BU - Tax Flashcards

Question

S Corp

Answer 1

Limited liability Max 100 owners (members of a family may be treated as 1) Only one class of ownership interests Dividends are not taxed

Answer 2

Limited liability Two levels of income tax Liquidation is taxable to corp and shareholders Losses are not deductible by shareholders

Answer 3

Limited partners have protection from partnership’s debt Must have at least 2 owners

Answer 4

Limited liability

Answer 5

No limited liability Only 1 owner NO classes of ownership Losses are deducted on the owner’s tax return

Answer 6

Made up of social security and Medicare (12.4% & 2.9%) If taxable income is more than $147K, then only the 2.9% applies to the excess (1.45 ER an 1.45 EE) 1/2 of the SE tax is adjusted to income on Schedule 1 (For AGI deduction) 1/2 of SE tax is subtracted from net earnings from self employment in the calculation of the max contribution to retirement

Answer 7

1. Get Net Earnings 2. Multiply Net Earnings by .9235 3. Multiply Step 2 by .153 to get SE tax Remember to subtract 1/2 of the SE tax FOR AGI

Answer 8

Cash Method - recognizes expenses when they are paid and revenue when they are actually or constructively received Constructive receipt - occurs when the funds are available without restrictions Accrual Method - recognizes revenue when the "right to receive" exists (account receivables); recognizes expenses when the liability can be clearly established Hybrid method - accrual for **inventory** purchases and sales of the **inventory,** but cash used for service portion

Answer 9

When prices are rising: FIFO = higher profit, higher tax liability, realistic inventory value LIFO = lower profit, lower tax liability, understated inventory value When prices are falling: FIFO = lower profit, lower tax liability, realistic inventory value LIFO= higher profit, higher tax liability, overstated inventory value Specific Identification: major advantage is that both inventory and COGS are accurate

Answer 10

Tangible items such as: buildings, machinery, vehicles, furniture and equipment Intangible items such as: patents, copyrights and computer software Must meet ALL the following: 1. must be property owned by the taxpayer 2. must be used in business or income producing activity 3. must have determinable useful life 4. must be expected to last more than 1 year

Answer 11

Straight-line * (Purchase Price - salvage value)/useful life = yearly deduction \**except year 1 and last year*\* Accelerated * Used to increase cash flow or max deduction * Adjusted basis x MACRS rate

Answer 12

ACHORN Auto = 5 years Computers = 5 years Heavy Machines = 7 years Office Furniture = 7 years Residential Real Estate = 27.5 years Non-residential Real Estate = 39 years

Answer 13

Depreciation reduces the owner's basis

Answer 14

ACID Accounts or note receivable from ordinary business Copyrights (literary, musical or artistic composition, letter, memo) Inventory or property held primarily for sale to customers Depreciable property used in business (1231 assets)

Answer 15

FIFO - IRS default, cost determined from the shares that were purchased first Avg Cost - determined by averaging all purchases Specific ID - best and most powerful

Answer 16

Excess of net LTCG over net STCL

Answer 17

1. Separate short term and long term into baskets 2. Net each basket 3. Net the two baskets together

Answer 18

Long-term - see tax tables Short-term - ordinary tax rates 3.8% Net Investment Income tax can be triggered

Answer 19

Taxable income determines LTCG tax rate 0/15/20 STCG is taxed at ordinary rates Unrecaptured 1250 gains are taxed at 25% Collectibles = 28% Net Investment Income tax of 3.8% could be triggered $3000 Capital loss per year, ($1500 for MFS), allowed and excess can be carried over indefinitely

Answer 20

is the amount that gross investment income & cap gains net income exceeds the allowable deductions will owe the tax if net investment income AND MAGI are over thresholds Tax is the lesser of net investment income OR excess of the MAGI over threshold

Answer 21

Wages Unemployment comp Operating income from non passive business Social security benefits Alimony Tax-exempt interest SE income Distributions from certain qualified plans Tax exempt interest on gov’t obligations

Answer 22

Property that is used in trade or business **_AND_** Property held for the production of income Gains are taxed at capital gains Losses are taxed as ordinary losses

Answer 23

1245 - personalty (furniture, computers, carpet) 1250 - realty (buildings, barns, rental property)

Answer 24

1. Original cost - depreciation = adjusted basis 2. If the property is sold below adjusted bass \> reported as ordinary loss 3. **If the property is sold between adjusted basis \> the amount over adjusted basis will be recaptured as ordinary income** 4. If the property is sold above original cost \> the amount above adjusted basis will still be recaptured at ordinary income , but the amount over the original cost will be taxed as capital gains

Answer 25

1. Original cost - depreciation = adjusted basis 2. If the property is sold below adjusted bass \> reported as ordinary loss 3. **If the property is sold between adjusted basis \> the amount over adjusted basis will taxed at 25% (unrecaptured gain)** 4. If the property is sold above original cost \> the amount above adjusted basis will still be taxed at 25% (unrecaptured gain), but the amount over the original cost will be taxed as capital gains

