Gross Income

<Adjustments>

Adjusted Gross Icome (AGI)

<Standard Deduction OR Itemized Deductions>

<Exemptions>

Federal Income Tax

<Tax Credits>

Other Taxes

<Payments>

Tax Due OR Refund

1. real/tangible property produced by taxpayer for business use

2. real/tangible property produced by taxpayer for sale to customers

3. real/tangible property acquired by taxpayer for resale

DOES NOT apply to property acquired for resale if annual gross receipts for previous 3 years exceeds $10 million

1. Taxpayer may use joint tax return standard deduction/rates for each of 2 taxable years following death of spouse

2. Must maintain household for whole taxable year that was principal place of abode of child

1. The individual is not married, is legally separated, or is married and has lived apart from spouse for the last 6 months

2. Not a qualifying widow(er)

3. Not a nonresident alien

4. Maintains as his/her home a household that, for more than 1/2 taxable year, is principal residence of: dependent son/daughter, father/mother (not required to live w/ taxpayer), or dependent relative

CARES mnemonic:

Close relative

Age limit: 19 or 24 in college

Residency and filing requirements: live w/ taxpayer for > 1/2 of tax year

Eliminate gross income test: must claim an exemption

Support test changes: must NOT contriubte > 1/2 of own support

SUPORT mnemonic

Support (over 50%) test

Under a specfic amount (taxable) gross income test: less than exemption amount

Preculdes dependent filing joint tax return test

Only citizens test

Relative test OR

Taxpayer lives w/ individual for whole year test

What are specific examples of income and exclusions

- Traditional deductible IRA distributions are taxed as ordinary income

- Roth IRA benefits are non-taxable

- Traditional non-deductible IRA principal is non-taxable, but accumulated earnings are taxable when withdrawn

- 10% penalty tax unless used to pay:

Home buyer (1st time)

Insurance (medical)

Medical expenses in excess of 7.5% AGI

Disability

Education

And

Death

Gross Rental Income

Prepaid Rental Income (nonrefundable deposit)

Rent Cancellation Payment

Improvement In-Lieu-of Rent (at FMV)

<Rental Expenses>

Net Rental Income/(Loss)

- If residence is rented for < 15 days/year, treated as personal residence (rental income excluded, mortgage interest and property taxes are itemized deductions

- If residence is rented for >=15 days/year, expenses pro-rated b/t personal and rental use

Capital: personal automobile, furniture and fixtures, sotcks and securities, personal/real property not used in business, interest in partnership, goodwill, purchased intangibles, other assets held for investment

Non-capital: property included in inventory or held for sale, depreciable personal property, A/R and N/R, original intangibles, treasury stock

Amount realized

<Adjusted basis of asset sold>

Gain/loss

Amount realized includes: cash received (boot), cancellation of debt (boot), property received at FMV, and services received at FMV (reduce amount realized by selling expenses

Adjusted basis: purchased property basis = cost, increase for capital improvements, reduce for accumulated depreciation

- If sold higher than donor's basis, use that to determine gain

- If sold between lower FMV and donor's basis, no gain/loss, use that as basis

- If sold lower than lower FMV, use lower FMV at date of gift to determine loss

- Gain is lower of realized gain or the boot received

- New basis = carryover basis - cash (boot) received + boot paid + gain recognized 

- loss never recognized

Gross profit = sale - COGS

Gross profit percentage = gross profit/sales price

earned revenue (taxable income) = cash collections * gross profit percentage

WRaP mnemonic

Wash sale loss

Related party transactions

and

Personal loss

- ST capital losses offset by ST gains at ordinary rates

- remianing ST capital loss is used to offset LT capital gains in 28% group

- remaining ST capital loss is used to offset LT gains from 25% (Section 1250)

- Remianing ST capital loss used to offset LT capital gains at lower tax rate

- offset from higher tax rates to lower tax rates

Nonqualified options:

- employee taxation (readily ascertainable value) = taxed at grant, if optoins lapse capital loss

- employee taxation (w/o readily ascertainable value) = taxed at exercise, no consequence if they lapse

Qualified options:

- ISO: employee = no compensation/salary income, capital G/L when sold, employer = no deduction

- ESPP: employee = no compensation/salary income, capital G/L when sold, employer = no deduction

- ADJUSTMENT

1. Deductible IRA:

- earnings accumulate tax free

- withdrawls taxable as ordinary income

- can't deduct if excessive AGI (rich) or have another qualified plan

- lesser of : $5k (x2 if married) OR individual's compensation

2. Roth IRA:

- contriubtions non deductible

- tax-free accumulation of earnings and distributions

- contribution limits = $5k x2

3. Nondeductible IRA:

- contribution limit: lesser of 1) $5k, 2) individual's compensation, 3) limit not contributed to other IRA's

