Tax Flashcards
1
Q
sources of tax law
A
- statutory (first and primary source)
- administrative (second primary source)
- judicial (third source)
2
Q
Internal Revenue Code
what source is it
A
- statutory (first and primary source)
3
Q
regulations
what are they and what source of tax law
A
- administrative (second primary source)
- full force and effect of law
- address issues or explain IRC, can be issued by Treasury
4
Q
revenue rulings
what are they and what source of tax law
A
- administrative (second primary source)
- proclamations by treasury to address common questions
- doesn’t have full force of law
5
Q
revenue procedures
what are they and what source of tax law
A
- administrative (second primary source)
- documents that provide additional info to taxpayers, e.g., inflation adjusted #s
6
Q
private letter rulings
what are they and what source of tax law
A
- administrative (second primary source)
- only binding for one taxpayer BEFORE transaction
7
Q
determination letters
what are they and what source of tax law
A
- administrative (second primary source)
- only binding for one taxpayer seek guidance AFTER transaction
8
Q
federal judicial tax court system
overview
A
-
US Supreme Court (appeals)
-
US Court of Appeals (regional)
-
US Tax Court
- Small Case division
- US District Court
-
US Tax Court
-
US Court of Appeals (federal)
- US Federal Claims
-
US Court of Appeals (regional)
9
Q
US tax court
tax prepayment, trial by jury, appeals
A
-
tax prepayment: no
- if you lose, penalties still apply
- trial by jury: no
- appeals: to US Court of Appeals (regional)
- Small Tax Case Division for deficiencies <$50K
- NO appeal
10
Q
US Court of Federal Claims
tax prepayment, trial by jury, appeals, location
A
- tax prepayment: yes
- trial by jury: no
- appeals: to US Court of Appeals (federal)
- Location: DC only
11
Q
US District Court
tax prepayment, trial by jury, appeals, location
A
- tax prepayment: yes
- trial by jury: yes
- appeals: US Court of Appeals (regional)
- location: local; not tax expert judges
12
Q
federal judicial tax court system
A
-
US Supreme Court (appeals)
-
US Court of Appeals (regional)
-
US Tax Court: no tax prepayment, no trial by jury, based in DC but they travel
- Small Case division: <$50K, no trial by jury, no tax prepayment
- US District Court
-
US Tax Court: no tax prepayment, no trial by jury, based in DC but they travel
-
US Court of Appeals (federal)
- US Federal Claims: tax prepayment required, no trial by jury, only in DC
-
US Court of Appeals (regional)
13
Q
who can represent a client during an IRS audit?
A
ACE
- Attorney
- CPA
- Enrolled agent
NOT a CFP
14
Q
interest and failure to file & pay penalties
A
- interest = federal short-term rate + 3%
-
failure to file - 5%/mo up to 25% (File = Five)
- i.e., up to 5 months
-
failure to pay - 0.5% per month up to 25% (Pay = Point five)
- i.e., up to 50 months
- failure to file is reduced by failure to pay running at the same time
- partial month = full month
15
Q
IRS statute of limitations
A
- 3 years to audit you
- can be extended to 6 years if taxpayer omits >25% gross income stated
- 10 years to collect the tax
- no statute of limitations if you never file a return or IRS can prove the return is intentionally fraudulent
16
Q
technical advice memorandums
what are they and what source of tax law
A
- administrative (second primary source)
- IRS reps seek advice on how to treat certain transactions
17
Q
What does Commerce Clearing House (CCH) do?
A
provides plain language interpretation of tax law
18
Q
Congressional Committee Reports
A
(sometimes known as the Blue Book) provides congressional reasoning/intent for enacting tax law.
19
Q
16th Amendment vs Revenue Act of 1861 vs Revenue Act of 1913 vs Revenue Act of 1916
A
- 1861 - imposed a federal income tax, it was later found to be unconstitutional because Congress did not have the power to levy an individual income tax at that time
- 16th Amendment - gave Congress the power to impose an individual income tax, but did not itself impose that tax
- 1913 - imposed the first constitutional income tax.
- 1916 - raised the rates previously imposed under the Revenue Act of 1913.
