Tax Flashcards
Gain on Personal Residence
If a taxpayer has owned and occupied a personal residence for at least two out of the last five years, $250,000 of a gain may be excluded from income for a single taxpayer
Order of Obligations - Secured Creditor
- first to pay expenses incurred in selling the collateral
- then toward the debt owed to the secured party,
- next to any junior or inferior secured parties with rights in the collateral.
NOL - Carryback/Carryforward
Back 2, forward 20
Standard Deductions
MFJ - 12,400
Single - 6,200
Personal Exemption - 3,950
Personal Exemption Phase Out
Single AGI - 254,200
MFJ AGI - 305,050
Cash-Basis Accounting
Allowed: Individuals w/ a Business
Not Allowed: Corporations, Partnerships w/ C-Corp Partner, Inventory
Deductions to Arrive at AGI
- MSA/HSA Contributions
- Moving Expenses
- Deductible part of Self-Employment Tax
- Self-Employed SEP, SIMPLE, and Qualified Plans
- Self-Employed Health Insurance Premiums
- Investment penalties for early withdrawal
- Alimony Paid
- IRA Deduction
- Student Loan Interest
Section 179 Expenses
Max Deduction: $25K, phased out for purchases in excess of $200K
- New/Used Equipment placed into service during the year
Carryover - Section 179
Excess of 179 expense
Carryover - Passive Activity
No Carryback
Carry forward indefinitely
Carryover - Investment Interest Expense
Expense > Income, Carry forward indefinitely
Carryover - Charitable Contributions
Carry forward - 5 years
Carryover - AMT Paid
Carry forward indefinitely
Apply against future income tax only (not against AMT liabilities)
Carryover - Capital Loss (Individual)
Up to $3K of capital loss, Carryforward remaining portion indefinitely, retains original character (ST/LT)
Carryover - Capital Loss (Corporation)
3 years back, 5 years forward
Carryforward as a STCL ONLY.
Installment Sales
Gross Profit/Contract Price
Contract Price = Sales Price - Buyer Liability
Home Mortgage Interest
Mortgage Interest deductions on loans up to $1M
Home Equity Interest deductible on loans up to $100K
Business Gifts - Schedule C
$25/person is deductible
Service awards up to $400 are deductible
Business Losses
Business losses ONLY offset active business income
Passive Losses
Passive losses don’t offset active income
Limited Partnership - Active/Passive
Considered Passive Income
Interest/Dividend Income - Active/Passive
Considered portfolio income (active)
Personal Property - Convention
Mid Year/Mid Quarter
Mid-Quarter if 40% or more of all purchases occur in 4th quarter
Real Property - Convention
Mid-Month
Leasehold Improvements - Convention
39 Year Straight-Line
Business Start-Up Costs
Deduct up to $5K of start-up costs
Reduced for any amount over $50K
Remaining costs are amortized
Medical Expenses - Schedule A
Deductible only once 10% AGI Threshold is reached
Total Medical Expenses - 10% AGI
Accident/Disability Insurance is not deductible
Foreign Taxes Paid - Schedule A
Foreign Income Tax - Deductible
Foreign Real Estate Tax - Deductible
Personal Property - Not deductible
Tax Assessments - Not deductible
Investment Interest Expense - Schedule A
Deductible only to the extent of net investment income
Gross Investment Income - Investment exp. in excess of 2% AGI = Net Investment Income
Mortgage Points - Schedule A
Deductible if it represents prepaid interest on purchase of a new home or improving a home
Refinance points are amortized over the life of the mortgage
Mortgage Interest Expense - Schedule A
If used to purchase a house, deductible on Schedule A on debt up to $1M
Refinance interest expense deductible up to $100K of debt
Charitable Contributions - Schedule A
LTCG Property + related to Charity
Deduction for FMV of property
Up to 30% of AGI
Charitable Contributions - Schedule A
STCG Property + not related to Charity
Deduction for Adjusted Basis in property
Up to 50% of AGI
Miscellaneous Schedule A Deductions
Must exceed 2% of AGI
- Education - if req’d to keep job
- Business Travel Expenses
- 50% of Meals/Entertainment
- Union Dues
- Tax prep fees
- Legal fees to collect alimony
- Appraisal fees to value: Casualty Losses & Charitable Contributions
Deductions not subject to AGI Phase out
- Medical
- Casualty
- Gambling
- Investment Interest Expense
Casualty Loss
Lower of FMV of Property or Basis - Insurance Proceeds - $100 per casualty - 10% of AGI
Qualifying Child
- Resident
- Under age 19, 24 if student
Qualifying Relative
- Citizen
- 50% of support
- Can’t earn more than personal exemption
- Social Security does not count as income.
