R4 Flashcards
Real Property
Land and items permanently affixed to it
Personal Property
- all prop not classified as real property
- machinery, equipment, automobiles
Capital Assets
- property (real and personal) held by the taxpayer
Noncapital Assets
- property included in inventory or held for sale in ordinary course of business
- depreciable property used in trade or business (section 1231, 1245, and 1250)
- accounts and notes receivable from business
- copyrights and compositions held by original artists (bc it’s like it’s for their business)
Gain or Loss Realized
Amount realized
- adjusted basis of asset sold
= gain or loss
Amount Realized (for gain/loss calc)
- cash received = boot
- assumption of debt by buyer; excess is boot
- property at FMV
- services at FMV
- amount realized is reduced by any selling expense
Adjusted Basis of Asset Sold (for gain/loss calc)
- Purchased Property Basis = cost
- includes amts to purchase, prepare, and place property into service (shipping, installation, sales taxes, testing)
- betterment or restoration or new or different use is added (as new asset separate from original?)
- reduce basis for depreciation (some spread depr.) - Gifted Property
- GR: rollover cost/NBV + any gift tax paid
- Exception: lower FMV at date of gift then loss based on FMV and gain based on NBV and in between is no g/l
- holding period: assume donor’s holding period - Inherited Property: step up (down) to FMV
- GR: date of death FMV becomes basis
- Alternative valuation date: if elected, valued using FMV at earlier of:
a) distribution/sale date or
b) alternate valuation date 6 months after death or dist.
- holding period: automatically long-term property
Gains not taxed if you can HIDE IT
but gain to extent of boot is taxable
- Homeowner’s Exclusion
- Involuntary Conversions
- Divorce Property Settlement
- Exchange of Like-Kind Business/Investment Assets
- Installment Sale
- Treasury and Capital Stock Transactions
Homeowner’s Exclusion
HIDE IT
sale of personal principal residence subject to exclusion from gross income for gain: (excess is taxable)
- 500,000 for MFJ & SS
- 250,000 for single, MFS, and HoH
for full exclusion:
- principal residence for 2 out of last 5 years
- both spouses have to meet use requirement
- surviving spouse entitled to 500,000 if occupied w decedent spouse and sold w/i 2 years of death
reduces exclusion:
- if nonqualified use, pro rata but don’t include year of sale
- pro rata partial exclusion if sale due to change in employment, health, or unforseen circumstances
- depreciation is taxable 1250 gain (doesn’t get deducted)
- rental income is prorated and also doesn’t get deducted
- no age requirement
- no rollover to another house required
- exclusion is renewable
Involuntary Conversions
HIDE IT
nonrecognition if (insurance) proceeds used for reinvestment to restore him to original position - gain is recognized to extent of unreinvested amt (taxable/boot)
- if no gain recognized, basis of new asset is same as old
- if gain recognized (boot), basis is cost less gain not recognized
- personal property: reinvestment must occur in 2 years, principal residence is 4 years
- business property: reinvest in 3 years
-losses are recognized and basis is cost
Divorce Property Settlement
HIDE IT
- nontaxable
- basis is carryover
Exchange of Like Kind Business/Investment Assets
HIDE IT
nonrecognition treatment accorded to “like-kind”
(except inventory, stock, securities, partnership interests, and real property in different countries)
like kind depends on status as real or personal property
- real prop for any real prop is ok
- but personal prop has to have same general use
+ timing requirements: replacement w/i 45 days and received by 180 days or date of income tax return
+ recognized gain is lower of realized gain or boot received
- loss is never recognized, it’s deferred and added to basis (below)
+ basis = FMV - deferred gain + deferred loss
- liabilities taken on by other party count as boot
- if other party is taking on liability and you are taking on a liability, net them to find boot
Installment Sale
HIDE IT
tax method for sales by nonmerchants and nondealers, not available for sales of stocks or securities traded on established market
+ recognize when cash is received
- taxable income calc. by multiplying annual cash collection by gross profit %
+ reportable gain/income
- gross profit = sale - COGS
- gross profit % = gross profit / sales price
- earned revenue (taxable income) = cash collections * gross profit %
Treasury and Capital Stock Transactions
HIDE IT
exempt from gain: (must be by corporation)
- sales of stock by corporation
- repurchase of stock by corp
- reissue of stock
Losses nondeductible if you WRaP them
- Wash Sale Loss
- Related Party Transactions
- Personal Loss
Wash Sale Loss
WRaP
when security (stock or bond) is sold for loss and repurchased within 30 days before or after sale date - new security is worth purchase price + disallowed loss
R4-25
Related Party Transactions
WRaP
related parties are direct family (not in laws) and entities MORE than 50% owned
