Tax Flashcards
What are the eligibility requirements for a
Subchapter S Corporation?
- Number of shareholders is limited to 100
- The Corporation can only have a single class of outstanding Common Stock (no preferred), but the Common can be voting or non-voting.
- Must be a Domestic Corporation Only individuals, estates and certain Trusts may be shareholders.
NOTE: Non-resident aliens (persons who are neither citizens nor permanent residents of the US) cannot be shareholders.
Tax Basis for Partnership / LLC
- Cash invested
- Direct loans made to the partnership
- Partnership Debt: Loans made to the partnership - not the partner (bank loans)
NOTE: S-Corp basis does NOT include bank loans even if the S-Corp owner personally guarantees the debt.
Property Classes
1245 Property (non real estate)
* 5 year: Computers, Autos, Trucks
* 7 year:Office Equipment except computers,
1250 Property (real estate)
* 27.5 year: Residential rental property
* 39 year: Non-residential real property
Remember: CATCORN
Boot / Gain Recognized / Basis
- No Boot Received: Recognized Gain is zero
-
When Boot is Received, just answer the recognized gain is the boot received
- Boot paid is added to Basis
- Basis carries over from the prior property
Sale of a Personal Residence (Section 121)
$250K (single) and $500k (MFJ) of Gain from the sale is tax-free if lived in for 2 out of the last 5 years.
* Exception available if taxpayer lives in the residence less than two years and moves because of a new job, for health reasons, etc. Receives a pro-rated amount.
* 50 mile move req.
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:
* 1st: Look back and recapture the lesser of the CRDs taken or the Gain realized, as 1245 Gain (ordinary income)
* 2nd: Recover any excess gain as 1231 (capital gain)… 1245 Gain - CRD = 1231 gain
Adj basis = OG cost - CRD (aka dep.)
Gain = sale price - adj. basis
Non-publicly traded partnerships
vs.
Publicly traded partnership rules
Non-publicly Traded
* AKA Relps: Real Estate Limited Partnerships
* Can net gains and losses…Pigs have pals
* Income on Sched E
Publicly Traded
* AKA MLP: Master Limited Partnerships
* Can only net losses within same partnership
* Income on Sched B
Section 179
Qualifying vs. Non-Qualifying Property
Qualifying:
* Tangible Personal Property
* 1245 Property
Non-Qualifying:
* Real Estate:
* 1250 Property
* Intangible (owning a franchise)
Can’t create a loss, limited to biz income
197 is intangible higher number for intangible
AMT Preference Items
Remember: I.P.O.D.
* 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
AMT Not-Deductible Items
Add Back:
* Incentive Stock Option Bargain Element
* Property and Income Taxes
Postponing 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 the AMT payable (more taxable income)
- Deferring exercise of incentive stock options (add back item to a later date or disqualifying the ISO so that it becomes NQSO (subject to ordinary income tax).
- Purchase public purpose muni bonds instead of private activity bonds.
Historic Rehabilitation Programs
Historic Rehabilitation programs that are 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- 250k of AGI.
How does the Deduction Equivalent tax credit work?
* Calculate tax to determine the maximum marginal tax bracket. If it is 25%, for example, then you multiply $25,000 by 25% to get $6250.
Low Income Housing Credit
Low-Income Housing programs that are held as passive activity may generate a Deduction:
* Equivalent Tax Credit up to $25,000. There is NO phase out.
* The Low Income Housing Credit is allowed annually over a 10 year “credit period.”
* The Depreciation is straight-line over 27.5 years.
How does the credit work?
* For example, multiply 35% by $25,000 to get a credit of $8750.
NOTE: Because there is no phaseout, it produces a higher credit.
Types of Phantom Income
Insurance:
* Lapse of Policy Loan
* Section 162 Life/Disability
Investments:
* Zero/Strip Income
* TIPS
* Declared but not paid Dividends
Tax/Retirement:
* K-1 Income from LP/FLP
* Recapture
* NUA
* 20% withholding plan distributions, Secular Trust
Charitable Giving
Calculate the Maximum Deductible - 60% of AGI
* Calculate the eligible amounts given to 50% organizations (public charities) such as all churches, schools, hospitals and organizations such as United Way, Red Cross, Humane Society, etc.
