Flashcards in REG Deck (208):
Under the installment method what % on a gain is recognized in the year of the sale?
When death occurs the beneficiary's basis is?
Fair market value
When death occurs the beneficiary's holding period is from when?
From when the dead person acquired it, it tacks on
The statutory amortization period for a covenant not to compete that's related to a business acquisition is?
When property is donated the donee's adjusted basis of the donation will be the lesser of what?
Fair market value or the donor's adjusted basis
Section 1244 stock sold at a loss is treated as what type of loss and how much can be deducted?
Ordinary loss. $50,000 ordinary loss for individuals $100,000 loss for married filing jointly. Anything over is treated as capital loss
Capital losses in excess of capital gains may not be used to reduce taxable income of a corporation. The losses may be...
Carried back three years and carried forward 5 years
Taxpayers may not recognize a losses attributable to the sale of stock if substantially similar stock is purchased 30 days before or after the sale giving rise to the loss. This is what rule?
Wash sale rule
A/R, inventory, trade or business assets owned for a year or less are what type of asset?
Trade or business assets owned for more than a year are what type of asset?
Section 1231 asset
All other assets or those used in ones personal activities and in investment activities are what type of assets?
Amount realized -adjusted basis =
Realized gain or loss
Cash received + fmv of any property received + liabilities assumed by buyer - selling expenses = what?
What amount realized includes
Cost including any liabilities or expenses connected + capital improvements - depreciation = what?
Holding period for gifts
If donee sells property at a gain what does the holding period do?
Carries over to the new owner
Holding period for gifts
If the donee sells the property at a loss what happens to the holding period?
It does not carry over
When the alternative valuation date is elected the basis of the property becomes it's fair market value how long after death?
Who can issue or revoke a cpa license?
State boards only
Capital gains and losses
Holding period begins and ends on date what transfers?
Capital gains and losses
For transactions where basis of new asset is determined by basis of old asset the holding period does what?
Tacks on to holding period of new asset
If the combo of net long term and net short term gains/losses is negative an individual can deduct how much per year and before or after AGI? What if you have more than the amount?
$3000 loss per year before AGI. You can carry forward indefinitely
Long term capital gain tax rate for individuals?
Usually 15% if the taxpayers regular tax rate is 15% then it's reduced to 0%. If you're taxed at the highest rate 39.6% then it's 20%
A 3.8% surtax is added to joint MAGI greater than 250,000 or for single head of household with magi greater then 200,000.
Net capital gain attributable to straight line depreciation claimed on real estate is taxed at what percent?
A maximum of 25%
Net capital gain from selling collectibles is taxed at what rate?
A maximum of 28%.
When capital gains are taxed at a maximum rate what does that mean?
If you fall into a lower % tax rate you will be charged that rate and not the maximum.
Gains can be taxed at different rates. How do you offset them with losses?
Offset the highest taxed gains first
Date the purchase or sale of stock/ bonds takes place is what date? Do you use this date for determining holding period?
Trade date, yes
Date stock/ bond is delivered or that payment is actually made? Do you use this date to determine holding period?
Settlement date, no
How is section 1244 stock loss treated? What are conditions to take section 1244 losses?
As an ordinary loss of $50,000 single or $100,000 joint. Original holder of stock and capitalization of company can't be more than $1,000,000.
What form do you use to report capital gain or loss?
What schedule do capital gains and losses get reported to?
Section 1231 asset gains and losses are netted against each other. If you have a gain its taxed as what?
Long term capital gain
Section 1231 asset gains and losses are netted against each other. If you have a loss its deductible as what?
An ordinary loss
To the extent of the losses taken for the past 5 years, the net section 1231 gain is treated as what and what is the name of this rule?
Ordinary income and the look back rule
Land and assets permanently attached to land?
Realty section 1250 recapture
Assets other than realty?
Personalty section 1245 recapture
How does section 1245 gain recapture work?
Realized gain less (adjusted basis less depreciation) equals recognized gain. Section 1245 gain is treated as ordinary income and gain up to the amount of the depreciation is ordinary income before anything left over is treated as section 1231 capital gain
How does section 1250 recapture work?
Any excess of amount of depreciation taken over what straight line depreciation is, is recaptured as ordinary income. The straight line depreciation is taxed ass a 25% gain. The rest of the gain recognized is section 1231 capital gain.
For a corporation, 1250 property is treated differently. There's no 25% taxed gain. What happens
Calculate 1250 the same. Section 291 take what would be recognized as 1245 less what was recognized as 1250 and times it by 20% that's the section 291 taxed as ordinary income. The left over is taxed as section 1231 capital gain.
