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CPA - REG Exam > R3 > Flashcards

R3 Flashcards

1
Q

How do you calculate the basis of property you bought?

A

add together:
-cash paid
-mortgage
-title

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2
Q

What is the exception to the gift tax basis rule?

A

the FMV at the date of the gift is lower than the donor’s basis at that time

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3
Q

How would you calculate the gain/loss of a gift (of stock) under the exception?

A

if the sales price is less than the basis but higher than the FMV on the date the gift was given, then the basis = sales price (resulting in no gain or loss on the sale)

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4
Q

T/F: If the sales price > the cost basis, the donee’s basis equals the donor’s cost basis.

A

true - choose the lower! (basis)

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5
Q

T/F: If the sales price < the cost basis but > FMV, the donor’s basis = the sales price.

A

true

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6
Q

T/F: If the sales price is lower than both the cost basis and FMV, the donee’s basis = FMV.

A

true

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7
Q

How do you calculate capital gains on property?

A

sales price
-rollover cost basis (what the donor purchased it for)
=capital gain

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8
Q

How do you determine if a capital gain is short-term or long-term?

A

if the donor’s holding period (how long they held on to the property before selling it to the donee) is greater than a year, it’s a long-term capital gain

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9
Q

If the FMV > donor’s basis, how would you calculate the capital gain?

A

Sales price (amount realized) - basis = gain

note: if there was a 2-for-1 stock-split, you would need to adjust the basis – # of shares x (stock price / 2)

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10
Q

What is the alternate valuation date?

A

the earlier of the date of distribution or six months after the date of death

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11
Q

What is the basis of inherited property to the beneficiary?

A

the FMV of the property at the date of the decedent’s death or the alternate valuation date

note: estate taxes paid never have any effect on the inherited property to the beneficiary

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12
Q

T/F: There is no income tax on the value of inherited property.

A

true

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13
Q

T/F: The holding period of inherited property is automatically considered long-term when the donor dies.

A

true

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14
Q

What is the taxpayer (donee)’s basis of inherited property?

A

FMV of the property at the date of death

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15
Q

What is the de minimis safe harbor rule?

A

you can expense and deduct items costing up to $5,000 each on your tax return if you have an applicable financial statement (AFS) and up to $2,500 each if you do NOT have an AFS

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16
Q

If a taxpayer’s personal residence for at least 2 of the prior 5 years is sold, what is their eligible exclusion for the gain?

A

$250,000 - single
$500,000 - married filing jointly

(you would subtract this from the gain)

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17
Q

How would you calculate the gain from the sale of your property to document on your tax return?

A

Sales price
-purchase price
-home improvements
-real estate commissions
-exclusion amount (based on filing status)
=gain (if any)

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18
Q

What happens in an involuntary conversion?

A

the basis of the new property = cost of new property - gain of the old property that wasn’t recognized

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19
Q

What is the formula used for an involuntary conversion?

A

a) insurance proceeds
-adjusted basis of old property
= realized gain
-(insurance proceeds - cost of new property)
=gain not recognized

b) cost of new property
-gain not recognized
=basis of new property

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20
Q

If there’s not a gain, what is the basis of the new property under an involuntary conversion?

A

adjusted basis of property
+ removal and clean up costs

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21
Q

T/F: No gain is recognized on a condemnation of property if the taxpayer reinvests the condemnation proceeds in property that is similar in service within 3 years after the close of the tax year in which the gain was realized.

A

true

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22
Q

What is a like-kind exchange?

A

real property exchanged for other real property

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23
Q

T/F: No taxable gain or loss will be recognized on a like-kind exchange if both assets are real estate property.

A

true

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24
Q

What is the formula for the basis of new property for real property?

A

FMV of property received
-deferred gain (if any)
+deferred loss (if any)
=basis of new property

note: you’ll have a deferred gain when you have a realized gain but no recognized gain

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25
Q

What is the formula for the realized gain or loss for real property?

A

FMV of real property received
-adjusted basis of real property given up (aka original cost - depreciation)
+boot received and net debt relief (old debt relief - new debt assumed)
-boot paid
=gain/loss REALIZED

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26
Q

What is the formula for recognized gain or loss for real property?

A

the lesser of the realized gain or boot received (the relief from liability + any cash received)

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27
Q

How would you calculate the deferred gain?

