Tax Flashcards
1
Q
What are not considered capital assets?
A
ACID: Accounts/notes receivable Copyrights and creative works Inventory Depreciable property used in a trade or business
2
Q
What is the only way to have a 1231 gain on 1245 property?
A
The only way to have a 1231 gain on 1245 property is to sell it for more than it was originally purchased for.
3
Q
1231 Gain
A
Any sale amount in excess of the original purchase price of a 1231 asset is 1231 gain.
4
Q
What does the Kiddie Tax apply to?
A
- The Kiddie tax only applies to “unearned income” in excess of $2,200 (2019).
- Unearned income = interest, dividends, capital gains, royalties, rents, pension and annuity income, and unearned income from trusts
- The Kiddie Tax applies to children under age 19 (or under age 24 if the dependent is a full-time student).
5
Q
MACRS Property Classes
A
3 year: tractors, rent-to-own property *5 year: autos, computers, office equipment *7 year: office furniture and fixtures 27.5 year: rental home 39 year: office building
*These two categories are the most likely to be tested.
6
Q
What type of properties use the mid-month convention?
A
Nonresidential real property and residential rental property use the mid-month convention.
7
Q
What are the dividend-received deductions (DRD) based on ownership percentages?
A
Ownership % -> DRD
- Less than 20% -> 50% DRD
- At least 20% and less than 80% -> 65 DRD
- At least 80% (Affiliated corporations) -> 100% DRD
8
Q
S Corporation Requirements
A
- Must be a domestic corporation.
- May not have more than 100 shareholders
- May not be owned by C corporations, partnerships, and certain trusts.
- The corporation is allowed only one class of outstanding stock. (However, an S corporation may have shares with voting rights and shares with no voting rights.)
9
Q
Underpayment Penalty
A
- Most people can avoid paying estimated tax if their withholding and credits equal 100% of the tax shown on the prior year’s return or 90% of the current year’s tax liability. (Taxpayers may not rely on this rule if the taxpayer had a short (less than 12 months) taxable year for the previous year.)
- A taxpayer does not have to pay estimated tax if:
1. the taxpayer had no tax liability for the previous year
2. the taxpayer was a U.S. citizen or resident for the entire year
and 3. the taxpayer’s tax year covered a 12-month period.
10
Q
Characteristics of 1231 Assets
A
- They are not used in a trade or business.
- They are either (1) depreciable property or (2) real property.
- They do not include: (a) inventory, (b) property held by the taxpayer primarily for sale to customers in the ordinary course of their trade or business, or (c) copyrights or creative owrks
- Section 1231 specifically includes certain property, such as: (a) timber, (b) coal, (c) iron ore, (d) certain livestock, and (e) unharvested crops (under certain conditions)
11
Q
What are some examples of items that increase the basis of an asset?
A
- Capital improvements, such as an addition on your home, a new roof, paving your driveway, installing central air conditioning, or rewiring your home.
- Assessments for local improvements, including water connections, sidewalks, and roads.
- The cost of restoring damaged property after a casualty loss.
- Legal fees, including the cost of defending and perfecting a title to the property.
- Zoning costs.
12
Q
What are some examples of items that decrease the basis of an asset?
A
- Casualty or theft loss deductions, if applicable due to federally declared disaster.
- Deduction for clean-fuel vehicles and clean-fuel vehicle refueling property
- Section 179 deduction
- Credit for qualified electric vehicles
- Depreciation
- Nontaxable corporate distributions
- Exclusion from income of subsidies for energy conservation measures
13
Q
What is the formula for determining the donee’s basis when a gift tax is paid?
A
Donor’s Basis + [ (Net Appreciation in Value of Gift / Value of Taxable Gift) x Gift Tax Paid ]
14
Q
What are the “wash sale” rules?
A
- Wash sales occur when a taxpayer disposes of securities at a loss and acquires substantially identical securities within 30 days before or after the date of the loss sale.
- The disallowed loss is added to the cost of the new stock or security to determine the new basis of the substantially identical securities.
- Wash sale rules do not apply to gains.
15
Q
What are the rules regarding excluding gain on a personal residence?
A
Qualification requirements for the exclusion under Section 121:
- The property must have been owned and occupied as a principal residence for 2 out of the last 5 years. (Note that a one year stay in a nursing home does not count toward the 2 year requirement.)
