Income Tax Flashcards

Question

Home Office Deduction

Answer 1

Not available for employees Statutory employees like life insurance salesman can claim this. Self-employed people can claim it. Need to prove they use the office exclusively and on a regular basis. Home office must be used for actual business uses. Must be no other fixed location where the taxpayer can conduct business from.

Answer 2

Cannot claim a loss with the home office deduction. Gross schedule C income: $50,000 Expenses: $45,000 Home Office Expense: $10,000 Can only deduct $5,000 of office expenses (cannot claim a loss with this deduction)

Answer 3

More strict with TCJA Meals with clients cannot be lavish and have to be business reasons. Office parties, meals for convenience of employer, and employee meals while travelling are allowed. Meals are 50% deductible. Tickets to sporting and cultural events are no longer deductible by employer. Entertainment expenses are NOT deductible.

Answer 4

ALWAYS 0 These were removed by TCJA

Answer 5

Last dollar of income is taxed at this. For LTCG: Use 0% if between 10-12% Use 15% if between 22%-35% (Under $583,750 MFJ) Use 20% if over 35% (Over $583,750 MFJ)

Answer 6

Medicare tax rate is 1.45% and increases to 2.35% over these wages: MFJ: $250k MSF: $125K S: $200k Employers will withhold always when wages are above $200k

Answer 7

Additional 3.8% Medicare tax is applied on investment income for taxpayers above $200k (single) and $250k (MFJ) Applies to lesser of amount over tax level or total investment income. Investment income includes STCG, LTCG, qualified and nonqualified dividends, interest income, and non-qualified annuity distributions Does not include Muni bond interest or IRA withdrawals

Answer 8

Earned income gets $450 added to it and that is the new deduction. Greater of that or $1,300 normal deduction. Can be no more than standard deduction of $14,600 Taxed at the parents tax rate.

Answer 9

Pay both halves of SS and Medicare tax. Based on net earnings from self-employment. Test questions will usually not exceed $168,600 for SE income. Above that is Medicare tax only. Shortcut is net SE income multiplied by .1413 to find the SE tax. Half the SE tax is an above the line deduction.

Answer 10

Both parents need to work. Children eligible until age 13 Qualifying expenses are limited to $3k per one child or $6k for two or more. This amount is multiplied by 20% for the actual credit. Max credit is $1,200 (normally) Technically percentage can go from 35%-20% depending on income but usually is 20%

Answer 11

Can claim a credit of $2,000 per qualifying child under 17. Available for child, stepchild, or foster child. MAGI phase-out is above $400k for MFJ and $200k for Single. $1,700 of the credit is refundable per child. $500 family credit for dependents who are non-qualifying children. Over 17, elderly parents, disabled adult child, etc. Need to provide more than half their support. Same phase outs.

Answer 12

US taxpayers that have paid income to foreign countries that the US is friends with can deduct those taxes or credit them dollar for dollar against their liability.

Answer 13

Credit is 50%, 20%, or 10% of retirement plan/IRA contribution depending on persons AGI. ($76,500 MFJ) Max credit is $2k single / $4k MFJ

Answer 14

Need to: 1. Adopt a child and have out-of-pocket expenses relating to it 2. Amount of tax credit is directly related to amount spent on adoption expenses. Special needs children get full credit. Qualifying expenses count as anything to finish the process, does not include surrogate parenting or adopting your spouse's child. Max credit is $16,810 with MAGI phaseout $252,150 to $292,150 Claim the credit when adoption is finalized.

Answer 15

Available credit for someone who (1) reaches 65 or (2) is under 65 but is retired with a total disability and receives disability income

Answer 16

Tax credit for low paying jobs people under certain amounts.

Answer 17

Deduction reduces your tax by your tax rate. Credit reduces your tax dollar for dollar. Equivalent tax credit = Deduction * Tax bracket Equivalent deduction = tax credit/tax bracket Deduction is worth more to high income people than low income people Credit is worth more to low income people than high income people

Answer 18

Dividend or interest Capital gains Real estate income (rentals) Income as a limited partner (passive) S Corp wages S Corp distributions

Answer 19

20% deduction on QBI. QBI is net income from pass-through business such as rental income, publicly traded partnerships, S-Corps, REITs, partnership income (limited too), and sole proprietorship income. Passive activities count too. Determined on each separate business owned. If one loses money, that can be offset by QBI of another. If there is loss that can be carried forward and offset at the next year. Pass-through income is broken down to personal service business (lawyers, actor, consulting, anything where revenue comes from talent of person) and all other business. Three tiers based on taxable income: - Tier 1 (Less than $191,950 (S) or $383,900 (MFJ)) Full 20% deduction whether a personal service or not Tier 2 (between $191,950 and 241,950 (S) or $383,900 and $483,900 (MFJ)) Personal service businesses start to phase out and non personal service get 20% deduction Tier 3 (over $241,950 (S) or $483,900 (MFJ)) No deduction for personal service Deduction based on wages and property for non personal services but can be 20%

Answer 20

Calendar year is to Dec 31st Fiscal year can be the end of any other month not Dec

Answer 21

Companies realize revenue in the year it is received with cash. Cash is most simple and used for most under $25M of revenue. Companies realize revenue when earnings process with goods or services is complete, regardless of when they get the cash. Accrual has to be used if you have over $25M of revenue (over past three years) and have inventory. Also has to be used if C Corp over that amount.

