Income Tax Flashcards
Hobby Loss Rules
Income is reportable.
TCJA eliminated the ability to deduct hobby loss expenses.
Any activity generating net income (profit) in three out of the five consecutive years is a business (not a hobby) and for horses it is two out of the seven consecutive years.
To be a Schedule C business it has to be conducted with continuity and regularity in a business like manner with a good-faith objective of making profit from it.
Tax Research Sources
Federal Tax Coordinator by the Research Institute of America
Federal Tax Service by the Commerce Clearing House Incorporated
Five Basic Categories of taxpayers who may be required to file a tax return
- Individuals (US citizens)
- Dependents
- Children under 24 (kiddie tax)
- Self-Employed
- Aliens
Filing Dates
Estimated Taxes:
- April 15th - 1st
- June 15th - 2nd
- September 15th - 3rd
- January 15th - 4th
Taxes are due on April 15th with a 6-month extension to file (not to pay) to go to October 15th
When filing an extension you still need to pay (can choose not to but there is a penalty)
If computation error is made, IRS sends a corrected amount and demand of any balance due (cannot go to court for this)
Forms
1040 - Individual Return
1040x - Amended return
1041 - Estate tax return
1120 - C Corp
1120S - S Corp
1065 - Partnership (informational only)
K1 - distribution to person
1099 - SE
Audit Representation
Can be represented by a CPA, EA, Attorney, Enrolled Actuary, or any other person permitted to represent a taxpayer before the IRS.
CFP is not classified as an audit representative
Penalties: Frivolous Return / Negligence / Fraud
Frivolous Return ($5,000 fine)
Omits important information to determine tax liability, shows substantially incorrect tax, based on the desire to not pay the tax
Negligence (20% penalty on underpayment attributed to negligence)
Accuracy related penalty is imposed if paying less tax is due to negligence or disregard of rules with no intent to defraud. Includes failure to make reasonable attempt to comply with the law or have reasonable care in preparing a tax return or not keeping books.
Fraud (75% penalty on underpayment attributed to fraud)
Intent to cheat the government by intentionally understating tax liability. Implies systematic omission of substantial amounts of income or by deduction of non-existent expenses.
CFP board is more focused on penalty amount rather than definitions
Failure to Pay and Failure to File
Failure to Pay
0.5% penalty per month to a max of 25%
Failure to File
5% penalty per month to a max of 25%
Best practice is to file, penalties coordinate with each other for first five months, but both can be applied
Estimated Tax
To avoid underpayment penalties need to either:
- Pay 90% of current year tax liability
- Pay 100% of prior years if AGI for prior year is less than $150k
(110% of priors years AGI if AGI of prior year is over $150k)
Different Filing Statuses and Requirements
Single: Just single
MFJ: Need to be married at least on the last day of the tax year (both spouses liable for tax)
MFS: Everything cut in half, this avoids exposure to claims of tax fraud of spouse (would avoid liability under innocent spouse rules if MFJ)
Qualified Widower: First year spouse dies you file MFJ, 2 years after that you can file qualified widower if you have a qualified child and maintain a home for them.
Head of Household: Maintain a home for your child and provide more than 50% of your children’s support.
Inclusions and Exclusions of Gross Income
Inclusions: Dividends - Interest - Schedule C income - capital gains - real estate - punitive damages (except for wrongful death) - wages - IRA distributions - pensions - alimony before 2019 - unemployment - SS
Exclusions: Gifts - Inheritances - Workers comp - Muni interest - child support - Compensatory damages
Tax Calc Process
Gross Income
(less adjustments)
AGI
(less deductions)
Taxable Income
(less credits plus other taxes)
Tax liability
(less payments)
Net tax due
Scholarship income
If receiving a scholarship, the amount in excess of tuition and fees and books is includable in income.
Qualified Dividend and LTCG taxation
LTCG rates
Tax-Free Fringe Benefits
Health plan premiums
Insurance premiums on first $50k
Company car for business only
Transit Pass ($315/mo. cap)
Exclude $5,000 for dependent care provided during a tax year
Exclusion from gross income of $5,250 per year of education assistance
Assitance programs including adoption credit for qualified expenses
Employer provided parking ($315/mo. cap)
Discounts on products up to employer’s gross profit percentage
Occasional overtime meal money (not season tickets)
Discounts on services up to 20%
Taxable Fringe Benefits (Tested)
- Health insurance premiums for self-employed, partners, more than 2% owners of S Corp are taxable income.
But…
Premiums include medical (health), dental, and long-term care are all 100% deductible as an above the line adjustment to income.
Disability premiums are not deductible in this case.
- Insurance premiums employer pays in excess of $50k of death benefit are taxable.
Premiums for SE health insurance are deductible up to the amount of net income from SE. If net income is less than total amount of health insurance premiums then you can only deduct up to net income.
Can include premiums for yourself, spouse, dependents, and children under 27
For S-Corp the Corp takes a deduction and it is income for the owner but then a deduction for the owner on the personal return.
Student Loan Interest Adjustment
Max of $2,500
MAGI phaseout $80k-95k
$165k-$195k
MAGI
AGI + muni interest, non-taxable SS income, and student loan interest.
Mostly tested around tax-exempt income in determining whether SS benefits are taxable.
Standard Deductions
AGI is reduced by greater of standard or itemized deductions.
No need to memorize.
Extra standard deduction is $1,550 for MFJ for every person above 65 and everyone that is blind.
For single filers the extra standard deduction is $1,950 for the same things.
MFJ is twice the standard deduction as MFS or single
Itemized deduction phaseout
Taken away by the TCJA (no longer a thing)
Qualified Residence Interest Rules
Proceeds of a mortgage used to buy, build, or improve a taxpayer’s home combined with multiple homes can only go to $750,000. Interest paid on the first $750,000 is deductible.
Includes principal mortgage and home equity loan.
Interest on loans before 2018 is grandfathered to $1M.
Home equity loan or mortgage has to be for improving the home and be secured by the home.
Refinanced mortgage cant be more than FMV of home.
Investment Interest Deduction (Margin Interest)
Interest paid on indebtedness, margin interest. Max deduction allowed is limited to the taxpayer’s net investment income.
Net investment income for this includes: STCG, interest income, nonqualified dividends, and royalties.
LTCG and qualified dividends are included if chosen to be taxed at ordinary income rates.
Margin interest accrued to buy and hold Municipal bonds is not tax deductible.
Excess of margin interest expense can be carried forward.
Usually deduction has to be of common stock that is held for collateral.
Miscellaneous Fees Deduction
NOT ALLOWED
investment advisor fees, etc, not allowed because of TCJA
Casualty Losses (schedule A)
Can only be claimed for unreimbursed losses from a federally declared disaster.
