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CFP TAX > Tax Fundamentals > Flashcards

Tax Fundamentals Flashcards

0
Q

Who provides the official interpretation of the Tax Code

A

US Treasury Department

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1
Q

What is the highest source of authority next to the Code. Regulations have the full force and effect of law.

A

Treasury Department Regulations

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2
Q

What is the Internal Revenue Bulletin (IRB)

A

Announces official rulings and procedures of the IRS, and publishes Treasury decisions, Executive Orders, Tax Conventions, legislation, court decisions, and other items of general interest.

Rules & Reg’s do not have have the full force of law

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3
Q

Revenue Rulings

A

Interpretations of the tax law with regard to taxable income, deductions, credits.
Do not have the full force of law
Gives guidance to IRS personnel and taxpayers

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4
Q

Revenue Procedures

A

Internal Management practices & procedures of the IRS as they affect the rights or duties of a taxpayer under the law

IRS uses Revenue Procedures to distribute info to general public

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5
Q

What are Letter Rulings?

A

at request of tax payer, the National Office of the IRS will describe it’s position on specific tax issue.

  • applies only to taxpayer who requested it
  • IRS does not publish PLR’s
  • PLR cannot be cited as precedent by anyone other than taxpayer
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6
Q

Determination Letters

A

issued by area district director in response to a taxpayer request regarding a completed transation

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7
Q

Technical Advice Memorandum (TAM)

A

a ruling by the IRS National Office prompted by a request from an agent performing an audit who needs clarification that cannot be provided by the local office

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8
Q

The Federal Judicial System has three trial courts..what are they

A
  1. US District Court - Jury available
  2. US Court of Federal Claims - No Jury
  3. US Tax Court - No Jury (19 Judges)
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9
Q

US District Court - Features and Characteristics

A
  1. Tax/Nontax legal matters, 1 Judge per court

2. Jury available. Taxpayer must first pay any deficiency

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10
Q

US Court of Federal Claims

A
  1. 16 Judges, Monetary Cases against US
  2. No Jury
  3. Taxpayer must pay deficiency first and then sue for refund
  4. Court base decisions on appeals decisions rendered by federal district Court of Appeals, not the Circuit Court of Appeals
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11
Q

US Tax Court

A
  1. 19 Judges, Tax Cases
  2. Taxpayer does not have to pay deficiency prior to trial
  3. Small Case Division - $50k of less. No Appeal allowed
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12
Q

US Appellate Courts

A
  1. 11 Geographical Circuit Courts of appeals

2. District Courts, Tax Court, and Court of Federal Claims must follow this court’s precendents

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13
Q

Research Institute of American (RIA) publishes…

A

Federal Tax Coordinator - multi volume, tax planning strategies

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14
Q

Commerce Clearing House

A

Publishes Standard Federal Tax Reporter…IRC regulations

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15
Q

Business Purpose Doctrine

A

Transaction to be effective for income tax purposes, it is intended to achieve genuine business purpose

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16
Q

Substance over form doctrine

A

IRS looks through the legal formalities of a transaction to determine it’s economic substance

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17
Q

Assignment of Income Doctrine

A

known as ‘the fruit and the tree” - taxpayer who earns the income and is the source of the income cannot assign the income to someone else for income tax purposes. Taxpayer will be taxed on the income

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18
Q

Tax Benefit Rule of Doctrine

A

this rule converts nontaxable receipts into taxable income. Taxpayer is reimbursed medical expenses paid and deducted in previous year. Because the taxpayer received a tax benefit via the previous year’s medical deduction, the application of the rule results in the taxability of the medical reimbursements

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19
Q

Constructive Receipt Doctrine

A

No substantial limitation or restriction on taxpayer’s right to bring the funds under the personal control, the income is taxed to the taxpayer. Example: payroll check issued on Dec 31 but picked up in Jan. Still must be declared in the year it was written.

