Deck 2

Question 1

Under the uniform capitalization (UNICAP) rules applicable to taxpayers with property acquired for resale, what should be capitalized with respect to inventory?

Answer 1

Direct material, direct labor, and factory overhead (applicable indirect costs) are capitalized with respect to inventory under the uniform capitalization rules for property acquired for resale. Applicable indirect costs include depreciation and amortization, insurance, supervisory wages, utilities, spoilage and scrap, design expenses, repair and maintenance and rental of equipment and facilities (including offsite storage), some administrative costs, costs of bonus and other incentive plans, and indirect supplies and other materials (including repackaging costs).

Real or tangible person property acquired by the taxpayer for resale (retailer’s inventory) are all subject to the UNICAP rules. However, retailers with average gross receipts under $26,000,000 for the three preceding tax years are exempt.

Research is NOT an item that would be included under UNICAP rules, it is expensed.

Question 2

What are the common assets for each of the Useful lives under MACRS (3,5,7,10)?

Answer 2

MACRS assets under each useful life period:

3 Years: Special tools for specific manufacturing applications
5 Years: Computers, copy machines, cars & trucks
7 years: Office furniture & equipment, machinery
10 Years: Water Vessels

Question 3

A domestic limited liability company not classified as a corporation under IRS regulations is owned entirely by one individual taxpayer. Unless the taxpayer elects otherwise, the company will be taxed as what?

Answer 3

A disregarded entity

A single-member limited liability company (LLC) is a disregarded entity that is considered to be the same entity as the owner. If the owner is an individual, the LLC is taxed as a sole proprietorship and the income and deductions are reported on Schedule C of the individual’s Form 1040 federal income tax return.

Question 4

How much income would you recognize with a stock incentive and nonqualified stock option (with or without the ascertainable value)?

Example: Grant date in Year 1 at $45; Exercised in year 1; In year 3 was sold at $95. 100 shares
Amount at exercise date $85

Answer 4

From grant date, you need to keep the stock for 2 years to get a long-term capital gain. If under 2 years, it’s ordinary gain.

Stock incentive option:
Year 1: $0
Year 3: $2,500 (95-45x100) (Price stock sold for - Stock option price)

Non-qualified Stock option:
Year 1: $4000 (85-45 X 100) (FMV-grant date amount X # of shares)
Year 3: $1,000 (95-85 X 100) (Price stock sold for - FMV X 100)

Say there was a readily ascertainable value for the nonqualified stock option of $5 per share:
Year 1: $500 Ascertainable amount X number of shares
Year 3: $4,500 (95-45-5 X 100) (Price stock sold for - grant date amount - ascertainable value X # of stock)

Question 5

What amount of stock (FMV or cost) is used to determine the amount contributed to charity if contributed to the appropriate person?

Answer 5

If the stock was held over a year, it is the FMV and is long-term capital gain property.

If the stock is held under a year it is ordinary income and so the taxpayer is allowed to deduct the lesser of the FMV of the cost basis.

Question 6

What dividends are included in the deduction for a personal holding company when computing company taxes?

Answer 6

The dividends paid deduction taken to arrive at personal holding company income includes the consent dividends for the taxable year as well as actual dividend distributions made.

Question 7

How is the Kiddie tax determined?

Answer 7

For children under 18, or 18-24 that do not provide over half of their support and is a full time student, only a portion of the income the child makes is subject to the kiddie tax. Net unearned income is unearned income - 2,200 and is taxed at the parent’s rate.

Unearned income = dividends, interest, rents, royalties, etc.

Question 8

How are distributions treated for corporations?

Answer 8

When a corporation distributes appreciated property to shareholders, the corporation recognizes a gain equal to the difference in basis and FMV.

If there is a liability attached to the property that exceeds FMV and that liability is assumed by the shareholder, then the gain to the corporation is equal to the liability - basis.

No losses are recognized on non liquidating distributions to shareholders, even if there are gains from other distributions, it is not netted against the gains.

