Tax Flashcards
Commerce Clearing House (CCH)
provides plain language interpretation of tax law
Congressional Tax Committee Reports (Blue Book)
- provides congressional reasoning for enacting tax law
- technical and difficult to understand
- best for interpretation of very recent tax law changes
to represent a client before the IRS you must be an
- Attorney
- CPA
- EA
alimony and maintenance costs
with ex-spouse written agreement, alimony may be directed to home maintenance costs and still maintain alimony status
not taxed under SS SE Tax
rental real estate income & shareholder’s share of S-Cord income above salary
tax planning services on which schedule for SE worker
Schedule C - business deduction
Schedule A - no longer allowed
kiddie tax
trust/estate tax rate
business bad debt
STCL
worthless stock held more than a year
LTCL
loss on small business stock 1244
OIL
STCL and LTCL use
first offset ST and LT gains
Then used to offset OI up to $3000
tax deferral techniques
IRA
owning cash value in life insurance (insurance savings component w/ deferred taxation)
filing tax return and blind or 65+ increased SD
must file to get additional SD for blind
must NOT file to get additional SD for 65+
“client’s income will closely approximate last year”
how much estimated taxes?
90% of “current year” = 90% of last year
self-employed: at what income must you file?
w-2 employee: at what income must you file?
>=$400 net earning SE income
income > StDed
taxation of…
ER retirement contributions
EE salary deferral
traditional IRA contribution
ER retirement contributions - excluded from GI
EE salary deferral - excluded from GI
traditional IRA contribution - Above line deduction
qualified dividends
held >60days before or after ex-dividend date
taxed at LTCG rate
taxed at set dollar breakpoints
ordinary dividends
held <=60days before or after ex-dividend date
taxed at ordinary income tax rate
Not allowed when figuring Net Operating Loss (NOL
when a company’s allowable deductions exceed its taxable income within a tax period.
- Any deduction for personal exemptions.
- Capital losses in excess of capital gains.
- The section 1202 exclusion…
- Nonbusiness deductions in excess of nonbusiness income.
- Net operating loss deduction. The domestic production activities deduction.
Net Operating Losses (NOL)
NOL losses currently CANNOT be carried back but they CAN be carried forward, (except for select agricultural or insurance filers)
NOL can only offset 80% of the current year’s income for years after 12/31/17.
marginal tax rate
The highest marginal rate paid by a taxpayer based on income.
effective income tax rate
The average rate a taxpayer pays based on taxable income.
death and basis in community property state
both halves of community property stepped to FMV regardless who inherit’s decedent’s half
undistributed profits and basis
increase basis
distributed profits and basis
decrease basis
swimming pools and basis
increase basis
Qualified Dependent: income received but not spent by dependent
gross income test - considered
support test - not considered
what constitutes support in determinging whether someone can be claimed as a dependent?
must be “GIVEN”
NOT support if used 99% of time and not given to dependent
maintenance cost, gas, insurance provided for non-given card counts as support
5 tests for Qualified Dependents
- Gross Income Test,
- Support Test
- Member of Household or Family Member Test,
- Citizenship Test (U.S., Canada or Mexico)
- Joint Filing Test.
Relationship (member of household or family member), Support, Gross Income, n-QC
can husbands be qualified dependents?
NO
when may a child of divorced parents be treated as qualifying child of the non custodial parent?
- The parents are legally divorced and not living in the same household.
- The child receives over one-half of his support for the year from his parents.
- The child is in the custody of the parents for more than half the year.
- The custodial parent signs a statement that he will not claim the child as a dependent for the year and the noncustodial parent attaches the statement to his return.
Abby and Brock are divorced. They have one daughter, Caroline, who spends exactly six months of the year living with her mother and exactly six months of the year living with her father. Abby has an AGI of $200,000 and Brock has an AGI of $150,000. Caroline is a qualifying child of both Abby and Brock. Who can claim Caroline as a dependent?
Abby
when all else equal, parent with highest AGI may claim as dependent
CANNOT both claim one person as a dependent
Section 1245 recapture does not apply to business equipment held for 17 months or longer if
The property was abandoned as worthless
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.
Section 1245 recapture applies to
sale of depreciated assets (business personalty)
included in AGI for current year
Original Issue Discount on the bonds for the current year.
NOT included…
- Earnings from Series EE bonds.
- Business income that was earned on Dec. 15 of the current year. The client mailed a check on Dec. 29 of the current year. The check arrived in Daniel’s mailbox on Jan. 2 of the following year.
- A business sale to a customer made on Oct. 15. Daniel extended the payment due date, and the client has yet to pay the bill.
pre 12/31/18 (TCJA) alimony rule
The income should be taxed to the person who enjoys the benefits of the income.
