EA Exam Prep – Part 2A
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1
EA Exam Prep – Part 2A
John O. Everett, Phd., CPA
Cherie J.Hennig, Phd., CPA
Learning Objectives
After attending this seminar, you should be able to:
• Recognize special tax business income inclusion rules
• Learn the basic MACRS classifications, computations, and
special rules regarding Sec. 179 and bonus depreciation
• Understand the gain/loss and tax basis consequences of
selling business properties
• Cite the rules for determining the tax gain or loss and
basis of replacement properties in qualifying like-kind
exchanges
• Identify special tax issues related to business
employment taxes and other special computations
• Recognize key tax issues associated with the formation,
operation, and liquidation of a partnership
3
Topic 1
Business Income:
Special Income
Inclusion Rules
4
1A Farmers – Inventory
• Livestock Raised for Resale – On Sch. F, deduct
cost of livestock, but no expenses (already
deducted on the cash basis)
• Accrual Basis - Capitalize feed & breeding fees
• Crop Method – Defer costs until year income is
realized (CCC Loan may report in year received)
• Ag Assistance Payments – Sch. F (& SE)
• Inventories – By either (1) cost, (2) LCM, (3) farmprice (mkt. – disposition costs), or (4) unit livestock (standard unit price by type and age)
• Question 1
5
Question 1
Betsy is a dairy cow raised on Ronald’s Dairy Farm. On
December 26, Ronald sold Betsy for $3,800. He incurred
$300 in transportation expenses that were included in the
sales price. Ronald estimates that Betsy cost $2,000 for food
and other expenses to raise her. He deducted these
expenses. What is Ronald’s gain from the sale of Betsy?
a. $1,500
b. $1,800
c. $3,500
d. $3,800
6
1B Farm Disaster and WeatherRelated Payments
• Crop Insurance and Disaster Pay – Income when
received, but may elect to postpone to later year if
income normally reported then
• Weather-related sales - Report forced excess
livestock/poultry sales due to drought/flood/ other
weather sales in later year when normally sold
(must be cash-basis, location eligible for federal
government assistance, detailed return
attachment)
• Questions 2 and 3
7
Question 2
In August 2013, Mr. Greenjeans, a cash-basis calendar-year
farmer, had his crop destroyed by a drought. On September 1,
2013 he received $30,000 from the federal government under the
Disaster Assistance Act of 2013. Mr. Greenjeans would have
normally received income from this crop on or about October 1,
2014. How should Mr. Greenjeans treat the $30,000 for federal
income tax purposes?
a. the $30,000 is nontaxable income
b. the $30,000 may be included in income in 2014 if the
election to do so was made in 2013
c. the $30,000 must be included in income in 2013
d. include $10,000 in income in 2013 and $20,000 in 2014
8
Question 3
Farmer Gray is a calendar-year cash-basis taxpayer. She
normally sells 200 head of livestock a year. Because of floods,
she sold 250 head of livestock during 2014. Farmer Gray
realized $50,000 from the sale. The Department of
Agriculture declared the flooded area a disaster area eligible
for federal assistance. What is the amount of income that
Farmer Gray can elect to postpone until 2015?
a. $12,500
b. $50,000
c. $10,000
d. $0, since only sales as a result of drought qualify
9
1C Cash Basis Income
• Cash Basis – Income when received, expenses
when paid (subject to cash equivalent, constructive
receipt, and claim of right rules)
• Normal Accounts Receivable – If unsecured, defer
income until actually collected
• Deposits – No income if obligation to repay (e.g.,
damage deposits)
10
1D Accrual Basis Income
• Accrual Method – Income when earned, not when
received (but subject to claim of right, constructive
receipt, etc.)
• Condition Precedent – Usually delays reporting of income
(such as lawsuit)
• Condition Subsequent – Does not delay recognition (such
as money-back offer)
11
1E Advance Payment Rules
• Advance Payments – Taxed immediately
• Exceptions to General Rule – If accrual method:
– Prepaid Membership Dues (Sec. 456)
– Prepaid Subscription Income (Sec. 455)
– Prepaid Services (Rev. Proc. 2004-34 – defer into next
year maximum if also used for financial accounting)
– Advances for Goods (Reg. Sec. 1.451-1 – defer income
until delivery, with 2-year maximum rule)
• Question 4
12
Question 4
Ms. Dee owns and operates a dance studio. On December 1,
2013 she received an advance payment of $2,400 from Angie to
give her 12 dance lessons. The agreement stated that one
lesson would be given in 2013 and 11 lessons in 2014. However,
due to Angie’s health, one lesson scheduled for June 2014 was
not given until January 2015. Ms. Dee uses the calendar year
and the accrual method of accounting for both tax and financial
accounting purposes. Assuming Ms. Dee elects to defer the
advance payments, when must she include the payment
received from Angie in income?
a. $2,400 in 2013
b. $200 in 2013 and $2,200 in 2014
c. $200 in 2013, $2,000 in 2014 and $200 in 2015
d. $2,400 in 2015
13
1F Miscellaneous Inclusion –
Debt Forgiveness
• Debt Cancellation – If personal, may be gift
• Business Debt – Generally income (except if cash
basis and not deducted) unless (1) insolvent, (2)
bankrupt, (3) farming (>50% farm receipt for 3
yrs), or (4) qualified business realty held by a noncorporate taxpayer
• Price for exclusion – Surrender favorable tax
attributes (credits, losses) and/or basis reduction
• Corp debt Forgiven – Dividend to S/H
• S/H Debt Forgiven – Add’l capital cont. by S/H
14
Topic 2
MACRS Cost
Recovery
Deductions
15
2A MACRS in General
• Cost Recovery – Only for (1) limited life (2)
business or production of income, and only when
“ready to use” (i.e., placed in service)
• Converted Personal Property – Initial basis is lesser
of cost basis or FMV at conversion
• Failure to Deduct Depreciation – Still reduces basis
(use straight-line if none deducted in past);
amended return allowed (also possible to recoup
with automatic change of accounting method)
• MACRS – Based on method, recovery period, &
placed-in-service year convention
16
2B Class Life and Acquisition
Year Assumptions
• Depreciable cost – includes installation
• Depr. Methods – MACRS, MACRS SL, ADS, AMT
• Recovery Table – 200% DB, 150% DB , SL
• Acquisition Year Assumption – Either:
– Mid-Year (Half-Year) – Most personalty
– Mid-Quarter – If >40% personalty in last quarter
– Mid-Month – All realty
• Question 5
17
Question 5
During 2014, Nancy, a calendar-year taxpayer, acquired and placed
in service the following business assets:
– January: Delivery trucks
$ 50,000
– March: Warehouse building
150,000
– June: Computer system
30,000
– September: Automobile
30,000
– November: Office equipment
90,000
Which convention(s) can Nancy use to figure 2014 depreciation?
