Income Tax Planning Flashcards
Section 1245
Tangible personalty property used in a trade or business that has been depreciated or amortized. (Patents, equipment, and other tangibles).
How is 1245 Personalty Property Taxed
First, gain or loss is treated as ordinary income to the extent of depreciation taken. Next, remaining gain is taken as 1231 gain.
personalty
refers to personal (non-real estate) property
Section 1245 recapture applies when:
Section 1245 recapture is treated as ordinary income for the gain realized resulting from depreciation taken that was greater than economic reality.
Carl Borden is a contractor who has just purchased a tractor for use in his business. Carl paid $25,000 plus $1,250 in sales tax for the tractor. The local municipality also imposes an annual personal property tax of $500. The tractor has an expected useful life of 5 years. What is Carl’s basis in the tractor for depreciation purposes?
The basis of depreciable property begins with the acquisition costs plus any additional expense necessary to acquire or making such property ready for use. Here, sales tax is a required expense by law and is therefore added to the acquisition cost resulting in the depreciable basis. $25,000 (cost) + $1,250 (sales tax) = $26,250.
The CFP® Exam deals with taxation at the federal level, state if specifically addressed. The municipal property tax (local tax, not state level tax), is not taken into account.
Which of the following distributions of IRC Section 1245 recapture property may result in the immediate recapture of some or all of previous depreciation deductions?
A distribution by a partnership to one of its partners.
A non-simultaneous like-kind exchange.
A disposition at death.
A sale for an interest-bearing note.
Solution: The correct answer is D.
Section 1245 recapture is applied to the sale of depreciated assets. Option “A” is incorrect because the distribution is a property distribution and not a sale. Option “B” is incorrect because there is no “sale” as part of a like-kind exchange. Option “C” is incorrect because the property transferred at death is not classified as a sale. Option “D” is correct because it is a sale, regardless for cash, notes, either or both.
Assuming an asset is sold for a gain, when would Section 1250 ordinary income occur?
Depreciable property is sold at a gain.
Depreciable property is sold regardless of whether there is a gain or loss.
Straight line depreciation is used on real property subject to ACRS.
Real property subject to ACRS and accelerated depreciation was used.
Solution: The correct answer is D.
Section 1250 gain applies to the realized gain on real property where the accelerated method was used. The gain is the excess of accelerated over straight line (ACRS). Section 1250 gain is taxed as ordinary income. Under current law (MACRS), only straight line depreciation of real property is used.
Jacob is divorced and has full custody of his two children although they spend every other weekend with their mother. How many personal exemptions is Jacob permitted on his Form 1040?
Solution: The correct answer is A - 0.
Per the TCJA, personal exemptions are suspended from 1/1/18 through 12/31/2025.
One of the five tests which must be met to qualify as a dependent is:
A. The age of the dependent.
B. The dependent is either a member of the taxpayers household or meets the criteria for family relationship.
C. The taxpayer is a U.S. citizen.
D. All of the above.
Solution: The correct answer is B.
The five dependency tests are: 1) Gross Income Test, 2) Support Test, 3) Member of Household or Family Member Test, 4) Citizenship Test (U.S., Canada or Mexico), and 5) Joint Filing Test.
The Qualified Dependent Test includes which of the following tests:
Gross income.
Support.
Member of household or family.
Citizenship or residence.
Joint return.
Solution: The correct answer is D - All the Above
The five elements of the Qualified Dependent Test are: Gross income, support, member of household or family, citizenship or residence, and joint return.
Sally and Kaleb have 2 dependent children, ages 6 and 9. They file their income tax return jointly. They are both in great health, and in their mid-30s. Assuming their AGI is $192,000, how much should they expect as a credit for the child tax credit in 2022, if anything?
Solution: The correct answer is C.
The child tax credit is $2,000 per qualified child, so $4,000 in this instance. Up to $3,000 can be refundable ($1,500 per child)
The enhance child tax credit from the American Rescue Act expired on 12/31/2021
Material Participation
- greater than 500 hours per year for the activity. Or
- Greater than 100 hours per year AND greater than any other participant. Note: can be a combination of other activities as long as it reaches over 500.
Which of the following factors should be considered in determining whether an activity is treated as an appropriate economic unit for the grouping of passive activities?
The similarities and differences in types of business.
The extent of common control.
The extent of common ownership.
All of the above.
Solution: The correct answer is D.
Options “A,” “B” and “C” are all considerations in determining the appropriate treatment of an economic unit.
Under the Last In First Out (LIFO) inventory system:
The last goods purchased are the first goods sold.
LIFO means that the oldest goods will remain in inventory until sold.
The cost of goods is assigned the most current inventory costs.
LIFO insures that the newest goods are sold.
Solution: The correct answer is C.
The LIFO method is concerned with movement of costs through inventory, not goods. The cost of the last units purchased will be the first costs to be transferred to cost of goods sold when the goods are sold.
Accuracy Related Penalty
makes a substantial understatement of his tax liability, generally more than 10 percent of the correct tax liability and at least a $5,000 tax deficiency. The penalty imposed is generally 20% of underpayment amount.
