ALL COMBINED Flashcards
(400 cards)
1
Q
What is the holding period on a stock dividend?
A
Holding period of new stock received from a dividend takes on the holding period of the original stock
2
Q
When are scholarships not taxable?
A
When they are not in return for services rendered, AND The money is used *only* for tuition and books Note: Scholarships for room and board are includable in income.
3
Q
What authority does a limited partner have under a Limited Partnership?
A
- Right to inspect records of the business. 2. Can still vote on partnership business without losing limited liability 3. Can consult and advise partnership without losing limited liability (assuming they don’t actually make the decisions)
4
Q
What are the miscellaneous deductions on Schedule A, and how are they deducted?
A
Deductible in excess of 2% of AGI Continuing Education - if required to keep your job Business travel 50% Meals and entertainment Union Dues Tax prep fees Legal fees to collect alimony Appraisal fees to value casualty loss of charitable contributions
5
Q
Which items are not counted as income on Schedule K of form 1065?
A
Passive Income Portfolio Income 1231 Gain or Loss Mnemonic: PP1231
6
Q
How are a decedent’s medical expenses handled with respect to an Estate?
A
Medical expenses paid after death, but incurred within 1 year of death go on decedents personal tax return
7
Q
What is a refundable tax credit? Which individual tax credits are most commonly refunded?
A
A tax credit which takes the taxpayer’s tax owed on the return below zero, resulting in a refund to the taxpayer. Earned Income Credit (EIC), American Opportunity Credit and the Additional Child Tax credit. Note: the REGULAR child tax credit is NOT refundable.
8
Q
What is required by the Statements on Standards for Consulting Services (SSCS)?
A
Competence; Due Professional Care; Planning; Supervision; Obtain Sufficient Data; Serve Client Interest; Agreement: Written or Oral; Communicate w/ Client; Objectivity NOT REQUIRED: Independence
9
Q
What is the casualty loss floor for a C-Corporation?
A
No floor on Corporate casualty loss like there is with an individual taxpayer If destroyed, the loss is the property’s basis (minus proceeds) Calculation: Adjusted basis - Proceeds from Insurance = Loss If partially destroyed, take the lesser of FMV or adjusted basis reduction (minus proceeds)
10
Q
What are the duties and abilities of a bankruptcy trustee?
A
Represents the bankruptcy estate Can sue or be sued Oversees bankruptcy and watches for preferential creditor payments Oversees priority transfer of assets to creditors
11
Q
Under what circumstances can medical expenses paid on behalf of another be deducted on someone’s Schedule A?
A
Must be a citizen of North America Must live with you, or if they do not, must be mother/father or a relative closer than a cousin. Benefactor must provide more than 50% support to the beneficiary.
12
Q
How are Net Operating Losses handled in a Trust?
A
Trusts can have a Net Operating Loss Any unused NOL flows through to the beneficiaries
13
Q
What is Implied Authority in an agency?
A
When authority is expressly granted; it is implied that the agent has the authority to carry out the duties Does not include authority to sell or alter a business
14
Q
How are profits and losses split in a Limited Partnership?
A
Unlike G.P.; L.P. profits/losses are split according to capital contributions by default
15
Q
The definition of Ultramares Decision:
A
Accountants are not liable to third parties unless the third party was an intended beneficiary of the engagement AND the accountant knew they would be relying on the financial statements.
16
Q
How are gains and losses handled with respect to a Corporation’s transactions involving its own stock?
A
Corporations have no gain/(loss) from transactions involving their own stock, including Treasury Stock. If Corporation gets property in exchange for stock, there is no gain/(loss) on the transaction.
17
Q
When can contracts be discharged by law?
A
Party under contract is bankrupt Party under contract dies or is incapacitated Party cannot physically complete the contract (i.e. They are in prison so can’t finish building your house)
18
Q
Who can sue under the Securities Act of 1933?
A
Purchasers of securities only
19
Q
What is tenancy by entirety?
A
1/2 of marital assets go to deceased spouses Estate
20
Q
What is an Agency Coupled with an Interest?
A
Agent acquires an ownership interest in the Agency Can only be terminated early (before the interest expiration date) by the Agent Unless the Agency has a specific time limit spelled out in a contract; the Agent’s authority is irrevocable by the Principal
21
Q
What age group is protected under Age Discrimination Laws?
A
They protect people ages 40 and above at companies where at least 20 people are employed
22
Q
What amount of a decedent’s Estate is exempt from Estate Tax?
A
The First $5,250,000 is exempt with a 40% tax on amount above that
23
Q
What are the key aspects of a corporate officer?
A
Appointed by the Board of Directors Act as Agents Owe a fiduciary duty to the corporation Can have legal fees paid by corporation for defense in lawsuit brought on them from carrying out their normal duties (exception- suit brought against officers by shareholders)
24
Q
What is the tax treatment of startup costs for a partnership?
A
Tax treatment is the same as that of an individual taxpayer. However syndication fees are not deductible or amortized.
25
What must a contract contain?
Offer, Acceptance, Consideration, Proper form (oral or written), Legal subject matter, 2 Competent parties
26
What is Ultra Vires?
Corporation management acting beyond what the Articles of Incorporation allow Shareholders can sue for Ultra Vires
27
What is a wash sale?
30 Day rule applies Disallowed loss adds to basis of new stock New stock takes on date of acquisition of old stock
28
Accountant's liability for negligence - What are the requirements?
DUTY - DAMAGES - RESULT Duty - Accountant must have had duty to perform with due care exercised by an average accountant. Damages - The client experienced actual damages. Result/Causation - The damages were as a result of the negligence.
29
What actions can pierce the veil of a corporation?
Commingling of assets Fraud Under-capitalization
30
What are the Proxy Solicitation Requirements under the Securities Act of 1934?
Proxy must give shareholders audited balance sheets from 2 most recent years o Requirement holds true even if one class of stock
31
What are the principles of the Interstate Income Act of 1959?
A state can't collect income tax on sales within its borders as long as the orders are filled and shipped outside of the state Applies to tangible property only Does not protect a Corporation in the state where incorporated Does not protect from taxes using metrics other than income (Ex: Sales Tax)
32
When CAN'T a partnership use cash basis?
1. They have inventories 2. Partnership is a tax shelter 3. Has a corporate partner 4. Gross receipts are $5 Million or more Exception: If gross receipts are $1 Million or LESS and Partnership maintains inventories; Cash method is ok.
33
What does Real Property include?
Land, Buildings fixed to the land, and Property under/above the land.
34
Name the Requirements for Accountant to be liable under the Securities Act of 1933.
Damages & Material Misstatements Only o Reliance on financial statements are not a requirement unless purchased more than a year after the security is registered Proving negligence is not a requirement
35
What is a stock subscription and what is required for it to be valid?
An offer to buy shares of stock Must be accepted by corporation to be valid Offer cannot be revoked for 6 months Subscriber becomes liable once accepted
36
What is the purpose of Schedule M-2 on a Corporate tax return? How is it calculated?
Reconciles beginning to ending retained earnings Beginning Unappropriated Retained Earnings + Net Income + Other Increases - Dividends paid - Other decreases = Ending Unappropriated Retained Earnings
37
What are the characteristics of perfection of interest in a secured transaction?
Gets higher priority over others claiming rights to collateral after the perfection takes place Attachment must take place BEFORE perfection
38
What is a mechanics lien?
Lien on real property to secure payment for a repair/improvement done to the house A contractor builds an addition to your house and you won't pay. They can't repo your house; so they get a Mechanics Lien that sticks until you sell your house and they get paid
39
What estimated tax payments must be paid in by an individual taxpayer either via withholding or by quarterly tax payments?
The lesser of: 90% of current year's total tax 100% of prior year's total tax 110% of prior year's total tax (if AGI is $150,000 or more)
40
Who can and cannot own an S-Corporation?
CAN be owned by Estates; Trusts; and Individuals CANNOT be owned by a C-Corporation
41
How are Corporate organization costs handled?
Amortization of costs begin the month the Corporation commences business activity If the Corporation doesn't amortize organization costs in year one, they can never be amortized Costs associated with offerings are neither deductible nor amortized
42
What procedures must an Accountant have in place under the Securities Act of 1934?
Accountant must have procedures in place to: Determine if Going Concern is an issue Determine if any material related party transactions occurred Determine if material illegal acts occurred
43
Accountant's Workpapers - Confidentiality Requirements
1. Can be subpoenaed 2. Can be looked at by another CPA doing peer review 3. Property of the accountant who created them Note: Source documents supplied by client must be returned to client if they request them back; even if there is a billing dispute.
44
When can a board of directors authorize charitable contributions for a tax year?
The Board of Directors can authorized charitable contributions up to 3/15 and have them count in the previous tax year
45
What is Apparent (Ostensible) Authority in an agency?
Apparent Authority is based on the third party's perspective - they believe that the Agent has the authority to enter into a contract based on: \*Prior dealings with agent \*Agent's title leads the third party to believe they can enter into a contract \*The Principal hires the Agent to carry out duties that normally carry with them the rights to enter into contracts
46
Under what situations are sales of goods covered by the Statute of Frauds? What are the exceptions?
