2.1 Property Transactions - Realized Gain / Loss

1. Amount Realized

(1) Cash received
(2) FMV property received
(3) FMV Service received
(4) Cancellation of debt (C.O.D)

2. Adjusted Basis of the Property

1) Purchased property: cost basis

<Include>
brokerage commission, sales tax, title transfer tax, a recording fee, legal fee,
appraisal fee, the survey fee, freight, installation & testing, zoning cost,
new roof, new gutters, demolition costs, installation of lifelines
<Exclude>
fire insurance, mortgage insurance, points, refinancing points, real property tax
* Points related acquisition indebtedness: immediately
* Refinancing points: amortized
(1.10 Below The Line Deductions)

2) Gift property: roll-over cost basis (donor's basis)

(1) FMV > donor's basis: donor's basis + gift tax adjustments

(2) FMV < donor's basis: dual basis
a) gain basis: donor's basis
b) loss basis: FMV at the date of the gift
c) middle selling: no gain/loss recognized

(3) Holding period
a) Donor's basis: donor's period
b) FMV: date of the gift

3) Inherited property: Step-up FMV basis

(1) Alternate valuation date (6month after death)
(2) Holding period: long-term

4) Property received as compensation for service: FMV

5) Allocation of basis

(1) Basket purchase: allocated on their FMV

(2) Stock split: allocate the original basis over the total number

(3) Stock dividends
a) Identical: allocated equally to all shares
b) Different: allocated based on the FMV of each

(4) Employee stock option

6) Property converted into business use

Lower of the basis or the FMV

1.13 Tax Procedures

1. Assessments

Three years from later of
(a) original due date of the return or
(b) date of return is filed.

2. Claims for Refund

Later of
(a) three years from the return was filed or
(b) two years from the tax was paid
*Bad debts, worthless securities: seven years

3. IRS Audit and Appeal Process

1) Selection of return for audit
(1) Statistical models (DIF)
(2) Random (manual) selection

2) Types of audits
(1) Direct correspondence audit
(2) Office or field audit (formal examination)

3) Appeals process
(1) Preliminary notice (30-Day Letter) and administrative appeal request
(2) Notice of deficiency (90-Day Letter)

4. Federal Judicial Process

(1) U.S. Tax Court
(2) U.S. District Court
(3) U.S. Court of Federal Claims
(4) U.S. Court of Appeal
(5) U.S. Supreme Court

5. Penalties Imposed on Taxpayers

1) Failure-to-file (Late filing) penalty: 5%
2) Failure-to-pay (Late payment) penalty (tax delinquency penalty): 0.5%
* Interest on penalties: federal short-term interest rate

3) Accuracy-Related Penalty: 20%
i) Negligence penalty with respect to an understatement of tax
ii) Penalty for substantial understatement of tax
iii) Penalty for a substantial valuation misstatement

4) Fraud Penalty: 75%

5) Taxpayer's Defense
(1) Reasonable basis standard: 20% chance of succeeding (Form 8275)
(2) Substantial authority standard: a one-in-three chance of succeeding
(3) More likely than not standard

1.12 Tax Credits

1. Overview of Tax Credit

2. Personal Tax Credit

1) Credit for other dependents

$500 for each dependent who is not a qualifying child under age 17.

2) Foreign tax credit <Form 1116>

Computation of allowable credit

3) Child and dependent care credit <Form 2441>

Babysitter, daycare, nursery school (not grammar school) for a child under age 13.

4) American opportunity credit ($2,500 max. per year)

For a student's first four years of post-secondary (college) education
100% of first $2,000 and 25% of the next $2,000 credit, 40% refundable per student (2019)

5) Lifetime learning credit ($2,000 max. per year)

20% of qualified expenses up to $10,000 (2019) at the taxpayer

6) Retirement savings contribution credit

Available for contributions to either a traditional IRA or Roth IRA

7) Elderly and/or permanently disabled credit

$5,000/$7,500 - SS Benefit - 50% (AGI - $5,000/$7,500) x 15%

8) Adoption credit

$14,080 (2019)

9) General business credit (combination)

10) Credit for prior year AMT

3. Refundable Credit

11) Withholding taxes / estimated taxes paid

12) Excess social security taxes withheld

13) Earned income credit (EIC)

14) Child tax credit
$ 2,000 credit for each qualifying child age under 17, refundable up to $1,400

