Income Tax Flashcards

Question

Business Has Losses / Don’t need Liability Protection

Answer 1

**Sole - Proprietorship** - Schedule C - Retirement Plan (Keogh) - 100% of medical, dental, & LTC insurance deductible for owner - Deduct 1/2 SE Tax - Lack of Continuity - Profit or loss reported on schedule C (excess loss exceeds other income, loss can be carried forward indefinitely) - Interest paid for debt is deductible on Schedule C (no limit when gross receipts are less than $27 million) **Partnership** - Form 1065 for informational purposes only - Retirement Plan (Keogh) - 100% of medical, dental, & LTC insurance deductible for owners - Lack of Continuity - **Losses up to Basis** - unlike sole-prop where losses are added to 1040 - Deduct 1/2 of SE Tax - Disadvantage = joint and several liability & Partnership can dissolve upon death, bankruptcy, incapacity of partner *Losses up to basis include money contributed as well as any loans provided personally or by the bank*

Answer 2

**LLC/LLP** - Partnership or Sole Prop wrapped with limited liability - Limited partnership must have one general partner and the rest can be limited (limited partners only responsible up to basis) **S - Corporation** - Form 1120-S - Retirement Plan (not Keogh) - 100% of medical, dental, & LTC for insurance deductible for 2% owners - Losses up to basis (excluding debt from a bank) - basis is increased by gain for the year - No more than 100 shareholders - immediate termination if loose eligibility - spouses are always 1 - usually held in ESOP - only 1 class of stock (can do voting or non-voting) - Must be domestic and shareholders must be US citizen or residents - Unanimous consent by all shareholders to become S-Corp

Answer 3

20% deduction of qualified business income (NET) - pass through entities such as: - Sole-Prop - Partnerships - Real Estate Investors (REIT Income) - LLC’s - S - Corp - MLP’s Service = phased out @ $182,100 - $232,100 (S) or $364,200 - $464,200 (MFJ) Capital = not phased out but lesser of 20% or 50% of W2 Wages Paid **Dont get QBI on salary portion**

Answer 4

**Basis** = taxpayers investment in asset or property **Cost Basis** = basis + incidental fees (legal fees commissions, **sales tax**, freight, improvements (not repairs), real estate taxes, and normal business expenses) **Adjusted Basis** = cost basis - recovery deductions (deprecation or amortization)

Answer 5

Intangibles are **Amortized** - recovery method very similar to straight line depreciation - Goodwill - Patents - Franchise

Answer 6

Election to **expense** up $1,160,000 of qualifying property in year of acquisition (1245 Property) **It CAN NOT create a loss** *Now includes renovations to an interior of 1250 property*

Answer 7

**Can only be preformed with real business property** - defers gain, does not erase it *Rules & Requirements* - Same taxpayer who sells property must buy (exchange) - Must identify (select) property within 45 days - Must close on property within 180 days - Price of replacement property must be greater or equal to current property Give Boot = increases substitute basis Receive Boot = Recognized Gain

Answer 8

- Short term gain and losses are netted / Long term gains and losses are netted - Short term loss can offset long term gain & Long term loss can offset short term gain - Long term gains and short term gain can not be added together (short term gain is taxed at OI) **What is taxed at ordinary income?** - Short term gain - 1245 depreciation recapture - interest / ordinary dividends - CD maturing **Long term capital gains** - must be held for at least 12 months and a day - 10% - 12% tax bracket = 0% LTCG rate - 37% tax bracket = 20% LTCG rate - everything else is at 15% - **watch out for collectibles** at 28% - this could be a gold bullion ETF **Rates are based off of taxable income not AGI - could sell asset and be brought into higher taxable income rate**

Answer 9

**Exclusion Amount: $500,000 (MFJ) or $250,000 (S)** - Must have used the home in aggregate 2 out the last 5 years - If entire gain is excluded, it is not reported - Widowed spouses can use full $500,000 exemption within 2 years of death **Exceptions to living in residence less than 2 years** - Move for work 50 miles or more away - unexpected child births - Divorce / Death - Health Reasons Months lived / 24 X exclusion amount = adjusted exclusion

