Tax Flashcards
credit equivalent deduction
Tax Credit / Tax Bracket = Deduction
hint: CBD
Credits are worth more to a low-bracket taxpayer Deductions are worth more to a high-bracket taxpayer
Exclusions to Gross Income
Gifts
Inheritances
Municipal Bond interest
Worker’s Comp
Child support
Compensatory damages
Hint: GIMBO and the 3 C’s
property classes
1245 Property (non real estate)
5 year: Computers, Autos, Trucks
7 year: Office Equipment except computers,
1250 Property (real estate)
27.5 year: Residential rental property
39 year: Non-residential real property
Remember: CATCORN
AMT preference items
Excess Intangible Drilling Costs (IDC)
Private Activity Municipal Bond
Oil and Gas Percentage Depletion / Excess intangible drilling costs (IDC) (NOT cost depletion)
Depreciation (ACRS/MACRS) but not straight line
Remember: I.P.O.D.
itemized deductions (Schedule A)
Medical (in excess of 7.5% AGI)
State and local taxes capped at $10k (SALT)
Home Mortgage interest (max debt $325k S/$750k MFJ)
Investment interest (limited to net investment income)
Casualty losses (federally declared disaster, $100 deductible, then in excess of 10% AGI)
Charitable gifts
HINT: MS HICC
Miscellaneous itemzied decutions:
- gambling losses to the extend of gains
- unrecovred investment in an annuity ceases due to death
- death taxes attributable to income IRD
Charitable Deduction: Cash
Amount of deduciton: FMV
Public Charity max deduction: 60% of AGI
Private Charity max deduciton: 30% of AGI
Charitable deduction: Ordinary income property and short term cap gain property
Amount of deduciton: lesser adjusted basis of FMV
Public Charity max deduction: 50% of AGI
Private Charity max deduciton: 30% of AGI
chartiable deduciton: long term capital gain intangibles
Amount of deduciton: FMV or Basis
Public Charity max deduction:
- FMV: 30% of AGI
- Basis: 50% of AGI
Private Charity max deduciton:
- FMV: 20% of AGI
- Basis: 20% of AGI
charitable deduction: Tangible property (related use)
Amount of deduciton: FMV or basis
Public Charity max deduction:
- FMV: 30% of AGI
- Basis: 50% of AGI
Private Charity max deduciton: BASIS: 20% of AGI
chartiable deduction: Tangible property (use unrelated)
Amount of deduciton: lesser FMV or basis
Public Charity max deduction: 50% of AGI
Private Charity max deduciton: 20% of AGI
charitable deduction: real property
Amount of deduciton: FMV or basis
Public Charity max deduction:
- FMV: 30% of AGI
- Basis: 50% of AGI
Private Charity max deduciton: BASIS: 20% of AGI
charitable deduction carryover
5 years
Kiddie Tax
applies to
- child under age 19
- full time student under age 24
unearned income above $2,200 taxed at parents rate
- Standard decuction: greater of
- $1,100
- or earned income + $350 (limited to regular standard deduction)
- $1,100 taxed at child’s rate of 10%
Section 179
allows for write off amounts up to 1.05 million
tax credits
Child tax credit
American opportunity / Life time learning credit
Child and Dependent care credit
Adoption credit
Foreign tax credit
Residential energy credit
CAL DAFR
Tax Calculation Process
Gross Income
- above the line deductions
= AGI
- below the line (itemized or standard deduction)
= Taxable Income (use filing status to calculate tax)
- credits
= tax payer’s liability
child and depedent care credit
to qualify must:
- keep a home
- have earned income
- pay expeneses - maid, babysitting, etc
- have a dependent younger than 13 or a spouse physically or mentally incapacitated
max credit: qualifying expenses of $3,000 for one child or $6,000 for two or more
if AGI over $43k, then 20% X expenses (max $6000) = credit allowed
Child Tax Credit
$2,000 for each child under age 17
reduced by $50 for each $50 for each $1,000 by which MAGI exceeds $200k S/$400k MFJ
refundable up to $1,400 per child
Adoption Credit
taken in year adoption is final
qualified adoption expenses: costs, court costs, attorney fees, NOT surrogatge parenting arrangements
nonrefundable credit
max credit 2021: $14,440
phased out MAGI of $216,660 and $256,660
S corp tax form
annutal income tax return: must file Form 1120S by March 15th of the following year
election: file Form 2553 by March 15th of tax year election is to take effect
accumulated earnings tax
goal: to discourage individual taxpayers from using an entity soley for tax avoidance
tax rate of 20% on amounts deemed to be in excess of corporations needs
Personal Service Corporation (PSC)
corporation where the principal activity is the performance of a personal service by owners
inome retained is taxed at 21%
professionals at risk: HAALE PSC
- Health
- Architects
- Accountants
- Lawyers
- Engineers
- Performing arts
- actuarial Science
- Consulting
S Corp
Max 100 shareholders
