CPA Self Study -Self Study CPE for CPAs



Table of Contents TOC \o "3-7" \h \z \t "Heading 2,1,Chapter Title,1,Subtitle,2,Major Heading,2" Chapter 1 - Individual Tax Elements – Section 1 PAGEREF _Toc441269677 \h 1-1Federal Income Taxes: A Description PAGEREF _Toc441269678 \h 1-2Application of U.S. Individual Income Tax PAGEREF _Toc441269679 \h 1-2Gross Income PAGEREF _Toc441269680 \h 1-2Adjusted Gross Income (AGI) PAGEREF _Toc441269681 \h 1-3Taxable Income PAGEREF _Toc441269682 \h 1-3Standard Deduction PAGEREF _Toc441269683 \h 1-3Itemized Deduction PAGEREF _Toc441269684 \h 1-3Personal Exemptions PAGEREF _Toc441269685 \h 1-4Filing Status PAGEREF _Toc441269686 \h 1-4Rates & Tax Liability PAGEREF _Toc441269687 \h 1-4Tax Credits PAGEREF _Toc441269688 \h 1-4Rates, Tables, & Statutory Amounts PAGEREF _Toc441269689 \h 1-5Income Tax Rates - §1 PAGEREF _Toc441269690 \h 1-5Marriage Penalty PAGEREF _Toc441269691 \h 1-6Standard Deduction - §63 PAGEREF _Toc441269692 \h 1-7Dependent Limit - §63(c)(5) PAGEREF _Toc441269693 \h 1-7Personal Exemptions & Phaseout (Expired & Reinstated) - §151 PAGEREF _Toc441269694 \h 1-7Limitation on Itemized Deductions (Expired & Reinstated) - §68 PAGEREF _Toc441269695 \h 1-8Earned Income Tax Credit - §32 PAGEREF _Toc441269696 \h 1-9Disqualified Income PAGEREF _Toc441269697 \h 1-9Means-Tested Programs PAGEREF _Toc441269698 \h 1-9Social Security & Self-Employment Earnings Base PAGEREF _Toc441269699 \h 1-10Standard Mileage Rate PAGEREF _Toc441269700 \h 1-10Qualified Transportation Fringes PAGEREF _Toc441269701 \h 1-10Passenger Automobile Depreciation Limits (“CAPS”) PAGEREF _Toc441269702 \h 1-10Expensing Deduction - §179 PAGEREF _Toc441269703 \h 1-11Self-Employed Health Insurance Deduction PAGEREF _Toc441269704 \h 1-11Corporate Income Tax Rates PAGEREF _Toc441269705 \h 1-11Chapter 1 - Individual Tax Elements – Section 2 PAGEREF _Toc441269706 \h 1-13Withholding & Estimated Tax PAGEREF _Toc441269707 \h 1-13Estimated Tax - §6654 PAGEREF _Toc441269708 \h 1-13Social Security, Medicare & FUTA (or Payroll) Taxes PAGEREF _Toc441269709 \h 1-14FICA - §3111 & §3121 PAGEREF _Toc441269710 \h 1-14Temporary Employee OASDI Cut PAGEREF _Toc441269711 \h 1-15SECA - §1401 PAGEREF _Toc441269712 \h 1-15Temporary Sole Employer OASDI Cut PAGEREF _Toc441269713 \h 1-15Wage Base PAGEREF _Toc441269714 \h 1-15Additional Hospital Insurance Tax On Certain High-Income Individuals PAGEREF _Toc441269715 \h 1-15Final Regulations – TD 9645 PAGEREF _Toc441269716 \h 1-16FUTA - §3301 & §3306 PAGEREF _Toc441269717 \h 1-16Filing Status PAGEREF _Toc441269718 \h 1-16Marital Status PAGEREF _Toc441269719 \h 1-17Single Taxpayers PAGEREF _Toc441269720 \h 1-17Divorced Persons PAGEREF _Toc441269721 \h 1-17Sham Divorce PAGEREF _Toc441269722 \h 1-17Annulled Marriages PAGEREF _Toc441269723 \h 1-17Chapter 1 - Individual Tax Elements – Section 3 PAGEREF _Toc441269724 \h 1-19Married Taxpayers PAGEREF _Toc441269725 \h 1-19Same-Sex Marriage PAGEREF _Toc441269726 \h 1-19Marriage Penalty PAGEREF _Toc441269727 \h 1-19Spouse’s Death PAGEREF _Toc441269728 \h 1-20Married Persons Living Apart PAGEREF _Toc441269729 \h 1-20Filing Jointly PAGEREF _Toc441269730 \h 1-20Joint Liability PAGEREF _Toc441269731 \h 1-20Innocent Spouse Exception PAGEREF _Toc441269732 \h 1-21Nonresident Alien PAGEREF _Toc441269733 \h 1-23Filing Separately PAGEREF _Toc441269734 \h 1-24Special Rules PAGEREF _Toc441269735 \h 1-24Joint Return after Separate Returns PAGEREF _Toc441269736 \h 1-25Separate Returns after Joint Return PAGEREF _Toc441269737 \h 1-25Exception PAGEREF _Toc441269738 \h 1-25Head of Household PAGEREF _Toc441269739 \h 1-25Advantages PAGEREF _Toc441269740 \h 1-25Requirements of §2(b) PAGEREF _Toc441269741 \h 1-26Considered Unmarried PAGEREF _Toc441269742 \h 1-26Keeping Up a Home PAGEREF _Toc441269743 \h 1-26Qualifying Person PAGEREF _Toc441269744 \h 1-26Summary PAGEREF _Toc441269745 \h 1-27Qualifying Widow(er) With Dependent Child PAGEREF _Toc441269746 \h 1-28Chapter 1 - Individual Tax Elements – Section 4 PAGEREF _Toc441269747 \h 1-30Gross Income PAGEREF _Toc441269748 \h 1-30Compensation PAGEREF _Toc441269749 \h 1-30Fringe Benefits PAGEREF _Toc441269750 \h 1-30Rental Income PAGEREF _Toc441269751 \h 1-31Advance Rent PAGEREF _Toc441269752 \h 1-31Security Deposits PAGEREF _Toc441269753 \h 1-31Payment for Canceling a Lease PAGEREF _Toc441269754 \h 1-31Social Security Benefits PAGEREF _Toc441269755 \h 1-31Taxability of Benefits PAGEREF _Toc441269756 \h 1-32Alimony & Spousal Support PAGEREF _Toc441269757 \h 1-34Requirements PAGEREF _Toc441269758 \h 1-34Recapture PAGEREF _Toc441269759 \h 1-35Child Support PAGEREF _Toc441269760 \h 1-35Prizes & Awards - §74 & §274 PAGEREF _Toc441269761 \h 1-35Dividends & Distributions PAGEREF _Toc441269762 \h 1-36Ordinary Dividends PAGEREF _Toc441269763 \h 1-36Money Market Funds PAGEREF _Toc441269764 \h 1-36Dividends on Capital Stock PAGEREF _Toc441269765 \h 1-36Dividends Used to Buy More Stock PAGEREF _Toc441269766 \h 1-36Qualified Dividends PAGEREF _Toc441269767 \h 1-37Capital Gain Distributions PAGEREF _Toc441269768 \h 1-37Undistributed Capital Gains PAGEREF _Toc441269769 \h 1-37Form 2439 PAGEREF _Toc441269770 \h 1-37Basis Adjustment PAGEREF _Toc441269771 \h 1-38Real Estate Investment Trusts (REITs) PAGEREF _Toc441269772 \h 1-38Nontaxable Distributions PAGEREF _Toc441269773 \h 1-38Return of Capital PAGEREF _Toc441269774 \h 1-38Basis Adjustment PAGEREF _Toc441269775 \h 1-38Liquidating Distributions PAGEREF _Toc441269776 \h 1-39Distributions of Stock and Stock Rights PAGEREF _Toc441269777 \h 1-39Taxable Stock Dividends and Stock Rights PAGEREF _Toc441269778 \h 1-39Chapter 1 - Individual Tax Elements – Section 5 PAGEREF _Toc441269779 \h 1-42Discharge of Debt Income PAGEREF _Toc441269780 \h 1-42Exceptions from Income Inclusion PAGEREF _Toc441269781 \h 1-42Reduction of Tax Attributes PAGEREF _Toc441269782 \h 1-43Order of Reductions PAGEREF _Toc441269783 \h 1-43Foreclosure PAGEREF _Toc441269784 \h 1-43Nonrecourse Indebtedness PAGEREF _Toc441269785 \h 1-44Recourse Indebtedness PAGEREF _Toc441269786 \h 1-44Mortgage Relief Act of 2007 PAGEREF _Toc441269787 \h 1-45Principal Residence PAGEREF _Toc441269788 \h 1-45Qualified Principal Residence Indebtedness PAGEREF _Toc441269789 \h 1-45Acquisition Indebtedness PAGEREF _Toc441269790 \h 1-46American Recovery & Reinvestment Act of 2009 Deferral - Expired PAGEREF _Toc441269791 \h 1-46Bartering PAGEREF _Toc441269792 \h 1-46Barter Exchange PAGEREF _Toc441269793 \h 1-47Backup Withholding PAGEREF _Toc441269794 \h 1-48Chapter 1 - Individual Tax Elements – Section 6 PAGEREF _Toc441269795 \h 1-50Recoveries PAGEREF _Toc441269796 \h 1-50Itemized Deduction Recoveries PAGEREF _Toc441269797 \h 1-51Recovery Limited to Deduction PAGEREF _Toc441269798 \h 1-51Recoveries Included in Income PAGEREF _Toc441269799 \h 1-52Non-Itemized Deduction Recoveries PAGEREF _Toc441269800 \h 1-52Amounts Recovered for Credits PAGEREF _Toc441269801 \h 1-52Tax Benefit Rule PAGEREF _Toc441269802 \h 1-52Income Earned by Children - §73 PAGEREF _Toc441269803 \h 1-53“Kiddie” Tax on Unearned (Investment) Income - §1(g)(1) [Form 8615] PAGEREF _Toc441269804 \h 1-53Application, Threshold & Impact PAGEREF _Toc441269805 \h 1-53Definitions PAGEREF _Toc441269806 \h 1-54AMT Exemption for Children - §59(j) PAGEREF _Toc441269807 \h 1-55Election to Report on Parents’ Return - §1(g)(7)(A) [Form 8814] PAGEREF _Toc441269808 \h 1-55Election Situations PAGEREF _Toc441269809 \h 1-56Exclusions from Income PAGEREF _Toc441269810 \h 1-58Educational Savings Bonds - §135 PAGEREF _Toc441269811 \h 1-58Income Exclusion PAGEREF _Toc441269812 \h 1-58Limitation PAGEREF _Toc441269813 \h 1-58MAGI PAGEREF _Toc441269814 \h 1-59Notice 90-7 PAGEREF _Toc441269815 \h 1-59Education Expenses PAGEREF _Toc441269816 \h 1-59Excludable Interest PAGEREF _Toc441269817 \h 1-59Forms 8818 & 8815 PAGEREF _Toc441269818 \h 1-59Scholarships & Fellowships - §117 PAGEREF _Toc441269819 \h 1-59Definitions PAGEREF _Toc441269820 \h 1-60Work Learning Service Programs PAGEREF _Toc441269821 \h 1-60Scholarship Prizes PAGEREF _Toc441269822 \h 