Final Exam Review Flashcards
personal holding company test
corporation will be considered a personal holding company if it meets both the Income Test and the Stock Ownership Test.
The Income Test states that at least 60% of the corporation’s adjusted ordinary gross income for the tax year is from certain dividends, interest, rent, royalties, and annuities
Stock Ownership Test states that at any time during the last half of the tax year, 5 or fewer individuals must directly or indirectly own more than 50% in value of the corporation’s outstanding stock
deducting legal expenses to arrive at AGI
Trade or business expenses are deductible on Schedule C (for AGI), where the number is transferred to Form 1040 and is part of adjusted gross income
subpart F income
taxable income includable by a US taxpayer from a controlled foreign corporation
income should not have an economic connection to the country of origin (ex: Irish company in England performs services from contract entered by US parent)
like-kind exchange
transaction involving BUSINESS ASSETS (land for a building to be used in a trade business). cannot be personal prop or inventory, partnership investments, stock
section 1231 property
Depreciable personal and real property used in the taxpayer’s trade or business and held over 12 months
taxation on intracompany dividends?
no, dividends are deducted during consolidation, so not taxable
preponderance of the evidence standard for IRS
the IRS must prove by a preponderance of the evidence that the taxpayer willfully and deliberately attempted to EVADE tax to win a civil penalty
privity defense
basically the CPA doesn’t have a duty to 3rd parties, unless he knows of their reliance on the CPAs work. (ex: CPA is not liable to a client’s creditor)
when is a gratuitous surety released from liability to a creditor? (4)
- creditor commits fraud
- duress or breach
- surety lacks capacity or goes bankrupt
- material change (extension of time)
to file an involuntary petition, if there are 12 or more creditors:
at least 3 of the creditors who are owed individually or in aggregate at least $16,750 in unsecured debt
organizational expenses deduction
can deduct the first $5K of qualified organizational expenses. after that the remainder is amortized over 180 months
note: the $5,000 is reduced as the total cost exceeds 50,000 for each item
rules for an auction withOUT reserve
goods must be sold if an offer is made; however, if no offer is made within a reasonable time, can be revoked.
rules for an auction WITH reserve
auctioneer can withdraw goods for sale at any time until they announce completion of the sale
basis for Property acquired as a gift
generally retains the rollover cost basis & increases with any gift tax paid
ex: give child $10 gift with a FMV of $15. child’s basis is $10, the rollover cost basis at date of sale
The Social Security tax is based on
a self-employed person’s net profit or
an employee’s gross income (limited)
general rule regarding mailbox rule and revocations
mailbox rule - acceptance is valid when dispatched
revocation - revocation of a contract needs to be received before it is annulled
basically, if you mail someone to cancel a contract, it’s not effective until they receive it. if they accept offer before receiving revocation, contract is still valid
cash prize awarded in contest taxable as part of AGI?
yup
gain or loss on the liquidation of a partnership interest?
NO
so if asset + cash received in liquidation is still less than basis, you “Zero out to get out” and the basis is increased to get the partnership to 0.
ex: received $35 cap asset and cash of $15. if basis is $65:
65-15=50. so attribute all 50 to asset.
deductions for SEP IRA plans
yes - Amounts contributed to self-employed retirement plans are permitted as adjustments (for AGI)
Attachment establishes:
a secured party’s right to take possession of collateral from a debtor when there is a default on a secured transaction
shareholders basis in S corp:
income (taxable + non tax)
less distributions
= total basis increase/# shareholders
capital asset:
includes property (real and personal) held by the taxpayer for investment or for personal use
covered opinion
includes any written or electronic advice concerning transactions specified by the IRS as listed transactions.
incentive stock option (6) (ATE PEE)
best tax option
- (A) approved: granted under a plan that is properly approved
- (T): ten years: must be done within 10 years
- (E): exercise price > FMV exercise price can NOT be less than FMV of stock at grant date
- (P): voting power cannot be more than 10% employee may not own more than 10% of voting power
- (E): Employee must hold for 2 years & 1 year after exercise date - employee must HOLD for at least 2 years after grant date, and at least one year after EXERCISE DATE
- (E) employed - employee must remain an employee from date option is granted to 3 months before exercised
ESPP ownership req
can’t own more than 5%
SSTB businesses
health, law, accounting, actuarial science, performing arts, consulting, athletics, FS.
