Federal Taxation Flashcards
(363 cards)
1
Q
The highest individual income tax rate after ATRA was enacted.
A
39.60%
2
Q
The highest capital gains tax rate after ATRA.
A
20%
3
Q
The estate tax exclusion after ATRA was enacted.
A
$5m (to be adjusted for inflation).
4
Q
Income level at which highest tax bracket starts for married couples filing jointly.
A
$450,000 (to be adjusted for inflation).
5
Q
What is the percentage of ACA’s Medicare surtax on unearned income?
A
3.8% (of lesser of NII or excess of AGI over AGI thresholds).
6
Q
What is the ACA cut-off for “large employers” subject to employer mandate penalty?
A
50 FTEs.
7
Q
What is the ACA Individual Mandate Penalty after 2016?
A
$695 per adult (which will be inflation adjusted).
8
Q
What does the acronym PPACA mean?
A
The Patient Protection and Affordable Care Act, more commonly known as the ACA or Obamacare.
9
Q
What is the threshold to begin deducting medical expenses under the PPACA?
A
10% of AGI (raised from expenses above 7.5% before the PPACA).
10
Q
How does one determine the basis of gifts?
A
- Generally have a carryover basis; 2. A gift with adjusted basis > Fair Market Value (FMV) takes FMV basis if property is sold at a loss.
11
Q
Define “capital assets.”
A
Assets other than inventory, accounts receivable, notes receivable, assets used in a trade or business owned for more than 1 year, or creative works (in the hands of the creator).
12
Q
Define “return on capital.”
A
The cost of goods or property sold is recovered before any gain is realized.
13
Q
Define “Section 1231 assets.”
A
Realty and depreciable property used in a trade or business owned more than one year.
14
Q
How does one determine the basis of inheritances?
A
- Fair market value; 2. Always long-term holding period (except for 2010 when there was no estate tax).
15
Q
Define “Long Term Holding Period.”
A
More than 1 year.
16
Q
List the qualified small business stock exclusion of gain requirements.
A
- Stock held for more than five years after initial issuance; 2. Stock from active corporation with assets less than $50 million.
17
Q
What is the ordinary loss deduction limit on the sale of a worthless small business stock?
A
$50,000 ($100,000 if married filing joint).
18
Q
List the characteristics of ordinary loss deduction on sale of worthless small business stock.
A
- Corporation issued stock for less than $1 million; 2. Corporation must conduct an active business; 3. Taxpayer received stock from corporation in initial offering.
19
Q
Describe the elements of the net capital loss deduction for individuals.
A
- Deductible up to $3,000 per year; 2. For AGI; 3. Also limited to taxable income; 4. Excess loss carries forward; no limit on carryforward period.
20
Q
What is the maximum tax rate for capital gains from the sale of collectibles?
A
The maximum rate is 28%.
21
Q
What is the net capital loss limit for individuals?
A
The loss limit is $3,000.
22
Q
Define “long-term assets.”
A
Assets held over one year.
23
Q
How can corporations use their capital loss deduction?
A
- Can only use capital losses to offset capital gain net income; no deduction for net capital losses; 2. Unused losses are carried back three years and forward five years.
24
Q
What is the percentage of qualified small business exclusion of stock gain?
A
50% (increased to higher levels for certain temporary periods).
25
What depreciation is subject to recapture under Section 1250?
Excess depreciation (depreciation claimed over straight-line).
26
What is the maximum tax rate for gain attributable to depreciation claimed on real estate?
25% for straight line depreciation recapture.
27
What is the period of time that lookback rules apply to Section 1231 gains?
5 years.
28
What depreciation is subject to recapture under Section 1245?
All depreciation claimed.
29
Define "Section 1245 property."
All property other than land and building.
30
Define "listed property."
Assets, such as computers and vehicles (but not cell phones), that are commonly used for business and personal purposes.
31
List the alternatives to the Modified Accelerated Cost Recovery System (MACRS).
1. Straight line for personalty; 2. AMT system - 150% declining balance; 3. Alternative depreciation system-straight line over extended life; 4. Units of production.
32
What is the depreciation method for realty under the Modified Accelerated Cost Recovery System (MACRS)?
The depreciation method is straight line.
33
What is the general convention for personalty under the Modified Accelerated Cost Recovery System (MACRS)?
The general convention is mid-year.
34
What is the general convention for realty under the Modified Accelerated Cost Recovery System (MACRS)?
The general convention is mid-month.
35
Under what circumstances can a convention other than the mid-year convention be used for all personalty?
A mid-quarter convention is used for all personalty if more than 40% of personalty is purchased in last quarter of the year.
36
What criteria should be considered in making a determination to expense an asset for income tax purposes?
1. Tangible Personalty; 2. Lesser of business income or $500,000 in 2012; 3. Phased out dollar for dollar if tangible personalty asset purchases exceed $2,000,000 in 2012.
37
Describe the business use test for listed property.
1. Business use must exceed 50% of total use; 2. Business use is limited to use in the trade or for the convenience of the employer; 3. Failure to meet business use means cost recovery limited to straight line; 4. But note that business and investment use can be depreciated.
38
What is the class life for realty?
39 years (27 1/2 years for "residential").
39
What is the depreciation method for personalty under the Modified Accelerated Cost Recovery System (MACRS)?
The depreciation method is double declining balance.
40
Define "involuntary conversion."
The result of a casualty (an unexpected, unavoidable outside influence like a storm, fire, shipwreck, a theft, or a condemnation).
41
What is the replacement period for involuntary conversions (except for condemned-business realty)?
The replacement must be made within two years from END of tax year in which the gain is realized.
42
What are the key differences between like-kind exchange and involuntary conversion rules?
Like-kind exchange rules are mandatory but involuntary conversion rules are elective. Like-kind exchange rules apply to gains and losses but involuntary conversion rules apply only to gains. Type of replacement property under involuntary conversion rules is narrower than like-kind property.
43
Is realty considered like-kind property?
All Realty is considered to be like-kind; so land is like-kind with a building.
44
List the requirements for deferral due to involuntary conversion.
1. Disposition qualifies as involuntary conversion; 2. Must replace property with property similar or related in service or use; 3. Must be made within two years from end of tax year of conversion (three years in the case of condemnation or threat of condemnation of real property held for productive use in a trade or business or for investment); 4. Boot causes recognition of realized gain.
45
What is the adjusted basis of replacement property after involuntary conversion?
Cost reduced by any deferred gain.
46
List the qualifying property for like-kind exchanges.
1. Business or investment property; 2. Not inventory or receivables; 3. Must be "like-kind;" 4. Cannot be across US borders; 5. Special rules when related taxpayers.
47
Describe the wash-sale rule.
Losses from the sale of securities are not recognized if similar securities are purchased 30 days before or after the sale.
48
Describe the principal residence-ownership test.
The taxpayer must have owned the residence for at least two of the preceding five years.
49
Describe the principal residence-frequency test.
The exclusion is available no more frequently than every two years; limited exceptions.
50
What are the requirements for the $250,000 exclusion on sale of a residence rule?
1. Frequency test; 2. Ownership test; 3. Use test.
51
What is the gain on the sale of residence exclusion rule?
