ACC 401 Midterm 1

How to calculate a tax?
Tax base x tax rate = tax

Tax base – federal income, amount on which tax rate is applied
Tax rate- depends on who taxpayer is

Proportional tax – tax rate does not change irrespective of whether tax base increases or
Ex. Sales tax

Progressive tax – as tax base goes up, your tax rate goes

Formula for federal income tax on individuals:
Income – exclusions = income
gross income - deductions = income
taxable income - (tax calculated – tax credits) = tax due/refund

Economic Justification - help control the in some manner or encourage certain activities, industries, or businesses
- research and development
- small businesses
- foster technological progress
- encouraging investment in business capital
- clean air & environmental resources
- agriculture

Social Considerations - desire to encourage certain results.
- accident and health insurance plans
- pension plans
- qualified charities
- obtain or extend education
- care for minors or disabled dependents

Equity Considerations - fairness, progressive, regressive, or taxes
- alleviate effect of multiple taxation
- postpone recognition of gain when lacking ability to pay the tax

wherewithal to pay - inequity of taxing a transaction when the taxpayer lacks the
involuntary conversion - property is destroyed by casualty or taken by a authority through condemnation

Political Considerations - political considerations often influence tax law
- special interest legislation
- state/local government influences

Tax law sources
Primary authorities – official tax authorities from the branches of government (legislative, judicial, executive)

Legislative – statutes, internal revenue code (THE source for law)
- Enacted by congress & signed into law by president

Judicial – cases on tax , look at these cases for research
- Interpret or internal revenue code/law

Administrative (Executive) – treasury department, IRS, private letter rulings, tax advice

Secondary authorities – comes from publishers, tax articles, tax sources
- Interpret and tax law from publisher’s perspective
- Good starting point for your
- Carry little to no weight in court system, cannot them in memos or in practice

Statutory authorities
U.S. Constitution
- amendment – grants congress to tax income from whatever source derived

Tax treaties - Enables congress to create tax treaties with other companies
- Negotiated agreements between two different on how they’re going to tax a person or business entity
- Sometimes will conflict with law, whatever comes out last prevails

Organization of Internal revenue code
- Subtitle, chapter, , sec, , paragraph, , clause
- Example of code citation:
Section, section #, subsection, paragraph designation

Committee reports
- Explanation of law, what the proposed change & justification
- Takes a long time for guidance to come out so people look at committee reports to the legislation

Legislative process for tax bills
1. Begins in of reps, in house ways of means committee, debated it and draft a bill
2. Send it to the whole house & vote on it, cannot bill
3. Goes to and if passes bill becomes an act
4. Passed to senate committee to debate & amend, send it back to senate
5. Senate debates, votes, and modify
6. Passes and goes to conference committee, takes house & senate version, choose whatever version provision, compromise & combine, or strike the provisions
7. Goes back to house & for vote
8. If passed, go to for signature & president signs it, becomes a public law & incorporated into internal revenue code of 1986
9. If president vetoes it, it’ll go back to house & senate, they can if they have 2/3 positive majority vote in each house & senate

Judicial Sources: The Courts
Supreme court – court in the land, all decisions in lower courts must be followed by supreme court

Court of appeals – 2nd highest level, circuit courts, 11 based on region, 1 in DC, 1 is court of appeals in federal circuit

- Different court of appeals do not have to follow other circuits decisions in appellate courts, not compelled to, can be persuaded & influenced but not required to

Trial level courts: trial level courts – lowest levels, where litigation is initiated
- Have to strategize where they’ll bring their claim
- Trial level courts have to follow other courts decisions, only have to follow higher court decisions with appellate jurisdiction

Us district court
- Local court
- Typically has judge, judges are
- Can hear tax, criminal, a variety of cases
- Taxpayer has to pay tax & then sue for refund
- The only trial level court where a trial is available
- Can appeal to court of

Us Tax court – national court, judges of tax
- the only court where the taxpayer doesn’t have to pay tax in order to be heard by the court
- if someone doesn’t agree with decisions, it can go to court of
- depends on taxpayer’s residence which court region to go to

