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146 Cards in this Set

  • Front
  • Back
How is a sole proprietor taxed?
The sole proprietor needs to include all business income (less cost of goods sold) in gross income.
What is a term loan?
A below-market loan if the amount loaned exceeds the present value of all payments due under the loan.
What is a demand loan?
Any loan payable in full on demand of the lender.
How is a below-market loan treated?
It is treated as a gift
What is the tax effect on a landlord in regards to rental income?
All rent received is taxable income
What is a dividend?
Any distribution of property made by a corporation to its shareholders out of its earnings and profits.
What portion of Social Security benefits are taxable?
A portion of Social Security income is taxable to the extent that a taxpayer’s provisional income exceeds certain base amounts.
What is provisional income?
Provisional income equals adjusted gross income, plus one-half of Social Security received, plus some non-taxable items such as tax exempt interest.
What are the 1st threshold amounts for filing single? married filing jointly?
Single: $25,000
Married Filing Jointly: $32,000
What happens if the taxpayer's provisional income exceeds the 1st threshold (but does not exceed the 2nd threshold)?
The taxable portion of Social Security is the lesser of:
1) 50% of Social Security benefits, or
2) 50% of the excess of the taxpayer’s provisional income over the base.
What are the 2nd threshold amounts for filing single? married filing jointly?
Single: $34,000
Married Filing Jointly: $44,000
What happens if a taxpayer’s provisional income exceeds the 2nd threshold?
The taxable portion of Social Security is the lesser of:
1) 85% of Social Security benefits OR
2) 85% of the amount that provisional income exceeds the threshold plus the smaller of (a) The amount of SS benefits included under the prior law, or (2) $4,500 for unmarried taxpayers or $6,000 for married filing jointly.
How are Social Security benefits handles for married taxpayers filing separately?
Married taxpayers filing separately have no base amount and must include in gross income the lesser of
1) 85% of Social Security benefits OR
2) 85% of their provisional income
Is interest on U.S. Savings Bonds taxable?
1) The general rule is that interest on U.S. savings bonds is fully taxable.

2) Cash basis taxpayers may report interest income on a yearly basis or defer the recognition of interest income until the bonds mature.
How is interest handled on U.S. Savings Bonds (EE Bonds used for education) if the proceeds are used to finance the higher education of the taxpayer, taxpayer's spouse, or dependents?
1) Interest earned on U.S. savings bonds may be excluded if the proceeds are used to finance the higher education of the taxpayer, taxpayer’s spouse or dependents.

2) Qualified higher education expenses: Tuition and fees qualify. Room and board and expenses incurred outside of the degree program (e.g., sports, clubs) do not qualify. The bonds must be redeemed during the same tax year in which qualified educational expenses are incurred.
What happens if the qualified educational expenses and the Series EE proceeds are different amounts?
1) Expenses > Proceeds: If the qualified educational expenses exceed the Series EE proceeds (principal and interest), then all the interest may be excluded, subject to the income phase out rules.

2) Proceeds > Expenses: If the qualified educational expenses are less than the Series EE proceeds (principal and interest), then only a portion of the interest may be excluded based on the exclusion formula.
What is the exclusion formula needed to calculate the portion of interest that may be excluded?
Exclusion Amount = Interest on EE Savings Bond x (Qualified Educational Expenses / Series EE Proceeds)
What are the 4 non-strategy fringe benefits that are excluded from gross income?
1) No-additional-cost services
2) Qualified employee discounts
3) Working condition fringe benefits
4) De minimis fringe benefits (property or service, the value of which is so small as to make the accounting for it unreasonable or administratively impracticable)
What are no-additional-cost services?
Generally excluded from gross income if:
1) No significant additional costs are incurred by the employer and
2) The service provided is offered for sale to customers in the ordinary course of the line of business for which the employee is working.
What are qualified employee discountss?
1) Generally excluded from gross income.
2) For property purchased at a discount, the exclusion may not exceed the employer’s gross profit margin. For services purchased at a discount, the exclusion may not exceed 20%.
What are working condition fringe benefits?
The fair market value of any property or services provided to an employee is excluded by that employee if it represents an ordinary and necessary business deduction to the employer.