Answer 22

Need approval from IRS

Answer 23

Any contract with building or manufacturing property if not completed in the year in which it is entered into.

Answer 24

Some or all of the amount realized on the sale consists of a buyers note, the seller may be entitled to use a unique method of accounting for capital gain realized to be spread over the life of the note rather than in one year. Exceptions to the rule (all gain will be taxable in one year): - All payments are received in one year - Property is publicly traded securities - Property is sold at a loss - Property is sold to a related party who in turn sells the property within two years of the original purchase date

Answer 25

Gross profit percentage = Profit / Total contract price Gross profit percentage * payment = capital gain on the payment LTCG or STCG depending on holding period

Answer 26

During inflationary (rising) prices FIFO: - Increases earnings - Increases tax - Accurately states current inventory prices LIFO: - Decreases earnings - Decreases (defers) tax - Understates current inventory prices Specific Identification: - Usually the best for getting the result you want

Answer 27

If you have losses in excess of income, this generates a NOL and is reported on its tax-return. No tax is incurred at that point and losses would be suspended and carried forward. NOL sustained in one year may be used to reduce taxable income in a current year. TCJA limits amount of NOL that can be utilized in a given year but no limit on carry forward. Carrybacks of NOLs are not permitted.

Answer 28

Pros: Retirement plans (SEP) 100% medical premium deduction No legal formalities Conduit of income to owner Cons: Unlimited liability Business dies with owner Capital structure depends on owner

Answer 29

Pros: Retirement plans (SEP) 100% medical premium deduction Partnership agreement can be verbal Conduit of income to owner Cons: Unlimited personal liability for acts of other (joint and several liability) Partnership dissolves upon death or bankruptcy of a partner Capital structure depends on owners

Answer 30

May be classified as partnership or corporation. Can be partnership if no more than two of these are true: Centralization of management Continuity of life Limited liability Free transferability of interests Ownership interests, disbursement of funds, capital structure, and other financial items are governed by a contract among owners and governed by state law. Owners can be involved in daily activity without losing limited liability status, every member has limited liability against all debts

Answer 31

General partners are not personally liable for malpractice related claims from the other general partners. Useful for when a partnership wants to convert from an entity that does have unlimited liability. Can just easily convert. When forming a new entity, flexibility of an LLC makes it a better choice.

Answer 32

Separate tax entity. It distributes after-tax earnings to its owners as dividends and those get taxed a second time. Flat tax rate of 21%. No more graduated tax or AMT. Pros: Separate tax entity (can reduce income of high earners if kept in Corp) Unlimited amount of owners Dividend Reduction Limited liability Continuity of life Cons: Corporate formalities Dividends paid after tax (double taxation) Accumulated earnings taxed

Answer 33

US Corp investing in another US Corp gets a dividend deduction: 0-20% of ownership: 50% dividend deduction 20-80% of ownership: 65% dividend deduction 80-100% of ownership: 100% dividend deduction

Answer 34

Corporation (C or S) that was initially capitalized with no more than $1M. Loss of $100,000 per year on MFJ ($50k for S) is considered an ordinary loss. Can also take $3k capital loss. Carried forward too. Gain is capital gain.

Answer 35

Need a unanimous vote from shareholders to become one. Pros: Limited liability Conduit of income Basis equals cash plus direct loans made by owner to S Corp Cons: Corporate formalities Sale of stock limited Cannot utilize NOL because it all passes through Trust can be shareholder Can issue voting and no voting stock

Answer 36

Need at least one general partner. They control the operations. Limited partner cannot control anything or else they forfeit limited liability. Limited partner liable for partnership debt only up to their capital contribution.

Answer 37

If Business if profitable: Choose C Corp or PSC If Business has losses then look at: Is it risk-free? (no liability or enough insurance): Choose Sole proprietorship or partnership Is it risky? (liability): Choose S Corp, LLC, or Limited partnership If business says nothing about risk then do S Corp over sole proprietorship. Generally limited liability is what you should go for between two options unless they specifically say it’s risk free. Even then limited liability is better.