Only court with small case division
- hears cases that are or less
- more informal preceding
- don’t need an , can represent themselves
- can’t be cited as
- not open to

Us court of federal claims
- Has judges, national court, usually 1 judge hear a case at a time
- Judges are
- Hears case that are brought against the
- Taxpayer has to pay tax & then sue for refund
- Have to appeal to Court of appeals for circuit, not based on geography/taxpayer’s residence

Tax court decisions
- Regular tax decisions have tax issues that have not come up before
- Memorandums involve decisions that is based on law

Practice Problem:

Tax Court - Judge(s)
Federal Claims - Judge(s)
District Court - judge(s)
Trial jury available - only in the court
Don't have to pay tax first - court

1. No cash to pay for litigation of IRS tax claim - court since you don't have to pay money beforehand
2. Complicated tax issue - court for tax experts
3. Issue is not complicated but want people sympathetic to their plight - court because there's a jury trial option

Writ of certiorari – request to be heard by court
- Rare that they’ll hear a tax case
- Do not hear all cases that are appealed to them

Stare decisis: Latin for “to stands by things decided”
- If taxpayer brings a case to tax court, the tax court has to follow its own rulings as precedent & has to follow prior ruling of court w/ appellate jurisdiction

Golsen rule - Decided that court must follow stare decisis
- Similar controlling facts but two different taxpayers with different circuits
1. One court has favorable vs other court is unfavorable
2. Even though the facts are the same, higher court rulings are and results are different
Possible to have conflicting decisions within tax courts themselves

Practice Problems:
a. Found a case for court of appeals for federal circuit with favorable decision for your client - Bring case to court of federal claims since it’ll follow court of appeals federal circuit ruling
b. Resident of NJ, there’s a case in 1st circuit & 3rd circuit that’s on point - circuit, the court of appeals would have to follow that decision when going to tax or district court
c. Resident of NJ, bring it before tax court, found 1st circuit & 9th circuit on point, one favorable & one unfavorable
- Both will have weight since there’s no prior decision in 3rd circuit
- Look at case that supports taxpayer and argue that, the case that’s unfavorable try to the difference from that one

Discuss significance of following taxpayer’s issue
1. Decision from district court of Wyoming, taxpayer lives in Wyoming - Follow ruling
2. Court of federal claims, taxpayer lives in Wyoming - Follow ruling
3. 2nd circuit court of appeals, taxpayer lives in California - Doesn’t have to follow ruling
4. Decision by supreme court - follow ruling

Administrative Sources: The US Treasury
- IRS is Division of US Treasury

3 Different Type of treasury regulations w/ 3 Different Purposes
Purposes
1. Interpretive – is interpreting the internal revenue code, providing further & explanation
2. Procedural – explains the IRS own and procedures in administration of tax law
3. Legislative – congress directs the treasury department to regulations about a specific tax area, actually writing laws instead of interpreting
- Pretty rare to do

Forms
1. Final – administrative authority, official interpretation of internal revenue code by treasury department & IRS
- Same force & effect as law
- Considerable in court system, judges will defer to these
2. Temporary – a tax issue comes up and needs more attention & guidance and will issue a temporary regulation
- issued concurrently with regulations
- you need proposed regulation for comments to get final regulations
- the normal process to make final regulations takes a long time
- expires automatically in years
- given deference by & follow it, taxpayers can rely on temporary regulations if ever litigated
3. Proposed – issue regulations & open to public , practitioners, academics will review & make suggestions, IRS take suggestions, takes them/rejects them and draft regulations
- the government’s view
- tentative
- carry less than final & temporary in court
- Are not on taxpayer & IRS

Revenue Rulings
- Official pronouncement that comes out of national office
- The IRS is applying tax law to a specific factual situation
- Do not carry as much as final or temporary treasury regulation
- Good for providing on IRS tax position they’ll take
- Often

Revenue procedures
- Does not carry much as treasury regulations
- Explains IRS practices &

Private letter rulings
- Taxpayer requests from IRS a decision based on their specific proposed tax
- Cannot be cited as by any other taxpayer in litigation
- Applies to the specific and specific situation
- Can be cited to avoid substantial understatement penalty & tax preparer penalty
- Acquiescence or non-acquiescence
i. Acquiescence – although IRS with court decisions, but will no longer continue litigate tax issue
ii. Non-acquiescence – disagree with court decision and continue to court decision
g. Actions on decisions - Explains for acquiescence or non-acquiescence

