Chapter 7

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Chapter 7

  1. 1. Chapter 7 Accounting Periods and Methods and Depreciation Income Tax Fundamentals 2011 Gerald E. Whittenburg & Martha Altus-Buller 2011 Cengage Learning
  2. 2. Learning Objectives <ul><li>Determine different accounting periods and methods for tax periods </li></ul><ul><li>Calculate depreciation using MACRS tables </li></ul><ul><li>Identify when §179 election to expense may be applied </li></ul><ul><li>Apply listed property and luxury automobile limitations </li></ul><ul><li>Understand tax treatment of intangibles </li></ul><ul><li>Determine whether parties are considered related and how to treat related party transactions </li></ul>2011 Cengage Learning
  3. 3. Accounting Periods <ul><li>Rarely, a taxpayer’s tax year will differ from the calendar year </li></ul><ul><li>However, in partnership </li></ul><ul><ul><ul><li>Tax year must be the same tax year as 50% of partners </li></ul></ul></ul><ul><ul><ul><li>If majority of partners’ tax years are different, must use tax year of ‘principal partners’ </li></ul></ul></ul><ul><ul><ul><ul><li>Principal partner defined as partner with at least 5% share in profits or capital </li></ul></ul></ul></ul><ul><ul><ul><li>If principal partners have different tax years, partnership generally required to use least aggregate deferral method </li></ul></ul></ul><ul><ul><ul><li>Note: Partnerships don’t pay tax as an entity </li></ul></ul></ul>2011 Cengage Learning
  4. 4. Accounting Periods <ul><li>Partnerships/S-Corporations may elect to adopt a different fiscal tax year from the one prescribed on previous slide, but only </li></ul><ul><ul><ul><li>If entity can demonstrate that natural business cycle easily conforms to fiscal year other than calendar year </li></ul></ul></ul><ul><ul><ul><li>Such as golf course (natural cycle in Denver ends in October) </li></ul></ul></ul><ul><ul><ul><li>Note: S-Corporations don’t pay tax as an entity </li></ul></ul></ul>2011 Cengage Learning
  5. 5. Required Tax Payment <ul><li>Even though S-Corporations and partnerships don’t pay tax, the entity must make an estimated payment if choosing to use a fiscal year-end different from calendar year-end </li></ul><ul><ul><li>Estimated taxes are calculated as </li></ul></ul><ul><ul><ul><li>Estimated deferral period taxable income </li></ul></ul></ul><ul><ul><ul><li>x </li></ul></ul></ul><ul><ul><ul><li>(Highest individual tax rate + 1%) </li></ul></ul></ul><ul><ul><li>Estimate deferral period taxable income by using average monthly income from preceding fiscal year </li></ul></ul>2011 Cengage Learning
  6. 6. Required Tax Payment Example <ul><li>Example </li></ul><ul><li>San Juan River Expeditions Inc., an S-Corp, has taxable income of $360,000 for the year ended 9/30/10 with a three-month deferral period. The company made a $15,000 payment last year. What’s their current required tax payment? </li></ul>2011 Cengage Learning
  7. 7. Solution <ul><li>Example </li></ul><ul><li>San Juan River Expeditions Inc., an S-Corp, has taxable income of $360,000 for the year ended 9/30/10 with a three-month deferral period. The company made a $15,000 payment last year. What’s their current required tax payment? </li></ul><ul><li>Solution </li></ul><ul><li>The required tax payment = </li></ul><ul><li>(Estimated taxable income in deferral period x 36%) - prior year’s tax payment </li></ul><ul><li>Deferral period is 3 months (October – December) </li></ul><ul><li>[($360,000/12) x 3 months] = $90,000, ($90,000 x 36%) = $32,400 </li></ul><ul><li>($32,400 - 15,000) = $17,400 estimated tax payment due in current year </li></ul>2011 Cengage Learning
  8. 8. Tax Year for Personal Service Corporation <ul><li>A Personal Service Corporation (PSC) is a corporation with shareholder-employee(s) who provide a personal service, such as architects or dentists </li></ul><ul><li>Generally must adopt calendar year </li></ul><ul><li>However, can adopt a fiscal year if </li></ul><ul><ul><li>Can prove business purpose </li></ul></ul><ul><ul><li>or </li></ul></ul><ul><ul><li>Fiscal year results in a deferral period of less than 3 months </li></ul></ul><ul><ul><li>and </li></ul></ul><ul><ul><ul><li>Shareholders’ salaries for deferral period are proportionate to salaries received during rest of the period or </li></ul></ul></ul><ul><ul><ul><li>Corporation limits its salaries deduction </li></ul></ul></ul>2011 Cengage Learning See next slide