a. mid-quarter for all except warehouse uses mid-month
b. half-year for all of the assets
c. mid-quarter for all of the assets
d. half-year for all assets except warehouse uses mid-month
18
2C Basic MACRS Computations
• Regular MACRS – Apply table factor to cost; table
factor based on MACRS class & convention
• Table Factors - 1st year, half-year convention, the
MACRS personalty factor is (1/MACRS life x 2.00 x
.50); for mid-qtr, Yr. 1, Qtr. 1 the factor is
(1/MACRS life x 2.00 x 10.5/12)
• Like-kind Exchange Property – Depreciate old basis
over remaining life of old asset, but any “boot
given” is separate “new” depreciable asset
• Figure 1
19
Figure 1 (MACRS Classes)
• Personalty:
– 3 Year – Class life < 4, horses older than 2 yr
– 5 Year – Class life >3<10, autos, light-weight trucks,
computers, printers, personalty in rent
– 7 Year – Class life >9>16, single-purpose agricultural
equipment, asset with no class life given in RP 86-57
– 10-Year – Class life >15<20, theme park structures
– 15-Year – Class life >19<25, land improvements
– 20-Year – Sewer pipes, irrigation systems
• Realty:
– 27.5-Year – Residential realty (at least 80% rents from dwelling)
– 31.5-Year – Nonresidential placed in service before 5/13/93
– 39-Year – Nonresidential placed in service after 5/12/93
20
2D Bonus Depreciation
• Bonus Amount – Available for year that an item of
personalty is placed in service
• Computation – Bonus is 50% of cost of asset,
taken as a deduction in year the personalty is
placed in service (mandatory, unless “opt out”)
• Regular MACRS – Taken on other 50%
• Coordination With Sec. 179 – If Sec. 179 also
elected, take Sec. 179 first, followed by bonus,
then regular MACRS
21
2E Sec. 179 Deduction
• Election – Expense up to $500,000 of total
business personalty placed in service during year
(business percentage use only)
• Phaseout - $1 for $1 put in service > $2,000,000
• Taxable Income Limit - Unused adds to next year
• Listed Property Recapture – Includes any 179
• Like-kind Exch. – Boot given qualifies for 179
• Figure 2
• Question 6
22
Figure 2
• Example: Taxpayer places $2,260,000 of personalty (no
class life given) in service in 2014 and elects Sec. 179:
Sec. 179 deduction
Bonus depreciation
Regular MACRS (7 yr.)
Total deduction
$ 240,000 (a)
1,010,000 (b)
144,329 (c)
$1,394,329
(a) $500,000 – ($2,260,000 - $2,000,000)
(b) ($2,260,000 - $240,000) x .50
(c) ($2,260,000 - $240,000 - $1,010,000) x .14290
23
Question 6
In 2014, Mary Jane placed in service a machine that
cost $2,350,000. If she placed no other Section 179
property in service during the year, how much is her
maximum Sec. 179 deduction?
a. $-0b. $150,000
c. $350,000
d. $500,000
24
2F S/L MACRS & ADS Elections
• S/L MACRS – S/L over MACRS life (consistency
requirement for the year)
• Alternative Depreciation System (ADS) – Also elected
irrevocably – S/L over class life, except computers &
autos (5 yrs), no class life (12 yrs), & realty (40 yrs)
• Sec. 179 & Conventions – Still apply
• Question 7
25
Question 7
All of the following statements about ADS (alternative
depreciation systems) are correct except:
a. the election must be made by the due date, including
extensions, for the tax return of the year in which the
property was placed in service
b. the election to use ADS can be revoked
c. excluding nonresidential real and residential rental
property, the election of ADS for a recovery class of
property applies to all property in that recovery class that is
placed in service during the tax year of the election
d. ADS is figured using the straight-line method
26
2G Listed Property Rules
• “Listed” Property Rules – Applicable to autos, computers,
video, cell phones, and other entertainment equipment
• Limitation – Use ADS S/L if business use alone does not
exceed 50% of total usage
• Recapture – Applies in a later year if business use drops
to 50% or below; additional income is (prior deduction –
correct ADS)
27
2H Luxury Auto Limitations
• Luxury Auto Limitations – Applicable to vehicles
(passenger) < 6,000 lbs., cost < $15,800
• Maximum Depreciation (2014) - set at $3,160
[$11,160 with bonus] (Yr. 1), $5,100 (Yr. 2),
$3,050 (Yr. 3), and $1,875 each succeeding year
(not for vehicle for hire); higher limits for luxury
trucks/vans/SUVs [$3,460 and $11,460]
• Less Than 100% Business Use – Limit decrease
same %; 80% bus. use would be $11,160 x .80
• Question 8
28
Question 8
On January 1, 2014, Sally Jefferson purchased an
auto for $18,000. Her business use was 60% during
2014. She is electing $1,000 a Section 179 deduction
on the auto. What is her total deduction for calendar
tax year 2014?
a. $18,000
b. $11,160
c. $6,696
d. $3,160
29
2J Cost Recovery for AMT
• AMT Cost Required Cost Recovery:
– Personalty - 150% DB over MACRS life (class life if placed
in service prior to 1999)
– Realty - Straight-line recovery over MACRS life (40 years
if placed in service prior to 1999)
• Difference – Between MACRS and AMT deductions
is a + or - adjustment for AMT
• AMT Recovery – May be used for regular tax as
well to eliminate AMT adjustment
30
Topic 3
Business Bad
Debt
Deductions
31
3A Business vs. Non-business
Bad Debt Determinations
• Bad Debt – Must be bona fide and possess
characteristics of outside loan- family gift?
• Cash-Basis Lender – No deduction for bad debts
(no basis, since no income reported), but any outof-pocket expenses are deductible
• Business Bad Debts – Must have business
relationship; investor status does not qualify
(unless taxpayer is also an employee who made
loan to protect livelihood)
32
3B Reporting Bad Debts
• Business Bad Debt – Must use direct write-off method
(evidence debt is bad); an ordinary deduction, and any
evidence of partial worthlessness justifies deduction
• Nonbusiness Bad Debt – Deductible only when final
determination is made, and is deducted as a short-term
capital loss
• Question 9
33
Question 9
With regard to the correct treatment of business bad debts, all
of the following statements are correct except:
a. Tom deducted a bad debt in a prior tax year and later
recovered part of it. He may have to include the amount
recovered in gross income in the year of recovery.
b. Bill can deduct his business bad debt as a short-term
capital loss.
c. Sally received property in a partial settlement of a debt.
She should reduce the debt by the fair market value of the
property received and deduct the remaining amount as a
bad debt.
d. Jane can deduct the difference between the amount owed
by a bankrupt entity and the amount received from the
distribution of its assets as a bad debt.
34
3C Recoveries of Bad Debts
• Tax Benefit Rule – Applies to recoveries (“other
income” if tax benefit from earlier deduction)
• Installment Note – If recovered, full face value
amount of note is reported as income
• Tax Benefit – Includes any NOL carryover benefit
(used or still unexpired) generated by original
deduction
• Question 10
35
Question 10
In 2013, the Rox Company had gross income of $185,000,
a bad debt deduction of $7,000, and other allowable
deductions of $181,000. Rox carried back the 2013 NOL of
$3,000 to 2011 and it was used in full to lower Rox’s tax
for 2011. In 2014, Rox recovered $5,000 of the bad debt
deducted in 2013. What is the amount of the bad debt
recovery that Rox should include in income for 2014?
