R4 Flashcards
Real property
Real property includes land and all items permanently affixed to the land (e.g., buildings, pav
Complete liquidation of partnership
Rule: In a complete liquidation of a partnership, the partner’s basis in the distributed property is the same as the adjusted basis of his partnership interest (the partner is essentially exchanging his partnership interest for assets of the partnership), reduced by any monies received. The partner recognizes gain only to the extent that money received exceeds the partner’s basis in the partnership.
Statue of limitations
Unless there is a substantial 25% misstatement of income or fraud, the statue of limitations is generally three years from the later of the due date or filing date of a return. This adjustment is improper because there is no evidence of fraud or substantial misstatement and some of the years are old enough that the three year statute has expired.
Gift rules
Rules: Every transfer of money or property, whether real or personal, tangible or intangible, for less than adequate or full consideration is a gift. A donor may exclude the maximum allowable amount of gifts according to the tax law each year made to each donee. In addition, there are four items that qualify for unlimited exclusion from gift tax: (1) payments made directly to an educational institution for a donee’s tuition, (2) payments made directly to a health care provider for medical care, (3) charitable gifts, and (4) marital transfers. Relationship of the donee to the donor is not of consequence.
Gift
annual gift exclusion is $15K
Capital assets and 1231 assets
Hall’s limousine used in his trade or business is considered a Section 1231 asset. Section 1231 assets are not considered capital assets. Choice “c” is incorrect. Hall’s personal residence and personal furnishings are considered capital assets.
Calendar year requirments
rule : An estate may choose the same accounting period as the decedent, or it may choose a calendar year or any fiscal year it wishes, with a few limited exceptions. ule Trusts except taxexempt trusts must adopt a calendar year.
Partners basis
Rule: In general, a partner’s basis in his/her partnership interest will be the amount of cash contributed plus the adjusted basis of any property contributed in exchange for the interest.
Not elected to be a corporation
This LLC has not elected to be treated as a corporation. Therefore, it will be treated as a partnership by default. Decker’s basis will be the adjusted basis of the property contributed less 50% of the liability, which is assumed by the other partner. $5,000 – $1,500 = $3,500.
Depreciable basis
The rules for depreciable basis in tax are generally the same as the AAP rules for capitaliing an asset. The depreciable basis is the cost associated with the purchase of the asset and with getting the asset ready for its intended use. Further improvements are also capitalied, and the basis is reduced for any accumulated depreciation. In this case, the cost of obtaining the equipment and getting the equipment ready for its intended use
Principal residence exception
This is a principal residence that the taxpayer has owned and lived in for the last seven years. This exceeds the requirement of at least two of the last five years. Baker may therefore exclude up to $250,000 of gain. The realized gain is $84,000 ($165,000 selling price – $70,000 adjusted basis – $10,000 selling expenses – $1,000 fix-up expenses incurred within 90 days of the sale). All of the realized gain is excluded, and none of it is recognized.
Guaranteed payments
ule uaranteed payments are reasonable compensation paid to a partner for serv ices rendered without regard to the partner’s ratio of income. They are allowable ta deductions to the partnership and ordinary income to the partner receiv ing them. ote A guaranteed payment will not increase a partner’s basis in the partnership because the payment has been distributed to the partner.
due date of a federal estate tax return (Form 706), for a taxpayer who died and didnt file an extention
unless an extension is filed, Form 706 is due exactly nine months after the decedent’s death
Different types of assets
An automobile for personal use is a capital asset. Depreciable business property is a Section 1231 asset, not a capital asset. . Accounts receivable for inventory sold is an ordinary income asset, just like the original inventory. Real property used in a trade or business is a Section 1231 asset, not a capital asset.
partnership adj basis
Pert’s adjusted basis in the partnership is equal to the $12,000 adjusted basis of the land he contributed to the partnership less the 50% allocable percentage of the $4,000 mortgage assumed by the other partners.