A taxpayer may exclude gains up to $250,000 ($500,000 joint return) on the sale of residence.
52
Describe the principal residence-use test.
The residence is used by taxpayer as a principal residence for at least two of the preceding five years.
53
Are losses on sales by related parties recognized?
Losses from sales of business/investment property to related parties are not recognized.
54
Describe the interest-exclusion rule.
Interest on state or local governmental obligations is excluded.
55
When can interest on Series EE savings bonds be excluded?
1. Taxpayer incurs higher education expenses in year bonds are cashed in; 2. The exclusion is available only for bonds that are issued to individuals who are at least 24 years old.
56
Describe the claim-of-right rule.
Requires the taxpayer to include property in income in the period in which an apparent claim to the property materializes, even if it is possible that this income may have to be returned in the future.
57
How does one determine the amount of property dividend that should be included in income?
Value received to extent paid from earnings and profits.
58
Describe the tax-benefit rule.
Requires a taxpayer to include an expense reimbursement in income if the expense was deducted in a prior period and provided a tax benefit in that period.
59
What is the tax treatment of proportionate stock dividends and splits?
1. Not a taxable event; 2. Taxpayer must adjust basis per share; 3. Option to receive cash instead triggers dividend income.
60
Describe the constructive receipt rule.
A cash-basis taxpayer must include property in income in the period in which the right to (or control of) the property is acquired, even if no actual cash receipt.
61
What is the tax treatment of child support?
Never taxable to the recipient, no deduction to payor.
62
Describe the personal injury exclusion rule.
Compensatory damages for physical injuries or sickness only are excluded from income.
63
What is the tax treatment of alimony?
1. Taxed to the recipient; 2. Allowed as a "for AGI" deduction to payor.
64
Describe the alimony front-loading rules.
Require recapture of deductions and income if alimony payments decline more than $15,000 over the first 3 years after the divorce.
65
What are the requirements to qualify for alimony?
1. Payment must be in cash or via expense payment; 2. Must be contingent on recipient still being alive; 3. Required by a written agreement or decree; 4. Not identified as "non-alimony."
66
What is the tax treatment of gifts?
1. Gifts are excluded from income; 2. Income accrued up to date of gift is taxable to donor; after, to donee.
67
Are scholarships taxable?
1. Generally excluded up to amount of tuition and expenses; 2. No services can be required; 3. Student loans forgiven after a public service requirement are excluded from gross income of the student.
68
What is the treatment of life insurance proceeds?
Proceeds of life insurance received due to the death of the insured are excluded from income.
69
Are prizes and awards subject to taxation?
Generally taxed.
70
When are leasehold improvements recognized as income?
The fair value of leasehold improvements is income to the landlord if the improvements are made in lieu of rent.
71
What costing methodology is required for the production of goods for sale?
Full absorption costing.
72
Describe the cash method of accounting.
Recognizes income (and expenses) in the year in which payment is received (or paid.)
73
What entities are required to use the accrual method for Sales and Cost of Goods Sold?
Taxpayers for whom sales of inventory constitute a substantial source of income.
74
Describe the hybrid method of accounting.
Allows cash basis for all income and expenses except that sales and purchases of inventories must be accounted for under the accrual method.
75
Under what circumstances are health insurance proceeds excluded from income?
1. Excluded if taxpayer paid premiums; 2. Excluded if employer paid premiums and reimbursement is for qualified medical expenses.
76
A tax payer can generally exclude the value of an employee discount that an employer provides an employee from the employee's wages, up to what limits?
1. 20% of value of services; 2. Average gross profit percentage for goods.
77
Define the "working condition benefit."
A benefit provided by the employer that would be deductible if the employee had instead paid the expense, excluded from income if reimbursed by employer.
78
What insurance premiums paid for employees are excludible from the employer's income?
1. Group term life insurance up to $50,000 of coverage; 2. Health insurance premiums.
79
What types of fringe benefits are excluded from an employee's income?
1. Meals and lodging for convenience of employer; 2. Working condition expenses; 3. De minimus fringes; 4. No additional cost fringes; 5. Employee discounts; 6. Employee gifts (under $25) and safety/achievement awards.
80
What deductions are allowed for a Roth Individual Retirement Account (IRA)?
Zero. Deductions are never allowed for Roth IRA contributions.
81
What is the tax treatment of contributions of salary to "qualified" pension plans?
Deferred until distributions are made from the pension.
82
What is the maximum contribution that can be made to a 401(k) plan to reduce an employees taxable salary?
Allows voluntary employee contributions to reduce taxable salary up to a maximum of $17,500 for 2013.
83
What is the maximum contribution an individual can make to a Traditional or Roth Individual Retirement Account (IRA)?
Lower of $5,000 or earned income.
84
Lobbying expenses are not deductible if they are incurred to influence legislation at what levels of government?
No deduction for lobbying at the federal or state level.
85
List the requirements for business expense deductions.
1. Must have bona fide profit motive; 2. Must be ordinary and necessary; 3. Must be reasonable in amount.
86
What deductions are allowed for illegal drug businesses?
Only the cost of goods sold is allowed as a deduction.
87
List the types of deductions that are prohibited.
1. Personal expenses unless specifically allowed; 2. Expenditures benefiting more than 1 period must be capitalized; 3. Expenditures against public policy; 4. Expenses used to generate tax-exempt income.
88
What deductions are allowed "above the line" to arrive at adjusted gross income (AGI)?
1. Alimony payments; 2. Trade or business; 3. Rent or royalty expenses; 4. Losses; 5. 50% of Self-employment tax; 6. 100% of medical insurance for self-employed; 7. Moving expenses; 8. IRA and Keogh contributions; 9. Student loan interest.
89
What requirements must be met to deduct moving expenses?
1. New job must add 50 miles or more to commute; 2. Must be active in new job for 39 weeks during first 52 weeks after move; 3. Limited to reasonable amounts to move possessions, and transportation costs for taxpayer and others residing with taxpayer.
90
What is the limit on the student loan interest deduction?
Limited to $2,500 of interest on loans to finance the cost of higher education.
91
List the qualifying medical expenses that may be included in the computation of uninsured medical expense deduction.
1. Doctors, eyeglasses, dentists, and health insurance; 2. Cost of prescribed drugs; 3. Medical transportation and travel up to $50/night/person; 4. Costs of altering home for handicapped person to the extent FMV is not increased.
92
How is the uninsured medical expense deduction calculated?
Total medical expenses for taxpayer, spouse, and dependents reduced by 10% or 7.5% of AGI.
93
Describe what is allowable for the deduction for home mortgage interest.
1. Interest paid on debt relating to principal residence and second home is deductible; 2. Debt limited to $1 million on debt to purchase, construct, or improve residence; 3. Additionally, interest on $100,000 of home equity loans is deductible; 4. Points paid on loans can be deducted in a year of purchase or improvement;
94
What determines whether a taxpayer should take a standard deduction or an itemized deduction?
Taxpayer deducts greater of standard deduction or itemized deductions.
95
What is the investment interest deduction limit?
Limited to net investment income.
