Income Tax Accounting Exam 3

Closed transaction

In a closed transaction, all material parts of the transaction have been completed. As a result, tax planning involving a closed transaction is limited to presentation of the facts to the IRS in the most favorable, legally acceptable manner possible.

Organizational expenditures

Organizational expenses (also known as organizational costs) are associated with the formation of a business prior to the beginning of operation. A corporation may amortize organizational expenses over a period of 180 months. Certain expenses related to starting a company do not qualify for amortization (e.g., expenses connected with issuing or selling stock or other securities).

Boot

Other property in addition to stock of the corporation in exchange for the transfer of cash or other property, received by the shareholder

FUTA

The federal unemployment tax, which is paid in full by employers. The tax is 6% of an employee's wages up to $7,000

Form 1065

The form that partnerships use to report its income and other items

Qualified Business Income

The income attributed to individual taxpayers by a pass-through entity such as a sole proprietorship, partnership, or S corporation that excludes capital gains, most dividends, interest, and other nonbusiness income.

Barbara receives a current distribution consisting of $2,000 cash plus other property with an adjusted basis to the partnership of $2,300 and a fair market value on the date of the distribution of $7,000. Barbara has a 10 percent interest in the partnership and her basis in her partnership interest, immediately prior to the distribution, is $5,000. What is Barbara's basis in the non-cash property received in the current distribution?

$2,300 (Barbara takes the partnership's basis in the property distributed to her)

The Social Security portion of the FICA tax is imposed at a rate of (not including any additional tax for high-income earners):

6.2 percent for the employee and 6.2 percent for the employer.

Mike deducts a bad debt on his 2020 tax return. How many years is the statute of limitations for the bad debt deduction?

7 years

Which of the following liabilities would be considered nonrecourse?

A $20,000 real estate loan which allows the bank to take the real estate if the taxpayer stops making payments on the loan.

Sick leave credit

A credit that applies to 100% of qualified sick leave wages paid in the quarters between April 1, 2020 and December 31, 2020

Family leave credit

A credit that matches the amount that is required to be paid: normal wages up to $200 per day.

Nonrecourse Liabilities

A debt for which the borrower is not personally liable. If the debt is not paid, the lender generally can only repossess the property pledged as collateral on the loan

Statute of Limitations

A time period within which an action may be taken by the IRS or a taxpayer on a tax return. In general, the statute of limitations for a tax return runs for 3 years from the date the tax return was filed or the return extended due date, whichever is later

Fraud penalty

A time period within which an action may be taken by the IRS or a taxpayer on a tax return. In general, the statute of limitations for a tax return runs for 3 years from the date the tax return was filed or the return extended due date, whichever is later.

Employee Stock Ownership Plans

A type of defined contribution pension plan in which employers provide their employees with ownership in the employer's stock.

Defined benefit plan

A type of pension plan in which the plan specifies the pension payment amounts payable to an employee upon retirement, based on the employee's earnings history, tenure of service and age.

Defined contribution plan

A type of pension plan in which the plan specifies the regular contributions made by the employer and employee in which the pension benefits are based on the contribution amounts and the returns of the plan's investments.

Backup withholding

A withholding with the purpose of ensuring that income tax is paid on income report on form 1099

Partnership

Conduit, reporting entities, that engage in some type of business or financial activity, and are not subject to taxation. Various items of partnership income, expenses, gains, and losses flow through to the partners and are reported on their respective individual income tax returns.

Start-up costs

Costs that may be incurred by any business, including sole proprietorships reported on Schedule C

Special deductions

Deductions allowed to corporations including the dividends received deduction and the deduction for organizational expenditures and start-up costs.

Stock basis

Determined by the following formula:

EFTPS

Electronic Federal Tax Payment System

Form W-2

Employee's Wage & Tax Statement, used to report wages, tips and other compensation paid to an employee

Form 940

Employer's Annual Federal Unemployment Tax Return, used to report an employer's FUTA liability for the year

Form 941

Employer's Quarterly Federal Tax Return, which reports the federal income taxes withheld from wages and the total FICA taxes attributable to wages paid during each quarter

Interest rate

Equal to the federal short-term rate plus 3 percentage points

FICA

FICA imposes social taxes on forms of earned income to provide benefits for retired and disabled workers. Referred to as FICA taxes, Social Security and Medicare taxes are withheld using a specific percentage from an employee's wages. Both the employer, the employee, and the self-employed are responsible for the payment of FICA taxes.

