Taxes Flashcards
Treasury Regulations
A source for all tax law
Revenue Rulings, and procedures
Administrative interpretation that may be cited as a precedent
Congressional committee reports
Indicate the intent of Congress, but may not be cited as a precedent
Private letter rulings
Apply to specific taxpayers in a particular situation
Step transaction
Ignore the individual transactions instead tax the ultimate transaction
Sham transaction
This transaction lacks a business purpose and economic substance will be ignored for tax purposes
Substance over form
The substance of a transaction and not merely its form governance its tax consequences.
For example, the president of a company is lended money from the company. There is no written loan agreement. He never intends to repay loan or take a salary. The loan is taxed to president.
Assignment of income
Income is taxed to the tree that grows the fruit, although it may be assigned to another prior to receipt.
For example, Mr. T owns XYZ and S corporation. He directs that all income from the corporation be paid to his son. Mr. T reports no income. The income is taxed to Mr. T.
Hobby loss
Any activity generating net income or profit in three out of five consecutive years is a business not a hobby. For horses, profit is necessary and only two out of seven consecutive years.
Frivolous return
One that omits information necessary to determine tax liability, shows a substantial, incorrect tax, or is based on the taxpayers desire to impede the collection of tax.
The penalty is $5000
Negligence
Without intent to defraud
20% penalty
Fraud
Intent to cheat the government by deliberately understating tax liability
Penalty is 75% of the portion of a tax underpayment attributable to fraud
Failure to pay
Penalty is half a percent per month, the taxes unpaid with a maximum amount of 25%
Failure to file
Penalty is 5% of the tax due each month with a maximum of 25%
Two types of estimated tax payments
1) 90% of the current year tax tax liability
2) hundred percent of the prior years liability or 110% of the prior years adjusted gross income exceeded $150,000
Fringe benefits - tax-free
1) premiums employers pay for health plan
2) premiums employers pay for group life policy up to $50,000
3) company car for business
4) commuter highway vehicle and transit Pass
5) up to $5000 for dependent care assistance provided during a tax year paid by employer
6) employer provided education assistance up to $5250 a year
7) employer provided parking spots $315 a month
8) discount on Company products
9) overtime, meal money, CAA fair theater or sporting event tickets
Medicare taxes
If > $200k (250k MFJ), rate is 2.35%
If < $200k, rate is 1.45%
NIIT of 3.8% on investment income if annual income is more than $200k ($250k MFJ)
LTCG Rates
Use 0% if in the 10-12% bracket.
Use 15% if in the 22-35% bracket.
Use 20% if in the 35-37% bracket.
Kiddie Tax
- Applies to UNEARNED INCOME greater than $2,600 (w/ at least one living parent)
- Applies to:
1) Kids under 18
2) Age 18 if half support
3) 19-23 if half support and FT student - FIRST $1,300 is tax free.
- Next $1,300 is taxed at child’s tax (10% or $130)
- Anything above is taxed at parents’ marginal rate
If there’s EARNED income, earned income + $450 is tax free.
Credit for child and dependent care expenses (age 13) - nonrefundable
- percentage of expenses paid for care of a dependent that allows the taxpayer to work and earn income
- Limited to $3000 for one dependent or $6000 for two or more dependents
- Multiply qualifying expenses by 20% for applicable credit
Child Tax Credit, partially refundable
- $2k/child under 17 ($1.7k refundable)
- Reduced by $50 for every $1000 over $400k MAGI ($200k single)
- Also, there’s a $500 credit for every non-qualifying dependent (older than 17, elderly parent, disabled parent, etc) if pay 50% of their expenses
Adoption credit, non refundable
- The maximum credit is $16,810 per eligible child
- Credit is phased out ratably for taxpayers with Magi between $252,150 and $292,150
- Includes: adoption fees, court cost, attorney fees, foreign child fees (no surrogate)
- Eligible: 17 and younger, or any age if special needs
- Apply when finalized
Cash v Accrual Tax Accounting
- Use cash when profits are less than $25M
- If a company maintains inventory, use accrual
Limited liability company (LLC)
- may be classified for federal income tax purposes as a partnership or a corporation
- classified as a partnership if it has no more than two of the following:
1) centralization of management
2) continuity of life
3) limited liability
4) free transferability of interests
- Every member has limited liability for all debts or claims against business
Qualified business income deductibility
Income from partnerships, so proprietorships and other past through businesses can deduct up to 20% of income
The taxpayers business must net a profit
TIER 1: if total taxable income is less than $191k (S) or $383k (MFJ), can claim full 20%
TIER 2: if a personal service firm, no deduction allowed over $241k (S) or $483k (MFJ)
TIER 3: Everything in between is partial tax bene
Limited liability partnership (LLP)
General partners are not personally liable for malpractice related claims arising from the professional misconduct of another general partner
LLC is generally more flexible
C Corp
- function as a separate tax entity
- If a corporation distributes after tax earnings to its owners, the income is taxed a second time at the owner level (double taxation)
- corporation profit is taxed at a flat rate of 21%
- dividend received deduction:
1) US corporation investing in another US corporation receives a deduction for dividends received
2) 50% of dividends received from qualifying corporations may be excluded from income of recipient corporation if the recipient corporation owns 20% or less
3) 65% exclusion if the ownership is between 20 and 80%
4) 100% exclusion if the ownership is greater than 80%
S Corp
- functions as a conduit for items of income deductions, and tax credits
- Can only become an S Corp. by unanimous election of its shareholders
- Shareholders limited to 100
- Can only issue a single class of outstanding common stock (no preferred)
- Must be a domestic corporation
- limited liability
Limited Partnership (LP)
- virtually any business can operate as a limited partnership
-ONLY PASSIVE INVESTORS
- must have at least one general partner
- limited partners are liable for partnership debt only to the extent of their capital contributions
Simple vs Complex
- Simple = $300 income tax exemption
- Complex =$100 income tax exemption
Like kind exchange calculations
1) Realized Gain = Total value received - adjusted basis of property
2) Recognized Gain = the lesser of the realized gain or the boot received
3) Substitute basis = FMV of property acquired - [Realized gain - Recognized gain]
Alternative Minimum Tax (AMT)
Separate method of calculating income tax liability.
