First reading

Question 1

NQSO (option price could be less than FMV)

Answer 1

No impact on AMTI

Readily determinable value, recognize ORINDARY INCOME for FMV on the date of option granted to the employee (transaction value on exchange)

Question 2

ISO

1.(less than 10%)

2. not less than FMV of the stock on the grant date
3. May exercise upto $100,000 in a year
4. Exercisable within 10 years of Grant date
5. Option price cannot be less than the FMV

Answer 2

ESPP

1. (less than 5%)
2. option price ?Not less than 85% of FMV of the stock when granted or exercised (whichever is less)e.g. $22/$28=88%
3. More than 27 months after grant date
4. No more than $25,000 per year
5. Written and approved by shareholders

Question 3

Income qualifying for FEIE must be earned(NOT unearned such as div, int income)

Answer 3

Wages, salaries, commissions, bonuses, tips, professional fees, self-employment income and other forms of compensation

Question 4

Spanish Income
_____________________*US Taxes = FT limit
Worldwide Income

Answer 4

Take lesser of actual Foreign taxes paid or Foreign taxes limit (FT limit)

Question 5

Comp

Answer 5

Bonus received as shares take as per FMV
NQSO - take as per Bargain purchase (FMV-Par or Basis)

Question 6

ISO

Answer 6

Basis = exercise price

If Option price < FMV of stock on grant date = cannot be ISO

Question 7

ESPP

Answer 7

Need to be under 5%

Question 8

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.

Answer 8

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

Question 9

Charity - Goodwill Ordinary Income property = 50%

Form 8283 required when amount is more than $500 ($501)

Answer 9

Cash = 60% of AGI

Question 10

NON STATUTORY STOCK OPTION = NQSO

Answer 10

Ordinary income to be added to cost basis
Ordinary Income = selling for $5 on an established exchange

Question 11

Above 65

Answer 11

Eligible for extra standard deduction for old age and if they r blind

Question 12

HSA = Pretax deduction $4,150 (2024 maximum HSA contribution)

Answer 12

Pre-tax deduction reduces AGI/taxable income

Question 13

Kiddie tax

Answer 13

Earned Income +450

Question 14

Suspended losses can be carried forward only _____

Answer 14

X NEVER carried back X

Question 15

Commissions earned from selling a vacation property are considered ___________

Answer 15

active income

Question 16

PAL can only offset passive activity income only

Answer 16

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.

Question 17

Loss on disposition of Royalty producing asset is __________

Answer 17

Portfolio income/loss

Question 18

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.

Answer 18

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.

Question 19

AMTI

Answer 19

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

Question 20

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

Answer 20

Spouse contri + TP contri = e.g. 2500 k each

Tax savings = 5000 30% = 1500
FICA = 50007.65%=383

Question 21

Timing strategies for anticipated tax rate decrease

Answer 21

INCOME AND GAIN - Defer recognition to later year when rates are lower

DEDUCTION AND LOSS - Accelerate recognition to current year when rates are higher.

Question 22

FSA and HSA - similarities

1. Both are pre-tax deductions
2. Both are tax free distributions if used for qualified expenses

Answer 22

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.

Question 23

Unified Transfer Tax = Merger of Estate tax (Taxable transfers of property at death) + Federal Gift tax (TAXABLE transfers of property during lifetime)

Answer 23

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.

Question 24

The car is ordinary income property because it is a personal-use asset that has____________

Answer 24

depreciated in value.

Question 25

If a business borrows money to purchase municipal state bonds:

Answer 25

1. The income generated is not taxable and the INTEREST EXPENSE is NOT DEDUCTIBLE.

Question 26

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.

Answer 26

court costs, attorney costs and accountant costs

Question 27

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.

Answer 27

Upon death, the trustee of the trust will distribute the assets according to the instructions in the trust agreement.

Question 28

Defined CONTRIBUTION plan

Answer 28

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.

Question 29

Section 401(k) retirement plans are the most common type of employer-sponsored defined contribution plans.

Answer 29

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.

Question 30

Charitable deduction is not allowed when there is an NOL or negative TI

Answer 30

Prior year NOL cannot be used to create or increase the current year NOL.

Question 31

Sec 382 corporate stock ownership change

Ownership more than 50%

Answer 31

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.

Question 32

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.

Answer 32

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%

Question 33

Reorganization are usually not taxable events. E.g. Ch 11 bankruptcy is non-taxable

Answer 33

Liquidations are usually taxable event

Question 34

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.

Answer 34

Exclusion:

A noncorporatr 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; or
2. $10 million ($5 million if MFS)

Question 35

C Corp - Worthless Stock: Sec 1244 stock

Answer 35

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.

Question 36

AFR - Applicable federal rate

Question 37

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 third 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.

Answer 37

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
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.

Question 38

COMPARABLE UNCONTROLLED PRICE (CUP) - only for tangible property (Sales, purchases and leases)

COMPARABLE UNCONTROLLED TRANSACTION (CUT) - only for intangible property (regarding royalty payments)

Answer 38

RESALE PRICE - Tangible property only

COST PLUS - Tangible property only

COMPARABLE PROFITS METHOD - based upon operating margin, gross margin, ROA or return on capital

Question 40

COMPLEX TRUST

Answer 40

It distributes corpus

Question 41

Trust is a separate tax paying entity.

Answer 41

Distbn made by the trusts are deductible by the trust.

Question 42

SIMPLE TRUST

Answer 42

cannot make distributions and contributions to the charitable orgs.

