Tax Flashcards
What are Capital Assets?
Most personal use assets and most investment assets are capital assets. - Depreciable property used in a trade or business is generally a Section 1231 asset, not a capital asset. - Assets that are not capital assets or Section 1231 assets are ordinary income assets.
* Section 1221(a) of the IRC defines what is not a capital asset, including: -Inventory, - Depreciable property used in a trade or business, - Copyrights and creative works (if held by the creator of such works), and - Accounts and notes receivable,
Remember, all assets are capital assets except ACID (Accounts/notes
receivable, Copyrights and creative works, Inventory, and Depreciable property used in a trade or business).
What are ordinary income assets?
- Ordinary assets are those assets that, when sold, result in ordinary income to the owner of the asset.
- Some of the assets listed in Section 1221(a) that are not capital assets are actually ordinary income assets, including inventory, accounts receivable, creations in the hands of the creator, and copyrights in the hands of the creator.
What are section 1231 assets?
- Section 1231 assets are assets used in a trade or business.
- In addition to being used in a trade or business, Section 1231 assets are either (1) depreciable property or (2) real property.
- Section 1231 assets do not include: -Inventory, - Property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or
- Copyrights or creative works.
- Section 1231 specifically includes certain property, such as: -Timber, -Coal, - Iron Ore, - Certain Livestock, and - Unharvested crops (under certain conditions)
What increases/decreases basis?
Three rules for basis of gifted property
- There are three rules related to the basis of gifted property: the general rule and two exceptions. - The general rule is that the donee’s basis in the gifted property is the same as the donor’s basis in the gifted property.
- The first exception occurs when the FMV of the gifted asset is less than the donor’s basis (loss property). When the FMV of the gifted asset is less than the donor’s basis, the Double Basis Rule must be used. (see example with Alex and Beth) * For gains only, the basis of the donor is also the adjusted basis of the donee. * For losses only, the basis to the donee is the FMV of the property on the date of the gift. * If the asset is later sold by the donee and the amount realized is between the fair market value at the time of the gift and the adjusted basis of the donor, no gain or loss is recognized.
- The second exception occurs when gift tax has been paid. In the event that gift tax has been paid and the asset had appreciated in the hands of the donor, then the portion of the tax which is associated with the appreciation is added to the donor’s basis to determine the donee’s basis.
Calculation of gain or loss formula
Treatment of gains/losses for different assets summary
Net capital gains/losses steps
- The steps below should be followed to determine the net capital gain or loss.
- First, net long-term capital gains and long-term capital losses.
- Second, net short-term capital gains and short-term capital losses.
- If the taxpayer has both long-term net gains and short-term net gains, do not proceed to the next step. Both the net long-term gain and the net short-term gain should be recognized.
- Third, if the taxpayer has a net loss in one category and a net gain in the other category, then the net long-term gain/loss should be netted against the net short-term gain/loss. * In other words, if the taxpayer has a net long-term capital gain and a net short-term capital loss, the net short-term capital loss reduces the net long-term capital gain.
- Similarly, if the taxpayer has a net long-term capital loss and a net short-term capital gain, the net short-term capital gain reduces the net long-term capital loss.
Limitations on capital losses
if a series of transactions results in a net capital loss, the amount of the loss that may be recognized in the current tax year is limited. - Under current law, up to $3,000 of capital losses (either short or long-term) may be recognized against other forms of income in any one tax year.
- If a capital loss is realized in a given tax year, but is not recognized due to the imposition of the loss limitation rule, the remaining loss is carried forward indefinitely, and may be used to offset future capital gains, or, alternatively, generate a $3,000 loss deduction each year against other income until the loss is used up.
Recharacterization of some capital losses on small business stock into ordinary losses
Under IRC Sec. 1244, a single taxpayer can deduct up to $50,000 ($100,000 for married individuals filing jointly) of the loss on small business stock as an ordinary loss in any given year if the following requirements are met: - The stock represents ownership in a domestic corporation. - The corporation was a small business corporation (less than $1 million in total capital contributions plus paid-in capital) at the time the stock was issued.
- The company was incorporated after November 6, 1978. - The loss was sustained by the original owner of the stock (the person to whom the stock was issued by the corporation), who is not a corporation, trust, or estate.
- The stock was issued to the original owner in exchange for money or property. Stock issued in return for services or other stock does not qualify.
- For the five years prior to the loss, the corporation must have earned more than 50% of its gross receipts from sources other than royalties, rents, dividends, interest, annuities, and capital gains. * Note that any loss in excess of the per year limit is treated as capital loss. Furthermore, Section 1244 does not apply to gains. Any gains associated with Section 1244 stock are treated as capital gains.
Section 1244 allows taxpayer to deduct up to how much loss?
