Tax Flashcards
What is the primary source for all tax law?
Internal Revenue Code
What are treasury regulations?
A source of tax law
Revenue rulings and revenue procedures
Administrative interpretation/may be cited as precedent
Congressional Committee reports
Indicate the intent of Congress/may not be cited as precedent
Private letter rulings
Apply to a specific taxpayer and situation (ex. Crummey)
Judicial sources
Court decisions interpret law and/or facts
Estimated taxes due dates
April 15, June 15, September 15, January 15
1, +2, +3, +4
Frivolous return penalty
$5000
Negligence penalty
20% of the portion of the tax underpayment attributable to negligence (not the interest!)
Civil fraud penalty
75% of the portion of the tax underpayment attributable to fraud
Failure to file penalty
5% of the tax due per month with a maximum of 25%
Failure to pay penalty
0.5% per month each month the tax is unpaid with a maximum of 25%
Estimated tax due
No penalty if taxpayer pays 90% of the current year’s tax liability or 100% of prior year’s tax liability (or 110% of previous year’s AGI exceeded $150,000)
How much self-employment tax is deductible for AGI?
1/2 of self-employment tax (.07065)
How much health insurance premiums are deductible for AGI?
All premiums for self-employment only
How to calculate deductible loss
Federally declared disasters only!
1st: Use lesser of basis or FMV
2nd: Subtract any insurance coverage
3rd: Subtract $100 (floor)
4th: Subtract 10% of AGI
Deductible meal expenses
Deductible to a 50% limit if they are ordinary and necessary to a business
What does self-employment income include?
- Net schedule C income
- General partnership income (K-1 income)
- Board of directors’ fees
- Part-time earnings (1099)
Do wages and distributions from an S-corp count as self-employment?
No
Does real estate income count as self-employment income?
No
Does limited partner income and loss count as self-employment income?
No
Calculation for self-employment tax
Multiply NET self-employment income by .1413
Does general partnership income (K-1 income) count as self-employment income?
Yes
Credit for child and dependent care expenses
- Until age 13
- Not refundable
- Limited to $3000 for one dependent or $6000 for 2+ dependents
- 20% credit percentage
Child tax credit
- Partially refundable
- $2k for each child under age 17
- Phased out at $400k MAGI MFJ and $200k single
- Up to $1600 per child is a refundable tax credit
What business entity can receive a dividend-received deduction?
C-Corps are eligible for 50% dividend-received deduction
How are personal service corporations taxed?
Flat 21% tax rate (C-Corp)
S Corp basis
1) cash plus
2) direct loans made by the shareholder to the corporation
No bank loans factor into basis
Deductibility of interest paid for business purposes for a sole proprietorship
Deductible without limit on Schedule C
General partnership basis
1) cash contributed by the partner
2) direct loans made to the partnership by the partner
3) loans made to the partnership
5-year 1245 property
Computers, autos, and light duty trucks
7-year 1245 property
Office equipment except computers
27.5-year 1250 property
Residential rental property
39-year 1250 property
Nonresidential real property
179 deduction
Election to expense up to $1,160,000 of qualifying property int he year of acquisition. Generally 1245 property. It cannot create a loss
AMT preference items
IPOD
- Excess Intangible drilling costs
- Private-activity municipal bond
- Oil and gas percentage depletion - NOT cost depletion
- Depreciation (ACRS/MACRS) - but not straight-line
AMT add back items
- Incentive stock option bargain element
- Property, state and local taxes
Excludible rental income for principal residence
If rented for under 14 days a year, income is excludible from gross income, but not deductions attributable to the rental use are allowed
Low-income housing program deductions
May generate deduction-equivalent tax credit up to $25k, no income phaseout
Credit is allowed annually over a 10-year “credit period”
Maximum charitable deduction
60% of AGI
How is appreciated LTCG property deducted for charitable contribution?
30% of AGI when using FMV
50% of AGI when using basis
How is ordinary income property deducted for charitable contribution?
50% of AGI
Limited to basis
What is included as ordinary income property as it relates to charitable donations?
Inventory
Works of art created by taxpayer
Use-unrelated property
Short-term capital gains property
A copyright
Net loss deduction for active participants in real estate activity
Net losses from real estate activity can be deducted (up to $25k)
Phased out for taxpayers with AGI between $100k and $150k on a $2 for $1 basis
Step transaction
Ignore the individual transactions and instead tax the ultimate transaction
Sham transaction
This transaction lacks a business purpose, and economic substance will be ignored for tax purposes
Substance over form
The substance of a transaction and not merely its form governs its tax consequences
Assignment of income
Income is taxed to the “tree that grows the fruit” although it may be assigned to another prior to receipt
Hobby loss
Any activity generating net income in 3 out of 5 consecutive years is a business (not a hobby)
For horses, it’s 2 out of the last 7 years
What is a frivolous return?
One that omits information necessary to determine the taxpayer’s liability, shows a substantially incorrect tax, or is based on the taxpayer’s desire to impede the collection of tax
Are scholarships considered taxable income?
No if they are used for tuition, but scholarship used towards room and board are taxable income
What are the taxable fringe benefits?
- Health insurance premiums paid for self-employed, partners, and more than 2% owners of S corps are taxable income. However, 100% is deductible on form 1040 to the extent that costs do not exceed net income from the business (for self-employment). Can include all types of health (medical, dental, LTC), but NOT disability.