1-60Education Expenses PAGEREF _Toc441269823 \h 1-60Education Assistance Programs - §127 PAGEREF _Toc441269824 \h 1-60Employer Educational Trusts - §83 PAGEREF _Toc441269825 \h 1-61Qualified Tuition Programs (QTP) - §529 PAGEREF _Toc441269826 \h 1-61Gift & Inheritance Exclusion PAGEREF _Toc441269827 \h 1-61Subsequent Income PAGEREF _Toc441269828 \h 1-61Divorce PAGEREF _Toc441269829 \h 1-61Business Gifts PAGEREF _Toc441269830 \h 1-62Employees PAGEREF _Toc441269831 \h 1-62Insurance PAGEREF _Toc441269832 \h 1-62Exceptions PAGEREF _Toc441269833 \h 1-62Purchase for Value PAGEREF _Toc441269834 \h 1-62Installment Payments PAGEREF _Toc441269835 \h 1-63Specified Number of Installments PAGEREF _Toc441269836 \h 1-63Specified Amount Payable PAGEREF _Toc441269837 \h 1-63Installments for Life PAGEREF _Toc441269838 \h 1-64Chapter 1 - Individual Tax Elements – Section 7 PAGEREF _Toc441269839 \h 1-66Personal Injury Awards - §104 PAGEREF _Toc441269840 \h 1-66Personal Injury PAGEREF _Toc441269841 \h 1-66Emotional Distress PAGEREF _Toc441269842 \h 1-66Punitive Damages PAGEREF _Toc441269843 \h 1-66Tax Benefit Rule - §111 PAGEREF _Toc441269844 \h 1-66Interest State & Local Obligations - §103 PAGEREF _Toc441269845 \h 1-66Foreign Earned Income Exclusion - §911 PAGEREF _Toc441269846 \h 1-67Nonbusiness & Personal Deductions PAGEREF _Toc441269847 \h 1-67Itemized Deductions PAGEREF _Toc441269848 \h 1-68Limitation on Itemized Deductions - §68 PAGEREF _Toc441269849 \h 1-68Personal & Dependency Exemptions PAGEREF _Toc441269850 \h 1-69Personal Exemptions PAGEREF _Toc441269851 \h 1-69Dependency Exemptions PAGEREF _Toc441269852 \h 1-69Before 2005 PAGEREF _Toc441269853 \h 1-69After 2004 PAGEREF _Toc441269854 \h 1-70Residency Test PAGEREF _Toc441269855 \h 1-70Citizenship PAGEREF _Toc441269856 \h 1-70Relationship Test PAGEREF _Toc441269857 \h 1-70Age Test PAGEREF _Toc441269858 \h 1-71Joint Return Prohibition PAGEREF _Toc441269859 \h 1-71Exception PAGEREF _Toc441269860 \h 1-71Phaseout of Exemptions PAGEREF _Toc441269861 \h 1-71Interest Expense - §163 PAGEREF _Toc441269862 \h 1-72Personal Interest - §163(h)(1) PAGEREF _Toc441269863 \h 1-73Definition PAGEREF _Toc441269864 \h 1-73Deductibility PAGEREF _Toc441269865 \h 1-73Investment Interest Expense - §163(d) PAGEREF _Toc441269866 \h 1-73Definitions PAGEREF _Toc441269867 \h 1-73Net Investment Income Limitation PAGEREF _Toc441269868 \h 1-74Qualified Residence Interest - §163(h)(3) [Form 8598] PAGEREF _Toc441269869 \h 1-74Definitions PAGEREF _Toc441269870 \h 1-74Limitations PAGEREF _Toc441269871 \h 1-75Acquisition Indebtedness PAGEREF _Toc441269872 \h 1-75Home Equity Indebtedness PAGEREF _Toc441269873 \h 1-76Refinancing PAGEREF _Toc441269874 \h 1-76Home Improvements PAGEREF _Toc441269875 \h 1-76Timing PAGEREF _Toc441269876 \h 1-77Alternative Minimum Tax Co-ordination PAGEREF _Toc441269877 \h 1-77Points PAGEREF _Toc441269878 \h 1-78Home Purchase & Improvement Exception PAGEREF _Toc441269879 \h 1-79Refinancing PAGEREF _Toc441269880 \h 1-79Huntsman Case PAGEREF _Toc441269881 \h 1-79Mortgage Interest Statement - R.P. 92-11 PAGEREF _Toc441269882 \h 1-80Allocation of Interest Expense PAGEREF _Toc441269883 \h 1-80Chapter 1 - Individual Tax Elements – Section 8 PAGEREF _Toc441269884 \h 1-87Education Expenses PAGEREF _Toc441269885 \h 1-87Educational Transportation PAGEREF _Toc441269886 \h 1-90Educational Travel PAGEREF _Toc441269887 \h 1-90Meal Expenses PAGEREF _Toc441269888 \h 1-91Investment Seminars PAGEREF _Toc441269889 \h 1-91Higher Education Expense Deduction - §222 PAGEREF _Toc441269890 \h 1-92Dollar Limitation & Phase Out PAGEREF _Toc441269891 \h 1-92Educator Expenses - §62 PAGEREF _Toc441269892 \h 1-92Medical Expense Deductions - §213 [Schedule A] PAGEREF _Toc441269893 \h 1-92Items Deductible PAGEREF _Toc441269894 \h 1-93Items Not Deductible PAGEREF _Toc441269895 \h 1-93Medical Insurance Premiums PAGEREF _Toc441269896 \h 1-93Medicare Part A PAGEREF _Toc441269897 \h 1-94Medicare Part B PAGEREF _Toc441269898 \h 1-94Medicare Part D PAGEREF _Toc441269899 \h 1-94Prepaid Insurance Premiums PAGEREF _Toc441269900 \h 1-94Meals & Lodging PAGEREF _Toc441269901 \h 1-95Expenses of Transportation PAGEREF _Toc441269902 \h 1-95Permanent Improvements PAGEREF _Toc441269903 \h 1-95Spouses, Dependents & Others PAGEREF _Toc441269904 \h 1-96Reimbursement of Expenses PAGEREF _Toc441269905 \h 1-96Long-Term Care Provisions PAGEREF _Toc441269906 \h 1-96Long-Term Care Payments - §7702B(d)(4) PAGEREF _Toc441269907 \h 1-96Long-Term Care Premiums - §213(d)(10) PAGEREF _Toc441269908 \h 1-97IRA Withdrawals for Certain Medical Expenses PAGEREF _Toc441269909 \h 1-97Charitable Contributions - §170 [Schedule A] PAGEREF _Toc441269910 \h 1-97Requirements for Deductibility PAGEREF _Toc441269911 \h 1-98Qualified Organizations PAGEREF _Toc441269912 \h 1-98Limitations on Contributions PAGEREF _Toc441269913 \h 1-98Five-year Carryover PAGEREF _Toc441269914 \h 1-99Contributions of Cash PAGEREF _Toc441269915 \h 1-99Benefits Received PAGEREF _Toc441269916 \h 1-99Benefit Performances PAGEREF _Toc441269917 \h 1-99Athletic Events PAGEREF _Toc441269918 \h 1-100Raffle Tickets, Bingo, Etc. PAGEREF _Toc441269919 \h 1-100Dues, Fees, or Assessments PAGEREF _Toc441269920 \h 1-100Contribution of Property PAGEREF _Toc441269921 \h 1-100Clothing & Household Goods PAGEREF _Toc441269922 \h 1-100Ordinary Income or Short-Term Capital Gain Type Property PAGEREF _Toc441269923 \h 1-101Exception PAGEREF _Toc441269924 \h 1-101Capital Gain Type Property PAGEREF _Toc441269925 \h 1-101Exceptions PAGEREF _Toc441269926 \h 1-101Conservation Easements PAGEREF _Toc441269927 \h 1-102Loss Type Property PAGEREF _Toc441269928 \h 1-102Vehicle Donations PAGEREF _Toc441269929 \h 1-103Fractional Interests PAGEREF _Toc441269930 \h 1-103Other Types of Contributions PAGEREF _Toc441269931 \h 1-103Charitable Distributions from IRAs - §408 PAGEREF _Toc441269932 \h 1-104Substantiation PAGEREF _Toc441269933 \h 1-104Cash Contributions PAGEREF _Toc441269934 \h 1-104Contributions Less Than $250 PAGEREF _Toc441269935 \h 1-104Contributions of $250 or More PAGEREF _Toc441269936 \h 1-105Payroll Deduction Records PAGEREF _Toc441269937 \h 1-106Noncash Contributions PAGEREF _Toc441269938 \h 1-106Deductions of Less Than $250 PAGEREF _Toc441269939 \h 1-106Additional Records PAGEREF _Toc441269940 \h 1-106Deductions of At Least $250 But Not More Than $500 PAGEREF _Toc441269941 \h 1-107Deductions Over $500 But Not Over $5,000 PAGEREF _Toc441269942 \h 1-107Deductions over $5,000 PAGEREF _Toc441269943 \h 1-108Contributions over $75 Made Partly for Goods or Services PAGEREF _Toc441269944 \h 1-108Deduction for Taxes - §164 [Schedule A] PAGEREF _Toc441269945 \h 1-109Income Taxes PAGEREF _Toc441269946 \h 1-109Real Property Tax PAGEREF _Toc441269947 \h 1-109Accrual Method Taxpayers PAGEREF _Toc441269948 \h 1-110Standard Deduction for Real Property Taxes (Expired) - §63(c)(1) PAGEREF _Toc441269949 \h 1-110State & Local Sales Tax Deduction - §164 PAGEREF _Toc441269950 \h 1-110Sales Tax Deduction for Qualified Vehicles (Expired) - §164 PAGEREF _Toc441269951 \h 1-110Personal Property Tax PAGEREF _Toc441269952 \h 1-111Other Deductible Taxes PAGEREF _Toc441269953 \h 1-112Examples of Non-Deductible Taxes PAGEREF _Toc441269954 \h 1-112Chapter 1 - Individual Tax Elements – Section 9 PAGEREF _Toc441269955 \h 1-116Casualty & Theft Losses - §165 [Schedule A] PAGEREF _Toc441269956 \h 1-116Definitions PAGEREF _Toc441269957 \h 1-116Proof of Loss PAGEREF _Toc441269958 \h 1-116Amount of Loss PAGEREF _Toc441269959 \h 1-116Insurance & Other Reimbursements PAGEREF _Toc441269960 \h 1-116Limitations PAGEREF _Toc441269961 \h 1-117Allocation for Mixed Use Property PAGEREF _Toc441269962 \h 1-118Standard Deduction for Disaster Losses (Expired) – §63(c) PAGEREF _Toc441269963 \h 1-118Miscellaneous Deductions - §67 [Schedule A] PAGEREF _Toc441269964 \h 1-118Deductions - Subject to 2% Limit PAGEREF _Toc441269965 \h 1-118Deductions Not Subject To 2% Limit PAGEREF _Toc441269966 \h 1-119Nondeductible Expenses PAGEREF _Toc441269967 \h 1-119Moving Expenses - §217 PAGEREF _Toc441269968 \h 1-119Distance Test PAGEREF _Toc441269969 \h 1-120Time Test PAGEREF _Toc441269970 \h 1-121Time Test for Employees PAGEREF _Toc441269971 \h 1-121Time Test for Self-employment PAGEREF _Toc441269972 \h 1-121Deductible Expenses PAGEREF _Toc441269973 \h 1-121Travel Expenses PAGEREF _Toc441269974 \h 1-122Travel by Car PAGEREF _Toc441269975 \h 1-122Location of Move PAGEREF _Toc441269976 \h 1-122Reporting PAGEREF _Toc441269977 \h 1-123Reimbursements PAGEREF _Toc441269978 \h 1-123Chapter 1 - Individual Tax Elements – Section 10 PAGEREF _Toc441269979 \h 1-125Credits PAGEREF _Toc441269980 \h 1-125Dependent Care Tax Credit - §21 [Form 2441] PAGEREF _Toc441269981 \h 1-125Eligibility PAGEREF _Toc441269982 \h 1-125Employment Related Expenses PAGEREF _Toc441269983 \h 1-125Qualifying Out-of-the-home Expenses PAGEREF _Toc441269984 \h 1-126Payments to Relatives PAGEREF _Toc441269985 \h 1-126Allowable Amount PAGEREF _Toc441269986 \h 1-126Dependent Care Assistance - §129 PAGEREF _Toc441269987 \h 1-126Reporting PAGEREF _Toc441269988 \h 1-126Earned Income Tax Credit - §32 [Form 1040] PAGEREF _Toc441269989 \h 1-126Persons with Qualifying Children PAGEREF _Toc441269990 \h 1-127Persons without a Qualifying Child PAGEREF _Toc441269991 \h 1-128Computation PAGEREF _Toc441269992 \h 1-128Phaseout PAGEREF _Toc441269993 \h 1-128Advance Payment of Earned Income Credit (Expired) - §3507(b)(2) PAGEREF _Toc441269994 \h 1-129Adoption Credit - §23 & §137 PAGEREF _Toc441269995 \h 1-129Qualified Adoption Expenses PAGEREF _Toc441269996 \h 1-130Exclusion from Income for Employer Reimbursements - §137 PAGEREF _Toc441269997 \h 1-130Chapter 1 - Individual Tax Elements – Section 11 PAGEREF _Toc441269998 \h 1-132Child Tax Credit - §24 PAGEREF _Toc441269999 \h 1-132Credit Amount PAGEREF _Toc441270000 \h 1-132Qualifying Child PAGEREF _Toc441270001 \h 1-132Phase out PAGEREF _Toc441270002 \h 1-132Refundable Child Care Credit Amount PAGEREF _Toc441270003 \h 1-132AMT & Child Tax Credit PAGEREF _Toc441270004 \h 1-133Hope & Lifetime Learning Credits - §25A PAGEREF _Toc441270005 \h 1-133Lifetime Learning Credit PAGEREF _Toc441270006 \h 1-133Phase Out PAGEREF _Toc441270007 \h 1-133Hope (with American Opportunity modifications) Credit PAGEREF _Toc441270008 \h 1-133Phase Out PAGEREF _Toc441270009 \h 1-134Refundable PAGEREF _Toc441270010 \h 1-134Ministers & Military - §107 PAGEREF _Toc441270011 \h 1-134Clergy PAGEREF _Toc441270012 \h 1-134Rental Value of a Home PAGEREF _Toc441270013 \h 1-134Members of Religious Orders PAGEREF _Toc441270014 \h 1-135Military & Veterans PAGEREF _Toc441270015 \h 1-135Wages - §61 PAGEREF _Toc441270016 \h 1-136Nontaxable Income - §134 PAGEREF _Toc441270017 \h 1-136Veterans’ Benefits - §134 PAGEREF _Toc441270018 \h 1-137Chapter 2 - Expenses, Deductions & Accounting – Section 12 PAGEREF _Toc441270020 \h 2-139Landlord's Rental Expense PAGEREF _Toc441270021 \h 2-140Reporting Rental Property Expenses (Repealed) - §6041 PAGEREF _Toc441270022 \h 2-140Repairs & Improvements PAGEREF _Toc441270023 \h 2-141Repairs PAGEREF _Toc441270024 \h 2-141Improvements PAGEREF _Toc441270025 \h 2-141Repair Regulations - Reg. §1.263(a)-3 PAGEREF _Toc441270026 \h 2-142Application PAGEREF _Toc441270027 \h 2-142De Minimis Safe Harbor Election PAGEREF _Toc441270028 \h 2-142Making the Safe Harbor Election PAGEREF _Toc441270029 \h 2-143Analytical Framework for Repairs vs. Improvement PAGEREF _Toc441270030 \h 2-143Alternatives To The Facts & Circumstances Analysis PAGEREF _Toc441270031 \h 2-143Safe Harbor Election For Small Taxpayers PAGEREF _Toc441270032 \h 2-143Safe Harbor For Routine Maintenance PAGEREF _Toc441270033 \h 2-144Election To Capitalize Repair & Maintenance Costs PAGEREF _Toc441270034 \h 2-144Change in Accounting Method & Form 3115 PAGEREF _Toc441270035 \h 2-144Salaries & Wages PAGEREF _Toc441270036 \h 2-144Rental Payments for Property & Equipment PAGEREF _Toc441270037 \h 2-144Insurance Premiums PAGEREF _Toc441270038 \h 2-145Local Benefit Taxes & Service Charges PAGEREF _Toc441270039 \h 2-145Travel & Local Transportation Expenses PAGEREF _Toc441270040 \h 2-145Tax Return Preparation PAGEREF _Toc441270041 \h 2-145Other Expenses PAGEREF _Toc441270042 \h 2-145Tenant's Rental Expense PAGEREF _Toc441270043 \h 2-146Rent Paid in Advance PAGEREF _Toc441270044 \h 2-146Lease or Purchase PAGEREF _Toc441270045 \h 2-146Determining the Intent PAGEREF _Toc441270046 \h 2-147Taxes on Leased Property PAGEREF _Toc441270047 \h 2-147Cash Method PAGEREF _Toc441270048 \h 2-147Accrual Method PAGEREF _Toc441270049 \h 2-147Cost of Acquiring a Lease PAGEREF _Toc441270050 \h 2-148Option to Renew - 75% Rule PAGEREF _Toc441270051 \h 2-148Cost of a Modification Agreement PAGEREF _Toc441270052 \h 2-149Commissions, Bonuses, & Fees PAGEREF _Toc441270053 \h 2-149Loss on Merchandise & Fixtures PAGEREF _Toc441270054 \h 2-150Improved Leased Property PAGEREF _Toc441270055 \h 2-150Construction Allowances Provided To Lessees - §110 PAGEREF _Toc441270056 \h 2-150Assignment of a Lease PAGEREF _Toc441270057 \h 2-150Capitalizing Rent Expenses PAGEREF _Toc441270058 \h 2-151Chapter 2 - Expenses, Deductions & Accounting – Section 13 PAGEREF _Toc441270059 \h 2-153Health Insurance Costs of Self-Employed Persons - §162(l) [Schedule C] PAGEREF _Toc441270060 \h 2-153Requirements for Eligibility PAGEREF _Toc441270061 \h 2-153Amount Deductible PAGEREF _Toc441270062 \h 2-153Percentage PAGEREF _Toc441270063 \h 2-153Hobby Loss Rules - §183 [Schedule C] PAGEREF _Toc441270064 \h 2-154Allowable Deductions PAGEREF _Toc441270065 \h 2-154Limited Deductions PAGEREF _Toc441270066 \h 2-154Profit Motive Presumptions PAGEREF _Toc441270067 \h 2-155Special Rule for Horse Breeding PAGEREF _Toc441270068 \h 2-155Other Factors PAGEREF _Toc441270069 \h 2-155Self-Employment Taxes - §3111 & §3121 PAGEREF _Toc441270070 \h 2-156Home Office Deduction - §280A [Schedule C] PAGEREF _Toc441270071 \h 2-156Requirements PAGEREF _Toc441270072 \h 2-156Deductible Expenses PAGEREF _Toc441270073 \h 2-157Employee's Home Leased To Employer PAGEREF _Toc441270074 \h 2-158Residential Phone Service PAGEREF _Toc441270075 \h 2-158Allocations PAGEREF _Toc441270076 \h 2-158Room v. Square Footage PAGEREF _Toc441270077 \h 2-158R.P. 2013-13 Safe Harbor PAGEREF _Toc441270078 \h 2-158Limitations PAGEREF _Toc441270079 \h 2-159Expanded Principal Place of Business Definition PAGEREF _Toc441270080 \h 2-160Business & Investment Credits PAGEREF _Toc441270081 \h 2-162Business Credit Carryback & Carryforward Rules - §39(a) PAGEREF _Toc441270082 \h 2-163NOL Comparison - §172 PAGEREF _Toc441270083 \h 2-163Chapter 2 - Expenses, Deductions & Accounting – Section 14 PAGEREF _Toc441270084 \h 2-166Travel & Entertainment PAGEREF _Toc441270085 \h 2-166Travel Expenses PAGEREF _Toc441270086 \h 2-166Determining a Tax Home - Travel Expenses PAGEREF _Toc441270087 \h 2-166Tax Home PAGEREF _Toc441270088 \h 2-166Regular Place of Abode in a Real & Substantial Sense PAGEREF _Toc441270089 \h 2-167Two Work Locations PAGEREF _Toc441270090 \h 2-167Temporary Assignment PAGEREF _Toc441270091 \h 2-167Rigid One-Year Rule PAGEREF _Toc441270092 \h 2-168Away From Home - Travel Expenses PAGEREF _Toc441270093 \h 2-169Sleep & Rest Rule PAGEREF _Toc441270094 \h 2-169Substantial Period PAGEREF _Toc441270095 \h 2-169Chapter 2 - Expenses, Deductions & Accounting – Section 15 PAGEREF _Toc441270096 \h 2-172Business Purpose - Travel Expense PAGEREF _Toc441270097 \h 2-172Categories of Expense PAGEREF _Toc441270098 \h 2-172Travel Costs PAGEREF _Toc441270099 \h 2-172Costs at Destination PAGEREF _Toc441270100 \h 2-172All or Nothing PAGEREF _Toc441270101 \h 2-172Time PAGEREF _Toc441270102 \h 2-17251/49 Rule PAGEREF _Toc441270103 \h 2-172Foreign Business Travel PAGEREF _Toc441270104 \h 2-173Personal Pleasure PAGEREF _Toc441270105 \h 2-173Primarily Business PAGEREF _Toc441270106 \h 2-173Full Deduction Exception PAGEREF _Toc441270107 \h 2-173Limitations - Travel Expenses PAGEREF _Toc441270108 \h 2-173Meals & Lodging PAGEREF _Toc441270109 \h 2-173Domestic Conventions & Meetings PAGEREF _Toc441270110 \h 2-173Foreign Conventions & Meetings PAGEREF _Toc441270111 \h 2-174Cruise Ship Convention PAGEREF _Toc441270112 \h 2-174Chapter 2 - Expenses, Deductions & Accounting – Section 16 PAGEREF _Toc441270113 \h 2-178Eligible Expenses - Entertainment PAGEREF _Toc441270114 \h 2-178Test #1 - "Directly Related" PAGEREF _Toc441270115 \h 2-178Test #2 - "Associated With" PAGEREF _Toc441270116 \h 2-178Test #3 - Statutory Exceptions PAGEREF _Toc441270117 \h 2-179Expense for Spouses Of Out Of Town Business Guests PAGEREF _Toc441270118 \h 2-180Entertainment Facilities PAGEREF _Toc441270119 \h 2-180Home Entertainment Expenses PAGEREF _Toc441270120 \h 2-180Limitations - Entertainment PAGEREF _Toc441270121 \h 2-180Exceptions PAGEREF _Toc441270122 \h 2-180Ticket Purchases PAGEREF _Toc441270123 \h 2-181Charitable Sports Events Exception PAGEREF _Toc441270124 \h 2-181Skyboxes PAGEREF _Toc441270125 \h 2-181One Event Rule PAGEREF _Toc441270126 \h 2-181Related Parties PAGEREF _Toc441270127 \h 2-181Food & Beverages PAGEREF _Toc441270128 \h 2-182Chapter 2 - Expenses, Deductions & Accounting – Section 17 PAGEREF _Toc441270129 \h 2-185Substantiation PAGEREF _Toc441270130 \h 2-185Travel Expense Substantiation PAGEREF _Toc441270131 \h 2-185Entertainment & Meal Expense Substantiation PAGEREF _Toc441270132 \h 2-185Business Gifts Expense Substantiation PAGEREF _Toc441270133 \h 2-186Substantiation Methods PAGEREF _Toc441270134 \h 2-186Adequate Records PAGEREF _Toc441270135 \h 2-186Sufficiently Corroborated Statements PAGEREF _Toc441270136 \h 2-187Exceptional Circumstances PAGEREF _Toc441270137 \h 2-187Retention of Records PAGEREF _Toc441270138 \h 2-187Exceptions to Substantiation Requirements PAGEREF _Toc441270139 \h 2-188Employee Expense Reimbursement & Reporting PAGEREF _Toc441270140 \h 2-188When an Employee Needs to File Form 2106 PAGEREF _Toc441270141 \h 2-189Employee Expense Reimbursement & Reporting PAGEREF _Toc441270142 \h 2-189Family Support Act of 1988 PAGEREF _Toc441270143 \h 2-189Remaining Above-The-Line Deduction PAGEREF _Toc441270144 \h 2-190Chapter 2 - Expenses, Deductions & Accounting – Section 18 PAGEREF _Toc441270145 \h 2-193Accountable Plans PAGEREF _Toc441270146 \h 2-193Reasonable Period of Time PAGEREF _Toc441270147 \h 2-194Adequate Accounting PAGEREF _Toc441270148 \h 2-194Per Diem Allowance Arrangements PAGEREF _Toc441270149 \h 2-194Federal Per Diem Rate PAGEREF _Toc441270150 \h 2-195Related Employer PAGEREF _Toc441270151 \h 2-198Meal Break Out PAGEREF _Toc441270152 \h 2-199Partial Days of Travel PAGEREF _Toc441270153 \h 2-199Usage & Consistency PAGEREF _Toc441270154 \h 2-199Unproven or Unspent Per Diem Allowances PAGEREF _Toc441270155 \h 2-199Travel Advance PAGEREF _Toc441270156 \h 2-200Reporting Per Diem Allowances PAGEREF _Toc441270157 \h 2-200Reimbursement Not More Than Federal Rate PAGEREF _Toc441270158 \h 2-200Reimbursement More Than Federal Rate PAGEREF _Toc441270159 \h 2-200Nonaccountable Plans PAGEREF _Toc441270160 \h 2-202Chapter 2 - Expenses, Deductions & Accounting – Section 19 PAGEREF _Toc441270161 \h 2-206Local Transportation PAGEREF _Toc441270162 \h 2-206Assignments within Work Area PAGEREF _Toc441270163 \h 2-206Old Revenue Ruling 90-23 (Superseded) PAGEREF _Toc441270164 \h 2-206Temporary Work Site Definition PAGEREF _Toc441270165 \h 2-207Reserve Units PAGEREF _Toc441270166 \h 2-207Revenue Ruling 99-7 PAGEREF _Toc441270167 \h 2-207Automobile Deductions PAGEREF _Toc441270168 \h 2-208Eligible Expenses PAGEREF _Toc441270169 \h 2-208Apportionment of Personal & Business Use PAGEREF _Toc441270170 \h 2-208Actual Cost Method PAGEREF _Toc441270171 \h 2-209Depreciation & Expensing PAGEREF _Toc441270172 \h 2-209Placed in Service PAGEREF _Toc441270173 \h 2-209Half-year Convention PAGEREF _Toc441270174 \h 2-209Quarterly Convention Exception PAGEREF _Toc441270175 \h 2-209MACRS PAGEREF _Toc441270176 \h 2-209Double Declining Balance Method PAGEREF _Toc441270177 \h 2-210Depreciation "Caps" PAGEREF _Toc441270178 \h 2-210Bonus (or Additional First-year) Depreciation - §168 PAGEREF _Toc441270179 \h 2-210Expensing Limit PAGEREF _Toc441270180 \h 2-211Chapter 2 - Expenses, Deductions & Accounting – Section 20 PAGEREF _Toc441270181 \h 2-214Predominate Business Use Rule PAGEREF _Toc441270182 \h 2-214Qualified Business Use PAGEREF _Toc441270183 \h 2-214More Than 50% Use Test PAGEREF _Toc441270184 \h 2-214Limitations PAGEREF _Toc441270185 \h 2-214Recapture PAGEREF _Toc441270186 \h 2-214ITC Recapture PAGEREF _Toc441270187 \h 2-214Excess Depreciation Recapture PAGEREF _Toc441270188 \h 2-215Leasing Restrictions PAGEREF _Toc441270189 \h 2-215Standard Mileage Method PAGEREF _Toc441270190 \h 2-215Limitations PAGEREF _Toc441270191 \h 2-216Alternating Use PAGEREF _Toc441270192 \h 2-216Switching Methods PAGEREF _Toc441270193 \h 2-216Charitable Transportation PAGEREF _Toc441270194 \h 2-216Medical Transportation PAGEREF _Toc441270195 \h 2-217Gas Guzzler Tax - §4064 PAGEREF _Toc441270196 \h 2-217Automobiles PAGEREF _Toc441270197 \h 2-217Limousines PAGEREF _Toc441270198 \h 2-218Vehicles Not Subject To Tax PAGEREF _Toc441270199 \h 2-218Chapter 2 - Expenses, Deductions & Accounting – Section 21 PAGEREF _Toc441270200 \h 2-221Fringe Benefits PAGEREF _Toc441270201 \h 2-221Excluded Fringe Benefits PAGEREF _Toc441270202 \h 2-221Prizes & Awards - §74 PAGEREF _Toc441270203 \h 2-221Group Life Insurance Premiums - §79 PAGEREF _Toc441270204 \h 2-221Personal Injury Payments - §104 PAGEREF _Toc441270205 \h 2-222Employer Contributions to Accident and Health Plans - §106 & §105 PAGEREF _Toc441270206 \h 2-222Partnerships & S Corporations - R.R. 91-26 PAGEREF _Toc441270207 \h 2-222Health Insurance & FICA - Announcement 92-16 PAGEREF _Toc441270208 \h 2-222Meals & Lodging - §119 PAGEREF _Toc441270209 \h 2-223Cafeteria Plans - §125 PAGEREF _Toc441270210 \h 2-223Educational Assistance Programs - §127 PAGEREF _Toc441270211 \h 2-224Dependent Care Assistance - §129 PAGEREF _Toc441270212 \h 2-225No-Additional Cost Services - §132(b) PAGEREF _Toc441270213 \h 2-225Qualified Employee Discounts - §132(c) PAGEREF _Toc441270214 \h 2-225Working Condition Fringe Benefits - §132(d) PAGEREF _Toc441270215 \h 2-226Transportation in Unsafe Areas PAGEREF _Toc441270216 \h 2-226De Minimis Fringe Benefits - §132(e) PAGEREF _Toc441270217 \h 2-227Employer Provided Automobile PAGEREF _Toc441270218 \h 2-227Annual Lease Value Method PAGEREF _Toc441270219 \h 2-227Cents Per Mile Method PAGEREF _Toc441270220 \h 2-228Commuting Value Method PAGEREF _Toc441270221 \h 2-228Chapter 2 - Expenses, Deductions & Accounting – Section 22 PAGEREF _Toc441270222 \h 2-232Methods of Accounting - §446 PAGEREF _Toc441270223 \h 2-232Cash Method PAGEREF _Toc441270224 \h 2-232Constructive Receipt PAGEREF _Toc441270225 \h 2-232Accrual Method PAGEREF _Toc441270226 \h 2-232Advance Payments PAGEREF _Toc441270227 \h 2-232Accrual Method Required PAGEREF _Toc441270228 \h 2-232Other Methods of Accounting PAGEREF _Toc441270229 \h 2-233Hybrid Methods PAGEREF _Toc441270230 \h 2-233Long Term Contracts - §460 PAGEREF _Toc441270231 \h 2-233Percentage of Completion PAGEREF _Toc441270232 \h 2-233Percentage of Completion - Capitalized Cost Method PAGEREF _Toc441270233 \h 2-233Look-back Rule PAGEREF _Toc441270234 \h 2-234Uniform Capitalization - §263A PAGEREF _Toc441270235 \h 2-234Annual Sales Limit PAGEREF _Toc441270236 \h 2-234Artist Exception PAGEREF _Toc441270237 \h 2-234Classification of Property PAGEREF _Toc441270238 \h 2-234Costs PAGEREF _Toc441270239 \h 2-235Self Constructed Assets PAGEREF _Toc441270240 \h 2-235Allocation Method PAGEREF _Toc441270241 \h 2-235Manufactured Products PAGEREF _Toc441270242 \h 2-235Interest PAGEREF _Toc441270243 \h 2-236Change in Accounting Method PAGEREF _Toc441270244 \h 2-236Chapter 2 - Expenses, Deductions & Accounting – Section 23 PAGEREF _Toc441270245 \h 2-239Accounting Periods PAGEREF _Toc441270246 \h 2-239Definitions PAGEREF _Toc441270247 \h 2-239Taxable Years PAGEREF _Toc441270248 \h 2-239No Books Kept PAGEREF _Toc441270249 \h 2-239New Taxpayer PAGEREF _Toc441270250 \h 2-239Partnership PAGEREF _Toc441270251 \h 2-240S Corporations PAGEREF _Toc441270252 \h 2-240Personal