REG Flashcards
(93 cards)
1
Q
Individual Taxation
What is the difference between and tax deduction and a tax credit?
A
- A tax credit will decrease the amount of tax owed dollar for dollar, which will offer more tax savings
- A tax deduction will reduce the overall taxable income
2
Q
Individual Taxation
What is types of income are excluded from gross income?
A
- Gifts given by bequest (i.e. wills)
- Life Insurance Settlements
- Proceeds from a lawsuit for physical injuries
- Scholarships
- Fellowship Grants only up to the of costs for tuition, books and other education expenses
3
Q
Individual Taxation
How is taxable income calculated for a cash-basis taxpayer when compensation includes a service or product?
A
- If services are paid for with property, then income is the FMV of the property on the date it was received
- If cash and services are received, then the income would be the total amount received + the FMV of the property on the date it was received
4
Q
Individual Taxation
When are advanced payments reported as income in the current year?
A
- When there are no restrictions on the advanced amount
- When there is a 1-year deferral of income for services performed in subsequent years
5
Q
What is Subpart F Income?
A
- Subpart F income is income that comes from foreign company services that is performed outside of the foreign subsidiary’s country of incorporation
- Example: A U.S. company has a subsidiary in England, and the English subsisidiary performs services in Ireland that were agreed to by the U.S. parent corporation
6
Q
Individual Taxation
How is an annuity payment included in gross income?
A
- Any amount received that is in excess of the cost of the annuity are included in gross income
Example
Annuity Investment: $100,000
Disbursements: $12,000/year for 10 years
Total Amount of Disbursements: $12,000 x 10 = $120,000
Total Excess Amount: $120,000 - $100,000 = $20,000
Current year income reported in gross income: Total Excess Amount/# of Years = $20,000/10 = $2,000
7
Q
Individual Taxation
When can an employee taxpayer take deductions on state and local taxes paid?
A
- State and local taxes paid are deductible when the taxpayer selects itemized deductions
- Federal income tax withheld is taken as a tax credit, since the tax credit applies to the total tax due
Federal, Social Security and State and local taxes are not included in the standard deductions
8
Q
Individual Taxation
What is applied for self-employment tax?
A
- Social Security
- Medicare
Passive and portfolio income are not included in self-employment tax
9
Q
Individual Taxation
What schedule is used to report additional income and adjustments to income?
A
Schedule 1
* Part I of Schedule 1 reports income
* Part II of Schedule 1 reports adjustments to income
10
Q
Individual Taxation
What is reported on Schedule 1 on Form 1040?
A
- Additional income and adjustments
- Summaries from Schedule E and Schedule C
- Hobby income
11
Q
Individual Taxation
What is reported on Schedule B of the Form 1040?
A
Portfolio Income
* Interest Income
* Dividend Income
12
Q
Individual Taxation
What is reported on Schedule E of the Form 1040?
A
Supplemental Income and Loss
* Rental income and deductions
* Self-Employment Tax
* Foreign Property Tax
13
Q
Individual Taxation
What is reported on Schedule C of the Form 1040?
A
Information for Self-Employeed Business Owners and sole proprietorships
* Revenue/Losses
* Expenses
* Meal and dining expenses
* Profit or loss from business
* Foreign Real Property Taxes
* Unincorporated business tax
* Payroll Taxes
14
Q
Individual Taxation
What is reported on Schedule D of the Form 1040?
A
Capital Gains and Losses
Part I: Short-term capital gains
Part II: Long-Term capital gains
15
Q
Individual Taxation
What is reported on Schedule SE of the Form 1040?
A
Self-Employment tax due on net earnings
16
Q
Individual Taxation
What is the formula to calculate savings bond interest?
A
Tax-Exempt Interest
* (Higher Education Expense / Total Bond Amount Received) x Accrued Interest
Taxable Interest
* ((Total Amount Received - Tax-Exempt Interest) / Total Bond Received) x Accrued Interest
17
Q
Individual Taxation
What is the income treshold for Tax-Exempt Series EE Savings Bond interest?
