First reading Flashcards
NQSO (option price could be less than FMV)=No impact on AMTI
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)
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.
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
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
Income qualifying for FEIE must be earned(NOT unearned such as div, int income)
Wages, salaries, commissions, bonuses, tips, professional fees, self-employment income and other forms of compensation
Spanish Income
_____________________*US Taxes = FT limit
Worldwide Income
Take lesser of actual Foreign taxes paid or Foreign taxes limit (FT limit)
Comp
Bonus received as shares take as per FMV
NQSO - take as per Bargain purchase (FMV-Par or Basis)
ISO
Basis = exercise price
If Option price < FMV of stock on grant date = cannot be ISO
ESPP
Need to be under 5%
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.
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
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
Cash = 60% of AGI
NON STATUTORY STOCK OPTION = NQSO
Ordinary income to be added to cost basis
Ordinary Income = selling for $5 on an established exchange
Above 65
Eligible for extra standard deduction for old age and if they r blind
HSA = Pretax deduction $4,150 (2024 maximum HSA contribution)
Pre-tax deduction reduces AGI/taxable income
Kiddie tax
If earned income is more than $1300, then Std deduction =Earned Income +450 or $14,600
Suspended losses can be carried forward only _____
X NEVER carried back X
Commissions earned from selling a vacation property are considered ___________
active income
PAL can only offset passive activity income only
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.
Loss on disposition of Royalty producing asset is __________
Portfolio income/loss
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.
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.
AMTI
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
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)
Spouse contri + TP contri = e.g. 2500 k each
Tax savings = 5000 30% = 1500
FICA = 50007.65%=383
Timing strategies for anticipated tax rate decrease
INCOME AND GAIN - Defer recognition to later year when rates are lower
DEDUCTION AND LOSS - Accelerate recognition to current year when rates are higher.
FSA and HSA - similarities
- Both are pre-tax deductions
- Both are tax free distributions if used for qualified expenses
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.
Unified Transfer Tax = Merger of Estate tax (Taxable transfers of property at death) + Federal Gift tax (TAXABLE transfers of property during lifetime)
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.
The car is ordinary income property because it is a personal-use asset that has____________
depreciated in value.
If a business borrows money to purchase municipal state bonds:
- The income generated is not taxable and the INTEREST EXPENSE is NOT DEDUCTIBLE.
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
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.
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.
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.
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.
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.
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%
Reorganization are usually not taxable events. E.g. Ch 11 bankruptcy is non-taxable
Liquidations are usually taxable event
Qualified Small Business Stock(QSBS)- C Corp only not S corp
1.Stock issued after Aug 10, 1993
- Acquired at the original issuance.
- C corp only not S corp
- Less than $50 million of capital as of the date of stock issuance.
- 80% or more of the value of the corp’s assets used in the active conduct of one or more qualified trades or businesses.
- 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:
- 10 times the TP’s basis in the stock; (e.g. 5000 basis *10 times = 50,000) or
- $10 million ($5 million if MFS)
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.
AFR is
Applicable federal rate
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:
- S Corps (are not allowed to be part of affiliated group)
- Foreign Corps
- Most real estate investment trusts (REITs)
- Some insurance companies
- Brother-sister companies
- 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.
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
COMPLEX TRUST
It distributes corpus
Trust is a separate tax paying entity.
Distbn made by the trusts are deductible by the trust.
SIMPLE TRUST
cannot make distributions and contributions to the charitable orgs.
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.
Non grantor trusts
either simple or complex trusts
Corpus includes ____________
Capital gain and loss
Casualty gain
DNI or Distributble net income (no corpus items)__________
excludes capital gain and loss
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
- Subpart F income
- GILTI
- Income invested in U.S. property
- Income subject to the transition tax
______________are considered fixed, determinable, annual, or periodic income (FDAP) and is subject to U.S. withholding tax requirements.
- 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. - 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.
To increase a corp’s foreign derived intangible income, sale of property must be: (OUT AND OUT)
- to non U.S. persons
- For use outside the U.S.
- Not to a related party for its own use
The IRS MAY make adjustments necessary to a controlled transaction based on the ___________
“arm’s-length” standard.
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.
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
Separate legal entities
- IC-DISC - Interest charge domestic international sales corp = Tax exempt entity
- CFC
- 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.
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.
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
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
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.
Foreign-Derived Intangible Income (FDII)
50 or older
eligible for catch up contribution