96
Describe the income tax deduction.
Personal income taxes imposed by state, local, or foreign governments are deductible; taxpayer can choose to deduct greater of state sales tax or state income tax.
97
Define "investment income."
Interest, dividends, ordinary gains (not long-term capital gains unless elected by taxpayer) less investment expenses.
98
What type of property taxes may a taxpayer deduct as an itemized deduction?
Taxes imposed on property owned by taxpayer that is used for personal purposes.
99
List the characteristics of a charitable contribution.
1. Must be made to qualifying organization (not political organizations); 2. Can include cash or property, but not services; 3. Written records of contribution are required; 4. Limited based on AGI.
100
What deductions are subject to a 2% floor?
1. Employee expenses not reimbursed under an accountable plan; 2. Investment expenses; 3. Tax return preparation expenses; 4. Home office expenses of an employee; 5. Hobby expenses.
101
What entities make up Public "A" charities?
Government subdivisions, hospitals, churches, schools, and similar institutions operated for religious, scientific, educational, or charitable purposes.
102
How is the 2% of the AGI floor limit calculated?
Applied by subtracting 2% of AGI from subjected deductions.
103
What floor limits are applied to casualty losses on personal use property?
1. $100 for each occurrence; 2. Total losses for the year are reduced by 10% of AGI.
104
Describe the limits on charitable contributions.
1. 50% of AGI 2. Deduction for contributions of long-term capital gain property to "A" charities limited to 30% of AGI; 3. Deduction for contributions of long-term capital gain property to "B" charities limited to 20% of AGI; 4. Unused deductions carry forward 5 years.
105
How is casualty loss calculated for business property?
Insurance proceeds - adjusted basis of damaged property.
106
What entities make up Private "B" charities?
Fraternal orders, cemetery companies, and private foundations operated for religious, scientific, educational, or charitable purposes.
107
List the personal expenses that are deductible from AGI.
1. Home Mortgage Interest; 2. Taxes; 3. Charitable contributions; 4. Casualty losses; 5. Medical expenses.
108
Define "casualty."
A sudden, unexpected event damaging or destroying an asset.
109
What types of organizations qualify for charitable contributions?
1. Public "A" Charities; 2. Private "B" Charities.
110
List the requirements for entertainment deductions.
1. Activity must have a business purpose; 2. Substantial business discussion must occur; 3. Club dues not permitted; 4. Contemporaneous written records are required; 5. Reduced by 50%, unless compensation to employee.
111
What deductions are allowed for business travel?
1. Limited to trips with business purpose; 2. Amount and purpose must be substantiated; 3. Meals and lodging when "away from home" overnight; 4. Meals are reduced by 50%.
112
List the requirements for deducting non-business bad debts.
1. Must be a bona fide loan; 2. Deductible as short-term capital losses in year of complete worthlessness; 3. Partial worthlessness not deductible.
113
List the requirements for deducting losses for worthless assets.
1. Asset must be totally worthless; 2. Treated as sold for no consideration on last day of taxable year.
114
List the requirements for deducting business bad debts.
1. Only use direct write-off method; 2. Deducted to extent loan is partially worthless.
115
Define "passive activity."
A profit-seeking activity in which the taxpayer does not materially participate in the management of the activity.
116
Describe the hobby deduction limitations.
1. Limited to gross profit generated by hobby; 2. Can only be deducted as 2% miscellaneous itemized deductions (except for mortgage interest and property taxes); 3. Expenses must be deducted in a specific order.
117
Describe the exception to passive loss rules.
1. Real estate professionals (minimum 750 hours employment/yr); 2. Active participation for management of rental realty.
118
List the requirements for home office deductions.
1. Business use must be exclusive and regular; 2. Must be a principal place of business or for the convenience of the employer; 3. Must be allocated between residence and office; 4. Limited to income after non-office expenses.
119
What are the requirements for active participation in the management of realty?
1. Taxpayer must own at least 10% of the property; 2. Taxpayer must significantly participate in decision making; 3. Maximum loss of $25,000; 4. Phased out at 50% rate for AGI exceeding $100,000.
120
List the order of hobby deductions that can be taken on a tax return.
1. Mortgage Interest and Property Taxes; 2. Cash expenses; 3. Depreciation.
121
Describe the general treatment of passive activity gains/losses.
The expenses and revenues from "passive" activities are combined (netted) and the expenses in excess of revenue (the passive loss) is suspended.
122
When does the hobby/business burden of proof shift to the Internal Revenue Service?
When the activity generates a profit in three out of five consecutive years.
123
Describe the qualifying relative gross income test.
The gross income of the dependent cannot exceed the exemption amount for the year, unless one of the following exceptions is met: 1. child of the taxpayer less than 19; 2. full-time student and less than 24.
124
Describe the qualifying child residence test.
The child must have the same residence as the taxpayer for more than one half of the taxable year.
125
Describe the exemption phase-out.
Two percent of total exemptions are lost for each $2,500 increment (or portion) above the trigger AGI.
126
Describe the residency test.
A dependent must be a citizen, resident of U.S., or resident of Canada or Mexico.
127
When parents are divorced, which parent is able to claim the dependency exemption for the child?
1. Parent with custody (over half the year) gets the exemption in the absence of any written agreement; 2. The custodial parent can waive the exemption to the other party (in writing by filing Form 8332).
128
Describe the qualifying child relationship test.
The child must be a natural, step, adopted, or foster child; a sibling or step-sibling; or a descendent of one of the above.
129
List the five tests for "qualifying relative."
1. Support test; 2. Gross income test; 3. Relationship test; 4. Marital test; 5. Residency test.
130
True or false: Phase-out of exemption applies to only personal exemptions.
False. It applies to both personal and dependency exemptions.
131
When does a taxpayer qualify for the head of household filing status?
The taxpayer must provide more than one-half of the cost of maintaining the home in which a qualifying child or other dependent relative lives for more than half the tax year.
132
Describe the qualifying child non self-supporting test.
The child must not have provided more than one-half of his or her own support.
133
Describe the qualifying relative support test.
The taxpayer must provide more than 50% of the dependent's total support.
134
When do multiple support agreements apply?
1. Applies if except for the support test, each individual would otherwise be eligible to claim dependent; 2. Each individual provides over 10% but less than half of support; 3. A written agreement allocates the dependency exemption to an individual providing more than 10% of support.
135
List the six tests for a child to qualify for the dependency exemption.
1. Residence Test; 2. Age Requirement; 3. Relationship Test; 4. Marital Test; 5. Residency Test; 6. Not self-supporting test.
136
Describe the marital test for a dependent.
A dependent cannot file married joint, unless only to obtain a refund and there was no tax liability for the year.
137
What filing status is a surviving spouse allowed to use?
Can file married-filing-joint for two years after spouse's death if taxpayer provides over half the cost of maintaining a home for a dependent child whose principal place of abode is with the taxpayer.
138
What are the requirements for selecting the head of household status?
Taxpayer must provide more than half of the cost of maintaining the household for a qualifying child or a qualifying relative (a non-relative living in the home for the entire tax year does not qualify). This home must be the qualifying child's or qualifying relative's principal residence for more than half of the tax year.
