Flashcards in NINJA Flashcards - REG tax law Deck (194):
How is shareholder basis calculated for a new interest in a Corporation?
Adjusted basis of property transferred + Gain recognized (if less than 80% ownership) - Boot received = Shareholder basis. If shareholders have 80% control after a property transfer, no taxable event occurs. If liabilities exceed basis on contributed property to a Corporation, a gain is recognized.
How is shareholder basis calculated for a TRANSFEROR of an interest in a Corporation?
+ Gain recognized by shareholder
FMV of Corporate Interest
- Adjusted basis of property
What basis do shareholders and Corporations use for property?
They both use ADJUSTED BASIS, NOT FMV of property.
Describe how loss is taken on Section 1244 small business Corporation stock?
A loss on worthless stock is an ordinary loss.
What are the requirements for taking an ordinary loss on Section 1244 small business Corporation stock?
Taxpayer must be original stock owner, and either an individual or partnership
$50k (single) or $100k (MFJ) limit - remainder is a capital loss
Must have been issued in exchange for money or property (not exchanged for services)
Shareholder equity must not be in excess of $1 million
Both common and preferred stock is allowed
What are the basic rules for filing a form 1120?
Return is due regardless of income level
Return is due 3/15 if on a calendar year basis, or 2 1/2 months after end of fiscal year
An automatic six-month extension is available
When are Corporate federal tax estimated payments required, and how are they calculated?
Required if more than $500 in tax liability expected, or
100% current year liability
100% previous year liability
Note: If Corporation had more than $1 Million in revenue the previous year, the first estimated payment must be based on the previous year and the remainder based on the current year.
Describe the AMT calculation for C-Corporations
+Tax Preference Items
+/- ACE Adjustments
- 40,000 Exemption
= Tax Base
= Tentative Minimum Tax
- Regular Tax Liability
What are the pre-ACE adjustments for C-Corporation tax AMT calculations?
Real Estate purchased between 1986 and 1999 using Straight Line Depreciation must depreciate over a useful life of 40 years
Personal Property - use 150% MACRS, not 200%
Construction must use % completion method
What are the ACE adjustments in the C-Corporation AMT tax calculation?
Municipal Bond Interest
Life Insurance Proceeds
70% Dividends Received Deduction
Organizational Expenditures must be capitalized, not amortized
Note: AMT paid gets carried forward indefinitely, but never carried back
When are C-Corporations exempt from AMT?
In year one
In year two, if year one gross receipts were less than $5 Million
In year three, if the average gross receipts for years 1 and 2 were less than $7.5 Million
In year four and beyond, if the average from the previous 3 years is less than $7.5 Million
How are gains and losses handled with respect to a Corporation's transactions involving its own stock?
Corporations have no gain/(loss) from transactions involving their own stock, including Treasury Stock.
If Corporation gets property in exchange for stock, there is no gain/(loss) on the transaction.
How are Corporate organization costs handled?
Amortization of costs begin the month the Corporation commences business activity
If the Corporation doesn't amortize organization costs in year one, they can never be amortized
Costs associated with offerings are neither deductible nor amortized
How are a C-Corporation's deductible charitable contributions calculated?
Sales -COGS= Gross Profit
Gross Profit + Rent, Royalties, Gross Dividends, Capital Gains
Total Income - Deductions (No charitable contributions, Dividends
Received Deductions (DRD), or NOL Carrybacks allowed)
- NOL Carryforwards
=Taxable Income before charitable contributions, DRD, NOL Carrybacks
=Deductible Charitable Contributions
How are excess charitable contributions treated in a C-Corporations?
Excess charitable contributions get carried forward 5 consecutive years (No Carryback)
When can a board of directors authorize charitable contributions for a tax year?
The Board of Directors can authorized charitable contributions up to 3/15 and have them count in the previous tax year
How is the dividends received deduction (DRD) calculated, and what are the limitations?
80% Interest = 100% DRD
20-79% = 80% DRD
less than 20% = 70% DRD
Only allowed if no consolidated return is filed. Qualified dividends from domestic Corporations only.
What is the Dividends Received Deduction (DRD) calculation when there is a loss from operations?
