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Tax Flashcards

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1
Q

What are 1231 assets?

A

Includes 1245 and 1250 assets
Depreciable property used in trade or business

Must be held greater than 1 year

Timber, coal, iron, livestock, unharvested crops. Certain purchased intangibles

Means you can take an ordinary loss versus capital loss (up to 37%)

1231 gives lowest cap gains rate and highest loss write off

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2
Q

What can you use the 1031 exchange on?

A

Real estate only according to TCJA

Used to include same sex livestock, etc

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3
Q

What is 1245 property?

A

Tangible or personal property like machines, furniture business equipment, light fixtures, carpeting

Construction equipment

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4
Q

What is the basis of inherited property?

A

The FMV at date of death

or

the alternate valuation date if properly elected by the executor

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5
Q

What is the basis of property received as a gift?

A

Basis typically carry over (so you get the donors basis)

Holding period also carry’s over

note that the “gift” is the full value (FMV)
The “taxable gift” is different

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6
Q

What is a donees basis when the donor paid some gift tax in cash?

A

Take the donees basis and add:

Realized gain/FMV * gift tax paid

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7
Q

What is the basis when the FMV of the gift has dropped below the original basis?

A

This is loss property so double basis.

Determine a Gain Basis and a Loss Basis

If the sell is between basis’, no gain or loss.

If sold below loss basis, use loss basis as basis

If loss property, starts at transfer date

If gain property, use donor’s HP

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8
Q

When determining basis, who are related parties?

A

Siblings, including half

Does not include:
aunts and uncles

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9
Q

What is a 267 deal?

A

restrictions on loss sales to related parties.

Ex: selling something for less than FMV to a child

The seller can’t claim a loss

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10
Q

What is section 1250 depreciation recapture?

A

Up to 25%

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11
Q

What is the cap gains tax rate on collectibles?

A

Up to 28%

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12
Q

What happens if you have a loss on a personal use asset?

A

Can’t take the loss!

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13
Q

How does a wash sale impact basis?

A

If someone sells at a loss then buys back, the new basis is equal to the new sale price PLUS the loss that they tried to recognize when they sold.

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14
Q

What is section 121?

A

Personal residence gain exclusion

Can exclude MFJ $500k of gain if
- Either spouse meets the 2 year ownership requirement
- Both spouses must meet the 2 year use requirement

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15
Q

What happens if you had to sell your home prior to the 2 year test?

A

You can still claim the exclusion if you had:
-change in health
-change in job
-unforeseen circumstances - expecting twins

You’ll be able to claim a partial based on the number of months you were there divided by 24 months

Example: 21 months over 24 months * $500k exclusion

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16
Q

What is a section 1244?

A

Apply to losses only

A single taxpayer can deduct up to $50k on the loss of a small business stock as an ordinary loss ($100k MFJ)

Small business must be less than $1m in total cap contributions

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17
Q

What is section 1033?

A

Allows property owners to avoid tax liability on capital gain that occurs as a result of the forced loss of a property.

Example: Your property is destroyed or condemned

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18
Q

What is section 1035?

A

Swapping of life insurance or annuitieis

Life can be swapped for life

Annuity can be swapped for annuity

Life can be swapped for annuity

Annuity CAN NOT be swapped for life

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19
Q

Section 2035?

A

When someone gifts life insurance within 3 years of death.

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20
Q

What are above the line exclusions?

A

Life insurance
Scholarship money for tuition (but not for room and board)
Inheritance

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21
Q

What are above the line deductions?

A

Losses on sale or exchange of property

Deductions from rental and royalty property

one-half of self employment paid

100 % of health insurance premiums paid by self employed people

Contributions to pensions

Interest on student loans ($2500) (there are phaseouts)

HSA

Trade or business accounts

Alimony payment if divorce was BEFORE 1/1/19

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22
Q

What are below the line deductions?

A

Either standard deduction

Itemized deductions
- Charitable contributions
- Limited casualty losses
- Medical expenses in excess of 7.5% of AGI
- Limited misc itemized deductions
- interest on mortgage and investments, subject to limitation
s
- Mortgage insurance premiums
- Taxes (state/sales & use, local, us prop) caped at $10k

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23
Q

What is a cash basis taxpayer?

A

Most individuals

Recognize when you actually get the cash

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24
Q

What is accrual constructive receipt?

A

Income becomes taxable when it is
- readily available to the taxpayer
- income that is not subject to limitations or restrictions

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25
Q

How does qualifying widow work?

A

For the 2 years after a partner dies, they can file as qualifying widower if there are dependents

In the year of death, still file as married filing jointly

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26
Q

What are additional standard deductions?

A

If MFJ:
Blind - $1400
over 65 - $1400

It’s per spouse. Can collect both blind and over 65

If single:
Each is $1700

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27
Q

What is a qualifying child for the qualifying tax credit?

A

Does not provide more than 50% of their support
Under 17

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28
Q

A qualifying child for tax purposes (not for the tax credit) is:

A
  • child, grandchild, stepbrother, stepsister
  • under 19 or 24 if in school
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29
Q

What is a qualifying relative?

A
  • Gross income is less than $4,400
  • Child, grandchild, sibling, parents, grandparents, parents siblings or anyone that lives with you year around
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30
Q

What’s included in Gross Income?

A

-Compensation for services
-Gains from property
-interest and dividends
-rents and royalties
- Income from life insurance and endowment contracts
-Pensions
- forgiven debt (unless bankruptcy)
-unemployment benefits
-income in respect of a decedent
-annuity payments
-below market rate loans
-alimony and separate maintance

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31
Q

How are annuities taxed?

