REG BOOK Notes Flashcards
QUALIFYING CHILD
- Child 2. Stepchild 3. Legally Adopted child 4. Foster child 5. Brother or sister or a descendant of one of these
*Permanently disabled child = no age limit
FUll time student = at least 5 months during the taxable year
Father or mother not required to live with the taxpayer (TP must maintain over half of the cost of upkeep over 50%)
UPKEEP - Rent, mortgage int, property taxes, insurance, utility charges, repairs and food consumed in the home.
Dependent relatives (MUST LIVE WITH THE TAXPAYER)
Grandparents, brothers, sisters, aunts, uncles, nephews, nieces, stepparents, parents-in-law, sisters-in-law, brothers-in-law
(cousins, foster parents and unrelated dependents DO NOT qualify as relatives unless they live with TP)
CARES test qualifying child
- CLOSE relative
- AGE Limit
- RESIDENCY and filing requirements
- ELIMINATE gross income test X
- SUpport test
Qualifying relative
1. SUPPORT test
2. UNDER a specific amount of taxable gross income test (under USD 5,050)(exempt from TI)- SSB, tax exempt int income and tax exempt scholarship)
3. PRECLUDES dependent filing a joint tax retun test
4. ONLY citizens (residents of US/Canada or Mexico) test
5. RELATIVE test or TAXPAYER lives with individual for WHOLE year test (EITHER, OR)
HEAD OF HOUSEHOLD = live for HALF year
QUALIFYING WIDOWER or Surviving spouse - WHOLE year
Gross income test does not apply to a ____________
QUALIFYING CHILD
Scholarships received by a dependent are not included in determining the dependent support if the dependent is a ___________and is a ___________________
Full time student and is a child or a step child (this does not extend to siblings or Descendents)
Multiple declartion support form , the joint contributors are require to file ___________= 2 or more contributing more than 50% combined. Must have contributed more than 10% individually
Form 2120
2.5 months to elect for S corp status for _____________
new corporations from the date of Formation
Can be terminated with more than 50% votes
FRINGE BENEFITS such as medical premiums and car allowances are included in shareholders’ income and are deductible by the S corp if the shareholder owns ___________of the company.
More than 2%
Requirements of a security interest to attaching:
- There must be an agreement to create the security interest evidenced by either an authenticated security agreement or the creditor’s taking possession or control of the collateral.
- THe creditor must give VALUE (including antecedent debt)
- The debtor must have RIGHTS in the collateral.
*The creditor need not take possession for a sec int to attach if there is a written security agreement.
If there is no authenticated security agreement, a security int can attach if the security party takes possession of the collateral or has control of it.
A gartuitous surety will be released when the creditor commits fraud, when there is duress or breach, when the surety lacks capacity or goes bankrupt or when there is a material change. (e.g. an extension of time) without the surety’s consent.
A COMPENSATED surety would be released only to the extent harmed.
VALID CONTRACT requirements
- Offer
- Acceptance
- Consideration
- Lack of defenses
The business judgment rule applies to officers as well as directors, who in their capacity, act in a manner the officer believes to be in the best interest of the corporation, and with the care an ordinarily prudent person in a like position would exercise. If the standards of the business judgment rule are met, ______________________
the officer is not liable to the company for resulting damages.
A trustee in bankruptcy is treated as a ___________ on all of the debtor’s property as of the date the bankruptcy petition is filed. The trustee is subordinate to all prior perfected security interests, including statutory liens that were effective prior to the filing of the bankruptcy petition.
hypothetical lien creditor.
The trustee does not have the right to avoid any STATUTORY liens against the debtor’s property that were effective before the filing of the bankruptcy petition.
Like any secured creditor, the trustee would have the power to prevail against a creditor with an unperfected security interest and to force persons holding the debtor’s property to deliver it to the trustee.
FUTA-FEDERAL UNEMPLOYMENT TAX ACT
All employers who have QUARTERLY Payrolls of at least 1 PERSON 1 DAY A WEEK for 20 WEEKS in a year must participate in FUTA.