20
Q
Section 1231
what assets are included, how are gains/losses taxed, holding period, depreciation
A
- includes: assets used for revenue production in business; includes personalty or realty
- excludes: inventory, copyrights or creative works
- gains = capital gains
- losses = ordinary losses
- holding period: must be held >1 year
- depreciation recapture may apply at ordinary income
21
Q
Section 1245
A
- Depreciable business personalty
- 1st: Section 1245 gain (ordinary income) to extent depreciation was taken
- 2nd: Section 1231 gain (i.e. LTCG)
- losses are ordinary
22
Q
Section 1250
A
- depreciable business realty
- 1st: accelerated depreciation (i.e., > straight line) = ordinary income
- 2nd: straight line depreciation = 25% (i.e., Section 1250 rate)
- 3rd: 1231 (LTCG)
- any loss is an ordinary loss
23
Q
what happens to basis and holding period for inherited property
A
step up to FMV and always long-term
24
Q
what happens to basis and holding period for gifted property
A
double basis rules
holding period carries over with the basis applied
25
limits on recognition of capital losses
$3000/year
carried forward indefinitely
26
what happens to basis and holding period for death bed property
* death bed = appreciated property gifted within 1 year of death by same taxpayer that decedent left the property to
* no step up to FMV
27
MACRS
*what is and what are the terms*
* Modified Accelerated Cost Recovery System
* method of depreciation where useful life varies based on property class
* 3 yr - tractor (not tested much)
* 5 - autos and computers; Section 1245
* 7 - office furniture/fixtures; Section 1245
* 27.5 - residential rental realty; Section 1250
* 39 - nonresidential realty (i.e., Section 1250 property )
* Hint: CAT Off Right Now
* CAT - Computers Autos Trucks
* Off - Office furniture and fixtures
* R - Residential
* N - Non-residential
28
MACRS
*methods*
* 200% declining balance (GDS)
* 150% declining balance (GDS)
* straight line (GDS)
* straight line (ADS)
29
Deductions FOR AGI
* _For_ AGI is above the line
* Self-employed deductions
* IRA/HSA/retirement contributions
* Student loan interest up to $2500 and subject to phaseout (on tax sheet)
* Moving expenses for military only
* Alimony payments for divorces final before 2019
* trade or business expense - COGS only for drug trafficking, never bribes, only 50% for meals
* loss on sale or exchange of property
* rental and royalty property
* penalty on premature withdrawals from CDs
30
which business expenses are deductible FOR AGI
*illegal, bribes, meals, transport, entertainment*
* COGS only for drug trafficking
* never bribes
* only 50% for meals
* at restaurant, fully deductible in 2022
* 100% for transportation
* no deducting entertainment
31
which self-employment costs are deductible FOR AGI?
* business expenses
* health insurance (unless you are covered by your spouse's plan)
* retirement plans
* ½ self-employment tax
32
is workers comp taxable?
No; it's considered to be something that makes you whole
33
Deductions FROM AGI
* _From_ AGI is below the line i.e., itemized deductions
* Medical expenses \>7.5% of AGI
* taxes - state, local, property, foreign
* Interest - personal residence, investments
* charity
* casualty losses
* gambling loss to extent of winnings
* annuity for decedent to extent of unrecovered basis
* Note: qualified business income is in addition to sandard/itemized deduction
34
what taxes are deductible
*rules, from or for AGI?*
* _From_ AGI is below the line i.e., itemized deductions
* state income OR sales tax (not both) + local property tax up to $10K
* real estate taxes
* personal property taxes
* foreign taxes paid
35
what casualty losses are deductible
*rules, from or for AGI?*
* _From_ AGI is below the line i.e., itemized deductions
* business (does _not_ have to be federal disaster)
* federal disaster
* 10% AGI limit and 100 floor
* lesser of
* decline in FMV
* adjusted taxable basis
* no erosion or termite damage
* federally declared disaster
36
itemized deductions not subject to 2% AGI floor
* IRDs
* gambling losses to extent of winnings
* impairment related work expenses for handicapped
* annuity losses for decedent annuitant
37
what interest expenses are deductible
*rules, from or for AGI?*
* _From_ AGI is below the line i.e., itemized deductions
* on personal residence for debt up to $750K ($1M for mortgages prior to 2018)
* investment interest expense (e.g., margin expenses)
38
709 vs 706 Tax Returns
709 - Gift tax return/GSTT (I'm on cloud 9)
706 - Estate Tax Return (I'm 6 feet under)
39
Do personal use asset gains/losses get reported?
