Deck 3

Question 1

How do you calculate the income a partner with 50% ownership would report from the partnership on his tax return when given the following:

Guaranteed Payment $10,000
Net Business Income before guaranteed Payment $100,000
Net-long term gains $20,000

Answer 1

You would take the Net business income before the guaranteed payment and subtract the guaranteed payment to get the actual income to allocate to each partner.

100,000 - 10,000 = 90,000 * 50% = 45,000

You would then take the income amount allocated to the partner and add his guaranteed payment total and then add his portion of the net long-term capital gains to get the total income to report.

45,000 + 10,000 + 10,000 (20,000*.50) = 65,000

Question 2

What is the usual result to the shareholders of a distribution in complete liquidation of a corporation?

Answer 2

Capital Gain or loss

Shareholders treat property received in a complete liquidation of a corporation as full payment for their stock. Therefore, the shareholder must recognize capital gain or loss equal to the difference between the fair market value of the property received and the basis of the stock surrendered.

Question 3

In which circumstances is the IRS able to make transfer pricing adjustments?

Answer 3

In situations where a U.S based taxpayer:

• Transfers, sells, purchases, or leases tangible property or intangible property to or from an affiliate OR
• Enters into loan agreements or service contracts with an affiliate OR
• Shares costs with an affiliate

In which the affiliate either is not subject to US income tax or does not file a consolidated income tax return with the US tax-based taxpayer

In these situations the IRS has the ability to modify the basis of assets, or require the taxpayer to recognize income with respect to an otherwise tax-free transaction.

Question 4

When you have current and accumulated E&P in a year and 2 distributions, how do you allocate the first distribution to the accumulated and current E&P?

Current E&P $25,000
Accumulated E&P $100,000
Distribution 1 $10,000
Distribution 2 $15,000

Answer 4

Current E&P is allocated to the distributions on a pro rata basis. Then accumulated E&P is applied to the distributions in chronological order. Total distributions are 25,000 (10,000 + 15,000). Current E&P is allocated to the first distribution at 40% (10,000/25,000). So 10,000 (25,000*.4) of current E&P is allocated to the first distribution. The remaining $15,000 (25,000 - 10,000) is allocated to accumulated E&P.

Question 5

If a partnership has a loss of $10,000 and a partners share of that loss is 5,000, but that partners basis is $1,000, what can the partner do with the remaining $4,000 loss over the $1,000 basis?

Answer 5

The remaining $4,000 of loss is suspended, and can be deducted in the future when his basis is reinstated.

Question 6

Do separately stated items, tax exempt items, and portfolio income increase a partner’s basis?

Answer 6

Yes

Question 7

What type of alternative minimum tax is available as a credit against future regular tax?

Answer 7

Only alternative minimum tax attributable to timing differences is allowed as a credit against future regular tax. For example, long-term construction contracts.

Question 8

When a beneficiary receives a distribution from an estate, what amount is taxable?

Answer 8

The amount of income an estate beneficiary reports from the estate is limited by the estate’s distributable net income (estate income - estate disbursements).

The distributions is taxable up to the amount of the estate’s distributable net income.

For example, say the estate had estate income of 100, estate disbursements of 80 and distributions of 50. The estate’s distributable net income is 20 (100-80) and so the distribution is taxed up to 20. since the total distribution was 50, 20 is taxable.

Question 9

Is group term life insurance taxable?

Answer 9

The first $50,000 of group term life insurance is a nontaxable fringe benefit. Amounts exceeding this are taxable based on IRS tables.

Question 10

Do at risk and passive losses apply in determining a partner’s deduction for that partner’s share of partnership losses? Or just one of those?

Answer 10

Both the “at-risk” limits and the “passive loss” limits will apply in determining a partner’s deduction for that partner’s share of partnership losses. Partners are subject to the basis limitations on losses, the “at-risk” provisions, and the passive loss limitations on the losses passed through from the partnership.

Question 11

Is boot paid or received used to determine gain?