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20
Q

Income from Partnerships

A
  1. Income taxed to partners at their own individual rate
  2. Partnership file an informational return (Form 1065)
  3. Each partner receives a K-1 indicating his share of income
  4. Income from General Partnership K-1 is typically self employment income
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21
Q

S Corporations Income

A
  1. Shareholders, rather then the corporation, pay tax on S Corporations Income
  2. Shareholder’s receive K-1
  3. EE of S Corp will received W-2
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22
Q

Income in Respect of a Decedent (IRD)

A
  1. Income generated by assets of estate that is distributed from the estate to beneficiaries
  2. Any income not distributed is generally taxed to the estate/trust according to estate and trust tax schedule
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23
Q

Income in Community Property States

A

1 One-half of earnings for each spouse considered owned by the
other spouse.
2. Spouses living apart in Community Property States - spouse (former spouse) will be taxed only on the their own actual earnings if they live apart for entire year, do not file a joint return, and do not transfer any of the income between themselves during the year

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24
Q

Interest on Below Market Loans

A
  1. Lender issues a below market loan, lender may be required to input (recognize) interest income or the borrower may receive an interest expense deduction when in fact, no interest has been received or paid.
    a. Imputed interest calculated using the Federal Government’s borrowing rate, compounded semi annually and adjusted monthly.
    b. If interest is charged is less than Fed. Fund rate, the imputed interest is the difference using the Fed rate and the interest determine using the actual rate
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25
Q

Imputed Interest Rules apply to the following types of below market rate loans

A
  1. Gift Loans - Lender interest income, borrower interest expense. Gift was made to borrower in amount of imputed interest.
  2. Compensation Loans - Corporation has interest income & compensation expense for imputed interest. Borrower has compensation income & interest expense, possibly deductible.
  3. Corporation- Shareholder loan to non-EE shareholder. Corporation interest income & dividend distribution for imputed interest. Shareholder will have dividend income & interest expenses
  4. Tax Avoidance Loans - loans that significantly affect borrower or lender’s federal tax liability
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26
Q

Exceptions & Limitations to Imputed Interest Rules

A
  1. No interest is imputed on total outstanding gift loans in aggregate of $10,000 or less between individuals, unless proceeds are used to purchase income producing property.
  2. Loans between individuals greater than $10k and less than or equal to $100,000, the imputed interest cannot exceed the borrower’s net investment income from all sources for the year.
    a. If borrower’s net investment income for year $1000 or less no interest is imputed on loans of $100,000 or less
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27
Q

Annuity Income Contracts Issued after August 13, 1982

A
  1. Withdrawals (including loans) on contracts issued after August 13, 1982 are included in gross income up to total earnings (LIFO)
  2. Amounts received in excess of post Aug 13,82 increases in CV are a recovery of capital until taxpayer’s cost has been entirely recovered.
  3. > 59.5 10% penalty
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28
Q

Annuity Income on August 13, 1982 or Earlier…

A
  1. Income FIFO
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29
Q

Social Security Benefits Taxed

A
  1. 85% of SS may be included in gross income

2. Amount subject to tax based on taxpayer’s provisional income

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30
Q

Federal Insurance Contributions Act (FICA) Tax

A
  1. Included: SS (OASDI) and Medicare (HI)
  2. OASDI: EE 6.2% and ER 6.2%. Self Employed: 12.4% Wage Base Cap: $113,700
  3. Medicare no ceiling for earnings: HI tax is 1.45% for both EE & ER; Self Employed pay 2.9% on net income
  4. Total Self Employment Tax: 15.3%
  5. Beginning 2013 Additional Medicare Tax: .9% for Self Employed who have combined income <$250k (MFJ)
  6. Beginning 2013 additional Medicare surtax of 3.8% imposed on unearned investment income of certain higher income taxpayers.
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31
Q

Death Benefit Only (DBO)

A
  1. $$ paid by ER, upon EE’s death to EE’s beneficiary are FULLY includable in beneficiary income.
  2. This $$ not life insurance; they are cash fringe benefit paid by the ER upon EE’s death and are FULLY taxable
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32
Q

Scholarships and Tax

A
  1. Must be student for a degree
  2. Exclude from gross income amounts for tuition & related expenses, but NOT Room and Board
  3. EE’s of nonprofit allowed to exclude a tuition waiver from Gross Income if the waiver is pursuant to qualified tuition reduction program
  4. Payments directly to education school are qualified payments, not includable in student’s income, and not subject to gift tax
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33
Q

Life Insurance Revenue Ruling 2009 - 13 - tax treatment when cash surrenders and sales of life insurance contracts when the sale is to unrelated person who will suffer not economic loss upon death of insured

