Tax Flashcards
Accrual method
Revenue recognition is two parts. -The right to receive income and not contingent upon a future event. And
-the amount can be ESTIMATED with reasonable accuracy
Expenses have three-prong tests
1. Determine that the liability exists. Contingent expenses are not allowed
2. The amount can be estimated with reasonable accuracy
3. Economic performance must have occurred. Work was done
AMT & ISOs
*most likely AMT test?
Positive adjustment @ exercise
(FMV @ Ex - strike price)*shares
Negative adj @ sale
(FMV @ ex - FMV @sale)*shares
btw regular capital gain is FMV @ sale - strike price (assuming a qual disposition)
AMT Formula
*Memorize
Regular taxable income
+tax PREFERENCE items
+ std ded if don’t itemize
+/-AMT adj
= AMTI
-Exemption
=AMT base
*AMT tax rate
=Gross AMT tax
- AMT foreign tax credit
=Tentative Minimum Tax (TMT)
-Regular tax liability
=AMT
If TMT > Reg tax, diff is AMT
AMT items
IPOD
Iso bargain purchase at exercise
Private activity bonds
Oil and gas depletion
Depreciation ACRS and MACRS
AMT Planning
*Memorize
If a TP is subject to AMT in current year
*Accelerate income into the AMT year
*Defer tax deductions until a regular tax year
Optimal - do above until AMT liab = reg tax
At risk passive activity rules
If they ask him on at risk it seems like they want the amount after applying the loss
First apply the at-risk rules
If you meet that hurdle then look at the passive loss rules
Losses can never exceed income
Ptp vs private
Private interest losses can be netted against other private interest activities
PTP losses can only be used to offset income from the same PTP ie PY
See card
Avd exceptions
Depreciable property
Copyright
Patents
Intellectual property
Don’t include antique/collectible cars because they are not depreciable
Boot
Boot can be cash debt assumption inventory and personality
For example buyer is assuming your mortgage buyer is giving you some equipment and inventory or you are assuming their mortgage or giving inventory or equipment
Cap gains tax example
Taxable income sets the floor
Capital gains are stacked on top of taxable income
See attached
Capital gain netting rules
- Separate short and long term
- Net each basket. And use a separate basket for section 1250 and collectibles
- Net the capital gains and losses
Whichever one was larger determines whether you have net short or long
Casualty loss itemized deduction
Federally declared disaster area only
Lesser fmv or basis
And reduce loss by
insurance PMT
$100
If you still have a loss (if number is positive
Only amt greater than 10% AGI is deductible
CG/CL offsetting
Track the buckets
St v lt
Then within lt
0/15/20
25 untecap dep
28 collectibles
Offset ST G&L
Offset LT G&L
Use up losses in this order:
28%
25%
0/15/20 LTCG
And on exam don’t forget to limit loss to 3k against ordinary income
Charitable deduction AGI limits
Basis 5 letters; FMV 3 letters
Watch ST v LT in a ?
FIVE year carryover
Cash 60/30
Ordinary 50/30
STCG, inv, tp created art
LTCG Basis 50/30
LTCG FMV 30/20
So private foundation always 30 exc 20 with LTCG FMV
Charitable documentation requirements
<250 receipt ok
>=250 need written ack
>500 fill out 8283
>5k may need appraisal
>500k does need appraisal
Charity: use related vs use unrelated
Basis = 5 letters
FMV = 3 letters
Use related.