- The exclusion can only be used once every 2 years.
- Any appreciation during non-qualified use periods are not subject to the exclusion.
- For a married couple: both must meet the use requirement and not have utilized the exclusion within the last two years, but either may meet the ownership test.
Each spouse may exclude up to $250,000 of gain from the sale of their principal residence.
If the gain is exempt, it doesn’t need to be reported.
16
Q
What are the steps for netting capital gains and losses?
A
- Net long-term capital gains and long-term capital losses.
- Net short-term capital gains and short-term capital losses.
- If the taxpayer has a net loss in one category and a net gain in the other category, then the net long-term gain/loss should be netted against the net short-term gain/loss.
17
Q
Characteristics of Section 1244 Small Business Stock
A
A single taxpayer can deduct up to $50,000 ($100,000 for MFJ) of the loss on small business stock as an ordinary loss in any given year if the following requirements are met:
- The stock represents ownership in a domestic corporation.
- The corporation was a small business corporation (less than $1 million in total capital contributions plus paid-in capital) at the time the stock was issued.
- The company was incorporated after November 6, 1978.
- The loss was sustained by the original owner of the stock (the person to whom the stock was issued by the corporation), who is not a corporation, trust, or estate.
- Any loss in excess of the per year limit is treated as a capital loss.
- Section 1244 does not apply to gains. (Any gains associated with Section 1244 stock are treated as capital gains.)
18
Q
What are the rules for “Married filing jointly”?
A
- In order to file as married filing jointly, the taxpayer and their spouse must have been married as of the last day of the year.
- If the taxpayer’s spouse died during the year and the taxpayer did not remarry, the taxpayer may still file a joint return with that spouse for the year of death.
19
Q
What is the standard deduction for a taxpayer who is claimed as a dependent?
A
Greater of:
- $1,100 (2019) or
- $350 plus earned income (but not exceeding the single standard deduction)
Plus any additional standard deduction amounts that apply.
20
Q
A Qualifying Relative must meet which four tests?
A
- Not a Qualifying Child Test - the person cannot be the qualifying child of any other taxpayer.
- Relationship Test - The person must be either (a) related to the taxpayer as a child (including step, foster, or in-law), sibling, (including half, step, or in-law), descendant of any of them, parent (including in-law), or aunt or uncle and (b) live with the taxpayer all year as a member of their household (and the relationship must not violate local law).
- Gross Income Test - the person’s gross income for the year must be less than $4,150.
- Support Test - the taxpayer must provide more than half of the person’s total support for the year.
Additional tests: joint return test (must not file a joint return) and citizenship/residency test (US citizen, resident alien, national, or a resident of Canada or Mexico for at least part of the tax year)
21
Q
A Qualifying Child must meet what four tests?
A
- Relationship Test - the child of the taxpayer must be the taxpayer’s child (including step or foster), sibling (including step or half), or a descendant of any of them.
- Age Test - the child must be (a) under age 19 at the end of the year, (b) under age 24 at the end of the year and a full-time student, or (c) any age if permanently and totally disabled.
- Abode Test - the child must have lived with the taxpayer for more than half of the year.
- Support Test - the child must not have provided more than half of their own support.
Additional tests: joint return test (must not file a joint return) and citizenship/residency test (US citizen, resident alien, national, or a resident of Canada or Mexico for at least part of the tax year)
22
Q
What is the Exclusion Ratio for the Taxation of Annuity Payments?
A
Exclusion Ratio = (Investment in the Contract) / (Expected Total Return)
23
Q
What are the life insurance transfer for value exceptions?
A
The proceeds of a life insurance policy can still be excluded from gross income even if the policy is transferred for valuable consideration. These circumstances include if the policy is transferred to:
- the insured
- a partner of the insured
- a partnership in which the insured is a partner
- a corporation in which the insured is a shareholder or officer
- (by) tax-free exchange or gift
24
Q
What are the characteristics of Modified Endowment Contracts (MECs)?
A
A MEC is a life insurance contract that fails to meet the 7-pay test.
A contract fails to meet the 7-pay test if the accumulated amount paid under the contract at any time during the first 7 contract years exceeds the sum of the net level premiums which would have been paid on or before such time if the contract provided for paid-up future benefits after the payment of 7 level annual premiums.