SOCIAL SECURITY BASE is calculated on _________
a self-employed person’s NET PROFIT from SELF-EMPLOYMENT (subject to certain maximum limitations.
For EMPLOYEES, this tax is based on gross wages (With some adjustments).
A voluntary petition in bankruptcy will be denied if the debtor failed to_____________
keep or preserve adequate books and records.
ANTICIPATORY REPUDIATION
Bob had no duty to respond to the letter. Samantha’s phone call and the letter constituted an anticipatory repudiation. An anticipatory repudiation arises when one person unequivocally communicates in advance of performance that he or she will not perform. Samantha did just that. In the face of an anticipatory repudiation, the nonrepudiating party has several options, including ignoring the repudiation, awaiting full performance, and suing if full performance is not tendered. Since Bob followed this option, he is entitled to sue for damages despite his not responding to the letter.
To have limited liability, an LLP must file with _______________. It is generally designed for professionals (and ownership is usually limited to licensed professionals) who desire to be partners with other like professionals and yet not have liability for the malpractice of their partners. Some states require that ____________be carried to protect those harmed by the professionals’ malpractice.
the state a registration statement usually referred to as Articles of LLP
personal liability insurance (not property insurance)
Failure to designate a registered agent in the articles makes the articles faulty in most states and _____________, but in and of itself, it is not a ground for piercing the corporate veil to reach shareholders’ personal assets to satisfy corporate obligations.
is a ground for seeking dissolution of the corporation
AUCTION SALE WITH RESERVE -In an auction with reserve the auctioneer may withdraw the goods at any time until he announces completion of the sale.
AUCTION SALE WITHOUT RESERVE - an auctioneer withdraw the goods put up for sale, if no bid is made within a reasonable time.
In an auction without reserve, after the auctioneer calls for bids on an article or lot, that article or lot cannot be withdrawn unless no bid is made within a reasonable time.
If an individual files a voluntary petition under Chapter 7, the case may be dismissed or converted to a Chapter 13 case if abuse is found.
Abuse may be found under the means test or the general abuse test.
*The automatic stay stopping collection applies to ANY BANKRUPTCY PROCEEDINGS
VOLUNTARY petition is not subject to the $18,600 floor. The floor is only applicable to involuntary petitions.
None of the business entities listed offer its owner(s) protection from personal liability for contracts entered into by the business.
A sole proprietorship is a business owned and run by one person, and that person is personally liable for all the obligations of the business.
A partnership is an association of two or more persons to run a business for PROFIT.
PARTNERSHIP - All partners are personally liable for obligations of the partnership.
LIMITED PARTNERSHIP - A limited partnership has at least one general partner who is liable for obligations of the partnership and at least one limited partner who has no personal liability for obligations of the partnership.
Release of a co-surety is treated the same as release of security. The release discharges the other co-sureties to the extent of the impairment of their rights. Had West not been released, Quill would have had a right of contribution against West for half of the debt. Thus, Quill is discharged to that extent.
ARTICLE 9 OF UCC - Attachment establishes a secured party’s right to take possession of collateral from a debtor when there is a default on a secured transaction.
Holders in due course are relevant to commercial paper under Article 3(NEGOTIABLE INSTRUMENTS such as commercial paper-forgery is not a defense) of the UCC. NEGOTIABLE inst cannot be attached. Attachment has nothing to do with holders in due course.
Perfection establishes a secured party’s rights to collateral securing an obligation as against third parties who also might have an interest in the collateral after a debtor defaults on the secured obligation.
Warehousemen are relevant to Documents of Title under Article 7 (PERSONAL PROPERTY) of the UCC. Attachment has nothing to do with the rights of warehousemen.
Punitive damages are not available in a contract action, even if the breach was intentional.
Compensatory damages are available for breach of a personal service contract. The courts usually award the difference between the contract price and the price the nonbreaching party had to pay someone else to perform.
Restitution of a benefit conferred is available after a party has been discharged from a contract. For example, if a party to a contract pays the other party in full and the other party is subsequently discharged from performing due to impossibility, the courts can make the discharged party restore the benefit—i.e., give back to the other party the payment that was made.
