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Clark's Cards > Income Tax > Flashcards

Income Tax Flashcards

1
Q

What are the eligibility requirements for a

Subchapter S Corporation?

A
  • Number of shareholders is limited to 100
  • The Corporation can only have a single class of outstanding Common Stock (no preferred), but the Common can be voting or non-voting.
  • Must be a Domestic Corporation Only individuals, estates and certain Trusts may be shareholders.

NOTE: Non-resident aliens (persons who are neither citizens nor permanent residents of the US) cannot be shareholders.

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2
Q

Tax Basis for Partnership / LLC

A
  • Cash invested
  • Direct loans made to the partnership
  • Partnership Debt: Loans made to the partnership - not the partner (bank loans)

NOTE: S-Corp basis does NOT include bank loans even if the S-Corp owner personally guarantees the debt.

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3
Q

Property Classes

A

1245 Property (non real estate)

  • 5 year:Computers,Autos,Trucks
  • 7 year:Office Equipment except computers,

1250 Property (real estate)

  • 27.5 year: Residential rental property
  • 39 year: Non-residential real property

Remember: CATCORN

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4
Q

Boot / Gain Recognized / Basis

A

No Boot Received: Recognized Gain is zero

When Boot is Received, recognized gain is boot received

  • Boot paid is added to Basis
  • Basis carries over from the prior property
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5
Q

Netting Capital Gains and Losses

A

Step 1:

  • ST Capital Gains and ST Losses are Netted
  • LT Capital Gains and LT Losses are Netted

Step 2:

  • If a Gain and Loss remain, they are again Netted

Step 3:

  • If a Loss remains after Netting Capital Gains and Losses, only $3,000 of the Net Losses can be used to offset ordinary income
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6
Q

Sale of a Personal Residence (Section 121)

A

$250K (single) and $500k (MFJ) of Gain from the sale is tax-free if lived in for 2 out of the last 5 years.

  • Exception available if taxpayer lives in the residence less than two years and moves because of a new job, for health reasons, etc. Receives a pro-rated amount.
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7
Q

Recapture (1245 Property)

A

When the sole proprietor purchases equipment and takes Depreciation (Cost Recovery Deduction - CRD), the CRDs offset the sole proprietor’s ordinary income.

When the sole proprietor sells the equipment for a gain, the sole proprietor must:

  • 1st: Look back and recapture the lesser of the CRDs taken or the Gain realized as 1245 Gain (ordinary income)
  • 2nd: Recover any excess gain as 1231 (capital gain)
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8
Q

Section 179

Qualifying vs. Non-Qualifying Property

A

Qualifying:

  • Tangible Personal Property
  • 1245 Property

Non-Qualifying:

  • Real Estate
  • 1250 Property
  • Intangible (owning a franchise)
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9
Q

AMT Preference Items

A
  • Excess Intangible Drilling Costs (IDC)
  • Private Activity Municipal Bond
  • Oil and Gas Percentage Depletion
  • Depreciation (ACRS/MACRS) but not straight line

Remember: IPOD = Preference Items

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10
Q

AMT Add-Back Items

AMT Not-Deductible Items

A

Add Back:

  • Incentive Stock Option Bargain Element
  • SALT
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11
Q

Postponing AMT

A
  • Accelerating receipt of taxable income or deferring the payment of property taxes, state income taxes, deductible medical expenses or charitable giving, the regular tax (1040) may exceed the AMT payable (more taxable income)
  • Deferring exercise of incentive stock options (add back item to a later date or disqualifying the ISO so that it becomes NQSO (subject to ordinary income tax).
    • Purchase public purpose muni bonds instead of private activity bonds.
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12
Q

Historic Rehabilitation Programs

A

Historic Rehabilitation programs that are held as passive activity may generate a Deduction:

  • Equivalent Tax Credit of up to $25,000.

The benefit of this Deduction:

  • Equivalent Tax Credit phases out between $200- 250k of AGI.

How does the Deduction Equivalent tax credit work?

  • Calculate tax to determine the maximum marginal tax bracket. If it is 25%, for example, then you multiply $25,000 by 25% to get $6250.
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13
Q

Low Income Housing Credit

A

Low-Income Housing programs that are held as passive activity may generate a Deduction:

  • Equivalent Tax Credit up to $25,000. There is NO phase out.
  • The Low Income Housing Credit is allowed annually over a 10 year “credit period.”
  • The Depreciation is straight-line over 27.5 years.

How does the credit work?

  • For example, multiply 35% by $25,000 to get a credit of $8750.