Technical advice memorandum - IRS agent, area director, appeals officer, etc. asks IRS national office for further for specific tax technical issue

IRS publications
- Cannot in memo or in practice
- Carry no in court system

Tax research process
Step 1: identify and refine
- Understand your facts, what’s from tax perspective

Open facts: haven’t happened yet
Closed fact: tax actions and want to know what will happen
- Identify issues
- Start broad & narrow it down

Step 2: locate appropriate tax law
- RIA checkpoint

Step 3: analyze tax sources
- Apply facts to , apply client’s facts to law
- Questions of fact – research hinges on client’s , favorable vs unfavorable, distinguish client from them
- Questions of law – words or phrases, definitions, meanings &
- Conflicting authorities – the one that carries more (higher court decision), age of decision, appellate jurisdiction that apply
- Consider both sides – cannot simply support position, have to look at opposing side (unfavorable), can you differentiate client’s cases to assess strength of conclusion

Step 4: formulated solutions, solutions
- Consider nontax factors

IRAC – issue, , analysis,

Assess tax law sources
Internal revenue code – authority
Treasury regulations – taxpayer has burden of
1. Final – force and effect of law, admin authority, substantial weight
2. Temp – can be , given considerable weight
3. Prop – not on taxpayer and IRS

Judicial sources – have to look at level of court case, taxpayer residence, type of decision
1. Novel tax issue = more vs tax court memo decision
2. Weight of authority
3. The the case has more weight
4. Have to look at subsequent

Other administrative sources
1. Revenue rulings, private letter rulings, notices from IRS
2. Does not carry as much
3. Can be overturned and has been

Unofficial sources
1. sources
2. Cannot cite, carry no
3. Can help understand but can’t be used

IRS publications
1. Carry no , IRS aren’t bound by these

Tax memo layout
Facts
i. do not simply cut & paste facts given
ii. glean only facts
iii. Provide necessary background
iv. Facts might influence research answer
Issues
Authorities
i. List out authorities & apply it to client’s fact
Conclusion
Analysis
i. start with authority, and then follow by decreasing authorities

United Draperies, Inc. v. Comm., 340 F.2d 936 (CA–7, 1964), aff'g 41 T.C. 457 (1963), cert. denied 382 U.S. 813 (1965).

a. In which court did this case first appear?
The U.S. Court
b. Did the appellate court uphold the trial court?

c. Who was the plaintiff?
United Draperies, Inc.
d. Did the U.S. Supreme Court uphold the appellate court decision?

Using the legend provided, classify each of the following tax sources.
Legend
P = Primary tax source
S = Secondary tax source
B = Both
N = Neither

a. Sixteenth Amendment to the U.S. Constitution.

b. Tax treaty between the United States and India.

c. Revenue Procedure.

d. An IRS publication.

e. U.S. District Court decision.

f. Yale Law Journal article.

g. Temporary Regulations (issued 2018).

h. U.S. Tax Court Memorandum decision.

i. Small Cases Division of the U.S. Tax Court decision.

j. House Ways and Means Committee report.

income – broadly defined, taxed from whatever derived
a. included in gross income unless there’s a statute that excludes it
b. proceeds are not included in gross income

exclusions – excluded from gross income and it’s never taxed
a. statutes state so
b. life insurance proceeds to beneficiary are generally from gross income
i. good public policy – people are too distraught to worry about paying tax
c. interest income from state & local municipal bond is exempt
i. federal government is subsidizing state & local industries, provides incentive to bonds

deductions – not allowed unless there’s a specific tax revision
a. above the line deductions (Above adjusted gross income) – trade or expenses are typically deductible, COGS, salaries, etc.
b. below the line deductions (below adjusted gross income) – have option of picking higher of either standard deduction or itemized deduction
i. itemized – expenses that are allowed by statutes to be deducted
1. medical expenses
2. mortgage interests
3. state taxes
4. charitable contributions (qualified charitable organizations)
c. qualified businesses income – certain businesses are allowed a deduction, engaged in certain industries