A
Single: $80,000
Married, Filing Jointly: $120,000
18
Q
Individual Taxation
What is the revenue threshold to report passive Loss
A
A phased-out approach is used:
* AGI less than $100,000, then the maximum amount of $25,000 can be deducted
If AGI is more than $100,000 and less than $150,000:
* The maximum deduction of $25,000 is phased out
* $0.50 on the dollar will be calculated
If AGI is equal and more than $150,000
* The passive loss is only offset by the passive income
* The passive loss is carried over
19
Q
Individual Taxation
What is an example of a phased out passive loss deduction when the taxpayer actively participates?
A
AGI = $110,000, Real estate loss = $30,000
The Phase Out Range = $150,000 - $125,000
$0.50 x (110,000 - 100,000) = $0.50 x $10,000 = $5,000
$25,000 - $5,000 = $20,000 deduction against earned income
20
Q
Individual Taxation
What happens when a passive gain and a passive loss occur in the same year?
A
- All passive activity gains and losses are netted to arrive at a single number
- If the net number is a gain, the gain is taxable
- If the net number is a loss, the loss cannot be deducted against salary and the loss is carryfoward indefinitely
21
Q
Individual Taxation
What is the difference between Capital Assets and Section 1231 Assets?
A
- Capital Assets are for individual taxpayers
- Section 1231 assets are for real estate and other assets used in a trade or business
22
Q
Individual Taxation
What is the limit for deducting capital gains and losses?
A
$3,000 (Single, MFJ, HH)
$1,500 (Married-Filing Separately)
23
Q
Individual Taxation
How are gains and losses for capital reported?
A
- Stocks and Bonds: Gains and losses are reported
- Capital loss on investment stock has a limitation of $3,000
- Home and furnishings: Only gains are reported, not losses
- Recreation: Only gains are reported, not losses
24
Q
Individual Taxation
What is the income tax rate on capital gains and losses?
A
- The tax rate is 0% if the taxpayer is already in the lower tax bracket
- The maximum tax is 15%
25
# Individual Taxation
What is the limit for Qualified Business Income (QBI)?
Taxable income of $165,000 (Single)/$330,000 (MFJ)
26
# Individual Taxation
What is the calculation for QBI Deduction?
Taxable income x Lesser of:
* 20% x the lower of taxable income or Schedule C Profit
* 50% of W-2 wages earned from the partnership
27
# Individual Taxation
How is provisional income calculated when determining taxes on Social Security benefits?
AGI (Before Benefits) + Total Other Income + Total Interest + 50% of Social Security Benefits
28
# Individual Taxation
What are the income thresholds to determine taxable income on social security benefits?
Taxable Income
* Less than or equal to $25,000 (Single)/$32,000 (MFJ): No Tax
* More than $25,000/$32,000 but less than $34,000/$44,000: 50% Tax
* More than $34,000/$44,000: 85% Tax
29
# Individual Taxation
How are social security benefits calculated when determining taxable income with respect to provisional income being at the 50% tax threshold?
**Married, Filing Jointly:
Income is between $32,000 and $44,000**
Lesser of:
* 50% of Social Security Benefits
* 50% of the excess of provisional income over $32,000
**Single, Head of Household or Qualifiying Widower:
Income is between $25,000 and $34,000**
Lesser of:
* 50% of Social Security Benefits
* 50% of the excess of provisional income over $25,000
30
# Individual Taxation
How are social security benefits calculated when determining taxable income with respect to provisional income being at the 85% tax threshold?
**Single, Head of Household, Qualifying Widow**
Lesser of:
* 85% of the excess of provisional income over $34,000 + $4,500
* 85% of benefits
**Married, Filing Jointly**
Lesser if:
* 85% of the excess of provisional income over $44,000 + $6,000
* 85% of benefits
31
# Individual Taxation
What is considered as taxable interest income that could cause social security to be taxable?
* Tax exempt bonds
* Banks certificates of deposit
* US Savings Bonds
32
# Individual Taxation
What are the deductions to arrive at AGI?
"SHAMPOO"
* **S**tudent Cost, including student loan interest
* **H**ealth Insurance paid by Self-Employed, HSA
* **A**limony paid before 12/31/18 divorces
* **M**oving expenses for members of military
* **P**enalty on early withdrawal of savings
* **O**ne-half of self-employment tax
* **O**ld age/Retirement IRA contributions
33
# Individual Taxation
What is the maximum credit that can be taken on student loan interest?
* The limit is $2,500
* Deduction starts to phase out when AGI is $70,000 (Single)/$140,000 (MFJ)
* The phase-out range is $15,000
34
# Individual Taxation
What is the maximum deduction for Health Savings Accounts (HSA)?
