Income Tax

Question 1

Capital assets

Answer 1

• most PU assets and investment assets
• not depreciable property

all assets are capital assets EXCEPT ACID
- accounts/notes receivable, copyrights and creative works, inventory, and depreciable property used in a trade or biz

Question 2

Ordinary Income asset

Answer 2

• when sold result in income to the owner of the asset
  inventory, accounts receivable, creations in the hand of the creator and copyrights in the hands of the creator, stock in trade held for sale to customers in the ordinary course of biz

Question 3

How property is held

Answer 3

• personal use
• investment
• for business purposes
• capital asset
• OI asset
• section 1231 asset

Question 4

1231 Assets

Answer 4

• assets used in a trade or biz
• are either depreciable property or real property
• includes: timber, coal, iron ore, livestock, unharvested crops
• do NOT include: inventory, copyrights, property held by the taxpayer for sale to customers for his trade

Question 5

Basis

Answer 5

• necessary to determine the gain/loss on a sale or other disposition of property
• determine the amount that may be recovered tax free through depreciation deductions
• determine the deduction for obsolescence and sometimes for depletion

Question 6

cost basis

Answer 6

• the amount paid in cash, debt obligations, other property, or services
• includes amounts paid for the following items:
  
  • sales tax, freight, installation and testing, excise tax, legal and accounting fees, revenue stamps, recording fees, real estate taxes

Question 7

when property is acquired in a taxable exchange

Answer 7

• the cost is the FMV of the property

Question 8

when property is acquired subject to a mortgage

Answer 8

• the basis of the property is the FMV of the property

Question 9

when property is acquired as a dividend in kid or as compensation for services

Answer 9

• the taxpayers basis in the property is the FMV of the property at the time of acquisition

Question 10

increase in the basis of an asset

Answer 10

• capital improvements (addition on home, new roof, paving driveway, installing central air, rewiring)
• assessments for local improvements including water connections, sidewalks, and roads
• cost or restoring damaged property after a casualty loss
• legal fees, such as cost of defending and perfecting the title to property

Question 11

decreases to basis

Answer 11

• exclusion from income of subsidies for energy conservation measures
• casualty or theft loss deductions and insurance reimbursements (biz only)
• deduction for clean fuel vehicles and vehicle refueling property
• section 179 deduction
• credit for qualified electric vehicles
• depreciation
• nontaxable corporate distributions

Question 12

property acquired in an exchange

Answer 12

• the newly acquired property will have a carryover basis if the property is exchanged for property of equal value (no boot is paid)

Question 13

property that is exchanged for a more valuable asset

Answer 13

• boot is paid, the new asset will have a carryover basis (cost basis of exchanged property) + boot paid

Question 14

property that is exchanged for a less valuable asset

Answer 14

• boot is received, and the new asset will have a carryover basis reduced by any boot received that was greater than the gain

Question 15

holding period for capital gains

Answer 15

• always LT for inherited property

Question 16

Basis of gifted property

Answer 16

• general rule: the donees basis in the gifted property is the same as the donors basis in the gifted property
• exception 1: when FMV of gifted asset is < the donor’s basis = double basis rule must be used
  
  • gains: basis of the donor is also the adjusted basis of the donee
  • losses: basis of the donee is the FMV of the property on the date of the gift
  • no gain/loss: if the asset is later sold by the donee and amount realized is between the FMV and the adjusted basis of the donor
• exception 2: when gift tax has been paid and asset appreciated in the hands of the donor, the portion of the tax which is associated with appreciation is added to donors basis to determine donees basis

Question 17

Donee’s basis

Answer 17

= Donors basis + (( net apprec in value of gift / value of taxable gift) * gift tax paid)

net appreciation = FMV - adjusted basis

Question 18

Loss on the sale of gifted property

Answer 18

• basis of the property in the hands of the donee is the lower of:
  
  • donors basis
  • FMV of property at time of gift

Question 19

HP for gifted property

Answer 19

• general rule: HP in the hands of the donee includes the HP of the donor
• if double basis asset ( gifted asset where FMV < donors basis at time of gift) is sold for a loss, then the HP for the donee starts on the date of the gift

Question 20

gifted property general rule

Answer 20

• there is no sale of stock when donee receives it

- must maintain the donors original basis

Question 21

basis of property transferred between spouse incident to divorce

Answer 21

• treated the same as gifts
• the carryover basis applies
• no gain/loss is recognized on a transfer between spouses or former spouses incident to a divorce
• treated as incident to divorce if it occurs within one year of the date on which the marriage legally ended and is related to the cessation of the marriage
• sales price - former spouses basis = LT/ST cap gain/loss for the divorced spouse

Question 22

Gain on asset

Answer 22

= sale price - net appreciation

Question 23

Related Party Transactions Section 267 Rule

Answer 23

• only affects transactions where there is a loss
• transferors loss is forever lost (Cannot claim a loss on the asset), transferee takes asset with double basis rule (FMV for losses, transferors basis for gains)
• HP always begins at the date of the sale

Question 24

Related Party transaction of loss property

Answer 24

• FOLLOWS DOUBLE BASIS RULE

Question 25

if a taxpayer sells property to charity for < FMV

Answer 25

- the basis of the property must be used between the portions of the property sold and the portion given to charity

Question 26

Basis for Sale Purposes

Answer 26

= (Amount Realized / FMV) * Basis of property

Question 27

3.8% medicare contribution tax

Answer 27

- for taxpayers with AGI > $200k single or AGI > $250k MFJ - tax is imposed on the lesser of: - individuals NII for the tax year or - modified AGI in excess of the limits

Question 28

Collectibles

Answer 28

- taxed at 28%

Question 29

Unrecaptured Section 1250 Gain

Answer 29

- taxed at 25%

Question 30

Qualifying Small Biz Stock section 1202

Answer 30

- a % of the gain is taxed at 28% if the HP is at least 5 years Amount of gain you can exclude: - 50% of the QSBS is acquired before Feb 2009 - 75% is the QSBS is acquired after Feb 2009 and before Sep 2010 - 100% if the QSBS is acquired after Sep 2010

Question 31

Holding period for LT cap gains

Answer 31

- taxed at a min rate of 20%

Question 32

HP for ST cap gains

Answer 32

- taxed as OI

Question 33

HP calculation

Answer 33

- the day of disposition is included in the HP, but the day of acquisition is not included in the HP

Question 34

Taxation of gains on capital assets

Answer 34

- taxed only when there has been both a realization event and a recognition event

Question 35

Gains must be realized before recognized

Answer 35

Realized before recognized

Question 36

Realization

Answer 36

- occurs when theres a disposition of property (sale/exchange) - occurs when there is segregation of the gain

Question 37

Recognition

Answer 37

- occurs when a realized gain is taxed

Question 38

Exception when realized gains are not recognized (taxed)

Answer 38

- when the gain is exempt from taxation | - when the gain is deferred to a future time

Question 39

in order for a gain to be realized

Answer 39

- an asset must be sold or exchanged

Question 40

less obvious situations if an exchange has happened

Answer 40

- natural disasters that destroy property cause a realization event to occur for income tax purposes since the G/L can be calculated at that time. - the loss may or may not be recognized at that time - the bankruptcy of a company ( special rules govern the recognition of loss associated with worthless securities)

Question 41

Adjusted Basis

Answer 41

= Cost of Property + capital additions - cost recovery

Question 42

Ordinary Gains

Answer 42

= fully taxable

Question 43

Ordinary Losses

Answer 43

= Fully deductible

Question 44

subject to special tax treatment

Answer 44

- capital G/L's

Question 45

Amount Realized on the sale/exchange of an asset

Answer 45

= sum of cash received + FMV of property received in exchange + liabilities shed

Question 46

Non-Recourse Loans

Answer 46

- sale of mortgaged real estate yields phantom income | - when the tax payer takes large write-offs or disposes of the property subject to the loans

Question 47

Recognition of gain occurs:

Answer 47

- when debt is relieved (portion of mortgage is forgiven, that is income) - when money is "taken out of" an investment as a loan when the indiviual is not personally liable for the loan - with net gifts (transfers where the donee agrees to pay the gift tax)

Question 48

Realized but NOT recognized

Answer 48

- like-kind exchanges of real property held for productive use/investment - certain exchanges where cash received is quickly reinvested in similar property - transfer of property to controlled corp - exchange for plans of corporate reorg - transfers to or distribs from partnerships

Question 49

wash sale

Answer 49

- disallowed loss - when a taxpayer disposes of securities at a loss and acquires identical securities within 30 days before/after the date of loss sale - disallowed loss is added to the cost of the new stock or security to determine the new basis of the substantially identical securities

Question 50

wash sale rule applies

Answer 50

- index fund for index fund

Question 51

was sale rule does NOT apply

Answer 51

- index fund for managed large cap fund

Question 52

wash sale

Answer 52

= bought stock for $100/sh, fell to $10/sh. Sold stock to take a $90/sh loss. Thought stock was going to go back up so went in the market again and bought same stock for $30/sh. no loss is allowed, and disallowed loss amount + new stock price = new basis (100-10) + 30 = new basis

Question 53

wash sale loss rules

Answer 53

- do not apply to futures or foreign currencies | - apply if a warrant and stock are identical

Question 54

preferred stock is identical to common stock if preferred stock:

Answer 54

- is convertible to common stock - has same voting rights as common stock - is subject to the same div restrictions - trades @ prices that don't vary significantly from the conversion ratio - is unrestricted as to convertibility

Question 55

capital gain on sale of principal residence for single tax payers

Answer 55

$250,000 sell price - purchase price - exclusion amount = LT/ST cap gain

Question 56

capital gain on sale of principal residence for MFJ tax payers

Answer 56

$500,000 sell price - purchase price - exclusion amount = LT/ST cap gain

Question 57

reduced exclusion

Answer 57

- available if the sale of the personal residence is due to change in employment - change in health - diagnosis, cure, mitigation, treatment - other unforeseen circumstances - disaster area, involuntary conversion, death, unemployment, divorce/breakup of engaged couple, bullying

Question 58

a loss resulting from worthless securities

Answer 58

- deductible in the year in which the securities become completely worthless

Question 59

worthless stock

Answer 59

- purchase stock that becomes worthless is treated as having sold the stock and resulting in a ST/LT cap loss

Question 60

Net Capital Losses

Answer 60

allowed $3,000 per year excess are carried to next year indefinitely always retain their ST/LT features net LTCG and STCG if 1 is - and the other is +, but do NOT net if they are BOTH +

Question 61

net capital gain

Answer 61

- recognized in the current tax year regardless of its size

Question 62

capital loss

Answer 62

- $3,000 per year indefinitely | - used against other income

Question 63

IRC Sec 1244

Answer 63

a taxpayer can deduct (single $50k, MFJ $100k) of the loss on small biz stock as an ordinary loss in any given year if the following reqs are met:

Question 64

IRC Sec 1244

Answer 64

a taxpayer can deduct (single $50k, MFJ $100k) of the loss on small biz stock as an ordinary loss in any given year if the following reqs are met: - stock reps ownership in domestic corp - corp was a small biz corp at time stock was issued - company was incorporated after Nov 1978 - loss was sustained by original owner of the stock who is not a corp, trust or estate - stock was issued to the original owner in exchange for money or property . Stock issued in return for services or other stock does not qualify - for 5 years prior to loss, the corp must have earned > 50% of its gross receipts from sources other than royalties, rents, divs, interest, annuities, cap gains

Question 65

Section 267

Answer 65

- applies to losses only - disallows losses from in/direct sales or exchanges of property between related parties - related parties do NOT include: in-laws, aunts/uncles, cousins

Question 66

Never gift or sell an asset to a related party when the donor's basis is > the FMV of the asset

Answer 66

You are not able to take a loss on the sale

Question 67

Section 1231 Gain/Loss

Answer 67

- when a taxpayer disposes of a business asset

Question 68

Section 1231 Asset

Answer 68

- depreciable or real property used in a trade or business - owner must have a LT holding period - asset must be depreciable real or personal property used in a trade/business - trade or business assets that qualify for depreciation deductions - the generation of a section 1231 gain will not result in a tax benefit for the corp, capital losses can only be used to offset capital gains

Question 69

1231 Gains

Answer 69

- treated as capital gains for income tax purposes - gains will qualify for LT CGs tax rate - full amount of depreciation must be recaptured as OI - Only when the sale price exceeds the original purchase price there will be a 1231 gain

Question 70

1231 Losses

Answer 70

- treated as ordinary losses for income tax purposes | - will not be subject to the limitations that typically apply to capital assets

Question 71

Section 1245 Property

Answer 71

- includes property that is or has been subject to an allowance for depreciation or amortization - tangible personal property used in a trade or biz and includes depreciable prop: equip, patents, copyrights, and other intangibles - land and buildings (real property) is NOT section 1245 property - any gain is treated as OI to the extent of depreciation allowed on the property, and any gain beyond that which must be treated as OI is treated as a 1231 gain

Question 72

When Section 1245 property is sold

Answer 72

- property will be sold for an amount = its adjusted basis where there will be no G/L and no depreciation recap and no tax consequence - property will be sold for an amount < the adjusted basis, where the taxpayer will have an OL and will not have any depreciation recap. AKA not enough depreciation was taken to achieve economic reality because the FMV < adjusted taxable basis - the property will be sold for an amount that exceeds the adjusted basis of the property, but the gain does not exceed the amount of depreciation taken, where the taxpayer will have an ordinary gain to the extent of the gain AKA the taxpayer took too much depreciation and now must give it back - the property will be sold for an amount that exceeds the adjusted basis of the property and the gain exceeds the amount of depreciation taken, where the taxpayer will have OI to the extent of the depreciation taken and cap gain on the remainder of the gain AKA the asset appreciated instead of depreciated and the taxpayer shouldnt have taken depreciation

Question 73

New basis once taken 1245 depreciation

Answer 73

= cost basis - depreciation amount

Question 74

The only way to have a section 1231 gain on a section 1245 property is to sell it for more than it was originally purchased for

Question 75

Section 1231 Gain

Answer 75

= sell price - (purchase price - depreciation) - (amount of depreciation)

Question 76

Any sale amount in excess of the original purchase price of a section 1245 asset is a section 1231 gain

