Tax

Computation of depreciation to provide greater deductions in earlier years of equipment and other business or investment property. A qualified retirement plan to which contributions from salary are made from pre- tax dollars.

Rules applied in determining when and how to report income and expenses on tax returns.

Method of accounting that reports income when it is earned, disregarding when it may be received, and expense when incurred, disregarding when it is actually paid.

Mortgage taken to buy, hold, or substantially improve main or second home that serves as security.

Rental real estate activity involving property management at a level that permits deduction of losses.

Basis in property increased by some expenses (for example, by capital improvements) or decreased by some tax benefit (for example, by depreciation).

Gross income minus above-the-line deductions (such as deductions other than itemized deductions, the standard deduction, and personal and dependency exemptions).

Payments for the support or maintenance of one’s spouse pursuant to a judicial decree or written agreement related to divorce or separation.

System comparing the tax results with and without the benefit of tax preference items for the purpose of preventing tax avoidance.

Write-off of an intangible asset’s cost over a number of years.

An interest rate determined by reference to the average market yield on U.S. government obligations. Used in Sec. 7872 to determine the treatment of loans with below-market interest rates

Limits on tax losses to business activities in which an individual taxpayer has an economic stake.

Withholding for federal taxes on certain types of income (such as interest or dividend payments) by a payor that has not received required taxpayer identification number (TIN) information.

Uncollectible debt deductible as an ordinary loss if associated with a business and otherwise deductible as short-term capital loss.

Amount determined by a taxpayer’s investment in property for purposes of determining gain or loss on the sale of property or in computing depreciation.

Investments (such as stocks, bonds, and mutual funds) and personal property (such as home).

Profit (net of losses) on the sale or exchange of a capital asset or Sec. 1231 property, subject to favorable tax rates, and loss on such sales or exchanges (net of gains) deductible against $3,000 of ordinary income.

Addition of cost or expense to the basis of property.

Tax deductions and credits not fully used in one year are chargeable against prior or future tax years to reduce taxable income or taxes payable.

Amount subtracted from income tax liability.

Expense subtracted in computing adjusted gross income.

Deduction for the extent a natural resource is used.

Qualified retirement plan with annual contributions based on a percentage of compensation.

Proportionate deduction based on the cost of business or investment property with a useful life (or recovery period) greater than one year.

Wages, bonuses, vacation pay, and other remuneration, including self- employment income, for services rendered.

Refundable credit available to low-income individuals.

Defined contribution plan that is a stock bonus plan or a combined stock bonus and money purchase plan designed to invest primarily in qualifying employer securities.

Estimated tax – Quarterly payments of income tax liability by individuals, corporations, trusts, and estates.

A deduction against net income based on taxpayer status (such as single, head of household, married filing jointly or separately, trusts, and estates).

The price that would be agreed upon by a willing seller and willing buyer, established by markets for publicly-traded stocks, or determined by appraisal.

A 12-month taxable period ending on any date other than December 31.

Income tax paid to a foreign country and deductible or creditable, at the taxpayer’s election, against U.S. income tax.

• Rental Income:  Not reported
• Mortgage Interest:  All deducted on Sch. A if Taxpayers principal or Qualified second home.
• Property Taxes:  All deducted on Sch A
• Expenses Directly Related to Rental:  Nondeductible
• Other Rental Expenses:  Nondeductible

• Rental Income:  All reported on Schedule E
• Mortgage Interest: Portion allocated to rental activity deducted on Schedule E. Personal-use portion nondeductible.
• Property Taxes: Portion allocated to rental activity deducted on Schedule E4. Personal-use portion deductible on Schedule A. 
• Expenses Directly Related to Rental:  Deducted on Schedule E.
• Other Rental Expenses:  Portion allocated to rental activity deducted on Schedule E (subject to passive loss rules). Personal-use portion nondeductible

• Rental Income:  All reported on Schedule E.
• Mortgage Interest:  Portion allocated to rental activity deducted on Schedule E. Personal-use portion deductible on Schedule A, if taxpayer treats this as a second home under mortgage interest rules.
• Property Taxes:  Portion allocated to rental activity deducted on Schedule E4. Personal-use portion deductible on Schedule A.2
• Expenses Directly Related to Rental:  Deducted on Schedule E.
• Other Rental Expenses:  Portion allocated to rental activity deducted on Schedule E, but limited to gross rental income, less the expense items in the preceding rows. Personal-use portion nondeductible.

