 1231 assets must be held for longer than 12 months to received favorable gain/loss treatment
true
requires any recognized gain to be treated as ordinary income to the extent of depreciation taken on the property disposed of up to the gain recognized and does not apply if the property is disposed of at a loss
section 1245 recapture
Blaine bought a depreciable business asset for $75k. Before selling it for $60k he was able to to write off $45k in depreciation. What are the tax consequences of this transaction?
Purchased price = $75k
less depreciation = $45k
basis in asset before sale = $30k
Selling Price = $60k
less adjusted basis = $30k
Gain on sale = $30k (this is taxed as ordinary income)
True or false?
Section 1245 rules apply to losses
false
prevents taxpayers from receiving benefits of both accelerated depreciation and long term capital gain and requires the recapture of depreciation deducted by the taxpayer in excess of what it would have been using straight line
section 1250 recapture
Mark sold a building on June 15 for $100,000. Mark’s income tax rate is 28%. He had acquired the building more than 5 years earlier for $75k. Straight-line depreciation taken was $30,000. What are tax consequences of this transaction?
Purchase price = $75k
less depreciation = $30k
adjusted basis = $45k
Selling Price = $100k
less adjusted basis = $55k in gain
$30k is recaptured depreciation that will be taxed at 25%
the other $25k will be taxed at the 15% rate
true or false?
under section 1245 and 1250 if the owner of the asset dies the heirs are subject to the recapture requirements
false
true or false?
you receive interest payments if you own an original issue discount bonds
false
true or false?
you must amortize the premiums on municipal bonds
false
true or false?
treasury bond’s interest is not subject to state income tax
false
true or false?
the interest earned on original issue discount bonds gets added to your basis in the bond
true
true or false?
the basis for a NQSO is the FMV at the time of exercise
true
the difference between the FMV of the stock on the date of exercise and the option price
bargain element
true or false?
with NQSO the bargain element is considered compensation income and taxed as ordinary income
true
true or false?
you recognize income when an ISO is granted
false
what is a qualified disposition under ISO?
holding for more than two years after grant date and more than one year after the exercise date
John’s employer grants him a NQSO with an exercise price of $25. John exercises the NQSO when the FMV is $40. John sells the stock two years later for $60. What are the tax consequences for this transaction?
John has ordinary income = $15 per share in the current year
John has long term gain = $20 per share when he sells the stock
George’s employer grants him an ISO on January 1, 2017 with an exercise price of $25 per share. George exercises the ISO on January 2, 2018 when the market price is $40 per share. George sells the stock in 2020 for $60 per share. What are the tax consequences for this transaction?
AMT adjustment for $15 per share
Long term capital gain of $35 (60 - 25)
AMT basis = $40
AMT gain = $20
in regards to mutual funds, if the capital gain/dividend is distributed to the shareholder in ____, the shareholder will be taxed and _____ increase his adjusted basis in the mutual fund
cash ; cannot
in regards to mutual funds, if the capital gain/dividend is ____ , the shareholder _____ be taxed and ______ increase his adjusted basis in the mutual fund
reinvested ; will be ; can
Tommy purchased a mutual fund with a $10k lump sum amount two years ago. He elected to reinvest all dividends and capital gains. Last year, the mutual fund paid a dividend of $500 and had a capital distribution of $200. During the current year the mutual fund paid a $700 dividend and had a capital gain distribution of $300. Today Tommy sold the mutual fund for $20k. What are the tax consequences
Year 1 = $700 in taxable income ($500 of which could be taxed at favorable dividend rates if they were qualified)
Year 2 = $1,000 in taxable income ($700 of which could be taxed at favorable dividend rates if they were qualified) + $8,300 in long term gain
losses on section 1244 stock are ordinary losses up to $____ per year for single taxpayers and $____ per year for MFJ
$50k ; $100k
allows losses from the sale of shares of small, domestic corporations to be deducted as ordinary losses instead of as capital losses
section 1244 stock
If a single client has MAGI of $210k , including $15k of net investment income. What amount will be subject to the 3.8% surtax?
