Description
Book SynopsisTable of ContentsPart I Introduction to Income Taxation
1 The Professional Practice of Taxation 1-1
1.1 The Basics of Tax Planning 1-4
The IRS: An Uninvited Third Party 1-4
The Goal of Tax Planning 1-5
Considering Tax Costs and Non-Tax Costs 1-6
1.2 Individual Income Tax Formula 1-7
1.3 Tax Compliance vs. Tax Planning 1-15
Closed vs. Open Transactions 1-16
Marginal Tax Rates, Average Tax Rates, and Effective Tax Rates 1-17
Tax Planning Opportunities 1-20
1.4 Tax Avoidance vs. Tax Evasion 1-28
Tax Evasion 1-28
Spotlight on the Law: Is the Tax Law Unconstitutional? 1-29
Tax Ethics 1-30
1.5 Tax Rules vs. GAAP 1-32
1.6 Goals of Tax Policymakers 1-33
Raise Revenue 1-34
Social Objectives 1-34
Economic Objectives 1-35
Equity Objectives 1-35
Political Objectives 1-37
1.7 Other Taxes Paid by Individuals 1-38
Other Federal Taxes 1-38
State and Local Taxes 1-39
Implicit Taxes 1-40
1.8 Professional Taxation as a Career 1-41
The Role of a Tax Professional 1-41
Characteristics of Successful Tax Professionals 1-42
2 Fundamentals of the Federal Income Tax System 2-1
2.1 Taxpayer Activities: Trade or Business, Investment, or Personal Use 2-4
Trade or Business 2-4
Investment Activities 2-5
Personal Activities 2-7
2.2 Classification of Assets 2-10
Ordinary, Section 1231, and Capital 2-10
Spotlight on the Law: Classification of an Asset: Sell Now or Later? 2-11
Realty vs. Personalty 2-12
Holding Period 2-13
2.3 Basis 2-14
What Is Basis? 2-14
Recovery of Basis 2-15
2.4 Foundations of Income 2-17
An All-Inclusive Definition of Income 2-18
Realization of Income 2-18
Income and Basis 2-19
2.5 Foundations of Deductions 2-21
Is an Expenditure Deductible? 2-21
Where Are Expenses Deductible? 2-23
2.6 Introduction to Property Transactions 2-24
Gains and Losses from Sales and Dispositions 2-24
Deferred Gains and Losses 2-26
Excluded Gains and Losses 2-31
3 Tax Authority, Research, Compliance Rules, and Professional Responsibilities 3-1
3.1 Sources of Tax Authority 3-5
Legislative Sources of Tax Authority 3-6
Administrative Sources of Tax Authority 3-8
Judicial Sources of Tax Authority 3-11
Spotlight on the Law: Impact of Filing a Petition Late 3-13
Secondary Sources of Tax Authority 3-16
3.2 Locating and Evaluating Authority 3-17
Weighting of Tax Authority 3-17
The Research Process 3-18
3.3 Compliance Responsibilities 3-20
Filing Requirements 3-20
Taxpayer Penalties 3-22
3.4 Tax Professional Responsibilities 3-31
Circular 230 3-31
Statements on Standards for Tax Services (ssts) 3-34
3.5 Tax Practice and Procedure 3-37
Audit Process 3-38
Appeals Process 3-40
Other Audit Issues 3-40
Signing a Return 3-41
4 Dependents and Filing Status 4-1
4.1 Dependents—Introduction and Qualifying Child 4-3
General Rules for Dependency 4-4
General Rules for Qualifying Child 4-4
Tiebreaker Rules 4-7
Unmarried Parents 4-8
Spotlight on the Law: Can I Claim My Dog as a Dependent? 4-10
4.2 Qualifying Relative and Other Dependency Rules 4-11
General Rules for Qualifying Relative 4-11
Other Dependency Rules 4-13
4.3 Filing Status—Introduction 4-16
General Rules for Married Filing Jointly (MFJ) and Single 4-17
Married Filing Separately (MFS) 4-19
Innocent Spouse Relief 4-20
4.4 Head of Household and Qualifying Widow(er) 4-21
General Rules for Head of Household Status 4-21
Qualifying Widow(er) 4-25
4.5 Dependent on Another Return and Kiddie Tax 4-28
Standard Deduction for a Dependent 4-28
Kiddie Tax 4-29
4.6 Filing Requirements 4-32
Part II Income
5 Framework for Income Recognition 5-1
5.1 All-Inclusive Approach to Income 5-4
Determining Income Recognition 5-5
Form of Receipt 5-5
Treasure Trove Principle 5-6
