REG Flashcards
What is the Basis of property for Inheritance
FMV at date of death
What is the Basis of property for Inheritance, if AVD is elected
FMV at AVD(6 months after date of death) or FMV at date of distribution, whichever is earlier
Calculcation of ADJ Basis for Appreciated Gift:
Cost of Asset + Improvements-Accum Depr = Donors adj basis
What is the limit for tax deduction of corporation/partnership organization costs in the tax year the business begins business
Limit is $5000 the tax year the business begins, The $5,000 deduction is reduced by the amount by which total organizational costs exceeds $50k, excess is amortized over a 180 month period from the date the business begins.
what is the De minimus Safe Harbor Tax Provision
Safe Harbor Tax Provision = De minimis safe harbor for capital expenditures:permits a tax payer to expense up to 5k of the cost of qualified tangible asset if corp has applicable F/S and up to 2.5k if NO applicable F/S
Amounts Paid to improve tangible real and personal property are required to be capitilized if the costs result in the following (Mnemonic)
BAR
Betterment: occurred during production, increases capacity, productivity, efficiency
Adaptation: different use of the property than the taxpayers intended use
Restoration: replacement of a major component of the property
What are the requirements for Property to be eligible for section 179
Acquired By Purchase for use in active trade/business.
For use in the U.S.
From an unrelated party Tangible Personal Property (section 1245 property), off the shelf computer software or certain improvements to a non-residential building (after the buildings in service-date)
What advantage does Section 179 and Bonus Depreciation allows taxpayer to do
Allows taxpayers to fully/partially expense certain depreciable property.
Amortization deduction - Section 197 Intangibles
What are section 197 intangibles
Section 197 Intangibles are intangible assets acquired (not self created) during trade/business or investment, basis is amortized over 180 month pd using straight line method
What is the amount of capital loss deduction that is allowed to be applied in a tax year for an individual
only 3k allowed to be applied against ordinary income, the rest is carried forward to the next year NEVER carried back, 1,500 if MFS
What is the ordering process of netting capital loss against capital gains and there tax rate
1 LTCGs on collectibles taxed at 28%
2 unrecaptured 1250 gains taxed at 25%
3 any remaining LTCGs taxed at 15%
What are capital assets
Capital assets are generally personal used property or investments, NOT property used in trade/business or self created intangible property, not invent, not A/R
Cash Basis taxpayer only focus on income “actually or constructively received”
True
State the rules/threshold treatment for gain on sale of personal residence.
How long do they have to own/occupy the residence
Taxpayers can
Exclude up to 250k of gain on sale for individual and 500k for MFJ. In order to qualify for exclusion: they must Own and Occupy the residence for 2 to 5 yrs immediately before sale
is commission paid to underwriter (underwriter commissions) deductible
No, commission paid to underwriter (underwriter commissions) is a cost associated with issuing of stock and therefore NOT DEDUCTIBLE
What is a passive activity
Passive activity - trade/business a taxpayer doesnt materially participate in (e.g - partnerships, S Corps)
What is Schedule C (1040) used for
Schedule C (on a 1040). For sole proprietorship, Used to record a business’s income and expenses EXCEPT farming business
what is Schedule A (1040)for
Schedule A, 1040 is used to report personal itemized deductions (e.g. medical exp, mortgage interest)
What is in Schedule F (1040)
used to report farming income and exp
explain “At-Risk rules”
“At Risk Rules” applies to S corp shareholders. This is when the taxpayer (shareholder) deduction of losses is limited to how much they can actually lose , meaning you can only deduct losses up to the amount of a shareholders at-risk investment. doesnt apply to Corporate level.
Computation of Taxable Income
Gross Income
- Exclusions from Income
- Adjustments for AGI
AGI
- Adjustments from AGI
Taxable Income
True/False. QBI is a deduction FROM AGI but is not an itemized deduction
True
What are loss limitations
Losses Disallowed for Tax Purposes. A loss limitation prevents taxpayers from benefitting from certain loss deductions from transactions that are entered into to create a tax loss. IRC has established several loss limitations that deter taxpayers from generating loses in order to reduce income tax liability. E.G. a wash sale
What is in Schedule E (1040)
Income and Exp from rental and royalty arrangements Ordinary income/loss from K-1s pass through activities
List the requirements for a Taxpayer to file MFJ (married filing Jointly)
Be married
Agree to file a joint return
Have the same tax year
Be either a U.S Citizen or a resident alien(green card)
When a spouse dies, the taxpayer can file for MFJ until when?
For the current year of death.
