More Concepts (NINJA) Flashcards
How do you treat casualty losses on a tax return?
Deductible on Schedule A—Itemized Deductions, subject to a threshold amount of 10% of adjusted gross income
What is always the phase-out threshold of AMTI?
150,000
This is what you subtract from an AMT composed of Regular Taxable Income, plus Pos. AMT Adjustments, Less negative AMT Adjustments, PLUS the PPP preference items back in
This amnt. is to be MULTIPLIED by 25%
And that amount is your AMT exemption.
John’s principal place of business is considered to be at his personal residence (i.e., he qualifies to deduct home-office expenses). On occasion, John travels from his residence to various temporary work sites. In determining his deduction for transportation expenses, which of the following statements is correct?
John may include the expenses that were incurred in traveling to any work location in the same trade or business.
Further Explanation:
If a taxpayer’s residence is his or her principal place of business for purposes of IRC Section 280A(c)(1)(A) (i.e., he or she qualifies for the home-office deduction), the taxpayer may deduct daily transportation expenses incurred in going between the residence and another work location in the same trade or business, regardless of whether the other work location is regular or temporary and regardless of the distance.
What is the definition of a writ of certiorari?
A petition for the Supreme Court to review a lower court’s decision.
What does accounting income NOT include?
Anything (trustee fees, capital gains) that are instead allocated to CORPUS of trust!
AMTI Exemptions List Card:
PANIC TIMME & PPP
Remember.. the ONLY ones that might subtract out of taxable income on the way to AMT, are the “PANIC” elements.
PANIC (-)
Passive activity losses, accelerated depreciation (post 1986), NOL of individual taxpayer, installment income, contracts (dif between percentage completion vs. completed contract)
“TIMME” is going to ADD BACK IN (+)
Tax deductions, int. deductions on certain home equity loans (Not qualified mortgage ins.), Medical Deductions, 2% Misc. Deductions, Exemptions (personal + standard deduction) …. All going back in
PPP added back in (+)
Private activity bond interest, percent depletion (Excess over adj. base of property), Accelerated dep. PRE 1987
What are personal assets also called?
CAPITAL ASSETS
How to calculate double-declining balance for MACRS depreciation questions.
First-year depreciation under MACRS is based on double declining balance.
A 7-year life would yield depreciation of 2/7 the first year.
Because the purchase was made in December, the mid-quarter convention is used and 1-1/2 months of depreciation is recorded.
Depreciation is $1,000 (Cost × 2/7 × 1.5[midquarter]/12)
AGI Card - what to deal with “Above the Line” in arriving at AGI
1) IRA
2) Student Loans
3) HSA
4) Moving Expenses
5) 1/2 S.E. FICA
6) S.E. Health Insurance
7) S.E. Retirement
8) Interest Withdrawal PENALTIES
9) Alimony Paid (or received)
10) Attorney fees for certain whistle-blowing cases
11) Domestic Production Activities Deduction
“Businesses with “qualified production activities” can take a tax deduction of 3% from net income. This is a tax break pure and simple (Best for small manufacturing companies).”
Under the U.C.C. Sales Article, the warranty of title may be excluded by…
the seller’s statement that it is selling only such right or title that it has.
Danielson invested $2 million in DEC, a qualified small business corporation. Six years later, Danielson sold all of the DEC stock for $16 million and purchased an office building with the proceeds. Danielson had not previously excluded any gain on the sale of small business stock. What is Danielson’s taxable gain after the exclusion?
SECTION 1202 Rules Apply:
Exclude 50% of gain if held for over 5 yrs (this can be limited to the greater of $10 mil. or 10x taxpayer basis)
What happens when you accrue the wrong estimate for an income item, on a prior-year tax return?
You include the difference in the current year.
What are the rules about R&D expensing?
60 months or longer
What is the “Failure-to-pay” penalty? Is it different from interest?
Yes.
Failure to pay is usually 0.5% per month or part of month, past the date the return was due for filing (EVEN with extensions)!
