Pillar Topics Flashcards
(47 cards)
1
Q
Calculating the Basis of Assets Converted to Business Use
A
- Converted assets basis at date of conversion is the LESSOR of the original cost basis + Improvements or the FMV.
- You then use this tax basis going forward for any gains or losses at the sale of the property.
2
Q
Calculating the Basis of Gifted or Inherited Assets
A
- For gifted property, typically the basis is the adjusted basis from the donor, unless the donee then sells the gift later. At that point, it may be different based on the selling price.
- With inherited property, typically the basis is stepped up at the date of death for the beneficiary. This “stepped-up” basis = FMV. NBV is NOT needed.
- ALL inherited property is Long-term.
- Alternate valuation date used if elected. It is the EARLIER of 6 months OR date of distribution. If distribution date occurs BEFORE alternate valuation date, use the distribution date as the basis.
3
Q
Calculating the Basis of Stock Acquired Through a Wash Sale
A
- Wash sale rules apply if there is a loss on a sale and within 30 days BEFORE or AFTER there is a purchase of similar or identical stock.
- This can disallow some of the loss or all.
- This can also affect the holding period of future purchases and it can also affect the basis of future purchases and sales.
4
Q
Calculating Tax Depreciation for Tangible Business Property Using MACRS
A
- There is half-year convention, mid-quarter, mid-month.
- Half-year and mid-quarter apply to personal property.
- Mid-month applies to real property. Half year most of the time, unless Mid-quarter applies: 40% of personal property being placed into service in the final quarter.
- There is 5-year, 7-year for personal property, 27.5-year for residential rental, and 39-year for commercial.
5
Q
Determine Property Eligible for Section 179 deduction
A
- There is a maximum deduction amount, a phase-out amount, and an income limit for Sec. 179.
- For any amount more than the phase out, this starts reducing the total 179 deduction dollar-for-dollar.
- Not all property qualifies, it has to be business use tangible assets. Has to be from an unrelated party. The deduction is limited to business income.
6
Q
Calculating the Basis of Intangible Assets, Including Start-Up Costs
A
- $5,000 of start-up costs and organizational costs can be immediately deducted EACH.
- However, this would be reduced dollar-for-dollar for everything over $50,000, meaning that if you had a total of $55,000 or more, there would be no immediate deduction.
7
Q
Calculate Tax Amortization for Intangible Assets
A
Intangible assets typically include goodwill, patents, brand, customer lists. They are amortized usually over 180 months (15 years) for tax purposes.
8
Q
Calculate Tax Amortization for Intangible Assets
A
Section 197 is 15-year amortization for intangibles. Typically from acquisition of another business, includes things like goodwill, customer lists (i.e. items that are NOT tangible assets).
9
Q
Calculate Tax Amortization for Intangible Assets
A
A Patent that has indefinite life will NOT have any associated amortization expense. Instead, these intangible assets must be tested for impairment annually.
10
Q
Calculate the Amounts to Include In An Individual’s Gross Income
A
- What goes into gross income to be taxed? Wages, interest from bonds EXCEPT for municipal bonds, dividends from investments, distributions from normal IRAs or 401ks, some social security benefits, alimony received from a divorce BEFORE 2019 and punitive damages.
- Barters - you include FMV of service RECEIVED.
11
Q
Calculate the Amounts NOT Included In An Individual’s Gross Income
A
- What is NOT included in gross income? ROTH IRA distributions, child support, alimony received for divorce AFTER 2019, inheritance, parts of annuities.
12
Q
Capital Gains from Investments and Virtual Currencies
A
- First you net short-term gains and losses.
- Next, you net long-term gains and losses.
- If there is a gain in both, then both gains are reported separately.
- If there is a gain and a loss, then you net those and if there is a net loss, it is limited to $3,000 or ordinary income.
13
Q
Capital Gains from the Sale of Gifted Assets
A
- The donee takes on the donor’s adjusted basis and the donor’s holding period when they are gifted the asset. This means that if the donor held the asset for more than one year, even if the donee sold it right away, it would still be a long term gain.
- However, in situations where the selling price is LESS THAN the adjusted basis of the donor, there are two things that can happen:
1. If the selling price is less than the adjusted basis, but greater than the FMV at the date of gift, then there is no gain or loss.
- If the selling price is LESS THAN the adjusted basis AND less than the FMV, then the FMV is used as the basis for calculating the loss.