Loans and withdrawals from MECs are subject to LIFO treatment. (When loans or withdrawals are made from a MEC, the proceeds of the loan or withdrawal are included in gross income to the extent of earnings.)
25
Which of the following are included in taxable income?
1. Workers' Compensation for personal physical injury or sickness
2. Punitive Damages
3. Damages for Emotional Distress
Excluded:
1. Workers' Compensation for personal physical injury or sickness
Included:
2. Punitive Damages
3. Damages for Emotional Distress
26
List the deductions for AGI
* Trade or business expenses
* Deductions from losses on sale or exchange of property
* Deductions from losses on sale or exchange of property
* Deductions from rental and royalty property
* Alimony payments for divorces finalized prior to 12/31/2018 (can't extend beyond recipient's death)
* One-half of self-employment tax paid
* 100% of health insurance premiums
* Contributions to pension, profit sharing, annuity plans, IRAs, etc.
* Penalty on premature withdrawals from time savings accounts or deposits
* Interest on student loans
* Health Savings Accounts
27
What are the characteristics and the shortcut formula for "Excess Alimony" Payments?
* Alimony deduction - only applies to contracts signed prior to 12/31/2018 (for contracts signed after that no income or deduction)
* 3 year review period
* Excess payments are included in payor's taxable income in the third post-separation year
* Payee is permitted a deduction equal to the amount includible in the payor's income in that year.
* Shortcut formula to determine if there is an excess alimony payment: P1 + P2 -2xP3 - $37,500 = Recapture (if > 0, then excess alimony)
* Note: child support is not alimony applicable on divorces filed and amended before 12/31/2018. Divorces finalized or amended in 2019 and after will not allow for alimony deductions.
28
What are eligible medical expenses that are subject to 10% of AGI?
* Prescriptions
* Non-cosmetic surgeries
* Some qualified long-term care services
* Insurance premiums including schedule for long-term care policies and hospitalization insurance
* Tuition for special, medically necessary schools (e.g. school for deaf or blind dependent)
Capital expenditures:
* On the advice of a physician
* To the extent that the FMV of the property is not increased
* Includes operating expenses (e.g. cost of operating a pool)
* For handicapped entrances and railings, there is no increased value test (note that this does not apply to elevators)
Transportation and lodging:
* Parking, tolls, travel to and from doctor (deductible at 20 cents or $0.20 (2019) per mile if you drive your own car)
* Lodging limit of $50 per night per *person*
* Deduction for meals not allowed
29
What are 50% Organizations for the purpose of determining a charitable deduction amount?
They are:
1. public charities (including churches, schools, hospitals)
2. private operating foundations
3. private nonoperating foundations that distribute their contributions to either public charities or private operating foundations within 2.5 months of their tax year end (referred to as a pass-through private foundation).
30
What are 30% Organizations for the purpose of determining a charitable deduction amount?
Private nonoperating foundations that don't distribute within 2.5 months of the organization's tax year end:
subject to either a 20% (long-term capital gain property or 30% (cash and ordinary income property) of AGI limitation
31
Examples and characteristics of federally declared disaster area personal casualty losses subject to 10% of AGI and a $100 floor per casualty
* Federally declared disasters caused by fire, storm, shipwreck, or other casualty.
* To be deductible, the loss must be from an event that is identifiable, damaging to taxpayer's property, and sudden, unexpected, and unusual in nature
* For personal casualties, the loss must be related to a federally declared disaster.
* Business casualties do not require a federal declaration.
32
What are the rules for taking a home office deduction?
1. Office must be used exclusively and on a regular basis as: (a) the principal place of business or (b) a place of business used by clients, patients, or customers. (For employees, office must also be for the convenience of the employer.)
2. A home office qualifies as a principal place of business if: (a) taxpayer conducts administrative and management activities in the home office and (b) there is no other fixed location where taxpayer conducts these activities.
3. Home office expenses cannot cause net loss from the business activity.
4. Home office deduction is limited to business gross income in excess of other business expenses (ordering rules apply). (Excess is carried forward, subject to a limit.)
33
Adoption Expenses Credit
* Credit for qualified adoption expenses incurred in adoption of eligible child.