Ordering for Special deductions of C corp to arrive at taxable income
- Charitable deduction (CF 5 YEARS, Accrual within 3.5 months of taxable year)
- DRD
- Capital loss Carrybacks
*NOL carryforwards do not reduce TI for computing the DRD but they do reduce TI for the CHaritable contribution limitation
NI per books
+ Expenses deducted on books but not on tax return (e.g. meals?)
+Income currently taxable but not included in book income (e.g. prepaid rent)
- Income reported on books but not on tax return
-Deductions on tax return but not recorded on books
___________________________________________________________
Taxable Income
Permanent differences
1. Tax exempt int
2. Officers’ life insurance proceeds
3. Excess tax depreciation
4. Carryovers from charitable contributions, NOLs and capital losses.
5. FEDERAL INCOME TAX (full per book $120,000)
6. ENTERTAINMENT EXPENSE
TEMP DIFF
ADD: Bad debt expense if Tax is less than Book
Coverdell earnings accumulate ________
Tax free (not taxable)
AOC-available for post secondary (college)/ undergraduate (expenses are above $4,000) only (not for graduate student)
Max Credit $2,500 per student
100% of the first $2,000 in qualified expenses = 2000100% = $2000
+
25% for the next $2,000 in qualified expenses = 200025% = $500 for a total of
$2000+$500 = $2,500
LLC is available for UNLIMITED number of years and for qualified tuition and related expenses (Except BOOKS) at eligible Educational institutions. For both post secondary (college education) and graduate level courses.
Once per family even if multiple qualified children in the family
Max credit is $2,000 per year per family
20% of first $10,000 in qualified expenses
MACRS and first year bonus depreciation is fully deductible for S corporation
Business meals -50%
Business entertainment - not deductible
179 expense is separately stated
Int expense is ordinary business dedcution
INVESTMENT RELATED TO INV INT EXPENSE
IS SEPARATELY STATED
A perfected security interest in the securities can only be obtained by ___________
possession, control and filing.
IRA
MARGINAL TAX RATE + PENALTY on early withdrawal
GIFT = GAIN case when FMV is more than Donor’s basis
Take rollover basis of the donor to calculate gain
C CORP - ACCRUAL METHOD Must be used for :
- Purchases and sales of inventory if the business has greater than $30 million (2024) of avg annual gross receipts for 3 year period ending with the preceding tax year)
- Tax Shelters
- Farming corps if greater than $30 million of avg annual gross receipts for 3 year period ending with the preceding tax year)
- C corps, trusts with UNRELATED trade of business income and partnerships having a C corp as a partner ($30 mn rule)
C CORP - EXECUTIVE COMPENSATION
Publicly held - C corp may not deduct compensation expenses in excess of _______________paid to covered employees
such as
$1,000,000
(CEO, CFO, 3 other most highly compensated officers)
*entertainment expenses are generally not dedcutible unless they are included in INCOME of officers, directors and 10% or greater shareholders or known as controlling shareholders , then they are deductible by the corporation only to the extent of what was included in their income and covered employees paid tax on it.
If IRS determines that a shareholder’s salary is unreasonable, it may reclassify part of the salary as a dividend distribution because it is not deductible by the corporation and is generally taxed at preferential tax rates for the shareholder/employee.
Cash basis TPs - Bad debt is not deductible because they never included this amount in gross income.
EXCEPTION: Uncollectible check that has been deposited and recorded as income
Accrual based TPs - Only direct write-off or charge off allowed
C CORP - BUsiness Interest Expense limits:
SUm of:
1. Business int income
+
2. 30% of ATI (Business income excluding int income and int expense)
+
3. Floor plan financing is debt used to acquire motor vehicles held for sale or lease where the debt is secured by the acquired inventory.
Int expense on debt incurred to Purchase tax free bonds is not deductible because state, local and municipal bond income is not taxable.
