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Taxation- REG CPA Exam 2024 Questions
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Ordinary Assets - Answer>>Depreciable business property held for one year or less than one year (created assets) Examples: inventory, AR, creative works, etc. 1231 Assets - Answer>>Depreciable business property held for more than one year Capital Assets - Answer>>anything not ordinary/1231 assets (personal and investment assets, goodwill) Calculation of Realized Gain/Loss - Answer>>Amount Realized
- Adjusted Basis Amount Realized - Answer>>Cash received, FMV of Property receive, liabilities assumed by buyers, less selling expenses Adjusted Basis - Answer>>Cost of property + capital improvements - depreciation + costs with acquisition Gift Gain Basis - Answer>>adjusted basis of donor Gift Loss Basis - Answer>>Lower of: adjusted basis of donor and FMV of gift at date Loss on sale of personal use property - Answer>>NOT recognized If sells Gift for between gain and loss basis - Answer>>NO basis recognized
Holding Period of gift - Answer>>if gain basis used - tacks onto donor's holding period if loss basis used - starts once donee gets gift Inheritances - Answer>>valued at FMV at time of gift (if elected, 6 months later) Holding Period_ Inheritances - Answer>>Always deemed long term Netting Process - Answer>>Net ST and Net LT, then Net ST and LT together Individual Capital Losses - Answer>>$3,000 is deductible (FOR AGI) and remainder is carried forward indefinitely and NOT carried back at all Long term capital losses are offset against capital gains in order of 28%, 25%, and 20% Individual Capital Gains - Answer>>Added back to ordinary income and take at preferential rates Preferential Rates - Answer>>If regular tax rate is 15% or less = 0% If regular tax rate is 39.6% = 20% If regular is above 15% and lower than 39.6% = 15% Corporation Capital Losses - Answer>>NOT deductible but can offset capital gains (carry forward 5 years, carry back 3 years) Corporation Capital Gains - Answer>>just added back to income, no preferential rates
Net Gain on Section 1231 Assets - Answer>>Treated as LT Capital Gains Net Loss on Section 1231 Assets - Answer>>Treated as Ordinary Loss Recapture - Section 1245 Recapture - Answer>>gain on PERSONALTY are ordinary income to extent of Accumulated Depreciation, the rest of the gain is Section 1231 Gain Recapture - Section 1250 Recapture - Answer>>gain on REALTY are ordinary income to the extent MACRS (AD) exceeds SL, the SL amount is a 25% gain, and the remainder is a Section 1231 Gain Gain on Sale of LT Land - Answer>>Always a 1231 Gain Look-back Rule - Answer>>After Recapture-- Look back 5 years, to the extent losses offset the gain those are ordinary losses and the remaining gain is taxed as LT Capital Gain Recapture for Corporations - Answer>>Section 1245 same, 1250 same Additional 291 Recapture 290 Recapture Calculation - Answer>>Section 1245 (if property has 1245 property)
- Section 1250 actual amount Excess Amount x. 20 = Section 291 Recapture Form 4797 - Answer>>For Sale of Business Property
MACRS deprecation - Answer>>Assumes no RV it is 200% of Double Declining
- on MACRS charts half year and mid month conventions are always factored in for buying year/month Half Year Convention - Answer>>Only for 1231 Assets
- Used for PERSONALTY
- it is as if the asset was purchased mid year so get half a year depreciation in year bought and sold Mid Month Convention - Answer>>- Used for REALTY
- depreciation allowed for half the month it is purchased and sold 5 year PERSONALTY assets - Answer>>Cars, computers, copiers, office equipment, rental appliances and furniture 7 year REALTY assets - Answer>>Office furniture and fixtures and agricultural and other machinery Residential REALTY - Answer>>27.5 years depreciated Non-residential REALTY - Answer>>39 years depreciated Mid- Quarter Convention - Answer>>Instead of Mid Year convention, PERSONALTY property that is new and if more than 40% of all PERSONALTY property acquired during the last quarter of the year, you can one half quarter for quarter purchased in and quarter sold PERSONALTY - Answer>>anything NOT fixed to land, all other assets besides building and land REALTY - Answer>>Building and land (fixed assets)
- Boot Received Like Kind Exchanges - Answer>>- has same general characteristic as property given up
- Realty for Realty is like kind
- Realty for Personalty is NOT like kind
- Does NOT apply to personal use property
- MANDATORY Holding Period of Like-Kind - Answer>>It tacks on the holding period of the original property plus new property Boot - Answer>>Anything received that is NOT like-kind (ex. Cash, property -use FMV-, liability assumed by buyer, etc.) Basis of Like-Kind Property Calculation - Answer>>FMV of property received
- Postponed Gain
- Postponed Loss = Basis of Like- Kind Property Postponed Loss Calculation - Answer>>is the loss that cannot be taken because losses are not recognized. if there is a loss on a sale, that amount is the postponed loss. Involuntary Conversion - Answer>>- ELECTIVE
- results from unexpected casualty