- earnings accumulate tax-free

- distributions: principal is non taxable, perviously accumulated earnings are taxable

DEDUCTION

- payments on behalf of yourself, spouse, and dependent (who received over half of support from me)

- expenses include: paid and charged amounts during year, payments made for deceased, amounts repaid to taxpayer must reduce allowable expense

Qualified Medical Expenses

<Insurance Reimbursement>

Qualified Medical Expense Paid

<7.5% AGI>

Dedcutible Medical Expenses

- Deductible medical expense: medicine/drugs, doctors, medical/accident insurance, required surgery, transportation to facility

DEDUCTION

HIPPE mnemonic

Home

Investment: to the extent of investment income

Personal (not deductible)

Prepaid interest: allocate to proper period of loan

Educational loan interest (ADJUSTMENT, not deduction)

1. American Opportunity Credit: against federal income taxes for qualified tuition, fees, and materials ($2,500 max credit)

2. Lifetime Learning Credit: $2k max per year, only 1 per year

3. Coverdell Educatoin Savings Account Distributions: exclude from income

Can use both 1) and 2) in the same year

Regualr Taxable Income

± Adjustments

+ Preferences

Alternative Minimum Taxable Income

<Exemption>

Alternative Minimum Tax Base

x Tax Computation

Tentative AMT Tax

<Tax Credits>

Tentative Minimum Tax

<Regular Income Tax>

Alternative Minimum Tax (in addition to regular tax)

1) Exemption formula: 33,750 less 25% (AMTI - $112,500) for single, $45k less 25% (AMTI - $150k) for joint and 22,500 less 25% (AMTI - $75k) for married individuals filing separately

2) Preferences (always add-back):

Private activity bond interetes income

Percentage depletion excess over adjusted basis 

Pre-1987 accelerated depreciation

Everything else is adjustment either add or subtract

3) Credit for Prior Year Minimum Tax: offsets regular tax

4) AMT Credits: foregin tax credit, adoption credit, child tax credit, contributions to retirement plans credit, earned income credit

Corporation:

- no G/L recognized in issuance of C/S, purchase of treasury stock, and sale of treasury stock

- basis of property is greater of NBV and debt assumed

Shareholder:

- No G/L recognized if 80% control and boot not involved

- Basis = asset NBV - liability (less than zero = Gain)

TRADE/BUSINESS DEDUCTION

- 9% of lesser of QPAI and taxable income (disregarding QPAI deduction)

Domestic Production gross receipts

<COGS>

<Other directy allocable expenses/losses>

<Proper share of other deductions>

QPAI

TRADE/BUSINESS DEDUCTION

- max deduction of 10% of taxable income

- must be paid w/in 2.5 months of year-end

- taxable income is before deduction of charitable contribution, dividends received, NOL carryback, capital loss carryback, or QPAI deduction

TRADE/BUSINESS DEDUCTION

- 100% deductible

- partially destroyed: loss is lesser of decline in value or adjusted basis of property immediately before casualty

- fully destroyed: loss is adjusted basis of property

TRADE/BUSINESS EXPENSE

- corporation named as beneficiary (key person) = not tax deductible

- insured employee named as beneficiary (fringe benefit) = tax deductible

5-year:

- automobiles, light trucks, computers, typewriters, copiers, and duplicating equipment

7-year:

- office furniture and fixtures and equipment

- comprised of depreciable personal and real property used in business held over 12 months

- gain = LT capital gain from sales, exchanges, or involuntary conversions

- loss = ordinary loss

- personal business property (i.e. autos)

- GAIN ONLY = lesser of gain recognized or all A/D is recaptured as ordinary income

- remaining gain is section 1231 gain

- real properties used in trade/business (i.e. warehouse/building)

- recaptures only portion of depreciation in excess of straight line

LIE mnemonic

Long-term contracts: difference b/t completed contract and percentage-of-completion

Installment Sales: difference b/t full accrual and installment sales

Excess depreciation

PPP mnemonic

Percentage depletion: excess over adjusted basis

Private Activity Bonds

Pre 1987 ACRS depreciation

MIND mnemonic

Municipal bond interest

Increase life insurance cash surrender value

Non straight-line depreciation after 1989

Dividends Received Deduction

NIRD mnemonic

60% of adjusted ordinary income consisting of:

Net rent if less than 50% of ordinary gross income

Interest that is taxable

Royalties or 

Dividends from unrelated domestic corporation

- taxed additional 15%

Negative Adjustments:

- federal income taxes, penalties/fines, officer life insurance premiums (corp = beneficiary), expenses for production of tax-exempt income, non-deductible charitable contributions, non-deductible capital losses

Positivie Adjustments:

- refunds, tax-exempt income, NOL deductions, life insurance proceeds, DRD, carryovers of capital losses/charitable contributions

- partnership tax deduction (like salary/interest expense)

- partner taxable income

Estate (trust) gross income (includes capital gains)

<Estate (trust) Deductions>

Adjusted Total Income

+ Adjusted Tax-Exempt Interest

<Capital Gains>

DNI

Simple Trust:

- only makes distributions out of current income (not trust corpus)

- required to distribute all income curretnly

- cannot take deduction for charitable contribution

- $300 deduction

Complex Trust:

- may accumulate current income

- may distribute principal

- may deduct charitable contributions

- exemption of $100

- FMV of property owned (value = date of death or earlier of date of distribution/6 months after death)

- insurance proceeds

- incomplete gifts

- revocable transfers

- all property entitled to be received

1. an agreement made up of an offer and acceptance

2. an exchange of consideration (legal value)

3. lack of defenses

1. Was there a manifestation of intent to contract?

2. Was there definiteness and certainty in the essential terms?

3. Was there communication of the above to the offeree?

1. Revocation by offeror: can revoke offer anytime before acceptance (exceptions: option contract, unilateral contract, merchant firm offers)

2. Rejection by oferee: can do it expressly with rejection or counteroffer, effective when received, and w/in reasonable time (w/o specific time period)

3. Termination by operation of law (automatic)

- only person to whom offer was made to can accept

- method = any one reasonable unless specified

- must be unequivocal (mirror image rule)

- mailbox rule = effective upon dispatch (NOT when received) unless specified

MAIDS mnemonic

Misrepresentation of material fact by defrauding party

Actual and justifiable reliance by the victim

Intended to induce victim to rely

Damages

Scienter

MYLEGS mnemonic

Marriage is the consideration

Year or more to complete contract

Land

Executors' contracts

Goods of $500 or more

Surety (pay the debt of another)

1. seller must be merchant

2. offer must be in writing and signed by merchant

3. offer must give assurances it will be kept open for a certain time

- Fraud (MAIDS)

- statute of limitations - 4 years

- statute of frauds (4 exceptions to contract in writing):

Specially manufactured goods

Written confirmation that is sufficient to bind the sender

Admitted in court

Performed contract

- impossiblity/impracticality

- for risk of loss to pass, goods must be identified

- Step 1: as stated in the contract

- Step 2: NONCARRIER: nonmerchant - risk passes on tender of delivery, merchant - risk passes on actual delivery, CARRIER: shipment contract - risk passes on delivery to carrier, destination contract - risk passes at destination

- express warranties (oral/written): statements of fact, descriptions, or samples or models, must be part of the basis of the bargin

- implied warranty of title: seller has good title and right to transfer the title, can only be disclaimed by specific language (not "as is")

- implied warranty of merchantability: only one that requires merchant seller, promise goods fit for ordinary purpose

- implied warranty of fitness: buyer relies on any seller to select goods suitable for buyer's purpose (specific, instead of general like merchantability)

- be in writing

- be signed by the maker (note) or drawer (draft)

- contain an unconditional promise (note) or order (draft)

- be for a fixed amount of money

- be payabe on demand or at definite time

- be payable to order or to bearer (except checks)

- contain no additional undertaking or instruction

- Step 1: become holder - person with good title to commercial paper, BEARER paper requires delivery while ORDER paper requires delivery and endorsement

- Step 2: obtain the paper in due course - for value, in good faith, and without notice of any defense or claims of ownership

- Step 3: transferees of commercial paper by HDC retain the rights of a HDC

FAIDS mnemonic

Fraud in the execution, forgery

Adjudicated insanity, material alteration of the instrument

Infancy, illegality

Duress, discharge in bankruptcy

Suretyship defenses, statute of limitations (3 yrs for drafts, 6 years for notes)

1. Maker - primarlily liabile

2. Drawer - secondarily liable

3. Drawee - primarily liable after acceptance, if drawee signs or certifies liable as acceptor (discharges prior parties)

4. Endorser - secondarily liable, unless endorsement w/o recourse (no liability)

- has priority over all other types of security interests in the same collateral if properly perfected

- arises when: 1) creditor sells collateral to debtor on credit or 2) creditor advances funds used by debtor to purchase collateral

