Income Tax

Question 1

Qualifying Child

Answer 1

Must meet:
- Relationship Test
- Abode Test
- Age Test
- Support Test

Question 2

Qualifying Relative

Answer 2

• Relationship Test
• Gross Income Test (less than $4,700 for 2023)
• Support Test (more than 1/2)
• Not a qualifying child
• Citizenship/Residency Test

Question 3

Taxation of Compensation for Injuries & Sickness

Answer 3

• Workers’ Comp: excluded from gross income
• Punitive Damages: INCLUDED in gross income
• Emotional Distress Damages: INCLUDED in gross income

Question 4

Revenue Act of 1913

Answer 4

Created the Internal Revenue Code

Question 5

Primary Sources of Tax Law

Answer 5

• Internal Revenue Code
• Administrative Law Sources (IRS)
• Judicial Sources

Question 6

Failure to File Penalty

Answer 6

5% per month up to 25%
(Reduced by failure to pay penalty)

Question 7

Failure to Pay Penalty

Answer 7

0.5% per month up to 25%

Question 8

American Opportunity Tax Credit

Answer 8

• Applicable to first 4 years of post-secondary degree
• 100% of first $2000 / 25% of next $2000
• Refundable up to 40% ($1,000)

Question 9

Lifetime Learning Credit

Answer 9

• Max. 20% of expenses up to $10k
• Income phase ours exist

Question 10

Property Classes (for Depreciation)

Answer 10

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

Question 11

Section 179

Answer 11

Can immediately expense $1,160,000 of tangible business property placed in service during the year
(Phaseout for property over $2.89 million - section 179 reduced by excess)

Question 12

Entities - Easiest/Cheapest to Form

Answer 12

Proprietorships & General Partnerships

Question 13

Entities - Lowest Administrative Req.

Answer 13

Sole Proprietorships

Question 14

Entities - Easiest Transferability & Dissolution

Answer 14

Sole Proprietorship

Question 15

Entities - Liability Protection

Answer 15

Limited Liability Partnerships (LLPs) and Limited Liability Companies (LLCs)

Question 16

Sole Proprietorship

Answer 16

• owned/operated by a single individual
• easy/cheap to form
• owner maintains legal liability
• business expenses deductible from gross income

Question 17

General Partnerships

Answer 17

• more sources of initial capital than sole prop.
• low administrative burdens
• income/losses passed through
• more difficult than sole prop. To transfer interest
• unlimited liability

Question 18

Limited Partnerships

Answer 18

• favorable pass-through partnership tax status
• flexibility in structuring ownership interests
• limited partners have limited liability
• must file with state to register
• losses for limited partners are generally passive losses

Question 19

Limited Liability Partnerships

Answer 19

• pass through partnership taxation
• flexible ownership interest structure
• partners not liable for acts of other partners
• must file with state to register
• unlimited liability for own acts of malpractice

Question 20

Family Limited Partnerships (FLP)

Answer 20

• control retained by senior family member
• some creditor protection
• expensive to establish and significant operational requirements

Question 21

Limited Liability Company (LLC)

Answer 21

• limited liability for members
• unlimited number of members
• income passed to members through K-1
• can have multiple classes of ownership
• difficult to transfer ownership interest
• laws vary from state to state

Question 22

C Corporation

Answer 22

• Ease of raising capital
• Shareholders have limited liability
• unlimited life of entity
• administrative burdens
• requires federal tax ID
• difficult to dissolve

Question 23

S Corporation

Answer 23

• essentially a C corp. with different tax filing
• no more that 100 shareholders
• ownership is restricted to US citizens/residents, trusts, estates, and charitable orgs

Question 24

Appreciated Property with Gift Tax Paid ( Formula)

Answer 24

Donor’s Basis + (Net Appreciation in Gift / Taxable Gift) x Gift Tax Paid