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REG CPA > REG CPA TAX > Flashcards

REG CPA TAX Flashcards

1
Q

REG TAX

How is shareholder basis calculated for a new interest in a Corporation?

A

Adjusted basis of property transferred + Gain recognized (if less than 80% ownership) - Boot received = Shareholder basis. If shareholders have 80% control after a property transfer, no taxable event occurs. If liabilities exceed basis on contributed property to a Corporation, a gain is recognized.

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2
Q

REG TAX

How is shareholder basis calculated for a TRANSFEROR of an interest in a Corporation?

A

Transferor’s basis
+ Gain recognized by shareholder
= Basis

OR

FMV of Corporate Interest
- Adjusted basis of property
= Gain

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3
Q

REG TAX

What basis do shareholders and Corporations use for property?

A

They both use ADJUSTED BASIS, NOT FMV of property.

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4
Q

REG TAX

Describe how loss is taken on Section 1244 small business Corporation stock?

A

A loss on worthless stock is an ordinary loss.

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5
Q

REG TAX

What are the requirements for taking an ordinary loss on Section 1244 small business Corporation stock?

A

Taxpayer must be original stock owner, and either an individual or partnership

$50k (single) or $100k (MFJ) limit - remainder is a capital loss

Must have been issued in exchange for money or property (not exchanged for services)

Shareholder equity must not be in excess of $1 million

Both common and preferred stock is allowed

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6
Q

REG TAX

What are the basic rules for filing a form 1120?

A

Return is due regardless of income level

Return is due 3/15 if on a calendar year basis, or 2 1/2 months after end of fiscal year

An automatic six-month extension is available

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7
Q

REG TAX

When are Corporate federal tax estimated payments required, and how are they calculated?

A

Required if more than $500 in tax liability expected, or

100% current year liability

100% previous year liability

Note: If Corporation had more than $1 Million in revenue the previous year, the first estimated payment must be based on the previous year and the remainder based on the current year.

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8
Q

REG TAX

Describe the AMT calculation for C-Corporations

A 
Taxable Income
\+Tax Preference Items
\+/- Adjustments
= Pre-ACE
\+/- ACE Adjustments
= AMTI
- 40,000 Exemption
= Tax Base
x 20%
= Tentative Minimum Tax
- Regular Tax Liability
= AMT
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9
Q

REG TAX

What are the pre-ACE adjustments for C-Corporation tax AMT calculations?

A

Real Estate purchased between 1986 and 1999 using Straight Line Depreciation must depreciate over a useful life of 40 years

Personal Property - use 150% MACRS, not 200%

Construction must use % completion method

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10
Q

REG TAX

What are the ACE adjustments in the C-Corporation AMT tax calculation?

A

Municipal Bond Interest
Life Insurance Proceeds
70% Dividends Received Deduction
Organizational Expenditures must be capitalized, not amortized

Note: AMT paid gets carried forward indefinitely, but never carried back

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11
Q

REG TAX

When are C-Corporations exempt from AMT?

A

In year one

In year two, if year one gross receipts were less than $5 Million

In year three, if the average gross receipts for years 1 and 2 were less than $7.5 Million

In year four and beyond, if the average from the previous 3 years is less than $7.5 Million

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12
Q

REG TAX

How are gains and losses handled with respect to a Corporation’s transactions involving its own stock?

A

Corporations have no gain/(loss) from transactions involving their own stock, including Treasury Stock.

If Corporation gets property in exchange for stock, there is no gain/(loss) on the transaction.

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13
Q

REG TAX

How are Corporate organization costs handled?

A

Amortization of costs begin the month the Corporation commences business activity

If the Corporation doesn’t amortize organization costs in year one, they can never be amortized

Costs associated with offerings are neither deductible nor amortized

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14
Q

REG TAX

How are a C-Corporation’s deductible charitable contributions calculated?

A

Sales -COGS= Gross Profit
Gross Profit + Rent, Royalties, Gross Dividends, Capital Gains
=Total Income
Total Income - Deductions (No charitable contributions, Dividends
Received Deductions (DRD), or NOL Carrybacks allowed)
- NOL Carryforwards
=Taxable Income before charitable contributions, DRD, NOL Carrybacks
x 10%
=Deductible Charitable Contributions

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15
Q

REG TAX

How are excess charitable contributions treated in a C-Corporations?

A

Excess charitable contributions get carried forward 5 consecutive years (No Carryback)

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16
Q

REG TAX

When can a board of directors authorize charitable contributions for a tax year?

A

The Board of Directors can authorized charitable contributions up to 3/15 and have them count in the previous tax year

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17
Q

REG TAX

How is the dividends received deduction (DRD) calculated, and what are the limitations?

A

80% Interest = 100% DRD

20-79% = 80% DRD

less than 20% = 70% DRD

Only allowed if no consolidated return is filed. Qualified dividends from domestic Corporations only.

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18
Q

REG TAX

What is the Dividends Received Deduction (DRD) calculation when there is a loss from operations?

