Tax Flashcards
1
Q
Internal Revenue Code
A
Primary source of all tax law
2
Q
Treasury regulations
A
Great authority but not law
3
Q
Revenue ruling and revenue procedures
A
- administrative interpretation
- may be cited
4
Q
Congressional committee reports
A
- indicate the intent of congress
- may not be cited
5
Q
Private letter ruling
A
Apply to a specific taxpayer
6
Q
Judicial sources
A
Court decisions interpret
7
Q
Step transaction
A
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
8
Q
Sham transaction
A
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
9
Q
Substance over form
A
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
10
Q
Assignment of Income
A
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
11
Q
Dates for paying estimated taxes
A
April 15
June 15
September 15
January 15
12
Q
Frivolous return- IRS penalties
A
$5,000
13
Q
Negligence-IRS penalties
A
Penalty is 20% of the portion of the underpayment attributed to negligence
14
Q
Civil fraud - IRS penalties
A
Penalty is 75% of the portion of the tax underpayment attributable
15
Q
Failure to file - IRS penalties
A
Penalty is 5% of the tax due per month, with a maximum of 25%
16
Q
Failure to pay - IRS penalties
A
Penalty is 0.5% per month the tax is unpaid with a maximum of 25% (pay-point)
17
Q
Federal withholding tax- underpayment penalty
A
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)
18
Q
Adjustments for Adjusted Gross Income (AGI)
A
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)
19
Q
Schedule A itemized deductions
A
- 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
20
Q
Casualty losses (calculation of the deductible loss)
A
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
21
Q
Kiddie tax
A
- 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)
22
Q
Self-Employment income
A
- 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
23
Q
Self-Employment tax calculations
A
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
24
Q
Tax Credits
A
- 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)
25
Cash- accounting method
Mandatory where taxpayer’s records reflect only cash transactions, and there are no inventories
26
Accrual- accounting method
Mandatory for purchase and sales where there are inventories
27
Hybrid- accounting method
Combined accrual for inventory portion of business and cash for cash portion of business
28
Percentage of completion- accounting method
For long term contracts where the contracts will not be completed within the taxable year started
29
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
30
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
31
5 year property class
CAT
1245 property
- Computers
- Autos
- Trucks
32
7 year property class
1245 property
Office equipment except computers
33
27.5 year property class
1250 property
Residential rental property
34
39 year property class
1250 property
Non-residential real property
35
Boot/gain recognized/basis
1. No boot received- recognized gain is 0
2. When boot is received just answer the recognized gain is the boot received
3. Boot paid is added to basis
4. Boot carries over from prior property
36
Capital gains and losses
1. ST capital gains and ST losses are netted. LT capital gains and LT losses are netted
2. If a gain and loss remain, they are again netted
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
37
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
38
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)
39
Section 179 qualifying property
- tangible personal property
- 1245 property
40
Section 179 non-qualifying property
- real estate
- 1250 property
- intangible (owning a franchise)
41
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
42
AMT add back items
- incentive stock option bargain element
- property and income taxes
43
AMT not deductible items
Standard deduction
44
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
45
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
46
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
47
Insurance- phantom income
- lapse of policy loan
- section 162 life/disability
48
Investments- phantom income
- zero/strip income
- TIPs
- declared but not paid dividends
49
Tax - phantom income
- K-1 income from LP/FLP
- recapture
50
Retirement - phantom income
- NUA
- 20% withholding plan distributions
- secular trust
51
Charitable giving
1. Calculate the maximum deductible- 60% of AGI
2. Calculate the eligible amounts given to 50% organizations (public charities) such as all churches, schools, hospitals and organizations like United way, Humane society, etc.
3. Calculate the eligible amounts given to 30% organizations (private charities) like private non-operating foundations, war veteran groups or fraternal organizations
52
Charitable giving
(Types of property- 50% charities)
- cash- deduct up to 60% of AGI
- long term appreciated property- using FMV deduct up to 30% of AGI
- use-unrelated property, ST capital gain property- using basis can deduct up to 50% of AGI
53
Investment interest deduction
Does not include dividends treated as ordinary income
54
FIFO reflects
The current cost on the balance sheet
55
Installment sale calculation of gain
1. Profit ➗total contract price = gross profit percentage
2. Gross profit percentage ✖️ installment
56
Business entity that cannot use NOI
S corps
They already pass through annual losses
57
Schedule C loss
- sole proprietor use
- can be applied against income earned in same year
- will reduce client’s AGI
58
Pass-through businesses
- s corp
- sole proprietorship
- general partnership
- limited partnership
59
C corp owner-employee tax notification documents
- W-2 for earned income (salary)
- 1099 for shareholder’s dividends
60
Distributable Net Income
(DNI)
Determines the amount of income to be distributed to the beneficiaries and the corresponding deduction of the trust.