Examples: Cell phone used by the employee for the primary convenience of the employer, but also available for personal use; subscriptions to business periodicals; on-the-job training; inventory being tested by the employees outside of the employer’s workplace.
What are De minimis fringe benefits?
Excluded when the value of property or services provided to the employee are so minimal that accounting for it would be unreasonable.

Examples: Using the copy machine for personal purposes; occasional tickets to sports events, coffee and snacks, occasional company picnics.
How much of group life insurance can be excluded from gross income?
1) An employee can exclude the cost of group term life insurance provided by an employer as long as the face value of the policy does not exceed $50,000.
2) If over $50,000 of coverage is provided by an employer, the cost of the premium for the excess coverage must be included in the gross income of the employee.
Income received as an annuity from an annuity, endowment, or life insurance contract consists of what 2 parts?
1) Non-taxable return of investment
2) Taxable gain on investment
How is the tax-free portion of the annuity treated?
The tax free portion of the annuity is spread evenly over the taxpayer’s lifetime.
For annuities, how is the excludable amount calculated (Step 3)?
Annual Annuity Payments Received x Exclusion Ratio = Excludable Portion of Annuity Payment

Annual Annuity Payments Received
- Excludable Amount
= Amount Included in Gross Income
For annuities, what is the exclusion ratio and how is it calculated (Step 2)?
The exclusion ratio is used as a multiplier in the calculation of the amount of the annuity payment that can be excluded from gross income.

Exclusion Ratio = Investment in Contract / Expected Return Under the Contract
For annuities, how do you calculate the expected return under the contract (Step 1)?
Multiplier from Table 2
x Annual Annuity Payments (monthly payment x 12)
= Expected Return
How does worker's compensation affect gross income?
Excludable: Amounts received as compensation for occupational personal injury or sickness.
Includable: Amounts received as compensation for non-occupational personal injury or sickness.
How do benefits received from employee-paid accident and health insurance plans affect gross income?
These benefits are excluded from gross income.
How do benefits received from employer-paid accident and health insurance plans affect gross income?
Benefits received from employer-paid plans are taxable UNLESS the following conditions are met:
1) Permanent injury or loss of bodily function if amounts are paid on the nature of the injury and not on work time lost.
2) Reimbursement for actual medical expenses incurred by employee, spouse or dependents.
What is the tax treatment for physical injury or sickness damage awards?
Excluded from taxable income.
What is the tax treatment for non-physical injury or sickness damage awards?
Taxable, except if damages are used to pay for medical expenses related to emotional distress.
What is the tax treatment for lost wage damages?
It is taxable income.
What is the tax treatment for punitive damages?
It is taxable income.
What is the tax advantage of cafeteria plans?
Each employee is permitted to choose between cash or nontaxable benefits. Employees are not subject to federal income tax for the amount of menu items that are nontaxable. In addition, the cost of these fringes is deductible as compensation to the employer.
What are the non-taxable items allowable under cafeteria plans?
1) Group-term life insurance coverage below $50,000
2) Health and accident protection and dental plans
3) Child care
4) Vacation days
5) Dependent care assistance
6) Adoption assistance
Unused benefits from one plan year may not be accumulated by an employee and carried over to succeeding years.
What is the tax treatment for adoption assistance?
1) An employee may exclude from gross income of up to $12,150 of adoption expenses per child, where such expenses are paid for by the taxpayer’s employer under a qualified adoption assistance program.