This is complete or partial damage, not deterioration. Need a timely insurance claim.
Calculation:
1: Choose the lower of the basis or the FMV
2: Less: insurance coverage
3: Less: $100 floor (per occurrence)
4: Less: 10% of AGI (total for the year)
Home Office Deduction
Not available for employees
Statutory employees like life insurance salesman can claim this.
Self-employed people can claim it.
Need to prove they use the office exclusively and on a regular basis.
Home office must be used for actual business uses.
Must be no other fixed location where the taxpayer can conduct business from.
Gross Income Limit for Home Office Deduction
Cannot claim a loss with the home office deduction.
Gross schedule C income: $50,000
Expenses: $45,000
Home Office Expense: $10,000
Can only deduct $5,000 of office expenses (cannot claim a loss with this deduction)
Meals and Entertainment Expenses
More strict with TCJA
Meals with clients cannot be lavish and have to be business reasons.
Office parties, meals for convenience of employer, and employee meals while travelling are allowed.
Meals are 50% deductible.
Tickets to sporting and cultural events are no longer deductible by employer.
Entertainment expenses are NOT deductible.
Personal Exemptions
ALWAYS 0
These were removed by TCJA
Marginal Tax Rate
Last dollar of income is taxed at this.
For LTCG:
Use 0% if between 10-12%
Use 15% if between 22%-35% (Under $583,750 MFJ)
Use 20% if over 35% (Over $583,750 MFJ)
Medicare Taxes
Medicare tax rate is 1.45% and increases to 2.35% over these wages:
MFJ: $250k
MSF: $125K
S: $200k
Employers will withhold always when wages are above $200k
Net Investment Tax
Additional 3.8% Medicare tax is applied on investment income for taxpayers above $200k (single) and $250k (MFJ)
Applies to lesser of amount over tax level or total investment income.
Investment income includes STCG, LTCG, qualified and nonqualified dividends, interest income, and non-qualified annuity distributions
Does not include Muni bond interest or IRA withdrawals
Kiddie Tax
Earned income gets $450 added to it and that is the new deduction. Greater of that or $1,300 normal deduction.
Can be no more than standard deduction of $14,600
Taxed at the parents tax rate.
Self-Employment Tax
Pay both halves of SS and Medicare tax.
Based on net earnings from self-employment.
Test questions will usually not exceed $168,600 for SE income. Above that is Medicare tax only.
Shortcut is net SE income multiplied by .1413 to find the SE tax.
Half the SE tax is an above the line deduction.
Child Care (Dependent Care) Credit
Both parents need to work.
Children eligible until age 13
Qualifying expenses are limited to $3k per one child or $6k for two or more. This amount is multiplied by 20% for the actual credit. Max credit is $1,200 (normally)
Technically percentage can go from 35%-20% depending on income but usually is 20%
Child Tax Credit
Can claim a credit of $2,000 per qualifying child under 17. Available for child, stepchild, or foster child. MAGI phase-out is above $400k for MFJ and $200k for Single. $1,700 of the credit is refundable per child.
$500 family credit for dependents who are non-qualifying children. Over 17, elderly parents, disabled adult child, etc. Need to provide more than half their support. Same phase outs.
Foreign tax credit
US taxpayers that have paid income to foreign countries that the US is friends with can deduct those taxes or credit them dollar for dollar against their liability.
Retirement Savings Contribution Credit
Credit is 50%, 20%, or 10% of retirement plan/IRA contribution depending on persons AGI. ($76,500 MFJ)
Max credit is $2k single / $4k MFJ
Adoption Credit
Need to:
1. Adopt a child and have out-of-pocket expenses relating to it
2. Amount of tax credit is directly related to amount spent on adoption expenses. Special needs children get full credit.
Qualifying expenses count as anything to finish the process, does not include surrogate parenting or adopting your spouse’s child.
Max credit is $16,810 with MAGI phaseout $252,150 to $292,150
Claim the credit when adoption is finalized.
Credit for Elderly and Permanently and Totally Disabled
Available credit for someone who (1) reaches 65 or (2) is under 65 but is retired with a total disability and receives disability income
Earned Income Credit (refundable)
Tax credit for low paying jobs people under certain amounts.
Tax Deduction vs Tax Credit
Deduction reduces your tax by your tax rate.
Credit reduces your tax dollar for dollar.
Equivalent tax credit = Deduction * Tax bracket
Equivalent deduction = tax credit/tax bracket
Deduction is worth more to high income people than low income people
Credit is worth more to low income people than high income people
Income that doesn’t count as SE income (no SE tax)
Dividend or interest
Capital gains
Real estate income (rentals)
Income as a limited partner (passive)
S Corp wages
S Corp distributions
Qualified Business Income
20% deduction on QBI.
QBI is net income from pass-through business such as rental income, publicly traded partnerships, S-Corps, REITs, partnership income (limited too), and sole proprietorship income. Passive activities count too.
Determined on each separate business owned. If one loses money, that can be offset by QBI of another. If there is loss that can be carried forward and offset at the next year.
Pass-through income is broken down to personal service business (lawyers, actor, consulting, anything where revenue comes from talent of person) and all other business. Three tiers based on taxable income:
- Tier 1 (Less than $191,950 (S) or $383,900 (MFJ))
Full 20% deduction whether a personal service or not
Tier 2 (between $191,950 and 241,950 (S) or $383,900 and $483,900 (MFJ))
Personal service businesses start to phase out and non personal service get 20% deduction
Tier 3 (over $241,950 (S) or $483,900 (MFJ))
No deduction for personal service
Deduction based on wages and property for non personal services but can be 20%
Accounting Periods
Calendar year is to Dec 31st
Fiscal year can be the end of any other month not Dec
Cash Method vs Accrual Method of Accounting
Companies realize revenue in the year it is received with cash.
Cash is most simple and used for most under $25M of revenue.
Companies realize revenue when earnings process with goods or services is complete, regardless of when they get the cash.
Accrual has to be used if you have over $25M of revenue (over past three years) and have inventory. Also has to be used if C Corp over that amount.
Changing Accounting Method
Need approval from IRS
Long-Term Contract
Any contract with building or manufacturing property if not completed in the year in which it is entered into.
Installment Sales
Some or all of the amount realized on the sale consists of a buyers note, the seller may be entitled to use a unique method of accounting for capital gain realized to be spread over the life of the note rather than in one year.
