Day 768
DIET
Perfect bodybuilding diet.
EXERCISES
30 minutes of rowing on a concept2 machine with a total distance of about 6,500 meters (about 4 miles).
COMMENTS
Busy day, getting used to these.
I made it into the Green MAGnitude and Purple Wraath commercials. Check them out in the bodybuilding.com product page!
http://www.bodybuilding.com/store/clabs/mag.html
http://www.bodybuilding.com/store/clabs/purple.htm
Just click the video!
INTERESTING CPA TIDBITS OF THE DAY
Figuring out gain and losses between the corporation and the shareholder can be pretty confusing. I will try to distinguish each different scenario to create a clearer picture. Again, this is for corporate tax only. I will do partnership tax tomorrow.
Stock Issuance
Corporation - Never recognize gain or loss when issuing own stock or bonds in exchange for money or property. (No G/L)
Shareholder Contributed Property w/o Boot
Corporation - Never recognize gain or loss.
If money or property is received from a non-shareholder,for example stimulus money or money provided by a city for a company to come in. The property purchased by the money will have a 0 basis. This makes 100% sense because the full property sale in the future will be completely taxable. If there is money left over after acquisition of property, existing property basis that the corporation owns will be reduced. Makes sense, free money means a taxable gain in the future. Reducing basis means increased tax potential later on.
Shareholder Contributed Property w/ Boot
Shareholder - If something is received by the shareholder other than stock, we realize a gain (not loss) to the extent of the FMV of the boot received. Assumption of a liability is typically not seen as a boot. This makes sense because liabilities can be netted with the value of the property transferred.
With tax, there are always exceptions. A liability is considered a boot if there is no business purpose of tax avoidance purpose with the liability. Gain recognition is also triggered if the liability exceeds the adjusted basis of the property. This is logical, the company is assuming your massive liability, which is pretty much identical to a cash payment. You need to recognize gian.
If both these exceptions occur, the first exception about tax avoidance and no business purpose takes priority. This is scary!
Let's shift our gears to basis. Shareholder's basis in STOCK equals basis of property transferred + gain recognized (makes sense since recognition of gain = more tax = increase basis in all tax scenarios) - FMV of boot received (what you get in return, not yet taxed until sold, so logically reduce basis) - liabilities assumed by corporation except those deductible when paid (makes sense, like a cash payment, we will need to pay tax on this later, so reduce basis).
Corporation's basis in PROPERTY is pretty simple. If money or property is received from a shareholder, the basis the corporation recognizes is the shareholder's carry over basis plus any gain recognized by the shareholder. This is logical because if gain is taxed, we don't want to double tax this, so we increase the basis like the other tax rules I have discussed.
Stocks for Services
Like partnerships. Shareholders must recognize ordinary income (taxable income) when performing a service in exchange for ownership. The basis in the stock is equal the the income recognized. If the stock possesses restrictions, the shareholder does not have income until the restrictions pass.
Related Party Rules
Like all things, loss is disallowed when a corp sells an asset to a related party. A related party constitutes > 50% ownership of the stock. This makes sense because when you have GREATER than 50% ownership, you have control of the company. The loss is potential deferred and follows related prty rules upon sale of asset.
Transfer to a Controlled Corporation (Section 351)
No gain or loss is recognized is property is transferred to a corporate in exchange for stock if the transferors (the original possessors of the property) control the corporation. Property includes everything but services. Stock does not include convertible securities, options or warrants. And control is the classic 80% or greater voting power AND non voting class of stock. These rules are logical since you are basically giving the property to yourself because you control the corporation.
Non-Liquidiating Distributions to Shareholders
Up until now, we have talked about property transfers TO the corporation. What happens when company's distribute property BACK to shareholders?
Shareholder - Net distribution is determined by the FMV net of liabilities. The character of the distribution is dividend income (to the extent of earnings and profits), return of stock basis (for distributions greater than earnings and profits) and finally capital gain (if distribution is greater than the stock basis). This makes sense. When we run out of E&P, we must dip into our basis. When we hit a 0 basis, we can never go negative so everything in excess is a capital gain.
The basis of the property received is the FMV at distribution. If liabilities end up greater than FMV, the FMV = liabilities = basis. This makes sense, why would you accept property with massive liabilities on it? You would require a higher basis to reduce the taxable base.