Answer 38

C Corp - profitable and want a lot of owners PSC - if one of the HALE Sole Proprietorship - some losses, Want to do it yourself (risk-free) Partnership - some losses, Want to do it with a person (risk-free) LLC - some losses, Want limited liability, do it with another, and have basis increase with bank loans S-Corp - some losses, want limited liability, do it with another, basis does not increase with bank loans Limited - some losses, limited liability, don't want the work

Answer 39

Taxable income and loss is on schedule C. If loss, that offsets other income and can be carried forward as an NOL. If business owner borrows money for business purposes, then interest paid is deductible without limit on schedule C. No more carry backs for NOLs but you can carry forward.

Answer 40

File informational return. Each partner includes in their return their part of the K1 reporting income/loss. Losses are deductible up to basis. Basis equals (1) cash contributed; (2) direct loans made; (3) loans made to the partnership like bank loans (which the partner may be held responsible for)

Answer 41

Losses are deductible up to basis. Basis equals (1) cash contributed; (2) direct loans made Bank loans are not included in S Corps owner's basis even if personally guaranteed by S Corp owner. Shareholders usually do not have personal liability for the debt when an S Corp takes on debt.

Answer 42

Regardless of number of members, if it is a partnership then only a informational return is filed. Same basis rules as partnerships (makes it a very appealing entity if the entity is going to be taking out bank loans)

Answer 43

Tax is imposed in addition to regular (flat 21%) tax when a regular Corp accumulates over $250,000 or $150,000 for PSC's. Corp needs a legit business reason to avoid the accumulated earnings tax. 20% tax.

Answer 44

Corps cannot deduct a dividend that is distributed. It is both taxed at the corporate level and at the shareholder level. NOL is not felt by the owners of the Corp, it is carried forward to offset future income from the Corp. no carry backs.

Answer 45

Have beneficiaries Have responsible person (PR or Trustee) Transfer property Administer property in a fiduciary way Are distinct tax entities

Answer 46

Estate comes into existence when someone dies, Trust can be established before Estates operate for a limited time, Trusts can last long Estates moves property, Trusts can hold it Estates are supervised by court, Trusts by private arrangement

Answer 47

Both file 1041. Estates can deduct accounting fees, attorney fees, and expenses of preparing return. Need to see whether it is better to take it on 1041 or 706. K1 is issued to beneficiary.

Answer 48

Due on April 15th on entity's year end. Need to file a return if: - Any taxable income - Gross income of $600 or more - Beneficiary is a nonresident alien

Answer 49

Estate can choose calendar year or fiscal year. Get a $600 exemption on a short-period return. Trusts can only choose calendar year unless a charitable trust.

Answer 50

Beneficiaries are taxed on amount distributed and trust or estate is taxed on amount accumulated or retained. If it must distribute all its income, beneficiary needs to report that whole amount whether received or not. If trustee has choice to distribute income then beneficiary needs to report: - all income that is required to be distributed - all amounts actually paid

Answer 51

Very compressed

Answer 52

A grantor trust is one where the grantor holds too much power, so the income is taxed to him. Other trusts are called non-grantor trusts. Grantor trust rules: IRC says that a grantor (rather than beneficiary) will be taxed on income of trust. These are tainted trusts. These violations create a tainted trust: - Income is used for grantor or spouse's benefit. - Income is used for grantor's legal expenses - Income is used to fund a life insurance policy on the grantor's life - The grantor or spouse can control the timing and distribution of the trust. (beneficial enjoyment) Reversionary Interest: The grantor will receive back more than 5% of the trust value at the time of creation. (taxable to grantor) Administrative power: deal with trust property for less than full value, vote on the stock, and borrow from the trust. (taxable to grantor)

Answer 53

Unfunded: grantor makes a yearly gift to the trust to fund the premium. no income is generated so no tax. Funded: grantor puts in an income generating asset that generates income to pay the premium. The amount of the premium paid is taxable income to the grantor. The rest is taxable to whoever it goes to (trust, grantor, beneficiary)

Answer 54

Tainted if: Grantor Retains: - Right to income or to use the trust property (beneficial enjoyment) - Reversionary interest that exceeds 5% at the time of death

Answer 55

Simple trusts (estates) is a conduit to forward income to beneficiaries. Trust passes its income and deduction to the beneficiaries who report it on their own income tax return. Beneficiary pays taxes on it at their own marginal tax rates (distributable net income DNI). Trust is a separate tax entity. Corpus cannot be distributed and charitable gifts cannot be made. Complex trust is taxed as a distinct entity if: if it irrevocable, grantor has not retained any control, and income is accumulated (either because trust has to or trustee can retain it) income accumulated is taxed to trust, distributed income is taxed to beneficiary. Corpus can be distributed and charitable gifts can be made. A complex trust 'may' distribute income. Irrevocable trust is usually, but not always a complex trust. $300 exemption for simple trusts that have to distribute all income and $100 exemption for complex trusts that are not required to distribute income

Answer 56

Revocable trusts are great for probate. Most grantors name themselves trustee for their living trust. At trustor's death, it becomes irrevocable and either terminates and distributes income or continues until a later date. No gift tax consequence. All income is taxable to the grantor under grantor trust rules. Grantor holds control over property. Irrevocable trust is where grantor gives up all rights with property transferred to the trust. Grantor can't change the trust, becomes a non-grantor trust. Can be taxed as a simple or complex trust.

