R2

Question 1

In general how is the donee’s basis of a gift determined? How is the holding period determined?

Answer 1

1) the donee’s basis is the same as the donor’s basis. The basis can be increased by gift tax paid on appreciation of the gift
2) the holding period for donee includes the donor’s holding period unless basis becomes FMV, then the holding period starts at date of gift

Question 2

What is the basis of a gift for determining gain or loss in a sale transaction?

Answer 2

1) For calculating gain on sale, the gift basis to use is the donor’s rollover basis
2) For calculating loss on sale, the gift basis to use is the FMV at the date of gift
3) If sales price between the donor’s rollover basis of the gift and FMV of gift at the date of gift, no gain or loss recognized on sale

Question 3

What is the basis of gifted property for depreciation purposes?

Answer 3

The basis of gifted property for depreciation purposes is the lesser of:
1) donor’s adjusted basis at date of gift OR
2) FMV at date of gift
Note: depreciable basis determined separately from gain/loss basis

Question 4

How is the basis and holding period of inherited property determined?

Answer 4

The basis of inherited property is the lower of:
1) FMV at date of death OR
2) FMV at alternate valuation date (if elected), which is
-six months after date of death OR
-date of distribution/sale, if earlier than six months

The holding period is automatically considered LT for all inherited property, regardless of how long deceased owned property

Question 5

What is the treatment of capital gains/losses for individual taxpayers? (Not applicable to corporations)

Answer 5

Net capital losses are deducted up to a maximum of $3,000 per year against noncapital income (ordinary income, passive income or portfolio income). $1.5k for MFS. Any excess can be carried forward indefinitely.

Capital gains fully taxable (but at lower tax rates)

Holding period:
-ST-one year or less
-LT-more than one year

Question 6

What is the tax treatment of capital gains/losses for C corporations?

Answer 6

1) No distinction between ST and LT
2) Net capital gains taxed at regular corporate tax rate
3) Net capital losses:
-carry back 3 years, forward 5 years
-can only offset net capital gains within carryback/carryforward window

Question 7

Identify the nondeductible losses (WRAP)

Answer 7

Wash Sales
Related Party Transactions
And
Personal loss

Question 8

What is the tax treatment given to wash sales of securities?

Answer 8

1) Losses are disallowed if the same security is bought within 30 days before or after the sale
2) The disallowed loss increases the basis in the repurchased security OR
3) basis - proceeds from sale + purchase of new security
4) date of acquisition of repurchased security is the date of acquisition for original security
Note: Dealers in securities excluded from wash sale rules if loss occurs from transaction in ordinary course of business

Question 9

What is the recovery method for 3 year through 20 year personal property under MACRS?

Answer 9

1) 3 yr through 10 yr property: 200% declining balance
2) 15 yr and 20 yr: 150% declining balance
3) salvage value is ignored
4) taxpayer may choose SL depreciation in lieu of DDB

Question 10

What is the half-year convention under MACRS?

Answer 10

1) six months of depreciation is taken in the year of acquisition and the year of disposal
2) when SL depreciation is elected, the HY convention is still applicable
3) same method of depreciation must be used for all personal property acquired that year in each property class

Question 11

What is the mid-quarter convention under MACRS?

Answer 11

Mid-quarter convention replaces the HY convention if greater than 40% of taxpayer’s personal property (3 yr through 20 yr classes) is placed in service during the last 3 months of tax year

The mid-quarter convention treats all personal property placed in service during each quarter of tax yr as being placed in service on mid-point of quarter

Question 12

What is mid-month convention under MACRS?

Answer 12

Mid-month convention is used for calculating MACRS depreciation of real property
1) 27.5 yr residential rental real property
2) 39 yr nonresidential real property

The real property is treated as placed in service in the middle of the month of acquisition and disposed of during the middle of the month of disposition

Question 13

What is section 179 expense deduction?

Answer 13

Up to $1,160,000 of acquisition cost of personal property used in a trade or business may be deducted in 2023

Limitations:
1) Reduced $1 for each $1 of qualifying property placed in service in excess of $2,890,000 (2023)
2) Deduction is limited to taxable income (before the deduction)

Note: must be property purchased from an unrelated party and for use in business

Question 14

Describe the bonus depreciation method for federal income tax purposes

Answer 14

1) Bonus depreciation expense is 80% (2023) of the cost of qualified property placed in service during the year
2) Qualified property is personal property and qualified improvements with a class life of 20 years or less
3) Bonus depreciation expense is claimed after Section 179 expense (if elected), and before regular MACRS depreciation expense

Question 15

How are intangibles such as goodwill, licenses, franchises, and trademarks amortized for federal income tax purposes?

Answer 15

Intangibles are amortized:
1) SL
2) Over 15 yrs (180 months)
3) Starting with the month of acquisition

Question 16

Netting process for individuals for gains and losses

Answer 16

-Gains/losses, including any capital loss carryforwards, are netted within each rate group, resulting in a net gain or loss for the group
1) ST ordinary tax rate group
2) LT 0/15/20 percent tax rate group
3) LT 28% tax rate group (collectibles and QSBS)

Question 17

Rules on capital and personal use assets

Answer 17

Personal use assets are capital assets
1) A gain on sale of personal-use asset is a taxable capital gain
2) A loss on sale of personal-use asset is a nondeductible personal loss

Question 18

Foreclosure property treatment for gains/losses

Answer 18

Foreclosure of property with a nonrecourse, secured loan is treated as a sale of the property.

