1.4 - Items From Other Entities Flashcards
Business entities are either _____ entities or _____ entities for tax purposes.
Separate taxpaying entities
Flow through entities
This business entity pays tax on the income earned by the business.
This business entity reports income on a tax return filed for informational purposes only. The income flows through to the owners and is taxed at the individual owner level.
Separate taxpayingentity
Flow through entity
The tax system in the U.S. recognizes four categories of business entities:
Partnership or limited liability company (LLC)
S corporation
Sole proprietorship
C corporation
What type of entity are the following business entities and where are their income’s reported?
- Partnership or limited liability company (LLC)
- S corporation
- Sole proprietorship
- C corporation
- Flow through entity - income on form 1065
- Flow through entity- income on form 1120S
- Flow through entity - income on form 1040, Schedule C
- Separate taxpaying entity - income on Form 1120
What is a K-1?
Each partner gets a K-1 and reports their share of net income/loss on their 1040 schedule E
When is partnership and S corporation income taxed?
When business earns and reports the income NOT when distributed
Guaranteed payments to partners or LLC members for services provided to the partnership are subject to what two taxes?
Self-employment (social security and Medicare) tax and income tax
Shareholders in an S corporation receive a salary, so how are their salaries taxed?
Half of the social security and Medicare taxes are paid by the corporation and half are withheld from the shareholder’s salary.
If a partner or LLC member is actively involved in the operations of the business, the partner or member’s allocable share of ordinary business income is considered self-employment income which is subject to what tax?
Self-employment tax
What is on reason a business may choose to organize as an S corporation rather than a partnership or LLC?
The shareholder’s allocable share of S corporation ordinary business income is not self employment income and therefore no self-employment tax is applied
What did the Tax Cuts and Jobs Act of 2017 provide?
A deduction of up to 20 of qualified business income for eligible flow-through entities
What is ordinary business income minus ordinary business deductions earned from a sole proprietorship, S corp, limited liability company, or partnership connected to business conducted within the US?
Qualified business income (QBI)
What is excluded from QBI?
Wages earned as an employee
Guaranteed payments to partners
Dividends
Interest
Long-term and short-term capital gains and losses
What is any tangible, depreciable property that is held by the business called?
Qualified property
What is any business other than a specified services trade or business (SSTB) called?
Qualified trade or business (QTB)
What is a business that involves direct services in the field of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage, investment management, trading or dealing in securities, partnership interest or commodities?
Specified service trade or business (SSTB)
What two jobs are specifically excluded from the SSTB?
Engineering and architectural services
What is the basic QBI deduction calculation?
20% X QBI
What is the specific income level for those MFJ and all other filers must obtain to be able to qualify for the QBI deduction?
MFJ = between $340,100 - $440,100
All others = between $170,050 - $220,050
In regard to the W-2 wage and property limitation, the QBI deduction is limited to the greater of:
50% of W-2 wages for the business
OR
25% of W-2 wages for the business plus 2.5% of the unadjusted basis immediately after acquisition of all qualified property
There is an overall taxable income limitation to the QBI deduction. It is the lesser of:
The combined QBI deductions for all qualifying businesses
OR
20% of the taxpayers taxable income (before QBI deduction) in excess of net capital gain
What are the three categories taxpayers are divided into to best apply the limitations of the QBI deduction based on the taxable income and the W-2 wages and property limitations?
Category 1 - taxable income below $170,050 (S) or $340,100 (MFJ)
Category 2 - taxable income above $220,050 (S) or $440,100 (MFJ)
Category 3 - taxable income between $170,050 and $220,050 (S) or $340,100 - $440,100 (MFJ)
For a category 1 taxpayer, what QBI deduction do they receive if they are a Qualified Trade or Business (QTB) or a Specified Service Trade or Business (SSTB)?
Both would receive a full 20% QBI deduction
For a category 2 taxpayer, what QBI deduction do they receive if they are a Qualified Trade or Business (QTB) or a Specified Service Trade or Business (SSTB)?
If QTB - the W-2 wage limitation applies
If SSTB - no QBI deduction is allowed
For a category 3 taxpayer, what QBI deduction do they receive if they are a Qualified Trade or Business (QTB) or a Specified Service Trade or Business (SSTB)?
