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Comprehensive > Tax > Flashcards

Tax Flashcards

1
Q

sources of tax law

A
  • statutory (first and primary source)
  • administrative (second primary source)
  • judicial (third source)
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2
Q

Internal Revenue Code

what source is it

A
  • statutory (first and primary source)
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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
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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
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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
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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
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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
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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 Court of Appeals (federal)
      • US Federal Claims
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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
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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
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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
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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 Court of Appeals (federal)
      • US Federal Claims: tax prepayment required, no trial by jury, only in DC
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13
Q

who can represent a client during an IRS audit?

A

ACE

  • Attorney
  • CPA
  • Enrolled agent

NOT a CFP

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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
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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
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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
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17
Q

What does Commerce Clearing House (CCH) do?

A

provides plain language interpretation of tax law

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18
Q

Congressional Committee Reports

A

(sometimes known as the Blue Book) provides congressional reasoning/intent for enacting tax law.

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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.
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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
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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
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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
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23
Q

what happens to basis and holding period for inherited property

A

step up to FMV and always long-term

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24
Q

what happens to basis and holding period for gifted property

A

double basis rules

holding period carries over with the basis applied

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25
Q

limits on recognition of capital losses

A

$3000/year

carried forward indefinitely

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26
Q

what happens to basis and holding period for death bed property

A
  • death bed = appreciated property gifted within 1 year of death by same taxpayer that decedent left the property to
  • no step up to FMV
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27
Q

MACRS

what is and what are the terms

A
  • 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
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28
Q

MACRS

methods

A
  • 200% declining balance (GDS)
  • 150% declining balance (GDS)
  • straight line (GDS)
  • straight line (ADS)
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29
Q

Deductions FOR AGI

A
  • 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
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30
Q

which business expenses are deductible FOR AGI

illegal, bribes, meals, transport, entertainment

A
  • COGS only for drug trafficking
  • never bribes
  • only 50% for meals
    • at restaurant, fully deductible in 2022
  • 100% for transportation
  • no deducting entertainment
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31
Q

which self-employment costs are deductible FOR AGI?

A
  • business expenses
  • health insurance (unless you are covered by your spouse’s plan)
  • retirement plans
  • ½ self-employment tax
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32
Q

is workers comp taxable?

A

No; it’s considered to be something that makes you whole

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33
Q

Deductions FROM AGI

A
  • 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
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34
Q

what taxes are deductible

rules, from or for AGI?

A
  • 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
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35
Q

what casualty losses are deductible

rules, from or for AGI?

A
  • 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
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36
Q

itemized deductions not subject to 2% AGI floor

A
  • IRDs
  • gambling losses to extent of winnings
  • impairment related work expenses for handicapped
  • annuity losses for decedent annuitant
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37
Q

what interest expenses are deductible

rules, from or for AGI?

A
  • 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)
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38
Q

709 vs 706 Tax Returns

A

709 - Gift tax return/GSTT (I’m on cloud 9)

706 - Estate Tax Return (I’m 6 feet under)

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39
Q

Do personal use asset gains/losses get reported?

A

gains should be

losses are not claimed

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40
Q

what are not capital assets

Section 1221(a)

A

ACID

  • Accounts receivable
  • Copyrights/creative works in hands of creator
  • Inventory
  • Depreciable business property
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41
Q

Is tax paid on a purchase considered basis?

A

yes

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42
Q

do repairs adjust basis?

A

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)

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43
Q

value of gift vs taxable gift

A

if exam asks for gift value, it’s FMV.

If exam asked for taxable gift, it’s less the annual exclusion (if applicable)

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44
Q

how does basis work for loss sale to related party (section 267)

A
  • seller cannot deduct the loss
  • buyer has double basis (FMV for loss and seller basis for gain)
  • no holding period carryover
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45
Q

who are related parties for loss sales (section 267)

A
  • siblings (half but not step)
  • lineal descendants
  • ancestors
  • spouse
  • excludes
    • in-laws
    • aunts/uncles
    • cousins
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46
Q

can you take a loss on the sale of personal assets?