tax credits – amounts and other prepayments
a. reduces current tax liability
5. realized & recognized income
a. deferral – income is taxed
b. have cash on hand for current use
c. can reduce the amount of tax liability now and apply it later

recognition of gross income – once all 3 recognized, have to be included
a. has to be an benefit – included in tax return
b. must be – prerequisite for recognition (what period is income recognized & reduce uncertainty in calculating amount of income)
i. taxpayer engages in a transaction with another party
ii. as a result of the transaction, there is a measurable change in taxpayer’s property rights
c. no tax provision in internal revenue code that allows an or deferral

Return of capital principle – return of the cost of taxpayer capital investment of an asset is not taxed, what’s taxed is the between sales proceed and cost of asset
a. Bought amazon stock for $1000, sold for $2500, gain 1500
i. $1000 cost is return from their proceeds
ii. Only should be taxed

Economic income – takes into account the value of the asset less the liabilities and add back consumption

Gross income – has to be and recognized

Accounting periods
a. Individuals: year end, Jan-Dec
b. Corporation: Typically year, end on a month other than Dec
c. Partnerships & S-Corps: Typically year end

3 primary accounting method for tax purposes
a. Hybrid - Combination of cash basis & method
ii. If a taxpayer sells inventory, sales rev & cogs follow method
iii. Rest of taxpayer’s income and expenses follows basis

Cash receipts method - recognize income when it is actually or constructively received
Actual – have in hand
Constructive
a. Income has been made readily to
b. No substantial restrictions or limitations on taxpayer’s over the income (claims of rights doctrine)

Joshua works for the Gap, received check in mail on dec 20 2020, didn’t cash check until jan 2021
a. Recognize gross income in since he could’ve cashed it anytime in 2020
4. Joshua received check in dec 20 2020, saw it was postdated in Jan 2021
a. Recognize in 2021 since he can’t cash it until 2021

Advantages
1. More flexibility for taxpayer in terms of timing of recognition of income or
a. Taxpayer sells goods in Dec, tells customer payment is due in Jan, do not recognize income until they receive money
b. Deferred from 2020 to 2021

Accelerate deductions to reduce taxable
a. Pay expense in 2020 instead of 2021
b. IRS placed restrictions to how much you can defer or accelerate
3. Easier for bookkeeping purposes
iii. Loan proceeds – not includible in gross
1. Not revenue, it’s a

Fair market value of assets – in gross income
1. Instead of cash, sent to Joshua $500 in jackets, sweaters, etc.
a. Doesn’t have to be cash, form of receipt does not matter, would have to include
v. Property subject to restrictions

Receives property subject to substantial risk of forfeiture (have to return property), does not recognize in gross the amount of property until substantial risk of forfeiture lapses
a. Maria is working and employers give her stock, if you leave within 5 years of date you were hired you have to forfeit the stock
b. Does not have to recognize until the 5 years is over and there’s income recognition

Obligation to repay – receive income and have to it
1. Landlord requires security deposit, but have obligation to pay back if there’s no damage to apartment
a. Does not recognize as gross income unless renter creates damage to apartment and loses their security deposit
b. Recognizes in the year he inspects and discovers damage
i. Landlord also gets a deduction in repairs and maintenance

Accrual method - Results in a better matching of revenues and
b. Recognize income in the year it is

All events test is satisfied – all events have occurred that fixed the taxpayer’s right to receive the
1. of one of the following dates
a. Date the taxpayer has provided services or transferred
b. Date the payment is
c. Date the payment is
ii. Income can be determined with reasonable accuracy (you know the amount)

Subsequent event
i. If it isn’t satisfied and there’s a subsequent event like a taxpayer still recognizes once the elements are satisfied
1. If customer later exercises warranty, taxpayer can claim

Prepaid rent & prepaid interest – paid ahead of when it is due, so recognized when payment is

Special Rules for Accrual Method
Prepaid income: general rule
1. Financial accounting perspective: unearned/prepaid income is considered as a liability, report it when it is actually
2. Tax perspective: prepaid income/advance payment/unearned income is recognized in the year of since all events test was satisfied & measured with reasonable accuracy

