First reading Flashcards
1
Q
NQSO (option price could be less than FMV)=No impact on AMTI
A
Exercise FMV over the Purchase price or option price is a PREFERENCE ITEM for AMT
Readily determinable value, recognize ORINDARY INCOME for FMV on the date of option granted to the employee (transaction value on exchange)
2
Q
CHATGPT - Both ISOs and ESPPs can create AMT issues, but ISOs have a higher likelihood of triggering AMT due to the large spread on exercise.
ESPPs may trigger AMT if the discount is significant and the shares are held.
It’s important to consult with a tax professional to assess the potential AMT impact based on your individual situation, including your exercise and sale plans for ISOs and ESPP shares.
A
3
Q
ISO
1.(less than 10%)
- not less than FMV of the stock on the grant date (Grant price=FMV on grant)
- May exercise upto $100,000 in a year(anything in excess of this amount is NQSO)
- Exercisable within 10 years of Grant date
- Option price cannot be less than the FMV
A
ESPP (Recognize Ordinary Income instead of CAPITAL GAIN) when exercise price is less than the FMV of the stock on the grant date
- (less than 5%)
- option price Not less than 85% of FMV of the stock when granted or exercised (whichever is less)e.g. $22/$28=88%
- More than 27 months after grant date
- No more than $25,000 per year
- Written and approved by shareholders
4
Q
Income qualifying for FEIE must be earned(NOT unearned such as div, int income)
A
Wages, salaries, commissions, bonuses, tips, professional fees, self-employment income and other forms of compensation
5
Q
Spanish Income
_____________________*US Taxes = FT limit
Worldwide Income
A
Take lesser of actual Foreign taxes paid or Foreign taxes limit (FT limit)
6
Q
Comp
A
Bonus received as shares take as per FMV
NQSO - take as per Bargain purchase (FMV-Par or Basis)
7
Q
ISO
A
Basis = exercise price
If Option price < FMV of stock on grant date = cannot be ISO
8
Q
ESPP
A
Need to be under 5%
9
Q
GIFT TAX ANNUAL EXCLUSION = $18,000
Gift by either SPOUSE may be treated as made one-half by each. Gift splitting creates a $36,000 exclusion per donee.`
If an individual taxpayer forgives a debt to a friend or family member, either in part or in full, the forgiveness of debt is considered to be a gift.
The remainder interest in a trust given to the taxpayer’s younger daughter is a future interest because it will be distributed to her at some future date. A future interest gift does not qualify for either a deduction or the annual exclusion from gift tax AND is an INCOMPLETE gift and ENTIRE AMOUNT will be TAXED.
A
UNLIMITED = Spouses, Charity, Hospitals and Universities are unlimited Exclusion (not limited to $18,000)
Unlimited gifts allowed for spouse - no exclusion to be checked
Future gift is taxable (coz it is not a gift at present)
Allowed deductions for GIFT TAX = gift tax annual exclusion, charitable contribution deduction, unlimited marital deduction.
A donor may exclude gifts of up to $18,000 per year/per donee. In addition, there are four items that qualify for unlimited exclusion from gift tax: (1) payments made directly to an educational institution for a donee’s tuition, (2) payments made directly to a health care provider for medical care, (3) charitable gifts, and (4) marital transfers.
A gift by either spouse may be treated as made one-half by each. This gift splitting creates a $36,000 ($18,000 × 2) exclusion per donee
10
Q
Charity - Goodwill Ordinary Income property = 50%
Form 8283 required when amount is more than $500 ($501)
Appraisal is required for contribution of more than $5,000
Appreciated LTCG property = 30% of AGI
A
Cash = 60% of AGI
11
Q
NON STATUTORY STOCK OPTION = NQSO
A
Ordinary income to be added to cost basis
Ordinary Income = selling for $5 on an established exchange
12
Q
Above 65
A
Eligible for extra standard deduction for old age and if they r blind
13
Q
HSA = Pretax deduction $4,150 (2024 maximum HSA contribution)
A
Pre-tax deduction reduces AGI/taxable income
14
Q
Kiddie tax
A
If earned income is more than $1300, then Std deduction =Earned Income +450 or $14,600
15
Q
Suspended losses can be carried forward only _____
A
X NEVER carried back X
16
Q
Commissions earned from selling a vacation property are considered ___________
A
active income
17
Q
PAL can only offset passive activity income only
A
Net PAL are suspended and carried forward to offset passive activity income in future years and can offset against active income only in the year of disposal.
18
Q
Loss on disposition of Royalty producing asset is __________
A
Portfolio income/loss
19
Q
Section 7872 imputed interest rules
Imputed interest rules - Interest must be IMPUTED when an individual makes a BELOW MARKET INTEREST or NO INTEREST LOAN, unless the loan is de minimis (<or equal to $10,000 gift, compensation, or corp-shareholder loan).
The TP (LENDER) reports the imputed interest as interest income over the life of the loan.
Affected loans are characterized as arm’s length transactions (non-related parties) in which the lender is treated as making a loan at the applicable federal rate (AFR).
FOREGONE INTEREST - difference between calculated AFR interest and interest paid, if any is characterized as (1) a gift to the borrower followed by (2) a retransfer of this interest to the lender.
The retransfer results in imputed interest income that must be reported by the lender over the life of the loan.
A
APPLY to: No interest loans or below-market interest gift, compensation, corp-shareholder or tax avoidance loans
DO NOT APPLY to: Loans incurred in acquiring property (other imputation rules may apply)
EXEMPTIONS and LIMITATIONS: de minimus for <or equal to 10,000 gift, compensation, and corporation -shareholder loans
Imputed int limited to borrower’s net interest income for <or equal to 100,000 gift loans.
OPERATION - Int imputed based on applicable federal rate less any interest paid.
