CPA REG 2020

**# of days the taxpayer have to file a petition with the Tax Court for a redetermination of the deficiency after receiving a notice of deficiency from the IRS

90 days **30 days is the preliminary notice (appeals conference) **file a petition with the tax court!!! not district court

**tax positions %%%

< 20% frivolous return - no defence > 20% reasonable basis 40-50% substantial authority (**reports issued by the U.S. Congress, IRS regulations, rules, and releases, and U.S. court case decisions, but NOT foreign court case decisions) > 50% more likely than not standard

partnership capital account

= the same as basis but without the partners % of liabilities

** %%% Covered opinion

A covered opinion includes any written or electronic advice concerning transactions specified by the IRS as listed transactions.

**c corp distributes land with nonrecourse liability to its shareholder

If a property's fair market value is less than the amount of the liability assumed, the property's fair market value is assumed to be the amount of the liability assumed by the shareholder. so when the corp recognized gain it would be (the liability assumed - adjusted basis)

Avoidance vs Evasion^3

Avoidance: minimizing tax liability through legal arrangements and transactions. Evasion: takes place once a tax liability has already been incurred. illegal. Key distinction: intent.

companies exempted from securities filing 1933

B Banks R railsroads I Insurance N Not for profit G government S short term commercial paper

QBID Calc^6

Basic = 20% * QBI or 20% *(TI-Net Capital Gain) Limitations Single = 164,900 - 214,900 Married = 329,800 - 429,800 if reach the lower taxable income threshold, QBID is further limited to the greater of - 50 percent of wages or - 25 percent of wages plus 2.5% of the unadjusted basis of qualifying property

QC^3

C - close relative (kid, stepkid, brother, sister, or descendant of these.) A - age limit (18 or younger/ 24 or younger if student) R - esidency for at least half a year, and can not file joint return E - exempt from income test S - support, must provide at least 50%

exceptions from having to file a 990

C Church H Highschools/religions R religious orders I internal support related S societies that are missionary related T tax exempt by congress

**which entities has the most flexibility in choosing an accounting period

C corp NOT: partnership --> calendar year required s corp --> calender year unless vaild business purpose for a different taxable year Personal service corp --> calender year unless vaild business purpose for a different taxable year

Excess Business Losses^7

Non-C corp are subject to this limit. Limitation= GI from trade/business+ $255K ($510K MFJ)floor All deduction from business-Limitation=Excess business loss(is carried forward as NOL, in carryover years, NOL is limited to 80% of the future year's TI)

**Employee Stock Options - nonqualified

Nonqualified option **readily ascertainable value = taxed when granted %%% (Recognized as ordinary income at the year granted if the option traded on an established market) tax is added to the basis. without readily ascertainable value = taxed at exercised as ordinary income employer can deduct expense in the same year employee reports income.

Discharge by operation of law^17

Occurs when it is impossible/illegal to finish the performance: death, illegal

Fraud in the execution^17

Occurs when the signature of a party is obtained by a fraudulent misrepresentation - makes a contract void

**U.S. source and Foreign Source

The sale of purchased inventory is sourced where title passes **income from compensation for personal services is sourced where the service is performed

**Statute of Frauds (Suretyship) %%%

The statutes of Frauds requires written evidence of the promise to answer for the debt of another signed by the surety. A suretyship undertaking not evidenced by a written memorandum is unenforceable

**short sales

a short sale of stock results in a capital gain or loss. The holding period is based on (end on) the date the short sales is executed, NOT the closing date

**stock redemption

a stock redemption that is proportionate with respect to the shareholder is treated as a dividend (ordinary income) to the redeeming shareholder treated as exchange of stock (capital gain/loss): complete termination of the redeeming shareholder's interest in the corporation; complete liquidation of a corporation; partial liquidation of the corporation

**Surety

a surety generally is primarily liable on the debt the surety agrees to backstop and has no right to compel the creditor to collect from the principal debtor or to proceed against the principal debtor's collateral **BUT the definition the surety is DIRECTLY LIABLE to the CREDITOR on a contract !!! so "the surety is primarily liable to the creditor"" is correct!

Tax planning-Timing^3

accelerates/defers recognition of income/deduction. e.x. use of depreciation method

**Accord and satisfaction

accord and satisfaction discharge the original duty. An accord is an agreement to substitute one contract for another, and satisfaction is the execution of the accord

**due diligence requirements for the earned income credit

address eligibility checklists, computation worksheets, record retention, and also reasonable inquiries to the taxpayer

**c corp expense to expense

advertising: which is in the nature of selling expenses are deductible if they are reasonable and are related to the taxpayer's business activities

Unenforceable Contract^17

all elements of contract but the law will not enforce the contract because it does not comply with another legal requirement. (e.x contract not in writing)

valid contract^17

all elements of contracts are presents and all parties are obligated to perform. -Remedy for the non-breaching party Generally, to have an enforceable contract there must at least be 1. an agreement made up of an offer and an acceptance, 2. an exchange of consideration; and 3. lack of any applicable defenses.

** %%%Multiple Support Agreement

all must be qualifying relatives who together contribute more than 50% of the support of the dependent. In addition, to claim the exemption an individual must contribute over 10% of the support of the dependent ***Need to be over 10% not at 10%

S corp election

all shareholders must concent to form 2553. **- goes into effect Jan 1 year after election or that same year if filed by march 15th. (If not Jan next year) - more than 50% have to terminate it **reelect s status: must wait until the beginning of the fifth year after the year of termination before it can elect S corp status again **capital losses and all other items of income and loss flow through to the tax returns of the shareholders **the net operating loss carryovers are not immediately deductible by the shareholders

**Complex trust

all trust's that are not simple are complex - may accumulate current income **- may distribute principal (corpus) - may deduct charitable contributions - is permitted an exemption of $100

what is necessary to create an agency

all you need is consent and a principal with capacity

Depletion

allowed on exhaustible natural resources, such as timber, minerals, oil, and gas. example:oil property has 1,000,000 recoverable barrels at the beginning of the year and cost basis of 1,000,000. 50,000 barrels were sold. basis/barrels = xx * # sold1M/1M = 1 * 50K = 50K.

**prevention of performance

also discharge for breach of the implied duty of cooperation

**gift taxes and estate taxes and their affect on the basis

although gift taxes paid on a gift may affect the basis of gifted property to the donee, estate taxes paid on inherited property never affect the basis of inherited property to the beneficiary.

Credit for Prior Year Minimum Tax^7

certain allowable AMT paid in a taxable year may be carried over as a credit, CRRYFWD is forever. - can only offset regular tax in future years. to compute MTC amount, recomputed the recent year's AMT without adjustments for the exclusion items

**Merchant's firm offer

certain offers by merchants are irrevocable without consideration. Merchant's firm offers are irrevocable for the time stated, or if no time is stated, for a reasonable time, but in no event longer than three months

**farmer cannot file voluntary petition for bankruptcy under

chapter 9 -- municipal debt adjustment

**civil / criminal law

civil = burden of proof is on the taxpayer $1,000 criminal = burden of proof is on gov

**guaranteed payment

compensation for services provided to the partnership is guaranteed payment, NOT SALARY WAGES OR Dividend **guaranteed payment does not increase basis but increase ordinary income of the partner

**section 1231

composed principally of depreciable personal and real property used in the taxpayers trade or business and held for over 12 months. losses are treated as ordinary and can be used to offset ordinary income NOT: inventory held for resale **Including: e.g. 1. loss on the abandonment of office equipment 2. loss on the sale of a building 3. loss on the sale of delivery trucks

liquidation of an S Corp consequences to s corp

corp will recognize gain or loss on the distribution of property as if the property was sold at FMV FMV - basis = taxable G/L (report on K-1 and increase basis)

**bad debt in c corp

corporations that are not small banks or thrift institutions are required to use the direct charge=off method rather than the reserve method

**Uniform Capitalization Rules^8 (IRC Section 263A) **also in c corp session R4-15

cost for construction of real or tangible personal property to be used in trade or business and costs of producing or acquiring property for sale to customers are capitalized **warehouse cost (x selling expense like distribution or marketing) ***the uniform capitalization rules do not apply to inventory acquired for resale if the taxpayer's average gross receipts for the preceding three tax years do not exceed $26,000,000 **warehousing cost, **quality control, depreciation and amortization, insurance, supervisory wages, indirect supplies and other materials (including repackaging costs), off-site storage and taxes, excluding income taxes are all considered factory overhead items (applicable indirect cost) . BUT Research, advertising, marketing (G&A, selling, R&D) should be expensed

Income with respect to decedent

covers income earned before the taxpayers death but not after

**partnerships basis for property contributed

greater of 1. NBV (rollover) (FMV-NBV is the amount allocated to that partner when sold) or 2. debt assumed **holding period: the partner's holding period of the capital asset

Negligent Misrepresentation^17

has no knowledge of false info but its caused due to acting without due care - remedies

**personal service corporation (PSC)

is primarily involved in the performance of one of the following fields: accounting, law, consulting, engineering, architecture, health, and actuarial science e.g.an architecture and engineering firm Not: catering service, groundskeeping firm, real estate brokerage

**incomplete gift

included in the gross estate for computing the estate tax. - a gift is not considered complete if it is conditional or revocable. ***e.g. if the donor retains the right to determine the amount of distributions to be made, so it is not subject to the gift tax

**the scope of the secured transactions article of the code

included: the outright sale of accounts receivable x included: 1. a landlord's lien 2. the assignment of a claims for wages

**CPA who prepares client's federal income tax returns for a fee

must keep a completed copy of each return for a specified period of time **for each tax return prepared, a tax preparer must retain either the taxpayer's name and identification number, or a copy of the return

the securities act of 1933 (IPO)

must provide investors with sufficient investment information, SEC checks for completeness not accuracy

**Respondeat superior

under the doctrine of respondeat superior, a principal including a corporation, can be held liable for an employee's tort committed within the scope of the employment

trusts tax rates

$0 for under 2,550 and 37% the highest tax rate for anything over 12,500.

**Gift tax exclusions

%%% 15,000 per year per donee. *** so this exclusion is for per donee not per gift: e.g. if A gifted B 2 gifts this year, the exclusion for both gifts for B is 15000 in total if A gifted B 1 gift and C 1 gift then the exclusion is 15000 for B's gift and 15000 for C's gift can deduct 30K if split between married 11,700,000 per MFJ lifetime exclusion

**tax payer to avoid penalties

%%% taxpayer can generally avoid penalties if he/she acted in good faith, if there was a reasonable basis to support the tax return position, and if the taxpayer did not have willful neglect no requirement that the error not exceed $1000

**consolidated return

%%%**the common parent must directly own 80 percent or more of the voting power of at least one of the other includible corporations and having a value equal to at least 80 percent or more of the total value of all outstanding stock of the corp. brother/sister corps can not. where an individual owns 80% of each **an affiliated group means that a common parent owns 1) 80% or more of the voting power of all outstanding stock and 2) 80% or more of the value of all outstanding stock of each corporation **Groups that are not allowed to file consolidated return 1. S Corp 2. Foreign corporations 3. most real estate investment trusts (REITs), some insurance companies, brother-sister corporations in which an individual (not a corporation) owns 80% or most of the stock of two or more corporations, and most exempt organizations

Duress^17

1. improper threat- voidable by the innocent 2. Physical compulsion: void **it must be shown that the seller's improper threats actually induced the purchaser to assent to the contract XXX NO NEED to show: what a reasonable person would do or the threat would made with the intent to influence the purchaser

**4 warranties

** 1. express warranties: oral/written statement must be part of the basis of the bargain b/w buyer and seller x: the seller selects goods knowing the buyer's intended use **e.g. confirmity of goods to sample **2. implied warranty of title: in every sales contract no liens or encumbrances 3. implied warranty of merchantability: ordinary purpose 4. implied warranty of fitness for a particular purpose: where the seller knows the particular purpose for which the buyer will use the goods and knows the buyer is relying on the seller's skill or judgment to select suitable goods

**charitable contributions limit for c corp

** 10 percent of adjusted taxable income maximum *** Note that for individuals, there are different % see notes above **excess carried forward 5 years ** an accrual can be deducted if 1. paid with 3.5 months of year-end. 2. the BOD authorizes the contribution during the tax year **taxable income used for the limit is calculated before the deduction of: - any charitable contribution deduction - **the dividends received deduction - any capital loss carryback **but taxable income in other questions should be calculated after taken the dividend received deduction *** income before special deduction should include full dividend income and not include the DRD ; and it should include the full charitable contributions *** matching contribution to employee-designated qualified universities are deductible

**Organization expenses to capitalize (organizational) c corp

** may elect to deduct up to 5,000 each of organization expenditures and start up costs. reduced by the amount by which the costs exceed 50K. ***each $5000 amount is reduced by the amount by which the organization or start up costs exceed $50000, respectively **(remaining after excluding the 5k) amortized over 180 months (15 years). **the question said no less then 180 months **allowable org expenses include fees paid for legal services in drafting the partnership agreement or corporate charter, fees paid for accounting services, fees paid for partnership filings. (not expenses for printing and sale of stock certificates) For corps in meeting minutes, bylaws, fee paid to the state of incorporation as well. start up costs include training costs, advertising costs, and testing costs incurred prior to opening of the business. **not allowed: issuing and selling stock, commissions, ***underwriter's fee, and ***costs incurred in the transfer of assets to a corporation

**Grantor Trusts

**- the grantor, (the individual who established the trust) retains control over the trusts assets - considered a disregarded entity for income tax purposes, any taxable income or deduction of a grantor trust is reported on the income tax return of the grantor - grantor trust can be a qualified shareholder of an S corp - generally included in the taxable estate of the grantor upon his or her death

**duties of principal to agent

**1. compensation (not owe if the agent is gratuitous [work for free]) **2. reimbursement/ indemnification 3. remedies of the agent

**duties of agent to principal

**1. loyalty: not to self-deal, usurp opportunities, or have conflicts of interest with the principal 2. obedience 3. reasonable care **4. duty to account: the agent has a duty to account to the principal for all property and money received and paid out when acting on behalf of the principal. The agent cannot commingle the principal's property with the agent's property

**Unilateral and Bilateral Contracts^17

**U: only one party makes promise, the other party performs an action which obligates the promisor to fulfill the promise. (e.x. reward to find dog) B: Both parties makes promises. (reserve a hotel room)

**breach contract (each party's responsibilities)

**the breach party has a duty to recover damage but the other party also has a duty to mitigate: if he/she loses the job bc of the other party's breach of contract, he/she should try finding a similar job and then have the breach party to pay the difference

**small claims division

**decisions in the small claims division of the U.S. Tax Court lack precedential value

homeowners exclusion

**exclusion = 500K MFJ or 250K single - taxpayer must have owned and used the property as principal residence for two years or more during the five year period ending on the date of sale. - this period above does not have to be continuous but can be reduced for nonqualified use. - if only one spouse meets the requirements than can only get the 250K. - a widower can get the 500K exclusion if sells home within the 2 years after death. - can be eligible for a reduced exclusion if the sale is due to a change of employment, health or unforeseen circumstances. (must be 50 miles further) - if 2 lived in and 2 rented than still get 250K exclusion but 50% of gain would be taxed **improvements and real estate commission when sale the house is included in the ending basis ***BUT fix up expense does not affect basis --should be expense

**Capital loss^7

**individuals = 3,000 maximum deductions to offset other types of gross income (such as ordinary income, passive income and portfolio income); excess can be carryforward for an unlimited time %%% portfolio income includes interest on investment and cannot be offsetting against passive loss corporation = 3 back and 5 forward as STCL to offset only capital gains

**attachment (secured transaction)

**is also the process whereby a security interest is created to give the creditor rights against the debtor the term attachment refers to the relationship b/w the debtor and the secured party (creditor): %%% There are 3 requirements for an attachment: 1. Agreement of the parties (either an authenticated record of the agreement or the creditor's having either possession or control of the collateral) (aka either the creditor must take possession of the collateral or the debtor must sign a security agreement that describes the collateral) 2. value is given by creditor 3. debtor has rights in the collateral

**depreciation question

**land is not depreciable so the cost of land is not added to the depreciable basis **the real estate taxes is a deductible expense for the business but it is not capitalized for the depreciable basis computation **FMV of the land is irrelevant