Exceptions to the rule (all gain will be taxable in one year):
- All payments are received in one year
- Property is publicly traded securities
- Property is sold at a loss
- Property is sold to a related party who in turn sells the property within two years of the original purchase date
Calculation of gain on installment sale
Gross profit percentage = Profit / Total contract price
Gross profit percentage * payment = capital gain on the payment
LTCG or STCG depending on holding period
Inventory Valuation Methods
During inflationary (rising) prices
FIFO:
- Increases earnings
- Increases tax
- Accurately states current inventory prices
LIFO:
- Decreases earnings
- Decreases (defers) tax
- Understates current inventory prices
Specific Identification:
- Usually the best for getting the result you want
Net Operating Loss (NOL)
If you have losses in excess of income, this generates a NOL and is reported on its tax-return. No tax is incurred at that point and losses would be suspended and carried forward.
NOL sustained in one year may be used to reduce taxable income in a current year.
TCJA limits amount of NOL that can be utilized in a given year but no limit on carry forward.
Carrybacks of NOLs are not permitted.
Sole Proprietorship Pros/Cons
Pros:
Retirement plans (SEP)
100% medical premium deduction
No legal formalities
Conduit of income to owner
Cons:
Unlimited liability
Business dies with owner
Capital structure depends on owner
Partnership Pros/Cons
Pros:
Retirement plans (SEP)
100% medical premium deduction
Partnership agreement can be verbal
Conduit of income to owner
Cons:
Unlimited personal liability for acts of other (joint and several liability)
Partnership dissolves upon death or bankruptcy of a partner
Capital structure depends on owners
LLC Pros/Cons
May be classified as partnership or corporation. Can be partnership if no more than two of these are true:
Centralization of management
Continuity of life
Limited liability
Free transferability of interests
Ownership interests, disbursement of funds, capital structure, and other financial items are governed by a contract among owners and governed by state law.
Owners can be involved in daily activity without losing limited liability status, every member has limited liability against all debts
Limited Liability Partnership (LLP)
General partners are not personally liable for malpractice related claims from the other general partners. Useful for when a partnership wants to convert from an entity that does have unlimited liability. Can just easily convert.
When forming a new entity, flexibility of an LLC makes it a better choice.
Corporations
Separate tax entity. It distributes after-tax earnings to its owners as dividends and those get taxed a second time.
Flat tax rate of 21%. No more graduated tax or AMT.
Pros:
Separate tax entity (can reduce income of high earners if kept in Corp)
Unlimited amount of owners
Dividend Reduction
Limited liability
Continuity of life
Cons:
Corporate formalities
Dividends paid after tax (double taxation)
Accumulated earnings taxed
Corporation Dividend Deduction
US Corp investing in another US Corp gets a dividend deduction:
0-20% of ownership: 50% dividend deduction
20-80% of ownership: 65% dividend deduction
80-100% of ownership: 100% dividend deduction
Section 1244 Qualified Small Business Stock
Corporation (C or S) that was initially capitalized with no more than $1M. Loss of $100,000 per year on MFJ ($50k for S) is considered an ordinary loss. Can also take $3k capital loss.
Carried forward too.
Gain is capital gain.
S Corp
Need a unanimous vote from shareholders to become one.
Pros:
Limited liability
Conduit of income
Basis equals cash plus direct loans made by owner to S Corp
Cons:
Corporate formalities
Sale of stock limited
Cannot utilize NOL because it all passes through
Trust can be shareholder
Can issue voting and no voting stock
Limited Partnership
Need at least one general partner. They control the operations.
Limited partner cannot control anything or else they forfeit limited liability.
Limited partner liable for partnership debt only up to their capital contribution.
Business Choice Flow Chart
If Business if profitable:
Choose C Corp or PSC
If Business has losses then look at:
Is it risk-free? (no liability or enough insurance):
Choose Sole proprietorship or partnership
Is it risky? (liability):
Choose S Corp, LLC, or Limited partnership
If business says nothing about risk then do S Corp over sole proprietorship. Generally limited liability is what you should go for between two options unless they specifically say it’s risk free.
Even then limited liability is better.
Choosing Between Different Forms
C Corp - profitable and want a lot of owners
PSC - if one of the HALE
Sole Proprietorship - some losses, Want to do it yourself (risk-free)
Partnership - some losses, Want to do it with a person (risk-free)
LLC - some losses, Want limited liability, do it with another, and have basis increase with bank loans
S-Corp - some losses, want limited liability, do it with another, basis does not increase with bank loans
Limited - some losses, limited liability, don’t want the work
Conduit: Sole Proprietorship
Taxable income and loss is on schedule C. If loss, that offsets other income and can be carried forward as an NOL.
If business owner borrows money for business purposes, then interest paid is deductible without limit on schedule C.
No more carry backs for NOLs but you can carry forward.
Conduit: Partnerships
File informational return. Each partner includes in their return their part of the K1 reporting income/loss.
Losses are deductible up to basis. Basis equals (1) cash contributed; (2) direct loans made; (3) loans made to the partnership like bank loans (which the partner may be held responsible for)
Conduit: S Corps
Losses are deductible up to basis. Basis equals (1) cash contributed; (2) direct loans made
Bank loans are not included in S Corps owner’s basis even if personally guaranteed by S Corp owner.
Shareholders usually do not have personal liability for the debt when an S Corp takes on debt.
Conduit: LLC
Regardless of number of members, if it is a partnership then only a informational return is filed.
Same basis rules as partnerships (makes it a very appealing entity if the entity is going to be taking out bank loans)
Corporate Accumulated Earnings Tax
Tax is imposed in addition to regular (flat 21%) tax when a regular Corp accumulates over $250,000 or $150,000 for PSC’s. Corp needs a legit business reason to avoid the accumulated earnings tax. 20% tax.
Corp Distributions and NOL
Corps cannot deduct a dividend that is distributed. It is both taxed at the corporate level and at the shareholder level.
NOL is not felt by the owners of the Corp, it is carried forward to offset future income from the Corp. no carry backs.
Similarities between estates and trusts
Have beneficiaries
Have responsible person (PR or Trustee)
Transfer property
Administer property in a fiduciary way
Are distinct tax entities
Differences between estates and trusts
Estate comes into existence when someone dies, Trust can be established before
Estates operate for a limited time, Trusts can last long
Estates moves property, Trusts can hold it
Estates are supervised by court, Trusts by private arrangement
Filing Requirements
Both file 1041.
Estates can deduct accounting fees, attorney fees, and expenses of preparing return. Need to see whether it is better to take it on 1041 or 706. K1 is issued to beneficiary.
Deadlines
Due on April 15th on entity’s year end. Need to file a return if:
- Any taxable income
- Gross income of $600 or more
- Beneficiary is a nonresident alien
Choice of Taxable Year
Estate can choose calendar year or fiscal year. Get a $600 exemption on a short-period return.