taxation: flow through
one class of stock only
only US citizens can be shareholdings
Capital Asset Definition
capital assets except:
- Accounts receivable
- Copywrites
- Inventories
- Depreciable Property
ACID
Section 1231
gains: capital gain tax treatment (when held long term)
losses: ordinary losses
Section 1245
depreciable personal property (furnishings, equipment)
recapture of any gain that was depreciated, taxed as ordinary income. remaining gain is section 1231 gain
Section 1250
depreciable real property
recapture: 25% tax on unrecaptured gain (unless tax bracket us lower)
section 1231 for remaining gain
Section 121
can exclude $250k S/$500k MFJ of gain on sale of home
must be owned by at least one spouse and used by BOTH over the last two of the 5 years to qualify
can only use exclusion every two years
rental property: personal use
rented less than 15 days per year
exclude income
expenses are non deductible except mortgage interest and taxes
rental property: rental
rented 15 or more days and not used for personal use the greater of 14 days per year or 10% of the rental days
losses deductible up to $25k. phase out AGI $100k-$150k - lose $1 for every $2 above $100k
report income and deduct expenses on schedule E
rental property: mixed use
rented more than 14 days and personal use exceeds rental standard
deduct expenses
cannot deduct loss
report income and deduct expenses on schedule E
Section 1033
involuntary conversion: theft, destruction, requisition, condemnation
must replace within two years (3 years for government takings)
if amount reinvested is less than the amount realized from the conversion then gain recognzied
Section 1031
gain is deffered if exchanged realty for realty. must be for trade, business, or investement
receipt of boot will result in the recognition of some gain if there is a realized gain
if boot is given will add to the basis in the new property
Section 1035
exchnages of annuities and life insurnace
Section 267
related party transactions
applies to when a loss would occur
sell for a loss to a related party: realized loss is NOT recognized
related party’s basis:
- Original basis for gain purposes
- FMV at time of purchase for loss purposes
holding period begins on date of purchase from related party
inherited IRD asset basis
carry over basis
(pensions, annuities, installment sales)
Gifting of appreciated property: Donee’s basis
Donor’s basis + [(FMV-donor’s basis) / (FMV - annual exclusion)] X gift tax paid = Donee’s basis
donors holding period carries over
if no gift taxes are paid, then carry over basis
FMV = FMV on date of gift
tax implications of a wash sale
realized loss is disallowed
basis of the new stock will include the unrecovered portion of the basis of the formerly held stock
1244 Stock
only applies to first $1million of stock initially issued by a C corp or S corp
loss deductible as an ordinary loss
maximum loss $50k S / $100k MFJ
remaining loss is capital loss
claimed on form 4797
Installment sales ordering rules
- recognize 25% gain (recapture amount)
- then capital gain
material participant (passive activity rules)
- more than 500 hours of participation
- more than 100 hours and at least as much as any other participant
- participation of the tax payer ws substantially all of the participation in the activity
passive activity
- activity where the tax payer does not materilaly participate
- rental activities, except real estate professionals, even if the tax payer does materially partipate
passive activity loss rules
- at risk rules: amount at risk = cash and property invested + recourse debt (personally liable) + share of income
- passive losses can only be offset against passive income
publically traded partnership loss rules
cannot be used to offset losses from nonpublically traded partnerships OR other publically traded partnerships
must be the same publically traded parternship
AMTI
regular taxable income
+ positive AMT adjustments
- AMT adjustments
+ tax preferences
= AMTI
AMT calculation
AMTI
- AMTI exemption
= minimum tax base
X AMT rax rate
= tentative tax
- regular income tax on taxable income
= AMT
Adjustments to income (above the line)
- half of SE tax
- SE Health insurance deduction
- IRA deduction
- Tuition and fees deduciton
- certain Business expenses
- Educator expenses
- Alimony (pre 2019)
- Moving expenses (members of armed forces)
- Student loan interest deduction
- HSA deduction
- Qualified plans, SEPs, SIMPLES
SHIT BEAMS HQ
Section 197
amortization of intangibles (ex good will and franchises)
uses straight line depreciation
IRS penalties
Frivolous Return: $5000
NeGliGence: Penalty is 20% (2 g’s) of the portion of the underpayment attributed to negligence.