139
Define "abandoned spouse."
1. Spouse doesn't live in house for last 6 months of year; 2. Maintain a household for at least 6 months for dependent child.
140
What factors can increase a taxpayer's standard deduction?
1. Taxpayer is blind at year-end; 2. Taxpayer reaches 65 by year-end.
141
Describe the concept of kiddie tax.
1. Taxable income for child is divided into unearned and other income; 2. Net unearned income in excess of $2,000 (for 2013) for children less than age 18 and children between 19 and 23 who are full-time students is taxed at parents' rate. However, children between 18 and 23 are included only if their earned income does not exceed 50% of their total support for the year.
142
Describe the Alternative Tax Adjustments.
1. Difference between AMT cost recovery and regular tax; 2. No installment method allowed; 3. No standard deduction or personal/dependency exemption allowed; 4. Medical expenses only in excess of 10% of AGI; 5. Interest on home equity loans not allowed unless to improve residence; 6. No phase-out of itemized deductions.
143
When is the alternative minimum tax exemption phased out?
1. Triggered by Alternative Minimum Tax Income over certain thresholds; 2. Phased-out at 25% of amount over trigger.
144
Describe the Alternative Minimum Tax Preference adjustments.
1. Percentage depletion over adjusted basis; 2. Interest on "private activity" municipal bonds (except for bonds issued in 2009 and 2010); 3. Excess intangible drilling costs over 10-year straight line amortization; 4. Pre-1987 accelerated depreciation over straight line.
145
What are the requirements for filing a self-employment income tax return?
Must file a tax return if self-employment income is above $400.
146
What is the alternative minimum tax rate?
1. 26% up to $175,000; 2. 28% over $175,000.
147
List the characteristics of self-employment tax.
1. Social Security is 12.4% (2013) of SE income up to an annual cap; 2. Ceiling is reduced by other wages; 3. Medicare is 2.9% on all SE income.
148
What expenses qualify for the adoption credit?
Qualified expenses include adoption fees, court costs, attorney fees, and travel expenses.
149
Describe the Lifetime Learning Credit.
1. Allowed up to $2,000 per taxpayer; 2. 20% of up to $10,000 of educational expenses; 3. Qualified educational expenses are nondeductible tuition and academic fees incurred by a taxpayer, spouse, or any dependent of the taxpayer.
150
Describe the child tax credit.
A $1,000 credit is allowed for each qualifying child under the age of 17.
151
List the eligibility requirements for the dependent care credit.
Care must be provided for: 1. A dependent who has not reached the age of 13; 2. A dependent (or spouse) who is mentally or physically incapacitated and lives with the taxpayer for more than half the year.
152
Describe the American Opportunity Credit.
1. Allowed up to $2,500 (2013) per year for each eligible student; 2. 100% of first $2,000 and 25% of next $2,000 on qualified educational expenses; 3. Qualified educational expenses are nondeductible tuition and academic fees incurred during first four years of post-secondary education.
153
How is the dependent care credit calculated?
1. Begins at 35% if AGI is less than $15,000 and is reduced by 1% for each $2,000 increment (or part) in AGI; 2. The minimum dependent care credit percentage is 20%; 3. Limited to $3,000, or $6,000 if more than one dependent. Cannot exceed wages of lowest paid spouse.
154
Must U.S. taxpayers include worldwide income in the tax return?
U.S. taxpayers must include income earned from anywhere in the world on their federal income tax return.
155
What is the time frame for the carryback/carryforward of the foreign tax credit?
1 year/10 years.
156
What is the basis for stock received from property transferred to a corporation by a control club member?
The adjusted basis of the transferred property plus any gain recognized less any boot received less any liabilities assumed by the corporation.
157
What are the membership requirements for a control club?
1. Property must be contributed (not services) to count toward control test; 2. Must be transferred solely in exchange for stock; 3. Immediately after transfers, members contributing property must own at least 80% of voting and nonvoting stock; 4. Receipt of boot triggers gain but not loss.
158
What is a corporation's basis for property received from the transfer by a control club member?
The adjusted basis in the property from the transferor plus any gain recognized by the transferor.
159
What is considered a boot in a control club transaction?
Property received other than stock.
160
What is the importance of being a control club member?
Deferral of gain and loss is required for members of the control club.
161
Define "control club."
The group of individuals who participate in a transfer of property to a corporation and are in control of the corporation immediately after the transfer.
162
List the characteristics of a net operating loss.
1. Negative taxable income carried forward from other tax years; 2. Carryover period is back 2 and forward 20; 3. Carryovers from previous years are not included in calculating current year NOL.
163
What is the basis of accounting that is required for most corporations?
Accrual.
164
Describe the corporation fiscal-year rule.
Corporations can choose a fiscal year unless the corporation makes an "S" election or qualifies as a "personal service corporation."
165
How are nondeductible expenses treated on a Schedule M-1?
Added to book income.
166
Define "personal service corporation."
A corporation whose principal activity is the performance of personal services performed by employees who own substantially all of the stock.
167
How is income that is taxable but not included in book income treated on a Schedule M-1?
Added to book income.
168
What purpose does a Schedule M-1 serve?
A reconciliation of book income to taxable income.
169
How are deductions not expensed in book income treated on a Schedule M-1?
Subtracted from book income.
170
How is nontaxable income included in book income treated on a Schedule M-1?
Subtracted from book income.
171
List the exceptions to the accrual accounting requirement for corporations.
1. Small corporations (average gross receipts less than $5 million); 2. Personal service corporations; 3. S corporations.
172
What is the dividends-received deduction when a corporation owns 80% or more of stock?
The deduction is 100%.
173
What is the dividends-received deduction when a corporations owns 20 to 79% of stock?
The deduction is 80%.
174
List the characteristics of charitable contributions.
1. Can deduct accrued contributions if paid within 2 1/2 months following year-end; 2. Limit is 10% of taxable income; 3. Excess carried forward for 5 years.
175
List the characteristics of a dividends-received deduction.
1. Percent of domestic dividends; 2. Percentage depends on amount of stock held by corporation; 3. Limited by taxable income unless it creates or adds to a net operating loss.
176
List the characteristics of organizational expenditures.
1. $5,000 may be deducted; phased out $1 for $1 once organizational expenses exceed $50,000; 2. Remaining amount is amortized over 180 months; 3. Must be incurred before end of first tax year; 4. Stock issuance fees are not included.
177
What is the dividends-received deduction when a corporation owns less than 20% of stock?
70% of dividends received.
178
Describe the alternative minimum tax corporate exemption phase-out.
25% of AMTI over $150,000.
179
Describe the alternative minimum tax (AMT) net operating loss (NOL) deduction.
1. Allowed for carryover of net operating losses under the AMT in prior years; 2. Limited to 90% of AMTI.
180
Describe the adjusted current earnings (ACE) adjustment that must be made to the alternative minimum taxable income (AMTI) to help determine the alternative minimum tax.
[ACE - AMTI (before adjustments)] x 75%.
181
Describe the formula used to determine the alternative minimum tax for corporations.