- Insurance premiums your employer pays on a group life policy in excess of $50k of death benefit if the plan is nondiscriminatory are taxable
Adjustments from gross income to get to AGI (above the line deductions on Schedule 1)
- IRA contributions
- Student loan interest
- Keogh or SEP
- Self-employment tax (.07065= half of .1413)
- Alimony paid before 2019
- 100% self-employment health insurance
- Moving expenses (active military only)
- Penalty for early withdrawal of savings
- HSA
- $4000 education expense (AGI limits apply and used as an alternative to AOC)
S Corp stock keys
Only one class of stock, no preferred
No more than 100 shareholders
Corporate accumulated earnings tax
Penalty tax of 20% of “accumulated taxable income” in additional to regular corporate tax
A regular corp can accumulate $250k ($150k for PSC) without needing to pay
Tax is meant to coerce corporations to pay dividends
Tax forms used by C corporations (filing, employee, and distributions)
Filing: 1120
Employee: W-2
Distributions: 1099 (dividends)
Tax forms used by self-employed (filing, employee, and distributions)
Filing: Schedule C
Employee: Schedule C
Distributions: N/A
Tax forms used by partnership (filing, employee, and distributions)
Filing: 1065
Employee: W-2
Distributions: K-1
Tax forms used by S Corps (filing, employee, and distributions)
Filing: 1120S
Employee: W-2
Distributions: K-1 (unearned)
What type of tax returns do trusts file?
Form 1041, AKA the Fiduciary Income Tax Return
What type of income tax returns do estates file?
Form 1041, AKA the Fiduciary Income Tax Return
What type of depletion triggers AMT?
Percentage depletion, not cost depletion
Alimony recapture rules
Excess front-loading of alimony
Add first two years alimony then deduct constant ($37,500) to get recapture amount – for alimony paid in first two years but none in the third
When to use cash method of accounting
Most business having no more than $29MM in average revenues
Realize revenue from services performed in the year the payment is received (constructive receipt), regardless of when the services were performed
Section 121
Exclusion of $500k of realized gain (MFJ) or $250k (single)
Taxpayer must have used the home as a principal residence for 2 years out of the last 5 years immediately preceding the home’s date of sale
Below the line deductions (Schedule A)
- Standard deduction
- Medical, dental, and LTC (above 7.5%)
- Casualty losses (federal disaster)
- Real estate taxes (up to $10k)
- SALT (up to $10k combined w/ real estate)
- Home mortgage interest
- Charitable gifts
- Investment interest expense
Can publicly traded MLP income be netted?
No! Losses must remain in partnership
Can nonpublicly traded MLP income be netted
Yes! Can be netted with other nonpublicly traded MLP income
Realized gain calculation
Total value receieved (FMV of property + boot) - adjusted basis of property
Recognized gain calculation
Boot received, or zero
Substitute basis calculation
FMV of property acquired - (realized gain - recognized gain)
3 methods of mutual fund sells
- FIFO
- Specific identification
- Average cost
What form is partnership income or loss reported on?
Form K-1
Are bank loans included in partnership basis?
Yes
Are bank loans included in S corp basis?
No
Are bank loans included in LLC basis?
Yes, same as partnerships
What tax filing form do partnerships file?
1065, but for informational purposes only
NOLs
An NOL sustained in one year may be used to reduce the taxable income for a future year.
Tax Cuts and Jobs Act (TCJA) limits the amount of net operating losses (NOLs) that can be utilized in a given tax year while allowing for an indefinite carryforward.
Carrybacks of NOLs are no longer permitted for losses after 2017.
Who can file as qualifying widower?
If spouse dies and home is maintained for dependent child, surviving spouse can file as qualifying widower and pay MFJ tax rates for two years (plus current year) but only if remains unmarried and maintains home for child.
If no child, can file jointly in year of death but then as single the following year
Ordinary dividends are on which tax form?
Schedule B
Business income/losses are on which tax form?
Schedule C
Child (unearned) standard deduction
$1250
Home office deduction for employees
Repealed
How much are meals deductible by a business for employees?
50%
How much of meals are deductible for entertaining clients?
100% as long as they are not lavish or extravagent
Is entertainment deductible for a business?
No, not for clients or employees
How do improvements affect basis in property?
Increases basis by amount of improvements (capitalized)
Do repairs to a property increase its cost basis?
No, they are deducted as expenses
How do legal fees, commissions, and sales tax affect cost basis of property?
Increases cost basis
How does cost-recovery deduction affect basis of property?
Decreases basis
Self-employment tax calculation
Multiply self-employment income by .1413 and round up
Losses for LLCs
Up to basis (like a partnership)
How is hobby income reported on taxes?
Misc. Income, not a Schedule C
What can investment interest be deducted against?
STCG and portfolio income, cannot deduct against LTCG and qualified dividends
NOLs were allowed in which types of entities prior to 2018?
Estates, Self-employed, and Corporations
S Corps and partnerships are not allowed
How to calculate charitable bargain sale deduction
(Sale price / FMV) x basis
Is self-employment tax paid on income from an S-Corp?
Nope!
Is self-employment tax paid on income from a general partnership?
Yes!
Is self-employment tax paid on income from a rents receieved?
No!
Self-employment income will not exeed what amount?
$160,200
