BUSINESS TERMS AND FORMS Flashcards
The term for the owners of an LLC
Members
How an LLC is referred as when it’s taxed as part of the owner’s individual tax return.
Disregarded Entity
Form 8832
Form 8832 is filed by an LLC to elect a tax treatment as a Corporation.
Form 2553
An LLC files Form 2553 to elect the tax treatment as an S Corporation. (The S Corp requirements must be met)
What is the Direct Charge-Off Method of Accounting?
The DIRECT CHARGE-OFF METHOD is an accounting method for uncollectible accounts that directly debits, or charges, an expense account when a bad debt is discovered.
This eliminates from the books the revenue recorded as well as the outstanding balance owed to the business.
For corporations that are NOT financial institutions, the direct charge-off method for bad debts MUST be used.
Contrasts with the ALLOWANCE METHOD, which accounts for uncollectible accounts by expensing estimates of uncollectible accounts in the period when the related sales take place.
What is the “Constant Yield Method”
The Constant Yield Method is a method of accretion (a.k.a the increase) of Bond Discounts, which translates to a gradual increase over time, given that the value of a Discount Bond increases over time until it equals the Face Value. The first step in the Constant Yield Method is determining the Yield To Maturity (YTM)
Yield To Maturity (YTM)
Yield to maturity (YTM) is the total return anticipated on a bond if the bond is held until it matures. Yield to maturity is considered a long-term bond yield but is expressed as an annual rate.
Accretion
the process of growth or increase, typically by the gradual accumulation of additional layers or matter.
Coupon Rate
The Coupon Rate is the ANNUAL INTEREST that the owner of the bond will receive.
To complicate things the coupon rate may also be referred to as the YIELD from the bond.
Uniform Capitalization Rules
The Uniform Capitalization (UNICAP) Rules requires the costs of construction of real or tangible personal property, used in the course of business, to be capitalized. (Rather than being deducted).
This includes inventory, and the costs to be capitalized are the costs necessary to prepare the item for its intended use.
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.
Personal Service Corporations
A personal service corporation is a type of a C CORP that is created to provide PERSONAL SERVICES to individuals or groups.
Often made up of PROFESSIONALs in a specific fields like:
- accounting,
- engineering,
- architecture,
- consulting,
- actuarial science,
- law,
- performing arts and
- health (including veterinary services)
Marginal Tax Rate
The marginal tax rate is the incremental tax paid on incremental income.
As income rises, each dollar of income above the previous level is taxed at a higher rate.
EXAMPLE:
If a household were to earn an additional $10,000 in wages on which they paid $1,530 of payroll tax and $1,500 of income tax, the household’s marginal tax rate would be 30.3 percent.
Ratable
Capable of being rated, estimated, or appraised: ratable income.
UNICAP Rules
Uniform Capitalization Rules
What fields (industries) are exempt from UNICAP Rules? (List of 4)
(F.A.O.R.)
- Farming
- Arts - Freelance writing, photography, or art
- Oil and gas wells development
- Research and experimentation
Treasury Stock
Treasury Stock is shares of Corporate Stock that a company previously sold to investors and since bought back.
- Treasury stock is formerly outstanding stock that has been repurchased and is being held by the issuing company.
- Treasury stock reduces total shareholder’s equity on a company’s balance sheet, and it is therefore a CONTRA EQUITY Account.
- There are two methods to record treasury stock: the cost method and the par value method.
What is the BOOK VALUE of a purchased bond?
The Book Value is the amount paid for it.
What is the FACE VALUE of a purchased bond?
The Face Value is the amount of money promised to the bondholder upon the bond’s maturity.
Premium Bond
A Premium Bond is a bond trading above its face value.
Closely Held C Corporation
Generally, a closely held corporation is a corporation that:
Has more than 50% of the value of its outstanding stock owned (directly or indirectly) by 5 or fewer individuals at any time during the last half of the tax year, and
Is NOT a Personal Service Corporation (PSC).
Corporation
A form of business enterprise that is set up as a legal entity.
Its existence is distinct and separate from those who own and control it.
Corporation Tax Classifications
C Corp
S Corp
Other Types of Corporations
Domestic Corporation
Foreign Corporation
Closely-held Corporation
Publicly-held Corporation
Public Corporation (Municipal Corporation)
Domestic Corporation
A Domestic Corporation is a corporation that does business in the state it is incorporated in.
Foreign Corporation
A Foreign Corporation is a corporation that does business in a state other than the state it was incorporated in.
Closely-held Corporation
The ownership is held by a small group of shareholders
The stock is not traded in primary or secondary markets.
The general GAAP standards are about the same.
Publicly-held Corporation
A Publicly-held Corporation is a corporation where the stock is actively traded in a primary or secondary stock market.
Public Corporation (Municipal Corporation)
A Public Corporation is an entity created to administer the business affairs of a municipality (a town, county, or a Federal unit).
Most Public Corporation’s are also not-for-profit entities.
Advantages of Corporate Structure rather than being a Partnership or a Sole Proprietorship. (List of 8)
Separate legal entity
Limited liability
Free transferability of ownership interests (Stock)
Ease of capital assembly (Shareholders)
Single taxation on undistributed corporate income
Centralized Management
No mutual agency
On-going life
Advantages of being a Separate Legal Entity as a Corporation. A Corporation can: (List of 4)
(M.O.B.S.)
