Topics You Should Know (Modules 7-15)

Question 1

Taxpayers redeeming qualified U.S. SERIES EE BONDS in the same year that QUALIFIED HIGHER EDUCATION expenses are paid may _______________________. There are two conditions that must be met: _______________ and _____________.

Answer 1

EXCLUDE the interest income on the bonds from gross income

1. the purchaser of the bond must have made the purchase after reaching the AGE OF 24
2. the purchaser must be the SOLE OWNER of the bonds (or joint owner with his or her spouse)

Question 2

TAXABLE bonds purchased at a PREMIUM are ________ to be amortized. NONTAXABLE bonds purchased at a PREMIUM are ______ to be amortized.

Answer 2

allowed (optional)

required

Question 3

The amortized bond PREMIUM is based on the _____________. The amount amortized usually ______ the taxpayer’s basis in the bonds and, for TAXABLE bonds, RESULTS IN AN _____________ for interest received from the bond.

Answer 3

constant yield to maturity
reduces
offsetting deduction

Question 4

Under the ACCRUAL METHOD of accounting, income is reported for tax purposes once all EVENTS to establish a taxpayer’s RIGHT TO RECEIVE the income _______ and the AMOUNT can be determined with ________.

Answer 4

have occurred

reasonable accuracy

Question 5

If an amount of income has been ACCRUED on the basis of a _____________ with the exact amount to be determined at a later date, any DIFFERENCE BETWEEN the ESTIMATE and EXACT AMOUNT is to be _______ or _______ in the year when the exact amount can be determined.

Answer 5

reasonable estimate
included in income
deducted

Question 6

Generation-skipping transfer tax

Answer 6

1. imposed on outright or in trust transfers to beneficiaries more than one generation BELOW the generation of the donor
2. flat tax equal to the maximum gift and estate tax RATE
3. a SEPARATE tax imposed in addition to the gift and estate taxes

Question 7

INTEREST-FREE LOANS are subject to the IMPUTED INTEREST RULES if they ______. The INTEREST that is not being paid by the borrower to the lender is CONSIDERED a _____ from the lender ______ that the loan is outstanding.

Answer 7

EXCEED $10,000
gift
each year

Question 8

A corporation may DEDUCT the FAIR MARKET VALUE of the contributed property but _______ the SAME AMOUNT to ________ for the receipt of the gift.

Answer 8

must add

its gross income

Question 9

The amount of INCOME REALIZED by a taxpayer from SERVICES RENDERED equals the SUM OF the amount of _________ AND the ________________________.

Answer 9

cash received

fair market value of any property received

Question 10

Under the TAX BENEFIT RULE, if the taxpayer takes a DEDUCTION in a PREVIOUS year and then receives a REFUND or reimbursement in a LATER year, the refund/reimbursement must be included in ______ to the _____________ of the deduction received.

Answer 10

income

extent of the benefit

Question 11

The NINE taxes subject to the TAX BENEFIT RULE are:

Answer 11

1. state income taxes
2. personal property taxes
3. real property taxes
4. state sales and use taxes
5. state corporation franchise taxes
6. stamp taxes
7. federal excise taxes
8. customs duties
9. farmland preservation credits.

Question 12

ALIMONY RECEIVED by a taxpayer is ___________ and ALIMONY PAID by a taxpayer is _______________.

Answer 12

INCLUDED in that taxpayer’s GROSS INCOME

DEDUCTIBLE from that taxpayer’s GROSS INCOME

Question 13

To be considered ALIMONY, the PAYMENTS must be MADE UNDER a __________.

Answer 13

divorce or separation agreement

Question 14

Taxable income

Answer 14

1. Wages, salaries, tips
2. Interest received on state and federal income tax refunds
3. Interest received on U.S. Treasury certificates
4. Interest received on life insurance proceeds
5. Interest on federal government obligations
6. Dividends received (stock dividends on preferred stock is taxable)
7. Alimony received
8. Business income or (loss)
9. Capital gain or (loss)
10. Other gains or (losses)
11. IRA distributions [Traditional IRA taxable amount = (always use marginal tax rate + 10% penalty if under 59 1/2)distribution; Roth IRA taxable amount = (marginal tax rate if ownership is less than five years + 10% penalty if under age 59 1/2)distribution]
12. Pensions and annuities (contributions made with AFTER-TAX dollars will be PARTIALLY included in taxable income; simplified method to determine taxable amount)
13. Rental income (realty that is used for both personal and rental purposes will be treated as if it was used 100% for personal use if the amount of rental days is less than 14, then no income recognized)
14. Unemployment compensation
15. Social Security Benefits (up to 85% can be taxed; refer to rules below)
16. Other income (some prizes or rewards, gambling winnings, money found on street, income from a hobby, jury duty pay)

Question 15

Nontaxable income

Answer 15

1. Child support payments
2. Property settlements
3. State and federal income tax refunds
4. Scholarships and fellowships used to pay tuition and course‐related fees, books, supplies, and equipment for a DEGREE CANDIDATE
5. Principal received on life insurance proceeds (up to $50,000 for GROUP-TERM)
6. Dividends received from a life insurance policy (total dividends have NOT YET EXCEEDED accumulated premiums paid)
7. Inheritances
8. Employee fringe benefits (with limitations)
9. Gifts received
10. Loans
11. Cash support from parents
12. Prizes or awards (if the below exclusion requirements are met)
13. Interest received on state government obligations
14. Interest received on qualified U.S. Series EE Bonds in the same year that QUALIFIED HIGHER EDUCATION expenses are paid
15. Stock dividends
16. Interest received from the city
17. Realized gains up to $250,000 ($500,000 if filing joint; both spouses must meet the use test, but only one must meet the ownership test) on the SALE OF A RESIDENCE if the residence has been owned and used by the taxpayer as a PRINCIPAL residence for at least TWO of the preceding FIVE years.

Question 16

Alimony must be received in the FORM OF ________.

Answer 16

cash

Question 17

Provisional Income (PI)

Answer 17

AGI + tax-exempt interest + 50% (Social Security Benefits)

Question 18

Calculation for the taxable amount of Social Security Benefits (SSB) included in income

Answer 18

If Provisional Income EXCEEDS Base Amount 1 ($32,000 married or $25,000 single) BUT NOT Base Amount 2 ($44,000 married or $34,000 single), then the TAXABLE AMOUNT of SSB is the LESSER OF:
50% × SSB
50% × (PI − BA1)

If PI EXCEEDS BA2, then the TAXABLE AMOUNT of SSB is the LESSER OF:
.85 × SSB, or
.85 × (PI − BA2), PLUS the LESSER OF
amount included based on the 50% formula (50% × SSB), or $4,500 (unless married filing jointly, then $6,000).

Question 19

If an EMPLOYER REQUIRES JURY PAY TO BE REMITTED in exchange for regular compensation for the period the employee was performing jury duty, the employee ______ the jury duty pay from _______ as an adjustment.

Answer 19

may deduct
gross income

(included in gross income, then deducted)

Question 20

Generally, STOCK DIVIDENDS _________. The new basis can be calculated by:

Answer 20

are nontaxable

e.g.

paid $90,000 for 450 shares common stock

received a stock dividend of 50 new common shares

$90,000/(450 + 50) = $180 per share (new basis)

Question 21

Any STOCK that is DISTRIBUTED on PREFERRED STOCK results in a _______ stock dividend. A taxpayer’s BASIS for original stock is _________ to the dividend stock in proportion to _________. The amount to be included in the shareholder’s income is the stock’s ______________________.

Answer 21

taxable
allocated
fair market values
fair market value on DATE OF DISTRIBUTION

e.g. Original common stock basis $300

Common stock (FMV)	$450
Preferred stock (FMV)	   150
Total value	                 $ 600

The ratio of the common stock to total value is $450/$600 or 3/4. This ratio multiplied by the original common stock basis of $300 results in a basis for the common stock of $225. The basis of the preferred stock would be ($150/$600 × $300) = $75.

Question 22

What is the THREE-STEP PROCESS for calculating the TAX of a corporation for a SHORT PERIOD?

Answer 22

1. Annualize income by multiplying the income in the short period by 12 months divided by number of months in the short period
2. Calculate the tax on annualized income
3. Multiply the computed tax by the number of months in the short period divided by 12

Question 23

Unless the IRS consents to a change of method, taxpayers are REQUIRED to use the ACCRUAL METHOD of accounting for purchases and sales if __________ are used.

Answer 23

inventories

Question 24

Manufacturers and certain retailers and wholesalers are REQUIRED to use the ____________________ to CAPITALIZE all the DIRECT and INDIRECT COSTS allocable to property they produce and for property bought for resale. These costs are then ALLOCATED to ____________ and _________ during the year, which usually results in an ______ in the BASIS of the inventory.

Answer 24

uniform capitalization method
ending inventory
property sold
increase

e.g. quality control, off-site storage facilities, warehousing, taxes excluding income taxes

Question 25

If PRICES ARE RISING and LIFO is used then the cost of inventory, and therefore the total for costs of goods sold, will be ______. If costs of good sold is ______ then taxable income will be ______, which also means that the current tax liability will be ______.

Answer 25

higher (contains all new inventory with higher prices) higher lower lower

Question 26

With an ACCOUNTABLE PLAN, all REIMBURSEMENTS are ______ in the employee's income and all employee DEDUCTIONS will be _____________________.

Answer 26

included | 2% miscellaneous itemized deductions

Question 27

CAFETERIA PLANS allow employees to select from a ____________________ and __________ the value of the nontaxable benefits in their gross income.

Answer 27

menu of fringe benefits and cash | NOT include

Question 28

The requirements of CAFETERIA PLANS are:

Answer 28

1. all participants MUST BE EMPLOYEES 2. participants MAY CHOOSE BETWEEN TWO OR MORE BENEFITS composed of cash or qualified benefits 3. participants are REQUIRED TO MAKE ELECTIONS among the benefits 4. the plan MUST BE IN WRITING and have certain SPECIFIED INFORMATION 5. the plan MAY NOT PROVIDE participants with DEFERRED INCOME, except for under 401(k) plans

Question 29

Treasure trove principle

Answer 29

1. unexpected cash flows; money found | 2. taxable income

Question 30

The first _______ of GROUP-TERM LIFE INSURANCE provided by an employer is a TAX-FREE fringe benefit. The excess over _________ usually is taxable unless the proceeds were paid by ___________.

Answer 30

$50,000 $50,000 reason of death

Question 31

What is the latest date that an IRA CONTRIBUTION can be made in order to qualify as a DEDUCTION on the prior year's return?

Answer 31

the original due date of the return, even if the return is extended

Question 32

Marginal tax rates

Answer 32

the rate of tax that applies to the LAST DOLLAR of income e.g. married filing jointly and taxable income is $100,000, within the 25% marginal tax BRACKET because the last dollar of income is subject to tax at a rate of 25%.

Question 33

Effective tax rates

Answer 33

the AVERAGE RATE of taxation that applies to income total tax liability divided by total income in any given year

Question 34

DISTRIBUTIONS FROM THE TRADITIONAL IRA are taxable at the taxpayer's __________ for federal income tax purposes.

Answer 34

ORDINARY INCOME

Question 35

Contributions to ROTH IRAs are _________ whereas contributions to TRADITIONAL IRAs are _________ if certain requirements are met.

Answer 35

never deductible | deductible

Question 36

A taxpayer will NOT RECEIVE A BASIS for their CONTRIBUTIONS TO AN IRA because they were made from earnings that were ________.

Answer 36

not taxed

Question 37

NO TAXES are paid on the INTEREST income earned on IRAs UNTIL the retirement savings are ___________.

Answer 37

distributed

Question 38

For determining the amount of income that a SELF-EMPLOYED individual may contribute to a KEOGH PROFIT-SHARING PLAN, EARNED INCOME is defined as ___________________________.

Answer 38

net self-employed earnings LESS the deductible Keogh contribution and one-half of the self-employment tax

Question 39

Three conditions that allow prizes or awards to be EXCLUDED from gross income.

Answer 39

1. the prize or award is made primarily in RECOGNITION OF religious, charitable, scientific, educational, artistic, literary, or civic achievement, but only if the recipient was selected WITHOUT ACTION ON HIS OR HER PART to enter the contest 2. the recipient is NOT REQUIRED to render substantial FUTURE SERVICES as a condition to receiving the prize or award 3. the prize or award is TRANSFERRED by the payor TO a governmental unit or tax‐exempt charitable organization.

Question 40

A cash‐basis taxpayer should report gross income _________________________________.

Answer 40

For the year in which income is either ACTUALLY OR CONSTRUCTIVELY received, whether in cash or in property.

