NINJA CPA REVIEW

NINJA Notes 2015 (2014 Tax Law tested until June 30, 2015)

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Table of Contents The N.I.N.J.A. Framework Taxation I. Individual Taxation 8 II. Partnership Taxation 27 III. Corporate Taxation 36 IV. Gift & Estate Taxation 51 V. Property Transactions 58 VI. Multi-Jurisdictional Tax Issues 68 Law & Professional Responsibilities VII. Professional Responsibilities 70 VIII. Federal Securities Acts 74 IX. Business Structures 79 X. Contract Law 94 XI. Sales Law 99 XII. Commercial Paper 102 XIII. Secured Transactions 111 XIV. Bankruptcy & Debt 112 XV. Employment & Environment Law 123 XVI. Property Law 126 XVII. Agency Law 129 XVIII. Dodd-Frank Reform Act 135 XIX. JOBS Act 141

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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 dont 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 its 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 NINJA MCQ and do them with a focused frenzy. Do so many MCQs that youre absolutely sick of them. As you encounter little fact nuggets that you didnt 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, doesnt 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 youve 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 doesnt 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 youve 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. Dont 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. Youve taken ridiculous notes and have done hundreds (thousands?) of multiple-choice questions. Youve re-written your notes. Now, study that stack of review Gold in your hands multiple times, aim for a NINJA MCQ Trending Score of 85% heading into exam day, 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. 142 pages x 5 reads /4 weeks / 7 days per week = Approx. 25 pages per day 5-Week Plan: Approx. 142 pages x 5 reads /3 weeks / 7 days per week = Approx. 34 pages per day 4-Week Plan: Approx. 142 pages x 5 reads /2 weeks / 7 days per week = Approx. 51 pages per day 3-Week Plan: Approx. 142 pages x 5 reads /1 weeks / 7 days per week = Approx. 101 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. NINJA STUDY PLANNER www.another71.com/wp-content/files/REG_NINJA_Study_Planner.zip

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I. Individual Taxation 2014 INDIVIDUAL TAX RATES (Tested until 7/1/15)

! Single Taxpayer

! Married Filing Jointly

Taxable Income Over

$0 $9,075 $36,900 $89,350 $186,350 $405,100 $406,750

But Not Over

$9,075 $36,900 $89,350 $186,350 $405,100 $406,750

Pay

$0 $907.50 $5,081.25 $18,193.75 $45,353.75 $117,541.25 $118,118.75

+ % Excess on

10% 15% 25% 28% 33% 35% 39.6%

of the amount over

$0 $9,075 $36,900 $89,350 $186,350 $405,100 $406,750

Taxable Income Over

$0 $18,150 $73,800 $148,850 $226,850 $405,100 457,600

But Not Over

18,150 $73,800 $148,850 $226,850 $405,100 457,600

Pay

$0 $1,815 $10,162.50 $28,925 $50,765 $109,587.50 $127,962.50

+ % Excess on

10% 15% 25% 28% 33% 35% 39.6%

of the amount over

$0 $18,150 $73,800 $148,850 $226,850 $405,100 $457,600

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DEDUCTIONS & EXEMPTIONS

! 2014 Standard Deduction

o MFJ - $12,400

o Single - $6,200

! 2014 Personal Exemption

o $3,950

! 2014 Personal Exemption Phaseout

o Single AGI

" $254,200

o MFJ AGI

" $305,050

CASH BASIS ACCOUNTING

! Allowed for Individual Taxpayers owning a Business

! Not allowed for:

o Corporations

o Partnerships with a C-Corp Partner

o Inventory

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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

! Alimony paid

! IRA Deduction

! Student Loan Interest

o Can't be another taxpayer's dependent SECTION 179 EXPENSES

! For New/Used equipment placed into service between January 1, 2014 and December 31, 2014

! Max Deduction: $25,000

o Note: Congress retroactively changed this for

2014, but that's irrelevant for exam purposes per the AICPA's New Pronouncement Policy

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! Max Total Equipment Purchases for 2014: $200,000

o $25,000 deduction is phased-out dollar for dollar for the amount of equipment purchases that exceed $200,000

" If a company buys $215,000 in equipment, then the $25,000 deduction is reduced by ($215,000 - $200,000) $15,000

" Max 179 Deduction: $25k - $15k = $10k

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

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! 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 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

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! 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!

