REG 1 and 2 Text Notes

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Chapter 1: Individual Taxation
1. Individual Taxation Filing Status a. Requirement For Filing (Who Must File?) i. General Rule: must file if income is = or greater than the sum of 1. 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 GR 1. Net earnings from SE are $400 or more 2. Who can be claimed as dependent on another taxpayer s return have unearned income and gross income of $950 (2009) or more 3. Receive advance payment of earned income credit must file b. When to file i. April, 15 c. Filing Status i. Single/ End of year test 1. Single at year end or 2. Legally separated ii. MFS: may file separate return even if one spouse had income. In community state, most of income, deductions, credit, and etc are split 50/50 iii. Qualifying Widow(er) (surviving spouse) 1. For Two years after spouse s 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 household that, for the WHOLE entire taxable year, with the principal place of abode of a son, stepson, daughter, or stepdaughter (by blood or adoption). Surviving spouse must be entitled to a dependency exemption for such individual. iv. Head of Household: pay lower taxes which will yield larger standard deduction and wider tax brackets. To qualify: 1. Not married, legally separated, or is married and has lived apart from his/her spouse for the last six month of the year at the close of the taxable year. 2. Is not a qualifying widower 3. Not a nonresident alien 4. 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 Exemptions a. Personal Exemptions: 2009 is $3650 i. Person claimed as dependents: if the folk use it, you loose it

ii. Married taxpayers 1. Each spouse receives personal exemption 2. Spouse as personal exemption on a separate return 3. Individual Taxation Gross Income a. Specific items of income and exclusions i. Salaries and Wages 1. Money 2. Property at FMV (if taxable), if non-taxable then NBV 3. Cancellation of Debt 4. 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 specially excluded 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: not taxable up to $50K of employer s paid in. anything over $50K will be taxable based on IRS table which won t be everything. 7. Non-Taxable Fringe Benefits a. 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 employee s income when paid by employer. Only included as income when: i. Reimbursement for medical expenses actually incurred by the employee or ii. Compensation for the permanent loss or loss of use of a member or function of the body. c. De Minimis Fringe benefits: so minimal is excluded from income d. Meals and lodging: meals furnished by employer not taxable e. Employer payment of employee s educational expense: up to $5250 is exclude from gross income f. Qualified tuition reductions: employees of institutions studying at 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 employer s GP%. Excess is income ii. Service discounts: excluded up to 20% of the FMV of the services. Excess is income iii. Employer-provided parking: up to $230 (2009) per month is excluded. iv. Transit passes: exclude up to $120 (2009) per month ii. Interest Income (Schedule B) 1. Taxable Interest (GR: all interest are taxable)

Federal bonds Industrial development bonds Coporate bonds Premiums received for opening a saving account (prizes and awards as FMV) e. Part of the proceeds from an installment sales is taxable as interest f. Interest paid by federal or state gov t for late payment of tax refund is taxable 2. Tax Exempt Interest ( Reportable but not taxable) a. State and local govt bonds/ obligations b. Bond of a US Possession c. 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 ownership 3. Taxpayer is 24 or older when used 4. 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 unearned income 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 parent s higher tax rate. a. Add up all the unearned income child standard deduction (950 for 2009) and additional $950 for 2009 which is $1900 in total. 4. Forfeited Interest (adjustment): penalty on withdrawal from savings: it is deductible as adjustment in the year incurred. iii. Dividend Income 1. Source Determines taxability 2. Three categories of dividends a. Taxable Dividends i. Taxable amount (to shareholder receiving) 1. Cash = amount received 2. Property = FMV ii. Special (lower rate) Tax Rate: in order for qualify dividend to be taxed at the lower rates of 0, 10, or 15, rather than the marginal rate (15, 28, 33), the stock must ve been held for the 60 days surrounding the 120 days before dividend is declared. b. Tax-Free Distributions i. Return of Capital: ii. Stock split iii. Stock dividend (unless cash or other property option/ taxable FMV)

a. b. c. d.