Service Corporations PAGEREF _Toc441270253 \h 2-241C Corporations PAGEREF _Toc441270254 \h 2-241Business Purpose Exception PAGEREF _Toc441270255 \h 2-241Section 444 Election PAGEREF _Toc441270256 \h 2-241Partnerships & S Corporations PAGEREF _Toc441270257 \h 2-242Personal Service Corporations PAGEREF _Toc441270258 \h 2-242Tiered Structures PAGEREF _Toc441270259 \h 2-242Expensing - §179 PAGEREF _Toc441270260 \h 2-242Placed In Service PAGEREF _Toc441270261 \h 2-242Qualifying Property PAGEREF _Toc441270262 \h 2-243Purchase Restrictions PAGEREF _Toc441270263 \h 2-243Section 1245 Property PAGEREF _Toc441270264 \h 2-243Property Used Primarily for Lodging PAGEREF _Toc441270265 \h 2-244Deduction Limit PAGEREF _Toc441270266 \h 2-244Maximum Dollar & Investment Limits PAGEREF _Toc441270267 \h 2-244Taxable Income Limit PAGEREF _Toc441270268 \h 2-245Carryover of Unallowable Deduction PAGEREF _Toc441270269 \h 2-245Married Taxpayers Filing Separate Returns PAGEREF _Toc441270270 \h 2-246Passenger Automobiles PAGEREF _Toc441270271 \h 2-246Partnerships PAGEREF _Toc441270272 \h 2-246S Corporations PAGEREF _Toc441270273 \h 2-247Cost PAGEREF _Toc441270274 \h 2-247Election PAGEREF _Toc441270275 \h 2-247Records PAGEREF _Toc441270276 \h 2-247Revocation of Election PAGEREF _Toc441270277 \h 2-247Figuring the Deduction PAGEREF _Toc441270278 \h 2-248Recapture of §179 Deductions PAGEREF _Toc441270279 \h 2-248Dispositions PAGEREF _Toc441270280 \h 2-248Installment Sales PAGEREF _Toc441270281 \h 2-249Depreciation & Cost Recovery - §167 & §168 PAGEREF _Toc441270282 \h 2-249Personal Property PAGEREF _Toc441270283 \h 2-249ACRS - §168 PAGEREF _Toc441270284 \h 2-249Applicable Percentage PAGEREF _Toc441270285 \h 2-249Straight-line Election PAGEREF _Toc441270286 \h 2-250MACRS PAGEREF _Toc441270287 \h 2-250Elections PAGEREF _Toc441270288 \h 2-251MACRS Conventions PAGEREF _Toc441270289 \h 2-251Mid-quarter Convention Exception PAGEREF _Toc441270290 \h 2-251Recapture - §1245 PAGEREF _Toc441270291 \h 2-251Bonus (or Additional First-year) Depreciation - §168 PAGEREF _Toc441270292 \h 2-252Initial 50% Additional First-year Depreciation PAGEREF _Toc441270293 \h 2-252Temporary 100% Additional First-year Depreciation PAGEREF _Toc441270294 \h 2-252Back to 50% Additional First-year Depreciation PAGEREF _Toc441270295 \h 2-252PATH Act Extensions & Modifications PAGEREF _Toc441270296 \h 2-252Qualified Property - §168(k)(2) PAGEREF _Toc441270297 \h 2-253Depreciation Limits on Business Vehicles - §168(k)(2)(F) PAGEREF _Toc441270298 \h 2-254Credits in Lieu of Depreciation – §168(k)(4) PAGEREF _Toc441270299 \h 2-254Nonqualified Property - §168(k)(2) PAGEREF _Toc441270300 \h 2-254Real Property PAGEREF _Toc441270301 \h 2-260ACRS PAGEREF _Toc441270302 \h 2-260MACRS PAGEREF _Toc441270303 \h 2-267Leasehold Improvement, Retail Improvement & Restaurant Property - §168 PAGEREF _Toc441270304 \h 2-267Qualified 15-Year Leasehold Improvement Property - §168(e)(3)(E)(iv) PAGEREF _Toc441270305 \h 2-267Qualified Leasehold Improvement Property PAGEREF _Toc441270306 \h 2-267Qualified 15-Year Retail Improvement Property - §168(e)(E)(ix) PAGEREF _Toc441270307 \h 2-268Qualified Retail Improvement Property PAGEREF _Toc441270308 \h 2-26815-Year Restaurant Improvement Property - §168(e)(3)(E)(v) PAGEREF _Toc441270309 \h 2-269Qualified Restaurant Property PAGEREF _Toc441270310 \h 2-269Expensing & Bonus Depreciation Permitted PAGEREF _Toc441270311 \h 2-269Expensing - §179 PAGEREF _Toc441270312 \h 2-269Bonus Depreciation - 168 PAGEREF _Toc441270313 \h 2-269Recapture Considerations - §1245 & §1250 PAGEREF _Toc441270314 \h 2-270Recapture - §1250 & §1245 PAGEREF _Toc441270315 \h 2-275Section 1245 PAGEREF _Toc441270316 \h 2-275Full Recapture PAGEREF _Toc441270317 \h 2-275Section 1250 PAGEREF _Toc441270318 \h 2-275Partial Recapture PAGEREF _Toc441270319 \h 2-275MACRS Recapture Exception for Real Property PAGEREF _Toc441270320 \h 2-275Alternative Depreciation System - §168(g) PAGEREF _Toc441270321 \h 2-275Mandatory Application PAGEREF _Toc441270322 \h 2-275Method PAGEREF _Toc441270323 \h 2-276Amortization PAGEREF _Toc441270324 \h 2-276Costs Eligible for Amortization PAGEREF _Toc441270325 \h 2-276Trademarks & Trade Names - §167(r) PAGEREF _Toc441270326 \h 2-276Methods & Periods for Amortization PAGEREF _Toc441270327 \h 2-276Partnership & Corporate Organization Costs - §709 & §248 PAGEREF _Toc441270328 \h 2-277Business Start-Up Costs - §195 PAGEREF _Toc441270329 \h 2-277Depletion - §613 PAGEREF _Toc441270330 \h 2-277Other Assets PAGEREF _Toc441270331 \h 2-277Chapter 3 - Property Transfers & Retirement Plans – Section 24 PAGEREF _Toc441270333 \h 3-1Sales & Exchanges of Property PAGEREF _Toc441270334 \h 3-2Sale or Lease PAGEREF _Toc441270335 \h 3-2Easements PAGEREF _Toc441270336 \h 3-3Capital Gains & Losses PAGEREF _Toc441270337 \h 3-3Capital Assets - §1221 PAGEREF _Toc441270338 \h 3-3Capital Gains & Qualified Dividends Rate – §1(h) PAGEREF _Toc441270339 \h 3-4Holding Periods - (§1222 & §1223) PAGEREF _Toc441270340 \h 3-4Capital Losses - §1211 PAGEREF _Toc441270341 \h 3-5Business Property PAGEREF _Toc441270342 \h 3-5Basis of Property PAGEREF _Toc441270343 \h 3-6Basis Adjustments PAGEREF _Toc441270344 \h 3-6Property Received as a Gift PAGEREF _Toc441270345 \h 3-6Property Received by Inheritance PAGEREF _Toc441270346 \h 3-7Changes in Property Usage PAGEREF _Toc441270347 \h 3-7Stocks & Bonds PAGEREF _Toc441270348 \h 3-7Chapter 3 - Property Transfers & Retirement Plans – Section 25 PAGEREF _Toc441270349 \h 3-10Sale of Personal Residence - §121 PAGEREF _Toc441270350 \h 3-10Two-Year Ownership & Use Requirements PAGEREF _Toc441270351 \h 3-10Tacking of Prior Holding Period PAGEREF _Toc441270352 \h 3-11Prorata Exception PAGEREF _Toc441270353 \h 3-11Limitations on Exclusion PAGEREF _Toc441270354 \h 3-11Reduced Home Sale Exclusion for Periods of Nonqualified Use PAGEREF _Toc441270355 \h 3-12Computation PAGEREF _Toc441270356 \h 3-12Nonqualified Use PAGEREF _Toc441270357 \h 3-12Post-May 6, 1997 Depreciation PAGEREF _Toc441270358 \h 3-12Surviving Spouse Home Sale Exclusion PAGEREF _Toc441270359 \h 3-13Installment Sales - §453 PAGEREF _Toc441270360 \h 3-13General Rules PAGEREF _Toc441270361 \h 3-13Dealer Sales PAGEREF _Toc441270362 \h 3-13Unstated Interest PAGEREF _Toc441270363 \h 3-14Related Parties - §453(e) PAGEREF _Toc441270364 \h 3-14Disposition of Installment Notes - §453B PAGEREF _Toc441270365 \h 3-16Determining Installment Income PAGEREF _Toc441270366 \h 3-16Pledge Rule PAGEREF _Toc441270367 \h 3-18Escrow Account PAGEREF _Toc441270368 \h 3-18Depreciation Recapture PAGEREF _Toc441270369 \h 3-18Like Kind Exchange PAGEREF _Toc441270370 \h 3-18Chapter 3 - Property Transfers & Retirement Plans – Section 26 PAGEREF _Toc441270371 \h 3-21Repossessions - §1038 PAGEREF _Toc441270372 \h 3-21Personal Property PAGEREF _Toc441270373 \h 3-21Non- Installment Method Sales PAGEREF _Toc441270374 \h 3-22Basis of Installment Obligation PAGEREF _Toc441270375 \h 3-22Gain or Loss on Repossession PAGEREF _Toc441270376 \h 3-22Installment Method Sales PAGEREF _Toc441270377 \h 3-22Basis of Installment Obligation PAGEREF _Toc441270378 \h 3-22Gain or Loss on Repossession PAGEREF _Toc441270379 \h 3-22Basis of Repossessed Personal Property PAGEREF _Toc441270380 \h 3-24Bad Debt PAGEREF _Toc441270381 \h 3-24Real Property PAGEREF _Toc441270382 \h 3-24Conditions PAGEREF _Toc441270383 \h 3-24Figuring Gain on Repossession PAGEREF _Toc441270384 \h 3-25Limit on Taxable Gain PAGEREF _Toc441270385 \h 3-25Repossession Costs PAGEREF _Toc441270386 \h 3-25Indefinite Selling Price PAGEREF _Toc441270387 \h 3-27Character of Gain PAGEREF _Toc441270388 \h 3-27Basis of Repossessed Real Property PAGEREF _Toc441270389 \h 3-27Holding Period for Resales PAGEREF _Toc441270390 \h 3-28Bad Debt PAGEREF _Toc441270391 \h 3-28Seller’s Former Home Exception PAGEREF _Toc441270392 \h 3-29Chapter 3 - Property Transfers & Retirement Plans – Section 27 PAGEREF _Toc441270393 \h 3-34Involuntary Conversions - §1033 PAGEREF _Toc441270394 \h 3-34Condemnations PAGEREF _Toc441270395 \h 3-34Threat of Condemnation