REG set 1

Question 1

How do you report the gain on sale of a personal residence?

Answer 1

Taxpayer would not have to report gain on sale if he is entitled to the exclusion amount up to $250,000 ($500,000 MFJ). To qualify, the taxpayer must reside in the property for 2 of the past 5 years.

Question 2

What amount of social security benefits are taxable?

Answer 2

the higher the income, the more social security benefits will be taxable up to the maximum of 85% of SSB. If given provisional income, compare the provisional amount to the base amount ($25,000 single and $32,000 MFJ). If the provisional income is lower than the base amount, none of the social security benefits will be taxable. When the provisional income exceeds the base amount, 85% of social security benefits are taxable

Note: provisional income includes 1/2 of social security benefits.

Question 3

How to determine the amount of a bargain purchase is included in gross income

Answer 3

Usually, employee discounts do not result in taxable income to the recipient. However, the amount may be excluded if the employer is using services usually purchased by the users. The amount excluded in gross income is 20% * FMV of the total services used, while the remainder of the basis is included in gross income.

Question 4

How do you calculate the ordinary gain recaptured from a sale of Section 1250 property (real property) by a C Corp (Section 291 Recapture)

Answer 4

ordinary gain = 20% * lesser of accumulated depreciation or gain

Question 5

How to define “earned income” when using a Keogh profit-sharing plan

Answer 5

net self-employment income after deduction of all business expenses and the one-half of self-employment taxes as well as the Keogh contribution itself

Question 5

How to define “earned income” when using a Keogh profit-sharing plan and how to calculate the deductible Keogh contribution the taxpayer can make in a given year?

Answer 5

Earned income: net self-employment income after deduction of all business expenses and the one-half of self-employment taxes as well as the Keogh contribution itself

Keogh Contribution Limit:
annual contribution limited to the lessor of

• 20% of net self-employment income before deduction (25% of net self-employment income after the deduction for Keogh contributions)
• annual limit ($61,000)
• 100% of earned income

Question 6

Net Investment Income Tax (NIIT)

Answer 6

3.8% of the lesser of:

-Net investment Income (total investment income minus investment expenses)
Or
-Excess Modified AGI over the threshold amount ($200,000 single, $250,000 MFJ, $125,000 MFS))

Question 7

What determines if a debtor is considered insolvent?

Answer 7

Insolvent if FMV of debtor assets < Liabilities

Question 8

Explain how to calculate Dividends Received Deduction (DRD)

Answer 8

First, know the correct DRD percentages which are based on the mount of ownership in the company.

Less than 20% –> 50% DRD
20% to 79% –> 65% DRD
greater than 80% –> 100%

If the taxable income is less than the dividend amount, a taxable income limitation applies. The DRD % will be multiplied by the Taxable income to determining the allowed DRD.

However, if there is a NOL in the current year or the dividend is less than the TI, this limitation does not apply and the DRD will equal the dividend amount * the DRD % allowed

Question 9

How do you determine the taxability of contributions to corporations in exchange for stock?

Answer 9

First determine if one or more persons who transfer property in exchange for stock own 80% of the stock

If YES, the transfer is nontaxable and the corporation uses the shareholder’s carryover adjusted tax basis for property (if boot is received, the shareholder recognized gain up to the amount of boot received so the SH’s basis would equal boot(recognized gain) + basis)

If NO, the transfer is taxable to the shareholder and the corporation used FMV of the property received as the basis

Question 10

How do you calculate net unearned income which is used to determine kiddie tax?

Answer 10

First, subtract the child’s unearned income by the GREATER of

$2300

or

$1100 + itemized deductions related to unearned income

= net unearned income

the net unearned income for a child will be taxed at the parent’s rates

Question 11

Which taxpayers CANNOT use the cash method?

Answer 11

1. C Corps (unless the gross recipets do not exceed $26 million), or is a farming business, or is a personal service corporation (PSC)
2. Partnerships with a C-corp partner
3. Tax shelters

Question 12

Compare the different treatment of Net Operating Losses for corporations and individuals

Answer 12

Individuals AND Corporations: NOLs have no carry back period and can now be carried forward indefinitely. When the NOL is applied, it can only be applied up to 80% of income, the rest is carried forward.

*overall, NOLs are treated the same way no matter if an individual taxpayer or Corp.

Question 13

What is the difference in treatment of net capital losses if you are an individual taxpayer or C Corp?

Answer 13

Individual: up to $3,000 of capital losses can be deducted against ordinary income and the rest is carried forward indefinitely

C Corp: a net capital loss can be carried forward 5 years and carried back 3 to offset capital gains
* for C corps, carryback and carryforwards are always treated as short term capital losses

Question 14

Explain the treatment of property distributions in complete liquidation of a C Corp?

Answer 14

1. Capital asset (investments): capital gain or loss
2. Ordinary Income- producing property (inventory): ordinary income or loss
3. Section 1231 assets (equipment): subject to section 1245 and 1250 recapture, remaining balance generally a capital gain or ordinary loss

Question 15

What is the global intangible low-taxed income (GILTI)?

Answer 15

GILTI is a wide ranging category of income designed to immediately tax revenue from foreign-held intangible assets at a low rate instead of deferring that tax.

Question 16

How do you treat stock redemptions? And explain how to determine if the redemption is substantially disproportionate.