Gains and losses from sale of business property are reported on what form?
Personalty uses mostly which MACRS?
5 year - trucks cars computers machinery and equipment
7 year - office furniture and fixtures
When calculating MACRS depreciation for say year three when the asset is sold what do you do?
Multiply by the appropriate year 3 percent then times it by .5.
What do you use if more than 40% f all personality is placed get in service during the last quarter of the taxable year for depreciation?
Mid quarter convention
When calculating MACRS depreciation mid quarter for say year three when the asset is sold what do you do?
Multiply by the appropriate year 3 percent then times it by half of a quarter or 1.5months/12 months
Amount of years used for realty depreciation calculations?
Residential is 27.5 years non residential is 39 years
We don't depreciate land for MACRS. What do you do with land value?
Subtract it out to get depreciable basis.
Taxpayers can elect to expense a certain amount of tangible personalty used in trade or business. What is this and what's not eligible?
Section 179 and investment property
For 2014 what's the max you can depreciate for luxury vehicles?
Under 6000 lbs is $3,160. Over 6000 lbs is $25,000. The amounts vary over time. You can depreciate the whole thing but it's over ,ore than the MACRS 5 years
If you create an intangible asset can you depreciate it?
If you acquire it can you amortize it?
Yes over 15 years only if you got them by acquiring a trade or business.
What form do you use for section 179?
If a corporation has unused capital loss that's carried back or forward to another year it's treated as...
Short term whether or not it was short or long term.
Are losses recognized for like kind exchanges?
Gains are recognized for like kind exchanges how?
The lesser of boot received or realized gain
Any non like kind property received as part of the exchange. Liabilities assumed by the other party are included. This is what?
What assets do like kind exchange rules apply to?
Business and investment only, not personal
What's the formula for like kind exchange Basis?
FMV of property received - postponed gain + postponed loss
What's the holding period for like kind exchanges?
Holding period of like kind property surrendered tacks on to holding period of like kind property received
Destruction theft seizure and condemnation of property is what?
Involuntary conversion. Replacement property must be similar or related in use.
How long do you have to replace involuntary conversion property?
2 years from close of taxable year where it was destroyed or 3 years for condemned business or investment property.
Calculate involuntary conversion
Amount realized Fromm conversion - adjusted basis in old property. = realized gain. /loss.
Realized gain/loss - Cost of replacement property = recognized gain limited to realized gain
Losses are never deferred
What happens to holding period in involuntary conversion?
If gain is deferred it tacks on to new property. If not deferred it doesn't tack
In wash sale to get the basis of stock left what do you do?
Add disallowed loss to the cost basis. Holding period of sold shares tacks on to remaining shares
What doesn't count as related party?
In laws, aunts, uncles, cousins
Can be used to offset any gain recognized when the current owner disposes of the property in the future. It can only reduce the gain to 0. What is this?
Related party loss - the right of offset
Related party holding period?
An individual can exclude what amount of gain on sale of primary residence?
Rules for sale of principal residence?
Individual must have owned and occupied residence as a principal residence for at least 2 of the 5 years before disposition
Does installment sales apply to losses?
What form do installment sales go on?
Does depreciation recapture have to be recognized in the year of the sale for installment sales?
Gross profit from sale is recognized as cash is received for installment sale.formula is
Recognized gain x gross profit %
All income is considered to be taxable unless the income is specifically excluded by the tax law. What is this the definition of?
Is gross income limited to cash?
No, bartering is included
What rule says income has been constructively received if the amount is readily available to the tax payer and actual receipt is not subject to substantial restrictions?
Constructive receipt (only applies to cash basis)
What principal is this? Income is taxed to the individual who earned it. Income cannot be assigned to others
Assignment of income
What rule is this: requires taxpayer to include an expense reimbursement in income if the expense was deducted in a prior period and the deduction reduced the taxpayers taxable income
Tax benefit rule
What rule is this: requires the taxpayer to include property in income in the period in which an apparent claim to the property materializes. A later repayment of the property generates a deduction but does not influence the earlier recognition of income
Claim of right doctrine
What is interest income?
All interest income is taxable except municipal interest which is interest paid on government bonds
Is interest earned from mutual funds tax free?
Yes, to the extent that the funds own municipal bonds
Is gain on sale of municipal bonds taxable?
Is prepaid interest income taxed when received?
What's up with the interest income for series EE bonds?
It's paid at maturity not annually but taxpayer can elect to have it taxed annually
Interest at maturity or redemption of series EE bonds can be excluded if what conditions are met?
