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DANKO CFP FC REVIEW > Tax Planning > Flashcards

Tax Planning Flashcards

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1
Q

What are the eligibility requirements for a Subchapter S Corporation?

A
  • 100 or less shareholders.
  • Can only have a single class of outstanding common stock, but it can be voting or non-voting.
  • Has to be a DOMESTIC corporation.
  • Only individuals, estates and certain trusts may be shareholders.
  • Non-resident aliens cannot be shareholders.
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2
Q

Tax Basis for Partnership / LLC

A
  • Cash invested
  • Direct loans made to the partnership
  • Partnership Debt: Loans made TO the partnership (bank loans). Not made to the partner.
  • S-Corp basis does NOT include bank loans even if the S-Corp owner personally guarantees the debt.
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3
Q

Property Classes

A

1245 Property (Non real estate):
- 5 Year: Computers, Autos, Trucks.
- 7 Year: Office Equipment

1250 Property (real estate):
- 27.5 Year: Residential RENTAL property
-39 Year: Non-residential REAL property

CATORN!

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4
Q

Boot / Gain Recognized / Basis

A
  1. No Boot Received: Recognized gain is ZERO!
  2. When Boot is Received the recognized gain is the boot RECEIVED.
  3. Boot paid is added to Basis
  4. Boot carries over from the prior property.
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5
Q

Netting Capital Gains and Losses

A

Step 1:
- ST Capital Gains and ST Losses are netted.
- LT Capital Gains and LT Losses are netted.

Step 2:
- If a gain and loss remains, THEY ARE NETTED.

Step 3:
- If a loss remains after netting capital gains and losses, ONLY $3,000 OF NET LOSSES CAN BE USED TO OFFSET ORDINARY INCOME.

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6
Q

Sale of Personal Residence: Section 121

A
  • Single: $250,000 of gain from sale is tax-free.
  • MFJ: $500,000 of gain from sale is tax-free.
  • Must have lived in the home for 2 out of the last 5 years.
  • Exceptions: Taxpayer moves for new job 50 miles away. Divorce, legal separation, or death. Becoming eligible for unemployment. Change in employment. Multiple births. Damage to home. Condemnation, foreclosure. An unforeseen circumstance.

If lived in the house for less than 2 years, there will be a prorated amount.

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7
Q

Recapture: 1245 PROPERTY ONLY (5&7)!! NO 1250 (27.5&39)

A
  • When the sole proprietor purchases equipment and takes depreciation (CRD), the CRDs offset Ordinary Income in coming years.
  • When the sole proprietor sells the equipment for a gain, they must:
    First, recapture the LESSOR of CRDs taken or the GAIN realized as 1245 recapture (ORDINARY INCOME).
    Second, recover any excess gain as 1231 gain (capital gain).

When the amount realized is less than the adjusted basis, the result is an ordinary loss.

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8
Q

Section 179: Qualifying vs Non-Qualifying Property

A

Qualifying:
- Tangible personal property
- 1245 Property

Non-qualifying:
- Real Estate
- 1250 property
- Intangible

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9
Q

AMT Preference Items

A

I PREFER an IPOD

Intangible drilling costs (Excess)
Private-activity Municipal Bond
Oil and Gas percentage depletion
Depreciation (ACRS/MACRS, but not Straight-line)

Preference Items are income that normally is received tax-free, that may trigger AMT.

Notice that cost depletion is not a preference item, but percentage depletion IS!

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10
Q

AMT Add Back Items

A

Some itemized deductions are not allowable deductions for calculation of the AMT, which are called add back items, which include:

  • Property, state, city/income and sales taxes (limited to $10,000/year)
  • Incentive stock option bargain element (excess of the FMV over the option price at the exercise date).

The standard deduction is deductible

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11
Q

Postponing AMT

A
  • Accelerating receipt of taxable income, or deferring payment of property taxes, state income taxes, deductible medical expenses, or charitable giving. THE REGULAR TAX (1040) MAY EXCEED THE AMT PAYABLE.
  • Deferring exercise of incentive stock options to a later date (preference item), or DISQUALIFY the ISO so that it becomes NQSO subject to ordinary income.
  • Purchase PUBLIC purpose muni bonds instead of PRIVATE purpose bonds.
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12
Q

Historic Rehabilitation Programs

A
  • Held as passive activity.
  • Generates a DEDUCTION-EQUIVALENT tax credit of UP TO $25,000.
  • Phases out between $200,000 and $250,000 of AGI.
  • Marginal tax bracket % x $25,000.
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13
Q

Low-income Housing Credit

A
  • Held as passive activity.
  • Generates a DEDUCTION-EQUIVALENT tax credit of up to $25,000.
  • Allowed annually over a ten-year “credit period”
  • Marginal tax bracket % x $25,000.

NO PHASEOUT

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14
Q

Types of Phantom Income

A

Insurance: Lapse of a policy loan, Section 162 (executive bonus) life/disability.

Investments: Zero/Strip income, TIPS, declared but not paid dividends.

Tax: K-1 income from LP/FLP, recapture

Retirement: NUA, 20% withholding plan distributions, secular trust.

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15
Q

Charitable Giving steps

A
  1. Calculate the MAXIMUM DEDUCTIBLE - 60% of AGI.
  2. Calculate the eligible amounts given to public charities. Churches, schools, hospitals and organizations such as the United Way, Red Cross, and Human Society.
  3. Calculate the eligible amounts given to private charities. Private non-operating foundations, war veteran groups, and fraternal orders.
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16
Q

Charitable Giving: Chart

A

Step 1: Calculate the maximum amount deductible. 60% of AGI.

Step 2: calculate the amount to public charities.
- Up to 60% of AGI for cash donations
- Up to 30% of AGI for LTCG Property using FMV.
- Up to 50% of AGI but using
Basis for LTCG property
Basis for inventory/works of art
Basis for STCG property
Basis for use unrelated property

Step 3: Calculate the amount to private charities
- Up to 30% of AGI for cash donations
- Up to 20% of AGI for LTCG property
- Up to 30% of AGI but using
Basis for inventory/works of art/use unrelated
Basis for STCG and LTCG property

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17
Q

Sources of Federal Tax Law/Authority: Internal Revenue Code

A

Primary source of all tax law.

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18
Q

Sources of Federal Tax Law/Authority: Treasury regulations

A

Great authority, but not law.

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19
Q

Sources of Federal Tax Law/Authority: Revenue rulings and Revenue procedures

A

Administrative interpretation/may be cited.

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20
Q

Sources of Federal Tax Law/Authority: Congressional Committee reports

A

Indicates the intent of congress/ may NOT be cited.

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21
Q

Sources of Federal Tax Law/Authority: Private letter rulings

A

Apply to a specific taxpayer.

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22
Q

Sources of Federal Tax Law/Authority: Judicial sources

A

Court decisions interpret.

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23
Q

Step transaction

A

Ignore individual transactions, tax the ultimate transaction.

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24
Q

Sham Transaction

A

A transaction that lacks a business purpose and/or economic substance, will be ignored for tax purposes.

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25
Q

Substance over form

A

The substance of a transaction governs its tax consequences.

When there is no intent to repay a loan, or no written loan agreement.

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26
Q

Assignment of Income

A

Income is taxed to the tree that grows the fruit even though it may be assigned to another.

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27
Q

Dates for Paying Estimated Taxes

A

April 15, June 15, September 15, January 15
1, 2, 3, 4

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28
Q

IRS Penalties: Frivolous return

A

$5,000

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29
Q

IRS Penalties: Negligence

A

20% of the portion of the underpayment attributed to negligence.

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30
Q

IRS Penalties: Civil Fraud

A

75% of the portion of the tax underpayment ONLY not interest deficiency.

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31
Q

IRS Penalties: Failure to file

A

5% of the tax due per month, with a max of 25%.

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32
Q

IRS Penalties: Failure to pay

A

0.5% per month of the tax unpaid, with a max of 25%.

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33
Q

Federal Withholding Tax Underpayment Penalty

A

To avoid this penalty, pay the LESSOR of:
1) 90% of current year’s tax liability.
2) 100% of previous year’s tax liability (or 110% of previous year if gross income exceeded $150,000).