Select FMV or Basis
FMV 30% AGI, Basis 50% AGI
Use unrelated
Lesser of FMV or basis
FMV 30% AGI, Basis 50% AGI
Child & Dependent Care credit
Max expenses 3k/6k
Max credit 35%; min 20%
AGI 15k/45k
Drops from 35% by 1% for every 2k above 15k AGI = down to 20% by 45k AGI
Credits
Refundable and non-refundable
Refundable
EIC, OTC, ACTC, AOC
Remember CTC is technically not refundable. Remember AOC is refundable while LLC is not
Deductions for AGI
What schedule and page
List them
Schedule one page 2
Early withdrawal penalties
Business expenses for government officials on fee basis, performing artists, and reservist over 100 miles from home
Sl interest
Educator
Moving for active duty
Pre-19 alimony
1/2 SE tax
SEHI incl dental <ci
SEP
IRA
HSA
Depreciation property classes
S1245
5 year property. autos, light duty trucks, computers
7 year property. Office equipment except computers, furnishings, machinery and equipment
S1250
27.5 residential rental
39. Commercial rental
Depreciation straight line
First and last year generally use half year convention
Remember to deduct salvage value before computing depreciation
Slow and steady descent
Vs MACRS is an accelerated descent. More depreciation and early years less in later
Education credits
Neither can be taken when MFS
Entity types suitability
If need ltd liability usually pick scorp
Entity types
Deductibility of losses
Entity types
Liability, owners and classes
Estimated tax payments safe harbor
The lesser of
90% of the current years tax
100% prior year or 110% if income over 150k
Exclusions
FATCA Form 8938
threshholds US res vs non res
$@ last day/$ any time
US residents
JT 100/150
Sing/MFS 50/75
NonRes
Jt 400/600
Sing 200/300
FBAR req
Over 10k at ANY time during the year
File FinCEN
Good ? On Cg vs orf
Remember that section 1231 assets are not capital. And losses are treated as ordinary. So do not use those when you net this list of things
Musical composition created by himself and sold it again is ordinary.
Gst 3 types
Taxable distributions. Any distribution of income or corpus from a trust to a skip person that is NOT otherwise subject to estate or gift tax
Taxable termination. Determination by death the lapse of time release of power or otherwise of an interest in property held in a trust resulting in skip persons holding all the interest in the trust
Direct skips. A transfer subject to an estate or gift tax made to a skip person
Gst skip person
2 gen or 37.5 younger
Related is determined by family tree including in laws)
Unrelated to someone between 37 and a half and 62 and a half years younger
And remember a spouse of your son even though more than 37 and a half years younger still qualifies as only one generation down and is not a skip person
A niece or nephew is only one generation away
How can suspended losses be released?
Sold in a taxable transaction
Gift. Added to donee’s basis
Divorce. Suspended losses added to the recipients basis
Sold to related party when they sell to an unrelated party
Inheritance? Deducted on final descendents return only to extent losses exceed the step up in basis
How long do you need to hold ISOs
Two years from grant date
plus one year from the date of exercise
Otherwise they become NSOs
How old does one have to be to buy US savings bonds
24
Hybrid accounting method
Goods and services
Tp wants to use cash but has some inventory.
Use accrual or inventory purchases and sales of the inventory and
Use CASH method for the service portion
Imputed Interest
Loans <10k = not imputed
Loans b/w 10k and 100k
-if NII<$1,000 = not imputed
-Otherwise lesser of NII or AFR
Loans > 100k = AFR
Also not imputed:
-Sales of property <3k
-Pmts due w/i 6 mos
-Debt subj to OID
Inventory methods
Fifo is realistic
Lifo of understates inventory during rising prices and overstates inventory during falling prices
But when it is possible specific identification is actually the most accurate
IRA phaseout calc
And student loan
(High end-AGI)/spread * Max contribution= maximum deduction
Use the max contribution even if they did not make the max! Then compare the max deduction to their contribution
Itemized deductions
Investment interest expense limited to investment income
Mortgage interest limited to less than or equal to 750k debt
Casualty fed declared disaster only see separate card
Cash charity limited to 60% of AGI
Medical over 7 and 1/2% AGI
Salt
Kiddie Tax - mix of earned and unearned
Kid: Unearned + earned
less: std deduction which is
greater of: 1300 or (earned+450)
less: amount taxed at parents rate
= amount taxed at kids rate
Parent. Unearned minus 2,600 = amount taxed at parents rate.
