REG Flashcards
1
Q
5-Year MACRS Property
A
Automobiles, light trucks, computers, and copiers
2
Q
7-Year MACRS Property
A
Furniture and fixtures, machinery, and equipment
3
Q
What % of business meals are deductible for corporations?
A
50%
4
Q
What orgs have to use the accrual basis of accounting?
A
tax shelters, large C Corps (avg. annual gross receipts over 3-year period > $26 million), and manufacturers
5
Q
Treatment of Excess Capital Losses for a Corporation
A
Carried back 3 years, Carried forward 5 years; Can only be offset against capital gains; Cannot deduct capital losses in excess of capital gains
6
Q
Dividends-Received Deduction (Corporation)
A
Ownership Less than 20% = 50% deduction
Ownership Between 20-80% = 65% deduction
Ownership > than 80% = 100% deduction
Lesser of: Dividends Received or Taxable Income
Note: Limit to taxable income does not apply if taking the full deduction results in a loss; Losers don’t follow the rules
Not available to:
- Personal service corporations
- Personal holding companies
- Personally taxed S corporations
7
Q
Charitable Deduction (Corporation)
A
Limited to 10% of its taxable income computed without regard to:
1. the contribution deduction
2. the dividends-received deduction
3. net operating loss carryback
4. capital loss carryback
Any excess can be carried forward for 5 years. No carryback.
8
Q
Earned Income Credit
A
A refundable tax credit; Only for individuals; Eligibility:
- live in the US for more than half of the year
- meet earned low-income thresholds
- not have more than a specified amount of disqualified income
- if there are no qualifying children, be at least age 19, except for students and qualified former foster youth or homeless youth
- file a joint return with one’s spouse with certain exceptions
9
Q
Criteria in determining whether a company is a Personal Holding Company
A
Criteria #1: More than 50% of the stock must be owned by 5 or fewer individuals
Criteria #2 60% of adjusted ordinary gross income consists of:
1) Dividends
2) Taxable Interest
3) Royalties, but not mineral, oil, gas or copyright royalties
4) Net rent, if less than 50% of ordinary gross income
10
Q
Personal Service Corporation (PSC)
A
Primarily involved in the performance of one of the following fields: accounting, law, consulting, engineering, architecture, health and actuarial science
11
Q
Organizational Expenditures + Start-Up Costs
A
- Organizational Expenditures: Legal + Accounting Services
- Start-up Costs: Training, Advertising, + Testing
- Respectively, deduct $5000 and amortize excess over 180 months
- Each $5000 amount is reduced by the amount by which the organizational expenditures or start-up costs exceed $50,000
12
Q
Novation
A
An agreement to substitute a third party for one of the parties to a contract and to release the party who was substituted out
13
Q
Rescission
A
Undoes a contract and restores the parties to the positions they would have been in if no contract were made
14
Q
Revocation
A
Refers to the withdrawal of an offer
15
Q
Release
A
Simply discharges a party, does not restore the party to their original position
16
Q
Noncarrier Case, Seller Not a Merchant
A
Risk of loss passes to the buyer upon seller’s tender of delivery of goods to the buyer (Garage sale)
17
Q
Noncarrier Case, Seller is Merchant
A
Risk of loss passes upon actual delivery to the buyer (buyer takes physical possession)
18
Q
Carrier Case, Shipment Contract
A
Risk of loss passes to the buyer when the goods are delivered to the carrier
19
Q
Carrier Case, Destination Contract
A
Risk of loss passes to the buyer when the goods reach the destination and the seller tenders delivery
20
Q
Express Warranties
A
Oral/Written Agreement; Any statement of fact or promise made by seller, any description of goods made by seller, or any sample/model shown by seller
21
Q
Implied Warranty of Title
A
Implied in every sale of goods that the seller has good title and right to transfer the title, ie. no unstated liens or attachments on goods
22
Q
Implied Warranty of Merchantability
A
Implied warranty that goods are fit for ordinary purposes; only in sales by merchants; merchantability can be disclaimed by a general disclaimer (ie. as is or with all faults)
23
Q
Implied Warranty of Fitness for Particular Purpose
A
buyer relies on seller to select goods suitable for buyer’s particular purpose; can be made by any seller; can be disclaimed by a general disclaimer (ie. as is or with all faults)
24
Q
Surety
A
One who agrees to be liable for the debt or obligation of another
25
Qualifying Child
CARES
Close relative
Age limit (19, 24+ in college)
Residency + filing requirements (same principal residence for more than half of the year)
Eliminate gross income test
Support test (must not have contributed more than half of his or her own support)
26
Exceptions to Penalty Tax on early withdrawal from 401K
```
HIM DEAD
Homebuyer (first-time)
Insurance (medical)
Medical expenses in excess of percentage of AGI floor
Disability (permanent or indefinite)
Education (college)
Adoption or birth of a child within one year
Death
```
27
Chapter 7 + Chapter 11: Involuntary Bankruptcy Case - Who must join the petition?
If a debtor has fewer than 12 creditors, only one creditor owed at least $16750 in aggregate must join.