C-CORP CASUALTY LOSS DEDUCTION
- Partially destroyed - lesser of the two:
A - Decline in FMV
or
Adjusted basis immediately before the casualty or NBV
Less: Insurance reimbursement - FULLY DESTROYED
CASUALTY LOSS = ADJUSTED basis of the property
Deductible loss = NBV less: Insurance reimbursement
INDIVIDUAL - CASUALTY LOSS DEDUCTION
Only allowed for FEDERALLY declared DISASTER AREA
Decline in FMV or Adjusted basis
less: Insurance proceeds or reimbursement received
1. FLOOR $100
2. LESS: 10% OF AGI limitation
ORG EXPENDITURES = If expenses are more than $50k , the amount of 5k deduction is reduced by the amount which exceeds $50,000.
Amortized remaining over 180 months or 15 years
If or expenditure was $55,000 or greater, no immediate deduction of $5k. Zero
Self-employment income excludes gains and losses from disp of property used in a trade or business and ordinary income from S corp
Includes guaranteed payment from partnership subject to SE tax
DEDUCTIONS FOR CORP:
- State income tax paid to another state
- FTC paid to another country
- property tax
- SALT
- Excise tax and Sales tax
- payroll taxes (FICA, unemployment)
- Franchise tax
A SECURED CREDITOR is not an __________ for thr purpose of a preferential transfer
INSIDER
GIFT
- FMV > donor’s basis = Donor’s rollover basis will be TP’s basis
- FMV<Donor’s basis
(a) GAIN = donor’s basis becomes TP’s basis
(b) LOSS = FMV becomes donor’s rollover basis (Holding period from the day after the gift day, may be ST in most of the cases)
GIFT
FMV will be the basis only when there is a LOSS
Else donor’s rollover basis will be the basis
For tax purposes , Dividends, capital gains and capital losses are considered as PORTFOLIO INCOME or INVESTMENT INCOME and ___________
NOT PASSIVE INCOME
RENTAL income or loss is not considered as PASSIVE if it belongs to a (2 exceptions) ___________
REAL ESTATE professional or when any TP materially participates or actively participates
SURETY is released from laibility or obligation to the creditor if creditor:
- Fails to tell surety negative information about debtor
- Makes agreement with debtor that increases surety’s risk of loss
- Releases collateral that secures the debt (equal to collateral’s value)
- Extends debtor’s due date for repayment
- Refuses debtor’s tender of payment
- Releases debtor from the debt
ACCOUNTING PERIOD
- C CORP has flexibility in CHOOSING accounting period
- Calendar year or fiscal year - NO business justification required
S CORP or PSC
-Calendar year end or
-Fiscal year end requires JUSTIFIED BUSINESS REASON
PARTNERSHIP OR LLC
- Must be the same as year end majority owners/partners (default)
- fiSCAL YEAR OR 52/53 week year end requires JUSTIFIED BUSINESS REASON
TRUST OR ESTATE - CALENDAR YEAR END ONLY
anything related to stock cannot be org expenditures
A deduction for promotional items (prospective clients) is limited to ______
$4 per items
SYNDICATION fee - neither amortized nor depreciated - not deductible as Org expenses
CH 13
VOLUNTARY ONLY
RENTAL LOSS
DEDUCT 100,000
DEDUCT 50% IN excess of 100,000 from AGI
deduct STEP 2 from limit of 25,000 deductible loss
Phased out if MAGI exceeds $150,000, which means ZERO deductible loss if MAGI exceeds 150,000.
Easement is a _________-
real property.
*Contract right is intangible(right to do something or received a benefit)
DERIVATIVE ACTION
On behalf of corp against a shareholder (perhaps?)
CH 7 - Voluntary
Trustee may either be appointed by the courts or elected by the creditors.
COMPENSATORY DAMAGES = DIRECT OR ACTUAL LOSSES
lIFE ISNURANCE PROCEEDS ARE NOT TAXABLE SO DEDUCT JUST LIKE
TAX EXEMPT INCOME
Child tax credit
under 17?
dependent care of family credit = $500?