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34
Q

Adjustments for AGI

A

AGI is the second step in the 1040 calculation.

AGI = Gross Income - Adjustments.

Adjustments:
- IRA contributions
- Student loan interest ($2,500 limit)
- Self-employment tax (.07065)
- HSA
- 100% Self-employment health insurance
- Keogh or SEP
- Moving expenses (Active military)
- Penalty for early withdrawal of savings
- Alimony paid for a PRE-2019 divorce
- $4,000 educational expense (AGI limits apply and used as an alternative to AOC)

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35
Q

Schedule A Itemized Deductions

A
  • Medical, Dental, and Qualified LTC (7.5% of AGI).
  • Casualty and theft losses (federally declared disaster).
  • Real Estate, State and Local; sales, and Personal Property taxes up to $10,000.
  • Investment interest expense (up to net investment income)
  • Home mortgage interest
  • Mortgage insurance qualified residence (<$100,000 AGI)
  • Charitable gifts
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36
Q

Casualty Losses (Calculation of the deductible loss)

A

Must be a federally declared disaster

1) Use the LESSOR of Basis or FMV
2) Subtract any insurance coverage
3) Subtract $100 floor
4) Subtract 10% of AGI

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37
Q

Kiddie Tax

A

All unearned income of a child who has not attained age 18 or turns 19-23 if a full-time student and who has at least one parent alive is taxed at parents rate regardless of the source of the assets.

REDO THIS CARD.

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38
Q

What constitutes as Self-Employment Income?

A
  • Net Schedule C income
  • General partnership income (K-1)
  • Board of Director Fees
  • Part-time earnings (1099)
  • NOT wages or distributions (K-1 income) from an S-CORP. Nothing from an S-Corp is considered self-employment income.
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39
Q

Tax credits

A
  • Credit for child & dependent care expenses ($600 for 1, $1,200 for 2+).
  • Child tax credit (up to $1,600/child could be refundable. $2,000 if you pay taxes). PR.
  • Adoption credit. NR.
  • Elderly and disabled credit (65 and/or disabled). NR.
  • Foreign tax credit. NR.
  • Earned income credit. REFUNDABLE.
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40
Q

Accounting Methods

A
  • Cash: Mandatory where taxpayer’s records reflect only cash transactions, and there are NO inventories.
  • Accrual: Mandatory for purchases and sales where there ARE inventories.
  • Hybrid: Combines accrual for inventory portion of business and cash for cash portions of business.
  • Percentage of Completion: For long term contracts where the contract will not be completed within the taxable year started.
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41
Q

Hobby Loss Rules

A

TCJA eliminated miscellaneous itemized deductions and the opportunity to deduct hobby related expenses.

Any activity generating income (profit) in 3 out of 5 consecutive years is a business. For horses, 2 out of 7 consecutive. CANT DEDUCT EXPENSES UNLESS ITS A BUSINESS EARNING AN ACTUAL PROFIT FOR FHE YEARS STATED ABOVE.

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42
Q

T or F: An individual is required to file if their net earnings from self-employment are at least $400

A

T

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43
Q

Which tax form is used to amend a return?

A

1040X

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44
Q

Rose filed an extension on April 15. On June 1, she filed her tax return and owed an additional $400 on a total tax liability of $4,100. Explain.

A

90% of the total current year tax liability $4,100 is $3,690. Rose actually paid $3,700 ($4,100-$400). There is no failure to pay the total amount due because she fulfilled the 90% rule by paying slightly more than 90%. There is no penalty, but interest may be due.

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45
Q

Tax liability vs taxable amount

A

Tax liability is the ACTUAL tax paid. Be careful of this estimated tax/withholding tax/underpayment questions.

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46
Q

Gross Income Inclusions: APRICOTT PWUB

A
  • Alimony received, divorced before 2019.
  • Punitive damages (Except wrongful death).
  • Real estate: Schedule E.
  • IRA distributions.
  • Capital gains and losses: Schedule D.
  • Ordinary dividends: Schedule B.
  • Taxable Social Security.
  • Taxable interest: Schedule B.
  • Pensions and Annuities
  • Wages, Salaries, Tips.
  • Unemployment income.
  • Business income and losses: Schedule C.
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47
Q

Gross Income Exclusions: CIG CWM

A
  • Child Support
  • Inheritances
  • Gifts
  • Compensatory damages
  • Workers’ compensation
  • Municipal bond interest
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48
Q

Tax Calculation

A

GROSS INCOME
- Adjustments (above the line)
= AGI (the line)
- Deductions (below the line)
= TAXABLE INCOME
x Tax-rate
= TAXABLE CALCULATION
- Credits
+ Other taxes
= TAX LIABILITY
- Quarterly payments/Withholdings
= NET TAX DUE or REFUND

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49
Q

T or F: Scholarships for tuition and books are excluded for income but portions attributable to room and board are taxable income.

A

T

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50
Q

Tax-free Fringe Benefits

A
  • Occasional overtime meal money, cab fare, theater or sporting event tickets (not season tickets).
  • Discounts on services are limited to 20% off the selling price charged to customers.
  • Premiums the employer pays to a health plan for the employee, the spouse, or the dependents.
  • Group life policy up to $50,000 (paid by employer).
  • Company car for business purposes.
  • Transit pass: $300/month
  • Parking: $300/month
  • An employee may exclude up to $5,000 ($2,500 MFS) paid or incurred by the employer for dependent care assistance.
  • $5,250/year (aggregate) exclusion from gross income for employer-provided education assistance.
  • $10,000 exclusion from gross income for employer-assistance programs for qualified adoption expenses.
  • Value of discounts on company products if it does not exceed the employer’s gross profit %.
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51
Q

Taxable Fringe Benefits

A
  • Health insurance premiums paid for self-employed, partners, and more than 2% owners of an S corporation are taxable income (100% is deductible as an adjustment). This does not include disability insurance premiums.
  • Insurance premiums your employer pays on a group life policy in excess of $50,000 if the plan is nondiscriminatory, are taxable (per table I).
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52
Q

Are group disability benefits taxable??

A

Usually yes

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53
Q

Adjustments to Income for AGI:
k. miSshaPEs

A

Keogh or SEP (self employed)
Moving expenses (active military)
IRA contributions
Student loan interest
Self-employment tax. ONE HALF! (half of .1413 calc.)
HSA
Alimony paid pre-2019
Penalty for early withdrawal of savings
Educational expense ($4,000. AGI limits apply and used as an ALTERNATIVE to AOC).
Self-employment health insurance (100%)

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54
Q

How much student loan interest can be deducted?

A

Qualifying individuals may claim an above the line deduction on the front of the 1040. Limited to $2,500.

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55
Q

Is alimony paid to an ex-spouse (pre-2019 divorce) still deductible if they remarry?

A

Yes.

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56
Q

What is MAGI?

A

AGI + tax-exempt interest, non-taxable social security income, student loan interest, etc.

The most common usage of MAGI will be surrounding tax-exempt interest in determining whether social security benefits are taxable.

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57
Q

What is the extra standard deduction for EACH spouse MFJ age 65 or older and/or blind? Single?

A

$1,500 MFJ

$1,850 Single

If 65+ AND blind, you get the elderly AND blind deductions combined ($3,000 MFJ per individual, or $3,700 S)

Blindness has no age requirement.

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58
Q

Itemized deductions- Schedule A

A
  • Medical, dental, & qualified LTC expenses.
  • State, local, sales, real estate, and personal property taxes limited to $10,000.
  • Mortgage insurance qualified residence (<$100,000 AGI).
  • Home mortgage interest (separate from above).
  • Charitable gifts
  • Investment interest
  • Casualty losses (if federally declared disaster area).
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59
Q

Qualified residence interest rules

A
  • Proceeds of a mortgage loan must be to buy, build, or improve. Secured by home.
  • Only interest paid on first $750,000 ($375,000)
  • Includes principal mortgage and home equity loans.
  • Up to $1M is grandfathered for pre-12/15/17
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60
Q

Investment interest deduction

A

Investment interest is interest paid on indebtedness for property held for investment (margin).