If the debtor has 12 or more creditors, at least three creditors owed at least $16750 in aggregate must join.
28
Exceptions to Discharging of Debts under Chapters 7 and 11
```
WAFTED
Willful and malicious injury
Alimony
Fraud
Fines + Penalties owed to the government
Taxes (within 3 years)
Educational loans (unless prove undue hardship)
Debts undisclosed in bankruptcy petition
```
29
Priority Claimants (from highest to lowest priority)
SAG WEG CTI
1) Support obligations owed to spouses + children
2) Expenses of the bankruptcy administration
3) Claims that accrue in the ordinary course of business after the involuntary petition is filed but before the order of relief (Gap)
4) Wage claims of employees for sum earned within 180 days of bankruptcy, up to $13650
5) Sums owed for employee benefits up to whatever of the $13650 above is left
6) Claims of grain farmers + fishermen up to $6275
7) Consumer deposits up to $3025
8) Tax claims
9) Personal injury claims arising from DUI
30
Piercing the Corporate Veil
In some circumstances, the courts will hold the shareholders, officers, or directors of a corporation liable because the legislative privilege of conducting business in corporate form is being abused. Typical causes for piercing the corporate veil:
1. Shareholders commingle personal funds with corporate funds
2. Corporation was inadequately capitalized
3. Corporation was formed to commit fraud on existing creditors
31
Share Exchange
One corporation acquires all of the outstanding shares of one or more classes of stock of another corporation. Both corporations continue to exist as separate entities
32
Alimony/Spousal Support Payments
2018 & earlier = income to ex-spouse
| 2019 & later = not income to ex-spouse
33
Dividend Income (Taxability)
Corporate Retained Earnings = Taxable Dividend
No R/E and taxpayer has basis in stock = Nontaxable and reduces basis
No R/E and no stock basis = Taxable Capital Gain
34
Taxable Misc Income
Prizes & Awards = FMV is taxable
Gambling = Winnings taxable at FMV, losses deducted to extent of gambling winnings (not netted)
Damage Awards - if compensation is for lost profit, the award is income
Punitive Damages = taxable
Cancellation of Debt Income = taxable
35
Interest on US Series EE savings bond issued after 1989 is tax-exempt when
- used to pay for higher education
- taxpayer is over the age of 24 when bond is issued
- married taxpayer files a joint return and
- taxpayer meets certain income requirements
36
When to recognize gain/loss on sale of stock?
Whether on cash or accrual basis of accounting, taxpayers who sell stock or securities on an established securities market must recognize gains and losses on the trade date, rather than on the settlement date
37
Uniform Capitalization Rules
require the capitalization of certain costs related to inventory, including direct materials, direct labor, and indirect overhead costs including warehousing; do not apply to inventory acquired for resale if the taxpayer's average gross receipts for the preceding three tax years do not exceed $26 million
38
Specified Service Trade or Business (SSTB)
Trade or business involving direct services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, and brokerage.
Engineering and architectural services are specifically excluded from the definition of SSTB.
39
Mom-and-Pop Exception to PAL Limitation
An individual taxpayer may deduct up to $25,000 of net passive activity losses attributable to rental real estate if the taxpayer:
-actively participates in the rental real estate activity; and
-owns at least 10% of the rental real estate activity
Allowance reduced by 50% of the excess of the taxpayer's AGI over $100,000. Allowance is completed eliminated when AGI exceeds $150,000.
40
Self-Employment Tax
Net earnings from self-employment = 92.35% of self-employment income
- Total tax of 15.3% on earnings up to $142,800 in 2021
- One-half of SE tax paid is deductible (employer half)
41
Charitable Contribution Itemized Deduction (Individuals)
- A charitable contribution may be in the form of cash or property.
- Deduction for ordinary income property (inventory, short-term assets, investment or personal-use assets that have depreciated in value, depreciation recapture on long-term, business-use assets) is lesser of property's adjusted basis or FMV
- Deduction for LTCG property is its FMV at time of contribution (appreciated capital gain property that has been held for more than one year, include: investment assets, personal-use assets, gain in excess of ordinary income depreciation recapture for long-term, business-use assets)
- Charitable contributions subject to the 60% limit that are not fully deductible in the year made may be carried forward 5 years.
42
Retirement Savings Contribution Credit
A nonrefundable credit for contributions of up to $2,000 to either a traditional or Roth IRA by an eligible taxpayer (at least 18 years old, not a full-time student, not a dependent of another taxpayer).
43
Who qualifies as a dependent?
An individual is a dependent of a taxpayer if they meet the qualifying child or qualifying relative rules.
44
Multiple Support Agreement
In a multiple support agreement, all must be qualifying relatives who together contribute more than 50% of the support of the dependent. In addition, a contributor must have provided more than 10% of the individual's support to claim the individual as a dependent.
45
Group Term Life Insurance
Group Term Life Insurance premiums for coverage in excess of $50,000 are taxable to the employee.
46
Rental Real Estate Activity Loss
Rental real estate activities are passive activities and losses from them are generally not allowed to be used as an offset against income from any nonpassive activities.
