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)

Answer 20

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

Answer 21

• $2k/child under 17
• 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

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

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