Only take DRD % x Taxable Income
Note: If DRD brings a loss situation, then you can take the full DRD
If Taxable Income remains after DRD, only a partial DRD (T.I.. x DRD %) is allowed
How are Corporate losses on a sale to a Corporation where a taxpayer owns a 50% or more interest handled in a C-Corporation?
A loss on a sale to a Corporation where taxpayer owns a 50% or more interest is disallowed
How are capital losses handled in a C-Corporation?
Capital Losses are deductible only to the extent of Capital Gains
How are net short term capital gains taxed in a C-Corporation?
Net Short Term Capital Gains are taxed at ordinary income rates
How are Corporate losses carried back/forward?
Corporations can carry back losses 3 years and carry forward losses 5 years as a Short Term Capital Loss
How are bad debt losses handled in a Corporation?
Bad debt losses are classified as ordinary
What is the casualty loss floor for a C-Corporation?
No floor on Corporate casualty loss like there is with an individual taxpayer
If destroyed, the loss is the property's basis (minus proceeds)
Calculation: Adjusted basis - Proceeds from Insurance = Loss
If partially destroyed, take the lesser of FMV or adjusted basis reduction (minus proceeds)
How are net operating losses handled in a C-Corporation?
If loss includes NOL Carryforward, reduce the loss (add back the amount) to get the loss without the Carryforward
Then, carry back the NOL 2 years starting with the earliest year and reduce the taxable income there and then move to the most recent year
Any leftover NOL = This year's NOL
How is investment interest expense handled in a C-Corporation?
Unlike individual taxation, investment interest expense is not limited to investment income.
Investment interest on tax-free investments are NOT deductible.
What is the purpose of Schedule M-1 on a Corporate tax return? Which items are included?
Schedule M-1 reconciles book to tax income before Net Operating Loss/Dividend Received Deduction
Includes permanent differences (such as tax-exempt interest and non-deductible expenses) and temporary differences (accelerated depreciated tax depreciation, straight-line, etc.)
What is the purpose of Schedule M-2 on a Corporate tax return? How is it calculated?
Reconciles beginning to ending retained earnings
Beginning Unappropriated Retained Earnings
+ Net Income
+ Other Increases
- Dividends paid
- Other decreases
= Ending Unappropriated Retained Earnings
What is the purpose of Schedule M-3 on a Corporate tax return?
Like M1, but for Corporations with $10M+ in assets
How are affiliated (80%) Corporation tax returns handled?
Consolidation election is binding going forward
Dividends between them are eliminated, Advantage- Gains are deferred, Disadvantage- losses are deferred.
One AMT exemption
One accumulated earnings tax allowed
Note: In order to consolidate, the parent must have 80% voting power and own 80% of the stock value
How are Corporate distributions to shareholders handled?
Distribution is a dividend to the extent of current accumulated earnings and profits (ordinary income)
Then, remainder (if any) is a return of basis. Then, add'l remainder (if any) is a Capital Gain
Distribution amount = FMV of Property + Cash - Liability Assumed
Shareholder basis = FMV of Property + Cash received (basis not reduced by the attached liability)
What is the order of treatment in a Corporation's distribution to a shareholder?
1. Distribution is a dividend to the extent of current and accumulated earnings and profits
2. Shareholder basis is then exhausted
3. Remainder, if any, is a Capital Gain
What is the basic calculation for accumulated earnings and profits in a Corporation?
Beginning Accumulated Earnings and Profits
+ Net Income
+ Gain on Distribution (if not already in book income)
- Distribution (but cannot create a deficit)
- NOL of prior years
= Ending Accumulated Earnings and Profits
What is the treatment of a gain in a complete Corporate liquidation?
If Capital Property, then Capital Gain
If Non-Capital Property, then Ordinary Income
Gain characterization is the same for both the Corporation and the shareholder
What is the treatment of a loss in a complete Corporate liquidation?
Corporation: Depends on if property is capital in nature, otherwise ordinary loss
Individual: capital loss only
What is the treatment of the liquidation of a subsidiary?
No G/L to parent company
What is a consent dividend? How is it treated?
Consented by the Board of Directors but not yet paid
Treat as if distributed by the end of the year
Describe the requirements for a personal holding company.
