Revise (Final review)

Question 1

Loss is never realized in Like kind exchange so everything will be ________

Answer 1

deferred and will be added to CALCULATE basis of the new property received (FMV of new property + Deferred loss)

Question 2

Sec 743(b) adjustment =
Outisde basis - Inside basis

Answer 2

Sec 754 election can be made by a partnership to adjust the basis of its property in order to match the partnership’s property value with the partner’s investment values.

The Section 743(b) basis adjustment is the difference between the outside basis or FMV of the partnership assets (the purchase price) and the new partner’s share of the partnership’s inside basis (adjusted basis) of the partnership assets. The Section 743(b) basis adjustment is allocated entirely to the new partner. It is added to (or subtracted from) that partner’s inside basis to make the new partner’s inside basis equal to his or her outside basis.

Sec 743(b) basis adjustments are needed to line up inside and outside basis

Question 3

A corp distributed land with a basis of $20,000 and a FMV of $60,000, but was subject to a nonrecourse liability of $70,000 to its sole shareholder. What amount represents the corp’s recognized gain.

Answer 3

CORPORATION = If a property’s FMV is less than the amount of the liability assumed, the property’s FMV is assumed to be the amount of the liability assumed by the shareholder, so FMV is assumed to be $70000. Recognized gain = $70,000 - $20,000 = $50,000.

Question 4

The GILTI inclusion (active income) is calculated as a U.S. shareholder’s of a CFC’s net income, reduced by the excess of:

(1) 10% of the CFC’s aggregrate adjusted basis in depreciable tangible property used in its trade or business, over
(2) the CFC’s net interest expense

CFC net income is the starting point in the GILTI inclusion calculation.

CFC net interest expense is an important piece of the GILTI inclusion calc because it guides the reduction of CFC net income.

A CFC’s net income should be reduced by 10% precent of the CFC’s basis in depreciable tangible property used in a trade or business to calculate the GILTI inclusion.

Answer 4

Subpart F income (passive income + related party active income) is not a component of the GILTI inclusion calculation.

Question 5

Partnership’s basis in the artwork is the _____________

Answer 5

rollover basis or same as the partner’s adjusted basis in the property.

Question 6

S CORP TERMIANTION

Answer 6

With excess passive income, S corporation status is terminated at the beginning of the
fourth year.

Question 7

Reelecting S Status
Once an S corporation election has been terminated, the corporation must wait until____________ after the year of termination before it can elect S corporation status again.

Answer 7

the beginning of the 5th year

Question 8

Partnership, conversion of personal use property to business use where FMV < Adjusted Basis

Answer 8

ADJUSTED BASIS WILL BE FMV in the scenario when FMV< BASIS (no gain or loss to be recognized as per tax laws)

Question 9

GENERAL PARTNERSHIP=JOINT VENTURE

Answer 9

UNLIMITED LIABILITY (All r personally liable)

Question 10

The self-employment tax is generally 15.3 percent of self-employment earnings.

The SE tax is calculated on 92.35 percent of self-employment income.

Sole Proprietorship: Self-employment income to sole proprietor
Partnership: Self-employment income to partner if actively involved in business operations
S Corporation: Not self-employment income to shareholder (active or inactive)

Answer 10

Partnership = Guaranteed payment and partner’s share of ORD income = BOTH SUBJECT TO SE TAX

Question 11

NIIT

Answer 11

Partners (PASSIVE) in a partnership and shareholders (PASSIVE) in an S corporation may be subject to the additional
3.8 percent net investment income (NII) tax on their share of business income if the partner or shareholder is not actively involved in the operations of the business. If a partner or shareholder
is a passive owner, his or her share of business income is passive income, which is included in
investment income for NIIT purposes.

A sole proprietorship’s income is self-employment income
to the owner, not passive income.
This additional tax on investment income only applies to higher-income taxpayers whose AGI
exceeds a threshold amount of $200,000 (MFJ $250,000).

Question 12

It is important to remember the difference between capital account and basis in
partnership interest:

Answer 12

Basis in partnership interest = Capital account + Partner’s share of partnership liabilities

Question 13

QBI Deduction

S CORP BENEFIT = QBI deduction of 20% to an individual

Answer 13

available to individual owners of flow-through entities, including

partnerships, S corporations, and sole proprietorships.

The deduction is
generally 20 percent of the owner’s share of qualified business income, subject to certain limitations.

The deduction is taken on the owner’s individual income tax return.

Question 14

C CORP BENEFICIAL WHEN _____

Answer 14

The C corporation form may also be more advantageous if the individual
marginal tax rates of the owners are higher than the C corporation flat tax rate of 21 percent.

(If the business is organized as a C corporation, the corporation will pay tax at the 21-percent corporate income tax rate.)

IN SCENARIO, when there is no DISTIBUTION BY A C CORP OR BY AN ENTITY, C CORP will be beneficial when INdividusl has higher MARGINAL TAX rate as compared to C CROP

Because the owners are in the highest individual tax brackets, and there are
no distributions to owners that will be taxed as dividend income if it is a C corporation,
the owners will pay less in total taxes if the business is organized as a C corporation.

Question 15

Partnership beneficial because_____

Partnership disadvantage = SE Tax (IF ACTIVE PARTNER)

Answer 15

One advantage of the partnership form over the S corporation form is that partnerships have
greater flexibility in allocating income, losses, and deductions among the owners.

Question 16

RELATED PARTY SALE (Brother, sister)

Examples of related parties:

1. Certain family members
2. Controlled corp and shareholder owning (directly or indirectly)>50% of the outstanding stock
3. Partnership and controlling partner owning>50% int in the partnership
4. Two corps that are members of a controlled group
5. Grantor and a fiducairy of any trust
6. 2 S Corps, if the same person owns>50% of each corp’s outstanding stock
7. An S CORP and a C CORP, if the same person owns>50% of each corp’s O/S STOCK
8. A corp and a PARTNERSHIP, if a TP owns >50% of the Corp’s O/S Stock and >50% of the capital int or profits int in the P/S
9. Executor of an estate and the estate’s beneficiaries

Answer 16

Recognized gain in the second year or at the time of sale to unrelated party = REALIZED GAIN - PREVIOUSLY DISALLOWED LOSS(by a relative)

ONLY IN THE CASE OF GAIN OR TO THE EXTENT OF GAIN (It may not create further losses to be recognized)

Question 17

Like kind exchange does not apply to PERSONAL PROPERTY but only APPLIES TO ____________

Answer 17

REAL PROPERTY which is held for productve use in a trade or business or held for investment, property must be located in the U.S., 45 day rule to designate replacement property, 180 day rule for closing on property which means that entire amount of gain needs to be recognized and nothing is deferred when it comes to PERSONAL PROPERTY (e.g. warehouse equipment)>

Entire gain on personal property is TAXABLE and is not tax exempt.

Question 18

Automobile sold by a C corp to a shareholder holding more than _____

Answer 18

50% of corp’s stock is considered as a related party sale. Losses are disallowed.

Question 19

2 main types of Sec 529 QTP (QUALIFIED TUITION PROGRAMS)

Answer 19

1. Prepaid tuition plan - account is tied to a specific state or school so it has less flexibility; lower risk because it is guaranteed to increase in value at the same rate as tuition increases.
2. Educational savings plan: Can be used to pay a broader array of higher education expenses; funds can be used at any college or university; higher risk because there is no guaranteed benefit; the accumulation of funds is invested subject to market conditions.

Question 20

Nontaxable options for unused section 529 plan funds

Answer 20

If there are leftover funds in a section 529 plan after the beneficiary has completed his or her postsecondary education, following options are available for the reamining funds:

1. SAVE THE FUNDS FOR FUTURE EDUCATIONAL NEEDS
2. TRANSFER THE FUNDS TO A FAMILY MEMBER
3. WITHDRAW UPTO $10,000 TO PAY QUALIFIED EDUCATION LOANS.
4. ROLLOVER UPTO $35,000 TO THE BENEFICARY’S ROTH IRA

Question 21

Limits on contribtuions to SEP IRA Plans - For SELF-EMPLOYED TPs and their employees:

Max contribution is lesser of:

Answer 21

1. 20% of SE Net Income reduced by ONE-HALF OF SE TAX DEDUCTION OR
2. $69,000 (No additional catch-up contribution for TPs age 50 or older)

Question 22

Required Minimum Distributions (RMDs)
Taxpayers are required to start taking required minimum distributions (RMDs) by April 1 of the
year after the later of:

(1) The year the employee reaches age 73 OR
(2) The year the employee terminates employment with the plan sponsor

Answer 22

The penalty for failure to take RMDs is 25 percent.

The penalty amount is reduced to 10 percent if the failure to take the RMD is corrected in a timely manner.

Question 23

2018-2020 NOLs
Carryback 5 years, CF indefinitely
Can offset 100% of 2018-2020 TI

80% of post-2020 TI

Answer 23

When liabilities assumed by CORP IS MORE THAN THE AB of property transferred to the CORP

1. Shreholder’s basis/NEW BASIS in stock

= AB + Gain recognized - Liabilities assumed by corp

2. COrp’s basis = AB of property contributed + Gain recognized by shareholder

Question 24

Equipment previously used in Oak’s business with a five-year recovery period for tax purposes was sold on September 20, Year 7, for net proceeds of $45,000. The equipment was originally purchased for $57,000 on March 1, Year 1.

Answer 24

The equipment was fully depreciated when it was sold in Year 7, so the adjusted basis in the property is $0. The gain realized and recognized is $45,000 ($45,000 proceeds – $0 adjusted basis). Depreciable personal property used in a business for more than one year is Section 1245 property. When Section 1245 property is sold at a gain, the gain is treated as ordinary to the extent of prior depreciation taken. Accumulated depreciation for the equipment is $57,000, so the entire $45,000 gain is ordinary income.

Question 25

Homeowner’s exclusion, Sec 121 exclusion - Sale of primary residence

2/5 YEARS - Owneship test (by one spouse)

2/5 YEARS - Use test (by both spouses)

MFJ - $500,000 EXCLUSION
SINGLE, HOH, MFS - $250,000 EXCLUSION

If Surviving spouse sells the residence within 2 years of death of spouse, she is allowed to take entire $500,000 MFJ exclusion.

A TP mau use the homowner exclusion as often as available over his or her lifetime provided he or she meets the other requirements, but the exclusion may not be used more than every 2 years

Answer 25

Hardship provision = If sale is due to a change in palce of employment, health or other unforeseen circumstance taxpayer may prorate the exclusion. Change in employment requires the new work location to be at least 50 miles farther from the home sold than the old work location. (If MFJ TP moved due to change in work location and lived in home only for 1 year out of 2 eligible period, he is eligible for only half of the exclusion of $250,000 (1/2*500000))

Non-qualified use provision if couple doesn’t live in the primary residence in 1/5 years

2 steps involved:

1. Calculate realized gain
   e.g. 850000-$240000 = 610000

Step 2 = 610000/5=$122,000 (Gain for 1 year of NON-QUALIFIED USE will be taxable)

Non qualified period = (Nonqualified use/total ownership period)

Question 26

1231 NET LOSS = treated as ordinary loss

Sec 1231 (Business property held in business or trade for more than 1 year)

Answer 26

1231 NET GAIN = treated as Capital gain

Sec 1231 (Business property held in business or trade for more than 1 year)

Question 27

C Corp - Sec 291 depreciation recapture is
20% of the lesser of:

1. Accumulated depreciation
2. Gain recognized

Answer 27

Dep 300000
Gain 400,000

Sec 291 recapture = 20% of 300,000 = 60000=Ordinary income

REMAINING = Sec 1231 gain

Question 28

Grantor and Fiduciary are related parties

Answer 28

Entities that are more than 50% owned, either directly or indirectly by an individual are related parties.

Question 29

When SP is in between 2 basis, (Esp in the case of related parties)- same as GIFT TAX RULES

Answer 29

gain or loss is always ZERO

SP=Purchase price

Question 30

Revocable gifts, conditional gifts, future interest gifts are not eligible for annual gift tax exclusion.

Answer 30

Charitable contribution deduction:
1. Capital gain property: FMV at contribution (appreciating property)
2. Ordinary income property (depreciating) = Lesser of Property’s AB or FMV at contribution

Charitable deduction, Adjusted basis = when it’s related to unintended purpose
Immediately sells it at less than FMV, take SP as deduction

Question 31

Systematic risk can be mitigated by investing in derivatives, such as options or futures contracts, or short-selling investments.

Systematic risk is risk that affects an entire system, such as the capital markets or the economy as a whole.

(e.g. currency risk, inflation risk, sociopolitical risk)

Answer 31

Nonsystematic risk, or business risk, is risk that is unique to a certain industry or company rather than affecting an entire system. It can be mitigated by diversifying investments.

Default risk, which is the risk that the issuer of a bond will fail to make interest payments or repay the principal when a bond matures, is an example of nonsystematic risk.

Nonsystematic risk cannot be mitigated by investing in derivatives, such as options or futures contracts, or short-selling investments.

Management risk, which is the risk inherent in any company’s day-to-day operations, is an example of nonsystematic risk.

Question 32

Funding Post-Secondary Education

Section 529 qualified tuition programs,
Coverdell education savings accounts,
U.S. Series EE savings bonds, and
Uniform Gift to Minors Act (UGMA)/Uniform Transfer to Minors Act (UTMA) custodial accounts.

other funding avenues available,
such as financial aid, Pell grants, federal grants, scholarships, and a variety of other loans.

1. SEC 529 QUALIFIED TUITION PROGRAM - part of Post Secondary Education plan
   Section 529 qualified tuition programs (QTPs) are programs established by a state, or eligible
   educational institution, that allow taxpayers to contribute to an account that prepays qualified
   educational expenses (prepaid tuition plan) or to a savings account (educational savings plan).
   The earnings in QTPs grow tax-deferred and qualified distributions from the program are
   income tax-free.

Specific details of QTPs vary significantly between states and institutions.

Some states offer a full income tax deduction for contributions while other states only offer a partial
income tax deduction.

Funding
A Section 529 QTP is funded by making gifts and is limited to the annual gift tax exclusion
amount. Presently, the annual exclusion amount is $18,000. However, Section 529 plans
allow for an individual to gift up to five years of the annual exclusion amount at one time when
contributing to a QTP, which is $85,000 ($18,000 × 5 years). With the use of split gifts, a married
couple can defer up to $170,000 per child ($18,000 × 2 = $36,000 × 5 years). The IRS considers
the lump-sum gift the equivalent of five years of $18,000 (or $36,000) gifts. No additional gifts
are allowed for the five-year period following the lump-sum gift.

2. Prepaid Tuition Plan
   A prepaid tuition plan is guaranteed to increase in value at the same rate as college tuition
   increases. What is being purchased is a semester, a quarter, or some other unit of measure
   of college tuition. From an investment perspective, the plan is a low-risk, tax-advantaged
   investment vehicle, with earnings matching the average increase in tuition. The hypothetical
   earning potential is greater than the interest earned from a savings account or a certificate
   of deposit because inflation rates for education tend to exceed historical earnings for
   bank deposits.
   Prepaid tuition plans are exempt from federal income tax and may be exempt from state and
   local income taxes. Typically, the plan is guaranteed by the full faith and credit of the state. The
   risk to the owner of a prepaid tuition plan is the potential that the beneficiary may choose a
   school in a state other than the one from which the plan was purchased. The plan may still be
   used; however, the full cost of tuition in an out-of-state school may not be covered.

