South-Western Federal Taxation 2022 - Essentials of Taxation: Individuals and Business Entities [25] 9780357711095

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2020 Tax Rate Schedules Single—Schedule X If taxable income is: Over— $

0

Head of household—Schedule Z

But not over—

The tax is: ………10%

$ 9,875

9,875

40,125

40,125

85,525

$

of the amount over— $

0

If taxable income is: Over— $

0

But not over—

The tax is: ………10%

$ 14,100

987.50 1 12%

9,875

14,100

53,700

4,617.50 1 22%

40,125

53,700

85,500

$

of the amount over— $

0

1,410.00 1 12%

14,100

6,162.00 1 22%

53,700

85,525

163,300

14,605.50 1 24%

85,525

85,500

163,300

13,158.00 1 24%

85,500

163,300

207,350

33,271.50 1 32%

163,300

163,300

207,350

31,830.00 1 32%

163,300

207,350

518,400

47,367.50 1 35%

207,350

207,350

518,400

45,926.00 1 35%

207,350

518,400

………

156,235.00 1 37%

518,400

518,400

………

154,793.50 1 37%

518,400

Married filing jointly or Qualifying widow(er)— Schedule Y–1

Married filing separately—Schedule Y–2

If taxable income is: Over—

If taxable income is: Over—

$

0

But not over—

The tax is: ………10%

$ 19,750 $

of the amount over— $

0

$

But not over—

0

$ 9,875

The tax is: ………10% $

of the amount over— $

0

19,750

80,250

1,975.00 1 12%

19,750

9,875

40,125

987.50 1 12%

9,875

80,250

171,050

9,235.00 1 22%

80,250

40,125

85,525

4,617.50 1 22%

40,125

171,050

326,600

29,211.00 1 24%

171,050

85,525

163,300

14,605.50 1 24%

85,525

326,600

414,700

66,543.00 1 32%

326,600

163,300

207,350

33,271.50 1 32%

163,300

414,700

622,050

94,735 .00 1 35%

414,700

207,350

311,025

47,367.50 1 35%

207,350

622,050

………

167,307.50 1 37%

622,050

311,025

………

83,653.75 1 37%

311,025

2021 Tax Rate Schedules Single—Schedule X If taxable income is: Over— $            0

Head of household—Schedule Z

But not over—

The tax is: ………10%

$    9,950 $

of the amount over—

If taxable income is: Over—

But not over—

$             0

$             0

$   14,200

………10%

The tax is:

of the amount over— $             0

9,950

40,525

995.00 1 12%

9,950

14,200

54,200

$ 1,420.00 1 12%

14,200

40,525

86,375

4,664.00 1 22%

40,525

54,200

86,350

6,220.00 1 22%

54,200

86,375

164,925

14,751.00 1 24%

86,375

86,350

164,900

13,293.00 1 24%

86,350

164,925

209,425

33,603.00 1 32%

164,925

164,900

209,400

32,145.00 1 32%

164,900

209,425

523,600

47,843.00 1 35%

209,425

209,400

523,600

46,385.00 1 35%

209,400

523,600

………

157,804.25 1 37%

523,600

523,600

………

156,355.00 1 37%

523,600

Married filing jointly or Qualifying widow(er)—­ Schedule Y–1

Married filing separately—Schedule Y–2

If taxable income is: Over—

of the amount over—

If taxable income is: Over—

But not over—

………10%

$             0

$            0

$     9,950

1,990.00 1 12%

19,900

9,950

40,525

But not over—

$            0

$  19,900

19,900

81,050

The tax is: $

The tax is: $

of the amount over—

………10%

$             0

995.00 1 12%

9,950

81,050

172,750

9,328.00 1 22%

81,050

40,525

86,375

4,664.00 1 22%

40,525

172,750

329,850

29,502.00 1 24%

172,750

86,375

164,925

14,751.00 1 24%

86,375

329,850

418,850

67,206.00 1 32%

329,850

164,925

209,425

33,603.00 1 32%

164,925

418,850

628,300

95,686.00 1 35%

418,850

209,425

314,150

47,843.00 1 35%

209,425

628,300

………

168,993.50 1 37%

628,300

314,150

………

84,496.75 1 37%

314,150

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Tax Formula for Individuals Income (broadly defined). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Exclusions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Deductions for adjusted gross income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjusted gross income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: The greater of— Total itemized deductions or standard deduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Personal and dependency exemptions*. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deduction for qualified business income** . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Taxable income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax on taxable income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Tax credits (including Federal income tax withheld and prepaid). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax due (or refund). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$xx,xxx (x,xxx) $xx,xxx (x,xxx) $xx,xxx

(x,xxx) (x,xxx) (x,xxx) $xx,xxx $ x,xxx (xxx) xxx

$

*Exemption deductions are not allowed from 2018 through 2025. **Only applies from 2018 through 2025. Note: For 2021, individuals using the standard deduction may also subtract from adjusted gross income, cash charitable contributions of up to $300 ($600 if married, filing jointly).

Basic Standard Deduction Amounts Filing Status Single Married, filing jointly Surviving spouse Head of household Married, filing separately

2020

2021

$12,400 24,800 24,800 18,650 12,400

$12,550 25,100 25,100 18,800 12,550

Amount of Each Additional Standard Deduction Filing Status Single Married, filing jointly Surviving spouse Head of household Married, filing separately

2020

2021

$1,650 1,300 1,300 1,650 1,300

$1,700 1,350 1,350 1,700 1,350

Personal and Dependency Exemption 2020 $4,300

2021 $4,300

 

Note: Exemption deductions have been suspended from 2018 through 2025. However, the personal and dependency exemption amount is used for other purposes (including determining whether a “qualifying relative” is a taxpayer’s dependent).

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AMT Formula for Individuals Taxable income (increased by any standard deduction taken) Plus or minus: Adjustments Plus: Preferences Equals: Alternative minimum taxable income (AMTI) Minus: Exemption Equals: Alternative minimum tax (AMT) base Multiplied by: 26% or 28% rates Equals: Tentative minimum tax before foreign tax credit Minus: AMT foreign tax credit Equals: Tentative minimum tax (TMT) Minus: Regular tax liability (less any foreign tax credit) Equals: AMT (if TMT > regular tax liability)

2020 AMT Exemption and Phaseout for Individuals Phaseout

 

Filing Status

Exemption

Begins at

Ends at

$113,400 72,900 56,700

$1,036,800 518,400 518,400

$1,490,400 810,000 745,200

Married, filing jointly Single or Head of household Married, filing separately

2021 AMT Exemption and Phaseout for Individuals Phaseout

 

Filing Status Married, filing jointly Single or Head of household Married, filing separately

Exemption

Begins at

Ends at

$114,600 73,600 57,300

$1,047,200 523,600 523,600

$1,505,600 818,000 752,800

 

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Income Tax Rates—Estates and Trusts Tax Year 2021 Taxable Income

The Tax Is: Of the Amount Over—

Over—

But not Over—

$

$ 2,650

10%

2,650

9,550

$ 265.00 1 24%

2,650

9,550

13,050

1,921.00 1 35%

9,550

13,050

………

3,146.00 1 37%

13,050

0

$

0

Income Tax Rates—C Corporations, 2018 and after For all income levels, the tax rate is 21%.

Tax Formula for Corporate Taxpayers Income (from whatever source). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ xxx,xxx

  Less: Exclusions from gross income. . . . . . . . . . . . . . . . . . . . . . . .

2 xx,xxx

Gross Income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ xxx,xxx

  Less: Deductions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2 xx,xxx

Taxable Income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ xxx,xxx

  Applicable tax rates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3

xx%

Gross Tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ xx,xxx

  Less: Tax credits and prepayments. . . . . . . . . . . . . . . . . . . . . . . . .

2

Tax Due (or refund). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ xx,xxx

x,xxx

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i

Essentials of Taxation:

2022

Individuals and Business Entities General Editors Annette Nellen J.D., CPA, CGMA San Jose State University

Andrew D. Cuccia Ph.D., CPA University of Oklahoma

Mark B. Persellin Ph.D., CPA, CFP® St. Mary’s University

James C. Young Ph.D., CPA Northern Illinois University

Contributing Authors Andrew D. Cuccia Ph.D., CPA University of Oklahoma

Miles Romney Ph.D. Florida State University

Annette Nellen J.D., CPA, CGMA San Jose State University

Toby Stock Ph.D., CPA Ohio University

Donald R. Trippeer Ph.D., CPA State University of New York College at Oneonta Kristina Zvinakis Ph.D. The University of Texas at Austin

William A. Raabe Ph.D., CPA Madison, Wisconsin

SWFT Series Authors James H. Boyd Ph.D., CPA Arizona State University

Steven C. Dilley J.D., Ph.D., CPA Michigan State University

Bradrick M. Cripe Ph.D., CPA Northern Illinois University

William H. Hoffman, Jr. J.D., Ph.D., CPA University of Houston

D. Larry Crumbley Ph.D., CPA Texas A&M University - Corpus Christi

Sharon S. Lassar Ph.D., CPA University of Denver

Andrew D. Cuccia Ph.D., CPA University of Oklahoma

David M. Maloney Ph.D., CPA University of Virginia

Annette Nellen J.D., CPA, CGMA San Jose State University Mark B. Persellin Ph.D., CPA, CFP® St. Mary’s University William A. Raabe Ph.D., CPA Madison, Wisconsin

Toby Stock Ph.D., CPA Ohio University James C. Young Ph.D., CPA Northern Illinois University Kristina Zvinakis Ph.D. The University of Texas at Austin

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South-Western Federal Taxation: Essentials of Taxation: Individuals and Business ­Entities, 2022 Edition Annette Nellen, Andrew D. Cuccia, Mark B. Persellin, James C. Young

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3 Simple Ways Checkpoint Helps You Make Sense of All Those Taxes 1

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Preface Committed To Educational Success

S

outh-Western Federal Taxation (SWFT) is the most trusted and best-selling series in college taxation. We are focused exclusively on providing the most useful, comprehensive, and up-to-date tax texts, online study aids, tax preparation tools, and research tools to help instructors and students succeed in their tax courses and beyond. SWFT is a comprehensive package of teaching and learning materials, significantly enhanced with each edition to meet instructor and student needs and to add overall value to learning taxation. Essentials of Taxation: Individuals and Business ­Entities, 2022 Edition provides a dynamic learning experience inside and outside of the classroom. Built with the most important and relevant resources and tools, our complete learning system provides multiple options for students to achieve success. Essentials of Taxation: Individuals and Business ­Entities, 2022 Edition provides accessible, comprehensive, and authoritative coverage of the relevant tax code and regulations as they pertain to the individual or business taxpayer, as well as coverage of all major developments in Federal income taxation.

In revising the 2022 Edition, we focused on: • Accessibility. Clarity. Substance.  The authors and editors made these their focus as they revised the 2022 edition. Coverage has been streamlined to make it more accessible

to students, and difficult concepts have been clarified, all without losing the substance that makes up the South-Western Federal Taxation series. • Developing professional skills.  SWFT excels in bringing students to a professional level in their tax knowledge and skills, to prepare them for immediate success in their careers. In addition to exposing students to tax policy and law, our materials include opportunities for students to develop communication skills, to use tax preparation and research software, to apply net present value concepts to the tax planning process, to enhance their spreadsheet and data analytics capabilities, and to familiarize themselves with the format and content of the CPA exam. • CengageNOWv2 as a complete learning ­system.  Cengage Learning understands that digital learning solutions are central to the classroom. Through sustained research, we continually refine our learning solutions in CengageNOWv2 to meet evolving student and instructor needs. ­CengageNOWv2 fulfills learning and course management needs by offering a personalized study plan, video lectures, autograded homework, auto-graded tests, and a full eBook with features and advantages that address common challenges.

v Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Learning Tools and Features to Help Students Make the Connection FULL-COLOR DESIGN: We understand that students struggle with learning difficult tax law concepts and applying them to real-world scenarios. The 2022 edition uses color to bring the text to life, capture student attention, and present the tax law in an understandable and logical format. Corporations: Organization, Capital Structure, and Operating Rules

12 C H A P T E R

❏❏ Selected content is streamlined to guide students in focusing on the most important concepts for the CPA Exam while still providing in-depth coverage of topics.

12-8

PART 5

Business Entities

LO.2 Explain the tax consequences of incorporating and transferring assets to controlled corporations.

L E A R N I N G O B J E C T I V E S : After completing Chapter 12, you should be able to:

Property transactions producing realized gain or loss normally produce tax consequences. As a result, unless special provisions in the Code apply, a transfer of property to a corporation in exchange for stock is a taxable transaction. The gain or loss equals the difference between the fair market value of the stock and other assets the shareholder received and the shareholder’s tax basis in the property transferred.

12-2a Section 351 Rationale and General Rules In contrast to the typical result of full gain or loss recognition, the Code permits nonrecognition of gain or loss in limited circumstances. For example, both § 1031 (like-kind exchanges—see Chapter 7) and § 351 (transfers of property to controlled corporations) postpone gain or loss recognition until a substantive change in the taxpayer’s investment occurs (e.g., a sale of property or ownership shares to outsiders). When a taxpayer exchanges some of his or her property for other property of a like kind, § 1031 provides that gain (or loss) realized on the exchange is not recognized because a substantive change in the taxpayer’s investment has not occurred. The rules accomplish this deferral by reducing the taxpayer’s basis in the assets received by the deferred gain or increasing the basis by the deferred loss. This substituted basis results in taxpayers recognizing the gain or loss when they sell the new property for cash or non-like-kind property. Similarly, Exhibit 12.1 illustrates that § 351 defers gain or loss when shareholders transfer property to a controlled corporation (defined later in the chapter) in exchange for the corporation’s own stock. There are at least three reasons for this tax deferral treatment. First, contributing property to a corporation leaves an owner’s economic status unchanged when incorporating business assets; only the form of the investment has changed. The investment in the business assets carries over to an investment in corporate stock. Second, when a shareholder receives only stock in the corporation, the shareholder is not in a position to pay a tax on any realized gain. As a result, tax deferral is justified under the wherewithal to pay concept discussed in Chapter 1. As noted later, however, when a shareholder receives property other than stock (i.e., cash or other “boot”) from the corporation, the shareholder recognizes some or all of the realized gain. A third justification for the nonrecognition of gain or loss provisions under § 351 is that Congress believes tax rules should not impede a taxpayer’s judgment about the best choice of entity form for conducting business.

Cash Furniture and fixtures Land and building

Characterize the tax differences between debt and equity investments.

LO.7

List and apply the tax rules unique to computing corporate taxable income.

LO.3

Describe the special rules that apply when a corporation assumes shareholder liabilities.

LO.8

LO.4

Compute the adjusted basis of shareholder stock and corporate contributed assets.

LO.9

LO.5

Explain the tax aspects of the capital structure of a corporation.

Taxpayer

Compute the corporate income tax.

ChApTER OuTLINE

12-2 Organization of and Transfers to Controlled Corporations, 12-8 12-2a Section 351 Rationale and General Rules, 12-8 12-2b Transfer of Property, 12-10 12-2c Stock Transferred, 12-11 EXAMPLE 12-2d Control of the Corporation, 12-12 12-2e Assumption of Liabilities—§ 357, 12-15 Corporations: Organization, Structure, andOther Operating 12-2f Basis Capital Determination and Issues,Rules 12-20 12-2g Recapture Considerations, 12-24

12-4 Corporate Operations, 12-28 12-4a Deductions Available Only to Corporations, 12-28 12-4b Business Interest Expense Limitation, 12-31 12-4c Determining the Corporate Income Tax Liability, 12-34

Tax Basis

Fair Market Value

$ 10,000 20,000 240,000 $270,000

$ 10,000 60,000 300,000 $370,000

12-9

THE BIG PICTURE

KURHAN/SHUTTERSTOCK.COM

GrowinG into the Corporate Form

Describe the reporting process for corporations.

12-5 procedural Matters, 12-34 12-5a Filing Requirements for Corporations, 12-34 12-5b Estimated Tax Payments, 12-35 12-5c Schedule M–1—Reconciliation of Income (Loss) per Books with Income per Return, 12-35 12-5d Schedule M–2—Analysis of Unappropriated Retained Earnings per Books, 12-37 12-5e Schedule M–3—Net Income (Loss) Reconciliation for Corporations with Total Assets of $10 Million or More, 12-37 12-5f Effect of Taxes on Financial Statements, 12-38

Amber has operated her business as a sole proprietorship since it was formed 10 years ago. Now, however, she has decided to incorporate the business as Garden, Inc., because the corporate form offers several important nontax advantages, including limited liability. Also, the incorporation would enable her husband, Jimmy, to become a part owner in the business. Amber is also anxious to take advantage of the reduced corporate tax rate in the 2017 tax act. Amber expects to transfer her business assets in exchange for Garden stock, while Jimmy will provide accounting and legal services for an equity interest. Amber’s sole proprietorship assets available for transfer to the new corporation are as follows:

Accounts receivable Building Other assets

Adjusted Basis

Fair Market Value

$ –0– 100,000 300,000 $400,000

$

50,000 400,000 550,000 $1,000,000

Aware of the problem of double taxation associated with operating as a regular corporation, Amber is considering receiving some corporate debt at the time of the incorporation. The interest expense on the debt will then provide a deduction for Garden, Inc. Amber’s main concern is whether the incorporation will be a taxable transaction. Can the transaction be structured to avoid tax? Read the chapter and formulate your response.

12-3 Capital Structure of a Corporation, 12-25 12-3a Capital Contributions, 12-25 12-3b Debt in the Capital Structure, 12-26

Taxes owing to the Government … are the price that business has to pay for protection and security. —Benjamin n. Cardozo TA X TA L K

Ron will receive stock in the newly formed corporation worth $370,000. Without the nonrecognition provisions of § 351, Ron would recognize a taxable gain of $100,000 ($370,000 2 $270,000) on the transfer. Under § 351, however, Ron recognizes no gain because his economic status has not changed. Ron’s investment in the assets of his sole proprietorship ($270,000) carries over to his investment in the incorporated business, which is now represented by his ownership of stock in the corporation. This adjustment to his stock basis results in a $100,000 gain deferral and not gain exclusion. As a result, § 351 provides for tax neutrality on the initial incorporation of Ron’s sole proprietorship.

12-1

3/12/20 11:32 AM

59341_ch12_hr_002-053.indd 2-1

In a manner similar to a like-kind exchange, if a taxpayer transfers property to a corporation and receives “boot” (money or property other than stock), § 351(b) requires gain recognition to the extent of the lesser of the gain realized or the boot received (the amount of money and the fair market value of other property received). Gain is characterized (e.g., ordinary, capital) according to the type of asset transferred.8 Loss on a § 351 transaction is never recognized. The nonrecognition of gain or loss is accompanied by a substituted basis in the shareholder’s stock.9 The major shareholder consequences of a taxable property transaction versus one that is tax deferred are identified in Concept Summary 12.2.

Concept Summary 12.2 Shareholder Consequences: Taxable Corporate Formation versus Tax-deferred § 351 Transaction

Gain Realized

on 35 Secti

1 do

Sectio

Gain recognized; basis of stock received equals its FMV.

ly t app es no

n 351

appli

es

Gain deferred; basis of stock received equals its FMV – deferred gain.

Amount realized – adjusted basis of consideration transferred.

Cash or Other Property Corporation

on 35 Secti

Stock Loss Realized

5

LO.6

Explain the tax consequences of incorporating and transferring assets to controlled corporations.

Transfers to Controlled Corporations Under § 351

ExHIBIT 12.1

EXAMPLE

Identify major tax and nontax considerations associated with the corporate form of business.

LO.2

12-1 An Introduction to Corporate Income Taxation, 12-2 12-1a Double Taxation of Corporate Income, 12-2 12-1b Comparison of Corporations and Other Forms of Doing Business, 12-3 12-1c Nontax Considerations, 12-6 12-1d Limited Liability Companies, 12-7 12-1e Entity Classification, 12-7

CHAPTER 12

12-2 ORGANIzATION OF ANd TRANSFERS TO CONTROLLEd CORpORATIONS

LO.1

Ron is considering incorporating his sole proprietorship. He is concerned about his personal liability for the obligations of the business. Ron realizes that if he incorporates, depending on state law, he will be liable only for the debts of the business that he has personally guaranteed. If Ron incorporates his business, the following assets will be transferred to the corporation: continued

1 do

12-14

Rev.Rul. 68–55, 1968–1 C.B. 140.

appli es

Loss deferred; basis of stock received equals its FMV + deferred loss.

PART 5

9

8

Loss usually recognized; basis of stock received equals its FMV.

ly t app es no

Sectio n 351

Business Entities

CHAPTER 12 Corporations: Organization, Capital Structure, and Operating Rules

As noted earlier, a person receiving stock in exchange for services and for property transferred is taxed on the stock value related to those services but not on the stock In addition, all stock received by the person transferring both property and services counts in determining whether the transferors acquired control of the corporation.23

issued for property. § 358(a). See the discussion preceding Example 26.

The Big picture EXAMPLE

59341_ch12_hr_002-053.indd 8-9

15

❏❏ Examples are clearly labeled and directly follow concepts to assist with student application. An average of over 40 examples in each chapter use realistic situations to illustrate the complexities of the tax law and allow students to integrate chapter concepts with illustrations and examples.

Assume the same facts as in Example 14, except that Jimmy transfers property worth $800,000 (basis of $260,000) in addition3/12/20 to services rendered to Garden, Inc. (valued at $200,000). 11:32 AM Now Jimmy becomes a part of the control group. Amber and Jimmy, as property transferors, together receive 100% of the corporation’s stock. Consequently, § 351 applies to the exchanges. Amber recognizes no gain. Jimmy recognizes no gain on the transfer of the property, but he recognizes ordinary income equal to the value of the shares issued for services rendered. Thus, Jimmy recognizes $200,000 of ordinary income currently.

Transfers for Services and Nominal property Note that to be part of the group meeting the 80 percent control test, the person contributing services must transfer property having more than a “relatively small value” compared with the value of services performed. Section 351 will not apply when a small amount of property is transferred and the primary purpose of the transfer is to qualify the transaction under § 351 for other transferors.24 The IRS generally requires that for a transferor who contributes both property and services to be included in the control group, the value of the property transferred must be at least 10 percent of the value of the services provided.

determining Control Group Membership When Services Are Rendered EXAMPLE

16

EXAMPLE

17

23

Reg. § 1.351–1(a)(2), Ex. 3.

Ava and Rick form Grouse Corporation. Ava transfers land (worth $100,000, basis of $20,000) for 50% of the stock in Grouse. Rick transfers equipment (worth $50,000, adjusted basis of $10,000) and provides services worth $50,000 for 50% of the stock. Because the value of the property Rick transfers is not small relative to the value of the services he renders, his stock in Grouse Corporation is counted in determining control for purposes of § 351; thus, the transferors own 100% of the stock in Grouse. In addition, all of Rick’s stock, not just the shares received for the equipment, is counted in determining control. As a result, Ava does not recognize gain on the transfer of the land. Rick, however, must recognize income of $50,000 on the transfer of services. Even though the transfer of the equipment qualifies under § 351, his transfer of services for stock does not.

Assume the same facts as in Example 16, except that the value of Rick’s property is $2,000 and the value of his services is $98,000. In this situation, the value of the property is small relative to the value of the services (and well below the 10% threshold provided by the IRS); therefore, Rick will not be considered a property transferor. Consequently, the control requirement is not met and the transaction is fully taxable to both Ava and Rick. None of Rick’s stock is counted in determining control because the property he transfers has a nominal value in comparison to the value of the services he renders. As a result, Ava recognizes $80,000 of gain on the transfer of the land. She has a basis of $100,000 in her Grouse stock. Rick must recognize income of $98,000 on the transfer for services rendered, and any realized gain or loss is recognized on the property transferred. Rick also has a $100,000 basis in his Grouse stock.

24

Reg. § 1.351–1(a)(1)(ii).

12-15

Transfers to Existing Corporations Once a corporation is operational, § 351 also applies to any later transfers of property for stock by either new or existing shareholders. That is, § 351 does not apply solely at the time of corporate formation. Tyrone and Pooja formed Blue Corporation three years ago. Both Tyrone and Pooja transferred appreciated property to Blue in exchange for 50 shares each in the corporation. The original transfers qualified under § 351, and neither Tyrone nor Pooja recognized gain or loss on the exchange. In the current year, Tyrone transfers property (worth $90,000, adjusted basis of $5,000) for 50 additional Blue shares. Tyrone has a taxable gain of $85,000 on the transfer. The exchange does not qualify under § 351 because Tyrone does not have 80% control of Blue Corporation immediately after the transfer—he owns 100 shares of the 150 shares outstanding, or a 66 2 3 % interest.

EXAMPLE

18

If current shareholders transfer property with a small value relative to the value of stock already owned, a special rule applies (similar to the nominal property rule noted for service contributors). In particular, if the purpose of the transfer is to qualify a transaction under § 351, the ownership of the current shareholders does not count toward control. Thus, in the preceding example, if Pooja had contributed $200 for one share of stock at the time of Tyrone’s contribution, Pooja’s ownership would not count toward the 80 percent control requirement and Tyrone would still have had a taxable exchange.

12-2e Assumption of Liabilities—§ 357

LO.3

It is not uncommon to form a corporation by transferring assets and liabilities of an unincorporated business. Liabilities assumed by the other party are equivalent to cash received and are treated as boot. Without a provision to the contrary, the transfer of mortgaged property to a controlled corporation could require recognition of gain by the transferor if the corporation took over the mortgage. This would be consistent with the treatment given in like-kind exchanges under § 1031. Section 357(a) provides, however, that when the acquiring corporation assumes a liability in a § 351 transaction, the liability is not treated as boot received for gain recognition purposes. However, liabilities assumed by the corporation are treated as boot in determining the basis of the stock received. As a result, the liabilities assumed by the corporation reduce the basis of the stock the shareholder receives.

describe the special rules that apply when a corporation assumes shareholder liabilities.

The Big picture Return to the facts of The Big Picture on p. 12-1. Assume that you learn that Amber’s husband, Jimmy, becomes disinterested in becoming a stockholder in Garden, Inc., and that Amber’s building is subject to a liability of $70,000 that Garden assumes. Consequently, Amber receives 100% of the Garden stock, is relieved of the $70,000 liability, and contributes property with an adjusted basis of $400,000 and fair market value of $1,000,000. The exchange is tax-free under § 351 because § 357(a) precludes treating the debt relief as boot for determining recognized gain. However, the basis to Amber of the Garden stock is $330,000 [$400,000 (basis of property transferred) 2 $70,000 (amount of the liability assumed by Garden)].

EXAMPLE

19

GLOBAL TAx ISSUES Does § 351 Cover the Incorporation of a Foreign Business? When a taxpayer wants to incorporate a business overseas by moving assets across U.S. borders, the deferral mechanism of § 351 applies in certain situations, but not in others. In general, § 351 is available to defer gain recognition when starting up a new corporation outside the United States unless so-called tainted assets are involved. Under § 367, tainted assets, which include assets such as inventory and accounts receivable, are

treated as having been sold by the taxpayer prior to the corporate formation; therefore, their transfer results in the current recognition of gain. The presence of tainted assets triggers gain because Congress does not want taxpayers to be able to shift the gain outside U.S. jurisdiction. The gain recognized is ordinary or capital depending on the nature of the asset involved.

59341_ch12_hr_002-053.indd 14-15

vi Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

3/12/20 11:32 AM

CHAPTER 14 Partnerships and Limited Liability Entities

14-35

Key Terms

COMPUTATIONAL EXERCISES: Students need to learn to apply the rules and concepts covered in each Basis in the partnership interest, 14-7 Guaranteed payment, 14-29 Precontribution gain or loss, 14-19 chapter to truly understand them. These exercises, many of which mirror text examples, allow students to practice and Capital account, 14-21 Inside basis, 14-12 Profit and loss sharing ratios, 14-6 apply what they are learning. Capital interest, 14-6

Limited liability company (LLC), 14-4

Profits (loss) interest, 14-6

Capital sharing ratio, 14-6

Limited liability partnership (LLP), 14-4

Qualified nonrecourse financing, 14-27

Disguised sale, 14-10

Limited partnership, 14-3 ❏❏ Found in the end-of-chapter sections of the textbook

Distributive share, 14-4

Economic effect test, 14-19 ❏❏ CengageNOWv2 General partnership, 14-3

Nonrecourse debt, 14-22

Recourse debt, 14-22 Separately stated items, 14-5

Organizational costs,versions 14-14 Special allocation, 14-7 provides algorithmic of these problems Outside basis, 14-12

Syndication costs, 14-13

Computational Exercises 1.

lO.4 Enerico contributes $100,000 cash in exchange for a 40% interest in the calendar year ABC LLC. This year ABC generates $80,000 of ordinary taxable income and has no separately stated items. Enerico withdraws $10,000 cash from the partnership at the end of the tax year. a. Compute Enerico’s gross income from ABC’s ordinary income for the tax year. b. Compute Enerico’s gross income from the LLC’s cash distribution.

2.

lO.2 Henrietta transfers cash of $75,000 and equipment with a fair market value of $25,000 (basis to her as a sole proprietor, $10,000) in exchange for a 40% profit and loss interest worth $100,000 in the XYZ Partnership. 13-36 PART 5 Business Entities a. Compute Henrietta’s realized and recognized gains from the asset transfers. Communications Research Problem 2. Emerald Corporation must change its method of accounting for b. Compute Henrietta’s basis in her interest in XYZ. Federal income tax purposes. The change will require that an adjustment to income be made over three tax periods. Jonas, the sole shareholder of Emerald, wants to c. What is XYZ’s basis in the equipment that it now holds? better understand the implications of this adjustment for E & P purposes, as he

anticipates a distribution from Emerald in the current year. Prepare a memo for your lO.2 Wozniacki and Wilcox form Jewel LLC, with each receiving a ofone-half firm’sinvestor files describing the results your research. interest in the capital and profits of the LLC. Wozniacki receives his one-half Partial list of research aids: § 481(a). interest as compensation for tax planning services that he rendered prior to the for97–27, 1997–1 C.B. 680. mation of the LLC. Wilcox contributes $50,000 cash.Rev.Proc. The value of a one-half capital Use internet tax resources to address the following questions. Look for reliable webinterest in the LLC (for each of the parties) is $50,000. and blogs of the IRS and other government agencies, media outlets, businesses, ❏❏ Research Problems provide students vitalsites practice an increasingly demanded skill a. Compute Wozniacki’s realized and with recognized frominjoining taxgain professionals, academics,Jewel. think tanks, and political outlets. area. Some of Wozniacki’s these end-of-chapter items ask students to analyze tax data, helping them to b. Compute basis in hisData interest in Jewel. Analytics Research Problem 3. Just how common are dividend distributions? Are dividends conthescenarios. companies traded on the essential New York Stock Exchange, or do closely understand the Jewel application this Communications information incentrated various These features c. How does treat theofservices that Wozniacki has inrendered?

3.

RESEARCH AND Data Analytics PROBLEMS:

held corporations pay dividends in a similar manner? Did dividends decrease during prepare students for professional tax environments. the Great Recession of 2008 and 2009? Search for answers to these questions on the

lO.5 At the beginning of the tax year, Barnaby’s basis in the BBB Partnership was internet and/or in academic journal articles. $50,000, including his $5,000 share of partnership debt. At the end In addition, using data fromof thethe IRS tax Tax Statistics website (irs.gov/statistics), find and analyze corporate balance sheet data (overall and by size of total assets) to year, his share of the entity’s debt was $8,000. provide answers to the questions above. Summarize the data you find in a Microsoft Barnaby’s share of BBB’s ordinary income for Excel the spreadsheet year wasand$20,000, and he e-mail it, along with a three-paragraph summary of your findEnd-of-chapter CPA Review ings, his to your instructor. received cash distributions totaling $12,000. In addition, share of the partnership’s Questions from Becker PREPARE STUDENTS FOR SUCCESS. Students review key concepts using proven questions from Becker Research 4. Publicly corporations reacquire their own shares for Communications tax-exempt income was $1,000. Determine Barnaby’s basisProblem at the end of thetraded tax year. ® 4.

Becker Professional Education REVIEW QUESTIONS:

various Through use CPA of a tender offer, a corporation can purchase Professional Education —one of the industry’s most effective tools toreasons. prepare forthethe Exam.

a substantial the company’s lO.3 Candlewood LLC began its business on September 1; itpercentage uses a ofcalendar tax stock. Prepare an outline discussing (1) why publicly traded corporations reacquire their own shares and (2) how the and an accounting year. Candlewood incurredtender $6,500 in legal fees for drafting offer process works for both corporations and shareholders. E-mail your outline tofees your professor. the LLC’s operating agreement and $3,000 in accounting for tax advice of an organizational nature, for a total of $9,500 of organizational costs. Candlewood also incurred $30,000 of preopening advertising expenses and ❏❏ Located in select $24,500 of salaries and training costs for new employees before opening for busiend-­of-chapter sections CPAcosts. Review ness, for a total of $54,500Becker of startup TheQuestions LLC desires to take the largest deduction available for these costs. Compute Candlewood’s deductions for the first ❏❏ Tagged by concept in 1. On January 1, year 5, Olinto Corp., an accrual basis, calendar year C corporation, year of its operations for: had $35,000 in accumulated earnings and profits. For year 5, Olinto had current ­CengageNOWv2 earnings and profits of $15,000 and made two $40,000 cash distributions to its sharea. Organizational expenses. holders, one in April and one in September of year 5. What amount of the year 5 distributions is classified as dividend income to Olinto’s shareholders? Startup ❏❏ Questionsb.similar to expenses. what

5.

students would actually find on the CPA Exam

59341_ch14_hr_002-047.indd 35

a. $15,000

c. $50,000

b. $35,000

d. $80,000

2. Fox Corp. owned 2,000 shares of Duffy Corp. stock that it bought in year 0 for $9 per share. In year 8, when the fair market value of the Duffy stock was $20 per share, Fox distributed this stock to a noncorporate shareholder. Fox’s recognized gain on this distribution was: a. $40,000 c. $18,000 2/22/20 3:42 PM b. $22,000 d. $0

vii Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

See how the SWFT series helps students understand the big picture and the relevancy behind what they are learning. CHAPTER 3 Taxes in the Financial Statements

THE BIG PICTURE

THE BIG PICTURE: Tax Solutions for the

WAVEBREAKMEDIA/SHUTTERSTOCK.COM TETRA IMAGES/GETTY IMAGES

Taxes in The Financial sTaTemenTs Raymond Jones, the CEO of Arctic Corporation, would like some help reconciling the amount of income tax expense on Arctic’s financial statements with the amount of income tax reported on the company’s corporate income tax return for its first year of operations. Mr. Jones does not understand why he can’t simply multiply the financial statement income by the Federal 21 percent marginal income tax rate to get the financial tax expense. Although the financial statements show book income before tax of $21.5 million, the reported income tax expense is only $5 million. In addition, the corporate Federal income tax return reports taxable income of $19 million and Federal income taxes payable of $3.99 million ($19 million 3 21%). Without knowing the specifics of the company’s financial statements, does Arctic’s situation look reasonable? What causes the difference between the taxes shown in the financial statements and the taxes due on the tax return?

3-15

EXAMPLE

17

$420,000

Because the future benefits of the tax credit carryovers are considered more likely than not to be realized, they are recognized as a deferred tax asset and reduce Warren's current-year tax expense.

BRIDGE DISCIPLINE BOXES AND END-OF-CHAPTER QUESTIONS: When a deferred tax asset does not meet the more likely than not threshold for recognition, ASC 740 requires that a valuation allowance be created. The valuation allowance is a contra-asset account that offsets all or a portion of the deferred tax asset (similar to the way an allowance for uncollectible accounts is used to reflect the net realizable value of accounts receivable).

59341_ch03_hr_002-039.indd 1

%

21.0% 0.8 (2.1) (4.4) 15.3%

*$200,000 3 (21% 2 10%).

Recognizing Deferred Tax Assets

$320,000 100,000

$

$105,000 4,200 (10,500) (22,000)* $ 76,700

Only permanent differences appear in the rate reconciliation. Temporary differences do not affect the total book income tax expense; they simply affect the amount of the tax expense that is current versus deferred.

CHAPTER 3 Taxes in the Financial Statements

Continue with the facts of Example 16. Warren records the following journal entry for the book income tax expense and deferred tax asset related to the expected use of the credits.

Real World. Taxation comes alive at the start of each chapter as The Big Picture examples provide a glimpse into the lives, families, careers, and tax situations of typical individual or business filers. Students will follow a family, individual, or other taxpayer throughout the chapter, to discover how the concepts they are learning apply in the real The Big Picture world. EXAMPLE Finally, to solidify student comprehension, each 22 chapter concludes with a Refocus on the Big Picture summary and tax planning scenario. These scenarios re-emphasize the concepts and topics from the chapter and allow students to confirm their understanding of the material. Expected tax at U.S. statutory tax rate Disallowed meals expense Municipal bond interest Foreign income taxed at less than U.S. rate Income tax expense (provision)

Read the chapter and formulate your response.

Income tax expense (provision) Deferred tax asset Income tax payable

3-1

Return to the facts of The Big Picture on p. 3-1. Arctic’s total reported tax expense, $5,000,000, is not equal to what might be expected by applying the Federal tax rate of 21% to its pretax book income, or $4,515,000 ($21,500,000 3 21%). And given that Arctic’s combined Federal and state income tax rate is 25%, one might expect to find book tax expense of $5,375,000. Arctic’s effective tax rate of 23.26% ($5,000,000 total tax expense/$21,500,000 pretax book income) does not equal the Federal statutory rate of 21% or the combined Federal and state tax rate of 25%. This suggests that Arctic has some combination of permanent book-tax differences and/ or available credits. Mr. Jones should be able to find these in Arctic’s tax rate reconciliation in its tax footnote. Because Arctic operates in a state that imposes an income tax, Mr. Jones should expect to find state taxes in the reconciliation as an item that increases Arctic’s effective tax rate relative to the Federal statutory rate of 21% and its tax expense over what would be expected based on multiplying its pretax book income by the statutory rate. Because state income taxes increase Arctic’s effective tax rate, Mr. Jones should expect to find other reconciling items that reduce Arctic’s effective tax rate.

2/19/20 8:54 PM

Bridge Discipline boxes throughout the BRIDGE DISCIPLINE Bridge to Financial Analysis text present material and concepts from other disciplines such as economics, financial accounting, EXAMPLE 18 law, and finance. They help to bridge the gap between taxation issues and issues raised in other business courses. Bridge Discipline questions, in CHAPTER 3 Taxes in the Financial Statements the end-of-chapter material, help test these concepts Permanent differences include the following. income. A common example is municipal bond interest, which is and give students the chance to apply concepts • Nontaxable included in income for book purposes but is not taxable. they’ve learned in the Bridge Discipline boxes. • Nondeductible expenses. A portion of business meals, all entertainment expenses, Financial analysts perform an important function for the capital markets in their detailed analyses of companies. The analyst combs through the financial reports and other information about a company to produce an informed opinion on how a company is performing. Analysts’ earnings forecasts often constitute an important metric to examine when making decisions about investing in companies. An experienced financial analyst typically will have a good handle on interpreting financial statement information.

Returning to Example 16, assume that Warren's management believes it is more likely than not that Warren will be able to use only $40,000 of the 2020 general business credits in any tax year, with the remaining $60,000 expiring unused. Warren will use a valuation allowance to reflect the realizability of the deferred tax asset, making the following journal entry in addition to the one made in Example 17. Deferred tax expense Valuation allowance

$60,000

$60,000

As a result of recording the valuation allowance, Warren's tax expense will be increased to $380,000 as follows. Book

Current tax expense/payable

3-21

Effective Tax Rate Reconciliation

However, even experienced analysts often will “punt” when it comes to interpreting the tax information contained in a financial statement, preferring to look at net income before taxes (or even EBITDA, earnings before interest, taxes, depreciation, and amortization). A great deal of useful information about a business is contained in its tax footnote, and analysts might have an edge if they work at understanding the mysteries of taxes in the financial statements.

3-5

Tax

$420,000

$420,000

Deferred tax expense (benefit) Deferred tax asset

($100,000)

Less: Valuation allowance Total tax expense

60,000

and certain penalties are not deductible for tax purposes, but they are fully expensed in arriving at book income. • Tax credits. Credits such as the research activities credit reduce the Federal income tax liability but have no corresponding book treatment.

(40,000) $380,000

FINANCIAL DISCLOSURE INSIGHTS:

59341_ch03_hr_002-039.indd 21 Concept Summary 3.1 summarizes the sources of typical corporate book-tax FINANICAL DISCLOSURE INSIGHTS Tax Losses and the Deferred Tax differences. Asset

Although a current-year net operating loss (NOL) represents a failure of an entity’s business model to some, others see it as an immediate tax refund. But when an NOL hits the balance sheet as a deferred tax asset, the story is not over. The NOL creates or increases a deferred tax asset that may or may not be realizable in future periods: the key question for a financial analyst is whether the entity will generate enough net revenue in future years to create a positive tax liability that can be offset by the NOL carryover amount.

to help students go further in their knowledge of certain topics, Digging Deeper links within the text provide more in-depth coverage than the text provides. Digging Deeper materials can be found on the book’s website at www.cengage.com. Some of the end-of-chapter exercises are labeled “Digging Deeper” to indicate students should use those materials to answer the question.

viii

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Both International Financial Reporting Standards (IFRS) and U.S. GAAP preclude recognizing a deferred tax asset when the asset is unlikely to be realized. However, unlike U.S. GAAP, IFRS does not make use of a valuation allowance. Rather, under IAS 12, a deferred tax asset is recorded only when it is “probable” (a higher standard than GAAP’s “more likely than not”) that the deferred tax amount will be realized, and then only to the extent of that probable amount. Thus, no offsetting valuation allowance is needed.

DIGGING DEEPER: Designed 59341_ch03_hr_002-039.indd 15

Tax professionals need to understand how taxes affect financial statements. Financial Disclosure Insights, appearing throughout Concept Summary 3.1 Common Book-Tax Differences the text, use current information about existing Temporary Differences Permanent Differences taxpayers to highlight book-tax reporting • Unearned revenues. Nontaxableand income (e.g., state/municipal differences, effective tax • rates, trends in bond interest; life insurance proceeds). • Expenses failing the all events or economic performance tests. reporting conventions. • Nondeductible expenses: • Accelerated depreciation of fixed assets. • Amortization of goodwill.

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º Meals and entertainment. º Fines and penalties. º Certain executive compensation. • Credits: º Research and development credit.

In-depth coverage can be found on this book’s companion website: cengage.com

3-1b Generally Accepted Accounting Principles and ASC 740 Accounting for income taxes under GAAP is governed by Accounting Standards Codification (ASC) 740. Consistent with most financial accounting principles, ASC 740 emphasizes the balance sheet, taking a balance sheet approach to the accounting for income taxes. Specifically, it requires that the balance sheet reflect both a current liability related to all income taxes (Federal, state and local, and foreign) reflected on its tax returns for the year as well as a deferred tax liability or deferred tax asset for the future tax effects of items included in its current and prior financial statements but not in taxable income (i.e., temporary book-tax differences). That is, ASC 740 adopts a comprehensive inter-period allocation approach to income taxes, requiring that all income taxes that relate to the income reported in the current financial statements be reported in those same financial statements regardless of when they might be legally due under the tax law. The sum of the liabilities reflected on the current tax returns represents a corporation’s current tax expense while the future tax effects related to its temporary book-tax differences lead to the recognition of either a deferred tax expense or deferred tax benefit .

1 DIGGING DEEPER

LO.2 Explain the basic principles of Accounting Standards Codification (ASC) 740.

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

1-23

CHAPTER 1 Introduction to Taxation

managed in a way that will help to minimize the client’s tax liability. The General Framework for Income Tax Planning in Exhibit 1.3 lists each element in the income tax formula, develops tax planning strategies designed to minimize taxes, and provides brief summaries of specific examples of tax planning. The framework is followed by a discussion of the tax planning strategies, along with detailed examples of how the strategies can be applied. In Chapters 4 through 18 of this book, these strategies and their tax formula components provide the framework for Tax Planning Strategies features.

TAX PLANNING FRAMEWORK: To General Framework for Income Tax Planning E X H I B I T 1.3 demonstrate the relevance of tax planning for Tax Formula Tax planning Strategy Tax planning Examples Compensate employees with nontaxable fringe benefits Income and exclusions ➢ Avoid income recognition. business and individual taxpayers, Essentials (see Example 19). Postpone sale of assets (see Example 20). ➢ postpone recognition of income to of Taxation: Individuals and Business achieve tax deferral. Invest in stock of another corporation (see Example 21). 2 Deductions ➢ maximize deductible amounts. Entities presents a tax planning framework Elect to deduct charitable contribution in year of pledge ➢ Accelerate recognition of deductions to achieve tax deferral. rather than in year of payment (see Example 22). like one used by tax practitioners. Introduced 5 Taxable income ➢ Shift net income from high-bracket Postpone recognition of income to a low-bracket year 3 Tax rate in Chapter 1, this framework extends to a series years to low-bracket years. (see Example 23). Postpone recognition of deductions to a high-bracket of Tax Planning Strategies incorporated year (see Example 24). from high-bracket Pay children in the family business (see ➢ Shift net income throughout the remainder of the text. The inclusion of the tax planning framework, and theto work planning taxpayers to low-bracket taxpayers. Example 25). Shift net income from high-tax Establish subsidiary operations in countries with low tax strategies in each chapter, makes it easier than ever to understand➢the effects that careful tax planning can jurisdictions to low-tax jurisdictions. rates (see Examples 26 and 27). Hold assets long enough to qualify for long-term capital ➢ Control the character of income and have in today’s world. deductions. gain rates before selling them (see Example 28). ➢ Avoid double taxation.

18-18

PART 6

Operate as a flow-through entity rather than a C corporation (see Example 29). Maximize deductible expenses paid by a C corporation to a shareholder/employee (see Example 30).

Special Business Topics

TAX PLANNING STRATEGIES: The tax planning 5 Federal income tax

TAx PLANNING STRATEGIES Selling Stock or Assets

2 Tax credits

Strategy: Avoid Double Taxation. Structuring the transfer of a business as a stock sale may produce detrimental tax results for the purchaser. As Example 18 illustrates, the basis of the corporation’s assets is not affected by a stock sale. If the fair market value of the stock exceeds the corporation’s adjusted basis for its assets, the purchaser is denied the opportunity to step up the basis of the assets to reflect the amount in effect paid for them through the stock acquisition—there is nothing analogous to a § 754 election available for C corporations. An asset sale resolves the purchaser’s problem of not being able to step up the basis of the assets to their fair market value. The basis for each asset is its purchase price. Then the purchaser may transfer the property to a corporation in a § 351 transaction. However, an asset sale may not be attractive to the seller. If an asset sale is used, the seller of the business can be either the corporation or its shareholders. If the seller is the corporation, the corporation sells the business (the assets),

➢ maximize tax credits.

Make structural changes to a building where the expenditures qualify for the rehabilitation tax credit

Example 31). framework extends to subsequent (seechapters as Tax 5 Tax owed (or refund) Planning Strategies boxes that are tied to the topical coverage of the chapters. Planning Strategies 1-5c Taxcontain Minimization Strategies Related to Income ★ Framework Focus: often examples to further illustrate the Income ➤ Avoid Income Recognition. Section 61(a) of the Code defines gross income as “all income from whatever source derived.” However, the Code contains tax provisions concept for students. Because some planning ➤ Tax Planning that allow various types of income to be excluded from the tax base. Numerous Strategy exclusions are available for individuals, but very fewinto are available forframework, corporations. strategies do not fit neatly the the However, a corporation can provide excludible income for its owners at no tax cost to the corporation. text also provides tax planning strategies called Thinking Outside the Framework.

FR AME WORK FOCuS: TAX R ATE

pays any debts not transferred, and makes a liquidating distribution to the shareholders. If the sellers are the shareholders, the corporation pays any debts that will not be transferred and makes a liquidating distribution to the shareholders; then the shareholders sell the business. Regardless of the approach used for an asset sale, double taxation occurs. The corporation is either taxed on the actual sale of the assets or taxed as if it had sold the assets when it makes the liquidating distribution to the shareholders. The shareholders are taxed when they receive cash or assets distributed in kind by the corporation. From the perspective of the seller, the ideal form of the transaction is a stock sale. Conversely, from the purchaser’s perspective, the ideal form is an asset purchase. Thus, a conflict exists between the buyer’s and the seller’s objectives regarding the form of the transaction. Therefore, the bargaining ability of the seller and the purchaser to structure the sale as a stock sale or an asset sale, respectively, is critical.

Such an election, once made, is binding on the entity and applies to all subsequent exchanges of ownership interests. Therefore, although it may benefit a purchaser if the entity’s assets have appreciated prior to the acquisition date, creating a positive basis adjustment for the new owner, it may be detrimental to a future purchaser if assets are depreciated at the time of acquisition, resulting in a negative basis adjustment for the 59341_ch01_hr_002-039.indd new owner.18

23

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18-5c C Corporations The sale of a business held by a C corporation can be structured as either an asset sale or a stock sale. The stock sale has the dual advantage to the seller of being less complex both as a legal transaction and as a tax transaction. It also has the advantage of providing a way to avoid double taxation since the only gain recognized is on the sale of the stock by the shareholder. Finally, any gain or loss on the sale of the stock is treated as a capital gain or loss to the shareholder.

Global Tax Issues: The

­ lobal Tax Issues feature gives G 18 ­insight into the ways in which taxation is affected by international concerns and illustrates the effects of various events on tax liabilities across the globe. EXAMPLE

CHAPTER 9 Individuals as Taxpayers

GLOBAL TAX ISSUES Filing a Joint Return

Jane and Zina each own 50% of the stock of Purple Corporation. They have owned the business for John Garth is a U.S. citizen and resident, but he 10 years. Jane’s basis in her stock is $40,000, and Zina’s basis in her stock is $60,000. They agree to spends much of his time in London, where his employer sends sell the stock to Rex for $300,000. Jane recognizes a long-term capital gain of $110,000 ($150,000 2 him $40,000), and Zina recognizes a long-term capital gain of $90,000 ($150,000 2 $60,000). Rex takes a on frequent assignments. John is married to Victoria, a basis in his stock of $300,000. Purple’s basis in its assets does not change as a result of the stock sale.

citizen and resident of the United Kingdom. Can John and Victoria file a joint return for U.S. Federal

Conversely, the purchaser will prefer that the transaction be structured as a sale of tax purposes? Although § 6013(a)(1) specifically the individual assets, assuming that those assets have a fair market value in excess income of their basis to the corporation. This allows the purchaser to increase the basis of the precludes the filing of a joint return if one spouse is a assets to their fair market value.

18

§§ 743 and 754.

59341_ch18_hr_002-038.indd 18

9-21

nonresident alien, another Code provision permits an exception. Under § 6013(g), the parties can elect to treat the nonqualifying spouse as a “resident” of the United States. This election would allow John and Victoria to file jointly.

But should John and Victoria make this election? If Victoria has considerable income of her own (from non-U.S. sources), the election could be ill-advised. As a nonresident alien, Victoria’s non-U.S. source income would not be subject to the U.S. income tax. If she is treated as a U.S. resident, however, her non-U.S. source income will be subject to U.S. tax. Under the U.S. worldwide approach to taxation, all income (regardless of where earned) of anyone who is a resident or citizen of the United States is subject to tax.

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9-4b Filing Requirements General Rules In general, an individual must file a tax return if gross income equals or exceeds the applicable standard deduction.28 For example, a single taxpayer under age 65 must file a tax return in 2020 if gross income equals or exceeds $12,400. Because the standard deduction amount is subject to an annual inflation adjustment, the gross income thresholds for determining whether a tax return must be filed normally change every year. The additional standard deduction for those age 65 or older is considered in determining the gross income filing requirements. For example, the 2020 filing requirement for a single taxpayer age 65 or older is $14,050 ($12,400 basic standard deduction 1 $1,650 additional standard deduction). A self-employed individual with net earnings of $400 or more from a business or profession must file a tax return regardless of the amount of gross income. Even though an individual has gross income below the filing level amounts and therefore does not owe any tax, he or she must file a return to obtain a tax refund of any tax that might have been withheld from their income by a payer. A return is also necessary to obtain the benefits of the earned income credit (see Chapter 10). In addition, an individual who needs to reconcile the amount of premium tax credit received in advance during the year or owed to them (to help pay for health insurance obtained through the Marketplace) must file a return (see Chapter 10).

Filing Requirements for Dependents Computation of the gross income filing requirement for an individual who is a dependent of another taxpayer is subject to more complex rules. For example, such an individual must file a return if he or she has either earned income in excess of the standard deduction amount or unearned income in excess of the greater of $1,100 or the sum of unearned income plus $350. In-depth coverage can be found on this book’s companion website: cengage.com

8 DIGGING DEEPER

ix 28 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 § 6012(a)(1).

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CengageNOWv2 is a powerful course management tool and online homework resource that elevates student thinking by providing superior content designed with the entire student workflow in mind. ❏❏ MOTIVATION:  engage students and better prepare them for class ❏❏ APPLICATION:  help students learn problem-solving behavior and skills to guide them to complete taxation problems on their own ❏❏ MASTERY:  help students make the leap from memorizing concepts to actual critical thinking

Motivation — To help with student engagement and pre­paredness, CengageNOWv2 for SWFT offers: ❏❏ “Tax Drills” test students on key concepts and applications. With three to five questions per learning objective, these “quick-hit” questions help students prepare for class lectures or review prior to an exam.

Application — Students need to learn problem-solving behavior and skills, to guide them to complete taxation problems on their own. However, as students try to work through homework problems, sometimes they become stuck and need extra help. To reinforce concepts and keep students on the right track, CengageNOWv2 for SWFT offers the following. ❏❏ End-of-chapter homework from the text is expanded and enhanced to follow the workflow a professional would use to solve various client scenarios. These enhancements better engage students and encourage them to think like a tax professional. x Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

❏❏ Algorithmic versions of end-of-chapter homework are available for computational exercises and at least 15 problems per chapter. ❏❏ “Check My Work” Feedback. Homework questions include immediate feedback so students can learn as they go. Levels of feedback include an option for “check my work” prior to submission of an assignment. ❏❏ Post-Submission Feedback. After submitting an assignment, students receive even more extensive feedback explaining why their answers were incorrect. Instructors can decide how much feedback their students receive and when, including the full solution. ❏❏ Built-in Test Bank for online assessment.

Mastery — ❏❏ Tax Form Problems give students the option to complete the Cumulative Intuit ProConnect Tax problems and other homework items found in the end-of-chapter manually or in a digital environment. ❏❏ An Adaptive Study Plan comes complete with an eBook, practice quizzes, glossary, and flashcards. It is designed to help give students additional support and prepare them for the exam. CengageNOWv2 Instant Access Code ISBN: 978-0-357-51948-6 Contact your Cengage Learning Consultant about different bundle options.

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xii

PREFACE

EXTENSIVELY REVISED. DEFINITIVELY UP TO DATE. Each year the South-Western Federal Taxation series is updated with thousands of changes to each text. Some of these changes result from the feedback we receive from instructors and students in the form of reviews, focus groups, web surveys, and personal e-mail correspondence to our authors and team members. Other changes come from our careful analysis of the evolving tax environment. We make sure that every tax law change relevant to the introductory taxation course was considered, summarized, and fully integrated into the revision of text and supplementary materials. The South-Western Federal Taxation authors have made every effort to keep all materials up to date and accurate. All chapters contain the following general changes for the 2022 edition. •• Updated materials to reflect changes made by Congress through legislative action (including the tax provisions contained in the CARES Act, the Consolidated Appropriations Act of 2021, and the American Rescue Plan Act of 2021). •• Streamlined chapter content (where applicable) to clarify material and make it easier for students to understand. •• Revised numerous materials as the result of changes caused by indexing of statutory amounts. •• Revised Problem Materials, Computational ­Exercises, and CPA Exam problems. •• Updated Chapter Outlines to provide an overview of the material and to make it easier to locate specific topics. •• Revised Financial Disclosure Insights and Global Tax Issues as to current developments. In addition, the following materials are available online. •• An appendix that helps instructors broaden and customize coverage of important tax provisions of the Affordable Care Act. (Instructor Companion Website at www.cengage.com/login) •• An appendix that covers depreciation and the Accelerated Cost Recovery System (ACRS). (Instructor Companion Website at www.cengage.com/login)

Chapter 1 •• Expanded discussion of tax rates to cover statutory, marginal, average, and effective tax rates and added a new example. Some of this information was previously in Chapter 9. •• Removed the Digging Deeper feature related to who pays taxes. •• Added an explanation of another income tax ­planning framework.

•• Expanded the discussion on judicial concepts to also include the substance over form doctrine. •• Added a new problem on tax rate computations (correlates with expanded discussion of tax rates in text).

Chapter 2 •• Updated discussion on changes to the CPA exam. •• Expanded Digging Deeper notes to include the relevance of Chief Counsel Advice Memoranda. •• Updated end-of-chapter materials as needed.

Chapter 3 •• Updated Global Tax Issues feature related to IAS 12 and the current state of the convergence between U.S. GAAP and IFRS. •• Updated Financial Disclosure Insights feature for corporations paying no income tax in 2018. •• Added new example illustrating the intra-period allocation of tax expense. •• Added new discussion and three examples of the impact of subsequent events on the accounting for uncertain tax positions. •• Revised former Concept Summary 3.2 (summarizing the provision process); it is now Concept Summary 3.3. •• Deleted former Example 26 illustrating the refund of previously paid AMT as the 2020 CARES Act accelerated all remaining refunds to 2019. •• Added two discussion problems requiring students to: Identify reasons current tax expense as reported in the financial statements may not correspond to the current-year tax returns. Explain the impact of a tax dispute settlement on book income. •• Added a problem requiring students to determine the impact of a tax dispute settlement on book income and provide the related journal entry. •• Modified former Problems 34–39 so they now include an example of a deferred tax benefit as well as an expense. •• Eliminated former Problem 43 as other problems already require a tax rate reconciliation. •• Eliminated former Research Problem 4 requiring the identification of deferred tax assets and liabilities in a company’s financial statements as a similar task is included in other research problems. ➤➤

➤➤

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PREFACE

Chapter 4 •• Made minor updates tied to 2020 law changes. •• End-of-chapter problem added on imputed interest on a below-market loan.

Chapter 5 •• Changed order in which disallowance possibilities are discussed to emphasize their relation to each other and other items discussed in the text. •• Added Digging Deeper 3 to illustrate the determination directly from financial statement information of a deduction for an expense failing to meet the all events and economic performance tests. •• Added Digging Deeper 9 to discuss the basics of the repair regulations. •• Updated text for inflation-adjusted items. •• Added new Example 24 to illustrate the treatment of research and experimental expenditures incurred after 2021. •• Added a brief discussion of the purpose of the limitation on the deductibility of business interest. •• Revised and updatedend-of-chapter materials as needed (including changes needed to reflect revised inflation-adjusted items). •• Added a new Problem 13 requiring the determination directly from financial statement information of a deduction for an expense failing to meet the all events and economic performance tests. •• Revised Problem 27 related to the treatment of research and experimental expenditures beginning in 2022.

Chapter 6 •• Updated text and end-of-chapter materials as needed.

Chapter 7 •• Updated text for inflation-adjusted items. •• Revised and updated end-of-chapter materials as needed (including changes needed to reflect revised inflation-adjusted items).

xiii

Chapter 8 •• Updated text for inflation-adjusted items. •• Updated Tax Fact entitled “Capital Gains for the Wealthy?” for the distribution of capital gains and qualified dividends across income levels. •• Added a Digging Deeper feature covering recapture on sales of property between related parties. •• Revised and updated end-of-chapter materials as needed (including changes needed to reflect revised inflation-adjusted items). •• Deleted former Problem 41 related to recapture on installment sales.

Chapter 9 •• Moved explanation of statutory, marginal, and average tax rates to Chapter 1. •• Updated Tax Fact entitled “What Mode of Tax Filing Is Right for You?” for e-filing statistics. •• Updated materials for annual inflation adjustments. •• Added note about temporary allowance of the deduction of cash contributions for non-itemizers in Concept Summary 9.1.

Chapter 10 •• Updated credit coverage for changes made by the American Rescue Plan Act of 2021 (P.L. 117–2). •• Updated education tax credits discussion. •• Updated end-of-chapter problems as needed.

Chapter 11 •• Updated text for recent pandemic-related tax law changes. •• Updated and improved discussion of education expenses and related tax benefit. •• Updated end-of-chapter problems as needed.

Chapter 12 •• Switched Learning Objectives 3 and 4 to reflect changes in the text. •• Switched text Sections 12-2e and 12-2f to enhance readability and student comprehension. •• Reversed the order of discussion of assigning basis in § 351 transactions and the effect of liabilities transferred to a corporation on stock and asset bases.

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

xiv

PREFACE

Chapter 13

Chapter 16

•• Updated text to reflect that for 2021 and 2022 there is no E & P adjustment for business meals provided by a restaurant as they are 100% deductible.

Chapter 14 •• Updated Tax Fact entitled “Partnership Power” to reflect 2018 statistics of income information for partnerships. •• Updated Tax Fact entitled “What Do Partnerships Do?” to reflect 2018 statistics of income information for partnerships. •• Updated QBI phaseout thresholds for inflation adjustments. •• Updated excess business loss rules for inflation adjustments. •• Updated self-employment taxable income limitations for 2021. •• Updated tax return problem requirements to recommend use of ProConnect Tax software.

Chapter 15 •• Updated Tax Fact entitled “The Business of S ­Corporations.” •• Updated QBI phaseout information. •• Reduced loan basis coverage. •• Updated excess business losses limits to 2021 amounts.

•• Updated text and end-of-chapter materials as needed.

Chapter 17 •• Moved discussion of the low-income housing credit from the Digging Deeper supplement to text Section 17-2d. •• Deleted separate section for corporate AMT. •• Updated material for inflation adjustments. •• Added three new Becker questions.

Chapter 18 •• Updated data in Tax Fact entitled “Revenue Relevance of Corporate versus Individual Taxpayers,” in Tax Fact entitled “The Relative Popularity of Flow-Through Entities,” and in Exhibit 18.1. •• Added publicly traded partnerships to comparison of the treatment of organization forms for tax and nontax purposes. •• Updated income limits on which self-employment taxes are imposed. •• Deleted former Problems 10 and 31.

TAX LAW OUTLOOK From your SWFT Series Editors Legislation related to the COVID-19 pandemic was a vehicle for several tax changes in 2020. Several more were incorporated into the American Rescue Plan Act of 2021 (P.L. 117–2; March 11, 2021). Looking forward, a new administration and a change in the balance of power in Congress is likely to lead to several proposed tax law changes related to changing economic and social goals. For example, the Biden administration and 117th Congress have begun to discuss changes to the Tax Cuts and Jobs Act of 2017 (TCJA), including its international provisions. Other proposals, including tax rate increases on both corporations and individuals, are expected to offset the cost of the Biden administration’s Build Back Better plan (with legislation likely to be discussed and possibly enacted before the end of the 117th Congress). Taxpayers and their advisers will need to evaluate how these changes affect their financial planning strategies and adjust their plans appropriately. Students and researchers as well should have plenty of opportunities to discuss and analyze the practical and policy implications of these proposals. The SWFT editors will be monitoring these activities and provide updates to adopters as needed.

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

PREFACE

xv

SUPPLEMENTS SUPPORT STUDENTS AND INSTRUCTORS Built around the areas students and instructors have identified as the most important, our integrated supplements package offers more flexibility than ever before to suit the way instructors teach and students learn.

Online and Digital Resources for Students

Online access to ProConnect™ Tax software is offered with each NEW copy of the textbook—at no additional cost to students.*

www.cengage

CengageNOWv2 is a powerful course management and online homework tool that provides robust instructor control and customization to optimize the student learning experience and meet desired outcomes. CengageNOWv2 Instant Access Code ISBN: 978-0-357-51948-6 Contact your Cengage Learning Consultant about different bundle options. Thomson Reuters Checkpoint™ is the leading online tax research database used by professionals. Checkpoint™ helps introduce students to tax research in three simple ways: •• Intuitive web-based design makes it fast and simple to find what you need. •• Checkpoint™ provides a comprehensive collection of primary tax law, cases, and rulings along with analytical insight you simply can’t find anywhere else. •• Checkpoint™ has built-in productivity tools such as calculators to make research more efficient—a resource more tax pros use than any other. Six months’ access to Checkpoint™ (after activation) is packaged automatically with every NEW copy of the textbook.* More than software: Put the experience of ProConnect™ Tax on your side. •• Get returns done right the first time with access to all the forms you need, backed by industryleading calculations and diagnostics. •• Save time with logical data-entry worksheets instead of traditional forms-based methods. •• It’s all online, so there’s nothing to install or maintain.

.com Students can use www.cengage.com to select this textbook and access Cengage Learning content, empowering them to choose the most suitable format and giving them a better chance of success in the course. Buy printed materials, eBooks, and digital resources directly through Cengage Learning and save at www.cengage.com. Online Student Resources Students can go to www.cengage.com for free resources to help them study as well as the opportunity to purchase additional study aids. These valuable free study resources will help students earn a better grade: •• Flashcards use chapter terms and definitions to aid students in learning tax terminology for each chapter. •• Online glossary for each chapter provides terms and definitions from the text in alphabetical order for easy reference. •• Learning objectives can be downloaded for each chapter to help keep students on track. •• Tax tables used in the textbook are downloadable for reference. The first-of-its-kind digital subscription designed specially to lower costs. Students get total access to everything Cengage has to offer on demand—in one place. That’s 20,000 eBooks, 2,300 digital learning products, and dozens of study tools across 70 disciplines and over 675 courses. www.cengage.com/unlimited

Printed Resources for Students Looseleaf Edition (978-0-357-51945-5) This version provides all the pages of the text in an unbound, three-hole-punched format for portability and ease of use. Online access to ProConnect™ Tax software is included with every NEW textbook as well as Checkpoint™ from Thomson Reuters.*

*NEW printed copies of the textbook are automatically packaged with access to Checkpoint™ and ProConnect™ Tax software. If students purchase the eBook, they will not automatically receive access to Checkpoint™ and ProConnect™ Tax software.

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

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xvi

Comprehensive Supplements Support Instructors’ Needs

CengageNOWv2 is a powerful course management and online homework tool that provides robust instructor control and customization to optimize the student learning experience and meet desired outcomes. In addition to the features and benefits mentioned earlier for students, CengageNOWv2 includes these features for instructors: • • Learning Outcomes Reporting and the ability to analyze student work from the gradebook. Each exercise and problem is tagged by topic, learning objective, level of difficulty, estimated completion time, and business program standards to allow greater guidance in developing assessments and evaluating student progress. •• Built-in Test Bank for online assessment. The Test Bank files are included in CengageNOWv2 so that they may be used as additional homework or tests.

Solutions Manual Written by the South-Western Federal Taxation ­editors and authors, the Solutions Manual features solutions arranged in accordance with the sequence of chapter material. Solutions to all homework items are tagged with their Estimated Time to Complete, Level of Difficulty, and Learning Objective(s), as well as the AACSB’s and AICPA’s core competencies—giving instructors more control than ever in selecting homework to match the topics covered. The Solutions Manual also contains the answers with explanations to the end-of-chapter Becker CPA Review Questions. Available on the Instructor Companion Website at www.cengage.com/login.

PowerPoint® Lectures with Notes The Instructor PowerPoint Lectures contain more than 30 slides per chapter, including outlines and instructor guides, concept definitions, and key points. Available on the Instructor Companion Website at www. cengage .com/login. ®

Test Bank Written by the South-Western Federal Taxation ­editors and authors, the Test Bank contains approximately 2,200 items and solutions arranged in accordance with the sequence of chapter material.

Each test item is tagged with its Estimated Time to Complete, Level of Difficulty, and Learning Objective(s), as well as the AACSB’s and AICPA’s core competencies— for easier instructor planning and test item selection. The 2022 Test Bank is available in Cengage’s test generator software, Cognero. Cengage Learning Testing Powered by Cognero is a flexible, online system that allows you to: •• author, edit, and manage Test Bank content from multiple Cengage Learning solutions •• create multiple test versions in an instant •• deliver tests from your LMS, your classroom, or wherever you want •• create tests from school, home, the coffee shop— anywhere with Internet access (No special installs or downloads needed.) Test Bank files in Word format as well as versions to import into your LMS are available on the Instructor Companion Website. Cognero Test Banks available via single sign-on (SSO) account at www.cengage .com/login.

Other Instructor Resources All of the following instructor course materials are available online at www.cengage.com/login. Once logged into the site, instructors should select this textbook to access the online Instructor Resources. •• Instructor Guide •• Edition-to-edition correlation grids by chapter •• An appendix that helps instructors broaden and customize coverage of important tax provisions of the Affordable Care Act •• The Depreciation and the Accelerated Cost Recovery System (ACRS) appendix

Custom Solutions Cengage Learning Custom Solutions develops personalized solutions to meet your taxation education needs. Consider the following for your adoption of South-­ Western Federal Taxation 2022 Edition. •• Remove chapters you do not cover or ­rearrange their order to create a streamlined and efficient text. •• Add your own material to cover additional topics or information. •• Add relevance by including sections from Sawyers/Gill’s Federal Tax Research or your state’s tax laws and regulations.

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

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xvii

ACKNOWLEDGMENTS We want to thank all the adopters and others who participated in numerous online surveys as well as the following individuals who provided content reviews and feedback in the development of the South-Western Federal Taxation 2022 titles. Annette Nellen / Andrew D. Cuccia / Mark B. Persellin / James C. Young Lindsay G. Acker, University of WisconsinMadison Deborah S. Adkins, Nperspective, LLC Mark P. Altieri, Kent State University Susan E. Anderson, Elon University Henry M. Anding, Woodbury University Jennifer A. Bagwell, Ohio University George Barbi, Lanier Technical College Terry W. Bechtel, Texas A&M University – Texarkana Chris Becker, LeMoyne College Tamara Berges, UCLA Ellen Best, University of North Georgia Tim Biggart, Berry College Rachel Birkey, Illinois State University Israel Blumenfrecht, Queens College Patrick M. Borja, Citrus College / California State University, Los Angeles Dianne H. Boseman, Nash Community College Cathalene Bowler, University of Northern Iowa Madeline Brogan, Lone Star College – Montgomery Darryl L. Brown, Illinois Wesleyan ­University Timothy G. Bryan, University of Southern Indiana Robert S. Burdette, Salt Lake Community College Ryan L. Burger, Concordia University Nebraska Lisa Busto, William Rainey Harper College Julia M. Camp, Providence College Al Case, Southern Oregon University Machiavelli W. Chao, Merage School of Business, University of California, Irvine Eric Chen, University of Saint Joseph Christine Cheng, Louisiana State University James Milton Christianson, Southwestern University and Austin Community College Wayne Clark, Southwest Baptist University Ann Burstein Cohen, University at Buffalo, The State University of New York Ciril Cohen, Fairleigh Dickinson University Seth Colwell, University of Texas - Rio Grande Valley Dixon H. Cooper, University of Arkansas Rick L. Crosser, Metropolitan State University of Denver John P. Crowley, Castleton University Susan E. M. Davis, South University Dwight E. Denman, Newman University

James M. DeSimpelare, Ross School of Business at the University of Michigan John Dexter, Northwood University James Doering, University of Wisconsin – Green Bay Michael P. Donohoe, University of Illinois at Urbana Champaign Deborah A. Doonan, Johnson & Wales University Monique O. Durant, Central Connecticut State University Wayne L. Edmunds, Virginia Commonwealth University Rafi Efrat, California State University, Northridge Frank J. Faber, St. Joseph’s College A. Anthony Falgiani, University of South Carolina, Beaufort Jason Fiske, Thomas Jefferson School of Law John Forsythe, Eagle Gate College Alexander L. Frazin, University of Redlands Carl J. Gabrini, College of Coastal Georgia Kenneth W. Gaines, East-West University, Chicago, Illinois Carolyn Galantine, Pepperdine University Sheri Geddes, Hope College Alexander Gelardi, University of St. Thomas Joel Gelb, Farleigh Dickinson University Daniel J. Gibbons, Waubonsee Community College Martie Gillen, University of Florida Charles Gnizak, Fort Hays State University J. David Golub, Northeastern University George G. Goodrich, John Carroll University Marina Grau, Houston Community College – Houston, TX Vicki Greshik, University of Jamestown College Jeffrey S. Haig, Santa Monica College Marcye S. Hampton, University of Central Florida June Hanson, Upper Iowa University Donald Henschel, Benedictine University Kenneth W. Hodges, Sinclair Community College Susanne Holloway, Salisbury University Susan A. Honig, Herbert H. Lehman ­College Jeffrey Hoopes, University of North Carolina Christopher R. Hoyt, University of Missouri (Kansas City) School of Law Marsha M. Huber, Youngstown State University Carol Hughes, Asheville-Buncombe ­Technical Community College Helen Hurwitz, Saint Louis University

Richard R. Hutaff, Wingate University Zite Hutton, Western Washington University Steven L. Jager, Cal State Northridge Janeé M. Johnson, University of Arizona Brad Van Kalsbeek, University of Sioux Falls John E. Karayan, Woodbury University Carl Keller, Missouri State University Cynthia Khanlarian, Concord University Bob G. Kilpatrick, Northern Arizona University Gordon Klein, UCLA Anderson School Taylor Klett, Sam Houston State University Aaron P. Knape, Peru State College Cedric Knott, Colorado State University – Global Campus Ausher M. B. Kofsky, Western New ­England University Emil Koren, Saint Leo University Jack Lachman, Brooklyn College – CUNY Richard S. Leaman, University of Denver Adena LeJeune, Louisiana College Gene Levitt, Mayville State University Teresa Lightner, University of North Texas Sara Linton, Roosevelt University Roger Lirely, The University of Texas at Tyler Jane Livingstone, Western Carolina University Heather Lynch, Northeast Iowa Community College Michael J. MacDonald, University of Wisconsin-Whitewater Mabel Machin, Florida Institute of ­Technology Maria Alaina Mackin, ECPI University Anne M. Magro, George Mason University Richard B. Malamud, California State University, Dominguez Hills Harold J. Manasa, Winthrop University Barry R. Marks, University of Houston – Clear Lake Dewey Martin, Husson University Anthony Masino, East Tennessee State University Norman Massel, Louisiana State University Bruce W. McClain, Cleveland State U ­ niversity Jeff McGowan, Trine University Allison M. McLeod, University of North Texas Meredith A. Menden, Southern New Hampshire University Robert H. Meyers, University of WisconsinWhitewater John G. Miller, Skyline College Tracie L. Miller-Nobles, Austin Community College

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xviii

PREFACE

Jonathan G. Mitchell, Stark State College Richard Mole, Hiram College David Morack, Lakeland University Lisa Nash, University of North Georgia Mary E. Netzler, Eastern Florida State College Joseph Malino Nicassio, Westmoreland County Community College Mark R. Nixon, Bentley University Garth Novack, Pantheon Heavy Industries & Foundry Claude R. Oakley, DeVry University, Georgia Al Oddo, Niagara University Sandra Owen, Indiana University – Bloomington Vivian J. Paige, Old Dominion University Carolyn Payne, University of La Verne Ronald Pearson, Bay College Thomas Pearson, University of Hawaii at Manoa Nichole L. Pendleton, Friends University Chuck Pier, Angelo State University Lincoln M. Pinto, DeVry University Sonja Pippin, University of Nevada – Reno Steve Platau, The University of Tampa Elizabeth Plummer, TCU Walfyette Powell, Strayer University Darlene Pulliam, West Texas A&M University Thomas J. Purcell, Creighton University John S. Repsis, University of Texas at Arlington John D. Rice, Trinity University

Jennifer Hardwick Robinson, Trident Technical College Shani N. Robinson, Sam Houston State University Donald Roth, Dordt College Richard L. Russell, Jackson State University Robert L. Salyer, Northern Kentucky ­University Rhoda Sautner, University of Mary Bunney L. Schmidt, Keiser University Allen Schuldenfrei, University of Baltimore Eric D. Schwartz, LaRoche College Tony L. Scott, Norwalk Community College Randy Serrett, University of Houston – Downtown Wayne Shaw, Southern Methodist University Paul A. Shoemaker, University of Nebraska – Lincoln Kimberly Sipes, Kentucky State University Georgi Smatrakalev, Florida Atlantic University Randy Smit, Dordt College Leslie S. Sobol, California State University Northridge Eric J. Sommermeyer, Wartburg College Marc Spiegel, University of California, Irvine Teresa Stephenson, University of Wyoming Beth Stetson, Oklahoma City University Debra Stone, Eastern New Mexico University Frances A. Stott, Bowling Green State University Todd S. Stowe, Southwest Florida College

Julie Straus, Culver-Stockton College Martin Stub, DeVry University James Sundberg, Eastern Michigan University Kent Swift, University of Montana Robert L. Taylor, Lees-McRae College Francis C. Thomas, Richard Stockton College of New Jersey Randall R. Thomas, Upper Iowa University Ronald R. Tidd, Central Washington University MaryBeth Tobin, Bridgewater State ­University James P. Trebby, Marquette University Heidi Tribunella, University of Rochester James M. Turner, Georgia Institute of Technology Anthony W. Varnon, Southeast Missouri State University Adria Palacios Vasquez, Texas A&M University – Kingsville Terri Walsh, Seminole State College of Florida Natasha R. Ware, Southeastern University Mark Washburn, Sam Houston State University Bill Weispfenning, University of Jamestown (ND) Kent Williams, Indiana Wesleyan University Candace Witherspoon, Valdosta State University Sheila Woods, DeVry University, Houston, TX Xinmei Xie, Woodbury University Thomas Young, Lone Star College – Tomball

SPECIAL THANKS We are grateful to the faculty members who have diligently worked through the problems and test questions to ensure the accuracy of the South-Western Federal Taxation homework, solutions manuals, test banks, and comprehensive tax form problems. Their comments and corrections helped us focus on clarity as well as accuracy and tax law currency. We also thank Thomson Reuters for its permission to use Checkpoint™ with the text. Sandra A. Augustine, (retired) Hilbert College Robyn Dawn Jarnagin, University of Arkansas Kate Mantzke, Northern Illinois University Ray Rodriguez, Murray State University

Miles Romney, Florida State University George R. Starbuck, McMurry University Donald R. Trippeer, State University of New York College at Oneonta Raymond Wacker, Southern Illinois ­University, Carbondale

Michael Weissenfluh, Tillamook Bay Community College Marvin Williams, University of HoustonDowntown

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

The South-Western Federal Taxation Series To find out more about these books, go to www.cengage.com.

2022

INDIVIDUAL INCOME TAXES, 2022 EDITION (YOUNG, NELLEN, RAABE, PERSELLIN, HOFFMAN, Editors) provides accessible, comprehensive, and authoritative coverage of the relevant tax code and regulations as they pertain to the individual taxpayer, as well as coverage of all major developments in Federal taxation. (ISBN 978-0-357-51907-3) Young • Nellen Raabe • Persellin Hoffman

2022

CORPORATIONS, PARTNERSHIPS, ESTATES & TRUSTS, 2022 EDITION

2022

(RAABE, YOUNG, NELLEN, HOFFMAN, Editors) covers tax concepts as they affect corporations, partnerships, estates, and trusts. The authors provide accessible, comprehensive, and authoritative coverage of relevant tax code and regulations, as well as all major developments in Federal income taxation. This marketleading text is intended for students who have had a previous course in tax. (ISBN 978-0-357-51924-0)

Raabe • Young

2022

xix Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

xx

PREFACE

COMPREHENSIVE VOLUME, 2022 EDITION

2022

Young • Maloney Nellen • Persellin Cuccia

2022

(YOUNG, MALONEY, Nellen, PERSELLIN, CUCCIA, Editors) Combining the number one individual tax text with the number one corporations text, Comprehensive Volume, 2022 Edition is a true winner. An edited version of the first two South-Western Federal Taxation textbooks, this book is ideal for undergraduate or graduate levels. This text works for either a one-semester course in which an instructor wants to integrate coverage of individual and corporate taxation or for a two-semester sequence in which the use of only one book is desired. (ISBN 978-0-357-51101-5)

ESSENTIALS OF TAXATION: INDIVIDUALS AND BUSINESS ENTITIES, 2022 EDITION (NELLEN, CUCCIA, PERSELLIN, YOUNG, Editors) emphasizes tax planning and the multidisciplinary aspects of taxation. This text is designed with the AICPA Model Tax Curriculum in mind, presenting the introductory Federal taxation course from a business entity perspective. Its Tax Planning Framework helps users fit tax planning strategies into an innovative pedagogical framework. The text is an ideal fit for programs that offer only one course in taxation where users need to be exposed to individual taxation, as well as corporate and other business entity taxation. This text assumes no prior course in taxation has been taken.

2022

Nellen • Cuccia Persellin • Young

2022

(ISBN 978-0-357-51943-1)

FEDERAL TAX RESEARCH, 12E (SAWYERS AND GILL) Federal Tax Research, Twelfth Edition, offers hands-on tax research analysis and fully covers computer-oriented tax research tools. Also included in this edition is coverage on international tax research, a review of tax ethics, and many new real-life cases to help foster a true understanding of Federal tax law. (ISBN 978-0-357-36638-7)

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

PREFACE

xxi

ABOUT THE EDITORS Annette Nellen, J.D., CPA, CGMA, directs San José State University’s graduate tax program (MST) and teaches courses in tax research, tax fundamentals, accounting methods, property transactions, employment tax, ethics, leadership, and tax policy. Professor Nellen is a graduate of CSU Northridge, Pepperdine (MBA), and Loyola Law School. Prior to joining SJSU in 1990, she was with a Big 4 firm and the IRS. At SJSU, Professor Nellen is a recipient of the Outstanding Professor and Distinguished Service Awards. Professor Nellen is an active member of the tax sections of the AICPA and American Bar Association, including chairing the AICPA Tax Executive Committee from October 2016 to May 2019. In 2013, she received the AICPA Arthur J. Dixon Memorial Award, the highest award given by the accounting profession in the area of taxation. Professor Nellen is the author of BloombergBNA Tax Portfolio, Amortization of Intangibles. She has published numerous articles in the AICPA Tax Insider, Tax Adviser, Tax Notes State, and The Journal of Accountancy. She has testified before the House Ways & Means and Senate Finance Committees and other committees on Federal and state tax reform. Professor Nellen maintains the 21st Century Taxation Website and blog (21stcenturytaxation.com) as well as Websites on tax policy and reform, ­virtual currency, and state tax issues (sjsu.edu/­people/annette.nellen/).