Question 77

Section 1250

Answer 77

governs the recapture of depreciation on real section 1231 assets (business realty, buildings, real estate) requires that the excess depreciation as OI at OI rates when sold, gain is treated as the lesser of the gain or the difference between depreciation taken and the straight line depreciation will be taxed as OI. This is the recapture of the depreciation

Question 78

Recognized Value

Answer 78

= depreciation - Straight line depreciation

Question 79

Unrecaptured 1250 Depreciation

Answer 79

- if the gain exceeds the recognized value, the lesser of the remaining gain or the straight line depreciation taken on the property will be taxed at 25%

Question 80

All section 1250 losses

Answer 80

= Ordinary Losses

Question 81

5 year lookback rule

Answer 81

- forces the taxpayer to net section 1231 G/Ls over a 5 year period

Question 82

Non recognition Transactions

Answer 82

- "realized" but not "recognized" income - like-kind exchanges - principal residence - investment real estate - life insurance policies

Question 83

Nontaxable vs. Tax-free Transactions

Answer 83

Nontaxable Transaction: - realized G/L not currently recognized - recognition is postponed to a future date (via carryover basis) - carryover basis - HP for a new asset (HP of asset surrendered carries over to the asset acquired) - depreciation recapture (potential recap from asst surrendered carries over to the new asset) - Tax-free Transaction (non-recognition of gain is permanent)

Question 84

Like-Kind exchanges

Answer 84

- deferred taxation of gains associated with certain transactions from a section 1031 exchange - only real property receives 1031 treatment - thee exchange properties must be of similar character and nature, but don't have to have similar uses

Question 85

Property exchanged for like-kind property

Answer 85

- no G/LL is recognized if the property is held either for productive use in a trade/biz or as an investment

Question 86

Section 1031 does NOT apply to:

Answer 86

- personal assets - stock in trade held primarily for sale (inventory) - stocks, bonds, notes, interests in partnerships, CDs of trust or beneficial interests - tangible personalty - other securities or evidence of indebtedness or interest , or choices in action

Question 87

Like-kind exchange treatment

Answer 87

- if it is available, it is mandatory | - taxpayer cannot choose whether to subject the transaction to current tax or defer the gain into the future

Question 88

Real Estate Exchanges

Answer 88

- improved realty may be exchanged for unimproved realty - US realty may NOT be exchanged for foreign realty - foreign realty may be exchanged for foreign realty

Question 89

To defer the gain on property being exchanged, these requirements need to be met to avoid current taxation

Answer 89

- proceeds from the sale of the original property must be held by an escrow agent - replacement property must be identified within 45 days of the sale of the original property - the closing on the replacement property must take place by the earlier of: - 180 days from the sale of the original property - due date of the tax return for the year the original property was sold

Question 90

tax consequences of participating in like-kind exchanges

Answer 90

- if like-kind property is only received in the exchange, there is no immediate tax consequence - non-like-kind property and cash/money received in exchanged is referred to as BOOT

Question 91

Boot

Answer 91

- non-like-kind property and cash/money received in exchanged

Question 92

Boot is received

Answer 92

- when taxpayer is trading DOWN, the taxpayer who is giving up a more valuable asset in exchange for a less valuable asset + boot - when the boot exceeds the gain realized on the transaction, the remaining boot is not taxed, but is treated as a TF return of basis - if any boot is received by the taxpayer in the exchange, the basis of the new property is reduced by the amount of the boot

Question 93

Loss involving Boot

Answer 93

- not recognized on exchanges involving boot | -

Question 94

Mortgage treated as the boot

Answer 94

- when mortgage is transferred with the property, the party transferring the mortgage is treated as having received boot equal to the amount of debt relief, and the party undertaking the mortgage obligation is treated as giving boot

Question 95

Summary of calculating income tax consequences of a Section 1031 exchange:

Answer 95

- determine whether client is trading up or down - clients who receive ONLY like-kind property in the exchange will not have any current income tax consequence - party trading up recognizes no gains, and adds to their old basis any cash/boot given to the other party - the party trading down will be required to recognize gain to extent of boot received - if the boot exceeds gain, the amount of boot in excess of the gain is treated as a return of capital and reduces the basis in the new asset - losses realized in a like-kind exchange are not recognized until the replacement property is sold - taxpayers basis in the replacement property = FMV of the property received in the exchange + the disallowed loss - debt relief is treated as boot, requiring gain recognition for the party no loner responsible for paying back the loan - the party assuming the debt will increase their basis in the replacement property by a like amount

Question 96

Basis adjustments in a like-kind exchange

Answer 96

- basis of property received = the basis of the property given - less the amount of any money received by the tax payer - +/- the amount of any gain or loss that was recognized on the exchange - basis in like-kind asset received - basis in boot received is the FMV of property - basis in like-kind property using IRC approach

Question 97

Gain Recognition from Boot

Answer 97

- if FMV - Adjusted Basis amount is > the boot amount: then basis remains the same - if FMV - Adjusted Basis amount is < the boot amount (the boot amount is > the difference between FMV and basis): then the recognized gain is the difference between FMV and the adjusted basis

Question 98

recognized G/L

Answer 98

- as of the date the property is sold

Question 99

related party

Answer 99

- any relative | - controlled corporation (corp where the taxpayer owns more than 50% of the equity interest)

Question 100

Exchanges of stock for property

Answer 100

- no G/L is recognized when a corp receives money or property in return for its stock - sale of stock to investors is treated as an infusion of capital and is not subject to income tax

Question 101

Involuntary conversion

Answer 101

- the destruction, theft, seizure, or sale or exchange under threat of condemnation of property - often associated with eminent domain - NOT a voluntary act by a taxpayer

Question 102

Section 1033 Replacement Property

Answer 102

- similar in function/use as involuntarily converted property - acquired within a specific period (starts when involuntary conversion/threat of condemnation occurs, ends 2 years from the year-end of year that gain is realized)

Question 103

Replacement Property

Answer 103

- different for an owner-investor than for an owner-user - for business or investment real estate that is condemned, replacement property has same meaning as for like-kind exchanges - functional use test applies: requires the replacement property to serve the same functional use as the original property - taxpayer use test applies: requires the replacement property to be used by the taxpayer in a similar activity as the original property

Question 104

reinvestment under section 1033 related to natural disasters

Answer 104

- must be made by the end of the year realization + 2 years

Question 105

Cash Basis Taxpayers

Answer 105

- recognize income when it's earned - most individuals and some biz - deemed to receive income when it is credited to the taxpayers account, set apart for the taxpayer, or made available to be taken into the taxpayers possession - include in the GI all items of income actually received during the tax year. If received property and services, must include FMV in income - recognition of income must be consistent with constructive receipt doctrine

Question 106

Accrual basis taxpayers

Answer 106

- recognized income when it is earned - most biz - taxpayers report an amount in their GI on the earliest of: (when payment is received, when income amount is due to the tax payer, when taxpayer earns the income)

Question 107

Doctrine of Constructive Receipt

Answer 107

- states that when income is readily available to the taxpayer, and that income is not subject to limitations/restrictions, that income is deemed to be constructively received and should be taxed

Question 108

Income subject to limitation or restriction

Answer 108

- not constructively received - limitations/restrictions include: - limitation on either the time or manner of payment and if the financial condition of the debtor makes payment of the income in question impossible, there is no constructive receipt

Question 109

taxable year

Answer 109

- annual accounting period for keeping records and reporting income/expenses - 12 mon period of the calendar year some choose fiscal year

Question 110

Fiscal year

Answer 110

- 12 mo period ending on last day of a month other than december - must file form 1128 to change from calendar to fiscal year reporting and receive approval

Question 111

Qulaifying widower

Answer 111

- can file with qualifying child for 2 years following the year in which the taxpayer's spouse died if all apply: - TP was eligible to file joint return with spouse in the year the spouse died - TP has NOT remarried - TP has a child/stepchild for whom the TP can claim as qualified - child lived in TPs home all year - TP paid more than 1/2 cost of keeping up a home during the year

Question 112

Personal and Dependency Exemptions (repealed under TCJA)

Answer 112

- $4,400

Question 113

Standard Deductions for those blind or 65+

Answer 113

- $1,750 for individuals not married and not filing as qualified widower (for single and HOH) - $1,400 for all other taxpayers

Question 114

Blind Tax Filer

Answer 114

- must file to receive the additional standard deduction | - IRS does NOT have this on file

Question 115

Blind AND 65+

Answer 115

- receive 2 additional standard deductions | - $1,750 + $1,750 = $3,500

Question 116

Not eligible for standard deduction

Answer 116

- MFS and 1 spouse files as itemized deductions (must do what other spouse does) - non-resident aliens - individuals filing returns for tax year < 12 months

Question 117

Dependent's Standard Deduction

Answer 117

- claimed as a dependent of another taxpayer - $1,150 OR - $400 + earned income (not exceeding normal standard deduction of $12,950) - standard deduction is higher if the dependent is 65+ and/or blind

Question 118

Personal and Dependency Exemptions

Answer 118

- repealed for 2018 through 2025

Question 119

Qualifying Child

Answer 119

- Support test - Age test - Abode Test - Relationship test *children carry SAARs

Question 120

Qualifying Child Rules

Answer 120

- for the purposes of the HOH filing status - EITC - child tax credit - credit for child and dependent care expenses

Question 121

Qualifying Child: Relationship Test

Answer 121

To qualify, a child of taxpayer must be: - taxpayers child - descendant of the taxpayers child - taxpayers brother, sister, stepbro, stepsis, half bro, half sis - descendent of all of the above bullet - a cousin is NOT a qualifying child - a descendant of the taxpayer, TPs sibling or a descendant of the TPs sibling - TPs child may be a natural, step, adopted, or eligible foster child

Question 122

Qualifying Child: Abode Test

Answer 122

- qualifying child must live with the TP for > half the year - TP and dependent are considered to occupy the HH even during temporary absences due to special circumstances such as illness, education, business, vaca, or military service

Question 123

Qualifying Child: Age Test

Answer 123

- FT qualifying child must be under the age of 19 as of hte end of the calendar year OR - student under the age of 24 as of the end of the calendar year in order to satisfy the test - student = must be FT at an educational institution during 5 months of the calendar year - includes: primary and secondary schools, colleges, universities and similar education institutions

Question 124

Qualifying Child: Support Test

Answer 124

- satisfied if a qualifying child does not provide more than 1/2 of their support during the year - if the child is the TP's child and is FT student, Scholarships are NOT considered support

Question 125

If more than 1 person is eligible to claim another person as a dependent as a qualifying child, there are tie-breaker rules

Answer 125

Question 126

Child of divorced/separated parent

Answer 126

- normally the qualifying child of the custodial parent

Question 127

Requirements for a child to be treated as a qualifying child of the non-custodial parent

Answer 127

- parents are divorced/legally separated under divorce decree, or lived apart at all times during the last 6 months of the year - child receives over 1/2 of his support for the year from his parents - child is in the custody of the parents for more than 1/2 the year - custodial parent signs a statement that they will not claim the child for the year, and the noncustodial parent attaches the statement to his return (form 8332)

Question 128

Form 8332

Answer 128

- statement from custodial parent that they will not claim the qualifying child for the year, several years or future years - attach certain pages from the decree to the tax return of the noncustodial parent

Question 129

Qualifying Relative Test

Answer 129

- must meet the 4 tests to qualify as a dependent of a TP for the child tax credit - Relationship test - Gross income test - support test - not a qualifying child test Relative = So Gross Right Now

Question 130

Qualifying Relative: Relationship Test

Answer 130

the potential dependent of the TP must be: - TP's child or a descendant of a child - TP's bro, sis, step bro, step sis - TP's father, mother, step mother, step father, grandparent - TP's son (nephew), daughter (niece), of a bro or sis of the TP - son in law, daughter in law, father in law, mother in law, bro/sis in law of TP - any other individual (non-related person) who has the same principal place of abode as the TP for the current tax year and is a member of the TPs household - a person who WAS married to the TP during part of the year does NOT qualify - an unrelated person does NOT qualify in certain limited circumstances if the relationship violates the law

Question 131

Qualifying Relative: Gross Income Test

Answer 131

- a dependents' GI must be < the person exemption amount ($4,400 for 2022) for the year - this contrasts with a qualifying child for whom there is no such test - fellowships/scholarships are EXCLUDED from GI

Question 132

Can be a qualifying relative if does not meet qualified child test

Answer 132

-can be a qualified relative if it is a son that you provide for who is 25 years old at college

Question 133

Qualifying Relative

Answer 133

= Child tax credit

Question 134

Qualifying child

Answer 134

= HOH filing status, EITC, child tax credit, and credit for child and dependent care expenses

Question 135

Qualifying Relative: Support Test

Answer 135

- TP must provide more than 1/2 of the support of a dependent - support includes: housing, food, clothing, education, and medical treatment - income received by a dependent does not count as support provided by the dependent unless it is actually expended for that purpose - if income earned by an elderly parent is deposited into a savings account and not used for support, then it does not count as support provided by the dependent

Question 136

NOT a qualifying Child test

Answer 136

- to be claimed as a qualifying relative, a person cannot be a qualifying child of any TP for the tax year

Question 137

Additional Tests for Qualifying Child and Qualifying Relative

Answer 137

- Joint Return Test AND | - Citizenship or residency test

Question 138

Additional Tests for Qualifying Child and Qualifying Relative: Joint Return Test

Answer 138

to satisfy this test, - a married dependent must not file a joint return with a spouse unless a tax return is filed only to claim a refund for tax withheld - if neither spouse is otherwise required to file a tax return - if no tax liability would exist for either TP on separate returns

Question 139

Additional Tests for Qualifying Child and Qualifying Relative: Citizenship or residency Test

Answer 139

- dependent must be a citizen or national of the US or a resident of the US, canada, or Mexico during some part of the year - this test does not apply for certain adopted kids

Question 140

Summary of Tests for a Qualifying Dependent CHILD and a Qualifying Dependent RELATIVE

