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EA Exam Prep – Part 2A

• All audio is streamed through your computer speakers. • There will be several attendance verification questions

during the LIVE webinar that must be answered via the online quiz at the conclusion to qualify for CPE.

• Today’s webinar will begin at 2:00pm EDT• Please note: You will not hear any sound until the webinar

begins.

EA Exam Prep – Part 2A

John O. Everett, Phd., CPA

Cherie J.Hennig, Phd., CPA

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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

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Topic 1

Business Income:Special Income Inclusion Rules

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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)

farm-price (mkt. – disposition costs), or (4) unit live-stock (standard unit price by type and age)

•Question 1

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

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1B Farm Disaster and Weather-Related 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

Question 2In 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

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Question 3Farmer 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

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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)

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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)

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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

Question 4Ms. 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

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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 non-corporate 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

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Topic 2

MACRS Cost Recovery

Deductions

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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

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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

Question 5During 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

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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

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

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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

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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

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 $ 240,000 (a) Bonus depreciation 1,010,000 (b) Regular MACRS (7 yr.) 144,329 (c) Total deduction $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

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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. $-0- b. $150,000 c. $350,000 d. $500,000

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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

Question 7All 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

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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)

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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

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

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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

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Topic 3

Business Bad Debt

Deductions

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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 out-of-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)

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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

Question 9With 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.

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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

Question 10In 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. $-0- b. $1,000 c. $4,000 d. $5,000

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Topic 4

Tax-DeferredExchanges

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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

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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)

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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

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

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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

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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

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 12Lou 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 12,250Lou 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?

Lou Casey a. $4,000 $3,000 b. $4,000 $2,750 c. $4,750 $3,000 d. $4,750 $2,750

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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

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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

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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

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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)

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)

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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)

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Topic 5

Sec. 1231 Gains & Losses

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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

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

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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

Figure 5

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Business & Investment Casualty & Theft Section 1231 Capital Taxable Gains & Losses Gains & Losses Gains & Losses Income*

Short-Term: $ XXX $ XXX $ XXX (XXX) (XXX) (XXX) XXX XXX XXX Long-Term: $ XXX (XXX) XXX XXX (XXX) XXX ________ Taxable

* Includes any Sec. 1245 and Sec. 1250 depreciation recapture and Sec. 1231(c) ordinary income.

Net Gain

Net Gain

Net Loss

Net Loss

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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

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Topic 6

Depreciation Recaptures

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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

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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

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 $53,000 $85,000 $106,000 Adjusted basis ($100,000 - $40,000) (60,000) (60,000) (60,000) Total gain (loss) $ (7,000) $15,000 $ 46,000 Composition of gain: Sec. 1245 (ordinary income) -- $15,000 $ 40,000 Sec. 1231 gain -- -- 6,000 Sec. 1231 loss $(7,000) -- -- 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 14Mr. 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

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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

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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

Figure 7

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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.

Question 15On 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

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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

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

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6F “Quick Look”: Sec. 291 Recap (Corp) & 25% Rate

Gain (Ind)Gain assuming 1245 $100,000Actual 1250 gain ( 20,000) 25% Gain (IND) $ 80,000 * x .20Sec 291 Gain (CORP) $ 16,000 ==== * Termed “Unrecaptured Sec. 1250 Gain”

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Topic 7

Self-employed Taxes, Estimated

Taxes, and Special Tax Computations

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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

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

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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 non-farm up to $4,800 as SE income

•Farmers – Similar method •Required for Opt. - $400 SE income prior 2 yrs.•Question 18

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:– Gross profit from sporting goods store $100,000– Rental income from upper level (45%) of building 20,000– Building depreciation expense 10,000– Utilities for ground floor (tenant pays own utilities) 4,500– Depreciation on vehicles used in business 3,000– Gain on sale of van used 100% in business 2,000– Contributions to her Keogh retirement plan 5,550– Sarah’s health insurance premiums 4,500– Mortgage interest on building 10,000– Other expenses of running her sporting goods business

11,500 a. $64,700 b. $68,200 c. $70,000 d. $83,000

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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

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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

Question 19Cal 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 $140,000Which 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

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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

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Topic 8

Partnerships: Tax Issues at Formation

Under Sec. 721

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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

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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

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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”

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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

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

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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

Question 21Earl 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?

