| 1 An Introduction to Tax |
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Who Cares aboutTaxes and Why? 1-2 |
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What Qualifies as aTax? 1-3 |
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How to Calculate aTax 1-5 |
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Different Ways to MeasureTax Rates 1-5 |
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Proportional Tax Rate Structure 1-9 |
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ProgressiveTax Rate Structure 1-9 |
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RegressiveTax Rate Structure 1-10 |
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Employment and Unemployment Taxes 1-12 |
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State and Local Taxes 1-14 |
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Evaluating AlternativeTax Systems 1-17 |
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Static vs. Dynamic Forecasting 1-18 |
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Income vs. Substitution Effects 1-19 |
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Horizontal vs. Vertical Equity 1-21 |
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Evaluating Tax Systems TheTrade-Off 1-23 |
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| 2 Tax Compliance, the IRS, and Tax Authorities |
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Taxpayer Filing Requirements 2-2 |
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Tax Return Due Date and Extensions 2-3 |
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Statute of Limitations 2-3 |
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Legislative Sources: Congress and the Constitution 2-11 |
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Internal Revenue Code 2-11 |
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The Legislative Process forTax Laws 2-12 |
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Basic Organization of the Code 2-13 |
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Judicial Sources:The Courts 2-14 |
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Administrative Sources:The U.S. Treasury 2-15 |
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Regulations, Revenue Rulings, and Revenue Procedures 2-15 |
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Step 1: Understand Facts 2-17 |
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Step 2: Identify Issues 2-17 |
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Step 3: Locate Relevant Authorities 2-18 |
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Step 4: AnalyzeTax Authorities 2-19 |
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Step 5: Document and Communicate the Results 2-21 |
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Research Question and Limitations 2-22 |
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Tax Professional Responsibilities 2-23 |
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Taxpayer and Tax Practitioner Penalties 2-26 |
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| 3 Tax Planning Strategies and Related Limitations |
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BasicTax Planning Overview 3-2 |
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Present Value of Money 3-3 |
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TheTiming Strategy WhenTax Rates Are Constant 3-4 |
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TheTiming Strategy When Tax Rates Change 3-7 |
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Limitations to Timing Strategies 3-10 |
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Income-Shifting Strategies 3-11 |
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Transactions between Family Members and Limitations 3-11 |
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Transactions between Owners and Their Businesses and Limitations 3-12 |
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Income Shifting across Jurisdictions and Limitations 3-15 |
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Conversion Strategies 3-16 |
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Limitations of Conversion Strategies 3-19 |
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Additional Limitations toTax Planning Strategies: Judicial Doctrines 3-19 |
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Tax Avoidance versus Tax Evasion 3-20 |
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| 4 Individual Income Tax Overview, Exemptions, and Filing Status |
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The Individual IncomeTax Formula 4-2 |
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IncomeTax Calculation 4-10 |
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Personal and Dependency Exemptions 4-12 |
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Dependency Requirements 4-12 |
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Married Filing Jointly and Married Filing Separately 4-19 |
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Qualifying Widow or Widower (Surviving Spouse) 4-20 |
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Married Individuals Treated as Unmarried (Abandoned Spouse) 4-23 |
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Summary of IncomeTax Formula 4-24 |
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Appendix A: Dependency Exemption Flowchart (Part I) 4-27 |
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Appendix A: (Part II) 4-28 |
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Appendix B: Qualifying Person for Head of Household Filing Status 4-29 |
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Appendix C: Determination of Filing Status Flowchart 4-30 |
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| 5 Gross Income and Exclusions |
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Realization and Recognition of Income 5-2 |
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What Is Included in Gross Income? 5-2 |
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Realization Principle 5-3 |
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Other Income Concepts 5-4 |
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Return of Capital Principle 5-4 |
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Recovery of Amounts Previously Deducted 5-5 |
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When DoTaxpayers Recognize Income? 5-6 |
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Who Recognizes the Income? 5-8 |
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Community Property Systems 5-8 |
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Income from Services 5-10 |
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Employee Stock Options 5-10 |
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Income from Property 5-12 |