**Sch E

**rental of residence - fewer than 15 days excluded from income rented home 15 days or more but used home for more than 14 days or 10 percent of rental days, it is treated as a personal residence. prorate expenses - no loss allowed (taxes/interest are deducted for portion is was rented of the year. utilities and depreciation are for the portion rented/lived there) - Nonresidence property, losses are considered passive and can only deduct to the extent of passive income. active participant can deduct up to $25,000 rental losses agains nonpassive income. **if the property is personally used more than 14 days, any net loss from the rental of the property will be disallowed **proprated depreciation is permitted for the rental activity **PREPAID rent is income when received even for an accrual-basis taxpayer

**Statute of frauds^17******

**requires certain contract to be in writing TO BE ENFORCEABLE ***Both parties need NOT sign the writing and only the party to be charged (i.e. the party trying to avoid the contract) must have signed ****if A and B enters into a contract bc A is selling B a house. If A signed the paper and B did not. B will be able to seek enforcement of the contract since A signed but A would not be able to enforce the contract against B since B did not sign it - 1. Marriage **-2. contracts longer than 1yr (**the one year period runs from the DATE OF CONTRACT, not the when the PERFORMANCE BEGAN!!!) %%% also performance need to perform within a year means to finish it within a year not to start within a year --e.g. to coach football team for the next five years, even enter in the contract this year, would require a written contract %%% and the exception of this one is that if one party has fully performed his/her part of the contract. In such a case, the contract can be enforced despite the lack of a sufficient writing if the aggrieved party can convince the court that the oral term was indeed part of the contract. - 3. Sale of interest in land - 4. sale of goods >=500 (not real estate) - 5. **answer the debt of another **no requirement that the terms of a written contract be contained in a single writing **not require for the contract to be in writing --ONLY that some writing reflects the material terms of the contract and that that writing is signed by the PARTY SOUGHT to be held liable, NOT NECESSARILY both parties

**who is not eligible for reorganization (chapter 7 and chapter 11)

**savings and loan corporation **stockbrokers ***NOT: railroads ***i think in general it is the business that to give people money as their business, they cannot just file bankruptcy and said they dont have money any more

**Base erosion and anti abuse tax (BEAT)

**the base erosion and anti-abuse tax (BEAT) may apply to corporations with average annual gross receipts of $500 million or more for the three preceding tax year

**foreign branch

**unincorporated foreign entity that is viewed as an extension of the domestic corp. not a separate legal entity, however, earnings from the branch are generally taxed by the foreign corp as well. fed tax and then take a deduction or credit

**S Corp Qualifications

- **"100" or less shareholders. Family one counts as 1 (common ancestors, lineal descendants of common ancestors) - may own interest in a C Corp but may not file a consolidated tax return with the C corp. - eligible shareholders - must be an individual, estate or certain types of trusts - may not be a nonresident alien - charitable/retirement plans may be a shareholder - neither corps or partnerships can be - grantor and voting trusts are permissible sharehol **- only can have 1 class of stock. may have voting rights though but not preferred. **- The election of S corporation status must be made by a qualified corporation with the unanimous (written) consent of ALL shareholders **- a limited liability company with more than one owner is treated as a partnership, NOT Eligible to be shareholders in an S corporation

Acceptance of offer^17

- Mirror image rule: must be positive, unequivocal, and unconditional. Has to accept all terms of an offer. - Acceptance may be communicated by words or actions

**Passive Activity Loss (PAL)^7

- Passive losses against passive income; excess will be carried forward - this rule apply to individuals, estates, trusts, personal service corporations, and closely held corporations %%% Rental Real Estate: - when someone actively participate in rental, owns 10% or more of the activity, has MAGI of less than $150K; permitted a deduction up to $25K in losses in excess of passive income against active income. - Phaseout: $25K is reduced by 50% of modified AGI (AGI without regard to PALs, SSB, and IRAs) in excess of 100K **the loss is allocated b/w the two activities with passive losses based on the ratio of each activity's loss to the total losses

element of a legally enforceable contract

- an agreement made up of an offer and acceptance - an exchange of consideration - a lack of defenses

**shareholders basis in C corp

- cash amount contributed - property: NBV, reduced by any debt on property. services: not counted as part of 80% control group, and FMV is taxable and amount of basis Gain realized = FMV = NBV

**best practices for tax advisors

- communicated with the client regarding the terms of the engagement to determine the clients purpose and use for advice - establishing the facts and arriving at a conclusion supported by the law and facts - advising the client about the importance of conclusions reached - acting fairly and with integrity - take reasonable steps the firm is consistent with the above.

consequences to shareholder for s corp liquidation

- distributions from an s corp are treated as payments in exchange for stock - adjusted basis in stock is subtracted from the amount realized to calculate gain or loss Cash/FMV property - liabilities assumed - stock basis = taxable gain/loss

unrelated business income (UBI)

- does not include any activity where all of the work is performed by unpaid workers(volunteers) or articles are made by disabled persons as part of their rehabilitation. - no tax on the first $1,000

below market loans and imputed interest

- have to report foregone interest as interest income - if under 10,000 between individuals than that is ok - gift loans under 100,000: the foregone interest to be included as income by the lender and deducted by the borrower is limited to the amount of the borrowers net investment income for the year. if the borrowers net investment income is 1,000 or less than 0 is applied. calculation: loaned 200K at 1% and AFR amount is 2.24% than imputed interest is the difference.

**3 relevant torts a CPA can be liable of

- negligence - constructive fraud (gross negligence/reckless) - fraud ( willful, intent)

orgs that fail to meet tax exempt organizations

- no part of the net earnings may benefit any private shareholder or individual - a substantial part of the activities of the organization may not be nonexempt activities carrying on propaganda or otherwise attempting to influence legislation - the organizations may not directly participate or intervene in any political campaign

membership organizations/ social clubs

- not taxed unless it makes a profit

%%%**Simple Trusts

- only makes distributions out of current income, it cannot make distributions from principal. - required to distribute all of its income currently **- cannot take a deduction for a charitable contribution - entitled to a $300 exemption in arriving at its TI

**noncapital assets

- property normally included in **inventory or held for sale to customers in the ordinary course of business. - depreciable personal property and real estate used in a trade or business. **- accounts and notes receivable arising from sales or services in the taxpayers business - copyrights, literary, musical, or artistic compositions held by the original artist. - treasury stock

proving male practice

- tax preparer owed a duty to the taxpayer - there was a breach of that duty - plaintiff suffered injuries - there was a determinable cause between injury suffered and duty of the tax preparer

**UCC Statute of fraud

--contracts for the sale of goods for $500 or more must be evidenced by a writing signed by the party being sued. %%%exceptions: 1. contracts for specially manufactured goods 2. where a merchant sends another merchant a written confirmation (e.g. a purchase order) of a contract that is sufficient to bind the sender, it will also bind the recipient if she does not object within 10 days 3 contracts that parties have admitted in court 4 contracts that have been performed to the extent that the performance has been accepted %%% for partial shipment --> only bind the receiver if they accepts it and only to the extent of the goods received %%%partial payment of the receiver would make the contract enforceable only to the extent of the payment accepted

distributions in a C corp

1. Current E&P ---> taxable dividend 2. accumulated E&P ----> taxable dividend 3. return of capital (no E&P) -----> tax free and reduces basis of common stock 4. capital gain distribution(no E&P, no basis) ---> taxable income as a capital gain

**Capacity^17

-assumed to exist unless: **1. minor: may disaffirm his/her contract (even within a reasonable time after becoming an adult) ***a minor may disaffirm even if the subject matter of the contract has been destroyed (even by the minor's own negligence); the minor's only duty is to return whatever is left - always liable for a quasi-contract. 2. mental capacity - judicially declared: already void -after contract: voidable 3. Intoxicated - only voidable at the option of the intoxicated person.

partnership formation / taxation

-generally not taxed at formation on contribution of property in return for partnership interest. -partner is taxed as ordinary income for rights to receive a share of capital for services rendered -partner is taxed when property contributed is subject to a liab (% assumed by other partners) in excess of basis

**section 179 rules

-only for depreciable, trade, or business personal property - Deduction: 1.05M minus the excess of Sec.179 Eligible asset acquisitions for the year over $2.62 M or TI from the active business can be taken in lieu of (instead of) depreciation to qualify for IRC section 179: 1. the property must be purchased for use in the taxpayer's active trade or business 2. the property must be purchased from an unrelated party %%%1,050,000 limit for a single asset in a year and 2.62 million total. reduced dollar for dollar any amount over. deduction not allowed if a net loss or it creates a net loss (limited to taxable income).

tax penalties

-unreasonable position understatement = the greater of 1,000 or 50% of the income the preparer received - willful or reckless understatement = $5,000 or 50% of the income preparer received

what is the max amount of executive compensation a corp can deduct for officers

1,000,000

**annual estimated tax payment for a c corp is the least of

1. 100 percent of the tax liability of the prior year's return, assuming a positive tax liability 2) 100 percent of the current year tax liability 3) 100 percent of estimated current year tax liability according to the annualized income method **the prior year method cannot be used if the corporation owned no tax for the preceding year or the preceding year was less than 12 months **no underpayment of estimated tax penalty will be imposed if the total underpayment of tax for the year is less than $500

**What actions b/w debtor and creditors releases the debtor from its debt

1. Composition of creditors: Yes (an agreement b/w debtor and at least two creditor that the creditor will take less than full payment to discharge the debts owned by the debtor to the creditors who participate in the composition agreement) 2. assignment for the benefit of creditors: No (transfer some or all of his or her property to a trustee, who disposes of the property and uses the proceeds to satisfy the debtor's debts. The debtor is not discharged from unpaid debts by this procedure since creditors do not agree to any discharge)

**Fraud Elements^17 %%%

1. False representation of material fact 2. Intent to misrepresent/deceive/scienter / gross negligence (reckless) (the best defense for CPA) 3. intent to induce reliance 4. actual and justifiable reliance by plaintiff on the misrepresentation 5. reliance occurred and damage was done **a disclaimer in the engagement letter is not a defense to fraud

Breach^17

1. Material breach: unjustified. Can seek remedies 2. Nonmaterial breach: receives parts of the contract.

**Discharge by agreement^17

1. Mutual recession 2. Accord and satisfaction: new contract occurs. 3. Novation: contract that replace a party with another party.

Items not sufficient consideration ^17

1. Past consideration - e.x returning a dog before find out about the rewards. 2. Pre-existing legal duty - imposed by law or already required to perform

???Substitutes for consideration^17

1. Promissory Estoppel: e.x have to pay the donation you promised on. 2. Quasi-contract: one of the party is substainly benefited. Reasonable payment has to be made.

**employee stock option SIM

1. Qualified ISO: granted 50 shares on 4/10/Y1 @$45 ; exercised on 9/5/Y1 @$75 ; sold 11/20/Y3 @$95--> Y1 income = 0 Y3 = (95-45)*50 = 2500 2. Qualified ISO: granted 50 shares on 4/1/Y1 @$45; never exercised and lapsed --> Income Y1 & Y3 = $0 3. Nonqualified Stock Option: granded 100 shares on 4/1/Y1 @$65 (for both option price and FMV) ; option had a readily ascertainable value of $3 per share ; exercised 9/5/Y1 @ $85 ; sold stock on 11/20/Y3 @$95 --> Y1 income = $3*100 = $300 (ordinary income) Y3 income = $95*100 - ($65*100+300) = $2700 (LTCG) 4. Nonqualified stock option: same as 3 except no readily ascertainable value --> Y1 income = ($85-$65)*100= 2000 (ordinary income) Y3: ($95-$85)*100 = 1000 (LTCG)

Performance^17

1. Strict: according to the terms of contract 2. Substantial: duties are difficult to perform without some deviation from perfection

**partnership tax year

1. a partnership may elect to have a tax year other than the generally required tax year if the deferred period for the tax year elected does not exceed three months (**e.g. 75% interest partner has December 31st year-end, but the partnership could elect to have Nov 30th year-end and the deferred period is not 11 months but 1 month !!!) 2. in the absence of an election to adopt an annual accounting period, the required tax year for a partnership is a tax year of one or more partners with a more than 50% interest (in aggregate) in profits and capital 3. most elections that affect the calculation of taxable income of a partnership are made by the partnership itself rather than by an individual partner (e.g. the elections as to methods of accounting, methods of depreciation and the section 179 expensing of a limited amount of depreciable property, the election not to use installment method accounting, and similar elections are made by the partnership and apply to all partners. HOWEVER, individual partners can make the election to take a deduction or a credit for taxes paid to foreign countries

**excluded from unrelated trade or business (tax-exempt organization)

1. activity where substantially all the work is performed by unpaid volunteer workers 2. sale of articles made by disabled persons as part of their rehabilitation (including operating a grocery store almost fully staffed by emotionally disabled persons as part of a therapeutic program)

**The MACRS method

1. applies to the calculation of the cost recovery deduction for used tangible depreciable property 2. the recovery period for the depreciable realty must be 27.5 years for residential realty and 39 years for commercial realty

**temporary difference and permanent difference

1. bad debt deduction

**termination of actual authority (operation of law)

1. death 2. incapacity of principal 3. discharge in bankruptcy 4. failure to acquire license 5. destruction of the subject matter of the agency 6. subsequent illegality

**negligence element

1. defendant owned a duty of care to the plaintiff (**so if the CPA exercise reasonable care, this element would not exist) 2. the defendant breached that duty by failing to act with due care 3. the breach caused plaintiff's injury; 4. damage **so for #3, if CPA can prove the negligence was not the proximate cause (main reason** i guess!!) of the client's loss, the third element does not exist ***reliance is not an element!!!

** Unrelated Business Income (UBI)

1. derived from an activity that constitutes a trade or business 2. is regularly carried on, and 3. not substantially related to the organization's tax-exempt purpose

**licensing requirement (contract)

1. failure to have a license required to protect the public makes a contract void 2. if the license is required merely to raise revenue, the contract is enforceable

%%% perfection

1. filing a financing statement 2. possession (tangible assets only) 3. attachment (part of automatic perfection) a. PMSI in consumer goods b. Small -Scale assignment --> so not "90% of the AR" for example

** life insurance premium and proceed

1. life insurance proceeds on the life of an officer when the corporation is the owner and beneficiary are not reported as taxable income of the corporation --> so any expense related to the premiums would not have been tax deductible for the corporation 2. XXXX --> life insurance premiums paid on the insurance policy where the beneficiary is named by the insured employee, such premiums are deductible by the corporation as an employee benefit

**Termination of offer^17

1. may occur after a specified period or date - if no time is stated, the offer will terminate in a reasonable time **2. Death or incompetence's 3. Destruction of subject matter 4. Revocation: The offeror can revoke prior to acceptance. 5. Rejection: offeree rejects

**3 broad categories of misconduct relating to the disciplinary power of the state boards of accountancy

1. misconduct while performing accounting services, 2. misconduct outside the scope of performing accounting services, 3. a criminal conviction

** Offer Components^17 (contract)

1. must be communicated to offeree 2. Must be authorized by offeror 3. Must indicate an objective intent to enter into a contract 4. must be sufficiently definite and certain. (name, subject matter, price and quantity, time and place) ***price

**financial statement relating to collateral debtor creditor

1. name and the address of the debtor and of secured party (dont have to include the signature) 2. a description or indication of the collateral covered by the financing statement 3. if the collateral is related to real property, a description of that real property X need to include: a statement of the purpose of the transaction

**accuracy related penalty (tax)

1. negligence or a disregard of the tax rules or regulations (20% of the understatement of tax) **the penalty of 20% is avoided if the taxpayer has a reasonable basis for taking the position, the taxpayer has disclosed the position on the tax return, and the position does not pertain to a tax shelter 2. any substantial understatement of income tax

**separate limitation of foreign tax credit limitation

1. passive category income (dividends, interest, rents royalties) 2. general category income 3. foreign branch income 4. global intangible low-taxed income

**an agent to make business has the implied authority to do

1. pay the business debt 2. purchase inventory for the business 3. hire or discharge business employees the agent does not have authority to: 1. sell the business fixtures

**unlimited gift exclusion

1. payments made directly to an educational institution (E.g. tuition) ***Not room and board 2. payments made directly to a health care provider 3. Charitable gifts 4. Marital deduction **Political contributions are not taxable gifts and the filing of a gift tax return is not required (they are nondeductible business expense) ***if a taxpayer gives a taxable gift in excess of the 15,000 per donee exclusion amount, the amount in excess of $15000 is a taxable gift and subject to the gift tax

