Chapter 2 Flashcards
1
Q
What are the basic actions that occur in a bankruptcy?
A
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.
2
Q
For what debts does bankruptcy NOT stop collections?
A
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
3
Q
How does bankruptcy of a corporation affect the owner’s ability to file bankruptcy?
A
It doesn’t; because the corporation is a separate legal entity.
Under bankruptcy; corporations are dissolved
Under bankruptcy; individuals are discharged
4
Q
What key action will cause a bankruptcy discharge to be denied?
A
If a debtor fails to keep good records or falsifies documents; a discharge will be denied
5
Q
What are the basic characteristics of a Chapter 7 bankruptcy (liquidation)?
A
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)
6
Q
What are the requirements for a voluntary bankruptcy filing under Chapter 7?
A
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
7
Q
What are the requirements for an involuntary bankruptcy filing under Chapter 7?
A
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
8
Q
What entities are disallowed from involuntary Chapter 7 bankruptcy filings?
A
Charities
Farms
9
Q
How can a debtor reclaim possession of their property from the interim bankruptcy under Chapter 7?
A
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
10
Q
What are the basic characteristics of a Chapter 11 bankruptcy (business repayment) filing?
A
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
11
Q
What are the basic characteristics of a Chapter 13 bankruptcy (personal repayment) filing?
A
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
12
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
13
Q
How and when is a bankruptcy trustee appointed?
A
Optional - Creditors decide
Can be elected by creditors or can be appointed by the court
14
Q
What actions can a bankruptcy trustee take with respect to preferential creditor payments in a bankruptcy?
A
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)
15
Q
When can preferential transfers be voided by a bankruptcy (BK) trustee?
A
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
16
Q
What is the treatment of a secured creditor in a bankruptcy?
A
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.
17
Q
What is the order of priority given to unsecured creditors in a bankruptcy?
A
- BK Trustee and Attorney fees get paid before all other unsecured credit cards
- Salaries required to continue business once BK proceedings begin
- Any claims filed resulting from business operations that occur after involuntary BK is filed
- Wages owed to employees
- Retirement contributions within last 6 months
- Consumer deposits for undelivered goods
- Child Support & Alimony
- Taxes
- Other general unsecured claims
18
Q
What are key aspects of a bankruptcy involving a landlord or leases under Chapter 7?
A
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
19
Q
What is the bankruptcy estate?
A
The pool of assets available to creditors until liquidation
20
Q
What assets are exempt from creditors in a bankruptcy estate?
A
Social security
Disability payments
Unemployment; Child Support; Alimony; Wages; Pensions; Annuities to the extent that they provide reasonable support for debtor and dependents
21
Q
How long after a Chapter 7 bankruptcy filing can creditors claim inheritance or insurance payments for repayment?
A
Inheritance/Insurance payments received within 180 days of filing for a Chapter 7 bankruptcy become part of the BK Estate
22
Q
What is a garnishment with respect to a bankruptcy?
A
Court allows a creditor to garnish or take a portion of the debtor’s paycheck
23
Q
What is a mechanics lien?
A
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
24
Q
What is an artisan’s lien?
A
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
25
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
26
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
27
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
28
What is a guarantor?
Similar to surety; but a guarantor is secondarily liable
29
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
30
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.
31
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
32
What basis do shareholders and Corporations use for property?
They both use ADJUSTED BASIS, NOT FMV of property.
33
Describe how loss is taken on Section 1244 small business Corporation stock?
A loss on worthless stock is an ordinary loss.
34
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
35
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
36
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.
37
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
```
38
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
39
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
40
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
41
How are gains and losses handled with respect to a Corporation's transactions involving its own stock?
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.
42
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
43
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
44
How are excess charitable contributions treated in a C-Corporations?
Excess charitable contributions get carried forward 5 consecutive years (No Carryback)
45
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
46
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.
47
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
48
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
49
How are capital losses handled in a C-Corporation?
Capital Losses are deductible only to the extent of Capital Gains
50
How are net short term capital gains taxed in a C-Corporation?
Net Short Term Capital Gains are taxed at ordinary income rates
51
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
52
How are bad debt losses handled in a Corporation?
Bad debt losses are classified as ordinary
53
What is the casualty loss floor for a C-Corporation?
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)
54
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
55
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.