If value of goods sold is \> $500; sales contract must be in writing Exceptions: Merchants can enter into oral contracts for \> $500 items. Oral contracts are binding for special or uniquely-made items (i.e. custom cabinets or custom furniture that could not be sold if buyer reneged)
47
How long is AMT paid carried forward, and how is it applied?
It can be carried forward indefinitely. It may be applied against future \*regular\* income tax, but not against future AMT tax liability.
48
How are section 1231 gains and losses handled?
Casualty Losses on 1231 Property - Net the losses \* Net Loss = Ordinary Loss \* Net Gain = Combine with other 1231 Gains 1231 Net Loss - If 1231 Losses exceed gains; treat as Ordinary Loss 1231 Net Gain - If 1231 Gains exceed losses; treat at LTCG 1231 Gain = LTCG 1231 Loss = Ordinary Loss
49
When are Corporate federal tax estimated payments required, and how are they calculated?
Required if more than $500 in tax liability expected, or 100% current year liability 100% previous year liability Note: If Corporation had more than $1 Million in revenue the previous year, the first estimated payment must be based on the previous year and the remainder based on the current year.
50
How do you terminate Apparent Authority?
\*Let the public know \*Let the people or entities that the Agent previously interacted with know \*In cases of death; or Principal is otherwise not competent to contract; ALL authority is revoked
51
How are capital losses taken in a corporation?
capital losses only offset capital gains Carryback 3 years - if you elect NOT to carryback; you lost the option in the future Carry forward 5 years - only as STCL
52
How is section 1245 depreciation recapture handled; and when does it apply?
To the extent of depreciation; treat as ordinary gain Remainder is 1231 gain; which is LTCG - There are no 1245 Losses 1231 Gain = LTCG 1245 Gain = Ordinary Casualty Gain = LTCG 1231 Loss = Ordinary 1245 Loss = N/A Casualty Loss = Ordinary
53
How is shareholder basis calculated for a TRANSFEROR of an interest in a Corporation?
Transferor's basis + Gain recognized by shareholder = Basis OR FMV of Corporate Interest - Adjusted basis of property = Gain
54
What depreciation convention is used for real property?
Mid-month
55
Characterize the following carryover: Passive Activity Loss
No carryback Can carry forward indefinitely
56
What is required to negotiate Order Paper?
Must have delivery and endorsement If paper is exchanged for value; transferor must give an UNQUALIFIED endorsement
57
Define contract liability.
Guarantees payment of a liability
58
When is an employee covered by Workman's Compensation?
Employees injured on the job get protection; even if they messed up and caused the injury themselves Exception: If the employee intentionally harmed themselves; there is no Workman's Compensation
59
What is the purpose of the negotiation of commercial paper?
Transfers ownership to another party
60
How is gain or loss on sale of a partnership interest calculated?
Gain or Loss = Amount realized on sale - basis in partnership interest
61
True or False: In a Limited Partnership; a General Partner can also be a Limited Partner at the same time.
True. A Limited Partner; however; cannot also be a General Partner and maintain limited liability.
62
How are Net Operating Losses (NOLs) utilized?
Can be carried back 2 years If any left, can be carried forward 20 years.
63
How many education credits may be taken on a tax return?
American Opportunity Credit - per student Lifetime Learning Credit - per taxpayer Note: The American Opportunity Credit is refundable.
64
What are the requirements to form a Limited Partnership?
Governed by state L.P. laws Must file L.P. certificate with Sec. of State Only General Partners must be listed Future additions or subtractions of G.P. require certificate to be updated with state
65
What are the characteristics of a Mortgage?
Must be in writing Signed Description of property Delivered
66
Define qualifying child for most individual tax factors.
Must be resident of North America Under age 19, or under age 24 if a student
67
What actions or circumstances will revoke a contract?
Offeror revokes and offeree receives revocation Offeree finds out prior to acceptance that offeror has sold the item In the case of an Option; offeror cannot revoke until the time of the option has elapsed Initial rejection by offeree doesn't void the option.
68
When does warranty liability occur?
Occurs when you negotiate commercial paper By signing; you warrant to all future parties By not signing; you warrant to current party only
69
What assets are NOT capital assets?
Inventory; Business interest; Accounts Receivable; Covenant not to compete Goodwill IS a capital asset
70
Does a casualty loss affect the basis of property?
No. It decreases the fair market value (FMV) of the property.
71
Are interest and dividends active or passive income?
Neither. They are portfolio income.
72
How are partnership losses taken on an individual's return?
Losses cannot be taken beyond a partner's basis in the partnership Losses in excess of basis are carried forward until basis is available
73
Which of the following are taxable: Child Support, Divorce Property Settlements, Alimony
Alimony IS taxable. Child support and divorce property settlements are NOT taxable.
74
What are the key points of the 1933 Securities Act; Regulation A?
Issuer can issue $50M of securities per year and be exempt if they file a notice with the SEC Non-issuers (AKA a private individual) can sell $1.5M per year and be exempt
75
What is Constructive Fraud?
Gross Negligence - reckless disregard for truth CPAs usually not liable for simple negligence; but Gross Negligence (aka Constructive Fraud) opens the CPA up to be liable to third parties.
76
What is joint tenancy with respect to an Estate? How is it calculated?
When two non-spouses jointly own property FMV at death X % Ownership = Amount in Estate
77
How long can investment interest expense in excess of investment income be carried forward?
Indefinitely.
78
When does a partnership terminate?
When there is less than 2 partners (only one partner) When 50% of the partnership interests sell within a 12 month period- partnership IMMEDIATELY terminates.
79
Which personal insurance premiums are not deductible as medical expenses on Schedule A?
Accident or disability insurance premiums are not deductible.
80
What is the Uniform Division of Income for Tax Purposes Act (UDITPA)?
Uniform criteria for determining taxable income of multi-state corporations Also known as the Multi-State Tax Compact
81
What amount of business start-up costs can be deducted? How is it expensed?
Up to $5,000 Amortized over 180 months Reduced dollar-for-dollar by amount over $50,000
82
What are the required actions with Discovery of Illegal Activity?
Accountant must report discovered illegal activity to Audit Committee or Board of Directors If material in public company; BOD has \*1 DAY\* to notify SEC.
83
What entities are exempt from filing registration statements under the 1933 Securities Act?
Banks; Commercial Paper; Farmers; Co-ops; Charities; Governments Also exempt: Securities sold in ONE state; where investors are residents; 80% of business done in one state; and resales can't occur within 9 months to interstate parties.
84
What is the partner's basis in a partnership when they provide a service in exchange for the interest?
The basis in the partnership interest is the amount of taxable service revenue provided by service provider.
85
Which farming costs related to land are deductible? Which aren't?
Deductible: Costs incurred to PRESERVE soil/water Non-deductible: Costs incurred to drain wetlands or prep for irrigation (i.e. improve land)
86
What property qualifies for section 1250 treatment; and how are gains/losses handled?
1250 property is Real Estate Use 1250 for Gain only. For losses; use 1231 Individuals: Post-1986 property with a gain is 1231 LTCG If Straight Line depreciation is used; don't use 1250 - Entire gain is 1231 Corps: Section 291 requires 20% of depreciation classified as ordinary gain Remainder is 1231 LTCG
87
What are the basic characteristics of a Chapter 7 bankruptcy (liquidation)?
Discharges all non-exempt debt Can only be filed every 8 years from previous Chapter 7 filing Voluntary or involuntary filing Certain businesses are disallowed from Chapter 7 bankruptcies - Railroads; Banks; Insurance companies; Savings & loans (think: 7th inning RBIs)
88
Adoption expenses - Are they deductible?
NO, they are not deductible. However tax benefits are available through the adoption CREDIT.
89
What are the basic characteristics of a Simple Trust?
Income distributions mandatory Accumulation of income disallowed No charitable contributions Distribution of Trust corpus DISALLOWED Allowed personal exemption of $300
90
Are workman's compensation insurance benefits taxable?
No - similar to an award for damage to make a person whole.
91
What is the parol evidence rule?
Prevents one party to a written contract from coming in after the fact and claiming that a certain conversation took place that conflicts with what is agreed upon in the written contract It also prevents using an oral argument to read into the meaning of what is written on paper If it's on paper; it trumps what was agreed-upon orally prior to the written contract Note: does not negate oral agreements made AFTER the contract or disallow oral words from clarifying ambiguous contract language.
92
What are the key aspects of Treasury Stock?
No Gain/Loss recognized on Treasury stock Have no voting rights Can be re-purchased below par Cannot produce dividends
93
Who must approve mergers and consolidations?
Boards must approve Shareholders must approve by Majority Disapproving shareholders can get an appraisal and get their stock back at current market price Merger does NOT need creditor approval
94
With respect to liability on subsequent debts; what happens when a partner withdraws from a partnership?
Partner not liable assuming notice given. Notice must be given to nullify apparent authority People who had knowledge of their role must be personally notified Public must be notified
95
When are 1231; 1245 and 1250 gains or losses always ordinary?
When the asset is held less than one year.
96
Name the key responsibilities of an accountant when preparing a tax return.
