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NINJA Notes 2013


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 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.

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.

Now is the time to start working multiple-choice questions 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.

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 rewriting 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


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, 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
)*+*,-.! /0123.!45.6! 7!89! 7!8(:'99! 7!8#%:#%9! 7!8(%:&%9! 7!8;'(:&%9! 7!8#((:#%9! 2G!>H.!*32=0>! 25.6! 7!89! 7!8(:'99! 7!8#%:#%9! 7!8(%:&%9! 7!8;'(:&%9! 7!8#((:#%9!

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! Married Filing Jointly

)*+*,-.! /0123.!45.6! 7!89! 7!8;':$99! 7!8'9:'99! 7!8;$":'99! 7!8";':$%9! 7!8#((:#%9! 2G!>H.!*32=0>! 25.6! 7!89! 7!8;':$99! 7!8'9:'99! 7!8;$":'99! 7!8";':$%9! 7!8#((:#%9!

<=>!?2>!45.6! 7!8;':$99! 7!8'9:'99! 7!8;$":'99! 7!8";':$%9! 7!8#((:#%9!

@*A! 7!89! 7!8;:'$9! 7!8I:'#%! 7!8"':'#%! 7!8$(:&&%! 7!8;9%:9&"!

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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 taxfree 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 WORKMANS 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/productspage/ninja-cpa-review-study-guides/

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