If QTB - phase in of W-2 wage limitation
If SSTB - QBI, W-2 wages, and qualified property amounts are reduced and then phase in of W-2 wage and property limitation using reduced amounts
A single QTB taxpayer has the following:
Income before QBI deduction = $50,000
Net capital gains = $5,000
QBI = $40,000
Calculate the QBI Deduction.
40,000 X 20% = 8,000
(Not limited by wages since 50k < 170k)
(Not limited by overall limit because (50K-5K capital gains)X20% = 9,000 which is more than the 8,000 deduction)
A single SSTB taxpayer has the following:
Income before QBI deduction = $50,000
Net capital gains = $15,000
QBI = $40,000
Calculate the QBI deduction.
40,000 X 20% = 8,000
50,000 - 15,000 =35,000 X 20% = 7,000
7,0000 < 8,000 therefore, QBI deduction = 7,000
A QTB taxpayer has the following:
Income before QBI deduction = $240,000
Net capital gains = 0
QBI = 100,000
Share of W-2 wages = 30,000
Share of QTB’s UIBA of qualified property = $80,000
Calculate the QBI deduction.
100,000 X 20% = 20,000
30,000 * 50% = 15,000
(30,000 X 25%) + (80,000 * 2.5%) = 7,500 + 2,000 = 9,500
9,500 < 15,000, therefore we compare the 15,000 to the 20,000 QBI deduction.
20,000 > 15,000, therefore the QBI deduction is 15,000.
A SSTB taxpayer has the following:
Income before QBI deduction = $240,000
Net capital gains = 0
QBI = 100,000
Share of W-2 wages = 30,000
Share of UBIA of qualified property = 80,000
Calculate the QBI deduction.
0
Because the business is an SSTB and the taxpayer’s income is above 220,050 the taxpayer is not eligible for a QBI deduction.
A QTB taxpayer has the following:
Income before QBI deduction = $212,550
Net capital gains = 0
QBI = 100,000
Share of W-2 wages = 30,000
Qualifies property = 0
Calculate the QBI deduction.
100,000 X 20% = 20,000
30,000 X 50% = 15,000
20,000 - 15,000 = 5,000
212,550 - 170,050 (lower wage limit) = 42,500
42,500 / 50,000 (Amount between the wage limit) = 85%
85% X 5,000 = 4,250
20,000 - 4,250 = 15,750 QBI deduction
A SSTB taxpayer has the following:
Income before QBI deduction = 212,550
Net capital gains = 0
QBI = 100,000
Share of W-2 wages = 30,000
Qualified property = 0
Calculate the QBI deduction.
212,550 - 170,050 (lower wage limit) = 42,500 / 50,000 (Amount between wage limit) = 85%
100% - 85% = 15% X 100,000 = 15,000 X 20% = 3,000
30,000 X 15% = 4,500 X 50% = 2,250
3,000 - 2,250 = 750 X 85% = 637.5
3,000 - 637.5 = 2,362.5 QBI deduction
A taxpayer may have multiple sources of business income that are eligible for the QBI deduction. If one or more of these sources has a loss for the tax year, what does the taxpayer do?
Th losses are allocated pro-rate among the qualifying businesses with positive QBI to calculate the QBI deduction. The W-2 wages and UBIA of qualified property of the business with a negative QBI are ignored and do not get allocated or carried forward.
Calculate the QBI deduction fr the following businesses:
Business A QBI = 100,000
Business B QBI = 200,000
Business C QBI = -75,000.
100,000 + 200,000 = 300,000
100,000/300,000 = 1/3
200,000/300,000 = 2/3
(75,000) X 1/3 = (25,000)
Adjusted business A QBI = 100,000 - 25,000 = 75,000
(75,000) X 2/3 = (50,000)
Adjusted business B QBI = 200,000 - 50,000 = 150,000
If QBI for the tax year (either one source or multiple sources) is negative, what happens to the QBI deduction and QBI loss?
The QBI deduction is 0 and the QBI loss is carried forward as a separate business.
