gleim cpa review...example 8-10 maximum sec. 179 deduction in 20182019, diana’s corner stores...

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Gleim CPA Review Updates to Regulation Study Units 8-20

2019 Edition, 1st Printing June 2019

NOTE: Sections with changes are indicated by a vertical bar in the left margin. Text that should be deleted is displayed with a line through it. New text is shown with blue underlined font. The revisions included in this PDF primarily reflect tax laws that became effective January 1, 2019. These tax laws are testable on the CPA exam beginning July 1, 2019. All Gleim outlines, questions, and simulations have been updated accordingly. This PDF reflects the relevant in-book changes for Study Units 8-20 only. A separate PDF contains the in-book changes for Study Units 1-7. This update does not include outline sections or questions in which the only changes were to update tax years. Please make note that these need to be updated by you for your book. Our online materials already reflect all tax year updates. As of the date of this update, the IRS had not yet released all of the 2019 tax forms. Please check www.gleim.com/taxforms for any updates. The IRS forms will be updated online as they are released. Study Unit 8 -- Property Transactions: Basis and Gains

Page 220, Subunit 8.1, Item 4.b.:

b. Uniform capitalization rules do not apply if property is acquired for resale and the company’s annual gross receipts (for the past 3 years) do not exceed $2526 million.

Page 228, Subunit 8.2, Item 3.g.4) and Depreciation Methods table:

4) The following three types of real property qualify for 15-year, straight-line depreciation:

a) Qualified leasehold improvement property (QLIP) b) Qualified restaurant property (QRP) c) Qualified retail improvement property (QRIP)

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Depreciation Methods

Method Type of Property Benefit

GDS

200% DB

• Nonfarm 3-, 5-, 7-, and 10-year property

• Farm 3-, 5-, 7-, and 10-year property placed in service after 2017, in tax years ending after 2017

• Provides a greater deduction during the earlier recovery years

• Changes to SL when that method provides an equal or greater deduction

150% DB

• All farm property (except real property) Farm 3-, 5-, 7-, or 10-year property placed in service before 2018

• All 15- and 20-year property (except qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property)

• Nonfarm 3-, 5-, 7-, or 10-year property

• Farm 3-, 5-, 7-, or 10-year property placed in service after 2017

• Provides a greater deduction during the earlier recovery years

• Changes to SL when that method provides an equal or greater deduction

SL

• Nonresidential real property

• Qualified leasehold improvement property

• Qualified restaurant property

• Qualified retail improvement property

• Residential rental property

• Trees or vines bearing fruit or nuts

• Water utility property

• All 3-, 5-, 7-, 10-, 15-, and 20-year property electing SL

• Property for which you elected Sec. 168(k) of the Internal Revenue Code for a tax year beginning before January 1, 2018

• Qualified improvement property [as defined in Sec. 168(e)(6) of the Internal Revenue Code] placed in service after 2017

• Provides for equal yearly deductions (except for the first and last years)

ADS SL

• Listed property used 50% or less for business • Property used predominantly outside the U.S.

• Tax-exempt property

• Tax-exempt bond-financed property

• Farm property used when an election not to apply the uniform capitalization rules is in effect

• Imported property from trade-discriminating countries

• Any property for which you elect to use this method

• Any nonresidential real property, residential rental property, or qualified improvement property held by an electing real property trade or business [as defined in Sec. 163(j)(7)(B) of the Internal Revenue Code]

• Any property that has a recovery period of 10 years or more under the GDS that is held by an electing farming business [as defined in Sec. 163(j)(7)(C) of the Internal Revenue Code]

• Provides for equal yearly deductions (except for the first and last years)

of 21 Page 230, Subunit 8.2, Item 4.d. and Example 8-10:

d. For 20182019, a deduction may be for no more than either

1) The amount of $1,000020,000 minus the excess of Sec. 179 costs for the year over $2.55 million or

[. . .]

EXAMPLE 8-10 Maximum Sec. 179 Deduction

In 20182019, Diana’s Corner Stores upgraded various equipment and computers at a total cost of $2,750,000. All assets purchased are eligible for Sec. 179 treatment. The Sec. 179 deduction is phased out dollar for dollar once the minimum threshold for purchases is exceeded. Therefore, the maximum Sec. 179 deduction Diana’s Corner Stores can take is $750820,000 [$1,000020,000 maximum deduction – ($2,750,000 purchases – $2,500550,000 phaseout)].

Page 236, Subunit 8.3, Item 4. table:

Filing Status 0% Breakpoint 15% Breakpoint 20% Breakpoint

Married Filing Jointly Under $77,20078,750 $77,20078,750 $479,000488,850Head of Household Under 51,70052,750 51,70052,750 452,400461,700All Other Individual Filers Under 38,60039,375 38,60039,375 425,800434,550Estates and Trusts Under 2,600650 2,600650 12,700950

Page 240, Subunit 8.1, Question 4:

4. Which of the following is subject to the Uniform Capitalization Rules of Code 263A?

A. Editorial costs incurred by a freelance writer.

B. Research and experimental expenditures.

C. Mine development and exploration costs.

D. Warehousing costs incurred by a manufacturing company with $12 million in annual gross receipts.

Answer (D) is correct. REQUIRED: The uniform capitalization rules. DISCUSSION: The uniform capitalization rules

require the costs for construction (manufacture) of real or tangible personal property to be used in trade or business and costs of producing or acquiring property for sale to customers (retail) to be capitalized. The uniform capitalization rules do not apply if property is acquired for resale and the company’s annual gross receipts (for the past 3 years) do not exceed $2526 million. Both direct and most allocable indirect costs necessary to prepare the inventory for its intended use must be capitalized. The warehousing costs are direct costs that must be capitalized and the manufacturing company has annual gross receipts of $12 million so the exemption does not apply.

