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CPA REG > R4 > Flashcards

R4 Flashcards

1
Q

Real Property

A

Land and items permanently affixed to it

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2
Q

Personal Property

A
  • all prop not classified as real property

- machinery, equipment, automobiles

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3
Q

Capital Assets

A
  • property (real and personal) held by the taxpayer
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4
Q

Noncapital Assets

A
  • 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)
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5
Q

Gain or Loss Realized

A

Amount realized
- adjusted basis of asset sold
= gain or loss

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6
Q

Amount Realized (for gain/loss calc)

A
  • 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
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7
Q

Adjusted Basis of Asset Sold (for gain/loss calc)

A
  1. 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.)
  2. 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
  3. 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
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8
Q

Gains not taxed if you can HIDE IT

A

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
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9
Q

Homeowner’s Exclusion

HIDE IT

A

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
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10
Q

Involuntary Conversions

HIDE IT

A 
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

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11
Q

Divorce Property Settlement

HIDE IT

A
  • nontaxable

- basis is carryover

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12
Q

Exchange of Like Kind Business/Investment Assets

HIDE IT

A

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
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13
Q

Installment Sale

HIDE IT

A

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 %
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14
Q

Treasury and Capital Stock Transactions

HIDE IT

A

exempt from gain: (must be by corporation)

  • sales of stock by corporation
  • repurchase of stock by corp
  • reissue of stock
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15
Q

Losses nondeductible if you WRaP them

A
  • Wash Sale Loss
  • Related Party Transactions
  • Personal Loss
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16
Q

Wash Sale Loss

WRaP

A 
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

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17
Q

Related Party Transactions

WRaP

A

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
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18
Q

Personal Loss

WRaP

A

No deduction for loss on nonbusiness disposal or loss

- itemized deduction may be available for casualty and theft loss

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19
Q

Individual Capital Gain and Loss Rules

A 
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
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20
Q

Corporate Capital Gain and Loss Rules (c corps only)

A

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
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21
Q

MACRS Depreciation

A

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
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22
Q

Section 179 Expense Deduction in Lieu of Depreciation

A

$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
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23
Q

Depletion

A

allowed on exhaustible natural resources like timber, minerals, oil, and gas
2 methods

  1. Cost Depletion (GAAP)
    - cost/# of units total = unit depletion rate
    - unit depletion rate * # of units sold
  2. 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
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24
Q

Amortization

A

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
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25
Q

Section 1231, 1245, and 1250 assets

really just need 1231 & 1245

A

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

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26
Q

Repair Regulations

A

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
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27
Q

Partnership Formation

A

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

28
Q

Partnership Basis

A

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

29
Q

Partnership Tax Returns

A
  • 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
30
Q

Partnership termination

A
  • 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
31
Q

Transactions b/w Partner and Partnership

A

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
32
Q

Partnership Taxable Income and Losses

A

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

33
Q

Partnership Guaranteed Payments

A

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
34
Q

Partnership Tax Elections

A

that affect calculation of taxable income are made by partnership, not the partner

35
Q

Partnership Organizational and Start Up Expenditures

A

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

36
Q

Sydication Costs

A

raising money

- not deductbile

37
Q

Cancellation of Debt Income

A

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

38
Q

Partnership Nonliquidating Distributions

A
  • 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
39
Q

Partnership Liquidating Distributions

A

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

40
Q

LLC Taxation

A

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
41
Q

Taxation of Estates

A

Estates are subject to 2 separate taxes:

1) Income tax: annually
2) Estate tax: one time based on value of decedent’s estate

42
Q

Unified Estate and Gift Tax

A

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
43
Q

Fiduciary Accounting for Estates and Trusts

A

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
44
Q

Distributable Net Income (DNI)

A

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

45
Q

Estate/Trust Deductions

A
  • 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)
46
Q

Adjusted Tax Exempt Interest

A
  • amount of tax-exempt interest income reduced by:
    a) related interest expense and
    b) other related investment expenses related to tax-exempt interest
47
Q

Income Distributed to the Beneficiaries

A

on schedule K-1 and form 1041

- retains same character

48
Q

Income Distribution Deduction (E/T)

A

equals the lessor of:

  • actual distribution to beneficiary or
  • DNI (less adjusted tax-exempt interest)
49
Q

Annual Estate Income Tax Return

A

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
50
Q

Annual Trust Income Tax Return

A

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
51
Q

The Estate Tax (Form 706)

A

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
52
Q

Gross Estate

A

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)
53
Q

Estate Deductions

A

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
54
Q

Unified Estate and Gift Credit

A

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 ^

55
Q

Deceased Spouse’s Unused Exclusion

A

Surviving spouse can add the unused exclusion amount of deceased spouse on top of her own 5,450,000 exclusion

56
Q

Other Credits that reduce Estate Tax

A
  • Foreign Death Taxes
  • Prior Transfer Taxes: gift taxes paid after 1976 are subtracted from tentative estate tax to arrive at gross estate tax
57
Q

The Gift Tax (Form 709)

A
  • must file if donor gives more than $14,000 (28,000 for joint) per donee per year
  • due date april 15
58
Q

Gift Tax Unlimited Exclusions

A
  1. payments made directly to educational institution
  2. payments made directly to health care provider for medical care
  3. charitable gifts
  4. marital deduction
59
Q

Gifts– Present vs Future Interest

A

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
60
Q

Gifts– Complete vs Incomplete

A

Incomplete if it is conditional or revocable

  • complete gifts qualify for annual exclusion
  • incomplete gifts are not and will stay in estate
61
Q

Gift Recipients (estate)

A
  • nontaxable at NBV + gift tax paid by donor
62
Q

Calculating Taxable Gifts

A

total amount of gifts equals aggregate value of all gifts made during the calendar year less annual exclusion 14,000/28,000 per donnee

63
Q

Generation Skipping Transfer Tax

A
  • 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
64
Q

Worthless Security Treatment

A

worthless security is treated as being sold or exchanged on the last day of the year it becomes worthless as a capital loss

65
Q

De Minimis Rule

Repair Regulations

A

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
66
Q

Safe Harbors and Small Business

Repair Regulations

A

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

CPA REG (11 decks)

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