Incorrect Flashcards
(154 cards)
1
Q
📅 When can a corporation re-elect S status after revocation?
A
📌 5 full tax years must pass before re-election is allowed (without IRS consent).
- Example: If S status ends Jan 1, Year 5 ➝ re-elect no earlier than Jan 1, Year 10
- IRS permission is required to re-elect sooner
2
Q
🧾 How is the amortization deduction calculated when a business is purchased mid-year?
A
📌 Amortize over 180 months (15 years), using months in service.
- Applies to intangible assets like goodwill, customer lists, trade names
- Start amortization in the month of acquisition
- If purchased on July 1, only 6 months are amortizable in Year 1
🧮 Example:
- Total intangibles = $100K (customer list) + $50K (trade name) + $90K (goodwill) = $240,000
- Annual amortization = $240,000 / 180 = $1,333.33/month
- Year 1 deduction = $1,333.33 × 6 = $8,000
3
Q
How do the child tax credit ($3,400) and child & dependent care credit ($1,200) apply to a $4,100 tax liability?
A
🧾 Scenario:
- Tax liability = $4,100
- Credits: $1,200 child care (nonrefundable), $3,400 child tax (partially refundable)
🔁 Step-by-step:
1) Apply $1,200 nonrefundable child care credit → tax drops to $2,900
2) Apply $3,400 child tax credit → tax drops to $0
3) $500 of Child Tax Credit is refunded (partially refundable)
🚫 No carryover allowed for child care credit
✅ $500 refund from child tax credit only
Key Rule:
- Nonrefundable credits reduce tax but don’t refund excess
- Refundable/partially refundable credits can create a refund after liability hits zero
4
Q
If a partner is not named in a breach of contract lawsuit, can they still be held personally liable under RUPA?
A
✅ No. Under RUPA, partners have joint and several liability for contract breaches — but a partner must be named in the lawsuit to be held personally liable.
5
Q
Are punitive damages from a personal injury award taxable?
A
✅ Yes. Punitive damages are always taxable and must be included in gross income.
Only compensatory damages for physical injuries are excluded from income. In this case, $2,000,000 (punitive) is taxable; $200,000 (compensatory) is not.
6
Q
Are debts from DUI-related death or injury, and unpaid HOA fees, dischargeable in bankruptcy under BAPCPA?
A
✅ No. Under BAPCPA, all three are nondischargeable:
- Death or injury caused while intoxicated (car or aircraft)
- Homeowner association (HOA) fees
These debts cannot be eliminated through bankruptcy.
7
Q
You paid the following for your elderly parent:
- Medical expenses
- Life insurance premiums
- Fair rental value of lodging
Which of these count toward total support for dependent status?
A
✅ Included:
- Medical expenses
- Fair rental value of lodging
❌ Not included:
- Life insurance premiums
8
Q
Which of the following items are included in a C corporation’s taxable income?
- Gross receipts
- Other income
- Deductible expenses
- Net capital loss
A
Gross receipts – Included
- Other income – Included
- Deductible expenses – Subtracted
- Net capital loss – Excluded (unless capital gains exist)
Rule:
- C corps can only deduct capital losses against capital gains. Only individuals can deduct 3k capital loss
- No deduction is allowed against ordinary income for Ccorps
- Unused capital losses are carried back 3 years and forward 5 years to offset capital gains only.
9
Q
Qualifying Surviving Spouse (QSS) Filing Status
A
To qualify, the taxpayer must:
- Have a dependent child living in the home for the full year.
- Pay over 50% of the cost of maintaining the home.
- Be eligible to file jointly in the year of spouse’s death.
- Not remarry before year-end.
- File as QSS in the 2 years after the year of death.
✘ Living with dependent for only 6 months = not enough.
✘ Maintaining home for only 6 months = not enough.
10
Q
Wash Sale Rule (IRC §1091)
A
If a taxpayer sells stock at a loss and buys substantially identical stock within 30 days before or after the sale date, the loss is disallowed (not deductible). This is known as the wash sale rule.
- Only the proportion of the loss related to the number of shares repurchased is disallowed.
- The disallowed portion of the loss is added to the basis of the newly purchased shares.
💡 Example:
- July 10: Buy 100 shares for $10,000
- Dec 24: Buy 50 more shares for $4,000
- Jan 8: Sell original 100 shares for $7,000
- Total loss = $3,000
Since 50 new shares were bought within 30 days before the sale, the wash sale rule applies to 50 of the 100 shares sold:
- $3,000 × (50 ÷ 100) = $1,500 disallowed loss
- $1,500 disallowed loss is added to basis of the 50 new shares: $4,000 + $1,500 = $5,500 new basis
📌 Result:
- Recognized loss = $1,500
- Basis of remaining 50 shares = $5,500
11
Q
Organizational Costs - Tax vs. Book (IRC §248)
A
Tax rules for organizational costs:
- Up to $5,000 can be deducted immediately, but this is reduced dollar-for-dollar when total costs exceed $50,000.
- Any remaining amount must be amortized over 180 months, starting the month business begins.
-If fully expensed on the books, the entire amount must be added back to book income for tax purposes (except for the allowable amortization).
📘Example:
- Book income: $520,000
- Org costs: $257,400 (fully deducted on books)
- Business began in June (7 months in Year 1)
- No immediate deduction (exceeds $50,000 by too much)
- Allowable tax deduction: $257,400 × 7 ÷ 180 = $10,010
🧾 Taxable income:
= Book income
+ Add back full org cost ($257,400)
– Subtract amortization ($10,010)
= $520,000 + $257,400 – $10,010 = $767,390
12
Q
Accountant Liability in Reviews & Audits (e.g. S-1 Review)
A
- Accountants can be liable for fraud or negligence in any engagement — including reviews.
- A clean audit doesn’t shield them from later liability.
- Each service (audit, review, etc.) is judged separately.
- Liability depends on the facts of the review, not past work.
- In an S-1 review, the accountant can be liable for fraud, negligence, or both.
13
Q
S Corporation Shareholder Restrictions (IRC §1361)
A
✅ Allowed shareholders:
- U.S. citizens or resident individuals
- Estates
- Certain trusts
- 501(c)(3) exempt organizations
- Married couples (count as one)
❌ Not allowed:
- Nonresident aliens
- Corporations (except certain qualified S corp subsidiaries)
- Partnerships
📌 Rule:
An S corporation election is invalid if it has even one ineligible shareholder.
14
Q
AICPA Ethics Investigation – Possible Outcomes
A
The AICPA is a private membership organization. It cannot revoke a CPA license — only a state board of accountancy can do that.
✅ Possible AICPA outcomes:
- Dismissal of investigation (no violation found)
- No further action (insufficient evidence or decision not to pursue)
- Corrective action (e.g., CPE requirements)
- Admonishment (formal reprimand)
- Suspension or expulsion from AICPA membership
❌ Not possible:
- Revocation of CPA license → Only state boards can do this
📌 Example:
If a CPA is investigated by the AICPA, the harshest outcome would be expulsion from membership, not license revocation.
15
Q
Late Filing Penalty – IRC §6651(a)(1)
A
- Penalty = 5% of unpaid taxes per month, but capped at maximum of 25%
- Applies each month (or part of a month) the return is late
- Based on the amount of tax due but unpaid
📘 Example:
- Tax owed = $60,000
- Filed 4 months late
- 5% × $60,000 = $3,000 per month
- $3,000 × 4 months = $12,000 penalty
16
Q
MACRS Depreciation – Residential Rental Property
A
- Residential rental property is depreciated using straight-line over 27.5 years.
- Land is not depreciable — must subtract land cost from total if it was included.