14
Q
Capital Gains from the Sale of Inherited Assets
A
- When it comes to sales of assets received from a decedent, the term is ALWAYS considered long-term. Also, the basis for gains and losses is the FMV of the asset on the date of the death of the decedent. However, it can be elected to take an alternate valuation date 6 months after the date of death, and this can be the new FMV basis.
- Just like with all capital losses, when it comes to gross income for an individual, only $3,000 of a capital loss can be included in ordinary income.
15
Q
Tax-Exempt Interest and Gross Income
A
- Municipal bond interest is NOT taxable. Interest from an HSA that has qualifying distributions for medical expenses is NOT taxable.
- Interest from US EE Series bonds (basically education savings bonds) is also NOT taxable if distributions were for qualifying education expenses (Qualifying education expenses would be for higher education expenses).
- Tax refunds don’t count as taxable interest or income. However, interest FROM a tax refund is taxable. Typical things like interest from a savings account at your bank are taxable.
16
Q
Gifts Received, Life Insurance Proceeds, and Gross Income
A
- Gifts received are excluded from Gross Income.
- Life insurance proceeds are excluded from gross income in most cases. However, if there is a transfer for value of the life insurance policy, then some of it may be taxable to the recipient OR, if there is interest received from the policy because the recipient didn’t want to receive it in a lump sum, the interest will be taxed.
17
Q
Income Reported in the Year of Death for a Decedent
A
- Final 1040s for a decedent are still just a normal 1040, the only difference is that it is cut off at the date of death of the decedent. So, you still take all the money they earned AND received, you still take the same deductions, and the spouse can still file jointly.
- Anything that is received AFTER the date of death will be considered taxable to the decedents estate or the beneficiary.
18
Q
Taxation of Income from Disregarded Entities
A
- Disregarded entities are typically single-member LLC or Sole proprietorships. An individual uses the Schedule C to report business income and Schedule E to report rental income. The income from the business or rental goes to the individual’s income on the 1040.
- Personal expenses of the individual (like life insurance, retirement, personal tax payments), are NOT deductible on the Schedule C or E.
19
Q
Taxation of Income from Pass-through Entities
A
- Pass-through entities are things like Partnerships, S Corporations, and certain LLCs. Income generated by a pass-through entity is passed through and taxed proportionally to each individual who has an ownership interest. This income is taxed even if the individual did not actually receive any money from the pass-through entity. This is why distributions are not taxed, because the money has already been taxed.
- Separately stated items are NOT added all together, instead they are put into each corresponding area of an individual’s tax return (things like guaranteed payments, interest, dividends, etc. ).
- Also, there are some loss limitations that exist for losses from a pass-through entity (tax basis limitation and the passive activity loss limitation).
20
Q
Adjusting Gross Income with Self-Employment and Other Items
A
- SEP IRAs are limited by a percentage of net self employment earnings. Net Earnings = Net Self Employment Profit - Half of the Self Employment Tax.
- Multiply net earnings by the current year contribution percentage limit (something like 20% or 25%) and that gives you the max contributions for an SEP IRA.
- Half of self employment is tax is deductible. Self employed health insurance premiums are deductible (up to total net profit).
- Alimony can be deducted if for a divorce before 2019.
- Capital losses can be reduced by up to $3,000.
- Moving expenses are NOT deductible, except for active duty military who moves for military reasons.
21
Q
HSA and Retirement Contributions
A
- HSAs are part of High Deductible Plans. They let you put in pretax dollars, and the contributions can reduce your gross income.
- Distributions from an HSA are tax free as long as they are used for qualifying medical expenses. Traditional IRAs have yearly limits to how much you can contribute, and those contributions typically are able to reduce gross income. However, if income is high, then those contributions start phasing out.
- Roth IRA contributions do NOT reduce gross income. Nondeductible Traditional IRAs are for people who make too much money for a normal traditional IRA, and these contributions are also not able to reduce gross income.
22
Q
Itemized Deductions - Medical Expenses
A
- The Allowable Deduction = Qualified medical expenses - reimbursement - 7.5% AGI Floor.
- Most medical expenses performed by a medical professional and that are professionally prescribed count.
- Expenses covered by HSAs or that are reimbursed are not included (reduce the amount of deduction taken).
- Payments made in current tax year for medical procedures that year count, even if paid by credit card, or check. Expenses for spouses and dependents (as well as the taxpayer themselves) are counted.
