Tax Final Exam

Front 1

Types of depreciation:
Tangible assets?
Intangible assets?
Natural Resources?

Back 1

Tangible assets = cost recovery -or- depreciation

Intangible assets = amortization
Natural resources = Depletion

Front 2

What is generally included in Realty?

Back 2

Land and buildings permanently affixed to the land.

Front 3

What is generally included in Personalty?

Back 3

Any asset that is not realty.

includes: furniture, machinery, equipment, and many other types of assets.

Front 4

Is there any difference between personalty and personal use property?

Back 4

YES! Personal use property can be personalty or realty-- it just has to be held for personal use rather than for use in a trade or business or an income-producing activity. WRITE-OFFS are not allowed for personal use assets.

Front 5

What happens if no cost recovery is claimed on a piece of property?

Back 5

The basis of the property must still be reduced by the amount that should have been deducted. In other words, the basis must still be reduced by the allowable cost recovery.

Front 6

What does MACRS apply to?

Back 6

--Assets used in a trade or business or for the production of income.
--Assets subject to wear and tear, obsolescence, etc.
--Assets must have a determinable useful life.
--Assets that are tangible personalty or realty.

Front 7

When does the mid-quarter convention apply?

Back 7

When more than 40% of personalty is placed in service during last quarter of year.

Front 8

Describe the mid-quarter convention.

Back 8

Assets treated as if place in service (or disposed of) in the middle of the quarter of which they were actually placed in service (disposed of)

Front 9

What is the statutory life for MACRS residential rental realty?

Back 9

27.5 yrs

Front 10

SS179

Which section is this?

Back 10

This is the section where you can elect to immediately expense assets in the year you put them into service.

Can only be used on business personalty. Can't be used on realty or even income-producing personalty (if that income producing personalty is not part of a trade or business).

Limit is $250,000. When expensing assets using this section you are reducing the depreciable base of the asset. When figuring depreciation after using this Section 179 the depreciable base is net of the amt expensed. The order goes, Section 179 first, then the additional first-yr depreciation (for 2008 assets) THEN the MACRS table.

Front 11

Does everyone get to use the Section 179 election for expensing assets in the year put into service?

Back 11

No, its generally only for smaller businesses. The expense limitation (250k for 2008) is reduced by the amount of Section 179 property placed in service during that year that exceeds $800,000.

Front 12

Other than the amount of section 179 assets put into service in that year, are there any other limitations on the section 179 election?

Back 12

Election to expense [section 179 assets] cannot exceed taxable income (before section 179) of taxpayer's trades or businesses.

Front 13

Is there any carryover for section 179?

Back 13

Yes. Since section 179 expenses cannot exceed taxable income the amount section 179 expenses exceeds taxable income by can be carried over to the next tax year. However, the amount carried over still reduces the Basis currently.

Front 14

What properties are considered listed properties when thinking of limits on Cost Recovery.

Back 14

--Passenger Automobile
--Other property used as means of transportation
--Property used for entertainment, recreation, or amusement
--Computer or peripheral equipment
--Cellular telephone

Front 15

For property to be considered as predominantly used for business, business use must exceed...

Back 15

50%.

Front 16

When considering what property is predominantly used for business, is an asset that is used for Production of Income included?

Back 16

No. Use of asset for production of income is not considered in this 50% test.

Front 17

What happens if business use falls below 50% for an asset after the year the property is placed in service?

Back 17

Excess cost recovery must be recaptured.

Front 18

What is section 197 for?

Back 18

Section 197 Intangibles is for claiming amortization deductions.

Front 19

How do you amortize intangibles under section 197?

Back 19

You use straight-line recovery over 15 years. Beginning in the month the intangible is acquired.

Front 20

What type of intangibles does section 197 include?

Back 20

Section 197 includes:
--Acquired Good Will
--Going-concern value
--Trademarks
--Trade names, etc.

Front 21

Anything to say about start-up expenditures?

Back 21

Yes, they are partially amortizable under section 195. Yes another section --this time its 195.

This treatment is available only by election.

Front 22

How does section 195 work for start-up expenditures?

Back 22

Allows the taxpayer to deduct the lesser of:
--The amount of start-up expenditures OR
--$5,000, reduced by the amount of start-up expenditures that exceed $50,000.

Also: Any amounts not deducted may be amortized ratably over 180 months beginning in month trade or business begins.

Front 23

Passive Loss Rules require income and losses to be separated into...

Back 23

3 categories:

--Active
--Passive
--Portfolio

Front 24

Passive Loss Rules, generally, disallow the deduction of...

Back 24

passive losses against active or portfolio income

Front 25

In general, passive losses can only...

Back 25

offset passive income

Front 26

True or false?
Passive losses are not subject to the At-Risk rules.