Andrew D. Cuccia, Ph.D., CPA, is the Steed ­Professor of Accounting at the University of Oklahoma. He is a graduate of L­oyola University, New Orleans ­ (B.B.A.), and the University of Florida (Ph.D.). Prior to entering academia, Andy practiced as a CPA with a

Big 4 accounting firm.  Before joining the University of Oklahoma, he was on the faculty at Louisiana State University and the University of Illinois. His research focuses on taxpayer and tax professional judgment and decision making and has been published in several journals, including The Accounting Review, Journal of Accounting Research, The Journal of the ­American Taxation Association, and Tax Notes. He has taught undergraduate and graduate courses in income tax fundamentals as well as graduate courses in corporate tax, tax policy, and tax research.  Andy is a past president of the American Taxation Association and a member of the American Accounting Association and the AICPA.

Mark B. Persellin, Ph.D., CPA, CFP®, is the Ray and Dorothy Berend ­ Professor of Accounting at St. Mary’s University. He is a g ­ raduate of the University of Arizona (B.S.), the University of Texas at Austin (M.P.A. in Taxation), and the University of Houston (Ph.D.). He teaches Personal Income Tax, Business Income Tax, and Research in Federal Taxation. Prior to joining St. Mary’s University in 1991, Professor Persellin taught at Florida Atlantic Uni­versity and Southwest Texas University (Texas State University) and worked on the tax staff of a Big 4 firm. His research has been published in numerous academic and professional journals, including The Journal of the American Taxation Association, The ­Accounting Educators’ Journal, The Tax Adviser, The CPA Journal, Journal of Taxation, Corporate Taxation, The Tax ­Executive, TAXES—The Tax Magazine, Journal of International Taxation, and Practical Tax ­Strategies. In 2003, Professor Persellin established the St. Mary’s University Volunteer Income Tax Assistance (VITA) site, and he continues to serve as a trainer and reviewer at the site.

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

xxii

PREFACE

James C. Young is the PwC Professor of Accountancy at Northern Illinois University. A graduate of Ferris State University (B.S.) and Michigan State University (M.B.A. and Ph.D.), Jim’s research focuses on taxpayer responses to the income tax using archival data. His dissertation received the PricewaterhouseCoopers/ American Taxation Association Dissertation Award, and his subsequent research has received funding from a number of organizations, including the Ernst & Young Foundation Tax Research Grant Program. His work has been published in a variety of academic and professional journals, including the National Tax Journal, The Journal of the American Taxation Association, and Tax Notes. Jim is a Northern Illinois University Distinguished Professor, received the Illinois CPA Society Outstanding Accounting Educator Award in 2012, and has received university teaching awards from Northern Illinois University, George Mason University, and M ­ ichigan State University.

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Brief Contents Part 1: The World of Taxation CHAPTER 1

INTRODUCTION TO TAXATION

1-1

CHAPTER 2

WORKING WITH THE TAX LAW

2-1

CHAPTER 3

TAXES IN THE FINANCIAL STATEMENTS

3-1

Part 2:  Structure of the Federal Income Tax CHAPTER 4

GROSS INCOME

4-1

CHAPTER 5

BUSINESS DEDUCTIONS

5-1

CHAPTER 6

LOSSES AND LOSS LIMITATIONS

6-1

Part 3:  Property Transactions CHAPTER 7 PROPERTY TRANSACTIONS: BASIS, GAIN AND LOSS, AND NONTAXABLE EXCHANGES

7-1

CHAPTER 8 PROPERTY TRANSACTIONS: CAPITAL GAINS AND LOSSES, SECTION 1231, AND RECAPTURE PROVISIONS 8-1

Part 4: Taxation of Individuals CHAPTER 9

INDIVIDUALS AS TAXPAYERS

9-1

CHAPTER 10 INDIVIDUALS: INCOME, DEDUCTIONS, AND CREDITS

10-1

CHAPTER 11 INDIVIDUALS AS EMPLOYEES AND PROPRIETORS

11-1

xxiii Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

xxiv

Brief Contents

Part 5:  Business Entities CHAPTER 12 CORPORATIONS: ORGANIZATION, CAPITAL STRUCTURE, AND OPERATING RULES

12-1

CHAPTER 13 CORPORATIONS: EARNINGS & PROFITS AND DISTRIBUTIONS

13-1

CHAPTER 14 PARTNERSHIPS AND LIMITED LIABILITY ENTITIES

14-1

CHAPTER 15 S CORPORATIONS

15-1

Part 6:  Special Business Topics CHAPTER 16 MULTIJURISDICTIONAL TAXATION

16-1

CHAPTER 17 BUSINESS TAX CREDITS AND THE ALTERNATIVE MINIMUM TAX

17-1

CHAPTER 18 COMPARATIVE FORMS OF DOING BUSINESS

18-1

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Contents Part 1: The World of Taxation CHAPTER 1 Introduction to Taxation The Big Picture: A Typical Tax Year for a Modern Family

TAXES IN OUR LIVES The Relevance of Taxation to Accounting and Finance Professionals How to Study Taxation Individuals and Taxes

The Structure of Tax Systems Tax Rates Tax Bases Incidence of Taxation

1-1 1-1

1-2 1-2 1-3 1-4

1-5 1-5 1-6 1-7

Types of Taxes

1-7

Taxes on the Production and Sale of Goods Employment Taxes Taxes at Death Gift Tax Tax Fact: A Profile of Tax Collections Property Taxes Other U.S. Taxes Income Taxes Bridge Discipline: Bridge to Political Science and Sociology Concept Summary: Overview of Taxes in the United States Financial Disclosure Insights: What Do You Mean by “Income” Anyway?

1-7 1-9 1-11 1-12 1-13 1-13 1-14 1-15 1-17 1-18

Income Taxation of Business Entities

1-18

Tax Planning Fundamentals

1-23 1-24 1-25 1-27 1-28

Understanding the Federal Tax Law

1-28

Revenue Needs Economic Considerations Social Considerations Global Tax Issues: Outsourcing of Tax Return Preparation Equity Considerations Political Considerations Influence of the Internal Revenue Service Influence of the Courts

1-28 1-28 1-29 1-29 1-30 1-31 1-32 1-32

Summary1-33 Refocus on the Big Picture: A Typical Tax Year for a Modern Family

1-34

CHAPTER 2 Working with the Tax Law

2-1

The Big Picture: Researching Tax Questions

2-1

Tax Law Sources

2-2

Statutory Sources of the Tax Law Tax Fact: Scope of the U.S. Tax System Administrative Sources of the Tax Law Judicial Sources of the Tax Law Concept Summary: Federal Judicial System: Trial Courts Bridge Discipline: Bridge to Public Policy

2-2 2-3 2-6 2-10 2-11 2-16

1-19

Proprietorships1-19 C Corporations 1-19 Partnerships1-19 S Corporations 1-20 Limited Liability Companies and Limited Liability Partnerships 1-20 Dealings between Individuals and Their Business Entities 1-20 Financial Disclosure Insights: Book-Tax Differences 1-21

Overview of Tax Planning and Ethics A General Framework for Income Tax Planning

Tax Minimization Strategies Related to Income Tax Minimization Strategies Related to Deductions Tax Minimization Strategies Related to Tax Rates Tax Fact: The U.S. Federal Income Tax Tax Minimization Strategies Related to Tax Credits

1-21 1-21 1-22

Working with the Tax Law—Tax Research

2-17

Identifying the Problem 2-18 Refining the Problem 2-18 Locating the Appropriate Tax Law Sources 2-18 Bridge Discipline: Bridge to Business Law 2-19 Assessing Tax Law Sources 2-20 Arriving at the Solution or at Alternative Solutions 2-23 Communicating Tax Research 2-23 Updates2-25 Tax Research Best Practices 2-25 Financial Disclosure Insights: Where Does GAAP Come From? 2-27

xxv Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

xxvi

CONTENTS

Tax Research on the CPA Examination

2-27

Bridge Discipline: Bridge to Regulation and Oversight Refocus on the Big Picture: Researching Tax Questions

2-28 2-29

CHAPTER 3 Taxes in the Financial Statements

3-1

The Big Picture: Taxes in the Financial Statements

3-1

ACCOUNTING FOR INCOME TAXES—BASIC PRINCIPLES

3-2

Book-Tax Differences Concept Summary: Common Book-Tax Differences Generally Accepted Accounting Principles and ASC 740

3-2 3-5 3-5

CAPTURING, MEASURING, AND RECORDING TAX EXPENSE—THE PROVISION PROCESS

3-7

Current Tax Expense 3-8 Global Tax Issues: Accounting for Income Taxes in International Standards 3-9 Deferred Tax Expense 3-9 Finanical Disclosure Insights: The Book-Tax Income Gap 3-9 The Valuation Allowance 3-14 Finanical Disclosure Insights: Tax Losses and the Deferred Tax Asset 3-15 Finanical Disclosure Insights: Releasing Valuation Allowances 3-17

Tax Disclosures in the Financial Statements Presentation of Amounts Recognized in the Financial Statements The Financial Statement Footnotes The Effective Tax Rate Reconciliation Bridge Discipline: Bridge to Financial Analysis

Special Issues

3-18 3-18 3-18 3-19 3-21

3-21

The Financial Accounting for Tax Uncertainties Concept Summary: Recognizing the Tax Benefits of Uncertain Tax Positions Under ASC 740–10 Effects of Statutory Tax Rate Changes Repeal of the Corporate Alternative Minimum Tax The Corporate Tax Department Concept Summary: The Income Tax Provision Process

3-21 3-22 3-25 3-25 3-26 3-27

BENCHMARKING3-27 Methods of Analysis Tax Rate Sustainability Uses of Benchmarking Analysis Concept Summary: Benchmarking Analysis Refocus on the Big Picture: Taxes in the Financial Statements

3-28 3-29 3-30 3-30 3-31

Part 2: Structure of the Federal Income Tax CHAPTER 4 Gross Income The Big Picture: Just What Is Included i n Gross Income?

The Tax Formula Components of the Tax Formula

Gross Income Concepts of Income Financial Disclosure Insights: What Does “Income” Mean to You? Comparing Accounting and Tax Concepts of Income Form of Receipt Concept Summary: Gross Income Concepts

4-1

4-2 4-2

4-3 4-4 4-5 4-5 4-6

TIMING OF INCOME RECOGNITION

4-6

Taxable Year Accounting Methods Tax Planning Strategies: Cash Receipts Method Bridge Discipline: Bridge to Economics and Finance Special Rules for Cash Basis Taxpayers Special Rules for Accrual Basis Taxpayers Tax Planning Strategies: Prepaid Income Concept Summary: Income Tax Accounting

4-6 4-6 4-8 4-9 4-10 4-11 4-12 4-13

GENERAL SOURCES OF INCOME Income from Personal Services Income from Property Tax Fact: How Much and What Type of Income? Global Tax Issues: Which Foreign Dividends Get the Discounted Rate? Income Received by an Agent Tax Planning Strategies: Techniques for Reducing Investment Income

Specific Items of Gross Income Gains and Losses from Property Transactions Interest on Certain State and Local Government Obligations Bridge Discipline: Bridge to Public Economics Life Insurance Proceeds Tax Planning Strategies: Life Insurance Income from Discharge of Indebtedness Tax Benefit Rule Imputed Interest on Below-Market Loans Improvements on Leased Property Concept Summary: Income Recognition Rules Refocus on the Big Picture: Just What Is Included in Gross Income?

CHAPTER 5 Business Deductions

4-13 4-13 4-13 4-14 4-15 4-16 4-17

4-17 4-18 4-20 4-20 4-21 4-22 4-23 4-25 4-26 4-28 4-29 4-29

5-1

The Big Picture: Calculating Deductible Expenses

5-1

Overview of Business Deductions

5-2

Ordinary and Necessary Requirement Reasonableness Requirement Tax Planning Strategies: Unreasonable Compensation

4-1

4-3

Timing of DEDUCTION RECOGNITION The Cash Method Tax Planning Strategies: Time Value of Tax Deductions The Accrual Method Expenses Accrued to Related Parties Prepaid Expenses—The “12-Month Rule”

5-2 5-3 5-4

5-4 5-4 5-5 5-5 5-6 5-7

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

CONTENTS

Disallowance Possibilities

5-8

Expenses Incurred in the Investigation of a Business Public Policy Limitations Global Tax Issues: Overseas Gun Sales Result in Large Fines Political Contributions and Lobbying Activities Expenses Related to Entertainment, Recreation, or Amusement Business Interest Expense Excessive Executive Compensation Interest and Other Expenses Related to Tax-Exempt Income Other Disallowance Possibilities

5-8 5-9 5-10 5-10

Research And Experimental Expenditures

5-14

Expense Method Deferral and Amortization Method

ISSUES RELATED TO OTHER COMMON BUSINESS DEDUCTIONS

5-11 5-12 5-13 5-13 5-14

5-15 5-15

5-16

Interest Expense 5-16 Taxes5-16

Charitable Contributions

5-17

Deductible Contributions 5-18 Measuring Noncash Contributions 5-18 Limitations Imposed on Charitable Contribution Deductions5-20

Cost Recovery Allowances

5-20

Overview5-20 Cost Recovery: In General 5-21 Bridge Discipline: Bridge to Finance 5-21 Modified Accelerated Cost Recovery System (MACRS) 5-23 MACRS for Personal Property 5-23 MACRS for Real Estate 5-26 Concept Summary: MACRS: Class Lives, Methods, and Conventions 5-28 Election to Expense Certain Depreciable Assets (§ 179) 5-28 Additional First-Year Depreciation (Bonus Depreciation) 5-30 Financial Disclosure Insights: Tax and Book Depreciation 5-31 Bridge Discipline: Bridge to Economics and the Business Cycle 5-32 Limitations Related to Automobiles and Property Used for Personal Purposes 5-32 Concept Summary: Listed Property Cost Recovery 5-35 Bridge Discipline: Bridge to Finance and Economics 5-36 Alternative Depreciation System (ADS) 5-36

Amortization5-37 Tax Planning Strategies: Structuring the Sale of a Business

5-37

Depletion5-37 Intangible Drilling and Development Costs (IDCs) Depletion Methods Tax Planning Strategies: Switching Depletion Methods

Cost Recovery Tables Refocus on the Big Picture: Calculating Deductible Expenses

5-38 5-38 5-40

5-40 5-44

CHAPTER 6 Losses and Loss Limitations The Big Picture: Receiving Tax Benefits from Losses

Bad Debts Specific Charge-Off Method Business versus Nonbusiness Bad Debts Concept Summary: The Tax Treatment of Bad Debts Using the Specific Charge-Off Method Loans between Related Parties

Worthless Securities and Small ­Business Stock Losses Worthless Securities Small Business Stock (§ 1244 Stock) Losses Tax Planning Strategies: Maximizing the Benefits of Small Business (§ 1244 Stock) Losses

Casualty and Theft Losses Definition of Casualties and Thefts Tax Planning Strategies: Documentation of Related-Taxpayer Loans, Casualty Losses, and Theft Losses Deduction of Casualty and Theft Losses Loss Measurement Casualty and Theft Losses of Individuals Concept Summary: Casualty Gains and Losses

Net Operating Losses

xxvii

6-1 6-1

6-2 6-3 6-4 6-4 6-5

6-5 6-5 6-5 6-6

6-7 6-7 6-7 6-8 6-9 6-10 6-12

6-13

Introduction6-13 General NOL Rules 6-13

The Tax Shelter Problem

6-14

Bridge Discipline: Bridge to Finance

6-15

At-Risk Limitations Concept Summary: Calculation of At-Risk Amount

Passive Activity Loss Limits Classification and Tax Treatment of Passive Activity Income and Loss Taxpayers Subject to the Passive Activity Loss Rules Rules for Determining Passive Activities Material Participation Concept Summary: Tests to Determine Material Participation Rental Activities Concept Summary: Passive Activity Loss Rules: Key Issues and Answers Interaction of At-Risk and Passive Activity Loss Limits Concept Summary: Treatment of Losses Subject to the At-Risk and Passive Activity Loss Limitations Special Passive Activity Rules for Real Estate Disposition of Passive Activities Tax Planning Strategies: Utilizing Passive Activity Losses

Excess Business Losses Definition and Rules Computing the Limit Refocus on the Big Picture: Receiving Tax Benefits from Losses

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

6-16 6-17

6-17 6-17 6-21 6-22 6-22 6-23 6-24 6-25 6-26 6-27 6-27 6-29 6-30

6-31 6-32 6-32 6-33

xxviii

CONTENTS

Part 3: Property Transactions CHAPTER 7 Property Transactions: Basis, Gain and Loss, and Nontaxable Exchanges 7-1 The Big Picture: Calculating Basis and Recognized Gain for Property Transactions

DETERMINING GAIN OR LOSS Realized Gain or Loss Concept Summary: Realized Gain or Loss Bridge Discipline: Bridge to Financial Accounting Recognized Gain or Loss Concept Summary: Realized and Recognized Gain or Loss

7-1

7-2 7-2 7-6 7-7 7-7 7-8

Basis Considerations

7-8

Determination of Cost Basis Property Received as a Gift Tax Planning Strategies: Gift Planning Inherited Property Tax Planning Strategies: Inherited Property

7-8 7-10 7-12 7-13 7-14

Disallowed Losses Personal Use Assets Transactions between Related Parties Wash Sales Concept Summary: Illustration of the Wash Sale Rules Tax Planning Strategies: Avoiding Wash Sales Property Converted from Personal Use to Business or Income-Producing Use

7-14 7-14 7-14 7-15 7-16 7-17 7-17

Nontaxable ExchangeS—GENERAL CONCEPTS

7-18

Like-Kind Exchanges—§ 1031

7-19

Like-Kind Property 7-19 Tax Planning Strategies: Like-Kind Exchanges 7-20 Exchange Requirement 7-20 Boot7-21 Basis and Holding Period of Property Received 7-22 Bridge Discipline: Bridge to Economics 7-23

Involuntary Conversions—§ 1033 Involuntary Conversion Defined Replacement Property Concept Summary: Involuntary Conversions: Replacement Property Tests Time Limitation on Replacement Nonrecognition of Gain Tax Planning Strategies: Recognizing Involuntary Conversion Gains

7-24 7-26 7-26 7-27 7-27 7-28

CHAPTER 8 Property Transactions: ­C apital Gains and Losses, Section 1231, and Recapture Provisions

8-1

General Scheme of PROPERTY Taxation

8-2

Concept Summary: Recognized Gain or Loss Characteristics

Refocus on the Big Picture: Calculating Basis and Recognized Gain for Property Transactions

8-2

Capital Assets

8-3

SPECIAL RULES

8-6

§ 1244 Stock 8-6 Worthless Securities 8-6 Retirement of Corporate Obligations 8-6 Options8-6 Concept Summary: Options: Consequences to the Grantor and Grantee 8-8 Patents8-8 Lease Cancellation Payments 8-9

Holding Period General Rules Special Holding Period Rules Short Sales Tax Planning Strategies: Timing Capital Gains

Tax Treatment of Capital Gains and Losses of Noncorporate Taxpayers Net Capital Gains Concept Summary: Alternative Tax Rates on Net Capital Gains (NCG) (Based on Filing Status and Taxable Income) Tax Planning Strategies: Gifts of Appreciated Securities Global Tax Issues: Capital Gain Treatment in the United States and Other Countries Concept Summary: Capital Gains of Noncorporate Taxpayers Net Capital Losses Capital Gain and Loss Netting Process Tax Planning Strategies: Matching Gains with Losses Small Business Stock Tax Fact: Capital Gains for the Wealthy?

8-10 8-10 8-11 8-12 8-13

8-14 8-14 8-15 8-15 8-16 8-17 8-17 8-17 8-20 8-20 8-22

Tax Treatment of Capital Gains and Losses of Corporate Taxpayers

8-22

Section 1231 GAINS AND LOSSES

8-23

Relationship to Capital Gains and Losses Definition of Section 1231 Assets  General Procedure for § 1231 Computation Concept Summary: Section 1231 Netting Procedure

8-23 8-24 8-25 8-28

7-29

Section 1245 Recapture SALE OF A PRINCIPAL RESIDENCE—§ 121

8-1

The Big Picture: Capital Gains and Losses, § 1231 Gains and Losses, and Recapture

7-30 7-30

Bridge Discipline: Bridge to Financial Accounting Section 1245 Property Observations on § 1245

8-28 8-30 8-30 8-30

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

CONTENTS

Section 1250 Recapture Concept Summary: Comparison of § 1245 and § 1250 Depreciation Recapture Unrecaptured § 1250 Gain (Real Estate 25% Gain) Additional Recapture for Corporations Tax Planning Strategies: Selling Depreciable Real Estate

Depreciation Recapture and ­Nontaxable and Tax-Free Transactions

8-31 8-31 8-32 8-32 8-33

8-34

Gifts8-34 Death8-34 Certain Nontaxable Transactions 8-34 Like-Kind Exchanges and Involuntary Conversions 8-35 Tax Planning Strategies: Timing of Recapture 8-35 Refocus on the Big Picture: Capital Gains and Losses, § 1231 Gains and Losses, and Recapture 8-36

Part 4: Taxation of Individuals CHAPTER 9 Individuals as Taxpayers The Big Picture: A Divided Household

The Individual Tax Formula Concept Summary: Individual Income Tax Formula Components of the Tax Formula

Standard Deduction Basic and Additional Standard Deduction Limitations on the Standard Deduction for Dependents

Filing Status and Filing Requirements Filing Status Bridge Discipline: Bridge to Equity or Fairness Global Tax Issues: Filing a Joint Return Filing Requirements

Tax Determination Tax Rate Schedule Method Tax Table Method Computation of Net Taxes Payable or Refund Due Tax Planning Strategies: Shifting Income and Deductions across Time

Tax Planning Strategies: Income of Certain Children Additional Taxes for Certain Individuals

TAX RETURN FILING PROCEDURES Selecting the Proper Form The E-File Approach Tax Fact: What Mode of Tax Filing Is Right for You? When and Where to File Modes of Payment Refocus on the Big Picture: A Divided Household

CHAPTER 10 Individuals: Income, ­Deductions, and Credits

9-25 9-25 9-26

9-27 9-27 9-28 9-29 9-29 9-29 9-30

10-1

The Big Picture: The Tax Implications of Life!

10-1

Overview Of Income Provisions ­Applicable To Individuals

10-2

Bridge Discipline: Bridge to Economics and Finance

10-3

9-1 9-1

9-2 9-2 9-3

Specific Inclusions Applicable To Individuals 10-3 Alimony and Separate Maintenance Payments Prizes and Awards Unemployment Compensation Social Security Benefits

10-3 10-5 10-5 10-6

9-7

Specific Exclusions Applicable To Individuals 10-6

9-8 9-9

Gifts and Inheritances 10-6 Scholarships10-7 Damages10-8 Concept Summary: Taxation of Damages 10-9 Workers’ Compensation 10-10 Accident and Health Insurance Benefits 10-10 Educational Savings Bonds 10-10 Wrongful Incarceration 10-11

DEPENDENTS9-10 Qualifying Child Concept Summary: Tiebreaker Rules for Determining Dependency Status Qualifying Relative Tax Planning Strategies: Multiple Support Agreements and the Medical Expense Deduction Other Rules for Determining Dependents Tax Planning Strategies: Problems with a Joint Return Comparison of Dependent Categories Concept Summary: Tests for Dependency Status

Kiddie Tax—Unearned Income of Dependent Children

xxix

9-10 9-11 9-12 9-15 9-15 9-16 9-16 9-17

9-17 9-17 9-19 9-21 9-21

Itemized Deductions

10-11

Medical Expenses 10-12 Taxes10-15 Tax Planning Strategies: Timing the Payment of Deductible Taxes 10-17 Interest10-17 Concept Summary: Deductibility of Personal, Student Loan, Investment, and Mortgage Interest 10-21 Charitable Contributions 10-21 Global Tax Issues: Choose the Charity Wisely 10-24 Concept Summary: Determining the Deduction for Contributions of Appreciated Property by Individuals 10-25 Other Itemized Deductions 10-26

9-22 9-22 9-23 9-23 9-23

Individual Tax Credits Tax Planning Strategies: Effective Utilization of Itemized Deductions Adoption Expenses Credit

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

10-27 10-28 10-28

xxx

CONTENTS

Child and Dependent Tax Credits Credit for Child and Dependent Care Expenses Education Tax Credits Earned Income Credit Premium Tax Credit Refocus on the Big Picture: The Tax Implications of Life!

10-28 10-29 10-30 10-32 10-33 10-34

CHAPTER 11 Individuals as Employees and Proprietors11-1 The Big Picture: Self-Employed versus Employee— What’s the Difference?

Employee Versus Independent Contractor Factors Considered in Classification Bridge Discipline: Bridge to Equity or Fairness and Business Law Tax Planning Strategies: Self-Employed Individuals

Exclusions Available To Employees Employer-Sponsored Accident and Health Plans Bridge Discipline: Bridge to Economic and Societal Needs Medical Reimbursement Plans Meals and Lodging Furnished for the Convenience of the Employer Group Term Life Insurance Qualified Tuition Reduction Plans Other Employee Fringe Benefits Cafeteria Plans Flexible Spending Plans Concept Summary: Employee Fringe Benefits General Classes of Excluded Benefits Concept Summary: General Classes of Fringe Benefits Foreign Earned Income

Expenses RELATING TO TIME AT Work Transportation Expenses Travel Expenses Tax Planning Strategies: Transportation and Travel Expenses Education Expenses Entertainment and Meal Expenses Other Expenses of Work Classification of Employee Expenses Contributions to Individual Retirement Accounts Concept Summary: Comparison of IRAs

Individuals As Proprietors Accounting Periods and Methods Income and Deductions of a Proprietorship Retirement Plans for Self-Employed Individuals Tax Planning Strategies: Factors Affecting Retirement Plan Choices Deduction for Qualified Business Income  Concept Summary: An Overview of the 2021 Qualified Business Income Deduction Estimated Tax Payments

11-1

11-2 11-2 11-3 11-4

11-4 11-5 11-6 11-6 11-7 11-8 11-9 11-10 11-11 11-11 11-12 11-12 11-16 11-17

11-18 11-18 11-19 11-22 11-22 11-23 11-25 11-27 11-28 11-31

11-31 11-31 11-32 11-33 11-35 11-35 11-41 11-42

Hobby Losses General Rules Presumptive Rule of Profit-Seeking Determining the Taxable Amount Refocus on the Big Picture: Self-Employed versus Employee— What’s the Difference?

11-43 11-44 11-44 11-45 11-46

Part 5: Business Entities CHAPTER 12 Corporations: Organization, Capital Structure, and Operating Rules The Big Picture: Growing into the Corporate Form

An Introduction To Corporate INCOME TaXATION Double Taxation of Corporate Income Global Tax Issues: U.S. Corporate Taxes and International Business Competitiveness Comparison of Corporations and Other Forms of Doing Business Tax Fact: Corporations’ Reporting Responsibilities Bridge Discipline: Bridge to Finance Nontax Considerations Concept Summary: Tax Treatment of Business Forms Compared Limited Liability Companies Entity Classification

Organization Of And Transfers To ­Controlled Corporations Section 351 Rationale and General Rules Concept Summary: Shareholder Consequences: Taxable Corporate Formation versus Tax-Deferred § 351 Transaction Property Defined Stock Transferred Control of the Corporation Tax Planning Strategies: Utilizing § 351 Basis Determination and Other Issues Concept Summary: Tax Consequences to the Shareholders and Corporation: With and Without the Application of § 351 (Based on the Facts of Example 26) Assumption of Liabilities—§ 357 Global Tax Issues: Does § 351 Cover the Incorporation of a Foreign Business? Concept Summary: Tax Consequences of Liability Assumption Tax Planning Strategies: Avoiding § 351 Recapture Considerations Tax Planning Strategies: Other Considerations When Incorporating a Business

Capital Structure Of A Corporation Capital Contributions Debt in the Capital Structure

12-1 12-1

12-2 12-2 12-2 12-3 12-5 12-6 12-6 12-6 12-7 12-7

12-8 12-8 12-9 12-10 12-11 12-12 12-13 12-15

12-17 12-19 12-19 12-22 12-23 12-24 12-24

12-25 12-25 12-26

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

CONTENTS

TAXING Corporate Operations Deductions Available Only to Corporations Business Interest Expense Limitation Tax Planning Strategies: Organizational Expenditures Determining the Corporate Income Tax Liability

Procedural Matters Filing Requirements for Corporations Estimated Tax Payments Schedule M–1—Reconciliation of Income (Loss) per Books with Income per Return Concept Summary: Conceptual Diagram of Schedule M–1 (Form 1120) Schedule M–2—Analysis of Unappropriated Retained Earnings per Books Schedule M–3—Net Income (Loss) Reconciliation for Corporations with Total Assets of $10 Million or More Bridge Discipline: Bridge to Financial Accounting Effect of Taxes on Financial Statements Refocus on the Big Picture: Growing into the Corporate Form

CHAPTER 13 Corporations: Earnings & Profits and Distributions The Big Picture: Taxing Corporate Distributions

12-28 12-28 12-31 12-32 12-34

12-34 12-34 12-35

12-36 12-37 12-37 12-38 12-38 12-39

13-1 13-1

13-2

Earnings and Profits (E & P)

13-2

Tax Fact: Who Pays Dividends? Computation of E & P Summary of E & P Adjustments Allocating E & P to Distributions Concept Summary: Computing E & P Bridge Discipline: Bridge to Finance Tax Planning Strategies: Corporate Distributions Concept Summary: Allocating E & P to Distributions

13-3 13-3 13-7 13-7 13-8 13-11 13-11 13-13

Noncash Dividends

Constructive Dividends Types of Constructive Dividends Global Tax Issues: A Worldwide View of Dividends Shareholder Treatment of Constructive Dividends Tax Planning Strategies: Constructive Dividends

Corporate Liquidations The Liquidation Process Liquidating and Nonliquidating Distributions Compared Tax Planning Strategies: Corporate Liquidations

Restrictions On Corporate Accumulations 12-35

Corporate Distributions—Overview

Bridge Discipline: Bridge to Investments Noncash Dividends—Effect on the Shareholder Noncash Dividends—Effect on the Corporation Bridge Discipline: Bridge to Finance

Global Tax Issues: Non-U.S. Shareholders Prefer Capital Gain Treatment in Stock Redemptions Tax Planning Strategies: Stock Redemptions

13-13 13-13 13-14 13-14 13-16

13-16 13-17 13-18 13-18 13-19

Refocus on the Big Picture: Taxing Corporate Distributions

CHAPTER 14 Partnerships and Limited Liability Entities The Big Picture: The Tax Consequences of Partnership Formation and Operations

Overview of Partnership Taxation Forms of Doing Business—Federal Tax Consequences Tax Fact: Partnership Power Definition of a Partnership Bridge Discipline: Bridge to Finance Partnership Taxation and Reporting Partner’s Ownership Interest in a Partnership Bridge Discipline: Bridge to Business Law

13-24 13-24 13-24 13-25

13-25 13-26

14-1 14-1

14-2 14-2 14-3 14-3 14-4 14-4 14-6 14-7

Formation of a Partnership: Tax Effects

14-8 14-8 14-9 14-9 14-11 14-12 14-12

Operations of the Partnership Schedules K and K–1 Partnership Allocations Concept Summary: Tax Reporting of Partnership Activities Basis of a Partnership Interest Bridge Discipline: Bridge to Financial Accounting Tax Fact: What Do Partnerships Do? Partner’s Basis, Gain, and Loss Loss Limitations Tax Planning Strategies: Make Your Own Tax Shelter Concept Summary: Partner’s Basis in Partnership Interest

13-21

Transactions Between Partner and Partnership

Stock Redemptions

13-22

Guaranteed Payments Other Transactions between a Partner and a Partnership

13-22

13-23 13-24

Gain or Loss on Contributions to the Partnership Concept Summary: Partnership/LLC Taxation: Tax Reporting Exceptions to Nonrecognition Tax Issues Related to Contributed Property Inside and Outside Bases Tax Accounting Elections Concept Summary: Partnership Formation and Basis Computation Initial Costs of a Partnership

Stock Dividends

Bridge Discipline: Bridge to Finance

xxxi

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

14-13 14-13

14-15 14-15 14-18 14-18 14-20 14-21 14-22 14-23 14-25 14-26 14-28

14-28 14-29 14-30

xxxii

CONTENTS

Partners as Employees Tax Planning Strategies: Transactions between Partners and Partnerships Concept Summary: Partner-Partnership Transactions

Limited Liability Companies Taxation of LLCs Advantages of an LLC Disadvantages of an LLC Concept Summary: Advantages and Disadvantages of the Partnership Form

14-30 14-31 14-31

14-32 14-32 14-32 14-33

CHAPTER 15 S Corporations The Big Picture: Converting a C Corporation to an S Corporation

An Overview of S Corporations Qualifying for S Corporation Status Definition of a Small Business Corporation Bridge Discipline: Bridge to Business Law Tax Planning Strategies: When to Elect S Corporation Status Tax Fact: The Business of S Corporations Tax Planning Strategies: Beating the 100-Shareholder Limit Making the Election Shareholder Consent Tax Planning Strategies: Making a Proper Election Loss of the Election Tax Planning Strategies: Preserving the S Election

Operational Rules Computation of Taxable Income Qualified Business Income Deduction Allocation of Income and Loss Tax Fact: A “Small” Business Corporation Tax Treatment of Distributions to Shareholders Tax Planning Strategies: Salary Structure Concept Summary: Distributions from an S Corporation Tax Planning Strategies: The Accumulated Adjustments Account Tax Treatment of Noncash Distributions by the Corporation Concept Summary: Consequences of Noncash Distributions Shareholder’s Basis in S Stock Tax Planning Strategies: Working with Suspended Losses Treatment of Losses Concept Summary: Treatment of S Corporation Losses Tax Planning Strategies: Loss Considerations Limitation on the Deduction of Excess Business Losses Other Operational Rules Bridge Discipline: Bridge to Public Finance

15-27 15-27 15-28 15-29 15-29 15-30

Summary15-30 Refocus on the Big Picture: Converting a C Corporation to an S Corporation

15-31

14-33

Summary14-34 Refocus on the Big Picture: The Tax Consequences of Partnership Formation and Operations

Entity-Level Taxes Tax on Pre-Election Built-In Gain Tax Planning Strategies: Managing the Built-In Gains Tax Passive Investment Income Penalty Tax Tax Fact: The S Corporation Economy Tax Planning Strategies: Avoid PII Pitfalls

14-34

15-1 15-1

15-2 15-3 15-3 15-3 15-4 15-5 15-6 15-6 15-7 15-7 15-7 15-9

15-10 15-10 15-12 15-13 15-14 15-14 15-15 15-16 15-19 15-19 15-20 15-21 15-23 15-23 15-24 15-24 15-25 15-26 15-26

Part 6: Special Business Topics CHAPTER 16 Multijurisdictional Taxation The Big Picture: Going International

16-1 16-1

The Multijurisdictional Taxpayer

16-2

U.S. Taxation of Multinational Transactions

16-2

Bridge Discipline: Bridge to International Law Sources of Law Tax Issues Tax Fact: U.S. Income Tax Treaties in Force Tax Fact: Where Do We Stand? Tax Planning Strategies: Sourcing Income from Sales of Inventory Tax Planning Strategies: Utilizing the Foreign Tax Credit Financial Disclosure Insights: Overseas Operations and Book-Tax Differences Concept Summary: Subpart F Income and a CFC Tax Fact: The Inbound Sector Concept Summary: U.S. Income Tax Treatment of a Non-U.S. Person’s Income

Crossing State Lines: State and Local Income Taxation In the United States

16-3 16-4 16-5 16-6 16-8 16-9 16-10 16-12 16-13 16-16 16-17

16-17

Sources of Law 16-17 Financial Disclosure Insights: Tax Rates in Non-U.S. Jurisdictions16-18 Tax Fact: State Tax Revenue Sources 16-18 Tax Issues 16-19 Tax Planning Strategies: Nexus: To Have or Have Not 16-21 Financial Disclosure Insights: State/Local Taxes and the Tax Expense 16-24 Concept Summary: Corporate Multistate Income Taxation 16-24 Tax Planning Strategies: Where Should My Income Go? 16-25

Common Challenges Authority to Tax Bridge Discipline: Bridge to Cost Accounting and Executive Compensation Division of Income

16-25 16-25 16-26 16-26

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

CONTENTS Transfer Pricing Bridge Discipline: Bridge to Economic Development and Political Science Tax Havens Interjurisdictional Agreements Refocus on the Big Picture: Going International

CHAPTER 17 Business Tax ­Credits and the Alternative Minimum Tax

16-26 16-27 16-27 16-28 16-28

17-1

The Big Picture: Dealing With Tax Credits and the AMT

17-1

GENERAL BUSINESS TAX CREDIT OVERVIEW

17-2

General Business Credit Tax Fact: Business Tax Credits Treatment of Unused General Business Credits

17-2 17-3 17-3

SPECIFIC CREDITS IN GENERAL BUSINESS CREDIT

17-4

Tax Credit for Rehabilitation Expenditures Bridge Discipline: Bridge to Finance Work Opportunity Tax Credit Research Activities Credit Low-Income Housing Credit Energy Credits Disabled Access Credit Credit for Small Employer Pension Plan Startup Costs Credit for Employer-Provided Child Care Small Employer Health Insurance Credit Global Tax Issues: Sourcing Income in Cyberspace—Getting It Right When Calculating the Foreign Tax Credit Credit for Employer-Provided Family and Medical Leave Concept Summary: Tax Credits included in the General Business Credit

17-4 17-5 17-5 17-6 17-7 17-8 17-8 17-9 17-9 17-10 17-10 17-11 17-11

Foreign Tax Credit

17-13

Alternative Minimum Tax (AMT)

17-13

Calculating the AMT: The AMT Formula 17-14 AMT Adjustments 17-16 Tax Planning Strategies: Control the Timing of Preferences and Adjustments 17-22 Concept Summary: Summary of AMT Adjustment Provisions 17-23 AMT Preferences 17-23 Tax Planning Strategies: Avoiding Preferences and Adjustments17-25 Illustration of the AMT Computation 17-25 AMT Credit 17-26 Tax Planning Strategies: Other AMT Planning Strategies 17-27 Concept Summary: Summary of AMT Preference Provisions 17-27 Concept Summary: AMT Adjustments and Preferences17-28 Refocus on the Big Picture: Dealing with Tax Credits and the AMT 17-28

xxxiii

CHAPTER 18 Comparative Forms of Doing Business18-1 The Big Picture: Choosing a Business Form and Other Investments

18-1

Alternative Organizational Forms in which Business may be Conducted

18-2

Nontax Factors Affecting the Choice of Business Form

18-3

Tax Fact: The Relative Popularity of Flow-Through Entities Limited Liability Tax Fact: Revenue Relevance of Corporate versus Individual Taxpayers Other Factors Capital Formation Global Tax Issues: Do Corporations Pay Taxes?

THE TAX CONSEQUENCES OF ­ORGANIZATIONAL FORM CHOICE

18-4 18-4 18-5 18-5 18-5 18-6

18-6

Effect on the Taxation of Business Operations 18-7 Effect on the Ability to Specially Allocate Income among Owners 18-8 Effect on the Tax Treatment of Capital Contributions 18-9 Effect on the Basis of an Ownership Interest 18-9 Effect on the Application of the At-Risk and Passive Activity Loss Rules 18-10 Effect on the Tax Treatment of Distributions 18-11 Effect on Other Taxes 18-12

Minimizing Double Taxation

18-12

Making Deductible Distributions Bridge Discipline: Bridge to Economics Deferring Distributions Making Return-of-Capital Distributions Electing S Corporation Status

18-13 18-15 18-15 18-15 18-16

Disposing of a Business Sole Proprietorships Partnerships and Limited Liability Companies C Corporations S Corporations Concept Summary: Tax Treatment of Disposition of a Business

Converting to Another Business Form Sole Proprietorship Partnership or LLC C Corporation

Overall Comparison of Business Forms Concept Summary: Tax Attributes and Consequences of Different Organizational Forms of Doing Business Refocus on the Big Picture: Choosing a Business Form and Other Investments

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

18-16 18-17 18-18 18-18 18-19 18-19

18-21 18-21 18-21 18-22

18-22 18-23 18-26

xxxiv

CONTENTS

APPENDICES

Online Appendices DEPRECIATION AND THE ACCELERATED COST RECOVERY SYSTEM (ACRS)

TAX FORMULAS, TAX RATE SCHEDULES, AND TABLES

A-1

TAX FORMS

B-1

GLOSSARYC-1 TABLE OF CODE SECTIONS CITED

D-1

PRESENT VALUE AND FUTURE VALUE TABLES

E-1

AFFORDABLE CARE ACT PROVISIONS

Digging Deeper Each chapter has additional content that is described and highlighted throughout the text. This can be found at www.cengage.com.

INDEXI-1

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

1 PART

the world OF TAXATION CHAPTER

1

Introduction to Taxation CHAPTER

2

Working with the Tax Law CHAPTER

3

Taxes in the Financial Statements

Part 1 provides an introduction to taxation in the United States. Taxes imposed by Federal, state, and local governments are discussed. A unique tax planning framework is presented that is applied throughout the book in developing tax planning strategies for both business entities and individual taxpayers. The tax research process, including the relevance of the legislative, administrative, and judicial sources of the tax law, is introduced. Part 1 concludes with a chapter on accounting for income taxes in financial statements, as a bridge to topics covered in other accounting courses and an ­introduction to the financial disclosure effects of the tax law.

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

1

C H A P T E R

Introduction to Taxation

L E A R N I N G O B J E C T I V E S :   After completing Chapter 1, you should be able to: LO.1 LO.2

Explain the importance of taxes, how to study taxes, and how tax and finance professionals work with taxes. Explain the components of a tax.

LO.5

Explain the tax systems that apply to business entities and their owners.

LO.6

Identify tax planning opportunities using a general framework for tax planning.

LO.3

Identify the various taxes affecting business entities and individuals.

LO.7

Explain the economic, social, equity, and political considerations that underlie the tax law.

LO.4

Describe the basic tax formula for individuals and business entities.

LO.8

Describe the influence of the IRS and the courts on the Federal tax system.

C h a p ter O u tline 1-1 Taxes in Our Lives, 1-2 1-1a The Relevance of Taxation to Accounting and Finance Professionals, 1-2 1-1b How to Study Taxation, 1-3 1-1c Individuals and Taxes, 1-4 1-2 The Structure of Tax Systems, 1-5 1-2a Tax Rates, 1-5 1-2b Tax Bases, 1-6 1-2c Incidence of Taxation, 1-7 1-3 Types of Taxes, 1-7 1-3a Taxes on the Production and Sale of Goods, 1-7 1-3b Employment Taxes, 1-9 1-3c Taxes at Death, 1-11 1-3d Gift Tax, 1-12 1-3e Property Taxes, 1-13 1-3f Other U.S. Taxes, 1-14 1-3g Income Taxes, 1-15 1-4 Income Taxation of Business Entities, 1-19 1-4a Proprietorships, 1-19 1-4b C Corporations, 1-19 1-4c Partnerships, 1-19

1-4d S Corporations, 1-20 1-4e Limited Liability Companies and Limited Liability Partnerships, 1-20 1-4f Dealings between Individuals and Their Business Entities, 1-20 1-5 Tax Planning Fundamentals, 1-21 1-5a Overview of Tax Planning and Ethics, 1-21 1-5b A General Framework for Income Tax Planning, 1-22 1-5c Tax Minimization Strategies Related to Income, 1-23 1-5d Tax Minimization Strategies Related to Deductions, 1-24 1-5e Tax Minimization Strategies Related to Tax Rates, 1-25 1-5f Tax Minimization Strategies Related to Tax Credits, 1-28 1-6 Understanding the Federal Tax Law, 1-28 1-6a Revenue Needs, 1-28 1-6b Economic Considerations, 1-28 1-6c Social Considerations, 1-29 1-6d Equity Considerations, 1-30 1-6e Political Considerations, 1-31 1-6f Influence of the Internal Revenue Service, 1-32 1-6g Influence of the Courts, 1-32 1-7 Summary, 1-33

How many people were taxed, who was taxed, and what was taxed tell more about a society than anything else. —Charles Adams TA X TA L K  

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THE BIG PICTURE

CORBIS/SUPERSTOCK

A Typical Tax Year for a Modern Family Travis and Amy Carter are married and live in a state that imposes both a sales tax and an income tax. They have two children, April (age 17) and Martin (age 18). Travis is a mining engineer who specializes in land reclamation. After several years with a mining corporation, Travis established a consulting practice that involves a considerable amount of travel due to work he performs in other states. Amy is a registered nurse who, until recently, was a homemaker. In November of the current year, she decided to reenter the job market and accepted a position with a medical clinic. The Carters live only a few blocks from Ernest and Mary Walker, Amy Carter’s parents. The Walkers are retired and live on interest, dividends, and Social Security benefits. The following activities with current year and possible future tax ramifications occurred. • The ad valorem property taxes on the Carters’ residence increased, while those on the Walkers’ residence decreased. • When Travis registered an automobile that was purchased last year in another state, he paid a sales tax to his home state. • As an anniversary present, the Carters gave the Walkers a recreational vehicle (RV). • Travis employed his children to draft blueprints and prepare scale models for use in his work. Both April and Martin have had training in drafting and topography. • Early in the year, the Carters were audited by the state on an income tax return filed a few years ago. Later in the year, they were audited by the IRS on a Form 1040 they filed for the same year. In each case, a tax deficiency and interest were assessed. • The Walkers were audited by the IRS. Unlike the Carters, they did not have to deal with a revenue agent, but settled the matter by mail. Explain these developments and resolve any tax issues raised. Read the chapter and formulate your response.

1-1 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

1-2

PART 1   The World of Taxation

1-1  TAXES IN OUR LIVES

LO.1 Explain the importance of taxes, how to study taxes, and how tax and finance professionals work with taxes.

T

“Taxes are what we pay for civilized society.”

his is a famous quote from U.S. Supreme Court Justice Oliver Wendell Holmes, Jr. It is engraved on the government building at 1111 Constitution Avenue in Washington, D.C.—headquarters of the Internal Revenue Service (IRS). This quote eloquently sums up the primary purpose of taxation—to raise revenue for government operations. Governments at all levels—national, state, and local—require funds for defense, protection (police and fire), education, transportation, the court system, social services, and more. Various types of taxes provide the resources to pay for government services. In addition, taxation often is used as a tool to influence the behavior of individuals and businesses. For example, an income tax credit (which reduces a taxpayer’s tax bill) may be designed to encourage people to purchase a fuel-efficient car. A tobacco excise tax may discourage individuals from smoking by increasing the cost of tobacco products. Taxes permeate our society. Various types of taxes, such as income, sales, property, and excise taxes, come into play in many of the activities of individuals, businesses, nonprofit entities (like charities), and governments themselves. Most directly, individuals are affected by taxes by paying them. Taxes may be paid directly or indirectly. A direct tax is paid to the government by the person who owes the tax. Examples include the personal income tax, which is paid by filing a personal income tax return (Form 1040 at the federal level), and property taxes on one’s home (paid to the local government). Individuals also pay many taxes indirectly. For example, when you buy gasoline for your car, the price you pay likely includes some of the income taxes and the gasoline excise taxes owed by the oil company. And a renter indirectly pays property taxes assessed on the landlord (who will consider that cost when determining how much rent to charge). Ultimately, all taxes are paid by individuals. The corporate income tax, for example, is paid directly by the corporation, but it really is paid indirectly by individuals in their capacity as customers, investors (owners), or employees; the taxes are passed along to individuals through higher prices for products and services, lower dividends, and/ or lower wages. Taxes also affect the lives of individuals via the ballot box. Federal, state, and local elections often include initiatives that deal with taxation, such as whether Federal income taxes should be raised (or lowered), whether a new tax should be imposed on soda, or whether the sales tax rate should be increased. Candidates running for office often have ideas on tax changes they would like to make if they are elected.

1-1a  The Relevance of Taxation to Accounting and Finance Professionals The Federal corporate income tax rate is 21 percent. State income taxes constitute, on average, an additional 5 percent. So a large corporation may devote about 25 percent of its net income to pay income taxes. In addition, businesses are subject to employment taxes, property taxes, sales taxes, and various excise taxes. Corporations with international operations are subject to taxation in other countries. Small businesses also pay a variety of taxes that affect profits and cash flows. Given its significance, taxation is a crucial topic for accounting and finance professionals. They must understand the various types of business taxes to assist effectively with: • Compliance: Ensure that the business files all tax returns and makes all tax payments on time. Mistakes and missed due dates will lead to penalties and interest expense.

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

CHAPTER 1  Introduction to Taxation

• Planning: Help a business to apply favorable tax rules, like deferring income and obtaining tax credits, to minimize tax liability (and maximize owner wealth). The time value of money concept also is important here, as is coordinating tax planning with other business goals to maximize earnings per share. • Financial reporting: Financial statements include a variety of tax information, including income tax expense on the income statement and deferred tax assets and liabilities on the balance sheet. Footnotes to the financial statements report various tax details, including the company’s effective tax rate. Computation and proper reporting of this information requires knowledge of both tax and the financial reporting rules [including the Financial Accounting Standards Board’s Accounting Standards Codification (ASC) 740, Income Taxes]. • Controversy: Assist when the taxpayer interacts with a tax agency (like the IRS). The IRS and state and local tax agencies regularly audit tax returns to verify that taxes were properly computed and paid. • Cash management: Taxes must be paid on time to avoid penalties and interest. Income taxes must be estimated and paid quarterly and reconciled on the annual return. Other taxes may be due weekly, monthly, quarterly, or semiannually. Businesses must be sure they have the funds ready when the taxes are due and have procedures to track due dates. • Data analysis: With a majority, if not all, of a company’s records maintained in digital form, there are opportunities to use this information to enhance profits, better understand the customer base, and improve and understand the information from a tax perspective. Tax practitioners often need skills in data analysis and visualization to identify samples for both internal and external audits, find ways to identify the products and services subject to sales tax in different states, and extract tax data to help inform other business functions, such as where to locate a new sales office. The IRS and state tax agencies also use data analysis to help identify potential audit issues. The level and depth of tax knowledge needed for any accounting or tax professional depends on his or her specific job. The vice president of tax for a company clearly needs thorough knowledge in all areas of taxation; the same is true of a partner in a CPA firm. In contrast, the corporate treasurer likely focuses more on cash management, working closely with the company’s tax advisers, so needs only a basic understanding of taxes. It is essential to maintain a balanced perspective when working with tax systems. A corporation that is deciding where to locate a new factory does not automatically select the city or state that offers the most generous tax benefits. Nor does the person who is retiring to a warmer climate pick Belize over Arizona because Belize has no income tax while Arizona does. Tax considerations should not control decisions, but they are one of many factors to be considered.

1-1b  How to Study Taxation The goal of studying taxation is to be able to recognize issues (or transactions) that have tax implications and to try to understand the justification for the related tax rules. You may have heard that tax is a difficult subject because of the many rules, exceptions, and definitions. You even may have heard that taxation is boring. Taxation is a challenging topic, but it is certainly not boring. Taxation is an important and exciting topic due to constant changes made by the three branches of our Federal government (as well as by state and local jurisdictions), the significance of taxes to the bottom line of a company and an individual’s finances, and the effects of taxes on our economy and society.

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

1-3

PART 1   The World of Taxation

Tax professionals tend to find enjoyment in their chosen field due to the intellectual challenge of dealing with tax rules for compliance and planning purposes, the opportunity to interact with colleagues or clients to help them understand the effects brought about by taxes, and the knowledge that their work affects the financial well-being of individuals and businesses. For tax professionals, the study of taxation is an ongoing and intriguing process. When Congress changes the tax law, tax professionals must review the new rules to understand how they affect clients or their employer. In addition, decisions rendered by the courts in tax disputes and guidance issued by the Treasury Department and Internal Revenue Service must be understood to ensure correct compliance with the law and to identify updated tax planning ideas. In studying taxation, one should focus on understanding the rules and the why(s) behind them rather than memorizing the many isolated or disconnected rules and terms. The rules become more meaningful by thinking about why the rule exists for the particular type of tax. For example, why do Federal income tax rules allow for a child care credit? Why is tax depreciation different from that used for financial reporting? Aiming for understanding, rather than memorization, will make your journey into the world of taxation interesting and meaningful, and it will prepare you well for dealing with taxation in your accounting or finance career.

1-1c  Individuals and Taxes

Individual

In ve sto r

s ic itie Civ sibil s on es sp sin Re Bu

Fin Lit anci era al cy

lia n Co mp

g n in

Em l/ plo na er o ye s r um e e Personal P ns o C Responsibilities

lan xP Ta

ce

The following diagram illustrates the many ways individuals interact with taxes. For example, as shown in the outer circle, individuals pay taxes and file tax returns (tax compliance). They also engage in tax planning as part of their desire to maximize the present value of after-tax wealth. If their tax return is audited or they do not pay their taxes, taxpayers will deal with the IRS or a state/local tax agency (tax controversy). Individuals deal with tax rules and planning in their roles as consumers, employees, investors, and business owners. Tax law is designed around these various taxpayer activities. Finally, as shown by the inner circle, individuals have a personal responsibility to comply with tax laws and pay any taxes due. Individuals also have a civic responsibility to understand taxes in their role as citizens and voters. Moreover, individuals need to understand how taxes affect their personal cash flows, consumption, and savings. Use this diagram as you study the materials in this text, considering where in the circle various rules fit.

Ta x

1-4

Tax Controversy

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CHAPTER 1  Introduction to Taxation

1-2  The Structure of Tax Systems

LO.2

Most taxes have two components: a tax rate and a tax base (such as income, wages, value, or sales price). Tax liability is computed by multiplying these two components. Taxes vary by the structure of their rates, the base subject to tax, and whether reductions to the tax liability are allowed (e.g., credits). The tax formula (below) is helpful in both calculating a taxpayer’s tax liability for any type of tax and understanding the effect of proposals to change the tax laws.

[Tax rate(s)

Tax base]

Tax credits

Explain the components of a tax.

Tax liability

1-2a  Tax Rates Tax rates can be progressive, proportional, or regressive. A tax rate is progressive if the rate increases as the tax base increases. The Federal income tax imposed on individuals is a progressive tax as indicated by the Tax Rate Schedules you can find inside the front cover of this text. Currently, the tax rates increase from 10 percent to 37 percent as taxable income (the tax base) increases. A tax is proportional if the rate of tax is constant, regardless of the size of the tax base. State retail sales taxes are proportional. Bob purchases an automobile for $6,000. If the sales tax on automobiles is 7% in Bob’s state, he will pay a $420 tax. Alternatively, if Bob pays $20,000 for a car, his sales tax will be $1,400 (still 7% of the sales price). Because the average tax rate does not change with the tax base (sales price), the sales tax rate is proportional.

EXAMPLE

1

Finally, regressive tax rates decrease as the tax base increases. Federal employment   taxes , such as FICA and FUTA, can be termed regressive. When the tax base and the taxpayer’s ability to pay generally are positively correlated (i.e., when they move in the same direction), many tax pundits view regressive tax rates as unfair. This is because the tax burden decreases as a percentage of the taxpayer’s ability to pay. In 2021, the combined Social Security and Medicare tax rate levied on the wages of employees is 7.65% up to a maximum of $142,800 and 1.45% on all wages over $142,800. Pooja earns a salary of $30,000. She pays FICA taxes of $2,295, an average tax rate of 7.65%. Alternatively, if Pooja earns $160,000, she pays $11,174 {(7.65% 3 $142,800) 1 [1.45% 3 ($160,000 2 $142,800)]}, an average tax rate of 6.98%. Once the FICA base exceeds the maximum amount subject to the Social Security part of FICA, the FICA tax rate becomes regressive because the tax rate decreases as the tax base increases.

EXAMPLE

2

Under all three tax rate structures, the amount of taxes due increases as the tax base increases. The structure of tax rates only affects the rate of increase (i.e., progressive taxes increase at an increasing rate, proportional taxes increase at a constant rate, and regressive taxes increase at a decreasing rate). The terms progressive, proportional, and regressive are also used to describe the effect of a tax on taxpayers relative to their income. The Federal income tax is progressive because the tax represents a greater percentage of a higher-income taxpayer’s income relative to a lower-income taxpayer. A flat rate income tax is proportional (or flat) since each taxpayer devotes the same percentage of income to pay the tax. Finally, a tax is regressive if lower-income taxpayers devote a greater percentage of income to pay the tax relative to higher-income individuals. For example, if two individuals, one with

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1-5

1-6

PART 1   The World of Taxation

$10,000 of income and the other with $200,000 of income, both buy the same number of gallons of gasoline during the year, the excise tax paid represents a larger percentage of the lower-income individual’s income compared to the higher-income individual. See further discussion in text Section 1-6d on equity considerations of tax systems. The terms progressive, proportional, and regressive are most often used to describe tax rates in the design of tax systems or to describe the economic effect of taxes on individuals. Effective tax rates (described below) are also used for this purpose. For tax compliance and planning purposes, a taxpayer’s statutory, marginal, and average tax rates are determined and used. The statutory tax rate is the tax rate (or rates) specified in the law. For example, Code § 11 provides that the income tax rate for corporations is 21 percent. Code § 1 provides that the top income tax rate applicable to individuals is 37 percent. The marginal tax rate is the tax rate applicable to the next dollar of income (if describing an income tax effect). For example, using the 2021 Tax Rate Schedule included in this text (see Appendix A), notice that a single person with taxable income of $25,000 has a marginal tax rate of 12 percent. This rate is relevant to let a taxpayer know the tax effect of, for example, earning a $1,000 bonus from one’s employer (in this case, the taxpayer’s income tax would increase by $120; note that employment taxes would also be owed on such income). The average tax rate is equal to the tax liability divided by taxable income. This rate can be useful in comparing taxpayers or a taxpayer’s changed tax picture from one year to another. The effective tax rate is equal to taxes paid (often the tax liability) divided by the taxpayer’s ability to pay (some income measure, like adjusted gross income or disposable income). This rate is often used by policy makers to measure the progressivity of a tax system. For financial reporting purposes, effective tax rate generally refers to total tax expense as a percentage of pretax book income (see text Section 3-3c).

EXAMPLE

3

In 2021, Jasmine, who is single, has adjusted gross income of $77,550, uses the standard deduction of $12,550, and has $65,000 of taxable income. Her Federal income tax computed using the Tax Rate Schedule is $10,049, determined as follows (using the Tax Rate Schedule for single taxpayers in Appendix A): 10% × $9,950 12% × ($40,525 − $9,950) 22% × ($65,000 − $40,525) Total Federal income tax

$  995 3,669 5,385 $10,049

• Jasmine’s statutory tax rates are 10%, 12%, and 22%. • Jasmine’s marginal tax rate is 22%. Her next dollar of income is taxed at this rate (and this tax rate will be applied until she reaches $86,376 of taxable income, at which point her marginal tax rate becomes 24%). • Jasmine’s average tax rate is 15.46% ($10,049 ÷ $65,000). • Jasmine’s effective tax rate (using her AGI) is 12.96% ($10,049 ÷ $75,550).

In the example above, the statutory, marginal, average, and effective tax rates differ because they were determined using the progressive Federal income tax for individuals. If instead, the taxpayer was a corporation, all the tax rates would be 21 percent because the Federal corporate income tax is proportional.

1-2b  Tax Bases Most taxes are levied on one of four kinds of tax bases. • Transactions [including sales or purchases of goods and services and transfers of wealth (e.g., by gift or at death)]. • Property or wealth (including ownership of specific kinds of property). Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

CHAPTER 1  Introduction to Taxation

1-7

• Privileges and rights (including the ability to do business as a corporation, the right to work in a certain profession, and the ability to move goods between countries). • Income on a gross or net-of-expenses basis. Because the Federal income tax usually has the most significant influence when decisions are made, it is the principal focus of this text. Information on criteria used in designing a tax structure can be found on this book’s companion website: www.cengage.com

1 DIGGING DEEPER

1-2c  Incidence of Taxation We most often think of our tax burden as including only the taxes we pay directly (like income taxes). But we also pay many taxes indirectly. Often, the incidence of various taxes directly paid by businesses is on the final consumer of goods and services. Similarly, the incidence of property taxes on an apartment building is primarily on the tenant rather than the owner, since the owner factors this tax into the rental rate. Individuals also bear the incidence of the corporate income tax in their capacities as employees and investor/owners. In evaluating tax systems, it is important to consider taxes paid both directly and indirectly in order to understand the effect of taxes on individuals. Determining the incidence of all taxes, though, is not easy due to the influence of economic factors, like the effect of supply and demand on the pricing of goods and services at any point in time.

1-3  Types of Taxes In many countries, transaction taxes are more important than income taxes. We will discuss three types of transaction taxes: sales and certain excise taxes , employment taxes, and taxes on the transfer of wealth (as gifts and at death).

LO.3 Identify the various taxes affecting business entities and individual.

1-3a  Taxes on the Production and Sale of Goods Sales tax and some excise taxes are imposed on the production, sale, or consumption of commodities or the use of services. Excise taxes and general sales taxes differ by the breadth of their bases. An excise tax base is limited to a specific kind of good or service, but a general sales tax is broad-based (e.g., it might be levied on all retail sales). All levels of government impose excise taxes, while state and local governments (but not the U.S. Federal government) make heavy use of the general sales tax.

Federal Excise Taxes Together with customs duties, excise taxes served as the principal source of revenue for the United States during its first 150 years of existence. Since World War II, the role of excise taxes in financing the Federal government has decined steadily, falling from about 30 to 40 percent of revenues just prior to the war to about 3 percent now. During this time, the Federal government came to rely upon income and employment taxes as its principal sources of funds. Despite the decreasing contribution of excise taxes to the Federal government, they continue to have a significant impact on specific industries. Currently, trucks, trailers, tires, liquor, tobacco, firearms, certain sporting equipment, medical devices, and air travel all are subject to Federal excise taxes. Excise taxes extend beyond sales transactions. They also are levied on privileges and rights, as discussed below. The bases used for Federal excise taxes are as diverse as the goods that are taxed. Fuels are taxed by the gallon, vaccines by the dose, air travel by the price paid for the ticket, water travel by the passenger, coal by the ton extracted or by the sales price, insurance by the premiums paid, and the gas guzzler tax by the mileage rating on the automobile produced. Some of these taxes are levied on producers, some on resellers, and some on consumers. In almost every circumstance, the tax rate structure is proportional. Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

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PART 1   The World of Taxation

With the exception of Federal excise taxes on alcohol, tobacco, and firearms, Federal excise taxes are due at least quarterly, when the Federal excise tax return (Form 720) is filed.

State Excise Taxes Many states levy excise taxes on the same items taxed by the Federal government. For example, most states have excise taxes on gasoline, liquor, and tobacco. However, the tax on specific goods can vary dramatically among states. Compare New York’s $4.35 tax on each pack of 20 cigarettes to Missouri’s $0.17 per pack. These differences at the state level can provide ample incentive for smuggling between states and for state-line enterprises specializing in taxed goods.1 Other goods and services subject to state and local excise taxes include admission to amusement facilities; hotel occupancy; rental of other facilities; and sales of playing cards, oleomargarine products, and prepared foods. Some counties impose a tax on transfers of property that require recording of documents (such as real estate sales and sales of stock and securities).

Local Excise Taxes Over the last few years, two types of excise taxes imposed at the local level have become increasingly popular. These are the hotel occupancy tax and the rental car “surcharge.” Because they tax the visitor who cannot vote, they are a political windfall and serve as a means of financing special projects that generate civic pride (e.g., convention centers and state-of-the-art sports arenas). A few cities have created excise taxes that apply to digital transactions, like fees for streaming music and movies, app downloads, Uber and Lyft fares, and Airbnb rentals.

General Sales Tax The broad-based general sales tax is a major source of revenue for most state and local governments. It is used in all but five states (Alaska, Delaware, Montana, New Hampshire, and Oregon). The U.S. Federal government does not levy a general sales tax. Although specific rules vary from state to state, the sales tax typically employs a proportional tax rate and includes retail sales of tangible personal property (and occasionally personal services) in the base. Some states exempt medicine and groceries from the base (or tax these items at a lower rate), and sometimes tax rates vary with the good being sold (e.g., the sales tax rate for food may differ from the rate on other goods). The sales tax is collected by the retailer and then paid to the state government. Local general sales taxes, over and above those levied by the state, are common. It is not unusual to find taxpayers living in the same state who pay different general sales tax rates based on the city or county in which they make their purchases. For various reasons, some jurisdictions temporarily suspend the application of a general sales tax. The prevalent justification for these sales tax holidays is to reduce the cost of certain necessities, such as back-to-school items or hurricane preparedness items.

Use Taxes One obvious approach to avoiding state and local sales taxes is to purchase goods in a state that has little or no sales tax and then transport the goods back to one’s home state. Another alternative is to purchase goods from an out-of-state internet-based vendor (e.g., an Amazon affiliate) that then ships the goods directly to the purchaser. Use taxes exist to prevent this tax reduction ploy. The use tax is a transaction tax imposed at the same rate as the sales tax on the use, consumption, or storage of tangible property. Every state that imposes a general sales tax levied on the consumer also applies a use tax. 1

Some excise taxes are referred to as “sin” taxes (because goods such as liquor, marijuana, and tobacco are subject to the tax). Although it is commonly

believed that these taxes are imposed for the purpose of discouraging consumption of the taxed item, evidence frequently fails to show this effect.

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CHAPTER 1  Introduction to Taxation

The Big Picture Return to the facts of The Big Picture on p. 1-1. The payment Travis made when he registered the car is probably a use tax. When the car was purchased in another state, likely no sales tax (or a lower amount) was levied. The current payment makes up for the amount of sales tax he would have paid had the car been purchased in his home state.

EXAMPLE

4

The use tax is difficult to enforce for many purchases since many consumers are not aware of the tax. Most states have measures to curtail the loss of this revenue (e.g., by requiring consumers to report and pay the tax when they file their state income tax return).

Value Added Tax The value added tax (VAT) is a variation of a sales tax and is levied at each stage of production on the value added by the producer. A VAT is used by almost all countries around the world; the United States is one of the few countries that does not use a VAT. The tax typically serves as a major source of revenue for governments that use it.2 The most commonly used form of VAT is the credit invoice VAT. In its basic form, sellers charge a VAT on everything they sell, and all buyers pay the VAT. Business buyers, though, get the VAT they pay refunded (or credited) against the VAT they collect and have to remit to the government. As a result, the final consumer pays the VAT, but it is assessed and collected throughout the production and distribution of the goods or services (in contrast, the sales tax is paid by the final consumer only). A credit invoice VAT system can be fairly simple, although many countries add complexities (e.g., special rates on certain goods or services, or exemptions for small businesses). Country X imposes a VAT at a 10% rate and uses the credit invoice VAT system. Farmer Jane grows wheat and sells it to ABC Mill for $110 [$100 plus VAT of $10 (10% 3 $100)]. ABC Mill sells refined wheat flour to Birch Bakery for $154 [$140 plus VAT of $14 (10% 3 $140)]. Finally, Birch Bakery uses the flour to sell cupcakes to consumers for $187 [$170 plus VAT of $17 (10% 3 $170)]. Along the way, the parties involved pay, collect, and remit the following VAT, resulting in total VAT paid to the government of $17.

EXAMPLE

5

Farmer Jane $10 collected and remitted to the government ABC Mill    4 remitted to the government ($14 collected less $10 paid) Birch Bakery   3 remitted to the government ($17 collected less $14 paid) $17 Total VAT If Country X instead used a sales tax, the sales from Farmer Jane to ABC Mill to Birch Bakery would be exempt from tax because the goods were purchased for resale. The buyers of the final cupcakes would pay sales tax of $17, the same amount collected under the credit invoice VAT.

1-3b  Employment Taxes Both Federal and state governments tax the salaries and wages paid to employees. On the Federal side, employment taxes represent a major source of funds. For example, the FICA tax accounts for more than one-third of revenues in the Federal budget, second only to the income tax in its contribution. The Federal government imposes two kinds of employment tax. The Federal Insurance Contributions Act (FICA) imposes a tax on self-employed individuals, employees, and employers. The proceeds of the tax are used to finance Social Security and Medicare benefits. The Federal Unemployment Tax Act (FUTA) imposes a tax on employers only. The FUTA tax provides funds to state unemployment benefit programs. Most state employment taxes are similar to the FUTA tax, with proceeds used to finance state unemployment benefit payments. 2

Some proposals to reduce the Federal government’s reliance on the employment and income taxes or help reduce the national debt have focused on VAT as an alternative tax system.

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PART 1   The World of Taxation

FICA Taxes The FICA tax has two components: old age, survivors, and disability insurance payments (commonly referred to as Social Security) and Medicare health insurance payments. The Social Security tax rate is 6.2 percent for the employee and 6.2 percent for the employer, and the Medicare tax rate is 1.45 percent for both the employer and the employee. The maximum base for the Social Security tax is $142,800 for 2021 and $137,700 for 2020. There is no ceiling on the base amount for the Medicare tax. The employer withholds the FICA tax from an employee’s wages. Payments usually are made through weekly or monthly electronic payments or deposits to a Federal depository. Employers also file Form 941, Employer’s Quarterly Federal Tax Return, by the end of the first month following each quarter of the calendar year (e.g., by July 31 for the quarter ending on June 30) and pay any remaining amount of employment taxes due for the previous quarter. Failure to pay can result in large penalties. FICA tax is not assessed on all wages paid. For example, wages paid to children under the age of 18 who are employed in a parent’s trade or business are exempt from the tax.

The Big Picture EXAMPLE

6

Return to the facts of The Big Picture on p. 1-1. Presuming that April and Martin perform meaningful services for Travis (which the facts seem to imply), they are legitimate employees. April is not subject to Social Security tax because she is under the age of 18. However, Martin is 18, and Travis needs to collect and pay FICA taxes for him. Furthermore, recall that Amy Carter now is working and is subject to the Social Security and Medicare taxes. Travis, as an independent contractor, is subject to self-employment tax, discussed in the next section.

An additional 0.9 percent Medicare tax is imposed on earned income (including self-employment income) above $200,000 (single filers) or $250,000 (married filing jointly). Unlike the Social Security tax of 6.2 percent and the regular Medicare portion of 1.45 ­percent, an employer does not match the employees’ 0.9 percent additional Medicare tax. Similarly, an additional 3.8 percent Medicare tax is assessed on the investment income of individuals whose modified adjusted gross income exceeds $200,000 or $250,000. For this purpose, investment income includes interest, dividends, net capital gains, and income for similar portfolio items.

The Big Picture EXAMPLE

7

Return to the facts of The Big Picture on p. 1-1. The combined income of Travis and Amy Carter may be large enough to trigger one or both of the additional Medicare taxes. The marginal tax rate of “upper-income” taxpayers is higher than that of other individuals because of these taxes. Congress has designated these taxes to cover a portion of Federal health care costs. Betty would have considered these taxes when making her decision to reenter the workforce.

Self-Employment Tax Self-employed individuals also pay into the FICA system in the form of a self-­ employment (SE) tax (determined on Schedule SE, filed with Form 1040, U.S. Individual Income Tax Return). Self-employed individuals are required to pay both the employer and the employee portion of the FICA taxes. The 2021 SE tax rate is 15.3 percent on selfemployment income up to $142,800 and 2.9 percent on all additional self-employment income. Self-employed individuals deduct half of the SE tax—the amount normally deductible by an employer as a business expense. Self-employment income is discussed in more detail in text Section 11-4b.

Unemployment Taxes For 2021, FUTA applies at a rate of 6.0 percent on the first $7,000 of covered wages paid during the year to each employee. As with FICA, this represents a regressive rate Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

CHAPTER 1  Introduction to Taxation

1-11

structure. The Federal government allows a credit for unemployment tax paid (or allowed under a merit rating system)3 to the state. The credit cannot exceed 5.4 percent of the covered wages. As a result, the amount required to be paid to the U.S. Treasury could be as low as 0.6 percent (6.0% 2 5.4%) of an employee’s wages. FUTA and state unemployment taxes differ from FICA in that the tax is imposed only on the employer.

1-3c  Taxes at Death The transfer of property upon the death of the owner may be a taxable event. If the tax is imposed on the transferor at death, it is called an estate tax . If the law taxes the recipient of the property, it is termed an inheritance tax . As is typical of other types of transaction taxes, the value of the property transferred provides the base for determining the amount of the tax at death. The Federal government imposes an estate tax. Only a few state governments levy their own additional inheritance taxes, estate taxes, or both. In a typical year, about 2.8 million U.S. individuals die. At the same time, only about 5,400 estates file a Federal estate tax return showing a taxable estate. Total collections of Federal estate and gift tax revenues amount to about $20 billion per year. At the time of her death, Wilma lived in a state that imposes an inheritance tax but not an estate tax. Mary, one of Wilma’s heirs, lives in the same state. Wilma’s estate is subject to the Federal estate tax, and Mary is subject to the state inheritance tax.

EXAMPLE

8

The Federal Estate Tax Never designed to generate a large amount of revenue, the Federal estate tax was intended to prevent large concentrations of wealth from being kept within a family for many generations. Whether this objective has been accomplished is debatable, because estate taxes can be substantially reduced (or deferred for decades) through careful tax planning activities. Determination of the estate tax base begins with the gross estate, which includes property the decedent owned at the time of death. It also includes property interests, such as life insurance proceeds paid to the estate or to a beneficiary other than the estate if the deceased-insured had any ownership rights in the policy. Most property included in the gross estate is valued at fair market value as of the date of death. Deductions from the gross estate in arriving at the taxable estate include funeral and administration expenses, certain taxes, debts of the decedent, and transfers to charitable organizations. A marital deduction is available for amounts passing to a surviving spouse (a widow or widower). When Luis died, he owned $30,000,000 in various securities, real estate, and personal effects. Under his will, Luis gave $1,000,000 to the local art museum and provided $12,000,000 to his surviving wife Angelina. Luis’s executor computes a Federal estate tax on the $17,000,000 taxable estate.

EXAMPLE

9

Once the taxable estate has been determined and certain taxable gifts have been added to it, one must determine a tentative tax liability. The tentative liability is reduced by a variety of credits to arrive at the amount due. In 2021, $11.7 million of a U.S. decedent’s estate effectively is excluded from the estate tax, with a maximum 40 percent tax rate on any excess. Spouses can share a $23.4 million estate tax exclusion. These amounts are indexed annually for inflation.4

State Taxes at Death States usually levy an inheritance tax, an estate tax, or both. The two forms of tax differ according to whether the liability is imposed on the heirs or on the estate. 3

States follow a policy of reducing unemployment tax on employers with stable employment. Thus, an employer with no employee turnover might face state unemployment tax rates as low as 0.1% or, in some cases, zero.

This merit rating system explicitly accounts for the savings generated by steady employment. 4 § 2010; in 2020, the exemption amount was $11.58 million.

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PART 1   The World of Taxation

Typically, an inheritance tax divides the heirs into classes based on their relationship to the decedent. The more closely related the heir, the lower the rates imposed and the greater the exemption allowed. Some states allow a zero rate of tax on amounts passing to a surviving spouse.

1-3d  Gift Tax Like estate and inheritance taxes, the Federal gift tax is an excise tax levied on the right to transfer property. In this case, however, the tax is imposed on transfers made during the owner’s life rather than at death. The tax applies only to transferred amounts that are not supported by full and adequate consideration (i.e., gifts). EXAMPLE

10

Carl sells property worth $20,000 to his daughter, Bryce, for $1,000. Carl has made a $19,000 gift to Bryce.

The Federal gift tax is intended to complement the estate tax. The gift tax base is the sum of all taxable gifts made during one’s lifetime. Gifts are valued at the fair market value of the property on the date of the gift. To compute the tax due in a year, the tax rate schedule is applied to the sum of all lifetime taxable gifts. The resulting tax is then reduced by gift taxes paid in prior years. The Federal gift tax and the Federal estate tax are unified.5 The transfer of assets by a decedent at death effectively is treated as a final gift under the tax law. As a result, the 2021 $11.7 million exclusion and the 40 percent top tax rate for the estate tax also is available to calculate the tax liability generated by lifetime gifts. If the exclusion is exhausted during one’s lifetime against taxable gifts, it is not available to reduce the estate tax liability. The same tax rate schedule applies to both lifetime gifts and the estate tax. EXAMPLE

11

Before his death, Ben makes taxable gifts exceeding the exclusion amount. Because the unified transfer tax exclusion was used up during his life to offset the tax due on these gifts, no further amount is left to reduce Ben’s estate tax liability.

Annual taxable gifts are determined by reducing the fair market value of gifts given by an annual exclusion of $15,000 per donee; this amount does not use up any of the lifetime exclusion. A married couple can elect gift splitting, which enables them to transfer twice the annual exclusion ($30,000) per donee per year, before eroding the lifetime exclusion amount. Taxable gifts are reduced by deductions for gifts to charity and to one’s spouse (the marital deduction). Gifts for medical and educational purposes may be exempt from the gift tax as well.

Gift Tax Exclusion and Deductions EXAMPLE

12

EXAMPLE

13

Marco made the following gifts: $500,000 to his wife Irena, $100,000 to their daughter Anita, and $100,000 to the San Mateo Church. The marital and charitable deductions offset the gifts to Irena and the church. The $15,000 per donee annual exclusion reduces the taxable gift to Anita. Another $15,000 of the taxable gift could be eliminated if Irena agrees to a gift-splitting election.

On December 31, Vera gives $15,000 to each of her four married children, their spouses, and her eight grandchildren. On January 3 of the following year, she repeats the procedure. Due to the annual exclusion, Vera has not made a taxable gift, although she transferred $240,000 [$15,000 3 16 (the number of donees)] twice, in a matter of days, for a total of $480,000. If Vera had been married, she could have given twice as much ($960,000) tax-free, by electing gift splitting with her spouse.

5

§§ 2010 and 2505. Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

CHAPTER 1  Introduction to Taxation

1-13

Tax Fact A Profile of Tax Collections Federal budget receipts as estimated for fiscal 2021 indicate a dependence to a great extent on payroll and

individual income taxes. Corporate income tax collections likely are far below what the general public might expect.

Federal Tax Collections 2% regular tax liability)

2020 AMT Exemption and Phaseout for Individuals Phaseout

 

Filing Status

Exemption

Begins at

Ends at

$113,400 72,900 56,700

$1,036,800 518,400 518,400

$1,490,400 810,000 745,200

Married, filing jointly Single or Head of household Married, filing separately

2021 AMT Exemption and Phaseout for Individuals Phaseout

 

Filing Status Married, filing jointly Single or Head of household Married, filing separately

Exemption

Begins at

Ends at

$114,600 73,600 57,300

$1,047,200 523,600 523,600

$1,505,600 818,000 752,800

 

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Appendix B Tax Forms The IRS tax forms mentioned in this text can be found at the IRS website at irs.gov/forms-instructions. In addition to reviewing and using the IRS tax forms in your study of taxation, also consider reviewing the comparable forms from the tax agency in your state (usually called the Department of Revenue). A list of state tax agency links is available at aicpa .org/research/­externallinks/taxesstatesdepartmentsofrevenue .html. This can help you see some of the differences between Federal and state income tax rules, as well as similarities. Form 1040

U.S. Individual Income Tax Return (pages 1 and 2)

B-3

Additional Income and Adjustments to Income

B-5

Schedule 2

Additional Taxes

B-6

Schedule 3

Additional Credits and Payments

B-6

Schedule A

Itemized Deductions

B-7

Schedule C

Profit or Loss from Business

B-8

Schedule D

Capital Gains and Losses

B-10

U.S. Return of Partnership Income

B-12

Schedule 1

Form 1065

Schedule K-1 Partner’s Share of Income, Deductions,   Credits, etc.

B-17

Form 1120

U.S. Corporation Income Tax Return

Form 1120-S

U.S. Income Tax Return for an S Corporation B-24

Schedule K-1 Shareholder’s Share of Income,   Deductions, Credits, etc.

B-18

B-29

Form 4562

Depreciation and Amortization

B-30

Form 4797

Sales of Business Property

B-32

B-1 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

B-2

APPENDIX B   Tax Forms

Form 6251

Alternative Minimum Tax—Individuals

B-34

Form 8949 Sales and Other Dispositions of Capital  Assets

B-36

Form 8959

B-38

Additional Medicare Tax

Form 8960 Net Investment Income Tax—Individuals,   Estates, and Trusts

B-39

Form 8995 Qualified Business Income Deduction   Simplified Computation

B-40

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B-3

Form

APPENDIX B  Tax Forms

1040 U.S. Individual Income Tax Return 2020 (99)

Department of the Treasury—Internal Revenue Service

Filing Status Check only one box.

Single

Married filing jointly

OMB No. 1545-0074

Married filing separately (MFS)

IRS Use Only—Do not write or staple in this space.

Head of household (HOH)

Qualifying widow(er) (QW)

If you checked the MFS box, enter the name of your spouse. If you checked the HOH or QW box, enter the child’s name if the qualifying person is a child but not your dependent ▶

Your first name and middle initial

Last name

Your social security number

If joint return, spouse’s first name and middle initial

Last name

Spouse’s social security number

Home address (number and street). If you have a P.O. box, see instructions.

Apt. no.

City, town, or post office. If you have a foreign address, also complete spaces below. Foreign country name

Presidential Election Campaign Check here if you, or your spouse if filing jointly, want $3 ZIP code to go to this fund. Checking a box below will not change Foreign postal code your tax or refund.

State

Foreign province/state/county

At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?

You

Spouse

Yes

No

You as a dependent Your spouse as a dependent Standard Someone can claim: Deduction Spouse itemizes on a separate return or you were a dual-status alien Age/Blindness You:

Were born before January 2, 1956

(1) First name If more than four dependents, see instructions and check here ▶

Attach Sch. B if required.

Standard Deduction for— • Single or Married filing separately, $12,400 • Married filing jointly or Qualifying widow(er), $24,800 • Head of household, $18,650 • If you checked any box under Standard Deduction, see instructions.

Spouse:

Are blind

Dependents (see instructions):

(2) Social security number

Last name

Was born before January 2, 1956

1

Wages, salaries, tips, etc. Attach Form(s) W-2

2a 3a 4a

Tax-exempt interest . Qualified dividends . IRA distributions . .

5a 6a 7

Pensions and annuities . . 5a b Taxable amount . Social security benefits . . 6a b Taxable amount . Capital gain or (loss). Attach Schedule D if required. If not required, check here . Other income from Schedule 1, line 9 . . . . . . . . . Add lines 1, 2b, 3b, 4b, 5b, 6b, 7, and 8. This is your total income Adjustments to income: From Schedule 1, line 22 . . . . . . . . . . . .

8 9 10 a

. . .

. . .

2a 3a 4a

.

.

.

.

.

.

.

.

.

1

b Taxable interest . b Ordinary dividends . b Taxable amount . .

. . .

. . .

. . .

. . .

2b 3b 4b

. . .

