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 Return: $5000
- Negligence: Penalty is 20% of the portion of the underpayment attributed to negligence.
- Civil Fraud: Penalty is 75% of the portion of the tax underpayment attributable.
- Failure to File: Penalty is 5% of the tax due per month, with a maximum of 25%.
- Failure to PAY: Penalty is 0.5% per month the tax is unpaid, with a maximum of 25% (Pay-Point)
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
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
**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
All net UNEARNED income of a child who has:
- NOT attained the age 18
- Is 19-23 and a full-time student
- Has at least one parent alive
…is taxed at Parent’s Rates regardless of the source of the assets.
Children under 18 are entitled (2020) to a Standard Deduction amount ($1,100) and an additional $1,100 of unearned income will be taxed at the child’s rate (10%).
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
Self-Employment Tax Calculation
The Taxable Wage Base will not exceed $142,800 (2021).
- If you added up the self-employed income, and you exceeded $142,800, you did something wrong. Why? Social Security tax stops at $142,800 (2021).
Shortcut: Multiply Self-employment Income by 0.1413
Tax Credits
- Credit for child and dependent care expenses
- 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
Constructive receipt doctrine for transactions
- Income can be used despite the money not yet received
- occurs in cash accounting situations
- does not apply with the use of accrual accounting.
- Taxpayers must include any income on their taxes based on the year that income was constructively received, even if they don’t have possession of the funds.
Hobby Loss Rules
NO PROFIT REQUIRED
INCOME is the factor and must be claimed
Income generated 3 of 5 consecutive years = NOT a hobby
Income Generated 2 of 7 consecutive years for HORSES = NOT a hobby
Losses allowed only to the extent of profit
** Income reported as Miscellaneous taxable
Tax RESEARCH sources
does not influence LAW
Federal Tax Coordinator from the RIA (Research Institute of America, publisher)
Federal Tax Service from the CCH (Commerce Clearing House Inc.)
MAY NOT BE CITED IN TAX COURT
Step Transaction
IRS recognizes a transaction as a STEP to the ultimate transaction
Substance Over Form
IRS recognizes that the FILING is in order but the ultimate econimic outcome is obfuscated
Who has to file? Filing Requirements
- individuals (net earnings >$400)
- Dependendents
- Children under 24 (KIDDIE TAX)
- Self Employed
- Aliens
Filing Dates for Estimated Taxes
- 4/15; wait 2 mos
- 6/15; wait 3 mos
- 9/15; wait 4 mos
- 1/15;
NOT QUARTERLY
Late installments can amend earlier ones
6mo extension until 10/15
** IRS Checks: Math Errors and sends demand of balance due (no court privelege)
IRS forms for filing
1041 for estates and trusts
1040X to Amend math errors
1040A WAS used <2018 to report simple income (no itemizations)
Audit Representation can be made for a tax payer by the following people:
Any attorney
Enrolled Agent
Enrolled Actuary
CPA
Any other persion legally permitted to represent the tax payer
Penalties and reasons for them
Frivolous return $5,000
Negligence: 20% of underpayment (No intent to fraud)
Fraud: 75% of underpayment
Failure to pay: .5% / mth (max 25%) => 6%/yr
Failure to File: 5% / mth (max 25%) => 60%/yr
BEST PRACTICE IS ALWAYS TO FILE
Estimated Taxes to AVOID PENALTIES
Pay the LESSER of:
- 90% of current year’s tax
-
100% of prior year’s TAX OR
- 110% of prior year AGI IF the AGI > $150,000)
Filing Statuses
- Single
- MFS
- avoids spouse fraud under innocent spouse rules
- MFJ
- HOH
- residents who have maintain 50% of support for dependents
- Qualifying Widower
- Has a child and not remarried
- Last 2 years after death
Inclusions to Gross Income By Schdule
- Schedule B
- Ordinary Dividends
- Taxable Interest
- Schedule C
- Business Income & Losses
- Schedule D
- Capital Gains and Losses
- Schedule E
- Real Estate and PASSIVE Income
Inclusions 1040
- Punitive Damanges (NOT wrongful Death)
- Wages, Salaries, Tips
- IRA distributions
- Pensions & Annuities
- Alimony (div. < 2019)
- Unemployment Income
- Taxable Social Security
Exclusions from Gross Income
- Gifts
- Inheritance
- Child Support
- Muni Bond Interest (may be subject to AMT)
- Workers Comp
- Compensatory Damages
Tax Calculation
for INCOME
-
GROSS INCOME
- less adjustments above the line for AGI makes
-
AGI (Adjusted Gross Income)
- less deductions below the line from AGI makes
-
TAXABLE INCOME
- multiplied by tax rate makes
-
TAXABLE CALCULATION
- less credits plus other taxes
-
TAX LIABILITY
- less quarterly payments and withholding
- NET TAX DUE or REFUND
Are scholarships taxable income?