Question 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.)

Answer 43

It is used instead of a will to stipulate how a person’s assets will be distributed when they die.

Question 44

Non grantor trusts

Answer 44

either simple orc complex trusts

Question 45

Corpus includes ____________

Answer 45

Capital gain and loss
Casualty gain

Question 46

DNI or Distributble net income__________

Answer 46

excludes capital gain and loss

Question 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.

Answer 47

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

Question 48

______________are considered fixed, determinable, annual, or periodic income (FDAP) and is subject to U.S. withholding tax requirements.

1. FDAP
2. FATCA - withholding tax on foreign entities for failure to provide information to U.S. recipients (e.g. ID)

Answer 48

Dividend, Interest income and royalties

Question 49

To increase a corp’s foreign derived intangible income, sale of property must be:

Answer 49

1. to non U.S. persons
2. For use outside the U.S.
3. Not to a related party for its own use

Question 50

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

Question 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.

Answer 51

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.

Question 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).

Answer 52

Because ForCo is a CFC, certain types of income (e.g., passive investment income) earned are subject to immediate taxation

Question 53

Separate legal entities

1. IC-DISC - Interest charge domestic international sales corp
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.

Answer 53

The Subpart F rules supersede the PFIC rules when both apply, which results in more immediate recognition of Subpart F income.

Question 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.

Answer 54

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.

Question 55

The base erosion and anti-abuse tax (BEAT) may apply to corporations with average annual gross receipts of $500 million or more for the three preceding tax years.

Answer 55

RELATED FOREIGN AFFILIATES

Question 56

Coverdell - $2000 per child

qualified elementary, secondary or higher education expenses to

Tuition, books, room and board eligible

Answer 56

AGI Single 96,800 -
AGI MFJ

subject to 10%

SAMe cannot be used for AOC or LLC

Question 57

FDII creates a deduction for a portion of income for a U.S. corporation. FDII includes the following:

the sale or property sold by the taxpayer to any person who is not a U.S. person and is for foreign use;
services provided by the taxpayer to any person or with respect to property, not located within the U.S. (including some electronic services); and
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.

Answer 57

Foreign-Derived Intangible Income (FDII)

Question 58

50 or older

Answer 58

eligible for catch up contribution

Question 59

Sec 529 plan to Roth IRA - Beneficiary’s Roth IRA must be maintained for 15 years

Answer 59

Lifetime limit on transfers from a Sec 529 plan to Roth IRA is of $35,000.

Question 60

A gain is recognized only if(building) _________

Answer 60

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)

Question 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.

Answer 61

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.

Question 62

2017 & before- carryback 2 years, CF 20 yrs
2018 -2020 - Carryback 5 years, CF indefinitely (100%TI)

Answer 62

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

Question 63

These do not qualify for Sec 501(c) (3)Exempt __________

(Corp, LLC and Trust, scientific purpose - allowed for Sec 501c(3)) - Form 990

Answer 63

Sole Proprietorship
Partnership
Individuals

(Read REG chapter)

Question 64

Political or legislative activities is allowed only for_____________

Answer 64

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)

Question 65

UBI includes (it’s not considered as excluded income) ___________

Answer 65

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 .

Question 66

EXCLUDED income from UNRELATED BUSINESS INCOME__________

Question 67

Excess Business Loss Limitation limits =2024

Answer 67

MFJ = $610,000
Single = $305,000

Question 68

AT RISK Basis includes ONLY _________ and does not include non-recourse debt.

Answer 68

Recourse debt

Question 69

Unified transfer tax system

Unified credit limit = $13,610,000 (2024)

Answer 69

FEDERAL GIFT TAX + ESTATE TAX

Question 70

LIFETIME = Inter Vivos Transfers

Answer 70

TESTAMENTARY = Property at death

Question 71

Examples of future interest gifts (not eligible for annual exclusion):

Answer 71

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

Question 72

Recipients pay no gift tax

Answer 72

General rule = Basis to the recipient equals the donor’s basis + gift tax paid due to the appreciation in value inherent in the gift.

Question 73

A gift is considered complete and is subject to gift tax :

Answer 73

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.

Question 74

Tax on cumulative lifetime gifts (formula):

Answer 74

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

Question 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.

Answer 75

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.

Question 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

Answer 76

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

Question 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)

Answer 77

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

Question 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.

Answer 78

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)

Question 79

Sec 1245 PERSONAL PROPERTY

Answer 79

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

Question 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.
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. (Exception: Sales of musical compositions held by the original artist receive capital gain treatment.)
Treasury stock.

Answer 80

Ordinary assets
1. Trade accounts receivable
2. Inventory (Depends)

Question 81

LAND is not a depreciable asset, so there is _________

Answer 81

NO DEPRECIATION RECAPTURE (ENTIRE SEC 1231 GAIN)

Question 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

Answer 82

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

Question 83

Only 1 spouse must meet the ownership requirement

Answer 83

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

Question 84

Recapture is not allowed in case of ______

Answer 84

loss

Question 85

All losses on involuntary conversions are _______

Answer 85

Recognized

Question 86

Estimated tax payment, CORP=

Answer 86

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

Question 87

Realized loss is never realized in like kind exchange

Answer 87

? True or False

Question 88

Sale to related and later to unrelated party - If SP is in between basis of TP1 and basid of TP2 _________

Answer 88

zero gain or loss (in the middle)

Question 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.

Answer 89

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.