Tax Management Techniques

Question 1

Define different types of non-refundable and refundable credits

Question 2

Classify the different credits as personal, miscellaneous, general business and refundable.

Question 3

Personal Credits

Answer 3

Enacted for social welfare as opposed to economic reasons:
Child Tax Credit
Child and Dependent Care Credit
Tax Credit for the Elderly and Disabled- non refundable max of 15% of initial $5,000 ($7,500 of MFJ and both are >65), reduced by social security, annuity benefits
Adoption Credit
American Opportunity Tax Credit
Lifetime Learning Credit

Question 4

General business credits

Answer 4

Combined for overall dollar limitation on their use since non-refundable.

If general business credits exceed tax limits effective 12/31/97, may be carried back one year and forward 20 years. Credits from earliest years used first to prevent them from expiring

Examples:
Disabled Access Credit
Tax Credit for Rehabilitation Expenditures
Business Energy Credits
Work Opportunity Credit

Question 5

Disabled Access Credit

Answer 5

Disabled access credit is equal to 50% of eligible expenditures that exceed $250 but do not exceed $10,000 => annual credit limitation is $5,000. Reduces basis of the property

Question 6

Small business eligibility for disabled access credit

Answer 6

<=1MM gross receipts in preceding year or no more than 30 FT employees in preceding year and makes timely election to claim credit

Question 7

Tax Credit for Rehabilitation expenditures

Answer 7

provides incentives for rehabilitating older industrial and commercial buildings and certified historic structures, subject to:
-10% for structures originally placed in service before 1936 and 20% for certified historic structures.
- only to trade or business property and property held for depreciable investment
-includes renovation, restoration, or construction of a building, but not the enlargement or new construction. For buildings other than certified historic structures, a rehabilitation project must meet certain structural tests.
-For certified historic structures, the total rehabilitation must be certified by the Department of the Interior as being consistent with the historic character of the building.
-Straight-line depreciation generally must be used with the applicable §168 recovery periods for the rehabilitation expenditures. The regular MACRS depreciation rules apply to the portion on the property’s basis that is not eligible for the credit.
-The basis of the property for depreciation is reduced by the full amount of the credit taken.
-rehabilitation expenditures must exceed the greater of the property’s adjusted basis or $5,000
-rehabilitation credit is recaptured at a rate of 20% per year if there is an early disposition of the property.

Question 8

Work Opportunity Tax Credit (WOTC)

Answer 8

elective basis and is intended to reduce unemployment for individuals who are considered economically disadvantaged:
- LT family assistance recipient,
-Qualified recipient of Temporary Assistance for Needy Families (TANF),
-Qualified veteran,
-Qualified ex-felon,
-Designated community resident,
-Vocational rehabilitation referral,
-Summer youth employee,
-Supplemental Nutrition Assistance Program (SNAP) benefits (food stamps) recipient,
-SSI recipient, or
-Qualified long-term unemployment recipient.
$2,400-$9,600 depending on targeted group and qualified wages paid in 1st year

Question 9

Refundable Credits

Answer 9

Earned Income Credit - negative income tax/welfare benefit for certain low-income families based on earned income that includes wages, salaries, tips, and other employee compensation plus net earnings from self-employment. The Earned Income Credit encourages low-income individuals to become gainfully employed.

available to individuals with qualifying children <19/ 24 FT students residing at same residence for > half year and certain individuals without children (principal residence is in US>half year, between 25-64 and not dependent) if the earned income and AGI thresholds are met /<$10,000 (including dividends, interest, net rental income, cap gain net income).

Question 10

foreign tax credit

Answer 10

Generally, the foreign tax credit results in a greater tax benefit because the credit is fully offset against the tax liability, while a deduction merely reduces taxable income; if cannot claim a credit for the full amount of qualified foreign income taxes paid or accrued in the year, they are allowed a carryback and/or carryover of the unused foreign income tax, except that no carryback or carryover is allowed for foreign tax on income included under IRC Section 951A. Taxpayers can carry back for one year and then forward for ten years the unused foreign tax.

