Corp / Entity Taxation Flashcards
Expense Deduction in lieu of Depreciation
Section 179 expense
Limit = $510k for new/used personal property
Phase out dollar for dollar after $2,030,000
Deduction not permitted when net loss exists or if deduction would create a net loss
Corp Tax
Executive Compensation Deduction
Max = $1M (fixed / base salary)
Form 709
Gift tax form
tax paid by person giving the gift
Tax Due on Current Gifts
Formula…
Gross gifts in a calendar year (@FMV) - exclusion of $14k per donee per year - unlimited marital deduction - unlimited charitable gifts = taxable gifts this year
+ taxable gifts of prior years
= cumulative lifetime gifts
x tax rate
- tax paid
- credits
= tax due on current gifts
Estate Expenses and Deductions
Medical expenses
Administrative expenses
above = expense or liability, but not both
Unlimited charitable deduction
Unlimited marital deduction
above = discretionary deductions
Estate Transfer Tax
Formula…
gross estate - non discretionary deductions = adjusted gross estate - discretionary deductions = taxable estate \+ adjusted taxable gifts = tentative tax base at death x uniform tax rates = tentative estate tax - gift taxes payable = gross estate tax - applicable credit = estate tax due
Form 706
Filed if gifts exceed 2017 limit ($5,490,000)
Due in 9 months after death
Property transfers to corporations
Non-taxable upon formation, if resulting in 80% ownership
Taxable if not 80%, or subsequent to formation
Treated like a sale of property to corp at FMV
Corp Tax
Shareholder Tax Consequences
No gain/loss if:
1 - 80% control
2 - no receipt/loot
- ..
- no cash withdrawn
- excess debt put into corp
NBV assets - liabilities = gain/loss
Amortization
GAAP not equal to Tax
Tax = 15 yr SL
GAAP =
- public = impairment test / not amortized
- private = option to amortize over 10 years
Form 1041
US income tax return for estates and trusts
Complex Trusts
May accumulate current income
May distribute principle
May deduct charitable contributions
Permitted a $100 exemption in arriving at taxable income
Grantor Trust
Individual who established the trust retains control
Income tax of the grantor
Can be qualified shareholder of an S Corp
Typically included in the taxable estate of the grantor upon his/her death
Simple Trusts
Only make disbursements out of current income
Required to distribute all of its income currently
Cannot take a deduction for charitable contributions
Entitled to a $300 exemption
Trusts and Estates
Annual Estate Income Tax
Form 1041
Required when income exceeds $600
- exemptions for estates = $600
- no standard deduction allowed
Tax year return due 15th day of 4th month
Estate exempted from making estimated tax payments for first two tax years
Trusts and Estates
Income Distribution Deduction
Lessor of:
1 - actual distribution to beneficiary
2 - DNI (less adjusted tax-exempt interest)
Distributable Net Income
(DNI) formula…
estate / trust gross income (includes cap gains)
- estate / trust deductions
= Adjusted Total Income
+ adjusted tax exempt interest
- capital gains (attributable to corpus)
= DNI
Nontaxable Liquidation of a Partnership
“complete withdrawal”
beg. capital account
+ % of income/loss up to withdrawal
= Partners capital account
+ % of liabilities
= Adjusted basis at date of withdrawal
- cash withdrawn
= Remaining basis to be allocated to assets withdrawn
Gain recognized exception = $ > basis
Loss recognized exception = $ < basis (no other items)
LLC Key Points
Protects from liabilities like a corporation
Unlimited members
Sole prop can be single member LLC
Can’t IPO
LLC members can make changes / manage but shareholders generally cannot
Taxable Income to Partners
Income = taxable = increases basis
Withdrawal = nontaxable = decreases basis
Partnership Terminates when…
Ops cease
50% of cap and profits is sold or exchanged
Less than 2 partners
Partnerships
Property Subject to an (excess) liability
If debt relieved (negative basis) exceeds basis once everything is factored in, it results in a 0 basis and taxable gain as boot/loot to the partner
Partnership Initial Basis Calculation
Cash contributed \+ NBV property contributed - Liabilities assumed by partnership \+ Services rendered FMV (taxable as income to partner) \+ Share of partnership liabilities
How to lose S Corp Status
Voluntary revocation
Failure to meet eligibility requirements
- corp or foreign owner
+ 25% gross receipts from passive investment income for 3 consecutive years and had C corp E/P at end of each year
can re-apply in 5 years
S Corp Shareholder
Loss Limitation Formula
Basis
- Direct shareholder loans
- Distributions
= Loss Limitation
Computing Shareholder Basis in S Corp
initial basis
+ income items (separate, non-separate, tax free income)
+ additional shareholder investments in corp stock
- distributions to shareholders
- loss or expense items
= ending basis
1120
Schedule E
Ordinary business income (including S Corp)
Net rental real estate income/loss
S Corp
Pass-through of income/losses to SH
K1 - on per share, per day basis
Losses limited to basis
Deduct up to = basis + direct loans
Disallowed losses can be carried forward indefinitely
Cost of fringe benefits over 2% not deductible
- include in K1
S Corp
Passive Investment Income taxed if…
S Corp has accumulated C Corp E/P
Passive income exceeds 25% of gross receipts investment
S Corp
Exemptions from Recognizing Gain
No tax on “built-in-gain” if:
S Corp was never a C Corp
Sale / xfer doesn’t occur within 10 years of S Corp election
Appreciation occurred after S election
Distributed asset was acquired after S election
Net unrealized gain (built-in) has been completely recognized in prior tax years
S Corp
Eligible Shareholders
1 class of stock / 100 shareholders max
Must be an individual, estate, or certain type of trust
Can’t be nonresident alien
Qualified retirement plans, trusts, 501c3’s okay
No corporations or partnerships
Grantor and voting trusts okay
S Corporations
Shareholders pay tax
Avoids 2x taxation
Form C corp and then apply for S corp election
Liquidation and Reorganization Rules
Liquidation
Business activity completely ceases
Corp consequence = taxable
Shareholder consequence = taxable
Liquidation and Reorganization Rules
Reorganization
Business activity continues
Nontaxable to both corp and shareholders
Tax Free Reorganizations
Type F
Change in form, identity, or place or organization
Tax Free Reorganizations
Type E
Recapitalizations
Tax Free Reorganizations
Type D
Dividing of the corp into separate operating corporations
Tax Free Reorganizations
Type C
Acquisition by one corp of another corps assets, stock for assets
Tax Free Reorganizations
Type B
Acquisition by one corp of another corps stock, stock for stock
Tax Free Reorganizations
Type A
Mergers or consolidations
Corporation Paying Dividend Exceptions
Does not create a taxable event
exception: property dividends = taxable event
FMV property
- NBV
= corp gain
Stock Dividends
Generally not taxable
Value is FMV at distribution date
Basis = basis of old stock / (old + new shares)
Constructive Dividends
Excessive salaries paid to shareholder employees
Excessive rents and royalties
“Loans” to shareholders where there is no intent to repay
Sale of assets below FMV
Dividends Defined
Current E/P (by year end) = taxable div
Accumulated E/P (distribution date) = taxable div
Return of capital (no E/P) = tax free, reduces basis
Capital gains distribution (no E/P/no basis) =
taxable income as capital gain