Corporation - Gain (not loss) is recognized to extent FMV is greater than adjusted basis of property. Like the above rule, if liabilities is greater than FMV, the FMV = the liability itself. It is interesting to note that liability has nothing to do with gain recognition. What happens in a loss scenario?
Complete Liquidation Scenario
Shareholders - Net distributions (FMV net of liabilities) is treated as a payment for stock. Generally a gain or loss is recognize. The property basis is equal to the FMV. This makes sense since we are basically discontinuing the organization.
Corporation - Recognize gain or loss on disposition of asset. Related party rules apply limiting losses. If property is a contribution of capital or Section 351 transfer, within 5 years preceding distribution, no loss is recognized. (See Controlled Transfer above) If corporation acquires the property mentioend above within 2 years of the doption of the plan of liquidation, any built-in loss is disallowed and post-contribution loss is allowed.
Liquidition of Subsidiary
Parent Corporation - No gain or loss is recognized on receipt of property of any 80% of more owned subsidiary. All tax attributes (NOL, CC CF) transfer to the parent corporation.The basis in the subsidiary stock disappears.
Subsidiary Corporation - No gain or loss recognized if the above applies. If subsidiary has debt outstanding to the parent, nonrecognition also applies to property distributed in satisfaction of the debt. If <20% ownership, gain (but not loss) is recognized for minority shareholders. Gain or loss must be recognized on exchange of minority shareholder stock for corporate property. Look up.
Day 767
DIET
Ate pretty lightly today. The majority of it consisted of random carb items. It looks like I finally broke past the 160 pound plateau. Hopefully this isn't a sodium bloat from last night's cheat and I can maintain this weight and keep gaining.
EXERCISES
Interesting... The injury I've sustained 6-8 months ago can be lessened by changing my feet position in a deadlift. The wider my stance, the more glute pain I have. The narrower my stance, the less pain. Either way, I still need to get this checked out.
- Deadlift - 320 went up "relatively" pain free after shifting my stance
- BB Row
- One Arm DB Rows
- Rack Squats
- Pull Ups
- Hyperextensions fused with BB Rows
- Calf Raises
- Stretches
EXTRA ACTIVITIES
None.
COMMENTS
Getting some random work done. Not too much CPA thinking until now.
INTERESTING CPA TIDBITS OF THE DAY
There are a few deductions for corporate tax that trip me up because each have a special definition of taxable income that is unique to calculating the deduction. This makes sense since you have to take one deduction before you can calculate another.
Tonight, I will explore the calculation of taxable income for the corporate charitable contribution deduction, dividend received deduction and the qualified production income deduction.
Starting with charitable contribution, you calculate taxable income by ignoring the dividend received deduction (DRD), the charitable contribution deduction (CCD), and the domestic production activities deduction (DPRAD). Looking at this logically, we calculate the CCD before all other deductions. We can also ignore NOL carrybacks. This means we don't need to recalculate the CCD when we have a NOL in future years. This is also the same with capital loss carry backs. We can ignore future capital losses that will change our taxable income.
Next, the DRD follows similar rules except this is AFTER the CCD. This means we actually include the CCD in our calculation of taxable income. We can ignore all the things mentioned above with one addition. We can also ignore NOL carry forwards. That is, NOL carried from the past. I'm not sure why there is a difference but it is one distinction that I must remember.
The last DPAD is calculated using the lesser of qualified production income or taxable income without the DPAD times 6%. (the rate is 3% in 2005 and 2006 and 9% from 2010 onwards).
Logical? As long as you keep the order of these deductions clear, you should have no problems answering questions.
Day 766
DIET
Went to outback steak house with my friends. Got the 11 OZ house sirloin, sweet potato, and potato soup. Honestly, I make a much better meal than outback. Finished the night with some Apple Pie Ben and Jerry's Ice Cream!
EXERCISES
Feeling tired so took today off.
EXTRA ACTIVITIES
None.
COMMENTS
CPA review till I went out to eat and grocery shopping to stock up on meat!
