Taxation

Question 0

Accrual basis taxpayer

Answer 0

Items of income are includable in gross income in the year in which

1. the RIGHT to receive the income becomes fixed and
2. the amts receivable become determinable w/ reasonable accuracy

Question 1

Cash basis taxpayers

Answer 1

Consider items of income (or expenses) as recd and therefore taxable in the year actually or constructively recd

Question 2

Constructive receipt of income

Answer 2

One has right to access income that has been remitted to one but not currently in his possession

Applies only to cash basis taxpayers

Question 3

Actual receipt of income

Answer 3

Taxpayer received income and has it in his possession

Question 4

Net Cap Gains

Answer 4

[(net LT cap gains) - (LT cap losses)] - ( short term cap losses - short term cap gains)

Question 5

Cap gains tax rates

Answer 5

10
15.   0%
25
28.    15%
33
35
39.6.   20%

Question 6

Constructive sales

Answer 6

Prohibited by irs
= sales which use hedging techniques to eliminate the risk of owning the securities w/o actually selling the securities and realizing a cap gain
This method reduces cap gains for appreciated financial positions in assets that would result in a gain if sold
= hedge against cap gains taxes on an asset by showing losses using hedging version of the same asset

Question 7

C Corp

Answer 7

• Limited liability. Owners not liable for company’s losses
• The only bus structure that is NOT a pass thru entity

Double Taxation of C Corp Income:
Net inc taxed at Corp level
THEN distributed to owners or SH who must also pay tax on inc

Every publicly traded corporation is a C-Corp
- no limits to the number of SH
Eg. Microsoft, Fedex, UPS, McDs Adobe, GE, Expedia, Caterpillar and so on.

• does not get tax deduction for dividends paid
• Receives tax deduction for interest paid to bond holders
• it’s taxable inc = gross inc subj to tax minus deductions allowed to corp eg Ord + necessary bus expense
• not the same as book inc

Question 8

NOL Net Operating Loss

Answer 8

= C Corp’s operating loss
If bus deductions > bus gross income

a Corp may CARRY BACK a NOL to

1. each of 2 preceding yrs and
2. then remaining loss may be carried forward to each of following 20 yrs

• can only reduce corp profits. Not inc of individual SH

Question 9

C Corp : Cap Gains and losses

Answer 9

Cap gains and losses from sales of Cap Assets/ exchanges. Can deduct Cap Losses only to extent they have Cap Gains

Carry Back: UNUSED net cap LOSSES from a year

1. To each of 3 preceding yrs. then
2. the remaining loss can be carried forward to each of 5 following yrs

Question 10

Corp Inc Tax Rates

Answer 10

NB surtaxes imposed at cert levels of corp inc to phase out benefits of lower corp tax brackets
Fed tax rates
15
25
34
39 (34% + 5% surtax to reduce benefits of 15% and 25% brackets)
34
35
38 (35% +3% surtax to reduce benefits of 34% bracket)
35% flat tax on all tax inc

Question 11

Accumulated Earnings Tax

Answer 11

Applied only to earnings and profits that are accumulated beyond the reasonable needs of the business
Only accumulated inc that > $250k/year. <— potentially subj to tx
Paid in addn to regular corp inc tax at highest ind tax rate

Question 12

Pass through business entities

Answer 12

= tax reporting NOT tax paying entities
They report P/L and other tax items to Owners
Owners
   1. Pay taxes on them 
    2. Deduct them on ind tx return

Partnerships
S corp
LLCs

Question 13

Partnerships

Answer 13

Don’t pay taxes
Rept each partner’s distributive share of P/L
P/L is filed on partner’s own return AND Partner deducts the loss
Partner is also taxed on any guaranteed payments eg sales paid to him by partnership

Following - All taxed under same tax rules
General partnership
LP
LLPs

Question 14

PTP. Publicly traded partnership

Answer 14

= master limited partnership
Special kind of partnership
Partnership is a PTP if interest in partnership is traded on securities mkt or secondary mkt
Taxed like corporation
Exception: if >= 90% gross inc is from passive sources then taxed like partnership

Question 15

S Corp = sub chapter S Corp

Answer 15

Only some eligible to make S election
Must be domestic US corp
P/L are passed through to SH in proportion to stock holdings.
P/L are taxable on their own return
S-corp w/ max no of SH - some number less than 100.

Question 16

LLCs. Limited Liability Corp

Answer 16

Est’d by filing with the State

Result. Advantages of both
1 Corp.
Limited liability for debts/obligations
Freedom of Management - members manage entity

2. Partnership = not taxable entity
   P/L and other tx item are passed on to personal tax return of members

Question 17

Kiddie tax

Answer 17

Requires that net unearned income of kid < 19 to be taxed to the kid but the parents’ top marginal inc tax rate assuming the rate is > kid’s rate

Question 18

AMT

Answer 18

An additional tax over/above the regular inc tax

Question 19

Grantor Trust

Answer 19

Has Keeps control
Grantor is also Trustee, Beneficiary of Inc + Principal
Items of Income and deductions on GRANTOR’s Inc tax return

Keeps revisionary interest in the trust —> so Trust Income is taxed at Grantor Rate. (Tax rates for Trusts are much higher)

Question 20

IDGT. Intentionally Defective Grantor Trust

Answer 20

Grantor make irrevocable gift of property Property is transferred out of decedent’s estate into the Trust. Usually for kids. Names someone else as Trustee

1. Structured as Grantor Trust (for Inc Tx purposes) -> Items of Income and tax deductions on GRANTOR’s Inc tax return
2. Structured so that Corpus is NOT Included in Grantor’s gross Estate (for Fed Estate Tax Purposes)

Question 21

Bracket creep

Answer 21

Situation where tax brackets are stagnant but inflation increases income levels.
Individuals move to higher bracket due to inflation
Result Tax brackets are indexed for inflation