- Dependents have to have 50% or more of their support form the tax payer AND they either have to be a relative (child, parent, grandparent) or they have to live with the tax payer throughout the year.
23
Q
Itemized Deductions - The Mortgage Expense Deduction
A
- Interest on a home mortgage is generally deductible, as long as it is for mortgages under $750,000, ($1,000,000 if before December 15, 2017).
- A secondary residence can be included in this calculation, as long as it is used for personal use more than 14 days or 10% of fair rental days, whichever is larger.
- The $750,000 limit is cumulative, so it includes the primary and secondary residence.
- Home equity loans are also included in this calculation, as long as they were for buying, improving, or building the home they were from.
- If the total mortgage amounts are greater than $750,000, then you divide the $750,000 by the total mortgage amount. Then you take this percentage and multiply it by the total qualified interest.
24
Q
Itemized Deductions - Casualty Loss Deductions
A
- Personal property casualty losses can only be deducted if from a federally declared disaster.
- If it is in a federally declared disaster, here the calculation:
1. Take the lower of the decrease in FMV or adjusted basis of the property.
2. Subtract any insurance reimbursements 3. Subtract $100 per casualty loss.
4. Subtract 10% of AGI. The remainder is the allowable casualty loss as a deduction in the current year.
25
Itemized Deductions - Deducting Real Estate, Personal Property, and Income Taxes
* State and local real estate, personal property and income tax are deductible.
* There is a maximum amount of all these taxes that can be taken as a deduction, and that is: The SALT cap., which is $10,000 ($5,000 if married filing separately). If an individual itemizes deductions, they can choose between income and sales tax to be used, whichever is greater.
* Federal Income Tax is NOT deductible.
26
Itemized Deductions - Deducting Charitable Contributions
* Cash contributions are limited to 60% of AGI.
* Ordinary Income Property donations (inventory, items for sale, short term) are limited to 50% of AGI.
* Property Donations that are Long Term are limited to 30% of AGI.
* If all three of these occur, here is the order:
1. 60% AGI;
2. then 50% AGI items less the allowed amount from 60% AGI limit and
3. Finally, the lesser of what remains from the 50% AGI limit or the 30% AGI limit is taken for LTCG items.
* Amounts over limits are carried forward for 5 years.
* Services are not deductible, and neither are gifts to people or donations to political campaigns.
27
The QBI Deduction
* The QBI deduction is typically 20% of Qualified Business Income from a QTB or SSTB.
* If the taxpayer has taxable income other than the QBI, then take into consideration the general QBI deduction limit, with is taking: the lessor of QBI deduction OR 20% of the Taxpayer's taxable income less any net capital gains. The QBI deduction is applied the same way for QTBs or for SSTBs if the taxpayer's taxable income without the QBI deduction is below a certain threshold.
* Once their income passes the threshold, that's when the other limitations start applying. QTBs start to look at W2 Wages paid and unadjusted basis of assets put into service to start reducing the QBI deduction.
* SSTBs start reducing the QBI deduction in the phase out range, and once above the phase out range, the QBI deduction is not allowed to be taken.
28
Personal-Use Asset and Hobby Losses (Disallowed Losses)
* Hobby losses are NOT deductible.
* An activity is considered a hobby unless it turns a profit in 3 of the past 5 years.
* Income from hobbies is taxable, while the expenses cannot be used to reduce taxable income.
* Losses from the sale of personal property (such as a boat or a personal use car, etc.) are NOT deductible. Gains from the sale of personal property are taxable. however.
29
The Tax-Payer Filing Statuses
* Married Filing Jointly: Have to be legally married as of the last day of the year and not be legally separated.
* Married Filing Separately: Must be legally separated but not divorced as of the last day of the year.
* Head of Household: Unmarried or qualifying as unmarried (separated for more than 6 months), pay more than half of living expenses and also more than half for dependents.
* Qualifying Widower: Can be taken the two years after death of a spouse, basically the same as Married filing jointly, but can't have remarried and must still have dependent children.
30
Identifying Qualified Dependents
* Qualifying Dependent: US Citizen or Resident, can't be claimed by anyone else, can't claim their own dependent, can't claim spouse as dependent.
* Qualifying Child: Must be child, step child, foster or adopted child, sibling, under 19 or under 24 if full time student, live with you more than half the year, half support.
* Qualifying Relative: Not a qualifying child, either lives with you all year or is a relative, gross income under certain threshold, and gets more than half support from you.