Civil Fraud: Penalty is 75% of the portion of the tax underpayment attributable.
Failure to File: Penalty is 5% of the tax due per month, with a maximum of 25%.
Failure to PAY: Penalty is 0.5% per month the tax is unpaid, with a maximum of 25% (Pay-Point)
collectible long term gains rate
28%
adjusted basis
Basis = taxpayer’s investment in any asset or property right
Basis is increased by legal fees, commissions, sales tax, freight and improvements (hint: CLIFS)
Basis is NOT effected by repairs (deductable expense), real estate taxes, or normal business operating expenses
Improvements MUST be capitalized
Tax Cuts and Jobs Act eliminated deductions
- Miscellaneous deductions
- Unreimbursed personal casualty losses (unless federal distater)
- Home office deduction for employees (Self-employed individuals can still claim deduction)
Stricter limit on Meals and Entertainment Expense
- No Entertainment deduction
- Meals for EEs while traveling are 50% deductible
- Travel is 100% deductible
- Office parties still deductible
- Tickets to sporting and cultural events NOT deductible
casualty losses (calculation of the deductible loss)
First: Use the lesser of basis or FMV
Second: Subtract any insurance coverage
Third: Subtract $100 (floor)
Fourth: Subtract 10% of AGI.
*Must be a presidentially declared “natural disaster”ca
types of phantom income
Insurance:
- Lapse of Policy Loan
- Section 162 Life/Disability
Investments:
- Zero/Strip Income
- TIPS
- Declared but not paid Dividends
Tax/Retirement:
- K-1 Income from LP/FLP
- Recapture
- NUA
- 20% withholding plan distributions, Secular Trust
Self employment tax calculation
The Taxable Wage Base will not exceed $142,800 (2020).
If you added up the self-employed income, and you exceeded $142,800, you did something wrong. Why? Social Security tax stops at $142,800 (2020).
Shortcut: Multiply Self-employment Income by 0.1413
accounting methods
Cash: Mandatory where taxpayer’s records reflect only cash transactions, and there are no inventories.
Accrual: Mandatory for purchases and sales over $25M where there are inventories.
Hybrid: Combines accrual for inventory portion of business and cash for cash portion of business.
Percentage of Completion: For long-term contracts where the contract will not be completed within the taxable year started.
Boot gain / basis
boot received = recognized gain
boot paid = added to basis
basis carried over from last property
Net operating loss
NOL = excess of deductible expenses over gross income
allowed for self-employed, corporations, estates, and trusts
CANNOT be carried back but may be carried forward indefinitely
Federal withholding tax underpayment penalty
To avoid, pay the lesser of:
90% of the current year’s tax liability
100% of the prior year’s tax liability (or 110% if the last year’s adjusted gross income exceeded $150,000)
Charitable Bargain Sale
Property sold to charity for less than FMV.
Calculation:
Sale Price / FMV x basis = adjusted basis
Sale Price - adjusted basis = taxable gain
realized gain vs recognized gain
realized gain: economic or inherit gain at the time of transaction
- realized gain = sale price - commissions paid on sale
- adjusted basis = purchase price + commissions paid on purchase
recognized gain: part of realized gain that is immediately taxable
- recognized gain = realized gain - adjusted basis
C corp advantages and disadvantages
Advantages
- Separate tax entity, taxed at flat 21%
- Dividend-received deduction (50% exclusion)
- Limited liability & continuity of life
Disadvantages
- corporate formalities
- Dividends paid (after-taxs)
- Accumulated earnings > double taxation above $250k
Fringe Benefits
- Health Care Premiums
- Insurance Premiums on non-discriminatory group life policy up to $50k
- Company car for working conditions only
- Employer-provided transit passes ($270/mo. cap) or parking ($270/mo. cap)
- Occasional overtime meal money, cab fare, theater or sporting event tickets
- Discounts on services limited to 20% of selling price charged to customers
multiple 1231 gains (lookback)
5 year lookback
Step 1:
total gain in current year
- current year recapture
- unrecaptured lossses over past 5 years
= capital gain (section 1231)
Step 2:
total gain in current year
- capital gain (section 1231)
= gain taxed as ordinary income
1231 adjusted basis
purchase price - depreciation = adjusted basis
Losses from oil and gas working interests
dedcutible agaisnt active or portfolio losses without limit and without respect to AGI
Losses from real estate activities
can deduct $25k of losses against active and portfolio income
reduced by 50% of the taxpayers AGI in excess of $100k.