What are the Filing Status for unmarried taxpayers
Qualifying Widower (with dependent child)
Head of Household (HOH)
Single
What are the requirements to file as Qualifying Widower (spouse)
be entitled to file jointly the year spouse died
2 years after death
Cannot have remarried
Have a dependent child who lived with taxpayer for ENTIRE tax year
Paid more than half of homes upkeep for the ENTIRE tax yr
Qualifying child Requirements (Mnemonic)
Note: Child Tax credit is $2,000
CARES
C- Close rrelative
A - Age (Child must be under 19 or under 24 if full time student, or child is totally/permanently disabled
R - Residency (Child lives in ur residency for more than 50% of the time)
E - Eliminate (gross Income) (Gross Income test does not include SS, tax exempt interest, tax exempt scholarships, life insurance premiums)
S - Support
Requirements for Qualifying relative (Mnemonic)
Note: Family Tax credit is $500
SUPORT includes child, stepchild, sibling, stepsibling, nieces, nephews
S- Support
U - Under $5050 (gross Income
P - Precludes (Joint)
O - Only (citizens)
R - Relative or
T - Taxpayer lives with you for whole year
Explain Book income vs Tax income
Book income is used by companies to report income and exp to S/H, while tax income is used to report earnings and tax liability to tax authorities
What is NIIT
NIIT - Net Investment Income Tax is imposed on the unearned income of individuals, estates and trusts ( threshold of $200k for single taxpayers and HOH, $250k for MFJ and Qualified Widower, $125k for MFS). Only on US Citizens and resident aliens. This tax does not apply to trusts that are exempt from tax, e.g. charitable trusts.
Formula for Reconciliation of book income to Taxable Income
Net Income for the year per books
Add: EXp deducted on books but not on tax return
Add: Income Currently taxable but not included in book income
Minus:Inc currently taxble but not included in book incom
Minus: Income reported on books but not on tax return
Minus: Ded. on tax return but not recorded on books
Equals: Taxable Income
What is dividends received deduction (DRD)
The dividends received deduction (DRD) alleviates multiple taxation by allowing a corp that received dividends a deduction when dividends are received
What is the DRD deductible allowed for each invst. List % and amounts
DRD deduction
ownership in investment (a corp %rinvestment in another corp) Allowed DRD
<20% 50%
>/equal 20% but < 80% 65%
>/equal to 80% (affiliated) 100%
Calculation for S/H’s Basis
S/H’s beginning Basis
Add: Additional S/H Contributions ( Municipal bond interest because its a tax exempt income)
Add: Ordinary Business Income attributed to the S/H
Minus: Distributions from Corp, i.e. S/Hs Distr ( i.e. cash/property)
Minus: Percentage share of Corp’s Operating loss & separately stated deductions/losses and Non deductible expenses
True/False To qualify for DRD, investor must own investess stock for a minimum HP of 46 days
True
what is Bonus Depreciation
An additional allowance for depreciation in the first year when certain prop. is Placed in service. bonus depreciation occurs unless taxpayer elects out
Tax treatment of Earned interest, what interest are Included and Excluded from Gross Income
Included in AGI: Interest on tax refunds, Zero-coupon bonds (accrued each yr), US treasury obligations, Series EE savings bonds
Excluded from AGI : So interest related to education and municipal Interest on sate or municipal bonds, qualified higher education bonds, Series EE savings bonds for qualified higher education exp (tuition and fees)
What are the types of LLC’s and their tax treatments
Single member LLC :By default taxed as sole proprietorship
May elect to be taxed as S corp or C corp
Multiple Member LLC By defualt taxed as a partnership
May elect to be taxed as S corp or C corp
True/False once LLC registers its classification, LLC must wait 60 months to make a new election
True
what does the American Institute of Certified Public Accountants (AICPA) do
Provides auditing standards, accounting education, and CPA exam
what does the state societies of certified public accountants do
Provide accounting education at the state level
what does the state boards of public accountancy do
License CPA’s, enforce rules of conduct, set continuing education requirements
what does the Public company of Oversight Board (PCAOB) do
Oversee CPAs who audit publicly traded companies
what does the National Association of State Boards of ACCountancy (NASBA) do
Oversee state boards of accounting
what does the Internal Revenue Services (IRS) do
Oversee CPAs who practice before the IRS
what does the Financial Accounting Standards Board (FASB) do
Provides accounting standards and principles
Taxpayers can avoid (reduced or eliminated) an accuracy related penalty in what cases
If the tax position is based on substantial authority (40%) they will avoid penalty.
