Tax Planning Flashcards
Sole Proprietor
Liability: unlimited
Participants: 1
Taxation: individual level; must file form 1040, schedule C
Income (reported on form 1040 schedule C) is self-employment income
General Partnership
Liability: unlimited
Participants: >1; no maximum
Taxation: flow through; must file form 1065
Income (reported on schedule K-1) is self-employment income
Limited Partnership
Liability: general partner - unlimited; limited partner - limited
Participants: at least one general partner and one limited partner; no maximum
Taxation: flow through; must file form 1065
Income (reported on schedule K-1) is self-employment income for the general partner - may or may not be for the limited partners
Limited Liability Partnership (LLP)
Liability: limited
Participants: >1; no maximum
Taxation: flow through; must file form 1065
Income could be self-employment or ordinary reported on schedule K-1
Family Limited Partnership (FLP)
Liability: limited for limited partners; unlimited for general partner (though GP often retains small % ownership (such as 1%))
Participants: >1; no maximum
Taxation: taxed as partnership; entity form 1065; schedule K-1s issued to general and limited partners
Purpose is to transfer assets to younger generations using annual exclusions and valuation discounts for minority interest and lack of marketability; FLPs, if properly structured, work extremely well for estate planning
Limited Liability Company (LLC)
Liability: limited
Participants: 1 or more members
Taxation: can be taxed as a sole proprietorship (file form 1040, schedule C), partnership (file form 1065), corporation (file form 1120), or s-corporation (file form 1120S)
Income could be self-employment, W-2 income and ordinary income, W-2 income; note that partnerships (in addition to LLCs) may also be taxed as another type of entity by filing form 8832 entity classification election
S-Corporation
Liability: limited
Participants: no more than 100 shareholders
Taxation: flow through; must file form 1120S
Owners’ income flows through on schedule K-1; employee’s income is reported on W-2; owner employees receive both schedule K-1 and W-2
Must be a domestic corporation.
May not be owned by C Corporations, partnerships, and certain trusts.
Allowed only one class of outstanding stock, however, can have shares with or without voting rights.
Corporation
Liability: limited
Participants: no restrictions
Taxation: entity level - corporation pays tax; must file form 1120
Income (reported on W-2 and form 1099-div) could be W-2 income and dividend income
Capital Assets
Most personal use assets and most investment assets.
Cost Basis
The amount paid in cash, debt obligations, other property, or services. Includes:
Sales Tax
Freight
Installation and testing
Excise taxes
Legal and account fees (when they must be capitalized)
Revenue stamps
Recording fees
Real estate taxes (if assumed for the seller)
Gain on inherited assets
Always long-term capital gain
Holding period of capital gains
To qualify for long-term capital gains rate, asset must be held for at least a year and is taxed at a minimum rate of 20%.
Short-term capital gains are taxed as ordinary income.
In calculating the holding period, the day of disposition is included but the day of acquisition is not.
Adjusted Basis
Cost of property
+ Capital additions
- Cost recovery
= Adjusted basis
Loss Property
Never gift or sell an asset to a related party when the donor’s basis is greater than the FMV of the asset.
What are NOT considered capital assets?
ACID:
- Accounts/notes receivable
- Copyrights and creative works
- Inventory
- Depreciable property used in a trade or business
What is the ONLY way to have a 1231 gain on a 1245 property?
To sell it for more than it was originally purchased for. Any sale amount in excess of the original purchase price of a section 1245 asset is a section 1231 gain.
1231 Gain
Any sale amount in excess of the original purchase price of a 1231 asset.
The lesser of the gain or the difference between depreciation taken and straight-line depreciation is taxed as ordinary income.
Kiddie Tax
Only applies to unearned income in excess of $2,500.
Applies to children under age 19 (or 24 if a full-time student).
First $1,250 standard deduction, second $1,250 taxed at child’s rate, remaining amount taxed at parent’s marginal rate.
Earned income standard deduction is the greater of:
$1,250 OR
$400 plus the earned income amount
(maximum deduction is $13,850)
The remainder is taxed at the child’s tax rate.
MACRS Property Classes
5 Year: Autos, computers, office equipment
7 Year: Office furniture and fixtures
*CAT/Corn
*Nonresidential and residential real property use mid-month convention
MACRS for Real Estate
Residential rental: straight-line depreciation over 27.5 years
Commercial: straight-line depreciation over 39 years
Straight Line Depreciation
Adjusted Basis
- Salvage Value
= Depreciable Amount
/ Estimated Useful Life
= Annual Depreciation Deduction
Underpayment penalty
Most people can avoid paying estimated tax if their withholding and credits equal 100% of the tax shown on the prior year’s return or 90% of the current year’s tax liability.
