REG Flashcards
What is the individual income tax formula
Step 1: Gross Income - Adjustments = Adjusted Gross Income
Step 2: AGI - the larger of Standard Deduction or Itemized Deduction = Taxable Income before Qualified Business Income Deduction
Step 3: Taxable Income Before QBI - QBI deduction= Taxable Income
Step 4: Taxable Income - Tax Credits + other taxed - payments = Tax due or refund
What is the criteria to be considered a qualifying child?
Qualifying Child - CARES
C - Close Relative
A - Less than 19 yos or 24
if a full-time college student
R - Residency: person must live with the taxpayer for at least half the taxable year
E - Eliminates the Gross Income test
S - Support greater than 50% is provided by the taxpayer
***ALL THE CRITERIA MUST BE MET FOR EACH RESPECTIVE DEPENDENT STATUS TO QUALIFY
What is the criteria to be considered a qualifying relative?
Qualifying Relative - SUPORT
S - Support test (see above)
U - under $4.7k of gross income
P - Prevents dependent as filing a joint return unless the MF J or Single would result in zero liability
O - Only citizens of U.S. or residents of U.S., Mexico, or Canada
R - Must be a relative OR
T - Taxpayer lives with individual (IF NON RELATIVE) for the whole year
What are the limitations of QBI and their criteria
Limitation based on Taxable Income
-Category 1: Taxable income is <= $182,100 (Single) or >= $364,200 (Married)
-Category 2: Taxable income is >$232,100 (Single) or > $464,200 (Married)
Limitation based on Qualified Trade or Business (QTB) vs Specified Service Trade or Business (SSTB)
-Category 1: Same as category 1 found in taxable income
-Category 2: Taxable income is >$232,100 (Single) or > $464,200 (Married)
***Taxable Income categories and category 1 of QTB or SSTB are multiplied by 20%
**If flowthrough proceeds come from SSTB, then the QBI deduction is $0
Nuances of Net Business Income (reported on schedule C)
-It is taxable twice: once at the regular tax rate and the other for Social Security and Medicare
-Self-employment tax is calculated on 92.35% of SE income (because you’re only liable for the ER or EE portion NOT both)
-SE Tax = 15.3%
-You can claim a an adjustment up to half of the SE Tax
What is the basic formula for the determination of Net Rental Income (Loss)
Gross Rental Income
+ Prepaid Rental Income
+ Rent Cancellation Payment
+ Improvement (@FMV) instead of rent payments
- Rental Expenses
What’s the calculation to calculate deductible medical expenses?
Qualified Medical Expenses
- Insurance Reimbursement
- 7.5% of AGI
What are the AGI Limitations when it comes to Charitable Contributions made to public charities
Cash = 60%
Ordinary Income Property* = 50%
LT Capital Gain Property** = 30%
*the lesser of the properties adjusted basis (cost) or FMV at the time contributed
**FMV at the time contributed
NOTE: Excess above AGI are allowable for carryforward up to 5 yrs
What is the formula to calculate the amount of loss caused by a declared disaster
The lesser of: Cost of property or Decreased FMV
- Insurance Proceeds
- $100/ occurrence
- 10% of AGI
What is the tax treatment of capital gains/losses for individual taxpayers
Net Capital Losses are deducted up to $3,000/yr against noncapital income and any excess can be carried indefinitely
What is the tax treatment of capital gains/losses for C corporations
Net capital losses:
-Carried back three years, forward five years
- Cannot offset net capital gains in the CY, only during the carryback/carryforward window
What are the nondeductible losses
W - Wash Sales
R - Related Party transactions
A - And
P - Personal Losses
Describe the half-year, mid-quarter, and half-month conventions
Half-year: six months depreciation is taken in the year of acquisition and disposal
Mid-quarter: only used if more than 40% of the assets placed in service during the year were placed during the quarter 4. all property is treated as if its placed in service in the mid-point of the quarter
Mid-month: used for calculating depreciation of REAL property. Residential (27.5 yr) Nonresidential (39) are depreciated using straight-line basis, and treated as if it were placed in the middle of the month
What is section 179
A cost recovery strategy that allows a maximum deduction (of personal property) of $1,160,000.
Note: If the value of the property is > $2,890,000 then the excess is deducted from the limit to arrive at the basis
What is bonus depreciation
Bonus depreciation expenses 80% of the cost of qualified property placed in service during the year. (claimed after section 179 and before MACRS)
What are temporary book/tax differences? Name some
Temporary book/tax differences are income/expense items that are recognized in different periods for book income and taxable income
Examples:
Depreciation Expense
BDE
Business interest expense
Unearned rent/royalty income
What are permanent book/tax differences? Name some
Permanent book/tax differences are income/expense items that are either 1) recognized in for financial but never for tax or vice-versa
Examples:
Interest Income from municipal bonds
Life insurance proceeds on key employees
Fines, penalties
Entertainment expense
What are the general corporation NOL carryforward/backward rules
-NOLs before 2018 can be carried back 5 yrs and carried fwd 20 yrs
-NOLs arising during 2018, 19, 20 can be carried back 5 yrs and carried fwd indefinitely (can offset 100% of future taxable income)
-NOLs arising in 21 cannot be carried back but can be carried fwd indefinitely (can offset only 80% of future taxable income
What is the treatment for corporate capital gains/losses
-Losses are applied against capital gains only NOT taxable income
-Losses can be carried back 3 yrs and fwd 5 yrs
What makes up the apportionment factor used to apportion income to a state?