DRD is allowing in computing _____________
*Only C corps are eligible for DRD not the other ones as DRD applies to corporate tax and others are not taxed at corp level
NOL
UCC
1. Article 2 - Sale of goods (warranties, disputes, rejection of goods)
2. Article 3 - Negotiable Instruments (promissory notes, checks, drafts)
3. Article 4 - Bank deposits and collections (e.g. insufficient funds, how to handle this situation).
4. Article 9 - Secured Transactions
chatgpt
Purpose: Governs secured transactions, where a borrower gives a security interest in personal property (like equipment or inventory) to secure a loan or credit.
Example:
A business takes out a loan from a bank and offers its inventory as collateral for the loan. If the business defaults on the loan, the bank may seize the inventory. Article 9 governs the creation, perfection, and enforcement of the bank’s security interest in the collateral (e.g., how the bank can properly perfect its interest by filing a UCC-1 Financing Statement).
For example, if a business borrows money and uses its machinery as collateral, it might file a UCC-1 form with the state to make the bank’s interest in the machinery public. If the business defaults, the bank can seize the machinery, subject to the rules of Article 9.
ANTECEDENT DEBT - Chatgpt
- Preferential Payments (Section 547 of the Bankruptcy Code):
Under U.S. bankruptcy law, if a debtor makes a payment to a creditor on an antecedent debt within a specified period (usually 90 days before filing for bankruptcy), the payment may be considered preferential. This means the debtor gave a preference to one creditor over others, and the payment could be subject to being returned or “clawed back” by the bankruptcy trustee.
For example, if a debtor makes a large payment to a creditor on an old debt just before filing for bankruptcy, the trustee may seek to reverse the payment to ensure all creditors are treated equally.
- Fraudulent Transfers (Section 548 of the Bankruptcy Code):
A fraudulent transfer involves the debtor transferring assets or making payments on antecedent debts with the intent to delay or defraud creditors. If the debtor’s transfer is found to be fraudulent, it may be reversed by the bankruptcy court.
For instance, if a debtor sells property or pays a debt to a family member just before filing for bankruptcy, and the transfer was made with the intent to hide assets or reduce the estate available for creditors, it may be deemed fraudulent.
Preference Period: In the case of preferential payments, payments made on antecedent debts within a specified period (e.g., 90 days for non-insiders and 1 year for insider creditors) may be scrutinized and potentially reversed.
. The goal of scrutinizing such payments is to ensure that all creditors are treated equitably.
1231 property or business asset
- Ordinary
- Capital
- Sec 1231
1.INVENTORY AND ACCOUNTS/NOTES RECEIVABLES = ORDINARY ASSETS, Less than 1 year = Ordinary assets
- SEC 1231 - Depreciable assets used in a trade/business owned for more than 1 year =1231 assets
- 1245 = counted as Ordinary business income/loss
Premium on disability insurance do not qualify for
Med expense
SCHOLARSHIP TAXABLE if____________
stipend received for research services required by the scholarship.
S CORP - AAA - Accumulated adjustments account that reports undistributed earnings of an S corp that have been previously taxed to the shareholders. Distributions from the AAA are tax free to the extent of the AAA.
Tax exempt income and related expenses do not affect AAA. Instead, these are reflected in the OTHER ADJ ACCOUNT (OAA).
AAA can have a negative balance due to losses. However, distributions may not make the AAA negative or increase a negative balance.
Calc
Beg AAA
+Ordinary business income
+Dividend Income
+STCG
+Charitable contributions
_____________________________
ENding AAA
Pass-through losses can reduce loan basis but DISTRIBUTIONS do not.
