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CPA EXAM > Tax > Flashcards

Tax Flashcards

1
Q

Gain on Personal Residence

A

If a taxpayer has owned and occupied a personal residence for at least two out of the last five years, $250,000 of a gain may be excluded from income for a single taxpayer

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2
Q

Order of Obligations - Secured Creditor

A
  • first to pay expenses incurred in selling the collateral
  • then toward the debt owed to the secured party,
  • next to any junior or inferior secured parties with rights in the collateral.
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3
Q

NOL - Carryback/Carryforward

A

Back 2, forward 20

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4
Q

Standard Deductions

A

MFJ - 12,400
Single - 6,200
Personal Exemption - 3,950

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5
Q

Personal Exemption Phase Out

A

Single AGI - 254,200

MFJ AGI - 305,050

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6
Q

Cash-Basis Accounting

A

Allowed: Individuals w/ a Business

Not Allowed: Corporations, Partnerships w/ C-Corp Partner, Inventory

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7
Q

Deductions to Arrive at AGI

A
  • MSA/HSA Contributions
  • Moving Expenses
  • Deductible part of Self-Employment Tax
  • Self-Employed SEP, SIMPLE, and Qualified Plans
  • Self-Employed Health Insurance Premiums
  • Investment penalties for early withdrawal
  • Alimony Paid
  • IRA Deduction
  • Student Loan Interest
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8
Q

Section 179 Expenses

A

Max Deduction: $25K, phased out for purchases in excess of $200K
- New/Used Equipment placed into service during the year

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9
Q

Carryover - Section 179

A

Excess of 179 expense

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10
Q

Carryover - Passive Activity

A

No Carryback

Carry forward indefinitely

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11
Q

Carryover - Investment Interest Expense

A

Expense > Income, Carry forward indefinitely

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12
Q

Carryover - Charitable Contributions

A

Carry forward - 5 years

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13
Q

Carryover - AMT Paid

A

Carry forward indefinitely

Apply against future income tax only (not against AMT liabilities)

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14
Q

Carryover - Capital Loss (Individual)

A

Up to $3K of capital loss, Carryforward remaining portion indefinitely, retains original character (ST/LT)

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15
Q

Carryover - Capital Loss (Corporation)

A

3 years back, 5 years forward

Carryforward as a STCL ONLY.

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16
Q

Installment Sales

A

Gross Profit/Contract Price

Contract Price = Sales Price - Buyer Liability

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17
Q

Home Mortgage Interest

A

Mortgage Interest deductions on loans up to $1M

Home Equity Interest deductible on loans up to $100K

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18
Q

Business Gifts - Schedule C

A

$25/person is deductible

Service awards up to $400 are deductible

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19
Q

Business Losses

A

Business losses ONLY offset active business income

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20
Q

Passive Losses

A

Passive losses don’t offset active income

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21
Q

Limited Partnership - Active/Passive

A

Considered Passive Income

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22
Q

Interest/Dividend Income - Active/Passive

A

Considered portfolio income (active)

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23
Q

Personal Property - Convention

A

Mid Year/Mid Quarter

Mid-Quarter if 40% or more of all purchases occur in 4th quarter

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24
Q

Real Property - Convention

A

Mid-Month

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25
Q

Leasehold Improvements - Convention

A

39 Year Straight-Line

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26
Q

Business Start-Up Costs

A

Deduct up to $5K of start-up costs
Reduced for any amount over $50K
Remaining costs are amortized

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27
Q

Medical Expenses - Schedule A

A

Deductible only once 10% AGI Threshold is reached
Total Medical Expenses - 10% AGI
Accident/Disability Insurance is not deductible

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28
Q

Foreign Taxes Paid - Schedule A

A

Foreign Income Tax - Deductible
Foreign Real Estate Tax - Deductible
Personal Property - Not deductible
Tax Assessments - Not deductible

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29
Q

Investment Interest Expense - Schedule A

A

Deductible only to the extent of net investment income

Gross Investment Income - Investment exp. in excess of 2% AGI = Net Investment Income

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30
Q

Mortgage Points - Schedule A

A

Deductible if it represents prepaid interest on purchase of a new home or improving a home