Section 1244 allows the taxpayer to deduct up to $50,000 of loss on 1244 stock against ordinary income
Faith owned ABC securities. She paid $5,000 for her shares and sold them for $7,000. Twenty days later, she purchased identical shares for $6,500. Which of the following is true?
a) The wash sale rules will apply.
b) The stock will receive Section 1244 treatment.
c) The stock will receive like-kind treatment.
d) Faith’s basis in the new shares is $6,500
Answer: D The wash sale rules will not apply because the stock was not sold for a loss. The stock does not receive Sec-tion 1244 treatment because there is no indication that this is Section 1244 stock, and the stock was not sold for a loss. Securities are not, by statute, like-kind assets. Faith’s basis will be what she paid for the new share ($6,500).
Gifted property/basis calculation
Savannah’s basis = Cindy’s basis + ((Unrealized appreciation/taxable gift) x gift tax paid)
Destiny’s business property was destroyed by fire. The original basis was $250,000. She received insurance proceeds of $600,000. She acquired replacement property two months later and paid $620,000 for the new property. What is Destiny’s basis in the new property?
In an involuntary conversion, the basis of the new property is generally a carryover basis. The basis is adjusted up if additional dollars are invested, and adjusted down if the replacement asset fair market value is less then the asset’s adjusted basis. $250,000 + $20,000 additional investment. ($270k total)
What is the gain that will be recognized on the sale of the home?
Each spouse is entitled to a $250,000 exclusion of gain if they meet the ownership and use rules. Only one spouse is required to own the home for 2 of the last 5 years, however each is required to use the home for 2 out of the last five years. If the time frame is not met, a partial exclusion is available if the move was due to job change or other unforeseen circumstances. In this case, Kevin qualifies for the full $250,000 exclusion. Sydney is entitled to 9/24 of the exclusion = $93,750. The gain is $1,000,000 – $400,000 basis – $250,000 Kevin’s exclusion - $93,750 Sydney’s exclusion = $256,250.
Ginger’s grandmother bequeathed stock to Ginger at her death 5 years ago. The grandmother paid $100 for the stock, and it was valued at $5,000 when the grandmother died. Ginger gave the stock to her daughter Emily 2 years ago. The stock was valued at $4,000 at the date of transfer. Emily sold the stock today for $4,500. What is the gain or loss on the sale?
$0… When Ginger’s grandmother died, Ginger inherited the stock with a basis of $5,000. When Ginger gave the stock to Emily, the stock had a double basis because the stock was in a loss position. Emily had a gain basis of $5,000 and a loss basis of $4,000. Since Emily sold the stock between those two values, Emily will not recognize any gain or loss.
When to use MACRS?
allow the client to depreciate over the equipment’s life expectancy. because it is an acceptable method of tax depreciation as well as one which will yield the greatest expense in the early portion of the asset’s life.
Can married filing seperate itemize and standard deduct?
No, one cannot standard deduct and the other itemize
5 year property under MACRS
automobiles & cattle
7 year property under MACRS
office furniture
Kids’ income taxed @ parents rate?
unearned income over $2,500 is subject to tax at the parent’s tax rates
With accrural accounting, when does taxpayer (seller) recognize income?
The accrual accounting method recognizes income when the taxpayer has a right to collect. This occurs usually after the completion of a job and in no case later than when the invoice is prepared and sent.
Are moving expenses deductible?
NO. For years after 12/31/17, qualified moving costs are not deductible and if reimbursed by employer, they must be included in income.
Tax/gift tax implications of tuition paid directly to university?
A payment directly to a university is considered a qualified transfer and is therefore not considered a gift for gift tax and generation-skipping tax purposes. Therefore, there are no filing requirements for the payment.
When does seller recognize income under cash basis accounting?
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).
Kiddie tax standard deduction for earned income
Earned income is not subject to kiddie-tax. His standard deduction is the greater of $1,250 or his earned income plus $400, not to exceed $13,850 in 2023.
Under current rules, the Section 179 deduction for expensing qualifying business property in 2023 is:
Section 179 deduction is $1,160,000 for 2023. However, the amount is reduced dollar for dollar for acquisition amounts above $2,890,000 placed into service during 2023.
Which of the following represents an addback for alternative minimum tax that would potentially result in a minimum tax credit?
The bargain element of an incentive stock option is an addback for alternative minimum tax purposes. In addition, since the addback is considered a deferral item for AMT, it would be eligible for the minimum tax credit in subsequent years.
Employee lodging includible as income?
An employee is allowed to exclude from gross income the value of lodging furnished by an employer to the employee if the lodging is furnished (1) on the employer’s business premises, (2) for the convenience of the employer, and (3) the employee is required to accept the lodging as a condition of employment. It does not matter that Hansel and Gretel were paid a housing allowance, which they were then required to pay back to the employer for rent. Hansel and Gretel can exclude the entire value of their housing from their gross income.
