What is the tax treatment of capital gains/losses for individual taxpayers?
Net capital losses are deducted up to a maximum of $3,000 per year against non-capital income. Any excess can be carried forward.
Capital gains are fully taxable (but at a lower tax rates).
- Short-term--one year or less
- Long-term--more than one year
In general, how is the donee's basis of a gift determined? How is the holding period determined?
- In general, the donee's basis of a gift is the same as the donor's basis. The carryover basis may be increased for gift tax paid on appreciation of the gift.
- The holding period includes the donor's holding period unless basis becomes FMV, then holding period starts at date of gift.
What is the basis of a gist for determining gain or loss in a sale transaction?
- For purposes of calculating a gain on sale, the gift basis to use is the donor's rollover basis.
- For purposes of calculating a loss on sale, the gift basis to use is the FMV at the date of the gift.
- If the sales price is between the donor's rollover basis of the gift and the fair market value of the gift at the date of the gift, no gain or loss is recognized on a sale.
What is the gift basis used to calculate depreciation?
The basis for depreciation (if applicable) is the lesser of (i) the donor's adjusted basis at the date of the gift or (ii) the fair market value at the date of the gift.
Note: Depreciable basis is determined separately from gift/loss basis.
In general, how is the basis in inherited property determined? How is the holding period determined?
The basis of inherited property is the lower of the:
- FMV at the date of death OR
- FMV at alternate lower valuation date (if elected), which is:
- six months from the date of death; or
- disposal date (if disposed of less than six months from the date of death).
The holding period is automatically deemed long-term for all inherited property, regardless of how long the deceased owned the property.
When is a gain not taxed?
Divorced property settlement
Exchange of like-kind business/investment assets (tangible)
Treasury and capital stock transactions (by corporation)
Gains are not taxed when you can "Hide It."
Identify the major tax provisions of involuntary conversions of property?
Gain may be deferred if insurance proceeds are reinvested in property that is similar or related in service or use within two years for personal property or three years for business property.
A realized gain exists when insurance proceeds are greater than the adjusted basis in the converted property. Note the difference between realized gain versus recognized gain:
- Gain not recognized if proceeds reinvested in qualified replacement property.
- Basis is cost of replacement property less any gain recognized.
- Losses are recognized in involuntary conversions.
- Basis is replacement cost when losses are recognized.
Holding period includes period that the original property was held.
What is the exclusion amount on the recognition of gain on the sale of personal residence, provided the criteria for exclusion are met?
Gain exclusion for personal residence:
- $250,000 for single taxpayers
- $500,000 for married taxpayers
Identify the criteria for the exclusion provision on the sale of personal residence.
- Taxpayer must have owned and used the property as the principal residence for two years or more during the five-year period ending on the date of the sale or exchange. Periods of nonqualified use cause a portion of the gain to be taxable (sales/periods after 2008).
- Either spouse for a joint return must meet the ownership requirement, and both spouses must meet the use requirement with respect to the property.
- Taxpayers may be eligible for a partial (on a prorated basis) exclusion if the sale is due to a change in place of employment, health, or unforeseen circumstances, when claimed within the previous two years or fail to meet the ownership and use requirements.
- No age requirement.
- No rollover to another house is required.
- Renewable, can be utilized more than one time.
Name the criteria for a classification as a like-kind exchange.
Like-kind exchange criteria:
- Tangible real or personal property; and
- Used in trade or business; or
- Held for investment (except inventory, stock, and securities).
In a like-kind exchange, what is the basis of the property received?
Basis of property received in a like-kind exchange is as follows:
Fair market value of like-kind property received - Deferred gain + Deferred loss
Identify the nondeductible losses.
Wash sale loss
Related party transactions
"Wrap" up these losses, because they are not deductible.
What is the tax treatment given to wash sales?
- Losses are disallowed if the same security is bought within 30 days before or after the sale.
- The disallowed loss increases the basis in the property (security).
- Gains are taxable.
What is the tax treatment for sales to related parties?
- No deduction is allowed for losses on sales to related parties.
- On a later resale, any gain recognized is reduced (but not below zero) by the previous disallowed loss.
What are the corporate capital gain/loss rules for C corporations?
Net capital gains (long-term and short-term):
- Corporate net capital gains are added to ordinary income and taxed at the regular tax rate.
- Section 1231 gains are entitled to capital gain treatment.
Net capital losses (long-term and short-term):
- Corporate net capital losses are carried back three years and forward five years as short-term capital loss.
- They are deducted from capital or Section 1231 gains.
For assets acquired after 1986, what is the recovery method for 3-, 5-, 7-, and 10-year property (MACRS)?
200% Declining Balance--Estimated salvage value is not considered.
