Federal Taxation: Cost Recovery, Individual Tax Computations, Deductions, and Professional Ethics

Vocabulary practice flashcards covering property acquisition, MACRS cost recovery, individual income tax computations, tax credits, above-the-line and itemized deductions, and professional tax ethics standards.

Tax Adjusted Basis

The remaining unrecovered cost of a business asset for tax purposes, calculated as $\text{Tax Adjusted Basis} = \text{Initial Tax Basis} - \text{Accumulated Depreciation/Amortization/Depletion}$.

De Minimis Safe Harbor

An administrative tax provision that allows businesses to immediately deduct low-cost tangible personal property rather than capitalizing it; taxpayers with an Applicable Financial Statement (certified audited financial statement) can deduct single expenses up to $\$5,000$, while taxpayers without an AFS can deduct single expenses up to $\$2,500$.

Half-Year Convention

A default MACRS depreciation convention for personal property that treats all assets placed in service or disposed of during the taxable year as if placed in service or disposed of at the exact midpoint of the year, providing $50\%$ of a full year's depreciation in the acquisition and disposition years.

Mid-Quarter Convention

A mandatory MACRS personal property convention triggered when more than $40\%$ of the total depreciable basis of tangible personal property placed in service during the year is placed in service in the fourth quarter, treating assets as placed in service at the midpoint of their respective quarters.

Mid-Month Convention

The MACRS depreciation convention applied to all real property that treats assets as placed in service or disposed of in the middle of the applicable month, requiring straight-line depreciation over recovery periods of $27.5$ years for residential rental property or $39$ years for nonresidential real property.

Section 179 Expensing

An elective tax provision that allows taxpayers to immediately deduct up to $\$2,500,000$ of qualified tangible personal property placed in service in $2025$, subject to a dollar-for-dollar phase-out when total qualifying property placed in service exceeds $\$4,000,000$, and limited to business taxable income.

Qualified Production Property (QPP)

New, nonresidential real property constructed by the taxpayer and placed in service after $\text{July } 4, 2025$ that is used for a qualified production activity transforming tangible property (other than food or beverage) in the United States, eligible for $100\%$ bonus depreciation under the OBBBA.

Section 197 Intangibles

Intangible assets acquired in connection with the purchase of a trade or business (including goodwill, going-concern value, customer lists, and covenants not to compete) that must be amortized on a straight-line basis over a statutory recovery period of $180$ months ($15$ years) using the full-month convention.

Percentage Depletion

A cost recovery method for natural resources calculated by multiplying gross income from resource extraction by a statutory IRS percentage; deductions may exceed the taxpayer's original basis, but the annual deduction cannot exceed $50\%$ ($100\%$ for oil and gas) of taxable income before depletion.

Marriage Penalty

A tax consequence occurring when a married couple incurs a greater total federal income tax liability by filing as Married Filing Jointly compared to the sum of the tax liabilities they would owe if each spouse were permitted to file as Single, typically impacting dual-earner couples whose joint income reaches the highest tax brackets.

Kiddie Tax

A tax rule designed to prevent high-income parents from shifting investment income to children by taxing the net unearned income of qualifying children (generally aged $0-17$, or aged $18-23$ if full-time students supported by parents) exceeding $\$2,700$ in $2025$ at the parents' marginal tax rate.

Alternative Minimum Tax (AMT)

A parallel federal income tax calculation intended to ensure higher-income individuals pay a baseline amount of tax by adjusting regular taxable income, adding back specific tax preferences and deductions (such as state and local taxes), subtracting an AMT exemption, and applying rates of $26\%$ and $28\%$.

Net Investment Income Tax (NIIT)

A $3.8\%$ surtax assessed on the lesser of an individual taxpayer's net investment income (including interest, dividends, annuities, royalties, and capital gains) or the excess of modified adjusted gross income over statutory thresholds ($\$200,000$ for Single and $\$250,000$ for Married Filing Jointly).

Self-Employment (SE) Tax

A federal tax of $15.3\%$ ($12.4\%$ Social Security tax up to a statutory wage base plus $2.9\%$ Medicare tax on all earnings) levied on $92.35\%$ of net self-employment earnings, for which taxpayers receive a $50\%$ above-the-line deduction.

Child Tax Credit (CTC)

A credit of $\$2,200$ in $2025$ for each qualifying child under age $17$ who has a valid Social Security Number and is claimed as a dependent, which phases out at higher AGI levels and is partially refundable as the Additional Child Tax Credit (ACTC).

American Opportunity Tax Credit (AOTC)

An education tax credit of up to $\$2,500$ per eligible student ($100\%$ of the first $\$2,000$ of qualified tuition, fees, and course materials, plus $25\%$ of the next $\$2,000$) for the first $4$ years of postsecondary education, of which up to $40\%$ is refundable.

