reg 1 and 2 text notes

8/8/2019 REG 1 and 2 Text Notes

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Chapter 1: Individual Taxation

1. Individual Taxation Filing Statusa. Requirement For Filing (Who Must File?)

i. General Rule: must file if income is = or greater than the sum of1. Personal exemption + regular standard deduction (except for MFS) +

additional standard deduction for taxpayers age 65 or over or blind

(except for MFS)

ii. Exceptions: must file even lower than the GR1. Net earnings from SE are $400 or more2. Who can be claimed as dependent on another taxpayers return have

unearned income and gross income of $950 (2009) or more

3. Receive advance payment of earned income credit must fileb. When to file

i. April, 15c. Filing Status

i.

Single/ End of year test1. Single at year end or2. Legally separated

ii. MFS: may file separate return even if one spouse had income. In communitystate, most of income, deductions, credit, and etc are split 50/50

iii. Qualifying Widow(er) (surviving spouse)1. For Two years after spouses death: may use MFJ standard deduction

and rate BUT NOT THE EXEMPTION FOR THE DECESAED SPOUSE for

each of two taxable years following the year of death of the spouse. In

case of remarried, then file MFJ with new spouse

2. Principal Residence for Dependent Child: must maintain a householdthat, for the WHOLE entire taxable year, with the principal place of

abode of a son, stepson, daughter, or stepdaughter (by blood oradoption). Surviving spouse must be entitled to a dependency

exemption for such individual.

iv. Head ofHousehold: pay lower taxes which will yield larger standard deductionand wider tax brackets. To qualify:

1. Not married, legally separated, or is married and has lived apart fromhis/her spouse for the last six month of the year at the close of the

taxable year.

2. Is not a qualifying widower3. Not a nonresident alien4. Maintains a household that, for more than half the taxable year, is the

principal residence of:a. A son or daughter: a child must a qualifying child, or qualifying

dependent

b. Father or mother (not required to live with)c. Dependent relatives (must live with)

2. Individual Taxation Exemptionsa. Personal Exemptions: 2009 is $3650

i. Person claimed as dependents: if the folk use it, you loose it


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ii. Married taxpayers1. Each spouse receives personal exemption2. Spouse as personal exemption on a separate return

3. Individual Taxation Gross Incomea. Specific items of income and exclusions

i. Salaries and Wages1. Money2. Property at FMV (if taxable), if non-taxable then NBV3. Cancellation of Debt4. Bargain purchases: employer sells to employee at less than FMV, the

difference is the income to employee

5. Taxable fringe benefits (non statutory): fringe benefit not speciallyexcluded by law is all included as income. Personal use of company car

is consider income and subject to employment taxes and withholdings.

6. Partially taxable fringe benefits: portion of life insurance premium: nottaxable up to $50K of employers paid in. anything over $50K will be

taxable based on IRS table which wont be everything.

7. Non-Taxable Fringe Benefitsa. Life insurance proceeds: proceeds from life insurance is not

taxable, but interest is taxable

b. Accident, medical, and health insurance (employer paid):premium payment are excludable from employees income

when paid by employer. Only included as income when:

i. Reimbursement for medical expenses actually incurredby the employee or

ii. Compensation for the permanent loss or loss of use of amember or function of the body.

c. De Minimis Fringe benefits: so minimal is excluded fromincome

d. Meals and lodging: meals furnished by employer not taxablee. Employer payment of employees educational expense: up to

$5250 is exclude from gross income

f. Qualified tuition reductions: employees of institutions studyingat the undergrad lvl who receive tuition reductions may exclude

the tuition reduction from income. Grad student can exclude

such reduction only if they are engaged in teaching or research

activities and only if the tuition deduction is in addition to the

pay for the teaching or research.

g. Qualified employee discounts:i. Merchandise discounts: excludable discount is limited

to the employers GP%. Excess is income

ii. Service discounts: excluded up to 20% of the FMV ofthe services. Excess is income

iii. Employer-provided parking: up to $230 (2009) permonth is excluded.

iv. Transit passes: exclude up to $120 (2009) per monthii. Interest Income (Schedule B)

1. Taxable Interest (GR: all interest are taxable)


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a. Federal bondsb. Industrial development bondsc. Coporate bondsd. Premiums received for opening a saving account (prizes and

awards as FMV)

e. Part of the proceeds from an installment sales is taxable asinterest

f. Interest paid by federal or state govt for late payment of taxrefund is taxable

