Tax Flashcards
Business Structure: S-Corp
- 100 Shareholders Max
- Single class of outstanding Common Stock (no preferred), but the Common can be voting or non-voting.
- U.S. Only
- Individuals, estates and certain Trusts may be shareholders.
NOTE: Non-resident aliens (persons who are neither citizens nor permanent residents of the US) cannot be shareholders.
Business Structure: Tax Basis (cash, loans)
Partnership / LLC
- Cash invested
- Direct loans made to the partnership
- Partnership Debt: loans from the bank
S-Corp
- Cash
- Loans made to the S-Corp
- No Bank Loans
Property Classes (1245/1250)
Remember: CATCORN
1245 Property (non-real estate)
- 5 year: Computers, Autos, Trucks
- 7 year: Office Equipment except computers,
1250 Property (real estate)
- 27.5 year: Residential rental property
- 39 year: Non-residential real property
Property Exchange (1031)
Boot / Gain Recognized / Basis
No Boot Received: Recognized Gain is zero
When Boot is Received, just answer the recognized gain is the boot received
Boot paid is added to Basis
Basis carries over from the prior property
Can exchange a rental property for a home if the home is turned into a rental property
Netting Capital Gains and Losses
Step 1:
ST Capital Gains and ST Losses are Netted
LT Capital Gains and LT Losses are Netted
Step 2:
If a Gain and Loss remain, they are again Netted
Step 3:
If a Loss remains after Netting Capital Gains and Losses, only $3,000 of the Net Losses can be used to offset ordinary income
Personal Residence: Sale (Section 121)
$250K (single) and $500k (MFJ) of Gain from the sale is tax-free if lived in for 2 out of the last 5 years.
Exception available if taxpayer lives in the residence less than two years and moves because of a new job, for health reasons, etc. Receives a pro-rated amount.
Depreciation Recapture (1245 Property)
Depreciation Recapture (1245 Property - non-real estate)
When the sole proprietor purchases equipment and takes Depreciation (Cost Recovery Deduction - CRD), the CRDs offset the sole proprietor’s ordinary income.
There are TWO Tax Ramifications:
- 1245 Ordinary Income Tax
- 1231 Capital Gain
When the sole proprietor sells the equipment for a GAIN, the sole proprietor must:
1st: Look back and recapture the LESSOR of the CRDs taken or the Gain realized as 1245 Gain (ordinary income)
2nd: Recover any excess gain as 1231 (capital gain)
Calculation
Original Cost (Basis)
- CRD (depreciation RECAPTURE)
= Adjusted Basis
Sale Price
- Adjusted Basis
= Gain
The 1245 recapture is the CRD
The 1245 Ordinary Income Taxable Amount is the LESSOR of the CRD or the Gain
The 1231 Capital Gain Taxable Amount is the Gain - CRD
On. Installment Sales, the 1245 gain is paid right away as ordinary income, but the 1231 gain is spread out over the installment period
(Profit/Sales Price) x Installment Payment = Taxable Gain
Section 179
Qualifying vs. Non-Qualifying Property
Qualifying:
- Tangible Personal Property
- 1245 Property
Non-Qualifying:
- Real Estate
- 1250 Property
- Intangible (owning a franchise)
AMT: Preference Items
Remember I.P.O.D.
- Excess Intangible Drilling Costs (IDC)
- Private Activity Municipal Bond
- Oil and Gas Percentage Depletion / Excess intangible drilling costs (IDC)
- Depreciation (ACRS/MACRS) but not straight line
AMT: Add-Back Items
AMT Add-Back Items
- Incentive Stock Option Bargain Element
- Property and Income Taxes
AMT: Strategies to Postpone
Accelerating receipt of taxable income or deferring the payment of property taxes, state income taxes, deductible medical expenses or charitable giving, the regular tax (1040) may exceed the AMT payable (more taxable income)
Deferring exercise of incentive stock options (add back item to a later date or disqualifying the ISO so that it becomes NQSO (subject to ordinary income tax).
Purchase public purpose muni bonds instead of private activity bonds.
Tax Deduction: Historic Rehabilitation Programs
Historic Rehabilitation programs that are held as passive activity may generate a Deduction:
Equivalent Tax Credit of up to $25,000.
The benefit of this Deduction:
Equivalent Tax Credit phases out between $200- 250k of AGI.
