Top-Quality ACC330 Exam 3 Review:
Notes, Tips, and Practice Q&A
nontaxable exchange - a transaction resulting in gain or loss thats not recognized (in
whole or part) in the current year
- BTD is temporaty and will reverse as newly acquired property is depreciated or
disposed of
- if no cash is received, entire gain or loss is deferred
how do nontaxable exchanges make tax law neutral? - can convert property from
one form to another without tax costs
elements of a generic nontaxable exchange - - transforms one property interest into
another
- only disposition and receipt of qualifying property can be a nontaxable exchange
- must be nontaxable to both firms (agreed before exchange that properties are of
equal value for arm's length exchange)
substituted basis rule - causes an unrecognized gain or loss on a nontaxable
exchange to be included in the basis of the qualifying property acquired, G/L remains
dormant as long as taxpayer holds the property and is recognized upon taxable
disposition of the property
- FMV of property received - deferred gain or + deferred loss
how to calculate basis of property surrendered in a nontaxable exchange - same as
basis of property acquired,
FMV of property - deferred gain/+ deferred loss
boot - any cash or nonqualifying property included in a nontaxable exchange when
the FMV of properties are unequal
- party receiving boot recognizes a portion of realized gain equal to boot FMV
- must allocate basis between boot and property
how to calculate basis of qualifying property acquired when there's a boot received -
basis of qualifying property surrendered + gain recognized - FMV of boot
how to calculate basis of qualifying property acquired when there's a boot paid -
basis of qualifying property surrendered + FMV of boot
characteristics of nontaxable exchange - - involves qualifying property
- G/L realized on exchange is deferred
- basis of qualifying property received = basis of qualifying property surrendered
(substituted basis rule)
- receipt of booth trigger gain recognition up to boot FMV
corporate formation - no G/L is recognized when property(tangible and intangible
assets, NOT personal services) is transferred to a corp solely in exchange for stock if
receive control of property immediately after exchange
, - 351 corp formation rule: transferor must own at least 80% of stock after exchange
to be nontaxable
- corp does not recognize G/L whether nontaxable or taxable to transferor
- if exchange is nontaxable(80%), corp takes carryover basis from transferor for
property
- if exchange is taxable, corp takes cost basis for property
partnership formation - neither partners or partnership recognize G/L when property
is exchanged for equity interest
- more flexible than corporate exchange
- no 80% rule, all exchanges are nontaxable
types of nontaxable exchange - like-kind exchange: 1031, exchange of similar
property
formation of business entity: 351
what tax standard relates to nontaxable formations of business entities? - efficiency
how to calculate basis of stock received for corp formation exchange - = substituted
basis (basis of transferred property)
- corp uses carryover basis for received property
sole proprietorship - unincorporated business entity owned by one individual
- owns business assets and is solely liable for debt
- report income using schedule C of form 1040 (individual income tax return). Tax on
net income included in ordinary income not schedule C. All income/loss on schedule
C is ordinary, capital is reported on personal form
- net loss can reduce taxable amount to zero and remainder carries forward
indefinitely
QBI deduction - deduction for noncorporate businesses to lower effective tax rates
for passthrough entities
- equals 20% of business income for sole proprietorship, partnership, or S corps
- final deduction cannot exceed 20% of taxable income
can be reduced by deductible portion of self-employment taxes, self-employed health
insurance deduction, and deductions for contributions to retirement plans
home office deduction - if you have an office at home, can deduct a portion of home
expenses based on office square-footage. Often an abused deduction which is
flagged for audit
FICA employment tax - 6.2% social security tax (wages up to 160,200) + 1.45%
medicare tax
- paid by employer and employee
-employee also pays 2.35% medicare tax on wages over 200k
how to self-employed pay tax - don't receive a salary, just take income as personal
and pay tax as individual.
- 50% is deductible on 1040 because technically a business expense
Notes, Tips, and Practice Q&A
nontaxable exchange - a transaction resulting in gain or loss thats not recognized (in
whole or part) in the current year
- BTD is temporaty and will reverse as newly acquired property is depreciated or
disposed of
- if no cash is received, entire gain or loss is deferred
how do nontaxable exchanges make tax law neutral? - can convert property from
one form to another without tax costs
elements of a generic nontaxable exchange - - transforms one property interest into
another
- only disposition and receipt of qualifying property can be a nontaxable exchange
- must be nontaxable to both firms (agreed before exchange that properties are of
equal value for arm's length exchange)
substituted basis rule - causes an unrecognized gain or loss on a nontaxable
exchange to be included in the basis of the qualifying property acquired, G/L remains
dormant as long as taxpayer holds the property and is recognized upon taxable
disposition of the property
- FMV of property received - deferred gain or + deferred loss
how to calculate basis of property surrendered in a nontaxable exchange - same as
basis of property acquired,
FMV of property - deferred gain/+ deferred loss
boot - any cash or nonqualifying property included in a nontaxable exchange when
the FMV of properties are unequal
- party receiving boot recognizes a portion of realized gain equal to boot FMV
- must allocate basis between boot and property
how to calculate basis of qualifying property acquired when there's a boot received -
basis of qualifying property surrendered + gain recognized - FMV of boot
how to calculate basis of qualifying property acquired when there's a boot paid -
basis of qualifying property surrendered + FMV of boot
characteristics of nontaxable exchange - - involves qualifying property
- G/L realized on exchange is deferred
- basis of qualifying property received = basis of qualifying property surrendered
(substituted basis rule)
- receipt of booth trigger gain recognition up to boot FMV
corporate formation - no G/L is recognized when property(tangible and intangible
assets, NOT personal services) is transferred to a corp solely in exchange for stock if
receive control of property immediately after exchange
, - 351 corp formation rule: transferor must own at least 80% of stock after exchange
to be nontaxable
- corp does not recognize G/L whether nontaxable or taxable to transferor
- if exchange is nontaxable(80%), corp takes carryover basis from transferor for
property
- if exchange is taxable, corp takes cost basis for property
partnership formation - neither partners or partnership recognize G/L when property
is exchanged for equity interest
- more flexible than corporate exchange
- no 80% rule, all exchanges are nontaxable
types of nontaxable exchange - like-kind exchange: 1031, exchange of similar
property
formation of business entity: 351
what tax standard relates to nontaxable formations of business entities? - efficiency
how to calculate basis of stock received for corp formation exchange - = substituted
basis (basis of transferred property)
- corp uses carryover basis for received property
sole proprietorship - unincorporated business entity owned by one individual
- owns business assets and is solely liable for debt
- report income using schedule C of form 1040 (individual income tax return). Tax on
net income included in ordinary income not schedule C. All income/loss on schedule
C is ordinary, capital is reported on personal form
- net loss can reduce taxable amount to zero and remainder carries forward
indefinitely
QBI deduction - deduction for noncorporate businesses to lower effective tax rates
for passthrough entities
- equals 20% of business income for sole proprietorship, partnership, or S corps
- final deduction cannot exceed 20% of taxable income
can be reduced by deductible portion of self-employment taxes, self-employed health
insurance deduction, and deductions for contributions to retirement plans
home office deduction - if you have an office at home, can deduct a portion of home
expenses based on office square-footage. Often an abused deduction which is
flagged for audit
FICA employment tax - 6.2% social security tax (wages up to 160,200) + 1.45%
medicare tax
- paid by employer and employee
-employee also pays 2.35% medicare tax on wages over 200k
how to self-employed pay tax - don't receive a salary, just take income as personal
and pay tax as individual.
- 50% is deductible on 1040 because technically a business expense