2) Qualified adoption expenses include ordinary and necessary adoption expenses, court costs, attorney fees and other expenses incurred for the principal purpose of the legal adoption of a child.
When is the exclusion for adoption assistance phased out?
The exclusion is phased out for taxpayers with an adjusted gross income between $182,180 and $222,180.
What is the tax treatment for employee tuition reduction plans?
Payments of up to $5,250 per year paid by an employer to, or on behalf of, an employee for tuition and course-related material may be excluded from employee income.
What are considered qualified educational expenses for employee tuition reduction plans?
Qualified educational expenses includes the payment or provision of tuition, fees, books, supplies, and equipment.
What is a qualified dependent care assistance program?
A separate written plan of an employer under which the employer pays or incurs dependent care costs for the exclusive benefit of employees. Employees can exclude up to $5,000 ($2,500 for married persons filing separately).
The dependent care assistance program is subject to an earned income limitation, what does it say?
1) The exclusion is subject to an earned income limitation. An unmarried taxpayer may not exclude more than his or her earned income for the year. A married taxpayer may not exclude more than the lesser of his or her earned income or the spouse’s earned income.
2) The earned income of an incapacitated or student spouse is deemed to be $250 per month for one qualifying dependent or $500 per month for 2 or more qualifying dependents.
Types of Federal Taxes
1) Income taxes on corporations, individuals, and fiduciaries
2) Employment taxes
3) Estate and gift taxes
4) Excise and customs taxes. Also, revenues are generated from state and local taxes. Consideration is given to the attractiveness of alternative systems—the value-added tax and flat tax.
Tax Avoidance
Legal and a legitimate pursuit of a business entity.
Tax Evasion
Requires the presence of a tax liability. There is a legal obligation to disclose a tax liability based on completed transactions and the refusal to report the tax liability is illegal.
What is the result of the 16th Amendment?
Congress empowered itself to tax income.
What was the result of the Revenue Act of 1913?
Imposed income tax on individuals, corporations and other entities, effective 3/1/1913.
What was the result of the Internal Revenue Codes of 1939, 1954, and 1986?
Recodified the numerical referencing format of legislative tax law after significant tax law revisions had occurred.
What are the badges of tax evasion?
1) Understatement of income
2) Claiming of ficticious or improper deductions
3) Accounting irregularities
4) Allocation of income
5) Acts and conduct of the taxpayer
What are the steps in the enactment of a revenue bill?
1) Origination in the House of Representatives Ways and Means Committee
2) Passage by the House
3) Passage by the Senate
4) Resolution of differences in House and Senate versions by the Joint Conference Committee, composed of members of both legislative bodies
5) Approval of the final version by both the House and the Senate
6) Approval or veto by the President
7) Incorporation into the Internal Revenue Code. Both the Senate and the House must vote affirmatively by a two-thirds majority to override a veto.
What's the deal with The Taxpayer Relief Act of 1997?
The most significant tax legislation since the Tax Reform Act of 1986. Major features of the Act include a reduction in capital gains tax rates, expanded IRAs, education tax incentives,
estate tax relief, and a child tax credit.
What is the primary purpose of tax law?
The primary purpose of the tax law is obviously to raise revenue, but social, political, and economic objectives are also important.
What economic factors affect the rationale behind the federal income tax?
Numerous provisions of the tax law have been employed to help stimulate the economy, to encourage capital investment, or to direct resources to selected business activities. Examples include the following: MACRS depreciation; the optional expensing election in lieu of depreciation; percentage depletion; special farming elections to expense rather than to capitalize expenses for soil and water conservation, land clearing, and fertilizers; the S corporation provisions; the Section 1244 stock loss provision; and the tax rate structure for regular corporations.
What is accrual basis accounting?
Income is accounted for as and when it is earned, whether or not it has been collected.
What is a capital asset?
Everything owned and used for personal purposes, pleasure, or investment.
Examples:
1) Stocks
2) Bonds
3) A residence
4) Pleasure automobile
What is cash basis accounting?
It must be used by all taxpayerswho do not keep books. Income is reported only as it is received, in money or other property having a fair market value, and expensess are deductible only in the year that they are paid.
What are conduits?
They pass through their income (loss) to owners (beneficiaries). A partnership is an example.
What is claim of right?
It asks whether cash or property received by an individual to which the individual does not have full claim and which the individual might have to return in the future must be included in come. The question here is whether the taxpayer must report the income when received or wait until the taxpayer has full right to it.
What are income taxes?
Individual income tax and corporate income tax.
What are employment taxes?
FICA Social Security, FICA Medicare and FUTA.