Accountant must prepare the return in good faith and ask for more information if something is missing When recommending a tax position; the accountant should realistically believe that it would stand up under the scrutiny of a court
97
What makes a contract subject to the Statute of Frauds?
o Cannot be completed within one year o Involves the purchase of real estate o $500+ Sale of Goods o Co-signing and guaranteeing the debt of another
98
What are the powers granted under the Environmental Protection Act?
EPA has the power to assess civil penalties for violating environmental laws like the Clean Air Act The EPA can sue violators Citizens can sue violators States can sue violators Citizens can even sue the EPA to force enforcement For hazardous waste sites: owners; operators; transporters; and lenders associated with the site can be held liable
99
When does a security interest attach; or become legally enforceable?
Secured interest must be supported by consideration given. Debtor must actually own the rights to the collateral or have possession. Secured interest much be recorded
100
How are charitable donations for STCG property and property not related to the charity's function deducted on Schedule A?
Deduction is taken for adjusted basis in the property, up to 50% of AGI.
101
How does death of a partner affect the partnership's taxable year?
The taxable year closes with respect to the decedent partner's interest ONLY.
102
How are Corporate distributions to shareholders handled?
Distribution is a dividend to the extent of current accumulated earnings and profits (ordinary income) Then, remainder (if any) is a return of basis. Then, add'l remainder (if any) is a Capital Gain Distribution amount = FMV of Property + Cash - Liability Assumed Shareholder basis = FMV of Property + Cash received (basis not reduced by the attached liability)
103
Who can accept an offer?
Must be accepted by intended party (offeree) Acceptance can only be made by a party who knows an offer has been made and has all of the facts - AKA a meeting of the minds They must intend to accept
104
How are a C-Corporation's deductible charitable contributions calculated?
Sales -COGS= Gross Profit Gross Profit + Rent, Royalties, Gross Dividends, Capital Gains =Total Income Total Income - Deductions (No charitable contributions, Dividends Received Deductions (DRD), or NOL Carrybacks allowed) - NOL Carryforwards =Taxable Income before charitable contributions, DRD, NOL Carrybacks x 10% =Deductible Charitable Contributions
105
Which property is governed by section 1231?
Real or Personal Business Property held more than a year Inventory is never 1231 Property
106
How is an S-Corporation terminated?
To terminate election, 50% of the shareholders must consent No S Corp election allowed for 5 years after termination S Corp termination effective immediately following an act that terminates status
107
What is promissory estoppel?
Promises to donate are legally enforceable Basically; you can't tell a charity; Hey; if you buy this $100;000 piece of land; I'll pay for the building that will go on it; and then renege on your promise
108
When does the dissolution of a Limited Partnership occur?
Automatically happens 1. Once final General Partner leaves 2. Time specified in certificate lapses 3. Event specified in certificate happens 4. Unanimous consent by partners 5. Illegal activity
109
Define primary liability with respect to a contract.
First in line to pay on the note/draft Maker of a Promissory Note has primary liability and must pay according to terms of the note With a Check; no party has Primary Liability Exception: Drawee (your bank) is primarily liable to pay if they certify - i.e. promise to pay
110
What are the key aspects of a corporation?
Shareholders have limited liability to the extent of their capital contribution C Corporations have a perpetual life and continue even after shareholder death Corporations are a separate legal entity from their owners and can own property; sue; be sued Corporations must file Articles of Incorporation in state of governance
111
Which IRA contributions are deductible?
Traditional IRA = deductible Roth IRA = not deductible
112
What does the Volcker Rule require banking institutions to disclose?
Relationships with hedge funds must be fully disclosed to regulators
113
What does a gross Estate consist of?
Cash and Property FMV at death, or alternate valuation.
114
How did Reg D, Rule 506 change under the JOBS Act?
General Solicitation and Advertising now allowed
115
What is the purpose of Schedule M-1 on a Corporate tax return? Which items are included?
Schedule M-1 reconciles book to tax income before Net Operating Loss/Dividend Received Deduction Includes permanent differences (such as tax-exempt interest and non-deductible expenses) and temporary differences (accelerated depreciated tax depreciation, straight-line, etc.)
116
In a like-kind exchange; how is it handled if a netting of mortgages results in net boot paid?
DO NOT subtract the boot paid amount from the cash received Ignore the boot paid amount from the mortgage completely
117
When are mortgage points deductible and how are they deducted?
They are deductible if they represent prepaid interest on purchase of a new home or improving a home. Refinance points are amortized over the life of the mortgage.
118
What can make a contract VOID?
Fraud in the execution Formed under extreme duress - extreme Illegal
119
What is a surety (co-signing)?
A third party agrees to be liable for a loan Example: A parent co-signs on their child's car loan
120
How much social security income can be taxed for individuals in higher income brackets?
Up to 85%
121
How are partner benefits paid by the partnership treated?
Health insurance; life insurance and other benefits paid on behalf of the partner are treated as guaranteed payments and are includable as self-employment income.
122
What entities are disallowed from involuntary Chapter 7 bankruptcy filings?
Charities Farms
123
What is the annual exclusion amount for a taxpayer's Gift taxation? What is required to get the exclusion?
$14,000 per year per spouse to each individual In order to get the exclusion, the recipient must immediately acquire a present interest in the property and get unrestricted access to the property and all of its benefits
124
How is a surety liable in a transaction?
A surety is primarily liable Surety can be released from liability if the creditor behaves in a way that increases the risk that they initially agreed to Surety can be released from liability if the debtor changes the loan agreement in a way that materially increases the surety's risk
125
What is an artisan's lien?
Applies to personal property like a car If the dealership does $500 in repairs to your car; you don't get the car back until you pay
126
What is (are) the depreciation convention(s) for personal property?
Mid-year/Mid-quarter
127
When is inspecting Board minutes the right of a shareholder?
Shareholders can inspect Board minutes and records only if request is in good faith
128
What is a trade acceptance?
Seller extends credit to Buyer Buyer agrees to pay Seller - Buyer has primary liability Seller is both Drawer and Payee - Seller has Secondary Liability
129
What is Warranty of Merchantability?
This good will do its intended purpose Can be disclaimed
130
What forms may acceptance of a contract take?
Can be written or oral Must be in the form/method required by offeror Must be mirror image - i.e. no changes in terms
131
Interest on home equity loans up to what amount are deductible on an individual tax return?
$100,000
132
What is joint tenancy?
Undivided interest in entire property Upon death; property goes to other joint tenants
133
What items are required in a corporations Articles of Incorporation?
Name; purpose; powers of Corporation Name of registered agent & incorporators Stock share classes authorized; par values Name of corporate officers NOT required
134
What is the result of a clerical error in a contract?
The contract is unenforceable. Example: Person signs a contract to pay $500.00 to have their lawn re-seeded but due to clerical error; it actually reads $5000.00
135
What aspects are related to all classes of corporate stock?
Valid consideration must be given for shares Cash; property; or services performed No promises to pay or perform services
136
For an Emerging Growth Company IPO, how many years of audited financial statements are required?
2 years
137
Which items can be carried over to future years on an individual tax return?
Investment interest expense in excess of investment income Charitable contributions Excess Section 179 Capital losses AMT Paid Passive Activity Losses
138
Can spouses married filing jointly use different accounting methods?
Yes, if they each own a small business. All non-business income is cash basis.
139
What is the APPARENT authority of a partner in a partnership?
A third party reasonably believes partner has authority to bind partnership to contract Cannot use apparent authority to add a new partner Cannot use apparent authority to sell or bind partnership assets
140
What is BOOT in a like-kind exchange?
Cash received + unlike property received + liability passed to other party
141
Which depreciation table is used for personal tangible property related to farming?
MACRS 150
142
What are the REAL defenses against a holder in due course (HDC); which will WIN?
A holder in due course takes an instrument subject to Real Defenses (WIN vs. HDC) Material alterations to the instrument Forgery Bankruptcy Maker not competent to Contract Fraud in the execution
143
How are expenses and fees related to tax-exempt income handled in a Trust?
Expenses and fees from tax-exempt income are not deductible for either a Complex or Simple Trust
144
When is a corporation liable for pre-incorporation actions taken by a Promoter?
Promoter personally liable unless third party agrees to a novation and releases Promoter from liability; UNLESS the corporation adopts.
145
Contracts under the Statute of Frauds must be in what form to be valid?
They must be in writing.
146
What five warranties occur with every commercial paper transfer?
Warranty of Title No defense will stand against it No material alteration No knowledge of bankruptcy proceedings All signatures are legitimate
147
What is Common Law Fraud?
Regular fraud Misrepresentation of Material Fact Scienter Damages Reasonable Reliance
148
How is adjusted partnership basis calculated?
Beginning partnership basis + Capital contributions + Share of ordinary partnership income + Capital gains + Tax-exempt partnership income (DON'T FORGET!) = Ending partnership basis
149
What are the personal defenses against a holder in due course (HDC) which will LOSE?
An HDC takes an instrument free of Personal Defenses (LOSE vs. HDC) Lack of consideration/value given Breach of contract/warranty Duplicate payments Fraud (in the inducement only) Voidable contracts
150
What are the requirements for exclusion of gain on a primary residence? How are losses treated?
Must live there 2 out of 5 years Loss on sale of home is NOT deductible
151
What is the treatment of a secured creditor in a bankruptcy?