1. Owner of bond is at least 24
2. Proceeds are used to pay higher education tuition and fees
3. The tuition and fees are for taxpayer spouse of dependents
4. The exclusion is phased out at higher income levels
If a taxpayer buys a taxable bond at a premium what happens?
1. An election can be made to amortize the premium
2. The amortization reduces the basis of the bond
3. The amortization offsets the interest income from the bond
4. The amortized bond premium is computed using constant yield to maturity method.
How are bond discounts amortized? What does amortization do to interest income?
Effective interest rate method. The amortization increases interest income.
For short term bonds what happens to the discount?
For cash basis it's taxed at maturity as ordinary income
For accrual basis it's reported as earned
How is dividend income taxed if qualified?
Same as capital gains. Is taxpayer is in 10 or 15% bracket it's 0%. For higher brackets it's 15 or 20% and the 3.8% surcharge could apply.
What's qualified dividend income?
When the dividend comes from a corp. that is traded on us stock market.
What's the order dividends are taxed in?
1. Dividend income to the extent of E&P
2. Reduction of basis in stock
3. Capital gain
Are dividends on common stock taxable? Preferred?
Common: not taxable
if a common shareholder receives some of the dividend in cash is it taxable?
What schedule are interest and dividends reported on?
What is bond premium amortization offset against? What happens to the bond's basis?
Interest income from the bond in computing taxable income. The basis is reduced by the amortization.
Who is taxed for alimony?
the recipient is taxed on it and the person paying it receives a deduction to AGI
Who is taxed on child support?
it's taxed to the recipient and not deductible by the person paying it.
Who is taxed on property transfers between spouses? (in a divorce)
They are not taxable and the basis stays the same
What qualifies as alimony?
1. needs to be made in cash
2. payment terminates when recipient dies
3. has to be required by a written agreement
4. the payment is not child support or identified as non-alimony
is unemployment taxable?
Are benefits from accident and health policies included in income?
Are payments received from the party that PHYSICALLY injured or made you sick included as income? (worker's comp)
Are benefits from disability plans included in income?
No unless premiums were paid by employer and not taxed to employee.
Are medical premiums paid by employer included in income?
Are payments received from nonphysical distress/injury included in income?
Are benefits received under long term care insurance included in income?
Are punitive damages included in income?
When you receive annuity payments what happens?
part of the payment is income and part is basis recovery. Once the basis is recovered they payment is fully taxable.
Whats the formula for determining what's excluded for an annuity payment
excluded = (cost of annuity / expected return) x payment
is jury duty pay includable in income?
If jury pay is given to employer what happens?
The employee gets a deduction to AGI
When using the standard deduction are state tax refunds from the previous year included in gross income?
No, if using the standard deduction
Uninsured medical expenses are eligible for for deduction if total expenses exceed 10% AGI. True or false?
What items Qualify as itemized medical expenses?
Nursing home if for medical reasons
Qualifying auto expenses
Lodging up to $50 per night per patient and travel companion
Usual items not including funeral, cosmetic, nonprescription etc.
What's the formula for deductible medical expenses
Qualified medical expenses
-reimbursements from insurance
-10% of AGI=
Deductible medical expense
What taxes can be deducted on schedule A?
State/local income taxes and property taxes. Can elect to deduct sales tax instead of income tax.
What value of prizes and awards is included in income?
When can prizes and awards be excluded from income?
1. when selected without action on his/her part
2. not required to perform services
3. amount paid is directly to tax-exempt or government organization
Are scholarships excluded from income?
yes, if the funds are used by a degree seeking student for tuition, fees, books, supplies, and equipment
Are life insurance proceeds included in income?
No, they're taxed under estate tax.
is the sale/exchange of a life insurance policy included in income?
Is the surrender or sale of a policy of a terminally/chronically ill person included in income?
Only the amount over the cost.
Are gifts and inheritances included in income?
No, they're taxed under federal estate and gift tax
Is debt forgiveness generally included in income?
When is debt forgiveness not included in income?
Bankruptcy, but NOLs, credit carryovers, and property basis are reduced and insolvency up to the amount insolvent
For cancellation of debt related to trade or business is the debt considered income?
No, but basis in property is reduced.
When are social security benefits included in income?
When provisional income exceeds a specified amount.
PI=AGI + tax exempt interest + .50(SSB), When are SSBs taxed?
If PI exceeds base amount1 but not 2 it's the lesser of .5 x (PI x BA1) .50 x SSB, If PI exceeds base amount 2 then it's the lesser of .85 x SSB or .85 x (PI-BA2) plus lesser of first formulas or $4500.