What are estate and gift taxes?
Taxes on transfers of property.
What are excise and custom taxes?
Taxes on transactions (taxes on the purchase of alcohol).
What are the political objectives of tax law?
To benefit one’s own constituents or to discourage certain activities.
What are the social objectives of tax law?
To encourage behavior (e.g., deduction for charitable contributions) or discourage behavior (e.g., illegal kickbacks are not deductible)
What are 4 types of entities?
1) Individuals
2) Corporations
3) Trusts
4) Estates
What is the fundamental concept of income?
Incomes from whatever source derived. Gain derived from capital, labor, or both.
What are net capital gains taxed at?
Capital gains are taxed at a maximum of 15%. Collectibles and Section 1202 gains are taxed at 28%.
Is depreciable property an asset?
Depreciable property is not a capital asset.
What are the 5 major provisions of the Taxpayer Relief Act?
1) Capital gains tax rate reduction
2) Exclusion of a portion of the gain on the sale of a personal residence
3) Roth IRA
4) Child tax credit
5) Education tax incentives
Does a corporation have to pay gift tax on gifts that it makes?
No, the gift tax is imposed only on transfers made by individuals.
What does gross income include?
Gross income includes all items of income from whatever source unless specifically excluded.
What are some examples of gross income?
1) Wages
2) Salaries
3) Tips
4) Interest
5) Dividends
6) Alimony received
7) Business income
8) Rental income
9) Royalties
10) Pensions
11) Annuities
Who is allowed a personal exemption?
1) Individual taxpayer and spouse
2) Dependents of the taxpayer (qualifying child or relative)
What is the deduction amount per exemption allowed for 2009?
$3,650
What 4 tests must an exemption meet?
R - Relationship: child, stepchild, sibling (or a descendant of any of these individuals).
A - Age: under 19 or 24 and full-time student.
S - Support: a child who provides over half of its own supports is not a qualifying child.
H - Housing: child lived with taxpayer for over half the year.
What is the criteria of the relationship test for a qualifying relative?
Dependent must be a relative. Aunts and uncles qualify, first cousins do not.
What is the criteria of the household test for a qualifying relative?
Dependent must occupy the taxpayer’s household during the entire year (exceptions include birth, death, illness, education, military and business travel).
What is the criteria of the gross income test for a qualifying relative?
Dependent’s gross income < $3,650 in 2009.
What is the criteria of the support test for a qualifying relative?
A taxpayer must provide over one-half of the amount “actually spent” on support for the potential dependent. Includes food, shelter, clothing, medical care and education. Scholarships are not counted in determining the support of a potential dependent.
An individual (such as a parent) may not claim an exemption for a dependent who filed a joint return with the dependent’s spouse unless:
The dependent and the dependent’s spouse are only filing a return to receive a refund and no tax liability would exist for either spouse on separate returns.
A taxpayer is considered as having provided over half the support of an individual where two or more people contributed support if the following 4 tests are met.
1) No one person contributed over half the support.
2) Those who collectively furnished over ½ the support could have claimed the exemption except for the support test.
3) The taxpayer claiming the exemption paid over 10% of the support.
4) Each person who paid over 10% files a written declaration that they will not claim the individual as a dependent.
The general rule is that the custodial parent is entitled to the exemption in all cases UNLESS either of the following are met:
The custodial parent files a written declaration with the IRS waiving the right to the exemptions.
A taxpayer’s personal exemption is reduced when AGI exceeds certain threshold amounts.
1) The deduction is reduced by 1/3 of 2% for each $2,500 (or fraction thereof) of AGI in excess of the threshold amount ($1,250 for a married individual filing separately).
2) For a single individual, the phase-out begins when AGI exceeds $166,800 ($250,200 for married filing jointly).
What's the deal with Itemizing vs. Standard Deduction
The taxpayer should take the larger of the two.
What is the standard deduction?
All taxpayers receive a minimum deduction. It is based on your filing status.
How can medical expenses be an itemized deduction?
If they exceed 7.5% of the AGI floor and are not business related.
How can property taxes be an itemized deduction?
If the property taxes are state and local, not federal. If they are on principal residences, personal-use cars, stock, and other non business-use property.
How can income taxes be an itemized deduction?
If they are state and local, not federal taxes. If they are on salaries, capital gains, and other non-business income.
How can casualty losses be an itemized deduction?
If they exceed 10% of the AGI floor. If they are on principal residences, personal-use cars, and other personal property.
How can chariatable contributions be an itemized deduction?
If they do NOT exceed 50% of the AGI ceiling. In certain cases, not to exceed 30% or 20% ceiling.
Most miscellaneous expenses can be included as an itemized deduction but only the aggregate amount exceeding 2% AGI floor.
Examples:
1) Unreimbursed employee business expenses
2) Hobby expenses (out-of-pocket and depreciation)
3) Tax preparation fees
4) Investment counseling fees

