Income Tax Flashcards
Step Transaction
Ignore the individual transactions and instead tax the ultimate transaction.
Ex. The XYZ corporation sells property to an unrelated purchaser ho subsequently resells the property to a wholly owned subsidiary of XYZ
Sources of Federal Tax law/Authority
Internal Revenue Code- primary source of all tax law
treasury regulations: great authority but not law
revenue ruling and revenue procedures: administrative interpretation/may be cited
Congressional Committee reports: indicate the intent of congress/may not be cited
private letter rulings:apply to a specific taxpayer
Judicial sources: court decisions interpret
Sham Transaction
a transaction that lacks a business purpose and economic substance will be ignored for tax purposes
ex: a sale by xyz to abc where both xyz an abc are owned by the same persons
substance over form
the substance of a transaction and not merely its form governs its tax consequences
ex the president of xyz has the company to lend him the money he needs. he never repays the loan or take a salary
assignment of income
income is taxes to the tree that grows the fruit even though it may be assigned to another prior to receipt
mr. t owns xyz, an s corporation. he directs that all income is paid to his son. mr t reports no income
dates for paying estimated taxes
april 15 june 15 september 15 Jan 15 ajsj
frivolous return
a frivolous return is one that omits information necessary to determine the tax liability, shows a substantially incorrect tax, or is based on the taxpayers desire to impede the collection of tax
IRS Penalties
Frivolous return = $5000
Negligence: penalty is 20% of the portion of the underpayment attributed to negligence
Civil Fraud: Penalty is 75% of the portion of the tax underpayment attributable
Failure to file: Penalty is 5% of the tax due per month, whith a maximum of 25%
Failure to PAY: Penalty is .5% per month the tax is unpaid with a max of 25% , pay point
Federal Withholding Tax Underpayment Penalty
To avoid, pay the lesser of the following:
1) 90% of the current year’s tax liability
2) 100% of the prior year’s tax liability (or 110% if the 2011 adjusted gross income exceeded $150,000)
Adjustment for Adjusted Gross Income - AGI
The second step in the 1040 calculation is adjusted gross income. It is the total income (or gross income) less adjustments to income. The main adjustments or deductions to income are the following: IRA Contributions Self-employment tax Self-employment health insurance 100% Keogh or SEP Alimony paid *self employment income X .07065
Schedule A- Itemized Deductions
medical, dental, and LTC (7.5% AGI) casualty and theft losses real estate taxes investment interest expense home mortgage interest state and local taxes personal property taxes charitable gifts
investment expense (tax treatment)
investment expenses are directly connected with the production of investment income (margin interest) In determining net investment income, the 2% miscellaneous itemized deductions must be taken into account, specifically investment advisor fees. In other words, investment income is offset by deductible investment advisor fees.
Casualty Losses - Calculation of the deductible loss
1st - use the lesser of the basis or FMV
2nd - subtract any insurance coverage
3rd - subtract $100 floor
4th - subtract 10% AGI
Miscellaneous Deductions Schedule A
Subject to a 2% AGI
fees to investment counselors
tax advice and preparation fees
professional and business association dues
unreimbursed employee business expense
employee home office expense
They are accumulated and then 2% of AGI is subtracted
Kiddie Tax
All net UNEARNED income of a child who has NOT attained age 24 and who has at least one parent alive is taxed at the marginal rate of child’s parents regardless of the source of the assets creating theincome
Children under 24 are entitled 2012 to a standard deduction amount ($950), and an additional $950 of unearned income will be taxed at the child’s marginal rate (10%)
Self-Employment Income
Net schedule C income
general partnership income (k-1) income
board of directors fees
Part-time earning (1099)
Does NOT include the following: wages from an S Corp K-1 distributions from an S corp Real estate income or rents paid Gains from property, securities, or commodities dividends or interest on investments
Self-Employment Tax Calculation
shortcut! multiple total net self employment income by 12.28% and round up
Tax credit
Credit for child and dependent care expenses (nonrefundable)
child tax credit (earned more than 12,550 - refundable)
adoption credit (refundable)
elderly and disabled credit (nonrefundable)
foreign tax credit (nonrefundable)
earned income credit (refundable)
Installment sales exceptions
if all payments received are in the year of sale
if property is publicly traded securities
if property is sold at a loss
if property is sold to a related party (son, daughter, etc) who is in turn sell the property within 2 years of original purchase date
accounting methods
cash: mandatory where taxpayer’s records reflect only cash transactions with no inventories
accural: mandatory for purchases and sales where there are inventory.
hybrid: combines accrual for inventory portion of business and cash for cash portion of business
percentage of completion: for long-term contracts where the contract will not be completed within the taxable year started
FIFO vs. LIFO
Fifo- (first-in, first out)
increase earning
greater tax liability
current cost inventory
LIFO (last-in, first-out)
Reduced earnings
Deferral of taxes
Understated inventory
Net Operating Losses (NOL)
An NOL sustained in one year may be used to reduce the taxable income for another year. It may be carried back two years, and/or it may be carried forward twenty years
NOL is allowed to the self-employed and regular corporations. It is not allowed to partnerships or S corporations
S Corporation - Special Requirements
the number of shareholder is limited 100
the corporation can have only a single class of outstanding common stock (no preferred) , but the common stock can be voting or non-voting
must be a domestic corporation
only individuals, estates, and certain trusts may be shareholders. Note: nonresident aliens (persons who are neither citizens nor permanent residents of the U.S.) cannot be shareholders
Personal service business that should avoid operating as a regular corporation
Health
Accounting, architectural, artists
Law
Engineering
Personal Service Corporation PSC
a closely held C corporation that is owned by certain individuals who perform service is denied the progressively of corporate rate schedule. Any income retained by a PSC is taxed at a flat 35% (no graduated rates like a regular corporation)
Conduit Entities Partnerships
Partnership is an unincorporated association of two or more persons to conduct business as co-owners. A partnership must file a tax return (form 1065), but it is for information purposes only. Each partner includes in his/her return the distributed share of the partnership income or loss items
Losses up to basis: basis equals cash contributed by the partner, direct loans made to the partnership by the partner, and loans made to the partnership - not the partner (share of partnership debt for which the partner may ultimately be held responsible)