MAX INVESTMENT INTEREST DEDUCTION IS LIMITED TO THE TAXPAYER’S NET INVESTMENT INCOME

Can be carried over indefinitely.

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61
Q

Investment income

A
  • Interest, non-qualified dividends, royalties, and short-term gains.
  • A qualified dividend will only qualify as investment income if the taxpayer elects not to use the reduced tax rates (uses OI rates).
  • LT gains will only qualify as investment income if the taxpayer elects not to use LT rates (uses OI rates)
  • In other words, the taxpayer needs to elect out of qualifying rates and elect ST cap gains rates (OI rates).

Assume ordinary income rates

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62
Q

Home office deduction

A
  • Must be self-employed
  • Prove the space is used exclusively and regularly
  • There must be no other fixed location of the trade or business where the taxpayer conducts substantial business.
  • Gross income - business expenses = amount that can be deducted for home office expense (depreciation, home maintenance, etc.)
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63
Q

Are itemized miscellaneous deductions repealed?

A

YES from 2018-2025.

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64
Q

Meals and Entertainment Expense

A
  • Meals for entertaining clients and wooing prospects may be deductible IF BUSINESS IS ACTUALLY CONDUCTED, taxpayer present, not lavish. 100% deductible.
  • Expenses for recreation, social, or similar activities for the benefit of employees, other than HCEs, are still deductible (office parties).
  • Business meals for the convenience of the employER, where no business is being done, are now only 50% deductible.
  • Meals for employees while travelling are 50% deductible.
  • Tickets to sporting or cultural events are not deductible.
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65
Q

Medicare taxes

A
  • For WAGES in excess of $200,000 S, $250,000 MFJ, $125,000 MFS, the Medicare tax rate will increase to 2.35% (1.45% + .9%). The additional .9% is added to the 1.45% if over the threshold.
  • If less than $200,000, the rate will remain at 1.45%.
  • An additional 3.8% Medicare tax will be applied to INVESTMENT INCOME for taxpayers with annual income of more than $200,000 S, $250,000 MFJ. Investment income includes LTCG and distributions from NQ annuities.
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66
Q

What is Kiddie Tax?

A

It is a tax to discourage the shifting of income to children.

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67
Q

Who do the Kiddie tax rules apply to?

A

To the following with UNEARNED income greater than $2,500 with at least one living parent:
- 17 years old or younger
- 18 where earned income is less than half of support
- 19-23 where earned income is les than half of support and full time student

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68
Q

What if a child subject to Kiddie tax has earned income?

A

The amount of the earned income + $400 is used in step one of Kiddie tax calculation.

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69
Q

Is the parents tax bracket always used in the kiddie tax calculation??

A

Yes. Never a grandparent even if they are the ones providing the unearned income.

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70
Q

Calculating Kidding tax for child with unearned income:

A

$1,250 standard deduction
$1,250 @10% (Childs rate)
Remainder @ Parents tax rate

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71
Q

Calculating Kiddie tax for child with earned and unearned income:

A

Standard deduction is the GREATER of $1,250 OR earned income + $400 (but no more than the single person standard deduction $13,850).

Next $1,250 @ 10%

Remainder @ Parents tax rate

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72
Q

What is self-employment tax?

A
  • SE pay their own Social Security and Medicare taxes. Since SE function as both the employer and employee, they pay both halves of the tax.
  • SE tax is based on NET EARNINGS.
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73
Q

Self-employment income DOES NOT include the following:

A
  • Dividends or interest on investments.
  • Gains (or deductions for losses) from property, securities, or commodities.
  • Real estate income or rents paid.
  • Distributive share of income or loss of a LIMITED PARTNERSHIP
  • WAGES from an S-CORP
  • DISTRIBUTIONS from an S-CORP (K-1 income).

Wages and distributions from S-corps are never included in self-employment income.

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74
Q

Self-employment income DOES include the following:

KNOW THESE 4!

A
  • NET schedule C income. DONT GET FOOLED BY NET.
  • General partnership INCOME (K-1 income)
  • Board of director fees
  • Part-time earnings (1099)

It is NET schedule C income plus the others.

Distributions/income from a General Partnership is SE income.

ANY DISTRIBUTION FROM AN S CORP IS NOT SE INCOME. IN RELATION TO SE INCOME QUESTIONS, WHEN YOU SEE S-CORP CROSS IT OFF.

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75
Q

To calculate SE income:

A

.1413

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76
Q

How is self-employment tax paid?

A

It is added to the taxpayers income tax liability, and then HALF is subtracted on the front of the 1040 (half of .1413).

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77
Q

Child and dependent care credit
- Until what age?
- MAGI phaseout?
- Credit amount?

A
  • Until age 13
  • No MAGI Phaseout
  • 20% credit for expenses actually paid.
  • up to $3,000 for 1 child, or $6,000 for two children (20% is either $600 or $1200).
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78
Q

Child tax credit
- MAGI Phaseout?
- Credit amount?
- Until what age?
- refundable?

A
  • Has MAGI phaseout
  • Individuals may claim a child tax credit of $2,000 for each qualifying child under 17 years old.
  • Reduced by $50 for each $1,000 above $400,000 MAGI for MFJ and $200,000 MAGI for unmarried individuals.
  • Up to $1,600/child is a refundable credit.
  • There is also a $500 family credit for each dependent who is not a qualifying child, presuming 50% of their support is provided. Same phaseout as above. ie: Alex Brooks.
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79
Q

Are credits included in reportable income?

A

No. Credits come into play later in the tax calculation.

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80
Q

Retirement Savings Contribution Credit

A
  • Credit of 50%, 20%, 10% of retirement plan/IRA contribution depending on AGI.
  • No credit is available for taxpayers over $73,000 MFJ.
  • max credit is $2,000 S / $4,000 MFJ.
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81
Q

Max adoption credit

A
  • $15,950 per eligible child.
  • If adopting a special needs child, full credit is claimable even if expenses are less than the full amount.
  • There is an AGI phaseout.
  • Foreign national expenses can only be claimed when adoption is FINAL.
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82
Q

Credit for elderly and the permanently and totally disabled

A
  • 65, or,
  • under 65, is retired with a permanent and total disability, AND receives disability income.
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83
Q

Earned income credit

A

For low income earners with earned income under certain limits. This is a refundable credit.

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84
Q

Tax deduction vs Tax credit

A
  • A deduction is worth more to a high-bracket taxpayer, and a credit is worth more to a low-bracket taxpayer.
  • Deduction = multiply for credit equivalent
  • Credit = divide for deduction equivalent

DM CD

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85
Q

Accounting methods: Cash

_____ or ______ in average revenues will use this method.

A
  • Firms realize revenue from services performed in the year RECEIVED.
  • Firms match expenses against revenues in the year the expense is PAID, regardless of when the liability was incurred.
  • Most businesses with $29 million OR LESS in average revenues will now use the cash method of accounting.
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86
Q

Accounting methods: Accrual

A
  • Firms realize revenue when the services they provide is complete, regardless of when payment is received.
  • Firms match expenses against revenues in the year the firm INCURS the liability for the expense.
  • No longer mandatory for purchases and sales where there are inventories, UNLESS the corporation or other business averages over $29 million in revenues during prior three years.
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87
Q

Installment sales

A
  • Permits the capital gain recognized to be spread over the life of the note rather than be recognized entirely in the year of the sale.

Exclusions:
- All payments are received in the year of the sale
- publicly traded securities
- loss property
- sold to related party who turns and sells it within 2 years

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88
Q

Installment sale: Gross profit percentage

A

Gain realized / Total contract price.

Gain / Price.

Gains are Capital gains. LT or ST depending on holding period of newly acquired property, not previous owners holding period.

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89
Q

During periods of rising prices, what will happen if a company switches from LIFO to FIFO?

A

Net business income will be HIGHER. Low initial cost, selling for higher price. Think about it. Its not difficult.

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90
Q

What is specific ID good for?

A

Can create gains, losses, or neutralize a gain or loss. Good being able to manipulate appearance of profits or losses.