NOTE: Because there is no phaseout, it produces a higher credit.

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14
Q

Types of Phantom Income

A

Insurance:

  • Lapse of Policy Loan
  • Section 162 Life/Disability

​Investments:

  • Zero/Strip Income
  • TIPS
  • Declared but not paid Dividends

Tax/Retirement:

  • K-1 Income from LP/FLP
  • Recapture
  • NUA
  • 20% withholding plan distributions, Secular Trust
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15
Q

Charitable Giving

A

Calculate the Maximum Deductible - 60% of AGI

  • Calculate the eligible amounts given to 50% organizations (public charities) such as all churches, schools, hospitals and organizations such as United Way, Red Cross, Humane Society, etc.
  • Calculate the eligible amounts given to 30% organizations (private charities) such as private non-operating foundations, war veteran groups, and fraternal orders.
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16
Q

Charitable Giving (Types of Property - 60% Charities)

A
  • Long-Term Appreciated Property, using FMV deduct up to 30% of AGI
  • Use-unrelated Property, Inventory, ST Capital Gain Property using basis deduct up to 50% of AGI
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17
Q

Sources of Federal Tax Law/Authority

A
  • Internal Revenue Code: Primary Source of all tax law.
  • Treasury Regulations: Great authority, but not law.
  • Revenue Rulings and Revenue Procedures: Administrative interpretation. May be cited.
  • Congressional Committee Reports: Indicate the intent of Congress. May not be cited.
  • Private Letter Rulings: Apply to a specific taxpayer .
  • Judicial Sources: Court decisions interpret
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18
Q

Step Transaction

A

Ignore the individual transaction and instead tax the ultimate transaction.

  • Example: The XYZ Corporation sells property to an unrelated purchaser who subsequently resells the property to a wholly owned subsidiary of XYZ.
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19
Q

Sham Transaction

A

A transaction that lacks a business purpose and economic substance will be ignored for tax purposes.

  • Example: A sale by XYZ to ABC, but both XYZ and ABC are owned by the same persons.
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20
Q

Substance Over Form

A

The substance of a transaction, and not merely its form, governs its tax consequences.

  • Example: The president of XYZ has the company loan him the money he needs. He never intends to repay the loan or take a salary.
21
Q

Assignment of Income

A

Income is taxed to the tree that grows the fruit, even though it may be assigned to another prior receipt.

  • Example: Mr. T owns XYZ, an S Corp. He directs that all income be paid to his son. Mr. T reports no income.
22
Q

Dates for Paying Estimated Taxes

A
  • April 15
  • June 15
  • September 15
  • January 15
23
Q

IRS Penalties

A
  • Frivolous Return: $5000
  • Negligence: Penalty is 20% of the portion of the underpayment attributed to negligence.
  • Civil Fraud: Penalty is 75% of the portion of the tax underpayment attributable.
  • Failure to File: Penalty is 5% of the tax due per month, with a maximum of 25%.
  • Failure to PAY: Penalty is 0.5% per month the tax is unpaid, with a maximum of 25% (Pay-Point)
24
Q

Federal Withholding Tax Underpayment Penalty

A

To avoid, pay the lesser of:

  • 90% of the current year’s tax liability
  • 100% of the prior year’s tax liability (or 110% if the last year’s adjusted gross income exceeded $150,000)
25
Q

Adjustments for Adjusted Gross Income (AGI)

A

The second step in the 1040 calculation is adjusted gross income. It is Total Income (or Gross Income) less adjustments to income.

The main Adjustments or Deductions to Income are:

  • IRA Contributions
  • Self-employment Tax - half (.07065)
  • Self-employment Health Insurance (100%)
  • Keogh or SEP
  • Alimony paid - divorced before 2019
26
Q

Schedule A Itemized Deductions

A
  • Medical, Dental, and LTC (7.5% of AGI)
  • Casualty and Theft Losses
  • Real Estate Taxes**
  • Investment Interest Expense
  • Home Mortgage Interest
  • State and Local Taxes**
  • Personal Property Tax**
  • Charitable Gifts

**Limited to $10,000/yr.

27
Q

Casualty Losses (Calculation of the Deductible Loss)

A

Must be a presidentially declared “natural disaster”

First: Use the lesser of basis or FMV

Second: Subtract any insurance coverage

Third: Subtract $100 (floor)

Fourth: Subtract 10% of AGI.

28
Q

Kiddie Tax

A

All net UNEARNED income of a child who has:

  • NOT attained age 18, or
  • Turns 19-23 if a full-time student and who has at least one parent alive is taxed at parent’s rate regardless of the source of the assets.