A

Only take DRD % x Taxable Income

Note: If DRD brings a loss situation, then you can take the full DRD

If Taxable Income remains after DRD, only a partial DRD (T.I.. x DRD %) is allowed

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19
Q

REG TAX

How are Corporate losses on a sale to a Corporation where a taxpayer owns a 50% or more interest handled in a C-Corporation?

A

A loss on a sale to a Corporation where taxpayer owns a 50% or more interest is disallowed

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20
Q

REG TAX

How are capital losses handled in a C-Corporation?

A

Capital Losses are deductible only to the extent of Capital Gains

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21
Q

REG TAX

How are net short term capital gains taxed in a C-Corporation?

A

Net Short Term Capital Gains are taxed at ordinary income rates

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22
Q

REG TAX

How are Corporate losses carried back/forward?

A

Corporations can carry back losses 3 years and carry forward losses 5 years as a Short Term Capital Loss

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23
Q

REG TAX

How are bad debt losses handled in a Corporation?

A

Bad debt losses are classified as ordinary

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24
Q

REG TAX

What is the casualty loss floor for a C-Corporation?

A

No floor on Corporate casualty loss like there is with an individual taxpayer

If destroyed, the loss is the property’s basis (minus proceeds)

Calculation: Adjusted basis - Proceeds from Insurance = Loss

If partially destroyed, take the lesser of FMV or adjusted basis reduction (minus proceeds)

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25
Q

REG TAX

How are net operating losses handled in a C-Corporation?

A

If loss includes NOL Carryforward, reduce the loss (add back the amount) to get the loss without the Carryforward

Then, carry back the NOL 2 years starting with the earliest year and reduce the taxable income there and then move to the most recent year

Any leftover NOL = This year’s NOL

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26
Q

REG TAX

How is investment interest expense handled in a C-Corporation?

A

Unlike individual taxation, investment interest expense is not limited to investment income.

Investment interest on tax-free investments are NOT deductible.

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27
Q

REG TAX

What is the purpose of Schedule M-1 on a Corporate tax return? Which items are included?

A

Schedule M-1 reconciles book to tax income before Net Operating Loss/Dividend Received Deduction

Includes permanent differences (such as tax-exempt interest and non-deductible expenses) and temporary differences (accelerated depreciated tax depreciation, straight-line, etc.)

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28
Q

REG TAX

What is the purpose of Schedule M-2 on a Corporate tax return? How is it calculated?

A

Reconciles beginning to ending retained earnings

Beginning Unappropriated Retained Earnings
+ Net Income
+ Other Increases
- Dividends paid
- Other decreases
= Ending Unappropriated Retained Earnings

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29
Q

REG TAX

What is the purpose of Schedule M-3 on a Corporate tax return?

A

Like M1, but for Corporations with $10M+ in assets

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30
Q

REG TAX

How are affiliated (80%) Corporation tax returns handled?

A

Consolidation election is binding going forward

Dividends between them are eliminated, Advantage- Gains are deferred, Disadvantage- losses are deferred.

One AMT exemption

One accumulated earnings tax allowed

Note: In order to consolidate, the parent must have 80% voting power and own 80% of the stock value

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31
Q

REG TAX

How are Corporate distributions to shareholders handled?

A

Distribution is a dividend to the extent of current accumulated earnings and profits (ordinary income)

Then, remainder (if any) is a return of basis. Then, add’l remainder (if any) is a Capital Gain

Distribution amount = FMV of Property + Cash - Liability Assumed

Shareholder basis = FMV of Property + Cash received (basis not reduced by the attached liability)

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32
Q

REG TAX

What is the order of treatment in a Corporation’s distribution to a shareholder?

A
  1. Distribution is a dividend to the extent of current and accumulated earnings and profits
  2. Shareholder basis is then exhausted
  3. Remainder, if any, is a Capital Gain
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33
Q

REG TAX

What is the basic calculation for accumulated earnings and profits in a Corporation?

A

Beginning Accumulated Earnings and Profits
+ Net Income
+ Gain on Distribution (if not already in book income)
- Distribution (but cannot create a deficit)
- NOL of prior years
= Ending Accumulated Earnings and Profits

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34
Q

REG TAX

What is the treatment of a gain in a complete Corporate liquidation?

A

If Capital Property, then Capital Gain

If Non-Capital Property, then Ordinary Income

Gain characterization is the same for both the Corporation and the shareholder

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35
Q

REG TAX

What is the treatment of a loss in a complete Corporate liquidation?

A

Corporation: Depends on if property is capital in nature, otherwise ordinary loss

Individual: capital loss only

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36
Q

REG TAX

What is the treatment of the liquidation of a subsidiary?

A

No G/L to parent company

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37
Q

REG TAX

What is a consent dividend? How is it treated?

A

Consented by the Board of Directors but not yet paid

Treat as if distributed by the end of the year

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38
Q

REG TAX

Describe the requirements for a personal holding company.

A

No banks or financial institutions can be PHCs

5 or fewer individuals own more than 50% of the stock

60% of the PHC’s income must be from passive means

PHC tax is self-assessing - 20% tax rate on undistributed PHC Income

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39
Q

REG TAX

How is Corporate accumulated earnings tax (AET) different from PHC taxation?

