Taxes

Question 1

Treasury Regulations

Answer 1

A source for all tax law

Question 2

Revenue Rulings, and procedures

Answer 2

Administrative interpretation that may be cited as a precedent

Question 3

Congressional committee reports

Answer 3

Indicate the intent of Congress, but may not be cited as a precedent

Question 4

Private letter rulings

Answer 4

Apply to specific taxpayers in a particular situation

Question 5

Step transaction

Answer 5

Ignore the individual transactions instead tax the ultimate transaction

Question 6

Sham transaction

Answer 6

This transaction lacks a business purpose and economic substance will be ignored for tax purposes

Question 7

Substance over form

Answer 7

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.

Question 8

Assignment of income

Answer 8

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.

Question 9

Hobby loss

Answer 9

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.

Question 10

Frivolous return

Answer 10

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

Question 11

Negligence

Answer 11

Without intent to defraud

20% penalty

Question 12

Fraud

Answer 12

Intent to cheat the government by deliberately understating tax liability

Penalty is 75% of the portion of a tax underpayment attributable to fraud

Question 13

Failure to pay

Answer 13

Penalty is half a percent per month, the taxes unpaid with a maximum amount of 25%

Question 14

Failure to file

Answer 14

Penalty is 5% of the tax due each month with a maximum of 25%

Question 15

Two types of estimated tax payments

Answer 15

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

Question 16

Fringe benefits - tax-free

Answer 16

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

Question 17

Medicare taxes

Answer 17

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)

Question 18

LTCG Rates

Answer 18

Use 0% if in the 10-12% bracket.

Use 15% if in the 22-35% bracket.

Use 20% if in the 35-37% bracket.

Question 19

Kiddie Tax

Answer 19

• 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.

Question 20

Credit for child and dependent care expenses (age 13) - nonrefundable

Answer 20

• 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

Question 21

Child Tax Credit, partially refundable

Answer 21

• $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

Question 22

Adoption credit, non refundable

Answer 22

• 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

Question 23

Cash v Accrual Tax Accounting

Answer 23

• Use cash when profits are less than $25M
• If a company maintains inventory, use accrual

Question 24

Limited liability company (LLC)

Answer 24

• 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

Question 25

Qualified business income deductibility

Answer 25

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

Question 26

Limited liability partnership (LLP)

Answer 26

General partners are not personally liable for malpractice related claims arising from the professional misconduct of another general partner LLC is generally more flexible

Question 27

C Corp

Answer 27

- 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%

Question 28

S Corp

Answer 28

- 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

Question 29

Limited Partnership (LP)

Answer 29

- 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

Question 30

Simple vs Complex

Answer 30

- Simple = $300 income tax exemption - Complex =$100 income tax exemption

Question 31

Like kind exchange calculations

Answer 31

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]

Question 32

Alternative Minimum Tax (AMT)

Answer 32

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

Question 33

Cash Gifts & Deductibility

Answer 33

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

Question 34

Appreciated Property & Gift Deductibility

Answer 34

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

Question 35

Ordinary Income Property and Deductibility

Answer 35

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

Question 36

Collectibles (Tax Rate)

Answer 36

28% capital gains rate

Question 37

Coefficient of Variation (CV)

Answer 37

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

Question 38

Research Institute of America (RIA) & Commerce Clearing House (CCH)

Answer 38

Publishers of reference books on federal income tax. CANNOT be cited to audit/tax court.

Question 39

Estimated Tax Filing Dates

Answer 39

1) April 15th +2: June 15th +3: Sept 15th +4: Jan 15th

Question 40

Itemized deduction types (Schedule A)

Answer 40

- 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*])

Question 41

Calculating Deductible Loss

Answer 41

1) Use lessor of basis or FMV 2) Subtract insurance coverage 3) Subtract $100 floor 4) Subtract 10% of AGI

Question 42

Meal & Entertainment Expense Deduction

Answer 42

- 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%

Question 43

Self-employment income

Answer 43

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

Question 44

FICA Taxes

Answer 44

- 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

Question 45

Related Party Tax Trap

Answer 45

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 .

Question 46

C-Corp

Answer 46

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

Question 47

Sole Proprietorship

Answer 47

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!

Question 48

General Partnership Keys

Answer 48

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

Question 49

S-Corp

Answer 49

BUSINESS HAS LOSSES Use if RISKY entity 1) Pension Plan 2) 100% medical, dental, LTC deductible for 2% owners!!! 3) Losses up to basis = 1. Cash 2. 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

Question 50

LLC

Answer 50

BUSINESS HAS LOSSES Use if RISKY entity 1) limited liability (like a corporation) 2) Losses up to basis (like partnership)

Question 51

LP Keys

Answer 51

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

Question 52

Section 1244 - Qualified Small Business Stock

Answer 52

- 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

Question 53

Basis

Answer 53

Increased for: legal fees, commissions, sales tax, freight and improvements NOT increased for: repairs, real estate tax, normal biz operating expense

Question 54

Sale of Residence - Section 121

Answer 54

- 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

Question 55

NO CORPORATE AMT

Answer 55

Eliminated, wrong answer

Question 56

AMT Depletion

Answer 56

PERCENTAGE DEPLETION TRIGGERS AMT … not cost depletion

Question 57

AMT Add back items

Answer 57

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

Question 58

Publicly Traded Partnership (PTP)

Answer 58

- 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

Question 59

Non-Publicly Traded Partnerships

Answer 59

- 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

Question 60

$25k loss for Active Participants

Answer 60

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

Question 61

Rental of Principal Residence (not business usually)

Answer 61

- Simplest tax treatment when rent home for FEWER than 15 days - Rental income excludable from gross income but no deductions allowed

Question 62

Renting Vacation Home (normally biz)

Answer 62

Personal use cannot exceed LONGER OR GREATER of 14 days or 10% of rental use Deductions attributable to renting are allowed

Question 63

Charitable Contributions & Deductions

Answer 63

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

Question 64

Hobby Gains & Losses

Answer 64

Hobby losses NOT deductible Gains reported as Miscellaneous income

Question 65

Alimony Rules!!! (recapture)

Answer 65

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