Income Tax Flashcards

Question

LLC (Risky entities)

Answer 1

Is a partnership if no more than 2 of the following: Centralization of management, limited liability, continuity of life or free transferability of interests If LLC may operate like a GP, then members can still be involved in daily operations

Answer 2

Sole Prop, Partnership, S corp and other pass throughs may deduct up to 20 percent of income if the taxpayer has qualified business income. Single taxpayer AGI < $182k or Joint <$364,200 can claim full deduction Partnerships: Losses deductible up to basis. Basis is cash contributed by partner, direct loans made by partner and partnership debt S Corp: Losses deductible up to basis Basis is cash contributed by shareholder, direct loans made by shareholder (3rd party loans not allowed)

Answer 3

Limited partnership where general partners are not personally liable for malpractice claims of the other general partner

Answer 4

For profitable businesses Advantages: Separate tax entity Unlimited investors (sale of stock) Limited Liability Continuity of life Dividend received exclusion (50% if 20% owner, 65% if 20-80% owner & 100% if >80% owner) Disadvantages: Corporate formalities Dividends paid after tax (Double taxation) Double taxation on accumulated earnings beyond certain limit

Answer 5

C Corp owned by HALE individuals. Flat tax of 21%, for profitable businesses H - Health A - Accounting, Architectural, Actors L - Law E - Engineering

Answer 6

Becomes an S corp by unanimous election of shareholders Advantages: <= 100 shareholders Only a single class of common stock, can be voting or non (not preferred) Domestic corp Individuals, estates and certain trusts can be shareholders Files on 1120S Disadvantages: Corporate formalities Sale of stock limited by eligibility standards

Answer 7

Any business can be a limited partnership. Must have one General Partner. Limited partner is passive investor and liable up to their capital contribution.

Answer 8

Corp: 1120 (Filing), W-2 (Employee), 1099 (Distributions) Sole: Schedule C (Filing), Sched. C (Employee), N/A (Distribution) Partnership: 1065 (Filing), W-2 (Employee), K-1 (Distributions) S Corp: 1120S (Filing), W-2 (Employee), K-1unearned (Distributions)

Answer 9

1. Trust is created intentionally. Estate comes into existence by operation of law upon decedents death 2. Estates operate for a limited period. Trusts operate for many years 3. Estates move property to beneficiaries. Trusts may retain property 4. Court supervises the estate. Trustee operates trust under private agreement

Answer 10

Estate: File 1041, due on 15th of the fourth month after the entity's year ends, only file if either >$600 gross income, any taxable income or bene is a nonresident alien. Estate can deduct admin costs, attorney fees and expense for preparing return Trusts: Must file using calendar year, except charitable trusts

Answer 11

Beneficiaries must report all income to be distributed, whether or not it was received and all amounts actually paid or credited up to the amount of their distributed net income

Answer 12

Also known as tainted or defective trusts. The following violations taint the trust and tax the grantor rather than the trust itself. 1. Trust income is/may be distributed or accumulated for later distribution to grantor or spouse 2. Trust income is/may be used to discharge any legal obligation of the grantor 3. Trust income is/may be used to pay premiums on life insurance of either grantor or spouse Can also be tainted for estate tax if grantor.... 1. Has Beneficial enjoyment: right to income or right to use/enjoy trust property 2. Has reversionary interest (interest that reverts back to grantor) that exceeds 5% at the time of death All others would be non-grantor trusts

Answer 13

Insurance Life Insurance Trust Unfunded: if yearly gift to the trust pays the insurance premium Funded: If lump sum (corpus) is given at beginning and income generated pays premium. Only the amount of the premium is taxable to the grantor. The remainder is taxed to the trust

Answer 14

Used as conduit for distributing income to beneficiaries. Beneficiaries pay the taxes not the trust. Cannot make charitable gifts

Answer 15

Taxed as a separate entity. It's irrevocable and grantor has not retained any control Income must or may be accumulated. Income accumulated taxed to trust, income distributed taxed to beneficiary. Can make charitable gifts, and corpus can be distributed *Not all irrevocable trusts are complex

Answer 16

Revocable: Grantor trusts, all income earned is taxed to the grantor. At death, trust becomes irrevocable corpus is either distributed or continues to later date. Irrevocable: Grantor gives up all rights in property transferred to trust. It becomes a non grantor trust. Can be taxed as simple or complex depending on whether all income is distributed in that tax year

