Tax Flashcards
How is shareholder basis calculated for a new interest in a Corporation?
Adjusted basis of property transferred + Gain recognized (if less than 80% ownership) - Boot received = Shareholder basis. If shareholders have 80% control after a property transfer, no taxable event occurs. If liabilities exceed basis on contributed property to a Corporation, a gain is recognized.
How is Gift taxation different from Estate taxation?
Property transferred while taxpayer is living
Under what accounting basis are individual tax returns prepared?
Cash Basis. Note: This basis is NOT allowed for Corporations, Partnerships with a C-Corp partner, or for inventories.
What is the Interstate Income Act of 1959?
Restricts a state’s authority to tax interstate commerce
True or false? Partnerships are a taxable entity.
False. Income and expenses flow through to the partner to be taxed via a Form K-1.
What is the basic calculation for basis in property?
Cost of property + Purchase expenses + Debt assumed + Back taxes and interest paid = Basis. Note: taxes and interest related to time when a taxpayer did not own the property are not deductible - they are added to basis.
How is shareholder basis calculated for a TRANSFEROR of an interest in a Corporation?
Transferor’s basis + Gain recognized by shareholder = Basis OR FMV of Corporate Interest - Adjusted basis of property = Gain
What is the annual exclusion amount for a taxpayer’s Gift taxation? What is required to get the exclusion?
$14,000 per year per spouse to each individual In order to get the exclusion, the recipient must immediately acquire a present interest in the property and get unrestricted access to the property and all of its benefits
What are the deductions to arrive at Adjusted Gross Income (AGI) for individuals?
*MSA/HSA contributions *Investment penalties for early withdrawal *Self-employed medical insurance premiums *Self-Employment Tax (approx. 50%) *IRA Contributions *Student loan interest (can’t be another taxpayer’s dependent) *Moving expenses *Alimony *Tuition - can’t take AOC/Lifetime Learning Credit for same expense *Teacher expenses *Attorney fees in discrimination lawsuit
What are the principles of the Interstate Income Act of 1959?
A state can’t collect income tax on sales within its borders as long as the orders are filled and shipped outside of the state Applies to tangible property only Does not protect a Corporation in the state where incorporated Does not protect from taxes using metrics other than income (Ex: Sales Tax)
When exchanging property for a partnership interest; how is gain or loss recognized?
Neither gain nor loss is recognized in an exchange of property for a partnership interest. It is a non-taxable event.
What is the recipient or donee’s basis on gifted property?
Sold at a gain: use donor’s basis Sold at a loss: use lesser of donor’s basis or FMV at time of distribution Sold in between donor’s basis and FMV: No gain or loss
What basis do shareholders and Corporations use for property?
They both use ADJUSTED BASIS, NOT FMV of property.
If a Gift is an annuity, what value is used for the Gift?
If the Gift is an annuity, use Present Value to determine the gross Gift
Which items can be carried over to future years on an individual tax return?
Investment interest expense in excess of investment income Charitable contributions Excess Section 179 Capital losses AMT Paid Passive Activity Losses
What is the Uniform Division of Income for Tax Purposes Act (UDITPA)?
Uniform criteria for determining taxable income of multi-state corporations Also known as the Multi-State Tax Compact
What is a partner’s basis in partnership property?
Initial basis for partnership property is the basis of the property that was contributed or exchanged for the partnership interest.
What is the basis and holding period of inherited property?
FMV at date of death or alternate valuation date (6 months later) If alternate date is elected by property is sold before 6 month window; use FMV at date of death. Property inherited is LTCG property regardless of how long it is held by the recipient.
Describe how loss is taken on Section 1244 small business Corporation stock?
A loss on worthless stock is an ordinary loss.
What is the basic Gift tax calculation?
Gross Gifts - 1/2 of Gifts (treated as given by spouse) - Total # of donees x $14,000 exclusion = Taxable Gift
Characterize the following carryover: Passive Activity Loss
No carryback Can carry forward indefinitely
What are the basic principles of UDITPA?
Designed to ensure a company is not taxed more than once on its income Forces a corporation to segregate Business Income from Non-Business Income
When services are exchanged for a partnership interest; how is this treated for tax purposes?
It is a taxable event; treated the same as compensation for the services. The taxable income equals the % of partnership interest received times the FMV of the partnership. i.e. the FMV of the interest received is the taxable income for the service provider.
What is the holding period on a stock dividend?
Holding period of new stock received from a dividend takes on the holding period of the original stock
What are the requirements for taking an ordinary loss on Section 1244 small business Corporation stock?