Prepaid rent and prepaid interest
1. Follow the general rule of all events test & reasonable accuracy

Advance payment for services
I.R.C. Sec. 451(c) – have to recognize the amount in the in which they perform services, the remainder can elect to defer only to the following

Advance payment for goods

Full inclusion – in the year they received, they recognized the amount in gross income
Deferral – in taxpayer’s financial statement, if it reports income in the year of receipt, it cannot defer to following
i. Can defer it if their financial statement reports it as a deferral to only following year

Prepaid rent or interest – recognized in year of

Income sources
a. Income from personal services (earned income)

Assignment of income doctrine - The person that earns the income by performing is taxed on income of the performance
ii. Fruit and tree metaphor

Income from property - Income from property is taxed to the of the property

Interest income – any interest income is , no matter how small
a. Interest income from a bank
b. Income producing property

Property transferred by gift – interest income is by donor and giftee based on number of days each have held the property
Property transferred – seller recognizes interest income on date of

Dividends
Qualified dividends – subject to tax rate, lower than ordinary income tax rate, depends on taxpayer’s ordinary income
i. 0, 15, 20%

Stock gifted before date of record
i. Dividends has ripen and belongs to the to be taxed

Life insurance proceeds - Generally from gross income

Exceptions to exclusion

Owners policy and takes cash surrender value
Cash surrender value – if owner voluntarily terminates their policy and can cash it out

Transfers for valuable consideration - transfers to another for money

Accelerated death benefit – if the taxpayer is insured on the policy, receives the benefit on result of transfer to someone else
1. receives proceeds from the insurance & is not
2. Person is terminally or chronically ill and transfers to another person

Terminally ill: dying within 24 months due to a
a. Can use benefit for whatever they want and still

Chronically ill: cannot perform certain daily
a. benefits have to be used for long term

interest on life insurance proceeds
i. leaves it with insurance company and choose to receive install payments w/ interest
ii. principal amount excludable, interest is

tax benefit rule – if a taxpayer, in one year, gets the tax benefit of a deduction and then in a later year recovers all or part of amount, in that year of recovery, have to include the amount of the recovery in

Interest on state & local government obligations

Interest from municipal bonds – from gross income
b. Its constitutional to tax bonds but never amended the laws
c. It encourages people to buy their bonds even if their interest rates are

Us treasury bill & bonds are still at federal level

One state can tax interest on bonds from another state
i. Want to discourage you from buying out-of-state bonds

Imputed Interest on below-market loans - Shifting taxes from high rate to low rate, using below-market loans
i. Weren’t charging the appropriate rate
ii. Lend money to another party w/ low tax rate w/o charging interest
iii. Creating tax as a unit

Imputed interest rules
i. Since lender is not charging imputed interest, government will impute themselves (deemed what they think is appropriate)
ii. Amount that would have been charged at the rate – what is actually

Applies to:
1. Gift loans
2. Compensation-related loans
3. Corporate-shareholder loans
4. Tax avoidance loans

Gift loan
1. Loan proceeds – 200,000
2. AFR 10%
3. Imputed interest 20,000
4. expense of
a. Used for personal reasons, interest expense not
b. Lender is deemed to have interest of 20000 taxed at their rate
c. Lender paid a gift of 20,000, not
d. Borrower received a gift of 20,000 from gross income
5. IRS gets money from interest of lender
6. Motive of loan: gift

Employer to Employee – compensation-related loans
1. Loan proceeds – 200,000
2. AFR 10%
3. Imputed interest 20,000
4. Borrower, int of 20,000
a. Used for personal reasons, not
5. Lender has interest of 20,000 taxed at ordinary income tax rate

Motive of loan
a. lender considers it as compensation expense
b. borrower receives compensation of 20,000, taxed at ordinary income tax rate
7. IRS gets money from compensation income of

Corporation to shareholder – corporate-shareholder loans
1. Loan proceeds – 200,000
2. AFR 10%
3. Imputed interest 20,000
a. Shareholder has 20,000 interest expense, not for personal reasons
b. Corporation received interest of 20,000 taxed at ordinary rate

