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35 Cards in this Set
- Front
- Back
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Adjustments to Basis |
Increases to Basis • Capital infusions • Amortization of discount bonds • Profit of pass-through entities • Liabilities assumed Decreases to Basis • Return of capital (Distributions from pass-thru entities • Depreciation • Amortization of bond premium • Liabilities shed |
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STEPPED-UP BASIS RULE EXCEPTIONS |
Contemplation of Death Rule .Appreciated property is acquired by a decedent • As a gift, • Within one year of death, and The property passes from the donee-decedent to the original donor or donor's spouse. • Income in Respect of a Decedent (IRD) property (IRC Section 691) “deferred income” ex. retirement accounts •Annuity payments transferred from the decedent to a beneficiary |
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BASIS OF GIFTED PROPERTY |
• General Rule: Carryover basis Changes in basis result from: • (1)Payment of gift tax (2). Gift of property with FMV < adjusted basis on date of gift |
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IMPACT OF GIFT TAX ON BASIS: EXAMPLE |
Jena received a gift from Brooks on June 15 of this year that had a FMV of $20,000. Brooks' adjusted basis in the asset was $15,000, and he paid a gift tax on the transfer of $800. (Assume that a previous gift equal to the gift tax annual exclusion amount was made earlier in the year.) • Jena's basis in the gifted property is $15,200 Calculation: $15,000 + ($5,000/$20,000 x $800) |
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GIFTED PROPERTY: DOUBLE BASIS RUL EXAMPLE (1 OF 2) |
Sully purchased 100 shares of Hyde, Inc. five years ago for $5k He just gave those shares to his son, Randall, when the value of 100 shares was $1,000 Gain Basis= $5k Loss basis=$1k If he sells $5k or more, use gain basis If he sells for $1k or less, use loss basis If he sells between $1k-$5k (no gain/no loss corridor) |
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HOLDING PERIOD FOR GIFTED PROPERTY |
General Rule • Holding period in the hands of the done includes the holding period in the hands of the donor. Gain basis= add ownership for each party Exception • If double-basis asset is sold for a loss, holding period for donee starts on date of gift. Loss basis |
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BASIS AND SPOUSAL TRANSFERS: EXAMPLE |
Vinny and Lisa, who jointly own a house in Maryland, are in the process of getting divorced. Vinny and Lisa each own 50% of the house, which has a basis of $100,000 and a FMV of $175,000. As part of their divorce settlement, Lisa will receive sole ownership of the house in Maryland. Lisa's basis in the house will be $100,000 (her $50,000 basis plus $50,000 of carryover basis from Vinny). |
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RELATED PARTY TRANSACTIONS |
Related Party Spouse, ancestors & descendants, brothers and sisters (of the whole or half blood) Sales • If a gain results, normal rules apply • If loss results, double basis rule applies • Holding period resets ALWAYS Gifts • Gain property - carryover basis • Loss property - double basis rule applies • Holding period resets only if loss basis is used |
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Depreciation MACRS |
Real Estate: Straight Line • Residential: 27.5 years • Commercial: 39 years • Land: not depreciable Personalty: Accelerated • Double Declining Balance * • 3 year • 5 year • 7 year • 10 year • 150% Declining Balance * • 15 year • 20 year *Switches to Straight Line (SL) when SL generates higher deduction |
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DEPRECIATION COVENTIONS |
Personalty • Half-year convention • If more than 40% placed in service in 4th quarter, mid-quarter convention applies 1 1/2 months Real Estate • Mid-month convention Intangible Property (can’t touch it) Straight-line • 15 year (180 month) • Referred to as "amortization" |
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BONUS DEPRECIATION |
• Up to 80% bonus depreciation available on new or used equipment put into use in 2023. •For years prior to 2023, when bonus depreciation was 100%, the entire cost could be deducted in the year it was placed in service. Taxpayers can elect 50% bonus depreciation in lieu of the 80% rate in 2023. |
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IRC SECTION 179 |
• Permits business owners to expense capital acquisitions • Requirements: • Asset must have > 50% business use • Limit on deduction: $1,160,000 (indexed for inflation) for 2023 • Cannot be used to generate loss Excess is carried forward |
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SECTION 179 PHASEOUT |
Expense election is phased out • On a dollar-for-dollar basis For depreciable property placed in service in excess of $2,890,000 for 2023 • Special rule for vehicles: • Over 6,000 pounds, less than 14,000 pounds • Section 179 deduction limited to $28,900 for 2023 |