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vii.

iv. Life insurance dividend dividends caused by ownership of insurance with a mutual company (premium return) c. Capital gain distribution: made by a corporation with no gain or profits, and shareholder have recovered his/her basis, and excess will be taxed. State and local tax refunds: not taxable if the taxes did not result in a tax benefit in the prior year 1. Prior year itemized = taxable state or local refund 2. Prior year used standard deduction = non taxable state or local refund ( 1040 EZ = standard deduction) Payments Pursuant To A divorce: child support first and then alimony 1. Alimony/ Spousal Support (income): adjustment @ AGI and includable 2. Child Support: non deductible, not includable 3. Property settlements (non-taxable): if payment is made in lump sum or property, the paying spouse gets not deduction and receiving spouse doesn t get taxed. Business Income or Loss (Schedule C or C-EZ): compute on Schedule C and transferred to Form 1040 as one amount. 1. Net Business Income or Loss is Taxable a. Net Taxable Business Income i. Income tax ii. Federal SE Tax 1. An adjustment to income is allowed for ½ (7.65% up to 106800 in 2009) of SE tax paid 2. Allows the taxpayer to deduct the employer portion 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 income i. 2-year back ii. 20 forward Uniform Capitalization Rules: provide guidelines with respect to capitalizing or expensing certain costs. 1. Types of property a. Produced for use b. Produced for sale c. Acquired for resale: retailer s inventory. This doesn t apply to (inventory) property acquired for resale if the taxpayer s average gross receipts for the preceding 3 tax years do not exceed $10M annually. ( gross receipt $10M, URC apply)

2. Costs required to be capitalized: DM, DL, and certain indirect costs includes: utilities, warehousing costs, repairs, maintenance, indirect labor, .etc basically factory OH. 3. Cost not required to capitalized: SG&A and R&D viii. IRA Income 1. GR (taxable when withdrawn): can t start until 59.5 years old. Required to withdraw by the age of 70.5 2. Taxation of distribution( benefits) a. Regular Tax i. Ordinary Income (Traditional Deductible IRA distributions): taxed as ordinary income ii. Distribution/ Benefits from Non-Deductible IRAs 1. Roth IRA: non taxable 2. Traditional Non-Deductible IRA

Chapter 3: Corporation
Formation:
1. Corporate Tax Consequences a. GR: no gain or loss recognized b. Basis of property: it is the greater of i. Adjusted NBV (plus gain recognized by the shareholder) or ii. Debt assumed by corporation c. In case if the FMV > NBV, the basis will be FMV 2. Shareholder Tax Consequences a. No gain or loss recognized if two condition exists: i. 80% control ii. Boot not involved (received): Cash, Cancellation of Debt (NBV Liabilities = Excess liability = Boot (gain)) b. Basis of common stock ( to shareholder) i. Cash amount contributed ii. Property adjusted basis (NBV) 1. It is reduced by any debt 2. Add: taxable boot, debt > basis to bring stock basis to zero iii. Service FMV (Taxable)

Operation:
3. Charitable Contribution a. 10% of Adjusted Taxable Income Limitation b. Before the deduction of i. Charitable contribution deduction ii. The DRD iii. NOL Carry back iv. Capital loss carry back v. UP production activities deduction 4. Business losses or casualty losses related to business a. Ordinary loss or capital loss

5.

6. 7.

8. 9.