Answer 140

Question 141

Estimated Tax Payments

Answer 141

- due April 15th, June 15, Sept 15, and Jan 15 of following year

Question 142

if tax payment falls on Sat, Sunday or Holiday

Answer 142

- tax payment is considered on time if it is paid next biz day

Question 143

To avoid tax penalties, TPs must pay estimated tax if the following apply

Answer 143

- TP expects to owe at least $1,000 in tax after subtracting w/h and credits - TP expects his w/h and credits to be < the SMALLER of: - 90% of the tax to be shown on your 2022 tax return - 100% of the tax shown on prior year's tax return. Prior year's tax return must cover all 12 months

Question 144

Form 1040

Answer 144

- where individual income taxes are reported

Question 145

Gross Income

Answer 145

- all income from whatever source derived - money, property, barter - includes both earned and unearned income

Question 146

Sources of Income

Answer 146

- personal services - income from property - income from partnerships, s corps, trusts and estates - income in community property states

Question 147

personal services

Answer 147

- when a TP performs services for which he is compensated, the TP has income as a result of those services

Question 148

income from property

Answer 148

- must be included in GI of the owner of the property

Question 149

Income from partnerships, Scorps, trusts, estates

Answer 149

- pass through entities that pass income through to the owner of the biz - income is generally taxable to the bene unless income is not distributed, in which case it will be taxable to the trust/estate

Question 150

Income in community property states

Answer 150

- 1/2 of each spouses income is considered owned by the other spouse

Question 151

Items included in Gross Income

Answer 151

- annuity payments - compensation for services - GI from biz - gains from dealing property - interest and divs - rents and royalties - alimony and separate maintenance pmts for divorce decrees by 2018 - income from life insurance and endowment contracts - pensions - discharge of indebtedness - distributive share of partnership GI - income in respect of a descedent - income from an interest in an estate or trust

Question 152

Exclusion ratio

Answer 152

= what I have / what I receive in total = [annual payment - (exclusion ratio * annul payment)] = amount excluded from gross income

Question 153

Exclusion Ratio

Answer 153

= adjusted basis / fmv = exclusion % (exclusion % * distribution received) = not subject to income tax distribution received - (exclusion % * distribution received) = subject to income tax

Question 154

Ratio of AB

Answer 154

= AB before withdrawal / FMV of account at withdrawal

Question 155

Social Security Benefits Grid

Answer 155

Question 156

Social Security Benefits Calculator 85% and 50%

Answer 156

Question 157

Below Market Loan

Answer 157

- apply to term or demand loans that are gift loans or tax avoidance loans - have special income tax treatment that requires the lender to impute the interest income that would have been earned had the lender made a bona fide interest-bearing loan - interest is phantom

Question 158

Imputed Interest on loan between 0 - >=$10,000

Answer 158

- $0

Question 159

Imputed Interest on loan between $10,001 to >=$100,000

Answer 159

lesser of: - NII or - interest calculated using AFR less interest calculated using stated rate of the loan (interest rate * amount of loan) if borrowers NII < $1,000, then $0 imputed interest

Question 160

Imputed Interest on loan is >$100,000

Answer 160

- interest calculated using AFR less interest calculated using stated rate of the loan = given interest rate * loan amount

Question 161

interest

Answer 161

= unearned income

Question 162

Below market rate loans by a corporation to a shareholder in that corporation

Answer 162

- treated as a div to a shareholder | - as shareholder makes loan payments, the payments are treated by the corp as interest income

Question 163

Below market rate loans from an ER to an EE

Answer 163

- treated as paid compensation for the EE and are subject to employment taxes - as EE makes loan payments, the ER must treat the payments as taxable interest income

Question 164

Gift

Answer 164

- gratuitous transfer of property - donor acted out a "detached and disinterested generosity made out of affection, respect, admiration, charity, or like impulses"

Question 165

proceeds of a life insurance policy are excluded from GI when:

Answer 165

transferred to: - insured - partner of insured - partnership in which the insured is a partner - corp in which the insured is a shareholder/officer - by a TF exchange or gifts

Question 166

Terminally ill

Answer 166

- an individual who has been certified by a physician as having an illness or physical condition which can reasonably be expected to result in death in 24 months or less after the date of certification

Question 167

chronically ill

Answer 167

- unable to perform at least 2 of the 6 ADLs for at least 90 days

Question 168

Activities of Daily Living (ADLs)

Answer 168

- BED To Chair - bathing - eathing - dressing - transferring - toileting - continence

Question 169

MEC

Answer 169

- life insurance contract that fails the 7 pay test - fails the 7 pa test by accumulating the amount paid under the contract at any time during the 1st 7 years and exceeds the sum of the net level of premiums - W/ds = LIFO - once a MEC always a MEC

Question 170

Scholarships

Answer 170

- is not included in GI - can be a fellowship - qualified tuition and related expenses do not include amounts received fo rroom and board - any amount received for room and board are taxable to the recipient

Question 171

Gain on Sale of Personal Residence

Answer 171

- GI does not include up to $250,000 from the sale/exchange of property if the property has been owned and used by the TP as the TPs principal residence for at least 2/5 years. - if MFJ, exclusion = $500,000

Question 172

Reduced exclusion for the sale of personal residence:

Answer 172

may be available if the sale of personal residence is due to: - change in employment - change in health - unforeseen circumstances the amount excluded is based on the period of ownership between the last sale and current sale

Question 173

Sale of a principal residence that was jointly owned by surviving and deceased spouse:

Answer 173

- allowed the $500k gain exclusion | - the sale must occur no later than 2 years after the date of death of deceased spouse

Question 174

Any appreciation during non-qualified use periods

Answer 174

- not subject to the exclusion

Question 175

compensation for injuries/sickness are excluded from GI:

Answer 175

- workers comp - any damages received due to personal physical injuries/sickness - payments from accident/health insurance personally owed by TP

Question 176

Punitive Damages

Answer 176

- included in GI - not excludable from income - applies to damages after 1996 - excluded if damages were awarded in wrongful death action

Question 177

Damages for emotional distress

Answer 177

- included in GI unless attributable to injury/sickness or are paid for reimbursement of actual medical expenses arising from emotional distress

Question 178

compensatory damages for bodily injury

Answer 178

- excluded from GI

Question 179

compensatory damages for harm to reputation

Answer 179

- included in GI

Question 180

Group Term Life Insurance Premiums are deductible except for:

Answer 180

- deductions made on behalf of sole proprietors/partners - deductions made on behalf of stockholders, unless providing substantial services - when ER is named beneficiary

Question 181

Section 79 Requirements

Answer 181

- DB is excluded from income tax when its provided to a group of EEs through ER policy - individual selection of voverage outside standard multiple of salary amounts is not permitted if the DB is to be excluded from GI

Question 182

Exceptions to Section 79

Answer 182

- if group insurance is issued to trustees of a qualified pension plan, the amount paid for by the ER is taxable to EEs

Question 183

Group Term Not taxable to EEs when:

Answer 183

- the EE has terminated due to disability - qualified charity is named as the beneficiary - ER is named the beneficiary

Question 184

Taxation of group term insurance

Answer 184

- first $50,000 of coverage is not taxable to the EE - cost of excess coverage is per 1,000* $ over - EE contributions are subtracted from annual costs to arrive at taxable income

Question 185

Meals and Lodging

Answer 185

- not included in the EEs GI if they are furnished by ER - on ER's premises - For convience of ER

Question 186

Lodging

Answer 186

- EE is required to accept lodging as a condition of employment in order for the lodging to be excluded from the EEs GI

Question 187

Dependent Care

Answer 187

- up to $5,000 of dependent care costs paid for by ER can be excluded from GI

Question 188

Athletic Facilities

Answer 188

- use of athletic facilities located on ER premises can be excluded from GI if not offered to public

Question 189

Educational Assistance Programs

Answer 189

- ER provided educational assistance for loan repayments - extended to 2026 - exclusion is limited to $5,250/year

Question 190

Adoption Assistance Programs

Answer 190

- EE expenses paid by ER are excludable from GI - limit is $14,890 - phaseout between MAGI of $223,410 - $263,410

Question 191

Cafeteria Plan

Answer 191

- allows EEs to choose between cash and certain nontaxable benefits - if cash: amount received is taxable - if nontaxable benefit: benefit remains non-taxable

Question 192

Classes of non-taxable EE benefits

Answer 192

- no-additional cost services - Qualified EE discounts - Working condition fringes - De minimis Fringe benefits - Qualified transportation fringes - qualified moving expense reimbursement

Question 193

no-additional cost services

Answer 193

non-taxable if: - EE receives services - ER incurs no substantial add'l cost in providing services - services offered are within line of biz in which EE works - benefit is offered on non-discrim. basis

Question 194

Qualified EE discounts

Answer 194

non-taxable if: - discount is not on realty or investment personalty - item discounted is from the same line of biz in which EE works - discount cannot exceed gross profit on personalty or 20% on services - benefit is offered on non-discriminatory basis

Question 195

Working Condition Fringes

Answer 195

- not taxable

Question 196

Qualified transportation fringes

Answer 196

- encourages use of mass transit to commute to work - qualified parking - not ER deductible, EE can exclude from income - can be discrimin. - EE can choose between ER provided parking and cash w/o loss of exclusion

Question 197

moving expenses

Answer 197

- moving household goods and personal effects from the former home to the new home - traveling and associated lodging during the move from the home to the new home

Question 198

Foreign Earned Income Exclusion

Answer 198

- $112,000

Question 199

Foreign Earned Income

Answer 199

- in order to claim a foreign housing exclusion, deduction, you must have foreign earned income, your tax home must be in a foreign country, and must be: - US citizen who is a bona fide resident of a foreign country for uninterrupted period that includes tax year - US resident alien who is a citizen of a country where the US has an income tax treaty in effect and is a resident of a foreign country for tax year - US citizen or resident alien who is physically present in a foreign country for at least 330 full days during 12 consecutive months

Question 200

Interest on state/local gov obligations

Answer 200

- exempt from tax

Question 201

Interest on these bonds are NOT tax exempt:

Answer 201

- private activity bonds that are not qualified - arbitrage bonds - bonds that do not meet all of the reqs of section 149

Question 202

Section 1231 Assets

Answer 202

- business assets - Gains = cap gains - losses = OL - depreciation recapture may apply on the sale of the asset

Question 203

Section 1245

Answer 203

- depreciable business personalty - NOT Real estate - gains = ordinary gains to the extent of depreciation allowed on the property - Gains above original purchase price = treated as Section 1231 gain - If property sold at a loss = loss is ordinary loss

Question 204

Section 1251

Answer 204

- Depreciable Business Realty (Business Real Estate) - 1st gains = OI to the extent of accelerated depreciation taken - 2nd gains = to the extent of SL deprec taken are unrecaptured Section 1250 deprec taxed at 25% (unrecap 1250) - 3rd gains = any additional gain is taxed at cap gains rate (1231 gains) - If property is sold at loss = loss is OL

Question 205

Business Assets Depreciation Recapture Equation

Answer 205

= Original Purchase Price - Accelerated Depreciation Amount - Straight Line depreciation = After Tax Basis Selling Price - After Tax basis = Gain/Loss Gain/Loss - Accelerated Depreciation (Ordinary Income) - Straight Line Depreciation (25% Unrec 1250) = leftover is 1231 LTCG

Question 206

Gift Tax Paid

Answer 206

- formula if there is a gain | - IRRELEVANT IF IN LOSS POSITION

Question 207

if you are in a loss position

Answer 207

gift tax paid is irrelevant

Question 208

Straight Line Depreciation

Answer 208

= Adjusted basis - Salvage Value = Depreciable amount / estimated useful life = annual depreciation deduction

Question 209

Straight Line Depreciation Method

Answer 209

= Adjusted basis - Salvage Value = Depreciable amount / estimated useful life = annual depreciation deduction

Question 210

Qualifying Widower

Answer 210

- status applies for the 2 years following the year of a spouse's death

Question 211

MFS

Answer 211

- the dead spouse's filing status if significant other marries within same year

Question 212

Commerce Clearing House Fed Tax Guide

Answer 212

- best source for obtaining a plain language understanding about current tax law

Question 213

Revenue Rulings

Answer 213

based on a set of facts that are common to many TPs

Question 214

Private Letter Rulings

Answer 214

- issued at request of an individual TP

Question 215

substantial authority

Answer 215

- official words and rulings which can be relied on to support a tax opinion/position

Question 216

Sources of substantial authority for tax research include

Answer 216

- IRC, Congressional Committee Reports (blue book), T regs, private letter rulings

Question 217

District Court

Answer 217

- where a jury trial is available for tax controversies

Question 218

Congressional Committee Reports

Answer 218

- best source for gathering info about the intent of recent changes in tax law - provides congressional reasoning for enacting tax law

Question 219

Private letter ruling

Answer 219

case by case basis

Question 220

Increase in basis

Answer 220

- price of machine + sales tax + freight + installation and testing costs

Question 221

Adds basis

Answer 221

- addition of a room and pool

Question 222

Does NOT add basis

Answer 222

- roof repair, painting

Question 223

increase in basis for land

Answer 223

- all costs of making property ready for use are capitalized | - acquistion cost, legal feels, rezoning costs, property improvement, installation of sewer

Question 224

Adjusted Basis with Gift tax paid

Answer 224

= donors ATB + (appreciation / FMV) + gift tax paid

Question 225

Adjusted Basis added to building sale

Answer 225

- acquisition costs are the only thing added to basis

Question 226

Buyers Basis

Answer 226

- the amount the building is selling for

Question 227

Individual Income Tax

Answer 227

- generates the largest % of gross collections for the IRS

Question 228

Constructive Receipt Doctorine

Answer 228

Applies to a secular trust used for deferred compensation

Question 229

All persons with taxable income

Answer 229

are subject to the "pay-as-you-go" payment procedure but not withholdings

Question 230

Our tax laws encourage taxpayers to:

Answer 230

Sell investment assets that have declined in value, but keep those investment assets that have appreciated.