INTERESTING CPA TIDBITS OF THE DAY
Net operating loss (NOL) is another finicky creature that confuses me. The general rule is that this loss can be carried back 2 years and forward 20 years. To calculate the actual NOL, we first start with Negative Taxable Income. We then proceed to add back personal exemptions, excess capital losses over capital gains and excess non-business deductions over non-business income. The rationale behind net operating losses is to include only business related expenses.
- Let's dissect the equation. Starting with personal exemptions, this is obviously something we add back because it is personal.
- Excess of non-business deductions over non-business income. This means we took more personal deductions than we made income for. This is logical to add back since NOL focuses only on business deductions. Non-business deductions include the standard deduction and SEP retirement plan contributions. Non-business income include dividends, interest, capital gains.
- Finally, excess capital losses over capital gains must be added back. I am not entirely sure about why this is not included but my rationale is that they somehow classify these losses are purely personal in nature. This is something I just need to remember.
We can safely ignore casualty losses (even personal), rental losses, salary, rent as business related activities. These things trip me up. Another thing to remember is that we are only including the EXCESS in the above equations.
A new election can carry back losses up to five years instead of 2, but this is limited to only t0 50% of the year's income. This is phased out for firms with greater than 15 million gross reciepts and those receiving an infusion of federal money.
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Switching gears to interest and refunds. These two things ALWAYS trip me up.
For refunds we do not need to include federal income tax refunds in our income because we are NEVER allowed to take a deduction. For state income tax refunds, we MUST include it in our income IF our previous year's itemized deduction exceeds our standard deduction. This makes sense, if itemized, we took a deduction in a previous year. If we never itemized, we do not need to include this into our income.
For interest we need to include everything except interest from tax exempt vehicles and U.S. possession bonds.
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Slightly related to interest, we sometimes purchase bonds at discount or at a premium. Let's think of the tax consequences of these logically.
With a discount bond. We are purchasing the instrument for LESS than face value. This usually happens if the coupon rate is less than current interest rates. This means you generate less interest for the bond. Overtime, the bond value approaches the face value. This means we are increasing the bond basis. In tax, we logically increase basis as we recognize tax. Thus, we must include the interest in gross income.
With a premium bond. We are purchasing the instrument for MORE than face value. This usually happens if coupon rate is greater than current interest rates. This means you generate more interest for the bond. Overtime, the bond value approaches the face value. This means we are decreasing the basis. This means we can offset interest income. A note to make is that this follows the current year method. [Needs revision]
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One of my friends asked a really good question on the discussion boards of our CPA review class. I thought I would think through his problem. He asked... "What is the difference between casualty loss and involuntary conversion?" Here is what I answered, flushed out a tiny bit.
We know that casualty losses can be essentially four categories. Personal property is separately netted for gains and losses.
Partial Damage Personal = Lesser of (Decrease in FMV or Adjusted Basis of Property) minus insurance minus $500 dollar floor PER PERSONAL casualty minus 10% AGI (if loss). There is no 10% AGI limit if it is a gain.
Complete Damage Persona l = Lesser of (Decrease in FMV or Adjusted Basis of Property) minus insurance minus $500 dollar floor PER PERSONAL casualty minus 10% AGI (if loss). There is no 10% AGI limit if it is a gain.
Partial Damage Business = Lesser of (Decrease in FMV or Adjusted Basis of Property) minus insurance. [Unsure, can't find documentation]
Complete Damage Business = Adjusted basis of property minus any insurance reimbursement.
Involuntary Conversions refer to condemned property. Destruction, theft, and seizure are also classified as involuntary conversions but these are generally deductible as casualty losses above. For our purposes, we will focus on condemned property. We usually see the replacement of property within 2 years of a realized gain or 3 years for condemned business or investment real property.
While we recognizes casualty LOSSES are itemized deductions. (If a gain does occur, we net the gains and losses and then everything is treated as a capital gain or loss) We typically see involuntary conversions (in problems) as GAINS since we get more insurance reimbursement than what it costs us to replace the property. Think of this more as a property transaction. We can't take involuntary conversion losses because these are personal. For involuntary conversion problems, we focus more on the basis of the new property or the gain resulting from the purchase of the replacement property.
Day 765
DIET
Pretty protein packed throughout the day. Ended the night with some pizza as wel.
EXERCISES
Hit the gym hoping I would hit a huge PR with the bench but ended up failing. Feeling very disappointed but will hit the gym harder to hit my goal.
