Tax-Reg_Review Deck_2

Question 1

What is Tax basis Gain or Loss for gifted properties?

Answer 1

If the future selling price is lower than the donor’s cost basis but higher than the fair market value of the property at the time of gift, neither gain nor loss is recognized by the donee on the sale of the property.
For Example:
Original Cost of Donor - $1,000
FMV at the time Gift - $800
Sold by Donne at - $900
No Gain or Loss to be reported by the tax-payer in the year of sale.

If the future selling price is lower than the fair market value of the property at the time of the gift, the donee’s basis is the fair market value of the
property at the time of the gift.

Question 2

What is the basis of Inherited Property?

Answer 2

The basis of inherited property to the beneficiary is the fair market value
of the property at the date of the decedent’s death (or the alternate valuation date, if the alternate valuation date is used for determining the value of the estate for estate tax purposes).

The alternate valuation date is the earlier of the date of distribution/sale or 6 months after the date of death.

Question 3

What is tax basis of Personal property converted to the business?

Answer 3

The depreciable basis of property converted from personal use to business
use is the lesser of:

(1) the original cost basis, as adjusted for any improvements to the property; or
(2) the FMV of the property on the date of conversion.

Question 4

True or False:
Personal property taxes are allowable itemized deductions.

Answer 4

TRUE!
Taxes are generally deductible in the year paid, and real estate taxes, income taxes, and personal property taxes are allowable itemized deductions.

Question 5

True or False:

Security deposits held in a segregated account are taxable gross income.

Answer 5

FALSE!
If security deposits are held separately and not available to be applied to last month’s rent (as in a segregated account), they are a liability of the taxpayer and not included in income in the year received.

Question 6

Rental Income Formula -

Answer 6

Gross Rental Income
Prepaid Rental Income
Rent Cancellation payments
Improvement in lieu of Rent
LESS: Rental Expenses
————————————
NET RENTAL INCOME or (LOSS).

Question 7

What type of Assets / Properties include under MACRS 5 year property?

Answer 7

MACRS 5-year property includes automobiles, light trucks, computers, typewriters, copiers, duplicating equipment, and other such items.

Question 8

What type of Assets / Properties include under MACRS 7 year property?

Answer 8

MACRS 7-year property, which includes office furniture and fixtures, equipment.

Question 9

What is the Recovery period for depreciable residential and commercial properties?

Answer 9

The recovery period for the depreciable real property must be -
27.5 years for residential real property and
39 years for commercial real property.

Question 10

What is the recovery period for Intangible Assets/Properties under MACRS?

Answer 10

Acquisitions of goodwill, covenants not-to-compete, franchises, trademarks, and trade names must be amortized on a straight-line basis over a 15-year period (180 months) beginning with the month of acquisition.

Question 11

True or False:

A person must live with the Tax-Payer for the entire year to be qualified as dependent for Qualified Relative.

Answer 11

TRUE!

Question 12

Child Tax Credit -

Answer 12

1. Married filing jointly - AGI up to $400,000
2. Child must be under age 17
3. Maximum Credit available $2,000 per child.

Question 13

True or False:
Single taxpayer with taxable income (before QBI deduction) of $241,950 or more can claim QBI deduction for a Specified Service Trade or Business (SSTB).

Answer 13

FALSE!

Singled tax-payer with AGI increasing $241,950 from SSTB ARE NOT qualified for QBI deduction.

For Married tax-payer AGI threshold is $483,900.

Question 14

How Dividend Received Deduction determined for C Corporations?

Answer 14

The Dividend Received Deduction is (DRD) :
(1) 50% of dividends received from corporations owned less than 20% by the recipient corporation;
(2) 65% of dividends received from a “20% owned corporation”;
(3) 100% of qualifying dividends received from members of the same affiliated group to which the recipient corporation belongs; and
(4) 100% of dividends received by a small business investment company.

However, the deduction is limited to 50% × dividends-received deduction (DRD) modified taxable income.

DRD modified taxable income is calculated as taxable income before the dividends-received deduction, any NOL deduction, and capital loss carry-back deduction.

Question 15

True or False:

Personal Service Corporations are permitted the use of the cash method.

Answer 15

TRUE!
The general rule is that the accrual method of accounting will be required by tax shelters, large C corporations (average annual gross receipts over three-year period greater than $30 million [2024]) and manufacturers.

Question 16

How Organization / Start Up Costs are treated?

Answer 16

Organization (Start-Up) costs of a corporation may be amortized over a period of not less than 180 months. The taxpayer may elect to deduct up to $5,000 in Year 1, subject to $50,000 total expenditure limitations.

Start up costs above $50,000 are adjusted to dollar to dollar deduction from the maximum deduction of $5000.

For example:
If start up costs are $52,000, then only $3,000 ($5,000 Max Deduction - $2,000 in excess of $50k) can be claimed as deduction.

Question 17

Permissible deduction on Charitable contribution to C Corporations is -

Answer 17

The charitable contribution deduction is limited to 10% of
taxable income before the dividends-received deduction and the charitable contribution deduction.

Question 18

True or False:

Premiums on group-term life insurance covering the lives of employees are deductible by the employer, unless the employer is a direct or indirect beneficiary.

Answer 18

TRUE!

Question 19

True or False:

Insurance expense on officers’ lives where the corporation is the owner and beneficiary of the life insurance policy are not deductible.

Answer 19

TRUE!

Also, proceeds from insurance on the death of an officer where the corporation is the owner and beneficiary are not includable in the taxable income of a corporation.

Question 20

True or False:
A non-business bad debt loss is deductible for the tax purposes.

Answer 20

FALSE!
A nonbusiness bad debt must be totally worthless to be deductible.

A nonbusiness bad debt is treated as a short-term capital loss in the year the debt becomes totally worthless.