Trusts can only choose calendar year unless a charitable trust.
Tax of Distribution to Beneficiaries
Beneficiaries are taxed on amount distributed and trust or estate is taxed on amount accumulated or retained. If it must distribute all its income, beneficiary needs to report that whole amount whether received or not.
If trustee has choice to distribute income then beneficiary needs to report:
- all income that is required to be distributed
- all amounts actually paid
Estate/Trust Tax Brackets
Very compressed
Grantor/Non-Grantor Trusts
A grantor trust is one where the grantor holds too much power, so the income is taxed to him. Other trusts are called non-grantor trusts.
Grantor trust rules:
IRC says that a grantor (rather than beneficiary) will be taxed on income of trust. These are tainted trusts. These violations create a tainted trust:
- Income is used for grantor or spouse’s benefit.
- Income is used for grantor’s legal expenses
- Income is used to fund a life insurance policy on the grantor’s life
- The grantor or spouse can control the timing and distribution of the trust. (beneficial enjoyment)
Reversionary Interest: The grantor will receive back more than 5% of the trust value at the time of creation. (taxable to grantor)
Administrative power: deal with trust property for less than full value, vote on the stock, and borrow from the trust. (taxable to grantor)
ILIT Funding
Unfunded: grantor makes a yearly gift to the trust to fund the premium. no income is generated so no tax.
Funded: grantor puts in an income generating asset that generates income to pay the premium. The amount of the premium paid is taxable income to the grantor. The rest is taxable to whoever it goes to (trust, grantor, beneficiary)
Tainted Trust for Estate Tax Purposes
Tainted if:
Grantor Retains:
- Right to income or to use the trust property (beneficial enjoyment)
- Reversionary interest that exceeds 5% at the time of death
Simple / Complex Trusts
Simple trusts (estates) is a conduit to forward income to beneficiaries. Trust passes its income and deduction to the beneficiaries who report it on their own income tax return. Beneficiary pays taxes on it at their own marginal tax rates (distributable net income DNI). Trust is a separate tax entity. Corpus cannot be distributed and charitable gifts cannot be made.
Complex trust is taxed as a distinct entity if:
if it irrevocable, grantor has not retained any control, and income is accumulated (either because trust has to or trustee can retain it)
income accumulated is taxed to trust, distributed income is taxed to beneficiary. Corpus can be distributed and charitable gifts can be made.
A complex trust ‘may’ distribute income.
Irrevocable trust is usually, but not always a complex trust.
$300 exemption for simple trusts that have to distribute all income and $100 exemption for complex trusts that are not required to distribute income
Revocable / Irrevocable Trusts
Revocable trusts are great for probate. Most grantors name themselves trustee for their living trust. At trustor’s death, it becomes irrevocable and either terminates and distributes income or continues until a later date. No gift tax consequence. All income is taxable to the grantor under grantor trust rules. Grantor holds control over property.
Irrevocable trust is where grantor gives up all rights with property transferred to the trust. Grantor can’t change the trust, becomes a non-grantor trust. Can be taxed as a simple or complex trust.
Trust deductions
Charitable deduction (complex trusts)
Depreciation, depletion, cost recovery
Net operating carryforwards
Administration expenses
Deduction for all income it is required to distribute (does not matter if it actually distributes it)
Distributable Net Income (DNI)
Limits the amount that trust (or estate) beneficiaries must report as gross income. DNI rules allow the trust to:
- claim a deduction for amount distributed
- limit the portion of the distribution that is taxable to beneficiaries
- ensure that the character of the distributions remain the same for the beneficiary as it was to the trust.
no double taxation of trust income because trust gets a deduction on distributed income to beneficiaries. Deduction is equal to lesser of amount distributed or DNI.
Income distribution deduction to the trust and therefore taxable income to the beneficiary is the lower of the DNI or actual amount distributed.
Cost Basis and Adjusted Basis
Cost basis is original basis + legal fees, commissions, sales tax, delivery, freight, and improvements like renovations but NOT repairs, real estate taxes, or normal business expenses.
Improvements must be capitalized but repairs are deducted as expenses and never impact basis.
Adjusted Basis is cost basis less any cost recovery (depreciation).
Amortization and Accretion
Amortization is the depreciation of an intangible object like goodwill. These are amortized under section 197. Like a franchise or goodwill or logo.
Accretion is from a bond that is issued with a discount from par value like a zero-coupon bond. Every time you pay income tax on the interest (phantom income) that adds to the basis of the bond.
Basis of property received by gift
Value of gift for gift tax purposes is its FMV at the time of the gift.
If the FMV is greater than the basis, then the recipient of the gift gets the original basis as their basis. (Carry-over)
If the FMV is less than the basis at time of gift, then its more complicated.
Need to be sold above the basis to recognize a gain and needs to be sold below the FMV at time of gift to recognize a loss. If in between those two then no gain or loss.
If this is the case, then it is better to sell the item, recognize the loss, and then gift the cash.
Basis of inherited property (community and noncommunity)
Basis is at the date of death or AVD if chosen.
In community property states, marital property gets full step up if at least half is included in gross estate of deceased spouse.
In common law states, the property only gets half a step up in basis.
MACRS Table vs Straight Line
Applies to all recovery property (not land or intangibles). Half-year convention must be used.
MACRS
5-Year: Year 1 is 20% and Year 2 is 32%
7-Year: Year 1 is 14.29% and Year 2 is 24.29%
Straight-Line
5-Year: Year 1 is 10% and Year 2 is 20%
7-Year: Year 1 is 7.14% and Year 2 is 14.29%
Use MACRS unless specified to use straight-line
179 Deduction
Can expense up to $1.22M of qualifying property in year of acquisition and reduced as you get qualifying property that exceeds $3.05M.
Qualifying property is 1245 property to use in a trade or business.
Expense is limited to the taxable income from the business activities of the person. Cannot create a loss for yourself.
Section 179 loss can be carried forward.
Realized Gain v Recognized Gain
Realized = is how much the person do they currently have without deductions
Recognized = is how much they have to report on their tax return after credits
1031 Like-Kind Exchanges
Method of deferring gain
Qualifying property is real estate only
Like kind property is of the same nature even if they differ in quality
Real property is usually like-kind but property outside the US is not like-kind
Like Kind: Apartment for shopping center or farm for a ranch
Need to meet both conditions:
- exchange properties must be like kind
- taxpayer must use the acquired property for business
If just one side does it then it qualifies for them.
Boot
Liabilities assumed by another are considered boot.
If both are assuming the others liabilities, only net debt relief is boot.
If giving boot, that increases your basis.
