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ISEA-2019-BUS > BUSINESS - BUSINESS ENTITIES > Flashcards

BUSINESS - BUSINESS ENTITIES Flashcards

1
Q

LLC

A

Limited Liability Company

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2
Q

What is the big benefit of an LLC?

A

The protection of the owners (AKA members).

All members of the LLC are protected from personal liability without any restriction on their participation in the business.

Members are liable only to the extent of their investment in the business.

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3
Q

In terms of Federal taxation, an LLC is taxed either as a: (3 options)

A

An LLC is taxed either as a

  1. Corporation, a
  2. Partnership, or as
  3. Part of the owners individual tax return, which is called a DISREGARDED ENTITY.

How it is taxed at the Federal level is determined by decisions the LLC makes.

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4
Q

Most states do not restrict ownership, and so Corporation MEMBERS may include

  • Individuals,
  • Corporations,
  • Other LLCs, and
  • Foreign entities.
A

There is no maximum number of members, or an LLC can simply be one individual.

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5
Q

LLC Alternate Election Tax Treatment - Rules of the Road

A

The LLC may elect an alternative treatment no more than 75 DAYS after the beginning of the tax year the election is to take effect, or anytime in the preceding tax year.

LLCs file Form 8832 to elect tax treatment as a Corporation.

LLCs file Form 2553 to elect tax treatment as an S Corporation. (The S Corp requirements must be met)

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6
Q

What is the rule concerning an LLC changing its Tax Classification.

A

Once the LLC entity makes an election to change its taxation classification, the entity generally cannot change its classification by election again for 60 months (5 YEARS) after the effective date.

It can be changed with IRS permission, but that is not the norm.

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7
Q

No gain or loss is recognized on treasury stock transactions.

True or False?

A

True.

Note: Treasury Stock is shares of Corporate Stock that a company previously sold to investors and since bought back.

NOTE: Or in other words, Treasury Stock reflects the difference between the number of shares issued and the number of shares outstanding.

Good to know. Not core test material

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8
Q

Bad debts that become worthless in whole or in part during the tax year are deductible.

True or False?

A

True.

Good to know. Not core test material

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9
Q

For corporations that are not financial institutions, the Direct Charge-Off Method for bad debts must be used.

True or False?

A

True.

Good to know. Not core test material

Under the DIRECT WRITE-OFF METHOD, when a small business determines an invoice is uncollectible they can debit the Bad Debts Expense account and credit Accounts Receivable immediately. This eliminates the revenue recorded as well as the outstanding balance owed to the business in the books.

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10
Q

The amortization of a bond premium should be calculated using the CONSTANT YIELD TO MATURITY METHOD, and can be used as an offset to interest income.

A

Using the Constant yield method:

Purchase Price
x 
Yield To Maturity (YTM) at issuance
-
Subtract the Coupon Interest.

As the bond reaches maturity, the premium with be amortized over time, eventually reaching $0 on the exact date of maturity.

(Good to know. Not core test material)

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11
Q

Intangibles (including purchased goodwill) are amortized over 15 years.

True or False?

A

True.

Note: Anti-churning rules prevent you from amortizing most section 197 intangibles if the transaction in which you acquired them didn’t result in a significant change in ownership or use.

(Good to know. Not core test material)

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12
Q

The Uniform Capitalization (UNICAP) Rules require that costs of construction of real or tangible personal property be used in the course of business to be capitalized.

This includes inventory, where the costs necessary to prepare an item for its intended use should be capitalized

Manufacturers of tangible personal property, and retailers of personal property must use these rules if the annual gross receipts for the preceding three three years exceed $26 million.

The resale rule only applies to large businesses. If your annual gross receipts are less than $10 million, you are exempt from this requirement.

A

Good to know. Not core test material

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13
Q

Meals provided by employers to employees for the employer’s own convenience are 50% deductible.

True or False?

A

True.

Good to know. Not core test material

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14
Q

A corporation has two choices with qualifying research and development (R&D) expenditures.

A
  1. Deduct the expenses, or
  2. Elect to capitalize the expenditures and amortize ratably over a five-year period.

(Good to know. Not core test material)

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15
Q

Passive activity losses limitations apply to:

  • Individuals,
  • Personal Service Corporations (PSC) and
  • Closely Held C Corporations.
A

Good to know. Not core test material

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16
Q

Business casualty losses are fully deductible.