T/F foster child payments are excluded from income if they are for reimbursement for expenses incurred to care for the foster child
T/F Welfare payments from governmental entities are included in income
The event that triggers the taxation of income
the cost of goods or property sold
return of capital
The amount of realized income after eliminating deferred and excluded income
Accrual recognizes income in the year it is received or earned?
Earned, prepaid income is recognized in the year received.
Cash basis recognizes income in the year it is received or earned?
What happens to prepaid expenses in cash basis?
pro-rated if recognition of total expense in current year would distort taxable income
What entities can't use cash basis?
C Corp, Partnerships that have C Corps as partners, and tax shelters
An entity other than a c corp for which ownership interests have been offered for sale in an offering required to be registered with Federal or State Security agencies
Who can use cash basis
Any corp (or partnership with c corp partners) whose annual gross receipts don't exceed $5 mil, certain farming businesses, qualified personal service corps
a corp that exists if substantially all of the activities of the business consist of services in health, law, engineering, architecture, accounting actuarial science, performing arts, or consulting and at least 95% of its stock is owned by employees performing the services
Qualified personal service corp.
in general businesses with inventories must use what method to report purchases and sales?
taxpayers whose annual gross receipts do not exceed $1 mil can use what method for purchase and sales accounts?
Taxpayers whose annual gross receipts exceed $1 mil but are less than $10 mil can use what method for purchase and sales accounts if their primary business is delivering services and they are not a corp.
manufactures and certain retailers and wholesalers are required to use what method to capitalize all direct and indirect costs allocable to property they produce and bought for sale.
uniform capitalization method
Projects that last more than 1 year are required to use which method for recognizing income?
Percentage of completion
gross profit from the project can be deferred until completion is what method?
completed contract method
Who can use the the completed contract method?
those with $10mil or less in gross receipts during preceding 3 years if project lasts no longer than 2 years. home construction contractors. a contract where less than 10% of total costs relates to actual construction of property on the land
What schedule is income from farming reported on?
What method of accounting do farms generally use?
Cash basis unless the farm is run as a corp, partnership, or tax shelter
How are farm inventories measured?
cost, lower of cost or market, farm-price market, and unit-livestock price market.
Can an accounting method be changed?
Not without consent of IRS
Deferral method for prepaid expenses
payments go in gross income in year of receipt if they are also in financial statements, remaining payments are recognized in following year.
How do you compute for a short year tax return?
1. annualize income
2. compute tax on 12 months
3. then prorate that for the short term
if a company uses a/r for services rendered does this require the use of the accrual method?
What happens if you estimate the wrong amount of an income item?
It's includible or deductible in the next tax year.
When using LIFO in a period of high costs what happens to income and COGS?
COGS are higher and this makes taxable income lower, gross receipts - COGS = gross income.
Uniform capitalization rules apply to retailers whose average gross receipts for the preceding 3 years exceed what amount?
What amount of group term life insurance provided by an employer is a tax free fringe benefit?
$50,000, anything over is taxable.
If you contribute to a retirement plan from before tax earnings is that considered a basis?
If your employer contributes to your retirement fund do you have basis?
If you receive a distribution from a retirement fund and you have no basis in it and neither does your employer is it all included in gross income?
How do you calculate what's excluded from income from an annuity?
take the total months of payments x payment = expected return. Take the basis divided by the expected return and this is the exclusion ratio. multiply this by the amount received in the year and this is what is excluded.
Are contributions to Roth IRAs deductible?
Are contributions to traditional IRAs deductible?
Roth no, traditional yes if conditions are met.
the distribution from a traditional IRA is taxed at what tax rate?
If an early distribution is taken, what's the penalty tax rate and how is it treated
10% is added to the marginal tax rate
Section 529 Plans
allows you to save for college by excluding contributions from income. distributions can be used for tuition and fees , books and reasonable room and board and are excluded from income unless used for something otherwise. A 10% penalty is added on.
Mortgage interest is deductible on schedule A to what extent?
Interest on a max of a $1Mil loan for purchase or remodel or lesser of $100,000 or FMV used towards any expenses, or points
How is property that is given as a charitable contribution treated?
LTCG property is valued at fmv, limited to 30% of AGI
What's the formula for a casualty loss deduction?
lower of decline in fmv or ab
-$100 per casualty
-10% AGI =
Casualty loss deduction
When donating to the purchase of tickets what can the taxpayer deduct?
The amount paid less the fair value
When donating stock less than 1 year old. how is the charitable contribution calculated?
FMV - STCG
Is a donation to a needy family considered a charitable contribution?
Is education expense to meet minimum entry level education requirements at an individual's place of employment deductible as a miscellaneous expense?
