REG Flashcards

Question

Explain "assignment" vs "delegation" of contracts as it pertains to the involvement of third-parties not explicitly stated in the contract itself.

Answer 1

1. Assignment: When original party is replaced with new party, and original party is no longer responsible for any portion of the contract. 2. Delegation: Original party substitutes another party into the contract to do some/all of the items promised by original party. BOTH the original party and new party will both be responsible for the contract.

Answer 2

1. Compensatory damages 2. Specific performance (when monetary damages is insufficient to repay party for breach of contract) 3. Injunction (court order requiring one party to either do or refrain from doing a specific act) 4. Rescission: (restoring the parties' conditions to their original positions pre-contract) 5. Liquidating damages

Answer 3

Implied warranty: Warranties that require no words, either oral or written. For example, in implied warranty of merchantability, a merchant promises, without saying as such, that their goods are fit and safe for normal use. Express warranty: Warranties that a buyer receives from a seller, and typically include a material representation of a fact, or facts, regarding the goods being sold. A breach of these warranties is grounds for litigation.

Answer 4

Implied warranties of title: Warranties given specifically to goods to help guarantee the owner of those goods. The title the buyer of the goods acquires cannot be a “better” title than the seller has to give. Implied warranty of fitness: Warranties given for a particular purpose. Buyer is relying on seller’s expert opinion and the seller must know purpose of purchase.

Answer 5

1. Duty of care: The seller owes buyer the duty of due care 2. Breach: The seller failed to use reasonable care 3. Damages: The buyer suffered damages 4. Causality: Seller's breach caused the buyer's damages.

Answer 6

1. Defective product: Must show a Defective product 2. Cause: Must show the defect caused injury 3. Unreasonably dangerous: Must show the defect was unreasonably dangerous to users and consumers 4. Business: Must show seller was engaged in that Business 5. Changes: Must show it reached the user without substantial changes

Answer 7

Surety: promises to pay a creditor the amount owed by the debtor, if debtor defaults on a debt. 1. Right of Subrogation: after surety pays debt to the creditor in full, the surety obtains all of creditor’s rights. 2. Rights of Reimbursement: surety has right to recover from debtor all money that surety paid to the creditor after debtor defaulted on the loan 3. Right of Exoneration: surety can obtain a court order that establishes that debtor is most liable for the debt amount (and not the surety)

Answer 8

1. Demanding payment of the debt from the Surety (after other options have been exhausted) 2. Demanding payment of the debt from the Debtor 3. Attempting to possess any collateral that exists that was used to help secure the loan

Answer 9

1. Lack of writing or consideration 2. Payment or performance by debtor 3. Fraud by the creditor 4. Increased risk that exceeds agreement terms

Answer 10

Ch. 7 Bankruptcy is liquidation bankruptcy; debtor's assets are liquidated in order to pay their debt owed to creditors. (However, excludes banks, insurance companies, railroads, savings/loan associations, credit unions, HMOs) Ch. 11 Bankruptcy permits the reorganization of an entity's debt. (However, excludes stockbrokers, commodities brokers, banks, savings/loan associations.) Ch. 13 Bankruptcy permits the reorganization of debt by individuals. Requirements are less than $383,175 in unsecured debt and $1,149,525 in secured debt.

Answer 11

If less than twelve (12) creditors exist, any single creditor who is owed more than $15,325 in unsecured debt may file a petition. Or, if more than twelve (12) creditors exist, at least three of the unsecured creditors must join in the filing to meet the $15,325 total amount needed. Also, there must be no dispute over the amount owed on the debt.

Answer 12

T - Transfer of property that benefits a creditor A - Antecedent, pre-existing debt N - Ninety day window in order to make transfer I - Debtor must be insolvent M - Creditor received More than would have via bankruptcy

Answer 13

Property claim: If a creditor has right to a piece of property held by the debtor, the property is turned over to creditor. Trust claim: If creditor is a beneficiary for trust property, that property is not considered part of the debtor’s estate. Secured claim: Claims that held by a creditor who has an interest in a specific piece of property.

Answer 14

Secured creditors have attached specific piece of property held by the debtor in exchange for something of value. Unsecured creditors are paid in full at each level of priority before any claims at a lower level are paid.

Answer 15

Attachment: Formal process of placing a claim on property owned by the Debtor, in exchange for credit Perfection by Possession: when the Creditor takes the collateral used to secure the debt with debtor's agreement. Perfection by Filing: when the Creditor files a Financing Statement with the appropriate state agency. Perfection by Attachment: form of perfecting a security interest to collateral automatically. Can only occur with PMSI Creditors in consumer goods.

Answer 16

FICA: Federal Insurance Contribution Act. FICA represents the federal payroll tax imposed on employees, employers, and independent contractors to fund Social Security and Medicare. 85% of all FICA benefits received are taxable. FUTA: Federal Unemployment Tax Act. FUTA provides for unemployment benefits to be collected by employees who have lost their jobs through no fault of their own. Employers pay FUTA when paid $1500 in wages in a year. WC: Workers Compensation. Provides insurance benefits to employees injured within the scope of employment.

Answer 17

ERISA: Employee Retirement Income Security Act. Sets standards for funding and investment of pension plans to help ensure that there is no mismanagement of the investment funds contributed by both employees and employers.

Answer 18

1. National Environmental Policy Act (NEPA) 2. Clean Air Act (CAA) 3. Clean Water Act (CWA) 4. Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) 5. Resource Conservation and Recovery Act (RCRA)

Answer 19

TCJA repealed the individual mandate that all persons must obtain health insurance. As of 2019, taxpayers no longer have to pay a penalty if they do not have health insurance.

Answer 20

1. Sole proprietorship: No specific filings or registrations. 2. Partnership: Partnership agreement, although not required to be in writing. Dissolution can occur by either an act of one of the partners, or by operation of law. 3. Corporation: Must file Articles of Incorporation with the state, disclosing Stock Provisions (number of authorized shares, voting stock, and a capital structure for the stock), names of the Corporation, its registered agent, and all incorporators. 4. LLC: Must file Articles of Organization within the state, disclosing name of the LLC, and where its owners have limited liability. Must file Operating Agreement as well.

Answer 21

Approval steps for merger or consolidation 1. Submit a formal plan of merger or consolidation to both boards and get majority approval. 2. Submit to all stockholders and get majority approval (give notice of time, date and place). 3. Submit a plan to the secretary of state, who issues a certificate of the merger upon approval. (Short form merger is when a parent merges with a 90%+ owned sub)

Answer 22

Elements of a deed: An effective real property deed must be made in writing, signed by the grantor (seller), containing a description of the property, and be delivered to the grantee (buyer). General warranty deed: guarantees owner that they have title, including the right to convey that title, that there are no unstated encumbrances on the property. Special Warranty Deed: only guarantees ownership for the time in which the seller owns a piece of property. Quitclaim Deed: deed where grantor gives whatever title or interest he has but doesn’t guarantee he has anything. This is the deed with the least protection.