gains should be
losses are not claimed
40
what are not capital assets
Section 1221(a)
ACID
* Accounts receivable
* Copyrights/creative works in hands of creator
* Inventory
* Depreciable business property
41
Is tax paid on a purchase considered basis?
yes
42
do repairs adjust basis?
no; basis is only for capitalized purchases (e.g., if you buy a new A/C, it impacts basis but not if you repair it)
43
value of gift vs taxable gift
if exam asks for gift value, it's FMV.
If exam asked for taxable gift, it's less the annual exclusion (if applicable)
44
how does basis work for loss sale to related party (section 267)
* seller cannot deduct the loss
* buyer has double basis (FMV for loss and seller basis for gain)
* _no_ holding period carryover
45
who are related parties for loss sales (section 267)
* siblings (half but not step)
* lineal descendants
* ancestors
* spouse
* **excludes**
* in-laws
* aunts/uncles
* cousins
46
can you take a loss on the sale of personal assets?
no
47
wash sale
* dispose of security and repurchase substantially similar one within 30 days
* cannot take the loss but basis will include original basis + new basis
48
personal residence gain exclusion
*requirements, use for spouses*
* must own and use 2 out of last 5 years
* can't use exclusion more often than every 2 years
* $250K single
* $500K single if
* either spouse meets ownership requirement
* both spouses meet use requirement
* If owned \< 5 years, the exclusion amount is based on % of qualified use vs unqualified use in the time you owned it (e.g., single person owned for 4 years, 2 years as VAC and 2 year use gets 50% of $250K excluded)
49
exceptions for personal residence gains
*reasons and tax treatment*
* reasons
* change in employment
* change in health
* unforeseen circumstances
* treatment: prorated exclusion for number of months requirement was met out of 24 months (months met / 24 x excludable gain = exclusion)
50
capital gains and losses for worthless securities
* deductability
* deductible in the year they become worthless
* artificial date of sale is last day of year security because worthless (12/31)
51
how to net ST and LT gains/losses when they are equal
If a loss, ST losses are taken first so the LT carries over, if applicable
52
how to net capital gains and losses
* calculate net ST gains/loss
* calculate net LT gains/losses
* net those two together and whatever is higher (ST or LT) is how net will be treated
* if ST and LT are equal, ST losses are taken first so the LT carries over, if applicable
53
limits on 1244 capital losses
*what it's for, tax treatment, requirement*
* **what it's for**: loss on small business stock as ordinary income
* **tax treatment**
* single can deduct up to $50K
* married $100K
* can carry forward indefinitely
* **requirement**
* domestic company
* \<$1M capital
* can use it even if you're a significant owner (e.g., 50%)
54
how much can you deduct of LTCL?