- Taxpayer may choose straight line depreciation in lieu of 200% declining balance.
- 20-year property uses the 150% declining balance method.
What is the half-year convention?
Six months of depreciation is taken in the year of acquisition and the year of disposal.
Note: When straight-line depreciation is elected, the half-year convention is still applicable.
The method of depreciation used must be used for all personal property acquired that year in a given property class.
What is the mid-quarter convention?
Mid-quarter convention replaces the half-year convention is greater than 40% of a taxpayer's property (other than real property) is placed in service during the last three months of a tax year.
The mid-quarter convention treats all personal property placed in service during any quarter of the tax year as being placed in service on the mid-point of the quarter.
What is the mid-month convention?
Mid-month convention is used for calculating depreciation of real property (27.5-year residential rental real estate and 39-year nonresidential real property).
The real property is treated as placed in service in the middle of the month or acquisition. When using the mid-month convention, real property is also treated as disposed of during the middle of the month of acquisition.
What is the expense deduction (Section 179) in lieu of depreciation?
In 2014, $25,000 of acquisition cost of personal property used in a trade or business may be deducted in any one year.
- Reduced $1 for each $1 of qualifying property placed in service in excess of $200,000.
- Deduction is not permitted when a net loss exists or if the deduction would create a net loss (limited to taxpayer's taxable income from trade or business).
What are Section 1231 assets?
Generally, depreciable or real property used in a trade or business and held over 12 months.
- Net all Section 1231 gains and losses.
- If gains > losses, treat the net amount as long-term capital gain.
- If losses > gains, treat the net amount as ordinary loss.
What is the tax treatment of Section 1245 assets?
- Recapture all accumulated depreciation as ordinary income under Section 1245.
- Any excess gain is Section 1231 gain.
Identify the tax treatment given Section 1250 assets for individuals.
An amount equal to lesser of (i) the recognized gain on the sale of the Section 1250 asset or (ii) the accumulated depreciation on the Section 1250 asset is taxed at a maximum rate of 25%. Any gain in excess of the amount taxed at 25% is taxed at the preferential rates of 0%, 15%, or 20%.
What is the Section 291 rule for corporations?
Amount recaptured as ordinary income on the sale of real property under Section 291 is equal to 20% of the lesser of the recognized gain or the accumulated depreciation. Any gain in excess of the amount recognized as ordinary income is allowed capital gain treatment under Section 1231.
What is the initial basis of a partner's interest?
+ Property--Adjusted basis (NBV)
- % (Liabilities)--Liabilities assumed by other partners
+ Services--Fair market value (and taxable to partner) + % Liabilities--Liabilities assumed by incoming partner
= Beginning Capital Account
What is the basis of contributed property to the partnership?
The basis of contributed property to the partnership is the partner's basis increased by any gain recognized by the partner on the contribution.
State the holding period for a partner's interest.
The holding period for a partner's interest is equal to the holding period of the property contributed if the property were a capital asset or a Section 1231 asset in the hands of the partner. If the property were an ordinary income asset (i.e., inventory), the holding period starts on the date of contribution to the partnership.
What is the formula for a partner's basis in its partnership interest?
Basis = Capital account + Partner's share of partnership recourse liabilities
When does a partnership cease to exist, for tax purposes?
- When operations cease
- When 50% or more of the total interest (capital and profits) in the partnership is sold or exchanged within a 12-month period
- When there are fewer than two partners (the partnership becomes a sole proprietorship)
What is the treatment of guaranteed payments to a partner?
A guaranteed payment is a deduction on the partnership tax return, and the payment flows through to the partners as part of ordinary business expenses on the K-1.
Then, because the partner is not considered an employee, the payment must be included as self-employment income on the partner's return.
What is the limit on the deductibility of a partnership loss to a partner?
A partner's ability to deduct partnership losses is first limited to the partner's adjusted basis in the partnership. Secondly, the loss deduction is limited to the partner's "at-risk" amount. Finally, the passive activity loss limitations must be considered.
How are the partnership income and losses reported?
On a Schedule K-1
- Net business income or loss
- Guaranteed payments to partners
- Net "active" rental income or loss
- Net "passive" rental income or loss
- Interest income
- Dividend income
- Capital gains and losses
- Charitable contributions
- Section 179 "bonus deprecation"
- Investment interest expense
- Partner's health insurance premiums
- Retirement plan contributions (Keogh plan)
- Tax credits
How are partnership losses treated at the partner level?
A partner reports losses on the partner's income tax return to the extent that partner has basis.
A partner's loss in excess of the partner's basis, and any loss not allowed on account of the "at risk" rules or the "passive activity loss" rules, will be a carryforward indefinitely (and remain suspended until basis becomes available or the partner disposes of the entire partnership interest).