$10k will be subject to the 3.8% surtax
you take the lesser of net investment income or the amount over the MAGI threshold which in this case is $200k
Rick and Carol sold their home this year and had a gain of $650k (assume they met the section 121 gain exclusion rules). Their MAGI is $175k before including the sale. Their MAGI also already includes $10k of net investment income. What amount will be subject to the 3.8% surtax?
they can exclude up to $500k from home sale so they will realize $150k. Their new MAGI is $325k. The surtax applies to the lesser of MAGI over threshold or net investment income. The threshold for this case is $250k and the net investment income is $10k plus $150k from home sale. So $75k over threshold is less that the $160k of net investment income.
The 3.8% will apply to $75k
this tax is a backup to the federal income tax to ensure that no taxpayer with substantial economic income can avoid significant tax liability by using deductions and exclusions
Alternative Minimum Tax
how to calculate alternative minimum taxable income
regular taxable income
+ positive AMT adjustments
- negative AMT adjustments
+ tax prefernces
how to calculate alternative minimum tax
alternative minimum taxable income - AMTI exemption = minimum tax base x AMT rate = Tentative AMT - regular income tax on taxable income = AMT
a ___ adjustment for AMT is made when the deduction or exemption allowed for _____ income tax purposes exceeds the deduction or exemption allowed for ____ purposes
positive ; regular ; AMT
a ___ adjustment for AMT is made when the deduction or exemption allowed for _____ income tax purposes is less than the deduction or exemption allowed for ____ purposes
negative ; regular ; AMT
true or false?
personal and dependency exemptions are allowed under AMT
false
true or false?
standard deduction is allowed under AMT
false
true or false?
itemized deduction for medical expenses in excess of the 10% AGI floor are allowed under AMT
true
true or false?
itemized deductions for taxes such as state income tax and property taxes are allowed under AMT
false
True or false?
miscellaneous itemized deductions are allowed under AMT
false
Tax preferences are always ____
positive
tax preferences always ______ taxable income
increase
true or false?
the AMT paid in one year may be used as a credit against regular tax in a future year
true
Dave a single taxpayer just filed his income tax return for 2017. With the return, Dave had to pay $35k of AMT resulting from the exercise of ISO (a deferral item) and some tax-exempt interest from private-activity bonds (an exclusion item). If Dave had taken into account only the exclusion items (tax exempt interest) his AMT liability would have only been $20k. What would Dave’s minimum tax credit be if that were the case?
AMT paid $35k
less AMT based on exclusion items only $20k
= AMT based on deferral items only which also = his minimum tax credit = $15k
true or false?
the AMT credit is available for both deferral and exclusion items
false, only deferral items
corporations may have to pay the AMT if taxable income for regular tax purposes, combined with any adjustments and preference items, exceeds $___
$40k
true or false?
all corporations are exempt from AMT in the first year of existence
true
in the second year of existence, the corporation would be exempt from AMT if its gross receipts were $_____ or less in the prior year
$5 million
in the third year of existence and going forward, the corporation would be exempt from AMT if its average annual gross receipts for all prior three year periods were $_____ or less
$7.5 million
an adjustment designed to ensure that all corporations pay some minimum tax on economic income
adjusted current earnings adjustment (ACE)
The ACE adjustment is equal to ____% of the difference between ACE and AMTI
75%
ABC Corp has AMTI of $200k before any ACE adjustment. The corp has adjusted corporate earnings of $300k. What is the ACE adjustment and what is the total adjusted AMTI?
