REG SuperfastCPA Flashcards
In a fraud case, the CPA is generally liable to all:
reasonably foreseeable victims of the misstatement
Consideration must be:
legally sufficient. This doesn’t mean fair or equal.
A CPA can charge a contingent fee when helping a client with a claim for a refund filed solely:
in connection with a determination of statutory interest or penalties.
Ultramares rule:
established in a 1931 case of the same name, requires privity before an accountant is liable for negligence. Other rules, such as the Restatement rule, allow foreseeable users who rely on a negligently false statement to sue.
Sales contracts over $500 are governed by:
the statute of frauds. The UCC governs even the sale of a gumball
What is the one term that must be set for a UCC contract to be enforceable?
acceptance. Without acceptance it’s still just a negotiation
to be an enforceable written contract, what must the contract include?
the quantity of goods
under UCC when does risk of loss pass to buyer?
when the goods are delivered to the carrier
what does a principal have to do to terminate residual authority of one of its agents?
notify all thee agent’s known customers and publish the termination in appropriate trade journals
details of an output contract
when a customer agrees to buy all their materials from one supplier. courts decided that parties probably know about how much a supplier will order, so that is enough consideration to support a contract. If a contract cant be concluded within a year of its execution it must be supported by a signed writing under the statute of frauds
what can never be inferred?
quantity. price, subject matter, time for performance can all be inferred.
who has the responsibility in a check fraud scheme
the party in the best position to detect the loss- so usually the company the bad checks are coming from
If someone is going to transfer a check (order paper) to you, what two things do you need to make it valid?
Possession- meaning you need to actually have the check- and the person transferring it to you needs to have signed it.
Are punitive damages available in breaches of contract?
NO
what are reasonable grounds to OMIT an answer on a client’s tax return?
SSTS #2 says that only if both 1) the info isn’t readily available, and 2) the answer is not significant in terms of taxable income or loss
what is the hierarchy of paying of dividing up cash to creditors/IRS after a bankruptcy?
1.security interests are paid first2.child support and alimony3.admin costs such as attorneys and accountants who helped DURING the bankruptcy4. employee wages 3 MONTHS PRIOR5. contributions to benefit plans6. claims on raising or storage of grain7. consumer deposits8. all taxes are paid next9. unsecured creditors who filed in a timely fashion are paid pro rata and MUST BE FULLY REPAID before anything is paid to unsecured creditors who DID NOT file in a timely fashion
Usually, the first security interest to have priority will be the first one __________.But what is the exception dealing with purchase money?
Perfected.A purchase money security interest in NON-INVENTORY collateral has priority if it is perfected before the debtor takes possession or within 20 days thereafter.
what type of standard for tax shelters has the IRS adopted?
a “more likely than not” standard- meaning if the preparer thinks it is more likely than not that the position will be upheld- they don’t need to worry about the tax return preparer penalty
in a tenancy in common, the owners have the right to pass their interests to ________
their heirs through the estate
is a purchase price and a description of the property required to have a valid deed?
NO- you only need a description of the property
what is an example of a defect in the marketable title to real property?
an unrecorded easement
can incidental beneficiaries sue to enforce contracts?
no- the parties to the contract don’t have their benefit in mind when they create the contract
what is required for someone to file chapter 7 bankruptcy?
they must have debts- it can be any amount, as long as it is not an “abuse of the process”
Things to remember when looking at bankruptcy distribution problems:
1- Look at the dates! Priorities change based on the dates
claims with a “realistic possibility” of being sustained need not be:
disclosed. these are claims that have between a 33% and 50% chance of being sustained
can a surety compel the creditor to collect from the primary debtor or go after the debtor’s collateral?
no. the surety is primarily liable upon the debtor’s default, and they can’t compel the creditor to take either of these actions
2 ways intent can be established:
show that the defendant acted recklessly, or that the defendant knew of the misrepresentation
if a person is adjudicated incompetent by a court having proper jurisdictions- all future contracts entered into by this person are:
VOID
if a principal is either partially disclosed or undisclosed, is an agent personally liable for contracts entered into?
YES
Under the UCC secured transactions article, what will ALWAYS prevent a security interest from attaching?
failure of the debtor to have rights in the collateral
what entity handles ethical complaints that carry national implications
the AICPA
the 1933 securities act applies to sales of securities, including stocks, bonds and notes that are issued for periods over ___________
9 months
what is rule 505 of Regulation D of the 1933 securities act?
it allows a securities sale of up to 5mil in 12 months without registering with the SEC. it can only sell shares to a limit of 35 non-accredited investors but unlimited sales to accredited investors
what is rule 506 of reg D of the 1933 securities act?
Rule 506 merely requires that the securities not be advertised to the general public and not be sold to more than 35 non-accredited investors. Any type of security may qualify for this exemption, including stocks and debentures. There is no limit on the dollar value of the issue, so long as the other restrictions are complied with.
if you incorporate your business and you put all assets into the corp in exchange for stock, what % do you have to own immediately afterwards to qualify as tax free?
80%
in a non-liquidating distribution of property, how do you report the transaction?
the same as if you’d sold the property at its fair market value. If you had stock you bought for $10 per share, and you gave it to an owner of the corp when it was worth $20 per share, you’d report $10 of capital gains per share.
what are the tax implications to a corp and the individual if a corp has land that it bought for 20k but is now worth 25k, and the corp distributes it to an individual? (the corp still owes 10k on the land and the individual assumes the debt)
the corp would report a gain of 5k, and the individual reports a gain of 15k. the individual is 15k better off than before the transaction.
when you put property into a corp in exhange for stock, how is your basis in the stock determined?
it is your previous basis in the property plus any gain recognized on the property. if you had an asset you paid 100k for but is worth 150k when you transfer it, if the transfer qualifies as tax free you have basis of 100k in the stock. but if the transfer doesn’t qualify as tax free and you have a 50k gain on the transfer, then your basis in the stock is 150k.
if an individual transfers equipment into a new corporation with a basis of 100k but a FV of 150k and the transaction is tax free, what basis does the business take in the asset
100k. when you transfer property into a corp and end up with 80% or more of the stock, the tax basis is retained by both parties
when property is conveyed to an owner, whether as a liquidating distribution or not, it is recorded as:
as if it were sold for FMV. if it is a capital asset then there is a capital gain equal to the FMV less the basis.
if you have preferred and common shareholders, 270k in your profits and earnings account, and you pay 200k dividends to preferred shareholders and 100k dividends to common shareholders, how do they each report them?
preferred report 200k of dividends, and common shareholders report 70k of dividends and 30k of nontaxable return of basis. When corporate distributions exceed earnings and profits, the earnings and profits are first allocated to the distribution made to the preferred shareholders with any remainder to the common shareholders
what is section 1245 property?
personal decpreciable equipment used in a business. equipment and machinery fall into this category
what is section 1250 property?
1250 property includes business land and most real property that is subject to depreciation
how are taxes determined when a company is buying and selling its own stock?
it doesnt matter- a company buying and selling its own stock is nontaxable
what are capital assets for a corporation?
For a corporation, capital assets are normally limited to investments in stocks, bonds, and land (held in hopes of appreciation in value). Buildings, equipment, and inventory are bought to produce revenues and do not qualify as capital assets.
what are the threshholds and percentages for the dividends received deductions?
up to 20% ownership is 70%20-80% ownership is 80%above 80% is 100%
what is the dividend received deduction applied to?
the lower of the dividend amount or the overall income amount. if operations actually lost 20k but the dividend was 100k, the dividends deduction percentage would be applied to 80k
how do capital losses work for corporations?
they can be carried back 3 years and forward 5 years but they can only reduce other capital gains. they do not lower taxable income
what rate are capital gains for corporations taxed at?
the ordinary tax rate for the corp. it’s not a different rate like it is for individuals. when a net capital loss is either carried back or forward it is always treated as a short term loss
when a corp sells an asset, what would create ordinary income?
if an asset was bought for 50k, had dep exp of 10k, and was sold for 60k, 10k would be ordinary income and 10k would be a 1231 gain. the dep exp is recaptured through the sale.
are dividend-received deductions allowed for non-domestic companies?
NO. if you get dividends from a non domestic corp it’s all taxable
what time period are section 197 items amortized over?