Lifetime Learning Credit (LLC)

A nonrefundable tax credit equal to $20\%$ of up to $\$10,000$ of qualified tuition and related expenses (maximum credit of $\$2,000$ per tax return) incurred to acquire or improve job skills, available for an unlimited number of years across undergraduate, graduate, or professional programs.

Underpayment Safe-Harbor Provisions

IRS statutory safe harbors permitting taxpayers to avoid underpayment penalties if their annual prepayments equal or exceed either $90\%$ of their current year tax liability or $100\%$ of their prior year tax liability ($110\%$ if prior year AGI exceeded $\$150,000$).

Above-the-Line (ATL) Deductions

Deductions subtracted directly from gross income to arrive at Adjusted Gross Income (AGI), which provide a tax benefit regardless of whether the taxpayer claims the standard deduction or itemizes deductions on Schedule A.

Health Savings Account (HSA)

A tax-exempt custodial account paired with a qualifying high-deductible health plan that offers a triple tax advantage: contributions are deductible above-the-line, investment earnings grow tax-deferred, and distributions used for qualifying medical expenses are tax-free.

Qualified Student Loan Interest Deduction

An above-the-line deduction of up to $\$2,500$ per year for interest paid on qualified educational debt used to pay for higher education expenses of the taxpayer, spouse, or dependent, which phases out based on modified AGI and is unavailable to married taxpayers filing separately.

Medical Expense Deduction

An itemized deduction on Schedule A permitting taxpayers to deduct unreimbursed, out-of-pocket qualified medical and dental expenses only to the extent the total expenses exceed a statutory floor of $7.5\%$ of Adjusted Gross Income.

State and Local Tax (SALT) Deduction

An itemized deduction on Schedule A allowing taxpayers to deduct state and local real estate, personal property, and income (or general sales) taxes, subject to a statutory cap of $\$40,000$ in $2025$ with a minimum phase-out floor of $\$10,000$.

Acquisition Indebtedness

Debt incurred to buy, build, or substantially improve a taxpayer's primary or secondary residence, where mortgage interest paid is deductible on Schedule A up to a principal limit of $\$750,000$ ($\$1,000,000$ for debt incurred on or before $\text{December } 15, 2017$).

Capital Gain Charitable Property

Appreciated capital assets held for more than $1$ year that are donated to a qualified charity, deductible as an itemized deduction at fair market value on the donation date, which eliminates taxable recognition of the underlying unrealized capital gain.

Qualified Business Income (QBI) Deduction

A below-the-line deduction authorized under Section 199A allowing eligible non-corporate taxpayers to deduct up to $20\%$ of qualified business income earned through sole proprietorships, partnerships, and S corporations.

Schedule 1-A Deductions

Temporary below-the-line deductions enacted under the OBBBA for tax years $2025-2028$, including deductions for qualified tip income (up to $\$25,000$), qualified overtime compensation (up to $\$12,500$), qualified passenger vehicle loan interest (up to $\$10,000$), and an enhanced senior deduction ($\$6,000$ for individuals aged $65$ and older).

Contingent Fee

A fee arrangement where the compensation amount depends on a specific finding or result; strictly prohibited by the AICPA Code and Circular 230 for preparing original or amended tax returns, but permitted for IRS audits of previously filed returns, judicial proceedings, or claims filed to reduce IRS interest and penalties.

Acts Discreditable

Unethical actions prohibited under the AICPA Code of Professional Conduct that harm the reputation of the CPA profession, including refusing to return client-provided records, disclosing CPA exam questions, misleading advertising, and failing to timely file personal tax returns.

Client Records

Accounting and financial source documents provided to a practitioner by a client, which remain client property and must be returned promptly on demand even if the client owes outstanding fees to the practitioner.

CPA Work Products

Working papers, computational schedules, and analyses prepared by a CPA during an engagement, which generally remain the proprietary property of the CPA rather than the client.

Preparer Tax Identification Number (PTIN)

An identifying number issued by the IRS required for any individual who prepares or assists in preparing all or substantially all of a tax return or claim for refund in exchange for compensation, whether paid in cash, discounted fees, or bartered goods and services.

Refund Check Endorsement Penalty

A statutory Internal Revenue Code penalty assessing $\$500$ per violation against any tax return preparer who endorses, negotiates, or deposits a government refund check issued to a client into an account managed by the preparer.

Substantial Authority

An objective standard of tax law authority requiring approximately a $40\%$ likelihood that a reported tax position will be sustained on its merits upon examination, which protects tax return preparers from statutory understatement penalties without requiring special disclosure on the return.