Question 9

What are the characteristics of a simple trust?

Answer 9

A simple trust is required to distribute all annual income to beneficiaries, which cannot be charitable organizations. The income from the trust is taxable to the recipient, and the corpus (principal) must remain in the trust. Capital gains also stay within the trust and become part of the corpus.

Question 10

What are some examples of capital assets?

Answer 10

Personal automobile of individual
Furniture and fixtures in the home o fthe individual taxpayer
Stocks and securities of all types (except those held by dealers)
Personal property of a taxpayer not used in a trade or business
Real property not used in a trade or business
Interest in partnership
Goodwill of a corporation
Copyrights, literary, musical, or artistic compositions that have been purchased
Other assets held for investment

Question 11

What medical expenses can be claimed on an income tax return for an individual for medical expenses (subject to AGI income limitation of 7.5%)?

This is an itemized deduction

Answer 11

Physical therapy (professional medical services)
Medicine and prescription drugs
Insurance premiums providing reimbursement for medical care and accidents
Medically necessary surgery
Transportation to Medical facility (limit - lesser of actual cost or 17 cents per mile in 2020)
Physically disabled costs (also includes removal of structural barriers in their residences to accommodate a disability)

These are reduced for any insurance recovery received.

Question 12

What percent of stockholders of voting and nonvoting shareholders must consent for an s corporation status to be revoked?

Answer 12

S corporation status can be revoked if shareholders owning more than 50% of the total number of issued and outstanding shares consent. The specific percentage of voting and nonvoting shareholders is not considered, only the total.

Question 13

Is Alimony, child support, and property settlements in a divorce included in income?

Answer 13

Child Support and property settlements in divorces are non taxable items and so not included in income.

Alimony determined before dec 31, 2018 is taxable and included in income. (after 2018 is non taxable)

Question 14

When a question asks what would be reported as ordinary income on a corporation’s income tax return, what is it asking?

Answer 14

Ordinary income is the net of all taxable and deductible ordinary business revenue and expenses not including separately stated items.

Question 15

How are distributions to corporations classified when there is E&P and when distributions exceed E&P?

Answer 15

Distributions are considered dividends to the shareholder to the extent a corporation has current or accumulated earnings and profits. Any amount distributed over E&P is a liquidating return of capital to the shareholders.

Question 16

When a person inherits stock after the death of the owner of the stock, what amount is included in the heir’s income?

Answer 16

Heirs are not taxed on inheritances. Income or loss results when inherited property is sold.

Question 17

Do you use the effective tax rate or the marginal tax rate to calculate taxes?

Answer 17

Marginal rate

The regular income tax that applies is the marginal rate (the rate for the next dollar of taxable income). The effective tax rate is simply the total tax divided by the total taxable income.

Question 18

An employee who has had social security tax withheld in an amount greater than the maximum for a particular year may claim what?

Answer 18

An employee who has had Social Security tax withheld in an amount greater than the maximum for a particular year may claim the excess as a credit against income tax, if that excess resulted from correct withholding by two or more employers.

Question 19

How would you calculate the gain or loss for a corporation when there has been a distribution to shareholders by that corporation?

Answer 19

In a corporate liquidation, distributions are subject to two levels of taxation. First, the corporation must recognize gain or loss as if it sold the assets for the fair market value. Second, the shareholders would report gain or loss determined by the difference between the fair market value of the assets received and the shareholders’ adjusted basis of the stock. The gain at the corporate level would be calculated as the fair market value less the basis.

Note that although corporations do not get lower tax rates on certain capital gains (as individuals do), corporations must still identify gains and losses as capital vs. noncapital. Marketable securities and investment property would be capital and inventory and receivables would be ordinary

Question 20

How is a distribution treated to a shareholder of an S corporation?

Answer 20

Distributions have no effect on a shareholder’s basis if they are out of accumulated earnings and profits and are therefore taxable. They would also have no effect on a shareholder’s basis if the basis is already zero, which would result in the shareholder recognizing a gain to the extent of the distribution.

