NINJA CPA REVIEW®

NINJA Notes 2013 Regulation

   

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Table of Contents The N.I.N.J.A. Framework Taxation I. Individual Taxation 8 II. Partnership Taxation 26 III. Corporate Taxation 35 IV. Gift & Estate Taxation 50 V. Property Transactions 57 VI. Multi-Jurisdictional Tax Issues 67 Law & Professional Responsibilities VII. Professional Responsibilities 68 VIII. Federal Securities Acts 73 IX. Business Structures 78 X. Contract Law 93 XI. Sales Law 98 XII. Commercial Paper 101 XIII. Secured Transactions 109 XIV. Bankruptcy & Debt 111 XV. Employment & Environment Law 121 XVI. Property Law 124 XVII. Agency Law 126 XVIII. Dodd-Frank Reform Act 133

   

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The N.I.N.J.A. Framework

NAIL THE VIDEOS Watch your CPA Review videos first – before working any assigned homework questions. The CPA Review industry says to watch a section of CPA Review video and then work the accompanying MCQs. This perspective stems from the old-school approach to the paper and pencil exam where you had to sit in a live classroom and learn from an instructor on weekends. Today, there is a smarter way to study. You don’t have to go to a weekend live course. You can fire up the laptop on a Tuesday morning and knock out two hours of material before you even brush your teeth. If you work MCQs in week one over your week one topic, guess what? You will work them again in week 5 or 6 when you review because you will forget what you learned. If you watch a video in week one and score an 85 on the corresponding MCQs, will you be able to score an 85 four weeks later? Not likely. You will need to work them again anyway and it’s not a smart use of study time. Instead, let the N.I.N.J.A. Framework guide you.

INTENSE NOTES Repeat after me: “PUT THE HIGHLIGHTER DOWN.” Which method do you think will help you learn the material better – painting printed words in a book with pretty florescent colors or writing them down on a legal pad and thinking about the information?

   

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Grab a stack of legal pads, put the highlighter down, and start writing. Many people have said that instead of taking their own notes, they just re-write the material inside of this study guide, which is fine too.

NON-STOP MCQS Now is the time to start working multiple-choice questions and do them with a focused frenzy. Do so many MCQs that you’re absolutely sick of them. As you encounter little “fact nuggets” that you didn’t know or are prone to forget, write it down and add it to your voluminous stack of notes.

JUST RE-WRITE IT This is where it gets tedious. This is also where the payoff happens. You may be familiar with the fact that if you had a choice between $3 Million and 1¢ doubled daily for 31 days, the penny doubled for 31 days ends up tripling the $3 Million. The payoff, however, doesn’t happen until the 31st day. The road is long, but ends up being worth it in the end. The same goes for re-writing your study notes. The thought of grabbing that stack of legal pads and going to town re-writing what you’ve already written may sound like a ridiculous suggestion at first, but I am a firm believer in its impact. Merely writing down your notes and then reviewing them before your exam doesn’t have near the impact as taking your furious scribbles and converting them into re-packaged, easily-digestible “fact nuggets.” Not only will your notes mean more when you’ve whittled away the non-essentials, but you are actually learning the

   

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material twice. Re-processing the material by re-writing your notes is like letting the information marinade in your mind. Just like a well-prepared steak, you will taste the payoff of this extra step. Don’t like taking notes? No problem. Re-write these NINJA Notes instead. You will absorb the material better vs. reading only. Plan wisely because this will likely take a week to complete. “I have found this to be unbelievably helpful! This is now my second section that I have followed this piece of advice and, once again, I am amazed at how much the material "clicks" as I review and write the notes a second time. Sure, it's time-consuming, but for me, it is worth it. No questions asked. Not only does it help with processing and understanding the material, but it also results in a better, more organized set of study notes to use for review up until exam date.” – Sandy

ALL COMES TOGETHER You have watched the videos. You’ve taken ridiculous notes and have done hundreds (thousands?) of multiple-choice questions. You’ve re-written your notes. Now, study that stack of review Gold in your hands multiple times, work MCQs over weak topics, study your notes even more, and then go in and PASS the CPA Exam.