A

Use the exclusion ratio

Investment in the contract/Expected total return

The portion of each annuity payment must be included in gross income according to the exclusion ratio

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32
Q

How much of social security is included in gross income?

A

max 85%

Hurdles..

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33
Q

How are below market loans included in gross income?

A

$0-$10k loans – $0 imputed interest

$10k-<=$100k – impute interest
– AFR rate minus loaners rate
– Cap at the investors net investment income*
– If NII is less than $1k, no impute

> $100k – Interest calculated using AFR interest calculated using stated rate of loan. No cap for NII

*NII = Interest, STCGm NQDiv

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34
Q

What is specifically excluded from gross income?

A

Gifts and inheritances
Life insurance proceeds
Scholarships (tuition, fees, books)
Gain on sale of personal residence
Qualifying distributions from Roth
Compensation for injuries and sickness
Meals and lodging furnished for the convenience of the employer or the employers premises

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35
Q

What are employee fringe benefits?

A

Athletic facilities
Educational assistance programs (limited to $5,250)
Employee discounts (20% on service)``
FSA and HSA

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36
Q

What is the mortgage interest deduction?

A

Can be deducted on up to two homes
Can’t be used on HELOC unless HELOC is for home improvement
$1m for homes finances prior to 2017
$750k for homes financed after 2017

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37
Q

What is net investment income?

A

Taxable interest
short term cap gains
non qualified dividends

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38
Q

What are the deductions for SALT taxes?

A

Capped at $10k
Below the line deduction

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39
Q

How are charitable contributions deducted?

A

Itemized, below the line

If a public charity (can’t be donor advised fund)
60% deduction on cash
50% deduction on ordinary property

RELATED USE If you donate real property, intangible assets (stocks, bonds)or tangible property
-deduct 30% if FMV
-deduct 50% if basis

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40
Q

What is deduction clustering?

A

Strategically take the standard or itemized deduction in alternating years

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41
Q

What are common preference items for AMT?

A

ADD BACK:
Private activity bonds (stadium, parking lot, etc)
Depreciation
ISO
SALT

Intangible drilling costs
Percentage depletion

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42
Q

How does AMT and standard deductions work?

A

You don’t get a SD with AMT

You get an exemption amount

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43
Q

What is NOT deductible on AMT?

A

SALT tax!

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44
Q

What is depreciation recapture?

A

If you’ve deprecated more than what you’ve sold it for, you have to recognize the depreciation as ordinary income.

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45
Q

How are LLCs taxed?

A

They can choose to file as an entity OR individual

– 1040 or K1

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46
Q

How are S Corps taxed?

A

Both K1 and W2

Employees get W2

Shareholders get K1

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47
Q

What is the order of authority for tax administration?

A
  1. IRS (primary source)
  2. Regulations - explain code
  3. Revenue Rulings -
  4. Revenue procedures
  5. Private Letter Rulings - one taxpayer seeks guidance. Not binding. Pre-transaction
  6. Determination Letters - post transaction
  7. Technical Advice Memorandums
  8. Judicial Sources - courts
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48
Q

How long is the statute of limitations for IRS auditing?

A

3 years when return has been filed
– Can extend to 6 years if you underestimate gross income by more than 25%
10 years to collect

Does not apply if you don’t file a return or file an intentional fraudulent return

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49
Q

What is the interest on late return?

A

fed short term rate plus 3%

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50
Q

What is the failure to file penalty

A

5% per month up to 25%

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51
Q

What is the failure to pay penalty?

A

.5% per month up to 25%

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52
Q

How do you calculate a failure to file and failure to pay penalty?

A

Reduce FTF by FTP

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53
Q

What are advantages of the US tax court?

A

Only court where no payment of tax is necessary

No jury trial available

Deficiencies under $50k

Appeals to US court of appeals

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54
Q

What are advantages/disadvantages of the US district court?

A

Advantages
- local
- actual jury
- convenient

Disadvantage
- Judge may be less experienced with tax cases
- must have paid taxes already

Appeals to court of appeals

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55
Q

What are advantages/disadvantages of the US district court?

A

Advantages
- local
- actual jury
- convenient

Disadvantage
- Judge may be less experienced with tax cases
- must have paid taxes already

Appeals to court of appeals

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56
Q

What’s the deduction ceiling for a charitable donation of cash?

A

60% of AGI (public charity)

Charitable contributions can be carried forward for FIVE years

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57
Q

What can you deduct if you donate ordinary income property?

A

Ordinary income property - ex: computers for business or inventory

Valuation is the lesser of adjusted basis or FMV

Deduct:
50% of AGI (public)
30% of AGI (private)

Also applies to loss property and Short-Term Capital Gain property

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58
Q

What can you deduct if you donate LTCG assets that are unrelated?

A
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59
Q

What is the “Special Election” for LTCG property donated to a charity?

A

If the property fits one of these categories:
1. real prop
2. intangible prp (stock)
3. tangible property which is usable to the charity

Donator can choose to deduct one of 2 ways. Either
- taxable basis of the property and retain the 50% AGI

OR
- FMV of the property up to 30% of AGI

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60
Q

What is the deduction cap of LTCG property that’s tangible with unrelated use?

A

50% of agi (public)

20% of AGI (private)

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61
Q

What are qualifying medical expenses?

A

Prescription drugs
Health insurance premium (outside of work)
Eligible capital improvements - making home accessible for mobility (ramps, elevator when medically necessary, etc

Nursing home and special schools

Travel and lodging for medical treatments

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62
Q

How much of medical expenses are deductible?

A

anything over 7.5% of AGI

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63
Q

What is not a deductible medical expense?