Applies in cases where the calculation of the AMT results in a higher tax liability than the calculation of the regular income tax
Designed to prevent the taxpayer from reducing tax liability below reasonable levels
Highest tax rate is 28%!!! (Vs 37%)
Income automatically exempt is $85,700 (S) or &133,300 (MFJ)
IPOD added back:
- Private municipal bond
- Oil & drilling
- Depreciation (not straight line)
To reduce AMT, increase your taxable income basically
Cash Gifts & Deductibility
A taxpayer cannot deduct more than 60% of AGI for cash gifts to a public charity
Any contribution in excess of such limit is carried forward as an itemized deduction for five years or sooner death
Appreciated Property & Gift Deductibility
Deduction is up to 30% of AGI unless they elect to use the property’s basis rather than fair market value
If basis is used, can deduct up to 50% of AGI
Ordinary Income Property and Deductibility
Property that if sold would produce ordinary income, not capital gains
The deduction is limited to basis
Includes:
- inventory
- copyright
-use-unrelated property
- a work of art created by taxpayer
- short term capital gains property
Collectibles (Tax Rate)
28% capital gains rate
Coefficient of Variation (CV)
Risk/Return
Measures relative variability to compare investments with widely varying rates of return.
Standard deviation divided by the average or mean
Risk per unit of expected return
Research Institute of America (RIA) & Commerce Clearing House (CCH)
Publishers of reference books on federal income tax.
CANNOT be cited to audit/tax court.
Estimated Tax Filing Dates
1) April 15th
+2: June 15th
+3: Sept 15th
+4: Jan 15th
Itemized deduction types (Schedule A)
- medical, dental, LTC > 7.5% AGI
- casualty losses
- Real estate taxes + State, Local and Sales Taxes (SALT- limited to $10k)
- home mortgage interest
- Charitable gifts
- investment interest expense (margin account - limited to net investment income[interest, div, royalties, ST gains, NO LT GAINS OR QUALIFIED DIV*])
Calculating Deductible Loss
1) Use lessor of basis or FMV
2) Subtract insurance coverage
3) Subtract $100 floor
4) Subtract 10% of AGI
Meal & Entertainment Expense Deduction
- After 12/31/2017, all expenses are non deductible unless:
• Meals or entertaining clients and wooing prospects may be deductible if business conducted, taxpayer is present, and meals aren’t lavish.
• Expenses for benefit of taxpayer’s employees (other than highly comped) - office parties
• Biz meals provided for convenience of employer are only 50% deductible
• Meals for employees while traveling is 50% deductible
- Sporting events/tickets are no longer deductible
Meal Expense - deductible to a 50% limit:
1) Salaried employee (unreimbursed)
2) Corp can pay 100% of expense but not deduct 50% of expense on corporate return
3) Self-employed must pay 100% but can only deduct 50%
Self-employment income
Includes:
- Net schedule C income
- general partnership income (k-1)
- Board of directors fees
- part-time earnings (1099)
-DO NOT INCLUDE: real estate income, LP, S Corp wages, k-1 distribution from S-Corp
- Taxable wage base not to exceed $168,600, amounts above are subject to Medicare tax only!
- SHORTCUT IS x .1413
FICA Taxes
- W2 employee = x 0.153
- the employee and employer each pay 6.2% +1.45% or a total of 15.3%
- Up to W-2 earnings of $168,600
- after $168,600 each pay Medicare taxes of 1.45% or a total of 2.9% unlimited
Related Party Tax Trap
When property is sold to a related party (son/daughter) who intern sells the property within two years of the original purchase date.
Installment sale, collapses and gain is taxed retroactively in the first year .
