WGU C239 Advanced Tax Concepts
|Complete Answers and Solution
AAA bypass election - ✔✔In the context of a distribution by an S corporation, an
election made by the entity to designate that the distribution is first from accumulated
earnings and profits (AEP) and only then from the accumulated adjustments account
(AAA). § 1368(e)(3).
accelerated cost recovery system (ACRS) - ✔✔A method in which the cost of tangible
property is recovered (depreciated) over a prescribed period of time. This depreciation
approach disregards salvage value, imposes a period of cost recovery that depends
upon the classification of the asset into one of various recovery periods, and prescribes
the applicable percentage of cost that can be deducted each year. A modified system is
currently the default cost recovery method; it is referred to as MACRS. § 168.
accountable plan - ✔✔A type of expense reimbursement plan that requires an
employee to render an adequate accounting to the employer and return any excess
reimbursement or allowance. If the expense qualifies, it will be treated as a deduction
for AGI.
accumulated adjustments account (AAA) - ✔✔An account that aggregates an S
corporation's post-1982 income, loss, and deductions for the tax year (including
nontaxable income and nondeductible losses and expenses). After the year-end income
and expense adjustments are made, the account is reduced by distributions made
during the tax year.
Accumulated E & P - ✔✔Net undistributed tax-basis earnings of a corporation
aggregated from March 1, 1913, to the end of the prior tax year. Used to determine the
amount of dividend income associated with a distribution to shareholders. § 316 and
Reg. § 1.316-2.
acquiescence - ✔✔Agreement by the IRS on the results reached in certain judicial
decisions; sometimes abbreviated Acq. or A.
ad valorem taxes - ✔✔A tax imposed on the value of property. The most common ad
valorem tax is that imposed by states, counties, and cities on real estate. Ad valorem
taxes can be imposed on personal property as well.
additional first-year depreciation - ✔✔In general, this provision provides for an additional
cost recovery deduction of 100 percent for qualified property acquired and placed in
,service after September 27, 2017, and before January 1, 2027. (The bonus depreciation
percentage is reduced by 20 percent for each tax year after 2022.) Qualified property
includes most types of new and used property other than buildings. The taxpayer can
elect to forgo this bonus depreciation. Different rules applied between 2008 and
September 28, 2017. § 168(k).
adjusted basis - ✔✔The cost or other basis of property reduced by depreciation allowed
or allowable and increased by capital improvements. Other special adjustments are
provided in § 1016 and the related Regulations.
allocate - ✔✔The assignment of income for various tax purposes. A multistate
corporation's nonbusiness income usually is allocated to the state where the
nonbusiness assets are located; it is not apportioned with the rest of the entity's income.
The income and expense items of an estate or a trust are allocated between income
and corpus components. Specific items of income, expense, gain, loss, and credit can
be allocated to specific partners if a substantial economic nontax purpose for the
allocation is established.
alternative depreciation system (ADS) - ✔✔A cost recovery system in which the cost or
other initial basis of an asset is recovered using the straight-line method over recovery
periods similar to those used in MACRS. The alternative system must be used in certain
instances and can be elected in other instances. § 168(g).
amortization - ✔✔The tax deduction for the cost or other basis of an intangible asset
over the asset's estimated useful life. Examples of amortizable intangibles include
patents, copyrights, and leasehold interests. Most purchased intangible assets (e.g.,
goodwill) can be amortized for income tax purposes over a 15-year period. § 197.
amount realized - ✔✔The amount received by a taxpayer upon the sale or exchange of
property. Amount realized is the sum of the cash and the fair market value of any
property or services received by the taxpayer plus any related debt assumed by the
buyer. Determining the amount realized is the starting point for arriving at realized gain
or loss. § 1001(b).
apportioned - ✔✔The assignment of the business income of a multistate corporation to
specific states for income taxation. Usually, the apportionment procedure accounts for
the property, payroll, and sales activity levels of the various states, and a proportionate
assignment of the entity's total income is made using a statutory apportionment formula.