If the tax position has a reasonable basis for the position (20% chance of being sustained based on merits) will avoid the penalty only if its adequately disclosed in the tax return
List the Tax rules Hierarcchy
IRC
Treasury Regulations
Internal revenue Bulletin: Revenue rulings
revenue procedures
Notices
Announcements
Written Determintions ( Binding on IRS to specific taxpayer only) Private Lettter Rulings (PLR) (This is a resulting interpretation from the IRS about specific on how to apply a certain usually complex transaction, tax law)
Techinal Advice Memorandum (TAM) ( comes from higher level IRS field officers instead of taxpayers)
General Counsel Memorandum ( no longer issued
Other IRS Publications and INformation ( Not Binding on IRS) Forms and Publications
News releases and fact sheets
FAQs
Note: IRC, TR, and IRB are Binding on IRS
List the Refundable credits (Mnemonic)
WE ACE
W - Withheld Credits
E - Earned Income Credit
A - American Opportunity Credit
C - Child care credit
E - Excess Social security paid
Explain Tax credits vs Itemized deduction
Tax Credits is a reduction in your tax liability, while itemized deductions (adjustments from AGI) reduces your taxable income. Which means in most cases the tax credit serves as an additional deduction in what you have to pay the iRS.
List Filing status and their corresponding standard deductions for 2024
Single - $14,600 ( if blind/ over 65 yrs additional $1,950.
MFJ - $29,200 ( if blind /over 65 an additional $1,550
MFJ - $14,600 ( if blind /over 65 an additional $1,550
HOH - $21,900 ( if blind/over 65yrs additioinal $1,950
List/Explain Adjustments For AGI (Mnemonic)
I EMBRACED Health and Farming
I - Interest in student loans ( lesser of qualified student loan interest paid or $2,500, no time limit, deduction is phased out if AGI>$75k for single and >$155K when MFJ
E - self Employment deductions (Can deduct 50% of their self employment tax, can also deduct health insurance premiums for themselves and their families, Contr to SEP-IRAs, SIMPLE IRAs, and self employed 401ks are deductible
M - Moving expenses (Schedule C) suspended from 2018 to 2025 except for US armed forces and active duty
B - Business expenses (schedule C) (Bad debts recognized as write-off, 50% meals, entertainment exp no loonger allowed after 2017, 100% business travel, Misc 2% deductions have been suspended until 2026, gifts of $25 per item up to 250, $4 per promotional item, , Hobby Losses – If no profit in 3 of 5 years, loss generally not deductible
R - Rental, royalty, and flow thru entities (has to be rented out for over 14days otherwise its considered a home)
A - Alimony paid (prior to 2019 is ideductible by payer and included in gross income for the receiver)
C - Contributions to Qualified Retirement Plans (IRA Contr - The max contr to an IRA for 2024 is $7,000 ( $7,500 catchup if you are age 50 or older , 401K Contr for 2024 contr. limit is $23,000 with a catch-up contr limit of $7,500 for 50 or older
Contributions to a traditional IRA are deductible in arriving at AGI unless both of the following conditions apply:
The individual is actively participating in another pension or profit-sharing plan, and
The individual’s AGI exceeds a threshold amount; 2024 amounts are:
○ Singlefilers: phaseout range starts at $77,000, ends at $87,000
○ MFJfilers: phaseout range starts at $123,000, ends at $143,000
For a married couple, if the individual is not actively participating in another plan but the individual’s spouse
is a participant, contributions for the nonparticipating spouse cannot be deducted if thejoint AGI exceeds
$228,000 for 2024.
The phaseout is computed as:
Modified AGI – Phaseout range starting point
× IRA contribuation limit
Phaseout range (ie, $10,000 or $20,000)
E - Educational savings accounts contributions
D - jury Duty (jury duty pay remitted to employer)
Health Savings Plan
Farming - Farming Income (schedule F)
What are Organization Costs
Expenses related to the formation of a corporation or partnership like: legal fees, state incorporation fees, cost of organizational meetings
What are start-up costs
Costs incurred before the business is active, expenses are incurred in creating an active trade/business like market analysis, trave to potential business locations, wages for employees in training, Tax treatment same as treatment of organization costs
True/False For FOB destination, the seller NOT the buyer pays for shipping
True
What is the tax treatment of Gain and losses of personal use property
Gains are recognized and included in taxable income, losses are not recognized and not tax deductible
How do you Calculate total deductible organization costs for the tax yr
$5k(which is reduced by amount over $50K) + amount remaing after you subtract the $5k that is amortized for the year
Whats included in Gross Income (Mnemonic)
WIDGIPUF
WAGES (Regular Pay, bonus pay, overtime, tips, commission, vacation pay, sick pay)
INTERESTS (interests from bank accounts, interests from bonds and treasury notes, interest from loans, US Savings bonds interest, Interest from tax refunds
DIVIDENDS - Ordinary dividends, qualified dividends, capital gain distr.