Are gambling losses deductible subject to the 2% or AGI floor?
Charitable contributions can't exceed what amount of AGI?
what amount of entertainment can be deducted?
If a taxpayer is on cash basis can they deduct bad debt?
No, they have no basis as income was never recorded.
When AGI is under $100k and you actively participate in rental real estate activity, what's the max rental loss you can take?
When you actively participate in rental real estate activities and your AGI is over $100,000, how do the related losses get phased out?
Half of the amount of AGI over $100k is subtracted from the losses. $25k max so if there's more than $25k that amount gets suspended
Can suspended passive losses be carried back?
No, only forward
In the year a passive activity is sold, what happens to passive losses?
They are released and can be used to offset all types of income
Expenses of a hobby can only be deducted to the extent of income from the hobby. True or false?
Where are expenses of a hobby deducted?
Schedule A under other as subject to 2% limitation
When MAGI exceeds $150k how are passive losses treated?
Deductible to the extent of passive income
If a spouse dies during the year, can a personal exemption be claimed for that year on the spouse that died?
If MFJ, can one spouse claim personal exemption for the other if they have no gross income and no one claims them as a dependent?
In determining qualifying child: the dependent must be a natural child, step child, adopted, foster, sibling, step sibling, or decendant. Included brother sister niece and nephew. What test is this?
In determining qualifying child: dependent must have same principal place of abode as taxpayer for more than .5 tax year. What test is this?
In determining qualifying child: dependent must be under age 19 at end of tax year or under 24 if a full time student for at least 5 months of tax year. Must be younger than TP claiming the dependent. No age limitation on permanently disabled. What test is this?
In determining qualifying child: dependent cannot file MFJ. What test is this?
In determining qualifying child: dependent must be a citizen or resident of US, Canada or Mexico. What test is this?
In determining qualifying child: dependent must not have provided more than 50% of own support. What test is this?
Not self supporting
Who is excluded in qualifying relative?
Qualifying child and cousins
What tests must qualifying relative pass?
Gross income test
Joint return test
Multiple support arrangements
Who can claim the dependency exemption?
TP must provide 10% or more support but less than half, a written agreement allocates the exemption to one member of the group signed by all.
Are exemptions subject to a phase out?
Yes depending on filing status
What's the formula for tax calculations?
AGI less itemized or standard deduction and exemptions equals taxable income.
Taxable income x tax rate = gross tax less tax credits plus additional taxes equals net tax
To be eligible for DRD, the stock must be of a domestic corporation held over a 45-day window (90 days for preferred stock). This prevents dividend stripping. The DRD cannot be claimed by S corporations, personal service corporations, and personal holding companies. True or False
What percentage is deductible for DRD based on ownership percentage?
20% ownership or less is 70% of dividends
20%-80% ownership is 80% of dividends
80% or more ownership is 100% of dividends
How is DRD handled if it creates a loss?
you would take the DRD percentage times taxable income to get the deduction instead of using the percentage on the dividends.
What is the corporate tax formula?
Less: Deductions (except charitable, dividends received, domestic production deduction, NOL carryback, capital loss carryback) =
Taxable income for charitable limitation
Less: Charitable contributions (d deduction (however, note that NOL carryforwards are not allowed for computing the DRD limit)
Less: Dividends received deduction=
Taxable income before carrybacks
Less: Domestic Production Deduction, NOL carryback and STCL carryback =
Corporations engaged in production activities within the United States qualify for a deduction equal to 9% times the lower of 1) qualified production activity income or 2) taxable income. The DPD is reduced for the production of oil, gas, and related products. True or False?
What does qualified production activity income equal?
Gross receipts from domestic production less:
Cost of goods sold, direct expenses allocated to this income, and a pro-rata share of indirect expenses allocated to this income.
The DPD may not exceed what % of the wages allocable to domestic production income?
How much of organization of a corporation expenditures may be deducted in the year of formation?
$5000, but it decreases for expenses incurred over $50000.
How are the remaining expenses over the $5000 of organizational expenditures treated?
They are amortized over 180 months
What is included in organizational expenditures?
legal services incident to organization, accounting services, organizational meetings of directors and shareholders, and fees paid to incorporate. They must be incurred before the end of the taxable year that business begins (but they do not have to be paid, even if on the cash basis).
When can a corporation deduct vacation pay for employees?
accrual method used, it is paid during year, it's vested and paid no later than 2.5 months after end of year.
When are life insurance premiums fully deductible to a corporation?
if the corporation is neither the direct or indirect beneficiary. They're deductible as part of reasonable compensation paid to execs.