REG Becker

Question 1

R3 - M1: C Corporation Overview

What is the maximum allowable deduction that a C Corp may take as a charitable contribution on its income tax return?

Answer 1

C corps are allowed a max charitable contribution deduction of 10% of taxable income before the following deductions:
- any charitable contribution
- the dividends-received deduction
- any net operating loss carryback
- any net capital loss carryback

Question 2

What and how is the amount of organizational costs calculated for a corporation’s (or partnership’s) deduction?

Answer 2

Organization costs allowed include legal fees to obtain the corporate charter (to draft the partnership agreement), necessary accounting services, expenses of temporary directors, and incorporation fees paid to the state (fees paid for partnership filings). Org costs exclude stock issue costs and commissions paid to underwriters to help sell the shares. Org costs include start up costs like training, advertising, and testing incurred prior to the opening of the business.

Syndication costs are not deductible (e.g., offering materials).

The first $5,000 of org costs is immediately deductible as long as the expenditures do not exceed the annual expenditure limitation of $50,000. The remaining organizational costs are amortizable over a minimum of 15 years (180 months).

Question 3

How long can an excess contribution be carried forward for?

Answer 3

5 years

Question 4

What is the charitable deduction limitation?

Answer 4

• A charitable deduction is limited to the amount paid during the year or by the 15th day of the fourth month after the taxpayer year ends.
• The deduction for a cash contribution (including carryove from prior) to a public charity like a church is limited to 60% of AGI.

Question 5

What is the maximum deduction of business gifts per recipient per year?

Answer 5

$25 per recipient per year.

Question 6

How does a C corporation deduct net LT capital loss in the current year if there are no capital gains?

Answer 6

Regardless of ST or LT, a capital loss for a C corporation can only offset capital losses against other capital gains existing in the current year. If there are cap losses and no cap gains in the CY, then the cap losses can be carried back 3 years or carried forward five years.

Question 7

What is the specified minimum holding period for the corporate dividends-received deduction?

Answer 7

The investor corp must own the investee’s stock for a minimum holding period of 45 days.

Question 8

What are the dividends received deduction (DRD) thresholds?

Answer 8

• If percentage owned is < 20% then DRD is 50%
• If percentage owned is between 20% and 80% then DRD is 65%
• If percentage owned is > 80% then DRD is 100%

Question 9

What is the charitable contribution limit?

Answer 9

Charitable contributions limit is 10% of “taxable income before charitable contributions.”

So for m1/m3 tax income adjustments, it is as follows:

NI per book
+/- adjustments
= Taxable income before charitable contributions
- Charitable contributions (10% limit of TI before CC)
=Taxable income

Question 10

Is foreign income taxes paid by a corporation claimed as a deduction or credit?

Answer 10

The corporation has the option to claim the foreign income taxes paid as either a deduction or as a credit.

Question 11

Is the accumulated earnings tax imposed on partnerships or corporations, or both?

Answer 11

Only corporations (not classified as personal holding companies) are potentially liable for accumulated earnings tax, regardless of the number of stockholders.

Question 12

What is the required annual estimated tax payment for a C corporation for their federal income tax liability?

Answer 12

It is the least of:
1) 100% of the tax liability (positive) of the prior year’s return.
2) 100% of the current year tax liability.
3) 100% of estimated current year tax liability using the annualized income method.

Question 13

How is the accumulated earnings tax imposed on a corporation?

Answer 13

Firstly, a corporation must have accumulated earnings in excess of $250,000. After that, the earnings is subject to the accumulated earnings tax, but must first be reduced by the accumulated earnings credit ($250,000 for manufacturing companies).

Ex: Manufacturing company’s federal taxable income is $400K and federal income tax is $100K. Thus, accumulated taxable income is calculated as $400k - $100k - $250K = $50k

Question 14

What are the two criteria to determine if a company (corp) is a personal holding company?

Answer 14

1) more than %50 of the stock is owned by 5 or fewer individuals
2) at least 60% of the adjusted ordinary gross income consists of certain investment income (i.e., NIRD:
N: Net rent if under 50% of ordinary gross income.
I: Interest that’s taxable.
R: Royalties other than mineral, oil, gas, or copyright.
D: Dividends from unrelated domestic corp.

Question 15

What are the NOL Carryback and Carryforward rules for C corporations?