**Not a defense from surety

1. principal debtor is bankrupt is not a defense to the surety 2. principal debtor was incompetent at the time the contract was made is not a defense available to the surety **3. Fraud on the surety (debtor lied to the surety so the surety agree to guarantee the payment) by the principal debtor is not a defense unless the creditor knew of the fraud

**shareholder recognized question MCQ-06518

1. shareholder who contributes only services is not counted as part of the control group (so the remaining shareholder can see if they satisfy section 351 by checking if their remaining shares are over 80%) 2. if the remaining shareholder does not satisfy the 80%, and one shareholder got stock exchange of legal fee, then the legal fee is compensation for services rendered so need to be recognized as income by this shareholder

partnership tax loss limitation

1. tax basis 2. at risk amount (does not include nonrecourse) 3. passive activity 4. excess business loss NOL is 80% of taxable income

%%%**Aiding and abetting understatements of tax liability on a tax return

1. taxpayer has the burden of proof to establish by the preponderance of the evidence that the law and the evidence do not support the position of the IRS (preponderance of the evidence) 2. criminal action, the government has the burden of proof to establish by evidence beyond a reasonable doubt that the taxpayer is guilty of the charges

**S corp termination

1. the S election is terminated if the S corp has passive investment income greater than 25% of gross receipts for three consecutive years 2. an S corp may have only one class of stock. A difference in voting privileges (e.g. voting and nonvoting common stock) does not constitute another class of stock, and they are combined for S election (and revocation) purposes. 3. the election for an S corp is revoked on the date when over 50% of the shareholders elect to revoke

**accumulated earnings tax

1. the imposition of the accumulated earnings tax does not depend on the number of shareholders a corporation has 2. personal holding companies are not liable for the accumulated earnings tax ; a parent-subsidiary group is not a requirement for the imposition of the accumulated earnings tax 3. 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) 4. personal service corporations are entitled to only $150,000 of (lifetime) accumulated earnings To eliminate or reduce accumulated earnings tax: a. demonstrate that the "reasonable needs" of its business require the retention of all or part of the Year 1 Accumulated Taxable income b. pay dividends by April 15 next year (the tax due date) 5. MCQ-02160: accumulated earnings tax income = taxable income - federal income tax - minimum accumulated earnings credit ($250,000)

**courts of original jurisdiction (tax)

1. the tax court 2. the U.S. District Court 3. the U.S. Court of Federal Claims **U.S. District Court cases are heard before one judge, not a panel of judges **when the U.S. supreme court denies a writ of certiorari, it does not confirm the lower court's decision

**Debtor's remedies (suretyship)

1. writ of attachment (an order by the court to a sheriff to seize a person's property) 2. Garnishment (an order to a third person who holds property of the debtor to turn the property over to a creditor)

failure to pay penalty

1/2 of 1% per month up to 25% of the unpaid tax

**Consideration requirements^17 (contract)

2 elements: **1. Legal sufficiency - Exists if the promisee incurs a legal detriment or the promisor incurs a legal benefit ***(doesn't have to equal valued) 2. bargained-for exchange - both parties must receives something of legal value in exchange for incurring a legal detriment

**when do bonus accruals have to be paid to be able to deduct?

2.5 months of taxpayers year end. March 15th.

business gifts

25$ per person per year

**when do you have to use accrual basis

26 million or more of gross receipts average over the prior 3 years. **(qualified) personal service corporations are treated as individuals for purposes of the rules for accrual basis tax reporting --> therefore, personal service corporations (regardless of the amount of gross receipts), may use the cash basis of reporting for income tax purpose **C corp also uses accrual method so rent revenue in the income tax return would include cash received from rent + increase receivables during the year + nonrefundable deposit that received

**wrongful disclosure and/or use of tax return information

3 exceptions: 1. disclosure allowed by any provision of the IRC and disclosures pursuant to a court order 2. allowable uses (preparation of state and local tax returns and preparation of declaration of estimated tax) 3. disclosures and uses permitted by U.S. treasury regulations for quality and peer reviews and administrative orders ok: 1. peer review 2. enable the tax processor to electronically compute the taxpayer's liability 3. **an accountant may disclose confidential client information to any party if the client specifically consents to the release of information 4. a state CPA society voluntary quality control review board %%%NOT OK: 1. to enable a third party to solicit business from the taxpayer 2. disclosure may be made to comply with an SEC audit request (need to be subpoenaed or the client consents)

**liquidation of a partnership

3 ways a partner may liquidate their interest 1. complete withdrawal 2. sale of a partnership interest 3. retirement or death partners basis in distributed property is the same as the adjusted basis of the partners interest reduced by any boot received. if have excess basis than allocate it to the property withdrawn (not a gain) unless cash is the only thing received. liquidating must zero basis out where as a nonliquidating you just have to stop at zero. **note on #2 sale of partnership interest amount realized is (sale price + relief of partnership debt) partner basis is (capital account + share of partnership liability) ***basis does not include cash in the partnership!! %%% realized gain = amount realized - partner basis %%%Noted that realized gain is ordinary to the extent of unrealized receivables / appreciated inventories sold (the partner's share ofc) capital gain/loss = (sale price + relief of debt - capital account - relief of debt) = sale price - capital account

what is the tax rate U.S. can tax a dividend to a foreign person?

30%

failure to file penalty

5% of the amount of tax due for each month up to 25%. - if 60 days late, minimum is lesser of $210 or 100 percent of the tax due - partnership = $200 per month * per partner

**partnership distribution

A nonliquidating distribution to a partner is nontaxable in general, distributions of cash or property to a partner reduce the partner's basis in the partnership interest by the cash or adjusted basis (NBV) of the property distributed (first cash distribution then property) Property distributed: 1. if partner's basis > adjusted basis of the property --> the partnership basis is reduced by the property adjusted basis the partner's basis in the property is the same as the partnership's basis in the property 2. if partner's basis < adjusted basis, partner's basis in the partnership is 0 after accepting the property and the partner's property basis is whatever the partner's basis is before the property distribution (but after cash distribution) 3. cash distribution > partner's basis --> capital gain *** 4. distribution of Multiple asset use partner's basis if the total adjusted basis of those asset are larger than the partner's basis then start from Cash --> hot asset (inventory, unrealized receivables) --> other assets and the last item's basis would change to make the partner's basis not below 0 (see example R5-M3) **basis is reduced by distribution prior to the reduction for loss ***but basis is increased by ordinary income before cash distribution (MCQ-08916)

Legality^17

A promise to commit, or induce the commission of, a tort or crime is void on grounds of public policy

**disclosed principal and withdraw of the third party after knowing the agent is unauthorized

A third party may withdraw from a transaction or agreement entered into with an agent who exceeded his or her authority at any time prior to the principal's ratification of the agent's unauthorized acts

Mailbox rule^17

Acceptance is effective at the moment of dispatch if: 1. Offeree used an authorized medium of acceptance and 2. Offer is still open

%%% Bankruptcy and alimony

After secured creditors are paid, the unsecured creditors entitled to a priority are paid. Claims for alimony have the first priority among unsecured creditors.

Conditions^17

An act, event, or set of facts that creates, limits an absolute duty - Timing - express/implied

Purchase property basis

Cost + capital improvements + liabilities created reduce basis for accumulated depreciation - repairs/ maint are not included in the basis of asset bought but testing is

** Inventory valuation methods

Cost Method: at cost + direct labor, DM Lower of Cost or Market Method: Cost or FMV Rolling Average Retail Method FIFO LIFO **the taxpaer is not required to receive permission each year from the IRS to continue the use of the LIFO method **LIFO method can be used for tax purposes only if the LIFO method is used for financial statement purposes

**Sch C

Deductions - not including obvious expenses **Or personal expense like health insurance for oneself and family mileage rate expense = 54.5 cents put charity on sch A **business meals = 50% deductible in schedule C **interest expense paid in advance by a cash basis taxpayer can not be deducted until current year employee benefits bad debts actually written off **adjustment to income is allowed for one half (7.65% of up to 142,800 self employment income plus 1.45% thereafter. **no self-employment tax is owed if self-employment income, after multiplying by 92.35 percent, is less than $400 Example: 20K in income. 20K*92.35%=$18470. 18,470*15.3%= $2,826. Not Deductible **salaries paid to self - (considered draw) FIT personal expenses/ health insurance (for the owner) ** note that health insurance for the employees are deductible entertainment %%% **bad debt when you never reported the income **Becker?: bad debts actually written off for an accrual basis taxpayer only (direct write-off method, not the allowance method, is used for tax purpose) max loss allowed = 500K/250K, loss can be greater if not passive and it is offsetting other business income. excess CF = 4 ever to offset 80% of income in future **rule: if foreign travel is primarily personal in nature (vacation), none of the travel expenses incurred will be allowable business deduction, even if the taxpayer was involved in business activities while in the foreign country **the deductions for one-half of self-employment tax and self-employment health insurance are adjustments from total gross income (1040) and they are not deducted from self-employment earnings (schedule c) (which is gross business income - gross business expense)

**Gift^8/15

Donee's basis in property acquired: Donor's basis+gift tax paid: Gift tax paid*[(FMV-donor basis)/(FMV-annual exclusion)]+ donor's basis If FMV<donor's basis, donee has a dual basis -the FMV at the date of gift is used is the property is later transferred at a loss - Donor's basis is used if its transfer later at a gain. if the transfer is > FMV but < donor's basis, no gain/loss is recognized

Seperately Stated Items

Guaranteed payments Net active rental income Net passive rental income Interest income Dividend Income Capital gains/losses charitable contributions section 179 investment interest expense partners health insurance premiums retirement plan contributions tax credits

Innocent misrepresentation^17

False representation of a material fact. But has no knowledge of the false info and have acted with due care

**debtor's right (suretyship)

Federal law does not allow creditors to institute garnishment proceedings with respect to federal social security benefits

what form is signed after an audit if an agreement is reached with the taxpayer?

Form 870

***Basis for Gifts %%%

GR is to roll over the cost basis but if the FMV is lower than it depends on the selling price can be long term or short term %%% 15,000 per giftee if it is directly to medical or educational institution then have unlimited exclusion from gift tax

inherited basis

GR: FMV at the date of death (Step up/down rule). Alternative valuation date: FMV 6 months after death or when sold if sold before 6 months. automatically considered long term.

Capitalize or Expense

GR: tangible property that is not inventory should be capitalized. economic life less than 12 months = expense (supplies) improvments = capitalize ($ to acquire) intangibles = capitalize tangibles = capitalize

Gain/Loss on Disposals

Gain not taxed if below H omeowners exclusion I nvoluntary conversion D ivorce property settlement E xchange of like kind I nstallment sale T reasury capital and stock Loss - not a loss if below W ash sale losses R elated party losses And P ersonal losses

%%% exception when gratuitous promise is enforceable ( could be enforceable)

Generally, a gratuitous promise is not enforceable. Becky received no consideration for her promise to perform. Thus, no contract was formed. However, detrimental reliance can substitute for consideration.

Casualty and Theft Losses^7

In general, the loss amount is the lesser of the decline in FMV or the AB minus insurance reimbursements - if business or investment property is completely lost or stolen, AB is used to compute the loss. As of 2018, personal casualty and theft losses only apply to federal declared disasters and losses to the extent of casualty gain Personal losses: itemized deduction - take the lessor of lost cost/adjusted basis or decrease in FMV minus the insurance recovery than subtract $100 to get eligible loss, than subtract out 10% AGI to get deductible loss.- an insurance claim has to be filed, and the losses are not covered by the insurance.

**shareholder basis in S Corp Stock

Initial basis + income items (ordinary business income, separately stated income/gain, and **tax-exempt income, **capital gain) +additional investments - distributions - loss or expense items (**including STCL [even if STCL is over LTCG]) ***note that the order of the above equation is important, even if the s corp has capital loss, it would be after the distribution!!! (MCQ-01952) ***also note that this order is used to calculate the shareholder's basis but when the question ask the total amount of income from the S corp to be included in shareholder's adjusted gross income. it would be: his/her share of the ordinary income from the s corp this year (****note that the tax exempt income and cash distribution not exceeding the basis are not taxable** --> hence would not be in the adjusted gross income) **same thing applies to partnership!!! **Note that the debt basis is increased by direct loans made to the s corp by the owner (so the owner's basis in the stock is not affected by the entity's bank loan increases or decreases) **Both tax-exempt and taxable interest income increases a shareholder's basis in S corporation stock ***!!! For AAA, however, it is increased by 1. ordinary business income 2. separately stated income and gain items (OTHER THAN TAX-EXEMPT INCOME) !!! ***seperately stated income such as dividend income (not part of net business income) **for LLC partnership for example, the basis would increase if the entity has outstanding resource liabilities to third party **Wages from the corporation does not affect the basis ***BUT salary to owner who worked as CEO of the corp would be part of the S corp ordinary business income that could be deducted ***%%% Section 179 Expense, interest income and charitable contributions are separately stated items not part of S corp's ordinary business expense %%%But Regular MACRS depreciation is part of ordinary income ****Interest expense (interest expense on bank line of credit) !!! is part of ordinary income for S corp! BUT investment interest expense is a separately stated item (apply for partnership as well) ***section 1231 loss or interest income are separately stated items (partnership)

**greatest authoritative value for tax planning of transaction

Internal Revenue Code (**NOT tax court decision bc they interpret the IRC but do not the the authority of the IRC) 1. The Internal Revenue Code, 2. tax court cases, and 3. Treasury regulations, respectively, are considered primary authoritative sources when one is conducting tax research %%% IRS publications are not considered a primary authoritative source when one is conducting tax research

%%% prepare the will

Legal fees for preparation of a will are not deductible.

S Corp Loss Limitation

Loss Limitation = Basis + Direct Shareholder loans(recourse loans only) - Distributions direct shareholder loans (basically the debt basis: e.g. if the shareholder made a loan of $13k and 3k was repaid by the corp during the year, the debt basis at year-end is 10k) **any losses disallowed may be carried forward indefinitely and will be deductible as the shareholder's basis is increased

**fraud & constructive fraud

M misrepresentation of material fact A actual and justifiable reliance by plaintiff I ntent to induce plaintiffs reliance D damanages S scientor (intent to deceive/knowing it was false) **constructive fraud does not require intent

**section 1245

M&E - gains only depreciable personal property used in a trade or business for more than 12 months. **- upon the sale of 1245 asset, the lesser of gain recognized or all accumulated depreciation taken on the asset is recaptured as ordinary income under section 1245 and any remaining gain is section 1231 gain. (capital gain) **could qualify as section 1245 property if "a self-employed taxpayer purchased office furniture ..." **accumulated depreciation!!! for 1245, in excess depreciation is IRRELEVANT!!!

Qualifying Widower^3

Married in year spouse dies and QW for the next two years - must have a dependent(has to be son/daughter) live with you all year & pay atleast half for that residence

Estate deductions

Medical expenses administrative expenses charitable (unlimited) marital deduction (unlimited to spouse)

lobbying and political expenses =

ND

can an S corp file a consolidated return?

NO

limitation of chapter 7

NO R railroads I Insurance B BANKS S small business investment companys

NOL's^7

NOLs prior to 2018 are 2 back and 20 forward with no limit. NOLS from 2018 and after are deductible up to 80% of taxable income and can be carried forward indefinitely NOL carried forward is a deduction to arrive at AGI NOL calculation - Taxable income - Add back NOLs carried forward into the current tax year - Add back the Qualified Business Income Deduction - Add back excess of nonbusiness deduction over nonbusiness income. (NB deduction: alimony, contribution to self-employed retirement plans, loss from the sale of investment property, and either the standard deduction or all itemized deductions; NB income includes: interest, dividends, gain on the sale of investment property, treasure trove)

**partnership liquidation 2.0

Payment made in liquidation of the interest of a retiring partner are considered a distribution by the partnership. Therefore, a retiring partner continues as a partner until his interest has been completely liquidated by the partnership distributions **in other words, whatever he got per year are distributions that reduced his basis in the partnership and when he got more than his basis in a particular year, his basis becomes zero and he recognized the excess as income

**Head of Household^3

QC or QR or relative/parent must live with taxpayer for at least half year; pays more than 50% - unmarried or legally separate - can not be a nonresident alien **-has dependent living with them >half the year (dependent parents not required to live with them) -not married

QR^3

S - support, must provide at least half of support U - under a specific amount of gross income (4,200) P - precludes dependent filing joint return O - only can be U.S., Mexican, or Canadian citizen R - relationship test or (parents, stepkids, inlaws, stepsisters) T - taxpayer lives with individual

**liquidation c corp

SHers treat property received in a complete liquidation of a corp as full payment for their stock --> therefore should recogize capital gain or loss (Difference b/w the fair market value or the property received and the basis of the stock surrendered) %%%**parent/sub liquidation no gain or loss is recognized by either the parent or the sub when the parent owns at least 80%, liquidates its sub. The parent assumes the basis of the sub's asset as well as any unused NOL or capital loss or charitable contribution carryovers **during liquidation, if property with liability is transferred, the parent would not net the sub's basis with the liability together, instead, the parent would carry the asset at the sub's basis and has a separate liability of $50,000 on its balance sheet ***sale of inventory would be ordinary income not capital gain!!!

