Gleim CPA Review Updates to Regulation 2013 Edition, 1st Printing June 2013

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1 Page 1 of 12 Gleim CPA Review Updates to Regulation 2013 Edition, 1st Printing June 2013 NOTE: Text that should be deleted is displayed with a line through the text. New text is shown with a blue background. IRS Forms No material changes have been made to these IRS forms; however, we are providing these links for the 2012 version of these forms from the Internal Revenue Service. FORM LINK Schedule A Schedule B Schedule C Schedule E Schedule F Study Unit 4 Self-Employment, Farming, and Adjustments Page 150, Subunit 4.3, 5.a.: This update is a result of the American Taxpayer Relief Act of 5. Qualified Transportation Fringe Benefits a. Up to $ a month may be excluded for the value of employer-provided transit passes and transportation in an employer-provided commuter highway vehicle. b. Additionally, an exclusion of up to $240 per month is available for employer-provided parking. c. Employees may use both of these exclusions.

2 Study Unit 5 Deductions from AGI, Credits, AMT, and Limitations Page 2 of 12 Page 199, Subunit 5.4, 1.: This update is a result of the American Taxpayer Relief Act of 5.4 ALTERNATE MINIMUM TAX 1. The alternative minimum tax (AMT) is applied only if the tentative minimum tax exceeds the taxpayer s regular tax liability. Individuals use Form 6251 to calculate AMT. The formula below is an overview of the AMT. NOTE: The 2012 exemption amounts have not been decided by Congress; therefore, the 2011 exemption amounts have been used. AMT FORMULA Taxable income + Tax preferences + Personal exemptions + Standard deduction if taxpayer does not itemize +/ Certain other adjustments = Alternative minimum taxable income (AMTI) Phaseout of $.25 Exemption amount per $1 in excess of Married filing jointly $74,450 78,750 $150,000 Single $48,450 50,600 $112,500 Married filing separately $37,225 39,375 $ 75,000 = Alternative minimum tax base Rate AMT base (married filing jointly) First $175,000 26% Excess 28% = Tentative minimum tax Regular income tax = Alternative minimum tax 2. Tax preference items receive favorable treatment in computing regular income tax, e.g., tax-exempt interest on private activity bonds (issued after 1986 but excluding those issued in 2009 and 2010), excess depletion, intangible, drilling cost, small business stock exclusion (sold prior to September 28, 2010, or after December 31, ).

3 Study Unit 6 Property Transactions Page 3 of 12 Page 226, Subunit 6.1, 8.a.4)a): This update is a result of the American Taxpayer Relief Act of 8. Adjusted Basis a. Initial basis is adjusted consistent with tax relevant events. Adjustments include the following: 1) Certain expenditures subsequent to acquisition are property costs, and they increase basis, e.g., legal fees to defend title or title insurance premiums. 2) Basis must be increased for expenditures that prolong the life of the property by at least 1 year or materially increase its value. Assessments that increase the value of property should be capitalized. a) Examples include major improvements (e.g., new roof, addition to building) and zoning changes. b) Maintenance, repair, and operating costs are not capitalized. 3) Increase to basis may result from liability to the extent it is secured by real property and applied to extend its life. 4) Basis must be reduced by the larger of the amount of depreciation allowed or allowable (even if not claimed). Unimproved land is not depreciated. a) Sec. 179 expense is treated as a depreciation deduction. The Sec. 179 amount is $139, ,000 for 2012 under the Small Business Job Act of 2010 American Taxpayer Relief Act of Page 232, Subunit 6.2, 15.a.: This update is a result of the American Taxpayer Relief Act of 15. Small Business Stock Exclusion a. Under Section 1202, taxpayers may exclude 50% of the gain from the sale or exchange of small business stock. The stock must have been issued after August 10, 1993, and held for more than 5 years. The exclusion increases to 75% for stock acquired after February 17, 2009, and before September 28, The exclusion increases to 100% for stock acquired after September 27, 2010, and before January 1, Page 244, Subunit 6.6, 5.c.: This update is a result of the American Taxpayer Relief Act of 5. Sec Qualified Small Business Stock a. When a taxpayer sells or exchanges Sec small business stock that the taxpayer has held for more than 5 years, 50% of the gain may be excluded from the taxpayer s gross income. 1) If the small business stock qualifies for this 50% exclusion, any recognized gain from the sale or exchange of the stock is subject to a maximum capital gains rate of 28%.