GUARANTEED PAYMENTS - pmts for services, payments for use of capital, retiremnt pmts to retired partners.
INCOME FROM QUALIFIED RETIRED PLAN -
PUNITIVE DAMAGES (usually associated with non physical injuries) - Legal settlements and awards, damages for non physical injuries.
UNEMPLOYMENT COMPENSATION unemployment benefit plan
FRINGE BENEFITS - personal use of a company car(like when the company gives u car, the portion not used for work purpose, cash bonuses or gift cards, gym memberships if not on site at the company’s premises, reimbursements for moving that do not meet IRS criterias, Excess life insurance coverage (thats coverage that is over $50K, amount over $50k is taxable))
which retirement plan is included in gross income
INCOME FROM QUALIFIED RETIRED PLAN - Distr from traditional IRAs because contr. was made with pretax dollars, Distr from 401k and similar employer sponsored plans, pension & annuity pmts, Roth IRA Conversions, Non qualified Distr. from Roth IRAs which are withdrawals from earnings in a Roth IRA that do not meet the qualified distr. criteria. Punitive Damages (usually associated with non physical injuries) -
What’s NOT included in Gross Income -
Workers comp
Gifts, Inheritances
Employee Fringe Benefits
Compensatory damages for physical injury or sickness
Damages awarded for medical expenses related to emotional distress as a result of workplace bodily injury
Interest Income from invst municipal bonds (tax-exempt interest), interest from gifts or inheritances(this is taxable once u receive the gift/inheritance
Child support payments
marital property settelement pmts
Guaranteed payments that are distributive share of partners profits, reimbursementsfor partnership expenses
Life Insurance proceeeds paid ny reason of death
Employer Contr to retirement plans
Health Insurance Premiums paid by employer
Reimbursements for business expenses
Gifts from Employer - small infrequent gifts
Qualified retirement planning services - these are 1. the qualified distr from Roth IRAs withdrawals that meet the criteria for a qualified distribution - distr made after the accountfor at least 5yrs and the account holder is 59.5yrs or older. 2. Return of contr from traditional IRAs or 401k 3. loans from 401k plans, 4. Rollovers - when u rollover a distr from one qualified plan to another within the allowed 60 day period
Qualified tuition reduction
Qualified transportation benefits
Qualified employee discounts
De- minimis frine benefits. (too small lije coffee dougnuts)Certain fringe benefits - like company gyym membership, employee discounts
Workers comp
Certain types of insurance payouts - like proceeds from an insurance payout from death of an insuredemployee
What is a Section 1231 Property
Section 1231 property is real or depreciable business property held for more than one year. A section 1231 gain from the sale of a property is taxed at the lower capital gains tax rate versus the rate for ordinary income. If the sold property was held for less than one year, the 1231 gain does not apply. Specifically excluded is inventory, property held for sale to customers, accounts and notes receivable arising from the ordinary course of business
What is section 1245 property
Section 1245 depreciable assets are personal property used in a trade, business, or income-producing activity (e.g. equipment, furniture, computers). These assets are assigned an asset class that establishes the specified
depreciation periodas shown in the table below
tangible personal property (non realty)
Section 1245 Property difference from 1231 Property
ction 1245 property is not truly a separate class of property from section 1231 property. Rather, section 1245 property may be defined as certain types of section 1231 property on which there exists an unrecaptured allowed or allowable depreciation or amortization deduction.
The importance of section 1245 comes into play when a business sells business property at a gain. When section 1245 property is sold at a gain, amounts previously claimed as depreciation (allowed or allowable) are recaptured at ordinary income tax rates, and the remaining gain is taxed at capital gains rates. This is because they have already received favorable tax treatment on the property through depreciation or amortization deductions.
If section 1245 property is sold at a loss, the property follows section 1231 rules, and the loss is ordinary and can offset ordinary income.
Section 1250 Property
Section 1250 generally applies to real property (such as commercial buildings and rental houses) and real property structural components (such as roofs and flooring) that are depreciated over longer periods of time than section 1245 property. Section 1250 outlines specific taxation rules for property that has been depreciated using an accelerated depreciation method. When section 1250 property is sold at a gain, the difference between the straight-line depreciation and the accelerated method claimed is taxed as ordinary income, while the rest of the gain is taxed at capital gains rates.