Refinance points are amortized over the life of the mortgage

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31
Q

Mortgage Interest Expense - Schedule A

A

If used to purchase a house, deductible on Schedule A on debt up to $1M

Refinance interest expense deductible up to $100K of debt

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32
Q

Charitable Contributions - Schedule A

LTCG Property + related to Charity

A

Deduction for FMV of property

Up to 30% of AGI

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33
Q

Charitable Contributions - Schedule A

STCG Property + not related to Charity

A

Deduction for Adjusted Basis in property

Up to 50% of AGI

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34
Q

Miscellaneous Schedule A Deductions

A

Must exceed 2% of AGI

  • Education - if req’d to keep job
  • Business Travel Expenses
  • 50% of Meals/Entertainment
  • Union Dues
  • Tax prep fees
  • Legal fees to collect alimony
  • Appraisal fees to value: Casualty Losses & Charitable Contributions
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35
Q

Deductions not subject to AGI Phase out

A
  • Medical
  • Casualty
  • Gambling
  • Investment Interest Expense
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36
Q

Casualty Loss

A

Lower of FMV of Property or Basis - Insurance Proceeds - $100 per casualty - 10% of AGI

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37
Q

Qualifying Child

A
  • Resident

- Under age 19, 24 if student

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38
Q

Qualifying Relative

A
  • Citizen
  • 50% of support
  • Can’t earn more than personal exemption
  • Social Security does not count as income.
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39
Q

Minor Income Taxed at Parent’s Rate

A

Child’s unearned income - early withdrawal penalties - $1K - greater than $1K or child’s itemized deduction related to unearned income

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40
Q

MFJ - Accounting Method

A

Different accounting methods are acceptable if they each own a small business

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41
Q

Alternative Minimum Tax Add-Backs

A
  • Difference between FMV of stock options vs. amount paid
  • No state income tax, real estate tax, or personal property allowed for AMT
  • No personal exemptions or standard deductions
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42
Q

Self-Employment Tax

A

15.3% of Net Profit

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43
Q

American Opportunity Tax Credit

A

First 4 yrs. of post secondary education
100% of first $2K, 25% of next $2K = $2,500

Includes tuition and course-related supplies

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44
Q

Lifetime Learning Credit

A

Per taxpayer, not refundable

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45
Q

Estimated Tax Payments

A

Lesser of:

  • 90% Curent Total Tax
  • 100% PY Total Tax
  • 110% PY Total Tax (if AGI is $150K or more)
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46
Q

Statute of Limitations for Tax Audit

A
  • 3 years (generally)
  • 6 years if 25% or more of gross income was omitted from the tax return
  • No Statute of Limitations for Fraud or Failure to file

“Clock” starts on due date or the date return was filed - whichever is earlier.

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47
Q

Tax Refund Claims

A

Must be claimed within:

3 years of return due date, or 2 years of being paid (whichever is later)

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48
Q

Dividend Income

A

Treated as Ordinary Income, can’t offset dividends with a capital loss

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49
Q

Life Insurance - Taxable/Not taxable

A

ER can pay premiums for up to $50K in coverage w/o being included in income, greater than $50K counts as income

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50
Q

Scholarships - Taxable/Not taxable

A

Not taxable if not in return for services rendered (i.e. GA gets scholarship for teaching classes)

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51
Q

Tax Free Interest Income - Taxable/Not taxable

A

State & Municipal Bonds
US EE Savings Bonds

Note: Treasury bonds ARE taxable.

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52
Q

Tax-Free Dividend Income - Taxable/Not taxable

A
  • Some stocks
  • S-Corporations
  • Life Insurance
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53
Q

Social Security Benefits - Taxable/Not taxable

A

Up to 85% of Social Security income can be taxed for people in higher income brackets

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54
Q

Unemployment - Taxable/Not taxable

A

Taxable

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55
Q

Damages Awarded - Taxable/Not taxable

A

Any “make-whole” payment - Not taxable

Punitive Damages - Taxable

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56
Q

Worker’s Comp - Taxable/Not taxable

A

Not taxable, considered a “make-whole” payment

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57
Q

Divorce, Alimony, and Child Support - Taxable/Not taxable

A

Not taxable & not deductible - Divorce, Child Support

Taxable & Deductible - Alimony

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58
Q

Net Operating Loss - Taxable/Not taxable

A

Carryback 2 years, Carryforward 20 years

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59
Q

IRA Contributions - Taxable/Not taxable

A

Traditional IRA - Deductible

Roth IRA - Not Deductible

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60
Q

Filing Status - Married Filing Jointly

A
  • Must be married at end of year
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61
Q