Taxable Income + Tax Preferences +/- AMT Adjustments and ACE Adjustment = Alternative Minimum Taxable Income (AMTI) - Minimum Tax Exemption = Tax Base x Tax Rate (20%) = Tentative Tax - Regular Tax = Alternative Minimum Tax (AMT.)
182
List the alternative minimum tax adjustment types.
1. Gains from installment sales; 2. Accelerated portion of depreciation; 3. Adjustment for adjusted current earnings.
183
What purpose does the calculation of an Alternative Minimum Tax serve?
Taxpayer must pay the greater of alternate minimum tax or regular tax.
184
Define "tax preferences."
Specific adjustments that increase taxable income when computing alternative minimum taxable income (AMTI.)
185
List the alternative minimum tax preference types.
1. Percentage depletion over adjusted basis; 2. Interest on private activity municipal bonds; 3. Excess intangible drilling costs; 4. Pre-1987 accelerated depreciation over straight-line.
186
Define the "alternative minimum tax adjustments."
Specific adjustments that can either increase or decrease taxable income when computing alternative minimum taxable income.
187
What is the alternative minimum tax exemption for corporations?
The exemption is $40,000.
188
List the additions that should be made to taxable income for the purpose of determining the accumulated earnings penalty.
1. Dividends received deduction; 2. Net operating or capital loss carryovers.
189
Define "consent dividend."
Not actually paid to shareholders; shareholders consent to be taxed as though a dividend (identified in the consent) was paid.
190
What additions should be made to taxable income for the purpose of determining a Personal Holding Company tax?
1. Dividends received deduction; 2. Carryover for net operating losses from year prior to previous year.
191
How is the accumulated earnings credit calculated?
The greater of: 1. The amount of the current earnings and profits needed for the "reasonable needs" of the business; 2. $250,000 less than the accumulated earnings and profits at the close of preceding year.
192
What deductions should be made to taxable income for the purpose of determining a Personal Holding Company tax?
1. Accrued income tax; 2. Excess charitable contributions; 3. Net capital gain (after tax).
193
Describe the Personal Holding Company (PHC) ownership test.
Met if more than 50% of the value of the stock is owned directly or indirectly by five or fewer individuals in the last half of the year.
194
Describe the Personal Holding Company (PHC) income test.
Met if passive income constitutes 60% of adjusted ordinary gross income (AOGI).
195
Define "adjusted ordinary gross income (AOGI)".
Gross income excluding capital and 1231 gains and reduced by expenses associated with the production of rent and royalty income.
196
Define "Personal Holding Company."
A corporation that may be subject to the personal holding company tax.
197
Define "deficiency dividend."
A dividend expressly declared to avoid the tax and is paid within 90 days of tax imposition (the finding of a deficiency due to the PHC tax).
198
What dividends reduce the income of Personal Holding Companies?
Pro-rata dividends paid: 1. During the year; 2. By consent; 3. Within two and one-half months of year-end; 4. Deficiency dividends.
199
List the reductions that should be made to taxable income for the purpose of determining the accumulated earnings penalty.
1. Accrued income taxes; 2. Excess charitable contributions; 3. Net capital loss; 4. Net capital gain after tax.
200
List the tests used to determine the Personal Holding Company status.
1. Income test; 2. Ownership test.
201
List the corporations that are exempt from the Personal Holding Company tax.
1. Banks; 2. Insurance companies; 3. Finance companies.
202
What does passive income include?
Includes dividends, interest, and sometimes, rents, royalties, and personal service contracts.
203
Describe the brother/sister controlled group total control test.
The five common shareholders must own in aggregate 80% or more of the stock of each corporation within the group for certain tax provisions.
204
Define "affiliated groups."
Corporations related through intercorporate ownership, can elect to file consolidated return.
205
List the two types of tests for brother/sister controlled groups.
1. Total control; 2. Common ownership.
206
What are the requirements of an affiliated group?
Each corporation (except for parent) must be owned 80% (value and voting power) or more by the other corporations in the group on every day of tax year.
207
Describe the brother/sister controlled group common ownership test.
Aggregating the lowest percentages each holds in any one firm for the common shareholders, the total must exceed 50 percent.
208
Describe the tax consequences of being a controlled group.
1. Limited to one set of corporate tax brackets; 2. One alternative minimum tax exemption and one accumulated earnings credit; 3. Intercompany losses are treated as related party sales.
209
What are the requirements of a controlled group?
Each corporation, except for parent, must be owned 80% (value or voting power) or more by the other corporations in the group on last day of tax year.
210
Define "constructive dividend."
A payment to a shareholder that, despite not intended as a distribution of earnings, is regarded as a dividend.
211
What are distributions considered when current earnings and profits (E&P) are negative and accumulated earnings are positive?
A dividend to the extent of net E&P (accumulated E&P less proportion of current loss) on the date of the distribution.
212
What types of distributions reduce earnings and profits?
1. Cash distributions; 2. Property distributions.
213
What are the tax consequences, if any, of distributions when current and accumulated earnings are negative?
Tax-free return of capital (up to adjusted basis), excess over basis is capital gain.
214
What are distributions considered when current earnings and profits (E&P) are positive and accumulated earnings are negative?
A dividend only to extent of current E&P.
215
What effect does property distribution have on earnings and profits (E&P)?
1. Reduce E&P by greater of adjusted basis or value, then reduced by any liabilities assumed by shareholder; 2. Distributions of appreciated property also increase E&P by amount of gain.
216
What additions should be made to taxable income when earnings and profits are computed?
1. Municipal interest; 2. Life insurance income; 3. Dividends received deduction; 4. Deductions claimed for carryforward from prior years; 5. The deferred portion of a gain from a current installment sale; 6. The amount of depreciation deducted in excess of straight-line.
217
What deductions should be taken from taxable income when earnings and profits are computed?
1. Federal income tax (net of credits); 2. Net capital loss; 3. Excess amounts of charitable contributions; 4. Penalties; 5. Life insurance premiums for a key employee; 6. Disallowed portion of entertainment expenses; 7. Deferred gains on installment sales recognized in later years; 8. Reversal of taking out excess depreciation over straight- line.
218
When is a distribution considered a dividend?
If earnings and profits are positive.
219
What are the tax consequences, if any, of distributions when current and accumulated earnings are positive?
Taxable as dividends.
220
List the two types of stock attribution.
1. Entity; 2. Family.
221
What conditions must exist to treat a redemption to pay death taxes as a sale?
1. Stock held by decedent must be 35% or more of adjusted gross estate; 2. Redemption is limited to the total of federal and state death taxes and funeral and administrative expenses.
222
What is the accounting treatment of partial liquidation stock redemptions?
Treated as a sale by non-corporate shareholders.
223
Who can be considered a family for the purpose of family attribution stock redemptions?
Includes spouse, children, grandchildren, and parents.
224
Describe the substantially disproportionate interest test.
The shareholder must own less than 80% of the shares that were owned prior to the redemption.
225
List the substantially disproportionate redemption tests.
1. Control test; 2. Reduced interest test.
226
What conditions must exist for recognizing no gain or loss on the liquidation of a subsidiary?
