Chapter 2: Other ER Situations Flashcards
1
Q
A C corporation is _______ _______ from its individual owners for tax purposes.
A
A separate entity
2
Q
The owners of a C corporation are not ________ _________ for the __________ of the corporation.
A
Personally liable
Liabilities
3
Q
If a C corporation wants to share some of its gains with a shareholders, it may do what?
A
Issue a dividend
4
Q
The payment of a dividend to shareholders is a tax deduction to the corporation true or false?
A
False it is not a tax deduction to the corporation, but it is taxable income to the shareholders
5
Q
A corporation is run by it _____________.
A
Board of Directors
6
Q
The board, then appoints________ to be responsible for __________ ________ of the company.
A
Officers
Daily operations
7
Q
Generally, when the corporation acts it is by a ___________ of the Board of Directors
A
Resolution
8
Q
Resolutions of the Board of Directors occur in three different ways, which are:
A
Annual meeting,
special meetings,
unanimous, written, consent
9
Q
Sometimes directors of the board receive compensation. Does this make them employees?
A
It does not make them employees
10
Q
The corporate form protects owners from experiencing personal liability for what two things?
A
Errors made by employees
Harm sustained by the public in relation to the business
11
Q
When a business the structure does a corporation is sold it may be: advantageous? Or detrimental? To the owners for tax reasons.
A
Detrimental
12
Q
Unincorporated business structures include:
A
S corporations
LLCs or limited liability corporations
LLP’s or limited liability partnerships
13
Q
Owners of unincorporated entities are generally referred to as:
A
Self-employed individuals
Or
Owner -employees
14
Q
Income and expenses of a sole proprietorship are shown on the proprietors
A
Personal tax return
15
Q
Which schedule of the 1040 does the income and expenses of a sole proprietor’s business show on?
A
Schedule C
16
Q
When a sole proprietor files taxes, contributions made to a qualified plan for employees show up where?
When is sole proprietor filed taxes? Contributions made to a qualified plan for himself show up where?
A
Schedule C and will flow through to the proprietors form 1040 as part of the net income or loss
Line 13 of Form 1040
17
Q
The proprietors compensation for qualified plan purposes will be called:
A
Earned Income
18
Q
A sore proprietors business is disregarded for tax purposes, true or false?
A
True, it is disregarded.
19
Q
An independent contractor may be a sole proprietor. What is the three prong test?
A
Behavioral- does the company control how the worker does his job?
Financial - how the worker is paid, how expenses are reimbursed, who provides tools and supplies
Type of relationship - are there written contracts or employee type benefits?
20
Q
A partnership is a unincorporated business that’s owned by more than one individual. What are the three types of partnerships?
A
General partnerships
Limited partnerships
Limited liability partnerships
21
Q
In a general partnership, all partners are ________ liable for any of the debts of the partnership.
Any partner may ______ ________ of the partnership without the approval of the other partners
______ and _______ are shared amongst the partners
A
Equally
Take action
Profits and losses
22
Q
The partnership must file what form each year?
A
Form 1065- which is an informational return only
23
Q
Partnerships, pay taxes, yes or no?
A
No. It is a disregarded entity for tax purposes.
24
Q
Each partners share of business income and expenses is reported each year on which schedule?
A
Schedule K-1, which is attached to the partners form 1040
25
What information from schedule K1 flows onto the 1040 for a partner?
Net income or loss
26
How does a partnership dissolve automatically?
Upon the withdrawal or the death of any partner
27
After the dissolution of a partnership, how can a successor be created?
With any remaining partners or with any new partners that joined up at any time
28
Who is a limited partner in a limited partnership? What does that mean?
Most states allow limited partnerships. The limited partner simply invests and is not involved in the day-to-day operations. Consequently, their liability is limited only to their equity in the partnership.
29
Can a limited partner, then earn income in a limited partnership?
No, a limited partner cannot earn income. Their income would only be considered passive income based off of the investment, not earned income.
30
Can a limited partner invest in a 401(k) in a limited partnership?
No, a limited partner cannot because their income is passive income only
31
An LLC with two or more owners may elect to be taxed as what to entities?
A partnership or a corporation
32
If no election for tax purposes is made to either an LLC consisting of a sole proprietor or partners then what happens?