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Property Dispositions 5-15 |
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Capital Gains and Losses 5-16 |
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Netting Process for Gains and Losses 5-17 |
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Losses on Sales to Related Parties 5-19 |
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Other Sources of Gross Income 5-20 |
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Income from Flow-through Entities 5-20 |
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Prizes, Awards, and Gambling Winnings 5-23 |
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Social Security Benefits 5-24 |
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Discharge of Indebtedness 5-27 |
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Exclusion and Deferral Provisions 5-28 |
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Gains on the Sale of Personal Residence 5-29 |
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Education-Related Exclusions 5-31 |
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Other Educational Subsidies 5-32 |
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Exclusions That Mitigate Double Taxation 5-33 |
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Gifts and Inheritances 5-33 |
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Life Insurance Proceeds 5-34 |
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Foreign-Earned Income 5-34 |
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Sickness and Injury-Related Exclusions 5-36 |
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Workers' Compensation 5-36 |
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Payments Associated with Personal Injury 5-36 |
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Health Care Reimbursement 5-37 |
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Disability Insurance 5-37 |
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Employer-Provided Qualified Retirement Plans 5-38 |
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Appendix A: Netting Gains and Losses from 0/15/20 Percent, 25 Percent, and 28 Percent Capital Assets 5-42 |
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Effect of 25 Percent and 28 Percent Capital Gains onTax Liability 5-46 |
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Appendix B: 2015 Social Security Worksheet from Form 1040 5-47 |
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| 6 Individual For AGI Deductions |
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Deductions for AGIOverview 6-2 |
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Deductions Directly Related to Business Activities 6-2 |
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Trade or Business Expenses 6-4 |
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Rental and Royalty Expenses 6-5 |
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Flow-through Entities 6-6 |
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Loss Limitation Rules 6-6 |
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Tax Basis, At-Risk, and Passive Loss Rules 6-6 |
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Tax Basis and At-Risk Rules 6-7 |
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Passive Activity Income and Losses 6-7 |
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Passive Activity Definition 6-8 |
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Income and Loss Categories 6-8 |
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Rental Real Estate Exception to the Passive Activity Loss Rules 6-10 |
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Loss Limitation RulesRental Use of the Home 6-11 |
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Rental with Minimal Rental Use 6-11 |
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Residence with Significant Rental Use (Vacation Home) 6-12 |
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Nonresidence (Rental Property) 6-16 |
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Business Use of Home Deduction Limitations 6-17 |
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Direct vs. Indirect Expenses 6-20 |
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Limitations on Deductibility of Expenses 6-21 |
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Deductions Indirectly Related to Business Activities 6-23 |
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Individual Retirement Accounts 6-23 |
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Comparing Traditional and Roth IRAs 6-28 |
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Self-employed Retirement Accounts 6-29 |
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Health Insurance Deduction by Self-EmployedTaxpayers 6-32 |
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Self-EmploymentTax Deduction 6-32 |
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Penalty for Early Withdrawal of Savings 6-33 |
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Deductions Subsidizing Specific Activities 6-33 |
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Deduction for Interest on Qualified Education Loans 6-33 |
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Deduction for Qualified Education Expenses 6-35 |
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Summary: Deductions for AGI 6-36 |
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| 7 Individual from AGI Deductions |
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Transportation and Travel for Medical Purposes 7-3 |
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Hospitals and Long-Term Care Facilities 7-4 |
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Medical Expense Deduction Limitation 7-4 |
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Charitable Contributions 7-7 |
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Contributions of Money 7-7 |
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Contributions of Property Other Than Money 7-8 |
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Charitable Contribution Deduction Limitations 7-10 |
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Casualty and Theft Losses on Personal-Use Assets 7-12 |
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Tax Loss from Casualties 7-12 |
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Casualty Loss Deduction Floor Limitations 7-13 |
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Miscellaneous Itemized Deductions Subject to AGI Floor 7-14 |
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Employee Business Expenses 7-14 |
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Tax Preparation Fees 7-17 |
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Limitation on Miscellaneous Itemized Deductions (2 percent of AGI Floor) 7-19 |