* Examples of expenses include adoption fees, court costs, and attorney fees.
* Maximum credit is $14,080 (2019), with credit phased out ratably for modified AGI between $211,160 and $251,160.
* An eligible child is one who is: (a) less than 18 years of age or (b) physically or mentally handicapped.
* The Adoption Expenses Credit is a nonrefundable credit, but the excess may be carried forward for five years.
34
Child Tax Credit
* $2,000 for each dependent child (includes step and foster children, siblings including step and half and descendants of any of the above) under age 17 (2019)
* Married taxpayers must file jointly to be eligible for the credit
* Eligible children are: (a) Under age 17, (b) did not provide half of their own support for the tax year, (c) lived with the taxpayer for more than half the year, (d) was a US citizen, national or resident, and (e) claimed as a dependent on the taxpayer's tax return
* Credit is phased out by $50 for each $1,000 of AGI above specified levels (2019): $400,000 MFJ Or $200,000 MFS/single
* Up to $1,400 is refundable per child subject to limitations.
35
Child & Dependent Care Credit
* Must have employment-related care costs for a dependent under age 13 or handicapped dependent or spouse
* Married taxpayers must file a joint return to obtain credit
* Credit amount is: eligible care costs x applicable % (ranging from 20% to 35% with 20% applying to AGI over $43,000)
* Amount of costs that qualify is the lesser of actual costs or $3,000 for one qualified individual and $6,000 for two or more qualified individuals
* Costs for care of qualified individual within taxpayer's home or outside home. If outside home, handicapped dependent must spend at least 8 hours a day within taxpayer's home.
36
Credit for Other Dependents
* $500 nonrefundable credit for qualifying dependents
* Includes dependents as defined under present law, i.e. qualifying relatives AND qualifying children age 17 and over.
* A SSN is not required for this credit.
37
American Opportunity Tax Credit (AOTC)
* The maximum credit per eligible student is $2,500 (2019) per year for the first 4 years of post-secondary education.
* 100% of first $2,000 of qualifying expenses plus 25% of next $2,000 of qualifying expenses
* To be eligible, the student must take at least 1/2 of a full-time course load
* Qualifying expenses include textbooks purchased from the school or another off-campus source.
38
Lifetime Learning Credit
* The maximum credit per taxpayer is 20% of qualifying expenses (up to $10,000 per year in 2019).
* This credit cannot be claimed in the same year for the same person the AOTC is claimed.
39
What are the preference items for AMT?
1. Percentage depletion: the amount of percentage depletion taken for regular tax in excess of the adjusted basis of the property at the end of the year is a preference item.
2. Intangible drilling costs: AMT requires 10 year amortization. Intangible drilling costs are currently deductible for regular tax. Preference is excess of regular tax deduction over [AMT amortization plus (65% x net oil & gas income)].
3. Interest on private activity bonds: This interest is not taxable for regular tax purposes, but is included in income for AMT purposes. Expenses incurred in carrying these bonds are not deductible for regular tax purposes, but offset the interest income in computing the AMT preference.
40
What are the exceptions to non-vacation rental property that are being deemed as passive losses?
* Rental activities by dealers are considered active.
* Residential rental losses up to $25,000 are deductible against ordinary income by taxpayers with AGI less than or equal to $100,000, with phaseout between $100,000 and $150,000.
41
Personal use vs. rental use for the determination of vacation home treatment
Fewer than 15 rental days: No gross income from rentals included in gross income and no deductible rental expenses. Mortgage interest and property taxes are treated as if on personal residence (generally deductible in full if itemizing).
More than 14 rental days: Treatment depends on the amount of personal use. If the personal use days are NOT more than the greater of 14 days or 10% of fair rental days, then the taxpayer can deduct all expenses allocated to rental use even if loss results.
42
Definition of a Passive Activity
No material participation, unless rental activities
Exception: Real estate dealers are not considered a passive activity:
* If the real estate is actively managed, then the taxpayer can deduct up to $25,000 against ordinary income.
* This exception is subject to a phaseout of $1 for every $2 that AGI exceeds $100,000 and completely phased out at an AGI of $150,000
43
Definition of Material Participation
* Greater than 500 hours per year OR greater than 100 hours and the most of any participant
* Substantial, continuous involvement in the operation of the activity
44
What are the rules regarding Suspended Losses at Risk?