Answer 15

1) NOLs for 2017 and earlier are carried back 2 years and forward 20 years (offsets 100% of future TI).
2) NOLs in 2018, 2019, 2020 can be carried back 5 years and forward forever:
- NOL carryforward offsets 100% of TI for 2018-2020, but 80% for TI in 2021 and future years after deducting pre-2018 NOL carryforwards.
3) NOLs for 2021+ cannot be carried back but can be carried forward forever with 80% allowed to offset TI for 2021+ after deducting pre-2018 NOL carryforwards.

Question 16

How are C corporation’s net capital losses treated?

Answer 16

C corporation’s net capital losses are carried back 3 years and forward 5 years then expire. The net capital losses cannot be deducted from ordinary income (like individuals offsetting up to $3,000 per year from ordinary income), and can only be used to offset capital gains.

Capital gains are taxed at the same rate as ordinary income for a corporation.

Question 17

M5: S Corporation Overview

What is the domicile requirement and election form that must be met to qualify as an S corporation?

Answer 17

1) Must be a domestic corporation (not a foreign entity)
2) All shareholders (voting and nonvoting) must consent to a valid election on Form 2553 that the company files with the IRS.

Question 18

M5: S Corporation Overview

Who is and is not an eligible shareholder for an S corp.?

Answer 18

Eligible:
- Individuals, estates, or certain types of trusts.
- Qualified retirement plans and 501 (c)(3) charitable organizations

Not eligible:
- Corporations and partnerships
- Nonresident aliens

Question 19

M5: S Corporation Overview

Other testable items related to S corporations:

Answer 19

• No more than 100 shareholders and a family is considered 1 shareholder
• Only one class of stock outstanding
• Differences in C/S voting rights are allowed
• Preferred stock is not allowed
• S corps may own an interest (shares) in a C corporation (even 100 percent), but a C corporation cannot own shares in an S corporation.
• S corps cannot file a consolidated tax return with the C corporation

Question 20

M5: S Corporation Overview

When does an S corporation’s election take effect?

Answer 20

1) Existing S corps:
- S election filed by March 15 (third month for FY) is effective on January 1 of that year.
- S election filed after March 15 (third month for FY) is effective on January 1 of the next year.

2) Newly formed S corps:
- 2-month grace period from date of incorporation to elect S corp status.
- Follow the above exisiting S corp rules if status not filed within first 60 days.

Question 21

M5: S Corporation Overview

What is the tax return form for an S corp., and why is it a flow through entity?

Answer 21

• Form 1120S is filed using the calendar year by March 15th (third month of fiscal year if valid business purpose is established with IRS).
• S corps are taxed like partnerships, so no double taxation and all earnings are passed through to shareholders and taxed at the individual shareholder level.
• An S corp is only taxed at the corporate level if it was a C corporation before converting to an S corporation.

Question 22

M5: S Corporation Overview

How is the S corporation status terminated?

Answer 22

1) Shareholders holding more than 50% of the stock (voting and nonvoting) consent to a voluntary revocation. The effective date can be specified with the same filing rules above (i.e., consented by March 15th has an effective termination date of Jan 1st of that year).

2) S corp fails to meet any of the S status qualifications (date of failure is date of termination):
- includes a corp or parntership owner
- includes a foreign owner
- has more than 100 owners

3) If more than 25% of the S corp’s gross receipts are from passive investment income for 3 consecutive years and the S corp has a prior C corp E&P. The effective termination date is at the beginning of the 4th year.

Question 23

M5: S Corporation Overview

How many years does the corporation have to wait to re-elect S corp status after it was terminated?

Answer 23

Must wait until the start of the 5th year from the recent effective termination date.

Question 24

M5: S Corporation Overview

How does an S corporation flow-through to the owner(s)’s individual’s tax return?

Answer 24

The S corp’s tax return is the 1120S which is used to prepare and distribute the Schedule K-1 to the individual’s income tax return, form 1040.

Question 25

M5: S Corporation Overview

How are S corps similar and different than partnerships?

Answer 25

Similar:
- S corps flow-through ordinary business income or loss and separately stated items of income, gain, loss, and deductions to the shareholders.
- Allocations to shareholders are made on a per-share, per-day basis.
- Shareholders in an S corp must include on their individual income tax return their ditributive share of each separate “pass-through” item.
- Shareholders are taxed on these items, regardless of whether or not the items have been distributed (withdrawn) to them during the year.