Educational Savings Plan
An educational savings plan, unlike a prepaid tuition plan, has no guaranteed benefit. The plan
is invested in the stock market and is subject to market conditions. As a result, the amount of
savings may not be sufficient to cover all the education costs; however, the funds accumulated
may exceed the cost of education, depending on the investment returns.
The assets in an educational savings plan are controlled by the account owner and not the
beneficiary (child). Regardless of whether the beneficiary chooses to attend college or is unable
to attend, the beneficiary does not have access to the funds.

COVERDELL Coverdell Education Savings Accounts
A separate education savings account may be set up to pay the qualified education expenses of
a designated beneficiary.
Contributions are nondeductible; maximum contribution per beneficiary is $2,000 annually.
The designated beneficiary may be any child under age 18. There is no limit to the number
of beneficiaries (each beneficiary has a separate account).
The maximum allowable contribution amount is phased out for taxpayers with modified
adjusted gross income between these amounts:
AGI Phase-out Ranges
Unmarried
Married
$95,000–$110,000
$190,000–$220,000

Earnings accumulate tax-free while in an education savings account.
Distributions, both of principal and interest, are tax-free to the extent that they are used for qualified elementary, secondary, or higher education expenses of the designated beneficiary. The earnings portion of excess distributions is taxable income to the beneficiary.

Qualified education expenses include tuition, fees, tutoring, books, room and board, supplies, and equipment.
Any amounts remaining when the beneficiary reaches 30 years of age must be distributed
(except in the case of a special needs beneficiary). If the distribution is made directly to the
beneficiary, the distributed amount is taxable to the beneficiary and subject to a 10 percent
penalty (similar to Section 529 qualified tuition programs (QTPs) . Alternatively, the balance can be rolled over tax free to another family member of the taxpayer with no penalty.

A taxpayer can claim the American opportunity tax credit or lifetime learning credit for a tax year and exclude from gross income amounts distributed from a Coverdell education
savings account.

However, the distribution cannot be used for the same educational
expenses for which either the American opportunity tax credit or the lifetime learning credit
was claimed.

U.S. Series EE Savings Bonds
Interest income from U.S. Series EE savings bonds issued after 1989 is tax-exempt if used to pay for qualified higher education expenses (reduced by tax-free educational assistance) of the taxpayer, spouse, or dependents. Qualified higher education expenses include tuition and fees,
contributions to a qualified tuition program (QTP), and contributions to a Coverdell education
savings account. The interest exclusion is proportionally phased out for taxpayers with modified AGI of $91,850–$106,850 ($137,800–$167,800 MFJ).

Answer 32

Tuition and fees are qualified higher education expenses for both types of Section 529 qualified tuition programs (QTPs), prepaid tuition plans and educational savings plans.

Books and supplies are qualified higher education expenses for educational savings plans but not prepaid tuition plans.

Equipment required for the program of study is a qualified higher education expense for educational savings plans, but not prepaid tuition plans

Room and board for students enrolled at least half-time are qualified higher education expenses for educational savings plans but not prepaid tuition plans.

Student Loans
Another very popular mechanism students use to help pay college tuition is a student loan.

Unlike other types of financial aid, loans need to be repaid. As a result, special care and planning needs to be made to ensure that any loans taken out can be repaid in the future.

Loans for federal student aid must be repaid even if the student does not graduate from the program. The
loan may be forgiven, cancelled, or discharged under certain circumstances.

3.5.1 Stafford Loans
Stafford loans are for undergraduate and graduate students who can show financial need after
aid from other sources is subtracted from the cost of attendance. The loan is made by the U.S.
Department of Education and offers flexible repayment options. There are two types of Federal Stafford loans:

subsidized and unsubsidized.

Subsidized Stafford loans are need-based. The federal government pays the loan interest while the student is attending school, in deferment, or during the grace period before repayment begins.

Unsubsidized Stafford loans are not need-based, and eligibility is determined by the
student’s year in school, other financial aid awards, and the estimated cost of attendance.

Students who borrow unsubsidized Stafford loans are responsible for all interest that accumulates while they are in school, in deferment, and during the grace period.
A student may be eligible for one or both types of Stafford loans.

Parent Loans for Undergraduate Students
Parent loans for undergraduate students (PLUS) are federal student loan programs available to the parents of dependent undergraduate students. Parents may borrow up to the cost of attendance minus any other aid through this credit-based loan program each academic year.

The PLUS program is not need‑based. The parent must meet federal standards of
creditworthiness and is responsible for repaying the loan.

3.5.3 Student Loan Interest Expense.

The adjustment for education loan interest is limited to $2,500.
All interest payments qualify for the adjustment.
It is phased out for AGI between:
2023
Unmarried
MFJ
$75,000–$90,000
$155,000–$185,000
Deduction is completely phased out at AGI equal to or more than $90,000 (2023) for
unmarried taxpayers (single or head of household) and $185,000 (2023) for married
taxpayers filing jointly.

Married taxpayers must file jointly to claim the adjustment.
A dependent may not claim the adjustment.
The taxpayer must be legally obligated to pay the loan (e.g., interest paid by a parent on a
child’s student loan will not qualify for the adjustment).
Interest is only deductible on loans incurred by a taxpayer solely to pay for qualified
education expenses (e.g., general loans such as a home equity line of credit would
not qualify).
3.6 Grants
3.6.1 Federal Pell Grant
Federal Pell grants are based on financial need and are awarded to undergraduate students who
have not yet earned a bachelor’s or professional degree and are enrolled in an eligible degree or
certificate program. Amounts for Pell grants change annually. The amount received by a student
will depend on cost of attendance for a particular school, a student’s financial need, full- or
part‑time student status, and whether schooling will be for a full academic year or less.

Federal Pell grants do not have to be paid back and there is no interest due because it is a grant and not a loan.

Federal Supplemental Educational Opportunity Grant Federal Supplemental Educational Opportunity grants (FSEOG) provide grants to low-income
undergraduate students to finance the costs of post-secondary education. The program is administered directly by the college or university’s financial aid office and is “campus-based”—
not all schools participate in the program. Participating institutions apply each year for the
FSEOG allocation by applying to the Department of Education (DOE). Based on a statutory
formula, the DOE awards funds based on the specific institution’s previous funding level and
the aggregate need of eligible students in attendance in the prior year. The college or university
must contribute 25 percent of the award amounts. FSEOGs do not have to be paid back and
there is no interest due because it is a grant and not a loan.

Question 33

Living trust

Answer 33

A living trust designates a trustee and provides instructions for the distribution of a decedent’s assets after their death. The trustee must distribute the assets according to the instructions in the trust agreement.

Property is transferred to the living trust during a person’s lifetime, but the assets are not transferred to beneficiaries until after the person’s death.

Retirement accounts should not be placed in a living trust due to possible complications with retirement account early withdrawal penalties.

Assets owned by a living trust are excluded from the decedent’s probate estate.

Question 34

TRADITIONAL IRA

1. Tax deductible,
2. MAGI phase out - $123,000 - $143,000(MFJ)
   Single - $77,000 to $87,000
3. Contribution - lesser of $7,000 or earned income for 2024
   Age 50 or older $1,000 catch up contribution
4. Both contributions and earnings are taxable in year of distribution
5. Withdrawals (whole distribution) before age 59.5= 10% penalty
6. RMDs must generally begin at age 73

Answer 34

ROTH IRA

1. Not tax deductible
2. MAGI Phaseout range MFJ - $230,000 - $240,000
   Single and HOH - $146,000 - $161,000
3. Contribution - lesser of $7,000 or earned income for 2024
   Age 50 or older $1,000 catch up contribution
4. Neither contributions nor earnings are taxed (if it falls under qualified category, more than 5 year contribution)
5. 10% penalty = earnings only before age 59.5 and account opened for <5 years
6. Withdrawals are not required for the original owner

Question 35

IRA Taxable only when ____

Answer 35

they were deductible (traditional IRA)

Question 36

Roth IRA and Roth 401k=No RMDs

Traditional 401K - RMDs by Age 73 or the year the employee terminates employment with the plan sponsor

Penalty for failure to take RMDs is 25%

The penalty amount is reduced to 10% if the failure to take the RMD is corrected in a timely manner.

Answer 36

Traditional IRA = requires RMD to begin from April 1 of the year following the year in which TP reaches 73

Traditional IRA = EARNINGS are TAXABLE

Question 37

An affiliated group means that a common PARENT (a corporation) directly owns:

80 percent or more of the voting power of all outstanding stock; and
80 percent or more of the value of all outstanding stock of each corporation.

Answer 37

Corporations in which an INDIVIDUAL (not a corporation) owns 80 percent or more of the stock of two or more corporations are brother-sister corporations.

Question 38

C corp basis in the property = GREATER OF:

Answer 38

(a)Rollover basis +Boot/Gain received by transfer/Shareholder
(b) Mortgage

Question 39

Partial liquidation of shares is known as sale and therefore, not considered as dividend (doesn’t come out of E&P)

Answer 39

True

Question 40

Disproportional stock redemption means that there has been a meaningful reduction in the shareholder’s ownership interest. The % onwership after the redemption must be <50% and must be <80% ownership before the redemption.

Answer 40

The IRS is able to make transfer pricing adjustments when a U.S.-based taxpayer enters into a service contract with an affiliate that does not file a consolidated tax return with the U.S.-based taxpayer or is not subject to U.S. income tax. Because the affiliate files a consolidated tax return with the U.S.-based taxpayer, the IRS is not able to make transfer pricing adjustments in this case.

The IRS is able to make transfer pricing adjustments when a U.S.-based taxpayer shares costs with an affiliate that either is not subject to U.S. income tax or does not file a consolidated income tax return with the U.S.-based taxpayer.

The IRS is able to make transfer pricing adjustments when a U.S.-based taxpayer transfers, sells, purchases, or leases tangible or intangible property to or from an affiliate that either is not subject to U.S. income tax or does not file a consolidated income tax return with the U.S.-based taxpayer. Because the taxpayer sold tangible property, the IRS is able to adjust.

The IRS is able to make transfer pricing adjustments when a U.S.-based taxpayer transfers, sells, purchases, or leases tangible or intangible property to or from an affiliate that either is not subject to U.S. income tax or does not file a consolidated income tax return with the U.S.-based taxpayer. Because the taxpayer purchased intangible property, the IRS is able to adjust.

Question 41

ENTITY Paying the DIVIDENDS (residence of the payor) determine the source of the __________

Answer 41

DIVIDENDS

Question 42

Gains, profits, and income derived from the purchase of inventory property outside the United States and its sale within the United States would be considered U.S.-source. However, inventory purchased in the U.S. and sold outside the U.S. would not be considered U.S. source income.

INVENTORY sourced to the location where it is SOLD.

Answer 42

Gains from the disposition of a United States real property interest are deemed U.S.-source income.

Because the patent use happens within the U.S., this would be U.S.-source income

All underwriting income from issuing an annuity would be deemed U.S.-source income

Real property always sourced to PROPERTY LOCATION.

Question 43

PERMANENT ESTABLISHMENT
- Like conducting business on a regular basis
-like having a foreign location
-like having a permanent location

Answer 43

OCCASIONAL travel does not imply PERMANENT Establishment

Question 44

Choice “B” is correct. Income earned by a foreign subsidiary is not taxed until the earnings are brought back to the United States in the form of a dividend, meaning the U.S. parent has control over when the profits are recognized.

Choice “A” is incorrect. An IC-DISC does not give a U.S. company control over when foreign profits are recognized.

Choice “C” is incorrect. Profits earned by a CFC are taxed when earned.

Choice “D” is incorrect. Profits earned by a foreign branch are treated as being earned directly by the domestic corporation and are accordingly taxed in full when earned.

Answer 44

Choice “C” is correct. BEAT is a minimum tax on large U.S. corporations with a significant amount of deductible payments to related foreign affiliates. This provision is a means to eliminate the tax advantage that would result from these payments, as they reduce the U.S. tax base.

The BEAT rules only apply to payments made to RELATED foreign affiliates because corporations would be able to exert significant control over those affiliates’ businesses.

BEAT rules apply to US CORPS Only

Choice “A” is incorrect. An IC-DISC allows certain manufacturing companies to reduce their tax liability.

Choice “B” is incorrect. GILTI tax is a minimum tax imposed on certain low-taxed income that is intended to reduce the incentive to relocate CFCs to low-tax jurisdictions.

Choice “D” is incorrect. The transition tax is a one-time tax on the previously untaxed foreign earnings of a CFC, consistent with the TCJA’s change to a territorial-based tax system.

Question 45

Base EROSION ANTI-Abuse TEST-Goal is to eliminate erosion of tax base through deductible payments.

It is a minimum tax on large US Corps (Avg annual gross receipts of $500 million or more over 3 consecutive years) with a significant amount of deductible payments to realted foreign affiliates because such deductions reduce the US TAX BASE.

Answer 45

BEAT - Also known as minimum tax on large U.S. Corporation with a significant amount of deductible payments to related foreign affiliates.

Question 46

S corporations are the exception to the timeline for the transition tax and are permitted this special rule. S corp is permitted to defer the transition tax until the entity liquidates, ceases doing business, or its ownership is transferred.

Choice “A” is incorrect. A sole proprietorship would not be subject to the transition tax.

Choice “B” is incorrect. A partnership would not be subject to the transition tax.

Choice “D” is incorrect. C corporations must pay the transition tax in eight installments over eight years, pursuant to a specific schedule.

Answer 46

S corp in certain situations may owe taxes(conversion from C Corp to S CORP).

Partnership may never owe taxes.

C CORP - Individuals subject to 3.8% NIIT On dividend income and other passive income. Only applies to higher income taxpayer whose AGI exceeds a threshold amount of $200,000 (MFJ $250,000).

NIIT (applies to passive owners only)- partners in a partnership and shareholders in an S corp may be subject to NIIT on their share of business income if the partner or shareholder is NOT actively involved in the operations of the business.

Question 47

Annualization factor
Q1 - 12/3 (25% of annualized tax)
Q2- 12/3 ( 50% of annualized tax)
Q3 - 12/6 (75% of annualized tax)
Q4 - 12/9 (100% of annualized tax)

Answer 47

Calculate annualized income
Calculate annualized tax
(calculate 25-100% of annualized tax as applicable)

Question 48

Following income is not eligible for the 100 percent dividends-received deduction:
y Subpart F income
y Global intangible low-taxed income
y Income invested in U.S. property
y Income subject to the transition tax

Question 49

Choice “D” is correct. Most elections that affect the calculation of taxable income are made at the partnership level, including the election of the inventory method used.

Choice “A” is incorrect. For a partnership, an election to exclude income from the discharge of indebtedness is made at the partner level, rather than the partnership level.

Choice “B” is incorrect. The election for foreign taxes paid, choosing to take the foreign tax credit or deduct the foreign taxes as an itemized deduction, is made at the partner level, rather than the partnership level.

Choice “C” is incorrect. The election of cost or percentage depletion method for oil and gas wells is made at the partner level, rather than the partnership level.

Answer 49

Elected at partnership level:
1. Organizational expenditures and start-up costs
2. Accounting methods and inventory methods
3. Tax Year
4. Depreciation methods
5. Election out of installment sale treatment
6. Sec 754 election

as these cause significant impact on P/S Taxable income and profits/losses

PARTNER LEVEL
1. Exclusion of income from discharge of indebtedness
2. Election for foreign taxes paid
3. Cost or % depletion for oil and gas wells.