- BB Bench - 225 goes up easy for multiple reps. 245 goes up easy. 265 just stalled at the bottom but easy on a 2 board press. Hmmm....
- CGBP superset Bench Dips
- Tate Press
- JM Press
- DB Press
- Lateral Raises
- Bicep Curls
EXTRA ACTIVITIES
Walking in ridiculous snow.
COMMENTS
CPA, CPA and CPA. Going to do a UNICEF event in Chicago early tomorrow.
INTERESTING CPA TIDBITS OF THE DAY
Taking a break, need to sleep soon to wake up at 5 AM. Edit: Weather conditions were so bad last night that my driver didn't feel comfortable driving a group of people to Chicago. I feel bad that we missed the UNICEF event, but saftey comes first.
Since I have time now, I plan to update my CPA tidbits section with "fun" dose of alternative minimum tax (AMT) for Corporations. Since my previous post went fairly deep in individual AMT. I will only touch on the differences. Under adjustments, we can ignore the personal exemptions and deductions that apply to individuals. Instead we focus on the different depreciation methods. These are FUNKY. Again the whole purpose is to slow down depreciation so you can take less deductions and thus pay a higher tax later on. Everything in corporation adjustments are related to timing issues, this means we can take a credit to offset regular tax liability in the future. This is just like individual AMT. Below are some of the depreciation adjustments. This is REALLY confusing. I don't think memorizing this will help but understanding that depreciation is a major factor will benefit me more.
- For REAL property from 1986 to 1999, we recapture the excess of regular depreciation over straight-line depreciation using a 40 year life.
- For PERSONAL property from 1986 to 1999, we recapture the excess of regular depreciation over a 150% declining balance depreciation based on ADS life.
- For PERSONAL property past 1998, we recapture the excess of regular depreciation over 150% declining balance over the same class life.
- You can still take 50% bonus depreciation (no change).
- Adjustments for gain or loss on sale of property resulting from depreciation difference under regular tax and AMT. This makes sense since your adjusted basis changes. If there is a basis adjustment, we realize a higher basis (less depreciation) which means a lower gain so we decrease by the adjustment.
- Add by NOL deduction. (Random)
The preference adjustments do not change. But we do need to make a third adjustment called the Adjusted current earnings (ACE) adjustment. ACE is a concept based on earnings and profits. The logic here is to take the taxable income then add and subtract the difference amounts that are allowed under GAAP accounting but not under tax. For example, we do not include tax-exempt income in tax rules but under GAAP this is still income so we need to add these back to taxable income to get to our earnings. The ACE adjustment is computed by taking 75% of the difference between the pre-ACE AMTI and ACE. Pre-ACE AMTI results after taking adjustments and preferences. A few miscellaneous facts... If we have a 70% DRD we add this back to ACE. We decrease by basis adjustment on asset sale. We don't adjust this for private activity bond activity (interest/expenses). But the TRICKY part is that ACE does not equal E&P computation (which I will discuss later). With ACE, we do not add back federal income taxes, penalties and fines, and disallowed portion of business meals and entertainment. These traditionally would be deducted in computing the true earnings and profits. I don't understand the logic behind this but I need to make a mental note here. Increase for deferred gain on non-dealer I/S sales, LIFO inventory adjustments and organizational expense amortization.
If we get a negative ACE adjustment, this is only limited by the aggregation positive ACE adjustments in prior years reduced by previous negative ACE adjustments. We think through this in a cumulative basis.
After the ACE adjustment, we have one last deduction labeled AMT net operating loss deduction. This is limited to 90% of pre-net operating loss AMTI (but we can take 100% of in 2001/2002). This makes sense since the less deductions we can take, the more tax the government can collect. Pre-net operating loss basically reflects Regular taxable income after the three adjustments/preference items mentioned above.
Another difference with corporations is that the exemption is only 40,000 less 25% of AMTI over 150,000. This will most likely be phased out for most companies. The AMT tax base is also lower at 20% compared to 26/28% for individuals.
Other miscellaneous rules include the following. This isn't too hard to remember, just another fact to stick in the old brain.
- In the 1st tax year of a corporation's existence, there is no tentative minimum tax.