ACE adjustment = ($300k - $200k) x 75% = $75k
Total adjusted AMTI = $200k + $75k = $275k
how to calculate AMTI for corporations
Taxable income \+ positive adjustments - negative adjustments \+ tax preferences = AMTI before ACE adjustment \+ ACE adjustment = AMTI
how to calculate of AMT for corporations
AMTI - AMTI exemption ($40k if available) = minimum tax base x AMT rate 20% = Tentative AMT - Regular income tax on taxable income = AMT
the $40k exemption in regards to a corporations AMT gets phased out at a rate of $____ for each dollar of AMTI in excess of $____
$0.25 ; $150k
a business owned by only one individual who is personally liable for the obligations of the business
sole proprietorship
an association of two or more persons who jointly control and carry on a business as co-owners for the purpose of making a profit
general partnership
under a general partnership, the partners are ____ liable for the obligations of the business
personally
a professional partnership in which the partners have limited liability to the extent of investment except where personally liable through malpractice
limited partnership
an entity in which the owners have limited liability for debts and claims of the business even while participating in management
limited liability company
a separate legal entity that is created by state law and operates under a common name through its elected management
corporation
owners of corporations are called ________
shareholders
owners (shareholders) of a corporation have ____ liability
limited
a corporation with no more than 100 shareholders, restricted to citizens, resident aliens, certain estates/trusts and no more than one class of stock
S corporation
true or false?
simplicity is an advantage of a sole proprietorship, you don’t have to create a separate entity
true
true or false?
a sole proprietorship is costly to establish
false
true or false?
a sole proprietorship can respond quickly to business opportunities
true
true or false?
it is not easy to terminate a sole propreitorship
false
true or false?
it is easy to raise capital for a sole proprietorship
false
a sole proprietorship has _______ liability
unlimited
true or false?
upon death or incapacity, a sole proprietorship will most likely terminate
true
sole proprietors must include a schedule ____ with their tax return
C
what are the steps to terminate a sole proprietorship?
- cease operations
- pay off all vendors
- report final income or loss on schedule C
a general partnership will have a schedule ____ for income tax purposes and each partner under the general partnership will receive a schedule ____ to file with their individual tax returns
K ; K-1
true or false?
to be a general partnership, the partners must have the right to participate in the management and operation of the business
true
occurs when a partner ceases to be associated with the partnership business, resulting in a change in the relation of the partners, or by admission of a new partner
dissolution
true or false?
when dissolution occurs the new partnership is liable for the obligations of the old partnership
true
dissolution terminates the authority of partners, except the authority to complete _______ _________
unfinished business
includes collecting, preserving, and selling partnership assets ; discharging liabilities ; collecting debts owed to the partnership; allocating current income
unfinished business
if the partnership is insolvent, ____ creditors have priority over _________ creditors
partnership ; individual
a general partner has ____ liability
unlimited
limited partners have ____ liability
limited
true or false?
a limited partner has authority to bind the partnership
false
true or false?
a general partner has authority to bind the partnership
true
a partnership with a general partner and at least one limited partner
family limited partnership
typically created by a senior family member who transfers business or investment assets to the partnership
family limited partnership
true or false?
a family limited partnership is not subject to taxation itself
true
true or false?
corporations get a tax deduction for the dividends they pay to shareholders
false
true or false?
personal holding company tax is a special tax that applies only to C corps
true
true or false?
personal service tax is a special tax that applies only to C corps
true
true or false?
accumulated earnings tax is a special tax that applies only to C corps
true
if the dividend receiving corporation owns less than 20% of the dividend paying corporation, the dividend received deduction will be ___% of the dividend actually received
70%
if the dividend receiving corp owns at least 20% of the dividend paying corporation but less than 80%, the dividend received deduction will be ____% of the dividend actually received
80%
if the dividend receiving corp owns at least 80% of the dividend paying corp, the dividend received deduction will be ___% of the dividend actually received
100%
the objective of this type of tax is to discourage individual taxpayers from using the corporate entity solely for tax avoidance
personal holding company tax
and
accumulated earnings tax
what two tests must you meet to be considered a personal holding company?
- ownership test
2. passive income test
the ___ test checks to see if during the last half of the taxable year, greater than 50% of the value of outstanding stock of the corp is owned by 5 or fewer individuals
ownership test
the ___ test checks to see if 60% of the corp’s adjusted ordinary gross income consists of personal holding company income
passive income test
what is the tax rate for personal holding company tax in 2017?
20%
true or false?