* If suspended losses are from "At Risk" activity, they are NOT deductible until the at risk amount is positive from additions or income.
* If losses are suspended under passive activity rules, the losses are deductible upon disposition.
45
What is the first primary source of tax law?
The Internal Revenue Code
46
Types of Treasury Department Regulations
1. Proposed
2. Temporary
3. Final
47
Proposed Regulations
A preview of final regulations and do not have any legal precedence.
48
Temporary Regulations
Issued when guidance is needed quickly and have the same authoritative value as final regulations.
49
Final Regulations
Final regulations have the full force and effect of law. Three types:
a. Procedural regulations = essentially housekeeping instructions
b. Interpretive regulations implement the intent of committee reports and the IRC.
c. Legislative regulations allow the Treasury to determine the details of the law. However, Congress must specifically delegate this authority to the Treasury.
50
Characteristics of Revenue Rulings
* Revenue Rulings are interpretations of the tax laws issued by the IRS.
* They are usually provided in response to a taxpayer request and are based on facts common to many taxpayers.
* While Revenue Rulings do not have the full force and effect of law, they are binding on officials of the IRS.
51
Characteristics of Revenue Procedures
* Revenue procedures describe internal practices and procedures within the IRS.
* Revenue procedures, like Revenue Rulings, are published in the Internal Revenue Bulletin.
* Revenue Procedures generally state changes in techniques and administrative procedures used by the IRS.
52
Characteristics of Private Letter Rulings
* Private Letter Rulings (PLRs) are issued by the IRS at the request of the taxpayer.
* With regard to the taxpayer who requested the PLR, the IRS is bound by its determination in the ruling.
* PLRs are made available to the public after deletion of certain materials and can be used by other taxpayers as guidance regarding the described transaction.
* PLRs cannot be relied on by other taxpayers as precedence.
53
Interest Penalty for Noncompliance on the Internal Revenue Code
* Interest accrues from the original due date of the return, even if the taxpayer obtained an extension.
* Interest is compounded daily. The interest rate is the federal short-term rate plus 3%. (That rate is determined every 3 months.)
* Interest is paid on refunds if not received within 45 days of the taxpayer filing a claim for a refund.
54
"Failure to File" penalty
* Accrues 5% per month up to 25%
* Any number of days in a month counts as a full month
* Reduced by any applicable failure to pay penalty during the same months
* Filed more than 60 days late, the minimum failure to file penalty is $215 in 2019 or the amount of tax due.
* If the failure to file penalty relates to a fraudulent failure to file, then the penalty is increased to 15% per month up to 75%.
55
"Failure to Pay" penalty
* Accrues at a rate of 0.5% per month up to 25%.
* If both a failure to file penalty and a failure to pay penalty apply, then the failure to file penalty is reduced by the failure to pay penalty.
56
Statute of Limitations: For Assessment of Deficiency
* Generally 3 years from due date of return
* 6 years if material omission (25% of income or more)
* No statute if fraudulent return
57
Statute of Limitations: For Refund
Later of 3 years from date return is filed or 2 years from date of payment
58
Who may represent a client during an audit by the IRS?
1. Attorney
2. CPA
3. Enrolled Agent
(Note that a CFP(r) Professional may not represent a client during an IRS audit.)
59
The US Tax Court
* No payment of tax is necessary in order to bring a claim before the US Tax Court.
* Trial by jury is not available.
* The Small Tax Case Division handles deficiencies under $50,000 at the taxpayer's request. (Note that this is an informal procedure with no appeal rights.)
* Tax Court decisions do not bind the IRS with respect to other taxpayers.
* Appeals are to the US Court of Appeals.
60
The US Court of Federal Claims
* Sits only in Washington, DC.
* Tax deficiencies must be paid to proceed in this forum.
* Appeals are to the US Court of Appeals for the Federal Circuit.
61
The US District Court
* Allows a jury trial.
* Tax deficiencies must be paid to proceed in this forum.
* The District Court is bound by decisions of its Appeals Court and the US Supreme Court.
62
The US Court of Appeals
* There are 12 Circuit Courts, located throughout the United States.
* The US Court of Appeals handles appeals from Tax Court and District Court.