Question 41

The EXCLUSION for interest received on U.S. SERIES BONDS applies only to education expenses INCURRED BY the taxpayer, the taxpayer's spouse, or any person whom the taxpayer may claim as a dependent for the year. Otherwise (condition is not met) QUALIFIED HIGHER EDUCATION expenses are DECREASED by:

Answer 41

1. qualified scholarships that are not includible in gross income 2. payment of educational expenses to an institution that is an exempt organization 3. reimbursement, payment, or waiver of qualified educational expenses through a state tuition program 4. any educational allowance allowable under U.S. Tax Code

Question 42

INCOME in respect of a DECEDENT is income earned by a decedent before death that __________ in the decedent's final income tax return because of the decedent's METHOD OF ACCOUNTING (e.g., receivables of a cash basis decedent). Such income MUST BE INCLUDED in ____________ and HAS ____________ as it would have had if the decedent had lived.

Answer 42

was not includible gross income by the person who receives it the same character (e.g., ordinary or capital) e.g. Includes a bonus earned before the taxpayer's death but not collected until after death

Question 43

Although an S CORPORATION generally must use a ______ year, it may request permission from the IRS to have a _____ year if it can establish a valid business purpose.

Answer 43

calendar | fiscal

Question 44

A C CORPORATION may elect to use either a _____ year or a ______ year as its annual accounting period.

Answer 44

calendar | fiscal

Question 45

C CORPORATIONS are generally not allowed to use the ___ method of accounting. A limited EXCEPTION that permits the use of the _______ method is available if the C corporation is a ________________, the business is organized as a ____________, if the C corporation for every year has inventory gross receipts of _____________, or if the C corporation for every year has average gross receipts of _____________ for any prior three‐year period and does not have ________.

Answer 45

``` cash cash qualified personal service corporation partnership $1 million or less $5 million or less inventories ```

Question 46

A taxpayer ________ LIFE INSURANCE PREMIUMS in which the taxpayer is directly or indirectly THE BENEFICIARY.

Answer 46

may not deduct

Question 47

A taxpayer _______ the GROUP TERM LIFE INSURANCE premiums if the insured employee or his/her BENEFICIARIES would get the insurance proceeds.

Answer 47

may deduct

Question 48

DEDUCTIONS can be divided into two broad categories:

Answer 48

deductions for AGI and deductions from AGI (i.e., itemized deductions).

Question 49

ACTIVITIES/TRANSACTIONS can be divided into THREE mutually exclusive categories:

Answer 49

1. Personal 2. Trade/business 3. Investment

Question 50

Expenses related to one's PERSONAL activities _______________.

Answer 50

CANNOT BE deducted unless specifically provided for in the IRC (e.g., charitable contributions, mortgage interest).

Question 51

Expenses related to TRADE OR BUSINESS activities ________________________.

Answer 51

are DEDUCTIBLE if they are RELATED to the business operations and are ORDINARY, NECESSARY, and REASONABLE.

Question 52

Expenses related to INVESTMENT activities or other activities that produce income ______________.

Answer 52

are DEDUCTIBLE if ORDINARY, NECESSARY, and REASONABLE.

Question 53

Expenses related to the MANAGEMENT or MAINTENANCE of property and in connection with the DETERMINATION OF ANY TAX ____________.

Answer 53

are DEDUCTIBLE

Question 54

Items that are NOT DEDUCTIBLE

Answer 54

1. Fines and penalties (additional tax that was not paid, interest on that payment) 2. Bribes 3. Life insurance premiums in which the taxpayer is directly or indirectly the beneficiary 4. Contributions to ROTH IRAs 5. Expenses related to one's PERSONAL activities 6. Amounts related to controlled substances 7. Federal income taxes 8. State and local fees 9. Assessments for public improvements (tend to increase the value of the taxpayer's property)

Question 55

NO DEDUCTION OR CREDIT shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of _____________________(within the meaning of schedule I and II of the ______________) which is PROHIBITED BY federal LAW or the law of any state in which such trade or business is conducted. However, a DEDUCTION is allowed for the ______________.

Answer 55

trafficking in controlled substances Controlled Substances Act cost of merchandise purchased

Question 56

Deductions for CASH-BASIS taxpayers generally are taken when ________. However, for expenses covering _________, the deduction must be SPREAD over the period for which the expenses apply.

Answer 56

actually paid | 12 months or more

Question 57

Deductions FOR AGI

Answer 57

1. Educator expenses paid up to $250 ($500 if married filing jointly and both spouses are eligible educators, but not more than $250 each) 2. Certain business expenses of reservists, performing artists, and fee-basis government officials 3. Health savings account deduction 4. Moving expenses [limited to moving the household goods and lodging; if closely related to the start of work at a new location and a distance test (50 miles) and a time test (39 weeks in the 12-month period or if self-employed, 78 weeks in the 24-month period with at least 39 weeks in the 12-month period) are met] 5. Self-employment tax (7.65% employer-equivalent portion; 50% limitation) 6. Self-employed SEP, SIMPLE, and qualified plans 7. Self-employed health insurance 8. Penalty on early withdrawal of savings 9. Alimony paid 10. Traditional IRA contributions (covered=phase out based on AGI; not active=lesser of $5,500 ($6,500 if age 50 or older) or 100% of compensation in 2017) 11. Student loan interest (limited to $2,500 and is reduced by AGI in excess of $60,000 if single, head of household, or a qualifying widow(er); $120,000 if married filing jointly) 12. Tuition and fees 13. Domestic production activities 14. Other deductions (jury duty pay required to be remitted by employer; group term life insurance premiums if the insured employee or his/her beneficiaries would get the insurance proceeds; section 179 depreciation; expenses incurred from a passive activity)

Question 58

Deductions FROM AGI (Itemized Deductions on Schedule A)

Answer 58

1. Medical and dental expenses paid (paid with a credit card prompts deduction) in excess of 10% (7.5% if age 65 or older) of AGI 2. Taxes paid [state and local income taxes or sales/use tax (the greater of the two); state, local, and foreign real property; state and local personal property; foreign income] 3. Interest paid [home mortgage; acquisition debt to buy, build, or improve your home up to $1,000,000 ($500,000 if married filing separately); home equity debt (second mortgage taken out) up to a loan balance equal to the lower of $100,000 or the FMV less acquisition debt of the house; points paid to refinance a loan must be amortized over the life of the loan; insurance premiums; investment up to the amount of net investment income and the excess can be carried forward] 4. Gifts to charity paid below the 50% of AGI ceiling (the amount that exceeds this ceiling may be carried forward for 5 years) 5. Casualty and theft losses, not the premiums for casualty insurance, resulting from NONINCOME-PRODUCING property paid in excess of the $100 and 10% of AGI floors (the loss must be SUDDEN and UNEXPECTED; e.g. water heater explosion; not an e.g. termites or water damage to roof) 6. Miscellaneous expenses paid in excess of 2% of AGI (unreimbursed employee expenses—job travel, meals and entertainment - additional 50% limitation, union dues, work clothes and uniforms, business gifts - up to $25, job education, etc.; tax preparation fees, legal fee for tax advice related to a divorce, IRA trustee's fees, appraisal fee for a charitable contribution; other expenses—investment, safe deposit box, hobby, etc.) 7. Other Miscellaneous expenses (amortizable premium on taxable bonds; casualty and theft losses from INCOME-PRODUCING property; federal estate tax on income in respect of a decedent; gambling losses up to the amount of gambling winnings; impairment-related work expenses of persons with disabilities; loss from other activities from Schedule K-1 (Form 1065-B), box 2; losses from Ponzi-type investment schemes; repayments of more than $3,000 under a claim of right; unrecovered investment in an annuity)

Question 59

ALIMONY payments you make under a divorce or separation instrument, such as a divorce decree or a written agreement incident thereto, are DEDUCTIBLE if all of the following requirements are met:

Answer 59

1. You and your spouse or former spouse DO NO FILE A JOINT RETURN with each other 2. You pay in CASH (including checks or money orders) 3. The divorce or separation instrument DOES NOT SAY that the payment is NOT ALIMONY 4. If legally separated under a decree of divorce or separate maintenance, you and your former spouse are NOT MEMBERS OF THE SAME HOUSEHOLD when you make the payment 5. You have NO LIABILITY to make any payment (in cash or property) AFTER the DEATH of your spouse or former spouse 6. Your payment is NOT treated as CHILD SUPPORT

Question 60

Net investment income

Answer 60

1. investment INCOME less investment EXPENSES 2. remaining amount after deduction is carried over, INDEFINITELY, and deducted in a year that has sufficient net investment income

Question 61

Taxpayers may deduct the qualified MEDICAL EXPENSES incurred for both _____________________________.

Answer 61

their treatment and the treatment of spouses and dependents

Question 62

Qualified medical expenditures include:

Answer 62

1. Diagnosis 2. Cure 3. Mitigation 4. Treatment or prevention of disease 5. For the purpose of affecting any structure or function of the body 6. Meals and lodging furnished as NECESSARY incidents to the care of an individual PRIMARILY at an institution (not a hospital) for medical care e. g. prescription drugs, eye examinations and eyeglasses/contact lenses, necessary medical procedures (appendix, foot), tooth extraction, hearing aids, unreimbursed insurance premiums, drug rehabilitation, wheelchair, cosmetic surgery deemed necessary, emergency room, crutches, wigs relating to hair loss resulting from chemotherapy treatments, annual physical exam, transportation for medical and dental examinations, physical therapy, dental implants, paid for a dependent (the gross income and joint return tests do not apply) and hearing aid batteries * expenses are reduced by reimbursed insurance premiums

Question 63

Charitable contributions are made to:

Answer 63

1. Churches 2. Educational institutions that maintain a regular faculty and curriculum 3. Hospitals and medical schools 4. Organizations supported by the government that hold property and/or investments for the benefit of a college or university 5. Federal, state or local governmental units 6. Organizations normally receiving most of its support from the public or a governmental unit

Question 64

Calculation for casualty loss itemized deduction

Answer 64

``` Lower of decline in FMV or AB of property Less: Insurance Reimbursements Less: $100 per casualty Less: 10% × AGI = Casualty loss deduction ```

Question 65

Jimet, an unmarried taxpayer, qualified to itemize deductions. Jimet's adjusted gross income was $30,000 and he made a $2,000 cash donation directly to a needy family. Jimet also donated stock, valued at $3,000, to his church. Jimet had purchased the stock four months earlier for $1,500. What was the maximum amount of the charitable contribution allowable as an itemized deduction on Jimet's income tax return?

Answer 65

$1,500 The $2,000 cash donated to a needy family is not deductible because the needy family is not a qualified charitable organization. The stock was purchased for $1,500 and NOT HELD FOR ONE YEAR to be capital gain property, therefore the deduction for the stock is the fair market value of the stock ($3,000) less the short-term capital gain ($1,500) if the stock had been sold ($3,000 − basis of $1,500) = $1,500.

Question 66

Stock contributed to a charitable organization

Answer 66

1. If NOT HELD for one year, then the deduction is the FMV of the stock LESS the short-term capital gain if the stock had been sold. The deduction is limited to 50% of AGI. 2. If HELD for more than one year, then the deduction is FMV of the stock. The deduction is limited to 30% of AGI.

Question 67

FOOD AND BEVERAGE EXPENSES are only deductible, if:

Answer 67

1. the expenses are not lavish or extravagant 2. the taxpayer (or one of his employees) is present when the food or beverages were provided 3. the expense relates directly to the conducting of business

Question 68

For MEALS AND ENTERTAINMENT EXPENSES that an employee is REIMBURSED by his/her employer, the 50% limit applies to the ________. However, if the reimbursement is included in the employee's INCOME, the 50% limits apply to the __________.

Answer 68

employer | employee

Question 69

Destry, a single taxpayer, reported the following on his 2017 U.S. Individual Income Tax Return Form 1040: ``` Income: Wages $ 5,000 Interest on savings account 1,000 Net rental income 4,000 Deductions: Personal exemption $ 4,050 Standard deduction 6,350 Net business loss 16,000 Net short-term capital loss 2,000 ``` What is Destry's net operating loss that is available for carryback or carryforward?

Answer 69

$7,000 Wages $ 5,000 Interest on savings account 1,000 Net rental income 4,000 Net business loss (16,000) Net short-term capital loss (2,000) AGI ( 8,000) Deductions: Personal exemption $ 4,050 Standard deduction 6,350 Taxable loss (18,400) Adjustments to arrive at NOL carry back or carry forward (Use Form 1045, Schedule A for calculation purposes.) $18,400 TAXABLE LOSS Plus $ 4,050 Personal exemption, Destry cannot deduct his personal exemption. Plus $5,350 Adjustment for deductions that are not connected to a trade or business or employment, such as the standard deduction of $6,350 reduced by the non-business income of $1,000 interests from savings. Plus $ 2,000 Short-term capital loss as adjusted by business capital gains and losses (-0-). ($ 7,000) Correct carryback or carryforward

Question 70

An INDIVIDUAL'S LOSSES on transactions entered into for PERSONAL purposes are only DEDUCTIBLE if the losses qualify as ________________________.