Answer 17

Charitable deduction: Only for complex Administrative expenses All income the trust is required to distribute, doesn't matter whether or not it's actually distributed. Complex trust has a $300 exemption if it has to distribute all income and $100 if it is not required to distribute income

Answer 18

DNI (Distributable Net Income): Limits amount beneficiaries must report as gross income on distrubtion. The deduction is the lesser of the DNI and the distributions for the year. Must limit portion of distribution that is taxable to beneficiary

Answer 19

Cost Basis = Original purchase price or investment in any asset + improvements (including legal fees, commission and sales tax) Improvements: Increase cost basis, but must be capitalized first. Replacing A/C, plumbing or roof. Add fence, room. Pave Driveway. Incur assessment. Repairs: Deducted as expenses, never affect cost basis. Repair or pay for something are typical key words. Adjusted Basis = Cost basis less cost recovery (deductions). Deduction generates tax savings but reduces basis of the asset

Answer 20

Assets with no physical substance can still be recoverable similar to straight line depreciation

Answer 21

Creates phantom income for each year of the bond's life for the discount earned on that bond (often for zero coupon bonds)

Answer 22

Use the lesser of the FMV or the adjusted basis on date of gift. If FMV is less than adjusted basis: Use following for actual sale of the gift Gain if sale price is > Adjusted basis Nothing if between the two Loss if sale price is < FMV

Answer 23

Community: Receives a full step up in basis to FMV Noncommunity (common law): 1/2 step up on basis to FMV

Answer 24

MACRS requires half year convention for year of acquisition (recovers faster). Its used for non residential real estate property Recovery MACRS Straight Line Year 5 year 7 year 5 year 7 year 1) 20% 14.29% 10% 7.14% (straight is half for both 5&7) 2) 20% 14.29%

Answer 25

5 Year: Computer, Auto, Light Duty Trucks (1245 Property) 7 Year: Office furniture and fixtures (1245 Property) 27.5 Year: Residential rental property (1250 property) 39 Year: Nonresidential real property (1250 property) CORN Accronym, residential is more useful therefore shorter schedule

Answer 26

Allows for 1245 property to be deducted $ for $ to the taxable income for the taxpayer of any trade or business up to $1,160,000. Cannot create a loss though.

Answer 27

No gain or loss is recognized on exchange of certain like kind investments or for productive use in trade or business Real estate is only qualifying property. - Shopping center, rental property, apartment complex, farm, ranch Taxpayer must use property for business purposes (no primary residence)

Answer 28

Any consideration in addition to exchange in a 1031 exchange Boot Received: recognized basis Boot Paid: Add to your current basis Basis carries over from last property

Answer 29

Realized Gain: FMV of property acquired + boot - adjusted basis (amount will be provided) Recognized Gain: Lessor of realized gain or boot received (if no boot received answer is 0) Substitute basis: FMV of property acquired - (realized gain - recognized gain)

Answer 30

Short term gains & losses are netted against each other Long term gains & losses are netted against each other Remaining gains & losses are netted against each other (not gains & gains or losses & losses) Only $3k of losses can be used to offset ordinary income

Answer 31

LTCG Single Joint HOH 0% <=44,625 89,250 59,750 15% <=492,300 553,850 523,050 20% Anything Above the numbers in 15% STCG Taxed at ordinary income rates, long term collectible rates are 28% 1250 property long term capital gains are taxed at LTCG rates, but a special 25% depreciation recapture is applied when property is sold

Answer 32

3 methods FIFO Specific Identification: Identify specific shares to sell Average Cost: Average cost of all shares held. (Total cost held / # shares held)

Answer 33

Must have owned the home and it be their primary residence. $500,000 is excluded from gross income on sale for joint, $250k for single Can receive partial deduction if move is required by employer, health reasons or unforeseen circumstances (divorce or natural disaster). Deduction is percentage of how long you lived their prior to leaving

Answer 34

Applies to all 1245 property. Business claims cost recovery depreciation as a deduction of ordinary income. When 1245 property is sold for a gain: Look back and recapture the lesser of total CRD's taken or gain realized (ordinary income) recover any excess gain as 1231 gain. (If CRD's taken are < gain, the excess gain minus the CRD's)

Answer 35

If taxpayer makes an installment sale of tangible personal property all depreciation recapture must be reported as income in the year of sale.

