Term
| Tax-advantage assets will often have a lower return than non-tax-advantaged assets because |
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Definition
| They are often subject to implicit taxes |
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Term
| Which of the following principles encourages a vertically equitable tax system? |
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Definition
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Term
| Out of the following: Legislative regulation, Private letter ruling, Revenue ruling, Interpretive regulation, Revenue procedure, which has the lowest authoritative weight? |
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Definition
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Term
| After filing a 6-month extension, under the statue of limitations for IRS, when should an assessment end for the person? |
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Definition
3 years after the persons filing date
(Omitting over 25% of gross income extends the statute to 6 years
) |
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Term
| Out of the following: Taxpayer’s employment, Filing status, Taxpayers, gross income, Taxpayers age, which is not a factor that determines whether a taxpayer is required to file a tax return? |
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Definition
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Term
Which of the following is an example of the character tax planning strategy? A cash-basis business delaying billing its customers until year at end, A Corporation paying its shareholders a $20,000 dividend
, A Corporation paying its owner a $20,000 salary, A high rate taxpayer investing in a tax exempt municipal bonds |
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Definition
| A high rate taxpayer investing in a tax exempt municipal bonds is a tax planning strategy |
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Term
| Out of the following: Activities with preferential tax rates, Implicit taxes, Assignment of income doctrine, Constructive receipt doctrine, which of the following may limit the character tax planning strategy? |
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Definition
Constructive receipt doctrine
(restricts income deferral for cash-method taxpayers) |
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Term
Out of the following:
Whether expenditure is related to a business activity, Reasonableness of an expenditure, Whether and expenditure will be likely to produce income, Timeliness of an expenditure, which would the IRS most likely apply the arm’s length transaction test? |
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Definition
| Reasonableness of an expenditure |
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Term
| Section 179 intangibles are: |
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Definition
| Not subject to accelerated depreciation |
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Term
| The sale of machinery for more than the original cost basis (before depreciation), used in a trade or business, and held for more than one year results in the following types of gain or loss? |
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Definition
| Section 1245 and Section 1231 |
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Term
| What is the income effect? |
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Definition
| people will work harder to maintain same after tax income |
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Term
| What is the substitution effect? |
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Definition
| people will substitute leisure time for productive time |
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Term
| What are the 5 criteria of alternative tax systems? |
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Definition
| Sufficiency, equity, certainty, convenience, economy. |
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Term
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Definition
| tax system must provide enough revenue to fund government expenditures. |
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Term
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Definition
| tax system should spread the tax burden in a fair and equitable manner. Fair can b generally defined as related to an individual’s ability to pay. This can typically be considered as either vertical equity (taxpayers with greater ability pay more tax) and horizontal equity (taxpayers in same situation will pay same tax). The US system has progressive tax rates to deal with vertical equity and considers a number of factors with respect to horizontal equity (blind, elderly, etc.) |
|
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Term
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Definition
| taxpayers should be able to determine when to pay, where to pay, and how much tax to pay. The US system affords a fairly reasonable level of certainty as taxpayers generally know when and where to pay – calculating the amount has proven difficult. |
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Term
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Definition
| – a tax system should be designed to facilitate the collection of taxes without undue hardship on the taxpayer. The sales tax or withholding from wages represent convenient collection vehicles. |
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Term
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Definition
| The tax system should minimize the cost associated with collecting revenue. The US system is about ½ a cent. |
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Term
| How do you calculate the tax liability? |
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Definition
| Locate bracket: (Taxable income - taxable income over)* tax rate + # next to % |
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Term
| What is the effective tax rate? |
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Definition
| the taxpayer’s average rate of taxation on each dollar of total income (both taxable and non-taxable) |
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Term
| Proportional Tax Rate (Flat Tax): |
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Definition
| imposes a constant tax rate throughout the tax base. |
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Term
|
Definition
| imposes an increasing marginal tax rate as the tax base increases |
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Term
|
Definition
| imposes a decreasing marginal tax rate as the tax base increases |
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Term
| Corporations tax return due date |
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Definition
| 15th day of the 3rd month following end of tax year |
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Term
| How do you calculate Present Value? |
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Definition
| (Taxable income * tax rate) -> (Taxable income - tax) = ATCF. -> (ATCF * Discount rate on PV table) = PV. |
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Term
Add all the Present Values to get NPV.
Remember: DO NOT FORGET TO ADD year 0 ATCF to get NPV. |
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Definition
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Term
| Remember for year 1 (NPV calculations) to subtract ATCF of year 0. |
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Definition
|
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Term
| What are the types of Audits? (most to least common) |
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Definition
Correspondence exams: by mail and are generally 1 or 2 items on the taxpayers return
Office exams: taxpayers meet at a local IRS office for exam
Field exams: exams that are at the taxpayer’s place of business |
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Term
| What are the 5 steps to tax research? |
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Definition
| 1. Understand the facts 2. Identify the issues 3. Locate relevant authorities 4. Analyze the tax authorities 5. Communicate research results |
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Term
| What is the professional responsibility of the AICPA SSTS? |
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Definition
| to recommend appropriate standards of practice for tax pros |
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Term
| What does Circular 230 do? |
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Definition
provides regulations governing tax practice and applied to all persons practicing before the
IRC 6694: imposes penalties on a tax practitioner for any position that is not supported by substantial authority. (more likely than not – 50% chance of a being sustained on its merits) |
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Term
| When tax rates are constant: |
|
Definition
accelerate tax deductions → maximizes PV of tax savings
defer recognizing taxable income → minimizes PV of taxes paid |
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Term
|
Definition
| taxpayers should prefer to recognize deductions during high-tax-rate years and income during low-tax-rate years |
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Term
What is the Assignment of income doctrine?
