Progress Test Review (1-4) Flashcards
What are passive losses?
Passive losses are only deductible against other passive income.
“Mom & Pop” Rule - How much is the exception allowable?
$25,000 of passive losses to be deducted against other nonpassive income.
**Learn Phase-Out
When an employee receives a nonqualified stock option they must RECOGNIZE?
Ordinary income - the value of the option if traded on an established market.
Charitable contributions subject to 50% limit that are not fully deductible in the year made may be:
Carried forward 5 years.
NOL
Carried back 2 years and forward 20 years
Individual capital Losses
Carried forward indefinitely until used up (or taxpayer’s death).
Adjustment to arrive at AGI
1) Self-employed FICA (50%)
2) Alimony paid
3) Self-employed health insurance
Itemized Deduction - Schedule A
1) Qualified mortgage interest paid
An employee who has had S.S tax withheld in an amount greater than the maximum for a particular year, may claim:
The excess as a credit against income tax, if that excess resulted from correct withholding by 2 or more employers.
Assessment Period for filing.
Usually, a tax must be assessed within 3 years after a return is filed. The assessment period begins fro the due date of the return is filed to the due date OR “filing date” of the gross income if the return is filed lter (with an extension). The assessment period is extended to 6 years for returns that omit more than 25% of the gross income that should have been reported.
Selection of an accounting method for tax purposes by a newly incorporated C corporation:
Is made on the INITIAL tax return by using the chosen method.
Corporate dividends received deduction
Affected by a requirement that the investor corporation must own the investee’s stock for a specified minimum holding period.
Which organization must file annual information returns?
Private foundations
(MACRS) - Modified accelerated cost recovery system for property placed in service after 1986.
Salvage value is ignored for purposes of computing the MACRS deduction.
In filing a consolidated federal income tax return, a corporate group eliminates ?
Dividends from group members.
Upon disposition of tangible property used in a business, ordinary income is recognized…
To the extent of the LESSER of the amount of gain realized or the depreciation which was allowed or allowable.
In a liquidating distribution, a partner’s basis in the distributed property is the…
Same as the Adjusted Basis of his partnership interest reduced for any monies actually received.
Basis in a Partnership Interest formula:
Cash Contributed
+Basis of land contributed
Less: Mortgage of land assumed by partners(other percentage_
+Recourse liabilities assumed(whatever percentage given)
=Basis
Individual’s suspended passive activity losses
Suspended losses can be carried forward, but not back, until utilized!
Passive activity losses & credits applies to:
Personal service corporations
Which factor should a CPA consider in choosing whether to provide oral or written advice to a client?
Tax sophistication of the client.
Adjustment to AMTI
1) passive activity
2) deductible medical expenses
3) individual taxpayers net operating losses.
Transfer pricing issues exist when
A U.S. - based taxpayer shares costs with an affiliate that is NOT subject to U.S. income tax and does not file a consolidated income tax return with the U.S. - based taxpayer.
DRD
70% of dividends received from corporations owned less than 20% by stock & value by the recipient corporation.
Rule: S corporation is revoked on the date when over 50% of the shareholders elect to revoke. Formula?
Total number of shareholders filing consent to revoke (30,0000+5000)/divided by total numbers of shareholders(60,000+40,000) = percentage
Avoid Penalty for underpayment of estimated tax:
if AGI is less then $150,000 & excess of $150,000
90% of current tax on the return for the current year paid in 4 equal installments or 100% of the prior year’s tax liability paid in 4 equal installments.
If over 150K = ONLY 110% of prior year’s tax liability.
–> There is always an option to pay 90% of the current year’s tax.
AMT is computed as:
Excess of the tentative AMT over the regular tax.
Regard to consolidated tax returns
Operating losses of 1 group member may be used to offset operating profits of the other members included in the consolidated return.
Interest that is subject to tax
- U.S. Treasury certificates = generally taxable
- Refund of prior year’s federal income tax.
If a corporate taxpayer switches from FIFO method to LIFO method of valuing inventory. What happens?
Under the LIFO method, the inventory on hand at the end of the year is treated as being composed of the earliest acquired goods.
Foreign income taxes paid by a corporation:
May be claimed either as a deduction or as a credi, at the option of the corporation.
Capital Assets are defined as property held by the taxpayer, except:
1) Property normally included in inventory or held for sale to customers in the ordinary course of business.
2) Depreciable property & real estate used in business
3) accounts & notes receivable arising from sales or services in the taxpayer’s business.
4) Copyrights, literary, musical or artistic compositions
5) Treasury stock.
Incentive Stock Option
1) Once exercised, the stock must be held at least 2 years after the grant date & at least 1 year after the exercise date.
2) No recognition
Employee Stock Purchase Plans
- They are a type of qualified stock option plan
Employer may recognize a deductible expense for a….
Nonqualified stock option in the same year that the employee will recognize ordinary income.
C Corporation’s net capital losses are used by:
Carrying back 3 years, and forward 5 years.
Which professional bodies has the authority to revoke a CPA’s license to practice public accounting?
The state board of accountancy is the only body listed that can grant a CPA license and the only body that may revoke such a license.