Limited Exception in cases where a taxpayer owns at least 10% of the property and actively particpates. Up to $25,000 of the passive loss can be offset against nonpassive income. The $25,000 allowance is reduced by an amount equal to 50% of the amount by which the taxpayer's modified AGI exceeds $100,000 (becoming fully phased-out at modified AGI of $150,000)
47
Qualified Business Income - What is NOT Included
does NOT include:
- any wages earned as an employee or guaranteed payments to partners
- dividends, interest, and long-term and short-term capital gains and losses
48
Accord & Satisfaction
An accord is an agreement to substitute one contractual obligation for another. Satisfaction is the performance of the accord. The origianl contractual duties are not discharged until the accord is satisfied.
49
Actual Authority
The authority an agent reasonably believes that they possess because of the principal's communications to the agent. Actual authority may be express or implied.
50
Adoption Credit
A nonrefundable tax credit for qualifying expenses of adopting a child under age 18 or adopting a person who is physically or mentally unable to care for themselves. Medical expenses are not qualifying expenses. Maximum credit allowed is amount of qualified adoption expenses up to $14,440.
51
Agency Coupled with an Interest
This type of agency arises when the agent has an interest in the subject matter of the agency, such as where the agency power is given as security. In effect, the agent has paid for the right to be appointed as the agent, usually by giving credit. Such agencies are not revocable by the principal.
52
American Opportunity Credit
Available against federal income taxes for qualified tuition, fees, and course materials (including books) paid for a student's first four years of postsecondary education at an eligible educational institution. (Up to $1000 of this credit is refundable in 2021)
53
Apparent Authority
Apparent authority is agency power arising from words or conduct of a principal that, when manifested to third parties, reasonably induce them to believe that actual authority exists.
54
Business Judgment Rule
A director will not be liable to the corporation for acts performed or decisions made in good faith, in a manner the director believes to be in the best interest of the corporation, and with the care that an ordinarily prudent person in a like position would exercise.
55
Cancellation of Debt (COD)
When a creditor forgives a debt without payment. COD is taxable income to the debtor unless the creditor intended it as a gift or it meets certain exceptions relating to bankruptcy, insolvency, or farming.
56
Casualty and Theft Loss
A loss caused by a hurricane, earthquake, fire, flood, theft or similar event that is sudden, unexpected or unusual.
57
Chapter 7 Liquidation
A type of bankruptcy in which a debtor's assets are sold and turned into cash, which is distributed to the appropriate creditors.
58
Chapter 11 Reorganization
A type of bankruptcy in which the debtor remains in possession of their assets and a plan to pay off debts (a plan of reorganization) is submitted.
59
Child Tax Credit
(2021) A fully refundable tax credit of $3000 for each qualifying child between 6 and 17 and $3600 for each qualifying child under age 6.
60
De Minimis Fringe Benefits
Fringe benefits that are so minimal that they are impractical to account for and may thus be excluded from income.
61
Derivative Action
When a corporation has a legal cause of action against someone but refuses to bring the action, the shareholders may have a right to bring a shareholder derivative action to enforce the corporation's right. Such an action may be brought against a director of the corporation or outsiders.
62
Dissociation
A change in the relationship of the partners caused by any partner ceasing to be associated in the carrying on of the business. The remaining partners have the right to continue the business.
63
Dissolution
Upon dissolution, the partnership is terminated and the business must be wound up. Winding up is liquidation that involves the process of collecting the partnership assets, paying the expenses involved, satisfying creditors' claims, and distributing the net assets of the business to the appropriate party.
64
Express Authority
The actual authority of an agent specifically given in the principal's written or spoken communications to the agent.
65
Failure-to-File Penalty
The penalty is 5% of the amount of tax due for each month the return is not filed.
66
Failure-to-Pay Penalty
The penalty is one-half of 1% per month up to a maximum of 25% of the unpaid tax.
67
Family Tax Credit
A nonrefundable family credit is allowed for each person who is not a qualifying child for purposes of the child tax credit but is a qualifying dependent under the dependency rules. ($500 credit)
68
Foreign Earned Income Exclusion
Income excludable from the income of a taxpayer who lives in and earns income in a foreign country.
69
Fraud in the Execution
Fraud in the execution occurs when a party is deceived into signing something that they does not know is a contract.
70
Fraud in the Inducement
With fraud in the inducement, the defrauded party is aware of what they are signing, but was tricked into signing by a representation of false circumstances.
71
3 ways to have a reasonable tax position
- substantial authority for the position exists (40-50%) or
- reasonable basis for a disclosed position exists (20%) or
- it is reasonable to believe that a tax shelter or reportable transaction position would meet the more-likely-than-not standard (>50%)
72
Implied-in-Fact Contract
A contract formed by the conduct of the parties.
73
Kiddie Tax
A popular name for the tax rate imposed on the investment income of children under a specified age. Children with substantial investment income, such as interest, dividends, rents, and royalties, must pay tax on their investment income at a rate that is the same as the tax brackets applicable to trusts and estates.
74
Mailbox Rule
A contract rule that states that an acceptance is generally effective when sent if properly addressed.