Motive:
a. Deems corporation pays a 20,000 , not deductible
b. Shareholder deemed to receive dividend of 20,000 subject to preferential rate at 0, 15, or 20% depending on ordinary rate
IRS gets money from interest of Corporation & dividend of shareholder

Exceptions

De minimis exception – for convenience
1. $10,000 or less, applies to all loans
2. Cannot be used for tax avoidance purposes or to purchase income-producing

Aggregate loans
1. $100,000 or less
2. Applies only to loans between individuals
3. Imputed interest is capped at a ceiling in the amount of borrower’s net investment
4. If borrower’s net investment income is $1000 or , imputed interest rules do not apply

CODI (cancellation of debt income - Discharge of indebtedness – cancellation of debt forgiveness of debt)

General rule: Amount is in gross income, no obligation to repay

If taxpayer transfers officiated property in satisfaction of debt
i. Government views it as if sold as property as gain or loss & took money from sale and repaid debt, not treated as a sale

Foreclosure – treated as sale, have to recognize gain or loss on forced sale

Special situations:

Creditors’ gifts – borrower borrows money from lender, lender decides to cancel debt
1. Treated as a if canceled out of love, affection, respect, not subject to tax
2. If business canceled debt for business reasons or expediency, has to be considered as

Seller’s cancellation
1. Canceled all or part of debt, it is considered as purchase price
2. When later sold, has to recalculate gain or loss from the new basis
3. Not

Shareholder’s cancellation of corporation debt
1. Shareholder loaning money to corp
2. Treated as if shareholder made an additional capital contribution
3. Not
4. Shareholder basis in stock increases

Forgiveness of certain student loans
1. If student stays within state and practices for certain number of years, they’ll cancel the debt
2. from gross income

Insolvency and bankruptcy – excludable to the extent that the taxpayer is insolvent
1. Liabilities exceed
2. Have to reduce tax attributes to extent of exclusions or to reduce basis in tax assets

Trade or Business Deductions - Deductions must be directly connected to activity
a. IRC Sec. 162

To be deductible:
i. Ordinary – common and accepted practice in that business industry, does not have to be
ii. Necessary – & appropriate to the business
iii. Reasonable – not under the circumstances

Methods of Accounting

Cash
General – deductible in the year it is

Capital expenditures – cannot take an deduction even though you paid the full amount
a. Have to capitalize and

Prepaid expense
a. Used to try to accelerate their deduction by paying in dec 2020 instead of jan 2021

One-year rule (12 month rule) – deductible in the year that it is provided that two elements are satisfied, both tests have to be satisfied
i. Contract period cannot last more than year
ii. Contract period cannot extend beyond the year following the year of (year payment is 2020, contract cannot extend past 2021)
c. If not fully satisfied, they must prorate the prepaid expense over the contract period
d. Prepaid must be required, not voluntary
e. Does not apply to , interest is always recognized ratably over the period

Accrual – all 3 has to be met
All events test – all events have occurred to fix the
Amounts have to be measured with reasonable
Economic performance test
1. receives good and services from another – met when 3rd party provides the goods or services to taxpayer
2. provide goods and services to another – met when taxpayer provides the goods and services
3. rent or lease property from another – met ratably over the rental period
4. payment liabilities – met when it is actually

interest expense – recognized ratably over the period

recurring item exception to economic performance test (make an m adjustment)
1. even though economic performance test is not yet, a taxpayer can take a deduction for a recurring item
a. the item has to be and the taxpayer takes it/treats it consistently from year to year
b. the amount cannot be , cannot be a significant event
c. the all test has to be met
d. even though economic performance test has not occurred yet, it must occur within/after months year end
e. if all satisfied, can take a deduction for the item

reserves – not because economic test has not been satisfied
1. ex. the allowance for doubtful accounts
2. estimates are not deductibles

Expenses accrued to related parties – will be disallowed a
a. Irc section 267
b. Family members, spouses, siblings, ancestors, descendants
c. Shareholders that own more than 50% of a C-Corp
d. Controlled group