When a partnership is terminated, what basis does the partner assume for distributed property?
- Upon termination of a partnership, a partner's basis in the property distributed from the partnership is equal to the partner's basis in the partnership interest reduced by any money received.
- The holding period for the property includes the partnership's holding period.
How is an LLC treated for federal income tax purposes?
For federal income tax purposes, an LLC is treated as one of the following: a partnership, corporation, or sole proprietorship.
What is the treatment of a single-member LLC for federal income tax purposes?
A single-member LLC is considered a disregarded entity for federal income tax purposes and will be treated as a sole proprietorship, unless it elects to be taxed as a corporation.
What consideration should be made before forming an LLC?
- An LLC provides similar protection from liabilities as a corporation but does not have the "double taxation" of a corporation if the LLC is taxed as a partnership.
- LLC members generally have the right to amend the LLC operating agreement, provide input, and manage LLCs, yet corporate shareholders generally do not have these same rights.
- An LLC cannot become a public company. It must convert to a corporation before issuing an IPO.
- LLCs do not have these same restrictions with regard to its members as S Corporations have with regard to its shareholders.
What is the default tax treatment for an LLC that has two members and has not elected to be taxed as a corporation?
What are the filing requirements (Form 1041) and estimated tax requirement for the annual estate income tax return?
Form 1041 must be filed if annual income is $600 or more.
- Estate gets a personal exemption, $600
- Estate is exempt from estimated tax payments for two years
Define distributable net income (DNI).
+ Estate (trust) gross income (including capital gains)
- Estate (trust) deductions
= Adjusted total income
+ Adjusted tax-exempt interest
- Capital gains allocated to corpus
= Distrubutable net income (DNI)
What is the income distribution deduction?
The income distribution deduction is the lesser of the following:
Total distributions (including income required to be distributed currently) to beneficiary less tax-exempt interest
DNI (less adjusted tax-exempt interest)
Define gross estate.
The gross estate is the fair market value at the date of death (or at the earlier date of distribution or six months after the date of death if the alternative valuation date is elected) of all the decedent's worldwide property, including real property, personal tangible property, and intangible property. The gross estate also includes the fair market value of the decedent's share of jointly held property.
Identify some nondiscretionary deductions for an estate.
Example of nondiscretionary deductions for an estate:
- Medical expenses
- Administrative expenses
- Outstanding debts of decedent
- Claims against the estate
- Funeral costs
- Certain taxes (including state death taxes)
Define the appliable credit for 2014 and state the amount.
The applicable credit is the estate and gift tax calculated on total lifetime and death-time transfers of up to $5,340,000 (2014). For 2014, the tax credit is $2,081,800. The amount of credit shelters lifetime and death-time transfers (gift and/or estate) of up to $5,340,000.
State the formula for determining the estate tax.
+ Gross estate
- Nondiscretionary and discretionary deductions
= Taxable estate
+ Aggregate adjusted taxable gifts made during life
=Tentative tax base at death
x Uniform tax rates
= Tentative estate tax
- Gift tax paid in prior years
= Gross estate tax
- Applicable credit
= Estate tax due
What is the annual exclusion for gifts?
Each year an individual can give any number of people up to $14,000 (2014) each without gift tax ramifications.
- Amounts directly paid on behalf of the donee:
- Tuition paid directly to an educational organization
- Fees paid directly to a health care provider for medical care of the donee
- Charitable gifts
- Marital deduction
What is the difference between present interest gift and future interest gift?
- The postponement of a right to use, possess, or enjoy the property distinguishes a future interest from a present interest.
- A present interest qualifies for the annual exclusion ($14,000 in 2014).
- A future interest (or a present interest without ascertainable value) does not qualify got the annual exclusion.
Identify how the tax due on current gifts is determined.
1. Gross gifts in a calendar year (at FMV)
Exclusions of $14,000 per donee per year ($28,000 if married and "gift-splitting")
- Payments made directly to educational institutions and/or health care providers
- Unlimited marital deduction of gift to donor's spouse
- Charitable gifts
= Taxable gifts this year
+ Taxable gifts prior years
= Cumulative lifetime gifts
2. Tax on cumulative gifts (calculate)
- Gift tax on prior gifts
- Applicable credit
= Tax due on current gifts
Distinguish between simple trusts and complex trusts.
- Distribution is made out of current income only
- Income is taxable to beneficiary
- All income must be distributed
- No deduction is allowed for charitable contributions
- Exemption is $300
- Distributions may be out of principal (corpus)
- Income may be accumulated within the trust (no income distribution requirement)
- Deductions are allowed for charitable contributions
- Exemption is $100