S corporations are subject to the personal holding company tax
false
banks ____ (are or are not) subject to the personal holding company tax
are not
are life insurance companies subject to the personal holding company tax?
no
corporations that are involved in health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting, and at least 95% of stock is held by active or retired employees
personal service corpoartion
income earned by a personal service corporation is taxed to the corporation at a flat ___% rate
35%
tax that applies whenever a corporation accumulates earnings beyond its reasonable needs, unless the corporation can prove otherwise by a preponderance of evidence
accumulated earnings tax
the accumulated earnings tax rate is ___%
20%
a complete liquidation of a corporation is taxed as a ___ or ____ to the shareholder
sale ; exchange
In general, the IRS treats S corporation shareholders as ___
partners
what is the principle advantage of S corporation status over C corporation status?
avoidance of double taxation of dividends
true or false?
generally speaking a S corp must be a calendar year taxpayer
true
under a S corp any employee who owns more than __% of the corp’s stock is treated as a partner
2%
true or false?
under an S corp, any fringe benefits provided to a more than 2% shareholder employee must be included in that shareholder’s gross income unless the tax code states otherwise
true
true or false?
accident and health insurance premiums paid by an S corp to a more than a 2% shareholder employee are included in the shareholder’s gross income
true
true or false?
S corps can deduct the premiums they pay to more than 2% shareholder employees for accident and health insurance premiums
true
true or false?
under a S corp, the entire amount of the health insurance premium included in a shareholder employee’s income can be deducted by the shareholder employee
true
What special taxes may a S corporation have to pay?
- Built in gains tax
- LIFO recapture tax
- Excess net passive income tax
a tax that applies to S corps that use to be C corps
built in gains tax, LIFO recapture tax, and the excess net passive income tax
tax imposed on any unrealized built in gain that is recognized on the disposition of any asset by the S corp
built in gains tax
how to calculate unrealized built in gain
FMV - the basis of an asset as of the date the C corp converts to a S corp
the recognized built in gain is any gain recognized from the sale of an asset within the ___ year period following the S corp election
10
true or false?
any assets acquired by the S corp after the conversion date are not subject to the built in gains tax
true
true or false?
any appreciation of the asset after the date of the conversion is subject to the built in gains tax
false
what tax rate gets applied to the S corps unrecognized built in gains?
the highest corporate income tax rate
a C corp that uses the ___ method of inventory valuation in its last taxable year before making an S corp election must include in income a ____ recapture amount
LIFO ; LIFO
the LIFO recapture amount is the excess inventory valuation under the ____ method over the inventory valuation under the ____ method
FIFO ; LIFO
true or false?
the LIFO recapture amount must be included in taxable income of the C corp in its last tax year
true
ABC co. converted from a C corp to a S corp. On the date of the conversion ABC co. had inventory with LIFO basis of $90k. The FIFO value of the inventory was $140k. How much must ABC add to their taxable income for their final C corp tax return?
$140k - $90k = $50k
true or false?
LIFO recapture is taxed on the basis of the corporation’s ordinary income tax rate
true
when must a S corp pay excess net passive income tax?
if passive income exceeds 25% of its gross receipts during the year
true or false?
if a S corp has accumulated earnings and profits as well as investment income that exceeds 25% of gross receipts for 3 consecutive years, it will be terminated beginning the following year
true
with a ___ corp all items of income and expenses are reported on the basis of the ownership percentage of each shareholder
S
provides limited liability to its members and allows great flexibility regarding the taxation of the entitiy
LLC
costs of forming an LLC may be ___ than with other business entities
higher
true or false?
to form a LLC you need an operating agreement
true
true or false?
a partnership but not a corporation can be converted to a LLC
false, they can both be converted to a LLC
true or false?
there is no limit on the number of members in a LLC
true
true or false?
the formation of a LLC is a taxable event
false, it is a non taxable event
in what ways can a LLC be taxed?
as a sole proprietor (only for single owner LLC)
as a partnership (two or more owners/members)
as a corporation
as a S corp
What type of liability do Sole proprietor’s have?
unlimited
What type of liability do partnership’s have?
general partnership = unlimited
limited partnership = limited
What type of liability do limited liability partnerships have?
limited
What type of liability do LLC’s have?
limited
What type of liability do S corps have?
limited
What type of liability do C corps have?
limited
what federal tax form is required to be filed for Sole propreitors?
