Deck 1

Question 1

In regards to passive activity, how are losses in the year of disposal treated?

Answer 1

In the year of disposal, any current or suspended passive activity losses for that activity can be offset against any other sources of income (active, passive, or portfolio).

For example, say a taxpayer has a $100 salary and $50 income from ordinary business from one activity, and $30 of losses from a passive activity with $10 of carryover from prior years. The gross income would be $110 ($100+$50-$30-$10) because you can offset the $150 by all passive activity losses current and from carryover.

Question 2

How are losses from passive rental real estate passive activities treated if no rental real estate income exists in the current year?

Answer 2

In regards to passive activities for real estate, if no passive income exists, and the taxpayer does not actively participate, no losses can be deducted.

However, if the taxpayer actively participates and owns at least 10% of the rental activity (mom and pop rule), the taxpayer can deduct up to $25,000 of losses against non-passive income.*

*IF the taxpayer has AGI above 100k, the 25k is reduced by 50% of the taxpayer’s AGI above 100k. Over $150, the mom and pop rule does not apply.

Question 3

What are the limitations for QBI (for both SSTB and QTB)?

Answer 3

Filing Status
Taxable Income B4 QBI Deduction
Single and all other $163,300 - $213,300
Married filing jointly $326,600 - $426,600

QBI when under $163,300 or $326,600 for both SSTB and QTB is just QBI * 20%

QBI over $213k or $426k for SSTBs only has no deduction (QTB has a calculation)

Question 4

What are examples of deductions for AGI (above the line)?

Answer 4

• Educator Expenses
• Trade or business expenses
• Rent or royalty expenses
• 50% of self-employment tax
• 100% of medical insurance premiums if self-employed
• Contributions to retirement plans (IRA)
• Contributions to health savings accounts (HSA’s)
• Student loan interest (limited to $2,500 - there is a phase out too)
• Alimony payments
• Capital losses in excess of capital gains (up to $3,000)
• Business rent on self-employed business
• Forfeited Interest (Adjustment)(Penalty on Withdrawal from savings)
• Attorney fees paid in certain discrimination and whistleblower cases
• WRITE OFF OF WORTHLESS NON BUSINESS DEBTS

Question 5

How do you determine the basis with a gift?

Answer 5

Future Selling price > Donee’s Cost basis = Donor’s Basis

Future selling price < FMV @ time of gift =FMV at time of gift

Donor’s basis > Future selling price > FMV at time of gift = no gain or loss is recognized
Basis is the basis of the amount it was sold for

(Inherited property after a death gets a step up or down to the FMV. Whereas other gifts not related to inheritances can be short or long term)

Question 6

How would you calculate the deductible loss for a Casualty Loss?

Answer 6

The lower of the decline in FMV or the adjusted basis in the property
Less: Insurance Reimbursement
Less: $100 floor per casualty
Less: 10% of AGI 
=The casualty loss deduction

Question 7

What is the max deductible amount for a SEP IRA?

Answer 7

The lesser of:

20% of self-employment net income reduced by one-half of self employment tax deductions

OR

$57,000

Question 8

With likekind property exchanges, how would you calculate the new basis when:

1. boot is received
2. boot is paid and
3. boot is paid and received?

Answer 8

1. Boot is received
Adjusted basis of property given up (original cost - depreciation)
\+ Gain recognized 
-Boot received 
= New Basis

2. Boot is paid
   Adjusted basis of property given up (original cost - depreciation)
   +Boot Paid
   =New Basis

3. Boot is received and paid
Adjusted basis of property given up (original cost - depreciation)
\+Gain recognized
-boot received
\+Boot paid
=New Basis

Question 9

How would you calculate the credit for the child and dependent care credit?

Answer 9

Qualifying person must be:

• Under age 13 or
• A disabled dependent of any age who is unable to care for themselves (must meet support test of a dependent)
• A spouse who is disabled and not able to take care of themselves.

Earned income requirement: Married tax payers must both produce earned income from wages, salary, or self - employment net income to be eligible for credit (unless one is full time student or physically or mentally incapacitated)

Actual credit is calculated as the lessor of:

1. the earned income of the lesser-earned spouse
2. the actual expenses incurred or
3. the maximum allowable amount (3,000 for one dependent or 6,000 for 2 or more dependents)

Then the qualifying amount of the credit is multiplied by the applicable % which is based on the taxpayer’s AGI:

• Maximum 35% with AGI less than $15,000
• Phase out 20 - 35%: Credit decreases by 1 percent for each $2,000 ( or fraction thereof) of AGI over $15,000, but not below 20%
• Minimum 20%

Question 10

What are the AMT Adjustments?