A

Not Self-Assessing like a PHC

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40
Q

REG TAX

How is the accumulated earnings credit calculated for a Corporation?

A

Take greater of $250,000 ($150,000 for Service Corps) or the legitimate balance based on future needs (i.e. purchasing a building)

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41
Q

REG TAX

What are the requirements for holding S-Corporation status?

A

Only individuals, estates and trusts can be shareholders

Domestic only, no international S-corps or foreign shareholders

Up to 100 shareholders allowed, and only one class of stock allowed

Calendar tax year only

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42
Q

REG TAX

How is an S-Corporation election made?

A

Election for S Corp status must be made by 3/15 and counts as being an S Corp since the beginning of the year

To make election, 100% of the shareholders must consent

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43
Q

REG TAX

How is an S-Corporation terminated?

A

To terminate election, 50% of the shareholders must consent

No S Corp election allowed for 5 years after termination

S Corp termination effective immediately following an act that terminates status

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44
Q

REG TAX

What items are not included in calculating an S-Corporation’s ordinary income?

A

These items are included on Schedule K, not in ordinary income:

Foreign Taxes paid deduction
No Investment Interest expense
Section 179 Deduction 
1231 Gain or Loss
Charitable Contributions
Portfolio Income (dividends or interest)
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45
Q

REG TAX

How is S-Corporation shareholder basis calculated?

A

Beginning Basis
+Share of Income Items (including non-taxable income!)
-Distributions (cash or property)
-Non-deductible expenses
-Ordinary Losses (but don’t take income below zero)
= Ending basis

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46
Q

REG TAX

What is the formula for an S-Corp Built-in Gains Tax?

A

FMV of Assets @ S-Corp Election Date - Adjust. Basis of Assets = Built-in Gain x 35% Corporate Rate

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47
Q

REG TAX

How is Gift taxation different from Estate taxation?

A

Property transferred while taxpayer is living

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48
Q

REG TAX

What is the annual exclusion amount for a taxpayer’s Gift taxation? What is required to get the exclusion?

A

$14,000 per year per spouse to each individual

In order to get the exclusion, the recipient must immediately acquire a present interest in the property and get unrestricted access to the property and all of its benefits

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49
Q

REG TAX

If a Gift is an annuity, what value is used for the Gift?

A

If the Gift is an annuity, use Present Value to determine the gross Gift

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50
Q

REG TAX

What is the basic Gift tax calculation?

A

Gross Gifts
- 1/2 of Gifts (treated as given by spouse)
- Total # of donees x $14,000 exclusion
= Taxable Gift

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51
Q

REG TAX

How is a Gift taxed if a recipient gains a future ownership in the Gifted property?

A

Recipient must gain ownership and all rights to property to get the annual exclusion. If recipient merely gains a future ownership, then the present value of the Gift is 100% taxable to donor and cannot exclude from Gift tax calc

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52
Q

REG TAX

What are the deductions for Gift tax, besides the annual exclusion?

A

Tuition and medical expenses paid directly to the provider organization (note: NOT books or dorm fees)

Political contributions

Charitable Gifts

Unlimited Gifts to spouse

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53
Q

REG TAX

What is the basis of Gifted property for the recipient?

A

If a loss on sale, basis is FMV on the date of the Gift

If a gain on sale, basis is same as donor’s basis

No G/L if donor basis is less than sales price, and sales price is less than FMV @ Gift date

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54
Q

REG TAX

How/when are Gift tax returns filed?

A

Calendar-year basis only

Due April 15

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55
Q

REG TAX

What are the basic characteristics of complex Trust?

A

Income distributions are optional
Accumulation of income ok
Charitable contributions ok
Contributions using tax-exempt income are not deductible
Allowed personal exemption of $100

Key Point: Distribution of Trust corpus (principal) ok

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56
Q

REG TAX

What are the basic characteristics of a Simple Trust?

A

Income distributions mandatory

Accumulation of income disallowed

No charitable contributions

Distribution of Trust corpus DISALLOWED

Allowed personal exemption of $300

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57
Q

REG TAX

How are Net Operating Losses handled in a Trust?

A

Trusts can have a Net Operating Loss

Any unused NOL flows through to the beneficiaries

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58
Q

REG TAX

How are expenses and fees related to tax-exempt income handled in a Trust?

A

Expenses and fees from tax-exempt income are not deductible for either a Complex or Simple Trust

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59
Q

REG TAX

When is property transferred in an Estate?

A

After the death of the donor

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60
Q

REG TAX

What amount of a decedent’s Estate is exempt from Estate Tax?

A

The First $5,430,000 is exempt with a 40% tax on amount above that

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61
Q

REG TAX

How are a decedent’s medical expenses handled with respect to an Estate?

A

Medical expenses paid after death, but incurred within 1 year of death go on decedents personal tax return

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62
Q

REG TAX

How is an Estate’s NOL handled?

A

Estates can have a Net Operating Loss

Any unused NOL flows through to the beneficiaries

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63
Q

REG TAX

What does a gross Estate consist of?

A

Cash and Property FMV at death, or alternate valuation.

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64
Q

REG TAX

What is joint tenancy with respect to an Estate? How is it calculated?