  9. 9. PSC Limit on Salaries Deduction <ul><li>Purpose is to keep the PSC from deducting one year’s salary in first nine months </li></ul><ul><li>If salaries don’t remain constant, the PSC can only deduct pro rata amount </li></ul><ul><ul><li>Based on a required formula </li></ul></ul>2011 Cengage Learning
  10. 10. Short Period Taxable Income (TI) <ul><li>If taxpayer has a short year (other than first or last year of operation), tax is calculated based on following example: </li></ul><ul><ul><ul><li>In 2010, Flo-Mex changes from a calendar year to tax year ending 9/30. For the short period 1/1/10 – 9/30/10, Flo-Mex’ taxable income = $20,000 * </li></ul></ul></ul><ul><ul><ul><ul><li>Steps to calculate tax for the short period </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Annualize TI $20,000 x 12/9 = 26,667 </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Estimated tax on annualized TI $26,667 x 15% = 4,000 </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Allocate tax to short period $ 4,000 x 9/12 = 3,000 </li></ul></ul></ul></ul></ul><ul><li>Individual taxpayers rarely change tax years </li></ul><ul><ul><ul><li>*Note: Calculations for short year TI requires special adjustments </li></ul></ul></ul>2011 Cengage Learning
  11. 11. Accounting Methods <ul><li>There are three acceptable accounting methods for reporting taxable income </li></ul><ul><ul><li>Cash </li></ul></ul><ul><ul><li>Hybrid </li></ul></ul><ul><ul><li>Accrual </li></ul></ul><ul><li>Must use one method consistently </li></ul><ul><ul><li>Make an election on your first return by filing using a particular method </li></ul></ul><ul><ul><li>Must obtain permission from IRS to change accounting methods </li></ul></ul>must use same method for tax & books 2011 Cengage Learning
  12. 12. Accounting Methods <ul><li>Cash receipts/disbursements method </li></ul><ul><ul><li>This method most common for individuals </li></ul></ul><ul><ul><li>Recognize income when cash actually or constructively received </li></ul></ul><ul><ul><li>Recognize deduction in year of payment </li></ul></ul><ul><ul><ul><li>Exception - can’t deduct prepaid rent or interest </li></ul></ul></ul><ul><ul><li>Can’t use cash basis if taxpayer is a </li></ul></ul><ul><ul><ul><li>C corporation </li></ul></ul></ul><ul><ul><ul><li>Partnership with a corporation as a partner </li></ul></ul></ul><ul><ul><ul><li>Tax exempt trusts with unrelated business income </li></ul></ul></ul><ul><ul><ul><ul><li>Doesn’t apply to certain organizations </li></ul></ul></ul></ul>2011 Cengage Learning
  13. 13. Accounting Methods (continued) <ul><li>Accrual method </li></ul><ul><ul><li>Recognize income when earned and can be reasonably estimated </li></ul></ul><ul><ul><li>Recognize deductions when incurred and can be reasonably estimated </li></ul></ul><ul><li>Hybrid method </li></ul><ul><ul><li>An example of a hybrid taxpayer is one that utilizes cash method for receipts and disbursements, but accrual for cost of products sold </li></ul></ul>2011 Cengage Learning
  14. 14. Depreciation <ul><li>Depreciation is a process of allocating and deducting the cost of assets over their useful lives </li></ul><ul><ul><li>Does not mean devaluation of asset </li></ul></ul><ul><ul><li>Land is not depreciated </li></ul></ul><ul><li>Maintenance vs. depreciation </li></ul><ul><ul><li>Maintenance expenses are incurred to keep asset in good operating order </li></ul></ul><ul><ul><li>Depreciation refers to deducting part of the original cost of the asset </li></ul></ul><ul><ul><li>Complete Form 4562 to reflect depreciation </li></ul></ul>2011 Cengage Learning