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91
Q

Net Operating Loss

A
  • If a firms operations result in excess deductible expenses over income, this generates a NOL.
  • If a firm has no taxable income, there is no tax cost.
  • Excess expenses can be carried forward.
  • TCJA limited the amount of deduction but allows for carryforward.
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92
Q

Why would NOL generally be important to a sole proprietors who just started a business?

A

Schedule C losses attributable to a sole proprietorship may be claimed on that proprietor’s personal 1040 and thus reduce AGI and ultimately taxable income.

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93
Q

T or F: Sick pay is taxable, tickets to MLB GAMES are taxable, and a gift is not treated as taxable income?

A

T. Gifts are subject to gift tax, and occasional tickets are non-taxable, but many games are taxed.

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94
Q

Margin interest is only deductible up to____________.

A

Investment income. ie: interest, ordinary dividends, stcg.

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95
Q

T or F: reimbursed entertainment expenses and subsidized parking are not SE income.

A

T

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96
Q

FIFO method of inventory control reflects_____________.

A

Current cost.

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97
Q

Can an S-corp utilize NOLs?

A

No, because they already pass-through annual losses.

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98
Q

Can NOLs be carried forward indefinitely?

A

Yes

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99
Q

What can only be carried forward for 5 years??

A

Unused charitable deduction. 5 years or death.

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100
Q

Sole Proprietorship

A
  • Responsible for operating the business on a day-to-day basis.
  • Business operations are undistinguished from the owner’s personal affairs for both legal and tax purposes.

Advantages
- Conduit of income and losses on Schedule C
- 100% medical insurance premiums deductible
- Keogh and SEP available.

Disadvantages
- Unlimited liability
- Business dies with owner

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101
Q

General Partnership

A
  • Conduit of income and losses on Schedule C.
  • 100% medical insurance premiums deductible.
  • Keogh and SEP available.
  • Partnership agreement can be oral.
  • Unlimited personal liability
  • Partnership dissolves with death/incapacity
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102
Q

LLC

A
  • Can be either a Partnership or a Corporation
  • Classified as a Partnership unless it has more than two corporate characteristics (centralization of management, continuity of life, limited liability, free transferability of interest).
  • LLC’s may operate like a general partnership, where members can be involved in daily operations without losing their limited liability status.
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103
Q

TCJA tax deduction on QBI:

A

TCJA created a tax deduction for certain taxpayers of up to 20 percent of income from partnerships, sole proprietorships, and other pass-through business, but the taxpayer must have Qualified Business Income (and must be a pass-through entity).

QBI is the net income (profit) from pass-through business (rental income, PTPs, REITs).

The total amount of QBI is determined by EACH separate business that the taxpayer owns.

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104
Q

QBI-199A: Tier I

A

< 364,200 MFJ get full 20% deduction, even if a PSC.

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105
Q

QBI-199A: Tier II

A

> $464,200 MFJ No deduction if a PSC. Limited deduction if any other PT business.

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106
Q

QBI-199A: Tier III

A

Between $364,200-$464,200 Partial tax benefit no matter the nature of the business, but PSCs phaseout eventually.

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107
Q

LLP

A

A partnership where the general partners are not personally liable for malpractice-related claims arising from the professional misconduct of another GP.

Useful for a partnership that wants to convert from an entity where one or more partners have unlimited liability.

In general, when forming a new entity, the flexibility of an LLC generally makes it preferable to an LLP.

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108
Q

Regular C Corporation

A
  • Separate tax entity
  • Double taxation
  • Corporate profits are taxed at a flat 21%, and then if those after-tax earnings are distributed to its owners, the distributed income is taxed a second time at owner level.

Advantages
- Separate tax entity
- Sale of stock to unlimited number of investors
- Dividend-received deduction (50% rule)
- Limited liability
- Continuity of life

Disadvantages
- Corporate formalities
- Dividends paid (after-tax)
- Accumulated earnings are subject to double taxation

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109
Q

Dividend received deduction (C Corp advantage)

A
  • A US corp investing in another US corp gets a deduction for dividends received.
  • 50% received can be excluded from income if owns 20% or less of distributing corp.
  • 65% if between 20%-80%.
  • 100% if >80%
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110
Q

1244 Small Business Stock

A
  • C or S corp that was initially capitalized with no more than $1 million.
  • Loss of $100,000/year on a joint return ($50,000 otherwise) is considered to be an ORDINARY LOSS, rather than a capital loss.

Can take a 1244 loss and capital loss in the same year tho if greater than 100k/50k of loss.

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111
Q

PSC

A
  • C corporations owned by HALE individuals.
  • Any retained income by these PSCs are taxed at a flat 21% like other C Corps.

Health (doctors, dentists, etc.)
Accountants, Architectural, Actors, Athletes
Law
Engineers

112
Q

S Corporation

A
  • functions as a conduit for items of income, deductions, and tax credits.

Eligibility
- Max 100 shareholders
- Single class of common stock, but can be voting AND/OR non-voting (no preferred stock).
- Must be domestic corporation
- Only individuals, estates, and certain trusts can be shareholders (US citizens or perm residents).

Advantages
- Limited liability
- Conduit income or loss to owner but limited losses up to basis.
- BASIS = CASH + DIRECT LOANS BY SHAREHOLDER

Disadvantages
- Corporate formalities
- Sale of stock limited by eligibility standards

113
Q

Limited Partnership

A
  • At least one GP, and could have many LPs.
  • LP are liable for partnership debt only to the extent of their capital contributions (conduit taxation).
114
Q

Business organization chart: Business is profitable (comfortably profitable)

A

C Corporation
- Separate tax entity
- Dividend-received deduction (50%, 65%, 100%)

PSC
- Flat 21% tax rate like C Corps

115
Q

Business organization chart: Business has losses & is a risk-free entity (doesn’t need limited liability or has adequate liability insurance)

A

Sole Proprietorship
- Keogh/SEP
- 100% medical, dental, & LTC insurance deductible for owner
- Lack of continuity

Partnership
- Keogh/SEP
- 100% medical, dental, & LTC insurance deductible for owner
- Lack of continuity
- Losses up to basis

116
Q

Business organization chart: Business has losses & is a risky entity (needs limited liability)

A

S Corporation
- Pension plan
- 100% medical, dental, & LTC insurance deductible for >2% owner
- Losses up to basis
- No more than 100 shareholders
- Only one class of stock (no preferred)
- Must be domestic corporation
- Shareholders must be US citizens or residents
- All shareholders must consent to the election

LLC
- Limited liability like a corporation
- Losses up to basis like a partnership

LP
- LPs cannot actively participate in business
- Losses up to basis

117
Q

Conduit entities: Sole Proprietorships

A
  • Taxable income or loss is reported on Schedule C (profit/loss from business).
  • If the Sole Prop operated at a loss, the Schedule C loss carries to the first page of the 1040.
  • If business loss exceeds other income, certain taxpayers can carry forward as an NOL indefinitely.
  • If a business owner borrows money for business purposes relating to a sole prop, the interest paid without limit on the debt is deductible on schedule C*
118
Q

Conduit entities: Partnerships

A
  • Files form 1065 for informational purposes only.
  • Each partner includes in their return the distributed share of the partnership income/loss reported on Form K-1.
  • Losses are deductible up to basis.
  • BASIS = CASH CONTRIBUTED BY PARTNER + DIRECT LOANS MADE BY THE PARTNER + LOANS MADE TO THE PARTNERSHIP (BANK LOAN)
119
Q

Conduit entities: S Corporations

A
  • Losses up to basis
  • Basis = cash + direct loans made by the shareholder. Unlike Partnerships, bank loans made directly to the corp are not included in basis.
120
Q

Are bank loans included in the S corp owner’s basis?