- must be replaced by property "similar or related in service of use" within 2 years from END of tax year in which gain is realized
- Gains are postponed but Losses are NOT postponed Calculation to determine the recognized gain - Answer>>Amount Realized from Conversion
- Cost of Replacement Property
= Recognized Gain, limited to Realized Gain Basis of New Property - Answer>>FMV of new property received
- Postponed Gain -------> Realized gain - Recognized Gain = Basis in New Property Wash Sales - Answer>>Losses from the sale of securities are NOT recognized if similar securities are purchased within 30 days of the sale Basis in new stock from Wash Sales - Answer>>Cost
- Disallowed Loss =Basis in new stock Holding Period of Wash Sales - Answer>>includes holding period of old stock Related Party Losses - Answer>>Losses are NOT Recognized (related parties do not include in-laws, aunts, uncles, cousins)
- Deferred losses create a right to offset gains when sold to unrelated party Holding period of related parties - Answer>>Begins on date of purchase of property from related party Sale of Principal Residence - Answer>>Principal Residence = must be owned and occupied for 2 out of the last 5 years Exclusion Amount: single - 250, married - 500,
- if married only one has to meet ownership test but both must live in it
- can only exclude once every 2 years
Claim of Right doctrine - Answer>>Must deduct from income the amount for that year even if you would receive repayment in prior year -- repayment in prior year is included in income Assignment of Income doctrine - Answer>>Income is taxed to the individual who earns the income, even if taxpayer directs that the funds pay someone else Interest Income - Answer>>Always taxable UNLESS municipal interest (however, the gain or loss from sale of municipal bond is taxable) Bond Premiums - Answer>>- Use constant yield to maturity method
- offset interest income (decreases) Bond Discounts - Answer>>- Use effective interest method
- Increases interest income Series EE Bonds - Answer>>- Interest not paid annually, but only paid at maturity
- Interest included in income at maturity (unless elected to include annual increases in value each year as income) Series EE Bonds - Interest EXCLUDED from income if.. - Answer>>1) Owner of bond is at least 24 years old
- If taxpayer uses proceeds to pay higher education expenses in year of redemption PHASED OUT: when modified AGI exceeds single - 76,000, filing jointly - 113,
Municipal Interest - Answer>>Interest on STATE and LOCAL government obligations and obligations of a possession of the US is NOT TAXABLE ** if State and Local bond is sold at a gain, gain is taxable Dividends on Stock - Answer>>Taxed as Dividend Income if distribution is made from retained earnings (aka: earnings and profits) Determining Tax-ability of Cash/Property Dividends - Answer>>1) Dividend Income to the extent of Earnings and Profits
- Reduce the basis in stock
- Once basis is gone, excess is capital gains Stock Dividends and Splits - Answer>>NOT TAXABLE ** to be non-taxable stock dividends must be paid to common shareholders (the dividend can be made of either common or preferred though) ** if stock dividend is paid to preferred shareholders it is TAXABLE Qualified Dividend Income - Answer>>Taxes at same rates as Capital Gains for Individuals
- dividend must come from domestic or foreign corporation whose stock is traded on US established securities market and held for more than 60 days Option to receive cash in lieu of stock whether or not exercised... - Answer>>triggers recognition of dividend income Schedule B - Answer>>Interest and Ordinary Dividends
Medical Insurance paid by Employer - Answer>>NOT TAXABLE Long Term Care Insurance - Answer>>NOT TAXABLE Annuities - Answer>>Each payment is part income and part return of capital
- the amount paid for an annuity is the taxpayer's basis in asset
- basis recovered over life of annuity Calculate NOT TAXABLE portion of income - Answer>>(Cost of Annuity/ Expected Return) x payments for year Prizes and Awards - Answer>>If found - TAXABLE Excluded from Income if:
- for civic, artistic, educational, scientific, or literary achievement AND
- selected without action on his/her part
- not required to perform services
- amount paid directly to tax exempt gov organization (essentially they do not take ownership/accept it) Scholarships - Answer>>NOT TAXABLE for amount of tuition, fees, books, equipment and supplies TAXABLE if for room and board Life Insurance Proceeds - Answer>>If from death of insured, NOT TAXABLE Exception to Life Insurance Proceeds - Answer>>if surrender policy due to person being terminally ill, the accelerated death benefits are NOT TAXABLE Gifts and Inheritances - Answer>>NOT TAXABLE for recipient