20
Q
AMTI
A
Add: Tax Preferences (permanent difference)
+ Pvt activity bond interest
+ Excess intangible drilling costs
+ Excess % depletion
+ Small Business stock gain exclusion (7%)
-/+ Adjustments: (may be permanent or temporary)
+Local and state income taxes or general sales tax, property taxes
+ Incentive stock options (exercise price-market price)
-/+Excess depreciation on personal property (excess dep is added back)
(-)Refunds of local and state income taxes included as income
+ Standard deduction
____________________________________________
Temp timing difference for DEPRECIATION deduction, where regular tax uses the 200% DDB and AMT uses the 150% DDB for personal property.
IF REGULAR TAX DEP>AMT DEP , then excess is ADDED back for AMTI
21
Q
FSA = pretax deduction like IRA, may use these funds to pay for eligible dependent care services for a qualifying person during work hours.
NO CARRYOVERS (USE IT OR LOSE IT)
A
Spouse contri + TP contri = e.g. 2500 k each
Tax savings = 5000 30% = 1500
FICA = 50007.65%=383
22
Q
Timing strategies for anticipated tax rate decrease
A
INCOME AND GAIN - Defer recognition to later year when rates are lower
DEDUCTION AND LOSS - Accelerate recognition to current year when rates are higher.
23
Q
FSA and HSA - similarities
- Both are pre-tax deductions
- Both are tax free distributions if used for qualified expenses
A
FSA - Employer established, not for self-employed, lower contribution limits, no interest earned, use it or lose it
HSA - must have a HDHP, Self-employed eligible, higher contribution limits, earns tax free interest if used for qualified medical expenses, portable - balances can carryover indefinitely with no maximum and account can be converted to an IRA at the age of 65.
24
Q
Unified Transfer Tax = Merger of Estate tax (Taxable transfers of property at death) + Federal Gift tax (TAXABLE transfers of property during lifetime)
A
The unified transfer tax is based on an individual’s CUMULATIVE TAXABLE gifts made to others during their lifetime and transfers of property at death, not only on an individual’s taxable transfers of property during their lifetime.
The unified transfer tax is reduced by a unified credit, not a credit for gifts given during the lifetime of an individual.
In 2024, the taxable estate of up to $13,610,000 will yield no tax liability.
25
The car is ordinary income property because it is a personal-use asset that has____________
depreciated in value.
26
If a business borrows money to purchase municipal state bonds:
1. The income generated is not taxable and the INTEREST EXPENSE is NOT DEDUCTIBLE.
27
Probate fees, which include _____________, can be expensive and reduce the amount of the gross estate able to be distributed to the heirs of the estate. (TP wants to avoid it whenever possible in real life scenario)
court costs, attorney costs and accountant costs
28
Retirement accounts should not be put into a living trust (due to possible complications with early withdrawal penalties) but most other assets would be suitable.
Upon death, the trustee of the trust will distribute the assets according to the instructions in the trust agreement.
29
Defined CONTRIBUTION plan
Employees bear the entire financial risk of the plan's performance. The amount that can be contributed to an employee's account is defined rather than the amount of the benefit.
Unlike the defined benefit plan, the employee bears the investment risk in a defined contribution plan, and the value of the account fluctuates due to changes in the capital markets (investments). The retirement benefit is solely the balance in the employee's account.
30
Section 401(k) retirement plans are the most common type of employer-sponsored defined contribution plans.
The maximum amount that a taxpayer can contribute to an IRA is the lesser of earned income or $7,000 (2024). Taxpayers age 50 or older can contribute an additional $1,000. A married taxpayer can use a spouse's earned income to make an IRA contribution.
Tara is 55 years old, so she can contribute up to $8,000 to an IRA ($7,000 + additional $1,000). Although her earned income is only $4,000, she can use $4,000 of her spouse's earned income to make a contribution. Tara's earned income of $4,000 + $4,000 of Steve's earned income = $8,000 Tara's maximum IRA contribution.
31
Charitable deduction is not allowed when there is an NOL or negative TI
Prior year NOL cannot be used to create or increase the current year NOL.
32
Sec 382 corporate stock ownership change
Ownership more than 50%
pre 5%
post aggregate over 50%
3 year period ending on, but including, the date of the change in ownership (the testing date).
When a corporation's Section 382 limitation amount exceeds its taxable income for the year, the excess limitation amount is carried forward and added to the following year's limitation amount.
The corporation determines the Section 382 limitation amount on the deduction of pre-change NOL carryforwards in each post-change tax year by multiplying the fair market value of the corporation's stock immediately before the Section 382 ownership change by the federal long-term, tax-exempt rate.
The rate used to calculate the Section 382 limitation amount is the federal long-term tax-exempt rate, not the federal short-term tax-exempt rate.
33
A Section 382 ownership change occurs when one or more "5-percent shareholders" increase their aggregate ownership of the loss corporation's stock by more than 50 percent over the lowest stock percentage owned by those shareholders during the testing period. A "5-percent shareholder" is any shareholder who owns 5 percent or more of the loss corporation's stock at any time during the testing period. The testing period is the three-year period ending on, but including, the date of the change in ownership (the testing date).
Both individuals are "5-percent shareholders" and their aggregate ownership has increased by more than 50 percent during the three-year testing period, so the current year acquisition of the loss corporation's stock is a Section 382 ownership change that triggers Section 382 loss limitations.
E.g.
A's stock ownership on the testing date 28%
A's lowest stock ownership during the testing period (4%)
Increase in A's stock ownership during the testing period 24%
Increase in B's stock ownership during the testing period 28%
Aggregate ownership increase 52% > 50%
34
Reorganization are usually not taxable events. E.g. Ch 11 bankruptcy is non-taxable
Liquidations are usually taxable event
35
Qualified Small Business Stock(QSBS)- C Corp only not S corp
1.Stock issued after Aug 10, 1993
2. Acquired at the original issuance.
3. C corp only not S corp
4. Less than $50 million of capital as of the date of stock issuance.
5. 80% or more of the value of the corp's assets used in the active conduct of one or more qualified trades or businesses.
