Tax Management Techniques - Review Questions Flashcards
Assume that Robert has a business which is sold on July 1st of the current year for $1,000,000. The terms of the sale require a down payment of 30%, with a monthly 7-year note at 6%. The adjusted basis in the business is $125,000 and it was purchased approximately 12 years ago.
What is the monthly installment payment?
Answer: $10,225.99
Computed as: n = 84; i = 0.50; PV = ($700,000); solving for PMT = $10,225.99.
Assume that Robert has a business which is sold on July 1st of the current year for $1,000,000. The terms of the sale require a down payment of 30%, with a monthly 7-year note at 6%. The adjusted basis in the business is $125,000 and it was purchased approximately 12 years ago.
What is the amount of cash flow received in year one?
Answer: $361,355.93
Computed as: installment payment of $300,000 (calculated as: $1,000,000 x 30%) + $61,355.93 (calculated as $10,225.99 monthly payments x 6 payments (July 31st – December 31st)).
Assume that Robert has a business which is sold on July 1st of the current year for $1,000,000. The terms of the sale require a down payment of 30%, with a monthly 7-year note at 6%. The adjusted basis in the business is $125,000 and it was purchased approximately 12 years ago.
How is the down payment taxed?
Answer: $262,500 is taxed as a Long-Term Capital Gain
Computed as: $300,000 Down Payment Received - $37,500 Return of Basis. The $37,500 Return of Basis is obtained as follows: (($125,000 Basis / $1,000,000 Total Sales Price) x $300,000 Amount Received).
Assume that Robert has a business which is sold on July 1st of the current year for $1,000,000. The terms of the sale require a down payment of 30%, with a monthly 7-year note at 6%. The adjusted basis in the business is $125,000 and it was purchased approximately 12 years ago.
What is the value of the installment receivable as of 12/31 of the current year?
Answer: $659,136.25
When you amortize the six installment payments above you determine the interest on the payments received is $20,492.18. Compute as: n = 84; i = 0.50; PV = ($700,000); solving for PMT = $10,225.99. Next, 6 f AMORT = $20,492.18 interest; “x><y” = $40,863.75 of principal payments received. Lastly, to find the ending installment balance, press “RCL” “PV” = $659,136.25. The net installment note receivable at 12/31 of the current year can also be obtained as ($700,000 beginning balance - $40,863.75 principal payments received = $659,136.25).
Assume that Robert has a business which is sold on July 1st of the current year for $1,000,000. The terms of the sale require a down payment of 30%, with a monthly 7-year note at 6%. The adjusted basis in the business is $125,000 and it was purchased approximately 12 years ago.
How are the six installment payments received in Year 1 taxed?
First, determine the interest on the payments received which is $20,492.18. See question #4 above for calculation steps.
Next, determine the long-term capital gain on the $40,863.75 of principal payments received. The long-term gain is $35,755.78, computed as: $40,863.75 of Principal Payments Received - $5,107.97 Return of Basis. The $5,107.97 Return of Basis is obtained as follows: (($125,000 Basis / $1,000,000 Total Sales Price) x $40,863.75 for the Six Principal Payments Received).
The recap for the six installments payments of $61,355.94 is comprised of: $20,492.18 of Interest Taxed as Ordinary Income + $35,755.78 Long-Term Capital Gain + $5,107.97 Return of Basis (Note that the math is off a penny due to rounding).
Assume that Robert has a business which is sold on July 1st of the current year for $1,000,000. The terms of the sale require a down payment of 30%, with a monthly 7-year note at 6%. The adjusted basis in the business is $125,000 and it was purchased approximately 12 years ago.
How is the total cash flow received in year one taxed?
You need to combine the amounts computed for the downpayment received and the six installment payments received during the year.
Total Payments of $361,355.93 are treated as follows: $20,492.18 Interest + $298,255.78 Long-Term Capital Gain + $42,607.97 Return of Basis.
Who is more favorably treated under non-qualified stock-option rules?
Employers
Employees
Employers
Employers receive a tax deduction for the compensation related to a non-qualified stock option plan.
Peter was recently granted 500 incentive stock options (ISOs) on January 23rd of this year. The fair market value matched the exercise price at the time of grant and was $50 per share. Assume Peter held the stock for the next 6 months and then exercised the stock when the fair market value equaled $75 per share. He then held the stock for 18 more months before finally selling it at $125 per share. Which of the following accurately describes the tax consequences of this transaction?
Choose the best answer.
1) $12,500 of ordinary income at exercise, followed by $25,000 long-term capital gain at final sale.
2) $12,500 of long-term capital gain at exercise, followed by $25,000 short-term capital gain at final sale.
3) $12,500 of long-term capital gain at exercise, followed by $25,000 long-term capital gain at final sale.
4) $0 of taxation at exercise, followed by $37,500 of long-term capital gain at final sale.