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Miscellaneous Itemized Deductions Not Subject to AGI Floor 7-20 |
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Phase-Out of Itemized Deductions 7-20 |
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Summary of Itemized Deductions 7-20 |
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The Standard Deduction and Exemptions 7-22 |
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Bunching Itemized Deductions 7-24 |
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Deduction for Personal and Dependency Exemptions 7-24 |
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Taxable Income Summary 7-25 |
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Appendix A: Calculation of Itemized Deduction Phase-Out for 2016 7-26 |
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Appendix B: Personal Exemption Phase-Out Computation for 2016 7-27 |
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| 8 Individual Income Tax Computation and Tax Credits |
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Regular Federal IncomeTax Computation 8-2 |
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Marriage Penalty or Benefit 8-3 |
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Exceptions to the Basic Tax Computation 8-3 |
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Preferential Tax Rates for Capital Gains and Dividends 8-4 |
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Net Investment IncomeTax 8-5 |
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Alternative MinimumTax 8-8 |
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Alternative Minimum Tax Formula 8-9 |
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Alternative Minimum Taxable Income (AMTI) 8-9 |
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Tentative Minimum Tax and AMT Computation 8-13 |
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General AMT Planning Strategies 8-14 |
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Employment and Self-Employment Taxes 8-14 |
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Employee FICATaxes Payable 8-15 |
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Self-EmploymentTaxes 8-17 |
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Employee vs. Self-Employed (Independent Contractor) 8-22 |
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Employee vs. Independent Contractor Comparison 8-22 |
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Nonrefundable Personal Credits 8-25 |
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Child and Dependent Care Credit 8-26 |
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Refundable Personal Credits 8-31 |
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Earned Income Credit 8-31 |
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Other Refundable Personal Credits 8-32 |
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Credit Application Sequence 8-34 |
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Taxpayer Prepayments and Filing Requirements 8-35 |
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Underpayment Penalties 8-36 |
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Late Payment Penalty 8-39 |
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| 9 Business Income, Deductions, and Accounting Methods |
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Business Gross Income 9-2 |
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Ordinary and Necessary 9-3 |
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Limitations on Business Deductions 9-5 |
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Expenditures against Public Policy 9-5 |
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Political Contributions and Lobbying Costs 9-5 |
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Expenses Associated with the Production of Tax-Exempt Income 9-6 |
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Personal Expenditures 9-7 |
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Mixed-Motive Expenditures 9-8 |
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Meals and Entertainment 9-8 |
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Travel and Transportation 9-9 |
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Record Keeping and Other Requirements 9-11 |
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Specific Business Deductions 9-12 |
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Domestic Production Activities Deduction 9-12 |
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Losses on Dispositions of Business Property 9-13 |
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Business Casualty Losses 9-14 |
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Financial and Tax Accounting Methods 9-17 |
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Overall Accounting Method 9-17 |
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All-Events Test for Income 9-19 |
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Taxation of Advance Payments of Income (Unearned Income) 9-19 |
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Unearned Service Revenue 9-20 |
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Advance Payment for Goods 9-20 |
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Uniform Capitalization 9-21 |
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Inventory Cost-Flow Methods 9-22 |
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All-EventsTest for Deductions 9-24 |
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Economic Performance 9-24 |
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Limitations on Accruals to Related Parties 9-28 |
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Comparison of Accrual and Cash Methods 9-29 |
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Adopting an Accounting Method 9-30 |
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Changing Accounting Methods 9-33 |
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Tax Consequences of Changing Accounting Method 9-33 |
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| 10 Property Acquisition and Cost Recovery |
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Cost Recovery and Basis for Cost Recovery 10-2 |
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Basis for Cost Recovery 10-3 |
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Personal Property Depreciation 10-7 |
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Depreciation Recovery Period 10-8 |
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Depreciation Conventions 10-9 |
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Calculating Depreciation for Personal Property 10-9 |
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Applying the Half-Year Convention 10-10 |