Like-Kind Exchange Calculations
Only things that matter: FMV of acquired property; Adjusted basis of property given up; and Boot
Realized Gain = Total value received (FMV of acquired + Boot received) - Adjusted basis (increased by boot given)
Recognized Gain = Lesser of Realized Gain or Boot Received
Substitute Basis = FMV of acquired - (Gain Realized - Gain Recognized)
Time Limit of 1031 Exchanges
45 days (before/after) for property to be received to be identified
180 days to acquire title
Related Party Transactions
If you do a 1031 exchange to a related party and they sell within two years of the exchange date, then the entire realized gain will be recognized on the date of sale.
Similar to installment sale to a related party.
1231, 1245, and 1250 tax rates
1231 is taxed as capital gain and loss is treated as ordinary income loss
1245 is taxed at ordinary income rates
1250 is taxed at 25%
Section 121 (Sale of Residence)
Need both spouses to meet both requirements to get the full exclusion.
Partial exclusion for unforeseen circumstances. If moving for work, it has to be 50 miles away.
Partial exclusion depending on how long you have been there.
Sales costs, commissions, are added to the basis.
No tax return is needed if gain is under the exclusion amount.
Up to 2 years after spouse died can you sell for full exclusion. Death is also considered an unforeseen circumstance.
1031 Exchange with a 121 exclusion
It is possible!
If you meet the 2/5 year rule for ownership and use and THEN rent your home for 2 years, you can claim both the 121 exclusion and then make a 1031 exchange.
If renting or a vacation home first, then the owner only gets a percentage of the exclusion based on how long the property is a primary residence divided by how long they have owned the property. Prevents people from moving into vacation homes to get the exclusion.
Installment Sale Recapture (Depreciation)
If doing an installment sale of tangible personal property, ALL depreciation recapture must be reported as income in the year of disposition. NOT GOOD
Remainder of the gain is still subject to installment sale rules.
Charitable Bargain Sales
If charitable deduction is available, basis is sold to charity for less than FMV must be allocated between portion of property sold and portion given to charity.
New Basis = (Charitable Amount Proceeds / FMV) * Original Basis
Charitable Amount Proceeds - New Basis = Taxable Gain
AMT Info
Distinct, alternate method of calculating income tax liability.
Secondary tax that comes into play if too many credits, deductions, and exemptions.
There are exemptions here that phaseout with income.
Max tax rates are 26% and 28%
C Corps do not have AMT
Itemized deductions increase chance of AMT because they reduce current income.
AMT Calc
- Start with AGI
- Add back items
- Add preference items
- AMT base
- Exclusions
- AMTI
- Calculate AMT Tax
AMT tax payable is AMT over regular tax due.
Add back items are added back, other itemized deduction items are not added back.
The higher your tax bracket, the harder it is to trigger AMT because of the tax brackets.
Depletion
Percentage depletion ONLY. Usually triggers AMT because it is accelerated.
This is depreciation for natural resources.
Passive Activities
Trade or business where the taxpayer does not materially participate.
These losses can only offset other passive income.
Passive loss cannot be used to offset portfolio income, compensation, or business income.
1986 act separated earned investment and passive income, active wages, portfolio income, and passive income.
Passive Activities Netting Process
Passive income from non-publicly traded partnerships (RELPs) can offset passive income from other NPTPs, or other passive income, called passive income generators PIGs.
The passive activity losses PALs offset the PIGs.
This netting is done on schedule E.
Publicly traded partnerships can only offset loss from income of the same partnership. Cannot reduce other passive income or other publicly traded passive income.
Investment in Passive Acitivities
You can own equity in businesses and not materially participate. They do get a share of income though, that is passive.
Can only deduct loss up to the amount of passive income of another.
Two kinds of passive activities
- Rentals, including equipment and real estate (exception: active participation) and royalty income (oil royalties)
- Businesses where the taxpayer does not materially participate.
Limited partnerships, partnerships, S-Corps, LLCs can be this.
Publicly Traded Partnerships
Also known as master limited partnerships (MLPs)
These are partnerships where the interests are publicly traded on an exchange.
Can only deduct loss from the same publicly traded partnerships if they have income. Restrictive
Can be carried forward until the partnership is completely sold.
Income from these is considered portfolio income.
Passive Activities Netting Calc
First net the non publicly traded partnerships and other passive net income.
Next, look at the publicly traded partnerships.
Treatment of Disallowed Losses
Suspended losses are carried forward until you completely dispose of the interest.
No $3,000 per year loss allowed like capital loss.
Passive loss limitation is not permanent. When you dispose of the entire interest (selling all the properties) or die, any suspended losses according to that interest are fully deductible in the year of disposition.
Phantom Income from Limited Partnerships
Phantom income can occur when declining real estate properties are refinanced and debt is forgiven. Income arises from the portion of debt that is forgiven.
Passive Loss Exceptions for Real Estate
$25,000 loss is deductible from the real estate activity and gets phased out between 100k-150k AGI. Phased out 50 cents every dollar above the AGI. This can offset active or portfolio income.
Material Participation
Material participation in an activity is if the taxpayer is involved in the operation of the activity on a regular, continuous, and substantial basis.
Having a job means that is your material participation and probably can’t be materially participative in another activity.
Active Participation for Real Estate
Active participation is less stringent. It is an exception to the passive loss rule.
The definition is bona fina involvement, or essentially the decision maker in management decisions.
Need to own at least 10% of the property.
Residential real estate can produce profit or loss, income or loss is shown on schedule E.
Principal Residence Renting and Vacation Home Renting
If you rent less than 15 days:
Rental income is excluded from your income, but no deductions attributable to the rental use are allowed.
If you use the home less than the longer of (1) 14 days or (2) 10% of the period of rental use:
This is considered a rental and will be treated as a rental with deduction attributable to rental use may be allowed.
If you use the home more than the longer of (1) 14 days or (2) 10% of the period of rental use:
This is considered mixed use, treated as a residence instead of a business, and expenses related to the property may not be deducted as a business expense.
Oil and Gas working interests
Oil and gas working interests are not passive and are exempt from PAL rules if the taxpayer is a general partner (usually the case) and is personally liable for losses.
Losses are deductible against active or portfolio income without limits and no AGI restrictions.
To qualify as working interest, the form of ownership may not limit the personal liability.
If a limited partner, any loss becomes passive.
Percentage (not cost) depletion can trigger AMT.
Equipment Leasing
Closely held C Corp owning an equipment leasing partnership (not PSCs) can use passive losses to offset active, but not portfolio, income. Not available to S Corps, ONLY closely held C Corps
Can deduct losses up to its basis.
Closely held corporation is held by one person or small group of family.
Married/Widow Filing Requirements
For the year of death, use MFJ.