True or False?

A

True.

There are no $100 deductions and there are no limitations based on income as there are for individuals.

(Good to know. Not core test material)

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17
Q

Bonuses that are compensation are deductible in the year that they are earned, not in the year that they are paid.

True or False?

A

True…

…as long as the bonuses are paid within 2.5 months after the fiscal year end when the deduction is claimed.

Good to know. Not core test material

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18
Q

Fines and penalties paid to any governmental organization, including items such as late payment interest, are not deductible.

True or False?

A

True.

Good to know. Not core test material

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19
Q

A cafeteria plan is a company’s plan that allows an employee to choose from a selection of benefits.

True or False?

A

True.

Good to know. Not core test material

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20
Q

Any direct foreign taxes that are paid by a US corporation may be used as either a business DEDUCTION or a TAX CREDIT, at the option of the corporation.

True or False?

A

True.

Good to know. Not core test material

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21
Q

Can an employee work without a SS#?

A

Yes.

They must apply for one but can work while waiting to it to be assigned.

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22
Q

When must an entity elect to become a Corporation for the current tax year?

A

They must elect an alternative tax treatment for their company no more than 2 months and 15 days after the beginning of the tax year the election is to take effect.

That, or any time in the preceding tax year.

So MARCH 15th is the last day if you want your entity to have the new election on Jan 1 of that year.

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23
Q

Year-End Inventory of a Corp should include:

A
  • Merchandise or Stock in trade
  • Raw materials (unless FOB = Freight On Board)
  • Work in progress
  • Finished products
  • Supplies that physically become a part of the item intended for sale.
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24
Q

How to determine if someone is an employee?

A

If an employer can CONTROL WHAT AND HOW work will be done, an employer-employee relationship exists, and it does not matter what the relationship is called.

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25
Q

How to determine if someone is an independent contractor?

A

If an individual is responsible for a timely completion of a project for an agreed price, and is free to perform the same type of work for others concurrent with the 1st job, these are the hallmarks of an Independent Contractor.

26
Q

Define a Statutory Employee

A

A statutory employee is an independent contractor who is considered an employee for tax withholding purposes if they meet certain conditions. This typically means they will receive a W-2 but are otherwise not considered full employees

27
Q

Section 263A

A

UNICAP “Uniform Capitalization Rules”

They capitalize the direct cost and part of the direct costs for production or resale activities.

Beginning in 2018 under the TCJA, any producer that meets the “Gross Receipts Test ($26 Million for 2019) is EXEMPTED from the application of Section 263A.

28
Q

Name the 4 most common forms of businesses

A

Sole Proprietorship
Partnership
Corporation
S Corp

29
Q

Start Up Costs Examples (S&W, A, A, T)

A

Salaries & Wages - Employees, Execs, Consultants
Analysis of Markets
Advertising
Travel

30
Q

“Organizational Costs” Qualifiers (List of 4)

A

Costs are considered Organizational if they are:

  1. For the CREATION of a Corp
  2. Chargeable to a CAPITAL ACCOUNT
  3. AMORTIZED over life of Corp
  4. Incurred BEFORE END of 1ST tax year.
31
Q

What are 2 types of Capital Expenses that CANNOT be Amortized

A
  1. Costs for issuing stock, securities, or partnership interests, such as commissions, professional fees, and printing costs.
  2. Costs associated with the transfer of assets to the business.
32
Q

Gifts - Rule for Deducting:

A

A deduction in NOT available for business gifts made in excess of $25.

33
Q

When is RENT deductible?

A

In general a TP may deduct rent as an expense ONLY if the rent is for the use of property in the TP’s business.

34
Q

How are leases treated by the IRS?

A

The IRS treats lease payments, including taxes on leased property, as payments of RENT.

(Amortize costs to acquire a lease over the remaining term of the lease.) ??

A TP must DEPRECIATE permanent improvements to leased property.

35
Q

What qualifies as Interest Expense Deductions for a business?

A

ALL interest paid during the tax year on debts related to a business is generally deductible by a TP.

Interest can be deducted if:

  1. The TP is legally liable for the debt.
  2. Both the TP and the lender intend that the TP will repay the debt.
  3. The TP and the lender have a true debtor-creditor relationship.
36
Q

Interest on what must be capitalized?

