Income Tax Flashcards
1
Q
Internal Revenue Code
A
Primary source of all tax law
2
Q
Treasury Regulations
A
A source for all tax law
3
Q
Revenue Rulings and Procedures
A
Administrative interpretation - may be cited as precedent
4
Q
Congressional Committee Reports
A
Indicates the intent of Congress - can’t be used as precedent
5
Q
Private Letter Rulings
A
Apply to a specific taxpayer in particular situation
6
Q
Judicial Sources
A
Court decisions interpret the law
7
Q
Step Transaction
A
Ignores individual transaction and taxes the ultimate transaction
Example: XYZ sells property to unrelated party who then sells it to an XYZ subsidiary.
8
Q
Sham Transaction
A
Transaction lacks business purpose
Example: a sale by XYZ to ABC when XYZ and ABC are owned by the same person.
9
Q
Substance over form transaction
A
The substance of the transaction not the form governs the tax consequences
Example: President of XYZ has the company lend him money that he doesn’t intend to repay and doesn’t take a salary.
10
Q
Assignment of Income transaction
A
Income is taxed to the tree that grows the fruit.
Example: Mr. T owns XYZ, S Corp. he directs all income to his son and reports no income. Income is taxed to Mr. T.
11
Q
Tax form 1040A
A
Reports simple income
12
Q
Form 1040 X
A
Use to file amended return
13
Q
Form 1041
A
Use for estates and trusts
14
Q
Frivolous return penalty
A
Omits necessary information. $5k penalty
15
Q
Negligence on return
A
Under payment with intent to defraud. 20% penalty
16
Q
Fraud on a return
A
Intent to cheat the government. 75% of under payment.
17
Q
Failure to pay
Failure to file
A
Pay = .5% per month up to 25% File = 5% penalty per month up to 25%
18
Q
Estimate tax to avoid penalty
A
90% of current year tax liability
100% of prior year or
110% of prior yr if AGI is above $150k
19
Q
Exclusions of gross income
A
Gifts Inheritances Child support Muni bond income Workers comp Compensatory damages
20
Q
Above the line adjustments
A
IRA contributions Student loan interest - capped at $2500 Medical savings account Moving expense- military only Self employment tax (.07065) $4k educational expense 100% of self employment health ins Leigh or SEP Penalty for early wd HSA
21
Q
2018 Itemized Deductions
A
Medical, dental, ltc >7.5% State and local taxes Personal property tax RE taxes Mortgage int Charitable gifts Inv interest Casualty and theft losses
State, property, RE taxes capped at $10k combined
22
Q
Definition on marginal tax
A
Percent applied to last taxable dollar.
23
Q
Kiddie tax
A
Created to discourage shifting income to lower bracket tax payer
All unearned income for those under 18, or under 24 and a full time student, are taxed at trust rates.
24
Q
What does self employment income include and not include?
A
Net schedule C
General partnership income (K-1)
Board of director fees
Part time earnings (1099)
Not Included:
Wages from S Corp
Distributions (k-1) from a Corp
Any distribution from S Corp is into self employment income.
25
Self employment tax liability calculation short cut
1. Calculate self employment income
| 2. Multiply by .1413 and round up
26
How to calculate self employment AGI
1. Calculate net schedule C income
2. Minus 1/2 of self employment tax (.1413)
3. Subtract ins premiums - max ltc premium deduction is $3,720.
27
Child care credit vs child credit
Child care max is $6k for 2 or more defendants and tax credit is equal to 20%
$6k x 20% = $1200
Child credit is $2k for each dependent. 3 kids= $2k x 3 = $6k child credit
28
$3k Ira deduction vs $960 child care credit calculation for 35% tax bracket
Deduction = $3k x 35% = $1050 deduction (better for high tax bracket)
Credit = $960/.35 = $2742 equivalent deduction ( better for lower tax bracket)
29
Cash Method for tax accounting
Form realizes revenue when they are actually paid not when services are completed
TCJA expanded this to all businesses under $25M in avg revenues
30
Accrual Method for tax accounting
Realizes revenue when good or service is complete, regardless of when pmt is received.
Mandatory method for businesses with $25M in revenues during prior 3 years.