NOT claims right to income - alimony could be paid to a third party for home maintenance…it would still be taxable to ex-spouse
all business deductions are
for AGI (above the line)
Job-related EE expenses not allowed item misc deduc
can money pad for child support be structured in divorce to be deductible to payor spouse for divorces prior to 2020?
Yes, if the money to be considered as child support is included in deductible alimony
If an agreement is reached (prior to 12/31/18) 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 with the child reaching the age of majority or death.
qualfied education expense vs qualified eductation interest expense
both above line deduction interest - 2500 qualified education (tuition & fees) - 4000
gross income given and pre2019 alimony received
don’t include alimony in GI again, already included
categories of credits
- refundable
- non-refundable
partially-refundable not a classification
general business credit carryback and carryforward sequence
- carryforward to current year
- amount of the current year business credit
- carrybacks to current year
forward - current - back of current year
For the purposes of Earned Income Credit, which loss/losses are disregarded?
- Net losses from estate and trusts.
- Net losses from non-business rents.
- Net capital losses
- Taxable interest on U.S. government issue securities.
1,2,3
Tax has already been paid on federally issued securities, while the rest are all disregarded.
available credit for nonrefundable credit is limited to
Lessor of
- credit amount
- amount of tax due
conditions for claiming dependent care credit
- The taxpayer must provide over 1/2 cost of maintaining the household, which is also the principal residence of the child.
- The child must be a dependent.
- If married, both parents must work (incldues looking for work) or go to school.
used to determine the appropiate treatment of an economic unit
- The similarities and differences in types of business.
- The extent of common control.
- The extent of common ownership
tax accounting periods
52-53 week
fiscal
calendar
partial year
- 52-53 week - ends on specified day of week that occurs last week of the last month of the tax year
- fiscal - ends last day of a month other than december
- calendar - ends last day of december
- partial year - time span less than 1 year
tax accounting method if income generated from inventory
accrual basis
classifications of income
active - includes EI
passive - includes UE
portfolio - includes UE
material participation
- More than 500 hours of participation
- Taxpayer is the only one who substantially participates
- Taxpayer spends greater than 100 hours in the tax year and no one else spends more
- Taxpayer has materially participated in any 5 of the previous 10 years
- The activity is a personal services activity and the individual has materially participated in any 3 prior years
- Taxpayer participates 100 or more hours in this activity and total participation in all such activities exceeds 500 hours
basis of personal use property converted to business use
Lessor of…
- ATB at date of conversion
- FMV at date of conversion
LIFO inventory system
FIFO inventory system
The cost of the last units purchased will be the first costs to be transferred to cost of goods sold when the goods are sold.
The cost of the first units purchased will be the first costs to be transferred to cost of goods sold when the goods are sold.
accuracy related penalty
f the taxpayer files an incorrect return and has failed to make a good faith effort to comply with the tax law.
If the taxpayer understates his tax liability by more than 10 percent of the correct tax liability, and at least a $5,000 tax defeciency
If the taxpayer makes a substantial understatement associated with an estate or gift tax valuation.
tax preparer penalty - willful or reckless conduct
Greater of…
- $5000
- 50% of income drived by preparer of tax return
tax return filed more than 60 days late
penalty of…
Lessor of $435 or 100% of tax due
who can utilize bad debt deduction (recognize income not received)
accrual taxpayers only
NOT cash basis taxpayers
non business - STCL
business - OI
investment interest
- itemized deduction to extent of investment income
- not an itemized deduction if loan used to purchase tax exempt muni bonds
tax benefits of premiums paid on a long term care policy
policy must be guaranteed renewable or non-cancelable for the premiums to be deductible.
itemized deductions: medical bills
can deduct parent’s (immediate family member’s) medical bills even if not a dependent (except for income special exception)
non presciption insulin
itemized deduction
charitable contributions: loss property
basis cannot beused on loss property
check to see if FMV < Basis (loss)
home mortgage interest
deduction limited to qualified residential interest and a maximum indebtedness of $750,000 if financed after 12/15/17 (1M before 12/15/17)
cafeteria plans
- must offer at least one taxable benefit (cash) and one non-taxable benefit
- A cafeteria plan is a written plan under which the employee may choose to receive either cash or taxable benefits as compensation or qualified fringe benefits that are excludable from wages.
- Cafeteria plans are authorized by Section 125 of the Internal Revenue Code.