Question 50

Inside basis = Partnership’s basis in its assets.

Answer 50

Outside basis = Partner’s basis in their partnership interest.

Question 51

PARTNERSHIP

Zara and Anton are planning to start a new business, Elitado Equipment Solutions, as a general partnership. Zara contributed a building with a fair market value (FMV) of $350,000 and an adjusted basis of $250,000 in exchange for her 50 percent partnership interest. The partnership assumed the remaining mortgage (nonrecourse secured debt) on the building of $50,000. Anton contributed equipment with an FMV of $300,000 and an adjusted basis of $375,000 in exchange for his 50 percent partnership interest.

What amount of gain or loss do Zara and Anton recognize on the exchange of property for their partnership interests?

Answer 51

No gain or loss is generally recognized on the contribution of property to a partnership in exchange for a partnership interest.

One exception where gain is recognized is where a partnership assumes liabilities transferred by a partner, and the liabilities assumed by the other partners are more than the contributing partner’s basis in the property contributed.

In this case, Zara does contribute property with debt attached that is assumed by the partnership. However, the debt assumed by the other partner, Anton, is only $25,000 ($50,000 × 50%), which is less than Zara’s $250,000 adjusted basis in the building contributed, so Zara does not recognize any gain.

Question 52

C corporations provide limited liability for owners and require that articles of incorporation are filed with the state upon formation. They allow foreign owners.

Choice “C” is incorrect. Limited liability partnerships (LLPs) provide limited liability for owners and require that articles of incorporation are filed with the state upon formation. They allow foreign owners.

Choice “D” is incorrect. Limited partnerships provide limited liability for owners and require that articles of incorporation are filed with the state upon formation. They allow foreign owners.

Answer 52

General partnership, GP or Joint venture can be made by a handshake. No formal documentation required.

Because Kyle and Jimmy have not filed any documents with the state, they have formed a general partnership or joint venture. A general partnership or joint venture can be formed with a verbal or written agreement or by mere conduct and does not require that documents be filed with the state.

Question 53

Choice “C” is correct. The corpus of a trust is the property that is transferred into a trust by a grantor.

Choice “A” is incorrect. The income of a decedent passes through a trust to the beneficiaries. The corpus of a trust is the property that is transferred into a trust by a grantor.

Choice “B” is incorrect. The taxable income of a trust passes through a trust to the beneficiaries. The corpus of a trust is the property that is transferred into a trust by a grantor.

Choice “D” is incorrect. The dividends received from a corporation pass through a trust to the beneficiaries. The corpus of a trust is the property that is transferred into a trust by a grantor.

Answer 53

Grantor trusts are trusts in which the grantor retains certain ownership powers or control over the property transferred to the trust. All income and deductions of the trust are passed through to the grantor and included on the grantor’s income tax return.

Choice “A” is incorrect. Grantor trusts are not required to file separate income tax returns.

Choice “C” is incorrect. There is no requirement for annual distributions to the beneficiaries.

Question 54

The Orange Trust, a simple trust, has the following income and expenses for the current year.

Tax-exempt interest income
$10,000

Taxable interest income
17,000

Dividend income
18,000

Capital gains
15,000

Trustee fees
(10,000)

The trust agreement stipulates that trustee fees are split evenly between principal (corpus) and accounting income, respectively. Calculate the trust taxable income before the income distribution deduction for the year.

A.	 $44,700

B.	 $42,200

C.	 $39,700

D.	 $27,200

Explanation
SkillBuilder Video
Choice “B” is correct. Trust taxable income includes all taxable income earned by the trust, including capital gains and losses on the disposition of trust assets, reduced by deductible expenses related to the taxable income.

Income allocated to trust accounting income:

Tax-exempt interest income
$10,000

Taxable interest income
17,000

Dividend income
18,000

Trustee fees ($10,000 × 50%)
(5,000)

Trust accounting income
$40,000

Nondeductible portion of trustee fees:

$10,000 tax-exempt interest / $40,000 trust accounting income = 25%
Deductible portion of trustee fees = 75%
Taxable interest income
17,000

Dividend income
18,000

Capital gains
15,000

Deductible Trustee fees ($10,000 × 75%)
(7,500)

Exemption (Simple trust)
(300)

Trust taxable income before the income distribution deduction
$42,200

Choice “A” is incorrect. The deductible amount of trustee fees is $7,500, not $5,000. The nondeductible portion of trustee fees is based on the ratio of nontaxable interest income to trust accounting income.

Choice “C” is incorrect. The deductible amount of trustee fees is $7,500, not $10,000. The nondeductible portion of trustee fees is based on the ratio of nontaxable interest income to trust accounting income.

Choice “D” is incorrect. The capital gains of $15,000 must be included in the trust’s taxable income.

Question 55

S Corp that elects to become S Corp from C Corp even if at the beginning of the year is subject to BIG Tax = Only for the portion before selling actually (not subject to BIG on entire gain just on a portion held during C CORP period)

Answer 55

BIG tax is applicable on the GAIN that occurred while the CORP was a C CORP.

Question 56

If a trust has nontaxable income, then a portion of the trustee fees is also nondeductible.

The nondeductible portion of the trustee fees is the ratio of tax-exempt income to total trust accounting income.

Trust accounting income includes all taxable and nontaxable income and expenses other than capital gains and trust administrative expenses allocated to corpus. Trust accounting income = $9,000 taxable interest income + $2,000 tax-exempt interest income − $1,000 trustee fees = $10,000. The ratio of tax-exempt income to trust accounting income is 20 percent ($2,000 / $10,000), so the nondeductible portion of the trustee fees is $200 ($1,000 × 20%). The deductible trustee fees are the remaining 80 percent, which is $800 ($1,000 × 80%).

Answer 56

Foreign-derived intangible income is not a category of income for foreign tax credit limitation purposes.

The categories of income for foreign tax credit limitation purposes are
- general category income,
-passive category income,
-foreign branch income, and
-global intangible low-taxed income.

Question 57

Ownership change - Applies to 3 year testing period and applies to NOLs only (NOT TO CAPITAL LOSSES)

Sec 382 Limitation formula = FMV of corp’s stock before ownership change *Federal LT Tax-Exempt rate

Limitation each other + carryforward from PRIOR YEAR (unused income = Ordinary Income - NOL)

1 or MORE 5% shareholder increase their aggregate ownership of the loss corps stock by more than 50% over the lowest stock % owned by those stockholders during the testing period.

Answer 57

Common stock and Partnership interests are specifically EXCLUDED from LIKE-KIND EXCHANGE classification

Question 58

Corporation’s basis in case of Property contributed by shareholder/transferor

Greater of rollover basis or Liability assumed

Answer 58

Shreholder’s basis = Rollover basis -Liabilities assumed + Gain recognized

20,000-30000+10000=0

Question 59

Umbrella insurance contracts provide benefits for a liability claim, as opposed to a benefit for a property claim. A liability claim arises from an injury or damage to another person’s property (not the insured).

Answer 59

The first 20 days of a skilled nursing facility care are paid in full by Medicare.

For days 21–100, Medicare requires a daily coinsurance payment.

After 100 days of coverage, the patient must pay the full cost of care in a skilled nursing facility.

Question 60

Gain is recaptured as ordinary under Section 1250 to the extent of depreciation in excess of straight line.

e.g. That amount is $4,000. So $4,000 of the gain is recaptured as ordinary under Section 1250.

Answer 60

Jerry uses a building for business purposes. The building was purchased on April 1, Year 3, for $124,000. It was sold on October 3, Year 6, for $200,000. Accumulated depreciation as of the date of sale was $14,000, $4,000 of which was in excess of straight line. How much of the gain in Year 6 is recaptured as ordinary under Section 1250?

UNRECAPTURED SHOULD BE 10K - the difference.

Question 61

CFC- Either OR

Answer 61

A U.S. shareholder of a controlled foreign corporation is a U.S. person who owns at least 10 percent of the stock value OR voting stock.

Question 62

Consolidated -

If at least 80% or more ownership at the end of the year - same tax return

BOTH REQUIRED
At least 80% of both the VOTING STOCK and FMV of sub (VALUE at least 80%)

BOTH 80% OR MORE = VALUE/FMV of SUB AND
BOTH 80% OR MORE VOTING STOCK

CONSOLIDATED = In the event of sale to an unrelated party, take FIRST BASIS while calculating gain/loss

CONSOLIDATED RETURNS: When calculating CONSOLIDATED NOL, corps may not deduct :
1. Charitable contributions
2. Capital loss carrybacks from future years to offset a current year Net capital gain
3. NOL Carryovers from previous years

Answer 62

AFFILIATED:

When a corp DIRECTLY owns 80% or more of voting power AND value of stock of another corp.

CORPORATE SHAREHOLDERS, CORPORATION SHOULD OWN (not individuals)

(FIRES denied privilege of filing Consolidated return)

Consent form - Form1122

Brother Sister - cannot be consolidated

TO BE REMOVED from each member’s TI at the time of consolidation: CAPITAL GAINS AND LOSSES, SEC 1231 GAINS AND LOSSES, NOL, Charitable contri deduction, DRD.

Question 63

Services rendered__________

Answer 63

always at FMV

Question 64

EXCEPTION = A nonrecourse debt secured by real property will be allocated among all partners, even limited partners and included in BOTH ____________

Answer 64

the partner’s TAX BASIS and AT-RISK BASIS.

Loss suspended due to at-risk basis = Non recourse that’s not allowed in the Tax basis (Cheat code) (Year 1)

Year 2 = Suspended PAL due to insufficient AT-RISK Basis can be deducted from the gain on sale in the YEAR OF SALE.

Question 65

LIMITED PARTNER IN A LP is considered a PASSIVE ACTIVITY.

PAL = take lower of Sufficient tax and at-risk basis?
35,000 or 33,000 = take 33,000 sim

PAL Suspension = BEYOND THE EXTENT OF RENTAL INCOME
ORDINARY LOSS DEDUCTION ALLOWED = to the extent of rental income (passive)

Answer 65

Rental real estate passive income can be used to offset Partnership losses (but other partnership XYZ activity income cannot be used to offset partnership ABC losses)

Question 66

LIQUIDATING DISTRIBUTION - PROPERTY DISTRIBUTION ONLY

GAIN TO ENTITIES

C CORP, S CORP = Recognize gain at FMV of property - AB/NBV of property

Distributions come out at FMV (Considered as sale at FMV)

Partnership and LLC do not recognize any gain on distribution

Answer 66

LIQUIDATING DISTRIBUTION - PROPERTY DISTRIBUTION ONLY

GAIN TO SHAREHOLDERS/PARTNERS

C CORP, SHAREHOLDER LOSS/GAIN = BASIS of shareholder - FMV of property distributed

S CORP SHAREHOLDER LOSS/GAIN = Basis of shareholder + (Gain on S CORP property distributed to be added to BASIS of shareholder) - FMV of property distributed - Gain on S CORP property distributed
ULTIMATELY same result as C CORP

GENERAL PARTNERSHIP, partner’s Gain or loss = NO GAIN OR LOSS on DISTRIBUTION OF PROPERTY (e.g. LAND) unless there is CASH distribution

Question 67

Sec 1250 to INDIVIDUALS for real estate applies only for APPRECIATED PROPERTIES or in cases of accelerated depreciation.

IT is recaptured only to the extent of DEPRECIATION IN EXCESS OF STRAIGHT LINE (provided as $4k in the question)

Gain 90,000 less RECAPTURED 4,000

Answer 67

NO RECAPTURE OR UNRECAPTURED SEC 1250 RULE = DO NOT RECAPTURE FOR INDIVIDUALS, That’s why it’s known as UNRECPATURED rule

Question 68

In case of Janet, Karen and Lisa = LIQUIDATING DISTIBUTIONS, LIABILITY IS ASSUMED ONLY IN PARTNERSHIP

Answer 68

NOT IN S CORP

Question 69

NGC - NON GRANTOR TRUST = COMPLEX TRUST

Answer 69

TAI DOES NOT INCLUDE CORPUS

CORPUS = PRINCIPAL + CAPITAL GAINS+CASUALTY GAINS

Question 70

FDII (Foreign derived intangible income) =

Answer 70

Income that comes from exporting goods associated with intangible assets.

OUT AND OUT , not to a related party for its own use (like own entity not allowed, use for its own dental centers in Mexico)

Question 71

HSA = MAX CONTRIBUTION = $4,150(SELF ONLY), ($8,300 FAMILY PLAN)
Additional for age 55+ = $1,000
Total = $5,150

HSA if not used in the current year, rolls over to future years like IRA.

1. Must have a QHDHP
2. Cannot be eligible for Medicare
3. Cannot be claimed as a dependent
4. Owned by individual
5. Portable if change employment
6. Unused funds roll over indefinitely
7. Can be invested and earning tax free or tax free growth (if used for medical costs or qualified medical expenses)
8. Distributions are tax-free if used for medical expenses and savings tax free after age 65

Answer 71

FSA/Flexible spending account = Use it or lose it

Max Contribution = $3,200
Employer may offer 2.5 months grace period or $640 carryover to the next year

1. Can have a low - deductible plan or no health plan
2. Set-up by employer
3. Owned by employer
4. Not portable
5. Forfeited at year-end
6. May have a 2.5 month grace period
7. $3,200 per employee
8. Can change amount at open enrollment or if family situation changes
9. Distributions are tax-free if used for medical expenses
10. Annual contribution is available at beginning of plan year

Question 72

Rental real estate is by default a _______

Answer 72

Passive activity

Subject to phase out beyond AGI $150K

Question 73

_____ARE NOT RECOGNIZED ON LIKE KIND EXCHANGE

Answer 73

LOSSES

Question 74

MOM AND POP DEDUCTION

• Taxpayers who own more than 10 percent of the rental activity,

*have modified AGI under $100,000, and

*have ACTIVE participation (managing the property qualifies) may deduct up to $25,000 annually of net passive losses attributable to real estate against ORDINARY INCOME .

• There is a phase-out provision for modified AGI from $100,000 to $150,000, and the deduction is completely phased out for modified AGI in excess of $150,000.

Answer 74

True

Question 75

FMV of property is a DIVIDEND to the extent of BOTH POSITIVE AEP & CURRENT E&P ONLY + GAIN (FMV-BASIS) to be added to the E&P Balance when property is distributed. THIS IS KNOWN AS TAXABLE PORTION

Answer 75

ALWAYS ADD BACK GAIN ON PROPERTY IN E&P OR DIVIDENDS PROBLEMS, DIFFERENCE BETWEEN (FMV-BASIS)

Question 76

Property received in a divorce settlement =carryover basis

Answer 76

Holding period = Carryover basis as well

Question 77

RELATED PARTY GAIN

Answer 77

Gain is RECOGNIZED only to the extent that the FUTURE SALE PRICE exceeds the previous relative’s cost basis. (Use RELATIVE’s basis to determine gain)

No gain or loss is RECOGNIZED when SP is in the middle.

Loss is RECOGNIZED only to the extent that the SALES PRICE to the UNRELATED party is LOWER than the acquiring relative’s original purchase price in the asset. (FMV) USE PURCHASE PRICE to determine LOSS.

Question 78

The probate estate includes all the assets in the decedent’s estate that are not excluded from the probate estate. Assets that do not have a beneficiary designation would be included in the probate estate while assets that transfer automatically upon death such as POD (pay on death) and TOD (transfer on death), assets titled as joint tenants with rights of survivorship, and assets owned by a decedent’s living trust are not included. If the asset did have a beneficiary designation, it would automatically transfer to the named beneficiary upon death of the person and would not be included in the decedent’s estate.