a. $-0b. $1,000
c. $4,000
d. $5,000
36
Topic 4
Tax-Deferred
Exchanges
37
4A Qualifying Like-Kind
Exchanges (Sec. 1031)
• Qualifying Property – Either (1) used in a trade or
bus. or (2) held for production of income
• Swaps – Across categories are allowed
• Personalty – Must be “like class” (general asset
classification) or “like kind” (facts/circumstance)
• Intangibles – Qualify if similar (but not goodwill)
• Non-qualifying Transactions – Personalty for realty,
inventory, personal assets, stocks & securities,
partnership interests
38
4B Deferred Like-Kind
Exchanges
• Delayed Exchanges – Possible within limits
• Requirements for a Delayed Exchange –
– 45 Days – Identify replacement property
– 180 Days – Deliver replacement property (tax return
due date, if earlier)
• Multiple Properties – May be used
• Qualified Intermediaries – May be used, as long as
constructive receipt by either party not possible
(otherwise, treated as sale)
39
4C Like-Kind Gain or Loss
Computation
• Solely Like-Kind – No gain/loss, c/o of basis
• Monetary Boot Given – No gain or loss
• Nonmonetary Boot Given – Gain or loss on boot given
only (as if boot was first sold for FMV)
• Any Boot Received – No loss, gain is lesser of (1) realized
(acct) gain or (2) boot received (exp. offset)
• Expenses of Sale – May offset boot received first
• Liabilities – If assumed by TP, boot given; if assumed by
other party, boot received (net if in both directions)
• Holding Period – Of old property tacks to new
• Question 11
40
Question 11
Charlie Croker exchanged real estate held for investment
that had an adjusted basis of $8,000 for other real estate
that he will hold for investment. The property given up was
subject to a $3,000 mortgage. The real estate he received
had a fair market value of $10,000. Charlie also received
$1,000 in cash from which he paid $500 in exchange
expenses. He realized a gain on the exchange. How much
of the gain is taxable?
a. $5,550
b. $6,000
c. $4,000
d. $3,500
41
4D Basis of Like-Kind Property
Received – Method 1
• Method 1 – Work with Basis of Old:
Adjusted Basis – Old Like-kind Property
+ Gain Recognized
+ Boot Given
- Loss Recognized (e.g., nonmonetary boot)
- Boot Received______________________
= Basis of New Like-kind Property
42
4E Basis of Like-Kind Property
Received – Method 2
• Method 2 – Work with FMV of New property:
FMV of New Property
+ Loss not Recognized (Deferred/Postponed*)
- Gain Not Recognized (Deferred/Postponed*)
= Adjusted Basis – New Like-kind Property
*Deferred Gain/Loss = Acct’g. G/L – Taxable G/L
• Figure 3
• Question 12
43
Figure 3
Example 1: C Corporation exchanged an old machine (adjusted basis $10,000, fair market value $13,000)
for a new machine worth $12,000 and $1,000 cash.
Realized gain = ($12,000 + $1,000) - $10,000 = $3,000
Recognized gain = $1,000 (gain is lesser of $3,000 accounting gain or $1,000 boot received)
Adjusted basis of new - Method 1 = $10,000 + $1,000 + 0 - 0 - $1,000 = $10,000
Adjusted basis of new - Method 2 = $12,000 + 0 - $2,000 = $10,000
Example 2: Same as 2, except that C received a new machine worth $8,000 and $5,000 cash.
Realized gain = ($8,000 + $5,000) - $10,000 = $3,000
Recognized gain = $3,000 (acct’g gain; gain is lesser of $3,000 acct’g gain or $5,000 boot received)
Adjusted basis of new - Method 1 = $10,000 + $3,000 + 0 - 0 - $5,000 = $8,000
Adjusted basis of new - Method 2 = $8,000 + 0 - 0 = $8,000
Example 3: D Corporation exchanged an old machine (adjusted basis $10,000, fair value $13,000 subject
to a $4,000 mortgage) for a new machine (fair value $12,000, subject to a $3,000 mortgage).
Realized gain = ($12,000 + $1,000) - $10,000 = $3,000
Recognized gain = $1,000 (net liabilities assumed by the other party of $1,000; treat as boot received)
Adjusted basis of new - Method 1 = $10,000 + 1,000 + 0 - 0 - $1,000 = $10,000
Adjusted basis of new - Method 2 = $12,000 + 0 - $2,000 = $10,000
Question 12
Lou and Casey are independent, unrelated taxi drivers who
decided to swap cabs. The relevant facts are as follows:
Original Owner
Lou
Casey
Original cost
$12,000
$15,000
Fair market value
3,000
5,000
Depreciation claimed
10,000
12,250
Lou gave $2,000 cash and his old cab to acquire Casey’s cab.
What are Lou and Casey’s adjusted bases in their new cabs?
a.
b.
c.
d.
Lou
$4,000
$4,000
$4,750
$4,750
Casey
$3,000
$2,750
$3,000
$2,750
45
4F Like-Kind Exchanges –
Special Rules
• Related Party Exchanges – If either party sells
property w/i 2 years, original exchange taxable
• Corporate Reorganizations – Stock for stock, or
bonds for bonds nontaxable; taxable if (1) boot
received (non-stock, non-security) or (2) bonds
received exceed bonds surrendered
• Marital Transfers – Nontaxable between spouses
• Reinvestments in Qualified Small Bus. Stock – Gain
from sale of publicly-held securities limited to
amount not reinvested in QSBICs
46
4G Involuntary Conversions –
Gain or Loss
• Sec. 1033 – Election to defer gain only (loss is
usually deductible)
• Involuntary Conversion – Casualty, theft,
destruction, condemnation (or threat thereof)
• Qualified Replacement Property – Functional use
test if owner/user, only other income-producing
property producing rents if owner/lessor
• Qualified Replacement Period – Up to 2 years after
end of year gain first recognized
47
4H Involuntary Conversions –
Sec. 1033 Gain or Loss
• If Qualified – Taxable gain limited to insurance proceeds
NOT reinvested in qualified replacement
• Condemned Business or Investment Realty –
Replacement property need only be “like-kind”, 3-year
replacement period
• Holding Period – Of old property tacks to new property
48
4I Involuntary Conversions –
Basis of Replacement Property
• Basis of Replacement – Essentially uses Method 2 for
like-kind exchanges
• Basis = FMV new – Gain not recognized
• Gain Not Recognized = Accounting Gain – Taxable Gain
• Figure 4(a) and 4(b)
49
Figure 4(a)
T Company’s warehouse ($100,000 adjusted basis) was
destroyed by a fire, and he received insurance of
$108,000. T’s recognized taxable gain (loss) assuming
various costs of replacement properties would be as
follows:
a. $113,000 - Acct’g gain = $8,000, tax gain = $0, basis
= $105,000 (113 – 8, or 100 + 5)
b. $96,000 – Acct’g gain = $8,000, tax gain = $4,000,
basis = $96,000 (100 – 4)
50
Figure 4(b)
c. $101,000 - Acct’g gain = $8,000, tax gain =
$7,000, basis = $100,000 (101 – 1)
Assume the same facts as above, except that the
insurance proceeds were $96,000, and the cost of the
replacement property was $98,000:
d. $98,000 – Acct’g loss = ($2,000), tax loss = ($2,000),
basis = $98,000 cost (no deferral)
51
Topic 5
Sec. 1231 Gains &
Losses
52
5A Sec. 1231 Properties Defined
• Definition – Gains (losses) from the sale or
exchange of property used in a business and held
on long-term basis; also includes any involuntary
conversion of business properties
• Extended Definition - Includes cutting of timber,
mining of coal and iron ore, livestock used
productively in business, crops sold with land
• Note – Sec. 1231 property is never a capital asset,
and if held one year or less, result is ordinary
income or loss
• Question 13
53
Question 13
A used car lot owner sold an adjacent lot on June 9, 2014 for
$125,000. He purchased this lot on August 6, 2007 for
$65,000, and used it in his dealership. He did not pave this
lot or make any improvements to it. He paid $4,600 in closing
costs at the sale. How much gain does he have, and what
type of gain is it?