4 Page 4 of 12 b. The general requirements for stock to be treated as Sec qualified small business stock are: 1) The stock is received after August 10, ) The issuing corporation is a domestic C corporation 3) The seller is the original owner of the stock, and 4) The corporation s gross assets do not exceed $50 million at the time the stock was issued c. If the stock is acquired after February 17, 2009, and before September 28, 2010, 75% of the gain may be excluded. A 100% exclusion applies from September 28, 2010, through December 31, Study Unit 7 Corporate Taxable Income Page 268, Subunit 7.3, 3.c.-e.: This update is a result of the advanced deduction for inventory items, qualified computer technology, and books no longer being allowed under the American Taxpayer Relief Act of c. A corporation may deduct the adjusted basis of inventory and other ordinary income property contributed. In addition, half of the FMV AB difference is also deductible when inventory is donated solely for the care of infants, the ill, or the needy. 1) The deduction may not exceed two times the equipment s basis. 2) The FMV applies to unsolicited samples of inventory items that are subsequently donated to a qualified charitable organization. d. A corporation is allowed a deduction for the donation of qualified computer technology and equipment that is to be used for educational purposes at an elementary or secondary school. 1) The same rule for inventory of half the difference between the FMV and AB applies. e d. A corporation is allowed a deduction for the donation of qualified food and book inventory. 1) The deduction is equal to basis plus one-half of gain that would have been recognized if the asset were sold at FMV. 2) The deduction may not exceed two times the asset s basis. Page 272, Subunit 7.3, 13.a.: This update is a result of the American Taxpayer Relief Act of 13. Stock Redemptions a. Generally, ddeduction of amounts paid or incurred with respect to a stock redemption or the redemption of the stock of any related person is not allowed. An exception to the general rule is the allowance for ddeductions for interest paid or accrued within the tax year on indebtedness are allowed.

5 Page 5 of 12 Page 277, Subunit 7.4, 5.a. and c.: This update is a result of the American Taxpayer Relief Act of 5. Sec. 179 Expense a. A person may elect to deduct all or part of the cost of Sec. 179 property acquired during the year, up to a maximum of $139, ,000 in b. Sec. 179 property is 1) Tangible personal property, which is a) Recovery property (depreciable) b) Sec property 2) Acquired a) By purchase b) From an unrelated party c) For use in the active conduct of a trade or business NOTE: Specifically excluded from the Sec. 179 election are air-conditioning and heating units, property used for lodging, property used by tax-exempt organizations, and property used outside the United States. c. The Small Business Jobs Act of 2010 expanded the definition of qualified Sec. 179 property is expanded for 2010 and to include qualified real property, which is defined as qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property. Page 278, Subunit 7.4, 5.e.6)a): This update is a result of the American Taxpayer Relief Act of 5) No more than the statutory amount may be deducted as depreciation on cars and certain luxury items. Excess over the limit may not be expensed under Sec ) For 2012, a deduction may be for no more than either a) $139, ,000 minus the excess of Sec. 179 costs for the year over $560,000 2 million or b) Taxable income from the active conduct of any trade or business during the tax year. 7) The date the Sec. 179 property is placed in service is irrelevant to the amount of the Sec. 179 expense deduction allowed. However, the number of days the Sec. 179 property is in service may be a factor when determining the eligibility of property.

