Income Tax Flashcards
1
Q
What are the eligibility requirments for a
Subchapter S Corporation?
A
- Number of shareholders is limited to 100
- can only have a single class of outstanding Common Stock (no preferred), but the Common can be voting or non-voting.
- Individuals, estates and certain trusts may be shareholders.
- can only take losses up to basis (major disadvantage), remained can be NOL
- unearned income and losses become an adjustment to basis. (phantom income)
NOTE: Non-resident aliens cannot be shareholders.
2
Q
AMT Add-Back Items
AMT Not-Deductible Items
A
add-back items: itemized deduction items allowable for 1040 but not for AMT.
- Incentive Stock Option Bargain Element*
- Property and Income Taxes (SALT)
*bargain element = FMV @ exercise date - option price
3
Q
Sole proprietorship
A
Advantages
- conduity entity
- Taxes reported on Schedule C
- Losses can be carried forward indefinetely as a NOL (like a corp)
- 100% of med, dental, & LTC are deductible for owner
- Interest paid on debt is deductible on Schedule C (no limit)
Disadvantages
- Lack of continuity
4
Q
Section 179
Qualifying vs. Non-Qualifying Property
A
179 = election to expense up to $1,040,000 of qualifying propety in the year of aquisition
Qualifying: (CATCO)
- Tangible Personal Property (manufacturing equipment)
- 1245 Property
Non-Qualifying:
- Real Estate
- 1250 Property
- Intangible (owning a franchise, 197)
5
Q
Charitable deduction for Loss Property
A
deduction is limited to FMV
6
Q
Step Transaction
A
Ignore the individual transaction and instead tax the ultimate transaction
- Example: The XYZ Corporation sells property to an unrelated purchaser who subsequently resells the property to a wholly owned subsidiary of XYZ.
7
Q
Oil and Gas Working Interest
A
- exempt from PAL rules
- Losses from OGWI are deductible against active or portfolio income without limits. No AGI phaseout.
- To qualify the form of ownership may not limit personal liability (LP)
8
Q
Substance Over Form
A
The substance of a transaction, and not merely its form, governs its tax consequences.
- Example: The president of XYZ has the company loan him the money he needs. He never intends to repay the loan or take a salary.
9
Q
An individual is required to file a tax return if earnings from self employment (1099) are more than ______?
A
$400
10
Q
Tax Section 197
A
amortization of Intagibles (ex goodwill & franchises)
uses straight-line depreciation
11
Q
Assignment of Income
A
Income is taxed to the tree that grows the fruit, even though it may be assigned to another prior receipt.
- Example: Mr. T owns XYZ, an S Corp. He directs that all income be paid to his son. Mr. T reports no income.
12
Q
Sham Transaction
A
A transaction that lacks a business purpose and economic substance will be ignored for tax purposes.
- Example: A sale by XYZ to ABC, but both XYZ and ABC are owned by the same persons.
13
Q
IRS Penalties
A
- Frivolous Return: $5000
- NeGliGence: Penalty is 20% (2 g’s) 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, with a maximum of 25%.
- Failure to PAY: Penalty is 0.5% per month the tax is unpaid, with a maximum of 25% (Pay-Point)
14
Q
Tax filing extension
A
- you get a 6mo extension (Oct 15)
- form must show full amount estimated as tax.
- If payments are due they must be made. Taxpayers may extend filing but not payment
15
Q
Passive Acitivites Loss Rule
A
If an individual owns an interest in a business, but does not materially particiapte, the interest is passive interest.
Can only deduct loss to the extent of income generated by other passive activies.
Exceptions: May deduct up to $25k/year of net losses from RE activity from their active or portfolio income. Phaseout $100-150k
- Material participation
- Acitve Participation
16
Q
Sources of Federal Tax Law/Authority
A
- Internal Revenue Code: Primary Source of all tax law.
- Treasury Regulations: Great authority, but not law.