Exception:
1) Gambling losses are NOT subject to the 2% AGI floor
What are the standard deductions in regards to filing status?
1) $5,700 Single individuals
2) $11,400 Married individuals filing jointly
3) $5,700 Married individuals filing separate returns
4) $8,350 Heads of households (and abandoned spouse)
5) $11,400 Surviving spouses
What is the additional standard deduction and its criteria?
An additional standard deduction is allowed for aged (65 and older) or blind taxpayers.

The additional standard deduction is $1,400 for unmarried taxpayers ($1,100 for married taxpayers).
What is the criteria for an abandoned spouse?
1) Cost of household furnished by taxpayer exceeds one-half of the total cost.
2) Abode of the taxpayer is the abode of a dependent child over one-half of the year.
3) Other spouse not member of household during last half of the year.
4) Separate return is filed.
What is the criteria for a surviving spouse?
1) Taxpayer must be unmarried.
2) Taxpayer must furnish more than one-half of the cost of household for a child or stepchild.
3) Child or stepchild must be a dependent. No other relatives qualify.
4) Taxpayer's household must be the principal abode for a child or stepchild for more than one-half of the year.
What is the criteria for head of household?
1) Taxpayer must be unmarried.
2) Taxpayer must furnish more than one-half the cost of the household for a dependent.
3) Unmarried qualifying child need not be a dependent. Other relatives (including married child or grandchild or unmarried foster child) must be dependents. Dependency through a multiple support agreement does not count.
4) Taxpayer’s household must be the principal abode for more than one-half of the year. However, the taxpayer’s dependent parents do NOT need to live with the taxpayer.
What is the criteria for tax returns of dependents?
1) An individual cannot take a personal exemption for themselves if they can be claimed as a dependent on another persons return.
2) An individual is entitled to a standard deduction equal to the greater of (a) $950 or (b) the taxpayers earned income plus $300 (up to the maximum standard deduction of $5,700 for 2009).
What is the criteria for The Kiddie Tax?
1) The general rule is that if a dependent child under age 18 has net unearned income in excess of $1,900 the excess (over $1,900) is taxed at the parents’ top rate.
2) Net unearned income is investment income (income from interest, dividends, capital gains and trusts).
What is considered unearned income taxed at parent's top rate (Kiddie Tax, Step 2)?
Unearned Income (interest, dividends, capital gains, and certain trust income)
Less: $950 (the first $950 clause)
Less: The greater of...
(1) $950 of standard deduction/$950 of itemized deductions, or
(2) total allowable deductions associated with the production of the unearned income.
= Unearned income taxed at the parents' top rate
What are itemized deductions?
Expenses of a personal nature that are specifically allowed as a deduction. Deductions from AGI.
How do you determine how much income is taxed at the child's rate (Step 3)?
Add: Taxable income
Less: Unearned income taxed at the parents' rate
= Income taxed at the child's rate
How do you determine a child's taxable income (Step 1)?
Add: Gross income (earned and unearned income)
Less: Standard deduction for a dependent (greater of $950 or earned income plus $300)
= Child's taxable income
What is the self-employment tax rate for 2009?
The tax rate is 15.3% and it is made up of two parts:
1) An old-age, survivors, and disability insurance (OASDI) rate of 12.4% on self-employment income up to $106,800.
2) A medicare hospital insurance (HI) rate of 2.9% without limit on self-employment income.
How much of the self-employment tax is allowed as a deduction for AGI?
One-half of the employment tax.