A

NO

121
Q

Conduit entities: LLC

A
  • If the entity is treated as a partnership, only an informational return is filed, and the income subject to tax will pass through to the individual members.
  • If the entity is treated as a corporation, the business itself is a taxable entity and normally files 1120 or 1120s.
122
Q

Corporate accumulated earnings tax

A
  • Unless specifically exempt, a corporation that accumulates earnings and profits to avoid income tax to its shareholders is subject to an annual accumulated earnings penalty tax equal to 20% (not 21%) of the amount accumulated for the year.
  • This penalty tax is in addition to the regular 21% corporate tax.
  • A regular corporation can generally accumulate $250,000 ($150,000 PSC) WITHOUT ESTABLISHING A BUSINESS NEED. Anything over these limits will face penalty tax, UNLESS THERE IS A BONA FIDE BUSINESS NEED. If there is a bona fide need, corps can avoid the penalty tax!
  • This is to encourage corps to pay dividends.
123
Q

Tax forms: Corporation

A

Filing: 1120
Employee: W-2
Distribution: 1099 (dividends)

124
Q

Tax forms: Self employed

A

Filing: Schedule C
Employee: Schedule C
Distribution: N/A

125
Q

Tax forms: Partnership

A

Filing: 1065
Employee: W-2
Distribution: K-1

126
Q

Tax forms: S Corporation

A

Filing: 1120S
Employee: W-2
Distribution: K-1

127
Q

Are estates and trusts distinct tax entities?

A

Yes

128
Q

A fiduciary must file a return for the estate or trust if any of the following exist:

A
  • Any taxable income for the year.
  • Gross income of $600 or more.
  • A beneficiary who is a resident alien.
129
Q

T or F: Although estates may select or retain any tax year, ALL TRUSTS (except 501(a) or charitable) must use a calendar year.

A

T

130
Q

Grantor Trust (defective or tainted)

A
  • Trust income is, or may be distributed or accumulated for later distribution to grantor and/or spouse.
  • Trust income is, or may be used to discharge any legal obligation of the grantor
  • Trust income actually is used to discharge a legal obligation of the grantor
  • Power to control beneficial enjoyment of the trust principal or income is held by either the grantor or spouse.
  • Trust income is, or may be used to pay premiums on life insurance on the life of either the grantor or spouse.
131
Q

What is an unfunded ILIT?

A
  • Yearly gift to the trust pays the life insurance on the grantor.

This is not taxable income to the grantor.

132
Q

What is a funded ILIT?

A
  • Lump sum gift of ILIT investments, and then the income from those investments pays the premium of the life insurance on the grantor.

The amount of the actual premium paid is taxable income to the grantor, and the remainder of investment income is taxed to the trust if accumulated, or to the beneficiary if distributed.

133
Q

T or F: A reversionary interest that exceeds 5% of the trust value, at the time of creation, is retained by the grantor.

A

T

134
Q

What makes a trust defective for estate tax purposes?

A

If the grantor retains:
- A right to income, or the right to use or enjoy trust property (beneficial enjoyment).
- A reversionary interest that exceeds 5% measured at the time of death.

You don’t want a trust to be tainted for income AND estate tax purposes.

135
Q

A simple trust (or estate) is merely a _________________ for forwarding income to beneficiaries.

A

Conduit.

The trust (or estate) passes its income (and deductions) through to the beneficiaries who then report the income, and pay taxes on it at their own marginal tax brackets (DNI).

In this case, a simple trust/estate is a separate tax entity but operates as a tax conduit.

136
Q

A complex trust is a _____________

A

Separate tax entity for tax purposes if it meets both of the following:
- It is irrevocable, and there is no grantor control.
- Income is accumulated.

Most irrevocable trusts are complex trusts.

137
Q

Simple vs. Complex trusts

A
  • Income is distributed vs. Income must or may be accumulated
  • Income taxed to bene vs. Income accumulated taxed to trust, income distributed taxed to bene.
  • Normally no distribution of corpus vs. Corpus can be distributed
  • No charitable gifts vs. May make charitable gifts.
138
Q

Can an irrevocable trust be a simple or complex trust? why or why not?

A

Yes. If it distributes all income, it is a simple trust. If it accumulates income, it is a complex trust.

139
Q

Deductions for Trusts

A

Deductions for a trust are very similar for deductions an individual can elect.

A couple exceptions are:
- charitable deduction is only allowed for complex trusts.
- Depreciate, cost recovery, and depletion are calculated in the same manner as for individuals.
- Carryforwards are available.
- Admin expenses are allowed.
- A trust is allowed a deduction for all income that it is required to distribute regardless if that income is actually distributed.

140
Q

Complex trust distribution exemption:

A
  • A complex trust that is REQUIRED to distribute all of its income has an exemption of $300.
  • A complex trust that is NOT REQUIRED to distribute income has an exemption of $100.
141
Q

What is DNI?

A

Distributable net income.

DNI limits the amount that trust (or estate) beneficiaries must report as gross income for income tax purposes.

DNI rules also allow the trust or estate to:
- Claim a deduction for the amount distributed.
- Limit the portion of the distribution that is taxable to the beneficiaries.
- Ensure that the character of the distribution remains the same for the beneficiary as it was to the trust.

There is no double taxation of trust income because the trust receives a deduction. This deduction is equal to the lesser of the amount distributed to the beneficiaries or the DNI.

142
Q

If a trust is established to benefit the grantor, it is classified as a ____________.

A

Grantor trust. For tax purposes.

143
Q

What is basis increased by? 5

A
  • Legal fees
  • Commissions
  • Sales tax
  • Freight
  • Improvements

Repair vs. Replace: Replacing is an improvement, and increases basis. Repairs DO NOT increase basis. Repairs are typically deducted as expenses.

144
Q

What is Adjusted Basis?

A

Cost basis - Cost recovery (deductions).

Deductions generate tax savings and reduces the basis of the asset.

145
Q

Amortization

A

Recovery of certain capital expenditures that are not ordinarily deductible in a manner that is similar to straight line.

Cost recovery for intangibles under section 197.

146
Q

Accretion

A

When an asset (bond) is discounted from par value, the discount must be accreted over the life of the asset. Each year, the accreted portion, or earned portion, is included as taxable interest income, which increases basis. Accretion creates no current year cash, and is considered Phantom Income.

147
Q

Basis of property received by gift and in nontaxable transactions.

A
  • For gift tax purposes, the value of the gift when given, is FMV.
  • If FMV on the date of the gift is greater than the donor’s adjusted basis, then use the donor’s adjusted basis.
148
Q

T or F: Gifts of appreciated property carry the donor’s basis over to the donee.

A

T

149
Q

Loss gift basis

A

If FMV on the date of gift is less than the donor’s adjusted basis in the gift, then the following occurs:
- A loss is measured using the FMV
- A gain is measured using donor’s basis
- If the sale price is in between the two, no gain or loss is recognized.

150
Q

Holding period for gifts vs. inherited

A

Holding period for gifts carries over from the donor.

Holding period for inherited property is LT no matter what.

151
Q

Basis for inherited property in a community state

A

Community = California

In community property states, marital property enjoys a full step-up in basis if at least one-half of the whole property is includable in the deceased spouses gross estate.

152
Q

Basis for inherited property in a noncommunity state (common law)

A

Noncommunity = New York. NY is Common to me!!!

In a noncommunity property state, property only gets a half step-up in basis.

153
Q

T or F: The basis for property acquired by inheritance is the FMV on date of death, or alternate valuation date if elected

A

T

154
Q

Depreciation/cost-recovery

A

Depreciation/cost-recovery deductions are allowance for the exhaustion and wear and tear of property used in a trade or business, or held for the production of income.

155
Q

What is MACRS?

A

Modified Accelerated Cost Recovery System. Applies to all recovery property, except for land or intangibles, placed into service after 1986.

Straight-line is an option under MACRS, but a half-year convention must be used.

156
Q

Property classes: 1245 and 1250 property
CAT
O
R
N

A

5 year- Computers, Autos, Trucks (light duty). 1245 property.
7 year- Office furniture and fixtures. 1245 property
____________________________________________________________________
27.5 year- Residential rental property. 1250 property.
39 year- Non-residential real property. 1250 property.

157
Q

MACRS Tables

A

MACRS SL
5 year 7 year 5 year 7 year
1 20% 14.29% 10% 7.14%
2 32% 24.49% 20% 14.29%

158
Q

Section 179

A

Tax law allows businesses to EXPENSE, rather than capitalize, a limited dollar amount of tangible property during a taxable year.

159
Q

179 Deduction

A

Under the TCJA, a business may expense up to $1,160,000 (23) of qualifying property in the year of acquisition.

Qualifying property is generally tangible personal property (CATO, 1245 only) purchased for trade or business.

