Gleim CPA Review Updates to Regulation 2014 Edition, 1st Printing July 2014

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1 Page 1 of 5 Gleim CPA Review Updates to Regulation 2014 Edition, 1st Printing July 2014 NOTE: Text that should be deleted is displayed with a line through the text. New text is shown with a blue background. Study Unit 3 Individual Taxation and Gross Income Page 114, Subunit 3.5, 10.e.1): This update corrects the information for private activity bond requirements. 10. Interest on State and Local Government Obligations a. Payments to a holder of a debt obligation incurred by a state or local governmental entity are generally exempt from federal income tax. Background Historically, this exemption has been extremely important to state and local governments. It allows them to offer their debt at lower interest rates, thereby lowering their cost of capital. b. Exclusion of interest received is allowable even if the obligation is not evidenced by a bond, is in the form of an installment purchase agreement, or is an ordinary commercial debt. c. These obligations must be in registered form. d. The exclusion applies to obligations of states, the District of Columbia, U.S. possessions, and political subdivisions of each of them. e. The interest on certain private activity bonds and arbitrage bonds is not excluded. 1) Private activity bonds are bonds of which more than 10% of the proceeds are to be used in a private business or and more than 10% of the principal or interest is secured or will be paid by private business property, or more than 5% or $5 million of the proceeds are to be used for private loans. 2) Interest on private activity bonds can still be excluded if the bond is for residential rental housing developments, public facilities (such as airports or waste removal), or other qualified causes. f. Interest on state, local, and federal tax refunds is not excluded.

2 Page 2 of 5 Study Unit 5 Deductions from AGI, Credits, AMT, and Limitations Page 192, Subunit 5.3, 2.a.8): This update correctly lists the Adoption Credit as nonrefundable. 2. Nonrefundable Personal Credits a. These credits include 1) Foreign Tax Credit 2) Child and Dependent Care Credit 3) Lifetime Learning Credit 4) Retirement Savings Contribution Credit 5) Child Tax Credit 6) Credit for the Elderly or the Disabled 7) General Business Credit 8) The Adoption Credit Page 195, Subunit 5.3, 2. and 3.a.5): This update moves the discussion of the Adoption Credit to item 2. and removes the Adoption Credit from the refundable credits list. i. Adoption Credit. A credit is allowed for qualified adoption expenses incurred by the taxpayer. 1) Qualified adoption expenses are reasonable and necessary adoption expenses, including adoption fees, court costs, attorney fees, and other directly related expenses. 2) The maximum credit is $12,970 per qualified child, including a special-needs adoption. a) The credit for a child with special needs is allowed regardless of the actual expenses paid or incurred in the year the adoption becomes final. b) The amount of the credit allowable for any tax year is phased out for taxpayers with Modified Adjusted Gross Income (MAGI) in excess of $194,580 and is fully eliminated when MAGI reaches $234,580. 3) Any unused credit may be carried forward for up to 5 years and is not subject to the MAGI phaseout. 3. Refundable Credits a. A refundable credit is payable as a refund to the extent the credit amount exceeds tax otherwise due. Refundable credits include credits for the following: 1) Taxes withheld 2) The Earned Income Credit 3) Additional Child Tax Credit 4) American Opportunity Credit 5) The Adoption Credit

3 Page 3 of 5 Page 197, Subunit 5.3, 3.f.: This update removes the discussion of the Adoption Credit from under item 3. f. Adoption Credit. A credit is allowed for qualified adoption expenses incurred by the taxpayer. 1) Qualified adoption expenses are reasonable and necessary adoption expenses, including adoption fees, court costs, attorney fees, and other directly related expenses. 2) The maximum credit is $12,970 per qualified child, including a special-needs adoption. a) The credit for a child with special needs is allowed regardless of the actual expenses paid or incurred in the year the adoption becomes final. b) The amount of the credit allowable for any tax year is phased out for taxpayers with Modified Adjusted Gross Income (MAGI) in excess of $194,580 and is fully eliminated when MAGI reaches $234,580. 3) Any unused credit may be carried forward for up to 5 years and is not subject to the MAGI phaseout. Page 200, Subunit 5.4, 2.: This update corrects information based on tax preference treatment to small business stock. 2. Tax preference items receive favorable treatment in computing regular income tax, e.g., taxexempt 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 purchased prior to September 28, 2010, or after December 31, 2013). Page 219, Simulation Tab 2 answer explanation: This update corrects the amount in the answer explanation. 2. Tax Credits (6 Gradable Items) 1. $500. The Lifetime Learning Credit is 20% of qualified expenses and is allowed for any year the American Opportunity Credit is not taken or allowed (post 4th year). The applicable expenses are limited to $10,000. The credit phases out for a single taxpayer with AGI between $53,000 and $63,000. Taxpayer A s credit is calculated as follows: $5,000 20%, i.e., $1,000, reduced by 50% ($58,000 $53,000) $10,000, i.e., $ $1,000. Despite taking the above-the-line deduction for the contribution to the IRA, Taxpayer B is still allowed a retirement savings contribution credit equal to 50% of $2,000. Taxpayer B s AGI is below the $59,000 phaseout threshold for MFJ taxpayers. 3. $4,000. Qualified employers may take the Work Opportunity Tax Credit (WOTC) equal to 40% of the first $10,000 wages paid to LT family assistance recipients who work at least 400 hours. Generally, the credit is 40% of the first $6,000 wages paid to qualifying employees. 4. $12,970. The maximum adoption credit amount of $12,650 $12,970 is allowed regardless of the actual expenses paid or incurred in the year the adoption becomes final for a special-needs child. 5. $750. Taxpayers who have qualifying children are entitled to the child tax credit of $1,000 per child. Taxpayer E has one qualifying child. The credit for single taxpayers begins to phase out by $50 per $1,000 in excess of $75,000. Taxpayer E s $1,000 credit is reduced by $250: ($80,000 $75,000) ($1,000 $50). 6. $268. Qualified taxpayers are allowed an earned income credit based on an applicable percentage. As a single individual with no children, Taxpayer F s credit is 7.65% of the $3,500 earned income.

