chapter 5 Flashcards
S Corps retain corp status and their corp characteristics
shareholders are not liable for corp. debt
shares can be freely transferred
shareholders can be employees
Tax exempt orgs
charities, labor orgs, social clubs, pension and profit sharing trusts and private foundations
exemptions-
may be in the form of a corp or trust and must apply for and receive an exemption from taxation form 1023 and 1024
filing requirements
must file an information return (form 990) if gross receipts exceed $50,000.
reports income/expenses and substantial contributors. must include lobbying and political expenditures
CHURCHES DONT FILE 990
-must file by the 5th month MAY 15th
Form 990-N
EO that are not required to file an information return (990) have to fill out one of these forms
- justifies continuing the exempt status and confirms annual gross receipts are less than $50k.
- churches and state institutions are still exempt from these forms too
- if they do not meet exempt status for 3 consecutive years then they lose their status
- make forms available to interested parties
private foundations
EO that receive less than 1/3 of their annual support from their members and public
- file form 990-F
Qualifiers
Must operate exclusively for tax-exempt purpose
- organized for religious, charitable or educational purposes
- influencing legislation or political parties is not an acceptable purpose.
lobbying expenses
excise tax of 5% is imposed on lobbying expenditures and 5% may also be imposed on org managers who agreed to expenditures
Unrelated Biz income
UBI must be from business regularly carried on and be unrelated from the EO exempt purposes
- business substantially related only if the activity contributes importantly to the accomplishment of the exempt purposes of the org.
related income not subject to tax includes:
- activity where substantially all work is performed for no compensation
- business carried on for the convenience of students
- sale of merchandise received as contributions
-investment income
-rents received from real property
income from debt-financed property unrelated to exempt function of EO is UBI
income from advertising in journals is UBI
UBI is taxed if exceeds $1000 at regular corp rates if org is a corp and trust rates if it is a trust.
foreign income
Taxed on US citizens if earned from other countries
Income earned in US taxed on foreigners
foreign source
income earned ina foreign country include employee benefits
US source
income earned domestically
unearned income
is foreign source if recieved form a foreign resident or for property that is used in a foreign country
sale of personalty
income determined based on residence of the shelter except inventory is sourced where TITLE TRANSFERS
depreciable property recapture is sourced where depreciation was claimed. remaining gain is sourced where title transfers
income from sale of intangibles is sourced where amortization is claimed
Source of income from use of tangible property is determined by country where property is used
INterest income
US source if received from US GOVT/ NON CORP US RESIDENTS/ DOMESTIC CORPS
Dividends
Dividends from US corp are US source and from foreign corps are foreign source
Outbound Transfers
transfer of assets from US to foreign country may trigger income
if assets are used in trade or business outside of US, gain is deferred unless property is (Inv. installment obligations or foreign currency)
Controlled Foreign Corps
A CFC is a foreign corporation for which more than 50% of the voting power or value of stock is owned by U.S. shareholders (limited to those who own, directly and indirectly, 10% or more of the foreign corporation) on any day of the tax year of the foreign corporation.
FX gain or loss
resulting from normal course of biz operations are ordinary
fx g/l resulting from investment or personal transactions are CAPITAL
Transfer Taxes
may use transfer pricing to manipulate amount of income earned in US., IRS has broad powers to reallocate income transferred to ensure that income is clearly stated
World-Wide Income- double taxation
US taxpayers are taxed on all income earned anywhere in the world.
- -foreign income taxes paid are itemized deduction for individuals
- –a credit can be claimed for FX taxes paid
- certain individuals can elect to exclude foreign earned income
Limit for tax credit
if effective rate exceeds the foreign effective rate
Limit= (US tax on worldwide income X foreign source taxable income)/ worldwide taxable income
individuals must add personal exemptions of worldwide income
excess foreign tax credits can be carried back one year and forward 10 years
Qualifiers for individuals who want to exclude foreign income (2 tests)
during a continuous period that includes the entire tax year, the individual must be a bona fide resident of a least one foreign country
the individual must have a tax home in a foreign country and must be present in one or more foreign countries for 330 days during 12 months.
THINK MISSIONARIES and otherforieng workers
Chaska could exclude her income from foreign income being taxed for this year.
Qualifying individuals can exclude:
- foreign earned income for personal services limited to 100,800
- employer provided foreign housing income limited to 14,112
- must file an election to take the exclusion which is binding for future years until revoked
- taxpayer was present in foreign cuntry for 330 days but less than an entire year, the exclusion is pro rata based on e 365 days.