Answer 16

A stock redemption is taxed to the shareholder as either dividend income or capital gain or loss.

To be treated as a capital gain, at least one of five conditions must be met:

1. distribution is a redemption of stock to pay death taxes
2. all the shareholders stock is redeemed
3. redemption is from a incorporate shareholder in a partial liquidation
4. redemption is substantially disproportionate
5. redemption is not essentially equivalent to a dividend

*to be substantially disproportionate, the shareholder must own less than 50% of the outstanding stock after the redemption AND
the shareholder’s ownership must be reduced to less than 80% of previous ownership of the outstanding stock

Question 17

How do you define and calculate accumulated earnings tax?

Answer 17

The accumulated earnings tax (AET) is imposed on corporations if they have accumulated retained earnings beyond a reasonable amount.

Calculation:

+ Federal Taxable Income

• $25,000 {which is the accumulated earnings credit, $150,000 if PSC}
• dividends paid or consented to by shareholders
• amount retained to pay taxes for the tax year

Question 18

What is the order of allocation for a partnership nonliquidating distribution?

Answer 18

1. cash (this includes marketable securities)
2. unrealized receivables and inventory (hot assets & also includes depreciation recapture)
3. other assets (land, buildings, equipment)

Question 19

Define and explain the treatment of guaranteed payments

Answer 19

Guaranteed payments are not based on partnership income or loss

GP are a deduction when computing partnership ordinary income

Separately stated item on the partner’s K-1

taxable to the recipient partner as ordinary income

does not directly affect the partner’s tax basis

subject to self-employment tax on the partner’s tax return

Question 20

What must a complex trust do in order to be considered complex?

Answer 20

A complex trust is one that can do any of the following:

1. make annual beneficiary distributions that are below the trust’s distributable net income
2. make distributions to a charity
3. distribute principal (corpus)

Irrevocable trusts are either simple or complex. A simple trust must distribute all income and has a personal exemption of $300 while a complex trust has a personal exemption of $100

also note, the two types of trusts are grantor (revocable) and irrevocable

Question 21

SIMS:

Given tax schedules to complete. what is important information to keep in mind?

Answer 21

• when determining the amount to include in IRAs, pensions, and annuities, keep in mind that distributions from a traditional IRA are taxable while distributions from a Roth IRA are not taxable (pensions are also taxable distributions)
• Sch. 1 is used to determine the additional income included in Form 1040
• Sch. 1 also include business income which is calculated using Sch. c (business income)

Question 22

What is reported on Schedule E?

Answer 22

• ordinary income and losses from rental real estate
• royalties
• partnerships
• S corps
• estates & trusts
• real estate mortgage investments

Question 23

What is excluded from gross income?

Answer 23

• gifts and inheritances
• federal income tax refund
• state income tax refund (if standard deduction was used in the year that generated the refund)
• gain on sale of a personal residence $250,000 ($500,000 MFJ)

Question 24

How do you treat guaranteed payments from partnerships on Form 1040? in other words, how do individual reports guaranteed payments?

Answer 24

treated as earned income

Question 25

What is the treatment of employees’ group term life insurance? How do we treat this as an individual’s tax return?

Answer 25

Excess death benefit over $50,000 is taxable based on the cost of excess coverage

Question 26

What are the statutory periods to acquire replacement property for involuntary conversions?

Answer 26

2 years: destruction or theft of property resulting in insurance recovery

3 years: government condemnation or eminent domain award

4 years: conversion in connection with a federally declared disaster

Question 27

Explain the treatment of Section 1244 losses

Answer 27

Up to $50,000 ($100,000 MFJ) is treated as ordinary deduction

The remaining loss is treated as a capital loss
( capital losses are limited to $3000 annually)

Question 28

Explain the treatment of a gain or loss when the sale takes place between related parties.

Answer 28

If the sale results in a GAIN, the seller recognizes the gain

If the sale results in a LOSS, the seller may NOT recognize a loss

Note: a corporation is considered a related party to any shareholder owning more than 50% of the stock

the acquiring party may later deduct a loss if the property is sold to an UNRELATED party but the deductible loss is limited to any gain on the sale

Question 29

What is the basis in inherited property for the one receiving it and what is the basis in a gift to the donee?

Answer 29

If inherited, the basis of the inherited property is the FMV on the date of death
*unless estate makes alternate valuation date election

For gifts, the basis is determined by comparing the FMV to the donor’s basis.

if the FMV is greater than the donor’s basis (appreciated), the donor’s basis becomes the donee’s basis

if the FMV is less than the donor’s basis, based on whether gain or loss occurs using the sales price given. if net proceeds are greater than donor basis, then capital gain is recognized and the donor’s basis is used, If net proceeds are less than the FMV of gift, then capital loss and basis is FMV. If the net proceeds are between donor basis and FMV, no gain or loss recognized.

Question 30

Given contributions made by a taxpayer to charities, how do you determine the basis of the contribution if it has a basis and FMV (assets contributed other than cash)?

Answer 30

If the contribution is a long-term asset, then the FMV will be used as the basis

*appreciated long-term capital asset will use the FMV for the basis

If the contribution is a short-term asset, then the lower of the basis or the FMV is used

If the asset is sold by the charitable organization after the asset has been received, then the basis is limited to the sales proceeds