Answer 36

No loss deduction for sale of a stock that is repurchased within 30 days

Answer 37

Like kind exchanges and installment sales are subject to related party rules, meaning if they sell the property within 2 years any gain not recognized is recognized on the date of sale

Answer 38

Alternative minimum tax rate is either 26 or 28%. AGI or Post 1040 income + Pref Items + Add back items - exemptions. Multiply by AMT tax rate Preference items that need to be added back for AMT calculation: IPOD Intangible Drilling Cost (Excess depletion) Private activity municipal bond Oil & Gas percentage depletion Depreciation (ACRS & MACRS, Not straight line) Add back items: Taxes: Property, state, city/income & sales Bargain element: On incentive stock options AMT Tax Payable = AMT - estimate regular tax (if answer is negative then its 0)

Answer 39

1. Accelerate the receipt of taxable income or defer payment of taxes (property/state income), deductible medical expenses, or charitable giving (increases taxable income) 2. Defer the exercise of ISO's to a later date or disqualify it so it becomes a nonqualified stock option 3. Purchase public purpose muni bonds (not private activity)

Answer 40

A trade or business where the taxpayer does materially participate. There are two types of passive activities: 1. Rentals, both equipment and rental real estate, and oil royalties 2a. Limited partnerships 2b. Partnerships, S-Corps and LLC's (both 2a and 2b the taxpayer cannot materially participate) May only deduct the loss to the extent of income generated from another passive activity

Answer 41

Publicly Traded MLP's: Cannot be used to offset losses from any other source. Losses are carried forward but can only be used for future income from that same partnership Non-Publicly Traded MLP's: Can uses losses to net against passive income generators. Can only take loss up to income generated can't take extra. PIG & PAL (Passive income generator & Passive Income Losses) When owner disposes of their entire position in a passive activity or dies, any suspended losses are fully deductible in that year.

Answer 42

Material: Taxpayer is involved in the operation of an activity on a regular, continuous and substantial basis. (Generally not a limited partner) Active: Requires bona fide involvement in management decisions. Must own >=10% interest in the property (can never be a limited partner).

Answer 43

Can deduct up to $25k in net losses for real estate. Phased out 2 for 1 with AGI between 100k-150k. Principal Residence (Not a passive activity): Rented < 15 days, income excluded from gross income Renting vacation home: included as a residence if owner uses it for personal purpose >14 days or 10% of the period of rental use.

Answer 44

Invest in low income housing that generates losses and credits Invest in GP's that is losing money (unlimited liability and pass through losses)

Answer 45

Widow: Can file jointly with deceased individual for that year. If they maintain the home for a dependent child, they can file jointly for the 2 years after the year of death Divorce: Finalized after 12/31/2018, alimony payments are not deductible, and recipient doesn't claim as income. Alimony is deductible if the below and finalized before 12/31/18 are met. - Cannot live or file joint tax return together at time of payment - Payments made in cash a. Payments can be made to cover rent, mortgage, tax or tuition liabilities b. If payee owns life insurance policy on payor, premiums paid would qualify for payor if they make them c. Payments in noncash (services, use of property etc) or payments to maintain property owned by payor and used by payee all do not qualify - Payments must be received by or FOB of payee spouse (not child support) - Payments cannot extend beyond the death of recipient spouse

Answer 46

Payments made in first two years - $37,500 = Recapture amount Amount recaptured is treated as ordinary income to payor (because they deducted too much in years 1 & 2)

Answer 47

Nondeductible to payor and nontaxable to payee. Never considered as part of alimony

Answer 48

Cash Contribution: Max 60% of AGI for total contribution (50% to public and 30% to private) For Appreciated property Public Organization: 50% of AGI Private Organization: 30% of AGI If using basis you can use up to 50% of AGI, up to 30% of AGI for FMV Use Related: Real Estate and Stocks Use-unrelated: Inventory, copyright, short term capital gain property, use-unrelated property (land or artwork). Must use basis but can take the full 100% up to the AGI limit of the organization donating too. Properties with a loss must use lower number, short term must use basis

Answer 49

Business cannot deduct >10% of its taxable income for charitable gifts Any business other than S-corp can deduct inventory as a gift.