Deduction is reduced dollar for dollar by the cost of qualifying property (placed into service during the taxable year) that exceeds $2,890,000. (23)

Expense limited to taxable income from ANY trade or business of the taxpayer… Cannot create loss, but can be carried forward.

Always take the immediate deduction instead of depreciating

160
Q

T or F: Future depreciation is not as cost effective as a current deduction

A

T

161
Q

What kind of transaction will trigger an immediate tax deduction?

A

REPAIR

If certain requirements are met, 1245 property could be expensed immediately under Section 179.

162
Q

T or F: For gift tax purposes, a loss gift is valued at FMV.

And a gain gift is valued at donors Basis.

A

T

163
Q

1031 Exchange

A

No gain or loss will be recognized on the exchange of certain properties held either for an investment or for productive use in a trade or business.

164
Q

1031 qualifying property

A

Real estate is the only property eligible for like-kind exchange treatment. Personal property was eliminated.

Exchange must be like-kind, and acquired property must be used in trade or business. Personal residence can’t be exchanged for rental property.

Must be used as investment property to defer gain under Section 1031 like-kind.

165
Q

Is relief of a mortgage considered boot received?

A

Yes, it is added to FMV of property acquired in a like-kind exchange.

166
Q

Like-kind exchange calculations. No matter how many numbers are given on the exam, use the following 3:

A

1) FMV of the property received
2) Adjusted basis of property given up
3) Boot

167
Q

Like-kind exchange calculations: Realized gain

STEP 1

A

Total value received - adjusted basis of own property.

(FMV + Boot received) - (adjusted basis of own property + Boot paid)

168
Q

Like-kind exchange calculations: Recognized gain

STEP 2

A

LESSOR of Realized gain (STEP 1) or Boot received,

169
Q

Like-kind exchange calculations: Substitute Basis

STEP 3

A

FMV of property acquired - (realized gain - recognized gain)

FMV of property acquired - (step 1 - step 2)

*Typically the answer to this step is original basis + Boot paid.

170
Q

Keys to Boot:

A

Boot received = recognized gain

Boot paid is added to own basis

Basis carries over from last property

171
Q

Time limit on like-kind exchanges

A
  • Must be IDENTIFIED within 45 days.
  • Must be RECEIVED within 180 days.
172
Q

What happens if like-kind property is exchanged with a related party, and then is turned around and sold within 2 years?

A

It collapses.

The gain not recognized in the exchange is recognized on the date of the turn-around sale.

173
Q

LT, ST, collectible, and real property tax rates

A
  • LTCGs are subject to preferred tax table.
  • STCGs are subject to Ordinary Income rates.
  • LT collectibles are subject to 28% tax rate.
  • Real property (1250) LT gains are subject to capital gains tax table, but a special 25% depreciation recapture rate is applied when the property is sold.
174
Q

What happens to carryforward capital loss at death?

A

$3,000 can be claimed in the year of death on the estates 1041, but anything remaining is lost.

175
Q

What three methods are used in identifying mutual fund shares?

A

FIFO
Specific ID
Average cost

176
Q

T or F: In the sale of a residence, if the home-sa;e gain is entirely excluded from the 121 exclusion, the transaction doesn’t even need to be reported on the taxpayer’s return.

A

T

177
Q

Realized vs. Recognized

A

Realized is what sum at the sale before exclusions or deductions.

Recognized is the sum that is actually paid taxes on.

178
Q

Can certain taxpayers do both the 121 exclusion and 1031 like-kind exchange?

A

Yes if all the requirements are met.

179
Q

Installment sale recapture

A

If a taxpayer makes an installment sale of tangible personal property, all depreciation recapture must be reported as income IN THE YEAR OF DISPOSITION. This is a serious disadvantage.

IF THERE IS NO DEPRECIATION, THERE IS NO RECAPTURE.

180
Q

Wash sale rule

A

No loss deduction is allowed for any loss or other disposition of stock or securities if within a period beginning 30 days before and ending 30 days after the SALE, the taxpayer acquires (buys) substantially identical stock or securities.

30 days before and after the sale.

181
Q

Charitable Bargain sales

A

If a charitable deduction is available, the basis of the property sold to the charity for less than FMV must be allocated between the portion of the property sold and the portion given to charity.

SIMPLY PUT, BASIS IS REDUCED BY THE % DISCOUNT THAT IS GIVEN!

Bargain price / FMV = %

% x Basis = Basis %

Bargain price - Basis % = taxable gain

182
Q

AMT Mechanics

A
  • A separate method of calculating income tax liability.
  • It is to prevent the taxpayer from reducing tax liability below reasonable levels.
  • TCJA (Trump Act) retained individual AMT, but repealed corporate AMP.
  • The maximum AMT rate is 28% versus the 37% regular tax maximum rate that applies for 2018 through 2025.
  • There is an exemption phaseout for AMT!
183
Q

AMT Calculation

A

1) Start with regular post-deduction 1040 income if itemizing, or AGI if electing standard deduction.
2) Add back exclusion items (items that were deductible for 1040 but not for AMT).
3) Add back Preference items.
4) Result equals AMT base
5) Subtract exemptions
6) Result equals AMTI
7) Multiply by 26% and 28% tax rates

184
Q

T or F: AMT - regular tax is the AMT payable, unless regular tax exceeds AMT payable. In that case, there is no AMT payable.

A

T

185
Q

T or F: C corps are subject to AMT

A

F. C corps are no longer subject to AMT.

186
Q

AMT Planning strategies to increase regular tax, to avoid AMT

A
  • Accelerating the receipt of taxable income.
  • Deferring the payment of property taxes, state income taxes, deductible medical expenses, or charitable giving.
  • Deferring the exercise of an ISO (add back item) to a later date.
  • Disqualifying the ISO so it becomes a NQSO (income taxable).
  • Purchasing PUBLIC purpose muni bonds instead of private activity bonds.
187
Q

What causes AMT? Tricky quiz question

A

Itemized deductions (mortgage interest & charitable giving) reduce the regular taxes and could indirectly trigger AMT by “uncovering the rock”.

Add-back items (real estate & local taxes) are added back to taxes which increase the possibility of paying AMT.

AMT is calculated based on AGI.

188
Q

Does claiming the standard deduction reduce the possibility of paying AMT? Why or why not?

A

Yes it does, because when there are no itemized deductions to add back, there are no AMT preference items or add-back items.

189
Q

Do all businesses need to file federal income tax returns?

A

Yes. Certain entities are for informational purposes only.

190
Q

T or F: A regular corporation would report earned income to its employees on Form W-2 and dividends to shareholders on Form 1099.

A

T

191
Q

Losses from passive activities may only be offset from______________________

A

Other passive activities

192
Q

A passive activity loss may generally not be used by a taxpayer to reduce ____________,_________________,________________

A

portfolio income, compensation, or business income.

193
Q

PIGS and PALS

A

Losses from Non-publicly traded limited partnerships (PALs) can only be used to offset income from Non-publicly traded limited partnership (PIGs).

THESE ARE ON THE RIGHT SIDE OF THE DIAGRAM.

The netting process is done on Schedule E along with active participation.

194
Q

What is another name for a PTP?

A

Master Limited Partnership

195
Q

PTP income is ______________________ and shown on ______________

A

Portfolio income, Schedule B.

196
Q

___________ from a PTP may NOT be used to offset _________________ from other sources.

A

Losses, passive income

197
Q

Net _____________ from a PTP must be carried forward and used ONLY against the future income of __________________

A

loss, the SAME partnership.

198
Q

How long is loss carried forward in a publicly traded partnership?

A

Until offset against income in the SAME partnership, or until the partnership is SOLD or DEATH, in which case the loss can be fully deducted in the year of disposition.

199
Q

Does income come out of a PTP??

A

Yes income comes out as PORTFOLIO INCOME, but losses in a PTP stay in and do not get netted.

200
Q

To qualify for active participation, the taxpayer must own at least _____% interest in the property

A

10%

201
Q

Qualifying taxpayers may deduct up to ___________ per year of net losses from active participation in real estate activity from AGI.

Is there a phaseout?

A

$25,000. Any additional losses can be carried forward.