• 1. Customer use of property seven days or less
• 2. Use of property less than 30 days and taxpayer provides significant personal services
• 3. Taxpayer provides extraordinary services (for example, a hospital)
• 4. Rental of property is incidental to an investment
• 5. Non-exclusive use by customers for defined time period
• 6. Property used in a non-rental activity conducted by a partnership, S corporation which taxpayer owns
• an interest

• 1. Taxpayer (TP) participates in activity for more than 500 hours.
• 2. TP activity constitutes substantially all of the participation in the activity.
• 3. TP participates more than 100 hours and no other individual has greater participation
• 4. The sum of TPs significant participation activities exceeds 500 hours and TP participates more
• than 100 hours in the activity.
• 5. TP materially participates in the activity in 5 of the past 10 preceding taxable years.
• 6. TP materially participates in a personal service activity for any three preceding taxable years.
• 7. Facts and circumstances, TP participates on regular, continuous, substantial basis.

• • If classified as personal interest — not deductible
• — If second home is rented out, it must be used as a home for part of the
• year
• – More than 14 days or more than 10% of the number of days during
• the year that the home is rented at a fair rental, whichever is longer

• — Deductible interest on acquisition indebtedness after December 15,
• 2017, limited to loans up to $750,000
• — Deduction for home equity interest suspended from January 1, 2018,
• through December 31, 2025

• — Subject to the passive loss rules instead of rental real
• estate rules
• — Because they do not qualify as a vacation home,
• personal percentage of mortgage interest is not
• allowable on Schedule A

• — TCJA — Beginning January 1, 2018, Section 179 expensing allowed for depreciable assets related to
• rental properties
• — Residential QIP is not eligible for
• Section 179 nor bonus depreciation

• • Taxpayer must actively participate
• — Must own 10% or more of the activity and management responsibility for the property
• • $25,000 allowance is phased out ratably as adjusted gross income increases from $100,000 to
• $150,000
• • A real estate professional may deduct real estate losses in full against
• their income

• • Section179 allowed for rental properties
• per TCJA of 2017
• • Section 179 is allowed for QIP
• • QIP applies to improvements made to
• nonresidential real estate only

• • Principal place of business
• • Used exclusively and regularly
• • In the case of an employee
• — Must be for the convenience of the employer
• • Traditional method
• — Depreciation recapture required
• • Simplified method
• — Avoids the requirement to depreciate the house, no
• recapture implications

• • Nine factors under IRC Section 1.183
• • A string of losses is not necessarily determinative
• — Start-up losses
• — Musicians trying to make a profit
• — Weighing the nine factors
• • Presumption of profit motive
• — Exists if taxpayer has a profit in any three years during a consecutive
• five-year period

• • Election to postpone
• determination about whether the presumption applies that an activity is engaged in for profit
• • Generally used to defer a
• decision in the event of an audit

• — Interest tracing rules apply
• • Converting long-term capital gains (LTCG) and dividends into ordinary income to use more
• investment interest expense
• — Good idea or no?