A
  1. Sale is not a viatical settlement
  2. Seller not terminally/chronically ill
  3. Term/Cash Value/Whole Life - aggregate premiums paid must be determined.
  4. Part of gain on the sale can receive capital gain treatment when it exceeds the cash surrender value of policy
  5. Adjust basis reduced by the cost of insurance
  6. Buyer has basis in policy deducted from death benefit (transfer in value)
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34
Q

Modified Endowment Contract (MEC)

A
  1. Life Insurance Policy Issued after Jun 21, 1988, fails the 7 pay test
  2. 7 Pay Test- contract is a MEC if premiums during 1st 7 years exceed total of net level preimums
  3. Material Change - existing life insurance policy undergoes material change must pass 7 year pay test each time there is a material change to policy: failure causes policy to be considered a MEC
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35
Q

MEC Characteristics

A
  1. Early w/d’s or loans from MEC basis is recovered last (LIFO)
  2. W/d’s and loans to extent of earnings are taxed
  3. MEC’s subject to 10% penalty on taxable part of any w/d’s if made prior to policy owner being 59.5
  4. MEC classification does not affect tax of death benefit
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36
Q

Compensation for Injuries and Illness

A
  1. Compensatory damages may be included in income.
    a. Physical injury/sickness, damages excludable from gross income (special damages)
    b. Persona, nonphysical damage (emotional distress, business reputation, breach of contract, age discrimination, sexual harassment), must be included in gross income
  2. Punitive damages received for personal injury generally included in gross income
  3. Interest on damage awards for personal injury, both compensatory and punitive included in gross income
  4. Workers’ compensation amounts received are excluded from gross income
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37
Q

Qualified EE discounts can be excluded from income if…

A
  1. In the case of property, it is not real property or investment personal property
  2. Property/services same line as that of the business
  3. Property: limited to gross profit component of the price to customers
  4. Services: exclusion limited to 20% of customer price
  5. Nondiscrimination: Can not be in favor of HCE
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38
Q

Working Condition Fringe

A

ER provides property/services to EE that EE could have deducted had he paid for them himself, the value of the property/services is non-taxable fringe benefit.
Discrimination does not affect exclusion status

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39
Q

De Minimis Fringes

A
  1. Value of de minimis fringes are excludable

2. Personal use of company car, copy machine, occasional tickets

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40
Q

Qualified Transportations Fringes Not Taxable

A
  1. Transportation in commuter highway vehicle between EE’s home and work
  2. Transit pass within limits $245/month
  3. Parking: $245/month
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41
Q

Employer Adoption Assistance

A
  1. Excludable from Gross Income
  2. $12,970
  3. Written plan
  4. Phaseout: $194,580-$234,580
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42
Q

Educational Savings Bonds excludable interest on EE & I Bonds from Gross Income if…bond proceeds used for qualified higher education…rules…

A
  1. Issued after Dec 31, 1989
  2. <24yrs old
  3. No exclusion for MJS
  4. Phaseout: JT: $112,050 & $74,700 all others
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43
Q

Section 1202 Qualified Small Business Stock (QSBS)

A
  1. Non-corporate investors exclude up to 50% of gain they realize on QSBS. Remaining gain taxed at 28%.
  2. Stock must be held for 5 years or longer
  3. Limited to 10 million or 10 times taxpayer’s basis
44
Q

Creditors and Debt and Taxes

A
  1. Lender forgives debt, borrower must report the forgiven debt as income
  2. Does not apply to bankruptcy
  3. Taxpayer transfers appreciated property to satisfy debt, income is realized. Transaction is a sale of appreciated property followed by payment of a debt
  4. When creditor forecloses property treated as a sale or exchange
  5. Students forgiven school loans for return of working after graduation do not have to include the debt forgiveness in their income
45
Q

Exclude Foreign Income from US Tax rules…

A
  1. Bona fide resident of foreign country or,
  2. 330 days in foreign country any 12 consecutive months
  3. Taxpayer’s who live and work abroad may exclude for ER provided foreign housing up to $29,280
46
Q

Qualified Higher Education Expenses

A
  1. Above the line deduction from gross income for qualified tuition and fees (not room and board) associated with higher education of taxpayer.
47
Q

Teacher’s Classroom Expense

A
  1. $250 for AGI deduction (above the line)
  2. Eligible Educators
    900 hrs of instruction
    Kinder-12th grade
    Teachers, counselors, instructors, principals, aides
48
Q

HSA’s

A

20% penalty for w/d’s other than qualified medical expenses.