Use Widower for two years after the first year if you have a home and a qualified child.
Exemption Amounts for Children
Always $0
For kids under 24 as students and under 19 that you provide more than 50% of their income, you get a “theoretical exemption”
Community and non-community property MFS
If separate returns are filed by a couple in a community property state, one half of income must be reported by each spouse.
Income from separate property is treated as separate income.
Recapture rules of alimony
If you pay excess alimony payments, IRC thinks that is a disguised property settlement and they will make you recapture some as income.
Calc for only 2 payments:
Add the first two payments
Subtract $37,500
That’s the recapture amount
Calc for 3 payments:
Add first two payments
Double the third payment and add to $37,500
Subtract first two payments from that number above
Recapture amount
Best way to handle passive activity loss
Get non publicly traded income generating partnership
Get a real estate (active participation) that generates income
Sell the interest
Charitable Deduction Amounts
Public (50%):
Cash is 60%
Ordinary income (use-unrelated, inventory, copyright, art, STCG) is deducted at basis at 50%
LTCG is 50% at basis and 30% at FMV
Use-related, if LTCG then 30% FMV or basis at 50%
If STCG, even if use related, then always 50%
Private (30%):
Cash is 30%
Ordinary income (use-unrelated, inventory, copyright, art, STCG) is deducted at basis at 30%
LTCG is 30% at basis and 20% at FMV
Use-related, if LTCG then 20% FMV or basis at 30%
Carryover Periods
Charitable Deduction is available for immediate year, then 5 years after are carried over (total of 6)
Still the same form of deduction as before
Substantiating Charitable
Need to substantiate any contribution (cash or property) of $250 or more or deduction is not allowed.
Need written acknowledgment (not cancelled check) from organization.
If a vehicle, need substantiation if it’s $500 or more. If the organization sells it, then the deduction is the amount they sell it for.
Corporation Contributions
Corporation may not deduct more than 10% of taxable income for charitable gifts on 1120.
If a Corp is donating inventory (other than S-Corp) then you donate basis plus 1/2 of appreciation but can’t go over twice the amount of the basis.
Charitable Deduction other things
- if a sole proprietor, deduction is on Schedule A, not Schedule C
- If FMV of LTCG is below the basis, then you have to do 50% up to the FMV
(If this is the case, it is better to sell, recognize the loss, and donate the cash) - Stocks and real estate are not subject to use-unrelated rules
- Choosing basis over FMV for LTCG is almost always wrong
- Can never deduct the property for more than what it’s worth. If the charity can sell it for less than a FMV, deductible value is what they sell it at. This is for cars, for other property it is at FMV even if that is less than what the charity sells it for.
Charitable Deduction Calc
First, calculate 60% of AGI (max deduction)
Second, calculate all the 50% public charity deductions (add)
Third, calculate all the 30% private charity deductions (add)
Anything over the 60% is carried over
Standard vs Itemized Deduction
If you can get the itemized, do things that help that.
Take the higher of the two
For vs From AGI
For is to get to AGI
From is taken from AGI
Lady extended her return and filed in June to find she owed an additional $400 on a total tax liability of $4,100
What is the result of this?
Nothing, she had 90% of current year
No failure to pay because she had CYSH
No penalty will apply but interest may be due
If a client has a hobby activity that is generating loss every year and his accountant is including the income but not deducting expenses, what should they do?
They should try to make a profit for at least 3/5 years.
If you extend your return but it is covered under PYSH or CYSH is there a penalty?
No underpayment penalty because you are covered.
There could be a penalty for the failure to pay if you didn’t pay at the time of extension.
AGI if tax liability is $125k
Well over $150k for PYSH
Best source for obtaining intent about laws
Congressional Committee Reports
Are scholarships attributed to room and board countable as taxable income?
YES
Net schedule C income along with expenses listed
Net means that the expenses have already been deducted so the expenses are not subtracted again
Net schedule C income and deductions
Net schedule C income, don’t back anything off this
So it is Net schedule C income
1/2 SE taxes, less 100% of medical, dental, and qualified LTC premiums are an adjustment to income on the front of the 1040
How much income must be reported by lenny and a bunch of income sources are given along with childcare expenses
They are looking for GROSS income here. So do not deduct 20% of the childcare expenses because that is a credit and will be applied against tax liability
But, the gross income is normal income
What are the best moves to reduce income tax exposure?
Buying a condo is nice to get interest deduction
Getting muni bonds is great
Enrolling in a FSA if you do not have medical claims is not great
Best option for company additional benefits if in a high tax bracket
Deferred comp because it would not be currently taxable
Corp producing a lot of income, best move for owner parent?
Pay your kid the most possible to shift the income away from your own high income tax bracket
Can you deduct medical insurance premiums on Sch A?
Yes as long as they are above 7.5% of AGI
Inventory methods
FIFO, LIFO, Specified ID
Can NOLs be carried back?
NO
Best form of business for a CFP that wants to eventually bring their kids into the practice
S Corp and issue voting and nonvoting shares this way they can get in but you retain control
Sole is too risky and limited partnership interests does not allow them to participate
Usually want to move away from sole proprietorship
You have $200k in a normal C Corp and add an additional $100k, how much accumulated earnings tax?
$300k-$250k = $50k
$50k * 20% = $10k of tax
If you retain a right to trust income is it included in your estate?
YES
It would not be included if you had a right to the income for 15 years and then it transferred to someone, because it would lapse
Are tainted trusts included in the estate of the grantor?
YES
A client should not establish an irrevocable trust that is tainted for both estate and income tax reasons?
Yes, it serves no purpose. Grantor might as well keep the assets in his or her name.
Different money managers, one provides 4% muni return and another gives 6% growth and 6% income, which to choose?
More aggressive because even if that income is taxed additionally, there is a lot more growth there.
Which business could help a business owner reduce his taxes?
C Corp could help because it is taxed at 21%
All the other forms are pass-through entities or conduit entities so that would not do much in terms of reducing taxes
Gross income
All your income, net schedule C losses are included here too before taking adjustments
Capital losses
Can only take losses to basis for S Corp and partnership
Sole can take more
Corp takes capital losses
Connie buys office furniture and improves her office, what is the amount of the depreciation for the office furniture?
Do not include the office improvements because it is specifically asking for the amount of depreciation taken on the furniture
Mini case where you have $151k to buy treasuries that are now worth $140k but pay a 11% on the original purchase price of $100k
If they are in the 32% tax bracket what is the gain?
Because treasuries that were issued at 11% are now worth $140k then it is not as simple as multiplying the gain by the coupon
Income = ($151k/$140k) * $11,000 (coupon payment on a $140k bond) = $11,864.60
$11,864.60*68% = $8,068 after tax gain
What securities will let you take investment interest tax deduction?