15 years
how are incorporation fees expensed?
the first 5k can be deducted in the first year, the rest is amortized over 180 months
how are doubtful accounts treated for tax purposes?
the expense has to be incurred- meaning only the amount of accounts actually written off are able to be deducted
how are charitable deductions calculated for corporations?
the amount deducted in one year is up to 10% of income before any dividends received deductions. this means that you would take income plus dividend income and take 10% of that, then subtract the DRD afterwards. any amount over that can be carried forward for 5 years
a bad debt can only be deducted to the extent that:
it was included in income.Bad debt expense is actually the removal of a previously recognized income that was never received
what are the 3 elements of deductible business expenses?
ordinary, necessary, and reasonable in amount
what happens if a owner/employee is getting paid 300k and 50k of that is determined to be unreasonable compensation?
that 50k will then be taxed at a dividend but it also becomes NOT-deductible for the corp
how is inventory treated as a charitable donation?
when it’s donated, the deduction amount is the lower of cost or fair value
business gifts up to $____ per person can be deducted
$25
what is the half-year convention under MACRS?
According to the rules of MACRS, personal property is treated as placed in service or disposed of at the midpoint of the taxable year, resulting in a half-year of depreciation for the year in which the property is placed in service or disposed of by the company.
what is the tax treatment when there is a like-kind exchange with boot?
the amount taxed is the lesser of the boot received or the gain.
when a company owns 80% or more of another, when are gains reported for tax purposes?
not until the gain is realized by a sale to an outside party.
the benefit of using the installment sales method is removed by:
being added to taxable income as an adjustment
what constitutes a personal holding corporation?
more than half of the value of the outstanding stock must be owned by five or fewer individuals at some point during the last half of the year. at least 60 percent of its ordinary income must be generated by dividends, interest, rents, royalties, and other passive income
is interest income on state and federal government obligations included in taxable income?
interest from federal obligations IS taxable but interest from state obligations IS NOT taxable
which of these are included in the gross income of the recipient during a divorce: alimony, child support, and property settlement?
only alimony. alimony is included in the recipient’s gross income, but child support and property settlements are not
if someone is supposed to receive alimony and child support, but receives much less then they are supposed to during the year, how is it taxed?
the amount is applied to child support first. If they were supposed to get 5k during the year in child support and they received 6k total, 5k would be child support and 1k would be alimony.
how is the exclusion ratio computed on an annuity contract?
you take the basis over the amount expected to be received, and then multiply that percentage by the total of the payments received that year. so if you paid 50k for an annuity and it was estimated that you would be paid out a total of 100k, your exclusion ratio is 50%
what are the types of capital assets for individuals?
Capital assets for individual taxpayers are personal property, such as household furniture and tools, and investment property, such as real estate and securities such as stocks and bonds.
how are gains and losses handled on personal and investment property for individuals?
Taxpayers must report gains and losses on investment property (such as their investment stocks and bonds) but only gains on personal property are reported. For example, if a taxpayer sells personal furniture at a gain, that capital gain must be reported. However, if the same personal property is sold at a loss, no deduction is allowed.
how are short and long term capital gains and losses treated by an individual?
the first step is to net the short term gain and loss and the long-term gain and loss.Then, you net the two together. A net capital loss of up to $3k can be deducted in any year in arriving at AGI, and any loss over that can be carried forward indefinitely.Also, when netting the overal gains and losses together, whatever is bigger determines whether it’s a long term or short term
how are gains/losses treated in related party transactions on the individual level?
gains are taxed but losses are not deductible
how much capital losses can someone filing “married filing separately” deduct in a given year?
this filing status can only deduct $1,500 instead of the regular 3,000
what is the treatment of non business bad debt?
the principal is written off in the year the loan is deemed worthless and it is considered short-term. any foregone interest is not deductible
how is basis determined when a gift is given?
it’s the basis of the gift in the hands of the gift-giver
if you inherit stock worth 10k, how much tax do you owe?
assets that are inherited aren’t taxable. You take a basis in them that’s the same as the fair value on the date of death.
how are qualified dividends taxed?
Qualified dividends are those dividends collected from a U.S. domestic corporation or a qualified foreign corporation. To encourage investments in these companies, the dividends are taxed at the same reduced rate that applies to long-term capital gains.
how is a like-kind exchange taxed when no cash is received?
the basis of the new asset is the same as the basis in the asset given up plus any cash paid, and no gain or loss is recognized
how is a trade that is not like-kind treated for tax purposes?
your basis in the new asset is its fair market value, and you subtract the basis in the asset you traded and that difference is your gain
if cash is received in a like-kind exchange what is the tax consequence?
a gain is recognized on whatever is the lower of the cash received or the gain on the exchange. If there was 5k received and the gain was only 3k, then a 3k gain is recognized. if the gain was 5k and cash received was 2k, then a gain of 2k is recognized
what is the rule on excluding a gain on the sale of a primary residence?
If certain rules are met, a couple filing a joint return can exclude up to $500,000 of the gain on their personal residence. The structure had to be their principal residence for at least two of the most recent five years. This exclusion cannot be taken in two consecutive years.
what are the rules for a C corp to use the cash basis of accounting?
c corps cant use the cash method unless their average annual gross receipts for the previous three years do not exceed 5 million. once they pass 5 million they must use accrual method for all future years
can partnerships use the cash basis of accounting?
yes, as long as none of the partners are a c corp. and there are no income limits for the cash basis
characteristics of ORDINARY ASSETS?
accounts and notes receivableinventorytrade or business assets OWNED FOR A YEAR OR LESS
characteristics of 1231 assets?
Trade or business assets owned for MORE than a year
if you inherit property and the donor’s basis is higher than FMV, how is it treated when you sell the asset for tax purposes?
You assume the lower FMV as your basis for computing losses, and you use the donor’s higher basis for computing gainsIf you sell it at a price in between the gain and loss basis, no gain or loss is recognized
If you inherit stock and sell it within a year is it a short-term or long-term gain?
You assume the holding period of the donor. So if they had only had it 6 months you start at 6 months when you inherit it- if they had it 5 years and you sell it the day after you inherit it, it is still a long-term gain
when the alternate valuation date is elected after a death, what is the basis for the property distributed?
it is the fair market value on the date that is six months after the date of death
if you (an individual) have ST cap losses of 10k and LT cap losses of 10k how much can you deduct of each one in the current year?
3k can be deducted, and the ST losses are deducted first.
in an involuntary conversion, how do you calculate any gain or loss?
the taxable gain is the LOWER of the actual gain on the transaction or the money left over after the replacement
what is the basic hobby loss rule?
you have to make a profit in 3 out of the most recent 5 years. so 3 years of losses in a row means you’re engaged in a hobby not a business.expenses related to a hobby are deductible only to the extent of revenues earned
how are benefits under cafeteria plans taxed?
they are only taxable if they are received in cash
what is the exception to the rule of stock dividends being non-taxable?
if the investor can choose between cash or a stock dividend, then it’s taxable.If some owners are given common stock but some are given preferred stock, then it’s taxable to all.
how are gambling gains/losses treated for tax purposes?
Winnings from gambling activities are reported within the income of the taxpayer. Losses are shown as miscellaneous itemized deductions. However, the losses deducted cannot exceed the amount of gambling winnings being reported
is interest on United States treasury bonds taxable?
nterest revenue on United States treasury bonds is taxable on a federal income tax tax return. Interest revenue on US Series EE bonds is tax exempt but only when it meets specific rules: the bonds must have been purchased by the taxpayer who was over 24 years old and the proceeds must be used to pay college costs for taxpayer, spouse or a dependent. Interest revenue on state and municipal bonds are always tax free on a federal return.
how are passive activity losses treated on an individual tax return?
Passive activity losses are not deductible on an individual income tax return. They are carried over and used to offset passive income in the future until used up. A passive activity is a business in which the taxpayer serves as an owner but does not materially participate in the operation. Rental activities and limited partnerships are also included in this category, regardless of the owner’s participation.
what is the loss deductibility exception dealing with losses from rental activity?
passive losses on rental activities are deductible up to $25,000 as long as the owner is an active participant in the management. The deductibility of this $25,000 is lost gradually if the taxpayer’s income is especially high. Passive losses are carried forward indefinitely so that they can reduce future passive activity gains.
if a taxpayer has a reasonably high income level but they get social security benefits, what percent of the SS is taxable?
usually 85%. So 85% of the SS benefits received would be included in taxable income
what can cause a scholarship to be considered earned income?
if the recipient has to work as a requirement of the scholarship, such as teaching 2 classes a week
If a couple separates and the husband gives the wife 5k before a legal separation decree is in place how is the 5k taxed?
It is not yet alimony so it is not taxable to the woman.