Minor Income Taxed at Parent’s Rate
Child’s unearned income - early withdrawal penalties - $1K - greater than $1K or child’s itemized deduction related to unearned income
MFJ - Accounting Method
Different accounting methods are acceptable if they each own a small business
Alternative Minimum Tax Add-Backs
- Difference between FMV of stock options vs. amount paid
- No state income tax, real estate tax, or personal property allowed for AMT
- No personal exemptions or standard deductions
Self-Employment Tax
15.3% of Net Profit
American Opportunity Tax Credit
First 4 yrs. of post secondary education
100% of first $2K, 25% of next $2K = $2,500
Includes tuition and course-related supplies
Lifetime Learning Credit
Per taxpayer, not refundable
Estimated Tax Payments
Lesser of:
- 90% Curent Total Tax
- 100% PY Total Tax
- 110% PY Total Tax (if AGI is $150K or more)
Statute of Limitations for Tax Audit
- 3 years (generally)
- 6 years if 25% or more of gross income was omitted from the tax return
- No Statute of Limitations for Fraud or Failure to file
“Clock” starts on due date or the date return was filed - whichever is earlier.
Tax Refund Claims
Must be claimed within:
3 years of return due date, or 2 years of being paid (whichever is later)
Dividend Income
Treated as Ordinary Income, can’t offset dividends with a capital loss
Life Insurance - Taxable/Not taxable
ER can pay premiums for up to $50K in coverage w/o being included in income, greater than $50K counts as income
Scholarships - Taxable/Not taxable
Not taxable if not in return for services rendered (i.e. GA gets scholarship for teaching classes)
Tax Free Interest Income - Taxable/Not taxable
State & Municipal Bonds
US EE Savings Bonds
Note: Treasury bonds ARE taxable.
Tax-Free Dividend Income - Taxable/Not taxable
- Some stocks
- S-Corporations
- Life Insurance
Social Security Benefits - Taxable/Not taxable
Up to 85% of Social Security income can be taxed for people in higher income brackets
Unemployment - Taxable/Not taxable
Taxable
Damages Awarded - Taxable/Not taxable
Any “make-whole” payment - Not taxable
Punitive Damages - Taxable
Worker’s Comp - Taxable/Not taxable
Not taxable, considered a “make-whole” payment
Divorce, Alimony, and Child Support - Taxable/Not taxable
Not taxable & not deductible - Divorce, Child Support
Taxable & Deductible - Alimony
Net Operating Loss - Taxable/Not taxable
Carryback 2 years, Carryforward 20 years
IRA Contributions - Taxable/Not taxable
Traditional IRA - Deductible
Roth IRA - Not Deductible
Filing Status - Married Filing Jointly
- Must be married at end of year
Filing Status - Head of Household
- Has a dependent child
- Provides more than 50% support
- Lives with them more than 50% of the year
Filing Status - Qualifying Widower
- Has a dependent child
- Gets MFJ status for year of death + 2 tax years
Affordable Care Act
Penalty for not having minimum essential coverage:
$95 per person
1% of Household income over threshold
3 month grace period for being uninsured
Partnership Basics
- Partnerships are not a legal (taxable) entity
- Income and Expenses flow through to the partner via a Form K-1
Property in exchange for Partnership Interest
- Non-taxable event: No G/L recognized
- Partner’s Basis = Basis of Property Contributed
Exception: Property has a liability that exceeds the basis Capital Gain
Services in exchange for Partnership Interest
- Taxable event
- Treated the same as compensation
- Use % of Partnership Interest x FMV of Partnership = Taxable Income
Taxable income amount becomes basis
Partnership Holding Period of an Asset
- Inherits holding period of asset contributed
- Exception: Inventory, holding period begins when contributed
Startup Costs for a Partnership
- Tax treatment same as individual ($5K deductible, reduced after $50K total, rest is amortized)
Deductions to Arrive at Partnership Income
- COGS
- Wages
- Guaranteed Payments
- Business Bad Debt
- Interest Paid
- Depreciation
- Amortization
Partnership Losses
- Cannot be taken below basis
- Loss is carried forward until basis is available
Guaranteed Payments
Appear in partner’s income during year in which FY closes
Partnership Benefits
Treated as guaranteed payments and are self-employment income
i.e. Health Insurance, Life insurance, etc.