• • Not available if the taxpayer is eligible to participate in a subsidized plan from the employer
• of his or her spouse
• • Limited to income from the associated business
• • Medicare insurance premiums
• qualify

• • Is limited to 20% of taxable income in excess of net capital gain
• • Qualified trade or business
• — Sole proprietorships, partnerships (at partner level), S corporations (at shareholder level), and
• certain trusts
• — Rental real estate safe harbor
• • Is effective for tax years 2018–
• 2025

• • Allows the qualified business income deduction to
• apply to rental real estate
• • Must maintain detailed contemporaneous records of activities performed
• • Must spend at least 250 hours during the year on
• qualifying activities
• • May not have used the property as a residence
• during any portion of the year
• • Triple net leases do not qualify
• • Make an irrevocable election

• • Costs incurred that would normally be deductible except they were incurred before the business
• was open for business
• — Advertising
• — Rent
• — Utilities
• — Wages
• • List separately on Form 4562
• • Up to $5,000 deducted unless expenses
• exceed $50,000
• — Reduce the $5,000 for every $1 in excess of $50,000
• • Amortize the remainder over 15 years — on a monthly basis (180 months)
• • Election to amortize or deduct is irrevocable
• — Report on page 2 of Form 4562
• • If missed in year 1, permanently capitalize

• • Section 248
• • Treat in the same way as start- up expenses
• • Sole proprietorships will not have these expenses (unless they
• form an LLC)

• • TCJA — A technical correction has been made (CARES Act) for qualified improvement property to be
• eligible for bonus depreciation or eligible for
• 15-year depreciation
• — Eligible for Section 179 expensing
• — Retroactive effect for JOBS Act periods
• — Consider taxpayer’s long-term plan regarding recapture provisions

• • Exemption from reporting in income
• — Bankruptcy
• — Insolvency
• — Qualified farm indebtedness
• — Qualified real property business indebtedness
• — Student loans discharged due to death or disability
• — Qualified principal residence indebtedness
• • In all cases, taxpayer is required to reduce tax attributes for discharge to be exempt from tax
• • File Form 982, Reduction of Tax Attributes Due to
• Discharge of Indebtedness

• • Alimony payments under a final divorce or separation instrument executed on or before December
• 31, 2018 are deductible by the payer and taxable to the recipient.
• — Temporary support agreements not considered final
• • TCJA repealed the deductibility of alimony payments for divorce or separation instruments, and
• under certain instruments executed on or before December 31, 2018 but later modified, if the
• modification expressly states the repeal of the deduction for
• alimony applies to the modification.

• • When trading in an automobile
• • TCJA — Like-kind exchanges limited to exchanges of real property
• — Exchanges of personal property may result in gain recognition
• — Report disposition of old vehicle as a sale

• • Net positive income from self-
• rentals is nonpassive.
• • Net loss from self-rental is passive.
• • Grouping the activities together
• is not allowed.

• • Must use the 20-factor test
• • Control is key
• • Number of hours worked — not important
• • High profile issue for IRS
• — Discuss with clients the facts and circumstances to determine proper classification
• • Voluntary Classification Settlement Program
• (VCSP) — a cheap fix

• • Disability insurance premiums for insurance to reimburse for business overhead when individual
• is ill are deductible.
• • Disability insurance premiums for insurance to provide income
• to the insured are not deductible.

• — May expense capital assets up to $2,500
• each
• — Must have written policy effective first of year and be consistent with books
• — May deduct materials and supplies up to
• $200 per item or invoice
• — Not required to file Form 3115

• — Those performing in the fields of health, law, financial services, consulting, brokerage
• services, athletics, or any trade or business where the principal asset of such trade or business
• is the reputation or skill of one or more of its employees (Section 1202(e)(3)(A))
• — Exception for architecture and engineering services;
• those are not considered SSTBs

• taxable income is below the
• threshold amount
• • SSTB is subject to the phase-out once taxable income is above the threshold
• • Once outside of the phase-out
• range, no deduction allowed

• • There is no limitation if taxable income is under
• phase-out limits.
• • Phase-out range begins at $326,600 for joint filers and $163,300 for single and HOH (2020).
• — MJF full phase-out limitation = $426,600 (2020)
• — Single and HOH full phase-out limitation = $213,300 (2020)
• • Phase-out is calculated on a pro rata basis.
• • Full 20% reduction of net QBI is permitted subject
• to taxable income (in excess of NCG) limitation.