**Foreign-derived intangible income

Sales to non-U.S. persons of property for use outside the U.S. increase a corporation's foreign-derived intangible income **not to related parties **also the sale is not within US

Factors limiting loss for rental activity

Tax basis = S corp At risk basis = partnership Passive activity loss = rental excess business loss = maximum allowed 500k/250K crryFW = 80% passive activity losses can be deducted against other passive income or can deduct the suspended losses in the year sold. **mom and pop exception: if actively participates in rental real estate activity can deduct 25K if own at least 10% of rental activity, phaseout from 100K-150K **deductible as active (50% of taxpayers personal services are in rental and more than 750 hours of services) ex: real estate agent can fully deduct losses against other income

**Subpart F Income %%%

Taxable income includable by a U.S. Taxpayer from a controlled foreign corporation. Generally includes income that has no economic connection to the country of origin. (Ex. Services are provided by an Irish company in England by a contract entered into by its U.S. parent.

**gift basis

The basis in property acquired as a gift is generally the same as the cost basis in the hands of the donor the basis in property acquired by bequest or inheritance is the fair marker value at the date of the decedent's death if an alternate valuation date is not elected

**The IRS requested client records from a CPA who does not have possession or control of the records, according to Treasury Circular 230,

The CPA must: notify the IRS of the identity of any person who, according to the CPA's belief, could have the records

**FDCPA (fair debt collection practices act)

The FDCPA gives parties injured by unfair collection practices the right to sue for damages.

**Chapter 7 bankruptcy what effect does a bankruptcy discharge have on a judgment creditor when there is no bankruptcy estate

The debtor is relieved of any personal liability to the judgement creditor

%%% IRS Field Audit

The field audit is conducted by an IRS representative, at the taxpayer's home or office, or at the place of business of the taxpayer's representative. The field audit is conducted by an IRS representative, but not at an IRS office. An office audit takes place in an IRS office. (local IRS) %%% The taxpayer can make an audio recording of the examination interview. An office audit, not a field audit, may be conducted via correspondence.

**Independent Contractor

The most important factor in determining whether a person is an independent contractor is the right to control the manner in which work is performed **employers are not liable for the torts of independent contractor

**De minimis Rule

The policy must be a written accounting policy for nontax purposes that treats as an expense. if company has an applicable F/s than 5,000 per asset. otherwise max is 2,500 per asset.

Undue influence^17

When a dominant party wrongly exploits a confidential relationship - voidable

**UCC

To satisfy the UCC statute of frauds regarding sales of goods: quantity and signature (of the party being sue) must be in writing **Applies to all contracts for the sales of goods regardless of price **absent an agreement otherwise, the seller is not obligated to deliver the conforming goods to the buyer, but merely needs to hold them for the buyer's disposition **Good faith: merchant sellers must also observe reasonable standards of fair dealing in the trade

**Parol Evidence Rule^17

Used by courts: prohibits admission of oral evidence when writing is intended to be final and complete expression of agreement of parties - exception: evidence that makes the written agreement void, voidable, or unenforceable; ***subsequent***!! modification or rescission; evidence of any separate agreement subsequent: admissible prior and contemporaneous (at the same time) : inadmissible **bc this rule is about prohibiting prior, when the question asked what applies, it would be apply to the evidence prior

**Filing a valid petition in bankruptcy act as an automatic stay of actions (pause) to:

Yes: Garnish the debtor's wage No: Collect alimony from the debtor

**intoxication

a contract will be VOIDABLE due to intoxication only if a party was intoxicated

**specific performance (contract)

a court order to perform under the terms of a contract; it is available only in contracts for unique or rare property

**U.S. withholding tax requirements

a customer payment for the sale of inventory within the U.S. is business income, which is taxed on a net basis and is not subject to withholding **FDAP and FATCA nonbusiness income is subjected to withholding ***E.g. FDAP: dividend income, interest income FATCA: a foreign financial institution that does not provide information about U.S. persons is subject to the foreign account tax compliance act of 2010

**voluntarily bankruptcy

a debtor can obtain another voluntary discharge in bankruptcy after EIGHT years have passed

**CFC (controlled foreign corporation)

a foreign corporation is considered a CFC if more than 50% of its stock is owned by a U.S. shareholder on any day of the year **if it is a CFC, certain types of income (e.g. passive investment income) earned are subject to immediate taxation

** gain from illegal activity

a gain from an illegal activity is includible in income; to determine the gain, a deduction is permitted for cost of merchandise; business expenses for operating an illegal business (aka business expense other than the cost of merchandise), are not permitted as deduction

**liquidated damages (contract)

a liquidated damages clause is enforceable if at the time of contracting it appears that the amount of damages in case of breach would be difficult to assess and the amount is reasonable approximation of the damages and not a penalty

**material breach

a material breach generally will discharge the nonbreaching party

**nonbusiness bad debt

a personal (nonbusiness) bad debt is treated as a short-term capital loss in the year the debt becomes totally worthless so if it is partially collectible, it is not short-term capital loss and none of the loss is deductible

**involuntary conversion

amount realize = insurance received realized gain = insurance receive - adjusted basis (old building basis) recognized gain = amount realized (aka insurance proceed)- new building price basis of the new building = cost of the new building - gain not recognized **e.g. building got burned down carrying amount 520k FMV 550k removal and cleanup cost 10k insurance covered 500k base for determination of its loss = 520k + 10k 550k doesn't matter bc the owner has no intend to sale in the first place

**agent liability (disclosed/undisclosed principal)

an agent generally is not liable on contracts that the agent makes on the principal's behalf if the principal is disclosed, but the agent is personally liable on contracts the agent makes on behalf of the principal when the principal is undisclosed

rental real estate losses if active

an individual can deduct up to 25K, limited by 50% for any amount over 100K. 120K of AGI than only 15K is deductible. if not active than can only deduct against other passive losses.

**acceptance/revocation of an offer^17

an offer is accepted when mailed and an revocation of an offer is revoked when received unless otherwise stated in the agreement or an offer has consideration.

**The CPA is prohibited from showing the workpapers to anyone without the client's permission, except:

and there is more but just the highlight of the ones that I got wrong: 1. to a state CPA society voluntary quality-control review panel, when requested 2. inquiry from the professional ethics division of the AICPA 3. prospective purchasers 4. AICPA/State Trial Board 5. Court Proceedings (to its own attorney) 6. when GAAP requires disclosure NOT: 1. When another CPA firm if the information concerns suspected tax return irregularities 2. a letter to the client from the IRS 3. not to FASB

life insurance taxable to employees

any amount of 50K is taxable formula 200K(coverage) -50K / amount of protection * employees amount per month

**prefer stock and common stock shareholders dividend recognition

any dividend payments to a preferred shareholders are considered dividend income to the preferred shareholders

**variations of surety's risk

any variation of the contract that changes a gratuitous surety's risk will discharge the gratuitous surety. A variation of a contract that changes a compensated surety's risk will discharge the surety only if the change is material and increases the surety's risk of loss %%%A gratuitous surety will be released when the creditor commits fraud, when there is duress or breach, when the surety lacks capacity or goes bankrupt, or when there is a material change (e.g., an extension of time) without the surety's consent. (Note: A compensated surety would be released only to the extent harmed.) %%%Release of the debtor does not release a gratuitous surety if the creditor reserves the right to pursue the surety. The surety will have recourse against the debtor directly for reimbursement.

**Personal property^8

anything not classified as real property (machinery, equipment, and automobiles) **- Mid year/mid-quarter convention 200% declining: - 3yrs: special tools - 5 yrs: computers, office machinery, cars, trucks, R&E equipment - 7yrs: Most machinery, office furniture equipment (computer desk, office furniture...) - 10yrs: water vessels, food& tobacco manufacturing 150% declining - 15yrs: data communication plants(phone), sewage treatment, billboards - 20yrs: Utilities

%%% The business judgment rule

applies to officers as well as directors who in their capacity, act in a manner the officer believes to be in the best interest of the corporation, and with the care an ordinarily prudent person in a like position would exercise. If the standards of the business judgment rule are met, the officer is not liable to the company for resulting damages.

**1 of 2 Incentive Stock Options (ISO) - qualified

approved by shareholders, granted within 10 years from the plan, *****option price may not be lower than FMV at date of grant, *****employee may not own more than 10% of stock at date of grant. no income is recognized at the date of grant. gain is recognized in the year the stock is sold. ****The gain is a capital gain if the stock is held for 2 years after the grant date and 1 year after the exercised date. if this is not met than the FMV at the exercised date is an ordinary gain and the rest is capital gain. no tax deduction to employer because it is not income to employee

punitive damages

are fully taxable as ordinary income if received in a business context or for loss of personal reputation. unless its a wrongful death case

Estates and Trusts

are separate legal tax paying entities, distributions by these entities are deductible by the entity yet taxable to the recipient - estates (you can die anytime) do not have to be a calendar year end. - trusts have to be 12/31

feederorganizations

are taxed on all income

**anticipatory repudiation (immediate breach)

arises when one of the parties to a contract indicates that they will not perform gives the nonbreach party options to treat the contract as being breached, reselling the goods, and recovering the difference b/w the contract price and the resale price

methods of formation of a contract^17

express contract: formed by language, oral, written implied in fact: contract formed by conduct implied in law: unconscious ambulance ride

**hot asset partnership

as a general rule, a partner who sells or exchanges his or her partnership interest has a recognized capital gain or loss. The capital gain or loss is measured by the difference b/w the amount realized for the sale and the adjusted basis of the partnership interest exception: any gain that represents a partner's share of hot assets is treated as ordinary income **hot assets are 1. unrealized receivables 2. appreciated inventory

means test for chapter 7 filing

avg monthly income - allowed expenses) X 60 is compared with 7,700 and 12,850, if less thatn 7,700 than chapter 7. if greater than dismissed.

**Divorce Property Settlement

basis = NBV = Nontaxable - when a divorce settlement provides for a lump sum payment or property settlement, it is a nontaxable event. the basis to the recipient with be carryover.

**partnership basis

beginning basis +% of income (**including tax free + capital gain) -% of losses - distributions =- % of liabilities = year end basis

holding period

begins on the date of purchase

**mechanic lien & artisan lien

both generally requires the lienholder to give notice of legal action before selling the debtor's property

**negligence %%% privity defense

breach of duty to exercise due care **for a cause of action for negligence, the client must prove at least that the CPA failed to exercise due care **in most states, a CPA's duty of care extends not only to the client, but also to all persons whom the CPA knows will be relying on the CPA's work (those are called LIMITED FORESEEABLE NOT FORESEEABLE) ***So foreseen parties are not eligible --%%% "privity defense" --For negligence only / this defense is the exception of accountant not being liable to 3rd party in the case of negligence --in other words, the defense said if the accountants are liable to 3rd parties for negligence if the accountant had reason to know the 3rd party would rely on his/her work %%%lack of privity is only a defense to negligence, it is not a defense to fraud **has to be actually relied on the report (so "any third party whose reliance on the report was reasonably foreseeable" is NOT ENOUGH)

**related party transactions include

brothers/sisters spouses ancestors and lineal descendants entities that are more than 50% owned controlled groups - where two entities own 50% tax exempt orgs **corporation and a shareholder who owns more than 50% of the corporation %%% not inlaws or step relationships **loss is not allowed to deduct when it is a sale to related party

%%% **Bonus Depreciation

can expense qualified property with a recovery period for 20 years or less. 100%.

**earned income credit

can only by claimed by individuals, not corporations

what is a penalty the SEC can impose on an accountant

can suspend or permently revoke an accountants right to practice before the SEC

**basis of a partnership at inception

cash/ basis in property contributed + liabilities you assume from other partners (recourse &nonrecourse) - liabilities you give to other partners + services fmv = basis if basis is negative than taxable gain to make it zero (can never begin in the negative) increased/decreased by % of income/loss (tax & tax free, e.g. **partnership ordinary income, separately stated income, and tax exempt income) ** a partner's share of partnership liabilities increases, the partner's basis in the partnership increases. Bc the partnership has more money borrowed in **service fmv: E.g. If Kelly receives 10% interest of a partnership for the service she provided, the FMV of the net asset that used for calculating the 10% interest is used. so Kelly will recognize 10% of FMV as her ordinary income **realize LTCL would be what the actual diff b/w sale price and the basis and RECOGNIZE LTCL would be 3000 per person

amount realized for sale of partnership interest

cash/FMV of property received + liabilities assumed by buyer

requirement of attachment

creditor must take possession or control of the collateral or obtain an authenticated record of a security agreement if there is a record of the security agreement, it must be authenticated by the debtor debtor must have the rights to the collateral - remember that a financing statement is not required and it is related to perfection

**Fringe Benefits s corp

deductible = for non shareholder employees and those employee shareholders owning 2 % or less of the S corp. Nondeductible = shareholders owning over 2 percent is not deductible by the S corp, unless the corp included the benefits in the employee/shareholders W-2 income. **(so those premium would flow through from s corp to the employee's gross income ) e.g. the health insurance premiums for the more than 2% shareholder is not

**cosigner of a loan

discharge of the principal debtor for bankruptcy does not discharge a cosigner of a loan

**treatment of distribution from C corp to shareholder

distributions from C corp are considered DIVIDEND income (ORDINARY income) to the extent of the C corp's current (AND) accumulated earnings and profits; Any excess distribution is treated as a NONTAXABLE RETURN OF CAPITAL to the extent of a shareholder's basis; Any distributions in excess of both earnings and profits and a shareholder's basis in the stock of the corp is treated as a capital gain %%%**Note that the current E&P and accumulated E&P are not NETTED. E.g. corp has accumulated deficit for 45k, but has current profit of 15k. When it distribute 18k to its shareholder, 15k would be taxable dividend income; the remaining 3k would be nontaxable return of capital to shareholder basis **for dividend's in the form of property, the shareholders are taxed for the fair market value (ON THE DATE OF DISTRIBUTION) of the property received

UBI/ excluded income from ax exempt orgs

dividends, interest, royalties, rents, sale of property, bingo games/ games of chance, research, labor unions

Limited Partners

do not pay SE tax unless they receive a guaranteed payment. Partners are considered self employed and have to pay SE tax. limited = passive

when liquidating a partnership recording G/L

do not record gain or loss just add the G/L to your basis in property received. the amount is the amount in excess of basis partnership.

**remedies

either compensatory damagers or specific performance NOT BOTH

Safe Harbor

election allows taxpayers to expense routine maintenance. - qualifying small taxpayer with average annual gross receipts of 10 million or less during the three preceding tax years can expense costs related to an eligible building that do not exceed 2% of unadjusted basis or 10,000.