Answer 26

Allows for the deferral of gain or loss recognition on realty for realty exchanges Only applies to 1231 property, and must be realty for realty Boot is non-qualifying property Boot kicks in tax

Answer 27

The taxpayer has **45 days** from the date of transfer to identify potential replacement properties The replacement must be received and the exchange completed no later than whichever is earlier: 1. **180 days** after the transfer of the original property **OR** 2. the due date (with extensions) of the tax return for the tax year in which the transfer of original property occurs

Answer 28

1. **Amount Realized:** FMV of qualifying property received +/- net boot 2. **Realized Gain:** the _amount realized_ - the basis of the property transferred 3. **Recognized Gain:** the lesser of _realized gain_ or net boot received\*\*\*\*\*\* 4. **Deferred Gain:** the _realized gain_ - _recognized gain_ 5. **Substituted basis:** FMV of qualifying property received - the _deferred gain_

Answer 29

Related person: spouse, child, grandchild, parent, sibling, entities where taxpayer owns more than 50% of the stock Gains are treated normally Losses will not be recognized until asset is sold to an unrelated party Losses may be allowed, partially allowed or disallowed. The related party purchaser is who has a chance to use the loss

Answer 30

S-Corp, Partnerships, LLC

Answer 31

applies before the passive activity rules states that he taxpayer can only deduct losses to the extent that there is enough basis (amount at risk) If a loss passes the at-risk rules, THEN the loss will be subject to the passive activity rules

Answer 32

Private interests - LLC, partnership or S-corp Public interests - publicly traded partnership

Answer 33

1. Separate private interests from PTPs 2. Private interest passive losses are allowed to be netted against all private interest passive income, Losses can not exceed income 3. PTPs income can ONLY be netted against PTP losses from the SAME PTP. You can only do this by netting current year PTP income against a prior suspended loss from the same PTP

Answer 34

passive losses can only used to the extent of passive income excess passive losses will be suspended

Answer 35

taxpayer ownership is at least 10% of the property AND substantial involvement in managing the property

Answer 36

$25k loss if MAGI is equal to or less than $100k $25k is phased-out if MAGI is $100k-$150k no loss allowed if MAGI is over $150k

Answer 37

(150k - MAGI)/2 = max loss allowed

Answer 38

Personal Use Rental Use Mixed Use

Answer 39

Rented for less than 14 days Not required to report rental income Can deduct mortgage interest and taxes as itemized deduction only applies to primary and vacation home

Answer 40

Personal Use is less than 14 days or 10% of days rented Trips to property for maintenance and repairs do not count as personal usage All expenses allocated to the property are allowed and the property can produce passive losses subject to the passive activity rules

Answer 41

Personal use is more than 14 days or 10% of days rented Expenses must be allocated between personal and rental use Deductions are limited to gross rental income Unused losses are carried forward to future years

Answer 42

Is rental use less than 14 days? Yes then personal use Is personal use less than 14 days or 10% of days rented? yes than rental use If no, then mixed.

Answer 43

Cannot recognize loss for personal residence sale Exclusion can be used every 2 years (730 days) Taxpayer must meet both usage and ownership test If married, both spouses have to pass the usage test and 1 spouse must meet the ownership test Taxpayer who do not meet the ownership or usage test, or use the the exclusion more than once within 730 days, may qualify for reduced exclusion

Answer 44

* Job relocation * Employment change leaves you unable to pay your living expenses * Qualifying for unemployment benefits * Health issues * Divorce or legal separation * Birth of twins or other multiples * Damage to home from disaster * Condemnation or seizure of the property * Other unforeseen circumstances

Answer 45

(#of days or months in home)/(either 730 days or 24 months) x 250k (or $500k) exclusion to get the prorated exclusion

Answer 46

Single taxpayer must have **owned** the home for 2 years out of the last 5 years and **used** it for 2 out of the last 5 years Married taxpayers **One** must have **owned** the home for 2 years out of the last 5 years and **both** must have **used** it for 2 out of the last 5 years

Answer 47

Gifts less than $250 require a receipt Gifts more than $250 require a donor letter Donor responsible for obtaining written communication from organization

Answer 48

Can only deduct un reimbursed expenses incurred Examples: unreimbursed transportation expenses, lodging, meals while away from home Mileage can be deducted at .14/mile rate Services are not deductible

Answer 49

Purchase price minus FMV = contribution deduction

Answer 50

Related: charity makes use of the donated property in a manner consistent with exempt purpose Deduction is 30% of FMV or 50% of cost basis Unrelated: charity uses property in a way unrelated to the exempt purpose (art given to school that will not use it for education purposes) Deduction is the lesser of cost basis or FMV