How does the Deduction Equivalent tax credit work?
Calculate tax to determine the maximum marginal tax bracket. If it is 25%, for example, then you multiply $25,000 (the credit) by 25% to get $6250.
Tax Credit: Low Income Housing
Low-Income Housing programs that are held as passive activity may generate a Deduction:
Equivalent Tax Credit up to $25,000. There is NO phase out.
The Low Income Housing Credit is allowed annually over a 10 year “credit period.”
The Depreciation is straight-line over 27.5 years.
How does the credit work?
For example, multiply tax rate of 35% by $25,000 to get a credit of $8750.
NOTE: Because there is no phaseout, it produces a higher credit.
Phantom Income: Types
Insurance:
- Lapse of Policy Loan
- Section 162 Life/Disability
Investments:
- Zero/Strip Income
- TIPS
- Declared but not paid Dividends
Tax/Retirement:
- K-1 Income from LP/FLP
- Recapture (1245 depreciation recapture)
- NUA
- 20% withholding plan distributions, Secular Trust
Charity: Organization Types
50% organizations (public charities): all churches, schools, hospitals and organizations such as United Way, Red Cross, Humane Society, etc.
30% organizations (private charities): private non-operating foundations, war veteran groups, and fraternal orders.
Charity: Deduction Calculations % AGI
- Long-Term Appreciated Property
- Short-Term Capital Gain Property
Calculate the Maximum Deductible - 60% of AGI
Long-Term Appreciated Property, using FMV deduct up to 30% of AGI; can roll forward unused deduction; or up to 50% of AGI using basis and no rollover
Use-unrelated Property, ST Capital Gain Property using basis deduct up to 50% of AGI; basis only, cannot roll forward unused deduction
Federal Tax Law / Authority
- Internal Revenue Code: Primary Source of all tax law.
- Treasury Regulations: Great authority, but not law.
- Revenue Rulings and Revenue Procedures: Administrative interpretation. May be cited.
- Congressional Committee Reports: Indicate the intent of Congress. May not be cited.
- Private Letter Rulings: Apply to a specific taxpayer .
- Judicial Sources: Court decisions interpret
Tax Transactions: Step Transaction
Ignore the individual transaction and instead tax the ultimate transaction
Example: The XYZ Corporation sells property to an unrelated purchaser who subsequently resells the property to a wholly owned subsidiary of XYZ.
Tax Transactions: Sham Transaction
A transaction that lacks a business purpose and economic substance will be ignored for tax purposes.
Example: A sale by XYZ to ABC, but both XYZ and ABC are owned by the same persons.
Tax Transactions: Substance Over Form
The substance of a transaction, and not merely its form, governs its tax consequences.
Example: The president of XYZ has the company loan him the money he needs. He never intends to repay the loan or take a salary.
Tax Transactions: Assignment of Income
Income is taxed to the tree that grows the fruit, even though it may be assigned to another prior receipt.
Example: Mr. T owns XYZ, an S Corp. He directs that all income be paid to his son. Mr. T reports no income.
Estimated Taxes: Filing Dates
April 15
June 15
September 15
January 15
IRS Tax Penalties
Frivolous Return: $5000
Negligence: Penalty is 20% of the portion of the underpayment attributed to negligence.
Civil Fraud: Penalty is 75% of the portion of the tax underpayment attributable.
Failure to FILE (worst): Penalty is 5% of the tax due per month, with a maximum of 25%.
Failure to PAY: Penalty is 0.5% per month the tax is unpaid, with a maximum of 25% (Pay-Point)
Estimated Taxes: How to Calculate
90% of the current year’s tax liability
100% of the prior year’s tax liability (
110% if the last year’s adjusted gross income exceeded $150,000)
Personal Taxes: AGI Adjustments (above the line)
Adjustments From Gross Income to Arrive at Adjusted Gross Income (AGI)
The second step in the 1040 calculation is adjusted gross income. It is Total Income (or Gross Income) less adjustments to income.