* Calculate the eligible amounts given to 30% organizations (private charities) such as private non-operating foundations, war veteran groups, and fraternal orders.
Types of Donated Property
- Long-Term Appreciated Property, using FMV deduct up to 30% of AGI
- Use-unrelated Property, ST Capital Gain Property using basis deduct up to 50% of AGI
- Real estate and stock are always use-related
Charitable Bargain Sale
- Adjusted Basis = (Sale / FMV) x basis
- Gain = Sale - Adjusted basis
Sources of Federal Tax Law/Authority
- Internal Revenue Code: Primary Source of all tax law.
- Treasury Regulations: Great authority, but not law.
- Revenue Rulings and Revenue Procedures: Administrative interpretation. May be cited.
-
Congressional Committee Reports: Indicate the intent of Congress. May not be cited.
Private Letter Rulings: Apply to a specific taxpayer . - Judicial Sources: Court decisions interpret
Step Transaction
Ignore the individual transaction and instead tax the ultimate transaction.
* Example: The XYZ Corporation 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.
* Example: 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.
* Example: The 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.
* Example: 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
IRS Penalties
- Frivolous Return: $5000
- Negligence: Penalty is 20% of the portion of the underpayment attributed to negligence.
- Civil Fraud: Penalty is 75% of the portion of the tax underpayment attributable.
- Failure to File: Penalty is 5% of the tax due per month, with a maximum of 25%.
- Failure to PAY: 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:
* 90% of the current year’s tax liability
* 100% of the prior year’s tax liability (or 110% if the last year’s adjusted gross income exceeded $150,000)
Adjustments for Adjusted Gross Income (AGI)
The second step in the 1040 calculation is adjusted gross income. It is Total Income (or Gross Income) less adjustments to income.
The main Adjustments or Deductions to Income are:
* IRA Contributions
* 1/2 Self-employment Tax (.07065)
* Self-employment Health Insurance (100%)
* Keogh or SEP
* Alimony paid - divorced before 2019
Front-loading Alimony
- Alimony decreases too fast means its a property settlement not alimony
- Alimony has to be recaptured
- Add alimony payments - 37,500 (constant)
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/yr.
Casualty Losses (Calculation of the Deductible Loss)
- Use the lesser of basis or FMV
- Subtract any insurance coverage
- Subtract $100 (floor)
- Subtract 10% of AGI. Must be a presidentially declared “natural disaster”
Kiddie Tax
All net UNEARNED income of a child who has:
NOT attained age 18, 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 assets.
Children under 18 are entitled (2024) to a Standard Deduction amount ($1,300) and an additional $1,300 of unearned income will be taxed at the child’s rate (10% marginal tax bracket).
Self-Employment Income
- Net Schedule C Income
- General Partnership Income (K-1 income)
- Board of Directors fees
- Part-time earnings (1099)
Does NOT include wages or K-1 distributions from an S Corp
Self-Employment Tax Calculation
The Taxable Wage Base will not exceed $168,600 (2024).
* If you added up the self-employed income, and you exceeded $168,600, you did something wrong. Why? Social Security tax stops at $168,600 (2024).
Shortcut: Multiply Total Self-employment Income by 0.1413
FICA Percentages
- W2 EE: 15.30%
- SE EE: 14.13%
- If over $168,600: additional 1.45% over that amount
Tax Credits
- Credit for child and dependent care expenses (multiply expenses by 20%)
- Up to 3k for one kid, up to 6k for 2+ kids
- Child Tax Credit (up to $1,700 could be refundable)
- 2k per kid
- Adoption Credit
- Elderly and Disabled Credit
- Foreign Tax Credit: Can be taken as a credit or a deduction
- Earned Income Credit (refundable)
Adoption Credit
- Qualified expenses: Adoption fees, court costs, attorney fees, and cost to adopt a foreign child
- Elegible children:
- Under age 17
- Any US citizen or resident alion who has special needs
Accounting Methods
- Cash: Mandatory where taxpayer’s records reflect only cash transactions, and there are no inventories. Avg. revenue < $29M or $25M indexed
- Accrual: Mandatory for purchases and sales over $25M+ where there are inventories.