Answer 23

A mortgage requires four elements: must be made in a writing, signed by the mortgagor, contains a description of the property, and delivered to the mortgagee.

Answer 24

A lease is an agreement whereby the renter has the right to exclusive possession of a piece of property, but does not have ownership of that property. Unlike mortgages, leases do not require writing unless the lease is for 1+ year. If the lease is in writing, it must include a description of the leased premises.

Answer 25

1. Real property: Land and anything attached to the land. 2. Personal property: Anything else that is moveable and is not real property. 3: Conversion: From personal to real property, or vice versa.

Answer 26

Tax basis: The portion of the asset's value from which tax liability is calculated. Initial basis: Purchase price plus costs to ready the asset for its intended purpose. Adjusted basis: Initial basis plus improvements, less depreciation or depletion.

Answer 27

Determine the Relative FMV by taking the FMV of each house divided by the total FMV of all houses. Multiply this amount by the purchase price of the land to determine the amount of the purchase price of the land allocated to each house.

Answer 28

Basis of property received as a gift, GAIN = Amount sale of gift above DONOR's basis. Basis of property received as a gift, LOSS = Lesser of FMV or donor’s basis.

Answer 29

Tax basis of stock dividend = Number of shares distributed, times FMV per share at date of distribution. This is the taxable dividend income amount.

Answer 30

Gifted property will have a holding period determined by whether the taxpayer is using the GAIN basis, or the LOSS basis. Holding period determines whether the sale is a long-term vs. short-term capital gain or loss. Gift sold at GAIN = Basis is donor's basis. Holding period of donee begins on date when the donor purchased the gift. Gift sold at LOSS = Lesser of the donor’s basis or FMV at the date of gift. If donor's basis, then holding period is the date of the gift. If FMV, then holding period begins on the date the donor originally purchased the item.

Answer 31

Like-kind exchange: An exchange transaction limited to business-use real property that is given up in exchange for similar business-use real property. Basis of like-kind exchange = Basis of property given up + [Gain recognized] + [Boot basis paid] - [Loss recognized] - [FMV of boot received]

Answer 32

Boot: Any property given up or received that is not a like-kind. The most common type of boot is cash, or liabilities assumed.

Answer 33

Boot received: Reduction in basis. Boot paid: Plus, or addition, in basis.

Answer 34

Treatment of liability (mortgage) assumed: 1) Each taxpayer nets the mortgage assumed by the other taxpayer and the new mortgage being taken on from the other taxpayer. 2) If the netting of the mortgages results in net boot RECEIVED, add net boot received from the mortgages to cash received to arrive at total net boot received. Recognized gain = Lesser of realized gain OR total boot received (cash only). 3) If the netting of the mortgages results in net boot PAID, net boot received will only be the cash received. Net boot paid from the netting of the mortgages will still affect calculation of basis of the new property.

Answer 35

Though the gain is calculated as realized one way, for tax purposes, it is more important to determine gain RECOGNIZED to the extent of: (1) lesser of the realized gain, or (2) the net boot received from netting the mortgages.

Answer 36

Involuntary conversions cover theft, casualty or condemnation. Proceeds would typically be insurance proceeds, if any. Gain or loss in involuntary conversion = Insurance proceeds less the property’s adjusted basis

Answer 37

Wash sale refers to when stocks or securities are sold at a loss, and identical stocks or securities are acquired within 30 days either before or after the sale date. Loss is postponed and will increase the basis of the newly acquired stocks or securities. Gains are fully taxable.

Answer 38

An individual taxpayer is allowed to exclude $250,000 ($500,000 if married filing a joint return) of gain upon the sale of a home if certain requirements are met. Most important rule is that the home must have been owned and occupied as the primary residence for total of at least two of the prior five years. If the gain exceeds the dollar limit for exclusion, then the full balance of the gain is recognized. Postponement is not an option. Losses upon the sale of a principal residence are not tax deductible.

Answer 39

The Protecting Americans from Tax Hikes Act of 2015 (PATH Act) includes permanent tax breaks, including exclusions on small business stock gains (Section 1202). The new law makes permanent the exclusion of 100 percent of the gain on the sale or exchange of qualified small business stock (QSBS) acquired after September 27, 2010, and held for more than five years. If the requirements are met to be a qualified small business stock, then 100% of any gain from the sale of the stock can be excluded up to the greater of $10 million or 10 times the stockholder’s basis. Section 1244 allows a loss upon the sale of qualified small business stock to be treated as ordinary loss versus capital losses. If there is a loss, up to $50,000 of the loss is ordinary on an individual return, or $100,000 for married filing joint.

Answer 40

All capital asset gains and losses must follow a specified netting process. Short-term capital gains (STCG) and losses (STCL) must be netted together SEPARATE from the long-term capital gains (LTCG) and losses (LTCL) netting process. Once a net short-term gain (NSTCG) or loss (NSTCL) and a separate net long-term capital gain (NLTCG) or loss (NLTCL) is determined, then the net short-term gain or loss and the net long-term gain or loss is netted together. The result will be the net capital gain (NCG) or net capital loss (NCL). STCG > STCL = NSTCG STCG < STCL = NSTCL LTCG > LTCL = NLTCG LTCG < LTCL = NLTCL

Answer 41

1) Capital losses: For taxpayers who file a joint return or, individual taxpayers who file single or head of household, they can take a net capital loss against ordinary income, up to a maximum of $3,000. Any amount not currently used may be carryforward indefinitely, either as shortterm or long-term, based on the holding period. 2) Capital Gains: All net capital gains are included in an individual’s tax return. If the net capital gain is a net short-term capital gain, the net amount will be taxed at ordinary income rates. If an individual has a net short-term capital loss and a net long-term capital loss, when applying the $3,000 loss limit, always use up the net short-term capital loss first and then use the net long-term capital loss. Remember, no more than $3,000 of capital losses can be deducted against ordinary income in any one year. For married filing separately, the maximum capital loss that can be deducted against ordinary income is $1,500.

Answer 42

Section 1231 assets include: 1) Depreciable personal property that is used in a trade or business or, 2) Real property used in a trade or business, and 3) Property must be held for more than one year. The gain from the sale or exchange of a Section 1231 asset will be recaptured as ordinary income to the extent of the lesser of all depreciation taken or, the recognized gain. This recaptured gain is Section 1245 gain.