* Maximum deduction is $3,600 (Single) /$7,200 (MFJ)
* Must have a deductible of $1,400 (Single) /$2,800 (MFJ)
35
# Individual Taxation
What is the deduction limit for a self-employed pension, or KEOGH, plan?
Lesser of
* 25% of net income reported on Scheldule C
* Maximum amount of about $66,000
36
# Individual Taxation
What is the calculation to determine the deduction from a self-employed pension, or KEOGH, plan?
20% X (Self-Employed Earnings - Self Employment Taxes)
37
# Individual Taxation
What is the maximum deductions for IRA Contributions?
**Applies to both Traditional and Roth IRAs**
* Before Age 50: $6,500/$13,000
* After Age 50: $7,500/$15,000
* If the earned income is less than the maximum deduction, then the deduction contribution would be the earned income.
Example
* Earned income for a 50 year old is $5,200, then the IRA deduction contribution reported would be $5,200.
38
# Individual Taxation
What is the spousal rule for IRA contribution deductions?
* The AGI is below $220,000
* A married spouse who is non-working , or earns very little, is entitled to contribute and deduct the same amount that the working spouse contributed
39
# Individual Taxation
How is the taxation treated for an Education IRA?
* The Eduction IRA tax is similar as to a Roth IRA
* No deduction for contribution
* No taxation when distributed
40
# Individual Taxation
What amount can be contributed to an Education IRA?
* Maximum Education IRA contribution is $2,000/year
* A distribution of $10,000 is allowed for private K-12 education
41
# Individual Taxation
What is the difference between the Child Tax Credit and the Family Credit?
Child Tax Credit
* The tax credit is $2,000 per child under the age of 17, as of 12/31 of the taxable year
* $1,600 per child is **partially refundable**
Family Credit
* $500 **non-refundable** credit for each qualifying dependent, other than qualifying children
* Example of qualifying dependent is a child over the age of 17 or an older or elderly parent
42
# Individual Taxation
What is the dependent care credit?
* No AGI limitation
* Covers 20% of care expenses
* If AGI is less or equal to $15,000, the percentage covered is 35%
* Expenses are capped at $3,000 for one child, $6,000 for more than one child
* The calculation is limited to the lowest earned income of the spouse or the expense cap
* If the spouse has no income, then no credit can be taken
43
# Individual Taxation
How is the dependent care credit calculated?
Examples
* For two children, one spouse earned $60,000 and the other spouse earned $10,000. Total child care costs of $15,000. Since $6,000 is less the lowest income earned, then the dependent care credit would be $1,200 ($6,000 x 20%)
* For two children, one spouse earned $73,000 and the other spouse earned $2,000. Since $2,000 is less then the maximum amount of $6,000, the dependent care credit would be $400 ($2,000 x 20%)
44
# Individual Taxation
What are the requirements for the American Opportunity Credit?
* Taxpayer must be enrolled as a student for at least a half-time basis
* The taxpayer must be a candidate for a degree
* Qualifying expenses must be for the current year and for the first three months of the following year
* Qualifying expenses are for tuition and all related supplies required for courses, **except room and board**
* Credit limitation of $2,500 per student
* Up to 40% of $1,000 of tax liablity is partially refundable
* AGI phase out begins at $80,000/$160,000
* No credit after $90,000/$180,000
45
# Individual Taxation
What is the calculation to determine the American Opportunity Credit Deduction?
* The spend amount to maximize the credit is $4,000
* 100% of the first $2,000 of qualifying expenses
* 25% of the following $2,000 of qualifying expenses
46
# Individual Taxation
What is an example of American Opportunity Credit calculation?
Total tax before credit is $2,000
American Opportunity Credit = $2,500
Tax Liability = ($500) ($2,000 - $2,500)
Amount refunded would be $500 x 40% = $200
Total tax before credit is $2,500
American Opportunity Credit = $2,500
Tax Liability is zero since $2,500 - 2,500 = 0
Amount refunded would be $1,000 x 40% = $400
Total tax before credit is $800
American Opportunity Credit = $2,500
Tax Liability = ($1,700) ($800 - $2,500)
Amount refunded would be $1,700 x 40% = $680
47
# Individual Taxation
What are the requirements for the Lifetime Learning Credit?