The Corp is considered like a person (entity) under the law and therefore it has rights and responsibilities that exist separate from the owners.
A Corp can:
- Enter into contracts
- Own property
- Can have legal action brought against it (shielding members)
- Bring legal action
A.K.A. M- Make Deals O- Own Stuff B- Be Sued S- Sue
Advantages of being a Limited Liability as a Corporation
Generally the owners (shareholders) are only at risk for what they invested in the Corp.
Advantages of “Free Transferability of Ownership Interests” as a Corporation
Shareholders are able to share stock to anyone they want to at any time.
Advantages of the Ongoing Life of a Corporation
The existence of a Corp doesn’t terminate when an owner (shareholder) dies. It has an unlimited life.
Advantages of the Centralized Management of a Corporation
Shareholders ownership without direct involvement in management.
Shareholders elect the Board Of Directors and this board in turn hires Officers and Management.
NOTE:
Shareholders CAN be on the Board, and Officers, or in management.
When Single Taxation in play for Corp Income?
When a Corporation has a profit, they pay Single Taxation on Undistributed Income.
Key word: UNDISTRIBUTED
Advantages of having No Mutual Agency as a Corporation
The shareholders are not individually able to enter into a contract for the Corporation. They can’t therefore cause liability.
Advantages of having Ease of Capital Assembly as a Corporation
It’s easier to raise money as a Corporation because you aren’t needing to rely on relatives and friends.
There’s a broader pool of potential investors.
Disadvantages of Incorporating
Formal incorporation process, and ongoing reporting.
Governmental regulation - this differs from state to state.
Double taxation on distributed corporate income
Double Taxation on Distributed Income from a Corporation Explained
The Corp makes profit, and pays taxes on that profit.
The after-tax profit that is then distributed to shareholders who are taxed again on the dividends received, at the shareholder level.
Promoter
An individual who performs the activities necessary to form a corporation.
Fiduciary Duty of a Corporation’s Promoter
They must act in the best interest of the would-be Corporation’s owners
And they can not have any secret profits. If they do, they need to be surrendered to the Corporation.
Novation
Novation takes the name of the PROMOTER out of contracts made on behalf of the Corporation and replaces him with the Corporation’s Name.
This transfers liability from the Promoter to the Corporation prior to the Corporation becoming an official entity.
Incorporators
The individuals who sign the Articles of Incorporation.
The Incorporators elect the directors if the directors are not named in the articles.
The incorporators then resign.
De Jure Corporation
A Corporation that has SUBSTANTIALLY complied with all the formalities required.
In this situation, the Corp exists and even the State Govt can cancel it.
Once articles are filed a company is considered a De Jure Corp.
Corporation by Estoppel
If a 3rd party enters into a contract with an entity they believe to be a Corp, the courts will recognize it as such.
This then protects shareholders from any liability related to the performance of the contract.
De Facto Corporation
Or otherwise substance-over-form.
This is an attempted Corp that has NOT substantially complied, BUT they have made a good-faith-effort to comply. They’ve operated like a Corp. They are not trying to skirt the rules.
This will be treated as a Corp, but will need to fix what needs fixing.
Debenture Bond
A bond that is UNSECURED by collateral.
They rely solely on the creditworthiness and reputation of the issuer.
Frequently used.
DEFENITION:
Debenture: an unsecured loan certificate issued by a company, backed by general credit rather than by specified assets.
Secured Bonds
Bonds that have collateral to decrease the risk to investors.
If the issuer defaults on the bond, the title to the asset is transferred to the bondholders.
Convertible Bonds
A fixed-income Corporate Debt Security that yields interest payments.
Able to be converted from debt into equity, aka from bond to stock.
NOTE:
The conversion of the Bond to Stock can be done at certain times of the Bond’s life and is usually at the discretion of the bondholder.
Subscriber
A Subscriber is the purchaser of Subscription Agreements, A.K.A. contracts for future purchases of shares of corporate stock at specified prices.
There are Pre-incorporation subscribers
There are Post-incorporation subscribers
And there are Conditional Subscriptions
Authorized Stock
Stock that is authorized to be issued in the Articles of Incorporation.
This is the total number of shares that exist, the total number of shares that can be sold.
Issued Stock
Issued Stock the portion of authorized stock that has actually been issued to shareholders.
Outstanding Stock
Outstanding Stock is the portion of authorized stock that has actually been issued to and is still owned by outside shareholders.
The difference between Outstanding Stock and Issued Stock are TREASURY SHARES.
Treasury Shares
Shares that were issued, and are outstanding, but were bought back by the Corp. Not currently held by outside shareholders.
This is the difference between Outstanding Stock and Issued Stock
The Doctrine of Respondeat Superior
A Corp is held liable for the acts of tort that it’s employees commit and cause, if the acts are committed within the course and scope of their employment.
Example:
When a truck driver’s negligence results in a truck accident, a person injured in the accident may be able to bring the truck driver’s employer, usually a trucking company, into the lawsuit.