20% penalty does not apply to w/d’s after age 65

49
Q

Interest on Educational Loans (Above the Line)

A
  1. Interest paid on qualified eduction loans deductible above the line.
  2. $$ must have been used for higher education tuition, fees, room, board, and other necessary expenese
  3. Taxpayer claiming deduction may not be claimed as a dependent of another
50
Q

Interest on Education Loans

A

$2,500 annual deduction, (Phaseout levels)

Single: $60-75k

MJF: $125-155K

51
Q

AGI % Limitations

A
  1. Charitable (< 50% of AGI)
  2. Medical
    a. Under 65 > 10% of AGI
    b. 65 or older > 7.5% of AGI thru 2016
  3. Casualty Losses >10% of AGI
  4. Misc. Itemized Deductions >2% of AGI
52
Q

Alimony Recapture (Front Loading)

A

If there is more than $15,000 decrease in alimony payments between any of the first three years, there may be alimony recapture

53
Q

Basic Standard Deductions

A 
Single   $6,100
MFJ     $12,200
Qualifying Widow $12,200
Head of Household  $8,950
MFS    $6,100
54
Q

Dependency Exemption

A

$3,900

55
Q

Major Itemized Deductions

A 
Medical Expenses
Taxes
Interest
Charitable Contributions
Casualty Losses
56
Q

Miscellaneous Itemized Deductions: Not subject to 2% floor

A

Impairment-related work expenses
Gamblin losses, but only to the extent of net winnings included in gross income
Annuity contract basis recovery
Pro Rata portion of estate taxes paid with respect to income of decedent

57
Q

Miscellaneous Itemized Deductions subject to 2% of AGI Floor

A 
Employee Business Expenses
Home Office Expenses, for EE's
Investment Expenses
Tax Return Prep Fees
All other miscellaneous itemized deductions
58
Q

Medical Expense Deductions

A
  1. Must not be reimbursed
  2. AGI Floor
    a. Under 65 - 10% of AGI
    b. 65 and older - 7.5% of AGI
    c. MFJ only one spouse must be 65 or older to use 7.5%
59
Q

Medical Expense Deduction: What is Covered?

A

Diagnosis, cure, mitigation, treatment, prevention of disease
Transportation to & back
Qualified LTC (subject to limits)
Insurance premiums (Limits)

60
Q

Medical Expense Deduction: What is not covered?

A

Unnecessary Cosmetic Surgery

Funerals

61
Q

Medical Expense Deduction: Diagnosis, cure, mitigation, treatment

A

Hospital charges, doc’s fees, glasses, insurance premiums, stop smoking programs, surgery to correct vision, legal abortion, weight loss program
Prescription & insulin
Nursing home expenditures (including meals) if medical care is primary reason for admittance
Cost of lead based paid removal
Surgery to correct a congenital deformity or disfiguring disease
Tuition for special school if the school has special facilities or if medical care related to the infirmity is received

62
Q

Medical Expenses: Capital Expenditures allowed with some restrictions. Expenditures must be…

A

Medical Nature
Doc’s Advice
Patient Alone
Reasonable expense
Operating & Maintenance Expenditures are also allowable
Appraisal costs
Deduction is allowed only while medical condition exists
7.5%/10% of AGI applies to Capital Expenditures

63
Q

Medical Expenses: Transportation and Lodging

A

Fares, Ambulance, Personal Car, Tolls, Parking
Travel costs of parent with minor child
Lodging with restrictions: primarily medical necessary; limited to $50/night
One meal reduction allowed: if meals are provided on site and part of medical care. The 50% meal deductibility rule does not apply

64
Q

Medical Expenses: Qualified LTC

A

Medical services for chronically ill person that are provided under a prescribed plan of care.
Includes expenditures for diagnostic, therapeutic, preventive, rehabilitative, and personal care services