- Revenue Rulings 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
17
Q
Holding period taxation
A
- STCG & 1245 are taxed at ordinary income tax rates
- LTCG are subject to a maximum of:
- 0% in 10-12% tax bracket
- 15% in the 25-35% tax bracket
- 20% in the 35-37% tax bracket
- Collectible long-term gains subject to tax rate of 28%
18
Q
Low Income Housing Credit
A
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.
19
Q
Credit equivalent deduction
(calculation)
A
Tax Credit / Tax Bracket = Deduction
hint: CBD
- Credits are worth more to a low-bracket taxpayer
- Deductions are worth more to a high-bracket taxpayer
20
Q
Original/Adjusted basis
A
- Basis = taxpayer’s investment in any asset or property right
- Basis is increased by legal fees, commissions, sales tax, freight and improvements (hint: CLIFS)
- Basis is NOT effected by repairs (deductable expense), real estate taxes, or normal business operating expenses
- Improvements MUST be capitalized
21
Q
Income Tax calculation (form 1040)
A
22
Q
Schedule A Itemized Deductions
A
- Medical, Dental, and LTC (above 7.5% of AGI)
- Casualty and Theft Losses (federal disaster)
- Real Estate Taxes**
- Investment Interest Expense
- Home Mortgage Interest
- State and Local Taxes**
- Personal Property Tax**
- Charitable Gifts
Remember: My Doctor Likes Casual Theft, Real E? I-IE, Homie. SALT, Pretty Please? Great! **Limited to $10,000/yr.
23
Q
Personal Service Corporation (PSC)
A
PSC = closely held C-corp owned and funded by fees from proessionals who perform certain services
- Health
- Accounting / Architectural
- Law
- Engineering
Remember: H.A.L.E.
income retained is taxed at flat 21% rate
24
Q
Exclusions to Gross Income
A
- gifts
- inheritances
- municipal bond interest
- worker’s comp
- child support
- compensatory damages
Hint: GIMBO and the 3 C’s
25
Tax Cuts and Jobs Act-eliminated deductions
* Miscellaneous deductions
* Unreimbursed personal casualty losses (*unless federal distater*)
* Home office deduction for employees (Self-employed individuals can still claim deduction)
* *Stricter* limit on Meals and Entertainment Expense
* _No_ Entertainment deduction
* Meals for EEs while traveling are 50% deductible
* Travel is 100% deductible
* Office parties still deductible
* Tickets to sporting and cultural events NOT deductible
26
Installment Sale (calculation of gain)
Profit / total contract price = Gross profit percentage
Installment x Gross Profit percentage = total gain
_Related party tax trap_ = property purchased through installment sold within 2 years, the insteallment sale collapses
27
Casualty Losses (Calculation of the Deductible Loss)
**First:** Use the lesser of basis or FMV
**Second:** Subtract any insurance coverage
**Third:** Subtract $100 (floor)
**Fourth:** Subtract 10% of AGI.
**\*Must be a presidentially declared "natural disaster"**
28
Types of Phantom Income
**Insurance:**
* Lapse of Policy Loan
* Section 162 Life/Disability
**Investments:**
* Zero/Strip Income
* TIPS
* Declared but not paid Dividends
**Tax/Retirement:**
* K-1 Income from LP/FLP
* Recapture
* NUA
* 20% withholding plan distributions, Secular Trust
29
Calculating chartiable gifts
* Step 1: Calculate the maximum amount deductible (60% AGI)
* Step 2: Amount to public charities (50% organizations)
* Up to to 60% AGI for cash donation
* Up to 30% of AGI for LTCG property
* Up to **_5_**0% of AGI but using:
* _basis_ for inventory
* _basis_ for artwork
* _basis_ for STCG property
* _basis_ for use-unrelated property
* Step 3: Amount to private charities (30% organizations)
30
Depreciation Recapture (1245 Property)
When a business purchases equipment and takes depreciation (cost recovery deduction), the CRDs offset the business' _ordinary income_. When the business sells the equipment for a gain, the business 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)
31
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.
32
Can certain taxpayers do both 121 exclusion and 1031 like-kind exchange?
