Income Tax Rules Flashcards
What are the rules for Dividends when one corporation owns another corporation?
- 70% of dividends received from qualifying corporation may be excluded from income of recipient corporation if recipient corporation owns 20% or less of distributing corporation
- 80% exclusion if 20%–80% ownership
- 100% exclusion if 80% or more ownership
70% excluded from tax = 0%-20% ownership of other corporation.
80% excluded from tax = 20%-80% ownership of other corporation.
100% excluded from tax = 80%-100% ownership of other corporation.
What type of entity does a Personal Service Corporation (PSC) use and what are the types of service companies?
PSC can only use a C-Corporation.
Call AAA for HELP acronmy
Taxed at 35% flat rate, not graduated rate.
95% of activities in accounting, architecture, actuarial science, health, engineering, law, performing arts (AAA for HELP) + vets or consulting.
What are the passive loss general rules?
A passive activity is one that involves the conduct of any trade or business in which the taxpayer does not materially participate.
The general rule is that passive losses are deductible only against passive income.
However, passive income from a publicly traded partnership cannot be offset by passive losses arising from any other source (nonpublicy traded).
Income from active participation rental activities is considered passive income and can be offset by nonpublicly traded LP’s.
Any rental activity is a passive activity whether or not the taxpayer materially participates. However, there are special rules for real estate rental activities and real estate professionals.
What is active participation vs. material participation?
Active participation is not the same as material participation.
Active participation is less stringent compared to material participation. A taxpayer is considered to actively participate when they make management decisions to a certain extent. These management decisions include but are not limited to approving new tenants, deciding rental terms, and approving expenditures.
Allows $25K of annual losses to be deducted
Loss deduction phase out between $100K-$150K of AGI on a $2 for $1 basis.
Ownership of less than 10% interest or ownership of a limited partnership dose NOT qualify.
To qualify as a real estate professional, one must meet three requirements of material participation:
- 50% of the taxpayer’s services during the tax year are performed in real property trades or businesses in which the taxpayer materially participates
- The taxpayer must complete over 750 hours of service during the tax year in real property business in which he or she materially participates
- The taxpayer must participate materially in the real estate activity
What is Portfolio Income when discussing passive activity losses?
Portfolio income is not treated as income from a passive activity; it must be accounted for separately, and passive losses and credits generally may not be applied against it. The term “portfolio income” includes interest, dividends, annuities and royalties, as well as gain or loss from the disposition of income-producing or investment property that is not derived in the ordinary course of a trade or business.
What are unrelated business taxable income (UBTI) Rules?
a. UBTI is created by running a business in a retirement trust(unfair tax advantage)
b. If a qualified plan trust is carrying on a trade/business not related to purpose of the trust, the result is UBTI.
c. UBTI that exceeds $1,000 is subject to tax.
(1) Qualified plan investment earnings that represent UBTI subject to income tax at corporate rates
d. Types of income considered UBTI:
(1) income from a limited/general partnership interest, since partnerships provide flow-through of business income and
(2) use of leverage such as dividends from margined stock
(3) exception is real estate—can use leverage, or purchase in a partnership that is 100% owned by qualified plans
e. types of income not considered UBTI:
(1) dividends
(2) interest
(3) annuities
(4) royalties
(5) real property rents, even if property is leveraged
(6) gain from sale or exchange of capital assets
Ex:
Income from any type of property will be taxable as UBTI if the property has been acquired with borrowed funds (e.g., a life insurance policy loan).
Income from the operation of a business (e.g., vending machines) is subject to UBTI.
Real property rents are statutorily exempt from UBTI.
Qualified plan trusts generally cannot use debt in purchasing investments. The exception is real estate; thus, stock purchased on margin would generate UBTI, and debt-financed real property would not.
Limited partnership investments are considered the same as general partnership investments, and the associated management of the partnership’s business results in UBTI.
Unrelated Business Taxable Income (UBTI)
Ex:
Income from any type of property will be taxable as UBTI if the property has been acquired with borrowed funds (e.g., a life insurance policy loan).
Income from the operation of a business (e.g., vending machines) is subject to UBTI.
Real property rents are statutorily exempt from UBTI.
Qualified plan trusts generally cannot use debt in purchasing investments. The exception is real estate; thus, stock purchased on margin would generate UBTI, and debt-financed real property would not.