Tort
a wrongful act or an infringement of a right (other than under contract) leading to civil legal liability.
Ultra Vires Doctrine
A Corp can not act or enter into a contract (expressly or impliedly) in any way that is not authorized by either State Statue, the Articles of Incorporation, or it’s bylaws.
If the Corp does enter into contracts outside the scope they are supposed they are called Ultra Vires Contracts. They are not illegal but they are void (unenforceable) under common law.
Piercing The Corp Veil
If a corporation is used as a vehicle to perpetrate fraud or commit some other act of malfeasance, then the courts can disregard (ignore) the corporation as a separate entity and instead hold individual shareholders or corporate officers liable for wrongdoing perpetrated by the corporation.
CE&P
Current Earnings and Profit.
Similar to Taxable Income, but with some adjustments.
AE&P
Accumulated Earnings and Profit.
All the undistributed E & P from all previous years. This is calculated on the first day of each Year.
The dividends that are distributed from CEP or AEP are taxable.
Dividends that are not from E & P are considered a Return Of Capital, and is therefore not taxable and reduces the basis of the shareholder.
ROC
Return of Capital
As opposed to receiving a Dividend. An ROC reduces the basis of an investor’s position.
ACB
Adjusted Cost Basis
FOB
“Free Onboard” Destination designates the seller will pay shipping costs, and remain responsible for the goods until the buyer takes possession.
Therefore, during transit, the items belong to the seller and are included in their inventory.
Tax Home
A Tax Home is the entire city or general area where the main place of business or work is located, regardless of where the individual maintains a family home.
Therefore, if you travel to work every week, which is in a city away from your home residence, you are NOT allowed to deduct travel expenses.
Form 1065
Form 1065 is filed as an INFO ONLY Tax Return for a Partnership.
Even though Partnership’s don’t pay taxes, the IRS requires it to know what the Individual Partners must pay for taxes.
Syndication Costs
Syndication Costs are the costs associated with selling the partnership interests to partners.
Syndication Costs are NOT deductible for federal income tax purposes.
Schedule K
Schedule K is attached to the Partnership return.
The Schedule K includes the summary of how the partnership reports its taxable items of income, deduction, credit, etc.
Schedule K is then divided into “baby” schedules known as K-1s.
Cold Assets
Capital Assets are called Cold assets.
The sale of cold assets leads to a capital gain or loss.
Hot Assets
Unrealized Receivables and Substantially Appreciated Inventory (A.K.A. Inventory and Accounts Receivable) are Hot Assets.
The sale of Hot Assets leads to an ORDINARY gain or loss.
Form 941
Employees use Form 941 to report income taxes, Social Security tax, or Medicare tax withheld from employee’s paychecks.
Due Date: Last day of the month following the end of the quarter. (ie. April 30, july 31, Oct 31, and Jan 31).
Guaranteed Payments
GUARANTEED PAYMENTS are those made by a partnership to a partner that are determined without regard to the partnership’s income. GPs are part of the Costs of doing Business.
They are always Ordinary Income to the receiving partner
A partnership treats guaranteed payments for services, or for the use of capital, as if they were made to a person who is not a partner.
This treatment is for purposes of determining gross ordinary income and DEDUCTIBLE business EXPENSES only.
NOTE: Net operating losses, short term capital losses and contributions are not used when computing the ordinary income of a partnership.
Statutory Non-Employee
A statutory nonemployee is a worker classification that aligns with independent contractors. Businesses that employ statutory nonemployees do not need to withhold federal income or FICA (Social Security and Medicare) taxes from their wages.
Examples:
- a direct seller,
- licensed real estate agent, or
- qualifying companion sitter.
They are treated as Self-Employed and are responsible for paying taxes on their own.
Employers MUST report statutory nonemployee wages.
Depreciation reduces basis by the amount actually deducted or by the amount allowable if the amount allowable is greater than the depreciation that was actually deducted.
True or false?
True.
NOTE:
The basis of a business asset, or any asset, can NEVER be less than zero.
Depreciation is a Use-it-or-lose-it scenario because DEPRECIATION RECAPTURE is ALWAYS assessed by IRS at the sale of a depreciated asset.
Requirements of an S Corp
- Be a DOMESTIC Corporation
- Have only allowable shareholders including individuals, certain trusts, and estates.
S Corps may NOT include:
- partnerships,
- corporations or
- non-resident alien shareholders
- Have no more than 100 shareholders
- Have one class of stock
- Not be an ineligible corporation i.e. certain
- financial institutions,
- insurance companies, and
- domestic international sales corporations.
A partner’s basis in a partnership interest includes the partner’s share of a partnership liability if the liability:
- Creates or increases the partnership’s basis in any of its assets,
- Gives rise to a current deduction to the partnership, or
- Is nondeductible, noncapital expense of the business.
Partnership Interest
Partnership Interest is a partner’s share of the profits and losses of a limited partnership and affords the partner the right to receive distributions of partnership assets.
Determining a Partnerships Tax Year:
If one or more partners having the same tax year own a MAJORITY INTEREST (more than 50% interest) in partnership profits and capital, the partnership MUST use the tax year of those partners.
