REG BOOK Notes

Question 1

QUALIFYING CHILD

Answer 1

1. 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

Question 2

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.

Answer 2

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)

Question 3

CARES test qualifying child

1. CLOSE relative
2. AGE Limit
3. RESIDENCY and filing requirements
4. ELIMINATE gross income test
5. SUpport test

Answer 3

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)

Question 4

HEAD OF HOUSEHOLD = live for HALF year

Answer 4

QUALIFYING WIDOWER or Surviving spouse - WHOLE year

Question 5

Gross income test does not apply to a ____________

Answer 5

QUALIFYING CHILD

Question 6

Scholarships received by a dependent are not included in determining the dependent support if the dependent is a ___________and is a ___________________

Answer 6

Full time student and is a child or a step child (this does not extend to siblings or Descendents)

Question 7

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

Answer 7

Form 2120

Question 8

2.5 months to elect for S corp status for _____________

Answer 8

new corporations from the date of Formation

Can be terminated with more than 50% votes

Question 9

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.

Answer 9

More than 2%

Question 10

Requirements of a security interest to attaching:

Answer 10

1. 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.
2. THe creditor must give VALUE (including antecedent debt)
3. 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.

Question 11

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.

Answer 11

A COMPENSATED surety would be released only to the extent harmed.

Question 12

VALID CONTRACT requirements

Answer 12

1. Offer
2. Acceptance
3. Consideration
4. Lack of defenses

Question 13

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, ______________________

Answer 13

the officer is not liable to the company for resulting damages.

Question 14

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.

Answer 14

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.

Question 15

FUTA-FEDERAL UNEMPLOYMENT TAX ACT

Answer 15

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.

Question 16

SOCIAL SECURITY BASE is calculated on _________

Answer 16

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).

Question 17

A voluntary petition in bankruptcy will be denied if the debtor failed to_____________

Answer 17

keep or preserve adequate books and records.

Question 18

ANTICIPATORY REPUDIATION

Answer 18

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.

Question 19

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.

Answer 19

the state a registration statement usually referred to as Articles of LLP

personal liability insurance (not property insurance)

Question 20

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.

Answer 20

is a ground for seeking dissolution of the corporation

Question 21

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.

Answer 21

AUCTION SALE WITHOUT RESERIE - 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.

Question 22

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.

Answer 22

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.

Question 23

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.

Answer 23

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.

Question 24

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.

Answer 24

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 of the UCC. 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 of the UCC. Attachment has nothing to do with the rights of warehousemen.

Question 25

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.

Answer 25

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.

Question 26

Ordering for Special deductions of C corp to arrive at taxable income

Answer 26

1. Charitable deduction (CF 5 YEARS, Accrual within 3.5 months of taxable year)
2. DRD
3. Capital loss Carrybacks

*NOL carryforwards do not reduce TI for computing the DRD but they do reduce TI for the CHaritable contribution limitation

Question 27

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

Answer 27

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

Question 28

Coverdell earnings accumulate ________

Answer 28

Tax free (not taxable)

Question 29

AOC-available for post secondary (college)/ undergraduate (expenses are above $4,000) only (not for graduate student)

Answer 29

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

Question 30

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.

Answer 30

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

Question 31

MACRS and first year bonus depreciation is fully deductible for S corporation

Business meals -50%
Business entertainment - not deductible

Answer 31

179 expense is separately stated

Question 32

Int expense is orfinary business dedcution

Answer 32

INVESTMENT RELATED TO INV INT EXPENSE
IS SEPARATELY STATED

Question 33

A perfected security interest in the securities can only be obtained by ___________

Answer 33

possession, control and filing.

Question 34

IRA

Answer 34

MARGINAL TAX RATE + PENALTY on early withdrawal

Question 35

GIFT = GAIN case when FMV is more than Donor’s basis

Answer 35

Take rollover basis of the donor to calculate gain

Question 36

C CORP - ACCRUAL METHOD Must be used for :

Answer 36

1. 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)
2. Tax Shelters
3. Farming corps if greater than $30 million of avg annual gross receipts for 3 year period ending with the preceding tax year)
4. C corps, trusts with UNRELATED trade of business income and partnerships having a C corp as a partner ($30 mn rule)

Question 37

C CORP - EXECUTIVE COMPENSATION

Publicly held - C corp may not decduct compensation expenses in excess of _______________paid to covered employees
such as

Answer 37

$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 corpration 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.

Question 38

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

Answer 38

Accrual based TPs - Only direct write-off or charge off allowed

Question 39

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.

Answer 39

Int expense on debt incurred to Purchase tax free bonds is not deductible because state, local and municipal bond income is not taxable.

Question 40

C-CORP CASUALTY LOSS DEDUCTION

1. Partially destroyed - lesser of the two:
   A - Decline in FMV
   or
   Adjusted basis immediately before the casualty or NBV
   Less: Insurance reimbursement
2. FULLY DESTROYED
   CASUALTY LOSS = ADJUSTED basis of the property

Deductible loss = NBV less: Insurance reimbursement

Answer 40

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

Question 41

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

Question 42

Self-employment income excludes gains and losses from disp of property used in a trade or business and ordinary incoem from S corp

Answer 42

Includes guaranteed payment from partnership subject to SE tax

Question 43

DEDUCTIONS FOR CORP:

Answer 43

1. State income tax paid to another state
2. FTC paid to another country
3. property tax
4. SALT
5. Excise tax and Sales tax
6. payroll taxes (FICA, unemployment)
7. Franchise tax