Yes, as long as the requirements are satisfied
33
Kiddie Tax
All net UNEARNED income of a child who has:
* NOT attained the age 18
* Is 19-23 and a full-time student
* Has at least one parent alive
...is **taxed at Parent's Rates** regardless of the source of the assets.
Children under 18 are entitled (2020) to a Standard Deduction amount ($1,100) and an additional $1,100 of unearned income will be taxed at the child's rate (10%).
34
Self-Employment Tax Calculation
The Taxable Wage Base will not exceed $137,700 (2020).
* If you added up the self-employed income, and you exceeded $137,700, you did something wrong. Why? Social Security tax stops at $137,700 (2020).
**Shortcut**: Multiply Self-employment Income by 0.1413
35
Dates for Paying Estimated Taxes
* April 15 (1mo)
* June 15 (+2mo)
* September 15 (+3mo)
* January 15 (+4mo)
36
Accounting Methods
* **Cash:** Mandatory where taxpayer's records reflect only cash transactions, and there are no inventories.
* **Accrual:** Mandatory for purchases and sales over $25M where there are inventories.
* **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.
37
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.
* Surviving spouse can use MFJ exemption for _up to 2 years_ and spouse dies
* **Exception** **available** if taxpayer lives in the residence less than two years and moves because of a new job, for health reasons, etc. Receives a pro-rated amount.
38
What qualifies as investment income?
* Income from property held for investment
* interest
* dividends\*
* royalties
* STCGs\*\*
\* dividends are included as investment income ONLY if taxpayer elects _not_ to use the reduced rate.
\*\* LTCG can be included if the taxpayer elects _out_ of LT rates
39
Property Classes
**1245 Property (non real estate)**
* **5 year:****C**omputers,**A**utos,**T**rucks
* **7 year:****O**ffice Equipment except computers,
**1250 Property (real estate)**
* **27.5 year**: **R**esidential rental property
* **39 year: N**on-residential real property
**Remember**: CATCORN
40
When are Fringe Benefits taxable?
* Health Insurance Premiums paid for self-employed, partners, and more than 2% owners of an S-Corp are Taxable Income.
* 100% is deductible as an adjustment to income on the FRONT of the 1040.
* This can include all types of health insurance programs.
41
Boot / Gain Recognized / Basis
* Boot received = recognized gain
* Boot paid = Added to Basis
* Basis carries over from last propety
42
Historic Rehabilitation Programs
Historic Rehabilitation programs that are held as passive activity may generate a Deduction:
* Equivalent Tax Credit of up to $25,000.
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.
43
Taxation of Business Entities
44
Net operating loss
* NOL = excess of deductible expenses over gross income
* allowed for self-employed, corporations, estates, and trusts
* CANNOT be carried back but may be carried forward **indefinitely**
45
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 $3,000 of the Net Losses can be used to offset ordinary income
46
Federal Withholding Tax Underpayment Penalty
To avoid, pay the lesser of:
* 90% of the current year's tax liability
* 100% of the prior year's tax liability (or 110% if the last year's adjusted gross income exceeded $150,000)
47
Self-Employment Income
* **Net** Schedule C Income
* _General Partnership_ Income (K-1 income)
* Board of Directors fees
* Part-time earnings (1099)
Does not include:
* Real Estate income or **rents paid**
* distributive share of income or loss of a LP
* Wages or K-1 Income from an _S Corporation_
48
Charitable Giving
(AGI limits, organizations, & carryforward)
Calculate the Maximum Deductible - 60% of AGI
* Calculate the eligible amounts given to 50% 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 orde*rs.
* Any contribution in excess of such limits is carried forward as itemized deduction for **up to 5 years** (or death)
49
AMT Preference Items
* Excess **Intangible** Drilling Costs (IDC)
* **Private** Activity Municipal Bond
* **Oil** and Gas _Percentage_ Depletion / Excess intangible drilling costs (IDC) (NOT cost depletion)
* **Depreciation** (ACRS/MACRS) but not straight line
**Remember**: I.P.O.D.
50
Charitable Bargain Sale
| (calculating taxable gain)
Property sold to charity for less than FMV.
