Acct 425 Final Exam

Front 1

At-Risk Rules

Back 1

-Prevents a loss when an economic loss does not occur
-Applies to all activities for production of income and trade/business
-Losses are limited to amount at risk
-Disallowed losses C/F indefinitely. Must inc. basis to be able to take loss.

Front 2

At-Risk Calculation

Back 2

Cash or Property Contributed (Adj. Basis)
+ Share of Liabilities (Recourse & Qualified NonRecourse)
+ Income/Gains from Property or Investment
- Distribution
- Release of Liability
= Amount At-Risk Allowed

Front 3

3 Types of Liabilities

Back 3

1. Recourse- Taxpayer is personally liable (include in at-risk)
2. NonRecourse- Taxpayer is not liable (do not include in at-risk)
3. Qualified NonRecourse- Applies to activity of holding real property/estate (include in at-risk)

Front 4

Passive Activity Loss Rules (PAL)

Back 4

-IRC separates income/loss into:
Activity
Portfolio/Investment
Passive

Front 5

Active

Back 5

Wages, schedule C

Loss is unlimited

Front 6

Portfolio/Investment

Back 6

Interest, dividends, capital gains

$3,000 loss

Front 7

Passive

Back 7

-Do not materially participate (<500 hours)
-Can only offset passive loss against passive income
-EXCEPTION: Rental Property
1) Can take $25,000 loss against active or portfolio income (Qualifications: AGI<$100,000, phased out at $150,000 AND Active participation: Own >10% and make decisions)
2) Most are considered passive (Material participation>750 hrs)

Front 8

Alternative Minimum Tax
(AMT)

Back 8

Separate tax system to avoid excessive tax deductions

Front 9

AMT Calculation

Back 9

Regular Taxable Income
+ Personal/Dependent Exemptions
+ Standard Deductions (if you don't Itemize)
+/- AMT Adjustments
+ Tax Preference Items
= AMT Income
- Exemption Amount
x Tax Rate
= Tentative AMT Tax
- Regular Tax
= AMT Tax

Front 10

AMT Adjustments

Back 10

-Medical expenses (10% threshold)
-Taxes (not allowed)
-Misc. Deductions (not allowed)
-Mortgage Interest (no home equity for personal purchases)
-Incentive Stock Options (FMV when you exercise option)
-Depreciation (ABS)

Front 11

Flow Through Entities

Back 11

-Ordinary Income/Loss & Separately stated Items flow through to individual taxpayers/partners.
-Separately stated items: could affect individual partners differently
-Ordinary Income/Loss: consists of all ordinary income $ expenses
-Each partner files a 1065 with IRS
-Sch. K lists the income, credits & deductions (K-1 for each individual)

Front 12

Ordinary Income/Loss

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-All items are accumulated and reduced by ordinary and necessary expenses to derive net ordinary income/loss.
-Day to day business
-Expenses must be necessary, ordinary & reasonable

Front 13

Guaranteed Payments

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-Payments made to partners for services rendered
-Must be calculated without regard to partnership income
-Reported as Ordinary & Separately Stated Items
-Considered SE Income, so pay SE tax

Front 14

Ordinary Items

Back 14

Gross Profit
Ordinary Income
Salary & Wages (nonpartners)
Repairs & Maint.
Bad Debts
Rent
Taxes & Licenses
Interest
Depreciation
Retirement Plans
Employee Benefits

Front 15

Separately Stated Items

Back 15

Net Income from Rentals
Interest Income
Dividends
Royalty Income
Capital Gains & Losses
Section 1231 Gains & Losses
Charitable Contributions
Section 179 Expense
Tax Credits
AMT Adjustments & Preferences
Partner Health Insurance Premiums

Front 16

Tax Law

Back 16

-Gives IRS right to audit return & records
-Right to summon taxpayer & 3rd parties
-W2, credit card receipts, certified mailing receipt

Front 17

Accuracy Check

Back 17

-ALL returns
-Check for math errors, incorrect SS #s, etc.
-Small % is actually audited

Front 18

Audit Selections

Back 18

1. DIF Score
2. TCMP Audit
3. Informants

Front 19

Discriminant Function System
(DIF Score)

Back 19

-Top secret
-Higher tax score, higher chance of audit
-Schedule C (home office, tips, meals & entertainment, travel, earned income credit)

Front 20

Taxpayer Compliance Measurement System
(TCMP Audit)

Back 20

-Randomly selected
-Has been discontinued

"Son of a TCMP":
-Pulls 13,000 returns randomly
-Starts with 3rd parties

Front 21

Informants

Back 21

news, informants (NOT CPAs), states, other government agencies

Front 22

Types of Audits

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1. correspondence
2. office audit
3. field audit