Question 11

Intra family transfer techniques

Answer 11

-Employment of family members: child must be qualified and have a skill set equal to the job requirements
-Sale-lease backs and gift-lease backs: transfer wealth relatively quickly while gaining some income tax advantages eg property that is used in a trade or business can sell/gift to child as tax deductible expense
-Family limited partnerships (FLP)- income is distributed from the business directly to the partners in proportion to their ownership percentage/ able to transfer limited partnership shares to children without relinquishing control of the business, which are significantly discounted in value when transferred to family members because LP shares cannot control the business. GP liability can be remedied with LLC. most appropriate when income is from capital resources, not personal services.
-Installment sales and self-canceling installment note (SCIN)- seller can defer recognition of capital gain over several years. Since the PV of remaining installment payments is included in seller’s gross estate at death, SCIN can correct this
-Private annuity- similar tax consequences to SCIN, must be unsecured and based on seller’s actuarial life expectancy. The income tax treatment of unsecured private annuities is based on the following principles:

Gain is equal to the difference between the present value of the annuity promised and the transferor’s basis.
Gain should be reported ratably over a period of years measured by the life expectancy of the annuitant.
The transferor’s investment in the contract is the transferor’s basis in the property.
A portion of each annuity payment payable to the transferor is treated as:
return of basis;
capital gain; and
ordinary income.

Question 12

Taxation of incentive stock option (ISO)

Answer 12

-employee does not recognize taxable income upon grant/exercise of ISO
- taxation occurs upon sale of stock acquired through exercise of ISO (timing within employee’s control)=> normally LT gain
-spread creates adjustment item for AMT purposes
-preferred by employees when LT cap gain rates are low compared to ordinary income

Question 13

Employer requirements of ISOs

Answer 13

• option price=> FMV on option’s grant date
• must be granted within 10 of date plan is adopted, and employee must exercise the option within 10 years of grant date
  -option must be exercisable only by employee and non-transferable except death
• employee can’t own >10% of voting power of employer corporation’s stock immediately before option’s grant date
• total FMV of stock options that become exercisable in any year can’t >$100,000
• o/procedural requirements eg shareholder approval of plan

Question 14

Employee requirements of ISOs

Answer 14

No tax consequences if following are met:
-can’t dispose within 2 yrs of option’s grant date and 1 yr after exercise rate
- must be employed by issuing company on grant date and continue until within 3 months before exercise date
- (excess of FMV over strike price on exercise date=tax preference item for AMT. When optioned stock is sold, LTCG/L is recognized; and if employee meets above, then employer does not receive corresponding compensation deduction- if above are not met, then treated as NQ stock option)

Question 15

Non-Qualified Stock Options (NQSOs)

Answer 15

• Options that do not meet the requirements of IRC Section 422:
• generally no tax implications to recipient on grant date (except for publicly traded stock options)
• taxation typically occur on exercise date
  Employers benefit since the receive gross exercise cost and is entitled to tax deduction for compensation element that is taxed to employee

Question 16

Qualified organizations

Answer 16

-US, DC, a state or possession of the US, or a political subdivision of a state or possession
-corporation, trust, community chest, fund, or foundation created or organized under the laws of the US/ state, possession, or the District of Columbia
- post or organization of war veterans
- domestic fraternal society, order, or association
- Certain cemetery companies

Public:
-Churches or a convention or association of churches
-Educational institutions that normally maintain a regular faculty, curriculum, and regularly enrolled students
-Hospitals & medical schools whose principal function is medical care or medical education and research
-Government-supported organizations that exist to receive, hold, invest and administer property for the benefit of a college or university
-Any qualified governmental unit
-Certain private operating foundations

Question 17

Contribution Of Capital Gain Property

Answer 17

Held over one year on which cap gain would be recognized if sold at FMV on contribution date
(If cap gain or STCG would be recognized, then considered ordinary income property)

Publicly traded stock qualifies for LTG treatment to private non-operating foundations
Amount of contribution to private non-operating foundation is FMV-cap gain (adjusted basis)

Capital gain property (tangible personal property) contributed to public charity used by organization for purposes unrelated to charity’s function: Amount of contribution deduction=FMV-cap gain = adjusted basis

Question 18

Contribution Of Ordinary Income Property

Answer 18

Deduction=Adjusted property basis, regardless of charitable organization
unless :
-Inventory to be used by the charity solely for the care of the ill, needy, or infants.
-Donations of scientific equipment constructed by the taxpayer and donated to a college, university, or qualified research organization to be used for research, experimentation, or research training in the physical or biological sciences.
-Contributions of computer technology and equipment that is donated to public libraries and elementary and secondary schools.
Deduction= FMV-50% of ordinary income that would be recognized if sold @ FMV (limited to 2x adjusted basis)

Question 19

Contribution of Services

Answer 19

un-reimbursed expenses incurred to render the services:
-transportation/.14/mile, lodging, meal expenses [50% deductible if purchased from a restaurant while away from home (2023)], and the cost of a uniform without general utility that is required to be worn