Back 26

False. Passive losses ARE subject to the At-Risk rules.

--The At-Risk rules were designed to prevent TPs from deducting losses in excess of their economic investment in an activity.

Front 27

Definition of At-Risk?

Back 27

--The amount of a TPs economic investment in an activity.

More specifically: Amount of cash and adjusted basis property contributed to the activity plus amounts borrowed for which TP is personally liable (recourse debt)

Front 28

Does the At-Risk amount include non-recourse debt?

Back 28

At-Risk amount does not include non-recourse debt unless the activity involves real estate.

In other words: For real estate activities, qualified nonrecourse debt is included in determining at-risk limitation.

Front 29

What are the limitations on At-Risk amounts? there are 4

Back 29

--Can deduct losses from activity only to the extent TP is at-risk.
--Any losses disallowed due to at-risk limitation are carried forward until at-risk amount is reduced below zero.
--At-risk limitations must be computed for each activity of the TP separately.

Front 30

How do the at-risk limits coincide with the passive loss rules?

Back 30

--At-risk limitation is applied FIRST to each activity to determine maximum amount of loss allowed for the year.
--Then, passive loss limitation applied to ALL losses from ALL passive activities to determine actual amount of loss deductible for the year.

Front 31

What increases a TPs at-risk amount?
(4 items)

Back 31

--Cash and the adjusted basis of property contributed to the activity.
--Amounts borrowed for use in the activity for which the TP is personally liable or has pledged, as security, property not used in the activity
--TPs share of amounts borrowed for use in the activity that are qualified nonrecourse financing (real estate)
--TPs share of the activity's income

Front 32

What decreases a TPs at-risk amount?
(3 items)

Back 32

--Withdrawals from the activity.
--Taxpayer's share of the activity's loss.
--Taxpayer's share of any reductions of debt for which recourse against the TP exists or reductions of qualified nonrecourse debt (real estate)

Front 33

What is considered active income?
(4 items)

Back 33

--Wages, salary, and other payments for services rendered
--Profit from trade or business activity in which TP materially participates.
--Gain from sale or disposition of assets used in an active trade or
business.
--Income from intangible property created by TP

Front 34

What is considered portfolio income?
(2 items)

Back 34

--Interest, dividends, annuities, and certain royalties no derived in the ordinary course of business.
--Gains/losses from disposition of assets that produce portfolio income or held for investment

Front 35

Losses from which type of activities are considered passive losses?
(2 items)

Back 35

--Losses from trade or business activities in which TP does not materially participate, and
--Certain rental activities

Front 36

Give me some bullet points on Passive loss credits.

Back 36

--Credits from passive activities are subject to loss limitation
--Utilize passive credits to the extent of tax attributable passive income
--Credits that are disallowed are suspended and carried forward similar to losses.
----------Suspended credits can be used to offset tax from disposition of activity but any credits but any credits left after activity is disposed of are lost forever.

Front 37

Anything special about closely held corporations?

Back 37

Yes. Closely held corporations can deduct passive losses against active income.

Front 38

If Rental of tangible (real or personal) property does not meet one of the 6 exceptions it is automatically ... this type of activity?

Back 38

It is automatically passive activity.

Front 39

True or False? If the Rental of tangible (real or personal) property meets one of the exceptions then the activity isn't subject to the material participation tests.

Back 39

False.
Even if they activity meets one of the exceptions then the activity is still subject to the material participation tests.

Front 40

What are the 6 exceptions that rental of tangible (real or personal) property can meet in order to not automatically be considered a passive activity?

Back 40

--The average period of the customer use is 7 days or less.
--The average period of customer use of the property is 30 days or less, and the TP provides significant personal services (Significant services are only services performed by individuals)
--TP provides extraordinary personal services (extraordinary personal services occur when the customer's use of the property is incidental to the services provided.
--Rental of the property is incidental to a nonrental activity of the TP
--TP customarily makes the property available during business hours for nonexclusive use by customers.
--Property is provided for use in an activity conducted by a partnership, S corporation, or joint venture in which TP owns an interest.

Front 41

What are the two significant exceptions to the General Rule that rental real estate losses are treated like other passive losses?

Back 41

1. Real Estate Professionals!
--Rental Real Estate losses are not treated as passive if the following requirements are met:
--TP performs more than 1/2 of his/her personal services in real property businesses in which the TP materially participates,
--TP performs more than 750 hrs of services in these real estate property businesses as a material participant
2. Rental Real Estate Activities
--TP can deduct up to $25,000 of losses on real estate rental activities against active or portfolio income
--Benefit is reduced by 50% if TP's AGI in excess of $100,000.
--To qualify for this exception the TP must: actively participate in rental activity AND own atleast 10% of all interests in activity (active particpation def.: Requires only participation in making management decisions in a significant and bona fide sense)