- Use the mid-month convention: the property is treated as placed in service on the 15th of the month, no matter the actual date.
(So June placement = 0.5 month for June + 6 full months = 6.5 months depreciation in Year 1)
📘 Example:
- Total cost = $360,000
- Land = $30,000 → Depreciable basis = $330,000
- Placed in service June 29 → treated as June 15
- Year 1 deduction:
= $330,000 × (6.5 ÷ (27.5 × 12))
= $6,500
17
Q
Alimony, Child Support, and Property Settlements – Gross Income Rules
A
✅ For divorce agreements executed before 2019:
- Alimony is included in the recipient’s gross income and deductible by the payer.
- Child support is not taxable to the recipient and not deductible by the payer.
- Property settlements are also non-taxable and not deductible.
📘 Example:
- Total received: $50,000
- $25,000 = Alimony → taxable
- $10,000 = Child support → not taxable
- $15,000 = Property settlement → not taxable
- Gross income = $25,000
18
Q
Who Is a Tax Return Preparer (TRP)?
A
A tax return preparer is anyone who:
- Is paid (cash or barter) to prepare a tax return or a substantial part of one
- May be anyone — they do not have to be a CPA, attorney, or EA
- No exam or license is required under federal law
- Can also include someone who assigns others to prepare returns
Not a TRP if:
- Preparing returns for free (e.g., for friends/family)
- Preparing returns for their own employer
- Performing clerical tasks only (e.g., data entry)
📘 Example:
An accountant who prepares his mechanic’s tax return in exchange for tires is a TRP — bartering counts as compensation.
19
Q
Safe Harbor – Worker Classification
A
Safe harbor means the IRS will not penalize a business for misclassifying workers as independent contractors — if certain conditions are met.
To qualify, the business must:
1. Have a reasonable basis for the classification (e.g., professional advice or industry norm)
2. Consistently treat similar workers the same way
3. File 1099s (not W-2s) for those workers
✅ If all three apply, the IRS won’t reclassify or impose penalties.
20
Q
Wash Sale – Partial Disallowance & Basis Adjustment
A
A wash sale happens when stock is sold at a loss and the taxpayer buys substantially identical stock within 30 days before or after the sale.
- The loss on the sale is not deductible for the number of shares repurchased
- The disallowed portion of the loss is added to the basis of the repurchased shares
- If fewer shares are repurchased, only part of the loss is disallowed
- If more shares are repurchased, the loss is still disallowed only up to the number of shares sold
📘 Example:
- Jan 1: Buy 500 shares @ $25 = $12,500
- May 12: Sell 500 shares @ $23 → $1,000 loss
- May 28: Buy 250 shares @ $22 → triggers wash sale on 250 shares
Disallowed loss = 250 ÷ 500 × $1,000 = $500
Adjusted basis of 250 shares = $5,500 + $500 = $6,000 → $24/share
- Oct 15: Sell 100 shares @ $18
→ Loss = $24 – $18 = $6/share × 100 = $600 recognized
✅ Final deductible loss:
= $1,000 original
– $500 disallowed
+ $600 recognized later
= $1,100 total deductible
21
Q
Bad Debt Deduction – Book vs Tax (Corporations)
A
For book purposes (GAAP):
- Use the allowance method (estimate credit losses based on expected uncollectibles)
For tax purposes:
- Must use the direct write-off method
- Can only deduct actual bad debts written off during the year
- No deduction allowed for estimated or projected losses
📘 Example:
A corporation can’t deduct a reserve for doubtful accounts. It may only deduct specific accounts once they’re actually written off as worthless.
22
Q
Charitable Contribution – Substantiation Over $5,000
A
To deduct a noncash donation over $5,000, the taxpayer must have:
- A qualified appraisal from an independent qualified appraiser
- A contemporaneous written acknowledgment (CWA) from the charity
- A completed Form 8283, Section B, attached to the tax return
🚫 Not allowed:
- FMV estimates by the charity or its employees
- Comparative values or good faith estimates from the donee
📘 Example:
Taxpayer donates an antique necklace worth $6,000 to a museum.
To claim the deduction, they must obtain a qualified appraisal, a written acknowledgment, and attach Form 8283.
23
Q
Section 179 Deduction – Taxable Income Limitation
A
The Section 179 deduction is limited to taxable income before the deduction.
- Extra amounts are carried forward
- Only applies to business-use personal property
📘 Example:
- Equipment = $570,000
- Taxable income = $405,000
- Max 179 deduction = $405,000
- Extra $165,000 = carryforward
24
Q
Safe Harbor Rule – Estimated Tax Payments
What is the minimum payment required to avoid an underpayment penalty?
A
To avoid the penalty, pay the lesser of:
-
100% of prior year’s tax
(or 110% if prior AGI > $150K joint / $75K other) - 90% of current year’s tax
Other rules:
- Applies if total tax owed > $1,000
- Withholding + estimates can count toward payment
✅ Pay the lesser amount to stay penalty-free
25
When is a principal still liable for acts of a terminated agent?
Even after firing an agent, the principal may be liable if **apparent authority** still exists.
To terminate apparent authority:
- **Actual notice** must be given to all known customers
- **Constructive/public notice** is required for others who might rely on the agent's role
If notice is inadequate, third parties may still rely on the agent's past position — and the principal is bound.
✅ Apparent authority survives until outsiders are properly notified
26
How are capital gains and losses treated when calculating a C corporation’s taxable income?
- **Net capital gains** are **fully included** in taxable income
- **Capital losses** are deductible **only against capital gains** (not ordinary income)
- **Excess capital losses** are **not deductible** in the current year
- Instead, they are **carried back 3 years** and **forward 5 years**
✅ C corps can only use capital losses to offset capital gains — never regular income
27
What creates nexus for state income tax purposes?
A business establishes **nexus** (taxable presence) in a state if it:
- **Owns property** in the state (e.g. buys an office building) ✅
- **Has employees** doing more than soliciting sales
- **Provides services or earns income** from sources other than selling tangible goods
But NOT if it only:
- **Sells goods** into the state (via interstate shipping)
- **Hires contractors to solicit sales**
- **Purchases goods** from in-state suppliers
✅ Property ownership or business activity beyond sales triggers nexus for income tax
28
A C corp recorded $800,000 of credit loss expense on its books, but deducted $930,000 for tax. What type of difference is this on Schedule M-3?
This is a **temporary difference** because:
- The item (credit losses) is **recognized in both book and tax**, but **in different periods**
- GAAP (book) and tax use **different methods** to recognize bad debt
- The $130,000 difference will reverse over time
✅ Temporary differences arise when the **same item** is treated differently for timing
🚫 Permanent differences never reverse (e.g., tax-exempt income)
29
How is amortization calculated for intangible assets like trademarks acquired in a business purchase?
Under **Section 197**:
- Intangibles are amortized **straight-line over 180 months** (15 years)
- Applies to assets **acquired**, not self-created
- Amortization starts the **month the asset is acquired or placed in service** (whichever is later)
✅ Example:
$1,200,000 / 180 = $6,666.67 per month
If acquired in March → 10 months × $6,666.67 = **$66,667** deduction
30
Which items must be adjusted when reconciling book income to taxable income?
Add back to book income (not deductible for tax):
- Bad debt expense (book estimate)
- Net capital loss
- Life insurance premiums (if corp is beneficiary)
Subtract from book income (deductible for tax):
- Actual customer accounts written off
✅ M-1 adjusts for items treated differently under book vs. tax rules
31
Which of the following is NOT included in the total support of a dependent?
