Income Tax Flashcards
What are the eligibility requirments for a
Subchapter S Corporation?
- Number of shareholders is limited to 100
- The Corporation can only have a single class of outstanding Common Stock (no preferred), but the Common can be voting or non-voting.
- Must be a Domestic Corporation Only individuals, estates and certain Trusts may be shareholders.
NOTE: Non-resident aliens (persons who are neither citizens nor permanent residents of the US) cannot be shareholders.
Tax Basis for Partnership / LLC
- Cash invested
- Direct loans made to the partnership
- Partnership Debt: Loans made to the partnership - not the partner (bank loans)
NOTE: S-Corp basis does NOT include bank loans even if the S-Corp owner personally guarantees the debt.
Property Classes
1245 Property (non real estate)
- 5 year:Computers,Autos,Trucks
- 7 year:Office Equipment except computers,
1250 Property (real estate)
- 27.5 year: Residential rental property
- 39 year: Non-residential real property
Remember: CATCORN
Boot / Gain Recognized / Basis
No Boot Received: Recognized Gain is zero
When Boot is Received, just answer the recognized gain is the boot received
- Boot paid is added to Basis
- Basis carries over from the prior property
Netting Capital Gains and Losses
Step 1:
- ST Capital Gains and ST Losses are Netted
- LT Capital Gains and LT Losses are Netted
Step 2:
- If a Gain and Loss remain, they are again Netted
Step 3:
- If a Loss remains after Netting Capital Gains and Losses, only $3,000 of the Net Losses can be used to offset ordinary income
Sale of a Personal Residence (Section 121)
$250K (single) and $500k (MFJ) of Gain from the sale is tax-free if lived in for 2 out of the last 5 years.
- Exception available if taxpayer lives in the residence less than two years and moves because of a new job, for health reasons, etc. Receives a pro-rated amount.
Recapture (1245 Property)
When the sole proprietor purchases equipment and takes Depreciation (Cost Recovery Deduction - CRD), the CRDs offset the sole proprietor’s ordinary income.
When the sole proprietor sells the equipment for a gain, the sole proprietor must:
- 1st: Look back and recapture the lesser of the CRDs taken or the Gain realized as 1245 Gain (ordinary income)
- 2nd: Recover any excess gain as 1231 (capital gain)
Section 179
Qualifying vs. Non-Qualifying Property
Qualifying:
- Tangible Personal Property
- 1245 Property
Non-Qualifying:
- Real Estate
- 1250 Property
- Intangible (owning a franchise)
AMT Preference Items
- Excess Intangible Drilling Costs (IDC)
- Private Activity Municipal Bond
- Oil and Gas Percentage Depletion / Excess intangible drilling costs (IDC)
- Depreciation (ACRS/MACRS) but not straight line
Remember: I.P.O.D.
AMT Add-Back Items
AMT Not-Deductible Items
Add Back:
- Incentive Stock Option Bargain Element
- Property and Income Taxes
Postponing AMT
- Accelerating receipt of taxable income or deferring the payment of property taxes, state income taxes, deductible medical expenses or charitable giving, the regular tax (1040) may exceed the AMT payable (more taxable income)
- Deferring exercise of incentive stock options (preference item) to a later date or disqualifying the ISO so that it becomes NQSO (subject to ordinary income tax).
- Purchase public purpose muni bonds instead of private activity bonds.
Historic Rehabilitation Programs
Historic Rehabilitation programs that are held as passive activity may generate a Deduction:
- Equivalent Tax Credit of up to $25,000.
The benefit of this Deduction:
- Equivalent Tax Credit phases out between $200- 250k of AGI.
How does the Deduction Equivalent tax credit work?
- Calculate tax to determine the maximum marginal tax bracket. If it is 25%, for example, then you multiply $25,000 by 25% to get $6250.
Low Income Housing Credit
Low-Income Housing programs that are held as passive activity may generate a Deduction:
- Equivalent Tax Credit up to $25,000. There is NO phase out.
- The Low Income Housing Credit is allowed annually over a 10 year “credit period.”
- The Depreciation is straight-line over 27.5 years.
How does the credit work?
- For example, multiply 35% by $25,000 to get a credit of $8750.
NOTE: Because there is no phaseout, it produces a higher credit.