75
Parol Evidence Rule
A contract rule that prohibits the admission of oral or written evidence that contradicts the terms of a fully integrated written contract.
76
Formation of C Corps - Corporation Tax Consequences
There is no gain/loss recognized by the corporation issuing stock in exchange for property when:
-formation (issuance of common stock)
-reacquisition (purchase of treasury stock)
-resale (sale of treasury stock)
Basis = NBV = nontaxable
Note: If adjusted basis of property exceeds FMV of property, the corporation's basis is limited to the FMV. This prevents built-in losses.
77
Formation of C Corps - Shareholder Tax Consequences
Shareholder contributing property has no gain/loss if the following 2 conditions are met:
1) 80% control - immediately after the transaction, those transferors contributing property must own at least 80% of the voting stock and at least 80% of the nonvoting stock
2) No receipt of boot - transfer of property must be solely in exchange for stock
78
Shareholder's Basis in Common Stock (Detailed Computation)
```
Adjusted basis of transferred property (including cash)
+FMV of services rendered
+Gain recognized by shareholder
-Cash received
-Liabilities assumed by corporation
-FMV of nonmoney boot received
=Basis of common stock
```
79
Permanent Differences (between Tax + GAAP)
Never Included in Taxable Income
- Interest income from municipal or state bonds
- Certain proceeds from life insurance on the life of a corporate officer
- Federal income taxes are not tax-deductible
80
Business Gifts
$25 per person, per year
81
Estimated Payments of Corporate Tax
Small Corporations Pay lesser of:
- 100% of tax shown on return for current year OR
- 100% of tax shown on return for preceeding year
```
Large Corporation (taxable income >$1 million in any of 3 preceding tax years)
-Must pay 100% of the tax shown on return for current year
```
82
Corporation Tax Rate
21%
83
Corporate Consolidated Tax Return
Must be an affiliated group and each member must file a consent form;
An affiliated group means that a common parent directly owns
-80% or more of the voting power of all outstanding stock and
-80% or more of the value of all outstanding stock of each corporation
Note: Brother-sister corporations may NOT file consolidated returns. (ie. an individual owns 80% or more of the stock of two or more corporations).
84
Netting Rules for Current E&P and Accumulated E&P
Both current + accumulated E&P are positive - no issues
Both current + accumulated E&P are negative - distributions are not dividends
Current E&P is positive, accumulated E&P is negative - distributions are dividends to the extent of current E&P only
Current E&P is negative, accumulated E&P is positive - the two amounts are netted and the distributions are dividends if the net amount is positive
85
Corporation Paying Dividends
General rule - Does not create a taxable event
Exception: Property Dividends - taxable to corporation paying
FMV property
=Corporate gain
Thus, E&P is increased
Dividend = taxable if out of new E&P
86
When the CPA exam has tested on tax issues related to corporations paying property dividends, normally involves the following sequence of events
1) corporation has no E&P (dividend would not be taxable income)
2) corporation distributes appreciated property as a dividend
3) corporation has a recognized gain (on property dividend)
4) corporate gain increases/creates corporate E&P
5) dividend to shareholder is now taxable income (to extent of E&P)
87
Qualified Small Business Stock
Individuals who hold qualified small business stock for > 5 years may generally exclude 100% of gain
-maximum is greater of:
10 times the taxpayer's basis in the stock or
$10 million ($5 million if MFS)
-must have acquired stock at original issuance
88
Eligibility Requirements S Corporation
1) Qualified Corporation
2) Eligible Shareholders
- must be individuals, estates, or certain trusts in USA
- may not be a nonresident alien
- neither corps nor partnerships are eligible shareholders
3) Shareholder Limit - no more than 100
4) One Class of Stock
- there may be no more than one class of stock outstanding, ie. only common stock
- differences in common stock voting rights are allowed
89
When Does Election Take Effect for S Corps?
If elected by March 15, it will be retroactive to beginning of year.
After March 15, will be in effect Jan 1 of the following year
90
Shareholder Basis in S Corporation Stock
Initial Basis (contributions: cash, adjusted basis of property, FMV of services)
+Income items (ordinary business income, separately stated income/gain items, tax-exempt income) includes tax-free items
+additional contributions
-distributions to shareholders
-loss/deduction items (ordinary business loss, separately stated/loss deduction items, nondeductible expense items)
=Ending Basis
91
S corp status will terminate if
- shareholders holding >50% of stock consent to a voluntary revocation
- corp fails to meet any of the qualifications for S status
- excess passive investment income: more than 25% for three consecutive years (but only if prior C corp E&P)
92
Partner's Initial Basis in Partnership Interest (Outside Basis)
Cash contributed
+Property contributed (adjusted basis)
+Services provided (FMV, if capital basis)
< Liabilities transferred to partnership, assumed by other partners >
+Partner's share of partnership liabilities
=Partner's initial basis in the partnership interest
93
Recourse Debts
Debts for which a partner has personal liability, which means the creditor can go after the partner's personal assets. Allocated to partners or LLC members who have personal liability (ie. only general partners share)
94
Partnership's Basis in Contributed Property (Inside Basis)
Greater of NBV or Debt Assumed
95
Inside Basis
Basis that the partnership itself has in the asset it owns
96
Outside Basis
Basis a partner has in the ownership interest
97
Partner's Tax Basis in Partnership Interest
```
Beginning capital account
+ % all income
< % all losses + deductions >
< distributions >
Ending Capital Account
+ % partnership liabilities
Ending Tax Basis in Partnership Interest
```
Basis in partnership interest = capital account + partner's share of partnership liabilities
98
3 Ways to Liquidate a Partnership
1. Complete withdrawal (liquidating distribution; zero out to get out)
2. Sale of partnership interest
3. Retirement or death
99
What happens when a partner contributes property to a partnership, which has a FMV that is higher or lower than the NBV, and the property is later sold?