Answer (A) is incorrect. A freelance writer is not a manufacturing or acquisition activity. Answer (B) is incorrect. The research and experimental expenditures are not manufacturing or acquisition costs. Answer (C) is incorrect. Mine development and exploration costs are not manufacturing or acquisition costs.

of 21 Pages 242-243, Subunit 8.2, Questions 9 and 11:

9. Browne, a self-employed taxpayer, had 20182019 business taxable income of $950,000 prior to any expense deduction for equipment purchases. In 20182019, Browne purchased and placed into service, for business use, office machinery costing $975,000. This was Browne’s only 20182019 capital expenditure. Browne’s business establishment was not in an economically distressed area. Browne made a proper and timely expense election to deduct the maximum amount. Browne was not a member of any pass-through entity. What is Browne’s deduction under the election?

A. $950,000

B. $975,000

C. $1,000020,000

D. $2,500550,000

Answer (A) is correct. REQUIRED: The maximum amount of Sec. 179

deduction in 20182019. DISCUSSION: Tangible and depreciable personal

property can be expensed by up to $1,000020,000 in 20182019, the year of acquisition. This amount is reduced when the amount of Sec. 179 property placed in service in a given year exceeds $2,500550,000. Since this limit does not apply, the maximum deduction would be $1,000020,000; however, there are other limits. Section 179(b)(3)(A) limits the deduction to taxable income derived from the active conduct of any trade or business. In this case, the maximum deduction is $950,000.

Answer (B) is incorrect. The Sec. 179 deduction is limited to taxable income. Answer (C) is incorrect. The maximum Sec. 179 deduction of $1,000020,000 for 20182019 ignores the taxable income limit. Answer (D) is incorrect. The amount of $2,500550,000 is the threshold at which the deduction is reduced dollar-for-dollar, ignoring the taxable income limit in this case.

11. In 20182019, Micro Corp. purchased a machine to be used in its business. The machine qualifies as Sec. 179 property. The cost of the machine is $2,543950,000. What is the amount of Sec. 179 deduction that Micro Corp. may take in 20182019?

A. $0

B. $957620,000

C. $467600,000

D. $1,000020,000

Answer (B) is correct. REQUIRED: The amount of Sec. 179 deduction

allowed. DISCUSSION: The maximum dollar amount that may

be deducted under Sec. 179 is $1,000020,000 in 20182019 for the cost of qualifying depreciable tangible property placed in service in the year 20182019. The phase-out threshold for eligible property placed in service is $2,500550,000 in 20182019. Thus, the $1,000020,000 maximum Sec. 179 deduction is reduced (but not below zero) by the amount that the cost of qualifying property placed in service during the year exceeds $2,500550,000. Thus, the Sec. 179 deduction is $957620,000 [$1,000020,000 – ($2,543950,000 – $2,500550,000)].

Answer (A) is incorrect. A Sec. 179 deduction may be taken. Answer (C) is incorrect. Using the $5101,000,000 limit from last year results in $467600,000. Answer (D) is incorrect. The amount of $1,000020,000 does not reduce the deduction by the phase-out.

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Copyright © 2019 Gleim Publications, Inc. All rights reserved. Duplication prohibited. Reward for information exposing violators. Contact [email protected].

Study Unit 9 – Property Transactions: Special Topics

Page 248, Subunit 9.1, New items 2.-3. and New Example 9-3: Subsequent Examples have been renumbered accordingly.

2. Constructive Ownership – Corporation Stock

a. Generally, an individual is considered to own the stock owned by his or her brothers and sisters (whole or half blood), spouse, ancestors, and lineal descendants.

1) An individual owning any stock in a corporation proportionately owns any stock the corporation owns in another entity (i.e., corporation, partnership, etc.).

b. Stock Redemptions

1) The (redeemed) shareholder is treated as owning shares owned by certain related parties. The following ownership types are considered constructively owned by the shareholder through related parties:

a) Stock owned directly or indirectly by or for the shareholder’s spouse, children, grandchildren, or parents

EXAMPLE 9-3 Constructive Ownership

A corporation has 100 shares outstanding. A husband, wife, child, and grandchild (the child’s child) each own 25 shares. The husband, wife, and child are each considered to own 100 shares. The grandchild is considered to own only 50 shares (25 shares of the grandchild + 25 shares of the child).

b) Stock owned directly or indirectly by or for a partnership (or S corporation) in which the shareholder is a partner

i) The reverse also applies (i.e., a partnership owns stock owned by a partner).

c) Stock owned directly or indirectly by an estate or trust in which the shareholder is treated as a beneficiary or an owner

d) Stock owned directly or indirectly by or for a corporation (other than an S corporation) in which the shareholder owns directly or indirectly at least 50% of the value of the stock

e) Stock on which the shareholder holds an option to buy

3. Constructive Ownership – Partnership Interest

a. Generally, an individual is treated as owning the interest owned by his or her spouse, brothers and sisters, children, grandchildren, and parents.

