Taxes Flashcards
1031 Realized Gain Formula
(FMV Rcv’d + Boot) - Adjusted Basis
Depreciation Recapture Steps
(1245 & 1231 Gain)
- Cost - CRD = Adj. Basis
- Sale - Adj. Basis = Sale Gain
1245 Gain is LESSOR of
A. CRD
B. Sale Gain
If 1245 is
A. CRD ⟶ Gain - CRD = 1231
B. Sale Gain ⟶ NO 1231
What is MACRS 7yr. Property?
- Office furniture/fixtures
- Basic equipment/machinery
Corp. Accumulated Earnings Tax
20% above threshold
Regular corp > $250k
PSC >$150k
NOT Investment Income
“Angsty Teens Quit Life”
Active Biz Income
Tax-exempt Income
Qual. Dividends (Not invest income for deductions)
Life Insurance Proceeds
What is the 179 Deduction?
Expense up to $1.22mil. of 1245 property in year of purchase
- excess can be carried forward
(Phaseout dollar for dollar for property costs > $3.05mil)
Installment Sale Gross Profit % Formula
Profit / Sale Price = Profit %
Note: Installment PMT x Profit % = Taxable gain
Substance Over Form Example
Pres. of XYZ has co. lend him $ without intent to repay
Substance is income, even thought the form is a loan
What is ordinary income property for charitable gifts?
Copyrights
Inventory (cont. limited to cost)
Art created by donor
STCG Prop
Use-unrelated Prop
Note: Assume stock/real estate gifted is LTCG/USE RELATED
NOT Subject to SE Tax
“Dogs Chase Rabbits, Lazy Squirrels Sleep”
- Dividends/Interest
- Capital Gains
- Real Estate $ (passive)
- LP Distribution
- S Corp Wages
- S Corp K1
YES Subject to SE Tax
- Net Sched C Income
- GP K1
- BoD Fees
- 1099 Wages
Cost Basis for Gift given at a Loss
When donee sells asset:
LOSS = FMV at date of gift
GAIN = donor basis
Assignment of Income Example
“Tree that bears the fruit”
Parent earns salary but assigns income to son
Parent is taxed, they bore the fruit
Type of Gain/Loss for Sec 1244 Stock
Gain = Cap Gain rate
Loss = Ord. Inc.
- $50k max. deduct for SINGLE
- $100k max. deduct for MFJ
What are the qualifications to take advantage of Sec. 1244 Stock treatment?
- C or S Corp.
- Founded < $1mil.
- NO PSC
YES Investment Income
- Taxable Interest
- Ord/Qual dividends (stock)
- NO itemized offset with Qual dividends!
- Royalties
- Rental Income (passive)
- STCG
Estimated Tax PMT to avoid penalty
LESSER OF:
90% of current year
or
100% of last year
*110% of last year if AGI > $150k
Real Estate Activity Deduction Phaseout
For active participants, not material!
Deduction = $25k/yr
Phaseout:
$100k - $150k AGI
2-to-1 Phase out in range
> $150k AGI - NO deduction
Fed Disaster Deductible Loss Calc
LESSOR: FMV or Basis
(-) Insurance Payout
(-) $100 floor
(-) (AGI x 10%)
= Deduction
Gross Income Exclusions
- Gifts
- Inheritance
- Child Support
- Muni Interest
- Worker’s Comp.
- Compensatory PMT
- What is MACRS 5yr. Property?
- What is Yr 1-2 Recovery %
Computers, Auto, Light Truck
Yr 1 = 20%
Yr 2 = 32%
Step Transaction Example
- ABC Co. sells to 3rd Party
- 3rd Party sells to subsidiary of ABC.
SE Tax Calc
NET SE Income x .1413
Round UP
1031 Substitute Basis
(Adjustment After Transaction)
FMV - (Realized - Recognized)
1031 Recognized Gain Shortcut
LESSOR of:
Realized or Boot
No boot = 0 Recognized
What is included in Sched A?