  15. 15. Depreciation Methods <ul><li>Straight-line depreciation is easiest, for accounting purposes, and is calculated as </li></ul><ul><ul><li>(Cost of asset – salvage value)/Years in estimated life </li></ul></ul><ul><li>Modified Accelerated Cost Recovery System (MACRS), for tax purposes, allows capital assets to be written off over a period identified in tax law </li></ul><ul><ul><li>Accelerated method used for all assets except real estate </li></ul></ul>2011 Cengage Learning
  16. 16. Personal Property Recovery Periods <ul><li>With MACRS, each asset is depreciated according to an IRS-specified recovery period </li></ul><ul><ul><li>3 year ADR* midpoint of 4 years or less </li></ul></ul><ul><ul><li>5 year Computers, cars and light trucks, R&D equipment, certain energy property & certain equipment </li></ul></ul><ul><ul><li>7 year Mostly business furniture & equipment and property with no ADR life </li></ul></ul><ul><ul><li>*See Table 7.1 on page 7-9 for Asset Depreciation </li></ul></ul><ul><ul><li>Ranges (ADR) for recovery periods for all classes of assets </li></ul></ul>2011 Cengage Learning
  17. 17. Calculating Depreciation for Personal Property <ul><li>Depreciation is determined using IRS tables </li></ul><ul><ul><li>MACRS rates found in Table 7.2 on page 7-10 </li></ul></ul><ul><ul><li>Rates multiplied by cost (salvage value not used in MACRS) </li></ul></ul><ul><ul><li>Tables based on half-year convention </li></ul></ul><ul><ul><ul><li>Means 1/2 year depreciation taken in year of acquisition and 1/2 year taken in final year </li></ul></ul></ul><ul><li>May elect to use tables based on straight-line instead (percentages in Table 7.3 on page 7-11) </li></ul><ul><li>Note: Must use either MACRS or straight-line for all </li></ul><ul><li>property in a given class placed in service during that year </li></ul>2011 Cengage Learning
  18. 18. Using Tables -Personal Property <ul><li>Example 1: On March 15, Zumiz Co. purchased furniture for $180,000; what is the recovery period and depreciation? (assume no bonus depreciation taken) </li></ul><ul><li>Use Table 1 to see it’s a 7-year asset </li></ul><ul><li>Use Table 2 to get percentages </li></ul><ul><li>Year 1: $180,000 x .1429 = $25,722 </li></ul><ul><li>Year 2: $180,000 x .2449 = $44,082 </li></ul><ul><li>Example 2 : On February 3, Bling LLC bought a computer for $12,000; what is the recovery period and depreciation? (assume no bonus depreciation taken) </li></ul><ul><li>Use Table 7.1 to see it’s a 5-year asset </li></ul><ul><li>Use Table 7.2 to get percentages </li></ul><ul><li>Year 1: $12,000 x .20 = $2,400 </li></ul><ul><li>Year 2: $12,000 x .32 = $3,840 </li></ul>2011 Cengage Learning
  19. 19. Mid-Quarter Convention <ul><li>Mid-quarter convention is required if taxpayer purchases more than 40% of total assets (except real estate) in the last quarter of tax year </li></ul><ul><ul><li>Must apply this convention to every asset purchased in the year </li></ul></ul><ul><ul><li>Excludes real property and §179 property </li></ul></ul><ul><ul><li>Must use special mid-quarter tables </li></ul></ul><ul><ul><ul><li>Found at major tax service such as Commerce Clearing House (CCH) or Research Institute of America (RIA) </li></ul></ul></ul>2011 Cengage Learning
  20. 20. 50% Bonus Depreciation <ul><li>Reinstated for 2008-2010 </li></ul><ul><li>Additional depreciation immediately available </li></ul><ul><li>Applies to assets with recovery period of twenty years or less plus computer software, leasehold improvements and water utility property </li></ul><ul><li>Amount = 50% of adjusted basis </li></ul><ul><li>Take 50% bonus first, then regular MACRS depreciation on remaining basis </li></ul><ul><li>May elect out of bonus if anticipate need for higher depreciation in future years </li></ul>2011 Cengage Learning
  21. 21. Personal Property Depreciation Example <ul><li>Example </li></ul><ul><li>Nicole purchases a cherry desk and executive chair for use in her engineering firm on July 16, 2010 for $8,150. What is her depreciation for 2010 using half-year convention and MACRS tables? 2011? (Assume Nicole didn’t take bonus depreciation as she anticipates higher income in subsequent years). </li></ul><ul><li>How would 2010 depreciation change if she had taken 50% bonus depreciation? </li></ul>2011 Cengage Learning