$3K per year (after being netted)
the remaining can carry forward
55
Section 1202
if you've held a small business stock \>5 years, you get a favorable capital gain
it's the counter part to 1244
56
nontaxable exchanges - Like kind exchange (section 1031)
*what is it, what kind of exchanges are allowed*
* can swap business property (realty or investment) one for another and _defer_ taxation because no actual cash has been exchanged and thus wouldn't necessarily be available for tax
* must be held for production of income or investment
* NOT personalty (e.g., equipment)
* US property can only be exchanged for US property
* foreign can be exchanged for foreign
* transactions must be economically equal
* anything that is not the property is boot (cash, debt forgiveness, equipment, etc)
57
nontaxable exchanges - Like kind exchange (section 1031)
*what kind of property is excluded*
* personal property/assets
* inventory
* stocks, bonds, notes
* equipment
58
nontaxable exchanges - Like kind exchange (section 1031)
*what happens if you receive boot*
* receiver must recognize the boot as gain
* payer of boot must recognize a gain if the FMV of the boot is \> basis in boot
if trading up in the exchange and boot exceeds gain, it reduces your basis
59
nontaxable exchanges - Like kind exchange (section 1031)
*when must new property be acquired?*
* if unsimultaneous, 1031 still applies as long as new property is identified within 45 days and received by 180 days from sale or due date of tax return
* proceeds must be held in escrow
60
nontaxable exchanges - involuntary conversions (1033)
* if you receive money for involuntary conversion of property (biz, residential, VAC) due to destruction, theft, seizure, condemnation, you can defer taxation on the gain
* can defer 2 years unless condemnation which is 3 years
* time starts at end of year when realization occurs (i.e., when check from insurance is received
* funds must be used for replacement property to get this treatment
61
nontaxable exchange - life insurance policies (section 1035)
* tax free exchange of life insurance if you swap:
* life for life
* life for annuity
* annuity for annuity
* i.e., MEC for life insurance won't allow a deferral so it may result in a gain
62
cash basis vs accrual basis
* cash - you recognize when you receive the money
* accrual - you recognize as you accrual (business typically)
63
head of household
*who qualifies*
* unmarried or considered unmarried (basically separated and home is main home for child
* qualifying person must live with taxpayer \>50% of year
* child - single or married if claimed as exemption
* mother/father - if you can claim as exemption
* relative - lived with you \>50% of year and can claim exemption
64
qualifying widower
* available 2 years after death of spouse (i.e., not the year of death)
* must have a dependent child in home all year, not be remarried
65
child tax credit
*how much, what is a qualifying child, how much is refundable*
* $2000; $1500 is refundable
* \<17
* Lived with taxpayer \>50%
* Doesn't provide \>50% of their own support
* AGI phaseout on formula sheet
* must have SSN
66
who is a qualifying child for dependency
* child, grandchild, step-sibling, half-sibling, niece/nephew
* does not provide \>50% of their own support
* lives with taxpayer \>50%
* \<19 or student \<24
* must have SSN
67
what is a qualifying relative for dependency
* household member that lives with you year round or grandparent/parent/aunt in assistive living
* you must provide \>50% support
* dependent gross income \<$4400
* doesn't need SSN but must be citizen or resident of US, Canada, or Mexico
68
is discharge of indebtedness gross income?
yes unless bankruptcy
69
how much of social security benefits is taxed
* based on provisional income
* provisional income = AGI + tax-exempt interest (e.g., muni bonds) + foreign income +½ SS benefits
* 1st hurdle
* single = $25K
* MFJ = $32K
* if below 1st hurdle, 0% of SS benefits are taxable
* 2nd hurdle
* single = $34K
* MFJ = $44K
* if above hurdle, 85% of SS benefit is taxable
* if between 1st and 2nd hurdle, taxable benefit is lesser of
* 50% SS benefit
* (provisional income - 1st hurdle) x 50%
70
gross income inclusion for below market loans
* Loan \< or = $10K: $0 imputed interest
* Loan \> $100K: full imputed interest
* Loan between $10K and $100K and net investment income \>$1000: imputed interest based on lesser of:
* net investment income or
* imputed interest
* imputed interest = amount stated rate is below AFR (applicable federal rate)
71
what items are excluded from gross income
* gifts and inheritances
* life insurance proceeds
* scholarships
* gain on personal residence \<$250K/$500K
* qualified distributions from Roths/403(b)
* compensation for injuries and sickness (workers comp, damages)
* NOT punitive damages or damages for emotional distress
72
is employer-provided adoption assistance included in gross income?
No, the first $14,890 of expenses is excluded
Exclusion phases out between MAGI $223K-263K
73
is employer-provided dependent care included in gross income?
No, the first $5000 is excluded
74
is employer education assistance program included in gross income?