- In the 2nd tax year, the corporation must have less than 5 million gross receipts in year 1.
- In the 3rd tax year, the corporation must have less than 7.5 million in gross receipts for years 1 and 2 averaged out.
- In the future years, the three year lagging average gross receipts must not exceed 7.5 million.
Day 764
DIET
Typical bodybuilder diet. Loading up on carbs and protein. I need to eat more because I'm losing weight at an alarming pace. My activity levels is way too high.
EXERCISES
Hit the gym with box jumps, jump rope and a nice dose of weighted abdominals. Planks and side plank circuits are possibly the greatest abdominal exercise ANYONE can do. You can feel the muscles tighten up when doing then.
EXTRA ACTIVITIES
Got two calls from fellow longboarders to hit the streets. It felt amazing to shred with my friends late at night. My new board feels like a Cadillac, pumps like a dream and rides smooth as butter. I almost didn't go out because I wanted to study more CPA but finding balance in life is also very important.
COMMENTS
The days pass by so fast. The minutes feel like seconds. Senior year is passing too quickly! I need to make sure not to fall into a study coma and go out more. I created this blog to help myself achieve a balance and I will not forget this.
INTERESTING CPA TIDBITS OF THE DAY
I need to discover the logic behind the topics that confuse me the most or the topics that I am most unfamiliar with. Therefore... today's topic is the Alternative Minimum Tax (AMT) for Individuals and Corporations. AMT was created so taxpayers pay a "minimum" amount of tax to the government. The government feels certain individuals are not paying enough tax and this floor helps the government capture some more tax. Personally, I find this tax fairly annoying but it makes sense since the tax rules in general penalize the taxpayer rather then help.
I will first start with individuals. To figure out AMT, we start with regular taxable income. From there, we add or subtract adjustments and then add in tax preference items to come to the alternative minimum taxable income. Adjustments can be further broken down into timing and permanent classifications. For timing issues, the AMT chooses to use a "slower" period to depreciate or recognize deductions. This means we need to recapture some of the depreciation deductions or similar items and add it back to our taxable income to increase our tax base. This makes sense since the government is trying to recognize more tax upfront then later. Timing also signifies that in the long run, the slower depreciation method will deduct more than MACRS. This makes sense since depreciation will always remove the entire basis in some period of time, so the total depreciation taken overtime will be the same no matter what method you use. For timing adjustments, this applies to personal property depreciation, % completion and income recognition upon exercise of incentive stock options rather than upon sale. Permanent adjustments are fairly simple to understand, these are adjustments that the government thinks a wealth taxpayer should not take certain deductions or exemptions. For permanent adjustments, we must add back personal exemptions, standard deductions, tax deductions, 2% miscellaneous deductions, 2.5% additional floor limit for medical expenses, and home mortgage interest if used for any purpose other than to buy, build, or improve the taxpayer's principal or second home. Now, switching gears to tax preferences, we see two items. Excess accelerated over straight-line depreciation for real and leased personal property placed in service before 1987 and tax-exempt interest on certain private activity bonds less related expenses are included back to taxable income. Private activity bonds are considered used for private business if at least 10% of the proceeds are used for this purpose.
After looking at the adjustments and tax preferences, we get the alternative minimum taxable income (AMTI). We then subtract out an exemption of (70,950 MFJ or 46,700 S which is reduced by 25% of AMTI in excess of 150,000 MFJ or 112,500 S). We take this minimum tax base and multiply by the tax rate of 26% or 28% if your base is > 175,000. Finally we can subtract out AMT foreign tax credits and get our tentative minimum tax. We only recognize AMT by the amount the tentative minimum tax exceeds regular tax liability. This makes sense since AMT signifies a floor. If regular tax exceeds AMT, we don't recognize any AMT.
Another thing to note is the a minimum tax credit is created for timing difference to offset regular tax liability in the future. This is logical since timing differences will negate itself in the future. If the regular tax exceeds the AMT tax in a given year and you have unused minimum tax credit (from timing adjustments), you can utilize the difference as a credit against regular tax.
AMT for corporations is supposedly easier, but I find it to be more complicated because of a third adjustment. I will continue this in tomorrow's post since I need to run to class now. CPA review class too haha.