A

Elective cosmetic surgery
General health items - vitamins
Health club
Marijuana (state might allow)
OTC drugs
Dance lessons

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64
Q

What happens if you take a medical deduction one year, then the next year are reimbursed by your health insurance?

A

Reimbursement becomes taxable income

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65
Q

Who is charged kiddie tax?

A

Under 19 or under 24 if still in school

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66
Q

What is the tax rate on unearned income for minors?

A

First $1150 is not taxed
Next $1150 is taxed to the child (single filer rates
Above $2300 is taxed at the parental rate

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67
Q

How is earned income taxed to a minor?

A

Deduction is the greater of earned income + $400 OR $1150.

Standard deduction can’t exceed single filers standard deduction

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68
Q

What qualifies for a like kind exchange?

A

Real property
In the US
Held for investment purposes or for production of income

(Can’t be personal property)

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69
Q

What happens in a like kind exchange when FMV is the same, but ATB is different?

A

Basis stays the same

No tax consequences because no funds where exchanged

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70
Q

What happens if boot exceeds basis?

A

Reduce the basis

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71
Q

How long do you have to find a new property in a like kind exchange?

A

Identified within 45 days of date when old property was transferred

Received within 180 days of transfer

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72
Q

What happens when you use boot to pay in a like kind exchange?

A

If you use boot, you must recognize gain on that boot. Example, someone uses $10k ($7k basis) in stocks to pay for a like kind exchange. – $3k gain

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73
Q

What is active income?

A

Taxpayer materially participates in generating income
-losses are fully deductible
-salary, general partnerships, self-employment income

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74
Q

What is passive income?

A
  • real estate ventures
  • rental income
  • limited partnerships
  • losses deductible UP TO a passive income
    – Losses can be carried forward to following years
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75
Q

What is portfolio income?

A
  • traditional investment activities
  • losses are deductible
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76
Q

How are publicly and non publicly traded partnerships netted against each other?

A

Public must net with public

Non public must net with non public

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77
Q

What happens with loss when disposing of passive activities?

A

When disposing of a passive activity, you can offset the full loss against active income

Normally you can only offset with passive income

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78
Q

How many days can you rent a property and keep it personal use?

A

14 days

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79
Q

What can you deduct on a rental property?

A

Mortgage deduction. (up to 2 properties)
Can deduct losses up to $25k (depending on income)
-Phase out starts at $100k, phases out at 50

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80
Q

What is mixed used property?

A

Rented more than 15 days, used personally more than 14 days OR 10% of the amount of time it’s rented

Note that if they are doing repairs on the property it doesn’t count as personal use

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81
Q

What are implications of rental property?

A
  • must report income
  • Can deduct rental use expenses ($25k limit with phaseout)
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82
Q

What are implications of mixed use property?

A

No losses can be deducted
Must include rental income

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82
Q

What are implications of mixed use property?

A

No losses can be deducted
Must include rental income

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82
Q

What are implications of mixed use property?

A

No losses can be deducted
Must include rental income

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83
Q

How are illegal business taxed?

A

Think marijuana

Must report income

Can deduct cost of goods sold, rent, legal activities

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84
Q

How is alimony deducted?

A

If signed before end of 2018,
- included in income
- deduction to payer

If after,
- not included in income (not taxable)
- no deduction

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85
Q

When are moving expenses deductible?

A

Stopped being deductible with TCJA

Only when moving for armed services

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86
Q

When are casualty losses deducible?

A

When there is a FEDERALLY declared disaster that is SUDDEN and UNEXPECTED

Loss is equal to lesser of decline in FMV or ATB

Subject to 10% AGI floor

Less $100 per incident

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87
Q

When did the mortgage interest deduction change?

A

homes financed prior to 2017 can have interest on up to $1m loan deducted

After 2017, $750k loan interest deductible

No reverse mortgage deduction

No heloc deduction unless used for home improvement

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88
Q

How do you get to adjusted gross estate?

A

Take out:
-last medical expenses
-admin expenses
-funeral expenses
-debts of the decedent
-losses occurred during administration of estate

89
Q

What are features of the child tax credit?

A

$2000 total. Up to $1500 for EACH child may be refundable

AGI phase outs - $200k S, $400k MFJ

Child must have a social security

Under 17

Lived with parents over half the year

son, daughter, stepchild, foster child, sibling, step sibling, half sibling, and descendent

If doesn’t qualify, still might qualify for dependent tax credit

90
Q

What are features of the Qualifying Dependent tax credit?

A

$500 NON refundable credit

Dependents are defined under present law

Doesn’t need SSN

91
Q

What are features of the child and dependent care credit?

A

Credit of 20% of expenses paid for the care of
- a dependent under 13
- spouse or dependent with a handicap

Expenses are lesser of 20% of actual costs or $3k per child
- also limited by the earned income of the lower earning spouse.
– so stay at home parents don’t get this unless they themselves are in school or handicapped and can’t care for the kid

92
Q

When is a business presumed to be a hobby?

A

no profit in 3 of 5 years

2 of 7 for horses

Hobby activities can’t generate deductible losses

93
Q

What is the treatment on hobby losses?

A

You need to include hobby income

You CAN”T take any losses or deductions

94
Q

What type of deduction do you get when you’re a pass through entity?

A

below the line deduction (after AGI)

Essentially a business owner (non corp) can deduct 20% of their business income!

Form 8995

Qualified

20% based on qualified business income

Separate from itemized and standard deductions

95
Q

How much can you expense with section 179?