Deductions from AGI - Below the line - COMITT
C - Charitable contr (limited to 60% of AGI for cash contr, and 30% of AGI for property contributions, has to be 501(c)3, for non-cash donations more than $250, you need a written acknowledgement from the charity, for items valued greater than $5k you generally need a qualified appraisal. remaining can be carried forward for 5yrs. if FMV < adjusted basis, then amt deducted is FMV
you can deduct donations up to 60% of your AGI for cash contr and 30% of AGI for prop. contr.
O - Other deductions - gambling losses deductible to extent of gambling winnings, excess losses cant be carried forward, estate taxes
M - Medical Expense Deductions - thresshold is 7.5% of AGI, can deduct unreimbiursed medical exp that exceeed 7.5%of AGI. EXp must be deducted in the yearthey were paid regardless of when the services were provided.
I - Interest expenses (Qualified Residence Interest Deduction, You can deduct “home Acquisition debt” - these are interest on mortgages obtained to build, buy, or substantially improve your primary or secondary residence) Loan limits - loans after Dec 15, 2017 deduct interset up to $750K for qualified residence loan. Loans taken after Dec 15, 2017, limit is $1milliion. If you refinance, ne loan amt is limited to old mortgage amt at time of refinancing
Loan Limits - For loans taken after Dec 15, 2017 you can deduct interest up to $750,000 of qualified residence loan
For loans taken no or before Dec 15, 2017 you can deduct interest up to $1,000,000 of qualified residence loan
Refinanced Debt - if you refinance youor original mortgage, the new loan amount for the deduction is limited to the balance of the old mortgage at the time of refinancing
Additional Loans - Interest on home equity loans and lines of credit is deductible if the funds were used to buy, build or substantially improve the taxpayers home that secures the loan.
Form 1098 - Mortgage lenders typically issue form 1098 detailing the amount of interest paid during the yr
T - Taxes ( greater of state,local and foreign taxes OR sales tax. cannot take both, limit is $10k MFJ, $5k if MFS. personal and property taxes included. real estate taxes, foreign income taxes
Non deductible taxes - fed incomme taxes, SS taxes, Medicare, fed estate and gift taxes etc.
T - Theft & casualty ( has to be a federally declared disaster, Casualty loss is the lesser of the adjusted basis OR decrease in FMV of the property as a result of the casualty. Subtrsct any insurance or other reimbursement you received or expect to receive.
To calculate casualty loss: Amount of loss= lesser of Adj Basis the property or the decrease in the FMV of the property as a result of the casualty.after calculating loss, reduce by insurance reimbursement if any, reduce by $10,and reduce by 10% of AGI
you must itemize deductions to claim a casualty loss
What is QBI
Qualified Business Income - also known as section 199A deduction, is a significant tax break for small business owners and self employed individuals
QBI allows eliigible taxpayers to deduct up to 20% of their qualified business income from their taxable income
claimed on individual tax returns
What Income is eligible under QBI
income from pass-through entities like S corp, partnership or sole-proprietorship. Does NOT apply to C corps.
What are the thresholds for QBI
For 2024 the thressholds amounts for single filers is $185K, for MFJ $370K
What type of businesses qualiify for QBI
Most businesses except for “specified service trades or businesses”(SSTBs) like law, health, consulting. If your income is above the thresholds, the deduction for SSTBs may be reduced or eliminated.
What is W-2 Wages & Capital Limit for QBI
For taxpayers with income above the threshold, the deduction may be limited based on the W-2 wages paid by the business and the unadjusted basis of qualified property used in the business. If your taxable income surpasses these thresholds, the deduction will be reduced according to a formula that considers the excess income. If you make $191,950 or less as a single filer or $383,900 as a joint filer u may qualify for QBI
How do you calculate
Determine your QBI = Net amount of qualified items of income, gain, deduction, and loss from any qualified trade/business. (this doesn’t include capital gains/losses dividends, interest income)
Calculate 20% of QBI for each business
Apply limitations if necessary (if ur taxable income exceeds the thresholds, apply the W-2 wages and capital limit)
Aggregate and apply to Taxable Income (the total deduction is limited to 20% of your taxable income minus any net capital gain)
Final deduction is the lower of 20%of QBI or 20% of Taxable Income
What is the Exclusion of gain on principal residence, and the criterias
Taxpayers can elect to exclude 250K
(500k if MFJ) to recognize
Criterias are:
1.They owned the prop at least 2yrs within the 5 yr period ending on sale date
2. Used the prop as a principal residence at least 2yrs within the 5yrs
3. Has not excluded gain on another principal residence within the 2yr pd
Taxpayers withdrawal from IRA before 59.5 yrs old may result in a tax penalty of :
Taxpayers withdrawal from IRA before 59.5 yrs old may result in a tax penalty of 10%, in addition to the inclusion in gross income
Tax treatment of Earned interest, what interest are Included and Excluded from Gross Income
Included in AGI: Interest on tax refunds, Zero-coupon bonds (accrued each yr), US treasury obligations, Series EE savings bonds
Excluded from AGI : Interest on state or municipal bonds, qualified higher education bonds, Series EE savings bonds for qualified higher education exp (tuition and fees)
True/False Premiums on disability insurance policy are not tax deductible
True
True/False Long term capital gains are taxed at a lower rate than your ordinary income tax rate
TRue
Short term capital gains are taxed as what
Short term capital gains are taxed at your ordinary income tax rate
What are the Rules that allow you to deduct Business Losses from Pass -thru entities
Material Participation : taxpayer must materially participate in the business
Basis Limitation: Taxpayer can only deduct loss up to their basis in the company, this includes adjusted basis of other property brought to the business
At-Risk Limitation: Losses are limited to the amount the taxpayer has at-risk to the business
Passive Activity Loss Rules: “Passive Activity Loss Rules: If the taxpayer does not materially participate, the loss may be considered a passive activity loss, which can only be used to offset passive income.”