4 Page 4 of 5 Study Unit 6 Property Transactions Page 250, Subunit 6.2, Question 7: This update corrects amounts in the foils and answer explanations. 7. Browne, a self-employed taxpayer, had 2013 business taxable income of $435,000 prior to any expense deduction for equipment purchases. In 2013, Browne purchased and placed into service, for business use, office machinery costing $450,000. This was Browne s only 2013 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 passthrough entity. What is Browne s deduction under the election? A. $130, ,000 B. $145, ,000 C. $500,000 D. $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 $500,000 in 2013, the year of acquisition. This amount is reduced when the amount of Sec. 179 property placed in service in a given year exceeds $2,000,000. Since this limit does not apply, the maximum deduction would be $500,000; 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 $500,000 for 2013 ignores the taxable income limit. Answer (D) is incorrect. The amount of $2,000,000 is the threshold at which the deduction is reduced dollar-for-dollar, ignoring the taxable income limit in this case. Page 255, Subunit 6.5, Question 22: This update adds more detail to the correct answer explanation. 22. The following data pertain to installment sales of personal property made by Fred Dale, an accrualmethod taxpayer, in his retail furniture store: Year of Sale Installment Sales Profit Collections in Year 3 Year 1 $ 50,000 $15,000 $10,000 Year 2 100,000 40,000 30,000 Year 3 150,000 75,000 40,000 These sales were not under a revolving credit plan. Under the installment method, Dale should report gross profit for Year 3 of A. $35,000 B. $75,000 C. $80,000 D. $130,000 Answer (B) is correct. REQUIRED: The amount collected that is reported as gross profit. DISCUSSION: The installment method is usually disallowed for dispositions of property by dealers. This includes any disposition of (1) personal property, if the person regularly sells such personal property on the installment plan, and (2) real property held by the taxpayer for sale to customers in the ordinary course of his/her trade or business. Exceptions are made for property used or produced in the trade or business of farming and, if so elected, sales of residential lots or timeshares, subject to interest payments on the deferred tax. Dale is excluded from installment sale deferral because the disposition of his property falls under personal property of a type regularly sold by the person on the installment plan. Because he does not qualify, he must recognize all of his profit in Year 3, which is stated in the question as $75,000. Answer (A) is incorrect. The amount of $35,000 results from subtracting the collections in Year 3 from the installment sale profits. Answer (C) is incorrect. The amount of $80,000 results from adding all the collections in Year 3. Answer (D) is incorrect. The amount of $130,000 results from adding the profits from installment sales in all 3 years.

5 Page 5 of 5 Study Unit 15 Corporations Page 554, Subunit 15.2, 6.d.1), Example: This update adds the number of shares in treasury stock. d. A stock split is an issuance of shares for the purpose of reducing the unit value of each share. Accordingly, the par or stated value, if any, also is reduced. A stock split does not increase a shareholder s proportionate ownership. It merely increases the number of shares outstanding. 1) A stock split is not a distribution. EXAMPLE In the example above, the board of directors instead declared a 2-for-1 common stock split. There are currently 5,000 shares in treasury stock. The laws of the state of incorporation protect treasury stock from dilution. Thus, the entity reduces the stated value of its common stock to $0.50 per share and issues 100,000 new shares, 90,000 issued to shareholders ($45,000 2) and 10,000 to the treasury (5,000 2). Total equity remains unchanged. 100,000 shares $0.50 (new) = 50,000 $1 (old) Study Unit 20 Debtor-Creditor Relationships Page 783, Subunit 20.3, Question 9: This update corrects an amount in the question stem and clarifies language in the correct answer explanation. 9. Green owes the following amounts to unsecured creditors: Rice, $5,700; Zwick, $4,800; Young, $14,800 $15,800; and Zinc, $4,900. Green has not paid any creditor since January 1, Year 1. On May 1, Year 1, Green s sole asset, a cabin cruiser, was seized by Xeno Marine Co., the holder of a perfected security interest in the boat. On July 1, Year 1, Rice, Zwick, and Zinc involuntarily petitioned Green into bankruptcy under Chapter 7 of the Federal Bankruptcy Code. If Green opposes the involuntary petition, the petition will be A. Upheld because the three filing creditors are owed more than $15,325. B. Upheld because one creditor is owed more than $15,325. C. Dismissed because there are fewer than 12 creditors. D. Dismissed because the boat was seized more than 90 days before the filing. Answer (A) is correct. REQUIRED: The status of an involuntary petition under Chapter 7. DISCUSSION: If the debtor has fewer than 12 creditors, any 1 or more creditors who alone or together have unsecured claims of $15,325 or more can file an involuntary petition. If there are the debtor has 12 or more creditors, any 3 or more who together hold unsecured claims of at least $15,325 can file an involuntary petition. Answer (B) is incorrect. Young did not join in filing the petition. Answer (C) is incorrect. A debtor with fewer than 12 creditors may be involuntarily petitioned into bankruptcy by one or more creditors who alone or together are owed more than $15,325. Answer (D) is incorrect. A challenged involuntary petition is not dismissed if the debtor is generally not paying his/her bills as they become due or, within 120 days before filing, a custodian or receiver took possession of all or most of the debtor s property to enforce a lien against the property.