Taxpayer must be original stock owner, and either an individual or partnership $50k (single) or $100k (MFJ) limit - remainder is a capital loss Must have been issued in exchange for money or property (not exchanged for services) Shareholder equity must not be in excess of $1 million Both common and preferred stock is allowed
How is a Gift taxed if a recipient gains a future ownership in the Gifted property?
Recipient must gain ownership and all rights to property to get the annual exclusion. If recipient merely gains a future ownership, then the present value of the Gift is 100% taxable to donor and cannot exclude from Gift tax calc
How is excess 179 expense carried forward?
Carry forward to next year. Use in any year is limited to taxable income.
What is considered Business Income?
Part of the corporation’s regular course of business Includes acquisition of tangible and intangible property if such activities are part of the regular trade or business
What is the partner’s basis in a partnership when they provide a service in exchange for the interest?
The basis in the partnership interest is the amount of taxable service revenue provided by service provider.
What property is eligible for like-kind exchange treatment?
Real for real or personal for personal business property only US property only
What are the basic rules for filing a form 1120?
Return is due regardless of income level Return is due 3/15 if on a calendar year basis, or 2 1/2 months after end of fiscal year An automatic six-month extension is available
What are the deductions for Gift tax, besides the annual exclusion?
Tuition and medical expenses paid directly to the provider organization (note: NOT books or dorm fees) Political contributions Charitable Gifts Unlimited Gifts to spouse
How long can investment interest expense in excess of investment income be carried forward?
Indefinitely.
What is the holding period of an asset that has been contributed to a partnership?
The partnership inherits the holding period of the asset contributed. The exception of inventory- the holding period begins when contributed.
What is BOOT in a like-kind exchange?
Cash received + unlike property received + liability passed to other party
When are Corporate federal tax estimated payments required, and how are they calculated?
Required if more than $500 in tax liability expected, or 100% current year liability 100% previous year liability Note: If Corporation had more than $1 Million in revenue the previous year, the first estimated payment must be based on the previous year and the remainder based on the current year.
What is the basis of Gifted property for the recipient?
If a loss on sale, basis is FMV on the date of the Gift If a gain on sale, basis is same as donor’s basis No G/L if donor basis is less than sales price, and sales price is less than FMV @ Gift date
How long is the carry forward for charitable contributions?
Can be carried forward 5 years.
What is the tax treatment of startup costs for a partnership?
Tax treatment is the same as that of an individual taxpayer. However syndication fees are not deductible or amortized.
In a like-kind exchange; how is it handled if a netting of mortgages results in net boot paid?
DO NOT subtract the boot paid amount from the cash received Ignore the boot paid amount from the mortgage completely
Describe the AMT calculation for C-Corporations
Taxable Income +Tax Preference Items +/- Adjustments = Pre-ACE +/- ACE Adjustments = AMTI - 40,000 Exemption = Tax Base x 20% = Tentative Minimum Tax - Regular Tax Liability = AMT
How/when are Gift tax returns filed?
Calendar-year basis only Due April 15
How long is AMT paid carried forward, and how is it applied?
It can be carried forward indefinitely. It may be applied against future *regular* income tax, but not against future AMT tax liability.
What deductions are subtracted from gross revenues to arrive at partnership income?
COGS Wages - except for partners Guaranteed payments to partners Business bad debt (if on accrual basis) Interest paid Depreciation (except section 179) Amortization (Startup costs; goodwill; etc)
What is an involuntary conversion? When does it not result in a gain?
Occurs when you receive money for a property involuntarily converted There is no gain if you reinvest the proceeds completely If proceeds not completely reinvested; gain is LESSER of realized gain or amount not reinvested.
What are the pre-ACE adjustments for C-Corporation tax AMT calculations?
Real Estate purchased between 1986 and 1999 using Straight Line Depreciation must depreciate over a useful life of 40 years Personal Property - use 150% MACRS, not 200% Construction must use % completion method
What are the basic characteristics of complex Trust?
Income distributions are optional Accumulation of income ok Charitable contributions ok Contributions using tax-exempt income are not deductible Allowed personal exemption of $100 Key Point: Distribution of Trust corpus (principal) ok
How are capital losses applied in individual taxes?
$3,000 net capital loss can be taken in each year, the rest is carried forward indefinitely. The loss retains its character (STCL or LTCL).
How are partnership losses taken on an individual’s return?
Losses cannot be taken beyond a partner’s basis in the partnership Losses in excess of basis are carried forward until basis is available
What are the requirements for exclusion of gain on a primary residence? How are losses treated?
Must live there 2 out of 5 years Loss on sale of home is NOT deductible
What are the ACE adjustments in the C-Corporation AMT tax calculation?
Municipal Bond Interest Life Insurance Proceeds 70% Dividends Received Deduction Organizational Expenditures must be capitalized, not amortized Note: AMT paid gets carried forward indefinitely, but never carried back
What are the basic characteristics of a Simple Trust?