1) An interest directly or indirectly owned by or for a corporation, partnership, estate, or trust is considered to be owned proportionately by or for its shareholders, partners, or beneficiaries. In the case of a C corporation, attribution only occurs if such a shareholder (directly or indirectly) owns 5% or more of the corporation.

b. A family partnership is one consisting of a taxpayer and his or her spouse, ancestors, lineal descendants, or trusts for the primary benefit of any of them.

1) Siblings are not treated as members of the taxpayer’s family for these purposes.

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Page 252, Subunit 9.3, Item 2.a.1):

1) Only real property qualifies for like-kind treatment for transfers after December 31, 2017. Like-kind property is alike in nature or character but not necessarily in grade or qualityReal property located within the United States is like-kind with all other real property in the U.S. Foreign real estate is like-kind with other foreign real estate. But U.S. real estate and foreign real estate are not like-kind.

a) Properties are of like kind if each is within a class of like nature or character without regard to differences in use (e.g., business or investment), improvements (e.g., bare land or house), location (e.g., city or rural), or proximity.

Page 257, Subunit 9.4, Figure 9-2:

Figure 9-2

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8. For the current year, the installment method may not be used for

A. Sales of personal property (except farm property) by dealers who regularly sell this type of personal property on an installment plan.

B. Sales of real property (except farm property and certain sales of residential lots or timeshares) held by a dealer for sale in the ordinary course of business.

C. Sales of personal property (except farmproperty) by dealers who regularly sell this type of personal property on an installment plan or sales of real property (except farm property and certain sales of residential lots or timeshares) held by a dealer for sale in the ordinary course of businessPublicly traded equity securities.

D. NoneAll of the answers are correct.

Answer (CD) is correct. REQUIRED: The transactions for which the installment

method of accounting is disallowed. DISCUSSION: Under current law, use of the

installment method is usually disallowed for dispositions of property by dealers [Sec. 453(b)(2)]. This includes any disposition of (1) personal property, if the person regularly sells such personal property on the installment plan, and (2) real property held by the taxpayer for sale to customers in the ordinary course of his or her trade or business. Exceptions are made for property used or produced in the trade or business of farming, and, if so elected, sales of residential lots or timeshares, subject to interest payments on the deferred tax [Sec. 453(l)]. Additionally, in general, installment sales do not apply to publicly traded securities.

Answer (A) is incorrect. The installment method may not be used for sales of realpersonal property (except farm property and certain sales of residential lots or timeshares) held by a dealer for sale in the ordinary course of business) by dealers who regularly sell this type of personal property on an installment plan. Answer (B) is incorrect. The installment method may not be used for sales of personalreal property (except farm property and certain sales of residential lots or timeshares) by dealers who regularly sell this type of personal property on an installment planheld by a dealer for sale in the ordinary course of business. Answer (DC) is incorrect. Both scenarios are excluded from use of the installment methodIn general, installment sales do not apply to publicly traded securities.

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Study Unit 10 – Corporate Taxable Income

Page 272, Subunit 10.1, Item 1.j.:

j. Personal Holding Company (PHC). Any nonexempt closely held corporation is classified as a PHC if a significant portion of its income is passive in nature. PHCs are subject to a penalty tax on excessundistributed personal holding company income.

Page 273, Subunit 10.1, Item 6. table:

Income – Exclusions

= Gross income – Deductions

= Taxable income before special deductions – Dividends-received deduction – Net operating losses

= Taxable income × Tax rate

= Gross regular taxTax liability – Credits – Prepayments

= Net regular tax liability orand refund receivable + FICA taxes + Special taxes

= Tax liabilitydue or refund receivable Page 283, Subunit 10.3, Items 16.b. and 19.b.1):

b. The business interest deduction is limited to the sum of business interest income, 30% of the business’s adjusted taxable income, and floor plan financing interest. Disallowed business interest may be carried forward indefinitely. For S corporations and partnerships, the limitation is generally applied at the corporate or partnership level. Any business interest deduction is taken into account in determining the non-separately stated taxable income or loss of the S corporation and partnership.

1) The adjusted taxable income is computed without regard to a) Any item of income, gain, deduction, or loss that is not properly allocable to a

trade or business

b) Business interest expense or business interest income

c) Net operating loss deduction

d) Qualified business income deduction (QBID)

e) Any deductions allowable for depreciation, amortization, or depletion

2) Floor plan financing interest refers to interest paid or accrued on debt used to finance the acquisition of a motor vehicle held for sale or lease and secured by the inventory.

3) The deduction limitation does not apply to small businesses with average gross receipts of $2526 million or less.

[. . .]