Capital Gain Basis ofRecognized Partnership

Interest a. $1,600 $1,600 b. $0 $(1,600) c. $4,000 $8,000 d. $1,600 $0

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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

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

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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

Figure 8(a)

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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)

Figure 8(b)

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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).

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

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Topic 9

Reporting Partnership Income

& Guaranteed Payments

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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

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

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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

Question 25For 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 750The 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

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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

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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

Question 26Under 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?

Partnership Sybil a. $3,000 $15,000 b. $15,000 $15,000 c. $3,000 $27,000 d. $15,000 $27,000

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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

Question 27Under 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

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Topic 10

Partnership Distributions and

Sales of Partnership Interest

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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

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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

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

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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

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

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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

Question 30Which 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.

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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

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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

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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

Question 31A 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 Fair Market Value Cash $ 0 $ 0 Inventory items 1,000 2,000 Asset X 500 4,000 Asset Y 1,000 1,000What is A’s basis in Assets X and Y?

Asset X Asset Y a. $ 500 $1,000 b. $1,500 $3,000 c. $3,500 $1,000 d. $4,400 $1,100

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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

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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

Question 32The 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)

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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

Question 33Susan 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 Fair Market Value Cash $ 60,000 $ 60,000 Unrealized receivables 0 32,000 Inventory 40,000 80,000 Fixed assets 60,000 40,000 Total assets $160,000 $212,000What 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

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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 equiv-alent 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 non-partnership 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. Form W-2 wages2. Rate of pay for the period3. 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

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Question Answer Explanation

1 c The cost of raising cattle has already been deducted

2 b Postponement allowed if crop income otherwise would occur then

3 c ($50,000/250 = $200 SP per cow); $200 x 50 = $10,000 deferred

4 b If all services not completed by 2014, no further deferral available

5 a More than 40% of personalty (90/200) placed in service in last qtr

6 b The $500,000 max. reduced by $350,000 excess over $2,000,000

7 b An ADS election may not be revoked

8 c Max. deduct. (MACRS & Sec. 179) is $ 11,160 limit x .60 usage

9 b Business bad debts are deductions against ordinary income

10 d Full amount is includable, since the NOL used completely in 2011

11 d Gain is limited to boot received; expenses may offset boot first

12 b L(2,000basis+2,000 boot given); C(2,750basis+2,000gn-2,000bt)

13 b Assumes property used in business, qualifies for Sec. 1231

14 b Total depr. taken ordinary, balance is capital (only 1231 trans.)

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15 b Total gain is $107,000 ($225,000 - $118,000); $27,000 excess is ord. 16 a All recapture is recognized in the year of sale for an installment sale17 a An S shareholder is investor and not considered to be self-employed 18 c Ignore rents, gain, Keogh, ins. prem.; deduct 55% of depr. & mortg.19 b At least 2/3’s of income from farming, they need only make one pay.20 a No boot or services are involved, no gain is reportable by partner21 d Gain = $9,600 liab. assumed by other partners - $8,000 adj basis22 a Basis=$30,000 adj. basis – ($15,000x.80) mortg. + ($4,000x.20) liab23 c P’ship = $15,000 adj basis to Bob carries to p’ship (no inc. for gain)24 d Depr. expense could never be handled differently by the partners25 c Ord. = [(37,000-1,000+4,000-7,000-750) x .50] (1245 is part of ord)26 a Partner guaranteed $15,000; income share only $12,000; $3,000 GP27 d Use GP and ord. income share of p’ship year ($12,000 & $6,000)28 b Basis is limited to partnership interest basis less cash received29 c Pre-contribution gain of $35,000 is recognized ($60,000 - $25,000)30 b Payments for p’ship interest itself are distributions, not inc. shares31 d After Inv. = $5,500; X gets $500 + $3,500 apprec. + (4/5 x$500 exc.) 32 c Liabilities assumed are included in amount realized; net gain $033 c ¼ of gain on partnership books for rec & inv is ord.; rest is cap loss

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