Tax Characteristics- S corp
S shareholders are taxed on portion of icome/loss regardless of distribution
No imposition of corp. AMT, PHC or accumulated earnings tax. Individual tax preferences are allocated to shareholders
The adjusted basis of SH stock is generally adjusted at YE
Shareholders recognize gains when value of distribution exceeds the adjusted basis in stock
Parterns in a partnership are not eligible to benefit from fridge benefit exclusions- same thing for S Corps where SH owns more than 2% of S CORP
2% or greater S Corp SH can deduct premiums paid on health insurance as a deduction for AGI as long as the SH has earned income in excess of the amount paid for premiums
SH who work for the S Corp are employees and subject to SE taxes
Eligibility Requirements
non resident aliens/ C Corps/ Partnerships are not eligible SH.
Estates can be SH
Trusts can be SH
Shareholder limits
no more than 100 sh
all members of a family and their estates are treated as one SH
each beneficiary of a SH trust is counted as a SEPARATE SH
Co-owners of stock count as one SH
Stock Requirements
one class of stock convertible stock does not violate the requirement until converted
Election requirements- S Corp
unanimous consent of SH is required for election of S Corp
- valid for current year if made before March 15th
- both spouses must consent if co-owners of stock
- ALL current SH must consent to election
Termination Requirements- S Corp
Voluntary termination occurs through majority vote made before March 15.
or if there is greater than 50% change in ownership within 12 months all members must consent to S Corp election
Involuntary occurs through violating requirements– makes it an S Corp short year
- involuntary termination due to violation of the limit on passive investment income exceeding 25% of gross receipts for 3 consecutive years.
Calendar year-end
generally the default for S Corps
Reporting Objectives- S Corp
may use cash basis of accounting unless the corp is a tax shelter.
Reports taxable income and separately stated items for each SH on K-1
Not entitled to most special corp deductions like DRD
S Corps do not pay AMT PHC tax or AE tax
S Corps make the most of tax elections, like amortizing start up costs and organization costs
Flow through- S Corp
SH report income based on pro rata share of stock ownership
- recalculate on a daily basis if interests change during the year.
- if interest is terminated during the year, then share can be calculated by closing th books as of termination date- but all partners must agree to this
Adjusted Stock basis- S corp
Basis \+ contributions of capital \+ SH share of income - distributions to SH -Share of losses
Loss Limitation
- adjusted basis of stock limits loss deductions bc SH basis cannot be reduced below 0
- adjusted basis of loans to corp by SH can be used for loss deductions
- can only deduct losses to extent they are at risk for investments in the corp
- passive loss limits may also limit loss deductions
- unused losses are carried forward indefinitely
S Corp distributions
may trigger corp gain but normally represent a return on ccapital for SH
Corp gain= distributing appreciated property and the gain is passed through to SH like other income
Shareholder income if Corp has no E&P
distribution creates a gain to the SH if distribution exceeds the SH adjusted basis in the stock
- amout of distribution is amount of cash plus FMV of property distributed
- distributions in excess of basis are treated as gains from sale of stock
most likely taxed as capital gains b/c stock is probably be a cap asset in hands of SH (held for investment)
Shareholder income if S Corp has E&P
SH of S corp with accumulated E&P from previous status as C Corp are subject to complex distribution system
- accumulated undistributed income generated during an S status is recorded at corp level as AAA
- adjusted in same way as stock basis except no adj. for tax exempt income and AAA can be negative but only by losses
OAA tracks
tax exempt income earned by the corp
Order of distributions- AAA
first tax free from AAA
then from E&P (dividend income)
from stock basis which is tax free return of capital
remaining is a capital gain
bypass election
allows distribution to first come from E&P and then from AAA
Distributions from OAA and AAA
reduce the stock basis for the SH
distributions of cash during minimum 1 year period following termination of S Corp
treated as tax free recovery of stock basis to extent it doesn’t exceed AAA balance
since only cash distributions receive special treatement the corp should not distribute property during this time
Built in Gains Tax
S corp subject to tax if corp sells property contained built-in gain at time of S election
- no imposed on corp that has always been a S Electing corp
= tax imposed at highest corporate rate 35% and limited to net amount of built-in gain at time of election
Passive Investment Income Tax
S Corp can be subject to top corp tax rate if corp reports excessive passive investment income and corp has E&P from prior C Corp.
- excess passive income is more than 25% of gross receipts
- IRS ccan waive if corp establishes it made distributions within a reasonable time