Superior to claims of other types of creditors Can take either collateral or cash proceeds from the sale of an asset If collateral doesn't satisfy amount owed; Secured Creditors become a general creditor for the difference.
152
When can a LOSS occur in a partnership distribution?
Only in a liquidating distribution.
153
What elements are needed for a sale covered under the Uniform Commercial Code (UCC)?
Offer - You offer to sell something at a price Acceptance - the other party accepts Consideration - Something of value has been exchanged for the goods Note: The UCC only covers sales of goods.
154
If a Gift is an annuity, what value is used for the Gift?
If the Gift is an annuity, use Present Value to determine the gross Gift
155
Is unemployment compensation taxable?
Yes.
156
How are affiliated (80%) Corporation tax returns handled?
Consolidation election is binding going forward Dividends between them are eliminated, Advantage- Gains are deferred, Disadvantage- losses are deferred. One AMT exemption One accumulated earnings tax allowed Note: In order to consolidate, the parent must have 80% voting power and own 80% of the stock value
157
What are the elements of a Firm Offer?
You offer to sell something at a price and keep that offer open for a set period of time 3 months max Only merchants can make firm offers Must be in writing and signed
158
How does bankruptcy of a corporation affect the owner's ability to file bankruptcy?
It doesn't; because the corporation is a separate legal entity. Under bankruptcy; corporations are dissolved Under bankruptcy; individuals are discharged
159
What is the formula for an S-Corp Built-in Gains Tax?
FMV of Assets @ S-Corp Election Date - Adjust. Basis of Assets = Built-in Gain x 35% Corporate Rate
160
What is the new basis of a partnership interest sold?
Basis = Capital account + Liabilities assumed
161
How/when are Gift tax returns filed?
Calendar-year basis only Due April 15
162
What does and does NOT happen when a General Partner assigns their partnership interest to someone else?
1. Other party gets that partner's share of the profits and/or capital contribution. 2. Does NOT give assignee authority to vote on partnership business 3. Assignee does NOT have right to inspect partnership books 4. Assignor still maintains liability 5. Partner does NOT have the right to assign their interest in partnership property or allow partner's creditors to attach a lien.
163
Insider trading rules under the Securities Act of 1934 apply to which individuals?
Officers; Directors and 10% Owners
164
How is the accumulated earnings credit calculated for a Corporation?
Take greater of $250,000 ($150,000 for Service Corps) or the legitimate balance based on future needs (i.e. purchasing a building)
165
What are key aspects of a bankruptcy involving a landlord or leases under Chapter 7?
The bankruptcy trustee can act in the best interest of the creditors and assign the leases under contract to the creditors The trustee has 60 days to assume leases on equipment after bankruptcy is granted or the leases will be rejected
166
What property is eligible for like-kind exchange treatment?
Real for real or personal for personal business property only US property only
167
What actions can a bankruptcy trustee take with respect to preferential creditor payments in a bankruptcy?
Trustee can void payments on antecedent (past) debts that occur within 90 days of a BK filing A Trustee cannot void a payment made to a creditor that is an even swap (contemporaneous exchange) and for new value A voidable preference must be on an old debt where the debtor is basically picking and choosing which creditors they send money to (AKA a voidable preference)
168
What depreciation life and convention are used for leasehold improvements?
15 year straight line (S/L)
169
What is an Option?
Some amount of consideration (like money) is put forth by offeror to keep the offer open for a stated period of time
170
Name the Defenses of an Accountant under the Securities Act of 1933.
Accountant used Due Diligence Accountant followed GAAS Damages weren't caused by accountant's work Plaintiff knew of the material misstatements
171
What types of discrimination are prohibited for employers based on civil rights laws?
Sex Race Religion National Origin
172
What is the difference between a post-dated check and a negotiable time draft?
A check is payable on demand; even if post-dated. A negotiable time draft is not payable until the date designated for payment.
173
What happens if an offeree accepts a contract but puts added stipulations?
It is not acceptance; but instead becomes a counter-offer and the original offeror is now the offeree
174
What is the bankruptcy estate?
The pool of assets available to creditors until liquidation
175
What is the actual authority of a partner in a partnership?
Has authority to bind the partners to a contract.
176
How are capital losses applied in individual taxes?
$3,000 net capital loss can be taken in each year, the rest is carried forward indefinitely. The loss retains its character (STCL or LTCL).
177
What is a cosurety; and how are they liable in a transaction?
Two sureties are guaranteeing the same debt Proportionately liable - If one cosurety is released from their obligation; then the remaining cosureties have their proportionate share reduced by the released party's percentage If one surety pays more than their proportionate share of the risk; then the other sureties must compensate them for the difference; which is called Right of Contribution
178
On an individual return, regular mortgage interest on what loan amount is deductible?
$1,000,000
179
When are life insurance premiums of an employee includable in income?
Premiums paid by an employer for coverage in excess of $50,000 per employee are includable in income.
180
How is investment interest expense handled in a C-Corporation?
Unlike individual taxation, investment interest expense is not limited to investment income. Investment interest on tax-free investments are NOT deductible.
181
What is the order of priority given to unsecured creditors in a bankruptcy?
1. Court Costs and Fees 2. Child Support & Alimony 3. Expenses from ordinary course of business during bankruptcy proceedings 4. Wages owed to employees 5. Retirement contributions within last 6 months 6. Consumer deposits for undelivered goods 7. Taxes 8. Other general unsecured claims
182
What is an Accountant's Liability for Detecting Fraud (Under Normal Circumstances)?
It is not the accountant's job to find fraud and they are not normally liable for not detecting it
183
What is an Agent's liability when acting for an undisclosed principle?
\*Agent liable to third party even if acting within authority \*Third party can sue both Principal and Agent if Principal becomes disclosed \*Agent can then sue Principal
184
What are the requirements for an involuntary bankruptcy filing under Chapter 7?
In some cases; your creditors can force you into Chapter 7 or Chapter 11 BK Creditors must be able to prove that they are not being paid on time (i.e. debtor is insolvent) or that within the past 120 days the debtor assigned a custodian of the secured property If 12+ unsecured creditors - at least 3 must file; claims must be in excess of $15325 If less than 12 unsecured creditors - only 1 must file; claim(s) must be in excess of $15325 Upon filing; a judge will declare an order for relief unless the debtor protests
185
What is an involuntary conversion? When does it not result in a gain?
Occurs when you receive money for a property involuntarily converted There is no gain if you reinvest the proceeds completely If proceeds not completely reinvested; gain is LESSER of realized gain or amount not reinvested.
186
What are the disadvantages of an S-Corporation?
No more than 100 shareholders allowed One class of stock allowed Shareholders must be US Citizens/Residents
187
What is required to maintain the negotiability of a commercial paper?
Must be in writing Signed by drawer/maker Be without conditions for payment (other than limitations on payment sources) Amount of money must be stated Payable to order or bearer
188
What is a Warranty of Title?
The seller has the right to sell the good and no one else can stake claim to that good
189
Which damages awarded in lawsuits are taxable? Which are not?
Payments made to make you whole are NOT taxable (i.e. to pay for losses of property, body parts or earning ability) Any payments for punitive damages ARE taxable.
190
How is an S-Corporation election made?
Election for S Corp status must be made by 3/15 and counts as being an S Corp since the beginning of the year To make election, 100% of the shareholders must consent
191
What are the three requirements for a gift?
Intent for it to be a gift Delivery of the gift Acceptance of the gift
192
Which dividend income is tax free?
S-corporation (actually distributions) Life insurance
193
Describe the AMT calculation for C-Corporations
Taxable Income +Tax Preference Items +/- Adjustments = Pre-ACE +/- ACE Adjustments = AMTI - 40,000 Exemption = Tax Base x 20% = Tentative Minimum Tax - Regular Tax Liability = AMT
194
Describe the Federal Unemployment Tax Act
An employer-paid tax. Must file return and pay even if only one employee works there. Deductible to company - Not deductible by the employee. Allows employers to credit the FUTA liability by the amount of State Unemployment Tax (SUTA) they pay.
195
What happens upon the death of a partner in a partnership?
Partner's estate gets share of partnership profits and capital account Estate does NOT get any partnership assets Remainder of partners own partnership assets Heirs of decedent are not added as partners unless remaining partners unanimously agree
196
What is considered Business Income?
Part of the corporation's regular course of business Includes acquisition of tangible and intangible property if such activities are part of the regular trade or business
197
What is the basic calculation for basis in property?
Cost of property + Purchase expenses + Debt assumed + Back taxes and interest paid = Basis. Note: taxes and interest related to time when a taxpayer did not own the property are not deductible - they are added to basis.
198
Define secondary liability with respect to contract liability
Drawers are Secondarily Liable if Drawee fails to pay a Draft Endorsers (the payee) are secondarily liable Holder in due course can hold Endorser liable Exception: Endorsed Without Recourse
199
What are the advantages of a creditor holding a lien in a secured transaction?
Creditor holds priority over claims to collateral vs. unperfected security interests Beats perfected security interests filed after lien attachment Exceptions: Purchase money security interest; which has a 10 day grace period to be filed Buyers purchasing in the ordinary course of business are immune from security interests held by merchants
200
What is the Interstate Income Act of 1959?