PAGEREF _Toc441270396 \h 3-34Reports of Condemnation PAGEREF _Toc441270397 \h 3-35Property Voluntarily Sold PAGEREF _Toc441270398 \h 3-35Easements PAGEREF _Toc441270399 \h 3-35Condemnation Award PAGEREF _Toc441270400 \h 3-36Amounts Withheld From Award PAGEREF _Toc441270401 \h 3-36Net Condemnation Award PAGEREF _Toc441270402 \h 3-36Interest on Award PAGEREF _Toc441270403 \h 3-36Payments to Relocate PAGEREF _Toc441270404 \h 3-37Severance Damages PAGEREF _Toc441270405 \h 3-37Treatment of Severance Damages PAGEREF _Toc441270406 \h 3-37Expenses of Obtaining an Award PAGEREF _Toc441270407 \h 3-38Special Assessment Withheld from Award PAGEREF _Toc441270408 \h 3-38Severance Damages Included in Award PAGEREF _Toc441270409 \h 3-39Gain or Loss from Condemnations PAGEREF _Toc441270410 \h 3-39How to Figure Gain or Loss PAGEREF _Toc441270411 \h 3-39Part Business or Part Rental PAGEREF _Toc441270412 \h 3-40Postponement of Gain PAGEREF _Toc441270413 \h 3-40Choosing to Postpone Gain PAGEREF _Toc441270414 \h 3-40Cost Test PAGEREF _Toc441270415 \h 3-40Replacement Period PAGEREF _Toc441270416 \h 3-40Condemnation PAGEREF _Toc441270417 \h 3-40Replacement Property Acquired Before the Condemnation PAGEREF _Toc441270418 \h 3-41Extension PAGEREF _Toc441270419 \h 3-41Time for assessing a deficiency PAGEREF _Toc441270420 \h 3-42Chapter 3 - Property Transfers & Retirement Plans – Section 28 PAGEREF _Toc441270421 \h 3-45At Risk Limits for Real Estate - §465 PAGEREF _Toc441270422 \h 3-45Amount At Risk PAGEREF _Toc441270423 \h 3-45Qualified Nonrecourse Financing PAGEREF _Toc441270424 \h 3-45Section 1031 Like Kind Exchanges PAGEREF _Toc441270425 \h 3-46Statutory Requirements & Definitions PAGEREF _Toc441270426 \h 3-46Qualified Transaction - Exchanges v. Sales PAGEREF _Toc441270427 \h 3-47Held for Productive Use or investment PAGEREF _Toc441270428 \h 3-47Investment Purpose PAGEREF _Toc441270429 \h 3-47Statutory Exclusions from §1031 PAGEREF _Toc441270430 \h 3-47Like Kind Property PAGEREF _Toc441270431 \h 3-48Nature or Quality of Property PAGEREF _Toc441270432 \h 3-48Real v. Personal Property PAGEREF _Toc441270433 \h 3-48Chapter 3 - Property Transfers & Retirement Plans – Section 29 PAGEREF _Toc441270434 \h 3-51The Concept of “Boot” PAGEREF _Toc441270435 \h 3-51Realized Gain PAGEREF _Toc441270436 \h 3-51Recognized Gain PAGEREF _Toc441270437 \h 3-51Limitation on Recognition of Gain under §1031 PAGEREF _Toc441270438 \h 3-51The Definition of “Boot” PAGEREF _Toc441270439 \h 3-51The Rules of “Boot” PAGEREF _Toc441270440 \h 3-52Property Boot PAGEREF _Toc441270441 \h 3-52Mortgage Boot PAGEREF _Toc441270442 \h 3-52Netting “Boot” - The Rules of Offset PAGEREF _Toc441270443 \h 3-52Property Boot Given Offsets Any Boot Received PAGEREF _Toc441270444 \h 3-53Mortgage Boot Given Offsets Mortgage Boot Received PAGEREF _Toc441270445 \h 3-53Mortgage Boot Given Does Not Offset Property Boot Received PAGEREF _Toc441270446 \h 3-53Revenue Ruling 72-456 & Commissions PAGEREF _Toc441270447 \h 3-53Gain or Loss on Boot PAGEREF _Toc441270448 \h 3-53Basis on Tax-Deferred Exchange PAGEREF _Toc441270449 \h 3-54Allocation of Basis PAGEREF _Toc441270450 \h 3-54Installment Reporting of Boot PAGEREF _Toc441270451 \h 3-54Exchanges Between Related Parties PAGEREF _Toc441270452 \h 3-54Reporting an Exchange PAGEREF _Toc441270453 \h 3-55Types of Exchanges PAGEREF _Toc441270454 \h 3-55Two-Party Exchanges PAGEREF _Toc441270455 \h 3-55Three-Party “Alderson” Exchange PAGEREF _Toc441270456 \h 3-56Three-Party “Baird Publishing” Exchange PAGEREF _Toc441270457 \h 3-57Delayed Exchanges PAGEREF _Toc441270458 \h 3-5845-Day Rule PAGEREF _Toc441270459 \h 3-58Method of Identification PAGEREF _Toc441270460 \h 3-58180-Day Rule PAGEREF _Toc441270461 \h 3-59Chapter 3 - Property Transfers & Retirement Plans – Section 30 PAGEREF _Toc441270462 \h 3-61Final Regulations for Delayed (Deferred) Exchanges PAGEREF _Toc441270463 \h 3-61Deferred (Delayed) Exchange Definition PAGEREF _Toc441270464 \h 3-63Identification Requirements PAGEREF _Toc441270465 \h 3-63Identification & Exchange Periods PAGEREF _Toc441270466 \h 3-63Method of Identification PAGEREF _Toc441270467 \h 3-63Property Description PAGEREF _Toc441270468 \h 3-63Revocation PAGEREF _Toc441270469 \h 3-64Substantial Receipt PAGEREF _Toc441270470 \h 3-64Multiple Replacement Properties PAGEREF _Toc441270471 \h 3-64Actual & Constructive Receipt Rule PAGEREF _Toc441270472 \h 3-65Four Safe Harbors PAGEREF _Toc441270473 \h 3-65Safe Harbor #1 - Security PAGEREF _Toc441270474 \h 3-65Safe Harbor #2 - Escrow Accounts & Trusts PAGEREF _Toc441270475 \h 3-65Safe Harbor #3 - Qualified Intermediary PAGEREF _Toc441270476 \h 3-66Safe Harbor #4 - Interest PAGEREF _Toc441270477 \h 3-66Exchanges of Partnership Interests PAGEREF _Toc441270478 \h 3-67Chapter 3 - Property Transfers & Retirement Plans – Section 31 PAGEREF _Toc441270479 \h 3-70Retirement Plans PAGEREF _Toc441270480 \h 3-70Qualified Deferred Compensation PAGEREF _Toc441270481 \h 3-70Qualified v. Nonqualified Plans PAGEREF _Toc441270482 \h 3-70Major Benefit PAGEREF _Toc441270483 \h 3-72Current Deduction PAGEREF _Toc441270484 \h 3-72Timing of Deductions PAGEREF _Toc441270485 \h 3-72Part of Total Compensation PAGEREF _Toc441270486 \h 3-72Compensation Base PAGEREF _Toc441270487 \h 3-72Salary Reduction Amounts PAGEREF _Toc441270488 \h 3-73Benefit Planning PAGEREF _Toc441270489 \h 3-73Pension Protection Act of 2006 PAGEREF _Toc441270490 \h 3-74Corporate Plans PAGEREF _Toc441270491 \h 3-74Advantages PAGEREF _Toc441270492 \h 3-74Current PAGEREF _Toc441270493 \h 3-75Deferred PAGEREF _Toc441270494 \h 3-75Disadvantages PAGEREF _Toc441270495 \h 3-75Employee Costs PAGEREF _Toc441270496 \h 3-75Comparison with IRAs & Keoghs PAGEREF _Toc441270497 \h 3-75Basic ERISA Provisions PAGEREF _Toc441270498 \h 3-75ERISA Reporting Requirements PAGEREF _Toc441270499 \h 3-76Fiduciary Responsibilities PAGEREF _Toc441270500 \h 3-76Bonding Requirement PAGEREF _Toc441270501 \h 3-77Prohibited Transactions PAGEREF _Toc441270502 \h 3-77Additional Restrictions PAGEREF _Toc441270503 \h 3-77Fiduciary Exceptions PAGEREF _Toc441270504 \h 3-77Loans PAGEREF _Toc441270505 \h 3-78Employer Securities PAGEREF _Toc441270506 \h 3-78Excise Penalty Tax PAGEREF _Toc441270507 \h 3-79PBGC Insurance PAGEREF _Toc441270508 \h 3-79Sixty-Month Requirement PAGEREF _Toc441270509 \h 3-79Recovery Against Employer PAGEREF _Toc441270510 \h 3-79Termination Proceedings PAGEREF _Toc441270511 \h 3-80Plans Exempt from PBGC Coverage PAGEREF _Toc441270512 \h 3-80Chapter 3 - Property Transfers & Retirement Plans – Section 32 PAGEREF _Toc441270513 \h 3-84Basic Requirements of a Qualified Pension Plan PAGEREF _Toc441270514 \h 3-84Written Plan PAGEREF _Toc441270515 \h 3-84Communication PAGEREF _Toc441270516 \h 3-84Trust PAGEREF _Toc441270517 \h 3-84Requirements PAGEREF _Toc441270518 \h 3-84Permanency PAGEREF _Toc441270519 \h 3-85Exclusive Benefit of Employees PAGEREF _Toc441270520 \h 3-85Highly Compensated Employees PAGEREF _Toc441270521 \h 3-85Reversion of Trust Assets to Employer PAGEREF _Toc441270522 \h 3-85Participation & Coverage PAGEREF _Toc441270523 \h 3-86Age & Service PAGEREF _Toc441270524 \h 3-86Coverage PAGEREF _Toc441270525 \h 3-87Percentage Test PAGEREF _Toc441270526 \h 3-87Ratio Test PAGEREF _Toc441270527 \h 3-87Average Benefits Test PAGEREF _Toc441270528 \h 3-87Numerical Coverage PAGEREF _Toc441270529 \h 3-88Related Employers PAGEREF _Toc441270530 \h 3-88Vesting PAGEREF _Toc441270531 \h 3-88Full & Immediate Vesting PAGEREF _Toc441270532 \h 3-89Minimum Vesting PAGEREF _Toc441270533 \h 3-89Diversification Rights PAGEREF _Toc441270534 \h 3-90Nondiscrimination Compliance PAGEREF _Toc441270535 \h 3-90Contribution & Benefit Limits PAGEREF _Toc441270536 \h 3-91Defined Benefit Plans (Annual Benefits Limitation) - §415 PAGEREF _Toc441270537 \h 3-91Defined Contribution Plans (Annual Addition Limitation) - §415 PAGEREF _Toc441270538 \h 3-91Limits on Deductible Contributions - §404 PAGEREF _Toc441270539 \h 3-92Assignment & Alienation PAGEREF _Toc441270540 \h 3-92Miscellaneous Requirements PAGEREF _Toc441270541 \h 