A

no

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47
Q

wash sale

A
  • dispose of security and repurchase substantially similar one within 30 days
  • cannot take the loss but basis will include original basis + new basis
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48
Q

personal residence gain exclusion

requirements, use for spouses

A
  • 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)
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49
Q

exceptions for personal residence gains

reasons and tax treatment

A
  • 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)
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50
Q

capital gains and losses for worthless securities

A
  • deductability
    • deductible in the year they become worthless
  • artificial date of sale is last day of year security because worthless (12/31)
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51
Q

how to net ST and LT gains/losses when they are equal

A

If a loss, ST losses are taken first so the LT carries over, if applicable

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52
Q

how to net capital gains and losses

A
  • 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
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53
Q

limits on 1244 capital losses

what it’s for, tax treatment, requirement

A
  • 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%)
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54
Q

how much can you deduct of LTCL?

A

$3K per year (after being netted)

the remaining can carry forward

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55
Q

Section 1202

A

if you’ve held a small business stock >5 years, you get a favorable capital gain

it’s the counter part to 1244

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56
Q

nontaxable exchanges - Like kind exchange (section 1031)

what is it, what kind of exchanges are allowed

A
  • 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)
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57
Q

nontaxable exchanges - Like kind exchange (section 1031)

what kind of property is excluded

A
  • personal property/assets
  • inventory
  • stocks, bonds, notes
  • equipment
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58
Q

nontaxable exchanges - Like kind exchange (section 1031)

what happens if you receive boot

A
  • 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

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59
Q

nontaxable exchanges - Like kind exchange (section 1031)

when must new property be acquired?

A
  • 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
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60
Q

nontaxable exchanges - involuntary conversions (1033)

A
  • 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
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61
Q

nontaxable exchange - life insurance policies (section 1035)

A
  • 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
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62
Q

cash basis vs accrual basis

A
  • cash - you recognize when you receive the money
  • accrual - you recognize as you accrual (business typically)
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63
Q

head of household

who qualifies

A
  • 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
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64
Q

qualifying widower

A
  • 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
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65
Q

child tax credit

how much, what is a qualifying child, how much is refundable

A
  • $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
Q

who is a qualifying child for dependency

A
  • 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
Q

what is a qualifying relative for dependency

A
  • 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
Q

is discharge of indebtedness gross income?

A

yes unless bankruptcy

69
Q

how much of social security benefits is taxed

A
  • 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
Q

gross income inclusion for below market loans

A
  • 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
Q

what items are excluded from gross income

A
  • 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
Q

is employer-provided adoption assistance included in gross income?

A

No, the first $14,890 of expenses is excluded

Exclusion phases out between MAGI $223K-263K

73
Q

is employer-provided dependent care included in gross income?

A

No, the first $5000 is excluded

74
Q

is employer education assistance program included in gross income?

A

No, the first $5250/year is excluded

75
Q

flexible spending and dependent care account exclusions from gross income

A

flexible spending = $2850/year ($500 can be rolled over)

dependent care = $5000

76
Q

itemized deductions not subject to 2% AGI threshold

A
  • 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
Q

charity deductions

deduction limits by donation type, carry-forward

A
  • 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
Q

deducting mortgage insurance

A
  • 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
Q

medical deductions

A
  • 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
Q

who does Kiddie tax apply to?

A

dependent children (<19 or student <24)

81
Q

Credits

A
  • 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
Q

what is kiddie tax on unearned income?

A
  • 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
Q

what is kiddie tax standard deduction

A

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
Q

what is kiddie tax on earned income?