Answer 11

If property other than property qualifying for like-kind exchange treatment is received (cash, relief from liabilities, or nonqualifying property), the gain recognized is the lesser of the realized gain or the boot received. Note that only boot received, not boot paid, triggers gain recognition.

If the exchange includes both debt assumed and debt relief, the debt is netted together (“net the debt”). Net debt assumed is boot paid and net debt relief is boot received.

Question 12

How would you calculate the following for a liquidation distribution for a C corp, and S corp, a partnership, and an LLC:

Corporations Gain/ loss
Shareholders gain/ loss
Basis in property

10% ownership

Pre-distribution basis: 300

Land: FMV 270 ; Adjusted Basis 150

Corporations total liabilities:
Non recourse 400
Recourse 100
Total liabilities 500

Answer 12

Corporations Gain/ loss:
C corporation and S corporation: Difference between the FMV and adjusted basis of property distributed = 120 (270-150)
Partnership and LLC = 0 (flows through to the partner so the corporation shows no gain or loss)

Shareholders gain/ loss:
C corp = Difference between the basis and the FMV of the property = -30 (300-270)
S Corp = The gain above of 120 from the corp flows through and increases the basis to 312 (300 + 120*.10) and it also is reported as a 12 gain so the calculation ends up being -30 (300+12-270-12)
Partner and LLC = 0 (property nets it to 0, no cash or receivables or inventory that would cause a gain)

Basis in property=
S and C Corp = FMV of property = 270
Partner = 250 (300-500.1) You take the basis - partner’s share of the liabilities
LLC = 260 (300-400.1) You take the basis - partner’s share of the liabilities (only nonrecourse debt for the LLC)

Question 13

What increases the accumulated adjustments account (AAA) of an S corporation?

Answer 13

The accumulated adjustments account (AAA) is increased by separately stated and non-separately stated income and gains (except tax-exempt income and certain life insurance proceeds).

So Charitable contributions, distributions to shareholders, and capital contributions by the shareholders are all examples of decreases to the AAA, while interest and dividends are examples of increases to the AAA.

Question 14

How do you split the loss from the sale of a 1231 asset between 1231 and 1245?

Answer 14

All losses on the sale of 1231 assets are considered 1231 losses. No portion of the loss is attributed to 1245 like gains are.

Question 15

How would you determine the amount subject to the built in gains tax?

Answer 15

When a C corporation converts to an S-corp, appreciated property that the corporation owns is subject to the built in gains tax if the property is sold within the recognition period, which is 21% of the built-in gain at the time of conversion to an s-corp. The recognition period is 5 years.

To determine the amount subject to the built in gains tax you would take the difference between the item’s basis and the FMV at the time of election.

Question 16

In an agent/ principle situation, who is liable if a agent contracts with a company and is instructed not to disclose that they are acting on the principle’s behalf?

Answer 16

The third party to a contract with an agent for an undisclosed principal may elect to hold either the subsequently discovered principal or the agent liable.

Question 17

What is the rule for suspended passive activity losses on carrying back or forward the loss?

Answer 17

Tax rules allow suspended passive losses to be carried forward, but not back, until utilized.

Please note, this is different than capital losses where you deduct up to $3,000 each year that offsets ordinary income.

Question 18

How would you determine if a distribution is considered dividend income or return of capital for preferred and common stockholders?

Answer 18

A dividend to a preferred shareholder is based on that shareholder’s fixed percentage at purchase. Preferred shareholders are not common equity owners of a corporation, and they only get paid based on their preferred percentage; therefore, any dividend payments to a preferred shareholder are considered dividend income to the preferred shareholder. Preferred shareholders are paid in full before common shareholders receive dividends.

Common shareholders are residual owners of a corporation and share in the retained earnings (“earnings and profits” is the tax term) of the corporation as well as the net assets. A “dividend” distribution to a common shareholder may or may not be classified as a taxable dividend. A dividend is defined by the Internal Revenue Code as a distribution of property by a corporation out of its earnings and profits (E & P). Dividends come first from current E&P and then from accumulated E&P. Any distributions in excess of current or accumulated E&P are first return of capital (up to the basis of the common stock) and then capital gain distribution.