Election to Expense Assets – Section 179
a. Have to capitalize and depreciate over useful
b. Taxpayer can opt to get an immediate up to 1040000 for 2020
c. Annual election
d. Applies to tangible personalty used in trade of business
e. Have to reduce the basis of the asset you’re able to claim

Limitations
i. Phaseout limitation (2590000 for 2020)
1. The immediate expense, dollar for dollar, to the extent of the personalty is over 2590000
ii. Taxable income limitation – the taxpayer is further limited in their to the taxable income of the business

Additional First-Year Depreciation (Bonus Depreciation)
a. In addition to 179 or instead of 179
b. Can immediately deduct % of the cost of qualified property
c. Qualified property – property that has class life of 20 years or less
i. Include new and used but newly
d. If 179 is taken, bonus depreciation is computed after
e. Claim bonus in the year assets were placed in
f. After bonus, any remaining basis is calculated using MACRS

Excessive Executive Compensation
a. Government concerned that c-corps were claiming huge deductions for executive compensations
b. Put a $1 million a C-Corp can take for executive compensation per tax year, per covered executive

Exceptions – before Tax cuts and Jobs Act 2019 taxpayers found a way around this
i. Would pay a $1 million to executive, 2 million on performance-based, 1 million on commission-based; would get around the ceiling by recategorizing the compensation
ii. If contract was established in 2017, it would be in
iii. After tax cuts and jobs act, performance based and commission would be included in ceiling

Before: Established by 11/2/2017, you will be grandfathered in and allowed
a. Compensation 1,000,000; performance based 2,000,000; deducting a total of 3 million on tax return

After:
a. No longer the way to get around
b. Compensation 900,000; performance based 2,100,000; can only deduct 1,000,000

Exceptions – can still take deductions for these and not included in the ceiling
1. Payments to qualified plans
2. Payments excludable from gross
a. Health benefits, medical benefits

Cost Recovery
a. Tangible Assets: assets that will benefit more than period has to be capitalized and depreciated
i. Allocated over useful life of
ii. Use an form for depreciation
Intangible assets: copyrights & patents are
c. No deduction for land/assets with no life

Nature Property
Real property (realty) – land and
Personal property (personalty)– any asset that is not
i. Not to be confused with use property
ii. Write off are not allowed for personal use assets
1. Personal use can be realty or
c. In order to be deductible, has to be a trade or business asset or for the production of
d. Has to have a limited life & useful life
i. Subject to wear, tear and obsolesce

Property basis – cost basis
Asset cost basis – accumulated = adjusted cost basis
1. All expenses to purchase the asset and make it available for intended use
a. Sales tax, insulation costs
ii. Reduced by the amount of depreciation that is or could’ve been taken
1. What is deducted as depreciation expense or what could’ve been but didn’t

MACRS: tax depreciation – form of accelerated depreciation
a. Taxpayer gets more upfront in the earlier years of the asset and slows down in the later years

Personal property
i. What is class of the asset – determined by revenue procedures
ii. What the method of – double declining balance method, twice the straight line
1. Use tables the incorporate the methods

What is the convention
1. Half year
a. In the year, the asset is placed in service, taxpayer will get half-year worth of depreciation
i. Placed in jan or dec still gets year
b. In the year of disposal, will get a year worth of depreciation
i. Jan vs dec will still get a half year worth
i. 1st percentages and last percentages are half years
ii. Everything in the middle is not half year, it is full year
iii. If you dispose in the middle, you’d have to divide the percentage in half

Mid quarter
a. Applies if more than % of personalty is placed in service during last quarter of the year
i. Taxpayers were buying in dec 2020 instead of jan 2021
b. Treats assets as if it were placed into service in the middle of the quarter
i. Placed in jan, 1st quarter
c. Disposal - Gets depreciation in half of the quarter in the of disposal
i. Get depreciation expense in 1, 2, .5 of quarter 3
ii. Full year’s depreciation x [(quarter in which asset disposed - .5)/4]
d. Year 1 already takes account in the half quarter like half-year
i. First – 12.5% = .5/4
ii. Second – 37.5% = 1.5/4
iii. Third – 62.5% = 2.5/4
iv. Fourth – 87.5% = 3.5/4
iv. DB – gets more in the beginning and then switches to straight-line