Answer 57

Charitable deduction (complex trusts) Depreciation, depletion, cost recovery Net operating carryforwards Administration expenses Deduction for all income it is required to distribute (does not matter if it actually distributes it)

Answer 58

Limits the amount that trust (or estate) beneficiaries must report as gross income. DNI rules allow the trust to: - claim a deduction for amount distributed - limit the portion of the distribution that is taxable to beneficiaries - ensure that the character of the distributions remain the same for the beneficiary as it was to the trust. no double taxation of trust income because trust gets a deduction on distributed income to beneficiaries. Deduction is equal to lesser of amount distributed or DNI. Income distribution deduction to the trust and therefore taxable income to the beneficiary is the lower of the DNI or actual amount distributed.

Answer 59

Cost basis is original basis + legal fees, commissions, sales tax, delivery, freight, and improvements like renovations but NOT repairs, real estate taxes, or normal business expenses. Improvements must be capitalized but repairs are deducted as expenses and never impact basis. Adjusted Basis is cost basis less any cost recovery (depreciation).

Answer 60

Amortization is the depreciation of an intangible object like goodwill. These are amortized under section 197. Like a franchise or goodwill or logo. Accretion is from a bond that is issued with a discount from par value like a zero-coupon bond. Every time you pay income tax on the interest (phantom income) that adds to the basis of the bond.

Answer 61

Value of gift for gift tax purposes is its FMV at the time of the gift. If the FMV is greater than the basis, then the recipient of the gift gets the original basis as their basis. (Carry-over) If the FMV is less than the basis at time of gift, then its more complicated. Need to be sold above the basis to recognize a gain and needs to be sold below the FMV at time of gift to recognize a loss. If in between those two then no gain or loss. If this is the case, then it is better to sell the item, recognize the loss, and then gift the cash.

Answer 62

Basis is at the date of death or AVD if chosen. In community property states, marital property gets full step up if at least half is included in gross estate of deceased spouse. In common law states, the property only gets half a step up in basis.

Answer 63

Applies to all recovery property (not land or intangibles). Half-year convention must be used. MACRS 5-Year: Year 1 is 20% and Year 2 is 32% 7-Year: Year 1 is 14.29% and Year 2 is 24.29% Straight-Line 5-Year: Year 1 is 10% and Year 2 is 20% 7-Year: Year 1 is 7.14% and Year 2 is 14.29% Use MACRS unless specified to use straight-line

Answer 64

Can expense up to $1.22M of qualifying property in year of acquisition and reduced as you get qualifying property that exceeds $3.05M. Qualifying property is 1245 property to use in a trade or business. Expense is limited to the taxable income from the business activities of the person. Cannot create a loss for yourself. Section 179 loss can be carried forward.

Answer 65

Realized = is how much the person do they currently have without deductions Recognized = is how much they have to report on their tax return after credits

Answer 66

Method of deferring gain Qualifying property is real estate only Like kind property is of the same nature even if they differ in quality Real property is usually like-kind but property outside the US is not like-kind Like Kind: Apartment for shopping center or farm for a ranch Need to meet both conditions: - exchange properties must be like kind - taxpayer must use the acquired property for business If just one side does it then it qualifies for them.

Answer 67

Liabilities assumed by another are considered boot. If both are assuming the others liabilities, only net debt relief is boot. If giving boot, that increases your basis.

Answer 68

Only things that matter: FMV of acquired property; Adjusted basis of property given up; and Boot Realized Gain = Total value received (FMV of acquired + Boot received) - Adjusted basis (increased by boot given) Recognized Gain = Lesser of Realized Gain or Boot Received Substitute Basis = FMV of acquired - (Gain Realized - Gain Recognized)

Answer 69

45 days (before/after) for property to be received to be identified 180 days to acquire title

Answer 70

If you do a 1031 exchange to a related party and they sell within two years of the exchange date, then the entire realized gain will be recognized on the date of sale. Similar to installment sale to a related party.

