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Final Review Session BA 128A. Final Exam 5/18 12:30- 3:30 C230 Questions from last lecture Review Chapter 13 Final Review Ch I5,7,8,9,10,12,13,14; C2,3,4,9,11,12. Chapter 13 Estate Tax. Estate tax formula Gross estate - deductions (expenses, debts & losses) =Adjusted gross estate

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Final review session ba 128a
Final Review Session BA 128A

  • Final Exam 5/18 12:30- 3:30 C230

  • Questions from last lecture

  • Review Chapter 13

  • Final Review Ch I5,7,8,9,10,12,13,14; C2,3,4,9,11,12

Chapter 13 estate tax
Chapter 13 Estate Tax

Estate tax formula

Gross estate

- deductions (expenses, debts & losses)

=Adjusted gross estate

- deductions (marital and charitable)

= Taxable Estate

+ Adjusted taxable gifts (post 1976)

= Estate Tax Base

Tentative tax (current uniform transfer tax rates)

- Post 1976 gift taxes (current uniform transfer tax rate) - unified credit taken in year gift taxes are paid

- unified credit (full amount)

- other credits

= Estate Tax payable


  • Expenses - administrative expenses for managing the estate, funeral expenses

  • Debts - personal liabilities e.g. mortgage

  • Casualty and theft losses - incurred while estate is being settled

  • Marital and Charitable deductions - no ceiling

Valuation of estate
Valuation of estate

  • FMV at date of death or alternate valuation date

  • Alt. Valuation - all or nothing

  • FMV at date of death - price at which property would change hands between a willing buyer and seller

  • exception - life insurance - valued at face value

  • listed stock - average of low and high price; if sale takes place within a few days of death date, use wtd average of high and low stock price on the nearest trade dates before and after date of death

  • Other valuation - Block stock, non-public stock, real estate, annuities

Chapter 5 capital g l
Chapter 5 Capital G/L

  • ST < 1yr, LT > 1yr; deduct loss up to $3000, gain taxed at 20% except uncolletibles, 1250 unrecapture and section 1202

  • Netting of CL and CG

    • net STCL and STCG

    • net LTCL and LTCG


    • adjusted NCG is NCG without uncollectibles, section 1250 unrecapture and then sec1202 small bus stock

    • both NLTCL and NSTCL - use NSTCL first - retain character of loss

    • NSTCL > NLTCG - net highest rate group first (ie 28%, 25% and then 20%)

Chapter 5
Chapter 5

  • Realized vs. recognized gain

  • Property basis

    • received as gift - usually donor’s basis except if FMV < basis, donee has 2 basis (if sold at gain later, basis = donor’s basis, else basis = FMV)

    • Gift tax paid by donor increase donee’s basis

    • property from decedent - FMV

    • property convert from personal to business - lower of FMV or adjusted basis

    • basis of stock dividend

    • basis of stock rights

Chapter 7 itemized deductions
Chapter 7- itemized deductions

  • Deduct only if it exceeds standard deduction

  • Subject to phase out - 3% of amount exceeds threshold. Qualified medical expenses

  • Taxes

  • Qualified interest

  • Casualty and theft losses

  • Miscellaneous deductions

    • Non reimbursed employee expenses

    • Investment expenses

    • Cost of tax advice

  • Charitable Contributions

Qualified medical expenses
Qualified Medical Expenses

  • Deduct the amount that exceed 7.5% of AGI

  • No deduction it it is reimbursed

  • Include taxpayer, taxpayer’s spouse and dependent

  • Diagnosis, cure, mitigation, treatment and prevention of disease, medical procedures involving function or structure of body - except cosmetic surgery unless for deformity correction

  • Transportation for medical reasons

  • Long term care

  • Capital expenditures for medical care - add a swimming pool, remove physical barriers