a. $55,400 Section 1250 gain
b. $55,400 Section 1231 gain
c. $4,600 Section 1245 gain, $50,800 Section 1231 gain
d. $55,400 Schedule D gain
54
5B Netting Sec. 1231 Gains &
Losses
• “Best of Both Worlds” Netting – At the end of the
year, all Sec. 1231 property gains and losses are
netted, with the net result receiving the “best of
both tax worlds” treatment:
– Net gain – treated as a long-term capital gain
– Net loss – each treated as ordinary income or loss
• Note – If net gain for individuals, gains must be
separated into 15%, 25% and 28% categories
• Figure 5
55
Figure 5
Business &
Investment
Casualty & Theft
Gains & Losses
$ XXX
(XXX)
Net Gain
Section 1231
Gains & Losses
$ XXX
(XXX)
XXX
Capital
Gains & Losses
Short-Term:
$ XXX
(XXX)
XXX
Long-Term:
$ XXX
(XXX)
XXX
(XXX)
XXX
Net Gain
Taxable
Income*
XXX
XXX
Net Loss
Net Loss
________
Taxable
* Includes any Sec. 1245 and Sec. 1250 depreciation recapture and Sec. 1231(c) ordinary income.
56
5C Sec. 1231(c) Lookback
Recapture
• Recapture Rule – Designed to prevent taxpayers
from loading all gains in one year and all losses in
a different year (for best of both worlds in each)
• If Current-Year Result is Net Gain – Gain is
ordinary income to extent of any unrecaptured net
Sec. 1231 losses in past 5 years
• Remaining Gain – If any, is Sec. 1231 gain
• Example – Assume $32,000 Sec. 1231 loss in 2013,
$48,000 Sec. 1231 gain in 2014; in 2014, $32,000
is reported as ordinary income, and the remaining
$16,000 as Sec. 1231 gain
57
Topic 6
Depreciation
Recaptures
58
6A Sec. 1245 Property Defined
• Definition – Three characteristics:
– Depreciable personalty (tangible property other than
buildings and permanent building components)
– Held on a long-term basis
– Sold at a gain
• Included Assets – Ballplayer contracts, autos, room air
conditioners, greenhouses
• Excluded Assets – Elevators & escalators
59
6B Sec. 1245 Computations
• Tax Result – Gain on sale ordinary income to
extent of depreciation taken on property
• Gain Exceeding Depreciation – Sec. 1231 gain
• If Sold at a Loss – Sec. 1231 loss
• Sec. 179 Deduction – Treated as depreciation
• 1245 Rule – Also applies to limited realty (ACRS
realty with accelerated recovery – see next)
• Figure 6
• Question 14
60
Figure 6
Facts: Jill Wade placed in service a machine in 2012 at a cost of $100,000. Jill deducted a total of $40,000
depreciation, and she sold the machine in 2014. The tax results of selling the machine at three different
assumed sales prices are:
Case A
Case B
Case C
Amount realized
Adjusted basis ($100,000 - $40,000)
Total gain (loss)
Composition of gain:
Sec. 1245 (ordinary income)
Sec. 1231 gain
Sec. 1231 loss
$53,000
(60,000)
$ (7,000)
$85,000
(60,000)
$15,000
$106,000
(60,000)
$ 46,000
--$(7,000)
$15,000
---
$ 40,000
6,000
--
Case A: Machine is sold at a loss; Sec. 1245 recapture rules do not apply.
Case B: Gain is all ordinary income under Sec. 1245 since gain is less than the $40,000 total
depreciation taken.
Case C: Gain is ordinary income to the extent of total depreciation taken ($40,000), and the remaining gain is
Sec. 1231 gain. (Note: The machine was sold for $6,000 more than it originally cost, and since this
amount was never depreciated, that excess represents Sec. 1231 gain that will not be recaptured.)
Question 14
Mr. X acquired a machine for use in his business on
January 2012 for $30,000. Depreciation taken on the asset
was $6,000 in 2012 and $4,800 in 2013. Mr. X sold the
machine on January 26, 2014 for $32,000. What is the
amount and character of X’s gain on the disposition of the
asset, assuming this was the only business asset sold
during the year?
a. $-0- capital gain, $12,800 ordinary gain
b. $2,000 capital gain, $10,800 ordinary gain
c. $10,800 capital gain, $2,800 ordinary gain
d. $12,800 capital gain, $-0- ordinary gain
62
6C Sec. 1250 Property Defined
• Definition – Four characteristics:
– Depreciable realty
– Held on a long-term basis
– Sold at a gain
– Property on which “excess depreciation” exists
• Excess Depreciation – Total taken exceeding S/L
• MACRS Realty – Not subject to Sec. 1250, since
only SL recovery is allowed
63
6D Sec. 1250 Computations
• General Rule – 100% of “excess depreciation”
recaptured as ordinary income
• Exceptions to General Rule –
– ACRS Nonresidential – 100% of total depreciation
– MACRS Realty – None (no excess depreciation)
• 25% Rate for Individuals – Possible for
“unrecaptured Sec. 1250 gain (see slide 6F)
• Figure 7
• Question 15
64
Figure 7
Date Placed In Service
Assuming Property is
Nonresidential Realty
Assuming Property is
Residential Realty
Before 1981 (old depreciation
rules)
100% of excess
depreciation
100% of excess
depreciation
1981 - 1986 (old ACRS rules)
100% of total
depreciation *
100% of excess
depreciation
After 1987 (current MACRS
rules)
Not applicable**
(No excess depreciation)
Not applicable**
(No excess depreciation)
* Sec. 1245 recapture rule applies; however, if taxpayer elects straight-line recovery, property reverts to
Sec. 1250 and there is no recapture (no excess depreciation).
** Only straight-line recovery is allowed for MACRS.
65
Question 15
On December 31, 2014 John sold an apartment building for
$225,000. He had purchased the building and placed it in
service July 31, 1985 for $200,000. The depreciation
deducted as of December 31, 2013 was $75,000, of which
$25,000 was excess of depreciation adjustments over
depreciation using the straight-line method. In 2014, the
depreciation deducted was $7,000, of which $2,000 was
excess depreciation. What amount may John treat as a
Section 1231 gain?
a. $107,000
b. $80,000
c. $27,000
d. $25,000
66
6E Special Recapture Rules
• Installment Sale – All recapture in year of sale
• Nontaxable Exchange – Gain due to boot rec’d
ordinary if recapture would be on a sale at FMV
• Charitable Contribution – Ordinary income
property; reduce deduction by recapture
• Carryover of Recapture Potential – With gifts
(statement required), like-kind exchange, or
involuntary conversion
• Question 16
67
Question 16
Which of the following dispositions of depreciable
property would trigger recapture?