Restricts a state's authority to tax interstate commerce
201
What is tenancy in common in an Estate?
A, B, and C own property If A dies, FMV of As share goes to heirs
202
What assets are exempt from creditors in a bankruptcy estate?
Social security Disability payments Unemployment; Child Support; Alimony; Wages; Pensions; Annuities to the extent that they provide reasonable support for debtor and dependents
203
What is Warranty of Fitness?
This good is the right choice for you based on the seller's expert opinion Can be disclaimed
204
What is the treatment of the liquidation of a subsidiary?
No G/L to parent company
205
What is the purpose of a Consulting Engagement?
This engagement helps the client be more efficient with personnel and resources in order to accomplish their goals.
206
What is the Dividends Received Deduction (DRD) calculation when there is a loss from operations?
Only take DRD % x Taxable Income Note: If DRD brings a loss situation, then you can take the full DRD If Taxable Income remains after DRD, only a partial DRD (T.I.. x DRD %) is allowed
207
How is net self-employment income from a partnership interest calculated?
Partner's % share of ordinary income from partner's K-1 + Guaranteed payments - Partner's % share of section 179 expense from K-1 = Self-employment income (subject to SE tax)
208
What is the treatment of a gain in a complete Corporate liquidation?
If Capital Property, then Capital Gain If Non-Capital Property, then Ordinary Income Gain characterization is the same for both the Corporation and the shareholder
209
What are the requirements for filing as qualifying widower?
Must have a dependent child. Essentially gets MFJ status for the year of death + 2 tax years
210
What is personal property?
Tangible property; such as cars; equipment; etc. Intangible property such as patents; trademarks; copyrights; etc.
211
How is net investment income calculated, for the purpose of deducting excess investment interest expense?
Gross investment income - investment expense in excess of 2% of AGI = net investment income Investment interest expense in excess of net investment income is deductible.
212
When are C-Corporations exempt from AMT?
In year one In year two, if year one gross receipts were less than $5 Million In year three, if the average gross receipts for years 1 and 2 were less than $7.5 Million In year four and beyond, if the average from the previous 3 years is less than $7.5 Million
213
When are guaranteed payments to a partner includable in taxable income?
They appear in partner's income during the year in which the partnership's fiscal year CLOSES.
214
What will void an offer?
If offeror dies or becomes insane before acceptance; offer is void. Contract is binding if acceptance occurs before death/insanity.
215
What are the major aspects of FICA and Social Security taxes?
Paid by Employer AND Employee - Employer withholds from employee's paycheck and must pay tax matching employee's withholding If employer under-withholds; they are required to make up the difference Self-employed individuals must pay both the employer and the employee share; which is Self Employment Tax People drawing Social Security may have their benefits reduced if they go back to work and earn an income
216
How long after a Chapter 7 bankruptcy filing can creditors claim inheritance or insurance payments for repayment?
Inheritance/Insurance payments received within 180 days of filing for a Chapter 7 bankruptcy become part of the BK Estate
217
How can a debtor reclaim possession of their property from the interim bankruptcy under Chapter 7?
If the debtor pays the court-assigned bond to keep a property in an involuntary BK; they can reclaim possession of their property from the interim BK trustee
218
What is the liability of a limited partner in a Limited Partnership?
Limited partners are liable to the extent of their capital contributions only Exception - A Limited Partner (who cannot participate in management decisions) becomes involved with management decisions Becomes liable to third parties \*IF\* they knew of their involvement
219
How long is the carry forward for charitable contributions?
Can be carried forward 5 years.
220
What is the statute of limitations with respect to buyer protection?
Buyer must sue to recover damages within 4 years.
221
What are the key elements of a valid Partnership?
Must have two or more partners. Must intend to engage in business for profit. Life of partnership is of limited duration in most cases. Agency/fiduciary relationship is created. Partnership interest is always considered personal property.
222
How are charitable contributions of LTCG property and property related to a charity's function deducted?
Deducted at fair market value (FMV), up to 30% of AGI
223
When services are exchanged for a partnership interest; how is this treated for tax purposes?
It is a taxable event; treated the same as compensation for the services. The taxable income equals the % of partnership interest received times the FMV of the partnership. i.e. the FMV of the interest received is the taxable income for the service provider.
224
What is the biggest disadvantage of a corporation?
Double taxation
225
226
What are the basic characteristics of complex Trust?
Income distributions are optionalAccumulation of income okCharitable contributions okContributions using tax-exempt income are not deductibleAllowed personal exemption of $100Key Point: Distribution of Trust corpus (principal) ok
227
With respect to PRECEDING debts; what is the liability of a partner in a partnership?
Old partners: Jointly and severally liable unless creditors grant novation New partners: Only capital account at risk on preceding debts. For subsequent debts; they are joint and severally liable.
228
If endorsed; within what amount of time must a check be presented for payment in order to hold the ENDORSER liable?
Within 7 days
229
What is required for Agency to exist?
Both parties must consent to the relationship and intend for an Agency relationship to exist Agent owes Principal fiduciary duty Principal doesn't owe Agent fiduciary duty A contract is NOT required and an Agency agreement is not based on Contract Law; Exception - If duties cannot be performed within a year; a signed writing is required
230
How is Corporate accumulated earnings tax (AET) different from PHC taxation?
Not Self-Assessing like a PHC
231
What is the goal of the Volcker Rule?
Banking Institutions maintain healthy capitalization ratios
232
What is required to form a Limited Liability Partnership (LLP)?
1. Majority vote required to form LLP 2. Articles of LLP filed with Secretary of State 3. Governed by laws of that State 4.Limited Liability Partnership must be in name 5. No General Partners - each LLP partner has limited liability - Exception: Negligence of partner or those under partner's supervision
233
At what rate is self-employment tax assessed?
15.3% of net earnings from self-employment (Note: executor of an estate is NOT self-employment income)
234
What are the requirements for a holder to be a holder in due course?
Holding a negotiable instrument Taking instrument in Good Faith - Even if you buy a stolen note and you dont know that its stolen; youre still an HDC Having no knowledge of defenses again instrument; i.e. problems with the instrument Giving a \*present value\* for the instrument (a future value doesnt count)
235
What is a garnishment with respect to a bankruptcy?
Court allows a creditor to garnish or take a portion of the debtor's paycheck
236
What are the deductions to arrive at Adjusted Gross Income (AGI) for individuals?
\*MSA/HSA contributions \*Investment penalties for early withdrawal \*Self-employed medical insurance premiums \*Self-Employment Tax (approx. 50%) \*IRA Contributions \*Student loan interest (can't be another taxpayer's dependent) \*Moving expenses \*Alimony \*Attorney fees in discrimination lawsuit
237
What characterizes a Professional Corporation?
Shares owned only by licensed professionals (CPAs; attorneys; etc.) Limited Liability for debts Personal Liability for negligence
238
Can corporations and other partnerships become partners in a partnership?
Yes; corporations and other partnerships can become partners of a partnership
239
What is the revenue limit for an Emerging Growth Company IPO?
$1 Billion
240
Which assets may creditors of a partnership go after; and in which order?
Creditors must go after partnership assets first before suing partners individually
241
What are the requirements for holding S-Corporation status?
Only individuals, estates and trusts can be shareholders Domestic only, no international S-corps or foreign shareholders Up to 100 shareholders allowed, and only one class of stock allowed Calendar tax year only
242
What are the key aspects of Joint Ventures (JV)?
Similar to a General Partnership; except generally; a JV is for a single business activity Example: two companies promote a concert Ability to bind other JV partners is limited JV partners still have a fiduciary responsibility to JV No state filings or paperwork necessary
243
What is the purpose of Schedule M-3 on a Corporate tax return?
Like M1, but for Corporations with $10M+ in assets
244
How is shareholder basis calculated for a new interest in a Corporation?
Adjusted basis of property transferred + Gain recognized (if less than 80% ownership) - Boot received = Shareholder basis. If shareholders have 80% control after a property transfer, no taxable event occurs. If liabilities exceed basis on contributed property to a Corporation, a gain is recognized.
245
Under the JOBS Act, what is the capital ceiling under Regulation A?
Reg. A Capital ceiling raised from $5M to $50M
246
How does perfection occur in a secured transaction?
By filing a financing statement By possessing the collateral
247
Do limited partners have a fiduciary responsibility to a Limited Partnership?
No. Limited Partners are do not have a fiduciary responsibility to Limited Partnership
248
What deductions are subtracted from gross revenues to arrive at partnership income?
COGS Wages - except for partners Guaranteed payments to partners Business bad debt (if on accrual basis) Interest paid Depreciation (except section 179) Amortization (Startup costs; goodwill; etc)
249
What is the statute of limitations for a tax audit?
3 years, generally 6 years if 25% or more of gross income was omitted The clock starts on the LATER of the due date or the filing date of the return. There is NO STATUTE OF LIMITATIONS for either fraud or failure to file a required return.
250
What is a partner's basis in partnership property?
Initial basis for partnership property is the basis of the property that was contributed or exchanged for the partnership interest.
251
What is the difference between Express versus Implied duties of an accountant under contract?