65
Q

Chronically ill

A

Unable to perform at least two ADL’s of daily living

66
Q

Medical Expenses: Health Insurance Premiums

A

Individual and group policies are covered
Any premiums paid by ER not deductible by EE
Self-Employed can
Deduct 100% of health insurance premiums fro AGI,
No deduction is allowed for premiums paid by an EE if an ER plan is available

67
Q

Medical Expenses: LTC

A 
40 or less $360
40 but less than 50 $680
50 but less than 60 $1,360
Older than 60 but less than 70 $3,640
Older than 70 $4,550
68
Q

Medical Expense Deduction

A

Deduction is available in the year paid for both cash and accrual basis
Deduction available in the year incurred for deceased taxpayers
Payment on credit card, payment is deemed to have been made
Current deduction not allowed for prepayment of future medical care unless taxpayer is under obligation to make the payment

69
Q

Taxes as a Deduction: Real Estate

A
  1. Must be based on the value of the property
  2. Deductible for the person the taxes are imposed on regardless of who pays them
  3. Assessments not deductible
70
Q

Itemized Deductions: Interest

A
  1. Can deduct interest on funds borrowed to acquire investment assets
  2. Qualified dividends not included in investment ncome
  3. Capital gains not included in investment income
  4. Cannot be derived in the ordinary cause of business
  5. Does not include tax-exempt interest
71
Q

Itemized Deduction: Investment Expenses

A
  1. Must be directly connected with the production of income
  2. Examples: subscriptions to professional newsletters, safe deposit box rentals, portfolio management fees
  3. Does not include commissions in buying and selling investments
72
Q

Qualified Residence Interest: Interest paid on debt for the purchase of a qualified residence of the taxpayer is deductible.

A
  1. Qualified residence includes primary residence and one other residence
  2. May include condo, trailer, boat with living quarters, moble homes
  3. Debt must be secured by property
  4. Max. allowable acquisition indebtedness is $1 million ($500k for MFS)
  5. Includes construction and substantial improvements
73
Q

Qualified Residence Interest: Equity Loans

A

Home equity loans are covered. Interest is deductible on the indebtedness to the lesser of:

a. FMV less acquisition indebtedness
b. $100,000
c. Interest on home equity loans not used for home improvements not considered qualified residence interest for the purposes of AMT and is added back for calculation of AMT

74
Q

Qualified Residence Interest: Interest paid on points

A
  1. Points on a home loan are deductible in the year paid: (Principal residence loan only)
    a. Borrower (buyer) is treated as paying any points seller paid for borrower’s mortgage
    b. Borrower can deduct points up to the funds provided plus seller paid points
    c. Buyer must reduce basis in house by points paid by seller. Seller reduces amount realized by this amount.
  2. Points on refinancing must be capitalized and amortized over life of the loan.
  3. If Refinancing is for home improvement and points are paid from a separate source, points are currently deductible.
75
Q

Qualified Residence Interest

A
  1. If interest is paid for a business use or the production of income, it is deductible for AGI
  2. If interest is paid for personal use, (investment interest and qualified residence) it is deductible from AGI
76
Q

Itemized Deduction: Casualty Loss - Section 165

A
  1. Nonbusiness use of property limited to losses from first, storm, shirpwreck, or other casualty or theft
  2. Casualties refer to losses meeting three criteria:
    Identifiable event causing the loss
    Property damage loss
    Event is sudden, unusual, and unexpected
  3. Cash or property received as compensation for or to repair/replace damaged property reduces the amount of the loss (insurance payment)
77
Q

Casualty Losses: Events that are not casualties

A
  1. Termite Damage

2. Most drought related loses are considered progressive deterioration are not casulties

78
Q

Theft Losses

A
  1. Larceny, Embezzlement, Robbery
  2. Deducted in the year of discovery, not the year of theft. Deduction only to the extent that loss exceeds expected recovery from any insurance
  3. If insurance claim is greater then the adjusted basis, a gain is recognized.
79
Q

When to deduct casualty Losses

A
  1. General Rule - loss is deductible in the year the loss occurs, (except theft losses). If a reasonable chance of recovery from insurance exists, no loss is allowed.
  2. Disaster area losses:
    a. President of US declares disaster area
    b. Previous year’s taxes have already been filed, the taxpayer may file and amended return
80
Q