Spotlight on the Law: Great Catch but Beware of the Taxes! 5-7
5.2 Judicial Doctrines 5-8
Constructive Receipt Doctrine 5-9
Tax Benefit Rule 5-10
Claim of Right Doctrine 5-12
Assignment of Income Doctrine 5-13
5.3 Accounting Methods and Periods—Income 5-14
Cash vs. Accrual Method of Accounting 5-14
Recovery of Capital 5-16
Installment Sales 5-17
Income from Community Property 5-22
Change in Accounting Method 5-23
5.4 Business Income for Individuals 5-24
Sole Proprietorships and Single Member LLCs 5-25
Rental Real Estate 5-26
Royalty Income: Investment or Business? 5-27
Income from Other Pass-Through Entities: Partnerships, Limited Liability Companies (LLCs), and S Corporations 5-27
Advanced Topic—Drilling Down 5-28
5.5 Qualified Business Income Deduction 5-30
Qualified Business Income 5-30
Rental Real Estate 5-31
Determining the Qualified Business Income Deduction (Steps 1–5) 5-31
Determining the Qualified Business Income Deduction (Steps 6–7) 5-36
Determining the Qualified Business Income Deduction (Step 8) 5-38
Advanced Topics—Drilling Down 5-39
6 Income from Personal Activities 6-1
6.1 Income from Prizes, Awards, and Scholarships 6-6
Taxable Prizes and Awards 6-6
Exclusion for Awards for Recognition of Civic or Other Achievements 6-7
Exclusion for Olympic Medals 6-7
Scholarships 6-8
6.2 Divorces 6-10
Alimony 6-10
Child Support 6-12
Property Transfers 6-12
Inadequate Payments of Alimony or Child Support 6-13
6.3 Income and Basis Issues for Gifts and Inheritances 6-14
Income Tax Consequences of Gifts and Inheritances 6-15
Basis and Holding Period Issues for Property Received as Gift 6-16
Basis and Holding Period Issues for Inheritances 6-21
Basis and Issues for Property Converted from Personal Use 6-22
Advanced Topic—Drilling Down 6-24
6.4 Income from Injuries and Other Damage Awards 6-26
Determining the Tax Implications of Damage Awards: Key Questions 6-27
Legal Fees and Damage Awards 6-29
6.5 Income from Death of a Taxpayer 6-31
General Rule 6-31
Exceptions to the General Rule 6-32
Advanced Topic—Drilling Down 6-34
6.6 Forgiveness of Debt 6-35
Love or Generosity 6-36
Bankruptcy 6-36
Insolvency 6-38
Real Property Used in a Trade or Business 6-38
Other Debt Forgiveness 6-38
Spotlight on the Law: Is Debt Forgiveness Always Equitable? 6-39
6.7 Other Inclusions and Exclusions 6-40
Foster Child Payments 6-41
Government Assistance Program Payments (Welfare) 6-41
Parsonage 6-41
Income in Respect of a Decedent (IRD) 6-42
Jury Duty Pay 6-43
Unemployment Compensation 6-43
Advanced Topic—Drilling Down 7-45
7.7 Distribution Rules 7-47
Withdrawals from a Traditional IRA 7-47
Withdrawals from a Roth IRA 7-48
Distributions from Other Qualified Plans 7-49
Required Minimum Distributions 7-49
Rollovers 7-50
Annuities 7-50
7.8 Social Security Benefits 7-54
Spotlight on the Law: Taxation of Social Security Benefits 7-56
7.9 Foreign Earned Income 7-57
Part II (Ch. 5–7): Comprehensive Tax Return Problem
7 Income from Services 7-1
7.1 Wages and Tip Income 7-6
Wages 7-7
Tip Income 7-8
7.2 Income from Insurance-Related Fringe Benefits 7-9
Discrimination Rules 7-9
Employer-Purchased Health, Disability, and Long- Term Care Insurance 7-10
Life Insurance Premiums 7-12
Insurance Benefits Received 7-14
7.3 Income from Other Fringe Benefits 7-18
Personal Expenses Paid by Employer 7-18
Food and Lodging 7-19
Working Condition Fringe Benefits 7-20
De Minimis Fringe Benefits 7-21
No-Additional-Cost Services 7-21
Employee Discounts 7-22
Nominal Gifts 7-22
Safety and Length of Service Achievement Awards 7-22
Transportation and Parking 7-23
Other Fringe Benefits 7-23
Cafeteria Plans 7-25
7.4 Stock Options 7-27
Nonqualified Stock Options 7-29