What are the AMT preferences?

Answer 10

Adjustments (either increase or decrease taxable income):
PANIC TS
Passive activity losses are added back
Accelerated depletion, depreciation, or amort.
Net Operating Losses
Installment method not allowed
Completed Contract method
Tax deduction for state or property taxes added back
Standard deduction - NONE

Preferences (always increase)(PPP):
Percent Depletion over adjusted basis for certain minerals
Interest on “Private activity” bonds
Qualifying small business stock

Question 11

A personal use asset is a capital asset. How is a gain or loss on the sale of a personal use asset treated?

Answer 11

A gain on the sale of a personal use asset is a taxable capital gain.

A loss on the sale of a personal use asset is a nondeductible personal loss.

Question 12

How much loss can be deducted for a section 1244 stock loss in one year? Is it ordinary or capital loss?

Answer 12

The maximum section 1244 loss that can be deducted by a single taxpayer in any year is $50,000. All losses designated as section 1244 losses are ordinary by definition.

If there is loss over this amount it is treated as a capital loss using capital loss rules.

Only the original owner can receive this deduction mentioned above. If the item is sold, the new owner does not get to deduct a loss.

Question 13

What are the characteristics of 1245 gain?

Answer 13

Section 1245 assets are depreciable personalty and section 1250 assets are realty.

Section 1245 takes gains on personalty as ordinary income up to the amount of accumulated depreciation. Any gain over the accumulated depreciation is a 1231 long-term capital gain.

For example if a personal property asset was purchased for $500 and accumulated depreciation to date is $100 and the asset was sold for $800, the total gain in $300. $100 of this will be a 1245 gain and $200 will be a 1231 gain.

Question 14

How would you depreciate personal property and real property under MACRS?

Answer 14

In general, when personal property is placed into service, the asset is treated as being placed into service at the mid-year point regardless of when purchased.

When a taxpayer places more than 40% of its property (other than certain qualifying real property) into service in the last quarter of the taxable year, the corporation must use the mid-quarter convention for MACRS depreciation purposes. With this method the acquisitions are segregated by quarter and treated as if placed in service in the middle of each respective quarter.

Real property (realty) includes land and anything affixed to land such as buildings, machinery, crops. Under MACRS, realty is depreciated using the straight line method. Residential Realty (houses, apartments) is depreciated over a 27.5 year period. Nonresidential realty (office building) is depreciated over 39-years. Real property is depreciated using the mid-month convention.

Question 15

For the dividends received deduction, how is it determined what % a corporation can deduct?

Answer 15

If the corporation owns less than 20%, the DRD is 50%.
If the corporation owns 20-79%, the DRD is 65%.
If the corporation owns 80% or more, the DRD is 100%.

Affiliated corporations that file consolidated returns can take a 100% dividends-received deduction.

There is an income limitation on the DRD.

The DRD is a special deduction available to corporations. It is specifically not available to S corporations, personal holding companies (PHC), personal service corporations, or individuals.

Question 16

For Partnerships and S-Corps, what are considered to be separately stated items?

Answer 16

Charitable contributions
Interest Income (including tax exempt interest income)
Dividend income from investments
Rental activities
Section 179 deductions 
Capital gains and losses (i.e sale of securities) (1231 included, 1245 Excluded!)
Tax credits
Foreign taxes
Retirement Plan payments for partners
Business insurance

Question 17

Is social security received taxable?

Answer 17

The maximum amount of taxable Social security benefits is 85% of social security benefits received.

The threshold to include social security as taxable income is $25,000 single and $34,000 married. Anything above that is taxable as per the above statement.

Question 18

When forming a partnership, when would a partner recognize a gain for contributions to the formation?

Answer 18

Partner’s that own 80% or more alone or together would not recognize a gain.

Any partner who owns 80% or less alone or together, could recognize a gain if they render services for stock. The gain would be in the amount of the FMV of the stock received.

Question 19

How are dividend distributions treated for a corporation?

Answer 19

The taxable amount of a dividend to a shareholder from a corporation’s earnings and profits is the amount received in cash or the FMV of the property received.

The general rule is the payment of a dividend does not create a taxable event, unless the distribution is appreciated property. When the distribution is appreciated property, the corporation recognizes gain as if the property was sold at FMV. This gain increases the E&P as well. The shareholder recognizes dividend income.

