Reg Flashcards - Chapter 1

Question 1

Mom and Pop Exception for rental income

Answer 1

$25,000 exclusion for losses over any gains.

Phase out for AGI between $100,000-$150,000

Question 2

ESPP

Answer 2

Option exercise price must be less than 85% of purchase price
Cannot exercise more than 27 months past grant date

Question 3

Roth IRA

Answer 3

All qualified benefits are nontaxable

Question 4

Traditional Nondeductible IRA

Answer 4

Principal = nontaxable

Accumulated earnings = taxable when withdrawn

Question 5

Exception to penalty tax for early retirement withdrawal

Answer 5

HIM DEAD:
Homeowners (1st time)
Medical Insurance 
Medical costs (in excess of 10% AGI)
Disability
Education, college tuition, books, fees, etc
and
Death

Question 6

Annuities

Answer 6

Amount not taxable is calculated by using a factor based on the age of the recipient:
Ex: Investment in contract is $60,000 and annuitant is 64 years old. Factor is 260 months.
60,000/260 = 230.77 is excludable from each of the first 260 payments.
If the annuitant lives longer than 260 months, the further payments are fully taxable.
If annuitant dies before 260 months is up, the unrecovered portion is a misc. deduction on the final income tax return not subject to the 2% AGI floor

Question 7

Business recoveries

Answer 7

To determine if a business recovery is excludable from taxable gross income, you must determine what the damages were paid “in lieu of”

Question 8

Nonqualified options

Answer 8

Taxed when granted if the option has a readily ascertainable value when granted

Question 9

Readily ascertainable value

Answer 9

Option is traded on established market
OR all of the following conditions:
1. Optino is transferable
2. Option is excercisable immediately in full when it is granted
3. No conditions or restrictions taht would have significant effect on the value
4. Fair value of the option privilege is readily ascertainable

Question 10

Basis of stock on grant with readily ascertainable value

Answer 10

No taxation on date of exercise of option.

Basis = exercise price + amount previously taxed on the date of grant

Question 11

If no readily ascertainable value

Answer 11

Taxable event is the exercise date of the option.
Employee recognizes ordinary income based on the fair market value of the stock purchased - amounts paid (if any) for the option

Question 12

ISO

Answer 12

Incentive Stock Option

1. Must be granted under a plan by shareholders
2. Options must be granted within 10 years of the earlier of the date when the plan was adopted or approved
3. Exercise price may not be less than the FMV of the stock at the date of the grant
4. Employee may not own >10% of the combined voting power
5. Once exercised, the stock must be held at least 2 years after the grant date and at least 1 year after the exercise date
6. Employee must remain an employee of the corporation for the date the option is granted until at least 3 months before exercised

Question 13

Tax treatment for ISO

Answer 13

Not taxable as compensation
Capital gain/loss when sold
Excess of the FMV of stock at exercise date less the purchase price is preference item for AMT

Question 14

Tax treatment for ESPP

Answer 14

Not taxable as compensation
Capital gain/loss when sold
If option price is < FMV of stock on grant date, ordinary income is recognized as the lesser of the difference of the FMV of stock when sold and the exercise price OR the difference between the exercise price and the FMV of stock on the grant date