Incentive Stock Options 7-29
Advanced Topics—Drilling Down 7-32
7.5 Reimbursement of Employee Business Expenses 7-34
Scenario 1: Accountable Plan 7-34
Scenario 2: Nonaccountable Plan 7-35
7.6 Retirement Plans 7-36
Section 401(k) Plans 7-36
Pension Plans 7-37
Self-Employed Plans 7-38
Individual Retirement Accounts 7-38
Part III Deductions
8 Framework for Deductions 8-1
8.1 Types of Activities 8-4
Trade or Business Activity 8-4
Investment/Production of Income Expenses 8-6
Personal Expenses 8-7
8.2 Disallowance of Deductions 8-8
Disallowed Expenses 8-8
Adequate Substantiation 8-11
Benefit of the Taxpayer 8-12
8.3 Types of Deductions 8-13
Spotlight on the Law: Insurance Fraud Payback: Deductible or Not Deductible? 8-14
8.4 Accounting Methods for Deductions 8-15
Prepaid Expenses 8-15
Prepaid Interest 8-16
All-Events Test and Economic Performance 8-17
Payments to a Related Party 8-19
Advanced Topic—Drilling Down 8-20
8.5 Capital Expenditure vs. Repair 8-22
8.6 Accounting for Inventories 8-24
Small Businesses 8-24
Large Businesses 8-25
9 Deductions for AGI and Itemized Deductions 9-1
9.1 Deductions for AGI 9-5
Educator Expenses 9-6
Health Savings Account 9-7
Moving Expenses 9-8
50% of Self-Employment Tax 9-8
Qualified Plan and IRA Contributions 9-9
Self-Employed Health Insurance Deduction 9-9
Penalty on Early Withdrawal of Savings 9-10
Alimony Paid 9-10
Student Loan Interest 9-10
Higher Education Tuition and Fees 9-11
Attorney’s Fees for Discrimination Lawsuits 9-11
Jury Duty Pay 9-12
Charitable Contributions 9-12
9.2 Deductions from AGI: Itemized Deductions vs. Standard Deduction 9-14
9.3 Medical Expenses 9-16
Qualified Medical Expenses 9-17
Other Medical Expense Rules 9-18
Medical Expense Calculation 9-19
9.4 Taxes 9-20
General Rules 9-20
$10,000 Limit 9-22
Spotlight on the Law: The Angst of the SALT Deduction Limitation 9-22
Sales Taxes 9-22
Taxes that Are Not Deductible 9-24
9.5 Interest 9-25
Home Mortgage Interest 9-25
Investment Interest Expense 9-28
Personal Interest 9-29
Other Rules Regarding Interest 9-30
9.6 Charitable Contributions 9-30
Was the Donation Made to a Qualified Charitable Organization? 9-31
Contribution of Services 9-31
Contributions of Cash or Property 9-33
Is There Appropriate Substantiation of the Donation? 9-35
Did the Donor Receive Anything of Value in Return for the Contribution? 9-35
What Limitations Apply to the Amount of the Donation? 9-36
Special Rules for Charitable Contributions 9-38
Nondeductible Contributions 9-38
9.7 Casualty Losses 9-42
Definition of a Casualty Loss 9-42
Casualty Loss Computation 9-42
Casualty Gains and Losses 9-43
9.8 Other Itemized Deductions 9-45
Deductible Other Expenses 9-45
Nondeductible Miscellaneous Expenses 9-45
Advanced Topic—Drilling Down 9-46
10 Business Expenses 10-1
10.1 Business Expense Requirements 10-4
Sole Proprietorship 10-4
Employee Business Expenses 10-4
New Business Investigation Expenses 10-6
10.2 Transportation and Travel Expenses 10-8
Transportation Mode vs. Travel Mode 10-8
Transportation Rules 10-8
Travel Expense Rules 10-9
Business Travel Mixed with Personal Travel 10-10
Travel When Not Away from Home 10-11
Other Travel-Related Limits 10-12
10.3 Entertainment and Education Expenses 10-14
Entertainment 10-14
Spotlight on the Law: Meals and Entertainment: Difference in Tax Treatment 10-15
Education 10-16
10.4 Business Interest 10-18
10.5 Bad Debts 10-21
Cash Method vs. Accrual Method 10-21
Business Bad Debts 10-21
Nonbusiness Bad Debts 10-22
10.6 Net Operating Losses 10-23
Pre-2018 NOLs 10-24
NOLs in 2018, 2019, and 2020 10-24
Post-2020 NOLs 10-24
NOL Computation 10-25
10.7 Excess Business Losses 10-29