Answer 71

1231 is taxed as capital gain and loss is treated as ordinary income loss 1245 is taxed at ordinary income rates 1250 is taxed at 25%

Answer 72

Need both spouses to meet both requirements to get the full exclusion. Partial exclusion for unforeseen circumstances. If moving for work, it has to be 50 miles away. Partial exclusion depending on how long you have been there. Sales costs, commissions, are added to the basis. No tax return is needed if gain is under the exclusion amount. Up to 2 years after spouse died can you sell for full exclusion. Death is also considered an unforeseen circumstance.

Answer 73

It is possible! If you meet the 2/5 year rule for ownership and use and THEN rent your home for 2 years, you can claim both the 121 exclusion and then make a 1031 exchange. If renting or a vacation home first, then the owner only gets a percentage of the exclusion based on how long the property is a primary residence divided by how long they have owned the property. Prevents people from moving into vacation homes to get the exclusion.

Answer 74

If doing an installment sale of tangible personal property, ALL depreciation recapture must be reported as income in the year of disposition. NOT GOOD Remainder of the gain is still subject to installment sale rules.

Answer 75

If charitable deduction is available, basis is sold to charity for less than FMV must be allocated between portion of property sold and portion given to charity. New Basis = (Charitable Amount Proceeds / FMV) * Original Basis Charitable Amount Proceeds - New Basis = Taxable Gain

Answer 76

Distinct, alternate method of calculating income tax liability. Secondary tax that comes into play if too many credits, deductions, and exemptions. There are exemptions here that phaseout with income. Max tax rates are 26% and 28% C Corps do not have AMT Itemized deductions increase chance of AMT because they reduce current income.

Answer 77

1. Start with AGI 2. Add back items 3. Add preference items 4. AMT base 5. Exclusions 6. AMTI 7. Calculate AMT Tax AMT tax payable is AMT over regular tax due. Add back items are added back, other itemized deduction items are not added back. The higher your tax bracket, the harder it is to trigger AMT because of the tax brackets.

Answer 78

Percentage depletion ONLY. Usually triggers AMT because it is accelerated. This is depreciation for natural resources.

Answer 79

Trade or business where the taxpayer does not materially participate. These losses can only offset other passive income. Passive loss cannot be used to offset portfolio income, compensation, or business income. 1986 act separated earned investment and passive income, active wages, portfolio income, and passive income.

Answer 80

Passive income from non-publicly traded partnerships (RELPs) can offset passive income from other NPTPs, or other passive income, called passive income generators PIGs. The passive activity losses PALs offset the PIGs. This netting is done on schedule E. Publicly traded partnerships can only offset loss from income of the same partnership. Cannot reduce other passive income or other publicly traded passive income.

Answer 81

You can own equity in businesses and not materially participate. They do get a share of income though, that is passive. Can only deduct loss up to the amount of passive income of another.

Answer 82

1. Rentals, including equipment and real estate (exception: active participation) and royalty income (oil royalties) 2. Businesses where the taxpayer does not materially participate. Limited partnerships, partnerships, S-Corps, LLCs can be this.

Answer 83

Also known as master limited partnerships (MLPs) These are partnerships where the interests are publicly traded on an exchange. Can only deduct loss from the same publicly traded partnerships if they have income. Restrictive Can be carried forward until the partnership is completely sold. Income from these is considered portfolio income.

Answer 84

First net the non publicly traded partnerships and other passive net income. Next, look at the publicly traded partnerships.

Answer 85

Suspended losses are carried forward until you completely dispose of the interest. No $3,000 per year loss allowed like capital loss. Passive loss limitation is not permanent. When you dispose of the entire interest (selling all the properties) or die, any suspended losses according to that interest are fully deductible in the year of disposition.

Answer 86

Phantom income can occur when declining real estate properties are refinanced and debt is forgiven. Income arises from the portion of debt that is forgiven.

Answer 87

$25,000 loss is deductible from the real estate activity and gets phased out between 100k-150k AGI. Phased out 50 cents every dollar above the AGI. This can offset active or portfolio income.

Answer 88

Material participation in an activity is if the taxpayer is involved in the operation of the activity on a regular, continuous, and substantial basis. Having a job means that is your material participation and probably can’t be materially participative in another activity.

Answer 89

Active participation is less stringent. It is an exception to the passive loss rule. The definition is bona fina involvement, or essentially the decision maker in management decisions. Need to own at least 10% of the property. Residential real estate can produce profit or loss, income or loss is shown on schedule E.

Answer 90

If you rent less than 15 days: Rental income is excluded from your income, but no deductions attributable to the rental use are allowed. If you use the home less than the longer of (1) 14 days or (2) 10% of the period of rental use: This is considered a rental and will be treated as a rental with deduction attributable to rental use may be allowed. If you use the home more than the longer of (1) 14 days or (2) 10% of the period of rental use: This is considered mixed use, treated as a residence instead of a business, and expenses related to the property may not be deducted as a business expense.