Answer 43

Section 1250 assets are real property subject to depreciation and used in a trade or business. If categorized as 1250 property, then IRC Section 1250 will override IRC Section 1231 for tax purposes. Section 1250 assets must calculate ADDITIONAL depreciation to determine the amount of depreciation RECAPTURE, in the case of accelerated depreciation. The additional depreciation is equal to the amount of total accelerated depreciation taken, minus depreciation as if the straight-line method had been used for real property, under the ACRS method. This additional depreciation is the amount to be RECAPTURED AS ORDINARY INCOME upon a sale.

Answer 44

Installment sale: A sale of property that results in a gain (not a loss) where a taxpayer receives at least one payment after the tax year of the sale. Annual gain recognized = [Gross profit ÷ Total contract price] x Amount received for the year Contract price = (Sales price – seller’s liabilities assumed by the buyer) + (Excess of the liabilities assumed by buyer over the seller’s basis in the property).

Answer 45

Related parties generally describes transactions between: (1) family members and (2) a corporation and an individual who owns more than 50% of the entity. If there is a sale between related parties and a loss results, then the loss is not deductible. But, if the purchaser sells the property later at a gain, then a disallowed loss can reduce the gain at that time.

Answer 46

Imputed interest: The difference between the original interest stated in the loan and the AFR ("applicable federal rate" published by the IRS). Imputed interest is considered a gift from the lender to the borrower and may be subject to gift tax.

Answer 47

Modified Accelerated Cost Recovery System (MACRS): A simplified method of financial accounting depreciation and is an accelerated method compared to straight-line depreciation. Salvage value is ignored for all assets. Most business assets will be either a 5 or 7-year life. 5-year assets are office machines, computers, and cars. 7-year assets are office furniture and fixtures. Real property is classified as residential or non-residential real property. Residential recovery period is 27.5 years. Non-residential recovery period is 39 years.

Answer 48

IRC Section 179 allows a taxpayer to directly expense, in addition to depreciating under MACRS, tangible personal property used in business. 179 requires that the property is purchased for use in business and is purchased from an unrelated party. In 2021, maximum deduction is the lesser of: (1) $1,050,000 minus the amount that the total purchases exceed $2,620,000, or (2) taxable income before Section 179.

Answer 49

Under the Tax Cuts and Jobs Act, qualified property acquired and placed in service after September 27, 2017, and before January 1, 2023 for taxable years starting on or after January 1, 2019, can take bonus depreciation of 100% which remains in effect until January 1, 2024. Applies to personal property used in a trade or business with a useful life of 20 years or less. The bonus depreciation percentage is only calculated in the year of acquisition. The bonus depreciation decreases by 20% each year.

Answer 50

The orders of Items to be used in the calculation of the first year’s depreciation for tangible personal property, used in a trade or business.: i. Take the cost of tangible personal property. ii. Apply Section 179 and deduct it from the cost. iii. Subtotal is the basis after Section 179. iv. Take bonus depreciation and subtract it from “iii.” v. This equals the remaining basis, which is used to calculate the averaging convention depreciation for the first year. First year depreciation = “ii” + “iv” + “v”

Answer 51

Tax basis of gifts is: Gross gifts (cash + Property FMV at date of gift) PLUS: One-half of spouse’s gifts to third parties if gift-splitting is elected LESS: Deductions allowed: -One-half of gifts to third parties treated as given by spouse if gift-splitting is elected -Annual exclusion (up to $15,000 per donee, for gifts of a present interest) -Unlimited exclusion for tuition or medical expenses paid on behalf of the donee, and the amounts are paid directly to the provider -Unlimited exclusion for gifts paid to political organizations -Unlimited exclusion for gifts for amounts paid to charitable organizations -Unlimited exclusion for gifts to your spouse EQUALS: Taxable gifts for the current year

Answer 52

Cash: Individuals; C Corp, S Corp, & Partnerships UNDER $26M over 3-yr avg; Sole proprietorship; Qualified personal service corporations Accrual: C Corp, S Corp, & Partnerships ABOVE $26M over 3-yr avg; Tax shelters

Answer 53

If the average annual gross receipts for the past three years exceeds $26 million, the entity is subject to the uniform capitalization rules. Capitalized direct costs include: direct materials and direct labor (as well as other indirect costs). Does not include: Marketing, selling, distribution costs; General and administrative expenses; Research and experimental costs.

Answer 54

First, income from farming business is reported on Schedule F. After a farmer calculates net earnings from self-employment on Schedule F, they must file Schedule SE to determine self-employment tax.

Answer 55

To Compute Taxable Income: Step 1: Compute gross income, defined as “all income from whatever source derived,” by determining what is included and what can be excluded. Step 2: Subtract deductions (above the line) to arrive at Adjusted Gross Income (AGI) Step 3: Subtract “itemized” deductions or the standard deduction (whichever is greater) Result: Taxable Income

Answer 56

To Compute Individual Income Tax Liability: Step 1: Compute the annual income tax liability Step 2: Decrease this tax liability by any available tax credits Step 3: Add to tax liability any other applicable taxes (for example, self-employment tax or the Alternative Minimum Tax) Step 4: Deduct payments that were made to the IRS during the tax year, including: - Taxes that were withheld during the year by an employer - Estimated tax payments made during the year Result: Taxes due to IRS or tax refund due to the taxpayer

Answer 57

1. Compensation for services 2. Gross Income from a business or profession 3. Unemployment benefits 4. Distributive share of dividend income 5. Gifts from an employer (excludes non-cash holiday gifts) 6. Gain from sale or exchange of real estate, securities, property 7. Rent and royalties 8. Gambling winnings 9. Employee death benefits paid by an employer (NOT life insurance proceeds) 10. Embezzled or illegal income 11. Litigation settlement income awarded for punitive damages 12. Scholarship funds for non-degree seeking students, and for room & board (even if degree-seeking) 13. Discharge of debt 14. Prize or award money (but excluded if transferred directly to tax-exempt charitable organization) 15. Interest income (but excluded if from state & local bonds, or mutual funds)

Answer 58

1. Unrealized income (stock went up in value but hasn’t been sold) 2. Return of capital (such as stock dividends on common stock) 3. Property received from your former spouse under the divorce decree, and cash alimony received from a divorce executed after December 31, 2018 4. Proceeds to a beneficiary from a life insurance policy 5. Workers compensation payments 6. Reimbursement from employer-provided accident and health plan 7. Accident and health insurance benefits paid to an employee 8. Qualified foster care payments 9. Welfare payments received from government entities 10. Payments received for support of minor children 11. Litigation settlement income awarded for non-punitive damages 12. Scholarship funds used by a degree-seeking candidate toward tuition and related expenses.