11 Limitations on Business Losses and Expenses 11-1
11.1 Business Use of a Home 11-4
Qualification as a Home Office 11-4
Spotlight on the Law: The Home Office Rule 11-5
Evaluating Home Office Deductions 11-6
Simplified Method for Home Office Deduction 11-9
11.2 Hobby Losses 11-11
Definition of a Hobby 11-11
Evaluating the Tax Consequences of Hobbies 11-13
11.3 Vacation Homes 11-14
Personal Category for a Vacation Home 11-15
Rental Category for a Vacation Home 11-16
Personal/Rental Category for a Vacation Home 11-17
11.4 Basis and At-Risk Limitations 11-23
Basis Hurdle 11-23
At-Risk Hurdle 11-24
11.5 Passive Loss Rules 11-25
Tax Consequences of Passive Losses 11-25
Material Participation 11-27
Limited Partners and Rental Activities 11-29
Rental Real Estate 11-30
Selling an Activity with Suspended Passive Losses 11-31
Use of Suspended Losses at Death 11-31
Passive Credits 11-32
Advanced Topic—Drilling Down 11-33
11.6 Losses from Partnerships and S Corporations 11-34
Advanced Topics—Drilling Down 13-24
13.3 Amortization 13-26
Computing Tax Amortization 13-27
Defining Amortizable Intangible Assets 13-27
13.4 Depletion 13-29
Part III (Ch. 8–11): Comprehensive Tax Return Problem
Part IV Taxation of Property Transactions
12 Taxation of Investment Income 12-1
12.1 Interest Income 12-4
Municipal Interest Income 12-4
Series EE and Series I Bonds 12-6
Bond Premiums and Discounts 12-7
Spotlight on the Law: Is an Interest-free Loan Treated as a Loan or a Gift? 12-9
Advanced Topics—Drilling Down 12-10
12.2 Dividend Income 12-14
General Rules for Dividends 12-14
Qualified Dividend Income 12-15
Evaluating the Tax Consequences of Dividend Distributions 12-16
Stock Dividends 12-18
Constructive Dividends 12-20
12.3 Capital Gains and Losses 12-22
Capital Asset Definition 12-22
Netting Capital Gains and Losses 12-23
Long-Term Capital Gain Rates 12-27
Ordering Rule for Netting Capital Losses 12-29
Advanced Topics—Drilling Down 12-32
12.4 The 3.8% Net Investment Income Tax 12-36
Defining the Net Investment Income Tax 12-36
Computing the Net Investment Income Tax 12-37
13 Cost Recovery of Property 13-1
13.1 General MACRS Rules 13-5
Personalty (Personal Property) 13-5
Realty (Real Property) 13-12
Spotlight on the Law: Is It Ever Possible to Depreciate Land? 13-14
13.2 Additional Cost Recovery Rules 13-15
Bonus Depreciation 13-15
Section 179 Election 13-17
Automobile Depreciation 13-20
Other Depreciation Systems 13-24
14 Taxation of Assets Used in a Trade or Business 14-1
14.1 Distinguishing Section 1231 Assets from Ordinary and Capital Assets 14-4
Review of Ordinary and Capital Assets 14-4
Section 1231 Assets 14-4
14.2 Identifying Types of Section 1231 Assets 14-7
Spotlight on the Law: Impact of Identifying a Business Asset 14-9
14.3 Netting Section 1231 Gains and Losses 14-10
14.4 Section 1245 Depreciation Recapture 14-15
Defining Section 1245 Assets 14-16
Evaluating Section 1245 Depreciation Recapture 14-16
14.5 Section 1250 Depreciation Recapture 14-20
Defining Section 1250 Assets 14-21
Evaluating Section 1250 Depreciation Recapture 14-22
Reporting Sales of Business Assets: Form 4797 14-26
Advanced Topic—Drilling Down 14-27
15 Property Transactions: Nonrecognition of Gains and Losses 15-1
15.1 Related-Party Losses 15-4
Defining Related Party 15-4
Evaluating Related-Party Transactions 15-4
Advanced Topic—Drilling Down 15-8
15.2 Wash Sales 15-9
Defining a Wash Sale 15-9
Evaluating a Wash Sale 15-10
Spotlight on the Law: Do Wash Sale Rules Apply to Assets Held in an IRA? 15-15
15.3 Like-Kind Exchanges 15-15
Defining Like-Kind Exchanges 15-15
Evaluating Like-Kind Exchanges 15-16
Boot 15-19
Advanced Topics—Drilling Down 15-22
15.4 Involuntary Conversions 15-26