. . .

. . .

. .

. .

▶

5b 6b 7

. .

. .

. .

. .

. ▶

8 9

.

.

.

. .

.

. .

.

. .

.

. .

.

. .

. . 10a Charitable contributions if you take the standard deduction. See instructions 10b Add lines 10a and 10b. These are your total adjustments to income . . . .

.

.

.

.

▶

10c

11 12 13

Subtract line 10c from line 9. This is your adjusted gross income . . Standard deduction or itemized deductions (from Schedule A) . . Qualified business income deduction. Attach Form 8995 or Form 8995-A

. . .

. . .

. . .

. . .

. . .

. . .

. . .

▶

. .

11 12 13

14 15

Add lines 12 and 13 . . . . . . . . . . . . . . . . Taxable income. Subtract line 14 from line 11. If zero or less, enter -0- .

. .

. .

. .

. .

. .

. .

. .

. .

14 15

b c

For Disclosure, Privacy Act, and Paperwork Reduction Act Notice, see separate instructions.

Is blind

(4) ✔ if qualifies for (see instructions): Child tax credit Credit for other dependents

(3) Relationship to you

Cat. No. 11320B

Form

1040 (2020)

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B-4

APPENDIX B   Tax Forms Page 2

Form 1040 (2020)

16 17

Tax (see instructions). Check if any from Form(s): 1 8814 Amount from Schedule 2, line 3 . . . . . . . .

.

4972 3 . . . .

.

.

.

.

.

16 17

.

18 19 20

Add lines 16 and 17 . . . . . . . . Child tax credit or credit for other dependents Amount from Schedule 3, line 7 . . . .

. . .

.

.

.

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

18 19 20

21 22 23

Add lines 19 and 20 . . . . . . . . . . . . . . . Subtract line 21 from line 18. If zero or less, enter -0- . . . . . Other taxes, including self-employment tax, from Schedule 2, line 10

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

21 22 23

24 25 a

Add lines 22 and 23. This is your total tax Federal income tax withheld from: Form(s) W-2 . . . . . . . . .

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▶

24

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Form(s) 1099 . . . . . . Other forms (see instructions) . Add lines 25a through 25c . .

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. . .

. . .

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25b 25c . . .

26 27 28

2020 estimated tax payments and amount applied from 2019 return . Earned income credit (EIC) . . . . . . . . . . . . . Additional child tax credit. Attach Schedule 8812 . . . . . .

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25d

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26

29 30 31 32 33

American opportunity credit from Form 8863, line 8 . . . . . . . 29 Recovery rebate credit. See instructions . . . . . . . . . . 30 Amount from Schedule 3, line 13 . . . . . . . . . . . . 31 Add lines 27 through 31. These are your total other payments and refundable credits . Add lines 25d, 26, and 32. These are your total payments . . . . . . . . .

. .

. .

▶

34

If line 33 is more than line 24, subtract line 24 from line 33. This is the amount you overpaid

.

.

32 33 34

.

▶

b c d • If you have a qualifying child, attach Sch. EIC. • If you have nontaxable combat pay, see instructions.

Refund

. . .

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2

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25a

. . 27 28

35a ▶b Direct deposit? See instructions. ▶ d 36

Amount of line 34 you want refunded to you. If Form 8888 is attached, check here . ▶ c Type: Routing number Checking Account number Amount of line 34 you want applied to your 2021 estimated tax . . ▶ 36

.

Amount You Owe

Subtract line 33 from line 24. This is the amount you owe now .

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37

Paid Preparer Use Only

.

Phone no. ▶

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▶

37

Yes. Complete below.

No

Personal identification number (PIN) ▶

Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge and belief, they are true, correct, and complete. Declaration of preparer (other than taxpayer) is based on all information of which preparer has any knowledge. Date

Your occupation

If the IRS sent you an Identity Protection PIN, enter it here (see inst.) ▶

Spouse’s signature. If a joint return, both must sign.

Date

Spouse’s occupation

If the IRS sent your spouse an Identity Protection PIN, enter it here (see inst.) ▶

Phone no.

Email address

Your signature

▲

Joint return? See instructions. Keep a copy for your records.

.

Do you want to allow another person to discuss this return with the IRS? See instructions . . . . . . . . . . . . . . . . . . . . ▶ Designee’s name ▶

Sign Here

.

35a

Savings

Note: Schedule H and Schedule SE filers, line 37 may not represent all of the taxes you owe for 2020. See Schedule 3, line 12e, and its instructions for details. Estimated tax penalty (see instructions) . . . . . . . . . ▶ 38

For details on how to pay, see instructions. 38

Third Party Designee

.

▶

Preparer’s name

Preparer’s signature

Date

PTIN

Check if: Self-employed

Firm’s name

Phone no.

▶

Firm’s address

▶

Go to www.irs.gov/Form1040 for instructions and the latest information.

Firm’s EIN

▶

Form

1040 (2020)

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

APPENDIX B  Tax Forms

SCHEDULE 1 (Form 1040) Department of the Treasury Internal Revenue Service

2020

▶ Attach to Form 1040, 1040-SR, or 1040-NR. to www.irs.gov/Form1040 for instructions and the latest information.

Attachment Sequence No. 01

Your social security number

Name(s) shown on Form 1040, 1040-SR, or 1040-NR

Part I

OMB No. 1545-0074

Additional Income and Adjustments to Income ▶ Go

B-5

Additional Income

1 2a b 3 4 5 6 7 8

Taxable refunds, credits, or offsets of state and local income taxes . . . . . . . Alimony received . . . . . . . . . . . . . . . . . . . . . . . . . . . Date of original divorce or separation agreement (see instructions) ▶ Business income or (loss). Attach Schedule C . . . . . . . . . . . . . . . Other gains or (losses). Attach Form 4797 . . . . . . . . . . . . . . . . . Rental real estate, royalties, partnerships, S corporations, trusts, etc. Attach Schedule E Farm income or (loss). Attach Schedule F . . . . . . . . . . . . . . . . . Unemployment compensation . . . . . . . . . . . . . . . . . . . . . . Other income. List type and amount ▶

9

Combine lines 1 through 8. Enter here and on Form 1040, 1040-SR, or 1040-NR, line 8 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 2a 3 4 5 6 7 8 9

Part II Adjustments to Income 10 11

Educator expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Certain business expenses of reservists, performing artists, and fee-basis government officials. Attach Form 2106 . . . . . . . . . . . . . . . . . . . . . . . 11 12 Health savings account deduction. Attach Form 8889 . . . . . . . . . . . . 12 13 Moving expenses for members of the Armed Forces. Attach Form 3903 . . . . . 13 14 Deductible part of self-employment tax. Attach Schedule SE . . . . . . . . . 14 15 Self-employed SEP, SIMPLE, and qualified plans . . . . . . . . . . . . . . 15 16 Self-employed health insurance deduction . . . . . . . . . . . . . . . . . 16 17 Penalty on early withdrawal of savings . . . . . . . . . . . . . . . . . . 17 18a Alimony paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18a b Recipient’s SSN . . . . . . . . . . . . . . . . . . . . ▶ c Date of original divorce or separation agreement (see instructions) ▶ 19 IRA deduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 20 Student loan interest deduction . . . . . . . . . . . . . . . . . . . . . 20 21 Tuition and fees deduction. Attach Form 8917 . . . . . . . . . . . . . . . 21 22 Add lines 10 through 21. These are your adjustments to income. Enter here and on Form 1040, 1040-SR, or 1040-NR, line 10a . . . . . . . . . . . . . . . 22 For Paperwork Reduction Act Notice, see your tax return instructions.

Cat. No. 71479F

Schedule 1 (Form 1040) 2020

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

B-6

APPENDIX B   Tax Forms

SCHEDULE 2

OMB No. 1545-0074

Additional Taxes

(Form 1040) Department of the Treasury Internal Revenue Service

▶ Go

1 2 3

Attachment Sequence No. 02

Your social security number

Name(s) shown on Form 1040, 1040-SR, or 1040-NR

Part I

2020

▶ Attach to Form 1040, 1040-SR, or 1040-NR. to www.irs.gov/Form1040 for instructions and the latest information.

Tax

Alternative minimum tax. Attach Form 6251 . . . . . . . . . . . . . . . . Excess advance premium tax credit repayment. Attach Form 8962 . . . . . . . Add lines 1 and 2. Enter here and on Form 1040, 1040-SR, or 1040-NR, line 17 . .

1 2 3

Part II Other Taxes 4 5 6

Self-employment tax. Attach Schedule SE . . . . . . . . . . . . Unreported social security and Medicare tax from Form: a 4137 Additional tax on IRAs, other qualified retirement plans, and other accounts. Attach Form 5329 if required . . . . . . . . . . . . . 7a Household employment taxes. Attach Schedule H . . . . . . . .

. . . . . b 8919 . tax-favored . . . . . . . . . .

b Repayment of first-time homebuyer credit from Form 5405. Attach Form 5405 if required . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Taxes from: a Form 8959 b Form 8960 9 10

c Instructions; enter code(s) Section 965 net tax liability installment from Form 965-A . . . 9 Add lines 4 through 8. These are your total other taxes. Enter here and on Form 1040 or 1040-SR, line 23, or Form 1040-NR, line 23b . . . . . . . . . . . .

For Paperwork Reduction Act Notice, see your tax return instructions.

SCHEDULE 3

1 2 3 4 5 6 7

6 7a 7b 8

10 Schedule 2 (Form 1040) 2020

Cat. No. 71478U

▶ Go

OMB No. 1545-0074

2020

▶ Attach to Form 1040, 1040-SR, or 1040-NR. to www.irs.gov/Form1040 for instructions and the latest information.

Attachment Sequence No. 03

Your social security number

Name(s) shown on Form 1040, 1040-SR, or 1040-NR

Part I

5

Additional Credits and Payments

(Form 1040) Department of the Treasury Internal Revenue Service

4

Nonrefundable Credits

Foreign tax credit. Attach Form 1116 if required . . . . . . . . . . . . . . Credit for child and dependent care expenses. Attach Form 2441 . . . . . . . Education credits from Form 8863, line 19 . . . . . . . . . . . . . . . . . Retirement savings contributions credit. Attach Form 8880 . . . . . . . . . . Residential energy credits. Attach Form 5695 . . . . . . . . . . . . . . . Other credits from Form: a 3800 b 8801 c Add lines 1 through 6. Enter here and on Form 1040, 1040-SR, or 1040-NR, line 20

1 2 3 4 5 6 7

Part II Other Payments and Refundable Credits 8 9 10 11 12 a b c d e f 13

Net premium tax credit. Attach Form 8962 . . . . . . . . . . . . . . . . . 8 Amount paid with request for extension to file (see instructions) . . . . . . . . 9 Excess social security and tier 1 RRTA tax withheld . . . . . . . . . . . . . 10 Credit for federal tax on fuels. Attach Form 4136 . . . . . . . . . . . . . . 11 Other payments or refundable credits: Form 2439 . . . . . . . . . . . . . . . . . . . . . 12a Qualified sick and family leave credits from Schedule(s) H and Form(s) 7202 . . . . . . . . . . . . . . . . . . . . 12b Health coverage tax credit from Form 8885 . . . . . . . . 12c Other: 12d Deferral for certain Schedule H or SE filers (see instructions) . 12e Add lines 12a through 12e . . . . . . . . . . . . . . . . . . . . . . . 12f Add lines 8 through 12f. Enter here and on Form 1040, 1040-SR, or 1040-NR, line 31 13

For Paperwork Reduction Act Notice, see your tax return instructions.

Cat. No. 71480G

Schedule 3 (Form 1040) 2020

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

APPENDIX B  Tax Forms

Itemized Deductions

SCHEDULE A (Form 1040)

OMB No. 1545-0074

to www.irs.gov/ScheduleA for instructions and the latest information. ▶ Attach to Form 1040 or 1040-SR. Caution: If you are claiming a net qualified disaster loss on Form 4684, see the instructions for line 16.

Taxes You Paid

1 2 3 4

Caution: Do not include expenses reimbursed or paid by others. Medical and dental expenses (see instructions) . . . . . . Enter amount from Form 1040 or 1040-SR, line 11 2 Multiply line 2 by 7.5% (0.075) . . . . . . . . . . . . Subtract line 3 from line 1. If line 3 is more than line 1, enter -0- .

Caution: Your mortgage interest deduction may be limited (see instructions).

1

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4

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7

8b c Points not reported to you on Form 1098. See instructions for special 8c rules . . . . . . . . . . . . . . . . . . . . . d Mortgage insurance premiums (see instructions) . . . . . . . 8d e Add lines 8a through 8d . . . . . . . . . . . . . . . 8e 9 Investment interest. Attach Form 4952 if required. See instructions . 9 10 Add lines 8e and 9 . . . . . . . . . . . . . . . . . . .

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10

11 Gifts by cash or check. If you made any gift of $250 or more, see 11 instructions . . . . . . . . . . . . . . . . . . . 12 Other than by cash or check. If you made any gift of $250 or more, see instructions. You must attach Form 8283 if over $500 . . . . 12 13 Carryover from prior year . . . . . . . . . . . . . . 13 14 Add lines 11 through 13 . . . . . . . . . . . . . . . . . .

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14

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5 State and local taxes. a State and local income taxes or general sales taxes. You may include either income taxes or general sales taxes on line 5a, but not both. If you elect to include general sales taxes instead of income taxes, check this box . . . . . . . . . . . . . . . . . ▶ b State and local real estate taxes (see instructions) . . . . . . . c State and local personal property taxes . . . . . . . . . . d Add lines 5a through 5c . . . . . . . . . . . . . . . e Enter the smaller of line 5d or $10,000 ($5,000 if married filing separately) . . . . . . . . . . . . . . . . . . . 6 Other taxes. List type and amount ▶ 7 Add lines 5e and 6

Interest You Paid

Attachment Sequence No. 07

Your social security number

Name(s) shown on Form 1040 or 1040-SR

Medical and Dental Expenses

2020

▶ Go

Department of the Treasury Internal Revenue Service (99)

B-7

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8 Home mortgage interest and points. If you didn’t use all of your home mortgage loan(s) to buy, build, or improve your home, see instructions and check this box . . . . . . . . . . . ▶ a Home mortgage interest and points reported to you on Form 1098. See instructions if limited . . . . . . . . . . . . . .

5a 5b 5c 5d 5e 6 . .

8a

b Home mortgage interest not reported to you on Form 1098. See instructions if limited. If paid to the person from whom you bought the home, see instructions and show that person’s name, identifying no., and address . . . . . . . . . . . . . . . . . . . ▶

Gifts to Charity Caution: If you made a gift and got a benefit for it, see instructions.

Casualty and 15 Casualty and theft loss(es) from a federally declared disaster (other than net qualified disaster losses). Attach Form 4684 and enter the amount from line 18 of that form. See Theft Losses instructions .

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15

16 Other—from list in instructions. List type and amount ▶ Other Itemized Deductions 16 17 Add the amounts in the far right column for lines 4 through 16. Also, enter this amount on Total 17 Form 1040 or 1040-SR, line 12 . . . . . . . . . . . . . . . . . . . . Itemized Deductions 18 If you elect to itemize deductions even though they are less than your standard deduction, check this box .

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For Paperwork Reduction Act Notice, see the Instructions for Forms 1040 and 1040-SR.

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Cat. No. 17145C

.

▶ Schedule A (Form 1040) 2020

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

B-8

APPENDIX B   Tax Forms

SCHEDULE C (Form 1040)

Profit or Loss From Business

OMB No. 1545-0074

2020

(Sole Proprietorship) ▶ Go to www.irs.gov/ScheduleC for instructions and the latest information. Department of the Treasury Internal Revenue Service (99) ▶ Attach to Form 1040, 1040-SR, 1040-NR, or 1041; partnerships generally must file Form 1065.

Attachment Sequence No. 09

Name of proprietor

Social security number (SSN)

A

Principal business or profession, including product or service (see instructions)

B Enter code from instructions

C

Business name. If no separate business name, leave blank.

D Employer ID number (EIN) (see instr.)

E

Business address (including suite or room no.)

F G H

City, town or post office, state, and ZIP code Cash (2) Accrual (3) Other (specify) ▶ Accounting method: (1) Did you “materially participate” in the operation of this business during 2020? If “No,” see instructions for limit on losses If you started or acquired this business during 2020, check here . . . . . . . . . . . . . . . . .

I

Did you make any payments in 2020 that would require you to file Form(s) 1099? See instructions .

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J

If “Yes,” did you or will you file required Form(s) 1099? .

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▶

Part I

▶

Income

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2 3 4

Gross receipts or sales. See instructions for line 1 and check the box if this income was reported to you on Form W-2 and the “Statutory employee” box on that form was checked . . . . . . . . . ▶ Returns and allowances . . . . . . . . . . . . . . . . . . . . . . . . . Subtract line 2 from line 1 . . . . . . . . . . . . . . . . . . . . . . . . Cost of goods sold (from line 42) . . . . . . . . . . . . . . . . . . . . . .

1 2 3 4

5 6 7

Gross profit. Subtract line 4 from line 3 . . . . . . . . . . . . . . . . . Other income, including federal and state gasoline or fuel tax credit or refund (see instructions) . Gross income. Add lines 5 and 6 . . . . . . . . . . . . . . . . . . .

5 6 7

1

Part II

Expenses. Enter expenses for business use of your home only on line 30.

8

Advertising .

9

Car and truck expenses (see instructions) . . . . . Commissions and fees . Contract labor (see instructions)

10 11

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12 13

Depletion . . . . . Depreciation and section 179 expense deduction (not included in Part III) (see instructions) . . . . .

14

Employee benefit programs (other than on line 19) . . Insurance (other than health) Interest (see instructions): Mortgage (paid to banks, etc.)

15 16 a b 17 28 29 30

8

18 19

9 10 11

20

12

21 22 23

13

24

a b

a 14 15

b 25 26

16a

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18 19

Rent or lease (see instructions): Vehicles, machinery, and equipment Other business property . . .

20a 20b

Repairs and maintenance . . . Supplies (not included in Part III) . Taxes and licenses . . . . .

21 22 23

Travel and meals: Travel . . . .

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24a

Deductible meals (see instructions) . . . . . . . Utilities . . . . . . . . Wages (less employment credits) .

24b 25 26

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16b 27a Other expenses (from line 48) . 17 b Reserved for future use . . Total expenses before expenses for business use of home. Add lines 8 through 27a . . . . . . .

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Office expense (see instructions) Pension and profit-sharing plans .

Other . . . . . . Legal and professional services

Tentative profit or (loss). Subtract line 28 from line 7 .

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Yes

No

Yes Yes

No No

▶

27a 27b 28 29

Expenses for business use of your home. Do not report these expenses elsewhere. Attach Form 8829 unless using the simplified method. See instructions. Simplified method filers only: Enter the total square footage of (a) your home: and (b) the part of your home used for business: Method Worksheet in the instructions to figure the amount to enter on line 30

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. Use the Simplified . . . . . . .

31

Net profit or (loss). Subtract line 30 from line 29.

32

• If a profit, enter on both Schedule 1 (Form 1040), line 3, and on Schedule SE, line 2. (If you checked the box on line 1, see instructions). Estates and trusts, enter on Form 1041, line 3. • If a loss, you must go to line 32. If you have a loss, check the box that describes your investment in this activity. See instructions. • If you checked 32a, enter the loss on both Schedule 1 (Form 1040), line 3, and on Schedule SE, line 2. (If you checked the box on line 1, see the line 31 instructions). Estates and trusts, enter on Form 1041, line 3. • If you checked 32b, you must attach Form 6198. Your loss may be limited.

For Paperwork Reduction Act Notice, see the separate instructions.

Cat. No. 11334P

}

}

30

31

32a 32b

All investment is at risk. Some investment is not at risk. Schedule C (Form 1040) 2020

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

B-9

APPENDIX B  Tax Forms

Page 2

Schedule C (Form 1040) 2020

Part III

Cost of Goods Sold (see instructions)

33

Method(s) used to value closing inventory:

34

Was there any change in determining quantities, costs, or valuations between opening and closing inventory? If “Yes,” attach explanation . . . . . . . . . . . . . . . . . . . . . . . . .

a

b

Cost

c

Lower of cost or market

Other (attach explanation)

35

Inventory at beginning of year. If different from last year’s closing inventory, attach explanation .

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35

36

Purchases less cost of items withdrawn for personal use

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36

37

Cost of labor. Do not include any amounts paid to yourself .

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37

38

Materials and supplies

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38

39

Other costs .

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39

40

Add lines 35 through 39 .

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40

41

Inventory at end of year .

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41

42

Cost of goods sold. Subtract line 41 from line 40. Enter the result here and on line 4 .

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42

Part IV

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Yes

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Information on Your Vehicle. Complete this part only if you are claiming car or truck expenses on line 9 and are not required to file Form 4562 for this business. See the instructions for line 13 to find out if you must file Form 4562. /

/

43

When did you place your vehicle in service for business purposes? (month/day/year)

44

Of the total number of miles you drove your vehicle during 2020, enter the number of miles you used your vehicle for: a

No

▶

b Commuting (see instructions)

Business

c Other Yes

No

45

Was your vehicle available for personal use during off-duty hours?

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46

Do you (or your spouse) have another vehicle available for personal use?.

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Yes

No

47a

Do you have evidence to support your deduction?

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Yes

No

If “Yes,” is the evidence written?

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Yes

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b

Part V

48

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Other Expenses. List below business expenses not included on lines 8–26 or line 30.

Total other expenses. Enter here and on line 27a .

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48 Schedule C (Form 1040) 2020

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

B-10

APPENDIX B   Tax Forms

SCHEDULE D

Capital Gains and Losses

(Form 1040) Department of the Treasury Internal Revenue Service (99)

OMB No. 1545-0074

2020

▶ Attach to Form 1040, 1040-SR, or 1040-NR. Go to www.irs.gov/ScheduleD for instructions and the latest information. ▶ Use Form 8949 to list your transactions for lines 1b, 2, 3, 8b, 9, and 10.

▶

Attachment Sequence No. 12 Your social security number

Name(s) shown on return

Did you dispose of any investment(s) in a qualified opportunity fund during the tax year? Yes No If “Yes,” attach Form 8949 and see its instructions for additional requirements for reporting your gain or loss.

Part I

Short-Term Capital Gains and Losses—Generally Assets Held One Year or Less (see instructions)

See instructions for how to figure the amounts to enter on the lines below. This form may be easier to complete if you round off cents to whole dollars.

(d) Proceeds (sales price)

(e) Cost (or other basis)

(g) Adjustments to gain or loss from Form(s) 8949, Part I, line 2, column (g)

(h) Gain or (loss) Subtract column (e) from column (d) and combine the result with column (g)

1a Totals for all short-term transactions reported on Form 1099-B for which basis was reported to the IRS and for which you have no adjustments (see instructions). However, if you choose to report all these transactions on Form 8949, leave this line blank and go to line 1b . 1b Totals for all transactions reported on Form(s) 8949 with Box A checked . . . . . . . . . . . . . 2 Totals for all transactions reported on Form(s) 8949 with Box B checked . . . . . . . . . . . . . 3 Totals for all transactions reported on Form(s) 8949 with Box C checked . . . . . . . . . . . . . 4 Short-term gain from Form 6252 and short-term gain or (loss) from Forms 4684, 6781, and 8824 . . 5 Net short-term gain or (loss) from partnerships, S corporations, estates, and trusts from Schedule(s) K-1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Short-term capital loss carryover. Enter the amount, if any, from line 8 of your Capital Loss Carryover Worksheet in the instructions . . . . . . . . . . . . . . . . . . . . . . . . 7 Net short-term capital gain or (loss). Combine lines 1a through 6 in column (h). If you have any longterm capital gains or losses, go to Part II below. Otherwise, go to Part III on the back . . . . . .

Part II

4 5 6

(

)

7

Long-Term Capital Gains and Losses—Generally Assets Held More Than One Year (see instructions)

See instructions for how to figure the amounts to enter on the lines below. This form may be easier to complete if you round off cents to whole dollars.

(d) Proceeds (sales price)

(e) Cost (or other basis)

(g) Adjustments to gain or loss from Form(s) 8949, Part II, line 2, column (g)

(h) Gain or (loss) Subtract column (e) from column (d) and combine the result with column (g)

8a Totals for all long-term transactions reported on Form 1099-B for which basis was reported to the IRS and for which you have no adjustments (see instructions). However, if you choose to report all these transactions on Form 8949, leave this line blank and go to line 8b . 8b Totals for all transactions reported on Form(s) 8949 with Box D checked . . . . . . . . . . . . . 9 Totals for all transactions reported on Form(s) 8949 with Box E checked . . . . . . . . . . . . . 10 Totals for all transactions reported on Form(s) 8949 with Box F checked . . . . . . . . . . . . . . 11 Gain from Form 4797, Part I; long-term gain from Forms 2439 and 6252; and long-term gain or (loss) from Forms 4684, 6781, and 8824 . . . . . . . . . . . . . . . . . . . . . . . 12 Net long-term gain or (loss) from partnerships, S corporations, estates, and trusts from Schedule(s) K-1 13 Capital gain distributions. See the instructions . . . . . . . . . . . . . . . . . . . 14 Long-term capital loss carryover. Enter the amount, if any, from line 13 of your Capital Loss Carryover Worksheet in the instructions . . . . . . . . . . . . . . . . . . . . . . . . 15 Net long-term capital gain or (loss). Combine lines 8a through 14 in column (h). Then, go to Part III on the back . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . For Paperwork Reduction Act Notice, see your tax return instructions.

Cat. No. 11338H

11 12 13 14 (

)

15 Schedule D (Form 1040) 2020

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

APPENDIX B  Tax Forms

Page 2

Schedule D (Form 1040) 2020

Part III 16

B-11

Summary

Combine lines 7 and 15 and enter the result

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16

• If line 16 is a gain, enter the amount from line 16 on Form 1040, 1040-SR, or 1040-NR, line 7. Then, go to line 17 below. • If line 16 is a loss, skip lines 17 through 20 below. Then, go to line 21. Also be sure to complete line 22. • If line 16 is zero, skip lines 17 through 21 below and enter -0- on Form 1040, 1040-SR, or 1040-NR, line 7. Then, go to line 22. 17

Are lines 15 and 16 both gains? Yes. Go to line 18. No. Skip lines 18 through 21, and go to line 22.

18

If you are required to complete the 28% Rate Gain Worksheet (see instructions), enter the amount, if any, from line 7 of that worksheet . . . . . . . . . . . . . . . . . ▶

18

If you are required to complete the Unrecaptured Section 1250 Gain Worksheet (see instructions), enter the amount, if any, from line 18 of that worksheet . . . . . . . . . ▶

19

19

20

Are lines 18 and 19 both zero or blank and are you not filing Form 4952? Yes. Complete the Qualified Dividends and Capital Gain Tax Worksheet in the instructions for Forms 1040 and 1040-SR, line 16. Don’t complete lines 21 and 22 below. No. Complete the Schedule D Tax Worksheet in the instructions. Don’t complete lines 21 and 22 below.

21

If line 16 is a loss, enter here and on Form 1040, 1040-SR, or 1040-NR, line 7, the smaller of: • The loss on line 16; or • ($3,000), or if married filing separately, ($1,500)

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21 (

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Note: When figuring which amount is smaller, treat both amounts as positive numbers. 22

Do you have qualified dividends on Form 1040, 1040-SR, or 1040-NR, line 3a? Yes. Complete the Qualified Dividends and Capital Gain Tax Worksheet in the instructions for Forms 1040 and 1040-SR, line 16. No. Complete the rest of Form 1040, 1040-SR, or 1040-NR. Schedule D (Form 1040) 2020

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

B-12

Form

APPENDIX B   Tax Forms

1065

U.S. Return of Partnership Income For calendar year 2020, or tax year beginning

Department of the Treasury Internal Revenue Service

▶

A Principal business activity B Principal product or service C Business code number

Type or Print

, 2020, ending

OMB No. 1545-0123 , 20

2020

.

Go to www.irs.gov/Form1065 for instructions and the latest information.

Name of partnership

D Employer identification number

Number, street, and room or suite no. If a P.O. box, see instructions.

E Date business started

City or town, state or province, country, and ZIP or foreign postal code

F Total assets (see instructions)

$ (1) (1)

(2) (3) Initial return Final return Name change (4) Address change (2) (3) Cash Accrual Other (specify) ▶ H Check accounting method: I Number of Schedules K-1. Attach one for each person who was a partner at any time during the tax year ▶

G Check applicable boxes:

J Check if Schedules C and M-3 are attached . . . . . . . . . . . K Check if partnership: (1) Aggregated activities for section 465 at-risk purposes

. . (2)

(5)

Amended return

. . . . . . . . . . . . . . . ▶ Grouped activities for section 469 passive activity purposes

Tax and Payment

Deductions (see instructions for limitations)

Income

Caution: Include only trade or business income and expenses on lines 1a through 22 below. See instructions for more information. 1a Gross receipts or sales . . . . . . . . . . . . . . . . . 1a b Returns and allowances . . . . . . . . . . . . . . . . 1b c Balance. Subtract line 1b from line 1a . . . . . . . . . . . . . . . . . . . . 1c 2 Cost of goods sold (attach Form 1125-A) . . . . . . . . . . . . . . . . . . 2 3 Gross profit. Subtract line 2 from line 1c . . . . . . . . . . . . . . . . . . . 3 4 Ordinary income (loss) from other partnerships, estates, and trusts (attach statement) . . . . 4 5 Net farm profit (loss) (attach Schedule F (Form 1040)) . . . . . . . . . . . . . . 5 6 Net gain (loss) from Form 4797, Part II, line 17 (attach Form 4797) . . . . . . . . . . 6 7 Other income (loss) (attach statement) . . . . . . . . . . . . . . . . . . . 7 8 Total income (loss). Combine lines 3 through 7 . . . . . . . . . . . . . . . . 8 9 Salaries and wages (other than to partners) (less employment credits) . . . . . . . . . 9 10 Guaranteed payments to partners . . . . . . . . . . . . . . . . . . . . . 10 11 Repairs and maintenance . . . . . . . . . . . . . . . . . . . . . . . . 11 12 Bad debts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 13 Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 14 Taxes and licenses . . . . . . . . . . . . . . . . . . . . . . . . . . 14 15 Interest (see instructions) . . . . . . . . . . . . . . . . . . . . . . . . 15 16a Depreciation (if required, attach Form 4562) . . . . . . . . . . 16a b Less depreciation reported on Form 1125-A and elsewhere on return . 16b 16c 17 Depletion (Do not deduct oil and gas depletion.) . . . . . . . . . . . . . . . 17 18 Retirement plans, etc. . . . . . . . . . . . . . . . . . . . . . . . . . 18 19 Employee benefit programs . . . . . . . . . . . . . . . . . . . . . . . 19 20 Other deductions (attach statement) . . . . . . . . . . . . . . . . . . . . 20 21 Total deductions. Add the amounts shown in the far right column for lines 9 through 20 . . . 21 22 Ordinary business income (loss). Subtract line 21 from line 8 . . . . . . . . . . . 22 23 Interest due under the look-back method—completed long-term contracts (attach Form 8697) . 23 24 Interest due under the look-back method—income forecast method (attach Form 8866) . . . 24 25 BBA AAR imputed underpayment (see instructions) . . . . . . . . . . . . . . . 25 26 Other taxes (see instructions) . . . . . . . . . . . . . . . . . . . . . . 26 27 Total balance due. Add lines 23 through 26 . . . . . . . . . . . . . . . . . 27 28 Payment (see instructions) . . . . . . . . . . . . . . . . . . . . . . . 28 29 Amount owed. If line 28 is smaller than line 27, enter amount owed . . . . . . . . . . 29 30 Overpayment. If line 28 is larger than line 27, enter overpayment . . . . . . . . . . 30 Under penalties of perjury, I declare that I have examined this return, including accompanying schedules and statements, and to the best of my knowledge and belief, it is true, correct, and complete. Declaration of preparer (other than partner or limited liability company member) is based on all information of which preparer has any knowledge.

Paid Preparer Use Only

Signature of partner or limited liability company member

Print/Type preparer’s name

Firm’s name

Preparer’s signature

▲

▲

Sign Here

May the IRS discuss this return with the preparer shown below? See instructions. Yes No

Date Date

PTIN

Firm’s EIN ▶

▶

Firm’s address ▶

For Paperwork Reduction Act Notice, see separate instructions.

Check if self-employed

Phone no. Cat. No. 11390Z

Form 1065 (2020)

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

B-13

APPENDIX B  Tax Forms Form 1065 (2020)

Schedule B 1 a c e 2 a

Page

2

Other Information

What type of entity is filing this return? Check the applicable box: Domestic general partnership b Domestic limited partnership Domestic limited liability company d Domestic limited liability partnership Foreign partnership f Other ▶ At the end of the tax year: Did any foreign or domestic corporation, partnership (including any entity treated as a partnership), trust, or taxexempt organization, or any foreign government own, directly or indirectly, an interest of 50% or more in the profit, loss, or capital of the partnership? For rules of constructive ownership, see instructions. If “Yes,” attach Schedule B-1, Information on Partners Owning 50% or More of the Partnership . . . . . . . . . . . . . . .

Yes

No

b Did any individual or estate own, directly or indirectly, an interest of 50% or more in the profit, loss, or capital of the partnership? For rules of constructive ownership, see instructions. If “Yes,” attach Schedule B-1, Information on Partners Owning 50% or More of the Partnership . . . . . . . . . . . . . . . . . . . . 3 a

At the end of the tax year, did the partnership: Own directly 20% or more, or own, directly or indirectly, 50% or more of the total voting power of all classes of stock entitled to vote of any foreign or domestic corporation? For rules of constructive ownership, see instructions. If “Yes,” complete (i) through (iv) below . . . . . . . . . . . . . . . . . . . . . . . . . (i) Name of Corporation

(ii) Employer Identification Number (if any)

(iii) Country of Incorporation

(iv) Percentage Owned in Voting Stock

b Own directly an interest of 20% or more, or own, directly or indirectly, an interest of 50% or more in the profit, loss, or capital in any foreign or domestic partnership (including an entity treated as a partnership) or in the beneficial interest of a trust? For rules of constructive ownership, see instructions. If “Yes,” complete (i) through (v) below . . (i) Name of Entity

(ii) Employer Identification Number (if any)

(iii) Type of Entity

(iv) Country of Organization

(v) Maximum Percentage Owned in Profit, Loss, or Capital

4

Does the partnership satisfy all four of the following conditions? a The partnership’s total receipts for the tax year were less than $250,000. b The partnership’s total assets at the end of the tax year were less than $1 million. c Schedules K-1 are filed with the return and furnished to the partners on or before the due date (including extensions) for the partnership return. d The partnership is not filing and is not required to file Schedule M-3 . . . . . . . . . . . . . . . If “Yes,” the partnership is not required to complete Schedules L, M-1, and M-2; item F on page 1 of Form 1065; or item L on Schedule K-1. 5 Is this partnership a publicly traded partnership, as defined in section 469(k)(2)? . . . . . . . . . . . 6 During the tax year, did the partnership have any debt that was canceled, was forgiven, or had the terms modified so as to reduce the principal amount of the debt? . . . . . . . . . . . . . . . . . . . . . 7 Has this partnership filed, or is it required to file, Form 8918, Material Advisor Disclosure Statement, to provide information on any reportable transaction? . . . . . . . . . . . . . . . . . . . . . . . . 8

At any time during calendar year 2020, did the partnership have an interest in or a signature or other authority over a financial account in a foreign country (such as a bank account, securities account, or other financial account)? See instructions for exceptions and filing requirements for FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR). If “Yes,” enter the name of the foreign country ▶

9

At any time during the tax year, did the partnership receive a distribution from, or was it the grantor of, or transferor to, a foreign trust? If “Yes,” the partnership may have to file Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. See instructions . . . . . . . . .

Yes

No

10a

Is the partnership making, or had it previously made (and not revoked), a section 754 election? . . . . . . See instructions for details regarding a section 754 election. b Did the partnership make for this tax year an optional basis adjustment under section 743(b) or 734(b)? If “Yes,” attach a statement showing the computation and allocation of the basis adjustment. See instructions . . . . Form 1065 (2020)

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

B-14

APPENDIX B   Tax Forms

Form 1065 (2020)

Schedule B c

Page

3

Other Information (continued)

Is the partnership required to adjust the basis of partnership assets under section 743(b) or 734(b) because of a substantial built-in loss (as defined under section 743(d)) or substantial basis reduction (as defined under section 734(d))? If “Yes,” attach a statement showing the computation and allocation of the basis adjustment. See instructions

11

Check this box if, during the current or prior tax year, the partnership distributed any property received in a likekind exchange or contributed such property to another entity (other than disregarded entities wholly owned by the partnership throughout the tax year) . . . . . . . . . . . . . . . . . . . . . . . . ▶

12

At any time during the tax year, did the partnership distribute to any partner a tenancy-in-common or other undivided interest in partnership property? . . . . . . . . . . . . . . . . . . . . . . . .

Yes

No

If the partnership is required to file Form 8858, Information Return of U.S. Persons With Respect To Foreign Disregarded Entities (FDEs) and Foreign Branches (FBs), enter the number of Forms 8858 attached. See instructions . . . . . . . . . . . . . . . . . . . . . . . . . . ▶ Does the partnership have any foreign partners? If “Yes,” enter the number of Forms 8805, Foreign Partner’s 14 Information Statement of Section 1446 Withholding Tax, filed for this partnership . . . ▶ Enter the number of Forms 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships, attached 15 to this return . . . . . . . . . . . . . . . . . . . . . . . . . . ▶ 16a Did you make any payments in 2020 that would require you to file Form(s) 1099? See instructions . . . . . b If “Yes,” did you or will you file required Form(s) 1099? . . . . . . . . . . . . . . . . . . . . Enter the number of Forms 5471, Information Return of U.S. Persons With Respect To Certain Foreign 17 Corporations, attached to this return . . . . . . . . . . . . . . . . . . ▶ 18 Enter the number of partners that are foreign governments under section 892 . . . . ▶ 19 During the partnership’s tax year, did the partnership make any payments that would require it to file Form 1042 and 1042-S under chapter 3 (sections 1441 through 1464) or chapter 4 (sections 1471 through 1474)? . . . . 20 Was the partnership a specified domestic entity required to file Form 8938 for the tax year? See the Instructions for Form 8938 21 Is the partnership a section 721(c) partnership, as defined in Regulations section 1.721(c)-1(b)(14)? . . . . . 22 During the tax year, did the partnership pay or accrue any interest or royalty for which one or more partners are not allowed a deduction under section 267A? See instructions . . . . . . . . . . . . . . . . . If “Yes,” enter the total amount of the disallowed deductions . . . . . . . . . ▶ $ 23 Did the partnership have an election under section 163(j) for any real property trade or business or any farming business in effect during the tax year? See instructions . . . . . . . . . . . . . . . . . . . . 24 Does the partnership satisfy one or more of the following? See instructions . . . . . . . . . . . . . a The partnership owns a pass-through entity with current, or prior year carryover, excess business interest expense. b The partnership’s aggregate average annual gross receipts (determined under section 448(c)) for the 3 tax years preceding the current tax year are more than $26 million and the partnership has business interest. c The partnership is a tax shelter (see instructions) and the partnership has business interest expense. If “Yes” to any, complete and attach Form 8990. 25 Is the partnership electing out of the centralized partnership audit regime under section 6221(b)? See instructions. If “Yes,” the partnership must complete Schedule B-2 (Form 1065). Enter the total from Schedule B-2, Part III, line 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . ▶ If “No,” complete Designation of Partnership Representative below. Designation of Partnership Representative (see instructions) Enter below the information for the partnership representative (PR) for the tax year covered by this return. 13

Name of PR ▶ U.S. phone number of PR

▲

U.S. phone number of designated individual

▲

▲

U.S. address of PR

If the PR is an entity, name of the designated individual for the PR ▶

26 27 28 29

▲

U.S. address of designated individual

Is the partnership attaching Form 8996 to certify as a Qualified Opportunity Fund? . . . . . . . . . . If “Yes,” enter the amount from Form 8996, line 16 . . . . . . . . . . . . ▶ $ Enter the number of foreign partners subject to section 864(c)(8) as a result of transferring all or a portion of an interest in the partnership or of receiving a distribution from the partnership . . . . . ▶ At any time during the tax year, were there any transfers between the partnership and its partners subject to the disclosure requirements of Regulations section 1.707-8? . . . . . . . . . . . . . . . . . . . Since December 22, 2017, did a foreign corporation directly or indirectly acquire substantially all of the properties constituting a trade or business of your partnership, and was the ownership percentage (by vote or value) for purposes of section 7874 greater than 50% (for example, the partners held more than 50% of the stock of the foreign corporation)? If “Yes,” list the ownership percentage by vote and by value. See instructions. Percentage: By Vote By Value Form 1065 (2020)

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

B-15

APPENDIX B  Tax Forms Form 1065 (2020)

Page

Other Information

Alternative Minimum Tax (AMT) Items

Foreign Transactions

Credits

SelfEmploy- Deductions ment

Income (Loss)

Schedule K 1 2 3a b c 4 5 6 7 8 9a b c 10 11 12 13a b c d 14a b c 15a b c d e f 16a b c d f i k m p q r 17a b c d e f 18a b c 19a b 20a b c

Partners’ Distributive Share Items

4

Total amount

Ordinary business income (loss) (page 1, line 22) . . . . . . . . . . . . . . . 1 Net rental real estate income (loss) (attach Form 8825) . . . . . . . . . . . . . 2 Other gross rental income (loss) . . . . . . . . . . . . . 3a Expenses from other rental activities (attach statement) . . . . . 3b Other net rental income (loss). Subtract line 3b from line 3a . . . . . . . . . . . . 3c Guaranteed payments: a Services 4a b Capital 4b c Total. Add lines 4a and 4b . . . . . . . . . . . . . . . . . . . . . . 4c Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Dividends and dividend equivalents: a Ordinary dividends . . . . . . . . . . . . 6a b Qualified dividends 6b c Dividend equivalents 6c Royalties . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Net short-term capital gain (loss) (attach Schedule D (Form 1065)) . . . . . . . . . . 8 Net long-term capital gain (loss) (attach Schedule D (Form 1065)) . . . . . . . . . . 9a Collectibles (28%) gain (loss) . . . . . . . . . . . . . . 9b Unrecaptured section 1250 gain (attach statement) . . . . . . 9c Net section 1231 gain (loss) (attach Form 4797) . . . . . . . . . . . . . . . . 10 Other income (loss) (see instructions) Type ▶ 11 Section 179 deduction (attach Form 4562) . . . . . . . . . . . . . . . . . 12 Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . 13a Investment interest expense . . . . . . . . . . . . . . . . . . . . . . 13b Section 59(e)(2) expenditures: (2) Amount ▶ 13c(2) (1) Type ▶ Other deductions (see instructions) Type ▶ 13d Net earnings (loss) from self-employment . . . . . . . . . . . . . . . . . . 14a Gross farming or fishing income . . . . . . . . . . . . . . . . . . . . . 14b Gross nonfarm income . . . . . . . . . . . . . . . . . . . . . . . . 14c Low-income housing credit (section 42(j)(5)) . . . . . . . . . . . . . . . . . 15a Low-income housing credit (other) . . . . . . . . . . . . . . . . . . . . 15b Qualified rehabilitation expenditures (rental real estate) (attach Form 3468, if applicable) . . 15c Other rental real estate credits (see instructions) Type ▶ 15d Other rental credits (see instructions) Type ▶ 15e Other credits (see instructions) Type ▶ 15f Name of country or U.S. possession ▶ Gross income from all sources . . . . . . . . . . . . . . . . . . . . . 16b Gross income sourced at partner level . . . . . . . . . . . . . . . . . . . 16c Foreign gross income sourced at partnership level Reserved for future use ▶ e Foreign branch category . . . . . ▶ 16e h Other (attach statement) ▶ 16h Passive category ▶ g General category ▶ Deductions allocated and apportioned at partner level j Other . . . . . . . . . . . . . . ▶ 16j Interest expense ▶ Deductions allocated and apportioned at partnership level to foreign source income Reserved for future use ▶ l Foreign branch category . . . . . ▶ 16l o Other (attach statement) ▶ 16o Passive category ▶ n General category ▶ Total foreign taxes (check one): ▶ Paid Accrued . . . . . . . . . . . 16p Reduction in taxes available for credit (attach statement) . . . . . . . . . . . . . 16q Other foreign tax information (attach statement) Post-1986 depreciation adjustment . . . . . . . . . . . . . . . . . . . . 17a Adjusted gain or loss . . . . . . . . . . . . . . . . . . . . . . . . 17b Depletion (other than oil and gas) . . . . . . . . . . . . . . . . . . . . 17c Oil, gas, and geothermal properties—gross income . . . . . . . . . . . . . . 17d Oil, gas, and geothermal properties—deductions . . . . . . . . . . . . . . . 17e Other AMT items (attach statement) . . . . . . . . . . . . . . . . . . . . 17f Tax-exempt interest income . . . . . . . . . . . . . . . . . . . . . . 18a Other tax-exempt income . . . . . . . . . . . . . . . . . . . . . . . 18b Nondeductible expenses . . . . . . . . . . . . . . . . . . . . . . . 18c Distributions of cash and marketable securities . . . . . . . . . . . . . . . . 19a Distributions of other property . . . . . . . . . . . . . . . . . . . . . 19b Investment income . . . . . . . . . . . . . . . . . . . . . . . . . 20a Investment expenses . . . . . . . . . . . . . . . . . . . . . . . . 20b Other items and amounts (attach statement) Form 1065 (2020)

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

B-16

APPENDIX B   Tax Forms

Form 1065 (2020)

Page

5

Analysis of Net Income (Loss) 1

Net income (loss). Combine Schedule K, lines 1 through 11. From the result, subtract the sum of Schedule K, lines 12 through 13d, and 16p . . . . . . . . . . . . . . . . . . . . 1 (i) Corporate (ii) Individual (iii) Individual (iv) Partnership (v) Exempt 2 Analysis by (active) (passive) Organization partner type: a General partners b Limited partners

Schedule L

Balance Sheets per Books

Beginning of tax year (a) (b)

Assets Cash . . . . . . . . . . . . . . . . Trade notes and accounts receivable . . . . . . Less allowance for bad debts . . . . . . . . Inventories . . . . . . . . . . . . . . U.S. government obligations . . . . . . . . Tax-exempt securities . . . . . . . . . . Other current assets (attach statement) . . . . . Loans to partners (or persons related to partners) . Mortgage and real estate loans . . . . . . . Other investments (attach statement) . . . . . . Buildings and other depreciable assets . . . . . Less accumulated depreciation . . . . . . . Depletable assets . . . . . . . . . . . . Less accumulated depletion . . . . . . . . Land (net of any amortization) . . . . . . . . Intangible assets (amortizable only) . . . . . . Less accumulated amortization . . . . . . . Other assets (attach statement) . . . . . . . Total assets . . . . . . . . . . . . . . Liabilities and Capital 15 Accounts payable . . . . . . . . . . . . 16 Mortgages, notes, bonds payable in less than 1 year 17 Other current liabilities (attach statement) . . . . 18 All nonrecourse loans . . . . . . . . . . . 19a Loans from partners (or persons related to partners) . b Mortgages, notes, bonds payable in 1 year or more . 20 Other liabilities (attach statement) . . . . . . . 21 Partners’ capital accounts . . . . . . . . . 22 Total liabilities and capital . . . . . . . . .

(vi) Nominee/Other

End of tax year (c)

(d)

1 2a b 3 4 5 6 7a b 8 9a b 10a b 11 12a b 13 14

Schedule M-1

Reconciliation of Income (Loss) per Books With Income (Loss) per Return

Note: The partnership may be required to file Schedule M-3. See instructions. Net income (loss) per books . . . . 6 Income recorded on books this year not included on Schedule K, lines 1 through 11 (itemize): 2 Income included on Schedule K, lines 1, 2, 3c, a Tax-exempt interest $ 5, 6a, 7, 8, 9a, 10, and 11, not recorded on books this year (itemize): 3 Guaranteed payments (other than health 7 Deductions included on Schedule K, lines insurance) . . . . . . . . . . 1 through 13d, and 16p, not charged against book income this year (itemize): 4 Expenses recorded on books this year a Depreciation $ not included on Schedule K, lines 1 through 13d, and 16p (itemize): a Depreciation $ 8 Add lines 6 and 7 . . . . . . . . b Travel and entertainment $ 9 Income (loss) (Analysis of Net Income 5 Add lines 1 through 4 . . . . . . (Loss), line 1). Subtract line 8 from line 5

1

Schedule M-2 1 2 3 4 5

Analysis of Partners’ Capital Accounts

Balance at beginning of year . Capital contributed: a Cash . b Property Net income (loss) per books . . Other increases (itemize): Add lines 1 through 4 . . . .

. . . .

. . . .

.

.

6

. .

. .

. .

. .

7

Distributions: a Cash . . b Property . Other decreases (itemize):

8 9

Add lines 6 and 7 .

.

.

.

.

Balance at end of year. Subtract line 8 from line 5

.

.

.

Form 1065 (2020)

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

APPENDIX B  Tax Forms

B-17

651119 Final K-1

2020

Schedule K-1 (Form 1065) Department of the Treasury Internal Revenue Service

Part III Partner’s Share of Current Year Income, Deductions, Credits, and Other Items

/

2020

/

/

ending

/

Partner’s Share of Income, Deductions, ▶ See separate instructions. Credits, etc. Information About the Partnership

A

Partnership’s employer identification number

B

Partnership’s name, address, city, state, and ZIP code

C

1

Ordinary business income (loss)

2

Net rental real estate income (loss)

3

Other net rental income (loss)

4a

Guaranteed payments for services

4b

Guaranteed payments for capital

4c

Total guaranteed payments

5

Interest income

6a

Ordinary dividends

Check if this is a publicly traded partnership (PTP)

Part II

16

Foreign transactions

17

Alternative minimum tax (AMT) items

18

Tax-exempt income and nondeductible expenses

19

Distributions

20

Other information

Information About the Partner

E

Partner’s SSN or TIN (Do not use TIN of a disregarded entity. See instructions.)

6b

Qualified dividends

F

Name, address, city, state, and ZIP code for partner entered in E. See instructions.

6c

Dividend equivalents

7

Royalties

G

General partner or LLC member-manager

Limited partner or other LLC member

8

Net short-term capital gain (loss)

H1

Domestic partner

Foreign partner

9a

Net long-term capital gain (loss)

H2

If the partner is a disregarded entity (DE), enter the partner’s: 9b

Collectibles (28%) gain (loss)

9c

Unrecaptured section 1250 gain

10

Net section 1231 gain (loss)

11

Other income (loss)

12

Section 179 deduction

13

Other deductions

14

Self-employment earnings (loss)

TIN

Name

What type of entity is this partner?

I2

If this partner is a retirement plan (IRA/SEP/Keogh/etc.), check here

J

Partner’s share of profit, loss, and capital (see instructions): Beginning Ending Profit

%

Loss

%

Capital

%

% % %

Check if decrease is due to sale or exchange of partnership interest K

Credits

IRS Center where partnership filed return ▶

D

I1

15

For calendar year 2020, or tax year

beginning

Part I

OMB No. 1545-0123

Amended K-1

.

.

Partner’s share of liabilities: Beginning Nonrecourse

$

Qualified nonrecourse financing . . .

$

$

Recourse

$

$

.

.

Ending

$

.

.

.

Check this box if Item K includes liability amounts from lower tier partnerships. Partner’s Capital Account Analysis Beginning capital account

.

.

.

$

Capital contributed during the year .

.

$

Current year net income (loss) .

.

$

.

Other increase (decrease) (attach explanation) $ Withdrawals & distributions Ending capital account M

.

.

$(

.

.

.

$

)

No

If “Yes,” attach statement. See instructions.

Partner’s Share of Net Unrecognized Section 704(c) Gain or (Loss) Beginning

.

.

.

.

.

.

.

.

$

Ending .

.

.

.

.

.

.

.

.

$

For Paperwork Reduction Act Notice, see Instructions for Form 1065.

21

More than one activity for at-risk purposes*

22

More than one activity for passive activity purposes*

*See attached statement for additional information.

Did the partner contribute property with a built-in gain or loss? Yes

N

.

.

For IRS Use Only

L

www.irs.gov/Form1065

Cat. No. 11394R

Schedule K-1 (Form 1065) 2020

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

B-18

APPENDIX B   Tax Forms

1120

U.S. Corporation Income Tax Return

Form Department of the Treasury Internal Revenue Service A Check if: 1a Consolidated return (attach Form 851)

.

b Life/nonlife consoli-

dated return . . . 2 Personal holding co. (attach Sch. PH) . .

For calendar year 2020 or tax year beginning ▶

TYPE OR PRINT

OMB No. 1545-0123

, 2020, ending

2020

, 20

Go to www.irs.gov/Form1120 for instructions and the latest information.

Name

B Employer identification number

Number, street, and room or suite no. If a P.O. box, see instructions.

C Date incorporated

City or town, state or province, country, and ZIP or foreign postal code

D Total assets (see instructions)

3 Personal service corp.

$

Tax, Refundable Credits, and Payments

Deductions (See instructions for limitations on deductions.)

Income

(see instructions) . . 4 Schedule M-3 attached

E Check if: (1)

(2)

Initial return

(3)

Final return

(4)

Name change

Address change

1a

Gross receipts or sales .

.

.

.

.

.

.

.

.

.

.

.

.

.

1a

b c 2

Returns and allowances . . . . . . Balance. Subtract line 1b from line 1a . Cost of goods sold (attach Form 1125-A) .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. .

1b . . . .

. .

. .

. .

. .

. .

1c 2

3 4 5

Gross profit. Subtract line 2 from line 1c . . Dividends and inclusions (Schedule C, line 23) Interest . . . . . . . . . . .

. . .

. . .

. . .

. . .

. . .

. . .

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. . .

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. . .

. . .

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. . .

. . .

3 4 5

6 7 8

Gross rents . . . . . . . . . . . . . . Gross royalties . . . . . . . . . . . . . Capital gain net income (attach Schedule D (Form 1120)) .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

6 7 8

9 10 11 12

Net gain or (loss) from Form 4797, Part II, line 17 (attach Form 4797) Other income (see instructions—attach statement) . . . . . . Total income. Add lines 3 through 10 . . . . . . . . . Compensation of officers (see instructions—attach Form 1125-E) .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. .

9 10 11

13 14

Salaries and wages (less employment credits)

.

.

.

.

.

.

.

.

.

.

.

.

Repairs and maintenance

.

.

.

.

.

.

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.

.

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.

.

.

.

.

.

.

.

.

.

.

.

12 13 14

15 16 17

Bad debts . . . Rents . . . . Taxes and licenses

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

15 16 17

18 19 20

Interest (see instructions) . . . . . . . . . . . . . . . . . . . . . . . Charitable contributions . . . . . . . . . . . . . . . . . . . . . . . . Depreciation from Form 4562 not claimed on Form 1125-A or elsewhere on return (attach Form 4562) .

. . .

. . .

18 19 20

21 22 23

Depletion . . . . . . . . Advertising . . . . . . . Pension, profit-sharing, etc., plans

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

21 22 23

24 25 26

Employee benefit programs . . Reserved for future use . . . . Other deductions (attach statement)

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

24 25 26

27 28 29a

Total deductions. Add lines 12 through 26 . . . . . . . . . . . . . . . . . . . Taxable income before net operating loss deduction and special deductions. Subtract line 27 from line 11. Net operating loss deduction (see instructions) . . . . . . . . . . . 29a

▶

.

27 28

b c

. . .

. . .

.

.

.

.

.

.

.

.

.

.

.

30

Special deductions (Schedule C, line 24) . . . . . . . . Add lines 29a and 29b . . . . . . . . . . . . . Taxable income. Subtract line 29c from line 28. See instructions

. . .

. . .

. . .

. . .

. . .

31 32 33

Total tax (Schedule J, Part I, line 11) . . . . . . . . . . . . . . . 2020 net 965 tax liability paid (Schedule J, Part II, line 12) . . . . . . . . . Total payments, credits, and section 965 net tax liability (Schedule J, Part III, line 23) .

29b . . . .

▶ ▶

. .

. .

. .

. .

. .

29c 30

. . .

. . .

. . .

. . .

. . .

31 32 33

34 35 36

Estimated tax penalty. See instructions. Check if Form 2220 is attached . . . . . . . Amount owed. If line 33 is smaller than the total of lines 31, 32, and 34, enter amount owed . Overpayment. If line 33 is larger than the total of lines 31, 32, and 34, enter amount overpaid .

. . .

. . .

. .

. .

34 35 36

37

Enter amount from line 36 you want: Credited to 2021 estimated tax ▶

Refunded ▶

37

. . .

. . .

▶

Under penalties of perjury, I declare that I have examined this return, including accompanying schedules and statements, and to the best of my knowledge and belief, it is true, correct, and complete. Declaration of preparer (other than taxpayer) is based on all information of which preparer has any knowledge.

Date

Signature of officer

Paid Preparer Use Only

Print/Type preparer’s name

Preparer’s signature

▲

▲

Sign Here

. .

May the IRS discuss this return with the preparer shown below? See instructions. Yes No

Title Date

Check if self-employed

Firm’s name

▶

Firm’s EIN

Firm’s address

▶

Phone no.

For Paperwork Reduction Act Notice, see separate instructions.

Cat. No. 11450Q

PTIN

▶

Form 1120 (2020)

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

APPENDIX B  Tax Forms

Page 2

Form 1120 (2020)

Schedule C

Dividends, Inclusions, and Special Deductions (see instructions)

(a) Dividends and inclusions

(b) %

1

Dividends from less-than-20%-owned domestic corporations (other than debt-financed stock) . . . . . . . . . . . . . . . . . . . . . . . .

50

2

Dividends from 20%-or-more-owned domestic corporations (other than debt-financed stock) . . . . . . . . . . . . . . . . . . . . . . . .

65

3

Dividends on certain debt-financed stock of domestic and foreign corporations

4

Dividends on certain preferred stock of less-than-20%-owned public utilities

5

.

.

See instructions

.

.

.

23.3

Dividends on certain preferred stock of 20%-or-more-owned public utilities .

.

.

.

26.7

6

Dividends from less-than-20%-owned foreign corporations and certain FSCs

.

.

.

50

7

Dividends from 20%-or-more-owned foreign corporations and certain FSCs

.

.

.

65

8

Dividends from wholly owned foreign subsidiaries

.

.

.

.

.

.

.

100

9

Subtotal. Add lines 1 through 8. See instructions for limitations .

.

.

.

.

.

.

See instructions

.

.

.

.

10

Dividends from domestic corporations received by a small business investment company operating under the Small Business Investment Act of 1958 . . . . .

100

11

Dividends from affiliated group members .

.

.

.

.

.

.

.

.

.

.

.

.

.

100

12

Dividends from certain FSCs

.

.

.

.

.

.

.

.

.

.

.

.

.

100

13

Foreign-source portion of dividends received from a specified 10%-owned foreign corporation (excluding hybrid dividends) (see instructions) . . . . . . . . .

14

Dividends from foreign corporations not included on line 3, 6, 7, 8, 11, 12, or 13 (including any hybrid dividends) . . . . . . . . . . . . . . . . .

15

Section 965(a) inclusion .

16a

Subpart F inclusions derived from the sale by a controlled foreign corporation (CFC) of the stock of a lower-tier foreign corporation treated as a dividend (attach Form(s) 5471) (see instructions) . . . . . . . . . . . . . . . . . . . . .

b

Subpart F inclusions derived from hybrid dividends of tiered corporations (attach Form(s) 5471) (see instructions) . . . . . . . . . . . . . . . . . . .

c

Other inclusions from CFCs under subpart F not included on line 15, 16a, 16b, or 17 (attach Form(s) 5471) (see instructions) . . . . . . . . . . . . . . .

.

.

.

.

.

.

.

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.

.

.

.

.

.

.

.

.

Global Intangible Low-Taxed Income (GILTI) (attach Form(s) 5471 and Form 8992) .

.

18

Gross-up for foreign taxes deemed paid

19

IC-DISC and former DISC dividends not included on line 1, 2, or 3

20

Other dividends

21

Deduction for dividends paid on certain preferred stock of public utilities

22

Section 250 deduction (attach Form 8993)

23

Total dividends and inclusions. Add column (a), lines 9 through 20. Enter here and on page 1, line 4 . . . . . . . . . . . . . . . . . . . . . . Total special deductions. Add column (c), lines 9 through 22. Enter here and on page 1, line 29b .

.

.

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.

.

.

.

(c) Special deductions (a) × (b)

100

See instructions

.

17

24

B-19

100

.

.

.

.

.

. Form 1120 (2020)

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

B-20

APPENDIX B   Tax Forms Page 3

Form 1120 (2020)

Schedule J

Tax Computation and Payment (see instructions)

Part I—Tax Computation 1 2

Check if the corporation is a member of a controlled group (attach Schedule O (Form 1120)). See instructions ▶ Income tax. See instructions . . . . . . . . . . . . . . . . . . . . . . . .

3 4 5a

Base erosion minimum tax amount (attach Form 8991) . Add lines 2 and 3 . . . . . . . . . . . . Foreign tax credit (attach Form 1118) . . . . . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

Credit from Form 8834 (see instructions) . . . . General business credit (attach Form 3800) . . . Credit for prior year minimum tax (attach Form 8827)

. . .

. . .

. . .

. . .

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e 6 7

Bond credits from Form 8912 . . . Total credits. Add lines 5a through 5e Subtract line 6 from line 4 . . . .

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8 9a b

Personal holding company tax (attach Schedule PH (Form 1120)) . Recapture of investment credit (attach Form 4255) . . . . . Recapture of low-income housing credit (attach Form 8611) . .

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b c d

c

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2

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3 4

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6 7

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8

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10 11

2020 net 965 tax liability paid from Form 965-B, Part II, column (k), line 4. Enter here and on page 1, line 32

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12

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. . . . 5a 5b 5c 5d

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5e . . . . . . 9a 9b

d

Interest due under the look-back method—completed long-term contracts (attach Form 8697) . . . . . . . . . . . . . . . . . . . . . . . Interest due under the look-back method—income forecast method (attach Form 8866)

9c 9d

e f g

Alternative tax on qualifying shipping activities (attach Form 8902) Interest/tax due under Section 453A(c) and/or Section 453(l) . . Other (see instructions—attach statement) . . . . . . .

9e 9f 9g

10 11

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Total. Add lines 9a through 9g . . . . . . . . . . . . Total tax. Add lines 7, 8, and 10. Enter here and on page 1, line 31 .

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Part II—Section 965 Payments (see instructions) 12

Part III—Payments, Refundable Credits, and Section 965 Net Tax Liability 13

2019 overpayment credited to 2020

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13

14 15 16

2020 estimated tax payments . . . 2020 refund applied for on Form 4466 . Combine lines 13, 14, and 15 . . .

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14 15 ( 16

17 18 19

Tax deposited with Form 7004 . . . . Withholding (see instructions) . . . . Total payments. Add lines 16, 17, and 18

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17 18 19

Refundable credits from: Form 2439 . . . . . Form 4136 . . . . .

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21

Reserved for future use . . . . . . Other (attach statement—see instructions) Total credits. Add lines 20a through 20d .

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20c 20d . . .

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21

22

2020 net 965 tax liability from Form 965-B, Part I, column (d), line 4. See instructions .

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22

23

Total payments, credits, and section 965 net tax liability. Add lines 19, 21, and 22. Enter here and on page 1, line 33 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

20 a b c d

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)

20a 20b

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23

Form 1120 (2020)

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

B-21

APPENDIX B  Tax Forms

Page 4

Form 1120 (2020)

Schedule K

Other Information (see instructions)

1 2 a

Check accounting method: a Cash See the instructions and enter the: Business activity code no. ▶

b c 3

Business activity ▶ Product or service ▶

4

At the end of the tax year:

b

Accrual

c

Yes

Other (specify) ▶

Is the corporation a subsidiary in an affiliated group or a parent–subsidiary controlled group? If “Yes,” enter name and EIN of the parent corporation ▶

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a

Did any foreign or domestic corporation, partnership (including any entity treated as a partnership), trust, or tax-exempt organization own directly 20% or more, or own, directly or indirectly, 50% or more of the total voting power of all classes of the corporation’s stock entitled to vote? If “Yes,” complete Part I of Schedule G (Form 1120) (attach Schedule G) . . . . . .

b

Did any individual or estate own directly 20% or more, or own, directly or indirectly, 50% or more of the total voting power of all classes of the corporation’s stock entitled to vote? If “Yes,” complete Part II of Schedule G (Form 1120) (attach Schedule G) .

5

No

At the end of the tax year, did the corporation: a

Own directly 20% or more, or own, directly or indirectly, 50% or more of the total voting power of all classes of stock entitled to vote of any foreign or domestic corporation not included on Form 851, Affiliations Schedule? For rules of constructive ownership, see instructions. If “Yes,” complete (i) through (iv) below. (i) Name of Corporation

(ii) Employer Identification Number (if any)

(iv) Percentage Owned in Voting Stock

(iii) Country of Incorporation

b Own directly an interest of 20% or more, or own, directly or indirectly, an interest of 50% or more in any foreign or domestic partnership (including an entity treated as a partnership) or in the beneficial interest of a trust? For rules of constructive ownership, see instructions. If “Yes,” complete (i) through (iv) below. (i) Name of Entity

(ii) Employer Identification Number (if any)

(iii) Country of Organization

(iv) Maximum Percentage Owned in Profit, Loss, or Capital

6

During this tax year, did the corporation pay dividends (other than stock dividends and distributions in exchange for stock) in excess of the corporation’s current and accumulated earnings and profits? See sections 301 and 316 . . . . . . . . If “Yes,” file Form 5452, Corporate Report of Nondividend Distributions. See the instructions for Form 5452. If this is a consolidated return, answer here for the parent corporation and on Form 851 for each subsidiary.

7

At any time during the tax year, did one foreign person own, directly or indirectly, at least 25% of the total voting power of all classes of the corporation’s stock entitled to vote or at least 25% of the total value of all classes of the corporation’s stock? . For rules of attribution, see section 318. If “Yes,” enter: (a) Percentage owned ▶ and (b) Owner’s country ▶ (c) The corporation may have to file Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business. Enter the number of Forms 5472 attached ▶

8

10

Check this box if the corporation issued publicly offered debt instruments with original issue discount . . . . . . ▶ If checked, the corporation may have to file Form 8281, Information Return for Publicly Offered Original Issue Discount Instruments. Enter the amount of tax-exempt interest received or accrued during the tax year ▶ $ Enter the number of shareholders at the end of the tax year (if 100 or fewer) ▶

11

If the corporation has an NOL for the tax year and is electing to forego the carryback period, check here (see instructions)

9

▶

If the corporation is filing a consolidated return, the statement required by Regulations section 1.1502-21(b)(3) must be attached or the election will not be valid. 12

Enter the available NOL carryover from prior tax years (do not reduce it by any deduction reported on page 1, line 29a.) . . . . . . . . . . . . . . . . . . . . . . . . . ▶ $ Form

1120 (2020)

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

B-22

APPENDIX B   Tax Forms Page 5

Form 1120 (2020)

Schedule K 13

Other Information (continued from page 4) Yes

Are the corporation’s total receipts (page 1, line 1a, plus lines 4 through 10) for the tax year and its total assets at the end of the tax year less than $250,000? . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

No

If “Yes,” the corporation is not required to complete Schedules L, M-1, and M-2. Instead, enter the total amount of cash distributions and the book value of property distributions (other than cash) made during the tax year ▶ $ 14

Is the corporation required to file Schedule UTP (Form 1120), Uncertain Tax Position Statement? See instructions If “Yes,” complete and attach Schedule UTP.

.

.

.

.

15a b

Did the corporation make any payments in 2020 that would require it to file Form(s) 1099? If “Yes,” did or will the corporation file required Form(s) 1099? . . . . . . . . .

. .

. .

. .

. .

16

During this tax year, did the corporation have an 80%-or-more change in ownership, including a change due to redemption of its own stock? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

17

During or subsequent to this tax year, but before the filing of this return, did the corporation dispose of more than 65% (by value) of its assets in a taxable, non-taxable, or tax deferred transaction? . . . . . . . . . . . . . . . . . .

18

Did the corporation receive assets in a section 351 transfer in which any of the transferred assets had a fair market basis or fair market value of more than $1 million? . . . . . . . . . . . . . . . . . . . . . . . . . . .

19

During the corporation’s tax year, did the corporation make any payments that would require it to file Forms 1042 and 1042-S under chapter 3 (sections 1441 through 1464) or chapter 4 (sections 1471 through 1474) of the Code? . . . . . . . .

20

Is the corporation operating on a cooperative basis?.

21

During the tax year, did the corporation pay or accrue any interest or royalty for which the deduction is not allowed under section 267A? See instructions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . If “Yes,” enter the total amount of the disallowed deductions ▶ $

22

Does the corporation have gross receipts of at least $500 million in any of the 3 preceding tax years? (See sections 59A(e)(2) and (3)) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . If “Yes,” complete and attach Form 8991.

23

Did the corporation have an election under section 163(j) for any real property trade or business or any farming business in effect during the tax year? See instructions . . . . . . . . . . . . . . . . . . . . . . . . . . .

24 a b c 25

26

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Does the corporation satisfy one or more of the following? See instructions . . . . . . . . . . . . . The corporation owns a pass-through entity with current, or prior year carryover, excess business interest expense.

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.

The corporation’s aggregate average annual gross receipts (determined under section 448(c)) for the 3 tax years preceding the current tax year are more than $26 million and the corporation has business interest expense. The corporation is a tax shelter and the corporation has business interest expense. If “Yes,” complete and attach Form 8990. Is the corporation attaching Form 8996 to certify as a Qualified Opportunity Fund? . . . . . . . . . . . . . . If “Yes,” enter amount from Form 8996, line 15 . . . . ▶ $ Since December 22, 2017, did a foreign corporation directly or indirectly acquire substantially all of the properties held directly or indirectly by the corporation, and was the ownership percentage (by vote or value) for purposes of section 7874 greater than 50% (for example, the shareholders held more than 50% of the stock of the foreign corporation)? If “Yes,” list the ownership percentage by vote and by value. See instructions . . . . . . . . . . . . . . . . . . . . . . . Percentage: By Vote By Value Form

1120 (2020)

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

B-23

APPENDIX B  Tax Forms

Page 6

Form 1120 (2020)

Schedule L

Balance Sheets per Books

Beginning of tax year (a) (b)

Assets 1

Cash

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2a b 3 4 5 6 7 8 9 10a b 11a b 12 13a b 14 15

Trade notes and accounts receivable . Less allowance for bad debts . . . Inventories . . . . . . . . . U.S. government obligations . . . Tax-exempt securities (see instructions) Other current assets (attach statement) Loans to shareholders . . . . . Mortgage and real estate loans . . . Other investments (attach statement) . Buildings and other depreciable assets Less accumulated depreciation . . . Depletable assets . . . . . . . Less accumulated depletion . . . . Land (net of any amortization) . . . Intangible assets (amortizable only) . Less accumulated amortization . . . Other assets (attach statement) . . . Total assets . . . . . . . .

. . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . .

16 17 18 19 20 21 22

Accounts payable . . . . . . . . . Mortgages, notes, bonds payable in less than 1 year Other current liabilities (attach statement) . . Loans from shareholders . . . . . . . Mortgages, notes, bonds payable in 1 year or more Other liabilities (attach statement) . . . .

End of tax year (c)

(d)

(

)

(

)

(

)

(

)

(

)

(

)

(

)

(

)

Liabilities and Shareholders’ Equity

a Preferred stock . . . . b Common stock . . . . Additional paid-in capital . . . . . . . Retained earnings—Appropriated (attach statement) Retained earnings—Unappropriated . . . Adjustments to shareholders’ equity (attach statement) Less cost of treasury stock . . . . . . Total liabilities and shareholders’ equity . . Capital stock:

23 24 25 26 27 28

Schedule M-1

(

)

(

)

Reconciliation of Income (Loss) per Books With Income per Return Note: The corporation may be required to file Schedule M-3. See instructions.

1

Net income (loss) per books .

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2

Federal income tax per books

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3

Excess of capital losses over capital gains

4

Income subject to tax not recorded on books this year (itemize):

5

Expenses recorded on books this year not deducted on this return (itemize): Depreciation . . . . $ Charitable contributions . $ Travel and entertainment . $

a b c 6

Add lines 1 through 5 .

Schedule M-2 1 2 3

4

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7

Income recorded on books this year not included on this return (itemize): Tax-exempt interest $

8

Deductions on this return not charged against book income this year (itemize): a Depreciation . . $ b Charitable contributions $

9 10

Add lines 7 and 8 . . . . . . Income (page 1, line 28)—line 6 less line 9

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.

Analysis of Unappropriated Retained Earnings per Books (Schedule L, Line 25)

Balance at beginning of year Net income (loss) per books . Other increases (itemize):

Add lines 1, 2, and 3 .

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5

6 7 8

Distributions: a Cash . . b Stock . c Property . Other decreases (itemize):

. . .

. . .

. . .

Add lines 5 and 6 . . . . . . Balance at end of year (line 4 less line 7) Form 1120 (2020)

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

B-24 Form

APPENDIX B   Tax Forms

1120-S

U.S. Income Tax Return for an S Corporation

OMB No. 1545-0123

Do not file this form unless the corporation has filed or is attaching Form 2553 to elect to be an S corporation. ▶ Go to www.irs.gov/Form1120S for instructions and the latest information.

2020

▶

Department of the Treasury Internal Revenue Service

For calendar year 2020 or tax year beginning A S election effective date

TYPE OR PRINT

B Business activity code number (see instructions)

, 2020, ending

D Employer identification number

Number, street, and room or suite no. If a P.O. box, see instructions.

E Date incorporated

City or town, state or province, country, and ZIP or foreign postal code C Check if Sch. M-3 attached

G H I J

, 20

Name

F Total assets (see instructions) $

Is the corporation electing to be an S corporation beginning with this tax year? Yes No If “Yes,” attach Form 2553 if not already filed Check if: (1) Final return (2) Name change (3) Address change (4) Amended return (5) S election termination or revocation Enter the number of shareholders who were shareholders during any part of the tax year . . . . . . . . ▶ Check if corporation: (1) Aggregated activities for section 465 at-risk purposes (2) Grouped activities for section 469 passive activity purposes

Caution: Include only trade or business income and expenses on lines 1a through 21. See the instructions for more information.

1a

Tax and Payments

Deductions (see instructions for limitations)

Income

b

c 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22a b c 23a b c d e 24 25 26 27

1c 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21

22c

23e 24 25 26 27

Under penalties of perjury, I declare that I have examined this return, including accompanying schedules and statements, and to the best of my knowledge and belief, it is true, correct, and complete. Declaration of preparer (other than taxpayer) is based on all information of which preparer has any knowledge.

Paid Preparer Use Only

Signature of officer Print/Type preparer’s name Firm’s name

Date Preparer’s signature

▲

▲

Sign Here

Gross receipts or sales . . . . . . . . . . . . . . . . 1a Returns and allowances . . . . . . . . . . . . . . . . 1b Balance. Subtract line 1b from line 1a . . . . . . . . . . . . . . . . . . . . Cost of goods sold (attach Form 1125-A) . . . . . . . . . . . . . . . . . . . Gross profit. Subtract line 2 from line 1c . . . . . . . . . . . . . . . . . . . Net gain (loss) from Form 4797, line 17 (attach Form 4797) . . . . . . . . . . . . . Other income (loss) (see instructions—attach statement) . . . . . . . . . . . . . . Total income (loss). Add lines 3 through 5 . . . . . . . . . . . . . . . . . ▶ Compensation of officers (see instructions—attach Form 1125-E) . . . . . . . . . . . Salaries and wages (less employment credits) . . . . . . . . . . . . . . . . . Repairs and maintenance . . . . . . . . . . . . . . . . . . . . . . . . Bad debts . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Taxes and licenses . . . . . . . . . . . . . . . . . . . . . . . . . . Interest (see instructions) . . . . . . . . . . . . . . . . . . . . . . . . Depreciation not claimed on Form 1125-A or elsewhere on return (attach Form 4562) . . . . . Depletion (Do not deduct oil and gas depletion.) . . . . . . . . . . . . . . . . Advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pension, profit-sharing, etc., plans . . . . . . . . . . . . . . . . . . . . . Employee benefit programs . . . . . . . . . . . . . . . . . . . . . . . Other deductions (attach statement) . . . . . . . . . . . . . . . . . . . . Total deductions. Add lines 7 through 19 . . . . . . . . . . . . . . . . . ▶ Ordinary business income (loss). Subtract line 20 from line 6 . . . . . . . . . . . . Excess net passive income or LIFO recapture tax (see instructions) . . . 22a Tax from Schedule D (Form 1120-S) . . . . . . . . . . . . 22b Add lines 22a and 22b (see instructions for additional taxes) . . . . . . . . . . . . . 2020 estimated tax payments and 2019 overpayment credited to 2020 . 23a Tax deposited with Form 7004 . . . . . . . . . . . . . . 23b Credit for federal tax paid on fuels (attach Form 4136) . . . . . . . 23c Reserved for future use . . . . . . . . . . . . . . . . 23d Add lines 23a through 23d . . . . . . . . . . . . . . . . . . . . . . . Estimated tax penalty (see instructions). Check if Form 2220 is attached . . . . . . . ▶ Amount owed. If line 23e is smaller than the total of lines 22c and 24, enter amount owed . . . Overpayment. If line 23e is larger than the total of lines 22c and 24, enter amount overpaid . . . Enter amount from line 26: Credited to 2021 estimated tax ▶ Refunded ▶

May the IRS discuss this return with the preparer shown below? Yes No See instructions.

Title Date

Check if self-employed

▶

Firm’s EIN

Firm’s address ▶

Phone no.

For Paperwork Reduction Act Notice, see separate instructions.

Cat. No. 11510H

PTIN

▶

Form 1120-S (2020)

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

B-25

APPENDIX B  Tax Forms Form 1120-S (2020)

Schedule B 1

Page

a c See the instructions and enter the: a Business activity ▶ Check accounting method:

2 3

2

Other Information (see instructions) Yes No

Cash b Accrual Other (specify) ▶ b Product or service ▶

At any time during the tax year, was any shareholder of the corporation a disregarded entity, a trust, an estate, or a nominee or similar person? If “Yes,” attach Schedule B-1, Information on Certain Shareholders of an S Corporation . .

4

At the end of the tax year, did the corporation: a

Own directly 20% or more, or own, directly or indirectly, 50% or more of the total stock issued and outstanding of any foreign or domestic corporation? For rules of constructive ownership, see instructions. If “Yes,” complete (i) through (v) below . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (i) Name of Corporation

b

b

6

(iii) Country of Incorporation

(iv) Percentage of Stock Owned

(v) If Percentage in (iv) Is 100%, Enter the Date (if any) a Qualified Subchapter S Subsidiary Election Was Made

Own directly an interest of 20% or more, or own, directly or indirectly, an interest of 50% or more in the profit, loss, or capital in any foreign or domestic partnership (including an entity treated as a partnership) or in the beneficial interest of a trust? For rules of constructive ownership, see instructions. If “Yes,” complete (i) through (v) below . . . . . . . (i) Name of Entity

5a

(ii) Employer Identification Number (if any)

(ii) Employer Identification Number (if any)

(iii) Type of Entity

(iv) Country of Organization

(v) Maximum Percentage Owned in Profit, Loss, or Capital

At the end of the tax year, did the corporation have any outstanding shares of restricted stock? . . . . . . . If “Yes,” complete lines (i) and (ii) below. (i) Total shares of restricted stock . . . . . . . . . . ▶ (ii) Total shares of non-restricted stock . . . . . . . . . ▶ At the end of the tax year, did the corporation have any outstanding stock options, warrants, or similar instruments? If “Yes,” complete lines (i) and (ii) below. (i) Total shares of stock outstanding at the end of the tax year . ▶ (ii) Total shares of stock outstanding if all instruments were executed ▶

.

.

Has this corporation filed, or is it required to file, Form 8918, Material Advisor Disclosure Statement, to provide information on any reportable transaction? . . . . . . . . . . . . . . . . . . . . . . . . Check this box if the corporation issued publicly offered debt instruments with original issue discount . . . . ▶

7

If checked, the corporation may have to file Form 8281, Information Return for Publicly Offered Original Issue Discount Instruments. 8

If the corporation (a) was a C corporation before it elected to be an S corporation or the corporation acquired an asset with a basis determined by reference to the basis of the asset (or the basis of any other property) in the hands of a C corporation, and (b) has net unrealized built-in gain in excess of the net recognized built-in gain from prior years, enter the net unrealized built-in gain reduced by net recognized built-in gain from prior years. See instructions . . . . . . ▶ $

9

Did the corporation have an election under section 163(j) for any real property trade or business or any farming business in effect during the tax year? See instructions . . . . . . . . . . . . . . . . . . . . . . . . Does the corporation satisfy one or more of the following? See instructions . . . . . . . . . . . . . . The corporation owns a pass-through entity with current, or prior year carryover, excess business interest expense.