a. installment sale
b. gift
c. transfer at death
d. tax-free exchange where no money or unlike
property is received
68
6F “Quick Look”: Sec. 291 Recap
(Corp) & 25% Rate Gain (Ind)
Gain assuming 1245
Actual 1250 gain
$100,000
( 20,000)
25% Gain (IND)
$ 80,000 *
x .20
Sec 291 Gain (CORP) $ 16,000
====
* Termed “Unrecaptured Sec. 1250 Gain”
69
Topic 7
Self-employed Taxes,
Estimated Taxes,
and Special Tax
Computations
70
7A Self-Employment Earnings
Defined
• SE Earnings – Income on Sch. C, income share +
guaranteed payments for unlimited partner; Board
of Director fees, clergy, newspaper, real estate
agents, agricultural assistance payments
• SE Tax – SE inc. $400, church employee $100
• Independent Contractor – Not subject to SE tax;
controls what will be done & how it will be done
• Statutory employees – Driver, employee (Sch C)
• Question 17
71
Question 17
All of the following are subject to self-employment
tax except:
a. S corporation shareholder’s share of the
corporation’s taxable income
b. gain from a casualty or theft loss of inventory
c. rental income and related deductions
received by a real estate dealer
d. income received by a self-employed plumber
for repairing a faucet
72
7B Determining Self-Employed
Earnings
• SE Tax - SS = 12.4% of first $117,000 wages (or
SE income x .9235, if less)
• SE TAX – MC = 2.9% x SE income x .9235
• Partner Death – Allocate income to death
• Optional Method – If SE income < $4,800 and <
2/3’s non-farm gross income, report the 2/3’s nonfarm up to $4,800 as SE income
• Farmers – Similar method
• Required for Opt. - $400 SE income prior 2 yrs.
• Question 18
73
Question 18
• Sarah owns and operates a retail sporting goods business. Her store
is located on the ground floor of a two-story building that she owns.
Based on the following, compute her net self-employment income:
–
–
–
–
–
–
–
–
–
–
a.
b.
c.
d.
Gross profit from sporting goods store
Rental income from upper level (45%) of building
Building depreciation expense
Utilities for ground floor (tenant pays own utilities)
Depreciation on vehicles used in business
Gain on sale of van used 100% in business
Contributions to her Keogh retirement plan
Sarah’s health insurance premiums
Mortgage interest on building
Other expenses of running her sporting goods business
$64,700
$68,200
$70,000
$83,000
$100,000
20,000
10,000
4,500
3,000
2,000
5,550
4,500
10,000
11,500
74
7C Federal Unemployment
Taxes & Other Payroll Taxes
• FICA Taxes – Employer match - 6.2% on first
$117,000 (SS), 1.45% on all wages (MC)
• EI Number – Require only with employees
• FUTA Tax – 6.0% on first $7,000 wages (credit)
• Wages to Spouse – All taxes but FUTA
• Wages to Children – FUTA if <21, none if <18
• Farmers – Pay FUTA if (1) $20,000 or more wages
in a quarter, or (2) 10 workers for at least 1 day
for 20 weeks
75
7D Estimated Taxes and
Farm/Fishing Income
• Basic Rules – Special rules if 2/3s income from
farm or fishing
• Avoid Penalty – If each qtr. pay = (1) 66 2/3s of
current year tax or (2) 100% of prior year tax
• Alternative Exemption From Penalty – Either (1)
make one estimated payment by 1/15 & file by
4/15, or (2) file return & pay all tax due by 3/1
• Farm Income – Sch. F, Sch. E farm rents, gains for
sale
• Question 19
76
Question 19
Cal and Diane, a married couple, had the following income in 2014:
Taxable interest and dividend income $ 43,500
Rental income (Schedule E)
1,500
Farm income (Schedule F)
75,000
Farm rental income (Form 4835)
15,000
Schedule D income (sale of dairy cows)
5,000
Total gross income
$140,000
Which of the following statements describes their estimated tax?
a. they must file and pay estimated taxes in quarterly installments
b. they can wait until 1/15/2015 to make their first & only payment
c. they must file their return by January 31, 2015 and pay all the tax
that is due in order to avoid an estimated tax penalty
d. their adjusted gross income will be too high to take advantage of
any special estimated tax filing breaks
77
7E Income Averaging for
Farmers & Fishermen
• Averaging – Only for Schedule F profit shown by
individuals, partners, and S shareholders
• Election – Timely-filed return (Schedule J), unless
IRS allows to amend earlier return
• Elective Farm & Fishing Income – Elect to remove
any amount from current income, add 1/3 to each
3 prior years’ incomes, then add marginal taxes to
current-year tax
78
Topic 8
Partnerships: Tax
Issues at Formation
Under Sec. 721
79
8A Partnerships – Legal
Formalities
• Definition – Unincorporated group of two or more
persons carrying on a business for profit
• Co-ownership Sharing Expenses – Not a p’ship,
unless significant services provided
• Not a P’ship – Corp under state law, ins. co.,
certain banks, tax-exempt, REIT, trust
• Inv. Orgs – All members may opt out p/s
• Electronic Return – If partners >100
• Conversion to LLC – Not a liquidation of old
80
8B Partnerships – Family
Members as Partners
• Family Members – May be partners if:
– Capital is material income-producing factor, and interest
acquired in bona fide transaction, or
– Family members join together in good faith, each
provides capital or service to partnership
• Capital Interest – Is an interest in assets
• Gift Interest (Including Related Sale) – Any
compensation allocated before income
81
8C Partnerships – The
Partnership Agreement
• Partnership Agreement – Need not be in writing
• Modifications – May be made up to due date of return
(ignoring extensions)
• Local Law – Governs if agreement silent
• Flexibility – In allocating profits/losses, as long as
“substantial economic effect”
82
8D Contributions to Partnership
– No Liabilities Involved
• Sec. 721 – No gain/loss if solely for p’ship interest
• Basis & Holding Period – Carries over from
property to new partnership interests
• Contribution of Services – Always taxable, and
amount becomes basis of partnership interest
• Boot Received – Fully taxable transaction - later
transfer to partner may be collapsed
• Investment Co. – If p’ship has >80% assets as inv
(like corp.), gain on contribution is recognized
• Question 20
83
Question 20
During the current year, Scott contributed property having an
adjusted basis to him of $10,000 to LMN Partnership for a
45% interest in the partnership. At the time of the
contribution, the property had a fair market value of $20,000.
What is the amount and character of Scott’s gain on this
transaction to be reported on his current-year tax return?
a. $0
b. $4,500 long-term capital gain
c. $10,000 ordinary income
d. $10,000 long-term capital gain
84
8E Contributions to Partnership
With Liabilities Involved
• Liabilities Assumed by Partnership – Not treated as boot
received by partner as long as shares assumed by other
partners < basis
• Liabilities Assumed – Affect basis (below)
• Excess Liabilities – Gain for excess (above)
• Limit on Liability Assumption – FMV property
• Question 21
85
Question 21
Earl acquired a 20% interest in a partnership by
contributing property that had an adjusted basis to him of
$8,000 and that was subject to a mortgage of $12,000.
Which of the following results is correct?
a.
b.
c.
d.