If you have rental homes can you deduct charitable contributions from the rental revenue?
No. You would have your rental revenue and expenses on a schedule E of a 1040 and a charitable contribution isn’t a necessary expense of maintaining rental properties. But, you could include the charity as an itemized deduction on the schedule A of a 1040.
how are social security benefits taxed in the income is relatively low?
SS benefits are not taxed if the income is low. 50% becomes taxable if the income is higher, and up to 85% can be taxable if the income level is relatively high
are cash gifts included in taxable income?
no- cash received as a gift is not included in federal taxable income, although in some situations a gift tax may apply
what is the number of days per year that determines whether a property is treated as a rental or not?
15 days. If a property is rented for less than 15 days, no rental income is includable and expenses attributable to the rental are not deductible. The property taxes are still deductible in full on Schedule A
how are dividends on a life insurance policy treated for tax purpose?
they are not taxable. They are viewed as deduction in the expense of the policy
what are the requirements for EE bond interest to be tax free?
the bonds must be issued after December 31, 1989, be purchased by the sole (or joint owner) and the buyer must be at least 24 years old when bonds are purchased. The proceeds of the bonds must be used to pay the higher education tuition and fees for taxpayer, spouse, or dependent.
how are a C corp’s net capital losses used?
deducted from the corp’s ordinary income up to 3k, then carried back 3 years and forward 5 years
what is the maximum deduction in one year for a section 1244 loss?
50,000- 100k if filing jointly
what are examples of 1245 property?
all depreciable personal property such as equipment and machinery. under section 1245 recapture, gains are treated as ordinary income up to the amount that was depreciated.
how does the 1231 lookback provision work?
1231 gains are applied to past 1231 losses and treated as ordinary income. whent the past losses are absorbed the balance is a 1231 gain.if you have 100k of 1231 gain this year, but 80k 1231 loss last year, then 80k this year is ordinary income and 20k is a 1231 gain
what is the statutory amortization period for a covenant not to compete that is related to business acquisition?
15 years
the section 179 deduction is limited to:
the net income from the business
what is the MACRS life of a non-residential real property such as an office building?
39 years. MACRS requires that such a building is depreciated on the straight line bassis.BUT- the mid-month convention applies to this type of property which means no matter when it is placed into service it is considered to be mid-month.
is debt relief considered boot?
yes. that and cash
what are the 2 categories of qualified moving expenses?
moving the household goods, and lodging during the move. temporary living expenses are NOT deductible
what is the rule when a taxpayer make a charitable contribution in connection with admission to an entertainment event?
the taxpayer can only deduct the difference between the amount paid for admission and the fair value of admission. If you pay 100 but regular admission is only 50, you can deduct 50.
what is the rule with donating ‘ordinary income property’ to charity?
if you’ve owned it for less than a year the amount you can deduct is the lower of cost or market.If you’ve owned it more than a year, then you can deduct the FMV
what is the income percentage limit of donating long term capital gain property to charity?
you can only deduct up to 30% of your AGI in long term capital gain property.
what is the gross income test amount for someone to be claimed as a dependent by someone else?
3,900
how does the hope/american opportunity credit work?
It gives the taxpayer a credit of 100% of the first 2k and 25% of the next 2k of qualified post-secondary education expenses. So the total can be $2,500. The credit doesn’t begin phasing out for married filing jointly until the income hits 160k of AGI.
how does the child care credit work?
you can get a credit for eligible childcare expenses of 35% of the the expenses if you have AGI of 15k or less. If your AGI is more than 15k, the credit goes down 1% of your expenses for every 2k of AGI above 15k, but it is not reduced to less than 20% of the expenses.
how does the foreign income tax credit work?
it’s the lower of the foreign taxes paid, or the amount of US taxes that would be paid on the foreign income
how are corporate startup costs treated for tax purposes?
5k of organizational costs can be deducted in the first year- anything over 50k reduces the 5k that may be deducted in the first year though. Legal fees are allowed, but commissions paid to an underwriter are not. stock issue costs are not deductible either.
what percentage of ownership must consent to revoke the S status of an S corp?
more than 50%
what does article 2 of the UCC govern?
governs the sale of new and used goods, by both merchants and non-merchants
what items are stated separately for partnership income?
interest incomemunicipal interest incomesection 1231 gaincharitable donationslife insurance premiums on partner’s livesordinary income/loss
what is the statute of limitations on the IRS assessing additional taxes?
3 years unless the amount of income omitted is more than 25% of the income reported on the taxpayer’s income tax return
if a corp has E&P of 9k and it distributes 9k of cash to its sole shareholder, and land with a FMV of 40k and a basis of 5k, what is the shareholder’s taxable income because of the transaction?
if a corp distributes appreciated property, its E&P goes up by the difference between FMV and its basis in the property.So in this case, the total E&P is raised from 9k to 44k (9+35). So the shareholder has a gain of 44k and the remaining 5k is a return of capital and is nontaxable.
what is a type A reorg?
a merger or consolidation under state law. it is stock for asset, the target corp dissolves
what is a type B reorg?
stock for stock. Acquirer must own at least 80% of target after the transaction. Only voting stock can be used by acquiring. No boot allowed.
what is a type C reorg?
stock for asset. doesn’t have to be statutory. Only voting stock and can used by acquiring. Boot is allowed but it cannot exceed 20% of the consideration provided by acquiring. Acquiring must acquire substantially all of target’s assets(90% of net asset value and 70% of gross asset value)
If you get stock as a GIFT, what is your basis?
If the owner’s basis is less than FMV on the date of the gift, then your basis is the same as who gave it to you.But, if the FMV is less than the owner’s basis at the date of gift, then you have a separate gain basis and a loss basis. Your loss basis is the lower amount, and your gain basis is the higher amount.
What is your basis in INHERITED property?
The FMV of the property at the date used to value the property. *this can be the date of death or the alternate date as chosen by the executor
how is the basis in a jointly-owned property calculated?
The original basis is divided by the two. If you have 350k in basis, each has 175k in basis. At the death of one person, that person’s half is given to the survivor at FMV. So if the FMV of the property was 400k, then the survivor gets basis of 200k plus their original basis of 175k for a total basis of 375k in a property with a fmv of 400k
what does rule 506 D allow?
that the securities are NOT advertised to the public, and that they are not sold to more than 35 non-accredited investors.There is NO LIMIT on the dollar value of the issue- and they can be either stocks OR debentures
what is the primary thing to win a section 11 claim?
that there was a material misstatement in the registration statement on the effective date, that they can trace their shares to that registration statement, and that they suffered damages
if you give someone a check for 120k and they don’t deposit it within 30 days and then there is a bank failure, you are off the hook for:
the extra 20k. The FDIC will cover 100k.
what right does one cosurety have against another cosurety?
contribution. this means that if one surety pays more than his fair share, he can recover from the other surety
under the UCC, the party to whom a check is present for payment is the:
drawee. this is the bank.
what is one reason for which the corporate veil might be pierced?
if the corp was undercapitalized when it was formed
if you estimated your taxes in 2012 as 5k and then in 2013 you found the exact amount to be 6k, you:
include the remaining 1k in your 2013 tax return
what is the total allowable medical expenses amount?
20k. only medical expenses in excess of 10% of AGI are allowable as a deduction
a merchant’s firm offer has to remain open for:
a reasonable time
what is the only thing that can cause a gain in a partnership distribution?
when cash is distributed that exceeds the partner’s basis
are an insurance company’s securities regulated by the securities act of 1933?
YES
what is the medicare surtax obligation and how is it calculated?
3.8% of the lesser of net investment income or the excess of AGI over the AGI threshold which is total AGI minus 250k
foreign currency exchange gains or losses in the course of normal business are ______
ordinary
for an S corp, what all will increase or decrease a shareholders basis?
everything will affect the shareholders basis- even capital gains and losses
a C corps net capital losses are carried back:
back 3 years and forward 5. Remember that these are capital losses and not NOLs.NOLs can be carried back 2 years and forward 20
what a bond is amortized for tax purposes, what method is used?
constant yield to maturity method
even if the workload is uneven, if no agreement to the contrary exists, profits in a partnership will be:
divided equally- even if one partner does more work than the other. there needs to be an agreement if profits are different than 50/50
the person who goods must be delivered to under a negotiable bill of lading
the consignee of the bill of lading
if unionized employees go on strike, when must their company hire them back?
after a ‘unfair labor practice’ strike- not if the strike is over wages
which court is not of ‘original jurisdiction’
the united states court of appeals
do proposed regulations have the effect of law?
no
bilateral contract
promise for a promise
unilateral contract
promise in exchange for an act
executory contract
contract not fully performed on both sides
if you file chapter 7, any inheritence you get within how many days of filing will go to your creditors?
within 180 days
what are the reg D offerings?