10 a b c 11 a b

The corporation’s aggregate average annual gross receipts (determined under section 448(c)) for the 3 tax years preceding the current tax year are more than $26 million and the corporation has business interest expense. The corporation is a tax shelter and the corporation has business interest expense. If “Yes,” complete and attach Form 8990. Does the corporation satisfy both of the following conditions? . . . . . . . . . . . . . . . . . . The corporation’s total receipts (see instructions) for the tax year were less than $250,000. The corporation’s total assets at the end of the tax year were less than $250,000. If “Yes,” the corporation is not required to complete Schedules L and M-1. Form 1120-S (2020)

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

B-26

APPENDIX B   Tax Forms

Form 1120-S (2020)

Schedule B 12

13 14a b 15

Income (Loss) Deductions Credits

Yes

During the tax year, did the corporation have any non-shareholder debt that was canceled, was forgiven, or had terms modified so as to reduce the principal amount of the debt? . . . . . . . . . . . . . . . . If “Yes,” enter the amount of principal reduction . . . . . . . . . . . . . . ▶ $ During the tax year, was a qualified subchapter S subsidiary election terminated or revoked? If “Yes,” see instructions Did the corporation make any payments in 2020 that would require it to file Form(s) 1099? . . . . . . . . . If “Yes,” did the corporation file or will it file required Form(s) 1099? . . . . . . . . . . . . . . . . Is the corporation attaching Form 8996 to certify as a Qualified Opportunity Fund? . . . . . . . . . . . If “Yes,” enter the amount from Form 8996, line 15 . . . . . . . . . . . . . ▶ $

Schedule K

Foreign Transactions

Page

Other Information (see instructions) (continued)

1 2 3a b c 4 5

Shareholders’ Pro Rata Share Items

Ordinary business income (loss) (page 1, line 21) . . . . . . . . . . . . . Net rental real estate income (loss) (attach Form 8825) . . . . . . . . . . . Other gross rental income (loss) . . . . . . . . . . . . 3a Expenses from other rental activities (attach statement) . . . . 3b Other net rental income (loss). Subtract line 3b from line 3a . . . . . . . . . Interest income . . . . . . . . . . . . . . . . . . . . . . . Dividends: a Ordinary dividends . . . . . . . . . . . . . . . . . . b Qualified dividends . . . . . . . . . . . . 5b 6 Royalties . . . . . . . . . . . . . . . . . . . . . . . . . 7 Net short-term capital gain (loss) (attach Schedule D (Form 1120-S)) . . . . . . 8a Net long-term capital gain (loss) (attach Schedule D (Form 1120-S)) . . . . . . . b Collectibles (28%) gain (loss) . . . . . . . . . . . . . 8b c Unrecaptured section 1250 gain (attach statement) . . . . . . 8c 9 Net section 1231 gain (loss) (attach Form 4797) . . . . . . . . . . . . . 10 Other income (loss) (see instructions) . . . Type ▶ 11 Section 179 deduction (attach Form 4562) . . . . . . . . . . . . . . . 12a Charitable contributions . . . . . . . . . . . . . . . . . . . . b Investment interest expense . . . . . . . . . . . . . . . . . . . c Section 59(e)(2) expenditures . . . . . . Type ▶ d Other deductions (see instructions) . . . . Type ▶ 13a Low-income housing credit (section 42(j)(5)) . . . . . . . . . . . . . . b Low-income housing credit (other) . . . . . . . . . . . . . . . . . c Qualified rehabilitation expenditures (rental real estate) (attach Form 3468, if applicable) d Other rental real estate credits (see instructions) Type ▶ e Other rental credits (see instructions) . . . Type ▶ f Biofuel producer credit (attach Form 6478) . . . . . . . . . . . . . . g Other credits (see instructions) . . . . . Type ▶ 14a Name of country or U.S. possession ▶ b Gross income from all sources . . . . . . . . . . . . . . . . . . c Gross income sourced at shareholder level . . . . . . . . . . . . . . Foreign gross income sourced at corporate level d Reserved for future use . . . . . . . . . . . . . . . . . . . . . e Foreign branch category . . . . . . . . . . . . . . . . . . . . f Passive category . . . . . . . . . . . . . . . . . . . . . . g General category . . . . . . . . . . . . . . . . . . . . . . h Other (attach statement) . . . . . . . . . . . . . . . . . . . . Deductions allocated and apportioned at shareholder level i Interest expense . . . . . . . . . . . . . . . . . . . . . . . j Other . . . . . . . . . . . . . . . . . . . . . . . . . . Deductions allocated and apportioned at corporate level to foreign source income k Reserved for future use . . . . . . . . . . . . . . . . . . . . . l Foreign branch category . . . . . . . . . . . . . . . . . . . . m Passive category . . . . . . . . . . . . . . . . . . . . . . n General category . . . . . . . . . . . . . . . . . . . . . . o Other (attach statement) . . . . . . . . . . . . . . . . . . . . Other information p Total foreign taxes (check one): Paid Accrued . . . . . . . . . . q Reduction in taxes available for credit (attach statement) . . . . . . . . . . r Other foreign tax information (attach statement)

3

No

the . . . . .

Total amount

. .

. .

1 2

. . .

. . .

3c 4 5a

. . .

. . .

6 7 8a

.

.

. . .

. . .

. . .

. . .

.

.

9 10 11 12a 12b 12c 12d 13a 13b 13c 13d 13e 13f 13g

. .

. .

14b 14c

. . . . .

. . . . .

14d 14e 14f 14g 14h

. .

. .

14i 14j

. . . . .

. . . . .

14k 14l 14m 14n 14o

. .

▶

14p 14q

.

Form 1120-S (2020)

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

B-27

APPENDIX B  Tax Forms Form 1120-S (2020)

ReconOther ciliation Information

Items Affecting Shareholder Basis

Alternative Minimum Tax (AMT) Items

Schedule K

Post-1986 depreciation adjustment . . . . . . . . . . Adjusted gain or loss . . . . . . . . . . . . . . Depletion (other than oil and gas) . . . . . . . . . . Oil, gas, and geothermal properties—gross income . . . . . Oil, gas, and geothermal properties—deductions . . . . . . Other AMT items (attach statement) . . . . . . . . . . Tax-exempt interest income . . . . . . . . . . . . Other tax-exempt income . . . . . . . . . . . . . Nondeductible expenses . . . . . . . . . . . . . Distributions (attach statement if required) (see instructions) . . Repayment of loans from shareholders . . . . . . . . . Investment income . . . . . . . . . . . . . . . Investment expenses . . . . . . . . . . . . . . Dividend distributions paid from accumulated earnings and profits Other items and amounts (attach statement)

18

Income (loss) reconciliation. Combine the amounts on lines 1 through 10 in the far right column. From the result, subtract the sum of the amounts on lines 11 through 12d and 14p .

16 17 18 19 20 21 22 23 24 25 26 27

Balance Sheets per Books

Assets Cash . . . . . . . . . . . . . Trade notes and accounts receivable . . . Less allowance for bad debts . . . . . . Inventories . . . . . . . . . . . U.S. government obligations . . . . . . Tax-exempt securities (see instructions) . . Other current assets (attach statement) . . . Loans to shareholders . . . . . . . . Mortgage and real estate loans . . . . . Other investments (attach statement) . . . Buildings and other depreciable assets . . . Less accumulated depreciation . . . . . Depletable assets . . . . . . . . . Less accumulated depletion . . . . . . Land (net of any amortization) . . . . . . Intangible assets (amortizable only) . . . . Less accumulated amortization . . . . . Other assets (attach statement) . . . . . Total assets . . . . . . . . . . . Liabilities and Shareholders’ Equity Accounts payable . . . . . . . . . Mortgages, notes, bonds payable in less than 1 year Other current liabilities (attach statement) . . Loans from shareholders . . . . . . . Mortgages, notes, bonds payable in 1 year or more Other liabilities (attach statement) . . . . Capital stock . . . . . . . . . . . Additional paid-in capital . . . . . . . Retained earnings . . . . . . . . . Adjustments to shareholders’ equity (attach statement) Less cost of treasury stock . . . . . . Total liabilities and shareholders’ equity . .

4

Total amount

15a b c d e f 16a b c d e 17a b c d

Schedule L 1 2a b 3 4 5 6 7 8 9 10a b 11a b 12 13a b 14 15

Page

Shareholders’ Pro Rata Share Items (continued) . . . . . . . . . . . . . .

. . . . . . . . . . . . . .

. . . . . . . . . . . . . .

. . . . . . . . . . . . . .

. . . . . . . . . . . . . .

. . . . . . . . . . . . . .

. . . . . . . . . . . . . .

. . . . . . . . . . . . . .

. . . . . . . . . . . . . .

Beginning of tax year (a)

15a 15b 15c 15d 15e 15f 16a 16b 16c 16d 16e 17a 17b 17c

18 End of tax year

(b)

(c)

(d)

(

)

(

)

(

)

(

)

(

)

(

)

(

)

(

)

(

)

(

) Form 1120-S (2020)

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

B-28

APPENDIX B   Tax Forms

Form 1120-S (2020)

Schedule M-1

Page

5

Reconciliation of Income (Loss) per Books With Income (Loss) per Return Note: The corporation may be required to file Schedule M-3. See instructions.

1

Net income (loss) per books

2

Income included on Schedule K, lines 1, 2, 3c, 4, 5a, 6, 7, 8a, 9, and 10, not recorded on books this year (itemize)

3

4

.

.

.

.

5

a 6

a

Expenses recorded on books this year not included on Schedule K, lines 1 through 12 and 14p (itemize): Depreciation $

b

Travel and entertainment $

7 8

Add lines 1 through 3

Schedule M-2

.

.

.

.

.

Income recorded on books this year not included on Schedule K, lines 1 through 10 (itemize): Tax-exempt interest $ Deductions included on Schedule K, lines 1 through 12 and 14p, not charged against book income this year (itemize): Depreciation $

a

Add lines 5 and 6 . . . . . . . Income (loss) (Schedule K, line 18). Subtract line 7 from line 4 . . . .

.

Analysis of Accumulated Adjustments Account, Shareholders’ Undistributed Taxable Income Previously Taxed, Accumulated Earnings and Profits, and Other Adjustments Account (see instructions) (a) Accumulated adjustments account

1 2 3 4 5 6 7

Balance at beginning of tax year . . Ordinary income from page 1, line 21 Other additions . . . . . . . Loss from page 1, line 21 . . . . Other reductions . . . . . . . Combine lines 1 through 5 . . . . Distributions . . . . . . . .

8

Balance at end of tax year. Subtract line 7 from line 6 . . . . . . . . . . . . .

. . . . . . .

. . . . . . .

. . . . . . .

( (

(b) Shareholders’ undistributed taxable income previously taxed

) )

(c) Accumulated earnings and profits

(d) Other adjustments account

(

)

Form 1120-S (2020)

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

APPENDIX B  Tax Forms

B-29

671120

2020

Schedule K-1 (Form 1120-S) Department of the Treasury Internal Revenue Service /

beginning

/

Part III Shareholder’s Share of Current Year Income, Deductions, Credits, and Other Items

For calendar year 2020, or tax year

Ordinary business income (loss)

/

2

Net rental real estate income (loss)

3

Other net rental income (loss)

4

Interest income

2020

ending

/

Information About the Corporation

A

Corporation’s employer identification number

5a Ordinary dividends

B

Corporation’s name, address, city, state, and ZIP code

5b Qualified dividends

C

6

Royalties

7

Net short-term capital gain (loss)

D

Shareholder’s identifying number

8c Unrecaptured section 1250 gain

E

Shareholder’s name, address, city, state, and ZIP code

9

Current year allocation percentage .

G

Shareholder’s number of shares Beginning of tax year End of tax year

H

.

.

Credits

14

Foreign transactions

8b Collectibles (28%) gain (loss)

Information About the Shareholder

F

13

8a Net long-term capital gain (loss)

IRS Center where corporation filed return

Part II

OMB No. 1545-0123

Amended K-1

1

Shareholder’s Share of Income, Deductions, ▶ See separate instructions. Credits, etc. Part I

Final K-1

.

.

.

.

.

.

.

.

.

.

.

.

Net section 1231 gain (loss)

10

Other income (loss)

15

Alternative minimum tax (AMT) items

11

Section 179 deduction

16

Items affecting shareholder basis

12

Other deductions

17

Other information

%

Loans from shareholder Beginning of tax year .

.

.

.

.

.

$

.

.

.

.

.

$

For IRS Use Only

End of tax year

.

18

More than one activity for at-risk purposes*

19

More than one activity for passive activity purposes*

* See attached statement for additional information. For Paperwork Reduction Act Notice, see the Instructions for Form 1120-S.

www.irs.gov/Form1120S

Cat. No. 11520D

Schedule K-1 (Form 1120-S) 2020

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

B-30

Form

APPENDIX B   Tax Forms

4562

Depreciation and Amortization ▶ Attach

▶ Go

to your tax return. to www.irs.gov/Form4562 for instructions and the latest information.

Name(s) shown on return

1 2 3 4 5

Attachment Sequence No. 179 Identifying number

Business or activity to which this form relates

Election To Expense Certain Property Under Section 179 Note: If you have any listed property, complete Part V before you complete Part I.

Maximum amount (see instructions) . . . . . . . . . . . . . . . . . . Total cost of section 179 property placed in service (see instructions) . . . . . . Threshold cost of section 179 property before reduction in limitation (see instructions) . Reduction in limitation. Subtract line 3 from line 2. If zero or less, enter -0- . . . . . Dollar limitation for tax year. Subtract line 4 from line 1. If zero or less, enter -0-. If separately, see instructions . . . . . . . . . . . . . . . . . . . .

6

2020

(Including Information on Listed Property)

Department of the Treasury Internal Revenue Service (99)

Part I

OMB No. 1545-0172

(a) Description of property

(b) Cost (business use only)

. . . . . . . . . . . . married . . .

. . . . . . . . filing . .

1 2 3 4 5

(c) Elected cost

7 Listed property. Enter the amount from line 29 . . . . . . . . . 7 8 Total elected cost of section 179 property. Add amounts in column (c), lines 6 and 7 . . . . . . 8 9 Tentative deduction. Enter the smaller of line 5 or line 8 . . . . . . . . . . . . . . . . 9 10 Carryover of disallowed deduction from line 13 of your 2019 Form 4562 . . . . . . . . . . . 10 11 Business income limitation. Enter the smaller of business income (not less than zero) or line 5. See instructions 11 12 Section 179 expense deduction. Add lines 9 and 10, but don’t enter more than line 11 . . . . . . 12 13 13 Carryover of disallowed deduction to 2021. Add lines 9 and 10, less line 12 ▶ Note: Don’t use Part II or Part III below for listed property. Instead, use Part V. Part II Special Depreciation Allowance and Other Depreciation (Don’t include listed property. See instructions.) 14 Special depreciation allowance for qualified property (other than listed property) placed in service during the tax year. See instructions . . . . . . . . . . . . . . . . . . . . . . . 14 15 Property subject to section 168(f)(1) election . . . . . . . . . . . . . . . . . . . . 15 16 Other depreciation (including ACRS) . . . . . . . . . . . . . . . . . . . . . . 16 Part III MACRS Depreciation (Don’t include listed property. See instructions.) Section A 17 17 MACRS deductions for assets placed in service in tax years beginning before 2020 . . . . . . . 18 If you are electing to group any assets placed in service during the tax year into one or more general asset accounts, check here . . . . . . . . . . . . . . . . . . . . . . ▶ Section B—Assets Placed in Service During 2020 Tax Year Using the General Depreciation System (a) Classification of property

19a b c d e f g h i

20a b c d

(b) Month and year placed in service

(c) Basis for depreciation (business/investment use only—see instructions)

(d) Recovery period

(e) Convention

(f) Method

(g) Depreciation deduction

3-year property 5-year property 7-year property 10-year property 15-year property 20-year property 25 yrs. S/L 25-year property 27.5 yrs. MM S/L Residential rental 27.5 yrs. MM S/L property 39 yrs. MM S/L Nonresidential real MM S/L property Section C—Assets Placed in Service During 2020 Tax Year Using the Alternative Depreciation System S/L Class life 12 yrs. S/L 12-year 30 yrs. MM S/L 30-year 40 yrs. MM S/L 40-year

Part IV

Summary (See instructions.)

21 Listed property. Enter amount from line 28 . . . . . . . . . . . . . . . . . . . . 22 Total. Add amounts from line 12, lines 14 through 17, lines 19 and 20 in column (g), and line 21. Enter here and on the appropriate lines of your return. Partnerships and S corporations—see instructions . 23 For assets shown above and placed in service during the current year, enter the portion of the basis attributable to section 263A costs . . . . . . . . . 23 For Paperwork Reduction Act Notice, see separate instructions.

Cat. No. 12906N

21 22

Form 4562 (2020)

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

B-31

APPENDIX B  Tax Forms

Page 2 Listed Property (Include automobiles, certain other vehicles, certain aircraft, and property used for entertainment, recreation, or amusement.)

Form 4562 (2020)

Part V

Note: For any vehicle for which you are using the standard mileage rate or deducting lease expense, complete only 24a, 24b, columns (a) through (c) of Section A, all of Section B, and Section C if applicable. Section A—Depreciation and Other Information (Caution: See the instructions for limits for passenger automobiles.) 24a Do you have evidence to support the business/investment use claimed? 24b If “Yes,” is the evidence written? Yes No Yes No (c) (a) (b) Business/ (d) Type of property (list Date placed investment use Cost or other basis vehicles first) in service percentage

(e) Basis for depreciation (business/investment use only)

(f) Recovery period

(g) Method/ Convention

(h) Depreciation deduction

(i) Elected section 179 cost

25 Special depreciation allowance for qualified listed property placed in service during the tax year and used more than 50% in a qualified business use. See instructions .

25 26 Property used more than 50% in a qualified business use: % % % 27 Property used 50% or less in a qualified business use: S/L – % S/L – % S/L – % 28 Add amounts in column (h), lines 25 through 27. Enter here and on line 21, page 1 . 28 29 Add amounts in column (i), line 26. Enter here and on line 7, page 1 . . . . . . . . . . . . 29 Section B—Information on Use of Vehicles Complete this section for vehicles used by a sole proprietor, partner, or other “more than 5% owner,” or related person. If you provided vehicles to your employees, first answer the questions in Section C to see if you meet an exception to completing this section for those vehicles. (a) Vehicle 1

30 Total business/investment miles driven during the year (don’t include commuting miles) .

(b) Vehicle 2

(c) Vehicle 3

(d) Vehicle 4

(e) Vehicle 5

(f) Vehicle 6

31 Total commuting miles driven during the year 32 Total other personal (noncommuting) miles driven . . . . . . . . . 33 Total miles driven during the year. Add lines 30 through 32 . . . . . . . 34 Was the vehicle available for personal use during off-duty hours? . . . . . 35 Was the vehicle used primarily by a more than 5% owner or related person? . .

Yes

No

Yes

No

Yes

No

Yes

No

Yes

No

Yes

No

36 Is another vehicle available for personal use? Section C—Questions for Employers Who Provide Vehicles for Use by Their Employees Answer these questions to determine if you meet an exception to completing Section B for vehicles used by employees who aren’t more than 5% owners or related persons. See instructions. Yes No 37 Do you maintain a written policy statement that prohibits all personal use of vehicles, including commuting, by your employees? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Do you maintain a written policy statement that prohibits personal use of vehicles, except commuting, by your employees? See the instructions for vehicles used by corporate officers, directors, or 1% or more owners . . 39 Do you treat all use of vehicles by employees as personal use? . . . . . . . . . . . . . . . . 40 Do you provide more than five vehicles to your employees, obtain information from your employees about the use of the vehicles, and retain the information received? . . . . . . . . . . . . . . . . . . . 41 Do you meet the requirements concerning qualified automobile demonstration use? See instructions. . . . . Note: If your answer to 37, 38, 39, 40, or 41 is “Yes,” don’t complete Section B for the covered vehicles.

Part VI

Amortization (a) Description of costs

(b) Date amortization begins

(c) Amortizable amount

(e) Amortization period or percentage

(d) Code section

(f) Amortization for this year

42 Amortization of costs that begins during your 2020 tax year (see instructions):

43 Amortization of costs that began before your 2020 tax year . . . . . . 44 Total. Add amounts in column (f). See the instructions for where to report .

. .

. .

. .

. .

. .

. .

. .

43 44 Form 4562 (2020)

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

B-32

Form

APPENDIX B   Tax Forms

4797

Sales of Business Property

OMB No. 1545-0184

Department of the Treasury Internal Revenue Service

Attach to your tax return. Go to www.irs.gov/Form4797 for instructions and the latest information. ▶

▶

Attachment Sequence No.

Enter the gross proceeds from sales or exchanges reported to you for 2020 on Form(s) 1099-B or 1099-S (or substitute statement) that you are including on line 2, 10, or 20. See instructions . . . . . . . . . . .

Part I

1

Sales or Exchanges of Property Used in a Trade or Business and Involuntary Conversions From Other Than Casualty or Theft—Most Property Held More Than 1 Year (see instructions) (a) Description of property

2

27

Identifying number

Name(s) shown on return 1

2020

(Also Involuntary Conversions and Recapture Amounts Under Sections 179 and 280F(b)(2))

(b) Date acquired (mo., day, yr.)

(c) Date sold (mo., day, yr.)

(e) Depreciation allowed or allowable since acquisition

(d) Gross sales price

(f) Cost or other basis, plus improvements and expense of sale

3 4

Gain, if any, from Form 4684, line 39 . . . . . . . . . . . Section 1231 gain from installment sales from Form 6252, line 26 or 37 .

. .

. .

. .

. .

. .

. .

. .

3 4

5 6 7

Section 1231 gain or (loss) from like-kind exchanges from Form 8824 . . . . . . . . Gain, if any, from line 32, from other than casualty or theft . . . . . . . . . . . Combine lines 2 through 6. Enter the gain or (loss) here and on the appropriate line as follows .

. . .

. . .

. . .

. . .

. . .

. . .

5 6 7

. .

. .

. .

. .

. .

. .

(g) Gain or (loss) Subtract (f) from the sum of (d) and (e)

Partnerships and S corporations. Report the gain or (loss) following the instructions for Form 1065, Schedule K, line 10, or Form 1120-S, Schedule K, line 9. Skip lines 8, 9, 11, and 12 below.

8 9

Individuals, partners, S corporation shareholders, and all others. If line 7 is zero or a loss, enter the amount from line 7 on line 11 below and skip lines 8 and 9. If line 7 is a gain and you didn’t have any prior year section 1231 losses, or they were recaptured in an earlier year, enter the gain from line 7 as a long-term capital gain on the Schedule D filed with your return and skip lines 8, 9, 11, and 12 below. Nonrecaptured net section 1231 losses from prior years. See instructions . . . . . . . . . . . . .

8

Subtract line 8 from line 7. If zero or less, enter -0-. If line 9 is zero, enter the gain from line 7 on line 12 below. If line 9 is more than zero, enter the amount from line 8 on line 12 below and enter the gain from line 9 as a long-term capital gain on the Schedule D filed with your return. See instructions . . . . . . . . . . . . . .

9

Part II

Ordinary Gains and Losses (see instructions)

10

Ordinary gains and losses not included on lines 11 through 16 (include property held 1 year or less):

11 12

Loss, if any, from line 7 . . . . . . . . . . . Gain, if any, from line 7 or amount from line 8, if applicable

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

11 ( 12

13 14 15

Gain, if any, from line 31 . . . . . . . . . . . . . Net gain or (loss) from Form 4684, lines 31 and 38a . . . . . Ordinary gain from installment sales from Form 6252, line 25 or 36 .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

13 14 15

16 17

Ordinary gain or (loss) from like-kind exchanges from Form 8824 Combine lines 10 through 16 . . . . . . . . . . .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

16 17

18

For all except individual returns, enter the amount from line 17 on the appropriate line of your return and skip lines a and b below. For individual returns, complete lines a and b below.

. .

. .

. .

a If the loss on line 11 includes a loss from Form 4684, line 35, column (b)(ii), enter that part of the loss here. Enter the loss from income-producing property on Schedule A (Form 1040), line 16. (Do not include any loss on property used as an employee.) Identify as from “Form 4797, line 18a.” See instructions . . . . . . . . . . . . . . . .

18a

b Redetermine the gain or (loss) on line 17 excluding the loss, if any, on line 18a. Enter here and on Schedule 1 (Form 1040), Part I, line 4 . . . . . . . . . . . . . . . . . . . . . . . . . . .

18b

For Paperwork Reduction Act Notice, see separate instructions.

Cat. No. 13086I

)

Form 4797 (2020)

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

APPENDIX B  Tax Forms

Page 2

Form 4797 (2020)

Part III 19

B-33

Gain From Disposition of Property Under Sections 1245, 1250, 1252, 1254, and 1255 (see instructions)

(a) Description of section 1245, 1250, 1252, 1254, or 1255 property:

(b) Date acquired (mo., day, yr.)

(c) Date sold (mo., day, yr.)

Property C

Property D

A B C D These columns relate to the properties on lines 19A through 19D. ▶

20 21 22 23 24 25

26

27

. . . .

20 21 22 23

.

.

24

. .

. .

25a 25b

Gross sales price (Note: See line 1 before completing.) Cost or other basis plus expense of sale . . . . Depreciation (or depletion) allowed or allowable . . Adjusted basis. Subtract line 22 from line 21. . . Total gain. Subtract line 23 from line 20 . . . If section 1245 property: a Depreciation allowed or allowable from line 22 . b Enter the smaller of line 24 or 25a. . . . .

If section 1250 property: If straight line depreciation was used, enter -0- on line 26g, except for a corporation subject to section 291. a Additional depreciation after 1975. See instructions .

26a

b Applicable percentage multiplied by the smaller of line 24 or line 26a. See instructions. . . . . . . .

26b

c Subtract line 26a from line 24. If residential rental property or line 24 isn’t more than line 26a, skip lines 26d and 26e d Additional depreciation after 1969 and before 1976. . e Enter the smaller of line 26c or 26d . . . . . . f Section 291 amount (corporations only) . . . . . g Add lines 26b, 26e, and 26f . . . . . . . .

26c 26d 26e 26f 26g

Property B

If section 1252 property: Skip this section if you didn’t dispose of farmland or if this form is being completed for a partnership.

a Soil, water, and land clearing expenses . . . . . b Line 27a multiplied by applicable percentage. See instructions c Enter the smaller of line 24 or 27b . . . . . . 28 If section 1254 property: a Intangible drilling and development costs, expenditures for development of mines and other natural deposits, mining exploration costs, and depletion. See instructions b Enter the smaller of line 24 or 28a. . . . . . . 29

Property A

27a 27b 27c

28a 28b

If section 1255 property: a Applicable percentage of payments excluded from income under section 126. See instructions . . . b Enter the smaller of line 24 or 29a. See instructions

. .

29a 29b

Summary of Part III Gains. Complete property columns A through D through line 29b before going to line 30. 30 31

Total gains for all properties. Add property columns A through D, line 24 . . . . . . . . Add property columns A through D, lines 25b, 26g, 27c, 28b, and 29b. Enter here and on line 13 .

32

Subtract line 31 from line 30. Enter the portion from casualty or theft on Form 4684, line 33. Enter the portion from other than casualty or theft on Form 4797, line 6 . . . . . . . . . . . . . . . . . . . .

Part IV

. .

. .

. .

. .

. .

30 31 32

Recapture Amounts Under Sections 179 and 280F(b)(2) When Business Use Drops to 50% or Less (see instructions) (a) Section 179

33

Section 179 expense deduction or depreciation allowable in prior years.

.

.

.

34 35

Recomputed depreciation. See instructions . . . . . . . . . . . . . . Recapture amount. Subtract line 34 from line 33. See the instructions for where to report

. .

. .

.

.

.

.

33 34 35

(b) Section 280F(b)(2)

Form 4797 (2020)

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

B-34

Form

APPENDIX B   Tax Forms

6251

Alternative Minimum Tax—Individuals

Department of the Treasury Internal Revenue Service (99)

▶ Go

OMB No. 1545-0074

Attachment Sequence No. 32 Your social security number

Name(s) shown on Form 1040, 1040-SR, or 1040-NR

Part I

2020

to www.irs.gov/Form6251 for instructions and the latest information. ▶ Attach to Form 1040, 1040-SR, or 1040-NR.

Alternative Minimum Taxable Income (See instructions for how to complete each line.)

1

Enter the amount from Form 1040 or 1040-SR, line 15, if more than zero. If Form 1040 or 1040-SR, line 15, is zero, subtract lines 12 and 13 of Form 1040 or 1040-SR from line 11 of Form 1040 or 1040-SR and enter the result here. (If less than zero, enter as a negative amount.) . . . . . . . . . . . . . .

2a

If filing Schedule A (Form 1040), enter the taxes from Schedule A, line 7; otherwise, enter the amount from Form 1040 or 1040-SR, line 12 . . . . . . . . . . . . . . . . . . . . . . . . Tax refund from Schedule 1 (Form 1040), line 1 or line 8 . . . . . . . . . . . . . . . . Investment interest expense (difference between regular tax and AMT) . . . . . . . . . . . . Depletion (difference between regular tax and AMT) . . . . . . . . . . . . . . . . . . Net operating loss deduction from Schedule 1 (Form 1040), line 8. Enter as a positive amount . . . . . Alternative tax net operating loss deduction . . . . . . . . . . . . . . . . . . . . Interest from specified private activity bonds exempt from the regular tax . . . . . . . . . . . Qualified small business stock, see instructions . . . . . . . . . . . . . . . . . . . Exercise of incentive stock options (excess of AMT income over regular tax income) . . . . . . . . Estates and trusts (amount from Schedule K-1 (Form 1041), box 12, code A) . . . . . . . . . . Disposition of property (difference between AMT and regular tax gain or loss) . . . . . . . . . . Depreciation on assets placed in service after 1986 (difference between regular tax and AMT) . . . . . Passive activities (difference between AMT and regular tax income or loss) . . . . . . . . . . Loss limitations (difference between AMT and regular tax income or loss) . . . . . . . . . . . Circulation costs (difference between regular tax and AMT). . . . . . . . . . . . . . . . Long-term contracts (difference between AMT and regular tax income) . . . . . . . . . . . . Mining costs (difference between regular tax and AMT) . . . . . . . . . . . . . . . . . Research and experimental costs (difference between regular tax and AMT) . . . . . . . . . . Income from certain installment sales before January 1, 1987 . . . . . . . . . . . . . . . Intangible drilling costs preference . . . . . . . . . . . . . . . . . . . . . . . Other adjustments, including income-based related adjustments . . . . . . . . . . . . . .

b c d e f g h i j k l m n o p q r s t 3 4

Alternative minimum taxable income. Combine lines 1 through 3. (If married filing separately and line 4 is more than $745,200, see instructions.) . . . . . . . . . . . . . . . . . . . . . .

Part II 5

Alternative Minimum Tax (AMT) AND line 4 is not over . . . THEN enter on line 5 . . . $ 518,400 . . . . . $ 72,900 1,036,800 . . . . . 113,400 518,400 . . . . . 56,700

If line 4 is over the amount shown above for your filing status, see instructions.

7

8 9 10

11

2a 2b ( 2c 2d 2e 2f ( 2g 2h 2i 2j 2k 2l 2m 2n 2o 2p 2q 2r 2s ( 2t 3

)

)

)

4

Exemption. IF your filing status is . . . Single or head of household . . . . Married filing jointly or qualifying widow(er) Married filing separately . . . . .

6

1

}

.

.

5

Subtract line 5 from line 4. If more than zero, go to line 7. If zero or less, enter -0- here and on lines 7, 9, and 11, and go to line 10 . . . . . . . . . . . . . . . . . . . . . . . . . . . . • If you are filing Form 2555, see instructions for the amount to enter.

6

• If you reported capital gain distributions directly on Form 1040 or 1040-SR, line 7; you reported qualified dividends on Form 1040 or 1040-SR, line 3a; or you had a gain on both lines 15 and 16 of Schedule D (Form 1040) (as refigured for the AMT, if necessary), complete Part III on the back and enter the amount from line 40 here.

}

• All others: If line 6 is $197,900 or less ($98,950 or less if married filing separately), multiply line 6 by 26% (0.26). Otherwise, multiply line 6 by 28% (0.28) and subtract $3,958 ($1,979 if married filing separately) from the result. Alternative minimum tax foreign tax credit (see instructions) . . . . . . . . . . . . Tentative minimum tax. Subtract line 8 from line 7 . . . . . . . . . . . . . . .

. .

.

.

7

. .

. .

8 9

Add Form 1040 or 1040-SR, line 16 (minus any tax from Form 4972), and Schedule 2 (Form 1040), line 2. Subtract from the result any foreign tax credit from Schedule 3 (Form 1040), line 1. If you used Schedule J to figure your tax on Form 1040 or 1040-SR, line 16, refigure that tax without using Schedule J before completing this line (see instructions) . . . . . . . . . . . . . . . . . . . . . . AMT. Subtract line 10 from line 9. If zero or less, enter -0-. Enter here and on Schedule 2 (Form 1040), line 1

For Paperwork Reduction Act Notice, see your tax return instructions.

Cat. No. 13600G

10 11

Form 6251 (2020)

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

B-35

APPENDIX B  Tax Forms Form 6251 (2020)

Part III

Page

2

Tax Computation Using Maximum Capital Gains Rates Complete Part III only if you are required to do so by line 7 or by the Foreign Earned Income Tax Worksheet in the instructions.

12

Enter the amount from Form 6251, line 6. If you are filing Form 2555, enter the amount from line 3 of the worksheet in the instructions for line 7 . . . . . . . . . . . . . . . . . . . . . .

12

13

Enter the amount from line 4 of the Qualified Dividends and Capital Gain Tax Worksheet in the Instructions for Forms 1040 and 1040-SR or the amount from line 13 of the Schedule D Tax Worksheet in the Instructions for Schedule D (Form 1040), whichever applies (as refigured for the AMT, if necessary) (see instructions). If you are filing Form 2555, see instructions for the amount to enter . . . . . . . . .

13

14

Enter the amount from Schedule D (Form 1040), line 19 (as refigured for the AMT, if necessary) (see instructions). If you are filing Form 2555, see instructions for the amount to enter . . . . . . . . .

14

If you did not complete a Schedule D Tax Worksheet for the regular tax or the AMT, enter the amount from line 13. Otherwise, add lines 13 and 14, and enter the smaller of that result or the amount from line 10 of the Schedule D Tax Worksheet (as refigured for the AMT, if necessary). If you are filing Form 2555, see instructions for the amount to enter . . . . . . . . . . . . . . . . . . . . . . . Enter the smaller of line 12 or line 15 . . . . . . . . . . . . . . . . . . . . . . Subtract line 16 from line 12 . . . . . . . . . . . . . . . . . . . . . . . . .

15 16 17

15

16 17 18 19

20

21 22 23 24 25

26 27

28 29 30 31 32 33 34

If line 17 is $197,900 or less ($98,950 or less if married filing separately), multiply line 17 by 26% (0.26). Otherwise, multiply line 17 by 28% (0.28) and subtract $3,958 ($1,979 if married filing separately) from the result . . . ▶ Enter: • $80,000 if married filing jointly or qualifying widow(er), . . • $40,000 if single or married filing separately, or • $53,600 if head of household.

}

Enter the amount from line 5 of the Qualified Dividends and Capital Gain Tax Worksheet or the amount from line 14 of the Schedule D Tax Worksheet, whichever applies (as figured for the regular tax). If you did not complete either worksheet for the regular tax, enter the amount from Form 1040 or 1040-SR, line 15; if zero or less, enter -0-. If you are filing Form 2555, see instructions for the amount to enter . . . . . . . Subtract line 20 from line 19. If zero or less, enter -0- . . . . . . . . . . . . . . . . . Enter the smaller of line 12 or line 13 . . . . . . . . . . . . . . . . . . . . . . Enter the smaller of line 21 or line 22. This amount is taxed at 0% . . . . . . . . . . . . . Subtract line 23 from line 22 . . . . . . . . . . . . . . . . . . . . . . . . . Enter: • $441,450 if single . . • $248,300 if married filing separately • $496,600 if married filing jointly or qualifying widow(er) • $469,050 if head of household Enter the amount from line 21 . . . . . . . . . . . . . . . . . . . . . . . . .

}

Enter the amount from line 5 of the Qualified Dividends and Capital Gain Tax Worksheet or the amount from line 21 of the Schedule D Tax Worksheet, whichever applies (as figured for the regular tax). If you did not complete either worksheet for the regular tax, enter the amount from Form 1040 or 1040-SR, line 15; if zero or less, enter -0-. If you are filing Form 2555, see instructions for the amount to enter . . . . . . . Add line 26 and line 27 . . . . . . . . . . . . . . . . . . . . . . . . . . . Subtract line 28 from line 25. If zero or less, enter -0- . . . . . . . . . . . . . . . . . Enter the smaller of line 24 or line 29 . . . . . . . . . . . . . . . . . . . . . . Multiply line 30 by 15% (0.15) . . . . . . . . . . . . . . . . . . . . . . . . ▶ Add lines 23 and 30 . . . . . . . . . . . . . . . . . . . . . . . . . . . . If lines 32 and 12 are the same, skip lines 33 through 37 and go to line 38. Otherwise, go to line 33. Subtract line 32 from line 22 . . . . . . . . . . . . . . . . . . . . . . . . . Multiply line 33 by 20% (0.20) . . . . . . . . . . . . . . . . . . . . . . . ▶ If line 14 is zero or blank, skip lines 35 through 37 and go to line 38. Otherwise, go to line 35.

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. .

18

19

20 21 22 23 24

25

26

27 28 29 30 31 32 33 34

35 36 37 38

Add lines 17, 32, and 33 . . Subtract line 35 from line 12 Multiply line 36 by 25% (0.25) Add lines 18, 31, 34, and 37 .

39

If line 12 is $197,900 or less ($98,950 or less if married filing separately), multiply line 12 by 26% (0.26). Otherwise, multiply line 12 by 28% (0.28) and subtract $3,958 ($1,979 if married filing separately) from the result

39

40

Enter the smaller of line 38 or line 39 here and on line 7. If you are filing Form 2555, do not enter this amount on line 7. Instead, enter it on line 4 of the worksheet in the instructions for line 7 . . . . . .

40

▶

.

35 36 37 38

Form 6251 (2020)

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

B-36

Form

APPENDIX B   Tax Forms

8949

Department of the Treasury Internal Revenue Service

Sales and Other Dispositions of Capital Assets ▶ ▶

Go to www.irs.gov/Form8949 for instructions and the latest information.

File with your Schedule D to list your transactions for lines 1b, 2, 3, 8b, 9, and 10 of Schedule D.

OMB No. 1545-0074

2020

Attachment Sequence No. 12A

Social security number or taxpayer identification number

Name(s) shown on return

Before you check Box A, B, or C below, see whether you received any Form(s) 1099-B or substitute statement(s) from your broker. A substitute statement will have the same information as Form 1099-B. Either will show whether your basis (usually your cost) was reported to the IRS by your broker and may even tell you which box to check.

Part I

Short-Term. Transactions involving capital assets you held 1 year or less are generally short-term (see instructions). For long-term transactions, see page 2. Note: You may aggregate all short-term transactions reported on Form(s) 1099-B showing basis was reported to the IRS and for which no adjustments or codes are required. Enter the totals directly on Schedule D, line 1a; you aren’t required to report these transactions on Form 8949 (see instructions).

You must check Box A, B, or C below. Check only one box. If more than one box applies for your short-term transactions, complete a separate Form 8949, page 1, for each applicable box. If you have more short-term transactions than will fit on this page for one or more of the boxes, complete as many forms with the same box checked as you need. (A) Short-term transactions reported on Form(s) 1099-B showing basis was reported to the IRS (see Note above) (B) Short-term transactions reported on Form(s) 1099-B showing basis wasn’t reported to the IRS (C) Short-term transactions not reported to you on Form 1099-B 1 (a) Description of property (Example: 100 sh. XYZ Co.)

(b) Date acquired (Mo., day, yr.)

(c) Date sold or disposed of (Mo., day, yr.)

(d) Proceeds (sales price) (see instructions)

Adjustment, if any, to gain or loss. If you enter an amount in column (g), (e) (h) enter a code in column (f). Cost or other basis. Gain or (loss). See the Note below See the separate instructions. Subtract column (e) and see Column (e) from column (d) and (f) (g) in the separate combine the result Code(s) from instructions with column (g) Amount of instructions adjustment

2 Totals. Add the amounts in columns (d), (e), (g), and (h) (subtract negative amounts). Enter each total here and include on your Schedule D, line 1b (if Box A above is checked), line 2 (if Box B above is checked), or line 3 (if Box C above is checked) ▶

Note: If you checked Box A above but the basis reported to the IRS was incorrect, enter in column (e) the basis as reported to the IRS, and enter an adjustment in column (g) to correct the basis. See Column (g) in the separate instructions for how to figure the amount of the adjustment. For Paperwork Reduction Act Notice, see your tax return instructions.

Cat. No. 37768Z

Form 8949 (2020)

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Form 8949 (2020) Name(s) shown on return. Name and SSN or taxpayer identification no. not required if shown on other side

APPENDIX B  Tax Forms

B-37

Attachment Sequence No. 12A

Page 2

Social security number or taxpayer identification number

Before you check Box D, E, or F below, see whether you received any Form(s) 1099-B or substitute statement(s) from your broker. A substitute statement will have the same information as Form 1099-B. Either will show whether your basis (usually your cost) was reported to the IRS by your broker and may even tell you which box to check.

Part II

Long-Term. Transactions involving capital assets you held more than 1 year are generally long-term (see instructions). For short-term transactions, see page 1. Note: You may aggregate all long-term transactions reported on Form(s) 1099-B showing basis was reported to the IRS and for which no adjustments or codes are required. Enter the totals directly on Schedule D, line 8a; you aren’t required to report these transactions on Form 8949 (see instructions).

You must check Box D, E, or F below. Check only one box. If more than one box applies for your long-term transactions, complete a separate Form 8949, page 2, for each applicable box. If you have more long-term transactions than will fit on this page for one or more of the boxes, complete as many forms with the same box checked as you need. (D) Long-term transactions reported on Form(s) 1099-B showing basis was reported to the IRS (see Note above) (E) Long-term transactions reported on Form(s) 1099-B showing basis wasn’t reported to the IRS (F) Long-term transactions not reported to you on Form 1099-B 1 (a) Description of property (Example: 100 sh. XYZ Co.)

(b) Date acquired (Mo., day, yr.)

(c) Date sold or disposed of (Mo., day, yr.)

(d) Proceeds (sales price) (see instructions)

Adjustment, if any, to gain or loss. If you enter an amount in column (g), (e) (h) enter a code in column (f). Cost or other basis. Gain or (loss). See the Note below See the separate instructions. Subtract column (e) and see Column (e) from column (d) and (f) (g) in the separate combine the result Code(s) from instructions with column (g) Amount of instructions adjustment

2 Totals. Add the amounts in columns (d), (e), (g), and (h) (subtract negative amounts). Enter each total here and include on your Schedule D, line 8b (if Box D above is checked), line 9 (if Box E above is checked), or line 10 (if Box F above is checked) ▶

Note: If you checked Box D above but the basis reported to the IRS was incorrect, enter in column (e) the basis as reported to the IRS, and enter an adjustment in column (g) to correct the basis. See Column (g) in the separate instructions for how to figure the amount of the adjustment. Form 8949 (2020)

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

B-38

Form

APPENDIX B   Tax Forms

8959

Department of the Treasury Internal Revenue Service

Additional Medicare Tax

▶

OMB No. 1545-0074

Attach to Form 1040, 1040-SR, 1040-NR, 1040-PR, or 1040-SS. to www.irs.gov/Form8959 for instructions and the latest information.

▶ ▶ Go

Name(s) shown on return

Part I 1 2 3 4 5

6 7

9

10 11 12 13

Additional Medicare Tax on Medicare Wages

15

16 17

20 21 22 23 24

6 7

12 13

16 17

Total Additional Medicare Tax

Add lines 7, 13, and 17. Also include this amount on Schedule 2 (Form 1040), line 8 (check box a) (Form 1040-PR or 1040-SS filers, see instructions), and go to Part V . . . . . . . . . . .

Part V 19

Additional Medicare Tax on Railroad Retirement Tax Act (RRTA) Compensation

Railroad retirement (RRTA) compensation and tips from Form(s) W-2, box 14 14 (see instructions) . . . . . . . . . . . . . . . . . . . . Enter the following amount for your filing status: Married filing jointly . . . . . . . . . . . . . . . $250,000 Married filing separately . . . . . . . . . . . . . . $125,000 Single, Head of household, or Qualifying widow(er) . . . . . $200,000 15 Subtract line 15 from line 14. If zero or less, enter -0- . . . . . . . . . . . . . . . . Additional Medicare Tax on railroad retirement (RRTA) compensation. Multiply line 16 by 0.9% (0.009). Enter here and go to Part IV . . . . . . . . . . . . . . . . . . . . . . . . .

Part IV 18

Additional Medicare Tax on Self-Employment Income

Self-employment income from Schedule SE (Form 1040), Part I, line 6. If you 8 had a loss, enter -0- (Form 1040-PR or 1040-SS filers, see instructions.) . . Enter the following amount for your filing status: Married filing jointly . . . . . . . . . . . . . . . . $250,000 Married filing separately . . . . . . . . . . . . . . $125,000 9 Single, Head of household, or Qualifying widow(er) . . . . . $200,000 Enter the amount from line 4 . . . . . . . . . . . . . . . . 10 Subtract line 10 from line 9. If zero or less, enter -0- . . . . . . . . . 11 Subtract line 11 from line 8. If zero or less, enter -0- . . . . . . . . . . . . . . . . . Additional Medicare Tax on self-employment income. Multiply line 12 by 0.9% (0.009). Enter here and go to Part III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Part III 14

Attachment Sequence No. 71 Your social security number

Medicare wages and tips from Form W-2, box 5. If you have more than one Form W-2, enter the total of the amounts from box 5 . . . . . . . . 1 Unreported tips from Form 4137, line 6 . . . . . . . . . . . . . 2 Wages from Form 8919, line 6 . . . . . . . . . . . . . . . . 3 Add lines 1 through 3 . . . . . . . . . . . . . . . . . . . 4 Enter the following amount for your filing status: Married filing jointly . . . . . . . . . . . . . . . $250,000 Married filing separately . . . . . . . . . . . . . . $125,000 Single, Head of household, or Qualifying widow(er) . . . . . $200,000 5 Subtract line 5 from line 4. If zero or less, enter -0- . . . . . . . . . . . . . . . . . Additional Medicare Tax on Medicare wages. Multiply line 6 by 0.9% (0.009). Enter here and go to Part II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Part II 8

2020

If any line does not apply to you, leave it blank. See separate instructions.

18

Withholding Reconciliation

Medicare tax withheld from Form W-2, box 6. If you have more than one Form 19 W-2, enter the total of the amounts from box 6 . . . . . . . . . . Enter the amount from line 1 . . . . . . . . . . . . . . . . 20 Multiply line 20 by 1.45% (0.0145). This is your regular Medicare tax 21 withholding on Medicare wages . . . . . . . . . . . . . . . Subtract line 21 from line 19. If zero or less, enter -0-. This is your Additional Medicare Tax withholding on Medicare wages . . . . . . . . . . . . . . . . . . . . . . . Additional Medicare Tax withholding on railroad retirement (RRTA) compensation from Form W-2, box 14 (see instructions) . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Additional Medicare Tax withholding. Add lines 22 and 23. Also include this amount with federal income tax withholding on Form 1040, 1040-SR, or 1040-NR, line 25c (Form 1040-PR or 1040-SS filers, see instructions) . . . . . . . . . . . . . . . . . . . . . . .

For Paperwork Reduction Act Notice, see your tax return instructions.

Cat. No. 59475X

22 23

24 Form 8959 (2020)

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

APPENDIX B  Tax Forms

Form

8960

Department of the Treasury Internal Revenue Service (99)

Net Investment Income Tax— Individuals, Estates, and Trusts

▶ Go

OMB No. 1545-2227

9a b c d 10 11

Investment Income

12

. . .

. . .

. . .

1 2 3

.

.

.

4c

. . . .

. . . .

. . . .

5d 6 7 8

. . .

. . .

. . .

9d 10 11

Investment Expenses Allocable to Investment Income and Modifications

Investment interest expenses (see instructions) . . . State, local, and foreign income tax (see instructions) . Miscellaneous investment expenses (see instructions) . Add lines 9a, 9b, and 9c . . . . . . . . . . . Additional modifications (see instructions) . . . . . Total deductions and modifications. Add lines 9d and 10

Part III

Attachment Sequence No. 72 Your social security number or EIN

Section 6013(g) election (see instructions) Section 6013(h) election (see instructions) Regulations section 1.1411-10(g) election (see instructions) 1 Taxable interest (see instructions) . . . . . . . . . . . . . . . . . . . . 2 Ordinary dividends (see instructions) . . . . . . . . . . . . . . . . . . . 3 Annuities (see instructions) . . . . . . . . . . . . . . . . . . . . . . 4a Rental real estate, royalties, partnerships, S corporations, trusts, etc. (see 4a instructions) . . . . . . . . . . . . . . . . . . . . . . b Adjustment for net income or loss derived in the ordinary course of a non4b section 1411 trade or business (see instructions) . . . . . . . . . . c Combine lines 4a and 4b . . . . . . . . . . . . . . . . . . . . . . . 5a Net gain or loss from disposition of property (see instructions) . . . . . 5a b Net gain or loss from disposition of property that is not subject to net 5b investment income tax (see instructions) . . . . . . . . . . . . c Adjustment from disposition of partnership interest or S corporation stock (see instructions) . . . . . . . . . . . . . . . . . . . . . . 5c d Combine lines 5a through 5c . . . . . . . . . . . . . . . . . . . . . 6 Adjustments to investment income for certain CFCs and PFICs (see instructions) . . . . 7 Other modifications to investment income (see instructions) . . . . . . . . . . . 8 Total investment income. Combine lines 1, 2, 3, 4c, 5d, 6, and 7 . . . . . . . . . .

Part II

2020

▶ Attach to your tax return. to www.irs.gov/Form8960 for instructions and the latest information.

Name(s) shown on your tax return

Part I

. . . . . .

. . . . . .

. . . . . .

. . . . . .

. . . . . .

. . . . . .

. . . . . .

9a 9b 9c . . . . . . . . .

. . .

. . .

Tax Computation

Net investment income. Subtract Part II, line 11, from Part I, line 8. Individuals, complete lines 13–17. Estates and trusts, complete lines 18a–21. If zero or less, enter -0- . . . . . . . . . . . .

Individuals: 13 14 15 16 17

B-39

Modified adjusted gross income (see instructions) . . . . . . Threshold based on filing status (see instructions) . . . . . . Subtract line 14 from line 13. If zero or less, enter -0- . . . . . Enter the smaller of line 12 or line 15 . . . . . . . . . . . Net investment income tax for individuals. Multiply line 16 by 3.8% on your tax return (see instructions) . . . . . . . . . . .

. . . 13 . . . 14 . . . 15 . . . . . . . . . . . (0.038). Enter here and include . . . . . . . . . . .

Estates and Trusts:

18a Net investment income (line 12 above) . . . . . . . . . . . . . 18a b Deductions for distributions of net investment income and deductions under 18b section 642(c) (see instructions) . . . . . . . . . . . . . . . c Undistributed net investment income. Subtract line 18b from 18a (see instructions). 18c If zero or less, enter -0. . . . . . . . . . . . . . . . . . 19a Adjusted gross income (see instructions) . . . . . . . . . . . . 19a b Highest tax bracket for estates and trusts for the year (see instructions) . . 19b c Subtract line 19b from line 19a. If zero or less, enter -0- . . . . . . . 19c 20 Enter the smaller of line 18c or line 19c . . . . . . . . . . . . . . . . . . . . . 21 Net investment income tax for estates and trusts. Multiply line 20 by 3.8% (0.038). Enter here and include on your tax return (see instructions) . . . . . . . . . . . . . . . . . . . For Paperwork Reduction Act Notice, see your tax return instructions.

12

16 17

20 21

Cat. No. 59474M

Form 8960 (2020)

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

B-40

APPENDIX B   Tax Forms

Form

8995

Qualified Business Income Deduction Simplified Computation

Department of the Treasury Internal Revenue Service

OMB No. 1545-2294

▶ Attach

to your tax return. ▶ Go to www.irs.gov/Form8995 for instructions and the latest information.

2020

Attachment Sequence No. 55

Your taxpayer identification number

Name(s) shown on return

Note. You can claim the qualified business income deduction only if you have qualified business income from a qualified trade or business, real estate investment trust dividends, publicly traded partnership income, or a domestic production activities deduction passed through from an agricultural or horticultural cooperative. See instructions. Use this form if your taxable income, before your qualified business income deduction, is at or below $163,300 ($326,600 if married filing jointly), and you aren’t a patron of an agricultural or horticultural cooperative. 1

(a) Trade, business, or aggregation name

(b) Taxpayer identification number

(c) Qualified business income or (loss)

i ii iii iv v 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

Total qualified business income or (loss). Combine lines 1i through 1v, column (c) . . . . . . . . . . . . . . . . . . . . . . 2 Qualified business net (loss) carryforward from the prior year . . . . . . . 3 ( ) Total qualified business income. Combine lines 2 and 3. If zero or less, enter -04 Qualified business income component. Multiply line 4 by 20% (0.20) . . . . . . . . . . . 5 Qualified REIT dividends and publicly traded partnership (PTP) income or (loss) 6 (see instructions) . . . . . . . . . . . . . . . . . . . . Qualified REIT dividends and qualified PTP (loss) carryforward from the prior ) year . . . . . . . . . . . . . . . . . . . . . . . . . 7 ( Total qualified REIT dividends and PTP income. Combine lines 6 and 7. If zero or less, enter -0- . . . . . . . . . . . . . . . . . . . . 8 REIT and PTP component. Multiply line 8 by 20% (0.20) . . . . . . . . . . . . . . . 9 Qualified business income deduction before the income limitation. Add lines 5 and 9 . . . . . . 10 Taxable income before qualified business income deduction . . . . . . 11 Net capital gain (see instructions) . . . . . . . . . . . . . . . 12 Subtract line 12 from line 11. If zero or less, enter -0- . . . . . . . . 13 Income limitation. Multiply line 13 by 20% (0.20) . . . . . . . . . . . . . . . . . . 14 Qualified business income deduction. Enter the lesser of line 10 or line 14. Also enter this amount on the applicable line of your return . . . . . . . . . . . . . . . . . . . . . . ▶ 15 Total qualified business (loss) carryforward. Combine lines 2 and 3. If greater than zero, enter -0- . . 16 ( Total qualified REIT dividends and PTP (loss) carryforward. Combine lines 6 and 7. If greater than zero, enter -0- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 (

For Privacy Act and Paperwork Reduction Act Notice, see instructions.

Cat. No. 37806C

) ) Form 8995 (2020)

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Appendix C Glossary The key terms in this glossary have been defined to reflect their conventional use in the field of taxation. The definitions may therefore be incomplete for other purposes.

A AAA bypass election. In the context of a distribution by an S corporation, an election made by the entity to designate that the distribution is first from accumulated earnings and profits (AEP) and only then from the accumulated adjustments account (AAA). § 1368(e)(3). Abandoned spouse. The abandoned spouse provision enables a married taxpayer with a dependent child whose spouse did not live in the taxpayer’s home during the last six months of the tax year to file as a head of household rather than as married filing separately. §§ 2(b) and 7703(b). Accelerated cost recovery system (ACRS). A method in which the cost of tangible property is recovered (depreciated) over a prescribed period of time. This depreciation approach disregards salvage value, imposes a period of cost recovery that depends upon the classification of the asset into one of various recovery periods, and prescribes the applicable percentage of cost that can be deducted each year. A modified system is currently the default cost recovery method; it is referred to as MACRS. § 168. Accelerated death benefits. The amount received from a life insurance policy by the insured who is terminally ill or chronically ill. Any realized gain may be excluded from the gross income of the insured if the policy is surrendered to the insurer or is sold to a licensed viatical settlement provider. § 101(g). Acceleration rule. Treatment of an intercompany transaction on a consolidated return, when a sold asset leaves the group. Accident and health benefits. Employee fringe benefits provided by employers through the payment of health and accident insurance premiums or the establishment of employer-funded medical reimbursement plans. Employers generally are entitled to a deduction for such payments, whereas employees generally exclude such fringe benefits from gross income. §§ 105 and 106. Accident and health insurance benefits. See accident and health benefits.

Accountable plan. A type of expense reimbursement plan that requires an employee to render an adequate accounting to the employer and return any excess reimbursement or allowance. If the expense qualifies, it will be treated as a deduction for AGI. Accounting income. The accountant’s concept of income is generally based upon the realization principle. Financial accounting income may differ from taxable income (e.g., accelerated depreciation might be used for Federal income tax and straight-line depreciation for financial accounting purposes). Differences are included in a reconciliation of taxable and accounting income on Schedule M–1 or ­Schedule M–3 of Form 1120 for corporations. Accounting method. The method under which income and expenses are determined for tax purposes. Important accounting methods include the cash basis and the accrual basis. Special methods are available for the reporting of gain on installment sales, recognition of income on construction projects (the completed contract and percentage of completion methods), and the valuation of inventories (last-in, first-out and first-in, first-out). Accounting methods deal with the timing of when income and deductions are reported. §§ 446–474. Accounting period. The period of time, usually a year, used by a taxpayer for the determination of tax liability. Unless a fiscal year is chosen, taxpayers must determine and pay their income tax liability by using the calendar year ( January 1 through December 31) as the period of measurement. An example of a fiscal year is July 1 through June 30. A change in accounting period (e.g., from a calendar year to a fiscal year) generally requires the consent of the IRS. Usually, taxpayers are free to select either an initial calendar or a fiscal year without the consent of the IRS. §§ 441–444. Accrual method. A method of accounting that recognizes expenses as incurred and income as earned. In contrast to the cash basis of accounting, expenses need not be paid to be deductible, nor need income be received to be taxable. § 446(c)(2). Accumulated adjustments account (AAA). An account that aggregates an S corporation’s post-1982 income, loss, and deductions for the tax year (including nontaxable income and nondeductible losses and expenses). After the year-end C-1

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

C-2

APPENDIX C   Glossary

income and expense adjustments are made, the account is reduced by distributions made during the tax year. Accumulated E & P. Net undistributed tax-basis earnings of a corporation aggregated from March 1, 1913, to the end of the prior tax year. Used to determine the amount of dividend income associated with a distribution to shareholders. § 316 and Reg. § 1.316–2. Accumulated earnings tax. A special 20 percent tax imposed on C corporations that accumulate (rather than distribute) their earnings beyond the reasonable needs of the business. The accumulated earnings tax and related interest are imposed on accumulated taxable income in addition to the corporate income tax. §§ 531–537. Accuracy-related penalties. Major civil taxpayer penalties relating to the accuracy of tax return data, including misstatements stemming from taxpayer negligence and improper valuation of income and deductions, are coordinated under this umbrella term. The penalty usually equals 20 percent of the understated tax liability. Acquiescence. Agreement by the IRS on the results reached in certain judicial decisions; sometimes abbreviated Acq. or A. Acquisition indebtedness. Debt incurred in acquiring, constructing, or substantially improving a qualified residence of the taxpayer. The interest on such loans is deductible as qualified residence interest. However, interest on such debt is deductible only on the portion of the indebtedness that does not exceed $750,000 ($1,000,000 for debt incurred before December 15, 2017). § 163(h)(3). Active income. Wages, salary, commissions, bonuses, profits from a trade or business in which the taxpayer is a material participant, gain on the sale or other disposition of assets used in an active trade or business, and income from intangible property if the taxpayer’s personal efforts significantly contributed to the creation of the property. The passive activity loss rules require classification of income and losses into three categories with active income being one of them. Ad valorem taxes. A tax imposed on the value of property. The most common ad valorem tax is that imposed by states, counties, and cities on real estate. Ad valorem taxes can be imposed on personal property as well. Additional first-year depreciation. In general, this provision provides for an additional cost recovery deduction of 100 percent for qualified property acquired and placed in service after September 27, 2017, and before January 1, 2027. (The bonus depreciation percentage is reduced by 20 percent for each tax year after 2022.) Qualified property includes most types of new and used property other than buildings. The taxpayer can elect to forgo this bonus depreciation. Different rules applied between 2008 and September 28, 2017. § 168(k). Adjusted basis. The cost or other basis of property reduced by depreciation allowed or allowable and increased by capital improvements. Other special adjustments are provided in § 1016 and the related Regulations. Adjusted gross estate. Used in determining eligibility for deferred payments of Federal estate tax. The gross estate less the sum allowable as deductions under § 2053 (expenses, indebtedness, and taxes) and § 2054 (casualty and theft losses during the administration of the estate). § 6166(b)(6). Adjustments. In calculating AMTI, certain amounts (i.e., adjustments) are added to or deducted from the taxable

income starting point of the AMTI calculation. These adjustments generally reflect timing differences. § 56. Adoption expenses credit. A provision intended to assist taxpayers who incur nonrecurring costs directly associated with the adoption process, such as legal costs, social service review costs, and transportation costs. Up to $14,440 of costs incurred to adopt an eligible child qualify for the credit (unique rules apply when adopting a special needs child). A taxpayer may claim the credit in the year qualifying expenses are paid or incurred if the expenses are paid during or after the year in which the adoption is finalized. For qualifying expenses paid or incurred in a tax year prior to the year the adoption is finalized, the credit must be claimed in the tax year following the tax year during which the expenses are paid or incurred. § 23. Affiliated group. A parent-subsidiary group of corporations that is eligible to elect to file on a consolidated basis. Eighty percent ownership of the voting power and value of all of the corporations must be achieved every day of the tax year, and an identifiable parent corporation must exist (i.e., it must own at least 80 percent of another group member without applying attribution rules). § 1504(a). Aggregate (or conduit) concept. A perspective that regards a venture as an aggregation of its owners joined together in an agency relationship rather than as a separate entity. For tax purposes, this results in the income of the venture being taxable directly to its owners. For example, items of income and expense, capital gains and losses, tax credits, etc., realized by a partnership pass through the partnership (a conduit) and are subject to taxation at the partner level. Also, in an S corporation, certain items pass through and are reported on the returns of the shareholders. See also entity concept. Alimony and separate maintenance payments. Alimony deductions result from the payment of a legal obligation arising from the termination of a marital relationship. Payments designated as alimony generally are included in the gross income of the recipient and are deductible for AGI by the payor. For divorce or separation instruments executed after December 31, 2018, alimony is neither gross income for the recipient nor deductible by the payor. § 71. Alimony recapture. The amount of alimony that previously has been included in the gross income of the recipient and deducted by the payor that now is deducted by the recipient and included in the gross income of the payor as the result of front-loading. Alimony recapture is applicable for divorce or separation agreements executed before 2019. § 71(f). All events test. As applied to the recognition of income, the all events test requires that income of an accrual basis taxpayer be recognized when (1) all events have occurred that fix the taxpayer’s right to receive the income and (2) the amount can be determined with reasonable accuracy. Under § 451(b), an accrual method taxpayer must include amounts in income no later than for financial reporting purposes (other than for special rules such as the installment method). As applied to the recognition of expenses, the all events test prevents the recognition of a deduction by an accrual basis taxpayer until all the events have occurred that fix the taxpayer’s related obligation. This can be contrasted with GAAP under which a fixed or legal obligation is not required before an expense is recognized. Reg. §§ 1.446–1(c)(1)(ii) and 1.461–1(a)(2).

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

APPENDIX C   Glossary

Allocate. The assignment of income for various tax purposes. A multistate corporation’s nonbusiness income usually is allocated to the state where the nonbusiness assets are located; it is not apportioned with the rest of the entity’s income. The income and expense items of an estate or a trust are allocated between income and corpus components. Specific items of income, expense, gain, loss, and credit can be allocated to specific partners if a substantial economic nontax purpose for the allocation is established. Alternate valuation date. Property passing from a decedent by death may be valued for estate tax purposes as of the date of death or the alternate valuation date. The alternate valuation date is six months after the date of death or the date the property is disposed of by the estate, whichever comes first. To use the alternate valuation date, the executor or administrator of the estate must make an affirmative election. The election applies to all of the estate’s assets. Election of the alternate valuation date is not available unless it decreases the amount of the gross estate and reduces the estate tax liability. § 2032. Alternative depreciation system (ADS). A cost recovery system in which the cost or other initial basis of an asset is recovered using the straight-line method over recovery periods similar to those used in MACRS. The alternative system must be used in certain instances and can be elected in other instances. § 168(g). Alternative minimum tax (AMT). The AMT is a surtax, calculated as a percentage of alternative minimum taxable income (AMTI). AMTI generally starts with the taxpayer’s taxable income, prior to any standard deduction taken. To this amount, the taxpayer (1) adds designated preference items (e.g., tax-exempt interest income on private activity bonds), (2) makes other specified adjustments (e.g., to reflect a slower cost recovery method), (3) adjusts certain AMT itemized deductions (e.g., interest incurred on housing), and (4) subtracts an exemption amount. The taxpayer must pay the greater of the resulting AMT or the regular income tax (reduced by all allowable tax credits). The AMT applies to individuals, trusts, and estates; the AMT does not apply to C corporations after 2017. AMT preferences and adjustments are assigned to partners, LLC members, and S corporation shareholders. §§ 55–59. Alternative minimum tax credit. AMT liability can result from timing differences that give rise to positive adjustments in calculating AMTI. To provide equity for the taxpayer when these timing differences reverse, the regular tax liability may be reduced by a tax credit for a prior year’s minimum tax liability attributable to timing differences. § 53. Alternative minimum taxable income (AMTI). The base (prior to deducting the exemption amount) for computing a taxpayer’s alternative minimum tax. This consists of the taxable income for the year modified for AMT adjustments and AMT preferences. § 55(b)(2). Alternative tax. An option that is allowed in computing the tax on net capital gain. For noncorporate taxpayers, the rate is usually 15 percent (but is 25 percent for unrecaptured § 1250 gain and 28 percent for collectibles). However, the alternative tax rate is 0 percent (rather than 15 percent) for lower-income taxpayers (e.g., taxable income of $80,800 or less for married persons filing jointly). Certain high-income taxpayers (e.g., taxable income of more than $501,600 for married persons filing jointly) have an alternative tax rate of 20 percent. § 1(h).

C-3

Alternative tax NOL deduction (ATNOLD). In calculating the AMT, the taxpayer is allowed to deduct NOL carryovers following the regular tax NOL carryover provisions. The AMT NOL amount is referred to as the ATNOLD. The regular income tax NOL is modified for AMT adjustments and preferences to produce the ATNOLD. § 56(d). American Opportunity credit. This credit applies for qualifying expenses for the first four years of postsecondary education. Qualified expenses include tuition and related expenses and books and other course materials. Room and board are ineligible for the credit. The maximum credit available per student is $2,500 (100 percent of the first $2,000 of qualified expenses and 25 percent of the next $2,000 of qualified expenses). Eligible students include the taxpayer, taxpayer’s spouse, and taxpayer’s dependents. To qualify for the credit, a student must take at least one-half of the full-time course load for at least one academic term at a qualifying educational institution. The credit is phased out for higher-income taxpayers. § 25A. Amortization. The tax deduction for the cost or other basis of an intangible asset over the asset’s estimated useful life. Examples of amortizable intangibles include patents, copyrights, and leasehold interests. Most purchased intangible assets (e.g., goodwill) can be amortized for income tax purposes over a 15-year period. § 197. Amount realized. The amount received by a taxpayer upon the sale or exchange of property. Amount realized is the sum of the cash and the fair market value of any property or services received by the taxpayer plus any related debt assumed by the buyer. Determining the amount realized is the starting point for arriving at realized gain or loss. § 1001(b). Annual exclusion. In computing the taxable gifts for the year, each donor excludes the first $15,000 (for 2021) of a gift to each donee. Usually, the annual exclusion is not available for gifts of future interests. § 2503(b). Annuity. A fixed sum of money payable to a person at specified times for a specified period of time or for life. If the party making the payment (i.e., the obligor) is regularly engaged in this type of business (e.g., an insurance company), the arrangement is classified as a commercial annuity. A so-called private annuity involves an obligor that is not regularly engaged in selling annuities (e.g., a charity or family member). Apportion. The assignment of the business income of a multistate corporation to specific states for income taxation. Usually, the apportionment procedure accounts for the property, payroll, and sales activity levels of the various states, and a proportionate assignment of the entity’s total income is made using a statutory apportionment formula. Most states exclude nonbusiness income from the apportionment procedure; they allocate nonbusiness income to the states where the nonbusiness assets are located. Appreciated inventory. In partnership taxation, appreciated inventory is a hot asset, and a partner’s share of its ordinary income potential must be allocated. If a partner sells an interest in the partnership, ordinary income is recognized to the extent of the partner’s share in the partnership’s inventory and unrealized receivables. The definition of “inventory” here is broad enough to include any accounts receivable, including unrealized receivables. See also substantially appreciated inventory. § 751. Arm’s length. See arm’s length price.

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

C-4

APPENDIX C   Glossary

Arm’s length price. The standard under which unrelated parties would determine an exchange price for a transaction. Suppose, for example, Cardinal Corporation sells property to its sole shareholder for $10,000. In testing whether the $10,000 is an “arm’s length” price, one would ascertain the price that would have been negotiated between the corporation and an unrelated party in a bargained exchange. ASC 740. Under Generally Accepted Accounting Principles, the rules for the financial reporting of the tax expense of an enterprise. Permanent differences affect the enterprise’s effective tax rate. Temporary differences create a deferred tax asset or a deferred tax liability on the balance sheet. ASC 740-10. An interpretation by the Financial Accounting Standards Board. When an uncertain tax return position exists, this interpretation is used to determine the financial reporting treatment, if any, for the taxpayer. If it is more likely than not (i.e., a greater than 50 percent probability) that the uncertain return position will be sustained (e.g., by the courts) on its technical merits, it must be reported on the financial statements. The amount to be reported then is computed based on the probabilities of the outcome of the technical review and the amounts at which the dispute would be resolved. If the more-likely-than-not test is failed, no current financial disclosure of the results of the return position is required. Asset Depreciation Range (ADR) system. A system of estimated useful lives for categories of tangible assets prescribed by the IRS. The system provides a range for each category that extends from 20 percent above to 20 percent below the guideline class lives prescribed by the IRS. Asset use test. In the context of a corporate reorganization, a means by which to determine if the continuity of business enterprise requirement is met. The acquiring corporation must continue to use the target entity’s assets in the acquiror’s business going forward; if this is not the case, the requirement is failed. Assignment of income. A taxpayer attempts to avoid the recognition of income by assigning to another the property that generates the income. Such a procedure will not avoid income recognition by the taxpayer making the assignment if the income was earned at the point of the transfer. In this case, the income is taxed to the person who earns it. At-risk limitation. Generally, a taxpayer can deduct losses related to a trade or business, S corporation, partnership, or investment asset only to the extent of the at-risk amount. The taxpayer has an amount at risk in a business or investment venture to the extent that personal assets have been subjected to the risks of the business. Typically, the taxpayer’s at-risk amount includes (1) the amount of money or other property that the investor contributed to the venture for the investment, (2) the amount of any of the entity’s liabilities for which the taxpayer personally is liable and that relate to the investment, and (3) an allocable share of nonrecourse debts incurred by the venture from third parties in arm’s length transactions for real estate investments. § 465. Attribution. Under certain circumstances, the tax law applies attribution (constructive ownership) rules to assign to one taxpayer the ownership interest of another taxpayer. If, for example, the stock of Gold Corporation is held 60 percent by Marsha and 40 percent by Sidney, Marsha may be deemed to own 100 percent of Gold Corporation if Marsha and Sidney are mother and child. In that case, the stock owned by Sidney is attributed to Marsha. Stated differently,

Marsha has a 60 percent direct and a 40 percent indirect interest in Gold Corporation. It can also be said that Marsha is the constructive owner of Sidney’s interest. Automatic mileage method. Automobile expenses are generally deductible only to the extent the automobile is used in business or for the production of income. Personal commuting expenses are not deductible. The taxpayer may deduct actual expenses (including depreciation and insurance), or the standard (automatic) mileage rate may be used (56 cents per mile for 2021 and 57.5 cents per mile for 2020). Automobile expenses incurred for medical purposes are deductible to the extent of actual out-of-pocket expenses or at the rate of 16 cents per mile for 2021 and 17 cents per mile for 2020. For charitable activities, the rate is 14 cents per mile. Average tax rate. The average tax rate is equal to the tax liability divided by taxable income. This rate can be useful in comparing taxpayers or a taxpayer’s changed tax picture from one year to another.

B Bad debt. A deduction is permitted if a business account receivable subsequently becomes partially or completely worthless, providing the income arising from the debt previously was included in income. Available methods are the specific charge-off method and the reserve method. However, except for certain financial institutions, TRA of 1986 repealed the use of the reserve method for 1987 and thereafter. If the reserve method is used, partially or totally worthless accounts are charged to the reserve. A nonbusiness bad debt deduction is allowed as a short-term capital loss if the loan did not arise in connection with the creditor’s trade or business activities. Loans between related parties (family members) generally are classified as nonbusiness. § 166. Balance sheet approach. The process under ASC 740 (SFAS 109) by which an entity’s deferred tax expense or deferred tax benefit is determined as a result of the reporting ­period’s changes in the balance sheet’s deferred tax asset and deferred tax liability accounts. Basis in partnership interest. The acquisition cost of the partner’s ownership interest in the partnership. Includes purchase price and associated debt acquired from other partners and in the course of the entity’s trade or business. Benchmarking. The tax professional’s use of two or more entities’ effective tax rates and deferred tax balance sheet accounts. Used chiefly to compare the effectiveness of the entities’ tax planning techniques and to suggest future taxmotivated courses of action. Blockage rule. A factor to be considered in valuing a large block of corporate stock. Application of this rule generally justifies a discount in the asset’s fair market value, because the disposition of a large amount of stock at any one time may depress the value of the shares in the marketplace. Boot. Cash or property of a type not included in the definition of a tax-deferred exchange. The receipt of boot causes an otherwise tax-deferred transfer to become immediately taxable to the extent of the lesser of the fair market value of the boot or the realized gain on the transfer. For example, see transfers to controlled corporations under § 351(b), reorganizations under § 368, and like-kind exchanges under § 1031(b). Built-in gains tax. A penalty tax designed to discourage a shift of the incidence of taxation on unrealized gains from a

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APPENDIX C   Glossary

C corporation to its shareholders, via an S election. Under this provision, any recognized gain during the first five years of S status generates a corporate-level tax on a base not to exceed the aggregate untaxed built-in gains brought into the S corporation upon its election from C corporation taxable years. § 1374. Built-in loss property. Property contributed to a corporation under § 351 or as a contribution to capital that has a basis in excess of its fair market value. An adjustment is necessary to step down the basis of the property to its fair market value. The adjustment prevents the corporation and the contributing shareholder from obtaining a double tax benefit. The corporation allocates the adjustment proportionately among the assets with the built-in loss. As an alternative to the corporate adjustment, the shareholder may elect to reduce the basis in the stock. Business bad debt. A tax deduction allowed for obligations obtained in connection with a trade or business that have become either partially or completely worthless. In contrast to nonbusiness bad debts, business bad debts are deductible as business expenses. § 166. Business purpose. A justifiable business reason for carrying out a transaction. Mere tax avoidance is not an acceptable business purpose. The presence of a business purpose is crucial in the area of corporate reorganizations and certain liquidations. Buy-sell agreement. An arrangement, particularly appropriate in the case of a closely held corporation or a partnership, whereby the surviving owners (shareholders or partners) or the entity agrees to purchase the interest of a withdrawing owner. The buy-sell agreement provides for an orderly disposition of an interest in a business and may aid in setting the value of the interest for estate tax purposes. Bypass amount. The amount that can be transferred by gift or at death free of any unified transfer tax. For 2021, the bypass amount is $11.7 million for estate tax and $11.7 million for gift tax. Bypass election. In the context of a distribution by an S corporation, an election made by the entity to designate that the distribution is first from accumulated earnings and profits and only then from the accumulated adjustments account (AAA).

C C corporation. A separate taxable entity subject to the rules of Subchapter C of the Code. This business form may create a double taxation effect relative to its shareholders. The entity is subject to the regular corporate tax and a number of penalty taxes at the Federal level. Cafeteria benefit plans. See cafeteria plan. Cafeteria plan. An employee benefit plan under which an employee is allowed to select from among a variety of employer-provided fringe benefits. Some of the benefits may be taxable, and some may be statutory nontaxable benefits (e.g., health and accident insurance and group term life insurance). The employee is taxed only on the taxable benefits selected. A cafeteria benefit plan is also referred to as a flexible benefit plan. § 125. Capital account. The financial accounting analog of a partner’s tax basis in the entity. Capital account maintenance. Under the § 704(b) Regulations, partnership allocations will be respected only if capital accounts are maintained in accordance with

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those regulations. These so-called “§ 704(b) book capital accounts” are properly maintained if they reflect the partner’s contributions and distributions of cash; increases and decreases for the fair market value of contributed/distributed property; and adjustments for the partner’s share of income, gains, losses, and deductions. Certain other adjustments are also required. See also economic effect test and Section 704(b) book capital accounts. Capital asset. Broadly speaking, all assets are capital except those specifically excluded from that definition by the Code. Major categories of noncapital assets include property held for resale in the normal course of business (inventory), trade accounts and notes receivable, and depreciable property and real estate used in a trade or business (§ 1231 assets). § 1221. Capital contribution. Various means by which a shareholder makes additional funds available to the corporation (placed at the risk of the business), sometimes without the receipt of additional stock. If no stock is received, the contributions are added to the basis of the shareholder’s existing stock investment and do not generate gross income to the corporation. § 118. Capital gain property. Property contributed to a charitable organization that if sold rather than contributed, would have resulted in long-term capital gain to the donor. § 170(e). Capital gains. The gain from the sale or exchange of a capital asset. Capital interest. Usually, the percentage of the entity’s net assets that a partner would receive on liquidation. Typically determined by the partner’s capital sharing ratio. Capital losses. The loss from the sale or exchange of a capital asset. Capital sharing ratio. A partner’s percentage ownership of the entity’s capital. Carbon tax. A tax on fossil fuels to help reduce greenhouse gas emissions. Carried interest. A “partnership interest held in connection with performance of services,” as defined under § 1061. Long-term capital gains from such an interest are reclassified as short-term capital gains (with potential ordinary income treatment) unless the underlying asset that triggered the gain had more than a three-year holding period. This provision only applies to income and gains arising from managing portfolio investments on behalf of third-party investors, including publicly traded securities, commodities, certain real estate, or options to buy/sell such assets. Section 1061 was enacted in the TCJA of 2017 in an effort to curtail an industry practice that resulted in fund managers receiving partnership profits interests in exchange for services: these “profits partners” received long-term capital gain allocations from the fund, rather than ordinary income for the services provided in managing the fund’s assets. In addition to § 1061, the IRS has, from time to time, announced that it might issue regulations (under its general “anti-abuse” authority) to expand the scope of the carried interest rules. Cash balance plan. A hybrid form of pension plan similar in some aspects to a defined benefit plan. Such a plan is funded by the employer, and the employer bears the investment risks and rewards. But like defined contribution plans, a cash balance plan establishes allocations to individual employee accounts, and the payout for an employee depends on investment performance.

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APPENDIX C   Glossary

Cash method. See cash receipts method. Cash receipts method. A method of accounting that reflects deductions as paid and income as received in any one tax year. However, deductions for prepaid expenses that benefit more than one tax year (e.g., prepaid rent and prepaid interest) usually are spread over the period benefited rather than deducted in the year paid. § 446(c)(1). Casualty loss. A casualty is defined as “the complete or partial destruction of property resulting from an identifiable event of a sudden, unexpected, or unusual nature” (e.g., floods, storms, fires, auto accidents). Individuals may deduct a casualty loss only if the loss is incurred in a trade or business or in a transaction entered into for profit or arises from fire, storm, shipwreck, or other casualty or from theft. Individuals usually deduct personal casualty losses as itemized deductions subject to a $100 nondeductible amount and to an annual floor equal to 10 percent of adjusted gross income that applies after the $100 per casualty floor has been applied. Special rules are provided for the netting of certain casualty gains and losses. For tax years beginning after 2017 (and before 2026), personal casualty losses are limited to those sustained in an area designated as a disaster area by the President of the United States. Charitable contribution. Contributions made to qualified nonprofit organizations. Taxpayers, regardless of their accounting method, are generally allowed to deduct (subject to various restrictions and limitations) contributions in the year of payment. Accrual basis corporations may accrue contributions at year-end if payment is properly authorized before the end of the year and payment is made within three and one-half months after the end of the year. § 170. Check-the-box Regulations. By using the check-the-box rules prudently, an entity can select the most attractive tax results offered by the Code, without being bound by legal forms. By default, an unincorporated entity with more than one owner is taxed as a partnership; an unincorporated entity with one owner is a disregarded entity, taxed as a sole proprietorship or corporate division. No action is necessary by the taxpayer if the legal form or default status is desired. Form 8832 is used to “check a box” and change the tax status. Not available if the entity is incorporated under state law. Child tax credit. A tax credit based solely on the number of qualifying children under age 17. The maximum credit available is $2,000 per qualifying child. (In addition, a $500 nonrefundable credit is available for qualifying dependents other than qualifying children.) A qualifying child must be claimed as a dependent on a parent’s tax return and have a Social Security number to qualify for the credit. Taxpayers who qualify for the child tax credit may also qualify for a supplemental credit. The supplemental credit is treated as a component of the earned income credit and is therefore refundable. The credit is phased out for higher-income taxpayers. § 24. See also dependent tax credit. Circuit Court of Appeals. Any of 13 Federal courts that consider tax matters appealed from the U.S. Tax Court, a U.S. District Court, or the U.S. Court of Federal Claims. Appeal from a U.S. Court of Appeals is to the U.S. Supreme Court by Certiorari. Circular 230. A portion of the Federal tax Regulations that describes the levels of conduct at which a tax preparer

must operate. Circular 230 dictates, for instance, that a tax preparer may not charge an unconscionable fee or delay the execution of a tax audit with inappropriate delays. Circular 230 requires that there be a reasonable basis for a tax return position and that no frivolous returns be filed. Citator. A tax research resource that presents the judicial history of a court case and traces the subsequent references to the case. When these references include the citating cases’ evaluations of the cited case’s precedents, the research can obtain some measure of the efficacy and reliability of the original holding. Claim of right doctrine. A judicially imposed doctrine applicable to both cash and accrual basis taxpayers that holds that an amount is includible in income upon actual or constructive receipt if the taxpayer has an unrestricted claim to the payment. For the tax treatment of amounts repaid when previously included in income under the claim of right doctrine, see § 1341. Closely held C corporation. A regular corporation (i.e., the S election is not in effect) for which more than 50 percent of the value of its outstanding stock is owned, directly or indirectly, by five or fewer individuals at any time during the tax year. The term is relevant in identifying C corporations that are subject to the passive activity loss provisions. § 469. Closely held corporation. A corporation where stock ownership is not widely dispersed. Rather, a few shareholders are in control of corporate policy and are in a position to benefit personally from that policy. Closing agreement. In a tax dispute, the parties sign a closing agreement to spell out the terms under which the matters are settled. The agreement is binding on both the Service and the taxpayer. § 7121. Collectibles. A special type of capital asset, the gain from which is taxed at a maximum rate of 28 percent if the holding period is more than one year. Examples include art, rugs, antiques, gems, metals, stamps, some coins and bullion, and alcoholic beverages held for investment. Combined return. In multistate taxation, a group of unitary corporations may elect or be required to file an income tax return that includes operating results for all of the affiliates, not just those with nexus in the state. Thus, apportionment data are reported for the group’s worldwide or water’sedge operations. Community property. Arizona, California, Idaho, Louisiana, ­ isconsin Nevada, New Mexico, Texas, Washington, and W have community property systems. Alaska residents can elect community property status for assets. The rest of the states are common law property jurisdictions. The difference between common law and community property systems centers around the property rights possessed by married persons. In a common law system, each spouse owns whatever he or she earns. Under a community property system, one-half of the earnings of each spouse is considered owned by the other spouse. Assume, for example, that Jeff and Alice are husband and wife and that their only income is the $50,000 annual salary Jeff receives. If they live in New York (a common law state), the $50,000 salary belongs to Jeff. If, however, they live in Texas (a community property state), the $50,000 salary is owned one-half each by Jeff and Alice.