No banks or financial institutions can be PHCs
5 or fewer individuals own more than 50% of the stock
60% of the PHC's income must be from passive means
PHC tax is self-assessing - 20% tax rate on undistributed PHC Income
How is Corporate accumulated earnings tax (AET) different from PHC taxation?
Not Self-Assessing like a PHC
How is the accumulated earnings credit calculated for a Corporation?
Take greater of $250,000 ($150,000 for Service Corps) or the legitimate balance based on future needs (i.e. purchasing a building)
What are the requirements for holding S-Corporation status?
Only individuals, estates and trusts can be shareholders
Domestic only, no international S-corps or foreign shareholders
Up to 100 shareholders allowed, and only one class of stock allowed
Calendar tax year only
How is an S-Corporation election made?
Election for S Corp status must be made by 3/15 and counts as being an S Corp since the beginning of the year
To make election, 100% of the shareholders must consent
How is an S-Corporation terminated?
To terminate election, 50% of the shareholders must consent
No S Corp election allowed for 5 years after termination
S Corp termination effective immediately following an act that terminates status
What items are not included in calculating an S-Corporation's ordinary income?
These items are included on Schedule K, not in ordinary income:
Foreign Taxes paid deduction
No Investment Interest expense
Section 179 Deduction
1231 Gain or Loss
Portfolio Income (dividends or interest)
How is S-Corporation shareholder basis calculated?
+Share of Income Items (including non-taxable income!)
-Distributions (cash or property)
-Ordinary Losses (but don't take income below zero)
= Ending basis
What is the formula for an S-Corp Built-in Gains Tax?
FMV of Assets @ S-Corp Election Date - Adjust. Basis of Assets = Built-in Gain x 35% Corporate Rate
How is Gift taxation different from Estate taxation?
Property transferred while taxpayer is living
What is the annual exclusion amount for a taxpayer's Gift taxation? What is required to get the exclusion?
$14,000 per year per spouse to each individual
In order to get the exclusion, the recipient must immediately acquire a present interest in the property and get unrestricted access to the property and all of its benefits
If a Gift is an annuity, what value is used for the Gift?
If the Gift is an annuity, use Present Value to determine the gross Gift
What is the basic Gift tax calculation?
- 1/2 of Gifts (treated as given by spouse)
- Total # of donees x $14,000 exclusion
= Taxable Gift
How is a Gift taxed if a recipient gains a future ownership in the Gifted property?
Recipient must gain ownership and all rights to property to get the annual exclusion. If recipient merely gains a future ownership, then the present value of the Gift is 100% taxable to donor and cannot exclude from Gift tax calc
What are the deductions for Gift tax, besides the annual exclusion?
Tuition and medical expenses paid directly to the provider organization (note: NOT books or dorm fees)
Unlimited Gifts to spouse
What is the basis of Gifted property for the recipient?
If a loss on sale, basis is FMV on the date of the Gift
If a gain on sale, basis is same as donor's basis
No G/L if donor basis is less than sales price, and sales price is less than FMV @ Gift date
How/when are Gift tax returns filed?
Calendar-year basis only
Due April 15
What are the basic characteristics of complex Trust?
Income distributions are optional
Accumulation of income ok
Charitable contributions ok
Contributions using tax-exempt income are not deductible
Allowed personal exemption of $100
Key Point: Distribution of Trust corpus (principal) ok
What are the basic characteristics of a Simple Trust?
Income distributions mandatory
Accumulation of income disallowed
No charitable contributions
Distribution of Trust corpus DISALLOWED
Allowed personal exemption of $300
How are Net Operating Losses handled in a Trust?
Trusts can have a Net Operating Loss
Any unused NOL flows through to the beneficiaries
How are expenses and fees related to tax-exempt income handled in a Trust?
Expenses and fees from tax-exempt income are not deductible for either a Complex or Simple Trust
When is property transferred in an Estate?
After the death of the donor
What amount of a decedent's Estate is exempt from Estate Tax?
The First $5,250,000 is exempt with a 40% tax on amount above that
How are a decedent's medical expenses handled with respect to an Estate?
Medical expenses paid after death, but incurred within 1 year of death go on decedents personal tax return
How is an Estate's NOL handled?
