Final REG Review Flashcards
Individual Taxation – Individual AMT Formula
REGULAR TAXABLE INCOME
± Adjustements
\+ Preferences
= ALTERNATIVE MINIMUM TAX INCOME
– Exemption
= ALTERNATIVE MINIMUM TAX BASE
x Tax Rate
= TENTATIVE AMT TAX
– Tax Credits
= TENTATIVE MINIMUM TAX
– Regular Income Tax
= ALTERNATIVE MINIMUM TAXIndividual Taxation – Income Tax Formula
GROSS INCOME
– Adjustments
= ADJUSTED GROSS INCOME
– Exemptions
– Standard or Itemized Deductions
= TAXABLE INCOME
x Tax Rate
= FEDERAL INCOME TAX
– Tax Credits
\+ Other Taxes
– Payments
= TAX DUE/REFUNDIndividual Taxation – Individual AMT Formula: Adjustments
a) Increase of Decrease = PANIC
P = Passive activity losses
A = Accelerate depreciation
N = NOL of individual taxpayer
I = Installment income of a dealer
C = Contracts – % completion vs competed contract
b) Increase only
– Add back personal exemptions
– Add back standard deduction
– If itemize
– No phaseouts
– Medical < 10% AGI allowed
– No miscellaneous deductions
– Interest deduction on home equity loan not allowed
– No deduction for taxes
Individual Taxation – Individual AMT Formula: Preferences
Always add back = PPP
P = Private activity bonds interest income P = Percentage depletion over adjusted basis P = Pre-1987 accelerated depletion
Individual Taxation – Individual AMT Formula: Exemptions
Exemption = $40,000
Phase out = 25% of AMTI over $150,000
Individual Taxation – Individual AMT: Credits
- Foreign Tax Credit
- Adoption Credit
- Child Tax Credit
- Retirement Contributions Credit
- Earned Income Credit
Individual Taxation – Carrybacks/Forwards
Net operating loss (sole proprietor)
– 2 year back
– 20 years forward
Passive activity loss
– No carryback
– Indefinite carryforward
Excess chartiable deduction
– No carryback
– 5 years carryforward
Foreign tax credit
– 1 year carry back
– 10 years carry forward
General business credit
– 1 year carry back
– 20 year carry forward
AMT credit
– No carryback
– Indefinite carryforward
Individual Taxation – Phaseouts, I
– Mom & Pop Exception to PAL Rules
– Personal Exemptions
– Deductible IRA
Mom & Pop exception to PAL rules
– Can deduct upt to $25,000 PAL/yr
– Phaseout 50% of AGI over $100,000
– Phaseout complete by $150,000 AGI
Personal Exemption
– 2% per $2,500 over AGI
Deductible IRA
– Contributions are deductible
– Phaseout at high AGI and active participation in another qualified plan
Individual Taxation – Phaseouts, II
– Coverdell Education Savings Account
– Child and Dependent Care Credit
– Lifetime Learning Credit
Coverdell Education Savings Account
– Contribute up to $2,000 per beneficiary per year
– Phaseout at high AGI
Child and Dependent Care Credit
– 20 - 35% of eligible expenses
– Max expenses = $3,000 for 1 child, $6000 for multiple children
– Phaseout = 1% per $2,000 above $15,000 AGI
Lifetime Learning Credit
– Up to 20% of $10,000 tertiary education expenses
– $2,000 maximum credit
– Phaseout at higher AGI
Individual Taxation – Phaseouts, III
– Retirement Savings Contributions Credit
–Adoption Credit
– Child Tax Credit
Retirement Savings Contributions Credit
– up to 50% of $2,000 contribution
– $1,000 maximum credit
– Phaseout at high AGI
Adoption Credit
– $12,970 per child
– Phaseout at high AGI
Child Tax Credit
– $1,000 per child
– Phaseout = $50 per $1,000 excess AGI
Individual Taxation – Phaseouts, IV
– American Opportunity Credit
– Exemption for AMT
American Opportunity Credit
– $2,500 maximum credit
– Phaseout at high AGI
Exemption for AMT
= $40,000
– Phaseout = 25% of AMTI above $150,000
Individual Taxation – Itemized Deductions: Pease Limitation
Pease limitation = lesser of:
1) 3% excess AGI
or 2) 80% otherwise allowable itemized deduction
Pease limitation doesn’t apply to
– Medical expense (10% AGI floor)
– Investment interest expense (limited to net investment income)
– Casualty and theft ($100/event + 10% AGI floor)
– Gambling losses (limited to gambling wins)
Individual Taxation – Itemized Deductions that Pease Limitation applies to
Pease limitation applies to – State, local, foreign taxes – Interest expense for 1st or 2nd home – Charitable contributions – Miscellaneous itemized deductions (2% AGI floor)
Itemized Taxation – Tax Credits: Refundable Credits
- Child Tax Credit
- Earned Income Credit
- Withholding Tax
- Excess Social Security Tax Withheld
- American Opportunity Act
Individual Taxation – Tax Credits: Nonrefundable Credits
- Child and Dependent Care Crdit
- Elderly and Permanently Disabled Credit
- Lifetime Learning Credit
- Retirement Savings Contribution Credit
- Foreign Tax Credit
- Residential Energy Efficient Property Credit
- General Business Credit
Individual Taxation – Statute of limitations
Assessment of additional tax
– 3 years from later of return due date or filing date
– 6 years if 25%+ income understatement
– No limit if fraud
Filing to claim refund
– 3 years from return due date or 2 years from when tax paid
– Bad debt/worthless stock = 7 years from later or due date or filing date.