Guaranteed Payments (Formula)
% Share of Ordinary Partnership Income from K1 + Guaranteed Payments - % share of 179 expenses = Self Employment Income subject to self-employment tax
Partner’s Basis from Property Contribution
- Contribution of Property: Property’s original basis
- Compensation for services: FMV of % of partnership ownership
- Purchase of Interest: Amount of Purchase = Basis
- Interest by Gift: Gift Basis rules apply
Items not Deductible on Schedule K (flow to Partner’s K-1)
Investment Interest Expense
Foreign Tax Paid
Charitable Contributions
179 Expense
Items not Counted as income on Schedule K
Passive Income
Portfolio Income
1231 G/L
Partnership Basis (Formula)
Beginning Basis + Capital Contributions + Share of Ordinary Income + Capital Gains + Tax-Exempt Income = Ending Partnership Basis
Partnership Basis Decreases
- Money Distributed
- Adjusted Basis of Property Distributed
- Share of Ordinary Losses
- Partnership is relieved by a liability (considered a distribution)
Partnership Basis Increases
- Partnership Loan
Note: Guaranteed payments do not effect basis
Order of Adjustment to Basis
- Increase basis in share of liabilities
- Increase basis from all income items
- Decrease basis for distribution
- Decrease basis for losses
Partnership Taxable Year
must be the same as 50% of partners and use the same tax year for 3 consecutive years
Death of a Partner
Taxable year only closes with respect to partner and their partnership interest
Partnership can’t use cash-basis if:
- Partnership has inventories
- Tax Shelter
- Corporation is a partner
- Gross receipts of $5M or more
- Exception: Gross receipts of $1M or less and maintains inventory - OK for cash-basis
Partnership Termination
- Less than 2 partners
- 50% of partnership interest sells within 12 month period - terminates immediately
Sale of Partnership Interest
Results in a Capital Gain/Loss
Amount Realized - Basis in Partnership = G/L
Basis = Capital Account + Liabilities Assumed
Any assets sold that are not capital in = Ordinary Gain (Unrealized Receivables, Appreciated Inventory)
Partner’s Share of Ordinary Gain
FMV of Assets - AB of non-capital assets = Ordinary Gain x Partnership Interest % = Partner’s share of Ordinary Gain
Distribution - Order of Basis Reduction
- Money Received
- AB of unrealized receivables and inventory
- AB of other property
Losses - Liquidating/Non-liquidating Distributions
A loss can ONLY occur in a liquidating distribution.
Requirements for loss:
- Money was rec’d
- Unrealized receivables rec’d
- Appreciated inventories rec’d
Shareholder’s Basis in a Corporation (Formula)
AB of Property Transferred - Gain Recognized - Boot Rec’d = Shareholder Basis
If shareholders have 80% control after a property transfer, no taxable event occurs.
Corporation’s Property Basis (Formula)
Transferor’s Basis + Gain Recognized by Shareholder = Basis
Property - Corporations & Shareholders
Both shareholders and corporations use ADJUSTED BASIS of property for basis purposes, NOT FMV of property.
Sec. 1244 - Small Business Corps
Loss on Stock
Loss on worthless stock is an ordinary loss.
- Taxpayer must be the original stock owner.
- Taxpayer must be individual or partnership
- $50K single or $100K MFJ, remainder is capital loss
Estimated Tax Payments (Corporations)
- Req’d if more than $500 in tax liability is expected or:
- 100% CY liability
- 100% PY liability
AMT (C-Corp Formula)
Tax Income + Preferences +/- Adjustments = Pre-ACE \+/- ACE Adjustments = AMTI AMTI - $40K Exemption = Tax Base Tax Base x 20% = TMT TMT - Regular Tax = AMT
Pre-ACE Adjustment
- Personal Property - use 150% MACRS, not 200%
- Construction must use percentage of completion method.