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Asset Categorization |
All assets are capital assets except Ordinary Income assets • Accounts receivable •Creative works in hands of creator •Inventory Section 1231 Depreciable real personal property held for use in a trade or business, or for the production of income, held long term |
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TAXATION OF CAPITAL ASSETS |
Long-term gains generate lower tax rates than ordinary income tax rates: • 0% • 15% •20% • 25% for unrecaptured Section1250 depreciation • 28% for collectibles Net losses are limited: • $3,000 maximum (against other income) per year |
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TAXATION OF SECTION 1231 ASSETS |
Gains • Taxed at long-term capital gains rates Losses • Treated as ordinary losses *Long-term holding period is required. |
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SPECIAL HOLDING PERIOD RULES (1 OF 2) |
Property received from a decedent •Deemed to have a long-term holding period • Death is long-term Gifts FMV > basis on date of gift • Add holding period of donor and donee FMV < basis on date of gift • Gain basis used on sale Add holding period of donor and donee • Loss basis used on sale •Holding period starts on date of gift |
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SPECIAL HOLDING PERIOD RULES (2 OF 2) |
Related Party Sale Transaction • Holding period begins on date of sale Nonbusiness Bad Debts • Always short-term Nontaxable Exchange Holding period of replacement asset includes holding period of original asset |
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TYPES OF SECTION 1231 PROPERTY |
Section 1245 Property • Tangible personal property • Example: machinery and equipment Section 1250 Property • Real property • Example: buildings and structures |
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Selling real property |
The difference in straight line and total depreciation is always taxed at ordinary rates |
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NONSIMULTANEOUS NONTAXABLE EXCHANGE |
• The proceeds from the sale of the original property must be held by an escrow agent (the proceeds may not be received by the property owner wishing to engage in the 1031 exchange). A replacement property must be identified within 45 days of the sale of the original property. • The closing on the replacement property must take place by the earlier of (1) 180 days from the sale of the original property, or (2) the due date (including extensions) of the tax return for the year the original property was sold. |
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RELATED-PARTY EXCHANGES |
•Deferred gain is recognized in year of disposition if • Exchange occurs between related parties •Related party disposes of the property within 2 years • Does not apply if: •Either party dies before sale . Tax avoidance is not a motivation • Related party Brothers and sisters (whole or half blood or adopted) • Spouses (results in carryover basis) • Ancestors • Descendants Controlled corporations (>50% equity interest) |
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TAX CONSEQUENCES OF A SECTION 1031 EXCHANGE |
Basis of like-kind property transferred + Basis of boot given + Gain recognized - Fair market value of boot received - Loss recognized |
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SECTION 121: GAIN ON SALE OF PRINCIPAL RESIDENCE |
• Gain can be exempted from income up to: • $500,000 for MFJ • $250,000 for all others • Requirements: • Owned and used as principal residence for 2 out of the last 5 years. • A one-year stay in a nursing home facility counts towards the 2-year requirement. • Exclusion can be used only once every 2 years. |
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SECTION 121: EXEMPTION RULES FOR SPOUSES |
•For MFJ, the $250,000 exemption is increased to $500,000 if: Either spouse meets the 2-year ownership requirement, and •Both spouses meet the 2-year use requirement, and Neither spouse excluded gain from a prior sale or exchange of another principal residence within the prior 2 years. |
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GENERAL PARTNERSHIPS |
Advantages More sources of capital than proprietorships More management resources available than proprietorships Fewer administrative burdens than corporations Income and losses are passed through to the partners Disadvantages Transfer of interests is more difficult than proprietorships Unlimited liability Partnership tax and basis adjustment rules are complex Business net income is subject to self-employment tax Partners are entitled to few tax-free fringe benefits that are generally available to employees |
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LIMITED PARTNERSHIPS |
