Chapter 17 Flashcards
A ______ is not a taxable entity separate form the individual who owns the proprietorship.
sole proprietorship
The owner of a ______ reports all business income and expenses of the proprietorship on Schedule C of Form 1040
sole proprietorship
_____ are not subject to a Federal income tax.
Partnerships
A ______ is required to file Form 1065, which reports the results of the partnership;s business activities.
partnership
The partnership ordinary business income (loss) and the separately reported items are allocated to the partners according to the ________.
partnership’s profit and loss sharing agreement
*each partner receives a Schedule K-1 that reports the partner’s share of the partnership ordinary business income and separately reported income and expense items
Corporations are governed by ____ or ______ of the Internal Revenue Code.
Subchapter C
Subchapter S
_____, which generally do not pay federal income tax, are similar to partnerships in that ordinary business income (loss) flows through through to the shareholders to be reported on their seperate returns
S corporations
______ are subject to an entity-level federal income tax. This is known as ____
C Corporation
double taxation effect.
A C corporation reports its income and expenses on _____
Form 1120
When a corporation distributes its income, the corporation’s shareholders ______
report dividend income on their own tax returns
Income that has already been taxed at the corporate level is ______.
also taxed at the shareholder level
In many cases, the tax burden will be _____ if the business is operated as a corporation, but sometimes operating as a corporation can result in _____
greater
tax savings
Double taxation stems from the fact that _____ are not deductible by the corporation. It also stems from the face that ______ are taxable to the shareholder
dividends distributed
dividend distributions
Qualified dividend income is taxed at _____
the same preferential rate as long term capital gain
The net income of a proprietorship is subject to ______, as are some partnership allocations of income to partners
self-employment tax
Wages paid to a shareholder-employee of a corporation are subject to ____
payroll taxes
At the entity level, state corporate income taxes and/or franchise taxes are applicable for businesses formed as ______
corporations
The income of sole proprietorship, S corporations, and partnerships (including most LLC) is subject to ________ and without any rate preference for such income
state income taxation
Sole proprietors and general partners face the danger of _____
unlimited liability
Shares of stock in a corporation are freely transferable, whereas a partner’s sale of his or her partnership interest is subject to ____
approval by the other partners
Shareholders may come and go, but a corporation ca continue to exist. Death or withdrawal of a partner may terminate the existing partnership and cause financial difficulties that result in dissolution of the entity. This _____ is a distinct advantage of the corporate form of doing business
continuity of life
Corporations have _____. All managment responsibility is assigned to a board of directors, which appoints officers to carry out the corporation’s business
centralized management
Operating as an LLC allows its owners to avoid ______, which is primary nontax consideration in choosing this form of a business organization
unlimited liability
The tax advantage of LLCs is that qualifying businesses may be treated as ____ or ____ for tax purposes, thereby avoiding the problem of double taxation associated with regular corporations
proprietorship or partnership
Some states allow an LLC to have ____, but not continuity of life or free transferability of interests.
Other states allow LLCs to adopt any or all of the _____.
centralized management
corporate characteristics of centralized management, continuity of life, and free transferability of interests
An entity would be treated as a corporation if it had a majority of characteristics common to _______
corporations
Under the check-the-box rules, non-corporate entities with more than one owner can elect to be classified as _______
An entity with only one owner can elect to be classified as ______
partnership or corporation
sole proprietorship or corporation
*this election is not available to entities that are actually incorporated under state law or to entities that are required to be taxed as corporations under Federal law
LLCs are not treated as being _____
incorporated under state law
____ and ____ result from the taxable sale or exchanges of capital assets
capital gains and capital losses
Individuals generally pay a preferential tax rate of 15% on ____
net capital gains
Corporations receive ____ preferential tax rate
no
Corporate taxpayers are not permitted to claim any net capital losses as ___
Capital losses can only be used as _____
a deduction against ordinary income
an offset against capital gains
Recapture rules under §1245 and §1250 are equally applicable to _______
individuals and corporate taxpayers
*corporations may have more depreciation recapture (ordinary income) on the disposition of §1250 property than individuals
Under §291 a corporation will have additional ordinary income equal to 20% of the excess of the amount of depreciation recapture that would arise if the property §1245 property over the amount of depreciation computer under §1250. As a result the §1231 portion of the corporation’s gain on the disposition is correspondingly reduced by the additional recapture.
.
The _____ loss rules apply to individual taxpayers and to closely held C corporations and personal service corporations (PSC).
passive loss
For S corporations and partnerships, passive income and loss flows through to the owners, and the passive loss rules are applies at the _____
owner level
The passive loss rules are applied to closely held C corporations and the PSCs to prevent taxpayers from incorporating to avoid the _____
passive loss limitation
A corporation is _____ is, at any time during the last half of the taxable year, more than 50 percent of the value of the corporation’s outstanding stock is owned, directly or indirectly, by or for not more than 5 individuals.
closely held
A corporation is classified as a PSC if it meets these requirements
- the principal activity of the corporation is the performance of personal services
- The services are substantially performed by shareholder-employees
- More than 10 percent of the stock is held by shareholder-employees. Any stock held by an employee on any one day causes the employee to be a shareholder-employee
Passive losses cannot be offset agains either _____
active income or portfolio income
The application of the passive loss rules is not as harsh for _____
C corporations
they may offset passive losses against active income but not against portfolio income
Subject to certain exceptions, individual taxpayers are not allowed to offset passive losses against _____
either active income or portfolio income
Both corporate and individual taxpayers may deduct _____ if the recipient is a qualified ______.
charitable contributions
qualified charitable organizations
*Generally a deduction will be allowed only for the year in which the payment is made.