1. The parent must own 80% of the voting stock and other stock of the subsidiary; 2. The subsidiary must distribute its assets within the tax year (or within three years of the close of the tax year of the first distribution.)
227
Define family attribution.
Stock owned by family members is deemed to be owned by a related taxpayer.
228
What is the accounting treatment for a corporation gain or loss on stock in complete liquidations?
1. Fair Market Value (not less than attached liabilities) - adjusted basis of property; 2. Nature of gain/loss depends on nature of asset distributed.
229
What tests must be passed for a redemption of stock to qualify as a sale?
Must pass one of the following tests: 1. Not essentially equivalent to a dividend (NEED); 2. Redemption is substantially disproportionate; 3. Complete termination of stockholder's interest.
230
Define stock attribution.
When a shareholder is deemed to own stock held by other related taxpayers.
231
What is the accounting treatment for a shareholder gain or loss on stock in complete liquidations?
1. Value of distribution (less liabilities) - adjusted basis of stock; 2. Generally capital gain or loss.
232
What are the requirements for a partial liquidation?
1. Must completely terminate a "qualifying" business; 2. Must qualify as not essentially equivalent to a dividend in that it results from a genuine contraction of the corporate business.
233
Describe the substantially disproportionate control test.
Shareholder must own less than 50% of voting shares after redemption.
234
Definite partial liquidation.
A contraction of the corporate business. The corporation must completely terminate a "qualifying" business and must continue to operate at least one qualifying business.
235
Define a "qualifying business."
A trade conducted for five years prior to the determination.
236
Define entity attribution.
Stock owned by corporation, partnership, trust, or estate is deemed to be owned by a taxpayer who is an owner or beneficiary of the entity.
237
Describe a Type B Reorganization.
An acquisition of controlling interest of the stock of the target solely in exchange for voting stock of the acquiring firm.
238
What are the requirements for a Type D Reorganization?
The parent corporation must receive and distribute control of the subsidiary in the exchange (80% of the vote and other classes of stock).
239
List the seven types of organizations.
1. Type A 2. Type B 3. Type C 4. Type D 5. Type E 6. Type F 7. Type G.
240
When an organization is reorganized, what gain or loss, if any, is required to be recognized by the acquiring corporation?
The acquiring corporation does not recognize gain or loss on the transfer of its stock for the acquired corporation.
241
What are the requirements for a Type A Reorganization?
Most of the assets of the target firm are exchanged for equity (qualified stock) in the acquiring firm.
242
What is the benefit of a 338(h)(10) election?
1. Requires the recognition of any gain generated by the difference between the adjusted basis of the target's assets and the fair market value of the stock; 2. Benefit is that assets are stepped up to Fair Market Value.
243
Describe a Type A Reorganization.
Merger or consolidation under state law (called a statutory merger).
244
Describe a Type C Reorganization.
An acquisition of "substantially all" of the assets of the target solely in exchange for voting stock of the acquiring firm.
245
Describe a Type D Reorganization.
A divisive reorganization (not acquisitive) in that a corporation (the parent) divides by transferring assets to a subsidiary in exchange for subsidiary shares.
246
List the tax consequences of a merger or acquisition of assets in a taxable reorganization.
1. Target corporation recognizes gains and losses on the transfer of its assets; 2. Adjusted basis of target's assets is Fair Market Value; 3. Excess purchase price is allocated to goodwill and amortized over 15 years.
247
What are the requirements for a Type C Reorganization?
1. Acquiring firm acquires substantially all of the assets of the target in exchange for voting stock; 2. Target firm distributes stock and other assets to its shareholders; 3. Substantially all is 90% of net asset value and 70% of gross asset value.
248
What are the tax consequences of an acquisition via the purchase of stock and operation of acquired organization as a subsidiary?
1. Neither firm recognizes any gain or loss; 2. The purchase price of the target's shares is adjusted basis; 3. The adjusted basis of the target's assets does not change.
249
What are the requirements for a Type B Reorganization?
1. The acquiring firm must exchange its own voting stock for the stock of the target; 2. The acquiring firm must own at least 80% of the stock of the target firm after the acquisition; 3. Any consideration other than voting shares in the acquiring corporation will violate the requirements of the reorganization.
250
How is business income apportioned among the states in which it is earned?
Business income is apportioned among the states in which it is earned based on apportionment factors such as sales, property, and payroll.
251
What activities are sufficient to establish a nexus?
1. Approving/accepting orders; 2. Hiring/supervising employees other than sales staff; 3. Installation; 4. Maintaining an office; 5. Providing maintenance or engineering services.
252
How is the apportionment sales factor calculated?
Total Sales in State divided by Total Sales.
253
Define "nexus."
The degree of the relationship that must exist between a state and a foreign corporation for the state to have the right to impose a tax.
254
How is the foreign tax credit limitation calculated?
U.S. tax on worldwide income x Foreign source taxable income / Worldwide taxable income.
255
What constitutes foreign-sourced earned income?
Earned income is foreign source if earned in a foreign country and U.S. source if earned domestically.
256
What sources of U.S. interest income are taxable?
Interest income is U.S. source if received from: 1. U.S. government 2. No corporate U.S. residents 3. Domestic corporations.
257
Which has priority - U.S. tax law or treaties?
Treaties between the U.S. and other countries generally override the tax provisions in the U.S. tax law or foreign tax law.
258
Define "private foundation."
A private foundation is a tax-exempt organization which receives less than one-third of its annual support from its members and the general public.
259
What are the general filing requirements for an exempt organization?
They must file an information return (Form 990) if gross receipts exceed $50,000. Most exempt organizations not required to file an information return must file an annual electronic notice with the IRS (Form 990-N).
260
What is the tax rate for unrelated business income (UBI)?
UBI is taxed (only if it exceeds $1,000) at regular corporate rates if the organization is a corporation; at trust rates if it is a trust.
261
What items decrease a partner's basis in a partnership?
1. Distributions; 2. Proportionate share of expenses, including deductions, losses, and nondeductible expenses; 3. Proportionate share of decreases in liabilities.
262
What is a general partner's role in management and for what are they liable?
Can participate in management and have joint and several liability for the partnership's debts.
263
Define "partnership."
An association of two or more taxpayers to operate a business that is not taxed as a corporation.
264
What items increase a partner's basis in a partnership?
1. Contributions of property; 2. Proportionate share of income, including gains and exempt income; 3. Proportionate share of increases in liabilities.
265
What is a partner's basis in a partnership?
Substituted basis from the assets contributed to the partnership.
266
What is a limited partner's role in management and for what are they liable?
Only liable up to their investment, but they cannot participate in management.
267
How are contributions to a partnership accounted for?
1. Generally recognize no gain or loss on contributions; 2. No control club requirement; 3. Must recognize income for partnership interest received for services equal to the value of the partnership interest received.
268
Describe the characteristics of a partnership loss deduction limit.
1. Amount of adjusted basis; 2. To extent at risk; 3. May have passive loss limits; 4. Unused losses are carried forward indefinitely.
269
What tax forms does a partnership report income on?
1. Report taxable income on Form 1065; 2. Report separately stated items to each partner on Schedule K-1.
270
When do partners report income?