- Taxpayers can not rely on this rule if they had a short (less than 12 months) taxable year for the prior year.
A taxpayer does not have to pay estimated tax if:
- The taxpayer had no tax liability for the previous year;
- The taxpayer was a US citizen or resident for the entire year;
- And the taxpayer’s tax year covered a 12 month period.
1231 Asset
It is used in a trade or business and is either depreciable property or real property. I.e. buildings, machinery, equipment, land and buildings used for business, and leasehold improvements.
Specifically includes:
- Timber
- Coal
- Iron Ore
- Certain livestock
- Unharvested crops (under certain conditions)
Does NOT include:
- Inventory
- Property held by the taxpayer primarily for sale to customers in the ordinary course of business
- Copyright or creative works
Items that can increase the basis of an asset
Capital improvements - an addition on your home, a new roof, paving your driveway, installing central AC, rewiring your home.
Assessments for local improvements - water connections, sidewalks, roads.
Cost of restoring damaged property after a casualty loss.
Legal fees - cost of defending and perfecting a title to the property.
Zoning costs.
Items that can decrease the basis of an asset
Casualty or theft loss deductions, if applicable due to federally declared disaster.
Deduction for clean-fuel vehicles and clean-fuel vehicle refueling property.
Section 179 deduction.
Credit for qualified electric vehicles.
Depreciation.
Non-taxable corporate distributions.
Exclusion from income of subsidies for energy conservation measures.
Formula for donee’s basis when a gift tax is paid
Donor’s basis / (Net appreciation in value of gift / Value of taxable gift) x Gift tax paid
The basis of gifts of appreciated property to the donee is increased by the gift tax formula.
Wash Sale Rules
Occurs when a taxpayer disposes of securities at a loss and acquires substantially identical securities within 30 days before or after the date of the loss sale.
The disallowed loss is added to the cost of the new security to determine the new basis of the substantially identical security.
Do not apply to gains.
Sale of Personal Residence (Section 1231)
Qualification requirements for the exclusion under Section 121:
- The property must have been owned and occupied as a principal residence for 2/5 of the last years (one year stay in a nursing home does not count towards the 2 year requirement).
- The exclusion can only be used once every 2 years.
- Any appreciation during non-qualified use periods are not subject to the exclusion.
Single taxpayers can exclude up to $250k of gain.
Married taxpayers filing jointly can exclude up to $500k of gain. Both spouses must meet the use requirement and not have utilized the exclusion within the last 2 years, but either may meet the ownership requirement.
*A pro rated amount will pro rate the exclusion amount - not the gain.
(# of months of use/24) x Applibicable exclusion
Steps for netting capital gains and losses
- Net long term capital gains and long term capital losses.
- Net short term capital gains and short term capital losses.
- If the taxpayer has net loss in one category and net gain in the other, then the net long term gain/loss should be netted against the short term gain/loss.
Section 1244 Small Business Stock
A single taxpayer can deduct up to $50k ($100k if MFJ) of the loss on small business stock as an ordinary loss in any given year if:
- The stock represents ownership in a domestic corporation.
- The corporation was a small business (less than $1 million in total capital contributions plus paid-in capital) at the time the stock was issued.
- The company was incorporated after 11/6/1978.
- The loss was sustained by the original owner of the stock, who is not a corporation, trust, or estate.
Any loss in excess of the per year limit is treated as capital loss.
Does not apply to gains.
Married Filing Jointly Requirements
- The taxpayer and spouse must have been married as of the last day of the year.
- The the taxpayer’s spouse died during the year and the taxpayer did not remarry, the taxpayer may still file a joint return with that spouse for the year of death.
Qualifying Relative Test
- Not a qualified child test - the person cannot be the qualified child of any other taxpayer.
- Relationship test - the person either (a) must be related to the taxpayer (son, daughter, stepchild, foster child, brother/sister, half brother/sister, stepbrother/sister, or a decedent of any of them) or (b) must live with the taxpayer all year as a member of their household (and the relationship must not violate local law).
- Gross income test - the person’s gross income for the year must be less than $4,700.
- Support test - the taxpayer must provide more than half of the person’s total support for the year.
Additional: joint return test, and citizenship/residency test.
Qualifying Child Test
- Relationship test - the child of the taxpayer must be the taxpayer’s son/daughter, stepchild, foster child, brother/sister, half brother/sister, stepbrother/sister, or a descendant of any of them.
- Age test - the child must be (a) under age 19 at the end of the year, (b) under age 24 at the end of the year and a full time student, or (c) any age if permanently and totally disabled.
- Abode test - the child must have lived with the taxpayer for more than half of the year.
- Support test - the child must not have provided more than half of his or her own support for the year.
Additional: joint return test and citizenship/residence test.
