Income Tax Flashcards
Mel runs a business as a sole proprietor. The business is mature and successful. Every year he has profits. His wife has a successful business of her own. Mel would like to bring in additional investors and expand his business. Which is the most appropriate business form for Mel?
A (regular) corporation can be owned by an unlimited number of stockholders with no eligibility requirements. The corporation may also allow Mel to retain profits as a separate tax entity. Retained earnings are not immediately taxable to Mel. If Mel chooses a limited partnership, he can bring in additional investors. But the excess income is still taxable to him and he has unlimited liability exposure as a general partner.
Sara purchases new office equipment for $9,500. Sara pays $500 in sales tax. Assuming she uses MACRS, what is the cost recovery deduction for the first year?
$1429
$10,000 x 14.29% (seven-year property)
A company buys a light duty truck for $25,000. Under straight line method of depreciation, how much can the company take in cost-recovery deductions in the first year?
$25,000 x 10% = $2,500 (CHECK ON THIS)
$2500
If a sole prop makes a charitable contribution, is it considered to be made by the person or the business?
The person, so it would be an itemized deduction (schedule A) not self employed (C)
Above the line is the on what page of the tax return
front of the 1040
Kate ($200,000 of AGI) is considering giving a painting to a private university. Kate’s mother bought the painting for $10,000 many years ago. When Kate’s mother died, Kate inherited the painting which was then worth $50,000. It is now worth $100,000. What is the maximum allowable charitable deduction Kate can take in the current year?
$50,000
Art objects – FMV can be used only if the charity can use the art object in its charitable activity. Otherwise, use basis (the inherited value). There is no implication that the art is use related.
T/F
Reimbursed entertainment expenses and subsidized parking are not self-employment income.
True
Jim Jones bought an interest in a limited partnership (LP Properties) that invested in a large rental type property in Florida. As an accredited investor, he bought a $250,000 interest. LP purchased the property with cash of $10,000,000 and a bank loan of $90,000,000. Due to a real estate crash, the property is only worth $75,000,000. LP Properties told the bank that LP would default on the loan unless the bank renegotiated the loan balance for $75,000,000 (current mortgage principal $85,000,000). The bank agreed. What will happen at year end when LP, Inc. sends a K-1?
He will be charged with his proportional share of phantom income due to mortgage relief.
The Internal Revenue Code treats debt relief as if the taxpayer received income. With no cash received now, this becomes phantom income. The bank will charge LP, Inc. with $10,000,000 of income. The bank has to write the loss off.
Mr. Ulmerton, with his wife’s consent, transfers $28,000 to his grandson’s UTMA account. Mr. Ulmerton is the custodian of the account. Mr. Ulmerton likes to trade stocks. At year-end, he has generated $1,500 of short-term capital gains. What is his grandson’s tax liability?
$40
As long as the gain is short-term gain (ordinary income) and the gain is less than $2,200, the tax is 10% of $400 ($1,500 - $1,100). It is not necessary to know the trust tax rate. This is only true if the grandson had unearned income under $2,200.
Which of the following forms of business organization can pass LOSSES through to the owner(s)?
S corporation C corporation Sole proprietorship General partnership Limited partnership
EVerything except C corp
Interest in a non-publicly traded limited partnership (RELP). Substantial losses. how are they treated?
To realize the passive loss, must dispose his partnership interest. The losses go on a Schedule E and can only be offset by passive income. If bought a non-publicly traded partnership (RELP) that produced income, then use the losses.
Margaret donates stock she bought six months ago to the State University. She purchased the stock for $50,000. The current fair market value is $60,000. Margaret’s AGI is $150,000. What is her maximum allowable charitable deduction in the current year?
50,000
The charitable deduction for gifts of short-term Capital gains property is limited to basis and 50% of AGI.
Can S corps issue preferred stock?
No
Does a high salary paid to the owner affect S corps?
No
The IRS would not reclassify salary as dividends (conduit theory) but may try to reclassify excessive compensation in a regular corporation.
Due to inflation, inventory costs have risen. Jack LaRue wants to sell LaRue, Inc. for the best possible price. He wants profits to look as strong as possible. What should he do if he is currently valuating inventory using LIFO?
Use specific identification = BETTER PROFITS
FIFO= BETTER EARNINGS
As an alternative to FIFO or LIFO, businesses may value inventory under a specific identification method. If a taxpayer can specifically identify what to sell he can create a gain, a loss, or neutralize the gain or loss. By doing this, he could create the best profit. If he changed to FIFO, that would increase his earnings.
Bob and Fred, brothers, want to start a new restaurant. They will materially participate. They anticipate losses for the first three years due to competition. If one of the brothers dies, they want the survivor to be able to continue the business. They anticipate that they may have to raise additional capital through the sale of interests or have the business borrow funds.
What type of business is most appropriate
LLC
If they have an S corporation, their basis would be limited to cash invested in the business and direct loans, not corporate debt. The LLC would have the same basis as a partnership. This would allow the LLC to take more losses than an S corporation could take. This is an advantage over an S corporation.
Is K1 income from a general partnership included in the self employment tax calculation?
yes
Larry bought a light-duty truck for his business. The cost was $15,000. What cost recovery deductions can he take in the second year (MACRS)?
$4800
The truck is 5-year property ($15,000 x 32%).
During the year, Freddy’s business generated $13,000 of income. Unfortunately, he had $23,000 of expenses. He is a sole proprietor. Which of the following is true?
Schedule C losses can be applied against income earned in the same year.
Betsy divorces Arthur in 2017. She is required to pay alimony to him. Arthur wants the majority of the alimony quickly. He asks for $70,000 in the first year, $50,000 in the second year, and then nothing. How much of the alimony that Betsy pays is subject to recapture?
$82,500
1st year alimony $70,000 2nd year alimony + 50,000 Total $120,000 Less constant - 37,500 Recapture $82,500
During an inflationary period, Company A is using the LIFO form of inventory control. If it changes to FIFO, will it’s net business income be lower or higher?
Net business income will be higher.
FIFO indicates that Company A sell its lowest cost goods first. Thus its income would increase.
If Company A went from FIFO to LIFO its inventory cost would be understated and both its net business income and tax liability would be lower.
Mrs. P establishes an irrevocable trust for her son. She transfers $500,000 to the trust. The trust principal is placed with a money manager generating 6% taxable income. The trust applied for a whole life policy on her life. The trust will own and be the beneficiary of the policy. The premium of the whole life policy is $13,000 per year. The trust will pay the premium. The remaining income will accumulate in the trust. How will the income be taxed?
$13,000 as a taxable gift to Mrs. P and $17,000 as taxable income to the trust.
$13,000 as taxable income to Mrs. P and $17,000 as taxable income to the trust.
$30,000 as taxable income to Mrs. P.
$30,000 as taxable income the trust.
$13,000 as taxable income to Mrs. P and $17,000 as taxable income to the trust.
This is a tainted irrevocable trust. Only the life insurance premium is taxable to Mrs. P (the grantor). The remaining income is taxable to the trust.
Dr. Johnson (salary $500,000) races stock cars on weekends. Each year he earns about $30,000 from racing but has about $40,000 of related expenses. Which of the following is true?
The $30,000 of income must be reported as miscellaneous taxable income on Form 1040.
The $30,000 of income is miscellaneous income.