2. Tax Exempt Interest ( Reportable but not taxable)a. State and local govt bonds/ obligationsb. Bond of a US Possessionc. Series EE (US Savings Bond) = Educational Expenses

i. It is tax exempt when:1. Used to pay for higher education, reduced by

tax-free scholarships, of the taxpayer, spouse,

or dependents

2. There is taxpayer or joint ownership3. Taxpayer is 24 or older when used4. Acquired after 1989

ii. Phase-out for MAGI is over ($100650 for MFJ)d. Interest on Veterans Administration insurance

3. Unearned income of the child under 18 kiddie Tax: net unearnedincome of a dependent child under 18 not providing over half of his/her

own support, under 19 years of age under 24 if they are full time

student is taxed at his parents higher tax rate.

a. Add up all the unearned income child standard deduction (950for 2009) and additional $950 for 2009 which is $1900 in total.

4.

Forfeited Interest (adjustment): penalty on withdrawal from savings: itis deductible as adjustment in the year incurred.

iii. Dividend Income1. Source Determines taxability2. Three categories of dividends

a. Taxable Dividendsi. Taxable amount (to shareholder receiving)

1. Cash = amount received2. Property = FMV

ii. Special (lower rate) Tax Rate: in order for qualifydividend to be taxed at the lower rates of 0, 10, or 15,

rather than the marginal rate (15, 28, 33), the stock

mustve been held for the 60 days surrounding the 120

days before dividend is declared.

b. Tax-Free Distributionsi. Return of Capital:ii. Stock split

iii. Stock dividend (unless cash or other property option/taxable FMV)


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iv. Life insurance dividend dividends caused byownership of insurance with a mutual company

(premium return)

c. Capital gain distribution: made by a corporation with no gain orprofits, and shareholder have recovered his/her basis, and

excess will be taxed.

iv. State and local tax refunds: not taxable if the taxes did not result in a tax benefitin the prior year

1. Prior year itemized = taxable state or local refund2. Prior year used standard deduction = non taxable state or local refund

( 1040 EZ = standard deduction)

v. Payments Pursuant To A divorce: child support first and then alimony1. Alimony/ Spousal Support (income): adjustment @ AGI and includable2. Child Support: non deductible, not includable3. Property settlements (non-taxable): if payment is made in lump sum or

property, the paying spouse gets not deduction and receiving spouse

doesnt get taxed.

vi. Business Income or Loss (Schedule C or C-EZ): compute on Schedule C andtransferred to Form 1040 as one amount.

1. Net Business Income or Loss is Taxablea. Net Taxable Business Income

i. Income taxii. Federal SE Tax

1. An adjustment to income is allowed for (7.65% up to 106800 in 2009) of SE tax paid

2. Allows the taxpayer to deduct the employerportion of the SE tax as an adjustment to gross

taxable income

3.

All SE income is subject to 2.9% Medicare tax,but only up to 1068000 in 2009 is subject to the

12.4% Social security tax (a total of 15.3% on

earnings of less than 106800 in 2009)

b. Net Taxable Loss: may deduct other sources of incomei. 2-year backii. 20 forward

vii. Uniform Capitalization Rules: provide guidelines with respect to capitalizing orexpensing certain costs.

1. Types of propertya. Produced for useb. Produced for salec. Acquired for resale: retailers inventory. This doesnt apply to

(inventory) property acquired for resale if the taxpayers

average gross receipts for the preceding 3 tax years do not

exceed $10M annually. ( gross receipt

$10M, URC apply)


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2. Costs required to be capitalized: DM, DL, and certain indirect costsincludes: utilities, warehousing costs, repairs, maintenance, indirect

labor,.etcbasically factory OH.

3. Cost not required to capitalized: SG&A and R&Dviii. IRA Income

1. GR (taxable when withdrawn): cant start until 59.5 years old. Requiredto withdraw by the age of 70.5

2. Taxation of distribution( benefits)a. Regular Tax

i. Ordinary Income (Traditional Deductible IRAdistributions): taxed as ordinary income

ii. Distribution/ Benefits from Non-Deductible IRAs1. Roth IRA: non taxable2. Traditional Non-Deductible IRA

Chapter 3: Corporation

Formation:1. Corporate Tax Consequences

a. GR: no gain or loss recognizedb. Basis of property: it is the greater of

i. Adjusted NBV (plus gain recognized by the shareholder) orii. Debt assumed by corporation

c. In case if the FMV > NBV, the basis will be FMV2. Shareholder Tax Consequences

a. No gain or loss recognized if two condition exists:i. 80% controlii. Boot not involved (received): Cash, Cancellation of Debt (NBV Liabilities =