This deduction has an AGI phaseout between $100,000-$150,000 on a 2 for 1 basis.

202
Q

When a taxpayer rents their home for _______________ the rental income is excludible from the taxpayer’s gross income, but no _____________ attributable to the rental use are allowed.

A

15 or fewer days. Deductions

203
Q

A home is treated as a RESIDENCE in any tax year in which the owner’s use of the unit for personal purposes EXCEEDS the ______________ of ____________ or ________________________________

A

LONGER of 14 days, 10% of the period of rental use.

If treated as a residence, expenses related to renting are not deductible, and visa versa if treated as a business.

204
Q

Oil and gas working interests

A
  • These are not passive participation and are exempt from PAL rules.
  • Losses that the taxpayer is personally liable for can be deducted against ACTIVE OR PORTFOLIO INCOME WITHOUT LIMIT AND WITHOUT PHASEOUT.
  • Must be an active participant, any limited role will become passive loss.
205
Q

How can a taxpayer who makes a lot of money, lower their tax bill?

A
  • Become a GP of a oil and gas working interest that has losses.
  • Low income housing (no phaseout)
206
Q

A closely held ____________ that is not a ______ may use passive losses to offset Active income (not portfolio).

A

C corporation, PSC.

This is an exception for closely held C corps, but not for S corps.

207
Q

T or F: Community property gets a full step up in basis at death, but noncommunity (common law) only gets a half step up for the deceased portion?

A

TRUE!

208
Q

Pre and Post 2019 divorces

A

Pre 2019, Alimony payment is deductible, Alimony reception is includable in income.

Post 2019, Alimony is neither deductible or includable.

Pre 2019 divorces can adopt the new rules if divorce agreement is modified.

209
Q

Alimony test for pre-2019 divorces

A
  • Transfers of non-cash items DO NOT qualify as alimony.
  • Cash payments to third parties for ex-spouses rent, mortgage, tax, tuition etc. can qualify if pursuant to the divorce instrument.
  • Even if required by the divorce instrument, payments made to maintain the property OWNED BY THE PAYOR and USED BY THE PAYEE DO NOT QUALIFY.
  • If the PAYEE spouse OWNS life insurance on the life of the PAYOR spouse, the policy payments made by the payor WILL QUALIFY as alimony if required by the divorce instrument.
210
Q

Excess front-loading of Alimony.

What happens if there is payment in the third year?

A

Excess front-loading of alimony will be recaptured as ordinary income.

The constant is $37,500.

If there is payment in the third year, double the payment and add to the constant of $37,500, and that becomes the new constant that is subtracted from the first two years.

211
Q

Public vs. Private Charities

A

Public charities are 50% organizations. Churches, schools, hospitals. United Way, Red Cross, Humane Society, etc.

Private charities are 30% organizations. Private nonoperating foundations, Frats, VFWs.

212
Q

What is the first step in the charitable deduction calculation?

A

Calculate the maximum deductible. 60% of AGI.

A taxpayer cannot deduct more than 60% of AGI for cash gifts to a public charity.

213
Q

What is the second step in the charitable deduction calculation?

A

Calculate the eligible amounts given to PUBLIC CHARITIES.

214
Q

What is the third step in the charitable deduction calculation?

A

Calculate the eligible amounts given to PRIVATE CHARITIES.

215
Q

If there is an excess of charitable giving that cannot be utilized in the year of the gift, is there a carryover? If there is, how long can it be carried over for?

A

There is a carryover, and its limited to 5 years or death if sooner.

216
Q

Gifts of appreciated Long-term gain property

A

An individual’s deduction ceiling for gifts of appreciated long-term capital gains property to Public charities is 30% of AGI if using FMV, or 50% of AGI using Basis.

Use 30% of AGI using FMV. It is rarely to the individuals advantage to valuate the appreciated property at basis.

Public Organizations
- 30% of AGI using FMV. 3 letters in FMV = 30%.
- 50% of AGI using Basis. 5 letters in Basis = 50%.

217
Q

What is ordinary income property?

A

OI property is property that, if sold, would produce ordinary income, not capital gains.

Types of OI property are:
- Inventory
- A copyright
- Use-UNrelated property
- Work of art CREATED BY THE TAXPAYER
- Short-term capital gains property

THE DEDUCTION IS LIMITED TO 50% OF AGI USING BASIS FOR CHARITABLE GIVING

Stock and real estate are always presumed to be use-RELATED

218
Q

What is the allowance for cash donations to PRIVATE charities?

A

The allowable deduction for PRIVATE charities is 30% of AGI, as opposed to the 60% of AGI for PUBLIC charities.

219
Q

T or F: Any taxpayer must itemize in order to take a charitable deduction

A

T.

220
Q

No charitable deduction is allowed for any contribution of _________ or more, unless the taxpayer has written acknowledgement.

A

$250

221
Q

A charitable deduction will be denied to any taxpayer who fails to obtain written acknowledgement for any “qualified vehicle” donation, if the claimed value of the vehicle is greater than ___________________.

A

$500.

If charity sells turns and sells the vehicle without putting to use or improvement, the maximum deduction would be the amount of gross proceeds the charity received from the sale of the vehicle without any improvements.

222
Q

A corporation may not deduct more than ___________ of its TAXABLE INCOME for aggregate charitable gifts.

A

10%

223
Q

Contribution of inventory

A

If a corporation (other than an S corp) makes a gift of inventory, it can deduct its basis plus one-half of the property’s unrealized appreciation.

The claimed deduction may not exceed twice the basis of the property.

The inventory must be for the ill, needy, or care of infants.

224
Q

T or F: An estate is entitled to take a deduction for ordinary and necessary business expense.

A

T

225
Q

T or F: Only 1245 property qualifies for the Section 179 election.

A

T

226
Q

What is true about 1244 stock?

A
  • Up to $100,000 of loss is treated as ordinary loss.
  • Any loss in excess of the $100,000 annual ordinary loss is treated as a capital loss.
227
Q

In a community property state, does basis get a full step up?

A

Yes, it steps up fully to the fmv at the date of death.

228
Q

T or F: 1031 exchanges are no longer available for equipment but ONLY FOR REAL PROPERTY.

A

T

229
Q

Is the AMT exemption subject to phaseout?

A

Yes

230
Q

Are there any situations where active participation income can offset passive losses?

A

Yes. Schedule E income from active participation in RENTAL ACTIVITIES can be used to offset other passive losses.

231
Q

T or F: The inflation and fixed portions of I bond interest are tax-deferred until redemption or maturity (whichever comes first); it is not phantom income

A

T

232
Q

Debbie Sutton purchased blue chip stocks for $50,000 some years ago. She wants to donate them to her alma mater (a private university). They are presently worth $40,000. Debbie’s current year AGI is $145,000. What is the maximum charitable deduction she can take this year for the donation of the stock?

A

The deduction is limited to fair market value ($40,000). Debbie cannot claim a deduction for more than the value that is transferred to the charity. Debbie should have sold the stock for $40,000. Then she could take a $10,000 LTCL. Then she could have donated the sale proceeds (approximately $40,000).

233
Q

Does every individual with earned income need to file a tax return?

A

No. If youre under the filing threshold for your age and given filing status, you do not need to file.

An exception to this is if you have self-employment income greater than $400.

234
Q

How are Ordinary/Qualified dividends taxed?

A

Lower LTCG rates.

235
Q

Where a corporation or other business has inventories, and has averaged over ___ in revenues during the prior ______, must use the _______________

A

$29 million, three years, accrual method of accounting.

236
Q

T or F: S-corporations, LLCs, and Sole props are conduit entities

A

T.
S-corporations, LLCs, and Sole props. S-corporations, LLCs, and Sole props. S-corporations, LLCs, and Sole props. S-corporations, LLCs, and Sole props. S-corporations, LLCs, and Sole props. S-corporations, LLCs, and Sole props. S-corporations, LLCs, and Sole props. S-corporations, LLCs, and Sole props. S-corporations, LLCs, and Sole props. S-corporations, LLCs, and Sole props.