Answer 59

Each pass-through entity must prepare a Schedule K-1 to report the amounts that are passed through to each partner. Parts I and II of the Schedule K-1 include information about the partnership and the partner's portion of income. Three types of partnership income: (1) Ordinary income (loss); (2) Passive income (loss); (3) Portfolio income items. Schedule K-1, Part III discloses the partner’s share of current year income, deductions, credits, and other items.

Answer 60

1. Ordinary business income 2. Net rental real estate income 3. Other net rental income 4. Guaranteed payments 5. Interest income 6. Ordinary and qualified dividends 7. Royalties 8. Net short-term capital gain 9a. Net long-term capital gain 9b. Collectibles (28%) gain 9c. Unrecaptured Section 1250 gain 10. Net Sec. 1231 gain 11. Other income (Porfolio income, involuntary conversion, cancellation of debt) 12. Sec. 179 deduction 13. Other deductions (Charitable contributions, investment interest expense, royalty income, portfolio income, medical insurance, dependent care benefits, pension & IRA payments) 14. Self-employment earnings 15. Credits 16. Foreign transactions 17. Alternative minimum tax 18. Tax-exempt income/interest, and other non-deductible expenses 19. Distributions 20. Other information

Answer 61

Above-the-line: Deductions subtracted from gross income to arrive at AGI. Below-the-line: Deductions subtracted from AGI, after above-the-line. The term "tax expense" refers to a liability owed to a federal, state, or local government within the tax year. Taxpayer expenses are divided into 3 categories: Trade/business, investment, personal

Answer 62

1. Business expenses associated with a trade or self-employment 2. Expenses arising from rents and royalties 3. One half of self-employment tax 4. IRA and self-employed retirement plan contributions 5. Student loan interest 6. Jury duty pay remitted to an employer 7. Contributions to Health Savings Accounts 8. Attorney’s fees and court costs for discrimination suits and whistleblower awards 9. Forfeited interest or penalties paid on premature withdrawals from a time-savings account 10. Losses from the sale or exchange of property 11. Expenses of elementary and secondary teachers 12. Health Savings Accounts 13. Up to $300.00 of qualified cash charitable contributions for taxpayers, except married filing jointly is $600 and who do not itemize their deductions

Answer 63

All taxpayers can take either a standard deduction or itemized deductions. Basic standard deduction (2021): 1. Married filing jointly or surviving spouse: $25,100 2. Head of Household: $18,800 3. Single: $12,550 Categories of itemized deductions (2021): 1. Medical expenses 2. Taxes 3. Interest 4. Charitable contributions 5. Gambling losses 6. Miscellaneous deductions not subject to 2% deduction

Answer 64

Deductible Medical Expenses = Qualified Medical Expenses – Any Medical Expense Reimbursements – 7.5% of AGI This means that only the portion of qualified medical expenses that exceed 7.5% of the taxpayer’s AGI are deductible.

Answer 65

QBI (qualified business income) is income that passes through to the taxpayer from a sole proprietorships, partnerships, or S corporation. The individual who receives the income flow can get a deduction of 20% for their Qualified Business Income (QBI). It is also known as a Section 199A deduction. QBI is ordinary business income less business expenses. Both itemizing and non-itemizing taxpayers are eligible to take the deduction on their Form 1040.

Answer 66

Passive activity is any in which taxpayer does not “materially participate” in its management. In most cases, passive rental income (loss) will be reported on Form 1040, Schedule E. Material participation means the taxpayer either: (1) worked more than 500 hours on the activity during the tax year, or (2) worked 100+ hours on the activity when no other individual has. Also, the taxpayer must own 10%+ of the estate. An active manager of the rental real estate can deduct a maximum loss of $25,000/year.

Answer 67

Deductible loss = [Adjusted Basis of Property] – [Cash or FMV of Property/Services Received] – [Any Reimbursement or Compensation for the Loss] – [Property’s Salvage Value (if any)]

Answer 68

A net operating loss (NOL) is the excess of allowable business deductions over the gross income of the business activity for a particular tax year. NOL can be carried forward indefinitely but cannot be carried back. To compute NOL for corporate taxpayers: Gross Income – Allowable Business Deductions = Business Activity Loss – Any deduction for dividends received that was disallowed due to corporation’s taxable income – Any deduction for dividends paid on certain preferred stock of public utilities without limiting it to the year’s taxable income – Exclusion of gain from qualified small business stock = Corporate Net Operating Loss

Answer 69

1. Married Filing Jointly: Taxpayers who file jointly must have the same tax year. Married taxpayers filing jointly can have different accounting methods. 2. Married Filing Separate: Spouses divide their income and expenses according to ownership. 3. Qualifying Widower: Applicable for the two years after the year of death of spouse. When a spouse dies during the tax year, the surviving spouse may still choose MFJ status for that tax year. Taxpayer must provide more than 50% of the cost of maintaining the household for a child. 4. Head of Household: Taxpayer must be unmarried, and have a qualifying person living in the house for more than half the year. 5. Single: Everyone who does not fit the above. Includes taxpayers who were married but who then obtained a legal separation agreement at end of year.

Answer 70

1. Earned income credit (EIC): For eligible low-income workers who have “earned income.” For 2021, the maximum earned credit is $6,728. 2. Child Tax Credit (CTC): Taxpayers with AGI under a certain threshold can take a credit of $3,600 for qualifying child UNDER AGE 6, $3,000 per qualifying dependent under the age of 17. 3. American Opportunity Tax Credit (AOTC): Allowed a max of $2500/year for each eligible student, as: (1) 100% of first $2,000 of qualified educational expenses, and (2) 25% of the next $2,000 of qualified educational expenses.

Answer 71

1. Elderly credit: For taxpayers age 65+ or permanently disabled. 15% of the difference between an initial flat amount ($5,000 for single taxpayers; $7,500 for taxpayer and spouse) and income. 2. Child and dependent care credit: A child must be under 13 must live with the taxpayer for more than half the year. Income of $250/month for one qualifying individual requiring care. 3. Adoption credit: A non-refundable credit is allowed for qualified adoption expenses up to $14,440 for 2021 for each eligible child. 4. Lifetime Learning credit: The credit is computed as 20% of education expenses up to $10,000, for a maximum credit of $2,000. The AGI amount for Joint Filings totally phases out when AGI exceeds $90,000. 5. Foreign tax credit: The credit is limited to the lower of foreign taxes paid or the proportion of U.S. tax allocable to foreign sourced income

Answer 72

1. General Business Credit (GBC): Is actually a combination of multiple credits, including: (a) Rehabilitation Credit, (b) Business Energy Credit, (c) Work Opportunity Credit, (d) Alcohol fuels credit, (e) Research credit, (f) Employer-Provided Child Care Credit, (g) Small Employer Health Insurance Credit. But the combined limit of all of these credits is net income tax MINUS 25% of net regular tax liability over $25,000.