6. The includible portion of the gain is taxed at regular tax rates.
Exclusion:
A noncorporate shareholder or individual shareholder, who holds QSBS for more than 5 years, may generally exlude 100% of the gain on the sale or exchange of the stock.
Max exclusion per qualifying shareholder is limited to 100% of the greater of:
1. 10 times the TP's basis in the stock; (e.g. 5000 basis *10 times = 50,000) or
2. $10 million ($5 million if MFS)
36
C Corp - Worthless Stock: Sec 1244 stock
When a CORP'S Stock is sold or becomes worthless, an original stockholder can be treated as having an ordinary loss (full tax deductible) instead of a capital loss, upto $50,000 ($100,000 if MFJ).
Any loss in excess of this amount would be a capital loss, which would offset capital gains and then a maximum 3,000 ($1500 if MFS) per year would be deductible.
37
AFR is
Applicable federal rate
38
Tax RULES - you need 80% ownership to consolidate
Dividends received are 100% eliminated in CONSOLIDATION because they are intercompany dividends.
A significant advantage of consolidated tax returns is the ability to offset gains and losses among group members as if they were a single taxpayer.
Each member of the group must be an affiliated member at some time during the year but not necessarily own 80 percent or more of any other corporation.
Each member of the group must have the same tax year as the parent corporation to qualify for the privilege of filing a consolidated tax return.
Each member of the group must file a consent on Form 1122. However, the act of filing a consolidated tax return by the affiliated corporations will satisfy the consent requirement.
Estimated tax payments must be made on a consolidated basis, starting with the 3rd consolidated tax return year. Prior to the third consolidated return year, estimated tax payments can be computed and paid on either a separate or a consolidated basis.
Members of the consolidated tax group are generally permitted to continue to use the same accounting methods that were in place prior to filing as a consolidated group. An exception is certain methods that use threshold limitations applied on a consolidated basis, such as the determination of whether a corporation can use the cash method of accounting.
An affiliated group means that a common parent owns:
(a) 80% or more of the voting power of all outstanding stock
(b) 80% or more of the value of all outstanding stock of each corporation
1231 losses are deducted as ORDINARY LOSSES.
FAR/BOOK/FS rules - you need 50% ownership to consolidate.
CORPS not allowed to file a consolidated return or denied the privilege include:
1. S Corps (are not allowed to be part of affiliated group)
2. Foreign Corps
3. Most real estate investment trusts (REITs)
4. Some insurance companies
5. Brother-sister companies
6. Most exempt organizations
All members of the consolidated tax group must use the parent's tax year.
Although supplementary attachments and schedules are required, consolidated tax returns are filed using the same Form 1120 as single filing corporations and by checking the box on page 1, indicating that the Form 1120 is being filed on a consolidated basis.
Each member of the consolidated group is jointly and severally liable for the entire consolidated tax liability, tax penalties, and interest.
39
COMPARABLE UNCONTROLLED PRICE (CUP) - only for tangible property (Sales, purchases and leases)
COMPARABLE UNCONTROLLED TRANSACTION (CUT) - only for intangible property (regarding royalty payments)
RESALE PRICE - Tangible property only
COST PLUS - Tangible property only
COMPARABLE PROFITS METHOD - based upon operating margin, gross margin, ROA or return on capital
40
COMPLEX TRUST
It distributes corpus
41
Trust is a separate tax paying entity.
Distbn made by the trusts are deductible by the trust.
42
SIMPLE TRUST
cannot make distributions and contributions to the charitable orgs.
43
Revocable living trust are grantor trusts
(chatgpt- while all revocable living trusts are grantor trusts, not all grantor trusts are revocable living trusts. The revocable living trust is specifically focused on avoiding probate and allowing flexibility during the grantor's lifetime, while the term grantor trust focuses on the tax implications of the trust’s structure.)
AllRGT
It is used instead of a will to stipulate how a person's assets will be distributed when they die.
44
Non grantor trusts
either simple or complex trusts
45
Corpus includes ____________
Capital gain and loss
Casualty gain
46
DNI or Distributble net income (no corpus items)__________
excludes capital gain and loss
47
No FTC or deduction is allowed on dividends that benefit from the 100% DRD.
The deduction is subject to a holding period requirement which requires that the US corp hold the foreign corp stock for more than 365 days during the 731 day period beginning 365 days before the ex dividend date.
Certain income is not eligible for the 100% DRD
1. Subpart F income
2. GILTI
3. Income invested in U.S. property
4. Income subject to the transition tax
48
______________are considered fixed, determinable, annual, or periodic income (FDAP) and is subject to U.S. withholding tax requirements.
1. FDAP - FDAP deals with the withholding on foreign persons' investment-type income (e.g., dividends,
interest, royalties):
FDAP income includes dividends, interest, royalties, and compensation from personal
services. Such income is taxed on a gross basis at a statutory rate of 30 percent.
Withholding ensures the collection of taxes from foreign persons, over whom the IRS would
typically not have the jurisdiction to tax.
The U.S. person controlling the payment of U.S.-source income to the foreign person is
responsible for withholding the appropriate amount of tax on such payment.
2. FATCA - withholding tax on foreign entities for failure to provide information to U.S. recipients (e.g. ID)
Dividend, Interest income and royalties
FATCA-FATCA deals with withholding tax on foreign entities for failure to provide information to U.S. recipients:
The purpose of FATCA is to help combat tax evasion tied to U.S. persons investing in foreign
entities (e.g., deposits in foreign banks).
FATCA imposes a 30 percent withholding tax on foreign entities that do not provide
information about U.S. persons on Form 8966 FATCA Report.
FATCA applies to foreign financial institutions and nonfinancial foreign entities but does
not apply to payments made to nonresident aliens (i.e., foreign individuals), foreign
governments, international organizations, and certain retirement funds.
49
To increase a corp's foreign derived intangible income, sale of property must be: (OUT AND OUT)
1. to non U.S. persons
2. For use outside the U.S.
3. Not to a related party for its own use
50
The IRS MAY make adjustments necessary to a controlled transaction based on the ___________
“arm’s-length” standard.