Answer 70

casualty or theft losses

Question 71

The net operating loss CARRY BACK allows an individual or corporation to offset a NOL against taxable income for the previous _________ years. The net operating loss CARRY FORWARD allows an individual or corporation to offset a NOL against taxable income for the next _______ years. An individual or corporation MAY CHOOSE not to _______ an NOL and only __________.

Answer 71

2 20 carry back carry it forward

Question 72

CORPORATIONS other than certain financial institutions are REQUIRED to use the _________ method in accounting for BAD DEBTS. CERTAIN FINANCIAL INSTITUTIONS are allowed to use the ______ method.

Answer 72

direct charge-off | reserve

Question 73

Under the DIRECT-CHARGE OFF METHOD, CORPORATIONS may claim a DEDUCTION once a specific BUSINESS debt becomes ___________________ and a specific NONBUSINESS debt becomes ___________.

Answer 73

partially or wholly worthless | wholly worthless

Question 74

You can generally DEDUCT HOBBY EXPENSES, but only up to the amount of _______. A hobby isn't a business because it isn't carried on to __________.

Answer 74

hobby income | make a profit

Question 75

Unreimbursed employee expenses

Answer 75

1. Miscellaneous itemized deduction subject to 2% of AGI floor 2. Paid or incurred during the tax year, for carrying on your trade or business of being an employee, and ordinary and necessary.

Question 76

Passive Activity

Answer 76

A profit-seeking activity in which the taxpayer DOES NOT MATERIALLY PARTICIPATE in its management. e.g. limited partners; rental income regardless of the level of participation by the taxpayer

Question 77

Portfolio Income

Answer 77

Investment income such as interest, dividends, capital gains, and royalties.

Question 78

PASSIVE LOSSES can be deducted to the EXTENT OF _______. The net result will have NO EFFECT on ___________________.

Answer 78

passive income | portfolio income or income from active businesses

Question 79

A natural person is allowed a ________ allowance/deduction for offsetting NON PASSIVE INCOME WITH PASSIVE LOSSES resulting from RENTAL ACTIVITIES. However, the allowance/deduction must be reduced by ________ of the amount that the taxpayer's AGI exceeds ________ and is fully phased out when AGI exceeds _______.

Answer 79

$25,000 50 percent $100,000 $150,000 e. g. AGI is $125,000, the special $25,000 allowance/deduction is reduced by $12,500 [($125,000 − $100,000) × 50%]. Thus, $12,500 ($25,000 − $12,500) of the rental loss can be offset against income from nonpassive sources. e. g. AGI is $160,000, $15,000 passive income, and $35,000 passive loss. The $25,000 allowance/deduction does not apply since AGI exceeds $150,000. Passive losses can only be deducted to the extent of passive income. Therefore, only $15,000 of the real estate rental activity is deductible.

Question 80

Two ways to meet material participation requirement.

Answer 80

1. to work more than 500 hours in the activity | 2. to work more than 100 hours if no other individual works more than 100 hours

Question 81

Active Participation

Answer 81

Occurs for taxpayers who own AT LEAST 10% of the property and SIGNIFICANTLY participate in decision-making.

Question 82

Smith has an adjusted gross income (AGI) of $120,000 without taking into consideration $40,000 of losses from rental real estate activities. Smith actively participates in the rental real estate activities. What amount of the rental losses may Smith deduct in determining taxable income?

Answer 82

$15,000 Since Smith actively participates in the rental real estate activity he can deduct up to $25,000 of rental losses. However, this deduction is reduced once modified AGI exceeds $100,000. Smith has $20,000 of excess AGI ($120,000 − $100,000) so he loses $10,000 ($20,000 × 50%) of the deduction. Of the $40,000 of losses, he can deduct $15,000 ($25,000 − $10,000). The remaining $25,000 of losses is suspended.

Question 83

A review of Bearing's year 2 records disclosed the following tax information: Wages $ 18,000 Taxable interest and qualifying dividends 4,000 Schedule C trucking business net income 32,000 Rental (loss) from residential property (35,000) Limited partnership (loss) (5,000) Bearing actively participated in the rental property and was a limited partner in the partnership. Bearing had sufficient amounts at risk for the rental property and the partnership. What is Bearing's year 2 adjusted gross income?

Answer 83

$29,000 Wages, interest, dividends, and Schedule C income are all taxable for a total of $54,000. $25,000 of the rental loss is allowed since Bearing actively participates in the rental real estate activity and his modified AGI does not exceed $100,000. However, the $5,000 passive loss from the partnership cannot reduce other income. Therefore, AGI is $29,000.

Question 84

SUSPENDED PASSIVE LOSSES can be __________________, but they cannot be _________.

Answer 84

carried forward indefinitely | carried back

Question 85

The TIME TEST for deductible MOVING EXPENSES does NOT have to be met in case of _______ , _____________, or __________________.

Answer 85

death taxpayer’s job at new location ends because of disability taxpayer is laid off for other than willful misconduct

Question 86

Since a NOL generally represents a BUSINESS loss, an INDIVIDUAL taxpayer’s _______________, ___________________________, and _____________ cannot be subtracted in computing the NOL.

Answer 86

personal and dependency exemptions an excess of nonbusiness deductions over nonbusiness income a net capital loss

Question 87

No ____________ for INTEREST EXPENSE is allowed. Instead, interest expense must be ________ over the period to which it relates.

Answer 87

advance deduction | amortized

Question 88

Taxable Income Calculation

Answer 88

Gross Income - Deductions for AGI = AGI - Standard Deduction or Deductions from AGI (whichever is greater) - Personal Exemption ($4,050) = Taxable Income

Question 89

Standard Deduction Amounts

Answer 89

Single or Married filing separately, $6,350 Married filing jointly or Qualifying widow(er), $12,700 Head of household, $9,350

Question 90

Tax Liability Calculation

Answer 90

Filing Status = Single Disregard Self-Employment Tax Taxable Income = $94,750 Net Taxable Income = $94,750 Taxable Income - $1,300 Qualified Dividend Income = $93,450 Bracket = 28% Tax Liability = $18,713.75 + [$1,550 (excess over $91,900) * 28%] Plus Qualified Dividend Income Tax = $1,300*15% (within the 28% bracket) = $195 Plus Penalty on Premature IRA distribution (before age 59 1/2) = $5,000 Distribution*10% Penalty = $500 Total Tax Liability = $19,843

Question 91

Qualified dividend income is taxed at a ____________ for individuals. The tax rate is ______ for qualified dividends if the taxpayer is in the _______ tax bracket, _____ for qualified dividends if the taxpayer is in the ________ tax bracket, and _____ for qualified dividends if the taxpayer is in the _________ regular rate.

Answer 91

preferential rate 0% tax --> 10 or 15% bracket 15% tax --> 25, 28, 33, or 35% bracket 20% tax --> 39.6% bracket

Question 92

Investment income includes taxable _______, _______, __________, and _________.

Answer 92

1. interest income 2. dividends 3. annuities 4. certain royalties and rents

Question 93

Net investment income tax

Answer 93

The tax equals 3.8% of the LESSER OF 1) an individual's net investment income or 2) the excess of AGI over a threshold amount. The threshold amount is $250,000 for married filing joint ($125,000 for married filing separate) and $200,000 for unmarried individuals.

Question 94

If property is sold for which a depreciation deduction was claimed or could have been claimed, the SELLER must report any ____________ in the year of sale, whether or not an installment payment was received that year.

Answer 94

depreciation recapture income

Question 95

Depreciation recapture is equal to the LESSER OF ____________ or ______________.

Answer 95

realized gain on the sale | depreciation taken

Question 96

The depreciation recapture amount is also ______ to the original adjusted basis for INSTALLMENT SALE PURPOSES.

Answer 96

added

Question 97

The GROSS PROFIT % for installment sale purposes is determined by _________________________.

Answer 97

taking the gross profit and dividing by contract price (sales price)

Question 98

Installment sale income calculation

Answer 98

Payment in Year 1*Gross Profit % = Installment Sale Income for Year 1

Question 99

Generally, a lessor will NOT recognize any income as a result of the __________ made by a lessee that revert to the lessor at the expiration of the lease. However, if the parties intend the __________ to be, in whole or in part, a SUBSTITUTE for rental payments, then the lessor must recognize the improvements as __________ equal in amount to the reduction in rental payments.

Answer 99

capital improvements improvements rental income

Question 100

Insurance proceeds as payment on the debt, rather than as life insurance proceeds paid "by reason of death of the insured"

Answer 100

tax-free only to the extent of the amount of unpaid debt, and any proceeds in excess of the debt repayment must be included in gross income

Question 101

Not deductible charitable contributions

Answer 101

1. The value of your time or services 2. Political contributions 3. A needy family

Question 102

Determine the interest that is deductible on Schedule A-Itemized Deductions. ``` Olympic 1098 (Acquisition) Interest Paid $28,750 Principal $625,000 ``` ``` Spartan 1098 (Home Equity) Interest Paid $5,150 Principal $100,000 ``` Total interest expense Interest Paid $33,900 Principal $725,000

Answer 102

Olympic - Interest Deductible $28,750 Spartan - Interest Deductible $3,863 (see below) Total - Interest Deductible $32,613 Home Equity Limitation: FMV of residence = $700,000 Home equity interest expense is deductible only on the portion of the home equity loan that does not exceed the LESSER OF: The fair market value of the residence less the acquisition debt ($700,000 – 625,000 = $75,000), or $100,000 ($50,000 for married filing separate) Allowable percentage $75,000 Limitation/100,000 Principal = .75 Allowable home equity interest $5,150 Interest Paid × .75 = 3,863

Question 103

Schedule A (Form 1040)

Answer 103

Itemized Deductions

Question 104

Schedule B (Form 1040)

Answer 104

Interest and Ordinary Dividends

Question 105

Schedule C (Form 1040)

Answer 105

Profit or Loss From Business (Sole Proprietorship)

Question 106

Schedule D (Form 1040)

Answer 106

Capital Gains and Losses

Question 107

Schedule E (Form 1040)

Answer 107

Supplemental Income or Loss (rental real estate, royalties, partnerships, S corporations, estates, trusts, and residual interests in REMICs)

Question 108

Form 4562

Answer 108

Depreciation and Amortization

Question 109

The ______ method, using the increase in the allowance for doubtful accounts based on an aging of accounts receivable, cannot be used for _______.

Answer 109

reserve | tax purposes

Question 110

To maximize the INVESTMENT INTEREST expense deduction, a taxpayer may ELECT to include ___________________ as investment income. If the taxpayer chooses to do so, he/she must REDUCE the amount of ___________________ eligible for the REDUCED preferential long-term capital gains RATE by the same amount included in _____________.

Answer 110

qualified dividends and capital gains qualified dividend and capital gains investment income e.g. Joshua has the following investment income if he chooses to maximize his investment interest expense of $5,000: Interest income $950 Qualified dividend income 1,250 Long-term capital gain 1,700 Investment income $ 3,900 Joshua is allowed to take $3,900 of his $5,000 as an investment interest expense deduction. The remainder is carried forward indefinitely.

Question 111

One can qualify as a DEPENDENT as either a __________ or a ___________.

Answer 111

qualifying child | qualifying relative

Question 112

Qualifying Child Tests

Answer 112

1. Relationship test—The dependent must be a natural child, stepchild, adopted child, foster child, sibling, step-sibling, or a descendant of any of these. Note, that this definition includes brothers, sisters, nieces, and nephews. 2. Residence test—The dependent must have the same principal place of abode as the taxpayer for MORE THAN ONE HALF of the tax year. Note, that one could live with several individuals who potentially qualify to claim the individual as a dependent (mother, aunt, grandfather) at the same time. 3. Age test—The dependent must be UNDER the age of 19 at the end of the tax year, OR UNDER 24 if a full-time student for at least five months of the tax year. There is NO age LIMITATION if the individual is permanently and totally DISABLED. 4. Joint return test—A dependent cannot file married-jointly. 5. A dependent can file jointly to obtain a refund (the dependent is not required to file according to gross income level). Otherwise, a married-jointly taxpayer will not qualify as a dependent despite passing all of the other tests. 6. Citizenship/residency test—A dependent must be a citizen or resident of the U.S., or a resident of Canada or Mexico. 7. Not self-supporting test—To be claimed as a dependent, the individual must not have provided MORE THAN 50% of his or her own support. 8. Other requirements—In addition to the above, a qualifying child must be younger than the taxpayer who is claiming the child as a dependent. Also, if a parent is qualified to claim the child as a dependent but declines, no other individual can claim the individual unless that individual's AGI is higher than that of any parent.