Distributable net income ( DNI)
Distributable netincome is computed as the trusts net income less any expenses allocatable to income.
Worthless security
The rule is that a worthless security is treated as being sold or exchanged on the last day of the year it becomes worthless.
Contributed assets to a partnership
Rule enerally, no gain or loss is recognied on the contribution of property to a partnership in return for partnership interest. The basis of the partnership interest is the basis of the property in the hands of the partner upon contribution. The partnership takes on the contributor’s basis of the contributed property however, if the fair market value of the property differs from the basis, the amount of the unrealied gain or loss at the date of contribution is specially allocated to the contributing partner upon the sale of that contributed property
Partnership termination or complete liquidation
in a complete liquidation to a partnership the partners basis in the property is the same as the adjusted basis of his paternship interest reduced by his any monies received. This is ussually a non taxable event
However if partner receives money that exceeds his basis in his partnership than a gain or loss is recognized
llc
Choice “c” is correct. LLCs can select whether to be taxed as a partnership, corporation or sole proprietorship. An LLC with at least two owners is taxed as a partnership unless an election is made to be taxed as a corporation. Choice “b” is incorrect. An LLC cannot become a public company. It must convert to a corporation before issuing an IPO. Choice “d” is incorrect. All LLC members generally have the right to amend the LLC operating agreement, provide input, and manage LLCs. The Dorians may not v iew this “sharing” as a positive feature of their organization. Choice “a” is incorrect. A single-member LLC is considered a disregarded entity for federal income tax purposes and is treated as a sole proprietorship. It appears that both Jane and John Dorian will be “members” and should be able to elect either a partnership or corporation for tax purposes.
revokable trust
Choice “d” is correct. If a trust is revocable, then a completed gift has not taken place. Therefore, the assets of the trust are still included in the estate of the grantor. Choice “c” is incorrect. If a trust is revocable, then a completed gift has not taken place. Therefore, the grantor will not be subect to gift taxes on the transfer. Choice “a” is incorrect. Although the trust is revocable, it is still a valid trust for legal purposes. Therefore, the assets are not subect to probate upon the death of the grantor. Choice “b” is incorrect. The trust is revocable. Therefore, the grantor still has the power to control the trust funds.
Inherited property
There is no income tax on the value of inherited property. The property was distributed four months after death and the value that day (,) is used for the basis. , - , . Choice “d” is incorrect. There is no income tax on the value of inherited property. heirs are not taxed on inheritances. The income or loss results when inherited property is sold. Choice “c” is incorrect. There is no income tax on the value of inherited property. The gain on the sale is the difference between the sales price of , and all’s basis. all’s basis is the alternate valuation elected by the executor.
Types of assets
Assets held for personal use are capital assets. Choice “c” is incorrect. Depreciable personal property used in a trade or business (including fixtures used in a retail store) is not a capital asset. Instead, such property is Section 1231 or Section 1245 property. Choice “a” is incorrect. Trade accounts receivable are not capital assets. Instead, such receivables are ordinary assets. Choice “d” is incorrect. Real property used in a trade or business (including real property used to store business assets) is not a capital asset. Instead, such property is Section 1231 or Section 1250 property.
Required tax year for a partnership
Rule: Per IRC Section 0(b), a partnership tax year must have the same taxable year as the common taxable year of the partners that, in the aggregate, have interest greater than 50, which is determined based on the “testing day,” the first day of the partnership’s tax year (not considering the maority interest rule). Note: After a change is made to the “maority-interest” tax year end, the partnership does not have to change to another tax year for two years following the year of change. Exceptions to the rule exist. (1) If there is no “maority-interest” tax year, then the tax year is the tax year of all of the principal partners of the partnership (those owning 5 or more of the income or capital of the partnership). (2) If the partnership is still unable to determine a tax year using the general rule or the first exception, then the tax year that causes the least aggregate deferral of income to the partners must be adopted.