1.11 Other Taxes

1. Alternative Minimum Tax (AMT) <Form 6251>

1) Computation of tentative minimum tax

Regular taxable income
+ AMT adjustments
+ Tax preference items
= AMTI
- AMT exemption
= AMT base
x 26% or 28%
= Tentative AMT Tax
- AMT tax credits
= Tentative minimum tax
- Regular income tax
= AMT


2) AMT adjustments
(1) Timing differences
a) Passive activity losses
b) Accelerated depreciation: 40-year SL / 150% declining balance
c) Net operating loss
d) Installment method
e) Contracts (long-term)
(2) Itemized deduction (adds back)
a) Taxes
b) Standard deduction

3) Tax preference items (adds)
a) Private activity bond (Tax-exempt interest)
b) Pre-1987 accelerated depreciation on real property
c) Percentage depletion deduction

4) AMT exemption

5) AMT tax credit

6) Credit for prior year minimum tax
(1) Offsets the regular tax (excess tentative minimum tax)
(2) Forever carryforward
(3) Limitation on credit

2. Employee FICA Tax (Medicare and Social Security Tax)

Employer & Employee: (6.2% Social Security Tax + 1.45% Medicare Tax ) x 2 = 15.3%

3. Self-Employment Tax <Schedule SE>

15.3% (50% above the line deduction)

4. Additional 0.9% Medicare Tax

More than $125,000 (MFS), $250,000 (MFJ), $200,000 (Other) of medicare wages (box 5)

5. 3.8% Medicare Tax on Certain Unearned Income

High-income taxpayers to Net Investment Income Tax (NIIT)

1.10 Below The Line Deductions

I. Standard Deduction

Single $12,200 / HoH $18,350 / MFJ $24,400 (2019)

(1) Additional standard deduction for elderly and/or blind: single $1,650 / MFJ $1,300 (2019)
(2) Dependent's standard deduction: (a) $1,100 or (b) earned income +$350 (2019)

II. Itemized Deduction

1. Medical Expenses

1) Qualified individuals: spouse and dependent (no limitation to GI)

2) Timing of deduction: paid or charged

3) Amount of deduction: 10% of AGI (2019)

4) Types of deductible medical expenses
- Doctors
- Required surgery (reconstructive cosmetic surgery)
- Prescribed (Prescription) medicine and drugs
- Medical insurance premium
- Certain capital expenditures (exceeds the increase in FMV)
- Transportation to a medical facility
- Physically handicapped costs

5) Nondeductible Medical Expenses
- Elective cosmetic surgery, hair transplant surgery
- Over-the-counter drugs
- Life insurance premium
- Disability insurance premium
- Loss earning policy premium
- Capital expenditures
- Health club membership
- Funeral expenses and cemetery lots

2. Taxes

1) Deductible taxes
(1) Real property taxes (state, local taxes)
(2) Personal property taxes (state and local taxes)
(3) Income taxes (state, local and foreign taxes)
(4) Sales taxes (state, local general sales taxes)

2) Nondeductible taxes
- Federal taxes
- Business taxes (Schedule C), Rental real property taxes (Schedule E)
- Inheritance and gift taxes for states

3) Timing of deduction: cash/accrual method

4) Deduction limit: $10,000

3. Interest Expenses

1) Classification of Interest expenses
(1) Business/Rental Interest (Schedule C/E)
(2) Personal Interest (Nondeductible)
(3) Home mortgage interest
a) Buying, constructing, or substantially improving and secured by home
b) Points related acquisition indebtedness: immediately
c) Refinancing points: amortized

(4) Investment interest: net (taxable) investment income
a) Include as (taxable) investment income
- Interest and dividends
- Rents
- Royalties
- Net capital gain
(b) Exclude as (taxable) income
- Interest on a municipal bond
(c) Investment interest expenses used to purchase tax-free bonds: nondeductible

(5) Education (student) loan interest expense (Above the line deduction)

2) Timing of deduction
- Prepaid interest expenses must be allocated over the period
- Prepaid interest income is fully taxable in the year received

4. Charitable contributions

1) Qualifying organization
- Nondeductible: Bingo, raffle, gifts (individuals), political contributions

2) Contributed property: lesser of basis/FMV
- Appreciated LT capital gain property: FMV

3) Maximum allowable deduction
(1) Cash 60% / LT capital gain property 30% of AGI
(2) Combination rules (overall limit): 60% of AGI