With regards to charitable contributions an exception is made for ____. They can claim the deduction in the year preceding payment if these requirements are met.
accrual basis corporations
- the contribution must be authorized by the board of directors by the end of that year
- It must be paid on or before the 15th day of the 3rd month of the next year
Generally, a charitable contribution of property results in a deduction equal to _____.
to the property’s fair market value at the date of the gift.
*loss property should be avoided as the loss inherent in the property would be never recognized. A sale of the property to recognize the loss, followed by a charitable contribution of the sale proceeds, would produce a more favorable tax result
_____ also is the valuation amount for most charitable contributions of capital gain property.
Fair market value
_____ is property that, if sold, would result in long-term capital gain or §1231 gain for the taxpayer
Capital gain property
In what 2 situations would a capital gain property be measured by the basis of the property, rather than the fair market value.
- If the corporation contributes tangible personal property and the charitable organization puts the property to an unrelated use, the appreciation on the property is not deductible.
- If the charitable contribution was made to certain private non-operating foundations
The deduction for a contribution of ordinary income property is limited to _____
the basis of the property
*§1231 property is treated as ordinary income property to the extent of any depreciation recapture under §1245 and §1250.
____ is property that if sold, would result in ordinary income for the taxpayer
ordinary income property
On certain contributions of inventory by corporations the amount of the deduction sis equal to ______
the lesser of
- the sum of the property’s basis plus 50% of the appreciation on the property
- twice the property’s basis
For any tax year, a corporate taxpayer’s contribution deduction is limited to ____
10% of taxable income
*taxable income is computed without regard to the charitable contribution deduction, any net operating loss carryback or capital loss carryback, dividends received deduction, and domestic production activities deduction.
Any contribution in excess of 10% limitation (for corporations) may be _____
carried forward to the 5 succeeding tax years.
*any carryforward must be added to subsequent contributions and will be subject to 10% limitation. In applying the current year’s contribution must be deducted first, with carryover amounts from previous years deducted in order of time
The American Jobs Creation ACt of 2004 created a deduction based on the income from ______
manufacturing activities
Domestic production activities deduction is 9% of the lower of :
- qualified production activities income
2. taxable income or alternative minimum taxable income (computed without regards to the DPAD)
As for individuals, the net operating loss of a corporation generally may be carried back ____ years and forward ____ years to offset taxable income for those years.
2
20
*corporations may elect to forgo the carry back period and just carry forward an NOL
A corporation does not adjust its tax loss for the year for capital losses because ____.
a corporation is not permitted ta deduction for net capital losses
*Nor does a corporation make adjustments to nonbusiness deductions as individual taxpayers do
A corporation is allowed to include the ____ in computing its NOL
dividends received reduction
The purpose of the _____ is to mitigate multiple taxations of corporate income.
Dividends received deduction
*without the deduction, income paid to a corporation in the form of a dividend would be taxed to the recipient corporation with no corresponding deduction to the distributing corporation. When the recipient corporation paid the income to its shareholders, the income would again be subject to taxation with no corresponding deduction to the corporation. The dividends received deduction alleviates this inequity by causing only some or none of the dividend income to be taxable to the recipient corporation.
The amount of the dividends received deduction depends on ___
the percentage of ownership the recipient corporate shareholder holds in a domestic corporation making the dividend distribution
No dividends received deduction is allowed unless the corporations has ____
held the stock for more than 45 days
Another restriction applies to the dividends received deduction when the underlying stock is _____
debt financed
*debt-financed stock restriction reduces the dividends received deduction with respect to any dividend paying stock by the percentage of the investment in the stock that is debt financed. The reduction in the dividends received deduction cannot exceed the amount of the interest deduction allocable to the dividend
Under §248 a corporation may elect to amortize ____ over 180 month period beginning with the month in which the corporation begins business.
organizational expenditures
these include:
- legal services incident to organization
- necessary accounting services
- Expenses of temporary directors and of organizational meetings of directors or shareholders, and fees paid to the state of incorporation
These expenditures do not qualify as organizational expenditures
those connected with issuing or selling shares of stock or other securities or with the transfer of assets to a corporation. These expenditures reduce the amount of capital raised and are not deductible at all.
The first ____ of organizational costs can be immediately expensed, with any remaining amount of organizational costs amortized over a 180 month period
$5000
*This 5000 expensing amount is phased out on a dollar for dollar basis when these costs exceed $50,000
To qualify for the election of expensing organizational costs, the expenditures must be incurred ____
before the end of the tax year in which the corporation begins business
_____ include various investigation expenses involved in entering a new business, whether incurred by a corporate or an individual taxpayer. They also include operating expenses such as rent and payroll that are incurred by a corporatino before it actually begins to produce any gross income
Startup expenditures
A corporation must file a ____ whether it has taxable income or not
federal income tax return
A corporation must make payments of ____ unless its tax liability can reasonably be expected to be less than $500.
estimated tax
The required annual payment of estimated tax is the lesser of :
- 100% of the corporation’s tax for the current year
2. 100% of the tax for the preceding year
Estimated payments of taxes can be paid in 4 installments due on or before the 15th day of the __, ___, ___, ___ months
4,6,9,12
Income reconciliation for corporations who’s assets exceed $10 million are reported on ____
Schedule M-3
