Federal Taxation

Question 1

what causes trust property to be included in the grantor’s gross estate?

Answer 1

if the trust is revocable, which means the taxpayer maintains ownership or control of the property

Question 2

can an S corp be owned by a bankruptcy estate?

Answer 2

Yes. it can also be owned by decedent’s estates, or trusts.

Question 3

what happens if an S corp has excessive passive income? (passive income exceeds 25% of the corp’s gross receipts)

Answer 3

a tax at the highest corporate rate is imposed on the excessive passive income

Question 4

how are estimated tax payments calculated?

Answer 4

at least 90% of current years taxes or 100% of last years taxes. BUT- if AGI exceeds 150k, then tax payments during the year must be 110% of last years taxes

Question 5

when a C corp makes an S election and it has unrealized built-in gains in its assets as of the election day, they must pay a built-in gains tax on this appreciation if it is recognized within the:

Answer 5

next 10 years. That means if it is sold and the gain is recognized it has to pay a built-in gains tax on the appreciation at 35%

Question 6

how do 1231 gains and losses work?

Answer 6

1231 gains are carried back against 1231 losses and ordinary income is ‘recaptured’. Gains go back 5 years.

Question 7

when doing a life insurance as a fringe benefit question, the key thing to remember is that the first 50,000 of ______ is _____.

Answer 7

coverage is free. if it has 2.76 per $1000 of coverage, only apply it to the amount higher than 50k

Question 8

things to remember about putting property into a partnership:

Answer 8

the partnership divides up any debt on the property. if you put in property with that you have 7k of basis in, and there is a mortgage of 3k, then you would have 7k of basis in the partnership except you have to subtract the amount of the debt the other partners will assume. if you’re a 50% partner then you’d subtract 50% of the debt, so your basis goes down to 5.5k. 7k - 1.5k = 5.5k

Question 9

some guidelines for determining eligible exemptions:

Answer 9

the individual you are claiming must be a qualifying child or relative.
they can’t provide more than 50% of their own support- which means you provide over 50% of their support.
the personal exemption amount is 3,900 for income.
time at college counts as living at home- they need to live at home for more than 1/2 the year

Question 10

how is your taxable income and basis determined for property received as a dividend?

Answer 10

the taxable income is the FMV of the property received less any liabilities assumed.
Your basis is always the FMV of the property.

Question 11

what is the standard deduction for a trust or an estate in the fiduciary income tax return?

Answer 11

zero

Question 12

in a corporate formation, gain is recognized to the extent that the liabilities assumed by the corporation exceed the:

Answer 12

basis in the assets contributed by the shareholder.
If you put in property worth 20k, you have basis of 6k, and it has a 12k mortgage- your gain is the difference in your basis and the mortgage you’re being relieved of… so 6k in this case

Question 13

what is the rule for interest expenses when computing AMT?

Answer 13

the interest has to be related to the primary residence- it can’t be a home equity loan to buy a motor home.
you add back in taxes to compute AMT.
You add back in the 2% deductions to compute AMT.

Question 14

how do you deduct INVESTMENT INTEREST EXPENSE?

Answer 14

it is deductible to the extent of net investment income. So you take non-interest investment expenses and net them with investment income. You can then deduct investment interest expense up to the amount of net investment profit.

if you have investment income of 10k and investment expenses of 8k, you can deduct up to 2k of investment interest expenses.

Question 15

are medical expenses that you paid with a credit card deductible when you pay them or when you pay off the credit card?

Answer 15

they are deductible in the year you paid the medical expenses, not when you pay off the credit card.

Question 16

what are the rules for using real estate losses to offset ordinary income?

Answer 16

a natural person can offset up to 25k of nonpassive income with passive losses resulting from rental activities. You have to own at least 10% of the rental activity, and you must have actively participated.
Also, the 25k allowance is reduced by 50% of the amount that the taxpayer’s adjusted gross income exceeds 100k.
So if you have 200k in income, you have 100k over the 100k limit, and you have to reduce your losses by half of that amount, or 50k.

Question 17

which senate committee considers new tax legislation?

Answer 17

the finance committee

Question 18

if a partner disposes of his share of a partnership and it had suspended loss caryyovers, how is it treated?

Answer 18

the passive losses are released and can offset any type of income

Question 19

what are ‘hot assets’ of a partnership?

Answer 19

ONLY inventory and unrealized receivables

Question 20

how is basis in a distribution of property from a partnership to an individual calculated?

Answer 20

it is the same as the partnership’s basis in the property but it may not exceed the partner’s basis in the partnership.
Also, cash distributed reduces the partner’s basis dollar for dollar.
If you have a partner with basis of 50k and they get 20k in cash, and then some land with 40k of basis to the partnership, the partner can only take basis in the land of 30k. because of the 50k basis less the 20k received in cash, there’s only 30k of basis left for that partner.

Question 21

what is the gain and loss basis of stock that is given to you as a gift?

Answer 21

if the owners basis is less than FMV, then it is the owners basis. If the FMV is less than the owners basis, then you take the FMV basis for losses, and the owners basis for gains.
For an inheritance the gift is valued at FMV.