No, the first $5250/year is excluded
75
flexible spending and dependent care account exclusions from gross income
flexible spending = $2850/year ($500 can be rolled over)
dependent care = $5000
76
itemized deductions not subject to 2% AGI threshold
* IRD (e.g., inherited an IRA from grandpa)
* gambling losses to extent of gambling winnings
* impairment related work expenses for handicapped
* annuity losses for decent annuitant
77
charity deductions
*deduction limits by donation type, carry-forward*
* FROM AGI i.e., itemized
* Public charities are what is primarily tested and what the #s below are for
* **simple version** is 60% of AGI if cash and 50% of AGI if non-cash
* complex version
* FMV up to 60% AGI
* cash
* basis up to 50% AGI or FMV up to 30% AGI (donor can choose)
* LTCG property
* realty
* Intangible (stocks, bonds)
* tangible property for related use
* lesser of FMV or basis up to 50% AGI
* STCG property
* ordinary income property (depreciable business property like inventory, computes, rental property)
* loss property (e.g. used clothes)
* LTCG tangible property for unrelated use
* 5 year carry forward
* private non-operating is 20-30% depending on the time (not as commonly tested)
78
deducting mortgage insurance
* interest on mortgage and investments
* up to $750K mortgage ($1M for purchases prior to 2018)
* doesn't apply to HELOC unless it improves property
79
medical deductions
* FROM AGI i.e., itemized deduction
* Deductible to the extent they exceed 7.5% of AGI
* includes:
* capital improvements to your home that are necessary or helpful (e.g., wheelchair ramp)
* tip: elevator, since not necessary, is only deductible to extent cost \> value added to home
* travel and lodging with set limits
* nursing home and special schools
* prescription drugs
* health insurance premiums paid after tax
* Excludes
* cosmetic (unless restorative)
* general health (vitamins)
* gym fees
* marijuana
* over counter drugs (unless insulin)
* dance lessons
80
who does Kiddie tax apply to?
dependent children (\<19 or student \<24)
81
Credits
* Earned Income Credit (uncommonly tested)
* Child and Dependent Care
* $3K/ child $6K/ family limited to 20%
* Child tax credit of $2K/child \<17
* $500/non-child dependent (e.g., parent)
* American Opportunity Tax Credit and Lifetime Learning Credit
* Foreign Tax Credit
* Elderly/Disabled Credit
* Adoption Credit
82
what is kiddie tax on unearned income?
* first $1150 is tax free (i.e., that's the standard deduction)
* Note: if using earned income + $400, this $1150 deducts from that.
* e.g., $5000 earned has $5400 standard deduction, less $1150 means $4250 available deduction toward earned income
* next $1150 is taxed at child's rate (i.e., single tax rate)
* above $2300 is taxed at parent's rate (regardless of standard deduction)
83
what is kiddie tax standard deduction
greater of $1150 or earned income + $400 up to single tax filer standard deduction
* Note: if using earned income + $400 (up to single standard deduction), the $1150 unearned income deductible reduces that
* e.g., $5000 earned has $5400 standard deduction, less $1150 means $4250 available deduction toward earned income
84
what is kiddie tax on earned income?
taxed to child (i.e., at single rate)
85
passive income
*what it is, deductability of losses, examples*
* taxpayer does not materially participate
* losses deductible to extent of passive income
* suspended losses allowed in year of disposition
* e.g, limited partnership, real estate
86
at-risk passive activity rule
*what is the amount at risk, how are losses treated, carry forward, netting, disposition year*
* **amount at-risk**
* taxpayer's economic investment
* includes cash and debt if personally liable (recourse debt)
* **losses** deductible only to extent of passive income and amount at risk
* **carry forward** - excess suspended and carried forward until next year with income or until investment is sold
* **netting**: publicly traded partnerships cannot be netted together, but non-publicly traded partnerships can
* **losses in disposition year** - can take previous suspended losses and fully deduct from other income
* *filters visual - goes through at risk filter first with excess suspended, and then income;*
87
active income
*what it is, deductability of losses, examples*
* taxpayer materially participates
* losses fully deductible (at disposition)
* e.g., salary, general partnership, self-employment income
88
can you combine gains/losses of publicly traded or non-publicly traded limited partnerships?