Defining an Involuntary Conversion 15-26
Evaluating an Involuntary Conversion 15-28
15.5 Loss on Sale of Personal Use Assets 15-32
15.6 Sale of Principal Residence 15-33
Defining a Principal Residence 15-33
Evaluating the Sale of a Principal Residence 15-36
Advanced Topics—Drilling Down 15-38
Part IV (Ch. 12–15): Comprehensive Tax Return Problem
Part V Other Individual Topics
16 Personal Tax Credits 16-1
16.1 Introduction to Personal Tax Credits 16-4
Credit vs. Deduction 16-5
Nonrefundable vs. Refundable Credits 16-5
16.2 Child Tax Credit 16-7
Refundability 16-8
Tax Compliance 16-9
16.3 Credit for Other Dependents (Family Tax Credit) 16-10
16.4 Child and Dependent Care Credit 16-11
Defining the Child and Dependent Care Credit 16-12
Computing the Child and Dependent Care Credit 16-14
16.5 Earned Income Tax Credit (EITC) 16-18
Defining a Qualifying Child 16-20
Other Rules for the EITC 16-21
Computing the Earned Income Tax Credit 16-21
Tax Compliance 16-23
16.6 Education Credits 16-25
General Guidelines for Education Tax Benefits 16-26
American Opportunity Tax Credit (AOTC) 16-26
Spotlight on the Law: Who Can Claim the American Opportunity Tax Credit? 16-28
Lifetime Learning Credit (LLC) 16-28
Comparison of the AOTC and the LLC 16-30
Tax Compliance 16-31
16.7 Other Personal Tax Credits 16-32
Adoption Credit 16-32
Retirement Savings Contributions Credit (Saver’s Credit) 16-34
Credit for the Elderly or the Disabled 16-35
Energy Credits 16-36
Premium Tax Credit 16-38
Foreign Tax Credit 16-38
17 Alternative Minimum Tax and Other Taxes 17-1
17.1 Alternative Minimum Tax (AMT) 17-4
Formula for Computing the AMT 17-5
Adjustments 17-7
Preferences 17-9
Reconciling Taxable Income and AMT Income 17-10
Other AMT Items 17-11
17.2 Social Security, Medicare, and Self-Employment Taxes 17-17
Independent Contractor vs. Employee 17-18
Self-Employment Income 17-18
Self-Employment Tax Computation 17-19
Social Security and Medicare Taxes for Employees and Employers 17-22
Excess Social Security Tax Credit 17-22
17.3 Other Taxes 17-24
Nanny Tax 17-24
Spotlight on the Law: The Nanny Tax 17-25
Additional Medicare Tax 17-26
Parts II–V (Ch. 4–17): Comprehensive Tax Return Problem
Part VI CPA Evolution: Core – Tax
18 Business Entity Topics: CPA Exam Core – Taxation and Regulation 18-1
18.1 Corporations: Taxable Income Computation and Special Deductions 18-5
Corporate Income Tax Formula 18-5
Corporate Deductions 18-8
Spotlight on Becoming a CPA 18-18
18.2 Other Corporate Tax Issues 18-19
Capital Gains and Losses 18-19
Accounting Methods and Periods 18-20
Reconciliation of Book Income and Taxable Income 18-21
Net Operating Losses 18-24
Reconciliation of Retained Earnings 18-26
Corporate Alternative Minimum Tax 18-27
18.3 Business Tax Credits 18-29
Foreign Tax Credit 18-29
General Business Credit 18-30
Business Energy Credits 18-38
18.4 S Corporations 18-40
What is an S Corporation? 18-40
S Corporations vs. C Corporations 18-42
Eligibility Rules for S Corporations 18-43
Election Requirements 18-45
Termination of the S Election 18-46
Taxation of S Corporation Income 18-48
Shareholder’s Basis In S Corporation Stock 18-54
Other S Corporation Issues 18-57
18.5 Partnerships and Limited Liability Companies 18-61
What is a Partnership? 18-61
Taxation of Partnership Income 18-65
Partner’s Basis in Partnership Interest 18-68
18.6 Tax-Exempt Organizations 18-71
Types of Tax-Exempt Organizations 18-71
Eligibility to be Tax-Exempt 18-72
Filing Requirements 18-72
Unrelated Business Income 18-72
Part VI (Ch. 18): Comprehensive Tax Return Problem
Appendix A Tax Formula Items A- 1
Appendix B Tax Forms B- 1
Glossary G- 1
Index I- 1