In either case that an LLC with a sole proprietor or partners fails to make an election to be taxed as a corporation, then the automatic default is to a sole proprietorship or a partnership
33
If an LLC with partners chooses to be taxed as a partnership, are they treated as a corporation?
No, if partners decide to be taxed as a partnership, then that is how they will be treated
34
Are S corporations really unincorporated entities?
No, they are not. They are incorporated.
35
What is an S corporation then?
An S corporation is a corporation that has made an election to be taxed like a partnership
36
How is an S corporation taxed like a partnership how do profits flow through to the tax return? What is filed by the S Corp? What is filed by the member?
The S corporation only files and informational return via form 1120 S.
Members of the S corporation will receive schedule K one for profits or losses.
37
What are the two income types for a shareholder employee and an S corporation?
W-2 income
an allocation of “dividends” proportional to stake in the corporation
38
What is different between how employer contributions to a 401(k) are treated in partnerships and sole proprietorship versus how they are treated by an S corporation?
In an S corporation employer contributions to employee owners is actually a business expense that shows up on their K1; where in a sole proprietor and partnership, these are separate items on their 1040
39
What are four strict limitations on the formation of a S corporation?
One class of stock
100 shareholders or less
No NonRes Alien Shareholders
None of the shareholders may be other entities. Some Trusts are allowed as are ESOPs & Certain IRAs
40
LLP’s are generally taxed as partnerships for federal tax purposes, but they can elect to do what?
To be taxed as a corporation
41
If an LLP is taxed as a corporation then what happens?
Corporate tax rules apply
42
What is the primary purpose of Code Section 199A?
To provide a deduction of up to 20 percent of income from domestic businesses operated as sole proprietorships, partnerships, S corporations, trusts, or estates.
43
When did the regulations for Code Section 199A become finalized?
January of 2019.
44
What is the expiration date for the deduction under Code Section 199A unless extended by Congress?
2026.
45
What are the income thresholds for eligible taxpayers to claim the deduction in 2024?
Below $383,901 for joint returns and $191,950 for other taxpayers.
46
What is the deduction under Code Section 199A generally equal to?
The lesser of 20 percent of qualified business income plus 20 percent of qualified real estate investment trust dividends and qualified publicly traded partnership income or 20 percent of taxable income minus net capital gains.
47
What is the de minimis exception in the regulations for businesses earning specified service trade or business (SSTB) income?
Disregards SSTB income if it totals less than 10 percent of gross receipts for businesses with $25 million or less, and less than 5 percent for businesses exceeding $25 million.
48
What is the anti-avoidance rule under Code Section 643?
It treats multiple trusts as a single trust in certain cases.
49
What is the main goal of the anti-abuse safeguards in the regulations?
To prevent improper tax avoidance schemes, such as relabeling employees as independent contractors.
50
Define earned income.
The compensation of a self-employed individual.
51
What must a plan document include for self-employed individuals to share in compensation-based allocations?
A definition of earned income.
52
For what purposes is earned income used?
* IRC §415 purposes
* To determine allocations
* For calculating the deduction limit under IRC §404
* For nondiscrimination testing purposes.
53
Fill in the blank: The regulations for Code Section 199A allow a de minimis exception for businesses with gross receipts of $25 million or less, disregarding SSTB income if it totals less than _______.
10 percent.
54
True or False: The deduction under Code Section 199A is available for tax years beginning after December 31, 2017.
True.
55
What are the 5 types of entities (3 business, 2ownership) that can qualify for the deduction under Code Section 199A?
* Sole proprietorships
* Partnerships
* S corporations
* Trusts
* Estates.
56
If a plan covers self-employed individuals, the definition of compensation in the plan document must include a definition of what?
Earned income
57
Earned income is used as compensation for what three purposes?
415 : Determined Allocations
404 : calculating deduction limit
Non-discrimination testing
58
How does the IRC define net earnings for self-employment?
Gross income less business expenses, multiplied against the percentage of ownership of the owner or partner.
59
Once net earnings are determined, what happens next with self-employment and qualified plan contributions?
1/2 of self-employment taxes
Contributions made to a qualified plan
60
The net earnings from self-employment are reported on schedule C, what line? Or schedule C EZ line number?