Answer 78

Assets titled as joint tenants with rights of survivorship are not included in the probate estate and transfer to the named beneficiary upon death.

Assets that are designated payable on death (POD) automatically transfer to a named beneficiary upon death of the person and are not included in the probate estate.

TOD (transfer on death) assets automatically transfer to a named beneficiary upon death of the person and are not included in the probate estate.

Question 79

LIVING TRUST is a legal document used in estate planning that designates a trustee and provides instructions for the distribution of assets after the DEATH of the person. The living trust BYPASSES the probate process and makes the transfer of assets to the beneficiaries a smoother process. RETIREMENT ACCOUNTS should NOT be put into a LIVING TRUST (due to possible complications with EARLY WITHDRAWAL PENALTIES) but most other assets would be SUITABLE.

Answer 79

Upon death, the trustee of the trust will distribute the assets according to the instructions in the trust agreement.

Question 80

Max FEIE

Answer 80

126,500

Question 81

Accrual basis party cannot deduct the expense for liability that is owed to a cash basis taxpayer recognizes the associated income - RELATED PARTY

Answer 81

(Same year income, same year deduction), cannot be in different years.

Question 82

UNDERWRITING INCOME IS ALWAYS U.S. Income for a U.S. Corporation

Answer 82

True

Question 83

TAX FAVORED ISO

Answer 83

NO income is recognized until sold

Question 84

Value of a gift

Answer 84

FMV

Question 85

Campaign expenses paid to a political org is NOT A gift but a non deductible Business expense.

Answer 85

True

Question 86

A personal umbrella policy does not cover your own injuries or damage to your personal property.

Answer 86

Umbrella insurance contracts provide benefits for a liability claim. A liability claim arises from an injury or damage to another person’s property (not the insured).

Question 87

Tax Planning = If current marginal tax rate is lower AND FUTURE marginal tax rate is higher= Use ROTH IRA

Answer 87

A PROPORTIONAL Stock redemption is treated as a DIVIDEND

Question 88

IMPUTED INTEREST -

De minimis

any loan less than $10,000, do not need to include imputed income as long as funds are NOT USED to purchase INCOME PRODUCING ASSETS. (e.g. mutual fund or stocks)

Answer 88

For gift loans between individuals of $100,000 or less, the imputed (foregone) interest is limited to the amount of the borrower’s net investment income for the year.

If the borrower’s net investment income is $1,000 or less, the imputed interest is treated as zero.

Question 89

ROTH IRA is preferable when current marginal tax rate is expected to increase in future.

Answer 89

Traditional IRA is beenficial when current tax rate is expected to be lower in future.

Question 90

Partners pay SE tax

Answer 90

S CORP shareholders eligible for 20% QBI deduction

Question 91

NOL Rules same for C CORP and INDIVIDUALS

Answer 91

80% TI Limitation

2017 and pre-2017 = carryback 2 years, carryforward 20 years

2018-2020 = carryback 5 years, carryforward indefinitely , 100% TI

2021 onwards = carryforward indefinitely, subject to 80% TI Limitation , NO carryback

Question 92

DRD

Answer 92

0-19% == DRD 50% (Small)
20%-79% == DRD 65% (Large)
80%-100% ==DRD 100% (Consolidated)

Question 93

C CORP

Answer 93

CHaracter of gain or loss is always ST

Question 94

Current E&P are applied on a PRO-RATA BASIS to each distribution.

Answer 94

Accumulated E&P are applied in chronological order, beginning with the EARLIEST distribution.

Question 95

Stock dividends are generally not taxable unless the shareholder has a choice of receiving cash or other property.

Answer 95

The value of the taxable stock dividend is the FMV on the distribution date.

Question 96

Payment of a dividend does not create a taxable event for the corporation, a dividend is a reduction of E&P (Retained Earnings).

Answer 96

Disproportional - meaningful reduction in shareholder’s ownership interest.

The % ownership after the reduction must be less than 50% AFTER THE REDEMPTION and must be less than 80% BEFORE THE REDEMPTION.

Regardless of family ownership, a complete 100% termination of shareholder’s interest is considered dispropotional.

PaRTIAL liquidation teeated as an EXCHANGE of stock, NOT as dividend

Question 97

DELIVERY by common carrier does not create NEXUS in state

Answer 97

Minimum Accumulated earnings credit = $250,000 (deduct from TI-FEDERAL TAX)

PSC can use cash method

Question 98

NOL Carryforwards can offset 100% TI for NOLs generated in 2018-2020

80% of TI for 2021 and future years after deducting pre-2018 NOL Carryforwards

Question 99

A political contribution is not considered a gift for tax purposes, and is not subject to the gift tax.

Answer 99

Naming a beneficiary on an insured’s life insurance policy is not a complete gift because it is subject to a conditional precedent (the death of the insured), so it is not subject to the gift tax.

Question 100

Foreign stock is subject to to higher systematic risk, such as currency risk and/or sociopolitical risk.

Answer 100

Corporate bonds are generally higher risk than municipal bonds because a state or local municipality has the ability to levy taxes to fulfill its pledge under the bond indenture, whereas a corporation does not.

Question 101

A Roth IRA plan would be the most advantageous retirement plan for the client. A contribution to a Roth IRA is not deductible in the year the contribution is made. However, since the client’s other deductions currently result in a $0 income tax liability, the client would not benefit from a tax deduction for the contribution anyway. Because Roth IRA contributions are not deducted, later distribution of the contributions is nontaxable.

Distributions of earnings from a Roth IRA will also be nontaxable if the taxpayer is at least age 59½ and the distribution is made at least five years after the first day of the year in which the taxpayer makes his or her first contribution. Since the client is currently 58 years old and plans to retire in five years, both of these conditions would be met, and both the earnings and contributions distributed will be nontaxable. A contribution to a Roth IRA is not deductible in the year the contribution is made. However, since the client’s other deductions currently result in a $0 income tax liability, the client would not benefit from a tax deduction for the contribution anyway.

Answer 101

A traditional SEP IRA is a type of retirement account that is available to self-employed taxpayers. This type of plan would not be the most advantageous for the client because the contributions are deductible in the year they are made, and subsequent distributions of both principal (contributions) and earnings are fully taxable. Since the client’s other deductions currently result in a $0 income tax liability, the client would not benefit from the tax deduction for the contribution and would have to pay income tax on the total distributions after the client retires and is in a higher tax bracket.

A traditional employer-sponsored 401(k) plan would not be the most advantageous plan for the client because the contributions reduce the taxpayer’s taxable wages in the year the contributions are made, and subsequent distributions of both principal (contributions) and earnings are fully taxable. Since the client’s other deductions currently result in a $0 income tax liability, the client would not benefit from the reduction in his or her taxable wages and would have to pay income tax on the total distributions after the client retires and is in a higher tax bracket.

Question 102

LIFO Recapture Tax
A tax imposed on an S corporation’s excess inventory, computed using the FIFO method over the inventory using the LIFO method for the last C corporation year.

Answer 102

Modified Accelerated Cost Recovery System (MACRS)
The depreciation method generally used since 1986 for depreciable property other than real estate. MACRS reduces an asset’s basis faster than the straight-line depreciation method.

Question 103

SHAREHOLDER Basis in C CORP =

Answer 103

Cash contributed + Services performed

Question 104

Nonrecourse Debt
An obligation for which the debtor is not personally liable; for example, a mortgage on real estate acquired by a partnership without the assumption of mortgage liability by the partnership or any of the partners.

Question 105

Exception: The donor’s deduction for contribution of LTCG property to a charitable org is limited to the AB of the property IF :

Answer 105

The property is tangible personal property; AND
the charitable org uses the property for some purpose that is not related/UNRELATED to its charitable purpose (Such as selling or auctioning off the property)

Question 106

Donation of qualified VEHICLE sold by charitable org - If FMV at the date of the contribution is more than $500, the deduction is limited to the lesser of:

1. The gross proceeds from the sale of the vehicle; or
2. The FMV on the date of contribution (Assuming the FMV is less than the adjusted basis of the vehicle)

Answer 106

If the charitable org sells the vehicle for $500 or less, the deduction is limited to the lesser of:

1. $500 or
2. the FMV on the date of contribution (assuming the FMV is less than AB of the vehicle)

Question 107

Probate is a FORMAL LEGAL PROCESS to ADMINISTER an estate and DISTRIBUTE assets to the intended beneficiaries.

Answer 107

Tax qualified retirement plan has an advantage - avoidance of probate when the retirement plan is part of a trust arrangement or insurance contract.

Question 108

ANNUITY Contracts

Answer 108

Contracts between a TP and an insurance company. The earnings in the annuity accumulate on a tax deferred basis.

Question 109

Maximum contri to 401K is $23,000 for 2024 and ($30,500 if the employee is age 50 or older). The employee’s contri is limited to the employee’s comp for the year.

TRADITIONAL 401(K)
Employees do not pay income tax on wages they elect to contribute to a traditional 401K, although the wages are still subject to FICA and FUTA Taxes. Employer contributions to an employee’s traditional 401K account are not taxable income to the employee.

The maximum amount that the employee and employer combined can contribute to an employee’s 401K account is $69,000 in 2024 ($76,500 if the employee is age 50 or older)

Answer 109

ROTH 401K

Wages that an employee elects to contribute to a ROTH 401K are still fully TAXABLE.

Employer contributions to ROTH 401K accounts are TAXABLE income to the employee at the time of contribution

Question 110

Penalty for premature distributions of Sec 401K-

10% additional penalty tax on taxable distributions an employee receives BEFORE age 59.5 (or age 55 if he or she is no longer an employee of the 401K PLAN SPONSOR)

401K Employer sponsored retirement plan, Exceptions where no penalty is applicable

1. Medical expenses in excess of % of AGI Floor
2. Adoption or birth of a child within the first year after birth or adoption (5k maximum)
3. Disability (Total and perm disability)
4. Divorce - Division of account assets under a QDRO (Qualified Domestic relations order)
5. Death or terminal illness of account owner
6. Disaster - Federally declared natural disaster ($22k maximum)
7. Emergency expenses (for personal or family emergency, upto $1,000 per year)
8. Domestic abuse victims (lesser of $10,000 or 50% of retirement account)

Answer 110

IRA 10% penalty tax exceptions (differ from 401K exceptions):

1. HOMEBUYER (first time) - Distribution used toward the purchase of 1st home within 120 days of distribution ($10,000 maximum exclusion)
2. Insurance (medical) - If unemployed within 12 consecutive weeks of unemployment compensation
3. Medical expenses in excess of % of AGI Floor
4. Disability (permanent or indefinite, not temporary)
5. Education: College tuition, books, fees, etc.
6. Adoption or birth of a child made within 1 year from the DOB or adoption ($5k max exclusion)
7. Disaster - Qualified natural disaster ($22k maximum per disaster) SAME AS 401K
8. TERMINAL illness or death SAME
9. Emergency Expenses (for personal or family emergency, upto $1,000 per year) SAME
10. Domestic abuse victims (lesser of $10,000 or 50% of retirement account) SAME

Question 111

NOL - Carryback - Tax refund

Answer 111

Carry forward = Pay less taxes in future

Question 112

Sec 382 ownership (Aggregate ownership of shareholders should increase from 5% to more than 50%)

Ending or new ownership% - Beginning or old OWNERSHIP% = Increase in Ownership%

Answer 112

Annual sec 382 limitation amount = FMV of the loss of corp immediately BEFORE the ownership change * LT Tax Exempt rate

If limitation amount is greater than the TI amount for the year, any unused limitation amount is CARRIED FORWARD and it INCREASES the next year’s LIMITATION amount

Question 113

If DRD creates NOL , take higher of the 2 or else take lower of the 2:

1. 65% or as applicable % of Dividends
   or
2. 65% of TI

Answer 113

50%, 65% AND 100%

Question 114

A NOL carryback cannot be carried back to a year if it creates or increases a NOL for that year

Answer 114

If shareholder only contributes services, he is not counted as having control in corp. However, if he contributes both services and cash , then he is counted towards having a 80% control.

Question 115

C CORP CORPORATE DISTRIBUTIONS = DIVIDENDS when it comes out of E&P (GAAP calls it RE)

Answer 115

Distribution of depreciated property:
1. The corp cannot recognize a loss
2. The dividend is taxable income to the shareholder.
3. The shareholder’s basis in property distributed is the FMV of property.

Question 116

STOCK REDEMPTION occurs when a corp buys back stock from its shareholders.

Answer 116

PROPORTIONAL - If all shareholders are treated the same, the stock redemption is treated as a dividend. TAXABLE DIVIDEND = ORDINARY INCOME

DISPROPORTIONAL or Substantially DIspropotionate, stock redemptions treated as a SALE and recognizes CAPITAL GAIN . The % ownership after the redemption must be less than 50% and must be less than 80% of the percentage ownership before the redemption.

Question 117

Parent/Subsidiary liquidation - No gain or loss is recognized by either the paretn corp or the sub’s corp when the parent who owns at least 80%, liquidates its subsidiary.

CARRYOVER BASIS will be considered for non cash property when it comes to liquidation (and not the FMV) exception

Answer 117

The parent assumes the basis of the sub’s assets, as well as any unused NOL or capital loss, or charitable contribution carryovers.

Question 118

QSBS = Lucrative for investors as they allow upto $10 mn tax free(Sec 1244 stock)

EXCLUSION

SEC 1244 applies only to losses. Any gain from the sale of the stock is a capital gain.

Sec 1244 stock - applies to original purchaser , individual or partnership

Applies to ORIGINAL PURCHASER, INDIVIDUAL OR PARTNERSHIP

Tax treatment to shholder on the SALE of QSBS
1. 100% nontaxable gain or free if stock held for more than 5 years
2. Max exclusion : 10 times shholder’s stock basis OR $10 million
3. Any taxable gain in excess of exclusion taxed at regular tax rates

Answer 118

Issuer of Section 1244 stock
1. Domestic corp
2. Small business stock (issued<orequal to 1,000,000)
3. Shares issued for cash or property(other than securities)
4. <or equal to 50% of receipts from certain inestments and passive activityes(past 5 years)

Single - first $50,000 of loss reclassified as an ordinary loss
Any remaining loss is considered as a capital loss

Because a Section 1244 loss is an ordinary loss, it may be treated as a trade or business loss when calculating an individual’s NOL.

Question 119

The taxpayer can generally avoid the substantial valuation misstatement penalty and the gross valuation misstatement penalty if any one or more of the following circumstances apply:

1. The taxpayer may prepare and document a Section 482 study.
   (a) Based upon appropriate pricing methods
   (b) completed no later than the date the taxpayer files the federal income tax return
2. Penalties may be avoided if any portion of the net increase in federal income tax is attributable to any transaction solely between foreign corps, unless the treatment of such transaction affects the determination of income from sources within the US or taxable income effectively connected with the conduct of a trade or business within the US

Answer 119

INTERNATIONAL TAX ISSUES

Foreign subsidiary - separate legal entity, Certain types of income are not allowed to be deferred and are subject to immediate taxation (such as e.g. passive investment income)

Income earned by the SUB is not taxed until the earnings are brought back to the U.S. in the form of a dividens. In this way, the U.S. company has control over when foreign profits are recognized.
________________________________

A 10% shareholder than is not a U.S. Corp is not eligible for the DRD.