When a partner contributes property (which has a FMV that is higher or lower than the NBV) the built-in gain or loss with respect to that contributed property (when sold) must be allocated to the contributing partner.
Any gain or loss in excess of that built-in amount would be shared by all partners.
100
Guaranteed Payments
Guaranteed payments represent taxable income to the receiving partner and are reported separately on the partner's form K-1.
Guaranteed payments are allowable tax deductions to the partnership, provided they are payments for services rendered or the use of capital without regard to partnership income or profit and loss sharing ratios.
101
Subpart F Income
Subpart F income is taxable income includable by a U.S. taxpayer from a controlled foreign corporation. It generally includes income that has no economic connection to the country of origin.
102
Gifted Property - Holding Period
GR: recipient of the gift normally assumes the donor's holding period
Exception: If the FMV at the date of the gift is used as the basis, the holding period starts at the gift date.
103
Property Requirements for Like-Kind exchange
Real property used in a trade or business
Not available for inventory, investment in bonds, partnerships, and corporation stock. Not available for personal property.
104
Section 1231 Property
Includes Section 1245 depreciable property, Section 1250 depreciable real property, and land. Assets must be used in the taxpayer's trade or business and held for more than 12 months.
105
Section 1245 Property
Depreciable personal property used in a trade or business for more than 12 months (i.e. vehicles, computers, machinery, and equipment)
Upon the sale of a Section 1245 asset, the lesser of the gain recognized or accumulated depreciation taken on the asset is recaptured as ordinary income and any remaining gain is a Section 1231 gain.
106
Section 1250 Property
Depreciable real property used in a trade or business for more than 12 months (i.e. warehouse, office building, but not land)
Section 1250 recaptures only that portion of depreciation taken on real property that is in excess of straight line
107
Capital Assets
Include property (real and personal) held by the taxpayer, such as:
- personal automobile of taxpayer
- furniture and fixtures in home of taxpayer
- stocks + securities of all types
- personal property of taxpayer not used in trade or business
- real property not used in trade or business
- interest in a partnership
- goodwill of a corporation
- copyrights, literary, musical, or artistic compositions that have been purchased
- other assets held for investment
108
Section 179 Expense Deduction in Lieu of Depreciation
Each tax year, a taxpayer may elect to deduct, as an expense in lieu of depreciation, a fixed amount of depreciable personal property and qualified real property.
- The 2021 allowance is $1,050,000 for qualified property that is acquired from an unrelated party during the year.
- The maximum amount is reduced dollar for dollar by the amount of property placed in service during the taxable year that exceeds $2,620,000 (2021).
- Limited to the extent it would cause a net loss.
109
Bonus Depreciation
- Extended through 2026
- Under bonus depreciation rules, a taxpayer can expense an additional percentage of qualified property that is placed into service in the current year.
- 100% for property placed in service during years 2018 through 2022 and then phases down until 2026.
- Claimed after the Section 179 expense deduction but before the regular MACRS depreciation expense deduction
110
After-tax cash flow Formula
After-tax cash flow = Earnings after tax + Amortization + Depletion + Depreciation
111
Liquidation of a Controlled Subsidiary
No gain or loss is generally recognized in connection with the complete liquidation of a controlled subsidiary into its parent corporation. In addition, any unused net operating loss carryovers or charitable contribution carryovers would be transferred to the successor parent corporation.
112
Involuntary Petition for Bankruptcy
If a debtor has fewer than 12 creditors, any one or more creditors who are owed at least $16,750 in unsecured debt can file.
If the debtor has 12 or more unsecured creditors, at least three of the unsecured creditors who together are owed at least $16,750 must join in to bring an involuntary petition.
113
Under the federal Bankruptcy Code, an involuntary petititon in bankruptcy may not be filed against who?
Farmers and nonprofit charities cannot be petitioned involuntarily into bankruptcy.
114
Who is specifically excluded from reorganization under Chapter 11?
Savings and loan corporations and stockbrokers
115
Six Basic Types of Bankruptcy Cases
1. Chapter 7 - Liquidation
2. Chapter 9 - Municipal Debt Adjustment
3. Chapter 11 - Reorganization
4. Chapter 12 - Family Farmers with Regular Income
5. Chapter 13 - Adjustment of debts of individuals with regular income
6. Chapter 15 - Ancillary and other cross-border cases
116
The federal social security system contains four major benefit programs:
1. (OASI) old age and survivors insurance
2. (DI) disability insurance
3. Medicare
4. (SSI) supplemental security income
117
Federal Unemployment Tax Act (FUTA) - What Employers Must Contribute?