  22. 22. Solution <ul><li>Example </li></ul><ul><li>Nicole purchases a cherry desk and executive chair for use in her engineering firm on July 16, 2010 for $8,150. What is her depreciation for 2010 using half-year convention and MACRS tables? 2011? (Assume Nicole didn’t take bonus depreciation as she assumes higher income in subsequent years). </li></ul><ul><li>How would 2010 depreciation change if she had taken 50% bonus depreciation? </li></ul><ul><li>Solution </li></ul><ul><li>Using Table 1, we can see that business furniture has a 7-year life. Table 2 shows the percentages to use for recovery years 1 and 2; therefore </li></ul><ul><li>2010 depreciation = $1,165 ($8,150 x .1429) </li></ul><ul><li>2011 depreciation = $1,996 ($8,150 x .2449) </li></ul><ul><li>If bonus depreciation were taken: </li></ul><ul><li>2010 depreciation = 50% bonus depreciation + MACRS % to remaining basis </li></ul><ul><li>$8,150 x 50% = $4,075 bonus depreciation </li></ul><ul><li>$4,075 x .1429 = $582 MACRS depreciation </li></ul><ul><li> Total depreciation = $4,657 ($4,075 + $582) </li></ul>2011 Cengage Learning
  23. 23. Real Estate <ul><li>Real assets depreciated based on a recovery period – 2 types of real property </li></ul><ul><ul><li>27.5 years Residential real estate </li></ul></ul><ul><ul><li>39 years Nonresidential real estate </li></ul></ul><ul><ul><li>Real assets are depreciated using the straight-line method with a mid-month convention </li></ul></ul><ul><ul><ul><li>Mid-month convention assumes all purchases made in middle of month </li></ul></ul></ul><ul><ul><ul><li>Used for real estate acquired after 1986 </li></ul></ul></ul><ul><ul><ul><li>Rates found on Table 7.4 on page 7-13 </li></ul></ul></ul><ul><li>Note: Different rates apply for real property acquired </li></ul><ul><li>before 1981 and after 1980 but before 1987 </li></ul>2011 Cengage Learning
  24. 24. Real Estate Example <ul><li>Example </li></ul><ul><li>Gwen purchased a residential triplex on 8/1/10 for $290,000 (including land cost of $50,000). What is her depreciation for 2010? 2011? </li></ul>2011 Cengage Learning
  25. 25. Solution <ul><li>Example </li></ul><ul><li>Gwen purchased a residential triplex on 8/1/10 for $290,000 (including land cost of $50,000). What is her depreciation for 2010? 2011? </li></ul><ul><li>Solution </li></ul><ul><li>Since land is not depreciable, only $240,000 may be multiplied by percentages from Table 7.4 (27.5-year residential real property). The purchase occurred in the eighth month; therefore, depreciation equals </li></ul><ul><li>2010 $240,000 x 1.364% = $3,274 </li></ul><ul><li>2011 $240,000 x 3.636% = $8,726 </li></ul>2011 Cengage Learning
  26. 26. Election to Expense - §179 <ul><li>§179 allows immediate expensing of qualifying property </li></ul><ul><ul><li>For 2010, the annual amount allowed is $500,000 </li></ul></ul><ul><ul><li>Qualifying property is tangible personal property used in a business </li></ul></ul><ul><ul><ul><li>But not real estate or property used in residential real estate rental business </li></ul></ul></ul><ul><li>§179 election to expense is limited by 2 things </li></ul><ul><ul><li>If cost of qualifying property placed in service in a year > $2,000,000, then reduce §179 expense dollar for dollar </li></ul></ul><ul><ul><ul><li>For example, if assets purchased in current year = $2.1 million, taxpayer must reduce §179 by $100,000. Therefore, election to expense is limited to = $400,000 ($500,000 – 100,000). The remaining $1.7 million of basis is depreciated over assets’ useful lives (including bonus depreciation) if applicable. </li></ul></ul></ul><ul><ul><li>Cannot take §179 expense in excess of taxable income </li></ul></ul>2011 Cengage Learning