A CPA is permitted to disclose confidential client information without the consent of the client to:
Only a state CPA society voluntary quality control review board. This is the only exception made for court subpoenas & state CPA society quality control panels.
Penalties & fines with respect to exercising due diligence for the earned income credit
Due diligence requirements address eligibility checklists, computation worksheets, & record retention.
With respect to the penalty for aiding & abetting understatements of tax liability on a tax return
The burden of proof shifts to the IRS from the taxpayer.
Circular 230
1) Prohibits a practitioner from endorsing or negotiating refund checks issued to the client.
2) Must return all client records at the request of the client.
Circular 230: Covered Opinion
Arises from a transaction that, at the time the tax advice is rendered, the IRS has determined to be a tax avoidance transaction & identified as such in IRS-published guidance.
What is the disciplinary action by the AICPA & state CPA societies?
Membership in the AICPA can be suspended or terminated without a hearing.
For an opinion to be a covered opinion:
1) Opinion must reach an overall conclusion as to the likelihood of the tax treatment for each significant tax issue & provide the reasons for this conclusion/ state that the practitioner is unable to reach an overall conclusion (& provide the reasons for the inability to reach a conclusion).
2) Must set forth the likelihood that the taxpayer will prevail on the merits for each significant federal tax issue. If the likelihood cannot be determined for a particular tax issue, the opinion can still be issued but must state that fact.
3) Opinion cannot be based on unreasonable factual assumptions, factual representations, or statements or findings of the taxpayer or any other person. An unreasonable factual representation is a factual representation that the practitioner knows OR should have known is incorrect or incomplete.
An accountant is prohibited from showing the workpapers to anyone without the client’s permission, EXCEPT:
1) Lawful subpoena
2) Surviving member of the firm
3) Quality control panel
4) AICPA/State Trial Board
5) Court proceedings.
Qualified Stock Option
No Recognition in the year of grant.
Securities Exchange Act of 1934, Rule 10b-5
- Must prove reliance on a misstatement and that the defendant acted with scienter(intent to deceive or reckless disregard for truth)
- *1) Shares traded on a national exchange
2) At least have 500 shareholder’s in any 1 class who are not accredited & more than $10M in assets
3) corporation’s securities are traded on a national exchange - *Publicly traded corporations must register with the SEC & make certain periodic reports.
- -> Must file Quarterly Reports (Form 10-Q) & Proxy Statements
Securities Act of 1933, Section 11
- Show that the plaintiff acquired the stock
- Misstatement in the registration statement
- plaintiff suffered damages.
- You may only resell if the resale transaction continues to fall under the registration exemptions.
- *Plaintiff need not prove reliance or fraud.
- *Auditor complied with GAAS
- Insurance companies must generally be registered
Constructive fraud
Only requires reckless disregard for truth or falsity
Actual Fraud
-requires intent in making a material misstatement, upon which the plaintiff justifiably relies (& that the plaintiff suffers damages)
Preliminary prospectus, permitted under SEC Regulations, is known as the:
“Red-Herring” - prospectus. - Meaning: it may be missing certain information that is not yet available.
Tombstone Advertisement
Makes known the availability of a prospectus.
-a tombstone Ad can be placed before a registration statement is effective. Only certain information, such as the nature of the security, the price & availability of a prospectus, may be included in the ad.
What must be reported to the SEC under the reporting provisions of the Securities Exchange Act of 1934?
Tender offers, insider trading, & proxy solicitations!
Individual taxpayers may deduct the FMV of:
Property donated.
-The limit is 30% of the taxpayer’s AGI.
Tax liability calculation
Regular Tax Liability
Plus: AMT (regular tax liability -tentative minimum tax)
Plus: PHC (personal holding company tax)
=Tax liability
Organizational Expenses
5,000 total expenditure limitation allowed in Year 1.
List the Section 1231 assets
Refer to Notes
De Minimus Rule
1) Written policy to expense certain property
2) Applicable financial statement = allows company to expense items costing up to $5,000.
Ordinary Income is recognized :
On the gain to the extent of the Accumulated Depreciation.
-Any gain in excess of the original cost is capital gain.
What you sold & what you purchased for = capital gain income
The excess which is accumulated depreciation = ordinary income
Complex Trust
May distribute principal
Under Regulation A
An offering circular MUST be filed with the SEC
-sales can be made to any number of investors as long as sales do not exceed $5M.
Rule 506 Offering
Unlimited amount & can be NO more then 35 unaccredited investors (Must be sophisticated investors)
Rule 505 - Regulation D - Securities Act of 1933
- Must notify the SEC within 15 days after the first sale of the offering.
Alternative minimum tax preferences include:
Tax exempt interest from private activity bonds, & accelerated depletion, depreciation, or amortization
Result to the shareholder’s of a distribution in complete liquidation of a corporation:
Capital Gain/Loss
A contract can have conditions:
1) Precedent
2) Subsequent or
3) Concurrent
Undue influence
when a person in a position of trust or confidence takes unfair advantage of the relationship such that the other party’s free will to contract is overcome.
Sales Article does not
provide for punitive damages.
Valid Assignment
An assignment of right (in a contract) to another person may be oral or written & may be gratuitous.