**Annuities

example: investment is 60K and annuitant is 64 years old factor is 260 months per IRS table 60K/260 = 230.77 excluded from each of the first 260 payments. **the amount greater each payment is taxable. ***basiclly what you get more than the average expense you pay will be taxable (e.g. pay 100k and would get 12k per year for 10 years, 2k is taxable bc 10k is return to capital (100k/10y=10k per year) if live longer than 260 months = fully taxable if die before 260 than itemized deduction on remainder

treasury and capital stock

exempt from gain - sales of stock by corp - repurchase of stock by corp - reissue of stock

DNI

exempt income income allocated to income and not to principal capital gains/losses are allocated to principal (sale of stock) - expenses allocated to corpus

**Transfer pricing issues

exist when a US based taxpayer shares costs with an affiliate that either 1. not subject to the U.S. income tax or 2. does not file a consolidated income tax return with the US based taxpayer

Wash sale loss

exists when a security is sold for a loss and is repurchased within 30 days before or after the sale date. only applies to losses the % of shares repurchased is the amount not deductible **wash sell question google doc

**deductible expense timing when a cash-basis taxpayer owns 50% less or more of the c corp

expenses owed by an accrual-basis corporation to a cash-basis shareholder who owns at least 50 percent of the corporation's stock are not deductible by the corporation until the expense is actually paid in cash to the shareholder

levels of authority

express: written or oral instruction implied: a manager can hire and fire apparent: has the power but not the right (manager with limited authority) **the president of a corporation is an agent of the corporation and has apparent authority to enter contracts that appear to be within the ordinary scope of the corporation's business must give the notice to get ride of apparent authority **see google doc for MCQ-01335, when the agent has apparent authority (and the third party believes in, then the principal is liable)

more tax penalties

failure to sign return = $50 **failure to provide copy to taxpayer = $50 failure to furnish identification = $50 failure to keep records = $50 failure to file correct information = $50 (up to 27k for each return period) negotiation of IRS refund check = $510 failure to be diligent in **determining a clients eligibility for earned income credit = $510 disclosing info of clients = $250 for each instance & 1,000 misdemeanor

Related Party Transactions

family or more than 50% owned business are not considered arm length's.

**involuntarily bankruptcy

farmers and nonprofit charities cannot be petitioned involuntarily into bankruptcy **a court-appointed trustee may serve as both a trustee of an estate and also be its tax return preparer if authorized by the court. The CPA may receive a separate fee for services rendered in each capacity %%% To file an involuntary petition, if there are 12 or more creditors, at least 3 of the creditors who are owed in the **** AGGREGATE **** at least $16,750 in unsecured debt, must join in the petition.

Sch F

farming income - income is generally treated the same as sch C. insurance payments for crop damage = income interest paid on a loan used for farming is deductible. inventory must be kept if on accrual method. beginning inv + purchases - ending inv = COGS, sales - COGS = GP

**S Corporation

flow-through entity that reports income on form 1120S

**Section 291 ***20% of the lesser ... gain is ordinary income

for C corps, section 291 applies to section 1250 assets sold at a gain. amount of recapture as ordinary income is equal to 20% of the lesser of the recognized gain or the accumulated straight line depreciation taken on the asset. any remaining gain is a section 1231 gain.

**IRC Section 6701 penalty

for aiding and abetting the understatement of a tax liability applies to any person who knows about the actions of a subordinate to understate a tax liability and does not prevent those actions

**fraudulent inducement to make a contract

fraud requires misrepresentation of a material fact. Ordinarily, opinions or statements of value do not constitute misrepresentations of material facts unless made by experts. Appraised value would constitute a misrepresentation of a material face bc it was made by an expert

**Gift: Present vs. Future interest

future interest gifts: 1. remainder interest (distributed at some future time) ***exception: If the beneficiary receives accumulated interest and assets at age 21, an annual exclusion is eligible

**individual 1250 recapture ***gain taxed @25%

gain is characterized as a section 1231 gain and netted with other 1231 gains and losses to determine if the individual taxpayer has an over 1231 gain/loss - an amount equal to the lesser of recognized gain on the sale of the section 1250 asset, or 2 the straight line accumulated depreciation on the section 1250 asset is taxed at a max of 25% and anything in excess is preferential rates of 0,15,20. **"a sole proprietor..." the portion that is taxed at 25% is called unrecaptured section 1250 gain

**C CORPS Basis of property received

general rule is that the basis of the property received by a corp from the transferor is the greater of: - the transferors adjusted basis(NBV) plus any gain recognized by the transferor or - the debt assumed by a corporation - if basis exceeds FMV than use the FMV because there can not be built in losses

**cease of apparent authority

generally a general agent's apparent authority does not cease unless and until notice is given. HOWEVER, 1. if the principal has received a discharge in bankruptcy, notice is not required to terminate the agent's apparent authority 2. if the agent is declared insane 3. if it becomes impossible for the agent to lawfully perform the agent's duties, x notification Not when the agent has fulfilled the purpose for which the agency relationship was created (bc the third party has no way to know and apparent authority is what the third party believe)

**when to require agency agreement

generally agency power may be granted orally, even if the agent enters into contracts that must be in writing to be enforceable. However, most states require an agency agreement to be in writing if the agent is to purchase or convey interests in land

Assignment of rights^17

generally assignable without consent unless stated otherwise

Common law covers

generally derived from courts R real estate I insurance S services E employment acceptance must be a mirror of the offer

Voidable contract^17

gives a party the ability to either enforce or nullify a contract (e.x fake sales)

**1231 1245 1250 gain flowchart

google doc

**personal holding company

if 60% of adjusted ordinary gross income consists of: 1. dividends 2. taxable interest 3. Royalties, but not mineral, oil, gas or copyright royalties 4. net rent, if less than 50% of ordinary gross income %%% Bonus not part of personal holding company ***Not interest earned on tax-exempt obligations as those are not adjusted ordinary gross income ***MCQ-02234 To calculate personal holding company tax, need to deduct 1. dividends paid during the current year 2. consent dividends (which is dividend that is a hypothetical distribution made by agreement with the shareholders of the company whereby the shareholders pick up that amount in their personal income without an actual distribution being made) ***to determine undistributed personal holding company income prior to the divided paid deduction: need to deduct federal income taxes and net long-term capital gain less related federal income taxes

when does a capital expenditure relate to a medical expense deduction?

if it directly relates to a prescribed medical condition

**Mid quarter convention^8

if more than 40 percent of depreciable personal property is placed in service in the last quarter of the year, the mid quarter convention must be used.(emphasis on the personal property, real property does not affect this equation, also use first quarter for assets put in first quarter) 1st QTR 87.5% 2nd QTR 62.5% 3rd QTR 37.5% 4th QTR 12.5% e.x. for 3 year property placed in service in the 3rd qtr is AB/useful life*200%*37.5%

** Corporations are allowed to deduct reasonable compensation paid to shareholder-employees.

if the IRS determines that part of a shareholder's salary is unreasonable, it may reclassify part of the salary as a dividend (nondeductible)

when does an estate have to file a tax return

if the annual gross income is more than $600

safe harbor rules for deducting a small business improvement expense

if the asset is under 1 million than can deduct the expense if the expense is less than both 2% of the unadjusted basis of the asset or 10,000

**doctrine of substantial performance

if the breach is minor (so that the nonbreaching party recevied substantially what was bargained for), the contract is not discharged and the nonbreaching party is entitled only to damages for the minor breach **the key is that the nonbreaching party got most of what they are bargaining for **the recovery was limited

**Buyer's right on Seller's insolvency

if the buyer has paid part or all of the price (within 10 days before the insolvency) and the seller is insolvent, the buyer may recover the goods from the seller if the goods are identified . **goods are identified meaning the goods to be deliver to the buyer is segregated

**capital assets

include real and personal property - personal automobile of individual taxpayer - furniture and fixtures in the home of individual - stocks and securities of all types - personal property of a taxpayer not used in a trade or bus ** - real property not used in a trade or business (so if it is used in the business, It would be section 1231 assets [possiblely be section 1250 asset]) - interest in a partnership - goodwill of a corp %%% copyrights, literarcy, musical, compositions that have been purchases - other assets held for investments. short term is taxed at ordinary rates **- land held as an investment **-Government bonds sold by an individual investor **-options held by an investor **Not: a corporate real estate developer's unimproved land that is to be subdivided to build homes, which will be sold to customer -- land is usually a capital asset, but when it is effectively inventory, as when it is used by a developer to be subdivided, it is excluded from the statutory definition of capital asset ***when real property is sold by a dealer, it is considered inventory and results in ordinary income/loss upon sale %%% Copyrights, literary, musical, or artistic compositions held by the original artist. NOT A CAPITAL ASSET bc it is not an investment %%%

**Schedule M-1

includes: 1. premiums paid on key-person life insurance policy 2. interest expense to carry nontaxable municipal obligation (the interest is not tax-deductible and would be an adjustment on the schedule M-1 reconciliation) 3. federal income tax expense (deductible from book income but not deductible for tax purposes) 4. municipal bond interest (tax-free but would have been included in the book income so need to take it out in the taxable income) 5. political party contributions (nondeductible) 6. tax penalty (nondeductible) 7. excess capital losses over capital gains (should be added back to taxable income bc it is not deductible) not include (bc they are treated the same for book and tax purpose): 1. interest incurred on loan to carry U.S. obligations 2. Provision for state corporation income tax 3. state franchise tax refunds (are included in book income and taxable income)

**A foreign person must file form 1120-F US income tax return of a foreign corporation to report

income earned by a U.S. Branch income earned by a U.S. sub is reported on Form 1120 U.S. Corporation Income Tax Return

**property included in Chapter 7 Bankruptcy code

income generated from estate property and property the debtor receives from a devise, inheritances, property settlement divorce, **life insurance, **municipal bond interest ... within 180 days after filing of the petition

Special requirements for long term contracts

income recognition: percentage of completion method required for tax for nonexempt long term contracts. must use cost allocation rules. Exceptions: gross receipts less than 25 million for 3 prior years. & home construction contractors where at least 80% of total contract costs are related to the construction. start date can be when 5% of costs end date can be 95% of costs gross income recognized for the year is the portion of income that relates to the % complete for that year. cost incurred/ total expected cost = work done/total work = % earned.

involuntary conversions

insurance proceeds example with the ring story. as long as the taxpayer reinvest the proceeds in what the proceeds came from. two years to reinvest in personal property and 3 years for condemned business property. loss recognized if building burned with basis of 340K and insurance paid 330K and used the money to buy a building of 500K. 10K loss recognized. gain if the basis was 400K and insurance paid 450K and new building was 440K.

**amortization

intangibles such as goodwill, licenses, franchises, covenants not to compete, and trademark may be amortized using straight-line basis over a period of 15 years regardless of these items useful lives

**personal-use asset

is a capital asset a gain on the sale of a personal-use asset is taxable capital gain a loss on the sale of a personal-use asset is a nondeductible personal loss

**specific performance

is a court order to fulfill the terms of a contract if the principal-agent relationship is not contractual, there are no contractual terms to fulfill

**temporary regulation issued by the treasury department

is a primary authority because it is official tax law issued by a branch of the federal government, the administrative branch. Regulations are the treasury department's official interpretation of the IRC and have the highest authoritative weight of the administrative sources of tax law.

**foreign subsidiary

is a separate legal entity. is not taxed until the earnings are brought back to the U.S. in the form of a dividend.

**a cosigner

is a surety

**business use asset loss

is deductible

**50% of self-employment tax

is deductible to arrive at AGI (not an itemized deduction but an adjustment line item to arrive at AGI)

**selection of an accounting method for tax purpose

is made on the initial tax return by using the chosen method

**reorganization

is nontaxable to corporation and shareholders types: A: mergers or consolidations B: the acquisition by one corp of another corp's stock, stock for stock requirements: 1. the target is acquired using the stock of the acquiring corp or the acquiring corp's parent 2. the acquiring corp must be in control of the target immediately after the acquisition C: the acquisition by one corp of another corp's asset, stock for assets

**Quasi-contract

is not a contract at all. it is a remedy that allows a plaintiff to recover a benefit unjustly conferred upon the defendant - a remedy to prevent unjust enrichment **if an contract is formed than no need to have this remedy??

**section 1244 loss

is private company section 1244 stock loss does not affect capital loss/gain calculation bc it is ordinary loss not a capital loss **ordinary loss up to 50k (Not MFJ) --> then capital loss MFJ: 100k **Note that the loss is only available to the original owner (so not when you inherited the stock) if you inherited the stock it would be capital loss

**Gain or loss from the S corp's sale of collectibles

is separately reported on the schedule K-1 of IRS form 1120S **gross receipts or sales, section 1245 gain, unearned revenues are part of "ordinary business income" but not separately stated

income distribution deduction

is the lesser of taxable DNI (DNI less adjusted tax- exempt interest) or (ii) the actual distribution reduced by tax-exempt income (not just interest) included in the actual distribution

life insurance premiums key person vs. fringe

key person is ND (would be an M-1 for income not on return fringe is deductible (Employee owns the policy.

** real property^8

land and buildings, defined as land and all the items permanently affixed to the land **- SL and mid-month convention apply - Residential Rental: 27.5 yr - NR real estate: 39 **cost of title policy is included as basis in land

**Overall limitation to QBI deduction

lessor of combined QBI or 20 percent of the taxpayer's taxable income in excess of net captial gain (20% * (Taxable income - net capital gain))

**Business interest limitation expense

limited to 30% of adjusted taxable income. which is taxable income excluding interest income, interest expense deduction, and depreciation deduction. disallowed business interest expense can be carried forward indefinitely. does not apply to average annual gross receipts of $25 million or less for the prior three taxable years. only business interest income is subtracted in determining net business interest expense.

**loss disallowed when partner (over 50% interest in capital and profits)

losses b/w a controlling partner (over 50% interest in capital and profits) and his controlled partnership from the sale or exchange of property are not allowed

IRA Roth contributions limits^4

married filing jointly = 196K-206 HOH=124k-139k married filing separately = 0-10K

tax return preparer

means any person who prepares for compensation or who employs one or more persons to prepare for compensation - does not include interns or people who merely furnishes the return PTIN holders with no credidentials

uncontrolled transaction

means any transaction between two or more taxpayers that are not members of the same group of controlled taxpayers (sub <-> sub)

controlled transaction

means any transaction or transfer between two or more members of the same group of controlled taxpayers (parent <-> sub)

uncontrolled comparable

means the uncontrolled transaction or untrolled taxpayer that is compared, under any applicable pricing methodology, with a controlled transaction or with a controlled taxpayer. (company <-> outside customer)

Shifting^3

moving income from one to another. Family member or Tax Jurisdiction.

**Unilateral mistake

must be material to be defense also usually not a defense unlike the other party knew the mistake and still enters the contract BUT mutual mistake of fact can make the contract void **NOT value tho bc money is an opinion

tax penalties

negligence and substantial negligence penalty are both 20%. generally will not get hit with both. need to know both understatement liability and total tax liab. not a substantial understatement if the understatement is less than 10% of the total tax liab or less 5,000 for individuals/10,000 for corporations - penalty is 20% of the understatement

**diff b/w negligence and Fraud

negligence does not have intention as one of its element, while lack of intent is the best defence for CPA for unqualified opinion, for negligence, CPA can prove due care

**nexus / nexus triggers

nexus is defined as the minimum level of contact a taxpayer may have with a jurisdiction to be subject to tax. - owning or leasing tangible personal or real prop - sending employees into the state for training or work - soliciting sales in a state - **providing installation, maintenance, to customers within state - **accepting or rejecting sales orders within the state, or accepting returns -**collection of delinquent accounts do not create nexus if - think of sales tax - only business activity of the person within the state consists of the solicitation of orders for sales of tangible personal property - orders are sent outside the state for acceptance or rejection - if those orders are accepted, they are filled by shipment or delivery from a point outside the state. -** delivery by a common carrier

**personal loss

no deduction is allowed for the loss on a nonbusiness disposal or loss. **e.g. the loss on the sale of the personal residence is not deductible because it is a personal loss

**disposal of a personal-use asset

no deduction is allowed for the loss on disposal of a personal-use asset e.g. if a couple abandon their house, they cant deduct the loss

**C Corporation Tax Consequences (GAIN/LOSS --> LESSER) C CORP CONTRIBUTION

no gain or loss recognized by the corporation issuing stock in exchange for property in the following transactions: 1. formation --issuance of common stock ***in the question could be a couple shareholders exchange something and they receive stock 2. reacquisition --purchase of treasury stock 3. resale --sale of treasury stock if it is not the above three situations, the shareholder contributing property in exchange for corporation common stock has no gain or loss if the following two conditions of IRC Section 351 have been met: 1. 80 percent controls 2. No receipt of boot if does receive boot: 1. CASH WITHDRAWN 2. RECEIPT of debt securities recognized the gain to the lesser of cash received or realized gain (realized gain = amount realized [cash + stock] -adjusted basis [NBV] ) ***However, the amount of liabilities assumed by the corporation that exceeds the adjusted basis of the total asset transferred to the corporation is not Boot, BUT DOES RECOGNIZED GAIN recognized gain = NBV assets - liability assume

**shareholder tax consequences formation

no gain or loss recognized if immediately after the transaction, those transferors contributing property must own at least 80 percent of the voting stock and at least 80 percent of the non voting stock. and no boot/loot received. must only receive stock - liab in excess of basis or cash = gain

**minor ratify the contract

no partially ratify

**understates taxpayer's liability

no penalty is imposed if it is shown that there is reasonable cause for the understatement and the tax return preparer acted in good faith tax shelter --> more likely than not standard

**apportionment factor

nonbusiness income = home state (prop & rent expense location within state/ total prop + payroll paid to employees within state/ total payroll + sales from sources within the state/total sales) /3 **allocate --nonbusiness income **apportion --business income **The apportionment factor is calculated by averaging the factor of sales, payroll, and property for a specific state

Void Contract^17

not binding & is void since its inception. Can't enforce. (Illegal goods/acts)

estimated payments for corps

not classified as large corporations - need to pay the lesser of - 100% of tax shown on the current year - 100% of the tax shown on the return for the preceding year. large corps (tax income more than 1 million) - 100 percent of tax shown on CY

**fraudulent conveyances

occurs when a debtor transfers property with the intent to hinder, delay, or defraud any of her creditors, court may consider: 1. debtor remaining in possession after conveyance 2. secret conveyance 3. debtor retains an equitable benefit in the property conveyed

%%%fraud in the inducement^17

occurs when the defrauded party intentional enters into contract. Deceived about a material fact. -contract can be voidable

**example exchange like-kind

old original cost: 35k depreciation: 12k old FMV: 20k new FMV: 16.5k other party also agreed to pay 3.5k in cash the basis for the new property 19.5k = FMV new (16.5k) - deferred gain (0) + deferred loss (3k) deferred gain = 0 bc realized loss of 3k and then boot received 3.5k Loss recognized = 0 no gain recognized so no deferred gain and deferred loss is 3k = Old original cost (35k) - depreciation (12k) - (FMV of new (16.5k) - boot (3.5k) = 3k

**partially disclose (agent & principal liability)

once an undisclosed principal becomes known to the third party, the third party can elect to hold either the agent or the principal liable for breach of contract

Conversion ^3

one a category to another. e.x: convert inventory to capital gain property.