Estates can have a Net Operating Loss
Any unused NOL flows through to the beneficiaries
What does a gross Estate consist of?
Cash and Property FMV at death, or alternate valuation.
What is joint tenancy with respect to an Estate? How is it calculated?
When two non-spouses jointly own property
FMV at death X % Ownership = Amount in Estate
What is tenancy by entirety?
1/2 of marital assets go to deceased spouses Estate
What is tenancy in common in an Estate?
A, B, and C own property
If A dies, FMV of As share goes to heirs
How is Estate tax handled with respect to a beneficiary?
Property received through inheritance not income to recipient
Property value is FMV at date of death or 6 months later
If property is sold prior to 6 month date and the alternative date is used, FMV at date of sale is used to value property
Basis in property automatically assumes LT holding period
What is distributable net income (DNI)?
DNI = Taxable Income Expenses (from income production)
Trust beneficiaries only pay tax if earnings are distributed
Estate beneficiaries pay tax on DNI, regardless if distributed
When must a tax exempt organization file a 990-T for Unrelated Business Income?
If a tax exempt organization has more than $1,000 of UBI, it must file a Form 990-T
What are the requirements for a 501(c)3 organization?
Organized and Operated exclusively for exempt purposes
No earnings can benefit an individual or private shareholder
Cant attempt to influence legislation as a major part of its activities
Cant campaign politically
Under what accounting basis are individual tax returns prepared?
Cash Basis. Note: This basis is NOT allowed for Corporations, Partnerships with a C-Corp partner, or for inventories.
What are the deductions to arrive at Adjusted Gross Income (AGI) for individuals?
*Investment penalties for early withdrawal
*Self-employed medical insurance premiums
*Self-Employment Tax (approx. 50%)
*Student loan interest (can't be another taxpayer's dependent)
*Tuition - can't take AOC/Lifetime Learning Credit for same expense
*Attorney fees in discrimination lawsuit
Which items can be carried over to future years on an individual tax return?
Investment interest expense in excess of investment income
Excess Section 179
Passive Activity Losses
Characterize the following carryover: Passive Activity Loss
Can carry forward indefinitely
How is excess 179 expense carried forward?
Carry forward to next year.
Use in any year is limited to taxable income.
How long can investment interest expense in excess of investment income be carried forward?
How long is the carry forward for charitable contributions?
Can be carried forward 5 years.
How long is AMT paid carried forward, and how is it applied?
It can be carried forward indefinitely.
It may be applied against future *regular* income tax, but not against future AMT tax liability.
How are capital losses applied in individual taxes?
$3,000 net capital loss can be taken in each year, the rest is carried forward indefinitely.
The loss retains its character (STCL or LTCL).
How does an individual capital loss carryover differ from a corporate capital loss carryover?
Corporate capital loss carryovers may be carried back 3 years and forward 5 years. Individual capital losses are carried forward indefinitely.
Individual capital loss carryovers retain their character (STCL or LTCL). Corporate loss carryovers are carried forward as STCL only.
What ratio is applied to principle payments in an installment sale to determine the gain in a given year?
Gross Profit / Contract Price
What is the contract price in an installment sale for income tax purposes?
Contract Price = Sales Price - Liability assumed by buyer
On an individual return, regular mortgage interest on what loan amount is deductible?
Interest on home equity loans up to what amount are deductible on an individual tax return?
What business gift amounts are deductible on Schedule C of form 1040? What amount for service awards?
$25 per person for gifts
Service awards up to $400
What income can business losses offset on a 1040?
They may only offset active business income.
Note: W2 wages are considered active business income.
What income can passive losses offset on a 1040?
Only passive income such as rental income or limited partnership income.
Note: Wages are ACTIVE (cannot be offset by passive) and Interest/Dividends are PORTFOLIO (cannot be offset by passive)
Are interest and dividends active or passive income?
Neither. They are portfolio income.
What is (are) the depreciation convention(s) for personal property?
When is the mid-quarter convention used?
For depreciation when 40% or more of all purchases occur in 4th quarter.
What depreciation convention is used for real property?
What depreciation life and convention are used for leasehold improvements?