  • Medical insurance premiums

Classification of interest
Classification of interest

  • Active trade and business - for AGI

  • Passive activity - e.g. rental activity - for AGI - Chapter 8

  • Investment interest - offset investment income - from AGI

  • Personal interest - not deductible

  • Qualified residence - from AGI

  • Student loan - for AGI

Investment interest
Investment Interest

  • Investments - generates portfolio of income such as interest, dividends, annuities and royalties, not personal or business, not passive and not tax exempt securities

  • Net investment income = Investment income - investment expenses. Investment income include net gain to the extent that net gain exceeds net capital gain

  • Taxpayer can elect to include net capital gain in investment income that will be subject to regular tax rates

  • Investment expenses only deductible to the extent that it is >2% of AGI - ie this is the amount used to calculate net investment income

Other interest
Other interest

  • Qualified residence interest

    • Principal + secondary residence

    • Secured by home

    • Acquisition indebtedness - up to $1,000,000

    • Home equity interest - can only deduct the amount applied to the lesser of FMV of qualified residence in excess of acquisition indebtedness or $100,000

  • Student Loan interest

    • For higher education expenses

    • FOR AGI deduction

    • Maximum deductible amount = $1000 in 1998.

    • Phased out ratably for AGI between 40,000 and 50,000

Charitable contribution limitation amount
Charitable Contribution -limitation amount

  • Max - 50% of AGI

  • depends ORGANIZATION contributed to and TYPES of property contributed

  • Excess is carry forward for the subsequent 5 years

  • Capital gain property contributed to public charity is limited to 30% of AGI

  • Ordinary and cash property contributed to private nonoperating foundation is also limited to 30% of AGI

  • Contributions of capital gain property to private nonoperating foundation are limited to the lesser of 20% of taxpayer’s AGI or 30% of taxpayer’s AGI reduced by capital gain contributed to public charity

  • Contributions to athletics events in return for the right to purchase tickets (80% limitation)

  • Apply 50% limitation contributions first and then the 30% limitation

  • Carryover amounts subject to the same % limitations. Deductions for current year is applied first.

Charitable contributions basis
Charitable contributions - basis

  • Except capital property contributed to public charity (at FMV), all other transactions, used adjusted basis (or FMV - capital gain)

  • Transactions include ordinary and capital gain property to private nonoperating foundations, capital gain property that is unrelated use in nature - special circumstances - donation of inventory and scientific equipment - higher than adjusted basis

Chapter 8 loss and bad debts
Chapter 8 loss and bad debts

  • Sale or exchange of property - capital asset result in capital loss, property in bus/trade e.g. inventory, accounts receivable, depreciable property and land used in a trade or business - ordinary loss (section 1231 subject to netting rules (I13)

  • Abandonment of property - ordinary loss

  • Demolition of property not deductible - add to basis of land

  • Other disallowed loss - wash sales, like kind exchange, related party transaction, transfer of property to a controlled corp in exchange for stock

Passive loss
Passive loss

  • Definition - any rental activity or any trade/business where taxpayer does not materially participate

  • Passive loss can only net against passive income and can be carried over (each activity). Suspended losses of passive activity is deductible against ordinary income upon disposition ownership interest

  • Rental activity excluding real property trade/business

  • $25000 deduct against ordinary income if actively participates and own at least 10% of value of activity; loss is subject to phase out

Casualty loss
Casualty loss

  • Identifiable event that was sudden, unexpected or unusual

  • Theft is included (proper substantiation e.g. police report)

  • only allowed to deduct up to adjusted basis

    Bus/investment Personal

    Total destruction adjusted basis smaller of

    adjusted Basis or reduction in FMV

    Partial destruction smaller of

    --------> ad. Basis or <------------ reduction in FMV

Bad debts and nol
Bad Debts and NOL

  • Bad Debts

    • Bus bad debt - ordinary loss

    • Personal bad debt - ST capital loss

  • NOL

  • Adjust taxable income(loss) with

    • non-bus capital loss deduction

    • non-business deductions e.g. personal exemption and standard/itemized deduction