- A cafeteria plan is appropriate when employee benefit needs vary within the employee group.
compensation to family member’s for services
FMV at DOD included in family member’s GI even if transfer occurrred at death (through a will)
nondividend distributions
return of capital, NOT included in GI upto basis, taxable to extent exceeds basis
REITs
- cannot pay qualified DIV
- cannot sell an owner’s shares
- cannot pay tax for shareholder
automatic mileage method
- Rate doesn’t include parking fees and tolls
- MACRS is not permitted–nor is bonus depreciation such as 179
- you may switch between the standard mileage method and the actual operating cost method.
- Allows use on leased autos but the only exception is “If you want to use the standard mileage rate for a car you lease, you must use it for the entire lease period.”
must be capitalized by a business
vs
period costs
cost to improve, better, or extend life of an asset
vs
maintenance and tuneups
capital intensive business
- higher amount of revenue to expenses and a potentially high income tax burden
- desire to reduce income tax requires the need to increase expenses, and therefore, gives rise to potential excessive or unreasonable compensation.
taxable use test
requires 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
ex) rented office buiding completely destroyed
substitute basis
FMV - gain realized (not recognized)
maximum capital loss
- extent capital gains
- 3,000 against OI
- excess carried forward
taxation of cash dividends
taxation of stock dividends
recognized in the year paid
recognized in year sold
capital recovery
expensing of certain acquisition costs.
Bonds purchased at a premium are amortized over their life to expense the premium paid. The theory is that when they mature, their basis will be equal to their face value and not the face plus premium. Bond expenditures are, therefore, a recovery of capital.
basis for depreciation of gifted property for use in trade or business
lower of FMV or ATB
what will cause a leased equipment to be treated for tax purposes as a purchased equipment?
signs of ownership…
- Intent of the parties to the transaction.
- Whether any equity results from the arrangement.
- Whether any interest is paid.
- Whether the fair market value of the car is less than the “lease payment” or option when the option to buy is exercised.
- taxpayer will be required to elect standard mileage or take depreciation + actual expenses
improvments to land
depreciable
land itself, not depreciable
cost recovery of intangible asset
amortization
ex) patents and trademarks
cost recovery of tangible assets
depreciation
cost recovery of natural assets
depletion
periodic expensing of natural resources, tangible and intangible assets, as they are being used up.
It is an expense that fluctuates with the actual taking of the resource from the land.
most to least depreciation for given period
- MACRS - most
- Straight Line - least
ACRS discontinued
inclusion amount
designed to help to smooth the lease expense vs. the depreciation expense. The lease is front loaded.
is a hotel residential or non-residential real property
non-residential
taxation of advanced rent received
included in rental income in the year received regarless of the period covered or accounting method used
IRS deems business PHC…penalty
20% penalty tax on undistributed PHC income
income/earnings
C-corp vs S-corp
C-corp - retains income
S-Corp - required to pass profits/losses through to owners
add back items for AMT
- Depreciation of property placed in service after 1986.
- The standard deduction, if taken in lieu of itemized deductions.
- Passive activity losses.
- Installment sales undertaken after March 1, 1986.
standard deduction and AMT
if taken in lieu of ID, must be added back for AMT purposes
Section 179 Recapture
- business use of an asset drops below 50% for a given year
- when the asset is disposed of before it would have been fully depreciated.
What effect does claiming the Section 179 deduction have on an asset’s adjusted taxable basis?
Any amount of expense not to exceed the total cost, subject to income and Section 179 expense limits, reduces the adjusted taxable basis.
reason to choose c corp over s corp
fringe benefts w/o restrictions
Form 1099-R
reports amount of rollover
reports distributions
Form 5498
reflects contributions to the IRA
Form 8606
reports nondeductible contributions to IRA
determines tax consequences of taxable distributions
tax years…
trust
estate
partnership
S-corp
trust - calendar year
estate - calendar or fiscal
partnership - tax year, fiscal if partners are fiscal
S-corp - calendar or fiscal
commissions
reduce gain or add to loss
silent aution and deductible contribution
PP-FMV=charitable contribution
GRAT and S-Corp
can own stock in S Corp
Losses from limited partnerships
cannot be used to offset income from MLP
qualified transfers
pay education for someone directly to college
pay medical bills for someone directly to hospital
NO filing requirements
substantial period payments
To avoid an underpayment penalty, substantially equal periodic payments must continue for the greater of: 1) 5 years, or 2) until the individual attains age 59 ½. Therefore, a 42-year old would need to continue payments for 18 years.
avoids 10% early withdrawal penalty
which entities require estimated tax pmts
include but not limited to
estate
c-corp
sole prop
s-corp?
calculate FICA
wage (up to 137,700) x 6.2% + full wage x 1.45%
OASDI + HI