Capital Gain
Recognized
Basis of
Partnership Interest
$1,600
$0
$4,000
$1,600
$1,600
$(1,600)
$8,000
$0
86
8F Basis of Partnership Interest
• Adj. Basis – Partnership Interest =
Adj. basis of property transferred
+ gain recognized (from excess liabilities)
– boot rec’d (liabilities assumed by other partners)
Adj. basis of partnership interest
• If Only One Partner Liable – Add the liability only to that
partner’s basis
• Question 22
87
Question 22
In return for a 20% partnership interest, Kathy contributed
land having a $60,000 fair market value and a $30,000
basis to the partnership. The partnership assumes Kathy’s
$15,000 liability arising from her purchase of the land. The
partnership’s liabilities arising from its purchases of assets
is $4,000 immediately prior to the contribution. What is
Kathy’s basis in her partnership’s interest?
a. $18,800
b. $30,000
c. $15,000
d. $15,800
88
8G Basis of Contributed
Property to Partnership
• Partnership Basis in Property = Adjusted basis to
contributing partner (NOTE – no increase for gain
recognized by contributing partner)
• Cost Recovery Method – P’ship continues with
method used by contributing partner
• Distribution of Contributed Property – To another
partner within 7 yrs. may create gain
• Figures 8(a) and 8(b)
• Question 23
89
Figure 8(a)
Examples – Sec. 721 Transfers to a Partnership
Example 1: Sue Mason exchanges land ($20,000 adjusted basis, $30,000 fair market value) for a 1/3
interest in MNO Partnership worth $24,000 and $6,000 cash.
Realized gain = ($24,000 + $6,000) - $20,000 = $10,000
Recognized gain = $10,000 (Sec. 721 does not apply when boot is received – sale)
Basis of partnership interest to Sue = $24,000 (taxable exchange – use values)
Basis of land to MNO = $30,000 (taxable exchange – use fair market value)
Example 2: Assume the same facts, except that Sue receives only a 1/3 partnership interest worth $30,000.
Realized gain = $30,000 - $20,000 = $10,000
Recognized gain = $0 (Sec. 721 applies – no gain or loss since no liabilities)
Basis of partnership interest to Sue = $20,000 ($20,000 - 0)
Basis of land to MNO = $20,000 ($20,000 carryover basis)
Example 3: Assume the same facts as Example 2, except that the land is subject to a $24,000
recourse liability which is assumed by MNO Partnership.
Realized gain = $30,000 + [$24,000 x 2/3] - $20,000 = $26,000
Recognized gain = $0 (gain only if liabilities assumed by N and O exceed basis)
Basis of partnership interest to Sue = $20,000 - ($24,000 x 2/3) = $4,000
Basis of land to MNO = $20,000 (carryover of Sue’s basis)
90
Figure 8(b)
Example 4: Assume the same facts as Example 3, except that the land is subject to a $36,000
recourse liability which is assumed by MNO Partnership.
Realized gain = $30,000 + [$36,000 x 2/3] - $20,000 = $34,000
Recognized gain = $4,000 (excess of $24,000 liabilities assumed by N and O
[$36,000 x 2/3] over $20,000 basis of the land)
Basis of partnership interest to Sue = $20,000 + $4,000 - $24,000 = $0
Basis of land to MNO = $20,000 (carryover of Sue’s basis)
Note: If Sue contributed $30,000 services for the one-third interest, she would report $30,000 as income, have
a basis of $30,000 in the interest, and the partnership would have a $30,000 basis for salary expense deduction
(or possibly organization costs eligible for amortization).
91
Question 23
Bob acquired a 50% interest in a partnership by
contributing depreciable property that had an adjusted
basis of $15,000 and a fair market value of $45,000. The
property was subject to a liability of $32,000, which the
partnership assumed for legitimate business purposes.
What is the partnership’s basis in the property for
depreciation?
a. $0
b. $14,000
c. $15,000
d. $16,000
92
Topic 9
Reporting
Partnership Income
& Guaranteed
Payments
93
9A Ordinary Partnership Income
vs. Special Allocations
• Partner – Reports guaranteed payments (w/o
regard to profitability) and share of ordinary
income items and “specially allocated items”
• Ordinary Income (OI) – Any revenue/expense that
cannot vary across partners’ individual returns,
including a subtraction for guaranteed payments
• Specially Allocated Items – Any revenue/expense
that can vary across partner’s individual return
• Nonguaranteed Payments – Nontaxable Distrib.
• Question 24
94
Question 24
With respect to partnerships, which of the
following items is never considered a separately
stated item and must be included in the net
income from the partnership’s nonrental trade or
business activities?
a. dividends
b. charitable contributions
c. gains or losses from sales of capital assets
d. depreciation expense
95
9B Partner Reporting of
Partnership Income
• Profits & Losses – Allocated per partnership agreement
(or interest, if no agreement)
• Conduit – Character of each item retained
• Passive Loss – Retains character, combine
• Sec. 179 – Combine with TP’s other 179 items
• Schedule E – Used to report income/guaranteed
payments
• Acct’g Methods – Some determined at partner level if
item is treated differently
• Question 25
96
Question 25
For the year ended December 31, the partnership of Gil and Bill had
book income of $37,000 which included the following:
• Dividend income
$1,000
• Short-term capital loss
(4,000)
• Section 1231 gain
7,000
• Ordinary income (Sec. 1245 recapture)
1,500
• Interest income
750
The partners share profits and losses equally. What amount of income
(excluding all items which must be reported separately) should each
partner report on his individual return for the year?
a. $19,625
b. $18,500
c. $16,125
d. $7,313
97
9C Character of Partnership
Income or Loss
• Capital Assets and Inventory – In hands of contributing
partner, retains that character for five years in the
partnership’s hands
• Limit on Capital Loss – Limited to excess of contributing
partner’s basis over FMV of property at contribution
98
9D Determining Partnership
Guaranteed Payment Deduction
• Guaranteed Payment (GP) – Determined w/o
reference to profits, deductible by partnership, and
allocated directly to partner receiving the GP
(subject to SE tax)
• Regular Ordinary Income – Allocated to partners
after deduction for any guaranteed payments
• Minimum GP – If income share is < GP, deficiency
is a GP (if not, no GP is needed)
• Question 26
99
Question 26
Under a partnership agreement, Sybil is to receive 40% of
the partnership’s income, but not less than $15,000. The
partnership’s net income was $30,000 before considering
the minimum guarantee amount. What amount can the
partnership deduct as a guaranteed payment, and what
amount of income is Sybil required to report on her
individual tax return?
a.
b.
c.
d.
Partnership
$3,000
$15,000
$3,000
$15,000
Sybil
$15,000
$15,000
$27,000
$27,000
100
9E Timing of Guaranteed
Payment Income/Deduction
• Partner Income Share – Report for the partnership year
ending within the partner’s individual tax year
• Guaranteed Payments – Same reporting
• Beware – Changes in GPs during calendar year that are
not relevant to question
• Question 27
101
Question 27
Under the terms of ABC’s partnership agreement, Eric received,
as a guaranteed payment, 12 monthly payments of $1,000 from
2/1/2013 to 1/31/2014 from ABC partnership. His distributive
share of the partnership income is 10%. The ABC partnership
has $60,000 of ordinary income after deducting the guaranteed
payment. How much must Eric include on his individual tax
return for 2014 if Eric is a calendar-year taxpayer and the
partnership year ends 1/31/2014?