All employers who have quarterly payrolls of at least $1,500 or who employ at least one person one day a week for twenty weeks in a year must participate in FUTA.
118
Pre-Emptive Right
The right of current stockholders to purchase new issuances of additional stock in order to maintain current proportional ownership
119
Who has dissenting rights in a short-form merger?
In a short-form merger (one between a parent and a subsidiary), the subsidiary's shareholders have a right to dissent and take advantage of the appraisal remedy.
120
Contribution
The right a surety has against the surety's co-sureties to force them to pay their share of the debt
121
Exoneration
The right a surety has against the debtor to force the solvent debtor to pay a debt when the debtor refuses to do so
122
Subrogation
The right a surety has by which the surety succeeds to the creditor's rights against the principal when the surety pays the principal's obligations
123
Writ of Attachment
An order by the court to a sheriff to seize a person's real or personal property
124
Garnishment
An order to a third person who holds property of the debtor to turn the property over to a creditor
125
Composition of Creditors
An agreement between a debtor and at least two creditors that the creditors will take less than full payment to discharge the debts owed by the debtor to the creditors who participate in the composition agreement
126
Attachment
3 requirements
1) agreement of the parties (evidenced by a written security agreement or creditor taking possession of the collateral)
2) value is given by creditor
3) debtor has rights to the collateral
127
Perfection
5 methods to perfect
1) Filing - financing statement filed with the state, the debtor must sign
2) Taking Possession of Collateral
3) Control of investment property (securities)
4) Automatic Perfection upon attachment for PMSI in consumer goods or small scale assignment of accounts
5) Temporary Perfection - if the collateral is sold, the creditor has a temporary, perfected security interest in proceeds of the collateral that was sold for 20 days; if debtor moves, there is 4 month grace period for the creditor to file in the new state
128
De Minimis Safe Harbor Rule
Allowed to immediately expense up to a certain amount of personal property costs for income tax purposes. A taxpayer with an audited financial statement can deduct the amount paid for items costing up to $5,000 per item. A taxpayer without an audited financial statement can deduct up to $2,500 per item. If the cost of the item is more than the allowable amount, the entire cost of the item must be capitalized.
129
Netting Procedures for Capital Gains and Losses
Short-term Capital Gains and Losses
1. If there are any short-term capital losses, they are first offset against any short-term gains that would be taxable at the ordinary income rates.
2. Any remaining short-term capital loss is used to offset any long-term capital gains from the 28% rate group (e.g. collectibles).
3. Any remaining short-term capital loss is then used to offset any long-term gains from the 25% group (e.g. unrecaptured Section 1250 gains).
4. Any remaining short-term capital loss is used to offset any long-term capital gains applicable at the lower (e.g. 15%) tax rate.
Long-term Capital Gains and Losses
1) If there are any long-term capital losses from the 28% rate group, they are first offset against any net gains from the 25% rate group and then against the 15% rate group
2) If there are any long-term capital losses from the 15% rate group, they are offset first against any net gains from the 28% rate group and then against net gains from the 25% rate group.
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MACRS: Real Property
Residential Rental Property: 27.5-year straight line
Nonresidential Real Property: 39-year straight line
Straight-line depreciation is computed based on the number of months the property was in service. One-half month is taken in the month the property was placed in service. One-half month is taken for the month in which the property is disposed of.
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Installment Method
The tax method of reporting gains (not losses) for sales made by a nonmerchant in personal property and nondealer in real estate when part of the payments are received in a tax year after the year of the sale. Immediate recognition can be elected by reporting all of the gain on the sale on the seller's return for the year of disposition.
Under the installment method, revenue is reported over the period in which the cash payments are received.
Formula:
Gross Profit = Sales price - Adjusted basis
Gross Profit % = Gross Profit / Sales Price
Gain Recognized (Taxable Income) = Cash collections (Excluding interest) x Gross profit %
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Section 1231 Five-Year Look-Back Rule
When a taxpayer has a net Section 1231 gain for the year, the taxpayer must first "look back" to see if there were any net Section 1231 losses deducted as ordinary losses during the previous five years. If so, the taxpayer must "pay back", or recapture, this ordinary treatment by treating the current year net Section 1231 gain as ordinary income to the extent of those prior net Section 1231 losses. Any gain over the previous loss will be treated as a capital gain.
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Lifetime Learning Credit
The lifetime learning credit is equal to 20 percent of qualified higher education tuition and fees expenses up to $10,000, for a maximum of $2,000 per taxpayer (not per student).
Available for an unlimited number of years for qualified tuition and related course fees at eligible educational institutions. However, you cannot take both the American opportunity credit and the Lifetime Learning credit for the same student in the same year.
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American Opportunity Credit
Available against federal income taxes for qualified tuition, fees, and course materials paid for a student's first four years of postsecondary education at an eligible institution
-Maximum AOTC credit is $2,500:
-100% of the first $2000 of qualified expenses plus
-25% of the next $2000 of expenses paid
Expenses are on a "per student" basis.