- **Food, clothing**
- **Fair rental value (FMV) of lodging**
- **Medical expenses (including insurance premiums)**
- **Recreational and educational expenses**
- **Capital expenditures on behalf of the dependent**
- **Nontaxable scholarships** received by the dependent
- **Life insurance premiums** (if paid by policyholder, not for benefit)
- **Income and Social Security taxes paid** from the dependent's own income
Support includes:
- **Food, clothing**
- **Fair rental value (FMV) of lodging**
- **Medical expenses (including insurance premiums)**
- **Recreational and educational expenses**
- **Capital expenditures on behalf of the dependent**
🚫 Not included in support:
- **Nontaxable scholarships** received by the dependent
- **Life insurance premiums** (if paid by policyholder, not for benefit)
- **Income and Social Security taxes paid** from the dependent's own income
✅ Nontaxable scholarships do NOT count as support
32
When is a loss fully or partially disallowed under the wash sale rule?
A **wash sale** occurs when stock is sold at a loss and **substantially identical stock** is bought **within 30 days before or after** the sale.
- If the taxpayer **repurchases the same number of shares** → **Full loss disallowed**
- If the taxpayer repurchases **fewer shares** → **Only a portion of the loss is disallowed** (pro rata)
- Disallowed loss is **added to the basis** of the new shares
- Gains are **always taxable**, regardless of wash sales
✅ This rule prevents taxpayers from creating artificial losses by selling and quickly rebuying
33
What qualifies someone as a tax return preparer under IRS rules?
A person is a **tax return preparer** if they:
- Prepare returns for **compensation** (money or barter)
- Or supervise/employ others to do so
✅ Must obtain a **PTIN (Preparer Tax ID Number)**
✅ PTIN must be used on all claims for returns and refund claims
🚫 Not a preparer if:
- Doing it **free for a friend or family member**
- Only performing **admin/data entry** work
💡 Barter (e.g., trading services or goods) **does count** as compensation
34
**Do limited or general partners owe fiduciary duties in an LP?**
What fiduciary duties do general and limited partners owe in a limited partnership?
- **General partners** owe fiduciary duties to the LP and other partners
- Cannot compete with the LP
- Cannot use LP assets for personal gain
- Must act responsibly and lawfully
- **Limited partners** do **not** owe fiduciary duties
- May own competing business interests
- Treated more like passive investors (similar to shareholders)
35
How do you calculate depreciation when Section 179 is taken but bonus is not?
1) **Subtract Section 179** from the asset’s cost
- Example: Machine cost = $140,000
- Section 179 deduction = $20,000 (elected in Year 1)
- Remaining basis = $140,000 – $20,000 = **$120,000**
2) **Apply the correct MACRS rate each year** (7-year, half-year convention):
- **Year 1** (14.29%) → $120,000 × 0.1429 = **$17,148**
- **Year 2** (24.49%) → $120,000 × 0.2449 = **$29,388**
- **Year 3** (17.49%) → $120,000 × 0.1749 = **$20,988**
- **Year 4** (12.49%) → $120,000 × 0.1249 = **$14,988**
- **Year 5** (8.93%) → $120,000 × 0.0893 = **$10,716**
- **Year 6** (8.92%) → $120,000 × 0.0892 = **$10,704**
- **Year 7** (8.93%) → $120,000 × 0.0893 = **$10,716**
- **Year 8** (4.46%) → $120,000 × 0.0446 = **$5,352**
✅ Each year uses a specific MACRS % from the IRS table
💡 Section 179 reduces the basis before MACRS is applied
36
What are the child tax credit and credit for other dependents, and how are they affected by AGI?
- **Child Tax Credit (CTC):** $2,000 per qualifying child under age 17.
- **Credit for Other Dependents:** $500 per dependent who doesn’t qualify as a child (e.g., elderly parents).
- **Phaseout Begins at AGI:**
- $400,000 for **Married Filing Joint**
- $200,000 for other filers
**Example:**
- Married couple with $350,000 AGI.
- One daughter (age 16) = $2,000 child tax credit.
- One elderly father = $500 credit for other dependent.
- Total = **$2,500** in credits (no phaseout yet).
37
Which type of authority cannot exist when the principal is undisclosed?
- **Apparent authority** cannot exist if the principal is undisclosed.
- Why? Apparent authority relies on the third party seeing or knowing the principal’s involvement — but if the principal is hidden, there’s no way for the third party to rely on appearances.
**Key Distinctions:**
- **Express authority**: Allowed (agent is told directly what to do).
- **Implied authority**: Allowed (agent performs normal tasks reasonably necessary).
- **Apparent authority**: **Not allowed** — third party can’t rely on authority they don’t see.
38
When does a foreign financial account NOT need to be reported on FBAR?
**Not reportable:**
- Accounts holding only **virtual currency** (e.g. Bitcoin).
**Reportable**:
- Foreign bank, brokerage, mutual fund, futures, or options accounts.
- FBAR reporting is required if total foreign accounts exceed $10,000.
39
Which type of authority is considered a form of **actual authority**?
Actual authority includes:
- **Express authority**: Clearly granted by the principal.
- **Implied authority**: Inferred from the agent’s role or situation.
**Apparent authority** is NOT actual authority. It arises when third parties believe the agent has authority, based on the principal’s conduct.
Only **express** and **implied** authority are actual.
40
How do you calculate the dividends received deduction (DRD) for a C corporation, and what % applies based on ownership?
- The DRD % depends on how much of the distributing C corp is owned:
- <20% : DRD = **50%** of dividends received
- 20% to <80%: DRD = **65%**
- ≥ 80%: DRD = **100%**
**Example:**
$70,000 income includes $10,000 dividend from <20% owned corp
DRD = $10,000 × 50% = $5,000
Taxable income = $70,000 - $5,000 = $65,000
Tax = $65,000 × 21% = $13,650
41
📄 Schedule M-1: How do you adjust for bad debt expense when book uses the allowance method and tax only allows actual write-offs?
- Book expense includes estimated bad debts (allowance method), but tax only allows actual write-offs.
- If book expense > tax-deductible expense, the excess must be **added back** on Schedule M-1.
- This increases taxable income to reflect the true deductible amount.
🧠 Example:
- Book expense: $15,000 (estimated bad debts)
- Tax write-off: $5,000 (actual uncollectibles)
- M-1 adjustment = **$10,000 addition to book income** ($15,000 - $5,000)
✅ General Rule:
If a book expense is **not deductible for tax**, add it back on M-1 to reconcile to taxable income.
42
📌 **What is the basis and holding period for inherited property?**
- **Basis** = FMV on **date of death** (not date received)
- Use AVD only if elected by the estate and it lowers both value and estate tax
- **Holding period** = Always **long-term**
🧾 **Example:**
FMV at death = $23,000
Sold for $27,000 → Gain = $4,000 long-term
Don’t use $25,000 FMV at receipt — that’s incorrect unless AVD is elected
43
📌 **Which book-tax differences are added back on Schedule M-1?**
**Add back** book expenses **not deductible** for tax:
- Accrued credit loss expense (not deductible until written off)
- Fines, penalties, certain meals, life insurance premiums
**Subtract** book income items **not taxable**:
- Municipal bond interest
- Excess tax depreciation over book depreciation
🧾 [Example]
Book expense for bad debt = $10,000
Tax deduction allowed = $0 (not yet written off)
➤ Add back $10,000 to reconcile book to taxable income
44
📌 **What must a client prove to sue a CPA for common law negligence?**
To sue for negligence, a client must prove all elements of **CAMPS**:
- **C**ausal relationship
- **A**bsence of due care (CPA was careless)
- **M**aterial misstatement
- **P**rivity (relationship with CPA)
- **S**uffered loss (financial injury)
❌ **Reliance** is **not** required for negligence — it's only needed to sue for **fraud**.