Different:
- An S corp shareholder’s share of ordinary income is not subject to self-employment tax, even if the shareholder is actively involved in the operations of the business.

Question 26

M5: S Corporation Overview

What are the most important S corp items that flow through separately to the shareholder (similar to a partnership via Schedule K-1)?

see schedule K-1 for a complete list

Answer 26

1) Flows to Schedule A, itemized deductions:
-Charitable contributions
-Section 179 expense deduction
2) Flows to Schedule B, passive income:
-Interest income
-Dividend income
3) Flows to Schedule D:
-Net ST capital gain or loss
-Net LT capital gain or loss
-Net Section 1231 gain or loss
4) Flows to Schedule E, passive income:
-Rental real estate income or loss

Question 27

M5: S Corporation Overview

What is Section 199A Qualified Business Income (QBI) Deduction?

Answer 27

A below-the-line deduction of 20% of qualified business income may be available on ordinary business income flowed-through from an S corporation.

Question 28

M5: S Corporation Overview

When can an S corp deduct and not deduct a fringe benefit?

Answer 28

• Deductible: fringe benefits (e.g., company car, subsidized meals) for non-shareholder employees and those employee shareholders owning 2% or less of the S corp are deductible by the S corp in calculating ordinary business income.
• Nondeductible: the cost of fringe benefits for shareholders owning over 2% is nondeductible by the S corp, unless the corp includes the benefits in the employee/shareholder’s W-2 income.

Question 29

M5: S Corporation Overview

How is the calculation of an S corp’s stock generally the same as partnerships?

“BASE”

Stock basis and debt basis are tracked separately, but together they form tax basis.

Answer 29

B is Beginning Basis: Initial stock basis (contributions)
A is Add (income, contributions): Additional contributions, Income items (Ordinary business income, separately stated income/gain items, and tax-exempt income)
S is Subtract (distributions, losses): Distrubtions to shareholders, Nondeductible expenses, Loss/deduction items (ordinary business loss, separately stated loss/deduction itmes)
E is Ending Balance in S corporation stock

B+A=S+E

Question 30

M5: S Corporation Overview

How is an S corporation’s loss in excess of the shareholder’s tax basis applied?

Answer 30

• A loss in excess of the shareholder’s tax basis is suspended until tax basis is reinstated in future years (i.e., carried forward indefinitely). However, any suspended losses due to insufficient tax basis remaining when the shareholder disposes of his or her S corporation stock are lost.
• Tax basis can be reinstated by any of the items that increase stock basis: income, gains, and additional contributions.
• Any increases in future years reinstate the debt basis first, then stock basis.

Question 31

M5: S Corporation Overview

What is the Accumulated Adjustment Account (AAA)?

Answer 31

• Account to hold earnings and profit (retained earnings)
• Account balance goes up as money is earned and goes down as money is lost or withdrawn.
• Previously undistributed income and be withdrawn tax free since the shareholder already paid tax on their share as stated on their schedule K1 via individual return.
• AAA starts at $0.
• Distributions cannot reduce AAA below zero. However, AAA may be negative due to S corporation losses and deductions.

Question 32

M5: S Corporation Overview

How does AAA increase or decrease?

Answer 32

1) Increased by:
- Ordinary business income
- Separately stated income and gain items (other than tax-exempt income)

2) Decreased by:
- Ordinary business losses
- Separately stated losses and deductions
- Nondeductible expenses (other than expenses related to tax-exempt income)
- Distributions (may not reduce AAA below zero)

Question 33

How is prepaid interest deducted?

Answer 33

Prepaid interest is deductible in the tax year to which, and to the extent that interest is allocable- (i.e., as it accrues). This allocation is required even by a cash basis taxpayer.

Question 34

What’s the IRS examination sequence?

Answer 34

1) IRS examiner’s findings in an audit
2) Issue 30 day letter (preliminary notice) for taxpayer’s right to an administrative appeal or agree to the IRS proposed adjustments.
3) Taxpayer then has the right to petition with the U.S. Tax Court (90 day letter).

Question 35

R1 - M5: Itemized Deductions

What is the max amount of charitable contribution a taxpayer can deduct as an itemized deduction for a capital gain property (e.g., land)?

