Tax Flashcards
Sources of Federal Tax Law/Authority
- internal revenue code: primary source of tax law
- treasury regulations: a source of law
- revenue rulings: interpretations that may be cited
- congressional committee reports: intent of congress
- private letter rulings: apply to specific taxpayer
- judicial sources: court decisions interpret laws
Federal Tax Underpayment Penalty
To avoid, pay the lesser of:
1) 90% of the current years tax liability
2) 100% of the prior years tax liability (or 110% of gross income was over 150k)
Accounting Methods
- Cash: firm realizes revenue in the year payments are received (<25 million revenue)
- Accrual: firm realizes revenue when process of goods and services are complete (better with large inventory)
- Hybrid: combines accrual for inventory side and cash for cash side
- % of Completion: for long term contracts where the contract will not be completed within the taxable year
Property Classes (MACRS) and Depreciation
- 5 Year: Computer, Auto, Trucks (1245 Property)
- 7 Year: Office equipment except computers (1245)
- 27.5 Year: Residential rental property (1250)
- 39 Year: Non-residential rental property (1250)
Capital Gains and Losses
1) STCG and STCL are netted and LTCG and LTCL netted
2) If a gain and a loss remain, they are netted
3) If a loss remains after netting, only $3,000 of net loss can be used to offset ordinary income
Sale of Personal Residence (Section 121)
- $250k (single) and $500k (mfj) of gains from sale is tax free if they lived in home for 2 out of last 5 years
- Exception available if taxpayer lives in the residence less than 2 years and moves because of new job, health reasons, etc (received prorated amount)
Recapture (1245 Property)
(hug and 2 slugs)
Hug: I get to deduct a business expense for equipment (take a CRD)
Slug 1: my basis is lowered by the CRD that I take
Slug 2: if I sell the equipment, basis is taxed at ordinary income and over that is taxed at capital gain rates
Section 179 Deduction
A small business can expense newly acquired 1245 property instead of depreciation (offsetting Schedule C Income) up to $1.04m (limited by amount of income I generate)
Historic Rehabilitation Programs (HRPs)
HRP’s that are held as passive activity may generate a deductible-equivalent tax credit up to $25k. The benefit of this deduction-equivalent tax credit phases out between $200k AGI
How does that credit work? You calculate your tax to determine the maximum marginal tax bracket. If it is 25% for example, then you multiply $25k by 25% to get a credit of $6,250
Low Income Housing: Housing Credit
Tax credit up to $25,000 (no phase outs)
Multiply your tax bracket by $25,000 to find your tax credit.
Original Basis, Cost Basis, and Adjusted Basis
Original Basis is a taxpayers investment in any asset or property.
Cost Basis= Original Basis increased by legal fees, commission, sales tax, improvements but NOT repairs, real estate tax, or operating expenses
Adjusted basis= Cost Basis less cost recovery (deductions). Cost recovery produces a deduction for depreciation.
Passive Activity and at-risk rules
Passive Activity: taxpayer does not materially participate
Rule 1: only means to offset passive income is passive loss
Rule 2: Non-Publicly traded partnership income can be offset by any other non-publicly traded partnership loss (doesn’t need to be same partnership)
Rule 3: Publicly traded partnership income can only be offset by publicly traded income from the same MLP.
Widow will file for taxes as…
MFJ in the year of spouses death as she can benefit from this filing. After she will be Q widow or single
If a person finds they are due a tax refund…
file form 1040X within 3 years of the filed return or 2 years of the tax payment
An individual in the 12% marginal tax bracket has a LTCG tax rate of:
0%
Federal Gift Tax File Form
Federal Estate Tax File Form
Gift: 709
Estate: 706
Collectible Gain Tax
28% (note that this is higher than the LTCG tax of 20%)
Hobby Loss
The TCJA eliminated misc. itemized deductions and the ability to deduct hobby related expenses. Any activity generating a profit for 3 out of last 5 years is a business.
Net Operating Loss (NOL)
If business has more expenses than gross income, there is a NOL. (no S corps or partnerships)
NOL Deduction: An NOL in one year can be used to reduce taxable income for a future year. There is a limit on how much can be used in one year but no limit on carry forward amount. NOL carry over can only offset 80% of taxable income in one year.
LIFO and FIFO (inventory methods)
Last in, First out (if a company wants to reduce taxes in an inflationary period)
First in, First out (reflects current costs)
Amortization
Amortization is the recovery of certain capital expenditures that are not ordinarily deductible in a manner that is similar to straight line.
Some assets have no physical substance (goodwill). The tax basis in such intangible asset may be recoverable. Intangible’s are generally amortized under Section 197. The recovery method is similar to straight line depreciation.
Accretion
At issue, a bond is discounted from par value. that discount must be accreted over the life of the bond. Each year, the portion of discount that has been “earned” is included as taxable income and the bonds basis is increased (phantom income)
Wash Sale Rules
No deduction is allowed for any losses on stock if within a period beginning 30 days prior and ending 30 days after the sale the taxpayer acquired identical stock or securities
AMT Calculation
Start with post-deduction 1040 income (or AGI if taking the standard deduction)
Add back any items deductible for 1040 but not AMT
Add preference items
Equals AMT Base
Subtract exemptions
Equals AMT Income
Multiply by rate to get AMT liability
Personal Exemptions
No longer exist.
If disabled, you get a larger standard deduction
What amount of deduction would be equal to a credit?
Credit/tax rate
DNI
DNI determines the amount of income to be distributed to the beneficiary as well as the corresponding deduction by the trust.
