[jeff]

Welcome to the Q4 2016 CPA Exam Study Group for REG.

If this is your first post in the study group – please post your target exam date (just the time frame to preserve your anonymity), and your past history with this exam (optional, of course).

[aatoural]

@dtatham10 – I have it on the 23 of January. I usually try to get 2 hrs at night and lunch time at work during week days. During the weekend I try 4-5 depending on how it flows or how many things I have to do during the weekend.

For my REG exam I had to many issues. I had gotten a new position at work that requires more intensive analytical work. My boyfriend and I moved. plus my grandfather had a 3 bypass surgery. Studying in the hospital not very good, you have people coming and interrupting you every so often. So hopefully this will get me the 3 points I missed.

BEC - PASSED
AUD - 8/29/16
FAR - TBS
REG - TBS

[aatoural]

I am getting more and more confused with the life insurance premiums and any insurance premiums in general. Anybody has it clear?

BEC - PASSED
AUD - 8/29/16
FAR - TBS
REG - TBS

[JMG]

I'm a little confused on one of the Ninja sims for corporate tax deductions:

The info shows life insurance proceeds under revenues and life insurance premiums under expenses. I assumed that the proceeds meant that the corp is the beneficiary which would disqualify the expense as a deduction. However the correct answer shows that the expense was included in “other deductions.”

Can anyone shed some light here? There was no specific details given about the policy.

[JMG]

@aatoural great minds think alike, or get confused alike? lol

[aatoural]

@JMG – Lets hope it is great minds. ROFL. They have a big mess with the insurance proceeds.

BEC - PASSED
AUD - 8/29/16
FAR - TBS
REG - TBS

[RE2PECT]

@aatoural- From an individual tax perspective, life insurance premiums paid by an employer are not included in AGI to the extent of $50,000. Any premiums paid by an employer over that amount are included in the taxpayer's income.

From the corporation's perspective, they can't deduct premiums paid to their key officers if the corporation is the beneficiary on the policy. If the officer's family member is the beneficiary then the premiums can be deducted by the corporation.

FAR: 75 Roger & Ninja (notes/flashcards/audio/MCQ)
AUD: 73, 81
BEC: 71, retake 8/29
REG:

[HoosierCPA]

so one of my issues with REG over many of my prior exams is I am terrible at being able to answers peoples questions. I always ask questions but rarely answer questions. That's my goal this go around is to try and be able to answer more. Having said that I am not sure about the life insurance proceeds lol.

Is this the $50k tax free then everything over $50k is divided by $1k and multiplied by whatever the payout amount is?

Or is this where you are taxed only on the amount over what you contributed? So you contribute 100k and proceeds are 150k so 50k is taxable and 100 non taxable?

FAR - 78
REG - 72,74,71...please just go away REG nobody likes you!
BEC - 82
AUD - Aug 16

[demarcon]

@dtatham10 Life insurance proceeds aren't taxable, it's the premiums that are taxable on coverage over $50,000. They will usually give you the premium cost per $1,000 and you have to figure out the percentage that's over and multiply that by the premium to get the taxable amount. You aren't tax on any premiums that you paid.

$60k life insurance policy
Premium is $1 per $1000
Taxable income is $10 (10,000/60,000 * $60) = 10
Non Taxable is $50

Let me know if that makes sense 🙂

[RE2PECT]

@dtatham10- I barely ever respond or post questions lol. I feel like my explanations won't make much sense half the time and I'll be giving out the wrong information.

@demarcon- Just proved why I barely respond to people's questions lol. No wonder why you got a 97!

FAR: 75 Roger & Ninja (notes/flashcards/audio/MCQ)
AUD: 73, 81
BEC: 71, retake 8/29
REG:

[539Mayor]

One thing I noticed is being able determine the character of transaction. Ordinary, Cape Gain, Division from a Corp p ship lcc.

Also if u are an auditor do business with a compay is general council considered a conflit. I got an mcq on that. Trying to figure out who doesn't trigger a conflict.

[HoosierCPA]

@demarcon makes complete sense. Thanks! A lot of these questions I can answer but not explain so I hear ya @re2pect

FAR - 78
REG - 72,74,71...please just go away REG nobody likes you!
BEC - 82
AUD - Aug 16

[539Mayor]

I also need to look over characteristics of entities.