   

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How to use NINJA Notes READING You've invested in the NINJA Notes, now let it go to battle for you. You should read the them as many times as possible. Carry it with you wherever you go. Do you have an iPhone®, iPad®, or similar device(s)? Simply load the PDF onto the device and if you have 5 minutes of downtime, you have 5 minutes of study time.

It is recommended that you read the NINJA Notes at least five times leading up to your final two weeks of exam prep. If you have 6 weeks to study, then you need to complete this in 4 weeks. 5 weeks to study, then complete it in 3. 4 weeks = 2 weeks. You get the picture. The point is: plan, plan, plan and budget, budget, budget, budget because exam day is looming. 6-Week Plan: Approx. 138 pages x 5 reads /4 weeks / 7 days per week = Approx. 25 pages per day 5-Week Plan: Approx. 138 pages x 5 reads /3 weeks / 7 days per week = Approx. 33 pages per day 4-Week Plan: Approx. 138 pages x 5 reads /2 weeks / 7 days per week = Approx. 49 pages per day 3-Week Plan: Approx. 138 pages x 5 reads /1 weeks / 7 days per week = Approx. 98 pages per day

   

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RE-WRITING This step is optional, but it won over a lot of skeptics with its results. This is not mainstream advice. This is the NINJA way. The mainstream way of studying for the CPA Exam is old-fashion and outdated. Forget the old way. You are a NINJA now.

Now is the time to either 1. Re-write your own CPA Exam notes or 2. Re-Write the NINJA Notes. Plan on investing a week doing this and you should expect to get through 20 pages a day (Approx. 138 pages / 7) in order to stay on track. After this, you will still have one week left to put the finishing touches on your CPA Exam review prep – i.e. doing a ton of MCQs. (http://tinyurl.com/WileyTB)

   

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I. Individual Taxation 2012 INDIVIDUAL TAX RATES This is a 2013 exam but they test over 2012 tax laws. Don't memorize – just generally know how the tax brackets work.

Single Taxpayer

Married Filing Jointly

Taxable  Income  Over  

• $0  • $8,700  • $35,350  • $85,650  • $178,650  • $388,350  

But  Not  Over  

• $8,700  • $35,350  • $85,650  • $178,650  • $388,350  

Pay  

• $0  • $870  • $4,867.50  • $17,442.50  • $43,482.50  • $112,683.50  

+  %  Excess  on  

• 10%  • 15%  • 25%  • 28%  • 33%  • 35%  

of  the  amount  over  

• $0  • $8,700  • $35,350  • $85,650  • $178,650  • $388,350  

Taxable  Income  Over  

• $0  • $17,400  • $70,700  • $142,700  • $217,450  • $388,350  

But  Not  Over  

• $17,400  • $70,700  • $142,700  • $217,450  • $388,350  

Pay  

• $0  • $1,740  • $9,735  • $27,735  • $48,665  • $105,062  

+  %  Excess  on  

• 10%  • 15%  • 25%  • 28%  • 33%  • 35%  

of  the  amount  over  

• $0  • $17,400  • $70,700  • $142,700  • $217,450  • $388,350  

   

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DEDUCTIONS & EXEMPTIONS

2012 Standard Deduction

o Married Filing Jointly - $11,900

o Single - $5,950

2012 Personal Exemption

o $3,800

CASH BASIS ACCOUNTING

Allowed for Individual Taxpayers owning a Business

Not allowed for:

o Corporations

o Partnerships with a C-Corp Partner

o Inventory DEDUCTIONS TO ARRIVE AT AGI

MSA/HSA Contributions

Moving Expenses

Deductible part of Self-Employment Tax

Self-Employed SEP, SIMPLE, and Qualified Plans

Self-Employed Health Insurance Premiums

Investment penalties for early withdrawal

   