(Limitations on tax planning strategies) |
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Definition
| requires income to be taxed to the taxpayer who actually earned it |
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Term
What is the Business purpose doctrine?
(Limitations on tax planning strategies) |
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Definition
| IRS can challenge and disallow business expenses for transactions with no underlying business motivation. (ex. Cant expense spouse accompanying taxpayer on business trip) |
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Term
What is the Step-transaction doctrine?
(Limitations on tax planning strategies) |
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Definition
| IRS can collapse a series of related transactions into one transaction to determine the tax consequences of the transaction. |
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Term
What is the Substance-over-form doctrine?
(Limitations on tax planning strategies) |
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Definition
| IRS can reclassify a transaction according to its substance |
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Term
| Recognize gross income when: |
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Definition
1. Receive economic benefit (does not include borrowed money)
2. They realize the income: transactions with another party that results in change in property rights (assets or services are exchanged for cash, claims to cash, or other assets with a determinable value) when: time of transaction
3. No tax provision allows to exclude or defer income from gross income that year |
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Term
| When do Accrual base tax payers recognize income? |
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Definition
| income recognized when earned expenses recognized when incurred |
|
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Term
| when to cash basis taxpayers recognize income? |
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Definition
| income recognized when cash is received expenses recognized when paid |
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Term
| What are the types of income? |
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Definition
income recognized when cash is received expenses recognized when paid
(unearned income) gain/loss from sale of property, dividends, interest, rents, royalties and annuities. |
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Term
What is the Formula for calculating gain (loss) from sale of asset?
(Property dispositions) |
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Definition
Sales proceeds – selling expenses = amount realized
Amt realized – basis (investment) = gain (loss) |
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Term
| What is the Flow-through entity ? |
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Definition
): income and deductions go to owners
- taxed on their share whether or not cash is distributed to them |
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Term
| Prizes are included in gross income but what are the exclusions? |
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Definition
1. awards for scientific, literary, or charitable achievement (ex. Nobel PP)only if taxpayer immediately transfers award to a gov unit or qualified charity
- transfer can be claimed as a deduction for AGI
2. awards for length of service or safety achievement (limit $400 of tangible prop other than cash) |
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Term
| What is Discharge of Indebtedness? |
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Definition
Makes debt relief added to gross income
debt relief is gross income
*not taxable to the extent of insolvency (liabilities exceed assets)
*ex. 30k relief, 10k solvent = 10k taxable income |
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Term
| What are the Common exclusions to gross income? |
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Definition
Municipal interest: municipal bonds (are from gov)
-Fringe benefits: (auto, health club fees, home security paid by employer for employee)
*muse be “qualifying” FB or considered compensation of services (taxable) |
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Term
| What is an exclusion to mitigate double taxation? |
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Definition
| Gifts or inheritance (subject to transfer tax and not included in income tax) |
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Term
| What are the typical fringe benefits? |
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Definition
|
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Term
| How do you calculate self employment tax? |
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Definition
1. Calculate self-employment income
2. Multiply step 1 by .9235%)
A) If net earnings are
<=$106,800, then multiple Step 2 by 13.3%
B) If net earning are:
> $106,800 then multiply net earnings by 2.9 and add $106,800 x 10.4% ($11,107) |
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Term
| What are the Three main categories of factors to consider when determining Employee vs Self-employed? |
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Definition
Behavioral Control – employees are directed and controlled by the business.
Financial Control – the right to direct or control the business part of the work
Relationship of the Parties – relationship between business and worker |
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Term
| IRC §162: provision authorizing business deductions and they have to be: |
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Definition
Ordinary AND necessary
Ordinary expense: normal or appropriate for the business under the circumstances
*doesn’t have to be typical or repetitive (ex. legal fees)
-Necessary expense: helpful or conductive to the business activity, but doesn’t need to be essential or indispensable
Ex. Advertising, car and truck expenses, depreciation, employee compensation and benefits, insurance, interest, legal fees, office expenses, rent, repairs, supplies, travel, utilities, wages |
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Term
| What is a capital expenditure? |
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Definition
tangible assets with useful life>1 year (recovered through depreciation)
- Must capitalize cost for intangible assets: patents, goodwill, start-up costs, organizational expenditures (recovered through amortization or disposal) |
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Term
| Are illegal activities are taxable? |
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Definition
| Yes! (ex. selling stolen goods, illegal gambling, EXCEPT drug dealing) |
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Term
| What are Expenses Associated w/ Production of Tax-Exempt Income? |
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Definition
-Can’t deduct expenses that don’t generate taxable income (gain from municipal bonds)
-can’t deduct life insurance premiums on employee’s policies (death benefit nontaxable) |
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Term
| How much of a Mixed-motive expenditure of Food and Entertainment be deducted? |
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Definition
| 50% of business meals and entertainment |
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Term
| Can sole proprietors and self employed can deduct? |
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Definition
Yes! they can deduct travel and transportation.