Types of Phantom Income
Insurance:
- Lapse of Policy Loan
- Section 162 Life/Disability
Investments:
- Zero/Strip Income
- TIPS
- Declared but not paid Dividends
Tax/Retirement:
- K-1 Income from LP/FLP
- Recapture
- NUA
- 20% withholding plan distributions, Secular Trust
Charitable Giving
Calculate the Maximum Deductible - 60% of AGI
- Calculate the eligible amounts given to 50% organizations (public charities) such as all churches, schools, hospitals and organizations such as United Way, Red Cross, Humane Society, etc.
- Calculate the eligible amounts given to 30% organizations (private charities) such as private non-operating foundations, war veteran groups, and fraternal orders.
Charitable Giving (Types of Property - 60% Charities)
- Long-Term Appreciated Property, using FMV deduct up to 30% of AGI
- Use-unrelated Property, ST Capital Gain Property using basis deduct up to 50% of AGI
Sources of Federal Tax Law/Authority
- Internal Revenue Code: Primary Source of all tax law.
- Treasury Regulations: Great authority, but not law.
- Revenue Rulings and Revenue Procedures: Administrative interpretation. May be cited.
- Congressional Committee Reports: Indicate the intent of Congress. May not be cited.
- Private Letter Rulings: Apply to a specific taxpayer .
- Judicial Sources: Court decisions interpret
Step Transaction
Ignore the individual transaction and instead tax the ultimate transaction
- Example: The XYZ Corporation sells property to an unrelated purchaser who subsequently resells the property to a wholly owned subsidiary of XYZ.
Sham Transaction
A transaction that lacks a business purpose and economic substance will be ignored for tax purposes.
- Example: A sale by XYZ to ABC, but both XYZ and ABC are owned by the same persons.
Substance Over Form
The substance of a transaction, and not merely its form, governs its tax consequences.
- Example: The president of XYZ has the company loan him the money he needs. He never intends to repay the loan or take a salary.
Assignment of Income
Income is taxed to the tree that grows the fruit, even though it may be assigned to another prior receipt.
- Example: Mr. T owns XYZ, an S Corp. He directs that all income be paid to his son. Mr. T reports no income.
Dates for Paying Estimated Taxes
- April 15
- June 15
- September 15
- January 15
IRS Penalties
Frivolous
- Frivolous Return: $5000
Federal Withholding Tax Underpayment Penalty
To avoid, pay the lesser of:
- 90% of the current year’s tax liability
- 100% of the prior year’s tax liability (or 110% if the last year’s adjusted gross income exceeded $150,000)
Adjustments for Adjusted Gross Income (AGI)
The second step in the 1040 calculation is adjusted gross income. It is Total Income (or Gross Income) less adjustments to income.
The main Adjustments or Deductions to Income are:
- IRA Contributions
- Self-employment Tax
- Self-employment Health Insurance (100%)
- Keogh or SEP Alimony paid
- SHARESPM
Schedule A Itemized Deductions
- Medical, Dental, and LTC (7.5% of AGI)
- Casualty and Theft Losses
- Real Estate Taxes**
- Investment Interest Expense
- Home Mortgage Interest
- State and Local Taxes**
- Personal Property Tax**
- Charitable Gifts
- MMITCH
**Limited to $10,000/yr.
Casualty Losses (Calculation of the Deductible Loss)
First: Use the lesser of basis or FMV
Second: Subtract any insurance coverage
Third: Subtract $100 (floor)
Fourth: Subtract 10% of AGI. Must be a presidentially declared “natural disaster”
Kiddie Tax
Unearned income
Children under 18 are entitled (2022) to a Standard Deduction amount ($1,150) and an additional $1,150 of unearned income will be taxed at the child’s rate (10%).
over $2,300 taxed at parents rate
EARNED income greater of the standard deduction= earned income + $400 in step 1
sue- 15 has earned income $250 babysitting and $500 interest
she should take standard deduction of $1,100 unearned b/c
earned = $250 + $400
Self-Employment Income
- Net Schedule C Income
- General Partnership Income (K-1 income)
- Board of Directors fees
- Part-time earnings (1099) NOT wages or K-1 distributions from an S Corp
DON’T MAKE IT HARD- EVERYTHING ELSE IS NOT INCLUDED.
Self-Employment Tax Calculation
The Taxable Wage Base will not exceed $147,000 (2022).