ITEMIZED DEDUCTIONS:
- Gambling loss (offset wins only)
- Medical >7.5% AGI
- SALT, Property, Real Estate ($10k TTL combined)
- Mortgage interest <$750k
- Charity
- Fed disaster loss
- Margin interest (offset invest inc. only)
121 Exemption Widow(er) Provision
Widow(er) can claim full $500k 121 Exemption for 2yr after spouse’s death
Above the Line Adjustments
- IRA contributions
- Keogh, SEP
- 1/2 SE Tax (x .07065)
- SE Health Insurance Premiums
- Alimony (Pre-2019)
- $2,500 Student loan interest
- HSA Contributions
- Early withdrawal penalties
Estimated Tax Pmt Dates
April 15th
+2 June 15th
+3 Sept. 15th
+4 Jan. 15th
Frivolous Return Penalty
$5,000
Negligence Tax Return Penalty
20% of underpayment attributed to negligence
Civil Fraud Tax Return Penalty
75% of underpayment attributed to fraud
Failure to File
Failure to Pay
Penalties
Failure to File = 5% of PMT/mo. up to 25%
Failure to Pay = .5% of PMT/mo. up to 25%
Gross Income
- Wages/Salary/Tips
- Ord/Qual Dividends (Schd B)
- Taxable Interest (Schd B)
- Cap Gains (Schd D)
- Biz Income (Schd C)
- Real Estate Income (Schd E)
- Alimony Rcv’d (Pre-2019)
- Unemployment
- Punitive Dmg PMT
- Taxable SS
Are LTCG & Qual. Div Investment Income?
Only if taxpayer elects not to use LT Gain rates
Business Meal/Entertainment Deductions
Travel = 100%
Meals = 50%
Entertainment = 0%
What deductions/exemptions are eliminated?
- Itemized misc. expenses
- Personal exemptions
- Home office deduction for employees
- SE Still ok
Standard Deduction for Kiddie Tax with Earned & Unearned Income
GREATER of:
$1,300
or
Earned income + $450
FICA Tax %
< $168,600
Employer/Employee = 6.2% + 1.45%
> $168,600
Employer/Employee = 1.45%
> $200,000
Employee add .9% to 1.45%
Child/Dependent Care Credit
- Up to age 13yo
- Non-refundable
One Child = $3,000 max. exp.
Two + Children = $6,000 max. exp.
MULTIPLY EXPENSE BY 20%
Child Tax Credit
$2,000 per child <17yo
Up to $1,700 refundable
Adoption Credit
- Non-refundable
- ≤17yo
Expenses NOT Covered:
- Surrogate parenting
- Adopting Spouse’s child
Business Entity Shortcut:
Profitable
- C Corp
- PSC
Business Entity Shortcut:
Losses/Risk-Free
- Sole Proprietorship
- Partnership
Business Entity Shortcut:
Losses/Risky
- S Corp
- LLC
- LLP
1031 Shortcuts
No Boot = No Recognized Gain
Boot RCVD = Recognized Gain
Boot PAID = Add to basis
LTCG Brackets
10-12% Tax = 0% LTCG
22-35% Tax = 15% LTCG
35-37% Tax = 20% LTCG
Sec 121 <2yr Exemption
- Moving for “Unforeseen Circumstances”
- Typically moving for new job
NOTE: Must be ≥ 50mi Away
AMT Postpone/Avoid Strategy
- MORE Taxable Income
- Defer PMT of Property Tax, State Inc. Tax, Deductible Medical Exp., Charity
- Defer Exercise of ISO
- Purchase Public Muni, not private
AMT Preference Items
IPOD
- Excess Intangible Drilling Expense
- Private Activity Muni
- Oil & Gas % Depletion
- Depreciation (ACR/MACRS - No Straight Line)
AMT Add Back Items
- ISO Bargain Element
- SALT Deduction
Publicly Traded MLP Income
- Income not offset/sheltered from outside sources
- Schd B
Publicly Traded MLP Losses
- Can’t use losses to offset income from other sources
- Losses may carry forward
- Can only offset income from same MLP
Non Public PAL
(Passive Activity Losses)
PIGS need PALS
- Can only offset income from other Non Public Partnerships
Non Public PIG
(Passive Income Generator)
PIGS need PALS
- Can only net against losses from other Non Public Partnerships
Tax Treatment of Primary Residence Rental
If:
Rented for <15 Days/yr.