Individual Taxation – Tax Payments
Prepayments during tax year
– Withholding
– Social Security withholding
– Estimated tax payments
Make quarterly payments if
1) tax liability exceeds withholding by $1,000+
or
2) withholding is the lesser of a) 90% current year’s tax or b) 100% last year’s tax (110% if high AGI)
C Corprations –Formation: Shareholders
No gain or loss recognized unless
- Boot received
- Liabilities assumed > adjusted basis
Boot received
– Gain is lesser of 1) gain realized, or 2) FMV boot received
Liabilities assumed > adjusted basis
– Gain = liabilities assume – adjusted basis
Adjusted basis in stock = Adjusted bass of property transferred \+ Gain recognized – Boot received – Liabilities assumed by corporation
C Corporations – Formation: Corporation
No gain or loss recognized
Basis in property received is greater of
1) Shareholder’s basis in property,
2) Liability assumed by corporation
C Corporation – Book Income
INCOME
– Expenses
= NET INCOME BEFORE TAXES
– Tax
= NET INCOME AFTER TAXES
± Income/loss from discontinued operations, net of tax
± Extraordinary gain/loss, net of tax
± Accounting adjustments and changes, net of tax
= NET INCOME
C Corporation –Taxable Income
GROSS INCOME – Deductions = INCOME BEFORE SPECIAL DEDUCTIONS – Charity – Dividends Received Deduction = TAXABLE INCOME
C Corporation – Income Tax Formula
GROSS INCOME
– Deductions
= INCOME BEFORE SPECIAL DEDUCTIONS
– Charity
– Dividends Received Deduction
= TAXABLE INCOME BEFORE CARRYBACKS/FORWARDS
– NOL & Net Capital Carryback/forwards
= TAXABLE INCOME
x Tax Rate
= TAX LIABILITY
– Tax Credits
\+ Other Taxes
= TAXES DUEC Corporation – Special Deductions
Charitable Deductions limited to 10% of Income before Special Deductions
– Excess carried forward
Dividends received deduction
– 70% for 0 - 20% ownership
– 80% for 20 - 80% ownership
- 100$ for 80%+ ownership
C Corporations – Carryforwards/backs
NOL carried back 2 years, forward 20 years
Net Capital Loss carried back 3 years, forward 5 years
C Corporations - Filing
15th day of 3rd month after year-end
Accrual accounting for - Inventory – Tax Shelters – Certain farming corporations – C corps/trusts with UBI/partnerships that have C corp partners with $5 million receipts for last 3 years
C Corporations - Statute of Limitations
Assessment of additional tax: 3 years
– 6 years for 25% misstatement
C Corporation – Estminated Payments
15th day of 4th, 6th, 9th, and 12th month
Underpayment if don’t makes estimated payment and owe $500+
Small/medium corporations pay lesser of
1) 100% current year tax, or
2) 100% of last year tax
Large corporations pay 100% current year tax
C Corporation – Corporate AMT Formula
REGULAR TAXABLE INCOME
± Adjustment
\+ Preferences
= UNADJUSTED ALTERNATIVE MINIMUM TAXABLE INCOME
± ACE Adjustment
– AMT NOL Deduction
= ALTERNATIVE MINIMUM TAXABLE INCOME
– AMT Exception
= AMT BASED
x 20%
= GROSS AMT
– Foreign Tax Credit
= TENTATIVE MINIMUM TAX
– Regular Tax Liability
= ALTERNATIVE MINIMUM TAXC Corporation – Corporate AMT Formula: Adjustments
LID
L = Long-term Contracts
I = Installments Sales
D = Depreciation (post-1986 acquisitions)
C Corporation – Corporate AMT Formula: Preferences
PPP
P = Percentage depletion
P = Private activity bonds
P = PRe-1987 ACRS depreciation
C Corporation – Corporate AMT Formula: ACE Adjustment
ACE Adjustment
= 0.75 x (ACE – Alternative Minimum Taxable Income)
MOLDD
Adjusted Current Earnings
= Unadjusted alternative minimum taxable income
+ Municipal bond intérêts
+ Organizational expense amortization deduction
+ Life insurance proceeds on key employees
+ Depreciation: AMT less ACE depreciation
+ Dividends received deduction (70%) deduction
C Corporation – Corporate AMT: Exemption
$40,000 - 25% (alternative minimum taxable income – $150,000)
C Corporation – Accumulated Earnings Tax
Tax if Retained earnings > $250,000
Doesn’t apply to
– Personal holding companies
– Tax-exempt corporations
– Passive foreign investment corporations
TAXABLE INCOME
– Charity
– Capital Losses
– Taxes
– Dividedns paid or deemed paid
= ACCUMULATED EARNINGS CREDIT
– Remaining Credit
= CURRENT ACCUMULATED TAXABLE INCOME
x 20%
= ACCUMULATED EARNINGS TAX
C Corporations – Personal Holding Company Tax
Personal holding companies not subject to accumulated earnings tax. Subject to Personal Holding Company Tax instead