Question 22

for a stock split basis question:

Answer 22

figure out the total amount the stock cost originally and multiply that by the different split ratios to get the basis per share when the stock is sold

Question 23

how to do a wash sale question

Answer 23

let’s say you sold 500 shares at a loss and then purchased 100 back within 30 days at a lower price. the % of shares you bought back is the percentage of the loss you’re not allowed to take. So if selling the 500 shares got you a loss of $1,000, buying back 100 shares is 1/5 or 20% of the shares you sold. So $200 of loss would be disallowed.

Question 24

when does a short-term capital gain change into a long-term capital gain?

Answer 24

LONGER than one year. if it is exactly one year it is still short term.

Question 25

Details of personal use assets for tax purposes:

Answer 25

Personal use assets, such as a BOAT, are capital assets. BUT, if you have a loss when you sell a personal use asset IT IS NOT DEDUCTIBLE. It is of course taxable if you have a gain though.

Question 26

what is the difference in 1231, 1245, and 1250 property?

Answer 26

1245 and 1250 are BOTH still 1231 property, but they are each different.
1245 property is depreciable personalty such as equipment in a sole proprietorship. The amount of depreciation taken on 1245 property is recaptured when it is sold and is then ordinary income. The remaining gain is 1231 gain.
1250 property is depreciable realty such as land or buildings. On these you take the straight-line depreciation once it is sold and it is subject to the 1250 25% recapture tax. If there is actual depreciation over straight-line, that is subject to 1245 rules which would be ordinary income.

Question 27

what year class are computers under MACRS?

Answer 27

5 year class

Question 28

what is the half year convention under MACRS?

Answer 28

in the year the asset is purchased, it is depreciated for 6 months no matter when it is actually bought. same thing for the year it is sold

Question 29

generally a lessor will not be taxed on improvements made by a lessee unless:

Answer 29

the improvements are deducted from lease payments as a form of rental payments. if the improvement serve as a substitute for rental payments, then it is fully taxable to the lessor

Question 30

if you are the beneficiary of a life insurance policy which is collateral for someone who owes you money, how is it taxed?

Answer 30

only the amount that you get paid above what you are owed is taxable. If they owe you 100k and the policy pays you out 120k, then the 20k is taxable

Question 31

prepaid rental income is taxable when received unless:

Answer 31

unless it is potentially refundable

Question 32

how much of a capital loss can be deducted in one year for individuals?

Answer 32

3000- anything more than that is carried forward as a STCL.

Question 33

for interest on a series EE bond to be deductible, the person you spend it on must be:

Answer 33

a dependent of yours

Question 34

how are gambling gains and losses treated?

Answer 34

gambling winnings are included in gross income. Gambling losses DO NOT offset gambling winnings- they are deducted from AGI as a misc itemized deduction limited to the amount of gambling winnings

Question 35

formula for casualty losses:

Answer 35

you take the lesser of the decline in the property because of the casualty or the adjusted basis in the property
then you deduct any insurance reimbursements
then you have a disallowance of $100
then you deduct 10% of your AGI for the year
That leaves you with the casualty loss you’re allowed

Question 36

how much of the self employment tax is allowed as a deduction FOR AGI? what form does it go on?

Answer 36

one half. it would go on the form 1040

Question 37

are insurance premiums on property for personal use deductible?

Answer 37

no

Question 38

what is the rule about deducting the either sales tax or state income taxes paid?

Answer 38

you can deduct the greater of sales taxes paid or state income taxes paid

Question 39

are estimated federal tax payments deductible on the tax return?

Answer 39

no

Question 40

what is a schedule A?

Answer 40

itemized deductions

Question 41

where are tax preparer fees listed on a tax return?

Answer 41

it is a schedule A itemized item, even if the person earned all their money is from a schedule C sole proprietorship

Question 42

are personal life insurance premiums deductible?

Answer 42

no- they are considered a personal expense

Question 43

how is an interest forfeiture penalty for making an early withdrawal from a certificate of deposit treated?

Answer 43

it is deductible on page 1 of the 1040 to arrive at AGI

Question 44

are estimated state income taxes deductible?

Answer 44

yes- fully deductible as an itemized deduction schedule A

Question 45

are real estate taxes on a principal residence deductible?

Answer 45

yes- fully deductible as an itemized deduction schedule A

Question 46

how is an expenditure made for medical reasons that improves a residence treated for tax purposes?

Answer 46

it is an itemized deduction subject to a 7.5% of AGI threshold to the amount of the cost over the value it added to the home.

If the cost was 10k and it increased the home’s value by 8k, then 2k is deductible.

Question 47

are health insurance premiums deductible?

Answer 47

they are an itemized sched A deduction subject to a 7.5% AGI threshold

Question 48

how are unreimbursed employee expenses treated?

Answer 48

misc itemized deduction on sched A subject to a 2% of AGI threshold

Question 49

in a partnership distribution- when is gain recognized?

Answer 49

only when cash exceeds the basis in the partnership interest

Question 50

for the repair of a rare book, if the first price agreed upon is 450 but additional repairs are needed and the price goes up to 600, is that binding?

Answer 50

yes because the repair of the book is a service, and additional repairs equate to additional consideration, the increase in price is binding

Question 51

under the UCC how much of a deposit can a seller keep if the buyer defaults?

Answer 51

the lesser of $500 or 20% of the purchase price- even if there was no liquidated damages clause

Question 52

if you get assigned a partnership interest, do you get to share in profits and management?

Answer 52

you get the share of the profits, but you don’t get to participate in management unless the other partners agree