NINJA MCQS Flashcards
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.
Home equity indebtedness is limited to the lesser of:
the FMV of the qualified residence, in excess of the acquisition indebtedness with respect to that residence, or
$100,000 ($50,000 if married filing separate).
Forms a household employer who owes both FICA and FUTA tax in relation to the employment of his domestic service employees and has withheld income tax and FICA tax from the domestic employees’ wages may file in order to report all applicable federal employment taxes and withheld taxes for his domestic employees
file Schedule H and do not have to file Form 940 or Form 941
IRC Section 179
is a business tax provision
requires an active trade or business for eligibility
requires purchase from an unrelated party
cost of new or used
tangible depreciable
personal property
when property is contributed in exchange for a partnership interest.
no gain or loss is recognized, either by the partnership or the partner
tax on unrelated business taxable income is computed
using regular corporate income tax rates if an exempt organization is a corporation
For charitable trustsUBIT is taxed at trust rates.
gain on the sale of a principal residence
exclude $250,000 of gain ($125,000 of the gain since he lived in the residence only one year)
If the residence which was sold has not been occupied for at least two years, the $250,000 exclusion is prorated if the sale is due to a change in place of employment, health, or unforeseen circumstances as provided in the regulations.
types of entities is entitled to the net operating loss deduction
Trusts and estates
Not-for-profit organizations are generally denied net-operating-loss deductions except in calculating any unrelated business income tax.
pass-through (partnerships and S corporations) are denied a net operating loss deduction
IRC Section 179
is a business tax provision
requires an active trade or business for eligibility
requires purchase from an unrelated party
cost of new or used
tangible depreciable
personal property
expense up to $25,000 of the cost of personal property purchased and used in the active conduct of a trade or business and deduction cannot exceed net income
Excess amounts carry over to future years.
for personal property in excess of $200,000, the $25,000 is reduced dollar for dollar.
income and expense items where the partnership must decide on the accounting treatment,
especially where there are choices in the treatment of each item.
These include:
amortization of organization costs,
treatment of involuntary conversions, and
the option of Section 179 expensing of equipment.
The choice of choosing the credit or the use of a deduction for foreign taxes is left to the individual partner.
mid-quarter convention
required if more than 40% of assets acquired during a tax year are placed into service in the last quarter of a year
“Sales on approval” under Article 2 of the U.C.C.
allows the buyer a trial period in which to sample, temporarily use, and inspect the goods
Upon the passing of such trial period without return of the goods, the buyer takes title to the goods and assumes risk of loss.
Consideration
is a required element of a contract
some act of forbearance or detriment incurred, or benefit or promise thereof,
given to and received by the other party
in exchange for an act or promise by the second party
Consideration supports the promise given, causing the promise to be enforceable.
inducement to enter into a contract
need not have a monetary value
must be mutual for a valid contract, need not be equal
Consideration is not any of the following:
- Past consideration (consideration given in the past in exchange for a previous promise)
- A preexisting duty (that which the promisor is already legally bound to do by contract or statutory duty)
- Illusory promise (a promise in form but not in substance)
- A moral obligation (something a person feels morally obligated to do but is not legally obligated to do)
simple trust
all net income must be distributed on an annual basis
complex trust
all income does not have to be distrusted on an annual basis
charitable remainder trust
irrevocable trust established by a donor to provide an income stream to the income beneficiary, which the public charity or private foundation receives the remainder value when the trust terminates
generation-skipping trust
contributed assets are passed directly to the grantor’s grandchildren, not the grantor’s children
Exemptions to workers’ compensation coverage exempted.
vary state by state.
Typical statutory exclusions are:
domestic and agricultural employees, and
employers with less than a designated minimum of employees (which will vary by state).
Temporary employees are also commonly exempted.
The percentage depletion rate
coal mined in the United States - 10%
Some types of mining for clay - 5%
gold, silver, copper, and iron ore - 15%
gas and oil (small independent producers only) - 15%
Beneficiaries are taxed
on their share of the trusts income distributed to them,
but not more than their share of DNI of the trust
In a composition agreement,
a debtor enters into an agreement with his creditors whereby the debtor agrees to pay the creditors some fraction of the amount of the outstanding debt.
Such an agreement discharges the debtor once the debt is actually paid.
An assignment for the benefit of creditors
is a transfer by the debtor of all of his assets to a trustee, with the assigned funds to be used to pay off outstanding debts.
This does not have the effect of releasing the debtor from the debts.
passive activity loss rules are applicable to
individuals (including Pship/SCorp s/h), estates, trusts, closely held C corporations, and personal service corporations.
The passive activity loss rules are not applicable to
partnerships,
widely held C corporations,
S corporations.