A

Up to $1,080,000 of tangible property in service

Dollar for dollar reduction for every dollar earned over $2,700,000

limited to the amount of your income. Can carry over excess

96
Q

Sources of substantial authority on tax law include

A

Internal Revenue Code.
Congressional Committee Reports (Blue Book).
Treasury Regulations
Private Letter Rulings

97
Q

What did the 16th amendment do?

A

the 16th Amendment gave Congress the power to impose an individual income tax

98
Q

What was the revenue act of 1916?

A

Raised the rates previously imposed under the Revenue Act of 1913

99
Q

What imposed the first constitutional income tax?

A

Revenue act of 1913

100
Q

What provides a plain language interpretation of tax law?

A

Commerce Clearing House (CCH)

101
Q

What are Congressional Committee Reports?

A

Congressional Committee Reports (sometimes known as the Blue Book) provides congressional reasoning for enacting tax law. This language is often very technical and difficult to understand.

102
Q

What do Tax Court Reports provide?

A

Rulings of the U.S. Tax Court in the form of case law.

103
Q

What type of trial does a US district court have? A US tax court?

A

District court - Jury

Tax court - bench

US court of federal claims - bench

Small claims division - bench

104
Q

What is the tax formula?

A

Gross income
- Above the line deductions
= AGI
- Below the line deductions (standard deduction or itemized)
- Personal and dependency exemptions (after TCJA expires)
= Taxable Income
Calculate tax based on filing status (tax liability)
- Credits
+ Other taxes
- Prepayments
= refund or additional tax due

105
Q

When using the $1,400 additional deduction for being over 65 or blind…

A

Don’t need to file for age

MUST file if you are blind (they don’t know you’re blind but they do know your age)

106
Q

How is loss from non-business bad debt treated?

A

Short term loss or ordinary loss

ex: billed a client for services already done and they never paid the bill..

However, a cash basis taxpayer does not recognize income not received. Since the bad debt was never recognized as income, it cannot be recognized as a loss or a bad debt expense.

107
Q

How is loss from section 1244 stock treated?

A

small business stock

loss is treated as ordinary loss

108
Q

Alisha Syrmos, a CFP® Professional and fee-only financial planner, has assisted Bob Martin, a self-employed physician in tax and investment planning during the year. Identify the schedule(s) on which Alisha’s fee may be deductible by Bob on his federal income tax return.

A

Tax planning fees may no longer be deducted against a taxpayer’s itemized deduction, Schedule A. However, because the taxpayer is self-employed, the portion of services related to the business and not personal may be taken as a deductible expense on the taxpayer’s Schedule C.

109
Q

What is not allowed when calculating net operating loss?

A

Any deduction for personal exemptions.

· Capital losses in excess of capital gains.

· The section 1202 exclusion.

· Nonbusiness deductions in excess of nonbusiness income.

· Net operating loss deduction.

· The domestic production activities deduction.

110
Q

When do dividends qualify for the qualifying dividend rate?

A

When they are held more than 60 days in the 121 days surrounding the ex-dividend date.

If they aren’t held of for the 60 days, they are taxed at ordinary rates

111
Q

To file as MFJ,…

A

You must be married through the end of the year. THe year you divorce, you’d be single

112
Q

What is the abandoned spouse rule and filing status?

A

You are able to file as a head of household if you are considered to be abandoned by your spouse and are claiming dependent children.

An individual is required to live apart from his or her spouse for the entire last six months of the tax year to file under abandoned spouse status.

113
Q

What happens to community property when a spouse dies?

A

Upon the death of either spouse in a community property state, both halves of community property are stepped to the fair market value regardless of who inherits the decendant’s half.

114
Q

What are the 5 elements of the qualified dependent test?

A
  1. Gross income
  2. support
  3. member of household or family
    4.citizenship or residence
  4. joint return.
115
Q

If an individual who may otherwise qualify as a dependent does not spend funds that he or she has received (i.e., social security, wages), what is the IRS position regarding these unexpended amounts in terms of their application to the support test and their inclusion in being applied to the gross income test?

A

Income received but not spent is applicable to the gross income test but not the support test.

To claim someone as a dependent you have to provide at least 50% of their support. If the child has income that just goes into savings or spent on miscellaneous fun items instead of being used toward paying their bills (housing, clothing, food, etc.), while you are paying their bills, then you are supporting them. The income counts as gross income for the child, but it is not support unless they use it to support themselves.

116
Q

Which tax credit is refundable?

A

Earned Income credit

NOT fully refundable:
The American Opportunity credit.
Lifetime Learning credit.
Child Tax credit.
Adoption credit.

117
Q

When is other (non real estate) rental activity considered passive active?

A

If the rental is for less than 7 days. Ex: dvd business

118
Q

How many hours does a taxpayer need to be considered material?

A

1) the Taxpayer dedicated more than 500 hours to the activity or

2) the Taxpayer dedicated more than 100 hours and the most of anyone.

Part of the rules for PAL allows a Taxpayer to make an annual election to join similar activities to achieve the > than 500 hours for materiality, which is what III is outlining.

119
Q

Can publicly traded passive loss offset non publicly traded passive loss?

A

NO!

Passive Income from a publicly traded limited partnership may not be offset by any other passive losses. The Passive Income from a publicly traded LP would need to be offset by a prior suspended loss from the publicly traded LP.

120
Q

What are the IRS classifications of income?

A

Active, passive, portfolio

Note Earned income is a subset of active income while unearned income may be either passive or portfolio income.

121
Q

What are requirements of the individual “real estate investor exception” to the passive activity loss rules?

A

The taxpayer must own at least 10% of the value of the real estate.

The taxpayer must have an AGI of less than $150,000.

The taxpayer must actively participate in the activity.

