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Tax Flashcards

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1
Q

Related parties are defined as

A

Family members: Spouse, child, grandchild, parent, sibling, or

Related entities: if the taxpayer owns more than 50% of the stock of the corporation or interests for LLC and partnerships

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2
Q

How are gains for related party transactions treated?

A

Normally, as if sold to an unrelated party

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3
Q

How are losses for related party transactions treated

A

Losses on transactions will not be recognized until the related party sells the asset to an unrelated party, depending on the subsequent sale price by the related party, the loss may be allowed, partially allowed, or totally disallowed.

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4
Q

How are the disallowed losses eventually treated upon sale to an unrelated party?

A
  • Above original basis = fully allowed use of loss.
  • In between original basis and fair market value on related party sale date = partially allowed use of loss and no recognized gain.
  • Below fair market value on related party sale date = disallowed use of loss, recognizes losses below fair market value on related party sale date.
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5
Q

How are at risk and passive activity loss rules applied?

A

The at risk rules are always applied before the passive activity rules

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6
Q

What are the at risk rules?

A

The at risk rules states that taxpayer can only deduct losses to the extent that there is enough basis or the amount at risk

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7
Q

What are the passive activity rules?

A

The tax payer can only use passive losses to the extent that they have passive income. Any passive losses in excess of passive income will be suspended due to the passive activity rules.

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8
Q

What are the two types of interest in passive activities?

A

1 Private interest in an LLC partnership or S Corp.
2. Public interest in a publicly traded partnership PTP

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9
Q

How are private interest passive losses treated?

A

They are allowed to be netted against other private interest, passive income

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10
Q

How are PTP losses treated?

A

PTP’s income can only be netted against PTP losses from the same PTP. The only way this can happen is with current year PTP income being netted against a prior suspended loss from the same PTP.

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11
Q

Real estate activities are generally considered to be

A

Passive

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12
Q

How much may taxpayers deduct provided they actively participate in real estate

A

Up to a $25,000 loss

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13
Q

Active participation requires (real estate)

A
  • Ownership of at least 10% of the property
  • Substantial involvement in managing the property
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14
Q

$25,000 loss phase out (real estate)

A
  • The $25,000 loss is allowed if the taxpayers MAGI is equal to or less than $100,000
  • The $25,000 limit is phased out in the MAGI range from 100,000 to 150,000
  • Ranges of 100,000 to 150,000 are the same regardless of your filing status
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15
Q

Calculating active participant real estate loss deduction

A

-The reduced amount from 100K to 150K for every 2K there is a 1K reduction

-Start with upper phase out limit subtract MAGI divide by two and that’s your portion of loss limit

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16
Q

Personal use property

A
  • Allowed to rent for 14 days or less and not required to report income if rental usage is 14 days or less
  • Deductions would include mortgage interest and property taxes as itemized deduction
  • Only applies to the taxpayers primary residence and vacation home
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17
Q

Rental use property

A
  • Personal use cannot exceed the greater of 14 days or 10% of the number of days the property is rented
  • Trips made to the rental property for maintenance and repairs do not count as personal usage.
  • All expenses allocated to the rental property are allowed and the property can produce passive losses, subject to the passive activity rules $25,000 loss limit.
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18
Q

Mixed used property

A

-The taxpayer is not able to meet the minimum personal use requirements.
- Personal usage is the is greater than 14 days or 10% of the number of days the property is rented
- Expenses must be allocated between personal use and rental use
- Deductions are limited to gross rental income may have no income, but not negative income. Any unused losses are carried forward to future years, but remain subject to net income rules.