31
Calculating Individual Tax Liability and Certain Tax Credits
* Child Tax Credit = # of qualifying children x Credit amount per child.
* Total credit per child = $2,000
32
Calculating Individual Tax Liability and Certain Tax Credits
* Net Investment Income Tax (NIIT) = Lessor:
1. NIIT or
2. Excess of MAGI over threshold ($200k Single filers) x NIIT rate (3.8%)
33
Calculating Individual Tax Liability and Certain Tax Credits
Kiddie Tax calculation:
1. Calculate child's total unearned income (interest, dividends).
2. Subtract Standard Deduction from total unearned income.
3. Out of the total for #2, the amount up to the Standard Deduction is taxed at the child's tax rate (up to a threshold), and
4. Total unearned income - Kiddie tax threshold = Amount to be taxed at Parent's rate.
34
Calculating Individual Tax Liability and Certain Tax Credits
* The US has a progressive tax system, where you tax the income in each bracket all the way up to your income in the highest bracket.
* The Child Tax Credit gives $2,000 per qualifying child.
* The Net Investment Income Tax takes the lesser of: the net investment income OR the amount of Modified AGI over the Net Investment Income Tax limit. You multiply the lesser of the two by 3.8% to get the Net Investment Income Tax.
* The Kiddie Tax takes the child's unearned income, subtracts the standard deduction for the child, then subtracts it again. Any amount under the first standard deduction is not taxed. Any amount between the first and the second standard deduction is taxed at the child marginal tax rate, and any amount over the second standard deduction is taxed at the parent's marginal tax rate.
* The retirement savings contribution credit take a maximum contribution of $2,000 and multiplies it by a percentage based on the persons AGI to get the credit.
* The foreign tax credit is the lesser the foreign taxes paid or the percentage of US taxes calculated on Foreign Income.
35
Calculating Temporary Differences on Schedule M-3
* Temporary differences arise because of differences in timing and recognition between book and tax. They are temporary because in the end, they match up.
* Some common temporary differences would be depreciation, bad debt expense, rental income, and warranty expenses.
* Temporary differences are tracked on an M-3, which is kind of like a more advanced M-1.
36
Calculating Permanent Differences on Schedule M-3
* Permanent differences on an M-3 are exactly that: permanent. They will never be reversed, even with time.
* Municipal bonds and any tax exempt interest is a permanent difference that will be taken out of taxable income.
* Fines, penalties and fees are not deductible.
* Life insurance premiums on behalf of officers are also not deductible.
37
Calculating C Corporation Estimated Tax Payments
* For C Corporations, to avoid underpayment penalties, they must make estimated tax payments based on the LESSER of:
1. 100% of the previous years tax liability OR 2. 100% of the current year tax liability.
* If the Corporation is considered a "Large Corporation", then they have to pay 100% of the current year tax liability.
* C Corporations can also choose to take foreign income taxes paid and use them as a deduction OR the foreign income tax credit
38
Personal Holding Companies
* A C Corporation is considered a Personal Holding Company if:
1. More than 50% of it is owned by 5 individuals or less.
2. 60% or more of it's gross income is passive (interest, dividends, non-active rent, etc.).
* Any net income that is NOT distributed as dividends to it's shareholders is taxed at an additional 20%. This gives an incentive to take advantage of the dividends distributed deduction to avoid this additional tax liability.
39
C Corporation Net Operating Losses (NOLs) and Net Capital Losses (NCLs)
* NOLs can now ONLY be carried forward indefinitely, and can ONLY offset up to 80% of taxable income. They used to be carried back 2 years and forward 20 years. During 2018, 2019, and 2020, NOLs could be carried back 5 years and the 80% rule was lifted.
* NCLs can ONLY offset capital gains and are carried back 3 years of forward 5 years for C corporations.
40
Nexus and State Income Apportionment
* Nexus is essentially having a physical presence (like an office or warehouse), or having an economic presence like a store and significant sales in a state.
* Once you've determined what states have nexus, you would apportion income between them to determine how much income is taxed by each state.
* The most common apportionment factor formula used (though this can change in different states) is:
[(State property / Total property) + (State payroll / Total payroll) + (State sales / Total sales)] / 3.
* These are amounts of income that typically are taxed straight to the state where they occurred, and these would include non-operating income like interest and dividends.