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Applying the Mid-Quarter Convention 10-13 |
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Applicable Convention 10-17 |
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Depreciation Tables 10-17 |
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Special Rules Relating to Cost Recovery 10-18 |
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Immediate Expensing 10-18 |
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Depreciation for the Alternative Minimum Tax 10-29 |
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Depreciation Summary 10-29 |
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Section 197 Intangibles 10-31 |
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Organizational Expenditures and Start-Up Costs 10-32 |
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Research and Experimentation Expenditures 10-35 |
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Patents and Copyrights 10-35 |
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Amortizable Intangible Asset Summary 10-36 |
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Appendix: MACRSTables 10-40 |
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| 11 Property Dispositions |
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Determination of Adjusted Basis 11-3 |
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Property Converted from Personal Use to Business Use 11-3 |
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Realized Gain or Loss on Disposition 11-5 |
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Recognized Gain or Loss on Disposition 11-6 |
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Character of Gain or Loss 11-7 |
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Depreciation Recapture 11-9 |
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Scenario 1: Gain Created Solely through Cost Recovery Deductions 11-11 |
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Scenario 2: Gain Due to Both Cost Recovery Deductions and Asset Appreciation 11-11 |
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Scenario 3: Asset Sold at a Loss 11-12 |
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§1250 Depreciation Recapture for Real Property 11-13 |
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Other Provisions Affecting the Rate at Which Gains AreTaxed 11-14 |
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Unrecaptured §1250 Gain for Individuals 11-14 |
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Characterizing Gains on the Sale of Depreciable Property to Related Persons 11-16 |
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Calculating Net §1231 Gains or Losses 11-16 |
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§1231 Look-Back Rule 11-18 |
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Gain or Loss Summary 11-20 |
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NonrecognitionTransactions 11-20 |
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Like-Kind Exchanges 11-20 |
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Definition of Like-Kind Property 11-24 |
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Property Ineligible for Like-Kind Treatment 11-25 |
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Timing Requirements for a Like-Kind Exchange 11-25 |
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Tax Consequences When Like-Kind Property Is Exchanged Solely for Like-Kind Property 11-27 |
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Tax Consequences of Transfers Involving Like-Kind and Non-Like-Kind Property (Boot) 11-27 |
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Reporting Like-Kind Exchanges 11-29 |
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Involuntary Conversions 11-29 |
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Gains Ineligible for Installment Reporting 11-34 |
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Other Nonrecognition Provisions 11-34 |
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Related-Person Loss Disallowance Rules 11-35 |
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| 12 Entities Overview |
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Entity Legal Classification and Nontax Characteristics 12-2 |
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Legal Classification 12-2 |
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Nontax Characteristics 12-2 |
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Responsibility for Liabilities 12-3 |
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Rights, Responsibilities, and Legal Arrangement among Owners 12-3 |
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EntityTax Classification 12-5 |
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EntityTax Characteristics 12-7 |
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After-Tax Earnings Distributed 12-8 |
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Some orAll After-Tax Earnings Retained 12-11 |
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Mitigating the Double Tax 12-12 |
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Deductibility of Entity Losses 12-14 |
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OtherTax Characteristics 12-15 |
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Converting to Other EntityTypes 12-15 |
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| 13 Corporate Formations and Operations |
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Transfers of Property to a Corporation 13-2 |
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Transactions Subject to Tax Deferral 13-2 |
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Shareholders Must Transfer Property 13-2 |
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Shareholders Must Receive Stock in the Transferee Corporation in the Exchange 13-3 |
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Shareholders Transferring Property Together Must Be in Control of the Transferee Corporation Immediately after the Transfer 13-3 |
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Tax Consequences to Shareholders in a Qualifying Section 351 Exchange with No Boot 13-4 |
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Tax Consequences to Shareholders in a Qualifying Section 351 Exchange with Boot 13-5 |
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Assumption of Shareholder Liabilities by the Transferee Corporation 13-6 |
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Tax-AvoidanceTransactions 13-7 |
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Liabilities in Excess of Basis 13-8 |
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Shareholders' Basis in Stock Received in a Qualifying §351 Exchange 13-8 |