4) Carryover of excess charitable contributions: five years carryforward

5) Consideration for contribution

6) Contribution of services: not deduct

7) Students living: $50 per month

8) Timing of deduction: paid/charged

9) Substantiation requirement: Form 8283 (more than $5,000)

5. (Personal) Casualty and theft losses

- Federally declared disaster area

1) Casualty loss defined
2) Theft loss defined
3) Amount of casualty loss: reduction in FMV/basis
4) Amount of deduction: each exceeds $500 (2019)

6. Miscellaneous deductions

1) Gambling losses: only to the extent of gambling winning
2) Federal estate tax paid on income in respect of a decedent

III. Qualified Business Income Deduction

(Sec. 199A Deduction)

1) Qualified business income (QBI)

2) Limitations to the QBI deduction
(1) Qualified trade or business (QTB)
(2) Specified service trade or business (SSTB)

<Taxable income limitation>
Below $160,700 (2019): 20% of QBI
Above $210,700 (2019): QBT: w-2 wage and property limitation, SSTB: no deduction

<w-2 wage and property limitation>
a) 50% of W-2 wages for the business
b) 25% of W-2 wages for the business plus the unadjusted basis of qualified property

<overall limitation>
20% of the taxable income in excess of net capital gains

1.9 Above the Line Deductions (Adjustments)

1. Alimony paid (before 12/31/2018)

2. Retirement plan contribution

(1) Traditional (regular/deductible) IRA

a) Contribution: deductible
b) Tax-free accumulation of earnings (deferred)
c) Withdrawals (distributions): taxable
d) Amount of deduction (deduction limit) - $6,000 (2019) or earned income (compensation)
e) Earned income (compensation) defined - salary, wages, commissions

f) Deductibility requirements
(i) Full deductions: not participants in an employer retirement plan or AGI is less than $64,000 (2019)
(ii) Partial deductions: AGI is less than $74,000 (2019)
(iii) A spouse is not a participant and MFJ AGI is less than $193,000 (2019): full deductions

g) Premature (early) distribution (before age of 591/2) - 10% penalty tax
  1. Home purchase (1st time)
  2. Insurance (medical)
  3. Medical expense in excess of 7.5% of AGI
  4. Disability
  5. Education
  6. Death

* Excess contribution: 6% penalty (under age 59.5)
* Excess accumulation: 50% penalty (over age 70.5)

h) Additional catch-up contribution (age 50 or over): $1,000

(2) Roth IRA

a) Contribution: nondeductible
b) Tax-free accumulation of earnings
c) Withdrawals (distributions): tax-free
d) Contribution limits: $6,000 (2019)
e) Phase-out income limits: AGI is less than $122,000 (2019)
f) Qualified nontaxable distributions of Roth IRA: least five years
g) Rollovers from traditional (deductible) IRAs to Roth IRAs

(3) Nondeductible IRA

a) Contribution: nondeductible
b) Tax-free accumulation of earnings (deferred)
c) Withdrawals (distributions): previously accumulated untaxed earnings - taxable

(4) Education IRA (Coverdell Education Saving Accounts: CESAs)

a) Contribution: nondeductible
b) Tax-free accumulation of earnings
c) Withdrawals (distributions): tax-free (before the beneficiary reaches 30)
d) Contribution requirements - under 18,  $2,000 per child (2019), AGI is less than $95,000 (2019)

(5) Keogh (profit sharing) plans

Deductible $56,000 (2019), $57,000 (2020) or 25% of net self-employment earnings for Keogh

Other

*SEP (Simplified employee pension) plan
*SIMPLE (Savings incentive match plans for employees) plan

	Traditional IRA	Roth IRA	Education IRA (Coverdell ESAs)
Contribution	Deductible	Nondeductible	Nondeductible
Distribution	Taxable	Tax-free	Tax-free**
Limit (2019)	$6,000	$6,000	$2,000/child
AGI limit for full contribution (2019)	$64,000 (Single) $103,000 (MFJ)*	$122,000 (Single) $193,000 (MFJ)	$95,000 (Single) $190,000 (MFJ)

3. Penalty on early withdrawal of savings

4. Self-employed health insurance

 - 100% deductible

5. Self-employed taxes

 - 50% deductible

6. Education (student) loan interest expense

 - $2,500 (2019)

7. Educator expense

 - $250 (2019) per year each taxpayer

8. Moving expense

9. Health (medical) savings account contribution

10. Jury duty pay remitted to an individual's employer

11. Attorney fees paid in certain discrimination cases

* Higher Education Deduction

Tuition and fees deduction - $4,000

1.8 Losses: Deductions and Limitations

1. Net capital losses

1) Definition of capital assets

2) Netting procedures of capital gains and losses
Form 8949: Sales and Dispositions of Capital Assets - Schedule D