QTB is anything else not listed as an SSB
full performance & statute of frauds
although statute of frauds requires >1yr contracts in writing, if a contract has been fully performed, the contract can still be enforced despite missing writing
(recognized/realized) For income to be taxable on a tax return, it must be
BOTH recognized AND REALIZED
reorganization proceedings for bankruptcy. can it be voluntary ?
yes, either voluntary or non voluntary is A ok for reorg, and you don’t need a trustee
section 179 rules
max expense under section 179 for 2021 is $1,050,000
however, amount is reduced dollar for dollar for the amount total property placed in service exceeds 2,620,000.
what does modification of a sales contract under the UCC require
good faith & agreement for the modification between the parties. also modification must satisfy the statute of frauds (whether or not writing is required)
three requirements for attachment
(i) the parties agree to create the security interest evidenced by either the creditor’s taking possession of the collateral or a written security agreement that describes the collateral and is SIGNED by the debtor;
(ii) the CREDITOR must give value in exchange for the security interest;
(iii) and the DEBTOR must have rights in the collateral.
when is a partnership interest treated as ordinary income
any gain realized from the share of unrealized receivables and/or appreciated inventories is treated as ordinary income.
non qualified stock option: recognize value on the day they are received?
yes, recognize the readily ascertainable market value: FMV $/share * # shares
when is the principal bound by the agent’s acts?
if the agent acts with actual or apparent authority, or if the principal ratifies the transaction
rental real estate taxes deduction
deduction to ARRIVE AT Gross income
report on schedule E, then report net income on 1040
3 primary authoratative sources when conducting tax research:
The Internal Revenue Code, tax court cases, and Treasury regulations
formula for ordinary income/capital gain on sale of partnership interests:
Sale Price Less: - capital account (adjusted basis) - share of debt (adj) = total profit Less: - share of hot assets (unrealized recv)*** = capital gain
***share of hot assets = amount of the gain attributable to ordinary income
what is FUTA based on
The amount is based on the first $7,000 paid to each employee per year.
for tax purposes, what period are all intangibles amortized over?
15 years
entities entitled to the net operating loss (NOL) deduction
C corporations, estates, and trusts
With regards to a tax shelter, a penalty for understatement of taxpayer liability could apply to a CPA unless
it is reasonable to believe that the position would more likely than not be upheld on its merits
writ of garnishment
allows seizure of defendant’s property
ex: creditor can be allowed to collect money from a debtor’s wages
excess business loss rule
considered AFTER PAL limitations
limit on loss is $262K. any excess is carried forward
passive activity income
rental real estate, equipment leasing, or partnerships, s corps, llc with no material participation
PMSI
creditor who loans money to debtor, debtor then buys property, then gives creditor an interest in the property
must file before taking delivery of goods and notify prior creditors
De Minimus Rule
if a company has AFS (applicable financial statement) and a written policy to expense, a company can expense up to $5,000 each item.
if no AFS, only can expense up to $2,500 each. however, if an item cost more than that, nothing you can do
involuntary conversion
basically recognize the basis in a new property as FMV of new property - gain of old property not recognized
Loss on Section 1244 stock
married individuals can deduct up to 100,000 as ordinary loss. remaining is treated as capital loss Subject to 3k limit)
wash sale
A wash sale occurs when a taxpayer sells stock at a loss and invests in substantially identical stock within 30 days before or after the sale
will increase stock basis, but loss recognition is not allowed
state apportionment ratio?
the average of the state’s percentage of total payroll paid to employees within the state, percentage of sales from sources within the state, and the percentage of property and rent expense
corporation, net CAPITAL loss carry forward/back period
net capital losses are carried back 3 years and forward 5 years. they are NOT deducted from ordinary income
date of holding period for short sale
date short sale is EXECUTED, not the closing date
APA
binding contract between the IRS and the taxpayer by which the IRS agrees not to seek a transfer pricing adjustment for a covered transaction if the taxpayer files its return for a covered year consistent with the agreed transfer pricing method
treatment for loss on sale of principal residence
Personal loss, not capital loss.
Section 291 gain
only for C corps. lesser of 20% of gain on sale realized ([sale price-adjusted basis)*.20) or accumulated depreciation.
remainder will be a 1231 gain.
ex: sale property for 200, accumulated depreciation is 50, original cost 150.
basis = 150-50 = 100
gain = 200-100 = 100
so lesser of gain 20% = 100.2 = 20
or accumulated depreciation of 50.
291 ordinary income = 20
remaining 80 is section 1231 gain