122
Q
A

The basis of personal property converted to business use will be the taxpayer’s adjusted basis on that property as of the date of conversion or the FMV if lower.

So if you convert personal property to business property, it gets the LOWER of the basis or FMV on date of conversion.

Therefore gain will be MORE when sold as biz property

123
Q

Under the accrual method of accounting, the taxpayer (buyer) recognizes expenses when:

A

The buyer receives the seller’s invoice.

124
Q

What is the doctrine of constructive receipt?

A

When income is readily available to the taxpayer, and that income is not subject to substantial limitations or restrictions, that income should be subject to tax.

Doctrine of constructive receipt applies to many areas, including tax, employee benefits and retirement. For example, an employee is granted an employee bonus plan to be payable upon their retirement from the company. It is not taxable to the employee while they are working for the company. Once the employee reaches retirement age, the restrictions have been lifted and the employee can freely access the funds, they will become taxable.

125
Q

When does cash accounting recognize income?

A

Cash accounting recognizes income upon either actual or constructive receipt. Actual receipt is where the taxpayer has received the cash directly. Constructive receipt occurs when, though not having received the money in hand, the taxpayer has immediate access to the money (i.e., lock box receipt).

126
Q

Who can represent a taxpayer in court before the IRS

A

attorney, enrolled agent, certified public accountant and the taxpayer

NOT A CFP

127
Q

When is a taxpayer subject to an accuracy related penalty?

A

If he makes a substantial understatement of his tax liability:
- generally more than 10% of the correct tax liability and at least a $5,000 tax deficiency.

The penalty imposed is generally 20% of underpayment amount.

128
Q

What is the penalty for filing a fraudulent return?

A

The penalty for filing a fraudulent income tax return is 75% of the deficiency.

Ex: you fraudulently file to avoid $10k in taxes - $7,500 penalty. (plus what you owe)

129
Q

How much can an employee deduct for Unreimbursed business expenses?

A

$0! TCJA eliminated

130
Q

How are expenses from self-employment deducted?

A

Expenses from self-employment are deducted above the line and have no AGI floor.

131
Q

What is an exception for deducting non-prescription medical?

A

insulin

132
Q

How much is deductible for lodging when related to traveling for medical treatment?

A

$50/night per person

133
Q

What is the carry over period for charitable deductions?

A

5 years (so 6 total if you include the year of the initial charitable contribution)

134
Q

When is prize money not included in income?

A

Exception for certain prizes and awards transferred to charities Gross income does not include amounts received as prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement, but only if—

(1) the recipient was selected without any action on his part to enter the contest or proceeding;

(2) the recipient is not required to render substantial future services as a condition to receiving the prize or award; and

(3) the prize or award is transferred by the payor to a governmental unit or organization described in paragraph (1) or (2) of section 170(c) pursuant to a designation made by the recipient.

135
Q

When is scholarship money included in gross income?

A

When it’s for room and board

Not for tuition or books

136
Q

When are punitive damages included in taxable income?

A

Punitive damages are always included as taxable income. Other than damages awarded for personal injury, other damages, including punitive damages and recovery of lost wages, are taxable.

137
Q

How are property transfers from a divorce treated?

A

Property transfers are treated as acquired by gift and the transferor’s basis in the property is carried over to the transferee.

138
Q

Are loan proceeds included in taxable income?

A

no

139
Q

What travel expenses are deductible?

A

For 2021 and 2022 only

MEALS 100% deductible!

Domestic: If primarily business then deduct all airfare. Prorata meals and lodging.

Foreign: Prorata meals and lodging. Prorata airfare unless (then you can deduct all): < 7 days <25% on personal

No control; vacation not a deciding factor

Starting in 2023:
Same as above BUT
MEALS 50% deductible!

140
Q

What business costs must be capitalized?

A

Costs to improve, better, or extend the life of an asset are capitalized.

Versus things like tune-ups which are a maintenance activity. Maintenance and repairs (roof and windshield) are period costs deductible in the period in which they were incurred– no need to capitalize these costs

141
Q

What is the milage deduction for travel to and from work?

A

$0! this was eliminated at the end of 2017

142
Q

What is deductible in an illegal drug operation?

A

Cost of goods sold is the only deduction allowed for illegal drug operation activities.

If it’s illegal but not related to drugs (gambling), salaries, rent, etc is also deductible as long as it’s a legal expense

143
Q

When are you able to deduct the costs of investigating the purchase of a new line of business?

A

the business must be purchased (Can’t deduct if you decide not to purchase it)

if it’s the same line of business

If it’s a different line of business and the costs of investigation are recouped by capitalizing the expenses and amortizing it ratably over a 60-month period.

144
Q

When is a trip outside the US considered purely a business trip?

A
  • If less than 25% of time is for personal
  • When vacation is not a primary consideration
  • When the taxpayer does not have control over the timing or arrangements
  • The trip lasts for less than 7 days
145
Q

What are requirements for a deductible business related expense?

A

Ordinary, necessary, reasonable if it’s compensation

146
Q

What is the max gift deduction for customer gifts?

A

$25

147
Q

Losses in like kind exchanges are…

A

not recognized

148
Q

What is the cost recovery for cars? furniture? rental real estate?

A

Cars - 5 years
Furniture - 7 years
Rental real-estate? - 27.5 years
Hotel - 39 years

Remember “CAT-CORN” Computers, Autos, and Trucks are 5 year. Office furniture is 7 year. Residential real property (rental houses) is 27.5 year and Nonresidential real property (commercial buildings) is 39 year.

149
Q

What is a section 179 deduction?