237
Q

Revocable Trust vs Irrevocable trust

A

A revocable trust is a more popular alternative to probate for many estate planning clients. Most grantors name themselves trustee of their living trust for life. At the trustor’s death, the revocable trust becomes irrevocable, and either terminates with the corpus distributed, or continues until a later date.

An irrevocable trust is a non-grantor trust where all rights of property transferred to the trust are given up.

238
Q

Like-kind exchanges: examples of qualifying and non qualifying property

A

Qualifying: apartment complex for shopping center. Farm for a ranch.

Non qualifying: inventory of a business, principal residence, tangible personal property

239
Q

Depreciation recapture on 1245 property

A

Depreciation recapture may apply to all MACRS property (only 1245)

When a business purchases equipment and takes depreciation, the CRD’s offset the business’s ordinary income.

When a business sells the equipment for a gain the business must do the following:
1. Look back and recapture the LESSER of total CRDs taken or the gain realized as 1245 gain. Ordinary income.
2. Recover any excess gain as 1231 gain. Capital gain.

240
Q

Phantom income from Limited Partnerships

A
  • May occur in a tax shelter created prior to the 1986 Act where real properties, having declined in market value, are refinanced or the debt is forgiven.
  • Income arises from the debt forgiven.
  • Phantom income could also come from zero bonds, S-corps K-1s with no cash distributed, etc.
241
Q

Are business losses and/or capital losses included in determining gross income?

A

Yes they are

242
Q

Ordinary dividends vs Qualified dividends

A

Ordinary dividends are taxed at the taxpayers ordinary (higher) tax bracket.

Qualified dividends meet the criteria to be taxed at the lower long-term capital gains rates. Qualified Qualifies.

A dividend is considered to be qualified if you have held a stock for more than 60 days in the 121-day period that began 60 days before the ex-dividend date. Most dividends from US corporations are QDs.

243
Q

Are deductions allowed for interest paid on debt incurred to purchase or carry tax-exempt bonds?

A

No

244
Q

Are miscellaneous itemized deductions repealed?

A

YES! through 2025.

245
Q

What is the dependent child standard deduction?

A

It is the GREATER of the limited deduction of $1,250, OR the amount of earned income + $400, NOT TO EXCEED THE FULL SINGLE TAXPAYER STANDARD DEDUCTION AMOUNT OF $13,850.

246
Q

Tom, age 61, is self employed. His business has no employees. He is paying $3600 for medical insurance, $1200 for dental, and $2000 for LTC insurance. His current year schedule C net income is $90,000. What amount is his AGI?

A

$76,841.

247
Q

For businesses, having less than $29 million in average revenues will almost always use the ___________

A

Cash method of accounting. It is the easiest to maintain.

248
Q

Why would NOL generally be important to a sole proprietor, who just started a business?

A

Losses from the business can be claimed on the owners 1040.

Schedule C losses attributable to a sole proprietorship may be claimed on that proprietors personal 1040 and thus reduce AGI and ultimately taxable income.

249
Q

What are the four main conduit entities for a business ownership?

A

Sole proprietorships, partnerships, S corporations, and LLCs

250
Q

Dividend distributions for corporations versus conduit entities.

A

Corporate stockholders may receive return on their investment as a dividend.

Corporations cannot deduct a dividend that is distributed.

Corporate dividends are taxed both at the corporate level and again to shareholders. Double taxation.

S corporations, LLCs, and sole proprietorships are conduit entities and avoid double taxation.

251
Q

Filing requirements for Estates

A

Estates file on form 1041.

Because the estate is a separate entity, it is entitled to certain deductions such as administration  or costs, accounting and attorney fees, and expenses for preparing the estate return.

Expenses can be taken from the income tax return 1041 or as deductions from the gross estate 706.

252
Q

T or F: future depreciation is not as cost effective as a current deduction (expensing)

A

T

253
Q

179 vs 197

A

197 pertains to amortizing intangible assets or capital expenditures.

179 pertains to expensing tangible property.

197 is closer to heaven, good will is intangible.

254
Q

Note of Community vs Common Law states

A

If separate returns are being filed by a married couple living in a community property state, one-half of the community income generally must be reported by each spouse. In most other community property states, INCOME FROM SEPERATELY OWNED PROPERTY IS TREATED AS SEPARATE INCOME.

255
Q

Alimony is deductible by payor and taxable to payee if the following requirements are met:

A

Pre-2019 divorce, cannot file a joint, tax return or live together, payment must be made in cash, received by or for the benefit of the payee spouse, and cannot extend beyond the death of the recipient spouse.

256
Q

Can losses from a publicly traded or non-publicly traded partnership use the $3,000 capital loss deduction?

A

NO. Can only be offset by pub to pub, or non-pub to non-pub (or passive income)

257
Q

What qualifies as investment income for investment interest deduction purposes?

A

THINK ORDINARY INCOME! Interest, dividends, royalties, and short-term gains qualifies as investment income.

Dividends will be included as investment income only if the taxpayer elects not to use the reduced rates. Long-term gains are included only if the taxpayer elects out of long-term rates (and elects short-term cap gains treatment). Same with qualified dividends, unless it says they opted out of reduced rates and used OI rates, don’t count it.

258
Q

What are FICA and FUTA taxes?

A

These are payroll taxes.

FICA is Social Security and Medicare
FUTA is Unemployment

259
Q

FICA Taxes

A

Employee and Employer EACH pay 6.2% + 1.45% or a total of 15.3% up to the w-2 wage base of $160,200.

After $160,200 EACH pays 1.45% or a total of 2.9% (unlimited).

260
Q

Do FICA taxes apply on earned income above $160,200?

A

Yes, at 1.45% for the employee, and 1.45% for the employer for a total of 2.9% for an unlimited amount.

This is the Medicare tax portion of FICA that continues on for unlimited amount over the $160,200 wage base.

261
Q

Adoption credit (timing)

A

Adoption expenses incurred during the tax year PRIOR to the year the adoption is finalized, may be claimed as a credit IN THE YEAR THE ADOPTION IS FINALIZED.

Adoption expenses incurred during the year the adoption becomes final or the year following the finalization will be claimed IN THE YEAR THEY ARE INCURRED.

262
Q

What type of interest can be deducted without any limits?

A

interest paid on Sole proprietor loans.

Reflected on schedule C

263
Q

What type of entities can use the 20% QBI deduction?

A

Only pass through entities.

C corps cannot use it

264
Q

How long can you carry over an excess gift?

A

Five years.

You make the gift in the current year and then you have five additional years. Total of six installments.

265
Q

What can be claimed as either an itemized deduction or a tax credit?

A

Foreign tax credit

266
Q

What schedule do household employees file on?

A

Schedule H

267
Q

Personal and dependency exemptions

A

REPEALED!!! NONE!!

268
Q

Are gifts included in taxable income for the giftee???

A

NO!! Think about this.

It is gift taxed, not income taxed.

269
Q

Does FIFO or LIFO understate inventory?

Does FIFO or LIFO reflect current cost?

A

FIFO reflects current cost.

LIFO reflects understated inventory.

270
Q

Tax filing for an LLC

A

If the entity is formed as a partnership, only an information return is filed. Income subject to tax will pass through to the individual members.

If the entity is formed as a corporation, the business itself is a taxable entity and normally files using a form 1120 or 1120s.

271
Q

1245 loss

A

When the amount realized is less than the adjusted basis, the resulting loss is treated as an ordinary loss, not a capital loss.

272
Q

Is the AMT exemption subject to phase out?

A

Yes

273
Q

Equipment leasing

A

A closely held C corporation that is not a PSC may use passive losses to offset active, but not portfolio income.

This is an exception for closely held C corporations only

274
Q

Revocable trust for incapacity planning

A
  1. More widely recognized, and can be enforced while a durable power of attorneys authority may not be.
  2. You can specify management by the trustee in the event of grantors incapacity.
  3. Continues after death, while a durable power ceases at death.
275
Q

Are trusts required to distribute recognized capital gains, and income?

A

No, just income is distributed.

Recognized capital gains from the sale of securities are added to corpus, it is not distributed

276
Q

Can you take a Crummey and 5 or 5 in the same year?

A

Yes you can. If a current year gift is made, 17k plus > of $5000 or 5%.

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