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Alimony paid

IRA Deduction

Student Loan Interest

o Can't be another taxpayer's dependent

Teacher expenses

Moving Expenses

Tuition Expense

o Can't also claim AOC or Lifetime Learning Credit for same expenditures

SECTION 179 EXPENSES

For New/Used equipment placed into service between January 1, 2012 and December 31, 2012

Max Deduction: $139,000

Max Total Equipment Purchases for 2012: $560,000

o $139,000 deduction is phased-out dollar for dollar

for the amount of equipment purchases that exceed $560,000

If a company buys $575,000 in equipment, then the $139,000 deduction is reduced by ($575,000 - $560,000) $15,000

• $139,000 - $15,000 = $124,000

   

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CARRYOVERS

Excess 179 expense

Passive Activity Loss

o No Carryback

o Carry Forward Indefinitely

Investment Interest expense > Investment Income

o Carry Forward Indefinitely

Charitable Contributions

o Carry Forward 5 years

AMT Paid

o Carry Forward Indefinitely

o Apply against future Income Tax only

Not against future AMT liabilities

Capital Loss

o $3,000 Loss and Carry Forward rest Indefinitely

o Loss retains Character (STCL vs LTCL)

Compare to a Corporation

• 3 years back /5 years forward

• Carry forward as a STCL only

   

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INSTALLMENT SALES

Gross Profit / Contract Price

o Contract Price = Sales Price – (Buyer Liability)

HOME MORTGAGE INTEREST

Mortgage Interest deductible on loans up to $1M

Home Equity Interest deductible on loans up to $100K BUSINESS GIFTS (SCHEDULE C)

$25 per person is deductible

Service awards up to $400 are deductible

BUSINESS LOSSES

Business Losses only offset active Business Income

o W2 wages are considered active Business Income

Passive Losses don't offset active income

o W2 wages = Active Income

Can't be offset by Passive Losses

o Ltd Partnership income = Passive Income

Can be offset by passive losses

o Interest/dividend income = Portfolio Income

NOT PASSIVE!

   

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CONVENTIONS

Personal Property = Mid-Year/Mid-Quarter

o Use Mid-Quarter if 40% or more of all purchases occur in 4th quarter

Real Property = Mid-Month

Leasehold Improvements = 15 Year S/L

BUSINESS START-UP COSTS

Deduct up to $5,000 of Start-up costs

Reduced dollar-for-dollar by amount over $50,000

Remaining costs are amortized MEDICAL EXPENSES – SCHEDULE A

Deductible once 7.5% AGI threshold is reached

o If your AGI is $100,000, your first $7,500 of medical expenses are not deductible

Accident/Disability insurance is not deductible

MEDICAL EXPENSE - PAID ON BEHALF OF ANOTHER

Must be a Citizen of North America

If person is your mother/father or relative closer than a cousin, they don't have to live with you

Otherwise, they must live with you

Must provide more than 50% support to individual

   

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FOREIGN TAXES PAID – SCHEDULE A

Foreign

o Income Tax - Deductible

o Real Estate Tax - Deductible

o Personal Property Taxes - Not Deductible

o Tax Assessments - Not Deductible - Add to Basis

INVESTMENT INTEREST EXPENSE – SCHEDULE A

Deductible only the extent of Net Investment Income

Gross Investment Income <Investment expense in excess of 2% of AGI> = Net Investment Income

Note: Investment expense doesn't include Interest Expense. Investment interest expense on tax-free securities is not deductible

MORTGAGE POINTS – SCHEDULE A

Deductible if it represents prepaid interest on purchase of a new home or improving a home

Refinance points are amortized over the life of the mortgage

MORTGAGE INTEREST EXPENSE – SCHEDULE A

If used to purchase a house (i.e. not to pay off credit cards) deductible on Schedule A on debt up to $1M

Refinance interest expense deductible up $100k of debt

   

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CHARITABLE CONTRIBUTIONS – SCHEDULE A