The Trust Fund Recovery Penalty (TFRP)
Under IRC 6672, the TFRP is equal to the total amount of tax evaded (ie. 100%), not collected, or not accounted for and paid over.
The TFRP may be imposed for:
- 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.
Form 8801
Form used to calculate the credit for PRIOR YEAR MINIMUM TAX.
NOTE:
For a given tax year, if a taxpayer is not required to pay Alternative Minimum Tax (AMT) but did pay AMT in a previous year, they may be able to claim a minimum tax credit against their current year taxes.
Form 461
Form 461 is used by non-corporate TPs to calculate the amount of Excess Business Loss to report.
NOTE:
Form 461 does not exist for 2020, but will be issued beginning with 2021
ALE
ACA Provision
Applicable Large Employer
Employed at least 50 full-time employees on business days during the preceding year.
Applies to ALL employers including Tax-exempt and Gov’t entities.
Full-Time Employee
ACA Provision
Avg of 30 hours/week
Full-time Employee Equivalent (FTE)
ACA Provision
Add the total hours of paid service employers pay employees during the year and divide by 2080 (based on 40 hour week).
If the result is not a whole number, round to the next lowest whole number.
If less than one, round up to one FTE.
Excepted Property
Excepted property (a.k.a. Excluded property)
(as described in Publication 946, How to Depreciate Property) includes certain intangible property, certain term interests, equipment used to build capital improvements, and property placed in service and disposed of in the same year.
LEASED PROPERTY
PERSONAL USE PROPERTY
INVESTMENT PROPERTY
INVENTORY
LAND
Internally generated GOODWILL (IGG)
Incidents of Ownership
Incidents of Ownership is a legal term indicating a factor indicating legal title to property for federal estate tax purposes. For example, if a decedent possessed any incidents of ownership over property, the property would be included in his/her estate for federal estate tax purposes.
Internally Generated Goodwill
7 listed examples
Common components of IGG are:
- Brands of the company,
- Brand Names (as physical components of brands),
- Publishing Titles,
- Investments in Human Resources capital (knowledge and experience of employees),
- Customers’ Loyalty,
- Market share of the company
- Customer Relations, etc.
Section 197
Amortization of Goodwill and Certain Other Intangibles.
Section 197 intangibles are certain intangible assets acquired after August 10, 1993 (or after July 25, 1991, if chosen) in connection with the acquisition of a business which must be amortized over 15 years from the date of acquisition regardless of the assets useful life.
MACRS
Modified Accelerated Cost Recovery System - MACRS (1987-present)
Under this system, the capitalized cost (basis) of tangible property is recovered over a specified life by annual deductions for depreciation. The lives are specified broadly in the Internal Revenue Code.
It utilizes a 200% and 150% declining balance switching to straight line.
ACRS
Accelerated Cost Recovery System - ACRS (used for assets acquired between 1980-1986)
it allowed individuals and businesses to write off capitalized assets in an accelerated manner.
Schedule F (Form 1040)
Used by Farmers to figure their net profit or loss from Regular Farming Operations.
Schedule F (Form 1040)
Used by Farmers to figure their net profit or loss from Regular Farming Operations.
§1231 property
Section 1231 property is real or depreciable business property held for more than one year.
A section 1231 gain from the sale of a property is taxed at the capital gains tax rate (lower) versus the rate for ordinary income. If the sold property was held for less than one year, the 1231 gain does not apply.
§1231 property
Section 1231 property is real (aka LAND) property held for more than one year.
A section 1231 gain from the sale of a property is taxed at the lower capital gains tax rate versus the rate for ordinary income. If the sold property was held for less than one year, the 1231 gain does not apply.
§1231 also includes non-depreciable livestock that is raised for future use.
Livestock does NOT include:
- chickens
- turkeys
- pigeons
- geese
- emus
- ostriches
- rheas
- or other birds
- fish
- frogs
- reptiles
- etc
§1250 property
Section 1250 is depreciable real property used in a business.
Section 1250 addresses the taxing of gains from the sale of depreciable real property, such as commercial LAND or STRUCTURES such as buildings, warehouses, barns, rental properties, and their structural components at an ordinary tax rate. However, tangible and intangible personal properties and land acreage do not fall under this tax regulation.
What is Section 1245 property?
Section 1245 is depreciable business property other than real estate.
According to the Internal Revenue Service (IRS), Section 1245 property is defined as intangible or tangible personal property (ie. Farm Equip) that could be or is subject to depreciation or amortization, EXCLUDING buildings (REAL ESTATE) and structural components.
Also includes Depreciable Livestock.
If you sell Section 1245 property, you must recapture your gain as ORDINARY INCOME to the extent of your earlier depreciation deductions on the asset that was sold
To be classified as 1245 property, it must do one of the following:
- Play an integral part in manufacturing, production, or extraction or in furnishing transportation, communications, electricity, gas, water, or sewage disposal services for business operations.
- Be a research facility for any of the activities in item No. 1 above.
- Be a facility in any of the activities in item No. 1 above for the bulk storage of fungible commodities, which could be, for example, oil or gas storage tanks and grain storage bins. (Oil, gas, and grain are examples of fungible goods because each can be exchanged for an equal amount of the same kind. And according to the IRS, bulk storage means the storage of a commodity in a large mass before it is used.)