Then:
- Rental income is exempt from Gross Income
- No expense deduction
Tax Treatment of Vacation Home Rental
If:
Personally used for GREATER:
14 Days or 10% of Rental Days
Then:
- Property considered residence
- NO business deduction for expense
Retirement Phantom Income
- ESOP Distribution of Basis (NUA)
- Secular Trust
Investment Phantom Income
- ZERO Coupon/STRIPS
- TIPS
- Declared, not received dividends
Tax Phantom Income
- K1 from LP/FLP
- Recapture
AGI Deductions: Public Charity
Cash = 60% AGI
LTCG/Appreciated Prop:
- FMV = 30% AGI
- BASIS = 50% AGI
Ord. Inc. Prop: LESSOR
- 50% of AGI
- BASIS
AGI Deductions: Private Charity
Cash = 30% AGI
LTCG Prop:
- FMV = 20% AGI
- BASIS = 30% AGI
Ord. Inc. Prop: LESSOR
- 30% of AGI -or- BASIS
1031 Adjusted Basis Formula
Cost - CRD
Refundable Tax Credits
- Child tax (partial - max. $1700/ea)
- Earned Income
QBI keys
PASS THROUGH ONLY
QBI = Net income
- Below the line
- Up to 20% deduction of QBI
- US-Sourced income only
- Personal service S-Corp subject to phase out
GP/Sole Prop
Advantages
- Keogh/SEP Access
- 100% medical ins. premium deduct
- No legal formality
- Conduit income/loss
GP/Sole Prop
Disadvantage
- Unlimited Liability
- No life continuity
- Capital depends on biz owner personal assets
C Corp
Advantages
- Separate tax entity
- Unlimited stock holders
- Limited liability
- Continuity of life
- Dividend rcv’d deduction
C Corp Disadvantages
- Corporate formalities
- Potential double taxation of accumulated earnings
Corp Dividend Deduction Rates
<20% = 50% Deduction
20-80% = 65% Deduction
> 80% = 100% Deduction
S Corp Advantages
- Limited Liability
- Conduit income/loss
- Basis = cash + DIRECT loans
S Corp Disadvantages
- Corporate formalities
- Only single class of stock (common only)
- Limited 100 shareholders
- Basis only contribution and direct loan, no third party loan
Accrual Accounting Keys
Mandatory when:
- $25mil+ sales
- Inventory
Schedule H
Household Employee
Schedule C
“Career”
SE Business income (sole prop, single LLC)
- NO - partnership, S-Corp income
Schedule E
- Real Estate
- K-1 (S-Corp, partnership, estate)
Schedule B
- Ordinary/Qual dividends
- taxable interest
- Public MLP income
Schedule D
“Delighted/defeated”
Cap Gains / Cap Losses
Active Participation Keys
- Makes decisions
- Not involved day-to-day
- $25k deduction limit
- Phase out $100-$150k 2-for-1
Material Participation Keys
- Regular, substantial, continuous involvement
- No deduction limit
- No phase out
Alimony Recapture
(-) $37,500 from front-loaded PMT over year 1-2
Installment Sale Recapture Keys
- Full recapture recognized at time of sale - taxed
- Remaining gain reported over installment
How is loss treated with rental property sale?
Current year loss & passive loss carryforward = 100% deductible
(No AGI limit)
NOL Keys
- NOL created when deductions exceed income
- C-Corp carry-forward can only offset up to 80% of taxable income
- NO NOL carry-back after 2017
PSC Keys
- Flat 21% Tax
- NO Pass-through
“HALE” - Health (Dr., DDS, Etc.)
- Accounting, Architect, Actor, Athlete
- Law
- Engineering
LP Keys
- Must have min. 1 Gp - Unlimited Liability
- Basis = Cont. / Personal Loan / Bank Loan
- Income/Loss reports on K-1