A

gain realized - gain recognized

(any amount not yet recognized)

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28
Q

How would you calculate the recognized gain for a divorce property settlement?

A

sales price of new property - adjusted basis (original purchase price)

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29
Q

Reminder: when they ask for taxable gain, they’re asking for the recognized gain

A

noted

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30
Q

Reminder: you have a deferred gain when there is no boot received or debt relief

A

noted

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31
Q

Reminder: be super careful when reading if there is cash received or cash paid (“the taxpayer paid …”)

A

noted

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32
Q

What is a wash sale and how do you determine the amount of the disallowed deduction?

A

when stock is sold within 30 days of it being purchased and more stock was purchased in between those 30 days too

disallowed deduction:
# of shares x sale price
(# of shares x original purchase price)

33
Q

T/F: The disallowed deduction (loss) would never be recognized (in any year) but instead would increase the basis of the new shares.

A

true

34
Q

T/F: A loss on the sale of a personal-use asset is a nondeductible personal loss.

A

true

35
Q

T/F: The entire loss on a rental house is deductible but only $3,000 of a loss on common stock held for investment purposes.

A

true

36
Q

What is the difference between capital assets and Section 1231 assets?

A

capital assets are for personal use
Section 1231 assets are for business use

37
Q

What types of assets would non-capital assets include?

A
  1. inventory held for sale to customers
  2. depreciable property and real estate used in business
  3. accounts and notes receivable arising from sales or services in the taxpayer’s business
  4. copyrights, literary, musical, or artistic compositions held by the original artist (not purchased)
  5. U.S. treasury stock
    (note: an investment in U.S. treasury bonds would be a capital asset, even for a company)
38
Q

T/F: If the asset is used for a personal business, it’s NOT considered a personal asset b/c it’s still used in business.

A

true

39
Q

T/F: Real property sold by a DEALER is considered inventory and is not a capital asset.

A

true

40
Q

T/F: When Section 1245 assets are sold at a gain, all the accumulated depreciation on the asset is captured as ordinary income and any remaining gain is a capital gain (under Section 1231).

A

true

41
Q

What is the capital loss deduction limited to and where does the excess go?

A

$3,000 per year

the excess is carried forward indefinitely

42
Q

Reminder: If you’ve already carried forward the full amount of the carried forward loss, then you can recognize the current year gain in full.

A

noted

43
Q

What are the limits for capital loss deductions for single, married filing jointly, and married filing separately?

A

$3,000; $3,000; $1,500

44
Q

Reminder: make sure to net the gains and losses before determining how much of the losses can be deducted

A

noted

45
Q

What would the short-term capital loss be for options?

A

the price of the options that lapsed in the year they were purchased

46
Q

T/F: A nonbusiness bad debt (amount not collected) must be totally worthless to be deductible.

A

true - so if only a partial amount of the debt can be collected, it’s all worthless and would be a short-term capital loss in the year that it became worthless

47
Q

T/F: Section 1244 (private company) losses are considered ordinary losses and cannot be netted against capital losses.

A

true

48
Q

What is the order in which short and long-term capital gains/losses should be offset by each other?

A
  1. offset any short-term gains/losses at ordinary income rates
  2. offset any long-term capital gains from the 28% group
  3. offset any long-term capital gains from the 25% group
  4. offset any long-term capital gains from the 15% group
49
Q

Are nonbusiness bad debt losses treated as capital or ordinary losses?

A

Nonbusiness bad debt losses (ex. from bankruptcy) are treated as short-term capital losses in the year that the debt becomes totally worthless. This is in the current year or the year of the final settlement.

50
Q

How much of a capital loss can a corporation deduct?

A

none - it can be carried back for 3 years or carried forward for 5 years to offset net capital gains in other years

51
Q

What are 1231 assets?

A

depreciable personal property and real property (ex. land) used in a business and held for more than 12 months (these are NOT capital assets)

note: if one of these characteristics is missing, then the gain cannot be treated as a 1231 gain

52
Q

T/F: If a gain is less than AD of a depreciable asset used in a trade or business, it is all recaptured as an ordinary gain under the rules of Section 1245.

A

true

53
Q

How much of a gain would be recaptured under section 1245?

A

the lesser of the depreciation taken or the gain recognized (sale price - adjusted basis)

note: adjusted basis (if not already given) = purchase price - depreciation

54
Q

T/F: Any recaptured gain under section 1245 is classified as an ordinary income (or unrecaptured section 1250) gain while the remainder is classified as a section 1231 gain.