entirely phased out at $150k
worthless securities
holding period is long term
only $3,000 may be recognized in the current year, rest carried forward
cash method of accounting
income reported when cash is collected and expenses are reported when cash payments are made, used when there are no inventories
can be used by:
- individuals
- partnerships or corporations if gross receipts for all prior years do not exceed $26 mil
- certian farming businesses
- qualified personal esrvice corporations: accounting, law, engineering, health, consulting architecture, acturarial science or performaing arts
accural method of accounting
reporting of expenses in the same tax year that it is reported in the taxpayers financial statements and income when earned
used wen there are inventories and over $26 million
Bad debts
to be deductible must have a debtor-creditor relationship
lender must have a basis in the loan
FICA
FICA tax total = 7.65% EE and 7.65% ER + (additional medicare if applies)
- Social Security tax (OASDI) 6.2% ER + 6.2% EE capped at SS taxable wage base ($142,800)
- Medicare tax (HI) 1.45% EE + 1.45% ER
- .9% additional medicare tax on income above $200k S/$250k MFJ
- only paid by EE
- net investment income tax of 3.8% on investment income over certian thresholds
SE will pay both portions
taxation of sole proprietorship
taxed directly to proprietor
files schedule C with individual form 1040
taxation of partnerships
flow through entity
income and deductions flow through to partners, retian their character - reported on Schedule K-1
each partner receives a K-1 for their allocation, which are then reported on the individual return 1040
basis in partnerships
- begins with contributions and is adjusted by earnings and losses
- cash contribution = cash contributed
- property contribution = carryover basis
- distributions will reduce basis
- share of liabilites assumed by partnership will reduce basis
special taxes applicable to C corps
personal holding company tax
personal service corporation tax
accumulated earnings tax
C corp: Dividends received deduction
- if div receiving corp owns less than 20% of div paying corp then 50% deduction of divs recieved
- if div receiving corp owns at least 20%, but less than 80% then 65% deduction of divs received
- if div receiving corp 80% or more of div paying corp than 100% deduction of divs received
personal holding company tax
- GOAL: discourage people from using a corporate entity for tax avoidance
- personal holding company if:
- ownership test: more than 50% of the valuye of stock is owned by 5 or fewer individuals
- AND passive income test: 60% of corps adjusted ordinary gross ncome consists of personal holding company income
- undistributed personal holding company income = corps adjusted taxable income - divs paid decution
- undistributed personal holding company income taxed at personal holding company tax rate of 20%
personal service corporation tax
- personal service corportations: HAALE PSC
- Health,
- Architechture
- Accounting
- Law
- Enginerring
- Performing arts
- actuarial Science
- Consulting
- at least 95% of stock is held by active or retired employees
- innome earned taxed to the corporation at a flat rate of 21%
Special taxes for S corps that used to be C corps
taxes paid by the corporation, not the shareholders
- built in capital gains tax
- LIFO recapture
- Excess net passive income tax
S Corp shareholder that owns more than 2% of stock
treated as partner
fringe benefits included in shareholders gross income
accident and health premiums are deductible by corporation
gifting of loss property: if then sold for a LOSS
Donee’s basis = FMV on date of gift
holding period = starts on date of gift
gift tax paid at time of gift is NOT allocated to basis
gifting of loss property: if then sold for a gain
donee’s basis = carryover basis
holding period = carryover
gift tax paid is NOT allocated to basis
gifting of loss property: if sold between the donor’s basis and the FMV on the date of the gift
no gain or loss is recognized