Calculation:
Sale Price / FMV x basis = adjusted basis
Sale Price - adjusted basis = taxable gain
51
Tax credits (other than children)
* Adoption Credit (nonrefundable)
* included adption fees, court costs, attorney feeds, and cost to adopt.
* credit can be claimed the year adoption is finalized
* Elderly and Disabled Credit (nonrefundable)
* Foreign Tax Credit (nonrefundable)
* Earned Income Credit (**refundable**)
52
Realized Gain vs Recognized Gain
What's the difference?
* **Realized Gain** is economic or inherent gain at the time of the transaction.
* **Recognized Gain** part of realized gain that is _immediately taxable._
53
Recapture rules - excess front-loading of alimony
Excess alimony paid in 1st and 2nd years must be recaptured (included in income) in the third year if payments decrease by $15,000+ between years 2 & 3
1. no alimony paid year 3: add year 1 + 2 then subtract $37,500
2. payment made year 3: take year 3 multiply by 2 and add $37,500. Then subtract from year 1 + year 2.
3. Comparison of year 2 & 3 - look for decrease of GREATER THAN $15,000
54
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.
55
C Corporation
| (advantages & disadvantages)
Advantages
* Separate tax entity, taxed at flat 21%
* Dividend-received deduction (50% exclusion)
* Limited liability & continuity of life
Disadvantages
* corporate formalities
* Dividends paid (after-taxs)
* Accumulated earnings \> double taxation above $250k
56
What are the major Tax Free Fringe Benefits?
* Health Care Premiums
* Insurance Premiums on non-discriminatory group life policy up to $50k
* Company car for working conditions only
* Employer-provided transit passes ($270/mo. cap) or parking ($270/mo. cap)
* Occasional overtime meal money, cab fare, theater or sporting event tickets
* Discounts on services limited to 20% of selling price charged to customers
57
Deductions *for* AGI vs Deductions *from* AGI
Deductions *for* AGI/above the line deductions
- IRA contribution, Keogh/SEP, SE Tax & Insurance, Alimony
Deductions *from* AGI/below the line deductions
-Great of Standard or Itemized Deduction
58
Tax Credits (children)
* Credit for child and dependent care expenses (until age 13)
* nonrefundable
* 20% of allowable expense can be deducted
* expenses limited to $3,000 for one dependent and $6,000 for two
* Child Tax Credit (per child under 17)
* partially refundable up to $1,400 per child
* tax credit of $2,000
* phase out above $400k MFJ/$200k Single
59
Renting your vacation home (normally a business)
* personal use cannot exceed the **_greater of:_**
* 14 day; or
* 10% of rental use
* will be treated as a residence and lose any rental property deductions otherwise allowed.
60
Adjustments for Adjusted Gross Income (AGI)
The second step in the 1040 calculation is adjusted gross income. It is Total Income (or Gross Income) less adjustments to income. (Adjustments **FOR** AGI)
The main _Adjustments_ to income are:
* IRA Contributions
* Keogh or SEP
* Self-employment Tax (50% of .1314)
* Self-employment Health Insurance (100%)
* Alimony paid (pre-2019 divorces)
61
Section 1244 qualified small business stock
* only applies to first $1MM of stock (C of S) initially issued
* Loss of $100,000/yr (JT) is _ordinary_ (not capital) loss
## Footnote
*ex. business owner starts qualified C corp, losses $150,000 the first year. $100,000 can be claimed as 1244 ordinary loss and $3,000 as capital loss. VS $3,000 capital loss and $147,000 carry forward.*
62
Charitable Giving (Types of Property)
* Appreciated long-term capital gains property (50% organization)
* when valuing gift at **FMV**, may deduct **3**0% of AGI
* when valuing gift at **basis**, may deduct **5**0% of AGI
* Ordinary income property
* *ex. Inventory, artwork, copyright, _STCG_, _use-unrelated property_*
* Deduction is **limited to basis**