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 = 39 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

! (New) Deductible once 10% AGI threshold is reached

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o If your AGI is $100,000, your first $10,000 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

FOREIGN TAXES PAID SCHEDULE A

! Foreign Income Tax - Deductible

! Foreign Real Estate Tax - Deductible

! Foreign Personal Property Taxes - Not Deductible

! Foreign Tax Assessments - Not Deductible

o Add to Basis

INVESTMENT INTEREST EXPENSE SCHEDULE A

! Deductible only the extent of Net Investment Income

! Gross Investment Income = Net Investment Income

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! 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 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

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! 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 DEDUCTIONS NOT SUBJECT TO AGI PHASEOUT

! 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 (Note this was $500 in 2009 tax year)

=Deductible amount for casualty loss

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! 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

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 the Personal Exemption

" Social Security doesn't count as income

MINOR INCOME TAXED AT PARENTS RATE

! Child's unearned income

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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) ADD-BACKS

! Difference between Depreciation on Real Estate purchases pre-'99 vs AMT's Straight Line 40

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

! Difference between FMV of stock options vs amount paid for them

! No state income tax, real estate tax, or personal

property tax allowed for AMT.

! No personal exemptions or standard deductions

! Construction: Only % 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

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REFUNDABLE TAX CREDITS

! Taxpayer receives larger refund than what they paid

o Earned Income Credit

o Additional Child Tax Credits

o American Opportunity Credit 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

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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

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

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! 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 (Picture a Farmer's F150 truck)

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 Capital Loss (STCL)

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TAX REFUND CLAIMS

! Must be claimed within (whichever is later)

o 3 years of return Due Date

o 2 years of Tax being paid 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

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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

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

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! Any payment made for punitive damages = Taxable WORKMANS COMPENSATION

! NOT Taxable

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

DIVORCE, ALIMONY, & CHILD SUPPORT

! Not Taxable & Not Deductible

o Divorce Property Settlement

o Child Support

! Taxable & Deductible

o Alimony

ALIMONY RECAPTURE Alimony Recapture Formula: R2: P2 (P3 + 15,000) R1: P1 [(P2 R2 + P3)/2 + 15,000] R3: R2 + R1 Example: A couple divorces and the husband pays $80k alimony in year 1, $20k in year 2, and none in year 3. What amount of previously-deducted alimony (remember: alimony is a deduction to the person writing the check and income to the person receiving the check) should be recaptured as income to the husband in year 3?

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P1: $80,000 P2: $20,000 P3: $0 R2: P2 (P3 + 15k) R2: $20,000 (0 + 15,000) R2: $5,000 R1: P1 [(P2 R2 + P3)/2 + 15,000] R1: $80,000 [($20,000 - $5,000 + $0)/2 +15,000] R1: $80,000 [$7,500 + $15,000] R1: $80,000 - $22,500 R1: $57,500 R3: R1 + R2 R3: $57,500 + $5,000 R3: $62,500 Conclusion: In year 3, the husband will include $62,500 in gross income due to alimony recapture and the wife will have a deduction of $62,500. ADOPTIONS

! Adoption Expenses not deductible

o Adoption Credit available

NET OPERATING LOSS (NOL)

! Carryback 2 ... Carryforward 20 IRA CONTRIBUTIONS

! Traditional IRA = Deductible

! Roth IRA = Not Deductible

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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 AFFORDABLE CARE ACT (OBAMACARE)

! Annual Penalty for not having 'minimum essential coverage'

o Greater of:

" $95 per person ($47.50 if under 18)

" 1% of Household Income over threshold

o 3 month grace period for being uninsured

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