A U.S. Corp is allowed to exempt foreign source dividend payments from U.S. Taxation by taking a 100% DRD against such income if US corp owns 10% or more of the Dividend paying foreign corp.

No residual tax is imposed on dividend repatriations from foreign jurisdictions and the U.S. govt will not collect taxes on the foreign income.
_______________________
Following are not eligible for the 100% DRD
X Subpart F income
XGILTI
XIncome invested in U.S. property
XIncome subject to the transition tax

Question 120

FTC Limitation = US Taxes * Foreign source income
_______________________
Total Taxable Income

Answer 120

PFIC - A foreign entity is a PFIC if it meets:

1. Gross income test -75% or more of the foreign corp’s gross income is passive (e.g. dividends, interests, rents, royalties)

OR

2. The asset test - at least 50% of the foreign corp’s total assets are passive (e.g. assets that produce passive income).

PFIC undistributed earnings are subject to U.S. taxation under one of the 3 methods:

1. QEF - Qualified electing fund
2. MTM - Mark to marker method
3. Excess distribution method

Question 121

CFC - if more than 50% of its stock is owned by U.S. Shareholders.

A US Shareholder is any US PERSON owning at least10% of the foreign corp’s stock (VOTE OR VALUE).

Subpart F ONLY APPLIES to a foreign corp that qualfiies as a CFC

Answer 121

GILTI arose from TCJA, Applies from 2018 - It is a minimum tax imposed on certain Low-taxed income that is intended to reduce the incentive to relocate CFCs to low-tax jurisdictions.
US Corps are allowed special deduction?

Tax deduction amount

1. 2018-2025, the deduction amount is 50% of GILTI (37.5% for 2026 and later)
2. The TP is allowed to take a FTC upto 80% of the foreign taxes deemed paid
3. This deduction generally results in an effective tax rate of 10.5% (13.125% beginning in 2026) on GILTI inclusions as it halves the statutory corp tax rate of 21%

Tax Inclusion amount
- The GILTI is equal to the U.S. shareholder’s share of the CFC’s NI reduced by the excess of:
(a) 10% of the CFC’s aggregate AB in depreciable tangible property used in its trade or business over
(b) the CFC’s net interest expense

NI less: 10% of avg adjusted basis of quarterly depreciable tangible property= GILTI income

e.g. corporate shareholder’s ownership percentage e.g. 18% * GILTI income will be his share e,g, 18% *1384375 = $249,188

Corporate shareholder is eligible for 50% GILTI deduction because it is a corporate shareholder. It’s GILTI deduction is 50% of $249,188 = $124,594

Question 122

A US shareholder can exclude distributions of a CFC’s E&P that were previously taxed income (PTI) to U.S. shareholders as a result of a SUBPART F inclusion, GILTI inclusion or an investment in U.S. property

Answer 122

Transition tax - It is a 1 TIME TAX on the previously UNTAXED FOREIGN EARNINGS of a CFC consistent with the TCJA’s change to a territorial based tax system.

TCJA created a territorial style system for certain U.S. corps by allowing a 100% DRD for foreign source dividends from CFC.

The TRANSITION to this new system requires all U.S. shareholders to pay a 1 TIME TAX on the CFC’s previously UNTAXED FOREIGN EARNINGS.

For the last TAXABLE year beginning before Jan 1, 2018, a 1 TIME DEEMED REPATRIATION TAX is imposed on accumulated, untaxed earnings of foreign corps and is taken into account by all U.S. shareholders who own 10% or more of the CFC.

An EXCEPTION permits S CORP to defer the tax until the S CORP LIQUIDATES, CEASES doing business or the STOCK of the S CORP is TRANSFERRED.

CFC untaxed earnings, transition tax
Cash and cash equivalents = 15.5%
All other earnings = 8%

US shareholders can elect to pay the transition tax in 8 installments over 8 years pursuant to a specified schedule Year 1 to Yr 5 = 8%, Yr 6 = 15%, Yr 7 = 20%, Yr 8 = 25% (Total = 100%)

Question 123

BEAT, Base Erosion and Anti-Abuse Tax

Created under TCJA to impose a minimum tax on large US corps with a significant amount of deductible payments to related foreign affiliates.

1. AFFECTS US CORP with AVG ANNUAL GROSS RECEIPTS of at least $500 million for the 3 year taxable period ending with the preceding taxable year.
2. Enacted because the deductions reduce the US TAX BASE.
3. Effective for taxable years beginning after Dec 31, 2017 and is imposed on a US corp’s modified taxable income.

BEAT DOES NOT APPLY TO individuals, S CORPS, REGULATED INVESTMENT COMPANIES (RICs), REITs

Deductible payments to a CFC are added back in calculating a TP’s modified taxable income even if they are included in the TP’s as SUBPART F INCOME .
Tax rate = 2018 = 5%
2019-2025=10%
2026 or later = 12.5%

Answer 123

SUBPART F INCOME (PASSIVE AND ACTIVE INCOME FROM A RELATED PARTY)

BEAT - This PROVISION is a means to ELIMINATE the TAX ADVANTAGE that would result from these payments, as they reduce the US Tax Base.

Question 124

FDII (Foreign derived intangible income deduction) - TCJA created a new deduction for certain export activities.

Under the new provision, US corp can get a deduction for a portion of its FDII. IRC Section 250 provides U.S. Corps with a deduction for a portion of its FDII.

FDII is income from transactions(PROPERTY RELATED MOSTLY) involving non-U.S. persons located outside the US (DOUBLE OUT) including :

1. Sale of property sold by the TP to any person who is not a U.S. person and is for foreign use.
2. Services provided the taxpayer to any person or with respect to property not located within the US
3. property sold to a related party who is not a US person provided the property is ultimately sold by the related party to an unrelated party who is not a US person and the property is used outside the US.

the deduction amount is 37.5% for years beginning before 2026 (reduced to 21.875% for years after 2026)

Answer 124

The deduction for FDII is available only to C CORP that is not RICs or REITs.

Question 125

INTEREST-CHARGE DOMESTIC INTERNATIONAL SALES CORP (IC-DISC)

A set of provisions that enables domestic manufacturing corps that export goods to reduce their tax liability by permitting a tax deductible commission to be apid to an IC-DISC. Since the IC-DISC is tax exempt, no income is recognized on these commissions, thereby reducing the tax liability of the corp as a whole.

For domestic corps that manufacture or distribute US goods to export internationally, an IC-DISC may be beneficial to consider implementing.

IC-DISC allows an exporter corp to AVOID CORP Tax on the commission paid to the IC-DISC. There are limits to the commission that can be paid to an IC-DISC.

The max commission that can be paid to an IC-DISC is the GREATER of:
1. 50% of net sales of export property or
2. 4% of gross revenue from sales of export property

Export property must be certain qualified property.

Answer 125

It’s a TAX-EXEMPT entity that works as follows:

1. The US based corp (exporting co.) pays a commission to the IC-DISC, which generates a deduction for the US based corp.
2. The IC-DISC receives the commission income from the US based corp but since the IC-DISC is tax-exempt, no tax liability is generated.
3. The IC-DISC distributes the commission to shareholders, which is taxed at preferential rates to the shareholders (qualified dividend/LTCG rates)

Question 126

ANTI-DEFERRAL RULES - these provisions include PFICs, Subpart F income (CFC), Foreign base company income rules to discourage TPs from engaging in activities that would allow deferral of recognition of foreign income.

Answer 126

GILTI - A minimum tax imposed on certain low-taxed income that is intended to reduce the incentive to relocate CFCs to low-tax jurisdictions.

Question 127

Earnings invested in US property

Answer 127

Provision applicable to US shareholders intended to deter US TPs from REPATRIATING non-SUBPART F earnings from a CFC through loans and other investments in US property in a tax free manner.

Question 128

FORM 1120-F

Answer 128

US Income tax return of a Foreign CORP to report the income earned by the US BRANCH.

Question 129

NON-BUSINESS INCOME - FIXED, DETERMINABLE, ANNUAL OR PERIODIC INCOME (FDAP)

FDAP deals with the W/H on foreign persons’ INVESTMENT TYPE INCOME (e.g. DIVIDENDS, INT, ROYALTIES and COMP from personal services)

Taxed on a gross basis at statutory rate of 30%.

Withholding ensures the collection of taxes from foreign persons, over whom the IRS would typically not have the jurisdiction to tax.

The US person controlling the payment of US Source income to the foreign person is responsible for withholding the appropriate amount of tax on such payment.

Answer 129

NON BUSINESS INCOME: FATCA, 2010

it deals with withholding tax on foreign entities for failure to provide information to US recipients:

The purpose of FATCA is to help combat tax evasion tied to US persons investing in foreign entities (e.g. deposits in foreign banks)

Imposes a 30% withholding tax on foreign entities that do not provide information about US persons on Form 8966 FATCA report.

Applies to
1. Foreign fin institutions
2. Non fin foreign entities

Question 130

SPT = AT least 31 days during the current year

Answer 130

1/3 of preceding year and 1/6 of preceding prior year

Question 131

Mark to market regime for individuals -

The mark-to-market tax regime is imposed on covered expatriates who renounce their U.S. citizenship and satisfy one of the following three tests:
*
Tax Liability Test: average annual net income tax liability for five preceding taxable years exceeds indexed threshold ($190,000 for 2023).
*
Net Worth Test: Net worth of $2 million or more on date of expatriation.
*
Compliance Test: The individual failed to comply with U.S. federal tax obligations for five preceding taxable years.
Calculation of Tax
*
All property of the “covered expatriate” is treated as sold on the day before the expatriation date with any gain arising from the deemed sale taken into account in the taxable year of the deemed sale.
*
A $821,000 exclusion (2023) is allowed.
*
A taxpayer may elect to defer payment of tax attributable to property deemed sold [Section 877A(b)].

Question 132

TAX BASIS turns to ZERO and nothing can be dedcuted in the next year

Answer 132

ZERO DEDUCTION IN NEXT YEARS. In the year of disposition, any remaining suspended losses (PERMANENTLY LOST) due to INSUFFICIENT TAX BASIS are not deductible.

Question 133

S CORP

Form 2553 - Election by a Small Business Corporation (When C corp elects to be taxed as S Corp)

SEC 351 exchange tax free or non taxable if :
1. A contribution of property (NOT SERVICES)
2. Solely in exchange for stock (NO BOOT)
3. After the transfer, the shareholder or group of shareholders transferring in an integrated transaction has control of the corp through 80% or more, stock ownership

S CORPS are subject to tax ONLY when they have been C Corp previously,
resulting tax due to this conversion of entities is paid in 4 equal installments (takes 4 years)
1. The first of which is due with the final C Corp
2. The remaining 3 installments are paid by the S Corp in the first 3 years

1. LIFO RECAPTURE TAX
2. BIG TAX
3. PAL TAX

5 circumstanaces under which an S corp is exempt from the BIG TAX
(A) S corp was never a C Corp (B) Sale of transfer does not occur within 5 years of the first day that the S election is effective (C) The distributed asset was acquired after the S Election (D) The total net unrealized BIG has been completely recognized in prior tax years.

A QBI or Sec 199A below the line deduction of 20% of QBI may be available on ORdinary business income flowed through from S CORP - ADVANTAGE OF S CORP,

AAA is increased by ORD INCOME + SEPARATELY STATED INCOME AND GAIN

(No effect of tax exempt income or expense on AAA related to tax exempt income as it goes to OAA account)

OAA - It keeps a cumulative record of items that affects shareholder’s basis but do not affect AAA, E.g.

1. Tax exempt int on municipal bonds and related expenses
2. Tax exempt life insurance proceeds and related nondeductible premiums
3. Federal taxes paid or accrued in an S Corp year that relate to C corp years

OAA does not impact the taxability of S Corp distributions

An S CORP can elect to treat distrbn first from prior year C Corp’s AEP and then from S Corp AAA for a particulat year. Advantage would be to eliminate C corp E&p in order to potentially avoid terminating its S status due to excess Passive Investment Income. Another reason may be that it is a good year for shareholders to receive dividend income due to a LOW Individual TAX RATE.

An S CORP DOES NOT recognize a loss on the distribution of depreciated property to shareholders.

Shareholder’s basis is decreased by FMV of property distributed.

Answer 133

Shareholders are going to be TAXED on their proportionate share of the S corp earnings REGARDLESS of whether the earnings are distributed to them.

S CORP Shareholder basis:

Cash contributed
+ NBV of property contributed (reduced by any liability assumed by the corp)
+ FMV of any services contributed (Taxable to shareholder
+ Any gain recognized
________________________________________
SHareholder’s initial basis in the stock received)

SHAREHOLDER BAsis = FMV (when it does not qualify for Sec 351 exchange or NBV+ GAIN

Or

AB in property- debt assumed by the corp (WHEN Mortgage is involved)

GAIN REALIZED = FMV of property contributed - Basis

CORP’S BASIS = Greater of AB or Liability Assumed

Distbn of DEPRECIATED PROPERTY is not allowed for S CORP - NO LOSS recognized by Shareholder/Corp. S CORP recognizes ONLY GAIN on APPRECIATED PROPERTY.

S CORP Status will terminate as a result of the following 3 occurrences:

1. Shareholders holding more than 50% of the stock (voting and nonvoting) consent to a voluntary revocation
2. Corp fails to meet any of the qualifications for S status
3. Excess passive investment income - More than 25% of the corp’s gross receipts are from passive investment income for 3 consecutive years (but only if the corp has prior C Corp E&P)

If no date is specified and the revocation is filed by March 15, the revocation is effective Jan 1 of the current year. If revocation is filed after March 15, the effective date is Jan 1 of the following year. IF CORP FAILS to meet any of the requirements, S Corp status is terminated immediately.

With excess passive income, S Corp status is terminated at the beginning of the 4th year.

One S corp status has been TERMINATED, the corp must wait until the BEGINNING of the 5TH YEAR after the year of termination before it can elect S CORP status again

Question 134

ESTIMATED TAX PAYMENTS

Each payment is equal to 25% of the corp’s annual required payment

Minimum annual required payment is the lowest of the following:
1. 100% of current tax liability
2. 100% of PY’s Tax liability-may only be used for 1st Quarter payment for large corps (Over 1 mn in taxable income in 3 prior years), may not be used if corp did not have a tax liability on PY return.
3. 100% of estimated tax liability in CY by using the method of annualizing QUARTERLY TAXABLE INCOME.

Answer 134

ANNUALIZED METHOD

Q1 12/3 25% OF ANNUALIZED TAX

Q2 12/3 50% OF ANNUALIZED TAX

Q3 12/6 75% OF ANNUALIZED TAX

Q4 12/9 100% OF ANNUALIZED TAX

Question 135

PARTNERSHIP CONTRIBUTION

Profit int in partnership - No gain or loss to be recognized by the partner on contribution

Capital Int in partnership - Taxable ordinary income to be recognized (HIS SHARE * LIQUIDATION VALUE)

Tax year (Calendar year generally required) can elect fiscal year if consistent with tax year of majority of partners.

Related party losses (WRaP) - DISALLOWED
Losses between a controlling partner (OVER >50% INT in CAPITAL OR PROFITS) and the controlled partnership from the sale or exchange of property are not allowed.

Related party GAIN is TAXABLE ORDINARY INCOME if the property is NOT a CAPITAL ASSET in the hands of the transferee.