Casualty Losses: Measuring amount of loss

A
  1. Lesser of Adjusted basis
  2. Or, the Decline in FMV resulting from the event
  3. Losses from property held for partial business and partial personal use are determined separately for each portioin
  4. Losses are reduced by any insurance recovery that would have been received, whether or not a claim was filed
81
Q

Casualty Losses: Deduction for Losses

A

The Deduction for losses on personal use property is reduced by both a $100 floor and by 10% of AGI. The $100 floor applies to each casualty event, but the 10% floor is applied to the aggregate casualty loss amount for the year.
a. Personal use property losses are itemized deduction

82
Q

Miscellaneous Itemized Deductions: Subject to 2% of AGI floor

A
  1. Job Search Costs: present occupation; employment agency fees, travel; resume expenses
  2. Work Clothes/Uniforms - condition of employment; not suitable for every day wear; full time military uniforms not deductible
  3. Professional Organizations
  4. Hobby expenses
  5. Work tools if expected to last one year or less
  6. Expenses to produce/collect income (appraisal fees, tax prep fees)
  7. Other unreimbursed EE’s business expenses
83
Q

Miscellaneous Itemized Deductions: Not subject to 2% floor

A
  1. Federal Estate Tax on Income in Respect of Decedent (IRD)
  2. Gambling losses to extent of winnings
  3. Unrecovered investment in annuity contract when annuity ceases because taxpayer died
  4. Impairment-related work expenses of handicapped taxpayer
84
Q

Overall Limitation on Itemized Deductions

A
  1. Taxpayers at higher income levels allowable itemized deductions reduced by 3% of amount the taxpayer’s AGI exceeds threshold for the taxpayer’s filling status.
  2. Total reduction cannot be reduced more than 8%.
    MFJ and Surviving spouses AGI Limit $300,000
    Head of Household AGI Limit $275,000
    MFS AGI Limit $150,000
    Single AGI Limit $250,000
85
Q

Deductions for AGI

A
  1. Above the Line Deductions
  2. Expenses related to trade/business; Alimony paid; 50% of Self-employment tax paid; Capital loss deduction; interest penalty for early w/d of savings; Deductible IRA contributions; Student loan interest; Moving Expenses
86
Q

Itemized Deductions are from AGI: Below the line deductions

A

Charitable contributions, Medical expenses, Mortgage Interest, Taxes paid, Casualty Losses; Unreimbursed EE business expenses

87
Q

Section 162 Deductions

A

Deductions for expenses incurred in trade/business.

88
Q

Section 212

A

Deductions for expenses incurred in connection with investment activities

89
Q

For AGI and From AGI

A

Most expenses incurred in trade/business are deductions for AGI (Above the line);
Investment expenses are deductions from AGI (with the exception of expenses incurred to produce rents and royalties)

90
Q

Deductions and Losses: Requirements

A
  1. Ordinary and necessary requirement: necessary is a prudent person would make the same expenditure. Ordinary is it is normal/customary to make the expenditure (not capital)
  2. Reasonableness requirement: typically associated with compensation requirements.
91
Q

C - Corporation - Distribution

A

If a distribution from a C Corp. is classified as a dividend, the distribution will be double taxed; once to the corporation (earnings) and once to recipient-shareholder.

92
Q

S Corporation Distribution

A

Distribution from an S Corp generally treated as a tax-free return of capital.

  1. S Corp. shareholder prefers a distribution rather then a salary, which is subject to FICA
  2. If IRS deems the compensation is unreasonable, IRS will likely reclassify any excess of the distribution as salary
  3. The salary will be subject to FICA taxes
93
Q

Cash- Basis Requirements

A
  1. Deduction only when cash is received
  2. Income not recognized until cash is constructively received
  3. Capital outlay’s (even in cash) are not current deductions except as depreciation, amortization or depletion.
  4. Prepaid expenses required to be capitalized and amortized only if the life of the asset extends more than the taxable year after the year of payment.
94
Q

Accrual-Basis Requirements

A
  1. Takes a deduction or claims income when all events have occurred to create the taxpayer’s liability or right to receive income and the amount of the liability or income can be determined with reasonable accuracy all events test.
  2. Economic performance test must also be satisfied for deductions
95
Q

Hobby Income is

A
  1. Reduced first by taxes and interest
  2. Then by other non-capital related expenses
  3. Then by expenses that affect basis
96
Q