Answer 73

The federal income tax has 7 tax brackets for 2020: 10%, 12%, 22%, 24%, 32%, 35%, and 37%.

Answer 74

Social Security (FICA) is 7.65% for both employers and employees. Federal Unemployment (FUTA) is 6.2% of the first $7,000 wages paid to each employee. Self-Employment Income = [Gross Income from Self-Employment] – [Deductions Associated with the Activity (including director’s fees)] Net Earnings from Self-Employment = [Self-Employment Income] * 92.35%

Answer 75

The total self-employment tax is the sum the 12.4% Social Security, the 2.9% Medicare, and the .9% Additional Medicare tax portions. 1. Social Security Taxes = [Net Earnings from Self-Employment (up to $118,500)] * 12.4% 2. Medicare Taxes = [Net Earnings from Self-Employment (no ceiling)] * 2.9% 3. Additional Medicare Tax = [Ceiling Based on Filing Status] – [Net Earnings from Self-Employment] * 0.9%

Answer 76

For taxpayers with an AGI at or below the threshold in the prior year, estimated tax payments plus withholdings must equal the lesser of: - 90% of the current year’s tax - 90% of the tax determined using the annualized income method - 100% of the prior year’s tax, even if there was no tax liability in the prior year. For taxpayers with an AGI above the threshold ($150,000 for joint returns and single filers; $75,000 for married filing separately) in the prior year, estimated tax payments plus withholdings must equal the lesser of: - 90% of the current year’s tax - 90% of the tax determined using the annualized income method - 110% of the prior year’s tax

Answer 77

Partners can only recognize a gain on liquidating distributions if the cash received by the partner exceeds the partner’s basis in the partnership. Distribution is first treated as a distribution out of the Accumulated Adjustment Account (AAA), which is non-taxable, and reduces the shareholder’s basis in stock. Any distribution in excess of the S corporation shareholder’s stock basis is treated as a capital gain.

Answer 78

Tax advantages of a general partnership are: 1. Minimal tax filings as form 1065 is not a complicated filing 2. A flow-through entity which avoids double taxation Tax disadvantages of a general partnership are: 1. A partner’s share of ordinary income and guaranteed payments are subject to the self- employment tax. This is the combined employer and employee rate on social security and Medicare.

Answer 79

Tax advantages of a limited partnership are: 1. Flow-through entity, and no double taxation 2. The ordinary income of a limited partner is passive, and is not subject to self-employment tax Tax disadvantages of a limited partnership are: 1. Because the ordinary income (loss) of a limited partner is passive, it cannot offset non-passive income and losses of the limited partner. 2. The general partner in a limited partnership will pay self-employment taxes on the share of ordinary income, and guaranteed payments to partners.

Answer 80

Tax advantages of an LLC are: 1. Flow-through entity, and no double taxation 2. Can elect to be taxed like a S Corporation. The ordinary income of the S Corporation is not self-employment income, and is not subject to self-employment tax. Tax disadvantages of an LLC are: 1. Because it could elect to be a C Corporation, it is subject to double taxation 2. If it elects S Corporation status, now subject to requirements, such as no more than 100 members, no non-resident alien shareholders, and only one class of members.

Answer 81

An S corporation is a hybrid of sorts in that it follows many of the C corporation rules, but is treated like a partnership for taxation purposes. Advantages of forming an S corporation include: 1. Profits and losses flow through to the shareholders. The entity itself does not pay taxes on its income. 2. Shareholders enjoy limited liability and cannot be held liable for the debts or misconduct of the entity. 3. Shareholders can be both owners of the corporation as well as compensated employees, so long as the compensation is reasonable. 4. Ownership of S corporation shares can be freely transferred. Disadvantages of forming an S corporation include: 1. S corporation setup is more complicated. Articles of Incorporation must be filed in the corporation’s home state, and the entity must have a registered agent in the state. 2. Annual filings are also more complicated for S corporations, including annual report fees and franchise taxes imposed by most states. 3. An S corporation can only have 100 shareholders and can only issue one class of stock. A husband and wife count as one shareholder. 4. Because profit and loss allocation is based on stock ownership, S corporations do not have the flexibility that partnerships have in allocating income.

Answer 82

Advantages of forming an C corporation include: 1. Shareholders enjoy limited liability and cannot be held liable for the debts or misconduct of the entity. Can have unlimited number of shareholders. 2. C corporation has an unlimited life, which is not tied to the life of its owner(s). 3. Shareholders can be both owners of the corporation as well as compensated employees, so long as the compensation is reasonable. 4. Capital can be raised simply by selling stock. Ownership can be easily transferred through the sale of stock. Disadvantages of forming a C corporation include: 1. Corporate profits are subject to double taxation. The corporate entity itself is taxed on its profits, and the shareholders are also taxed on corporate income distributed as dividends. 2. C corporation set up is more complicated. Articles of Incorporation must be filed in the corporation’s home state, and the entity must have a registered agent in the state. 3. Annual filings are also more complicated for C corporations, including annual report fees and franchise taxes imposed by most states. 4. A more complicated tax return (Form 1120).

Answer 83

Book income: The income that is computed by applying GAAP to the corporation's accounting records and communicated to the shareholders in the financial statements. Taxable income: The income used to compute a taxpayer’s income tax liability.

Answer 84

Permanent differences: These items are either on the books or the tax return but never reverse themselves. Can arise from income items that are never taxable or expense items that are never deductible. These items will cause book income to be greater than taxable income. Temporary differences: Arise when GAAP rules dictate that income and expense to be recognized in one period, but tax accounting rules dictate that they are recognized in another period.

Answer 85

Both M-1 & M-3 are corporate tax return filings. But, Schedule M-1 should be completed by entities with LESS than $10 million of total assets, while Schedule M-3 should is for corporations with MORE than $10 million in total assets. Schedule M-1 starts with book income (loss), Line 1, and then adjusts up or down based on permanent or temporary differences. Meanwhile, Schedule M-3 is divided into three parts: (1) Financial information and net income reconciliation, (2) Reconciliation of net income with taxable income, and (3) Expense and deduction items that affect Part 2. Schedule M-2 is Analysis of Unappropriated Retained Earnings per Books.