45
📌 Ownership rules for S corporations
- An S corporation **may own 100% of another S corporation** (a qualified subchapter S subsidiary or QSub).
- An S corporation **may not own only a portion (e.g., 75%) of another S corporation** — it must own **100% or none**.
- An S corporation **may own stock in a C corporation**.
- An S corporation **may be a partner in a partnership**.
- However, **partnerships and C corporations cannot be shareholders of an S corporation**.
46
💼 Chapter 11: Insider retention bonus limit
Under U.S.C. 503(c)(1), a Chapter 11 debtor may pay a key insider a retention bonus **only if**:
- The insider has a real job offer elsewhere,
- The bonus is needed to retain them, and
- It does **not exceed 10×** the average bonus paid to nonmanagement staff that year.
📊 Example: If average is $35,000 → cap is $350,000.
47
💵 A single taxpayer (age 55) has gross income below the filing requirement and no taxes withheld. What credit would still justify filing a tax return?
- **Earned Income Credit (EIC)** is a **fully refundable credit**, meaning the taxpayer can receive a refund even with no tax liability.
- Filing a return is required to claim refundable credits.
- **Credits like Lifetime Learning, Saver’s, or Elderly/Disabled are nonrefundable** — they only reduce tax owed, not trigger a refund.
- Refundable credits = eligible for money back; nonrefundable = reduce tax only.
48
📚 When are scholarship or grant payments included in gross income?
**Both** payments must be included in gross income if they are compensation for services.
- **Payment I**: Teaching assistance (even if not required for degree) is **compensation**, so it's **taxable**.
- **Payment II**: A grant for participating in university-sponsored research is **compensation for services**, so it's also **taxable**.
- Only scholarships or grants used strictly for **tuition, fees, and course materials**, **not tied to work**, are excluded.
49
🧾 What must be shown to hold a CPA liable for civil fraud, and what damages apply?
- Must prove **intentional fraud** with **clear and convincing evidence**
Plaintiff can recover:
- **Compensatory damages** (financial loss)
- **Punitive damages** (punishment)
50
📄 Who must be listed on the certificate of limited partnership?
**Only general partners** must be listed.
- **Limited partners** are not required to be named.
51
📊 How do you convert cash-basis purchases to accrual-basis purchases?
- Start with **cash purchases paid**
- **Subtract beginning accounts payable**
- **Add ending accounts payable**
Example:
Cash paid = $455,000
Beg. A/P = $64,000
End A/P = $50,000
Accrual-basis purchases = 455,000 - 64,000 + 50,000 = **$441,000**
52
📌 Which of the following are corporate **debt** securities?
- Convertible bonds
- Debenture bonds
- Warrants
✅ Convertible bonds: Yes (debt)
✅ Debenture bonds: Yes (debt)
❌ Warrants: No (equity)
Warrants are equity securities because they give the holder the right to buy stock. Debt securities, like bonds, create a creditor relationship with the corporation and require repayment of principal with interest.
53
📌 What remedies are available to an agent if a principal violates duties in an agency relationship?
✅ Compensatory damages (e.g., unpaid earned compensation)
✅ Consequential damages (e.g., indirect losses like business expenses)
✅ Specific performance (only in rare cases involving unique subject matter)
❌ Novation is NOT a remedy — it replaces a party in a contract, not used for breach remedies.
54
🔁 **Refundable (or partially refundable):**
- **Earned Income Credit** → Fully refundable
- **Child Tax Credit** → Partially refundable
- **AOTC (American Opportunity Tax Credit)** → Partially refundable
🚫 **Not Refundable AND No Carryover:**
- **Lifetime Learning Credit**
- **Saver's Credit**
- **Elderly/Disabled Credit**
- **Child & Dependent Care Credit**
📆 **Not Refundable BUT Can Be Carried Forward:**
- **Adoption Credit** → Forward 5 years
- **Foreign Tax Credit** → Back 1 year, forward 10 years
- **General Business Credit** → Back 1 year, forward 20 years
🧠 Memory Tip:
- **Only 3 refundable credits** (EIC, Child, AOTC) — all involve **individuals/families/students**
- If it's for **business or foreign use**, it’s **nonrefundable with carryover**
- **Education credit rule:**
- **AOTC** = refundable
- **LLC** = not refundable, no carryover
🔁 **Refundable (or partially refundable):**
- **Earned Income Credit** → Fully refundable
- **Child Tax Credit** → Partially refundable
- **AOTC (American Opportunity Tax Credit)** → Partially refundable
🚫 **Not Refundable AND No Carryover:**
- **Lifetime Learning Credit**
- **Saver's Credit**
- **Elderly/Disabled Credit**
- **Child & Dependent Care Credit**
📆 **Not Refundable BUT Can Be Carried Forward:**
- **Adoption Credit** → Forward 5 years
- **Foreign Tax Credit** → Back 1 year, forward 10 years
- **General Business Credit** → Back 1 year, forward 20 years
🧠 Memory Tip:
- **Only 3 refundable credits** (EIC, Child, AOTC) — all involve **individuals/families/students**
- If it's for **business or foreign use**, it’s **nonrefundable with carryover**
- **Education credit rule:**
- **AOTC** = refundable
- **LLC** = not refundable, no carryover
55
What is the annual deductible limit for business gifts, and how is it applied?
**$25 per recipient per year**
- Applies to gifts given to clients/customers (not entertainment)
- If the gift exceeds $25, only $25 is deductible per person
- **Example**:
- 9 gifts at $30 → only $25 × 9 = **$225** deductible
- 1 gift at $100 → only $25 deductible
- 5 gifts at $15 → fully deductible = **$75**
- **Total deduction = $325**
- Promotional items <$4 are fully deductible and excluded from the $25 rule
- Engraving, shipping, etc. don’t count toward the $25
56
How do Section 179, bonus depreciation, and MACRS work together for first-year cost recovery?
**Order**: Section 179 → Bonus Depreciation → MACRS
1) **Section 179**: Deduct up to $1,250,000, reduced $1-for-$1 when purchases > $3,130,000.
- Example: $3,200,000 - $3,130,000 = $70,000 reduction
- Section 179 = $1,250,000 - $70,000 = **$1,180,000**
2) **Bonus Depreciation**: 40% × (3,200,000 - 1,180,000) = **$808,000**
3) **MACRS**: 20% × (3,200,000 - 1,180,000 - 808,000) = **$242,400**
**Total Deduction** = $1,180,000 + $808,000 + $242,400 = **$2,230,400**
57
If you have a $30,000 short-term capital loss and the following gains:
- $20,000 collectibles (28%)
- $18,000 §1250 gain (25%)
- $15,000 LTCG (15%)
How do you apply the loss, and what’s the final tax result?
Capital losses offset long-term gains in this IRS-mandated order:
1) 28% collectibles gain
2) 25% §1250 gain
3) 15% long-term capital gain
Apply $30,000 short-term loss:
- Offset full $20,000 collectibles gain → $0 taxable
- Offset $10,000 of §1250 gain → $8,000 remains
- No loss left to offset $15,000 LTCG
**Final Taxable Gains:**
- $8,000 taxed at 25%
- $15,000 taxed at 15%
- No capital loss deduction available (entire $30,000 loss was used)
**Key Rule:** Capital losses must offset long-term gains starting with the **highest tax rate first**, preserving gains taxed at lower rates.
58
How are capital gains and losses treated for C corporations? Can they deduct losses or include gains in taxable income?
- **Capital gains** are included in taxable income in the year they occur.
- **Net capital losses** cannot reduce ordinary income.
- Losses are used only to offset capital gains.
