Income tax - ch7 and on - business and property

foreign travel exceeding 7 days with personal tiem excee ding 25%

all expenses including airfare are prorated. busienss days/total days

if personal days represent less than 25% of days, it’s fully counted as a business expense

business property damaged by event

loss/gain = damage- insurance reimbursement. positive number is loss

entertaining clietn business expense

transportation is fully deductible, business meal/tip have a 50% limitation

C corp characteristics

unlimited shareholders
no disruption from shareholder bankruptcy
limited shareholder liability
can raise capital thru public stock offerings
taxed at entity level, owners not required to report their share of undistributed income on personal returns

s corp characteristics

limited liability
flow thru taxation
easy transferability of stock
allows shareholder employees to receive a reasonable salary while distributing remaining profits w/out self employment tax
one share of stock

single member llc

flow thru taxation
limited liability

pass through entities

business structure where the business itself doesn't pay income tax. Instead, the profits (and losses) "pass through" directly to the owners, who report that income on their own personal tax returns and pay tax at their individual rates

LLC, S CORP, partnership, sole proprietorship

With regard to Sections 1245 and 1250, Section 1231 treatment applies when

Any depreciable property is sold at a profit above its original cost
cap gain treatment

gains up to the prior amount are first classified as sec. 1245 or 1250

5 year lookback rule

net loss taxed as OI

net gain taxed as long term cap gain

whta creates potential section 1245 capture

sale of depreciable

tangible personal property used in a trade or business at a gain

Hannah owns an event planning company. Several years ago, she purchased a chocolate fountain for $3,000 and has since taken $1,200 in depreciation deductions on it. Hannah plans to sell the fountain. Which of the following statements correctly describes the tax consequences of selling the fountain?

Hannah’s adjusted basis is $1,800 ($3,000 − $1,200 depreciation). At a sale price of $2,000, her total gain is $200. Because the $200 gain does not exceed the $1,200 in prior depreciation taken, the entire $200 is recaptured as ordinary income under Section 1245. No capital gain results

when section 1250 come in

applies to the realized gain on real property where the accelerated depreciation method was used under ACRS. The ordinary income portion is the excess of accelerated depreciation over straight-line depreciation. Under current law (MACRS), only straight-line depreciation is permitted for real property, so Section 1250 ordinary income rarely arises on post-ACRS property.

str8 line depreciation
MACRS depreciation

allocates an equal amount of depreciation expense each period, resulting in the least deduction in the early years compared to accelerated methods.

MACRS (Modified Accelerated Cost Recovery System) uses the double declining balance method, providing the largest depreciation deductions in the early years of an asset’s life.

Diane purchased a hotel on November 15, five and one-quarter years ago, for $5,000,000. What is the straight-line cost recovery deduction for one month of the current year?

hotel is non residential property, depreciated on a straight line basis over 39 years.

5m/39 = 128,205.
Monthly depreciation = 128205?12

depreciable real estate calculation

Residential rental real estate is depreciated on a straight-line basis over 27.5 years, and commercial real estate is depreciated on a straight-line basis over 39 years

MACRS calculation (years)

Most automobiles are 5-year assets, most office furniture is 7-year assets, and residential rental real estate is depreciated over 27.5 years.

Alice purchased a 3-year MACRS business asset this year for $100,000. This is the only asset she purchased during the year. She did not elect Section 179 expensing and did not elect straight-line cost recovery. What is Alice’s MACRS cost recovery deduction for the year of purchase?

Three-year MACRS property uses the 200% double declining balance method with the half-year convention. The straight-line rate for 3-year property is 33.33%; doubled, this becomes 66.67%. Applying the half-year convention in year 1: 66.67% × 50% = 33.33%. Deduction = $100,000 × 33.33% = $33,333

Section 179 advantage

the ability to immediately expense the full cost of qualifying assets in the year of acquisition rather than recovering the cost over several years. This accelerates the tax deduction, reduces current-year taxable income, and improves the present value of after-tax cash flows by allowing earlier reinvestment of tax savings.

section 179 recapture

triggered in two situations: when the asset is disposed of before the end of its regular depreciation period, and when business use of the asset falls below 50% in any year. In both cases, previously deducted amounts in excess of regular depreciation must be recaptured as ordinary income.

section 179 max deduction

2,560,000
also cannot exceed business taxable income
phaseout when qualifying property exceeds a value of 4,090,000.
thankfullly, its a dollar for dollar phase out. if 50k over 4090000, then decrease the 2560000 # by 50k

Peyton exchanges a warehouse used in his business for a like-kind storage building owned by unrelated Eli. Peyton’s adjusted basis in his property is $40,000, and he gives Eli $20,000 cash plus the warehouse in exchange for Eli’s building, which is worth $36,000. What is Peyton’s new basis in the building received?

New Basis=Adjusted Basis of Property Given Up+Boot Paid (cash given)−Boot Received+Gain Recognized

Under Section 1031, what is the deadline for a taxpayer to identify replacement property in a deferred (nonsimultaneous) like-kind exchange?

45 days

in 1031 exchange how is mortgage treated

like a boot

3 categories of in come

active, passive, portfolio

rental real estate active participant exception to the pal rules

Active participants may deduct up to $25,000 of rental losses against ordinary income; this allowance phases out $1 for every $2 of AGI over $100,000 and is fully eliminated at AGI of $150,000.

why would rentla prop be treated as a residence

Rented for 14 days or fewer per year

mixed use

Personal use exceeds the greater of 14 days or 10% of rental days, AND the property is also rented for more than 14 days

Alex buys a zero coupon corporate 30-year bond to yield 8.5% for $86.52 per $1,000 face value on January 1 of this year. He sells the bond at the end of the third year for $115.51. Ignoring OID interest income previously accrued, what additional tax consequence does Alex have on the sale?

Over three years, Alex accrues OID as follows: Year 1: $86.52 × 8.5% = $7.35; adjusted basis = $93.87. Year 2: $93.87 × 8.5% = $7.98; adjusted basis = $101.85. Year 3: $101.85 × 8.5% = $8.66; adjusted basis = $110.51. Alex sells for $115.51 when his adjusted basis is $110.51, producing a gain of $5.00 above the accrued OID. This $5.00 excess is a long-term capital gain.

Al gifts stock in X Company to Bo. The FMV on the date of the gift is $12,000, and Al had acquired the stock two years earlier for $4,000. On April 15 of the following year, Al paid $4,800 in gift tax on the transfer. Bo sells the stock for $16,000 on July 1 of the year following the gift, exactly one year from the date of the gift. What is Bo's tax consequence?

When appreciated property is gifted and gift tax is paid, the donee's gain basis is increased by the portion of gift tax attributable to the unrealized appreciation. Gift tax added to basis = $4,800 × ($8,000 appreciation / $12,000 FMV) = $3,200. Adjusted basis = $4,000 + $3,200 = $7,200. Bo's gain = $16,000 − $7,200 = $8,800. The holding period is tacked to Al's two-year holding period, so the gain is long-term.

client in the 32% marginal income tax bracket sold an apartment building for $800,000. The client purchased the building eight years ago for $550,000 and claimed $100,000 in depreciation deductions over the holding period. Ignoring the Net Investment Income Tax, what is the total federal income tax due on the sale?

Adjusted basis = $550,000 − $100,000 = $450,000. Total gain = $800,000 − $450,000 = $350,000. The $100,000 of unrecaptured Section 1250 depreciation is taxed at 25%: $100,000 × 25% = $25,000. The remaining $250,000 is long-term capital gain taxed at 15%: $250,000 × 15% = $37,500. Total tax = $25,000 + $37,500 = $62,500.