When calculating new Shareholder bases in corporations, what will you consider Debt?
It IS boot received in the sense of calculating your new basis.
However, when attempting to choose a “recognized gain,” you will not factor in the debt relief. Only actual cash boot received.
the ONLY exception, when debt relief becomes taxable boot, is when it EXCEEDS the BASIS of the contributed property.
What do GAAP financial statements record a corp’s assets and liabilities at?
FAIR MARKET VALUE.
Different than the tax basis of new assets to the corp, which is generally That Asset+addit’l cash distributed in exchange for that asset by the corp.
When you roll over a traditional IRA into a Roth IRA, what is the first year you can take tax-free distribution on new Roth IRA?
5 yrs. from the year of Rollover.
EG, you roll in 2010.. can first take in 2015
Anti-fraud provisions: Rule 10B-5
IN general this can apply even when securities are not registered
-under the 1934 act, this prohibits FRAUD in connection with the PURCHASE or SALE of ANY SECURITY.
For a plaintiff to recover under 10b-5, they must prove the 3 elements, quite similar to Section 11, except just more general because it’s not just about a REGISTRATION STATEMENT:
1) Plaintiff bought or SOLD securities
2) Plaintiff suffered a Loss
3) Material Misrepresentation of fact, or in connection with sale.
In addition, plaintiff must prove:
4) Scienter, either through “False statements in reckless disregard for the truth” (STILL NO NEGLIGENCE)
5) Plaintiff reliance on the misrepresentations
6) Interstate commerce needs to be involved, via mail or national securities exchange is fine.
SEC Section 11
Section 11 imposes civil liability for misstatements, WHETHER OR NOT THEY ARE INTENTIONAL, in the registration statements.
Section 11 makes ANYONE who signs a registration statement liable for ALL damages caused by ANY misstatement of material fact in the registration statement.
A person wishing to sue under Section 11 need only show:
1) Plaintiff ACQUIRED stock (need not have bought)
2) Plaintiff SUFFERED A LOSS / Damages
3) Registration statement contained a MATERIAL MISREPRESENTATION or MATERIAL OMISSION of fact.
^^Those 3 things only. No negligence, scienter, intent to harm, the plaintiff need not “prove reliance… NOTHING EXCEPT having stock, suffered loss, material misrepresentation/omission. Those are the literal only 3 things that matter at all, under Section 11.
MUST BE BROUGHT w/IN ONE YEAR OF DISCOVERY
and THREE YEARS FROM OFFERING DATE
Registration signers will have “Due Diligence Defense” in Section 11 suits
Also will have the defense if they can prove it was NOT the misstatement that caused the damage, including proving that the misstatement was Immaterial and not material.
How do you calculate an “Amount Realized” when a partner sells his share of the partnership?
When a partner sells his interest in a partnership and he is relieved from his share of partnership liabilities, then the amount realized is the amount of cash received plus his share of liabilities.
Under the 2005 Bankruptcy Reform Act, the clerk of the bankruptcy court must provide a consumer-debtor with which of the following materials or services?
Written notice of the costs, purpose, and benefits of each form of bankruptcy.
Who are the “Insiders” under the 1934 act?
Officers, Directors, >10% stockholders –>
All must file reports with the SEC disclosing their holdings in the reporting company and making monthly updates
limits insider trading (short-swing profits)
Which of the following is considered capital assets for tax purposes?
A. Inventory
B. Land used in a business
C. Novel copyright held by the author
D. Mineral deposits sold in place
Mineral and similar natural resources deposits are considered to be capital assets when sold in place. The sale of mineral deposits, which are removed and sold in units, results in ordinary income. Copyrights held by the creator are not capital assets; however, purchased copyrights are capital assets. Inventory and land used in a business are specifically excluded from the definition of capital assets.
Do C and S corps recognize gain or loss upon liquidation?
Yes.
What is the minimum employment period for a worker’s wages to qualify for the Work Opportunity Credit?