- Carry back net capital losses **3 years**, and carry forward **5 years**.
- All carryovers are treated as **short-term**.
**Important:**
- The $3,000 capital loss deduction rule applies only to **individuals**, not C corporations.
- Taxable income = **Operating income – Operating expenses + Net capital gains** (if any).
- Net capital losses are excluded from this calculation.
59
Can an S corporation have both voting and nonvoting stock?
Can it have both common and preferred stock?
- **Yes** to voting and nonvoting stock — differences in voting rights are allowed
- **No** to common and preferred stock — all shares must have **identical rights** to distributions and liquidation
**Key Rule:**
S corps must have only **one class of stock**. Voting differences are OK, but economic rights must be the same.
60
What must a client prove to hold a CPA liable under common law?
**Ordinary negligence** — failure to exercise due care.
The client must show the CPA didn’t act as a reasonable accountant would.
No need to prove gross negligence or fraud.
61
What’s the difference between real property and personal property?
**Real property** = Land and anything permanently attached (e.g., buildings, plumbing, crops sold with land)
**Personal property** = Movable or intangible items (e.g., cars, furniture, copyrights, stocks)
Key rule:
- **Crops** sold *with land* = real property
- **Crops** sold *separately* = personal property
- **Intangibles** like copyrights are always personal property
62
How to calculate rent revenue on corporate income tax return
Rent Income = Cash Collected **– Beginning A/R** + Ending A/R + Nonrefundable Deposits
63
How is a shareholder’s stock basis in an S corporation adjusted?
+ Ordinary income
+ Tax-exempt income
+ Capital gains/losses and other separately stated income (charitable contributions)
– Distributions (cash or property)
– Nondeductible expenses
64
What are the basis adjustment formulas for S corps, partnerships, C corps, and individuals?
**S Corporation Shareholder Basis**
= Beginning basis
+ Ordinary income
+ Tax-exempt income
+ Separately stated gains
– Distributions
– Deductible losses/expenses
**Partnership Outside Basis**
= Beginning basis
+ Contributions
+ Share of income
+ Share of **liabilities**
– Distributions
– Share of losses
– Decrease in liabilities
**C Corporation Stock Basis**
= Initial investment
+ Additional stock purchases/contributions
(No adjustments for income or losses)
**Individual Property Basis**
= Purchase price
+ Capital improvements
– Depreciation (if applicable)
Key difference: **Only partnerships increase basis for liabilities. Only flow-throughs adjust for income/loss.**
65
According to Circular 230, what is the minimum standard required for a practitioner to sign a tax return position?
A **reasonable basis** (≥20% chance of being sustained) is the minimum standard required.
- Signing a return with a position that lacks a reasonable basis is considered **unreasonable** and violates Circular 230.
- Higher standards include:
- **Substantial authority** (≈40%)
- **Realistic possibility** (≈33%)
- **More-likely-than-not** (>50%) – required for **tax shelters** and some **corporate disclosures**, not general filings.
66
Which relationships qualify for the dependent "relationship test" under IRS rules?
- **Qualifying child** (includes: child, stepchild, adopted child, foster child, sibling, or their descendants), or
- **Qualifying relative** (includes: parents, grandparents, aunts, uncles, in-laws, and any ancestor not excluded by divorce or death).
**Cousins do NOT qualify** under either category.
67
How is first-year depreciation calculated under MACRS when Section 179 is not elected but bonus depreciation is allowed?
When Section 179 is not used, apply bonus depreciation first, then MACRS:
1. **Bonus depreciation** = Cost × % bonus rate
2. **Depreciable basis before MACRS** = Cost - Bonus depreciation
3. **MACRS depreciation** = (Depreciable basis × Double-declining rate × Half-year convention)
Example:
- Equipment cost: $9,500
- Bonus depreciation (40%): 9,500 × 40% = $3,800
- Basis for MACRS: 9,500 - 3,800 = $5,700
- MACRS (Year 1 using DDB & half-year): $5,700 × (2/5) × (6/12) = $1,140
- **Total Year 1 Depreciation = $3,800 + $1,140 = $4,940**
68
**Gifted property sold at a gain — what basis is used?**
Use the **donor’s original basis** if FMV > basis at time of gift.
Gain = Sale price - donor’s basis.
Example:
Donor basis: $1,200
FMV at gift: $1,400
Sold for: $2,500
→ Gain = $2,500 - $1,200 = **$1,300**
69
**When does a purchase money security interest (PMSI) perfect automatically without filing?**
- Only PMSIs in **consumer goods** perfect automatically.
- PMSIs in **equipment** or **inventory** do **not** perfect automatically.
- These require **filing a financing statement** to be perfected.
🚫 Example (No auto-perfection):
- Tables bought for a restaurant (equipment)
- Tables bought by a furniture store for resale (inventory)
✅ Example (Auto-perfection):
- Consumer buys a washing machine on credit
70
**What are the charitable contribution rules for C corporations?**
- Deduct FMV of **capital gain property**.
- Deduct **basis only** for ordinary income property, unless used to help the ill, needy, or infants (then up to **twice basis**, capped).
- Must be **paid or accrued** by year-end and **paid within 3.5 months**.
- **Carryforward** excess up to **5 years**.
71
💡 How much income to report when services are exchanged?
- Report the **FMV of what you receive**, not what you give.
- Applies to all barter transactions.
📘 Example:
Accountant trades $500 service for $550 paint job → reports **$550** as income.
72
**Warranty Deduction (Tax vs Book)**
📘 Formula:
Beg. Reserve + Book Expense - End. Reserve = Cash Paid
= **Deductible warranty expense**
📘 Example:
$120,000 + $16,000 - $90,000 = **$46,000 deductible**
73
**Gifted Property - Holding Period Rule (Loss vs. Gain)**
- **Gain**: Use donor’s basis → holding period **carries over**
- **Loss**: Use FMV at gift → holding period **starts over (day after gift)**
74
**Short-Form Merger (90%+ Parent Ownership) - Shareholder Rights**
- **No shareholder approval** needed by parent or subsidiary
- **Dissenting subsidiary shareholders** must be given **appraisal remedy** (right to be bought out at fair value)
- **Parent’s shareholders** have no appraisal rights (they give up nothing)
75
**Are lump-sum distributions from a qualified plan taxable?**
- Not taxable **if rolled into an IRA or another qualified plan within 60 days**
- Entire amount excluded from gross income if rolled over timely
- Contribution limits do **not** apply to rollovers
76
**What is the basis if you gift appreciated property and the donee dies within 1 year and leaves it back to you?**
Your basis = **your original basis before the gift** (carryover basis)
77
**Can a CPA use an engagement letter disclaimer to avoid liability for errors?**
- **No. Disclaimers don’t protect against:**
- Breach of contract
- Negligence
- Fraud
- Courts do not enforce disclaimers that try to waive liability for professional wrongdoing.
78
**If an agent issues a personal check while acting for an undisclosed principal, who is liable when the check bounces?**
- **The signer of the check is liable** unless the principal is disclosed on the face of the check.
- If the principal is undisclosed, **they are not liable** on the negotiable instrument.
- **Only disclosed parties can be held liable on a check.**
79
**Are group-term life insurance proceeds included in a beneficiary's gross income?**
- **No. Life insurance proceeds paid by reason of death are fully excluded from gross income.**
- Even though only the first $50,000 of employer-paid coverage is tax-free to the employee while alive, **the entire death benefit is excluded** from the beneficiary’s income.
80
**What is the basis and holding period of inherited property for the beneficiary?**
- **Basis = FMV on date of death** (not the decedent’s original cost).
- **Holding period is always long-term**, regardless of how long it's held.