56
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.)
57
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
58
What is the purpose of Schedule M-3 on a Corporate tax return?
Like M1, but for Corporations with $10M+ in assets
59
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
60
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)
61
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
62
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
63
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
64
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
65
What is the treatment of the liquidation of a subsidiary?
No G/L to parent company
66
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
67
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
68
How is Corporate accumulated earnings tax (AET) different from PHC taxation?
Not Self-Assessing like a PHC
69
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)
70
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
71
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
72
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
73
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)
```
74
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
75
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
76
How is Gift taxation different from Estate taxation?
Property transferred while taxpayer is living
77
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
78
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
79
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
80
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
81
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
82
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
83
How/when are Gift tax returns filed?
Calendar-year basis only
Due April 15
84
What are the basic characteristics of complex Trust?
Income distributions are optional
Accumulation of income ok
Charitable contributions ok
Contributions using tax-exempt income are not deductible
Allowed personal exemption of $100
Key Point: Distribution of Trust corpus (principal) ok
85
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
86
How are Net Operating Losses handled in a Trust?
Trusts can have a Net Operating Loss
Any unused NOL flows through to the beneficiaries
87
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
88
When is property transferred in an Estate?
After the death of the donor
89
What amount of a decedent's Estate is exempt from Estate Tax?
The First $5,250,000 is exempt with a 40% tax on amount above that
90
How are a decedent's medical expenses handled with respect to an Estate?
Medical expenses paid after death, but incurred within 1 year of death go on decedents personal tax return
91
How is an Estate's NOL handled?
Estates can have a Net Operating Loss
Any unused NOL flows through to the beneficiaries
92
What does a gross Estate consist of?
Cash and Property FMV at death, or alternate valuation.
93
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
94
What is tenancy by entirety?
1/2 of marital assets go to deceased spouses Estate
95
What is tenancy in common in an Estate?
A, B, and C own property
If A dies, FMV of As share goes to heirs
96
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
97
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
98
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
99
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
100
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.
101
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
*Tuition - can't take AOC/Lifetime Learning Credit for same expense
*Teacher expenses
*Attorney fees in discrimination lawsuit
102
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
103
Characterize the following carryover: Passive Activity Loss
No carryback
Can carry forward indefinitely
104
How is excess 179 expense carried forward?
Carry forward to next year.
Use in any year is limited to taxable income.
105
How long can investment interest expense in excess of investment income be carried forward?
Indefinitely.
106
How long is the carry forward for charitable contributions?
Can be carried forward 5 years.
107
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.
108
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).
109
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.
110
What ratio is applied to principle payments in an installment sale to determine the gain in a given year?
Gross Profit / Contract Price
111
What is the contract price in an installment sale for income tax purposes?
Contract Price = Sales Price - Liability assumed by buyer
112
On an individual return, regular mortgage interest on what loan amount is deductible?
$1,000,000
113
Interest on home equity loans up to what amount are deductible on an individual tax return?
$100,000
114
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
115
What income can business losses offset on a 1040?
They may only offset active business income.
Note: W2 wages are considered active business income.
116
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)
117
Are interest and dividends active or passive income?
Neither. They are portfolio income.
118
What is (are) the depreciation convention(s) for personal property?
Mid-year/Mid-quarter
119
When is the mid-quarter convention used?
For depreciation when 40% or more of all purchases occur in 4th quarter.
120
What depreciation convention is used for real property?
Mid-month
121
What depreciation life and convention are used for leasehold improvements?
15 year straight line (S/L)
122
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
123
How are medical expenses deducted on a 1040?
On Schedule A:
Amounts in excess of 10% of AGI may be deducted
124
Which personal insurance premiums are not deductible as medical expenses on Schedule A?
Accident or disability insurance premiums are not deductible.
125
Under what circumstances can medical expenses paid on behalf of another be deducted on someone's Schedule 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.
126
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.
127
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.
128
What investment interest is never deductible?
Investment interest expense on tax-free securities is not deductible.
129
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.
130
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
131
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.
132
Does a casualty loss affect the basis of property?
No. It decreases the fair market value (FMV) of the property.
133
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
134
What are the miscellaneous deductions on Schedule A, and how are they deducted?
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
135
Which itemized deductions are not subject to phaseout based on income or other factors?