504- 1 million505- 5 million506- private placement, unlimitedthe SEC must be notified within 15 days of the first sale
uniform capilization rules amount
gross receipts of 10million or more
under circular 230, if you find an error on a client’s tax return after he sends it, you are required to:
tell the client- it’s up to them what to do next
what are the rules and stipulations of an exempt offering under Reg D rule 506?
up to 35 nonaccredited investors may purchase shares. there is no limit on the placement of securities as long as the other requirements are met. the issuer needs to take reasonable steps to see that purchasers of the exempt offering are not underwriters and are buying for investment. the SEC must be notified within 15 days of the first sale of the securities.
what are the rules for filing a valid involuntary petition against someone?
there needs to be 12 creditors, or one creditor needs to be owed at least $14,425 of unsecured debt.
what are the rules on preferential transfers?
the trustee can set aside a payment to a creditor made within 90 days previous to the bankruptcy filing. A payment to an insider within a year before the bankruptcy can also be set aside as preferential. If you receive “new value” such as buying something before the bankruptcy, that won’t be preferential.
an unrecorded mortgage has priority over a subsequently recorded mortgage if the subsequent mortgagee:
knew of the un-recorded mortgage. If another mortgage company knows about an existing mortgage- even if it’s unrecorded, the unrecorded mortgage will take priority.
indemnity contract:
you promise to pay your friend if he has to pay someone 10k
suretyship contract:
you promise your friend’s bank that you’ll pay off his car loan if he doesn’t pay it
who enforces anti-trust laws?
The DOJ’s anti-trust division and the FTC
what types of entities are exempt from the registration requirements of the securities act of 1933 when they issue securities?
charities, railroad company, farmer’s cooperative, or banks
how does a suretyship work if 2 people are each 50% but one is released without the other one knowing?
before the one is released, either one could be forced to pay the entire amount, but they would then have the right of contribution to go after 50% from the co-surety. when one is released, the remaining surety is then only liable for 50% total.
which needs additional consideration to be binding: a material modification involving the sale of real estate or the material modification of a sale of goods under the UCC?
the real estate. UCC transactions can be modified without new consideration
what causes trust property to be included in the grantor’s gross estate?
if the trust is revocable, which means the taxpayer maintains ownership or control of the property
can an S corp be owned by a bankruptcy estate?
Yes. it can also be owned by decedent’s estates, or trusts.
what happens if an S corp has excessive passive income? (passive income exceeds 25% of the corp’s gross receipts)
a tax at the highest corporate rate is imposed on the excessive passive income
how are estimated tax payments calculated?
at least 90% of current years taxes or 100% of last years taxes. BUT- if AGI exceeds 150k, then tax payments during the year must be 110% of last years taxes
when a C corp makes an S election and it has unrealized built-in gains in its assets as of the election day, they must pay a built-in gains tax on this appreciation if it is recognized within the:
next 10 years. That means if it is sold and the gain is recognized it has to pay a built-in gains tax on the appreciation at 35%
how do 1231 gains and losses work?
1231 gains are carried back against 1231 losses and ordinary income is ‘recaptured’. Gains go back 5 years.
when doing a life insurance as a fringe benefit question, the key thing to remember is that the first 50,000 of ______ is _____.
coverage is free. if it has 2.76 per $1000 of coverage, only apply it to the amount higher than 50k
things to remember about putting property into a partnership:
the partnership divides up any debt on the property. if you put in property with that you have 7k of basis in, and there is a mortgage of 3k, then you would have 7k of basis in the partnership except you have to subtract the amount of the debt the other partners will assume. if you’re a 50% partner then you’d subtract 50% of the debt, so your basis goes down to 5.5k. 7k - 1.5k = 5.5k
some guidelines for determining eligible exemptions:
the individual you are claiming must be a qualifying child or relative.they can’t provide more than 50% of their own support- which means you provide over 50% of their support.the personal exemption amount is 3,900 for income.time at college counts as living at home- they need to live at home for more than 1/2 the year
how is your taxable income and basis determined for property received as a dividend?
the taxable income is the FMV of the property received less any liabilities assumed.Your basis is always the FMV of the property.
what is the standard deduction for a trust or an estate in the fiduciary income tax return?
zero
in a corporate formation, gain is recognized to the extent that the liabilities assumed by the corporation exceed the:
basis in the assets contributed by the shareholder.If you put in property worth 20k, you have basis of 6k, and it has a 12k mortgage- your gain is the difference in your basis and the mortgage you’re being relieved of… so 6k in this case
what is the rule for interest expenses when computing AMT?
the interest has to be related to the primary residence- it can’t be a home equity loan to buy a motor home.you add back in taxes to compute AMT.You add back in the 2% deductions to compute AMT.
how do you deduct INVESTMENT INTEREST EXPENSE?
it is deductible to the extent of net investment income. So you take non-interest investment expenses and net them with investment income. You can then deduct investment interest expense up to the amount of net investment profit.if you have investment income of 10k and investment expenses of 8k, you can deduct up to 2k of investment interest expenses.
are medical expenses that you paid with a credit card deductible when you pay them or when you pay off the credit card?
they are deductible in the year you paid the medical expenses, not when you pay off the credit card.
what are the rules for using real estate losses to offset ordinary income?
a natural person can offset up to 25k of nonpassive income with passive losses resulting from rental activities. You have to own at least 10% of the rental activity, and you must have actively participated.Also, the 25k allowance is reduced by 50% of the amount that the taxpayer’s adjusted gross income exceeds 100k.So if you have 200k in income, you have 100k over the 100k limit, and you have to reduce your losses by half of that amount, or 50k.
which senate committee considers new tax legislation?
the finance committee
if a partner disposes of his share of a partnership and it had suspended loss caryyovers, how is it treated?
the passive losses are released and can offset any type of income
what are ‘hot assets’ of a partnership?
ONLY inventory and unrealized receivables
how is basis in a distribution of property from a partnership to an individual calculated?
it is the same as the partnership’s basis in the property but it may not exceed the partner’s basis in the partnership.Also, cash distributed reduces the partner’s basis dollar for dollar.If you have a partner with basis of 50k and they get 20k in cash, and then some land with 40k of basis to the partnership, the partner can only take basis in the land of 30k. because of the 50k basis less the 20k received in cash, there’s only 30k of basis left for that partner.
what is the gain and loss basis of stock that is given to you as a gift?
if the owners basis is less than FMV, then it is the owners basis. If the FMV is less than the owners basis, then you take the FMV basis for losses, and the owners basis for gains.For an inheritance the gift is valued at FMV.
for a stock split basis question:
figure out the total amount the stock cost originally and multiply that by the different split ratios to get the basis per share when the stock is sold
how to do a wash sale question
let’s say you sold 500 shares at a loss and then purchased 100 back within 30 days at a lower price. the % of shares you bought back is the percentage of the loss you’re not allowed to take. So if selling the 500 shares got you a loss of $1,000, buying back 100 shares is 1/5 or 20% of the shares you sold. So $200 of loss would be disallowed.
when does a short-term capital gain change into a long-term capital gain?
LONGER than one year. if it is exactly one year it is still short term.
Details of personal use assets for tax purposes:
Personal use assets, such as a BOAT, are capital assets. BUT, if you have a loss when you sell a personal use asset IT IS NOT DEDUCTIBLE. It is of course taxable if you have a gain though.
what is the difference in 1231, 1245, and 1250 property?
1245 and 1250 are BOTH still 1231 property, but they are each different.1245 property is depreciable personalty such as equipment in a sole proprietorship. The amount of depreciation taken on 1245 property is recaptured when it is sold and is then ordinary income. The remaining gain is 1231 gain.1250 property is depreciable realty such as land or buildings. On these you take the straight-line depreciation once it is sold and it is subject to the 1250 25% recapture tax. If there is actual depreciation over straight-line, that is subject to 1245 rules which would be ordinary income.
what year class are computers under MACRS?