In addition, the following is how the self-employment tax is determined:
1) Net self-employment income * .9235 = Net income from self-employment
2) Net income from self-employment * 15.3% = Self-employment tax
What are the requirements for filing a tax return?
1) General rule is that if gross income exceeds the standard deduction plus personal exemptions, the taxpayer must file a return. There are exceptions to this rule.
2) The additional standard deduction for age is added to the basic standard deduction, however the additional standard deduction for blindness is not.
When should taxpayers use the tax tables/tax rate schedules?
1) Taxpayers with less than $100,000 of taxable income should use the tax tables.
2) Taxpayers that cannot use the tax tables should use the tax rate schedule (see inside front cover of textbook).
What is the basic tax formula for individuals?
Gross Income
- Deductions FOR AGI
= AGI
- Greater of Itemized Deductions or Standard Deduction
- Personal Exemptions
= Taxable Income
x Tax Rate
= Taxable Liability
- Tax Credits and Prepayments
= Net Tax Due or Refund
What are some examples of deductions FOR adjusted gross income?
1) Trade or business expenses, such as advertising, depreciation, and utilities.
2) Certain reimbursed employee expenses, such as travel, transportation, and entertainment expenses.
3) Moving expenses.
4) Losses from sale or exchange of property
5) Alimony payments
**The majority of the deductions are from business expenses.
What are tax credits?
1) They are applied against the income tax.
2) The principal credits include the earned income credit, child tax credit, credit for the elderly, general business credit, dependent care credit, and foreign income tax credit.
What are tax prepayments?
The tax liability is further reduced by the amounts withheld on income and by any estimated tax payments made during the year.
How is the term taxpayer defined?
The term “taxpayer” is defined as any person subject to any internal revenue act. The term person includes any individual, a trust, estate, partnership, association, company, or corporation.
When is income taxable?
Generally, any compensation granted to an individual to which the individual has an absolute right is regarded as constructively received income.
What is the California Rule in regards to community property income?
Income from separate property remains separate. Applies to California, Arizona, Nevada, New Mexico, Washington and Wisconsin.
What is the Texas Rule in regards to community property income?
Income from separate property is community income. Therefore, if spouses filed separate returns, the income would be shared between them. Applies to Texas, Idaho and Louisiana.
What happens to income from separate property?
1) If spouses filed separate returns, the income would be shared between them.
2) If spouses filed jointly, the income is included in the joint income total.
Compensation vs. Gift
Compensation:
1) Generally included in gross income
2) The courts say that it is compensation if the transferor takes a tax deduction.
3) If payment has "strings attached."

Gift:
1) Generally excluded from gross income.
2) Not intended as a return of value or made because of any intent to repay what is his due, but bestowed only because of personal affection or regard or pity, or from general motives of philanthropy or charity.
3) Transferor does NOT take a tax deduction.
What is considered community property income?
1) Property acquired after marriage is community property. Income from community property is community income.
2) Property acquired before marriage remains separate property.
How are prizes and awards generally taxed?
They are taxed based on fair market value at time of receipt.
What 4 conditions must be present in order for prizes and awards to be excludable from gross income?
1) Connected with the fields of science, charity, or the arts.
2) Involuntary selection process (i.e., through no effort of recipient).
3) No future services required of recipient.
4) Assigned to a governmental agency or tax-exempt charitable organization (rather than constructively received).
For employee achievement awards that are for length of service or safety achievement and delivered at a "meaningful presentation," how much can be excluded from gross income?
1) $400 if the plan is non-qualified (i.e., discriminates in favor of highly paid employees), or
2) $1,600 if the plan is qualified (i.e., does not discriminate in favor of highly paid employees).