Question 113

Qualifying Relative Tests

Answer 113

1. Support test—The taxpayer must provide MORE THAN 50% of the dependent's total support. The multiple support agreement provision continues to apply. - The support test traces the source of the funds used to pay for necessities. - Support does not include unused sources of funds of dependent. - Scholarships do not count as support. 2. Gross income test—The dependent's gross income must be LESS THAN the exemption amount for the year ($4,150 for 2018). Gross income is defined as only the income that is taxable. Social security income is EXEMPT. There are TWO EXCEPTIONS to this test. These apply for a CHILD/STEPCHILD or for an ADOPTED or a FOSTER CHILD: That is under the age of 19 at the end of the tax year. or That is under 24 at the end of the tax year and is a full-time student for at least five months during the tax year. - Joint return test—A dependent cannot file married- jointly. - Citizenship/residency test—A dependent must be a citizen or resident of the U.S., or a resident of Canada or Mexico.

Question 114

Multiple Support Agreements

Answer 114

1. Allow a group of taxpayers who (together) support an individual more than 50%. 2. Except for the support test, each individual in the group would otherwise be eligible to claim the individual as a dependent. 3. The taxpayer claiming the exemption provides OVER 10% but LESS THAN HALF of the support and is a QUALIFYING RELATIVE. 4. A written agreement allocates the dependency exemption to a member of the group. All members providing more than 10% of the support must sign.

Question 115

When the taxpayer and spouse FILE SEPARATE RETURNS, the taxpayer only may take an EXEMPTION FOR THE SPOUSE when the spouse ____________ and _____________.

Answer 115

has NO GROSS INCOME | was NOT CLAIMED as a dependent on another taxpayer's income tax return

Question 116

For a taxpayer to claim an individual as an EXEMPTION on his tax return, the individual must be a ________ of the taxpayer.

Answer 116

dependent

Question 117

Qualifying Child vs. Qualifying Relative

Answer 117

age test vs. gross income test

Question 118

Marital status is determined on the __________________.

Answer 118

last day of the tax year

Question 119

Whether taxpayers __________ does not impact filing status.

Answer 119

live together

Question 120

In the year that an individual's SPOUSE DIES, the spouse's filing status is ___________. For the TWO YEARS AFTER the year of death, the QUALIFYING WIDOW(ER) can continue to use the married filing joint rates if the taxpayer provides _______________________________________.

Answer 120

married filing jointly MORE THAN HALF of the cost of maintaining the household (rent, mortgage interest, taxes, home insurance, repairs, food, utilities, etc.) for a DEPENDENT child (step and adopted also)

Question 121

For HEAD OF HOUSEHOLD filing status, the following costs are considered in determining whether the taxpayer has contributed MORE THAN ONE-HALF the cost of maintaining the household:

Answer 121

1. rent 2. mortgage interest 3. taxes 4. insurance on the home 5. repairs 6. utilities 7. food eaten in the home

Question 122

Alternative Minimum Tax (AMT) for Individuals

Answer 122

1. Ensures that all taxpayers share the tax burden FAIRLY by preventing taxpayers with substantial income from avoiding significant tax liability 2. An individual must pay the greater of the regular tax or the tentative minimum tax (TMT) - includes both regular tax and AMT 3. An AMT exemption is provided which prevents many taxpayers from being impacted by the AMT. It is indexed for inflation and does phase out for higher income taxpayers 4. Nonrefundable personal CREDITS can offset the sum of the regular tax and the AMT, including: child and dependent care credit, adoption credit, credit for the elderly and disabled, child tax credit, education credits, IRA credit, nonbusiness energy property credit, residential energy efficient property credit, and foreign tax credit. 5. AMT Adjustment Items (fix timing differences) include: - MACRS 3-,5-,7-, and 10-year PERSONAL (not land or buildings) property that is depreciated using the 200% declining-balance method. For AMT, the 150% declining-balance method is used over the MACRS life. - No AMT Adjustment is required for property that is depreciated using Section 179 bonus depreciation. - For Itemized Deductions: Medical deduction is allowed only to the extent it exceeds 10% of AGI. Adjustment would be needed for individuals who are age 65 or older since they deduct medical expenses to the extent they exceed 7.5% of AGI; No deduction is allowed for taxes (so must be added back to taxable income); 2% Miscellaneous Deductions are not allowed (so must be added back to taxable income); Home equity interest not used to acquire or improve the residence (so must be added back to taxable income); Personal exemptions and the standard deduction (if used) are added back; The compensation element on the exercise date for an incentive stock option ($15 FMV and $10 payment = $5 difference is the compensation element) must be added back to taxable income. 6. AMT Preference Items include: - For real property and leased personalty purchased before 1987, excess of accelerated over straight-line depreciation must be added back to taxable income. - Tax-exempt interest on private activity bonds (less related expenses) must be added back to taxable income. 7. The AMT credit is limited to the amount of AMT generated from timing differences, and this credit is available in a year in which the tentative tax is less than regular tax (no AMT needs to be paid). The AMT credit may be carried forward indefinitely. Individual AMT Income Calculation ``` Regular taxable income +/- Adjustments + Preferences = AMT Income - Exemption = AMT Base X Rate (26% or 28%) = Tentative Minimum Tax (TMT) before Credits - Certain Credits = TMT - Regular Tax Liability = AMT (if positive) ```

Question 123

Net income from a SOLE PROPRIETORSHIP is subject to ______________.

Answer 123

self-employment tax

Question 124

Net earnings from self-employment calculation

Answer 124

Gross business receipts - COGS - Rent expense - Liability insurance premium = Net Self-Employment Income

Question 125

An employee who has SOCIAL SECURITY TAX withheld in an amount GREATER than the maximum for a particular year, may claim the EXCESS as a __________, if that excess resulted from correct withholding by two or more employers.

Answer 125

credit against income tax

Question 126

Ms. Planner is in the 25% tax bracket and itemizes on her tax return. She plans to make a charitable contribution of $12,000 to her alma mater this year. The net cost of this contribution to T is:

Answer 126

$9,000 Her tax savings is $3,000 ($12,000 x 25%) since the contribution is deductible. Therefore, her net cost is $9,000 ($12,000 - $3,000).

Question 127

A single individual who is age __________ OR _____ is eligible for an additional standard deduction ($1,550 for 2015). Two additional standard deductions are allowed for an individual who is age ________ AND _________.

Answer 127

sixty‐five or older blind sixty‐five or older blind

Question 128

Support made on behalf of a dependent

Answer 128

1. food 2. clothing 3. FMV of lodging 4. medical 5. recreational 6. educational 7. certain capital expenditures

Question 129

Excluded from support made on behalf of a dependent

Answer 129

1. life insurance premiums 2. funeral expenses 3. nontaxable scholarships 4. income 5. Social Security taxes paid from a dependent’s own income

Question 130

Requirements for filing a joint return

Answer 130

1. married couple 2. both agree 3. one spouse doesn't need to have income or deductions 4. spouse dies and the widow doesn't remarry in the same year (can file jointly for just that year) 5. spouses can have different accounting methods 6. don't have to live together for the entire year

Question 131

Unearned income in excess of _______ will be taxed at the parents' rates.

Answer 131

$2,000

Question 132

Child and Dependent Care Credit

Answer 132

1. designed to provide a nonrefundable tax credit for a portion of the expenses incurred for caregiving while the taxpayer is EMPLOYED 2. credit percentage begins at 35% if an AGI is LESS THAN $15,000, and is reduced by 1% for each $2,000 increment (or part) in an AGI above $15,000. The MINIMUM dependent care credit is 20% (Shortcut - AGI over $43,000 will receive credit of 20%) 3. maximum amount of EXPENSE eligible for the credit is $3,000 ($6,000 if more than one individual qualifies for care) 4. caregiver cannot be a dependent relative or child of the taxpayer

Question 133

Earned Income Credit (EIC)

Answer 133

1. complex method of mitigating employment taxes for low income taxpayers 2. refundable credit 3. credit percentage is 7.65% for no qualifying children, 34% for one qualifying child, 40% for two qualifying children, and 45% for three or more qualifying children 4. credit is DISALLOWED if disqualified income, such as interest, dividends, tax exempt interest, and other investment income exceeds $3,450 (2017) 5. a taxpayer CANNOT claim the credit if they file as married filing separately 6. the taxpayer MUST have been a U.S. citizen or resident alien for the entire tax year and must have a valid Social Security number

Question 134

The American Opportunity Tax Credit (AOTC)

Answer 134

1. It is allowed up to a maximum of $2,500 per year for each eligible student 2. It is computed as 100% of the first $2,000 and 25% of the next $2,000 of qualified educational expenses (incurred during the first FOUR years of postsecondary education; academic period beginning in the current tax year or the first THREE months of the next tax year; nondeductible tuition, academic fees, and course materials) 3. A qualifying student must be enrolled in a DEGREE PROGRAM for at least HALF/PART time 4. The credit is phased out ratably for single taxpayers with AGI in excess of $80,000 ($160,000 in the case of a joint return). The credit is phased out over a $10,000 range ($20,000 for joint return) and, thus, is completely gone when AGI reaches $90,000 ($180,000 joint return) 5. The credit can be claimed against the AMT, and 40% of the credit is refundable

Question 135

Tax credits resulting in a REFUND are credits for ____________, _____________, ___________, and ___________.

Answer 135

earned income tax withheld excess Social Security tax withheld excise tax for certain nontaxable uses of fuels and lightweight diesel vehicles

Question 136

Requirements for a tuition payment made on behalf of another individual to be excludible for gift tax purposes

Answer 136

1. must be paid directly to the educational organization 2. the educational organization needs to be in the U.S. 3. applies only to amounts paid for tuition 4. made for any individual

Question 137

Gift donors may exclude the first _______ of GIFTS made to each donee for each calendar year from the donor's taxable gifts. Married couples are allowed to elect to treat the gift as made ______ by each spouse.

Answer 137

$14,000 | one-half

Question 138

A transfer during the life of the donor (an inter vivos transfer) triggers a ___ tax.

Answer 138

gift

Question 139

A transfer at death (a testamentary transfer) triggers the _____ tax.

Answer 139

estate

Question 140

The recipient of a gift is called a ______, and the recipient of an inheritance is called an ______.

Answer 140

donee | heir

Question 141

The following are considered to be GIFTS subject to the federal gift tax:

Answer 141

1. Cash and property transfers 2. Debt forgiveness to family members 3. Sales at bargain prices to family members 4. Loans to family members at a bargain (below-market interest rates) 5. Transfers of property into trust for the benefit of others 6. Purchases of jointly owned real estate or securities if one co-owner contributes more than a fair proportionate share

Question 142

The following are NOT considered to be GIFTS subject to the federal gift tax:

Answer 142

1. DONATIONS of personal SERVICES 2. Transfers that can be REVOKED, such as placing assets in revocable trusts or placing cash into a joint bank account until the noncontributing owner actually withdraws funds. (When the noncontributing owner actually withdraws funds, a gift is now made.) 3. Payments to minor family members for food, shelter, clothing, and other reasonable SUPPORT needs 4. Payments to an employee that in substance are COMPENSATION for personal SERVICES 5. Payments for EDUCATION expenses or MEDICAL expenses paid on behalf of a donee, provided the payments are made directly to the educational institution or the medical provider 6. Payments for POLITICAL contributions 7. Property SETTLEMENTS incident to divorce

Question 143

The federal GIFT TAX and ESTATE TAX are coordinated in order to assure that all transfers are only subjected to _______________.

Answer 143

one of the two transfer taxes

Question 144

Deductions—For both the estate and gift taxes

Answer 144

1. There is an unlimited marital deduction for transfers to a SPOUSE (married at date of gift, U.S. citizen, property is not a terminable interest) 2. There is an unlimited charitable contribution deduction for transfers to CHARITY

Question 145

Individual taxpayers making gifts that are not fully excludable due to the $14,000 annual exclusion for each gift are REQUIRED TO FILE a _________, _________, by the ________ of the year FOLLOWING the year the gifts were given by the donor. If the donor DIES, it must be filed by the due date for filing the decedent's _____________ (generally ____ months after date of death).