• • For taxpayers in excess of the phase-out thresholds, the QBI deduction is the lesser of
• — twenty percent of QBI or
• — the greater of
• – fifty percent of the W-2 wages paid with respect to the business or
• – twenty-five percent of the W-2 wages plus 2.5% of the unadjusted basis, immediately after
• acquisition, of all
• qualified property

• • Permit more deferral than SEPs or SIMPLE IRAs
• • Instituted prior to the end of the year per 2020
• — Post 12/31/2019 — Have until due date of return (including extensions)
• • May not be discriminatory
• — Do not have to cover employees who work less than 1,000 hours per year
• • Contributions may total
• — $57,000 under age 50 (2020); $58,000 (2021)
• — $63,500 if age 50 or older (2020); $64,500 (2021)
• • Significant savings if business produces modest profit but they are not needed for the
• taxpayer’s lifestyle
• • May create significant savings especially for a “Mom and Pop” business
• • Must file Form 5500 when the plan has more than $250,000
• invested

• allowed
• — Must be business or investment property

• • Typically these are accomplished as multi-party exchanges
• • Time restraints
• — Identify replacement property within 45 days of transferring relinquished property
• — Execute by the earlier of 180 days after the transfer of the relinquished
• property or the due date of the return including extensions

• • No losses are allowed.
• • Non-like-kind property involved in the exchange may create a gain.
• • Assumption of liabilities may result in
• boot and gain recognized.

• required
• • May not be or have been within the past two years
• — A family member
• — Employee
• — Taxpayer’s attorney
• — Taxpayer’s accountant
• — Taxpayer’s banker
• — Taxpayer’s real estate agent

• two
• years, all deferred gains must be reported.
• • Related parties are those defined in Section 267(b).
• • Exceptions to this rule include the following:
• — Disposition is due to death
• — Disposition is due to compulsory or involuntary conversion
• — Purpose of the exchange or disposition was not tax avoidance

• • Continue to depreciate the old property
• • Depreciate any boot separately
• • If the properties have different depreciable lives
• — Use the longer of the two lives to depreciate any remaining basis on the original property
• — Use the proper depreciation rate for any boot based upon the property acquired
• — This commonly occurs when commercial property (39-year life)
• is exchanged for residential property (27½-year life)

• Example
• • Mel trades a residential property for a commercial building after owning it for 7½ years.
• • The remaining basis of the residential property is depreciated so that the total number of years
• it is written off is stretched to 39 years
• (for 31½ years).
• • Any boot that Mel paid is depreciated over 39 years.
• • If Mel had traded a commercial building for a residential building,
• — he must continue to depreciate the remaining basis over the 39-year period, and
• — he may depreciate any boot over 27½ years.

• • Active trade or business requirement
• — If subject to SE tax, does taxpayer qualify for self-employed health insurance deduction?
• — If self-employed, does taxpayer want to make pension contributions?
• • Isolated activity is not a trade or business
• — Royalties income can be considered trade or business income or passive income — depends upon
• facts and circumstances.
• – If passive income, then royalties are not subject to SE tax.
• – If trade or business, report on Schedule C.

• • Individual will receive a 1099-NEC
• — How would you handle it?

• • Charitable contributions may only be
• distributed from an IRA
• — Owner is age 70½ or older
• • Avoids increase in AGI
• • Counts as minimum required distribution
• • Taxpayer gets benefit even if he or she cannot itemize
• • Maximum is $100,000 per taxpayer

Transfer of money or property without expectation of anything in return, and excludable from income by the recipient. A gift may still be affected by the unified estate and gift transfer tax applicable to the gift’s maker.

A business asset, intangible in nature, adding a value beyond the business’s tangible assets.

Income from any and all sources, after any exclusions and before any deductions are taken into consideration.

A depreciation rule assuming property other than real estate is placed in service in the middle of the tax year.

An unmarried individual who provides and maintains a household for a qualifying dependent and therefore is subject to distinct tax rates.