a. $1,000 guaranteed payment and $6,000 ordinary income
b. $1,000 guaranteed payment and $500 ordinary income
c. $12,000 guaranteed payment and $500 ordinary income
d. $12,000 guaranteed payment and 6,000 ordinary income
102
Topic 10
Partnership
Distributions and
Sales of Partnership
Interest
103
10A Nonliquidating P’ship
Distribution – General Rules
• Gain – Gain recognized only if money (cash or
marketable securities) alone exceeds partner’s basis of
interest (reason: no basis of p’ship interest left to assign)
• Loss – Never recognized with a nonliquidating
distribution
104
10B Nonliquidating P’ship
Distributions – Basis Issues
• General Rule – Partnership basis in distributed
assets carries over to partner
• If P’ship Basis Exceeds Partner’s Basis – Basis of
property received will be basis of partner’s interest
(after any cash received is subtracted)
• Several Properties Received – If total basis exceeds
partner’s basis, allocate remaining partner’s basis
by relative FMVs
• Question 28
105
Question 28
The adjusted basis of Paul’s partnership interest is
$10,000. He receives a distribution of $4,000 cash
and property that has an adjusted basis to the
partnership of $8,000. (This was not a distribution
in liquidation.) What is the basis of the distributed
property in Paul’s hands?
a. $8,000
b. $6,000
c. $14,000
d. $2,000
106
10C Precontribution Gain Taxed
to Contributing Partner
• Partner Contributing Appreciated Property – Must
recognize gain on any distribution of that property by
partnership to any partner within 7 years of the
contribution
• Gain Recognized – The lesser of:
– FMV property received > Adj. basis of interest
– Net “precontribution” gain on original transfer
• Question 29
107
Question 29
On April 10, 2011 Reuben contributed land in exchange for
a 25% partnership interest in Larson Partners. The fair
market value of the land at the time was $60,000 and
Reuben’s adjusted basis was $25,000. On November 1,
2014 Larson distributed that land to another partner. The
fair market value at that time was $65,000. What is the
amount of Reuben’s recognized gain from the transfer of
the land by Larson to another partner?
a. $5,000
b. $10,000
c. $35,000
d. $40,000
108
10D – Liquidating P’ship
Distributions – General Rules
• Liquidating Distribution – Terminates interest
• Entire P’ship Liquidated – Gain only if money (cash
+ mkt. sec.) exceeds basis; Loss only if (1)
partner’s basis > distrib., (2) entire interest
liquidated, (3) distribution only in money,
unrealized receivables (below), or inventory
• Retiring or Deceased Partner – Allocate:
– Payments for Interest – Capital gain (loss)
– Other – Excess payments (GP or income share - ordinary)
• Question 30
109
Question 30
Which of the following statements about the liquidation of a
partner’s interest is incorrect?
a. A retiring partner is treated as a partner until his or her
interest in the partnership has been completely liquidated.
b. The remaining partner’s distributive shares of partnership
income are reduced by payments in exchange for a retiring
partner’s interest in partnership property.
c. The retiring partner will recognize a gain on a liquidating
distribution to the extent that any money distributed is
more than the partner’s adjusted basis in the partnership.
d. Payments in liquidation of an interest that are not made in
exchange for the interest in partnership property are
reported as ordinary income by the recipient.
110
10E Liquidating Distribution –
Effect on Partnership
• No gain or loss – Recognized by partnership with a
liquidating distribution
• Retiring or Deceased Partner – Tax treatment of payment
by the partnership:
– Payments for Interest – Nondeductible distribution
– Other – Payments for unrealized receivables or goodwill
are deductible as other payments
111
10F Liquidating P’ship Dist’s. Gain (Loss) to Partner
• Partner Share of Liabilities –Included in amount realized
with a liquidating distribution (since also in partner’s
basis)
• Liabilities Share – Treated as cash
• Payments in Installments – No tax consequences until
cash rec’d > basis
112
10G Liquidating P’ship Dist’s. –
Basis of Property Received
• Property Basis – Usually, basis – money rec’d.
• Unrealized Rec. & Inventory – Allocated basis equal
to partnership basis first (“tacking”)
• Remaining Basis – Allocated to properties, based
on each prop’s adjusted basis to p’ship
• If Excess Basis Remains – Allocate to appreciated
property first, then other @ FMVs
• If Not Enough Basis – Subtract from depreciated
properties first, then from other on adj. basis
• Question 31
113
Question 31
A is a partner in partnership PRS and has an adjusted basis in its
partnership interest of $6,500. In a complete liquidation of A’s
interest, A received the following:
PRS’s Basis
Cash
$
0
Inventory items
1,000
Asset X
500
Asset Y
1,000
What is A’s basis in Assets X and Y?
a.
b.
c.
d.
Asset X
$ 500
$1,500
$3,500
$4,400
Asset Y
Fair Market Value
$
0
2,000
4,000
1,000
$1,000
$3,000
$1,000
$1,100
114
10H Sale of a P’ship Interest –
General Consequences
• Gain or Loss – Generally capital unless sale
involves inventory or unrealized receivables
• Liabilities Share – Included in both amount realized
and adjusted basis for selling partner
• Adjusted Basis – Determined on sale date
• Possible – Installment method sale, basis adj.
• Not Possible – Like-kind exchange
• Abandonment of Interest – Ordinary loss
115
10I Sale of P’ship Interest
Without Sec. 751 Properties
• Gain or Loss – Must be capital without Sec. 751
properties; interest is a capital asset
• Liabilities Share of Selling Partner – Are assumed by
buying partner; thus, these must be part of amount
realized
• Question 32
116
Question 32
The adjusted basis of Dan’s interest in D & P Enterprise at
the end of the year, after allocation of his share of
partnership income, was $35,000. This included his
$19,000 share of partnership liabilities. The partnership
had not unrealized receivables or substantially appreciated
inventory items. On December 31, Dan sold his interest in
D & P Enterprise to Joanne for $16,000. It was agreed that
she would assume Dan’s share of partnership liabilities.
What is the amount of Dan’s capital gain or (loss)?
a. $1,000
b. $16,000
c. $0
d. $(19,000)
117
10J Sale of Partnership Interest
With Sec. 751 Properties
• Ordinary Income – Must be reported for any gain
on “Sec. 751 properties”
• Sec. 751 Prop. - Inventory & unreal receivables
• Unrealize Rec. – Right to receive noncapital asset,
acc’t receivables of cash-basis, depr. recapture
• Inventory – Not capital or Sec. 1231 gain
• Disclosure – Form 8308, details included
• Sec. 751 Gain – Determined first (based on FMV –
partner’s % basis), remainder capital gain/loss
• Question 33
118
Question 33
Susan has a 25% interest in the Boggs Partnership. The adjusted basis
for her interest at the end of the current year is $40,000. She sells her
interest in Boggs Partnership to Brian for $53,000 cash. The basis and
fair market value of the partnership’s assets (there are no liabilities)
are listed below. There was no agreement for allocation of sales price.