Filing Status - Head of Household

A
  • Has a dependent child
  • Provides more than 50% support
  • Lives with them more than 50% of the year
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62
Q

Filing Status - Qualifying Widower

A
  • Has a dependent child

- Gets MFJ status for year of death + 2 tax years

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63
Q

Affordable Care Act

A

Penalty for not having minimum essential coverage:
$95 per person
1% of Household income over threshold

3 month grace period for being uninsured

64
Q

Partnership Basics

A
  • Partnerships are not a legal (taxable) entity

- Income and Expenses flow through to the partner via a Form K-1

65
Q

Property in exchange for Partnership Interest

A
  • Non-taxable event: No G/L recognized
  • Partner’s Basis = Basis of Property Contributed
    Exception: Property has a liability that exceeds the basis Capital Gain
66
Q

Services in exchange for Partnership Interest

A
  • Taxable event
  • Treated the same as compensation
  • Use % of Partnership Interest x FMV of Partnership = Taxable Income

Taxable income amount becomes basis

67
Q

Partnership Holding Period of an Asset

A
  • Inherits holding period of asset contributed

- Exception: Inventory, holding period begins when contributed

68
Q

Startup Costs for a Partnership

A
  • Tax treatment same as individual ($5K deductible, reduced after $50K total, rest is amortized)
69
Q

Deductions to Arrive at Partnership Income

A
  • COGS
  • Wages
  • Guaranteed Payments
  • Business Bad Debt
  • Interest Paid
  • Depreciation
  • Amortization
70
Q

Partnership Losses

A
  • Cannot be taken below basis

- Loss is carried forward until basis is available

71
Q

Guaranteed Payments

A

Appear in partner’s income during year in which FY closes

72
Q

Partnership Benefits

A

Treated as guaranteed payments and are self-employment income
i.e. Health Insurance, Life insurance, etc.

73
Q

Guaranteed Payments (Formula)

A

% Share of Ordinary Partnership Income from K1 + Guaranteed Payments - % share of 179 expenses = Self Employment Income subject to self-employment tax

74
Q

Partner’s Basis from Property Contribution

A
  • Contribution of Property: Property’s original basis
  • Compensation for services: FMV of % of partnership ownership
  • Purchase of Interest: Amount of Purchase = Basis
  • Interest by Gift: Gift Basis rules apply
75
Q

Items not Deductible on Schedule K (flow to Partner’s K-1)

A

Investment Interest Expense
Foreign Tax Paid
Charitable Contributions
179 Expense

76
Q

Items not Counted as income on Schedule K

A

Passive Income
Portfolio Income
1231 G/L

77
Q

Partnership Basis (Formula)

A

Beginning Basis + Capital Contributions + Share of Ordinary Income + Capital Gains + Tax-Exempt Income = Ending Partnership Basis

78
Q

Partnership Basis Decreases

A
  • Money Distributed
  • Adjusted Basis of Property Distributed
  • Share of Ordinary Losses
  • Partnership is relieved by a liability (considered a distribution)
79
Q

Partnership Basis Increases

A
  • Partnership Loan

Note: Guaranteed payments do not effect basis

80
Q

Order of Adjustment to Basis

A
  • Increase basis in share of liabilities
  • Increase basis from all income items
  • Decrease basis for distribution
  • Decrease basis for losses
81
Q

Partnership Taxable Year

A

must be the same as 50% of partners and use the same tax year for 3 consecutive years

82
Q

Death of a Partner

A

Taxable year only closes with respect to partner and their partnership interest

83
Q

Partnership can’t use cash-basis if:

A
  • Partnership has inventories
  • Tax Shelter
  • Corporation is a partner
  • Gross receipts of $5M or more
  • Exception: Gross receipts of $1M or less and maintains inventory - OK for cash-basis
84
Q

