Income Tax

Question 1

Doctrine in which a court disallows a loss on the sale of an asset because the sale was not bona fine and was made for the purpose of realizing a loss.

Answer 1

Sham transaction.

Question 2

Is a gift of $30,000 taxable income?

Answer 2

No

Question 3

Ineligibility to claim a casualty loss deduction.

Answer 3

Vandalism, earthquake, hurricane, sonic boom; anything that is not federally declared disaster.

Question 4

Phase-out limits of itemized deductions.

Answer 4

None-it got repealed in the tcja.

Question 5

Requirement to file taxes.

Answer 5

Required if net earnings from self employment are at least $400.

Question 6

What form to use to amend the tax return?

Answer 6

Form 1040X

Question 7

Does penalty amount calculation include tax and/or interest deficiency?

Answer 7

Tax deficiency only.

Question 8

Inclusion/exclusion of scholarship in taxable income.

Answer 8

Exclusions: tuition and books. Inclusions: room and board

Question 9

What is not included in investment income?

Answer 9

Any long-term capital gains or qualified dividends.

Question 10

1099 “consultant” status

Answer 10

As a 1099 worker, the company isn’t required to pay withhold income or FICA tax.

Question 11

Accounting method for $25m+in revenue.

Answer 11

Accrual

Question 12

Inventory methods

Answer 12

LIFO and FIFO

Question 13

Can a limited partnership limit a general partner’s personal liability to the business?

Answer 13

No

Question 14

Which types of businesses must file federal tax returns?

Answer 14

All - certain entity returns are for info. purposes only.

Question 15

Basis of an owner of S corporation. Inclusion of the business’ bank loan that requires owner’s personal guarantee?

Answer 15

The bank loan will not increase basis.

Question 16

Why choose LLC over an S corp?

Answer 16

LLC allows to take more losses than an S corp. Basis for an S corp would be limited to cash invested in the business and direct loans, but not corporate debt.

Question 17

Taxation of a HALE (Health, accounting, law, and engineering) corporation.

Answer 17

HALE are PSC and taxed at 21%. A PSC with accumulated earnings > $150K will be exposed to 20% accum. earnings tax.

Question 18

Filing status that helps reduce business owner taxes?

Answer 18

C corp.

Question 19

Revocable vs. Irrevocable trust

Answer 19

1. If income is distributed from the irrevocable trusts it will be taxed as DNI.
2. If income accumulates in the irrevocable trust, it will be personal tax.
3. Grantor of the revocable trust will pay any income tax liability.

Question 20

Inclusion of property taxes and utilities in the adjusted basis calculation?

Answer 20

No as they’re currently deductible as expenses.

Question 21

Step-up basis rule for community state and common state ( eg. Jtwros)

Answer 21

Community State: both are full step up.
Common stale: only the deceased’s gets the step-up.
The survivor’s basis includes the deceaseds.

Question 22

Macrs definitions

Answer 22

1. It’s used to depreciate non-residential real property.
2. Requires the half-year convention for the acquisition year.
3. Requires mid-quarter convention if 740% of the depreciable property is put into service by the business during the 4th quarter of the tax year.

Question 23

Section 179 rules vs MACR rule depreciation.

Answer 23

Current deduction (section 179) is more cost effective than future depreciation (MACR depreciation).

Question 24

Recognition of gain for in-kind exchange.

Answer 24

Lessor of realized gain or boot received. If no boot is received (the person is giving boot) then no gain is recognized.

Question 25

Section 1244 stock.

Answer 25

A gain on a sale on a small business stock is a capital gain. $50K (single) or $100K (married) is maximum of loss treated as an ordinary loss. Any excess of $100K loss will se treated as capital losses limited to $3K per year.

Question 26

1031 exchanges’ applicability for real property and equipment?

Answer 26

Real property-yes.
Equipment - no.

Question 27

Is property tax itemized deduction a preference item or add-back item?

Answer 27

Yes its an add-back.

Question 28

Will selling your home reduce the amt payable?

Answer 28

Yes because it increases regular taxes for paying off mortgage (lower itemized deduction).

Question 29

Capital loss carry forward treatment for a deceased.

Answer 29

Loss can be claimed in the year of death (max $3K). Any unused can forward losses are lost after the year of death.

Question 30

Relationship between marginal income and tax- exempt securities.

Answer 30

The lower the marginal income, the less advantageous the tax-exempt income is.

Question 31

Publicly traded partnership (ptp) rules also known as master limited partnerships (mlps).

Answer 31

Income reported as portfolio income on schedule B. Losses may not be used to offset passive income-must carry forward and only used against the future income from the same partnership.

Question 32

Treatment of losses from active participation

Answer 32

Considered as passive losses and can be netted against passive income.

Question 33

Tax treatment of a debt relief.

Answer 33

IRS will treat it as if the taxpayer received income. Creation of phantom income.

Question 34

Charitable donation by a sole- proprietor. What’s the tax treatment?

Answer 34

Any donation made by an individual sole-proprietor through his business is considered as being made by the person, not the business. Schedule A as itemized deduction.

Question 35

Valuation of D stag property as charitable donation.

Answer 35

Valuation at basis even if its use-related.

Question 36

Entity: liability-risk-free. Guarantee partnership debt, and will have sporadic losses.

Answer 36

Partnership

Question 37

Entity: can take losses up to investment (basis).

Answer 37

S-corp

Question 38

Casualty loss calculation.

Answer 38

1. Less of basis or FMV.
2. Minus insurance coverage
3. Minus floor ($100)
4. Minus 10% of AGI

Equals deductible casualty loss.

Question 39

Inexpensive fringe benefits.

Answer 39

Section 125 plan, group life insurance up to $50K, and group dental.

Question 40

Surrender cost calculation for a mec policy.

Answer 40

[( FMV - basis) x tax rate] + 10% penalty on (FMV - basis). All ordinary income tax.

Question 41

10% penalty for a mec distribution before what age?

Answer 41

59 1/2

Question 42

Tax treatment of charitable gifts of inventory.

Answer 42

Based on what the property can se sold for.

Question 43

10% penalty for annuitizing an annuity.

Answer 43

Does not apply since the contract B annualized.

Question 44

Is there self-employment tax of salary and distribution from s-corp?

Answer 44

No. Salary paid by an s-corp is subject to FICA, not self-employment. Distribution excess earnings passed thru an s-corp are treated cis k-1 investment income, not self-employ.

Question 45

What is schedule h?

Answer 45

Household employees

Question 46

What is alimony recapture?

Answer 46

When there’s no alimony paid in the third year, subtract $37,500 from the total alimony paid in year 1 and 2.

Question 47

Capital gain brackets: 0%, 15%, 20%

Answer 47

0%: 10-12%
15%: 22-35%
20%: 35-37%