Question 21

Charitable contribution made by C Corporation basis for tax

Answer 21

The charitable contribution deduction is limited to 10% of taxable income before the dividends-received deduction and the charitable contribution deduction.

Question 22

How to determine estimated tax liability tax payments of C Corp?

Answer 22

Annual Estimated Tax payment is LESSER OF:

1. 100% of the tax liability of the prior year’s return, subject to a positive tax liability.
2. 100% of the current year tax liability, OR
3. 100% of the estimated current tax liability according to the annualized income method.

Question 23

What is Accumulated Earnings Tax Credit for C Corps?

Answer 23

Accumulated Earnigs Tax Credit -
1. Regualr C Corporations are entitled to $250,000 (lifetime) credit.
2. Personal service corporation are entitled to $150,000 (lifetime) credit.
The Accumulated Earnings Tax rate is 20% flat.

Question 24

True or False:
Corporations that make distributions in excess of accumulated earnings are liable for the accumulated earnings tax.

Answer 24

FALSE!
Corporations that make distributions in excess of accumulated earnings are NOT liable for the accumulated earnings tax.

There would be no accumulated earnings left to tax.

Question 25

How Personal Holding Companies status determined?

Answer 25

Personal holding company status applies - A. if a corporation is owned more than 50% by five or fewer individuals at any time during the last half of the tax year and B. if at least 60% of adjusted ordinary gross income for the tax year is personal holding company income (which would include income from investments in stocks and securities). Personal Holding Companies (PHC) are taxed an additional 20% on personal holding company Net Income not distributed.

Question 26

Calculation of Net Undistributed Income of Personal Holding Companies -

Answer 26

Net Income Not Distributed of PHC is derived: Taxable Income BEFORE Dividend paid deduction XXXXX Less: Federal Income Taxes XXXXX Net Long-term Capital Gain (net of tax) XXXXX =========== Undistributed Net Income of PHC before dividend paid XXXXX

Question 27

True or False: Net Capital Losses of C Corporations are carried forward for indefinitely until fully utilized.

Answer 27

FALSE! A C corporation's net capital losses are carried back 3 years and forward 5 years; they expire after 5 years. In addition, a C corporation cannot deduct net capital losses from ordinary income.

Question 28

True or False: Gambling losses are not deductible for tax purposes.

Answer 28

FALSE! Gambling losses are deductible as a miscellaneous itemized deduction (from AGI) limited to gambling winnings.

Question 29

Net Investment Income Tax (NIIT) -

Answer 29

The Net Investment Income Tax (NIIT) is 3.8 percent of the lesser of - (1) the taxpayer’s net investment income; or (2) the excess of modified AGI over a threshold amount. AGI threshold for NIIT - Single or Head of Household - $200,000 Married Filing Jointly - $250,000

Question 30

What is the maximum allowance / deduction under Section 179?

Answer 30

Machinery and equipment are seven-year property that qualifies for Section 179 expense. The 2024 Section 179 expense election maximum allowance is $1,220,000. The allowance is reduced dollar for dollar by the amount of Section 179 qualifying property placed in service during the year that exceeds $3,050,000 (2024).

Question 31

True or False: Retirement savings contribution credit is a refundable tax credit.

Answer 31

FALSE! It is NON-REFUNDABLE TAX CREDIT. Few Refundable Tax Credits are - - Earned Income Credit - Child Tax Credit - Excess Social Security Paid.

Question 32

True or False - The S Corporation can maintain passive investment income more than 25% to maintain it's S Corp status.

Answer 32

FALSE! The S election is terminated (immediately) if the S corporation has passive investment income greater than 25 percent of gross receipts for three consecutive years.

Question 33

Deductibility of fringe benefits by S Corporation -

Answer 33

Fringe benefits paid by an S corporation are deductible by the S corporation only for non-shareholder employees and those employee-shareholders owning 2 percent or less of the S corporation. Other fringe benefits paid are deductible by the S corporation if included as part of gross income from the S corporation for the individual receiving the benefits (i.e., included as part of income on the shareholder's W-2).

Question 34

Limitation of number of members for an S Corporation -

Answer 34

S Corporation can have maximum of 100 as members / shareholders. Family members may elect to be treated as one shareholder in an S corporation for purposes of the 100-shareholder limit. Family members include common ancestors, lineal descendants of common ancestors, and their current or former spouses.

Question 35

Who can not become a member / shareholder in S Corporations?

Answer 35

Following can not become member of an S Corporation - 1. Individual Retirement Accounts (IRA). 2. Non-resident Aliens. 3. C Corporations 4. Partnerships ONLY US CITIZENS or RESIDENT ALIENS can become Member of the S Corporation. Also few Qualified Non-Profits and Estates are permitted to become members of the S Corporation.

Question 36

Voluntary revocation of S Corporation -

Answer 36

S corporation status can be revoked if shareholders owning more than 50% of the total number of issued and outstanding shares consent to revoke. The specific percentage of voting and nonvoting shareholders is not considered, only the total.

Question 37

True or False - An S Corporation can not become member/shareholder in C Corporation.

Answer 37

FALSE! Although an S corporation cannot have a C corporation shareholder, there is no restriction on an S corporation being a shareholder in a C corporation.

Question 38

True or False: A terminated S corporation status can be re-elected in the Fifth year from the current tax year.

Answer 38

TRUE!

Question 39

Formula for Shareholder's basis of Stock in S Corporation -

Answer 39

The shareholder's basis of stock in an S corporation is increased by: additional contributions income or gain items (taxable and tax-exempt) and is decreased by: distributions to shareholders nondeductible expenses loss or deduction items The interest income, charitable contributions, and Section 179 expense are separately stated items. They flow through to the shareholder(s) separately on Schedule K-1 and are not part of ordinary income.