Best for businesses with inventory
31
Hybrid Method for tax accounting
Combination of cash and accrual Method.
Long term contracts, those lasting longer than 1 yr, will use percent of completion method.
32
Installment sale tax accounting
Realized gain is not recognized in the year of the sale, but over the life of the note.
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Exceptions:
Received in 1 yr
Property is public security
Sold at a loss
Property sold to related party who then sells it within 2 yrs
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33
Inventory Valuation: FIFO vs LIFO vs specific identification
Rising prices = LIFO is better
-causes reduced earnings, deferral of taxes, & understated inventory
FIFO:
Increases earnings, greater tax liability, current cost inventory
Specific Identification:
Owner identifies specifically what to sell. Better than FIFO for selling business for best price.
34
Net Operating Loss (NOL)
Business expenses exceed gross income. Excess loss is NOL.
Not allowed for S-corps or partnerships
TCJA only allows for NOL to be carried-forward and no longer backwards up to 80% of taxable income.
Carry forward use to be limited to 20 yrs
35
Sole Proprietorship business entity advantages and disadvantages?
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Adv:
Pension plans - keogh & SEP
100% medical ins is deductible
No legal formalities
Conduit of income - files on schedule C
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Disadvantages:
Unlimited liability
Bus. Dies with owner
Capital structure depends on owners resources
36
Partnership advantages and disadvantages?
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Adv:
Pension plans - keogh & SEP
100% medical ins is deductible
Agreement can be oral or written
Conduit of income or losses to owner
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Disadvantages:
Unlimited liability for acts of the partnership
Dissolves upon death, bankruptcy, or incapacity
Capital structure depends on partners resources
Must file tax return form 1065 a informational only and will include each partners return as well.
37
Limited liability company - LLC
1. Can be classified as corporation or partnership. Partnership must not have two or more characteristics of corporation.
2. 20% deduction for QBI - qualifies bus. Income for pass through businesses.
38
What are the Pass through entities?
Common types of Pass through are general partnerships, limited partnerships and limited liability partnerships, S corporations, income trusts and limited liability companies.
39
What is a Limited liability partnership - LLP?
1. GP is not liable for malpractice of another GP.
40
What are the advantages and disadvantages of a regular C Corp?
Advantages:
1. Separate tax entity. Distributions to owners are taxed again at there tax rate.
2. Sale of stock to unlimited investors
3. Limited liability
4. Continuity of life
5. Divd received deduction (50% rule)
Disadvantages:
1. Corporate formalities
2. Divd paid after tax
3. Accumulation of earnings beyond limits are subject to double taxation.
Divd deduction:
50% if 20% ownership
65% if 20%-80% ownership
100% deduction for >80% ownership
41
What is a Personal Service Corporation - PSC?
Closely held c Corp - HALE
- health, accounting & architects, actors, law, engineering.
Income retained by entity is taxed at 21% not 35%.
42
What is an S Corp?
1. Files taxes on for 1120 S
2. Limited to 100 shareholders
3. Can only issue common stock - can be voting or non voting
4. Must be domestic Corp
5. Only indv , estates, & certain trusts can be shareholders
Advantages:
1. Limited liability
2. Conduit of income and losses up to basis. Excess salary won’t be classified as dividend and be double taxed
3. Basis equals cash and direct loans - does not include bank loans
Disadvantages:
Corporate formalities
Sale of stock limited by eligibility standards.
Cant issue preferred stock
43
What is a simple trust?
Is a conduit for forwarding income to beneficiaries.
Beneficiaries pay taxes at their rates for distributed net income DNI.
Is a separate entity.
No charitable gifts
No distributions of corpus
44
What is a complex trust?
Income must or can be accumulated
Accumulated income is taxed to the trust
Distributed income is taxed to beneficiary
Corpus can be distributed
Can make charitable donations
45
Inherited basis: community property state vs common law
At death couple owns stock w/ FMV of $70k and original basis of $20k. Stock is sold for $80k. See answers below.
Community property provides a full step up in basis. $70k
Common law only get a step up on 1/2 of property. $45k
46
Modified accelerated cost recovery system - MACRS
For property placed in service after 1986
Straight line is an option but half year convention must be used.