Purchasing investments (not munis) or purchasing a home mortgage
Brokerage commission taken off what price?
Selling price
Realized gain with a house sale
That is the amount of gain realized not subtracting the 121 exclusion at that point, just the gain
When amount realized is less than adjusted basis what is the resulting loss treated as?
Ordinary loss
Not 1231 loss but ordinary
You bought a car for $30k and depreciated it down to $15k
You then sell it for $18k, what is the amount of gain?
$3k in the first year, any depreciation in an installment sale is automatically recognized in the first year of sale
Lady is about to retire, which asset should she sell?
A muni bond fund when she is in a low income tax bracket especially when the muni bond fund is paying comparably lower yields then similar bonds. This would give her a better yield
Installment sale depreciation
If an asset has depreciation and you enter into an installment sale, the entire amount of depreciation is taxable that first year
Trading an old piece of equipment with an adjusted basis of $10k and $2k cash for a piece of equipment worth $15, what is the recognized gain and basis?
Gain is $0
Basis is $12k
What is the gain on Section 1244 stock treated as?
Treated as capital gain
If a father creates a funded ILIT with the remainder payed to the fam, who does the income of the trust get taxed to?
While he is still living, it gets taxed to the father
Is an estate entitled to take a deduction for incurring business expenses?
Yes as long as they are normal business expenses
Which entities cannot use NOL?
S Corps and Partnerships because they are pass through entities
AMT Payable
AMT tax - regular tax
What causes AMT?
Itemizing deductions
Exercising ISOs
Private muni bonds
Oil and gas interests
How to avoid paying AMT
Earn more income!! Best option
Don’t itemize
Exercise NSOs this year
Defer property tax
Does the AMT exemption phaseout?
YES
Exception to passive activity
Active participation in rental real estate
Is equipment rental considered a passive activity?
YES
Gain from XYZ (ptp) of $10k
Loss from ACB (ptp) of $20k
Gain from LBL (nptp) of $9k
Loss from BLB (nptp) of $19k
How much gain and loss is recognized?
Gain of $10k is recognized
Loss of $9k is recognized
Can S Corps produce passive income to owners?
Yes, safe to assume that if it does not specify that the activity is material then it probably is passive
Between 30% ownership in S Corp, RELP ownership, and Active participation in rental real estate, what is passive?
S Corp and RELP
S Corp is assumed to be passive unless told otherwise
Active real estate is exception
Is EE income phantom?
NO
When do payments count as alimony for life insurance?
When it is owned by the payee and the payee is the beneficiary
Payor pays the premiums and is the insured
If these are met then the payor can deduct the premiums
What happens when a limited partnerships restructures its debt?
You get a K1 with phantom income having to pay tax on that amount on your portion
Does a divorce qualify as an unforeseen circumstance?
Yes, you can still qualify for the full $500k exclusion as long as you both lived there for 2 years
What is more likely to be taxable for a single lady?
Selling home for $500k gain or 1031 exchange?
Selling the home for the $500k gain, not indicated that she is married so that would result in gain.
Can a PSC use equipment leasing as a way to offset income?
No, only closely held C Corps can do this, not PSCs. Also not available to S Corps.
This can use passive losses to offset active income but not portfolio income.
If someone has a PSC and has a high level of income what is a great way to shelter some of that income?
Oil and gas working interest as a general partner because it offsets active income.
If it is not clear if a charity has a use for an item how should you treat it?
Treat as use unrelated so use the basis going to 50% if public.
What is loss property valued at for charitable deductions?
Valued at the lower FMV
Can’t take a deduction for more than something is worth
Charitable deduction can still be based off the higher (50%-public or 30%-private) percentage but only up to the amount of the FMV (i think double check)
What is STCG or ordinary income or use unrelated property valued at?
Basis or FMV if lower
What should be done with loss assets?
Sell it and take the loss
Best item to donate to charity
If wanting the highest for the current year, look at the highest basis and think about using the basis valuation at (50%-public or 30%-private) and how that compares with the rest
Think about FMV but that will be at the lower rates (30%-public and 20%-private)
At death what happens to the income tax deduction?
It stops
When to itemize vs take standard deduction
Take the higher, you can technically choose whichever you want
You should take the standard deduction if that is higher for sure.
Single - $14,600
MFJ - $29,200
Investing in an oil and gas limited partnership that creates loss, will that offset income?
No because it is a limited partnership.
Has to be a general partnership to offset active income
When are medical expenses itemized?
When they are greater than 7.5% of AGI
Are entertainment expenses deductible?
NO
Deduction FOR AGI
Net business losses
Net capital losses
Getting to AGI
When a possibly risky business with losses and you are between S Corp and Sole Proprietor, what do you choose?
Unless very explicitly stated that the business is VERY safe then fall to the side of safety by choosing S Corp
If you depreciated $20k from a $60k asset but then sold it for $80k what is the gain?
1245 recapture is $20k
1231 gain is $20k
Calculation of annuity
Taxable amount = basis / expected payout
If no details are given on expected payout, look at their life expectancy in the case and use that with the amount of payments they are expecting that is the expected payout
What property makes most sense to gift to your son wanting to start the same business as you?
Fully depreciated property
What plans will be cheap for an employer to provide?
Section 125 cafeteria plan
Group life up to $50k
Group dental
Split dollar and nonqualified deferred comp would not be cheap, would be expensive
Taxation of a MEC
LIFO (gain taxed first)
Tax on the gain AND 10% penalty on the gain that adds to the tax consequence
$50k basis and $100k FMV
$50k loan is taken out
$50k * 10% (penalty) + $50k * 25% (tax rate) = $17,500 in tax
How much is group life insurance?
Read the case and make sure you are subtracting any amount that the employee is paying
Can a kid take their standard deduction if they are paid a salary?
Yes
Private vs Public Charities
Public: Churches, schools, hospitals, charitable purposes, stopping cruelty
Private: Foundations, fraternal orders, war veterans organizations
If a mom got $1k/mo benefits and kid got $1.2k/mo benefit and the mom had a $14k of income, would her benefit be taxable?
No. Her income would be $6000 + $14000 = $20,000
Person who has legal right to receive benefits must determine if benefits are taxable. So if check is made out to kids then the mom is only taxed on her portion. The kids portion must be added to their other income to see if taxable (usually not).
Qualified widow tax brackets
Same as MFJ
HOH tax brackets
In between Single and MFJ
Qualified widow tax situation with SS payments
Same as MFJ
So it would be $32k and $44k for 50% and 85%
Do separate maintenance agreements (pre-2019) qualify as a tax deduction for a payor spouse?