If the scholarship exceeds tution and books.
Scholarship used for room and board are taxable.
Student loan interest deduction is capped at $2,500
Fringe Benefits – Tax FREE
- Dependent care ≤ $5,000 (MFJ); $2,500 (MFS)
- Health Plan Premiums
- Disability PREMIUMS (benefit from employer)
- Insurance group life (≤ $50,000)
- Car for business
- Transit Pass ≤ $270/mo ($3,240/yr)
- Discounts on company products *
- Education assistance ≤ $5,250 *
- Adoption Assistance ≤ $10,000 *
- Overtime meals, cab, theater, sports tix (NOT seasonal)
- Discounts on SERVICES (≤ 20% of retail)
* Exclusion for Employer gross income
Fringe Benefits – TAXABLE
HEAVILY TESTED
- S - Corp
- Premiums for Health Insurance
- Partners, self-employed, > 2% owners
- 100% Deductible BUT as an Adjustment to Income
- DOES NOT INCLUDE DISABILITY INSURANCE
- Premiums for Health Insurance
- EMPLOYER PAID lIFE INSURANCE PREMIUMS > $50,000 Death Benefit
- If the plan is nondiscriminatory
Annuity Contributions owned by employee that are not deferred comp.
ADJUSTMENTS
step 2 in tax calc
- IRA
- Be careful of phaseouts
- Student Loan Interest (50%)
- ≤ $2,500
- SEP/KEOGH (self-employed)
- Self-Employment Tax
- 0.07065 factor to adjust gross income (50% of 14.13%)
- Alimony paid for divorces settled < 2019
- Self-employement insurance 100%
- Military Moving (active)
- Penalty for early savings w/d
- HSA
- Education Expense ($4,000)
- AGI Limits
- alternative to AOC (American Opportunity Credit)
Standard Deductions
- Single: $12,550
- MFJ: $25.100
- MFS: $12,550
- HOH: $18,800
- Elderly (additional): $1,350 (>65 y.o. MFJ; $1,700 for Single)
- Blind (additional): $1,350
- Child unearned: $1,100
Schedule A
Itemized Deductions
Form 1040
- Medical, dental, & qualified LTC expenses >7.5%
- SALT ≤ $10,000
- Property taxes (personal) ≤ $10,000
- Real Estate Taxes ≤ $10,000
- Mortgage INSURANCE (qualified) < $100,000 AGI
- Mortgage INTEREST
- Charitable Gifts
- Investment Interest paid on margin (up to investment income)
- Casualty Losses from FEDERAL DISASTER
TCJA REPEALS ITEMIZED DEDUCTION THROUGH 2025
Qualified residence Rules
Deduction for Mortgage loan for home/home improvement
MFJ Interest on ≤ $750,000
Single/MFS Interest ≤ $375,000
On Schedule A
Includes both primary and heloc loans
** Note: if Cash out REFI exceeds prior debt
CASH OUT not deductible **
Investment Income
- Interest
- NonQual Dividends
- Royalties
- STCG
- Qual DIV IF taxpayer elects to use ordinary income
- LTCG IF taxpayer elects STCG rate
NO MISCELLANEOUS DEDUCTIONS SINCE TCJA
NO DEDUCTIONS FOR INTEREST PAID ON DEBT INCURRED TO PURCHASE TAX EXEMPT BONDS
Casualty Losses Deduction
FEDERAL DISASTER ONLY
Schedule A
- Unreimbursed losses (not covered by insurance: casualty and theft)
- MUST BE Federally DECLAIRED disaster
- Act of Nature (sudden, unexpected)
- Partial OR complete destruction
- Fire, Earthquake, Hurricane
- Loss reduced by $100 FLOOR
- Aggregate loss >10% of AGI is deductible
CALUCLATION of a Deductible Casualty Loss
- LESSER OF:
- Basis OR FMV
- LESS insurance coverage makes
- Uncovered losses
- LESS $100 Floor
- LESS 10% of AGI
- Makes a Deductible Loss
Always ask value of home and collections to make suree they are insured enough
HOME OFFICE Deduction
Schedule C
Screaming Audit Item
- IF self-employed OK BUT
- MUST be EXCLUSIVE AND
- NO OTHER available location where business is conducted
- Cannot create a LOSS
- Limited to Gross Income Limit after deductions
NO MISCELLANEOUS DEDCUTIONS
EVER
Meals and Entertainment Expenses
What’s Deductible
-
Deductible IF
- Client/Prospect entertainment AND Business is actually conducted
- Taxpayer is present
- Meals are NOT “Lavish or Extravagant”
-
EXCEPTIONS