Answer 145

``` gift tax return Form 709 April 15th federal estate tax return nine ```

Question 146

Under the UNIFIED RATE SCHEDULE, ______________ and ____________ are taxed on a ________ basis through reducing the amount of the unified credit by the sum of all amounts credited in preceding periods.

Answer 146

lifetime taxable gifts transfers at death cumulative

Question 147

A decedent's medical expenses paid by the decedent's estate are deductible on the DECEDENT'S TAX RETURN in the year incurred if:

Answer 147

1. the expenses were paid WITHIN A YEAR of the decedent's death 2. the expenses are NOT DEDUCTED for federal estate tax purposes 3. a WAIVER stating that no estate tax deduction for the expenses was taken by the estate and that the estate waives its right to the deduction

Question 148

Certain CREDITS may be offset against the gross estate tax to determine the NET ESTATE TAX of a U.S. citizen. They include:

Answer 148

1. UNIFIED credit 2. FOREIGN DEATH TAXES paid to a foreign country on account of PROPERTY located IN THAT COUNTRY that is included in the gross estate 3. estate tax paid on a PRIOR TRANSFER of the SAME PROPERTY within TEN YEARS of the death of the decedent. 4. gift taxes paid on PRE-1977 GIFTS

Question 149

For JOINTLY owned property by a HUSBAND AND WIFE (RIGHT OF SURVIVORSHIP OR TENANCY IN THE ENTIRETY), ______ of the value of the property will be included in the estate of the _________.

Answer 149

50% | first spouse to die

Question 150

Administration and selling expenses may be claimed either as a DEDUCTION from the ___________________ or as a DEDUCTION from the _______________________________.

Answer 150

decedent's gross estate for estate tax purposes | estate's taxable income for income tax purposes

Question 151

If a decedent's estate exceeds ________ (2017), the executor of a decedent's estate is REQUIRED TO FILE _______, the _______________, within ____ months of the date of death.

Answer 151

$5,490,000 Form 706 federal estate tax return nine

Question 152

"Buy-sell" agreements are EXCLUDABLE from a decedent's estate provided the agreement:

Answer 152

1. is a bona fide (genuine) business agreement 2. is not a device to transfer property to the decedents family for less than full and adequate consideration 3. has terms similar to those entered into by persons in arm's length transactions

Question 153

In general, once a TRUST is established and the taxpayer has TRANSFERRED PROPERTY to the trust, this property will NOT be included in the taxpayer's gross estate at death UNLESS _____________________.

Answer 153

the trust is REVOCABLE, so the taxpayer maintains ownership or control of the property

Question 154

For JOINTLY owned property with the RIGHT OF SURVIVORSHIP (UNMARRIED owners), ______ of the property is included in the estate of the _________. If it can be proven that the decedent DID NOT PAY _____ of the cost of property when originally purchased, then the amount included is the ____________ of the property multiplied by the ___________ by the decedent.

Answer 154

``` 100% first owner to die 100% fair market value percentage paid for ```

Question 155

All assets ________ by the decedent as of the date of death are included in the GROSS ESTATE.

Answer 155

owned

Question 156

Ryan and Christine Holm, filing a joint tax return for the current year, had a tax liability of $5,000 based on their tax table income and three exemptions. Ryan and Christine had earned income of $15,000 and $5,000, respectively. In order for Christine to be gainfully employed, the Holms incurred the following employment‐related expenses for their 5‐year‐old son, Toby: Payee Amount Alpine Day Care Center $ 900 Mulford Home Cleaning Service 700 Cindy Holm, babysitter (Ryan’s mother) 1,100 Assuming that the Holms do not claim any other credits against their tax, what is the amount of the CHILD AND DEPENDENT CARE TAX CREDIT they should report on their current year tax return?

Answer 156

$640 The credit is from 20% to 35% of certain dependent care expenses limited to the LESSER OF (1) $3,000 for one qualifying individual, $6,000 for two or more; (2) taxpayer’s earned income or spouse’s if smaller; or (3) actual expenses. The $900 paid to the Alpine Day Care Center qualifies, as does the $1,100 paid to Cindy Holm. Payments to relatives qualify if the relative is not a dependent of the taxpayer. Since Ryan and Christine Holm only claimed three exemptions, Cindy was not their dependent. The $700 paid to Mulford Home Cleaning Service DOES NOT qualify since it is completely unrelated to the care of their child. The credit is 35% if AGI is $15,000 or less, but is reduced by 1 percentage point for each $2,000 (or PORTION thereof) of AGI in excess of $15,000 (but not reduced below 20%). As the Holms had AGI of $20,000, the 35% maximum credit is reduced by 3 PERCENTAGE POINTS to 32% ($20,000 − $15,000/$2,000 = 2.5). Since qualifying expenses were $2,000, the Holms’ credit is 32% × $2,000 = $640.

Question 157

An employee who has had Social Security tax withheld in an amount greater than the maximum for a particular year, may claim ________________.

Answer 157

The excess as a CREDIT AGAINST INCOME TAX, if that excess resulted from CORRECT withholding by two or more employers.

Question 158

Adoption Credit

Answer 158

1. Nonrefundable credit for up to $13,570 (for 2017) of expenses incurred to adopt an eligible child 2. An ELIGIBLE CHILD is one who is under 18 years of age at time of adoption, or physically or mentally incapable of self‐care. 3. Generally, adoption expenses incurred or PAID during a tax YEAR PRIOR to the year in which the adoption is FINALIZED MAY BE CLAIMED as a credit in the tax YEAR FOLLOWING the year the expense was INCURRED. 4. Adoption expenses incurred during the year the adoption BECOMES FINAL or in the year FOLLOWING the FINALIZATION of the adoption are CLAIMED in the YEAR they were INCURRED.

Question 159

Child Credit

Answer 159

1. A $1,000 Child Credit is allowed for each qualifying child (as defined under the dependency rules) under the AGE OF 17 2. The credit is PHASED OUT for married taxpayers with AGI in excess of $110,000 ($75,000 for unmarried). The credit is reduced $50 for each $1,000 (or portion) over the trigger AGI amount

Question 160

Lifetime Learning Credit

Answer 160

1. Provides a credit of 20% of up to $10,000 of tuition and fees paid by a taxpayer for one or more students for graduate and undergraduate courses at an eligible educational institution. 2. The credit may be claimed for an UNLIMITED NUMBER OF YEARS, is available on a per‐taxpayer basis, and covers tuition and fees paid for the taxpayer, spouse, and dependents.

Question 161

Alternate evaluation for federal estate tax

Answer 161

1. Can be elected only if its use DECREASES both the value of the gross estate and the estate tax liability 2. Is irrevocable and applies to all property in the estate 3. Generally a date 6 months subsequent to the decedent’s death 4. Property disposed of within 6 months of death is valued at fair market value at date of disposition

Question 162

A special rule applies if a decedent acquires APPRECIATED PROPERTY as a GIFT within 1 YEAR of death and this property PASSES BACK to the donor or the donor’s spouse. When this occurs, the beneficiary’s BASIS is the basis of the property in the hands of the _____________________, rather than fair market value at date of death.

Answer 162

decedent before death

Question 163

PROPERTY BEQUEATHED due to the DEATH of the owner

Answer 163

1. FAIR MARKET VALUE BASIS to the beneficiary | 2. LONG TERM holding period

Question 164

The RECIPIENT OF A GIFT has a gain basis and a loss basis in the asset received

Answer 164

1. GAIN basis is the DONOR'S ADJUSTED BASIS 2. LOSS basis is the LOWER OF the FAIR MARKET VALUE OR the adjusted BASIS 3. asset is later sold for an AMOUNT IN BETWEEN the gain and loss basis, NO GAIN OR LOSS IS RECOGNIZED

Question 165

A SHAREHOLDER'S INITIAL BASIS in the STOCK of a corporation is ___________________.

Answer 165

the amount the shareholder PAID for the stock

Question 166

CONTRIBUTIONS of property to corporations results in the contributing SHAREHOLDER'S BASIS for the corporation's STOCK to _________________________.

Answer 166

INCREASE by the amount of the shareholder's ADJUSTED BASIS IN THE PROPERTY

Question 167

When PROPERTY is contributed to a corporation IN EXCHANGE FOR STOCK, the CORPORATION takes _________________________________________.

Answer 167

the SAME BASIS in the property that the shareholder had, INCREASED BY ANY GAIN recognized by the shareholder

Question 168

Under Section 351, __________ is recognized if the PROPERTY is TRANSFERRED solely for the EXCHANGE OF STOCK of the corporation, if immediately after the transfer the transferring taxpayer or taxpayers have _______ over the corporation. ________ is defined as OWNING at least _____ of corporation's voting stock and at least ______ of the corporation's other classes of stock.

Answer 168

``` NO gain or loss control Control 80% 80% ```

Question 169

The gain recognized by a shareholder when they transfer PROPERTY and BOOT to a corporation in EXCHANGE FOR STOCK is _______________.

Answer 169

the LOWER OF (1) the realized gain, or (2) the boot received

Question 170

On a corporate formation, SHAREHOLDER'S GAIN is recognized to the EXTENT that the _____________ EXCEED the _______________________.

Answer 170

liabilities assumed by the corporation | basis in the assets contributed by the shareholder

Question 171

Amount Realized by Shareholder

Answer 171

Value of Stock Received by SH [Net value of what the corporation received (cash + FMV of property - cash distributed) * The % of stock the shareholder received] + Cash Received by SH

Question 172

While CASH-BASED taxpayers deduct DEFERRED COMPENSATION in the tax year that the compensation is actually PAID to employees, ACCRUAL BASIS taxpayers deduct DEFERRED COMPENSATION in the tax year that the __________________. In addition, ACCRUAL BASIS taxpayers must pay the deferred compensation within the _______ months of a tax year to deduct the compensation in the _____ year.

Answer 172

LIABILITY to pay the compensation becomes FIXED first 2 1/2 preceding

Question 173

The LIABILITY to pay the deferred compensation becomes FIXED when:

Answer 173

1. all EVENTS have OCCURRED to establish the liability to pay the compensation 2. ECONOMIC PERFORMANCE has OCCURRED with respect to the liability 3. the AMOUNT can be determined with REASONABLE ACCURACY

Question 174

CORPORATIONS with total assets of $10 million or more are required to FILE ________, which provides much more detail than Schedule M-1. This schedule is a ________________________.

Answer 174

schedule M-3 | reconciliation of book income to taxable income before dividends received and net operating loss deductions

Question 175

Reconciliation of book income to taxable income

Answer 175

1. Nondeductible expenses are ADDED to book income [federal tax expense, net capital loss, expenses in excess of limits (50% limitation for meals), estimated bad debt or warranty, fines, etc.]. 2. Income that is taxable but not included in book income is ADDED to book income (e.g., prepaid income included in taxable income - accrual method is used for tax purposes). 3. Nontaxable income that is included in book income is SUBTRACTED from book income (municipal interest, life insurance proceeds, etc.). 4. Deductions not expensed in book income are SUBTRACTED from book income (dividends received deduction, election to expense/section 179 depreciation, etc.). * both temporary (e.g. accelerated depreciation on tax return and straight‐line on books) and permanent (e.g., tax‐exempt interest) differences are considered * goodwill is amortized over 15 years for tax purposes

Question 176

For tax purposes, businesses ______ ESTIMATED WARRANTY EXPENSE. Warranty expense _________ only when it is ACTUALLY INCURRED with respect to a specific product.

Answer 176

cannot deduct | can be deducted

Question 177

If a C corporation owns less than 20% (UNAFFILIATED) of a DOMESTIC corporation, ______ of ` or accrued from corporation may be DEDUCTED. A C corporation owning 20% or more but less than 80% of a DOMESTIC corporation may DEDUCT _____ of the DIVIDENDS received or accrued from the corporation. Similarly, C corporation owning 80% or more of a DOMESTIC corporation may deduct _____ of the DIVIDENDS received or accrued from the corporation. However, the dividend received DEDUCTION IS LIMITED to a percentage of the _________ of the corporation, UNLESS the corporation sustains a ____________.

Answer 177

``` 70% 80% 100% taxable income net operating loss ```

Question 178

Form 1120

Answer 178

U.S. Corporation Income Tax Return

Question 179

Individual vs. Corporation

Answer 179

1. Net capital losses are deducted up to $3,000 for individuals. VERSUS Capital losses may be deducted to the extent of capital gains. The unused losses may be carried back three years and forward five years. 2. Passive losses can be deducted to the extent of passive income. The net result will have no effect on portfolio and active income. VERSUS Closely held corporations can use passive losses to offset active income, but not portfolio income. Personal service corporation cannot offset passive losses against either active or portfolio income.

Question 180

NOL occurs when _________________.

Answer 180

a business reports operating expenses on its tax return that EXCEED its revenues

Question 181

Accounting methods for a NEW corporation are made on the ________.

Answer 181

initial tax return

Question 182

Organizational expenditures are:

Answer 182

1. Legal expenditures incurred by the corporation 2. Necessary accounting services 3. Expenditures of temporary directors and of organizational meeting directors and shareholders 4. Fees paid to the state of incorporation

Question 183

________ of ORGANIZATIONAL EXPENSES may be DEDUCTED, but the ______ is REDUCED by the amount of expenditures incurred that exceed ______. Expenses NOT DEDUCTED must be _______ and ________ over _____ months or _____ years, beginning with the month that the corporation BEGINS its business operations.