No for public
Yes for non-public
89
what is considered material participation for flow through entities
\>500 hours/year; includes other similar activities
\>100 hours and most of any other participants
90
portfolio income
*what it is, deductability of losses, examples*
* taxpayer invests in traditional investment activities
* losses are fully deductible
* e.g., interest and dividends
91
rental real estate passive activity loss exception
* up to $25K in passive loss from rental may be deducted from other income if
* taxpayer actively participates (arranges maintenance, screens tenants, etc.)
* AGI is \<$150K; phases out between $100K and $150K
* excess is carried over
92
personal rental property: personal use
* rented \<15 days
* income not taxable
* mortgage interest and property taxes 100% deductible up to $10K cap
93
personal rental property: rental use
* rented \<15 days and used personally less than or = to greater of 10% of rental 14 days
* days spent doing repairs is not personal use
* income is taxable
* deduct losses up to income and beyond by $25K (phased out by $150K)
* mortgage interest and property taxes deductible based on % used personal
94
personal rental property: mixed use
* rented \>14 days and personally used more than greater of 10% rental or 14 days
* income is taxable
* expenses not deductible beyond income
* mortgage interest and property taxes deductible based on % used personal
* for business, deduct based on # days rented / 365
* for other expenses, deduct for business based on # days rented / # days used (rented and personal)
95
AMT
*what it is, deduction differences*
* designed to change timing of tax payments and in some cases results in permanent tax increase
* it applies to everyone, it just doesn't generate extra tax for everyone
* itemized deductions for AMT compared to standard
* state/local, property taxes - _no_ deduction (so max add of $10K)
* No change for: mortgage interest, medical, charity, casualty
96
AMT preference items
* percentage depletion in excess of basis
* intangible drilling costs
* interest on private activity bonds (e.g., stadium); taxable for AMT purposes
97
AMT adjustments
* standard deduction, if taken (i.e., if you didn't itemize)
* accelerated depreciation for realty and personalty
* taxes (state, local, property)
* ISO bargain element
* positive at exercise
* negative at sale
98
AMT formula
* taxable income
* +- adjustments (most are + except for ISOs)
* + preferences (permanent changes; e.g., private activity municipal bonds)
* **= AMT income (AMTI)**
* - exemption amount (similar to standard deduction)
* **= AMT tax base**
* x applicable AMT rate
* **= Tentative minimum tax**
* - foreign tax credit
* - regular tax liability
* **= AMT**
99
AMT credit
*carrying forward/back, deferral items, exclusion items*
* AMT credit generated from deferral items in the AMT calculation may be carried forward indefinitely
* AMT credit may not be carried back
* Deferral items may be reversed in future years through the use of the AMT credit
* Exclusion items result in a permanent increase in tax.
100
entity types: sole proprietorship
*liability to owners, tax form, concept for tax, nature of owners income, set up*
* **liability to owners**: unlimited
* **tax form**: 1040 with business on Schedule C
* **concept for tax**: individual level
* **nature of owners income**: self-employment
* **set up**: easy
101
entity types: partnership
*liability to owners, tax form, concept for tax, nature of owners income, set up*
* **liability to owners**: general partners are unlimited; limited partners are limited
* **tax form**: 1065, then Schedule K-1 for owners comp which is reported on 1040
* **concept for tax**: flow-through
* **nature of owners income**: self-employment for general; ordinary income for limited partner
* **set up**: just file form
102
entity types: LLC
*liability to owners, tax form, concept for tax, nature of owners income, set*
* **liability to owners**: limited
* **tax form**: 1040 and Schedule C or 1120 (corp) or 1120S (S corp)
* **concept for tax**: can choose to be taxed as sole prop, partnership C or S corp
* **nature of owners income**: depends on how they chose to be taxed (sole prop, partner, C or S)
* **set up**: just file form
103
entity types: S corp
*liability to owners, tax form, concept for tax, nature of owners income, set up*
* **liability to owners**: limited
* **tax form**: 1120S, W2 (owner and employee) and Schedule K-1 (shareholder that isn't employee)
* **concept for tax**: flow-through
* **nature of owners income**: W2 and ordinary income (dividends)
* **set up**: higher cost, requires board of directors
104
entity types: C corp