For partnerships and S corporations, the passive activity loss rules apply at the partner/shareholder level.
requirements for a negotiable instrument:
- in writing.
- signed by the maker or the drawer.
- unconditional promise or order to pay a fixed amount of money, with or without interest or other charges described in the promise or order.
- payable to order or to bearer at the time it is issued or first comes into possession of a holder (unless it is a check).
- payable on demand or at a definite time.
- does not state any other undertaking or instruction by the person promising or ordering to do any act in addition to the payment of money,
but the promise or order may contain
(1) an undertaking or promise relative to collateral to secure payment,
(2) an authorization for confession of judgment, or
(3) a waiver of benefit of any law intended for the advantage or protection of an obligor.
A portion of a taxpayer’s Social Security benefits may be taxable.
For single taxpayers with provisional income above $34,000, gross income includes the lesser of:
85% of Social Security benefits received or
85% of excess of provisional income (defined as modified AGI + 1/2 Social Security benefit) over $34,000,
plus the smaller of:
the amount includible under the old law (1/2 of Social Security) or
$4,500
A person is discharged from a contractual obligation
if the other party has taken action to prevent a performance under the contract.
in the case of “accord and satisfaction.”
“accord” - agreement of the parties to modify a contract so as to require a different kind of performance than originally expected
“satisfaction” = completion of the modified performance, thus discharging the new obligation.
Corporate income tax: When a capital loss is carried to another year,
it is treated as a short-term loss (does not retain its original identity)
carry back three years, forward five years
Capital losses can only offset capital gains.
A partner’s share of a partnership loss is limited to
the partner’s basis in the partnership
then by passive activity rules and at-risk rules under IRC Sections 469 and 465
Excess loss over basis is carried forward.
Constructive fraud on the part of a CPA
Gross negligence
Extreme, flagrant, or reckless departure from the standards of due care and competence in performing or reporting upon professional engagements.
There need not be actual intent to deceive (scienter).
There is no necessity to identify any third-party users.
Ordinary negligence is a lesser offence than gross negligence.
If property contributed to a partnership is distributed to a partner other than the contributing partner within seven years of its contribution to the partnership
Contributing partner will be required to recognize the built-in gain or loss at the time of the disqualified distribution.
Gain or loss is calculated as if the property was sold for its FMV at the date of distribution.
Contributing partner’s gain recognized is limited to the gain that would be recognized by the partnership.
Basis in the property and partnership interests will be adjusted for the gain or loss recognized.
A CPA will be liable to a tax client for damages from:
- failing to timely file a client’s return,
- failing to advise a client of certain tax deductions, and
- neglecting to evaluate the option of preparing joint or separate returns that would have resulted in substantial tax savings for a married client.
NOT refusing to sign a client’s request for a filing extension.
Effect of the 2005 Bankruptcy Reform Act upon “homestead exemptions”
If the debtor was involved in any federal or state securities law violations or certain criminal acts within the past five years, there is no exemption regardless of the residency or domiciliary status of the debtor.
The debtor must have lived in or had been domiciled in the state for at least two years (730 days) prior to filing a petition for bankruptcy relief.
Using federal bankruptcy law to override state law, the maximum amount ever shielded from creditors is $155,675 (excluding equity from a prior sale of a previous principal residence that is located in the same state, was lived in for at least 3-1/3 years (1,215 days), years, and was rolled into the subject home’s equity).
Under the Negotiable Instruments Article of the U.C.C., describes the effect of a person indorsing a check “without recourse”?
The person makes no promise or guarantee of payment on dishonor
Changes made by the 2005 Bankruptcy Reform Act to Chapter 7 of the Bankruptcy Code include the following:
Cash advances totaling more than $925 from a credit card obtained within 70 days of the order may not be discharged, subject to a rebuttable presumption.
An unsecured claim for death resulting from the operation of a motor vehicle while the debtor was under drug or alcohol influence is a newly added item related to unsecured creditors.
Consumer debts for more than $650 for luxury goods or services provided within 90 days of the order of relief are nondischargeable.
Penalties resulting from federal election law penalties are nondischargeable.
Rental income
Any amount received as rent must be included in the year of receipt whether the taxpayer is accrual or cash basis.
In general, any payment to or made on the behalf of a landlord of any kind is additional rent income.
Any amounts received by a landlord in consideration for cancellation of a lease are additional rent revenue (and not capitalized).