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Tax Consequences to the Transferee Corporation in a Qualifying Section 351 Exchange 13-11 |
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Issues Related to Incorporating an Ongoing Business 13-12 |
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Contributions to Capital 13-12 |
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CorporateTaxable Income Formula 13-12 |
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Accounting Periods and Methods 13-13 |
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Computing Corporate RegularTaxable Income 13-14 |
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Book-Tax Differences 13-14 |
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Common Permanent Book-Tax Differences 13-14 |
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Common Temporary Book-Tax Differences 13-16 |
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Corporate-Specific Deductions and Associated Book-Tax Differences 13-17 |
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Net Operating Losses 13-19 |
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Charitable Contributions 13-21 |
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Dividends Received Deduction 13-23 |
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Taxable Income Summary 13-25 |
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RegularTax Liability 13-25 |
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ConsolidatedTax Returns 13-31 |
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Corporate Tax Return Due Dates and EstimatedTaxes 13-32 |
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Corporate Alternative MinimumTax 13-35 |
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Depreciation Adjustment 13-37 |
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Gain or Loss on Disposition of Depreciable Assets 13-37 |
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AMT NOL Deduction (ATNOLD) 13-39 |
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Alternative MinimumTaxable Income (AMTI) 13-39 |
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Alternative MinimumTax 13-40 |
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| 14 Corporate Nonliquidating and Liquidating Distributions |
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The BasicTax Law Framework That Applies to Property Distributions 14-2 |
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Computing Earnings and Profits and Determining the Dividend Amount Received by a Shareholder 14-3 |
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Overview of the ShareholderTaxation of Corporate Dividends 14-3 |
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Definition of a Dividend 14-3 |
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Computing Earnings and Profits 14-4 |
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Inclusion of Income That Is Excluded from Taxable Income 14-5 |
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Disallowance of Certain Expenses That Are Deducted in Computing Taxable Income But Do Not Require an Economic Outflow 14-5 |
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Deduction of Certain Expenses That Are Excluded from the Computation of Taxable Income But Do Require an Economic Outflow 14-5 |
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Deferral of Deductions or Acceleration of Income Due to Separate Accounting Methods Required for E&P Purposes 14-5 |
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Ordering of E&P Distributions 14-8 |
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Positive Current E&P and Positive Accumulated E&P 14-8 |
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Positive Current E&P and Negative Accumulated E&P 14-9 |
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Negative Current E&P and Positive Accumulated E&P 14-9 |
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Negative Current E&P and Negative Accumulated E&P 14-10 |
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Distributions of Noncash Property to Shareholders 14-11 |
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The Tax Consequences to a Corporation Paying Noncash Property as a Dividend 14-11 |
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Effect of Noncash Property Distributions on E&P 14-13 |
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Effect of Noncash Property Distributions on End of Year Accumulated E&P 14-13 |
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Constructive Dividends 14-14 |
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The Motivation to Pay Dividends 14-16 |
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Tax Consequences to Shareholders Receiving a Stock Dividend 14-17 |
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Nontaxable Stock Dividends 14-17 |
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Taxable Stock Dividends 14-18 |
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The Form of a Stock Redemption 14-20 |
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RedemptionsThat Reduce a Shareholders Ownership Interest 14-21 |
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RedemptionsThat Are Substantially Disproportionate with Respect to the Shareholder 14-21 |
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Redemptions in Complete Redemption of All of a Shareholder's Stock in a Corporation 14-24 |
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RedemptionsThat Are Not Essentially Equivalent to a Dividend 14-25 |
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Tax Consequences to the Distributing Corporation 14-26 |
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Partial Liquidations 14-27 |
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Complete Liquidation of a Corporation 14-28 |
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FullyTaxable Complete Liquidation 14-29 |
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Tax Consequences to Shareholders 14-29 |
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Tax Consequences to Liquidating Corporation 14-30 |
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Nontaxable and PartiallyTaxable Complete Liquidations 14-33 |
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Tax Consequences to Shareholders 14-33 |
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Tax Consequences to Liquidating Corporation 14-34 |
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| 15 Forming and Operating Partnerships |
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Flow-through Entities Overview 15-2 |
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Aggregate and Entity Concepts 15-2 |
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Partnership Formations and Acquisitions of Partnership Interests 15-3 |