Question 231

NOL

Answer 231

can only offset up to 80% of the current year's income

Question 232

CFP planning fees:

Answer 232

- deductible on the schedule C

Question 233

Tax Savings generated by IRA contribution

Answer 233

= contribution amount * tax bracket

Question 234

Net amount of LTCL can use each year against OI

Answer 234

- $3,000 | - remaining amount of loss above this is carried over

Question 235

Taxable Income for a qualified dependent

Answer 235

Standard deduction is greater of $1,150 or $400 + EI (but not greater than $1,150) Taxable income = Total income - deduction

Question 236

4th quarter fed income tax estimated payment

Answer 236

- due the following year by Jan 15th for the year the payment is made for

Question 237

Tax Formula

Answer 237

``` = Gross Income - Above line deductions = AGI - below line deductions - personal and Dependency (0) = Taxable income - credits + other taxes - prepayments ``` = refunds or additional tax due

Question 238

State and Local Income Taxees

Answer 238

- below the line deduction - limited to $10,000 - either standard or itemized

Question 239

A person who rents their home for less than 15 days

Answer 239

not required to include the income | it is considered personal property, not rental or mixed use

Question 240

Self-employed tax payer

Answer 240

- MUST file is income is >= $400 of net earnings from self-employment

Question 241

Employed Taxpayer

Answer 241

- no requirements for filing unless income > standard deduction and personal exemption

Question 242

Marginal Income tax rate

Answer 242

- tax rate applied to the last dollar of taxable income earned

Question 243

NOT allowed when calculating NOL

Answer 243

- any deduction for personal exemptions - capital losses in excess of capital gains - section 1202 exclusion - nonbiz deductions in excess of nonbiz income - NOL deduction - domestic production activities deduction

Question 244

tax planning techniques for deferring taxation

Answer 244

- contribution to an IRA | - owning cash value life insurance

Question 245

Alimony prior to 2018

Answer 245

- above the line deduction

Question 246

above the line deductions

Answer 246

- considered to be more favorable to the TP than below the line

Question 247

qualifying dividends under TCJA

Answer 247

- taxed at set dollar breakpoints

Question 248

Qualified Dividend Treatment

Answer 248

- holds stock for < 60 days, then does not meet the holding period and the ordinary dividend rate is the TP's marginal rate - holds stock for > 60 days in the 121 days surrounding the ex-div date

Question 249

Charitable deductions

Answer 249

- below the line | - used when itemizing taxes

Question 250

Education Interest Expense

Answer 250

- limited to $2,500 | - AKA student loan interest

Question 251

HDHP tax deduction per family

Answer 251

- $2,800 | - $1,400 per single person

Question 252

any other benefit required by the employer for the employer's benefit (lodging and meals)

Answer 252

- not included in the EE's AGI income

Question 253

OID original issue discount bond

Answer 253

- must be included in AGI even though phantom income

Question 254

expenses on rental

Answer 254

- above the line expense deduction

Question 255

max ordinary loss deduction

Answer 255

$50,000 of losses

Question 256

max LT capital loss deduction amount

Answer 256

$3,000 LTCL per year

Question 257

alimony received from a contract dated by or prior to 12/31/18

Answer 257

includible income for the payee and deductible for the payor

Question 258

Child support payments

Answer 258

neither deductible from nor includible in income

Question 259

Qualified moving expenses

Answer 259

always equal 0

Question 260

Alimony

Answer 260

is deductible even when paid to a third party on behalf of the receiving ex-spouse as long as agreed.

Question 261

medical expenses

Answer 261

- below the line deduction

Question 262

income from a trust

Answer 262

- NOT earned income

Question 263

Qualified Residential interest paid on home mortgage

Answer 263

Below the line deduction

Question 264

Capital loss on stock investment

Answer 264

above the line deduction

Question 265

deductions FOR AGI

Answer 265

= Above the line deduction

Question 266

deductions FROM AGI

Answer 266

= below the line deductions

Question 267

Functions of AGI

Answer 267

- limiting measure (floor) for medical expenses - limiting measure (ceiling) for charitable deductions - determine deductibility of IRA contributions - determine phaseout of other tax benefits

Question 268

Deductions FOR AGI include:

Answer 268

- trade or biz expense - deductions from losses on sale or exchange of property - deductions from rental and royalty property - alimony payments - 1/2 of self-employment tax paid - 100% of health insurance premiums paid by self-employed individual - contributions to pension, profit sharing, annuity plans, IRAs, etc - penalty on premature w/d's from savings accounts - interest on student loans - HSAs - teacher expenses deduction ($300 for qualified primary/secondary expenses)

Question 269

Trade/biz expenses

Answer 269

- for expenses to be deductible, they must be ordinary, necessary, or reasonable and incurred in conduct of biz

Question 270

Alimony:

Answer 270

- payment in cash, pursuant to a divorce/separation, does not extend beyond death of payee, not part of same household, considered earned income for IRA purposes - MUST end on death of recipient, is NOT child support, is NOT rent-free occupancy of the home

Question 271

Above the Line Deductions for Self-Employed Individuals

Answer 271

- education expenses: used to improve existing skills, meet reqs of profession or of ER, not deductible if used to meet min education standard, or to qualify for new or different trade. Expenses include: tuition, books, supplies, transportation, travel (lodging and 50% meals) - business gifts: limited to $25 each + wrapping, if

Question 272

Deductions FROM AGI

Answer 272

- itemized and standard deductions

Question 273

Itemized deductions FROM AGI

Answer 273

- medical expenses - certain state and local taxes - contributions to qualified charitable orgs - deduction clustering - charitable contribution from IRAs - casualty losses - certain personal interest expense

Question 274

Medical expenses

Answer 274

- Itemized deductions FROM AGI - > 7.5% of AGI - prescriptions, non-cosmetic surgeries, some qualified LTC services - insurance premiums - tuition for special, medically necessary schools - handicapped entrances, railings, w/ no increased value test

Question 275

Certain state/local taxes

Answer 275

-Itemized deductions FROM AGI - TPs may deduct property taxes on US property - TPs may deduct state income tax paid, or state/local sales tax Taxes are capped to $10,000 total

Question 276

Contributions to qualified charitable orgs

Answer 276

Itemized deductions FROM AGI - non-itemized tax filers: receive $300 in deduction ($600 MFJ) - itemized tax filers: depends on the type of donated property, but can be, 20%, 30%, 40%, 50%,60% of donor's AGI. OVerall, total deductible contributions for tax year cannot exceed 50% of donors AGI

Question 277

Public charities

Answer 277

- churches - schools - hospitals - gov entities

Question 278

Disallowed Charitable contribution deductions due to AGI limitations

Answer 278

- may be carried over for 5 years and used in FIFO order

Question 279

Max deductions for charities

Question 280

Deduction Clustering

Answer 280

Itemized deductions FROM AGI - allows TPs to cluster itemized deductions together in 1 year and take the standard deduction in the following year - early payment of state income or property taxes - early payment of mortgage interest - medical expenses - charitable donations

Question 281

Charitable contributions from IRAs

Answer 281

Itemized deductions FROM AGI - must be made directly by the IRA TTEE to a qualified charity - owner must be 70.5 - cannot exceed $100k/year - with Secure Act, contribution is no longer income to IRA owner, and not a charitable contribution, but it counts as the owners RMD

Question 282

Casualty Losses

Answer 282

- are deductible in the year in which loss is sustained - are only deductible if a national disaster is declared by the president - losses caused by fire, theft, storm, shipwreck - to be deductible, loss must be from an event that is identifiable and damaging to TPs property and unusual in nature

Question 283

Certain personal interest expense

Answer 283

- mortgage interest on a personal residence - investment interest expense is limited to investment interest income - excess investment interest expense may be carried over indefinitely - qualified personal residence interest - limited to $750k of mortgage indebtedness - limited to 2 houses - no home equity interest

Question 284

QBI Qualified Business Income

Answer 284

- deduction on pass through income of the owners - below the line deduction entities include: - sole props, partnerships, LLCs, s corps, REITs, master limited partnerships (MPLs) - reduces taxable income but does not reduce AGI - TPs can take deduction regardless if itemized or standard deduction - deduction is usually 20% of the TPs QBI (does not include investment income) - net result is to reduce the tax rate on the business income by 20% = (marginal tax rate * (1-.2))

Question 285

Combined QBI

Answer 285

= sum of each 20% of QBI

Question 286

QBI deduction

Answer 286

can take the lesser of: - Combined QBI which is the sum of 20% of each interest components OR - 20% of total taxable income (excludes capital gains) which is 20% * $

Question 287

Misc. itemized deductions subject to 2%

Answer 287

- no longer deductible

Question 288

deductible other employee expenses

Answer 288

- special clothing - uniform dues - professional expenses - job hunting in same profession

Question 289

TAX CREDITS

Answer 289

- Earned Income Credit - Adoption Expenses Credit - Child Tax Credit - Family Credit - Child and Dependent Care Credit - Education Tax Credit

Question 290

Earned Income Credit

Answer 290

must have earned income must have qualifying child (must meet relationship, residency and age tests) EITC = % rate * Earned Income credit for taxpayers w/o kids = TPs age 25 - 64

Question 291

Adoption Expense Credit

Answer 291

- $14,890 is max credit includes adoption fees, court costs, and attorney fees credit phaseout: $223,410 - $263,410 eligible child: - < 18 y/o or physically/mentally handicapped non-refundable credit excess may be carried forward 5 years

Question 292

Child tax credit

Answer 292

- $2,000 for each dependent kid <17 y/o includes step and foster kids married filers must be MFJ to be eligible for credit eligible kids: - < 17 y/o - US citizen - claimed as a dependent on TPs tax return credit is phased out for MAGI above specific levels subject to limitations, up to $1,400 per kid may be refundable

Question 293

Family credit (qualifying dependent credit)

Answer 293

- $500 credit for those who would qualify as a dependent | - qualifying kid 17+ and qualifying person

Question 294

Child and Dependent Care Credit

Answer 294

- must have employment related care costs for either: - Dependent < 13 - handicapped dependent or spouse credit amount = eligible costs * applicable % (between 20 - 35%) AGI of $43,000+ qualified expenses: the lesser of actual cost or $3,000 for 1 qualified individual and $6,000 for 2+ qualified individuals - the amount of eligible care costs cannot > TPs earned income - FT students or disabled TP are assumed to have EI up to max per month limits usually = 20% * eligible costs ($3k for 1 kid, $6k for 2+ kids)

Question 295

Education Tax Credit

Answer 295

- AOTC | - LLC

Question 296

AOTC

Answer 296

- American opportunity tax credit - 100% of 1st $2,000 - 25% of 2nd $2,000 Per kid 1st 4 years of post-secondary education must be at least 1/2 or FT student refundable credit up to 40% or $1,000 AGI phaseout: $160k - $180k MFJ, $80k - $90k (other)

Question 297

LLC

Answer 297

lifetime learning credit 20% of up to $10,000 qualifying expenses cannot claim this at the same time as the AOTC AGI phaseout: $160k - $180k MFJ, $80k - $90k (other)

Question 298

Kiddie Tax

Answer 298

- net unearned income of a kid under age 19 w/ a living parent is taxed at the parents tax rate, and age 24 if kid is a FT student - standard deduction: $1,150 for unearned income, next $1,150 is taxed at kid's marginal tax rate - kiddie tax does not apply unless the kid as unearned income > $2,300

Question 299

kiddie tax unearned income

Answer 299

- interest, divs, cap gains, royalties, rents, pension and annuity income, unearned income from trusts

Question 300

kiddie tax

Answer 300

- only applies if unearned income > $2,300

Question 301

kiddie tax

Answer 301

- first $1,150 not taxed bc of standard deduction - 2nd $1,150 taxed at kiddie tax rate Remaining amount above $2,300 is taxed at parents tax rate

Question 302

kiddie tax standard deduction option

Answer 302

greater of: | - $1,150 or EI + $400

Question 303

AMT Alternative Minimum Tax

Answer 303

- applies to individual TPs who take advantage of items of tax preference - TP is liable for the greater of his regular tax liability or AMT

Question 304

AMT Deductions

Answer 304

- charitable contributions - certain deductions for estate tax for income in respect of a decedent, gambling losses to the extent of winnings, casualty losses from federally declared disasters, and medical expenses > 7.5% AGI - Sec 199A QBI, Qualified resident interest - investment interest to the extent of qualified NII

Question 305

AMT

Answer 305

``` = Taxable income +/- adjustments + preferences ____________ AMTI - Exemption ____________ AMT Tax Base * AMT Rate ____________ Tentative Min Tax Rate - foreign tax credit - regular tax ____________ = AMT ```

Question 306

AMT Adjustments for individuals

Answer 306

- accelerated depreciation for real/personal property that is allowable for regular tax purposes (real prop - depcec in excess of 40year SL) (personal property - deprec in excess of 150% declining balance method) - standard deduction if itemized deductions are not used itemized deductions not allowed for AMT: - state and local taxes

Question 307

AMT Preferences

Answer 307

- arise bc of deductions/exclusions that provide substantial benefits - can ONLY be + reduce the benefits initially received when computing regular tax 1. Percentage depletion 2. Intangible drilling costs 3 interest on private activity bonds

Question 308

Preference item - percentage depletion

Answer 308

- amount of % depletion taken for regular tax in excess of the AB of the property at the end of the year is a preference item

Question 309

Preference item - intangible drilling costs

Answer 309

- AMT requires 10 year amortization - currently deductible for regular tax - preference is excess of regular tax deduction over [AMT amortization + (65% * net oil and gas income)]

Question 310

Preference item - interest on private activity bonds

Answer 310

- not taxable for regular tax purposes but is included in income for AMT purposes - expenses incurred in carrying these bonds are not deductible for regular tax purposes, but offset the interest income in computing AMT preference

Question 311

Preference Items

Answer 311

= ARE PII

Question 312

Loss Limitations - Rental property: Nonvacation Rental property

Answer 312

- rental property is considered a trade or biz and all ordinary and necessary biz expenses are deductible against income - some rental activities are deemed passive losses and are only deductible to the extent of passive income - 2 exceptions: 1) rental activities by dealers are considered active 2) residential rental losses up to $25k are deductible by TPs with AGI

Question 313

Loss Limitations - Rental property: Rental Vacation property

Answer 313

- subject to the same presumption and treated the same as hobbies - may have both personal and rental use of a vaca home - no rental expenses in excess of rental income are allowed and expenses are deducted in the same order as for hobby - determination of vacation home treatment is dependent on personal use vs rental use