- gains are imposed on all sales of non-depreciable property b/w all related parties except husband and wife and individual and 50%+ corp or partnership
- losses are disallowed even if made at arm’s length
- basis rules of relative receiving (same as gift tax) gain is based on higher original price and loss is based on lower price received for
- holding period starts w new owner’s period of ownership
Personal Loss
WRaP
No deduction for loss on nonbusiness disposal or loss
- itemized deduction may be available for casualty and theft loss
Individual Capital Gain and Loss Rules
Net Capital Gains Rules \+ Long Term - holding period: > 1 year - tax rate: 20% max, 15% for normal, 0 for low income \+ Short Term - holding period: 1 year or less - tax rate: ordinary income
Net Capital Loss Deduction and Loss Carryover Rules
- $3,000 max deduction from other income
- excess carryforward indefinitely and maintains character of long term or short term
- netting procedures: gains and losses netted w/i each tax rate group then offset short term and long term gains (respectively) beginning w highest tax rate group
Corporate Capital Gain and Loss Rules (c corps only)
Net Capital Gains
- added to ordinary income and taxed at reg rate
- section 1231 gains entitle to capital gain treatment
Net Capital Losses
- only used to offset capital gains (and 1231 gains)
- excess carryback 3 carryforward 5
MACRS Depreciation
Non Real Estate (Machinery & Equip)
- 3, 5, 7, and 10 year prop 200%
- 15 and 20 year prop 150%
- half year convention unless >40% purchased in last quarter of the year, then mid quarter convention
Real Estate (Building)
- subtract land cost
- residential rental property: 27.5 yr straight line
- nonresidential real property: 39 yr straight line
- mid month convention for placed in service and disposal
Section 179 Expense Deduction in Lieu of Depreciation
$500,000 deduction for personal property (m and e) acquired from unrelated party for business use
- reduced dollar for dollar by excess of 2,010,000
- not permitted when net loss exists or would create a net loss
- SUVs may be expensed up to 25,000
- separately stated on K & K-1, not ordinary income
- deducted from passive activity schedule that has income from real estate, s corps, partnerships, etc
Depletion
allowed on exhaustible natural resources like timber, minerals, oil, and gas
2 methods
- Cost Depletion (GAAP)
- cost/# of units total = unit depletion rate
- unit depletion rate * # of units sold - Percentage Depletion (non-GAAP)
- preference for AMT
- deduction limited to 50% of taxable income from well or mine
- tax only
- may be taken even after costs has been completely recovered and there is no basis
Amortization
GAAP =/= Tax
Tax: 15 year straight line starting w month of acquisition
GAAP: impairment test/not amortized
- research expenses amortized over 60 month
- business organizational and start up expenditures: 5,000 + excess/ 180 months amortized
Section 1231, 1245, and 1250 assets
really just need 1231 & 1245
1231 depreciable personal and real prop used in trade/business and held > 12 months
- 1231 gain is capital gain, 1231 loss is ordinary loss (deductible)
1245 personal property (sometimes tested)
- 1245: LESSER of accum. depreciation on m+e or gain recognized is recaptured as ordinary income
- excess gain on sale is 1231 capital gain
1250 real property
- 1250: accelerated depreciation on real property in excess of straight-line depr is recaptured as ordinary income
Repair Regulations
if regulations don’t require capitalization, then costs are considered repairs and expensed
GR: all tangible property that is not inventory is capitalized
- materials and supplies: items costing 200 or less or has economic life of less than 12 months (deductible)
- de minimis, safe harbor, small business taxpayers
Partnership Formation
GR: no gain or loss recognized on contribution of property
exceptions:
- services rendered for partnership interest is taxable ordinary income at FMV
- if there’s boot, taxable gain to partner
Partnership Basis
basis of contributing partner
- cash: amount
- property: NBV
- liabilities (for prop you put in) assumed by other partners is a reduction
- services: FMV (taxable ordinary income)
- liabilities (we take on) assumed of income partners
taxable boot (if negative) = basis - liabilities assumed by other partners - gain/boot brings basis back to 0
holding period of partnership interest includes holding period of property contributed
-built in gain/loss from date of contribution is allocated to contributing partner upon sale of the property
partnership’s basis for contributed property
- NBV or debt assumed
Partnership Tax Returns
- partnership not subject to income taxes
- must file 1065 tax return that includes schedule K and K-1 that gives detail about partner’s flow through
- required calendar year end, return is due March 15
- 3 month deferral for fiscal year is max permitted
Partnership termination
- operations cease
- 50%+ partnership interest in both capital and profits is sold or exchanged w/i 12 month period