Children under 18 are entitled (2023) to a Standard Deduction amount ($1,250) and an additional $1,250 of unearned income will be taxed at the child’s rate (10% marginal tax bracket).

29
Q

Self-Employment Income

A
  • Net Schedule C Income
  • General Partnership Income (K-1 income)
  • Board of Directors fees
  • Part-time earnings (1099) NOT wages or K-1 distributions from an S Corp
30
Q

Self-Employment Tax Calculation

A

The Taxable Wage Base will not exceed $160,200 (2023).

  • If you added up the self-employed income, and you exceeded $160,200, you did something wrong. Why? Social Security tax stops at $160,200 (2023).

Shortcut: Multiply Total Self-employment Income by 0.1413

31
Q

Tax Credits

A
  • Credit for child and dependent care expenses
    • $3K one dependent
    • $6k two or more
    • Use 20% of allowable expense on exam
  • Child Tax Credit
    • $2k for each child under 17
    • Up to $1,600 could be refundable
  • Adoption Credit
  • Elderly and Disabled Credit
  • Foreign Tax Credit
  • Earned Income Credit (refundable)
32
Q

Accounting Methods

A
  • Cash: Mandatory where taxpayer’s records reflect only cash transactions, and there are no inventories.
  • Accrual: Mandatory for purchases and sales over $25M+ where there are inventories.
  • Hybrid: Combines accrual for inventory portion of business and cash for cash portion of business.
  • Percentage of Completion: For long-term contracts where the contract will not be completed within the taxable year started.
33
Q

Personal Service businesses that are also regular Corporations (C-Corp)

A
  • Health
  • Accounting / Architectural
  • Law
  • Engineering

Remember: H.A.L.E.

Taxed at flat 21% rate

34
Q

Realized Gain vs Recognized Gain

What’s the difference?

A
  • Realized Gain is Economic or Inherent Gain at the time of the transaction.
  • Recognized Gain is the part of Realized that is immediately taxable.
35
Q

An individual is required to file a tax return if earnings from self employment (1099) are more than ______?

A

$400

36
Q

Elderly or Blind

A

$1,500 extra (per person) Standard Deduction (MFJ)

$1,850 Single Filers

Over 65 & Blind gets both (doubles)

37
Q

FICA Taxes

A

Employee & Employer each pay (6.2% + 1.45%) up to W-2 earnings of $160,200.

After $160,200 each pays Medicare taxes of 1.45%

38
Q

C Corporation

A

Taxed at flat 21% rate

Advantages of C-Corp:
* Separate tax entity (files Form 1120)
* Dividend-received deduction (50% exclusion)
* Unlimited # of investors
* Can provide non-qual deferred comp
* Limited liability
* Continuity of life

39
Q

Section 1244

A

Qualified Small Business Stock
* Tax Beneficial Treatment of Loss (business closing)
* Only applies to first $1m of stock (C or S) initially issued
* Allows loss of $100K / year (MFJ) as ordinary income loss, plus $3K capital loss.

40
Q

Passive Activity Income & Losses
(LPs, RELPs, MLPs)

Note: No Material or Active Participation

A
41
Q

Loss for Active Participants

A

$25k deduction per year of losses from real estate activity.

Phased out for AGI $100k - $150k on $1 for $2 basis.

No deduction over $150k AGI

42
Q

Rental of Principal Residence

A

No tax on rental income if rented up to 14 days during the year.

43
Q

Renting out a vacation home

A

Personal use cannot exceed longer of 14 days or 10% of rental days.

44
Q

Charitable Giving Steps

A
  1. Find AGI - Max for year is 60%
  2. First do Public, then Private
  3. Make Table:AGI / Deduct / Leftover / Carry Fwd*

Cash (60%) / Private 30%
FMV (30%) / Private 20%
Basis (50%) / Private 30%

*Carry Forward up to 5 years

45
Q

No Alimony Paid 3rd Year

A

Subtract $37,500 (constant) from alimony paid years 1 & 2.
Difference = Recapture amount

46
Q

What qualifies for like-kind exchanges?

A

Non-qualifying property is inventory of a business, personal residence and business equipment.

Qualifying property must be generally of the same type such as real estate for real estate.

47
Q

Can a C-Corp use the QBI deduction?
(Qualified Business Expense / 199-A)

A

No
Must be a pass-though business.

48
Q

Summary of Tax Forms

A

Clark's Cards (9 decks)

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