A

Under UNICAP Rules, a TP generally must capitalize INTEREST ON DEBT to produce REAL PROPERTY or certain TANGIBLE property.

37
Q

Insurance Premiums - Deductible

A

A deduction may be available for certain premiums paid for insurance related to a business including:

  1. Insurance for Natural Disasters and theft
  2. Credit Insurance
  3. Group medical insurance
  4. Liability Insurance
  5. Malpractice insurance
  6. Workers’ Comp Insurance
  7. Contributions to a State Unemployment Ins
  8. Overhead Insurance
  9. Vehicle Insurance
  10. Life insurance
  11. Business Interuption Insurance
38
Q

List 4 Non-Deductible Insurance Examples

A
  1. RESERVE FUNDS for Self-Insurance
  2. Premiums for a policy that pays for LOST EARNING due to sickness or health
  3. Certain LIFE INSURANCE and ANNUITIES
  4. Insurance to SECURE A LOAN.
39
Q

Self-Employed Health Insurance Deduction

A

Health Insurance Premiums are deductible provided the TP is:

  1. Self-Employed with a net profit reported on Sch C or Sch F if farming.
  2. A partner with net earnings from SE reported on Sch K-1
  3. A shareholder owning more than 2% of outstanding stock of an S Corp with wages from the Corp reported on Form W-2, Wage and Tax Statement.

The TP MUST establish the insurance plan under the TP’s business, however the plan may either be in the name of the business or the individual.

40
Q

Amending a Tax Return to claim self-employed health insurance is possible when?

And it is pursuant to

A

Partners of more-than-2% shareholders may be able to amend prior year returns to claim self-employed health insurance deductions.

Shareholders should write “Filed Pursuant to Notice 2008-1” at the top of any amended return.

41
Q

Name Deductible Travel Expenses (9 listed)

A
  • Travel
  • Lodging
  • Fares for taxis
  • Use of personal car while at business destination
  • Tips
  • Dry cleaning
  • Business calls
  • Computer rentals, stenographer fees, etc.
  • 50% of meals, as long as not lavish
42
Q

Is Personal Travel with some business attached deductible?

A

NO.

If a trip is primarily for personal reasons, such as a vacation, the entire cost of the trip is a nondeductible personal expense.

However, a TP may deduct expenses directly related to business while on the trip.

43
Q

A TP may deduct 100% of Travel Expenses Outside the USA as long as:

A

A TP may deduct 100% of travel expenses outside the US even if he didn’t spend the entire time on business if:

  1. TP didn’t have substantial control over trip arrangements
  2. It’s a week or less
  3. 25% or less of the time was non-business related
  4. the TP can establish that a vacation is NOT a major consideration.
44
Q

No meals are deductible if:

A

they are attached to an activity considered to be entertainment, amusement, or recreation.

45
Q

Expenses for recreational, social, or similar activities may continue to be deducted if:

A

primarily for the benefit of employees (as long as they are not highly compensated).

46
Q

How are Casualty and Theft losses treated by a Business?

A

In general, business casualty and theft losses are fully deductible, regardless of whether the damage occurred in a federal disaster area.

If a TP has a property that is stolen or destroyed, the decrease in FMV is NOT considered.

The loss is the TP’s adjusted basis minus the salvage value, insurance, and other reimbursements.

The TP can deduct the loss through the increase in the cost of goods sold

Or the TP can deduct the loss separately. In this scenario the TP must eliminate the affected inventory items from the cost of goods sold by making a downward adjustment to opening inventory and purchases.

47
Q

List Taxes that are Deductible

E, SE, PP, RE, S, E, HHUV

A
  1. Employment Taxes
  2. Self-Employment Taxes
  3. Personal Property Tax
  4. Real Estate Taxes
  5. Sales Tax
  6. Excise Taxes
  7. Heavy Highway Use Vehicle Tax
48
Q

How are BUSINESS BAD DEBTS handled?

A

A TP may only claim a Bad Debt Deduction if the amount owed to the TP was previously included in GROSS INCOME.

Bad debt is usually the result of CREDIT SALES to customers.

In the books, record goods and services that have been performed but not paid for as either ACCOUNTS RECEIVABLE or NOTES RECEIVABLE.

The amount of the above, which the TP is unable to collect, is BAD DEBT.

49
Q

A TP who uses the ACCRUAL accounting method should claim a bad debt deduction ONLY if the entire amount was previously included in income.

True or False?