* The Court of Appeals of one region is not bound to follow the decisions of the court of appeals in another region.
63
The US Supreme Court
Decisions of the US Supreme Court are binding on taxpayers and the IRS.
The US Supreme Court generally reviews tax cases if:
* there is a conflict between the circuit courts,
* an important and recurring problem in tax law administration is involved,
* many taxpayers are involved, or if
* the decision of a lower court conflicts with long-standing practice or the regulations.
64
In order to be depreciable, what requirements must the property meet?
1. It must be property you own.
2. It must be used in your business or income-producing activity.
3. It must have a determinable useful life.
4. It must be expected to last more than one year.
65
Examples of property that cannot be depreciated
* You cannot depreciate property that you use solely for personal activities. If you use property for business or investment purposes and for personal purposes, you can deduct depreciation based only on the business or investment use.
* e.g. you cannot deduct depreciation on a car used only for commuting, personal shopping trips, family vacations, driving children to and from school, or similar activities.
* You cannot depreciate inventory because it is not held for use in your business. (Inventory is any property you hold primarily for sale to customers in the ordinary course of your business.)
* Land cannot be depreciated.
66
Election to expense assets - Section 179 General Rules
* Can elect to immediately expense up to $1,020,000 (for 2019) of business tangible property placed in service during the year.
* Cannot use Section 179 for realty or production of income property.
* The amount expensed reduces depreciable basis.
* Cost recovery available on remaining basis.
* Expense limitation ($1,020,000 for 2019) is reduced by amount of Section 179 property placed in service during year that exceeds $2,550,000. (The result is a dollar for dollar deduction.)
* Limited to business income for the year.
* Primary advantage: by deducting more currently, total tax liability is reduced and the present value of cash flows is increased.
67
What assets are subject to amortization?
Goodwill
Trademarks
Covenants not to compete
Copyrights and patents used in a trade or business
68
Cash maximum deduction for contributions to {Public Charities, Private Operating Foundations and certain Private Nonoperating Foundations} vs Private Nonoperating Foundations (PNOF)
at FMV,
60% for public
30% for PNOF
69
Ordinary Income Property and Short-term Capital Gain Property maximum deduction for contributions to {Public Charities, Private Operating Foundations and certain Private Nonoperating Foundations} vs Private Nonoperating Foundations (PNOF)
at min(adjusted basis, FMV),
50% for public
30% for PNOF
70
Long-term Intangible Capital Gain Property maximum deduction for contributions to {Public Charities, Private Operating Foundations and certain Private Nonoperating Foundations} vs Private Nonoperating Foundations (PNOF)
at FMV, 30% for public (or 50% at adjusted basis)
| at adjusted basis, 20% for PNOF
71
Long-term Tangible Capital Gain Property maximum deduction for contributions to {Public Charities, Private Operating Foundations and certain Private Nonoperating Foundations} vs Private Nonoperating Foundations (PNOF)
at adjusted basis, 20% for PNOF
related use: at FMV, 30% for public (or 50% at adjusted basis)
unrelated use: at adjusted basis, 50% for public
72
Real Property maximum deduction for contributions to {Public Charities, Private Operating Foundations and certain Private Nonoperating Foundations} vs Private Nonoperating Foundations (PNOF)
at FMV, 30% for public (or 50% at adjusted basis)
| at adjusted basis, 20% for PNOF
73
What does Section 1031 Like-Kind Exchanges not apply to?
1. Personal assets
2. Stocks in trade held primarily for sale (inventory)
3. Stocks, bonds, notes, interests in partnership, certificates of trust or beneficial interests, or
4. Other securities or evidences of indebtedness or interest, or chooses in action
(Only apply to real property)
74
Income tax consequences of a Section 1031 exchange
* Clients who receive only like-kind property in the exchange will not have any current income tax consequences.
* The party trading up recognizes no gain and adds to the old basis any boot/cash given to the other party.
* The party trading down (receiving less like-kind property than given up) will be required to recognize gain to the extent of boot received. If the boot exceeds gain, the amount of boot in excess of the gain is treated as a return of capital and reduces the basis in the new asset.
* Losses realized in a like-kind exchange are not recognized until the replacement property is sold. The taxpayer's basis in the replacement property equals the fair market value of the property received in the exchange plus the disallowed loss.