LTCG Property + Property related to Charity

o Deduction for FMV of property

o Up to 30% of AGI

STCG Property + Property not related to Charity

o Deduction for Adjusted Basis in property

o Up to 50% of AGI MISC SCHEDULE A DEDUCTIONS

Must Exceed 2% of AGI

Education - If required to keep your job

Business travel expenses

50% of meals/entertainment Union Dues

Tax prep fees

Legal fees to collect alimony

Appraisal Fees to Value

o Casualty Loss

o Charitable Contributions

   

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DEDUCTIONS NOT SUBJECT TO AGI REDUCTION

Medical

Casualty

Gambling

Investment Interest Expense

CASUALTY LOSS

Decrease in FMV of property vs. Basis

Use the lower of the two numbers

Lower of above number <insurance proceeds> <$100> (Note – this was $500 in 2009 tax year) <10% of AGI>

=Deductible amount for casualty loss

Expenses to repair damaged personal property

o Not Deductible

QUALIFYING CHILD

Must be resident of North America

Under age 19 or age 24, if student

QUALIFYING RELATIVE

Must be citizen of North America

Same "relative" test as the test for medical expenses paid for another person

   

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o If person is your mother/father or relative closer

than a cousin, they don't have to live with you

o Otherwise, they must live with you

o Must provide more than 50% support to individual

o Can't earn more than $3,800

Social Security doesn't count as income

MINOR INCOME TAXED AT PARENTS’ RATE

Child's unearned income <early withdrawal penalties> <$950> <greater than $950 or child's itemized deduction related to unearned income> =Amount taxed at parents' rate

MARRIED FILING JOINTLY

Different accounting methods between spouses are OK if they each own a small business

Non-resident aliens can file MFJ with their spouse

ALTERNATIVE MINIMUM TAX (AMT)

Real Estate depreciation on property purchases pre-'99 vs Straight Line 40

Difference between 200% MACRS vs 150% MACRS on personal property

FMV of stock options vs amount paid for them

   

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7.5% medical deduction threshold for Schedule A vs 10% allowed for AMT

No state income tax, real estate tax, or personal

property tax allowed for AMT

No personal exemptions or standard deductions

For construction: only percentage of completion method allowed

No installment method on sales allowed

AMT paid is carried forward indefinitely and only reduces future regular tax, not future AMT

SELF-EMPLOYMENT TAX

15.3% of Net Profit

Exam Trick: Executor of Estate not SE Income REFUNDABLE TAX CREDITS

If the credit takes the amount of tax owed for the year below zero, the government owes the taxpayer money

Earned Income Credit

Additional Child Tax Credits

American Opportunity Credit

   

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EDUCATION CREDITS

American Opportunity Credit (formerly Hope Credit)

o Includes first 4 years of post-secondary school

Hope Credit only allowed first 2 years

o 100% Credit for first $2,000 expenses including

Tuition

Course-related Books & Supplies

• Hope Credit didn't include this

o 25% Credit for next $2,000 of expenses

aka – up to $500

o Total Available Credit per student: $2,500

Compare to Lifetime Learning Credit, which is per taxpayer

o 40% ($1,000) of credit is refundable

Compare to Lifetime Learning Credit, which is not refundable

Lifetime Learning Credit

o Per taxpayer

o Not refundable

   

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ESTIMATED TAX PAYMENTS

The lesser of:

o 90% of current total tax

o 100% of prior year's total tax

o 110% of prior year's total tax

If AGI is $150,000 or more

FARMING

Damaged crops? Insurance proceeds must be included in income in the year they are received

If weather issues force the sale of an abnormal volume of livestock, the gain on the extra sales may be deferred until next year

Costs to Preserve Soil/Water = Deductible

Costs to Drain wetlands or for irrigation = Not Deductible

If you want to preserve resources, you can Deduct

If you want to use resources, you cannot Deduct

Prepaid feed costs for livestock can be deducted up to 50% of other farming expenses