The main Adjustments or Deductions to Gross Income are:
- IRAs , HSAs, FSAs
- Self-employment Tax
- Self-employment Health Insurance (100%)
- Keogh or SEP
- Alimony paid
Personal Income: Deductions from AGI (itemized)
- Medical, Dental, and LTC (7.5% of AGI)
- Mortgage and investment interest
- Charitable gifts
- P-SALT: limited to $10,000
- Casualty (Federally declared) and Theft Losses
- both based on lessor of basis or FMV, 10% AGI, $100 deductible
P-SALT: Property (real estate and personal), State and Local taxes
Casualty Losses: Deduction
Must be federally declared disaster. $100 deductible.
First: Use the lesser of basis or FMV
Second: Subtract any insurance coverage
Third: Subtract $100 (floor)
Fourth: Subtract 10% of AGI. Must be a presidentially declared “natural disaster”
Kiddie Tax
All net UNEARNED income of a child who has:
- NOT attained age 18, or
- Turns 19-23 if a full-time student and who has at least one parent alive is taxed at parent’s rate regardless of the source of the assets.
Children under 18 are entitled (2023) to a Standard Deduction amount ($1,250) and an additional $1,250 of unearned income will be taxed at the child’s rate (10% marginal tax bracket).
Calculation
Unearned Income
- Standard Deduction ($1,250)
= Taxable Kiddie Income
Taxable Kiddie Income
- x 10% (kid rate) on next $1,250
- x parent tax rate on amount over $2,500
= Kiddie Tax
Self-Employment: Income
Self-Employment Income Sources
- Net Schedule C Income
- General Partnership Income (K-1 income)
- Board of Directors fees
- Part-time earnings (1099) NOT wages or K-1 distributions from an S Corp
Self-Employment: Taxes
The Taxable Wage Base will not exceed $160,200 (2023).
If you added up the self-employed income, and you exceeded $160,200, you did something wrong. Why? Social Security tax stops at $160,200 (2023).
Shortcut: Multiply Total Self-employment Income by 0.1413
Deduction from Self-Employment Income: Multiply by 0.07065 factor
Tax Credits
Tax Credits
Credit for child and dependent care expenses
- $3,000/$6,000 x 20%
- AGI phaseout
Child Tax Credit
- $2,000 per kid under 17
- up to $1,600 could be refundable)
- AGI phaseout
- Adoption Credit
- Elderly and Disabled Credit
- Foreign Tax Credit
- Earned Income Credit (refundable)
Accounting Methods
Cash: Mandatory where taxpayer’s records reflect only cash transactions, and there are no inventories.
Accrual: Mandatory for purchases and sales over $25M where there are inventories.
Hybrid: Combines accrual for inventory portion of business and cash for cash portion of business.
Percentage of Completion: For long-term contracts where the contract will not be completed within the taxable year started.
Personal Service Corporations (PSC)
These are regular corporations.
Remember: H.A.L.E.
- Health
- Accounting / Architectural
- Law
- Engineering
Realized Gain vs. Recognized Gain
Realized Gain is Economic or Inherent Gain at the time of the transaction.
Recognized Gain is the part of Realized that is immediately taxable.
Self-Employment Income: Required to File
An individual is required to file a tax return if earnings from self employment (1099) are more than ______?
$400
Business Tax: Write-Offs (meals, entertainment, travel, etc.)
Clients/Prospects
- Meals and entertainment may be deductible if not lavish, business is conducted and the employee is there
Non-Highly Compensated Employees
- office parties 100% deductible
All Employees
- 50% deductible for business meals and travel
Wash Sale
- 61 days
- disallowed loss is added to the cost basis
Which Investments to Try to Avoid Kiddie Tax
Avoid Tax
- munis: double tax free
- growth stocks: no income
- EE / I Bonds: pay federal tax at maturity
Subject to Phantom Tax
- zero coupon bonds
- STRIPS
Charitable Bargain Sales
Donated Property at a Bargain Sale
Charity Deductible Amount = FMV - Charity Sold Price
Adjusted Basis = (Charity Price Sold / FMV) x Original Basis
Charitable Taxable Gain = Charity Sold Price - Adjusted Basis
Taxes: Margin Expenses
Margin expenses only deductible up to net investment income
Net Investment Income: interest, non-qualified dividends, STCG, royalties, rental income, non-qualified annuities
Child Care Credit
Child Credit
Child Care Credit: Qualifying expenses up to $3,000 (1 kid) or $6,000 (2+ kids) x 20%
Child Credit: $2,000 per kid, subject to MAGI