* Debt relief is treated as boot, requiring gain recognition for the party no longer responsible for paying back the loan. The party assuming the debt will increase their basis in the replacement property by a like amount.
75
Basis adjustments in a like-kind exchange
The basis of the property received equals the basis of the property given up, less the amount of any money received by the taxpayer and plus/minus the amount of gain or loss that was recognized on the exchange.
```
Basis in like-kind asset received:
FMV of New Asset
- Gain Not Recognized
+ Loss Not Recognized
= Basis in New Asset
```
76
Definition and benefit of Section 1231 Assets
* The owner of the asset must have a long-term holding period (more than 1 year).
* The definition of a Section 1231 asset is "depreciable or real property used in a trade or business."
* The main benefit of Section 1231 is that the gains generated from the sale of a Section 1231 asset are treated as capital gains for income tax purposes after recapture of depreciation taken, and losses generated from the sale of a Section 1231 asset are treated as ordinary losses for income tax purposes.
- > Gains in excess of recapture will qualify for long-term capital gains tax rates
- > Losses will not be subject to the limitations that typically apply to capital assets
77
What entities are flow through?
1. Partnership
2. LLP
3. S Corp
4. LLC (depends on taxpayer election)
78
What entities have unlimited liability?
1. Sole proprietorship
| 2. General partnership
79
What is the nature of the owner's income from various entities?
Self-employment income (subject to self-employment tax): Proprietor, General Partnership, LLP
W-2 income: Corporation (C Corp) and S Corp
LLC - depends on taxpayer election
80
Imposed the first constitutional federal income tax
Revenue Act of 1913
81
Substantial authority
Official words and rulings which can be relied on to support a tax opinion or position: (i) Internal Revenue Code, (ii) Congressional Committee Reports (Blue Book), (iii) Treasury Regulations, and (iv) Private Letter Rulings
82
Blindness standard deduction
* A return must be filed to get the additional standard deduction.
* Only allowed for the taxpayer and their spouse, not for any dependents
83
Net Operating Loss
* cannot be carried back
* can be carried forward (usually)
* can only offset 80% of the current year's income
84
Tax deferral techniques
* Cash value life insurance
| * IRAs
85
Tax avoidance or elimination techniques
* Itemizing deductions
| * Child care credit
86
5-year Lookback rule for Section 1231
If you have losses in the last 5 years, you need to recognize that portion of your current year Section 1231 gain as ordinary income, with the remainder treated as Section 1231 capital gains.
87
Section 1245 recapture when the property was abandoned as worthless
Property sold or abandoned below the basis adjusted by depreciation is not subject to Section 1245 recapture because either not all depreciation was taken or there was more likely a loss rather than a gain. For 1245 recapture to occur, there must be a gain over the basis.
88
Section 1250 ordinary income occurs when
Realized gains on real property where the accelerated method was used. Under current law, only straight line depreciation of real property is used.
89
Support test when multiple individuals contribute to the support
* Need to provide at least 10% of the individual's support
| * If two people together provide over 50% and both provide over 10%, they must agree on who gets to claim the dependent
90
Purchases as support
* A stereo qualifies as support because if it was purchased and given to the dependent.
* A car doesn't count as support if it wasn't given to the dependent.
* Maintenance costs such as gas and insurance, would, however, qualify as support.
91
Alimony received
included in gross income - on line 11 of the 2017 1040
92
For AGI
above the line (all business)
93
From AGI
below the line
94
How can child support be structured to be deductible?
If an agreement is reached between former spouses where the decreed amount of alimony is increased to include child support, then the additional alimony would be taxable to the recipient and deductible to the payor. The additional money cannot be based on any contingency such as the child reaching the age of majority or death..
95
General Business Credit: ordering of carrybacks and carryforwards
1. The business credit carryforwards to the current year
2. The amount of the current year business credit
3. The business credit carrybacks to the current year
96
Refundable credits
EIC
97
Non-refundable credits
include: child care
98
Partially refundable credits
include: AOTC and child tax credit
99
Active participation
The taxpayer participates in making management decisions concerning the property, but is not substantially and continuously involved in the operation of the activity.
100
What decreases a taxpayer's at-risk amount?