Can be used for fixed assets
47
Property Classes: 1245 vs 1250 property
5 year: computers, autos, light duty truck. (1245)
7 year: office furniture and fixtures (1245)
27.5 years: residential rental property (1250)
39 year: nonresidential real property (1250)
48
MACRS vs Straight line Table: 5 yr vs 7 yr
MACRS 5 yr: yr 1 = 20%, yr 2 = 32%
MACRS 7 yr: yr 1 = 14.29%, yr 2 = 24.49%
SL 5 yr: yr 1 = 10%, yr 2 = 20%
SL 7 yr: yr 1 = 7.14%, yr 2 = 14.29%
49
Section 179 deduction for 1245 equipment
Business can expense up to $1m.
Example: business owner purchases $600k worth of equipment. They can deduct the full $600k. If above $1m excess is carried forward.
50
Step of AMT calculation
1. Start with post-deduction (optimizing) it AGI (standard deduction)
2. Add back any items not deductible under AMT.
3. Add preference items
4. Equals AMT base
5. Subtract exemptions
6. Result equals AMTI
7. Calculate AMT (26% or 28%)
51
AMT Preference items
IPOD
Intangible drilling costs
Private activity muni bond
Oil and gas depletion
Depreciation (ACRS/MACRS) but not straight line.
52
AMT Add backs
1. Property, state, city/income and sales tax.
2. Incentive stock option bargain element.
Note: bargain element is the excess of the fmv at exercise date over the option price.
53
Passive Activity
A trade or business in which the taxpayer does not materially participate.
No involvement in the business but they receive a share of operating losses or income.
54
Deduction for active participation in real estate.
Can deduct up to $25k in losses against income. Phased out between $100k-$150k on a 2 to 1 basis.
Example: if income is $110k, take $10k x .5 = $5k. $25k - $5k = $20k deduction
Historical phaseout: $200k+
55
Alimony test for deductibility
No cash items are not alimony
Cash pmts to 3rd party if obligated by divorce decree. Rent, mortgage, tax, tuition.
Pmts to maintain a property owned by payor spouse and used by the payee spouse will not even with divorce decree
Life ins owned by payer spouse on life of payor spouse will qualify if required under decree.
56
Alimony Recapture Rule
Excess alimony pmts over first 3 years are counted.
Example: $82k 1st yr, $43k 2nd yr, $0 3rd yr
$82k + $42k = $124k - $37,500 = $86,500 recapture.
If pmt is made in 3rd yr you should multiply by 2 and add to $37,500 constant. $10k yr 3 pmt = $10k x 2 = $20k + $37,500= $57,500
57
Charitable deduction limits
50% of AGI on cash to publish charity.
30% to private organization and for LTGC property such as stocks
50% for art, STCG property such as stocks, unrelated property.
Can only use fmv of art unless they use it.
Note: must itemize to be able to deduct. Would buy condo vs rent if need to itemize
58
Gross income inclusions
Ordinary divd - schedule B
Taxable interest - schedule B
Business income and losses - schedule C
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Capital gains and losses - sch D
Real estate - schedule E
Punitive damages (except wrongful death)
Wages, salaries, tips
Ira distributions
Pensions and annuities
Alimony prior to 2018 in decree
Unemployment income
Social security
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59
Section 179 - business deduction
Section 179 is deductible up to income and can’t create a loss.
60
Itemized deductions - Schedule A
Medical, dental, qualified ltc greater than 7.5% of AGI
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State and local taxes up to $10k
Personal property taxes up to $10k
Real estate taxes up to $10k
Mortgage ins for AGI under $100k
Home mortgage int
Charitable gifts
Investment interest
Casualty or theft losses
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61
1244 stock deduction
Write off up to $100k or ordinary income. After $100k losses are treated as capital losses limited to $3k per yr.
62
Personal service corporation - PSC
Closely held C Corp owned by individuals who perform services are denied the progressivist of corporate rate schedule
Income retained will be taxed at 21% and loses advantage of being separate tax entity.
Health
Accounting , architecture, actors
Law
Engineering