15 year straight line (S/L)
What amount of business start-up costs can be deducted? How is it expensed?
Up to $5,000
Amortized over 180 months
Reduced dollar-for-dollar by amount over $50,000
How are medical expenses deducted on a 1040?
On Schedule A:
Amounts in excess of 10% of AGI may be deducted
Which personal insurance premiums are not deductible as medical expenses on Schedule A?
Accident or disability insurance premiums are not deductible.
Under what circumstances can medical expenses paid on behalf of another be deducted on someone's Schedule A?
Must be a citizen of North America
Must live with you, or if they do not, must be mother/father or a relative closer than a cousin.
Benefactor must provide more than 50% support to the beneficiary.
Which foreign taxes are deductible?
Foreign INCOME and REAL ESTATE taxes are deductible.
Foreign personal property taxes are NOT deductible.
Foreign tax assessments are not deductible- they are added to the basis.
How is net investment income calculated, for the purpose of deducting excess investment interest expense?
Gross investment income - investment expense in excess of 2% of AGI = net investment income
Investment interest expense in excess of net investment income is deductible.
What investment interest is never deductible?
Investment interest expense on tax-free securities is not deductible.
When are mortgage points deductible and how are they deducted?
They are deductible if they represent prepaid interest on purchase of a new home or improving a home.
Refinance points are amortized over the life of the mortgage.
How are charitable contributions of LTCG property and property related to a charity's function deducted?
Deducted at fair market value (FMV), up to 30% of AGI
How are charitable donations for STCG property and property not related to the charity's function deducted on Schedule A?
Deduction is taken for adjusted basis in the property, up to 50% of AGI.
Does a casualty loss affect the basis of property?
No. It decreases the fair market value (FMV) of the property.
How is the deductible portion of a casualty loss calculated?
Take the lower of either A) Decrease in FMV or B) Basis in property (call this number GROSS LOSS)
GROSS LOSS - insurance proceeds received - $100 - 10% of AGI = Deductible casualty loss
What are the miscellaneous deductions on Schedule A, and how are they deducted?
Deductible in excess of 2% of AGI
Continuing Education - if required to keep your job
50% Meals and entertainment
Tax prep fees
Legal fees to collect alimony
Appraisal fees to value casualty loss of charitable contributions
Which itemized deductions are not subject to phaseout based on income or other factors?
Investment Interest Expense
Define qualifying child for most individual tax factors.
Must be resident of North America
Under age 19, or under age 24 if a student
Define qualifying relative for most individual tax factors?
Must be citizen of North America
Must live with you, unless mother/father or relative closer than a cousin
You must provide more than 50% support to the individual
How is minor income taxed at a parent's rate calculated (AKA kiddie tax)?
Child's unearned income
- early withdrawal penalties
- Greater than $1,000 or child's itemized deduction related to unearned income
= Amount taxed at parents' rate
Can spouses married filing jointly use different accounting methods?
Yes, if they each own a small business. All non-business income is cash basis.
At what rate is self-employment tax assessed?
15.3% of net earnings from self-employment
(Note: executor of an estate is NOT self-employment income)
What is a refundable tax credit? Which individual tax credits are most commonly refunded?
A tax credit which takes the taxpayer's tax owed on the return below zero, resulting in a refund to the taxpayer.
Earned Income Credit (EIC), American Opportunity Credit and the Additional Child Tax credit.
Note: the REGULAR child tax credit is NOT refundable.
How many education credits may be taken on a tax return?
American Opportunity Credit - per student
Lifetime Learning Credit - per taxpayer
Note: The American Opportunity Credit is refundable.
What estimated tax payments must be paid in by an individual taxpayer either via withholding or by quarterly tax payments?
The lesser of:
90% of current year's total tax
100% of prior year's total tax
110% of prior year's total tax (if AGI is $150,000 or more)
Which farming costs related to land are deductible? Which aren't?
Deductible: Costs incurred to PRESERVE soil/water
Non-deductible: Costs incurred to drain wetlands or prep for irrigation (i.e. improve land)
Which depreciation table is used for personal tangible property related to farming?
How long does the taxpayer have to petition the court for appeal after an audit?
If no petition to appeal is filed, how long does a taxpayer have to pay tax due after an audit?