Report livestock for sale (whether raised or bought for resale) on…
Schedule F
Livestock (not for sale) such as for draft, sport, or dairy are reported on…
Form 4797
PSC
Personal Service Corporation
A type of C corporation that is created to provide personal services to individuals or groups.
One where more than 10% of the stock by value is owned by professionals who provide personal services for the corporation in the fields of accounting, architecture, actuarial science, consulting
Section 263A
Section 263A, often referred to as the Uniform Capitalization rules or UNICAP, requires taxpayers to capitalize direct and indirect costs properly allocable to real or tangible personal property (self-constructed assets) produced or acquired for resale by the taxpayer.
However, small business taxpayers are exempted from Sec. 263A if the average gross receipts from their prior three tax years is less than $26 million.
Interesting Note:
A Section 263A adjustment, as we’ll soon see, is a timing difference. Any indirect costs that are ultimately capitalized into the cost of a taxpayer’s inventory – while rendered nondeductible for the year of capitalization – are then deducted in the immediately following year when that inventory is deemed sold. As a result, any deduction that is denied in year 1 and required to be capitalized would then be permitted in year 2.
Form 4684
Stolen goods that are noninventory business property – such as equipment, furniture or vehicles – are reported on Form 4684
Notice 2008-1
This notice provides rules under which a 2-percent shareholder-employee in an S Corp is entitled to the deduction of Accident and Health Insurance Premiums (under §162(l) of the Internal Revenue Code) that are paid or reimbursed by the S Corp and included in the 2-percent shareholder-employee’s gross income.
Example using the “Constant Yield Method” for Amortizing a Bond Premium
Consider that an investor purchases a bond for $1,050. The bond comes with five years until maturity and a par value of $1,000. It offers a 5% coupon rate that is paid semi-annually and with a yield to maturity of 3.89%
Since the coupon rate is paid semi-annually, it means that every six months, a coupon of $25 ($1,000 x 5%/2) will be paid. Also, the yield to maturity is stated in annual terms, so semi-annually the yield to maturity is 1.945% (3.89% / 2).
Plugging into the constant yield method formula, we get:
($1,050 x 1.945%) – $25 = –$4.58
The bond amortizes by $9.25 in the first period of six months. The bond’s value is now at $1,045.52 ($1,050 – $4.58).
If you continue it for the remaining nine periods, the bond will eventually be valued at $1,000 exactly.
What is the rule for filing Form 941?
An employer who is required or has elected to file Form 941, Employer’s Quarterly Federal Tax Return, must file Form 941 for each calendar quarter regardless of whether he paid wages or not.
After you file your first Form 941, you must file a return for each quarter, even if you have no taxes to report, unless you filed a final return or one of the exceptions listed next applies.
NOTE:
Special rules apply to some employers.
SEASONAL EMPLOYERS don’t have to file a Form 941 for quarters in which they have no tax liability because they have paid no wages.
Employers of HOUSEHOLD EMPLOYEES don’t usually file Form 941.
Employers of FARM EMPLOYEES don’t usually file Form 941.
Form 944
Form 944 is designed so the smallest employers (those whose annual liability for social security, Medicare, and withheld federal income taxes is $1,000 or less) will file and pay these taxes only once a year instead of every quarter.
Sub-Chapter S Corps
Corporation taxes filed under Subchapter S may pass business income, losses, deductions, and credits to shareholders. Shareholders report income and losses on individual tax returns, and pay taxes at ordinary tax rates.
S corporations pay tax on specific built-in gains and passive income at the corporate level.
Explain the Wherewithal-To-Pay Principle
The wherewithal to pay principle, which states that the tax is imposed when the taxpayer is best able to pay (at the time of sale) and the government is best able to collect, can answer a variety of tax questions and may become your best friend come examination time.
Form 3115
Form used to opt out of UNICAP if you previously were subject to it, but your gross receipts don’t exceed $26million.
Section 179 Deduction
The Section 179 deduction applies to TANGABLE PERSONAL PROPERTY such as machinery and equipment purchased for use in a trade or business, and if the taxpayer elects, qualified real property.
Section 179 of the IRC allows businesses to take an IMMEDIATE DEDUCTION for business expenses related to depreciable assets such as equipment, vehicles, and software. This allows businesses to lower their current-year tax liability rather than capitalizing an asset and depreciating it over time in future tax years
It has an unlimited Carry-Forward, so should it exceed the “taxable limitation” of the current tax year you can apply the deduction in the future.
IRC
Internal Revenue Code
Section 165
In general, Section 165 allows a deduction for any LOSS sustained during the taxable year and not compensated for by insurance or otherwise.
G & A Expenses
General and Administrative Expenses
They include:
- rent,
- utilities,
- insurance,
- legal fees, and
- certain salaries.
G&A expenses are a subset of the company’s operating expenses, excluding selling costs.
3 Categories of expenses on a profit/loss statement in relation to Section 263A
Category 1:
Costs that are 100% allocated to inventory (and likely already capitalized for book purposes), or so-called “direct costs.”