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19. Political Contributions and Lobbying Expenses

a. Contributions to a political party or candidate and, generally, lobbying expenses are not deductible.

b. De minimis exception

1) In-house lobbying expenses (e.g., travel expenses incurred for a company representative to offer testimony against proposed legislation) that do not exceed $2,000 are deductible. However, once total costs exceed $2,000, all costs become nondeductible.

Pages 286-287, Subunit 10.4, Item 3.: All of item 3. was replaced with the content below.

3. Capital Gains and Losses

a. Unlike individuals, corporations do not receive a preferential tax rate on long-term capital gains (LTCGs). Instead, LTCGs, or net capital gains (NCGs), are taxed at the same 21% tax rate as other corporate income.

+ Short-term capital gain (STCG) – Short-term capital loss (STCL) + Long-term capital gain (LTCG) – Long-term capital loss (LTCL)

= Net capital gain (NCG) or Net capital loss (NCL)

↓ ↓ × 21% Carry forward

b. Also unlike individuals, who can deduct up to a $3,000 NCL, corporations cannot take a net capital loss deduction. Instead, capital losses can only offset capital gains. Capital losses in excess of capital gains are nondeductible in the current year.

c. Nondeductible net capital losses can be carried back 3 years and forward 5 years.

1) A corporation cannot carry a capital loss from or to a year that it is an S corporation.

2) No election to forgo the carryback is available.

3) The capital loss carryback/carryover must be used to the extent possible in the earliest applicable tax year.

4) When utilizing a capital loss carryback/carryover, the oldest loss is used first.

5) The NCL is treated as an STCL in a carryover tax year. It offsets only a net capital gain before the carryover, but it may not produce or increase a current year NCL or an NOL.

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Page 287, Subunit 10.5, Item 3.:

3. Calculation

a. To reconcile income per books with income per tax, the following adjustments are made to net income (loss) per books (similar to Schedule M-1).

Net income (loss) per books + Federal income tax + Excess of capital losses over capital gains + Income subject to tax not recorded on books + Expenses recorded on books not deducted on the tax return

(e.g., book depreciation > tax) − Income recorded on books not subject to tax − Deductions on this return not charged against book income

(e.g., tax depreciation > book)

= Taxable income before the DRD and NOLs


2. An S corporation engaged in manufacturing has a year end of June 30. Revenue consistently has been more than $30 million under both cash and accrual basis of accounting. The stockholders would like to change the tax status of the corporation to a C corporation using the cash basis with the same year end. Which of the following statements is correct if it changes to a C corporation?

A. The year end will be December 31, using the cash basis of accounting.

B. The year end will be December 31, using the accrual basis of accounting.

C. The year end will be June 30, using the accrual basis of accounting.

D. The year end will be June 30, using the cash basis of accounting.

Answer (C) is correct. REQUIRED: The appropriate year end for a C

corporation. DISCUSSION: C corporations that are not personal

service corporations, S corporations, or small C corporations (less than an average of $2526 million in revenues per year over the past 3 years) must use the accrual basis of accounting. A corporation can use a fiscal year end; June 30 is therefore allowed.

Answer (A) is incorrect. C corporations that are not personal service corporations, S corporations, or small C corporations (less than an average of $2526 million in revenues per year over the past 3 years) must use the accrual basis of accounting. A corporation is not required to use a calendar year end; it can use a fiscal year end. Answer (B) is incorrect. The corporation does not need to change its tax year to a calendar year end. The C corporation can keep the fiscal year end of June 30. Answer (D) is incorrect. C corporations that are not personal service corporations or small C corporations must use the accrual basis of accounting.

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Pages 295 and 297, Subunit 10.3, Questions 7 and 12:

7. Which of the following costs are amortizable organizational expenditures?

A. Professional fees to issue the

corporate stock.

B. Printing costs to issue the corporate stock.

C. Legal fees for drafting the corporate charter.

D. Commissions paid by the corporation to an underwriter.

Answer (C) is correct. REQUIRED: The costs amortizable as organizational

expenditures. DISCUSSION: A corporation may is deemed to elect

to amortize deduct up to $5,000 (subject to a phase-out) of qualified organizational expenses. Any remaining amount is amortized over a period of not less than 180 months. Expenditures associated with the formation of the corporation, including legal fees for drafting the corporate charter, are amortizable.

12. The costs of organizing a corporation in 20182019

A. May be deducted in full in the year in which these costs are incurred even if paid in later years.

B. May be deducted only in the year in which these costs are paid.

C. May be amortized over a period of not less than 180 months, even if these costs are capitalized on the company’s books.

D. Are nondeductible capital expenditures.

Answer (C) is correct. REQUIRED: The deductibility of a corporation’s

organization costs. DISCUSSION: A corporation mayis deemed to elect

to deduct $5,000 of organizational expenses (subject to a phase-out) and amortize the remaining expenditures over a period of not less than 180 months, beginning with the month in which the corporation starts business.

Page 299, Subunit 10.4, Question 17: This question was previously edited in a March 2019 update.

17. Wonder, Inc., had 20182019 taxable income of $200,000 exclusive of the following:

Gain on sale of land used in business (held greater than 1 year) $25,000

Loss on sale of machinery used in business (held greater than 1 year) (13,000)

Loss on sale of securities held 3 years (4,000) Loss on sale of securities held

3 months (3,000)

On what amount of taxable income should Wonder compute tax?