- For the benefit of NHC employees (office parties still deductible)
-
Taxpayer Certainty and Disaster Tax Relief
- 100% deduction for business meals FROM A RESTAURANT 2021-2
- NO tickets; NO Personal and dependency exemptions
- Meals while traveling still deductible at 50% (100% this year and next yr if for business)
- Salaried employee NOT REIMBURSED for travel meals
Kiddie Tax Calculation
-
UNEARNED INCOME
- STEP 1: ≤ $1,100 (Standard deduction, no tax)
- STEP 2: $1,100 taxed at 10% ($110 max)
- STEP 3: ≥ $2,200 taxed at parent’s marginal tax rate
-
If kiddie has EARNED income Take the GREATER of the standard deduction of $1,100 or DO EARNED deduction
- DO EARNED income + $350 to get EARNED deduction
- IF EARNED deduction > $1,100 then use that
- If a child has BOTH add them together for kiddie gross income
**Child can be paid on 1099 (consultant, no fica) or be self employed AND owe .1413 on earnings
Self Employment Tax Bullets
- does NOT include soc sec and medicare tax
- as employee and employer you pay both
- It is based on NET earnings (not salary or taxable income)
What is and is NOT self employment income?
- DOES NOT include
- Dividends/Interest on investments
- Gains/Losses on property securities or commodities
- Real estate income OR rents paid
- Distrib. income share OR loss of L.P.
- Wages from S corp
- K-1 Income from S Corp (distributions
- DOES include
- NET Schedule C Income
- K-1 Income for G.P.
- Board of Director fees
- Part time 1099 earnings
What is the Max Tax Wage Base?
$142,800
above that is for MEDICARE TAX only
Self Employment Tax Calculation
Multiply the total self-employment income by .1413 and round up
Schedule 1 deductions
Insurance Premiums
Medical
Dental
LTC (Max LTC deduction has phaseouts; e.g. at 61 >$4,000)
Tax Credits
Dependent Care
allows parents to work and pay for childcare
Dependent care for kids < 13 y.o.
No phase out for Dependent Care
-
DEPENDENT care limits:
- $3,000 for 1 dependent
- $6,000 for 2 dependents
- Multiply by 35% or 20% (use 20% for exam)
- Allowable % by AGI
- < $15,000 = 35% credit
- >$43,000 = 20% credit
CHILD TAX Credit
$2,000 fore cach child < 17 y.o.
- Phaseouts: Tax Credit is reduced by $50 for for every $1,000 earned
- >$400,000 MFJ MAGI
- > $200,000 SINGL MAGI
- ≤ $1,400 / child is a refundable credit even if you don’t pay taxes
FAMILY Tax Crdit
$500 for dependents NOT chidren where you grant > 50% of support
Elderly and disabled
same phaseout as Child Tax Credit
NonRefundable for 17 or older
What is a Refundable Tax Credit
- Refundable tax credits are refunded to the taxpayer regardless of the taxpayer’s liability.
- These tax credits are called refundable because
- they can involve cash payments from the IRS if they put the taxpayer’s lability below zero.
Foreign Tax Credit …
what is it
other than NonRefundable
US Taxpayers can DEDUCT taxes paid to OTHER countries (must be allies)
OR
receive a credit $ for $ against tax liability
Adoption Credit
How to Qualify
Max Credit $14,440/child
Credit for related OOP expenses related to adoption
Special Needs child can claim full amount anytime
Qualifying Adoption Credit Expenses
- INCLUDED:
- Adoption fees
- court costs
- attorney fees
- Domestic Adoption costs
- available in the year PAID
- Foreigh adoption costs (including Travel)
- available in the year the adoption is FINAL
- Special Needs
- credit available the year adoption final
- 100% of all expenses
- NOT included:
- Surrogate parent costs
- adoption of spouse’s child
- Non special needs adoptions have a prorata phaseout
- MAGI $216,660-$256,660
MACRS Tables
LTCGs and Qualified Dividends
No longer tied to tax payer’s ord marginal income bracket
They have their very own brackets
PIGs NEED Income
Passive Income Generators
Schedule E