51
Advance Pricing Agreement Program.-The APA is a 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.
A controlled transaction analysis agreement is not an official document in the transfer pricing area.
A "request for competent authority" is a request by the taxpayer that the IRS and taxing officials in the other jurisdiction together determine the appropriate transfer price so that the taxpayer group is not taxed twice on the same income.
A section 482 study is prepared by the taxpayer based upon allowable pricing methods set forth by the IRS and is completed by the time the taxpayer files the federal income tax return. The taxpayer must determine that the prices for controlled transactions and controlled transfers are in accordance with the allowable pricing methods and that the use of such method was reasonable.
Section 482 of the Internal Revenue Code (IRC) deals with the allocation of income and expenses between related entities to ensure that transactions between them are priced fairly, adhering to the "arm's length principle." This is crucial for preventing tax avoidance by manipulating transfer pricing within multinational corporations or between related parties.
Section 482 Study NOT Based on Allowable Pricing Methods
The taxpayer may prepare and document a "Section 482 study" that is not based upon allowable
pricing methods set forth in the U.S. Treasury regulations.
The taxpayer must establish that none of such pricing methods was likely to result in a
price that would clearly reflect income, that the taxpayer used another pricing method to
determine such price, and that such other pricing method was likely to result in a price that
would clearly reflect income.
The documented study must be completed no later than the date the taxpayer files the federal income tax return.
52
Because a foreign branch is treated as an extension of a domestic corporation, its income/loss is taxed annually at the domestic corporation level. A foreign subsidiary is a separate legal entity, so income is not recognized by the U.S. corporation until the foreign subsidiary pays a dividend to the U.S. corporation (a repatriation).
Because ForCo is a CFC, certain types of income (e.g., passive investment income) earned are subject to immediate taxation
53
Separate legal entities
1. IC-DISC - Interest charge domestic international sales corp = Tax exempt entity
2. CFC
3. Foreign Subsidiary
An IC-DISC is a tax-exempt entity that pays no tax on commissions received from a U.S. corporation, which is the feature that creates tax savings for these entities.
An IC-DISC can only be used by domestic (U.S.) corporations that manufacture or distribute U.S. goods to export internationally.
An IC-DISC applies only to U.S. corporations exporting certain U.S. goods internationally, which reduces the U.S. corporation's tax liability through a deductible commission with no tax liability generated by the IC-DISC. The maximum commission that can be paid to an IC-DISC is the greater of 50 percent of net sales of export property or 4 percent of gross revenue from sales of export property.
Income earned by a U.S. branch is reported on Form 1120-F U.S. Income Tax Return of a Foreign Corporation.
The Subpart F rules supersede the PFIC rules when both apply, which results in more immediate recognition of Subpart F income.
54
Subpart F primarily exists to discourage taxpayers from using foreign corporations to defer U.S. taxes by accumulating income in CFCs. The income that must be immediately taxed is defined as foreign base company income, which consists of: (1) passive income or (2) active income tied to a related party. The U.S. corporation must recognize a pro rata portion of foreign base company income immediately with no deferral and no DRD.
Subpart F income is not a component of the GILTI inclusion calculation.
The GILTI inclusion is calculated as a U.S. shareholder's share of a CFC's net income, reduced by the excess of: (1) 10 percent of the CFC's aggregate adjusted basis in depreciable tangible property used in its trade or business, over (2) the CFC's net interest expense.
GILTI Income
CFC net interest expense is an important piece of the GILTI inclusion calculation because it guides the reduction of CFC net income.
CFC net income is the starting point in the GILTI inclusion calculation.
A CFC's net income should be reduced by 10 percent of the CFC's basis in depreciable tangible property used in a trade or business to calculate the GILTI inclusion.
55
The base erosion and anti-abuse tax (BEAT) may apply to US corporations with average annual gross receipts of $500 million or more for the three preceding tax years _________.
RELATED FOREIGN AFFILIATES
56
Coverdell - $2000 per child
qualified elementary, secondary or higher education expenses to
Tuition, books, room and board eligible
AGI Single 96,800 -
AGI MFJ
subject to 10%
SAMe cannot be used for AOC or LLC
57
FDII creates a deduction for a portion of income for a U.S. corporation. FDII includes the following:
1. the sale or property sold by the taxpayer to any person who is not a U.S. person and is for foreign use;
2. services provided by the taxpayer to any person or with respect to property, not located within the U.S. (including some electronic services); and
3. property sold to a related party who is not a U.S. person, provided the property is ultimately sold by the related party to an unrelated party who is not a U.S. person, and the property is used outside the U.S.
Foreign-Derived Intangible Income (FDII)
58
50 or older
eligible for catch up contribution
59
Sec 529 plan to Roth IRA - Beneficiary's Roth IRA must be maintained for 15 years (tax free transfer)
Sec 529 plan to Traditional IRA would be taxable.
Lifetime limit on transfers from a Sec 529 plan to Roth IRA is of $35,000.
60
A gain is recognized only if(building) _________
Debt assumed > Basis
(greater than 80% ownership in acquired stock)
New Basis in the stock
NBV of building = $40,000
Less: liabilities assumed = -(10000)
_______________________________________
Shareholder basis = $30,000
Corp's new basis in the builing
Greater of :
NBV or liability assumed
Add: Cash (checking account to basis, if any provided)
61
The exchange of property for stock qualifies as a nontaxable Section 351 transfer because the shareholders who contributed property, Black and Clark, own 80 percent or more of the stock immediately after the exchange. Because it is a nontaxable Section 351 transfer and there is no boot or liabilities involved, the shareholder's basis in the stock is the same as the adjusted basis of the property transferred.
The Section 351 requirements are met because the two investors transferred property solely in exchange for stock,
and the investors owned 80 percent or more of the corporation's stock immediately after the transfer.
