[jeff]

Welcome to the Q4 2017 CPA Exam Study Group for REG. 🙂

Introduce yourselves and let your fellow NINJAs know when you plan to take your REG exam.

The Five Steps (NINJA Framework): https://www.another71.com/pass-the-cpa-exam/

[mashloum]

Many thanks @56_Moves

[mashloum]

Interestd question
Oliver, a widower who does not live in a community property state, sold 50 acres of land he and his wife had paid $10,000 for in 1999. She died in 2009. As of the date of her death, the land was valued at $50,000 for estate tax purposes. Oliver sold the land for $100,000 on an installment basis. What is his gross profit percentage?
Graded 50%
90%
60%
Correct 70%

This answer is correct.
To calculate the gross profit percentage, “A certain percentage of each payment [received]. . .is reported as gain from the sale. It is called the ‘Gross profit percentage’ and is calculated by dividing your gross profit from the sale by the contract price . . . . Gross profit is the total gain you report on the installment method. To calculate your gross profit, subtract your installment sale basis from the selling price . . . . The contract price is the total of all principal payments you are to receive on the installment sale.”

“A qualified joint interest is any interest in property held by husband and wife as either of the following:

Tenants by the entirety.
Joint tenants with right of survivorship if husband and wife are the only joint tenants.

As the surviving spouse, your basis in property you owned with your spouse as qualified joint interest is the cost of your half of the property with certain adjustments. Decrease the cost by any deductions allowed to you for depreciation and depletion. Increase the reduced cost by your basis in the half you inherited.” Thus, Oliver’s adjusted basis at the time of sale is $30,000 [$5,000 + .50 ($50,000)]. His gross profit percentage, then, is 70% [($100,000 – $30,000) ÷ $100,000].

Publisher’s comment: If Oliver lived in a community property state, his basis would be $50,000 and 50% would be the correct answer.

[mardybum13]

@pcuniff @ benj2017

Thanks guys, your examples help a lot. I made them up myself lol. In my experience with FAR and AUD, the sims always tested basic scenarios like this.

b) So the person owning the phone recognizes gain of the FMV of the phone over its basis? Or the FMV of the services over the phone's basis?

c) What if the asset exchanged was an office printer (i.e. not a capital gain) instead of an iphone? My becker doesn't mention using FMV of services for calculating gain/loss on sale of assets. It only mentions this for capital gains

[Anonymous]

Can anyone tell me if the REG exam has changed since Q2? I know a few of the topics have been removed, but other than that were there any changes to be aware about?

[mashloum]

I understand that deferring gain reduced, but for the loss recognized, how?!

Which of the following will decrease the basis of property?
Graded Depreciation.
Return of capital.
Recognized losses on involuntary conversions.
Correct All of the answers are correct.

This answer is correct.
The basis must be reduced by the larger of the amount of depreciation allowed or allowable (even if not claimed). A return of capital is a tax-free distribution that reduces a stock’s basis by the amount of the distribution. If a shareholder’s basis has been reduced to zero because of a tax-free return of capital, any excess amounts received are treated as a capital gain. The basis of the replacement property from an involuntary conversion is reduced by any gain not recognized and any loss recognized.

[pcunniff]

@cpadream – i think you are right too, but i would almost think youd want to take advantage of the carry back in the current year since you would be able to CARRY FORWARD the loss 20 years (thereby not losing anything from the current year). I get your order of operations, but if i owned a business/corp (remember p ships cant have NOLS) and had an NOL for two of the years – i would try the best i could to take advantage of the CARRY BACK first….

@mardybum – i re-listened to the lecture in wiley because you had me second guessing. If the person repaired the phone out of generosity (like mowing the lawn example with no intent at all), but the DONOR sees this as “wow this person mowed my lawn – I will pay you 100. Or wow thanks for fixing my phone – i will pay you 50.” THIS COMES FROM THE INTENT OF THE DONOR!! In this case, the donee picks it up as wages.

However, like in any other gift example, if someone were to give me something as an outright GIFT, this would not be taxable to me (as the donee). Again, its the INTENT OF THE DONOR. The IRS will see this as you fixed the phone out of generosity or you mowed the lawn, but the person paid you thinking it was for services rendered. Thereby, you must claim this as wages on your 1040. They had no INTENT to outright just give you this money as a gift. He paid me $100 for mowing his lawn, not because im just the good looking neighbor 😉

[mashloum]

Mr. McCarthy exchanged real estate that he held for investment purposes for other real estate that he will hold for investment purposes. The real estate that he gave up had an adjusted basis of $8,000. The real estate that he received in the exchange had a fair market value of $10,000, and he also received cash of $1,000. Mr. McCarthy paid $500 in exchange expenses. What is the amount of gain recognized by Mr. McCarthy?
a.None of the answers are correct.
b.$500
c.$1,000
d.$2,500
Today question!
what is the answer?