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19
Q

IRC list the following as acceptable reasons for a reduced 121 exclusion

A

Job relocation
Employment changes, leaving you, unable to pay your living expenses
Qualifying for unemployment benefits
Health issues
Divorce or legal separation
Birth of twins, or other multiples
Damage to home from disaster
Condemnation or seizure of property
Other unforeseen circumstances

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20
Q

Ownership test and usage test section 121

A
  • Ownership test must have owned the property for two out of the last five years usage test must have used the property as a personal residence for two out of the last five years
  • Married: both spouses must meet the usage test. Only one spouse needs to meet the ownership test
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21
Q

Mixed use property

A

-The taxpayer is not able to meet the minimum personal use requirements (+14 days or 10% of days property is rented)
-Expenses must be allocated between personal use and rental use
-Deductions for direct rental expenses are deductible against rental income only
- Shared expenses such as mortgage interest, property taxes, utilities must be prorated based on the time the property is being used for rental vs personal use
-Any unused losses are carried forward, but remain subject to net income rules

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22
Q

Standard deduction (dependents)

A

$1300 or earned income +$450

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23
Q

Failure to file penalty

A

5% of unpaid taxes for each month or part of a month that a tax return is late up to 25% (5 mo)

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24
Q

When is the gift tax adjustment added to the donees basis?

A
  1. When the donor actually paid gift taxes and
  2. When the fair market value is > the donors basis

Appreciation factor = appreciation/ taxable amount of gift or FMV-basis/FMV-AE

(unless prior gifts were made to that recipient in the same tax year then you would not include the annual exclusion)

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25
Q

Gifted loss property

A
  • Gifted loss property if the sale price is above the adjusted basis of the donor = Donee will use donors, original basis and inherit donors holding period
  • Gifted loss property if the final sale is below the fair market value on the date of the gift = donee Will use fair market value on the date of the gift as basis and the holding period will be begin on the date of the gift
  • sale price in between donors basis in fair market value on the date of the gift = no loss or gain, holding period is a non-factor
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26
Q

When is a receipt required for a charitable deduction?

A

Under $250

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27
Q

When is a donor letter required for a charitable deduction?

A

Gifts of 250+

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28
Q

Calculating the mortgage interest deduction on a mortgage over 750,000

A

The mortgage interest deduction is for mortgage interest on up to 750,000 of mortgage debt if total mortgage debt exceeded 750,000:
750k/total mortgage = %
% x IR paid = deduction

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29
Q

Charitable contribution five-year carryover

A

Contributions that exceed the AGI limitation in the current year can be carried forward for five succeeding years
- Subject to original percentage in carryover years
- Deducted after deducting, allowable contributions for the current year
- When from two years exist, the earliest carryover is used

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30
Q

Charitable contribution five-year carryover

A

Contributions that exceed the AGI limitation in the current year can be carried forward for five succeeding years
- Subject to original percentage in carryover years
- Deducted after deducting, allowable contributions for the current year
- When from two years exist, the earliest carryover is used

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31
Q

Rental use property

A

Personal use cannot exceeded the greater of:
- 14 days or 10% of the number of days the property is rented

Trips made to the property for maintenance and repairs. Do not count as personal use.

All expenses allocated to the rental property, and the property can produce passive losses, subject to passive activity rules ($25K loss limit)

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32
Q

Personal use property

A

Allowed to rent for 14 days or less and not required to report income if rental usage is 14 days or less

Deductions would only include mortgage interest in property taxes as itemized deductions

Only applies to Tax primary residence and vacation home

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33
Q

Rental use property deductions

A

Allows for deduction of certain expenses, these expenses, which may include mortgage interest, real estate taxes, casualty, losses, maintenance, utilities, insurance, and depreciation will reduce the amount of rental income that is subject to tax

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34
Q

Real estate professionals

A

Rental losses are different for real estate professionals. Rental losses are not considered passive and all real estate losses can be used to offset other income.

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35
Q

Passive activity rules

A

Once a loss passes the at risk rules, then and only then will the loss be subject to the passive activity rules. Taxpayer can only use passive losses to the extent that they have passive income any passive losses in excess of passive income will be suspended due to the passive activity rules.