* Phase out of AGI starting at $80,000/$160,000
* No credit at all at $90,000/$180,000
* **Credit is non-refundable**
* Can be taken for courses in graduate, undergraduate or for learning a new job skill
48
# Individual Taxation
What is the calculation to determine the Lifetime Learning Credit Deduction?
* 20% of the amount spent on the first $10,000 of tuition and expenses per year
* Maximum credit is $2,000 per family per year
49
# Individual Taxation
What are due diligence requirements?
* Due diligence is required by third-party preparers
* It is a questionnaire that they must complete to make sure that the information is reported correctly
50
# Individual Taxation
When must a paid preparer answer due diligence questions?
Whenever a child is involved
* American Opportunity Credit
* Earned Income Credit
* Child Tax Credits
* Head of Household Status
51
# Individual Taxation
What are the requirements for the Retirement Savings Contribution Credit?
* Maximum of $1,000 non-refundable credit based on IRA contributions
* The credit is non-refundable
* The credit is available to younger people starting in the workforce
* AGI limitation of $37,000/$74,000
* If the AGI is less than $37,000, the credit is 50% of the contribution
52
# Individual Taxation
What is the calculation to determine Retirement Savings Contribution Credit?
* IRA Contribution x 50%
* Credit cannot be greater than $1,000
53
# Individual Taxation
What are the requirements for the Elderly and/or Permanently Disabled credit?
* Credit is either lesser of prior tax credit or 15% of eligible income
* The credit is non-refundable
* AGI limits and social security count against the credit
* The base amount is $3,750 (Single) / $7,500 (MFJ)
* Must be age 65 or disabled to qualify
54
# Individual Taxation
What is the calculation to determine the credit for Elderly and/or Permanently Disabled?
Base Amount
(Social Security Benefits)
(50% of AGI of $10,000)
Balance
Credit is lesser of current tax liability or 15% of balance
55
# Individual Taxation
What is an example of the credit for the Elderly Care Credit?
AGI: $16,000 (MFJ)
Taxes Owed: $95
Social Security: $2,000
Base: $7,500
Social Security Benefits: (2,000)
50% of AGI Over $10,000: (3,000)
Total: $2,500
Balance = 15% x $2,500 = 375
Credit: Lesser of Current Tax Liability or Balance
56
# Individual Taxation
What is the calculation to determine business tax credit?
* Step 1: Calculate the Net Tax Liability = Company's Tax Liabilitity - $25,000
* Step 2: Calculate the current year's business credit = Company's Tax Liability - (Net Tax Liability x 25%)
* Step 3: Determine Carryforward = Company's current liability - Current Year's Business Credit
57
# Individual Taxation
What credits are applicable to the business tax credit?
"WERF'S FIELD"
* **W**ork Opportunity Credit
* **E**mpowerment Zone Employment Credit
* **R**ehabilitation Credit
* **F**amily and Medical Leave Credit
* **S**mall Employer Health Insurance Credit
* **F**oreign Tax Credit
* **I**ncremental Research Credit
* **E**mployer Provided Child Care Credit
* **L**ow-Income Housing Credit
* **D**isabled Access Credit
58
# Individual Taxation
What are the qualifications for the Credit for Family and Medical Leave?
* Employees must receive at least two weeks of annual paid leave
* If the employer pays 50% of the wages during the employee's leave, the credit is 12.5%
* If the employer pays 100% of the wagest during the employee's leave, the credit is 25%
59
# Individual Taxation
What is the Work Opportunity Credit?
* Companies get credit for hiring from a certain target group
* The credit reduces the wages paid deduction
* The credit is based on the employee's first-year wages
* The maximum credit is 40% of the first $6,000 wages paid
60
# Individual Taxation
What is the Foreign Tax Credit Calculation?
(Foreign Source Income / Worldwide Income) x US Tax on Worldwide Income
61
# Individual Taxation
How are medical and dental expenses covered as a deductible?
The expenses must exceed 7.5% of AGI
**Example**
Health Insurance Premiums = $12,000
Prescription Medicines = $3,000
Reimbursed Insurance Payments = ($1,000)
Total Medical Expenses = $14,000
Total AGI = $100,000
7.5% x $100,000 = $7,500
Medical Expenses - 7.5% of AGI = Deduction
$14,000 - $7,500 = $6,500
62
# Individual Taxation
What is the maximum deductible for State and Local Property Tax?