Guaranteed payment subject to SE TAX by PARTNERS - not eligible for QBI (only applicable for S CORP Shareholders because they are paid ORd income/salary)

Answer 135

PARTNER’S BASIS = CAPITAL ACCOUNT + PARTNER’S % OF PARTNERSHIP DEBT (Liabilities)

EXCEPTION: A PARTNER’S share of QUALIFIED NONRECOURSE FINANCING (QNF) is a REAL ESTATE MORTGAGE obtained from an unrelated commercial lender and is INCLUDED in PARTNER’S AT-RISK BASIS.
Other nonrecourse debts are not included in AT-RISK BASIS.

If LIABILITIES assumed by other partners does not exceed the BASIS of the property CONTRIBUTED, then the CONTRIBUTING PARTNER will NOT have to recognize gain (ZERO GAIN) at the time of the CONTRIBUTION.

Question 136

PARTNERSHIP LIQUIDATION

LOSS = Outside basis - Inside basis

Even if the partners did not make a SEC 754 election, the IRS will mandate a 743(b) ADJUSTMENT if there is a SUBSTANTIAL BUILT-IN LOSS (when inside basis exceeds outside basis by $250,000 or more) at the time of PURCHASE. The goal of this ADJUSTMENT is to make the transferee have the OUTSIDE BASIS=INSIDE BASIS.

Answer 136

Partners recognize gain ONLY on the distribution of CASH when CASH DISTRIBUTED exceeds their basis

ZERO OUT TO GET OUT (LIQUIDATION)

If the entity is organized as a PARTNERSHIP, the entity DOES NOT recognize any gain on the appreciation of the property distributed to the owners in LIQUIDATION of the business and the owners would not geenrally recognize a gain or loss on the disposition of their partnership interest. C and S Corp recognize CAPITAL gain (FMV-BASIS) on appreciation of the property distributed.

Question 137

LLC - Not liable for recourse loan as all members have LIMITED LIABILITY.

Answer 137

None of the members will be liable for RECOURSE LOAN unless one or more owners PERSONALLY GUARANTEE the LLC recourse loan. LLC is more like LIMITED PARTNERSHIP.

Question 138

ISO

1. Voting power <10%
2. Right to buy back in the company at a discount.
3. Must be granted under a written plan document approved by the shareholders that indicates the total number of shares that may be issued and the employees eligible to participate.
4. Exercise upto $100,000 ISOs- Amount exceeding this will fall under category of NQSOs.
5. The employee must remain an employee of the corp from the date the option is granted until 3 months (1 yr if due to permanent and total disability) before the option is exercised.
6. EXERCISE PRICE MAY NOT BE LESS THAN FMV AT GRANT, MUST BE EQUAL.
7. Must be held by an employee for 2 years after grant date and 1 year after exercise date.

(Nothing to do with exercise price if readily determinable established exchange price is available)

Answer 138

ESPP

1. Voting power less than 5%
2. Employee contribution via payroll deduction
3. Plan must be written and approved by shareholders. Available to all FT Employees other than highly compensated employees and those with less than 2 years of employment.
4. Options cannot be exerised more than 27 months after the grant date.
5. No employee can acquire the right to purchase more than $25,000 of stock per year.
6. Employee must remain with the corporation from the date the option is granted until 3 months before option is exercised.
7. Exercise price may not be less than 85% of FMV when granted or exercised (whichever is lesser)
8. Same as ISO - Must be held by an employee for 2 years after grant date and 1 year after exercise date.

Question 139

AMTI FORMULA :

REGULAR TAXABLE INCOME
+/-ADJUSTMENTS
+PREFERENCES
____________________________
=AMTI

AMTI - ADJUSTMENTS (PANIC)

INCLUDED
1. PAL
2. Accelerated depreciation (no adjustment required for Sec 179 expense)
3. NOLs
4. Installment method may not be used for the dealer of property sales
5. Contracts (LT) - difference between % of completion method and completed contract method or any other method of accounting is an Adjustment

ADDED BACK AS ADJUSTMENTS
1. STATE TAX
2. STD DEDUCTION (if claimed)

DEDUCT AS AN ADJUSTMENT
(-) Refunds of state and local taxes included in taxable income

OTHER AMT ADJUSTMENTS
1. ISO exercised (Exercise price - Grant/purchase price)=ISO AMTI
2. Recalculate gain or loss on sale of depreciable assets
3. Pollution control facilities and amortization deductions
4. Mining exploration and development costs
5. Circulation expenses
6. Research and experimental expenditures
7. Passive tax shelter farm activities

NOT ADJUSTMENTS
(X Charitable contri and acquisition indebtedness-NOT ADJUSTMENTS)

Answer 139

AMTI

PREFERENCES(ALWAYS ADD):

1. Private Activity bond tax-exempt int income
2. % depletion deduction (excess of regular tax deduction over the property’s AB is added back)
3. Pre-1987 accelerated deprecaition over straight line for real property
4. Excess intangible drill costs
5. Gain on small business stock

Question 140

TRUST FORM 1041, Trust- Separate legal entity , created by grantor, managed by trustee. On an annual basis, the trust’s corpus (principal) may be used to generate TAXABLE INCOME.
The income passes through to either the trust’s grantor or beneficiaries for recognition annually.

CORPUS = Beginning balance + Capital gains - Trustee Fee(50%)

Trust ACCOUNTING INCOME (Book Income)=Tax-exempt int income + TAxable interest income + Dividend Income - Trustee fees (50%)

TRUST TAXABLE INCOME - Capital gains and losses (Except tax exempt income and expenses associated with it)

DNI = Trust taxable income+Exemption-Capital gains+Tax exempt int income - Trustee fees allocated to tax exempt interest

Answer 140

Grantor Trust (in which grantor retains certain ownership powers or control over the property transferred to the trust such as power to take income or borrow from the trust or change trust beneficiaries)= REVOCABLE LIVING TRUST, grantor trusts are not required to file separate income tax returns. Grantor trusts DO NOT need to file the return separately.

Individuals commonly use a revocable living trust instead of a will to stipulate how their assets and the provisions of the trust during the grantor’s lifetime.

NON-GRANTOR trusts - SIMPLE or COMPLEX trusts, these are separate taxpaying entities. Trust Income is taxable either to the trust or to the beneficiaries, depending on the amount of distributions to beneficiaries, the type of income and the type of trust.

Question 141

An exchange of personal residence would not qualify as a like-kind exchange since the USE of the property is personal. However, land whether unimproved or improved, is qualified property if it is held for INVESTMENT or USED IN A TRADE OR BUSINESS.

Common type of boot are Cash and COD

Non taxable disposition

Involuntary conversion - losses are recognized immediately.When the loss is recognized, the basis of new property is its REPLACEMENT COST. Recognized and realized loss will be the same.

All of the loss is deferred in like kind exchange as losses are not allowed and increases the basis in the new property.

Involuntary conversion rules apply to gains only.

-No gain is recognized when
(a) other similar property is received to replace the involuntarily converted property and
(b) all insurance or condemnation proceeds are reinvested in similar property

Gain is not recognized when all insurance or comdemnation procceds are reinvested in similar property.

LIKE KIND EXCHANGE - Only REAL PROPERTY QUALIFIES (Personal property DOES NOT qualify).

TPs must identify Like-kind replacement property within 45 days of giving up their property. Like kind property must be received by the earlier of 6 months or the due date of the tax return , the sale of property at the end of the year when the tax return is due in less than 6 months.

Answer 141

1. Surviving spouse is entitled to the full $500,000 exclusion if the surviving spouse sells the home within 2 years after date of the decedent spouse’s death
2. If only one spouse meets use test and not the other spouse, then exclusion amount is limited to $250,000 on sale of personal residence. Both must meet Use test, only one can meet OWNERSHIP test.

exception: hardship due to medical condition which forced the sale, exclusion amount in that case is :

Maximum single exclusion($250,000)*Months of qualifying ownership (e.g. 12 months)
_____________________________________________
24 months

=$125,000 allowable exclusion

3. In case of non-qualified use, e.g. rented for 2 out of 5 years, exclusion will be limited.This will apply to gain.

If the home is empty, it is not considered nonqualified use.

Question 142

Installment sales = GROSS PROFIT %

Loans charge interest and interest is taxable.

Answer 142

A portion of each installment payment will be treated as IMPUTED int, taxed at ordinary rates if no interest or inadequate interest is reported by the seller.

The interest is reported separately from each installment payment as ordinary income.

Question 143

TREASURY STOCK (ORDINARY property or sec 1231 asset) - non taxable transaction (no income or loss is recognized), NEVER TAXED

Question 144

SEC 1231 - Used in trade or business for more than 1 year (LT) - can be treated as both Capital gain and ORDINARY gain/loss

Answer 144

NET Sec 1231 loss is treated as Ordinary loss

NET Sec 1231 gain is treated as Capital gain

5 year lookback rule

Question 145

REAL PROPERTY

INDIVIDUALS, SEC 1250 REAL PROPERTY -
Sec 1250 real property (Gains only), does not apply to land as it is never depreciable. Applies only to individuals. (ONLY RECPATURE EXCESS OVER SL METHOD) UNRECAPTURED SEC 1250 GAIN (taxed at 25% rather than preferential rateS, Extremely rare in real scenario - almost never RECAPTURED), (considered as 1231 gain) to the extent of the lesser of:
1. recognized gain or
2. Accumulated depreciation taken on that asset.

C CORP - SEC 291, REAL PROPERTY the amount of recapture treated as ordinary income is calculated as :

20% of the lesser of
1. the recognized gain or
2. the accumulated SL depreciation taken on the asset

Any remaining gain is a Sec 1231 gain (LTCG).

Sec 291 depreciation only applies to C Corps, not other types of businesses.

Question 146

RELATED PARTIES (Sec 267) - Lineal or direct descendents (Grandparents, parents, children, grandchildren, spouses). IN LAWS AND STEP BRO, STEP SIS DO NOT COUNT AS RELATED PARTIES.

1. Entities that are more than >50% owned directly or indirectly by individuals, corps, trusts and/or partnerships. Constructive ownership rules apply.
2. Controlled groups (any 2 businesses/Corps, partnerships, S Corps,or a combination of those both more than >50% owned by the same party).
3. Various relationships between trusts, grantors, fiduciaries, executors and beneficiaries.
4. Tax exempt orgs and persons controlling, directly or indirectly, such orgs.

Answer 146

RELATED PARTY LOSSES are disallowed.

Holding period is when daughter bought stocks from mother (mother’s basis 10000)for 8000 (NO ROLLOVER Holding period for related party losses)

When sold at a lower price by daughter (Use daughter’s or second party’s original purchase price while determining loss), loss should be minimum.

Question 147

GIFT LOANS

LOAN <10,000 between related parties- No imputed interest reported on tax return if loan is below $10,000. Only actual interest paid is reported.

LOAN>$10,000 and <$100,000
-Lender taxed on foregone interest/imputed income upto amount NII, Net Investment Income

-Borrower deducts foregone interest upto amount of NII (not personal interest)

Similar to gambling losses - can only offset gambling winnings to $0 and cannot claim a loss.

If borrower’s NII is $1000 or LESS, the foregone interest is treated as ZERO.

Answer 147

LOAN >$100,000 (Sec 7872), Imputed interest will be charged and reported.

Lender taxed on total foregone interest.

Borrower can deduct all foregone interest regardless of NII (not personal interest)

Question 148

Net off debt relief in LIKE KIND EXCHANGE

Answer 148

Considered as boot

Question 149

MACRS is part of Ordinary business income

Answer 149

Sec179 expense is a separately stated item
Late filing penalty - SS ITEM
Charitable contri deduction - SS item

Question 150

Partnership debt lended by a partner when loan is recourse debt that is not secured by any partnership property belongs only to the lender partner and not to be divided amongst all the partners.

Answer 150

Losses nondedcutible on partner’s individual return when partner owns more than 50% ownership

Question 151

Independent contractor income = ACTIVE, BUSINESS INCOME (kind of from sole proprietorship)
K-1 ORDINARY BUSINESS INCOME = ACTIVE AND BUSINESS

K-1 RENTAL real estate ,BUSINESS PASSIVE

Answer 151

GUARANTEED PAYMENT, ACTIVE NON-BUSINESS INCOME

Question 152

Return of capital is neither taxable nor non-taxable, but it _________

or
RETURN OF CAPITAL = BASIS -AAA

Answer 152

reduces basis in stock

Question 153

S CORP BASIS

Answer 153

ALWAYS ADD GAIN ON Non liquidating distrubtion to the BASIS of all the shareholders.

Question 154

Accounts payable , Trade payable = RECOURSE DEBT

Answer 154

NONRECOURSE DEBT - Secured equipment loan + QNF (Mortgage)

QNF=Part of both Tax Basis and At-risk basis

Question 155

C CORP EARNINGS - SUbject to double taxation

C CORP NOLs

Low income tax brackets , no NIIT, it’s for high tax paying individuals.

Answer 155

Income passed through by both PARTNERSHIP AND S CORP are eligible for 20% QBI deduction.

No QBI deduction in case of loss

Question 156

Choice “B” is correct. Distributions of earnings in a qualified Roth IRA distribution are nontaxable.

A distribution from a Roth IRA is a qualified distribution if it is made at least five years after the first day of the year the taxpayer made his or her first contribution to the account and meets one of the following requirements:

the taxpayer’s age is 59 ½ or older;
the taxpayer is disabled;
the taxpayer is a first-time homebuyer and uses the distribution to purchase a home (max $10,000); or
the distribution is made to a beneficiary after the taxpayer’s death.
Choice “A” is incorrect. Earnings accumulate tax-free in both traditional and Roth IRAs, so this is not an advantage of a Roth IRA compared to a traditional IRA.

Choice “C” is incorrect. Contributions to a traditional IRA may be deductible, although the deduction may be limited for higher-income taxpayers if the taxpayer or spouse participates in an employer-sponsored retirement plan. Contributions to a Roth IRA are never deductible, so this is an advantage of a traditional IRA, not a Roth IRA.

Choice “D” is incorrect. The annual amount an individual can contribute to IRAs is limited to the lesser of: (1) a specified statutory amount (indexed annually for inflation) or (2) earned income, not just earned income. The limit applies to all combined IRA contributions for the year, including both Roth and traditional, so this is not an advantage for either type of IRA.

Question 157

Revocable means that the gift can be taken back or canceled and is not considered as a complete gift and therefore, filing of Form 709 is not required.

Answer 157

Transfer to non citizen spouses upto $185,000 are not reportable.

QTP - Qualified Tuition Plan can be spread over a 5 year period if an election is made. If the contribution is less than the annual gift tax exclusion ($18,000*5=$90,000) , no reporting is required.

Question 158

Partial liquidation buyback is treated as a sale not as a dividend. Therefore, E&p is not relevant in this scenario/question.

Answer 158

DIsproportional (only given to 1 shareholder and not to all) stock redemption is also treated as a SALE and therefore, E&P is not relevant in this question.

Disproprotional stock redemption means that there has been a meaningful reduction in the shareholder’s ownership interest.

when company buys back - exclude the shares bought back from the total remainder (500)

exam outstanding were 1000, bought back 500=remaining 500

total were 10,000, bought back 500

calc = 1000-500
______________ = 5.3%
10000-500
Disproportional stock redemption means that there has been a meaningful reduction in the shareholder’s ownwership intererst

% ownership after redemption must be less than 50%
% ownership before the redemption must be less than 80%

Question 159

Sale of inventory - sourced to the country it is SOLD in

Answer 159

ROYALTY INCOME - where it is being used.