Dividends from stock shares purchased on margin
Limited partnership investments are considered the same as general partnership investments, and the associated management of the partnership’s business results in UBTI.
Income from an oil drilling limited partnership purchased with cash
Who qualifies for the self employed health insurance deduction?
Self-employed health insurance deduction is an above the line deduction equal to 100% of the amount paid (including Medicare premiums) for medical and long-term care insurance for themselves, their spouses, or their dependents. The amount of long-term care insurance that may be deducted is limited. This provision also applies to a partner, or to a greater-than-2% shareholder in an S corporation, with wages from the S corporation reported on Form W–2.
If a Partnership or S corporation—reports premiums paid (or reimbursed) as wages to the greater-than-2% shareholder or on the K-1 for the partner (with no FICA tax in either instance). The self-employed health insurance deduction is then claimed by the partner or greater-than-2% shareholder.
Is the 50% of AGI Charitable Deduction allowed on 50% of Basis or FMV?
A 50% election allows a deduction based on the property’s basis, with a 50% of AGI limitation.
Ex.
Jim Corley is planning to make a charitable contribution to a local university, a qualifying charitable organization. He is going to contribute a piece of real estate that he has owned for six years. The fair market value of the property is $80,000 and his basis in it is $55,000. He has an AGI of $120,000.
What can you accurately tell Jim about the effect of a 50% election?
What can you accurately tell Jim about the effect of a 50% election?
A: The current year deduction is $40,000 with a $15,000 carryforward.
B: The current year deduction is $55,000 with no carryforward.
C: The current year deduction is $55,000 with a $25,000 carryforward.
D: The current year deduction is $60,000 with a $20,000 carryforward.
Answer is B.
What are the limits for contributions to Non-Public Charities (private foundations, veterans groups, and other non-profits)?
First Question to Ask - is a 50% (Public, Qualified) or 30% (Private Non-Qualified) charity
Second Question to Ask - is it ST or LT Property?
Third Question to Ask - If it is LT property, can I take the 50% Election, ONLY if it is a Public Charity and you take it form Adj Basis.
(1) 30% of AGI for ordinary income property from the Adjusted Basis
(2) 20% for LTCG property from the FMV
What are the limits for contributions to Public Charities (schools, churces, hospitals, and govt units, United Way, Red Cross, etc.)?
First Question to Ask - is a 50% (Public, Qualified) or 30% (Private Non-Qualified) charity
Second Question to Ask - is it ST or LT Property?
Third Question to Ask - If it is LT property, can I take the 50% Election, ONLY if it is a Public Charity and you take it form Adj Basis.
(1) 50% of AGI for ordinary income property from the Adjusted Basis.
(2) 30% of AGI for LTCG property from the FMV. (unless 50% election made).
50% election—for contributions of LTCG property to a 50%
organization ONLY, taxpayer may elect a 50% contribution
base, but must use Basis.
What are the allowable itemized deductions for purposes of computing AMT?
charitable deductions
qualified housing interest
property tax
gambling to the extent of gambling winnings
What year is ther no AGI limit for low-income housing tax credit?
1989
There is no AGI limit for low-income housing property placed in service after 1989.
Publicly Traded Limited Partnership vs. Non-Publicly Traded Limited Partnerships?
Only passive losses from nonpublicly traded limited partnerships may be offset against income from other nonpublicly traded limited partnerships.
The passive loss from a PTP must be held in suspense until that same activity generates income (or until a taxable disposition of the PTP).
Income from a publicly traded limited partnership may not be offset by any other passive losses.
Historic rehabilitation vs. Low Income housing expenditures and tax credits?
Historic rehabilitation expenditures give rise to a deduction equivalent tax credit.
The credit may offset tax due on up to $25K of income
The credit is phased out between $200K-$250K of AGI
Low-income housing expenditures give rise to a deduction equivalent tax credit
The credit may offset tax due on up to $25K of income
The credit is phased out between $200K-$250K of AGI
No AGI limit on property placed in service after 1989
Can offset AMT liability if placed in service after 2007
Max benefit for active participation in low-income and historic rehabilitation is $25K combined.
Example:
If client is in the 28% bracket, then $25K x 0.28 = $7,000 tax credit on 1040.