Answer 91

Oil and gas working interests are not passive and are exempt from PAL rules if the taxpayer is a general partner (usually the case) and is personally liable for losses. Losses are deductible against active or portfolio income without limits and no AGI restrictions. To qualify as working interest, the form of ownership may not limit the personal liability. If a limited partner, any loss becomes passive. Percentage (not cost) depletion can trigger AMT.

Answer 92

Closely held C Corp owning an equipment leasing partnership (not PSCs) can use passive losses to offset active, but not portfolio, income. Not available to S Corps, ONLY closely held C Corps Can deduct losses up to its basis. Closely held corporation is held by one person or small group of family.

Answer 93

For the year of death, use MFJ. Use Widower for two years after the first year if you have a home and a qualified child.

Answer 94

Always $0 For kids under 24 as students and under 19 that you provide more than 50% of their income, you get a “theoretical exemption”

Answer 95

If separate returns are filed by a couple in a community property state, one half of income must be reported by each spouse. Income from separate property is treated as separate income.

Answer 96

If you pay excess alimony payments, IRC thinks that is a disguised property settlement and they will make you recapture some as income. Calc for only 2 payments: Add the first two payments Subtract $37,500 That’s the recapture amount Calc for 3 payments: Add first two payments Double the third payment and add to $37,500 Subtract first two payments from that number above Recapture amount

Answer 97

Get non publicly traded income generating partnership Get a real estate (active participation) that generates income Sell the interest

Answer 98

Public (50%): Cash is 60% Ordinary income (use-unrelated, inventory, copyright, art, STCG) is deducted at basis at 50% LTCG is 50% at basis and 30% at FMV Use-related, if LTCG then 30% FMV or basis at 50% If STCG, even if use related, then always 50% Private (30%): Cash is 30% Ordinary income (use-unrelated, inventory, copyright, art, STCG) is deducted at basis at 30% LTCG is 30% at basis and 20% at FMV Use-related, if LTCG then 20% FMV or basis at 30%

Answer 99

Charitable Deduction is available for immediate year, then 5 years after are carried over (total of 6) Still the same form of deduction as before

Answer 100

Need to substantiate any contribution (cash or property) of $250 or more or deduction is not allowed. Need written acknowledgment (not cancelled check) from organization. If a vehicle, need substantiation if it’s $500 or more. If the organization sells it, then the deduction is the amount they sell it for.

Answer 101

Corporation may not deduct more than 10% of taxable income for charitable gifts on 1120. If a Corp is donating inventory (other than S-Corp) then you donate basis plus 1/2 of appreciation but can’t go over twice the amount of the basis.

Answer 102

- if a sole proprietor, deduction is on Schedule A, not Schedule C - If FMV of LTCG is below the basis, then you have to do 50% up to the FMV (If this is the case, it is better to sell, recognize the loss, and donate the cash) - Stocks and real estate are not subject to use-unrelated rules - Choosing basis over FMV for LTCG is almost always wrong - Can never deduct the property for more than what it’s worth. If the charity can sell it for less than a FMV, deductible value is what they sell it at. This is for cars, for other property it is at FMV even if that is less than what the charity sells it for.

Answer 103

First, calculate 60% of AGI (max deduction) Second, calculate all the 50% public charity deductions (add) Third, calculate all the 30% private charity deductions (add) Anything over the 60% is carried over

Answer 104

If you can get the itemized, do things that help that. Take the higher of the two

Answer 105

For is to get to AGI From is taken from AGI

Answer 106

Nothing, she had 90% of current year No failure to pay because she had CYSH No penalty will apply but interest may be due

Answer 107

They should try to make a profit for at least 3/5 years.

Answer 108

No underpayment penalty because you are covered. There could be a penalty for the failure to pay if you didn't pay at the time of extension.

Answer 109

Well over $150k for PYSH

Answer 110

Congressional Committee Reports

Answer 111

Net means that the expenses have already been deducted so the expenses are not subtracted again

Answer 112

Net schedule C income, don’t back anything off this So it is Net schedule C income 1/2 SE taxes, less 100% of medical, dental, and qualified LTC premiums are an adjustment to income on the front of the 1040

Answer 113

They are looking for GROSS income here. So do not deduct 20% of the childcare expenses because that is a credit and will be applied against tax liability But, the gross income is normal income

Answer 114

Buying a condo is nice to get interest deduction Getting muni bonds is great Enrolling in a FSA if you do not have medical claims is not great

Answer 115

Deferred comp because it would not be currently taxable

Answer 116

Pay your kid the most possible to shift the income away from your own high income tax bracket

Answer 117

Yes as long as they are above 7.5% of AGI

Answer 118

FIFO, LIFO, Specified ID

Answer 119

S Corp and issue voting and nonvoting shares this way they can get in but you retain control Sole is too risky and limited partnership interests does not allow them to participate Usually want to move away from sole proprietorship

Answer 120

$300k-$250k = $50k $50k * 20% = $10k of tax

Answer 121

YES It would not be included if you had a right to the income for 15 years and then it transferred to someone, because it would lapse

Answer 122

Yes, it serves no purpose. Grantor might as well keep the assets in his or her name.