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i. Partially destroyed: lesser of 1. Decline in value of the property or 2. Adjusted basis of property immediately before the casualty ii. Fully Destroyed (NBV): loss amount is adjusted basis of property 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 months Purchased Goodwill: amortized on SL over 15 years Capital Gain or Losses a. Capital losses deduction not allowed: no $3K deduction like individual. It only used to offset capital gain b. Carryover: 3back/5foward c. Taxed as ordinary income NOL: 2back/20forward General Business Credit a. Formula: net income tax less the greater of i. 25% of regular tax liability above $25K or ii. Tentative Minimum Tax for the year. Dividend Received Deduction: formula a. Gross Income (includes Dividend income) b. <Deductions>: not included for charity deduction and DRD) c. A d. <Charity>: max is 10% of A, not gifts, not political, 5 year carry forward e. B f. 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 bigger half instead) g. Taxable income of Loss h. Entity which DRD doesn t apply i. PSC ii. PHC iii. S Corp Depreciation a. MACRS: Real Estate i. 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: ½ month is taken in the month the property is placed in service. ½ month is taken for the month in which the property is disposed of. b. Expense Deduction of Section 179 i. May deduct fixed amount of depreciation ii. 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 during the year exceeds $800K iv. Deduction not allowed if it creates a loss v. SUVs: expense up to $25K.

12. Summary of Section 1231, 1245, and 1250 Assets a. 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 Gain ii. 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 of a. Gain recognized or b. 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 at 25% iv. Excess Gain is Section 1231 Gain: any gain in excess of original cost less SL Depre would be allowed section 1231 long term capital gain

Taxation
1. Filing Requirements a. Extension Form 7004 for 6 month b. Accrual Basis vs. Cash Basis i. Cash Basis: individuals, qualified PSC, and taxpayers who average annual gross receipts DO NOT EXCEED $1M ii. Accrual Basis: purchases and sales of inventory, tax shelters, farming corporations, C corporations, partnerships have C Corp. provided has greater than $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 if amount owed on return is $500 or more. a. Small Corporations: lesser of i. 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 three ways: i. 100% on current statement ii. May not use preceding year s return. c. Corporate AMT: subject to minimum 20% on AMTI exemption amount ($40K). Same objective like individual. i. Regular Taxable Income: before NOL deduction ii. Adjustments (add back or minus) 1. Long Term contracts 2. Installment sale dealer 3. Excess depreciation (post 1986) iii. Preferences (add back) 1. Percentage depletion

2. Private activity issued post 86 tax exempt interest income 3. Pre 87 ACRS excess depr iv. Adjusted Current Earnings (ACE) (addback) 1. Muni interest income: tax exempt interest income 2. Increase CSV life insurance 3. Non S/L Depreciation: after 1989; excess over alt depre sys life 4. DRD: under 20% ownership v. <AMT NOL Deduction> vi. AMTI vii. <AMT Exemption>: $40K 25% of MTI over $150K viii. AMT ix. X 20% x. Gross AMT xi. <Foreign Tax Credit> xii. Tentative MT xiii. <Regular Tax Liability> xiv. Alternative MT d. Accumulated Earnings Tax i. imposed on regular C crop for retained earning that excess of $250K ii. PSC is only $150K limit iii. Not on PHCs, tax-exempt corp, or passive foreign investment corp iv. Tax rate is 15% v. It is an IRS-assessed as a result in case of corporation audit e. Personal Holding Company Tax i. 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 or indirectly) and having 60% adjust ordinary gross income consisting of: 1. Net rent 2. Interest that is taxable 3. Royalties 4. Dividends from an unrelated domestic corp. iii. Additional Tax Assessed: 15% on PHC for net income not distributed iv. Not subject to Accumulated earnings tax v. 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 SEPRATELY a. 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 Amount a. Property dividend: i. Distributed appreciated property

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 holders a. Proportional taxable dividend income (to shareholder-ordinary income) b. Disproportional (substantially disproportionate) sale by shareholder subject to taxable capital gain/loss to shareholder

Liquidation
1. 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 shareholder a. 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 the adjusted basis of stock: FMV Stock Basis = Taxable Gain/Loss (2nd tax) 4. Tax- Free Reorganization a. 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 $3K b. 50% exclusion of Gain: holds qualified small business stock for more than 5 year, may exclude 50% of gain

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