5 year class
what is the half year convention under MACRS?
in the year the asset is purchased, it is depreciated for 6 months no matter when it is actually bought. same thing for the year it is sold
generally a lessor will not be taxed on improvements made by a lessee unless:
the improvements are deducted from lease payments as a form of rental payments. if the improvement serve as a substitute for rental payments, then it is fully taxable to the lessor
if you are the beneficiary of a life insurance policy which is collateral for someone who owes you money, how is it taxed?
only the amount that you get paid above what you are owed is taxable. If they owe you 100k and the policy pays you out 120k, then the 20k is taxable
prepaid rental income is taxable when received unless:
unless it is potentially refundable
how much of a capital loss can be deducted in one year for individuals?
3000- anything more than that is carried forward as a STCL.
for interest on a series EE bond to be deductible, the person you spend it on must be:
a dependent of yours
how are gambling gains and losses treated?
gambling winnings are included in gross income. Gambling losses DO NOT offset gambling winnings- they are deducted from AGI as a misc itemized deduction limited to the amount of gambling winnings
formula for casualty losses:
you take the lesser of the decline in the property because of the casualty or the adjusted basis in the propertythen you deduct any insurance reimbursementsthen you have a disallowance of $100then you deduct 10% of your AGI for the yearThat leaves you with the casualty loss you’re allowed
how much of the self employment tax is allowed as a deduction FOR AGI? what form does it go on?
one half. it would go on the form 1040
are insurance premiums on property for personal use deductible?
no
what is the rule about deducting the either sales tax or state income taxes paid?
you can deduct the greater of sales taxes paid or state income taxes paid
are estimated federal tax payments deductible on the tax return?
no
what is a schedule A?
itemized deductions
where are tax preparer fees listed on a tax return?
it is a schedule A itemized item, even if the person earned all their money is from a schedule C sole proprietorship
are personal life insurance premiums deductible?
no- they are considered a personal expense
how is an interest forfeiture penalty for making an early withdrawal from a certificate of deposit treated?
it is deductible on page 1 of the 1040 to arrive at AGI
are estimated state income taxes deductible?
yes- fully deductible as an itemized deduction schedule A
are real estate taxes on a principal residence deductible?
yes- fully deductible as an itemized deduction schedule A
how is an expenditure made for medical reasons that improves a residence treated for tax purposes?
it is an itemized deduction subject to a 7.5% of AGI threshold to the amount of the cost over the value it added to the home. If the cost was 10k and it increased the home’s value by 8k, then 2k is deductible.
are health insurance premiums deductible?
they are an itemized sched A deduction subject to a 7.5% AGI threshold
how are unreimbursed employee expenses treated?
misc itemized deduction on sched A subject to a 2% of AGI threshold
in a partnership distribution- when is gain recognized?
only when cash exceeds the basis in the partnership interest
for the repair of a rare book, if the first price agreed upon is 450 but additional repairs are needed and the price goes up to 600, is that binding?
yes because the repair of the book is a service, and additional repairs equate to additional consideration, the increase in price is binding
under the UCC how much of a deposit can a seller keep if the buyer defaults?
the lesser of $500 or 20% of the purchase price- even if there was no liquidated damages clause
if you get assigned a partnership interest, do you get to share in profits and management?
you get the share of the profits, but you don’t get to participate in management unless the other partners agree
if you put equipment into a corp worth 20k, you have basis of 6k, and it has a liability of 12k, how much gain do you recognize?
you recognize the amount of liability over your basis that you’re relieved of. So you had a 12k liability with basis of 6k, so your gain is 6k.
what basis does a corp take in land contributed by an owner?
it takes the owner’s basis plus any gain the owner recognized on the transaction.If an owner contributes land with 40k of basis but the corp gives him 10k in cash, the corp’s basis in the property is 50k
for corporations, how long is goodwill amortized?
amortized over 15 years
how are premiums paid on a key-person life insurance policy treated on an M-1?
they reduce book income but not taxable income
how are corporate NOLs treated?
you can carry them back two years and ahead 20 years
for a corp, are life insurance premiums paid for its executives as part of their taxable compensation deductible to the corp?
yes, they are fully deductible
is interest expense on a loan used to purchase municipal bonds deductible?
since the loan is used to purchase bonds that generate tax-exempt income, the interest expense is NOT deductible
is interest on municipal arbitrage bonds and interest on US treasury notes taxable to a corp?
yes- both are taxable.
how long do you have to own a stock to qualify for dividends received deduction?
45 days
is a dividend received deduction allowed on a REIT investment?
no
what amount of a net capital loss can a corp deduct in one year?
none- capital losses are only used to offset capital gains. they can be carried back 3 years and forward 5
is interest on funds borrowed for working capital deductible?
yes.
which of these are qualified organizational expenses for a corporate startup:-legal fees-state incorporation fees-commissions paid to broker on sale of stock
only the state incorporation fees and the legal fees. the broker fees aren’t deductible at all.
for a corp, how long can you carry forward excess charitable contributions?
up to five years
for dividends rec deduction questions, when the income is a net loss:
make sure to deduct it from the income amount before applying the DRD.-20k in net income with 200k of 25% owned dividends = a DRD of 80% against 180k - NOT 200k
difference in startup costs for a corp and organization costs for a corp?
nothing really- they are separate and each have the 5k rule but they are different. organization costs and startup costs are NOT lumped together
dividends received deduction limits:
0-20%: deduct 70%21-80%: deduct 80%81-100%: deduct 100%
how does the corporate AMT small corp exemption work?
In the first year of a corp’s existence it is automatically exempt from AMT.Year 2’s test is the gross receipts from year one.If year one’s gross receipts exceed 5million, then the corp is NOT exempt from AMT in year 2.Once the small corp test is failed, the corp is NOT exempt for all future tax years.The general test is 7,500,000- the above 5million test is for NEW corps.
what is the AMT exemption regarding 40k?
the exemption is 40k minus 25% of the AMT income exceeding 150k.If you have 200k of AMT income then 50k applies to the exemption. That would be 40k - (50k x .25) which equals 27,500
what is the federal acc earnings tax credit and how does it work?
it gives corps 250k to lower its income subject to the acc earnings tax, plus any dividends or fed income taxes paid.If your corp had 400k in taxable income and it paid 100k in tax, you then subtract the credit of 250k from the remaining 300k- this leaves you with 50k that is subject to the acc earnings tax
when would a corp want to distribute land instead of cash?
if the land is appreciated then the corp would have to pay tax on the appreciation.the amount of dividend income is the same either way to the shareholder
how do noncorporate shareholders treat gains on a redemption of stock that qualifies as a partial liquidation?
entirely as a capital gain
what is a B reorg?
stock for stock, and only the voting stock of the acquiring firm is permitted
what is a type a reorg?
a statutory merger- target ceases to exist, but target shareholders now own stock in acquiring corp
what is a type c reorg?
acquisition of “substantially all” of the assets of the target solely in exchange for voting stock of the acquiring corp
accrual based corps can deduct all or part of charitable contributions paid after the year end of its tax year if the contribution is paid within the first ____ months after the end of the tax year
2 and 1/2 months.if the board approved 300k to be donated on jan 31st of the next year, the corp can deduct the maximum amount this year.
are S corps eligible to be in an affiliated group?
NO
when you contribute cash and property to a partnership in exchange for a partnership interest, how is your basis in the partnership calculated?
Your cash gives you basis in the amount of the cash.You take your basis in the land you contributeLESS a mortgage on itADD back your % of the partnership in the mortgageADD your % of recourse liabilitiesThe sum of these equal your basis
if you contribute property and services to gain an interest in a partnership, how is your basis determined?
you get your basis in the land plus basis equal to the value of the services contributed. BUT- you must recognize wage income for the services provided- that’s what gives you tax basis
if you contribute services to get a partnership interest, do you use the % of net assets or the % of the assets FMV of the partnership?
you use the fair market value of the partnership to determine the amount of ordinary income you recognize
what depreciation method do partnerships use?
the partnership elects the method to use, but it has to be an approved method by the IRS
if a partnership sells depreciable property at a gain in excess of the depreciation allowed on the property:
then it will be treated partly as a 1231 gain and partly as ordinary income
for tax purposes, what will cause an end to a partnership?
a partnership terminates when it no longer does business as a partnership or if 50% or more interest in partnership capital and profits is exchanged within 12 months.
when a partner sells his interest, what are the tax consequences?
if the partnership has unrealized receivables or substantially appreciated inventory, then the partner will recognize ordinary income on his share.Also, whatever cash amount the partner sells his interest for is taxable, plus a gain in the amount of liabilities that he is no longer responsible for.
once an S corps status is revoked or terminated, how long does it have to wait before making a new S election?
five years
In a fraud case, the CPA is generally liable to all:
reasonably foreseeable victims of the misstatement
Consideration must be:
legally sufficient. This doesn’t mean fair or equal.