What is the statute of limitations for a tax audit?
3 years, generally
6 years if 25% or more of gross income was omitted
The clock starts on the LATER of the due date or the filing date of the return.
There is NO STATUTE OF LIMITATIONS for either fraud or failure to file a required return.
How is non-business bad debt deducted on a 1040?
It is treated as a STCL
How long does an individual taxpayer have to file a claim for refund?
Refunds must be claimed within 3 years of the return due date or within 2 years of being paid, whichever is later.
When are life insurance premiums of an employee includable in income?
Premiums paid by an employer for coverage in excess of $50,000 per employee are includable in income.
When are scholarships not taxable?
When they are not in return for services rendered,
The money is used *only* for tuition and books
Note: Scholarships for room and board are includable in income.
What interest income is tax free?
State & municipal bond interest
US EE Savings Bond interest (note: HH bond interest is taxable)
Which dividend income is tax free?
S-corporation (actually distributions)
How much social security income can be taxed for individuals in higher income brackets?
Up to 85%
Is unemployment compensation taxable?
Which damages awarded in lawsuits are taxable? Which are not?
Payments made to make you whole are NOT taxable (i.e. to pay for losses of property, body parts or earning ability)
Any payments for punitive damages ARE taxable.
Are workman's compensation insurance benefits taxable?
No - similar to an award for damage to make a person whole.
Which of the following are taxable: Child Support, Divorce Property Settlements, Alimony
Alimony IS taxable.
Child support and divorce property settlements are NOT taxable.
Adoption expenses - Are they deductible?
NO, they are not deductible. However tax benefits are available through the adoption CREDIT.
Describe alimony recapture.
2nd Year: (3rd year - 2nd year - $15,000)
1st Year Alimony Paid
- Avg alimony paid in 2nd & 3rd years
- Recapture from 2nd year
=1st Year Alimony Recapture
Total Recapture = 1st Year Recapture + 2nd Year
How are Net Operating Losses (NOLs) utilized?
Can be carried back 2 years
If any left, can be carried forward 20 years.
Which IRA contributions are deductible?
Traditional IRA = deductible
Roth IRA = not deductible
When can a couple file married filing jointly?
They must be married at the end of the year.
If one spouse dies, they must be married at the end of the year.
What are the requirements for filing as Head of Household?
Must have a dependent child
Must provide more than 50% of the child's support
Must live with them more than 50% of the year
What are the requirements for filing as qualifying widower?
Must have a dependent child.
Essentially gets MFJ status for the year of death + 2 tax years
What is the Interstate Income Act of 1959?
Restricts a state's authority to tax interstate commerce
What are the principles of the Interstate Income Act of 1959?
A state can't collect income tax on sales within its borders as long as the orders are filled and shipped outside of the state
Applies to tangible property only
Does not protect a Corporation in the state where incorporated
Does not protect from taxes using metrics other than income (Ex: Sales Tax)
What is the Uniform Division of Income for Tax Purposes Act (UDITPA)?
Uniform criteria for determining taxable income of multi-state corporations
Also known as the Multi-State Tax Compact
What are the basic principles of UDITPA?
Designed to ensure a company is not taxed more than once on its income
Forces a corporation to segregate Business Income from Non-Business Income
What is considered Business Income?
Part of the corporation's regular course of business
Includes acquisition of tangible and intangible property if such activities are part of the regular trade or business
True or false? Partnerships are a taxable entity.
False. Income and expenses flow through to the partner to be taxed via a
When exchanging property for a partnership interest; how is gain or loss recognized?
Neither gain nor loss is recognized in an exchange of property for a partnership interest. It is a non-taxable event.
What is a partner's basis in partnership property?
Initial basis for partnership property is the basis of the property that was contributed or exchanged for the partnership interest.
When services are exchanged for a partnership interest; how is this treated for tax purposes?
It is a taxable event; treated the same as compensation for the services. The taxable income equals the % of partnership interest received times the FMV of the partnership.
i.e. the FMV of the interest received is the taxable income for the service provider.
What is the partner's basis in a partnership when they provide a service in exchange for the interest?
The basis in the partnership interest is the amount of taxable service revenue provided by service provider.