Liquidated damages
agreed upon by all parties involved in the contract.
per clause in the contract
composition agreement,
a debtor enters into an agreement to pay the creditors some fraction of the amount of the outstanding debt.
discharges the debtor once paid
assignment for the benefit of creditors
transfer by the debtor of all of his assets to a trustee,
assigned funds to be used to pay off outstanding debts
assignment does not release debtor from debts
two tests that must be met to determine if a company is a personal holding company (PHC)
stock ownership test - more than 50% of the stock must be owned by five or fewer individuals a
income test - at least 60% of the corporate income must be personal holding company income investments (dividends, interest, rents, royalties) and certain personal service contracts
Hobby deductions are limited
to the amount of hobby income of the tax year.
taken in a prioritized order
Category 1 deductions are those that a taxpayer can take for personal as well as business activities, such as mortgage interest and property taxes, and are allowed in full.
Category 2 deductions are those that do not result in a basis adjustment such as advertising, insurance premiums, interest, utilities, and wages. Limited to the amount of income in excess of category 1 deductions.
Category 3 deductions are those that are basis adjustments such as depreciation. Limited to the amount of income in excess of categories 1 and 2 deductions.
For 2014, a taxpayer that files as Head of Household and is covered by an employer-sponsored qualified retirement plan is able to make tax-deductible contributions to a traditional IRA plan only if
their modified AGI is $60,000 or less.
In addition, a partially deductible contribution is permitted to a taxpayer only if their modified AGI is between $60,000 and less than $70,000.
The deductibility of student loan interest is limited to
$2,500 in 2014, but it is phased out for a taxpayer with modified AGI between $65,000 and $80,000 (between $130,000 and $160,000 for married filing jointly).
Articles of incorporation can only be amended by
shareholders
normal duties of a board of directors.
repealing bylaws,
declaring dividends, and
fixing compensation of directors
personal service corporation (PSC)
taxed at a flat rate of 35%.
occupations that qualify include: lawyers, accountants, actuaries, podiatrists, architects.
subject to the limits on the deductibility of passive activity losses.
meets both a function test and an ownership test (percentage of activity performed by the employee-owners)
tax avoidance transactions
legal transactions recognized in the Internal Revenue Code
employing tax planning strategies
reduce tax liability by taking advantage of tax-deductible transactions such as retirement investments, home interest expense, and tax-exempt investments.
Tax evasion
illegal nonpayment of taxes in a period
Capital assets
investment property
and
personal-use property
business-use assets
Section 1231, 1245, and 1250 assets
liquidating distribution by a corporation
general rule
recognize gain or loss on the distribution of property in a complete liquidation
property is treated as if it were sold at its fair market value BUT cannot be less than the amount of the liability on the property
A Crummey trust
a “safe harbor” rule
allows the annual gift tax exclusion on gifts to a trust
The gift of a future interest provision does not apply to gifts to a Crummey trust if trust assets go to the beneficiaries on or before age 21.
Giving the right to the trust income (generally only up to $14,000 per donee, per year) meets the requirement even though the beneficiaries do not actually withdraw the funds.
A small corporation is exempt from AMT tax. In general, to be considered a small corporation for this purpose, the corporation must have average annual gross receipts
under $7.5 million for the preceding 3-year period.
A special rule applies for the first two years of a corporation:
All corporations are exempt from AMT for their first tax year.
The second tax (initial test ) year, gross receipts test is $5 million.
The Uniform Commercial Code (U.C.C.) Sales Article generally requires that sales contracts in excess of $500
be evidenced by a written document.
If both parties are merchants, a document confirming the existence of an oral agreement and signed by the party sending the document satisfies the writing requirement as to the recipient as well as to the sender IF the recipient does not object to the writing within 10 days after receipt.
Wages paid for domestic services are subject to federal unemployment tax
if they exceed $1,000 per quarter, aggregating wages paid to all employees.
The employer’s required payment for federal unemployment (FUTA) tax cannot be withheld from the employee’s wages. This must be paid from the employer’s own funds.
Wages for, and payroll taxes on, domestic wages
in excess of $1,800 must be reported to the taxing authorities.
Usually, Social Security and Medicare withholdings are reported on Form 941. Form 1040, Schedule H, may be used to report federal employment taxes on cash wages paid to household employees.
Federal employment taxes that may be paid with Schedule H include Social Security, Medicare, withheld federal income, and federal unemployment (FUTA) taxes.
Withholding federal income taxes for household employees is required only if requested by the employee and agreed to by the employer. Such withholding would be reported on Schedule H and filed with Form 1040.
Section 351 tax-free transaction
No gain or loss is recognized
if property is transferred to a corporation by one or more persons solely in exchange for stock in such corporation and immediately after the exchange the persons are in control of the corporation (80% or more)
The basis of the stock received is the adjusted basis of the property transferred less any liability the corporation assumed.
mechanic’s lien
repairs to REAL property PLACED by the creditor
artisan’s lien
work done on PERSONAL property PLACED by the creditor
mortgage lien
security interest in REAL property GIVEN by owner to creditor as security
dividends-received deduction is allowed if the underlying stock was held for
at least 46 days during the 91-day period beginning on the date 45 days prior to the ex-dividend date.