Excess liability = Boot (gain))b. Basis of common stock ( to shareholder)

i. Cash amount contributedii. Property adjusted basis (NBV)

1. It is reduced by any debt2. Add: taxable boot, debt > basis to bring stock basis to zero

iii. Service FMV (Taxable)Operation:

3. Charitable Contributiona. 10% of Adjusted Taxable Income Limitationb. Before the deduction ofi. Charitable contribution deduction

ii. The DRDiii. NOL Carry backiv. Capital loss carry backv. UP production activities deduction

4. Business losses or casualty losses related to businessa. Ordinary loss or capital loss


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i. Partially destroyed: lesser of1. Decline in value of the property or2. Adjusted basis of property immediately before the casualty

ii. Fully Destroyed (NBV): loss amount is adjusted basis of property5. Organizational Expenditures and Start-up Costs

a. Deduct up to $5K of organizational expense AND $5000 of start up costs.b. Each is reduced by the amount which the organizational expense or start up costs

exceeds $50K, respectively.

c. Excess is amortized over 180 months6. Purchased Goodwill: amortized on SL over 15 years7. Capital Gain or Losses

a. Capital losses deduction not allowed: no $3K deduction like individual. It only used tooffset capital gain

b. Carryover: 3back/5fowardc. Taxed as ordinary income

8. NOL: 2back/20forward9. General Business Credit

a. Formula: net income tax less the greater ofi. 25% of regular tax liability above $25K orii. Tentative Minimum Tax for the year.

10.Dividend Received Deduction: formulaa. Gross Income (includes Dividend income)b. : not included for charity deduction and DRD)c. Ad. : max is 10% of A, not gifts, not political, 5 year carry forwarde. Bf. DRD: (1st corp. is taxed, owned 45 days before or after. Income: 100% (80% ~ 100%),

80% (20% ~ 80), 70% (under 20%). Limited to % of B (smaller of the two). Exception: if

taking the full % of dividend income will create or adds to a loss, then take the biggerhalf instead)

g. Taxable income of Lossh. Entity which DRD doesnt apply

i. PSCii. PHC

iii. S Corp11.Depreciation

a. MACRS: Real Estatei. Residential Rental Property: 27.5 years SL: apartments, duplex rental homes.ii. Non-Residential Real Property: 39 year SL: office buildings and warehouses

iii. Mid-Month convention: month is taken in the month the property is placed inservice. month is taken for the month in which the property is disposed of.

b. Expense Deduction of Section 179i. May deduct fixed amount of depreciationii. Limit is$250K of new or used property that is acquired during the year

iii. Max amount is reduced dollar for dollar if the amount placed in service duringthe year exceeds $800K

iv. Deduction not allowed if it creates a lossv. SUVs: expense up to $25K.


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12.Summary of Section 1231, 1245, and 1250 Assetsa. Section 1231: comprised of depreciable personal and real property used in trade or

business and held over 12 months

i. Capital Gain Treatment: Long-Term Capital Gainii. Ordinary Loss Treatment: ALL LOSSES ARE SECTION 1231 LOSS TREATED AS

ORDINARY LOSS

b. Section 1245 ( M&E Gains Only)i. Personal properties used in a trade or business for over 12 month (cars)ii. Recapture all Accumulated Depre

1. Less ofa. Gain recognized orb. All accumulated depre recaptured as ordinary income

2. Any remaining gain is Section 1231 Gain (long Term Capital Gain)c. Section 1250 (Buildings Gains Only)

i. Real properties used in trade or business over 12 month (warehouse)ii. Recapture difference between SL and Depreciation taken: When depre taken >

SL Depre -> gain is treated as ordinary

iii. SL Depreciate Taken: amount taken results in the overall gain being taxed at25%

iv. Excess Gain is Section 1231 Gain: any gain in excess of original cost less SL Deprewould be allowed section 1231 long term capital gain

Taxation1. Filing Requirements

a. Extension Form 7004 for 6 monthb. Accrual Basis vs. Cash Basis

i. Cash Basis: individuals, qualified PSC, and taxpayers who average annual grossreceipts DO NOT EXCEED $1M

ii. Accrual Basis: purchases and sales of inventory, tax shelters, farmingcorporations, C corporations, partnerships have C Corp. provided has greaterthan $5M of average annual gross receipts for 3 year ending with tax year.