Exclusion Ratio for the taxation of annuity payments
Exclusion ratio = Investment in the contract / Expected total return
Life insurance transfer for value exceptions
The proceeds of a life insurance policy can still be excluded from gross income even if the policy is transferred for valuable consideration. This includes:
- If the policy is transferred to the insured
- If the policy is transferred to a partner of the insured
- If the policy is transferred to a partnership in which the insured is a partner
- If the policy is transferred to a corporation in which the insured is a shareholder or officer
- If the policy is transferred by tax-free exchange or gift
Workers’ compensation
Excluded from taxable income
Punitive Damages
Included in taxable icome
Damages for emotional distress
Included in taxable income
Deductions FOR AGI (Above the line)
- Trade or business expenses
- Deductions from losses on sale or exchange of business property
- Deductions from rental and royalty property expenses
- Alimony payments if finalized BEFORE 2019
- 1/2 of self-employment tax paid
- 100% of health insurance premiums paid by a self-employed individual
- Contributions to pension, profit sharing, annuity plans, IRAs, etc.
- Penalty on premature withdrawals from time savings accounts or deposits
- Interest on student loans
- Tuition and fees for tax years 2018-2020
- Health savings accounts
- Moving expenses (armed forces)
Deductions from AGI (below the line/itemized)
- Medical expenses above 7.5% of AGI
- Taxes
- Interest
- Charitable contributions
- Casualty losses
Miscellaneous itemized deductions (those subject to the 2% hurdle repealed)
Deductible Medical Expenses
- Prescriptions
- Health insurance premiums (after tax, out of pocket payments - not what is paid through employer plans)
- Eligible capital improvements (home modifications to better mobility)
- Nursing home and special schools
- Travel and lodging for out of state treatments
*Deductible to the extent that these expenses exceed 7.5% of AGI
Nondeductible Medical Expenses
- Elective cosmetic surgery
- General health items (vitamins)
- Health club dues
- Marijuana
- Over the counter drugs
- Dance lessons
Requirements for a home office deduction
Office must be used exclusively and on a regular basis as the principal place of business or a place of business used by clients/patients/customers. For employees, office must also be for the convenience of the employer.
Qualifies as a principal place of business if:
- Taxpayer conducts administrative and management activities in the office, and
- There is no other fixed location where taxpayer conducts these activities.
Expenses cannot cause net loss from the business activity.
Deduction limited to business gross income in excess of other business expenses. Excess is carried forward subject to limit.
Adoption expenses credit
Credit for qualified adoption expenses incurred in adoption of eligible child (adoption fees, court costs, attorney fees).
Maximum credit is $15,950 - phased out for modified AGI between $239,230 - $279,230.
Eligible child is less than 18 or physically or mentally handicapped.
Nonrefundable credit but the excess may be carried forward for 5 years.
Child tax credit
$2,000 for each dependent child under 17.
Includes step and foster children.
Married taxpayers must file jointly to be eligible.
Credit is phased out by $50 for each $1,000 of AGI above:
- $400k for joint filers
- $200k for married filing separately
- $200k for single filers
Up to $1,600 is refundable per child subject to limitations.
Child and dependent care credit
Must have employment related care costs for a depending under age 13 or a handicapped dependent or spouse.
Married taxpayers must file jointly to be eligible.
Credit amount: eligible care costs x applicable %
- Applicable % ranges from 20-35%; 20% applies to AGI over $43k
Amount of qualifying costs is the lesser of actual costs or $3k for one qualified individual, and $6k for two or more qualified individuals.
- Costs for care of qualified individual within taxpayer’s home or outside home
- If outside home, handicapped dependent or spouse must spend at least 8 hours a day within taxpayer’s home
AMT preference items
- Percentage depletion: the amount of percentage depletion taken for regular tax in excess of the adjusted basis of the property at the end of the year is a preference item.
- Intangible drilling costs:
- AMT requires 10 year amortization. Currently deductible for regular tax.
- Preference is excess of regular tax deduction over [AMT amortization + (65% x net oil and gas income)] - Interest on private activity bonds: not taxable for regular tax purposes, but included in income for AMT.
- Expenses incurred in carrying these bonds are not deductible for regular tax purposes, but offset the interest income in computing the AMT preference.
Rental property passive losses
Rental losses on non-vacation rental property up to $25k are deductible against ordinary income by taxpayers with AGI less than or equal to $100k - phase out between $100-150k.
Gains and losses for different types of assets
Below-market loans
Charitable contribution deductions
For cash, adjusted basis = FMV
Unrelated use property, ordinary income property, short-term capital gain property, and loss property are typically converted to cash - same AGI limit
Deduction in year of donation plus 5 year carry forward
Dividend received deductions based on ownership percentages of C Corporations
Standard Deductions