What is the holding period of an asset that has been contributed to a partnership?
The partnership inherits the holding period of the asset contributed.
The exception of inventory- the holding period begins when contributed.
What is the tax treatment of startup costs for a partnership?
Tax treatment is the same as that of an individual taxpayer.
However syndication fees are not deductible or amortized.
What deductions are subtracted from gross revenues to arrive at partnership income?
Wages - except for partners
Guaranteed payments to partners
Business bad debt (if on accrual basis)
Depreciation (except section 179)
Amortization (Startup costs; goodwill; etc)
How are partnership losses taken on an individual's return?
Losses cannot be taken beyond a partner's basis in the partnership
Losses in excess of basis are carried forward until basis is available
When are guaranteed payments to a partner includable in taxable income?
They appear in partner's income during the year in which the partnership's fiscal year CLOSES.
How are partner benefits paid by the partnership treated?
Health insurance; life insurance and other benefits paid on behalf of the partner are treated as guaranteed payments and are includable as self-employment income.
How is net self-employment income from a partnership interest calculated?
Partner's % share of ordinary income from partner's K-1
+ Guaranteed payments
- Partner's % share of section 179 expense from K-1
= Self-employment income (subject to SE tax)
In general; what is a partner's basis in partnership property purchased?
Partner's basis is basis of goods exchanged or for services exchanged is FMV of partnership interest received.
If purchased; purchase price less liabilities incurred = basis.
For a gifted interest in a partnership; gift basis rules apply.
Which items are not deductible on Schedule K of form 1065?
Foreign tax paid
Investment interest expense
Section 179 expense
Which items are not counted as income on Schedule K of form 1065?
1231 Gain or Loss
How is adjusted partnership basis calculated?
Beginning partnership basis
+ Capital contributions
+ Share of ordinary partnership income
+ Capital gains
+ Tax-exempt partnership income (DON'T FORGET!)
= Ending partnership basis
What items DECREASE partnership basis?
Adjusted basis of property distributed
Partners's share of ordinary losses
Partnership is relieved of a liability (considered a distribution)
What INCREASES partnership basis?
Partnership getting a loan
How do liabilities either INCURRED or RELIEVED affect a partner's basis in a partnership?
If the partnership gets a loan; this INCREASES basis.
If partnership is relieved of a liability; this DECREASES basis.
How do guaranteed payments affect partnership basis?
They do not affect basis- they are already included in ordinary income; which affects basis.
What is the order in which basis is adjusted in a partnership?
1. Increase basis (all items; including tax-exempt income)
3. Losses (limited to basis)
How is the taxable year of a partnership determined?
It must be the same as 50% of the partners and use the same tax year for 3 years once adopted.
How does death of a partner affect the partnership's taxable year?
The taxable year closes with respect to the decedent partner's interest ONLY.
When CAN'T a partnership use cash basis?
1. They have inventories
2. Partnership is a tax shelter
3. Has a corporate partner
4. Gross receipts are $5 Million or more
Exception: If gross receipts are $1 Million or LESS and Partnership maintains inventories; Cash method is ok.
When does a partnership terminate?
When there is less than 2 partners (only one partner)
When 50% of the partnership interests sell within a 12 month period- partnership IMMEDIATELY terminates.
How is gain or loss on sale of a partnership interest calculated?
Gain or Loss = Amount realized on sale - basis in partnership interest
What is the new basis of a partnership interest sold?
Basis = Capital account + Liabilities assumed
How is the sale of non-capital partnership property treated?
As ordinary gain/loss.
Items that fall into non-capital category would be unrealized receivables; appreciated inventory; and similar.
How is a partner's share of an ordinary gain calculated?
FMV of Assets (non-capital)
- Adjusted basis of assets
= Ordinary gain
x Partner's % interest
= Partner's share of gain
Note: No gain or loss will be recognized by a partnership upon distribution of property.
What is the order of basis reductions for distributions from a partnership?
1. Money distributed
2. Adjusted basis of unrealized receivables and inventory
3. Adjusted basis of other property
Note: Only MONEY distributions will trigger a gain in a partnership distribution.
When can a LOSS occur in a partnership distribution?
Only in a liquidating distribution.