**$3000 net capital losses deducted against ordinary income

only apply to individual not to corporation; for corporation, the Net capital loss is carried back 3 years and forward 5 years to used against net capital gains generated in those years **!!! in the question it might say corporate taxpayer / corporation --> need to know those are not individuals !!!

SE Tax

only on net income, a farmer does not pay it on section 1231 gain because that has capital rates. example: 105,000 Net profits Net earnings from SE = 96,968 (105,000*.9235) SE Tax = 14,836 (96,968*.153) Adjustment for SE Tax paid = 7,418

Agency capacity

only the principal must be competent, the agent need not have capacity

**A power of Attorney

only the principal needs to sign a power of attorney this is a written authorization of agency may limit the agent's authority to specific transactions %%% is MAY limit so it is not a requirement

do you use outside basis or inside basis when determining G/L on a liquidation?

outside basis

personal holding company

owned 50% or more by 5 or less individuals at any point in time during the year, and atleast 60% of income comes from investments (dividends, interest, etc)

**partnership termination

partnership does not terminate with the IRS unless 1. it stops doing business 2. only one partner remains (sole proprietorship) **so if there are 4 partners (A - 40% B C D 20% each) and they are splitting b/w A+ B and C+ D, A and B will still be considered to be a continuation of their old partnership bc they constitute more than 50% of the old partnership

what has to happen for a corp to voluntarily dissolve?

passing by the board of directors

**Perfection (secured transaction)

perfection does not give the secured party permanent 100% priority if the collateral is moved to another state; filing in the new state generally is required for protection to last beyond four months. Moreover, perfection generally last five years unless extended **automatic perfection for consumer goods

**exchange of like kind business/investment real property

personal property does not qualify. - must identify property replacement within 45 days of giving up their property and the property must be received within 180 days. gain when boot received. do the give and get scenario **- basis received = FMV of LKE (the new real property exchange is worth...) - deferred gain + deferred loss. **gain realized = FMV of new + and boot - adjusted basis **gain recognized = lessor of realized gain or boot rec. **gain/loss deferred = realized - recognized ***NOTE: use the FMV of the new buildings for calculating both the basis received and the gain realized !!! **in order to meet the like-kind exchange requirements for nonrecognition of gain or loss, the property exchanged must be real property. (e.g. rental real estate located in different states) ***NOT: convertible preferred stock, partnership interests, convertible debentures ***Boot can be cash and can be something like a trailer!!

**2 of 2 Employee Stock Purchase Plans (ESPP)

plan must be written and approved by the shareholders - ***cannot grant options to any employee who has more than 5% of combined voting power. ***- cannot be exercised more than 27 months after the grant date. - no employee can acquire more than 25K of stock per year. ***-option price can lower than FMV price if it is not less than the lessor of 85% of the exercised price or granted price

**Social security income

possibly included as taxable income > 25K single or 32K MFJ none is taxable Income over 25K/32K = 50% taxable income over 34K/44K 85% taxable **threshold

**contract conditions

precedent, subsequent, concurrent

**Portion of Life insurance premiums

premiums paid by an employer on a group term life insurance policy covering his employees are not income to the employees up to the cost on the first 50K, premiums above this are taxable to the employee and usually included on the W-2. **e.g. John has group life insurance for 200k. the first 50k is not taxable but the 150k remaining is. and if the annual IRS-estiablished uniform cost of insurance is 2.76 per 1000, 2.76*150 = $414. So total gross income for John is his wages + $414

**Dividends received deduction

prevents triple taxation of earnings percent Ownership of another corp. 0-20% = 50% DRD 20-80% = 65% 80-100% = 100% **The investor corporation must own the investee's stock for a specific minimum holding period of more than 45 days ** personal service corporation and a personal holding company must include 100% of the dividends received from unrelated taxable domestic corporations in gross income in computing regular taxable income ** Dividend from an unrelated corporation means less than 20% of the company is owned **the DRD is generally calculated as 50% of dividend receive. However, the deduction is limited to 50% * DRD modified taxable income ***DRD modified taxable income is calculated as taxable income before the dividend-received deduction, any NOL deduction, and capital loss carryback deduction

what exempt org must file a informational return?

private organizations

**statute of limitation

provides that a legal action must be commenced within a certain period of time. typically 4-6 years. **ACTION OF BREACH is measured from the time the casue of action accrued (the date of the breach) **if the status of limitations period has expired on a contract, it is unenforceable. It does not make a contract void, but merely bars access to judicial remedies.

**501(c)(3)

public charities private foundations e.g. religious organizations NOTE**: cemetery companies, chambers of commerce, and supplemental unemployment benefit trusts are tax-exempt, nonprofit organizations, but they are not 501(c)(3) **Partnership will be qualified (foundation, fund, or corporation may qualified)

c corp foreign tax credit

qualified foreign tax amount or lessor of these two. 2) U.S. tax liab * 21% = X X / U.S. Tax liab = Z% Z% * X = your limit

**basis in related party transactions

rays selling price = 21K Less: Rays cost: 16K Disallowed loss 4K Rays Basis 20K Rays Gain 1K **loss is recognized only to the extent that the sale price to the unrelated party is lower than the acquiring relatives original purchase price in the asset **gain is recognized only to the extent that the future sale price exceeds the previous relatives (cost basis) **also gain and loss is reported by the person who sell to unrelated party ***basiclly the parent would have realized loss but would be disallowed to recognized it

section 1250

real business property, gains only, anything fixed to land depreciable real property used in a trade or business over 12 months. (warehouse or office building but not land) recapture rules differ some from 1245 rules because generally 1250 recaptures only the portion of depreciation that was taken in excess of straight line. but new laws post 1987 make it so real property has to be take on straight line.

**Guaranteed Payments to a Partner

reasonable compensation paid to a partner for services rendered without regard to the partners ratio of income. - are taxable - are deductible by partnership - separately stated and included in business net income - do not affect their basis - ordinary income

**revocation

refers to the withdrawal of an offer a contract may not be revoked

**release the buyer from all its obligations under a sales contract (UCC)

refusal of the seller to give written assurance of performance when reasonably demanded by the buyer

**Circular 230

regulations governing practice before the IRS authority to practice = License **written advice includes electronic communications **there is no requirement that the fee charged for an initial consultation be disclosed ****a preparer is allowed to accept a taxpayer's representations as a preparer is not required to obtain supporting documentation unless the preparer has reason to suspect the accuracy of the information provided by the taxpayer (However, a preparer MUST MAKE reasonable inquiries if the information provided by the taxpayer appears incorrect or incomplete) *****same for tax return preparer **Circular 230 does not prohibit a practitioner's holding the check for safe keeping and awaiting the client's return

**ratification (of unauthorized act of the agent)

requirements: 1. the agent must have indicated that she was acting on behalf of the principal 2. ALL MATERIAL facts must be disclosed to the principal 3. the principal must ratify the entire transaction (x partial ratification) 4. x need to tell the third party (bc the third party already thinks they have the contact with the principal) %%% agent must have apparent authority (so ratification is for unauthorized act) %%%. There is no requirement that the undisclosed principal must ratify the authorized acts of the agent to be held liable. The undisclosed principal will be liable for all authorized acts of the agent.

**partnership ordinary income

revenue -salaries -**guaranteed payments -rent expense -depreciation expense section 1231 loss or interest income are separately stated items **A partner must include his allocated share of partnership income even if not received in cash, in his tax return for his taxable year (usually calendar year) within which the taxable year of the partnership ends

**FOB place of shipment contract

risk of loss passes when the goods are placed in the hands of a carrier at the seller's loading dock correct answer: are delivered to the carrier wrong answer: are placed on the seller's loading dock --> not sufficient ****!!! in a noncarrier case, risk loss passes from a merchant seller on actual delivery of the goods into the buyer's possession --> mere tender at the seller's place of business does not pass the risk

Uniform commercial code covers

sale of goods -statutory law - does not need consideration

**partnership start up cost

same as c corp ($5000 180M) similar to c corp where the cost of issuing stocks are not deductible Syndication cost is not deductible for partnership

social security is based off

self employment persons net profit, for employees it is based off of gross income

gross income for C Corp

similar for corps and individuals, income is recognized when received. .. temp differences - interest income received in advance - rental income received in advance - royalty income received in advance .. items not included in taxable income - proceeds from life insurance of a key person/corp officer. - include installment sales when income is actually received for tax purposes - accrued warranty/accrued expenses = no deduction until paid

**release (contract)

simply discharge a party --> not restoring the party to their original position

**SCHE C 2

state and local taxes, and federal payroll taxes are deductible when incurred on property or income relating to business federal income taxes are not deductible foreign income taxes may be used as a credit

**who has authority to take your license (suspend / revoke)

state board of accountancy **also CPA pay license fees to them to maintain a CPA license **they also determine the continuing professional education requirements for licensed CPAs

reasons for a tax return audit

statistical models = likely to have additional rev. random selection prior year audit information return discrepancy deductions that exceed established norms

**basis spreading (stock split)

under the IRC, the receipt of a nontaxable stock dividend requires the shareholder to spread the basis of his original shares over both the original shares and the new shares received, resulting in the same total basis in the stock but a lower basis per share of stock held

**the filing of a petition in bankruptcy (voluntary or involuntary)

stops the enforcement of all judgment liens and collection actions against the debtor (called "automatic stay") **liens against the debtor's property (exempt or otherwise) are not terminated upon the filing of a petition in bankruptcy, they are merely stayed **the automatic stay stops creditors from pursuing collection actions against the debtor while the bankruptcy is pending **security interest in the debtor's property do not terminate upon the filing of the petition in bankruptcy, they continue until the secured interest is satisfied (BUT the trustee is treated as having a lien on all of the debtor's property the INSTANT the bankruptcy petition is filed)

**guaranteed payment from services rendered to a partnership

subject to self-employment tax

**(surety vs Guarantor)

surety: directly liable on the contract Guarantor: directly liable to the creditor ONLY IF the debtor does not perform his or her duty to the creditor

**installment sales

taxed when cash payment is received. **gross profit = sales price - adjusted basis ***gross profit percentage = gross profit / sales price ****gain recognized (taxable income) = cash collections (excluding interest) * gross profit percentage **interest is reported separately from each installment payment as ordinary income

**Under circular 230, when CPA discovers a prior year error

the CPA cannot prepare an amended return without the client's permission also doesn't have to advise the client to contact the tax preparer of the prior-year return (BUT need to inform the client of the error and advise of the consequences)

**penalty in tax return

the IRS does not impose a penalty on a CPA for making an error in calculating a tax return A CPA must give his or her client a copy of the client's tax return or face imposition of a penalty

Private letter ruling (PLR)

the IRS issues a private letter ruling (PLR) in response to a taxpayer's request for guidance on the tax treatment of a proposed transaction, typically one with significant tax consequences **it is the IRS's application of the internal revenue code **primary source

**gain on sale of stock received as compensation

the adjusted basis of the stock is the FMV of the stock AT THE TIME OF TRANSFER and gain would be the increase in FMV when later sells it

**Renunciation

the agent's termination renunciation will terminate the agency not by operation of law but by the act of a party!!!

**bad debt expense and taxable income

the bad debt expense taken on the allowance method is disallowed. %%%For tax purpose, the corporation must use the direct write-off method **Note that for the accrual method, when the taxpayer write off their uncollectible receivables, no expense has been disexpense (expense is not lower) ; what matters is what additional accrual expense that they add in the period the difference b/w taxable income and the book income would be what they actually write off and what they accrue in this period

excess social security tax

the excess is a credit towards income if the amount was correctly withheld from two or more employers

**alternate valuation date (inherited Property)

the executor can elect to use an alternate valuation date rather the decedent's date of death to value the property included in the gross estate: generally the earlier of 1. 6 months after the decedent's death 2. sale or distribution

**general business credit

the general business credit combines several nonrefundable tax credits and provides rules for their absorption against the taxpayer's liability

**FOB (carrier)

under the UCC pertaining to shipment contracts, titles to the goods passes to the buyer when the goods are delivered to a common carrier. This rules applies even when the GOODS are NONCONFIRMING GOODS

**general rule for basis of property corporation receives (BASIS --> GREATER)

the general rule is that the basis of the property received by a corporation from the transferor/shareholder is the greater of: 1. the transferor/shareholder's adjusted basis (net book value) of the property (plus any gain recognized by the transferor/shareholder) 2. the debt assumed by a corporation (however, the transferor may recognized gain to prevent a negative basis in stock received in exchange for the property)

**defense for guaranty

the guarantor may use some, but not all, of the debtor's defenses. For example, the debtor's minority or bankruptcy is not a defense to the guarantor

**half year convention

the half-year convention provides that one-half of the first year's depreciation is allowed in the year in which the property is placed in service, regardless of when the property is placed in service during the year, and a half-year's depreciation is allowed for the year in which the property is disposed of.