1) $12,500 of ordinary income at exercise, followed by $25,000 long-term capital gain at final sale.
The answer is $12,500 of ordinary income at exercise, followed by $25,000 long-term capital gain at final sale. For the ISO to be considered a qualifying disposition, Peter must hold the stock for more than one year after exercise and more than two years after the grant. Peter did not meet this requirement, thus turning his ISOs into NQSOs. For NQSOs, the difference between the FMV at date of exercise and date of grant is considered ordinary income. Subsequent sale will be the difference between the FMV at date of sale and date of exercise—taxed at either short or long-term capital gains depending on holding period.
Two years ago, Anita signed an employment contract to serve as president and chairman of the board of XYZ Motor Car Company. XYZ has had several unprofitable years, so Anita agreed to manage the company in exchange for five percent of profits should the company turn around. The signing agreement is non-forfeitable and is unfunded, but XYZ established an escrow account to fund future potential payments to Anita and will make deposits to the account of $100,000 per year. The fund is not secured for Anita’s deferred payments. Last year, the company began making profits. This year, XYZ’s profits were $3,000,000, so Anita received a payment of $150,000. How will this year’s results be taxed?
Choose the best answer.
1) Taxable income to Anita of $150,000 and a tax deduction to XYZ of $100,000
2) Taxable income to Anita of $100,000 and a tax deduction to XYZ of $150,000
3) Taxable income to Anita of $150,000 and no deduction to XYZ
4) Taxable income to Anita of $150,000 and a tax deduction to XYZ of $150,000
4) Taxable income to Anita of $150,000 and a tax deduction to XYZ of $150,000
If the requirements of the deferral are met, the employee is taxed when the amounts are actually paid or made available, and the employer receives a corresponding deduction in the same year.
Which types of income are not subject to withholding? (Check all that are true.)
1) Rent
2) Investment income
3) Capital gains
4) Income from employment
1) Rent
2) Investment income
3) Capital gains
The following types of income are not subject to withholding: investment income, rents, income from self-employment, and capital gains. Taxpayers who earn this type of income must make quarterly estimated tax payments.
If a taxpayer’s AGI is greater than $150,000 no penalty will be imposed if the taxpayer pays estimated tax payments in the current tax year, equal to what percentage of the prior year’s income tax liability?
Choose the best answer.
1) 100%
2) 105%
3) 110%
4) 112%
3) 110%
When the taxpayer’s AGI is greater than $150,000, the estimated tax payments for the current year need to be at least 110% of the prior year’s tax liability in order to avoid a penalty.
All of the following are true statements about Incentive Stock Options (ISOs) except:
1) The option price must be equal or greater than the stock’s FMV on the option’s grant date.
2) The option must be granted within 10 years of the date the plan is adopted, and the employee must exercise
the option within three years of the grant date.
3) The employee cannot own more than 10% of the voting power of the employer corporation’s stock
immediately before the option’s grant date.
4) The total FMV of the stock options that become exercisable to an employee in any given year must not
exceed $100,000.
2) The option must be granted within 10 years of the date the plan is adopted, and the employee must exercise
the option within three years of the grant date.
The employee must exercise the option within ten tears of the grant date.
Which statement correctly describes the intra-family transfer technique of sale-leasebacks and gift-leasebacks?
Choose the best answer.
1) Most appropriate to use when the business generates income from capital resources.
2) Compensation must be market-based and the skill set must match the job requirements.
3) Defers the recognition of capital gain and the outstanding note is not included in the decedent’s gross estate.
4) Transfers wealth quickly and property used in a trade or business is ideal for this strategy.
5) In order to be structured correctly, all payments must be unsecured.
4) Transfers wealth quickly and property used in a trade or business is ideal for this strategy.
Which statement correctly describes the intra-family technique of employment of a family member?
Choose the best answer.
1) Most appropriate to use when the business generates income from capital resources.
2) Compensation must be market-based and the skill set must match the job requirements.
3) Defers the recognition of capital gain and the outstanding note is not included in the decedent’s gross estate.
4) Transfers wealth quickly and property used in a trade or business is ideal for this strategy.
5) In order to be structured correctly, all payments must be unsecured.
2) Compensation must be market-based and the skill set must match the job requirements.
Which statement correctly describes the intra-family transfer technique of a Self-Canceling Installment Note (SCIN)?
Choose the best answer.
1) Most appropriate to use when the business generates income from capital resources.
2) Compensation must be market-based and the skill set must match the job requirements.
3) Defers the recognition of capital gain and the outstanding note is not included in the decedent’s gross estate.
4) Transfers wealth quickly and property used in a trade or business is ideal for this strategy.
5) In order to be structured correctly, all payments must be unsecured.
3) Defers the recognition of capital gain and the outstanding note is not included in the decedent’s gross estate.