Kiddie tax - when unearned income only
When ONLY unearned income
Kids unearned income >2600 taxed at parents marginal rate = “kiddie”Tax
First 1300 is zero tax
Next 1,300 taxed at kids rate - add this if they ask for total tax
Assume kids rate is 10%
Methods to determine cost basis
Fifo.. default IRS
Avg cost. Mutual funds companies prefer to use
Specific id..best from tax planning perspective
Not capital assets
ACID
A/r, n/r
Copyrights etc created by taxpayer
Inventory
Depreciable assets used in t or b ie s1231
WHEN must accrual method be used according to Bif
C corp vs other
Businesses including escorts must use accrual when inventory is necessary to account for income
C Corporations. must use accrual if avg annual GR 3 prior taxable years exceeds 30 million even if they don’t maintain inventory
Partnerships general partners versus limited partners
General. full control and management but unlimited liability
Limited. have minimum control /management but limited liability
Personal residence sale exclusion section 121
Know the section number
Highly tested topic
Know when 1 or both have to meet
Know exceptions to meeting the tests
Usage 2 of last 5
Ownership 2 of last 5
Both spouses must meet usage two of the last five
Only one spouse has to meet ownership
If don’t meet may qualify for REDUCED exclusion
Job relocation
Employment change leaves you unable to pay living expenses
Qualifying for unemployment benefits
Divorce or legal separation
Birth of multiples
Health issues
Disaster damage
Condemnation
Other unforeseen
PHASEOUTs
Student loan multiply the percentage by 2500 to get the max. Then compare the actual to this and take the lesser
For IRAs take the percentage times to Max
Preparer penalties
$600 failure diligence
Hh
Eic
CTC, actc
AOC, LLC
Failure to $60
Furnish return
Sign
Provide id#
Etc
Provisional income
50% of ss
Plus other income
Plus tax exempt
25/34
32/44
Qualifying widower
What status do they claim in what years
Year of death mfj or MFS
Next two years qualifying widower
if at least one child living with you who you can claim as a dependent and paid over half the cost
Related party transactions
Gains vs losses
Gain is normal treatment
No loss allowed initially between related parties
But when the seller sells to an unrelated party at a gain they can take the seller’s initial disallowed loss up to the amount of the gain on sale to unrelated
A initial seller, related
B initial buyer, related
C unrelated buyer
when B sells to C, the loss A incurred selling to B offsets the gain, if any
So always calculate the initial loss
Rental property use tests
Rental real estate
active participants
Hot topic
Know how to calculate the phase out
Generally passive but
If you’re an active participant, >=10% ownership
Can deduct up to 25k
if Magi without the rental loss is 100 to 150 k
All is less than 100k
Phase out for 100 to 150
Nothing if over 150 unless real estate professional who are never limited
Phase out
150k
-magi
=Subtotal
/2
=Allowed portion
S 179. Using more than profit when W-2 wages
You can use more section 179 if you or your spouse has W2 wages even from a completely separate job. However then remember you are giving up the opportunity to have lower SE tax in future years
S1031 definitions/calculations
fair market value property received plus or minus the net boot
=Amount realized
minus the basis of the property transferred
=Realized gain
Recognized gain is the lesser of the realized gain or the net boot received
Deferred gain is the realized gain minus the recognized gain
Substituted basis is the fair market value of the qualifying property received minus the deferred gain
S1031 exchanges
Realty for realty only
45 days from the date of transfer to ID replacement
Exchange must be completed no later than 180 days after the transfer of the property
Or the due date of the tax return whichever is earlier
S1231 umbrella for 1245 and 1250
Property that is both used in a trade or business and
held for the production of income
Best of both worlds tax treatment
Gains are capital
Losses are ordinary
1245 is personalty and
1250 is realty
They both fall under section 1231
Regarding dispositions
Gains to the extent of depreciation taken
1245 are taxed as ordinary
1250 taxed at 25%s1250 dep recapture
S1231 best of both worlds
Losses are taxed as ordinary
Gains are taxed as capital
But watch out on depreciation has been taken
For 1245 property you have to pay ordinary income tax on the amount of the depreciation taken
For 1250 it’s 25%
S1245 dispositions
See photo
Any gain to the extent of depreciation taken is taxed at ordinary rates
Sold for more than original cost. Entire amount of depreciation taken taxed at ordinary rate
plus amount over original cost is capital gain
Sold between adjusted basis and original cost.
Amount above adjusted basis taxed as ordinary income bc of depreciation taken
Sold below adjusted basis
ordinary loss
S1250 dep recapture
Remember 1250 is the realty, not equipment
S1250 dep recapture is at 25%
Vs yes 1245 taxes depreciation taken at ordinary rates but it’s not technically called depreciation recapture
S179 optimize
Deduct all then carryover any amount over business profit.
