Income Tax- Wrong Answer Flashcards
IRS ignores legal formalities to determine the economic outcome of a transaction
Substance over form
Transactions are independent. Parties involved will not complete the first transaction without anticipating that the whole series of transactions will take place. “Tax the ultimate transaction”
Step Transaction
Ignore-ignore-ignore- tax final
Coupon interest received by father, he assigns to so .
Assignment of income
Client receives dividends from life insurance policy but keeps them in the policy.
Constructive receipt
Owner of company pays $500 to 1099 employee (no other income)
Employee needs to file because net earnings are greater then $400
If you messed up your taxes what needs to happen
File 1040x
Fraud. Tax liability was 10k principal and 4,200 interest. Whats the penalty
75% of principle
Max student loan interest deductible and where?
Up to $2,500. Above the line on form 1040. Deductible on schedule 2 (check this)
Income 100k, portfolio income 5k, qualified dividends 7,500. Short term cap gains 22,500, margin interest expense 40k
What can they deduct?
27,500. Qualified dividends do not count as ordinary income
Ch. 2 oh 2-9
60k earned income, 2k interest from cd, 3k LTCG, 4K Margin Interest
How much of margin interest is deductible?
2k
Tax ch 2-11
Baseball card federally declared disaster
Basis 30k, FMV 50k, insurance 17k, AGI 80k
Deductible casualty loss
4,900
Lesser basis or FMV= 30k-insurance-floor (100)- 10% of AGI
Tax Ch 2
Medicare tax rates
1.45% <200k single, 250k MFJ
2.35% > 200k single, 250k MFJ
Tax 2-16
Age 12 receives $800 dividend income and $4,350 earned income
Standard deduction?
4,800
Greater of 1,300 or earned income +$450
Tax 2-18
How is self employment tax paid?
Added to income tax liability, then 1/2 is subtracted on the front of the form 1040.
Tax 2-19
Self employed person 61
3,600 Medical Insurance
1,200 Dental
2,000 LTC Qualified Insurance
90,000 Net Schedule C Income.
What is his AGI?
76,841.50
Net Sch. C -$6,358.50*
Less premiums $6,800
*90k x .07065 = 6,358
** max LTC at age 61 is over 4K. 2k LTC premium is under the phaseout/threshold).
How much is the child care tax credit?
Max is 6,000x20% = 1200
Per TCJA how much of the child tax credit may be treated as a refundable credit?
1,700/child
What is the childcare tax credit if dependent care spent is 3k and corporate dependent care benefits are 2k?
3k-2k=1k x 20%= $200
What are the 4 principles supporting indemnity? (One party will pay another party for loss occurred)
- Insurance interest
- The concept of actual cash value
- Other insurance (limit the ability to profit from a loss)
- Subrogation
What happens in a cross purchase agreement?
Stock holder buys other stockholders interest. No insurable interest for a company.
Collateral source rule
In tort liability, the plaintiffs measure of damage should not be mitigated by payments received from sources other than the negligent party/tortfeasor.
Notice of loss requirement would be found I which part of the insurance contract?
Conditions
Childcare tax credit
Max is $6,000 expense x 20%
2-21 Tax What is the MAGI limit for a single parent in regards to child tax credit?
200k
2-23 Tax. Which doesn’t produce income tax coming from business to top exec? $10k in excess group life, $10k into IRA, $10k in deferred comp plan. $10 into annuity owned by business
$10k deferred comp
Which scenario would a son of a business owner be able to make more money?
A. Working part time make $10/ hr (5k/yr)
B. Be a 1099 employee at $12/hr (about 500 hrs per year)
A. 5,000 - (5k x 7.65%)= 4,617.50
B. 6,000 - (6k x .1413) = 5,252.20
Easiest accounting method
Cash
Paid 150k for land. Sold it for 600k under installment method. Received 60k first year. What amount of capital must you recognize for the current year?
45k
Gross profit percentage 450k/600k=75%
60k x 75%= 45k
When to use specific identification?
A business can specifically identify what to sell and create a gain, loss, or neutralize a gain or loss. Can use it to show high profits…
What does a NOL accomplish?
Corporations can utilize losses from prior years to offset current year income.
Company X has annual revenues of 750k. Takes in all kinds of inventory and the turnover based on good pricing and sales keeps profitability month after month. What type of accounting?
Cash- Always the easiest
Dad sold property to son (50k cost basis) sale price 500k. Son sold property less than a year son sells the property for 1.5million. Whats the tax outcome?