It does not advice beneficiaries on the amount of income that the trust has earned
61
Estate’s deductions
Can take deductions for ordinary and necessary business expenses
62
Taxation when trust is used to satisfy legal support obligations
Taxed to the grantor
63
MARCS and Straight Line tables
MACRS/Straight Line
5yr. 7yr. 5yr. 7yr
Year1: 20% 14.29 10% 7.14%
Year2: 32% 24.49% 20% 14.29%
64
Building’s adjusted basis
Includes legal fees and renovations (improvements) minus cost recovery deduction (CRD)
Does not include repairs or property taxes
65
Like kind exchange realize gain
Total value - adjusted basis
- Total value- FMV of property acquired + boot
- Adjusted basis- original basis + boot
66
Section 1244 sale tax treatment
- up to $50,000 (single) or $100,000 (MFJ) of loss is treated as an ordinary loss
- any loss exceeding the maximum annual ordinary loss is treated as a capital loss
67
Average cost per share calculation
1. Each year amount ✖️ cost of shares = number of shares
2. Add up all shares
3. Total amount ➗ total number of shares
68
Community property step up
Full step up in basis to FMV
69
Capital gain recognized in like kind exchange
FMV of property receive
+ boot received
= property value
- basis of the property given up
= realized gain
Pick the lesser of boot or realized gain
70
Substitute basis (adjusted basis after swap)
FMV of property acquired - (realized gain - recognized gain)
71
Overall weighted return calculation
(Growth % ✖️ account value) ➗ 100
If not 100, then ➗ by total portfolio value
72
The property tax itemized deduction (for AMT purposes)
Add back item
73
Selling a home and renting (AMT purposes)
Will reduce AMT
selling home- lower itemized deductions to increase regular tax
Renting- eliminates property taxes so there is no deduction and will increase taxable income
74
AGI loss adjustments (active participation)
Active participation in real estate and active participation in an S corp can be losses and be subtracted out for calculating AGI
75
Entertainment costs
Not deductible
76
Casualty loss deduction calculation
1. Lesser of FMV or basis
2. Less insurance coverage
3. Less floor ($100)
4. Less 10% of AGI
77
General Partnership (GP) loss
Is fully deductible
78
Immediate tax consequence
Paying alimony (pre-2019)
79
Planning options to reduce taxes
- donate to charity- higher itemized deductions
- buy muni bonds- tax free income
- buy and hold stocks rather than high dividend paying stocks- reduces investment income
- buy a variable annuity- gain is deferred until the policy is surrendered or annuitized
80
Annuity monthly payout- taxable
1. (Basis➗payout)✖️ monthly payment= tax free
2. Payout ✖️(1- tax free)
Payout = monthly payment
✖️12✖️annuity payout years
81
Salary and AGI
Salary used for calculating AGI is net amount- after removing 401k or other retirement contributions
82
Section 179
- expenses for the purchase of business personal property are deductible up to the net income from the business
- cannot create a loss
- maximum for 2023 is over $1 million but the deduction is still limited to profits
83
MEC surrender/canceling policy tax consequence
1. (FMV - basis) ✖️tax rate
2. (FMV - basis) ✖️10% penalty (if under 59.5)
3. Add step 1 + step 2
Ex: tax bracket-25%, client is age 40, FMV= $50k, basis= $30k
1. ($50k-$30k) x 25%= 5000
2. ($50k-$30k) x 10%= 2000
3. 5000+2000= $7,000
84
Income charged for group insurance with table rates
1. Salary x amount of coverage employees will receive (ex 3x salary) - $50,000
2. (Step 1➗1,000) x table rate x 12
3. Step 2 - (monthly payment x12)
Ex: salary-$36k, coverage is 3x salary, table rate is 0.17 per $1000 per month, insurance cost $6/month.