Advantages Pass-through partnership tax status Flexibility to structure ownership interest Limited partners are not personally liable for the debts and obligations of the limited partnership Disadvantages Must file with the state to register Limited partners may not engage in management Losses for limited partners are passive losses |
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LIMITED LIABILITY PARTNERSHIPS |
Advantages Pass-through partnership tax status is available Flexibility to structure ownership interest Partners can insulate themselves from the acts of the other partners Disadvantages Must file with the state to register Transfer of ownership may be restricted to similarly-licensed professionals Losses for limited partners who do not materially participate are passive losses Unlimited liability for own acts of malpractice |
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FAMILY LIMITED PARTNERSHIPS (FLP) |
Advantages Control retained by senior family member Valuation discounts available Annual exclusion gifts may be used to transfer interests Some creditor protection Restrictions can be placed on transferability of limited partnership interests Commonly used as part of an estate planning strategy Disadvantages Attorney fees and costs Periodic valuation costs Operational requirements Potential IRS challenges regarding valuation and discounts |
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LIMITED LIABILITY COMPANIES (LLC) |
Advantages All members have limited liability and can participate in management Number of members is unlimited Can have multiple classes of ownership Single-member LLC is a disregarded entity for tax purposes Members may be individuals, corporations, trusts, other LLCs, and other entities Partnership taxation applies (unless S or C corporate status is elected) Distributions to members do not have to be directly proportional to members' ownership interests Disadvantages May have limited life Transfer of interest may be difficult and sometimes limited by operational agreement Some industries or professions may not be permitted to use LLC status Laws vary among states Laws are relatively new; therefore, court precedent cases are limited Members not meeting exceptions are subject to self-employment tax on all earned income if partnership is elected |
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CAT/CORN depreciation |
CAT (computer auto/trucks) 5yr O (office furniture/fixtures)7 yr R (residential property) 27.5 yr N (non residential prop) 39 yr |
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CORPORATIONS |
Advantages Relatively easy to: • Raise capital • Transfer ownership interest Shareholders have limited liabilitv. Unlimited life > More extensive management resources Shareholder/employees may receive the full array of employer-provided tax-free fringe benefits Disadvantages Potential for double taxation Administrative burdens More difficult to form Dissolution can cause taxable event Borrowing may be difficult without stockholder personal guarantees Requires a registered agent Requires a federal tax ID number |
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S CORPORATIONS |
Advantages Income passed through to shareholders for income tax purposes Shareholders have limited liability Distributions from S corporations are exempt from the payroll tax system, if the shareholder/employees are adequately compensated Disadvantages Limited to 100 shareholders (husband/wife treated as 1, also up to 6 generations also treated as 1) Only one class of stock is permitted Cannot have corporate, partnership, certain trusts, or nonresident alien shareholders Shareholder/employees owning more than two percent of the company are considered to be self-employed for fringe benefit purposes Borrowing may be difficult without stockholder personal guarantees |
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TAX RATE & QBI (2023) |
• Corporate tax rates are 21%. • Qualified business income (QBI) subject to 20% deduction for pass-through entities. Designed to move more companies to the US • Available regardless of whether the taxpayer selects the standard deduction or itemized deductions To create parity in tax treatment of pass-through entities versus C corporations • When taxpayer owns more than one qualified business: First, calculate the deductible QBI for each business, then •Net the above amounts to determine the "Combined QB|" •The deduction is the lesser of: .The Combined QBI, or • 20% of adjusted taxable income (excluding net capital gains) |
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Charitable Contributions |
Questions to Consider: 1) What type of charity are you donating to? Public or Private 2) Are you donating cash? 3) Are you donating property? • If so, what is the nature of the property? • Is it ordinary income? • Is it gain or loss property? • Is it short or long term? • Is it tangible, intangible or real property? • If it is tangible, will the charity use it in their charitable endeavors for at least 2 years? |