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

APPENDIX C   Glossary

Compensatory damages. Damages received or paid by the taxpayer can be classified as compensatory damages or as punitive damages. Compensatory damages are paid to compensate one for harm caused by another. Compensatory damages received on account of physical injuries are excludible from the recipient’s gross income. § 104(a)(2). Complete termination redemption. Sale or exchange treatment is available relative to this type of redemption. The shareholder must retire all of his or her outstanding shares in the corporation (ignoring family attribution rules) and cannot hold an interest, other than that of a creditor, for the 10 years following the redemption. § 302(b)(3). Completed contract method. A method of reporting gain or loss on certain long-term contracts. Under this method of accounting, all gross income and expenses are recognized in the tax year in which the contract is completed. Reg. § 1.451–3. Complex trust. Not a simple trust. Such trusts may have charitable beneficiaries, accumulate income, and distribute corpus. §§ 661–663. Composite return. In multistate taxation, an S corporation may be allowed to file a single income tax return that assigns pass-through items to resident and nonresident shareholders. The composite or “block” return allows the entity to remit any tax that is attributable to the nonresident shareholders. Conduit concept. A perspective taken toward a venture that regards the venture as an aggregation of its owners joined together in an agency relationship rather than as a separate entity. For tax purposes, this results in the income of the venture being taxable directly to its owners. For example, items of income and expense, capital gains and losses, tax credits, etc., realized by a partnership pass through the partnership (a conduit) and are subject to taxation at the partner level. Also, in an S corporation, certain items pass through and are reported on the returns of the shareholders. Conduit perspective. See conduit concept. Consolidated returns. A procedure whereby certain affiliated corporations may file a single return, combine the tax transactions of each corporation, and arrive at a single income tax liability for the group. The election to file a consolidated return usually is binding on future years. §§ 1501–1505 and related Regulations. Consolidation. The combination of two or more corporations into a newly created corporation. Thus, Black Corporation and White Corporation combine to form Gray Corporation. A consolidation may qualify as a nontaxable reorganization if certain conditions are satisfied. §§ 354 and 368(a)(1)(A). Constructive dividends. A taxable benefit derived by a shareholder from his or her corporation that is not actually initiated by the board of directors as a dividend. Examples include unreasonable compensation, excessive rent payments, bargain purchases of corporate property, and shareholder use of corporate property. Constructive dividends generally are found in closely held corporations.

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Constructive liquidation scenario. The means by which recourse debt is shared among partners in basis determination. Constructive receipt. If income is unqualifiedly available although not physically in the taxpayer’s possession, it still is subject to the income tax. An example is accrued interest on a savings account. Under the constructive receipt concept, the interest is taxed to a depositor in the year available, rather than the year actually withdrawn. The fact that the depositor uses the cash basis of accounting for tax purposes is irrelevant. See Reg. § 1.451–2. Continuity of business enterprise. In a tax-favored reorganization, the acquiring corporation must continue the historic business of the target or use a significant portion of the target’s assets in the new business. Continuity of interest. In a tax-favored reorganization, a shareholder or corporation that has substantially the same investment after an exchange as before should not be taxed on the transaction. Specifically, the target shareholders must acquire an equity interest in the acquiring corporation equal in value to at least 40 percent of all the outstanding stock of the target entity. Control. Holding a specified level of stock ownership in a corporation. For § 351, the new shareholder(s) must hold at least 80 percent of the total combined voting power of all voting classes of stock and at least 80 percent of the shares of all nonvoting classes. Other tax provisions require different levels of control to bring about desired effects, such as 50 or 100 percent. Controlled foreign corporation (CFC). A non-U.S. corporation in which more than 50 percent of the total combined voting power of all classes of stock entitled to vote or the total value of the stock of the corporation is owned by U.S. shareholders on any day during the taxable year of the foreign corporation. For purposes of this definition, a U.S. shareholder is any U.S. person who owns, or is considered to own, 10 percent or more of the total combined voting power of all classes of voting stock of the foreign corporation. Stock owned directly, indirectly, and constructively is used in this measure. See U.S. shareholder. §§ 951–965. Controlled group. Controlled groups include parent-­ subsidiary groups, brother-sister groups, combined groups, and certain insurance companies. Controlled groups are required to share certain elements of tax calculations (e.g., $250,000 accumulated earnings credit) or tax credits (e.g., research credit). §§ 1561 and 1563. Corporate liquidation. Occurs when a corporation distributes its net assets to its shareholders and ceases to be a going concern. Generally, a shareholder recognizes capital gain or loss upon the liquidation of the entity, regardless of the corporation’s balance in its earnings and profits account. The liquidating corporation recognizes gain and loss on assets that it sells during the liquidation period and on assets that it distributes to shareholders in kind. Corpus. The body or principal of a trust. Suppose, for example, Grant transfers an apartment building into a trust, income payable to Ruth for life, remainder to Shawn upon Ruth’s death. Corpus of the trust is the apartment building.

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APPENDIX C   Glossary

Correspondence audit. An audit conducted by the IRS by the U.S. mail. Typically, the IRS writes to the taxpayer requesting the verification of a particular deduction or exemption. The remittance of copies of records or other support is requested of the taxpayer. Cost depletion. Depletion that is calculated based on the adjusted basis of the asset. The adjusted basis is divided by the expected recoverable units to determine the depletion per unit. The depletion per unit is multiplied by the units sold during the tax year to calculate cost depletion. §§ 611 and 612. Cost recovery. The system by which taxpayers are allowed to recover their investment in an asset by reducing their taxable income by the asset’s cost or initial basis. Cost recovery methods include MACRS, § 179 expense, additional first-year deprecation, amortization, and depletion. §§ 168, 179, and 611. Court of original jurisdiction. The Federal courts are divided into courts of original jurisdiction and appellate courts. A dispute between a taxpayer and the IRS is first considered by a court of original jurisdiction (i.e., a trial court). The four Federal courts of original jurisdiction are the U.S. Tax Court, the U.S. District Court, the U.S. Court of Federal Claims, and the Small Cases Division of the U.S. Tax Court. Coverdell education savings account (§ 530 plan). Coverdell education savings account exempts from tax the earnings on amounts placed in a qualified account for the education expenses of a named beneficiary. Contributions are limited to $2,000 per year per beneficiary, and the proceeds can be withdrawn without tax provided the funds are used to pay qualified educational expenses for primary, secondary, or higher education. (There is an annual $10,000 per student limitation on distributions for tuition expenses for primary and secondary education.) Qualified educational expenses also include certain homeschooling expenses. The account is named for the late Senator Paul Coverdell (R-GA), who sponsored the legislation in Congress. § 530. Credit for certain retirement plan contributions. A nonrefundable credit is available based on eligible contributions of up to $2,000 to certain qualified retirement plans, such as traditional and Roth IRAs and § 401(k) plans. The benefit provided by this credit is in addition to any deduction or exclusion that otherwise is available resulting from the qualifying contribution. The amount of the credit depends on the taxpayer’s AGI and filing status. § 25B. Credit for child and dependent care expenses. A tax credit ranging from 20 percent to 35 percent of employmentrelated expenses (child and dependent care expenses) for amounts of up to $6,000 is available to individuals who are employed (or deemed to be employed) and maintain a household for a dependent child under age 13, disabled spouse, or disabled dependent. § 21. Credit for employer-provided child care. A nonrefundable credit is available to employers who provide child care facilities to their employees during normal working hours. The credit, limited to $150,000, is comprised of two components. The portion of the credit for qualified child care expenses is equal to 25 percent of these expenses, while the portion of the credit for qualified child care resource and referral services is equal to 10 percent of these expenses. Any

qualifying expenses otherwise deductible by the taxpayer must be reduced by the amount of the credit. In addition, the taxpayer’s basis for any property used for qualifying purposes is reduced by the amount of the credit. § 45F. Credit for employer-provided family and medical leave. A nonrefundable credit is available to employers who pay wages to employees while they are on family and medical leave. The credit is equal to 12.5 percent of wages paid to qualifying employees (limited to 12 weeks per employee per year). Employers must pay a minimum of 50 percent of the wages normally paid; if wages paid during the leave exceed 50 percent of normal wages, the credit is increased by 0.25 percent for each percentage point above 50 percent to a maximum of 25 percent of wages paid. The credit does not apply to wages paid in taxable years beginning after 2020. § 45S. Credit for small employer pension plan startup costs. A nonrefundable credit available to small businesses based on administrative costs associated with establishing and maintaining certain qualified plans. While such qualifying costs generally are deductible as ordinary and necessary business expenses, the availability of the credit is intended to lower the costs of starting a qualified retirement program and therefore encourage qualifying businesses to establish retirement plans for their employees. The credit is available for eligible employers at the rate of 50 percent of qualified startup costs. The maximum credit is $500 (based on a maximum $1,000 of qualifying expenses). § 45E. Crop insurance proceeds. The proceeds received when an insured crop is destroyed. Section 451(f) permits the farmer to defer reporting the income from the insurance proceeds until the tax year following the taxable year of the destruction. Crop method. A method of accounting for agricultural crops that are planted in one year but harvested in a subsequent year. Under this method, the costs of raising the crop are accumulated as inventory and are deducted when the income from the crop is realized. Cross-purchase buy-sell agreement. Under this arrangement, the surviving owners of the business agree to buy out the withdrawing owner. Assume, for example, Ron and Sara are equal shareholders in Tip Corporation. Under a cross-purchase buy-sell agreement, Ron and Sara would contract to purchase the other’s interest, should that person decide to withdraw from the business. Current distribution. A payment made by a partnership to a partner when the partnership’s legal existence does not cease thereafter. The partner usually assigns a basis in the distributed property that is equal to the lesser of the partner’s basis in the partnership interest or the basis of the distributed asset to the partnership. The partner first assigns basis to any cash that he or she receives in the distribution. A cash distribution in excess of the partner’s basis triggers a gain. The partner’s remaining basis, if any, is assigned to the noncash assets according to their relative bases to the partnership. Current E & P. Net tax-basis earnings of a corporation aggregated during the current tax year. A corporate distribution is deemed to be first from the entity’s current earnings and profits and then from accumulated earnings and profits. Shareholders recognize dividend income to the extent of the earnings and profits of the corporation. A dividend

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

APPENDIX C   Glossary

results to the extent of current earnings and profits, even if there is a larger negative balance in accumulated earnings and profits. Current tax expense. Under ASC 740 (SFAS 109), the book tax expense that relates to the current reporting period’s net income and is actually payable (or creditable) to the appropriate governmental agencies for the current period. Also known as “cash tax” or “tax payable.”

D De minimis fringe. Benefits provided to employees that are too insignificant to warrant the time and effort required to account for the benefits received by each employee and the value of those benefits. Such amounts are excludible from the employee’s gross income. § 132. De minimis fringe benefits. See de minimis fringe. Death benefits. A payment made by an employer to the beneficiary or beneficiaries of a deceased employee on account of the death of the employee. Debt-financed income. Included in computations of the unrelated business income of an exempt organization, the gross income generated from debt-financed property. Deceased spouse’s unused exclusion (DSUE). In computing the Federal estate tax, the decedent uses the exclusion amount to shelter an amount of the gross estate from taxation. When the first spouse to die fails to use a portion of his/her exclusion amount, the unused portion is “portable” and becomes available to the surviving spouse. The surviving spouse can use the DSUE only of his/her last spouse to predecease. Deduction for qualified business income. A deduction allowed for noncorporate taxpayers based on the qualified business income of a qualified trade or business. In general, the deduction is limited to the lesser of 20 percent of qualified business income, or 20 percent of taxable income before the qualified business income deduction less any net capital gain. There are three limitations on the deduction—an overall limitation (based on modified taxable income), another that applies to high-income taxpayers, and a third that applies to certain types of services businesses. § 199A. Deductions for adjusted gross income. The Federal income tax is not imposed upon gross income. Rather, it is imposed upon taxable income. Congressionally identified deductions for individual taxpayers are subtracted either from gross income to arrive at adjusted gross income or from adjusted gross income to arrive at the tax base, taxable income. Deductions from adjusted gross income. See deductions for adjusted gross income. Deductions in respect of a decedent. Deductions accrued at the moment of death but not recognizable on the final income tax return of a decedent because of the method of accounting used. Such items are allowed as deductions on the estate tax return and on the income tax return of the estate (Form 1041) or the heir (Form 1040). An example of a deduction in respect of a decedent is interest expense accrued to the date of death by a cash basis debtor. Deferred compensation. Compensation that will be taxed when received or upon the removal of certain restrictions on receipt and not when earned. Contributions by

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an employer to a qualified pension or profit sharing plan on behalf of an employee are an example. The contributions will not be taxed to the employee until the funds are made available or distributed to the employee (e.g., upon retirement). Deferred tax asset. Under ASC 740, an asset recorded on the balance sheet to reflect the future tax benefits related to a transaction or activity which has already been reflected in the financial statements. A deferred tax asset is often the result of the deferral of a deduction or the acceleration of income for tax purposes relative to Generally Accepted Accounting Principles. Deferred tax benefit. Under ASC 740, a reduction in the book tax expense that relates to the current reporting period’s net income but will not be realized until a future reporting period. Creates or adds to the entity’s deferred tax asset balance sheet account. For instance, the carryforward of a net operating loss is a deferred tax benefit. Deferred tax expense. Under ASC 740, a book tax expense that relates to the current reporting period’s net income but will not be realized until a future reporting period. Creates or adds to the entity’s deferred tax liability balance sheet account. For instance, a deferred tax expense is created when tax depreciation deductions for the period are “accelerated” and exceed the corresponding book depreciation expense. Deferred tax liability. Under ASC 740, a liability recorded on the balance sheet to reflect the future tax costs of a transaction or activity which has already been reflected in the financial statements. A deferred tax liability is often the result of the deferral of the recognition of income or the acceleration of a deduction for tax purposes relative to Generally Accepted Accounting Principles. Defined benefit plan. Qualified plans can be dichotomized into defined benefit plans and defined contribution plans. Under a defined benefit plan, a formula defines the benefits employees are to receive. The formula usually includes years of service, employee compensation, and some stated percentage. The employer must make annual contributions based on actuarial computations that will be sufficient to pay the vested retirement benefits. Defined contribution pension plan. Qualified plans can be dichotomized into defined benefit plans and defined contribution plans. Under a defined contribution plan, a separate account is maintained for each covered employee. The employee’s benefits under the plan are based solely on (1) the amount contributed and (2) income from the fund that accrues to the employee’s account. The plan defines the amount the employer is required to contribute (e.g., a flat dollar amount, an amount based on a special formula, or an amount equal to a certain percentage of compensation). Dependency exemptions. See personal and dependency exemptions. Dependent tax credit. For 2018 through 2025, the TCJA of 2017 replaced the dependency exemption with a $500 nonrefundable credit. This credit can be claimed for dependents who are not a qualifying child or under the age of 17. The dependent must be a citizen or resident of the United States. § 24(h). Depletion. The process by which the cost or other basis of a natural resource (e.g., an oil or gas interest) is recovered

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APPENDIX C   Glossary

upon extraction and sale of the resource. The two ways to determine the depletion allowance are the cost and percentage (or statutory) methods. Under cost depletion, each unit of production sold is assigned a portion of the cost or other basis of the interest. This is determined by dividing the cost or other basis by the total units expected to be recovered. Under percentage (or statutory) depletion, the tax law provides a special percentage factor for different types of minerals and other natural resources. This percentage is multiplied by the gross income from the interest to arrive at the depletion allowance. §§ 611–613A. Depreciation. The system by which a taxpayer allocates for financial reporting purposes the cost of an asset to periods benefited by the asset. Determination letter. Upon the request of a taxpayer, the IRS will comment on the tax status of a completed transaction. Determination letters frequently are used to determine whether a retirement or profit sharing plan qualifies under the Code and to determine the tax-exempt status of certain nonprofit organizations. Disabled access credit. A tax credit designed to encourage small businesses to make their facilities more accessible to disabled individuals. The credit is equal to 50 percent of the eligible expenditures that exceed $250 but do not exceed $10,250. Thus, the maximum amount for the credit is $5,000. The adjusted basis for depreciation is reduced by the amount of the credit. To qualify, the facility must have been placed in service before November 6, 1990. § 44. Disaster area losses. A casualty sustained in an area designated as a disaster area by the President of the United States. In such an event, the disaster loss may be treated as having occurred in the taxable year immediately preceding the year in which the disaster actually occurred. Thus, immediate tax benefits are provided to victims of a disaster. § 165(i). Disclaimer. Rejections, refusals, or renunciations of claims, powers, or property. Section 2518 sets forth the conditions required to avoid gift tax consequences as the result of a disclaimer. Disguised sale. When a partner contributes property to the entity and soon thereafter receives a distribution from the partnership, the transactions are collapsed and the distribution is seen as a purchase of the asset by the p ­ artnership. § 707(a)(2)(B). Disproportionate distribution. A distribution from a partnership to one or more of its partners in which at least one partner’s interest in partnership hot assets is increased or decreased. For example, a distribution of cash to one partner and hot assets to another changes both partners’ interest in hot assets and is disproportionate. The intent of the disproportionate distribution rules is to ensure that each partner eventually recognizes his or her proportionate share of partnership ordinary income. Disproportionate redemption. Sale or exchange treatment is available relative to this type of redemption. After the exchange, the shareholder owns less than 80 percent of his or her pre-redemption interest in the corporation and only a minority interest in the entity. § 302(b)(2). Disregarded entity. The Federal income tax treatment of business income usually follows the legal form of the taxpayer

(i.e., an individual’s sole proprietorship is reported on the Form 1040); a C corporation’s taxable income is computed on Form 1120. The check-the-box Regulations are used if the unincorporated taxpayer wants to use a different tax regime. Under these rules, a disregarded entity is taxed as an individual or a corporate division; other tax regimes are not available. For instance, a one-member limited liability company is a disregarded entity. Distributable net income (DNI). The measure that determines the nature and amount of the distributions from estates and trusts that the beneficiaries must include in income. DNI also limits the amount that estates and trusts can claim as a deduction for such distributions. § 643(a). Distributive share. In partnership or S corporation taxation, the distributive share is the amount of income, gain, deduction, loss, or credit allocated to a given partner or shareholder. The distributive share is the amount reported on a given line of the owner’s Schedule K–1. For example, a partner’s distributive share of ordinary income is the amount of income shown on that partner’s Schedule K–1, Part III, line 1. For S corporations, the distributive share must be determined based on the shareholder’s ownership percentage. For partnerships, the distributive share is generally determined in accordance with the partnership agreement. For both types of entities, amounts can be prorated if the ownership interest is transferred during the tax year. Dividend. A nondeductible distribution to the shareholders of a corporation. A dividend constitutes gross income to the recipient if it is paid from the current or accumulated earnings and profits of the corporation. § 316. Dividends received deduction. A deduction allowed a shareholder that is a corporation for dividends received from a domestic corporation. The deduction usually is 50 percent of the dividends received, but it could be 65 or 100 percent depending upon the ownership percentage held by the recipient corporation. §§ 243–246. Divisive reorganization. A “Type D” spin-off, split-off, or split-up reorganization in which the original corporation divides its active business (in existence for at least five years) assets among two or more corporations. The stock received by the original corporation shareholders must be at least 80 percent of the other corporations. Dock sales. A purchaser uses its owned or rented vehicles to take possession of the product at the seller’s shipping dock. In most states, the sale is apportioned to the operating state of the purchaser, rather than the seller. See also apportion and sales factor. Dollar-value LIFO. An inventory technique that focuses on the dollars invested in the inventory rather than the particular items on hand each period. Each inventory item is assigned to a pool. A pool is a collection of similar items and is treated as a separate inventory. At the end of the period, each pool is valued in terms of prices at the time LIFO was adopted (base period prices), whether or not the particular items were actually on hand in the year LIFO was adopted, to compare with current prices to determine if there has been an increase or decrease in inventories.

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APPENDIX C   Glossary

E Earned income credit. A tax credit designed to provide assistance to certain low-income individuals who generally have a qualifying child. This is a refundable credit. To receive the most beneficial treatment, the taxpayer must have qualifying children. However, it is possible to qualify for the credit without having a child. See the text chapter on credits for the computation procedure required in order to determine the amount of the credit allowed. § 32. Earnings and profits (E & P). Measures the economic capacity of a corporation to make a distribution to shareholders that is not a return of capital. Such a distribution results in dividend income to the shareholders to the extent of the corporation’s current and accumulated earnings and profits. Economic effect test. Requirements that must be met before a special allocation may be used by a partnership. The premise behind the test is that each partner who receives an allocation of income or loss from a partnership bears the economic benefit or burden of the allocation. Economic income. The change in the taxpayer’s net worth, as measured in terms of market values, plus the value of the assets the taxpayer consumed during the year. Because of the impracticality of this income model, it is not used for tax purposes. Economic performance test. One of the requirements that must be satisfied for an accrual basis taxpayer to deduct an expense. Economic performance occurs when property or services are provided to the taxpayer, or in the case in which the taxpayer is required to provide property or services, whenever the property or services are actually provided by the taxpayer. Education expenses. Employees may deduct education expenses that are incurred either (1) to maintain or improve existing job-related skills or (2) to meet the express requirements of the employer or the requirements imposed by law to retain employment status. The expenses are not deductible if the education is required to meet the minimum educational standards for the taxpayer’s job or if the education qualifies the individual for a new trade or business. Reg. § 1.162–5. Educational savings bonds. U.S. Series EE bonds whose proceeds are used for qualified higher educational expenses for the taxpayer, the taxpayer’s spouse, or a dependent. The interest may be excluded from gross income, provided the taxpayer’s adjusted gross income does not exceed certain amounts. § 135. Effective tax rate. The financial statements for an entity include several footnotes, one of which reconciles the expected (statutory) income tax rate (e.g., 21 percent for a C corporation) with the effective tax rate. The effective tax rate is equal to taxes paid (often the tax liability) divided by the taxpayer’s ability to pay (some income measure, like adjusted gross income or disposable income). For financial reporting purposes, effective tax rate generally refers to total tax expense as a percentage of pretax book income. The reconciliation often is done in dollar and/or percentage terms. Effectively connected income. Income of a nonresident alien or foreign corporation that is attributable to the operation

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of a U.S. trade or business under either the asset use or the business activities test. E-file. The electronic filing of a tax return. The filing is either direct or indirect. In direct filing, the taxpayer goes online using a computer and tax return preparation software. Indirect filing occurs when a taxpayer utilizes an authorized IRS e-file provider. The provider often is the tax preparer. E-filing. See e-file. Employment taxes. Taxes that an employer must pay on account of its employees. Employment taxes include FICA (Federal Insurance Contributions Act) and FUTA (Federal Unemployment Tax Act) taxes. Employment taxes are paid to the IRS in addition to income tax withholdings at specified intervals. Such taxes can be levied on the employees, the employer, or both. Energy credits. See energy tax credits. Energy tax credits. Various tax credits are available to those who invest in certain energy property. The purpose of the credit is to create incentives for conservation and to develop alternative energy sources. Enrolled agents (EAs). A tax practitioner who has gained admission to practice before the IRS by passing an IRS examination and maintaining a required level of continuing professional education. Entertainment expenses. With limited exceptions, the TCJA of 2017 repealed the deduction for entertainment expenses paid or incurred after 2017. § 274. Entity accounting income. Entity accounting income is not identical to the taxable income of a trust or estate, nor is it determined in the same manner as the entity’s financial accounting income would be. The trust document or will determines whether certain income, expenses, gains, or losses are allocated to the corpus of the entity or to the entity’s income beneficiaries. Only the items that are allocated to the income beneficiaries are included in entity accounting income. Entity buy-sell agreement. An arrangement whereby the entity is to purchase a withdrawing owner’s interest. When the entity is a corporation, the agreement generally involves a stock redemption on the part of the withdrawing shareholder. See also buy-sell agreement and crosspurchase buy-sell agreement. Entity concept. A perspective that regards a venture as an entity separate and distinct from its owners. For tax purposes, this results in the venture being directly responsible for the tax on the income it generates. The entity perspective taken toward C corporations results in the double taxation of income distributed to the corporation’s owners. Entity perspective. See entity concept. Estate tax. A tax imposed on the right to transfer property by death. Thus, an estate tax is levied on the decedent’s estate and not on the heir receiving the property. § 2001. Estimated tax. The amount of tax (including alternative minimum tax and self-employment tax) a taxpayer expects to owe for the year after subtracting tax credits and income tax withheld. The estimated tax must be paid in installments at designated intervals (e.g., for a calendar year individual taxpayer, by April 15, June 15, September 15, and January 15 of the following year).

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APPENDIX C   Glossary

Excess business loss. The excess of aggregate deductions of the taxpayer attributable to trades or businesses of the taxpayer over the sum of aggregate gross income or gain of the taxpayer plus a threshold amount. In 2021, the threshold amount is $262,000 ($524,000 in the case of a married taxpayer filing a joint return). The threshold amount is adjusted for inflation each year. This loss limitation applies to taxpayers other than C corporations and applies after the passive activity loss limitation of § 469. § 461(l). Excess lobbying expenditures. An excise tax is applied on otherwise tax-exempt organizations with respect to the excess of total lobbying expenditures over grass roots lobbying expenditures for the year. Excess loss account. When a subsidiary has generated more historical losses than its parent has invested in the entity, the parent’s basis in the subsidiary is zero, and the parent records additional losses in an excess loss account. This treatment allows the parent to continue to deduct losses of the subsidiary, even where no basis reduction is possible, while avoiding the need to show a negative stock basis on various financial records. If the subsidiary stock is sold while an excess loss account exists, capital gain income usually is recognized to the extent of the balance in the account. Excise taxes. A tax on the manufacture, sale, or use of goods; on the carrying on of an occupation or activity; or on the transfer of property. Thus, the Federal estate and gift taxes are, theoretically, excise taxes. Exclusion amount. The value of assets that is exempt from transfer tax due to the credit allowed for gifts or transfers by death. For gifts and deaths in 2021, the exclusion amount is $11.7 million. An exclusion amount unused by a deceased spouse may be used by the surviving spouse. See also exemption equivalent amount. Exempt organizations. An organization that is either partially or completely exempt from Federal income taxation. § 501. Exemption amount. An amount deducted from alternative minimum taxable income (AMTI) to determine the alternative minimum tax base. The exemption amount is adjusted for inflation and is phased out when AMTI exceeds specified threshold amounts. § 55(d). Exemption equivalent. The maximum value of assets that can be transferred to another party without incurring any Federal gift or estate tax. See also exemption equivalent amount. Exemption equivalent amount. The nontaxable amount (in 2021, $11.7 million for gift tax and estate tax) that is the equivalent of the unified transfer tax credit allowed.

F Fair market value. The amount at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of the relevant facts. Reg. §§ 1.1001–1(a) and 20.2031–1(b). Farm price method. A method of accounting for agricultural crops. The inventory of crops is valued at its market price less the estimated cost of disposition (e.g., freight and selling expense).

Feeder organization. An entity that carries on a trade or business for the benefit of an exempt organization. However, such a relationship does not result in the feeder organization itself being tax-exempt. § 502. FICA tax. An abbreviation that stands for Federal Insurance Contributions Act, commonly referred to as the Social Security tax. The FICA tax is comprised of the Social Security tax (old age, survivors, and disability insurance) and the Medicare tax (hospital insurance) and is imposed on both employers and employees. The employer is responsible for withholding from the employee’s wages the Social Security tax at a rate of 6.2 percent on a maximum wage base and the Medicare tax at a rate of 1.45 percent (no maximum wage base). The maximum Social Security wage base for 2021 is $142,800 and for 2020 is $137,700. Fiduciary. One who holds a legal obligation to act on another’s behalf. A trustee and an executor take fiduciary relationships relative to the grantor and the decedent, respectively. The fiduciary is assigned specific duties by the principal party (e.g., to file tax returns, manage assets, satisfy debt and other obligations, and to make investment decisions). The fiduciary often possesses specialized knowledge and experience. A fiduciary must avoid conflicts of interest in which the principal’s goals are compromised in some way. Field audit. An audit conducted by the IRS on the business premises of the taxpayer or in the office of the tax practitioner representing the taxpayer. Filing status. Individual taxpayers are placed in one of five filing statuses each year (single, married filing jointly, married filing separately, surviving spouse, or head of household). Marital status and household support are key determinants. Filing status is used to determine the taxpayer’s filing requirements, standard deduction, eligibility for certain deductions and credits, and tax liability. Final Regulations. The U.S. Treasury Department Regulations (abbreviated Reg.) represent the position of the IRS as to how the Internal Revenue Code is to be interpreted. Their purpose is to provide taxpayers and IRS personnel with rules of general and specific application to the various provisions of the tax law. Regulations are published in the Federal Register and in all tax services. Financial Accounting Standards Board (FASB). See Generally Accepted Accounting Principles (GAAP). Financial transaction tax. A tax imposed on some type of financial transaction, such as stock sales. Fiscal year. A 12-month period ending on the last day of a month other than December. In certain circumstances, a taxpayer is permitted to elect a fiscal year instead of being required to use a calendar year. Flat tax. A form of consumption tax designed to alleviate the regressivity of a value added tax (VAT). It is imposed on individuals and businesses at the same single (flat) rate. Flexible spending plans. An employee benefit plan that allows the employee to take a reduction in salary in exchange for the employer paying benefits that can be provided by the employer without the employee being required to recognize income (e.g., medical and child care benefits). Contributions to a flexible spending plan are limited to $2,750 for 2021. § 125(i).

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APPENDIX C   Glossary

Flow-through entity. The entity is a tax reporter rather than a taxpayer. The owners are subject to tax. Examples are partnerships, S corporations, and limited liability companies. Foreign earned income exclusion. The Code allows exclusions for earned income generated outside the United States to alleviate any tax base and rate disparities among countries. In addition, the exclusion is allowed for housing expenditures incurred by the taxpayer’s employer with respect to the non-U.S. assignment, and self-employed individuals can deduct foreign housing expenses incurred in a trade or business. The exclusion is limited to $108,700 per year for 2021 ($107,600 in 2020). § 911. Foreign Investment in Real Property Tax Act (FIRPTA). Under the Foreign Investment in Real Property Tax Act, gains or losses realized by nonresident aliens and non-U.S. corporations on the disposition of U.S. real estate create U.S.-source income and are subject to U.S. income tax. Foreign tax credit (FTC). A U.S. citizen or resident who incurs or pays income taxes to a foreign country on income subject to U.S. tax may be able to claim some of these taxes as a credit against the U.S. income tax. §§ 27 and 901–905. Franchise. An agreement that gives the transferee the right to distribute, sell, or provide goods, services, or facilities within a specified area. The cost of obtaining a franchise may be amortized over a statutory period of 15 years. In general, the franchisor’s gain on the sale of franchise rights is an ordinary gain because the franchisor retains a significant power, right, or continuing interest in the subject of the franchise. §§ 197 and 1253. Franchise tax. A tax levied on the right to do business in a state as a corporation. Although income considerations may come into play, the tax usually is based on the capitalization of the corporation. Fraud. Tax fraud falls into two categories: civil and criminal. Under civil fraud, the IRS may impose as a penalty an amount equal to as much as 75 percent of the underpayment [§ 6651(f)]. Fines and/or imprisonment are prescribed for conviction of various types of criminal tax fraud (§§ 7201–7207). Both civil and criminal fraud involve a specific intent on the part of the taxpayer to evade the tax; mere negligence is not enough. Criminal fraud requires the additional element of willfulness (i.e., done deliberately and with evil purpose). In practice, it becomes difficult to distinguish between the degree of intent necessary to support criminal, rather than civil, fraud. In either situation, the IRS has the burden of proof to show the taxpayer committed fraud. Fringe benefits. Compensation or other benefit received by an employee that is not in the form of cash. Some fringe benefits (e.g., accident and health plans, group term life insurance) may be excluded from the employee’s gross income and therefore are not subject to the Federal income tax. Fruit and tree metaphor. The courts have held that an individual who earns income from property or services cannot assign that income to another. For example, a father cannot assign his earnings from commissions to his child and escape income tax on those amounts.

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Functional currency. The currency of the economic environment in which the taxpayer carries on most of its activities and in which the taxpayer transacts most of its business. FUTA tax. An employment tax levied on employers. Jointly administered by the Federal and state governments, the tax provides funding for unemployment benefits. FUTA applies at a rate of 6.0 percent on the first $7,000 of covered wages paid during the year for each employee. The Federal government allows a credit for FUTA paid (or allowed under a merit rating system) to the state. The credit cannot exceed 5.4 percent of the covered wages. §§ 3301–3311. Future interest. An interest that will come into being at some future time. It is distinguished from a present interest, which already exists. Assume that Dan transfers securities to a newly created trust. Under the terms of the trust instrument, income from the securities is to be paid each year to Wilma for her life, with the securities passing to Sam upon Wilma’s death. Wilma has a present interest in the trust because she is entitled to current income distributions. Sam has a future interest because he must wait for Wilma’s death to benefit from the trust. The annual exclusion of $15,000 (in 2021) is not allowed for a gift of a future interest. § 2503(b).

G General business credit. The summation of various nonrefundable business credits, including the tax credit for rehabilitation expenditures, business energy credit, work opportunity credit, research activities credit, low-income housing credit, and disabled access credit. The amount of general business credit that can be used to reduce the tax liability is limited to the taxpayer’s net income tax reduced by the greater of (1) the tentative minimum tax or (2) 25 percent of the net regular tax liability that exceeds $25,000. Unused general business credits can be carried back one year and forward 20 years. § 38. General partners. A partner who is fully liable in an individual capacity for the debts owed by the partnership to third parties. A general partner’s liability is not limited to the investment in the partnership. See also limited partners. General partnership (GP). A partnership that is owned by general partners (only). Creditors of a general partnership can collect amounts owed them from both the partnership assets and the assets of the partners individually. Generally Accepted Accounting Principles (GAAP). Guidelines relating to how to construct the financial statements of enterprises doing business in the United States. Promulgated chiefly by the Financial Accounting Standards Board (FASB). Gift tax. A tax imposed on the transfer of property by gift. The tax is imposed upon the donor of a gift and is based on the fair market value of the property on the date of the gift. § 2501. Golden parachute payments. A severance payment to employees that meets the following requirements: (1) the payment is contingent on a change of ownership of a corporation through a stock or asset acquisition and (2) the aggregate present value of the payment equals or exceeds three times the employee’s average annual compensation. To the extent the severance payment meets these conditions, a deduction is disallowed to the employer for the excess of the payment over a statutory base amount (a

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APPENDIX C   Glossary

five-year average of compensation if the taxpayer was an employee for the entire five-year period). In addition, a 20 percent excise tax is imposed on the employee who receives the excess severance pay. §§ 280G and 4999. Goodwill. The reputation and other unidentifiable intangible assets of a company. For accounting purposes, goodwill has no basis unless it is purchased. In the purchase of a business, goodwill generally is the difference between the purchase price and the fair market value of the assets acquired. The intangible asset goodwill can be amortized for tax purposes over a 15-year period. § 197 and Reg. § 1.167(a)–3. Grantor. A transferor of property. The creator of a trust is usually referred to as the grantor of the entity. Grantor trust. A trust under which the grantor retains control over the income or corpus (or both) to such an extent that he or she is treated as the owner of the property and its income for income tax purposes. Income from a grantor trust is taxable to the grantor and not to the beneficiary who receives it. §§ 671–679. Grass roots expenditures. Exempt organizations are prohibited from engaging in political activities, but spending incurred to influence the opinions of the general public relative to specific legislation is permitted by the law. Gross estate. The property owned or previously transferred by a decedent that is subject to the Federal estate tax. The gross estate can be distinguished from the probate estate, which is property actually subject to administration by the administrator or executor of an estate. §§ 2031–2046. Gross income. Income subject to the Federal income tax. Gross income does not include all economic income. That is, certain exclusions are allowed (e.g., interest on municipal bonds). For a manufacturing or merchandising business, gross income usually means gross profit (gross sales or gross receipts less cost of goods sold). § 61 and Reg. § 1.61–3(a). Group term life insurance. Life insurance coverage provided by an employer for a group of employees. Such insurance is renewable on a year-to-year basis, and typically no cash surrender value is built up. The premiums paid by the employer on the insurance are not taxed to the employees on coverage of up to $50,000 per person. § 79 and Reg. § 1.79–1(b). Guaranteed payments. Payments made by a partnership to a partner for services rendered or for the use of capital to  the extent the payments are determined without regard to the income of the partnership. The payments are treated as though they were made to a nonpartner and thus are deducted by the entity. A guaranteed payment might be subject to self-employment tax (guaranteed payment for services) or net investment income tax (guaranteed payment for capital). Guaranteed payments are not eligible for the qualified business income deduction.

H Half-year convention. A cost recovery convention that assumes that property is placed in service at mid-year and thus provides for a half-year’s cost recovery for that year. § 168(d).

Head of household. An unmarried individual who maintains a household for another and satisfies certain conditions set forth in § 2(b). This status enables the taxpayer to use a set of income tax rates that are lower than those applicable to other unmarried individuals but higher than those applicable to surviving spouses and married persons filing a joint return. Health Savings Account (HSA). A medical savings account created in legislation enacted in December 2003 that is designed to replace and expand Archer Medical Savings Accounts. § 223. Highly compensated employee. The employee group is generally divided into two categories for fringe benefit (including pension and profit sharing plans) purposes. These are (1) highly compensated employees and (2) nonhighly compensated employees. For most fringe benefits, if the fringe benefit plan discriminates in favor of highly compensated employees, it will not be a qualified plan with respect, at a minimum, to the highly compensated employees. Historic business test. In a corporate reorganization, a means by which to determine if the continuity of business enterprise requirement is met. The acquiring corporation must continue to operate the target entity’s existing business(es) going forward; if this is not the case, the requirement is failed. Hobby losses. Losses from an activity not engaged in for profit. The Code restricts the amount of losses that an individual can deduct for hobby activities so that these transactions cannot be used to offset income from other sources. The TCJA of 2017 suspended the deduction of hobby expenses for tax years after 2017 (and through 2025). § 183. Holding period. The period of time during which property has been held for income tax purposes. The holding period is significant in determining whether gain or loss from the sale or exchange of a capital asset is long or short term. § 1223. Home equity loans. Loans that utilize the personal residence of the taxpayer as security. The interest on such loans is deductible as qualified residence interest. However, interest is deductible only on the portion of the loan that does not exceed the lesser of (1) the fair market value of the residence, reduced by the acquisition indebtedness, or (2) $100,000 ($50,000 for married persons filing separate returns). A major benefit of a home equity loan is that there are no tracing rules regarding the use of the loan proceeds. The TCJA of 2017 suspended the deduction of interest on home equity indebtedness for tax years after 2017 (and through 2025). § 163(h)(3). Hot assets. Unrealized receivables and substantially appreciated inventory under § 751. When hot assets are present, the sale of a partnership interest or the disproportionate distribution of the assets can cause ordinary income to be recognized. Hybrid method. A combination of the accrual and cash methods of accounting. That is, the taxpayer may account for some items of income on the accrual method (e.g., sales and cost of goods sold) and other items (e.g., interest income) on the cash method.

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

APPENDIX C   Glossary

I Imputed interest. For certain long-term sales of property, under §§ 483 and 1274 the IRS can convert some of the gain from the sale into interest income if the contract does not provide for a minimum rate of interest to be paid by the purchaser. The seller recognizes less long-term capital gain and more ordinary income (interest income). Imputed interest rules also apply on certain below-market loans under § 7872. Inbound taxation. U.S. tax effects when a non-U.S. person begins an investment or business activity in the United States. Incentive stock options (ISOs). A type of stock option that receives favorable tax treatment. If various qualification requirements can be satisfied, stock option grants do not create taxable income for the recipient. However, the spread (the excess of the fair market value at the date of exercise over the option price) is an adjustment item for purposes of the alternative minimum tax (AMT). The gain on disposition of the stock resulting from the exercise of the stock option will be classified as long-term capital gain if certain holding period requirements are met (the employee must not dispose of the stock within two years after the option is granted or within one year after acquiring the stock). § 422. Income. For tax purposes, an increase in wealth that has been realized. Income in respect of a decedent (IRD). Income earned by a decedent at the time of death but not reportable on the final income tax return because of the method of accounting that appropriately is utilized. Such income is included in the gross estate and is taxed to the eventual recipient (either the estate or heirs). The recipient is, however, allowed an income tax deduction for the estate tax attributable to the income. § 691. Income tax provision. Under ASC 740, a synonym for the book tax expense of an entity for the financial reporting period. Following the “matching principle,” all book tax expense that relates to the net income for the reporting period is reported on that period’s financial statements, including not only the current tax expense but also any deferred tax expense and deferred tax benefit. Income tax treaties. See tax treaties. Independent contractor. A self-employed person as distinguished from one who is employed as an employee. Indexation. A procedure whereby adjustments are made by the IRS to key tax components (e.g., standard deduction, tax brackets, personal and dependency exemptions) to reflect inflation. The adjustments usually are made annually and are based on the change in the consumer price index. Individual Retirement Accounts (IRAs). A type of retirement plan to which an individual with earned income can contribute a statutory maximum of $6,000 ($7,000 if age 50 or above) in 2021. IRAs can be classified as traditional IRAs or Roth IRAs. With a traditional IRA, an individual can contribute and deduct a maximum of $6,000 ($7,000 if age 50 or above) per tax year in 2021. The deduction is a deduction for AGI. However, if the

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individual is an active participant in another qualified retirement plan, the deduction is phased out proportionally between certain AGI ranges (note that the phaseout limits the amount of the deduction and not the amount of the contribution). With a Roth IRA, an individual can contribute a maximum of $6,000 ($7,000 if age 50 or above) per tax year in 2021. No deduction is permitted. However, if a five-year holding period requirement is satisfied and if the distribution is a qualified distribution, the taxpayer can make tax-free withdrawals from a Roth IRA. The maximum annual contribution is phased out proportionally between certain AGI ranges. §§ 219 and 408A. Inheritance tax. A tax imposed on the right to receive property from a decedent. Thus, theoretically, an inheritance tax is imposed on the heir. The Federal estate tax is imposed on the estate. Inside basis. A partnership’s basis in the assets it owns. Installment method. A method of accounting enabling certain taxpayers to spread the recognition of gain on the sale of property over the collection period. Under this procedure, the seller arrives at the gain to be recognized by computing the gross profit percentage from the sale (the gain divided by the contract price) and applying it to each payment received. § 453. Intangible drilling and development costs (IDCs). Taxpayers may elect to expense or capitalize (subject to amortization) intangible drilling and development costs. However, ordinary income recapture provisions apply to oil and gas properties on a sale or other disposition if the expense method is elected. §§ 263(c) and 1254(a). Intermediate sanctions. The IRS can assess excise taxes on disqualified persons and organization management associated with so-called public charities engaging in excess benefit transactions. An excess benefit transaction is one in ­ arket which a disqualified person engages in a non-fair m value transaction with the exempt organization or receives unreasonable compensation. Prior to the enactment of intermediate sanctions, the only option available to the IRS was to revoke the organization’s exempt status. International Accounting Standards Board (IASB). The body that promulgates International Financial Reporting Standards (IFRS). Based in London, representing accounting standard setting bodies in over 100 countries, the IASB develops accounting standards that can serve as the basis for harmonizing conflicting reporting standards among nations. International Financial Reporting Standards (IFRS). Produced by the International Accounting Standards Board (IASB), guidelines developed since 2001 as to revenue recognition, accounting for business combinations, and a conceptual framework for financial reporting. IFRS provisions are designed so that they can be used by all entities, regardless of where they are based or conduct business. IFRS have gained widespread acceptance throughout the world, and the SEC is considering how to require U.S. entities to use IFRS in addition to, or in lieu of, the accounting rules of the Financial Accounting Standards Board. Interpretive Regulations. A Regulation issued by the Treasury Department that purports to explain the meaning of a particular Code Section. An interpretive Regulation is given less deference than a legislative Regulation.

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

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APPENDIX C   Glossary

Inventory. Under § 1221(a)(1), a taxpayer’s stock in trade or property held for resale. For partnership tax purposes, inventory is defined in § 751(d) as inventory (per the above definition) or any partnership asset other than capital or § 1231 assets. See also appreciated inventory. Investment income. Consisting of virtually the same elements as portfolio income, a measure by which to justify a deduction for interest on investment indebtedness. Investment interest. Payment for the use of funds used to acquire assets that produce investment income. The deduction for investment interest is limited to net investment income for the tax year. Investor loss. Losses on stock and securities. If stocks and bonds are capital assets in the hands of the holder, a capital loss materializes as of the last day of the taxable year in which the stocks or bonds become worthless. Under certain circumstances involving stocks and bonds of affiliated corporations, an ordinary loss is permitted upon worthlessness. Involuntary conversion. The loss or destruction of property through theft, casualty, or condemnation. Gain realized on an involuntary conversion can, at the taxpayer’s election, be deferred for Federal income tax purposes if the owner reinvests the proceeds within a prescribed period of time in property that is similar or related in service or use. § 1033. Itemized deductions. Personal expenditures allowed by the Code as deductions from adjusted gross income. Examples include certain medical expenses, interest on home mortgages, state income taxes, and charitable contributions. Itemized deductions are reported on Schedule A of Form 1040.

J Joint tenants. Two or more persons having undivided ­ownership of property with the right of survivorship. Right  of survivorship gives the surviving owner full ownership of  the property. Suppose Bob and Tami are joint tenants of a tract of land. Upon Bob’s death, Tami becomes the sole owner of the property. For the estate tax consequences upon the death of a joint tenant, see § 2040.

K Keogh plans. Retirement plans available to self-employed taxpayers. They are also referred to as H.R. 10 plans. Under such plans, a taxpayer may deduct each year up to 100 percent of net earnings from self-employment or $58,000 for 2021, whichever is less. If the plan is a profit sharing plan, the percentage is 25 percent. Kiddie tax. Passive income, such as interest and dividends, that is recognized by a child under age 19 (or under age 24 if a full-time student) is taxed according to the brackets applicable to the child’s parent(s), generally to the extent the income exceeds $2,200 for 2021. The additional tax is assessed regardless of the source of the income or the income’s underlying property. § 1(g).

L Least aggregate deferral method. An algorithm set forth in the Regulations to determine the tax year for a partnership or limited liability entity with owners whose tax years differ. The tax year selected is the one that produces the least aggregate deferral of income for the owners. Least aggregate deferral rule. See least aggregate deferral method. Legislative Regulations. Some Code Sections give the Secretary of the Treasury or his delegate the authority to prescribe Regulations to carry out the details of administration or to otherwise complete the operating rules. Regulations issued pursuant to this type of authority truly possess the force and effect of law. In effect, Congress is almost delegating its legislative powers to the Treasury Department. Lessee. One who rents property from another. In the case of real estate, the lessee is also known as the tenant. Lessor. One who rents property to another. In the case of real estate, the lessor is also known as the landlord. Letter ruling. The written response of the IRS to a taxpayer’s request for interpretation of the revenue laws with respect to a proposed transaction (e.g., concerning the tax-free status of a reorganization). Not to be relied on as precedent by other than the party who requested the ruling. Liabilities in excess of basis. On the contribution of capital to a corporation, an investor recognizes gain on the exchange to the extent contributed assets carry liabilities with a face amount in excess of the tax basis of the contributed assets. This rule keeps the investor from holding the investment asset received with a negative basis. § 357(c). Life insurance proceeds. A specified sum (the face value or maturity value of the policy) paid to the designated beneficiary of the policy by the life insurance company upon the death of the insured. Lifetime learning credit. A tax credit for qualifying expenses for taxpayers pursuing education beyond the first two years of postsecondary education. Individuals who are completing their last two years of undergraduate studies, pursuing graduate or professional degrees, or otherwise seeking new job skills or maintaining existing job skills are all eligible for the credit. Eligible individuals include the taxpayer, taxpayer’s spouse, and taxpayer’s dependents. The maximum credit is 20 percent of the first $10,000 of qualifying expenses and is computed per taxpayer. The credit is phased out for higher-income taxpayers. § 25A. Like-kind exchanges. An exchange of real property held for productive use in a trade or business or for investment for other investment or trade or business real property. Unless non-like-kind property (boot) is received, the exchange is fully tax-deferred. § 1031. Limited liability company (LLC). A legal entity in which all owners are protected from the entity’s debts but which may lack other characteristics of a corporation (i.e., centralized management, unlimited life, free transferability of

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

APPENDIX C   Glossary

interests). LLCs generally are treated as partnerships (or disregarded entities if they have only one owner) for tax purposes. Limited liability partnership (LLP). A legal entity allowed by many of the states, where a general partnership registers with the state as an LLP. All partners are at risk with respect to any contractual liabilities of the entity as well as any liabilities arising from their own malpractice or torts or those of their subordinates. However, all partners are protected from any liabilities resulting from the malpractice or torts of other partners. Limited partners. A partner whose liability to third-party creditors of the partnership is limited to the amounts invested in the partnership. See also general partners and limited partnership (LP). Limited partnership (LP). A partnership in which some of the partners are limited partners. At least one of the partners in a limited partnership must be a general partner. Liquidating distribution. A distribution by a partnership that is in complete liquidation of the entity’s trade or business activities or in complete liquidation of a partner’s interest in the partnership. A liquidating distribution is generally a tax-deferred transaction if it is proportionate with respect to the partnership’s hot assets. In a proportionate liquidating distribution, the partnership recognizes no gain or loss. The partner only recognizes gain if the distributed cash (and cash equivalents, such as debt relief or certain marketable securities) exceeds the partner’s basis in the partnership. The partner recognizes a loss if only cash and hot assets are distributed and their combined inside (partnership) basis is less than the partner’s basis in the partnership interest. In any case where no gain or loss is recognized, the partner’s basis in the partnership interest is fully assigned to the basis of the assets received in the distribution. Listed property. Property that includes (1) any passenger automobile; (2) any other property used as a means of transportation; (3) any property of a type generally used for purposes of entertainment, recreation, or amusement; and (4) any other property of a type specified in the Regulations. If listed property is predominantly used for business, the taxpayer is allowed to use the statutory percentage method of cost recovery. Otherwise, the straight-line cost recovery method must be used. § 280F. Lobbying expenditures. An expenditure made for the purpose of influencing legislation. Such payments can result in the loss of the exempt status of, and the imposition of Federal income tax on, an exempt organization. Lobby expenditures are not deductible. Long-term care insurance. Insurance that helps pay the cost of care when the insured is unable to care for himself or herself. Such insurance is generally thought of as insurance against the cost of an aged person entering a nursing home. The employer can provide the insurance, and the premiums may be excluded from the employee’s gross income. § 7702B. Long-term contract. A building, installation, construction, or manufacturing contract that is entered into but not completed within the same tax year. A manufacturing contract

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is a long-term contract only if the contract is to manufacture (1) a unique item not normally carried in finished goods inventory or (2) items that normally require more than 12 calendar months to complete. The two available methods to account for long-term contracts are the percentage of completion method and the completed contract method. The completed contract method can be used only in limited circumstances. § 460. Long-term nonpersonal use capital assets. Includes investment property with a long-term holding period. Such property disposed of by casualty or theft may receive § 1231 treatment. Long-term tax-exempt rate. Used in deriving the yearly limitation on net operating loss and other tax benefits that carry over from the target to the acquiring when there is a more than 50-percentage-point ownership change (by value). The highest of the Federal long-term interest rates in effect for any of the last three months. § 382. Lower of cost or market (replacement cost). An elective inventory method, whereby the taxpayer may value inventories at the lower of the taxpayer’s actual cost or the current replacement cost of the goods. This method cannot be used in conjunction with the LIFO inventory method. Low-income housing credit. Beneficial treatment to owners of low-income housing is provided in the form of a tax credit. The calculated credit is claimed in the year the building is placed in service and in the following nine years. § 42. Lump-sum distribution. Payment of the entire amount due at one time rather than in installments. Such distributions often occur from qualified pension or profit sharing plans upon the retirement or death of a covered employee. The recipient of a lump-sum distribution may recognize both long-term capital gain and ordinary income upon the receipt of the distribution. The ordinary income portion may be subject to a special 10-year income averaging provision. § 402(e).

M Majority interest partners. Partners who have more than a 50 percent interest in partnership profits and capital, counting only those partners who have the same taxable year. The term is of significance in determining the appropriate taxable year of a partnership. § 706(b). Marginal tax rate. The tax rate applicable to the next dollar of income (if describing an income tax). Marital deduction. A deduction allowed against the taxable estate or taxable gifts upon the transfer of property from one spouse to another. Marriage penalty. The additional tax liability that results for a married couple when compared with what their tax liability would be if they were not married and filed separate returns. Matching rule. Treatment of an intercompany transaction on a consolidated return, when a sold asset remains within the group. Material participation. If an individual taxpayer materially participates in a nonrental trade or business activity, any

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APPENDIX C   Glossary

loss from that activity is treated as an active loss that can be offset against active income. Material participation is achieved by meeting any one of seven tests provided in the Regulations. § 469(h). Meaningful reduction test. A decrease in the shareholder’s voting control. Used to determine whether a stock redemption qualifies for sale or exchange treatment. Medical expenses. Medical expenses of an individual, a spouse, and dependents are allowed as an itemized ­deduction to the extent such amounts (less insurance reimbursements) exceed 7.5 percent of adjusted gross income. § 213. Merger. The absorption of one corporation by another with the corporation being absorbed losing its legal identity. Flow Corporation is merged into Jobs Corporation, and the shareholders of Flow receive stock in Jobs in exchange for their stock in Flow. After the merger, Flow ceases to exist as a separate legal entity. If a merger meets certain conditions, it is not currently taxable to the parties involved. § 368(a)(1). Mid-month convention. A cost recovery convention that assumes that property is placed in service in the middle of the month that it is actually placed in service. § 168(d). Mid-quarter convention. A cost recovery convention that assumes that property placed in service during the year is placed in service at the middle of the quarter in which it is actually placed in service. The mid-quarter convention applies if more than 40 percent of the value of property (other than eligible real estate) is placed in service during the last quarter of the year. § 168(d). Miscellaneous itemized deductions. A special category of itemized deductions that includes expenses such as professional dues, tax return preparation fees, job-hunting costs, unreimbursed employee business expenses, and certain investment expenses. Such expenses are deductible only to the extent they exceed 2 percent of adjusted gross income. The TCJA of 2017 suspended the deduction for these items for tax years after 2017 (and through 2025). § 67. Modified accelerated cost recovery system (MACRS). A method in which the cost of tangible property is recovered over a prescribed period of time. Enacted by the Economic Recovery Tax Act (ERTA) of 1981 and substantially modified by the Tax Reform Act (TRA) of 1986, the method disregards salvage value, imposes a period of cost recovery that depends upon the classification of the asset into one of various recovery periods, and prescribes the applicable percentage of cost that can be deducted each year. § 168. Multiple support agreement. To qualify for a dependency exemption, the support test must be satisfied. This requires that over 50 percent of the support of the potential dependent be provided by the taxpayer. Where no one person provides more than 50 percent of the support, a multiple support agreement enables a taxpayer to still qualify for the dependency exemption. Any person who contributed more than 10 percent of the support is entitled to claim the exemption if each person in the group who contributed more than 10 percent files a written consent (Form 2120). Each person who is a party to the multiple support agreement must meet all of the other requirements for claiming the dependency exemption. § 152(c).

Multistate Tax Commission (MTC). A regulatory body of the states that develops operating rules and regulations for the implementation of the UDITPA and other provisions that assign the total taxable income of a multistate corporation to specific states.

N National sales tax. Intended as a replacement for the current Federal income tax. Unlike a value added tax (VAT), which is levied on the manufacturer, it would be imposed on the consumer upon the final sale of goods and services. To reduce regressivity, individuals would receive a rebate to offset a portion of the tax. Negligence. Failure to exercise the reasonable or ordinary degree of care of a prudent person in a situation that results in harm or damage to another. A penalty is assessed on taxpayers who exhibit negligence or intentional disregard of rules and Regulations with respect to the underpayment of certain taxes. § 6662(c). Net capital gain (NCG). The excess of the net long-term capital gain for the tax year over the net short-term capital loss. The net capital gain of an individual taxpayer is eligible for the alternative tax. § 1222(11). Net capital loss (NCL). The excess of the losses from sales or exchanges of capital assets over the gains from sales or exchanges of such assets. Up to $3,000 per year of the net capital loss may be deductible by noncorporate taxpayers against ordinary income. The excess net capital loss carries over to future tax years. For corporate taxpayers, the net capital loss cannot be offset against ordinary income, but it can be carried back three years and forward five years to offset net capital gains. §§ 1211, 1212, and 1221(10). Net investment income. The excess of investment income over investment expenses. Investment expenses are those deductible expenses directly connected with the production of investment income. Investment expenses do not include investment interest. The deduction for investment interest for the tax year is limited to net investment income. § 163(d). Net operating loss (NOL). To mitigate the effect of the annual accounting period concept, § 172 allows taxpayers to use an excess loss of one year as a deduction for certain past or future years. For NOLs incurred after 2020, an indefinite carryforward period applies, and such NOLs are subject to an 80 percent of taxable income limitation in any carryforward year. (Different carryover rules apply for NOLs incurred before 2021, and there is no limitation on an NOL deduction in such years.) Nexus. The degree of activity that must be present before a taxing jurisdiction has the right to impose a tax on an outof-state entity. The rules for income tax nexus are not the same as for sales tax nexus. Ninety-day (90-day) letter. This notice is sent to a taxpayer upon request, upon the expiration of the 30-day letter, or upon exhaustion by the taxpayer of his or her administrative remedies before the IRS. The notice gives the taxpayer 90 days in which to file a petition with the U.S. Tax Court. If a petition is not filed, the IRS will demand payment of the assessed deficiency. §§ 6211–6216.

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

APPENDIX C   Glossary

No-additional-cost service. Services the employer may provide the employee at no additional cost to the employer. Generally, the benefit is the ability to utilize the employer’s excess capacity (e.g., vacant seats on an airliner). Such amounts are excludible from the recipient’s gross income. § 132(b). Nonaccountable plan. An expense reimbursement plan that does not have an accountability feature. The result is that employee expenses are not deductible. Nonacquiescence. Disagreement by the IRS on the result reached in certain judicial decisions. Nonacq. or NA. Nonbusiness bad debt. A bad debt loss that is not incurred in connection with a creditor’s trade or business. The loss is classified as a short-term capital loss and is allowed only in the year the debt becomes entirely worthless. In addition to family loans, many investor losses are nonbusiness bad debts. § 166(d). Nonqualified deferred compensation (NQDC). Compensation arrangements that are frequently offered to executives. Such plans may include stock options or annuities upon separation, for example. Often, an executive may defer the recognition of taxable income. The employer, however, does not receive a tax deduction until the employee is required to include the compensation in income. § 409A. Nonqualified stock option (NQSO). A type of stock option that does not satisfy the statutory requirements of an incentive stock option. If the NQSO has a readily ascertainable fair market value (e.g., the option is traded on an established exchange), the value of the option must be included in the employee’s gross income at the date of the grant. Otherwise, the employee does not recognize income at the grant date. Instead, ordinary income is recognized in the year of exercise of the option. Nonrecourse debt. Debt secured by the property that it is used to purchase. The purchaser of the property is not personally liable for the debt upon default. Rather, the creditor’s recourse is to repossess the related property. Nonrecourse debt generally does not increase the purchaser’s at-risk amount. Nonrefundable credits. A credit that is not paid if it exceeds the taxpayer’s tax liability. Some nonrefundable credits qualify for carryback and carryover treatment. Nonresident alien (NRA). An individual who is neither a citizen nor a resident of the United States. Citizenship is determined under the immigration and naturalization laws of the United States. Residency is determined under § 7701(b) of the Internal Revenue Code. Nontaxable exchange. A transaction in which realized gains or losses are not recognized. The recognition of gain or loss is postponed (deferred) until the property received in the nontaxable exchange is subsequently disposed of in a taxable transaction. Examples are § 1031 like-kind exchanges and § 1033 involuntary conversions. Not essentially equivalent redemption. Sale or exchange treatment is given to this type of redemption. Although various safe-harbor tests are failed, the nature of the redemption is such that dividend treatment is avoided, because it represents a meaningful reduction in the shareholder’s interest in the corporation. § 302(b)(1). Notices. A Notice is issued by the National Office of the IRS as official guidance when such information is needed before

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the time it takes to issue a Final Regulation. Such guidance is typically transitional until final guidance is issued. A Notice is published in an Internal Revenue Bulletin (I.R.B.).

O Occupational fee. A tax imposed on various trades or businesses. A license fee that enables a taxpayer to engage in a particular occupation. Occupational taxes. See occupational fee. Offer in compromise. A settlement agreement offered by the IRS in a tax dispute, especially where there is doubt as to the collectibility of the full deficiency. Offers in compromise can include installment payment schedules as well as reductions in the tax and penalties owed by the taxpayer. § 7122. Office audit. An audit conducted by the IRS in the agent’s office. Office in the home expenses. Employment and businessrelated expenses attributable to the use of a residence (e.g., den or office) are allowed only if the portion of the residence is exclusively used on a regular basis as a principal place of business of the taxpayer or as a place of business that is used by patients, clients, or customers. In computing the office in the home expenses, a taxpayer can use either the regular method or simplified method. As a general rule, the regular method requires more effort and recordkeeping but results in a larger deduction. Office in home expenses incurred by an employee are not deductible for tax years after 2017 (and through 2025). § 280A. Operating agreement. The governing document of a limited liability company. This document is similar in structure, function, and purpose to a partnership agreement. Optional adjustment election. See Section 754 election. Options. The sale or exchange of an option to buy or sell property results in capital gain or loss if the property is a capital asset. Generally, the closing of an option transaction results in short-term capital gain or loss to the writer of the call and the purchaser of the call option. § 1234. Ordinary and necessary. Two tests for the deductibility of expenses incurred or paid in connection with a trade or business; for the production or collection of income; for the management, conservation, or maintenance of property held for the production of income; or in connection with the determination, collection, or refund of any tax. An expense is ordinary if it is common and accepted in the general industry or type of activity in which the taxpayer is engaged. An expense is necessary if it is appropriate and helpful in furthering the taxpayer’s business or incomeproducing activity. §§ 162(a) and 212. Ordinary income property. Property contributed to a charitable organization that, if sold rather than contributed, would have resulted in other than long-term capital gain to the donor (i.e., ordinary income property and short-term capital gain property). Examples are inventory and capital assets held for less than the long-term holding period. A contribution of ordinary income property must generally be valued at its fair market value less the gain, if any, that would have been realized if sold. § 170(e). Organizational expenditures. Expenditures related to the creation of a corporation or partnership. Common organizational expenditures include legal and accounting fees

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APPENDIX C   Glossary

and state incorporation payments. Organizational expenditures exclude those incurred to obtain capital (underwriting fees) or assets (subject to cost recovery). Such expenditures incurred by the end of the entity’s first year are eligible for a $5,000 limited expensing (subject to phaseout) and an amortization of the balance over 180 months. §§ 248 and 709(b). Original issue discount (OID). The difference between the issue price of a debt obligation (e.g., a corporate bond) and the maturity value of the obligation when the issue price is less than the maturity value. OID represents interest and must be amortized over the life of the debt obligation using the effective interest method. The difference is not considered to be original issue discount for tax purposes when it is less than one-fourth of 1 percent of the redemption price at maturity multiplied by the number of years to maturity. §§ 1272 and 1273(a)(3). Other adjustments account (OAA). Used in the context of a distribution from an S corporation. The net accumulation of the entity’s exempt income (e.g., municipal bond interest), net of related nondeductible expenses. Other property. In a corporate reorganization, any property in the exchange that is not stock or securities, such as cash or land. This amount constitutes boot. This treatment is similar to that in a like-kind exchange. Outbound taxation. U.S. tax effects when a U.S. person begins an investment or business activity outside the United States. Outside basis. A partner’s basis in his or her partnership interest. Ownership change. An event that triggers a § 382 limitation for the acquiring corporation.

P Parent-subsidiary controlled group. A controlled or affiliated group of corporations where at least one corporation is at least 80 percent owned by one or more of the others. The affiliated group definition is more difficult to meet. Partial liquidation. A stock redemption where noncorporate shareholders are permitted sale or exchange treatment. In certain cases, an active business must have existed for at least five years. Only a portion of the outstanding stock in the entity is retired. §§ 302(b)(4) and (e). Partnership. For income tax purposes, a partnership includes a syndicate, group, pool, or joint venture as well as ordinary partnerships. In an ordinary partnership, two or more parties combine capital and/or services to carry on a business for profit as co-owners. § 7701(a)(2). Partnership agreement. The governing document of a partnership. A partnership agreement should describe the rights and obligations of the partners; the allocation of entity income, deductions, and cash flows; initial and future capital contribution requirements; conditions for terminating the partnership; and other matters. Passive activity loss. Any loss from (1) activities in which the taxpayer does not materially participate or (2) rental activities (subject to certain exceptions). Net passive activity losses cannot be used to offset income from nonpassive activity sources. Rather, they are suspended until the

taxpayer either generates net passive activity income (and a deduction of such losses is allowed) or disposes of the underlying property (at which time the loss deductions are allowed in full). One relief provision allows landlords who actively participate in the rental activities to deduct up to $25,000 of passive activity losses annually. However, a phaseout of the $25,000 amount commences when the landlord’s AGI exceeds $100,000. Another relief provision applies for material participation in a real estate trade or business. § 469. Passive investment company. A means by which a multistate corporation can reduce the overall effective tax rate by isolating investment income in a low- or no-tax state. Passive investment income (PII). Gross receipts from royalties, certain rents, dividends, interest, annuities, and gains from the sale or exchange of stock and securities. When earnings and profits (E & P) also exist, if the passive investment income of an S corporation exceeds 25 percent of the corporation’s gross receipts for three consecutive years, S status is lost. Pass-through entities. A form of business structure for which the income and other tax items are attributed directly to the owners and generally no separate tax is levied upon the  entity itself. Examples include sole proprietorships, partner­ships, and S corporations. Also referred to as a flowthrough entity. Patent. An intangible asset that may be amortized over a statutory 15-year period as a § 197 intangible. The sale of a patent usually results in favorable long-term capital gain treatment. §§ 197 and 1235. Payroll factor. The proportion of a multistate corporation’s total payroll that is traceable to a specific state. Used in determining the taxable income that is to be apportioned to that state. Pension plan. A type of deferred compensation arrangement that provides for systematic payments of definitely determinable retirement benefits to employees who meet the requirements set forth in the plan. Percentage depletion. Depletion based on a statutory percentage applied to the gross income from the property. The taxpayer deducts the greater of cost depletion or percentage depletion. § 613. Percentage of completion method. A method of reporting gain or loss on certain long-term contracts. Under this method of accounting, the gross contract price is included in income as the contract is completed. Reg. § 1.451–3. Permanent differences. Under ASC 740, tax-related items that appear in the entity’s financial statements or its tax return but not both. For instance, interest income from a municipal bond is a permanent book-tax difference. Permanent establishment (PE). A level of business activity, as defined under an income tax treaty, that subjects the taxpayer to taxation in a country other than that in which the taxpayer is based. Often evidenced by the presence of a plant, an office, or other fixed place of business. Inventory storage and temporary activities do not rise to the level of a PE. PE is the treaty’s equivalent to nexus. Personal and dependency exemptions. The tax law provides an exemption for each individual taxpayer and an

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

APPENDIX C   Glossary

additional exemption for the taxpayer’s spouse if a joint return is filed. An individual may also claim a dependency exemption for each dependent, provided certain tests are met. The TCJA of 2017 suspended the deduction for exemptions for tax years after 2017 (and through 2025). Personal exemptions. See personal and dependency exemptions. Personal holding company (PHC) tax. A penalty tax imposed on certain closely held corporations with excessive investment income. Assessed at a 20 percent tax rate on personal holding company income, reduced by dividends paid and other adjustments. § 541. Personal residence. If a residence has been owned and used by the taxpayer as the principal residence for at least two years during the five-year period ending on the date of sale, up to $250,000 of realized gain is excluded from gross income. For a married couple filing a joint return, the $250,000 is increased to $500,000 if either spouse satisfies the ownership requirement and both spouses satisfy the use requirement. § 121. Personal service corporation (PSC). A corporation whose principal activity is the performance of personal services (e.g., health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting) and where such services are substantially performed by the employeeowners. § 269A(b). Personalty. All property that is not attached to real estate (realty) and is movable. Examples of personalty are machinery, automobiles, clothing, household furnishings, and personal effects. Points. Loan origination fees that may be deductible as interest by a buyer of property. A seller of property who pays points reduces the selling price by the amount of the points paid for the buyer. While the seller is not permitted to deduct this amount as interest, the buyer may do so. Portfolio income. Income from interest, dividends, rentals, royalties, capital gains, or other investment sources. Net passive activity losses cannot be used to offset net portfolio income. Precedents. A previously decided court decision that is recognized as authority for the disposition of future ­ decisions. Precontribution gain or loss. Partnerships allow for a variety of special allocations of gain or loss among the partners, but gain or loss that is “built in” on an asset contributed to the partnership is assigned specifically to the contributing partner. § 704(c)(1)(A). Preferences. In calculating alternative minimum taxable income (AMTI), preference items are added to the taxable income starting point of the AMT calculation. AMT preferences are amounts allowed in the calculation of regular taxable income but not allowed in the calculation of AMTI. For instance, interest income from certain state and local bonds (i.e., private activity bonds) is an AMT preference item. § 57. Preferred stock bailout. A process where a shareholder used the issuance and sale, or later redemption, of a preferred

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stock dividend to obtain long-term capital gains, without any loss of voting control over the corporation. In effect, the shareholder received corporate profits without suffering the consequences of dividend income treatment. This procedure led Congress to enact § 306, which, if applicable, converts the prior long-term capital gain on the sale or redemption of the tainted stock to dividend income. Premium Tax Credit (PTC). A tax credit that is refundable and available in advance of filing a return for the year. The PTC serves to reduce the cost of health coverage obtained on the Marketplace (Exchange). A PTC is available to individuals who purchase coverage on the Exchange and have household income equal to or greater than 100 percent of the Federal poverty line (FPL) and no greater than 400 percent of the FPL. Also, an individual must not have been able to obtain affordable coverage from his or her employer. If obtained in advance, the PTC is given to the insurance provider to lower the monthly premium cost to the individual. The PTC is reconciled on Form 8962 (Premium Tax Credit) filed with Form 1040 or 1040-A (not Form 1040-EZ). Individuals who obtain insurance through the Marketplace receive Form 1095-A (Health Insurance Marketplace Statement) by January 31 of the following year. This form provides information necessary to claim or reconcile the PTC, including the monthly cost of premiums and the amount of PTC received in advance each month. § 36B. Principal partner. A partner with a 5 percent or greater interest in partnership capital or profits. § 706(b)(3). Private activity bonds. Interest on state and local bonds is excludible from gross income. Certain such bonds are labeled private activity bonds. Although the interest on such bonds is excludible for regular tax purposes, it is treated as a tax preference in calculating the AMT. §§ 57(a) (5) and 103. Private foundations. An exempt organization that is subject to additional statutory restrictions on its activities and on contributions made to it, because it is not sufficiently supported by the public. Excise taxes may be levied on certain prohibited transactions, and the Code places more stringent restrictions on the deductibility of contributions to private foundations. § 509. Probate costs. The costs incurred in administering a decedent’s estate. Probate estate. The property of a decedent that is subject to administration by the executor or administrator of an estate. Procedural Regulations. A Regulation issued by the Treasury Department that is a housekeeping-type instruction indicating information that taxpayers should provide the IRS as well as information about the internal management and conduct of the IRS itself. Profit and loss sharing ratios. Specified in the partnership agreement and used to determine each partner’s allocation of ordinary taxable income and separately stated items. Profits and losses can be shared in different ratios. The ratios can be changed by amending the partnership agreement or by using a special allocation. § 704(a).

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

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APPENDIX C   Glossary

Profit sharing plan. A deferred compensation plan established and maintained by an employer to provide for employee participation in the company’s profits. Contributions are paid from the employer’s current or accumulated profits to a trustee. Separate accounts are maintained for each participant employee. The plan must provide a definite, predetermined formula for allocating the contributions among the participants. It also must include a definite, predetermined formula for distributing the accumulated funds after a fixed number of years, on the attainment of a stated age, or on the occurrence of certain events such as illness, layoff, or retirement. Profits (loss) interest. The extent of a partner’s entitlement to an allocation of the partnership’s operating results. This interest is measured by the profit and loss sharing ratios. Property. Assets defined in the broadest legal sense. Property includes the unrealized receivables of a cash basis taxpayer, but not services rendered. § 351. Property dividend. Generally treated in the same manner as a cash distribution, measured by the fair market value of the property on the date of distribution. Distribution of appreciated property causes the distributing C or S corporation to recognize gain. The distributing corporation does not recognize loss on property that has depreciated in value. §§ 311 and 1371(a). Property factor. The proportion of a multistate corporation’s total property that is traceable to a specific state. Used in determining the taxable income that is to be apportioned to that state. Proportionate distribution. A distribution in which the partners’ interests in hot assets does not change. This can happen, for instance, when no hot assets are distributed (e.g., a proportionate cash distribution) or when each partner in a partnership receives a pro rata share of hot assets being distributed. For example, a distribution of $10,000 of hot assets equally to two 50 percent partners is a proportionate distribution. Proposed Regulations. A Regulation issued by the Treasury Department in proposed, rather than final, form. The interval between the proposal of a Regulation and its finalization permits taxpayers and other interested parties to comment on the propriety of the proposal. Proprietorship. A business entity for which there is a single owner. The net profit of the entity is reported on the owner’s Federal income tax return (Schedule C of Form 1040). Public Law 86–272. A congressional limit on the ability of the state to force a multistate corporation to assign taxable income to that state. Under P.L. 86–272, where orders for tangible personal property are both filled and delivered outside the state, the entity must establish more than the mere solicitation of such orders before any income can be apportioned to the state. Publicly traded partnership. A partnership the interests in which are traded on an established securities market or are readily tradable on a secondary market. Publicly traded partnerships are generally treated as corporations for tax purposes unless substantially all of their income is passive or is derived in connection with any mineral or natural resource or certain fuels. § 7704. Punitive damages. Damages received or paid by the taxpayer can be classified as compensatory damages or as punitive damages. Punitive damages are those awarded to punish

the defendant for gross negligence or the intentional infliction of harm. Such damages are includible in gross income. § 104(a)(2).

Q QBI deduction. See deduction for qualified business income. Qualified ABLE program. A state program that allows funds to be set aside for the benefit of an individual who became disabled or blind before age 26. Cash may be put into the fund annually up to the annual gift tax exclusion amount. Distributions to the designated beneficiary are not taxable provided they do not exceed qualified disability expenses for the year. § 529A. Qualified business income (QBI). For purposes of the qualified business income deduction, it is the ordinary income less ordinary deductions a taxpayer earns from a qualified trade or business conducted in the United States by the taxpayer. Includes the distributive share of these amounts from each partnership or S corporation interest held by the taxpayer. Does not include certain types of investment income (e.g., capital gains or losses and dividends), “reasonable compensation” paid to a taxpayer with respect to any qualified trade or business, or guaranteed payments made to a partner for services rendered. § 199A(c). Qualified business income deduction (QBID). See deduction for qualified business income. Qualified business unit (QBU). A subsidiary, branch, or other business entity that conducts business using a currency other than the U.S. dollar. Qualified dividend income (QDI). See qualified dividends. Qualified dividends. Distributions made by domestic (and certain non-U.S.) corporations to noncorporate shareholders that are subject to tax at the same rates as those applicable to net long-term capital gains (i.e., 0 percent, 15 percent, or 20 percent). The 20 percent rate applies to certain high-income taxpayers. The dividend must be paid out of earnings and profits, and the shareholders must meet certain holding period requirements as to the stock. §§ 1(h)(1) and (11). Qualified employee discount. Discounts offered employees on merchandise or services that the employer ordinarily sells or provides to customers. The discounts must be generally available to all employees. In the case of property, the discount cannot exceed the employer’s gross profit (the sales price cannot be less than the employer’s cost). In the case of services, the discounts cannot exceed 20 percent of the normal sales price. § 132(c). Qualified improvement property. Any improvement to an interior portion of nonresidential real property made after the property is placed in service, including leasehold improvements. § 168(e)(6). Qualified joint venture. At the election of the taxpayers, certain joint ventures between spouses can avoid partnership classification. Known as a qualified joint venture, the spouses generally report their share of the business activities from the venture as sole proprietors (using two Schedule C forms). This would be reported on Schedule E if the venture relates to a rental property. § 761(f). Qualified nonrecourse financing. Debt issued on realty by a bank, retirement plan, or governmental agency. Included in the at-risk amount by the investor. § 465(b)(6).

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

APPENDIX C   Glossary

Qualified real property business indebtedness. Indebtedness that was incurred or assumed by the taxpayer in connection with real property used in a trade or business and is secured by such real property. The taxpayer must not be a C corporation. For qualified real property business indebtedness, the taxpayer may elect to exclude some or all of the income realized from cancellation of debt on qualified real property. If the election is made, the basis of the property must be reduced by the amount excluded. The amount excluded cannot be greater than the excess of the principal amount of the outstanding debt over the fair market value (net of any other debt outstanding on the property) of the property securing the debt. § 108(c). Qualified residence interest. A term relevant in determining the amount of interest expense the individual taxpayer may deduct as an itemized deduction for what otherwise would be disallowed as a component of personal interest (consumer interest). Qualified residence interest consists of interest paid on qualified residences (principal residence and one other residence) of the taxpayer. Debt that qualifies as qualified residence interest is limited to $1,000,000 of debt to acquire, construct, or substantially improve qualified residences (acquisition indebtedness). For acquisition indebtedness incurred after December 15, 2017, the limit is reduced to $750,000. § 163(h)(3). Qualified small business corporation. For purposes of computing an exclusion upon the sale of qualified small business stock, a C corporation that has aggregate gross assets not exceeding $50 million and that is conducting an active trade or business. § 1202. Qualified small business stock. Stock in a qualified small business corporation, purchased as part of an original issue after August 10, 1993. The shareholder may exclude from gross income 100 (or 50 or 75) percent of the realized gain on the sale of the stock if he or she held the stock for more than five years. The exclusion percentage depends on when the stock was acquired. § 1202. Qualified terminable interest property (QTIP). Generally, the marital deduction (for gift and estate tax purposes) is not available if the interest transferred will terminate upon the death of the transferee spouse and pass to someone else. Thus, if Jim (the husband) places property in trust, life estate to Mary (the wife), and remainder to their children upon Mary’s death, this is a terminable interest that will not provide Jim (or Jim’s estate) with a marital deduction. If, however, the transfer in trust is treated as qualified terminable interest property (the QTIP election is made), the terminable interest restriction is waived and the marital deduction becomes available. In exchange for this deduction, the surviving spouse’s gross estate must include the value of the QTIP election assets, even though he or she has no control over the ultimate disposition of the asset. Terminable interest property qualifies for this election if the donee (or heir) is the only beneficiary of the asset during his or her lifetime and receives income distributions relative to the property at least annually. For gifts, the donor spouse is the one who makes the QTIP election. For property transferred by death, the executor of the estate of the deceased spouse makes the election. §§ 2056(b) (7) and 2523(f).

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Qualified trade or business. Used in determining the deduction for qualified business income (§ 199A). In general, it includes any trade or business other than providing services as an employee. In addition, a “specified services trade or business” is not a qualified trade or business. § 199A(d)(1)(B). Qualified transportation fringes. Transportation benefits provided by the employer to the employee. If these benefits are reimbursed by the employer, they are excludible from gross income by the employee, but not deductible by the employer after 2017. Such benefits include (1) transportation in a commuter highway vehicle between the employee’s residence and the place of employment, (2) a transit pass, and (3) qualified parking. Qualified transportation fringes are excludible from the employee’s gross income to the extent categories (1) and (2) above do not exceed $270  per month in 2021 and category (3) does not exceed  $270 per month in 2021. These amounts are indexed annually for inflation. § 132(f). Qualified tuition program (§ 529 plan). A program that allows college tuition to be prepaid for a beneficiary. When amounts in the plan are used, nothing is included in gross income provided they are used for qualified higher education expenses. § 529. Qualifying child. An individual who, as to the taxpayer, satisfies the relationship, abode, and age tests. To be claimed as a dependent, such individual must also meet the citizenship and joint return tests and not be self-supporting. §§ 152(a)(1) and (c). Qualifying relative. An individual who, as to the taxpayer, satisfies the relationship, gross income, support, citizenship, and joint return tests. Such an individual can be claimed as a dependent of the taxpayer. §§ 152(a)(2) and (d).

R Rate reconciliation. Under Generally Accepted Accounting Principles, a footnote to the financial statements often includes a table that accounts for differences in the statutory income tax rate that applies to the entity (e.g., 21 percent) and the higher or lower effective tax rate that the entity realized for the reporting period. The rate reconciliation includes only permanent differences between the book tax expense and the entity’s income tax provision. The rate reconciliation table often is expressed in dollar and/or percentage terms. Realized gain. See realized gain or loss. Realized gain or loss. The difference between the amount realized upon the sale or other disposition of property and the adjusted basis of the property. § 1001. Realized loss. See realized gain or loss. Realty. Real estate. Reasonable cause. Relief from taxpayer and preparer penalties often is allowed where reasonable cause is found for the taxpayer’s actions. For example, reasonable cause for the late filing of a tax return might be a flood that damaged the taxpayer’s record-keeping systems and made a timely completion of the return difficult. Reasonable needs of the business. A means of avoiding the penalty tax on an unreasonable accumulation of earnings.