ACE Adjustment
- Municipal Bond Interest
- Life Insurance Proceeds
- 70% DRD
- Organizational Expenditures
- AMT paid gets Carried Forward indefinitely (no carryback)
Corporate AMT Exemptions
- Exempt in year 1
- Year 2: if gross receipts are
Corporation Organization Costs - Amortization
Amortization of costs begins in the month the corporation begins business activity.
Costs associated w/ offerings are NEVER deductible or amortized.
C-Corporation Charitable Deductions
Limited to 10% AGI
The BOD can authorize Charitable Contributions up to March 15th ad have them count for the previous tax year.
Dividends Received Deduction
Only allowed if no Consolidated Return is filed.
80% Interest = 100% DRD
20-29% = 80% DRD
Corporate Losses - Loss on Sale where taxpayer owns >50%
Interest is disallowed
Corporate Losses - Capital Losses
- Only deductible to the extent of capital gains
- Net STCG are taxed at ordinary rates
- Can carryback losses 3 years, carryforward 5 years as STCL.
Corporate Losses - Bad Debt
Classified as ordinary losses
Casualty Loss - Corporates
No floor on corporate casualty loss
Destroyed: Loss = AB - Proceeds from Insurance
Partially Destroyed: Lesser of FMV or AB - Proceeds from Insurance
Net Operating Loss
If loss includes NOL Carryforward, reduce the loss (add back the amount) to get the loss w/o the carryforward.
Carryback the NOL 2 years starting with the earliest year and reduce the taxable income there and then move to most recent year.
Leftover = This year’s NOL.
Corporations - Investment Interest Expense
NOT limited to investment income like individual taxation.
Corporate Form M-1
- Reconciles book to tax income before Net Operating Loss/Dividend Received Deduction
- Permanent Differences: Tax-exempt interest
- Temporary Differences: Accelerated depreciated tax, straight-line, etc.
Corporate Form M-2
- Reconciles beginning to ending Retained Earnings
- N/I + Other Increases - Dividends Paid - Other Decreases = Ending Unappropriated Retained Earnings
Corporate Form M-3
Same as M-1, but for Corporations w/ $10M+ in assets.
Affiliated Corporations (80% Ownership)
- Consolidation election is binding
- Dividends are eliminated: G/L are deferred
- One AMT Exemption
- One Accumulated Earnings tax
- Parent must have 80% of the voting power and own 80% of the stock value.
Corporate Distribution - Shareholders
- Use FMV of Property
- Distribution is a dividend to the extent of current accumulated earnings and profits (ordinary income)
- Remainder is return of basis, then capital gain
Corporate Distribution - Shareholders (Formula)
Dist Amount = FMV of Property + Cash - Liabilities Assumed
Shareholder Basis = FMV of Property + Cash Rec’d
Corporation Distribution - FMV Below Basis
NO LOSS.
Corporate Distribution - Capital vs. Not-Capital
Capital: Capital Gain
Not-Capital: Ordinary Income
Order of Distribution Treatment
- Dividend to the extent of current & accumulated earnings & profits
- Shareholder basis is then exhausted
- Remainder is Capital Gain
Accumulated Earnings & Profits (Formula)
Beginning AE&P + Net Income + Gain on Distribution - Distribution (cannot create deficit) - NOL of prior years = Ending AE&P
Accumulated Earnings & Profit
All Positive: Deplete current amount w/ the dividend first
Current +, Accumulated -: Deplete only current amount
Both Negative: Current E&P cannot add to the deficit
Stock Redemptions
Result in a Capital Gain to the shareholder
Liquidation - Capital Property vs. Not Capital
Capital: Capital Gain
Not Capital: Ordinary Income
Gain characteristic is the same for both the corporation and the shareholder.
Liquidation - Loss Treatment
Corporation: Depends on if property is capital in nature, otherwise ordinary loss
Individual: Capital Loss only
Complete Liquidation of a Sub
No G/L to parent Company.
Consent Dividend
- Consented by the BOD but not yet paid.
- Treat as if distributed by the end of the year.
Personal Holding Companies
- Banks/Financial Institutions cannot be PHC
- 5 or fewer individuals own more than 50% of the stock
- 60% of the income must be passive
- PHC tax is a self assessing 20% tax rate.
Corporate Accumulated Earnings Tax Credit
Greater of $250K or the legitimate balance based on future needs
S- Corporations - Shareholders
- Only individuals, estates, and trusts
- Domestic Only
- Up to 100 shareholders allowed
- Only one class of stock allowed
S-Corporation Election
- Must be made by March 15th and counts as being an S-Corp since the beginning of the year.