Triggered by high levels of investment income
Personal holding company gets 60% of its income from
– net rent
– interest that is taxable
– royalties
– dividends from an unrelated domestic corporation
C Corporations - Current E&P
Corporate Taxable Income – Negative adjustments \+ Positive adjustments ± Positive/Negative adjustments = Current Earnigns & Profits
C Corporations - Current E&P: Negative adjustments
Federal income tax expense
Nondeductible penalties, fines, political contributions
Officer life insurance premiums (corporation is the beneficiary)
Expenses for production of tax-exempt income
Nondeductible charitable contributions
Nondeductible capital losses
C Corporations - Current E&P: Positive adjustments
Refunds of federal income tax paid
Tax-exempt income
Refunds of items that were nto subject to regular tax under the tax benefit rule
NOL deductions
Life insurance proceeds where corporation is the beneficiary
Dividends received deduction used to calculate regular taxable income
Carryovers of capital losses that impacted taxable income
Carryovers of charitable contributions that impacted taxable income
Nontaxable cancellation of debt not used to reduce basis of property
C Corporations - Current E&P: Negative/Positive adjustments
Losses and gains that have different effects on taxable income versus E&P
Changes in the cash surrender value of certain life insurance policies
Excess depreciation for E&P over that for regular income tax
Differences in allowable deductions for organizational and start-up expenses
Installment income method adjustments
Completed contract income vs. percentage-of-completion income
adjustments
Amortization of intangible drilling costs adjustments
Section 179 expense per regular tax versus ratable depreciation on the same property using a 5-yr life
C Corporations - Types of Liquidations
A = mergers or consolidations
B = acquisition, stock for stock
C = acquisition, stock for asset
D = divide into separate operating corporations
E = recapitalizations
F = change in identity, form, or place of organization
Worthless Stock
Only applies to original stockholders
Deduct up to $50,000 as ordinary loss (instead of capital loss)
Excess is capital loss
Property Transactions – Non-capital assets
Inventory
Accounts and notes receivables
Depreciable assets used in a trade or business (section 1231, 1245, 1250 property)
Copyrights, literary, musical, or artistic compositions held by the original artist with the exception of musical compositions which receive capital gain treatment
Treasury stock
Property Transaction – Capital Assets
Property held for personal use
Assets held for investment
Goodwill of a corporation
Stocks and securities except those held by dealers
Copyrights, literary, musical, or artistic compositions that have been purchased
Interest in a partnership
Property Transactions – Realized Gain or Loss
Realized Gain or Loss
= Amount realized
– Adjusted basis
Amount realized = Cash received \+ FMV property or services received \+ Liabilities assumed by buyers – Selling Expenses
Adjusted basis
= cost or other acquisition basis of property
+ capital improvements
– depreciation, amortization, and depletion
Property Transactions – Adjusted Basis
Purchased Property = Cost
Gifted property basis = donor’s rollover basis
– Exception: FMV < rollover cost basis
1) Sale price> rollover cost = gain, basis = rollover basis
2) Sale Price < FMV = loss, basis = FMV
3) FMV < Sale price < Rollover Cost = no gain/loss, basis = sale price
Inherited property = FMV on death or alternate valuation date
Property Transactions – Excluded or Deferred Gains
HIDE IT
H = Homeowner's Exclusions I = Involuntary conversion D = Divorce property settlement E = Exchange of like-kind business and investment assets I = Installment sales T = Treasury and capital stock transactions
Property Transactions – Excluded or Deferred Gains: Homeowner’s Exclusions
Limit $500,000 MFJ, $250,000 for everyone else
Owned and used house as principal resident for at least 2 of 5 last years
Property Transactions – Excluded or Deferred Gains: Involuntary Conversions
Gain recognized to the extent proceeds are not reinvested
– Basis = acquisition cost – unrecognized gain
If all proceeds reinvested, no gain
– Basis = basis of old asset + additional amount invested
Property Transactions – Excluded or Deferred Gains: Divorced Property Settlement