Question 314

< 15 rental days

Answer 314

- no GI from rentals and no deductible rental expenses | - the mortgage interest and property taxes are treated as if on personal residence

Question 315

> 14 rental days

Answer 315

- treatment depends on amount of personal use - if PU days are NOT > 14 days or 10% of fair rental days, then the TP can deduct all expenses allocated to rental use even if loss occurs

Question 316

Rental losses

Answer 316

subject to passive loss rules

Question 317

tax treatment of income and expenses of a primarily rental vaca home

Answer 317

- rental income = included in GI - rental expenses = deductible for AGI - rental income and expenses = reported on Schedule E

Question 318

treatment of allocated personal portion of vaca home expenses

Answer 318

- primarily rental use: taxes deductible FROM AGI, mortgage interest nondeductible (personal interest) - personal/rental use: mortgage interest and taxes are deductible from AGI - personal portion of other expenses (insurance, maintenance) non-deductible

Question 319

Hobby rules - for-profit acitivty

Answer 319

- TP can deduct expenses FOR AGI even in excess of income from the activity - at risk and passive loss rules may apply - if activity shows profit 3 out of 5 years (2/7 for horses) it is presumed that the TP has a profit motive

Question 320

Hobby losses

Answer 320

- no longer deductible

Question 321

3 types of income:

Answer 321

- active - passive - portfolio

Question 322

At risk rules: loss deduction

Answer 322

- I can only deduct losses up to the amount that I have funded - I invest $30k in 40% interest in GP. Partnership has $250k in losses, I can deduct up to the $30k that I put in, no greater. - cant take more than I put in - once basis is 0, then no further losses are allowed until basis is increased by add'l capital or by flow-through of earnings

Question 323

passive activity

Answer 323

- passive losses can only offset passive gains - no material participation -

Question 324

Passive activity - rental activities

Answer 324

exception: - real estate rental activities if client actively participates active participation: - reqs at least 10% ownership, as well as involvement in management decisions, such as approving new tenants/arranging for repairs if real estate is actively managed: then TP can deduct up to $25k agains OI exception is subject to a phaseout of $1 for every $2 AGI exceeds $100k completely phased out at AGI of $150k

Question 325

Passive activity - material participation

Answer 325

TP must meet 1 of the following: - participates > 500 hrs/year OR - TP participation constitutes all participation - > 100hrs and the most of any participant - TP participates for 100 hrs in this activity, and their total participation in all such activity > 500 hrs

Question 326

Active income includes:

Answer 326

- wages, salaries, schedule c income, and trade/biz income

Question 327

Portfolio income includes:

Answer 327

- interest, dividends, royalties, annuities

Question 328

suspended loss at risk:

Answer 328

- NOT deductible until the at-risk amount is positive from additions or income - under passive activity rules, the losses are deductible upon disposition

Question 329

IRC

Answer 329

- originally created by the revenue act of 1913

Question 330

IRC of 1939

Answer 330

- in 1939 the entire fed tax law was codified

Question 331

a new codification of the code was issued

Answer 331

- 1954

Question 332

the present tax code

Answer 332

- IRC of 1986

Question 333

first primary source of tax law

Answer 333

- the IRC

Question 334

the second primary source of tax law

Answer 334

- administrative law sources

Question 335

regulations

Answer 335

- issued by the US Treasury - interpretations of the IRC - have the full force and effect of law - 2nd highest authority of tax law - 3 types: proposed, temporary and final

Question 336

proposed regulations

Answer 336

- preview of final regs and do not have legal precedence

Question 337

temporary regulations

Answer 337

- issued when guidance is needed quickly and have the same authoritative value as final regs

Question 338

final regulations

Answer 338

- have the full force and effect of law | - 3 types: procedural, interpretive, and legislative

Question 339

procedural regulations

Answer 339

- are final regulations | - housekeeping instructions

Question 340

interpretive regulations

Answer 340

- final regs | - implement the intent of committee reports and the IRC

Question 341

legislative regulations

Answer 341

- type of final regs - allow the treasury to determine the details of the law - congress must specifically delegate this authority to the treasury

Question 342

Revenue Rulings

Answer 342

- interpretations of the tax law issued by the IRS - provided in response to a TP request and are based on facts common to many TPs - do not have full force and effect of law - binding on officials of the IRS - TPs can either rely upon rulings or challenge the rulings in court - may be cited as precedent - courts are not bound to them - published weekly in the IRbulletin

Question 343

Revenue Procedures

Answer 343

- describe internal practices and procedures within the IRS - published in the IRBulletin - state changes in techniques and admin procedures used by IRS

Question 344

Private letter rulings

Answer 344

- issued by the IRS at request of TP - the RIS is bound by its determination in the ruling - made available to the public after deletion of certain materials and can be used by other TPs as guidance regarding the described transaction - cannot be relied on by other TPs as precedent

Question 345

determination letters

Answer 345

- issued by District Directors for returns that will be filed in their respective districts - only issued with regard to completed transactions - issued only if the answer is covered by statute, treasury decision or regulation, or ruling opinion or court decision published in the IRBulletin

Question 346

TAM Technical Advice Memorandum

Answer 346

- issued by the national IRS office - issued in response to a request by an agent performing an audit - provide clarification that cant be provided by the local IRS office - deal with completed transactions - only apply to the TPs involved in the audit

Question 347

Judicial decisions

Answer 347

- 3rd primary source of tax law

Question 348

when TPs cant resolve disputes w/ IRS

Answer 348

- TPs may seek adjunction from federal courts

Question 349

court decisions

Answer 349

- interpretations and applications of the IRC by the judicial branch of gov

Question 350

Role of the IRS

Answer 350

- carry out responsibilities of the secretary of the treasury - secretary has the power to create an agency and enforce internal rev laws

Question 351

statutes of limitations

Answer 351

- 3 year window for TP to claim a refund - if no return is filed to claim the refund within 3 years, the $ becomes the property of the US treasury - does not start until return has been filed - 3 year window for IRS auditing tax return - 10 year window for IRS collecting tax - 6 year window if the TP omits add'l GI > 25% of amount of GI in filed return - infinity for fraud /false tax returns

Question 352

Interest for Noncompliance

Answer 352

- accrues from original due date of return even if theres an extension - compounded daily = fed ST rate + 3% - rate is determined every 3 months - interest is paid on refunds if not received within 45 days of the TP filing a claim for a refund

Question 353

Penalties for Noncompliance

Answer 353

- Failure to file: 5% per month up to 25% - if due to fraudulent FTF, penalty is increased to 15%/ mo up to 75% - if filed > 60 days late, then min FTF penalty is the smaller of $450 or amount of tax due - Failure to Pay: 0.5% per month up to 25% - if both FTF and a FTP penalty apply, then FTF is reduced by the FTP

Question 354

Underpayment of estimated tax

Answer 354

- can avoid paying estimated tax if w/h and credits = 100% of the tax on prior years return OR 90% of current year's tax liability - penalty is figured the same as interest - determine the amount of underpayment for each period of time and the # of days in that period, then apply an appropriate interest factor - interest rate is based on market interest rate - due dates for estimated payments: April, June, sept, dec 15th

Question 355

US District Court

Answer 355

- tax deficiencies must be paid to proceed in this forum - only forum which allows a jury trial - bound by decisions of its Appeals Court and US Supreme court

Question 356

US Court of Appeals

Answer 356

- 12 circuit courts in US - handles appeals from tax and district court - court of appeals of 1 region is not bound to follow the decisions of the court of appeals in another region

Question 357

US Supreme Court

Answer 357

- decisions on the US Supreme court are binding on TPs and the IRS - Supreme court review tax cases if: - there is a conflict between circuit courts - important/recurring problem in tax law administration is involved - many TPs are involved - decision of a lower court conflicts w/ longstanding practice or the regs

Question 358

US Tax Court

Answer 358

- no payment of tax is necessary in order to bring a claim before US Tax court - no trial by jury - small tax case division handles deficiencies under $50k at the TPs request - informal procedure with no appeal rights - decisions do not bind the IRS w/ respect to other TPs - appeals are the US court of Appeals

Question 359

US Court of Federal claims

Answer 359

- only in Washington, DC - only hears claims against US - tax deficiencies must be paid to proceed in this forum - appeals are to the US Court of Appeals for the fed circuit

Question 360

can represent a client during an audit by IRS

Answer 360

- attorney - cpa - enrolled agent (highest credential of the IRS awards) - NOT a CFP

Question 361

Statute of limitations

Answer 361

- 3 years from due date of return - 6 years if material omission of GI > 25% stated in return - no statute if fraudulent return - for refund: later of 3 years from date return is file or 2 years from date of payment

Question 362

audits

Answer 362

TP can either agree/disagree w/ any changes from audit and can appeal performed due to unmatching info from a w2 or 1099 may be done to study the behavior or similar TPs in handling a tax issue

Question 363

accuracy related penalty

Answer 363

20% applies to any underpayment due to negligence or disregard of rules and regs or understatement of income penalty cannot exceed 20% of the underpayment

Question 364

negligence

Answer 364

includes the lack of any reasonable attempt to comply with provisions of the IRC

Question 365

disregard

Answer 365

includes the careless, reckless, or intentional disregard of rules or regs

Question 366

substantially understated tax

Answer 366

if understatement of tax exceeds the greater of: 10% of the correct tax OR $5,000

Question 367

Fraud penalty

Answer 367

- 75% of the tax underpayment attributed to fraud

Question 368

Depreciation

Answer 368

- annual income tax deduction that allows you to recover the cost or other basis of certain property over the time you use the property - an allowance for the wear and tear, deterioration or obsolescence of the property - to match the cost of a productive asset to the revenues earned from using the asset

Question 369

land

Answer 369

- not depreciable

Question 370

to be depreciable, property must be:

Answer 370

- property of your own - used in your biz or income-producing activity - must have a determinable useful life - must be expected to last more than 1 year

Question 371

Property that cannot be depreciated

Answer 371

- used solely for personal activities - you can deduct depreciation based on biz/investment use but NOT personal use - inventory because it is not held for use in biz - land because it does not wear out or get used up but you CAN depreciate certain land prep costs (landscaping)

Question 372

straight line depreciation

Answer 372

- allows the TP to deduct the same amount of depreciation each year over the useful life of the property

Question 373

useful life of a patent/copyright

Answer 373

= lesser of the life granted to it by the gov or the remaining life when you acquire it - use straight line depreciation

Question 374

computer software

Answer 374

- considered an intangible under sect 197 - cannot be depreciated if in connection with the acquisition of assets, if so depreciate it over 36 months - it IS NOT considered a sect 197 intangible if: - it is readily available for purchase by the general public - it is subject to a nonexclusive license - it has not been substantially modified

Question 375

ACRS Accelerated Cost Recovery System

Answer 375

- system of depreciation based on recovery periods instead of useful life determined by the IRS - MACRS replaced ACRS for property placed into service after 1986

Question 376

MACRS modified accelerated cost recovery system

Answer 376

cannot use MACRS to depreciate the following property: - property placed in service before 1987 - property owned/used in 1986 - intangible property - films, video tapes, recordings - certain corp or partnership property acquired in a nontaxable transfer - property you elected to exclude from MACRS

Question 377

MACRS consists of 2 depreciation systems

Answer 377

- General Depreciation System GDS | - Alternative Depreciation System ADS

Question 378

Alternative Depreciation System ADS

Answer 378

must be used for the following property: - listed prop used 50% or less in a qualified biz use - any tangible prop used outside the US during the year - any tax exempt use property and bond financed property - all prop used in farming biz and placed in service in any tax year during which an election not to apply the uniform capitalization rules to certain farming costs is in effect - any property inported from a foreign country for which an executive order is in effect bc the country maintains trade restrictions or engages in other discriminatory acts