A

When two non-spouses jointly own property

FMV at death X % Ownership = Amount in Estate

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65
Q

REG TAX

What is tenancy by entirety?

A

1/2 of marital assets go to deceased spouses Estate

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66
Q

REG TAX

What is tenancy in common in an Estate?

A

A, B, and C own property

If A dies, FMV of As share goes to heirs

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67
Q

REG TAX

How is Estate tax handled with respect to a beneficiary?

A

Property received through inheritance not income to recipient

Property value is FMV at date of death or 6 months later

If property is sold prior to 6 month date and the alternative date is used, FMV at date of sale is used to value property

Basis in property automatically assumes LT holding period

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68
Q

REG TAX

What is distributable net income (DNI)?

A

DNI = Taxable Income Expenses (from income production)

Trust beneficiaries only pay tax if earnings are distributed

Estate beneficiaries pay tax on DNI, regardless if distributed

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69
Q

REG TAX

When must a tax exempt organization file a 990-T for Unrelated Business Income?

A

If a tax exempt organization has more than $1,000 of UBI, it must file a Form 990-T

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70
Q

REG TAX

What are the requirements for a 501(c)3 organization?

A

Organized and Operated exclusively for exempt purposes

No earnings can benefit an individual or private shareholder

Cant attempt to influence legislation as a major part of its activities

Cant campaign politically

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71
Q

REG TAX

Under what accounting basis are individual tax returns prepared?

A

Cash Basis. Note: This basis is NOT allowed for Corporations, Partnerships with a C-Corp partner, or for inventories.

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72
Q

REG TAX

What are the deductions to arrive at Adjusted Gross Income (AGI) for individuals?

A

*MSA/HSA contributions
*Investment penalties for early withdrawal
*Self-employed medical insurance premiums
*Self-Employment Tax (approx. 50%)
*IRA Contributions
*Student loan interest (can’t be another taxpayer’s dependent)
*Moving expenses
*Alimony
*Attorney fees in discrimination lawsuit

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73
Q

REG TAX

Which items can be carried over to future years on an individual tax return?

A

Investment interest expense in excess of investment income
Charitable contributions
Excess Section 179
Capital losses
AMT Paid
Passive Activity Losses

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74
Q

REG TAX

Characterize the following carryover: Passive Activity Loss

A

No carryback

Can carry forward indefinitely

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75
Q

REG TAX

How is excess 179 expense carried forward?

A

Carry forward to next year.

Use in any year is limited to taxable income.

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76
Q

REG TAX

How long can investment interest expense in excess of investment income be carried forward?

A

Indefinitely.

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77
Q

REG TAX

How long is the carry forward for charitable contributions?

A

Can be carried forward 5 years.

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78
Q

REG TAX

How long is AMT paid carried forward, and how is it applied?

A

It can be carried forward indefinitely.

It may be applied against future regular income tax, but not against future AMT tax liability.

79
Q

REG TAX

How are capital losses applied in individual taxes?

A

$3,000 net capital loss can be taken in each year, the rest is carried forward indefinitely.

The loss retains its character (STCL or LTCL).

80
Q

REG TAX

How does an individual capital loss carryover differ from a corporate capital loss carryover?

A

Corporate capital loss carryovers may be carried back 3 years and forward 5 years. Individual capital losses are carried forward indefinitely.

Individual capital loss carryovers retain their character (STCL or LTCL). Corporate loss carryovers are carried forward as STCL only.

81
Q

REG TAX

What ratio is applied to principle payments in an installment sale to determine the gain in a given year?

A

Gross Profit / Contract Price

82
Q

REG TAX

What is the contract price in an installment sale for income tax purposes?

A

Contract Price = Sales Price - Liability assumed by buyer

83
Q

REG TAX

On an individual return, regular mortgage interest on what loan amount is deductible?

A

$1,000,000

84
Q

REG TAX

Interest on home equity loans up to what amount are deductible on an individual tax return?

A

$100,000

85
Q

REG TAX

What business gift amounts are deductible on Schedule C of form 1040? What amount for service awards?

A

$25 per person for gifts

Service awards up to $400

86
Q

REG TAX

What income can business losses offset on a 1040?

A

They may only offset active business income.

Note: W2 wages are considered active business income.

87
Q

REG TAX

What income can passive losses offset on a 1040?

A

Only passive income such as rental income or limited partnership income.

Note: Wages are ACTIVE (cannot be offset by passive) and Interest/Dividends are PORTFOLIO (cannot be offset by passive)

88
Q

REG TAX

Are interest and dividends active or passive income?

A

Neither. They are portfolio income.

89
Q

REG TAX

What is (are) the depreciation convention(s) for personal property?

A

Mid-year/Mid-quarter

90
Q

REG TAX

When is the mid-quarter convention used?

A

For depreciation when 40% or more of all purchases occur in 4th quarter.

91
Q

REG TAX

What depreciation convention is used for real property?

A

Mid-month

92
Q

REG TAX

What depreciation life and convention are used for leasehold improvements?

A

15 year straight line (S/L)

93
Q

REG TAX

What amount of business start-up costs can be deducted? How is it expensed?