Income distributions mandatory Accumulation of income disallowed No charitable contributions Distribution of Trust corpus DISALLOWED Allowed personal exemption of $300
How does an individual capital loss carryover differ from a corporate capital loss carryover?
Corporate capital loss carryovers may be carried back 3 years and forward 5 years. Individual capital losses are carried forward indefinitely. Individual capital loss carryovers retain their character (STCL or LTCL). Corporate loss carryovers are carried forward as STCL only.
When are guaranteed payments to a partner includable in taxable income?
They appear in partner’s income during the year in which the partnership’s fiscal year CLOSES.
What is a wash sale?
30 Day rule applies Disallowed loss adds to basis of new stock New stock takes on date of acquisition of old stock
When are C-Corporations exempt from AMT?
In year one In year two, if year one gross receipts were less than $5 Million In year three, if the average gross receipts for years 1 and 2 were less than $7.5 Million In year four and beyond, if the average from the previous 3 years is less than $7.5 Million
How are Net Operating Losses handled in a Trust?
Trusts can have a Net Operating Loss Any unused NOL flows through to the beneficiaries
What ratio is applied to principle payments in an installment sale to determine the gain in a given year?
Gross Profit / Contract Price
How are partner benefits paid by the partnership treated?
Health insurance; life insurance and other benefits paid on behalf of the partner are treated as guaranteed payments and are includable as self-employment income.
Who is considered a related party in a property transaction? How does it affect the transaction?
Ancestors; siblings; spouse; descendants; corporation or partnership where you’re a 50% shareholder Seller cannot take a loss on sale to a related party; but gain is always recognized. Related party gets to use the disallowed loss when they sell. Related party’s holding period begins when they acquire the property. In-laws are NOT related parties.
How are gains and losses handled with respect to a Corporation’s transactions involving its own stock?
Corporations have no gain/(loss) from transactions involving their own stock, including Treasury Stock. If Corporation gets property in exchange for stock, there is no gain/(loss) on the transaction.
How are expenses and fees related to tax-exempt income handled in a Trust?
Expenses and fees from tax-exempt income are not deductible for either a Complex or Simple Trust
What is the contract price in an installment sale for income tax purposes?
Contract Price = Sales Price - Liability assumed by buyer
How is net self-employment income from a partnership interest calculated?
Partner’s % share of ordinary income from partner’s K-1 + Guaranteed payments - Partner’s % share of section 179 expense from K-1 = Self-employment income (subject to SE tax)
How are capital losses taken in a corporation?
capital losses only offset capital gains Carryback 3 years - if you elect NOT to carryback; you lost the option in the future Carry forward 5 years - only as STCL
How are Corporate organization costs handled?
Amortization of costs begin the month the Corporation commences business activity If the Corporation doesn’t amortize organization costs in year one, they can never be amortized Costs associated with offerings are neither deductible nor amortized
When is property transferred in an Estate?
After the death of the donor
On an individual return, regular mortgage interest on what loan amount is deductible?
$1,000,000
In general; what is a partner’s basis in partnership property purchased?
Partner’s basis is basis of goods exchanged or for services exchanged is FMV of partnership interest received. If purchased; purchase price less liabilities incurred = basis. For a gifted interest in a partnership; gift basis rules apply.
What assets are NOT capital assets?
Inventory; Business interest; Accounts Receivable; Covenant not to compete Goodwill IS a capital asset
How are a C-Corporation’s deductible charitable contributions calculated?
Sales -COGS= Gross Profit Gross Profit + Rent, Royalties, Gross Dividends, Capital Gains =Total Income Total Income - Deductions (No charitable contributions, Dividends Received Deductions (DRD), or NOL Carrybacks allowed) - NOL Carryforwards =Taxable Income before charitable contributions, DRD, NOL Carrybacks x 10% =Deductible Charitable Contributions
What amount of a decedent’s Estate is exempt from Estate Tax?
The First $5,250,000 is exempt with a 40% tax on amount above that
Interest on home equity loans up to what amount are deductible on an individual tax return?
$100,000
Which items are not deductible on Schedule K of form 1065?
Foreign tax paid Investment interest expense Section 179 expense Charitable contributions Mnemonic: IFC179
What are the steps in applying a capital gain or loss?
Net all STCG and STCL Net all LTCG and LTCL Add together Deduct $3;000
How are excess charitable contributions treated in a C-Corporations?
Excess charitable contributions get carried forward 5 consecutive years (No Carryback)
How are a decedent’s medical expenses handled with respect to an Estate?
Medical expenses paid after death, but incurred within 1 year of death go on decedents personal tax return