*liability to owners, tax form, concept for tax, nature of owners income, set up*
* **liability to owners**: limited
* **tax form**: Form 1120, W2 for employees and dividends on 1099-DIV
* **concept for tax**: entity level
* **nature of owners income**: W2 income and dividend income
* **set up**: highest cost to set up
105
qualified child vs Child Tax Credit vs Dependent Care Credit vs Family Credit vs Kiddie Tax
*ages*
* **Qualified child dependent**: \<18 or FT student \<24
* **Dependent Care**: \<13
* **Child Tax**: \<17 dependent
* **Family credit**: qualified child \> = 17
* **Kiddie Tax**: same as qualified child
106
qualified child vs Child Tax Credit vs Dependent Care Credit vs Kiddie Tax
amount
* **Qualified child dependent:**
* **Child Tax**: $2000/child
* **Dependent Care**: 20% of expenses up to $3K ($6K if 2 kids \<13); requires earned income from both spouses unless student or handicapped; i.e., credit only ends up being $600 or $1200
* **Family credit**: $500
* **Kiddie Tax**: Lesser of $1150 Standard or Earned Income + $400
* $1150 at child rate
* above $2300 at parent's rate
107
hobby
*what is a hobby, tax treatment*
* **what is a hobby**
* no profit in 3 out of 5 years is presumed hobby
* no profit motive
* **tax treatment**: report income but no expense deduction
108
deductions for pass through entities basics
* in addition to standard/itemized deduction
* creates 20% deduction based on qualified business income
* reduces taxable income, not AGI
109
Section 179 expense assets and recapture
* can choose to expense up to $1,080,000 of tangible business property (office equipment)
* reduced by the amount of the expense that exceeds $2.7M
* cannot create a loss
* applies before MACRS; i.e., if you can't expense it, you can depreciate it
* recapture when asset is sold before it would've been fully depreciated or when business use drops below 50%
110
when is a trip outside the US considered for purely business?
* taxpayer has no control over timing or arrangements
* lasts \<7 days
* \<25% of time spent on personal
* vacation is not primary consideration
111
fiscal vs 52-53 week tax accounting period
fiscal: ends on the last day of a month other than December
52-53 week ends last week of last month, with any specified day
112
is HELOC interest expense deductible?
Yes, only if used to purchase or improve the residence
113
who is required to file a tax return?
anyone with income \> standard deduction
If blind, the additional deduction doesn't apply for this consideration as it must be proven, but the age one does
114
when is rent included in taxable income? when received or when recognized?
when constructively received
115
what happens if a PHC (personal holding company) has undistributed income
If the business is deemed to be a PHC by the IRS, then a penalty tax of 20% can be imposed on the undistributed personal holding company income.
116
what is the penalty to tax preparers for under-reporting income
if willful or reckless, greater of $5K or 50% of income received by preparer for the return
117
max investment interest deduction
limited to investment income (including capital gains)
remaining can be carried over
doesn't apply to tax-exempt investments (e.g., muni bonds)
118
how are the costs of natural resources recovered?
depletion
119
how are the costs of intangible assets recovered?
amortization
120
when are costs of investigating a new line of business deductible?
* even if not purchased, deduction still allowed
* if new line is in same line of business, costs of investigating is deductible
* if new line is in a different line of business, costs of investigating are capitalized and amortized over 60-months
121
what is the maximum expense for business related gifts?
$25
122
what is substitute basis for a like-kind exchange?
FMV reduced by gain realized but not recognized
123
is gifted business property depreciable?
yes, to the extent of lesser of FMV or carry over basis
124
advantages of cash method of accounting
income can be deferred until cash is received
deductible expenses are accelerated if paid
125
are scholarships taxable income?
only to extend used for room and board
126
who claims the dependent child if 50/50 custody?
parent with higher AGI
127
what is capital recovery?
expensing of certain acquisition costs
e.g., bonds purchased at a premium recover basis as they mature
128
in what sequence must general business credits be applied for current year, carry forwards to current year, and carry backs to current year
1. carry forward
2. current year
3. carry backs
129
under the accrual method, when is income recognized?
when seller writes and sends invoice after sending goods
130
how many taxable and nontaxable benefits must a cafeteria plan offer?