Nontaxable event
Carryover basis
Property Transactions – Excluded or Deferred Gains: Exchange of Like-Kind Business/Investment Assets
Pure-like kind exchange = no gain recognized
If non-like kind exchange
– Gain recognized is lower of
1) realized gain, or
2) boot
Basis of new property = Basis of property given up \+ Boot or money given up – Boot or money received \+ Gain recognized
Property Transactions – Excluded or Deferred Gains: Installment Sales
Gains not excluded – gains deferred until cash collected
Taxable income (earned revenue) = Cash collection x Gross Profit
Gross profit %
= Gross Profit + Sales Price
Gross Profits = Sales – COGS
Property Transactions - Nondeductible Losses
- Wash Sale Losses
- Related party transactions
– Related parties = Direct relatives, spouse, entities 50%+ owned by individuals, corporations, trusts, and/or partnerships - Personal loss
Property Transactions - Nondeductible Losses: Related Party Transactions
Basis depends on buying related party’s final selling price
Final selling price > Selling related party’s basis = gain
– Basis = selling related party’s basis
Final selling price < price between parties = loss
– Basis = price between parties
Price between related parties < final selling price < selling related party’s basis = no gain or loss
–Basis = final selling price
Property Transactions – Individual Capital Gain Loss Rules
$3,000 max deduction of net capital losses
Excess carried forward indefinitely, maintain character as long-term or short term
Personal bad debt treated as short-term capital loss in year debt becomes worthless
Property Transactions – Corporate Capital Gain Loss Rules
No special $3,000 deduction
No lower capital gains rate
Net capital gains added to ordinary income and taxed at regular rate
Net capital losses can’t be deducted against ordinary income
– 3 year carry back and 5 year carry forward
Property Transactions – Depreciation: MACRS for Non Real-estate property
Half-year convention
– mid-quarter if 40%+ placed in service in last quarter of the month
5 year
– cars, computers, copiers etc
– 200% declining balance method*
7 year
– Office furniture, equipment
– 200% declining balance method*
15 year
– sewage treatment plantsman telephone distribution plants
– 150% declining balance method*
- ignore salvage value
Property Transactions – Depreciation: MACRS
MACRs for Property other than real estate
– 200%: 3-, 5-, 7-, and 10- year property
– 150%: 15-, and 20-year property
– Half-year convention, unless purchase more than 40% of property in the last quarter, then mid-quarter convention
MACRS for Real estate = leans and buildings – Straight-line depreciation – Residential = 27.5 years – Nonresidential = 39 years – Mid-month convention
Property Transactions – Depreciation: MACRS for Real-estate
Straight line method
Ignore salvage value
Subtract land cost
Mid-month convention
Nonresidential property = 27.5 years
Residential property = 39 years
Property Transactions – Section 179
Can elect to expense a fixed amount of depreciate property, in lieu of depreciation
Machinery and equipment: up to $500,000
Real estate: up to $250,000
SUV limited to $25,000
Amount reduced dollar for dollar by amount of property placed in service in excess of $2 million
Can’t take deduction if create net loss
Property Transactions – Amortization
Intangibles amortized over 15 years
Start up and business organization costs – expense $5,000 immediately & amortize rest over 180 months
– Reduce $5,000 for every dollar over $50,000
Research expense amortize over 60 months
Property Transactions – Section 1231
Section 1231 assets = depreciable business assets held over 12 months
Net Section 1231 gains treated as capital gains
Net Section 1231 losses treated as ordinary losses
Property Transaction – Section 1245 Assets
Section 1245 Assets = Machinery and equipment used in a business and held for over 12 months
Lesser of (1) recognized gain or (2) accumulated depreciation recaptured as ordinary income – Excess Section 1241 gain recognized as Section 1231 gain i.e treated as capital gains
No such thing as Section 1245 Loss
Property Transaction – Section 1250 Assets
Section 1250 Assets = Real business property
Recapture depreciation in excess of straight line, and up to accumulated deprecation as ordinary income.