Day 763
DIET
Ate at the school cafeteria today. Had one of the worse stomach aches. Not sure what was wrong with the pasta, but it made me feel pretty bad.
EXERCISES
Took today off for a UNICEF meeting.
EXTRA ACTIVITIES
Longboarding everywhere. It is cold... BUT I'm busted out my new longboard. It was so much fun, got a lot of stares haha.
COMMENTS
UNICEF is going well this year. Also CPA review is coming together. Took a practice partnership text in the CPA review books and pretty much got all the questions right that I was familiar with. There were maybe 5-8 that I had no idea because I didn't review it but I was able to decipher the answer using tax logic.
INTERESTING CPA TIDBITS OF THE DAY
It is very important to keep the asset class distinctions straight in your head. Different assets trigger different tax rates and rules. Ordinary assets such as inventory and accounts receivable are considered Ordinary Income. These are taxed at your normal tax rate. Investments (stocks and bonds) and personal assets (home, furniture and clothes) are considered Capital Assets. A long term capital asset will trigger tax at the 0-15% level, which is more favorable than the traditional tax rate. Another key note to make is that personally, you can only deduct up to 3,000 of net capital losses. Also capital losses from personal property are NOT deductible.
One thing that always confuses me is the Section 1231 gain or loss treatment after netting. A Section 1231 asset is depreciable personalty (movable) and realty (land and thing attached to land) used in a trade or business for greater than a year. If it is only one year on the dot, it does not count. If we have a net Section 1231 loss, this is always considered an Ordinary Loss. This is good since there is no limit to taking ordinary losses. A net Section 1231 gain is a little more tricky. Typically, we treat this as a long term capital gain. But again the government is clever, the Section 1231 loss mentioned previously helps us out. If we took Section 1231 losses in the previous 5 years, we have to recapture those as Ordinary Income. So if you were able to take Section 1231 losses as ordinary losses previously, chances are, they will be "offset" in future tax years. Very interesting.
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Another point I want to talk about is gifting. This is an interesting topic. Every asset in existence has basis. Basis is what allows you to calculate a future gain or loss. For example, the price you pay for stocks is the basis. When you gift people, generally both you, the donor, and the gifted, the donnee are not taxed. There is an exception to this rule (like all rules) I will touch on a little later.
If you donate something to someone (let's use stock as an easy example) where the fair market value is greater than the donor's basis (your basis). Your basis basically slides over to the donnee's basis. This is pretty simple. BUT if the stock you donate currently has an unrealized loss (the fair market value is LESS than what you paid for) something different happens. You don't calculate the basis until after the donnee sells the stock. If he sells it at a gain, the donnee will calculate the gain using the donor's adjusted basis. This makes sense since the government is smart. Why would the government allow the fair market value to slide over? This means the government is getting less tax money. Keeping the adjusted basis means a larger gain is recognized and the donnee will pay more tax. This is absolutely brilliant. The second scenario is if the donnee sells the stock for a loss. The correct basis to use is the lesser of the (donor's adjusted basis or the fair market value at the time of the gift). Logically speaking, this will always be the fair market value at the time of the gift (since this scenario only triggers if fair market value at the date of the gift is less than the donor's adjusted basis). This makes sense since the lower number that is used means the donnee will recognize less loss. There is less of a spread between the selling price of the stock and the chosen basis. Lastly, if the selling price falls between the fair market value at the time of the gift and the donor's basis, you recognize no gain or losses.
In special cases with the fair market value at the date of the gift is greater than the donor's adjusted basis the donor will actually have to pay gift tax. The donnee's basis is basically the donor's adjusted basis plus a proportion of the gift tax. The proportion is calculated by taking the fair market value of the gift minus the adjusted basis of the gift over the fair market value of the gift minus 13,000. My theory on how this comes from is that the numerator (FMV date of gift minus adjusted basis of gift) signifies the unrealized gain that was distributed to the donnee. The denominator (the FMV gift minus 13,000) represents the classic rule that you are exempt for paying taxes for below $13,000 per person as many people as you want. If you are donating an asset with greater than 13,000 fair market value, this will trigger gift tax rules. The formula takes into account this tax law and adjusts the original donor's basis accordingly for the extra tax that the donor has paid. Clever? Very.