A trust operated exclusively for purposes of paying qualified medical expenses of the account beneficiary and thus providing for deductible contributions, tax-deferred earnings, and exclusion of tax on any monies withdrawn for medical purposes.

The period of time a taxpayer holds onto property, therefore affecting tax treatment on its disposition.

– Income deemed attributable to deferred-payment transfers, such as below- market loans, for which no interest or unrealistically low interest is charged.

An option to purchase stock in connection with an individual’s employment, which defers tax liability until all of the stock acquired by means of the option is sold or exchanged.

– Income earned by a person, but not paid until after his or her death.

Adjustments in deductions, credits, exemptions and exclusions, plan contributions, AGI limits, and so on, to reflect annual inflation figures.

– Tax-exempt trust created or organized in the U.S. for the exclusive benefit of an individual or the individual’s beneficiaries.

Statements of income and other items recognizable for tax purposes provided to the IRS and the taxpayer. Form W-2 and forms in the 1099 series, as well as Schedules K-1, are the prominent examples.

Tax accounting method for reporting gain on a sale over the period of tax years during which payments are made, such as, over the payment period specified in an installment sale agreement.

Items such as patents, copyrights, and goodwill.

Goods held for sale to customers, including materials used in the production of those goods.

A forced disposition (for example, casualty, theft, condemnation) for which deferral of gain may be available.

Application of parents’ maximum tax rate to unearned income of their child under age 19. Full-time students under 24 are also subject to the kiddie tax.

A charge upon property after a tax assessment has been made and until tax liability is satisfied.

Tax-free exchange of business or investment property for property that is similar or related in service or use.

Items subject to special restrictions on depreciation (for example, cars, computers, cell phones).

The highest tax bracket applicable to an individual’s income.

The measurement of an individual’s involvement in business operations for purposes of the passive activity loss rules.

Assumption, for purposes of computing depreciation, that all real property is placed in service in the middle of the month.

Assumption, for purposes of computing depreciation, that all property other than real property is placed in service in the middle of the quarter, when the basis of property placed in service in the final quarter exceeds a statutory percentage of the basis of all property placed in service during the year.

An individual who is neither a citizen nor a resident of the United States. Nonresidents are taxed on U.S. source income.

The excess of face value over issue price set by a purchase agreement.

Losses allowable only to the extent of income derived each year (such as by means of carryover) from rental property or business activities in which the taxpayer does not materially participate.

– Partnerships, LLCs, LLPs, S corporations, and trusts and estates whose income or loss is reported by the partner, member, shareholder, or beneficiary.

A corporation, usually closely-held, that exists to hold investments such as stocks, bonds, or personal service contracts and to time distributions of income in a manner that limits the owner(s) tax liability.

– A trust that qualifies specific requirements for eligibility as an S corporation shareholder.

A form of investment in which a trust holds real estate or mortgages and distributes income, in whole or in part, to the beneficiaries (such as investors).

Treated as a partnership, investors purchase interests in this entity which holds a fixed pool of mortgages

The difference between property’s basis and the amount received upon its sale or exchange.

The amount of a prior deduction or credit recognized as income or affecting its characterization (capital gain vs. ordinary income) when the property giving rise to the deduction or credit is disposed of.

The amount of realized gain or loss that must be included in taxable income.

A corporation serving as a mutual fund that acts as investment agents for shareholders and customarily dealing in government and corporate securities.

An individual who is a permanent resident, has substantial presence, or, under specific election rules is taxed as a U.S. citizen.

A corporation that, upon satisfying requirements concerning its ownership, may elect to act as a pass-through entity.

Term commonly used to describe Sec. 25B credit for qualified contributions to a retirement plan or via elective deferrals.

Depreciable business property eligible for capital gains treatment.

Closely held stock whose sale may produce an ordinary, rather than capital, loss (subject to caps).

An insurance agent or other specified worker who is subject to social security taxes on wages but eligible to claim deductions available to the self-employed.

Tax benefits deemed includable for purposes of the alternative minimum tax.