A

true

55
Q

What is the gain realized (or gross profit) in an installment sale?

A
  1. cash to be received (including interest income)
    + debt assumed by the buyer (NOT notes receivable)
    - selling expenses
    - adjusted basis
    = gain realized / gross profit
  2. gain realized / sale price = gross profit %
  3. gross profit % x cash received that year = gain in the year of the installment sale
56
Q

What makes someone a related party to a partnership or corporation?

A

if they own more than 50% (in interest) of the partnership or corporation

57
Q

T/F: Deductions for losses between related parties are not allowed.

A

true

58
Q

T/F: Under the related party rules, the taxpayer constructively owns as much % of interest as their family members do (siblings, spouse, ancestors, and children).

A

true

59
Q

T/F: Relatives are considered related parties to the taxpayer.

A

true

60
Q

T/F: If the final selling price is between the relative’s cost basis and the original purchase price, the related party can reduce their gain up to the realized loss but not below zero.

A

true

ex. if the realized loss is $10,000 for the person who purchased the stock and the realized gain is $5,000 for the relative who received and later sold the stock, the relative can reduce the gain up to $10,000 but not below zero; the relative would not recognize any gain or loss since the gain of $5,000 would be reduced to zero

61
Q

Reminder: compare the sales price and the basis of stock when calculating the gain/loss if the stock was not subsequently sold to someone else

A

noted

62
Q

Reminder: you would not add land that was acquired for the purchase of the building as part of the depreciable base of the building b/c land is not depreciable

A

noted

63
Q

What does MACRS 5-year property include?

A

-automobiles
-light trucks
-computers
-typewriters
-copiers
-duplicating equipment

64
Q

What does MACRS 7-year property include?

A

-office furniture and fixtures
-equipment and property with no ADR midpoint classified elsewhere
-railroad track

65
Q

T/F: MACRS does not include salvage value calculations.

A

true

66
Q

What does the MACRS method half-year convention mean?

A

one-half of the first year’s depreciation is allowed in the year in which the property is placed in service, regardless of when the property is placed in service during the year, and a half year’s depreciation is allowed for the year in which the property is disposed of

67
Q

When a taxpayer places more than 40% of its property into service in the last quarter of the taxable year, the corporation must use the ___________ convention for MACRS depreciation purposes.

A

mid-quarter

through this method, acquisitions are segregated by quarter and treated as if placed in service in the middle of each respective quarter

68
Q

T/F: To qualify for IRC Section 179, the property must be tangible personal property purchased from an unrelated party and for use in the taxpayer’s active trade or business.

A

true

69
Q

What amount of cost recovery can a taxpayer claim?

A

just the amount for depreciable personal property

70
Q

How is the amortization for purchased intangible assets treated?

A

taxpayers would amortize the purchased intangible assets (customer relationships, trade names, and goodwill) over 180 months using the full-month convention beginning with the month of acquisition

*add up the value of all the assets, divide by 180 months, multiply by the months from the acquisition date through year-end

71
Q

T/F: For tax purposes, intangibles and covenants not to compete may be amortized using the straight-line basis over a period of 15 years, starting with the month of acquisition.

A

true

72
Q

Reminder: goodwill amortization starts in the month that business operations started

A

noted

73
Q

T/F: Ordinary income for tangible depreciable property is recognized to the extent of the lesser of the amount of gain realized (purchase price - depreciation compared to sales price) or the amount of the depreciation.

A

true

74
Q

T/F: The option exercise price must not be less than the lesser of 85% of the FMV of the stock when granted or exercised. The option cannot be exercised more than 27 months after the grant date.

A

true

75
Q

What would capital assets include?

A

-personal automobile of the taxpayer
-furniture and fixtures in the taxpayer’s home
-stocks and bonds
-real and personal property NOT used in a trade or business
-interest in a partnership
-goodwill of a corporation
-PURCHASED copyrights, literary, musical, or artistic compositions
-musical compositions held by the original artist
-other assets held for investment

76
Q

How do you calculate the Section 179 expense deduction?

A

$1,160,000 - (current purchases - $2,890,000) = Section 179 exp. deduction

77
Q

What do nontaxable like-kind exchanges apply to?

A

real property (land and everything attached, like buildings), NOT personal property

78
Q
A

CPA - REG Exam (8 decks)

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