- **Estate tax paid is NOT added** to the beneficiary’s basis.
81
**When is a CPA *not* liable to a client for damages related to tax return preparation?**
- A CPA is **not required to sign a filing extension**.
- Failing to sign an extension does **not cause damages** and does **not breach due professional care**.
82
**Chapter 11 Bankruptcy: Who makes up the creditors' committee?**
The **creditors' committee consists only of unsecured creditors**.
- Debtor can continue operations unless a trustee is appointed for cause.
- Court, not the creditors' committee, appoints a trustee if needed.
- The **debtor has 18 months exclusive right** to file a reorganization plan.
83
**What amounts are included in a shareholder's AGI from an S corporation?**
**Included in AGI:**
- Pro-rata share of **ordinary business income**
(Example: 50% × $80,000 = $40,000)
**Not Included in AGI:**
- **Tax-exempt income** (still increases basis)
- **Distributions** (if within basis = return of capital; not taxable)
Note: Shareholders pay tax on income allocated to them, not on distributions.
84
**Which items are included vs. not included in Schedule M-1 adjustments? Is the DRD part of M-1?**
**Included in M-1 adjustments:**
- Federal income tax (add back)
- Net capital loss (add back)
- 50% of business meals (add back)
- Tax-exempt muni bond interest (subtract)
**Not included in M-1 adjustments:**
- Dividends-received deduction (DRD)
**Rule:**
DRD is applied after M-1. It doesn’t affect book-to-tax reconciliation.
85
**Gifted Property - Donee's Basis When Donor Pays Gift Tax**
How is the **donee’s basis** calculated for appreciated property when the **donor pays gift tax**?
Use this formula:
[ (FMV – Donor's Basis) ÷ (FMV – Annual Exclusion) ] × Gift Tax Paid
**Example:**
- FMV = $90,000
- Donor's Basis = $30,000
- Gift Tax Paid = $12,000
- Exclusion = $19,000
Step 1: Appreciation = $90,000 – $30,000 = $60,000
Step 2: Net taxable gift = $90,000 – $19,000 = $71,000
Step 3: Portion of gift tax = ($60,000 ÷ $71,000) × $12,000 ≈ $10,141
Step 4: Donee’s basis = $30,000 + $10,141 = **$40,141**
86
What are the basics of the Federal Unemployment Tax Act (FUTA)?
**Employers get a credit** for state unemployment tax paid
- **Paid only by employers** (not withheld from employees)
- **Applies to first $7,000** of each employee’s wages
- **Wages count whether paid actually or constructively**
87
**Contract Assignment vs. Novation**
Who is liable when contract duties are assigned?
- When duties are assigned, **both** the assignor (original party) and assignee (new party) are liable
- A **novation** is required to release the assignor from liability
- Novation requires agreement by all three parties
- In absence of novation, the non-breaching party may sue **both** the assignor and assignee
88
**What happens when a business files Chapter 7 bankruptcy?**
- Lawsuits
- Trustee
- Debtor control
- Creditor committee
- Lawsuits are **automatically paused** (stay issued)
- Trustee is **court-appointed**, not by creditors
- Debtor **loses control** (trustee takes over)
- Creditors' committee is **not required**
89
**When is property considered partnership property under RUPA?**
Titled in the partnership’s name ✅
- Bought with partnership funds ✅
- Personally owned but used in business ❌ (still personal)
90
Elements needed to prove **common law fraud** against a CPA?
**Scienter** (intent to deceive) and **justifiable reliance** (client reasonably relied on the misstatement)
Fraud requires intent and reliance — not just mistakes or negligence.
91
What is required to file **voluntary Chapter 7 bankruptcy**?
Just **have any amount of debt** — no need to be insolvent or owe a specific number of creditors.
92
How is partnership ordinary income calculated.
By **ownership %** only.
Distributions and basis don’t affect allocation.
Longterm capital gain is separately stated.
93
Under UDITPA, what income is allocated to domicile vs. location?
**Domicile:**
- Interest & dividends
- Capital gains **(intangible)**
**Location:**
- Rents/royalties (tangible)
- Capital gains **(real estate)**
94
If an S corp election is made after March 15, when is it effective?
**January 1 of the next year**
- To be effective for the current year, election must be made by **March 15**
- Elections after that are **not retroactive**
95
Which contract rights are generally assignable?
- **Option contract rights** → Yes (assignment doesn’t **materially change** the contract)
- **Malpractice insurance rights** → No (assignment changes risk profile; **personal** in nature)
96
When can a business expense items under the de minimis safe harbor?
If **audited F/S**, can expense items ≤ **$5,000** each
- If **no audited F/S**, limit is **$2,500** each
- Items must be listed separately
- If over the limit → must **capitalize** as an asset
97
Who gets paid first in corporate bankruptcy: appraisers, taxes, or lawyers?
1. **Appraisers** – administrative costs (highest priority)
2. **State taxes** – priority unsecured claim
3. **Unrelated lawyers** – general unsecured creditor (lowest priority)
98
Can a CPA be found negligent even if they followed professional standards?
**Yes** – Following GAAP/GAAS helps, but courts may still find negligence based on how the work affected others.
99
What is the basis and holding period for **inherited property**?
- **Basis** = FMV on date of death (not decedent’s basis)
- **Holding period** = Always **long-term**, no matter how long it’s held
100
Do PSCs and PHCs get the dividends received deduction (DRD)?
**Yes** – They are C corps, so they include 100% of dividends in gross income, then apply DRD like any other C corp (50%, 65%, or 100%).
- **PSC** = Service-based C corp (e.g. law, accounting) owned by employee-performers
- **PHC** = C corp earning mostly passive income and owned by ≤5 individuals
101
What income does a partner report from a partnership?
- Share of the partnership’s profit
- guaranteed payments
- Special items like capital gains, interest, or charitable donations
❌ Distributions are **not income** — they just reduce basis
102
What damages can a seller recover if a buyer breaches a contract for custom goods?
**Compensatory damages** – to cover actual costs like labor and materials
❌ No specific performance (only the buyer can usually demand that)
❌ No punitive damages (those apply to torts, not contracts)
103
C corp capital loss rules
- Offset same-year capital gains ✅
- If no gains that year → carry back **3** years, then forward **5**
- ❌ Can’t offset ordinary income
**Ex**:
Year 8: $25K loss
Year 5 gain: $5K
Year 7 gain: $7K
→ Offset $12K total → Carry forward **$13K**
104
Who pays unemployement taxes and workers compensation
105
What’s required in a corporation’s articles of incorporation? (And what’s not?)
Must include:
- Name of the corporation
- Business purpose
- Term (how long it will exist)
- Name & address of each incorporator
- Number of authorized shares (capitalization)
- Initial board members
- Registered agent
❌ **Not required: Quorum requirements**
A **quorum** is the **minimum number of people needed to hold a valid meeting** (usually for voting). It’s set by **state law or bylaws**, not required in the articles.
106
What capital losses can **individuals** deduct or carry forward?
- Deduct up to **$3,000/year** against ordinary income.
- **Excess losses** carry forward **indefinitely**.
- **No carryback** allowed.
- **Municipal bond** losses are deductible; interest is tax-exempt.
**Personal-use losses** (e.g. home) are **not deductible**.
Capital gains/losses:
- +$5,000 (securities gain)
- -$9,000 (municipal bond loss - **deductible**)
- -$4,000 (painting loss - **deductible**)
- $11,000 (principal residence loss – not deductible)
Total deductible loss = $5,000 - $9,000 - $4,000 = **($8,000)**
→ Deduct **$3,000** this year
→ Carry forward **$5,000**
107
Are corporate shareholders (even if directors/officers) personally liable for the corporation’s debts?
