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.