Question 160

S CORP , DISTRIBUTIONS - TAXABLE DIVIDEND-AAA = RETURN OF CAPITAL

Answer 160

SE Tax and Liability are calculated separately
so Add SE Tax to calculate under payment penalty

Question 161

S CORP - EMPLOYEES with wages SUbject to FICA TAx only not SE TAX

Answer 161

PARTNERSHIPS - self-employed individuals /partners GUARANTEED PAYMENTS for services subejct to SE TAX

SUBJECT TO SE TAX
1. Guaranteed payments for services
2. Guaranteed payments for use of capital
3. Partner’s share of partnership income (does not include distributions)

Question 162

QUALIFIED STOCK OPTION- Bargain element increases AMTI

Answer 162

Flexible spending account (FSA) - contributions to FSA and HSA cannot be made in the same year. However, an HSA may be paired with the dependent care FSA and the limited purpose FSA because the covered costs for each type of account are different(i.e. health care, dependent care, and dental/vision).

FSA - Employer established, not for self-employed, lower contribution limits, no interest earned, use it or lose it.

HSA - Must have a HDHP (more out of pocket spending before health care plan kicks in, need to pay high deductible in the beginning) , self-employed eligible, higher contribution limitss, earns tax-free interest, portable

Question 163

The designation of a beenficiary on a life insurance policy is an incomplete gift because the TP can cancel the policy at ay time or change beneficiaries

Question 164

INCOME AND GAIN - Defer to the year when rates are lower

Answer 164

DEDUCTION AND LOSS - ACCELERATE RECOGNITION TO CURRENT YEAR WHEN RATES ARE HIGHER.

Question 165

TAX EXEMPT other than a religious org with gross receipts in excess of $50,000 in a given year is required to submit an information return, Form 990. I

REQUIRED:
1. Names of contributors
2. Amounts contributed
3. DSITRUBIONS MADE

DO not include name of the memberships

Answer 165

Church need not file the return, Form 990

NON-CORPUS INCOME = TRUST ACCOUNTING INCOME

TAXABLE INCOME TRUST = INCLUDE ALL TAXABLE ITEMS including CORPUS and deduct only DEDUCTIBLE PORTION OF trust accounting income (do not include the one related to Tax exempt income)

Tax exempt /Trust accounting income = exempt portion of trustee fee

Question 166

OAA - Separately stated

Non deductible expenses

= Federal BIG Tax
Inv expense related to nontaxable municipal bonds interest

Question 167

Kiddie Tax - Std Deduction

1. $1300
2. earned income + $450
3. Maximum $14,600 single standard deduction
4. Net Unearned income in excess of $2,600 is taxed at parent’s rate

Question 168

Guaranteed payment does not affect basis

Answer 168

It reduces ORD INCOME for CORP

Question 169

Jack is no longer the owner of the stock, so he is not affected by any subsequent gains (losses) on the sale of the stock he sold to Jill.

Answer 169

Realized gains ARE VERY WELL RECOGNIZED in related party sale

Recognized loss will depend on the SALE PRICE

NO holding period if NO GAIN or LOSS is recognized.

SALE PRICE IN THE MIDDLE - FOLLOW GIFT TAX RULES, No profit No loss

Like kind exchange does not apply to personal property and that’s why entire REALIZED GAIN will be recognized in FULL when it comes to PERSONAL PROPERTY.

Question 170

Marital transfers

Answer 170

Transfers are unlimited:

Exception: Terminable interest transfers DO NOT qualify unless QUALIFIED TERMINAL INT PROPERTY (QTIP) election is made.

Question 171

Activities that create PE:

1. Fixed place of business
2. Operating through dependent agent
3. Office, brance, factory, workshop, gas wells, mines
4. Dependent agent - sales services, management services, consulting services

Answer 171

Does not create PE:

1. Warehousing, displaying goods
2. Order processing
3. Advertising, marketing, market research

Question 172

Life Insurance
Life insurance protects against the economic loss created by death. This type of economic loss
is referred to as mortality risk. Life insurance provides income to surviving dependents, satisfies
outstanding debts, and pays for funeral expenses and sometimes children’s college costs.
A client’s insurability is an important aspect of their personal financial plan. Should a client need
life insurance for any of a myriad of reasons, the client’s insurability will be vital. All life insurance
contracts go through an underwriting process before they can be offered to an individual.
Additionally, there are numerous riders available for life insurance contracts. There are two main
types of contracts: term life insurance and permanent (or “whole”) life insurance.

Answer 172

Term Life Insurance
The purchase of a term life insurance contract is analogous to renting an apartment. No
ownership is vested in the property, and at the end of the period, the renter is left without a
home and faces the prospect of increased rent payments for the current or new apartment.
Term insurance works in much the same fashion. If the insured dies prior to the end of the
term, the death benefit of the insurance contract is paid to the named beneficiary. If the
insured lives beyond the term of the life insurance contract, the insured is faced with higher
premium payments should they desire to continue coverage; or worse, they may end up without
insurance if the premiums become too expensive.
Term life insurance provides protection for a definite, but limited, period of time. A term life
insurance policy is appropriate when there is a limited time need for the protection (such as
coverage for children’s education needs or a home mortgage) and there are limited funds available
for coverage. It is also used to cover the home mortgage (if the main income producer dies).

Question 173

Permanent Life Insurance
Permanent life insurance is an alternative to term life insurance. Unlike term insurance,
permanent life insurance accumulates cash value; and at some point, the accumulated value,
and/or current dividends (if a whole life insurance contract), are sufficient to the make the
premium payments. An analogy may be made to home ownership; at some point in time, the
mortgage is paid off and the property is owned free and clear and no additional mortgage
payments need to be made.
When the contract’s values are used to make premium payments, the life insurance contract is
said to be in premium offset. Note: premium offset cannot be guaranteed and is contingent on
the insurance company’s dividends and earnings within the life insurance contract.
The permanent life insurance contract’s accumulated values grow on a tax-deferred basis.
Dividends paid by the contract, if applicable, are income tax free, and the accumulated values
of the contract may be accessed on a first-in-first-out accounting basis. Additionally, contract
values may be accessed through contract loans, with the insurance company using the contract’s
accumulated value as security for the loan.
Permanent life insurance contracts are often a vital piece of the portfolio of a high-net-worth
individual who will be subject to the estate tax. These insurance proceeds are often used to pay
the estate tax and give the taxpayer the ability to leave their entire estate to their heirs.

Answer 173

Long-Term Care Insurance
Long-term care insurance provides a benefit to individuals who are either cognitively impaired
or who are unable to perform two of the activities of daily living: eating, bathing, dressing,
toileting, transferring (walking), and continence. Health insurance contracts (both group and
individual) exclude coverage for the costs of long-term care. A long-term care insurance contract
pays the insured a specific daily amount (based on scheduled limits) for services to assist with
the activities of daily living. While long-term care benefits are available under Medicare, they are
inadequate due to limitations on benefits, as well as eligibility requirements.

Medicare Limitations
The purchase of a long-term care insurance contract should not be considered without an
adequate understanding of benefits provided by Medicare. It may be said that long-term care
insurance picks up where Medicare leaves off. To qualify for benefits in a skilled nursing facility
under Medicare Part A (Hospital Insurance), the patient must meet the following conditions:
The patient’s condition requires skilled nursing care.
The patient has been in a hospital for at least three days in a row before admission to a
participating skilled nursing facility.
The patient is admitted to the skilled nursing facility within a short period of time after
leaving the hospital (within 30 days).
The patient’s care in the skilled nursing facility is for a condition that was treated in
the hospital.
A medical professional certifies that the patient needs and is receiving skilled nursing care.
The first 20 days of a skilled nursing facility care are paid in full by Medicare. For days 21–100, a
daily coinsurance payment is required by Medicare. After 100 days of coverage, the patient must
pay the full cost of care in a skilled nursing facility. To qualify for a skilled nursing facility, care
reimbursement under Medicare, the patient’s condition must be expected to improve within
a predictable time. Alzheimer’s coverage, and other forms of dementia, for which there is no
known cure, are specifically excluded.

Benefit Triggers and Activities of Daily Living
The Health Insurance Portability and Accountability Act (HIPAA) defines the six activities of daily
living (ADLs): eating, bathing, dressing, transferring from a bed to chair, using the toilet, and
maintaining continence. If a person is unable to perform, without substantial assistance from
another person, at least two activities of daily living (ADLs) for a period of at least 90 days, they
are considered chronically ill. Additionally, if substantial services are required to protect an
individual from threats to health and safety due to substantial cognitive impairment (Alzheimer’s
disease, strokes, or other brain damage) they are considered chronically ill. Both categories,
activities of daily living and cognitive impairment, trigger benefits under a long-term care
insurance contract.

Question 174

Umbrella Contracts
Umbrella insurance contracts provide benefits for a liability claim, as opposed to a benefit for
a property claim. A liability claim arises from an injury or damage to another person’s property
(not the insured). The umbrella contract also provides benefits for the economic risk associated
with legal liability. Oftentimes, legal liability is imposed on the insured for injury or for damage to
others’ property.
The umbrella insurance contract requires the insured (policy owner) to maintain specific
underlying liability coverage of specified minimum amounts in their underlying insurance
contracts (homeowner’s, automobile, etc.). For example, an excess liability insurance contract
may mandate that the underlying homeowner’s insurance contract have $500,000 of
liability coverage.
If a claim is made under one or more of the underlying insurance contracts, the umbrella
insurance contract will provide a benefit only after the limits of the underlying insurance
contract are exhausted. An umbrella insurance contract superimposes an “umbrella” of
protection over the top of the underlying insurance contract. If the underlying contract does not
fully cover a casualty loss, the umbrella policy will provide additional coverage for the loss.
There are exclusions in personal umbrella policies. These exclusions can be divided into three
categories: personal, criminal, and business exclusions.
A personal umbrella policy does not cover your own injuries or damage to your
personal property.
Intentional acts or criminal behaviors (any act committed with the intent to cause personal
injury or property damage) are not covered under personal umbrella policies.
Personal umbrella insurance will not cover damage caused while you are performing
business activities, such as any activity as a director or officer of a corporation, any
business pursuits, the rendering of, or failure to render, professional services, or workers’
compensation obligations.

Question 175

Concentration risk (due to lack of diversification) - A loss in a single investment has a large impact on the investor’s portfolio - Mutual fund has lowest concentration risk.

Liquidity Risk - An inability to sell an investment quickly at market rates

Company or credit risk - the business invested in does not remain in operation or able to pay debts

Interest rate risk - Rising Int rates cause bond prices to fall

Opportunity risk - The investment’s returns are lower than alternative investments

Legislative or regulatory risk - Govt laws or regulations reduce the value of an investment

Call risk - The issuer of a bond buys it back before the bond matures

Currency exchange risk or FX Risk - FX rates reduce the value of an international investment

Answer 175

Common stock, Savings account and municipal bonds carry relatively low market risk and credit risk. Because they do not involve diversification, they both have high concentration risk.

Question 176

CORPORATED BONDS

MUTUAL FUND BONDS

OTHER BONDS

Question 177

Umbrella insurance protects against liabilities that exceed the limits of other applicable insurance policies (e.g. auto). It does not cover the policyholder’s own expenses and does not usually cover liabilities arising from business contracts.

Medical bills from the insured’s heart atatck would be covered by health insurance. Umbrella insurance protects against liability only.

Answer 177

Umbrella insurance coverage kicks in when liability limits from other policies have been exhausted, but it does not cover the policyholder’s personal expenses (e.g. home furniture repairs). Because it offers an expanded liability shied, umbrella insurance is particularly useful for those with significant assets they want to protect from a potential lawsuit (e.g. from a car accident). Umbrella insurance premiums are not deductible for individuals but may be a deductible expnse for businesses.

Question 178

Loss of tax exempt status under section 501(c) (3)

Answer 178

1. Failure to file a return for 3 consecutive years
2. Failure to operate toward stated exempt purpose
3. Actiing to the PVT BENEFIT OF AN INDIVIDUAL (e.g. executive)
4. Substantial LOBBYING for or against legislation
5. Participating in political campaigns for or against any candidate

Question 179

If the acquiring member (child) subsequently sells the property within 2 years after acquisition, the transferring family member (TP) Must immediately recognize any remaining gain, upto the proceeds of the subsequent sale.

Answer 179

Gain realized on a property sales to a family member may be recognized over multiple tax years electing to use the installment sale method. However if the acquiring family member subsequently sells the property within 2 years of the installment sale, the original selling family member must recognize any remaining gain in that tax year.

Question 180

FOREIGN BASE COMPANY INCOME

Answer 180

1. Foreign personal holding company income-Generally, passive income, CFC income from dividends, interest, rents, royalties, gains from SALE OF CERTAIN FOREIGN PROPERTY and gain from FX RATE
2. Foreign base company sales income - CFC income from the purchase or sale of PERSONAL PROPERTY to or from a RELATED party when the property is MANUFACTURED OR SOLD OUTSIDE THE CFC’S COUNTRY OF INCORPORATION.
   If the CFC meaningfully participates in the production of income (e.g. provides sunstantial manufacturing to complete unfinished inventory), then the income is not considered SUBPART F INCOME.
3. Foreign base company services income- CFC income from the performance of services for on on behalf of a related party when the performance of services occurs outside the CFC’s country of incorporation.

Question 181

A future interest or a present interest WITHOUT ASCERTAINABLE VALUE_______________

Answer 181

does NOT qualify for the annual gift tax exclusion.

Question 182

Restricted stocks UNits (RSUs) - Holding period begins when stock vests.

Answer 182

ORDINARY income to be recognized when Stocks VEST (FMV of stock at vesting date)

Question 183

SAR - receives cash =ordinary income

Answer 183

FMV on exercise less FMV on grant

Question 184

LIQUIDATION PARTNERSHIP,

Answer 184

DECREASE basis by Recourse and non recourse basis as partner will be getting rid of the liabilites.

Question 185

NON-LIQUIDATION, PARTNERSHIP

Answer 185

Hot asset to the extent of basis , No gain or loss to be recognized in distribution of hot assets or other assets. Gain To be recognized only for the DISTBN in excess of CASH Distbn

Question 186

NON LIQUIDATION, C CORP

Answer 186

The distribution amount of property distbn

= FMV of the property
(-) Liabilities assumed by the shareholder
_____________________________________________
XXXX

Question 187

S CORP LIQUIDATION

Answer 187

DISTRIBUTE consolidated Gain/Loss of S CORP gain or loss to each shareholder (NOT Individual gain/loss to each partner)

MORTGAGE assumed by shareholder will reduce shareholder’s basis

Question 188

CONSOLIDATION

Answer 188

100% DRD can be taken on SUB’S INTER COMPANY DIVIDENDS

Question 189

ISOs

Answer 189

Holding period to be counted from Exercise date

Question 190

Real estate professional, PAL DOES NOT APPLY IN THIS SCENARIO:

Rental real estate activities are considered to be active, rather than passive, and the PAL limitation does not apply. A TP is a real estate professional if:
1. More than 50% of the TP’s personal services during the year are performed in real estate businesses
2. The TP performs more than 750 hours of services in real estate businesses during the year

Answer 190

Mom and POP exception to PAL limitation:

An individual TP amy deduct upto $25,000 of net passive activitiy losses if the TP,

1. Actively participates in the rental real estate activity
2. Owns at least 10% of the rental real estate activity

Eliminated when AGI exceeds $150,000

Question 191

Complete gift and is subject to gift tax

Answer 191

The possibility of a reversion (where the property could return to the donor in the future) doesn’t necessarily invalidate the gift as being complete, because the recipient has received an immediate interest in the property.