C-Corp
BIZ IS PROFITABLE
1) Separate tax entity - flat 21% tax rate (if Corp distributes to owners, distributed income is taxed a 2nd time at owner level - qual div)
2) Dividend received deduction of 50%
3) Personal Service Corp (PSC) - HALE (21%)
- Health
-Accounting, Architecture, Arts, Actuary
-Law
-Engineering
4) Preferred Stock!!!!
5) Can’t write losses off..
6) no pass through of earnings/losses
Sole Proprietorship
BUSINESS HAS LOSSES
Use if RISK FREE ENTITY
Conduit entity - report schedule C
1) Pension Plan (Keogh)
2) 100% medical, dental, LtC insurance deductible for owner
3) Lack of continuity
4) Interest on loans is fully deductible without limit!
General Partnership Keys
BUSINESS HAS LOSSES
Use if RISK FREE ENTITY
Conduit entity to
1) Pension Plan (Keogh)
2) 100% medical, dental, LTC deductible for owners
3) Lack of continuity
4) Losses up to BASIS =
1. Cash contributed
2. Direct loans made to partnership by partners
3. loans made to partnership
S-Corp
BUSINESS HAS LOSSES
Use if RISKY entity
1) Pension Plan
2) 100% medical, dental, LTC deductible for 2% owners!!!
3) Losses up to basis =
- Cash
- Direct Loans (NO BANK LOANS)
4) no more than 100 shareholders
5) ONLY common (no preferred)
6) Must be domestic and US shareholders
7) Unearned income not distributed is added to basis
LLC
BUSINESS HAS LOSSES
Use if RISKY entity
1) limited liability (like a corporation)
2) Losses up to basis (like partnership)
LP Keys
BUSINESS HAS LOSSES
Use if RISKY entity
1) No active participants
2) Losses up to basis
3) Must have at least one general partner
4) Debt only to extent of capital investment
Section 1244 - Qualified Small Business Stock
- Applies to first $1M of stock (c or s) issued
- Loss of $100k per yr (JT) or $50k (S) is ORDINARY LOSS, not capital
- BENEFICIAL
Basis
Increased for: legal fees, commissions, sales tax, freight and improvements
NOT increased for: repairs, real estate tax, normal biz operating expense
Sale of Residence - Section 121
- Must live in 2 of past 5 years
- an exception is available if taxpayer lives in the residence less than two years and moves because of a new job for health reasons or for unforeseen circumstances like marriage
- move must be greater than 50 miles
NO CORPORATE AMT
Eliminated, wrong answer
AMT Depletion
PERCENTAGE DEPLETION TRIGGERS AMT
… not cost depletion
AMT Add back items
1) Incentive Stock Option Bargain element
2) SALT (property state and city income)
3) Home equity indebtedness
*To avoid AMT, disqualify ISOs, earn more income, avoid SALT taxes
Publicly Traded Partnership (PTP)
- Also known as master limited partnerships (MLPs)
- Public if traded on established securities market or tradable on secondary market
- Income NOT sheltered by passive losses, is portfolio income (Schedule B)
- Losses cannot be used to offset passive income from other sources (only against income from SAME partnership)
- Losses carried forward until used against income from same partnership or SOLD
Non-Publicly Traded Partnerships
- Referred to as RELPs
- Passive activity loss can’t be used to offset portfolio income, comp, or biz income.
- losses from Non-public (private) limited partnerships (passive activity losses or PAL) can offset other non-public LPs (passive income generators or PIG)
- Noted on Schedule E
- Oil and Gas working interests are EXEMPT from rules. Losses are deductible against active or portfolio income
$25k loss for Active Participants
Qualifying taxpayers may deduct up to 25,000 per year of net losses from real estate activity from their active or portfolio income.
Phased out for AGI between $100k and $150k on a $2 for $1 basis. 22 analysis
Rental of Principal Residence (not business usually)
- Simplest tax treatment when rent home for FEWER than 15 days
- Rental income excludable from gross income but no deductions allowed
Renting Vacation Home (normally biz)
Personal use cannot exceed LONGER OR GREATER of 14 days or 10% of rental use
Deductions attributable to renting are allowed
Charitable Contributions & Deductions
1) Calculate max deductible amount (can’t be more than 60% of AGI)
- Excess can be carried forward for 5 years or death.
2) Calculate eligible amounts to 50% orgs (Public charities)
- All churches, schools and hospitals
- All orgs for charitable, religious, educational or literary purposes or prevent cruelty to animals/children
3) Calculate eligible amounts for 30% orgs (Private charities)
- Private non-operating foundations, fraternal orders or veterans
• Appreciated LT cap gains property:
- BASIS = 50% of AGI
- FMV = 30% of AGI
• Ordinary Income Property (ST cap gains, inventory, unrelated use, copyright)
- Limited to BASIS = 50% of AGI
Hobby Gains & Losses
Hobby losses NOT deductible
Gains reported as Miscellaneous income
Alimony Rules!!! (recapture)
When NO alimony paid in third year, subtract $37,500 from total alimony paid in year one and two combined.
That amount is recapture amount