Passive losses which are used against passive income from another source
101
What increases a taxpayer's at-risk amount?
a) Cash and the adjusted basis of property contributed to the activity
b) Amounts borrowed for use in the activity for which the taxpayer is personally liable or has pledge as security property not used in the activity
c) The taxpayer's share of amounts borrowed for use in the activity that is qualified non-recourse financing
102
Classifications of income
Active, passive, and portfolio
103
Earned income
Subset of active income
104
Unearned income
either passive or portfolio income
105
LIFO inventory system
* Concerned with the movement of costs through inventory, not goods
* The cost of the last units purchased will be the first costs to be transferred to cost of good sold when the goods are sold.
106
FIFO inventory system
The FIFO method is concerned with movement of costs through inventory, not goods. The cost of the first units purchased are the first costs to be transferred to cost of goods sold when the goods are sold.
107
52-53 week tax accounting period
ends on a specified day of the week (such as Friday) that occurs in the last week of the last month of the tax year
108
Fiscal year
ends on the last day of a month other than December
109
Calendar year
ends on the last day of December
110
Partial year tax accounting period
a time span less than 1 year
111
Accrual basis accounting method
* If income is generated from inventory, you must use accrual basis.
* Reporting of income and expenses is subject to the all events test
* C Corporations must use this -> any entity where a C Corporation is a partner or owner must use this
* S Corporations are not required to use this
* Recognize expenses when the buyer receives the seller's invoice
112
Preparer penalty for willful or reckless conduct
the greater of $5,000 or 50% of the income derived by the preparer for the return
113
Are losses on IRAs deductible?
No
114
Are losses on annuity contract disposition deductible?
Yes
115
Medical expense deductions for others
Can deduct medical expenses for individuals who would be dependents except for that their income requires them to file a return
116
Maximum investment interest deduction
includes long-term capital gains in addition to investment income
117
Casualty loss deduction when insurance is involved
Partial loss deduction = Damage - insurance proceeds
If net insurance proceeds are equal to adjusted taxable basis, no deduction allowed
118
REIT income
* Dividends are 100% ordinary, 0% qualified
| * Nondividend distributions are a return of capital and not included for gross income
119
Taxability of EE bond redemption for education
You can only exclude the part of the bond redemption proceeds used to pay for qualified education expenses from income.
120
What must a cafeteria plan offer?
At least one taxable benefit, usually cash, and one qualified nontaxable benefit.
121
Meals deduction
50% limitation
122
Domestic business trip deductibility rules
* If primarily business, deduct all airfare
| * Prorata meals and lodging
123
Foreign business trip deductibility rules
* Prorata meals and lodging
* Can deduct all airfare if < 7 days, < 25% on personal, no control, and vacation not a deciding factor (otherwise, prorata)
124
Are expenses incurred in connection with issuing and selling stock deductible?
No
125
Substitute basis
The fair market value of an asset, reduced by gain realized, but not recognized.
126
Can bargain sale transactions generate capital losses?
No
127
Capital loss carryovers
* Capital losses in excess of $3,000 are not disallowed, but are carried over indefinitely to future tax years.
128
Taxpayer use test
* If the taxpayer didn't use the property directly, the replacement property must meet this test
* Requires the replacement property to be used by the taxpayer in an activity which is treated the same for tax purposes in order to qualify for nontaxable exchange treatment
129
Capital recovery
* the expensing of certain acquisition costs
| * e.g. bond premiums - they are amortized over their life to expense the premium paid and thus are a recovery of capital
130
ACRS (Accelerated Cost Recovery System)
discontinued after 1986
131
MACRS (Modified Accelerated Cost Recovery System)
the tax depreciation method that will yield the greatest expense in the early portion of the asset's life
132
Advance rent
* Any amount you receive before the period it covers.
* Include it in your rental income in the year you receive it regardless of the period covered or the method of accounting you use.
133
Mixed use property
* Interest and taxes accrue daily.
* Other costs prorated according to use time
* Losses not deductible
134
Personal Holding Company (PHC)
* deemed by IRS because of involvement in a number of investments other than the stated business purpose
* a penalty tax of 20% can be imposed on the undistributed PHC income
135
Add-back items for AMT
include installment sales executed after March 1, 1986 but not before