YES, it is deductible.
Are foundations considered public charities?
NO they are private or 30% charities.
Steve owns and operates a large group of retail appliance stores. The store has an extensive selection of appliances for sale and he repairs appliances both under warranty and out of warranty. What method of accounting should he use?
- Cash
- Accrual
- Hybrid
He should use the hybrid approach.
This combines the accrual method for purchases and sales of inventory with the cash method for all other transactions.
Large group implies over $25M of revenue.
If Sam is using his STCG as a way to use his margin interest expense and is actually itemizing, should he sell some more of his stock at a loss?
No, because if he does he may lost his ability to deduct margin interest.
Sam estimates he can contribute $9,695 to his SEP at year end. He feels he can increase this by 10% per year for four more years. He will then take distributions in five years (by April 1st the year after he reaches 72). What return does he need to achieve to have $1.5M in his account when he takes his first distribution?
CF Questions
CF0 = -1,000,000
CF1 = -9,695
CF2 = -10,664.5
CF3 = -11,730.95
CF4 = -12,904.05
CF5 = -14,194.46
CF6 = +1,500,000
IRR = 6.14%
If the question had him wanting to take the cash out at the end of the fifth year then you would add $1,500,000 + -$14,194.46
Can LTC premiums be deducted on the front of 1040 as adjustment? What about Medicare supplemental policies?
What about Medicare Part B?
What about other health insurance premiums?
What about 1/2 of SE tax?
Qualified LTC premiums, Medicare supplemental policies, other health insurance premiums, and 1/2 of SE tax are deducted on the front of the 1040 as an adjustment to income.
Medicare Part B premiums paid are deductible on Schedule A on amounts greater than 7.5% of AGI, and not deducted on the front of the 1040.
Can a SE person deduct health and LTC premiums for both himself and his spouse?
YES, both count.
If you employ someone to care for your children or a disabled sibling which tax schedule would you recommend your client file?
Schedule H - Household employees
Which credit may be claimed as either an itemized deduction or tax credit?
- Childcare credit
- Child credit
- Foreign tax credit
- Adoption credit
Foreign taxes may operate as either a credit or deduction.
If a client wanted to adopt a foreign child, what would you recommend they do first?
- Choose an accredited adoption agency
- Decide on the country of adoption, gender, and medical needs
- Hire an immigration attorney
- Check on US Government restrictions and requirements
Hire an immigration attorney.
Should get legal advice before making important decisions about adopting a child.
Mr. Long bought an interest in a low-income housing program which generated a $20k loss this year. If he is in the 35% marginal tax bracket, what is the dollar amount of the credit he can claim?
- $7,000
- $8,750
$20,000 * 35% = $7,000
Wally is a well-known artist, the local art museum wants to exhibit one of his paintings. Normally they sell for $100k. He is so successful that he established a private foundation for starving artists. He has agreed to paint a massive mural for the museum, what do you suggest for him to get the max tax deduction for the gift to the museum?
- Gift the painting to a starving artist and let them donate it.
- Gift it to his private foundation and let it donate it to the museum.
- Sell it to his wealthy client and let them donate it.
- Keep track of his costs and donate it to the museum.
Keep track of his costs and donate it to the museum.
A work of art created by the taxpayer is valued at basis.
Who can you reach out to for the client as a privileged person?
Their family attorney.
Maybe designated trusted contact but look for the family attorney in most situation.
Test loves attorneys.
You have a client that needs a caretaker to drive them to your office. You ask him if he has filed his taxes and he is unsure, what should you do?
- Call IRS
- Call his CPA
- Call his daughter
- Call his attorney to ask his CPA
Call his attorney to ask his CPA
Joe paid $90k in income tax last year. This year he estimates his tax will be $130k, his employer has withheld $30k, how much does he have to pay in quarterly?
- $15k
- $17,250
- $21,750
- $25k
110% of last year since $90k of tax means well over $150k AGI. That is $99k - $30k is $69k.
$69/4 = $17,250
What is your tax status if you finalized your divorce on December 31st?
Single
Adjustments for Income
IRA Contributions
Keogh or SEP contributions
1/2 SE taxes
SE health insurance premiums (medical for fam and LTC for taxpayer and spouse)
Alimony paid pre 2019
Student loan interest
HSA
Moving expenses for active military
Penalty for early withdrawals of savings
Deductions for vs from AGI
For is to get to AGI
From is deducted from AGI
What expenses cannot create a loss?
Home use of office
Section 179 bonus depreciation (1245 property)
Does unused margin interest and excess 179 deduction carry forward?
Yes
What is deductible for SE
Meals are 50%
Entertainment is NOT
Travel is
What can a salaried person do if he has entertainment expenses for work?
Have his company reimburse him. The amount reimbursed would not be taxable income but the company would not be able to deduct it.
You CANNOT deduct it on Schedule A
Where are SE health insurance premiums and 1/2 of SE taxes deducted?
Front of the 1040s as an adjustment to income.
FICA Tax
6.2% + 1.45% by both the employee and employer.
What expenses are not included in adoption credit?
Surrogate parenting and spouses child.
Can deduct adoption fees, court costs, attorney fees, and costs to adopt. Credit taken in year it is finalized.
Elderly and disabled credit
Need to be 65
OR
disabled receiving disability payments.
Refundable credits
Child tax credit and EIC
Related party taxation
For installment sales and 1031 exchanges
Do I need professional insurance even with a limited liability company?
YES
Which interest can be deducted without limit?
- Investment
- Mortgage
- Sole Prop Loans
Sole Prop Loans
S Corp Basis
Increases with amount that is left in there that you are taxed on because it is essentially a cash contribution.
Distributions of cash reduce your basis because you are taking that part out. Losses also can be taken against basis.
Unused loss gets carried forward and used up against future income. Amount that you are taxed on increases your basis.
Amount deducted is called a loss carryforward.
S Corp salary to owner is subject to FICA and FUTA.
Can you have a carryback?
NO
Carryback NOLs have been removed.
How to make loans to S Corp.
Better to take loans out personally and then loan to S Corp.
Is land depreciated?
NO
Two exceptions to passive rules
Material and active participation
Phantom Income
Insurance: lapse with loan or 162
Investments: Zeros, TIPs, STRIPs, dividends declared but not paid
Tax: K1 income from LP/FLP or recaptures
Retirement: ESOP NUA or secular trust
Can you take loans from pension?
Yes if allowed
What is art that is created by the taxpayer valued at?
Valued at their basis using all the materials that they used to make the art.
Can S Corps have 1244 stock?
Yes
Do C Corps qualify as QBI?
NO
Can resident alien own an S Corp?
Yes!
Nonresident cannot own an S Corp