Answer 35

Appreciated property held longer than one year is considered capital gain property, and its FMV is deductible as a charitable contribution. However, capital gain given to a public charity (church) is limited to 30% of AGI.

Question 36

R1 - M4: Adjustments

What is the annual deductible amount for self-employed individuals to a SEP IRA?

Answer 36

The max annual deductible amount for self-employed individuals to a SEP IRA is the lesser of $66,000 or 20% of net earnings.
Net earnings is net self-employment income minus 50% of self-employment taxes.

Question 37

R4 - M4: Legal Duties and Responsibilities

What are the exceptions an accountant is prohibited from showing the workpapers to anyone without the client’s permissions?

Answer 37

1) Lawfule subpoena
2) Prospective purchasers, as long as the prospective purchases do not disclose the confidential information.
3) Quality control panel.
4) AICPA/State Trial Board
5) Court proceedings
6) When GAAP requires disclosure of such information in the financial statements.

Note: CPAs cannot show workpapersto the IRS or FASB withouth the client’s consent or lawful subpoena.

Question 38

R1 - M5: Itemized Deductions

What is the formula to compute the deduction on federally declared disaster area in which a taxpayer’s residence is located?

Answer 38

*Smaller loss (start with the lesser of lost cost/adjusted basis or decrease in FMV)
Less: insurance recovery
Equals: Taxpayer’s loss
Less $100 (per loss)
Equals: Eligible loss
Less: 10% AGI limitation
Equals: **Deductible loss

*The amount regarded as a casualty loss is the difference between the FMV of the property immediately before the casualty and its FMV immediately afterward. The loss cannot exceed the adjusted basis of the property.
**If the insurance covers the entire actual loss and the taxpayer recieves the reimbursement, then he/she is not allowed the to dedcuct the casualty loss.

Question 39

R1 - M3: Gross Income Part 2

How many days per year does a vacation residence need to be rented in order for rental income to recognized and expenses itemized for deduction on Schedule E?

Answer 39

A vacation residence is treated as a personal residence if is is rented for fewer than 15 days, and any rental income would be excluded form income and not require a Schedule E to be filed, so income impact on AGI would be zero.

Question 40

R1 - M7: Tax Computations and Credits

How may taxes paid by an individual to a foreign country (or a U.S. possession) be treated?

Answer 40

1) As a credit against federal income taxes due.
2) As an itemized deduction (no floor requirement)

Question 41

R2 - M1: Basis and Holding Period of Assets

How does a taxpayer determine the basis and gain or loss on the sale of an investment property he inherited from his parent?

Answer 41

Generally, the FMV on the date of death is the taxpayer’s basis on inherited property with the holding period automatically considered long-term (regardless if held for less than a year).

Question 42

What does the “automatic stay” created upon filing a petition in bankruptcy stop?

Answer 42

The “automatic stay” stops any attempt by creditors to collect through the garnishments of the debtors wages.

However, the “automatic stay” does not stop the collection of alimony.

Question 43

What is net investment income (NII) tax?

Answer 43

The NII tax is 3.8% of the lesser of:
1) the taxpayer’s investements income, OR
2) The excess of modified AGI over a threshold amount

Question 44

R6: M3 - Federal Laws and Regulations

What are the four major social security benefit programs?

Answer 44

1. (OASI): Old age and survivors insurance (e.g. payments to divorced spouses).
2. (DI): disability insurance (e.g., payments to children).
3. (Medicare) NOT medicaid
4. (SSI): supplemental security income.

Question 45

R1: M2 - Gross Income: Part 1

What are the five conditions that need to be met in order for interest on Series EE savings bonds to be tax-exempt (excluded)?

Answer 45

1. Interest is used to pay for higher education of taxpayer, a spouse, or dependents.
2. Eligible higher education expenses are reduced by tax-free scholarships
3. The taxpayer is over age 24 when the bonds are issued
4. The bonds are acquired after 1989.
5. The interest exclusion is subject to a phase-out, and the taxpayer does MFJ if married.

Question 46

R1: M2 - Gross Income: Part 1

Whether on the cash or accrual method of accounting, when does a taxpayer who sells stock or securties on an established securities market recognize gains & losses?

Answer 46

On the trade date (not the settlement).

Question 47

R6: M5 - Busienss Structures: Part 2

What is principle that protects coporate directors from personal liablity for acts performed in good faith on behalf of the corporation?