Since the Section 351 requirements are met, neither the corporation nor the contributing shareholders recognize any gain on the exchange.
62
2017 & before- carryback 2 years, CF 20 yrs
2018 -2020 - Carryback 5 years, CF indefinitely (100%TI)
2021 onwards
80% TI limit, CF indefinitely (no Carryback)
NOLs - 2020/2018 and onwards and if there is no NOL carryforward pre 2020 so take 80% of TI - from Becker SIM
63
These do not qualify for Sec 501(c) (3)Exempt __________
(Corp, LLC and Trust, scientific purpose - allowed for Sec 501c(3)) - Form 990
Sole Proprietorship
Partnership
Individuals
(Read REG chapter)
64
Political or legislative activities is allowed only for_____________
Participating in a non partisan (unbiased) voter registration drive in the local communicty
(some lobbying activities are allowed but only if there are not substantially part of the total activities)
65
UBI includes (it's not considered as excluded income) ___________
Rent from real property where substantial personal services are also provided.
or where the lease includes both real and personal property and the rents attributable to the personal property are more than 50% of the total rents .
66
EXCLUDED income from UNRELATED BUSINESS INCOME__________
Dividends, interest, annuities, and other investment income
Royalties
Rents from real property (unless personal services also provided, or the lease includes both
real property and personal property, and the rents attributable to the personal property are
more than 50 percent of the total rents)
Income from research by a college, university, or hospital
Gains and losses from disposition of property not held primarily for sale to customers in the ordinary course of business
Excluded Trade or Business Activities
The following activities are excluded from the definition of unrelated trade or business:
Bingo games (if legal, and limited to not-for-profit organizations, in the jurisdiction where
game is played)
Activity conducted for the convenience of an organization's members, students, patients,
or employees
Convention or trade show activity
Exchange or rental of membership lists
Sale of merchandise received as gifts or contributions (e.g., thrift shop)
Sale of articles made by disabled persons as part of their rehabilitation
Activity where substantially all the work is performed by unpaid volunteer workers
67
Excess Business Loss Limitation limits, Individual level =2024
MFJ = $610,000
Single = $305,000
68
AT RISK Basis includes ONLY _________ and does not include non-recourse debt.
Recourse debt
69
Unified transfer tax system
Unified credit limit = $13,610,000 (2024)
FEDERAL GIFT TAX + ESTATE TAX
70
LIFETIME = Inter Vivos Transfers
TESTAMENTARY = Property at death
71
Examples of future interest gifts (not eligible for annual exclusion):
1. Reversions (gifting assets and later getting the property back)
2. Remainders (distributed at some future time)
3. trust income interests where accumulation of income by a trustee is mandatory and accumulations are distributed at some future time at the discretion of the trustee
4. Present interests without ascertainable value
72
Recipients pay no gift tax
General rule = Basis to the recipient equals the donor's basis + gift tax paid due to the appreciation in value inherent in the gift.
73
A gift is considered complete and is subject to gift tax :
1. even though the donee is not yet born, provided his identity can later be ascertained
2. Despite the possibility that the property may revert to the donor at some future time.
Incomplete GIFTS = Conditional or REVOCABLE (for reasons other than the donor's death)
74
Tax on cumulative lifetime gifts (formula):
Tax on cumulative lifetime gifts
Less: Gift tax paid on prior gifts
Less: $5,389,800 applicable credit based on $13,610,000 lifetime exclusion (2024)
_________________________________________
Tax due on current gifts
75
Advantage of gifting appreciated non cash property, rather than transferring the property at death is that the transfer tax on any further appreciation of the property may owe additional income taxes when the property is sold in the future because of the lower basis in the gifted property.
However, the recipient of the gifted property may owe additional income taxes when the property is sold in the future because of the lower basis in the gifted property.
76
Sec 1231 (Intangible assets do not count)
Since the machine was held more than 12 months and was depreciated, it was a §1231 asset.
More than 12 months is a KEY here
1. Used in business
2. Real or personal depreciable property
3. Held for more than 1 year (long-term)
4. 1231 gains taxed at lower tax rates for Individuals
(Not C corps-for C corps there is no preferential rates, all capital gain)
5. 1231 losses can offset ordinary income even for C corps
Sec 1231 5 year lookback rule - First Unrecaptured ordinary loss will be treated as ORD INCOME and rest as Sec 1231 LTCG
77
Sec 291 Depreciation Recapture is 20% of the lesser of:(ONLY applies to C Corporations) - real property only sold at a gain (Individuals use Sec 1250)
STEP 1 - Lesser of:
1. The recognized gain; or
2. The accumulated SL Depreciation
STEP 2
First 20% of step 1 amount is depreciation recapture, remaining is Sec 1231 gain
78
Sec 1250 (Business Use REAL property): Gains only
The taxpayer's overall gain is split into two components: i) unrecaptured Section 1250 gain taxed at 25 percent and ii) regular Section 1231 gain taxed at the taxpayer's regular long-term capital gains rate, which is 20 percent.
Taxed at 25% rate but still considered as 1231 gain for building or real properties (no recapture). Just for tax purpose it is differently taxed but considered as Sec 1231 gain.
Applies only to Individuals and not C corporations
No DEPRECIATION RECAPTURE for property owned by individuals
The unrecaptured Section 1250 amount is taxed at a maximum rate of 25 percent but is still considered a Section 1231 gain. (25% key)
79
Sec 1245 PERSONAL PROPERTY
Depreciation recapture: Gain is ordinary income to the extent of the lesser of:
1. Gain recognized or
2. Accumulated depreciation on the asset
Sec 1245 recpature does not apply to losses
80
The parking lot and shed will fall under Section 1231 (provided they are used in the business over 12 months) and possibly Section 1250 upon sale of the assets.
Capital assets are defined as all property held by the taxpayer, except:
Inventory held for sale to customers in the ordinary course of business.
Depreciable property and real estate used in business (sec 1231)
Accounts and notes receivable arising from sales or services in the taxpayer's business.