A

taxed to child (i.e., at single rate)

85
Q

passive income

what it is, deductability of losses, examples

A
  • 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
Q

at-risk passive activity rule

what is the amount at risk, how are losses treated, carry forward, netting, disposition year

A
  • 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
Q

active income

what it is, deductability of losses, examples

A
  • taxpayer materially participates
  • losses fully deductible (at disposition)
  • e.g., salary, general partnership, self-employment income
88
Q

can you combine gains/losses of publicly traded or non-publicly traded limited partnerships?

A

No for public

Yes for non-public

89
Q

what is considered material participation for flow through entities

A

>500 hours/year; includes other similar activities

>100 hours and most of any other participants

90
Q

portfolio income

what it is, deductability of losses, examples

A
  • taxpayer invests in traditional investment activities
  • losses are fully deductible
  • e.g., interest and dividends
91
Q

rental real estate passive activity loss exception

A
  • 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
Q

personal rental property: personal use

A
  • rented <15 days
  • income not taxable
  • mortgage interest and property taxes 100% deductible up to $10K cap
93
Q

personal rental property: rental use

A
  • 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
Q

personal rental property: mixed use

A
  • 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
Q

AMT

what it is, deduction differences

A
  • 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
Q

AMT preference items

A
  • percentage depletion in excess of basis
  • intangible drilling costs
  • interest on private activity bonds (e.g., stadium); taxable for AMT purposes
97
Q

AMT adjustments

A
  • 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
Q

AMT formula

A
  • 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
Q

AMT credit

carrying forward/back, deferral items, exclusion items

A
  • 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
Q

entity types: sole proprietorship

liability to owners, tax form, concept for tax, nature of owners income, set up

A
  • 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
Q

entity types: partnership

liability to owners, tax form, concept for tax, nature of owners income, set up

A
  • 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
Q

entity types: LLC

liability to owners, tax form, concept for tax, nature of owners income, set

A
  • 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
Q

entity types: S corp

liability to owners, tax form, concept for tax, nature of owners income, set up

A
  • 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
Q

entity types: C corp

liability to owners, tax form, concept for tax, nature of owners income, set up

A
  • 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
Q

qualified child vs Child Tax Credit vs Dependent Care Credit vs Family Credit vs Kiddie Tax

ages

A
  • 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
Q

qualified child vs Child Tax Credit vs Dependent Care Credit vs Kiddie Tax

amount

A
  • 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
Q

hobby

what is a hobby, tax treatment

A
  • 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
Q

deductions for pass through entities basics

A
  • in addition to standard/itemized deduction
  • creates 20% deduction based on qualified business income
  • reduces taxable income, not AGI
109
Q

Section 179 expense assets and recapture

A
  • 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
Q

when is a trip outside the US considered for purely business?

A
  • taxpayer has no control over timing or arrangements
  • lasts <7 days
  • <25% of time spent on personal
  • vacation is not primary consideration
111
Q

fiscal vs 52-53 week tax accounting period

A

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
Q

is HELOC interest expense deductible?

A

Yes, only if used to purchase or improve the residence

113
Q

who is required to file a tax return?

A

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
Q

when is rent included in taxable income? when received or when recognized?

A

when constructively received

115
Q

what happens if a PHC (personal holding company) has undistributed income

A

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
Q

what is the penalty to tax preparers for under-reporting income

A

if willful or reckless, greater of $5K or 50% of income received by preparer for the return

117
Q

max investment interest deduction

A

limited to investment income (including capital gains)

remaining can be carried over

doesn’t apply to tax-exempt investments (e.g., muni bonds)

118
Q

how are the costs of natural resources recovered?

119
Q

how are the costs of intangible assets recovered?

A

amortization

120
Q

when are costs of investigating a new line of business deductible?

A
  • 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
Q

what is the maximum expense for business related gifts?

122
Q

what is substitute basis for a like-kind exchange?

A

FMV reduced by gain realized but not recognized

123
Q

is gifted business property depreciable?

A

yes, to the extent of lesser of FMV or carry over basis

124
Q

advantages of cash method of accounting

A

income can be deferred until cash is received

deductible expenses are accelerated if paid

125
Q

are scholarships taxable income?