Answer 47

Business judgment rule

Question 48

R3: M7 - Tax-Exempt Organization Overview

What sources does a tax-exempt organization need to qualify as publicy supported?

Answer 48

At least one-third of the tax-exempt organization’s total support must come from governmental units and the general public.

Question 49

R1: M4 Adjustments

What is the maximum traditional IRA deduction a couple MFJ can take?

Answer 49

Each can deduct the maximum amount of $6,500 for a total of $13,000 if they are not active participants in a qualified retirement plan.

Question 50

R1: M4 - Adjustments

Which IRA contributions are deductible, Roth or Traditional, or both?

Answer 50

Roth IRA contributions are not deductible (a nonrefundable credit is available for contributions for roth and traditional, but only up to $2,000).
**Traditional IRA contributions are deductible **depending on the taxpayer’s AGI, and whether he/she (or spouse, if married) is an active participant in an employer-sponsored retirement plan. If a single taxpayer is a participant in an employer-sponsored retirement plan, the deduction limit (up to $6,500) starts to phase out ratably when AGI is $73,000 and fully phased out when AGI is $83,000. However, there is no AGI phase-out if a taxpayer is not a participant in an employer-sponsored retirement plan.

Question 51

R1: M4 - Adjustments

Is educator expense and student loan interest an adjustment or itemized deduction, and if so, do they have a maximum allowance for deduction?

Answer 51

Both are “above-the-line” deductions. The max allowance for educator expenses (college tuition and fees) is $300 and for student loan interest is $2,500.

Question 52

How are alimony payments on or before December 31, 2018 treated that are required to be paid regardless if the payee dies?

Answer 52

These required payments (even if payee dies) are not considered to be payments for the alimony (support) and are considered amounts owed to the payee as part of the divorce settlement. Other regular alimony payments are deductible by the payor and are taxable income to the payee.

Question 53

R6: M5 - Business Structures: Part 2

What events could cause a corporation to dissolve?

Answer 53

1) Judisicial dissolution from a shareholder or creditor petitioning a court establishing that the board is hopelessly deadlocked, is committing fraud, or has committed a substantial waste fo corporate assets.
2) Dissolution when a corporation is merged out of existence.
3) dissolution by director and shareholder approval.

Question 54

R1: M3 - Gross Income: Part 2

How are profits and losses distributed to partners in a general partnership and in a limited partnership?

Answer 54

• Share of profits and losses are equal among all partners in a general partnership if the partnership agreement is silent in this regard.
• However, a limited partnership distributes profits and losses according to contributions by the partners when the partnership agreement is silent in this regard.

Question 55

R4: M3 - Federal Tax Procedures and Taxpayer Penalties

What is the difference between the U.S. Tax Court and the U.S. District Courts?

Answer 55

U.S. Tax Court: is a specialized trial court where Federal tax cases are heard intially without requiring the taxpayer to pay disputed taxes beforehand, and the trials are by judge and not jury. It is not an appeals court, and decisions may be appealed.
U.S. District Court: is not specialized like the tax court and requires the taxpayer to pay disputed taxes before the case is heard.

Question 56

R3: M5 - S Corporation Overview

How doees the accumulated adjustments account (AAA) increase and decrease for an S corporation?

Answer 56

• AAA is increased by ordinary business income and separately stated & non-separately stated income and gains (excpet tax-exempt income and certain life insurance proceeds). For example, interest and dividends.
• AAA is decreased by ordinary business losses, separately stated losses and deductions (charitable contributions), nondeductible expenses and distributions to shareholders (may not reduce AAA below zero).

Question 57

R2: M3 - Cost Recovery

What is the allowable Section 179 expense?

Answer 57

A taxpayer can elect to immediately expense a fixed amount of the cost of qualified business-use (tangible personal) property purchased and placed in service during the year.
The allowance for this immediate expense is $1,160,000. However, this max amount is reduced dollar-for-dollar by the property’s cost that exceeds $2,890,000.

Question 58

R1: M2 - Gross Income: Part 1

What is the typical character difference between a 501(c)(3) private foundation and a 501(c)(3) public charity?

Answer 58

• Private foundations typically recieve private support from a family or corporation instead of from public support from governmental units and the general public.
• The main activity of most private foundations is making grants to other charitable organizations and individuals.