Dad will report 450k LTCG
Son realizes 1million STCG
Can a C Corp utilize a tax deduction under QBI-199A?
No, not a pass through entity
What is QBI?
Qualified business income. Can be used by pass through entities and may qualify up to 20% deduction for each QBI they own.
Mostly rental, publicly traded partnerships and reits
Tax 4-4 What can claim the 65% dividend exclusion?
C Corp.
own 20% or less= 50% exclusion
Own 20-80% = 65% exclusion
Own 80%= 100% exclusion
Tax 4-5 Dr. Smith makes his professional association as a regular Corp. What happens to income retained by the PSC?
Flat taxes at 21% (flat corporate income tax rate)
Tax 4-6What are some differences between S and C Corp?
Stock? Salary? Retirement plans?
Owner of S Corp could take high salary and not have it count as dividends (conduit theory). S Corp can’t issue preferred stock. They both can offer pension plans and offer voting and non voting shares
Tax 4-8 A sole proprietor is taking a salary. She anticipates marginal profits or losses for the next several years. She does want it to be a family business so her kids can join. What is the most appropriate business for for her practice?
Change to an S Corp and issue both voting and non voting stock.
Limited partner/ kids can’t actively participate
Regular Corp- can’t take losses on her personal 1040
Sole prop- unlimited liability
Benefits of an S Corp for liability
Limited liability on the owner and has pass through losses
Tax 4-9 successful CPAs are merging. Whats the most appropriate business form?
An LLP- offers limited liability, no liability for the professional acts of the other partner. A regular C Corp would be classified as a PSC and subject to 21% tax rate. A straight up partnership would subject both parties to the liability of the other. S corp would be the next best answer.
Tax 4-9 what is deductible without limit on a business owners tax return?
Business investment interest paid (or expensed)
Tax 4-11 what is the corporate accumulated earnings tax? And what is it trying to accomplish?
20% of accumulated earnings (on top of regular corporate tax. The tax is designed to coerce corporations to pay dividends. Tax is only on amount above 250 (150k for PSC)
Tax 4-12 On what tax form are the S Corp distributions normally received by individuals?
Schedule K-1 of I 120S
Tax 4-12 what form are partnership distributions normally received by individuals?
K-1 of the 1065
Tax 4-14 why would an accountant that expects to double her profits not want to move away from being an S Corp?
If she became a C Corp, she would be a PSC and subject to 21% flat tax on profits. As an S owner the excess income exceeding her salary flows through to her at her personal tax bracket (unearned K-1 income). Limited partner wouldn’t be an option because she participates.
Tax 4-14 why would 2 ppl want to do business inside an LLC together and not a partnership?
Liability is extreme in the partnership. LLC offers same pass through losses
Tax 5-2 Which trust does not have to use a calendar year to file tax return?
Charitable trust (501a or charitable)
Tax 5-4 give an example of Grantor trust rules regarding an ILIT
Trust income is or may be used to pay premiums on life insurance on the life of either the grantor or the grantors spouse. The income from the trust is taxable to the grantor (not the trust)
Tax 5-6 Are beneficiaries taxed on distributed income from a simple trust?
Yes
Tax 5-7 how much is the income tax exemption on a trust that’s required to distribute all income? Not required to distribute all income?
$300, $100
Tax 5-8 If person A transfers assets to a trust for his own benefit, how is it classified for income tax purposes?
Grantor Trust
Tax 5-8 is a grantor trust tainted?
Yes, because trust does not pay the tax on its own income.
Tax 5-8 what does DNI allow the trust or estate to do?
- Claim a deduction for the amount that is taxable to the bene
- Limit the portion of distribution that is taxable to the bene
- Ensure the character of the distribution remains the same for the bene as it was to the trust
Tax 5-9 In a tainted irrevocable trust, who pays the tax on the trust paying a premium for a life insurance policy?
The grantor pays
Tax 6-1 what does “the original investment plus improvements” describe?
Cost basis
Tax 6-2 What is the adjusted basis?
Cost 190k, 4K paid legal fees, paid 12,500 to improve dock, claimed 25k in cost recover deductions, paid 13k prop taxes, paid 17k for utilities.
181,500
190+4+12,500-25k
Tax 6-6
MACRS/ Straight Line 5 year?
Computers, autos, and light duty trucks (1245 property)
Recover year 1,2 MACRS 20%,32%
Straight Line 10%, 20%