Partnership Termination

A
  • Less than 2 partners

- 50% of partnership interest sells within 12 month period - terminates immediately

85
Q

Sale of Partnership Interest

A

Results in a Capital Gain/Loss
Amount Realized - Basis in Partnership = G/L

Basis = Capital Account + Liabilities Assumed

Any assets sold that are not capital in = Ordinary Gain (Unrealized Receivables, Appreciated Inventory)

86
Q

Partner’s Share of Ordinary Gain

A

FMV of Assets - AB of non-capital assets = Ordinary Gain x Partnership Interest % = Partner’s share of Ordinary Gain

87
Q

Distribution - Order of Basis Reduction

A
  1. Money Received
  2. AB of unrealized receivables and inventory
  3. AB of other property
88
Q

Losses - Liquidating/Non-liquidating Distributions

A

A loss can ONLY occur in a liquidating distribution.

Requirements for loss:

  1. Money was rec’d
  2. Unrealized receivables rec’d
  3. Appreciated inventories rec’d
89
Q

Shareholder’s Basis in a Corporation (Formula)

A

AB of Property Transferred - Gain Recognized - Boot Rec’d = Shareholder Basis

If shareholders have 80% control after a property transfer, no taxable event occurs.

90
Q

Corporation’s Property Basis (Formula)

A

Transferor’s Basis + Gain Recognized by Shareholder = Basis

91
Q

Property - Corporations & Shareholders

A

Both shareholders and corporations use ADJUSTED BASIS of property for basis purposes, NOT FMV of property.

92
Q

Sec. 1244 - Small Business Corps

Loss on Stock

A

Loss on worthless stock is an ordinary loss.

  • Taxpayer must be the original stock owner.
  • Taxpayer must be individual or partnership
  • $50K single or $100K MFJ, remainder is capital loss
93
Q

Estimated Tax Payments (Corporations)

A
  • Req’d if more than $500 in tax liability is expected or:
  • 100% CY liability
  • 100% PY liability
94
Q

AMT (C-Corp Formula)

A 
Tax Income + Preferences +/- Adjustments = Pre-ACE
\+/- ACE Adjustments = AMTI
AMTI - $40K Exemption = Tax Base 
Tax Base x 20% = TMT
TMT - Regular Tax = AMT
95
Q

Pre-ACE Adjustment

A
  • Personal Property - use 150% MACRS, not 200%

- Construction must use percentage of completion method.

96
Q

ACE Adjustment

A
  • Municipal Bond Interest
  • Life Insurance Proceeds
  • 70% DRD
  • Organizational Expenditures
  • AMT paid gets Carried Forward indefinitely (no carryback)
97
Q

Corporate AMT Exemptions

A
  • Exempt in year 1

- Year 2: if gross receipts are

98
Q

Corporation Organization Costs - Amortization

A

Amortization of costs begins in the month the corporation begins business activity.

Costs associated w/ offerings are NEVER deductible or amortized.

99
Q

C-Corporation Charitable Deductions

A

Limited to 10% AGI

The BOD can authorize Charitable Contributions up to March 15th ad have them count for the previous tax year.

100
Q

Dividends Received Deduction

A

Only allowed if no Consolidated Return is filed.

80% Interest = 100% DRD
20-29% = 80% DRD

101
Q

Corporate Losses - Loss on Sale where taxpayer owns >50%

A

Interest is disallowed

102
Q

Corporate Losses - Capital Losses

A
  • Only deductible to the extent of capital gains
  • Net STCG are taxed at ordinary rates
  • Can carryback losses 3 years, carryforward 5 years as STCL.
103
Q

Corporate Losses - Bad Debt

A

Classified as ordinary losses

104
Q

Casualty Loss - Corporates

A

No floor on corporate casualty loss

Destroyed: Loss = AB - Proceeds from Insurance
Partially Destroyed: Lesser of FMV or AB - Proceeds from Insurance

105
Q

Net Operating Loss

A

If loss includes NOL Carryforward, reduce the loss (add back the amount) to get the loss w/o the carryforward.

Carryback the NOL 2 years starting with the earliest year and reduce the taxable income there and then move to most recent year.