How to Calculate Partners Basis
Partners initial Contribution
+Additional contribution
+Share of increase in partnership liabilities
+ Share of partnership income/other income
-Cash and property distr.
-share of reduction in partnership Liab.
-share of partnership losses/other deductions
Note: Partners ending Basis cannot go below zero
What are the requirements to file as Qualifying Widower (spouse)
- Be entitled to file jointly the year spouse died
- 2 years after death Cannot have remarried
- Have a dependent child who lived with taxpayer for entire tax year
- Entitled to file MFJ before spouse died
- Paid more than half of homes upkeep for the entire tax yr
Qualifying child Requirements (Mnemonic)
CARES Junior
C- Close relative
A - Age (Child must be under 19 or under 24 if full time student for at least 5 months, or child is totally/permanently disabled
R - Residency (Child lives in ur residency for more than 50% of the time)
E - Eliminate (gross Income) (Gross Income test does not include SS, tax exempt interest, tax exempt scholarships, life insurance premiums)
S - Support - child cannot have provided more than 50% of their own support during the tax yr
Joint Return - child cannot file a joint return in the tax yr, unless its to claim a refund
Nonrefundable Tax Credits (mnemonic)
FREE GC
- Foreign tax credit
- Retirement savings contribution credit
- Elderly & disabled credit
- Education credits (lifetime learning)
- General business credit
- Child & dependent credit
Refundable Tax Credits [Mnemonic]
FACEE
● F - Federal income tax withheld
● A - American opportunity credit
(40% refundable)
● C - Child tax credit
● E - Earned income credit
● E - Excess social security tax paid
To avoid penalties for underpayment of estimated taxes, the IRS offers
“safe harbor” rules for individual taxpayers. These rules are designed to provide guidelines on the minimum amount of estimated tax payments or withholdings that should be made during the year to avoid penalties.
List the 2 safe harbor rules payment optioins
● Payment of 90% of Current Year Tax Liability: ○ Youcan avoid a penalty if you pay, through withholding or estimated tax payments, at least 90% of the tax shown on your current year’s tax return.
● Payment of 100% (or 110%) of Prior Year Tax Liability: ○ Alternatively, you can avoid a penalty by paying 100% of the tax shown on your prior year’s tax return. ○
This percentage increases to 110% if your adjusted gross income (AGI) on that year’s return was more than $150,000 ($75,000 if married filing separately). Also, to avoid penalties you select lower of the two if you’re above this AGI Limits
Note: NoPrior Year Tax Liability: If you had no tax liability in the prior year (i.e., you didn’t have to file a return or your total tax was zero), there’s no required payment for the safe harbor
How do you calculate NIIT
Net Investment Income Tax (NIIT): ● NIIT is 3.8% on the lesser of net investment income or the excess of modified adjusted gross income (MAGI) over $200,000 for single filers.
What is Keogh Contribution and how is it calculated
Due to their low contr limits, individually managed retirement accounts like IRAs are not attractive options for self-employed taxpayers. The Keogh plans (qualified retirement plans) were created to allow these taxpayers make significantly higher tax-deferred contr from their self employment income.
Annual contr is limited to:
Lesser of : 20% of net self employment income before the deduction , which means including deduction or 25% after deduction, Annual limit ($69,000) or 100% of earned income
What are the Criterias for 179 Deduction:
Type of Property: The property must be tangible, purchased for use in the conduct of a trade or business, and subject to depreciation. This typically includes items like machinery, equipment, vehicles, and furniture
Acquisition: The property must be purchased, which can include property acquired by purchase for use in your trade or business. Leased or rented property generally does not qualify.