6 Page 289, Subunit 7.3, Question 12: This edit clarifies exceptions to stock redemptions. Page 6 of In 2012, Kara Corp. incurred the following expenditures in connection with the repurchase of its stock from shareholders to avert a hostile takeover: Interest on borrowings used to repurchase stock $100,000 Legal and accounting fees in connection with the repurchase 400,000 The total of the above expenditures deductible in 2012 is A. $0 B. $100,000 C. $400,000 Answer (B) is correct. REQUIRED: The amount that a corporation may deduct for expenses related to the repurchase of its stock. DISCUSSION: Interest expense incurred on business borrowings is deductible in the period in which it is paid or accrued. However, other expenses related to a stock repurchase or reorganization are capitalized. Answer (A) is incorrect. Interest expense incurred on business borrowings is deductible. Answer (C) is incorrect. Amounts paid or incurred in connection with a stock redemption are not deductible. Answer (D) is incorrect. The interest is deductible, but the costs associated with the repurchase are not. D. $500,000 Page 291, Subunit 7.4, Question 17: This update is a result of the American Taxpayer Relief Act of 17. Browne, a self-employed taxpayer, had 2012 business taxable income of $130, ,000 prior to any expense deduction for equipment purchases. In 2012, Browne purchased and placed into service, for business use, office machinery costing $145, ,000. This was Browne s only 2012 capital expenditure. Browne s business establishment was not in an economically distressed area. Browne made a proper and timely expense election to deduct the maximum amount. Browne was not a member of any pass-through entity. What is Browne s deduction under the election? A. $130, ,000 B. $145, ,000 C. $139, ,000 D. $560,000 2,000,000 Answer (A) is correct. REQUIRED: The maximum amount of Sec. 179 deduction in DISCUSSION: Tangible and depreciable personal property can be expensed by up to $139, ,000 in 2012, the year of acquisition. This amount is reduced when the amount of Sec. 179 property placed in service in a given year exceeds $560,000 2,000,000. Since this limit does not apply, the maximum deduction would be $139, ,000; however, there are other limits. Section 179(b)(3)(A) limits the deduction to taxable income derived from the active conduct of any trade or business. In this case, the maximum deduction is $130, ,000. Answer (B) is incorrect. The Sec. 179 deduction is limited to taxable income. Answer (C) is incorrect. The maximum Sec. 179 deduction of $139, ,000 for 2012 ignores the taxable income limit. Answer (D) is incorrect. The amount of $560,000 2,000,000 is the threshold at which the deduction is reduced dollar-fordollar, ignoring the taxable income limit in this case. Page 305, Unofficial Answer Explanations, Question 4.2.: This update is a result of the American Taxpayer Relief Act of 2. $76,000. A taxpayer may elect to deduct all or part of the cost of Sec. 179 property acquired during the year. For 2012, the deduction may be for no more than either $139, ,000 minus the excess of Sec. 179 costs for the year over $560,000 2,000,000 or taxable income from the active conduct of any trade or business during the tax year.

7 Study Unit 8 Corporate Tax Computations Page 7 of 12 Page 312, Subunit 8.4, 6.a.2): This update is a result of the American Taxpayer Relief Act of 6. Limit on Tax Benefits a. Each of the following is an example of tax benefit items of which only one must be shared by the members of a controlled group: 1) Tax brackets 2) Sec. 179 expensing maximum of $139, ,000 3) AMT exemption base of $40,000 4) General business credit $25,000 offset 5) AET $250,000 presumed deduction base NOTE: A controlled group generally may choose any method to allocate the amounts among themselves. In default, an item is divided equally among members. Page 313, Subunit 8.5, 2.b.1): This update is a result of the American Taxpayer Relief Act of 2. Tax Preference Items a. These items generate tax savings by reducing the taxpayer s taxable income. Therefore, they must be added back to taxable income when computing AMTI. b. Small business stock. When computing taxable income, noncorporate taxpayers may exclude up to 50% (100% for stock purchased after September 27, 2010) of gain realized on the sale or exchange of qualified small business stock held more than 5 years. 1) Generally, 7% of the excluded gain is added as an AMT tax preference item. However, stock sold between September 27, 2010, and January 1, , is excluded from tax preference treatment. Page 314, Subunit 8.5, 3.b.: This clarifies the treatment of adjustments for depreciation of Section 1250 property. 3. Adjustments a. Usually, adjustments eliminate time value tax savings from accelerated deductions or deferral of income. An adjustment is an increase or a decrease to TI in computing AMTI. b. Adjustments affecting corporate and noncorporate taxpayers: 1) Section 1250 property placed in service after December 31, This will not require an adjustment. Accelerated depreciation a) Real property. The AMT allowable amount is computed using a straight-line method, 40-year recovery period, and the mid-month convention. b) Personal property. Generally, the AMT allowable amount is computed using the 150%-declining-balance method and changing to the straight-line method when it yields a larger amount. c) Section 1250 property placed in service after December 31, 1998, will not require an adjustment, as all of it is depreciated using a straight-line method.

