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41 Cards in this Set
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What are the netting procedures for Capital Gains and Losses for noncorporated TPs? |
Short-term Capital Gains and Losses If there are any short-term capital losses (this includes any short-term capital loss carryovers), they are first offset against any short-term gains that would be taxable at the ordinary income rates. Any remaining short-term capital loss is used to offset any long-term capital gains from the 28% rate group (e.g., collectibles). Any remaining short-term capital loss is then used to offset any long-term gains from the 25% group (e.g., un-recaptured Section 1250 gains). Any remaining short-term capital loss is used to offset any long-term capital gains applicable at the lower (e.g., 15%) tax rate. Long-term Capital Gains and Losses If there are any long-term capital losses (this includes any long-term capital loss carryovers) from the 28% rate group, they are first offset against any net gains from the 25% rate group and then against net gains from the 15% rate group. If there are any long-term capital losses (this includes any long-term capital loss carryovers) from the 15% rate group, they are offset first against any net gains from the 28% rate group and then against net gains from the 25% rate group. |
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Is an option held by an investor a capital asset? How is an option treated when sold? |
Yes. An option sold or exchanged within one year of acquisition will generate either a short-term capital gain or capital loss. The loss would be calculated as the cost (or other basis) of the stock attached to the option. The option's exercise price is irrelevant. |
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What are Section 1231 assets? How are the gains and losses treated? |
1231 assets are depreciable personal and real property used in the TP's trade or business and held over 12 months. Therefore, 1231 assets are not capital assets, but they are given long term capital gain treatment. 1231 losses are always ordinary. |
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What are Section 1245 assets? How are the gains/losses treated? |
Section 1245 only applies to gains. All 1231 assets, which Section 1245 is a part of, which are losses are ordinary losses. 1245 assets are personal property used in trade or business for over 12 months. Upon sale, the lesser of the gain recognized or all accumulated depreciation is recaptured as ordinary income. Any remaining gain is a Section 1231 gain (capital treatment). |
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What are Section 1250 assets? How are the gains/losses treated? |
Section 1250 only applies to real property used in trade or business. Upon sale, the lesser of the gain recognized or the depreciation in excess of straight-line is recaptured as ordinary income. |
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What are the Section 1250 recapture rules for individuals? |
When individuals sell 1250 property at a gain, the gain is characterized as 1231 and netted with other 1231 gains. The lesser of the (1) recognized gain or (2) accumulated depreciation on the asset is taxed at a maximum rate of 25%. Any gain in excess is taxed at capital gain preferential rates of 0, 15, or 20%. |
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What are the rules for Section 179 deduction? |
To satisfy section 179, the property must be depreciable property (does not included land) purchased for use in trade or business and it must be purchased from an unrelated party. The deduction cannot create a loss or be applied to loss . |
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What are the 4 categories of MACRS property and what is the useful life for each? |
Residential Rental Property- 27.5 years SL Nonresidential Property- 39 years SL 5 year- automobiles, light trucks, computers, copiers, duplicating equipment, typewriters, and other such items 7 year- office furniture and fixtures (including computer desk), equipment and property with no ADR midpoint classified elsewhere, and railroad tracks
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What are the requirements to be a qualified small business and what does this allow? |
-average annual gross receipts during the preceding 3 years must be less than $10M -the property must have an adjusted basis below $1M -the deduction cannot exceed the lesser of $10,000 or 2% of unadjusted basis in property
If the TP meets these, TP may expense nonroutine maintenance |
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What are the De Minimis Rules? |
If a company has a written policy as of the beginning of the year for nontax purposes to expense certain property that is normally capitalized q) under a certain $ amount and b) with an economic useful life of 12 months or less, it may expense items costing up to $5,000 per item if the company has an applicable financial statement or $500 if it doesn't. The cost per item cannot exceed this maximum. If it does, all of the cost must be capitalized. Example: A pays $18,000 for 3 pieces of furniture ($6,000 each), and it has an applicable financial statements. The entire cost of $18,000 must be capitalized because the price per piece is > than max of $5,000. Applicable financial statements are those that are 1)required to be filed with SEC, 2)audited, or 3)required to be provided to a federal or state agency. |
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What does it mean if a TP elects a safe harbor? |
It allows TPs to expense routine maintenance that the TP reasonable expects to occur more than once during the class life of the asset and does not result in a betterment. |
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What is a partnership taxed on vs. the partners? |
The partnership is only taxed on income and expenses related to ordinary business, such as salaries and wages. All other income, capital gains, dividends, interest income/expense (based on limitations placed by income), insurance premiums where partnership is beneficiary, etc. is a separately stated item that flows through and is taxed at the partner level. HOWEVER, all income and expense are used in calculating a partners' basis. |
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Do guaranteed payments affect the basis of the partnership or all partners?