Answer 86

To calculate taxable income, these items are ADDED to book income: 1. Non-deductible expenses, including federal taxes, net capital losses, expenses that exceed deductible limits, certain fines, and penalties, etc. 2. Income that is taxable but not included in book income. For example, rents received in advance. To calculate taxable income, these items are DEDUCTED from book income: 1. Non-taxable income that is included in book income, such as municipal interest income and life insurance proceeds, etc. 2. Deductions that are not expensed in book income, including the dividends received deduction, depreciation on tax return in excess of book depreciation.

Answer 87

Corporations are artificial legal entities in which the owners, referred to as shareholders, typically enjoy limited liability. This “corporate veil” shields corporate shareholders from personal liability and generally limits a shareholder’s losses to the amount invested in the corporate stock. In exchange for limited liability and unlimited lifespan, corporate earnings are subject to “double taxation.” This means that not only is the corporation itself taxed on earnings, but shareholders too are taxed on earnings (dividends) distributed by the corporation.

Answer 88

Gross income = [Gross profit on sales] + [Gross dividends] + [Interest income] + [Gross rents and royalties] + [Capital gains] + [Other income] Taxable income = [Gross income] - [Deductions] - [NOL carryback] Net tax liability = [Taxable income x Tax rate] - [Credits] - [Payments] + [Other taxes] Remember that issuance of corporate stock, issuance of corporate debt and contributions of capital are all EXCLUDED from gross income of a corporation.

Answer 89

Business interest is deductible up to 50% of adjusted taxable income plus the taxpayer’s business interest income for the year. The limitation to business interest applies to C corporations, S corporations, partnerships, and sole proprietors that meet the gross receipts threshold of $26M.

Answer 90

1. Organization and Start-Up Expenditures: Incurred in connection with the formation and organization of a corporation, usually includes accounting and legal. Costs of issuance of stock and amortization thereof are excluded. 2. Syndication Expenses: Include costs associated with the issuance and sale of corporate stock. These costs must be capitalized and cannot be amortized. 3. Charitable contributions: 25% of the corporation’s taxable income before: Deduction for charitable contributions, dividends-received deduction, and any loss carrybacks. 4. Dividends received deduction (DRD): Deduction for a percentage of domestic dividends received by the corporation. a) Less than 20% ownership deduction = 50% of dividends received. b) 20% to 79% ownership deduction = 65% of dividends received. c) 80% ownership or more deduction = 100% of dividends received. (Hint: When an exam question does not specify the company’s ownership percentage, assume it is less than 20%, and so DRD percentage would be 50%.) 5. Transactions with related taxpayers (Think of indirect ownership as well). 6. Capital losses: Can offset capital gains, but corporations are not allowed to deduct any net capital losses against ordinary income. 7. Passive losses, then casualty losses.

Answer 91

Accumulated earnings tax is imposed by the IRS if it determines that the corporation is trying to avoid these taxes by accumulating income in excess of reasonable business needs. Accumulated Earnings Tax = ([Taxable income] +/- [Adjustments]) x 20% Adjustments include: Corporate income tax, charitable contributions over 25% limit, net capital loss, net long-term capital gains, dividends received deduction

Answer 92

PHC tax is a penalty tax that is triggered by relatively high levels of investment income in a corporation. It imposes a penalty on undistributed personal holding company income. A C corporation qualifies as a PHC if 2 tests are met: An income test (If passive income and portfolio income represent 60%+ of the entity’s adjusted ordinary gross income) and a stock ownership test (if more than 50% of the value of the corporation’s stock is owned, directly or indirectly, by 5 or fewer individuals). Adjusted Taxable Income = [Taxable income] +/- [Adjustments] PHC tax = ([Adjusted taxable income] +/- [Dividend adjustments]) x 20%

Answer 93

A corporation’s net operating loss is the excess of an entity’s business deductions over its gross income during a tax year. Effective for tax years beginning 2021, the CARES Act now allows for only a NOL carry forward (indefinitely), although there is a 80% limitation for all NOL carry forwards. Capital losses are deductible only against capital gains. They are not deductible against ordinary income on a corporate return. Unused capital losses can be carried back three years and carried forward five years, to offset capital gains.

Answer 94

When a taxpayer contributes property and receives boot in addition to corporate stock, and gets control, gain (but not loss) should be recognized. If boot is received, gain recognized to the shareholder is the lower of: (1) Realized gain (FMV less property’s adjusted basis), and (2) the FMV of boot received. Gain may be recognized in two circumstances if a corporation assumes shareholder’s debt: (1) Recognized Gain = Liability Assumed – Basis of Transferred Property, or (2) Gain = Lesser of realized gain or boot received

Answer 95

Shareholder Basis in Corporate Stock = [Basis of all property transferred to the corporation] + [Gain recognized by the shareholder] – [Boot received by the shareholder] - [Liabilities assumed by the corporation] Corporation’s adjusted basis in property = [Transferor’s basis in property] + [Any gain recognized by the transferor]

Answer 96

1. Distributions to shareholders are calculated as: Amount Distributed = Cash + [FMV at distribution date of property received] - [Liabilities assumed by the shareholder] 2. If liability on property exceeds property’s FMV, FMV is treated as liability amount: Amount Distributed = Cash + [Liability assumed by shareholder (when liability > FMV)] 3. Shareholder’s basis for property received in corporate distribution is: Shareholder's basis = Cash + [FMV at distribution date of property received] Hint: While the valuation of the distribution includes liabilities assumed by the shareholder, the basis calculation does not.

Answer 97

1. If current E&P and accumulated E&P are negative: Distributions are considered a return of capital and are tax-free up to the shareholder’s adjusted basis. Any excess is treated as a capital gain. 2. If current E&P and accumulated E&P are positive: The distribution is taxed as a dividend that is deducted first from current E&P. Once current E&P is depleted, distributions reduce accumulated E&P. 3. If current E&P are positive and accumulated E&P are negative: The distribution is a dividend only to the extent of current E&P. 4. If current E&P are negative and accumulated E&P are positive: First net the current E&P if negative against the positive Accumulated E&P, if the net is positive, then that represents the portion of the distribution which is a dividend.

Answer 98

1. If a corporation distributes stock, it is not taxable to the shareholder if there was no option to receive property in lieu of stock and there is no change in the proportionate interests of shareholders. 2. Constructive dividends are payments to shareholders not formally declared as dividends. Property distributions to shareholders are often treated as constructive dividends. 3. The total redemption of stock occurs when a corporation repurchases stock from shareholders. It is generally treated by the shareholder as a sale of stock that will trigger recognition of a capital gain or loss by the shareholder.