A

only to extend used for room and board

126
Q

who claims the dependent child if 50/50 custody?

A

parent with higher AGI

127
Q

what is capital recovery?

A

expensing of certain acquisition costs

e.g., bonds purchased at a premium recover basis as they mature

128
Q

in what sequence must general business credits be applied for current year, carry forwards to current year, and carry backs to current year

A
  1. carry forward
  2. current year
  3. carry backs
129
Q

under the accrual method, when is income recognized?

A

when seller writes and sends invoice after sending goods

130
Q

how many taxable and nontaxable benefits must a cafeteria plan offer?

A

1 taxable benefit (usually cash)

1 qualified nontaxable benefit

131
Q

are prizes and awards taxable?

132
Q

are business losses deductible against other income?

A

yes, assuming the activity is active and the person is a material participant

133
Q

what is the accuracy-related penalty, when is it incurred, and what is the fraud penalty?

A
  • 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
Q

what are the rules around personal vacation when a self-employed individual does not have to pro rata the cost of an international flight?

A

if trip is <7 days or <25% personal considered business and no need to pro rata the deduction

135
Q

how much can a corporation deduct in business startup costs?

A

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
Q

what is the penalty for filing a fraudulent income tax return?

A

75% of deficiency

137
Q

what is the minimum deductible to be considered high deductible?

single and family

A

$1400 single

$2800 family

138
Q

how are gains treated when personal use property is converted to business use?

A

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
Q

are nondividend distributions taxable?

A

yes, to the extent that they exceed basis (i.e., if basis has already been recovered)

140
Q

can section 1231 gains be carried back?

A

yes, 5-year look back

141
Q

how much interest do you include in income if you use some of a series EE bond to fund qualifying education expenses?

A

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
Q

what is the minimum failure to file penalty?

A

lower of $435 or 100% of tax due

143
Q

is non-business bad debt ST or LT loss?

144
Q

is the loss on worthless stock ST or LT?

A

LT if held >1 year

145
Q

how are qualified divididends taxed?

A

at capital gains rates which don’t have breakpoints exactly the same as income tax brackets

146
Q

when must a self-employed taxpayer file a return?

A

when they have $400+ net earnings from self-employment

147
Q

are improvements to sewers and installing streetlights included in basis?

A

yes, all costs making property ready for use are capitalized

148
Q

are legal and zoning fees included in basis?

A

yes, they are considered to be a cost that makes the property ready for use

149
Q

can NOL (net operating losses) be carried back or forward?

A

they cannot be carried back but can be carried forward

150
Q

much of the current year’s income can NOL offset?

151
Q

is a shareholder in an S corp required to be a US citizen?

152
Q

what is form 5498 used for?

A

IRA contributions

153
Q

what is form 8606 used for?

A

to determine the tax consequences of certain taxable distributions from IRAs

154
Q

are estates required to make estimated federal tax payments? what about partnerships, C corps and sole proprietors?

A

Yes for estates, C corps and sole proprietors

No for partnerships as they are flow-through and the entity never pays income tax

155
Q

earned income credit

A
  • 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
Q

adoption assistance phaseout

A

MAGI $233,410-$263,410

157
Q

is adoption credit refundable or carried forward/back?

A

not refundable

carried forward 5 years

158
Q

MACRS GDS and ADS

A

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
Q

5 year vs 7 year MACRS assets

A

5: auto, computer, office equipment
7: office furniture and fixtures

160
Q

5 year vs 7 year MACRS assets

A

5: auto, computer, office equipment
7: office furniture and fixtures

161
Q

over what period are intangible assets amortized? what are some examples

A

15 years

goodwill, trademarks, non-competes, copyrights/patents used in business

162
Q

what % of dividends can c corp owners exclude from income?

A

if they own <20%, deduct 50%

if they own 20-80%, deduct 65%

if they own >80%, deduct 100%

Comprehensive (9 decks)

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