Line 31
Line 3
61
The net earnings from self-employment are reported on schedule K-1 for partners. What is the line number?
Line 14
62
For partnerships, what other adjustments are made to line 14 of the K-1 for net earnings?
Subtract:
Depreciation allowance under IRC 179
Unreimbursed partner expenses
Depletion on oil and gas properties
63
Only earnings derived from what, are considered a factor and should be included and earned income?
A trade or business in which the individuals personal services are a material income producing factor
64
Earned income only includes earnings, derived from the individuals personal services and what else:?
Earnings derived from sale of property
Licensing of property
65
Is investment income considered earned income?
No, it does not
66
Are all guaranteed payments to a partner in a partnership considered earned income?
Only to the extent the guaranteed payments are for services rendered to the partnership
67
To arrive at adjusted net earnings:
Earnings are reduced by the deduction allowed under IRC _______(f) for what percentage of the individual self-employment tax?
164
1/2
68
If the employer is a sole proprietorship, then what percentage of the IRC 404 deduction, for the year will reduce the earned income of the sole proprietor?
100% of the deduction will reduce the earned income
69
If a sole proprietorship or partnership maintains more than one plan, how is the deduction calculated?
The combined qualified Plan deduction allowed is taken into account in determining the self-employed. Individuals earned income. that earned income amount is then used by all of the plans.
70
If the employer is a sole proprietorship or partnership with employees who are covered by the plan, how is earned income and deductions calculated?
Earn income includes the contributions made on behalf of such employees- including:
Pretax and pretax ketchup contributions made by employees
71
Are employee Roth contributions and Roth Catch Up contributions included as a deduction for a sole proprietor, or partner on their earned income?
No only pre-tax and pre-tax catch up
72
For 415 purposes to include employer, contributions and non-discrimination testing, what happens to the self-employed individuals deferrals when determining the 415?
Deferrals are added back into earned income for 415 purposes
73
Guaranteed payments are taken into account in computing net earnings from self-employment. The partnership calculates its gross income and deductions by treating the guaranteed payments as payments to:
As payments to a non-partner
74
Scenario: sue and Al are partners in the SA partnership. As part of their agreement they split profits 50-50. But Sue agrees that Al will get guaranteed payments of $5000 per month for a total of $60,000 per year. At the end of the year, the accountant determines after expenses. The net income for the business is $100,000. How much money does Shoe receive? How much money does our receive?
$60,000 needs to be reduced from the hundred thousand dollars, which leaves a final net income for the partnership of $40,000
$40,000 divided by two equals $20,000 each
Sue receives $20,000. Al receives $80,000. ($60k GPs, $20k NEs)
75
Scenario: sue and Al are in a partnership. Al has negotiated $60,000 a year and guaranteed payment. After expenses, the business has earned income of $50,000. How much did each partner make?
The guaranteed payment of $60,000 is deducted from the net income of $50,000 for a final net loss of $10,000.
The loss is split 50-50
Sue had a loss of $5000
Al made $55,000 ($60k GPs - $5k loss)
76
If an employee becomes a partner during the course of a year, how is their income determined?
It will be the sum of the individuals compensation as an employee plus his or her earned income as a partner
77
What type of compensation do directors of corporations receive?
Self-employment income
78
Can a director of a corporation who receives self-employment income, set up their own qualified plan that covers just them?
They sure can
79
Can a shareholder in an S corporation who did not receive any W-2 income during the course of the year make any contributions to the 401(k)?
No, they cannot. Contributions can only be made off of W-2 compensation for S corporations.
80
How is earned income determined if a self-employed individual is engaged in more than one trade or business?
Earned income is determined on a business by business basis and is not combined.
The self-employment tax deduction is applied on a pro rata basis across the businesses, and only the prorated portion is subtracted for each business.
81
True or false: a sole proprietor or partnership is an employer for ERISA purposes only with respect to its employees. They are not considered themselves employees. True or false?
True.
ERISA does not consider a sole proprietor or a partner to be an employee
82
When a self-employed individual makes an employer contribution such as a profit share to the plan what happens to their income? How is a allocation calculated for them?