  27. 27. Election to Expense - § 179 <ul><li>When using with regular MACRS, take §179 first, then reduce basis to calculate bonus depreciation, then reduce basis to calculate MACRS </li></ul><ul><li>For example </li></ul><ul><ul><li>In 2010, NanoPaint Inc.’s taxable income = $1.25 million. They placed a 7-year piece of property into service costing $842,000 – it was their only asset purchase in 2010. What is total depreciation, including election to expense? </li></ul></ul><ul><ul><li>Assuming bonus depreciation will be claimed – first take $500,000 deduction under §179, reduce basis to $342,000, then multiply by 50% to get bonus depreciation and then remaining basis ($171,000) by .1429 from MACRS tables </li></ul></ul><ul><ul><li>Total depreciation and Section 179 = $695,436 ($500,000 + 171,000 + * 24,436) = $695,436 </li></ul></ul><ul><ul><li>*(remaining basis of $171,000 x .1429) </li></ul></ul>2011 Cengage Learning
  28. 28. § 179 Example <ul><li>Example </li></ul><ul><li>On 7/11/10, O’Neill Machinery LLC purchases a tooling machine (7-year asset) for $659,000. The taxable income from the business is $1,445,500. What is the company’s total depreciation deduction for the current year, including §179 and MACRS? Assume bonus depreciation. </li></ul>2011 Cengage Learning
  29. 29. Solution <ul><li>Example </li></ul><ul><li>On 7/11/10, O’Neill Machinery LLC purchases a tooling machine (7-year asset) for $659,000. The taxable income from the business is $1,445,500. What is the company’s total depreciation deduction for the current year, including §179 and MACRS? Assume bonus depreciation. </li></ul><ul><li>Solution </li></ul><ul><li>Asset purchases didn’t exceed $2,000,000, so no reduction in §179 required: </li></ul><ul><li>Cost $659,000 </li></ul><ul><li>§179 expense ( 500,000) </li></ul><ul><li>Adjusted depreciable basis $159,000 </li></ul><ul><li>x 50% bonus depreciation ( 79,500) </li></ul><ul><li>Remaining Basis $ 79,500 </li></ul><ul><li>x Table % .1429 </li></ul><ul><li>MACRS $ 11,361 </li></ul><ul><li>Total depreciation= $590,861 $500,000 + $79,500 + $11,361 </li></ul>2011 Cengage Learning
  30. 30. Listed Property <ul><li>Special rules exist to limit deductions on assets that lend themselves to personal use , called ‘listed property’ </li></ul><ul><ul><li>Cars and trucks/vans under 6000 lbs. gross vehicle weight with specific exclusions </li></ul></ul><ul><ul><li>Computers (unless used exclusively at business) </li></ul></ul><ul><ul><li>Equipment used for entertainment, recreation or amusement </li></ul></ul><ul><li>If asset used <= 50% for business (or if use falls to below 50% in subsequent years) must use straight-line and election to expense not allowed </li></ul><ul><li>If asset used > 50% for business, must use MACRS </li></ul><ul><li>Separate section (Part V) on page 2 of Form 4562 </li></ul>2011 Cengage Learning
  31. 31. Luxury Auto Limitations <ul><li>IRS limits annual depreciation expense that may be claimed on passenger auto </li></ul><ul><li>Maximum allowed amount is luxury auto limits x business use % </li></ul><ul><li>Luxury auto limits are quite low </li></ul><ul><ul><li>Annual depreciation limit on ‘luxury’ autos placed into service in 2010 </li></ul></ul><ul><ul><ul><li>2010 - $3,060 (or $11,060 if taking bonus depreciation * ) </li></ul></ul></ul><ul><ul><ul><li>2011 - $4,900 </li></ul></ul></ul><ul><ul><ul><li>2012 - $2,950 </li></ul></ul></ul><ul><ul><ul><li>2013 and subsequent years - $1,775 </li></ul></ul></ul><ul><ul><ul><li>*Only allowed if used more than 50% </li></ul></ul></ul><ul><ul><ul><li>in business and purchased new during 2010 </li></ul></ul></ul>2011 CengaLearning
  32. 32. Exception to Luxury Auto Limitations <ul><li>Definition of passenger auto includes any 4-wheeled vehicle manufactured primarily for use on public streets and weighing less than 6000 lbs. </li></ul><ul><ul><li>Some SUVs weigh more than 6000 lbs. and so can be expensed under §179 </li></ul></ul><ul><ul><li>Beginning 10/22/04, can ‘only’ expense $25,000 and then depreciate remainder using five year MACRS percentages </li></ul></ul><ul><ul><ul><li>These SUVs will qualify for 50% bonus depreciation in 2010 as well </li></ul></ul></ul>2011 Cengage Learning