Hobby expenses are…

A

reported on Schedule A (Itemized Deductions) miscellaneous itemized deductions subject to 2% of AGI floor

97
Q

Legal and Accounting Fees

A
  1. when legal/accounting fees incurred in connection wit trade/business or for the production of rents and royalties, they are deductible for AGI
  2. If these legal/accounting fees incurred for any tax, they are deductible
  3. Legal fees incurred for personal purposes are non-deductible
  4. Legal fees related to the acquisition of an asset are added to the basis of the property
98
Q

Worthless Securities and Tax

A
  1. Securities must be completely worthless to be deducted
  2. Losses are deemed to be capital losses on the last day of the year which they become worthless, creating increased potential for long term capital loss.
99
Q

Small Business Stock - Section 1244 - Applies to Losses Only

A
  1. Generally, any security loss is capital in nature, but Section 1244 allows ordinary loss treatment if the loss is sustained by an individual who acquires the securities directly from the corporation.
    a. 1244 losses limited to $50,000 annually ($100,000 Jt Filers)
    b. Any losses in excess of limits are capital losses
100
Q

To Qualify for Section 1244 losses (Small Business Stock)

A
  1. In order to qualify for Section 1244 treatment, the corporation must receive less than $1 million in capital for stock at time of issue
  2. Section 1244 applies only to losses on the investment, not the gains.
101
Q

Bad Debts - Special Charge Off Method

A
  1. The bad debt must be identified by the taxpayer; the deduction cannot be for general reserves against bad debt.
  2. Deductions are only allowed in year of worthlessness
  3. If a previously deducted bad debt is later controlled, income is recognized only if a tax benefit was received.
102
Q

Business Bad Debts

A
  1. Business bad debts are sales/revenues (accounts receiveable) on credit that later become worthless
  2. A deduction is only allowed if the income from the receivable was previously included in income (if accrual basis because income was reported at time of service; not for cash basis because no payment means income was never reported)
  3. There must be an identifiable relationship between the creation of the debt and the trade or business
  4. Deduction is allowed when business debts become partially or wholly worthless
  5. Business bad debts are deductible as an ordinary loss in year incurred.
103
Q

Nonbusiness Personal Bad Debts

A
  1. Must be wholly worthless
  2. Debt not related to taxpayer’s trade or business
  3. Always considered short term capital loss
  4. Borrowed funds may be used for any purpose
104
Q

Bad Debts

A

Type of Debt Deduction
Business - Partial/Whole Ordinary loss in year incurred
Nonbusiness - wholly worthless Short term capital loss in yr incurred
Nonbusiness - partially worthless Non

105
Q

Unpaid Loans between Related Parties

A
  1. Bona fide loan or gift?
  2. To be a loan, must be an enforceable obligation to pay a specific amount of money
  3. Other factos: collateral, collection efforts, intent, interest paid.
106
Q

Loss of deposits in Insolvent Financial Institutions

A
  1. Loss of deposits may be deducted as personal casualty loss instead of nonbusiness bad debts, but they are then subject to 10% AGI limit and $100 floor
  2. May be elected only qualified individuals not >1% owners, relatives or officers.
  3. Amount of loss equals basis less amount received
107
Q

Business casualty losses or held for production of income casualty loss

A
  1. Identifiable event must be sudden, unexpected or unusual
  2. Losses related to business or trade property are deductible to AGI
  3. Not subject to $100 or 10% AGI floors to which individuals are held
  4. Losses related to property held for profit are not subject to $100 and 10% floors and are deductible for AGI only if the property is held for rent or royalty
  5. If completely destroyed, the loss is adjusted basis of property
  6. If partially destroyed, the loss is the lesser of the Adjusted Basis of the decliine in the FMV of the property
108
Q

NOL - Net Operating Losses

A
  1. Purpose of allowing NOL’s is to create an equitable situation for cyclical businesses that might otherwise lose substantial money without receiving tax benefit.
  2. Generally - Net Operating losses may be carried back two years preceding the loss year and forward 20 years following the loss year.
  3. Sequence of use of NOL’s - oldest completely used first.
  4. election to forego carry back - Election is Irrevocable.

CFP TAX (5 decks)

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