A

Up to $5,000

Amortized over 180 months

Reduced dollar-for-dollar by amount over $50,000

94
Q

REG TAX

How are medical expenses deducted on a 1040?

A

On Schedule A:

Amounts in excess of 10% of AGI may be deducted

95
Q

REG TAX

Which personal insurance premiums are not deductible as medical expenses on Schedule A?

A

Accident or disability insurance premiums are not deductible.

96
Q

REG TAX

Under what circumstances can medical expenses paid on behalf of another be deducted on someone’s Schedule A?

A

Must be a citizen of North America

Must live with you, or if they do not, must be mother/father or a relative closer than a cousin.

Benefactor must provide more than 50% support to the beneficiary.

97
Q

REG TAX

Which foreign taxes are deductible?

A

Foreign INCOME and REAL ESTATE taxes are deductible.

Foreign personal property taxes are NOT deductible.

Foreign tax assessments are not deductible- they are added to the basis.

98
Q

REG TAX

How is net investment income calculated, for the purpose of deducting excess investment interest expense?

A

Gross investment income - investment expense in excess of 2% of AGI = net investment income

Investment interest expense in excess of net investment income is deductible.

99
Q

REG TAX

What investment interest is never deductible?

A

Investment interest expense on tax-free securities is not deductible.

100
Q

REG TAX

When are mortgage points deductible and how are they deducted?

A

They are deductible if they represent prepaid interest on purchase of a new home or improving a home.

Refinance points are amortized over the life of the mortgage.

101
Q

REG TAX

How are charitable contributions of LTCG property and property related to a charity’s function deducted?

A

Deducted at fair market value (FMV), up to 30% of AGI

102
Q

REG TAX

How are charitable donations for STCG property and property not related to the charity’s function deducted on Schedule A?

A

Deduction is taken for adjusted basis in the property, up to 50% of AGI.

103
Q

REG TAX

Does a casualty loss affect the basis of property?

A

No. It decreases the fair market value (FMV) of the property.

104
Q

REG TAX

How is the deductible portion of a casualty loss calculated?

A

Take the lower of either A) Decrease in FMV or B) Basis in property (call this number GROSS LOSS)

GROSS LOSS - insurance proceeds received - $100 - 10% of AGI = Deductible casualty loss

105
Q

REG TAX

What are the miscellaneous deductions on Schedule A, and how are they deducted?

A

Deductible in excess of 2% of AGI

Continuing Education - if required to keep your job
Business travel
50% Meals and entertainment
Union Dues
Tax prep fees
Legal fees to collect alimony
Appraisal fees to value casualty loss of charitable contributions

106
Q

REG TAX

Which itemized deductions are not subject to phaseout based on income or other factors?

A

Medical
Casualty
Gambling
Investment Interest Expense

107
Q

REG TAX

Define qualifying child for most individual tax factors.

A

Must be resident of North America

Under age 19, or under age 24 if a student

108
Q

REG TAX

Define qualifying relative for most individual tax factors?

A

Must be citizen of North America

Must live with you, unless mother/father or relative closer than a cousin

You must provide more than 50% support to the individual

109
Q

REG TAX

How is minor income taxed at a parent’s rate calculated (AKA kiddie tax)?

A

Child’s unearned income
- early withdrawal penalties
- $1,050
- Greater than $1,050 or child’s itemized deduction related to unearned income
= Amount taxed at parents’ rate

110
Q

REG TAX

Can spouses married filing jointly use different accounting methods?

A

Yes, if they each own a small business. All non-business income is cash basis.

111
Q

REG TAX

At what rate is self-employment tax assessed?

A

15.3% of net earnings from self-employment

(Note: executor of an estate is NOT self-employment income)

112
Q

REG TAX

What is a refundable tax credit? Which individual tax credits are most commonly refunded?

A

A tax credit which takes the taxpayer’s tax owed on the return below zero, resulting in a refund to the taxpayer.

Earned Income Credit (EIC), American Opportunity Credit and the Additional Child Tax credit.

Note: the REGULAR child tax credit is NOT refundable.

113
Q

REG TAX

How many education credits may be taken on a tax return?

A

American Opportunity Credit - per student

Lifetime Learning Credit - per taxpayer

Note: The American Opportunity Credit is refundable.

114
Q

REG TAX

What estimated tax payments must be paid in by an individual taxpayer either via withholding or by quarterly tax payments?

A

The lesser of:

90% of current year’s total tax

100% of prior year’s total tax

110% of prior year’s total tax (if AGI is $150,000 or more)

115
Q

REG TAX

Which farming costs related to land are deductible? Which aren’t?

A

Deductible: Costs incurred to PRESERVE soil/water

Non-deductible: Costs incurred to drain wetlands or prep for irrigation (i.e. improve land)

116
Q

REG TAX

Which depreciation table is used for personal tangible property related to farming?

A

MACRS 150

117
Q

REG TAX

How long does the taxpayer have to petition the court for appeal after an audit?

A

90 days

118
Q

REG TAX

If no petition to appeal is filed, how long does a taxpayer have to pay tax due after an audit?

A

10 days

119
Q

REG TAX

What is the statute of limitations for a tax audit?