**This is sometimes known as the SALT deduction**
* $10,000 for Single, Head of Household, Married, Filing Jointly
* $5,000 for Married, Filing Separately
63
# Individual Taxation
What is the maximum deductible for Interest Expense?
* $750,000 for Single, Head of Household, Married, Filing Jointly
* $325,000 for Married, Filing Separately
64
# Individual Taxation
How are non-cash charitable contributions valued?
* The lower of the tax basis or the fair market value at the date of the donation
* If the asset was held for less than 1 year, the value is the based on the basis of the asset
* If the asset is donated for the same genre (i.e. artwork for a museum, then the value is the FMV is used
65
# Individual Taxation
What is the limitation for charitable contributions?
* Cash: 60% of the AGI
* Long-Term Capital Gain: 30% of AGI
66
# Individual Taxation
When can casualty losses be deducted?
* When the loss is declared a disaster by the president
* Each loss is the lesser of the adjusted FMV or the tax basis of the property
* Each loss must be reduced by the insurance reimbursement and $100
* The deduction is the amount of the total loss in excess of 10% AGI
67
# Individual Taxation
What is an example of a casualty loss deduction?
AGI = $70,000
Less of Adjusted Basis or FMV = $130,000
Reimbursement = $120,000
Total Loss = ($130,000 - 120,000) - $100 = $9,900
10% of AGI = $70,000 x 10% = $7,000
Deductible = $9,900 - $7,000 = $2,900
68
# Individual Taxation
What type of life insurance that is paid by the employer is not taxable to the employee?
* Group term life insurance
* The limitation of coverage is $50,000
* Anything over $150,000 is taxable to the employee based in IRS Cost
**Example**
Salary = $80,000
Group-Term Life Insurance = $120,000
IRS Cost: $2.12/$1,000 of coverage
First $50,000 is excluded, taxable amount = $70,000 ($120,000 - $50,000)
$2.12 x ($70,000/1,000) = $148.40
Taxable Amount = Salary + $148.40 = $80,000 + $148.40 = $80,148.40
69
# Individual Taxation
What is dependent care assistance?
* Dependent care assistance is part of the employer's cafeteria plan
* Programs are availabe to the employee
* If the employee chooses this plan, they can exclude up to $5,000
70
# Individual Taxation
How are higher education costs treated as part of an employer's cafeteria plan?
* Payments are made by the employer on behalf of the student
* A maximum of $5,250 is excluded from the employee's gross income
71
# Individual Taxation
What are the limits for employee achievement awards?
* If the award plan is in place, the deductible is $1,600 per employee
* If the award plan is not in place, the deductible is $400 per employee
72
# Individual Taxation
What type of income is included when calculating Kiddie Tax?
* Unearned Income
* Dividend Income
73
# Individual Taxation
What is the undearned income thresholds for Kiddie Tax?
* The first $1,250 of unearned income is exempt from kiddie tax
* The next $1,250 is taxed at the child’s rate
* The first $2,500 of unearned income is exempt from kiddie tax
* The difference between unearned income and $2,500 is subject to kiddie tax
74
# Individual Taxation
What if the child has earned income as well as unearned income?
The standard deduction is limited to the greater of
* $1,250
* Wages plus $400
75
# Individual Taxation
How are business casualty losses reported?
* Business casualty losses are reported on Form 4684
* The loss is the lesser of the property's basis vs. the decline in FMV
* If the property is completly destroyed or stolen, the adjusted basis is used to compute the loss **(the FMV is completely disregarded)**
* If inventory is stolen, the loss is the adjusted basis
76
# Individual Taxation
What is the best tax planning strategy when an individual's tax bracket changes?
* When the income tax bracket lowers, the best strategy is to defer income until the following year
* If the income tax bracket increases, the best strategy is to defer deductions since the deduction will have a higher tax value in the current year
77
# Individual Taxation
What are the steps to calculate business income loss
* Step 1: FMV Before Loss - FMV After Loss = Decrease in FMV
* Step 2: Choose the lesser of the adjusted basis or the decrease in FMV
* Step 3: (Lesser of the adjusted basis or the decrease in FMV) - Insurance Reimbursement = Business Casualty Loss
78
# Individual Taxation
What are the rules regarding NOL (After COVID)
* The NOL deduction is limited to 80% of income
* No carrybacks
* Carryfowards can be reported indefinitely
79
# Individual Taxation
What are the rules regarding NOL (During COVID)
* 80% of income is removed
* NOL has Carrybacks for up to 5 years
* NOL carryforward to fully offset income if the loss occurred in 2018, 2019 and 2020
* If the first applicable year does not have taxable income, then the NOL would be applied to the next applicable year
80
# Individual Taxation
If the taxpayer is under the age of 59 1/2, how is the IRA distributions calculated on a 1040 Form?