8 Page 8 of 12 Page 329, Subunit 8.5, Question 15: This question was updated to clarify the treatment of adjustments for depreciation of Section 1250 property. 15. Eastern Corp., a calendar-year corporation, was formed January 3, 2012, and on that date placed 5-year property in service. The property was depreciated under the general MACRS system. Eastern did not elect to use the straight-line method. The following information pertains to Eastern: Eastern s 2012 taxable income $300,000 Adjustment for the accelerated depreciation taken on year property 1, tax-exempt interest from specified private activity bonds issued in ,000 Answer (A) is correct. REQUIRED: The alternative minimum taxable income before the adjusted current earnings adjustment. DISCUSSION: The accelerated portion of MACRS depreciation is considered an adjustment item. and ttaxexempt interest from the private activity bonds are is considered a preference items, which. Both items must be added back to taxable income before consideration of the ACE adjustment. What was Eastern s 2012 alternative minimum taxable income before the adjusted current earnings (ACE) adjustment? A. $306,000 B. $305,000 C. $304,000 D. $301,000 Study Unit 9 Corporate Tax Special Topics Page 372, Subunit 9.9, Simulation Question Tab 3: This update is a result of the American Taxpayer Relief Act of Based on the following scenarios, enter the amount of capital gain or loss that would be recognized by the shareholder for each redemption of stock. Enter losses as a negative with a leading minus sign ( ), and enter zeros for blank cells (i.e., no gain or loss). Redemptions 1. Len, an individual shareholder, owned 15% of Elwood Corporation stock. Elwood redeemed 10% of the shares Len owned in exchange for equipment having a FMV of $40,000 and an adjusted basis of $15,000. Len s basis in all of his stock was $230, Jan purchased 300 shares of Weimer Brothers, Inc., 12 years ago for $40,000. Jan held all of the shares until the present time. In , Weimer Brothers redeemed 100% of Jan s stock for $175, Henry s estate owned 15% of Aaron, Inc. s outstanding shares. The estate bought the shares in 2006 for $65,000. This year, Aaron redeemed the stock for a building worth $90,000 and an adjusted basis of $75, Williams Corporation redeemed 250 shares worth $44,000 from an individual shareholder as part of a partial liquidation. The shares were originally purchased at $100 per share. Capital Gain or Loss

9 Study Unit 10 S Corporations Page 9 of 12 Page 382, Subunit 10.2, 11.d. and e.: This update is a result of the American Taxpayer Relief Act of d. This rule precludes 1) Payments to accident and health plans 2) Group-term life insurance coverage up to $50,000 3) Medical reimbursement plans and disability plans 4) Meals and lodging furnished for the convenience of the employer 5) Cafeteria plans 6) Qualified transportation benefits 7) Personal use of employer-provided property or services 8) Adoption assistance program 9) Employment achievement award e. Fringe benefits available to 2% shareholders includinge the following: 1) Dependent care assistance program 2) Educational assistance program 3) Compensation for injury and sickness 4) Adoption assistance program 5) Employment achievement award 6 4) No additional-cost service 7 5) Qualified employee discount 8 6) Working condition fringe 9 7) De minimis fringe 10 8) On-premises athletic facilities Page 388, Subunit 10.4, 3.b.1): This update is a result of the extension of the 5-year recognition period through 2013 by means of the American Taxpayer Relief Act of 3. Built-In Gains (BIG) Tax a. An S corporation that, upon conversion from C to S status, had net appreciation inherent in its assets is subject to tax of 35% on net gain recognized (up to the amount of builtin gain on conversion) during the recognition period. b. The recognition period normally is the 10-year period beginning on the date the S election became effective. For 2009 and 2010, the 10-year period was reduced to a 7-year period. This means if 2008 was the 7th year of S election, then the recognition period has ended for sales in Likewise, if 2009 was the 7th year, then the recognition period has ended for sales in ) Beginning in 2011 For , the recognition period was is reduced to 5 years for disposals by S corporations if the 5th taxable year precedes 2011 the applicable year ( ). a) Thus, the conversion must have taken place effective for 2012 disposals. c. The tax liability is passed through, as a loss, pro rata to its shareholders. 1) It reduces basis in each shareholder s stock and any AAA balance. 2) Subchapter C E&P are not reduced by BIG tax liability.