An employee must work at least 120 hours for the employer to qualify for the credit. The employee must be a member of certain targeted groups, such as ex-felon, high-risk youth, etc.
When a trust instrument is silent regarding a trustee’s powers, which of the following implied powers does a trustee generally have?
A.The power to make distributions of principal to income beneficiaries
B.The power to lease trust property to third parties
ONLY B.
One of the requirements to qualify as a holder of a negotiable bearer check is that the transferee must:
Have possession of the check.
Bearer always = Negotiable upon mere delivery!
What are start-up expenses?
Start-up expenses are amounts paid or incurred for:
- Investigating the creation or acquisition of a business, or
- Creating an active trade or business, or
- Activities engaged in for profit and for the production of income before the day on which the active trade or business begins, in anticipation of the activities becoming an active trade or business and which would have been deductible if paid by an existing trade or business.
Common types of start up expenses include:
- Advertising costs
- Salaries and wages paid to employees and their instructors for training before the business actually begins,
- Travel and related expenses incurred in the course of finding potential distributors, supplies and customers before the business begins;
- Salaries and fees paid to executives and consultants, as well as for professional services, if incurred before the business actually begins, and
- Expenses of investigating the creation or acquisition of a trade or business (investigatory expenses). These are the costs incurred in seeking and reviewing prospective businesses before reaching a final decision to acquire or enter any business. Investigatory expenses include expenses for the analysis and survey of potential markets, products, labor supply and transportation facilities as well as advertising and travel to search for new business as well as the cost of audits designed to help decide whether to attempt the acquisition.
What are organizational expenses?
Qualified organizational costs related to the creation of a corporation normally would be capitalized. These expenses include:
- Legal expenses incurred for the organization of the corporation, such as drafting the corporate charter, by-laws, minutes of organizational meetings, terms of original stock certificates.
- Necessary accounting services
- Expenses of temporary directors and of organizational meetings of directors or stockholders, and
- Fees paid the state of incorporation,
- Other legal costs incurred in connection with state corporate charter renewals of limited duration.
So, what aren’t organizational expenses? The following expenses would be capitalizable (non-deductible) and not qualified organizational expenses:
- Commissions and other expenses incurred with the issuance or sale of stock or other securities,
- Expenses incurred with the transfer of assets to a corporation,
What is a distribution from a partnership TAX-FREE to the extent of..?
The Accumulated Adjustments Account
What of a distribution is TAXABLE DIVIDEND (Still preferential tax treatment) to the extent of..?
Remainders, after tax-free distribution out of Accumulated Adjustment Account, can be taxed at the dividend rate up to the Earnings and Profits of the partnership.
ALL REMAINING IS TAXABLE GAIN, once you subtract the basis, which must come out in computing any gain.
E&P Adjustments: SUBTRACTIONS.
- Fed. Income Tax
- Non-deductible penalties and fines
- Office Life Insurance Premiums (where corp. is beneficiary)
- Producing tax-exempt income
- Non-deductible Charitable contribution portion
E&P Adjustments:
ADDITIONS.
- Refunds of Fed. Income Tax
- Tax-exempt income
- NOL Deductions
- Life ins. proceeds (not premiums paid) where CORP is beneficiary
- DRD goes back in
- Carried-over Capital Losses
- Carried-over Charitable Conts.
Earnings and profits is to Income Taxation, what a Retained Earnings calculation is to GAAP
What can be considered “Return of Capital” when a partner is receiving a partnership distribution?
Any amount up to the extent of their BASIS in the stock.
Under the Subchapter S Revision Act of 1982, an S corporation is a conduit like a partnership. Which of the following items will not retain their character and are not passed on to the shareholder as separately stated items?
Depreciation.
Depreciation expense is computed at the corporate level and not passed through separately to the shareholder. (Section 179 deduction is not considered depreciation expense for this purpose.)
The AICPA Principles of Professional Conduct provide that those who set out to deliver accounting services as a CPA will hold themselves out as:
individuals that will honor the public trust.
What does a 2-for-1 stock split do?