Answer 183

``` $5,000 $5,000 $50,000 capitalized amortized 180 15 ```

Question 184

There is a ___ limit on the deduction of taxable income (before special deductions for charity, dividends received domestic production, and carryovers) for a CORPORATION.

Answer 184

10%

Question 185

Accumulated Earnings Tax

Answer 185

1. A tax imposed on corporations that accumulate earnings BEYOND REASONABLE AMOUNT 2. This tax was imposed to PREVENT corporations from accumulating earnings and profits with the purpose of AVOIDING INCOME TAX ON ITS SHAREHOLDERS 3. Only the shareholders of closely-held corporations would tend to have the power to retain corporate earnings for their benefit. As a result, the accumulated earnings tax tends to be APPLIED MORE OFTEN TO CLOSELY-HELD CORPORATIONS 4. May be applied REGARDLESS of the NUMBER OF SHAREHOLDERS in a corporation

Question 186

Personal Holding Company (PHC)

Answer 186

1. A PHC is known as a C corporation formed for the PURPOSE of OWNING the STOCK OF OTHER COMPANIES. The STOCK OWNERSHIP TEST is satisfied if, at some time during the corporation's tax year, 50% or more of the corporation's stock was directly or indirectly owned by FIVE OR FEWER individuals. The INCOME TEST is satisfied if 60% or more of the corporation's adjusted ordinary gross income is PHC income. 2. PHC income consists of: dividends; interest; annuities; rents; mineral, oil and gas royalties; copyright and patent royalties; produced film rents; compensation for more than 25% use of corporate property by shareholders; amounts received under personal services contracts; and amounts received from estates and trusts. 3. The corporation will be subject to a 15% PENALTY TAX on UNDISTRIBUTED PHC income. The tax is self‐assessed by a corporation filing a Schedule PH along with its regular Form 1120 tax return. The tax may be AVOIDED by dividend payments sufficient to reduce undistributed PHC income to zero. The dividends which may reduce undistributed PHC income include dividends paid during the taxable year, dividends paid within 3 1/2 months after the close of the year, dividend carryover, and consent dividends, which are hypothetical dividends treated as if paid on the last day of the corporation’s taxable year. A company may avoid PHC tax liability for a previous year by payment of a deficiency dividend within 90 days of a "determination" by the IRS that the corporation was a PHC for a previous year. 4. TAX is equivalent to 20% of the corporation's accumulated taxable income 5. Accumulated taxable income is composed of taxable income adjusted downward for federal income and excess profits taxes, charitable deduction in excess of the ceiling, net capital gains and losses, and taxes of foreign countries and U.S. possessions and upward for certain corporate deductions, net operating loss deduction and capital loss carryback or carryover 6. When calculating the accumulated earnings tax, corporations are given a CREDIT, the accumulated earnings credit, of $250,000 ($150,000 for certain service corporations) plus dividends paid within the first 3 1/2 months of the corporation's tax year less accumulated earnings and profits at the end of the preceding tax year 7. Interest earned on TAX-EXEMPT obligations is EXCLUDED from PHC income

Question 187

Alternative Minimum Tax (AMT) for Corporations

Answer 187

1. Ensures that all taxpayers share the tax burden FAIRLY by preventing taxpayers with substantial income from avoiding significant tax liability 2. A corporation must pay the greater of the regular tax or the tentative minimum tax (TMT) - includes both regular tax and AMT 3. AMT Adjustment Items (fix timing differences) include: - MACRS 3-,5-,7-, and 10-year PERSONAL (not land or buildings) property that is depreciated using the 200% declining-balance method. For AMT, the 150% declining-balance method is used over the MACRS life. - No AMT Adjustment is required for property that is depreciated using Section 179 bonus depreciation. - Differences in gain/loss between regular tax and AMT caused by different bases in assets (due to different depreciation methods). - Difference in percentage of completion method income over completed contract method income. - Add regular tax NOLs in excess of AMT NOLs. - The installment method cannot be used for sales of inventory-type items. 4. AMT Preference Items include: - Tax-exempt interest on private activity bonds (less related expenses) must be added back to taxable income. Exceptions for private activity bonds issued in 2009 and 2010. - Excess of percentage depletion deduction over property's adjusted basis must be added back to taxable income. - The excess of intangible drilling costs using a ten-year amortization over 65% of net oil and gas income must be added back to taxable income. 5. Adjusted Current Earnings (ACE) Adjustment: - AMTI is increased by 75% of the excess of ACE over pre-ACE AMTI OR - AMTI is reduced by 75% of the excess of pre-ACE AMTI over ACE. The negative adjustment is limited to the aggregate of the positive adjustments under ACE for prior years reduced by any previously claimed negative adjustments. - ACE can be larger than AMTI because it includes ALL tax-exempt income and doesn't deduct organizational expenditures (rather capitalizes and amortizes them). 6. The AMT Exemption for corporations is $40,000, and it is phased out for AMTI over $150,000 (25% of the amount of AMTI over this trigger). The exemption is COMPLETELY phased out when AMTI equals $310,000. 7. For NEW corporations the TMT is always ZERO and there is NO AMT for its first year of operations. 8. The TMT is ZERO and there is NO AMT if the corporation's average annual gross receipts for all three-year-tax periods ending before the tax year doesn't exceed $7,500,000 ($5,000,000 for FIRST testing period). If a corporation FAILS this test for any year, then it will be subject to the AMT for ALL future years. 9. The AMT credit is limited to the amount of AMT generated from timing differences, and this credit is available in a year in which the tentative tax is less than regular tax (no AMT needs to be paid). The AMT credit may be carried forward indefinitely. ``` Taxable Income before the NOL Deduction +/- Adjustments (excluding ACE adjustment) + Preferences = AMTI before ACE and NOL +/- ACE adjustment = AMTI before NOL - NOL deduction (limited to 90% of AMTI before NOL) = AMTI - Exemption = AMT base X 20% (individuals have a 26% and 28% rate) = Tentative minimum tax before the FTC - Foreign tax credit (FTC) (individuals have more credits) = Tentative minimum tax - Regular tax liability = AMT (if positive) ```

Question 188

Boone Corporation, which is not exempt from the alternative minimum tax, reported adjusted current earnings (ACE) of $500,000 for 2017. Its alternative minimum taxable income (before the alternative minimum tax NOL deduction and ACE adjustment) was $200,000. Boone Corporation’s alternative minimum taxable income (after exemption) for 2017 was

Answer 188

$425,000 Boone’s pre‐ACE AMTI of $200,000 would be increased by an ACE adjustment of [($500,000 − $200,000) × 75%] = $225,000, resulting in an alternative minimum taxable income of $425,000. No AMT exemption would be available because Boone’s $40,000 exemption would be reduced (to zero) by 25% of AMTI in excess of $150,000.

Question 189

Consolidation of corporations

Answer 189

1. Permits the corporations to eliminate intercompany profits and losses 2. Allows the profitable corporation to offset its income against losses of another corporation 3. Permits net capital losses of one corporation to offset capital gains of another 4. Gains and losses on INTERCOMPANY SALES are DEFERRED until disposition outside the group. These gains and losses will be recognized at the time of the eventual disposition outside the consolidated firm but the nature of the gain or loss is determined by the use of the property at the time of the intercompany sale 5. Foreign corporations, exempt corporations, S corporations, and insurance companies are NOT ELGIBLE to consolidate 6. The election to consolidate must be UNANIMOUS and it is BINDING on future returns (irrevocable) and creates a joint and several tax LIABILITY 7. The members of the group must conform their tax year to the PARENT'S TAX YEAR 8. Intercompany dividends are ELIMINATED from consolidated TAXABLE income 9. The parent adjusts the BASIS OF THE STOCK of a consolidated subsidiary for ALLOCABLE portion of income, losses, and dividends 10. OWNERSHIP of a corporation is determined by examining the amount of voting stock, as well as other classes of stock. To qualify as a PARENT, a corporation must own 80% or more of each class. Once a parent and subsidiary exist, then RELATED CORPORATIONS can be included in the AFFILIATED GROUP if the total ownership (including all corporations within the group) rises to 80% or more

Question 190

Distributions from a Corporation

Answer 190

1. The value of the property distributed (net of any debt assumed by the shareholder) is the amount eligible for DIVIDEND treatment. The distribution will reduce ACCUMULATED and CURRENT earnings and profits (E and P) 2. The distribution of APPRECIATED property causes the corporation to recognize GAINS (not losses) like a sale of the property. The gains will increase ACCUMULATED and CURRENT E and P 3. If the LIABILITY on the property EXCEEDS the property's FMV, the FMV is treated as being EQUAL to the LIABILITY 4. Amount distributed = FMV − Liabilities on property 5. Basis of the property to the SHAREHOLDER is always just the fair market value 6. Constructive dividends (not formally declared as a dividend, e.g. property distributions to SHs) are also treated as distributions 7. Distributions from a corporation are TAXABLE as DIVIDEND INCOME to extent of the shareholder's pro rata share of ACCUMULATED and CURRENT E and P, the EXCESS is TAX-FREE to extent of shareholder's basis in stock (and reduces the basis), and the REMAINING distribution amount is taxed as a CAPITAL GAIN. Capital losses ARE NOT included as an option

Question 191

Adjustments to taxable income when computing E and P

Answer 191

1. 100% of meals and entertainment are deductible for computing E and P (rather than just 50%) 2. Organizational expenses cannot be amortized for E and P 3. The installment sale method is not allowed for computing E and P 4. Depreciation for E and P purposes is straight line

Question 192

Four possible scenarios to determine whether a distribution is a dividend in regards to E and P

Answer 192

1. If BOTH current and accumulated E and P are NEGATIVE, then distributions are a RETURN OF CAPITAL (tax-free up to adjusted basis—and then capital gain) 2. If BOTH current and accumulated E and P are POSITIVE, then the distribution is taxed as a DIVIDEND 3. If current E and P is POSITIVE but accumulated E and P is NEGATIVE, then a distribution is a DIVIDEND only to the EXTENT of the current E and P 4. If accumulated E and P is POSITIVE but current E and P is NEGATIVE, then a distribution is a DIVIDEND to the EXTENT of NET E and P (accumulated E and P less an allocated portion of the deficit in current E and P) on the date of the distribution

Question 193

Complete Liquidation

Answer 193

1. SHAREHOLDERS of a distribution in complete liquidation of a corporation receive CAPITAL GAIN OR LOSS treatment just as if they hold their stock 2. A CORPORATION will recognize GAIN OR LOSS on the distribution of its property in liquidation just as if the property were sold to the distributee at its fair market value 3. If stock of a SUBSIDIARY is liquidated by its parent company, any realized GAIN on the transaction is, in general, NOT RECOGNIZED

Question 194

Partial Liquidation

Answer 194

1. NONCORPORATE shareholders treat the gain on a REDEMPTION OF STOCK that qualifies as a partial liquidation of the distributing corporation as a CAPITAL GAIN, just as if they had sold their stock. 2. Redemptions qualifying for exchange treatment include (1) a redemption that is not essentially equivalent to a dividend, (2) a redemption that is substantially disproportionate, (3) a redemption that completely terminates a shareholder’s interest, (4) a redemption of a noncorporate shareholder in a partial liquidation, and (5) a redemption to pay death taxes. If none of the above five tests are met, the redemption proceeds are generally treated as a dividend. 3. CORPORATE shareholders receive DIVIDEND treatment on a partial liquidation

Question 195

Expenses related to a LIQUIDATION are ________ by the liquidating corporation.

Answer 195

deductible

Question 196

Assets transferred to the PARENT of the LIQUIDATING CORPORATION generally have a ___________. Tax attributes of the subsidiary _______________.

Answer 196

carryover basis | transfer to the parent (e.g. excess charitable contributions and net operating loss)

Question 197

Type A Reorganization

Answer 197

1. Merger or Consolidation | 2. Qualifies for tax-free treatment for both shareholders and the corporation

Question 198

Type B Reorganization

Answer 198

1. Stock for Stock transaction 2. Reorganization is tax-free if an 80% controlling interest was acquired and no boot was received 3. No gain or loss is recognized 4. Shareholder's BASIS in the stock received would be the SAME as the stock transferred.

Question 199

Type C Reorganization

Answer 199

1. Assets for Stock transaction 2. Reorganization is tax-free if "substantially all" (90% of net asset value and 70% of gross asset value) of the corporation's assets were transferred 3. No gain or loss is recognized

Question 200

Type E Recapitalization

Answer 200

1. a realized GAIN is recognized only to the EXTENT that consideration OTHER THAN stock or securities is received, including the FMV of an EXCESS of the principal amount of securities received over the principal amount of securities surrendered 2. The issuance by a corporation of its preferred stock in exchange for its bonds is nontaxable

Question 201

Sec 368 defines SEVEN TYPES OF CORPORATE REORGANIZATION.

Answer 201

1. Type A, a statutory merger 2. Type B, stock for stock 3. Type C, assets for stock 4. Type D, assets for subsidiary stock 5. Type E, a recapitalization 6. Type F, a mere change in identity, form, or place of organization 7. Type G, bankruptcy

Question 202

Only AFFILIATED corporations that have _____ with a state will be included in the state CONSOLIDATED income tax RETURN for that state.

Answer 202

Nexus

Question 203

Nexus

Answer 203

1. “sufficient physical presence” | 2. requirement for companies doing business in a state to collect and pay tax on sales in that state

Question 204

Sales Apportionment Factor Calculation

Answer 204

divide the sales from a specific state into total sales from all states

Question 205

Use Tax

Answer 205

Levied on the use of TANGIBLE personal property that was NOT PURCHASED IN THE STATE

Question 206

Franchise Tax

Answer 206

1. Levied on the privilege of doing BUSINESS IN A STATE | 2. Based on the VALUE of the CAPITAL used in the jurisdiction (common stock, paid-in capital, and retained earnings)

Question 207

Sales Tax

Answer 207

1. Levied on TANGIBLE personal property and some SERVICES | 2. Exemptions vary by state but usually include items bought for RESALE and that are used in MANUFACTURING

Question 208

Property Taxes

Answer 208

1. Ad valorem taxes based on the VALUE of REAL property (realty taxes) and PERSONAL property (personalty taxes) 2. There are usually EXEMPTIONS for certain types of property, including those for inventory 3. A few states also tax INTANGIBLE property 4. Usually levied for property OWNED at a specific date

Question 209

Excise Tax

Answer 209

1. Levied on the QUANTITY of an item or sales price. Examples include tax on gasoline, cigarettes, and alcohol 2. Can be charged to a MANUFACTURER OR CONSUMER

Question 210

Foreign Tax Credit (FTC)

Answer 210

1. The lower of: foreign tax paid or U.S. tax on worldwide income × Foreign source taxable income / Worldwide taxable income 2. unused foreign tax credit resulting from the application of the limitation can be CARRIED BACK ONE YEAR and FORWARD TEN YEARS and used to the extent that the taxpayer is below the limitation in those years

Question 211

Foreign-earned income from personal SERVICES is excluded up to ______ in 2017.

Answer 211

102,100

Question 212

The foreign housing is excludable to the extent it exceeds _______________. However, the housing exclusion may never exceed ______ in 2017

Answer 212

16% × $101,100, or $16,336 | $14,294

Question 213

The ORGANIZATIONAL TEST to qualify a public service charitable entity as TAX EXEMPT requires the articles of organization to ______________________.

Answer 213

limit the PURPOSE of the ENTITY to the CHARITABLE PURPOSE

Question 214

What exempt organizations DO NOT HAVE TO FILE Form 990 annual information returns?

Answer 214

1. Organizations with gross receipts that DO NOT EXCEED $50,000 2. Churches and auxiliaries of churches that are internally supported These organizations will most likely HAVE TO FILE an annual ELECTRONIC notice with the IRS (Form 990-N)

Question 215

What exempt organizations DO HAVE TO FILE Form 990 annual information returns?

Answer 215

1. Organizations with gross receipts that DO EXCEED $50,000 | 2. Private foundations

Question 216

Exempt organizations are strictly PROHIBITED from engaging in ___________________.

Answer 216

political campaigns and activities

Question 217

Private Foundation

Answer 217

tax-exempt organization which receives LESS THAN one-third of its annual support from its members and the general public

Question 218

501(c)(3) Exemption from Federal Income Taxes

Answer 218

1. Tax-exempt organizations INCLUDE corporations, community chests, funds, charities, labor organizations, social clubs, pension and profit-sharing trusts, and private foundations 2. Partnerships cannot be treated as tax-exempt

Question 219

Basis cannot be ______________, so a _____ must be recognized.

Answer 219

negative gain e.g. Calculate a negative basis due to transferring debt on property to other partners, a GAIN would be RECOGNIZED on that amount

Question 220

Under Code Section 444, partnerships, S corporations and personal service companies may ELECT to have a TAX YEAR that DIFFERS from their REQUIRED tax year, provided the tax year chosen DOES NOT HAVE a ____________________________. In addition, the adoption of a tax year other than that generally required MAY BE CLAIMED IF there is a _________________.

Answer 220

deferral period of LONGER THAN three months. | valid business purpose

Question 221

A PARTNER'S BASIS in the partnership interest is INCREASED by:

Answer 221

1. additional CONTRIBUTIONS (cash, basis of property reduced by liabilities assumed by OTHER partners) 2. additional INTERESTS PURCHASED OR INHERITED 3. the partner's SHARE OF the partnership's INCOME (including TAX-EXEMPT income and CAPITAL GAINS) 4. any INCREASES in the partner's SHARE OF partnership LIABILITIES

Question 222

A PARTNER'S BASIS in the partnership interest is DECREASED by:

Answer 222

1. CASH and the PARTNERSHIP'S A/B of PROPERTY RECEIVED by the partner in a NONLIQUIDATING DISTRIBUTION (the partner's basis in the property may NOT EXCEED his/her basis in the partnership less any cash received in the distribution) 2. the adjusted basis allocable to any part of the partner's INTERST SOLD OR TRANSFERRED 3. the partner's SHARE OF the partnership's LOSSES 4. any DECREASES in the partner's SHARE OF partnership LIABILITIES

Question 223

The holding period of a partnership interest acquired in exchange for a contributed CAPITAL asset begins on the date _____________________. The holding period of property acquired by a partnership as a contribution to the contributing partner's capital account _________________.

Answer 223

The partner's holding period of the capital asset began | Includes the period during which the property was held by the contributing partner

Question 224

When an individual contributes SERVICES to a partnership FOR A CAPITAL INTEREST in the partnership, the individual reports TAXABLE INCOME equal to ____________________. Capital interests received are treated as GUARANTEED PAYMENTS, which means the capital interest is viewed a salary payment and, as such, reported as ____________ by the partner.

Answer 224

the FAIR MARKET VALUE of the transferred capital interest | ordinary income

Question 225

The __________ ELECTS the METHOD used to DEPRECIATE partnership property with the results passed through to the partners. This method may be ___________________.

Answer 225

partnership | any type approved by the IRS

Question 226

Upon a PARTNERSHIP FORMATION the partnership's BASIS in the ASSETS RECEIVED FROM the CONTRIBUTING PARTNERS is ____________________________.

Answer 226

the basis in the hands of the partner

Question 227

LOSS allowed to be DEDUCTED on Form 1040 is limited to _________________.

Answer 227

basis in partnership/shareholder interest *first distributions are subtracted from the partner's/shareholder's basis, then losses can be subtracted

Question 228

NON-SEPARATELY STATED income or loss from trade or business activities must be reported on Schedule K of Form 1065 (if partnership) or Form 1120S (if S corporation). These items include:

Answer 228

1. Sales less cost of goods sold 2. Business expenses such as wages, rents, bad debts, and repairs 3. Deduction for guaranteed payments to partners 4. Depreciation 5. Amortization (over 180 months) of partnership organization and start-up expenditures 6. Section 1245 and 1250, recapture

Question 229

What is the tax treatment of NET LOSSES in EXCESS of the AT-RISK AMOUNT for an activity in a partnership?

Answer 229

Any losses in excess of the at-risk amount are SUSPENDED and CARRIED FORWARD without expiration and are DEDUCTIBLE against income in future years from that activity

Question 230

AT-RISK RULES limit the amount of LOSS DEDUCTIONS from ___________ to the amount the PARTNER had at-risk. The AMOUNT that a partner had at risk is the amount of _______________________. BORROWED amounts are considered to be at risk to the EXTENT that the partner is _______________. At-risk rules DO NOT apply to__________, but the rules DO apply to the ____________.

Answer 230