Copyrights, literary, musical, or artistic compositions held by the original artist (Ordinary Income property). (Exception: Sales of musical compositions held by the original artist receive capital gain treatment.)
Treasury stock
Ordinary assets
1. Trade accounts receivable
2. Inventory (Depends on the usage and where it is being used)
81
LAND is not a depreciable asset, so there is _________
NO DEPRECIATION RECAPTURE (ENTIRE SEC 1231 GAIN)
82
SALE PRICE = NBV + Dep recapture + 1231 gain
Sales - NBV =1231 loss
NBV = Sales - Dep recapture-1231 gain
Current year Dep + X so the NBV NBV/Adjusted basis - X
CHARACTER
SECTION 1245 RECAPTURE
(1) Applies only to personal property
(2) Captures upto full amount of accumulated depreciation but no more for gain
(3) does NOT apply to losses
SECTION 1231 GAIN/LOSS
1. Applies to personal property used in a trade or business and held for more than one year
2. All losses on 1231 property are 1231 losses
3. Gains are only 1231 gains to the extent that all depreciation is recaptured FIRST
SECTION 1250 RECAPTURE (rare to see) - Gain over S/L Depreciation
SECTION 291 RECAPTURE, C CORP - Recaptures 20% of gain for depreciable REAL property in a C Corporation
83
Sec 121 exclusion - Only 1 spouse must meet the ownership requirement, both MUST meet USE test
2 years use and ownership out of 5 years
spouse does not necessarily needed to be part of the deed or title
exclusion has not been used in the past 2 years from the date of sale
84
Recapture is not allowed in case of ______
loss
85
All losses on involuntary conversions are _______
Recognized
86
Estimated tax payment, CORP=
Each payment or estimated tax payment is equal to 25% of the corp's annual required payment of last year:
lesser of :
100% of last year's Tax
or 100% of this year's tax
87
Realized loss is NEVER recognized in like kind exchange
True (Losses are never RECOGNIZED)
88
Sale to related and later to unrelated party - If SP is in between basis of TP1 and basid of TP2 _________
zero gain or loss (in the middle)
89
When tax rates are increasing, it is not clear whether the company will benefit more from accelerating or deferring deductions, as the higher tax rate in future years may outweigh the discount factor.
A company will always reduce the present value of its tax costs by deferring income when tax rates are decreasing, as the reduced tax rate will enhance the tax savings.
When tax rates are constant, a company will always reduce the present value of its tax costs by deferring income since the present value of the tax costs will be lower for the income deferred until later years.
A company will always save tax by utilizing expiring carryforwards.
90
___________is responsible for the creation of a trust agreement
GRANTOR
91
Distributions to shareholders of an S corp are assumed to first come from the AAA (Accumulated Adjustment Account + ORD INCOME), which is made up of the entity's earnings that have already passed through to shareholders but have not yet been distributed. Distributions are not taxable since they represent amounts that have already been taxed.
Excess distributions come from accumulated E&P, which represents earnings of the entity when it had previously been a C corp that had neither been distributed nor passed through to the shareholders.
These distributions are taxable as ordinary dividends. Any additional distributions are considered nontaxable returns of capital until the shareholder's basis has been eliminated, with the remainder treated as a CAPITAL GAIN on the sale of stock.
92
Dividend income to shareholder = Both cash and Property dividends
at FMV
93
NON LIQUIDATING DISTRIBUTIONS -
Losses are not deductible for any of the entities (same rule for all)
94
Taxpayers may not deduct losses on sales of property to related parties.
A corporation and a shareholder who owns more than 50% of that corporation are considered related parties.
95
Casualty Event, so NO gain/loss recognized because ___________________
all proceeds were reinvested in property within 2 years.
96
RECOGNIZED ____________
that goes on the return or the amount taxed on the return
97
Corporations _______ recognize gain or income on reissuance of Treasury stock
NEVER
98
Whole point of an LKE is to defer gain:
Recognized gain is the lesser of:
1. Realized gain or 2. Boot received
In LKE, the character sticks with the property given up (usually)
99
Sec 351 requirements (S corp and C corp) only:
1. Transferred property solely in exchange for stock
2. Investors owned 80% or more of the corp's stock immediately after the transfer
if these both r met, no gain on the exchange, it's tax free or it's a non taxable transaction.
100
Unrecpatured Sec 1250 gain is taxed at __________and applies to INDIVIDUALS only
25%
101
When partners transfer their basis - Sec 754 and Sec 743(b)
Option to make Sec 754 election
IRS may mandate or force Sec 743(b) adj if there is a SUSBTANTIAL BUILT-IN LOSS at the time of PURCHASE when inside basis exceeds $250,000 or more.
Amount for which P/S int has been sold + Debt relief = outside basis
AB of Assets of P/S = Inside basis
102
PARTNERSHIP basis at the time of LIQUIDATION
Reduce cash from basis and remaining to the property (DOES NOT APPLY TO HOT ASSETS).
ZERO OUT (BASIS) to GET OUT
103
OUTSIDE BASIS - INSIDE BASIS = POSITIVE ADJ
INSIDE BASIS - OUTSIDE = NEGATIVE ADJ when assets basis is more than inside basis which is (SP + Debt relief)
104
Corp and Sole Propreitorship- free to transfer their share without consent
Limited partner is free to transfer his limited int only without consent of other partners?
105
C corp and S Corp - Sec 351 requirements ____
The bigger the basis, the better
106
SE tax = 15.3%
7.65% - employer share (6.2% social security + 1.45% medicare)
7.65% - employee share
pay on 92.35% of SE income not on entire SE income because 7.65% is employer share.
107
S corp income - not subject to SE tax, advantage of 20% QBI deduction for shareholders
Partnership subject to 15.3% SE tax
108
2% rule
S Corp (Compensation of Owners part I), fringe benefits are taxable when ownership is more than 2% of a shareholder
109
S corp , C Corp Sec 351 rule
More than 80% ownership, no gain or loss
110
Similarity between Corp and Limited Partnership
1. Can only be created by statute
2. Each must file a copy of its certificate with the proper state agency
111
Affialiated group
At least 80% ownership of another corp
112
C corp
has flexibility to choose an accounting period.