Refundable portion: up to $1000 may be refundable (40% of the credit)
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Incentive Stock Option Requirements
- Employee may not be more than a 10% shareholder
- The option price may not be less than the FMV of the stock on the date of the grant
- Once exercised, the stock must be held at least two years after the grant date and at least one year after the exercise date
- Employee must remain an employee of the corporation from the date the option is granted until three months before the option is exercised
- If the holding period requirements are not met, any gain is ordinary, up to the amount that the stock's FMV on the exercise date exceeds the option price
- Employee may exercise up to $100,000 of ISOs in a year. Any amount exercised above that threshold will be treated as a nonqualifying option.
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Employee Stock Purchase Plans
- must be written + approved by shareholdesr
- cannot grant options to any employee who has more than 5% share
- plan must include all full-time employees other than highly compensated employees and those with less than two years of employment
- option exercise price may NOT be less than the lesser of: 85% of the FMV of the stock when granted or exercised
- option cannot be exercised more than 27 months after grant date
- no employee can acquire the right to purchase more than $25000 of stock per year
- Once exercised, the stock must be held at least two years after the grant date and at least one year after the exercise date
- Employee must remain an employee of the corporation from the date the option is granted until three months before the option is exercised
- If the holding period requirements are not met, any gain is ordinary, up to the amount that the stock's FMV on the exercise date exceeds the option exercise price
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Nonqualified Options
- If the option does not meet conditions for qualified stock options, it will be treated as a nonqualified option.
- A nonqualified option is taxed as ordinary income when granted if the option has a readily ascertainable value at the time of grant.
- If option does not have a readily ascertainable value at time of grant, will be taxed when exercised as ordinary income equal to the bargain element (difference between the FMV and stock option price exercised).
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Covered Opinion
Includes any written or electronic advice concerning transactions specified by the IRS as listed transactions
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Privity Defense
A CPA's duty to act with reasonable care generally runs only to clients and to any person or limited foreseeable class of persons who the CPA knows will be relying on the CPA's work. It does not extend to other parties.
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Child + Dependent Care Credit
20% to 50% of work-related expenses to care for qualifying perons.
Qualifying persons:
- Dependent qualifying child who is under age 13 when care is provided
- A disabled dependent of any age who is unable to care for themself
- A spouse who is disabled and unable to care for themself
Eligible expenditures must be for the purpose of enabling the taxpayer to be gainfully employed:
- babysitter
- nursery school
- daycare
- not elementary school
Lesser of:
1) earned income of the lesser-earning spouse
2) actual expenses incurred
3) maximum allowable credit (Maximum allowable credit is $8000 for one qualifying person and $16000 for two or more qualifying people. Temporarily refundable for 2021.)
The credit is the qualifying amount multipled by the applicable percentage, which is based on taxypayer's AGI.
Maximum 50%: Maximum care credit is $4000 or $8000. AGI must be $125000 or less
Phase-out from 50-20%: Credit decreases by 1% for each $2000 over $125000, but is not reduced below 20% until AGI exceeds $400000
Phase-out from 20-0%: 20% credit decreases by 1% for each $2000 over $400000
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Net Investment Income Tax (NII)
3.8%
Levied on the lesser of
1) Taxpayer's net investment income
2) Excess of modified AGI over a threshold amount (single 200,000 or MFJ 250,000)
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Gain/loss realized and gain/loss recognized on like-kind exchange
gain/loss realized = amount realized - adjusted basis of property given up
gain recognized = lesser of realized gain or boot received
loss recognized = 0 - realized loss is NEVER recognized in a like-kind exchange
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Basis of New Property in Like-Kind Exchange
FMV of like-kind property received - Deferred gain + Deferred loss
OR
Adjusted basis of property given up - Loss recognized + Gain recognized - Boot received/Liabilities relieved + Boot paid/Liabilities assumed
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Deductible Casualty Losses (Itemized Deduction)
```
starting point is lesser of adjusted basis or decrease in FMV
smaller loss
< insurance recovery>
= taxpayer's loss
< $100 >
= eligible loss
< 10% of AGI>
=deductible loss
Note: The $100 reduction applies to each separate casualty loss, while the reduction for 10% of AGI applies to casualty losses in the aggregate.
```
145
Deductible Medical Expenses (Itemized Deduction)
```
Qualified medical expenses
< insurance reimbursement >
=Qualified medical expenses paid
<7.5% of AGI>
=deductible medical expenses
```
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Interest Expense Itemized Deduction Mneumonic
HIPPE
Home Mortgage Interest
Investment interest expense
Personal (Consumer) interest is NOT deductible
Prepaid interest (allocate to proper period)
Educational loan interest ($2500 per year)
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Non-taxable gains
A gain is not taxed if taxpayers can HIDE IT all.
