Tax Flashcards
Internal Revenue Code
Primary source of all tax law
Treasury regulations
Great authority but not law
Revenue ruling and revenue procedures
- administrative interpretation
- may be cited
Congressional committee reports
- indicate the intent of congress
- may not be cited
Private letter ruling
Apply to a specific taxpayer
Judicial sources
Court decisions interpret
Step transaction
Ignore the individual transaction and instead tax the ultimate transaction
Ex: XYZ corp sells property to an unrelated purchaser who subsequently resells the property to a wholly owned subsidiary of XYZ
Sham transaction
A transaction that lacks a business purpose and economic substance will be ignored for tax purposes
Ex: a sale by XYZ to ABC but both XYZ and ABC are owned by the same persons
Substance over form
The substance of a transaction and not merely its form governs its tax consequences
Ex: president of XYZ has the company loan him the money he needs. He never intends to repay the loan or take a salary
Assignment of Income
Income is taxed to the tree that grows the fruit even though it may be assigned to another prior receipt
Ex: Mr. T owns XYZ, an S corp. He directs that all income be paid to his son. Mr.T reports no income
Dates for paying estimated taxes
April 15
June 15
September 15
January 15
Frivolous return- IRS penalties
$5,000
Negligence-IRS penalties
Penalty is 20% of the portion of the underpayment attributed to negligence
Civil fraud - IRS penalties
Penalty is 75% of the portion of the tax underpayment attributable
Failure to file - IRS penalties
Penalty is 5% of the tax due per month, with a maximum of 25%
Failure to pay - IRS penalties
Penalty is 0.5% per month the tax is unpaid with a maximum of 25% (pay-point)
Federal withholding tax- underpayment penalty
To avoid, pay the lesser of:
1. 90% of the current year’s tax liability
2. 100% of the prior year’s tax liability (or 110% if the last year’s adjusted gross income exceeds $150,000)
Adjustments for Adjusted Gross Income (AGI)
The second step in the 1040 calculation is adjusted gross income. It is the total income (or gross income) less adjustments to income. Main adjustments or deductions to income are:
- IRA contributions
- self employment tax
- self employment health insurance (100%)
- Keogh or SEP
- alimony paid (pre-2019 divorce)
Schedule A itemized deductions
- medical, dental and LTC (7.5% of AGI)
- casualty and theft losses
- real estate taxes*
- investment interest expense
- home mortgage interest
- state and local taxes*
- personal property tax*
- charitable gifts
*limited to $10,000/year total
Casualty losses (calculation of the deductible loss)
Must be federally declared disaster
1. Use lesser of basis or FMV
2. Subtract any insurance coverage
3. Subtract $100 (floor)
4. Subtract 10% of AGI
Kiddie tax
- all net unearned income of a child who is not age 18 yet 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 asset
- children under 18 are entitled to a standard deduction of $1,250 and an additional $1,250 of unearned income will be taxed at the child’s rate (10% bracket)
Self-Employment income
- net schedule c income
- general partnerships income (K-1 income)
- board of directors fees
- part time earnings (1099)
- NOT wages or K-1 distributions from an S corp
Self-Employment tax calculations
The taxable wage base will not exceed $160,200. If you added up the self-employed income, and you exceed $160,200, you did something wrong.
Why? Social security tax stops at $160,300
*Shortcut: multiply total self employment income by .1413
Tax Credits
- credit for child and dependent care expenses
- child tax credit (up to $1,600/child could be refundable)
- adoption credit
- elderly and disabled credit
- foreign tax credit
- earned income credit (refundable)
Cash- accounting method
Mandatory where taxpayer’s records reflect only cash transactions, and there are no inventories
Accrual- accounting method
Mandatory for purchase and sales where there are inventories
Hybrid- accounting method
Combined accrual for inventory portion of business and cash for cash portion of business
Percentage of completion- accounting method
For long term contracts where the contracts will not be completed within the taxable year started
Subchapter S Corp eligibility
- number of shareholders is limited to 100
- the corporation can have only a single class of outstanding common stock (no preferred), but the common stock can be voting or non-voting
- most be a domestic corporation
- only individuals, estates and certain trusts may be shareholders
- nonresident aliens (neither citizen or permanent resident) cannot be shareholders
Tax basis- partnership/LLC
- cash invested
- direct loans made to the partnership
- partnership debt- loans made to the partnership- not the partner (bank loans)
- S corp basis does not include bank loans even if the S corp owner personally guarantees the debt
5 year property class
CAT
1245 property
- Computers
- Autos
- Trucks
7 year property class
1245 property
Office equipment except computers
27.5 year property class
1250 property
Residential rental property
39 year property class
1250 property
Non-residential real property
Boot/gain recognized/basis
- No boot received- recognized gain is 0
- When boot is received just answer the recognized gain is the boot received
- Boot paid is added to basis
- Boot carries over from prior property
Capital gains and losses
- ST capital gains and ST losses are netted. LT capital gains and LT losses are netted
- If a gain and loss remain, they are again netted
- If a loss remains after netting capital gains and losses, only $3,000 of the net losses can be used to offset ordinary income
Sale of personal residence (section 121)
- $250k (single) and $500k (MFJ) of gain from sale is taxed free if lived in the home for 2 out of the last 5 years
- exceptions available if the taxpayer lives in the residence less than 2 years and moves because of a new job for health reasons, etc. received the prorated amount
Recapture (1245 property)
When the sole proprietor purchases equipment and takes depreciation (cost recovery deduction-CRD), the CRDs offset the sole proprietor’s ordinary income. When the sole proprietor sells the equipment for a gain, the sole proprietor must:
1. Look back and recapture the lesser of CRDs taken or the gain realized as 1245 gain (ordinary income)
2. Recover any excess gain as 1232 gain (capital gain)
Section 179 qualifying property
- tangible personal property
- 1245 property
Section 179 non-qualifying property
- real estate
- 1250 property
- intangible (owning a franchise)
AMT preference items (IPOD)
- 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
- incentive stock option bargain element
- property and income taxes
AMT not deductible items
Standard deduction
Post posting AMT
- 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 AMT payable (more taxable income)
- deferred exercise of incentive stock options (preference item) to a later date
- or disqualifying the ISO so that it becomes NQSO (subject to ordinary tax)
- purchase public purpose municipal bonds instead of private purpose bonds
Historical rehabilitation programs
- if 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 $200,000 and $250,000 of AGI
- you can calculate your tax to determine the maximum marginal tax bracket. Then you multiply the $25,000 by your marginal tax bracket
Low income housing credit
- if held as passive activity may generate a deduction-equivalent tax credit up to $25,000. There is no phase out
- allowed annually over a 10 year “credit period”. The depreciation is straight line over 27.5 years
- multiply $25,000 by marginal tax bracket
- because there is no phaseout, it produces a higher credit
Insurance- phantom income
- lapse of policy loan
- section 162 life/disability