Express: Contract specifies what accountant will do Implied: Accountant performs without negligence
252
How are capital losses handled in a C-Corporation?
Capital Losses are deductible only to the extent of Capital Gains
253
Which foreign taxes are deductible?
Foreign INCOME and REAL ESTATE taxes are deductible. Foreign personal property taxes are NOT deductible. Foreign tax assessments are not deductible- they are added to the basis.
254
What is a draft?
A commercial paper involving three parties- a drawer; a payee and a drawee A drawer orders a sum to be paid to a payee by the drawee May be payable on demand or in the future
255
How are excess charitable contributions treated in a C-Corporations?
Excess charitable contributions get carried forward 5 consecutive years (No Carryback)
256
What are key aspects related to the holding of Preferred Stock?
No voting rights Get first rights to dividends and liquidation Cumulative Preferred Stock dividends that go undeclared accumulate and Corporation must pay it before issuing dividends to Common Stockholders Participating Preferred Stock gives shareholder right to dividends in addition to what they get as Preferred Stockholders
257
When can a client be sued for failing to detect fraud?
When a normal audit following GAAS would have detected the fraud. When an accountant agrees to take on more responsibility than what is required under a normal audit. When accountant words the audit report to indicate this greater responsibility.
258
What are the characteristics of a lease?
No writing required if
259
Under what accounting basis are individual tax returns prepared?
Cash Basis. Note: This basis is NOT allowed for Corporations, Partnerships with a C-Corp partner, or for inventories.
260
What are the key aspects of a Limited Liability Company (LLC)?
Members can participate in management and retain limited liability Members don't own any interest in LLC property Members can assign interest; but not transfer it Members divide profits equally unless otherwise stated
261
Describe alimony recapture.
2nd Year: (3rd year - 2nd year - $15,000) 1st Year: 1st Year Alimony Paid - Avg alimony paid in 2nd & 3rd years - $15,000 - Recapture from 2nd year =1st Year Alimony Recapture Total Recapture = 1st Year Recapture + 2nd Year Recapture
262
What is Scienter?
To report something knowing it is false. Characterized by reckless disregard for truth Intentionally conceal facts
263
What is the basis and holding period of inherited property?
FMV at date of death or alternate valuation date (6 months later) If alternate date is elected by property is sold before 6 month window; use FMV at date of death. Property inherited is LTCG property regardless of how long it is held by the recipient.
264
What are the basic principles of UDITPA?
Designed to ensure a company is not taxed more than once on its income Forces a corporation to segregate Business Income from Non-Business Income
265
How do liabilities either INCURRED or RELIEVED affect a partner's basis in a partnership?
If the partnership gets a loan; this INCREASES basis. If partnership is relieved of a liability; this DECREASES basis.
266
When is an employee an Agent; and when does this make the employer liable?
Employees are agents while acting within the scope of their duties. For employees who injure third parties while acting within the scope of their duties; both Employee and Employer are liable
267
What items are not included in calculating an S-Corporation's ordinary income?
These items are included on Schedule K, not in ordinary income: Foreign Taxes paid deduction No Investment Interest expense Section 179 Deduction 1231 Gain or Loss Charitable Contributions Portfolio Income (dividends or interest)
268
How are net short term capital gains taxed in a C-Corporation?
Net Short Term Capital Gains are taxed at ordinary income rates
269
What is a consent dividend? How is it treated?
Consented by the Board of Directors but not yet paid Treat as if distributed by the end of the year
270
How is Gift taxation different from Estate taxation?
Property transferred while taxpayer is living
271
Which items are not deductible on Schedule K of form 1065?
Foreign tax paid Investment interest expense Section 179 expense Charitable contributions Mnemonic: IFC179
272
When must a partnership agreement be in writing?
Must be WRITTEN if partnership activity falls within Statute of Frauds: A. Can't be completed in 1 year B. Even if partners reside in different states; not necessary unless within Statute of Frauds C. Neither dollar amount of transactions nor purchasing of real estate has bearing on whether partnership agreement must be in writing
273
What is the order of basis reductions for distributions from a partnership?
1. Money distributed 2. Adjusted basis of unrealized receivables and inventory 3. Adjusted basis of other property Note: Only MONEY distributions will trigger a gain in a partnership distribution.
274
What reports must be filed under the Securities Act of 1934?
Form 10-K Annual Report - Must be audited Form 10-Q Quarterly Report - Must be reviewed; but not audited Form 8-K - A notice of a material event; Must be filed within 4 days of event
275
What are some of the advantages of a corporation?
Ability to raise capital Limited liability - unless actions occur that pierce the veil Ease of ownership transfer
276
How is non-business bad debt deducted on a 1040?
It is treated as a STCL
277
What is the recipient or donee's basis on gifted property?
Sold at a gain: use donor's basis Sold at a loss: use lesser of donor's basis or FMV at time of distribution Sold in between donor's basis and FMV: No gain or loss
278
How is the sale of non-capital partnership property treated?
As ordinary gain/loss. Items that fall into non-capital category would be unrealized receivables; appreciated inventory; and similar.
279
What is Actual Authority in an agency?
Actual Authority is what is expressly granted or is implied by the duties you expect the Agent to perform and is necessary to carry them out
280
What are the requirements for filing as Head of Household?
Must have a dependent child Must provide more than 50% of the child's support Must live with them more than 50% of the year
281
What are the deductions for Gift tax, besides the annual exclusion?
Tuition and medical expenses paid directly to the provider organization (note: NOT books or dorm fees) Political contributions Charitable Gifts Unlimited Gifts to spouse
282
When are Agents liable for torts (civil wrongs) they commit?
Agents are liable for torts (civil wrongs) committed whether they had authority or not
283
If no petition to appeal is filed, how long does a taxpayer have to pay tax due after an audit?
10 days
284
What are the pre-ACE adjustments for C-Corporation tax AMT calculations?
Real Estate purchased between 1986 and 1999 using Straight Line Depreciation must depreciate over a useful life of 40 years Personal Property - use 150% MACRS, not 200% Construction must use % completion method
285
What are the basic characteristics of a Chapter 13 bankruptcy (personal repayment) filing?
Similar to Chapter 11; but for individuals Gives individuals a reprieve from creditors Creates a payment plan for the debt Ch. 13 Involuntary petitions are not allowed
286
What is the Liability of General Partners in a partnership?
Joint Liability - Partners are collectively liable for debts/torts Several Liability - Partners are individually liable for debts/torts
287
What is the Accountant-Client Privilege?
NO Federal Accountant-Client privilege for non-disclosure of private conversations to a court unless a particular state recognizes such a privilege. If your client tells you Yeah; I cheated on my taxes; a court could force an accountant to testify about that conversation.
288
What can make a contract VOIDABLE?
Fraud in the inducement Party not competent to contract Formed under SIMPLE duress Undue influence
289
What is the basic Gift tax calculation?
Gross Gifts - 1/2 of Gifts (treated as given by spouse) - Total # of donees x $14,000 exclusion = Taxable Gift
290
How are corporations formed by promoters?
Promoter issues prospectus; arranges capital; and is a fiduciary of the corporation. A promoter may profit from work performed if the corporation is aware of it.
291
True or False: Accountants are responsible for knowing the personal finances of tax preparation clients.
Accountants have no way of auditing individual's personal finances and are not required to do so when preparing a return
292
How is the deductible portion of a casualty loss calculated?
Take the lower of either A) Decrease in FMV or B) Basis in property (call this number GROSS LOSS) GROSS LOSS - insurance proceeds received - $100 - 10% of AGI = Deductible casualty loss
293
How and when is a bankruptcy trustee appointed?
Optional - Creditors decide Can be elected by creditors or can be appointed by the court
294
Define qualifying relative for most individual tax factors?
Must be citizen of North America Must live with you, unless mother/father or relative closer than a cousin You must provide more than 50% support to the individual
295
How are net operating losses handled in a C-Corporation?
If loss includes NOL Carryforward, reduce the loss (add back the amount) to get the loss without the Carryforward Then, carry back the NOL 2 years starting with the earliest year and reduce the taxable income there and then move to the most recent year Any leftover NOL = This year's NOL
296
What basis do shareholders and Corporations use for property?
They both use ADJUSTED BASIS, NOT FMV of property.
297
What is the primary advantage of an S-Corporation?
Avoidance of Double Taxation
298
When can a couple file married filing jointly?
They must be married at the end of the year. If one spouse dies, they must be married at the end of the year.
299
What is strict liability with respect to buyer protection?
Manufacturers of goods cannot disclaim that their products will be safe Can be liable if negligent
300
Describe how loss is taken on Section 1244 small business Corporation stock?
A loss on worthless stock is an ordinary loss.
301
What key action will cause a bankruptcy discharge to be denied?
If a debtor fails to keep good records or falsifies documents; a discharge will be denied
302
Describe Common Stock dividends and their rights/liabilities in relation to shareholders/corporations.
Dividends are NOT a shareholder right Once declared; dividends become a liability to corporation
303
What are the requirements for the assignment of a contract?
Contracts are assignable to a third party beneficiary; but must be done so in good faith Obligations may be assignable- Assignor is still liable Assignor may be released from liability if other party grants a novation
304
How are Corporate losses on a sale to a Corporation where a taxpayer owns a 50% or more interest handled in a C-Corporation?