- less than 2 partners
effect
- distributions to remaining partners and purchaser
- recontribution of assets to new partnership
Transactions b/w Partner and Partnership
GR: deemed to have occurred b/w partnership and outsider except
- Related Party (WRaP): losses if partner owns >50% are not deductible
- Related Party Gain is ordinary income if the property is depreciable or not a capital asset
Partnership Taxable Income and Losses
Taxable Income
- partner must include his distributive share of partnership income (even if not received) in his tax return
- guaranteed payments
- not distributions
Tax Losses- all losses offset their own gains
to deduct losses, must clear 3 hurdles
1. losses limited to tax basis
2. losses limited to at risk amount- doesn’t include nonrecourse liabilities
3. passive loss limitation: loss from partnership is passive so can only offset passive income (limit)
- carryforward loss indefinitely
Partnership Guaranteed Payments
are reasonable compensation paid to partner for serivcies or use of capital without regard to his ratio of income
- allowable tax deductions to the partnership as ordinary business expense on K-1
- taxable ordinary income to partner considered self employment income
Partnership Tax Elections
that affect calculation of taxable income are made by partnership, not the partner
Partnership Organizational and Start Up Expenditures
5000 each but reduced by amount exceeding 50,000
excess amortized over 180 months
- legal services, accounting services, fees for partnership filings
- training costs, advertising, and testing prior to opening
Sydication Costs
raising money
- not deductbile
Cancellation of Debt Income
when partnership transfers capital or profits interest to creditor to satisfy debt, partnership recognizes cancellation debt income in excess of amount of debt over FMV of interest
Partnership Nonliquidating Distributions
- GR: nontaxable
- distributions reduce partner’s basis by cash or NBV distributed
- basis in distribution is NBV, unless basis is not enough then stop at 0 and recognize less as a basis
- only gain if excess cash over partner’s basis in partnership
Partnership Liquidating Distributions
3 ways a partner may liquidate:
1) Complete Withdrawal
- zero out to get out
- basis in property is basis in partnership minus money received
- gain only if money received exceeds partner’s basis
- loss if only money received and less than partner’s basis
2) Sale of Partnership Interest
- capital gain or loss when transferring partnership
- gain/loss = amount realized - basis in partnership
- if partnership liabilities are transferred, added to amount realized
Exception: any gain of partner’s “hot assets” is ordinary income (unrealized receivables, appreciated inventory, and recapture income
3) Retirement or Death of Partner
- payments for partnership interest is capital gain/loss
- payments for partner’s income (ordinary income)
- if sold mid year, partnership income/losses allocated pro rata
- when partner retires, continues as partner until his basis has been completely liquidated by distributions, then they begin to count as gains
LLC Taxation
LLC members are not personally liable for obligations of the business
- separate legal entity from it’s owners
- LLC w/ 2+ owners is taxed as partnership unless elected to be taxed as a corporation
- LLC w 1 owner (not electing corp taxation) is treated as sole proprietorship and considered disregarded entity for federal income tax
Taxation of Estates
Estates are subject to 2 separate taxes:
1) Income tax: annually
2) Estate tax: one time based on value of decedent’s estate
Unified Estate and Gift Tax
estate and gift tax have been unified into a single transfer tax
- not all gifts are subject to gift tax
- gifts of $14,000 or less per donnee per year are excluded
- 2,125,800 unified estate and gift tax credit exempts from the first 5,450,000 of nonexcluded gifts
Fiduciary Accounting for Estates and Trusts
centered around classification of all receipts and disbursements as either principal (corpus) or income
- capital gains and losses are classified as principal
- amounts taxed to fiduciary and beneficiaries is determined by the classification
Distributable Net Income (DNI)
limit on amount trust or estate can deduct on distributions to beneficiaries
estate/trust gross income- including capital gains
- estate/trust deductions (ordinary and necessary)
+ adjusted tax exempt interest
- capital gains attributable to corpus
= DNI
Estate/Trust Deductions
- carrying on a trade or business
- production of income
- management or conservation of income-producing property
- determination, collection, or refund of any tax
- contributions to a charity (unlimited charitable deduction is allowed if provided for in the will)
Adjusted Tax Exempt Interest
- amount of tax-exempt interest income reduced by:
a) related interest expense and
b) other related investment expenses related to tax-exempt interest
Income Distributed to the Beneficiaries
on schedule K-1 and form 1041
- retains same character