1040 with Schedule C
what federal tax form is required to be filed for Partnerships?
form 1065
what federal tax form is required to be filed for limited liability partnerships?
form 1065
what federal tax form is required to be filed for limited liability company?
1040 with, Schedule C or 1065 or or 1120 or 120S
depends what you choose to be taxed as
what federal tax form is required to be filed for S corps?
form 1120S
what federal tax form is required to be filed for C corps?
form 1120
under what concept are sole proprietors taxed?
individual level
under what concept are partnerships taxed?
flow through conduit
under what concept are limited partnerships taxed?
flow through conduit
under what concept are LLC’s taxed?
can be taxed as sole props, partnerships, S corps, or C corps
under what concept are S corps taxed?
flow through conduit
under what concept are C corps taxed?
entity level
true or false?
limited partners usually have self employment income
false
what is the nature of the owner’s income from a sole proprietorship?
self employment income
what is the nature of the owner’s income from a partnership?
self employment income
what is the nature of the owner’s income from a limited liability partnership?
self employment income
what is the nature of the owner’s income from a LLC?
self employment income, or W-2 income and ordinary income
what is the nature of the owner’s income from a S corp?
W-2 and ordinary income
what is the nature of the owner’s income from a C corp?
W-2 income and dividend income
a legal arrangement whereby an individual transfers legal ownership of property to a trustee
trust
trust income can be taxed to:
- ____
- ____
- ____
the trust
the beneficiary
the grantor
a legal entity that comes into existence upon the death of an individual and remains in existence until the decedent’s assets pass to the heirs
an estate
persons or entities that responsible for trusts and estates are referred to as ____
fiduciaries
a trust in which principal distributions are prohibited
simple trust
a trust that is required to distribute all income to beneficiaries each year
simple trust
a trust in which charitable donations are prohibited
simple trust
a trust in which income can be accumulated
complex trust
true or false?
a complex trust allows principal to be distributed
true
under a complex trust, does the trust pay taxes on accumulated income?
yes
who pays tax on the trust’s income under a grantor trust?
the grantor
what makes a trust a grantor trust?
any of the following:
grantor can add or remove beneficiaries
grantor can choose timing of distributions
grantor can alter beneficiaries’ share of principal or income
grantor can retain a revisionary interest in either corpus or income
grantor retains certain admin powers
ability to take income distributions, hold or accumulate income for future distributions
true or false?
a grantor trust is ignored for income tax purposes
true
what are the major differences between trust taxable income and an individual’s taxable income?
- trust is entitled to a deduction for distributions made to beneficiaries
- trust is not entitled to a standard deduction
- a trust is entitled to a personal exemption of $300 for a simple trust and $100 for a complex trust
if paid within ___ year after death, medical expenses can be deducted either on the decedent’s final income tax return or the decedent’s estate tax return, but not both
1
if paid more than one year after death, medical expenses can only be deducted on the _______
decedent’s estate tax return
the amount deductible by the fiduciary of a trust is ___ of the amount taxable to the beneficiaries
equal to
what form do fiduciaries of a trust file for tax purposes?
form 1041
true or false?
a trust must adopt a calendar year for tax purposes
true
true or false?
estates must adopt a calendar year for tax purposes
false, calendar or fiscal are allowed
true or false?
trusts may be subject to AMT
true
what amount do the beneficiaries of a trust get taxed on?
an amount equal to the distribution deduction
A beneficiary who receives a distribution from a fiduciary will receive a schedule ____ each year
K-1
ABC Trust has DNI of $100k of which $40k is non taxable. The beneficiary received a distribution of $20k during the year. How much of the distribution is taxable to the beneficiary and how much is nontaxable?