A CPA can charge a contingent fee when helping a client with a claim for a refund filed solely:
in connection with a determination of statutory interest or penalties.
Ultramares rule:
established in a 1931 case of the same name, requires privity before an accountant is liable for negligence. Other rules, such as the Restatement rule, allow foreseeable users who rely on a negligently false statement to sue.
Sales contracts over $500 are governed by:
the statute of frauds. The UCC governs even the sale of a gumball
What is the one term that must be set for a UCC contract to be enforceable?
acceptance. Without acceptance it’s still just a negotiation
to be an enforceable written contract, what must the contract include?
the quantity of goods
under UCC when does risk of loss pass to buyer?
when the goods are delivered to the carrier
what does a principal have to do to terminate residual authority of one of its agents?
notify all thee agent’s known customers and publish the termination in appropriate trade journals
details of an output contract
when a customer agrees to buy all their materials from one supplier. courts decided that parties probably know about how much a supplier will order, so that is enough consideration to support a contract. If a contract cant be concluded within a year of its execution it must be supported by a signed writing under the statute of frauds
what can never be inferred?
quantity. price, subject matter, time for performance can all be inferred.
who has the responsibility in a check fraud scheme
the party in the best position to detect the loss- so usually the company the bad checks are coming from
If someone is going to transfer a check (order paper) to you, what two things do you need to make it valid?
Possession- meaning you need to actually have the check- and the person transferring it to you needs to have signed it.
Are punitive damages available in breaches of contract?
NO
what are reasonable grounds to OMIT an answer on a client’s tax return?
SSTS #2 says that only if both 1) the info isn’t readily available, and 2) the answer is not significant in terms of taxable income or loss
what is the hierarchy of paying of dividing up cash to creditors/IRS after a bankruptcy?
1.security interests are paid first2.child support and alimony3.admin costs such as attorneys and accountants who helped DURING the bankruptcy4. employee wages 3 MONTHS PRIOR5. contributions to benefit plans6. claims on raising or storage of grain7. consumer deposits8. all taxes are paid next9. unsecured creditors who filed in a timely fashion are paid pro rata and MUST BE FULLY REPAID before anything is paid to unsecured creditors who DID NOT file in a timely fashion
Usually, the first security interest to have priority will be the first one __________.But what is the exception dealing with purchase money?
Perfected.A purchase money security interest in NON-INVENTORY collateral has priority if it is perfected before the debtor takes possession or within 20 days thereafter.
what type of standard for tax shelters has the IRS adopted?
a “more likely than not” standard- meaning if the preparer thinks it is more likely than not that the position will be upheld- they don’t need to worry about the tax return preparer penalty
in a tenancy in common, the owners have the right to pass their interests to ________
their heirs through the estate
is a purchase price and a description of the property required to have a valid deed?
NO- you only need a description of the property
what is an example of a defect in the marketable title to real property?
an unrecorded easement
can incidental beneficiaries sue to enforce contracts?
no- the parties to the contract don’t have their benefit in mind when they create the contract
what is required for someone to file chapter 7 bankruptcy?
they must have debts- it can be any amount, as long as it is not an “abuse of the process”
Things to remember when looking at bankruptcy distribution problems:
1- Look at the dates! Priorities change based on the dates
claims with a “realistic possibility” of being sustained need not be:
disclosed. these are claims that have between a 33% and 50% chance of being sustained
can a surety compel the creditor to collect from the primary debtor or go after the debtor’s collateral?
no. the surety is primarily liable upon the debtor’s default, and they can’t compel the creditor to take either of these actions
2 ways intent can be established:
show that the defendant acted recklessly, or that the defendant knew of the misrepresentation
if a person is adjudicated incompetent by a court having proper jurisdictions- all future contracts entered into by this person are:
VOID
if a principal is either partially disclosed or undisclosed, is an agent personally liable for contracts entered into?
YES
Under the UCC secured transactions article, what will ALWAYS prevent a security interest from attaching?
failure of the debtor to have rights in the collateral
what entity handles ethical complaints that carry national implications
the AICPA
the 1933 securities act applies to sales of securities, including stocks, bonds and notes that are issued for periods over ___________
9 months
what is rule 505 of Regulation D of the 1933 securities act?
it allows a securities sale of up to 5mil in 12 months without registering with the SEC. it can only sell shares to a limit of 35 non-accredited investors but unlimited sales to accredited investors
what is rule 506 of reg D of the 1933 securities act?
Rule 506 merely requires that the securities not be advertised to the general public and not be sold to more than 35 non-accredited investors. Any type of security may qualify for this exemption, including stocks and debentures. There is no limit on the dollar value of the issue, so long as the other restrictions are complied with.
if you incorporate your business and you put all assets into the corp in exchange for stock, what % do you have to own immediately afterwards to qualify as tax free?
80%
in a non-liquidating distribution of property, how do you report the transaction?
the same as if you’d sold the property at its fair market value. If you had stock you bought for $10 per share, and you gave it to an owner of the corp when it was worth $20 per share, you’d report $10 of capital gains per share.
what are the tax implications to a corp and the individual if a corp has land that it bought for 20k but is now worth 25k, and the corp distributes it to an individual? (the corp still owes 10k on the land and the individual assumes the debt)
the corp would report a gain of 5k, and the individual reports a gain of 15k. the individual is 15k better off than before the transaction.
when you put property into a corp in exhange for stock, how is your basis in the stock determined?
it is your previous basis in the property plus any gain recognized on the property. if you had an asset you paid 100k for but is worth 150k when you transfer it, if the transfer qualifies as tax free you have basis of 100k in the stock. but if the transfer doesn’t qualify as tax free and you have a 50k gain on the transfer, then your basis in the stock is 150k.
if an individual transfers equipment into a new corporation with a basis of 100k but a FV of 150k and the transaction is tax free, what basis does the business take in the asset
100k. when you transfer property into a corp and end up with 80% or more of the stock, the tax basis is retained by both parties
when property is conveyed to an owner, whether as a liquidating distribution or not, it is recorded as:
as if it were sold for FMV. if it is a capital asset then there is a capital gain equal to the FMV less the basis.
if you have preferred and common shareholders, 270k in your profits and earnings account, and you pay 200k dividends to preferred shareholders and 100k dividends to common shareholders, how do they each report them?
preferred report 200k of dividends, and common shareholders report 70k of dividends and 30k of nontaxable return of basis. When corporate distributions exceed earnings and profits, the earnings and profits are first allocated to the distribution made to the preferred shareholders with any remainder to the common shareholders
what is section 1245 property?
personal decpreciable equipment used in a business. equipment and machinery fall into this category
what is section 1250 property?
1250 property includes business land and most real property that is subject to depreciation
how are taxes determined when a company is buying and selling its own stock?
it doesnt matter- a company buying and selling its own stock is nontaxable
what are capital assets for a corporation?
For a corporation, capital assets are normally limited to investments in stocks, bonds, and land (held in hopes of appreciation in value). Buildings, equipment, and inventory are bought to produce revenues and do not qualify as capital assets.
what are the threshholds and percentages for the dividends received deductions?
up to 20% ownership is 70%20-80% ownership is 80%above 80% is 100%
what is the dividend received deduction applied to?
the lower of the dividend amount or the overall income amount. if operations actually lost 20k but the dividend was 100k, the dividends deduction percentage would be applied to 80k
how do capital losses work for corporations?
they can be carried back 3 years and forward 5 years but they can only reduce other capital gains. they do not lower taxable income
what rate are capital gains for corporations taxed at?
the ordinary tax rate for the corp. it’s not a different rate like it is for individuals. when a net capital loss is either carried back or forward it is always treated as a short term loss
when a corp sells an asset, what would create ordinary income?
if an asset was bought for 50k, had dep exp of 10k, and was sold for 60k, 10k would be ordinary income and 10k would be a 1231 gain. the dep exp is recaptured through the sale.
are dividend-received deductions allowed for non-domestic companies?
NO. if you get dividends from a non domestic corp it’s all taxable
what time period are section 197 items amortized over?
