Taxation of Borrowing and Property Transactions: Recourse vs. Nonrecourse Debt, Exams of Tax Legislation and Financial Law

Download Taxation of Borrowing and Property Transactions: Recourse vs. Nonrecourse Debt and more Exams Tax Legislation and Financial Law in PDF only on Docsity! Fed Tax (Second Half) (135 Questions and Answers). What is recourse debt? - Correct answer Borrower is personally liable for full amount, regardless of collateral If borrower defaults on recourse debt, what can the bank do? - Correct answer Foreclose on collateral and sue borrower for any additional amount Does borrowing against appreciated property affect basis with recourse debt? - Correct answer No How is gain calculated on sale with recourse debt? - Correct answer Based on adjusted basis What is nonrecourse debt? - Correct answer Borrower liability limited to collateral If property declines in value with recourse debt and is transferred to lender, what happens? - Correct answer Gain on deemed sale or discharge of indebtedness income If property declines in value with nonrecourse debt and is transferred to lender, what happens? - Correct answer All income categorized as gain on sale Are tax implications similar between recourse and nonrecourse debt? - Correct answer Yes, no effect on basis when borrowing, gain calculated based on basis when sold How are settlement amounts allocated? - Correct answer Between compensatory and punitive damages What damages are excludible from income? - Correct answer Personal physical injuries/sickness When is emotional distress excludible? - Correct answer If arising from a physical injury Are breach of contract damages excludible? - Correct answer If related to a physical injury What is the tax treatment for the Defendant if damages are paid via appreciated property? - Correct answer Gain on property transfer What is the tax treatment for the Plaintiff if damages are paid via appreciated property? - Correct answer Takes FMV basis Are settlement services for physical injuries taxable? - Correct answer No Does seller get basis adjustment for sale of goodwill? - Correct answer No Can buyer still amortize goodwill despite seller's prior deductions? - Correct answer Yes How are damages for lost goodwill treated? - Correct answer Taxed as sale proceeds based on goodwill basis How are lost profits damages treated? - Correct answer Ordinary taxable income How do purchase price reductions impact buyer? - Correct answer Decrease purchase basis and future depreciation deductions Examples of purchase price reductions? - Correct answer Discounts, rebates, vouchers What is allowed as a trade or business deduction? - Correct answer Ordinary and necessary expenses What is the case law standard for trade or business deduction? - Correct answer Continuity and regularity to earn income or profit as the primary purpose How is trade or business determined? - Correct answer If activity is normal, usual, and customary for that business type What issue may the IRS raise for C corps' shareholder salaries? - Correct answer Shareholder salaries are unreasonably high What corporations still face the reasonable compensation issue? - Correct answer Mostly regular C corps What causes double taxation for C corps? - Correct answer Taxed at corporate level and shareholder level on dividends How do S corps and LLCs avoid double taxation? - Correct answer Pass through taxation How is S corp income taxed? - Correct answer Income passed through to shareholders and taxed at individual rates How are single member LLCs treated for tax purposes? - Correct answer Entity ignored for tax purposes How is LLC net income allocated? - Correct answer Allocated by ownership percentage How do LLC owners pay taxes? - Correct answer Owners pay tax on allocated share What do above the line deductions do? - Correct answer Directly reduce AGI When are below the line deductions applied? - Correct answer After AGI What are typical above the line deductions? - Correct answer Common business deductions What are the requirements for deducting business bad debts? - Correct answer Bona fide debt, trade or business of lending money, debt partially or totally worthless What facts and circumstances are considered regarding debt worthlessness? - Correct answer Debtor's financial situation, changes in business climate, collection efforts How is a business bad debt treated for taxes? - Correct answer Fully deductible when debt becomes worthless How is a nonbusiness bad debt treated for taxes? - Correct answer Short term capital loss when totally worthless, only deductible against capital gains What are investment expense deductions? - Correct answer Expenses to produce or collect taxable income, manage investments, determine any tax Does managing one's own investments qualify as a trade or business? - Correct answer No What are the hobby loss rules for activities not engaged in for profit? - Correct answer Losses deductible only up to income amount What is the qualified business income deduction? - Correct answer Additional 20% deduction Are personal, living, and family expenses deductible? - Correct answer No Is personal interest expense deductible? - Correct answer No How much of trade or business interest expense is deductible? - Correct answer Up to net investment income amount What are capital expenditures? - Correct answer Investments in long-term business assets that add value or prolong usefulness How are capital expenditures treated? - Correct answer Must be capitalized and depreciated over time What are deductible expenses? - Correct answer Ordinary and necessary costs to maintain existing business assets How are deductible expenses treated? - Correct answer Fully deductible in year paid How to distinguish repairs vs improvements? - Correct answer Repairs are deductible expenses, improvements are capital expenditures What selling costs are capital expenditures? - Correct answer Marketing, commissions, legal fees, title transfers When can selling costs be deductible? - Correct answer If seller regularly deals in that property Are personal asset repair costs deductible? - Correct answer No Do capital improvements to personal assets reduce tax? - Correct answer Yes, increase asset basis to reduce gain when sold How do stock/bond purchase commissions affect basis? - Correct answer Increase asset basis How do stock/bond sale commissions affect taxes? - Correct answer Reduce amount realized When are personal property losses deductible? - Correct answer As Casualty losses related to trade, business, or profit seeking activity What limits the amount of a deductible loss? - Correct answer Can't exceed adjusted basis When are preferential capital gains tax rates available? - Correct answer Long-term capital gains and qualified dividends How are capital gains and losses netted? - Correct answer Short term losses offset short term gains, long term losses offset long term gains What do property sales lead to? - Correct answer Capital gain or loss What do inventory sales lead to? - Correct answer Ordinary gain or loss How is a capital asset defined? - Correct answer Very broadly as property What is excluded from the definition of capital assets? - Correct answer Inventory held for sale What is a fiscal tax year? - Correct answer 12-month period ending on any month besides December What is a short tax year? - Correct answer Less than 12-month period when entity first creates or changes accounting period What are losses are deductible with passive activities? - Correct answer Only against passive income or gains What is passive activity? - Correct answer Trade or business without material participation What are exceptions to passive activity rules? - Correct answer Over 500 hours participating or rental real estate with high participation How to unlock suspended passive losses? - Correct answer Dispose of passive activity to use suspended losses What are at risk limitations? - Correct answer Deductible losses limited to capital taxpayer has personally at risk What entities do at risk limitations apply to? - Correct answer S corps/partnerships with liability limitations What are excess business loss limitations? - Correct answer Disallows using net business losses to offset other income How is excess business loss calculated? - Correct answer Gross income minus allowed business deductions or losses How is deductible loss amount calculated? - Correct answer Deductible Loss is less than or equal to Adjusted Basis How do you calculate amount realized? - Correct answer Sales proceeds received plus debt relieved How is gain or loss realized calculated? - Correct answer Amount realized minus adjusted basis How is adjusted gross income calculate? - Correct answer Gross income minus above the line deductions How is Federal Tax Liability calculated? - Correct answer AGI minus below the line deductions, then apply relevant tax rate What are above the line tax deductions? - Correct answer Deductions that relate to business income What are below the line tax deductions? - Correct answer Deductions that relate to personal items