Question 192

Revocable gifts

Answer 192

A gift is revocable if the donor reserves the right to revoke the gift or change the beneficiaries. The gift is complete when those rights terminate by reason other than the dono’r death.

E.G.
The donor voluntarily gives up the right to revoke (they decide, in writing, that they will no longer be able to change or revoke the gift).
The conditions of the gift change, such as a trust becoming irrevocable, or the donor no longer has the power to modify the terms.

Question 193

s corp termination

Answer 193

When an S corporation has more than 25% (not 35%) of its gross receipts from passive income for three consecutive years, it risks termination of its S corporation status under IRS rules. Specifically, if the corporation earns more than 25% of its gross receipts from passive income (such as interest, dividends, royalties, or rents), and this occurs for three consecutive years, the S corp can lose its S status and will automatically revert to a C corporation.

This rule is in place to prevent S corporations from being used primarily as passive investment vehicles instead of active businesses. If the termination happens, the S corp will need to file taxes as a C corporation, which could result in different tax treatments for the company and its shareholders.

Keep in mind, if the passive income situation is corrected (i.e., the passive income percentage falls below 25%), the S corporation status can be maintained.

Question 194

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 voluntarily 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 each 3 consecutive years (e.g. 2021, 2022, 2023) and accumulated E&P from C corp years - causes revocation - 1st day of 4th fourth year (more than 25%)

When SHAREHOLDING in an S-corp is less than 1 year, income is allocated on DAILY basis

Answer 194

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

Question 195

Trust fee we need to deduct in calculating__________

Answer 195

Trust Accounting Income

Question 196

Workers compensation award (related to job related injury) is excluded and __________

Answer 196

NOT TAXABLE

Question 197

Short selling stocks (selling an investment in the hopes of buying it back at a lower price later) is a strategy that provides returns when the market declines and is a method of mitigating systematic risk

Answer 197

Stephen should contribute the maximum amount of $5,150 (2024) from his salary to an HSA and have the $4,000 of medical expenses paid from the HSA.

Stephen can contribute up to $5,150 of his salary to an HSA in the current year ($4,150 2024 individual limit + $1,000 additional contribution for age 55 or older), which reduces his taxable gross income by $5,150. The payment of his $2,200 in medical expenses from the HSA is not included in his taxable gross income. HSA funds that are not spent continue to accumulate tax-free, so the $2,950 balance in his HSA at the end of the current year ($5,150 HSA contribution – $2,200 medical expenses paid) is rolled over to future years.

Question 198

Choice “C” is correct. Qualified Roth IRA distributions are nontaxable. The principal contributions as well as the earnings are nontaxable.

Choice “A” is incorrect. Deductible traditional IRA distributions are fully taxable. The principal contributions as well as the earnings are taxable.

Choice “B” is incorrect. Nonqualified Roth IRA distributions are partially taxable. The principal contributions are nontaxable, and the earnings are taxable.

Choice “D” is incorrect. Nondeductible traditional IRA distributions are partially taxable. The principal contributions are nontaxable, and the earnings are taxable.

Question 199

AT-RISK, year of disposition

Question 200

TAX BASIS, year of disposition

Answer 200

ZERO , No deduction allowed

Question 201

LLC TAXED AS ________

Answer 201

Partnership

Question 202

Each payment is equal to 25 percent of the corporation’s annual required payment.
The minimum annual required payment is the lowest of the following:

(1) 100 percent of tax liability in current year

(2) 100 percent of tax liability on prior year’s tax return:
(a) May only be used for first quarter payment for large corporations (over $1,000,000 in taxable income in three prior years)

(b) May not be used if corporation did not have a tax liability on prior year tax return

(3) 100 percent of estimated tax liability in current year by using the method of annualizing quarterly taxable income

Answer 202

ANNUALIZED METHOD:

The method of annualizing quarterly income essentially estimates the tax that would be due
if the corporation continued earning income at the same rate for the remainder of the year.
Because estimated payments are due 15 days following the end of the quarter, the annualization
lags one quarter, with the exception of the first quarter.

Question 203

2 years - involuntary conversion
3 years - condemnation, seizure, requisition (but not theft or destruction)
4 years - federally declared disaster area

Answer 203

When the GAIN exceeds $100,000, property ACQUIRED from related parties and certain close relatives DO NOT qualify as REPLACEMENT PROPERTY.

Question 204

INVOLUNTARY Conversion rules apply to GAINS only. LOSSES would be RECOGNIZED. When the loss is RECOGNIZED, the basis of the new property is its _____________

Answer 204

replacement cost.

Question 205

ADVANCE PRICING AGREEMENT PROGRAM

Answer 205

A program to resolve actual or potential TRANSFER PRICING disputes prior to EXAMINATION (Audit).

The agreement is a binding contract between the IRS and the TP by which the IRS agrees NOT TO seek a TRANSFER PRICING ADJUSTMENT for a COVERED Transaction if the TAXPAYER files its return consistent with the agreed TRANSFER PRICING method set forth in the contract.

Question 206

PARTNERSHIP - HOLDING PERIOD

(HUGE DIFFERENCE in both capital asset and ordinary income asset)

Answer 206

1. CAPITAL OR SEC 1231 ASSET , HOLDING PERIOD = ROLLOVER Holding period of property contributed (holding period of partner continues)
2. ORDINARY INCOME ASSET - Holding period begins on date property is contributed to the partnership

Question 207

QUALIFIED NONRECOURSE FINANCING (QNF)

Answer 207

QNF is a real estate mortgage obtained from an unrelated commercial lender.

ONLY Type of PARTNERSHIP NONRECOURSE DEBT included in a partner’s AT-RISK BASIS.

Question 208

NOT ALLOWED FOR INSTALLMENT SALE

Answer 208

1. Gain from the sale of DEPRECIABLE PROPERTY to a RELATED PERSON
2. SALE of STOCKS OR SECURITIES traded on an ESTABLISHED MARKET

Question 209

An LLC generally have the right to amend the LLC operating agreement, provide input and manage LLCs, yet corporate shareholders generally do not have these same rights.

Answer 209

An LLC cannot become a public company. It must convert to a corporation before issuing an IPO.

An LLC does not have these same restrictions with regard to members as S Corps have with regard to shareholders.

A sole proprietorship may become a single-member LLC if it files articles of organization with a STATE.

Question 210

REVISE REGULATION FLASHCARDS FOR TCP

Answer 210

Revise Elizabeth tab

Question 211

TPs eligible for REDUCED EXCLUSION due to hardship such as health condition, move due to employment more than 50 miles or unforeseen circumstances.

Answer 211

DIVORCE PROPERTY SETTLEMENT - no gain recognized
EXCEPTION : except when property is held in TRUST.

Except REAL PROPERTY in different countries.

Question 212

PERSONAL PROPERTY such as EQUIPMENT does not qualify for LIKE KIND EXCHANGE.

Question 213

INDIVIDUAL, ESTATE and TRUST

Answer 213

Deduction of NET capital losses is LIMITED to $3000 per year

Question 214

Transactions between PSC (Lawyer, doctor)/PERSONAL SERVICE CORP and an EMPLOYEE Owner are classified as RELATED PARTY Transaction.

Answer 214

True (% ownership does not matter)

IRC SECTION 267 = Related parties

Question 215

De minimus = Loans between individuals , compensation related and CORP Shareholders LOAN

NO imputed interest if LOAN is below $10k

Answer 215

Loan less than $100,000, imputed int to the extent of NII

NII LESS THAN $1,000 - ZERO IMPUTED INT to be reported

Question 216

RISK RETENTION e.g.

Answer 216

For risks that involve low loss severity and low loss frequency, the most suitable
technique is retention.

These risks rarely occur, and if they occur, their financial impact is inconsequential.

Question 217

RISK REDUCTION e.g. INSTALLING SECURITY CAMERAS

Answer 217

For risks that involve low loss severity and high loss frequency, the most suitable technique
is reduction.
Installing security cameras often discourages thieves and reduces the risks
associated with theft.

Question 218

RIKS TRANSFER e,,g Transfer or share the RISK with INSURANCE COMPANY.

Answer 218

For risks that involve high loss severity and low loss frequency, the most suitable technique
is risk transfer (insurance).

The insured shares the risk with the insurance company and the
retained portion has low financial impact.

Question 219

RISK AVOIDANCE e.g. RENTING the VACATION HOME instead of BUYING

Answer 219

For risks that involve high loss severity and high loss frequency, the most suitable techniqueis avoidance.

Insurance premiums on a vacation home in an area prone to flooding couldbe cost prohibitive. Instead of owning the vacation home, renting the vacation home would
avoid the risk.

Question 220

TERM INSURANCE - Analogous to renting an apartment

Answer 220

for a limited or a fixed period.

Term life insurance provides protection for a definite, but limited, period of time. A term life
insurance policy is appropriate when there is a limited time need for the protection (such as
coverage for children’s education needs or a home mortgage) and there are limited funds available
for coverage. It is also used to cover the home mortgage (if the main income producer dies).

Question 221

PERM or WHOLE Life Insurance (Analogous to PERM HOME ONWERSHIP)

Answer 221

Unlike term insurance,
permanent life insurance accumulates cash value; and at some point, the accumulated value,
and/or current dividends (if a whole life insurance contract), are sufficient to the make the
premium payments. An analogy may be made to home ownership; at some point in time, the
mortgage is paid off and the property is owned free and clear and no additional mortgage
payments need to be made.
When the contract’s values are used to make premium payments, the life insurance contract is
said to be in premium offset. Note: premium offset cannot be guaranteed and is contingent on
the insurance company’s dividends and earnings within the life insurance contract.
The permanent life insurance contract’s accumulated values grow on a tax-deferred basis.
Dividends paid by the contract, if applicable, are income tax free, and the accumulated values
of the contract may be accessed on a first-in-first-out accounting basis. Additionally, contract
values may be accessed through contract loans, with the insurance company using the contract’s
accumulated value as security for the loan.
Permanent life insurance contracts are often a vital piece of the portfolio of a high-net-worth
individual who will be subject to the estate tax. These insurance proceeds are often used to pay
the estate tax and give the taxpayer the ability to leave their entire estate to their heirs.

Question 222

Long-term care insurance provides a benefit to individuals who are either cognitively impaired
or who are unable to perform two of the activities of daily living: eating, bathing, dressing,
toileting, transferring (walking), and continence. Health insurance contracts (both group and
individual) exclude coverage for the costs of long-term care. A long-term care insurance contract
pays the insured a specific daily amount (based on scheduled limits) for services to assist with
the activities of daily living. While long-term care benefits are available under Medicare, they are
inadequate due to limitations on benefits, as well as eligibility requirements.

Answer 222

MEDICARE LIMITATIONS

LT CARE INSURANCE picks up where MEDICARE LEAVES OFF.

To qualify for benefits in a skilled nursing facility
under Medicare Part A (Hospital Insurance), the patient must meet the following conditions:
The patient’s condition requires skilled nursing care.
The patient has been in a hospital for at least three days in a row before admission to a
participating skilled nursing facility.
The patient is admitted to the skilled nursing facility within a short period of time after
leaving the hospital (within 30 days).
The patient’s care in the skilled nursing facility is for a condition that was treated in
the hospital.
A medical professional certifies that the patient needs and is receiving skilled nursing care.

Question 223

The first 20 days of a skilled nursing facility care are paid in full by Medicare. For days 21–100, a daily coinsurance payment is required by Medicare. After 100 days of coverage, the patient must
pay the full cost of care in a skilled nursing facility.

To qualify for a skilled nursing facility, care
reimbursement under Medicare, the patient’s condition must be expected to improve within
a predictable time.

Alzheimer’s coverage, and other forms of dementia, for which there is no
known cure, are specifically excluded.

Answer 223

UMBRELLA INSURANCE CONTRACTS - Liability claim as OPPOSED to a BENEFIT for a PROPERTY Claim.

Question 224

UTILIZED IN YEARS 2021 AND AFTER

Answer 224

Subject to 80% TI

Question 225

AMT TAX SYSTEM

Answer 225

A tax system implemented to ensure that individual taxpayers, particularly those with high income who use certain tax breaks under the tax law in order to significantly reduce their tax liability, pay at least some amount of minimum amount of income tax.

Question 226

Current E&P - Pro-rata

Answer 226

Accumulated E&P - Chronologically

Question 227

$5,389,800

Answer 227

Unified credit amount not the taxable state.

Question 228

LOANS from a CORP to a shareholder, the imputed interest is OFTEN TREATED as a DIVIDEND (to the extent of E&P) if the shareholder is NOT ALSO AN EMPLOYEE

Answer 228

If shareholder is ALSO an EMPLOYEE, the imputed interest is normally TREATED as a DIVIDEND if the employee owns more than a DE MINIMIS amount of stock.

However, if the loan was made solely in connection with the performance of services, it may be treated as compensation even when the employee owns a substantial amount of stock.w

Question 229

T3 Book reading to be done
T4 - completed

Answer 229

T1 - half
T2 - (half done) Intl Tax carry in train and study

Question 230

Trust Accounting Income

STEP 1 (ALL Less: Trustee fee)
STEP 2 calc Exempt portion of deductions

Answer 230

DNI ?

Trust taxable income ?

Question 231

DISTRIBUTIONS of EARNINGS from TRADITIONAL IRA = ALways taxable

Answer 231

Distributions of earnings are always taxable, whether or not the taxpayer deducted the
contribution when made.
A distribution from a nondeductible, traditional IRA is allocated between principal
(contributions) and earnings pro rata based on relative amounts in the IRA account at the
time of the distribution.

Question 232

DISTRIBUTIONS OF EARNINGS FROM ROTH IRA = NOT TAXABLE EXCEPT when falling under NON-QUALIFIED PLAN

QUALIFIED DISTRIBUTION FROM ROTH IRA
Meets one of the following requirements:
— taxpayer is age 59½ or older;
— taxpayer is disabled;
— taxpayer is a first-time homebuyer (has not owned a home for two years) and uses the
distribution to purchase a home (maximum $10,000); or
— distribution is made to a beneficiary after the taxpayer’s death.

Answer 232

NON-QUALIFIED when ROTH IRA does not meet 5 yr holding or contribution period, then EARNINGS are TAXABLE.

Distributions from Roth IRAs are considered to first come from principal (contributions),
then earnings.

Question 233

Deduct as ORDINARY INCOME (and NOT PASSIVE) in cases when _______

Answer 233

1. Real estate professional with More than 50% of service from real estate and
2. Greater than 750 hours

Question 234

ORD INCOME PROPERTY:

1. INVENTORY
2. ASSETS THAT HAVE DEPRECIATED IN VALUE
3. ASSETS HELD FOR LESS THAN 1 YEAR IN TRADE OR BUSINESS

Answer 234

ORD INCOME

Question 235

FEDERAL BUILT IN GAIN TAX

Answer 235

SEPARATELY STATED ITEM, NON DEDUCTIBLE

Question 236

Distribution in case of C CORP TO S CORP conversion or election:

Answer 236

1. It should first come from S CORP’S AAA
2. If election is made to bypass AAA, then distribution will come from C CORP’s AEP