- If you added up the self-employed income, and you exceeded $142,800, you did something wrong. Why? Social Security tax stops at $147,000 (2022)
Shortcut: Multiply Self-employment Income by 0.1413
Tax Credits
- Credit for child and dependent care expenses MAX $6,000 (2 kids) $3000 for 1 child
- Child Tax Credit (up to $1,400 could be refundable)
- Adoption Credit
- Elderly and Disabled Credit
- Foreign Tax Credit
- Earned Income Credit (refundable)
Accounting Methods
- Cash: Mandatory where taxpayer’s records reflect only cash transactions, and there are no inventories.
- Accrual: Mandatory for purchases and sales over $25M where there are inventories.
- Hybrid: Combines accrual for inventory portion of business and cash for cash portion of business.
- Percentage of Completion: For long-term contracts where the contract will not be completed within the taxable year started.
Personal Service businesses that are also regular Corporations (C-Corp)
- Health
- Accounting / Architectural
- Law
- Engineering
Remember: H.A.L.E.
Realized Gain vs Recognized Gain
What’s the difference?
- Realized Gain is Economic or Inherent Gain at the time of the transaction.
- Recognized Gain is the part of Realized that is immediately taxable.
An individual is required to file a tax return if earnings from self employment (1099) are more than ______?
$400
Hobby Loss
3/5 business not a hobby
2/7 for horses
Deductions for old and blind
65 or older extra $1,350
blind $1,700
cam have both
IRS Penalty
Negligence
Negligence: Penalty is 20% of the portion of the underpayment attributed to negligence.
IRS Penalty
Civil Fraud
Civil Fraud: Penalty is 75% of the portion of the tax underpayment attributable.
IRS Penalty
Failure to File
Failure to File: Penalty is 5% of the tax due per month, with a maximum of 25%.
IRS Penalty
Failure to PAY
Failure to PAY: Penalty is 0.5% per month the tax is unpaid, with a maximum of 25% (Pay-Point)
Estimated Tax
Pay the LESSER of
90% of current year tax liability
100% of prior year’s liability or 110% if prior year AGI is over 150k
AGI Calculation
SHARESPM
self employment tax (1/2) and 100% of health insurance
HSA
Alimony pre 2019
Retirment
Education
Student Loan Interest
moving expense (active Military only)
Itemized Deductions
MMITCH
Mortgage
Mortgage Insurance
Interest Exp
Taxes/real estate and property
Casulty Loss
Health exp over 7.5% AGI
NOL
Net Operating Loss
NOT allowed to partnership or S corps (they recognize losses in other ways)
Investment Income
Tax Deduction Vs. Tax Credit
low income = credit
high income = deduction
tax credit /tax bracket = equivalent deduction
deduction x tax bracket = equivalent tax credit
calculation of gain
- profit / total contract price = gross profit %
- intallment * Gross profit % = gain.
1244 qualified small business tock
loss of up to $100,000 on a joint return ($50,000- SGL)
AND
Capital loss 3,000
defective or tainted trust for estate tax purposes
beneficial enjoyment
revisionary interest that exceeds 5% measured at time of death.
Like Kind Exchange
NO Personal Residence
No Inventory
45 days to receive
180 days to title
keep for 2 years when related (related party)
Wash Sale
No loss deduction within 30 days before and ending after the sale taxpayer aquires substantially identical property
Taxable fringe benefit
Health insurance premiums paid for self-employed, partners and more than 2% owners of S Corp. 100% deductible as adjustment to income on front of 1040 (can’t exceed net income from business) Includes all types of health insurance medical dental LTC NOT disability insurance
Casualty loss
- lesser of FMV or basis 2. Subtract insurance coverage 3. Less -100 floor 4. Subtract 10% of AGI
Special taxes
20% special tax
A regular corporation can generally accumulate 250,000
150,000 for a PSC without establishing a business need.
Anything in excess of that has a special tax of 20% in addition to 21% corporate tax
Adjusted basis
Basis is increased by legal fees commissions sales tax freight and improvements NOT Repairs real estate normal business expense
AMT max %
28% If you’re in 37% bracket no AMT Without itemizing No AMT The answer to reducing AMT is to pay more regular tax
Alimony-front loading
Add what was paid in the first two years subtract the constant of 37,500 A payment was made in the 3rd year double it and add to the 37,500 Ex. 10,000 paid in a year three equals 20,000+37,500 = 57,500 subtract from the first two years to get the recapture amount
Active participation
Phased out between 100k-150k Eliminated at 150 K
Equipment leasing partnership
Only effective for C corps