- **No** — corporations are separate legal entities.
- Shareholders aren’t liable unless the **corporate veil is pierced** (e.g., fraud).
- Bankruptcy doesnt affect shareholder liability, only **fraud**
108
Does Social Security income count toward the gross income test for claiming a parent as a dependent?
- **No** — Social Security benefits are generally **excluded** from gross income for this test
- This allows many low-income parents to qualify as dependents
- If the parent’s only income is Social Security, they likely meet the gross income test
109
When can a U.S. corp claim a 100% DRD for foreign dividends?
- Must own **≥10%** of the foreign corp
- Must hold stock for **>365 days**
110
When can a corporation deduct life insurance premiums?
- **Deductible**: If employees' **dependents** are beneficiaries
**Not deductible**: If the **corporation** is the beneficiary
111
What starts a corporation’s voluntary dissolution?
- **Board of directors must pass a resolution to dissolve**
112
What shareholder approval is needed to revoke an S corp election?
**More than 50% of all shares (voting and nonvoting)**
113
Which items from a partner’s Schedule K-1 are included in their AGI?
**Included in AGI**:
- Ordinary business income
- Guaranteed payments
- Taxable dividends and interest
- Capital gains
- Rental income (if not limited by passive loss rules)
**Excluded from AGI**:
- **Tax-exempt interest** (e.g., municipal bond income)
- Nontaxable income items
Only taxable items from the K-1 flow into AGI. Tax-exempt items are separately stated but not included in AGI.
114
Can a director be indemnified in a derivative suit if found negligent and the Articles are silent?
**Yes, if a court permits it.**
- Court can allow indemnification if it finds it fair and reasonable, despite negligence or lack of provision in the Articles.
115
Is interest on a loan used to buy municipal bonds deductible?
**No**, it's **not deductible** for tax purposes.
-**Add back** to book income when computing taxable income.
116
What must a plaintiff prove to hold a CPA liable under the Securities Act of 1933?
1) **Plaintiff suffered a loss**
2) **Financial statements were materially misstated**
- Plaintiff does **not** need to prove CPA negligence or reliance.
- Burden shifts to CPA to prove they performed **due diligence**.
117
Which actions will bar a debtor from receiving a general bankruptcy discharge?
Any of the following will bar a general discharge:
1) **Failure to explain missing assets**
2) **Making false claims against the estate**
3) **Filing for bankruptcy within the last 8 years**
118
When is a contract modification unenforceable due to lack of consideration?
If one party agrees to do something they were already legally obligated to do (e.g., finish a job as originally agreed), there's no new consideration.
So a promise (like a bonus) based on that is not enforceable.
119
When is a tax preparer NOT liable for a client’s tax understatement?
If the CPA reasonably relies in good faith on information provided by the client and **has no reason to doubt it,** they are **not liable** for IRS penalties or interest.
**They are not required to verify documentation unless something appears incorrect or incomplete**.
120
What qualifies a cost as an **adaptation** under tax rules for capitalized improvements?
A cost is considered an **adaptation** if the property is modified for a **different use** than originally intended (e.g., converting R&D equipment for manufacturing use).
Adaptation is one of three types of **capitalized improvements** (along with **betterment** and **restoration**) under IRS regulations.
121
What costs are included and excluded when calculating the **tax basis** of equipment purchased for use in a trade or business?
**Included in tax basis**:
- **Purchase price**, net of any **trade discounts**
- **Sales tax**
- **Installation costs** or other costs to place the asset into service
**Excluded from tax basis**:
- **Delivery charges** if shipped **FOB destination** (seller pays)
- **Fines and penalties** (e.g., EPA violations)
**Example**:
Equipment list price: $55,000
Less 10% trade discount: -$5,500
+ Installation: $300
+ Sales tax: $3,400
= **Tax basis: $53,200**
122
How is basis determined for **inherited property** when the **alternate valuation date (AVD)** is elected?
If AVD is elected, basis = **FMV on the earlier of**:
- **Date of distribution** to heir
- **6 months after death**
- Always **long-term** holding period
- Gain/Loss = **Sale price - FMV basis**
**Example**:
Parent dies on 3/1/Y3
- FMV on 3/1/Y3: $8,000
- FMV 6 months later: $11,000
- Executor distributes to heir on 5/1/Y3 (FMV = $9,000)
- Sold same day for $9,000 → **Basis = $9,000**, so **Gain/Loss = $0**
123
What is the **warranty of title** under the UCC, and does “as is” disclaim it?
- Automatically applies to **all sales of goods**
- Guarantees seller has **legal ownership**, and goods are **free of liens or third-party claims**
- **“As is” only disclaims warranties about the condition** (like merchantability)
- “As is” does **NOT** disclaim the warranty of title
- To disclaim title, seller must say something like: **“Seller makes no warranty of title”**
- Disclaimer must be made **before the sale**
124
What is required for a **security interest to attach** under the UCC?
What is required for a **security interest to attach** under the UCC?
125
How is Year 1 MACRS depreciation calculated for residential real estate placed in service on June 29?
1) Residential rental property uses **27.5-year straight-line MACRS** with the **mid-month convention**.
2) Property placed in service June 29 is treated as placed in service **mid-June**, so it gets **6.5 months** of depreciation in Year 1.
3) Land is **not depreciable**, so subtract land value from total cost.
- $360,000 total – $30,000 land = $330,000 depreciable basis
4) Formula:
$330,000 × (6.5 months) ÷ (27.5 × 12 months) = **$6,500**
126
How is Year 1 MACRS depreciation calculated for residential real estate placed in service on June 29?
1) Residential rental property uses **27.5-year straight-line MACRS** with the **mid-month convention**.
2) Property placed in service June 29 is treated as placed in service **mid-June**, so it gets **6.5 months** of depreciation in Year 1.
3) Land is **not depreciable**, so subtract land value from total cost.
- $360,000 total – $30,000 land = $330,000 depreciable basis
4) Formula:
$330,000 × (6.5 months) ÷ (27.5 × 12 months) = **$6,500**
127
What type of liability do partners have under RUPA?
NOT true: Partners have joint **but not** several liability ❌
(True liability = joint **and** several)
✅ True under RUPA:
- A partnership is a separate legal entity
- A partnership can own property in its name
- A partnership can sue or be sued in its name
128
When can a corporation use a prior-year NOL carryover?
A prior-year NOL can only be used when the corporation has **positive taxable income** — it reduces that income (up to 80%).
If the current year has a **net loss**, the prior-year NOL is **excluded** from the NOL calculation.
**Example:**
2022 return shows $75,000 excess deductions, including:
- $13,400 prior-year NOL (excluded)
- $6,600 DRD (included)
2022 NOL = $75,000 - $13,400 = **$61,600**
129
When is a tax practitioner's communication with a client privileged under IRC §7525?
Only if:
- It's **tax advice** (not prep or financial/business advice)
- Given **in confidence**
- In an **IRS admin or civil proceeding** or **noncriminal federal tax case**
**Not privileged if:**
- Involves state/local tax, criminal matters, or tax prep
- U.S. is not involved in the case
**Example:**
Privileged: Tax advice in IRS worker misclassification case
Not privileged: Divorce or bankruptcy advice, state tax prep
130
When can a principal not revoke an agency?
When the agent is **coupled with an interest** (has a property or financial stake in the subject).
This makes the agency **irrevocable**.
**Example:**
Agent owns part of the property they manage.
131
How long can unused foreign tax credits be carried?
Can be **carried back 1 year** and **carried forward 10 years**.
**Only applies** if the taxpayer is below the foreign tax credit limitation in those years.
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What is the priority of an unperfected security interest?