Partnership
enerally, no gain or loss is recognied on a contribution of property to a partnership in return for a partnership interest. The partners original basis for a partnership interest acuired by contribution of property is the adusted tax basis of the property (unless the property is subect to excess liability, which is not the case in this uestion).
Related party transactions - loss dissallowed
Choice “c” is correct. The parent has a realied loss of $2,000 $,000 sale less $8,000 cost. However, none of this loss is recognied, because it is disallowed under the related party transaction rules. The child has a realied gain of $1,000 $,000 sale less $,000 cost. This gain can be reduced but not below zero by the disallowed loss of the parent. Therefore, the recognied gain to the child is zero.
non seperately state income
eenues 20000 alaies 000 uaantee paents 0000 ent expense 2000 epeiation expense 8000 total nonsepaatel state inoe 000
Inherited property
unless the executor elects the alternative valuation date the basis to the inheritor is the fair market value at date of death
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question 36 r4
r4
annual Section 1 Election to Epense Certain Depreciable Business Assets limit is $108,000
nder the election to epense certain depreciable business assets sec. 1, the tapayer may epense the cost of the depreciable asset up to the limitation, in this eample $108,000. Therefore, only the cost of the depreciable tangible business assets can be epensed $100,000.
Capital assets
Investment assets of a taxpayer that are not inventory are capital assets
Estate
All income and expenses of a trust are allocated to either income or Corpus i.E principal by the trust document, the income beneficiary will only receive the income and not hte corpus
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cost of land
includes purchase of title policy
Partnership basis
recourse liabilities increase the cost basis
Gifts
If the annual exclusion is , and giftsplitting is elected, then the couple can give up to , per recipient without it being a taxable gift. Both of these gifts are under that amount. ote that this is not the actual current annual exclusion. But the , is an assumption, given in the facts of the uestion
Net capital loss
The capital loss deduction is limited to $3,000 per year with the excess carried forward indefinitely. In this case, Lee can deduct $3,000 against his income and carry forward the remaining $5,000.
Gift
Rule: Every transfer of money or property, whether real or personal, tangible or intangible, for less than adequate or full consideration is a gift. There are four items that qualify for unlimited exclusion from gift tax and qualify to be excluded from being reported on a gift tax return: (1) payments made directly to an educational institution for a donee’s tuition, (2) payments made directly to a health care prov ider for medical care (3) charitable gifts, and (4) marital transfers. Relationship of the donee to the donor is not of consequence.
MACRS
When a taxpayer places 40% or more of its property (other than certain qualifying real property) into serv ice in the last quarter of the taxable year, the corporation must use the mid-quarter convention for MACRS depreciation purposes. With this method the acquisitions are segregated by quarter and treated as if placed in service in the middle of each respective quarter.
Parttner basis
When a partner’s share of partnership liabilities increases, that partner’s basis in the partnership increases by his share of the increase. Since the partner has unlimited liability, the partnership liabilities are treated as if the partner personally borrowed the money and then contributed it to the partnership.
amounts reported on individual income tax return
The deduction of the ordinary loss is limited to Junior’s basis and any at risk amounts. Junior’s basis is calculated as $40,000 + $12,500 capital gain - $5,000 charitable contributions = $47,500; thus the ordinary loss deducted on his return would be limited to $47,500.
Partership basis
The fair market value of property (high or low) is irrelevant in determining Black’s basis in Decorators. The partner’s adusted basis is used. since the mortgage does not exceed Black’s basis, he will not recognie a gain on the contribution of the encumbered property to Decorators.
Fiduciary return required if
Rule: A fiduciary must file a return on Form 1041 if the estate has gross income of $600 or more for the tax year and if none of the beneficiaries are nonresident aliens.
income distribution
he income distribution deduction is the lesser of the actual distribution to beneficiary or distributable net income (DN). f DN is 14,000 and the distribution to the beneficiary is 0,000, the income distribution deduction is 14,000. his, in effect, shifts the taxation of 14,000 from the trust to the beneficiary.