Question 379

GDS general depreciation system

Answer 379

``` 3 years: tractors, rent to own 5 years: autos, computers, office equipment 7 years: office furniture and fixtures 27.5 years: rental home 39 years: office building ```

Question 380

3 year property

Answer 380

- tractors for over the road use - any racehorse over 2 years old when placed in service - any other horse over 12 years old when placed in service - qualified rent to own property

Question 381

5 year property

Answer 381

- cars, taxis, buses - computers - office machines (calculators, copiers, printers) - any property used in research and experimentation - breeding cattle and dairy cattle - appliances, carpets, furniture used in residential rental real estate activity - certain geothermal, solar, and wind energy property

Question 382

7 year property

Answer 382

- office furniture and fixtures (desks, files and safes) - ag machine and equip - any property that does not have a class life and has not been designated by law as being in any other class - certain motorsports entertainment complex property through Dec 2020 - any natural gas gathering line placed in service after April 2005

Question 383

10 year property

Answer 383

- vessels, barges, tugs, and similar water transportation equip - any single purpose ag or horticulture structure - any tree or vine bearing fruits or nuts

Question 384

15 year property

Answer 384

- certain improvements made directly to land or added to it (fences, roads, bridges) - any retail motor fuels outlet, such as a conveince store - any muni wastewater treatment plant - any qualified leasehold improvement property in service before Jan 1, 2008 - any qualified restaurant property before Jan 2008 - initial clearing and grading land improvements for gas utility property - electric transmission property - any natural gas distribution line after 2005

Question 385

20 year property

Answer 385

- farm buildings - muni sewer not classified as 25 year property - initial clearing and grading land improvements for electric utility transmission and distribution plants

Question 386

25 year property

Answer 386

- this class is water utility property, which is either: - property that is an integral part of the gathering, treatment, or commercial distribution of water and w/o regard to this provision, would be a 20-year property - muni sewers other than property placed in service under a binding contract in effect at all times since 1996

Question 387

27.5 year property

Answer 387

- residential rental property - any building, structure, such as a rental home, if 80% or more of its gross rental income for the tax year is from dwelling units ( house or apt building, not a hotel, or transient basis building)

Question 388

39 year property

Answer 388

- nonresidential real property | - 1250 property (office building, store, warehouse, w/ class life < 27.5 years)

Question 389

nonresidential real property and residential real property

Answer 389

- use the mid-month convention

Question 390

mid-month convention

Answer 390

- treat all property placed in service or disposed of during a month as placed in service or disposed of at the midpoint of the month. - 1/2 month of depreciation is allowed for the month the property is placed in service or disposed of

Question 391

MACRS provides 3 depreciation methods under GDS and 1 depreciation method under ADS

Answer 391

- 200% declining balance method over a GDS recovery period - 150% declining balance method over a GDS recovery period - SL method over a GDS recovery method - SL method over an ADS recovery method

Question 392

Section 179 General Rules

Answer 392

- can elect to immediately expense up to $1,080,000 of biz tangible property placed in service during the year - cannot use section 179 for realty or production of income property - amount expensed reduces depreciable basis - cost recovery available on remaining basis

Question 393

Section 179 deduction is the lesser of:

Answer 393

-property placed in service (PPS) - taxable income OR - threshold of $1,080,000 phased out for PPS > $2,700,000

Question 394

taxable income before deduction

Answer 394

= actual taxable income + deduction amount

Question 395

Bonus Depreciation

Answer 395

- immediate 100% first year deduction for qualified new or used equip, acquired and placed in service after 2017 and before 2023

Question 396

assets subject to ammortization

Answer 396

- goodwill - trademarks - covenants not to compete - copyrights and patents used in a trade or biz

Question 397

Depletion

Answer 397

- natural resources and land | - two methods are cost and percentage

Question 398

cost depletion method

Answer 398

deduction amount = (asset basis / estimated total # of recoverable units of the assets) * # of units sold (not produced

Question 399

Percentage Depletion Method

Answer 399

= % is applied to the GI from the property (limited to 50% of the GI)

Question 400

Proprietorships and general partnerships

Answer 400

- less complex - inexpensive - easy to form

Question 401

admin reqs for sole proprietorships

Answer 401

- least burdensome

Question 402

Administrative Requirements

Answer 402

- registration with the state - annual filing reqs and state-imposed ops reqs that must be met to assure continuation of the entity's legal status and benefits that the legal status brings

Question 403

Transferability of an ownership interest

Answer 403

- easiest w/ proprietorship and becomes increasingly more difficult

Question 404

business forms that offer limited liability protection

Answer 404

- won't have their personal assets exposed to biz entity debts or obligations - not available for proprietorships or gen partnerships, nor to LPartnerships and only to a limited extent for LLP - failure to put LLC on correspondence could result in piercing the veil, which could result in personal liability for the owner. Keep books and records separate from personal.

Question 405

Sole Proprietorships

Answer 405

- biz ventures owned/opd by a single individual - arises when an individual engages in a biz for profit - can op under the name of the owner or it can conduct biz under a trade or fictious name - no filings are req'd w the sec of the state and no annual filing fees req'd - no transfer of assets to the entity

Question 406

Formation of a sole proprietorship

Answer 406

- easy and inexpensive, although may be required to obtain a local biz license - if collects sales taxes, it must register with the state or local taxing authority - ops made just by sole prop - any trade names or assets are owned by the individual proprietor

Question 407

Sole proprietor interest

Answer 407

- a proprietor has a 100% interest in assets and income

Question 408

Sole Proprietorship dissolution

Answer 408

- achieved by discontinuing biz ops and paying creditors or by death of proprietor

Question 409

Proprietorship Capital

Answer 409

limited to the resources of the proprietor including ability to borrow

Question 410

Proprietorship Liability

Answer 410

- major disadvantage | - personally legally liable for the debts and torts of his sole prop biz

Question 411

Proprietorship Operations

Answer 411

- no guarantee of continuity beyond the proprietorship | - has day to day mngmt and decision making responsibilities

Question 412

Sole Proprietorship Income Tax and Payroll Taxes

Answer 412

- cost of tax compliance is low bc it is simply added to 1040 schedule C form - conducts biz under his own SSN unless there are EEs, then need an EIN - does not have to pay unemployment taxes on himself but must for his EEs - pays self-employment tax on his own earnings 15.3% and 1/2 SS taxes 7.65% for his EEs - can deduct all ordinary and biz expenses from GI - to calculate the self-employed individual's contribution use KEOGH!

Question 413

Self Employed individual's contribution rate = KEOGH!!

Answer 413

25% / (1 + 25%) = 20%

Question 414

social security

Answer 414

6.2%

Question 415

medicare tax

Answer 415

1.45%

Question 416

KEOGH Equation

Question 417

Advantages to Sole Proprietorship

Answer 417

- easy to form - simple to operate - easy to sell biz assets - few admin burdens - income is generally passed through to the owner on 1040 sched C

Question 418

Disadvantages to Sole Proprietorship

Answer 418

- limited sources of capital - unlimited liability - no guarantee of continuity beyond the proprietor - biz income is subject to self-employment tax

Question 419

General Partnership

Answer 419

- joint biz ventures among 2+ people to conduct a biz as co-owners under their names or a fictious name - automatically created when 2+ people conduct biz for profit - general partnerships and limited partnerships - GPs: not req'd to be registered with the sec of state in the state of formation but LPs are req'd to register - each GP is a general agent for the biz and can participate fully in management and act with full authority for the firm

Question 420

GP Formation

Answer 420

- state law will govern the relative rights and obligations of the partners unless there is a contrary agreement among the partners - ownership of a GP may be in the form of partnership units, shares or %s

Question 421

GP Interest

Answer 421

- referred to as his partnership % interest | - usually have voting power in proportion to their ownership interest

Question 422

Disposal of GP interest

Answer 422

- either voluntary or judicial - partners usually vote for voluntary dissolution and pay creditors and then distribute remaining assets to partners in accordance with either the partnership agreement or in proportion to their individual partnership interests - judicial dissolution may be necessary when the partners cannot agree on how to conduct the biz or whether to dissolve the entity (unanimous partnership votes)

Question 423

GP Capital

Answer 423

- amount of capital contributed determines the ownership interest of a partner

Question 424

GP Liability

Answer 424

- a partner's personal assets can be seized to satisfy partnership obligations - all GPs in a partnership are subject to joint and several liability for the debts and obligations of the partnership

Question 425

GP Operations

Answer 425

- managed equally by all partners - can name a "managing partner" to do day-to-day ops - not req'd to have annual meetings of partners but must have a relaxed set of rules and formalities - EEs of a GP are eligible to receive a wide variety of TF fringe benes provided by ER such as health care

Question 426

General Taxation of a GP

Answer 426

- not subject to entity level taxation - file form 1065 w/ schedule K - income and losses are then passed through to individual partners in proportion to their interests - all partnership biz net income is subject to self-employment tax up to 15.3% - must have a federal EIN - can deduct all ordinary and necessary biz expenses from their income - passive partners may not be able to deduct losses due to passive activity rules even if they are at-risk - limited partners may not be subject to self-employment tax

Question 427

Tax Ramifications of Formation of a GP

Answer 427

- partners can form a partnership by contributing cash, property, services to the partnership in exchange for ownership interest - if a partner contributes personal/professional services to the partnership, the partner must recognize ordinary compensation income for the value of services. The amount of income recognized becomes the partner's basis in his/her partnership interest

Question 428

Tax ramifications of business operation of a partnership

Answer 428

- partnership must file form 1065 and is not required to pay tax at the entity level - each partners share of income and expense items is then reported on Form 1065 Schedule K1 (partnership req'd to provide K1 to both IRS and each partner) - partners AB in his partnership is adjusted each year to reflect the allocated items of income and expense - partners Adjusted Bases: + increased by his share of income - decreased by his share of partnership losses, nondeductible expenses and distributions

Question 429

Tax Ramification of W/Ds or distributions from a partnership

Answer 429

- partners may w/d cash or property from the partnership to meet their needs or as advance payments of their share of partnership income - a w/d treated as a return of capital and is not generally taxable - the w/d does reduce the partners AB in the partnership - once the partners AB has been reduced to 0, any add'l w/ds taken from the partnership will result in a cap gain to the partner

Question 430

Advantages of Partnerships

Answer 430

- more sources of initial cap than proprietorships - have more management resources available than proprietorships - have fewer admin burdens than corps - income and losses are generally passed through to the partners for tax purposes

Question 431

Disadvantages of Partnerships

Answer 431

- transfer of interests is more difficult than from proprietorships - unlimited liability - each partner is liable for partnership debts and obligations - partnership income tax and basis adjustment rules can be complex - business NI is subject to self-employment tax - partners are entitled to few TF fringe benes that are generally available to EEs

Question 432

Limited Partnerships LPs

Answer 432

- associations of 2+ people as co-owners to carry on a biz for profit except that one or more of the partners have limited participation in the management of the venture and thus limited risk exposure - if the LPs participate in the management of the enterprise, they become GPs - there is at least 1 GP

Question 433

LP Formation

Answer 433

- req'd to file a partnership agreement or any other required doc with the domiciliary state to establish the LP - Those states that req initial filings also req annual filings to maintain the entity status

Question 434

LP Dissolution and disposal of interest

Answer 434

- same as for a GP

Question 435

Transfer of a LP

Answer 435

- very difficult since the limited liability feature attracts more buyers and LPs have limited say in the day-to-day ops

Question 436

LP Capital

Answer 436

- easier to raise capital in an LP than a GP because of the availability of the liability shield for the non-managing LPs - limited liability may negatively affect the partnerships ability to obtain outside financing - 3rd party lenders may desire personal guarantees from the partners

Question 437

LP Liability

Answer 437

- limited as long as they refrain from participating in the management of the enterprise - GPs who do the day to day ops in a LP have unlimited liability for the enterprise debts and obligations

Question 438

LP Operations

Answer 438

- is a hybrid entity - GPs run the biz and are exposed to personal liability - LP must avoid making management decision to protect limited liability status

Question 439

LP Income Taxation and Payroll (SS) taxes

Answer 439

- LPs are not subject to self-employment tax since they are passive investors who do not participate in the management - GPs in a LP have self-employment income and file form 1065 and issues K1s to bot GP and LPs

Question 440

Advantages of LPs

Answer 440

- favorable pass-through partnership taxation status - flexibility in structuring ownership interests LPs are not personally liable for debts and obligations of the LP as ling as they do not engage in management

Question 441

Disadvantages of LPs

Answer 441

- must file with the state to register - GPs are liable for debts and obligations of the LP - losses for LPs are generally passive losses

Question 442

Limited Liability Partnership LLP

Answer 442

- hybrid entity that provides partial liability protection to its members - generally 1 comprised of licensed professionals such as accountants, attorneys, docs who practice together - partners may enjoy liability protection from the acts of their other partners - each partner remains personally liable for his own acts with respect to malpractice

Question 443

LLP Formation

Answer 443

- req'd to file with the domiciliary state to establish the LLP - states that require initial filings also require annual filings to maintain the entity status

Question 444

Dissolution and transfer of an interest in LLP

Answer 444

- same as for a GP - if comprised of licensed professionals, transfer of an interest will usually be more difficult because such interest may only be transferred to another similarly licensed professional

Question 445

LLP Capital

Answer 445

- amount of capital contributed usually determines the ownership interest in a partnership - sometimes partners allocate ownership interest differently from capital contributed

Question 446

LLP Liability

Answer 446

general partners of LLP: - insulate themselves from liabilities arising from acts of other partners - will not be personally liable for the debts and obligations arising from E&O, negligence, incompetence or acts committed by another partner or rep of the partnership who is not under the supervision or direction of the 1st partner

Question 447

LLP Operations and Management

Answer 447

- same as for any GP | - the LLP confers limited liability status on all partners, not just limited partners

Question 448

LLP Income taxation and payroll

Answer 448

- treated as a partnership for fed income tax purposes | - a flow-through entity and is not subject to tax at the entity level

Question 449

Advantages of LLPs

Answer 449

- favorable pass-through partnership taxation status available - flexibility in structuring ownership interests - partners can insulate themselves from acts of other partners

Question 450

Disadvantages of LLPs

Answer 450

- req'd to file w/state to register | - unlimited liability for own acts of malpractice

Question 451

Family Limited Partnerships FLP

Answer 451

- special type of LP created under state law with primary purpose of transferring assets to younger gens using annual exclusions and valuation discounts for minority interests and lack of marketability

Question 452

FLP Formation

Answer 452

- 1+ family members transfer highly appreciated property that is expected to continue to appreciate to a LP in return for both a small (1%) general and a large (99%) limited partnership interest - GP has unlimited liability and the sole management rights of the partnership, while the limited partners are passive interest holders w/ limited liability and no management rights - transferor transfers valuable property to a FLP and receives in exchange partnership interests

Question 453

FLP Interest, Disposal of Interest, and dissolution

Answer 453

- there are neither income nor gift tax consequences bc the entity created is owned by the same person(s) who owned it before the transfer - once FLP is created, the owner of the GP and LP interests values the LP interests - since there are usually transferability restrictions on the LP's intersts, and since the LPs have little control of the management of the partnership, LP interests are usually valued at a substantial discount from the FMVs. it is not uncommon for the discount of such interests to range between 20 and 40% for the purpose of calculating gift taxes payable by the transferor - the original transferor then begins an annual gifting program utilizing the discounts, the gift tax annual exclusions, and gift splitting to transfer LP interests to younger generation family members at reduced transfer costs

Question 454

FLP Capital

Answer 454

- the most important non-tax bene, is that the original owner can maintain control of the property transferred to the LP by only retaining a small GP interest - if the FLP is funded with a business interest, the GP could remain president of the biz, direct the company's strategic plan, receive reasonable compensation and fringe benes, hire/fire EEs, receive exec perks, and generally control the LPs interest - the LPs have no control over any of these enumerated management decisions The FLP is often undertaken as a series of transfers, including initial nontaxable contribution of property to the partnership followed by annual exclusion gifts of LP interests - while a GP has control over partnership affairs, an individ who transfers his property to an FLP needs to be financially secure w/o the transferred property, both from a NW and CF perspective

Question 455

FLP Liability

Answer 455

- an FLP can help protect family assets - by placing the gifts of LP interests to heirs, judgements or liens entered against a donee (LP) will not jeopardize the assets of the partnership - a donee's creditor would not be able to force the donee to liquidate his interest, since the donee does not have the right to force the liquidation of a LP interest - transferring LP interest to kids and their spouses can also help protect assets from divorce claims - if the kid and his spous divorce, even if the divorced spouse received a LP interest, they could not force distributions from the partnership, participate in management, require their interest to be redeemed, or force a liquidation of the partnership

Question 456

Taxation of a FLP

Answer 456

- the estate planning benes of the FLP are lost and expenses are increased when the IRS successfully contests the use of the FLP - to ensure the use of the favorable discounts, the FLP should possess economic substance by having its own checking accounts, tax ID #, payroll, and should not allow fam members to w/d funds at will, nor should it pay for personal expenses of it's owners - FLP is taxed as a partnership and files form 1065 and issued K1 to both GP and LPs. GP may be a corp or an individual. Treatment of payroll taxes will be determined by whether the GP is an individual or a corp - LPs are passive and not subject to employment tax

Question 457

Advantages of FLP

Answer 457

- control retained by senior fam member - valuation discounts are available for minority interests - annual exclusion gifts are used to transfer interests to fam members - some creditor protection - restrictions can be placed on transferability of LP interest of junior fam members - Commonly used as an estate planning strategy

Question 458

Disadvantages of FLP

Answer 458

- attorney setup fees and costs - periodic valuation costs - operational requirements - potential IRS challenges regarding valuation and discounts

Question 459

Limited Liability Company LLC

Answer 459

- separate legal entities formed by one or more individuals by meeting state statutory reqs necessary for the formation - formed in the same was as corps - chartered entities registered with the sec of state in the state of org - state reqs annual filings

Question 460

LLC interest

Answer 460

- owners contributions determine the ownership % of an LLC | - sometimes the org will want to divide the ownership interests in an amount differently than the initial contributions

Question 461

Disposal of Interest for an LLC

Answer 461

- may be difficult and restricted to transferring only to named parties - restriction are clarified in the operating agreement

Question 462

LLC Capital

Answer 462

- easier to raise in an LLC than in a proprietorship - similar to the ease of raising capital in a partnership - no limitation on the # of members or types of members in an LLC - members may include foreign individs, estates, trusts, corps - LLCs may allocate items of income and gains in any manner agreed to by the members in the operating agreement and can also create different classes of ownership interest which have different rights

Question 463

Liability of an LLC

Answer 463

- most important feature is that the LLC's individual owners are protected from personal liability for the LLC's debts and obligations unless they personally guarantee such obligations - liability obligation is not absolute - can pierce the veil in extraordinary cases of owner abuse or failure to maintain a clear and continuing identity

Question 464

LLC Management and Ops

Answer 464

- managed by an operating agreement - op agreement is similar to corp bylaws and may be amended from time to time - agreement specifies how and who will manage the LLC, how interests may be transferred - op agreements sometimes specify simple majority rules for some decisions, super majority rules for other decisions, and unamnimous votes for special situations (caution should be used bc they give a minority owner a veto power over all other members) - an LLC is not legally required to have an operating agreement - if an LLC does not have an operating agreement, it will by default be governed by the state laws regarding LLCs - it is best to have a written op agreement

Question 465

LLC Income Tax and Payroll Tax

Answer 465

- has a single member and is disregarded for fed income tax purposes - owner must file schedule C of form 1040, same as the proprietorship - an LLC with 2+ members can elect to be taxed for fed income tax purposes as a partnership, an Scorp or a C corp - once elected, the tax status will dictate the handling of self-employment tax and fringe benefits - as a pass-through entity an LLC's income is taxed to members at their personal rates - LLC losses are deductible on personal income tax returns to the extent of basis and may be limited by the passive activity rules - no gain or loss is recognized upon the distribution of appreciated property from an LLC to the member - gain will only be recognized to the extent that cash received exceeds the members adjusted basis - LLCs are usually taxed as partnerships - members are not allowed to exclude from GI the value of fringe benefits paid on their behalf by the LLC - usually taxed as partnerships - income earned by the LLC members is normally subject to self-employment tax on the tax returns of individual members except: LLC income derived from rental real estate and for LLC members who are not the managing member and are the equivalent of LPs - LLCs are usually classified as partnerships for fed income tax purposes - if an LLC is classified as a partnership for income tax purposes, the LLC must file an info return, Form 1065, detailing the items of income and expense that will be reported on the members amount of income, loss, deduction and credit - if LLC is classified as a corporation, the LLC must file form 1120 and will be responsible for any tax on the biz income

Question 466

Advantages of LLCs

Answer 466

- members have limited liability - # of members is unlimited but a single member LLC is a disregarded entity for tax purposes - members may be individuals, corps, trusts, other LLCs, and other entities - income is passed through to members, on schedule K1 - double taxation affecting most C corps is avoided if partnership tax status is elected - members can participate in managing the LLC - distributions to members do not have to be directly proportional to the members ownership interests as they do for S corps - can have multiple classes of ownership - entity may elect to be taxed as a partnership, an s corp, or a c corp

Question 467

Disadvantages of an LLC

Answer 467

- may have limited life - transfer of interests is often difficult and sometimes limited by operating agreement - some industries or professions may not be permitted to use LLC status - laws vary from state to state regarding LLCs - Laws are relatively new for LLCs so precedent from prior court cases are limited - for tax purposes, the complex partnership rules generally apply - members not meeting exceptions are subject to self-employment tax on all earned income if partnership status is elected

Question 468

C corps

Answer 468

- corps are chartered legal entities formed by one or more individuals by meeting state statutory reqs necessary for the formation of a corp - S corps are C corps with a special tax election

Question 469

Formation of C Corps

Answer 469

- can only be created by filing a charter doc with the state of incorporation which reqs to disclose its name, # of shares, and the purpose of the corp - the corp will be req'd to name a registered agent located in the state of incorporation -

Question 470

C Corp Interest

Answer 470

- ownership interests in a corp are held by a shareholder and are evidenced by shares of stock certificates - shares may be easy to transfer if there is a market, but certain small corps restrict the transfer of shares through a different shareholder agreement - shares of stock issued by the corp may be all one class or several classes

Question 471

C corp capital

Answer 471

- c corps can raise capital easier than a proprietorship or partnership - the limited liability status appeals to outside non-EE owners and investors

Question 472

C Corp Liability

Answer 472

- limited to the invested capital | - individual shareholders of the corp have limited liability

Question 473

C Corp Management and Ops

Answer 473

- managed by 1+ officers appointed by the BoD - BoD is the governing body of the corp - appoints various officers to run the corp - BoD acts in a formal way and is required to meet certain formalities - required to observe corp formalities and maintain good standing with sec of state

Question 474

C Corp Income and Payroll Tax

Answer 474

- taxed as a C corp unless C corp status is elected - must file form 1120 - pay taxes on their own income - owner of C corp and S corp are treated as EEs for payroll tax purposes - owner/EEs compensation is not considered self-employment income - cash distributions to a shareholder/EE in his capacity as a shareholder rather than as an EE are considered to be divs - C corp is not allowed to take a tax deduction for divs distributed to shareholders, but shareholders must include divs in their GI - the income of a C corp is taxed TWICE, once at the corp level and anther at the shareholder level when divs are distributed - in a closely held corp, careful tax planning can minimize/eliminate this double taxation - when non-cash distributions of appreciated property are made to shareholders/EEs, gain must be reorganized at the corporate level as though the property had been sold and the cash proceeds distributed - this gain must be reorganized at the corp level - for an Scorp the gain is passed through to shareholders and taxed on their individual income tax returns based on their ownership interests in the S corp - appreciated assets can be distributed by an LLC or by any entity tax as a partnership w/o any gain recognition at the time of distribution

Question 475

Tax Formula for a C Corp

Answer 475