A

Allows you to accelerate depreciation!
- up to $1,080,000 depreciation deduction on property that exceeds $2.7m

Machinery, gasoline storage tanks, livestock, vehicles, office equipment, etc

NOT rental income, buildings, land, etc

Writing off the expense of something (like a truck for business) all in the first year.

Section 179 deduction cannot exceed net business income in a given year. The rest of the Section 179 deduction can be carried over, but a 179 deduction cannot be used to create a business loss. Therefore, they would only be allowed to deduct $15,000 for the current year and carry forward $135,000.

150
Q

How much of uncollected rent is deductible?

A

NOTHING! You can’t deduct uncollected rent if the renter fails to pay

151
Q

Is rent paid in advance included in this years income?

A

According to Publication 17, “Advance rent is any amount you receive before the period that it covers. Include advance rent in your rental income in the year you receive it regardless of the period covered or the method of accounting you use.”

152
Q

What are s corp shareholder requirements?

A
  • must be a US citizen or US resident
  • Can also be an estate, trust, or charitable org

-Votes on the board of directors
- receives K-1 annually in order to prepare a personal income tax return
- Reports on a personal income tax return a pro-rata share of corporate profit or loss

153
Q

What types of companies are pass through?

A

S Corp
sole proproeter
LLC
partnship

154
Q

How long can the AMT credit be carried forward?

A

Indefinitely

155
Q

In gifted loss property to a relative, what happens to basis and holding period?

A

Double basis is created

When double basis is in effect, the gains are that of the holding period of the donor. For loss in this case below $750, it will use the donee’s basis, in this case short term loss.

156
Q

What happens if the stock you own goes to $0 and the company liquidates?

A

Section 165 creates an artificial sale date of December 31 for worthless securities. So it’s deemed to have sold the stock for $0 on December 31 and you can take that loss

157
Q

How is the basis of property treated during a divorce transfer?

A

Carry over basis, carry over holding period

158
Q

How are gains and losses treated in publically traded limited partnerships?

A
159
Q

When the employer covers life insurance, what is included in gross income?

A

Cost of the first $50k of coverage is not taxable to employee

The excess coverage over $50k is taxable as determined in the uniform premium table

160
Q

How much of a qualified employee discount is not taxable?

A

Can’t be greater than the cost of the product

Service, can’t be more than 20%

161
Q

How much education benefit can an employer provide without the employee having to include it in gross income?

A

$5250

FSA - $2850

162
Q

How much gain can a net operating loss offset?

A

80% of current years income

It can be carried forward

There used to be carry back allowed until 2018. Now there is NOT carry back allowed

163
Q

When must a taxpayer file taxes?

A

If income exceeds standard deduction, or, if self employed, net earnings exceeds $400

164
Q

If someone is self employed, what is the minimum amount of tax he should withhold?

A

100% if based on last years tax witholding

90% of expected tax owed this year

165
Q

How are qualified dividends taxed?

A

Capital gains rates as long as the stock was held 60 days before and after the dividend was paidIf

If not held for 60 day requirement - taxed at ordinary income rate

166
Q

What are the At Risk Rules?

A

They apply to flow through entities

Losses can only be deducted to the extent of property/money invested (at risk)

THEN

passive losses can only offset passive income and/or gains

So, if you have passive activity (rental with non material participation) you can deduct losses up to the gains

However, if you are ACTIVE, you can only deduct $25k from ordinary income subject to phase out of $1 for every $2 that AGI exceeds $100k

Passive activity suspended losses can be deducted at sale

167
Q

What is material participation?

A

Greater than 500 hours per year

Greater than 100 hours and the most of any participant

168
Q

When can publicly traded limited partnership losses be deducted? What bout non-public ally traded limited partnerships?

A

Publicly traded: ONLY deduct when the exact partnership produced a gain

Non-publically traded can net agains another non publicly traded investment

169
Q

What is the dependent care credit?

A

Applies to one or more dependents under age 13 or a dependent who can’t take care of themselves.

not refundable.

Can claim a percent of up to $3k for one dependent, or $6k for 2 or more.

If your AGI is over $43k, you can claim 20%.

For AGI under $43k, the percent of credit you can claim goes up to 35%

170
Q

What gross receipts would qualify a business as a small business for choosing cash basis or accrual basis accounting?

A

under $27m

171
Q

What is the preparer penalty for willful or reckless conduct with tax preparation for someone else?

A

The preparer penalty for willful or reckless conduct is the greater of $5,000 or 50% of the income derived by the preparer for the return.

So if you charged $1500 - penalty is $5k
If you charged $24000 - penalty is $12k

172
Q

What is the preparer penalty for willful or reckless conduct with tax preparation for someone else?

A

The preparer penalty for willful or reckless conduct is the greater of $5,000 or 50% of the income derived by the preparer for the return.

So if you charged $1500 - penalty is $5k
If you charged $24000 - penalty is $12k

173
Q

How much discount can an employer offer without having to include in income?

A

Ex: Harvey works for Ice Cream Dream, a company that sells commercial ice cream makers. Ice Cream Dream normally has a gross profit percentage of 30%. Harvey’s wife loves ice cream, so he decides to buy her a commercial ice cream maker for her birthday. Harvey paid $650 for an Ice Cream Dream 5000, that has a company retail price of $1,000. What, if any, amount must be included in Harvey’s gross income?

The discount cannot exceed gross profit on personalty or 20% on services. Ice Cream Dream’s normal gross profit percentage is 30%.

That gives him a $300 discount or $700 price based on the $1,000 retail price. He paid $650. $50 is more than the discount and is included in income.