Front 23

Correspondence

Back 23

-By mail for math errors, small $ items (Schedule D)

Front 24

Office Audit

Back 24

-At IRS
-Individual taxpayers without Schedule C

Front 25

Field Audit

Back 25

-At your office
-Worst

Front 26

Statute of Limitations

Back 26

1. 3 years from date filed or due date, whichever is later
2. If you never file or file a fraudulent return, no SOL
3. If taxpayer omits >25% of gross income, SOL is 6 years

Front 27

Tax Planning

Back 27

-Legal way of reducing taxable income
-Concerned with marginal rates
-Must occur 1st

Front 28

Tax Evasion

Back 28

-Illegal
-Usually with completed transactions

Front 29

Burden of Proof

Back 29

-IRS
-All taxpayer have to do is submit documents

Front 30

Taxpayer

Back 30

-Amended Returns 1040x
-Use original tax rules

Front 31

Average Tax Rate

Back 31

= Total Tax Liability/Total Income

Front 32

Legislative Process for Enacting a New Tax Law

Back 32

1. House Ways & Means Committee
2. House of Reps (for approval)
3. Senate Finance Committee
4. Senate
5. If disagreements, sent to Joint Conference Committee, then starts over
6. President

Front 33

Automatic Extension

Back 33

An extension is only an extension to file, not to pay.

Front 34

Nontaxable Income

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1. No additional cost services (for employee)
2. Conditions of work
3. Moving expenses
4. Dependent care help (limited)
5. Deminimis items
6. Child support
7. Workers compensation

Front 35

Courts that Hear Tax Cases

Back 35

1. US Tax Court: Traveling, expert judges; Don't have to pay taxes first; Appeal to US Court of Appeals, Supreme Court
2. US District Courts: Where you reside; Heard by jury; Must pay taxes first; Same appeal options
3. US Court of Federal Claims: Located in DC; Judges are not tax experts; Must pay taxes first; Appeals to US Court of Appeals for Federal Claims, Supreme Court

Front 36

Nontaxable Dividend to a Shareholder Recipient

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1. When in lieu of cash.
2. The dividend given in excess of E&P.
3. Qualified dividends for individuals with marginal gross income <25%

Front 37

Constructive Receipt

Back 37

Have the access to cash whether or not you chose to use it. That money is taxed and includes interest put into your account or $ picked up by your agent.

Front 38

Treasury Regulation

Back 38

Part of Administrative Authority & is the IRS's direct interpretation of the IRC.
1. Legislative- Full effect of law
2. General- No effect of law but court grants a lot of authority
3. Temporary- Only valid for 3 years
4. Proposed- No effect of law; Used to generate discussion

Front 39

Revenue Ruling
vs
Revenue Procedure

Back 39

Revenue Ruling- At the request of many taxpayers to clear up a confusing issue.

Revenue Procedure- Proactive & meant to clear up confusion up front.

They have less authority than Treas. Regs but more than other Regs. They're part of Admin. Auth. which has less auth. than statutory but more than judicial.

Front 40

SE Health Insurance Premiums

Back 40

Can't exceed net earnings

Front 41

Qualifying Education Expense for Education Loan Interest

Back 41

Tuition
+ Books
+ Room & Board
+ Supplies

Front 42

Deductible Medical Expenses from Capital Improvements

Back 42

Cost - FMV Inc. of House=

Front 43

Health Savings Account

Back 43

A health savings account is for self employed individuals or individuals with a high deductible. It is a maximum $2,900 deposit for an individual per year and it is a for AGI deduction. They can take $ out interest free for qualified medical expenses.

Front 44

Moving Expense Requirements

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1. Change in job location
2. Distance test (new home must be 50 miles farther from old office than old home to old office)
3. Time test- work 39 weeks in 1st year for full-time (or 78 weeks/2 years for part-time of SE)

Front 45

Individual Retirement Plan

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1. Traditional IRA- Must be qualified & have earned income
2. Roth IRA- Post tax funded; Has high income limitations

Front 46

Rule of Thumb for Taxability of Retirement Plan Distributions

Back 46

If the plan is funded by pre-tax money, all of the distributions will be taxed.

If the plan is funded by post-tax money, only some of the distributions will be taxed (because interest earned)

Front 47

Realized Gain

Recognized Gain

Back 47

FMV Received
Boot Received
(Old Basis)
(Boot Given)
=Realized Gain (Loss)

Recognized= Lesser of: Boot Received or Realized Gain

Front 48

Adjusted Basis

Back 48

Old Basis
+ Boot Given
- Boot Received
+ Gain Recognized
- Loss Recognized