Question 59

R2: M3 - Cost Recovery

For tax purposes, what is the amortization for intangible assets (i.e., patents, non-compete covenants, goodwill)?

Answer 59

15 years

Question 60

R1: M7 - Tax Computations and Credits

How are the American Opportunity credit and Lifetime Learning credit calculated?

Answer 60

• The American Opportunity credit is calculated as 100% of the first $2,000 in expenses and 25% of the second $2,000. The person/dependent must be enrolled at least half-time for at least one academic period during the tax year to qualify.
• The Lifetime Learning credit is 20% of qualified expenses up to $10,000, regardless of the expense (not 20% of $10,000), and the max credit per return is $2,000 per year.

Question 61

R2: M3 - Cost Recovery

Under the MACRS depreciation system, what convetion must be used for non-real property (e.g., equipment) and real property (e.g., building)?

Answer 61

• Property (other than real property) is depreciated using the half-year convention unless the mid-quarter exception applies (i.e., if more than 40% of total basis of said property is placed into service during the last three months of the tax year).
• Real property is depreciated using the mid-month convention.

Question 62

How do you determine the cost basis of securities sold by a child that was given the securities as a gift from his/her parent?

Answer 62

**Gifted property is equal to donor’s adjusted cost basis at gift date unless FMV at gift date < cost basis. **

If FMV at gift date is less than cost basis, put values including sales value from high to low vertically then select the middle value.

Question 63

Calculation of Deductible Medical Expenses:

Answer 63

Qualified medical expenses are deductible to the extent that they exceed medical insurance reimbursement and the 7.5% of AGI.

Qualified medical expenses
(Insurance reimbursement)
_______________________________________
=Qualified medical expenses “paid”
(7.5% of AGI)
_______________________________________
=Deductible Medical Expenses
================

Question 64

Qualifying Child (CARES Test)

Answer 64

Close Relative
Age Limit (under 19 or 24 if full-time student)
Residency and filing requriements (same abode as taxpayer for more then half a year)
Eliminate Gross Income Test
Support Test: child did not contribute to more than half of his/her own support. Social security and welfare are included up to actual support expenses. Scholarships are not included.

Question 65

Qualifying Relative (SUPORT Test)

Answer 65

Support over 50% test
Under a specific amount ($4,700) of taxable gross income
precludes dependent filing a joint tax return
Only citizens (residents of U.S./ Canada/ or Mexico)
Relate test (excludes cousins and foster parents) OR
Taxpayer: lives with the individual the whole year

Question 66

How are bad debt losses treated?

Answer 66

As short term capital losses in the year that the debt becomes totally worthless

Question 67

What is the maximum amount a self employed taxpayer can deduct for contributions to his/her SEP IRA for the year?

Answer 67

The maximum annual deductible amount for self-employed individuals to a SEP IRA is the lesser of $66,000 (2023) or 20% of net earnings*.

*Net earnings is net self-employemnt income minus 50% of self-employment taxes.

Question 68

What is the charitable contribution deduction limit?

Answer 68

Charitable contribution is limited to 10% of taxable income before the charitalb contribution deduction and dividend-received deductions.

Any disallowed/excess charitable contribution may be carried forward for 5 years.

Question 69

How may an individual taxpayer avoid the penalty for the underpayment of estimated tax?

Answer 69

Timely estimated tax payment s must be either:
1) 90% of the tax on the return for the current yer period (paid in four equal installment)
2) 110% of the prior year’s tax liability if AGI > $150,000
OR 100% of the prior years tax liability if AIG <= $150,000

Question 70

Is rent revenue taxable income for an accrual basis taxpayer if they receive rent in adavance (e.g., cas for all upcoming lease years)?

Answer 70

yes, rental revenue received in advance is taxable in the year of receipt as opposed to over the term fo the lease under GAAp. This is true for:
- rental income received in adavnce
- Nonrefundable rent deposits
- Lease cancellation payments

Question 71

What method does a corporation, and accrual based taxpayer, who is not a financial institution (i.e., small bank or thrift institution), use for dedcuting bad debts?

Answer 71

They are required to use the direct charge-off method instead of the reserve method.

Question 72

How does a newly incorporated C corporation select an accounting method for tax purposes?

Answer 72

They select their accounting method for tax purposes on the inital tax return by using the chosen method.