However, Harvey’s discount was 35% (1,000 - 650 = 350 / 1,000 = 35%). Therefore, Harvey must include 5% of the discount, or $50, in his gross income.

174
Q

What are features of a cafeteria plan?

A

A cafeteria plan must offer at least one taxable benefit, usually cash, and one qualified nontaxable benefit. All of the other statements regarding cafeteria plans are correct.

a written plan under which the employee may choose to receive either cash or taxable benefits as compensation or qualified fringe benefits that are excludable from wages.

authorized by Section 125 of the Internal Revenue Code.

appropriate when employee benefit needs vary within the employee group.

175
Q

What are qualified dividends?

A

Taxed at cap gains rates

applies to individuals only

Qualified when:
1. us company or qualified foreign corp
2. must hold the stock for min 60 days during 121 day period around ex div date

176
Q

For tax purposes, bargain sale transactions ….

A

can’t generate capital losses.

So if you sell loss property to a charity at a bargain rate, can’t claim a loss. no double basis rules

177
Q

When is a leased vehicle treated like a purchased vehicle for tax purposes?

A

Intent of the parties to the transaction.
Whether any equity results from the arrangement.
Whether any interest is paid.
Whether the fair market value of the car is less than the “lease payment” or option when the option to buy is exercised.

Any sign of ownership, including that of an installment sale will cause a leased vehicle to be treated for tax purposes as a purchased vehicle. Rather than deducting the lease payments, the taxpayer will be required to elect either standard mileage or to take depreciation plus actual expenses.

178
Q

How do you deduct/cost recover an intangible asset?

A

Through amortization.

Ex: goodwill`

179
Q

What is net unrealized appreciation?

A

Tax implications of stock that is held in a ESOP or other employer plan.

If they move the ESOP out of the plan, The employer put stock into the plan for you so you have to pay ordinary income tax on the basis of the stock that they contributed.

The difference between the basis and FMV is locked in as the NUA. This amount is locked in at LTCG rates.

If you sell it for an additional gain, additional amount is taxed based on holding period

NUA is locked in for benes - still LTCG on that

180
Q

What are requirements for a qualifying child for filing status?

A

Relationship test: child, descendent, sibling, step sibling, half sibling, descendent of sibling, step sibling, half, etc
- NO COUSINS, AUNTS, etc

Abode Test: live with the taxpayer 6+ months. Considered an occupant when at schooll hospital, vaca, military, away on biz

Age test: Under 19 or under 24 if student

Support test: Qualifier does not proivde mor than half of support. scholorships don’t count

181
Q

What are requirements for a qualifying relative?

A

Relationship test: descendent, sibling, ancestor, step family, nephew/niece, aunt/uncle, in laws
- Can be unrelated if they live there year around

Gross income test: dependent makes less than $4400

Support test: more than half support- food, clothing edu, med,

Not a qualifying child

no joint return with a spouse

can’t be a spouse

must be a citizen

182
Q

What is considered when estimating tax for SS?

A

MAGI =

AGI less SS
+ tax exempt interest (muni)
+ interest earned on saving bonds for edu
+ adoption assistance
+ edu interest deduction
+ foreign income that would otherwise been exluded

Hurdles
MFJ - $32k/$44k
S - $25k/$34k

183
Q

Is scholarship included in gross income?

A

Not for tuition or books.

Room and board scholarship IS included!

184
Q

What are deductions for AGI?

A

trade or business expenses

property loss on sale or exchange

pre 2018 alimony

deductions from rental prop

half of self employment tax

100% of self employment health insurance

contributions to pension, profit sharing, annuity, IRAs, (phase outs)

Student loan interest (phase out)

HSA

Teacher expense

185
Q

Where are business deductions always?

A

FOR AGI

Above the line

All business expenses (taken by their owners, i.e. sole proprietor or partner) are taken above the line or FOR AGI.

“Business deductions” are deductible directly against the business income, and will be reported on Schedule C or Schedule E (flow through from a K-1 is reported on Schedule E, and rental income and expenses are reported on Schedule E as well). On those forms, the business income and business deductions are netted, and the net amount is reported on the Form 1040 above-the-line.

QBI is not a business expense against revenue. It is a deduction based on pass through income of the owners.

The QBI deduction is at the individual level and is taken below-the-line. It is not a direct deduction against business income, it is a deduction against the individual owner’s share of income. Due to the phaseouts being based on each owner’s adjusted taxable income, it could be available for one owner, but not for another owner of the same business.

186
Q

Margie got divorced in 2020 so….

A

John CAN’T deduct alimony

Margie does NOT include alimony in her income

187
Q

Are awards for personal injury taxable?

A

NO! They are not taxaable

But PUNATIVE damages are

You can exclude awards for mental distress if it’s for medical bills

188
Q

When is income from selling your insurance through a vatical settlement not taxable?

A

If you are chronically ill- 2/6 tasks or severe mental

189
Q

When are capital improvements to your home deductible as a medical expense?

A

If you are handicap and improve home to help

For most things, you can deduct the expense less how much it increased the value of your home

For exit ramps, widening of hallways, lowering of bathroom fixtures (but not elevators) you can deduct the entire cost even if it increases the value of your home.

190
Q

When are Muni bonds an add back for AMT?

A

Only when they are private activity bonds

191
Q

What are the macrs depreciation timelines?

A
192
Q

How do you calculate net self employment income?

A

Multiple income by .9235 and .0765

Use this to calculate what can be contributed to a self employed qualfied planb

193
Q

What type of plan allows you to withdraw after 55 with no penalty?

A

Qualified plans but not IRAs

194
Q

What is the max contribution to a SIMPLE for an employee making $300k?