It is **subordinate** to lien creditors whose interest arises **before** the security interest is perfected.
**Note:**
- Perfection gives rights against third parties.
- Can perfect by **filing** or **taking possession**.
133
What 3 factors are used to apportion income under the Uniform Division of Income for Tax Purposes Act (UDITPA)?
**Average value of real and personal property, compensation to employees, and sales**
- Property: use **average value**, not FMV
- Payroll: based on **total compensation paid**, not number of employees
- Sales: based on **total sales** made in the state
- Formula: (Property % + Payroll % + Sales %) ÷ 3 × Total income
134
What is legally required for a real estate mortgage to be valid?
**It must be in writing, signed by the mortgagor (borrower), and delivered to the mortgagee (lender).**
- No signature is required from the mortgagee
- It must include a clear property description
- Recording the mortgage or stating the exact debt amount is **not required for validity**, only for protection against third parties
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Wash sale formulas
1) Disallowed Loss = Realized Loss × (Shares Repurchased ÷ Shares Sold)
2) New Basis of Replacement Shares = Purchase Price + Disallowed Loss
3) Realized Loss = Original Basis − Sale Proceeds
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**Indemnifying Corporate Officers (RMBCA)**
- Board may indemnify officers for liability in shareholder suits.
- Must serve corp's best interest and not violate public policy.
- Officers can also be directors.
- No stock ownership required.
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**General Business Credit (GBC)**
A combination of **30+ separate tax credits** under one uniform rule.
- Simplifies reporting for current, carryback, and carryforward years.
- Allows **1-year carryback** and **20-year carryforward**.
- Not all credits qualify (e.g., foreign tax credit is separate).
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**AGI Deduction Rules – Self-Employed**
**AGI Deduction Rules – Self-Employed**
- **Allowed deductions**:
- 50% of self-employment tax
- Health insurance premiums
- Traditional IRA contributions
- **Not allowed**:
- Alimony paid under a **2019 or later** divorce decree (not deductible)
**Example**:
$57,000 income
- $4,000 SE tax
- $6,000 insurance
- $2,000 IRA
= **$45,000 AGI**
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**Assignee Rights in a General Partnership (RUPA)**
- **Assignee is NOT personally liable** for the assigning partner's debts.
- **Assignee IS entitled** to the assigning partner’s share of:
- Profits and losses
- Surplus on dissolution
**Key Point**: Assignment gives only economic rights, not management or liability.
140
What's the rule for basis and loss when converting personal property to business use?
- Basis = lower of FMV or adjusted basis
- Depreciate from that basis after conversion
- Loss = sale price − (basis − depreciation)
**Example:**
FMV = $2,200, Depreciation = $1,320
Adjusted basis = $2,200 − $1,320 = $880
Sold for $550 → Loss = **$330**
141
What can a trustee in bankruptcy do with leases when a landlord-debtor files Chapter 7?
The trustee **may assign the leases** of the debtor **if it benefits the estate**.
- The trustee’s main duty is to **maximize asset value for creditors**.
- The trustee is **not required** to reject executory contracts (they have the option).
- Creditors **do not elect** the trustee immediately — an **interim trustee is appointed** first.
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A machine costing $140,000 was placed in service in August (Year 1). $20,000 was expensed under Section 179. Bonus depreciation was *not* taken. What's the correct Year 2 depreciation using 7-year MACRS and the half-year convention?
- **Section 179** reduces the depreciable basis: $140,000 - $20,000 = $120,000.
- Since bonus depreciation was **not** taken, apply MACRS on $120,000.
- **Year 2 MACRS rate for 7-year property** (half-year convention) = **0.2449 (GIVEN)**
- **Year 2 depreciation**:
$120,000 × 0.2449 = **$29,388**
**Key Rule:** Section 179 applies **first**, reducing basis before MACRS. Bonus depreciation would apply **second** if elected.
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143
When is a security interest perfected under the UCC?
Perfection requires:
1) **Attachment** = loan + signed security agreement + debtor has rights in the collateral
2) **Perfection** = filing (e.g., UCC-1) or possession
**Rule:** Even if filing is done early, perfection happens only after attachment.
**Example:**
Emily signed a security agreement and the lender filed on Feb 2, but she got the refrigerators on Mar 10.
Result: **Perfected on March 10** (when attachment occurred).
143
When can an accrual-method corporation deduct a payment to a related cash-basis party (e.g., shareholder)?
Under **IRC §267(a)(2)**, an accrual-method taxpayer can only deduct expenses to a **related party** (e.g., >50% shareholder) **when the related party includes the income**.
To solve:
1) Confirm the recipient is a **related party** (owns >50%).
2) Check **how much income the related party reported** (not how much was paid or accrued).
3) The corp can deduct **only the amount the related party recognized as income** in that year.
4) **Ignore ownership %** when calculating the deductible amount.
Example:
- If $4,500 rent is owed, and related party only recognizes $2,250 in Year 2, the corp can deduct **$2,250 in Year 2**.
144
How are domestic R&E costs treated under current tax law?
They must be **capitalized and amortized over 5 years** (no expensing allowed).
- **Mid-year convention** applies.
145
What is a "gap claim" in bankruptcy, and how is it treated in the distribution order?
A **gap claim** arises in an **involuntary bankruptcy** between the **petition filing** and the **order for relief**.
- Creditors providing goods/services during this time are **priority unsecured creditors**.
- Gap claims are paid **after secured claims**, but **before general unsecured claims**.
146
How do capital loss rules differ between **individuals** and **C corporations**?
**Individuals:**
- Can offset **capital gains** and up to **$3,000** of **ordinary income**
- **Carryforward indefinitely**
- **No carryback allowed**
- Losses retain their **short-term or long-term** character
**C Corporations:**
- Can offset **capital gains only** (not ordinary income)
- Must **carry back 3 years** and **carry forward 5 years**
- Losses are **always treated as short-term**
- **Unused losses expire after 5 years**
147
How much rental real estate loss can a taxpayer deduct if they actively participate and their AGI is $120,000?
- The **active participation exception** allows up to a **$25,000 rental loss deduction** against non-passive income
- This amount is **phased out** by **50% of AGI over $100,000**
- At $120,000 AGI:
- Excess = $120,000 - $100,000 = $20,000
- Phaseout = 50% × $20,000 = $10,000
- Allowable deduction = $25,000 - $10,000 = **$15,000**
**Key rule:**
- Exception phases out completely at **$150,000 AGI**
148
What right is available **only to a cosurety**, not to a surety?
**Contribution** is the right only a **cosurety** has
- It allows one cosurety who **pays more than their share** of the debt to recover proportionally from other cosureties
- In contrast, **exoneration**, **subrogation**, and **reimbursement** are available to **both** sureties and cosureties
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151
What is the basis of property gifted to someone who dies within one year, if it passes back to the original donor?
- If a donor gives appreciated property to someone who **dies within 1 year**, and the property **returns to the donor**,
- The donor’s basis is **not stepped up** to FMV at death
- Instead, the donor’s basis is the **decedent’s original basis** before death
- This rule **prevents basis step-up abuse**
**In this case:**
- Edwin gave stock (basis $5,000) to Lynn
- Lynn died within 1 year, and bequeathed it back to Edwin
- So Edwin’s new basis is **$5,000**, not the $9,000 FMV at death
152
If a repair shop fixes an item and isn’t paid, can their artisan’s lien beat a prior perfected security interest?
Yes — if state law gives the repair shop an artisan’s lien, it takes priority over earlier perfected security interests,
**as long as** the work was done in the **ordinary course of business** and the statute doesn’t say otherwise.