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

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APPENDIX C   Glossary

In determining the base for this tax (accumulated taxable income), § 535 allows a deduction for “such part of earnings and profits for the taxable year as are retained for the reasonable needs of the business.” § 537. Reasonableness. See reasonableness requirement. Reasonableness requirement. The Code includes a reasonableness requirement with respect to the deduction of salaries and other compensation for services. The courts have expanded this requirement to all business expenses, ruling that an expense must be reasonable in order to be ordinary and necessary. What constitutes reasonableness is a question of fact. If an expense is unreasonable, the amount that is classified as unreasonable is not allowed as a deduction. The question of reasonableness generally arises with respect to closely held corporations where there is no separation of ownership and management. § 162(a)(1). Recapitalization. A “Type E” reorganization, constituting a major change in the character and amount of outstanding equity of a corporation. Tax-free exchanges are stock for stock, bonds for bonds, and bonds for stock. For example, common stock exchanged for preferred stock can qualify as a tax-free “Type E” reorganization. Recognized gain. See recognized gain or loss. Recognized gain or loss. The portion of realized gain or loss subject to income taxation. Recognized loss. See recognized gain or loss. Recourse debt. Debt for which the lender may both foreclose on the property and assess a guarantor for any payments due under the loan. A lender also may make a claim against the assets of any general partner in a partnership to which debt is issued, without regard to whether the partner has guaranteed the debt. Recovery of capital doctrine. When a taxable sale or exchange occurs, the seller may be permitted to recover his or her investment (or other adjusted basis) in the property before gain or loss is recognized. Redemption to pay death taxes. Sale or exchange treatment is available relative to this type of stock redemption, to the extent of the proceeds up to the total amount paid by the estate or heir for estate/inheritance taxes and administration expenses. The stock value must exceed 35 percent of the value of the decedent’s adjusted gross estate. In meeting this test, shareholdings in corporations where the decedent held at least 20 percent of the outstanding shares are combined. § 303. Refundable credits. A credit that is paid to the taxpayer even if the amount of the credit (or credits) exceeds the taxpayer’s tax liability. Regular corporations. See C corporation. Rehabilitation expenditures credit. A credit that is based on expenditures incurred to rehabilitate industrial and commercial buildings and certified historic structures. The credit is intended to discourage businesses from moving from older, economically distressed areas to newer locations and to encourage the preservation of historic ­structures. § 47. Related party. Various Code Sections define related parties and often include a variety of persons within this (usually detrimental) category. Generally, related parties are accorded different tax treatment from that applicable to

other taxpayers who enter into similar transactions. For instance, realized losses that are generated between related parties are not recognized in the year of the loss. However, these deferred losses can be used to offset recognized gains that occur upon the subsequent sale of the asset to a nonrelated party. Other uses of a related-party definition include the conversion of gain upon the sale of a depreciable asset into all ordinary income (§ 1239) and the identification of constructive ownership of stock relative to corporate distributions, redemptions, liquidations, reorganizations, and compensation. Related-party transactions. The tax law places restrictions upon the recognition of gains and losses between related parties because of the potential for abuse. For example, restrictions are placed on the deduction of losses from the sale or exchange of property between related parties. In addition, under certain circumstances, relatedparty gains that would otherwise be classified as capital gain are classified as ordinary income. §§ 267, 707(b), and 1239. Rental activity. Any activity where payments are received principally for the use of tangible property is a rental activity. Temporary Regulations provide that in certain circumstances, activities involving rentals of real and personal property are not to be treated as rental activities. The Temporary Regulations list six exceptions. Reorganization. Any corporate restructuring, including when one corporation acquires another, a single corporation divides into two or more entities, a corporation makes a substantial change in its capital structure, a corporation undertakes a change in its legal name or domicile, or a corporation goes through a bankruptcy proceeding and continues to exist. The exchange of stock and other securities in a corporate reorganization can be effected favorably for tax purposes if certain statutory requirements are followed strictly. Tax consequences include the nonrecognition of any gain that is realized by the shareholders except to the extent of boot received. § 368. Report of Foreign Bank and Financial Accounts (FBAR). FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), must be filed by individuals and some businesses if they have foreign bank, brokerage, or similar accounts where at any time during the calendar year the aggregate balance exceeds $10,000. The form is filed electronically with the U.S. Department of the Treasury and is due by April 15 with an automatic extension to October 15. Significant penalties apply for failure to file the FBAR. The form is not attached to the income tax return (it is separately filed), but any interest earned by the foreign accounts is generally included in the account holder’s U.S. taxable income. Required taxable year. A partnership or limited liability company must use a required tax year as its tax accounting period, or one of three allowable alternative tax year-ends. If there is a common tax year used by owners holding a majority of the entity’s capital or profits interests or if the same year-end is used by all “principal partners” (partners who hold 5 percent or more of the capital or profits interests), then that tax year-end is used by the entity. If neither of the first tests results in an allowable year-end

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

APPENDIX C   Glossary

(e.g., because there is no majority partner or because the principal partners do not have the same tax year), then the partnership uses the least aggregate deferral method to determine its tax year. Research activities credit. A tax credit whose purpose is to encourage research and development. It consists of three components: the incremental research activities credit, the basic research credit, and the energy credit. The incremental research activities credit is equal to 20 percent of the excess qualified research expenditures over the base amount. The basic research credit is equal to 20 percent of the excess of basic research payments over the base amount. § 41. Research and experimental expenditures. Costs incurred to develop a product or process for which there exists uncertainty regarding its viability. The Code provides three alternatives for the tax treatment of research and experimentation expenditures. They may be expensed in the year paid or incurred, deferred subject to amortization, or capitalized. If the taxpayer does not elect to expense such costs or to defer them subject to amortization (over 60 months), the expenditures must be capitalized. § 174. In general, research and experimentation expenditures paid or incurred after 2021 must be capitalized and amortized over a five-year period. Some of these expenditures may also qualify the taxpayer for the credit for increasing research activities. § 41. Reserve method. A method of accounting whereby an allowance is permitted for estimated uncollectible accounts. Actual write-offs are charged to the reserve, and recoveries of amounts previously written off are credited to the reserve. The Code permits only certain financial institutions to use the reserve method. § 166. Residential rental real estate. Buildings for which at least 80 percent of the gross rents are from dwelling units (e.g., an apartment building). This type of building is distinguished from nonresidential (commercial or industrial) buildings in applying the recapture of depreciation ­provisions. The term also is relevant in distinguishing between buildings that are eligible for a 27.5-year life versus a 39-year life for MACRS purposes. Generally, residential buildings receive preferential treatment. Revenue Agent’s Report (RAR). A Revenue Agent’s Report (RAR) reflects any adjustments made by the agent as a result of an audit of the taxpayer. The RAR is mailed to the taxpayer along with the 30-day letter, which outlines the appellate procedures available to the taxpayer. Revenue neutrality. A description that characterizes tax legislation when it neither increases nor decreases the total revenue collected by the taxing jurisdiction. Thus, any tax revenue losses are offset by tax revenue gains. Revenue Procedures. A matter of procedural importance to both taxpayers and the IRS concerning the administration of the tax laws is issued as a Revenue Procedure (abbreviated Rev.Proc.). A Revenue Procedure is published in an Internal Revenue Bulletin (I.R.B.). Revenue Rulings. A Revenue Ruling (abbreviated Rev.Rul.) is issued by the National Office of the IRS to express an official interpretation of the tax law as applied to specific transactions. It is more limited in application than a

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Regulation. A Revenue Ruling is published in an Internal Revenue Bulletin (I.R.B.). Reversionary interest. The trust property that reverts to the grantor after the expiration of an intervening income interest. Assume that Phil places real estate in trust with income to Junior for 11 years and that upon the expiration of this term, the property returns to Phil. Under these circumstances, Phil holds a reversionary interest in the property. A reversionary interest is the same as a remainder interest, except that, in the latter case, the property passes to someone other than the original owner (e.g., the grantor of a trust) upon the expiration of the intervening interest. Roth IRA. See Individual Retirement Accounts (IRAs).

S S corporation. The designation for a corporation that elects to be taxed similarly to a partnership. See also Subchapter S. Sale or exchange. A requirement for the recognition of capital gain or loss. Generally, the seller of property must receive money or relief from debt to have sold the property. An exchange involves the transfer of property for other property. Thus, collection of a debt is neither a sale nor an exchange. The term sale or exchange is not defined by the Code. Sales factor. The proportion of a multistate corporation’s total sales that is traceable to a specific state. Used in determining the taxable income that is to be apportioned to that state. Sales tax. A state- or local-level tax on the retail sale of specified property. Generally, the purchaser pays the tax, but the seller collects it, as an agent for the government. V ­ arious taxing jurisdictions allow exemptions for purchases of specific items, including certain food, services, and manufacturing equipment. If the purchaser and seller are in different states, a use tax usually applies. Salvage value. The estimated amount a taxpayer will receive upon the disposition of an asset used in the taxpayer’s trade or business. Salvage value is relevant in calculating depreciation under § 167, but is not relevant in calculating cost recovery under § 168. Schedule K–1. A tax information form prepared for each partner in a partnership, each shareholder of an S corporation, and some beneficiaries of certain trusts. The Schedule K–1 reports the owner’s share of the entity’s ordinary income or loss from operations as well as the owner’s share of separately stated items, along with any other information the partner, shareholder, or beneficiary needs to prepare the return. Schedule M–1. On the Form 1120, a reconciliation of book net income with Federal taxable income. Accounts for temporary and permanent differences in the two computations, such as depreciation differences, exempt income, and nondeductible items. On Forms 1120S and 1065, the Schedule M–1 reconciles book income with the owners’ aggregate taxable income. Schedule M–3. An expanded reconciliation of book net income with Federal taxable income (see Schedule M–1). Required of C and S corporations and partnerships/LLCs with total assets of $10 million or more.

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

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APPENDIX C   Glossary

Scholarship. Scholarships are generally excluded from the gross income of the recipient unless the payments are a disguised form of compensation for services rendered. However, the Code imposes restrictions on the exclusion. The recipient must be a degree candidate. The excluded amount is limited to amounts used for tuition, fees, books, supplies, and equipment required for courses of instruction. Amounts received for room and board are not eligible for the exclusion. § 117. Section 121 exclusion. If a residence has been owned and used by the taxpayer as the principal residence for at least two years during the five-year period ending on the date of sale, up to $250,000 of realized gain is excluded from gross income. For a married couple filing a joint return, the $250,000 is increased to $500,000 if either spouse satisfies the ownership requirement and both spouses satisfy the use requirement. Section 179 expensing. The ability to deduct the cost of qualified property in the year the property is placed in service rather than over the asset’s useful life or cost recovery period. The annual ceiling on the deduction is $1,050,000 in 2021 ($1,040,000 in 2020). However, the deduction is reduced dollar for dollar when § 179 property placed in service during the taxable year exceeds $2,620,000 ($2,590,000 in 2020). In addition, the amount expensed under § 179 cannot exceed the aggregate amount of taxable income derived from the conduct of any trade or business by the taxpayer. Section 179 expensing election. See Section 179 expensing. Section 338 election. When a corporation acquires at least 80 percent of a subsidiary within a 12-month period, it can elect to treat the acquisition of such stock as an asset purchase. The acquiring corporation’s basis in the subsidiary’s assets then is the cost of the stock. The subsidiary is deemed to have sold its assets for an amount equal to the grossed-up basis in its stock. Section 382 limitation. When one corporation acquires another, the acquiring corporation’s ability to use the loss and credit carryovers of the target may be limited by this anti-abuse provision. For instance, the maximum NOL deduction available to the acquiring is the value of the target when acquired times the long-term tax-exempt interest rate on that date. Section 401(k) plan. A cash or deferred arrangement plan that allows participants to elect to receive up to $19,500 ($26,000 if age 50 or above) in 2021 in cash (taxed currently) or to have a contribution made on their behalf to a qualified retirement plan (excludible from gross income). The plan may be in the form of a salary reduction agreement between the participant and the employer. Section 704(b) book capital accounts. Capital accounts calculated as described under Reg. § 1.704–1(b)(2)(iv). All partnerships must maintain § 704(b) book capital accounts for the partners with the intent that final liquidating distributions are in accordance with these capital account balances. Partnership allocations will not be accepted unless they are properly reflected in the partners’ § 704(b) book capital accounts. These capital accounts are a hybrid of book and tax accounting methods. They reflect contributions and

distributions of property at their fair market values, but the capital accounts are otherwise generally increased by the partnership’s tax-basis income and decreased by tax-basis deductions (as reported on the partner’s Schedule K–1). Liabilities are only reflected in these capital accounts to the extent the partnership assumes a partner’s liability [reduces that partner’s § 704(b) book capital account] or a partner assumes a partnership liability [increases that partner’s § 704(b) book capital account]. See also capital account maintenance and economic effect test. Section 754 election. An election that may be made by a partnership to adjust the basis of partnership assets to reflect a purchasing partner’s outside basis in interest or to reflect a gain, loss, or basis adjustment of a partner receiving a distribution from a partnership. The intent of the election is to maintain the equivalence between outside and inside basis for that partner. Once the election is made, the partnership must make basis adjustments for all future transactions, unless the IRS consents to revoke the election. Section 1231 gains and losses. If the combined gains and losses from the taxable dispositions of § 1231 assets plus the net gain from business involuntary conversions (of both § 1231 assets and long-term capital assets) is a gain, the gains and losses are treated as long-term capital gains and losses. In arriving at § 1231 gains, however, the depreciation recapture provisions (e.g., § 1245) are applied first to produce ordinary income. If the net result of the combination is a loss, the gains and losses from § 1231 assets are treated as ordinary gains and losses. § 1231(a). Section 1231 lookback. For gain to be classified as § 1231 gain, the gain must survive the § 1231 lookback. To the extent of nonrecaptured § 1231 losses for the five prior tax years, the gain is classified as ordinary income. § 1231(c). Section 1231 property. Depreciable assets and real estate used in trade or business and held for the required longterm holding period. § 1231(b). Section 1244 stock. Stock issued under § 1244 by qualifying small business corporations. If § 1244 stock becomes worthless, the shareholders may claim an ordinary loss rather than the usual capital loss, within statutory limitations. Section 1245 property. Property that is subject to the recapture of depreciation under § 1245. For a definition of § 1245 property, see § 1245(a)(3). Section 1245 recapture. Upon a taxable disposition of § 1245 property, all depreciation claimed on the property is recaptured as ordinary income (but not to exceed any recognized gain from the disposition). Section 1250 property. Real estate that is subject to the recapture of depreciation under § 1250. For a definition of § 1250 property, see § 1250(c). Section 1250 recapture. Upon a taxable disposition of § 1250 property, accelerated depreciation or cost recovery claimed on the property may be recaptured as ordinary income. Securities. Stock, debt, and other financial assets. To the extent securities other than the stock of the transferee

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

APPENDIX C   Glossary

corporation are received in a § 351 exchange, the new shareholder recognizes a gain. For purposes of corporate reorganizations, securities are generally debt with terms longer than 10 years. To the extent stock and securities are transferred in a corporate reorganization under § 368, no gain or loss is recognized. Self-employment tax. A tax of 12.4 percent is levied on individuals with net earnings from self-employment (up to $142,800 in 2021) to provide Social Security benefits (i.e., the old age, survivors, and disability insurance portion) for such individuals. In addition, a tax of 2.9 percent is levied on individuals with net earnings from self-employment (with no statutory ceiling) to provide Medicare benefits (i.e., the hospital insurance portion) for such individuals. If a self-employed individual also receives wages from an employer that are subject to FICA, the self-employment tax will be reduced. A partial deduction is allowed in calculating the self-employment tax. Individuals with net earnings of $400 or more from self-employment are subject to this tax. §§ 1401 and 1402. Separate foreign tax credit income categories. The foreign tax credit of a taxpayer is computed for each of several types of income sources, as specified by the Code to limit the results of tax planning. FTC income “baskets” include general and passive. The FTC for the year is the sum of the credits as computed within all of the taxpayer’s separate FTC baskets used for the tax year. Separate return limitation year (SRLY). A series of rules limits the amount of an acquired corporation’s net operating loss carryforwards that can be used by the acquiror. Generally, a consolidated return can include the acquiree’s net operating loss carryforward only to the extent of the lesser of the subsidiary’s (1) current-year or (2) cumulative positive contribution to consolidated taxable income. Separately stated items. Any item of a partnership or an S corporation that might be taxed differently to any two owners of the entity. These amounts are not included in the ordinary income of the entity, but are instead reported separately to the owners; tax consequences are determined at the owner level. Severance taxes. A tax imposed upon the extraction of natural resources. Short period. See short taxable year. Short sale. A sale that occurs when a taxpayer sells borrowed property (usually stock) and repays the lender with substantially identical property either held on the date of the short sale or purchased after the sale. No gain or loss is recognized until the short sale is closed, and such gain or loss is generally short term. § 1233. Short taxable year. A tax year that is less than 12 months. A short taxable year may occur in the initial reporting period, in the final tax year, or when the taxpayer changes tax years. Special income tax computations may be required. Significant participation activity. Seven tests determine whether an individual has achieved material participation in an activity, one of which is based on more than 500 hours of participation in significant participation activities. A ­significant participation activity is one in which the

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individual’s participation exceeds 100 hours during the year. Temp.Reg. § 1.469–5T. Simple trust. Trusts that are not complex trusts. Such trusts may not have a charitable beneficiary, accumulate income, or distribute corpus. Simplified employee pension (SEP) plans. An employer may make contributions to an employee’s IRA in amounts not exceeding the lesser of 15 percent of compensation or $58,000 ($64,500 if age 50 or above) per individual in 2021. These employer-­sponsored simplified employee pensions are permitted only if the contributions are nondiscriminatory and are made on behalf of all employees who have attained age 21 and have worked for the employer during at least three of the five preceding calendar years. § 219(b). Small business corporation. A corporation that satisfies the definition of § 1361(b), § 1244(c), or both. Satisfaction of § 1361(b) permits an S election, and satisfaction of § 1244 enables the shareholders of the corporation to claim an ordinary loss on the worthlessness of stock. Small business stock (§ 1244 stock). See Section 1244 stock. Small Cases Division. A division within the U.S. Tax Court where jurisdiction is limited to claims of $50,000 or less. There is no appeal from this court. Solicitation of orders. A level of activity brought about by the taxpayer within a specific state. Under Public Law 86-272, certain types of solicitation activities do not create nexus with the state. Exceeding mere solicitation, though, creates nexus. Special allocation. Any amount for which an agreement exists among the partners of a partnership outlining the method used for spreading the item among the partners. Special use value. Permits the executor of an estate to value, for estate tax purposes, real estate used in a farming activity or in connection with a closely held business at its current use value rather than at its most suitable or optimal use value. Under this option, a farm is valued for farming purposes even though, for example, the property might have a higher potential value as a shopping center. For the executor of an estate to elect special use valuation, the conditions of § 2032A must be satisfied. Specific charge-off method. A method of accounting for bad debts in which a deduction is permitted only when an account becomes partially or completely worthless. Specified service trade or business. For purposes of the deduction for qualified business income, a specified ­service trade or business includes those involving the performance of services in certain fields, including health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, and brokerage services; services consisting of investing and investment management, trading or dealing in securities, partnership interests, or commodities; and any trade or business where the business’s principal asset is the reputation of one or more of its employees or owners. § 199A(d)(2). Spin-off. A type of reorganization where, for example, Apple Corporation transfers some assets to Core Corporation in exchange for Core stock representing control. Apple then distributes the Core stock to its shareholders.

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

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APPENDIX C   Glossary

Split-off. A type of reorganization where, for example, Apple Corporation transfers some assets to Core Corporation in exchange for Core stock representing control. Apple then distributes the Core stock to its shareholders in exchange for some of their Apple stock. Not all shareholders need to exchange stock. Split-up. A type of reorganization where, for example, Firefly Corporation transfers some assets to Fire Corporation and the remainder to Fly Corporation. In return, Firefly receives enough Fire and Fly stock representing control of each corporation. Firefly then distributes the Fire and Fly stock to its shareholders in return for all of their Firefly stock. Firefly then liquidates, and its shareholders now have control of Fire and Fly. Sprinkling trust. When a trustee has the discretion to either distribute or accumulate the entity accounting income of the trust and to distribute it among the trust’s income beneficiaries in varying magnitudes. The trustee can “sprinkle” the income of the trust. Standard deduction. The individual taxpayer can either itemize deductions or take the standard deduction. The amount of the standard deduction depends on the taxpayer’s filing status (single, head of household, married filing jointly, surviving spouse, or married filing separately). For 2021, the amount of the standard deduction ranges from $12,550 (for single) to $25,100 (for married, filing jointly). Additional standard deductions of either $1,350 (for married taxpayers) or $1,700 (for single taxpayers) are available if the taxpayer is blind or age 65 or over. Limitations exist on the amount of the standard deduction of a taxpayer who is another taxpayer’s dependent. The standard deduction amounts are adjusted for inflation each year. § 63(c). Startup expenditures. Expenditures paid or incurred prior to the beginning of the business that would have been deductible as an ordinary and necessary business expense if business operations had begun. Examples of such expenditures include advertising; salaries and wages; travel and other expenses incurred in lining up prospective distributors, suppliers, or customers; and salaries and fees to executives, consultants, and professional service providers. A taxpayer will immediately expense the first $5,000 ­(subject to phaseout) of startup expenditures and amortize the balance over a period of 180 months, unless the taxpayer elects not to do so. § 195. Statute of limitations. Provisions of the law that specify the maximum period of time in which action may be taken concerning a past event. Code §§ 6501–6504 contain the limitation periods applicable to the IRS for additional assessments, and §§ 6511–6515 relate to refund claims by taxpayers. Statutory employees. Statutory employees are considered self-employed independent contractors for purposes of reporting income and expenses on their tax returns. Generally, a statutory employee must meet three tests: • It is understood from a service contract that the services will be performed by the person. • The person does not have a substantial investment in facilities (other than transportation used to perform the services).

• The services involve a continuing relationship with the person for whom they are performed. For further information on statutory employees, see Circular E, Employer’s Tax Guide (IRS Publication 15). Statutory tax rate. The statutory tax rate is the tax rate (or rates) specified in the law. For example, § 11 provides that the income tax rate for corporations is 21 percent. Step down. See step-down in basis. Step transaction. Disregarding one or more transactions to arrive at the final result. Assume, for example, Beta Corporation creates Alpha Corporation by transferring assets desired by Beta’s sole shareholder, Carl. Carl then causes Alpha to liquidate to obtain the assets. Under these circumstances, the IRS may contend that the creation and liquidation of Alpha be disregarded. What really happened was a dividend distribution from Beta to Carl. Step up. See step-up in basis. Step-down in basis. A reduction in the tax basis of property. See also step-up in basis. Step-up in basis. An increase in the income tax basis of property. In an estate context, a step-up in basis occurs when a decedent dies owning appreciated property. Since the estate or heir acquires a basis in the property equal to the property’s fair market value on the date of death (or alternate valuation date if available and elected), any appreciation is not subject to the income tax. Thus, a stepup in basis is the result, with no immediate income tax consequences. In the partnership context, a step-up arises when a § 754 election is in effect and when one of several transactions arises: (1) a partner purchases a partnership interest for an amount that exceeds the partner’s share of the partnership’s inside basis, (2) the partner recognizes a gain on a distribution of cash from the partnership, or (3) the partnership takes a basis in a partnership property that is less than the partnership’s basis in that asset. In the opposite situations (e.g., loss recognition), a step-down can arise. See also step-down in basis. Stock bonus plan. A type of deferred compensation plan in which the employer establishes and maintains the plan and contributes employer stock to the plan for the benefit of employees. The contributions need not be dependent on the employer’s profits. Any benefits of the plan are distributable in the form of employer stock, except that distributable fractional shares may be paid in cash. Stock dividend. Not taxable if pro rata distributions of stock or stock rights on common stock. Section 305 governs the taxability of stock dividends and sets out five exceptions to the general rule that stock dividends are nontaxable. Stock option. The right to purchase a stated number of shares of stock from a corporation at a certain price within a specified period of time. §§ 421 and 422. Stock redemption. A corporation buys back its own stock from a specified shareholder. Typically, the corporation recognizes any realized gain on the noncash assets that it uses to effect a redemption, and the shareholder obtains a capital gain or loss upon receipt of the purchase price. Stock rights. Assets that convey to the holder the power to purchase corporate stock at a specified price, often for a

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

APPENDIX C   Glossary

limited period of time. Stock rights received may be taxed as a distribution of earnings and profits. After the right is exercised, the basis of the acquired share includes the investor’s purchase price or gross income, if any, to obtain the right. Disposition of the right also can be taxable. Subchapter S. Sections 1361–1379 of the Internal R ­ evenue Code. An elective provision permitting certain small business corporations (§ 1361) and their sharehold­ ers (§ 1362) to elect to be treated for income tax purposes in accordance with the operating rules of §§ 1363–1379. S corporations usually avoid the corporate income tax, and corporate losses can be claimed by the shareholders. Subpart F income. Certain types of income earned by a controlled foreign corporation that are included in U.S. gross income by U.S. shareholders of such an entity as they are generated, not when they are repatriated. Substance over form. A standard used when one must ascertain the true reality of what has occurred. Suppose, for example, a father sells stock to his daughter for $1,000. If the stock is really worth $50,000 at the time of the transfer, the substance of the transaction is probably a gift to her of $49,000. Substantial authority. Taxpayer and tax preparer understatement penalties are waived where substantial authority existed for the disputed position taken on the return. Substantial basis reduction. Arises when the partnership makes a distribution to a partner and the distributee partner recognizes a loss (or has a basis increase for the distributed assets) of at least $250,000. (The second situation would arise when the basis of the assets the partner receives must be stepped up to absorb all remaining partnership interest basis.) If there is a substantial basis reduction, the partnership is required to make a downward adjustment to the basis of its assets, even if the partnership does not have a § 754 election in effect. This adjustment is treated as a § 754 adjustment related to a distribution and so is allocated to the basis of all remaining partnership assets (except for cash). See also substantial built-in loss and § 754 election. Substantial built-in loss. Arises when a partner sells a partnership interest and the selling partner recognizes a loss on the sale of at least $250,000. In addition, a substantial built-in loss arises if the selling partner would be allocated more than a $250,000 loss if all partnership assets were sold (after considering special allocations). If there is a substantial built-in loss, the partnership is required to make a downward adjustment in the basis of its assets, even if the partnership does not have a § 754 election in effect. This adjustment is treated as a § 754 adjustment related to a sale of a partnership interest and so is allocated to the purchasing partner. See also substantial basis reduction and § 754 election. Substantially appreciated inventory. In partnership taxation, for purposes of the regular distribution rules and distributions under § 736, a distribution of inventory is only treated as a hot asset if it is substantially appreciated, meaning the fair market value of the inventory exceeds 120 percent of its basis. See appreciated inventory. Sunset provision. A provision attached to new tax legislation that will cause such legislation to expire at a specified

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date. Sunset provisions are attached to tax cut bills for long-term budgetary reasons to make their effect temporary. Once the sunset provision comes into play, the tax cut is rescinded and former law is reinstated. An example of a sunset provision is contained in the Tax Relief ­Reconciliation Act of 2001 that related to the estate tax. After the estate tax was phased out in 2010, a sunset provision called for the reinstatement of the estate tax as of January 1, 2011. Surviving spouse. When a husband or wife predeceases the other spouse, the survivor is known as a surviving spouse. Under certain conditions, a surviving spouse may be entitled to use the income tax rates in § 1(a) (those applicable to married persons filing a joint return) for the two years after the year of death of his or her spouse. § 2(a). Syndication costs. Incurred in promoting and marketing partnership interests for sale to investors. Examples include legal and accounting fees, printing costs for prospectus and placement documents, and state registration fees. These items are capitalized by the partnership as incurred, with no amortization thereof allowed.

T Tax avoidance. The minimization of one’s tax liability by taking advantage of legally available tax planning opportunities. Tax avoidance can be contrasted with tax evasion, which entails the reduction of tax liability by illegal means. Tax benefit rule. A provision that limits the recognition of income from the recovery of an expense or a loss properly deducted in a prior tax year to the amount of the deduction that generated a tax saving. Assume that last year Gary had medical expenses of $4,000 and adjusted gross income of $30,000. Because of the AGI limitation, Gary could deduct only $1,000 of these expenses [$4,000 2 (10% 3 $30,000)]. If this year Gary is reimbursed in full by his insurance company for the $4,000 of expenses, the tax benefit rule limits the amount of income from the reimbursement to $1,000 (the amount previously deducted with a tax saving). Tax credits. Amounts that directly reduce a taxpayer’s tax liability. The tax benefit received from a tax credit is not dependent on the taxpayer’s marginal tax rate, whereas the benefit of a tax deduction or exclusion is dependent on the taxpayer’s tax bracket. Tax evasion. The reduction of taxes by the use of subterfuge or fraud or other nonlegal means. For example, a cash basis taxpayer tries to increase his or her charitable contribution deduction by prepaying next year’s church pledge with a pre-dated check issued in the following year. Tax haven. A country in which either locally sourced income or residents of the country are subject to a low rate of taxation. Tax preparer. One who prepares tax returns for compensation. A tax preparer must register with the IRS and receive a special ID number to practice before the IRS and represent taxpayers before the agency in tax audit actions. The conduct of a tax preparer is regulated under Circular 230. Tax preparers also are subject to penalties for inappropriate conduct when working in the tax profession.

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

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APPENDIX C   Glossary

Tax Rate Schedules. Rate schedules that are used by upperincome taxpayers and those not permitted to use the tax table. Separate rate schedules are provided for married individuals filing jointly, heads of households, single taxpayers, estates and trusts, and married individuals filing separate returns. § 1. Tax research. The method used to determine the best available solution to a situation that possesses tax consequences. Both tax and nontax factors are considered. Tax shelters. The typical tax shelter generated large losses in the early years of the activity. Investors would offset these losses against other types of income and therefore avoid paying income taxes on this income. These tax shelter investments could then be sold after a few years and produce capital gain income, which is taxed at a lower rate compared to ordinary income. The passive activity loss rules and the at-risk rules now limit tax shelter deductions. Tax Table. A table that is provided for taxpayers with less than $100,000 of taxable income. Separate columns are provided for single taxpayers, married taxpayers filing jointly, heads of households, and married taxpayers filing separately. § 3. Tax treaties. An agreement between the U.S. Department of State and another country designed to alleviate double taxation of income and asset transfers, and to share administrative information useful to tax agencies in both countries. The United States has income tax treaties with almost 70 countries and transfer tax treaties with about 20. Taxable estate. The taxable estate is the gross estate of a decedent reduced by the deductions allowed by §§ 2053– 2057 (e.g., administration expenses, marital and charitable deductions). The taxable estate is subject to the unified transfer tax at death. § 2051. Taxable gift. The amount of a gift that is subject to the unified transfer tax. Thus, a taxable gift has been adjusted by the annual exclusion and other appropriate deductions (e.g., marital and charitable). § 2053. Taxable year. The annual period over which income is measured for income tax purposes. Most individuals use a calendar year, but many businesses use a fiscal year based on the natural business year. Certain entities, including S corporations, have a required taxable year. §§ 441, 706, and 1378. Technical Advice Memoranda (TAM). TAMs are issued by the IRS in response to questions raised by IRS field personnel during audits. They deal with completed rather than proposed transactions and are often requested for questions related to exempt organizations and employee plans. Temporary differences. Under ASC 740 (SFAS 109), taxrelated items that appear in the entity’s financial statements and its tax return, but in different time periods. For instance, doubtful accounts receivable often create a temporary book-tax difference, as a bad debt reserve is used to compute an expense for financial reporting purposes, but a bad debt often is deductible only under the specific write-off rule for tax purposes, and the difference observed for the current period creates a temporary difference.

Temporary Regulations. A Regulation issued by the Treasury Department in temporary form. When speed is critical, the Treasury Department issues Temporary Regulations that take effect immediately. These Regulations have the same authoritative value as Final Regulations and may be cited as precedent for three years. Temporary Regulations are also issued as proposed Regulations. Tenants by the entirety. Essentially, a joint tenancy between husband and wife. Tenants in common. A form of ownership where each tenant (owner) holds an undivided interest in property. Unlike a joint tenancy or a tenancy by the entirety, the interest of a tenant in common does not terminate upon that individual’s death (there is no right of survivorship). Assume that Tim and Cindy acquire real estate as equal tenants in common. Upon Tim’s death, his one-half interest in the property passes to his estate or heirs, not automatically to Cindy. Terminable interests. An interest in property that terminates upon the death of the holder or upon the occurrence of some other specified event. The transfer of a terminable interest by one spouse to the other may not qualify for the marital deduction. §§ 2056(b) and 2523(b). Theft losses. A loss from larceny, embezzlement, or robbery. It does not include misplacement of items. Thin capitalization. When debt owed by a corporation to the shareholders becomes too large in relation to the corporation’s capital structure (i.e., stock and shareholder equity), the IRS may contend that the corporation is thinly capitalized. In effect, some or all of the debt is reclassified as equity. The immediate result is to disallow any interest deduction to the corporation on the reclassified debt. To the extent of the corporation’s earnings and profits, interest payments and loan repayments on the reclassified debt are treated as dividends to the shareholders. Thirty-day (30-day) letter. A letter that accompanies an RAR (Revenue Agent’s Report) issued as a result of an IRS audit of a taxpayer (or the rejection of a taxpayer’s claim for refund). The letter outlines the taxpayer’s appeal procedure before the IRS. If the taxpayer does not request any such procedures within the 30-day period, the IRS issues a statutory notice of deficiency (the 90-day letter). Throwback rule. If there is no income tax in the state to which a sale otherwise would be apportioned, the sale essentially is exempt from state income tax, even though the seller is domiciled in a state that levies an income tax. Nonetheless, if the seller’s state has adopted a throwback rule, the sale is attributed to the seller’s state and the transaction is subjected to a state-level tax. Traditional IRA. See Individual Retirement Accounts (IRAs). Transfer pricing. The process of setting internal prices for transfers of goods and services among related taxpayers. For example, what price should be used when Subsidiary purchases management services from Parent? The IRS can adjust transfer prices when it can show that the taxpayers were attempting to avoid tax by, for example, shifting losses, deductions, or credits from low-tax to high-tax entities or jurisdictions.

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

APPENDIX C   Glossary

Transportation expenses. Expenses that include the cost of transporting the self-employed taxpayer (or employee) from one place to another in the course of business when the taxpayer is not in travel status. For tax years beginning after 2017 and before 2026, only reimbursed transportation expenses are deductible by employees. Commuting expenses are not deductible. Travel expenses. Expenses that include meals (generally subject to a 50 percent disallowance) and lodging and transportation expenses while away from home in the pursuit of a trade or business (including that of an employee). For tax years beginning after 2017 and before 2026, only reimbursed travel expenses are deductible by employees. Treaty shopping. An international investor attempts to use the favorable aspects of a tax treaty to his or her advantage, often elevating the form of the transaction over its substance (e.g., by establishing only a nominal presence in the country offering the favorable treaty terms). 12-month rule for prepaid expenses. Taxpayers who use the cash method are required to use the accrual method for deducting certain prepaid expenses (i.e., must capitalize the item and can deduct only when used). If a prepayment will not be consumed or expire by the end of the tax year following the year of payment, the prepayment must be capitalized and prorated over the benefit period. Conversely, if the prepayment will be consumed by the end of the tax year following the year of payment, it can be expensed when paid. To obtain the current deduction under the one-year rule, the payment must be a required payment rather than a voluntary payment.

U UDITPA. The Uniform Division of Income for Tax Purposes Act has been adopted in some form by many of the states. The Act develops criteria by which the total taxable income of a multistate corporation can be assigned to specific states. Unclaimed property. A U.S. state may have the right to acquire property that has been made available to an individual or legal entity for a fixed period of time, where the claimant has not taken possession of the property after a notice period. Examples of such property that a state could acquire are an uncashed payroll check or an unused gift card. Unearned income. Income received but not yet earned. Normally, such income is taxed when received, even for accrual basis taxpayers. Unified transfer tax. Rates applicable to transfers by gift and death made after 1976. § 2001(c). Unified transfer tax credit. A credit allowed against any unified transfer tax. §§ 2010 and 2505. Uniform capitalization (UNICAP) rules. Under § 263A, the Regulations provide a set of rules that all taxpayers (regardless of the particular industry) can use to determine the items of cost (and means of allocating those costs) that must be capitalized with respect to the production of

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tangible property. Small businesses, defined as those with average annual gross receipts in the prior three-year period of $26 million or less, that are not a tax shelter, are not required to use the UNICAP rules. Unitary approach. See unitary theory. Unitary theory. Sales, property, and payroll of related corporations are combined for nexus and apportionment purposes, and the worldwide income of the unitary entity is apportioned to the state. Subsidiaries and other affiliated corporations found to be part of the corporation’s unitary business (because they are subject to overlapping ownership, operation, or management) are included in the apportionment procedure. This approach can be limited if a water’s-edge election is in effect. Unit-livestock-price method. A method of accounting for the cost of livestock. The livestock are valued using a standard cost of raising an animal with the characteristics of the animals on hand to the same age as those animals. Unrealized receivables. Amounts earned by a cash basis taxpayer but not yet received. Because of the method of accounting used by the taxpayer, these amounts have a zero income tax basis. When unrealized receivables are distributed to a partner, they generally convert a transaction from nontaxable to taxable or an otherwise capital gain to ordinary income (i.e., as a “hot asset”). Unreasonable compensation. A deduction is allowed for “reasonable” salaries or other compensation for personal services actually rendered. The issue of unreasonable compensation usually is limited to closely held corporations, where the motivation is to pay out profits in some form that is deductible to the corporation. To the extent compensation is “excessive” (“unreasonable”), the distribution could be treated as a dividend, such that no deduction is allowed. Unreasonable position. A tax preparer penalty is assessed regarding the understatement of a client’s tax liability due to a tax return position that is found to be too aggressive. The penalty is avoided if there is substantial authority for the position or if the position is disclosed adequately on the tax return. The penalty equals the greater of $1,000 or one-half of the tax preparer’s fee that is traceable to the aggressive position. Unrecaptured § 1250 gain. Gain from the sale of depreciable real estate held more than one year. The gain is equal to or less than the depreciation taken on such property and is reduced by § 1245 and § 1250 gain. § 1(h)(6). Unrelated business income (UBI). Income recognized by an exempt organization that is generated from activities not related to the exempt purpose of the entity. For instance, the gift shop located in a hospital may generate unrelated business income. §§ 511 and 512. Unrelated business income tax (UBIT). Levied on the unrelated business income of an exempt organization. U.S. Court of Federal Claims. A trial court (court of original jurisdiction) that decides litigation involving Federal tax matters. Appeal from this court is to the Court of Appeals for the Federal Circuit. U.S. District Court. A trial court for purposes of litigating Federal tax matters. This court allows a jury trial.

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APPENDIX C   Glossary

U.S. shareholder. For purposes of classification of an entity as a controlled foreign corporation, a U.S. person who owns, or is considered to own, 10 percent or more of the total combined voting power of all classes of voting stock of a foreign corporation. Stock owned directly, indirectly, and constructively is counted for this purpose. § 951(b). U.S. Supreme Court. The highest appellate court or the court of last resort in the Federal court system and in most states. Only a small number of tax decisions of the U.S. Courts of Appeal are reviewed by the U.S. Supreme Court under its certiorari procedure. The Supreme Court usually grants certiorari to resolve a conflict among the Courts of Appeal (e.g., two or more appellate courts have assumed opposing positions on a particular issue) or when the tax issue is extremely important (e.g., due to the size of the revenue loss to the Federal government). U.S. Tax Court. One of four trial courts of original jurisdiction that decides litigation involving Federal income, death, or gift taxes. The only trial court where the taxpayer must not first pay the deficiency assessed by the IRS. The Tax Court does not have jurisdiction over a case unless a statutory notice of deficiency (90-day letter) has been issued by the IRS and the taxpayer files the petition for hearing within the time prescribed. U.S. trade or business. A set of activities that is carried on in a regular, continuous, and substantial manner. A non-U.S. taxpayer is subject to U.S. tax on the taxable income that is effectively connected with a U.S. trade or business. Use tax. A use tax is designed to complement the sales tax. The use tax has two purposes: to prevent consumers from evading sales tax by purchasing goods outside the state for in-state use, and to provide an equitable taxing environment between in-state and out-of-state retailers. Purchasers of taxable goods or services who were not charged sales tax because the seller did not have nexus with the purchaser’s state may owe use tax on the purchase.

V Vacation homes. The Code places restrictions upon taxpayers who rent their residences or vacation homes for part of the tax year. The restrictions may result in a scaling down of expense deductions for the taxpayers. § 280A. Valuation allowance. Under ASC 740 (SFAS 109), a tax-related item is reported for book purposes only when it is more likely than not that the item actually will be realized. When the “more likely than not” test is failed, a contra-asset account is created to offset some or all of the related deferred tax asset. For instance, if the entity projects that it will not be able to use all of its net operating loss carryforward due to a lack of future taxable income, a valuation allowance is created to reduce the net deferred tax asset that corresponds to the carryforward. If income projections later change and it appears that the carryforward will be used, the valuation allowance is reversed or “released.” Creation of a valuation

allowance usually increases the current tax expense and thereby reduces current book income, and its release often increases book income in the later reporting period. Value added tax (VAT). A national sales tax that taxes the increment in value as goods move through the production process. A VAT is much used in the majority of countries but has not yet been incorporated as part of the U.S. Federal tax structure. Vesting requirements. A qualified deferred compensation arrangement must satisfy a vesting requirement. Under this provision, an employee’s right to accrued plan benefits derived from employer contributions must be nonforfeitable in accordance with one of two vesting time period schedules (or two required alternate vesting schedules for certain employer matching contributions). Voluntary revocation. The owners of a majority of shares in an S corporation elect to terminate the S status of the entity as of a specified date. The day on which the revocation is effective is the first day of the corporation’s C tax year.

W W–2 Wages/Capital Investment Limit. A limitation on the deduction for qualified business income that caps the deduction at the greater of (1) 50 percent of the wages paid by a qualified trade or business or (2) 25 percent of the wages paid by the qualified trade or business plus 2.5 percent of the taxpayer’s share of the unadjusted basis of property used in the business that has not been fully depreciated prior to the close of the taxable year. § 199A(b)(2)(B). Wash sale. A loss from the sale of stock or securities that is disallowed because the taxpayer, within 30 days before or after the sale, has acquired stock or securities substantially identical to those sold. § 1091. Waters’ edge. A limitation on the worldwide scope of the unitary theory. If a corporate waters’-edge election is in effect, the state can consider in the apportionment procedure only the activities that occur within the boundaries of the United States. Waters’-edge election. See waters’ edge. Wherewithal to pay. This concept recognizes the inequity of taxing a transaction when the taxpayer lacks the means with which to pay the tax. Under it, there is a correlation between the imposition of the tax and the ability to pay the tax. It is particularly suited to situations in which the taxpayer’s economic position has not changed significantly as a result of the transaction. Whistleblower Program. An IRS initiative that offers special rewards to informants who provide evidence regarding tax evasion activities of businesses or high-income individuals. More than $2 million of tax, interest, and penalty must be at stake. The reward can reach 30 percent of the tax recovery that is attributable to the whistleblower’s information.

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

APPENDIX C   Glossary

Work opportunity tax credit. Employers are allowed a tax credit equal to 40 percent of the first $6,000 of wages (per eligible employee) for the first year of employment. ­Eligible employees include certain hard-to-employ individuals (e.g., qualified ex-felons, high-risk youth, food stamp recipients, and veterans). The employer’s deduction for wages is reduced by the amount of the credit taken. For qualified summer youth employees, the 40 percent rate is applied to the first $3,000 of qualified wages. The credit does not apply to any amount paid to an individual who begins work for the employer after 2020. §§ 51 and 52. Working condition fringes. A type of fringe benefit received by the employee that is excludible from the employee’s gross income. It consists of property or services provided

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(paid or reimbursed) by the employer for which the employee could take a tax deduction if the employee had paid for them. § 132(d). Worthless securities. A loss (usually capital) is allowed for a security that becomes worthless during the year. The loss is deemed to have occurred on the last day of the year. Special rules apply to securities of affiliated companies and small business stock. § 165. Writ of Certiorari. Appeal from a U.S. Court of Appeals to the U.S. Supreme Court is by Writ of Certiorari. The Supreme Court need not accept the appeal and usually does not (cert. den.) unless a conflict exists among the lower courts that must be resolved or a constitutional issue is involved.

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Appendix D Table of Code Sections Cited

I.R.C. This Work Sec.Page

This Work I.R.C. Sec.Page

1.............................................................2-5, 2-6, 9-22 1(g).................................................................... 10-31 1(g)(2)................................................................. 9-25 1(h)...................................................................... 4-19 1(h)(5)................................................................. 8-15 1(h)(11)............................................................... 4-15 1(h)(11)(C)(i)...................................................... 4-15 1(h)(11)(C)(ii)..................................................... 4-15 2...............................................................2-5, 2-6, 2-7 2(a)...............................................................2-5, 9-19 2(a)(1)(A).......................................................2-5, 2-6 2(b)...................................................................... 9-19 2(b)(1)(B)............................................................ 9-19 5............................................................................. 2-5 6............................................................................. 2-5 7............................................................................. 2-5 8............................................................................. 2-5 9............................................................................. 2-5 10........................................................................... 2-5 11....................................................................1-6, 2-5 12(d)...................................................................... 2-6 21....................................................................... 10-29 21(d).................................................................. 10-29 22(e)(3)............................................................... 9-11 23............................................................ 10-28, 11-10 24....................................................................... 10-28 24(h)(4)(B).......................................................... 9-16 25A.................................................................... 10-30 25A(i)(3)............................................................ 10-30

26(a)(2)............................................................. 17-16 27....................................................................... 17-13 32....................................................................... 10-32 32(i)................................................................... 10-32 36B......................................................... 10-33, 10-47 38....................................................................... 17-11 38(c).................................................................... 17-3 38(c)(3)(B).......................................................... 17-3 39(a)(1)............................................................... 17-3 41.....................................................5-14, 17-6, 17-12 41(b)(3)(A).......................................................... 17-7 41(b)(3)(D)......................................................... 17-7 41(c)(4)............................................................... 17-6 41(c)(5)............................................................... 17-6 41(d).................................................................... 17-7 41(e).................................................................... 17-7 42.............................................................. 17-7, 17-12 44.............................................................. 17-7, 17-12 45E........................................................... 17-9, 17-12 45F............................................................ 17-9, 17-12 45F(d)................................................................ 17-10 45R......................................................... 17-10, 17-12 45R(c)................................................................ 17-10 45R(d)(1)........................................................... 17-10 45R(d)(4)........................................................... 17-10 45S.......................................................... 17-11, 17-12 47....................................................................... 17-12 50(c).................................................................... 17-4 51.............................................................. 17-5, 17-12

D-1 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

D-2

APPENDIX D   Table of Code Sections Cited

I.R.C. This Work Sec.Page

I.R.C. This Work Sec.Page

53....................................................................... 17-26 55(a).................................................................. 17-16 55(b)(1)(A)........................................................ 17-16 55(d)(4)............................................................. 17-15 55(d)(4)(B)........................................................ 17-16 56....................................................................... 17-14 56(a)(1)(A)........................................................ 17-17 56(a)(1)(A)(ii)................................................... 17-17 56(a)(3)............................................................. 17-19 56(a)(4)............................................................. 17-20 56(a)(6)............................................................. 17-18 56(b)(1)(A)........................................................ 17-21 56(b)(1)(C)........................................................ 17-21 56(b)(1)(C)(e)................................................... 17-22 56(b)(1)(C)(i).................................................... 17-22 56(b)(1)(E)........................................................ 17-21 56(b)(3)............................................................. 17-19 56(d)(1)(A)(i)(II)............................................... 17-21 57....................................................................... 17-14 57(a)(1)............................................................. 17-23 57(a)(2)............................................................. 17-24 57(a)(5)............................................................. 17-24 57(a)(7).................................................. 17-24, 17-25 59(e).................................................................... 5-15 61..............................................2-29, 9-2, 12-10, 16-5 61(a)..................................................1-23, 9-4, 11-32 61(a)(3)................................................................. 7-7 61(a)(12).................................................... 2-35, 4-23 62........................................................................... 9-5 62(a)(1)...................................................... 6-10, 11-2 62(a)(2)............................................................. 11-27 62(a)(2)(D)........................................................ 11-27 62(a)(22)........................................................... 10-26 62(f).................................................................. 10-26 63(b)(3)............................................................. 11-37 63(c)(1)................................................................. 9-8 63(c)(5)................................................................. 9-9 67....................................................................... 10-26 67(g).................................................................... 11-2 71......................................................................... 10-3 71–91................................................................... 4-17 71(c)(2)............................................................... 10-5 71(c)(3)............................................................... 10-5 74......................................................................... 10-5 74(b).................................................................... 10-5 74(c).................................................................... 10-5 79....................................................................... 11-12 79(d).................................................................... 11-9 83....................................................................... 12-10 83(a).................................................................. 14-10

85......................................................................... 10-6 86................................................................ 10-6, 11-6 101.............................................................. 4-18, 11-6 101–140...................................................... 4-17, 10-2 101(a)(2)............................................................. 4-22 102.............................................................. 4-17, 10-6 102(c).................................................................. 10-6 103.............................................................. 4-17, 5-13 103(a).................................................................. 4-20 104(a)(1)........................................................... 10-10 104(a)(2)............................................................. 10-9 104(a)(3)........................................................... 10-10 105............................................................ 11-6, 11-12 105(a).................................................................. 11-5 105(b).................................................................. 11-5 105(c).................................................................. 11-5 105(h).................................................................. 11-6 105(h)(2)........................................................... 13-20 106...................................................11-5, 11-6, 11-12 106(d).................................................................. 11-6 108.............................................................. 4-18, 4-23 108(a)(1)(D)........................................................ 4-24 108(a)(1)(E)........................................................ 4-23 108(a)(1)(h)........................................................ 4-23 108(b).................................................................. 4-24 108(e)(5)............................................................. 4-24 108(e)(6)............................................................. 4-25 108(f)................................................................... 4-25 109.............................................................. 4-18, 4-28 111(a).................................................................. 4-25 117....................................................................... 4-17 117(a).................................................................. 10-7 117(b)......................................................... 10-7, 10-8 117(d)..............................................10-7, 11-9, 11-12 118..................................................................... 12-25 119..................................................................... 11-12 119(a).................................................................. 11-7 121..........................................7-30, 7-31, 10-19, 11-6 125.......................................................... 11-11, 11-12 125(f)................................................................. 11-11 127.......................................................... 11-10, 11-12 129.......................................................... 11-10, 11-12 132.......................................................... 11-12, 11-13 132(j)(1)............................................................ 11-15 132(j)(4)............................................................ 11-10 132(m)(2).......................................................... 11-15 135..................................................................... 10-10 137.......................................................... 11-10, 11-12 139....................................................................... 10-6 139F................................................................... 10-11

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

APPENDIX D  Table of Code Sections Cited

D-3

I.R.C. This Work Sec.Page

I.R.C. This Work Sec.Page

141..................................................................... 17-24 152....................................................................... 9-10 152(b)(2)............................................................. 9-16 152(b)(3)............................................................. 9-16 152(c).................................................................. 9-10 152(c)(3)(A)........................................................ 9-10 152(c)(4)............................................................. 9-11 152(d).................................................................. 9-12 152(d)(2)(H)....................................................... 9-12 152(d)(3)............................................................. 9-14 152(e)(2)............................................................. 9-15 152(f)(2).............................................................. 9-10 152(f)(3).............................................................. 9-12 152(f)(5).............................................................. 9-11 161..................................................................5-2, 9-2 162.................... 5-3, 5-8, 5-9, 5-17, 9-2, 11-32, 12-18 162(a).......................................5-2, 5-56, 11-2, 11-20 162(a)(1)........................................................... 18-13 162(c).................................................................... 5-9 162(c)(2)........................................................... 11-58 162(e)......................................................... 5-10, 5-11 162(f)...................................................5-9, 5-10, 5-56 162(g).................................................................... 5-9 162(l)................................................................. 11-32 162(m)................................................................. 5-13 163(d)................................................................ 12-32 163(d)(1)........................................................... 10-18 163(h)(3)........................................................... 10-19 163(h)(3)(E)...................................................... 10-20 163(h)(3)(F)(i)(I)............................................... 10-19 163(j)..............5-12, 5-36, 12-26, 12-31, 12-32, 14-15 163(j)(1)............................................................ 12-33 163(j)(4)............................................................ 12-33 163(j)(7)............................................................ 12-34 163(j)(8)(A)....................................................... 12-32 163(j)(8)(A)(v).................................................. 12-32 163(j)(8)(B)....................................................... 12-33 164..................................................................... 10-15 164(b)(6)........................................................... 10-16 164(f)...................................................... 11-32, 11-34 165..................................................................... 10-26 165(a).................................................................... 7-7 165(c)(3)............................................................. 6-10 165(g).................................................................... 6-5 165(g)(1)............................................................... 8-6 165(h)(3).................................................... 6-10, 6-11 165(h)(4)(E)........................................................ 6-10 165(h)(5)(B)........................................................ 6-11 165(h)(A)........................................................... 17-25 165(i)..................................................................... 6-8

166(a).................................................................... 6-3 167....................................................................... 8-29 168....................................................................... 8-29 168(b).................................................................. 5-26 168(b)(3)(D)....................................................... 5-26 168(b)(5)............................................................. 5-26 168(c).................................................................. 5-26 168(d)(2)............................................................. 5-26 168(d)(3)............................................................. 5-25 168(d)(4)(A)........................................................ 5-23 168(e)......................................................... 5-23, 5-26 168(e)(6)............................................................. 5-27 168(g).................................................................. 5-36 168(g)(2)............................................................. 13-5 168(k)....................................................... 8-29, 17-17 168(k)(2).................................................... 5-31, 13-5 168(k)(2)(F)........................................................ 5-34 168(k)(2)(F)(ii).................................................... 5-32 168(k)(2)(g)...................................................... 17-17 168(k)(6)............................................................. 5-31 170............................................................ 5-17, 10-21 170(a)(2)............................................................. 5-18 170(b).................................................................. 5-20 170(b)(1)(G)(iii)(II)........................................... 10-25 170(c)....................................................... 5-18, 10-21 170(d)....................................................... 5-20, 10-26 170(f)................................................................. 10-23 170(i)................................................................. 10-22 170(j)................................................................. 10-22 170(l)................................................................. 10-22 170(p)................................................................ 10-26 171......................................................................... 7-6 172....................................................................... 6-13 172(a)(1)............................................................. 6-14 172(b)(1)........................................................... 17-21 172(b)(1)(A)........................................................ 6-14 172(b)(1)(D)....................................................... 6-14 174.............................................................. 5-14, 17-7 174(a)(2).................................................... 5-14, 5-15 174(b)(1)............................................................. 5-15 174(b)(2)............................................................. 5-14 174(c).................................................................. 5-14 179........ 5-1, 5-28, 5-29, 5-30, 5-31, 5-32, 5-34, 5-35, 5-37, 5-45, 5-47, 5-52, 5-53, 5-54, 5-55, 5-56, 5-57, 5-58, 5-59, 7-5, 7-40, 8-29, 8-30, 8-31, 11-22, 11-55, 13-5, 13-6, 13-7, 13-8, 13-30, 14-5, 14-15, 14-18, 14-36, 17-17, 17-30, 18-15 179(b)(5)............................................................. 5-35 179(d).................................................................. 5-28 179(e).................................................................. 5-28

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

D-4

APPENDIX D   Table of Code Sections Cited

I.R.C. This Work Sec.Page

I.R.C. This Work Sec.Page

183..................................................................... 15-26 183(b)(2)........................................................... 11-44 183(d)................................................................ 11-44 195............................................... 12-31, 12-51, 14-14 195(b).................................................................... 5-8 197.................................3-4, 5-37, 8-29, 14-11, 18-17 197(a).................................................................. 5-37 199A.............. 5-12, 11-31, 11-35, 11-36, 11-40, 12-3, 12-4, 12-32, 14-20, 14-44, 15-13, 15-15, 18-7, 18-23 199A(a)................................................... 11-36, 15-12 199A(a)(1)(A).................................................... 11-36 199A(b)(1)(A)................................................... 11-36 199A(b)(2)(B)................................................... 11-38 199A(b)(2)(B)(ii)............................................... 15-13 199A(b)(4)......................................................... 11-38 199A(b)(6)(B)................................................... 11-39 199A(c)(3)(A).................................................... 11-36 199A(c)(4)......................................................... 11-36 199A(d)(1)......................................................... 11-36 199A(d)(1)(A)................................................... 11-40 199A(d)(2).............................................. 11-38, 11-40 199A(d)(2)(A)................................................... 11-40 211......................................................................... 2-5 212............................................................ 5-13, 10-11 212(1).................................................................... 2-5 213..................................................................... 10-26 213(a)................................................................ 10-12 213(d)(1)(A)...................................................... 10-12 213(d)(9)(A)...................................................... 10-12 215....................................................................... 10-3 217..................................................................... 11-15 219(b)(1)........................................................... 11-28 219(c)(2)........................................................... 11-28 219(g)................................................................ 11-28 219(g)(4)........................................................... 11-29 219(g)(7)........................................................... 11-29 221..................................................................... 11-23 221(b)(2)(C)...................................................... 10-17 221(c)................................................................ 10-17 221(e)(2)........................................................... 10-17 223............................................................ 11-6, 11-12 223(a)................................................................ 10-14 223(b).................................................................. 11-6 223(b)(2)........................................................... 10-15 223(c)(2)........................................................... 10-14 223(d)....................................................... 10-14, 11-6 223(f)................................................................. 10-14 241......................................................................... 2-5 243(a)................................................................ 12-28

245..................................................................... 12-28 245A.................................................................. 12-28 246(b)(2)........................................................... 12-29 246(c)................................................................ 12-30 248.................................... 12-30, 12-31, 12-32, 12-46 262..................................................................... 10-26 263A(i).................................................................. 4-8 265....................................................................... 5-14 265(a)(2)........................................................... 10-20 267.................... 2-23, 5-6, 5-7, 5-48, 7-14, 7-15, 8-12 267(a).......................................2-18, 2-23, 2-24, 7-14 267(a)(1)............................................................. 2-18 267(b)....................................................... 2-18, 15-26 267(b)(2)...........................................2-18, 2-23, 2-24 267(c).................................................................. 2-18 267(c)(2).................................................... 2-23, 2-24 267(c)(4).................................................... 2-18, 2-24 269A.................................................................. 18-11 274....................................................................... 5-36 274(a)(4)........................................................... 11-15 274(c)................................................................ 11-21 274(d)....................................................... 5-36, 11-27 274(e)....................................................... 5-12, 11-24 274(i)................................................................... 5-36 274(j)................................................................... 10-5 274(k)....................................................... 5-11, 11-24 274(n)..............................................5-11, 5-12, 11-24 274(n)(2)(D)..................................................... 11-24 275.......................................................... 10-15, 11-27 276....................................................................... 5-10 280A........................................................... 2-5, 10-19 280A through 280H.............................................. 2-5 280A(c)(1)......................................................... 11-25 280C(c)................................................................ 17-7 280E..................................................................... 5-10 280F(a)(1)........................................................... 5-33 280F(b)................................................................ 5-32 280F(b)(2)........................................................... 5-33 280F(b)(3)........................................................... 5-32 280F(d)(1)........................................................... 5-34 280F(d)(4)........................................................... 5-32 280F(d)(5)........................................................... 5-33 291.............................................................. 8-32, 8-33 301..................................................................... 13-14 301(c).................................................................. 13-2 301(c)(1)............................................................. 13-2 302(a)................................................................ 18-15 302(b)(2)........................................................... 13-23 302(b)(3)........................................................... 13-23 302(b)(4)................................................ 13-23, 13-34

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

APPENDIX D  Table of Code Sections Cited

D-5

I.R.C. This Work Sec.Page

I.R.C. This Work Sec.Page

303..................................................................... 13-23 305(a).................................................................. 7-10 307(a)....................................................... 7-10, 13-21 311.......................................................... 13-14, 13-23 311(b).......................................... 15-19, 15-20, 18-11 311(b)(2)........................................................... 13-15 312(a)................................................................ 13-15 312(b)................................................................ 13-15 312(c)................................................................ 13-15 312(d)(1)........................................................... 13-20 312(f)(1).............................................................. 13-5 312(k)(3)(A)........................................................ 13-5 312(k)(3)(B)........................................................ 13-6 312(n).................................................................. 13-6 312(n)(5)............................................................. 13-5 312(n)(7)........................................................... 13-23 316(a).................................................................. 13-2 318..................................................................... 13-23 331..................................................................... 13-25 331(a)..................................................... 18-15, 18-22 332....................................................................... 8-34 334(a)................................................................ 18-22 336(a)................................................................ 18-22 351.......................2-6, 8-34, 12-8, 12-9, 12-10, 12-11, 12-12, 12-13, 12-14, 12-15, 12-16, 12-17, 12-18, 12-19, 12-22, 12-23, 12-24, 12-39, 12-44, 12-45, 14-8, 15-21, 18-9, 18-20, 18-22, 18-23 351(a).......................................... 12-15, 12-23, 18-22 351(b)....................................................... 12-9, 12-20 351(b)(2)........................................................... 12-23 351(g)................................................................ 12-11 357..................................................................... 12-19 357(a)..................................................... 12-19, 12-22 357(b).......................................... 12-20, 12-21, 12-22 357(c).......................................... 12-20, 12-21, 12-22 357(c)(2)(A)...................................................... 12-21 358(a)............................................ 12-9, 18-21, 18-22 361(c)(5)(A)........................................................ 15-4 362(a).......................................... 12-15, 18-21, 18-22 362(a)(2)............................................................. 15-7 362(e)(2)........................................................... 12-17 367..................................................................... 12-19 368(c)..................................................... 12-12, 18-22 385............................................... 12-27, 12-28, 18-13 401–436............................................................... 11-6 401(b)(2)(A)...................................................... 14-31 401(c)(2)........................................................... 11-34 401(c)(2)(A)(v).................................................. 11-34

401(k)...........10-3, 11-34, 11-55, 13-13, 16-23, 17-27 402(c)(3)........................................................... 11-30 408(m)................................................................. 8-15 408(p)................................................................ 11-34 408(p)(2)(E)(i).................................................. 11-34 415(b)(1)........................................................... 11-34 415(c)(1)........................................................... 11-34 421(a)................................................................ 17-19 441......................................................................... 4-6 446(a).................................................................... 5-4 446(b).............................................................4-7, 5-4 446(e).................................................................... 5-4 448......................................................................... 4-8 448(c).................................................................. 5-12 448(d)(2)(A)........................................................ 6-21 451(b).................................................................... 4-8 451(c).................................................................. 4-12 453......................................................................... 4-7 457(b)................................................................ 17-27 460......................................................................... 4-7 461(g)(1)........................................................... 10-20 461(g)(2)........................................................... 10-20 461(h).................................................................... 5-5 461(l)............................................. 6-32, 14-28, 18-24 461(l)(3).............................................................. 6-32 461(l)(3)(A)(i)..................................................... 6-33 461(l)(4)(A)......................................................... 6-32 465..................................................................... 14-27 465(b)(1)............................................................. 6-16 465(b)(6)........................................................... 14-27 465(e).................................................................. 6-16 469.............................................................. 6-17, 6-32 469(a).................................................................. 6-21 469(b).................................................................. 6-19 469(c)(2)............................................................. 6-24 469(c)(7)............................................................. 6-27 469(c)(7)(B)........................................................ 6-28 469(d)(2)............................................................. 6-20 469(f)................................................................... 6-20 469(g)(2)............................................................. 6-29 469(h)(2)............................................................. 6-24 469(h)(5)............................................................. 6-24 469(i)................................................................... 6-28 469(i)(6).............................................................. 6-28 469(j)(2)............................................................ 18-11 469(j)(5).............................................................. 6-28 469(j)(6).............................................................. 6-30 469(j)(8).............................................................. 6-24 471(c).............................................................4-7, 4-8 474....................................................................... 2-28

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

D-6

APPENDIX D   Table of Code Sections Cited

I.R.C. This Work Sec.Page

I.R.C. This Work Sec.Page

481(a)................................................................ 13-36 482..................................................................... 16-14 509....................................................................... 5-19 531–537............................................................. 13-25 541–547............................................................. 13-26 585......................................................................... 6-2 611(a).................................................................. 5-39 612....................................................................... 5-38 613(a).................................................................. 5-39 614(a)................................................................ 17-23 643(a)(2)............................................................. 2-35 691..................................................................... 10-26 701....................................................................... 14-4 702............................................................ 14-4, 15-12 702(a)................................................................ 14-15 703(a)(1)............................................................. 14-5 703(a)(2)........................................................... 15-10 703(b)................................................................ 14-13 704(a)....................................................... 14-6, 14-19 704(b)....................................................... 14-7, 14-36 704(b)(2)........................................................... 14-19 704(c)..................................................... 14-43, 14-44 704(c)(1)........................................................... 14-19 704(d)................................................................ 14-26 705...................................................14-7, 14-21, 18-9 707....................................................................... 2-23 707(a)(2)(B)...................................................... 14-10 707(b)(1)........................................................... 14-30 707(b)(2)........................................................... 14-30 708(a).................................................................. 7-35 708(b)(1)........................................................... 18-18 709(a)................................................................ 14-13 709(b)................................................................ 14-14 721......................................... 8-34, 14-8, 14-9, 14-10, 18-9, 18-19 721(b).................................................................. 14-9 722................................................. 14-7, 14-11, 18-21 723................................................. 14-7, 14-11, 18-21 724..................................................................... 14-12 724(c)................................................................ 14-12 724(d)(2)........................................................... 14-12 732..................................................................... 14-17 733..................................................................... 14-17 742....................................................................... 4-21 743..................................................................... 18-18 751.......................................................... 18-18, 18-24 751(a)................................................................ 14-25 751(d)................................................................ 14-25 752................................................. 14-21, 14-22, 18-9

752(a)................................................................ 15-22 754.......................................................... 18-18, 18-37 761(a).................................................................. 14-3 761(f)................................................................. 18-26 861....................................................................... 16-7 861(a)(2)............................................................. 16-7 865....................................................................... 16-7 901..................................................................... 16-10 901–908............................................................. 17-13 903..................................................................... 16-10 904.......................................................... 16-10, 17-13 911(d)................................................................ 11-17 954(d)................................................................ 16-35 1001................................................................... 12-22 1001(a).........................................................7-3, 14-8 1001(b).................................................................. 7-3 1001(c).........................................................7-7, 14-8 1011..................................................................... 7-12 1011(a).................................................................. 7-4 1012(a).................................................................. 7-8 1014(a)................................................................ 7-13 1015(a)................................................................ 7-10 1015(d)(6)........................................................... 7-11 1016(a).................................................................. 7-4 1016(a)(2)............................................................. 7-5 1016(a)(4)............................................................. 7-5 1016(a)(5)............................................................. 7-6 1017..................................................................... 4-23 1031.......................7-19, 7-22, 7-30, 7-32, 7-40, 7-41, 8-38, 12-8 1031(a)(3)........................................................... 7-20 1032........................................................ 12-18, 12-25 1033......................................... 7-24, 7-25, 7-26, 7-28, 7-29, 7-38 1033(a)................................................................ 7-26 1033(a)(2)(A)...................................................... 7-28 1033(a)(2)(B)...................................................... 7-27 1033(b)................................................................ 7-28 1033(g)(4)........................................................... 7-27 1041..................................................................... 10-4 1045........................................................ 18-15, 18-25 1045(a)................................................................ 8-21 1060....................................................................... 7-9 1091..................................................................... 2-23 1091(a)..............................................2-24, 7-15, 7-16 1091(b)................................................................ 7-16 1091(d)................................................................ 7-15 1202........................................................ 18-15, 18-25 1202(a)................................................................ 8-20

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APPENDIX D  Table of Code Sections Cited

D-7

I.R.C. This Work Sec.Page

I.R.C. This Work Sec.Page

1202(a)(4)......................................................... 17-24 1202(a)(4)(C).................................................... 17-25 1202(b)................................................................ 8-21 1211..................................................................... 4-20 1211(b)................................................................ 8-14 1211(b)(1)........................................................... 8-19 1212..................................................................... 4-20 1212(a)(1)........................................................... 8-22 1221..............................................................8-8, 8-45 1221(a).................................................................. 8-3 1221(a)(2)........................................................... 8-23 1222(3)................................................................ 8-10 1223..................................................................... 8-11 1223(1)..................................................... 7-23, 12-19 1223(2)..................................................... 7-12, 12-19 1223(3)................................................................ 7-16 1223(4)................................................................ 7-10 1223(5).............................................................. 13-20 1223(9)................................................................ 7-14 1231................... 5-18, 7-23, 8-2, 8-3, 8-5, 8-10, 8-11, 8-23, 8-24, 8-25, 8-26, 8-27, 8-28, 8-29, 8-30, 8-31, 8-34, 8-35, 8-36, 8-42, 8-43, 8-46, 8-47, 11-36, 12-19, 12-24, 12-45, 14-11, 15-34, 15-36, 18-17, 18-25 1231(a)(3).................................................. 8-24, 8-26 1231(c)................................................................ 8-27 1233..................................................................... 8-12 1234(a)(1)............................................................. 8-7 1234(b).................................................................. 8-7 1235....................................................................... 8-8 1236(a).................................................................. 8-4 1237............................................................ 8-37, 8-39 1241..................................................................... 8-10 1244................. 6-5, 6-6, 6-33, 6-34, 6-36, 8-6, 15-26, 18-15, 18-25 1245.... 8-23, 8-28, 8-29, 8-30, 8-31, 8-32, 8-33, 8-34, 8-35, 8-36, 8-38, 8-43, 8-46, 8-47, 18-17 1245(a)(3)(C)...................................................... 8-30 1245(b)(1)........................................................... 8-34 1245(b)(2)........................................................... 8-34 1245(b)(3)................................................ 8-34, 12-24 1250..............8-16, 8-17, 8-18, 8-19, 8-20, 8-23, 8-28, 8-31, 8-32, 8-33, 8-34, 8-35, 8-38, 8-47, 18-17 1250(d)(1)........................................................... 8-34 1250(d)(2)........................................................... 8-34 1250(d)(3)................................................ 8-34, 12-24 1259..................................................................... 8-13 1271(a)(1)............................................................. 8-6 1272(a)(2)........................................................... 4-11

1272(a)(3)........................................................... 4-11 1273(a)................................................................ 4-11 1341................................................................... 13-35 1361.......................................................... 18-6, 18-22 1361–1379........................................................... 15-2 1361(B)(i)............................................................ 15-5 1361(b)................................................................ 15-4 1361(b)(1)(B)...................................................... 15-5 1361(b)(1)(D)...................................................... 15-4 1361(c)(1)(A)(ii).................................................. 15-5 1361(c)(4)............................................................ 15-4 1362(a).............................................................. 18-22 1362(a)(2)......................................................... 18-22 1362(b)................................................................ 15-6 1362(b)(1)(C)...................................................... 15-6 1362(d)................................................................ 15-7 1362(d)(1)(B)...................................................... 15-7 1362(d)(2)(B)...................................................... 15-8 1362(d)(3)(A)(ii)................................................. 15-8 1362(d)(3)(B).................................................... 15-29 1362(d)(3)(C).................................................... 15-29 1362(e)(3)........................................................... 15-8 1363(b).............................................................. 15-10 1366(a).............................................................. 15-10 1366(a)(1)......................................................... 15-13 1366(b).............................................................. 15-10 1366(c).............................................................. 15-10 1366(d).............................................................. 15-23 1366(f)(2).......................................................... 15-27 1367(a).............................................................. 15-21 1367(b)(2)......................................................... 15-21 1368(a)(1)(A).................................................... 15-23 1368(c)................................................... 15-16, 15-17 1368(c)(1).......................................................... 15-16 1368(e)(1)......................................................... 15-16 1368(e)(1)(A)......................................... 15-17, 15-23 1368(e)(3)......................................................... 15-16 1371(a)................................................................ 2-35 1371(e).............................................................. 15-18 1374(d)(4)......................................................... 15-30 1374(d)(7)......................................................... 15-28 1374(d)(7)(B).................................................... 15-27 1375(a).............................................................. 15-30 1375(b).............................................................. 15-30 1377(a)(1)......................................................... 15-13 1377(a)(2)......................................................... 15-14 1377(b).............................................................. 15-18 1402(a)...............................11-34, 14-5, 14-15, 14-30 1402(a)(12)........................................................ 11-32

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

D-8

APPENDIX D   Table of Code Sections Cited

I.R.C. This Work Sec.Page

I.R.C. This Work Sec.Page

1411................................................................... 14-31 1411(b)................................................................ 9-27 2006(a)(3)(B).................................................... 12-34 2010............................................................ 1-11, 1-12 2032(c)................................................................ 7-13 2305..................................................................... 3-26 2503(a)................................................................ 2-35 2503(g)(2)(A)...................................................... 2-35 2505..................................................................... 1-12 3101(b)(2)........................................................... 9-26 3402..................................................................... 9-23 4942..................................................................... 5-19 4980D.................................................................. 11-6 6012(a)(1)........................................................... 9-21 6012(a)(2)......................................................... 12-34 6013(a)(1)........................................................... 9-21 6013(g)................................................................ 9-21 6017................................................................... 11-32 6072(a)..................................................... 9-29, 12-34 6110(c).................................................................. 2-9 6114....................................................................... 2-6 6654..................................................................... 9-23 6654(b)(2)......................................................... 11-43 6654(b)(3)......................................................... 11-43 6654(c)(1).......................................................... 11-42 6654(e)(1)......................................................... 11-42 6655................................................................... 12-35 6655(g)(2)......................................................... 12-35 6662..................................................................... 2-23

6662(d)(2)(B)........................................................ 3-4 6699................................................................... 15-26 6712(a).................................................................. 2-6 7463(b)................................................................ 2-36 7701(a)(1)........................................................... 16-3 7701(a)(2)........................................................... 14-3 7701(a)(4)........................................................... 16-3 7701(a)(5)........................................................... 16-3 7701(b)................................................................ 15-2 7702B.................................................................. 11-6 7703(b)................................................................ 9-20 7704..................................................................... 18-6 7805....................................................................... 2-6 7805(e).................................................................. 2-7 7852(d)(1)............................................................. 2-6 7872..................................................................... 4-39 7872(a)(1)........................................................... 4-26 7872(b)(2)........................................................... 4-26 7872(c)................................................................ 4-27 7872(c)(1)(D)...................................................... 4-27 7872(c)(1)(E)....................................................... 4-27 7872(c)(2)............................................................ 4-27 7872(c)(3)............................................................ 4-27 7872(d)................................................................ 4-27 7872(d)(1)(B)...................................................... 4-27 7872(f)(2)............................................................ 4-26 9831(d)................................................................ 11-6 11012................................................................. 11-35 13206(a).............................................................. 5-15

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Appendix E Present Value and Future Value Tables Present Value of $1

E-2

Present Value of an Ordinary Annuity of $1

E-2

Future Value of $1

E-3

Future Value of an Ordinary Annuity of $1

E-3

E-1 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

E-2

APPENDIX E   Present Value and Future Value Tables

Present Value of $1 N/R

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

11%

12%

1

0.9901

0.9804

0.9709

0.9615

0.9524

0.9434

0.9346

0.9259

0.9174

0.9091

0.9009

0.8929

2

0.9803

0.9612

0.9426

0.9246

0.9070

0.8900

0.8734

0.8573

0.8417

0.8264

0.8116

0.7972

3

0.9706

0.9423

0.9151

0.8890

0.8638

0.8396

0.8163

0.7938

0.7722

0.7513

0.7312

0.7118

4

0.9610

0.9238

0.8885

0.8548

0.8227

0.7921

0.7629

0.7350

0.7084

0.6830

0.6587

0.6355

5

0.9515

0.9057

0.8626

0.8219

0.7835

0.7473

0.7130

0.6806

0.6499

0.6209

0.5935

0.5674

6

0.9420

0.8880

0.8375

0.7903

0.7462

0.7050

0.6663

0.6302

0.5963

0.5645

0.5346

0.5066

7

0.9327

0.8706

0.8131

0.7599

0.7107

0.6651

0.6227

0.5835

0.5470

0.5132

0.4817

0.4523

8

0.9235

0.8535

0.7894

0.7307

0.6768

0.6274

0.5820

0.5403

0.5019

0.4665

0.4339

0.4039

9

0.9143

0.8368

0.7664

0.7026

0.6446

0.5919

0.5439

0.5002

0.4604

0.4241

0.3909

0.3606

10

0.9053

0.8203

0.7441

0.6756

0.6139

0.5584

0.5083

0.4632

0.4224

0.3855

0.3522

0.3220

11

0.8963

0.8043

0.7224

0.6496

0.5847

0.5268

0.4751

0.4289

0.3875

0.3505

0.3173

0.2875

12

0.8874

0.7885

0.7014

0.6246

0.5568

0.4970

0.4440

0.3971

0.3555

0.3186

0.2858

0.2567

13

0.8787

0.7730

0.6810

0.6006

0.5303

0.4688

0.4150

0.3677

0.3262

0.2897

0.2575

0.2292

14

0.8700

0.7579

0.6611

0.5775

0.5051

0.4423

0.3878

0.3405

0.2992

0.2633

0.2320

0.2046

15

0.8613

0.7430

0.6419

0.5553

0.4810

0.4173

0.3624

0.3152

0.2745

0.2394

0.2090

0.1827

16

0.8528

0.7284

0.6232

0.5339

0.4581

0.3936

0.3387

0.2919

0.2519

0.2176

0.1883

0.1631

17

0.8444

0.7142

0.6050

0.5134

0.4363

0.3714

0.3166

0.2703

0.2311

0.1978

0.1696

0.1456

18

0.8360

0.7002

0.5874

0.4936

0.4155

0.3503

0.2959

0.2502

0.2120

0.1799

0.1528

0.1300

19

0.8277

0.6864

0.5703

0.4746

0.3957

0.3305

0.2765

0.2317

0.1945

0.1635

0.1377

0.1161

20

0.8195

0.6730

0.5537

0.4564

0.3769

0.3118

0.2584

0.2145

0.1784

0.1486

0.1240

0.1037

Present Value of an Ordinary Annuity of $1 N/R

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

11%

12%

1

0.9901

0.9804

0.9709

0.9615

0.9524

0.9434

0.9346

0.9259

0.9174

0.9091

0.9009

0.8929

2

1.9704

1.9416

1.9135

1.8861

1.8594

1.8334

1.8080

1.7833

1.7591

1.7355

1.7125

1.6901

3

2.9410

2.8839

2.8286

2.7751

2.7232

2.6730

2.6243

2.5771

2.5313

2.4869

2.4437

2.4018

4

3.9020

3.8077

3.7171

3.6299

3.5460

3.4651

3.3872

3.3121

3.2397

3.1699

3.1024

3.0373

5

4.8534

4.7135

4.5797

4.4518

4.3295

4.2124

4.1002

3.9927

3.8897

3.7908

3.6959

3.6048

6

5.7955

5.6014

5.4172

5.2421

5.0757

4.9173

4.7665

4.6229

4.4859

4.3553

4.2305

4.1114

7

6.7282

6.4720

6.2303

6.0021

5.7864

5.5824

5.3893

5.2064

5.0330

4.8684

4.7122

4.5638

8

7.6517

7.3255

7.0197

6.7327

6.4632

6.2098

5.9713

5.7466

5.5348

5.3349

5.1461

4.9676

9

8.5660

8.1622

7.7861

7.4353

7.1078

6.8017

6.5152

6.2469

5.9952

5.7590

5.5370

5.3282

10

9.4713

8.9826

8.5302

8.1109

7.7217

7.3601

7.0236

6.7101

6.4177

6.1446

5.8892

5.6502

11

10.3676

9.7868

9.2526

8.7605

8.3064

7.8869

7.4987

7.1390

6.8052

6.4951

6.2065

5.9377

12

11.2551

10.5753

9.9540

9.3851

8.8633

8.3838

7.9427

7.5361

7.1607

6.8137

6.4924

6.1944

13

12.1337

11.3484

10.6350

9.9856

9.3936

8.8527

8.3577

7.9038

7.4869

7.1034

6.7499

6.4235

14

13.0037

12.1062

11.2961

10.5631

9.8986

9.2950

8.7455

8.2442

7.7862

7.3667

6.9819

6.6282

15

13.8651

12.8493

11.9379

11.1184

10.3797

9.7122

9.1079

8.5595

8.0607

7.6061

7.1909

6.8109

16

14.7179

13.5777

12.5611

11.6523

10.8378

10.1059

9.4466

8.8514

8.3126

7.8237

7.3792

6.9740

17

15.5623

14.2919

13.1661

12.1657

11.2741

10.4773

9.7632

9.1216

8.5436

8.0216

7.5488

7.1196

18

16.3983

14.9920

13.7535

12.6593

11.6896

10.8276

10.0591

9.3719

8.7556

8.2014

7.7016

7.2497

19

17.2260

15.6785

14.3238

13.1339

12.0853

11.1581

10.3356

9.6036

8.9501

8.3649

7.8393

7.3658

20

18.0456

16.3514

14.8775

13.5903

12.4622

11.4699

10.5940

9.8181

9.1285

8.5136

7.9633

7.4694

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

APPENDIX E  Present Value and Future Value Tables

E-3

Future Value of $1 N/R

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

11%

12%

1

1.0100

1.0200

1.0300

1.0400

1.0500

1.0600

1.0700

1.0800

1.0900

1.1000

1.1100

1.1200

2

1.0201

1.0404

1.0609

1.0816

1.1025

1.1236

1.1449

1.1664

1.1881

1.2100

1.2321

1.2544

3

1.0303

1.0612

1.0927

1.1249

1.1576

1.1910

1.2250

1.2597

1.2950

1.3310

1.3676

1.4049

4

1.0406

1.0824

1.1255

1.1699

1.2155

1.2625

1.3108

1.3605

1.4116

1.4641

1.5181

1.5735

5

1.0510

1.1041

1.1593

1.2167

1.2763

1.3382

1.4026

1.4693

1.5386

1.6105

1.6851

1.7623

6

1.0615

1.1262

1.1941

1.2653

1.3401

1.4185

1.5007

1.5869

1.6771

1.7716

1.8704

1.9738

7

1.0721

1.1487

1.2299

1.3159

1.4071

1.5036

1.6058

1.7138

1.8280

1.9487

2.0762

2.2107

8

1.0829

1.1717

1.2668

1.3686

1.4775

1.5938

1.7182

1.8509

1.9926

2.1436

2.3045

2.4760

9

1.0937

1.1951

1.3048

1.4233

1.5513

1.6895

1.8385

1.9990

2.1719

2.3579

2.5580

2.7731

10

1.1046

1.2190

1.3439

1.4802

1.6289

1.7908

1.9672

2.1589

2.3674

2.5937

2.8394

3.1058

11

1.1157

1.2434

1.3842

1.5395

1.7103

1.8983

2.1049

2.3316

2.5804

2.8531

3.1518

3.4785

12

1.1268

1.2682

1.4258

1.6010

1.7959

2.0122

2.2522

2.5182

2.8127

3.1384

3.4985

3.8960

13

1.1381

1.2936

1.4685

1.6651

1.8856

2.1329

2.4098

2.7196

3.0658

3.4523

3.8833

4.3635

14

1.1495

1.3195

1.5126

1.7317

1.9799

2.2609

2.5785

2.9372

3.3417

3.7975

4.3104

4.8871

15

1.1610

1.3459

1.5580

1.8009

2.0789

2.3966

2.7590

3.1722

3.6425

4.1772

4.7846

5.4736

16

1.1726

1.3728

1.6047

1.8730

2.1829

2.5404

2.9522

3.4259

3.9703

4.5950

5.3109

6.1304

17

1.1843

1.4002

1.6528

1.9479

2.2920

2.6928

3.1588

3.7000

4.3276

5.0545

5.8951

6.8660

18

1.1961

1.4282

1.7024

2.0258

2.4066

2.8543

3.3799

3.9960

4.7171

5.5599

6.5436

7.6900

19

1.2081

1.4568

1.7535

2.1068

2.5270

3.0256

3.6165

4.3157

5.1417

6.1159

7.2633

8.6128

20

1.2202

1.4859

1.8061

2.1911

2.6533

3.2071

3.8697

4.6610

5.6044

6.7275

8.0623

9.6463

Future Value of an Ordinary Annuity of $1 N/R

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

11%

12%

1

1.0000

1.0000

1.0000

1.0000

1.0000

1.0000

1.0000

1.0000

1.0000

1.0000

1.0000

1.0000

2

2.0100

2.0200

2.0300

2.0400

2.0500

2.0600

2.0700

2.0800

2.0900

2.1000

2.1100

2.1200

3

3.0301

3.0604

3.0909

3.1216

3.1525

3.1836

3.2149

3.2464

3.2781

3.3100

3.3421

3.3744

4

4.0604

4.1216

4.1836

4.2465

4.3101

4.3746

4.4399

4.5061

4.5731

4.6410

4.7097

4.7793

5

5.1010

5.2040

5.3091

5.4163

5.5256

5.6371

5.7507

5.8666

5.9847

6.1051

6.2278

6.3528

6

6.1520

6.3081

6.4684

6.6330

6.8019

6.9753

7.1533

7.3359

7.5233

7.7156

7.9129

8.1152

7

7.2135

7.4343

7.6625

7.8983

8.1420

8.3938

8.6540

8.9228

9.2004

9.4872

9.7833

10.0890

8

8.2857

8.5830

8.8923

9.2142

9.5491

9.8975

10.2598

10.6366

11.0285

11.4359

11.8594

12.2997

9

9.3685

9.7546

10.1591

10.5828

11.0266

11.4913

11.9780

12.4876

13.0210

13.5795

14.1640

14.7757

10

10.4622

10.9497

11.4639

12.0061

12.5779

13.1808

13.8164

14.4866

15.1929

15.9374

16.7220

17.5487

11

11.5668

12.1687

12.8078

13.4864

14.2068

14.9716

15.7836

16.6455

17.5603

18.5312

19.5614

20.6546

12

12.6825

13.4121

14.1920

15.0258

15.9171

16.8699

17.8885

18.9771

20.1407

21.3843

22.7132

24.1331

13

13.8093

14.6803

15.6178

16.6268

17.7130

18.8821

20.1406

21.4953

22.9534

24.5227

26.2116

28.0291

14

14.9474

15.9739

17.0863

18.2919

19.5986

21.0151

22.5505

24.2149

26.0192

27.9750

30.0949

32.3926

15

16.0969

17.2934

18.5989

20.0236

21.5786

23.2760

25.1290

27.1521

29.3609

31.7725

34.4054

37.2797

16

17.2579

18.6393

20.1569

21.8245

23.6575

25.6725

27.8881

30.3243

33.0034

35.9497

39.1899

42.7533

17

18.4304

20.0121

21.7616

23.6975

25.8404

28.2129

30.8402

33.7502

36.9737

40.5447

44.5008

48.8837

18

19.6147

21.4123

23.4144

25.6454

28.1324

30.9057

33.9990

37.4502

41.3013

45.5992

50.3959

55.7497

19

20.8109

22.8406

25.1169

27.6712

30.5390

33.7600

37.3790

41.4463

46.0185

51.1591

56.9395

63.4397

20

22.0190

24.2974

26.8704

29.7781

33.0660

36.7856

40.9955

45.7620

51.1601

57.2750

64.2028

72.0524

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Index A AAA. See Accumulated adjustments account AAA, adjustments to corporate, 15:18 AAA bypass election, 15:17 Abandoned spouse rules, 9:20 Accelerated cost recovery system (ACRS), 5:20 See also Modified accelerated cost recovery system (MACRS) Accident and health insurance benefits, 10:10 Accident and health plans, employersponsored, 11:5 premiums, 11:5 Accountable plan, 11:2, 11:27 substantiation, 11:27 Accounting concept of income, 4:4 basic principles, 3:2–7 book-tax differences, 3:2–5 comparing tax concept and, 4:5 generally accepted accounting principles and ASC 740, 3:5–7 Accounting income, 4:4 Accounting methods, 4:6–10, 5:4 accrual method, 4:8–9 cash receipts method, 4:7–8 hybrid method, 4:10 sole proprietorship, 11:31–32 See also Accrual method; Cash receipts and disbursements method; Cash receipts method; Completed contract method; Hybrid method; Installment method; Percentage of completion method Accounting periods, sole proprietorship, 11:31–32 Accounting Standards Advisory Forum (ASAF), 3:9 Accounting Standards Codification (ASC) 740, 1:3 See ASC 740 Accounts and notes receivable, as definition of capital asset, 8:4 Accrual basis corporation, charitable contributions, 1:25, 5:18 Accrual basis taxpayers bad debt deduction, 6:2 collection of receivable by, 8:4 special rules for, 4:11–12 Accrual method, 4:6–7, 4:8–9 timing of deduction recognition, 5:5–6 Accrued income and expenses, book-tax temporary differences, 3:4 Accumulated adjustments account (AAA), 15:16, 15:17 tax planning strategies for the, 15:19 Accumulated E & P, 13:3, 15:15–19 chronological order allocation of, 13:7–9, 13:13 S corporation with, 15:16–17 S corporation with no, 15:15–16 Accumulated earnings tax, 13:25–26 Accuracy-related penalty, 2:23 Acquiescence (“A” or “Acq.”), 2:15 Acquisition indebtedness, 10:19 ACRS. See Accelerated cost recovery system Action on Decision, 2:15 Active income, 6:17 Active participant, qualified plan, 11:28–29