Bus profit can’t be less than zero
OR
Deduct only up to the business profit of zero and then you can deduct the macrs on remaining
See attached example
125k cost of asset
85k business profit before dep
S267 related parties
For rules on basus and holding period when bought from related party
Spouse, child, grandchild, parent, sibling, entity greater than 50%
Scorp
-Max 100 shareholders family members can be aggregated to count as one
-One class of stock but can have voting in non voting
(CCORP, partnerships and LLCs can have multiple classes)
-opportunity to avoid payroll tax when set up properly. Tax-free distributions of retained earnings
-use if you want liability protection and company funded benefits
SE tax
Remember to take the SE earnings times .9235
“Se taxable”
BEFORE multiplying by .153
Figure to compare to the max is this “Se taxable” after you’ve multiplied by 9235!!!
Remember that after the max 2.9% Medicare still applies
Section 179 and
Using both section 179 and macrs
Section 179 used in a given year is limited to the net profit. Well sometimes. See later card…
Two options if it’s more than the profit
1. Take 179 up to the profit and then you can take macrs depreciation the excess for yr 1. This will create a loss
Be sure to take the total cost of the equipment minus the amount you won 79 to compute the makers
2. Take section 179 on it all and carry the amount above the profit over. Your profit here will be zero.
If 179 elected it can be carried over
Selling 1231 at gain when dep taken
If selling above original cost part of your gain will be capital and part will be s1245 or 1250
If selling between original cost and adjusted basis all of your gain will be 1245 or 1250
If selling below adjusted basis you just have an ordinary loss
Tax deductibility of losses
Scorp shareholders deduct losses only to the extent of their tax basis in the stock. Basis does not include any portion of the corpse debt
Partnership and LLC. May deduct only to the extent of their tax basis in the partnership interest which includes their eligible share of debt for which they are liable
Tax entity suitability
CORP when owners need company funded benefits and liability protection
PARTNERSHIP. When taxes or product liability are not a concern. Generally owners don’t have liability protection although limited partners have protection from partnership debts
LLC. Need limited liability but partnership tax treatment example real estate investment owner
Sole prop when taxes or product liability are not a concern. Mom and pop shops
Tax entity. Complexity of dissolution. List in order
CCORP most complex
SCORP very complex
LLC complex
Partnership easy
Sole prop easiest
Tax formula
Taxable income
*Tax rate
Gross tax due
Less credits
Final tax due
Less w/h, estimates
Net tax payable or refund due
Tax penalties. Taxpayer
Failure to PAY .5%/month max 25%
Failure to FILE 5%/mo max 25%
When they are in the same month the two above are limited to FTF
Negligence 20% of the underpayment attributed to negligence
Civil fraud 75% of the underpayment attributed to civil fraud
Frivolous $5000 “go pound sand”
Useful lives
5 yrs. Autos, computers
7 yrs. Heavy machines and office furniture, fixtures and equipment
27.5 Residential
39 Commercial
What do you do with qualified dividends for Kiddie tax
No special treatment
Adding with the other investment income
Ps. You can exclude muni bond interest
When must the accrual method be used
Per bif
Whenever avg gross receipts for the 3 prior years are 30 million
Or
When a business has inventory
Kiddie tax checklist and steps
-Is there unearned income
-Did a minor ,19 or FT <24 receive it
-Did amount exceed 2600
If yes, RTFQ to see what’s asked then breakdown
1. Child’s taxable income
2. Amount taxed at parents rate (unearned less 2600)
3. Amount taxed at child’s rate
Child’s taxable step 1 less amount @ parents in step 2
4. Total tax due. Child’s plus parents
Ee bonds interest to exclude
A q e e / Total distribution times the interest
So if the aqee was 7000 in the distribution was 10,000
Then seven deep percent of the interest is excludable.
Watch exclude versus include
Ltcg
Obviously what short-term versus long-term
Within that long-term be careful because they will sometimes have it straddle capital gain brackets
Draw chart with ordinary income first then stack the capital gains on top of that when looking at the tax tables for capital gain rates
Niit
Be careful on the tables don’t accidentally use MFS for single. Single is $200 in the all other category
Tax exempt muni interest is not NIIT
NQ annuity income is investment income
Depreciation
Straight line is mid-year for the first and last year
Or if you straight line for rental it’s mid-month
Excise tax on excess contributions
6%