Category 2:
Costs that are 100% not allocated to inventory and may be currently deducted.
- Selling and Dist. costs
- R&D expenses
- Section 179 costs
- Section 165 losses
- Income Taxes
- Warranty & product Liability Costs
- Overall Management & Policies
- Strategic Bus. Planning
- General Financial Acctng
- Personnel Policy
- QC Policy
- Internal Audit
Category 3:
Costs that are indirectly attributable to inventory, and thus must be subject to additional scrutiny, or so-called “INDIRECT COSTS.”
The “Catch-All” Category.
It is the goal of Section 263A to determine what portion of the expenses in Category 3 must be capitalized as the cost of inventory, and what portion may be currently deductible.
Section 263A - Category 3 expenses to be divvied up.
Category 3 Expenses include:
- indirect labor costs
- officer’s compensation
- pension costs
- employee benefits
- rent
- depreciation
- real estate taxes
- utilities
- repairs and maintenance
- interest on debt
- quality control and inspection
- administrative costs
- insurance
- engineering and design
Reasonable Allocation Method, as related to Section 263A:
To be considered reasonable, an allocation method must be applied consistently and must not disproportionately allocate service costs to contracts expected to be completed in the near future.
AKA
Consistent - in application
Proportionate - in allocation
Timely - in execution
What is a Simple way to ID the Additional Section 263A Costs from Category 3.
A simple way to identify the Cat03 capitalized items is as “Personnel Oriented” and “Physical Space Oriented” expenses.
“Additional Section 263A Costs” should go in the line item of the same name on the COGS (Cost Of Goods Sold) schedule of the Tax Return.
Cost Of Goods Sold
Cost of goods sold (COGS) refers to the direct costs of producing the goods sold by a company.
COGS includes:
- cost of the materials and
- labor directly used to create the good.
COGS excludes indirect expenses such as:
- distribution costs and
- sales force costs.
Unrealized receivables
UNREALIZED RECEIVABLES are:
“Receivables that have a value to the partnership, but for which the related income has not yet been realized or recognized under the partnership’s method of accounting.”
The term Unrealized Receivables applies ONLY to amounts that will ultimately be realized and recognized as ORDINARY INCOME.
Substantially Appreciated Inventory
Substantially Appreciated Inventory is inventory that has a FMV in excess of 120 percent of the partnership’s Adjusted Basis for the inventory.
Par Value
Par Value is the nominal value of a bond, share of stock, or a coupon as indicated in writing on the document or specified by charter.
Cost Of Doing Business
The Cost of Doing Business (CODB or CDB) is any expense a business incurs while in the process of conducting business. A cost of doing business could be a direct cost, like raw materials, or an indirect cost, like building security.
Net Pre-Contribution Gain EXAMPLE:
Phil is a partner in partnership P. Phil’s outside basis is $900 and P’s Section 704(c) property for Phil consists of Property Y with a built-in gain of $600. P distributes property U, which has a basis of $700 and a FMV of $1,000 to Phil in a current distribution. Phil has a net pre-contribution gain of $600 and an excess distribution of $100 ($1,000 FMV of Property U - outside basis of $900). As a result, his Section 737 gain is limited to the $100 amount of the excess distribution.
Other examples at: https://www.law.cornell.edu/cfr/text/26/1.737-1 (eg. 1 & 3)
Section 731(a)(1)
Section 731(a)(1) provides that in the case of a distribution by a partnership to a partner, gain shall NOT be recognized to the partner, except to the extent that any money distributed EXCEEDS the adjusted basis of the partner’s interest in the partnership, immediately before the distribution.
Mixing Bowl Partnership
A mixing bowl structure allows two companies to exchange businesses or dissimilar assets and, if properly structured, receive a strong opinion from the client’s outside counsel that no current tax is triggered. The two parties each contribute the assets to be exchanged to a newly created partnership.
Outside Basis
The outside basis is the tax basis of each individual partner’s interest in the partnership. When a partner contributes property to the partnership, the partnership’s basis in the contributed property = its fair market value ( FMV ).
Form SS-4
Form SS-4 is the Application for Employer Identification Number.
It can be mailed or faxed to the IRS. Alternatively, an employer can apply for an EIN on-line on the IRS website or by calling the IRS.
Form SS-8
Form SS-8 is filed by firms and employees to request Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.
Form W-9
Form W-9 is a REQUEST for Taxpayer Identification Number and Certification.
Form 2553
Form 2553 is used to elect S Corp status for a small business.
Form 1041
Form 1041 is the tax return for Estates and Trusts.
It is required if the estate generates more than $600 in annual gross income, or if there is a beneficiary who’s a resident alien.
Book Income vs. Taxable Income
BOOK INCOME is used by companies to report their income and expenses to shareholders.
TAXABLE INCOME is used by businesses to report earnings and tax liability to tax authorities.
Form 1120
Use Form 1120, U.S. Corporation Income Tax Return, to report the income, gains, losses, deductions, credits, and to figure the income tax liability of a corporation.
Form 1120S
S CORPs are pass-through taxation entities. They file an INFORMATIONAL Federal Return (Form 1120S), but no income tax is paid at the corporate level. The profits/losses of the business are instead “passed-through” to the business and reported on the owners’ personal tax returns. Any tax due is paid at the individual level by the owners.