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Acquiring Partnership Interests When Partnerships Are Formed 15-3 |
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Contributions of Property 15-3 |
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Contribution of Services 15-9 |
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Organization, Start-Up, and Syndication Costs 15-12 |
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Acquisitions of Partnership Interests 15-13 |
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Partnership Accounting Periods, Methods, and Tax Elections 15-13 |
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Reporting the Results of Partnership Operations 15-17 |
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Ordinary Business Income (Loss) and Separately Stated Items 15-17 |
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Guaranteed Payments 15-19 |
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Net Investment IncomeTax 15-22 |
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Allocating Partners' Shares of Income and Loss 15-22 |
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Partnership Compliance Issues 15-23 |
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Partner's AdjustedTax Basis in Partnership Interest 15-27 |
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Cash Distributions in Operating Partnerships 15-29 |
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Tax-Basis Limitation 15-29 |
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Passive Activity Loss Limitation 15-31 |
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Passive Activity Defined 15-32 |
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Income and Loss Baskets 15-32 |
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| 16 Dispositions of Partnership Interests and Partnership Distributions |
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Basics of Sales of Partnership Interests 16-2 |
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Buyer and Partnership Issues 16-7 |
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Varying Interest Rule 16-8 |
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Basics of Partnership Distributions 16-9 |
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Operating Distributions 16-9 |
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Operating Distributions of Money Only 16-9 |
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Operating Distributions That Include Property Other Than Money 16-10 |
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Liquidating Distributions 16-12 |
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Gain or Loss Recognition in Liquidating Distributions 16-13 |
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Basis in Distributed Property 16-13 |
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Partner's Outside Basis Is Greater Than Inside Basis of Distributed Assets 16-14 |
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Partner's Outside Basis Is Less Than Inside Basis of Distributed Assets 16-17 |
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Character and Holding Period of Distributed Assets 16-21 |
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Disproportionate Distributions 16-24 |
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Special Basis Adjustments 16-26 |
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Special Basis Adjustments for Dispositions 16-27 |
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Special Basis Adjustments for Distributions 16-28 |
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| 17 S Corporations |
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S Corporation Elections 17-2 |
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S Corporation Qualification Requirements 17-2 |
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S Corporation Election 17-3 |
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S Corporation Terminations 17-5 |
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VoluntaryTerminations 17-5 |
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InvoluntaryTerminations 17-5 |
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Failure to Meet Requirements 17-5 |
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Excess of Passive Investment Income 17-6 |
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S Corporation Reelections 17-7 |
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Accounting Methods and Periods 17-8 |
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Income and Loss Allocations 17-8 |
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Separately Stated Items 17-9 |
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Shareholder's Basis 17-11 |
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Annual Basis Adjustments 17-12 |
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Tax-Basis Limitation 17-13 |
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Post-Termination Transition Period Loss Limitation 17-14 |
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Passive Activity Loss Limitation 17-15 |
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Self-Employment Income 17-15 |
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3.8 Percent Net Investment Income 17-16 |
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Operating Distributions 17-17 |
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S Corporation with No C Corporation Accumulated Earnings and Profits 17-17 |
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S Corporations with C Corporation Accumulated Earnings and Profits 17-18 |
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Property Distributions 17-20 |
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Post-Termination Transition Period Distributions 17-21 |
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Liquidating Distributions 17-21 |
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S CorporationTaxes and Filing Requirements 17-22 |
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Excess Net Passive Income Tax 17-24 |
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Filing Requirements 17-28 |
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Comparing C and S Corporations and Partnerships 17-30 |
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| Appendix A Tax Forms |
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A | |
| Appendix B Tax Terms Glossary |
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B | |
| Appendix C Comprehensive Tax Return Problems |
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C | |
| Appendix D Tax Rates |
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D-1 | |
| Code Index |
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CI-1 | |
| Subject Index |
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SI | |