@respect
I'm just going to go cumulative sets of 30. Take a few notes. Try to get 3 30 sets a day and then 5 10 Sims a day. Not giving up on this. Guess I have to keep a no booze policy thru the holidays

[RE2PECT]

Found these notes on Corps and Partnerships in an old thread.

Partnerships

*No gain or loss is recognized on a contribution of property to a partnership in return for partnership interest

> Services Rendered FMV
> Value of partnership interest acquired for services rendered is ordinary income to partner
> Property subject to excess liability – When property is contributed that is subject to a liability where the decrease in the partner’s individual liability exceeds his partnership basis, the excess is treated as taxable boot and is gain to the partner.
*Basis of contributing partner’s interest

1) Cash – amount contributed

2) Property – Adjusted Basis (NBV)

3) (Liabilities) – Incoming partner’s liabilities assumed by other partners is a reduction – what you put in

4) Services – FMV

5) Liabilities – Other partners’ liabilities assumed by incoming partner – what you take on

*Special allocation – When a partner contributes property with a FMV that is higher or lower than the property’s NBV, a built-in gain exists at the date of contribution. Upon the subsequent sale of that property, the built-in gain or loss that existed @ date of contribution must be specially allocated to the contributing partner.

*Related-party loss disallowed – Losses between a controlling partner (over 50%) and his controlled partnership from the sale or exchange of property are not allowed.

*Related –party gain is ordinary income

*Tax losses – generated by the partnership are deductible by the partners and can be used to offset ordinary income. The losses must clear three hurdles:

(1) Tax Basis

(2) At-risk amount

(3) Passive activity

*Losses limited to tax basis

• Deduction is limited to partners’ adjusted basis in the partnership, which is increased by an partnership liabilities for which he is liable for additional capital contributions to the partnership.

*Losses limited to at-risk amount

• Similar to calculation of partner’s basis, but at-risk amount in partnership doesn’t include certain nonrecourse liabilities

*Passive Loss Limitations

• Rules limit the ability of partners involved in passive activity from using ordinary losses from the passive activity to reduce ordinary taxable income

*Carryforward of losses

• Any unused loss resulting from the tax basis limitations can be carried forward and used in future years when basis becomes available

*Guaranteed Payments – are reasonable payments or compensation paid to a partner for services rendered or use of capital without regard to his ratio of income

Tax treatment

1) Partnership tax deduction

2) Partner taxable income

*Non-liquidating Distributions – Basis Reduction

> distributions of cash or property to a partner reduces the partner’s basis by the cash or adjusted basis of the property distributed
*3 Ways a partner may liquidate partnership interest*

1) Complete Withdrawal

2) Sale of partnership interest

3) Retirement or death

Beginning Capital Account (zero out to get out)

% of Income/(Loss) up to withdrawal

Partner’s capital account

% of liabilities

Adjusted basis @ date of withdrawal

(Cash withdrawn)

Remaining basis to be allocated to assets withdrawn

*Sale of partnership interest – General rule: partner has a capital gain/loss when transferring a partnership interest because a partnership interest is a capital asset

Beginning capital account

% Income/(Loss) up to sale

Capital account@ sale date

% of liabilities

Adjusted basis

(Amount rec’d) —-> Cash, COD, FMV Property, etc.

Gain/(Loss)

“Hot Assets”

1) Unrealized receivables

2) Appreciated inventory

3) Recapture income regarding depreciable assets owned by the partnership

Limited Liability Companies (LLCs)

“Members” are not personally liable

*For federal income tax preparers, an LLC is treated as one of the following:

• Disregarded Entity/Sole proprietorship

• Partnership

• Corporation

*An LLC with at least two members/owners is taxed as a partnership unless an election is made to have the LLC taxed as a corporation

*A single-member LLC not electing to be taxed as an corporation, is considered as a disregarded entity for federal income tax purposes and will be treated as a sole proprietorship

Additional notes on corporate/partnership basis:

C-Corporations

Shareholder Initial Basis:

Adjusted basis of property transferred (including cash)

+ FMV of services

+ Gain recognized by shareholder

– Cash received (distribution)

– Liabilities assumed by corporation

– FMV of nonmoney boot received (bonds/debt securities

= Basis of Common Stock

Note: A contribution of 80% must be made to qualify for a non-taxable transaction