** must look at intent of the donor to determine if it is a gift.. means there must be no consideration in return for gift Forgiveness of Debt - Answer>>TAXABLE unless it is a gift or related to bankruptcy proceedings Forgiveness of Debt -- If taxpayer is bankrupt or insolvent... - Answer>>debt forgiveness is NOT TAXABLE Forgiveness of Debt -- If taxpayer is insolvent but not bankrupt - Answer>>NOT TAXABLE up to the extent of insolvency **Insolvent means = Liabilities is GREATER than assets Social Security Benefits - Answer>>NOT TAXABLE unless provisional income exceeds specified amount, up to 85% of benefits, can be TAXED Provisional Income - Answer>>PI = AGI + Tax-Exempt Interest
- .50(Social Security Benefits) Taxes for Social Security Benefits if PI is.... - Answer>>Married PI is: NOT TAXED < 32,000 ---- 44,000 < TAXED at 85% Single PI is: NOT TAXED < 25,000 ---- 34,000 < TAXED at 85% ** if PI is in the middle of these ranges 50% taxed Foster Care Payments and Welfare Payments - Answer>>NOT TAXABLE Form 1040 - Answer>>Income is reported for individuals
- storage costs if off-site
- quality control
- taxes (except income taxes
- utilities, repairs, rent, and depreciation Does NOT include: marketing, selling, advertising, distribution expense, general and administrative expenses ** EXCEPTION: if a small personal property dealer has gross receipts of $10 million or less during preceding 3 years) Farming Business - Answer>>Cash method used UNLESS if farm is organized as corporation, partnership or tax shelter than Accrual method
- Use Schedule F Changes in Accounting Methods - Voluntary - Answer>>Spread income effect over 4 years
- if less than a 25,000 effect can elect to include in income in year of change Changes in Accounting Methods - NOT Voluntary - Answer>>if due to IRS, any positive adjustment to income is included in earliest tax year under examination Long-Term Contracts - Answer>>Use percentage of completion method ** Can only use Completed Contract for contractors whose average gross receipts for three preceding years do not exceed $10 million
Leasehold Improvements - Answer>>Fair Value of improvements is income to the landlord if the improvements were in lieu of rent Short Year Tax Return Steps to Find Tax Liability - Answer>>** used if corporation not in service the entire year Step 1) Income for period x 12/months in service Step 2) Step 1 Answer x tax rate Step 3) Step 2 Answer x months in service/ Rental Income -- 1) Prepaid Rent, 2) Lease Deposits - Answer>>Prepaid Rent - TAXABLE when RECEIVED Lease Deposits - TAXABLE ONLY when you receive unrestricted right to them Disability Insurance Premiums/Benefits Summary - Answer>>Paid by Employee (Taxpayer)
- Premiums Paid - Included in Income (TAXABLE)
- Benefits Received - NOT taxable Paid by Employer
- Premiums Paid - Deductible by Employer, NOT included in taxpayer's income - NOT TAXABLE
- Benefits Received - TAXABLE Business Reimbursements - Answer>>TAXABLE by employee UNLESS it is under accountable plan Life Insurance Premiums - Answer>>If paid by employer and it is GROUP TERM life insurance of $50,000 or under face value --- NOT TAXABLE **amt of life insurance paid over $50,000 are taxable **if it is for whole life insurance policy it is taxable
Safety and Length of Service Achievement Awards - Answer>>NOT TAXABLE up to $400 if not qualified plan and $1,600 if part of qualified plan Taxed if:
- received cash award
- received for any other reason besides length of service or safety records
- received more than once every 5 years Transportation and Parking - Answer>>Employer reimbursements is NOT TAXABLE up to $130/month for mass transit transportation and $250/month for parking Employer Provided Retirement Planning Advice - Answer>>NOT TAXABLE Payments from Employer for expense deductible as Moving Expense - Answer>>NOT TAXABLE Child and Dependent Care Services exclusion for Employees - Answer>>NOT TAXABLE on up to $5,000 if filed jointly, $2, if filed separately so that employee can work Undergrad/Grad tuition, fees, books, and supplies - Answer>>NOT TAXABLE up to $5, Adoption Expenses - Answer>>NOT TAXABLE up to $13, and phased out Flexible Spending Accounts - Answer>>portion of salary (pretax) is put into a fund to pay specific expense for the year -- if
not used before year end (may be extended to 2.5 months into next year) it is forfeited to employee Discrimination Rules for Fringe Benefits - Answer>>Benefits cannot only extend to highly compensated employees -- if so, highly compensated is taxed on FMV of benefit and non-highly compensated not taxed on value if otherwise excludible Accountable Plan - Answer>>if employee business expenses under an accountable plan is reimbursed -- NOT TAXABLE as long as all expense are proven by receipt or some other form of evidence and excess reimbursements are returned to employer from employee Grant Date - Answer>>Date option is granted to employee Exercise Date - Answer>>Date option is exercised and stock is purchased Sale Date - Answer>>Date that the stock is sold Non-Qualified Stock Options - Answer>>- Income recognized on EXERCISE date as ORDINARY INCOME equal to: (FMV of stock - exercise price) x # of shares exercised ** employer receives salary deduction for same amount ** employee's basis in stock is FMV at exercise date and used to compute gain or loss when sold, gain when sold is Capital Gain Incentive Stock Options - Answer>>Income recognized at SOLD DATE as LT Capital Gain as long as: -- held more than one year (Exercise to Sale Date >1 yr) -- not sold until after 2 years from grant date (Grant to Sale Date > 2 years)