A

3 years, generally

6 years if 25% or more of gross income was omitted

The clock starts on the LATER of the due date or the filing date of the return.

There is NO STATUTE OF LIMITATIONS for either fraud or failure to file a required return.

120
Q

REG TAX

How long does an individual taxpayer have to file a claim for refund?

A

Refunds must be claimed within 3 years of the return due date or within 2 years of being paid, whichever is later.

121
Q

REG TAX

When are life insurance premiums of an employee includable in income?

A

Premiums paid by an employer for coverage in excess of $50,000 per employee are includable in income.

122
Q

REG TAX

When are scholarships not taxable?

A

When they are not in return for services rendered,

AND

The money is used only for tuition and books

Note: Scholarships for room and board are includable in income.

123
Q

REG TAX

What interest income is tax free?

A

State & municipal bond interest

US EE Savings Bond interest (note: HH bond interest is taxable)

124
Q

REG TAX

Which dividend income is tax free?

A

S-corporation (actually distributions)

Life insurance

125
Q

REG TAX

How much social security income can be taxed for individuals in higher income brackets?

A

Up to 85%

126
Q

REG TAX

Is unemployment compensation taxable?

A

Yes.

127
Q

REG TAX

Which damages awarded in lawsuits are taxable? Which are not?

A

Payments made to make you whole are NOT taxable (i.e. to pay for losses of property, body parts or earning ability)

Any payments for punitive damages ARE taxable.

128
Q

REG TAX

Are workman’s compensation insurance benefits taxable?

A

No - similar to an award for damage to make a person whole.

129
Q

REG TAX

Which of the following are taxable: Child Support, Divorce Property Settlements, Alimony

A

Alimony IS taxable.

Child support and divorce property settlements are NOT taxable.

130
Q

REG TAX

Adoption expenses - Are they deductible?

A

NO, they are not deductible. However tax benefits are available through the adoption CREDIT.

131
Q

REG TAX

Describe alimony recapture.

A

2nd Year: (3rd year - 2nd year - $15,000)

1st Year:
1st Year Alimony Paid
- Avg alimony paid in 2nd & 3rd years
- $15,000
- Recapture from 2nd year
=1st Year Alimony Recapture

Total Recapture = 1st Year Recapture + 2nd Year
Recapture

132
Q

REG TAX

How are Net Operating Losses (NOLs) utilized?

A

Can be carried back 2 years

If any left, can be carried forward 20 years.

133
Q

REG TAX

Which IRA contributions are deductible?

A

Traditional IRA = deductible

Roth IRA = not deductible

134
Q

REG TAX

When can a couple file married filing jointly?

A

They must be married at the end of the year.

If one spouse dies, they must be married at the end of the year.

135
Q

REG TAX

What are the requirements for filing as Head of Household?

A

Must have a dependent child

Must provide more than 50% of the child’s support

Must live with them more than 50% of the year

136
Q

REG TAX

What are the requirements for filing as qualifying widower?

A

Must have a dependent child.

Essentially gets MFJ status for the year of death + 2 tax years

137
Q

REG TAX

What is the Interstate Income Act of 1959?

A

Restricts a state’s authority to tax interstate commerce

138
Q

REG TAX

What are the principles of the Interstate Income Act of 1959?

A

A state can’t collect income tax on sales within its borders as long as the orders are filled and shipped outside of the state

Applies to tangible property only

Does not protect a Corporation in the state where incorporated

Does not protect from taxes using metrics other than income (Ex: Sales Tax)

139
Q

REG TAX

What is the Uniform Division of Income for Tax Purposes Act (UDITPA)?

A

Uniform criteria for determining taxable income of multi-state corporations

Also known as the Multi-State Tax Compact

140
Q

REG TAX

What are the basic principles of UDITPA?

A

Designed to ensure a company is not taxed more than once on its income

Forces a corporation to segregate Business Income from Non-Business Income

141
Q

REG TAX

What is considered Business Income?

A

Part of the corporation’s regular course of business

Includes acquisition of tangible and intangible property if such activities are part of the regular trade or business

142
Q

REG TAX

True or false? Partnerships are a taxable entity.

A

False. Income and expenses flow through to the partner to be taxed via a
Form K-1.

143
Q

REG TAX

When exchanging property for a partnership interest; how is gain or loss recognized?

A

Neither gain nor loss is recognized in an exchange of property for a partnership interest. It is a non-taxable event.

144
Q

REG TAX

What is a partner’s basis in partnership property?

A

Initial basis for partnership property is the basis of the property that was contributed or exchanged for the partnership interest.

145
Q

REG TAX

When services are exchanged for a partnership interest; how is this treated for tax purposes?

A

It is a taxable event; treated the same as compensation for the services. The taxable income equals the % of partnership interest received times the FMV of the partnership.

i.e. the FMV of the interest received is the taxable income for the service provider.

146
Q

REG TAX

What is the partner’s basis in a partnership when they provide a service in exchange for the interest?

A

The basis in the partnership interest is the amount of taxable service revenue provided by service provider.

147
Q

REG TAX

What is the holding period of an asset that has been contributed to a partnership?