60% x $20k = $12k is taxable
40% x $20k = $8k non taxable
audit probability varies with ____ and ______
income level and type of income
name some situations that might trigger an audit
- significant investment losses
- business expenses that produce significant losses
- operating a cash business
- deductions that are larger than the average deductions taken by taxpayers at similar income levels
an audit where the issue is generally minor and is performed through mail
correspondance audit
an audit that is usually restricted in scope to specific items and is performed at the IRS office
office audit
an audit where a numerous amount of items are examined and the audit is performed on the premises of the taxpayer
field audit
what is the statute of limitations for audits?
- 3 years from the filing date of the return or due date if later
- 6 years if 25% of gross income is unreported
- no statute of limitations for failure to file or if a fraudulent return is filed
the failure to file will result in a penalty of ___% per month, up to a total of ____% (or 5 months of penalties)
5% ; 25%
if the return is filed more than ___ days after the due date or extended due date, the minimum penalty is the smaller of $___ or ____% of the unpaid tax
60 days ; $210 ; 100%
true or false?
failure to file penalty will not be assessed if the taxpayer can show that there was reasonable cause for the failure to file on time
true
if the failure to file is for a fraudulent return, the penalty is increased to ___% per month, up to a total of ___%
15% ; 75%
the failure to pay will result in a penalty of __% per month, up to a total of ___% (50 months)
0.5% ; 25%
if both a failure to file penalty and failure to pay penalty apply what happens?
the failure to file penalty will be reduced by the failure to pay penalty
a ___% penalty may be assessed for an accuracy related penalty due to negligence or a substantial understatement of tax without intent to defraud
20%
taxpayer files a timely tax return but fails to pay $15k additional tax to which $6k is attributable to the taxpayer’s negligence. What will be the penalty enforced upon the taxpayer?
the negligence penalty (also known as the accuracy related penalty)
20% x $6,000 = $1,200
A taxpayer files his return 39 days after the due date. Along with the return he remits a check for $6,000 which is the balance of the tax owed. What are the total failure to file and failure to pay penalties?
failure to pay penalty = .5% x $6,000 x 2 = $60
failure to file penalty = 5% x $6,000 x 2 = $600
but you have to reduce the failure to file penalty by the failure to pay penalty since they both apply in this case so the real failure to file penalty is $540
total penalty = $600
true or false?
one spouse may be held responsible for all the tax due even if all the income was earned by the other spouse
true
allows an individual to be relieved of responsibility for paying tax, interest, and penalties if his current or former spouse improperly reported or omitted items from a joint return
innocent spouse relief
tax relief that allows an individual to allocate any understatement of tax between himself and his/her spouse
relief by separation of liability
true or false?
under relief by separation of liability the individual is only responsible for his/her own portion of underpayment
true
what qualifications must be met to use the relief by separation of liability?
- the individual is no longer married to or is separated from the spouse whom he/she filed the joint return with
- the individual was not a member of the same household as the spouse whom he filed the joint return
If you do not qualify for innocent spouse relief or relief by separation of liability, you may still be relieved of responsibility for tax, interest, and penalties through ____ relieft
equitable
true or false?
Unlike innocent spouse relief or separation of liability, you can get equitable relief from an understatement of tax or an underpayment of tax
true
true or false?
to qualify for equitable relief you must not be eligible for innocent spouse relief or relief by separation of liability,
true
true or false?
only a recognized representative can represent a client before the IRS
true
who grants a representative the authority to act on behalf of the client during IRS hearings/meetings
a power of attorney
this person must file a written declaration with the IRS that states they are qualified and authorized to represent the client
recognized representative
give some examples of a recognized representative that are allowed
attorneys
CPA
enrolled agents or enrolled actuaries
true or false?
taxpayers who receive income that is not subject to withholding must make quarterly estimated tax payments
true
to avoid an underpayment penalty, taxpayers must make estimated payments that are the lesser of:
- ____
- ____
- ____
- 90% of the tax liability shown on the current year return
- 100% of tax liability shown on prior year return if AGI is less than $150k
- 110% of prior year’s tax liability if AGI is greater than $150k