Question 44

A SECURED CREDITOR is not an __________ for thr purpose of a preferential transfer

Answer 44

INSIDER

Question 45

GIFT

1. FMV > donor’s basis = Donor’s rollover basis will be TP’s basis
2. 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)

Answer 45

GIFT

FMV will be the basis only when there is a LOSS

Else donor’s rollover basis will be the basis

Question 46

For tax purposes , Dividends, capital hains and capital losses are considered as PORTFOLIO INCOME or INVESTMENT INCOME and ___________

Answer 46

NOT PASSIVE INCOME

Question 47

RENTAL income or loss is not considered as PASSIVE if it belongs to a (2 exceptions) ___________

Answer 47

REAL ESTATE professional or when any TP materially participates or actively participates

Question 48

SURETY is released from laibility or obligation to the creditor if creditor:

Answer 48

1. Fails to tell surety negative information about debtor
2. Makes agreement with debtor that increases surety’s risk of loss
3. Releases collateral that secures the debt (equal to collateral’s value)
4. Extends debtor’s due date for repayment
5. Refuses debtor’s tender of payment
6. Releases debtor from the debt

Question 49

ACCOUNTING PERIOD

1. C CORP has flexibility in CHOOSING accounting period
2. Calendar year or fiscal year - NO business justification required

Answer 49

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

Question 50

When is security interest perfected - later date if delivery date is later than filing date?

Question 51

anything related to stock cannot be org expenditures

Question 52

A deduction for promotional items (prospective clients) is limited to ______

Answer 52

$4 per items

Question 53

SYNDICATION fee - neither amortized nor depreciated - not deductible as Org expenses

Question 54

CH 13

Answer 54

VOLUNTARY ONLY

Question 55

RENTAL LOSS

Answer 55

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.

Question 56

Easement is a _________-

Answer 56

real property.

*Contract right is intangible(right to do something or received a benefit)

Question 57

DERIVATIVE ACTION

Question 58

CH 7 - Voluntary

Answer 58

Trustee may either be appointed by the courts or elected by the creditors.

Question 59

COMPENSATORY DAMAGES = DIRECT OR ACTUAL LOSSES

Question 60

lIFE ISNURANCE PROCEEDS ARE NOT TAXABLE SO DEDUCT JUST LIKE

Answer 60

TAX EXEMPT INCOME

Question 61

Child tax credit

Answer 61

under 17?
dependent care of family credit = $500?

Question 62

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

Answer 62

NOL

Question 63

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.

Answer 63

ANTECEDENT DEBT - Chatgpt

1. 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.

2. 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.

Question 64

1231 property or business asset

1. Ordinary
2. Capital
3. Sec 1231

Answer 64

1.INVENTORY AND ACCOUNTS/NOTES RECEIVABLES = ORDINARY ASSETS, Less than 1 year = Ordinary assets

2. SEC 1231 - Depreciable assets used in a trade/business owned for more than 1 year =1231 assets

3.

Question 65

Premium on disability incurance do not qualify for

Answer 65

Med expense

Question 66

SCHOLARSHIP TAXABLE if

Answer 66

stipend received for research services required by the scholarship.

Question 67

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.

Answer 67

Calc

Beg AAA
+Ordinary business income
+Dividend Income
+STCG
+Charitable contributions
_____________________________
ENding AAA

Pass-through losses can reduce loan basis but DISTRIBUTIONS do not.

Question 68

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 ___________

Answer 68

capital gains and losses , such is separately stated

Question 69

Distribution always reduce BASIS Before __________

Answer 69

LOSSES

Question 70

1 USD =

FBAR = use 12/31 rate
Maximum balance during the year

Answer 70

Foreign currency/Exchange rate

Question 71

Items included in Articles of Incorporation

Answer 71

1. Corp’s name
2. Nature and purpose (of corp’s business)
3. Term of the corp (or indefinite duration)
4. Name and address of each incorporator
5. Capitalization (i.e. equity structure_
6. Initial Board members
7. Registered agent in the state

Question 72

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

Answer 72

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 voluntarity 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 3 consecutive years and accumulated E&P from C corp years - causes revocation - 1st day of 4th fourth year

When SHAREHOLDING in an S-corp is less than a year, income is allocated on daily basis

Question 73

COrporations are created under state laws that require filing articles of incorporation with the proper state authority (e.g. secretary of state).

Question 74

FULLY DISCLOSED - PRINCIPAL ONLY
PARTIALLY DISCLOSED - BOTH PRINCIPAL AND AGENT Liable
UNDISCLOSED - Agent ONLY is responsible, Principal must indemnify agent

Question 75

Adoption credit

Answer 75

CF 5 years

Question 76

Voidable COntract - by 1 party

1. Duress (social or economic threat)
2. Undue influence
3. Misrepresentation of a material fact
   (unintentional misrepresentation, fraud in the inducement)
4. Mistake
5. Lack of capacity

Answer 76

VOid contracts - Cannot be enforced

1. Extreme duress
2. Fraud in the execution
3. Illegal subject matter
4. Incompetent party
5. Unconscionability

Question 77

PArtnership

Answer 77

Nature of loss is maintained as ordinary loss coz it passes through to the partners

Question 78

Exempt org can be in the form of __________

Answer 78

corporation or trust

Question 79

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 .

Answer 79

Short term held donated property - use amount as lower of the two (Adjusted basis vs. SP)

LT - FMV

Question 80

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

Answer 80

1. More than 50% of the outstanding stock must be owned by 5 or fewer individuals during the latter half of the year
2. 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.