A. $200,000

B. $202,500

C. $205,000

D. $212,000

Answer (C) is correct. REQUIRED: The taxable income of a corporation with

both capital and Sec. 1231 gains and losses. DISCUSSION: The sale of the land and the sale of

machinery used in the business are Sec. 1231 transactions, if held more than 1 year. Since the gain and loss net to a gain of $12,000, they are a long-term capital gain and loss. The capital losses on the securities are fully deductible because they do not exceed the $12,000 net Sec. 1231 gain.

Answer (A) is incorrect. Net capital gain constitutes taxable income. Answer (B) is incorrect. The Code allows no deduction for net capital gains. Answer (D) is incorrect. The net Sec. 1231 gain is treated as capital gain and can be offset by capital losses.

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18. Would the following expense items be reported on Schedule M-1 of the corporation income tax return showing the reconciliation of income per books with income per return?

Provision for Interest Incurred Current State

on Loan to Carry Corporation Income U.S. Obligations Tax Expense

A. Yes Yes

B. No No

C. Yes No

D. No Yes

Answer (B) is correct. REQUIRED: The item reported on Schedule M-1.

DISCUSSION: Items treated differently in computing income per books and taxable income are reported and reconciled on Schedule M-1. Items treated the same for financial and tax purposes are not reported on the schedule. Both interest to carry U.S. obligations and state income tax are deducted in computing book income and taxable income.

Study Unit 11 – Corporate Tax Computations


2. Disallowed Corporate Credits

a. Most tax credits are allowable to corporations. However, the following are not permitted:

1) Earned Income Credit 2) Child and Dependent Care Credit 3) Elderly and Disabled Credit 4) Child and Other Dependents Tax Credit 5) Adoption Credit 6) American Opportunity Credit 7) Lifetime Learning Credit


6. Limit on Tax Benefits

a. Each of the following is an example of tax benefit items of which only one must be shared by the members of a controlled group:

1) Section 179 expensing maximum of $1.02 million 2) General business credit $25,000 offset 3) AET $250,000 presumed deduction base

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11.6 PERSONAL HOLDING COMPANY (PHC) TAX

1. Penalty

a. The tax of 20% imposed on undistributed PHC income is a penalty in addition to regular income tax.

b. No offsetting credit or deduction is allowed for either the corporation or its shareholders, not even upon subsequent distribution of the earnings.


3. Sunex Co., is an accrual-basis, calendar-year domestic C corporation, is taxed on its worldwide income. In the current year, Sunex’s U.S. tax liability on its domestic and foreign source income is $60,000, and no prior-year foreign income taxes have been carried forward. Which factor(s) may affect the amount of Sunex’s Foreign Tax Credit available in its current-year corporate income tax return?

Income Source The Foreign Tax Rate

A. Yes Yes

B. Yes No

C. No Yes

D. No No

Answer (A) is correct. REQUIRED: The factor(s) that may affect the amount

of the Foreign Tax Credit. DISCUSSION: The Foreign Income Tax Credit is

equal to the lesser of the actual foreign tax paid or the Foreign Tax Credit limit. The Foreign Tax Credit limit is the proportion of the taxpayer’s tentative income tax (before the Foreign Tax Credit) that the taxpayer’s foreign source taxable income bears to his or her worldwide taxable income for the year.

Answer (B) is incorrect. The Foreign Income Tax Credit is equal to the lesser of the actual foreign tax paid or the Foreign Tax Credit limit. Answer (C) is incorrect. The Foreign Tax Credit limit is the proportion of the taxpayer’s tentative income tax (before the Foreign Tax Credit) that the taxpayer’s foreign source taxable income bears to his or her worldwide taxable income for the year. Answer (D) is incorrect. The Foreign Income Tax Credit is equal to the lesser of the actual foreign tax paid or the Foreign Tax Credit limit. The Foreign Tax Credit limit is the proportion of the taxpayer’s tentative income tax (before the Foreign Tax Credit) that the taxpayer’s foreign source taxable income bears to his or her worldwide taxable income for the year.

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Study Unit 12 – Corporate Tax Special Topics

Page 350, Subunit 12.8, Item 7.a. and New item 7.b.: Subsequent items have been renumbered accordingly.

7. Multijurisdictional Issues for Multinational Transactions

a. Noncorporate U.S. taxpayers (individuals or business entities) are subject to tax on worldwide income. This may result in the income being subject to double-taxation. In an effort to mitigate double-taxation, various allowances have been made (e.g., foreign earned income exclusion, foreign tax credit). These allowances, to varying degrees, give up U.S. jurisdiction over foreign income.

b. However, as a result of the Tax Cuts and Jobs Act of 2017, corporate taxpayers have moved from a worldwide system of taxation to a quasi-territorial system of taxation. The result is that the foreign-sourced income of foreign corporations at least 10% owned by U.S. corporations is not subject to U.S. taxation (the participation exemption) with some notable and significant exceptions (e.g., Subpart F, GILTI).