3-93Basic Types of Corporate Plans PAGEREF _Toc441270542 \h 3-93Defined Benefit PAGEREF _Toc441270543 \h 3-94Mechanics PAGEREF _Toc441270544 \h 3-94Defined Benefit Pension PAGEREF _Toc441270545 \h 3-94Defined Contribution PAGEREF _Toc441270546 \h 3-94Mechanics PAGEREF _Toc441270547 \h 3-94Discretion PAGEREF _Toc441270548 \h 3-95Favorable Circumstances PAGEREF _Toc441270549 \h 3-95Chapter 3 - Property Transfers & Retirement Plans – Section 33 PAGEREF _Toc441270550 \h 3-98Basic Requirements of a Qualified Pension Plan PAGEREF _Toc441270551 \h 3-98Profit Sharing PAGEREF _Toc441270552 \h 3-98Requirements for a Qualified Profit Sharing Plan PAGEREF _Toc441270553 \h 3-98Written Plan PAGEREF _Toc441270554 \h 3-98Eligibility PAGEREF _Toc441270555 \h 3-98Deductible Contribution Limit PAGEREF _Toc441270556 \h 3-99Substantial & Recurrent Rule PAGEREF _Toc441270557 \h 3-99Money Purchase Pension PAGEREF _Toc441270558 \h 3-100Cafeteria Compensation Plan PAGEREF _Toc441270559 \h 3-101Thrift Plan PAGEREF _Toc441270560 \h 3-101Section 401(k) Plans PAGEREF _Toc441270561 \h 3-102Death Benefits PAGEREF _Toc441270562 \h 3-103Defined Benefit Plans PAGEREF _Toc441270563 \h 3-104Money Purchase Pension & Target Benefit Plans PAGEREF _Toc441270564 \h 3-104Employee Contributions PAGEREF _Toc441270565 \h 3-104Non-Deductible PAGEREF _Toc441270566 \h 3-104Life Insurance in the Qualified Plan PAGEREF _Toc441270567 \h 3-105Return PAGEREF _Toc441270568 \h 3-105Universal Life PAGEREF _Toc441270569 \h 3-105Compare PAGEREF _Toc441270570 \h 3-105Plan Terminations & Corporate Liquidations PAGEREF _Toc441270571 \h 3-10510-Year Rule PAGEREF _Toc441270572 \h 3-106Lump-Sum Distributions PAGEREF _Toc441270573 \h 3-106Asset Dispositions PAGEREF _Toc441270574 \h 3-106IRA Limitations PAGEREF _Toc441270575 \h 3-107Chapter 3 - Property Transfers & Retirement Plans – Section 34 PAGEREF _Toc441270576 \h 3-109Self-Employed Plans - Keogh PAGEREF _Toc441270577 \h 3-109Contribution Timing PAGEREF _Toc441270578 \h 3-109Controlled Business PAGEREF _Toc441270579 \h 3-109General Limitations PAGEREF _Toc441270580 \h 3-110Effect of Incorporation PAGEREF _Toc441270581 \h 3-110Mechanics PAGEREF _Toc441270582 \h 3-111Parity with Corporate Plans PAGEREF _Toc441270583 \h 3-111Figuring Retirement Plan Deductions For Self-Employed PAGEREF _Toc441270584 \h 3-112Self-Employed Rate PAGEREF _Toc441270585 \h 3-112Determining the Deduction PAGEREF _Toc441270586 \h 3-113Individual Plans - IRA’s PAGEREF _Toc441270587 \h 3-114Deemed IRA PAGEREF _Toc441270588 \h 3-114Mechanics PAGEREF _Toc441270589 \h 3-114Phase-out PAGEREF _Toc441270590 \h 3-114Special Spousal Participation Rule - §219(g)(1) PAGEREF _Toc441270591 \h 3-115Spousal IRA PAGEREF _Toc441270592 \h 3-116Eligibility PAGEREF _Toc441270593 \h 3-117Contributions & Deductions PAGEREF _Toc441270594 \h 3-117Employer Contributions PAGEREF _Toc441270595 \h 3-117Retirement Vehicles PAGEREF _Toc441270596 \h 3-117Distribution & Settlement Options PAGEREF _Toc441270597 \h 3-118Life Annuity Exemption PAGEREF _Toc441270598 \h 3-118Minimum Distributions PAGEREF _Toc441270599 \h 3-118Required Minimum Distribution PAGEREF _Toc441270600 \h 3-119Definitions PAGEREF _Toc441270601 \h 3-119Distributions during Owner’s Lifetime & Year of Death after RBD PAGEREF _Toc441270602 \h 3-120Sole Beneficiary Spouse Who Is More Than 10 Years Younger PAGEREF _Toc441270603 \h 3-121Distributions after Owner’s Death PAGEREF _Toc441270604 \h 3-121Inherited IRAs PAGEREF _Toc441270605 \h 3-124Estate Tax Deduction PAGEREF _Toc441270606 \h 3-124Charitable Distributions from IRAs - §408 PAGEREF _Toc441270607 \h 3-124Post-Retirement Tax Treatment of IRA Distributions PAGEREF _Toc441270608 \h 3-125Income In Respect of a Decedent PAGEREF _Toc441270609 \h 3-125Estate Tax Consequences PAGEREF _Toc441270610 \h 3-126Losses on IRA Investments PAGEREF _Toc441270611 \h 3-126Prohibited Transactions PAGEREF _Toc441270612 \h 3-126Effect of Disqualification PAGEREF _Toc441270613 \h 3-126Penalties PAGEREF _Toc441270614 \h 3-127Borrowing on an Annuity Contract PAGEREF _Toc441270615 \h 3-127Chapter 3 - Property Transfers & Retirement Plans – Section 35 PAGEREF _Toc441270616 \h 3-129Tax-Free Rollovers PAGEREF _Toc441270617 \h 3-129Rollover from One IRA to Another PAGEREF _Toc441270618 \h 3-129Waiting Period between Rollovers PAGEREF _Toc441270619 \h 3-130Partial Rollovers PAGEREF _Toc441270620 \h 3-130Rollovers from Traditional IRAs into Qualified Plans PAGEREF _Toc441270621 \h 3-130Rollovers of Distributions from Employer Plans PAGEREF _Toc441270622 \h 3-130Withholding Requirement PAGEREF _Toc441270623 \h 3-130Waiting Period between Rollovers PAGEREF _Toc441270624 \h 3-131Conduit IRAs PAGEREF _Toc441270625 \h 3-131Keogh Rollovers PAGEREF _Toc441270626 \h 3-131Direct Rollovers from Retirement Plans to Roth IRAs PAGEREF _Toc441270627 \h 3-131Rollovers of §457 Plans into Traditional IRAs PAGEREF _Toc441270628 \h 3-132Rollovers of Traditional IRAs into §457 Plans PAGEREF _Toc441270629 \h 3-132Rollovers of Traditional IRAs into §403(B) Plans PAGEREF _Toc441270630 \h 3-132Rollovers from SIMPLE IRAs PAGEREF _Toc441270631 \h 3-132Nonspouse Rollovers PAGEREF _Toc441270632 \h 3-132Roth IRA - §408A PAGEREF _Toc441270633 \h 3-134Eligibility PAGEREF _Toc441270634 \h 3-134Contribution Limitation PAGEREF _Toc441270635 \h 3-135Roth IRAs Only PAGEREF _Toc441270636 \h 3-135Roth IRAs & Traditional IRAs PAGEREF _Toc441270637 \h 3-135Conversions PAGEREF _Toc441270638 \h 3-136AGI Limit Exception Repealed PAGEREF _Toc441270639 \h 3-137Recharacterizations PAGEREF _Toc441270640 \h 3-137Reconversions PAGEREF _Toc441270641 \h 3-138Taxation of Distributions PAGEREF _Toc441270642 \h 3-138No Required Minimum Distributions PAGEREF _Toc441270643 \h 3-139Simplified Employee Pension Plans (SEPs) PAGEREF _Toc441270644 \h 3-139Contribution Limits & Taxation PAGEREF _Toc441270645 \h 3-141SIMPLE Plans PAGEREF _Toc441270646 \h 3-142SIMPLE IRA Plan PAGEREF _Toc441270647 \h 3-142Employee Limit PAGEREF _Toc441270648 \h 3-142Other Qualified Plan PAGEREF _Toc441270649 \h 3-142Set up PAGEREF _Toc441270650 \h 3-143Contribution Limits PAGEREF _Toc441270651 \h 3-143Salary Reduction Contributions PAGEREF _Toc441270652 \h 3-143Employer Matching Contributions PAGEREF _Toc441270653 \h 3-143Deduction of Contributions PAGEREF _Toc441270654 \h 3-144Distributions PAGEREF _Toc441270655 \h 3-144SIMPLE §401(k) Plan PAGEREF _Toc441270656 \h 3-144Losses, AMT & Compliance PAGEREF _Toc441270657 \h 4-147Chapter 4 - Losses, AMT & Compliance – Section 36 PAGEREF _Toc441270658 \h 4-147Passive Losses PAGEREF _Toc441270659 \h 4-148Prior Law PAGEREF _Toc441270660 \h 4-148Passive Loss Rules PAGEREF _Toc441270661 \h 4-150Application PAGEREF _Toc441270662 \h 4-150Active Losses PAGEREF _Toc441270663 \h 4-150Credits PAGEREF _Toc441270664 \h 4-151Calculating Passive Loss PAGEREF _Toc441270665 \h 4-151Categories of Income & Loss PAGEREF _Toc441270666 \h 4-151Passive PAGEREF _Toc441270667 \h 4-151Portfolio PAGEREF _Toc441270668 \h 4-152Material Participation PAGEREF _Toc441270669 \h 4-153Self-Charged Interest Regulations PAGEREF _Toc441270670 \h 4-153Passive Deduction - Portfolio Income PAGEREF _Toc441270671 \h 4-153Regulations PAGEREF _Toc441270672 \h 4-153Chapter 4 - Losses, AMT & Compliance – Section 37 PAGEREF _Toc441270673 \h 4-158Suspension of Disallowed Losses PAGEREF _Toc441270674 \h 4-158Fully Taxable Disposition PAGEREF _Toc441270675 \h 4-158Abandonment & Worthlessness PAGEREF _Toc441270676 \h 4-158Related Party Transactions PAGEREF _Toc441270677 \h 4-158Credits PAGEREF _Toc441270678 \h 4-159Disallowance PAGEREF _Toc441270679 \h 4-159Increase Basis Election PAGEREF _Toc441270680 \h 4-159Entire Interest PAGEREF _Toc441270681 \h 4-159Partnership PAGEREF _Toc441270682 \h 4-159Grantor Trust PAGEREF _Toc441270683 \h 4-160Other Transfers PAGEREF _Toc441270684 \h 4-160Transfer By Reason Of Death - §469(g)(2) PAGEREF _Toc441270685 \h 4-160Transfer by Gift - §469(j)(6) PAGEREF _Toc441270686 \h 4-160Installment Sale - §469(g)(3) PAGEREF _Toc441270687 \h 4-161Activity No Longer Treated As Passive