Answer 10

AMT payable @ 26% or 28% **Preference Items** - Intangible Drilling Costs (excess) - Private Activity Municipal Bond - Oil and Gas **percentage** depletion (not cost) - Depreciation (not straight line) **Add back items** - can create credits - ISO Bargin Element - SALT taxes *Depletion - deprecation of natural resources* AMT Payable = difference between regular tax and AMT tax **Ways to avoid AMT** - Reduced taxable income/AGI - Accelerate taxable income (pay more tax) - Reduce or eliminate the preference or add back items

Answer 11

**Two Types of Passive Activities** - Limited Partnership (unless you are working) - Equity Interests without any personal service to the business (non participating S-Corp interests) **Rules** - Non-publicly Traded Partnerships (RELP’s) - Losses may not offset portfolio or active income - RELP losses may only be offset by other RELP Income up to the amount at risk - Netting Process on Schedule E - Publicly Traded Partnerships (MLP’s) - Income may only be offset by losses generated in the same MLP - This is portfolio income and shown on schedule B - Losses have to stay in the same MLP and can be carried forward to offset future income - Can take loss if full interest is sold

Answer 12

Material Participation: Involved in activity on a regular, continuous, and substantial basis - Could be an S-Corp but it is indicated as active on Schedule E Active Participation: Less demanding standard than material participation. Requires bona fide involvement in management decisions. - Limited partners may not be active participants - Shown on schedule E - Can’t just collect rent, but if you set rent prices and organize maintenance this would be active **SNOW EXAMPLE** - Material shovels snow - Active calls someone to shovel snow - Passive does not care

Answer 13

Active participants in real estate may deduct up to $25,000 per year of net losses from real estate activity from their active or portfolio income. Phased out between $100,000 to $150,000 ($2 for $1) of AGI

Answer 14

**14 days & Under**: do not have to report income but also dont get any expense deductions (must be reasonable rent) **Stay at residence for less than the greater of 14 days or 10% of total rental days**: Rental Real Estate - Allows the taxpayer to claim tax benefits like business expenses, depreciation, etc.

Answer 15

Low income housing programs that are held as a passive activity, may generate a deduction equivalent tax credit of $25,000 (no phaseout) Marginal Tax Bracket X $25,000 = credit Allowed annually over 10 year period

Answer 16

Oil and Gas working interests where taxpayer is general partner are exempt from passive activity rules Losses are deductible against active and portfolio income without limits (must be general partner) - Must assume unlimited liability relative to the business

Answer 17

Property transfers incident to a divorce = tax free Basis is carried over Life insurance does not have any consequences

Answer 18

Divorced Last day of year = Single (no children) or Head of Household (primary residence and have children) *if you got married the last day of year, you can file as married*

Answer 19

Deduction for medical expenses, medical insurance, child tax credit are dependent on dependency is awarded to the custodial parent (one having the kids for the majority of time) **unless written in an agreement to contrary** - child must receive more than half of his/her support from his/her parents for more than half of the calendar year (if not neither parent can claim)

Answer 20

Public Charities: - All schools, hospitals, and churches - All organizations for charitable, religious, educational or literary purposes or for the prevention of cruelty to children or animals Private Charity: - Private non-operating foundations - Fraternities - War veteran organizations **Deduction Limits (all based off AGI)** *Rules* - If multiple charitable contributions, total can not exceed 50% of AGI - Can carry forward for 5 years (Gift Year + 5 years) - its a mistake on the exam if you loose a client a deduction *Amount of deduction* - Cash = 60% of AGI - LTCG (stock, real estate) / Related Use Property = Basis (50% of AGI) or FMV (30% of AGI) - STCG / Ordinary Income Property / Use Unrelated = Basis (50% of AGI) - Inventory, Short term capital gain property, work of art (below), copyright, artwork and collectibles - Work of art can just deduct materials (basis) -Loss Property = 50% of FMV … wont you deduct basis as it is higher

Answer 21

- Can only be made if the distribution is made on or after the date the IRA owner reaches 70 1/2 - Only from IRA’s and after tax Roth IRA’s - NO EMPLOYER PLANS - **Capped at $100,000 per year per person ($200,000 MFJ)** - Only to taxable amounts, no basis transfer - Must be made in cash **After Tax Roth IRA**: Non-Qualified Roth and it is the earnings portion **Basis in IRA**: Non-deductible portion of IRA *can be used to reduce RMD Amounts* **Watch out for double dipping = contributions to the IRA after 70 1/2 then to turn around a give to charity**

Income Tax Flashcards

(45 cards)