A loss on a sale to a Corporation where taxpayer owns a 50% or more interest is disallowed
305
What income can business losses offset on a 1040?
They may only offset active business income. Note: W2 wages are considered active business income.
306
When has an accountant committed fraud?
Misrepresentation - Accountant misrepresents MATERIAL fact(s) Scienter - Accountant commits scienter Damages - Client has actual damages. Reasonable Reliance - Client reasonably relied on the misinformation.
307
What are the requirements for recognizing a gain in a partnership liquidating distribution?
1. Money was distributed 2. Unrealized receivables were distributed 3. Appreciated inventories were distributed Otherwise; no loss recognized.
308
What is a promissory note?
A promise to pay a specific amount. There are two parties involved - maker and a payee. It can reference other transactions without harming the instruments negotiability. Example: Bank Certificate of Deposit (CD)
309
When is a corporation liable for torts by employees?
If committed within the normal scope of the employee's job Even if they were disobeying orders Per respondeat superior
310
What are the major types of endorsements on commercial paper?
Blank - Doesnt name a new payee; transforms into a bearer paper Special - Names a new payee; transforms into an order paper Restrictive - Adds restrictions; doesnt stop further negotiation Qualified - Payment not guaranteed; without recourse added to endorsement
311
What sales are covered under the Uniform Commercial Code (UCC)?
Only sales of goods are covered under the UCC.
312
What are the priority rules for payment in a secured transaction?
If two parties are perfected; then the first one to file wins If neither party is perfected; then the first one to attach wins
313
What are the tenets of the Occupational Safety and Health Act (OSHA)?
Employers should promote a safe workplace and environment for their employees to work in Injury records must be kept Penalties can be both o Civil - $1;000 fine per day o Criminal - Could include imprisonment Employer can require a search warrant for OSHA to investigate their facilities
314
For what debts does bankruptcy NOT stop collections?
Student Loans Income taxes from previous 3 years Alimony & Child Support Debts/judgements resulting from drunk driving Pension obligations Debts relating to SOX violations Debts arising from illegal activities Debts not listed in the bankruptcy filing
315
How long does an individual taxpayer have to file a claim for refund?
Refunds must be claimed within 3 years of the return due date or within 2 years of being paid, whichever is later.
316
How are bad debt losses handled in a Corporation?
Bad debt losses are classified as ordinary
317
What is the order of treatment in a Corporation's distribution to a shareholder?
1. Distribution is a dividend to the extent of current and accumulated earnings and profits 2. Shareholder basis is then exhausted 3. Remainder, if any, is a Capital Gain
318
How is a corporation governed?
Board adopts Corporate Bylaws to govern company business
319
What are non-conforming goods with respect to buyer protection?
Buyer can reject some or all of the shipment if the seller didn't perform as agreed and ship what was expected Must give notice Must give seller a chance to remedy the situation
320
Who can sue under the Securities Act of 1934?
Purchases and Sellers of Securities
321
When must a tax exempt organization file a 990-T for Unrelated Business Income?
If a tax exempt organization has more than $1,000 of UBI, it must file a Form 990-T
322
What are the characteristics of a deed?
Must be in writing Signed Description of Property Delivered Recorded
323
How does an individual capital loss carryover differ from a corporate capital loss carryover?
Corporate capital loss carryovers may be carried back 3 years and forward 5 years. Individual capital losses are carried forward indefinitely. Individual capital loss carryovers retain their character (STCL or LTCL). Corporate loss carryovers are carried forward as STCL only.
324
How does the Volcker Rule limit banking institutions?
Limits banking institutions from owning more than 3% of a hedge fund's total ownership interest Limits banking institutions from owning interests in hedge funds that exceed 3% of their Tier 1 Capital (Common Stock + Retained Earnings + non-redeemable; non-cumulative Preferred Stock)
325
What are the basic rights of a debtor under the Fair Debt Collection Practices Act?
Basically - your creditors have the right to collect from you; but not abuse you or embarrass you The can't contact you once you're represented by an attorney They can call other people to find out where you are; but they cannot identify themselves as collectors They must stop calling you at work if you send them a certified letter that says my employer doesn't allow me to take calls at work. They must call you only at reasonable hours of the day - according to your time zone; not theirs
326
What is Agency Law?
Agency Law deals with someone's ability to bind you to a contract with a third party
327
What are the rights of found property?
Lost property - Finder's rights to property are less than Owner's Abandoned property - Finder's rights to property are greater than Owner's
328
What are the requirements for a Power of Attorney (POA)?
Must be in writing Must be signed by person granting the POA Ends upon death of Principal General POA - Agent authorized to handle all affairs Special POA - Agent authorized to handle only specific affairs
329
What income can passive losses offset on a 1040?
Only passive income such as rental income or limited partnership income. Note: Wages are ACTIVE (cannot be offset by passive) and Interest/Dividends are PORTFOLIO (cannot be offset by passive)
330
When is the mid-quarter convention used?
For depreciation when 40% or more of all purchases occur in 4th quarter.
331
What is the basic calculation for accumulated earnings and profits in a Corporation?
Beginning Accumulated Earnings and Profits + Net Income + Gain on Distribution (if not already in book income) - Distribution (but cannot create a deficit) - NOL of prior years = Ending Accumulated Earnings and Profits
332
In how many states must a corporation incorporate?
Corporations are only incorporated in one state Become adomestic corp. in that state Become aforeign corp. in any other state they do business in
333
When can preferential transfers be voided by a bankruptcy (BK) trustee?
Made within One Year of BK to insider - Corporate officers/directors; Partners; Relatives Made within 3 Months of BK non-insider Creditor receives larger payment than BK liquidation would have granted
334
How is Estate tax handled with respect to a beneficiary?
Property received through inheritance not income to recipient Property value is FMV at date of death or 6 months later If property is sold prior to 6 month date and the alternative date is used, FMV at date of sale is used to value property Basis in property automatically assumes LT holding period
335
What are the requirements for a 501(c)3 organization?
Organized and Operated exclusively for exempt purposes No earnings can benefit an individual or private shareholder Cant attempt to influence legislation as a major part of its activities Cant campaign politically
336
How much ordinary income can be offset by an INDIVIDUAL's capital losses?
$3;000 per year. Unused is carried forward and taken $3;000 each year. No carryback is allowed.
337
What is a Requirements Contract? How are they limited?
These are contracts where someone becomes the exclusive provider of something in exchange for consideration Companies can't get locked in to one and then have market conditions force them to sell something at what has become an unreasonable price
338
What is considered the biggest change to financial regulation since the Great Depression of the 1930s?
The Dodd-Frank Wall Street Reform Act of 2010
339
What are the requirements for a voluntary bankruptcy filing under Chapter 7?
Must pass means test Your income must be below the median income for your state (Note - median; i.e. middle; not mean; i.e. average) Credit card companies made it harder for people to declare Chapter 7 when they lobbied Congress in 2005
340
When is property transferred in an Estate?
After the death of the donor
341
How long does the taxpayer have to petition the court for appeal after an audit?
90 days
342
What is the basis of Gifted property for the recipient?
If a loss on sale, basis is FMV on the date of the Gift If a gain on sale, basis is same as donor's basis No G/L if donor basis is less than sales price, and sales price is less than FMV @ Gift date
343
What are the basic actions that occur in a bankruptcy?
Bankruptcy gives creditors protection from their creditors and stops them from either permanently (Chapter 7) or temporarily (Chapter 11 or 13) collecting a debt. The filing halts collection activity; grants automatic stay (with certain exceptions), and stops creditors from suing debtor.
344
When does title and risk of loss transfer on a sale of goods?
If terms are: FOB shipping point: Title transfers at point of shipment (i.e. when loaded on truck) FOB destination: Title and risk transfers once item is delivered
345
Under the JOBS Act Title V - Private Company Flexibility and Growth, what is the shareholder limit if there are less than 500 non-accredited shareholders?
2,000
346
Name the Basics of Partnership Formation - Form of agreement and intent
Agreement can be very informal - either ORAL; IMPLIED or WRITTEN Intent is to make a profit
347
In general; what is a partner's basis in partnership property purchased?
Partner's basis is basis of goods exchanged or for services exchanged is FMV of partnership interest received. If purchased; purchase price less liabilities incurred = basis. For a gifted interest in a partnership; gift basis rules apply.
348
What is a check?
A check is a type of draft that is payable ON DEMAND; payable to order of drawer or bearer Drawer - person writing the check Payee - person being paid Drawee - the bank
349
How is excess 179 expense carried forward?
Carry forward to next year. Use in any year is limited to taxable income.
350
How is the dividends received deduction (DRD) calculated, and what are the limitations?
80% Interest = 100% DRD 20-79% = 80% DRD less than 20% = 70% DRD Only allowed if no consolidated return is filed. Qualified dividends from domestic Corporations only.
351
Are Agents who act outside of their authority liable?
Agents who act outside of their authority will be liable for the act Exception - Principal ratifies the contract which relieves Agent of liability In order to ratify; Principal must know all of the facts and must ratify before third party cancels agreement If Principal keeps the benefits of the contract; ratification is implied Contract must be 100% ratified or there is no contract
352
What items DECREASE partnership basis?