Limited Partner

Limited partners may not participate in management and have no liability for partnership obligations beyond their capital contributions

Elwin worked at three jobs during 2020. He earned $30,000, $27,000, and $9,000, respectively, from the jobs. What amount can Elwin apply as a credit against his 2020 income tax liability for overpayment of FICA taxes?

$0 -- Elwin does not have excess FICA withholding.

In 2020, Willow Corporation had three employees. Two of the employees worked full-time and earned salaries of $25,000 each. The third employee worked only part-time and earned $4,000. The employer timely paid state unemployment tax equal to 5.4 percent of each employee's wages up to $7,000. How much FUTA tax is due from Willow Corporation for 2020, after the credit for state unemployment taxes?

$108 ($7,000 + $7,000 + $4,000) × (6.0% − 5.4%)

Phil and Bill each own a 50 percent interest in P&B Interests. P&B Interests has ordinary income for the year of $35,000 before guaranteed payments to Phil. If Phil receives guaranteed payments of $10,000 during the tax year, what is the total income or loss that should be reported by Bill from the partnership for this tax year?

$12,500 income (50% × ($35,000 − $10,000))

Jamie decides to contribute cash and property to a partnership she and her friends started. She contributes a building worth $260,000 that has an adjusted basis of $100,000 and she also contributes $40,000 in cash. What is her basis in the partnership?

$140,000 ($100,000 + $40,000)

The partnership of Felix and Oscar had the following items of income during the current tax year: Income from operations $157,000 Tax-exempt interest income 8,000 Dividend income 6,000 What is the total ordinary income from business activities passed through by the partnership for the current tax year?

$157,000 (tax-exempt interest and dividends are separately stated items.

Encumbered property

Property pledged for the liability. The property is said to be encumbered in the amount of the liability

An equal partnership is formed by Rita and Gerry. Rita contributes cash of $10,000 and a building with a fair market value of $150,000, adjusted basis of $55,000 and subject to a liability of $60,000. Gerry contributes cash of $100,000. What is the partnership's basis in the building contributed by Rita?

$55,000 (Generally, the partnership's basis in property contributed by a partner is equal to the partner's adjusted basis in the property at the time of the contribution plus any gain recognized by the partner.)

Sabrina contributes a building with an adjusted basis of $80,000 to a partnership. The fair market value of the building is $100,000 on the date of the contribution. What is Sabrina's basis in her partnership interest immediately after the contribution?

$80,000 (Generally, the basis of the partner's initial interest in the partnership will equal to the basis of the property contributed)

Dividends paid to a shareholder by a corporation should be reported on which of the following forms?

1099-DIV

Which of the following forms should be used by a company to report a 2020 payment of $1,500 to a computer consultant who is not an employee of the company?

1099-NEC

Social Security

12.4% tax up to $137,700 of wages.

Medicare

2.9% tax on all wages

Corporate tax rate

21% flat rate

Corporate charitable contributions deduction

A deduction limited to 10 percent of taxable income, computed before the deduction for charitable contributions, net operating loss carrybacks, capital loss carrybacks, and the dividends received deduction.

Current distribution

A distribution which does not result in the complete termination of the partner's interest in the partnership

Form 1120S

A form that an S corporation uses to report its income and other items

Form 1120

A form that corporations used to report its income and other items

Form W-4

A form that provides the information necessary for the employer to withhold income taxes at the prescribed amount.

Form 1099

A form used for each recipient of certain payments made in the course of an employer's trade or business, such as proceeds from brokers, payments to non-employees, and dividend or interest payments.

Paycheck Protection Program

A loan program designed to assist small businesses during the early stagers of the pandemic

Percentage Method

A method of determining an employee's withholding amount by preparing the adjusted wage amount, the tentative withholding amount, the adjustment for tax credits, and the final withholding

Wage bracket method

A method of determining the amount to withhold based on a table for the appropriate payroll period and marital status.