Leftover = This year’s NOL.

106
Q

Corporations - Investment Interest Expense

A

NOT limited to investment income like individual taxation.

107
Q

Corporate Form M-1

A
  • Reconciles book to tax income before Net Operating Loss/Dividend Received Deduction
  • Permanent Differences: Tax-exempt interest
  • Temporary Differences: Accelerated depreciated tax, straight-line, etc.
108
Q

Corporate Form M-2

A
  • Reconciles beginning to ending Retained Earnings

- N/I + Other Increases - Dividends Paid - Other Decreases = Ending Unappropriated Retained Earnings

109
Q

Corporate Form M-3

A

Same as M-1, but for Corporations w/ $10M+ in assets.

110
Q

Affiliated Corporations (80% Ownership)

A
  • Consolidation election is binding
  • Dividends are eliminated: G/L are deferred
  • One AMT Exemption
  • One Accumulated Earnings tax
  • Parent must have 80% of the voting power and own 80% of the stock value.
111
Q

Corporate Distribution - Shareholders

A
  • Use FMV of Property
  • Distribution is a dividend to the extent of current accumulated earnings and profits (ordinary income)
  • Remainder is return of basis, then capital gain
112
Q

Corporate Distribution - Shareholders (Formula)

A

Dist Amount = FMV of Property + Cash - Liabilities Assumed

Shareholder Basis = FMV of Property + Cash Rec’d

113
Q

Corporation Distribution - FMV Below Basis

A

NO LOSS.

114
Q

Corporate Distribution - Capital vs. Not-Capital

A

Capital: Capital Gain

Not-Capital: Ordinary Income

115
Q

Order of Distribution Treatment

A
  1. Dividend to the extent of current & accumulated earnings & profits
  2. Shareholder basis is then exhausted
  3. Remainder is Capital Gain
116
Q

Accumulated Earnings & Profits (Formula)

A

Beginning AE&P + Net Income + Gain on Distribution - Distribution (cannot create deficit) - NOL of prior years = Ending AE&P

117
Q

Accumulated Earnings & Profit

A

All Positive: Deplete current amount w/ the dividend first
Current +, Accumulated -: Deplete only current amount
Both Negative: Current E&P cannot add to the deficit

118
Q

Stock Redemptions

A

Result in a Capital Gain to the shareholder

119
Q

Liquidation - Capital Property vs. Not Capital

A

Capital: Capital Gain
Not Capital: Ordinary Income

Gain characteristic is the same for both the corporation and the shareholder.

120
Q

Liquidation - Loss Treatment

A

Corporation: Depends on if property is capital in nature, otherwise ordinary loss
Individual: Capital Loss only

121
Q

Complete Liquidation of a Sub

A

No G/L to parent Company.

122
Q

Consent Dividend

A
  • Consented by the BOD but not yet paid.

- Treat as if distributed by the end of the year.

123
Q

Personal Holding Companies

A
  • Banks/Financial Institutions cannot be PHC
  • 5 or fewer individuals own more than 50% of the stock
  • 60% of the income must be passive
  • PHC tax is a self assessing 20% tax rate.
124
Q

Corporate Accumulated Earnings Tax Credit

A

Greater of $250K or the legitimate balance based on future needs

125
Q

S- Corporations - Shareholders

A
  • Only individuals, estates, and trusts
  • Domestic Only
  • Up to 100 shareholders allowed
  • Only one class of stock allowed
126
Q

S-Corporation Election

A
  • Must be made by March 15th and counts as being an S-Corp since the beginning of the year.
  • Must use calendar tax year.
  • 100% of shareholders must consent
  • Termination: 50% of shareholders must consent
127
Q

S-Corp Rules

A
  • No Foreign taxes paid deduction allowed
  • No Investment Interest Expense allowed
  • No 179 Deduction
  • No 1231 G/L
  • No Charitable Contributions
  • No Portfolio Income
128
Q

S-Corp Shareholder Basis (Formula)

A

Beginning + Share of Income Items - Distributions - Non-deductible expenses - Ordinary Losses = Ending

129
Q

Built-In Gains (C-Corp to S-Corp)

A

Prevents a C-Corp from avoiding double taxation by converting to an S-Corp

FMV of Assets @ S-Corp Election Date - AB of Assets = Built-in Gain x 35% Corporate Tax Rate

130
Q

Gift Taxation Exclusion - Donor

A

$14K exclusion for ea. spouse is allowed

131
Q

Gift Tax - Donee

A

Property rec’d through gifts are not income to the recipient.