Final review session ba 128a

  • Carry back to get tax refund

  • Carry forward to deduct subsequent year income

  • Can elect not to carryback

  • Adjust back other deductions

    • non-bus capital loss deduction

    • non-business deductions e.g. personal exemption and standard/itemized deduction

Chapter 9 employee reimbursed expenses
Chapter 9 Employee Reimbursed Expenses

  • Reimbursed employee expenses

    • accountable plan - substantiation, excess is returned to employer - not include in GI and not deductible, if excess is not return, include in income

    • not accountable plan - include in GI, expenses deducted as misc. itemized deduction

  • Unreimbursed employee expenses - deductible from AGI - misc. itemized deduction

What is deductible
What is deductible

  • Travel expenses - transportation, meals and lodging. Meals - 50%, has to be away from tax home

  • Automobile expenses - standard vs. actual

  • Entertainment expenses - 50%

  • Moving expenses - for AGI deduction

  • Education expenses

  • Office in home expenses

  • Deferred compensation

    • Qualified plans - exclusive for employees, not discriminating and other vesting and funding requirements

    • Employer can deduct contribution and employee not taxed on earnings from contributions until withdrawn

    • Traditional IRA $2000 deductible for AGI - subject to salary limit

Chapter 10 depreciation
Chapter 10 - Depreciation

  • For assets/property used in trade or business or held for production of income

  • Personal use property - no depreciation

  • Personal property - equipment, vehicles, furniture

  • Real Property - land and structure permanently attached to the land

  • MACRS - personal

    • Personal property - half year convention, conversion to straight line if yields larger amount, amount reduced by half in year of disposition, recovery period is 3,5,7,10,15 years

    • Requires the use of mid-quarter if aggregate basis of all personal property in service in the last 3 months > 40% of the cost of all personal property placed in service during the tax year

    • Disposal calculation needs to be consistent, half year or quarter

  • MACRS - real property

    • Residential - 27.5 years recovery period

    • Non-residential, 39 years

    • mid-month, st line

Chapter 10 section 179
Chapter 10 Section 179

  • Apply only to tangible personal business property

  • $18500 in 1998 in year of acquisition

  • Not applied to real estate

  • Election made on annual basis

  • Limitations

    • cannot be related party transaction

    • Phase out >$200,000 property acquired $ for $

    • Cannot exceed taxpayer’s income

Chapter 13
Chapter 13

  • Section 1231 - treatment of character of gains and losses

  • Section 1245 - depreciable personal property + limited nonresidential real property (depreciation recapture)

  • Section 1250 - real property - excess depreciation

  • Section 1250 recapture - all st. line depreciation recapture at 25% LTCG

Section 1231 continue
Section 1231 continue

  • Net section 1231 gains and losses

  • If gain -> LTCG

  • If loss -> ordinary loss

  • exception- Casualty loss - if loss > gain, non section 1231 ordinary loss, if gain> loss, section 1231 gain

  • Subject to 5 year look back rule - ordinary loss in the past five years needs to be recaptured as ordinary income instead of capital gain - loss recaptured apply to net 1231 gain in the 25% group first and then the 20% group

Section 1245
Section 1245

  • Apply only to gains on disposition on property

  • Depreciation recapture as ordinary income

  • cannot exceed amount of realized gain

  • 1245 property

    • property subject to depreciation and amortization besides real property

      • applies mostly to depreciable personal property

      • property under section 179

      • exception nonresidential real estate placed in service between 1981-1986 that used ACRS accelerated cost recovery method instead of straight. line

Section 1250 and unrecapture 1250 gain
Section 1250 and Unrecapture 1250 gain

  • Includes most depreciable real property except nonresidential real estate placed in service between 1981-1986, low income housing and depreciable residential rental property. Section 1250 usually applies to real estate place in service before 1986 since straight line is used after 1986

  • Recapture only the additional depreciation over straight line into ordinary income

  • Unrecapture 1250 gain - rest of the depreciation (ie straight line) will be recaptured at long term capital gain rate of 25% instead of 20%