* You cannot deduct driving to work and back |
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Term
| If travel is primarily for business, how much can you deduct? |
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Definition
meals 50%, lodging, incidental expenses
Ex. 10 day trip, 1k flight, 9 days for business = 900$ deductible |
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Term
| If travel is primarily personal, how much can you deduct? |
|
Definition
| cant deduct any trans costs to arrive, but can deduct 50% meals, lodging, local trans, and incidentals on business part |
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Term
| When deducting mixed motive expenses one must: |
|
Definition
| must maintain specific, written, records with time amount and business purpose |
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Term
| Bad-Debt Expense deduction is only available to : |
|
Definition
| business using the accrual acctg method |
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Term
| How do you calculate the Domestic Production Activities Deduction (DPAD)? |
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Definition
9% x the lesser of business’s taxable income or QPAI
-QPAI-is the net income from selling or leasing property
the final deduction cannot exceed 50% of wages to employees in qualifying production activities during the year |
|
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Term
| what is a Business Casualties Losses (deduction)? |
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Definition
| losses where assets are stolen, damaged, or completely destroyed by a force outside of their control |
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Term
| What are the 3 types of tax years ends? |
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Definition
Calendar → year end Dec 31 (indi and proprieters)
Fiscal → year end last day of any month not Sep (c corps can choose)
52/53 week year → end same day of the week every year (c corps) |
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Term
| What is the 12 month rule? |
|
Definition
| less than- expense more then- capitalize |
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Term
| With revenue recognition, Prepaid expenses are : |
|
Definition
expense immediately if contract is less than a year and does go into the next fiscal year.
Otherwise amortize over contract period |
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Term
| What is the all events test? |
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Definition
| recognize income when all the events have occurred which fix the right to receive such income and the amount can be determined with reasonable accuracy. |
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Term
| How do you tax an advanced payment(prepaid income)? |
|
Definition
| recognize prepaid rental and prepaid interest income immediately upon receipt (the income is recognized before it’s earned) |
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Term
| Advance payment for services deduction does not apply if: |
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Definition
1. The income is actually earned by the end of the year of receipt
2. the prepayment was included in financial reporting income
3. the prepayment was for interest or rent |
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Term
| Businesses must use the accrual method to account for substantial inventories. True or False? |
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Definition
True. Purchases – accounts payable sales – accounts receivable
Can defer rev recognition until they receive payment from customers |
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Term
| What are changes in accounting methods? |
|
Definition
Permissible method: using and reporting the method for one year
Impermissible method is adopted by using and reporting the method for 2 years |
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|
Term
| For cost recovery real and personal property other than land are |
|
Definition
|
|
Term
| For cost recovery, intangible assets are subject to |
|
Definition
|
|
Term
| What are the 3 methods of depreciating personal property? |
|
Definition
200% double declining balance (set as standard for all tables)
150% declining balance
Straight line method |
|
|
Term
| what is the half-year convention? |
|
Definition
| Disposition on sale of asset: ½ of the depreciation in the year of sale is recognized |
|
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Term
| When do you use the mid-quarter convention? |
|
Definition
use when more then 40% of total assets of current year are put into service in the 4th quarter, otherwise use half life
*use same column for the rest of the assets remaining life |
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Term
| Mid quarter and mid month disposition is calculated: |
|
Definition
| full year depreciation x [(month sold - .5)/12] |
|
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Term
| How is real property depreciated? |
|
Definition
| using the straight line method, uses mid month convention, and has a recovery period of 27.5years |
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Term
| How do you calculate cost depletion of natural resources? |
|
Definition
(units sold/estimated total units of resource) x unrecovered basis in resource
% depletion: gross income x statutory recovery rate |
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|
Term
| How do you calculate cost depletion of natural resources? |
|
Definition
(units sold/estimated total units of resource) x unrecovered basis in resource
% depletion: gross income x statutory recovery rate |
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|
Term
| How do you calculate the Adjusted Basis ? |
|
Definition
Cost Basis – Cost Recovery Deductions
10,000 original price-3600 depreciation = adjusted basis of 6400 |
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|
Term
| What is an ordinary asset? |
|
Definition
| generally assets created or used in a taxpayer’s trade or business |
|
|
Term
|
Definition
| generally something held for investment (stocks/bonds), for profit or personal use |
|
|
Term
|
Definition
| depreciable assets and land used in a trade or business (including rental property) and held for more than one year. |
|
|
Term
| How are gains and losses treated in a 1231? |
|
Definition
- Net gain: treated as a long-term capital gain (max tax rate 25%)
- Net loss: treated as an ordinary loss |
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