1. Goods (consumer, inventory, and eqiupment)

2. Intangible collateral accounts

3. Investment property

4. Proceeds

1. agreement creating the security interest evidenced by authenticated record or taking possession of the collateral

2. value must be given by the secured party

3. debtor must have rights in the collateral

1. filing

2. taking possession (must be tangible)

3. control (be able to sell it w/o owner)

4. automatic perfection (consumer goods)

5. temporary perfection (20 days after proceeds receipt)

1. buyer in ordinary course of business of inventory that serves as collateral

2. holder of property perfected PMSI

3. holder of perfected security interest or judicial lien

4. holder of unperfected security interest

5. debtor 

1. Duty of loyalty - act solely in principal's interest, no kickbacks/conflicts/disclosure of confidential info

2. Duty of obedience - obey reasonable instructions

3. Duty of reasonable care - liable if neglegent

4. Duty to account - for all property/$$ received

1. compensation - reasonable

2. reimbursement

3. remedies of the agent - agent can bring action for any damages caused

1. express actual authoirty (oral/written instruction)

2. implied actual authority (agent has right and power) - do things reasonably necessary to carry out agency

power, not the right

1. principal's conduct - giving a title/position

2. distinguish from actual authority - based on 3rd party's reasonable belief that he has power to bind the principal

allows principal to choose to become bound by previously unauthorized action (power, but not right)

1. agent must have indicated that he/she was acting on behalf of principal

2. all material facts must be disclosed

3. principal must ratify entire transaction

- only disclosed principal may ratify

1. disclosed - principal liable if agent had authority (actual or apparent) or principal ratified

2. undisclosed - principal liable only if agent has actual authority

3rd party:

1. disclosed - agent not liable if authorized

2. undisclosed - agent liable

- calculate current monthly income (average of 6 months preceding filing) - if equal to or less than state median income, chapter 7 permitted

- Means Test - determine if debtor can repay debts using chapter 13 plan, current monthly income multiplied by 60 (< 7,025 = chapter 7, > 11,725 = chapter 13/dismiss)

Chapter 7 (RIBS mnemonic):

Railroads

Insurance companies

Banks

Savings institutions

Chapter 11 (BIBS mnemonic):

Brokers

Insurance companies

Banks

Savings institutions

- automatic stay (stops all collection efforts)

- debtor must file financial information (open and honest)

- voluntary: debtor files for order of relief, need not be insolvent but pass income tests

- involuntary: done by unsecured creditors, generally not paying debts when due, only creditors owed at least 14,425

- debtor must be individual

- must keep books and records

- must be 8 years after a prior discharge

WAFTED mnemonic

Willful and maliciouls injury

Alimony, maintenance support, and settlements from marriage separation

Fraudulent debts incurred, Fines and penalties

Taxes due w/in 3 years of filing

Embezzlement, larceny and fiduciary's fraud and Educational loans

Debts undisclosed

1. secured claimants

2. priority claimants

3. general creditros who filed claims on time

- share pro rata if there isn't enough to pay an entire category

BRINGS mnemonic

Banks and savings loans securities

Regulated common carriers 

Insurance policies

Not-for-profit

Government

Short-term CP (less than or equal to 9 months)

Regulation A: partial exemtion, sales may not exceed $5 million in a 12 month period

Regulation D: private offerings exemption

- Rule 504: securities issuance limit of $1 million

- Rule 505: securities issuance limit of $5 million

- Rule 506: unlimited dollar amount (sophisticated investors only)

- Section 11: imposes civil liability for misstatements whether intentional or not

Loss

Acquired the stock

Material misrepresentation/omission of fact

- Section 12: civil liability if requier registration was not made, immediate purchaser may sue for damages

- Section 17: criminal penalties against anyone who uses any type of fraud

1. companies whose shares are traded on national exchange OR

2. companies that have at least 500 shareholders and more than $10 million in assets

PANICTIMME mnemonic

Passive activity losses

Accelerated Depreciation

Net operating loss of individual taxpayer

Installment income of dealer

Contracts

Tax "deductions"

Interest deductions on some home "equity loans"

Medical deductions

Misc. deductions NOT allowed

Exemptions (personal) and standard deduction

- Intended: donee beneficiary (receive interest as gift) or creditor beneficiary (receive interest b/c party owes them something)

- incidental: no to directly confer benefits (no rights)

- compensatory: award nonbreaching party money to obtain substitute performance AND consequential damages (reasonably forseeable)

- specific performance: used with land or unique items

- liquidated: damages agreed to in the contract (reasonable and not a penalty)