CFP tax sections Flashcards
Section 179
allows an annual write off of the cost of tangible personal property (other than sports utility vehicles and luxury autos) used in a business and placed in service during the current year
max write off: $1,050,000 (2021)
ex: office equipment, business computers,
total deduction cannot exceed taxable income (carry forward is available)
if the total amount of property placed into service is above $2,620,000 ten allowance is reduced dollar for dollar for any amount over $2,620,000 (no carry forward available)
Basis is reduced by the entire amount of 179 expense taken (not adjusted for income limitation)
Section 1231
business disposing of depreciable and/or real property (machinery, equipment, buildings, timber/coal/ore, livestock held for breeding/diary/sport, unharvested crops on land used in a business, certain non personal use assets)
loss is treated as ordinary loss
gains treated as long term capital gains
reported on IRS form 4797: Sale of Business property
lookback rule - if you have a gain in the current year, then must report the gain as ordinary income to the extend section 1231 losses reported within the past 5 years
Section 1245
business disposing of depreciable and/or real property
RECAPTURE: requires that recognized gain be treated as ordinary income to the extend of depreciation taken on property disposed of up to the gain recognized
does not apply if disposed of at a loss, section 1231 will apply
remaining gain will be section 1231 gain
Section 1250
real property - buildings and structural components
prevents tax payers from receiving benefits of both depreciation and long term gains - requires RECAPTURE of depreciation
taxed at a max of 25%, unless taxpayers marginal rate is less, then it will be taxed at the marginal rate
does not apply if disposed at a loss, section 1231 will apply
any long term gain not attributable to depreciation is taxed at tax payers long term capital gains rate
Section 121
sale of a personal residence
exclusion of $250k single/$500k MFJ
home must be owned by at least one spouse and used as a principal residence by BOTH spouses for at least 2 of the 5 last years before the sale (do not have to be consecutive)
can be used once every two years
if you fail the ownership and use text due to a change in employment or health then a partial exclusion is allowed based on the shorter of either use or ownership (ex: months lived there/24 months X exclusion = partial exclusion)
losses are not recognized when selling a personal residence
Section 1031
like kind exchanges
nontaxable exchange of real property
both properties are used in business or for investment
must be domestic real property for domestic real property
can NOT be personal use assets
cannot dispose of property received from the exchange until after two years following the exchange
property received must be in a written agreement within 45 stays after the transferred property was surrendered
property in exchange must be received on or before the earlier of 180 days after the transfer of property given up or the due date of the tax return (including extensions) for the year the property was given up
boot: property received in an exchange
ex: cash, liabilities assumed by the other party, personal property
boot will result in gain if there is a realized gain or no recognition if there is a realized loss
Section 1033
involuntary conversion
resulting from: destruction, theft,. seizure, requisition, condemnation, sale or exchange under threat or imminence of the tax payers property
allows taxpayer to postpone gain realized from the conversation
if amount reinvested in replacement property equals or exceeds gain realized, then gain not recognized
if amount reinvested in replacement property is less than amount realized then realized gain is recognized to the extend proceeds are not reinvested
two year period from the end of the taxable year in which gain is realized to replace property (3 year period for real property used in trade business or investment
only applies to gains not losses
cost of new property - deferred gain = basis in new property
Section 1041
divorced spouses = carry over basis
Section 1035
Life insurance, annuities, and long term care
Section 267
related party
Section 1244
small business stock
applies to losses only
allows for ordinary losses
Losses limited to $5k annually ($100k joint filers)
losses in excess are capital losses
to qualify corporation must received less than $1 million in capital for stock at time of issue
Section 1202
qualified small business stock
Section 2032A
Special use valuation
if decedent owned a property that was used for farm or closely held business then it may be valued at its current actual use value rather than best use value
maximum reduction: $1,190,000
conditions (best value is used less mortgages/debt):
- value of property (real and personal) must be at least 50% of adjusted value of gross estate (gross estate less mortgage)
- value of real property along must be at lest 25% of the adjusted value of gross estate
- decedent or family member must have been a material participant for at least 5 of 8 last years
- must make election on form 706
- if disposed of to a non family member or discontinued use within 10 years of death then estate tax savings may be recaptured (exceptions for bankruptcy)
Section 6166
Deferred payments of estate tax
available to owners of farms of closely held businesses
value of business must exceed 35% of AGE
applied to proprietorships, partnerships, and corporations
executor can defer for 5 years any estate tax relating to the business, which then can be paid in 10 annual installments beginning after the 5 year deferral
2% interest rate applies to the taxes attributable to a portion of the taxable value, any value over a rate of 45% of the regular underpayment interest rate
Section 303
illiquid estates
permits estate to redeem shares as capital gain rate than receipt of dividend (ordinary income)
shares will receive a step up at death so gain/loss assessed from DOD
conditions:
- stock must be included in decedents estate
- value of stock must be more that 35% of AGE
- redemption amount cannot exceed federal ant state death taxes + deductible funeral and admin expenses