***If an employee receives both qualified and nonqualified awards, then the overall exclusion may not exceed $1,600.
Scholarships or fellowships are generally taxable, but when can they be excluded from gross income?
1) To a degreed candidate attending an educational institution.
2) For tuition and course related material (not room and board).
3) As a result of academic achievement, and not connected with services provided.

***Scholarships awarded because of non-academic achievement are usually compensation disguised as a scholarship so it is a taxable award.
How is a sole proprietor taxed?
The sole proprietor needs to include all business income (less cost of goods sold) in gross income.
How are partnerships and S corporations taxed?
1) Partnerships and S corps are not taxed, but their taxable income is taxed to individual partners and shareholders.
2) Partners and shareholders must include their proportionate share of business income in their gross income, regardless of whether or not the income was distributed.
What is a term loan?
A below-market loan if the amount loaned exceeds the present value of all payments due under the loan.
What is a demand loan?
Any loan payable in full on demand of the lender.
How is a below-market loan treated?
It is treated as a gift, dividend, contribution to capital, payment of compensation, or other payment depending on the substance of the transaction.
What loans are subject to imputed interest?
1) Gift loans (made out of love or generosity). Note that the “gift” is NOT the principal portion of the loan, rather, the amount of interest that is below market.
2) Compensation-related loans (employer loans to employees)
3) Corporation-shareholder loans (a corporation’s loans to ANY of its shareholders)
 
If all of the following apply:
1) Interest charged is less than the applicable federal rate (AFR)
2) Sum of all loans between lender and borrower exceeds $10,000
3) The loan was made after June 7, 1984
What are the steps to calculate the tax effect of below-market interest loans?
Step 1: “Pretend” that the borrower has “paid” the imputed interest to the lender as an interest payment.

Step 2: “Pretend” that the lender has returned the imputed interest back to the borrower as either a gift, compensation, or a dividend.
What is the tax effect on a landlord in regards to rental income?
All rent received is taxable income, including future years’ rent received in advance.
What is the tax effect on a tenant in regards to a business lease?
If rent is paid in advance, no deduction for rent expense is allowed until the year the payment is due.
When are a tenant's improvements taxable to cash-basis landlords?
1) If in lieu of rent or if the repairs paid for by lessee are the responsibility of the lessor, the improvements are taxable. The lessor has rental income to the extent of the market value of the improvements.
2) If NOT in lieu of rent, the improvements are NOT taxable. When the property is sold, the improvements will be taxed assuming they add value that results in a higher sales price.
What is a dividend?
Any distribution of property made by a corporation to its shareholders out of its earnings and profits.
What are the 2 common types of dividends?
1) Cash Dividends: Taxable.
2) Stock Dividends: Generally are not taxable. There are 5 exceptions to this rule. If a stock dividend meets one or more of these exceptions, it is taxable.
What are the 5 exceptions that make a stock dividend taxable?
1) Stockholder has option to receive stock in lieu of money.
2) Disproportionate distributions alter individual stockholder's proportionate interest in the corporation.
3) Some stockholders receive common stock and others receive preferred stock.
4) Stock dividend distribution on preferred stock.
5) Distributions of convertible preferred stock
Under the Post-1984 Agreements, what are the requirements for alimony to be deductible?
1) Payments must be made in cash.
2) Payments must be made under a divorce or separation instrument.
3) Parties must live in separate households after a divorce or separation decree is entered.
4) Alimony must end at the payee’s death.
5) Parties involved may not file a joint return.
Under the Post-1984 Agreements, what are the requirements for alimony to be deductible?
1) Payments must be made in cash.
2) Payments must be made under a divorce or separation instrument.
3) Parties must live in separate households after a divorce or separation decree is entered.
4) Alimony must end at the payee’s death.
5) Parties involved may not file a joint return.
Under the Post-1984 Agreements, what is the tax treatment for alimony and child support?
1) Alimony is taxable to the payee and the payor can deduct the alimony from gross income.
2) Child support is not taxable for the payee and the payor cannot deduct child support.
When is alimony required to be recaptured?
1) Payments made in the 2nd post-separation year exceed payments in the 3rd post-separation year by more than $15,000 and/or
2) Payments made in the 1st post-separation year exceed the average payments made in the 2nd and 3rd post-separation years by more than $15,000.
What are the calculations for a Year 2 recapture if the alimony payment structure meets the recapture requirements (Step 1)?
Year 2 Payment
- Year 3 Payment
= Excess Payment
- $15,000
= Amount subject to recapture for Year 2
What are the calculations for a Year 1 recapture if the alimony payment structure meets the recapture requirements (Step 2)?
Year 1 Payment
- (Year 2 Payment - Year 2 Recapture + Year 3 Payment) / 2
= Excess Payment
- $15,000
= Amount subject to recapture for Year 1

