income tax Flashcards
What are the eligibility requirments for aSubchapter S Corporation?
- Number of shareholders is limited to 100
- The corporation can only have a single class of outstanding common stock (no preferred), but the common can be voting or non-voting.
- Must be a domestic corporation Only individuals, estates and certain trusts may be shareholders. NOTE: Non-resident aliens (persons who are neither citizens nor permanent residents of the US) cannot be shareholders.
Tax Basis for Partnership / LLC
- Cash invested
Direct loans made to the partnership
Partnership Debt - Loans made to the partnership - not the partner (bank loans)
NOTE: S-Corp basis does NOT include bank loans even if the S-Corp owner personally guarantees the debt.
Property Classes
1245 Property 5 year - Computers, Autos, Trucks 7 year - Office Equipment except computers 1250 Property 27.5 year - Residential rental property 39 year - Non-residential real property Remember: CATCORN
Boot / Gain Recognized / Basis
No boot received - recognized gain is zero
When boot is received, just answer the recognized gain is the boot received
- Boot paid is added to basis
- Basis carries over from the prior property
Netting Capital Gains and Losses
Step 1:
* ST capital gains and ST losses are netted
* LT capital gains and LT losses are netted
Step 2:
* If a gain and loss remain, they are again netted
Step 3:
* If a loss remains after netting capital gains and losses, only $3000 of the net losses can be used to offset ordinary income
Sale of a Personal Residence(Section 121)
- $250K (single) and $500k (MFJ) of gain from the sale is tax-free if lived in for 2 out of the last 5 years. Exception available if taxpayer lives in the residence less than two year and moves because of a new job, for health reasons, etc. - receive a pro-rated amount
Recapture(1245 Property)
When the sole proprietor purchases equipment and takes depreciation (Cost Recovery Deduction - CRD), the CRDs offset the sole proprietor’s ordinary income. When the sole proprietor sells the equipment for a gain, the sole proprietor must:
1st - look back and recapture the lesser of the CRDs taken or the gain realized as 1245 gain (ordinary income)
2nd - recover any excess gain as 1231 (capital gain)
Section 179Qualifying vs. Non-Qualifying Property
Qualifying: * Tangible personal property * 1245 Property Non-Qualifying: * Real Estate * 1250 Property * Intangible (owning a franchise)
AMT Preference Items
Excess Intangible Drilling Costs (IDC)Private Activity municipal bondOil and Gas Percentage depletion / Excess intangible drilling costs (IDC)Depreciation (ACRS/MACRS) but not straight lineRemember: I.P.O.D.
AMT Add-Back ItemsAMT Not-Deductible Items
Add Back:
* Incentive Stock option bargain element
* Property and income taxes
* Miscellaneous Deductions - specifically watch out for financial advisor fees
* Home Equity interest NOT used for home improvement
Non-Deductible:
* Standard Deduction
Postponing AMT
Accelerating receipt of taxable income or deferring the payment of property taxes, state income taxes, deductible medical expenses or charitable giving, the regular tax (1040) may exceed the AMT payable (more taxable income) Deferring exercise of incentive stock options (preference item) to a later date or disqualifying the ISO so that it becomes NQSO (subject to ordinary income tax).
* Purchase public purpose muni bonds instead of private activity bonds.
Historic Rehabilitation Programs
Historic Rehabilitation programs that are held as passive activity may generate a deduction - equivalent tax credit of up to $250,000. The benefit of this deduction - equivalent tax credit phases out between $200- 250k of AGI.
- How does the deduction - equivalent tax credit work? Calculate tax to determine the maximum marginal tax bracket. If it is 25%, for example, then you multiply $25,000 by 25% to get $6250.
Low Income Housing Credit
Low-income housing programs that are held as passive activity may generate a deduction - equivalent tax credit up to $25,000. There is NO phase out.
* The low income housing credit is allowed annually over a 10 year “credit period.” The depreciation is straight-line over 27.5 years.
How does the credit work?For example, multiply 35% by $25,000 to get a credit of $8750. NOTE: Because there is no phaseout, it produces a higher credit.
Types of Phantom Income
nsurance - Lapse of policy loan, Section 162 life/disability
Investments - Zero/Strip Income, TIPS, declared but not paid dividends.
Tax - K-1 Income from LP/FLP, recapture
Retirement - NUA, 20% withholding plan distributions, secular trust
Charitable Giving
Calculate the maximum deductible - 60% of AGI
- Calculate the eligible amounts given to 60% organizations (public charities) such as all churches, schools, hospitals and organizations such as United Way, Red Cross, Humane Society, etc.
- Calculate the eligible amounts given to 30% organizations (private charities) such as private non-operating foundations, war veteran groups, and fraternal orders.