Question 20

Deduction limitations

Answer 20

50% AGI (Cash only to a 60%limit org/public charity=60% AGI limitation), excess is carried over 5 years
-30% of contributions of cap gain property to public charities @FMV, if using basis, then can be 50% of AGI
- if cap gain property donated to public charity and not put to related use, then reduced by cap gain that would have been recognized
-overall deduction limitation of 30% AGI applies to contributions of all types of property other than cap gain property (Cash/ordinary income) to a private non-operating foundation; but may be subject to further restrictions
-Contributions of cap gain property to private non-operating foundations are limited to lesser of 20% of AGI or 30%-contributions of cap fain property donated to public charity
Contributions subject to 50% (60% for cash) AGI limitation are accounted for before subject to 30% AGI limitation

Question 21

Stock redemption consequences

Answer 21

• taxable dividend treatment: prevents corporations from paying disguised dividends in the form of a stock redemption taxable as a capital gain
  -the exchange treatment is preferable if the shareholders have unused capital losses or capital loss carryovers that otherwise would be of limited tax benefit. A tax-free recovery of the shareholder’s stock basis is not permitted if the distribution is a dividend. In contrast, exchange treatment permits shareholders a tax-free recovery of their investment in the stock.

Question 22

Dividend Policy

Answer 22

Dividends paid from earnings and profits (E&P) are fully taxable to shareholders and are not deductible by the corporation (may/may not be more advantageous than paying higher salary to owners, which only has one level of taxation and is deductible to company.

Question 23

Use of losses for corporations

Answer 23

S election my be desirable when business anticipates net operating/capital losses during start up phase so that they can be used; and then terminate the election when profitable and C Corp treatment is preferred

Question 24

Accelerated or Deferred Deductions

Answer 24

cash-basis can elect this, useful planning tool for AMT or regular tax planning

Question 25

Larry has been granted ISOs to acquire $500,000 of stock of Lukas Films in the current year. How much of that stock should be exercisable in the current year and in subsequent years under the plan?

Answer 25

Total FMV of the stock options that become exercisable to an employee in any given year must not exceed $100,000.

Question 26

Veronica purchased land in 1996 for $20,000. In the current year, she donates the land to Cherry Foundation, a private non-operating foundation. At the time of the contribution, the FMV of the property is $50,000. What is the amount of her contribution?

Answer 26

Since Veronica donates the land to Cherry Foundation, which is a private non-operating foundation, the amount of her contribution is $20,000 ($50,000 - $30,000 capital gain that would be recognized if the land were sold)

Question 27

qualified plan

Answer 27

Includes pension plans, profit sharing plans, and stock bonus plans:
-The employer receives an immediate tax deduction for pension and profit-sharing contributions made on behalf of employees.
-The employee is not taxed on either employer or employee contributions or earnings of the plan assets until funds are withdrawn from the plan at retirement.

Question 28

Pension Plans

Answer 28

Qualified: systematic & definite payments based on formulas/actuarial methods / may provide for incidental benefits
Non-contributory- only by employer
Defined contribution pension plan: separate account for each participant and benefits are based on participant’s account- unvested forfeitures can be used either for other employees or reduce future employer contributions
Defined benefits plan: fixed benefit amount paid upon retirement- unvested forfeitures are used to reduce employer’s contributions for the plan

Question 29

qualified profit-sharing plan (PSP)

Answer 29

• definite predetermined formula to allocate contributions
  -substantial/recurring contributions must be made so plan is permanent
• employees can receive cash or defer taxation by having amounts in profit-sharing trust (Section 401k plans)
  -forfeitures may be reallocated
• lump-sum payments made before retirement may be provided following prescribed period for vesting
  -incidental benefits may also be provided (eg disability, death, medical insurance)

Question 30

Stock Bonus Plan

Answer 30

-defined contribution plan
-Employee Stock Ownership Plan (ESOP)- qualified stock bonus plan

Question 31

Qualification Requirements

Answer 31

-Section 401(a) requires that the plan must be for the employee’s exclusive benefit.
-may not discriminate in favor of highly compensated employees (own >5% stock/receive >$150K)
-a uniform relationship to the compensation payments to covered employees
-portion of the employees covered by the plan must be met-right to receive -benefits from the employer’s contributions must vest (that is, become non-forfeitable) after a certain period or a number of years of employment. Employer-provided benefits must be 100% vested after five years of service. In all cases, any employee contributions to the plan must vest immediately.