1) Nonresident aliens are usually only subject to U.S. income tax on U.S. source income. The table below shows the general rules for determining U.S. source income of nonresident aliens.


21. Which of the following statements is correct regarding Base-Erosion and Anti-Abuse Tax (BEAT)?

A. The base erosion minimum tax rate is 21% for 20182019.

B. The base erosion minimum tax rate is 5% for 20182019.

C. The base erosion minimum tax rate is 10% for 20182019.

D. The base erosion minimum tax rate is 3% for 20182019.

Answer (BC) is correct. REQUIRED: The correct statement about BaseErosion

and Anti-Abuse Tax (BEAT). DISCUSSION: The base erosion minimum tax

amount for the tax year is the excess of 10% (5% in the case of a tax year beginning in 2018) of the modified taxable income of the applicable taxpayer for the tax year over the applicable taxpayer’s regular tax liability reduced by certain specified tax credits.

Answer (A) is incorrect. The tax rate of 21% represents the income tax rate for corporations. Answer (CB) is incorrect. The base erosion minimum tax rate is 105% in the case of a tax year beginning afterin 2018. It is increased to 10% for subsequent years. Answer (D) is incorrect. The base erosion percentage test minimum threshold for nonaffiliated groups is 3%.

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Study Unit 13 – S Corporations and Exempt Organizations

Page 366, Subunit 13.1, Item 2.d.4):

d. The number of shareholders may not exceed 100.

1) A husband and wife are considered a single shareholder for this purpose.

2) Family members in a six-generation range are considered one shareholder.

3) A nonresident alien (NRA) may not own any shares.

4) Each shareholder must be either an individual (including an individual owner of a single-member LLC), an estate, a single-member LLC, or a qualified trust.

Page 377, Subunit 13.2, Item 15.a.: This item was previously edited in a March 2019 update.

15. Failure to File Penalty

a. The penalty base amount (regardless of any tax amount owed) is imposed in the amount of the number of persons who were shareholders during any part of the year, multiplied by $200205 (for 2019 tax returns filed in 2020) for each of up to 12 months (including a portion of one) that the return was late or incomplete. If tax is owed, the penalty increases to 5% of the amount owed per month.

Page 381, Subunit 13.4, Item 1.c.2):

c. Built-In Gains (BIG) Tax

1) An S corporation that, upon conversion from C to S status, had net appreciation inherent in its assets is subject to tax of 21% on net gain recognized (up to the amount of built-in gain on conversion) during the recognition period.

2) For conversions made after the 2010 tax year, theThe recognition period is the 5-year period beginning on the date the S election became effective.

a) Thus, thefor a conversion must have taken place effective 2013 for in 2014, the BIG tax will apply through 2018, allowing 2019 disposals to avoid the tax.

Page 384, Subunit 13.5, Item 2.b.4)c):

4) Some organizations exempted from the requirement include a(n)

a) Church or church-affiliated organization

b) Exclusively religious activity or any religious order

c) Organizations (other than a private foundation) having annual gross receipts that are not more than $50,000 (although they will have to file Form 990-N, discussed below)

d) Stock bonus, pension, or profit-sharing trust that qualified under Sec. 401

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Pages 390-391, Subunit 13.2, Questions 8 and 12:

8. Bob and Sally, unmarried taxpayers, each owned 50% of Lostalot, Inc., an S corporation. The corporation had a $50,000 operating loss for the tax year ending December 31, 20182019. As of December 31, 20172018, Bob’s basis in his stock was $15,000 and Sally’s was $5,000. During the 20182019 tax year, Sally mortgaged her home for $25,000 and loaned the money to the corporation. Although not personally liable, Bob told her not to worry and that if anything happened, he would help pay the mortgage debt. Calculate the amount of allowable loss deduction each shareholder would be able to recognize on their individual 20182019 tax returns.

A. Bob: $25,000, and Sally: $25,000.

B. Bob: $15,000, and Sally: $5,000.

C. Bob: $15,000, and Sally: $30,000.

D. Bob: $15,000, and Sally: $25,000.

Answer (D) is correct. REQUIRED: The loss deduction that may be

recognized on a shareholder’s individual return. DISCUSSION: Bob and Sally’s share of the loss is

$25,000 each. However, the deduction for each is limited to their basis in the S corporation. Bob’s deduction is limited to his $15,000 basis in the stock. Sally’s basis consists of her $5,000 stock basis and her $25,000 debt basis. Sally has enough basis to cover her share of the loss. Bob receives no debt basis from the mortgage debt because he is not personally liable.

Answer (A) is incorrect. Bob’s basis is not large enough to cover the $25,000 share of the loss. Answer (B) is incorrect. Sally’s basis is larger than $5,000. Answer (C) is incorrect. Sally’s share of the loss is not $30,000.

12. Tap, a calendar-year S corporation, reported the following items of income and expense in the current year:

Revenue $44,000Operating expenses 20,000Long-term capital loss 6,000Charitable contributions 1,000Interest expense 4,000

What is the amount of Tap’s ordinary income?