100 sh. at $100/sh.
becomes
200 sh. at $50/sh.
Stock splits do not CREATE NEW EQUITY. they simply split the equity already in place.
What are some Exemptions from Registration under the Securities act of 1933?
- Securities of a bank
- commercial paper
- government securities
- securities of nonprofit organizations
- securities of savings and loan associations
- securities of common carriers or contract carriers
- insurance, annuity, and endowment policies.
Which of the following is correct concerning payments received on an inherited installment obligation?
It is taxable to the beneficiary at the same gross profit percentage used by the decedent.
What is deductible from a decedent’s gross estate?
I. Expenses of administering and settling the estate
II. State inheritance or estate tax
At what points in time are “Married filing jointly” appropriate?
Up INTO spousal year of death!
EG – spouse dies 10/1/13.
In 2013 you file married filing jointly.
Employee Stock Purchase Plan Shareholder % Threshold?
5%
Also, the option price needs to be less than the LESSER of 85% of the stock price when granted, or exercised.
Are capital gains a part of self-employment income?
Nope. They receive capital gains treatment.
How to arrive at “Net Earnings for Self-employment,” Upon which you can calculate Self-Employment Tax and Adjustment…?
Multiply Net Self-Employment inc. by .9235
92.35% !!
Then, you do Medicare/SS tax, and take half out as an above the line adjustment.
Can non-profits take an NOL deduction?
No. Not-for-profit organizations are generally denied net-operating-loss deductions except in calculating any unrelated business income tax.
A 33-year-old taxpayer withdrew $30,000 (pretax) from a traditional IRA. The taxpayer has a 33% effective tax rate and a 35% marginal tax rate. What is the total tax liability associated with the withdrawal?
When the 33-year-old taxpayer withdraws $30,000 from an IRA, a penalty of 10% is imposed (0.10 × $30,000 = $3,000).
The $30,000 is added to taxable income and will be taxed not at the effective rate but at the marginal rate of 35% (0.35 × $30,000 = $10,500).
The total tax liability as a result of the withdrawal is $13,500 ($3,000 + $10,500).
Example of SEC 179, followed by 50% bonus, followed by MACRS deduction?
Sally Markey took the largest Section 179 deduction available in 2014, $500,000.
Equipment purchases: $555,000
Section 179 deduction: 500,000
Bonus depreciation deduction: 27,500 (1/2 of 55K)
1st-year depreciaton ($27,500 × .1429): 3,930
Total 1st-year deduction: $531,430
what determines filing date?
Postmark
What are non-contributory pension plans?
All of the funds are provided by the employer. The employee does not contribute.
The following taxpayers are not required to use the accrual method:
- Farming businesses
- Qualified personal service corporations
- Partnerships and corporations with gross receipts of not more than $5 million
What do you do with Commissions in Sales Prices?
Improvements?
Any commission is deducted from the amnt. of Gross Sale of House.
(EG: 650K gross sale, less 35K of commissions. Net sale price is $615K.)
Any improvements are added to the basis.
(EG house had a $300K basis and $40K of improvements. So basis of house is $340K.)
What is the built-in gain recognized on sale for S-Corps?
Always Zero.
Something NASBA does:
require CPE program sponsors to provide program-level content.
Do partnership disallowed losses for one year (EG Anything past the extent of the basis), carry forward to the next year?
Yes. And they come out of any gains seen by a partner in the partnership.
There are three times when a short-period tax return is required:
- When a corporation starts up and does not start in the first month of its adopted tax year
- When a corporation is dissolved and does not end on the last month of tax year
- When a corporation changes accounting policies in the middle of a tax year
For the short-period return, income must be annualized (if income for 6 months is $50,000, then annualized income is $100,000). Income tax is then calculated on the full-year annualized income. Then, the tax for the annualized income is reduced to the short-period tax by multiplying the tax by the number of months in the short period divided by 12.
This method results in a fraction of a full year: 2 months ÷ 12 = 0.1667; 3 months ÷ 12 = 0.25; 4 months ÷ 12 = 0.333; 5 months ÷ 12 = 0.4167; 6 months ÷ 12 = 0.50, etc.