Income tax liability before taking into account certain credits, and AMT liability over the regular tax liability.

The cost of transportation from one point to another

– Transportation, meals, and lodging costs incurred away from home and for trade or business purposes.

– Income from investments (such as interest, dividends, and capital gains).

Rules requiring capitalization of property used in a business or income-producing activity (such as items used in producing inventory) and to certain property acquired for resale.

Exempt organization income produced by activities beyond the organization’s exempt purposes and therefore taxable.

Sale of securities preceded or followed within 30 days by a purchase of substantially identical securities. Recognition of any loss on the sale is disallowed.

Deductible losses from a venture are limited to the amount that a taxpayer is actually risking from an economic standpoint. The taxpayer has an amount at risk to the extent of cash or other personal assets that are subjected to the risks of the business venture.

At-risk rules apply to most trade or business activities, including activities conducted through a partnership or activities for the production of income. The at-risk rules limit the amount of loss a partner can deduct from amounts for which that partner is considered at risk in the activity.

A closely held corporation is a corporation having a relatively small number of shareholders. The owners are usually active in the operation of the business. Stockholders are often directors. Its bylaws restrict stock transfers so that control by the small ownership group is maintained. For tax purposes, a closely held corporation is defined as one in which five or fewer individuals owned more than 50% of the value of all outstanding stock at any time during the last half of the year.

A fiduciary is one who holds a position of trust with respect to another party or its property. It is the fiduciary's duty to act selflessly for the benefit of another with undivided loyalty, obedience, and diligence—with due care and in good faith. This is the primary duty of an agent to the principal, of a trustee to the trust, and of an executor or executrix to the estate.

A general partner has the right to share in the management and profits of the partnership and has unlimited liability to partnership creditors.

An interest in property is a right to the use and enjoyment of the property or to income from the property. An interest in property may be full or partial, present or future, and indefinite or terminable.

For taxable years after 1986, income and losses were divided into three categories: passive, active, and portfolio.

If a taxpayer materially participates in a trade or business on a regular, continuous, and substantial basis, the income or loss resulting is active.

If the taxpayer does not materially participate in an activity, the income or loss resulting is passive.

The passive loss rules limit the amount of losses from passive activities that can reduce income from nonpassive sources. Generally, losses from passive activities in excess of passive income may not reduce nonpassive income (active income and portfolio income). Passive losses that cannot offset other types of income are suspended losses and must be carried forward to offset future passive income.

A passive activity involves the conduct of a trade or business in which the taxpayer does not materially participate. Material participation means regular, continuous, and substantial participation. This has been interpreted to be 500 hours per year. IRC Sec. 469(c)(1) and (h)(1)

A personal service corporation (PSC) is a corporation that has as its principal business the performance of personal services that are substantially performed by employee-owners.

IRC §469(j)(2)  

Personal services mean services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, and consulting.

Portfolio income is income from interest, dividends, annuities, and royalties not derived in the ordinary course of business.

Portfolio income also includes gains and losses from the sale of property that:


produces interest, dividend, annuity, or royalty income; and


is held for investment and not used in a passive activity.

For tax years beginning in 1988, a publicly traded partnership (PTP) is a partnership whose interests are traded on the stock exchange or secondary market and at least 90% of whose gross income is passive-type income.

IRC sec 7704(b) and (c)

A trust is a fiduciary relationship in which one person holds legal title to property subject to an equitable obligation to safeguard or use the property for the benefit of another. A trust represents a separation of legal and equitable title and may be of two types—inter vivos or testamentary. A trust may have different characteristics, such as accumulation, charitable, Clifford, complex, constructive, irrevocable, living, private, or revocable.

The act or process of assigning a value to something. Generally synonymous with “appraisal.”

• Passive Activity Loss Limitation Schedule that is used
• by real estate investors and other taxpayers who make over $100,000 per
• year in adjusted gross income. Form 8582 prevents taxpayers from
• claiming losses due to rental properties and other such investments when
• the income level has been exceeded.