The weighted average of the corporation’s property, payroll, and sales in the state
What is the basis of a gift for determining a gain or loss in a sale transaction
1) If the selling price is less than the FMV, then use FMV as your basis
2) If the selling price is greater than donors basis, then donors basis as your basis
3) If the selling price is in the middle of donors basis and FMV, then use selling price i.e no gain or loss
How is the basis and holding period of inherited property determined
The basis is the lower of FMV at the time of death or FMV at alternate valuation date (six months after the death or date of distribution/sale if earlier than six months)
*The basis for inherited property is ALWAYS considered long term
What is the formula for a partner’s basis in a partnership
Beginning capital accounts (contributions, less liabilities assumed by other partners
Additions: partner’s share of all income and gains (ordinary business income, separately stated, tax-exempt)
Subtractions: partner’s share of all losses and deductions and distributions
Ending capital
account + partner’s share of partnership liabilities
How are charitable contributions treated by corporations?
Can only take up to 10% of taxable income before charitable contributions, DRD, and capital loss carryback
What are the different percentages used to to calculate the dividend-received deduction
If ownership of the corporation is:
- Less than 20%, then use 50%
- In between 21%-79%, use 65%
- If greater than 80% use 100%
Note> this deduction is limited to the lesser of the Dividend*Ownership % or Taxable Income prior to DRD * Ownership %
Note 2> The DRD does not apply if it creates a a NOL
What are the only situations before the IRS when a tax practitioner may charge a contingent fee?
- IRS Examination (audit)
- claim solely for a refund of interest and/or penalties
- judicial proceeding
What are the methods used to select a tax return for an audit
- Statistical Models - picks them based on which returns are most likely to possess errors
- Random Selection
- PY audit yielded negative results
- Information return discrepancy (W2 or 1099s don’t match the income on the return)
- Deductions exceed established thresholds
What is the appeals process
If you don’t agree with the results of the audit,
First, the taxpayer will receive a 30 day letter notifying the taxpayer of the right to appeal. He/she has 30 days to request an appeal from the appeals officer
Second, if agreement has not been reached, the taxpayer will receive a 90 day letter which will state the taxpayer has 90 days to pay or file a petition with the U.S. Tax Court
If the taxpayer wished to litigate, they can take the case up to the U.S. District Court or the U.S. Court of Federal Claims , but they’re dues must have been paid to the IRS prior to doing so.
Remember that the U.S. District Court is the only court to have a jury.
What are the penalties for: Failure to file, failure to pay, negligence penalty with respect to unsubstantial understatement, and substantial penalty
Failure to file - 5% for each month up to 25% of unpaid tax
failure to pay - 0.5% for each month up to 25% of unpaid tax,
negligence penalty with respect to unsubstantial understatement - 20% of unpaid tax
substantial penalty - 20% of unpaid tax
What are the standards to consider when disclosing information on a taxpayer’s tax return
Reasonable standard, at least 20% of success
Substantial Authority Standard > 40% of success
More Likely Than not Standard > 50% of success
What are the elements of negligence
The defendant owed a duty of care
The defendant breached that duty by failing to act with due care
The breach caused plaintiff’s injury and damages
The CPA is liable to the client or foreseeable class of persons the CPA knows will rely on their work unless the the jurisdiction practices ultramares
What are the five elements of fraud
MAIDS
Misrepresentation of material fact
Actual and reasonable reliance by the defrauded party
Intent to induce reliance
Damages
Scienter
What is the difference between fraud and constructive fraud
Constructive fraud is not intentional and is synonymous with Gross Negligence
What are the exceptions to the rule that prohibits an accountant from showing workpapers to a third party without client permission
In response to a subpoena
to a prospective purchased of the CPA’s practice
to a state CPA QC review panel
in defense of a lawsuit brough on by a client
in defense of an investigation conducted by the AICPA
When GAAP requires disclosures of such information in the financial statements
What are express contracts, implied contracts, and quasi-contracts
Express contracts: any contract formed by words - written or oral
Implied contracts - when parties’ assent is inferred by their conduct
Quasi-contract: techinically not a contract, but more of a remedy to prevent unjust enrichment
What defenses render contracts void?
FAPI
Fraud in the execution
Adjudicated incompetency
Physical duress
Illegality
What contracts under the statute of frauds are supposed to be in writing
MY LEGS
Marriage
Year (contracts that can’t be performed within a year)
Land contracts
Executor contracts
Goods (sale of $500 or more)
Surety (to act as)
What are the types of defenses used by the defrauded
DUMIS
Duress
Undue Influence
Mutual mistake or Misrepresentation
Intoxicated
Statute of frauds or limitation
What are the elements of a legally enforceable contract
CO AXL
Capacity (competent and adult)
Offer
Acceptance
X-change consideration
Legal
What is the parol evidence rule
Basically states that prior or contemporaneous oral statement’s and prior written statements to adjust the terms of a contract are inadmissible
What are the surety’s rights against the principal
Exoneration - right to compel principal to pay
Subrogation - enforcement of creditors rights against principal
Reimbursement - right to receive from principal after surety pays
What is the mailbox rule
Contract is effective when the offeree sends the contract back to the offeror
How many creditors must join in filing a petition to commence an involuntary bankruptcy
If the debtor has 12 or more creditors, at least 3 creditors with unsecured claims at least $18,600
If the debtor has less than 12, then at least one creditor that has $18,600 of unsecured claims
