Remember and Understand - Individual and company tax

Question 1

What are passive activities for federal income tax purposes of INDIVIDUALS

Answer 1

A passive activity is any activity in which the taxpayer does not materially participate
Examples: rental activities, interests in limited partnerships, and S corporations

Question 2

What are the 5 different filing status?

Answer 2

• single
• married filing jointly
• married filing separately
• head of household
• qualifying widower with dependent child

Question 3

What is the criteria for filing single

Answer 3

Unmarried or legally separated from spouse at the end of the year

Question 4

What are the criteria for filing married filing jointly

Answer 4

• married and living together as spouses
• living together in a recognized common law marriage
• married and living apart but not legally separated or divorced

Question 5

What is the criteria for filing married filing separately?

Answer 5

• Married
• if one spouse wants to be responsible only for own tax or
• if both spouses do not agree to file a joint return

Question 6

What is the criteria for head of household?

Answer 6

• Individual not married, legal separated or is married and lives apart from their spouse for at least 6 months of the year
• not a qualifying widower
• not a nonresident alien
• individual maintained a home that, for more than half the taxable year, is the principal residence of a
• son or daughter who is a qualifying dependent
• A dependent relative who resides with the taxpayer or
• a dependent father or mother, regardless of whether they live with the taxpayer

Question 7

What is the criteria for filing qualifying widower?

Answer 7

• unmarried at end of tax year
• surviving spouse must maintain a household, which for the entire taxable year was principal place of abode of a son, stepson, daughter, or stepdaughter and
• the son, stepson, daughter qualifies as a dependent of the taxpayer

The taxpayer qualifies for this status for 2 years after year of death of the spouse

Question 8

What are the requirements for an individual to meet the definition for a qualifying child?

Answer 8

CARES
C - Close relative 
A - Age limit (19/24) 
R- Residency and filing requirement
E - Eliminate gross income test
S - Support test

Question 9

What are the requirements for an individual to meet the requirements for qualifying relative

Answer 9

SUPORT
S - Support (over 50%) test
U- under a specific amount of taxable gross income test
P - Precludes dependent filing a joint tax return test
O- only citizens (residents of US, Canada, Mexico)
R- relative test OR
T - Taxpayer lives with individual for the WHOLE year

Question 10

What is the age test for meeting the qualified child?

Answer 10

19 or

24 - in a full time school program

Question 11

What are the requirements for a corporation to file a consolidated return

Answer 11

i. Parent –Subsidiary Relationships may file a consolidated return
1. An affiliated group (where a common parent directly owns 90% or more of the voting power of all outstanding stock and 80% or more of the value of all outstanding stock of each corporation) of corporations may elect to be taxed as a single unit
ii. Brother and sister relationships may not file a consolidated return

Question 12

Recall eligible shareholders for an S corporation

Answer 12

i. Shareholders may be individuals, estates (testamentary and bankruptcy) and trusts including:
1. Grantor trusts during the life of the grantor plus 60 days
2. Testamentary trusts for 60 days after the stock is transferred to the trust
3. Stock voting trusts
4. Qualified subchapter S trusts
5. Electing small business trusts

Question 13

Recall S corporation eligibility requirements for federal income tax purposes

Answer 13

1. Qualified corporation
   ii. Eligible shareholders
   iii. Shareholder limit
   iv. One class of stock

Question 14

Explain the procedures to make a valid S corporation election for federal income tax purposes?

Answer 14

i. All current shareholders must consent to the election
ii. It must be unanimous
iii. The election may be made on form 2553 either A) during the preceding year or B) on or before the 15th day of the third month of the current taxable year

Question 15

How can an s corp status be terminated

Answer 15

Holders of a majority of the stock consent to a voluntary termination

• The corporation fails to meet any of all of the eligibility requirements
• More than 25% of the corporations gross receipts come from passive activities for three consecutive years and the corporation had C corporation earnings and profits at the end of each year

Question 16

What are factors that cause a built in tax gains to apply for federal income tax purposes

Answer 16

i. Built in gains tax occurs when a C corporation becomes an S corporation

Question 17

What are partnership elections applicable to a partnership for federal income tax purposes

Answer 17

i. 754 election –
1. Have the option to make a section 754 election when certain distributions of property from the partnership to a partner occur or when there is a transfer of a partnership interest by sale or exchange or upon the death of a partner
2. 743(b) adjustment follows 754
a. The section 743 (b) adjustments equal the difference between the value of the outside basis to the transferee partner (i.e., purchase price) and his share of the partnerships inside basis of the assets.
ii. 179 election – dollar limit on use of the election per year

Question 18

What are situations where a partnership would be terminated

Answer 18

i. There are three ways a partner may terminate a partnership interest:
1. Complete withdrawal
2. Sale of partnership interest
3. Retirement or death
ii. Two main reasons include
1. There is only one partner left
2. 50% of partnership interest is sold within a 12 month period

Question 19

What are the tax classification options for an LLC

Answer 19

i. Can be either corporations or partnerships

Question 20

Recall and explain the differences between simple and complex trusts for federal income tax purposes?

Answer 20

a. Simple – a trust that requires all income to be distributed each year, that does not make any charitable contributions and that does not make any distributions, except out of current income
b. Complex – all others

Question 21

What are the requirements to qualify as an IRC Section 501 C tax exempt organization

Answer 21

• make a written application for exempt status
• Be approved by the IRS
• Become incorporated under the standard procedures
• Issue capital stock
• include in the articles of organization the fact that the articles limit the purpose of the entity to the charitable exempt purpose

Question 22

What are the requirements to maintain exempt status

Answer 22

• no part of the net earnings may inure to the benefit of any private foundation or individual
• no substantial part of the activities may be nonexempt activities (propoganda)
• the organization may not directly participate or intervene in any political campaign
  Note: The organization must also file the required annual information tax forms (if applicable)
• if the organization fails to file for 3 years the tax exempt status will be revoked

Question 23

What is the definition of unrelated business income

Answer 23

gross income from any unrelated trade or business regularly carried on, minus business deductions connected therewith

Question 24

What is the required percentage for related parties

Answer 24

Owning 50% or more of a corporation

Question 25

Who are related parties

Answer 25

Brothers, sisters, husbands, wives, ancestors and lineal descendants

Question 26

What are the allowable gift tax deductions and exclusions for federal gift tax purposes

Answer 26

i. Present interest gift to a single individual (15,000)
ii. Gifts to spouse are excluded completely. However, gifts in contemplation of marriage such as engagement rings are included
iii. Expenses to support minors
iv. Charitable contributions
v. Political contributions
vi. Payments directly to school for benefit of another
vii. Payments directly to healthcare providers for benefit of another

Question 27

What is included in the decedent’s estate for federeal estate tax purposes

Answer 27

• FMV of the estate at the date of the person’s death of all worldwide property, including real property, personal tangible property and intangible property
• also includes the FMV of the decedent’s share of jointly held property

Question 28

What is the allowable estate tax deductions in a decedent’s estate

Answer 28

• Medical expenses
• admin expenses
• outstanding debts
• claims against the estate
• Funeral costs
• Certain taxes (including state death taxes)

Question 29

What property is subject to gift tax?

Answer 29

every transfer of money or property for less than adequate consideration is a gift.

Question 30

When is Form 709 required to be filed

Answer 30

must be filed by a donor who has made taxable gift more than 15,000 or 30,000 with gift-splitting