Activity - §469(f)(1) PAGEREF _Toc441270688 \h 4-161Closely Held To Nonclosely Held Corporation- §469(f)(2) PAGEREF _Toc441270689 \h 4-161Nontaxable Transfer PAGEREF _Toc441270690 \h 4-162Ordering of Losses PAGEREF _Toc441270691 \h 4-162Capital Loss Limitation PAGEREF _Toc441270692 \h 4-163Carryforwards PAGEREF _Toc441270693 \h 4-164Allocation of Suspended Losses PAGEREF _Toc441270694 \h 4-164Taxpayers Affected PAGEREF _Toc441270695 \h 4-164Noncorporate Taxpayers PAGEREF _Toc441270696 \h 4-164Regular Closely Held Corporations PAGEREF _Toc441270697 \h 4-164Personal Service Corporations PAGEREF _Toc441270698 \h 4-164Definition PAGEREF _Toc441270699 \h 4-164Real Estate Professionals PAGEREF _Toc441270700 \h 4-165Activities PAGEREF _Toc441270701 \h 4-165Facts & Circumstances Test PAGEREF _Toc441270702 \h 4-166Relevant Factors PAGEREF _Toc441270703 \h 4-166Rental Activities PAGEREF _Toc441270704 \h 4-167Limited Partnership Activities PAGEREF _Toc441270705 \h 4-167Partnership & S Corporation Activities PAGEREF _Toc441270706 \h 4-168Consistency PAGEREF _Toc441270707 \h 4-168Regrouping PAGEREF _Toc441270708 \h 4-168Partial Dispositions PAGEREF _Toc441270709 \h 4-169Chapter 4 - Losses, AMT & Compliance – Section 38 PAGEREF _Toc441270710 \h 4-172Alternative Minimum Tax - §55 PAGEREF _Toc441270711 \h 4-172Computation PAGEREF _Toc441270712 \h 4-172AMT Exemption Amount - §55(d) PAGEREF _Toc441270713 \h 4-173AMT Exemption Phaseout PAGEREF _Toc441270714 \h 4-174Regular Tax Deduction - §55(c) PAGEREF _Toc441270715 \h 4-174Tax Preferences & Adjustments PAGEREF _Toc441270716 \h 4-174Preferences & Adjustments for All Taxpayers PAGEREF _Toc441270717 \h 4-174Preferences & Adjustments for Noncorporate Taxpayers Only PAGEREF _Toc441270718 \h 4-175Preferences & Adjustments for Corporations Only PAGEREF _Toc441270719 \h 4-175Adjustments - §56 PAGEREF _Toc441270720 \h 4-175Itemized Deductions PAGEREF _Toc441270721 \h 4-175Standard Deduction PAGEREF _Toc441270722 \h 4-175Medical Expenses PAGEREF _Toc441270723 \h 4-176Taxes PAGEREF _Toc441270724 \h 4-176Interest PAGEREF _Toc441270725 \h 4-176Personal Exemptions PAGEREF _Toc441270726 \h 4-177Depreciation PAGEREF _Toc441270727 \h 4-177Alternative Depreciation System (ADS) PAGEREF _Toc441270728 \h 4-177ADS Recovery Periods PAGEREF _Toc441270729 \h 4-177Asset Placed in Service After 1998 PAGEREF _Toc441270730 \h 4-178Mining Exploration and Development Costs PAGEREF _Toc441270731 \h 4-179Basis PAGEREF _Toc441270732 \h 4-179Election PAGEREF _Toc441270733 \h 4-179Long-Term Contracts PAGEREF _Toc441270734 \h 4-179Home Construction Contracts PAGEREF _Toc441270735 \h 4-180Pollution Control Facilities PAGEREF _Toc441270736 \h 4-180Installment Sales PAGEREF _Toc441270737 \h 4-180Circulation Expenditures PAGEREF _Toc441270738 \h 4-180Incentive Stock Options PAGEREF _Toc441270739 \h 4-181Credit for Prior Year Minimum Tax & ISOs PAGEREF _Toc441270740 \h 4-181Research & Experimental Expenditures PAGEREF _Toc441270741 \h 4-181Passive Farm Losses PAGEREF _Toc441270742 \h 4-182Definition PAGEREF _Toc441270743 \h 4-182Loss Disallowance PAGEREF _Toc441270744 \h 4-182Allocation PAGEREF _Toc441270745 \h 4-182Same Activity Suspension PAGEREF _Toc441270746 \h 4-183Passive Activity Losses PAGEREF _Toc441270747 \h 4-183Business Untaxed Reported Profits (Pre-1990) PAGEREF _Toc441270748 \h 4-184ACE Adjustment (Post-1989) PAGEREF _Toc441270749 \h 4-185Adjusted Current Earnings Regulations PAGEREF _Toc441270750 \h 4-186Tax Preferences - §57 PAGEREF _Toc441270751 \h 4-187Depletion PAGEREF _Toc441270752 \h 4-188Intangible Drilling Costs PAGEREF _Toc441270753 \h 4-188Excess Drilling Costs PAGEREF _Toc441270754 \h 4-188Accelerated Depreciation PAGEREF _Toc441270755 \h 4-189Real Property PAGEREF _Toc441270756 \h 4-189Personal Property PAGEREF _Toc441270757 \h 4-189Private Activity Bond Interest PAGEREF _Toc441270758 \h 4-189Alternative Tax NOL Deduction PAGEREF _Toc441270759 \h 4-189Carrybacks & Carryovers PAGEREF _Toc441270760 \h 4-189Alternative Minimum Foreign Tax Credit PAGEREF _Toc441270761 \h 4-190Foreign Tax Credit Carryback or Carryover PAGEREF _Toc441270762 \h 4-190Tentative Minimum Tax PAGEREF _Toc441270763 \h 4-190Minimum Tax Credit PAGEREF _Toc441270764 \h 4-190Regular Income Tax Reduced PAGEREF _Toc441270765 \h 4-191Carryforward of Credit PAGEREF _Toc441270766 \h 4-191Other Credits PAGEREF _Toc441270767 \h 4-191Chapter 4 - Losses, AMT & Compliance – Section 39 PAGEREF _Toc441270768 \h 4-194Compliance PAGEREF _Toc441270769 \h 4-194Reporting Requirements PAGEREF _Toc441270770 \h 4-194Real Estate Transactions [Form - 1099S] PAGEREF _Toc441270771 \h 4-194Independent Contractors PAGEREF _Toc441270772 \h 4-195Cash Reporting [Form 8300] PAGEREF _Toc441270773 \h 4-197Exceptions PAGEREF _Toc441270774 \h 4-198Recipient’s Knowledge PAGEREF _Toc441270775 \h 4-198Cash Reporting Rules - Attorneys PAGEREF _Toc441270776 \h 4-198Sale of Certain Partnership Interests (Form 8308) PAGEREF _Toc441270777 \h 4-199Tax Shelter Registration Number [Form 8271] PAGEREF _Toc441270778 \h 4-199Asset Acquisition Statement [Form 8594] PAGEREF _Toc441270779 \h 4-199Chapter 4 - Losses, AMT & Compliance – Section 40 PAGEREF _Toc441270780 \h 4-202Accuracy-Related Penalties PAGEREF _Toc441270781 \h 4-202Negligence PAGEREF _Toc441270782 \h 4-202Substantial Understatement of Income Tax PAGEREF _Toc441270783 \h 4-202Penalty on Carryover Year Return PAGEREF _Toc441270784 \h 4-203Substantial Valuation Overstatements PAGEREF _Toc441270785 \h 4-203Substantial Estate & Gift Tax Valuation Understatements PAGEREF _Toc441270786 \h 4-204Final Regulations PAGEREF _Toc441270787 \h 4-204Negligence or Disregard of Rules PAGEREF _Toc441270788 \h 4-204Substantial Understatement Penalty PAGEREF _Toc441270789 \h 4-205Adequate Disclosure PAGEREF _Toc441270790 \h 4-206Information Reporting Penalty Final Regulations PAGEREF _Toc441270791 \h 4-206Penalty for Unrealistic Position PAGEREF _Toc441270792 \h 4-208Realistic Possibility Standard PAGEREF _Toc441270793 \h 4-209Adequate Disclosure PAGEREF _Toc441270794 \h 4-210Form 8275-R PAGEREF _Toc441270795 \h 4-210Statute of Limitations for Assessments PAGEREF _Toc441270796 \h 4-211Three Year Assessment Periods PAGEREF _Toc441270797 \h 4-211Six Year Assessment Period PAGEREF _Toc441270798 \h 4-211No Statute Of Limitations PAGEREF _Toc441270799 \h 4-211Extension of Statute Of Limitations PAGEREF _Toc441270800 \h 4-211Examination of Returns PAGEREF _Toc441270801 \h 4-211How Returns Are Selected PAGEREF _Toc441270802 \h 4-211Arranging the Examination PAGEREF _Toc441270803 \h 4-212Transfers PAGEREF _Toc441270804 \h 4-212Representation PAGEREF _Toc441270805 \h 4-212Recordings PAGEREF _Toc441270806 \h 4-212Repeat Examinations PAGEREF _Toc441270807 \h 4-212Changes to Return PAGEREF _Toc441270808 \h 4-213Appealing Examination Findings PAGEREF _Toc441270809 \h 4-213Appeals Office PAGEREF _Toc441270810 \h 4-213Appeals to the Courts PAGEREF _Toc441270811 \h 4-213Court Decisions PAGEREF _Toc441270812 \h 4-214Recovering Litigation Expenses PAGEREF _Toc441270813 \h 4-214Other Remedies PAGEREF _Toc441270814 \h 4-214Claims for Refund PAGEREF _Toc441270815 \h 4-214Cancellation of Penalties PAGEREF _Toc441270816 \h 4-214Reduction of Interest PAGEREF _Toc441270817 \h 4-214Answers & Explanations....................................................................................................................4-216Glossary..............................................................................................................................................4-343Index of Keywords & Phrases................................................................................................................4-aExam Score Sheet...................................................................................................................................4-lCPE Exam..............................................................................................................................................4-n ................
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