Offer in compromise

A negotiated settlement where the IRS accepts a settlement less than the total amount of tax due, usually when the taxpayer is unable to pay the amount they owe

Failure-to-file penalty

A penalty equal to 5 percent of the tax due with the return for every month or portion of a month the return is late. In the event the failure to file is fraudulent, the penalty is increased from 5 percent for each month or portion thereof to 15 percent, and the maximum penalty is increased from 25 percent to 75 percent. The minimum failure-to-file penalty is the lesser of $435 (in 2020) or the total amount of the taxes due with the tax return.

Fraud Penalty

A penalty equal to 75% of the amount of underpayment of taxes attributable to fraud

Accuracy-related penalty

A penalty of 20 percent of the underpayment amount imposed on taxpayers who file incorrect tax returns in certain situations.

Rollover

A process where the taxpayer receives a distribution of funds from a retirement plan and then transfers part or all of the funds to the new retirement plan trustee.

Qualified plan

A retirement plan that meets the exclusive benefit, non discrimination, participation and coverage, minimum vesting, and uniform minimum distribution criteria

Special one-day deposit rule

A rule applies to employers if income tax withholding and FICA taxes of $100,000 or more are accumulated at any time during the year

At-Risk Rule

A rule designed to prevent taxpayers from deducting losses from activities in excess of their investment in those activities

Schedule M-1

A schedule used to reconcile a corporation's book income to its taxable income, computed before the net operating loss and special deductions such as the dividends received deduction.

Unreported Income DIF

A score that the IRS uses to rank the likelihood of unreported income on any given return

S Corporation

A small business corporation whose shareholders have filed an election permitting the corporation to be treated in a manner similar to partnerships for income tax purposes. Of major significance are the facts that S corporations usually avoid the corporate income tax and that corporate losses can be claimed by the shareholders, limited to individual shareholder's adjusted basis.

Dividends received deduction

A special deduction for corporations that receive dividend income distributions from a domestic corporation that it has an ownership interest in. Generally designed to prevent double-taxation of corporate dividends paid by a corporate subsidiary to its parent.

Personal service corporation

A substantially employee-owned corporate that engages in one of the following activities: health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting

Accumulated earnings tax

A tax designed to prevent the shareholders of a corporation from avoiding tax at the shareholder level by retaining earnings in the corporation

Built-in Gains Tax

A tax on gains attributable to appreciation in the value of assets held by the corporation prior to the S corporation election

Correspondence audit

An audit conducted by the IRS by the U.S. mail. Typically, the IRS writes to the taxpayer requesting the verification of a particular deduction or exemption. The remittance of copies of records or other support is requested of the taxpayer.

Office Audit

An audit conducted by the IRS in the agent's office.

Field Audit

An audit conducted by the IRS on the business premises of the taxpayer or in the office of the tax practitioner representing the taxpayer.

Which of the following taxpayers are NOT required to make estimated payments?

An employee who works at a local department store with appropriate withholding and no other income -- a car mechanic who is self-employed and earns $50,000 a year and a wealthy individual whose earnings are from corporate dividends ARE required to make estimated payments

Steve is a single man who lives by himself. He has one job as a computer technician and takes the standard deduction. What is his 2020 Form W-4 likely to report?

Check the single box in Step 1 only - Steve appears to have no dependents, no additional income, and no additional deductions. He's likely to check the single box to complete his 2020 Form W-4. Note that the 2020 Form W-4 no longer reports allowances.

Qualified Nonrecourse Financing

Debt that is secured by the real estate and loaned or guaranteed by a governmental agency or borrowed from any person who actively and regularly engages in the lending of money, such as a bank, savings and loan, or insurance company

Employee retention credit

Grants eligible employers a credit against employment taxes equal to 50% of qualified wages paid to employees

At which of the following IRS locations are tax returns processed?

IRS Campus Processing Sites

Open transactions

In an open transaction, all the events have not yet been completed; therefore, the taxpayer has some degree of control over the tax consequences.