A

True.

50
Q

A TP who uses the CASH accounting method may NOT claim a bad debt deduction because the amounts were never included in income.

True or False?

A

True.

51
Q

After claiming a bad debt deduction that the TP is later able to recover (collect) for, it will likely need to be included in Gross Income.

True or False?

A

True.

However, a TP can exclude the amount deducted that didn’t reduce their tax.

Report this recovery as “OTHER INCOME” on the appropriate business form/ Schedule.

52
Q

List Deductible Miscellaneous Expenses (13 listed)

A
  • Advertising
  • Vehicle Operation
  • Credit Card Fees
  • Franchise Fees
  • Internet-related Expenses
  • Legal and Professional Fees
  • Tax Preparation Fees
  • License and Regulatory Fees
  • Cost of moving machinery
  • Penalties paid for late performance or nonperformance of a contract
  • Repairs
  • Supplies and Materials
  • Utilities and Telephone
53
Q

List Non-Deductible Business Expenses (10 Listed)

A
  • Anticipated LIABILITIES
  • BRIBES and Kickbacks
  • CHARITABLE Contributions (except for C Corps, all others claim on personal return)
  • 100% of ENTERTAINMENT Expenses
  • 50% of business MEALS
  • LOBBYING Expenses
  • POLITICAL Contributions
  • PENALTIES for Violating Laws
  • DEMOLITION Expenses
  • Club DUES or membership fees

Exceptions that ARE deductible:

  • Fees paid to CHAMBER OF COMMERCE,
  • BOARDS of Trade,
  • Business LEAGUES,
  • Professional ASSOCIATIONS, and
  • Trade Associations.
54
Q

Car Expenses are divided by actual mileage when used for both business and personal use.

True or False?

A

True.

Generally, commuting mileage (in the TAX HOME) is NOT deductible.

55
Q

The Car Deduction can either be by calculating the Standard Mileage Rate, OR combining the:

(D, I, G&O, R)

A
  • Depreciation (lease payments),
  • Insurance,
  • Gas and oil,
  • Registration fees

To use the Standard Mileage Rate, the TP must use this method for the FIRST year placing the vehicle in service.

56
Q

Standard Mileage Rate for 2019

A

$0.58/ mile

it goes down to $0.57.5 /mile in 2020.

Note: A TP may NOT use the Standard Mileage Rate after using ANY depreciation method other than Straight-Line, or after claiming a Section 179 deduction for the vehicle.

The TP can NOT claim BSM for more than 4 vehicles used simultaneously.

It can be used on cars for hire.

The TP may deduct the business part of the interest on the car Loan, State and Local Personal Property Tax on the car, parking fees and tolls, WHETHER OR NOT claiming the Standard Mileage Rate.

57
Q

The 2019 wage limit for withholding social security tax is ______________ in Social Security wages.

A

$132,900 ($137,700 in 2020)

58
Q

How to value inventory cost?

A

To properly value inventory at cost, the DIRECT cost and PARTIAL INDIRECT COSTS are included with each item.

59
Q

What is included in cost of goods sold? (M, L, FO)

What is NOT included?

A

Types of expenses that go into Cost Of Goods Sold include:

  • Cost of products or raw MATERIALS (including freight)
  • Direct LABOR
  • FACTORY OVERHEAD

Do NOT include things like:

  • Admin salaries
  • Office Supplies
60
Q

What is the earliest date that a business can be treated as a corporation without regard to the election relief rules, if they file Form 8832 by March 15 of any given year.

A

The earliest date is: January 1 of the year the Form 8832 is filed.

This is so because, an eligible entity may elect an alternative treatment no more than two months and 15 days after the beginning of the tax year the election is to take effect, or anytime in the preceding tax year.

61
Q

The TFRP (Trust Fund Recovery Penalty) is what % of the employment taxes that should have been paid?

A

Under IRC 6672, the penalty is 100% of the employment taxes that should have been paid.

The TFRP is imposed for the:

  • Willful failure to collect tax,
  • Willful failure to account for and pay tax, or
  • Willful attempt in any manner to evade or defeat tax or the payment thereof.
62
Q

An employee who is legally eligible to work in the United States, but does not yet have a SS#, can work while the application is pending.

True or False?

A

True.

The employee applies for a Social Security Number and/or card by completing Form SS-5.

ISEA-2019-BUS (13 decks)

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