Where is child support reported on a tax return?
Nowhere. Child support is non-taxable.
Dan owes debts to four different creditors. To satisfy these debts, Dan transfers his property to a trustee. The trustee converts the property to cash and pays it to all of the creditors on a pro rata basis. If all of the creditors only receive partial payments of the amounts they are due:
The debtor will NOT be released from liability for the balance due, because an assignment for the benefit of creditors does not require the consent of the creditors.
What is true of S-Corp election status?
If chosen before 3/15:
Jan 1 of that year
If chosen after 3/15:
Jan 1 of next year.
Is unanimous approval needed for corp. dissolution by the board of directors of a corporation?
No.
Which of the following concepts affects the amount of monetary damages recoverable by the non-breaching party when a contract is breached?
Both foreseeability and mitigation of damages.
When does fraud in the inducement occur?
Fraud in the inducement occurs when a contract is formed BASED UPON the FALSE or MISLEADING statements or actions of another party!!
What is a Partnership’s basis in a building?
It’s the BASIS OF THE BUILDING.
Mortgages on the building are a SEPARATE LINE ITEM.
The Financial Accounting Standards Board (FASB) structure is such that it is:
independent of all other business and professional organizations.
Which of the following costs is includible in inventory under the uniform capitalization rules for merchandise manufactured by a company for sale to its customers?
Engineering
Under the uniform capitalization rules, certain nonmanufacturing costs such as selling, research, product liability, and service department costs are not capitalized (Regulation Section 1.263A-1(e)(3)(iii)). Generally, manufacturing overhead costs such as indirect labor, indirect materials, purchasing costs, and engineering are capitalized.
Fuller was the owner and beneficiary of a $200,000 life insurance policy on a parent. Fuller sold the policy to Decker, for $25,000. Decker paid a total of $40,000 in premiums. Upon the death of the parent, what amount must Decker include in gross income?
Death proceeds $200,000
Less basis in policy:
Consideration paid for policy - 25,000
Premiums paid - 40,000
Interest disallowed 0
——–
Taxable amount $135,000
What is a voidable preference?
Voidable preference means transfer of assets to a secured creditor LESS THAN 90 days before a bankruptcy filing. We know creditor is “secured” if they have filed and thus perfected.
The voidable preference means one secured creditor is favored over others. After bankruptcy is filed, the trustee in bankruptcy may prevent this creditor from receiving the assets and instead transfer them to another creditor.
The concept of materiality would be least important to an auditor when considering the:
effects of a direct financial interest in the client on the CPA’s independence.
Personal Holding Companies:
More About Them
Generally, a corporation is a PHC if it meets both of the following requirements.
- PHC income test. At least 60% of the corporation’s adjusted ordinary gross income for the tax year is PHC income. See the instructions for Part II and the Worksheet for Figuring Ordinary Gross Income, Adjusted Ordinary Gross Income, and the PHC Income Test (Worksheet), later. Also, see Specific Instructions below.
- Stock ownership requirement. At any time during the last half of the tax year, more than 50% in value of the corporation’s outstanding stock is directly or indirectly owned by five or fewer individuals.
***For purposes of this requirement, the following organizations are considered individuals:
- A qualified pension, profit-sharing, or stock bonus plan described in section 401(a).
- A trust described in section 501(c)(17) that provides for the payment of supplemental unemployment compensation under certain conditions.
- A private foundation described in section 509(a).
- A part of a trust permanently set aside or exclusively used for the purpose described in section 642(c).
Exceptions. The term “personal holding company” does not include the following corporations, even if the two requirements above are met.
- Tax-exempt corporations.
- Banks, domestic building and loan associations, and certain lending or finance companies.
- Life insurance and surety companies.
- Certain small business investment companies operating under the Small Business Investment Act of 1958.
- Corporations under the jurisdiction of the court in a title 11 or similar case.
- Foreign corporations.