Answer 123

More aggressive because even if that income is taxed additionally, there is a lot more growth there.

Answer 124

C Corp could help because it is taxed at 21% All the other forms are pass-through entities or conduit entities so that would not do much in terms of reducing taxes

Answer 125

All your income, net schedule C losses are included here too before taking adjustments

Answer 126

Can only take losses to basis for S Corp and partnership Sole can take more Corp takes capital losses

Answer 127

Do not include the office improvements because it is specifically asking for the amount of depreciation taken on the furniture

Answer 128

Because treasuries that were issued at 11% are now worth $140k then it is not as simple as multiplying the gain by the coupon Income = ($151k/$140k) * $11,000 (coupon payment on a $140k bond) = $11,864.60 $11,864.60*68% = $8,068 after tax gain

Answer 129

Purchasing investments (not munis) or purchasing a home mortgage

Answer 130

Selling price

Answer 131

That is the amount of gain realized not subtracting the 121 exclusion at that point, just the gain

Answer 132

Ordinary loss Not 1231 loss but ordinary

Answer 133

$3k in the first year, any depreciation in an installment sale is automatically recognized in the first year of sale

Answer 134

A muni bond fund when she is in a low income tax bracket especially when the muni bond fund is paying comparably lower yields then similar bonds. This would give her a better yield

Answer 135

If an asset has depreciation and you enter into an installment sale, the entire amount of depreciation is taxable that first year

Answer 136

Gain is $0 Basis is $12k

Answer 137

Treated as capital gain

Answer 138

While he is still living, it gets taxed to the father

Answer 139

Yes as long as they are normal business expenses

Answer 140

S Corps and Partnerships because they are pass through entities

Answer 141

AMT tax - regular tax

Answer 142

Itemizing deductions Exercising ISOs Private muni bonds Oil and gas interests

Answer 143

Earn more income!! Best option Don't itemize Exercise NSOs this year Defer property tax

Answer 144

Active participation in rental real estate

Answer 145

Gain of $10k is recognized Loss of $9k is recognized

Answer 146

Yes, safe to assume that if it does not specify that the activity is material then it probably is passive

Answer 147

S Corp and RELP S Corp is assumed to be passive unless told otherwise Active real estate is exception

Answer 148

When it is owned by the payee and the payee is the beneficiary Payor pays the premiums and is the insured If these are met then the payor can deduct the premiums

Answer 149

You get a K1 with phantom income having to pay tax on that amount on your portion

Answer 150

Yes, you can still qualify for the full $500k exclusion as long as you both lived there for 2 years

Answer 151

Selling the home for the $500k gain, not indicated that she is married so that would result in gain.

Answer 152

No, only closely held C Corps can do this, not PSCs. Also not available to S Corps. This can use passive losses to offset active income but not portfolio income.

Answer 153

Oil and gas working interest as a general partner because it offsets active income.

Answer 154

Treat as use unrelated so use the basis going to 50% if public.

Answer 155

Valued at the lower FMV Can't take a deduction for more than something is worth Charitable deduction can still be based off the higher (50%-public or 30%-private) percentage but only up to the amount of the FMV (i think double check)

Answer 156

Basis or FMV if lower

Answer 157

Sell it and take the loss

Answer 158

If wanting the highest for the current year, look at the highest basis and think about using the basis valuation at (50%-public or 30%-private) and how that compares with the rest Think about FMV but that will be at the lower rates (30%-public and 20%-private)

Answer 159

Take the higher, you can technically choose whichever you want You should take the standard deduction if that is higher for sure. Single - $14,600 MFJ - $29,200

Answer 160

No because it is a limited partnership. Has to be a general partnership to offset active income

Answer 161

When they are greater than 7.5% of AGI

Answer 162

Net business losses Net capital losses Getting to AGI

Answer 163

Unless very explicitly stated that the business is VERY safe then fall to the side of safety by choosing S Corp

Answer 164

1245 recapture is $20k 1231 gain is $20k

Answer 165

Taxable amount = basis / expected payout If no details are given on expected payout, look at their life expectancy in the case and use that with the amount of payments they are expecting that is the expected payout

Answer 166

Fully depreciated property

Answer 167

Section 125 cafeteria plan Group life up to $50k Group dental Split dollar and nonqualified deferred comp would not be cheap, would be expensive