Their income would be reduced by the amount of the contribution to the plan AND it is that adjusted income that serves as the basis for determining their share of the profit share.
83
What is the formula for determining a pro rata contribution to a self-employed individual and their employees?
Net earned = Gross income (minus employees share)/ (1+X)
84
When calculating the earned income for a self-employed individual for profit-sharing purposes for themselves how do any forfeitures factor in?
The earned income is increased by the forfeiture amount since the forfeiture amount is reducing the employer cost of the contribution
85
What is a qualified separate line of business?
A designation a company makes to separate services or properties provided to customers
86
87
If the requirements for a QSLOB are met an employer may elect to apply coverage tests & non-discrimination tests in what manner?
Separately to each line of business (QSLOB)
88
The purpose of the QSLOB design designation is to test the plan on an employer, wide basis, true or false?
False
The purpose is to test the plan on a line of business (QSLOB) basis
89
What is a prerequisite for QSLOB testing?
The plan must first prove to be non-discriminatory by virtue of passing the coverage test on an employer wide basis.
90
Even though Q SLOB rules applied to coverage and non-discrimination, the separate lines of business are still treated as part of a single employer for what purposes?
All other qualification rules such as:
Crediting service for eligibility
Crediting service for vesting
Contribution, and benefits limits for 415
Top-heavy testing
91
What’s the minimum number of separate lines of business needed to be a QSLOB?
Two
92
To be a separate line of business, the line of business must be organized how?
Organized and operated separately from the remainder of the employer
93
A line of business must meet 4 criteria to be considered a separate separate line of business, which are:
Formally organized as a separate unit(s)
Separate profit center (s) with separate books for internal planning and control
Unique workforce with 90% or more of the employees provide services on a substantial service basis
Unique management where 80% or more of the top paid employees are substantial service employees to the line
94
Must Seperate Lines in a QSLOB, engage in a different service? If not, what is required?
No requirement that different services be provided.
The requirement is that the workforce management and financial accountability satisfies the separateness requirements
95
What is a vertically integrated business?
Consists of an upstream and a downstream business.
The downstream business must provide the product or service to the customer.
The upstream business may or may not provide
Generally, the upstream business provides property to the downstream business
96
What three requirements are there for a business to claim a QSLOB arrangement?
Must have at least 50 employees
give the IRS notice
Pass administrative scrutiny test
97
How frequently must the 50 employee requirement for the QSLOB be satisfied?
The separate line of business must include at least 50 employees on every day of the testing year
98
For a QSLOB, Are all employees counted in the 50 employee requirement?
Employees excluded from the top paid group test are excluded for purposes of this 50 employee test
99
An employer must provide notice to the IRS when doing what with a QSLOB?
Establishing and revoking
100
What form is used in either establishing or revoking a QSLOB with the IRS?
Form 5310-A
101
Q SLOB elections follow what calendar?
There are no fiscal year QSLOB they all follow a calendar year schedule.
102
If a QSLOB structure is being used on a plan that is a fiscal year plan. What year(s) are tested?
All Plan years inside of the calendar year testing year
103
When is form 5310 – a due?
No later than October 15th following the year for which the election applies
104
If all plans maintained by the employer are not in a calendar year, when is form 5310 – a due?
The 15th day of the 10th month, following the close of the Plan year that begins earliest in the calendar year.
105
The administrative scrutiny test for a QSLOB can be satisfied under what two conditions?
Under one of the safe Harbor tests
IRS determination
106
What are the 6 safe Harbor tests that would satisfy administrative scrutiny for a QSLOB?
Statutory
Different industries designation
Mergers and acquisitions
Industry segment
Average benefits
Minimum or maximum benefit
107
What is the statutory Safeharbor test for administrative scrutiny for a QSLOB?
This test is satisfied if the HCE percentage is 50% or greater, but not more than 200% of the HCE percentage determined on an employer wide basis
*** There is a special exception
108
What is the 50% special exception test for the statutory Safeharbor test for QSLOB’s?
The 50% test is deemed satisfied if:
10% of all HCE of the employer perform services exclusively for the QSLOB
109
Running a calculation for the statutory safe Harbor test:
HCE’s represent 10% of all employees across the employer
HCE’s represent 6% of the employees inside of the QSLOB.