Most states exclude nonbusiness income from the apportionment procedure; they
allocate nonbusiness income to the states where the nonbusiness assets are located.
automatic mileage method - ✔✔Automobile expenses are generally deductible only to
the extent the automobile is used in business or for the production of income. Personal
commuting expenses are not deductible. The taxpayer may deduct actual expenses
(including depreciation and insurance), or the standard (automatic) mileage rate may be
, used (56 cents per mile for 2021 and 57.5 cents per mile for 2020). Automobile
expenses incurred for medical purposes are deductible to the extent of actual out-of-
pocket expenses or at the rate of 16 cents per mile for 2021 and 17 cents per mile for
2020. For charitable activities, the rate is 14 cents per mile.
average tax rate - ✔✔The average tax rate is equal to the tax liability divided by taxable
income. This rate can be useful in comparing taxpayers or a taxpayer's changed tax
picture from one year to another.
basis in the partnership interest - ✔✔The acquisition cost of the partner's ownership
interest in the partnership. Includes purchase price and associated debt acquired from
other partners and in the course of the entity's trade or business.
boot - ✔✔Cash or property of a type not included in the definition of a tax-deferred
exchange. The receipt of boot causes an otherwise tax-deferred transfer to become
immediately taxable to the extent of the lesser of the fair market value of the boot or the
realized gain on the transfer. For example, see transfers to controlled corporations
under § 351(b), reorganizations under § 368, and like-kind exchanges under § 1031(b).
built-in gains tax - ✔✔A penalty tax designed to discourage a shift of the incidence of
taxation on unrealized gains from a C corporation to its shareholders, via an S election.
Under this provision, any recognized gain during the first five years of S status
generates a corporate-level tax on a base not to exceed the aggregate untaxed built-in
gains brought into the S corporation upon its election from C corporation taxable years.
§ 1374.
built-in loss property - ✔✔Property contributed to a corporation under § 351 or as a
contribution to capital that has a basis in excess of its fair market value. An adjustment
is necessary to step down the basis of the property to its fair market value. The
adjustment prevents the corporation and the contributing shareholder from obtaining a
double tax benefit. The corporation allocates the adjustment proportionately among the
assets with the built-in loss. As an alternative to the corporate adjustment, the
shareholder may elect to reduce the basis in the stock.
C corporations - ✔✔A separate taxable entity subject to the rules of Subchapter C of the
Code. This business form may create a double taxation effect relative to its
shareholders. The entity is subject to the regular corporate tax and a number of penalty
taxes at the Federal level.
Cafeteria plans - ✔✔An employee benefit plan under which an employee is allowed to
select from among a variety of employer-provided fringe benefits. Some of the benefits
may be taxable, and some may be statutory nontaxable benefits (e.g., health and
accident insurance and group term life insurance). The employee is taxed only on the
taxable benefits selected. A cafeteria benefit plan is also referred to as a flexible benefit
plan. § 125.
|Complete Answers and Solution
AAA bypass election - ✔✔In the context of a distribution by an S corporation, an
election made by the entity to designate that the distribution is first from accumulated
earnings and profits (AEP) and only then from the accumulated adjustments account
(AAA). § 1368(e)(3).
accelerated cost recovery system (ACRS) - ✔✔A method in which the cost of tangible
property is recovered (depreciated) over a prescribed period of time. This depreciation
approach disregards salvage value, imposes a period of cost recovery that depends
upon the classification of the asset into one of various recovery periods, and prescribes
the applicable percentage of cost that can be deducted each year. A modified system is
currently the default cost recovery method; it is referred to as MACRS. § 168.
accountable plan - ✔✔A type of expense reimbursement plan that requires an
employee to render an adequate accounting to the employer and return any excess
reimbursement or allowance. If the expense qualifies, it will be treated as a deduction
for AGI.
accumulated adjustments account (AAA) - ✔✔An account that aggregates an S
corporation's post-1982 income, loss, and deductions for the tax year (including
nontaxable income and nondeductible losses and expenses). After the year-end income
and expense adjustments are made, the account is reduced by distributions made
during the tax year.
Accumulated E & P - ✔✔Net undistributed tax-basis earnings of a corporation
aggregated from March 1, 1913, to the end of the prior tax year. Used to determine the
amount of dividend income associated with a distribution to shareholders. § 316 and
Reg. § 1.316-2.
acquiescence - ✔✔Agreement by the IRS on the results reached in certain judicial
decisions; sometimes abbreviated Acq. or A.
ad valorem taxes - ✔✔A tax imposed on the value of property. The most common ad
valorem tax is that imposed by states, counties, and cities on real estate. Ad valorem
taxes can be imposed on personal property as well.
additional first-year depreciation - ✔✔In general, this provision provides for an additional
cost recovery deduction of 100 percent for qualified property acquired and placed in
,service after September 27, 2017, and before January 1, 2027. (The bonus depreciation
percentage is reduced by 20 percent for each tax year after 2022.) Qualified property
includes most types of new and used property other than buildings. The taxpayer can
elect to forgo this bonus depreciation. Different rules applied between 2008 and
September 28, 2017. § 168(k).
adjusted basis - ✔✔The cost or other basis of property reduced by depreciation allowed
or allowable and increased by capital improvements. Other special adjustments are
provided in § 1016 and the related Regulations.
allocate - ✔✔The assignment of income for various tax purposes. A multistate
corporation's nonbusiness income usually is allocated to the state where the
nonbusiness assets are located; it is not apportioned with the rest of the entity's income.