How does the purchase of land for investment affect income of the partnership? |
No, it only affects the partner that receives it. All is allocated to the recipient.
It does not affect income of the partnership, so it has no effect on the partners' basis. |
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How is tax-exempt interest treated for a partnership and its partners? How are penalties and fines treated? |
Tax-exempt interest is not included in the income for the partnership and not taxable to the partners. Penalties and fines are not included in the expenses for the partnership and not tax-deductible for partners. HOWEVER, all income, including tax-exempt income, and all expenses, including fines and penalties, are included in calculating a partner's basis. |
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How is a long-term capital gain treated for a partnership? |
This items is separately stated so it would flow through to the partners and be taxable to the partners. |
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A, B, and C each own 1/3 of a partnership. A is the father of B and C is unrelated to either A or B. The partnership sells equipment to partner A at a loss. How is this treated? |
Losses between a controlling partner (over 50% interest in capital and profits) and his controlled partnership from the sale or exchange of property are not allowed. Therefore, this is a related party transaction because partner A owns directly or indirectly more than 50% of ABC. Partner A owns one third, and is the father of partner B, who also owns a third. Thus, partner A owns directly or indirectly two thirds of ABC. The loss is disallowed based on the related party transaction rules. These rules only apply if partner owns 50% controlling interest. |
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How is income vs. cash distributions taxed? |
Partners are generally taxed on all flow-through income, whether received in cash or not. The actual cash distribution is not taxable, but will reduce basis in the partnership. Note: This distribution might be taxable if it is in excess of a partner’s basis in the partnership. |
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What is included on the Schedule K vs. K-1? |
non separately-stated items: salaries, guaranteed payments, depreciation of machinery and equipment, contributions to pension plans (retirement plans) are recorded on schedule K in calculating ordinary business income (loss) or taxable income (loss)
separately-stated items: partner's health insurance premiums, contributions to Keogh pension plan, charitable contributions, interest income, and rental income are used to calculate the partner's distributive share items on sch K-1
listed on K-1 is the proportional share of items listed on sch k
Note: a guaranteed payment will not increase a partner's basis |
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Under entity theory, who elects the depreciation method to be used? |
The partnership elects the depreciation method to be used and may use any method approved by the IRS. |
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TIP |
When a partner retires and is receiving distributions of retirement pay which will eventually relieve him of his share in the partnership. Don't forget to reduce the partner's basis by the amount of debt relieved (his share of the liabilities). |
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How do you calculate the partner's basis in a liquidating distribution of property? |
With a liquidating distribution, the partner's basis for the distributed property is the same as the adjusted basis of his partnership interest, reduced first by any monies received. The partner will recognize gain only to the extent that money received exceeds the partner's basis in the partnership. (Key the basis is NOT the FMV of the property). |
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What elections does a partnership make vs. the partners? |
Most elections that affect the calculation of taxable income of a partnership are made by the partnership itself rather than by an individual partner. For example, 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. |
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In the sale of a partnership interest, what is the new partner's basis? |
A new partner's basis for his partnership interest consists of the amount of cash paid for the interest, plus the adjusted basis of property transferred for the interest, plus the new partner's share of partnership liabilities. |
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At formation, what is the holding period of a partnership interest acquired in exchange for a contributed capital asset? |
The holding period of a partnership interest acquired in exchange for a contributed capital asset begins on the date the partner's holding period of the capital asset began. |
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How is a tax year chosen for a partnership? |
Rule: Per IRC Section 706(b), a partnership tax year must have the same taxable year as the common taxable year of the partners that, in the aggregate, have interest greater than 50%, which is determined based on the "testing day," the first day of the partnership's tax year (not considering the majority interest rule). Note: After a change is made to the "majority-interest" tax year end, the partnership does not have to change to another tax year for two years following the year of change. Exceptions to the rule exist. (1) If there is no "majority-interest" tax year, then the tax year is the tax year of all of the principal partners of the partnership (those owning 5% or more of the income or capital of the partnership). (2) If the partnership is still unable to determine a tax year using the general rule or the first exception, then the tax year that causes the least aggregate deferral of income to the partners must be adopted. |
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What is end of the taxable year for a trust or estate? When is the tax return due for a trust or estate? |
All trusts, except for tax-exempt trust, must adopt a calendar year. Estates may choose the same accounting period as the decedent (or the fiscal year beginning on the date of death), or the calendar year or any fiscal year it wishes, with limited exceptions. Form 1041 estate and trust tax return is due on the 15th day on the fourth month after the close of its taxable year. EXCEPTION: the estate tax return is due 9 months after death. |
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What is the deadline a TP must file a gift tax return? What is the name of the form? |
The 15th day of the fourth month following the close of the taxable year in which the gift was made. Form 709. |
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What must be done to deduct administration expenses on the income tax return? What are administrative expenses? |
To deduct administration expenses on the income tax return, a statement must be filed with the income tax return stating that those deductions have not been taken on the decedent's estate tax return. These expenses include outstanding debt of decedent, claims against the estate, funeral costs, and certain taxes. |
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The applicable credit and the amount of gift taxes payable on prior gifts made (after 1976) reduce the amount of calculated tentative estate tax to arrive at the amount of estate tax payable with the estate tax return (Form 706). True or False. |
True. Note: Only gifts made after 1976 are added back to the gross estate to determine the taxable estate. The gift tax payable on these gifts are a subtraction to arrive at the Form 706 line item number 10, called gross estate tax. |
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When are charitable bequests to qualifying organizations and funeral expenses of the decedent both allowable deductions in determining the taxable estate? |
When it is in the provisions of the will |
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What is the unified estate and gift credit? What is the limit on this credit with respect to estate tax? |
This credit is used to reduce the taxable income from the estate and any gifts. The credit is $2,081,800, equal to a tax before credits of $5,340,000. The unified credit cannot make estate tax less than zero. Hence, only when estate and gifts are over the $5,340,000 tentative base is a tax return required. |
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What is the difference between DNI and taxable DNI? What is the income distribution deduction? |
DNI includes tax-exempt interest, but taxable DNI does not.