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36
Q

At risk rules

A

The at risk rules states that taxpayer can only deduct losses to the extent that there is enough basis or amount at risk. The at risk rules are always applied before the passive activity rules.

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37
Q

Publicly traded partnership

A

PTP income can only meet netted against losses from the same PTP. The only way this can happen is with current year PTP income being debt against a prior suspended loss from the same PTP.

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38
Q

Which entities are the focus of at risk in passive activity loss rules

A

Pass through entities with private interests, such as S corps, limited partnerships, LLCs and general partnerships

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39
Q

How can suspended losses be released?

A
  • Sold in taxable transaction. The full amount of suspended losses may be used to offset gain on the activity as well as other income, such as active and portfolio.
  • Gift: suspended losses are added to the donees basis and therefore not deductible by the donor
  • Sold to a related taxpayer: the losses remains suspended to the seller when the related party sells to an unrelated party. The original seller cannot deduct the losses.
  • Inheritance: suspended losses are deductible on the decedents final tax return only to the extent that they exceeded the step up in basis.
40
Q

Active participant real estate loss deduction

A

Magi limitations of 100 to 150,000

To calculate: upper limit-magi/2

41
Q

Real estate active participation requires

A

The taxpayer ownership of at least 10% of the property and substantial involvement in managing the property

42
Q

Scenarios for related party transaction

A
  • above original basis: fully allowed use of loss
  • In between original basis and fair market value unrelated party sale date: partially allowed use of loss and no recognized gain
  • Below fair market value related party sale date: totally disallowed use of loss and related party recognizes losses below fair market value on related party sale date
43
Q

How do related party transactions work?

A

Any gain on the transaction is treated normally as if sold to an unrelated party and losses on transactions will not be recognized until the related party sells to an unrelated party, depending on the subsequent sale price, the loss may be allowed, partially allowed, or totally disallowed.

44
Q

Unrelated use property, charitable deduction

A

Produces a deduction only for the lesser of cost basis or fair market value

45
Q

Related use property charitable deduction

A

Produces a charitable deduction equal to:
FMV = 30% of AGI
Basis = 50% of AGI

46
Q

Penalty for negligence

A

20% penalty will apply to the amount of the deficiency

47
Q

Penalty for fraud

A

A 75% penalty will apply to the amount of the deficiency

48
Q

Frivolous return

A

Penalty is 5000

49
Q

Failure to file

A

5% of the unpaid taxes for each month or part of a month that a tax return is late up to a max of 25%

50
Q

Failure to pay

A

0.5% per month the taxes unpaid up to a maximum of 25%

51
Q

What happens if both a failure to pay penalty failure to file penalty are applied in the same month?

A

The failure to file penalty is reduced by the amount of the failure to pay penalty for that month, combined for a total penalty of 5% for each month or part of a month that the return was late

52
Q

What is the max number of members for an S Corp?

A

100
Members of a family may be treated as one owner

53
Q

Does a plan contribution rate adjustment apply to employees?

A

No - if the plan contribution rate is 25% then that is what employees will get.

54
Q

Section 179 overview

A

Allows businesses to deduct the full cost of qualifying Capital assets immediately. The deduction limit is up to 1.2 million of the acquisition cost which can be deducted as an ordinary expense in the year of purchase.

55
Q

Depreciation

A

Annual income tax deduction for cost recovery for wear and tear, deterioration, or obsolescence of property

Tangible is buildings, machinery, vehicles, furniture, and equipment

Intangible is patents, copyrights, and software

56
Q

Accelerated depreciation

A

Enables taxpayers to have more depreciation in the early years, and less at the end of the assets useful life, which increases cash flow. Accelerated depreciation follows the MACRS table modified accelerated cost recovery system.

57
Q

Straight line depreciation

A

(Purchase price of an asset - salvage value) / useful life of the asset

Half or mid year convention: only half of the full amount of depreciation can be taken in the year the asset was put into service and another half is taken in the last year. For real estate there is a midmonth convention.

58
Q

When does depreciation start and stop?