Unearned Income
UNEARNED INCOME is income that has been included in taxable income b/c cash has been received, but not yet in a Corporation’s Book Income.
Form 8886 (RTDS)
Form 8886 is the “Reportable Transaction Disclosure Statement.”
It is not needed when filing Schedule M-3, since the M-3 includes the detailfound on Form 8886.
Schedule M-2
Schedule M-2 is an analysis of unappropriated retained earnings per books.
Submitted by a Corp with their Form 1120.
M-1 and M-3 are used to:
Used to show the IRS a Corps reconciliation of Book and Tax Income.
M-3 is more detailed.
Corporations MUST complete Schedule M-3 in lieu of Schedule M-1 when total assets at the end of the tax year that are reported on Schedule L are $10 million or more.
Dividend Received Deduction
C Corporations are entitled to a special deduction from income for dividends received from Domestic Corporations.
(A.K.A - A US company invests in another US company)
No deduction is allowed for shares that are not held for more than 45 days of the 91-day period that ends 45
days after the dividend is declared.
ATI
Accumulated Taxable Income
PHC
Personal Holding Company
Form 1120 PH
This form is filed by a PHC (Personal Holding Company) along with their Form 1120 to address the Self-Assessed PHC Tax.
Consent Dividends
A PHC can avoid paying the PHC Tax IF all of the shareholders agree to pay tax on the theoretical amount that should be distributed, even if it is not distributed.
This is called a CONSENT DIVIDEND and is treated as a dividend distributed from the standpoint of the company.
501 (c) (3)
Not-for-profit organizations that are charitable, educational, or scientific typically operate as Section 501 (c) (3) tax-exempt organizations and receive benefits such as:
- using a nonprofit postal permit for its mailings
- Pays no federal income taxes
- Gifts to is are tax deductible by the donor.
501 (c) (1)
Organizations created under acts of Congress (such as Federal Credit Unions)
501 (c) (4)
Political advocacy groups can qualify as Section 501 (c) (4) organizations although donations are not tax deductible for the donor.
501 (c) (6)
Business leagues, chambers of commerce, and the like are Section 501 (c) (6).
Depreciation Vs Depreciation Expense (not from FFA)
Accumulated depreciation is the total amount a company depreciates its assets, while depreciation expense is the amount a company’s assets are depreciated for a single period.
Simple vs Complex Trust
The difference between the two lies in the way that the trust deducts distributions to beneficiaries. In a simple trust, all income is treated as distributed to the beneficiaries.
With a complex trust, distributions can include ordinary income, dividends, capital gains and, perhaps, principal.
DNI
Distributable Net Income
Trusts and Estates MUST calculate DNI each year to determine the maximum amount of income distributions for which a distribution deduction is available. A trust may NOT deduct distributions in excess of the taxable amount of DNI.
What is a 403(b) Plan?
A 403(b) plan, also known as a tax-sheltered annuity (TSA) plan, is a retirement plan for certain employees of public schools, employees of certain tax-exempt organizations, and certain ministers.
What is a 457(b) Plan?
A 457(b) is a retirement plan available for employees of certain local governments.
SEP
A Simplified Employee Pension (SEP) Plan is available to a self-employed individual and his employees. Also, a self-employed individual can participate in a Savings Incentive Match Plan for Employees (SIMPLE) IRA and in a 401(k).
SIMPLE IRA
A Savings Incentive Match Plan for Employees
Section 351 Exchange
The transfer of property (or money and property) to a corporation in exchange for stock in that corporation (other than nonqualified preferred stock) is usually not taxable if immediately afterward the taxpayer is in CONTROL of the Corporation.
pro rata
Latin term meaning “in proportion.”
Inside Basis
The inside basis is the partnership’s tax basis in the individual assets.
Outside Basis
The outside basis is the tax basis of each individual partner’s interest in the partnership.
NOTE:
When a partner contributes property to the partnership, the partnership’s basis in the contributed property = its fair market value (FMV). HOWEVER, the outside basis of the partner increases only by the amount of the basis the partner had in the property.
Name the 2 types of Distributions
Current Distributions and Liquidating Distributions.
a CURRENT DISTRIBUTION decreases the partner’s capital account without terminating it, whereas a
LIQUIDATING DISTRIBUTION pays the entire capital account to the partner, thereby eliminating the partner’s equity interest in the partnership. Generally, losses are only recognized in a liquidating distribution.
Cash Distributions
No gain is recognized from a distribution of cash or marketable securities easily convertible to cash, unless the distribution is more than the partner’s outside basis, in which case, the excess is taxable as a capital gain.
Cap Gain =
Cash Distrib. -
Partner’s Outside Basis
Constructive Sales
In the past, many taxpayers have delayed recognition of income on securities or other properties by hedging their position to offset the risk of continually holding their position. Often, the gain is delayed so that the lower long-term capital gains rate would apply to the sale rather than the short-term ordinary income tax rate that would apply for short-term gains. To prevent this delay of income recognition, the tax law treats any hedging transaction of an appreciated financial position as a constructive sale.