Question 32

Employee Retirement Payments

Answer 32

generally taxed under the IRC Section 72 annuity rules:
-if non-contributory, then all of the pension benefits when received by the employee are fully taxable
- if contributory, then each payment is treated, in part, as a tax-free return of the employee’s contributions, and the remainder is taxable

Question 33

Limitation on Employer Contributions

Answer 33

• Defined contribution plan contributions in 2023 are limited to the lesser of $66,000 or 100% of the employee’s compensation.
• Defined benefit plans are restricted to an annual benefit to an employee of the lesser of $265,000 for 2023 or 100% of the participant’s average compensation for the highest three years.
  -An overall maximum annual employer deduction of 25% of covered compensation paid or accrued to plan participants is placed on defined contribution, profit sharing, and stock bonus plans.

Question 34

non-qualified deferred compensation (NQDC) plans

Answer 34

Incentives for executives:
-unfunded, non-forfeitable promise to pay fixed compensation amounts in future periods
- restricted property plans involving property transfers (employer-company stock), subject to substantial forfeiture risk and non-transferable

Question 35

Unfunded Deferred Compensation Plans

Answer 35

For highly compensated employees (HCEs) who desire to defer the recognition of income until future periods
-if the promise to make the compensation payment in a future period is non-forfeitable, the agreement must not be funded

Question 36

Restricted Property Plans

Answer 36

attract and retain key executives. Under such arrangements, the executive generally obtains an ownership interest (i.e., stock) in the corporation: receipt of restricted property in exchange for services rendered is not taxable if the property is non-transferable and subject to a substantial risk of forfeiture. Can make Section 83(b) election to elect to recognize income upon receipt of restricted property and pays LTCG on future gain

Question 37

Income types not subject to withholding

Answer 37

-investment income, rents, income from self-employment and capital gains

Question 38

Required Estimated Tax Payments

Answer 38

Due 4/15, 6/15, 9/15, 1/15
Estimated payments must be lesser of following:
- 90% tax liability on return for current year (/annualized basis)
-100% liability for prior year if AGI <=$150,000, if >$150,000, no penalty if pays estimated tax payments -110%
No penalty if estimated tax <$1K or had no tax liability for prior year

Question 39

Withholding taxes

Answer 39

-FICA up to $160,200, 7.65%, no ceiling to 1.45% Medicare portion. additional .9% Medicare tax is self-employment income >$250k MFJ/$125k MFS/$200k single
-All wages, salaries, fees, bonuses, commissions, taxable fringe benefits

Question 40

Net Operating Loss (NOL)

Answer 40

business expenses>income. Deduction for NOL only applies when carried to a year with taxable income:
- carried back and deducted from income of previous year (refund of previously paid taxes)
- carried forward and deducted from income of subsequent year

Question 41

Computing NOL

Answer 41

-Deduct expenses: (business-related, investment related, certain personal)
-Add back NOL deduction
-Add back capital loss deductions (up to $3k capital losses over capital gains in any year): Non-business cap gains & losses must be netted, and business gains & losses netted separately. Non business excess cap gains offset non-business ordinary deductions, and then offset business capital loss above business cap gain for year. If both result in net losses, then cap loss deduction added back. No deduction allowed. If non-business capital losses exceed non-business cap gains, losses may not offset excess business cap gains
-Add back excess of non-business deductions (charitable contributions, medical expenses, non-business interest and taxes)
-NOLS after 2020 can only be carried forward

Question 42

During the current year, Martin recognizes a short-term capital loss of $20,000 on the sale of an investment capital asset. He also recognizes a $6,000 long-term capital gain on the sale of a business capital asset. What is the total capital loss deduction that must be added back to compute the NOL?

Answer 42

For taxable income purposes, the loss of $20,000 is netted against the gain of $6,000, leaving a $14,000 net short-term capital loss. This loss provides a $3,000 deduction from taxable income, with the remaining $11,000 being carried forward to the following year.

To compute the NOL, however, none of the $20,000 non-business capital loss is deductible. Therefore, the $3,000 deduction as well as the $6,000 loss (from the $20,000 loss) that offset the $6,000 capital gain must be added back. Therefore, the total capital loss deduction that must be added back is $9,000.

Question 43

The recomputation of taxable income for the carryback year may affect the deductible amount of certain itemized deductions. All of these deductions except one must be recomputed using the reduced AGI amount. Which is the exception?

Answer 43

Deductions for medical expenses, charitable contributions, and casualty losses, are limited or measured by reference to the taxpayer’s AGI. All of these deductions except the deduction for charitable contributions must be recomputed using the reduced AGI amount.