Capital gain DISTRIBUTIONS are reported as LT capital gains no matter how long shares in a mutual fund or REIT are owned. Since special tax rates and limitations apply to ___________
capital gains and losses , such is separately stated
Distribution always reduce BASIS Before __________
LOSSES
1 USD =
FBAR = use 12/31 rate
Maximum balance during the year
Foreign currency/Exchange rate
Items included in Articles of Incorporation
- Corp’s name
- Nature and purpose (of corp’s business)
- Term of the corp (or indefinite duration)
- Name and address of each incorporator
- Capitalization (i.e. equity structure_
- Initial Board members
- Registered agent in the state
C corp
1.Taxed as separate entity
2. Unlimited types and classes (voting, nonvoting, preferred, convertible)
3. Limited liability - Yes
4. BOD and corporate officers
5. Any type of nationality, no limit on number
6. Nation of Origin - ANY
S corp
1. Pass through
2. Have only 1 class of both voting and nonvoting shares
3. Limited liability - YES
4. Management - BOD and Corporate officers
5. Individuals only, US citizen or resident , no more than 100 (IShareholders must be ndividuals, certain estates or trusts)
6. US domestic only
S CORP ELECTION = unanimous votes required , 100%
Revocation - more than 50%
Cannot have Partnership or LLC as shareholders.
Can re-elect after 5 years of revocation
Can be terminated voluntarily or involuntarily
Voluntary revocation - shareholders holding >50% of shares (voting and nonvoting) consent to revocation)
Effective date of election - on or after
first day of current tax year if within first 2.5 months of tax year
or
1st day of following tax year if after first 2.5 months of tax year
Passive investment income >25% of gross receipts for each 3 consecutive years (e.g. 2021, 2022, 2023) and accumulated E&P from C corp years - causes revocation - 1st day of 4th fourth year (more than 25%)
When SHAREHOLDING in an S-corp is less than 1 year, income is allocated on DAILY basis
COrporations are created under state laws that require filing articles of incorporation with the proper state authority (e.g. secretary of state).
FULLY DISCLOSED - PRINCIPAL ONLY
PARTIALLY DISCLOSED - BOTH PRINCIPAL AND AGENT Liable
UNDISCLOSED - Agent ONLY is responsible, Principal must indemnify agent
Adoption credit
CF 5 years
Voidable COntract - by 1 party
- Duress (social or economic threat)
- Undue influence
- Misrepresentation of a material fact
(unintentional misrepresentation, fraud in the inducement) - Mistake
- Lack of capacity
VOid contracts - Cannot be enforced
- Extreme duress
- Fraud in the execution
- Illegal subject matter
- Incompetent party
- Unconscionability
PArtnership
Nature of loss is maintained as ordinary loss coz it passes through to the partners
Exempt org can be in the form of __________
corporation or trust
Qualified charitable contribution limited to the sale price of (property) or used car.
If LT artwork is immediately sold by the charitable institution and is not used for exempt purpose, then take adjusted basis as value of the artwork for chartiable contribution purpose .
Short term held donated property - use amount as lower of the two (Adjusted basis vs. SP)
LT - FMV
PHC subject to Personal holding tax when 2 criterias are met together _____________
*IRS cannot impose both PHC Tax and AET (Accumulated earnings tax) in the same year
- More than 50% of the outstanding stock must be owned by 5 or fewer individuals during the latter half of the year
- at least 60% of the corp’s income must come from passive sources such as dividends, interest, rents, royalties or specific PERSONAL SERVICE INCOME (accountants, lawyers, doctors)
*Just like AET, the PHC tax can be diminished or eliminated by distributing dividends.
ANNUITY
Facts: Zoe purchased an annuity for $60,000 that would pay her $750 per month for
120 months (10 years).
Required: Calculate the amount of the taxable portion of each annuity payment received.
Solution:
Expected value of the annuity = $750 monthly annuity payment × 120 months = $90,000
Annuity exclusion ratio = $60,000 original investment / $90,000 expected value = 66.7%
return of capital
Taxable portion of each annuity payment = 100% − 66.7% = 33.3% × $750 monthly payment
= $249.75
PHC
20% penalty tax rate on undistributed dividends of personal holding company . (Sec 541)
Basis of a partner___________
Basis + FMV of services rendered
Priority claims - UNIVERSAL
- CHILD Support and alimony
- Admin expenses (trsutee fee, attorney fee)
- GAP claims or in between claims (during odinary course of business of the debtor
- Wages claims upto $13,650
- Employee benefit plans upto $13,650
- Grain farmers and fishermen upto $6,725
- Customer Deposits upto $3,025
- Tax claims
- Injury claims arising from intoxicated driving