Assets
Basis
Cash
$ 60,000
Unrealized receivables
0
Inventory
40,000
Fixed assets
60,000
Total assets
$160,000
Fair Market Value
$ 60,000
32,000
80,000
40,000
$212,000
What is the amount and character of Susan’s gain or loss?
a. $18,000 ordinary income, $-0- capital gain
b. $-0- ordinary income, $13,000 capital gain
c. $18,000 ordinary income, $5,000 capital loss
d. $6,500 ordinary income, $6,500 capital gain
119
Bonus Coverage
Business Shared
Responsibility
Payments
Employer Mandate
• Shared Responsibility Payment (Beginning in 2015) –
Required of “Applicable Large Employers (ALE),” defined
as companies with at least 50 full-time or full-time equivalent employees who work at least 30 hours a week if –
– Company fails to offer all those employees (or at least 95%) and
their dependents an employer sponsored health plan with minimum
essential coverage, and if at least one full-time employee qualifies
for federal subsidies, or
– Company offers such a plan, but at least one full-time employee
receives a premium tax credit, either because the coverage was
“unaffordable” to the employee or the plan does not meet “minimum
value” requirements (at least 60% of expected costs)
• Note – Related entities are combined for these purposes,
using the attribution rules related to qualified pensions
Counting Employees – Full-time
Equivalents
• Wording of Law – Makes avoiding the rules very difficult,
especially when cutting full-time staff and increasing part-time
staff, as part-time staff are converted to full-time equivalents
• Example – C Company has 25 full-time employees and 40
employees that work 24 hours per week; The 960 part-time
hours are converted to 32 “full-time equivalent” employees
(960/30), so C Company has 57 equivalent full-time
employees
• Individuals Who are Not Employees – Sch. C owner, partners,
>2% S shareholder or >5% C shareholder or any other nonpartnership entity (use attribution rules with S and C), &
family member/dependent of above
Affordability Requirement
• General Rule - Affordability is defined as the employee’s
share of the premium for employer-sponsored coverage
costing 9.5% or less of annual household income (9.56%
in 2015)
• Three Employer Safe Harbors – Since employers do not
know household incomes, the 9.5% affordability test can
be met by comparing employee cost share with 9.5% of
one of the following amounts):
1.
2.
3.
Form W-2 wages
Rate of pay for the period
Federal poverty line for a single individual
Minimum Value Requirement
• Definition – A plan offers “minimum value” if at least
60% of the total allowed cost of benefits expected under
the plan are covered
• HHS – Provides a minimum value calculator that
considers deductibles and co-pays
• Proposed Regs – Suggest other possible methods of
determining “minimum value”
Special Business SRP Rules
• Employees Rejecting Plan Coverage – If these employees
enroll in the Marketplace or receive Medicare or Medicaid
will not cause the employer to be subject to the SRP
• Spouse or Dependents – Purchasing health insurance
through the Marketplace, enrolling in Medicare or
Medicaid, will not cause the employer to be subject to
the SRP
• Note – In the two situations above, if the employer offers
coverage that is affordable and provides minimum value,
these individuals would not qualify for a credit anyway)
Computing the ALE SRP (1)
[No Coverage or <95% Coverage]
• Violation – Employer does not offer coverage or offers
coverage to fewer than 95% of full-time employees and
their dependents, and at least one F/T employee
received a credit
• SRP – Computed as follows:
(# Full-time employees – 30) x $2,000
• Note – Compute separately for each month if coverage is
not offered for all 12 months
• Example – Bee Co. has 120 full-time employees in 2016
and does not offer health coverage. Their SRP for 2016
is $180,000, or (120 – 30) x $2,000
Computing the ALE SRP (2)
[Plan, but Unaffordable or Not Min. Value]
• Violation – Employer offers a plan, but at least one
full-time employee in the plan receives a premium tax
credit, either because the coverage was “unaffordable”
to the employee or the plan does not meet “minimum
value”
• SRP - # Employees receiving credit x $3,000 (allocate
on a per months basis, if necessary); total payment
capped at (# Full-time employees – 30) x $2,000
• Example – C Company has 114 employees in 2016,
and 10 of these employees received a premium tax
credit. C’s SRP is $30,000 ($3,000 x 10), which is less
than $168,000 (114 – 30) x $2,000
Transition Relief - 2015 Only (1)
• Counting Employees - May use any 6 consecutive 2014
months for the 50 employee test
• Coverage Offer – Can be made first day of first pay
period in 2015, and the employee is treated as a covered
employee
• Dependent Coverage – Employers working on providing
dependent coverage in 2015 are not subject to SRP
penalties solely because no dependent coverage is
offered in 2015 (relief not available if coverage was
offered in 2013 or 2014 and was subsequently dropped).
Transition Relief -2015 Only (2)
• No 2015 SRP for Certain Smaller Employers – Employers
with at Least 50 but less than 100 employees are not
subject to the SRP in 2015 if certain conditions are met:
– Includes full-time equivalents and applies to each business day
– From 2/9/14 to 12/31/14, the employer may not reduce the size of
the workforce in order to qualify for this relief (unless bona fide
business reasons exist)
– From 2/9/14 to 12/31/15, the employer may not materially reduce or
eliminate existing health coverage
• Other Employers not Meeting the 50/100 Limit – In 2015:
– Coverage - Needed for only 70% of employees (95% other yrs.)
– SRP Penalties – based on total employees – 80 (30 in other yrs.)
ALE SRP Payment Calculation
Ace Corporation failed to offer minimum essential
insurance coverage to any of its 100 employees during
2015. A number of these employees used the federal
insurance exchange and received premium credits.
As a result of these events, Ace will make a 2015
Shared Responsibility Payment (SRP) of
a. $10,000
b. $40,000
c. $140,000
d. $200,000
Questions?
As Time Permits
Or contact:
NSA EA Review Blog
131
Question Answer
Explanation
1
2
3
c
b
c
The cost of raising cattle has already been deducted
Postponement allowed if crop income otherwise would occur then
($50,000/250 = $200 SP per cow); $200 x 50 = $10,000 deferred
4
5
6
7
8
9
10
11
12
13
14
b
a
b
b
c
b
d
d
b
b
b
If all services not completed by 2014, no further deferral available
More than 40% of personalty (90/200) placed in service in last qtr
The $500,000 max. reduced by $350,000 excess over $2,000,000
An ADS election may not be revoked
Max. deduct. (MACRS & Sec. 179) is $ 11,160 limit x .60 usage
Business bad debts are deductions against ordinary income
Full amount is includable, since the NOL used completely in 2011
Gain is limited to boot received; expenses may offset boot first
L(2,000basis+2,000 boot given); C(2,750basis+2,000gn-2,000bt)
Assumes property used in business, qualifies for Sec. 1231
Total depr. taken ordinary, balance is capital (only 1231 trans.)
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15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
b
a
a
c
b
a
d
a
c
d
c
a
d
b
c
b
d
c
c
Total gain is $107,000 ($225,000 - $118,000); $27,000 excess is ord.
All recapture is recognized in the year of sale for an installment sale
An S shareholder is investor and not considered to be self-employed
Ignore rents, gain, Keogh, ins. prem.; deduct 55% of depr. & mortg.
At least 2/3’s of income from farming, they need only make one pay.
No boot or services are involved, no gain is reportable by partner
Gain = $9,600 liab. assumed by other partners - $8,000 adj basis
Basis=$30,000 adj. basis – ($15,000x.80) mortg. + ($4,000x.20) liab
P’ship = $15,000 adj basis to Bob carries to p’ship (no inc. for gain)
Depr. expense could never be handled differently by the partners
Ord. = [(37,000-1,000+4,000-7,000-750) x .50] (1245 is part of ord)
Partner guaranteed $15,000; income share only $12,000; $3,000 GP
Use GP and ord. income share of p’ship year ($12,000 & $6,000)
Basis is limited to partnership interest basis less cash received
Pre-contribution gain of $35,000 is recognized ($60,000 - $25,000)
Payments for p’ship interest itself are distributions, not inc. shares
After Inv. = $5,500; X gets $500 + $3,500 apprec. + (4/5 x$500 exc.)
Liabilities assumed are included in amount realized; net gain $0
¼ of gain on partnership books for rec & inv is ord.; rest is cap loss
133
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134