``` investment activities cash and basis of property contributed to an activity personally liable for repayment partnerships individual partners ```

Question 231

Deductions are NOT ALLOWED to the partnership or any partner for expenses incurred to ____________________.

Answer 231

sell partnership interests

Question 232

Built-In Gain (or Loss) Property

Answer 232

Property that has APPRECIATED (declined) in value at the time of its CONTRIBUTION to the partnership (the VALUE of gain property is GREATER THAN its adjusted BASIS, whereas the value of loss property is less than its adjusted basis).

Question 233

The amount of GAIN ALLOCATED to a PARTNER from the SALE OF ASSETS they CONTRIBUTED to the partnership is the LOWER OF the ________ or _________. The EXCESS of the gain will be ALLOCATED amongst the ___________.

Answer 233

realized gain built-in gain partners

Question 234

Guaranteed payments

Answer 234

Made by a partnership to partners for SERVICES RENDERED to the partnership, that ARE DEDUCTIBLE BUSINESS EXPENSES under the Internal Revenue Code, are DEDUCTIBLE EXPENSES on the U.S. Partnership Return of Income, Form 1065, in order to arrive at partnership income (loss) and INCLUDED ON schedules K-1 to be taxed as ORDINARY INCOME to the partners.

Question 235

Evan, a 25% partner in Vista Partnership, received a $20,000 guaranteed payment in 2017 for deductible services rendered to the partnership. Guaranteed payments were not made to any other partner. Vista's 2017 partnership income consisted of: Net business income before guaranteed payments $80,000 Net long-term capital gains 10,000 What amount of income should Evan report from Vista Partnership on her 2017 tax return?

Answer 235

$37,500 Evan would treat the $20,000 payment from the partnership for services rendered as income on her 2017 tax return. She also must report her share of the partnership's net income. Since the guaranteed payments qualify as a deductible expense, Vista's partnership income may be reduced by the amount of the expense. Hence, the partnership's income would be $70,000; $80,000 in net business income before guaranteed payments plus the $10,000 net long-term capital gain less the $20,000 guaranteed payment. Evan's 25% share of the partnership's income would be $17,500 (25% × $70,000). Thus, Evan would report $37,500 in income from the Vista Partnership on her 2017 tax return − the sum of the guaranteed payment ($20,000) and her share of the partnership's income ($17,500).

Question 236

A partner receiving a DISTRIBUTION from a partnership usually does NOT recognize a gain or loss. Gains are RECOGNIZED ONLY to the EXTENT the partner receives _________________________. Gains from PROPERTY distributions other than cash are NOT RECOGNIZED UNTIL the partner __________________.

Answer 236

an amount of CASH EXCEEDING his/her ADJUSTED BASIS in the partnership interest sells or disposes of the property

Question 237

A partner's BASIS in PROPERTY distributed in a COMPLETE LIQUIDATION of the partner's partnership interest EQUALS ____________________.

Answer 237

the partner's partnership interest LESS any cash distributed in the transaction

Question 238

A PARTNERSHIP will be TERMINATED when:

Answer 238

1. there are no longer at least two partners 2. no part of any business, financial operation, or venture of the partnership continues to be carried on by any of its partners in a partnership 3. within a 12-month period there is a sale or exchange of 50% or more of the total interest in partnership capital and profits

Question 239

"Hot assets" for a partnership include ONLY ________ and ___________.

Answer 239

inventory | unrealized receivables

Question 240

When a partnership DIVIDES into two or more partnerships, the ORIGINAL PARTNERSHIP is CONTINUED in each of the new partnerships which contain partners that controlled __________ of the partnership interest in the original partnership.

Answer 240

50% or more

Question 241

If a partner SELLS OR EXCHANGES his/her partnership interest and the partnership has either UNREALIZED RECEIVABLES or SUBSTANTIALLY APPRECIATED INVENTORY, the partner recognizes _________________________________________.

Answer 241

an ORDINARY GAIN to the EXTENT that the AMOUNT REALIZED by the partner due to the unrealized receivables or substantially appreciated inventory is GREATER THAN the partner's BASIS IN THE ITEMS

Question 242

Irving Aster, Dennis Brill, and Robert Clark were partners who shared profits and losses equally. On February 28, 2017, Aster sold his interest to Phil Dexter. On March 31, 2017, Brill died, and his estate held his interest for the remainder of the year. The partnership continued to operate and for the fiscal year ending June 30, 2017, it had a profit of $45,000. Assuming that partnership income was earned on a pro rata monthly basis and that all partners were calendar‐year taxpayers, the distributive shares to be included in 2017 gross income should be

Answer 242

Aster $10,000, Brill $11,250, Estate of Brill $3,750, Clark $15,000, and Dexter $5,000 Clark was a partner for the entire year and is taxed on his distributive 1/3 share ($45,000 × 1/3 = $15,000). Since Aster sold his entire partnership interest to Dexter, the partnership tax year closes with respect to Aster on February 28. As a result, Aster's distributive share is $45,000 × 1/3 × 8/12 = $10,000. Dexter's distributive share is $45,000 × 1/3 / 4/12 = $5,000. Additionally, a partnership tax year closes with respect to a deceased partner as of date of death. Since Brill died on March 31, the distributive share to be included in Brill's 2017 Form 1040 would be $45,000 × 1/3 × 9/12 = $11,250. Since Brill's estate held his partnership interest for the remainder of the year, the estate's distributive share of income is $45,000 × 1/3 × 3/12 = $3,750.