A

$14k employee deferral

$9k employer match

SIMPLE does a 3% match and has no covered comp limit when it
it’s a match

Does use covered comp max if it’s a non elective contribution

195
Q

What type of retirement account allows for withdrawal of the entire balance?

A

A SIMPLE

196
Q

Can you roll a simple into an ira?

A

No!

197
Q

What’s special about a simple?

A

NO annual testing
25% penalty!

198
Q

How are non qualified withdrawals from an IRA that has basis penalized?

A

pro rata - penalty on the taxable portion of the withdrawal only

199
Q

What’s the min penalty for taxes filed more than 60 days late?

A

However, if a tax return is filed more than 60 days late (as it is in Ford’s case), the minimum failure to file penalty is the lower of $435 or 100% of the tax due. The penalty will not exceed 100% of the tax due.

200
Q

Do you have to file a gift tax return on qualified transfers?

A

No!

Qualified transfers are medical and eduction

201
Q

If it’s a passive activity, the loss is…

A

NOT DEDUCTIBLE UNLESS THERE IS PASSIVE INCOME

202
Q

What reporting period does a trust have for fed income tax purposes?

A

Must adopt a calendar year

203
Q

What is form 5498?

A

Form 5498 reflects contributions to the IRA. Use it when figuring out rolling over to an IRA

204
Q

What does a commission do to the basis of your stock?

A

Increases it!

205
Q

How do you calculate FICA taxes due on a someone earning $!75k salaray?

A
206
Q

what are the tax implications of a mixed use property?

A

When personal use exceeds 14 days, expenses are allocated between personal and rental use, and expenses are only deductible to the extent of income (no loss can be created).

In calculating the expenses that can be used, depreciation is the last available, and the portion of the other expenses already allocated against the rental income would have reduced the income to zero. The depreciation cannot be used to create a loss, so it is not deductible.

207
Q

How do you get to net income for a self employed person?

A

The earnings for Dennis from the Blue Elf are $58,000 of Schedule E income from the partnership. To compute the self-employment tax on Schedule SE for Dennis, multiply the self-employment earnings by .9235 (part of the self-employment calculation), to arrive at the new earnings of $53,563. This amount is multiplied by the 15.3% self-employment tax, and the tax is $8,195. The deduction for self-employment tax is one-half of this amount, or $4,098.

208
Q

Taxation of entities chart:

A
209
Q

When calculating AGI for a self employed person, make sure you…

A

Adjust for half of self employment tax (multiple by .9265)

210
Q

When is a non trip considered purely for business?

A

A trip outside the United States is considered to be purely for business when
less than 25 percent of the time spent on the trip was personal. The taxpayer does not have control over the timing or arrangements for the trip.
The trip outside the United States lasts for less than seven days.
Vacation was not a primary consideration for the trip.

211
Q

When is a leased vehicle considered a purchase?

A

Intent of the parties to the transaction.
Whether any equity results from the arrangement.
Whether any interest is paid.
Whether the fair market value of the car is less than the “lease payment” or option when the option to buy is exercised.

Any sign of ownership, including that of an installment sale will cause a leased vehicle to be treated for tax purposes as a purchased vehicle.

Rather than deducting the lease payments, the taxpayer will be required to elect either standard mileage or to take depreciation plus actual expenses.

212
Q

Dividends taxability

A

All dividends must be reported as income. If you hold the stock longer than 60 days, they are qualified (LTCG) ortherwise STCG

213
Q

DO you deduct FMV or Basis when donating short term property?

A

Lesser of!

If it’s LTCG prop then you can choose either fmv or basis

LTC

214
Q

When does a self employed person need to file?

A

if they earn $400 net income or more

215
Q

What is net operating loss?

A

When the deductions a company takes are greater than it’s income. Some stuff is deductible for a negative loss, some is not.

The net operating loss can carry forward to offset income in future years

The application of carryforward NOL is limited to 80% of the next years income

What is not allowed to be included in NOL?
Any deduction for personal exemptions.

· Capital losses in excess of capital gains.
· The section 1202 exclusion: Small Business Stock Gains Exclusion,

· Nonbusiness deductions in excess of nonbusiness income.

· Net operating loss deduction.

· The domestic production activities deduction.

216
Q

Why is 1231 beneficial?

A

So the benefit of 1231 is Capital Gains on Gains and Ordinary Loss On Loss!

217
Q

Section 1245 recapture

A

Ordinary gain is only 25% (note that it’s still called ordinary gain although it’s a different rate)

Note where 1231 and 1245 are

Same chart for 1250 but 1250 goes where the 1245 is - and 1250 is ordinary income not the special 25% !

1250 is real estate, land, and building

Section 1231 losses can be carried forward 5 years

218
Q

What is the spacial tax rate on 1245 depreciation recapture?

A

25%

219
Q

What are the 5 dependent tests?

A

1) Gross Income Test,
2) Support Test,
3) Not a qualifying child, 4
) Citizenship Test (U.S., Canada or Mexico), and
5) Joint Filing Test.

220
Q

Let’s say you sell to a charity at a bargain price, can you claim a loss?

A

NOOO

Reagan purchased stock in XYZ Corporation three years ago for $110,000. Today it is worth $100,000. Reagan exchanges (sells) the stock to a local charity for $10,000. What is Reagan’s capital loss on the transaction?

answer: 0

221
Q

Can you use section 179 for mixed use rental prop furniture?

A

no. Section 179 expense is only available for property used in a trade or business. Property used for the production of income, such as rental property furniture, is not eligible for the Section 179 expensing deduction.

CFP Exam (6 decks)

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