10 Page 10 of 12 Page 397, Subunit 10.4, Question 28: This update is a result of the extension of the 5-year recognition period through 2013 by means of the American Taxpayer Relief Act of 28. Tax Corp. converted from C to S status in The net appreciation inherent in its assets is subject to a tax on net gain recognized A. At the time of the conversion. B. During a recognition period of 5 2 years. C. With no effect on any shareholder s basis in the stock. D. Up to the amount of built-in gain on conversion. Answer (D) is correct. REQUIRED: The true statement about the built-in gains tax. DISCUSSION: An S corporation that, upon conversion from C to S status after 1986, had net appreciation inherent in its assets is subject to a tax of 35% on net gain recognized (up to the amount of built-in gain on conversion) during the recognition period. Answer (A) is incorrect. The net appreciation inherent in its assets is subject to a tax on net gain recognized during the recognition period. Answer (B) is incorrect. The recognition period normally is a 10-year period beginning on the date the S election became effective. Answer (C) is incorrect. The tax liability is passed through, as a loss, pro rata to its shareholders, and it reduces each shareholder s basis in the stock. Study Unit 11 Partnerships and Exempt Organizations Page 413, Subunit 11.2, 3.a.11): This update is a result of the American Taxpayer Relief Act of 3. Separately Stated Items a. Each partnership item of income, gain, deduction, loss, or credit that may vary the tax liability of any partner must be separately stated. Items that must be separately stated include the following: 1) Sec gain and loss 2) Net short- and net long-term capital gain or loss from the sale or exchange of capital assets 3) Dividends that are eligible for a corporate dividends-received deduction 4) Tax-exempt income and related expenses 5) Investment income and related expenses 6) Rental activities, portfolio income, and related expenses 7) Recovery items (e.g., prior taxes, bad debts) 8) Charitable contributions 9) Foreign income taxes paid or accrued 10) Depletion on oil and gas wells 11) Sec. 179 deductions ($139, ,000 for 2012)

11 Page 11 of 12 Page 429, Subunit 11.8, 2.b.4) - 6): This update adjusts the amount of annual gross receipts most small tax-exempt organizations must have in order to file. 4) Those exempted from the requirement include a(n) a) Church or church-affiliated organization b) Exclusively religious activity or any religious order c) Organization (other than a private foundation) having annual gross receipts that are not more than $25,000 50,000 d) Stock bonus, pension, or profit-sharing trust that qualified under Sec ) Private foundations are required to file annual information returns on Form 990 or Form 990-PF, regardless of the amounts of their gross receipts. 6) Organizations with under $25,000 50,000 in gross receipts that do not have to file an annual notice will be required to file a Form 990-N. a) The form is due by the 15th day of the 5th month following the close of the tax year. b) The form requires the organization to provide the name and mailing address of the organization, any other names used, a web address (if one exists), the name and address of the principal officer, and a statement confirming the organization s annual gross receipts are $25,000 50,000 or less. c) Failure to file the annual report for 3 years in a row will subject the organization to loss of its exempt status, requiring the organization to reapply for recognition. Page 439, Subunit 11.8, Questions 28 and 29: This update adjusts the amount of annual gross receipts most small tax-exempt organizations must have in order to file. 28. Which of the following organizations exempt from federal income tax under Sec. 501(a) must file an annual information return on Form 990 or Form 990-PF? A. An organization, other than a private foundation, having gross receipts in each year that normally are not more than $25,000 50,000. B. A school below college level, affiliated with a church or operated by a religious order, that is not an integrated auxiliary of a church. C. A private foundation exempt under Sec. 501(c)(3) of the Internal Revenue Code. D. A stock bonus, pension, or profit-sharing trust that qualifies under Sec. 401 of the Internal Revenue Code. Answer (C) is correct. REQUIRED: The organization that is required to file an annual information return. DISCUSSION: Most exempt organizations are required to file various returns and reports at some time during or following the close of their accounting periods. Private foundations are required to file annual information returns on Form 990 or Form 990-PF, regardless of the amounts of their gross receipts.

12 Page 12 of Which of the following organizations exempt from federal income tax must generally file an annual information report? A. An organization, other than a private foundation, with annual gross receipts that normally are not more than $25,000 50,000. B. A private foundation. C. A church. D. A religious order. Answer (B) is correct. REQUIRED: The organization that must file an annual information return. DISCUSSION: Most organizations exempt from tax under Sec. 501(a) must file annual information returns on Form 990, Return of Organization Exempt from Income Tax. Those excepted from the requirement are 1. A church or church-affiliated organization 2. An exclusively religious activity or religious order 3. An organization (other than a private foundation) having annual gross receipts that are not more than $25,000 50, A stock bonus, pension, or profit-sharing trust that qualified under Sec A Keogh plan whose total assets are less than $100,000 Answer (A) is incorrect. Such an organization is specifically exempt from filing annual information returns. Answer (C) is incorrect. A church is specifically exempt from filing annual information returns. Answer (D) is incorrect. A religious order is specifically exempt from filing annual information returns.