Question 243

The individual partner rather than the partnership makes what election?

Answer 243

Whether to take a deduction or credit for taxes paid to foreign countries

Question 244

On June 30, 2018, Berk retired from his partnership. At that time, his capital account was $50,000 and his share of the partnership's liabilities was $30,000. Berk's retirement payments consisted of being relieved of his share of the partnership liabilities and receipt of cash payments of $5,000 per month for 18 months, commencing July 1, 2018. Assuming Berk makes no election with regard to the recognition of gain from the retirement payments, he should report income therefrom of:

Answer 244

2018 - $0 2019 - $40,000 Immediately before retiring from the partnership, Berk had a balance of $50,000 in his capital account and his share of the liabilities amounted to $30,000, putting his adjusted basis in the partnership interest at $80,000. Berk's retirement payments consisted of being relieved of his share of the partnership liabilities and receipt of cash payments of $5,000 per month for 18 months, commencing July 1, 2018. Thus, in 2018, Berk would receive $60,000 in distributions of "money," $30,000 in liabilities assumed and $30,000 in cash payments ($5,000 per month multiplied by 6 months). The payments made to Berk in 2019 are not recognized in 2018 because Berk had no right to receive the income until paid in 2019. Since Berk's basis in the partnership interest, $80,000, is greater than the amount of "money'" received, $60,000, Berk would not recognize any income in 2018. This transaction would reduce Berk's basis in the partnership interest by the $60,000 of income not recognized, going from $80,000 immediately before Berk retired to $20,000 at the end of 2018. Berk received an additional $60,000 in cash payments ($5,000 per month multiplied by 12 months) in 2018. Of this amount, Berk would recognize $40,000 in 2019, the $60,000 in cash payments less the $20,000 in basis not absorbed at the end of 2018.

Question 245

Although gains and losses incurred in sales transactions between a partnership and its partners are generally recognized, a LOSS IS DISALLOWED if incurred in a transaction between ______________________.

Answer 245

a partnership and a partner owning (directly or constructively) MORE THAN a 50% capital or profits interest

Question 246

A partnership and a S corporation are PASS-THROUGH ENTITIES and income and deduction items pass through to be REPORTED on partners’/shareholders' returns even though ___________.

Answer 246

NOT distributed

Question 247

An INVOLUNTARY TERMINATION for a S Corporation can occur due to a violation of the LIMIT ON PASSIVE INVESTMENT INCOME exceeding ______________________.

Answer 247

25% of gross receipts for THREE consecutive years

Question 248

Once a corporation's S status is REVOKED OR TERMINATED, the corporation must wait _____ years before making a new S election, in the absence of IRS consent to an earlier election.

Answer 248

five

Question 249

A corporation's S election may be REVOKED VOLUNTARILY with the consent of the SHAREHOLDERS holding a __________ of the corporation's issued and outstanding stock, including nonvoting stock.

Answer 249

majority (51%)

Question 250

An S ELECTION made by the __________________ is EFFECTIVE for that YEAR. To be retroactive, the corporation had to be ELIGIBLE on ________ in the tax year PRIOR to the day of the election and all persons that were SHAREHOLDERS BEFORE that day, but not on that day, must _______ to the election. If the S election is FILED AFTER the ______________, the election is generally EFFECTIVE as of the ___________________.

Answer 250

15th day of the 3rd month of the tax year all days consent 15th day of the 3rd month of the tax year FIRST DAY of the corporation’s NEXT taxable year

Question 251

If the shareholder of a S Corporation owns _______ of the stock, then the entire INSURANCE PREMIUM PAYMENT must be included in INCOME. If the shareholder owned __________, the ENTIRE premium payment could be EXCLUDED from income.

Answer 251

2% or more | less than 2% of the stock

Question 252

The BUILT-IN GAINS tax APPLIES only when an existing C corporation makes an _______________.

Answer 252

S corporation election

Question 253

A C corporation that makes an S election and has UNREALIZED BUILT-IN GAINS in its assets as of the ELECTION DAY must pay a ___________ AT THE CORPORATE RATE OF ____ on this appreciation if it is recognized (SOLD) WITHIN the next ___ years.

Answer 253

built-in gains tax 35% 10

Question 254

The MAJOR DIFFERENCE between BASIS for a partner and an S corp shareholder occurs if the business _________. A PARTNER is ALLOWED to include __________________ in his basis, while an S CORP SHAREHOLDER CANNOT add _________ to his basis. All other increases and decreases to the partners'/shareholders' basis are the ________.

Answer 254

borrows money his share of the borrowed funds borrowed money same

Question 255

The Accumulated Adjustments Account (AAA) represents the CUMULATIVE TOTAL of an S corporation's ________________.

Answer 255

income items, less expenses and distributions

Question 256

The _______________ that a PARTNER has for a given day of the tax year is multiplied by the income allocated to that day to determine ALLOCATIONS.

Answer 256

ownership percentage

Question 257

Form 1065

Answer 257

U.S. Return of Partnership Income

Question 258

SEPARATELY STATED items of income, loss, deduction, and credit must be separately reported on Schedule K-1 for both partnerships and S corporations. These items include:

Answer 258

1. Guaranteed payments 2. Dividend income from investments (portfolio income) 3. Capital gains and losses 4. Charitable contributions

Question 259

When the PARTNERSHIP'S business and financial operations are continued by OTHER MEMBERS, there is a deemed _____________ to the remaining partners and the purchaser and a hypothetical _________ to a ____________ new partnership.

Answer 259

distribution of assets | recontribution of assets

Question 260

In a FAMILY PARTNERSHIP, ________________ must FIRST be reasonably COMPENSATED BEFORE INCOME IS ALLOCATED according to the capital interests of the partners.

Answer 260

SERVICES performed by family members

Question 261

A RETIRING PARTNER continues to be a partner for income tax purposes UNTIL __________________.

Answer 261

the partner's entire interest has been COMPLETELY LIQUIDATED through distributions or payments

Question 262

Distributable net income (DNI) for Fiduciaries

Answer 262

1. The maximum amount of distributions that can be TAXED TO BENEFICIARIES as well as the maximum amount of distributions DEDUCTION FOR AN ESTATE 2. Calculation --> Municipal interest income + taxable interest + capital gains ONLY IF they can be distributed to the beneficiary - accounting and trustee fees 3. Any items allocated to corpus (principal) are not included in the computation of a trust's accounting income

Question 263

Items Allocated to Principal and Interest for Fiduciaries

Answer 263

Principal - extraordinary items, payments that are made irregularly Interest - regular payments

Question 264

ESTATES may use _____________________ for its tax year. TRUSTS, except those that are tax-exempt, are required to use ____________ for its tax year.

Answer 264

either the calendar year or a fiscal year | the calendar year

Question 265

Income earned by a TRUST that is DISTRIBUTED TO the income BENEFICIARY, such as the dividends and interest, is TAXED to the _________. If the income is RETAINED by the TRUST, it is TAXED to the _____.

Answer 265

income beneficiary | trust

Question 266

Fiduciary (trust or estate)

Answer 266

takes care of money or other assets for another person

Question 267

Beneficiary

Answer 267

individual or group of individuals for whom a trust or estate is created for

Question 268

The amount of INCOME RECOGNIZED BY THE BENEFICIARIES is the LOWER OF ___________________________.

Answer 268

the total amount distributed or distributable net income e.g. DNI = $120,000 Distributions = $60,000 to K and $90,000 to L $120,000 < $150,000 = $120,000 ($90,000 L Distrib./$150,000 Total Distrib.) = 60% L's Gross Income is limited to DNI (the lower) = $120,000 * 60% = $72,000

Question 269

What items are DEDUCTIBLE on the fiduciary income tax return for a DECEDENT'S ESTATE?

Answer 269

1. Expenses of administering and settling the estate (if they are deducted on the fiduciary return they CANNOT ALSO BE deducted on the estate tax return) 2. State and local taxes (state inheritance or estate taxes are NOT deductible) 3. Charitable contributions (AGI limits do not apply) that are specifically provided for in the decedent's WILL

Question 270

Form 1041

Answer 270

Income Tax Return for Estates and Trusts

Question 271

Form 706

Answer 271

Estate Tax Return

Question 272

Grantor Trust

Answer 272

1. an individual creates a trust and retains certain interests in the trust 2. the income from the trust is taxed to the grantor

Question 273

General business credit

Answer 273

1. a combination of several tax credits that are computed separately each under its own set of rules 2. purpose is to combine these credits into a single amount to provide UNIFORM RULES for the current credits that may be taken to offset a taxpayer's tax liability 3. may be carried back for 1 year, then forward for 20 years

Question 274

Foreign income taxes paid by a corporation ______________.

Answer 274

May be claimed either as a DEDUCTION or as a CREDIT, at the option of the corporation

Question 275

Work opportunity tax credit

Answer 275

1. calculated on the amount of wages paid per eligible employee during the FIRST YEAR of employment 2. The maximum credit is 40% of the first $6,000 (or $2,400) of wages per employee

Question 276

Rehabilitation credit

Answer 276

expenditures to rehabilitate property placed in service before 1936 are eligible for a 10% credit

Question 277

Corporations can elect to deduct ACCRUED CONTRIBUTIONS if the contributions are actually PAID in the ____________________________.

Answer 277

first three-and-a-half months following the year-end

Question 278

Both corporations and individuals can generally DEDUCT the ___________ of investments given as charitable contributions.

Answer 278

fair market value

Question 279

C corporation SHAREHOLDERS who ALSO work in the business as EMPLOYEES are ELIGIBLE to participate in all of the ________________________.

Answer 279

fringe benefit rules provided in the tax law

Question 280

The NOL provides MORE BENEFIT to the taxpayer when it is used in the years that have the __________________.

Answer 280

highest marginal tax rates

Question 281

When APPRECIATED PROPERTY is distributed to a partner, _____________ by the PARTNERSHIP. However, if a C corporation or S corporation distributes appreciated property, __________ by the CORPORATION.

Answer 281

NO gain is recognized | gain MUST BE recognized

Question 282

Trusts and estates can carryback or carryforward a ________________.

Answer 282

net operating loss

Question 283

PASSIVE ACTIVITY LIMITS are applied to the following entities:

Answer 283

1. individuals 2. estates 3. trust 4. personal service corporations 5. closely-held personal service corporations

Question 284

Trusts and estates must make ______ estimated tax payments, except that an ESTATE is EXEMPT from making estimated tax payments for taxable years ending _____________________.

Answer 284

quarterly | within TWO YEARS of the decedent's death

Question 285

NO standard deduction is available for a ___________ on the fiduciary income tax return. On the other hand, a personal exemption is ALLOWED for an _________ on the fiduciary income tax return.

Answer 285

trust or an estate | estate or trust

Question 286

The PERSONAL EXEMPTION is ______ for an estate, _____ for a SIMPLE trust required to distribute all income CURRENTLY, and _____ for all OTHER trusts.

Answer 286

$600 $300 $100

Question 287

For income tax purposes, a DECEDENT'S ESTATE is allowed to adopt a calendar year or any fiscal year beginning on the date of ____________.

Answer 287

the decedent's death

Question 288

A NET OPERATING LOSS exists on tax returns of ___________.

Answer 288

taxable ENTITIES (C Corporation, Individuals, Trusts and Estates)

Question 289

Proper treatment for qualifying research and experimentation expenditures

Answer 289

1. Can be deducted as a CURRENT EXPENSE if the taxpayer so elects for the FIRST TAXABLE YEAR in which the expenditures are incurred 2. Otherwise, the taxpayer must CAPITALIZE the expenditures. Then, if the capitalized costs are not subject to depreciation (because there is no determinable life), the taxpayer can AMORTIZE them over a PERIOD OF 60 MONTHS or longer beginning with the month in which benefits from the expenditures are first realized

Question 290

Complex trust

Answer 290

permits accumulation of current income, provides for charitable contributions, or distributes principal (corpus) during the taxable year

Question 291

Passive activity losses are generally only deductible against ___________. If there is a NET PASSIVE LOSS and multiple loss activities, the suspended net passive loss MUST BE ALLOCATED to loss activities in proportion to ___________________.

Answer 291

passive activity income the amount of loss generated by each activity e.g. Since activities X and Y generated $30,000 and $50,000, respectively, of passive losses, the amount of the $60,000 net suspended loss allocated to Activity X would be ($30,000 / $80,000) × $60,000 = $22,500.

Question 292

Simple trust

Answer 292

is one that (1) is required to DISTRIBUTE ALL of its income each year, (2) CANNOT make charitable contributions, and (3) CANNOT make distributions of trust principal

Question 293

In the absence of an election to adopt an annual accounting period, the required tax year for a partnership is

Answer 293

A tax year of one or more partners with a more than 50% interest in profits and capital.