WGU - C237 - TAXATION 1 Flashcards _ Knowt
Key Terms and Concepts in Taxation
Audited Individuals and Businesses
30 Days:
Time allotted to taxpayers to request a conference with an appeals officer or agree to proposed adjustments made by the IRS.
Crucial for resolving disputes before escalating to legal action.
Period starts once the IRS notifies the taxpayer of adjustments (Ch 2-6).
90 Days:
Window after the appeals conference during which taxpayers must either pay the proposed deficiency indicated by the IRS or file a petition in the US Tax Court for formal review.
Ignoring this deadline may lead to default judgments in favor of the IRS (Ch 2-6).
Prepaid Expenses and Asset Types
12 Month Rule:
Allows for the current deduction of prepaid business expenses if they are contracted for a period not exceeding 12 months and do not extend into the next tax year.
This rule aids in effective cash flow management and tax planning for businesses (Ch 6-15).
1231 Assets:
These include tangible and intangible depreciable property used in a taxpayer's core business, provided they are held for over one year.
Gains from the sale of such assets can qualify for preferential long-term capital gains treatment (Ch 11-8).
1231 Look Back Rule:
A requirement for taxpayers to classify net gains or losses in the current tax year based on historical 1231 transactions.
Losses can offset ordinary income in prior years to avoid higher capital gains tax (Ch 11-18).
1245 Property:
Covers tangible personal property and certain intangible assets that have been depreciated.
Any gains upon sale are subject to depreciation recapture, changing their tax treatment from capital gains to ordinary income (Ch 11-10).
1250 Property:
Refers specifically to real property subject to depreciation, such as commercial buildings.
Sales can trigger depreciation recapture, affecting the taxation of the sold property (Ch 11-14).
291 Depreciation Recapture:
Applies particularly to corporate entities selling 1231 property, transforming the portion of previously declared 1231 gains into ordinary income for tax purposes.
Essential for accurate tax reporting on gains from property sales (Ch 11-14).
Accounting and Adjustments
481 Adjustment:
Pertains to changes in accounting methods affecting taxable income.
It ensures that income is accurately reflected under the new accounting method, which can lead to either additional tax liability or refunds (Ch 9-30).
Abandoned Spouse:
A classification that allows married taxpayers who have lived apart from their spouse for at least six months to file separately.
This status can lead to differing tax obligations and filing advantages (Ch 2-17).
Tax Regulations and Plans
Ad Valorem Tax:
A tax assessed based on the value of an asset, commonly applied to real estate properties.
The tax is calculated based on the market value of the property at the time of assessment (Ch 1-15).
Accelerated Death Benefits:
Provisions in life insurance policies that allow policyholders to receive benefits prior to death under specific conditions, offering tax advantages under certain scenarios (Ch 5-28).
Accountable Plan:
A reimbursement arrangement set by employers where employees are reimbursed for incurred expenses that require documentation and are strictly for business purposes.
Supports compliance with tax regulations while maximizing tax deductions for the employer (Ch 5-23).
Accounting Methods
Accounting Methods:
Refers to the procedures adopted for reporting income and deductions for tax purposes.
Different methods, such as cash vs. accrual, significantly impact taxable income and financial statements (Ch 9-14).
Accounting Period:
A defined timeframe designated for the reporting of income and expenditures for tax purposes, which can be annual, quarterly, or monthly (Ch 9-13).
Accrual Method:
A method where income is recognized when earned and expenses are deducted when liabilities are incurred, regardless of cash flow timing.
Preferred for larger businesses as it provides a more accurate financial picture (Ch 5-6).
Taxes and Credits
Accumulated Earnings Tax:
Imposed on corporations that retain earnings beyond reasonable business needs without justification, aimed at reducing shareholder avoidance of dividend taxes (Ch 15-3).
Acquiescence:
An IRS decision not to pursue appeals against a court ruling.
This can influence the treatment of similar future cases (Ch 2-17).
Action on Decision:
A document issued by the IRS that clarifies the rationale behind certain agency decisions, providing guidance for taxpayers (Ch 2-18).
Additional Tax Concepts
Additional Medicare Tax:
A tax imposed at 0.9% for individual earnings exceeding $200,000, addressing inequities in the funding of Medicare benefits (Ch 8-14).
Adjusted Basis:
Calculated as the original cost basis of an asset adjusted by capital improvements and depreciation, essential for determining gain or loss upon the sale of the asset (Ch 10-1, 11-5).
Adjusted Gross Income:
This includes a taxpayer's gross income minus specific deductions, forming the basis for further deductions and credits on the tax return (Ch 4-2).
Taxpayer Returns
After Tax Rate of Return:
The actual return on an investment after accounting for taxes paid, critical for assessing net income from investments (Ch 3-3).
Alimony:
Payments made to a former spouse as part of a divorce settlement, which may be deductible by the payer and taxable to the recipient under certain qualification criteria (Ch 5-14).
Income Recognition
All Events Test:
This test is used to determine the timing of income recognition, stating that income is recognized when the right to receive it is established with no contingencies (Ch 9-21).
All Inclusive Income:
A core tax principle asserting that all income from any source is subject to taxation unless explicitly exempted (Ch 4-2).
Taxation Principles
Alternative Minimum Tax:
A minimum taxation system that ensures taxpayers pay at least a minimum level of tax by disallowing certain deductions and credits (Ch 4-11).
Alternative Minimum Tax Base:
Calculated taxable income for AMT purposes, adjusted for specific items, indicating liability owed (Ch 8-8).
Compliance and Reporting
Claim of Right Doctrine:
A doctrine stating that income must be reported when it is actually received and accessible, regardless of later adjustments (Ch 5-7).
Deductions:
Specific expenditures allowed by tax law that reduce taxable income, subject to detailed regulations and limitations (Ch 4-7).
Deferrals:
Instances where income is recognized for tax purposes in a subsequent year, allowing for potential tax benefits (Ch 4-5).
Tax Planning Strategies
Bunching Itemized Deductions:
A strategy used by taxpayers to pay multiple years’ worth of deductible expenses in one year to exceed the standard deduction threshold, maximizing tax benefits (Ch 6-25).
Cash Method:
A simple accounting method that recognizes income only when cash is received and deductions when cash is paid, suitable for many small businesses (Ch 5-6).
Important Judicial Doctrines
Assignment of Income Doctrine:
A legal principle that dictates income taxation occurs based on the location of services performed for earned income while property-derived income is taxed where the property is located (Ch 3-12, 5-8).
Step Transaction Doctrine:
A doctrine that allows the IRS to treat a series of related transactions as one unified transaction for tax implications, preventing tax avoidance strategies (Ch 3-18).
Substance Over Form Doctrine:
This doctrine asserts that the IRS will focus on the actual economic reality of a transaction rather than its formal legal structure, ensuring fair tax treatment (Ch 3-18).
Final Notes
Tax Base:
Refers to the total amount of income, property, or transactions that are taxable, forming the foundation for tax calculations (Ch 1-5).
Tax Year:
The annual accounting period in which a taxpayer reports their income, impacting tax liabilities and reporting methods (Ch 9-13).
Tax Treaties:
Agreements made between two countries to dictate how cross-border transactions will be taxed, preventing double taxation and clarifying tax responsibilities (Ch 2-14).