**Withdrawal Exceptions do not apply**
* IRA distribution is taxed based on the **marginal tax rate**
* 10% penalty fee is included. The penalty fee **is not** subject to the marginal tax rate
**Withdrawal exceptions do apply**
* If the taxpayer takes out more than the exception, then the 10% Penalty fee will be applied to the difference of what was distributed and the amount applied to the exception
81
# Partnership Taxation
What is a Form 1065?
* Form 1065 is the Partnership Tax Return
* It is not used to pay income tax for the partners
* It is used to calculate Ordinary income and deductions
82
# Partnership Taxation
What is a Schedule K and a Schedule K-1
**Schedule K**
* Schedule K is used to indicate specific revenues and expenses for the partner in the partnership
* Schedule K summarized all of the information that is reported in the Schedule K-1
**Schedule K-1**
* Allocates the partnership's income, losses and any other items that may affect the partner's individual tax liability
83
# Partnership Taxation
What are guaranteed payments?
* A guaranteed salary to a partner is a set payment made for work that is done
* Payment is made regardless of whether the business is profitable
* The partner that receives the guaranteed salary reports it as income on their 1040
* The partnership reports the guaranteed salary as an operating expense
84
# Partnership Taxation
How are partnership disbributions treated?
Partnership distributions are treated as a return of capital
85
# Partnership Taxation
How are gains and losses recognized for the partnership when transferring assets to partners?
Partnerships do not recognize a gain or loss when transferring assets to partners
86
# Partnership Taxation
When is a gain reported for a partner in a liquidating or non-liquidating distribution?
* A gain is recognized when cash received is greater than the basis
* A gain is reported as ordinary income for the partner in both a liquidating and non-liquidating distribution
87
# Partnership Taxation
In a liquidation distribution, how are gains and losses reported for the partner?
Only cash has been distributed:
* A gain is recognized when the cash distributed is more than the partner's basis
* A loss is recognized when the cash distributed is less than the partner's basis
**Losses can only be reported when it is a cash-only distribution**
88
# Partnership Taxation
How are gains and losses recognized when partner receives a non-cash distribution?
Since no cash is distributed, the partner would not recognize a gain because cash would need to be distributed in order to recognize a gain
89
# Partnership Taxation
When are losses allowed in a distribution?
Losses are allowed only in a partnership liquidation distribution
90
# Partnership Taxation
How are assets valued in a non-liquidating distribution?
Since the asset came into the partnership at basis, the asset will be valued at basis
**FMV is not used in determining the partner's basis**
**Example**
Partner Basis: $160,000
Securities Basis: $34,000
Securities FMV: $220,000
Basis after Distribution: $126,000 ($160,000 - 34,000)
91
# Partnership Taxation
What is the partner's basis in a non-liquidating distribution of capital assets?
Lesser of:
* The adjusted basis of the partnership's basis in the asset
* The partner's remaining basis in the partnership before the distribution
**Example**
Partner's Basis before Distribution: $55,000
Adjusted Basis of Asset: $75,000
Amount of Asset Distribution: $55,000
Partner's new basis after distribution: 0
No gain or loss is recorded
92
# Partnership Taxation
When a cash and non-cash distribution takes place, what is the adjusted basis of the non-cash property?
The adjusted basis of the non-cash property is the difference between the unadjusted basis and the amount of cash received
**Example**
Partner A has a basis of $50,000
Cash Distribution of $20,000
Distributions are a car with a FMV of $40,000 and cash of $35,000
Partner’s Basis after distribution: $30,000
Gain Reported: $0, since cash distribution is less than the basis
93
# Partnership Taxation
What are hot assets?
* Unrealized receivables
* Appreciated inventory
* Any gain or loss as a result in a hot asset will be reported as ordinary income for the outgoing partner based on their share