**tax rate for an S corp that pays tax on built-in gains

the highest corporate income tax rate NOT: the calculated income tax rate of the corporation

**defense for surety

the incapacity of the surety

If a security becomes worthless in the current taxable year, it is treated as sold or exchanged on:

the last day of the taxable year

**distribute property as dividend (c corp)

the property distributed is treated as if it were sold to the shareholders at its FMV on the date of distribution. C corp recognized gain to the extent of the FMV over the adjusted basis or $10,000 shareholder recognized gain of the FMV of the property **loss on the distribution of the property is not deductible for the corporation **the shareholder's basis in the property distributed is the FMV of the property (not including the debt assume) ***note that this is different than parent sub liquidation where the parent will take the sub's carryover basis **be careful if the corporation is distributing appreciating property, the gain the corporation recognized will increase the current P&E, which will change the max for dividend income for the shareholder

**FOB destination contract

the seller has the risk of loss until he/she places conforming goods into the buyer's hands at the named destination, NOT NECESSARILY the buyer's place of business

**disciplinary power of the state boards of accountancy

the state board of accountancy can conduct a formal hearing for possible disciplinary action

**reorganization (chapter 11)

there is no requirement of liquidation in a reorganization **a creditor must wait 120 days to file a plan unless a trustee has been appointed

**IRS provision to adjust upward or downward the gross income and deduction b/w organizations to prevent the evasion of taxes

these organization may be members of an affiliated group that file a consolidated U.S. tax return

**AICPA and state CPA societies relating to CPA membership and license

they can sanction their members, but they cannot suspend or revoke a CPA's license AICPA could suspend or terminate membership for failure to pay dues or failure to comply with membership retention requirements (without a hearing) e.g. failure to pay dues and failure to meet CPE The joint Trial Board of the AICPA can expel a member by a two-thirds vote, not a majority vote

S Corp with E&P Distributions

to extent of AAA = not taxable, reduces basis in stock to extent of C Corp E&P = taxes as a div., does not reduce basis to extent of basis of stock = not subject to tax, reduces stock basis (return of capital) in excess of basis in stock = taxed as long term capital gain

%%% accrual method bad debt expense write off entries

to write off account under allowance method : DR Allowance for doubtful account CR AR Record bad debt expense: DR Bad Debt expense CR Allowance for doubtful account Direct write off method DR Bad debt expense CR AR

**Principals remedies

tort damages - wrongful act (Negligent, intentional) contract damages **Recovery of secret profits (constructive trust) withhold compensation

**retention of collateral in satisfaction of debt

transactive involving consumer: with consumers, the secured party may keep the collateral only in full satisfaction of the debt

**civil fraud penalty

transcends negligence or stupidity (willful and deliberate attempt)

**promise to ship or prompt shipment

under the sales article, an offer to buy goods for current or prompt shipment can be accepted by either 1. promise to ship 2. prompt shipment: ***a shipment of nonconforming goods is both an acceptance and a breach of contract ***if the seller reasonably notifies the buyer that nonconfirming goods are shipped only as an accommodation to the buyer, the shipment is not an acceptance. it is a counteroffer **the shipment of nonconfirming goods are acceptance if did not sign promise to ship and did not say it is a accommodation

**rescission (contract)

undoes a contract and restores the parties to the position they would have been in if no contract were made

**Built in Gains of S Corp

unrealized gain results from a c corp electing s status and the FMV of corp assets exceeds the adjusted basis of assets on the election date. **- sale has to occur within 5 years after election. **note that the s corp would only get taxed on the build-in gain as a corporation but the actual gain from sale (Selling price - FMV) would be taxed on the individual level **ONLY if the s corp has previously been a C corp!!!

%%% Three trial court for the tax judicial process

us tax court us district court us court of federal claims (the us tax court is the only forum in which taxpayers may litigate without first having to pay the disputed tax in full

Mutual Mistake^17

when both parties are mistaken about the same fact. - voidable - a sufficient defense for failure to perform the contract

**merchant's confirmatory memo rule

where a merchant sends another merchant a written confirmation (e.g. a purchase order) of a contract that is sufficient to bind the sender, it will also bind the recipient if she does not object within 10 days

AAA (accumulated adjustment account)

zero at the exception of the S corporation. Increased by separately and non separately state income and gains. (except exempt income and certain life insurance proceeds) decreases by distributions but may not decrease below zero from distributions, and decreases by non separately stated items (but not nondeductibles)

AMT^7

Alternative Minimum Tax - is a tax designed to ensure that taxpayers who take a large number of tax preference deductions pay a minimum amount of tax on their income. AMT is the excess of the tentative AMT over the regular tax.

**social security tax withheld

An employee who has had social security tax withheld in an amount greater than the maximum for a particular year may claim the excess as a credit against income tax, if that excess resulted from correct withholding by two or more employers *** the employee may not claim the excess as a credit against income tax, if that excess was withheld by one employer. The employer must adjust the excess for employee

noncash income

the amount of income to be reported is the FMV of the property or services RECEIVED. FMV of the service rendered is irrelevant.

**qualified business income deduction

20% * QBI

**Guaranteed payment paid to partners

%%% **for services provided or for the use of capital, without regard to partnership income or profit and loss sharing ratios, are an allowable deduction to the partnership and are also separately reported on schedule K-1 for inclusion on the partner's tax return. **guaranteed payments to partners or LLC members for services provided to the partnership or LLC are self-employment income to the recipient. Therefore, subject to self-employment (social security and medicare) tax in addition to income tax **shareholder in an s corporation could be an employee (unlike LLC or partnership, shareholders could not be employees) and receives a salary. so half of the social security and medicare taxes are paid by the corporation and half are withheld from the shareholder's salary

earned income credit eligibility^7

**- refundable (even if the individual had no income tax liability) Eligibility -Valid SSN; have earned income; must be US Citizen or resident alien all year or married to one. - meet certain earned low income thresholds - not have more than a specified amount of disqualified income - file a joint return; cannot use the MFS - Can't be the QC of another person - have investment income less than $3,650 - if don't have a QC, must have principal residence in US and at least 25 but not over 64

foreign tax credit^7

**- taxpayer may claim a credit for foreign income taxes paid to a foreign country or US possession. or the individual can deduct the taxes as an itemized deduction. **another way to treat the tax credit is to deduct the foreign tax as an itemized deduction (not subject to a 2% floor) - limited to the lessor of foreign taxes paid or taxable income from all foreign operations / total taxable worldwide income * U.S. tax - carryback one year and carryforward 10 years.

**casualty loss itemized deduction^6

**1. each individual loss exceeds $100 (e.g. A = 103, B=110) 2. aggregate of these excess losses (A = 103 -100 = 3 B= 110 -100 = 10 total exceeds loss = 3+ 10 = 13) exceeds 10% of AGI ***equation in the book *** smaller loss (lesser of 1. decrease in FMV 2. Adjusted basis) <insurance recovery> = taxpayer's loss <100> per incident = eligible loss <10% AGI> = Deductible loss ************************************ ***no casualty loss deduction is allowed for lost, misplaced, or broken property ** an insurance claim has to be filed, and the losses are not covered by the insurance for the loss to be deductible

**SSTB^6

**business involving services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage, trading or dealing securities, NOT: engineering, architectural services.

**IRA Income^4 (part of the gross income IRA distribution session)

**cannot be withdrawn until 59 1/2 without a 10% penalty RMD at 72 **Traditional - deductible (ordinary income) ***withdrawals after 591/2 from traditional is taxed as ordinary income ***principal nontaxable but earnings taxable Roth - Nondeductible, receive tax free tho exception to 10% penalty **H - first time home buyer up to 10,000 (distributions from Roth IRAs: qualified distribution) I - insurance M - medical expenses in excess of 7.5% of AGI D - Disability E - education college exp A adoption or birth of child made within one year from the date of birth or adoption (5000 max exclusion) D eath

**utilities cost vs mortgage interest vs. interest on auto loans vs. interest on home equity line of credit

**for a personal residence that is not used for rental purposes, no deduction is allowed for utilities costs or insurance; mortgage interest and property taxes are deductible **Mortgages of up to $750,000 to buy, build or substantially improve a home allow for the full deduction of interest. **interest on auto loans is not deductible **interest on home equity loans generally is not deductible unless the proceeds are used to substantially improve home ***e.g. if they use the money for vacation, then the interest is not deductible ***if the loan is secured by a home but is used for tuition, the interest is still not deductible

**filing status

**legally separated is considered unmarried and x qualify for married -filing -separately **qualifying widow/surviving spouse is valid for 2 years + need the presence of a dependent child

**itemized deduction: medical expense

**transportation to a physician's office for required medical care is a deductible medical expense for tax purpose **a medical expense deduction is allowed for payments made in the current year for medical services received in earlier years **a medical expense paid by credit card is deductible in the year the amount is charged to the credit card (rather than in a subsequent year when the credit card bill is paid) %%% medical insurance premium paid is included %%%life insurance premium is not included %%%NOT part of itemized medical expense: mandatory medicare A payment *******equation******** Qualified medical expenses <insurance reimbursement> = qualified medical expense "paid" <7.5% of AGI > = Deductible medical expense ***********************************

**Itemized deductions^6

- Medical in excess of 7.5% of AGI (includes all costs for rehab) - **medical insurance premiums is deductible - taxes - state/local, income/real property/sales, up to 10K(5K Single) - Interest expense for home/investment **(double check the number tho)- Charity up to 60% of AGI, 30% for noncash, 14 cents per mile for volunteering for a qualified org. (cannot donate to campaigns or families for medical expenses) **- Casualty/theft attributable to federal disaster (excess of 10%AGI) - appreciated property can be deducted at FMV - total charity cannot exceed 60% **- investment interest expense(Investment interest may be deducted only to the extent of net investment income, which is any excess of investment income over investment expense) ***noninterest investment expense are not deductible - gambling losses up to gambling winnings - $50 per month housing a student below 12 grade - ND = personal consumer interest **- charitable contributions can be CRRYFWD 5 yrs (subject to the 60% limit) **qualified mortgage interest paid is deductible on Schedule A as an itemized deduction **interest on a home mortgage, state taxes paid, and medical expense in excess of the AGI floor ***federal income tax withheld is not deductible in calculating federal income tax **contribution to IRAs and alimony paid on a divorce executed prior to 2019 are adjustments to gross income to arrive at AGI and they are not part of itemized deduction

**refundable credits %%%

1. child tax credit (refund is limited) **child and dependent care credit is NOT REFUNDABLE 2. earned income credit 3. federal income tax withheld (Form W-2) 4. excess social security tax paid 5. American opportunity credit (40 percent refundable) **retirement savings contribution credit is not refundable

%%% charitable deduction

1. long term capital gain 2. 60% 30% 50% 3. directly to need family --> not deductible %%%the example in R2-22 is kinda weird: when calculating the mix LTCG asset that the owner can take, the limit is cap at (50%*AGI - the deduction already took for cash and ordinary asset) instead of the 30* AGI limit for LTCG

**charitable contribution when elect standard deduction vs. when elect itemized deduction

1. when itemized deduction, it is considered adjustment from gross income (itemized deduction in schedule A) 2. when standard deduction, the individual can take an adjustment for up to $300 of cash contribution to public charities (this will be part of the adjustment to gross income --above AGI (adjusted gross income) )

**child tax credit^7

2k credit for each qualifying child (CARES rule applied here but the child has to be under 17 instead of 19 or 24) & $500 for each relative - QC: under 17 phase out - higher taxpayers must reduce credit by $50 for each 1,000 by which modified AGI income exceeds - 400K for MFJ - 200K for any other situation. **-Additional Child Tax Credit: refundable to the lessor of 1. excess child tax credit (over tax liability 2. (earned income - $2500) *15% 3. or $1400 per qualifying child.

AMT exemption amount^7

72,900 less 25% *(AMTI - 518,400) single or 113,400 less 25% * (AMTI - 1,036,800) for MFJ or 56,700 less 25% * ( AMTI - 518,400) MFS example: Single AMTI is 529,900, Exemption= 72900-25%(AMTI-518400)=70,025; AMT base=529,900-70,025=459,875; TMT=197,900*26%+(459,875-197,900)*28%

**Charitable Contributions^6

?50% limit org: **- Cash: 100% (temporarily increase to 100% for 2021) AGI, should be 60% AGI **- Long Term Capital gain: amount donated: FMV; 30% AGI **-ordinary income property: Lower of FMV or Adjusted Base; 50%AGI ***Overall limit for charitable deduction is 50% AGI ***order Cash --> personal property --> LTCG ***a charitable contribution is not allowed for the value of services rendered to a charity %%%also not for small cash contribution bc the doner cant substantiate it ***when the contribution is charged to a credit card, the contribution is deductible in the year the charge is made ****if the contribution is made directly to the needy family (is called gift) rather than to a qualified organization, the money is not deductible *** ? Non-50%: - Cash: 30% AGI - Capital gain property: Lower of FMV or AB; Lesser of 20% AGI or excess of 30% AGI over contributions to public charities -Everything else: 30% AGI

%%% dependent qualification

An individual qualifies as a dependent if he/she meets either the qualifying child or relative rules

Above the line Charitable contribution^6

CARES act: up to $300 is allowed for the 2020 tax year for individual taxpayer who do not itemize

Lifetime Learning Credit^7

Can be used for both graduate and undergraduate courses - credit = 20% of qualified tuition expenses; max credit allowed is 2000 - Phase out: 59K to 69K for single; 116K to 136K for MFJ - Reduced% out of 20% by: (AGI-59K)/Applicable expenses

EIC calculation^7

Multiply earned income by applicable percentage 0 QC: 7.65% $7030 EIC: 538 1 QC: 34% $10540 EIC: 3584 2 QC: 40% $14800 EIC: 5920 3 or more: 45% $14800 EIC: 6660

**Kiddie Tax

Net unearned income of a dependent child is taxed at the parent's marginal rate (kiddie tax). Net unearned income = unearned income - $2200 **$2200 = current applicable standard deduction for dependents + an additional $1100

**Adjustments^6

Educator expenses - $250 max **IRA - 6000 or 7000 if over 50 **Student loan interest expense - up to $2,500 for the tax year ***(IRC Section 221; NO limitation of the number of years that the interest may be deducted, other than that the interest may be deducted only when paid) **Moving expense - deductible when moving pursuant to military orders **50% self employment taxes **self-employed health insurance ***all medical insurance premiums paid for the taxpayer, spouse, and dependents **self-employed retirement - Keogh profit sharing plans interest withdrawal penalty **Alimony paid if issued before dec. 31 2018 HSA deduction attorney fees paid in discrimination cases Qualified dependent care may be excluded from AGI, but only to the extent of the lesser of $5,000 or the taxpayer's earned income Above-the-line charitable contribution

**qualified child (CARES)

Close relative - kids, siblings, step kids Age limit - under 19 or 24+college full time Residency and filing - same principal home 1/2 yr and cannot file joint return Eliminate gross income test - no test Support test changes - child did not contribute over 1/2 own support **for a student that was home for only two months, the principal home is still the parent's house **scholarship does not count as support provided **if grandparent provided more than half of the support, kid still qualified for qualified child for the PARENT as long as the Kid DOES NOT provide half of HIS/HERS own support **age limit! if not a full time student then is 19 or under

EIC phaseout^7

Decrease max EIC by phaseout [Max EIC- phaseout % * (individual's AGI -begin amt] 0 QC: 7.65% beg: 8790/14680 comp: 15820/21710 1 QC: 15.98% beg: 19330/25220 comp: 41756/47464 2 QC: 21.06% beg: 19330/25220 comp: 47440/53330 >=3: 21.06% beg: 19330/25220 comp: 50954/56844 - No EIC is available when AGI or earned income exceeds the completed phaseout amount.

**general rule for gifted property

Donor's Rollover Cost Basis exception: if the FMV at the date of gifts is lower than the rollover cost basis from the donor: 1. sell higher than Donor Basis (use donor basis to determine gain) 2. sell between donor basis and Lower FMV at Date of Gift (recognize no gain and loss and the basis is this new middle selling price) 3. sell lower than the lower FMV at Date of Gift (use the "lower FMV at date of gift" to determine loss) %%% holding period: normally assume the donor's. But if FMV at the time of the gift is used (loss basis) as the basis of the gift, the holding period starts as of the date of the gift

**general rule for Inherited property basis

FMV at Date of Death

**Child and dependent care credit^7

GR: both parents work and pay someone to take care of child (Non refundable) **the amount that is eligible for the credit is the lesser of 1. the earned income of the lesser-earning spouse 2. the actual expenses incurred 3. the max allowable amount ($3000 or $6000) - Total child and dependent care expense cannot exceed the earned income. The limitation is the smaller of the two for married couples. - maximum expenditures : 3,000 for one dependent of 6,000 for two or more - QC must be under 13 when the care is provided - any disabled dependent or spouse of any age who is unable to take care of themselves. - both parents must produce earned income or one be a student. ($250 per month for one QC) - eligible expenses must be for purpose of enabling the taxpayer to be gainfully employed. - credit computation - maximum: 35% of expense (15,000 AGI or less) - phase out 35 to 20%, credit decrease by 1 for each 2,000 of AGI over 15,000. but not below 20% - minimum 20% for AGI more than 43,000 is $600. 20 % of 3,000.

**Individual Tax Formula^4

Gross Income <adjustments> adjusted gross income -Standard or itemized deductions taxable income before QBID <QBID Deduction> Taxable income Tax <credits> <payments> other taxes refund/owe

**S Corporation dividend and effect on the shareholder's base

If C Corportation --> Carson would report dividend in gross income If S Corp --> Carson would report his share of the S corp's income as gross income, the dividend he got as a shareholder would reduce his basis in the S Corp's stock

**need to look at the book

QBI R1M4 loss limitation RIM5 (passive mom and pop exception etc!!)