The income distribution deduction is the lesser of DNI less adjusted tax-exempt interest (taxable DNI) or the distributions. This deduction is used by the trusts and estates to their reduce taxable income. |
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Does lifetime annual exclusion prohibit annual $14000 gift exclusion? |
No (according to Becker) |
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What is the generation-skipping tax? |
This tax is designed to prevent an individual from escaping an entire generation of gift and estate tax. It is a separate tax imposed in addition to federal estate and gift tax. The tax applies when individuals transfer property to a person who is two or more generations younger than the donor or transferor. Either the trustee or the donor must pay the GSTT. |
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What are complete vs. incomplete gifts? |
A gift is considered complete a) even though the done isn't born yet, provided the identity can later be ascertained and b) despite the possibility that the property may revert to the donor at some time in the future. A gift is considered incomplete (not subject to gift tax) if it is a)conditional- subject to conditions precedent and will not be provided unless conditions are met or b) revocable- donor reserves the right to revoke the gift or change the beneficiaries |
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How are present vs. future interest treated? |
A present interest qualifies for the annual exclusion and generally will be removed from the estate.
A future interest does not qualify for the annual exclusion and unless the required time period has passed, will not be removed from the estate. |
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What discretional expenses are allowed as an unlimited deduction for an estate? |
1) charitable (charitable, scientific, educations, and religious org) 2) marital (transfers to decedent's spouse) |
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How is a spouse's unused gift exclusion used? |
For decedents dying in 2014, the estate of the surviving spouse may be able to use, in addition to the $2,081,000 unified estate and gift tax, an additional credit upon the unused exclusion amount of the surviving spouse's predeceased spouse. The unused exclusion amount is the deceased spouse's applicable exclusion amount minus the portion of the exclusion that the deceased spouse's estate used to offset estate tax due. |
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What is the maximum gift exclusion? What exclusions are unlimited? |
$14,000 or $28,000 for MFJ if gift is given together. All payments made directly to an educational institution for tuition, made directly to a health care provider for medical care, charitable gifts, and marital deductions are allowed an unlimited exclusion. The marital deductions are only allowed if there is not a terminable interest in the property unless the property qualifies at Qualified Terminable Interest Property. (only donee spouse is entitled to income, receives distributions from the property, and can require the subject property to be made production, and property must be subject to payment of its pro rate share of its estate taxes upon death of spouse) |
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What is Form 706 vs. 1041? |
A 706 is an Estate Tax Return that one files for the fair market value of all of your personal assets at date of death. While a 1041 is a tax return one files reporting the income earned during the year, from date of death to usually December 31st, and years thereafter, until the estate or "trust" is officially closed. |
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What are involuntary conversions and how is a gain treated? |
Involuntary conversions include income received from the destruction, theft, or condemnation of property. A gain is not recognized on the gains as a result of these conversions given the rationale that the TP's reinvestment of the involuntarily received proceeds restores him to the position he held prior to the conversion. If the TP doesn't reinvest all the proceeds, his gain on the transaction will be recognized to the extent of the reinvested amount. (Look at R4 TBS) When no gain is recognized, the basis of the new asset is the same as the old asset (increased by additional amounts invested). Personal property must be reinvested within 2 years, while principal residences destroyed in a federally declared disaster have 4 years after the close of taxable year in which any part of gain was realized. The replacement property must serve the same function in TPs business. |