A. $13,000

B. $19,000

C. $20,000

D. $24,000

Answer (C) is correct. REQUIRED: The amount of Tap’s ordinary income. DISCUSSION: The items of income, deduction, and

credit of an S corporation are reported by the corporation; however, an S corporation is not allowed deductions for items that must be separately stated, which include longterm capital losses and charitable contributions. Therefore, Tap’s ordinary income equals $20,000 ($44,000 revenue – $20,000 operating expenses – $4,000 interest expense).

Answer (A) is incorrect. The long-term capital loss and charitable contribution must be stated separately and are therefore not deductible by the S corporation. Answer (B) is incorrect. The charitable contribution must be stated separately and is therefore not deductible in the computation of ordinary business income by the S corporation. Answer (D) is incorrect. The S corporation may deduct the $4,000 of interest expense.

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Pages 392-393, Subunit 13.4, Questions 15 and 16:

15. Tax Corp. converted from C to S status in 20182019. The net appreciation inherent in its assets is subject to a tax on net gain recognized

A. At the time of the conversion.

B. During a recognition period of 2 years.

C. With no effect on any shareholder’s basisinbasis in the stock.

D. Up to the amount of built-in gain onconversionon conversion.

Answer (D) is correct. REQUIRED: The true statement about the built-in

gains tax. DISCUSSION: An S corporation that, upon

conversion from C to S status after 1986, had, has net appreciation inherent in its assets is subject to a tax of 21% on net gain recognized (up to the amount of built-in gain on conversion) during the recognition period.

Answer (A) is incorrect. The net appreciation inherent in its assets is subject to a tax on net gain recognized during the recognition period. Answer (B) is incorrect. For conversions made after the 2010 tax year, theThe recognition period is a 5-year period beginning on the date the S election became effective. Answer (C) is incorrect. The tax liability is passed through, as a loss, pro rata to its shareholders, and it reduces each shareholder’s basis in the stock.

16. Magic Corp., a regular C corporation, elected S corporation status at the beginning of the current calendar year. It had an asset with a basis of $40,000 and a fair market value (FMV) of $85,000 on January 1. The asset was sold during the year for $95,000. Magic’s corporate tax rate was 21%. What was Magic’s tax liability as a result of the sale?

A. $0

B. $2,100

C. $9,450

D. $11,550

Answer (C) is correct. REQUIRED: The gain on a sale reported by a

C corporation that elected to be an S corporation. DISCUSSION: An S corporation that, upon

conversion from C to S status, had net appreciation inherent in its assets is subject to a built-in gains tax of 21% on net gain recognized (up to the amount of built-in gain on conversion) during the recognition period. Magic had $45,000 ($85,000 FMV in January 1 – $40,000 basis) of built-in gains at the time that Magic elected to be an S corporation. The tax on the $45,000 is $9,450 ($45,000 × 21%).

Answer (A) is incorrect. A gain on the sale is recognized by Magic. Answer (B) is incorrect. The amount of $2,100 is the corporate tax on the gain that occurred after the S corporation election. Answer (D) is incorrect. The amount of $11,550 is the corporate tax on the entire gain of $55,000 ($95,000 amount realized – $40,000 basis).

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20. Which of the following organizations exempt from federal income tax must generally file an annual information report?

A. An organization, other than a private foundation, with annual gross receipts that normally are not more than $50,000.

B. A private foundation.

C. A church.

D. A religious order.

Answer (B) is correct. REQUIRED: The organization that must file an annual

information return. DISCUSSION: Most organizations exempt from tax

under Sec. 501(a) must file annual information returns on Form 990, Return of Organization Exempt from Income Tax. Those excepted from the requirement are

1. A church or church-affiliated organization 2. An exclusively religious activity or religious order 3. An organization (other than a private foundation)

having annual gross receipts that are not more than $50,000 (they must only file an e-postcard)

4. A stock bonus, pension, or profit-sharing trust that qualified under Sec. 401

5. A Keogh plan whose total assets are less than $100,000

Answer (A) is incorrect. Such an organization is specifically exempt from filing annual information returns. Answer (C) is incorrect. A church is specifically exempt from filing annual information returns. Answer (D) is incorrect. A religious order is specifically exempt from filing annual information returns.

Study Unit 14 – Partnerships

Page 399, Subunit 14.1, Item 10.c.2):

2) Section 444 election (Fiscal fiscal year). A partnership may elect a tax year that is neither the required year nor a natural business year.

a) The year elected may result in no more than 3 months’ deferral (between the beginningend of a tax year elected and the end of the required tax year).

b) The partnership must pay an amount approximating the amount of additional tax that would have resulted had the election not been made.

Page 408, Subunit 14.2, Item 13.h.: This item was previously edited in a March 2019 update.

h. Inadequate filing. A penalty is imposed in the amount of the number of persons who were partners at any time during the year, multiplied by $200205 (for 2019 tax returns filed in 2020) for each of up to 12 months (including a portion of one) that the return was late or incomplete.

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Page 417, Subunit 14.5, Item 5.a.:

5. Termination of Partnership

a. Overview

1) A partnership terminates for federal tax purposes only when operations of the partnership cease.

a) The partnership’s tax year ends on the date of termination.

2) Sale or exchange termination is treated as a distribution of assets immediately followed by the contribution of those assets to a new partnership.