Answer 99

Shareholder Gain/Loss Recognition and Basis = (FMV of distribution - Any liabilities associated with the distributed property) - Stockholder’s Basis When a controlled subsidiary is liquidated, no real disposition of assets occurred. The assets are merely transferred from one corporation to a related corporation. Hint: If a corporation distributes appreciated property, with debt, in a complete liquidation, the gain to the corporation is the excess of the any debt assumed by the stockholder above basis of the property transferred to the stockholder.

Answer 100

A parent corporation may only elect to file consolidated returns if they own at least 80%-controlled subsidiaries. A controlled group of corporations is entitled to one $250,000 accumulated earnings tax credit. A brother-sister controlled group exists if two or more corporations are owned by five or fewer individuals/estates/trusts who own: (1) More than 50% of the total combined voting power of the corporate stock, AND (2) More than 50% of the total value of all shares of stock of each corporation (when looking at only the stock ownership of each person that is identical with respect to each corporation).

Answer 101

"Nexus" is the degree of the relationship that must exist between a state and a foreign corporation for the state to have the right to impose a tax. Nexus applies to the sale of tangible personal property, and is assessed yearly.

Answer 102

State Income Tax Computation is INCREASED by: Dividends received deduction, Expenses related to interest earned on US bonds, State income taxes, Municipal interest taxed for state purposes, depreciation that exceeds states' limits State Income Tax Computation is DECREASED by: Federal income taxes paid, Expenses related to municipal interest income, Interest on US bonds, Depreciation that is allowed by the state but not the federal government

Answer 103

Business income for State X = [Sales Factor + Payroll Factor + Property Factor] ÷ 3 Sales Factor = [Total Sales to In-State Customers] ÷ [Total Sales (net of discounts and returns)] Property Factor = [Avg. Cost of Real & Tangible Pers. Prop Owned/Rented & Located In-State] ÷ [Total Average Cost of All Such Property] Payroll Factor = [Compensation Paid or Accrued to In-State Employees] ÷ [Total Compensation Paid or Accrued]

Answer 104

Foreign taxpayers are only taxed on income that is from a U.S. source. United States taxpayers are taxed on all worldwide income, regardless of the source. EARNED income is sourced where it is earned, including any employee benefits that may be associated with that income. UNEARNED income is considered to be from a foreign source if it is received from a foreign resident or if it is related to property used in a foreign country. Interest income is considered to be from a U.S. source if it received from the U.S. government, non-corporate U.S. residents, or a domestic corporation. Dividends from U.S. corporations are U.S. sourced. Dividends from a foreign corporation are foreign sourced.

Answer 105

Foreign tax credit limitation = U.S. tax on worldwide income * [Foreign source taxable income ÷ Worldwide taxable income] Any excess foreign tax credits can be carried back one year and carried forward 10 years. Foreign currency exchange gains and losses resulting from the normal course of business operations are ordinary gains and losses.

Answer 106

1. Form 5471: When any U.S. individual controls a foreign corporation for at least 30 consecutive days during the shareholder’s tax year. 2. Form 8865: When any U.S. partner controls a foreign partnership. 3. Form 5472: When a U.S. corporation is 25% owned by one foreign person. 4. Form 926: When a U.S. individual transfers property to a foreign corporation (including in complete liquidation). 5. Form 8938: When a taxpayer has an interest in specified foreign financial assets above certain amount. 6. FinCEN Form 114: When a taxpayer with a financial interest in or signature authority over a foreign financial account exceeds certain amounts. These are informational returns that must be filed with the IRS when transactions take place or a relationship exists between U.S. taxpayers or entities and foreign corporations and partnerships.

Answer 107

Separately stated items are reported on any tax items that might be treated differently by any shareholder, and are reported separately to each shareholder. Includes: Dividend income, Charitable contributions, Section 1231 gains/losses, Net short-term capital gains/losses, interest income, gain/loss sale of collectibles

Answer 108

S Corp's net ordinary income includes: Ordinary business expenses, depreciation, amortization items, Section 1245 & 1250 recapture

Answer 109

The AAA tracks the cumulative total of undistributed net income items for S corporations. Other Adjustments Account (OAA) tracks the tax-exempt income and related expenses of the corporation. When distributions are made, they should be deducted in the following order: 1. Distributions are first made from the AAA. 2. Distributions from AAA and OAA reduceadjusted basis of shareholder stock. 3. Distributions are made from the accumulated E&P account (AEP). 4. Any additional distributions are considered to be made from the S corporation’s stock basis. 5. Any additional distributions are treated as capital gains to the shareholders.

Answer 110

Contributions of capital (cash and/or property) and S corporation income (including tax-exempt income) INCREASE the shareholder’s adjusted basis. Distributions of capital (cash and/or property) and S corporation losses (including non-deductible expenses) DECREASE the shareholder’s adjusted basis in this order: Cash, Inventory & AR, Other property. If a shareholder contributes property with an attached liability and that liability is assumed by the S corporation, the shareholder will recognize a gain equal to the excess of liability assumed by S Corp over the basis of the property contributed.

Answer 111

1. S corporation income (loss) per day = S corporation’s annual income and separately stated items ÷ 365 2. Shareholder income before change = [S corporation income(loss) per day] * [# of days before the ownership % change] * [% ownership before change] 3. Shareholder income after change = [S corporation income(loss) per day] * [# of days after the ownership % change] * [% ownership after change] 4. Total shareholder share of S corporation income = [Shareholder income before change] + [Shareholder income after change] Hint: Contributions of property to an S corporation follow the same rules of C corporations under Section 351.

Answer 112

The stock basis of the shareholder in an S corporation is increased by: 1. All income items, whether taxable or not, 2. Any additional contributions of assets, including cash. The stock basis of the shareholder in an S corporation is decreased by: 1. Distributions which are not part of gross income, 2. Nondeductible expenses that are not charged to capital. 3. All taxable losses and deductions (not to exceed basis)

Answer 113

1) Increased for all income items, whether taxable or not. 2) Increased for contributions of additional assets. 3) Decrease for withdrawal of assets. 4) Decreased for all distributions which are not part of gross income. 5) Decreased for expenses and loss which are deductible or not

Answer 114

The built-in gains tax applies to entities that CHANGE THEIR STATUS from a C corporation to an S corporation. Additionally, the property must be sold after 5 years from making the S election to avoid the S corporation from paying taxes on the gain on the sale of the asset at the highest corporate level (currently 21%). The built-in gain is calculated as an asset’s FMV less its adjusted basis at the time the entity converts from C corp. to S corp. status. In the year of conversion, the S Corp pays a built-in gain equal to 21% x the lesser of the realized built-in gain or the S corp.’s taxable income.