Question 44

Chyou is a general surgeon that recently contributed her services to a blood drive in a federally declared disaster area. To travel to the blood drive, she drove her car a total of 300 miles. During her trip, Chyou purchased a special set of scrubs for the event for $75 and had two meals at a cost of $80. Chyou earns $250/hour in her surgical work and spent 8 hours volunteering.

Calculate the deduction available to Chyou for her contribution of services.

Answer 44

$197

The law permits a deduction of 14 cents per mile.

Volunteers contributing their services are not able to use their hourly rate as a deduction.

Therefore, Chyou can deduct the special scrubs ($75), 100% of her meals ($80), and her mileage at a special rate of $0.14/mile (300 x $0.14 = $42)

Question 45

Bruce and Toni are married and file a joint tax return. For the current tax year, their modified AGI ($65,500) is the same as their AGI. Toni is attending the local community college part-time to earn credits toward an associate degree in nursing. Toni already has a bachelor’s degree in history and wants to become a nurse. She paid $2,500 in tuition and fees. Their son, Ben, is a full-time freshman at the state university. Bruce and Toni paid $8,000 in tuition and fees for Ben.

Which credit is Toni eligible for on her tuition and fees?

American Opportunity Tax Credit
Lifetime Learning Credit

Answer 45

The Lifetime Learning Credit is allowed for students who take part-time courses to improve their job skills.

Question 46

JoJo Co. has 25 full-time employees and had gross receipts of $5 million in the preceding year. In the current year, JoJo Co. installs access ramps in their home office and incurs $17,500 of eligible expenditures.

Calculate the amount of Disabled Access Credit that JoJo Co. will be able to claim in the current year.

Answer 46

Although JoJo Co. failed the gross receipt test (i.e., gross receipts of $1 million or less in the preceding year), they had 25 full-time employees in the preceding year and, as a result, qualify for the disabled access credit.

The qualifying expenditures were $17,500. The disabled access credit is equal to 50% of eligible expenditures that exceed $250 but do not exceed $10,000. Therefore, only $10,000 of eligible expenditures qualify for the credit, limiting the credit to $5,000 ($10,000 x 0.50).

Question 47

Which of the following statements is NOT correct regarding intra-family transfers?

A transfer using a private annuity is classified as a sale of the property.
A private annuity has a specific term.
A transfer using a SCIN can be collateralized.
The is an interest rate risk to the buyer in a transfer using a SCIN.

Answer 47

There is an interest rate risk to the seller, not the buyer in a transfer using a SCIN. The installment note interest is fixed for the term of the SCIN.

Question 48

Bartholomew has the noted amounts at-risk in the following partnerships:

$70,000 – JIV S-Corp
$55,000 – BFF Limited Partnership
$25,000 – YEH Publicly Traded Partnership
This year, Bartholomew incurred $130,000 in pass-through losses. Calculate the amount of allowable passive losses.

$0
$125,000
$130,000
$150,000
Pass-through losses can be claimed up to the taxpayer’s at-risk amounts in privately traded partnerships. The S-Corp and Limited Partnership have a total of $125,000 at-risk ($70,000 + $55,000). Therefore, $125,000 of the $130,000 of losses can be used. This will reduce the at-risk amounts to $0 for each entity & $5,000 of losses will be suspended until the basis is increased in either the S-Corp or the Limited Partnership.

Answer 48

Losses from a publicly traded partnership (PTP) can only be used if they were generated from that specific PTP. In this case, there is no indication that the losses came from YEH Publicly Traded Partnership. Therefore, the basis remains the same ($25,000) and the entity cannot be used to claim the pass-through losses.

Question 49

Matilda is filing her taxes as Single this year & her MAGI is $210,000. She also had the following:

$5,000 in LTCGs
$2,500 in interest income
$3,000 in dividends
$12,000 in alimony
Calculate the Net Investment Income Tax due.

Answer 49

Individuals, estates, and trusts are subject to a 3.8% tax on net investment income

Tax applies to the lesser of
NII or
the excess of modified AGI over $250k for MFJ ($200k Single)
In Matilda’s case, the total Net Investment Income (NII) is $10,500 [$5,000 (LTCGs) + $2,500 (interest) + $3,000 (dividends)]. Note, alimony is not considered NII.

For a Single tax filer, the MAGI threshold is $200,000. Matilda’s MAGI exceeds the threshold by $10,000. The NIIT applies to the lesser of NII ($10,500) or excess MAGI ($10,000); The NIIT will be applied to $10,000.

$10,000 x 0.038 = $380 of NIIT