15 years
how are incorporation fees expensed?
the first 5k can be deducted in the first year, the rest is amortized over 180 months
how are doubtful accounts treated for tax purposes?
the expense has to be incurred- meaning only the amount of accounts actually written off are able to be deducted
how are charitable deductions calculated for corporations?
the amount deducted in one year is up to 10% of income before any dividends received deductions. this means that you would take income plus dividend income and take 10% of that, then subtract the DRD afterwards. any amount over that can be carried forward for 5 years
a bad debt can only be deducted to the extent that:
it was included in income.Bad debt expense is actually the removal of a previously recognized income that was never received
what are the 3 elements of deductible business expenses?
ordinary, necessary, and reasonable in amount
what happens if a owner/employee is getting paid 300k and 50k of that is determined to be unreasonable compensation?
that 50k will then be taxed at a dividend but it also becomes NOT-deductible for the corp
how is inventory treated as a charitable donation?
when it’s donated, the deduction amount is the lower of cost or fair value
business gifts up to $____ per person can be deducted
$25
what is the half-year convention under MACRS?
According to the rules of MACRS, personal property is treated as placed in service or disposed of at the midpoint of the taxable year, resulting in a half-year of depreciation for the year in which the property is placed in service or disposed of by the company.
what is the tax treatment when there is a like-kind exchange with boot?
the amount taxed is the lesser of the boot received or the gain.
when a company owns 80% or more of another, when are gains reported for tax purposes?
not until the gain is realized by a sale to an outside party.
the benefit of using the installment sales method is removed by:
being added to taxable income as an adjustment
what constitutes a personal holding corporation?
more than half of the value of the outstanding stock must be owned by five or fewer individuals at some point during the last half of the year. at least 60 percent of its ordinary income must be generated by dividends, interest, rents, royalties, and other passive income
is interest income on state and federal government obligations included in taxable income?
interest from federal obligations IS taxable but interest from state obligations IS NOT taxable
which of these are included in the gross income of the recipient during a divorce: alimony, child support, and property settlement?
only alimony. alimony is included in the recipient’s gross income, but child support and property settlements are not
if someone is supposed to receive alimony and child support, but receives much less then they are supposed to during the year, how is it taxed?
the amount is applied to child support first. If they were supposed to get 5k during the year in child support and they received 6k total, 5k would be child support and 1k would be alimony.
how is the exclusion ratio computed on an annuity contract?
you take the basis over the amount expected to be received, and then multiply that percentage by the total of the payments received that year. so if you paid 50k for an annuity and it was estimated that you would be paid out a total of 100k, your exclusion ratio is 50%
what are the types of capital assets for individuals?
Capital assets for individual taxpayers are personal property, such as household furniture and tools, and investment property, such as real estate and securities such as stocks and bonds.
how are gains and losses handled on personal and investment property for individuals?
Taxpayers must report gains and losses on investment property (such as their investment stocks and bonds) but only gains on personal property are reported. For example, if a taxpayer sells personal furniture at a gain, that capital gain must be reported. However, if the same personal property is sold at a loss, no deduction is allowed.
how are short and long term capital gains and losses treated by an individual?
the first step is to net the short term gain and loss and the long-term gain and loss.Then, you net the two together. A net capital loss of up to $3k can be deducted in any year in arriving at AGI, and any loss over that can be carried forward indefinitely.Also, when netting the overal gains and losses together, whatever is bigger determines whether it’s a long term or short term
how are gains/losses treated in related party transactions on the individual level?
gains are taxed but losses are not deductible
how much capital losses can someone filing “married filing separately” deduct in a given year?
this filing status can only deduct $1,500 instead of the regular 3,000
what is the treatment of non business bad debt?
the principal is written off in the year the loan is deemed worthless and it is considered short-term. any foregone interest is not deductible
how is basis determined when a gift is given?
it’s the basis of the gift in the hands of the gift-giver
if you inherit stock worth 10k, how much tax do you owe?
assets that are inherited aren’t taxable. You take a basis in them that’s the same as the fair value on the date of death.
how are qualified dividends taxed?
Qualified dividends are those dividends collected from a U.S. domestic corporation or a qualified foreign corporation. To encourage investments in these companies, the dividends are taxed at the same reduced rate that applies to long-term capital gains.
how is a like-kind exchange taxed when no cash is received?
the basis of the new asset is the same as the basis in the asset given up plus any cash paid, and no gain or loss is recognized
how is a trade that is not like-kind treated for tax purposes?
your basis in the new asset is its fair market value, and you subtract the basis in the asset you traded and that difference is your gain
if cash is received in a like-kind exchange what is the tax consequence?
a gain is recognized on whatever is the lower of the cash received or the gain on the exchange. If there was 5k received and the gain was only 3k, then a 3k gain is recognized. if the gain was 5k and cash received was 2k, then a gain of 2k is recognized
what is the rule on excluding a gain on the sale of a primary residence?
If certain rules are met, a couple filing a joint return can exclude up to $500,000 of the gain on their personal residence. The structure had to be their principal residence for at least two of the most recent five years. This exclusion cannot be taken in two consecutive years.
what are the rules for a C corp to use the cash basis of accounting?
c corps cant use the cash method unless their average annual gross receipts for the previous three years do not exceed 5 million. once they pass 5 million they must use accrual method for all future years
can partnerships use the cash basis of accounting?
yes, as long as none of the partners are a c corp. and there are no income limits for the cash basis
characteristics of ORDINARY ASSETS?
accounts and notes receivableinventorytrade or business assets OWNED FOR A YEAR OR LESS
characteristics of 1231 assets?
Trade or business assets owned for MORE than a year
if you inherit property and the donor’s basis is higher than FMV, how is it treated when you sell the asset for tax purposes?
You assume the lower FMV as your basis for computing losses, and you use the donor’s higher basis for computing gainsIf you sell it at a price in between the gain and loss basis, no gain or loss is recognized
If you inherit stock and sell it within a year is it a short-term or long-term gain?
You assume the holding period of the donor. So if they had only had it 6 months you start at 6 months when you inherit it- if they had it 5 years and you sell it the day after you inherit it, it is still a long-term gain
when the alternate valuation date is elected after a death, what is the basis for the property distributed?
it is the fair market value on the date that is six months after the date of death
if you (an individual) have ST cap losses of 10k and LT cap losses of 10k how much can you deduct of each one in the current year?
3k can be deducted, and the ST losses are deducted first.
in an involuntary conversion, how do you calculate any gain or loss?
the taxable gain is the LOWER of the actual gain on the transaction or the money left over after the replacement
what is the basic hobby loss rule?
you have to make a profit in 3 out of the most recent 5 years. so 3 years of losses in a row means you’re engaged in a hobby not a business.expenses related to a hobby are deductible only to the extent of revenues earned
how are benefits under cafeteria plans taxed?
they are only taxable if they are received in cash
what is the exception to the rule of stock dividends being non-taxable?
if the investor can choose between cash or a stock dividend, then it’s taxable.If some owners are given common stock but some are given preferred stock, then it’s taxable to all.
how are gambling gains/losses treated for tax purposes?
Winnings from gambling activities are reported within the income of the taxpayer. Losses are shown as miscellaneous itemized deductions. However, the losses deducted cannot exceed the amount of gambling winnings being reported
is interest on United States treasury bonds taxable?
nterest revenue on United States treasury bonds is taxable on a federal income tax tax return. Interest revenue on US Series EE bonds is tax exempt but only when it meets specific rules: the bonds must have been purchased by the taxpayer who was over 24 years old and the proceeds must be used to pay college costs for taxpayer, spouse or a dependent. Interest revenue on state and municipal bonds are always tax free on a federal return.
how are passive activity losses treated on an individual tax return?
Passive activity losses are not deductible on an individual income tax return. They are carried over and used to offset passive income in the future until used up. A passive activity is a business in which the taxpayer serves as an owner but does not materially participate in the operation. Rental activities and limited partnerships are also included in this category, regardless of the owner’s participation.
what is the loss deductibility exception dealing with losses from rental activity?
passive losses on rental activities are deductible up to $25,000 as long as the owner is an active participant in the management. The deductibility of this $25,000 is lost gradually if the taxpayer’s income is especially high. Passive losses are carried forward indefinitely so that they can reduce future passive activity gains.
if a taxpayer has a reasonably high income level but they get social security benefits, what percent of the SS is taxable?
usually 85%. So 85% of the SS benefits received would be included in taxable income
what can cause a scholarship to be considered earned income?
if the recipient has to work as a requirement of the scholarship, such as teaching 2 classes a week
If a couple separates and the husband gives the wife 5k before a legal separation decree is in place how is the 5k taxed?
It is not yet alimony so it is not taxable to the woman.
If you have rental homes can you deduct charitable contributions from the rental revenue?