Active participation, rental real estate, 6:28 Actual cost method, 11:19, 11:22 Ad valorem taxes, 1:13, 10:16 Additional Credits and Payments, Schedule 3, Form 1040, 9:28 Additional first-year depreciation, 5:30–31 Additional Income and Adjustments to Income, Schedule 1, Form 1040, 9:28 Additional Medicare Tax, 9:26–27, 14:31 on earned income, 1:10 on investment income, 1:10 Additional standard deduction (age 65 or older or blind), 9:8–9, 9:21 amount of each, 9:9 Additional tax for base erosion, 16:15 Additional Taxes, Schedule 2, Form 1040, 9:28 Additional taxes for certain individuals, 9:26–27 Adjusted basis, 4:18, 7:3, 7:4 Adjusted gross income net capital gain income and dividends subject to reduced rate as a percentage of, 8:22 See also Deductions for AGI; Deductions from AGI Adjusted taxable income, 5:12 business interest expense limitation and, 5:12, 12:32–33 Adjustments, 17:16 E & P, 13:7, 13:8 in stock basis, 15:21 Administrative sources of the tax law, 2:6–9 assessing the significance of other, 2:21 letter rulings, 2:8–9 other administrative pronouncements, 2:9 Revenue Rulings, Revenue Procedures, and Notices, 2:8 Treasury Department Regulations, 2:6–7 Adoption assistance program, employee fringe benefits, 11:10 Adoption expenses credit, 10:28 ADS. See Alternative depreciation system AEP. See Accumulated earnings and profits Affordable Care Act (ACA), 10:33, 17:10 premium tax credit, 10:33 small employer health insurance credit, 17:10 After-tax value of assets, 10:3 Age, additional standard deduction for 65 or older, 9:8–9, 9:21 Age test, qualifying child, 9:10–11 Aggregate perspective. See Conduit perspective Aggregation of Business Operations, Schedule B, Form 8995–A, 11:42 Alimony, requirements for, 10:4 Alimony and separate maintenance payments, 10:3–5 property settlements, 10:4 requirements for alimony, 10:4 Alimony payments, deductions for AGI, 9:5 All events text, 5:5 Allocate, 16:21 Allocation and apportionment of deductions, 16:7–9 Allocation and apportionment of income, 16:21–23 Allocation of income and loss in S corporations, 15:13 short-year election, 15:14

Allowable cost recovery, 5:22 Allowed cost recovery, 5:22 Alternate valuation amount, 7:13 Alternative depreciation system (ADS), 5:23, 5:36 computing E & P, 13:5 depreciation of personal property, 17:17 depreciation of real property, 17:16–17 tables, 5:43–44 Alternative minimum tax (AMT), 17:2, 17:13–28 AMT adjustments, 17:14–15, 17:16–23 AMT credit, 17:26–27 AMT preferences, 17:14–15, 17:23–28 illustration of AMT computation, 17:25–26 liability, American Opportunity credit, 10:31–32 repeal of corporate, 3:25–26 Alternative minimum tax credit, 17:26–27 Alternative minimum tax formula for individuals, 17:15 alternative minimum taxable income (AMTI), 17:14–16 AMT liability, 17:15–16 exemption amount, 17:15 regular tax liability, 17:16 tentative minimum tax (TMT), 17:15–16 Alternative Minimum Tax—Individuals, Form 6251, 17:16 Alternative minimum taxable income (AMTI), 17:14–16 Alternative organizational forms in which business may be conducted, 18:2–3 Alternative tax NOL deduction (ATNOLD), 17:20–21 carryforward provisions, 17:21 Alternative tax rates on net capital gains (NCG), 8:15 American Federal Tax Reports (AFTR), 2:15–16 American Institute of Certified Public Accountants (AICPA), 1:22, 2:28 American Opportunity credit, 10:30–32 eligible individuals, 10:31 income limitations and refundability, 10:31–32 maximum credit, 10:31 restrictions on double tax benefit, 10:32 Americans with Disabilities Act of 1990, 17:2, 17:8 Amortizable bond premium, as capital recovery, 7:6 Amortizable Section 197 intangibles, 5:37 Amortization, 5:37 of intangible assets, 5:20 Amount realized, 4:18, 7:3–4 debt relief, 7:3 fair market value, 7:3 from a sale or other disposition of property, 7:3 selling expenses, 7:3 AMT. See Alternative minimum tax AMT adjustment provisions, summary of, 17:23 AMT adjustments, 17:14–15, 17:16–23, 17:28 adjusted gain or loss, 17:18–19

I-1 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

I-2

INDEX

AMT adjustments (continued) alternative tax net operating loss deduction, 17:20–21 completed contract method of accounting, 17:19 depreciation of personal property, 17:17–18 depreciation of real property, 17:16–17 incentive stock options, 17:19–20 itemized deductions, 17:21–22 standard deduction, 17:21 summary of provisions, 17:23 tax planning strategies for avoiding, 17:25 tax planning strategies for controlling the timing of preferences and, 17:22 AMT liability, AMT formula, 17:15–16 AMT preference provisions, summary of, 17:27 AMT preferences, 17:14–15, 17:23–28 exclusion for certain small business stock, 17:25 intangible drilling costs, 17:24 interest on private activity bonds, 17:24 percentage depletion, 17:23 summary of provisions, 17:27 tax planning strategies for avoiding, 17:25 tax planning strategies for controlling the timing of adjustments and, 17:22 Analysis of Net Income (Loss) schedule, 14:6 Analysis of Unappropriated Retained Earnings per Books, Schedule M–2, 12:37 Annual accounting period concept, mitigating the effect of, 1:31 Annual exclusion, gift tax, 1:12 Appellant, 2:22 Appellate courts, 2:12–13 other rules and strategies, 2:13 process and outcomes, 2:12–13 See also Courts Appellee, 2:22 Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, Form 4868, 9:29 Apportioned, 16:22 Apportionment factors, 16:22–23, 16:25 Apportionment of real estate taxes, 5:16–17 Apportionment procedure, 16:22–23, 16:26 double-weighted sales factor in three-factor, 16:22–23 sales-factor-only, 16:22–23 Appreciated property, determining the deduction for contributions of, by individuals, 10:25 Appreciated securities, tax planning strategies for gifts of, 8:15 Appropriate economic unit, 6:22 Arm’s length concept, 1:32–33 Arm’s length price, 16:14 ASAF. See Accounting Standards Advisory Forum ASC 740, 3:5, 3:9, 8:30 and generally accepted accounting principles, 3:5–7 deductible differences, 3:11 realizability of deferred tax assets, 3:14–16 taxable differences, 3:11 temporary differences, 3:11 valuation allowance, 3:15–16 Asset classification and realization events lease cancellation payments, 8:9–10 options, 8:6–8 patents, 8:8–9 retirement of corporate obligations, 8:6 Section 1244 stock, 8:6 special rules, 8:6–10 worthless securities, 8:6 Asset Depreciation Range (ADR), 13:5 Assets amortization of intangible, 5:37 business fixed, 8:5 buy versus lease decision, 5:21 capital, 8:2 classification of fixed, 8:23 disposing of C corporation as sale of, 18:18–19 disposing of partnership and LLC as sale of, 18:18 disposing of S corporation as corporatelevel sale of, 18:19 disposing of S corporation as liquidating distribution of, 18:19 disposing of sole proprietorship as sale of individual, 18:17

election to expense certain depreciable (Section 179), 5:28–30, 5:32 hot, 14:25 in a lump-sum purchase, allocation of cost among several, 7:9 intangible, contributed property, 14:11 maximizing the after-tax value of, 10:3 of partnerships, by industry, 14:22 personal use, 5:21 Section 1231, 8:2, 8:24 tainted, 12:19 Assignment of income, 4:13 Assumption of liabilities, 12:19–22 liabilities in excess of basis, 12:20–22 tax avoidance or no bona fide business purpose, 12:20 Athletic facilities, employee fringe benefits, 11:10 Athletic scholarships, 10:8 At-risk amount calculation of, 6:17 decrease to taxpayer’s, 6:17 increases to taxpayer’s, 6:17 At-risk and passive activity loss limits interaction of, 6:26–27 treatment of losses subject to, 6:27 At-risk limitation, 6:15, 6:16–17, 14:25 partnerships, 14:27–28 At-risk rules, 18:10–11 effect on application of, tax consequences of organizational form choice, 18:10–11 S corporation treatment of, 15:25 Audit process, 1:32 Authorized e-file Provider, 9:28 Automatic mileage method, 11:19, 11:22 Automobile expenses, computation of, 11:19 Automobiles depreciation and, 5:36 leased, 5:35–36 limits on cost recovery for, 5:33–34 passenger, 5:33ft used for personal purposes, limitations related to, 5:32–36 Average tax rate, 1:6 Awards, income from, 10:5 Away-from-home requirement, travel expenses, 11:19

B Bad debt deduction, 6:2–5 Bad debts, 6:2–5 business versus nonbusiness, 6:4 loans between related parties, 6:5 specific charge-off method, 6:3–4 tax treatment of using the specific charge-off method, 6:4 Balance sheet approach, 3:5 Bankruptcy, 2:12, 6:3 insolvency and, 4:24 Bargain element, 17:19 Bargain purchase of property, 7:8 Bargain rental of corporate property, 13:17 Bargain sale of corporate property to a shareholder, 13:17 Base amount, incremental research activities credit, 17:6 Base erosion, additional tax for, 16:15 Base erosion anti-abuse provision, 16:15 Base erosion anti-abuse tax (BEAT), 16:15 Bases, inside and outside, 14:12 Basic research, 17:7 Basic research credit, 17:7 Basic standard deduction, 9:8–9 amounts, 9:8 Basis adjusted, 7:4 adjustment for loss property, 12:16–18 adjustments due to entity operations, 14:21 carryover, 7:10, 14:11 computation, partnership formation and, 14:13 determination of cost, 7:8–10 election to expense certain depreciable (Section 179) assets, effect on, 5:30 for depreciating converted property, 7:17 for depreciation, 7:12 in S stock, shareholder’s, 15:21–23 in the partnership interest, 14:7–8

inside, 14:11, 14:12 limitation, partnerships, 14:26–27 of a partnership interest, 14:20–23 of boot received in like-kind exchanges, 7:22–23 of inherited property, 7:13 of like-kind property, 7:22–23 of ownership interest, effect on, tax consequences of organizational form choice, 18:9 of property received in like-kind exchanges, 7:22–24 of property to corporation, 12:15–16 of stock to shareholder, 12:15 original, 7:4 outside, 14:11, 14:12 partner’s, 14:7–8, 14:20–25 substituted, 12:15, 14:11 Basis considerations, 7:8–14 determination of cost basis, 7:8–10 inherited property, 7:13–14 property received as a gift, 7:10–12 Basis determination and other issues, 12:15–19 basis adjustment for loss property, 12:16–18 basis of property to corporation, 12:15–16 basis of stock to shareholder, 12:15 corporate treatment when stock is issued for services, 12:18 holding period for shareholder and transferee corporation, 12:19 partner’s basis, gain, and loss, 14:23–25 partnership liabilities, 14:22–23 Below-market loans effect of on the lender and borrower, 4:27 exceptions and limitations of imputed interest on, 4:27–28 exceptions to imputed interest rules for, 4:28 imputed interest income and deductions, 4:27 imputed interest on, 4:26–28 Benchmarking, 3:27–30 analysis, 3:30 methods of analysis, 3:28–29 tax rate sustainability, 3:29–30 Benefit received rule, 10:21–22 Benefits, general classes of excluded, 11:12–16 de minimis fringes, 11:14–15, 11:16 no-additional-cost services, 11:13, 11:16 nondiscrimination provisions, 11:15–16 qualified discounts on goods, 11:16 qualified discounts on services, 11:16 qualified employee discounts, 11:13–14 qualified moving expense reimbursements, 11:15, 11:16 qualified retirement planning services, 11:15, 11:16 qualified transportation fringes, 11:15, 11:16 working condition fringes, 11:14, 11:16 Benefits, general classes of fringe, 11:16 Bequests and inheritances, 10:6 Blindness, additional standard deduction for, 9:8–9 Blogs and RSS feeds, tax-related, 2:26 Board of Tax Appeals, 2:14 Bona fide debt, 6:5 Bona fide loans to shareholders, factors for determining, 13:18 Bonds municipal, 10:3 taxable, 10:3 Bonus depreciation, 5:30–31, 5:32 depreciation of personal property, 17:17 Book and tax depreciation, 5:31 Book-tax differences, 1:18, 1:21, 3:2–5, 12:35, 12:38 common, 3:5 dispositions of property, 7:7 favorable, 3:3 impact on taxable income, 3:2–3 overseas operations and, 16:12 permanent, 1:21, 3:3 temporary, 1:21, 3:3 unfavorable, 3:3 Book-tax income gap, 3:9 Book-tax permanent differences, 3:3, 12:38 nondeductible expenses, 3:5 nontaxable income, 3:5 tax credits, 3:5 See also Permanent differences

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

INDEX Book-tax temporary differences, 3:3, 12:38 accrued income and expenses, 3:4 depreciation on fixed assets, 3:4 intangible assets, 3:4 net operating losses, 3:4 See also Temporary differences Boot, 7:21–22, 12:8–9, 12:15 giving of, 7:21–22 receipt of, 7:21 Bridge Discipline Bridge to Business Law, 2:19, 14:7, 15:3 Bridge to Cost Accounting and Executive Compensation, 16:26 Bridge to Economic and Societal Needs, 11:6 Bridge to Economic Development and Political Science, 16:27 Bridge to Economics, 7:23, 18:15 Bridge to Economics and Finance, 4:9, 10:3 Bridge to Economics and the Business Cycle, 5:32 Bridge to Equity or Fairness, 9:19 Bridge to Equity or Fairness and Business Law, 11:3 Bridge to Finance, 5:21, 6:15, 12:6, 13:11, 13:16, 13:22, 14:4, 17:5 Bridge to Finance and Economics, 5:36 Bridge to Financial Accounting, 7:7, 8:30, 12:38, 14:21 Bridge to Financial Analysis, 3:21 Bridge to International Law, 16:3 Bridge to Investments, 13:13 Bridge to Political Science and Sociology, 1:17 Bridge to Public Economics, 4:20 Bridge to Public Finance, 15:26 Bridge to Public Policy, 2:16 Bridge to Regulation and Oversight, 2:28 Built-in gain or loss, 14:19 Built-in gains tax, 15:27 general rules, 15:27–28 LIFO recapture tax, 15:29 tax planning strategies for managing the, 15:28 Built-in loss property, 12:16–18 Built-in losses, contributed property, 14:12 Business disposing of a, 18:16–21 tax planning strategies for considerations when incorporating a, 12:24 tax planning strategies for structuring the sale of a, 5:37 tax treatment of disposition of a, 18:19–21 Business activities, deductions for AGI, 1:16 Business bad debt, 6:4 Business cycle, economics and, 5:32 Business deductions interest expense, 5:16 issues related to common, 5:16–17 ordinary and necessary requirement, 5:2–3 overview of, 5:2–4 reasonableness requirement, 5:3 taxes, 5:16–17 Business entities and individuals, dealings between, 1:20 income taxation of, 1:19–21 See also C corporations; Closely held C corporation; Corporations; Limited liability companies; Limited liability partnership; Partnerships; Regular corporations; S corporations; Sole proprietorships Business expenses partial list of deductible, 5:4 Tax Cuts and Jobs Act (TCJA) of 2017 and, 11:18 Business fixed assets, as definition of capital asset, 8:5 Business forms, 18:2–3 converting to another, 18:21–22 nontax factors affecting choice of, 18:3–6 number and proportion of, 18:3 overall comparison of, 18:22–26 tax treatment of compared, 12:6 See also C corporations; Closely held C corporations; Corporations; Limited liability companies; Limited liability partnership; Partnerships; Personal service corporation; Regular

corporations; S corporations; Sole proprietorships Business gifts, 11:25 Business income character of, comparison of corporations and other forms of doing business, 12:5 limitation, Section 179 expensing election deduction limitations, 5:30 tax rates, reductions in, 16:8 Business interest, 5:12 Business interest expense, 5:12 Business interest expense limitation, 5:12, 12:31–34 adjusted taxable income, 12:32–33 business interest income, 12:32 flow-through entities, 12:33–34 trade or business, 12:34 Business interest income, business interest expense limitation and, 12:32 Business law employee versus independent contractor, 11:3 income tax laws, 2:19 partnership agreement, 14:7 S corporation, 15:3 Business losses, comparison of corporations and other forms of doing business, 12:5 Business meals, 11:24–25 exception to disallowance of entertainment expenses, 5:11–12 Business of S corporations, 15:5 Business operations, effect on taxation of, tax consequences of organizational form choice,18:7 Business or income-producing use property, converted from personal use property to, 7:17 Business property complete destruction of, 6:9 partial destruction of, 6:9 Business property losses, 6:7 Business tax credits, 17:3, 17:11–12 credit for employer-provided child care, 17:9–10, 17:12 credit for employer-provided family and medical leave, 17:11, 17:12 credit for small employer pension plan startup costs, 17:9, 17:12 disabled access credit, 17:8–9, 17:12 energy credits, 17:8, 17:12 foreign tax credit, 17:13 general business credit, 17:2–3, 17:11 low-income housing credit, 17:7–8, 17:12 rehabilitation expenditures credit, 17:4–5, 17:12 research activities credit, 17:6–7, 17:12 small employer health insurance credit, 17:10, 17:12 work opportunity tax credit, 17:5–6, 17:12 See also Tax credits Business use personalty, 1:14 Business use property, 5:21 Business use realty, 1:14 Buy versus lease decision, 5:21 Buy-sell agreements, 4:22 Bypass election, 15:17

C C corporations, 1:19, 12:2, 14:2 additional tax for base erosion, 16:15 consequences of noncash distributions, 15:20 converting to another business form, 18:21–22 disposing of, 18:18–19 double taxation, 14:2 Form 1120, 1:19, 14:15 special tax rate for intangible income, 16:15–16 Subchapter C of Internal Revenue Code, 12:2 tax attributes and consequences of, 18:23–26 tax treatment of business forms compared, 12:6 tax treatment of the disposition of, 18:20 taxation of net capital gains and losses, 4:20

I-3

See also Business entities; Business forms; Closely held C corporations; Corporations; Personal service corporation; Regular corporations; S corporations Cafeteria plans, 11:11 Calendar year, 4:6 Capital, raising of, 12:7 Capital account, 14:21 Capital additions, 7:4 Capital assets, 8:2, 8:3–5 definition of, 4:18, 8:3–5 holding period, 8:10–13 nonpersonal use, 8:24 Capital changes, partner’s basis, gain, and loss, 14:25 Capital contributions, 12:25–26 effect on tax treatment of, tax consequences of organizational form choice, 18:9 Capital expenditures disallowance possibilities, 5:14 medical expenses, 10:12–13 Capital formation, nontax factors affecting choice of business form, 18:5–6 corporation, 18:6 limited partnership, 18:5–6 partnership, 18:5 sole proprietorship, 18:5 Capital gain and loss netting process. See Netting process, capital gain and loss Capital gain property, 5:18–19, 10:24 Capital gain treatment in the United States and other countries, 8:16 Capital gains, 4:18–20, 8:2 general categories of, 8:17 long-term, 8:14–17 net, 8:14–17 netting process, 4:19, 8:17–20 of noncorporate taxpayers, 8:17 short-term, 8:14 sole proprietorship, 11:31 tax planning strategies for timing, 8:13 tax treatment of corporate taxpayers, 8:22–23 tax treatment of noncorporate taxpayers, 8:14–21 See also Long-term capital gain; Net capital gain; Net long-term capital gain; Net short-term capital gain; Short-term capital gain Capital gains and losses, relationship to Section 1231 gains and losses, 8:23 Capital interest, 14:6 Capital investment, QBI deduction limitation based on, 11:38–40 Capital loss carryovers, 8:19–20 Capital loss deduction, 8:18 deductions for AGI, 9:5 Capital losses, 4:18–20, 8:2, 8:14 net, 8:17 netting process, 4:19, 8:17–20 short-term, nonbusiness bad debt, 6:4 tax treatment of corporate taxpayers, 8:22–23 tax treatment of noncorporate taxpayers, 8:14–21 worthless securities, 6:5 See also Long-term capital loss; Net capital loss; Net long-term capital loss; Net short-term capital loss; Short-term capital loss Capital recoveries, 7:4–6 Capital sharing ratio, 14:6 Capital structure of a corporation, debt in the capital structure, 12:26–28 Carryover basis, 7:10, 14:11 Carryover basis rule, basis of property to corporation, 12:15–16 Cash basis taxpayers bad debt deduction, 6:2 collection of receivable by, 8:4 special rules for, 4:10–11 Cash equivalent, 4:7 Cash management, relevance of taxation to accounting and finance professionals, 1:3 Cash meal allowance, 11:7 Cash method, timing of deduction recognition, 5:4–5 Cash receipts and disbursements method, 4:6–7

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

I-4

INDEX

Cash receipts method, 4:7–8 tax planning strategies for, 4:8 Casualties as capital recovery, 7:5 definition of, 6:7–8 Casualty gains, 6:9, 6:12 Casualty losses, 6:7–12 deduction of, 6:8–9 definition of casualty, 6:7–8 events that are not casualties, 6:7–8 individual, 6:10–12 loss measurement, 6:9–10 Section 1231 assets, 8:24 tax planning strategies for documentation of, 6:7 See also Theft losses Casualty or theft of nonpersonal use capital assets, Section 1231 assets, 8:24 CCH AnswerConnect, 2:19 CCH IntelliConnect, 2:19 Ceiling amount, Section 179 expensing election deduction limitations, 5:29 Centralized management, 12:7 corporation, 18:2, 18:5 Certified historic structure, 17:4 CFCs. See Controlled foreign corporations Change in form but not in substance, nontaxable exchange, 7:18 Charitable contribution deduction contribution carryovers, 10:26 50 percent ceiling, 10:24 limitations on, 5:20, 10:24 temporary 60 percent ceiling, 10:24 30 percent ceiling, 10:25 20 percent ceiling, 10:25 Charitable contributions, 5:17–20, 10:21–26 accrual basis corporations, 5:18 additional provisions for 2020 and 2021, 10:26 benefit received rule, 10:21–22 capital gain property, 5:18–19 contribution of services, 10:22 contributions in exchange for state and local tax credits, 10:22 criteria for a gift, 10:21 deductible contributions, 5:18 defined, 10:21 Form 8283, 10:23 measuring noncash contributions, 5:18–19 nondeductible items, 10:22–23 ordinary income property, 5:18–19 qualified organizations, 1:25, 5:18 record-keeping requirements, 10:23 time of deduction, 10:23 valuation requirements, 10:23 Checkpoint, 2:14, 2:19 Check-the-box Regulations, 12:7, 18:6 Chief Counsel Advice (CCA), 2:9 Chief Counsel Notices (CC), 2:9 Child and dependent care credit computations, 10:30 Child and dependent care services, employee fringe benefits, 11:10 Child care, credit for employer-provided, 17:9–10, 17:12 Child care resource and referral services, credit for employer-provided child care, 17:9–10 Child support, alimony and separate maintenance payments, 10:4–5 Child tax credit, 10:28–29 qualifying child, 9:10 Children of divorced or separated parents, support test for, 9:15 Chronological order allocation of accumulated E & P, 13:7–9, 13:13 Circuit Court of Appeals, 2:12 See also Courts Circular 230, 1:22 Citations, judicial, 2:14–16 Citator, 2:22 Citizenship, inbound tax issues, 16:16 Citizenship test, dependents, 9:16 Civil unions, filing status, 9:19 Claim of right doctrine, 4:9 Claims Court Reporter (Cl.Ct.), 2:16 Class lives, for personalty and realty, 5:28 Class of stock, small business corporation, 15:4–5

Client letter, 2:24–25 Closely held C corporation, 6:21–22, 18:11 reasonableness, 5:3 See also Business entities; Business forms; C corporations; Personal service corporation; Regular corporations; S corporations Collectibles, 8:15 Combined return of a unitary business, 16:23 Committee Reports, 2:4 Commodity futures options, 8:7 Commodity Futures Trading Commission, 5:9 Common law employee, 11:2–3 Common law system, 1:31–32 Community property system, 1:31–32 Commuter highway vehicle, 11:15 Commuting expenses, 11:18–19 Compensation excessive executive, 5:13 factors for determining reasonableness of, 13:17–18 indirect, 13:20–21 reasonable, 5:4 tax planning strategies for unreasonable, 5:4 unemployment, 10:5–6 unreasonable, 13:17–18 workers’, 10:10 Compensation-related loans effect of on the lender and borrower, 4:27 exemption for, 4:27 Compensatory damages, 10:8, 10:9 Completed contract method, 4:7 AMT adjustments, 17:19 Compliance, relevance of taxation to accounting and finance professionals, 1:2 Conduit perspective, 18:2 Conference Committee, 2:4 example of compromise in the, 2:4 Congress, intent of, 2:4 Constructive dividends, 13:16–21, 16:13–15 shareholder treatment of, 13:18–21 tax planning strategies for, 13:19–20 types of, 13:17–18 Constructive ownership provisions, 5:7 Constructive receipt, 4:10–11 Constructive sale treatment, short sales, 8:13 Continuity of life, 12:7 corporation, 18:2, 18:5 Contributed property, tax issues related to, 14:11–12 depreciation method and period, 14:11 intangible assets, 14:11 receivables, inventory, and built-in losses, 14:12 Contributions and distributions, tax treatment of Health Savings Account (HSA), 10:14 Contributions of appreciated property by individuals, determining the deduction for, 10:25 Control, 12:12–15 control immediately after the transfer, 12:12–13 transfers for property and services, 12:13–14 transfers for services and nominal property, 12:14 transfers to existing corporations, 12:15 Controlled corporations assumption of liabilities—Section 357, 12:19–22 basis determination and other issues, 12:15–19 control of the corporation, 12:12–15 organization of and transfers to, 12:8–25 property defined, 12:10–11 recapture considerations, 12:24 Section 351 rationale and general rules, 12:8–10 stock transferred, 12:11 transfers of property to under Section 351, 12:8–10 Controlled foreign corporations (CFCs), 16:12–15 constructive dividends, 16:13–15 defined, 16:12 Subpart F income, 16:12–15 Controversy, relevance of taxation to accounting and finance professionals, 1:3

Convenience of the employer test, meals and lodging, 11:8 Conventions, for personalty and realty, 5:28 Converted property basis for depreciating, 7:17 basis for determining loss on, 7:17 cost recovery basis, 5:22–23 gain basis for, 7:17 Copyrights and creative works, as definition of capital asset, 8:5 Corporate accumulations, restrictions on, 13:25–26 Corporate alternative minimum tax, repeal of, 3:25–26 Corporate distributions, 13:2 as capital recovery, 7:5–6 tax planning strategies for, 13:11–12 Corporate Distributions and Adjustments, Subchapter C, 2:5 Corporate income double taxation of, 12:2–3 measures of, 12:38 Corporate income tax, 1:2 Corporate income tax liability, determining the, 12:34 Corporate income tax rates, 12:34, 16:8 Corporate income taxation comparison of corporations and other forms of doing business, 12:3–6 double taxation of corporate income, 12:2–3 entity classification, 12:7 Fortune 500 companies and, 3:9 introduction to, 12:2–7 limited liability companies, 12:7 nontax considerations, 12:6–7 Corporate integration, 13:18 Corporate-level tax, 15:27 Corporate liquidations, 13:24–25 liquidating and nonliquidating distributions compared, 13:24–25 liquidation process, 13:24 tax planning strategies for, 13:25 Corporate multistate income taxation, 16:24 Corporate obligations, retirement of, 8:6 Corporate operations, determining the corporate income tax liability, 12:34 Corporate operations, taxing of, 12:28–34 business interest expense limitation, 12:31–34 deductions available only to corporations, 12:28–31 Corporate tax department, 3:26 functions of, 3:26 Corporate tax rate, Tax Cuts and Jobs Act (TCJA) of 2017 and, 11:35 Corporate Taxation, 2:20 Corporate taxpayers, tax treatment of capital gains and losses of, 8:22–23 Corporation-shareholder loans effect of on the lender and borrower, 4:27 exceptions to imputed interest rules, 4:28 exemption for, 4:27 Corporation’s basis in property received, 12:16 Corporations, 18:2 additional recapture for, 8:32–33 and other forms of doing business, comparison of, 12:3–6 capital formation, 18:6 capital structure of, 12:25–28 centralized management, 18:2, 18:5 continuity of life, 18:2, 18:5 effect of noncash dividends on, 13:14–16 effect of taxes on financial statements, 12:38 entity perspective, 18:2 estimated tax payments, 12:35 filing requirements for, 12:34 Form 1120, 12:34 free transferability of interests, 18:2, 18:5 limited liability, 18:2, 18:4 material participation, 6:24 minimizing double taxation, 18:12–16 nonshareholders, 12:25 personal service, 4:6 perspective of dividends to, 13:2 publicly traded, 5:13 reporting responsibilities, 12:5 Schedule M–1—Reconciliation of Income (Loss) per Books with Income per Return, 12:35–37

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

INDEX Schedule M–2—Analysis of Unappropriated Retained Earnings per Books, 12:37 Schedule M–3—Net Income (Loss) Reconciliation for Corporations with Total Assets of $10 Million or More, 12:37–38 Subchapter C, 2:5 See also Business entities; Business forms; C corporations; Closely held C corporations; Personal service corporation; Regular corporations; S corporations Cosmetic surgery, medical expenses, 10:12 Cost accounting, executive compensation and, 16:26 Cost basis allocation problems, 7:9–10 determination of, 7:8–10 identification problems, 7:9 Cost depletion, 5:38–39 Cost of repairs, 6:10 Cost recovery, 5:20 allowable, 5:22 allowed, 5:22 as capital recovery, 7:4–5 for automobiles, limits on, 5:33–34 in general, 5:21–23 listed property, 5:35 nature of property, 5:21–22 periods/classes, personalty, 5:24 placed in service requirement, 5:22 tables, 5:40–44 See also Accelerated cost recovery system (ACRS); Modified accelerated cost recovery system (MACRS) Cost recovery allowances, 5:20–36 additional first-year depreciation, 5:30–31 alternative depreciation system (ADS), 5:36 bonus depreciation, 5:30–31 election to expense certain depreciable assets (Section 179), 5:28–30 limitations related to automobiles and property used for personal purposes, 5:32–36 MACRS for personal property, 5:23–26 MACRS for real estate, 5:26–28 modified accelerated cost recovery system (MACRS), 5:23 Cost recovery basis for personal use assets converted to business or incomeproducing use, 5:22–23 Cost recovery recapture, 5:33 Costs, startup, partnerships, 14:14 Courts appellate, 2:12–13 Circuit Court of Appeals, 2:12 court of original jurisdiction, 2:10, 2:11 Federal District Courts, 2:12 influence of on tax law, 1:32–33, 1:34 trial, 2:10, 2:11–12 appeals, 2:12 location, 2:11 number of, 2:11 number of judges, 2:11 U.S. Court of Federal Claims, 2:10, 2:11–12, 2:12–13 judicial citations of, 2:15–16 jurisdiction of, 2:11 U.S. Courts of Appeals, 2:12 judicial citations of, 2:15–16 U.S. District Courts, 2:10, 2:11–12, 2:12–13 judicial citations of, 2:15–16 jurisdiction of, 2:11 U.S. Supreme Court, 2:13 judicial citations of, 2:16 U.S. Tax Court, 2:10, 2:11–12, 2:12–13 judicial citations of, 2:14–15 jurisdiction of, 2:11 Small Cases Division of the U.S. Tax Court, 2:10 Covenant not to compete, sale of a business, 5:37 Covered employees, publicly traded corporations, 5:13 COVID-19 pandemic earned income credit, 10:32ft food and beverage business expenses, 11:24 provisions for charitable contributions, 10:26

CPA examination aicpa.org/becomeacpa/cpaexam.html, 2:28 evolutionofcpa.org, 2:28 Regulation section, 2:27 task-based simulations (TBSs), 2:27–28 tax research on, 2:27–29 2024 modification of, 2:28–29 Creative works, 8:5 Credit for child and dependent care expenses, 10:29–30 calculation of, 10:30 earned income ceiling, 10:29 eligibility for, 10:29 eligible employment-related expenses, 10:29 qualifying child, 9:10 Credit for employer-provided child care, 17:9–10, 17:12 Credit for employer-provided family and medical leave, 17:11, 17:12 Credit for small employer pension plan startup costs, 17:9, 17:12 Credit invoice VAT, 1:8 Credits. See also Business tax credits; Individual tax credits; Tax credits Credits, passive activity, 6:20 carryovers of, 6:20 deduction equivalent of, 6:28–29 Credits in general business credit, 17:11–12 credit for employer-provided child care, 17:9–10, 17:12 credit for employer-provided family and medical leave, 17:11, 17:12 credit for small employer pension plan startup costs, 17:9, 17:12 disabled access credit, 17:8–9, 17:12 energy credits, 17:8, 17:12 low-income housing credit, 17:7–8, 17:12 rehabilitation expenditures credit, 17:4–5, 17:12 research activities credit, 17:6–7, 17:12 small employer health insurance credit, 17:10, 17:12 work opportunity tax credit, 17:5–6, 17:12 See also Business tax credits Cross-border transactions international tax laws, 16:2 U.S. taxation of, 16:4 Crossing state lines, state and local income taxation in the United States, 16:17–25 sources of law, 16:17–19 tax issues, 16:19–25 Crowdfunding, 10:6–7 Current E & P, 13:3 pro rata basis allocation of E & P, 13:7–9, 13:13 Current tax expense, 1:21, 3:5, 3:8–9 computation of, 3:8, 3:27

D Daily Tax Reports, 2:9 Damages, 10:8–10 compensatory, 10:8, 10:9 personal injury, 10:9–10 punitive, 10:9 taxation of, 10:9 Data analysis, relevance of taxation to accounting and finance professionals, 1:3 De minimis exception of in-house lobbying expenditures, 5:11 De minimis fringe benefits, 11:14–15, 11:16 Dealer in securities, 8:4 Death depreciation recapture and, 8:34 disposition of a passive activity at, 6:29–30 Death taxes, 1:11–12 Federal estate tax, 1:11 state taxes at death, 1:11–12 Debt distinguishing between equity and, 12:27–28 recourse and nonrecourse, 6:14ft, 14:22–23, 14:27–28 See also Bad debts; Business bad debt; Nonbusiness bad debt Debt as equity (thin capitalization problem), reclassification of, 12:27–28

I-5

Debt in the capital structure, 12:26–28 advantages of, 12:26 reclassification of debt as equity (thin capitalization problem), 12:27–28 Debt relief, sale of property, 7:3 Deductible taxes, tax planning strategies for timing the payment of, 10:17 Deduction, standard, 9:6, 9:7–9, 9:21 additional (age 65 or older), 9:21 additional (age 65 or older or blind), 9:8–9 basic, 9:8–9 Deduction for contributions of appreciated property by individuals, determining the, 10:25 Deduction for qualified business income, 9:7, 11:35–42 general rule, 11:36–37 limitation based on wages and capital investment, 11:38–40 limitation for specified services businesses, 11:40, 11:42 limitations on QBI deduction, 11:38 modified taxable income, 11:36–37 reporting, 11:42 See also Qualified business income (QBI) deduction Deduction limitations, Section 179 expensing election, 5:29–30 Deductions, 4:3 allocation and apportionment of, 16:7–9 business, 5:2–3 character of, 1:26 difference between tax credits and, 1:28 incurred, 5:4 issues related to common business, 5:16–17 itemized, 9:5–6, 10:11–27 limitations on charitable contribution, 5:20, 10:24 overview of business, 5:2–4 paid, 5:4 tax, 10:2 tax minimization strategies related to, 1:24–25 tax planning strategies for shifting across time, 9:23 tax planning strategies for time value of tax, 5:5 timing of recognition, 5:4–7 Deductions available only to corporations, 12:28–31 dividends received deduction, 12:28–30 organizational expenditures deduction, 12:30–31 Deductions for AGI, 4:3 alimony payments, 9:5 business activities, 1:16 business expenses of self-employed, 11:2 business losses of individuals, 6:10 capital loss deduction, 9:5 contributions to certain retirement plans, 9:5 contributions to Health Savings Accounts, 9:5, 10:14 educator expenses, 11:27 home office expenses of self-employed individual, 11:26 interest, 10:20–21 interest on qualified student loans, 10:17–18 losses from rent and royalty activities, 6:10 medical insurance premiums of self-employed, 11:32 ordinary and necessary expenses incurred in a trade or business, 9:5 part of self-employment tax paid, 9:5 reimbursed employee expenses under an accountable plan, 11:27 rent or royalty property expenses, 10:11 self-employment tax, 11:32 Deductions from AGI, 4:3, 9:5–6 educator expenses, 11:26 employee expenses, 11:2 expenses related to management of property held for production of income, 10:11 expenses related to production or collection of income, 10:11 interest, 10:20–21 itemized deductions, 1:16, 10:11 nonbusiness expenses, 10:11 personal expenses, 10:11 personal use losses of individuals, 6:10–12

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

I-6

INDEX

Deductions from AGI (continued) qualified business income deduction, 1:16, 11:37 reimbursed employee expenses under a nonaccountable plan, 11:27 unreimbursed employee expenses, 11:27 Defendant, 2:10 Deferral and amortization method research and experimental expenditures, 5:15–16 taxable years beginning after December 31, 2021, 5:15 taxable years beginning before January 1, 2022, 5:15 Deferral of gain or loss, nontaxable exchange, 7:18 Deferral of income, advance payments to accrual basis taxpayers, 4:12 Deferred income tax expense, 1:21 Deferred income tax liability, 12:38 Deferred tax assets, 1:21, 3:5, 3:9–10 effects of statutory tax rate changes, 3:25 identifying and measuring, 3:10–14 net operating losses (NOLs) as, 3:15 tax losses and, 3:15 Deferred tax benefit, 3:5, 3:9 computation of, 3:16 Deferred tax expense, 3:5, 3:9–14, 3:16 computation of, 3:16, 3:27 Deferred tax liabilities, 1:21, 3:5, 3:9–10, 5:31 depreciation and, 5:31 effects of statutory tax rate changes, 3:25 identifying and measuring, 3:10–14 Deficiency, payment of, 2:11–12 Defined benefit Keogh plan, 11:33 Defined contribution Keogh plan, 11:33 Dependency exemptions, 9:6, 9:10 Dependency status tests for, 9:17 tiebreaker rules for determining, 9:11 Dependent children, unearned income of, 9:25–26 Dependent tax credit, 10:28–29 Dependents, 9:10–17 citizenship test, 9:16 comparison of categories for, 9:16–17 filing requirements for, 9:21 joint return test, 9:16 limitations on the standard deduction for, 9:9 medical expenses for, 10:13 other rules for determining, 9:15–16 qualifying child, 9:10–11, 9:16–17 qualifying relative, 9:12–15, 9:16–17 Depletion, 5:37–40 intangible drilling and development costs (IDCs), 5:38 natural resource costs, 5:38 of natural resources, 5:20 operating costs, 5:38 tangible asset costs, 5:38 Depletion methods, 5:38–40 cost depletion, 5:38–39 percentage depletion, 5:39–40 tax planning strategies for switching, 5:40 Depreciable real estate, tax planning strategies for selling, 8:33 Depreciable real property, 8:31 Depreciation, 5:20 additional first-year, 5:30–31 as capital recovery, 7:4–5 automobiles and, 5:36 bonus, 5:30–31, 5:32 deferred tax liabilities and, 5:31 excess, 8:31 “luxury auto” limits, 5:33–34 of personal property, AMT adjustments, 17:17–18 of real property, AMT adjustments, 17:16–17 of tangible assets, 5:20 on fixed assets, book-tax temporary differences, 3:4 on gift property, basis for, 7:12 recapture of, 12:24 tax and book, 5:31 Depreciation method and period, contributed property, 14:11 Depreciation recapture certain nontaxable transactions, 8:34 comparison of Section 1245 and Section 1250, 8:31

death, 8:34 gifts, 8:34 involuntary conversions, 8:35 like-kind exchanges, 8:35 nontaxable and tax-free transactions and, 8:34–35 Determination letters, 2:9 Dicta, 2:22 Direct approach, calculation of alternative minimum taxable income (AMTI), 17:14 Direct tax, 1:2, 1:7 Disabled access credit, 17:2, 17:8–9, 17:12 Disallowance possibilities, 5:8–14 business interest expense, 5:12 capital expenditures, 5:14 excessive executive compensation, 5:13 expenditures for which the taxpayer does not have adequate substantiation, 5:14 expenses incurred in the investigation of a business, 5:8–9 expenses related to entertainment, recreation, or amusement, 5:11–12 interest and other expenses related to taxexempt income, 5:13–14 political contributions and lobbying activities, 5:10–11 public policy limitations, 5:9–10 Disallowed loss transactions, special holding period rules, 8:12 Disallowed losses, 7:14–17 personal use assets, 7:14 property converted from personal use to business or income-producing use, 7:17 transactions between related parties, 7:14–15 wash sales, 7:15–16 Disaster area losses, 6:8–9 Discharge of indebtedness, income from, 4:23–25 insolvency and bankruptcy, 4:24 qualified real property indebtedness, 4:24 seller cancellation, 4:24–25 shareholder cancellation, 4:25 student loans, 4:25 Disguised exchange, exceptions to nonrecognition, 14:9–10 Disguised sale, 14:10 Disinterested generosity test, 10:21 Disposition of a business, 18:16–21 C corporations, 18:18–19 limited liability companies, 18:18 partnerships, 18:18 S corporations, 18:19 sole proprietorships, 18:17 tax treatment of, 18:19–21 Disposition of passive activities, 6:29–30 Dispositions of property, book-tax differences, 7:7 Disregarded entity, 12:7 Distribution ordering rules, S corporation, 15:16–17 Distributions allocating E & P to, 13:7–13 and contributions, tax treatment of Health Savings Account (HSA), 10:14 consequences of noncash, 15:20 corporate, 13:2 corporation’s perspective, 13:2 effect of on inside and outside basis, 14:17–18 effect on tax treatment of, tax consequences of organizational form choice, 18:11 from an S corporation, 15:16 liquidating and nonliquidating compared, 13:24–25 minimizing double taxation by deferring, 18:15 minimizing double taxation by making deductible, 18:13–14 minimizing double taxation by making return-of-capital, 18:15 shareholder’s perspective, 13:2 Distributions to shareholders, tax treatment of in S corporation, 15:14–19 accumulated adjustments account (AAA), 15:17, 15:18 effect of terminating the S election, 15:18–19

other adjustments account (OAA), 15:17 S corporation with AEP, 15:16–17 S corporation with no AEP, 15:15–16 Schedule M–2, 15:18 Distributive share, 14:4 Dividend, 13:2 Dividends as investments, 13:13 constructive, 13:16–21, 16:13–15 from a foreign corporation, 4:15 income from, 4:15–16 noncash, 13:13–16 percentage of paid by size of corporate assets, 13:3 property, 13:13 stock, 13:21–22 taxation of, 12:3 worldwide view of, 13:18 Dividends received deduction, 1:24, 12:28–30 additions to taxable income, 13:4 NOL exception, 12:29 taxable income limitation, 12:28–29 taxation of cross-border income, 16:7 Documentation of related-taxpayer loans, casualty losses, and theft losses, tax planning strategies for, 6:7 Dollar-cost averaging, 13:13 Domestic corporation, 12:28, 15:3 Domestic partners, filing status, 9:19 Domestic travel for business and pleasure, travel expenses, 11:21 Double-declining-balance depreciation, MACRS for personal property, 5:23 Double taxation, 1:19, 1:26–27, 4:15, 5:4, 13:2 avoiding, 1:26–27 C corporations, 12:2–3, 14:2 effect on taxation of business operations, 18:7 foreign-source income and, 17:13 international taxation of U.S. taxpayers, 16:5 Double taxation, minimizing, 18:12–16 deferring distributions, 18:15 electing S corporation status, 18:16 making deductible distributions, 18:13–14 making return-of-capital distributions, 18:15 Double-weighted sales factor in three-factor apportionment procedure, 16:22–23 Drug trafficking, deduction of expenses incurred in illegal, 5:10 Dual basis rule, 7:11

E E & P. See Earnings and profits Earned income, 10:32–33, 11:34 additional Medicare tax on, 1:10 Earned income ceiling, credit for child and dependent care expenses, 10:29 Earned income credit, 10:32–33 amount of, 10:32–33 COVID-19 pandemic and, 10:32ft eligibility requirements, 10:32 qualifying child, 9:10, 10:32 workers without children, 10:32 Earnings and profits (E & P), 4:16, 13:2–13 adjustments, 13:7, 13:8 allocating to distributions, 13:7–13 computation of, 13:3–6, 13:8 effect of corporate distributions on, 13:15–16 netting of current and accumulated, 13:10, 13:13 Economic and societal needs, senior citizens, 11:6 Economic concept of income, 4:3–5 Economic considerations encouragement of certain activities, 1:28–29 encouragement of certain industries, 1:29 encouragement of small business, 1:29 tax law, 1:33 Economic development, incentive-granting community, 16:27 Economic effect, partnership allocations, 14:19 Economic effect test, 14:19 Economic income, 4:3 E & P measure of, 13:3 Economic performance test, 5:5 Economics and business cycle, 5:32

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

INDEX and finance, 4:9 investments, 10:3 nontaxable exchanges, 7:23 Education expenses, 11:22–23 allowable expenses, 11:23 employer or legal requirements to keep a job, 11:23 maintaining or improving existing skills, 11:23 Education tax credits, 10:30–32 eligible individuals, 10:31 income limitations and refundability, 10:31–32 maximum credit, 10:31 restrictions on double tax benefit, 10:32 Educational assistance, employee fringe benefits, 11:10 Educational savings bonds, 10:10–11 Educator expenses, 11:27 Effective tax rate, 1:6, 1:21, 3:19, 3:20 effect of changes in tax rates in non-U.S. jurisdictions, 16:18 Effectively connected income, 16:16 E-file, 9:28–29 Form 8453, U.S. Individual Income Tax Transmittal for an IRS e-file Return, 9:29 Form 8879, IRS e-file Signature authorization, 9:29 irs.gov/filing/e-file-options, 9:28 80 percent control test, 12:12 transfers for property and services, 12:13 transfers to existing corporations, 12:15 Election to expense certain depreciable assets (Section 179), 5:28–30, 5:32 deduction limitations, 5:29–30 effect on basis, 5:30 Electronic Federal Tax Payment System, (EFTPS), 9:29 Eligible expenditures, disabled access credit, 17:8 Eligible small business, 17:8 Employee achievement awards, 10:5 Employee expenses, classification of, 11:27–28 accountable plans, 11:27 nonaccountable plans, 11:28 unreimbursed expenses, 11:28 Employee fringe benefits, 11:4–18 adoption assistance program, 11:10 athletic facilities, 11:10 cafeteria plans, 11:11 child and dependent care services, 11:10 educational assistance, 11:10 employer-sponsored accident and health plans, 11:5 flexible spending plans, 11:11 frequent flyer miles, 11:10 general classes of, 11:16 group term life insurance, 11:8–10 meals and lodging furnished for the convenience of the employer, 11:7–8 medical reimbursement plans, 11:6 qualified tuition reduction plans, 11:9 Employee fringe benefits, general classes of excluded benefits, 11:12–16 de minimis fringes, 11:14–15, 11:16 no-additional-cost services, 11:13, 11:16 nondiscrimination provisions, 11:15–16 qualified discounts on goods, 11:16 qualified discounts on services, 11:16 qualified employee discounts, 11:13 qualified moving expense reimbursements, 11:15, 11:16 qualified retirement planning services, 11:15, 11:16 qualified transportation fringes, 11:15, 11:16 working condition fringes, 11:14, 11:16 Employee versus independent contractor, 11:2–4 factors considered in classification, 11:2–4 Employees common law, 11:2–3 covered, 5:13 highly compensated, 11:15 partners as, 14:30–31 personal services of, 4:13 Employees, exclusions available to, 11:4–18 cafeteria plans, 11:11

employer-sponsored accident and health plans, 11:5 flexible spending plans, 11:11 foreign earned income, 11:17–18 general classes of excluded benefits, 11:12–16 group term life insurance, 11:8–10 meals and lodging furnished for the convenience of the employer, 11:7–8 medical reimbursement plans, 11:6 qualified tuition reduction plans, 11:9 Employer Form 941, Employer’s Quarterly Federal Tax Return, 1:10 meals and lodging furnished for the convenience of, on the employer’s business premises, 11:7–8 Employer’s Quarterly Federal Tax Return, Form 941, 1:10 Employer-employee loans, exceptions to imputed interest rules, 4:28 Employer-employee relationship, 11:2–4 Employer-sponsored accident and health plans, 11:5 premiums, 11:5 Employment-related expenses, credit for child and dependent care expenses, 10:29 Employment taxes, 1:5, 1:9–11 comparison of corporations and other forms of doing business, 12:5 FICA taxes, 1:10 self-employment taxes, 1:10 unemployment taxes, 1:10–11 En banc, 2:11 Energy credits, 17:8, 17:12 Energy research credit, 17:7 ENPI. See Excess net passive income Entertainment, recreation, or amusement, expenses related to, 5:11–12 Entertainment and meal expenses, 11:23–25 business gifts, 11:25 business meals, 11:24–25 exceptions to the 50% rule, 11:24 50% deduction rule, 11:24 Entity classification, 12:7 Entity Classification Election, Form 8832, 12:7 Entity-level taxes, 15:27–30 passive investment income penalty tax, 15:29–30 tax on pre-election built-in gain, 15:27–29 Entity operations, basis adjustments due to, 14:21 Entity perspective, 18:2 Equity distinguishing between debt and, 12:27–28 reclassification of debt as, 12:27–28 Equity considerations mitigating the effect of the annual accounting period concept, 1:31 tax law, 1:34 the wherewithal to pay concept, 1:30–31 Equity or fairness, 1:30 employee versus independent contractor, 11:3 marriage penalty, 9:19 Estate Planning, 2:20 Estate tax, 1:11 See also Federal estate tax Estimated tax, 11:42 Estimated Tax for Individuals, Form 1040-ES, 9:24, 11:43 Estimated tax payments, 11:42–43 for corporations, 12:35 for individuals, 11:42–43 penalty on underpayments, 11:43 Ethics of tax planning, 1:22 overview of, 1:21–22 Excess business loss limitation, 6:32–33, 14:25 computing the, 6:32–33 partnerships, 6:32 S corporations, 6:32 Section 469 passive activity loss rules, 6:32 Excess business losses, 6:31–33 computing the limit, 6:32–33 definition and rules, 6:32 limitation on deduction of, 14:28, 15:25 Excess cost recovery, 5:33 Excess depreciation, 8:31 Excess intangible drilling costs (IDCs), 17:24

I-7

Excess net passive income (ENPI), 15:29–30 Excessive executive compensation, 5:13 Excise taxes, 1:2, 1:7 Federal, 1:7–8 local, 1:8 state, 1:8 Exclusion treatment, exceptions to, 4:21–22 Exclusions available to employees, 11:4–18 cafeteria plans, 11:11 employer-sponsored accident and health plans, 11:5 flexible spending plans, 11:11 foreign earned income, 11:17–18 group term life insurance, 11:8–10 meals and lodging furnished for the convenience of the employer, 11:7–8 medical reimbursement plans, 11:6 qualified tuition reduction plans, 11:9 Exclusions available to employees, general classes of excluded benefits, 11:12–16 de minimis fringes, 11:14–15, 11:16 no-additional-cost services, 11:13, 11:16 nondiscrimination provisions, 11:15–16 qualified discounts on goods, 11:16 qualified discounts on services, 11:16 qualified employee discounts, 11:13–14 qualified moving expense reimbursements, 11:15, 11:16 qualified retirement planning services, 11:15, 11:16 qualified transportation fringes, 11:15, 11:16 working condition fringes, 11:14, 11:16 Exclusive use requirement, office in the home expenses, 11:26 Ex-dividend date, 4:15ft Executive compensation, cost accounting and, 16:26 Exemption amount, 17:15 AMT formula, 17:15 Exemptions dependency, 9:6, 9:10 personal, 9:6, 9:10 Expenditures organizational, 14:14 research and experimental, 5:14–16 Expense method research and experimental expenditures, 5:15 taxable years beginning before January 1, 2022, 5:15 Expenses accrued to related parties, timing of deduction recognition, 5:6–7 incurred for the production of income, 5:13 incurred in the investigation of a business, 5:8–9 investment, 10:18 necessary, 5:3 nonbusiness, 10:11 ordinary, 5:2 partial list of deductible business, 5:4 personal, 10:11 related to entertainment, recreation, or amusement, 5:11–12 related to management of property held for production of income, 10:11 related to production or collection of income, 10:11 Expenses relating to time at work, 11:18–31 classification of employee expenses, 11:27–28 contributions to Individual Retirement Accounts, 11:28–31 education expenses, 11:22–23 educator expenses, 11:27 entertainment and meal expenses, 11:23–25 office in the home, 11:25–26 transportation expenses, 11:18–19 travel expenses, 11:19–22

F Failure to disclose penalty, 2:6 Fair market value, 4:7, 7:3 Family and medical leave, credit for employerprovided, 17:11, 17:12 Federal customs duties, 1:14 Federal District Courts, 2:12 See also Courts

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

I-8

INDEX

Federal estate tax, 1:11 Form 720, 1:8 Federal excise taxes, 1:7–8 Federal gift tax, 1:12–13 Federal income tax, 1:27 basic formula for, 1:16 formula for individuals, 1:16 structure of, 1:15–16 Federal income taxes (FIT), individual taxpayers versus corporate taxpayers, 18:4 Federal Insurance Contributions Act (FICA), 18:12 See FICA Federal judicial system, 2:10 trial courts, 2:11 Federal poverty level (FPL), 10:33 Federal poverty line. See Federal poverty level (FPL) Federal rates for loans, 4:26 Federal Register, 2:7 Federal Second Series (F.2d), 2:16 Federal Supplement Second Series (F.Supp.2d), 2:15 Federal Supplement Series (F.Supp), 2:15 Federal tax collections, 1:13 Federal Tax Coordinator, 2d, 2:19 Federal tax law, understanding, 1:28–33 Federal Third Series (F.3d), 2:16 Federal Unemployment Tax Act. See FUTA Fees, distinguished from taxes, 10:15 FICA taxes, 1:9, 1:10 effect on, tax consequences of organization form choice, 18:12 Form 941, Employer’s Quarterly Federal Tax Return, 1:10 Fiduciaries, Form 1041, 14:15 FIFO method, applied to carrybacks, carryovers, and utilization of credits, 17:4 50 percent organizations, 10:24 50% rule, exceptions to, 11:24 Filing procedures, tax return, 9:27–29 Filing requirements, 9:21 for corporations, 12:34 for dependents, 9:21 Filing status, 9:17–20 abandoned spouse rules, 9:20 head of household, 9:19–20 married taxpayers, 9:18–19 single taxpayers, 9:18 Final Regulations, 2:7 Finance business entities, 5:21 cash-flow benefit of tax deductions and credits, 17:5 corporate dividend policies, 13:11 double taxation of corporate income, 13:16 economics and, 4:9, 5:36 investments, 10:3, 12:6 limited partnerships or LLCs, 14:4 public, 15:26 stock buybacks, 13:22 wealth maximization, 6:15 Financial accounting capital account, 14:21 for tax uncertainties, 3:21–24 measures of corporate income, 12:38 property transactions, 7:7 tax law, 8:30 treatment of capital gains and losses, 8:30 Financial accounting income, 1:18, 1:21 Financial Accounting Standards Board (FASB), 1:18, 2:27, 3:9 Financial Accounting Standards Interpretation (FIN) 48, 3:21 Financial analysis, 3:21 Financial analysts, 3:21 Financial Disclosure Insights Book-Tax Differences, 1:21 Overseas Operations and Book-Tax Differences, 16:12 Releasing Valuation Allowances, 3:17 State/Local Taxes and the Tax Expense, 16:24 Tax and Book Depreciation, 5:31 Tax Losses and the Deferred Tax Asset, 3:15 Tax Rates in Non-U.S. Jurisdictions, 16:18 The Book-Tax Income Gap, 3:9 What Do You Mean by “Income” Anyway?, 1:18

What Does “Income” Mean to You?, 4:4 Where Does GAAP Come From?, 2:27 Financial reporting, relevance of taxation to accounting and finance professionals, 1:3 Financial statement reconciliation, 12:37 Financial statements effect of taxes on, 12:38 footnotes, 1:21, 3:18, 3:20, 3:27, 4:4 presentation of amounts recognized in, 3:18, 3:19–20 rate reconciliation, 3:19, 3:20 tax disclosures in, 3:18–21 taxes in, 3:2–30 First-in, first-out (FIFO) basis, cost identification problems, 7:9 Fiscal year, 4:6 Fixed assets, 8:23 classification of, 8:23 Fixture, 1:13 Flexible benefit plans. See Flexible spending plans Flexible spending plans, 11:11 Flow-through entities, 1:20, 1:27, 12:6, 14:2, 18:4, 18:7 business interest expense limitation and, 12:33 Flow-through of items of income and loss to S corporation shareholders, 15:11 Food and beverage business expenses, 50% deduction rule, 11:24 Foreign corporations, U.S. taxation of, 16:16–17 Foreign Corrupt Practice Act (FCPA), 5:10 Foreign-derived intangible income (FDII), 16:15–16 Foreign earned income, 11:17–18 definition, 11:17 Foreign earned income exclusion, 11:17 Foreign income taxes, deductibility of, 5:17 Foreign-source income foreign tax credit computation, 17:10 income sourcing rules, 16:7–9 taxation of, 17:13 Foreign tax credit (FTC), 16:6, 16:9–11, 17:2, 17:10, 17:13 computation of, 17:13 limits, 16:10–11 tax planning strategies for utilizing, 16:10 Foreign travel for business and pleasure, 11:21 Form 720, Federal excise tax return, 1:8 Form 941, Employer’s Quarterly Federal Tax Return, 1:10 Form 1040, U.S. Individual Income Tax Return, 1:10, 1:19, 1:27, 9:27–28, 14:15 Schedule 1, 9:28, 10:3, 11:32, 11:43 Schedule 2, 9:28 Schedule 3, 9:28 Schedule A, qualified residence interest, 10:21 Schedule C, 9:28, 10:21, 11:2, 11:31 Schedule SE, 1:10, 9:28, 10:21 Form 1040-ES, Estimated Tax for Individuals, 9:24, 11:43 Form 1040-SR, 9:28 Form 1041, fiduciaries, 14:15 Form 1065, partnerships, 1:19, 14:5–6 Schedule K, 14:6 Schedule K–1, 14:5–6 Form 1120, C corporation, 1:19, 12:34, 14:15 Form 1120S, S corporations, 1:20, 14:15 Schedule M–2, 15:17, 15:18 Form 2210, Underpayment of Estimated Tax by Individuals, Estates and Trusts, 11:43 Form 2553, S election, 15:6 Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, 9:29 Form 6251, Alternative Minimum Tax— Individuals, 17:16 Form 8283, Noncash Charitable Contributions, 10:23 Form 8453, U.S. Individual Income Tax Transmittal for an IRS e-file Return, 9:29 Form 8814, Parents’ Election to Report Child’s Interest and Dividends, 9:26 Form 8832, Entity Classification Election, 12:7 Form 8879, IRS e-file Signature authorization, 9:29

Form 8962, Premium Tax Credit, 10:33 Form 8995, Qualified Business Income Deduction Simplified Computation, 11:42 Form 8995–A, Qualified Business Income Deduction, 11:42 Schedule A, Specified Service Trades or Businesses, 11:42 Schedule B, Aggregation of Business Operations, 11:42 Schedule C, Loss Netting and Carryforward, 11:42 Schedule D, Patrons of Agricultural or Horticultural Cooperatives, 11:42 Form W–2, Wage and Tax Statement, 9:24 Forms of doing business, Federal tax consequences, 14:2–3 See Business entities; Business forms 401(k) plans, 10:3 Franchise tax, 1:15 Free transferability of interests, nontax factor affecting choice of business form, 18:5 corporation, 18:2, 18:5 Frequent flyer miles, employee fringe benefits, 11:10 Fringe benefits, general classes of, 11:16 Fruit and tree metaphor, 4:13 Full recapture, 8:29 Functional use test, replacement property, 7:26 FUTA tax, 1:9

G GAAP, 3:9, 3:15 See Generally accepted accounting principles GAAP balance sheet, 3:18 GAAP income statement, 3:18 Gain AMT adjustments, 17:18–19 built-in, 14:19 capital, 8:2 casualty, 6:12 determination of, 7:2–8 from property transactions, 4:18–20 nonrecognition of, in involuntary conversions 7:28–29 nonrecognition under Section 351 and Section 1031, 12:8–10 on contributions to the partnership, 14:8–9 precontribution, 14:19 realized, 4:18, 7:2–6 recognition of, noncash dividends, 13:14–15 recognized, 4:18, 7:7–8 Section 1231, 8:23 tax planning strategies for matching losses with, 8:20 See also Capital gains; Realized gain; Recognized gain Gain basis for converted property, 7:17 General business credit, 17:2–3, 17:11 overview of, 17:2–4 principal components of, 17:4 specific credits in, 17:4–12 General business credits, treatment of unused, 17:3–4 General framework for income tax planning, 1:22–23 General partners at-risk amounts, 6:16 material participation, 6:24 General partnership (GP), 14:3 General sales tax, 1:8 Generally accepted accounting principles (GAAP), 1:18, 2:27, 3:2 and ASC 740, 3:5–7 sources of, 2:27 Gift basis rules, 7:10–11 Gift loans effect of on the lender and borrower, 4:27 exceptions to imputed interest rules, 4:28 exemption for, 4:27 Gift planning, tax planning strategies for, 7:12 Gift splitting, 1:12 Gift tax, Federal, 1:12–13 Gifts business, 11:25 criteria for, 10:6, 10:21 depreciation recapture and, 8:34 disposition of a passive activity by, 6:30

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

INDEX of appreciated securities, tax planning strategies for, 8:15 special holding period rules, 8:11–12 Gifts and inheritances, 10:6–7 crowdfunding, 10:6–7 employer payments to employees, 10:6 Global activities timeline, 16:4 Global Tax Issues A Worldwide View of Dividends, 13:18 Accounting for Income Taxes in International Standards, 3:9 Capital Gain Treatment in the United States and Other Countries, 8:16 Choose the Charity Wisely, 10:24 Do Corporations Pay Taxes?, 18:6 Does Section 351 Cover the Incorporation of a Foreign Business?, 12:19 Filing a Joint Return, 9:21 Non-U.S. Shareholders Prefer Capital Gain Treatment in Stock Redemptions, 13:23 Outsourcing of Tax Return Preparation, 1:29 Overseas Gun Sales Result in Large Fines, 5:10 Sourcing Income in Cyberspace—Getting It Right When Calculating the Foreign Tax Credit, 17:10 U.S. Corporate Taxes and International Business Competitiveness, 12:2 Which Foreign Dividends Get the Discounted Rate?, 4:15 Global trade, international tax laws, 16:2 Golsen case, 2:13 Goods, taxes on the production and sale of, 1:7–9 Goodwill, 7:9 sale of a business, 5:37 Government Accountability Office (GAO), 18:6 Government bonds taxation of interest on Federal, 4:20–21 taxation of interest on state and local, 4:20–21 Grantee, 8:6–8 exercise of options by, 8:6–7 Grantor, 8:6–8 Gray areas, 2:12 Green card test, 16:16 Gross estate, 1:11 Gross income, 4:2–3, 4:3–6, 9:4, 10:2 comparing accounting and tax concepts of income, 4:5 concepts, 4:6 concepts of income, 4:3–5 form of receipt, 4:5–6 hobbies, 11:45 leased automobile inclusion amount, 5:35–36 partial list of exclusions from, 9:3 partial list of items, 9:4 Section 61 definition of, 1:23, 4:2 timing of income recognition, 4:6–13 See also Income Gross income, specific exclusions applicable to individuals, 10:6–11 accident and health insurance benefits, 10:10 damages, 10:8–10 educational savings bonds, 10:10–11 gifts and inheritances, 10:6–7 scholarships, 10:7–8 workers’ compensation, 10:10 wrongful incarceration, 10:11 Gross income, specific inclusions applicable to individuals, 10:3–6 alimony and separate maintenance payments, 10:3–5 prizes and awards, 10:4–5 Social Security benefits, 10:6 unemployment compensation, 10:5–6 Gross income, specific items of, 4:17–29 gains and losses from property transactions, 4:18–20 imputed interest on below-market loans, 4:26–28 Gross income exclusions, 4:17–29, 10:2 applicable to individuals, 10:6–11 improvements on leased property, 4:28–29 income from discharge of indebtedness, 4:23–25 interest on certain state and local government obligations, 4:20–21

life insurance proceeds, 4:21–22 tax benefit rule, 4:25 Gross income inclusions, 10:2 applicable to individuals, 10:3–6 Gross income test, qualifying relative, 9:12–13 Group term life insurance, 11:8–10 uniform premiums for $1,000 of protection, 11:10 Guaranteed payments, 14:29 Schedules K and K–1, 14:29

H H.R. 10 (Keogh) plans. See Keogh plans Half-year convention, 5:23–24 Head of household, 9:19–20 qualifying child, 9:10 Health insurance. See Employer-sponsored accident and health plans Health Insurance Marketplace, 10:33 Health Savings Account (HSA), 10:14–15, 11:6 contributions to, deductions for AGI, 9:5 deductible amount, 10:15 high-deductible plans, 10:14 tax treatment of contributions and distributions, 10:14 Highly compensated employees, 11:15 Hobbies factors for determination of, 11:44 gross income, 11:45 versus profit-seeking activities, 11:43–44 Hobby income, Schedule 1, Form 1040, 11:43 Hobby losses, 11:43–45 determining the taxable amount, 11:45 general rules, 11:44 presumptive rule of profit-seeking, 11:44 Holding, 2:22 Holding period, 7:12, 8:10–13 dividend income, 4:15 for property received as a gift, 7:12 for shareholder and transferee corporation, 12:19 general rules, 8:10–11 of a partner’s ownership interest, 14:11 of inherited property, 7:14 of new stock or securities, 7:16 of property, 8:2 of property received in like-kind exchanges, 7:22–24 short sales, 8:12–13 special rules, 8:11–12 Home equity loans, 10:19 Home office expense, 11:25–26 Hot assets, 14:25 Hotel occupancy tax, 1:8 House of Representatives, 2:3–4 House Ways and Means Committee, 2:3–4 Housing interest, itemized deductions, AMT adjustments, 17:22 Hybrid method, 4:6–7, 4:10

I IAS. See International Accounting Standards IAS 12, 3:15 IASB. See International Accounting Standards Board IFRS, 3:9, 3:15 See International Financial Reporting Standards Illegal business, deduction of expenses of operating, 5:10 Imputed interest, 4:26 calculation of, 4:26 exceptions and limitations of, 4:27–28 Imputed interest income and deductions, effect of certain below-market loans, 4:27 Imputed interest on below-market loans, 4:26–28 exceptions and limitations, 4:27–28 rules, exceptions to, 4:28 Inbound taxation, 16:3, 16:16 Incentive stock options (ISOs), 17:19–20 AMT adjustments, 17:19–20 Inclusion amount, leased automobiles, 5:35–36 Income, 4:2, 4:3, 9:3 accounting, 4:4 accounting concept of, 4:4

I-9

active, 6:17 additional Medicare tax on earned, 1:10 additional Medicare tax on investment, 1:10 allocation and apportionment of, 16:21–23 alternative minimum taxable (AMTI), 17:14–16 assignment of, 4:13 avoid recognition, 1:23–24 character of, 1:26 comparing accounting and tax concepts of, 4:5 concepts of gross, 4:3–5 dependent children’s unearned, 9:25–26 division of, multijurisdictional taxation, 16:26 earned, 10:32–33 economic, 4:3 economic concept of, 4:3–5 effect on ability to specially allocate among owners, tax consequences of organizational form choice, 18:8 effectively connected, 16:16 exclusions from, 4:2 financial accounting, 1:18, 1:21 from personal services, 4:13 from property, 4:13–16 general sources of, 14:13–16 gross, 4:3–6, 9:4, 10:2 interest and other expenses related to taxexempt, 5:13–14 of certain children, tax planning strategies for, 9:25 passive activity, 6:17, 6:30–31 portfolio, 6:17 postpone recognition to achieve tax deferral, 1:24 S corporation allocation of, 15:13 specific items of gross, 4:17–29 Subpart F, 16:12–15 tax minimization strategies related to, 1:23–24 taxable, 1:18, 1:21, 4:3, 9:7, 10:2 U.S. income tax treatment of a non-U.S. person’s, 16:17 unearned, 4:11–12 windfall, 4:4 worldwide taxable, 16:10 See also Gross income Income and deductions of a proprietorship, 11:32–33 medical insurance premiums, 11:32 self-employment tax, 11:32–33 Income “bunching,” 14:25 Income definitions, 1:18 Income from discharge of indebtedness, 4:23–25 insolvency and bankruptcy, 4:24 qualified real property indebtedness, 4:24 seller cancellation, 4:24–25 shareholder cancellation, 4:25 student loans, 4:25 Income from sales of inventory, tax planning strategies for sourcing, 16:9 Income measurement, multistate businesses, 16:20–24 allocation and apportionment, 16:21–23 unitary theory, 16:23–24 Income provisions applicable to individuals, overview of, 10:2 Income recognition accounting methods, 4:6–10 rules, 4:29 special rules for accrual basis taxpayers, 4:11–12 special rules for cash basis taxpayers, 4:10–11 taxable year, 4:6 timing of, 4:6–13 Income shifting across time, tax planning strategies for, 9:23 from high-bracket taxpayers to low-bracket taxpayers, 1:25–26 from high-bracket years to low-bracket years, 1:25 from high-tax jurisdictions to low-tax jurisdictions, 1:26 from parents to children, 9:25 tax planning fundamentals, 1:25–26 tax planning strategies for, 16:25

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

I-10

INDEX

Income sources, 4:13–16 income from personal services, 4:13 income from property, 4:13–16 income received by an agent, 4:16 Income sourcing multinational transactions, 16:7–9 rules, 16:7–9 Income tax, 1:2, 1:5–6 basic formula for, 1:16 Federal, 1:27 formula for individuals, 1:16 provision process, 3:27 Income tax accounting, 4:13 Income tax deduction, tax credit versus, 17:2 Income tax planning, general framework for, 1:22–23 Income tax rates, corporate, 12:34 Income tax treaties, 16:5 in force, U.S., 16:6 permanent establishment (PE), 16:5 Income taxation in the United States, state and local income, crossing state lines, 16:17–25 sources of law, 16:17–19 tax issues, 16:19–25 Income taxation of corporations, 12:28–34 business interest expense limitation, 12:31–34 deductions available only to corporations, 12:28–31 Income taxes, 1:15–17 basic principles of accounting for, 3:2–7 deductibility of state and local, 10:16–17 effect on, tax consequences of organization form choice, 18:12 in international standards, accounting for, 3:9 local income taxes, 1:17 state income taxes, 1:17 structure of the Federal income tax, 1:15–16 Incremental research activities credit, 17:6–7 base amount, 17:6 qualified research expenditures, 17:6–7 Indebtedness, income from discharge of, 4:23–25 insolvency and bankruptcy, 4:24 qualified real property indebtedness, 4:24 seller cancellation, 4:24–25 shareholder cancellation, 4:25 student loans, 4:25 Independent contractor, 11:2 employee versus, 11:2–4 expenses, Tax Cuts and Jobs Act (TCJA) of 2017 and, 11:18 misclassification of as an employee, 11:2 Indirect approach, calculation of alternative minimum taxable income (AMTI), 17:14 Indirect compensation, 13:20–21 Indirect tax, 1:2, 1:7 Individual Retirement Accounts (IRAs), 10:3, 11:28 contributions to, 11:28–31 traditional IRA and Roth IRA compared, 11:31 Individual tax credits, 10:27–33 adoption expenses credit, 10:28 American Opportunity credit, 10:30–32 child and dependent tax credit, 10:28–29 credit for child and dependent care expenses, 10:29–30 earned income credit, 10:32–33 education tax credits, 10:30–32 lifetime learning credit, 10:30–32 premium tax credit, 10:33 See also Tax credits Individual tax formula, 9:2–7 Individual tax formula components, 9:3–7 deductions for adjusted gross income (AGI), 9:5 deductions from adjusted gross income (AGI), 9:5–6 exclusions, 9:3 gross income, 9:4 income (broadly defined), 9:3 personal and dependency exemptions, 9:6 qualified business income deduction, 9:7 standard deduction, 9:6 taxable income, 9:7

Individuals and taxes, 1:4 and their business entities, dealings between, 1:20 casualty and theft losses, 6:10–12 determining the deduction for contributions of appreciated property by, 10:25 Form 1040, 14:15 overview of income provisions applicable to, 10:2 Individuals, specific exclusions applicable to, 10:6–11 accident and health insurance benefits, 10:10 damages, 10:8–10 educational savings bonds, 10:10–11 gifts and inheritances, 10:6–7 scholarships, 10:7–8 workers’ compensation, 10:10 wrongful incarceration, 10:11 Individuals, specific inclusions applicable to, 10:3–6 alimony and separate maintenance payments, 10:3–5 prizes and awards, 10:5 Social Security benefits, 10:6 unemployment compensation, 10:5–6 Individuals as proprietors, 11:31–43 accounting periods and methods, 11:31–32 deduction for qualified business income, 11:35–42 estimated tax payments, 11:42–43 income and deductions of a proprietorship, 11:32–33 retirement plans for self-employed individuals, 11:33–35 Inheritance tax, 1:11 Inheritances. See Gifts and inheritances Inherited property, 7:13–14 alternate valuation amount, 7:13 basis of, 7:13 holding period of, 7:14 primary valuation amount, 7:13 special holding period rules, 8:12 tax planning strategies for, 7:14 In-house lobbying expenditures, 5:11 Initial basis in partnership interest, 14:20–21 Inside basis, 14:11, 14:12 effect of distributions and withdrawals on, 14:17–18 Insolvency and bankruptcy, 4:24 Installment method, 4:7 Institute on Taxation and Economic Policy, 3:9 Insurance, group term life, 11:8–10 Insurance benefits, accident and health, 10:10 Intangible assets amortization of, 5:20, 5:37 book-tax temporary differences, 3:4 contributed property, 14:11 Intangible drilling and development costs (IDCs), 5:38 AMT preferences, 17:24 excess, 17:24 Intangible income, special tax rate for, 16:15–16 Intangible property personalty, 1:14 real, 8:32 Intent of Congress, 2:4 Inter vivos gifts, 10:6 Interest, 10:17–21 and other expenses related to tax-exempt income, 5:13–14 as business expenses, Schedule C, Form 1040, 10:21 calculation of imputed, 4:26 capital, 14:6 classification of interest expense, 10:20–21 deductibility of personal, student loan, investment, and mortgage, 10:21 deductible, 10:17–21 disposing of partnership and LLC as sale of ownership, 18:18 imputed, 4:26 in general, itemized deductions, AMT adjustments, 17:22 income from, 4:14 investment, 10:18 nondeductible, 10:17–21

on business debt, 5:12 on certain state and local government obligations, 4:20–21 on private activity bonds, AMT preferences, 17:24 on qualified student loans, 10:17–18 paid for services, 10:20 prepaid, 10:20 prepayment penalty, 10:20 profits (loss), 14:6 qualified residence, 10:19–20 tax-exempt securities, 10:20 Interest earned, 4:11 Interest expense allocation and apportionment of deductions, 16:7–9 business deductions, 5:16 classification of, 10:20–21 related to rents and royalties, Form 1040, Schedule E, 10:21 Interjurisdictional agreements, multijurisdictional taxation, 16:28 Internal Revenue Bulletin, 2:7, 2:8, 2:9, 2:15 Internal Revenue Code, 1:27, 16:4 arrangement of, 2:5 citing of, 2:5–6 interpreting, 2:20 of 1939, 2:2 of 1954, 2:2 of 1986, 2:2–3 origin of, 2:2–3 senior-citizen-friendly provisions, 11:6 Subchapter C, 1:19, 12:2 subchapter designations, 2:5 Subchapter K, 12:2, 14:2 Subchapter S, 1:20 Internal Revenue Service (IRS) accounting method used by taxpayer, 4:7 influence of on tax law, 1:32, 1:34 IRS Direct Pay, 9:29 IRS e-file Signature Authorization, Form 8879, 9:29 IRS Free File, 9:28 IRS Letter Rulings Reports, 2:9 IRs (News Releases), 2:9 IRS Publication 925, Passive Activity and At-Risk Rules, 6:25 IRS Regional Service Center (irs.gov/filing /where-to-file-paper-tax-returns -with-or-without-a-payment), 9:29ft IRS website (irs.gov), 2:8 National Office of the IRS, 2:8, 2:9 International Accounting Standards (IAS) 12, 3:9 International Accounting Standards Board (IASB), 1:18, 3:9 International business competitiveness, U.S. corporate taxes and, 12:2 International Financial Reporting Standards (IFRS), 1:18, 2:27 International law, international transactions, 16:3 International tax rates, 16:8 Interpretive Regulations, 2:21 Inventions and processes, as definition of capital asset, 8:5 Inventory as definition of capital asset, 8:3–4 contributed property, 14:12 tax planning strategies for sourcing income from sales of, 16:9 Investigation expenses, 5:8–9 Investigation of a business, expenses incurred in, 5:8–9 Investment earnings, 4:22 Investment expenses, 10:18 Investment holding company, 16:25 Investment income additional Medicare tax on, 1:10 tax planning strategies for reducing, 4:17 Investment interest, 10:18 deductibility of, 10:21 itemized deductions, AMT adjustments, 17:22 Investment partnership, exceptions to nonrecognition, 14:9 Investment property complete destruction of, 6:9 partial destruction of, 6:9 Investments, 13:13 effect of at-risk limitations, 6:15