AMT exclusion item
Exclusion items are those preferences and adjustments which will not reverse in future years. The deductions are permanently denied for AMT purposes.
The deduction for personal exemptions is an exclusion item.
AMT deferral items
preferences and adjustments which can be expected to reverse in future years.
When a taxpayer pays AMT that is due to deferral items, he or she is allowed an AMT credit in succeeding years against his or her regular tax.
A buyer has an insurable interest from the time
goods are identified in the contract.
A partner may deduct his share of partnership losses subject to three levels of limitations:
- Level 1: Any deductible loss is limited to the adjusted basis of the partner’s interest in the partnership. BASIS
- Level 2: If there is enough adjusted basis to deduct a loss, then the partner is only allowed to deduct the amount of loss for which he is at risk. AT-RISK
- Level 3: If there is enough adjusted basis and enough at risk, then the partner applies the passive activity limits. PAL
Property received by parent corporation from subsidiary corporation
has the same basis in the hands of the parent as the subsidiary
ALL carryover rules of IRC Section 381 apply:
Net Operating Loss
Business Credit
Capital Loss
Charitable Contribution Earnings and Profits
Guaranteed payments
payments to partners for services treated like salary payments to an employee or
or
use of capital treated like interest payments to a creditor
rather than partnership distributions (made without regard to partnership income)
Individuals may offset ordinary income with losses from rental real estate activities.
up to $25,000 ($50,000 if married filing jointly)
reduced (but not below zero) by 50% of the amount by which the adjusted gross income of the taxpayer for the year exceeds $100,000
standard deduction for a trust or an estate
$0/None
Personal exemptions for estates and trusts
estate - $600
simple trust - $300
complex trust - $100
mid-quarter convention
If more than 40% of the depreciable personal property is acquired in the last quarter of the year, the mid-quarter convention is used for all personal property acquired that year.
Normally the half-year convention applies to depreciate personal property placed in service.
The “hot assets” of a partnership
include unrealized receivables and inventory.
items that would generate ordinary income
Section 1231 assets and capital assets generate capital gains.
Cash creates neither ordinary income nor capital gains.
Actual fraud requires the professional to intentionally misstate a material fact or otherwise mislead the client.
Constructive fraud
does not require the CPA (or any professional) to act with fraudulent intent
professional acted in a grossly negligent manner.
plaintiff justifiably relied on the misrepresentation
The new change in Chapter 11 for individuals
they are not discharged until the plan is completed, unless the court orders otherwise.
if individuals receive assets after they have filed bankruptcy, they must dedicate those assets to the reorganization plan and use them to that effect.
Chapter 11 bankruptcy, while typically used for corporations, may be used for individuals.
The court may still use a “cram down” provision, meaning it may confirm a reorganization plan over the objection of creditors if it is shown the plan is equitable.
unified transfer tax
rate schedule imposed on taxable gifts made and taxable estates for deaths after 1976.
The tax base for estate tax is based on the taxable estate plus all post-1976 taxable gifts.
The tax base for determining the gift tax is based on all lifetime taxable gifts.
lifetime taxable gifts and transfers at death are taxed on a cumulative basis
Losses on the sale of income-producing property to certain related parties
are not recognized
disallowed loss may be used by the related purchasing party to offset any gain on a later disposition of the property
State tax refunds are not taxable to an individual
who does not itemize deductions as no prior tax benefit was received.
If a corporation’s charitable contributions exceed the limitation for deductibility in a particular year,
a corporation is permitted to carry over to the five succeeding tax years any contributions that exceed the 10% of its taxable income computed without regard to
(1) the deduction for a charitable contribution,
(2) the deductions for dividends received/dividends paid on certain preferred public utility stock
(3) any net operating loss carryback
(4) any capital loss carryback
(5) the domestic production deduction.
Financial Accounting Standards Board (FASB) structure
independent of all other business and professional organizations
part of a larger structure that helps to achieve consistent standards and improve financial accounting standards
The federal gift tax does not apply to the following:
- Medical care payments on another’s behalf paid directly to medical care provider
- Tuition payments made to an educational organization (for example, a university)
- Transfers to political organizations
Under the Securities Act of 1933, most issuances of securities must first be registered with the SEC. However, this requirement is only applicable to
issuers,
underwriters, and
dealers
“issuer” - individual or business entity that is offering the securities for sale to the public including a “control person,” meaning someone having substantial power to influence the policies of management (such as the president of the company)