What are the requirements for recognizing a gain in a partnership liquidating distribution?
1. Money was distributed
2. Unrealized receivables were distributed
3. Appreciated inventories were distributed
Otherwise; no loss recognized.
What is the basic calculation for basis in property?
Cost of property + Purchase expenses + Debt assumed + Back taxes and interest paid = Basis. Note: taxes and interest related to time when a taxpayer did not own the property are not deductible - they are added to basis.
What is the recipient or donee's basis on gifted property?
Sold at a gain: use donor's basis
Sold at a loss: use lesser of donor's basis or FMV at time of distribution
Sold in between donor's basis and FMV: No gain or loss
What is the basis and holding period of inherited property?
FMV at date of death or alternate valuation date (6 months later)
If alternate date is elected by property is sold before 6 month window; use FMV at date of death.
Property inherited is LTCG property regardless of how long it is held by the recipient.
What is the holding period on a stock dividend?
Holding period of new stock received from a dividend takes on the holding period of the original stock
What property is eligible for like-kind exchange treatment?
Real for real or personal for personal business property only
US property only
What is BOOT in a like-kind exchange?
Cash received + unlike property received + liability passed to other party
In a like-kind exchange; how is it handled if a netting of mortgages results in net boot paid?
DO NOT subtract the boot paid amount from the cash received
Ignore the boot paid amount from the mortgage completely
What is an involuntary conversion? When does it not result in a gain?
Occurs when you receive money for a property involuntarily converted
There is no gain if you reinvest the proceeds completely
If proceeds not completely reinvested; gain is LESSER of realized gain or amount not reinvested.
What are the requirements for exclusion of gain on a primary residence? How are losses treated?
Must live there 2 out of 5 years
Loss on sale of home is NOT deductible
What is a wash sale?
30 Day rule applies
Disallowed loss adds to basis of new stock
New stock takes on date of acquisition of old stock
Who is considered a related party in a property transaction? How does it affect the transaction?
Ancestors; siblings; spouse; descendants; corporation or partnership where you're a 50% shareholder
Seller cannot take a loss on sale to a related party; but gain is always recognized.
Related party gets to use the disallowed loss when they sell.
Related party's holding period begins when they acquire the property.
In-laws are NOT related parties.
How are capital losses taken in a corporation?
capital losses only offset capital gains
Carryback 3 years - if you elect NOT to carryback; you lost the option in the future
Carry forward 5 years - only as STCL
What assets are NOT capital assets?
Inventory; Business interest; Accounts Receivable; Covenant not to compete
Goodwill IS a capital asset
What are the steps in applying a capital gain or loss?
Net all STCG and STCL
Net all LTCG and LTCL
How much ordinary income can be offset by an INDIVIDUAL's capital losses?
$3;000 per year. Unused is carried forward and taken $3;000 each year.
No carryback is allowed.
Which property is governed by section 1231?
Real or Personal Business Property held more than a year
Inventory is never 1231 Property
How are section 1231 gains and losses handled?
Casualty Losses on 1231 Property - Net the losses
* Net Loss = Ordinary Loss
* Net Gain = Combine with other 1231 Gains
1231 Net Loss - If 1231 Losses exceed gains; treat as Ordinary Loss
1231 Net Gain - If 1231 Gains exceed losses; treat at LTCG
1231 Gain = LTCG
1231 Loss = Ordinary Loss
How is section 1245 depreciation recapture handled; and when does it apply?
To the extent of depreciation; treat as ordinary gain
Remainder is 1231 gain; which is LTCG - There are no 1245 Losses
1231 Gain = LTCG
1245 Gain = Ordinary
Casualty Gain = LTCG
1231 Loss = Ordinary
1245 Loss = N/A
Casualty Loss = Ordinary
What property qualifies for section 1250 treatment; and how are gains/losses handled?
1250 property is Real Estate that is not 1231 Property
Use 1250 for Gain only. For losses; use 1231
Individuals: Post-1986 property with a gain is 1231 LTCG
If Straight Line depreciation is used; don't use 1250 - Entire gain is 1231
Corps: Section 291 requires 20% of depreciation classified as ordinary gain
Remainder is 1231 LTCG