Answer 168

LIFO (gain taxed first) Tax on the gain AND 10% penalty on the gain that adds to the tax consequence $50k basis and $100k FMV $50k loan is taken out $50k * 10% (penalty) + $50k * 25% (tax rate) = $17,500 in tax

Answer 169

Read the case and make sure you are subtracting any amount that the employee is paying

Answer 170

Public: Churches, schools, hospitals, charitable purposes, stopping cruelty Private: Foundations, fraternal orders, war veterans organizations

Answer 171

No. Her income would be $6000 + $14000 = $20,000 Person who has legal right to receive benefits must determine if benefits are taxable. So if check is made out to kids then the mom is only taxed on her portion. The kids portion must be added to their other income to see if taxable (usually not).

Answer 172

Same as MFJ

Answer 173

In between Single and MFJ

Answer 174

Same as MFJ So it would be $32k and $44k for 50% and 85%

Answer 175

YES, it is deductible.

Answer 176

NO they are private or 30% charities.

Answer 177

He should use the hybrid approach. This combines the accrual method for purchases and sales of inventory with the cash method for all other transactions. Large group implies over $25M of revenue.

Answer 178

No, because if he does he may lost his ability to deduct margin interest.

Answer 179

CF Questions CF0 = -1,000,000 CF1 = -9,695 CF2 = -10,664.5 CF3 = -11,730.95 CF4 = -12,904.05 CF5 = -14,194.46 CF6 = +1,500,000 IRR = 6.14% If the question had him wanting to take the cash out at the end of the fifth year then you would add $1,500,000 + -$14,194.46

Answer 180

Qualified LTC premiums, Medicare supplemental policies, other health insurance premiums, and 1/2 of SE tax are deducted on the front of the 1040 as an adjustment to income. Medicare Part B premiums paid are deductible on Schedule A on amounts greater than 7.5% of AGI, and not deducted on the front of the 1040.

Answer 181

YES, both count.

Answer 182

Schedule H - Household employees

Answer 183

Foreign taxes may operate as either a credit or deduction.

Answer 184

Hire an immigration attorney. Should get legal advice before making important decisions about adopting a child.

Answer 185

$20,000 * 35% = $7,000

Answer 186

Keep track of his costs and donate it to the museum. A work of art created by the taxpayer is valued at basis.

Answer 187

Their family attorney. Maybe designated trusted contact but look for the family attorney in most situation. Test loves attorneys.

Answer 188

Call his attorney to ask his CPA

Answer 189

110% of last year since $90k of tax means well over $150k AGI. That is $99k - $30k is $69k. $69/4 = $17,250

Answer 190

IRA Contributions Keogh or SEP contributions 1/2 SE taxes SE health insurance premiums (medical for fam and LTC for taxpayer and spouse) Alimony paid pre 2019 Student loan interest HSA Moving expenses for active military Penalty for early withdrawals of savings

Answer 191

For is to get to AGI From is deducted from AGI

Answer 192

Home use of office Section 179 bonus depreciation (1245 property)

Answer 193

Meals are 50% Entertainment is NOT Travel is

Answer 194

Have his company reimburse him. The amount reimbursed would not be taxable income but the company would not be able to deduct it. You CANNOT deduct it on Schedule A

Answer 195

Front of the 1040s as an adjustment to income.

Answer 196

6.2% + 1.45% by both the employee and employer.

Answer 197

Surrogate parenting and spouses child. Can deduct adoption fees, court costs, attorney fees, and costs to adopt. Credit taken in year it is finalized.

Answer 198

Need to be 65 OR disabled receiving disability payments.

Answer 199

Child tax credit and EIC

Answer 200

For installment sales and 1031 exchanges

Answer 201

Sole Prop Loans

Answer 202

Increases with amount that is left in there that you are taxed on because it is essentially a cash contribution. Distributions of cash reduce your basis because you are taking that part out. Losses also can be taken against basis. Unused loss gets carried forward and used up against future income. Amount that you are taxed on increases your basis. Amount deducted is called a loss carryforward. S Corp salary to owner is subject to FICA and FUTA.

Answer 203

NO Carryback NOLs have been removed.

Answer 204

Better to take loans out personally and then loan to S Corp.

Answer 205

Material and active participation

Answer 206

Insurance: lapse with loan or 162 Investments: Zeros, TIPs, STRIPs, dividends declared but not paid Tax: K1 income from LP/FLP or recaptures Retirement: ESOP NUA or secular trust

Answer 207

Yes if allowed

Answer 208

Valued at their basis using all the materials that they used to make the art.

Answer 209

Yes! Nonresident cannot own an S Corp

Income Tax Flashcards

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