2. Estimated Payments of Corporate Tax: use annualized income method. Penalty assessed ifamount owed on return is $500 or more.

a. Small Corporations: lesser ofi. 100% tax shown on the return for the current year or;ii. 100% tax show on the return for the preceding year.

b. Large Corporations: whose taxable income was more than $1M can do in any of threeways:

i. 100% on current statementii. May not use preceding years return.

c. Corporate AMT: subject to minimum 20% on AMTI exemption amount ($40K). Sameobjective like individual.

i. Regular Taxable Income: before NOL deductionii. Adjustments (add back or minus)

1. Long Term contracts2. Installment sale dealer3. Excess depreciation (post 1986)

iii. Preferences (add back)1. Percentage depletion


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2. Private activity issued post 86 tax exempt interest income3. Pre 87 ACRS excess depr

iv. Adjusted Current Earnings (ACE) (addback)1. Muni interest income: tax exempt interest income2. Increase CSV life insurance3. Non S/L Depreciation: after 1989; excess over alt depre sys life4. DRD: under 20% ownership

v. vi. AMTI

vii. : $40K 25% of MTI over $150Kviii. AMT

ix. X 20%x. Gross AMTxi.

xii. Tentative MTxiii. xiv. Alternative MT

d. Accumulated Earnings Taxi. imposed on regular C crop for retained earning that excess of $250Kii. PSC is only $150K limit

iii. Not on PHCs, tax-exempt corp, or passive foreign investment corpiv. Tax rate is 15%v. It is an IRS-assessed as a result in case of corporation audit

e. PersonalHolding Company Taxi. Formed by high tax bracket taxpayers to channel their investment income by

the low normal tax (15% - 25%)

ii. Defined as corp more than 50% owned by 5 or fewer individuals (directly orindirectly) and having 60% adjust ordinary gross income consisting of:

1.

Net rent2. Interest that is taxable3. Royalties4. Dividends from an unrelated domestic corp.

iii. Additional Tax Assessed: 15% on PHC for net income not distributediv. Not subject to Accumulated earnings taxv. Self Assessed Tax

f. Personal Service Corporation: Flat 35% tax rate. Performing acctg, law, consulting,engineering, architecture

Distribution

1. Dividends Defined: DO NOT NET THEM TOGETHER, TREAT SEPRATELYa. Current E&P (by Y/E) = taxable dividend (1st)b. Accumulated E&P (Dist. Date) = Taxable dividend (2nd)c. Return of Capital (No E&P) = tax free and reduces basis of common stock (3rd)d. Capital Gain Distribution (No E&P/ No Basis) = taxable income as a capital gain (4th)

2. Corporation Paying Dividend Taxable Amounta. Property dividend:

i. Distributed appreciated property


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ii. Recognize gain as if the property had been sold ( FMV Property NBV = Gain(goes to E&P))

3. Stock Redemption: corporation buys back from stock holdersa. Proportional taxable dividend income (to shareholder-ordinary income)b. Disproportional (substantially disproportionate) sale by shareholder subject to taxable

capital gain/loss to shareholder

Liquidation1. If liquidated, transaction is subject to double taxation (corporate and shareholder level)2. Corp sells assets and distributes cash to shareholders

a. Recognize gains or losses: Sales price Basis = taxable gain/loss (1st tax)b. Shareholder recognize gain or loss to extent cash exceeds adjusted basis of stock:

Proceeds stock basis = taxable gain/loss (2nd tax)

3. Corporation distributes assets to shareholdera. Corp recognize gains or loss as if it sold the assets for the FMV: FMV Basis = Taxable

Gain/Loss (1st Tax)

b. Shareholder recognize gain or loss to extent FMV of Assets received exceeds theadjusted basis of stock: FMV Stock Basis = Taxable Gain/Loss (2nd tax)

4. Tax- Free Reorganizationa. Mergers of consolidation (typeA)b. Stock for Stock ( TypeB)c. Stock for assets (typeC)d. Dividing corp into separate operating corp (TypeD)e. Recapitalization (TypeE)f. Mere change in form, identity, place of organization (Type F)

5. Worthless Stock Section 1244 Stock (small business stock)a. When become worthless, original stockholder can be treated as a ORDINARY LOSS

(FULLY TAX DEDUCTIBLE) , instead of a capital loss, up to $50K ($100K MFJ). Any excess

will be capital loss to offset capital gain up to $3Kb. 50% exclusion of Gain: holds qualified small business stock for more than 5 year, may

exclude 50% of gain

reg 1 and 2 text notes

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