- Must use calendar tax year.
- 100% of shareholders must consent
- Termination: 50% of shareholders must consent
S-Corp Rules
- No Foreign taxes paid deduction allowed
- No Investment Interest Expense allowed
- No 179 Deduction
- No 1231 G/L
- No Charitable Contributions
- No Portfolio Income
S-Corp Shareholder Basis (Formula)
Beginning + Share of Income Items - Distributions - Non-deductible expenses - Ordinary Losses = Ending
Built-In Gains (C-Corp to S-Corp)
Prevents a C-Corp from avoiding double taxation by converting to an S-Corp
FMV of Assets @ S-Corp Election Date - AB of Assets = Built-in Gain x 35% Corporate Tax Rate
Gift Taxation Exclusion - Donor
$14K exclusion for ea. spouse is allowed
Gift Tax - Donee
Property rec’d through gifts are not income to the recipient.
- Loss on Sale of Property - Basis is FMV at date of gift
- Gain on Sale of Property - Basis is the same as donor
No G/L if Donor Basis
Gift Tax Returns
- Calendar-year tax basis only
- Due April 15th
Trust Taxation - Complex Trust
- Income distributions are optional
- Accumulation of income OK
- Charitable Contributions OK
- Distribution of Trust Corpus is allowed
- Exemption: $100
Trust Taxation - Simple Trust
- Income distributions are mandatory
- Accumulation of income is disallowed
- No Charitable Contributions
- Distribution of Simple Trust Corpus is disallowed
- Exemption: $300
Estate Tax Exemption
First $5.3M is exempt
40% taxation on amounts over $5.3M
Medical Expenses after Death
Paid after death but incurred w/in one year of death go on decedent’s personal tax return.
Taxable Gross Estate (Formula)
Cash + Property FMV @ Death Less: Funeral Costs Debts/Mortgages Casualty Losses Charitable Bequests State Death Tax
Tenancy by Entirety
1/2 of Marital assets go to decreased spouse’s estate
Tenancy in Common
FMV of deceased’s property goes to heirs
Estate Tax - Life Insurance Proceeds
Life insurance proceeds in husband’s name go onto his estate regardless of beneficiary
DNI (Formula)
DNI = Taxable Income - Expenses (from income production)
AB in Property
Cost + Expenses + Debt + Back taxes/Interest Paid = Basis
Gifted Property
Gain: Use donor’s basis
Loss: Lesser of donor’s basis or FMV at time of distribution
Sale of an Asset Gain Calculation
Selling Price (Cash Rec’d + Liability) - AB of Property = Gain
Like-Kind Exchange
Lesser of Realized Gain or Boot Rec’d
Boot (Formula)
Cash Rec’d + Unlike Property Rec’d + Liability passed to other party
Involuntary Conversion
Occurs when you receive money for a property involuntarily converted.
No gain if you reinvest the proceeds completely.
Wash Sale
- 30 day rule applies
- Disallowed loss adds to basis of new stock
- New stock takes on date of acquisition of old stock
Sales between Related Parties
Seller cannot take loss on sale, but the gain is always recognized.
Capital Gain/Loss Property Classification
- Inventory is NOT a capital asset.
- Business property is NOT a capital asset.
- A/R is NOT a capital asset.
- Goodwill is a capital asset.
Capital Assets: personal investments over 1 year.
Capital G/L (Non-Corporations)
- Net all STCG & STCL
- Net all LTCG & LTCL
Carryforwards always maintain their original character.
Capital Losses - Individuals
Offset $3K of ordinary income w/ a $3K capital loss
No carryback allowed for individuals.
1231 Property
Real or Personal Property held more than 1 year.
1231 G/L
Gain: LTCG
Loss: Ordinary Income
1245 (Personalty) Depreciation Recapture
You sell a piece of depreciated machinery at a gain.
Amt. of Depreciation is ordinary income.
Remainder is 1231 Capital Gain.
There are NO 1245 Losses.
1250 (Realty) Depreciation Recapture
You sell a building at a gain.
There are NO 1250 Losses.
Entire gain is 1231 gain.
Corps: Sec.291 requires 20% of depreciation classified as an ordinary gain. Remainder is 1231 LTCG.