41
S Corporation Status Termination and Revocation
* S Corporation status, once elected, have to maintain certain qualifications or else the status is terminated.
* The S Corporation must have 100 valid shareholders or less, have one class of stock, and all shareholders have to elect the status.
* S Corporation status can voluntarily be revoked if more than 50% of the shareholders elect to do so.
* Partnerships, C corporations, non-residents, and some trusts CANNOT be shareholders in an S Corp.
* If an S corporation was originally a C corporation, and it had passive income of 25% or greater of total earnings for the past three (3) consecutive years, the S Corp status can be terminated.
42
S Corporation Ordinary Income and Separately Stated Items
* S Corporations are considered Pass Through entities. This means that income and expenses are "passed through" to the shareholders to be taxed. Certain income and expenses are added together to get total ordinary income (loss), and this total amount is passed through to each shareholder based on shares held.
* Other items, called separately stated items, are NOT included in ordinary income and are each separately listed on the Shareholder's K-1. This is because certain items are taxed differently or have different consequences, so they need to be separated from the ordinary income.
* These typically include: Passive Incomes (like rental income, interest income, dividends, royalties, etc.), Capital Gains or losses, Charitable Contributions, Special Depreciation deductions (like the section 179 deduction).
43
S Corporation AAA
* The accumulated adjustments account is essentially to keep track of earnings and profits through the years to know what income has already been taxed to shareholders so they are not taxed again.
* Things that increase AAA would be: Ordinary Business Income and Separately Stated Items.
* Things that decrease AAA would be: Ordinary Business Loss, Separately Stated losses or deductions, nondeductible expenses, and distributions.
* Remember, distributions are the last part of the AAA calculation each year, and they cannot reduce it below zero (though business losses can reduce it below zero).
* Tax exempt income and the expenses related to it do NOT affect AAA.
44
S Corporation Debt Basis and Stock Basis
* Debt basis is different from stock basis. Debt basis is essentially when a shareholder loans money to the S corporation. It is decreased when the S Corp makes payments on the debt.
* Stock basis is more typically what we think of. It's when a shareholder buys into the corporation. It is increased and decreased by normal business activities of the S corporation and also distributions.
* Debt basis and stock basis together make up tax basis.
* If distributions to a shareholder are GREATER THAN their tax basis, then the amount that was greater can be taxed as a capital gain.
45
Partnership Ordinary Income and Separately Stated Items
* Partnerships, just like S corporations, pass through income and losses to the partners. Partnership ordinary income is basically just normal business operations (revenue, expenses, depreciation, etc.).
* However, just like with S corporations, certain items are considered separately stated items and so are NOT included in the calculation of ordinary income (loss). These would include things like interest or dividend income, capital gains or losses, charitable contributions, etc.
* Unlike S corporations, Partnerships have something called guaranteed payments. These are amounts paid to partners, regardless of the income of the partnership. In the context of the Partnership itself, these guaranteed payments are deducted from ordinary income.
46
Calculating Partner Basis
* A partner's basis or "outside basis" in a partnership is affected by multiple things. It increases or decreases based off the partner's share of ordinary income (loss), separately stated items, contributions and distributions, tax exempt income and non-deductible expenses, and last by the partner's share of liabilities.
* Technically, everything before the share of liabilities is the partner's capital account, and including the liabilities is the whole tax basis.
* If a partner contributes an asset, but the partnership takes on a liability that comes with the asset, the amount of the liability taken on by the partnership REDUCES the partner's basis gained from the asset.
* Debt that a partner personally guarantees INCREASES their basis.
* The percentage share of Non-recourse debt (partner is not personally liable, but secured by partnership property) INCREASES the partner's basis.
47
Income tax calculation
1. Separate ordinary versus capital gain income.
2. Capital gain income includes qualified dividends + capital gains. For ordinary income calculation, take taxable income from tax return and subtract capital gain income to arrive at total ordinary income.
3. Calculate capital gains tax - multiply capital gains by the LTCG and Qualified Dividend Preferential Tax Rate based on taxable income per tax return.
4. Calculate ordinary income tax - Take total ordinary income tax and subtract beginning range amount from regular tax rate schedule. Multiply amount by tax bracket rate to arrive at income tax. Add calculated income tax amount to the tax liability amount from previous tax brackets on the tax rate schedule.
5. Calculate total income tax by adding capital gains tax + ordinary income tax calculated. This number get inputted in Income tax field on the tax return.