MACRS – Realty
a. Residential rental – years
i. Property for which % or more of gross rental revenues are from non-transient dwelling units like an apartment building
ii. Straight-line method
iii. Mid-month

Nonresidential realty 0 31.5 years or years
i. Depends on when asset was placed in service – look at the years
ii. Straight-line method
iii. Mid-month
1. April 25 but treated as April 15
2. Calculate a full year’s depreciation x [(month in which asset disposed - .5)/12]

Amortization
a. Sec. 197 Intangibles
b. Intangible assets – assets taxpayers have acquired in the of a business
i. Goodwill, copyrights, patents
ii. Amortized on straight-line basis, years (180 months) beginning in month intangible is acquired

Investigation of a business - Investigation expenses a taxpayer occurs if they’re looking to an existing line of business or looking to starting a brand- line of business
b. Government concerned that what taxpayers are claiming to be investigation expenses but are actually expenses
d. Depends on if taxpayer is already in a similar line of business of which that they are investigating
i. Regardless of whether acquired or not acquired, can deduct the amount of expenses

TP not in a similar line of business or same business being investigated
i. Depends on whether acquired or not acquired

Not acquired: no allowed
1. Gov’t concerned that taxpayers were trying to claim personal vacation expenses

Acquired: can take deduction subject phaseout
1. Election – 5,000 of expense
2. Phase-out – 5,000 dollar for dollar to the extent the investigation expense 50,000
a. Remainder is amortized over months (15 years)
b. Start in month business is acquired

Interest Relating to Tax-Exempt Income
a. A taxpayer takes out a loan, uses loan proceeds, and bank is charging an interest to buy tax exempt income producing property then the interest expense is disallowed
Research and experimental expenditures
a. R&E expenditures
i. Has to be for the and/or improvement of product, invention, formula
ii. Does not include ordinary test, controls, advertising, promotions

Before 1/1/2022, three alternative treatments
i. Deduct the amount in the year paid or incurred
1. Most taxpayers choose to do this

Defer and amortize R&D expenses
1. Over a period of at least months (5 years)
a. Begins in the month taxpayer expects to receive a
2. Over 10-year period
a. begins in year or incurred

capitalize
1. on the balance but no deductions until the project is or deemed worthless

2022 onwards, 1 way to treat – TCJA 2017
i. No expense method
ii. & amortized
iii. Over months (5 years) domestic R&D
1. 15 years for foreign research expenses
2. Begin in the mid-point in the year that it was or incurred

Business Interest Expense Limitation
a. Take out loans and drive down taxable income, deduct interest related to the loans
b. TCJA 2017
c. The amount of deduction is limited to the sum of business interest income + taxable income
d. CARES Act: 2019 & 2020 % of adjusted taxable income
e. 2021 onward, % adjusted taxable income
f. indefinitely until they can use it
g. Targeted towards corporations

Exception: average gross receipts for the prior 3-year period of $ million or less, there will be no limitation

Charitable Contribution Deduction – for C-Corporation
a. Also from individual tax perspective
b. Qualified charitable organization – tax-exempt organizations in the
c. Donative intent – no intention of getting anything back in
d. Deductible in the year it is paid, regardless or cash or basis
i. No obligation to make a charitable contribution

Exception: only applies to C-Corp, if met it can deduct amount in 2020 despite not being paid yet until 2021
1. The board of directors approve the contribution by the corporation’s year (ex. Dec 31 2020)
a. Approves 100,000 by year-end
2. Must be made by day of the 4th month after year-end
a. April 15th

Property contributions
i. Long term capital gain property – capital asset held for more than 1 (like stock) then the amount is the fair market value of that property subject to limitations
1. Taxed at rates
ii. Ordinary income property (like inventory) – taxed at rates
1. Amount is adjusted basis of that property subject to limitations
a. Depends on what year
iii. Limitation: % of taxable income (before charitable contributions, NOLS, capital loss carryovers, DRDs)
1. CARES ACT: for 2020 only, % of taxable income for contributions
iv. Any amount disallowed because of limitation can be carryforward for years