113
C corp , use FMV to determine Gain
Partnership, Use Adjusted Basis
114
Partnerships do not recognize gains or losses on( LIQUIDATING and NON LIQUIDATING) PROPERTY DISTRIBUTIONS to partners.
PARTNER'S basis in property distributions generally has the SAME BASIS as in the hands of the partnership. ALSO known as ROLLOVER BASIS.
115
LIQUIDATING LIQUIDATIONS - PARTNERSHIPS
Partnerships don't recognize gain or loss on ANY distributions made to partners (different from S corps and C corps)
- Pship gain/loss is ZERO in both LIQUIDATING and NON-LIQUIDATING TRANSACTIONS
116
BASIS in P/S > AB
Current basis
(-) Asset NBV
________________
New Basis
P/S
If a partner receives cash distribution > Basis, partner recognizes a capital gain for the excess. GAIN is RECOGNIZED only in the event of CASH DISTRIBUTIONS (does not apply to PROPERTY DISTRIBUTIONS)
117
SERVICES are considered SUBPART F income when the CFC performs the services (e.g. engineering) OUTSIDE the CFC's HOME COUNTRY for /on behalf of the U.S. parent CORPORATION
E.g. Services are provided by an IRISH company IN ENGLAND under a contract entered into by its U.S. Parent.
118
cALC RATIO OR % of First and Second distribution
First distbn 33000, Second 42000
119
Taxable trasnfer = FMV
Non-taxable =Adjusted basis or NBV (Ns stick together)
120
Consolidated return
Adjusted basis stays same as the parent's basis
121
C CORP
C CORPORATION
1. TAXABLE EVENT vs. NON TAXABLE EVENT(80% ownership)
2. Calc difference between AB and FMV and add to AEP
3. Complete liquidation, gain = Greater of AB+realized gain or assumed liability (liability reduces the amount of distbn FMV of property-liability)
4. Non taxable transfer to the corp - use carryover AB + Boot
5. Non liquidating distbn = Gain of corp = FMV - basis (if liability exceeds FMV, only then it is considered)
6. Liquidating distbn by parent to subsidiary = use carryover basis of parent and liability will be shown on liability side (no adjustment required for basis), NO gain or loss to be recognized for subsidiary distribution
7. C corp does not recognize gain or loss on distribution of cash or depreciated property (only gain if the property is appreciated)
SHAREHOLDER
Basis of shareholder = Basis - Debt relief
(Debt assumed does not affect the basis of property in C corp by shareholder?)
Basis of shareholder in complete liquidation = FMV of the property
122
Roth IRA does not have RMD
Designation of beneficiary generally SUPERSEDES THE TERMS OF THE WILL. e.g. B listed as beneficiary of 401(k) of decedent
123
EXPECTED tax rate LOWER in retirement
Use Traditional IRA or Traditional 401(k)
124
PARTNERSHIP
Hot assets = AR, Inventory (appreciated), Depreciation recapture potential
Liquidating distbn of (a) land/property to partner = zero out to get out (Outside basis - Cash = Basis in land)
Property disbtn exceeding basis - do not recognize gain as they are non taxable
(b) Cash distbn exceeding basis, recognize gain
Non-liquidating distbn = use carryover basis of land
At-risk basis = remove non-recourse debt
Services contributed = take at FMV
Marketable securities are considered as cash /highly liquid so should be first in the allocation of distributed assets
CASH/MKTABLE securities-Hot Assets-Land, buildings and equipment
Mortgage higher than basis in land = shareholder to recognize GAIN (his % to be taken care of)
Sec 444 deferral election for tax year (3 months backwards)
Outside Basis - Inside basis = Section 743(b) adjustment (to eliminate the basis disparity when a P/S is sold, a P/S generally may make an irrevocable Sec 754 election
Inside basis = Adjusted basis in assets
Outside basis = Capital or amount realized + liabilities
Corps pay dividends, Partnerships DO NOT.
More than 50% ownership by a partner in a partnership will be considered as related party sale but not equal to 50% (loss is disallowed), gain is recognized.
A partnership year is adopted by filing a partnership's 1st TAX RETURN.
When a PARTNER acquires a partnership INTEREST by contributing CAPITAL assets or SECTION 1231 property, the basis of the contributed property CARRIES OVER from the partner to the partnership.
Recourse loan - to be part of partners' basis = Accounts payable and unsecured bank loan
Nonrecourse loan = Secured loan = DO NOT include in AT-RISK BASIS
Cash realized on liquidation in excess of partner's outside basis is a taxable capital gain to a PARTNER.
125
More than 30 million avg annual gross receipts allowed.
ENTITIES PROHIBITED from using CASH METHOD:
1. C Corp
2. partnership with a C Corp partner
3. Tax Shelters
Individuals are allowed to use cash method (no matter what their receipts are)
126
3 steps to dissolve a partnership
1. Partners agree to dissolve (i.e. discontinue)
2. Parternship winds up its business
3. All business/Financial operations cease and remaining property if any is distributed to partners (FINAL STEP)
127
Individual partner level
-FTC or deduction
-Oil and gas well depletion
-DIscharge from indebtedness property adjustment
P/S level
- Tax year
-Cost recovery or DEPRECIATION method
-INVENTORY method
-Treatment of organization costs
-Int expense deduction
-R&D costs
-Gains from involuntary conversions
-Section 754 election for basis ajdustment
128
COnsolidation election once MADE is binding for the CURRENT and all the FUTURE years and may be REVOKED ONLY if authorized by the ________
SECRETARY OF THE TREASURY.(Form 1120)
129
SOURCING RULES
1. gain on sale of REAL PROPERTY = Location of the REAL estate sold
2. PERSONAL property = According to the residence of the seller
3. Manufactured Inventory = Location of the assets used to produce the inventory
COMPLETE GIFT
A complete gift is a transfer of property in which the transferor of the property has relinquished dominion and control over the property. A gift is not considered complete if the gift is conditional or revocable.