Initial Basis

Is equal to the basis of the property transferred plus cash contributed to the partnership

Pass-Through Items

Items that are separately stated on the shareholders' Schedule K-1, specifically capital gains and losses, Section 1231 gains and losses, dividend income, charitable contributions, tax-exempt interest, most credits

Pass-through items

Items that pass through from an S Corp to the shareholders and retain their tax attributes on the shareholders' tax returns such as capital & section 1231 gains & losses, dividend income, charitable contributions, tax-exempt interest and most credits

Select the INCORRECT answer. Estimated income tax payments:

Need not be filed if the estimated tax, after subtracting withholding, can reasonably be expected to be more than $1,000 -- EITPs if inadequate, may result in nondeductible penalties, may be based on the amounts of the tax liability for the prior year, and are made in four installments on April, June, September 15 of the tax year and January 15 of the following year.

Nonrecognition treatment

No gain or loss is recognized on the exchange of like-kind property held for productive use in a trade or business or for investment. The rationale for the nonrecognition treatment is that the newly acquired property is a continuation of the old or relinquished property

Discriminant Function System

One process by which the IRS selects tax returns for audits. The DIF is a computerized statistical sampling technique.

General Partner

Partners who usually take on the risk of legal liability for certain actions of the partnership or debts of the partnership, as specified under state law and participate in management and have unlimited liability for partnership obligations

General Partnerships

Partnerships that may be formed by a simple verbal agreement or "handshake" between partners

Limited Partnerships

Partnerships that must be documented in writing and the entity must be legally registered in the state in which it is formed

Guaranteed Payments

Payments made to a partner for services rendered or for the use of the partner's capital that are made without regard to the income of the partnership

Estimated payments

Payments that are required to be made by self-employed taxpayers and taxpayers with large amounts of interest, dividends, and other income not subject to withholding

For tax purposes, in computing the ordinary income of a partnership, a deduction is allowed for:

Payments to partners, determined without regard to the income of the partnership, for services provided to the partnership. (Losses flow through to partners and are not carried back or forward by the partnership. Charitable contributions are separately stated items. Partnerships are not permitted to deduct a personal exemption.)

Personal Holding Company Tax

Personal holding companies, which are corporations with few shareholders and with income primarily from investments, are subject to a 20 percent tax on their undistributed earnings. The tax is imposed in addition to the regular corporate income tax; however, a corporation cannot be subject to both the accumulated earnings tax and the personal holding company tax in the same year

Schedule K-1

Presents the allocation of ordinary income or loss, special income and deductions, and gains and losses to each partner on the Form 1065

Basis

The amount assigned to an asset for income tax purposes. For assets acquired by purchase, the basis would be the cost of the asset plus any direct costs incidental to the purchase. Special rules govern the basis of property received as a result of another's death or by gift.

Appeals process of IRS

The appeals procedure begins with the IRS inviting the taxpayer to an informal conference with an appellate agent. If an agreement cannot be reached at the appeals level, then the matter is taken into the federal court system

Failure-to-pay penalty

The penalty for failure to pay is 1/2 of 1 percent of the amount of taxes due for every month or portion of a month that the payment is late, up to a maximum of 25 percent of the amount of taxes due. The penalty increases to 1 percent per month beginning 10 days after a notice of levy has been given to the taxpayer

Marginal tax rate

The rate at which tax is imposed on the "next" dollar of income

OASDI

The second part of FICA tax: Old-Age, Survivors, and Disability Insurance

Required annual payment

The smallest of the following amounts: ninety percent of the tax shown on the current year's return, one hundred percent of the tax shown on the preceding year's return, or 90% of the current-year tax determined by placing taxable income, alternative minimum taxable income, and adjusted self-employed income on an annualized basis for each quarter.

Form W-3

Transmittal of Wage & Tax Statement

Built-in gains tax

Under certain circumstances, an S corporation may be liable for tax at the corporate level. An S corporation may be subject to a tax on gains attributable to appreciation in the value of assets held by the corporation prior to the S corporation election.

Which one of the following forms must an employer provide to an employee by January 31 of the following year?

W-2

Trustee-to-trustee transfer

When a trustee of a retirement plan transfers assets to the trustee of a different retirement plan, upon instruction from the taxpayer. There are no tax implications nor are there any restrictions on amounts or number of transfer occurrences in a given year.