In the year that the partnership tax year-ends.
271
Define "pre-contribution property."
Property that has appreciated (depreciated) in value at the time of its contribution to the partnership.
272
What is the appropriate treatment of pre-contribution gains and losses?
Allocated to specific contributing partners when recognized by partnership.
273
What are guaranteed payments?
1. Those made to partners without regard to partnership income; 2. Ordinary income to recipients at the partnership year-end; 3. Reduce partnership income and therefore reduce each partner's share of income.
274
How is a partner's adjusted basis in liquidations allocated?
1. To cash distributions and cash deemed distributed; 2. To distributions of unrealized receivables and inventory in an amount equal to the partnership's basis in these assets; 3. To other assets distributed; 4. Deficiencies are allocated to properties with unrealized losses; 5. Excesses are allocated to properties with unrealized gains.
275
What conditions must exist for the recognition of loss on a liquidating distribution?
1. Distribution consists of only cash, and pro-rata distribution of inventory and unrealized receivables; 2. Outside basis of the partner's interest exceeds sum of cash plus inside basis of receivables and inventory.
276
What is the accounting effect of a deemed distribution?
A decrease in the partnership liabilities.
277
Define "gain recognition on non-liquidation distributions."
Cash distributed in excess of outside basis causes gain recognition.
278
What is the general gain recognition rule in partnership liquidations?
Distributions do not create gain or loss unless a partner receives cash (or cash equivalents) in excess of his adjusted basis.
279
Define "hot" assets.
1. Unrealized receivables; 2. Inventory; 3. Generate ordinary income.
280
How is gain/loss on a partnership interest calculated?
Capital gain or loss (with exclusion of "hot" assets) using outside basis in partnership.
281
What two events will terminate a partnership for tax purposes?
1. No part of the business continues to be carried on by any partner in the partnership within a 12-month period; 2. There is a sale or exchange of at least a 50% interest in both capital and profits within a 12-month period.
282
How does a partnership continue when there is a division of partnership?
One of the new partnerships is a continuation of the old partnership if the partners (in the new partnership) had a controlling interest in the old partnership.
283
How does a partnership continue when there is a merger?
One partnership continues if the old partners also control (more than 50%) the merged entity.
284
What circumstances may cause a termination of S Corporation status?
1. Majority vote of all shares; 2. Violation of an eligibility requirement; 3. Violation on limit of passive investment income for three consecutive years.
285
List the characteristics of an S Corporation.
1. Shareholders not liable for debt; 2. Shares freely transferred; 3. Shareholders can be employees; 4. Flow-through taxation.
286
List the requirements for an S Corporation status.
1. No more than 100 shareholders; 2. Nonresident aliens, partnerships, and most trusts cannot be shareholders; 3. Only one class of stock is outstanding (voting and nonvoting is OK).
287
After termination of an S Corporation, when may a company make a re-election for S Corporation status?
Cannot be re-elected without IRS permission for 5 years after termination.
288
What rules apply for the contribution of property to an S Corporation?
Control club (80%) rules apply (corporation rules.)
289
What must occur for an S Corporation status to be elected?
Must be unanimous.
290
List the types of trusts that can be stockholders in a corporation.
1. Estates; 2. Grantor trusts where grantor is alive; 3. Testamentary trusts within 2 years after death; 4. Special stock voting trusts (all beneficiaries are shareholders); 5. Qualified S trusts (all beneficiaries are shareholders); 6. Small business electing trusts; 7. Exempt entities.
291
What corporations are ineligible for S Corporation status?
1. Most subsidiaries; 2. Financial Institutions; 3. Domestic International Sales Corporations (DISCs); 4. Foreign corporations.
292
What items decrease a stockholder's basis in an S Corporation?
1. Distributions from accumulated adjustments accounts; 2. Share of nondeductible expenses and corporate loss.
293
List some characteristics of an S Corporation's corporate tax.
1. Not entitled to some corporate deductions (i.e., Dividends Received Deduction); 2. Do not pay alternative minimum tax; 3. Do not pay personal holding company tax; 4. Do not pay accumulated earnings tax.
294
How are losses and gains recognized for corporate taxes on property distribution?
1. Corporation generates gains by distribution of appreciated property; 2. Gain is passed through to shareholders. Losses are not recognized.
295
What tax effects do shareholder-employees of a corporation need to consider?
1. Imposed on greater than 2% shareholders on any day during year; 2. Fringe benefits are included in income. Accident and health premiums are included as fringe benefits.
296
What items increase a stockholder's basis in an S Corporation?
1. Additional contributions; 2. Share of corporate and exempt income.
297
List the four loss limits on S Corporation shareholders.
1. Adjusted basis of stock; 2. Adjusted basis of loans to corporation once stock basis exhausted; 3. May only deduct losses to extent at risk; 4. Passive loss limits.
298
What forms are used to report S Corporation income?
1. Report taxable income on Form 1120S; 2. Report separately-stated items for each shareholder on schedule K-1.
299
What options does an S Corporation have for taxable years?
1. Calendar year is default; 2. May use fiscal if used by more than 50% of shareholders; 3. Can elect a fiscal year with IRS permission if business reason.
300
What is the income effect on an S corporation of the distribution of property?
Gains are recognized for appreciated property; losses are not recognized.
301
How are shareholder gains on distributions calculated?
Cash + Value of Property Received - adjusted basis of stock.
302
What is the tax rate that is applied to built-in gains income?
Highest statutory corporate income tax rate.
303
What effect does an S Corporation distribution have on earnings and profits?
Nontaxable to extent of accumulated adjustments accounts 1. Dividend income to extent of earnings and profits; 2. Reduces basis in stock; no income; 3. Any excess is capital gain.
304
What does the accumulated adjustment account include?
Includes all income and expenses of S corporation except for tax-exempt income and related expenses.
305
List the requirements for the complete transfer of a gift.
1. Gift delivered to donee; 2. Donor must give up control of the property; 3. Donee must accept the gift.
306
List the type of transfers that are not considered gifts.
1. Payment of another individual's medical or educational expenses (tuition and fees only) if paid directly to education or medical provider; 2. Political contributions; 3. Satisfaction of an obligation.
307
What is the annual exclusion from gift tax?
1. $14,000 (2013); 2. Applied per donee per year; 3. Only applies to gift of present interest.
308
Who is liable for transfer taxes?
Donor or estate primarily liable; donee or heir secondarily liable.
309
What deductions from transfer taxes are allowed?
1. Unlimited marital deduction; 2. Unlimited charitable contribution deduction.
310
What is the limit on charitable contribution gift deductions?
Unlimited, allowed for gifts to charitable organizations.
311
When is a gift tax return required and when is it due?
1. Due April 15 for gifts made in prior year; 2. Required when gifts exceed annual exclusion or are gifts of future interest.
312
List the steps involved in calculating gift tax.
1. Determine current taxable gifts; 2. Add previous taxable gifts and calculate total gift tax; 3. Reduce total gift tax by previous gift taxes paid; 4. Reduce remaining gift tax by unused portion of unified credit.
313
Define "present interest."