***In calculating the recapture amount for the first year, only the amount calculated from [Year 2 Payment - Year 2 Recapture], rather than the Year 2 payment, is treated as paid in the second year. This is because the average payments made in the second and third year does not include the Year 2 recapture payment made in the second year that is recaptured in the third year.
How do you calculate the total alimony recapture (Step 3)?
Year 2 Recapture
+ Year 1 Recapture
= Total Alimony Recapture
What is the tax effect for the payor and payee in regards to alimony recapture?
1) Payor includes recapture amount in gross income in Year 3.
2) Payee is allowed a deduction from gross income in Year 3.
3) In regards to the normal alimony payments, the payee includes Year 1 and Year 2 payments in gross income. In Year 3, the payee deducts the difference between the recapture amount and the Year 3 payment from gross income if the recapture amount exceeds the Year 3 payment (if there is a Year 3 payment).
4) In regards to the normal alimony payments, the payor deducts Year 1 and Year 2 payments from gross income. In Year 3, the payor must include in gross income the difference between the recapture amount and the Year 3 payment if there is a payment in Year 3.
Forgiveness of debt is generally includable in gross income, but what are the 2 exceptions in which taxes are deferred (i.e., excluded from gross income)?
1) The debt is discharged in a Chapter 11 bankruptcy filing. The amount of debt discharged reduces certain tax attributes that otherwise could have provided a tax benefit in the future.
2) The borrower is insolvent outside of bankruptcy (i.e., Liabilities > FMV of assets immediately prior to discharge). However, the amount excluded from gross income cannot exceed the amount by which the taxpayer is insolvent. The taxpayer must recognize the excess amount in taxable income (Amount of debt forgiven - Insolvent Amount).
What is involved with the offsetting reduction of tax attributes?
As a price for the deferral (exclusion from gross income), the Code requires that the amount deferred be applied to reduce seven tax attributes in the order listed below. However, the Code offers a special election to first reduce the tax basis of depreciable property or real property held as inventory.
1) Net operating losses and loss carryovers
2) General business credits under Code Sec. 38
3) Minimum tax credits under Code Sec. 53
4) Net capital loss and loss carryovers
5) Basis of depreciable assets or nondepreciable real assets held as inventory
6) Passive activity losses
7) Foreign tax credit carryovers under Code Sec. 27
What are the exceptions to the recapture rule?
1) Payments cease by reason of death or remarriage prior to the end of the third post-separation year.
2) Payments received under a temporary support order before the divorce or separation.
3) Payments pursuant to a continuing liability to pay a fixed part of your income from a business or property or from compensation for employment or self-employment.