What is the HCE ratio than for the QSLOB? Does it satisfy the test?
60%
Yes because it is between 50% and 200%
110
What would satisfy the different industries safe harbor test?
If the QSLOB is in a separate industry or industries than every other QSLOB.
111
How are separate industries determined for the different industries safe harbor test for QSLOB’s?
The IRS has published a list
112
How is the mergers and acquisition safe Harbor test satisfied?
This test is satisfied if the line of business is an acquired line of business that satisfies the separateness requirements of 414 R3
AND
No more than 10% of employees transfer in or out of the acquired line during the testing year
113
How long is the mergers in acquisition safe Harbor test available for a QSLOB?
For a transition. Defined as the testing year (calendar year) that begins AFTER the date of acquisition up to three testing years thereafter
114
How is the industry segment safe harbor test for a QSLOB satisfied?
The LOB is reported as one or more industry segments on its:
annual SEC 10 K
or 20 F
115
What Treasury Reg does the average benefit safe harbor test have to satisfy for QSLOB?
the average benefits provided to EEs meet the treasury regulation 1.414 R – 5F
116
117
For a QSLOB the average benefit safe harbor test can be satisfied in one of two ways, which are:
If the QSLOB’s HCE percentage ratio is less than 50%:
—->then the average benefit % of the QSLOBs NHCEs must be no less than the actual benefit percentage of all other NHCEs of the employer.
If it is greater than 200%:
—-> the actual benefit % of the QSLOB’s HCES must be no greater than the actual benefit of all other HCE’s of the employer
118
For Q SLOB’s how is the maximum or minimum benefit Safeharbor test satisfied?
The test is satisfied if the plans for the QSLOB satisfying, minimum benefit test or maximum benefit test, which ever applies.
119
For the minimum benefit, Safeharbor test for a QSLOB when would that apply?
If the QSLOB’s HCE percentage is less than 50% of the employer wide percentage, then the minimum test must be satisfied
120
What is the minimum Safeharbor test for a QSLOB?
80%+ of the NHCEs of the QSLOB must:
accrue benefits DB plan
or
allocations in a DC plan
Which equal minimum or greater rates required by the regulations
121
In what case would the maximum Safeharbor benefits test apply for a QSLOB & under what conditions would it be satisfied?
If the QSLOB’s HCE % is at least 2X greater than the Employer %.
The HCE of the QSLOB cannot accrue benefits in a DB plan or allocations in a DC plan that exceed maximum rates prescribed by the regulations.
This test can be satisfied by averaging the rate of the HC’s if the average does not exceed 80% of the regulatory maximum rate
122
What happens if a separate line of business does not satisfy any of the safe harbor test?
It cannot be a QSLOB unless it obtains an IRS determination that it satisfies the administrative scrutiny test
123
All corporations are taxed on their earnings at the corporate level and not at the shareholder level, true or false?
False.
An S corporation is taxed at the individual shareholder level, not the corporate level
124
A sole proprietorship files, a separate tax return to report earned income, true, or false?
False
The earned income for a sole proprietorship is reported on the individuals tax return
125
AQSLOB, who meets the different industries safe harbor will have met the administrative scrutiny test, true or false?
True
126
A sole proprietor’s earnings are reduced 100% of the self-employment tax when determining earned income, true or false?
False the earnings are reduced by half of the self-employment tax
127
An LLP may be a nonprofit organization, true or false?
False LLP’s must be organized as for-profit entities
128
The separate line of business must satisfy a 50 employee requirement, a notice requirement and it administrative scrutiny requirement to be a QSLOB, true or false?
True
129
A QSLOB must be tested separately for all annual compliance testing, true or false?
False: the employer may elect to test on a QSLOB basis for coverage testing and non discrimination for deferrals & match.
Top heavy testing, as well as the application of the 415 limits among other things are performed on an employer wide basis
130
A plan must satisfy the non-discrimination classification test on an employer wide basis first before testing on a QSLOB basis, true or false?
True
131
Compensation that may be used for plan purposes for employees of a C corporation is formed W-2, compensation, true or false?
True
132
Compensation that may be used for plan purposes, for a partner of a partnership is formed W-2, compensation, true or false?
False based off of earned income reported on schedule K1.