Use: The property must be used more than 50% for business, and the cost eligible for the deduction is only the percentage that is used for business. For example, if an asset is used 60% for business, only 60% of the cost can be applied towards the Section 179 deduction
Timing: The property must be placed in service during the tax year for which the deduction is being claimed.
NeworUsed: Both new and used property can qualify for the Section 179 deduction if the taxpayer has not previously used the acquired property and it is the first instance of use by the taxpayer.
Limitations: There are dollar limits to the Section 179 deduction which are adjusted annually for inflation. Additionally, there is a threshold for total amount of equipment purchased, after which the deduction begins to be reduced on a dollar-for-dollar basis.
Exclusions: Certain property is excluded, such as land and investment property, leased property, property used predominantly to furnish lodging, and air conditioning or heating units.
Software: Off-the-shelf computer software placed in service during the year is typically eligible if it meets other general Section 179 requirements.
Improvements: Certain improvements to nonresidential real property can also qualify
What is Schedule M-3
For reporting temporary and permanent diff btw financial income and taxable income
List Permanent Differences on M-3
Non Deductible Exp : EXp reported on F/S (so it is subtracted which will reduce net income) but they are not deductible for tax purposes so should be included in taxable income. EX: fines/penalties, exp related to production of tax-exempt income, some entertainment exp
Tax Exempt Income : Like interest on municipal bonds
Different Treatment of Rev & Exp : Like life insurance proceeds received upon death of an insured key exec.
List Temporary Differences on M-3
Deffered Revenue : like subscription revenue may be recognized in different pds for financial reporting but taxed upfront
Allowance for Doubtful Accounts : FI calculates it but TI recognizes it when the debts are written off
Warranty Expenses: in FI recognized when a product is sold but for TI when the exp actually occurs
List the Exceptions to Penalty Tax for Early IRA Withdrawal (Mnemonic)
HIMDEADD – Exceptions to Penalty Tax for
Early IRA Withdrawal
● H - Homebuyer (first time)
● I - Insurance (medical; must be
unemployed for 12 consecutive
weeks)
● M - Medical expenses in excess of
percentage AGI floor.
● D - Disability (not temporary)
● E - Education
● A - Adoption or birth of child made
within one year from date of birth
or adoption
● D - Disaster
● D - Death or terminal illness
Modified AGI (MAGI) includes these items that were were previously deducted:(Mnemonic)
AEIOU – Modified AGI (MAGI) includes these
items that were were previously deducted:
● A - Adoption exclusion
● E - EE bond income
● I - IRA deductions
● O - Out of U.S. Income
● U - University student loan
What are the Three types of nondeductible losses.(Mnemonic)
WRaP – Three types of nondeductible losses.
● W - Wash sales
● R - Related party transactions
● and
● P - Personal losses
60% of adjusted ordinary income for a Personal Holding Company must come from these sources: (Mnemonic)
NIRD
● N - Net rent (if less than 50% of
ordinary gross income)
● I - Interest that is taxable
● R - Royalties (but not mineral, oil,
gas, or copyright royalties) or
● D - Dividends
Shareholder’s basis in S corp stock(Mnemonic)
BASE
● B - Beginning basis
● A - Add (income, contributions)
● S - Subtract (distributions, losses)
● E - Ending balance
Circular 230 addresses the
following(Mnemonic)
ADS Rules
● A - Authority to practice before IRS
● D - Duties and restrictions relating
to practice
● S - Sanctions for violations
● Rules applicable to disciplinary
hearings.
List the five elements that make it Fraud (Mnemonic)
MAIDS
● M - Misrepresentation of material fact
● A - Actual and justifiable reliance by plaintiff
● I - Intent to Induce plaintiffs
reliance
● D - Damages
● S - Scienter (intent to deceive)
Limits for Charitable Contributions
Charitable contributions to Public Charities/Private Operating Foundations:
Cash → 60% of AGI.
Ordinary income property → 50% of AGI.
Long-term capital gain property → 30% of AGI.
Charitable contributions to Private Nonoperating Foundations:
Cash → 30% of AGI.
Ordinary income property → 30% of AGI.
Long-term capital gain property → 20% of AGI.