The right to income or to enjoy property currently.
314
Define "gift tax trigger."
A transfer without adequate consideration during the life of the donor.
315
Define "gift."
A transfer of property for less than adequate consideration.
316
What is the unified credit?
Allows a minimum cumulative amount of tax-free transfers for the estate tax.
317
What qualifies as a marital gift deduction?
1. Allowed for most gifts to spouse; 2. Unlimited in amount; 3. Gifts of "terminable interests" do not qualify.
318
Describe the gift-splitting election on a tax return.
1. A gift is split and treated as being given by both spouses; 2. Both spouses can use an annual exclusion for gifts of present interests.
319
Define "gross estate."
1. Property owned by the decedent at the date of death; 2. Property "transferred" by the decedent at death.
320
What is meant by "generation skipping tax?"
Triggered by the transfer of property to someone more than one generation younger than decedent. This tax is not applicable when intervening descendants are deceased.
321
Define "estate."
A legal entity that comes into existence automatically at the death of a taxpayer (the "decedent").
322
What types of transfers must be included in gross estate if they are made within three years of death?
1. Transfers with retained interests; 2. Revocable transfers; 3. Transfers of life insurance.
323
What is the gross estate property valuation?
Fair market value at the date of death or the alternate valuation date.
324
List the types of other estate tax deductions.
1. Debts of the estate; 2. Final expenses; 3. Casualty and theft losses; 4. Charitable contributions.
325
Define "adjusted taxable gifts."
Taxable gifts other than gifts already included in the gross estate.
326
List the four steps in calculating estate tax.
1. Taxable estate increased by adjusted taxable gifts; 2. Apply tax rates to total transfers; 3. Reduce tentative transfer tax by gift taxes paid; 4. Subtract the unified credit.
327
What are the requirements for a property to be classified as a qualified terminable interest property (QTIP)?
1. Spouse must receive all income annually or more often; 2. Property must be included in spouse's estate.
328
When are estate tax returns required and when are they due?
1. Required when gross estate plus adjusted taxable gifts equals or exceeds the exemption equivalent; 2. Due 9 months after date of death.
329
In estate planning, what is the alternative valuation date?
Valuation date is six months after the date of a person's death. For estate tax purposes, the executor may place a value on the estate as of the date of death or on the alternate valuation date. To use the alternative valuation date, the estate value and tax must be less than on the date of death.
330
What properties are specifically included in gross estate?
1. Life insurance proceeds under certain conditions; 2. Jointly-owned property; 3. Property transferred where the decedent retained an interest or a power; 4. Certain gifts within three years of death.
331
What are the requirements for a marital deductions transfer?
1. Only to citizen spouses; 2. Property the spouse receives outright and for which he/she can control its ultimate destination; 3. Qualified terminable interest property.
332
List the conditions under which life insurance proceeds are included in gross estate.
1. Decedent had incidents of ownership; 2. Decedent's estate or executor is the beneficiary of the insurance policy.
333
What is the personal exemption amount for all other complex trusts?
The exemption amount is $100.
334
Define "distributed net income (DNI)."
DNI is the maximum amount of income that a beneficiary can have from a trust for a tax year, and the maximum amount of the distribution deduction by the trust.
335
What is the personal exemption amount for simple trust and complex trusts that distributes all income currently?
The exemption amount is $300.
336
What is the estate personal exemption amount?
The exemption amount is $600.
337
Which committee must tax bills begin with?
House Ways and Means Committee.
338
What types of regulations have the weight of law for only three years?
Temporary Regulations.
339
What types of regulations are specifically authorized by Congress?
Legislative Regulations.
340
What court of original jurisdiction does not require prepayment of the disputed tax?
U.S. Tax Court.
341
What is the purpose of a 90-day letter?
The time that the taxpayer has to file a petition with the Tax Court once this letter is received.
342
Describe the concept of "offer in compromise."
Allows a taxpayer to settle a tax liability for less than the actual amount owed.
343
What document describes the rules that one must meet to be eligible to practice before the Internal Revenue Service (IRS)?
Circular 230.
344
What is the purpose of tax Form 870-AD?
Provides the settlement of the appellate conference related to a tax dispute.
345
What is meant by the "gross income test"?
Taxpayers must generally file a return when income exceeds automatic deductions.
346
What is the due date of the tax return for individual returns?
1. 15th day of 4th month after year-end; 2. If above falls on weekend or holiday, next business day; 3. Automatic 6 month extension.
347
List the various non-filing penalties a taxpayer may face.
1. 5% per month of the tax due with the return; 2. The maximum penalty is 25% of the tax due. The minimum penalty for returns not filed within 60 days of the due date is the lesser of $135 or the amount of the tax due; 3. If the failure to file is fraudulent (intentional), the penalty is increased to 15% per month up to a maximum of 75% of the tax due with the return.
348
What is the due date for corporate returns?
The 15th day of 3rd month following the end of the tax year.
349
By how long does an extension of corporate tax extend the due date of the corporate tax return?
Six months upon request.
350
What is the general statute of limitations for tax returns?
Three years from later of filing date or due date.
351
List the automatic deductions that are included on an individual's tax return.
1. Personal exemption; 2. Standard deduction; 3. Increment to standard deduction for persons over 65.
352
List the two exceptions to the general statute of limitations for tax returns.
1. 6 years if 25% of gross income is understated; 2. No statute of limitations for fraud or failure to file tax return.
353
List the scenarios in which no underpayment penalty is charged for underpayment of taxes owed.
1. No penalty is imposed if the tax due with the return is less than $1,000; 2. No penalty is imposed if the tax payments during the year were at least 90% of current year taxes or 100% of last year's taxes (Watch over $150,000 AGI exception).
354
List examples of business entities that will be taxed as regular S corporation (known as per se corporations).
Examples include: 1. Entities incorporated under state law; 2. Insurance companies; 3. State-chartered banks if deposits are insured by FDIC; 4. Publicly-traded partnerships; 5. Specified foreign entities.
355
Define "disregarded entity."
Single-member limited liability company that is disregarded for federal tax purposes.
356
Which members of a limited liability have liability for the entity's debt?
No member has liability for the entity's debts.
357
True or false: Entities with more than one owner are, if not incorporated, taxed as a partnership unless they elect filing to be taxed as a corporation.
True. Such entities are taxed as parnerships unless they elect filing to be taxed as a corporation.
358
Describe the similarities of a Partnership and S Corporation.
1. Both are flow through entities with single taxation; 2. LLC members, limited partners, and S corporation shareholders have limited liability (but general partners do not); 3. Both have restrictions on the year-end that must be used for the entity.
359
When must a "check the box election" be made?
If made within the first 75 days of the year is effective for tax year.
360
True or false: A business incorporated under state law must file as a C-Corporation.
False. Business incorporated under state law can file as either C or S corporation.
361
List the types of owners who have limited liability.
Shareholders; Limited partners; Limited liability company members.
362
What classification options are there for partnerships and LLCs that have more than one owner?
Corporation (association); partnership.
363
True or false: Single-member entities (limited liability companies) are ignored for federal income tax purposes unless election filed to be taxed as a corporation.
True.