Section 1231 netting procedure
Section 1231 netting procedure

  • Determine casualty gains and loss

    • if loss -> non 1231 loss - business casualty loss is a for AGI deduction, personal casualty loss is a from AGI (itemized deduction)

  • Compute net 1231 gains/loss

    • net casualty gain

    • gains and losses from sale/exchange of section 1231 property

    • gains and losses from condemnation of property

  • If net 1231 gain, check unrecaptured 1231 loss from previous years

Chapter 14 amt
Chapter 14 AMT

  • Taxable income

    plus tax preference items

    plus personal and dependency exemption

    plus standard deduction if itemized deductions is not used

    plus adjustments - disallowed itemized deductions, timing difference adjustments, disallowed AMT tax credits

    = AMTI

    - AMT exemption - 45000 for married filing jointly, 33750 for single tax payers - subject to phase out 25% for AMTI > 150000 for married filing jointly and 112500 for single

    = AMT Base

    Tax rate = 26% for the first 175000

    28% for amount >175000

    = Tentative minimum tax

    - regular tax

    = AMT

C2 forms of organizations
C2 -Forms of organizations

  • Sole Proprietorship

  • Partnerships

  • S-corp

  • C-corp

  • Know the tax advantages and disadvantages and liability consequences

Tax considerations in forming corporations
Tax considerations in forming corporations

  • Tax free and taxable transfer of property

  • Section 351 - allows the deferral of gains and loss upon incorporation, apply to new and existing corporation

  • Requirements -

    • for stock

    • transfer in control immediately after exchange (no prearranged plan to sell)

    • Property must be transferred

  • Control - >= 80% of total voting stock and >=80% of each class of nonvoting stock

  • Property - money, A/R, inventory, equipment, intangibles and etc.

  • Exclusions - services, indebtedness with no security

Receipt of boot
Receipt of Boot

  • SH receives cash, notes instead of stock

  • SH recognized gain up to lesser of realized gain or FMV of boot

  • Character of gain depends on asset received

  • SH basis = adjusted basis of property transfer + gain recognized - (boot received, cash received or liability assumed by transferee (ie corp))

  • SH holding period - include property’s holding period

Transferee corp s recognition
Transferee Corp’s Recognition

  • No recognition if transfer stock even if 351 is not applied

  • If transfer appreciated property as part of section 351- recognized gain but not loss

  • Transferee corp basis = transferor’s adjusted basis for property + gain recognized by transferor

  • Holding period includes holding period of transferor + any depreciation recapture potential

C3 corporations deductions and losses
C3 - corporations deductions and losses

  • No itemized deductions, hobby losses, net investment interest deduction limitations, personal exemption, non-bus bad debts, alimony, IRA contribution

  • Casualty losses are fully deductible

  • No deduction for interest expenses incurred to borrow tax-exempt securities

Capital gains and losses
Capital Gains and Losses

  • Same process of netting LTCG, LTCL; STCG, STCL

  • Additional 20% depreciation recapture for section 1250 property

  • No $3000 capital loss offset against ordinary income; carry back 3 and forward 5

  • No capital gain rate preferential; same treatment as ordinary income

Charitable contributions
Charitable Contributions

  • 10% of adjusted taxable income

  • adjusted taxable income excludes charitable contribution deduction, NOL carryback, capital loss carryback, dividends-received deduction but INCLUDEs NOL carryover

  • Similar rules regarding ordinary income and capital gain property as individuals

Special deduction dividends received deduction
Special deduction - Dividends-received deduction

  • Include dividends in Gross Income

  • receive dividends deduction <20% - 70% deduction, >=20% but < 80% - 80% deduction

  • limitation - lesser of 70%(80%) of dividends or 70%(80%) of taxable income without regard to any NOL deduction, capital loss carryback or dividends-received deduction itself

  • Does not apply if an NOL results after the deduction is taken into account

  • If ownership >=80% - receive full 100% dividends deduction with no limitations - members of affiliated group