A

Depreciation starts when the property is placed in service for use in a trade or business or to produce income. Depreciation stops with the cost has been fully recovered or when it’s retired from service, which ever happens first.

59
Q

Useful life for common depreciable assets

A
  • auto five years
  • computer five years
  • Heavy machinery, seven years
  • Office furniture seven years
  • Residential real estate 27.5 years
  • non-residential real estate 39 years
60
Q

Who files the gift tax return if split gifts are less than the annual exclusion?

A

The donor spouse; the other spouse shows consent on form 709

61
Q

Trust tax filing requirements

A

The fiduciary must file form 1041 for a taxable domestic trust that has:
> any taxable income for the year
> gross income of 600+ regardless of taxable income
> a beneficiary who is a non-resident alien

62
Q

Student loan interest deduction applies to:

A

Unsubsidized federal Stafford loans
Subsidize federal Stafford loans
Federal Perkins loan
Federal grad plus loan
Federal parent plus loan
Federal consolidation loan
State education loans
Private student loans

63
Q

What is the maximum for the student loan interest deduction?

A

2500 and subject to phaseouts

64
Q

When must the accrual method be used?

A

Corporations must use the accrual method if the average annual gross receipts for the three taxable year ending with the prior taxable year exceeds 30 million (2024)

And when inventory is necessary to account for income, then accrual method must be used for purchases and sales .

65
Q

What requirements must property meet to be depreciable?

A
  • it must be property owned by the taxpayer
  • it must be used in business or income producing activity
  • It must have a determinable useful life
  • it must be expected to last more than one year
66
Q

Wait and see agreement

A

Method to transfer business interest that offers flexibility to both partners and the business

Passes BOB
Business has first option to purchase the deceased partner stock
Then the surviving partners have the option if business waves or purchases less than half
Then the business is required to purchase the deceased partners stock

67
Q

Tangible personal property for section 179

A
  • equipment purchase for business use
  • tangible personal property used in business
  • computers and off the shelf software
  • office furniture and equipment
  • certain business vehicles
68
Q

Non-qualifying property for section 179

A
  • Real property: land, buildings, land improvements
  • Air conditioning and heating
  • Property used outside the US
  • Property used to furnish lodging
  • Property acquired by gift or inheritance
  • Property purchase from related parties
69
Q

Section 179 phase out limit

A

The 1.22 million max deduction is reduced dollar per dollar if spending exceeds 3.05 million

70
Q

Limitations on section 179 deduction

A

Limited to the firms net profit, excluding the 179 expense

Any excess 179 expense can be carried over to the next year‘s taxes

The remaining amount is also allowed to be depreciated using the appropriate depreciation methods useful life. The aggregation of the 179 expense and the depreciation on the residual amount will cause profits to be negative as you will be expensing the 179 expense up to net profits in addition to taking the first year of depreciation.

71
Q

Section 179 - sole proprietorship

A

Sole proprietor can aggregate that business profit with unrelated W-2 wages for the purpose of calculating 179 expense deduction

72
Q

LLC members and self-employment tax

A

Members of an LLC are subject to the SE Tax if the LLC is taxed as a partnership and the members are actively involved in the business

If the LLC elects to be taxed as a corporation members may not be subject to SE tax on distributions, but they would still owe payroll taxes on wages received as employees

This does not apply to passive members who are only investors

73
Q

When is a receipt required for a charitable contribution?

A

For any charitable contribution under $250

74
Q

When is a donor letter required for a charitable contribution?

A

For any charitable contribution of $250 or more

75
Q

When is form 8283 required for a charitable contribution?

A

For any charitable contribution of $500 or more

76
Q

When is a qualified appraisal required for a charitable contribution?

A

For any property contributed above $500

77
Q

What is deductible when services are contributed to a charity?