3) Net capital gains rules
(a) Long term: more than one year, 15% tax rate
(b) Short term: one year or less, ordinary income

4) Net capital losses rules
(1) Offset against capital gains (Schedule D)
(2) Offset ordinary income to a $3,000 maximum (Schedule 1)
(3) Carry forward an unlimited period

2. Sale or exchange of securities

1) Worthless securities: as if they were sold on the last day of the taxable year

2) Small business stock
(1) Sec. 1244 stock: losses as ordinary losses (up to $50,000)
(2) Sec. 1202 stock (more than 5 years): gain 100% exclude from GI

3. Net passive activity losses

1) Definition of passive activity - any rental activity / not materially participate

2) Passive activity loss rule (PAL rule) - only offset passive income
Nondeductible PALs carryforward - carry forward without any limit

3) Taxpayers subject to PAL rule - individuals, personal service corporations, closely-held C corporations

4) PAL (disallowed net loss) exceptions
(1) Mom and pop exception - $25,000 deduct is the individuals are actively participating
The $250,000 is reduced by 50% of the amount by which adjusted gross income exceeds $100,000.

(2) real estate professional (not passive activity)

1.7 Depreciation, Amortization, and Depletion

1. Depreciation

1) MACRS (1987 and beyond)

(1) Salvage value: zero

(2) Property other than real property (personal property)
 - 5-year 200% class: automobiles, light trucks, computers
 - 7-year 200% class: office furniture and fixtures, equipment
a) Half-year convention
b) Mid-quarter convention (more than 40% placed in the last quarter)

(3) Real property (subtract land cost)
a) Residential rental real property (27.5-year straight-line)
b) Non-residential real property (39-year straight-line)
c) Mid-month convention

2) Bonus depreciation

For qualified property (new or used personal property with a recovery period of 20 years or less) placed in service after Sept. 27, 2017, and before Dec. 31, 2022, the first-year bonus depreciation percentage increases to 100%.

3) Straight-line in lieu of accelerated depreciation

4) Expense election in lieu of depreciation (Section 179)

The limit is $1,020,000 (2019) on new or used properties that are acquired by purchase from an unrelated party.

2. Amortization

1) Sec. 197 Intangible asset

Intangibles such as goodwill, franchises, licenses, trademarks, and covenant not to compete may be amortized using a straight-line basis over a period of 15 years (180 months), starting with the month of acquisition.

2) Others

(1) Organizational expenditure: first $5,000 to be expensed and the remainder is amortized over 180 months
(2) Research and development expenses: deducted currently or amortized over 60 months.

3. Depletion

1) Cost depletion (GAAP)
2) Percentage depletion (Non-GAAP)

1.6 Gross Income - Exclusion

1. Items that are NOT Income

1) Return of Capital
2) Amounts Obtained by a Loan
3) Unrealized Income

2. Major Statutory Exclusions

1) Scholarships and Fellowships

Excludable only spent on tuition, fees, books, and supplies (not room and board)
(a) The grant is made to a degree-seeking student.
(b) No services are to be performed as a condition of receiving the grant.
(c) The grant is not made in consideration for past, present, or future services of the grantee.

2) Employee Fringe Benefit

(1) Taxable Fringe Benefits (Non-Statutory)

(2) Partially Taxable Fringe Benefits
a) Group term life insurance premiums (employer-paid): $50,000 of coverage

(3) Non-Taxable Fringe Benefits
a) Accident, medical, and health insurance premiums (employer-paid)
b) De minimis fringe benefits
c) Meal and lodging
d) Employer payment of employee's educational expenses
e) Qualified tuition reductions
f) Qualified transportation
g) Flexible spending arrangements (FSAs)
h) Qualified profit-sharing, and stock bonus plans

(4) Cafeteria plans

3) Insurance Proceeds

(1) Life insurance proceeds (nontaxable)
(2) Accidents insurance proceeds (nontaxable)
(3) Recoveries of lost profit (taxable)
(4) Personal (physical) injury award (nontaxable)
(5) Punitive damages (taxable)
(6) Workers' compensation (nontaxable)
(7) Medicare benefits (nontaxable)

4) Gift and Inheritances

5) Foreign Earned Income Exclusion