``` = Total Income - exclusions from GI ___________ = GI - deductions ___________ = taxable income ```

Question 476

Corporate Income Tax rates

Answer 476

21%

Question 477

dividend received deductions with < 20% ownerships

Answer 477

50%

Question 478

dividend received deductions with at least 20% and < 80% ownerships

Answer 478

65%

Question 479

dividend received deductions with at least 80% ownerships

Answer 479

100%

Question 480

Corporate Taxable Income

Answer 480

= Gross income - allowed deductions

Question 481

Personal Service Corp PSC

Answer 481

- a C corp in which substantially all of the activities involve the performance of services in the fields of health, law, engineering, architecture, acctg, actuarial science, or consulting and all of the stock is owned by EEs - taxable income is taxed at a flat rate of 35% not at regular corporate income tax rates

Question 482

Double taxation

Answer 482

- taxed at the corporate level | - taxed at individual level

Question 483

Advantages of a C corp

Answer 483

- ease of raising capital - lim liab of shareholders - unlimited life of entity - ease of transfer of ownership interests - generally more management resources - shareholder/EEs may receive the full array of ER provided TF fringe benes

Question 484

Disadvantages of a C corp

Answer 484

- potential for double taxation - admin burdens - more difficult to form and dissolution can cause taxable gains - borrowing may be difficult without stockholder personal guarantees, which negates part of the advantage of LL - reqs a registered agent - reqs a fed tax ID #

Question 485

S Corps

Answer 485

- created under state law by first forming a C Corp and then filing S election with the IRS (same for C corp) - may not have more than 100 eligible shareholders - restricted to individuals who are US citizens /residents, estates, certain trusts, and charitable orgs - An Electing Small Biz Trusts is one of the trusts that can own an S Corp - must be an eligible corporation created under the laws of the US - insurance companies, domestic international sales corps and certain financial institutions are not eligible for S corp status - allowed only 1 class of outstanding stock (may have voting rights and shares with no voting rights)

Question 486

S Corp Interest, disposal and dissolution

Answer 486

- ownership interests in an S Corp are held by shareholders and are evidenced by shares of stock - transferability of shares may be restricted by shareholder agreement

Question 487

S Corp Capital

Answer 487

- easier to raise capital because of the limited liability protection - the limited # of allowable shareholders may have a negative affect the the ability to raise capital - Recent changes in the IRC allow close family members to be treated as a single liability shareholder

Question 488

S Corp Liability

Answer 488

- offers same protection as a C corp or LLC - shareholders liability for the acts, omissions, debts, and other obligations of the corp are limited to the shareholders cap contributions - shareholders will be personally liable for the debts of the corp: - lender to a closely held corp requires that the primary shareholders guarantee the loan to the corp. if this is the case, the shareholders are liable to the extent of their guarantees plus capital contribution - a court may ignore the legal fiction of the corp as an entity (pierce the veil) when the corp has been used to perpetuate fraud, circumvent law, accomplish an illegal purpose, or evade law - courts may disregard the corp form of entity if the corp is not maintained as a separate entity from its shareholders. This arises occasionally in the case of closely held corps

Question 489

S Corp Management and Ops

Answer 489

- # of shareholders is limited to 100 - can only have 1 class of stock - LLCs, partnerships, and other corps are prohibited from becoming S corp shareholders - non-resident aliens and most trusts may not be s corp shareholders

Question 490

S Corp Income Tax and Payroll Tax

Answer 490

- income is passed through to shareholders and is not taxed at the corp level - provides many of the benefits of a corp without any double tax of income earned by the corp - owners/EEs are EEs for payroll tax purposes - add'l distributions to shareholders beyond reasonable comp are treated as divs not subject to payroll tax - div distributions to shareholders are not subject to income tax at the time they are distributed - divs usually represent the distribution of income that has previously been taxed to the shareholder - in-kind distributions of appreciated assets will be treated as a deemed sale, which generate a cap gain in the case to all shareholders in proportion to their ownership even if the asset was only distributed to 1 shareholder - files form 1120S and provides each shareholder with a Form 1120S Schedule K1

Question 491

Tax Ramifications of Formation of an S corp

Answer 491

- formed in the same manner as a C corp | - the basis of a shareholder in S corp stock is similar to that for partners in a partnership

Question 492

Tax Ramifications of Biz Ops of an S corp

Answer 492

- s corp is not required to pay income tax at the entity level - s corp must file an info return Form 1120S - shareholders must take into account their pro rata share of corp taxable income and any separately stated items in computing their taxable incomes - each shareholders distributive share of items is reported on K1, which is furnished by S corp to both IRS and shareholder - ordinary income allocated to a shareholder from an S corp is not subject to self employment tax - shareholders taxable basis in the stock must be adjusted each year to reflect the allocated items of income and expense - AB is increased by a shareholders distributive share of both taxable and nontaxable S corp income and is decreased by the shareholders share of S corp losses, nondeductible expenses, and distributions

Question 493

Personal Income Tax Return from an s corp outstanding shares

Answer 493

= reported taxable income * (# days held / 365) * (# of shares / S corp total # of shares)

Question 494

Amount of Passive Losses from rental real estate

Answer 494

up to $25,000 in passive losses can be deducted from rental real estate activity IF: - client actively participates (maintenance, paints, screens tenants) - clients MAGI is < $100k (reduced by $1 for every $2 that MAGI exceeds $100k)

Question 495

Personal Use Property

Answer 495

- rented for < 15 days - income is NOT taxable (rental expenses are NOT deductible) - Mortgage interest and property taxes are 100% allowed on Schedule A

Question 496

Rental Use Property

Answer 496

- rented for 15 days+ - used personally less than or = to the greater of 10% of rental or 14 days - include income - can deduct expenses but must be apportioned between personal and rental use - can deduct loss up to $25k (phased out at $150k) over $100k reduced by $0.50 - property taxes for rental use are limited to the deduction of $10k

Question 497

Personal vs Rental vs Mixed Use Property

Answer 497

Question 498

SALT (state and local income tax) cap for personal, mixed, and rental use property

Answer 498

- $10,000

Question 499

Mixed Use Property

Answer 499

- rented out for > 15 days AND used by owner for > 14 days or 10% + of rental days - include rental income, apportion personal and rental expenses - NO losses

Question 500

Deferred gain transactions

Answer 500

- these transactions are REALIZED not recognized income (received cash in hand/bank account) - like kind exchanges 1031 (rolled back into successive assets) - involuntary conversion 1033 (natural disaster, fire, devastation for insurance proceeds payable to us) - life insurance proceeds 1035 (swapping like policy for like policy LL AA LA not AL)

Question 501

determine if person is moving up in value, if so recognize no gain but increase in basis

Answer 501

like-kind exchanges

Question 502

Section 1031

Answer 502

- applies to real property held for either: - productive use in a trade/biz an investment - does NOT apply to: - tangible personal property, inventory, stocks, bonds, notes, interests in partnerships, certificates of trusts OR beneficial interests