- Hybrid: Combines accrual for inventory portion of business and cash for cash portion of business.
- Percentage of Completion: For long-term contracts where the contract will not be completed within the taxable year started.
Personal Service businesses that are also regular Corporations (C-Corp)
Remember: H.A.L.E.
* Health
* Accounting / Architectural
* Law
* Engineering
An individual is required to file a tax return if earnings from self employment (1099) are more than ______?
$400
Investment Interest Deduction
- Max allowed is limited to net investment income
-
Investment Income: Interest, royalties, st gains
- Dividends and LT gains are included if you don’t use the LT rates
- Can carryforward
Installment Sale
Calculation of Gain
* Gross profit percentage: Profit ÷ Total contract price
* Gain Realized: Installment x Gross Profit Percentage
Related Party Trap
* Property sold to a related party who sells it within 2 years
* All gain is taxed retroactively in the first year
* If sale is on personal property… all depreciation recapture is reported as income in the year of disposition
Choosing Business Entities
(Biz is profitable)
C Corporation
* Separate tax entity using flat 21%
* Dividend-received deduction of 50%
Personal Service Corporation
* Flat 21% tax
* Remember HALE
Choosing Business Entities
(Biz has losses and is risky)
Needs limited liability
S corporation
* Pension PLan
* 100% of medical, dental, and LTC ins. deductible - 2% owners
* Losses up to basis
* Special Reqs:
* max 100 shareholders
* one class of stock (no pref)
* Domestic
* shareholders must be US citizens or res
* all shareholders must conset to election
Limited Liability Corp
* Limited liability like a copr
* Losses up to basis (same as partnership)
Limited Partnership
* Limited partners cannot actively participate in business
* Losses up to basis (same as partnership)
Choosing Business Entities
(Biz has losses and not risky)
Sole Proprietorship
* Pension Plan (Keogh)
* 100% of medical, dental, & lTC ins. deductible for owner
* Lack of continuity
Partnership
* Pension Plan (Keogh)
* 100% of medical, dental, & lTC ins. deductible for owner
* Lack of continuity
* Losses up to basis
Section 1244
- Only first $1m of stock (C or S) initially issued
- Max allowed: 100k (MFJ) or 50k
ordinary loss
Qualfied Business Income Deduction
- 20% of qualified business income deduction from pass through entities
- No QBI for serivce-related business
1031 Exchange Calculations
- Realized gain = (FMV of property recieved + boot) - adjusted basis of og property
- Recognized gain = boot received or realized gain
- Substitute Basis =. FMV of property recieved + (realized gain - recognized gain)
MACRS % vs Straight Line
MACRS
* Yr 1 for 5 yr property: 20%
* Yr 2 for 5 yr property: 32%
* Yr 1 for 7 yr property: 14.29%
* Yr 2 for 7 yr property: 24.49%
Straight-line
* Yr 1 for 5 yr property: 10%
* Yr 2 for 5 yr property: 20%
* Yr 1 for 7 yr property: 7.14%
* Yr 2 for 7 yr property: 14.29%
Real Estate Losses
- May deduct up to $25k/yr of net losses from real estate activity from their active or portfolio income.
Has a phase-out: - AGI up to 100k… can take full $25k deduction
- AGI btwn 100k and 150k… 2 for 1 basis
- Ex: 120k agi … 120k-100k=20k x.5 =10k allowable deduction
Rental Rules
Rental of Principal Res
* Home is rented for < 14 days durin gthe year
* Rental income is excludiblle
* No deductions attributable to rental
Rental of Vacay Home
* Personal use cant be greater of 14 days or 10% of rental use
Oil and Gas Working Interest
- Exempt from PAL rules
- If GP in in oil and gas company can take the losses agaisnt active income without limit
- If LP, no right to the loss until dissolution of partnership