Homeowner's Exclusion
Involuntary Conversion
Divorce Property Settlement
Exchange of Like-Kind Business/Investment Real Property
Installment sales
Treasury + Capital Stock Transactions
148
Net Operating Loss Pre-2018
Carryback 2 years, Carryforward 20 years
149
Net Operating Loss 2018, 2019, 2020
Carryback 5 years, Carryforward Indefinitely
150
Net Operating Loss 2021 & beyond
Yes can offset income/gains but limited to 80% of taxable income for tax years beginning in 2021, No carryback, Carryforward Indefinitely
151
Individual Capital Losses
Offset Income/Gains up to $3000, No carryback, Carryforward Indefinitely
152
Corporate Capital Losses
Carryback 3 years, Carryforward 5 years
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Refundable Tax Credits
```
Child Tax Credit
Earned Income Credit
Taxes withheld (paycheck)
Excess FICA (social security)
Small employer retirement plan start-up costs
Small business health care tax credit
Residential energy credits
Premium tax credit
40% of the American Opportunity tax credit (2021)
```
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Nonrefundable Tax Credits
Child + Dependent care credit
Credit for elderly or permanently disabled
Education tax incentives (American Opportunity Tax Credit + Lifetime Learning Credit)
Adoption credit
Retirement savings contribution credit
Foreign tax credit
General business credit
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Simple Trust
- Only makes distributions out of current income; cannot make distributions from the principal
- Required to distribute all of its income currently
- Cannot take a deduction for a charitable contribution
- Entitled to a $300 exemption in arriving at taxable income
156
Complex Trust
- may accumulate current income
- may distribute principal
- may deduct charitable contributions
- permitted an exemption of $100 in arriving at its taxable income
157
Distributions to Partners - Effect on Partnership
Unlike a corporation, a partnership does not recognize gain or loss for any distributions made to partners.
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Nonliquidiating Distributions to Partners - Effect on Partners
Property Distribution - A partner's basis in property distributed is the same as the partnership's basis in the property. However, the basis of the property may be reduced if the partner does not have sufficient basis in their partnership interest
Cash Distribution - If a partner receives a cash distribution that is greater than the partner's basis, the partner recognizes a capital gain for the excess.
Distribution of Multiple Assets - The partner's remaining basis is allocated among assets distributed. The basis is first assigned to cash, then "hot assets" (result in ordinary income when sold, ie. inventory and unrealized receivables), and then other property.
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Under the ultramares rule, which parties will an accountant be liable to for negligence?
Ultramares limits the accountant's liability for negligence to: (i) parties in privity and (ii) intended third party beneficiaries; parties who are merely "foreseen" cannot recover
160
Section 291 Depreciation Recapture Rules
When Section 1250 depreciable real property is sold at a gain and the taxpayer is a C corporation, it is subject to the Section 291 depreciation recapture rules. The gain is ordinary to the extent of 20% of the lesser of the prior depreciation taken or the gain. Any remaining gain is a Section 1231 gain.
161
Anticipatory Repudiation
Occurs when the promisor unequivocally indicates to the promisee that he will not perform when the time comes and there are executory duties on both sides of the contract.
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Sale of Partnership Interest
An interest in a partnership is generally a capital asset, however, any gain realized from the sale of a partner's share of unrealized receivables and/or appreciated inventories is treated as ordinary income. The character of the gain is ordinary to the extent of unrealized receivables or appreciated inventories sold.
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Excess Business Loss Limitation
An excess business loss for the year is the excess of aggregate business deductions for the year over the sum of aggregate business income for the year plus a threshold amount. For 2021, the threshold amount is $524,000 (MFJ) and $262,000 (all other taxpayers). Any excess business loss is carried forward as an NOL and is subject to the 80% of taxable income limitation for NOLs.
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At-Risk Loss Limitation
Loss is limited by the amount of the shareholder's risk of financial loss in the business; a shareholder's at-risk amount may be lower than their stock + debt basis if the taxpayer takes out a nonrecourse loan.
Any excess loss is suspended. Any suspended losses due to insufficient at-risk basis remaining when the shareholder sells their stock/interest can be offset against any gain from selling the stock/interest.
165
Tax Basis Loss Limitation
A loss can only be flowed through to the extent of the shareholder's tax basis (stock basis + basis is any direct loans).
Excess can be carried forward indefinitely. However, any suspended losses due to insufficient tax basis remaining when the shareholder sells the S corp stock/partnership interest are lost.
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Passive Activity Loss Limitation
Passive Activity Loss Limitation - can only offset passive activity income. A net PAL for the year is suspended and carried forward indefinitely to offset future passive activity income.
Any suspended PALs remaining in the year you sell it can be fully deducted against any income
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Itemized Deduction for Property Donated to Charity
FMV of property donated
| Limited to 30% of taxpayer's AGI
168
Additional Standard Deduction
Must be age 65 or older OR blind at end of year
| Additional deduction: $1350 per person
169
Type A Reorganization
Mergers or Consolidations
170
Type B Reorganization
The acquisition by one corporation of another corporation's stock, stock for stock
171
Type C Reorganization
The acquisition by one corporation of another corporation's assets, stock for assets
172
Itemized Deduction for State/Local Taxes
The total itemized deduction for state and local taxes is limited to $10,000