3) A return must be filed for the short period, which is the period from the beginning of the tax year through the date of termination.

3)4) The tax year of a partnership closes with respect to a partner whose entire interest in the partnership terminates by death, liquidation, or other means.

a) A deceased partner’s allocable share of partnership items up to the date of death will be taxed to the decedent on his or her final return.

b) Any items allocated after the date of death will be the responsibility of the successor in interest.

c) A return must be filed for the short period, which is the period from the beginning of the tax year through the date of termination.

c) The partnership’s tax year does not end. Page 426, Subunit 14.5, Question 20: “Curry’s sale of her partnership interest causes. . .” was removed. Study Unit 15 – Estates, Trusts, and Wealth Transfer Taxes

Page 429, Subunit 15.1, New item 5.a.3):

5. Grantor Trust

a. A grantor trust is any trust to the extent the grantor is the effective beneficiary.

1) The income attributable to a trust principal that is treated as owned by the grantor is taxed to the grantor.

2) The trust is disregarded.

a) A trust is considered a grantor trust when the grantor has greater than 5% reversionary interest.

b) A grantor is treated as the owner of a trust in which the income may be distributed or accumulated for the grantor’s spouse.

c) The grantor is also taxed on income from a trust in which the income may be applied for the benefit of the grantor. Use of income for the support of a dependent is considered the application of income for the benefit of the grantor. The income that may be applied for the support of a dependent is not taxable to the grantor if it is not actually used.

3) All revocable trusts are grantor trusts.

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12. Net Investment Income Tax

a. Estates and trusts are required to pay a 3.8% net investment income tax (NIIT) on the lesser of

1) Undistributed net investment income for the tax year or

2) Any excess fiduciary taxable income over the amount at which the highest tax bracket for estates and trusts begins for the tax year ($12,500750 for 20182019).


6. Marital Deduction

a. The amount of a gift transfer to a spouse is deducted in computing taxable gifts. Donor and donee must be married at the time of the gift, and the donee must be a U.S. citizen for the unlimited amount. For noncitizen spouses the deduction is limited to $152155,000 in 2019.

Page 441, Subunit 15.2, Item 10.d.:

d. Applicable credit amount (ACA). Tentative tax may also be reduced by any ACA (also referred to as unified credit). The ACA is a base amount ($4,417505,800 in 20182019) reduced by amounts allowable as credits for all preceding tax years. This excludes the first $11.1840 million of taxable gifts.

Page 442, Subunit 15.3, ESTATE TAX Formula:

ESTATE TAX Formula

GROSS ESTATE – Deductions

Expenses, claims, taxes Casualty and theft losses* Charitable bequests Marital deduction

= TAXABLE ESTATE + Taxable gifts made after 1976

= TOTAL TAXABLE TRANSFERS × Tax rate

= TENTATIVE ESTATE TAX – Gift taxes paid on post-1976 gifts

= GROSS ESTATE TAX – Applicable credit amount – Other credits

= ESTATE TAX LIABILITY

*For individuals (nonbusiness), loss must have occurred in a federally declared disaster area.

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Page 445, Subunit 15.3, Item 4. and Example 15-16:

4. Computing the Estate Tax and Credits

[. . .]

c. The tentative estate tax is reduced by the credit for gift taxes payable on post-1976 gifts, based on current rates, to arrive at gross estate tax.

d. TentativeGross estate tax reduced by gift taxes paid, the ACA, and other credit is the net estate tax.

e. The ACA is a base amount ($4,417505,800 in 20182019), not reduced by amounts allowable as credits for gift tax for all preceding tax years.

1) The ACA offsets the estate tax liability that would be imposed on a taxable estate of up to $11.1840 million computed at current rates.

2) Any unused amount by a deceased spouse may be used by the surviving spouse in addition to the surviving spouse’s own exclusion amount. Under this portability election, the surviving spouse could potentially have an available exclusion amount of $22.3680 million.

EXAMPLE 15-16 Surviving Spouse’s ACA

The deceased spouse only used $5.18 40 million of the allowed exclusion. The surviving spouse is allowed a $17.18 40 million exclusion ($11.18 40 million surviving spouse original amount + $6 million unused by the deceased spouse).


5. Estate Tax Return

a. The executor is required to file Form 706, United States Estate Tax Return, if the gross estate exceeds a threshold.

1) The threshold is $11.1840 million in 20182019.

2) Adjusted taxable gifts made by the decedent during his or her lifetime reduce the threshold.


b. If a decedent has no estate tax filing requirement [perhaps due to the gross estate being valued at less than the basic exclusion amount ($4,418,80011,400,000 in 20182019)] and for whom a return is filed for the sole purpose of making an allocation or election respecting the generation-skipping transfer tax, a Form 8971 is not required.


6. Exemption

a. Each individual is allowed an $11.1840 million exemption in 20182019 that (s)he, or his or her executor, may allocate to GST property. The exemption is indexed for inflation. Gift splitting applies to GSTTs; $22.3680 million is allocable.

gleim cpa review...example 8-10 maximum sec. 179 deduction in 20182019, diana’s corner stores...

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