Farm Personal Tangible Property (i.e. non-Real Estate)

uses MACRS 150

   

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AUDIT APPEALS

If no deal is reached after Appeal

o Taxpayer has 90 days to Petition the Tax Court

o If no Petition filed – Tax due within 10 Days

STATUTE OF LIMITATIONS FOR A TAX AUDIT

3 years

6 years if 25% or more of gross income (Gross Receipts + Capital Gains) was omitted from the tax return

The clock starts ticking on the Due Date of the return

or the date the return was filed - whichever is later

No statute of limitations for

o Fraud

o Failure to File NON-BUSINESS BAD DEBT

Treated as a Short-Term Casualty Loss (STCL) TAX REFUND CLAIMS

Must be claimed within (whichever is later)

o 3 years of return Due Date

o 2 years of Tax being paid

   

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DIVIDEND INCOME

Treated as Ordinary Income

o You can't offset Dividends with a Capital Loss

LIFE INSURANCE

Employer can pay premiums for up to $50,000 in coverage without it being included in income

Premiums paid on Life Insurance coverage > $50k count as income to the taxpayer

o If your employer pays for a $60k Life Insurance

policy, the premiums on the extra $10k are taxable income

SCHOLARSHIPS

Scholarships are not taxable as long as

o They are not in return for services rendered

If a graduate assistant gets a scholarship in return for teaching classes, that's not a tax-free scholarship

o The money is used for tuition and books

Room and Board counts as income TAX-FREE INTEREST INCOME

State & Municipal Bonds

US EE Savings Bonds

   

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o US HH Bonds are taxable

Remember: US Treasuries are taxable!!! TAX-FREE DIVIDEND INCOME

Some Stocks

S-Corps

Life Insurance SOCIAL SECURITY BENEFITS

Up to 85% of Social Security income can be taxed for people in higher income brackets

UNEMPLOYMENT COMPENSATION

Taxable DAMAGES AWARDED

Any payment made to make you 'whole' = Not Taxable

o You lose a limb in an auto accident and get paid $500,000 = not counted as taxable income

Any payment made for punitive damages = Taxable

WORKMAN’S COMPENSATION

NOT Taxable

Think of it as similar to being awarded damages to make you whole = Not Taxable

   

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DIVORCE, ALIMONY, & CHILD SUPPORT

Not Taxable & Not Deductible

o Divorce Property Settlement

o Child Support

Taxable & Deductible

o Alimony ALIMONY RECAPTURE

2nd Year: (3rd year - 2nd year - $15,000)

1st Year:

                               1st Year Alimony Paid <Avg. alimony paid in 2nd & 3rd years> <$15,000> <Recapture from 2nd year> =1st Year Alimony Recapture    

Total Recapture = 1st Year Recapture + 2nd Year Recapture

ADOPTIONS

Treated as personal expense and are not deductible

Only tax benefits allowed are through the adoption credit (which is not a refundable credit)

NET OPERATING LOSS (NOL)

Carryback 2 ... Carryforward 20

   

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IRA CONTRIBUTIONS

Traditional IRA = Deductible

Roth IRA = Not Deductible FILING STATUS

Married Filing Jointly

o Must be married at end of year

o If spouse dies, must be married at end of year

Head of Household

o Has a dependent child

o Provides more than 50% support

o Lives with them more than 50% of year

Qualifying Widow(er)

o Has a dependent child

o Gets MFJ status for year of death + 2 tax years

   

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Get More NINJA! Covering: Partnership Taxation Corporate Taxation Gift & Estate Taxation Property Transactions Multi-Jurisdictional Tax Issues Professional Responsibilities Federal Securities Acts Business Structures Contract Law Sales Law Commercial Paper Secured Transactions Bankruptcy & Debt Employment & Environment Law Property Law Agency Law Dodd-Frank Reform Act http://www.another71.com/products-page/ninja-cpa-review-study-guides/