A

The partnership inherits the holding period of the asset contributed.

The exception of inventory- the holding period begins when contributed.

148
Q

REG TAX

What is the tax treatment of startup costs for a partnership?

A

Tax treatment is the same as that of an individual taxpayer.

However syndication fees are not deductible or amortized.

149
Q

REG TAX

What deductions are subtracted from gross revenues to arrive at partnership income?

A

COGS
Wages - except for partners
Guaranteed payments to partners
Business bad debt (if on accrual basis)
Interest paid
Depreciation (except section 179)
Amortization (Startup costs; goodwill; etc)

150
Q

REG TAX

How are partnership losses taken on an individual’s return?

A

Losses cannot be taken beyond a partner’s basis in the partnership

Losses in excess of basis are carried forward until basis is available

151
Q

REG TAX

When are guaranteed payments to a partner includable in taxable income?

A

They appear in partner’s income during the year in which the partnership’s fiscal year CLOSES.

152
Q

REG TAX

How are partner benefits paid by the partnership treated?

A

Health insurance; life insurance and other benefits paid on behalf of the partner are treated as guaranteed payments and are includable as self-employment income.

153
Q

REG TAX

How is net self-employment income from a partnership interest calculated?

A

Partner’s % share of ordinary income from partner’s K-1
+ Guaranteed payments
- Partner’s % share of section 179 expense from K-1
= Self-employment income (subject to SE tax)

154
Q

REG TAX

In general; what is a partner’s basis in partnership property purchased?

A

Partner’s basis is basis of goods exchanged or for services exchanged is FMV of partnership interest received.

If purchased; purchase price less liabilities incurred = basis.

For a gifted interest in a partnership; gift basis rules apply.

155
Q

REG TAX

Which items are not deductible on Schedule K of form 1065?

A

Foreign tax paid
Investment interest expense
Section 179 expense
Charitable contributions

Mnemonic: IFC179

156
Q

REG TAX

Which items are not counted as income on Schedule K of form 1065?

A

Passive Income
Portfolio Income
1231 Gain or Loss

Mnemonic: PP1231

157
Q

REG TAX

How is adjusted partnership basis calculated?

A

Beginning partnership basis
+ Capital contributions
+ Share of ordinary partnership income
+ Capital gains
+ Tax-exempt partnership income (DON’T FORGET!)
= Ending partnership basis

158
Q

REG TAX

What items DECREASE partnership basis?

A

Money distributed
Adjusted basis of property distributed
Partners’s share of ordinary losses
Partnership is relieved of a liability (considered a distribution)

159
Q

REG TAX

What INCREASES partnership basis?

A

Partnership getting a loan
Capital contributions
Ordinary income
Capital gains
Tax-exempt income

160
Q

REG TAX

How do liabilities either INCURRED or RELIEVED affect a partner’s basis in a partnership?

A

If the partnership gets a loan; this INCREASES basis.

If partnership is relieved of a liability; this DECREASES basis.

161
Q

REG TAX

How do guaranteed payments affect partnership basis?

A

They do not affect basis- they are already included in ordinary income; which affects basis.

162
Q

REG TAX

What is the order in which basis is adjusted in a partnership?

A
  1. Increase basis (all items; including tax-exempt income)
  2. Distributions
  3. Losses (limited to basis)
163
Q

REG TAX

How is the taxable year of a partnership determined?

A

It must be the same as 50% of the partners and use the same tax year for 3 years once adopted.

164
Q

REG TAX

How does death of a partner affect the partnership’s taxable year?

A

The taxable year closes with respect to the decedent partner’s interest ONLY.

165
Q

REG TAX

When CAN’T a partnership use cash basis?

A
  1. They have inventories
  2. Partnership is a tax shelter
  3. Has a corporate partner
  4. Gross receipts are $5 Million or more

Exception: If gross receipts are $1 Million or LESS and Partnership maintains inventories; Cash method is ok.

166
Q

REG TAX

When does a partnership terminate?

A

When there is less than 2 partners (only one partner)

When 50% of the partnership interests sell within a 12 month period- partnership IMMEDIATELY terminates.

167
Q

REG TAX

How is gain or loss on sale of a partnership interest calculated?

A

Gain or Loss = Amount realized on sale - basis in partnership interest

168
Q

REG TAX

What is the new basis of a partnership interest sold?

A

Basis = Capital account + Liabilities assumed

169
Q

REG TAX

How is the sale of non-capital partnership property treated?

A

As ordinary gain/loss.

Items that fall into non-capital category would be unrealized receivables; appreciated inventory; and similar.

170
Q

REG TAX

How is a partner’s share of an ordinary gain calculated?

A

FMV of Assets (non-capital)
- Adjusted basis of assets
= Ordinary gain
x Partner’s % interest
= Partner’s share of gain

Note: No gain or loss will be recognized by a partnership upon distribution of property.

171
Q

REG TAX

What is the order of basis reductions for distributions from a partnership?

A
  1. Money distributed
  2. Adjusted basis of unrealized receivables and inventory
  3. Adjusted basis of other property

Note: Only MONEY distributions will trigger a gain in a partnership distribution.