1 taxable benefit (usually cash)
1 qualified nontaxable benefit
131
are prizes and awards taxable?
yes
132
are business losses deductible against other income?
yes, assuming the activity is active and the person is a material participant
133
what is the accuracy-related penalty, when is it incurred, and what is the fraud penalty?
* when:
* substantial understatement of tax liability (greater of \>10% or \>$5000 tax deficiency)
* files incorrect return and fails to make good faith effort to comply with law
* substantial understatement of estate or gift tax valuation
* penalty is usually 20%
* fraud penalty is 75%
134
what are the rules around personal vacation when a self-employed individual does not have to pro rata the cost of an international flight?
if trip is \<7 days or \<25% personal considered business and no need to pro rata the deduction
135
how much can a corporation deduct in business startup costs?
up to $5K reduced dollar for dollar by amount of costs \>$50K
remaining deducted ratably over 15 years
cannot deduct costs of issuing and reselling stock
136
what is the penalty for filing a fraudulent income tax return?
75% of deficiency
137
what is the minimum deductible to be considered high deductible?
*single and family*
$1400 single
$2800 family
138
how are gains treated when personal use property is converted to business use?
the adjusted basis becomes the lesser of original adjusted basis or FMV on date of conversion
no gain/loss recognized at time of conversion
139
are nondividend distributions taxable?
yes, to the extent that they exceed basis (i.e., if basis has already been recovered)
140
can section 1231 gains be carried back?
yes, 5-year look back
141
how much interest do you include in income if you use some of a series EE bond to fund qualifying education expenses?
apply proportionately to the amount used for education
e.g., $3K used for education and $5K redemption means 60% of the gain is excluded
142
what is the minimum failure to file penalty?
lower of $435 or 100% of tax due
143
is non-business bad debt ST or LT loss?
ST
144
is the loss on worthless stock ST or LT?
LT if held \>1 year
145
how are qualified divididends taxed?
at capital gains rates which don't have breakpoints exactly the same as income tax brackets
146
when must a self-employed taxpayer file a return?
when they have $400+ net earnings from self-employment
147
are improvements to sewers and installing streetlights included in basis?
yes, all costs making property ready for use are capitalized
148
are legal and zoning fees included in basis?
yes, they are considered to be a cost that makes the property ready for use
149
can NOL (net operating losses) be carried back or forward?
they cannot be carried back but can be carried forward
150
much of the current year's income can NOL offset?
80%
151
is a shareholder in an S corp required to be a US citizen?
no
152
what is form 5498 used for?
IRA contributions
153
what is form 8606 used for?
to determine the tax consequences of certain taxable distributions from IRAs
154
are estates required to make estimated federal tax payments? what about partnerships, C corps and sole proprietors?
Yes for estates, C corps and sole proprietors
No for partnerships as they are flow-through and the entity never pays income tax
155
earned income credit
* must have earned income and qualifying child
* amount: applicable % rate x earned income; rate varies by # children
* available if no kids but 25-64
156
adoption assistance phaseout
MAGI $233,410-$263,410
157
is adoption credit refundable or carried forward/back?
not refundable
carried forward 5 years
158
MACRS GDS and ADS
GDS (general depreciation system) is the 3, 5, 7, 10, 15, 20, 25, 27.5, 39 year system
ADS (alternative depreciation system) is equal yearly deduction and must be used for:
* used \<51% in business
* used primarily outside US
* tax-exempt use property
* bond-financed property
159
5 year vs 7 year MACRS assets
5: auto, computer, office equipment
7: office furniture and fixtures
160
5 year vs 7 year MACRS assets
5: auto, computer, office equipment
7: office furniture and fixtures
161
over what period are intangible assets amortized? what are some examples
15 years
goodwill, trademarks, non-competes, copyrights/patents used in business
162
what % of dividends can c corp owners exclude from income?
if they own \<20%, deduct 50%
if they own 20-80%, deduct 65%
if they own \>80%, deduct 100%