**Included in Gross income^4

Interest (The exclusion of certain interest on obligations of states does not apply to the federal government. Interest on U.S. obligations, such as U.S. Treasury bonds, is included in gross income.) **so interest on state government obligations are usually not taxable ***but interest on FEDERAL government obligations is taxable Dividends Wages **State tax refunds if itemized prior year ***!! taxable refund = total PY itemized deduction - PY standard deduction (aka tax benefit) --> so it is possible to have refund of 1500 but only 1150 is taxable income **if standard deduction (refund not taxable) ***noted that except for interest from state and local government bonds, interest income is fully taxable ***so interest on those refund (no matter it is state or federal) is taxable **Alimony received if issued before dec 31 2018 (deduction by the payer before 2018) ***after not taxable as gross income or deductible after 2018 ***qualify as deductible alimony: the payment must be in cash or its equivalent + the payment must end at the recipient's death business income K-1 Capital gain/loss **unemployment compensation **pension distribution social security benefits punitive damages other income Employer educational expenses for Employee over 5,250 Service discounts are limited to 20% or FMV of service Employer parking excluded up to $260 / month benefits received from Qualified pension, profit sharing **the value of the use of a company car is taxable employee fringe benefit. Even if the spouse of the employee use the car, the FMV of the car is taxable to the employee not the spouse!

**additional standard deduction^6

One qualified Taxpayer 65 or Blind = S = 1,700 MFJ = 1350 blind and 65 = S = 3,400 MFJ = 2,700 two qualified taxpayer each 65 or blind $2700 total both 65 and line $5400 total

Tax preference items^7

Positive adjustments to taxable income - Tax exempt interest on private activity bonds - Tax exempt bonds issued by state/local/govt for a project - Excess depletion - Intangible drilling cost - Small business stock exclusion

Health Premium Tax Credit(PTC)^7

Refundable Taxpayer who obtain health insurance through Health Insurance Marketplace - < 400% of the federal poverty line - Not file as MFS

**Tax Free Distributions

Return of Capital Stock Split **Stock Dividend - unless cash option (the original basis is not allocated to the original shares + new shares) life insurance dividend

**Tax exempt income^4

State and Local gov bonds/obligations Bonds of a U.S. Possession **Series EE (U.S. Savings Bonds) - exclusion for interest on Series EE Bonds to the extent it is spent on qualified higher education expenses for the year. ** { "Qualified higher education expenses" means tuition and fees required for the enrollment or attendance of the taxpayer, **the taxpayer's spouse, or any person whom the taxpayer may claim as a dependent for the year.} **{"otherwise qualified higher-education expenses" must be reduced by qualified scholarships not includible in gross income"} **purchaser of the bonds must be the sole owner of the bonds (or joint owner with his or her spouse) stock split return of capital life insurance proceeds **%%%Life insurance premiums paid by employer up to 50K. (e.g. MCQ will word like receive coverage of $200,000 and then taxable would be 200k - 50k = 150k. And then if the premiums is $9 per year for $1000 protection, the taxable income = 150k/1000*9 = $1350) **gifts and ** inheritances **workers compensation for a job-related injury aka damages for personal injury personal injury or illness award accident insurance - premiums paid by employer Medicare benefits **child support (could be a separate check with alimony) scholarships spent on tuition, fees, book/supplies. (not room and board) Recovery of previously paid taxes is excluded from prior income only if the prior deduction did not reduce the taxpayer's federal income tax. The Sec. 103 exclusion of interest on certain obligations of states does not apply to tax overpayments. **prize and award usually taxable for FMV but if 1) selected for award without entering into a contest 2) assign the award directly to a governmental unit or charitable organization then NOT taxable

**qualified relative (SUPORT)

Support - over 50% by taxpayer Under exemption amt of tax income -$4300 Precludes dependent filing a joint return Only citizens Relative - any relative; foster and cousins live with TP entire year or Taxpayer lives w/ individual for whole year %%%qualified parent does not need to live with the taxpayer to be deemed a dependent

**Schedule K-1

The S corporation provides Schedule K-1s that reports each shareholder's share of income, losses, deductions and credits. The shareholders use the information on the K-1 to report the same thing on their separate tax returns. Schedule K-1 is also used by Partnership

Tentative Minimum Tax^7

The amount that taxpayer pays if the amount is bigger than regular tax; if TMT is smaller than regular tax, just pays regular tax.

QC for EIC requirements^7

Three test must be meet: 1. Relationship: birth/adoption/step/foster 2. Residency: provide principle place >1/2year 3. Age: under 19 at the close of the tax year/disabled/student under age 24

QBID Rules^6

a 20% below the line deduction for all tax payers except C corps on eligible flow through income. - dividends, interest, and long term and short term capital gains and losses are not included.

%%% SEP IRA Plan ***

a deduction arrive at adjusted gross income

Keogh profit sharing plans adjustment^6

a self employed taxpayer subject to self employment is generally allowed to set up a Keogh retirement plan - max annual adjustment is lessor of - 57K or 25% of Self Employed earnings - 20% is used to calculate the deduction

Qualified property^6

any tangible property subject to depreciation which is held by the business at the end of the year and is used at any point during the year in the production of QBI.

**gain or loss on a year-end sale of listed stock

arises on the trade date not settlement date

Work Opportunity Tax Credit (WOTC)^7

available to employers who hire employees from a targeted group. this credit is part of the general business credit and was extended through 2019. credit = 40% of first 6,000 of the first years wages 40% of the first 3,000 to certain summer youth. Qualified groups = disabled, Vietnam veterans from economically disadvantaged areas, certain food stamp recipients.

credit for elderly and or permanently disabled^7

available to individuals who are 65 years or older or under 65 and retired due to permanent disability. A married MFS who lives with the spouse at any time during the year may not claim this credit this cred is 15% of the initial base: - single = 5000 or joint = 7500; MFS=3750 The initial base is reduced by: - Tax-exempt social security benefits. - 50% of excess AGI over 7,500 (single) or 10K(MFJ) or 5K (MFS)

**Qualified defined contribution plans

employer contributions to a qualified traditional defined contribution retirement plan and earnings on the amounts contributed are not taxable income to the employee until distributed

**tax benefit rule

book R2-19 but doesnt really make sense: MCQ-02007: Mike received $8000 invoice for personal property taxes in Year 10. He paid it and started legal action to recover the overstatement. He got $5000 back in year 11 --> In Year 10, Mike itemized deductions so he was taking the benefit of the $8000 deduction, in year 11, he need to recognize the $5000 as income; if he did standard, he doesnt need to recognize it as income.

**Student loan interest expense^6

can be deducted up to 2,500 per year phase out is 70K-85K for single and 140-170K MFJ e.x Deduction=interest paid-2500*[(AGI-70K)/15000] a dependent can not claim the adjustment

Health Savings adjustment^6

can make pretax contributions of up to 3,550 or 7,100 for families. increased by 1,000 for those who reach age 55 within the year.

**IRA distributions from gross income vs IRA deduction from Adjustments to income vs (also deduction from adjustment to income) Self-Employed Retirement Plans (SEP IRA, SIMPLE IRA, solo 401(k) ) vs. IRA tax credit

check google doc

general business credit^7

combination of the - investment credit - work opportunity credit - alcohol fuels credit - research credit - low income housing credit. - qualified child care expenditures - welfare to work credit - employer provided child care credit - small employer pension plan start up costs credit - alternative motor vehicle credit - other infrequent credits formula = net income tax - greater of 25% of net regular tax above 25K - net regular tax= regular tax liability reduced by nonrefundable credits - Excess GBC may be carried back 1 year and forward 20

**adoption credit^7

credit for qualifying expenses of adopting a child. maximum amount is 14,400 per child nonrefundable but credit in excess of liab may be carried forward for 5 years. phase out from 216,660 - 256,660 - not available for adopting a spouses kid. ***- medical expenses do not qualify. **qualify expense e.g. legal fee and agency fee

**ordinary income

does not include distribution or long term capital gains

Credits^7

dollar for dollar reduction of tax. 2 types of credits 1. personal tax credits - may reduce personal tax liability to zero but they may not result in a cash refund. - Foreign Tax credit - child and dependent care credit - Lifetime Learning Credit - Retirement Savings Contribution Credit - Child and other Dependents Tax Credit - Credit for the Elderly or the Disabled - General Business Credit - Adoption Credit - refundable credits - may reduce tax below zero and create a refund - Credit for taxes withheld - Earned Income Credit - Additional Child Tax Credit - American Opportunity Credit - Premium Tax Credit

**Partnership or limited liability company (LLC)

flow-through entity that reports income on form 1065 **A single-member LLC is considered a disregarded entity for federal income tax purposes and is treated as a sole proprietorship ***However, a change in the number of members of an LLC that has elected classification as a corporation does not affect the entity's classification. Both LLCs and corporations can have a single owner

**basic standard deduction^6

for a child under 19 or student under 24 who can be claimed as a dependent: - the greater of - $1100 or Earned income for the year plus $350 up to $12,400

**rental income

formula: gross rental income + prepaid rental income + rent cancellation payment + improvements in lieu of rent - rental expenses = net rental income (loss) ** note that if security deposits are held separately and not available to be applied to last month's rent, they are liability of the taxpayers and not included in income in the year received

**A taxpayer is required to make estimated quarterly tax payments if both of the following conditions are met:

if both conditions are met 1) - 1,000 or more tax liability (excess of tax liability over withholding) is expected 2) %%%if taxpayers withholding is less than the lesser of 90% of the current year's tax or 100% of last years tax (safe harbor) ----- if taxpayer has AGI of over 150K in the prior year than 110% of prior years tax liability is required to compute safe harbor payments. ***think of the second condition like "as long as the taxpayer paid one of those options amount of estimate tax payment, they don't have to pay penalty even if they owe tax for more than 1000 at April 15.

**adjustment IRA deduction

if she participate in an employer-sponsored retirement plan, she would be subject to the AGI limitation

**alimony

if the total payment received do not equal the total due, the amount first allocated to child support (e.g. dad paid 5k every month and 1k for child support and 4k for alimony but he only pays 4k this month, would be 1k for child support and 3k for alimony) if mom pays dad 1000 every year and the amount reduced to 800 when their kid turns 18 then 200 is considered child support bc is based on the child's status property settlement are not alimony and are not deductible %%%child support not taxable

**QBI

in connection of R5 M3, guaranteed payments for services are not included in qualified business income (QBI) for purposes of the section 199A QBI deduction for flow-through business entities

**cash basis taxpayer deduct interest

in the paid or the year to which the interest relates (incurred), whichever is later (prepaid interest must be allocated over the period of the loan, even for a cash basis taxpayer)

**loss limitations for individuals

in the year in which a taxpayer disposes of a passive activity, any current or suspended PALs for that activity may be offset against any other sources of income (active, passive, portfolio) ** the above happen, passive loss can be use to deduct non passive income *** last year loss due to excess of tax basis is lost ***last year loss due to excess of at-risk can be deducted against the gain on sales ***last year loss due to not enough passive income is fully deducted against non-passive income for the year of disposal ***excess business loss: business income deducted due to business loss + threshold (to be use to deduct non business income) = total deductible loss ****business loss (not combine loss after offsetting income) - excess business loss = remaining (is carried forward as a net operating loss) BOOK R1-61

**investment interest expense deduction

investment interest expense deduction is an itemized deduction limited to net investment income **rental income and tax exempt interest (such as municipal bond income) are not included in investment income **U.S. Treasury bond interest is included in investment income

**gambling loss

is deductible as a miscellaneous itemized deduction from AGI limited to gambling winnings (although the tax cuts and job act of 2017 suspended all miscellaneous itemized deductions subject to the 2 percent of AGI floor for tax years 2018 - 2025)

**the deduction for interest expense on investment indebtedness is

limited to net investment income (investment income - investment expense) **any excess amount will be carried forward indefinitely

AMT adjustment^7

may increase or decrease AMT represents a limitation on itemized deductions or timing differences T tax deductions(state/local/foreign income taxes & real/personal property taxes needs to add back) S standard deduction (needs to be add back)

Retirement savings contribution credit^7

nonrefundable tax credit that may offset both regular and alternative minimum tax is available for contributions to either a traditional or a roth IRA. - eligible taxpayers = at least 18 years old - not a full time student - not a dependent of another taxpayer. maximum allowable contribution - 2K maximum credit - 1000 for income under 39K - 400 for income under 42.5K - 200 for income under 65K - 0 for income over 65K

**the term active participation for a passive activity loss is relevant in relation to: rental real estate activity

not "passive activities in which the taxpayer materially participates" bc materially is another level

**ordinary income from an S corporation

not subject to self employment tax

American Opportunity Credit^7

of first four years for qualified expenses for post-secondary education - Allowed per student - not allowed for room & board maximum amount is 2,500 / child - 100% of the first 2,000 and 25% of the next 2,000 of expenses - credit begins to phase out with AGI exceeding 80K or 160K MFJ : Credit - Amount of credit allowed * (AGI-80K or 160K)/10K or 20K - 40% of the American opportunity credit is refundable

%%% legal expense not deductible to arrive at AGI

ordinary and necessary expense incurred for estate planning advice is not deductible in arriving at AGI

AMT calculation^7

pay greater of regular tax or tentative minimum tax. Regular tax income -+ adjustments + preferences + standard deduction if applies = AMT income - exemption = AMT base * AMT rate = tentative minimum tax - AMT foreign tax credit = tentative minimum tax - regular income tax = AMT tax rate is 26% on the first 197,900 (98950 MFS) of taxable excess AMTI and at 28% on all taxable income after 197,900.

**taxes deduction in itemized deduction

real estate tax on personal residence ad valoren tax on personal automobile (personal property taxes) current-year state and city income taxes withheld are all allowable deduction

**gross income for partnership

regardless of how much an individual actually got from the distribution of the partnership, the individual need to include his/her percentages of the operating income as the gross income

?? **failure to pay penalty vs. underpayment of estimated taxes penalty ??

scenario: Krete's employer withheld $16000 in federal income taxes for her. She files an extension request to file her individual tax return and paid $300 of additional taxes on April 15th On April 30th, she filed her return when her income tax liability is actually $16500 and she paid the remaining $200 tax liability 1. underpayment of estimated taxes penalty = 0 bc the taxes due after withholdings were not over $1000 2. failure to pay penalty: $200

**standard deduction amounts^6

single = 12550 MFS = 12550 MFJ/Qualifying Widow = 25100 HOH = 18800

tax computations

single has the highest bracket than, HOH, than MFJ, than MFS rates = 10%, 12, 22, 24, 32, 35, 37 use each bracket so someone with 92,000 in TI is taxed at the 10%, then the 12%, then 22%, then 24%.

3 categories for QBID^6

taxpayers below the TI limit = no limits of SSTB or TOB taxpayers in the middle of income thresholds - phase in for TOB pro rata over the taxable income thresholds. but phase out pro rata for SSTB taxpayers above TB limit - no deduction for SSTB and the limits mentioned above for TOB

**SEP(simplified employee pension) IRA

the 2021 max contribution to SEP IRA is the lesser of: 1) 20% of (self-employment net income - 50% of self employment tax) 2) $58,000 (or $64,500 for taxpayers age 50 or older)

**marginal vs. effective tax rate

the regular income tax is marginal rate and effective tax rate is the total tax divided by the total taxable income

Qualified Dividends

the stock must be held for more than 60 days during the 120 day period that begins 60 days before the ex dividend date. tax rates ( 0% - 10-12 % bracket 15% - most taxpayers 20% - 35-37% bracket

**Net investment income (NII) tax

the tax is 3.8% and is levied on the lesser of 1) the taxpayer's net investment income 2) the excess of modified AGI over threshold amount

**tax overpayment

total tax overpayment = current year estimated tax payment + current year withholding + current year extension - current year regular tax liability

IRA Rollevers

transfers can be made from traditional IRA's to rollover IRA's. no AGI limitations that affect these transfers. any previously amounts deducted are included in gross income.

**nonaccountable plan

under a nonaccountable plan, any amounts received by an employee from the employer must be reported by the employer as part of wages on the employee's W-2 for the year (even the employee had refund the boss part of it but the whole amount that he receives is still gross income from him)

**cash method

under the cash method, recognition occurs in the period the revenue is actually or constructively received in CASH or FAIRE MARKET VALUE of property