No. You would have your rental revenue and expenses on a schedule E of a 1040 and a charitable contribution isn’t a necessary expense of maintaining rental properties. But, you could include the charity as an itemized deduction on the schedule A of a 1040.
how are social security benefits taxed in the income is relatively low?
SS benefits are not taxed if the income is low. 50% becomes taxable if the income is higher, and up to 85% can be taxable if the income level is relatively high
are cash gifts included in taxable income?
no- cash received as a gift is not included in federal taxable income, although in some situations a gift tax may apply
what is the number of days per year that determines whether a property is treated as a rental or not?
15 days. If a property is rented for less than 15 days, no rental income is includable and expenses attributable to the rental are not deductible. The property taxes are still deductible in full on Schedule A
how are dividends on a life insurance policy treated for tax purpose?
they are not taxable. They are viewed as deduction in the expense of the policy
what are the requirements for EE bond interest to be tax free?
the bonds must be issued after December 31, 1989, be purchased by the sole (or joint owner) and the buyer must be at least 24 years old when bonds are purchased. The proceeds of the bonds must be used to pay the higher education tuition and fees for taxpayer, spouse, or dependent.
how are a C corp’s net capital losses used?
deducted from the corp’s ordinary income up to 3k, then carried back 3 years and forward 5 years
what is the maximum deduction in one year for a section 1244 loss?
50,000- 100k if filing jointly
what are examples of 1245 property?
all depreciable personal property such as equipment and machinery. under section 1245 recapture, gains are treated as ordinary income up to the amount that was depreciated.
how does the 1231 lookback provision work?
1231 gains are applied to past 1231 losses and treated as ordinary income. whent the past losses are absorbed the balance is a 1231 gain.if you have 100k of 1231 gain this year, but 80k 1231 loss last year, then 80k this year is ordinary income and 20k is a 1231 gain
what is the statutory amortization period for a covenant not to compete that is related to business acquisition?
15 years
the section 179 deduction is limited to:
the net income from the business
what is the MACRS life of a non-residential real property such as an office building?
39 years. MACRS requires that such a building is depreciated on the straight line bassis.BUT- the mid-month convention applies to this type of property which means no matter when it is placed into service it is considered to be mid-month.
is debt relief considered boot?
yes. that and cash
what are the 2 categories of qualified moving expenses?
moving the household goods, and lodging during the move. temporary living expenses are NOT deductible
what is the rule when a taxpayer make a charitable contribution in connection with admission to an entertainment event?
the taxpayer can only deduct the difference between the amount paid for admission and the fair value of admission. If you pay 100 but regular admission is only 50, you can deduct 50.
what is the rule with donating ‘ordinary income property’ to charity?
if you’ve owned it for less than a year the amount you can deduct is the lower of cost or market.If you’ve owned it more than a year, then you can deduct the FMV
what is the income percentage limit of donating long term capital gain property to charity?
you can only deduct up to 30% of your AGI in long term capital gain property.
what is the gross income test amount for someone to be claimed as a dependent by someone else?
3,900
how does the hope/american opportunity credit work?
It gives the taxpayer a credit of 100% of the first 2k and 25% of the next 2k of qualified post-secondary education expenses. So the total can be $2,500. The credit doesn’t begin phasing out for married filing jointly until the income hits 160k of AGI.
how does the child care credit work?
you can get a credit for eligible childcare expenses of 35% of the the expenses if you have AGI of 15k or less. If your AGI is more than 15k, the credit goes down 1% of your expenses for every 2k of AGI above 15k, but it is not reduced to less than 20% of the expenses.
how does the foreign income tax credit work?
it’s the lower of the foreign taxes paid, or the amount of US taxes that would be paid on the foreign income
how are corporate startup costs treated for tax purposes?
5k of organizational costs can be deducted in the first year- anything over 50k reduces the 5k that may be deducted in the first year though. Legal fees are allowed, but commissions paid to an underwriter are not. stock issue costs are not deductible either.
what percentage of ownership must consent to revoke the S status of an S corp?
more than 50%
what does article 2 of the UCC govern?
governs the sale of new and used goods, by both merchants and non-merchants
what items are stated separately for partnership income?
interest incomemunicipal interest incomesection 1231 gaincharitable donationslife insurance premiums on partner’s livesordinary income/loss
what is the statute of limitations on the IRS assessing additional taxes?
3 years unless the amount of income omitted is more than 25% of the income reported on the taxpayer’s income tax return
if a corp has E&P of 9k and it distributes 9k of cash to its sole shareholder, and land with a FMV of 40k and a basis of 5k, what is the shareholder’s taxable income because of the transaction?
if a corp distributes appreciated property, its E&P goes up by the difference between FMV and its basis in the property.So in this case, the total E&P is raised from 9k to 44k (9+35). So the shareholder has a gain of 44k and the remaining 5k is a return of capital and is nontaxable.
what is a type A reorg?
a merger or consolidation under state law. it is stock for asset, the target corp dissolves
what is a type B reorg?
stock for stock. Acquirer must own at least 80% of target after the transaction. Only voting stock can be used by acquiring. No boot allowed.
what is a type C reorg?
stock for asset. doesn’t have to be statutory. Only voting stock and can used by acquiring. Boot is allowed but it cannot exceed 20% of the consideration provided by acquiring. Acquiring must acquire substantially all of target’s assets(90% of net asset value and 70% of gross asset value)
If you get stock as a GIFT, what is your basis?
If the owner’s basis is less than FMV on the date of the gift, then your basis is the same as who gave it to you.But, if the FMV is less than the owner’s basis at the date of gift, then you have a separate gain basis and a loss basis. Your loss basis is the lower amount, and your gain basis is the higher amount.
What is your basis in INHERITED property?
The FMV of the property at the date used to value the property. *this can be the date of death or the alternate date as chosen by the executor
how is the basis in a jointly-owned property calculated?
The original basis is divided by the two. If you have 350k in basis, each has 175k in basis. At the death of one person, that person’s half is given to the survivor at FMV. So if the FMV of the property was 400k, then the survivor gets basis of 200k plus their original basis of 175k for a total basis of 375k in a property with a fmv of 400k
what does rule 506 D allow?
that the securities are NOT advertised to the public, and that they are not sold to more than 35 non-accredited investors.There is NO LIMIT on the dollar value of the issue- and they can be either stocks OR debentures
what is the primary thing to win a section 11 claim?
that there was a material misstatement in the registration statement on the effective date, that they can trace their shares to that registration statement, and that they suffered damages
if you give someone a check for 120k and they don’t deposit it within 30 days and then there is a bank failure, you are off the hook for:
the extra 20k. The FDIC will cover 100k.
what right does one cosurety have against another cosurety?
contribution. this means that if one surety pays more than his fair share, he can recover from the other surety
under the UCC, the party to whom a check is present for payment is the:
drawee. this is the bank.
what is one reason for which the corporate veil might be pierced?
if the corp was undercapitalized when it was formed
if you estimated your taxes in 2012 as 5k and then in 2013 you found the exact amount to be 6k, you:
include the remaining 1k in your 2013 tax return
what is the total allowable medical expenses amount?
20k. only medical expenses in excess of 10% of AGI are allowable as a deduction
a merchant’s firm offer has to remain open for:
a reasonable time
what is the only thing that can cause a gain in a partnership distribution?
when cash is distributed that exceeds the partner’s basis
are an insurance company’s securities regulated by the securities act of 1933?
YES
what is the medicare surtax obligation and how is it calculated?
3.8% of the lesser of net investment income or the excess of AGI over the AGI threshold which is total AGI minus 250k
foreign currency exchange gains or losses in the course of normal business are ______
ordinary
for an S corp, what all will increase or decrease a shareholders basis?
everything will affect the shareholders basis- even capital gains and losses
a C corps net capital losses are carried back:
back 3 years and forward 5. Remember that these are capital losses and not NOLs.NOLs can be carried back 2 years and forward 20
what a bond is amortized for tax purposes, what method is used?
constant yield to maturity method
even if the workload is uneven, if no agreement to the contrary exists, profits in a partnership will be:
divided equally- even if one partner does more work than the other. there needs to be an agreement if profits are different than 50/50
the person who goods must be delivered to under a negotiable bill of lading
the consignee of the bill of lading
if unionized employees go on strike, when must their company hire them back?
after a ‘unfair labor practice’ strike- not if the strike is over wages
which court is not of ‘original jurisdiction’
the united states court of appeals
do proposed regulations have the effect of law?
no