  • Loss on Sale of Property - Basis is FMV at date of gift
  • Gain on Sale of Property - Basis is the same as donor

No G/L if Donor Basis

132
Q

Gift Tax Returns

A
  • Calendar-year tax basis only

- Due April 15th

133
Q

Trust Taxation - Complex Trust

A
  • Income distributions are optional
  • Accumulation of income OK
  • Charitable Contributions OK
  • Distribution of Trust Corpus is allowed
  • Exemption: $100
134
Q

Trust Taxation - Simple Trust

A
  • Income distributions are mandatory
  • Accumulation of income is disallowed
  • No Charitable Contributions
  • Distribution of Simple Trust Corpus is disallowed
  • Exemption: $300
135
Q

Estate Tax Exemption

A

First $5.3M is exempt

40% taxation on amounts over $5.3M

136
Q

Medical Expenses after Death

A

Paid after death but incurred w/in one year of death go on decedent’s personal tax return.

137
Q

Taxable Gross Estate (Formula)

A 
Cash + Property FMV @ Death 
Less: Funeral Costs
Debts/Mortgages
Casualty Losses
Charitable Bequests
State Death Tax
138
Q

Tenancy by Entirety

A

1/2 of Marital assets go to decreased spouse’s estate

139
Q

Tenancy in Common

A

FMV of deceased’s property goes to heirs

140
Q

Estate Tax - Life Insurance Proceeds

A

Life insurance proceeds in husband’s name go onto his estate regardless of beneficiary

141
Q

DNI (Formula)

A

DNI = Taxable Income - Expenses (from income production)

142
Q

AB in Property

A

Cost + Expenses + Debt + Back taxes/Interest Paid = Basis

143
Q

Gifted Property

A

Gain: Use donor’s basis
Loss: Lesser of donor’s basis or FMV at time of distribution

144
Q

Sale of an Asset Gain Calculation

A

Selling Price (Cash Rec’d + Liability) - AB of Property = Gain

145
Q

Like-Kind Exchange

A

Lesser of Realized Gain or Boot Rec’d

146
Q

Boot (Formula)

A

Cash Rec’d + Unlike Property Rec’d + Liability passed to other party

147
Q

Involuntary Conversion

A

Occurs when you receive money for a property involuntarily converted.

No gain if you reinvest the proceeds completely.

148
Q

Wash Sale

A
  • 30 day rule applies
  • Disallowed loss adds to basis of new stock
  • New stock takes on date of acquisition of old stock
149
Q

Sales between Related Parties

A

Seller cannot take loss on sale, but the gain is always recognized.

150
Q

Capital Gain/Loss Property Classification

A
  • Inventory is NOT a capital asset.
  • Business property is NOT a capital asset.
  • A/R is NOT a capital asset.
  • Goodwill is a capital asset.

Capital Assets: personal investments over 1 year.

151
Q

Capital G/L (Non-Corporations)

A
  • Net all STCG & STCL
  • Net all LTCG & LTCL

Carryforwards always maintain their original character.

152
Q

Capital Losses - Individuals

A

Offset $3K of ordinary income w/ a $3K capital loss

No carryback allowed for individuals.

153
Q

1231 Property

A

Real or Personal Property held more than 1 year.

154
Q

1231 G/L

A

Gain: LTCG
Loss: Ordinary Income

155
Q

1245 (Personalty) Depreciation Recapture

A

You sell a piece of depreciated machinery at a gain.
Amt. of Depreciation is ordinary income.
Remainder is 1231 Capital Gain.

There are NO 1245 Losses.

156
Q

1250 (Realty) Depreciation Recapture

A

You sell a building at a gain.
There are NO 1250 Losses.
Entire gain is 1231 gain.

Corps: Sec.291 requires 20% of depreciation classified as an ordinary gain. Remainder is 1231 LTCG.

CPA EXAM (25 decks)

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