Gain in excess of accumulated depreciation = Section 1231 gain i.e. capital gain.
No such things as Section 1250 Loss
Estates & Trusts – Distributable Net Income
ESTATE/TRUST GROSS INCOME (includes capital gains)
– Estate (trust) deduction (ordinary and necessary)
= ADJUSTED TOTAL INCOME
+ Adjusted tax-exempt interest*
– Capital gain attributable to corpus
= DISTRIBUTABLE NET INCOME
Estates & Trusts – Estate Transfer Tax Formula
GROSS ESTATE
– Nondiscretionary Deductions
= ADJUSTED GROSS ESTATE
– Discretionary Deductions
= TAXABLE ESTATE
\+ Adjusted taxable gift (post-1976 gifts that were taxed)
= TENTATIVE TAX BASE
× Uniform Tax Rates
= TENTATIVE ESTATE TAX
– Gifts Taxes Paid (on post-1976 gifts)
= GROSS ESTATE TAX
– Uniform Credit (up to $2,045,800 credit)
= ESTATE TAX DUEEstates & Trusts – Income Tax Formula
GROSS INCOME (includes capital gains)
– Deductions
– Distribution deduction (maximum is DNI)
– Personal exemption
= TAXABLE INCOME
× Tax rates
= GROSS TAX
– Credits
\+ Additional taxes
= TAX PAYABLEGift Tax Formula
GIFTS IN CURRENT YEAR
– $14,000/donnee exclusion
– Unlimited marital gifts
– Charitable gifts
= TAXABLE GIFTS THIS YEAR
\+ Prior taxable gifts
= CUMULATIVE TAXABLE GIFTS
× Tax Rate
= TAX ON CUMULATIVE TAXABLE GIFTS
– Gift tax paid on prior gifts
– Applicable credit
= TAX DUE ON CURRENT GIFTSFederal Court System
Trial Courts
- US Tax Court
- US District Court (trial by jury)
- US Court of Federal Claims
Appeals Courts
1. US Courts of Appeals
– Appeals from US Tax Court & US District Courts
2. Federal Courts of Appeals
– Appeals from US Court of Federal Claims and other specialized courts
3. Supreme Court
– Highest court
AICPA Statements on Standards for Tax Services (SSTS)
- Tax Return Positions
- Answers to Questions on Returns
- Certain procedural aspects of preparing returns
- Use of Estimates
- Departure from position previously concluded in and administrative or court hearing
- Knowledge of an error
- Form and content of advice to taxpayers
Sarbanes-Oxley Act – Titles
Title I –PCAOB
Title II – Auditor Independence
Title III – Corporate Responsibility
Title IV – Enhanced Financial Disclosures
Title VII – Corporate and Criminal Fraud Accountability
Role of Taxes in Decision Making
Asset disposition = abandonment, sale, or trade in
Abandonment
– Net salvage value reduces initial investment in new asset
– Remaining book value deductible as loss
Sale
– Cash received reduces initial investment in new asset
– Gain on sale increases income taxes (and initial expenditure)
– Loss on sale reduces income taxes (and initial expenditure)
Trade in
– No income tax effect when traded in
– Provides additional depreciation for tax in later years and decreases taxes payable (and cash outflows) in those years.