1. 36k x 3 = 108k
108k - 50k= 58k
2. 58k➗1,000= 58
58 x .17 x 12 = 118.32
3. 6 x 12= 72
118.32 - 72 = 46.32
85
Avoid underpayment penalty
Pay the lesser of:
1. 90% of the current year’s estimated liability
2. 100% of last year’s liability (110% of proper year’s AGI exceeds $150,000)
86
Expenses included in the above 7.5% of AGI medical/dental/LTC
- un-reimbursed medical claims
- medical insurance premiums
- unpaid claims
87
MEC distribution taxation
Subject to ordinary income tax + 10% penalty if under 59.5
88
1244 stock loss
- qualifies for a write off on a joint tax return of up to $100,000 as an ordinary loss
- any losses in excess of $100,000 would be treated as capital losses limited to $3,000 per year
89
Under $25 million in annual revenue
Use cash accounting method, even with inventory
90
Charitable gifts of inventory
- deduction is based on what the property can be sold for, not the FMV
- similar to a gift of a car to a charity
91
Annuity taxation
- taxed as ordinary income
- if a contract is annuitized, there is no 10% penalty for those under 59.5
92
S Corp taxes
- Salary paid by an S corp is employment income subject to FICA (7.65%) NOT self employment taxes
- Excess earnings passed through from the S corp are treated as K-1 investment income
93
Adjustments for AGI
- IRA contributions
- net business losses
- net capital losses- max $3,000
- alimony paid (pre-2019)
- active participation (AGI under $100k)- up to $25,000 loss
- student loan interest
- keogh/SEP
- self employment tax
94
Itemized deductions
- home mortgage interest/tax
- real estate taxes/property taxes
- charitable contributions
- casualty loss
- medical, dental, qualified LTC expenses greater than 7.5% of AGI
- state and local, sales tax
95
C Corp keys
- business is profitable
- separate tax entity
- dividend received deduction:
a. 50% if corp owns 20% or less
b. 65% if corp owns 20-80%
c. 100% if corp owns 80% or more
- flat rate 21%
96
Personal Service Corporation (PSC) keys
- business is profitable
- flat tax rate at 21%
- HALE
Health (doctors, dentist, etc)
Accounting, architectural, actors
Law
Engineering
97
Sole proprietorship keys
- business has losses
- risk free entity
- pension plan (Keogh)
- 100% medical, dental, LTC insurance deductible for owner
- lack of continuity
98
Partnership (General) keys
- business has losses
- risk free entity
- pension plan (Keogh)
- 100% medical, dental, LTC insurance deductible for owner
- lack of continuity
- losses up to basis:
1. Cash
2. Loans
3. Third party loan
99
S Corp keys
- business has losses
- risky entity (needs limited liability)
- pension plan
- 100% medical, dental, LTC insurance deductible for greater than 2% owner
- special requirements
- losses up to basis
1. Cash
2. Loan
100
Limited Liability Company (LLC) keys
- business has losses
- risky entity (needs limited liability)
- limited liability (like a corporation)
- losses up to basis:
1. Cash
2. Loans
3. Third party loan
101
Limited Partnership (LP) keys
- business has losses
- risky business (needs limited liability)
- limited partners cannot actively participate in business
- losses up to basis
102
Corporation tax forms
Filing- 1120
Employee- W-2
Distributions- 1099 (dividends)
103
Self Employed tax forms
Filing- schedule C
Employee- schedule C
Distributions- N/A
104
Partnership tax forms
Filing- 1065
Employee- W-2
Distributions- K-1
105
S Corporations tax forms
Filing- 1120S
Employee- W-2
Distributions- K-1 (unearned)
106
Self Employment incomes includes
- net schedule C income
- general partnership income (K-1 income)
- board of directors fees
- part time earnings (1099)
107
FICA Taxes
6.2% up to $160,200 and 1.45% of income
108
NOLs are not allowed for
Partnerships or S corps
Starting in 2018, they are no longer allowed
109
Loss on sale of personal residence
Not allowed
110
Real estate activity loss
- May deduct up to $25,000 per year of net losses
- AGI phase out: $100,000-$150,000
111
Charitable deduction- loss property
Limited to the FMV but FMV is treated as basis
EX: AGI is $120,000, stock purchase for $75,000 and now worth $50,000.
- 50% of AGI= $60,000
- FMV of loss property is $50,000 so you can deduct the full $50,000
112
Do S Corps pay taxes?
No
S corps don’t directly pay taxes since they are conduit entities
Must file 1120S as an informational tax return
113
October 15
Deadline for filing an extended tax return
114
Home office expense deductibility
Can deduct up to the net profit
Cannot create a loss
115
Installment sale gain calculation
(Profit ➗ total contract price) ✖️ installment
116
Inventory cost method
LIFO
117
FIFO cost methods
- accrual
- hybrid
- cost recovery deduction (CRD)
118
CRD recapture 1245 gain calculation
1. Purchase price - CRD
2. Sell price - step 1 answer
119
Installment sale- capital gain reported calculation
1. (Sale ➗ current value) ✖️basis= sale basis
2. Profit = sale - sale basis
3. Profit➗ total contract price = gross profit percentage
4. Sale ➗ installment years = installment
5. Installment ✖️gross profit percentage
Ex: selling for $2.5m, current value: $5m, basis: $3m, 10 year installment sale
1. ($2,500,000➗$5,000,000) ✖️$3,000,000 = $1,500,000
2. $2,500,000 - $1,500,000 = $1,000,000
3. $1,000,000 ➗ $2,500,000 = 40%
4. $2,500,000➗10 = $250,000
5. $250,000 ✖️40% = $100,000