[Lentilcounter]

@mashloum

Section 1031(d) = The basis of property acquired in a like-kind exchange is equal to the adjusted basis of property surrendered, decreased by any boot received and increased by any gain recognized or boot given

recognized gain = lessor of realized gain or boot received

realized gain = $10K FMV of land + $1K boot received – $8K basis + $500 boot given = $2.5K
boot received = $1K

I think the answer would be $1K. But then I did some googling around and found Rev. Ruling 72-456. It says you can use the $500 in expenses to offset the $1K gain for a total recognized gain of $500.

BEC = 72 (6/08/16)
FAR = ?
REG = ?
AUD = ?

[Lentilcounter]

A taxpayer owns 50% of the stock of an S corp and materially participated in the corporation's activities. At the beginning of the year, the taxpayer had an adjusted basis of in the stock of $25K and made a loan to the corporation for $13K. During the year, $3K of the loan was repaid, and the taxpayer's share of the corporation's loss for the year was $40K. What is the amount of the loss that may be deducted on the taxpayer's tax return?

S corp. shareholder permitted to deduct pro rate share of S corp. loss on personal return subject to the limit –> loss limitation = basis + direct shareholder loans – distributions

The correct answer per Becker is $25K taxpayer end of the year basis + $10K recourse debt = $35K

I understand that non-recourse loans can be part of the shareholder's basis but are not part of the at-risk basis. However, recourse loans are included under the shareholder basis and at-risk basis.

Why doesn't the taxpayer's year-end basis in the problem include the $10K recourse loan for a total taxpayer end of the year basis of $35K?

I think I understand at-risk basis and the treatment of loans for S corps. with regards to shareholders. I am struggling to understand the shareholder basis under S corps. and the treatment of loans.

Thanks for the help in advance.

BEC = 72 (6/08/16)
FAR = ?
REG = ?
AUD = ?

[CPADream]

@Lentilcounter Isn't the Becker answer said include the $10k debt to have a $35k basis to offset the loss of $40k?

[Lentilcounter]

“A taxpayer can deduct loss from an S corporation equal to the taxpayer's stock basis and debt basis in the S corporation. At the end of the year, the taxpayer's stock basis is $25,000 and the debt basis is $10,000 ($13,000-$10,000). The taxpayer can deduct $35,000 ($25,000+$10,000) of the $40,000 loss.”

Becker's answer is given above. Why doesn't the taxpayer $25K stock basis include the debt basis of $10K to begin with? That is my question.

BEC = 72 (6/08/16)
FAR = ?
REG = ?
AUD = ?

[EfrainV24]

Took my REG exam on Monday. One piece of advice, know topics conceptually verses just the monetary components. I left the exam in a complete daze, it is a lot of information but it's my own fault for not preparing correctly. Could be I just had a difficult testlet but I did not feel prepared for this exam as I did for the previous three. The SIMs were beyond difficult for me with A LOT of information thrown in at once. As I said before, that's where the conceptual part came in. They throw a lot information at you and you need to decipher which is relevant and which isn't, similar to FAR. 12/19 cannot come quick enough just so I can purchase my new NTS, schedule my exam, and retake. Only issue is my next exam will fall during our 10K (year-end filing).

[Anonymous]

@lentilcounter ,

I think whats going on in that problem is that when you loan money to an S Corp, you wind up having a dual basis. You have your basis in stock and then you have your basis in debt. Since the question only asks what you can deduct, it doesn't get into the nitty gritty of what happens with basis.

According to Gleim, you reduce stock basis first, then debt basis, but not below zero. Then in future years, you restore the debt basis first with pass-through items and then stock basis.

I've only seen this in a couple MCQs in Gleim, and on one or two of the SIMS, so it might not be something you have to worry about.

[mashloum]

@lentilcounter

The key word here is “and made a loan to the corporation for $13K”, then the basis increased by that amount, while repayment will reduce it contrawise

@benj2017
Agree with you since only few question raised in Gleim only

[mashloum]

@lentilcounter

Here another question from Gleim for the same topic

Bobby owns 50% of Jingles, Inc., an S corporation filing tax returns on a calendar year. For tax year 2017, the corporation has an operating loss of $15,000 and separately stated tax-exempt income of $10,000. Bobby individually loans the corporation $4,000. His basis on January 1, 2017, is $2,000. What is his basis in the stock at year end 2017?
$(9,000)
$1,000
Graded $3,500
Correct $0

This answer is correct.
The IRC provides guidelines for adjustments to the basis of a shareholder’s S corporation stock. The increases include items of income (including tax-exempt income) that are passed through to the shareholder, nonseparately stated (ordinary) income, and the excess of deductions for depletion over the basis of the property subject to depletion. A loan made to an S corporation also increases the shareholder’s basis for the amount of the loan. The basis of Bobby’s stock is decreased by the amount of loss allocable to him; however, it cannot reduce his basis below zero.

Stock Basis Loan Basis

Basis at January 1 $ 2,000

Loan to corporation $4,000
Tax-exempt interest 5,000

Ordinary loss of S corporation (7,000) (500)

Basis at December 31 $ 0 $3,500

[Author]

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