Money distributed Adjusted basis of property distributed Partners's share of ordinary losses Partnership is relieved of a liability (considered a distribution)
353
What investment interest is never deductible?
Investment interest expense on tax-free securities is not deductible.
354
What are the key points of the 1933 Securities Act?
Governs Initial Public Offerings (not subsequent sales). Covers registration statements and accompanying information filed with SEC. Information must include audited financial statements & a prospectus. Note: Even if a company is exempt from registering under the 1934 Act; they still must adhere to the anti-fraud provisions of the Act
355
How do guaranteed payments affect partnership basis?
They do not affect basis- they are already included in ordinary income; which affects basis.
356
What does the Securities Act of 1934 govern?
The trading/selling of securities after the IPO
357
How are medical expenses deducted on a 1040?
On Schedule A: Amounts in excess of 10% of AGI may be deducted
358
What is a guarantor?
Similar to surety; but a guarantor is secondarily liable
359
What are the basic rules for filing a form 1120?
Return is due regardless of income level Return is due 3/15 if on a calendar year basis, or 2 1/2 months after end of fiscal year An automatic six-month extension is available
360
Describe the requirements for a personal holding company.
No banks or financial institutions can be PHCs 5 or fewer individuals own more than 50% of the stock 60% of the PHC's income must be from passive means PHC tax is self-assessing - 20% tax rate on undistributed PHC Income
361
Name the securities registered under the Securities Act of 1933.
Stocks Stock Options Stock Warrants Limited Partnership Interests - General Partnerships not allowed Bonds
362
When a past error is found in a client's tax return; what should an accountant do?
If a past error is found; accountant should inform client of this error. Contacting the IRS is NOT required. If client won't fix it; then the accountant should reconsider whether they want to do business with the client
363
How is a Gift taxed if a recipient gains a future ownership in the Gifted property?
Recipient must gain ownership and all rights to property to get the annual exclusion. If recipient merely gains a future ownership, then the present value of the Gift is 100% taxable to donor and cannot exclude from Gift tax calc
364
What is the order in which basis is adjusted in a partnership?
1. Increase basis (all items; including tax-exempt income) 2. Distributions 3. Losses (limited to basis)
365
What is the Accountant's Liability to Third Parties - Privity Defense?
Lack of privity defends against contract breach and negligence. NOT a defense against fraud.
366
What is distributable net income (DNI)?
DNI = Taxable Income Expenses (from income production) Trust beneficiaries only pay tax if earnings are distributed Estate beneficiaries pay tax on DNI, regardless if distributed
367
When does automatic perfection occur in a secured transaction?
Store sells a consumer good on credit - Store retains security interest A bank finances the purchase of a consumer good - Bank retains security interest
368
How are profits shared in a partnership?
Profit sharing is equal by default A. Unless partnership agreement says otherwise B. Unless specified; sharing of losses follows same pattern as sharing of profits
369
On a commercial paper; which value will supersede - words or numerical dollar amount?
Written amount supersedes the numerical dollar amount. For example; if the words say One hundred dollars and the numerical amount states $1000.00; the value of the paper will be $100.00.
370
What is the holding period of an asset that has been contributed to a partnership?
The partnership inherits the holding period of the asset contributed. The exception of inventory- the holding period begins when contributed.
371
What business gift amounts are deductible on Schedule C of form 1040? What amount for service awards?
$25 per person for gifts Service awards up to $400
372
What ratio is applied to principle payments in an installment sale to determine the gain in a given year?
Gross Profit / Contract Price
373
What are the rights of a General Partner in a partnership?
General Partners have joint control over the management of the partnership and its affairs Unanimous vote needed to change the structure of the partnership Each partner has full right to inspect partnership accounting and business Partner has the authority to assign their interest to another partner
374
What are the steps in applying a capital gain or loss?
Net all STCG and STCL Net all LTCG and LTCL Add together Deduct $3;000
375
What INCREASES partnership basis?
Partnership getting a loan Capital contributions Ordinary income Capital gains Tax-exempt income
376
How is S-Corporation shareholder basis calculated?
Beginning Basis +Share of Income Items (including non-taxable income!) -Distributions (cash or property) -Non-deductible expenses -Ordinary Losses (but don't take income below zero) = Ending basis
377
What interest income is tax free?
State & municipal bond interest US EE Savings Bond interest (note: HH bond interest is taxable)
378
True or false? Partnerships are a taxable entity.
False. Income and expenses flow through to the partner to be taxed via a Form K-1.
379
What is the treatment of a loss in a complete Corporate liquidation?
Corporation: Depends on if property is capital in nature, otherwise ordinary loss Individual: capital loss only
380
How is minor income taxed at a parent's rate calculated (AKA kiddie tax)?
Child's unearned income - early withdrawal penalties - $1,000 - Greater than $1,000 or child's itemized deduction related to unearned income = Amount taxed at parents' rate
381
When exchanging property for a partnership interest; how is gain or loss recognized?
Neither gain nor loss is recognized in an exchange of property for a partnership interest. It is a non-taxable event.
382
What are the requirements for taking an ordinary loss on Section 1244 small business Corporation stock?
Taxpayer must be original stock owner, and either an individual or partnership $50k (single) or $100k (MFJ) limit - remainder is a capital loss Must have been issued in exchange for money or property (not exchanged for services) Shareholder equity must not be in excess of $1 million Both common and preferred stock is allowed
383
How is an Estate's NOL handled?
Estates can have a Net Operating Loss Any unused NOL flows through to the beneficiaries
384
How are Corporate losses carried back/forward?
Corporations can carry back losses 3 years and carry forward losses 5 years as a Short Term Capital Loss
385
What is the contract price in an installment sale for income tax purposes?
Contract Price = Sales Price - Liability assumed by buyer
386
What is tenancy in common?
Undivided interest in a portion of the property Upon death; property goes to decedent's heirs
387
What are the registration form options under the 1933 Securities Act?
S-1 - Long Form or S-2 and S-3 - Less Detailed and preferred by issuers
388
What happens during the winding up of a partnership and in what order?
1. Creditors get paid; Partners can also be creditors 2. Distributions in arrears get paid 3. Partners get return of Capital accounts 4. Any remaining distributions Note: NO documents need to be filed with state to dissolve general partnership.
389
What characteristics will cancel the negotiability of a commercial paper?
An additional promise is stated in addition to the promise to pay (like the option to purchase Real Estate) The promise to pay occurs after some action by another party or an event; it cancels negotiability Cannot allow for an alternative such as payment or some other action by the maker Note: a stated amount of payment plus a stated % of interest is OK
390
Who is considered a related party in a property transaction? How does it affect the transaction?
Ancestors; siblings; spouse; descendants; corporation or partnership where you're a 50% shareholder Seller cannot take a loss on sale to a related party; but gain is always recognized. Related party gets to use the disallowed loss when they sell. Related party's holding period begins when they acquire the property. In-laws are NOT related parties.
391
What limitations does a limited partner have in a Limited Partnership?
1. They have no authority as an agent to bind the partnership 2. They can't participate in management decisions and maintain limited liability.
392
Under the 1933 Securities Act; Regulation D; what are Rules 504; 505 and 506?
Rule 504- Max Amount per year: $1M; Max Investors: Unlimited Rule 505 - Max Amount per year: $5M; Max Investors: 35 Unaccredited or Unlimited Accredited Rule 506 - Max Amount per year: Unlimited; Same as 505; but Unaccredited investors must be sophisticated
393
What are the basic characteristics of a Chapter 11 bankruptcy (business repayment) filing?
Allows a business a reprieve from creditors Creates a payment plan for the debt Business remains in operation At least 2/3 of each debt class of creditors must consent to reorganization Ch. 11 Involuntary petitions are allowed
394
What are the ACE adjustments in the C-Corporation AMT tax calculation?
Municipal Bond Interest Life Insurance Proceeds 70% Dividends Received Deduction Organizational Expenditures must be capitalized, not amortized Note: AMT paid gets carried forward indefinitely, but never carried back
395
Which itemized deductions are not subject to phaseout based on income or other factors?
Medical Casualty Gambling Investment Interest Expense
396
What are the key aspects of a corporation's board of directors (BOD)?
Elected by shareholders Owe fiduciary duty to corporation Must act in good faith to avoid being liable for bad judgment Good faith is NOT a defense for negligence
397
How is an Agency terminated?
\*Both Agent and Principal agree to terminate \*Principal fires Agent \*Agent fires Principal \*Agent breaches their contract by doing something like violating their obligation to act as a fiduciary to Principal
398
How is a partner's share of an ordinary gain calculated?
FMV of Assets (non-capital) - Adjusted basis of assets = Ordinary gain x Partner's % interest = Partner's share of gain Note: No gain or loss will be recognized by a partnership upon distribution of property.
399
Name the Requirements for an Accountant to be liable for fraud under the Securities Act of 1934.
Damages Material Misstatements Reliance on financial statements Scienter or reckless disregard for the truth
400
How is the taxable year of a partnership determined?
It must be the same as 50% of the partners and use the same tax year for 3 years once adopted.