True/False Interest from U.S. Treasury obligations/bonds are taxed
True
state which of these are tax deductible and what percentage
1. Credit losses(bad debts) accounts written off
2. Lodging for business
3. Business meals
4. Business gifts
- Deductible 100%
- Deductible 100%
- Business meals 50%
- Business gifts $25 per gift
When a taxpayer is paid with noncash property, what amount should be reported as income
Taxable income = Cash + FMV of the property or services received
QBI deduction is available only to:
Individuals
Trusts
Estates
state which of these are tax deductible to arrive at AGI and what limits for a self employed
1. Self Employment tax
2. Health Insurance
3. Alimony pursuant to a 2019 divorce decree
4. Traditional IRA
- Deductible 50%
- Deductible
- Not Deductible
- Deductible
Contributions to a traditional IRA are deductible in arriving at AGI unless both of the following conditions apply:
The individual is actively participating in another pension or profit-sharing plan, and
The individual’s AGI exceeds a threshold amount; 2024 amounts are:
○ Singlefilers: phaseout range starts at $77,000, ends at $87,000
○ MFJ filers: phaseout range starts at $123,000, ends at $143,000
taxpayers may exclude $250K ($500K MFJ) if they meet the ff requirements
- Owned and used the property as principle residence for at least 2 years within the 5 yr pd ending on the sale date
- taxpayer may not have used the exclusion within 2 yrs prior to the sale date
Calculate Casualty loss Deduction
Lower of FMV decrease OR Assets basis
- Insurance or govt reimbursements
-$100per event
-10% of AGI
To determine if there overpayment or underpayment of income taxes
- Increase the income tax liability for: Additional taxes (self employment, alternative minimum tax) and deduct tax credits, federal income tax withholdings, and any estimated tax pmts
Formula for determination of tax refund or tax due
Taxable Income
* Tax rate (or amount from tax tables)
= Income tax liability
+ self employment tax
+Alternative minimum tax
-Tax credits
-Fed income tax withheld
-Prepayments(estimated pmts)
= Tax refund or tax due
True/False A qualified student may claim the American Opportunity Tax credit and the Lifetime Learning Credit in the same year
False. to prevent “double dipping”
Deductible partnership losses are limited to the:
Lesser of partners basis or “at risk” amount
With the American Opportunity Tax Credit
- 40% is refundable (up to $1,000). Which means it may be partially refundable
- Amount of credit is phased out based on statutory modified AGI thresholds
- Its available for the first 4 years of a postsecondary education
-A taxpayer may claim it for each qualified student in their family
Keogh Contr LImit ( Keogh Contr is the alternative given to self employed becoz the individually managed retirment plans have low limits ).
Annual Contr limited to the lesser of:
20% of net self employment income before the deduction (also 25% of net self employment after the deduction for Keogh Contr)
Annual limit ($69,000 in 2024)
100% of earned income
True/False Income with respect to an S corp is passed thru to the S/Hs w/out regard to distr. and would be reported on the S/Hs individual tax return, i.e. will be included in the individuals Gross income
True
True/False Loss on sale of a personal use item is a nondeductible Loss
True
Alimony Payments attributable to divorce/separation agreement finalized pursuant to 2019 remain deductible, which means they are not included in the recipients income . Pursuant to 2019 is deductible, prior to 2018 is not deductible, it is INCLUDED in income, after 2019 which means it is following 2019 rule it is deductible
The term active participation for a passive activity loss is relevant in relation to
Rental real estate activities. The active participation rule applies to taxpayer who doesnt qualify as a “real estate person” for purposes of deducting losses from rental real estate activities. If a taxpayer actively participates in a rental activity at least 10% in the activity, they may deduct up to $25K of losses against ordinary income each yr
A lessor excludes from income any increase in the value of the property caused by the improvements made by the lessee, unless the improvements were made in lieu of rent
There is a 10% penalty on early withdrawal of retirement funds in addition to the usual marginal rate imposed on income.
What are the deductible losses by individuals
Losses from:
A trade/business
Passive activity
Casualty loss/theft
Transactions entered into for profit (investments) - Losses deductible are limited to $3k , and $1500 for MFS
The term MAGI refers to AGI adjusted for certain income and deductions like tax exempt income and foreign earned income deduction. It is used to determine a taxpayers eligibility for certain deductions, tax credits, and retirement plan contr. On the exam if needed MAGI is provided
An interest forfeiture penalty for making a premature withdrawal from a certificate of deposit should be deducted from gross income in arriving at AGI in the year in which the penalty is incurred
dependent credit for qualifying relative: $2000 for qualifying child under age of 17, $500 for qualifying adult. Credit phases out when AGI exceeds $400k for MFJ and $200 for other filing status
Alimony from is included in Gross income and is taxable
An inheritance is not taxable, other than to the extent to which it is subject to gift and estate tax
Payments for federal income tax are not deductible and refunds of overpayment are not taxable. Inheritance is not taxable
A capital asses is an asset that is ainvestment property and property held for personal use