Medical
Casualty
Gambling
Investment Interest Expense
136
Define qualifying child for most individual tax factors.
Must be resident of North America
Under age 19, or under age 24 if a student
137
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
138
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
139
Can spouses married filing jointly use different accounting methods?
Yes, if they each own a small business. All non-business income is cash basis.
140
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)
141
What is a refundable tax credit? Which individual tax credits are most commonly refunded?
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.
142
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.
143
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)
144
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)
145
Which depreciation table is used for personal tangible property related to farming?
MACRS 150
146
How long does the taxpayer have to petition the court for appeal after an audit?
90 days
147
If no petition to appeal is filed, how long does a taxpayer have to pay tax due after an audit?
10 days
148
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.
149
How is non-business bad debt deducted on a 1040?
It is treated as a STCL
150
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.
151
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.
152
When are scholarships not taxable?
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.
153
What interest income is tax free?
State & municipal bond interest
US EE Savings Bond interest (note: HH bond interest is taxable)
154
Which dividend income is tax free?
S-corporation (actually distributions)
Life insurance
155
How much social security income can be taxed for individuals in higher income brackets?
Up to 85%
156
Is unemployment compensation taxable?
Yes.
157
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.
158
Are workman's compensation insurance benefits taxable?
No - similar to an award for damage to make a person whole.
159
Which of the following are taxable: Child Support, Divorce Property Settlements, Alimony
Alimony IS taxable.
Child support and divorce property settlements are NOT taxable.
160
Adoption expenses - Are they deductible?
NO, they are not deductible. However tax benefits are available through the adoption CREDIT.
161
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
162
How are Net Operating Losses (NOLs) utilized?
Can be carried back 2 years
If any left, can be carried forward 20 years.
163
Which IRA contributions are deductible?
Traditional IRA = deductible
Roth IRA = not deductible
164
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.
165
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
166
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
167
What is the Interstate Income Act of 1959?
Restricts a state's authority to tax interstate commerce
168
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)
169
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
170
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
171
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
172
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.
173
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.
174
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.
175
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.
176
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.
177
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.
178
What is the tax treatment of startup costs for a partnership?
Tax treatment is the same as that of an individual taxpayer.
However syndication fees are not deductible or amortized.
179
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)
180
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
181
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.
182
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.
183
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)
184
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.
185
Which items are not deductible on Schedule K of form 1065?
Foreign tax paid
Investment interest expense
Section 179 expense
Charitable contributions
Mnemonic: IFC179
186
Which items are not counted as income on Schedule K of form 1065?
Passive Income
Portfolio Income
1231 Gain or Loss
Mnemonic: PP1231
187
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
188
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)
189
What INCREASES partnership basis?
Partnership getting a loan
Capital contributions
Ordinary income
Capital gains
Tax-exempt income
190
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.
191
How do guaranteed payments affect partnership basis?
They do not affect basis- they are already included in ordinary income; which affects basis.
192
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)
193
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.
194
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.
195
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.
196
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.
197
How is gain or loss on sale of a partnership interest calculated?
Gain or Loss = Amount realized on sale - basis in partnership interest
198
What is the new basis of a partnership interest sold?
Basis = Capital account + Liabilities assumed
199
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.
200
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.
201
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.
202
When can a LOSS occur in a partnership distribution?
Only in a liquidating distribution.
203
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.
204
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.
205
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
206
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.
207
What is the holding period on a stock dividend?
Holding period of new stock received from a dividend takes on the holding period of the original stock
208
What property is eligible for like-kind exchange treatment?
Real for real or personal for personal business property only
US property only
209
What is BOOT in a like-kind exchange?
Cash received + unlike property received + liability passed to other party
210
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
211
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.
212
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
213
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
214
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.
215
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
216
What assets are NOT capital assets?
Inventory; Business interest; Accounts Receivable; Covenant not to compete
Goodwill IS a capital asset
217
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
218
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.
219
Which property is governed by section 1231?
Real or Personal Business Property held more than a year
Inventory is never 1231 Property
220
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
221
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
222
What property qualifies for section 1250 treatment; and how are gains/losses handled?
1250 property is Real Estate that is not 1231 Property
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
223
When are 1231; 1245 and 1250 gains or losses always ordinary?
When the asset is held less than one year.