The income and expense items of an estate or a trust are allocated between income
and corpus components. Specific items of income, expense, gain, loss, and credit can
be allocated to specific partners if a substantial economic nontax purpose for the
allocation is established.
alternative depreciation system (ADS) - ✔✔A cost recovery system in which the cost or
other initial basis of an asset is recovered using the straight-line method over recovery
periods similar to those used in MACRS. The alternative system must be used in certain
instances and can be elected in other instances. § 168(g).
amortization - ✔✔The tax deduction for the cost or other basis of an intangible asset
over the asset's estimated useful life. Examples of amortizable intangibles include
patents, copyrights, and leasehold interests. Most purchased intangible assets (e.g.,
goodwill) can be amortized for income tax purposes over a 15-year period. § 197.
amount realized - ✔✔The amount received by a taxpayer upon the sale or exchange of
property. Amount realized is the sum of the cash and the fair market value of any
property or services received by the taxpayer plus any related debt assumed by the
buyer. Determining the amount realized is the starting point for arriving at realized gain
or loss. § 1001(b).
apportioned - ✔✔The assignment of the business income of a multistate corporation to
specific states for income taxation. Usually, the apportionment procedure accounts for
the property, payroll, and sales activity levels of the various states, and a proportionate
assignment of the entity's total income is made using a statutory apportionment formula.
Most states exclude nonbusiness income from the apportionment procedure; they
allocate nonbusiness income to the states where the nonbusiness assets are located.
automatic mileage method - ✔✔Automobile expenses are generally deductible only to
the extent the automobile is used in business or for the production of income. Personal
commuting expenses are not deductible. The taxpayer may deduct actual expenses
(including depreciation and insurance), or the standard (automatic) mileage rate may be
, used (56 cents per mile for 2021 and 57.5 cents per mile for 2020). Automobile
expenses incurred for medical purposes are deductible to the extent of actual out-of-
pocket expenses or at the rate of 16 cents per mile for 2021 and 17 cents per mile for
2020. For charitable activities, the rate is 14 cents per mile.
average tax rate - ✔✔The average tax rate is equal to the tax liability divided by taxable
income. This rate can be useful in comparing taxpayers or a taxpayer's changed tax
picture from one year to another.
basis in the partnership interest - ✔✔The acquisition cost of the partner's ownership
interest in the partnership. Includes purchase price and associated debt acquired from
other partners and in the course of the entity's trade or business.
boot - ✔✔Cash or property of a type not included in the definition of a tax-deferred
exchange. The receipt of boot causes an otherwise tax-deferred transfer to become
immediately taxable to the extent of the lesser of the fair market value of the boot or the
realized gain on the transfer. For example, see transfers to controlled corporations
under § 351(b), reorganizations under § 368, and like-kind exchanges under § 1031(b).
built-in gains tax - ✔✔A penalty tax designed to discourage a shift of the incidence of
taxation on unrealized gains from a C corporation to its shareholders, via an S election.
Under this provision, any recognized gain during the first five years of S status
generates a corporate-level tax on a base not to exceed the aggregate untaxed built-in
gains brought into the S corporation upon its election from C corporation taxable years.
§ 1374.
built-in loss property - ✔✔Property contributed to a corporation under § 351 or as a
contribution to capital that has a basis in excess of its fair market value. An adjustment
is necessary to step down the basis of the property to its fair market value. The
adjustment prevents the corporation and the contributing shareholder from obtaining a
double tax benefit. The corporation allocates the adjustment proportionately among the
assets with the built-in loss. As an alternative to the corporate adjustment, the
shareholder may elect to reduce the basis in the stock.
C corporations - ✔✔A separate taxable entity subject to the rules of Subchapter C of the
Code. This business form may create a double taxation effect relative to its
shareholders. The entity is subject to the regular corporate tax and a number of penalty
taxes at the Federal level.
Cafeteria plans - ✔✔An employee benefit plan under which an employee is allowed to
select from among a variety of employer-provided fringe benefits. Some of the benefits
may be taxable, and some may be statutory nontaxable benefits (e.g., health and
accident insurance and group term life insurance). The employee is taxed only on the
taxable benefits selected. A cafeteria benefit plan is also referred to as a flexible benefit
plan. § 125.