Taxable transaction – property transferred at FMV

Services do NOT count towards the 80% contribution

Initial basis – corporation

The greater of shareholder’s basis in property (NBV + gain recognized) or debt assumed

E&P calculation:

Taxable Income

+ Nontaxable income (perm. Differences)

– Nondeductible expenses (perm. Differences)

+/- Temporary GAAP vs Tax differences

= Current E & P

[Summary R3 pg 22)

Classifications of distributions:

E&P (current and accumulated) = taxable dividend

No E&P = return of capital (reduces basis – remember CANNOT have negative basis)

No basis = capital gain distribution (long term)

Current earnings are allocated to distributions on a pro rata basis (ratio of each distribution to total distributions)

Accumulated earnings are allocated to distributions in chronological order

Current E&P +, Accum E&P + = taxable dividend

Current E&P +, Accum E&P – = taxable dividend to extent of current

Current E&P -, Accum E&P – = no dividend at all

Current E&P -, Accum E&P + = net the two together and a taxable dividend exists to the extent of positive accum E&P

Preferred stock – paid a set amount, always get paid first, always a dividend

Taxable amounts to shareholders:

Cash dividend – amount received

Property dividend – FMV of prop received

Taxable amounts to corporation:

Property dividend – FMV of prop – NBV = corporate gain = current E&P

S-Corporations

S Corporation’s shareholder’s basis:

BAILED = Ending basis

+B – Beginning basis

+A – Additional investment in stock

+I – Income items*

-L – Loss items

-E – Expense items

-D – Distributions to shareholders

*Consisting of: (SSII + NSII) => Separately Stated Income Items + Nonseparately Stated Income Items, which includes tax-free income

S corp distributions with C corp E&P:

1) To extent of AAA – reduces basis – not taxed

2) To extent of C corp E&P – does not reduce basis – taxable dividend

3) To extent of basis – reduces basis – return of capital not taxed

4) In excess of basis – taxable capital gain distribution

For corporations, contributed property by shareholder is simply the basis of the contributor + any gain recognized by the shareholder or boot received (lower of the two). Gain recognized by the shareholder is to the extent that liabilities assumed by the corporation exceed the basis in the assets contributed by the shareholder.

Distribution of corporate property for shareholder: the amount distributed is the FMV less any liability assumed by the shareholder. Basis of that property to the shareholder is FMV. It is important to remember that whenever appreciate property is distributed by a corp, a gain must be recognized but not a loss.

Distribution to the shareholder is treated as follows: 1. Ordinary dividend to the extent of E&P (remember that current year is treated separately from accum E&P. If no accum, still use current year earnings (don’t net them). 2. Tax free to the extent of basis in the stock 3. Gain treated as capital gain.

2. For partnerships, the basis for the partnership when a partner contributes property is the partner’s basis. Partnership distributed property for the partner is the adjusted basis of the partnership property right before distribution. Partner’s basis is cash and property contributed (partner’s basis) less: 100% of mortgage assumed by partnership + partner’s portion of the mortgage based on ownership + partner’s share of debt (recourse is only assumed by general partners while nonrecourse is assumed by all partners) + value of services contributed +/- partner’s share of income/loss from the partnership – debt reduction of the partnership (partner’s share) – distributions to partner.

For partnerships, no gain can be recognized unless cash is also distributed. However, in a liquidating distribution, the property basis distributed is a PLUG since the ending basis must be zero (so, less any cash received in the distribution). Note that the capital account shown on the Partner’s k-1 is NOT the same as basis. The accounts can differ.

FAR: 75 Roger & Ninja (notes/flashcards/audio/MCQ)
AUD: 73, 81
BEC: 71, retake 8/29
REG:

[HoosierCPA]

@re2pect wow that's a lot to look at!

Random question–at risk rules..what all scenarios do they apply? Partnerships I know is the obvious one.

FAR - 78
REG - 72,74,71...please just go away REG nobody likes you!
BEC - 82
AUD - Aug 16

[aatoural]

Wow! Just when works gets crazy is when the forum gets full of posts.

Since I am a bit behind

@Re2pect – thanks. Does it work the same way for S corps?

@dtatham10 – I didnt get your last sentence “Or is this where you are taxed only on the amount over what you contributed? So you contribute 100k and proceeds are 150k so 50k is taxable and 100 non taxable?”

BEC - PASSED
AUD - 8/29/16
FAR - TBS
REG - TBS

[Author]

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