Net operating loss
Net Operating Loss

  • Carry back 2 (earliest of the 2 first) and forward 20 (first preceding year)

  • May elect not to carry back, once elected for the year, irrevocable

  • Deduction sequence

    • Charitable Contribution (include NOL carryover)

    • Dividends received deduction (not include NOL carryover)

    • NOL

C4 current e p
C4 - current E&P

  • Calculating current earnings and profits

    • start with taxable income or NOL

      Permanent differences

    • plus income excluded from taxable income but included in E&P

      • life insurance proceeds, tax-exempt interest income

    • plus deductions that reduce taxable income but not allowed in E&P

      • dividends-received deduction

      • NOL, charitable contribution, capital loss carryover

    • minus expenses and losses not deductible in taxable but allowed in E&P

      • federal income taxes

      • excess capital loss not allowed

      • excess charitable contributions

      • non deductible fines and penalties etc.

        Temporary difference

    • plus income deferred to a later year when computing taxable income but included in E&P in current year

    • plus or minus income and deductions items that is recomputed for E&P

      • depreciation - ADS for MACRS

      • LT contracts - % of completion for E&P

Non liquidating distributions
Non-liquidating distributions

  • Dividend - distribution made out of corporation’s E&P

  • Property as contribution - $, securities of other corporation, and any other property except stock, stock right of distributing corporation

  • if distributions > E&P - > return of capital, reduce ownership basis

  • if distributions> ownership basis, excess treated as gain of sale of stock - capital gain

Property distributions tax consequences to sh
Property Distributions- tax consequences to SH

  • Amount of distribution to shareholder is the property’s FMV, value determined at date of distribution, distribution amount reduced by any liability assumed by shareholder

  • Basis to shareholders is the FMV (regardless of liability assumed)

  • Distribution is dividend to the extent of the corp’s E&P

Property distributions tax consequences to corp
Property Distributions- tax consequences to corp

  • Corporation must recognized gain on distributed property that has appreciated in value

  • Property’s FMV must be at least the amount of liability assumed by shareholder

  • Does not recognized loss on distributed property

    Effect on E&P of corporation

  • gain recognized by distributed property increase E&P

  • Tax on the taxable gain on distributed property decrease E&P

  • Property’s adjusted basis/FMV reduce E&P (if adjMusted basis >= to FMV, reduce E&P with adjusted basis, else reduce E&P with FMV

Partnership profits and losses
Partnership profits and losses

  • Partnerships - tax reporting entity

  • partner reports his/her share of income from partnership from the partnership return

  • partnership has its own tax year and accounting methods

  • partnership income can office personal losses of individual partners

  • Partner’s Basis

    • contribution increase a partner’s basis in the partnership

    • liability assumed by the partner also increase his/her basis

    • gain increase partner’s basis

    • loss decrease partner’s basis until the basis =0

    • partner’s personal liabilities assumed by partnership decreases the partner’s basis

    • partnership distributions are tax free

Contribution of property to partnerships
Contribution of property to partnerships

  • No gain or loss recognized for the partner and partnership if property is cash, tangible and intangible property, services - need to recognized gain

  • if personal liabilities assumed by partnership exceed basis in partnership, recognize gain

  • partnership basis of property contributed = partner’s basis before the transfer

  • Unrealized receivables, basis = 0

  • holding period includes the transferor’s holding period

  • character of gain also transfers over

  • depreciation recapture also transfers over

  • apply the same rules after formation of partnership

Partnership s distributive share
Partnership’s distributive share

  • Depends on partnership agreement, profits and losses share may be different

  • Varying interest rule - if partnership interest % changes during the year, income and loss allocation is prorated between the different days of ownership and interest %

  • Special allocations

    • pre-contribution gain or losses for contribution to partnership after 3/31/1984

    • gain/loss at the time of contribution allocated solely to the SH who contributed the property

    • other special allocations allowed if criteria is met for substantial economic effect - appropriate decrease/increase in capital account of partner and partners will make up negative capital balance - see C9-19