Answer 51

Cash - no valuation needed, 60% for public and 30% for private LTCG - Donor elects FMV (30% public and 20% private) or Basis (50% public and 30% private) Ordinary - capital assets held for less than 12 months, or property created by donor, inventory 50% public and 30% for private)

Answer 52

Contribution in excess of AGI limit in the current year can be carried over for 5 succeeding years Subject to the original percentage limits in the carryover years Deducted after deducting current year contributions Carryovers 2+ years, the earliest carry over is used first

Answer 53

This only applies for alimony agreements before 2019 & alimony payments decrease or stop during the first 3 years If applicable, the payor will have to include in income in the 3rd year (previously deducted) & payee can deduct from income in the 3rd year (previously reported as income)

Answer 54

Is P1 - P2 \> $7500? AND Is P2-P3 \> $15K If no - then no alimony recapture require, did not front load If yes - then decide which calculation to use 1. P2-P3 \>$15000 then use P1 + P2 - 2(P3) - $37,500 = recaptured 2. P2-P3=$15000 then use P1 - [(P2 + P3) / 2] - $15,000 = recaptured

Answer 55

The IRS authorized to impute an interest charge if the taxpayer charges less than adequate IRS looks closely at gift loans, corporate shareholders loans and compensation related loans greater than $10k Exceptions are loans or gifts less than $10k, debt subject to original issue discount provisions, sales of property less than $3k and when all payments are due within 6 months

Answer 56

Loan amount = **$10k** or less then no imputes Loan amount = **$10k-$100k** then it is the lesser of NII and AFR (if NII is **$1000** or less, no imputed interest) Loan amount = **$100k+** then the AFR is used

Answer 57

AMT applies to taxpayers with high economic income by setting a limit to ensure those taxpayers at least pay a minimum tax Applies to individuals, corporate and trust tax returns When AMT exceeds regular tax liability, the difference is known as AMT payable If a taxpayer is subject to AMT in the current tax year: * Accelerate income* into the _AMT year_ * Defer tax deductions* until a _regular tax year_ The optimal strategy would be to do as above until the AMT liability ***equals*** the regular tax liability.

Answer 58

Regular taxable income Add in tax preference items Add in standard deduction (if TP does not itemize) Add/Subtract AMT adjustments and tax preference items = AMTI (Alternative Minimum Taxable Income) Subtract Exemption Amounts (phased out) = AMT Bases X AMT tax rates = Gross AMT Tax Subtract AMT foreign tax credit = Tentative Minimum Tax Subtract Regular tax liability = AMT

Answer 59

Foreign Bank and Financial Accounts When US person has a financial interest in or signature authority over at least one account outside the US and The aggregate value exceeds $10k at any time during the year Must file FinCEN Form 114 by tax deadline (Financial Crimes Enforcement Network)

Answer 60

US Taxpayer holds financial assets outside the US of certain threshold - due with 1040 Financial accounts include: savings, deposit, checking and brokerage accounts held with a bank or broker Thresholds: MFJ (US residents) $100k on last day or $150k at any point MFS or Single (US resident) $50k on last day or $75k at any point MFJ (non US) $400k on the last day or $600k at any point MFS or Single (non US) $200k on last day or $300k at any point

Answer 61

dependent children under 19 or full-time students under 24 that is claimed as a dependent by parents

Answer 62

Earned: wages, tips, professional fees, any amount received for performing work Unearned: interest, dividends, capital gains, rents, royalties Distributions of unearned income from a trust are also unearned income to a beneficiary of a trust

Answer 63

$1150 or earned income + $350, but not more than the standard deduction for single

Answer 64

Unearned Income - $1150 next $1150 is taxed at 10% Remaining is taxed at parents tax rate, this is the “kiddie tax” Add the $115 to the “kiddie tax” to get total tax due

Answer 65

Step 1: Gross Income (this is earned + unearned) Minus the standard deduction (this is the greater of the $1150 or earned income +350) = Child's taxable income Step 2: (Unearned income - $2300) x parent's tax rate = parent's tax due Step 3: (Child's taxable income - amount taxed at parent's rate) x 10% = Child's tax due Step 4: Add parent's tax due + child's tax due = total tax due

Answer 66

the expenditure should generally be capitalized.

Answer 67

Relationship Age Abode Support

Answer 68

calendar year

Answer 69

$100k and prison up to 5 years, or both.

Answer 70

3 years from the date the tax return was filed 6 year if tax payer omits items of gross income in total excess of 25% of gross income Unlimited/indefinite if fraud

Answer 71

only pertains to property used in trade or business NOT for property for the production of income $1,080,000 max amount is reduced dollar for dollar to the extent the firm exceeds $2.7M in capital spending The deduction of any elected 179 expense is limited to the firm's net profit, not including 179 expenses Any elected 179 expense that is limited by profitability can be carried over to next year's taxes For purpose of profitability, a sole-pro can aggregate net business profit with unrelated W-2 wages