If an S corporation has no accumulated earnings and profits, the amount distributed to a shareholder decreases the shareholder’s basis for the stock. The distribution is nontaxable to the extent of the shareholder’s basis.

Question 21

What all is included in taxable income when a partner receives a distribution of cash, their share of the business income, and a guaranteed payment?

Answer 21

A partner must include in income their share of partnership income (even if not received) on their tax return in the taxable year within which the taxable year of the partnership ends. This income includes guaranteed payments.

Withdrawals/distributions are not a taxable event, yet will decrease the partner’s basis.

Question 22

Are losses allowed in a partnership from the sale or exchange of property?

Answer 22

Losses between a controlling partner (over 50% interest in capital and profits) and his controlled partnership from the sale or exchange of property are not allowed.

Question 23

What tax year end should a newly formed partnership choose?

Answer 23

The required tax year for a partnership is the same tax year as that of the partners. If the partners have different tax years, the required tax year for the partnership is the tax year of the partner or partners who own more than 50 percent of the partnership.

A new partnership can make a Section 444 election to use a different tax year from its required tax year, but only if the deferral period is no longer than three months. The deferral period is the number of months from the end of the proposed new tax year to the end of the required tax year.

So if the tax year end was December 31, you could only propose a new tax year end that falls in October - December

Question 24

Deductions for AGI: Student Loan limitations include what?

Answer 24

There is a limitation of $2,500 on the deduction.
Deduction phases out for married filing joint taxpayers with AGI of $140,000 and single with AGI of $70,000.
Not allowed if the taxpayer is a dependent of another taxpayer, but there is no requirement that the taxpayer cannot have a dependent of his or her own.

Question 25

In regards to transfer pricing, what are some facts about controlled and uncontrolled transactions?

Answer 25

The IRS may make adjustments necessary to a controlled transaction based on the “arm’s-length” standard.

A controlled transaction is any transaction or transfer between two or more members of the same group of controlled taxpayers.

A controlled taxpayer is any one of two or more taxpayers owned or controlled directly or indirectly by the same interest.

Uncontrolled comparable refers to the uncontrolled transaction or uncontrolled taxpayer that is compared with a controlled transaction or controlled taxpayer.

Question 26

What are some ways a corporation can eliminate or reduce any accumulated earnings tax in the current year?

Answer 26

A corporation that can demonstrate that its reasonable business needs require it to accumulate earnings can escape the accumulated earnings tax on the portion reasonably accumulated.
Dividends paid by the due date of the tax return reduce the accumulated earnings subject to the accumulated earnings tax.

Question 27

How do you calculate distributable Net Income (DNI) for a trust?

Answer 27

The basic idea with the income and deductions for a trust is you take the income the trust made during the year, subtract deductions (taxable and non-taxable), then the trust makes distributions of DNI to beneficiaries.

Question 28

How do you determine the basis a corporation takes in property received

Answer 28

The general rule is that the basis of the property received from the transferor/shareholder is the greater of: (1) adjusted net book value of the transferor/shareholder plus any gain recognized by the transferor/shareholder or
(2) debt assumed by the corporation.
A shareholder recognizes gain when at least 80% of both the voting and nonvoting stock is not owned by the shareholders immediately after the transaction and there is taxable boot (cash is withdrawn or cancellation of debt exists) on the transaction.

There is no gain or loss to the corporation issuing stock in exchange for property for the issuance of stock.

Question 29

What is the calculation for an Installment sale to determine the annual gain?

Answer 29

Total Gain/ Contract Price X Annual Payment = Annual Gain

Question 30

In regards to small business stock, what is a requirement for the exclusion of gain for small business stock?

Answer 30

• The stockholder has to be an original stockholder of the corporation.
• As of the date of the stock issuance, the capital must be less than $50 million.
• The stock must be issued after August 10, 1993.
• The corporation must be a C corporation.