130
A type of educational savings plan. Similar to an IRA, a qualifying taxpayer may make nondeductible contributions to a qualified account for a child under 18. The child will be able to make tax-free withdrawals when he or she incurs qualified education expenses.
Employee Stock Purchase Plans (ESPP)
Qualified stock options meeting specific requirements that grant options to employees to purchase stock in a corporation. Generally, these options are not taxed as compensation to the employees and the employer does not receive a tax deduction.
131
A deferred compensation plan set up by an employer. A portion of a participating employee's earnings is deducted and placed in a qualified retirement plan. The employer may also contribute a matching percentage. Money in the plan is not taxed until the employee receives distributions, usually at retirement. A 401(k) plan is a defined contribution plan.
A depreciation method (e.g., MACRS) that allows a greater portion of the property cost to be deducted in the first years after purchase, rather than spreading the cost evenly over the life of the asset, as with the straight‑line depreciation method.
132
SEP Retirement Plan
A retirement plan similar to an IRA for self-employed individuals and their employees. Unlike IRAs, the employer sets up a SEP.
Section 1231 Asset
Depreciable property, or non-depreciable real estate, used in a trade or business, such as equipment, vehicles, and rental real estate. In general, if Section 1231 assets are held for the required time, capital gain treatment is available, while a loss is a deductible ordinary loss.
133
Section 1245 Asset
Tangible personal property that is subject to the recapture of depreciation under Section 1245. Upon a taxable disposition of the property, all depreciation claimed on the property is recaptured as ordinary income, to the extent of the gain recognized. Any gain on the sale in excess of depreciation may qualify for favorable capital gains tax treatment.
Section 1250 Property
Real estate that is subject to the recapture of depreciation under Section 1250 in which some or all of the accelerated depreciation in excess of straight-line depreciation claimed on the property may be recaptured as ordinary income. (recapture allowed ONLY IN EXCESS OF SL DEPRECIATION ON SEC 1250 PROPERTY BY INDIVIDUAL)
134
Section 179 Expense Deduction
The ability to deduct a capital expenditure in the year an asset (excluding real estate) is placed in service instead of over the asset's useful life. A Section 179 deduction is limited to the extent that it would cause a net loss
Section 529 Qualified Tuition Program
Programs established by a state, or eligible educational institution, that allow taxpayers to contribute to an account that prepays qualified educational expenses. The earnings in these plans grow tax-deferred, and qualified distributions are income-tax-free.
135
Statutory Stock Option
An option granted by an employer for an employee to buy stock as payment for services. Statutory stock options are categorized as incentive stock options or employee stock purchase plans.
Tax Basis Limitation
Tax laws that limit the amount of loss a taxpayer can deduct, to the extent of their tax basis in the activity generating the loss.
136
Ad Valorem Tax
A tax imposed on the value of property; for example, real estate taxes.
137
A sole proprietorship does not pay the owner a salary or other compensation, so the contribution of skilled labor in the formation of the business does not result in taxable income to the owner.
For all other business forms, the contributions of services in exchange for an ownership interest results in taxable compensation income to the recipient -owner.
138
The partner received only cash and/or hot assets (including inventory), the partner does not adjust the basis of the hot assets to zero out their outside basis.
Instead, the partner's basis in the inventory is equal to the partnership's basis and the partner would recognize a loss for any remaining outside basis the partner has after receiving all assets.
139
Add recourse or non recourse liabilities as applicable to the OUTSIDE BASIS in _________
PARTNERSHIP
140
Sec 754 election can be made by a partnership to adjust the basis of its property in order to match the partnership's property value with the partners' investment values. One instance where this adjustment can take place is if there is a transfer of a partnership interest.
The amount of the adjustment (known as a section 743(b) adjustment is equal to the difference between the purchasing partner's outside basis (basis in the partnership) and the purchasing partner's inside basis (share of the partnership's basis in the assets).
Normally, if a partnership does not have a section 754 election in effect, it is not permitted to adjust the inside basis of the assets when a sale of partnership interest occurs.
However, the IRS mandates a 743(b) adjustment when there is a substantial built-in loss at the time of purchase, even in the absence of a Section 754 election.
141
A qualified nonrecourse secured real estate mortgage is considered part of the "at-risk" basis because it represents a liability tied to the property, and the owner is potentially liable for repayment if the property is sold or foreclosed upon. This term is primarily used in the context of tax law, particularly with regard to limited partners or LLC members, and refers to how much an individual is financially "at risk" in a particular investment, such as a real estate partnership or property investment.
The IRS requires that taxpayers be at risk for their investment in order to claim deductions on certain losses, such as passive losses from real estate investments. The term "at-risk" generally refers to the amount of money or property a taxpayer has invested, where they could lose that money or property if the investment goes bad.
A qualified nonrecourse mortgage is a type of loan secured by real estate where the lender’s only recourse in case of default is to seize the property itself (they cannot pursue the borrower personally for repayment). The mortgage is nonrecourse because the borrower does not personally guarantee the loan.
142
PORTFOLIO INCOME
Interest, Dividends, Annuities, Royalties, Capital gains and losses
143
BECKER - MATERIAL PARTICIPATION
More than 500 hours of participation during the tax year
144
Real estate professional
PAL Limitation does not apply to you as it will be considered as active income and not the passive income
(1) More than 50% of TP's Personal services are from real estate businesses
(2) The TP performs more than 750 hours of services in real estate
145
Excess business loss limitation applies to all types of businesses _______
Income, active or passive
Limit $305,000 SIngle
$610,000 MFJ
146
Gift tax is paid by the person giving the gift.
Estate tax is paid by the estate.
147
Present int without ascertainable value is considered as________
future gift