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

INDEX effect of passive activity loss rules, 6:15 limited partnerships as, 12:6 Involuntary conversions, 1:30–31, 8:24 defined, 7:26 depreciation recapture and, 8:35 gains, tax planning strategies for recognizing, 7:29 losses, 7:28–29 nonrecognition of gain, 7:28–29 replacement property, 7:26–27 replacement property tests, 7:26–27 Section 1033, 7:24–29 time limitation on replacement, 7:27–28 treatment of for tax purposes versus financial accounting purposes, 7:7 IRAs. See Individual Retirement Accounts IRS. See Internal Revenue Service Itemized deductions, 9:5–6, 10:11–27 AMT adjustments, 17:21–22 charitable contributions, 10:21–26 deductions from AGI, 1:16, 10:11 interest, 10:17–21 medical expenses, 10:12–15 partial list of, 9:6, 10:11 Schedule A, Form 1040, 10:12 tax planning strategies for effective utilization of, 10:27 taxes, 10:15–17

J Joint return tax planning strategies for problems with a, 9:16 U.S. worldwide approach to taxation, 9:21 Joint return test, dependents, 9:16 Joint venture, 14:2 Journal of International Taxation, 2:20 Journal of Multistate Taxation and Incentives, 2:20 Journal of Taxation, 2:20 Judicial citations, 2:14–16 U.S. District Court, Court of Federal Claims, and Courts of Appeals, 2:15–16 U.S. Supreme Court, 2:16 U.S. Tax Court, 2:14–15 Judicial concepts and doctrines relating to tax, 1:33 Judicial decision reliability factors legal residence of the taxpayer, 2:21 level of the court, 2:21 subsequent events, 2:21 type of decision, 2:21 weight of the decision, 2:21 Judicial influence on statutory provisions, 1:33 Judicial opinions, understanding, 2:22 Judicial sources of the tax law, 2:10–16 appellate courts, 2:12–13 assessing the significance of, 2:21–22 judicial citations, 2:14–16 trial courts, 2:11–12 U.S. Supreme Court, 2:14 Jury trial, 2:11

K Keogh plans, 11:33–34 Kiddie tax, 8:15, 9:25 election to report certain unearned income on parents’ return, 9:26 Form 8814, Parents’ Election to Report Child’s Interest and Dividends, 9:26 net unearned income, 9:25–26 tax planning strategies for avoiding or minimizing the effect of the, 9:25

L Law, sources of in U.S. taxation of multinational transactions, 16:4–5 Lease cancellation payments, 8:9–10 lessee treatment, 8:10 lessor treatment, 8:10 Lease versus buy decision, 5:21 Leased property, improvements on, 4:28–29

Legislation, monitoring, 5:11 Legislative grace, 1:15 Legislative process, 2:3–4 for tax bills, 2:3 Legislative Regulations, 2:21 Lessee, 8:9 Lessee treatment, 8:10 Lessor, 8:9 Lessor treatment, 8:10 Letter rulings, 2:8–9 format of, 2:9 Liabilities assumption of in controlled corporations, 12:19–22 deferred income tax, 12:38 definition under Section 357, 12:21 partnership, 14:22–23 Liability assumption, tax consequences of, 12:22 Life insurance, tax planning strategies for, 4:22 Life insurance proceeds, 4:21–22 exceptions to exclusion treatment, 4:21–22 Lifetime learning credit, 10:30–32 eligible individuals, 10:31 income limitations and refundability, 10:31–32 maximum credit, 10:31 restrictions on double tax benefit, 10:32 LIFO recapture tax, S corporation, 15:29 Like-kind exchanges, 7:19–24 basis and holding period of property received, 7:22–24 boot, 7:21–22 depreciation recapture and, 8:35 exchange requirement, 7:20 in controlled corporations, 12:8–10 like-kind property, 7:19–20 Section 1031, 7:19–24 tax planning strategies for, 7:20 treatment of for tax purposes versus financial accounting purposes, 7:7 Like-kind property, 7:19–20 basis of, 7:22–23 Limitation based on wages and capital investment, 11:38–40 W–2 Wages Limit, 11:38–39 W–2 Wages/Capital Investment Limit, 11:39–40 Limitation for specified services businesses, phase-in of Specified Services Limit, 11:42 Limitation on deduction of excess business losses, 15:25 Limitations on deductions of personal casualty losses, 6:10–12 Limitations on QBI deduction, 11:38, 15:12–13 Limitations related to automobiles and property used for personal purposes, 5:32–36 change from predominantly business use, 5:33 leased automobiles, 5:35–36 limitation for sport utility vehicles, 5:35 limits on cost recovery for automobiles, 5:33–34 property not used predominantly for business, 5:32 substantiation requirements, 5:36 Limited liability, nontax factor affecting choice of business form, 18:4–5 corporation, 18:2, 18:4 limited liability company, 18:4 limited liability partnership, 18:5 limited partnership, 18:4 Limited liability companies (LLCs), 1:20, 12:7, 14:4, 14:32–33, 18:2, 18:3 advantages of, 14:32–33 attractiveness of as a form of business, 14:34 converting to another business form, 18:21–22 disadvantages of, 14:33 disposing of, 18:18 limited liability, 18:4 tax attributes and consequences of, 18:23–26 tax treatment of the disposition of, 18:19 taxation of, 14:32 See also Business entities; Business forms

I-11

Limited liability partnership (LLP), 1:20, 14:4, 18:2 limited liability, 18:5 See also Business entities; Business forms Limited partners, material participation, 6:24 Limited partnership (LP), 12:7, 14:3–4, 18:2 as an investment vehicle, 12:6 capital formation, 18:5–6 limited liability, 18:4 Liquidating and nonliquidating distributions compared, 13:24–25 Liquidation process, 13:24 Listed property, 5:32 change from predominantly business use, 5:33 cost recovery, 5:35 more-than-50% business usage test, 5:32 not used predominantly for business, 5:32 predominantly used in business, 5:32 straight-line method and, 5:32 substantiation requirements, 5:36 LLCs. See Limited liability companies Loan origination fee, 10:20 Loans below-market, 4:26–28 between related parties, 6:5, 6:7 home equity, 10:19 to shareholders, 13:18 Lobbying expenses, 5:11 special rules to disallowance of, 5:11 Local excise taxes, 1:8 Local income taxes, 1:17 and the tax expense, 16:24 deductibility of, 5:17 expenses, 16:24 Lodging, medical expenses, 10:13 Lodging and meals furnished for the convenience of the employer, 11:7–8 Long-term capital gain (LTCG), 4:19, 8:14–17 tax rates, 8:14–17 Long-term capital loss (LTCL), 4:19 Loss AMT adjustments, 17:18–19 built-in, 14:19 business bad debt deductible as ordinary, 6:4 business property, 6:7, 6:9 capital, 8:2 casualty, 6:7–12 determination of, 7:2–8 from property transactions, 4:18–20 in involuntary conversions, 7:28–29 investment property, 6:9 limitation on deduction of excess business, 15:25 nonrecognition under Section 351 and Section 1031, 12:8–10 on contributions to the partnership, 14:8–9 ordinary, 6:6 passive activity, 6:17 personal use property, 6:9 precontribution, 14:19 realized, 4:18, 7:2–6 recognition of, noncash dividends, 13:14–15 recognized, 4:18, 7:7–8 rental property, 6:9 rules for determining amount of, 6:9–10 S corporation allocation of, 15:13 S corporation treatment of, 15:23–25 Section 1231, 8:23 small business stock, 6:5–6 tax planning strategies for matching gains with, 8:20 theft, 6:7–12 treatment of, net operating loss, 15:23–25 treatment of by Congress, 6:2 See also Capital loss; Realized loss; Recognized loss Loss considerations, tax planning strategies for, 15:24–25 Loss limitations in partnerships, 14:25–28 at-risk limitation, 14:27–28 basis limitation, 14:26–27 limitation on deduction of excess business losses, 14:28 passive activity rules, 14:28 Loss measurement, casualty and theft, 6:9–10 multiple losses, 6:10 Loss Netting and Carryforward, Schedule C, Form 8995–A, 11:42

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

I-12

INDEX

Loss of the election loss of S corporation status, 15:8 passive investment income limitation, 15:8–9 reelection after termination, 15:9–10 S corporation status, 15:7–10 voluntary revocation, 15:7–8 Loss on converted property, basis for determining, 7:17 Loss transactions, disallowed, special holding period rules, 8:12 Losses, disallowed personal use assets, 7:14 transactions between related parties, 7:14–15 wash sales, 7:15–16 Losses, hobby, 11:43–45 determining the taxable amount, 11:45 general rules, 11:44 presumptive rule of profit-seeking, 11:44 Losses, suspended passive activity carryovers of, 6:19 impact of, 6:18–19 Losses last rule, 14:26, 15:21 Losses of individuals, casualty and theft, 6:10–12 personal use property, 6:10–12 Losses subject to at-risk and passive activity loss limitations, treatment of, 6:27 Low-income housing credit, 17:7–8, 17:12 computation of, 17:8 Low-income tenants, 17:8 Lump-sum purchase, allocation problems with, 7:9 “Luxury auto” depreciation limits, 5:33–34

M MACRS. See Modified accelerated cost recovery system Marginal business income tax rates, reductions in, 16:8 Marginal tax rate, 1:6 Marital deduction, 1:11, 1:12 Marketplace. See Health Insurance Marketplace Marriage penalty, 9:19 Married taxpayers filing jointly, 9:18–19 filing separately, 9:18 filing status, 9:18–19 marriage penalty, 9:19 Material participation, 6:22–24, 6:28 corporations, 6:24 limited partners, 6:24 participation defined, 6:24 tests to determine, 6:23 Material participation tests test based on facts and circumstances, 6:23 tests based on current participation, 6:23 tests based on prior participation, 6:22 Meal and entertainment expenses. See Entertainment and meal expenses Meals, medical expenses, 10:13 Meals and lodging furnished for the convenience of the employer, 11:7–8 furnished by the employer, 11:7 on the employer’s business premises, 11:7–8 required as condition of employment, 11:8 Medical care, 10:12 Medical expense deduction, tax planning strategies for multiple support agreements and the, 9:15 Medical expenses, 10:12–15 capital expenditures, 10:12–13 cosmetic surgery, 10:12 deductible, 10:12–15 defined, 10:12 examples of deductible and nondeductible, 10:13 for spouse and dependents, 10:13 Health Savings Accounts, 10:14–15 nondeductible, 10:12–15 nursing home care, 10:12 transportation, meals, and lodging, 10:13 Medical insurance, 1:10 premiums, sole proprietorship, 11:32 Medical leave, credit for employer-provided family and, 17:11, 17:12 Medical reimbursement plans, 11:6

Medicare tax, 1:10 Additional Medicare Tax on higher-income taxpayers, 9:26–27, 14:31 Members of the household, 9:12 Memorandum decisions, 2:14 Methods, for personalty and realty, 5:28 Mid-month convention, 5:26–27 Mid-quarter convention, 5:25–26 Modified accelerated cost recovery system (MACRS), 5:20 AMT depreciation of personal property, 17:17–18 class lives, methods, and conventions, 5:28 computing E & P, 13:5 for personal property, 5:23–26 for real estate, 5:26–28 tables, 5:41–43 See also Accelerated cost recovery system (ACRS) Modified adjusted gross income (MAGI), 9:27, 10:10–11 Modified taxable income, deduction for qualified business income (QBI), 11:36–37 Monitoring legislation, special rule to disallowance of lobbying expenses, 5:11 More-than-50% business usage test, 5:32 Multijurisdictional taxation, common challenges, 16:25–28 authority to tax, 16:25–26 division of income, 16:26 interjurisdictional agreements, 16:28 tax havens, 16:27 transfer pricing, 16:26–27 Multijurisdictional taxpayer, 16:2 Multinational transactions, common challenges, 16:25–28 authority to tax, 16:25–26 division of income, 16:26 interjurisdictional agreements, 16:28 tax havens, 16:27 transfer pricing, 16:26–27 Multinational transactions, U.S. taxation of, 16:2–17 sources of law, 16:4–5 tax issues, 16:5–17 Multiple support agreement, 9:14 tax planning strategies for the medical expense deduction and, 9:15 Multistate income taxation, 16:17–25 common challenges, 16:25–28 corporate, 16:24 formula for computing tax liability, 16:20 sources of law, 16:17–19 tax issues, 16:19–25 Multistate Tax Commission (MTC), 16:19 Municipal bonds, 10:3

N National Association of State Boards of Accountancy (NASBA), 2:28 National Office of the IRS, 2:8, 2:9 Natural resource costs, 5:38 Natural resources, 5:37 depletion of, 5:20 Net book value (NBV), 3:10–11 Net capital gain (NCG), 8:14–17, 8:18 alternative tax rates on, 8:15 computing, 4:19 modified taxable income, 11:37 net long-term gains, 8:14–17 short-term gains, 8:14 taxing, 4:19–20 Net capital loss (NCL), 8:17, 8:18 computing, 4:19 taxing, 4:19–20 Net earnings from self-employment, 11:32, 11:34 Net Income (Loss) Reconciliation for Corporations with Total Assets of $10 Million or More, Schedule M–3, 12:37–38 Net investment income, 4:27, 9:27, 10:18, 14:31 Net Investment Income Tax (NIIT), 9:26–27 Net long-term capital gain (NLTCG), 4:19, 8:2, 8:14–17 tax rates, 8:14–17

Net long-term capital loss (NLTCL), 4:19 Net operating loss (NOL), 6:13–14, 17:20–21 book-tax temporary differences, 3:4 carryforward provisions, 17:21 carryforwards and the 80 percent limit, 6:13–14 general rules, 6:13–14 S corporation treatment of, 15:23–25 Net regular tax liability, 17:3 Net short-term capital gain (NSTCG), 4:19, 8:14 Net short-term capital loss (NSTCL), 4:19, 8:2 Net unearned income of a dependent child, 9:25–26 Net worth, as a measure of income, 4:4 Netting procedure, Section 1231 gains and losses, 8:25–28 Netting process, capital gain and loss, 4:19, 8:17–20 capital loss carryovers, 8:19–20 special tax rates, 8:18–19 Netting process, personal casualty gains and losses, 6:11–12 Nexus, 16:19 tax planning strategies for, 16:21 No-additional-cost services, 11:13, 11:16 NOL. See Net operating loss NOL exception, dividends received deduction, 12:29 Nonaccountable plans, 11:28 failure to comply with accountable plan requirements, 11:28 Nonacquiescence (“NA” or “Nonacq.”), 2:15 Nonbusiness bad debt, 6:4 Nonbusiness expenses, deductions from AGI, 10:11 Noncash Charitable Contributions, Form 8283, 10:23 Noncash distributions consequences of, 15:20 partner’s basis, gain, and loss, 14:24–25 tax treatment of, 15:19–20 Noncash dividends, 13:13–16 effect on the corporation, 13:14–16 effect on the shareholder, 13:14 Noncorporate taxpayers, tax treatment of capital gains and losses of, 4:19–20, 8:14–21 capital gain and loss netting process, 8:17–20 net capital gains, 8:14–17 net capital losses, 8:17 small business stock, 8:20–21 Nondeductible contributions, IRAs, 11:29 Nondeductible expenses, book-tax permanent differences, 3:5 Nondeductible items, charitable contributions, 10:22–23 Nondiscrimination provisions, 11:15–16 Nonliquidating and liquidating distributions compared, 13:24–25 Nonliquidating property distribution, 13:24 Nonpersonal use capital assets, 8:24 casualty or theft of, Section 1231 assets, 8:24 Nonrecaptured net Section 1231 losses, 8:27 Nonrecognition, exceptions to, 14:9–10 disguised exchange, 14:9–10 disguised sale, 14:10 investment partnership, 14:9 services, 14:10 Nonrecognition of gain conversion into money, 7:28–29 direct conversion, 7:28 Nonrecourse debt, 6:14ft, 14:22–23, 14:27–28 Nonrecourse financing, qualified, 6:16 Nonresident alien (NRA), 16:16 small business corporation, 15:6 stock redemptions and, 13:23 U.S. taxation of, 16:16–17 Nonshareholders, 12:25 Nontax considerations, 12:6–7 Nontax factors affecting choice of business form, 18:3–6 Nontaxable economic benefits, 4:9 Nontaxable exchange, 7:18 general concepts, 7:18–19 special holding period rules, 8:11 treatment of for tax purposes versus financial accounting purposes, 7:7

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

INDEX Nontaxable income, book-tax permanent differences, 3:5 Nontaxable stock dividends, 7:10 Nontaxable transactions, depreciation recapture and, 8:34–35 Non-U.S. person’s income, U.S. income tax treatment of a, 16:17 Non-U.S. shareholders, stock redemptions and, 13:23 Notices, 2:8 citing of, 2:8 function of guidance, 2:8 Nursing home care, medical expenses, 10:12

Outsourcing of tax return preparation, 1:29 Overseas operations, book-tax differences and, 16:12 Owner-investor, replacement property, 7:26 Ownership and use tests, sale of a principal residence exclusion treatment, 7:30 Ownership interest, effect on basis of, tax consequences of organizational form choice, 18:9 Owner-user, replacement property, 7:26

O

Parents’ Election to Report Child’s Interest and Dividends, Form 8814, 9:26 Parker Tax Pro Library, 2:19 Partial recapture, 8:31 Participation active, 6:28 material, 6:22–24, 6:28 Partner and partnership, transactions between, 14:28–31 guaranteed payments, 14:29 partners as employees, 14:30–31 sales of property, 14:30 tax planning strategies for, 14:31 Partner-partnership transactions, 14:28–31 guaranteed payments, 14:29 partners as employees, 14:30–31 sales of property, 14:30 tax planning strategies for, 14:31 Partner’s basis, 14:7–8, 14:20–25 adjustments to, 14:21 capital changes, 14:25 gain and loss, 14:23–25 in partnership interest, 14:28 initial, 14:20–21 noncash distributions, 14:24–25 Partner’s ownership interest in a partnership, 14:6–8 Partners as employees, 14:30–31 Subchapter K, 2:5, 14:2 Partnership activities, tax reporting of, 14:18 Partnership agreement, 14:6–7 Partnership allocations, 14:18–20 economic effect, 14:19 precontribution gain or loss, 14:19 qualified business income deduction, 14:20 Partnership and partner, transactions between, 14:28–31 guaranteed payments, 14:29 partners as employees, 14:30–31 sales of property, 14:30 tax planning strategies for, 14:31 Partnership debt, recourse and nonrecourse, 14:22–23, 14:27–28 Partnership formation and basis computation, 14:13 Partnership interest basis in, 14:7–8 basis of, 14:20–23 initial basis in, 14:20–21 partner’s basis in, 14:28 partner’s holding period in, 14:11 Partnership liabilities, 14:22–23 ratable share of, 15:22 Partnership power, 14:3 Partnership taxation, overview of, 14:2–8 definition of a partnership, 14:3–4 forms of doing business—Federal tax consequences, 14:2–3 partner’s ownership interest in a partnership, 14:6–8 taxation and reporting, 14:4–6 Partnership taxation and reporting, 14:4–6 separately stated items, 14:5 tax reporting rules, 14:5–6 Partnership/LLC taxation, tax reporting, 14:9 Partnerships, 1:19, 14:2–3, 18:2 advantages and disadvantages of, 14:2–3, 14:33 assets of, by industry, 14:22 attractiveness of as a form of business, 14:34 capital formation, 18:5 conduit perspective, 18:2 consequences of noncash distributions, 15:20

OAA. See Other adjustments account Obligation to repay, amounts received under, 4:11 Obligations, retirement of corporate, 8:6 Occupational taxes, 1:15 Office in the home expenses, 11:25–26 exclusive use requirement, 11:26 Offset, right of, 7:15 Old age, survivors, and disability insurance, 1:10 On the employer’s business premises requirement, meals and lodging, 11:7–8 150 percent declining-balance depreciation depreciation of personal property, 17:17–18 MACRS for personal property, 5:23 One other residence, 10:19 “Only once every two years” rule, sale of a principal residence exclusion treatment, 7:30 Operating costs, 5:38 Options, 8:6–8 consequences to grantor and grantee, 8:8 exercise of by grantee, 8:6–7 failure to exercise, 8:7 sale of, 8:7 Ordinary and necessary, 5:2 Ordinary and necessary business expenses, 5:2–3, 11:32 Ordinary and necessary requirement, 5:2–3 Ordinary business income, Schedules K and K–1, 14:15 Ordinary income, 8:14, 8:28 partnerships, 14:5 sole proprietorship, 11:31 Ordinary income property, 5:18–19, 10:24 Ordinary loss, 6:6 business bad debt, 6:4 Organization for Economic Co-operation and Development (OECD), 12:2 Organizational expenditures, 12:30, 14:14 tax planning strategies for, 12:32 Organizational expenditures deduction, 12:30–31 Organizational form choice, tax consequences of, 18:6–12 effect on ability to specially allocate income among owners, 18:8 effect on application of at-risk and passive activity loss rules, 18:10–11 effect on basis of ownership interest, 18:9 effect on FICA taxes, 18:12 effect on income taxes, 18:12 effect on tax treatment of capital contributions, 18:9 effect on tax treatment of distributions, 18:11 effect on taxation of business operations, 18:7 Organizational forms of doing business, tax attributes and consequences of different, 18:23–26 Original basis, 7:4 Original issue discount, 4:11 Other adjustments account (OAA), 15:16, 15:17 Other disposition, 7:2 Outbound taxation, 16:3 Out-of-the-home expenses, credit for child and dependent care expenses, 10:29 Outside basis, 14:11, 14:12 effect of distributions and withdrawals on, 14:17–18

P

I-13

converting to another business form, 18:22 definition of, 14:3–4 disposing of, 18:18 entity perspective, 18:2 excess business loss limitation, 6:32 Form 1065, 1:19, 14:5–6 initial costs of, 14:13–14 limited liability companies, 14:32–33 movie industry and, 14:4 Schedule K, 14:6 Schedule K–1, 14:5–6 Schedule L, 14:6 Schedule M–1, 14:6 Schedule M–2, 14:6 Schedule M–3, 14:6 self-employment (SE) income, 14:30–31 self-employment tax, 14:31 statistics, 14:3 Subchapter K of Internal Revenue Code, 2:5, 14:2 tax attributes and consequences of, 18:23–26 tax treatment of business forms compared, 12:6 tax treatment of the disposition of a, 18:19 See also Business entities; Business forms Partnerships, operations of, 14:15–28 basis of a partnership interest, 14:20–23 distributions, 14:17–18 loss limitations, 14:25–28 partner’s basis, gain, and loss, 14:23–25 partnership allocations, 14:18–20 Schedules K and K–1, 14:15–18 withdrawals, 14:17–18 Partnerships, tax effects in formation of, 14:8–14 exceptions to nonrecognition, 14:9–10 gain or loss on contributions to the partnership, 14:8–9 initial costs of a partnership, 14:13–14 inside and outside bases, 14:12 tax accounting elections, 14:12–13 tax issues related to contributed property, 14:11–12 Passenger automobiles, 5:33ft Passive activities disposition of, 6:29–30 rules for determining, 6:22 Passive activity disposition of at death, 6:29–30 disposition of by gift, 6:30 Passive activity credits, 6:20 carryovers of, 6:20 deduction equivalent of, 6:28–29 Passive activity income, 6:17, 6:30–31 Passive activity income and loss carryovers of passive activity credits, 6:20 carryovers of suspended passive activity losses, 6:19 classification and tax treatment of, 6:17 general impact of, 6:18 impact of suspended losses, 6:18–19 passive activity changes to active, 6:20–21 passive activity credits, 6:20 Passive activity loss limits, 6:17–31 classification and tax treatment of passive activity income and loss, 6:17–21 disposition of passive activities, 6:29–30 interaction of at-risk and passive activity loss limits, 6:26–27 material participation, 6:22–24 rental activities, 6:24–25 rules for determining passive activities, 6:22 special passive activity rules for real estate, 6:27–29 taxpayers subject to the passive activity loss rules, 6:21–22 Passive activity loss rules, 6:15, 14:25, 18:10–11 effect on application of, tax consequences of organizational form choice, 18:10–11 key issues and answers, 6:25 partnerships, 14:28 taxpayers subject to, 6:21–22 Passive activity losses, 6:15, 6:17, 6:30–31 and credits, S corporation treatment of, 15:25 tax planning strategies for utilizing, 6:30–31 Passive income and loss, classification, 6:17

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

I-14

INDEX

Passive income generator (PIG), 6:30 Passive investment income (PII), 15:8–9, 15:29 Passive investment income penalty tax, S corporation, 15:29–30 pitfalls, tax planning strategies to avoid, 15:30 Passive trade or business, 6:32 Pass-through entities, 14:2 Patents, 8:8–9 holder defined, 8:9 substantial rights, 8:8–9 Patrons of Agricultural or Horticultural Cooperatives, 11:42 Pay-as-you-go procedures, 1:15 Payment of deficiency, 2:11–12 Payroll factor, 16:22–23, 16:25 Penalty accuracy-related, 2:23 failure to disclose, 2:6 on underpayments, 11:43 Percentage depletion, 5:39–40 AMT preferences, 17:23 Percentage depletion rates, 5:40 Percentage of completion method, 4:7, 17:19 Permanent book-tax differences. See Permanent differences Permanent differences, 1:21, 3:3, 12:38 nondeductible expenses, 3:5 nontaxable income, 3:5 tax credits, 3:5 Permanent establishment (PE), 16:5, 16:20 Personal exemptions, 9:6, 9:10 Personal expenses, deductions from AGI, 10:11 Personal holding company (PHC) tax, 13:26 Personal identification number (Self-Select PIN), 9:28–29 Personal injury damages, 10:9–10 physical, 10:9 Personal interest, deductibility of, 10:21 Personal nonrefundable credits, AMT liability and, 17:16 Personal property, MACRS for, 5:23–26 Personal property taxes, 10:16 Personal service corporation, 4:6, 6:21, 15:15 classification requirements, 18:11 See also Business entities; Business forms; C corporations; Closely held C corporation; Corporations; Regular corporations; S corporations Personal services, income from services of an employee, 4:13 Personal use assets, 5:21 converted to business or income-producing use, cost recovery basis for, 5:22–23 disallowed losses, 7:14 Personal use personalty, 1:14 Personal use property, 5:21 casualty and theft losses of individuals, 6:10–12 converted to business or income-producing use, 7:17 limitations on deductions of casualty losses, 6:10–12 netting process for casualty gains and losses, 6:11–12 partial or complete destruction of, 6:9 special rule on insurance recovery, 6:10 See also Personalty Personal use realty, 1:14 Personal wealth, maximizing, 10:3 Personalty, 1:13, 5:21 business use, 1:14 class lives, 5:28 conventions, 5:28 cost recovery periods/classes, 5:24 methods, 5:28 personal use, 1:14 taxes on, 1:14 Petitioner, 2:10, 2:22 Phaseout of traditional IRA deduction of an active participant in 2021, 11:28 Physical sickness, 10:9 PII. See Passive investment income Plaintiff, 2:10 Planning, relevance of taxation to accounting and finance professionals, 1:3 Points, 10:20

Political considerations special interest legislation, 1:31 state and local government influences, 1:31–32 tax law, 1:34 Political contributions, 5:10–11 Political science incentive-granting community, 16:27 tax law, 1:17 Portfolio income, 6:17 Post-election termination period, 15:18, 15:19 Practical Tax Strategies, 2:20 Precedent, 2:10, 2:13 Precontribution gain or loss, 14:19 Preferences, 17:23 Premium tax credit (PTC), 10:33 Premium Tax Credit, Form 8962, 10:33 Prepaid expenses, “12-month rule,” 5:7 Prepaid income, tax planning strategies for, 4:12 Prepaid interest, 10:20 Prepayment penalty, 10:20 Presumptive rule of profit-seeking, 11:44 Primary authority, 2:2 Primary sources of the tax law, 2:2, 2:22 Primary valuation amount, 7:13 Principal place of business, 11:25 Principal residence, 10:19 sale of a, 7:30 Private activity bonds, 17:24 Prizes, income from, 10:5 Pro rata basis allocation of current E & P, 13:7–9, 13:13 Procedural Regulations, 2:20 Production and sale of goods, taxes on, 1:7–9 Production or collection of income, expenses related to, 10:11 Profit and loss sharing ratios, 14:6 Profit or Loss from Business, Form 1040, Schedule C, 1:19, 11:2 Profits (loss) interest, 14:6 Progressive tax, 1:30 Progressive tax rate, 1:5–6, 9:2 Property, 12:10–11 adjusted basis of, 4:18, 7:4 amount realized from a sale or other disposition of, 7:3 AMT adjustments for depreciation of personal, 17:17–18 AMT adjustments for depreciation of real, 17:16–17 bargain purchase of, 7:8 bargain rental of corporate, 13:17 bargain sale of corporate to a shareholder, 13:17 basis adjustment for loss, 12:16–18 basis for depreciating converted, 7:17 basis for determining loss on converted, 7:17 basis of like-kind, 7:22–23 business use, 5:21 capital gain, 5:18–19, 10:24 classification and use of, 1:14 complete destruction of business or investment, 6:9 converted from personal use to business or income-producing use, 7:17 defined under Section 351, 12:10–11 depreciable real, 8:31 dispositions of, book-tax differences, 7:7 excluded under Section 1231, 8:24 fair market value of, 7:3 gain basis for converted, 7:17 holding period of, 8:2 included under Section 1231, 8:24 income from, 4:13–16 inherited, special holding period rules, 8:12 intangible, 1:14 intangible real, 8:31 involuntary conversion of, 7:24–29 like-kind, 7:19–20 manner of disposition, 8:2 nature of, 5:21–22 ordinary income, 5:18–19, 10:24 original basis of, 7:4 partial destruction of business or investment, 6:9 partial or complete destruction of personal use, 6:9 personal use, 5:21 qualified basis of, 17:8

replacement, 7:26–27 sales of, 14:30 Section 1245, 8:30 Section 1250, 8:31 shareholder use of corporate-owned, 13:17 shareholder’s basis of stock received in exchange for, 12:15 tangible, 1:14 tax-deferred transactions, 12:8–10 tax status of, 8:2 transfers of to controlled corporations, 12:8–10 used for personal purposes, limitations related to, 5:32–36 Property acquired from a decedent. See Inherited property Property dividend, 13:13 Property factor, 16:22–23, 16:25 Property placed in service maximum, Section 179 expensing election deduction limitations, 5:29 Property received, corporation’s basis in, 12:16 Property received as a gift, 7:10–12 adjustment for Federal gift tax paid, 7:11 basis for depreciation, 7:12 basis rules, 7:10–11 holding period, 7:12 Property settlements alimony and separate maintenance payments, 10:4 divorce decree, 10:4 Property taxation, general scheme of, 8:2 Property taxes, 1:2, 1:13–14 taxes on personalty, 1:14 taxes on realty, 1:13–14 Property transactions gains and losses from, 4:18–20 treatment of for tax purposes versus financial accounting purposes, 7:7 Proportional tax, 1:30 Form 1040, Schedule C, Profit or Loss from Business, 1:19 Proposed Regulations, 2:7 Proprietorship, 1:19 Form 1040, Schedule C, Profit or Loss from Business, 1:19 See also Sole proprietorships Provision process, 3:27 capturing, measuring, and recording tax expense, 3:7–17 Public charities, 10:24 Public economics, 4:20 Public finance, 15:26 Public Law 86–272, 16:19 Public policy, 2:16 Public policy limitations, 5:9–10 expenses incurred in illegal drug trafficking, 5:10 expenses of operating an illegal business, 5:10 Publicly traded corporations covered employees, 5:13 deduction limitation of compensation paid to covered employees, 5:13 Publicly traded partnerships, 18:6 Punitive damages, 10:9

Q QBI deduction, 14:20 Qualified business income (QBI), 11:35, 11:36, 14:20, 15:13 Tax Cuts and Jobs Act (TCJA) of 2017 and, 11:35 Qualified business income (QBI) deduction, 9:7, 11:35–42, 15:12–13 deductions from AGI, 1:16 effect on taxation of business operations, 18:7 limitations on, 15:12–13 overview of 2021, 11:41 reporting, 11:42 rules, Section 199A, 15:15 See also Deduction for qualified business income Qualified Business Income Deduction, Form 8995–A, 11:42 Qualified Business Income Deduction Simplified Computation, Form 8995, 11:42

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

INDEX Qualified charitable organization, 1:25 Qualified child care expenses, credit for employer-provided child care, 17:9–10 Qualified discounts on goods, 11:16 Qualified discounts on services, 11:16 Qualified dividends, 4:15 Qualified employee discounts, 11:13–14 Qualified fringe benefits, 11:4 Qualified higher education expenses, 10:10 Qualified improvement property, 5:27 Qualified moving expense reimbursements, 11:15, 11:16 Qualified nonrecourse financing, 6:16, 14:27 Qualified organizations, charitable contributions, 5:18 Qualified parking, 11:15 Qualified property depreciable period, 11:39 W–2 Wages/Capital Investment Limit, 11:39 Qualified real property business indebtedness, 4:23 Qualified real property indebtedness, 4:24 Qualified rehabilitation expenditures, rehabilitation expenditures credit, 17:5 Qualified research expenditures, incremental research activities credit, 17:6–7 Qualified residence, 10:19 Qualified residence interest, 10:19–20 deductibility of, 10:21 interest on acquisition indebtedness, 10:19 interest on home equity loans, 10:19 interest paid for services, 10:20 Schedule A, Form 1040, 10:21 Qualified retirement planning services, 11:15, 11:16 Qualified retirement savings programs, 10:3 Qualified small business stock, 8:15, 8:20 Qualified trade or business (QTB), 11:36 Qualified transportation fringes, 11:15, 11:16 Qualified tuition reduction plans, 10:7, 11:9 Qualifying child, 9:10–11 age test, 9:10–11 earned income credit, 10:32 relationship test, 9:10 residence test, 9:10 support test, 9:11 tiebreaker rules, 9:11 Qualifying relative, 9:12–15 gross income test, 9:12–13 relationship test, 9:12 support test, 9:13–15

R Rate reconciliation, 3:19, 3:20 Ratios capital sharing, 14:6 profit and loss sharing, 14:6 Real estate MACRS for, 5:26–28 special passive activity rules for, 6:27–29 tax planning strategies for selling depreciable, 8:33 Real estate professionals, 6:27–28 Real Estate Taxation, 2:20 Real estate taxes, 10:16 apportionment of, 5:16–17 Real estate 25% gain, 8:32 Real property depreciable, 8:31 intangible, 8:31 like-kind property, 7:19 See also Realty Realization, gross income, 4:5 Realization events, 7:2, 7:3 sale or other disposition of assets, 7:2 Realization principle, 4:4 Realized and recognized gain or loss, 7:7–8 Realized gain, 4:18, 7:2–6 adjusted basis, 7:4 amount realized, 7:3–4 calculation of, 7:3 capital additions, 7:4 capital recoveries, 7:4–6 original basis, 7:4 realization events, 7:2 Realized loss, 4:18, 7:2–6 adjusted basis, 7:4 amount realized, 7:3–4

calculation of, 7:3 capital additions, 7:4 capital recoveries, 7:4–6 original basis, 7:4 realization events, 7:2 Realty, 1:13, 5:21 business use, 1:14 class lives, 5:28 conventions, 5:28 methods, 5:28 personal use, 1:14 Reasonable compensation, 5:4 Reasonable prospect of full recovery, 6:8 Reasonableness, 18:13 closely held corporations and, 5:3 shareholder-employee compensation and, 5:4 Reasonableness requirement, 5:3 Recapture, 12:24 comparison of Section 1245 and Section 1250, 8:31 full, 8:29 partial, 8:31 Section 1245, 8:28–31 Section 1250, 8:31–33 tax planning for timing of, 8:35 Recapture considerations, basis determination and other issues, 12:24 Recapture provisions, 8:2 Receivables collection of by a cash basis taxpayer, 8:4 collection of by an accrual basis taxpayer, 8:4 contributed property, 14:12 Recognized and realized gain or loss, 7:7–8 Recognized gain, 4:18, 7:7–8 characteristics, 8:2 classification of, 8:2 Recognized loss, 4:18, 7:7–8 characteristics, 8:2 classification of, 8:2 Reconciliation of Income (Loss) per Books with Income per Return, Schedule M–1, 3:8, 12:35–37 Record date, 4:16ft Record-keeping requirements for charitable contributions, 10:23 Recourse debt, 14:22–23, 14:27 Recovery of capital, 18:15 Recovery of capital doctrine, 7:23 Refund due, computation of, 9:23–24 Regressive tax, 1:30 Regressive tax rate, 1:5–6 Regular corporations, 12:2 Subchapter C of Internal Revenue Code, 12:2 tax treatment of business forms compared, 12:6 See also Business entities; Business forms; C corporations; Closely held C corporation; Corporations; Personal service corporations; S corporations Regular decisions, 2:14 Regular tax liability, alternative minimum tax formula, 17:16 Regulation and oversight, 2:28 Regulation section, CPA examination, 2:27 Rehabilitation expenditures credit, 17:4–5, 17:12 qualified rehabilitation expenditures, 17:5 Related parties, 5:6 expenses accrued to, 5:6–7 loans between, 6:5 transactions between, 5:6–7, 7:14–15 Related-party transactions, 5:6–7, 7:14–15 relationships and constructive ownership, 5:6–7 Related-taxpayer loans, tax planning strategies for documentation of, 6:7 Relationship test members of the household, 9:12 qualifying child, 9:10 qualifying relative, 9:12 Rent or royalty property expenses, deductions for AGI, 10:11 Rental activity, 6:24–25 Rental car “surcharge,” 1:8 Rental property complete destruction of, 6:9 partial destruction of, 6:9

I-15

Rental real estate with active participation, 6:28–29 Repairs, cost of, 6:10 Replacement property, 7:26–27 functional use test, 7:26 special rule for condemnations, 7:27 taxpayer use test, 7:26–27 Replacement property tests, involuntary conversions, 7:26–27 Required annual payment, estimated tax for individuals, 11:42–43 Required as condition of employment, meals and lodging, 11:8 Research activities credit, 17:6–7, 17:12 basic research credit, 17:7 energy research credit, 17:7 incremental research activities credit, 17:6–7 Research and experimental expenditures, 5:14–16 deferral and amortization method of, 5:15–16 expense method, 5:15 Research expenditures, 17:6 Residence, inbound tax issues, 16:16 Residence test, qualifying child, 9:10 Residential rental real estate, 5:26 Respondent, 2:10, 2:22 Retirement plans contributions to, deductions for AGI, 9:5 for self-employed individuals, 11:33–35 tax planning strategies for factors affecting, 11:35 Revenue Procedures, 2:8 citing of, 2:8 function of guidance, 2:8 Revenue Rulings, 2:8, 2:21 citing of, 2:8 function of guidance, 2:8 Revenue-neutral, 2:19 Right of offset, 7:15 Rollovers and conversions, IRAs, 11:30 Roth IRAs, 11:29–30 compared with traditional IRAs, 11:31

S S corporation, operational rules, 15:10–26 allocation of income and loss, 15:13 computation of taxable income, 15:10–12 limitation on deduction of excess business losses, 15:25 qualified business income deduction (QBID), 15:12–13 shareholder’s basis in S stock, 15:21–23 tax treatment of distributions to shareholders, 15:14–19 tax treatment of noncash distributions by the corporation, 15:19–20 treatment of losses, 15:23–25 S corporation, qualifying status for, 15:3–10 definition of a small business corporation, 15:3–6 loss of the election, 15:7–10 making the election, 15:6 shareholder consent, 15:7 S corporation losses, treatment of, 15:24 S corporation rules, 15:30–31 S corporation shareholders, flow-through of items of income and loss to, 15:11 S corporation status, 15:8 conditions required to elect, 15:10 minimizing double taxation by electing, 18:16 tax planning strategies for when to elect, 15:4 S corporations, 1:20, 12:2, 14:2, 15:2 consequences of noncash distributions, 15:20 disposing of, 18:19 distributions from, 15:16 economic data, 15:30 entity-level taxes, 15:27–30 excess business loss limitation, 6:32 Form 1120S, 1:20, 14:15 income tax returns filed (%), 2017 tax year, 15:5 income tax returns filed by number of shareholders, 2014 tax year, 15:14 overview of, 15:2–3

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

I-16

INDEX

S corporations (continued) Subchapter K of Internal Revenue Code, 12:2 tax attributes and consequences of, 18:23–26 tax treatment of business forms compared, 12:6 tax treatment of the disposition of, 18:20–21 See also Business entities; Business forms S election effect of terminating the, 15:18–19 Form 2553, 15:6 loss of the election, 15:7–10 making the election, 15:6 shareholder consent, 15:7 tax planning strategies for making a proper, 15:7 tax planning strategies for preserving the, 15:9 Safe harbor provisions, reclassification of debt as stock, 15:4 Salary structure, tax planning strategies for, 15:15 Sale of a business covenant not to compete, 5:37 goodwill, 5:37 tax planning strategies for structuring the, 5:37 Sale of a principal residence requirements for exclusion treatment, 7:30 Section 121, 7:30 Sale of goods, taxes on the production and, 1:7–9 Sales factor, 16:22–23, 16:25 Sales-factor-only apportionment procedure, 16:22–23 Sales of inventory, tax planning strategies for sourcing income from, 16:9 Sales of property, 14:30 Sales taxes, 1:2, 1:5 deductibility of state and local, 10:16–17 Same-sex couple, filing status, 9:19 Savings incentive match plan for employees. See SIMPLE plan Schedule 1, Form 1040, 9:28, 10:3, 11:32, 11:43 Schedule 2, Form 1040, 9:28 Schedule 3, Form 1040, 9:28 Schedule A Form 1040, Itemized Deductions, 10:12, 10:21 Form 8995-A, Specified Service Trades or Businesses, 11:42 Schedule B, Form 8995–A, Aggregation of Business Operations, 11:42 Schedule C Form 1040, Profit or Loss from Business, 1:19, 9:28, 10:21, 11:2, 11:31 Form 8995-A, Loss Netting and Carryforward, 11:42 Schedule D, Form 8995–A, Patrons of Agricultural or Horticultural Cooperatives, 11:42 Schedule E, Form 1040, interest expenses related to rents or royalties, 10:21 Schedule K, Form 1065, 14:6 guaranteed payments, 14:29 partnership operations, 14:6, 14:15–18 Schedule K–1 guaranteed payments, 14:29 partnership operations, 14:5–6, 14:15–18 Schedule L, partnerships, 14:6 Schedule M–1, Reconciliation of Income (Loss) per Books with Income per Return, 3:8, 8:30, 12:35–37, 14:6 conceptual diagram of, 12:36 Schedule M–2—Analysis of Unappropriated Retained Earnings per Books, 12:37, 14:6, 15:17, 15:18 Schedule M–3—Net Income (Loss) Reconciliation for Corporations with Total Assets of $10 Million or More, 8:30, 12:37–38 partnerships, 14:6 Schedule SE, Form 1040, 1:10, 9:28 Schedule UTP, Uncertain Tax Position Statement, 12:38 Scholarships, 10:7–8 general information, 10:7–8 timing issues, 10:8

Secondary materials of the tax, 2:22 Section 1, individual tax rate, 1:6 Section 11, corporate tax rate, 1:6 Section 61, definition of gross income, 1:23, 4:2, 9:2, 11:32 Section 86, exclusion from gross income of Social Security benefits, 11:6 Section 101, gross income exclusion of life insurance proceeds received by reason of death of the insured, 4:17–18, 11:6 Section 103, gross income exclusion of interest on state and local bonds, 4:17 Section 105 exclusion of payments for permanent loss or loss of use of a member or function of the body or permanent disfigurement, 11:5 exclusion of payments received for medical care, 11:5 insurance benefits as employee includible income, 11:5 Section 108, gross income exclusion of income from discharge of indebtedness, 4:18 Section 109, gross income exclusion of the fair market value of leasehold improvements received by the lessor when a lease is terminated, 4:18 Section 121, sale of a principal residence, 7:30, 11:6 Section 139F, wrongful incarceration, 10:11 Section 161 business deductions, 5:2 deduction limitation of individuals’ expenses, 9:2 Section 162, ordinary and necessary business expenses, 9:2, 11:32 Section 170, contributions to qualified domestic organizations, 10:21 Section 179 expensing election, 5:28–30, 5:32, 11:22 computing E & P, 13:6 deduction limitations, 5:29–30 depreciation of personal property, 17:17 effect on basis, 5:30 tangible personal property, 18:15 Section 197 intangible assets, contributed property, 14:11 Section 199A, 14:20 comparison of corporations and other forms of doing business, 12:4–5 depreciable period for qualified property, 11:39 qualified business income, 11:36–37, 15:15 Section 217, qualified moving expenses, 11:15 Section 248, election to deduct and amortize organizational expenditures, 12:30–31 Section 262, sale or exchange of personal use assets, 8:12 Section 267, transactions between related parties, 5:6–7, 7:14–15, 8:12 Section 274 qualified transportation fringes, 11:15 substantiation requirements, 5:36 Section 291, additional recapture for corporate taxpayers, 8:32–33 Section 351 capital contributions to corporation, 18:9 80 percent control requirement, 18:9 incorporation of a foreign business, 12:19 property defined under, 12:10–11 rationale and general rules, controlled corporations, 12:8–10 requirements for nonrecognition of gain or loss, 12:10 services defined under, 12:10 tax consequences to shareholders and corporations (with and without the application of), 12:17 tax planning strategies for avoiding, 12:23 tax planning strategies for utilizing, 12:13 transactions, basis determination and other issues, 12:15–19 transfers of property to controlled corporations, 12:8–10 Section 357, assumption of liabilities under, 12:19–22 Section 367, tainted assets under, 12:19 Section 385, classification of debt and equity as wholly or part, 12:28

Section 461, limitation on deduction of net business losses, 15:25 Section 469 passive activity loss rules, excess business loss limitation and, 6:17–21, 6:32 Section 721 capital contributions to partnership, 18:9 deferral of recognition of realized gain or loss under, 14:8 Section 1031, like-kind exchanges, 7:19–24, 12:8–10 Section 1033, involuntary conversions, 7:24–29 Section 1045, deferral of gain for qualified small business stock, 18:15 Section 1202, partial exclusion of gain for certain small business stock, 18:15 Section 1221, definition of a capital asset, 8:3–5, 8:23 Section 1231 assets, 8:2 condemnation gains and losses, 8:24 definition of, 8:24 relationship to capital gains and losses, 8:23 Section 1231 gains and losses, 8:23–28 general procedure for computation, 8:25–28 Section 1231 lookback provision, 8:27 Section 1231 netting procedure, 8:28 Section 1231 property, 8:23 Section 1233, short sales, 8:12–13 Section 1235, substantial rights (patent), 8:8 Section 1244 stock, 6:5–6, 8:6, 18:15 losses, tax planning strategies for maximizing the benefits of, 6:6 Section 1245 property, 8:30 Section 1245 recapture, 8:28–31 comparison with Section 1250 recapture, 8:31 observations on, 8:30–31 Section 1250 gain, unrecaptured, 8:32 Section 1250 property, 8:31 Section 1250 recapture, 8:31–33 additional recapture for corporations, 8:32–33 comparison with Section 1245 recapture, 8:31 unrecaptured gain (real estate 25% gain), 8:32 Section 1259, constructive sale treatment (short sales), 8:13 Section 7702B, limited exclusion from gross income of long-term care insurance premiums and benefits, 11:6 Sections 105 and 106, exclusion from gross income of medical insurance premiums and benefits, 11:6 Sections 401–436, tax-deferral treatment of retirement plans, 11:6 Securities, 12:11 dealer in, 8:4 holding period of new, 7:16 substantially identical stock or, 2:23, 7:15 tax-exempt, 10:20 worthless, 6:5 Securities and Exchange Commission, 5:9, 5:10 regulation and oversight, 2:28 Securities options, 8:7 Self-directed retirement plan, 11:33 Self-employment, net earnings from, 11:32, 11:34 Self-employed individuals, 11:2 retirement plans for, 11:33–35 Schedule C, Form 1040, 11:2 Schedule SE, Form 1040, 1:10 tax planning strategies for, 11:4 Self-employment (SE) income, partnerships, 14:30–31 Self-employment tax, 1:10, 11:4 11:32–33 deductions for AGI, 9:5 funding of retirement and health care entitlements, 15:26 partnerships, 14:31 Seller cancellation, 4:24–25 Senate, 2:4 Senate Finance Committee, 2:4 Separate foreign tax credit income categories, 16:11 Separately stated items, 14:5 Schedules K and K–1, 14:15 Separation of ownership and management, nontax factor affecting choice of business form, 18:5

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

INDEX Series EE savings bonds, 10:10 Services contribution of, 10:22 corporate treatment when stock is issued for, 12:18 defined under Section 351, 12:10 exceptions to nonrecognition, 14:10 interest paid for, 10:20 no-additional-cost, 11:13 Services of an employee, personal services, 4:13 7.5%-of-AGI floor, medical expenses, 10:12 Severance taxes, 1:15 Shareholder cancellation, 4:25 Shareholder consent, S corporation status, 15:7 Shareholder consequences, taxable corporate formation versus tax-deferred Section 351 transaction, 12:9 Shareholder-employee, salary versus distributions in S corporation, 15:15 Shareholder-employee compensation, reasonableness, 5:4 Shareholder limit, tax planning strategies for, 15:6 Shareholder limitations, small business corporation, 15:5–6 Shareholder’s basis in S stock, 15:21–23 shareholder loans to S corporations, 15:21–22 stock basis adjustments, 15:21 Shareholder’s basis of stock received in exchange for property, 12:15 Shareholders bargain rental of corporate property by, 13:17 bargain sale of corporate property to, 13:17 basis of stock to, 12:15 effect of noncash dividends on, 13:14 flow-through of items of income and loss to S corporation, 15:11 income tax returns filed by number of S corporation, 2014 tax year, 15:14 loans to, 13:18 loans to S corporations, 15:21–22 payments for the benefit of, 13:17 perspective of dividends to, 13:2 treatment of constructive dividends, 13:18–21 U.S., 16:12 use of corporate-owned property by, 13:17 Shareholders, tax treatment of distributions to S corporation, 15:14–19 accumulated adjustments account (AAA), 15:17, 15:18 effect of terminating the S election, 15:18–19 other adjustments account (OAA), 15:17 S corporation with AEP, 15:16–17 S corporation with no AEP, 15:15–16 Schedule M–2, 15:18 Shares of stock, freely transferable, 12:7 Shifting income and deductions across time, tax planning strategies for, 9:23 from high-bracket taxpayers to low-bracket taxpayers, 1:25–26 from high-bracket years to low-bracket years, 1:25 from high-tax jurisdictions to low-tax jurisdictions, 1:26 from parents to children, 9:25 tax planning fundamentals, 1:25–26 Short sales, 8:12–13 Short-term capital gain (STCG), 4:19, 8:14 Short-term capital loss (STCL), 4:19 nonbusiness bad debt, 6:4 Short-year election, 15:14 Significant participation activity, 6:23 SIMPLE plans, 11:34–35 Single taxpayers, filing status, 9:18 Small business encouragement of, 1:29 tax benefits for, 18:15 Small business corporation, 15:3 definition of, 15:3–6 requirements for qualifying for, 15:3–6 Small Business Health Options Program (SHOP) Marketplace, 17:10

Small business stock (Section 1244 stock), 6:5–6, 8:20–21 exclusion, AMT preferences, 17:25 special gain exclusion, 8:20–21 Small business stock (Section 1244 stock) losses, 6:5–6 tax planning strategies for maximizing the benefits of, 6:6 Small Cases Division of the U.S. Tax Court, 2:10 Small employer health insurance credit, 17:10, 17:12 Social considerations, tax law, 1:33 Social Security, 1:10 Social Security benefits, 10:6 Social Security tax, 1:10 Sociology, tax law, 1:17 Sole proprietorships, 18:2 accounting methods, 11:31–32 accounting periods, 11:31–32 capital formation, 18:5 converting to another business form, 18:21 disposing of, 18:17 reporting of income and expenses, 11:31 Schedule C, Form 1040, 11:31 tax attributes and consequences of, 18:23–26 tax treatment of business forms compared, 12:6 tax treatment of the disposition of, 18:19 Solicitation of orders, 16:19 Special allocation, 14:7 Special rule for condemnations, replacement property, 7:27 Specific charge-off method, 6:3–4 business debt, 6:3 nonbusiness debt, 6:3 tax treatment of bad debts using, 6:4 Specific fact situations, 2:8 Specific identification, cost identification problems, 7:9 Specified service trade or business, 11:40 Specified Service Trades or Businesses, Schedule A, Form 8995–A, 11:42 Specified services businesses, QBI limitation for, 11:40, 11:42 Specified Services Limit, phase-in of, 11:42 Spouse, medical expenses for, 10:13 Spread, 17:19 Standard deduction, 1:16, 9:6, 9:21 additional (age 65 or older or blind), 9:8–9 AMT adjustments, 17:21 basic, 9:8–9 basic amounts, 9:8 limitations on for dependents, 9:9 Standard Federal Tax Reporter, 2:19 Standard mileage method, 11:19 Startup costs, partnerships, 14:14 Startup expenditures, 5:8–9, 12:31 Startup expenses. See Startup expenditures State and local income taxation in the United States, crossing state lines, 16:17–25 sources of law, 16:17–19 tax issues, 16:19–25 State corporate income tax liability, computing, 16:20 State corporate income tax modifications, 16:20–21 State death taxes, 1:11–12 State excise taxes, 1:8 State income taxes, 1:17 and the tax expense, 16:24 comparison of corporations and other forms of doing business, 12:5–6 deductibility of, 5:17 State tax expenses, 16:24 State tax revenue sources, 16:18 State/local tax expenses, 16:24 Statutory depletion, 5:39 Statutory sources of the tax law, 2:2–6 arrangement of the Internal Revenue Code, 2:5 citing the Code, 2:5–6 effect of treaties, 2:6 legislative process, 2:3–4 origin of the Internal Revenue Code, 2:2–3 Statutory tax law changes, effects of, 3:25 Statutory tax rate, 1:6 Stock corporate treatment of when issued for services, 12:18

I-17

disposing of C corporation as sale of, 18:18–19 dividend income, 4:16 holding period of new, 7:16 substantially identical securities or, 2:23, 7:15 Stock basis adjustments, 15:21 Stock buybacks, 13:22 Stock dividends, 13:21–22 nontaxable, 7:10 Stock options, 8:7 Stock received exchange for property, shareholder’s basis of, 12:15 Stock redemptions, 13:22–24 capital gain/loss treatment of, 13:23 non-U.S. shareholders and, 13:23 tax planning strategies for, 13:24 Stock transferred, controlled corporations, 12:11 Straight-line method depreciation of real property, 17:17 election of, 5:23, 5:26 listed property and, 5:32 MACRS for personal property, 5:23 Student loan interest deductibility of, 10:21 deductions for AGI, 10:17–18 Student loans, 4:25 Subchapter C, Internal Revenue Code, 1:19, 2:5, 12:2 Subchapter designations, Internal Revenue Code, 2:5 Subchapter K, Internal Revenue Code, 2:5, 12:2, 14:2 Subchapter S, Internal Revenue Code, 1:20, 2:5, 15:2 Subpart F income, 16:12–15 controlled foreign corporation and, 16:13 Substance over form doctrine, 1:33 Substantial authority, 2:23, 3:21–22 Substantial economic effect, 18:8 Substantial presence test, 16:16 Substantial rights, patents, 8:8–9 Substantially identical stock or securities, 2:23, 7:15, 8:13 Substantially rehabilitated, 17:5 Substantiation, accountable plan for reimbursement of employee expenses, 11:27 Substantiation requirements, 5:36 Substituted basis, 12:15, 14:11 Sudden event, casualty loss, 6:7 Support test children of divorced or separated parents, 9:15 multiple support agreements, 9:14 qualifying child, 9:11 qualifying relative, 9:13–15 Supreme Court. See U.S. Supreme Court Supreme Court Reporter (S.Ct.), 2:16 Surviving spouse, 9:19 Suspended losses, tax planning strategies for working with, 15:23 Suspended passive activity losses carryovers of, 6:19 impact of, 6:18–19 Syndication costs, 14:13

T Tables, cost recovery, 5:40–44 Tainted assets, 12:19 Tangible asset costs, 5:38 Tangible assets, depreciation of, 5:20 Tangible property, personalty, 1:14 Tariffs, 1:14 Task-based simulations (TBSs), CPA examination, 2:27–28 Tax accounting elections, partnerships, 14:12–13 Tax adjusted bases (AB), 3:10–11 Tax and book depreciation, 5:31 Tax attributes and consequences of different organizational forms of doing business, 18:23–26 C corporation, 18:23–26 limited liability company, 18:23–26 partnership, 18:23–26 S corporation, 18:23–26 sole proprietorship, 18:23–26

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

I-18

INDEX

avoidance, 1:22 bases, 1:6–7 benefit rule, 4:25, 17:21 benefits of uncertain tax positions under ASC 740–10, recognizing, 3:22 Tax bills, legislative process for, 2:3 Tax Center, 2:19 Tax collections, profile of, 1:13 Tax compliance, 2:2, 3:26 Tax concept of income, comparing accounting concept and, 4:5 Tax consequences of liability assumption, 12:22 Tax consequences of organizational form choice, 18:6–12 effect on ability to specially allocate income among owners, 18:8 effect on application of at-risk and passive activity loss rules, 18:10–11 effect on basis of ownership interest, 18:9 effect on FICA taxes, 18:12 effect on income taxes, 18:12 effect on tax treatment of capital contributions, 18:9 effect on tax treatment of distributions, 18:11 effect on taxation of business operations, 18:7 Tax consequences to the shareholders and corporation (with and without the application of Section 351), 12:17 Tax controversy, 3:26 Tax conventions, 2:6 Tax Court of the United States Reports (T.C.), 2:14 Tax credits, 9:24, 10:27–33, 17:2, 17:11–12 adoption expenses credit, 10:28 American Opportunity credit, 10:30–32 book-tax permanent differences, 3:5 child and dependent tax credit, 10:28–29 child tax credit, 10:28–29 contributions in exchange for state and local, 10:22 credit for child and dependent care expenses, 10:29–30 credit for employer-provided child care, 17:9–10, 17:12 credit for employer-provided family and medical leave, 17:11, 17:12 credit for small employer pension plan startup costs, 17:9, 17:12 dependent tax credit, 10:28–29 disabled access credit, 17:2, 17:8–9, 17:12 earned income credit, 10:32–33 education, 10:30–32 energy credits, 17:8, 17:12 foreign tax credit, 17:2, 17:13 general business credit, 17:2–3, 17:11 lifetime learning credit, 10:30–32 low-income housing credit, 17:7–8, 17:12 rehabilitation expenditures credit, 17:4–5, 17:12 research activities credit, 17:6–7, 17:12 small employer health insurance credit, 17:10, 17:12 tax minimization strategies related to, 1:28 versus income tax deduction, 1:28, 17:2 work opportunity tax credit, 17:5–6, 17:12 See also Business tax credits; Individual tax credits Tax Cuts and Jobs Act (TCJA) of 2017, 2:8 AMT and, 17:14 broad-based changes to MACRS, 11:39 business expenses, 11:18 child tax credit, 2:4 corporate tax rate, 11:35 exemptions and, 9:10 Federal corporate tax rates and, 3:25 independent contractor expenses, 11:18 international competitiveness, 12:2 itemized deductions and, 9:8 qualified business income (QBI), 11:35 Tax deductions, 9:24, 10:2 tax planning strategies for the time value of, 5:5 Tax deferral, 4:9 accelerate recognition of deductions to achieve, 1:25 postpone recognition of income to achieve, 1:24 Tax Tax Tax Tax

Tax department, functions of, by percent of time spent, 3:26 Tax depreciation deductions Federal income tax purposes, 5:31 generally accepted accounting principles (GAAP), 5:31 Tax determination, 9:22–27 additional taxes for certain individuals, 9:26–27 computation of net taxes payable or refund due, 9:23–24 kiddie tax, 9:25–26 Tax Rate Schedule method, 9:22 Tax Table method, 9:23 unearned income of dependent children, 9:25–26 Tax disclosures in financial statements, 3:18–21 Tax due (or refund), 4:3 Tax evasion, 1:22 Tax Executive, 2:20 Tax expense, capturing, measuring, and recording, 3:7–17 Tax expenses local, 16:24 state, 16:24 state/local, 16:24 Tax Fact A “Small” Business Corporation, 15:14 A Profile of Tax Collections, 1:13 Business Tax Credits, 17:3 Capital Gains for the Wealthy?, 8:22 Corporations’ Reporting Responsibilities, 12:5 How Much and What Type of Income?, 4:14 Partnership Power, 14:3 Revenue Relevance of Corporate versus Individual Taxpayers, 18:5 Scope of the U.S. Tax System, 2:3 State Tax Revenue Sources, 16:18 The Inbound Sector, 16:16 The Relative Popularity of Flow-Through Entities, 18:4 The S Corporation Economy, 15:30 The U.S. Federal Income Tax, 1:27 U.S. Income Tax Treaties in Force, 16:6 What Do Partnerships Do?, 14:22 What Mode of Tax Filing Is Right for You?, 9:29 Where Do We Stand?, 16:8 Who Pays Dividends?, 13:3 Tax file memorandum, 2:24 Tax formula, 1:5, 4:2–3 components of, 4:2–3 individual, 9:2–7 tax minimization strategies and, 1:23 Tax formula components, 4:2–3 deductions, 4:3 exclusions, 4:2 gross income, 4:2–3 income (broadly defined), 4:2 tax due (or refund), 4:3 taxable income, 4:3 Tax Foundation, 12:2 Tax haven, 16:27 Tax home, determining for travel expenses, 11:20 Tax issues, multinational transactions, 16:5–17 additional tax for base erosion, 16:15 authority to tax, 16:5–7 controlled foreign corporations, 16:12–15 foreign tax credit, 16:9–11 inbound issues, 16:16–17 income sourcing, 16:7–9 special tax rate for intangible income, 16:15–16 Tax issues, multistate businesses authority to tax, 16:19–20 income measurement, 16:20–24 Tax issues related to contributed property, 14:11–12 depreciation method and period, 14:11 intangible assets, 14:11 receivables, inventory, and built-in losses, 14:12 Tax law economic considerations, 1:28–29, 1:33 equity considerations, 1:30–31, 1:34 influence of IRS on, 1:32, 1:34 influence of the courts on, 1:32–33, 1:34 judicial sources of, 2:10–16

partners as employees, 14:30–31 political considerations, 1:31–32, 1:34 primary authority, 2:2 primary sources of, 2:2, 2:22 revenue needs, 1:28 secondary materials, 2:22 social considerations, 1:29–30, 1:33 understanding the Federal, 1:28–33 Tax law sources, 2:2–16 administrative, 2:6–9 judicial, 2:10–16 primary, 2:2, 2:22 secondary, 2:22 statutory, 2:2–6 tax commentary, 2:19–20 tax services, 2:19 Tax law sources, assessing for tax research, 2:20–23 assessing the significance of a Treasury Regulation, 2:20–21 assessing the significance of judicial sources of the tax law, 2:21–22 assessing the significance of other administrative sources of the tax law, 2:21 assessing the significance of other sources, 2:22–23 interpreting the Internal Revenue Code, 2:20 understanding judicial opinions, 2:22 Tax legislation, 2:19 Tax liability, 1:5 Tax losses and the deferred tax asset, 3:15 Tax Management Portfolios, 2:19 Tax minimization strategies related to credits, 1:28 related to deductions, 1:24–25 related to income, 1:23–24 related to tax credits, 1:28 related to tax rates, 1:25–27 Tax Notes, 2:9, 2:20 Tax Notes International, 2:20 Tax Notes State, 2:20 Tax on pre-election built-in gain general rules, 15:27–28 LIFO recapture tax, 15:29 S corporation, 15:27–29 Tax payments, estimated, 11:42–43 penalty on underpayments, 11:43 Tax planning, 1:22, 1:33, 3:26 avoidance versus evasion, 1:22 general framework for, 1:22–23 overview of, 1:21–22 strategies, 1:23 Tax planning fundamentals, 1:21–28 general framework for income tax planning, 1:22–23 overview of tax planning and ethics, 1:21–22 tax minimization strategies related to credits, 1:28 tax minimization strategies related to deductions, 1:24–25 tax minimization strategies related to income, 1:23–24 tax minimization strategies related to tax rates, 1:25–27 Tax planning process, 2:2 Tax planning strategies accumulated adjustments account, 15:19 avoid PII pitfalls, 15:30 avoiding or minimizing the effect of the kiddie tax, 9:25 avoiding preferences and adjustments, 17:25 avoiding Section 351, 12:23 avoiding wash sales, 7:17 beating the 100-shareholder limit, 15:6 cash receipts method, 4:8 constructive dividends, 13:19–20 control the timing of preferences and adjustments, 17:22 corporate distributions, 13:11–12 corporate liquidations, 13:25 effective utilization of itemized deductions, 10:27 factors affecting retirement plan choices, 11:35 for documentation of related-taxpayer loans, casualty losses, and theft losses, 6:7

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

INDEX gift planning, 7:12 gifts of appreciated securities, 8:15 income of certain children, 9:25 income shifting, 16:25 inherited property, 7:14 life insurance, 4:22 like-kind exchanges, 7:20 loss considerations, 15:24–25 make your own tax shelter, 14:26 making a proper election, 15:7 managing the built-in gains tax, 15:28 matching gains with losses, 8:20 maximizing the benefits of small business (Section 1244 stock) losses, 6:6 multiple support agreements and the medical expense deduction, 9:15 nexus, 16:21 organizational expenditures, 12:32 other AMT planning strategies, 17:27 other considerations when incorporating a business, 12:24 prepaid income, 4:12 preserving the S election, 15:9 problems with a joint return, 9:16 recognizing involuntary conversion gains, 7:29 salary structure, 15:15 self-employed individuals, 11:4 selling depreciable real estate, 8:33 shifting income and deductions across time, 9:23 sourcing income from sales of inventory, 16:9 stock redemptions, 13:24 structuring the sale of a business, 5:37 switching depletion methods, 5:40 techniques for reducing investment income, 4:17 time value of tax deductions, 5:5 timing capital gains, 8:13 timing of recapture, 8:35 timing the payment of deductible taxes, 10:17 transactions between partners and partnerships, 14:31 transportation and travel expenses, 11:22 unreasonable compensation, 5:4 utilizing passive activity losses, 6:30–31 utilizing Section 351, 12:13 utilizing the foreign tax credit, 16:10 when to elect S corporation status, 15:4 working with suspended losses, 15:23 Tax practitioners, tax planning, 1:22 Tax professionals, 1:33 Tax provision, 3:7–17 current tax expense, 3:8–9, 3:27 deferred tax expense, 3:9–14, 3:27 valuation allowance, 3:14–17 Tax publications, 2:19–20 Corporate Taxation, 2:20 Estate Planning, 2:20 Journal of International Taxation, 2:20 Journal of Multistate Taxation and Incentives, 2:20 Journal of Taxation, 2:20 Practical Tax Strategies, 2:20 Real Estate Taxation, 2:20 Tax Executive, 2:20 Tax Notes, 2:20 Tax Notes International, 2:20 Tax Notes State, 2:20 Taxation of Exempts, 2:20 The ATA Journal of Legal Tax Research, 2:20 The Tax Adviser (AICPA), 2:20 Tax rate average, 1:6 effective, 1:6 marginal, 1:6 progressive, 1:5–6 proportional, 1:5–6 regressive, 1:5–6 statutory, 1:6 Tax rate changes, effects of statutory, 3:25 Tax Rate Schedule for single taxpayers (2021), 9:22 Tax Rate Schedule method, 9:22 Tax Rate Schedules, 9:22 married taxpayers joint return, 9:18 Tax rates, 1:5–6 comparison of corporations and other forms of doing business, 12:4

in non-U.S. jurisdictions, 16:18 Medicare, 1:10 Social Security, 1:10 tax minimization strategies related to, 1:25–27 Tax reporting of partnership activities, 14:18 Tax reporting rules, partnerships, 14:5–6 Tax research, 2:17 arriving at the solution or at alternative solutions, 2:23 assessing tax law sources, 2:20–23 best practices, 2:25–26 communicating, 2:23–25 identifying the problem, 2:18 locating the appropriate tax law sources, 2:18–20 on the CPA examination, 2:27–29 refining the problem, 2:18 updates, 2:25 working with the tax law, 2:17–26 Tax research process, 2:17 Tax return filing procedures, 9:27–29 e-file approach, 9:28–29 modes of payment, 9:29 selecting the proper form, 9:27–28 when and where to file, 9:29 Tax return preparation, outsourcing of, 1:29 Tax services CCH AnswerConnect, 2:19 CCH IntelliConnect, 2:19 Checkpoint, 2:19 Parker Tax Pro Library, 2:19 Tax Center, 2:19 Tax Management Portfolios, 2:19 Tax shelter problem, 6:14–15 Tax shelters, 6:14–15 tax planning strategies for making your own, 14:26 Tax status of property, 8:2 Tax system incidence of taxation, 1:6 scope of the U.S., 2:3 structure of, 1:5–7 Tax Table method, 9:23 Tax treaties, 16:5 effect of, 2:6 permanent establishment (PE), 16:5 Tax treatment of bad debts using the specific charge-off method, 6:4 Tax treatment of disposition of a business, 18:19–21 Tax Treatment of S corporations and Their Shareholders, Subchapter S, 2:5 Tax uncertainties, financial accounting for, 3:21–24 initial measurement, 3:22–23 initial recognition, 3:21–22 subsequent events, 3:23–24 Taxable bonds, 10:3 Taxable estate, 1:11 Taxable income, 1:18, 1:21, 9:7, 10:2 computation of, 9:7 computation of E & P with additions to, 13:3–4 computation of E & P with subtractions from, 13:4 determining, 4:3 QBI deduction phaseout for a specified services business, 11:42 S corporation computation of, 15:10–12 worldwide, 16:10 Taxable income limitation, 12:28–29 Taxable year, 4:6 Taxation how to study, 1:3–4 incidence of, 1:6 of interest on Federal government bonds, 4:20–21 of interest on state and local government bonds, 4:20–21 relevance of taxation to accounting and finance professionals, 1:2–3 U.S. worldwide approach to, 9:21 worldwide system of business, 17:13 Taxation of cross-border income dividends received deduction, 16:7 territorial approach, 16:5–7 worldwide approach, 16:5–7 Taxation of damages, 10:9 Taxation of Exempts, 2:20

I-19

Taxation of multinational transactions, U.S., 16:2–17 sources of law, 16:4–5 tax issues, 16:5–17 Tax-deferred property transactions, 12:8–10 Taxes, 10:15–17 ad valorem, 1:13 Additional Medicare Tax on higher-income taxpayers, 9:26–27, 14:31 and tax expense, state/local, 16:24 business deductions, 5:16–17 corporate income, 1:2 death, 1:11–12 deductible and nondeductible, 10:16 direct, 1:2, 1:7 distinguished from fees, 10:15 effect of on financial statements, 12:38 effect on FICA, tax consequences of organizational form choice, 18:12 effect on income, tax consequences of organizational form choice, 18:12 employment, 1:5, 1:9–11 entity-level, 15:27–30 Federal collections, 1:13 Federal customs duties, 1:14 Federal estate, 1:11 Federal excise, 1:2, 1:7–8 Federal gift, 1:12–13 FICA, 1:9, 1:10 foreign, deductibility of, 5:17 franchise, 1:15 FUTA, 1:9 general sales, 1:8 in United States, overview of, 1:18 income, 1:2, 1:5–6, 1:15–17 indirect, 1:2, 1:7 individuals and, 1:4 inheritance, 1:11 itemized deductions, AMT adjustments, 17:21 local excise, 1:8 local income, 1:17, 5:17 Medicare, 1:10 miscellaneous state and local taxes, 1:15 Net Investment Income Tax (NIIT), 9:26–27 occupational, 1:15 on personalty, 1:14 payment by check or money order, 9:29 payment by credit card, 9:29 personal property taxes, 10:16 progressive or regressive, 1:30 property, 1:2, 1:13–14 proportional, 1:30 real estate, 10:16 sales, 1:2, 1:5 self-employment, 1:10 severance, 1:15 Social Security, 1:10 state and local income and sales, 10:16–17 state death, 1:11–12 state excise, 1:8 state income, 1:17 tax planning strategies for timing the payment of deductible, 10:17 unemployment, 1:10–11 use, 1:8–9 value added tax, 1:9 Taxes, types of, 1:7–18 employment taxes, 1:9–11 gift tax, 1:12–13 income taxes, 1:15–17 other U.S. taxes, 1:14–15 property taxes, 1:13–14 taxes at death, 1:11–12 taxes on the production and sale of goods, 1:7–9 Taxes in financial statements, 3:2–30 special issues, 3:21–27 Taxes in our lives, 1:2–4 Taxes on the production and sale of goods, 1:7–9 Federal excise taxes, 1:7–8 general sales tax, 1:8 local excise taxes, 1:8 state excise taxes, 1:8 use taxes, 1:8–9 value added tax (VAT), 1:9 Taxes payable, computation of net, 9:23–24 Tax-exempt income, interest and other expenses related to, 5:13–14

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

I-20

INDEX

Tax-exempt securities, 10:20 Tax-free transactions, 7:18 depreciation recapture and, 8:34–35 Taxpayer, multijurisdictional, 16:2 Taxpayer use test, replacement property, 7:26–27 Tax-related blogs and RSS feeds, 2:26 Tax-related websites, 2:26 Technical Advice Memoranda (TAMs), 2:9 Temporary assignments, travel expenses, 11:20 Temporary book-tax differences. See Temporary differences Temporary differences, 1:21, 3:3, 12:38 accrued income and expenses, 3:4 depreciation on fixed assets, 3:4 intangible assets, 3:4 net operating losses, 3:4 Temporary Regulations, 2:7 Tenant, low-income, 17:8 Tentative minimum tax (TM), 17:3 AMT formula, 17:15–16 Territorial approach, taxation of cross-border income, 16:5–7 Test based on facts and circumstances, 6:23 Tests based on current participation, 6:23 Tests based on prior participation, 6:23 Tests to determine material participation test based on facts and circumstances, 6:23 tests based on current participation, 6:23 tests based on prior participation, 6:23 The ATA Journal of Legal Tax Research, 2:20 The Tax Adviser (AICPA), 2:20 Theft losses, 6:7–12 deduction of, 6:9 definition of theft, 6:7–8 individual, 6:10–12 loss measurement, 6:9–10 Section 1231 assets, 8:24 tax planning strategies for documentation of, 6:7 See also Casualty losses Theft or casualty of nonpersonal use capital assets, Section 1231 assets, 8:24 Thefts as capital recovery, 7:5 definition of, 6:7–8 Thin capitalization, 12:27 Throwback rule, 16:23 Tiebreaker rules for determining dependency status, 9:11 qualifying child, 9:11 Time limitation on replacement, involuntary conversions, 7:27–28 Time value of money, 5:5, 8:20 Time value of tax deductions, tax planning strategies for, 5:5 Timing of deduction recognition, 5:4–7 accrual method, 5:5–6 cash method, 5:4–5 expenses accrued to related parties, 5:6–7 prepaid expenses—“12-month rule,” 5:7 Timing of recapture, tax planning strategies for, 8:35 Timing of recognition of theft losses, 6:9 Timing the payment of deductible taxes, tax planning strategies for, 10:17 “Title passage” rule, 16:9 Trade or business business interest expense limitation and, 12:34 expenses, deductions for AGI, 9:5 Traditional IRAs, 11:28–29 compared with Roth IRAs, 11:31 deduction of an active participant in 2021, phaseout of, 11:28 Transactions between related parties, 7:14–15 Transfer pricing, 3:23 multijurisdictional taxation, 16:26–27 Transfers for services and nominal property, 12:14 Transportation, medical expenses, 10:13 Transportation expenses, 11:18–19 commuting expenses, 11:18–19 computation of automobile expenses, 11:19 record-keeping requirements, 11:22

tax planning strategies for, 11:22 Travel expenses, 11:19–22 away-from-home requirement, 11:19 combined business and pleasure travel, 11:21–22 determining the tax home, 11:20 record-keeping requirements, 11:22 tax planning strategies for, 11:22 temporary assignments, 11:20 Treasury Decisions (TDs), 2:9 Treasury Department, regulation and oversight, 2:28 Treasury Department Regulations, 2:6–7, 2:21 assessing the significance of, 2:20–21 Trial courts, 2:10, 2:11–12 appeals, 2:12 Federal judicial system, 2:11 location, 2:11 number of, 2:11 number of judges, 2:11 See also Courts “12-month rule,” 5:7 28% property, 8:15–16, 8:17–20 2%-of-AGI floor, unreimbursed employee business expenses, 11:18

U U.S. corporate taxes and international business competitiveness, 12:2 U.S. Court of Federal Claims, 2:10, 2:11–12, 2:12–13 judicial citations of, 2:15–16 jurisdiction of, 2:11 See also Courts U.S. Courts of Appeals, 2:12 judicial citations of, 2:15–16 See also Courts U.S. District Courts, 2:10, 2:11–12, 2:12–13 judicial citations of, 2:15–16 jurisdiction of, 2:11 See also Courts U.S. income tax treaties in force, 16:6 U.S. income tax treatment of a non-U.S. person’s income, 16:17 U.S. Individual Income Tax Return, Form 1040, 1:10, 1:19 U.S. Individual Income Tax Transmittal for an IRS e-file Return, Form 8453, 9:29 U.S. shareholder, 16:12 U.S.-source income foreign tax credit computation, 17:10 income sourcing rules, 16:7–9 U.S. Supreme Court, 2:13 judicial citations of, 2:16 See also Courts U.S. Tax Cases (USTC), 2:15–16 U.S. Tax Court, 2:10, 2:11–12, 2:12–13 judicial citations of, 2:14–15 jurisdiction of, 2:11 Small Cases Division, 2:10 website (ustaxcourt.gov), 2:14 See also Courts U.S. tax system, scope of, 2:3 U.S. taxation of cross-border transactions, 16:4 U.S. taxation of multinational transactions, 16:2–17 sources of law, 16:4–5 tax issues, 16:5–17 U.S. trade or business, conduct of, 16:16 U.S. worldwide approach to taxation, 9:21 UDITPA (Uniform Division of Income for Tax Purposes Act), 16:19 Uncertain tax positions, recognizing the tax benefits of, under ASC 740–10, 3:22 Underpayment, estimated tax, 11:43 Underpayment of Estimated Tax by Individuals, Estates and Trusts, 11:43 Unearned income, 4:11–12, 9:25 Unearned income of dependent children, 9:25–26 election to report certain unearned income on parents’ return, 9:26

Form 8814, Parents’ Election to Report Child’s Interest and Dividends, 9:26 net unearned income, 9:25–26 Unearned investment income, Net Investment Income Tax (NIIT), 9:26–27 Unemployment compensation, 10:5–6 Unemployment taxes, 1:10–11 Unexpected event, casualty loss, 6:7 Unitary approach, 16:23 United States Board of Tax Appeals Reports (B.T.A.), 2:14 United States Reports, Lawyer’s Edition (L.Ed.), 2:16 United States Supreme Court Reports (U.S.), 2:16 Unlimited liability, sole proprietors and general partners, 12:6 Unlimited life, nontax factor affecting choice of business form, 18:5 Unreasonable compensation, 13:17–18 tax planning strategies for, 5:4 Unrecaptured Section 1250 gain, 8:16, 8:17–20, 8:32 Unreimbursed employee expenses, 11:28 2%-of-AGI floor, 11:18 Unreimbursed employment-related expenses, credit for child and dependent care expenses, 10:30 Unusual event, casualty loss, 6:7 Use or lose plans, 11:11 Use taxes, 1:8–9

V Valuation allowance, 3:14–17 tax planning for releasing, 3:17 Valuation requirements for charitable contributions, 10:23 Value added tax (VAT), 1:9 Voluntary revocation, 15:7–8

W W–2 wages, 11:38 W–2 Wages Limit, QBI deduction, 11:38–39 W–2 Wages/Capital Investment Limit, 11:38 phase-in of, 11:40 QBI deduction, 11:39–40 Wage and Tax Statement, Form W–2, 9:24 Wages, QBI deduction limitation based on, 11:38–40 Wash sale rules, 7:15–16 illustration of, 7:16 substantially identical stock or securities, 2:23 Wash sales, 7:15–16 tax planning strategies for avoiding, 7:17 Waters’ edge election, 16:25 Wealth, maximizing personal, 10:3 Websites, tax-related, 2:26 Wherewithal to pay, 1:30–31, 7:18, 12:8 Windfall income, 4:4 Withdrawals, effect of on inside and outside basis, 14:17–18 Work opportunity tax credit, 17:5–6, 17:12 computation of, 17:5–6 targeted and economically disadvantaged groups, 17:5 Workers without children, earned income credit, 10:32 Workers’ compensation, 10:10 Working condition fringes, 11:14, 11:16 Worldwide system of business taxation, 17:13 taxation of cross-border income, 16:5–7 Worldwide taxable income, 16:10 Worthless securities, 6:5, 8:6 Writ of Certiorari, 2:14 Wrongful incarceration, 10:11

Y Year of discovery, theft loss, 6:9

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Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.