EXAMPLE:
You buy 100 shares of XYZ stock on March 3 for $5 per share. In December, the price per share has reached $12. Although you would like to wait before selling it so that it qualifies for the long-term capital gains rate, you fear that the price will decline by then, so you buy a put on your stock on December 10. However, because you have hedged your position, you are required to recognize a constructive sale of your stock at the fair market value of $12 per share on the date that you purchased the put. Therefore, you must recognize a short term gain of ($12 – $5) × 100 = $700 on your stock for that tax year. Although you did not actually sell the stock, the law treats your purchase of a put as if you had also sold your stock and then immediately repurchased it, so your stock has a new holding period that begins on the date of the purchase of the put, December 10, and a new basis of $12 per share.
What is the CEILING RULE in relation to partnerships
Total ALLOCATIONS to Partners CAN NOT be greater than the total income and deductions of the PARTNERSHIP.
The Ceiling Rule stipulates that only individual partners can avail of allocations on gains and losses such that the collective amount of allocations provided for all partners should not be greater than the total income and deductions derived during the partnership.
Qualified Joint Ventures Status
A qualified joint venture consists of a partnership whose only partners are spouses who file a joint tax return and who both materially participate in the business.
A qualified joint venture is a joint venture that conducts a trade or business where (1) the only members of the joint venture are a married couple who file a joint return, (2) both spouses materially participate in the trade or business, and (3) both spouses elect not to be treated as a partnership.
Stock Rights
Stock rights (also known as “stock options”) are distributions by a corporation of rights to acquire its stock.
Distributions of stock dividends and stock rights are generally tax-free to shareholders. If the distribution is disproportionate (gives cash or other property to some shareholders and an increase in the percentage interest in the corporation’s assets or E&P to other shareholders) it is includable in gross income.
NOTE about Stock Dividends:
A stock dividend is a dividend payment made in shares of stock, not cash. Stock dividends are generally tax-free to the shareholders see §305(a). In that case, a stock dividend does not reduce E&P. There are exceptions, and if the dividend is taxable it will reduce E&P.
Form 1099-PATR
File Form 1099-PATR, Taxable Distributions Received From Cooperatives, for each person to whom the cooperative has paid at least $10 in Patronage Dividends.
NOTE:
A patronage dividend is essentially a refund for members who have purchased goods or services from a cooperative.
Patronage dividends can be deducted from gross income for tax purposes.
Like the Dividend to REI members.
Form 1099-DIV - Filing instructions. When and why?
Acorporation must generally send Forms 1099-DIV to the IRS with Form 1096 by February 28 (March 31 if filing electronically) of the year following the year of the distribution. Generally, a corporation must furnish Forms 1099-DIV to shareholders by January 31 of the year following the close of the calendar year during which the corporation made the distributions. It is necessary to file a Form 1099-DIV with the IRS for each person the corporation:
- Paid dividends (including capital gain dividends) and other distributions on stock of $10 or more,
- Withheld and paid any foreign tax on dividends and other distributions on stock,
- Withheld any federal income tax on dividends under the backup withholding rules, or
- Paid $600 or more as part of a liquidation.
File Form 1099-PATR, Taxable Distributions Received From Cooperatives, for each person to whom the cooperative has paid at least $10 in patronage dividends
Form 8606 (IRA related)
The owner of an IRA uses Form 8606 to report:
- Nondeductible contributions made to traditional IRAs;
- Distributions from traditional, SEP, or SIMPLE IRAs, if there are prior nondeductible contributions to traditional IRAs;
- Conversions from traditional, SEP, or SIMPLE IRAs to Roth IRAs; and
- Distributions from Roth IRAs
What is the formula to determine one’s contribution percentage for his SEP?
Retirement Q
Rate/ (1+rate)
So a 10% rate contribution percentage would be:
10/ (10 + 1)
= .090909
Health Insurance Premia paid by the employer under a plan or system for employees and their dependents generally are exempt from income tax, FICA, and FUTA.
True or False?
True.
UNLESS:
the employee is a more than 2% shareholder in the S-corporation that employs him and pays the premia.
KNOW THESE per Study Group Comments
Farming, Estates (IRD), Trust- be sure to know Chapter 17 really well. 1231, 1245, 1250 property What’s a capital gain, ordinary gain- De minimis Depreciation/Depletion/Amortization Start up costs/organizational COGS Lots of basis - lots of partnership What disqualifies an SCorp and who can/cannot be in an SCorp/partnership Sec 351 M1, M2, L NOL and TCJA Separately Stated Items Farming Inventory Corporate Liquidations Tax Exempt Orgs SEP/SIMPLE (I should’ve spent more time on this!) Schedule C
Constructive Dividend
A Constructive Dividend is a benefit received by a shareholder that the IRS reclassifies as a Dividend.
Constructive dividends are treated as distributions of stock or stock rights, they are fully taxable.
Accumulated Earnings Tax
Earnings that accumulate beyond the reasonable needs of a business may be subject to the Accumulated Earnings Tax.
As a ball park, any accumulation of $250,000 ($150,000 for a PSC) or less is considered within the reasonable needs of most businesses.
