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CFP TL VERSION > Income Tax > Flashcards

Income Tax Flashcards

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1
Q

Internal Revenue Code

A

Primary source of all tax law

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2
Q

Treasury Regulations

A

A source for all tax law

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3
Q

Revenue Rulings and Procedures

A

Administrative interpretation - may be cited as precedent

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4
Q

Congressional Committee Reports

A

Indicates the intent of Congress - can’t be used as precedent

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5
Q

Private Letter Rulings

A

Apply to a specific taxpayer in particular situation

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6
Q

Judicial Sources

A

Court decisions interpret the law

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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.

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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.

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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.

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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.

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11
Q

Tax form 1040A

A

Reports simple income

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12
Q

Form 1040 X

A

Use to file amended return

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13
Q

Form 1041

A

Use for estates and trusts

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14
Q

Frivolous return penalty

A

Omits necessary information. $5k penalty

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15
Q

Negligence on return

A

Under payment with intent to defraud. 20% penalty

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16
Q

Fraud on a return

A

Intent to cheat the government. 75% of under payment.

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17
Q

Failure to pay

Failure to file

A 
Pay = .5% per month up to 25%
File = 5% penalty per month up to 25%
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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

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19
Q

Exclusions of gross income

A 
Gifts 
Inheritances
Child support
Muni bond income
Workers comp
Compensatory damages
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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
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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

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22
Q

Definition on marginal tax

A

Percent applied to last taxable dollar.

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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.

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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.

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25
Q

Self employment tax liability calculation short cut

A
  1. Calculate self employment income

2. Multiply by .1413 and round up

26
Q

How to calculate self employment AGI

A
  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
Q

Child care credit vs child credit

A

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
Q

$3k Ira deduction vs $960 child care credit calculation for 35% tax bracket

A

Deduction = $3k x 35% = $1050 deduction (better for high tax bracket)

Credit = $960/.35 = $2742 equivalent deduction ( better for lower tax bracket)

29
Q

Cash Method for tax accounting

A

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
Q

Accrual Method for tax accounting

A

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
Q

Hybrid Method for tax accounting

A

Combination of cash and accrual Method.

Long term contracts, those lasting longer than 1 yr, will use percent of completion method.

32
Q

Installment sale tax accounting

A

Realized gain is not recognized in the year of the sale, but over the life of the note.

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
33
Q

Inventory Valuation: FIFO vs LIFO vs specific identification

A

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
Q

Net Operating Loss (NOL)

A

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
Q

Sole Proprietorship business entity advantages and disadvantages?

A 
Adv:
Pension plans - keogh & SEP
100% medical ins is deductible
No legal formalities
Conduit of income - files on schedule C

Disadvantages:
Unlimited liability
Bus. Dies with owner
Capital structure depends on owners resources

36
Q

Partnership advantages and disadvantages?

A 
Adv:
Pension plans - keogh & SEP
100% medical ins is deductible
Agreement can be oral or written
Conduit of income or losses to owner

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
Q

Limited liability company - LLC

A
  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
Q

What are the Pass through entities?

A

Common types of Pass through are general partnerships, limited partnerships and limited liability partnerships, S corporations, income trusts and limited liability companies.

39
Q

What is a Limited liability partnership - LLP?

A
  1. GP is not liable for malpractice of another GP.
40
Q

What are the advantages and disadvantages of a regular C Corp?

A

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
Q

What is a Personal Service Corporation - PSC?

A

Closely held c Corp - HALE
- health, accounting & architects, actors, law, engineering.

Income retained by entity is taxed at 21% not 35%.

42
Q

What is an S Corp?

A
  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
Q

What is a simple trust?

A

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
Q

What is a complex trust?

A

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
Q

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.

A

Community property provides a full step up in basis. $70k

Common law only get a step up on 1/2 of property. $45k

46
Q

Modified accelerated cost recovery system - MACRS

A

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
Q

Property Classes: 1245 vs 1250 property

A

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
Q

MACRS vs Straight line Table: 5 yr vs 7 yr

A

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
Q

Section 179 deduction for 1245 equipment

A

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
Q

Step of AMT calculation

A
  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
Q

AMT Preference items

A

IPOD

Intangible drilling costs

Private activity muni bond

Oil and gas depletion

Depreciation (ACRS/MACRS) but not straight line.

52
Q

AMT Add backs

A
  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
Q

Passive Activity

A

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
Q

Deduction for active participation in real estate.

A

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
Q

Alimony test for deductibility

A

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
Q

Alimony Recapture Rule

A

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
Q

Charitable deduction limits

A

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
Q

Gross income inclusions

A

Ordinary divd - schedule B
Taxable interest - schedule B
Business income and losses - schedule C

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
59
Q

Section 179 - business deduction

A

Section 179 is deductible up to income and can’t create a loss.

60
Q

Itemized deductions - Schedule A

A

Medical, dental, qualified ltc greater than 7.5% of AGI

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
61
Q

1244 stock deduction

A

Write off up to $100k or ordinary income. After $100k losses are treated as capital losses limited to $3k per yr.

62
Q

Personal service corporation - PSC

A

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

CFP TL VERSION (6 decks)

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