Answer 115

Type A reorganization: merger or consolidation under state law. In a merger, the Target Company dissolves into another corporation, the Acquiring Corporation. Type B reorganization: Target Company stock is acquired solely in exchange for the voting stock of Acquiring Company. As a result, acquiring Company must own at least 80% of the stock of Target Company. Type C reorganization: “substantially all” of the assets of Target Company are acquired in exchange for voting stock in Acquiring Company. “Substantially all assets” is defined by the IRS as assets having a FMV of at least 90% of the fair market value of all of Target Company's assets less liabilities. Type D reorganization: Division reorganization in which the Parent Company divides by transferring assets to a Subsidiary Company in exchange for shares of the Subsidiary Company. Type E is used for recapitalizations. Type F is used for nominal changes. Type G reorganizations are related to bankruptcy proceedings.

Answer 116

Target Company basis in new assets = [Basis in property to Target Company] + [Gain recognized by Target Company] Shareholder basis in Acquiring Company stock = [Basis in surrendered Target Company stock] + [Recognized gain] - [Boot received]

Answer 117

Profits and losses are allocated to each partner based on each partner’s profit and loss sharing ratio as defined in the partnership agreement. All items of income, gain, loss, deduction or credit that must be separately stated. Separately stated items include: dividends, tax-exempt interest, charitable contributions, Section 179 expenses, Section 1231 gains/losses, interest income, capital gains/losses, passive gains/losses. Finally, remember that a general partner’s distributive share of partnership income is subject to self-employment tax. Limited partner’s distributive share is generally not subject to self-employment tax.

Answer 118

When a partner contributes services in exchange for a partnership interest, the amount of income that must be reported and the partner’s resulting partnership basis is solely based on the value of the partnership interest received by the partner in exchange for the services. Not the value of services themselves! When a partner contributes property to a partnership, excess of the % of liability assumed by other partners, over the adjusted basis of the property contributed is treated as gain for the partner. Can be treated as ordinary income. Built-in gain property has a FMV that exceeds its adjusted basis at the time of contribution. Built-in loss property has a FMV lower than its adjusted basis at the time of contribution. There is no time limit on the allocation of the amount of built-in gain or loss from the sale of property.

Answer 119

Each partner calculates his personal adjusted basis (outside basis) in the partnership, and the partnership calculates the adjusted basis of the assets held by the partnership (inside basis). The partnership takes a carryover basis for contributed property, and this property has what is called an asset holding period which is used for depreciation calculations. The partner’s outside basis is adjusted in the following order: Beginning Basis Plus: Partner’s contribution of assets plus share of recourse debt Plus: Partner’s share of income, both taxable and tax-exempt income Less: (Partner’s distributions and withdrawals [not guaranteed payments]) Less: (Partner’s share of non-deductible losses and expenses) Less: (Partner’s share of deductible losses) = Ending Basis Remember that at least 10% of the value of the partnership interests must be owned by a partner (and spouse if applicable), in order to meet the criteria for the $25,000 exception for active participation in rental real estate activity.

Answer 120

A pro rata non-liquidating or current distribution is a distribution to a continuing partner (including a draw by the partner) in accordance with the partner’s ownership percentage. Partners can only recognize gain on non-liquidating distributions of cash which exceeds the partner’s basis in the partnership. "Hot assets" are inventory and unrealized receivables as defined under IRC Section 751. These are basically ordinary income-producing assets. Arm’s length sales to partners are not considered distributions. A partner’s basis in the partnership is increased by the partner’s proportionate share of any increases in partnership liabilities (recourse debt), which are treated like a contribution from the partner. Non-recourse liabilities are generally excluded when calculating a partner’s basis.

Answer 121

Like non-liquidating distributions, partners can only recognize a gain on liquidating distributions if cash exceeds the partner’s basis in the partnership. If a partner is relieved of a liability, it is treated as a cash distribution. The gain is equal to the amount realized by the partner, less the partner’s adjusted basis in the partnership. If cash and/or multiple properties are distributed in a liquidating distribution, the partner’s basis for the partnership interest is allocated in the following order: 1. First, reduce the partner’s basis in the partnership interest by any cash distributed, then the basis of the hot assets. 2. After the cash and hot assets reduce the basis, any noncash property left in the partnership takes on the remaining partner’s basis.

Answer 122

LLCs have several tax filing options: 1. LLCs with 2+ members are taxed as partnerships and can file a Form 1065. 2. Most LLCs can elect to be treated like a corporation for tax purposes. If they elect to be taxed as a corporation, they can be a C Corp and file Form 1120. 3. Or LLCs can instead elect to be like an S Corp, and file form 1120S. 4. A single member LLC must file a Schedule C and file self-employment tax.

Answer 123

A trust is an entity that is created to allow a third party, or trustee, to hold assets on behalf of one or more beneficiaries. Simple trust: All trust accounting income must be distributed to its beneficiaries annually. No charitable contributions can be made from the trust. No distributions of the trust principal, the corpus, can be made during the year. A simple trust can be revocable or irrevocable. Complex trust: Any trust that cannot be classified as a simple trust. Can retain some current income within the trust, provide for amounts to be set aside to be given as charitable gifts, or distribute monies allocated to the trust’s corpus.

Answer 124

There are many types of tax-exempt organizations, like 501(c)(1), which is credit unions. Goes up to 501(c)(19). Most commonly you will see Section 501(c)(3): Commonly referred to as “charitable organizations” and include religious, charitable, scientific, literary and educational organizations. Must pass 3 tests. Organizational test: Organization’s articles of incorporation must explicitly limit the organization’s activities to its taxexempt purpose. Operational test: Operated exclusively for its exempt purpose by engaging only in activities that further its exempt purpose. Activities test: May not attempt to influence legislation as a part of its activities nor may it participate in any campaign activity for or against political candidates.

Answer 125

Both public charity and private foundations are 501c(3) organizations. Public charity: Means donors can exclude a larger amount of their donations when giving to a public charity. To qualify, more than 50% of a public charity’s board of directors must be unrelated by blood, marriage, outside business co-ownership, nor compensated as employees of the organization. Must receive a significant amount of their revenue (33% minimum) from small donors. Private fooundation: Any other organizations that do not qualify as public charity. Has several disadvantages: Donors can deduct a smaller amount of their contributions to private foundations as compared to public charities, must file Form 990-PF, and must distribute a minimum of 5% of their assets annually.

Answer 126

Income from UBI is taxed. To be considered UBI, income must: 1. Be from a business regularly carried on by the organization 2. Be unrelated to the exempt organization’s tax-exempt purpose Examples of UBI include: 1. Income from debt-financed property that is unrelated to the organization’s exempt function 2. Income from advertising in journals or publications of the exempt organization.

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