If the distribution was a cash dividend, the shareholder would recognize the cash as dividend income.

Question 20

Are contributions of long term and short term property deducted at FMV or cost?

Answer 20

Contributions of long-term property (property owned for more than one year) are generally deductible at fair market value at the date of the gift.
Contributions of short-term property (property owned for one year or less) are generally deductible at the lower of cost or fair market value.

Question 21

How much loss can you recognize on the sale of property to a related party (i.e a shareholder who owns 50% or more directly or indirectly) to a corporation, vise versa, or between family members, or between corporations that own 50% of the other)?

Answer 21

0

Taxpayers may not deduct losses on sales of property to related parties

Question 22

For the child tax credit, how do you calculate what the refundable amount would be?

Answer 22

For dependent children under the age of 17, there is a credit given of 2,000 per child. This amount is refundable so if the credit is higher than the tax liability, the taxpayer gets a refund. There is a limit to this refund though which is the lesser of $1,400 or Earned income - 2500 * 15%.

So say a taxpayer had a tax liability of $1,000 and they had earned income of $100,000 with 2 qualifying children. How much of a refund would they get?
For 2 children they would get a credit of $4,000 which is reduced by their liability of $1,000 to $3,000. To determine how much of this is deductible we calculate whether $1,4002 is lesser than $100,000-250015%. And it looks like 2,800 is lesser than 14,625 so the taxpayer gets a 2,800 refund.

Keep in mind that there is no tax credit for taxpayers who have AGI of 400,000 (married) or 200,000 (all other tax payers)

Question 23

How are gains and losses treated for a corporation when non-liquidating distributions of property are given to shareholders?

Answer 23

Non-liquidating distributions from a corporation to the shareholder of property is treated as the FMV - the adjusted basis in the property. If the FMV is bigger, then the corporation recognizes a gain.

No losses on non-liquidating distributions are allowed.

Question 24

Are business losses and personal losses deductible?

Answer 24

The loss on the disposal of business-use assets is deductible, but the loss on the disposal of personal-use assets is not deductible.

Question 25

How are organizational expenditures treated for partnerships/ individuals, etc?

Answer 25

Organizational expenditures and start-up costs are deductible in the first year up to 5,000 + the remaining costs/15 years. (Exceeds $50,000 will phase-out).

Allowable organizational expenditures include fees paid for legal services in drafting the partnership agreement, fees paid for accounting services, and fees paid for filings. Legal fees to obtain corporate charter also included.

Nondeductible expenditures - raising capital (costs for offering materials).

Question 26

How are distributions to S Corps treated when they are in excess of the shareholders basis?

Answer 26

If the S corporation has never been a C corporation or if it has no C corporation accumulated E&P, the distribution is a tax-free recovery of capital to the extent it does not exceed the shareholder’s adjusted basis in the stock of the S corporation. When the amount of the distribution exceeds the shareholder’s adjusted basis of the stock, the excess is treated as a gain from the sale or exchange of property (normally a long-term capital gain).

Question 27

Which deductions to taxable income must a corp. take to determine undistributed personal holding company income prior to the dividend-paid deduction?

Answer 27

A personal holding company deducts federal income taxes in computing undistributed personal holding company income. A personal holding company deducts net long-term capital gain less related federal income taxes in computing undistributed personal holding company income.

Personal holding company income includes Dividends, interest, and royalties.

Question 28

Accumulated earnings tax can be imposed

Answer 28

Regardless of the number of shareholders in a corporation.

Personal holding companies and partnerships are not liable for this tax, but corporations are potentially liable. Only corporations that make distributions in excess of accumulated earnings are not liable for the tax as there would be no accumulated earnings left to tax.

Question 29

What are some characteristics of tax-free organizations?

Answer 29

• In a tax-free reorganization, the basis of stock received by shareholders is the original basis of the stock given up by the shareholders.
• Tax-free reorganizations are nontaxable for both the corporation and the shareholders.
• An individual can treat up to $50,000 of worthless Section 1244 stock as an ordinary loss.
• A proportional stock redemption is treated as a dividend.

Question 30

For a shareholder in an S corporation, What amount of corporate taxable income is included as income for a taxpayer in their individual tax return?

Answer 30

S Corporations work in a similar fashion to partnerships. The income is passed through to the shareholder and included in taxable income whether or not it is actually distributed. You would take the total taxable income of the corporation multiplied by the shareholders owned %. Any distribution will not affect the taxable income, but will reduce the shareholder’s basis in the S Corporation stock.