Question 19

How does a partner determine what is taxable income?

Answer 19

A partner must include his allocated share of partnership income, even if not received in cash, in his tax return for his taxable year (usually calendar year) within which the taxable year of the partnership ends.

Please note, loans received by the shareholder from the partnership are not included in income.

Question 20

If QBI is above $426,600, how would you determine the QBI for a QTB and for an SSTB?

Answer 20

SSTB = No deduction = 0

QTB =
You take the lesser of
1. 20% of the QBI OR
2. Greater of
a. 50%of the W2 wages paid by the business
b. 25% of the W2 wages paid by the business + 2.5% of the unadjusted basis of qualified property immediately after acquisition (meaning prior to depreciation)

Question 21

How would you determine if you can combine businesses for QBI for a QBT or a SSTB?

Answer 21

SSTB: Cannot aggregate

QTB:
1. The same person, or group of persons(family members included), owns at least 50% of each business.
2. The businesses to be aggregated must satisfy 2 of the following 3 criteria:
A. Provide products/ services that are the same or customarily offered together.
B. Shae facilities or significant centralized business elements.
C. Operated in coordination with other businesses in aggregated group.

Question 22

Do you include Private activity bonds in taxable income?

Answer 22

No, Private activity bonds are tax exempt/ nontaxable.

Question 23

Are state income tax refunds taxable?

Answer 23

State income tax refunds are taxable IF the taxpayer itemized deductions in the previous year.

Question 24

How do you calculate depletion for the cost method?

Answer 24

Adjusted basis in property/ Estimated units of mineral*) X Mineral units sold

If not given, estimated units of mineral can be calculated as Units sold during the year + estimated tons remaining at the end of the year (don’t forget what wasn’t sold in PYs)

With a limitation that the amount cannot exceed the beginning of the year adjusted basis.

Question 25

How do you calculate depletion using the percentage depletion method?

Answer 25

You take sales (amount sold X Price per item) X Statutory rate (usually given in the problem)

Limitation = 50% of taxable income

Question 26

Is land a capital asset?

Answer 26

Land is usually a capital asset, but when it is effectively inventory, as when it is used by a developer to be subdivided, it is excluded from the statutory definition of capital assets.

Question 27

In a situation where a corporation makes a distribution of property that has a liability attached that is greater than the FMV of the property, how would you calculate the recognized gain for the corporation?

Basis 30
FMV 60
Liability 90

Answer 27

Since the liability is larger than the FMV, you would take use the liability amount and subtract the basis to get the recognized gain.

Typically you take the FMV - Basis, but not if the liability is larger than the FMV.

So the answer here is 60 (90-30)

Question 28

What taxes (state or federal) are deductible for an individual who is a cash basis taxpayer?

Answer 28

State and local income taxes withheld from a cash-basis taxpayer are deductible in the year withheld.
Estimated tax liability paid in the current year is also deductible for state taxes.

Federal income tax withheld is not deductible in calculating federal income tax.
Any current year state and local income tax paid in the following year is not deductible until paid because she is a cash-basis taxpayer.

Question 29

Which types of gifts qualify for unlimited exclusion from the limitation of $15,000?

Answer 29

Every transfer of money or property, whether real or personal, tangible or intangible, for less than adequate or full consideration is a gift. There are four items that qualify for unlimited exclusion from gift tax: (1) payments made directly to an educational institution for a donee’s tuition (not required to be reported on a gift tax return), (2) payments made directly to a health care provider for medical care (not required to be reported on a gift tax return), (3) charitable gifts (may be required to be reported on a gift tax return), and (4) marital transfers (may be required to be reported on a gift tax return).

Question 30

What amount is dividend income in a situation where cash and property has been distributed?

Answer 30

A shareholder recognizes dividend income to the extent of cash received plus the FAIR MARKET VALUE of noncash property received at the date of distribution (provided the corporation’s earnings and profits at the time of the distribution are at least equal to the amount of the distribution).