172
Q

REG TAX

When can a LOSS occur in a partnership distribution?

A

Only in a liquidating distribution.

173
Q

REG TAX

What are the requirements for recognizing a gain in a partnership liquidating distribution?

A
  1. Money was distributed
  2. Unrealized receivables were distributed
  3. Appreciated inventories were distributed

Otherwise; no loss recognized.

174
Q

REG TAX

What is the basic calculation for basis in property?

A

Cost of property + Purchase expenses + Debt assumed + Back taxes and interest paid = Basis. Note: taxes and interest related to time when a taxpayer did not own the property are not deductible - they are added to basis.

175
Q

REG TAX

What is the recipient or donee’s basis on gifted property?

A

Sold at a gain: use donor’s basis

Sold at a loss: use lesser of donor’s basis or FMV at time of distribution

Sold in between donor’s basis and FMV: No gain or loss

176
Q

REG TAX

What is the basis and holding period of inherited property?

A

FMV at date of death or alternate valuation date (6 months later)

If alternate date is elected by property is sold before 6 month window; use FMV at date of death.

Property inherited is LTCG property regardless of how long it is held by the recipient.

177
Q

REG TAX

What is the holding period on a stock dividend?

A

Holding period of new stock received from a dividend takes on the holding period of the original stock

178
Q

REG TAX

What property is eligible for like-kind exchange treatment?

A

Real for real or personal for personal business property only

US property only

179
Q

REG TAX

What is BOOT in a like-kind exchange?

A

Cash received + unlike property received + liability passed to other party

180
Q

REG TAX

In a like-kind exchange; how is it handled if a netting of mortgages results in net boot paid?

A

DO NOT subtract the boot paid amount from the cash received

Ignore the boot paid amount from the mortgage completely

181
Q

REG TAX

What is an involuntary conversion? When does it not result in a gain?

A

Occurs when you receive money for a property involuntarily converted

There is no gain if you reinvest the proceeds completely

If proceeds not completely reinvested; gain is LESSER of realized gain or amount not reinvested.

182
Q

REG TAX

What are the requirements for exclusion of gain on a primary residence? How are losses treated?

A

Must live there 2 out of 5 years

Loss on sale of home is NOT deductible

183
Q

REG TAX

What is a wash sale?

A

30 Day rule applies

Disallowed loss adds to basis of new stock

New stock takes on date of acquisition of old stock

184
Q

REG TAX

Who is considered a related party in a property transaction? How does it affect the transaction?

A

Ancestors; siblings; spouse; descendants; corporation or partnership where you’re a 50% shareholder

Seller cannot take a loss on sale to a related party; but gain is always recognized.

Related party gets to use the disallowed loss when they sell.

Related party’s holding period begins when they acquire the property.

In-laws are NOT related parties.

185
Q

REG TAX

How are capital losses taken in a corporation?

A

capital losses only offset capital gains

Carryback 3 years - if you elect NOT to carryback; you lost the option in the future

Carry forward 5 years - only as STCL

186
Q

REG TAX

What assets are NOT capital assets?

A

Inventory; Business interest; Accounts Receivable; Covenant not to compete

Goodwill IS a capital asset

187
Q

REG TAX

What are the steps in applying a capital gain or loss?

A

Net all STCG and STCL

Net all LTCG and LTCL

Add together

Deduct $3;000

188
Q

REG TAX

How much ordinary income can be offset by an INDIVIDUAL’s capital losses?

A

$3;000 per year. Unused is carried forward and taken $3;000 each year.

No carryback is allowed.

189
Q

REG TAX

Which property is governed by section 1231?

A

Real or Personal Business Property held more than a year

Inventory is never 1231 Property

190
Q

REG TAX

How are section 1231 gains and losses handled?

A

Casualty Losses on 1231 Property - Net the losses
* Net Loss = Ordinary Loss
* Net Gain = Combine with other 1231 Gains

1231 Net Loss - If 1231 Losses exceed gains; treat as Ordinary Loss

1231 Net Gain - If 1231 Gains exceed losses; treat at LTCG

1231 Gain = LTCG

1231 Loss = Ordinary Loss

191
Q

REG TAX

How is section 1245 depreciation recapture handled; and when does it apply?

A

To the extent of depreciation; treat as ordinary gain
Remainder is 1231 gain; which is LTCG - There are no 1245 Losses

1231 Gain = LTCG
1245 Gain = Ordinary
Casualty Gain = LTCG

1231 Loss = Ordinary
1245 Loss = N/A
Casualty Loss = Ordinary

192
Q

REG TAX

What property qualifies for section 1250 treatment; and how are gains/losses handled?

A

1250 property is Real Estate
Use 1250 for Gain only. For losses; use 1231

Individuals: Post-1986 property with a gain is 1231 LTCG

If Straight Line depreciation is used; don’t use 1250 - Entire gain is 1231

Corps: Section 291 requires 20% of depreciation classified as ordinary gain
Remainder is 1231 LTCG

193
Q

REG TAX

When are 1231; 1245 and 1250 gains or losses always ordinary?

A

When the asset is held less than one year.

REG CPA (2 decks)

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