Question 73

Are life insurance proceeds taxable income, and related premium expenses tax deductible, for a corporation that is the owner and beneficiary of an insured officer?

Answer 73

No, the life insuranc proceeds are not reported as taxable income of the corp. Premiums paid for insurance on an officer’s life where the corporation is the owner and beneficiary of the policy are not decuctible.

However, group-term life insurance premiums paid on employees’s lives, with the emplyees’ dependents as owners and beneficiaries of the policies are considered to be fringe benefits and would be deductible by the corporation.

Question 74

Capital Assets:

Answer 74

Capital assets include property held by the taxpayer for investments:
- Personal automobile of the taxpayer
- Furniture and Fuxtures in the taxpayer’s home
- Stock and securities (except dealers)
- 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 purchased
- Other assets held for investment

Question 75

What is the maximum traditional IRA deduction allowed?

Answer 75

MFJ and neither are active participants in a qualifed retirement plan at work are allowed $6,500 each

MFJ and one is active, $5,200 allowed each

Married AGI phase-out ranges for traditional IRA:
- $116,000 - $136,000
- $136,001 - $217,999
- $218,000 - $228,000
- Above $228,000 means no deduction is allowed

Question 76

What are the two circumstances that give rise to transfer pricing issues?

Answer 76

Transfer pricing issues arise when a U.S. based taxpayer shares costs, transfers, sells, purchases, lease tangible/intangible property to/from, enter loan/service contracts with an affiliate that either:
1) is not subject to U.S. income tax, or
2) does not file a consolidated income tax return with the U.S.-based taxpayer

Question 77

How does a foundation qualify as a tax-exempt organization under IRC Section 501(c)(3)?

Answer 77

• Distribute income for each year as requried under the tax law
• Not engage in any act of self-dealing
• Not retuain any excess business holdings
• Publicly supported by at least 1/3 of total support coming from governmental units (grnts) and general public

Question 78

What are some examples of separately stated items?

Answer 78

• Interst income
• Gains / loss on sale of securities (capital gain/loss)
• Charitable contributions
• Section 1231

Question 79

When is the accrual basis method of accounting for tax purposes required? (i.e., The Unifrom Capitalization Rules of IRC Section 263A)

Answer 79

Tax Shelters

Manufacturers

Business has greater than $29M average gross receipts for 3 years as of the last ending tax year for:
- Accouting purchase and sales of inventory (inv. maintained).
- Certain farming corporations (other farming or ree raising businesses can use cash basis).
- C corps. trusts with unrelatred trade or busienss income, and partnerships having a C corp. as a partner.

Question 80

What does the “automatic stay” created upon filing a petition in bankruptcy stop?

Answer 80

The “automatic stay” stops any attempt by creditors to collect through the garnishments of the debtor’s wages.

However, the “automatic stay” does not stop the collection of alimony.

Question 81

What is net investment income (NII) tax?

Answer 81

The net investment income is 3.8% of the lesser of:
- the taxpayer’s NII or
- the excess of modified AGI over a threshold amount

Question 82

What is the de minimis safe harbor rule?

Answer 82

The de minimis safe harbor rule applies when a written policy to expense certain property at the beginning of the year is in place. The rule allows a company to expense items up to $2,500, if each item’s cost does not exceed $2,500, and each if they have an applicable financial statement (AFS) in place, otherwise no deduction would be allowed.

Question 83

How do you calculate net earnings from self-employemnt and self-employment tax?

Answer 83

“Net earnings from self-employment” is the “total amount of self-employment income” multiplied by the employer’s half of the “self employment tax” which is 7.65% ((12.4% social security + 2.9% medicare) / 2). The full “self-employment tax” paid by the taxpayer is the employer and employees portion equaling to 15.3%.

Remember theadjustment for self-employment tax paid is have of self-employment tax dolllar amount.

Question 84

What amount should an accountant report as income for agreed traded services with a painter if the painter provides $550 services worth and the accountant provides $500?

Answer 84

$550 income for the accountant, because noncash income is reported as the FMV of the property or services RECEIVED.

Question 85

What are the elements of constructive fraud?

Answer 85

The elements of constructive fraud:

1. Misrepresentation of a material fact.
2. Defendant acts with gross negligence or recklessly.
3. Intent to induce plaintiff’s reliance.
4. Actual and justifiable reliance by plaintiff.
5. Damages.