Question 503

Tangible personal property TCJA

Answer 503

- now has a tax consequence!!! | - recognize gain NOW

Question 504

Nontaxable Exchanges: Like-Kind Exchanges

Answer 504

REAL ESTATE: - land for building, land for land, building for building - US realty for US realty - foreign realty for foreign realty - transactions must be economically equal - anything not like-kind = BOOT Delayed Real estate transaction: - time limit on completion - almost always simultaneous exchanges - new property must be identified within 45 days of when old property was transferred - new property must be RECEIVED by the earlier of 180 days when the old property was transferred or the due date for the tax return covering the year of the transfer

Question 505

BOOT

Answer 505

- any time there is unlike property exchange - cash - equipment - forgiveness of debt (debt relief) WHO IS GETTING DEBT RELEIF = they receive boot (like cash) - receipt of boot = gain recognition equal to the lesser of boot received (FMV) or gain realized - no loss is recognized even when boot is received - if boot exceeds gain = reduction of basis - the transfer of boot property = recognized as a gain/loss on that property - treat as if boot property sold for its FMV

Question 506

receive boot

Answer 506

- recognize gain to the extent of boot received, same basis | - if boot exceeds gain, then reduce basis

Question 507

Pay boot

Answer 507

- no gain, increase basis by boot received

Question 508

losses realized in a like-kind exchange

Answer 508

- not recognized until the replacement property is sold

Question 509

Passive Income

Answer 509

- rental income

Question 510

Limited partner

Answer 510

IS NOT an active participant

Question 511

General Partner

Answer 511

- IS an active participant

Question 512

reduces a TPs at-risk amount

Answer 512

- passive losses which are used against passive income from another source

Question 513

increase the TPs at-risk amounts

Answer 513

- cash and adjusted basis of property contributed to the activity - amounts borrowed for use in the activity for which the TP is personally liable or has pledged as security property not used in the activity - TPs share of amounts borrowed for use in the activity that is qualified non-recourse financing

Question 514

Extent which rental losses of an active participant be deducted against active and passive income

Answer 514

- $25k of losses from rental property income may be deducted against OI - TP must be considered ACTIVE in that they participate in the general management and decision making of the property - the $25k is reduced $1 for every $2 over an AGI limit of $100k - When AGI reaches $150k, deduction is lost and treated as regular passive income

Question 515

material participant

Answer 515

- TP dedicated >500+ hrs to the activity - TP dedicted >100+ hrs and the most of anyone - TP can join similar activities and achieves the >500 hrs rule

Question 516

Summary of Rental Property Exceptions to Passive Categorization

Answer 516

1. Customer use less than or equal to 7 days 2. Customer use less than or equal to 30 days and significant personal services provided 3. Extraordinary personal services are provided 4. Rental activities incidental to non-rental activity 5. Rental activity available during business hours for nonexclusive use of customers 6. Rental property used in an activity conducted by partnership, etc. where the taxpayer is the owner and an active participant

Question 517

a requirement of the individual "real estate investor exception" to the passive activity loss rules

Answer 517

The taxpayer must own at least 10% of the value of the real estate. The taxpayer must have an AGI of less than $150,000. The taxpayer must actively participate in the activity.

Question 518

The rules for material participation are:

Answer 518

1. More than 500 hours of participation 2. Taxpayer is the only one who substantially participates 3. Taxpayer spends greater than 100 hours in the tax year and no one else spends more 4. Taxpayer has materially participated in any 5 of the previous 10 years 5. The activity is a personal services activity and the individual has materially participated in any 3 prior years 6. Taxpayer participates 100 or more hours in this activity and total participation in all such activities exceeds 500 hours A is incorrect because he would be a material participant. The rule is > 100 hours and no one spends more. They can spend the same, but not more

Question 519

The IRS has three classifications of income

Answer 519

active, passive and portfolio

Question 520

factors that should be considered in determining whether an activity is treated as an appropriate economic unit for the grouping of passive activities

Answer 520

The similarities and differences in types of business. The extent of common control. The extent of common ownership

Question 521

Dependent Test

Answer 521

Gary Saxbury Must Call Jeanne - Gross income - Support - member of HH - citizenship - joint return

Question 522

Section 179

Answer 522

- occurs when the asset is sold before it would have been fully depreciated - occurs when the biz use drops below 50%

Question 523

dependent care credit

Answer 523

20% on up to $3,000/child | max of $6,000 ($6k * 20%) = $1,200

Question 524

Eligibility of a dependent care credit

Answer 524

- TP must provide 1/2 cost of maintaining the HH, which is also the principal residence of the child - child must be a dependent - if married, both parents must work/go to school

Question 525

Refundable tax credit

Answer 525

- Earned Income Credit

Question 526

Non refundable tax credit

Answer 526

- foreign tax credit - tax credit for rehab expenses - disabled access credit

Question 527

Adoption Credit

Answer 527

- the lesser of the adoption expenses, $14,890, or amount of tax due

Question 528

Child Tax Credit Age Cutoff

Answer 528

17 or older

Question 529

Qualified Dependent Credit

Answer 529

- applies to qualified dependents and/or qualifying children 17 and over - It is limited to $500

Question 530

The "child tax credit" applies to

Answer 530

qualifying children under age 17 and was expanded under TCJA to $2,000 per child, with the possibility of up to $1,400 per child being refundable.

Question 531

The "earned income credit" is

Answer 531

a credit against the calculated tax, available to those with very low income, predominantly from earnings (wages) and it is a refundable credit

Question 532

LIFO

Answer 532

concerned with movements of costs through inventory, not goods cost of goods is assigned the most current inventory costs

Question 533

+/- from regular income to calculate AMT

Answer 533

- state income tax deduction

Question 534

Accrual basis TP

Answer 534

- recognizes the income the year the services or goods are PROVIDED

Question 535

Cash basis TPs

Answer 535

- year that the payment is ACTUALLY received

Question 536

income subject to self-employment tax

Answer 536

- self-employment income - income from an LLC when acting as a member-manager - distributive share of a general partner's income regardless of the nature of the partnership

Question 537

company discounts

Answer 537

cannot exceed Gross Profit % or 20% if an ER pays even less than discounted amount, then they have to take the difference between what they actually paid and the discount amount

Question 538

carry-over period for charitable contributions

Answer 538

- 5 years + initial year (6 years)

Question 539

CANNOT take deductions for unreimbursed EE business expenses

Answer 539

- airfare - lodging - meals - tuition and fees

Question 540

amount of deduction that can be taken for misc itemized deductions subject to 2% of AGI floor

Answer 540

- none!!!

Question 541

No longer itemized deductions

Answer 541

- job related moving expenses - tax return prep fee - unreimbursed EE expenses

Question 542

reconstructive surgery

Answer 542

- IS deductible medical expense subject to 7.5% AGI

Question 543

Casualty Loss

Answer 543

- not allowed on personal property only on

Question 544

non-deductible charitable materials

Answer 544

- cannot deduct artists time spent on the piece or time | - cannot deduct artists contribution or pro-rated overhead

Question 545

misc itemized deductions not subject to the 2% floor

Answer 545

- gambling losses tot he extent of gambling income - equity in an annuitized contract at the annuitants death - repayments of income

Question 546

hobby activity

Answer 546

- If the activity earns a profit in three out of five years, the IRS has the burden of proof of showing that there is no profit motive, but if there has not been a profit in three out of the last five years, the taxpayer has the burden of proof. - There is no bright line test that requires an activity to be treated as a hobby activity based on the income trend of an activity - Hobby income is included in gross income above the line, while hobby expenses are not deductible.

Question 547

Who can take a qualifying child deduction of a divorced couple with equal "ownership"

Answer 547

- the parent with the higher AGI

Question 548

Kiddie Tax Deduction

Answer 548

greater of: - $400 + EI OR - $1,150 Anything above the deduction amount is taxable income for the child

Question 549

PERSONAL EXEMPTIONS ARE NOT ALLOWED

Answer 549

PERSONAL EXEMPTIONS ARE NOT ALLOWED

Question 550

In order to treat the LTCG as ordinary income to allow for a greater deduction

Answer 550

it needs to state the special election was made or they would like to maximize the amount they can deduct

Question 551

deductible margin interest

Answer 551

- interest - ordinary dividends - ST CGs NO LTCGS NO qualifying dividends

Question 552

Uncollected Rent

Answer 552

- not a deduction from OI because it was never included in taxable income

Question 553

Net Operating Loss

Answer 553

- can only offset up to 80% of the current years income - cannot be carried back - can be carried forward

Question 554

A TP must file if

Answer 554

- net earnings from self-employment are > = to $400 | - net earnings and income exceed standard deduction

Question 555

Qualified dividends if sold around ex-dividend rate

Answer 555

- dividends will qualify for qualified dividend treatment if the individual meets the requisite holding period, which is more than 60 days in the 121 days surrounding the ex-dividend date - Since he only held the stock for < 60 days the div does not meet the holding period

Question 556

are more favorable deductions to the TP

Answer 556

- above the line deductions

Question 557

Methods to postpone taxation

Answer 557

- contribute to an IRA | - owning cash value life insurance (earnings grow tax-deferred, earnings are taxable once w/d)

Question 558

Under the accrual method of accounting, the taxpayer (buyer) recognizes expenses when:

Answer 558

The buyer receives the seller's invoice.

Question 559

A cash basis taxpayer includes income from a service business when:

Answer 559

The client's check is received by the taxpayer.

Question 560

Worthless Security Deduction

Answer 560

$50k of losses as 1244 loss against OI and $3k LTCL | $53k max if > $53k

Question 561

Cafeteria Plan

Answer 561

- must offer at least one taxable benefit, usually cash, and one qualified nontaxable benefit - A cafeteria plan is appropriate when employee benefit needs vary within the employee group - Cafeteria plans are authorized by Section 125 of the Internal Revenue Code - A cafeteria plan is a written plan under which the employee may choose to receive either cash or taxable benefits as compensation or qualified fringe benefits that are excludable from wages

Question 562

Section 1245 immediate recapture

Answer 562

applied to the sale of depreciated assets

Question 563

1231 capital gain

Answer 563

- subject to 5 year lookback rule

Question 564

CANNOT deduct

Answer 564

- personal use asset losses are not deductible

Question 565

Non-taxable events

Answer 565

- changes to the value of land | - someone trying to profit off of purchasing land that will have changes made to it, potentially increasing its value

Question 566

requirements for the deferral of gain in a nonsimultaneous exchange under Section 1031

Answer 566

The replacement property must be like-kind property with respect to the original property. The proceeds from the sale of the original property must be held by an escrow agent. A replacement property must be identified within 45 days of the sale of the original property. The closing on the replacement property must take place by the earlier of 180 days from the sale of the original property or the due date (including extensions) of the tax return for the year the original property was sold.

Question 567

partially refundable tax credit

Answer 567

- AOTC | - child tax credit

Question 568

fully refundable credits

Answer 568

- earned income tax credit

Question 569

Child tax credit

Answer 569

- $2k per kid is allowed - allowed a max of $4k - $1,500 per kid is REFUNDABLE - max refund is $3k

Question 570

Section 179 Equation

Answer 570

= 1,080,000 - (>+ - 2,700,000)

Question 571

Section 179

Answer 571

can deduct up to $1,080,000 phase out begins at $1 over $1,080,000 and up to $2,700,000 CANNOT exceed amount of income - whatever not used can be carried forward

Question 572

Section 179 recapture rules apply when

Answer 572

the business use of an asset drops below 50% for a given year or when the asset is disposed of before it would have been fully depreciated

Question 573

Kiddie Tax Subject to Parents tax rate

Answer 573

anything > $2,300 in unearned income under 19

Question 574

Kiddie Tax w/ > $13k EI and > $13k UEI

Answer 574

UEI - 1,150 (kid tax) - 1,150 (std deduct) = whatever leftover is taxed at parents rate EI = EI amount - [12,950 (std deduct) - 1,150 (UEI std deduct)] = kids tax ** add back the UEI 1,150 to get kids tax rate

Question 575

Kiddie Tax w/ > $13k EI and > $13k UEI

Answer 575

UEI - 1,150 (kid tax) - 1,150 (std deduct) = whatever leftover is taxed at parents rate EI = EI amount - [12,950 (std deduct) - 1,150 (UEI std deduct)] = kids tax ** add back the UEI 1,150 to get kids tax rate

Question 576

if a tax return is filed more than 60 days late

Answer 576

the minimum failure to file penalty is the lower of $435 or 100% of the tax due The penalty will not exceed 100% of the tax due

Question 577

Amount a corporation can deduct for business startup costs under Sec. 195

Answer 577

A corporation can deduct up to $5,000 of business startup costs under Sec. 195 Expenses incurred in connection with issuing and selling stock are not deductible

Question 578

Cost recovery

Answer 578

a periodic expensing of tangible property, including real and personal property used in business

Question 579

Amortization

Answer 579

a periodic expensing of the cost of intangible assets

Question 580

Depletion

Answer 580

the expensing of natural resources as they are being used up

Question 581

C corporation

Answer 581

losses do not flow through to the owners

Question 582

the amount of imputed interest

Answer 582

the lesser of net investment income or interest calculated using the AFR less interest calculated using the stated rate of the loan

Question 583

The statute of limitations for a substantial understatement of income greater than 25%

Answer 583

6 years

Question 584

The statute of limitations for the collection of a deficiency by the IRS`

Answer 584

10 years

Question 585

The general statute of limitations under Section 6501

Answer 585

3 years

Question 586

IRC

Answer 586

- the 1st primary source of law

Question 587

administrative law sources

Answer 587

- the second primary sources of tax law

Question 588

The penalty for filing a fraudulent income tax return

Answer 588

is 75% of the deficiency

Question 589

DRUG RUNNING BIZ

Answer 589

- limited to COGS as an expense

Question 590

entities subject to self employment tax

Answer 590

- LLC - self employment income - share distrib. of a gen partners income

Question 591

C Corps

Answer 591

- do not report on their personal income tax return | - are not pass thru entities

Question 592

If the business is deemed to be a PHC by the IRS

Answer 592

a penalty tax of 20% can be imposed on the undistributed personal holding company income.