Income Distribution Deduction (E/T)
equals the lessor of:
- actual distribution to beneficiary or
- DNI (less adjusted tax-exempt interest)
Annual Estate Income Tax Return
Form 1041
- required when annual income exceeds $600
- tax year: you can die anytime
a) calendar year due date april 15
b) fiscal year due date 15th day of 4th month after year end - exempt from making estimated tax payments for first two years
Annual Trust Income Tax Return
Form 1041
- trusts subject only to Income tax
- classified as grantor, simple or complex
- must use calendar year
- may deduct amounts distributed up to the DNI (less adjusted tax-exempt interest)
Simple Trusts
- only makes distributions from current income, not from principal/corpus
- required ti distribute all current income
- no deduction for charitable contribution
- $300 exemption in arriving at taxable income
Grantor Trust
- grantor retains control over trust assets
- disregarded entity for income tax purposes, reported on individual income tax return of grantor
Complex Trust
- all trusts not simple or grantor
- can be simple one year and complex the next
- may accumulate current income
- may distribute principal
- may deduct charitable contributions
- $100 exemption
The Estate Tax (Form 706)
Transfer tax imposed on value of property transferred by decedent at death
- Form 706 must be filed if gross value of estate + historical taxable gifts exceed $5,450,000
- Filing Deadline: 9 months after death
Gross Estate
value at date of death of all the decedent’s property and FMV of jointly held property
FMV of property owned
- spouse joint: 50/50
- other joint: 100% less other owner’s contribution
- alternate valuation date earlier of:
a) date property is distributed or
b) six months after death - insurance proceeds if deceased is beneficiary
- incomplete gifts
- revocable transfers
- all property entitled to be received (income)
Estate Deductions
Nondiscretionary Expenses can be deducted on either final income tax return or estate return
- Medical Expenses: subject to 10% AGI
- Administrative Expenses: outstanding debts, claims against the estate, funeral costs, and certain taxes
Discretionary Expenses
- unlimited charitable deduction
- unlimited marital deduction
Unified Estate and Gift Credit
credit of $2,125,800 equal to the tax on a $5,450,000 tentative tax base at death
that’s why you only need to file the return if it exceeds ^
Deceased Spouse’s Unused Exclusion
Surviving spouse can add the unused exclusion amount of deceased spouse on top of her own 5,450,000 exclusion
Other Credits that reduce Estate Tax
- Foreign Death Taxes
- Prior Transfer Taxes: gift taxes paid after 1976 are subtracted from tentative estate tax to arrive at gross estate tax
The Gift Tax (Form 709)
- must file if donor gives more than $14,000 (28,000 for joint) per donee per year
- due date april 15
Gift Tax Unlimited Exclusions
- payments made directly to educational institution
- payments made directly to health care provider for medical care
- charitable gifts
- marital deduction
Gifts– Present vs Future Interest
postponement of right to use, possess, or enjoy property makes it a future interest
- present interest qualified for annual exclusion
- future interest doesn’t qualify for exclusion and will not be removed from estate
Gifts– Complete vs Incomplete
Incomplete if it is conditional or revocable
- complete gifts qualify for annual exclusion
- incomplete gifts are not and will stay in estate
Gift Recipients (estate)
- nontaxable at NBV + gift tax paid by donor
Calculating Taxable Gifts
total amount of gifts equals aggregate value of all gifts made during the calendar year less annual exclusion 14,000/28,000 per donnee
Generation Skipping Transfer Tax
- separate tax in addition to federal estate and gift tax
- applies when individuals transfer property to a person who is 2+ generations younger
- either trustee or transferor pays the GSTT
- applies to all lifetime transfers in excess of 5,450,000 or 10,900,000 for married couples
Worthless Security Treatment
worthless security is treated as being sold or exchanged on the last day of the year it becomes worthless as a capital loss
De Minimis Rule
Repair Regulations
companies can make a de minimis annual expense election
- must be a written acct policy
- under a certain dollar amount
- useful life of 12 months or less
- if company has applicable financial statement, max is 5,000
- if no applicable financial statement, max is 500
Safe Harbors and Small Business
Repair Regulations
Safe Harbors
- elective safe harbor allowing taxpayers to expense routine maintenance that is reasonably expected to occur more than once and isn’t betterment
- small taxpayers can expense costs for a building if it doesn’t exceed lesser of:
a) 2% of unadjusted basis of building or
b) $10,000
small qualifications:
- less than $10 mill in assets or average annual gross receipts
- eligible building has unadjusted basis less than $1 mill
eliminates requirement for small business to fil form 3115 application for change in acct method