A
  • out-of-pocket transportation expenses ($.14 a mile)
  • the cost cost of lodging
  • the cost of meals away from home
78
Q

Donors must have a written acknowledgment from each charity for any single contribution of ____ or more before the donors can claim each charitable contribution on their tax return

A

$250

79
Q

The IRS looks closely at three situations to determine if interest must be imputed:

A
  • loans provided out of love, affection or generosity
  • Corporate shareholder loans from a corporation to its shareholder
  • Compensation related loans from employer to employee
80
Q

Five exceptions when imputed income does not apply:

A
  1. Loans between individuals totaling 10k or less, except when the borrowed funds are used to purchase income producing property.
  2. Corporate loans and compensation related loans totaling $10k or less.
  3. Debt subject to original issue discount provisions.
  4. Sales of property for 3K or less.
  5. When all payments are due within six months.
81
Q

When loans exceed ___, the imputed interest is charged based on the AFR

A

$100,000

82
Q

When loans are greater than ____ and up to including ____ the imputed interest is the lesser of:

A

$10,000; $100,000

  1. The AFR or
  2. The borrowers net investment income
83
Q

With loans are greater than ____ and up to including ____ the imputed interest is the lesser of:

A

$10,000; $100,000

  1. The AFR or
  2. The borrowers net investment income
84
Q

If the borrowers net investment income is ___ or less, imputed income will not apply

A

$1000

85
Q

If a tax payer is subject to AMT in the current year:

A
  • Accelerate income into the AMT year
  • Deferred tax deductions until a regular tax year
86
Q

3.8% Medicare surtax applies to the lesser of

A

NII or the excess of modified AGI over the thresholds (on Tax tables)

87
Q

Two prong test for constructive receipt: income

A
  1. The right to receive income is established and not contingent upon a future event.
  2. The amount can be estimated with reasonable accuracy.
88
Q

Exceptions to taxable cancellation of debt income

A
  • bankruptcy
  • insolvency
  • Mortgage debt
  • student loan public service loan forgiveness
89
Q

Section 1245 property: unrecaptured depreciation

A

Taxed at ordinary income tax rates

90
Q

Unrecaptured depreciation

A

Total amount of depreciation deductions taken

Special tax rate of 25% for 1250 (realty)

Recovery of past depreciation deductions upon sale

91
Q

Exceptions to early WD penalties: qualified plans

A
  • med expenses exceeding 7.5% of AGI
  • age 59.5
  • death
  • disability
  • 72T
  • age 55 + separation from service
92
Q

Exceptions to early WD penalties: IRA

A
  • med expenses exceeding 7.5% of AGI
  • education expenses
  • age 59.5
  • death
  • disability
  • health insurance premiums while unemployed
  • 72T
  • FT home purchase $10k
93
Q

Form 8938

A

Used to report specified foreign financial assets, if the total value of those assets exceeds certain thresholds

94
Q

Form 8938 threshold requirements

A

If you are married and you and your spouse file, a joint income tax return, you satisfied the reporting threshold only if the total value of your specified foreign financial assets is more than than 100,000 on the last day of the tax year or more than 150,000 at any time during the tax year for US residents

If you are unmarried or file separate returns, the reporting threshold is more than 50,000 on the last day of the tax year or more than 75,000 at any time during the tax year for US residents

95
Q

FBAR

A

Report of foreign bank and financial accounts. US persons are required to file an FBAR if:
- the US person had a financial interest or signature authority over at least one financial account located outside of the US
- the aggregate value of all foreign financial accounts exceeded 10,000 anytime during the year
- must file FINCEN form 114 by tax deadline

96
Q

FATCA

A

Foreign account tax compliance act

Requires certain individual US taxpayers holding financial assets outside the US that meet certain threshold reporting obligations to report those assets to the IRS on form 8938

Examples of financial accounts include savings, deposit, checking, and brokerage accounts

97
Q

HSA non qualified withdrawal penalty

A

20%

Distributions after 65 are not subject to penalty (but are subject to regular income tax)

CFP (10 decks)

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