It is not cancellation of debt because the debtor is not personally liable for the debt

The amount realized is the amount of the debt immediately prior to the foreclosure

Question 19

List of Section 1231 assets (gains capital, losses ordinary)

Answer 19

1) Depreciable business property
2) Real property used in a trade or business
3) Buildings and machinery
4) Natural resources
5) Livestock, unharvested crops, cattle
6) leaseholds that are at least one year old

Question 20

List of capital assets

Answer 20

1) personal automobile of taxpayer
2) furniture and fixtures in home of taxpayer
3) real or personal property held as an investment
4) stocks and securities of all types (NOT held by dealers)
5) personal property of taxpayer not used in a trade or business
6) real property not used in a trade of business
7) interest in partnership
8) goodwill of corporation
9) copyrights, literary, musical, or artistic comps purchased
10) other assets held for investment

Question 21

List of noncapital assets

Answer 21

1) property included in inventory or held for sale to customers in ordinary course of business
2) depreciable personal property and real estate used in trade or business
3) AR or Notes receivable arising from sales or services in taxpayer’s business
4) copyrights, literary, musical or artistic comps held by original artist
5) treasury stock (not an ordinary asset and not subject to capital gains treatment)

Question 22

Section 1245 property

Answer 22

Depreciable property used in a business and held for over one year
1) If sold at gain, all accumulated depreciation on asset recaptured as ordinary income
2) any excess gain is capital gain under Section 1231
3) Section 1245 only applies to gains
4) If asset sold for loss, loss would have been ordinary under Section 1231

Question 23

Worthless securities treatment

Answer 23

The cost or other basis of worthless stock or securities is treated as a capital loss as if they were sold on the last day of the taxable year in which they became totally worthless.

capital asset MUST be totally worthless to be deductible; if not, nondeductible

Note: option exercise prices are irrelevant with respect to determining loss on account of lapse of the options

Question 24

Section 1244 stock

Answer 24

-refers to the stock treatment of restricted stock by IRS.
-allows losses from sale of shares of small, domestic corporations to be deducted as ordinary losses instead of as capital losses
-maximum is $50k for individual tax return or $100k for MFJ

Question 25

Section 1250 property

Answer 25

-addresses tax gains from the sale of depreciable real property which are taxed at ordinary tax rates
-real property sold at a taxable gain must be depreciated under accelerated depreciation method
-use the SL method
-treated as ordinary income

Question 26

ST capital gains and losses rules

Answer 26

1) if there are any ST capital losses along with carryovers, they are offset against any ST gains that would be taxable at ordinary income rates
2) Any remaining ST capital loss is used to offset any LT capital gains from 28% rate group (ex. collectibles)
3) Any remaining ST capital loss is then used to offset any LT gains from 25% group (unrecaptured Section 1250 gains)
4) Any remaining ST capital loss used to offset any LT capital gains applicable at lower (15%) tax rate

Question 27

LT capital gains and losses rules

Answer 27

1) If there are any LT capital losses including carryovers from 28% rate group, are offset against any net gains from 25% group and then against net gains from 15% rate group
2) If any LT capital losses, including carryovers from 15% rate group, are offset FIRST against any net gains from 28% group and then against net gains from 25% rate group

Note: No capital losses are deductible against ordinary income ONLY against net capital gains

Question 28

short sales

Answer 28

results in a capital gain or loss
holding period is based on date the short sale is executed NOT the closing date of short sale when stock is delivered

Question 29

Net capital losses for corporations

Answer 29

-deduction is not available for c corporations for losses
-net capital losses carried over as a short-term capital loss
-net capital losses not deductible in current year and carried back three years or five years forward

Question 30

Wash sale loss calculation

Answer 30

1) take the number of shares not repurchased within 30 days x sale price
2) take the number of shares not repurchased within 30 days x the purchase price
3) subtract to get capital loss on sale
4) number of shares sold after repurchasing x sale price
5) number of shares sold after repurchasing x (purchase price of repurchased shares + (original sale price - original purchase price on previously owned stock)

Question 31

De minimis safe harbor rule

Answer 31

-txpayer with applicable financial statement can deduct items costing up to $5,000
-txpayer with NO applicable financial statement can deduct items costing up to $2,500 per item
-if cost of item is more than allowable amt, entire cost of item must be capitalized

Question 32

Retirements savings contributions deductions

Answer 32

1) full credit if not under a employer-sponsored plan
2) if under employer-sponsored plan, deduction is limited to filing statuses and AGI thresholds
3) max eligible contribution for credit is $2,000 per taxpayer. No carryover allowed
4) $2,000 times the percent rate on AGI tax table
5) tax credits reduce taxable income, making them deductible

Question 33

nonaccountable vs accountable plans

Answer 33

-accountable plans, reimbursement or excess amount is excluded from income and is not subject to withholding taxes
-nonaccountable plans, reimbursement or excess amount is included in income and subject to withholding taxes

Question 34

Section 1202 qualified small business stock

Answer 34

-treated as long-term capital gain at 28%
-its an original issue of C corporation stock held for more than 5 years
-C corp tax basis cannot be more than $50M
-txpayer allowed to exclude part of gain on sale of QSBS
-exclusion amt greater of $10M or ten times taxpayer’s basis in stock
-any gain in excess of excluded amt is taxed at 28% rate

Question 35

Personal (nonbusiness) bad debt

Answer 35

-treated as short-term capital loss as if sold on last day of taxable yr in yr becomes totally worthless

Question 36

Gain on sale of stock in wash sale

Answer 36

-wash sales occur only for losses
-if have gain on sold security and repurchased within 30 days, txpayer cannot use original basis
-txpayer must pay capital gains tax and use new purchase price as basis