Section codes Flashcards
Section 2032
Special Use Valuation or Current Use
The value included in the decedent’s gross estate will be the current use value of the property, subject to a limitation that the highest and best use value cannot be reduced by more than $ 1,180,000 2020
- Decedent must be a U S citizen or resident at death
- Property must be used in a farming operation or trade or business that was actively managed by the decedent or the decedent’s family 5 out of the 8 years immediately preceding decedent’s death
- Value of real and personal property (tractors, milking mach), used in qualifying manner must equal or exceed 50% of decedent’s gross estate (adjusted only for secured mortgages for the special use property)
- The value of the real property must equal or exceed 25 of the gross estate (as adjusted)
- The qualifying property must pass to qualifying heirs (a member of the decedent’s family who acquires the property from the decedent) who must actively participate in the farming activity or trade or business
- Executor must file the election with the estate tax return, complete with a recapture agreement
Section 303
Stock redemption - Closely held business
The estate must meet the 35% Rule
The Entity must be a C Corp
Effective without a previously executed document that is enforceable after death
The Stock Redeemed may be common or preferred
The value of the stock must be equal to or greater than 35% of the decedent’s adjusted gross estate, including gifts made in the last 3 years.
A 303 redemption can only be used if the corporation has the cash to redeem the shares.
A Section 303 redemption is limited to a dollar amount that cannot exceed the summation of death taxes of the estate, plus funeral and administrative expenses for which the decedent is liable.
Redemption amounts are determined by the payment of death taxes and estate administration taxes and costs.
The Earnings and Profits account must be positive or there is no need for a 303 redemption
Section 6166
Closely held business - Not C Corp; Partnership
The value of the business interest must be at least 35% of the value of decedent’s adjusted gross Interest is 2% on the first $628,000 ($1,570,000 x 40%) of tax for 2020
qualified disclaimer
A disclaimant can disclaim a fraction of an interest.
A disclaimant can disclaim any asset from among a group of assets.
A disclaimant can disclaim any dollar portion of an asset.
Wrong - Disclaimant cannot have any benefits prior to disclaiming
A disclaimant can have received the interest on a CD and still disclaim the CD as long as its in writing and within 9 months of the death of the decedent.
2503 (B)
Income must be distributed annually to Bnf
2503 (C)
The Bnf must be income and remainder
The annual income is usually taxed to the trust unless distributed to the beneficiary.
The corpus must be payable to the beneficiary at the attainment of age 21.
Qualify for the annual exclusion
NOT TRUE
If income is used to pay for support items for the grantor, then the income is taxed to the grantor. - must be paid to minor who is the BNF only
In order to qualify for the annual exclusion, Crummey powers must be used for beneficiaries under the age 21 because the gift is a gift of a future interest. - Crummey power is not required as it will be allowed AE in this trust
Section 1245 recapture applies when
All or a portion of gain on tangible personal business property resulted from depreciation taken.
Section 1245 recapture is treated as ordinary income for the gain realized resulting from depreciation taken that was greater than economic reality.
Section 1245 recapture is applied to the sale of depreciated assets.
For 1245 recapture to occur there must be a gain over the basis.Property sold or abandoned below the basis adjusted by depreciation is not subject to Section 1245 recapture because either not all depreciation was taken or there was more likely a loss rather than a gain.
Section 179 Deduction
Section 179 is an upfront business deduction, now at $1,040,000 (2020) that can be used by businesses to reduce tax liabilities. It’s possible to reduce Section 179 deduction to zero, depending how much is placed into service. If too much is placed into service, Section 179 would not have any advantages over other methods of depreciation.
Section 179 deduction is $1,040,000 for 2020. However, the amount is reduced dollar for dollar for acquisition amounts above $2,590,000 placed into service during 2020.
Claiming Section 179 expense immediately reduces the basis of the property by whatever the amount claimed (not to exceed original cost). The amount of deduction is limited in total and further subject to income limitation before the deduction is taken.
Rules:
When the asset is sold before it would have been fully depreciated.
When the business use drops below 50%.
Auto with >6000 LBS weight = Truck
Bot 600K deduct $600K
Section 179 sample
Kelly owns a potato chip manufacturing business. The demand for her gourmet potato chips is on the rise. This year her business had a record taxable income year of $750,000. Kelly has decided to invest in an upgraded potato slicing machine that will slice potatoes four times as fast as her previous machine. The cost of the new potato slicer is $2,650,000 and will be the only depreciable property that Kelly places into service during the current year. What is the amount of her Section 179 deduction for the current year?
Section 179 deductions are limited to $2,590,000 of equipment placed into service. Placing the full 2.59 million would give you 1.04 million in deductions. Amounts over the 2.59 million will reduce the maximum deduction dollar for dollar. Kelly’s Potato Chip manufacturing business’ taxable income was $750,000. Kelly cannot deduct more than her taxable income.
$2,650,000 - $2,590,000 = $60,000;
$1,040,000 - $60,000 = $980,000 limited to the $750,000 of taxable business income.