At-risk, passive activities, and earnings stripping rules:
A corporation that has an activity subject to the at-risk or passive activity rules or interest expense subject to the earnings stripping rules (or both) may have deductions and losses suspended or limited under these rules. As a result, do not use deductions and losses limited or suspended in any of the PHC computations. Treat any prior year deductions and losses allowed under the at-risk, passive activity, and earnings stripping rules as current year deductions and losses.
Where does Fed. Tax legislation originate?
Ways and Means committee, House of REPS… then Senate then Joint
Molly Smith died August 3, 2015. Which of the following is an allowable deduction in computing her federal taxable estate?
State death taxes paid by the estate
What are preemptive rights?
Preemptive rights provide protection for current shareholders to maintain their proportionate ownership share when new securities are sold. When a preemptive right exists, if new stock is sold, shareholders have the right to purchase a percentage of the new issue in proportion with their current holdings.
Preemptive = Pro-Rata Increases on Share holdings
A husband and wife can file a joint return even if:
The spouses have different accounting methods.
A stockholder’s derivative suit, if successful, probably would result in the officers and directors being:
The board of directors has a fiduciary relationship to the corporation.
To have violated their responsibility by knowingly allowing pollution, restricting dividends because of the fines and penalties, recovering the loss from insurance, then setting aside the money for bonuses to themselves would certainly be an abuse of discretion. They may not be liable financially because of the insurance recovery. They would not be immune to liability recovery if their actions were illegal or a breach of fiduciary duty.
A treaty in multinational tax matters is defined as:
A formal contract or agreement between countries under international law.
What is the percentage depletion rate allowed by the Internal Revenue Code for the recovery of capital invested in mining coal?
The percentage depletion rate for coal mined in the United States is 10%. Some types of mining for clay are allowed a 5% depletion rate. The 15% rate for mining includes gold, silver, copper, and iron ore.
What is true about losses in relation to Section 1245 and Section 1250 assets?
IRC Sections 1245 and 1250 are only applicable if the Section 1231 assets are sold at a gain.
Definition of Security
A security, generally, is the evidence of a debt or ownership or related right. Securities can include stock options and warrants in addition to debt (bonds, notes, loans, mortgages) and stock. A security is a share, participation, or other interest in property or in an enterprise of the issuer that:
- either is represented by an instrument issued in bearer or registered form or, if not represented by an instrument, is registered in books maintained to record transfers by, or on behalf of, the issuer;
- is of a type commonly dealt in on securities exchanges or markets or, when represented by an instrument, is commonly recognized in any area in which it is issued or dealt in as a medium for investment; and
- either is one of a class or series or by its terms is divisible into a class or series of shares, participations, interests, or obligations.
(Can include Debentures)
Who do Passive Loss Rules apply to?
Passive loss rules apply to individuals, estates, trusts, personal service corporations, and certain closely held corporations.
Limitations on passive activity losses apply to individuals as a result of a flow through from S corporations and partnerships, but do not apply at the S corporation or partnership level.
Private foundations may be subject to several taxes. Which of the following taxes is a private foundation not subject to?
Tax on accumulated earnings
What is a lookback rule?
The taxpayer is required to recalculate the annual profit reported on a contract.
As a general partner in Greenland Associates, an individual’s share of partnership income for the current tax year is $25,000 ordinary business income and a $10,000 guaranteed payment. The individual also received $5,000 in cash distributions from the partnership. What income should the individual report from the interest in Greenland?
$35,000 ($10K guaranteed + $25K ordinary business income share)
Cash distributions from the partnership have no bearing on the income reported by the partner.
What should be the main goal of tax planning?
Optimizing the taxpayer’s after-tax result
An entity who wishes to elect out of its default classification must use what IRS Form?
Form 8832
Under the Securities Exchange Act of 1934, which of the following penalties could be assessed against a CPA who intentionally violated the provisions of Section 10(b), Rule 10b-5 of the Act?
I.Civil liability of money damages
II.Criminal liability of a fine
Both