  33. 33. Luxury Auto Example <ul><li>Example </li></ul><ul><li>On 3/15/10, Jim purchased a new automobile for $50,000; it is a passenger auto weighing less than 6000 lb. The automobile is used 60% for business and Jim wants to know how much depreciation to claim if he elects out of the bonus depreciation rules. What if he does use the bonus depreciation? </li></ul>2011 Cengage Learning
  34. 34. Solution <ul><li>Example </li></ul><ul><li>On 3/15/10, Jim purchased a new automobile for $50,000; it is a passenger auto weighing less than 6000 lb. The automobile was used 60% for business and Jim wants to know how much depreciation to claim if he elects out of the bonus depreciation rules. What if he does take bonus depreciation? </li></ul><ul><li>Solution </li></ul><ul><li>Regular depreciation ($50,000 x 20% * ) 10,000 </li></ul><ul><li>Times business use percentage 60% X .60 </li></ul><ul><li>Possible depreciation 6,000 </li></ul><ul><li>“ Luxury auto” limitation (60% of $3,060) $ 1,836 </li></ul><ul><li>If Jim elects bonus depreciation, gets </li></ul><ul><li>Bonus depreciation ($50,000 x 50%) 25,000 </li></ul><ul><li>MACRS-remaining basis ($25,000 x 20%) 6,250 </li></ul><ul><li>Subtotal 31,250 </li></ul><ul><li>Business Use % 60% </li></ul><ul><li>Depreciation limited to business use % 18,750 </li></ul><ul><li>But ultimately limited to luxury auto x business use % (60% of $11,060) = $ 6,636 </li></ul><ul><li>* From MACRS tables, cars are 5-year assets </li></ul>2011 Cengage Learning
  35. 35. Intangible Assets <ul><li>§197 intangible assets are acquired by purchase </li></ul><ul><ul><li>Amortized over 15-years beginning in month acquired , includes assets such as </li></ul></ul><ul><ul><ul><li>Goodwill (value attributable to expected continuation of customers’ patronage) </li></ul></ul></ul><ul><ul><ul><li>Covenant not to compete </li></ul></ul></ul><ul><ul><ul><li>Franchise or trademark </li></ul></ul></ul><ul><ul><li>Many intangible assets are excluded from § 197 </li></ul></ul><ul><ul><ul><li>May not amortize self created assets like patents and copyrights </li></ul></ul></ul>2011 Cengage Learning
  36. 36. Amortization Example <ul><li>Example </li></ul><ul><li>FionaWear Inc. purchased a small textile company in May 2010 for $980,000. $54,000 of the purchase price was allocated to goodwill in the buy-sell agreement. How much goodwill may FionaWear amortize in 2010? </li></ul>2011 Cengage Learning
  37. 37. Solution <ul><li>Example </li></ul><ul><li>FionaWear Inc. purchased a small textile company in May 2010 for $980,000. $54,000 of the purchase price was allocated to goodwill in the buy-sell agreement. How much goodwill may FionaWear amortize in 2010? </li></ul><ul><li>Solution </li></ul><ul><li>$54,000/15 years = $3,600/12 months = $300 per month </li></ul><ul><li>§197 amortization $300 x 8 months = $2,400 </li></ul>2011 Cengage Learning
  38. 38. Related Party Transactions §267 <ul><li>Restricted transaction between related parties include </li></ul><ul><ul><li>Recognizing losses on sales between related parties </li></ul></ul><ul><ul><li>One accrual basis and one cash basis taxpayer as pertains to expensing unpaid expenses and interest </li></ul></ul><ul><li>Related parties are: </li></ul><ul><ul><li>Family members such as spouses, lineal descendants, siblings </li></ul></ul><ul><ul><li>A corporation and more than 50% owner </li></ul></ul><ul><ul><li>Brother/sister corporations </li></ul></ul><ul><ul><li>Parent/subsidiary corporations </li></ul></ul><ul><ul><li>Complex ‘constructive ownership’ rules </li></ul></ul>2011 Cengage Learning
  39. 39. Related Party Transactions §267 <ul><li>Losses disallowed between related parties </li></ul><ul><ul><li>When property sold later to an unrelated party, all previously disallowed losses may be taken against gain </li></ul></ul><ul><li>May not avoid tax when one taxpayer uses cash method for expenses and interest and the other taxpayer uses accrual method </li></ul>2011 Cengage Learning
  40. 40. The End! 2011 Cengage Learning My head hurts!

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