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Entities Tax Flashcards

1
Q

How is shareholder basis calculated for a new interest in a Corporation?

A

Adjusted basis of property transferred + Gain recognized (if less than 80% ownership) - Boot received = Shareholder basis. If shareholders have 80% control after a property transfer, no taxable event occurs. If liabilities exceed basis on contributed property to a Corporation, a gain is recognized.

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2
Q

How is shareholder basis calculated for a TRANSFEROR of an interest in a Corporation?

A

Transferor’s basis
+ Gain recognized by shareholder
= Basis

OR

FMV of Corporate Interest
- Adjusted basis of property
= Gain

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3
Q

What basis do shareholders and Corporations use for property?

A

They both use ADJUSTED BASIS, NOT FMV of property.

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4
Q

Describe how loss is taken on Section 1244 small business Corporation stock?

A

A loss on worthless stock is an ordinary loss.

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5
Q

What are the requirements for taking an ordinary loss on Section 1244 small business Corporation stock?

A

Taxpayer must be original stock owner, and either an individual or partnership

$50k (single) or $100k (MFJ) limit - remainder is a capital loss

Must have been issued in exchange for money or property (not exchanged for services)

Shareholder equity must not be in excess of $1 million

Both common and preferred stock is allowed

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6
Q

What are the basic rules for filing a form 1120?

A

Return is due regardless of income level

Return is due 3/15 if on a calendar year basis, or 2 1/2 months after end of fiscal year

An automatic six-month extension is available

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7
Q

When are Corporate federal tax estimated payments required, and how are they calculated?

A

Required if more than $500 in tax liability expected, or

100% current year liability

100% previous year liability

Note: If Corporation had more than $1 Million in revenue the previous year, the first estimated payment must be based on the previous year and the remainder based on the current year.

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8
Q

Describe the AMT calculation for C-Corporations

A 
Taxable Income
\+Tax Preference Items
\+/- Adjustments
= Pre-ACE
\+/- ACE Adjustments
= AMTI
- 40,000 Exemption
= Tax Base
x 20%
= Tentative Minimum Tax
- Regular Tax Liability
= AMT
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9
Q

What are the pre-ACE adjustments for C-Corporation tax AMT calculations?

A

Real Estate purchased between 1986 and 1999 using Straight Line Depreciation must depreciate over a useful life of 40 years

Personal Property - use 150% MACRS, not 200%

Construction must use % completion method

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10
Q

What are the ACE adjustments in the C-Corporation AMT tax calculation?

A

Municipal Bond Interest
Life Insurance Proceeds
70% Dividends Received Deduction
Organizational Expenditures must be capitalized, not amortized

Note: AMT paid gets carried forward indefinitely, but never carried back

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11
Q

When are C-Corporations exempt from AMT?

A

In year one

In year two, if year one gross receipts were less than $5 Million

In year three, if the average gross receipts for years 1 and 2 were less than $7.5 Million

In year four and beyond, if the average from the previous 3 years is less than $7.5 Million

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12
Q

How are gains and losses handled with respect to a Corporation’s transactions involving its own stock?

A

Corporations have no gain/(loss) from transactions involving their own stock, including Treasury Stock.

If Corporation gets property in exchange for stock, there is no gain/(loss) on the transaction.

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13
Q

How are Corporate organization costs handled?

A

Amortization of costs begin the month the Corporation commences business activity

If the Corporation doesn’t amortize organization costs in year one, they can never be amortized

Costs associated with offerings are neither deductible nor amortized

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14
Q

How are a C-Corporation’s deductible charitable contributions calculated?

A

Sales -COGS= Gross Profit
Gross Profit + Rent, Royalties, Gross Dividends, Capital Gains
=Total Income
Total Income - Deductions (No charitable contributions, Dividends
Received Deductions (DRD), or NOL Carrybacks allowed)
- NOL Carryforwards
=Taxable Income before charitable contributions, DRD, NOL Carrybacks
x 10%
=Deductible Charitable Contributions

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15
Q

How are excess charitable contributions treated in a C-Corporations?

A

Excess charitable contributions get carried forward 5 consecutive years (No Carryback)

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16
Q

When can a board of directors authorize charitable contributions for a tax year?

A

The Board of Directors can authorized charitable contributions up to 3/15 and have them count in the previous tax year

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17
Q

How is the dividends received deduction (DRD) calculated, and what are the limitations?

A

80% Interest = 100% DRD

20-79% = 80% DRD

less than 20% = 70% DRD

Only allowed if no consolidated return is filed. Qualified dividends from domestic Corporations only.

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18
Q

What is the Dividends Received Deduction (DRD) calculation when there is a loss from operations?

A

Only take DRD % x Taxable Income

Note: If DRD brings a loss situation, then you can take the full DRD

If Taxable Income remains after DRD, only a partial DRD (T.I.. x DRD %) is allowed

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19
Q

How are Corporate losses on a sale to a Corporation where a taxpayer owns a 50% or more interest handled in a C-Corporation?

A

A loss on a sale to a Corporation where taxpayer owns a 50% or more interest is disallowed

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20
Q

How are capital losses handled in a C-Corporation?

A

Capital Losses are deductible only to the extent of Capital Gains

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21
Q

How are net short term capital gains taxed in a C-Corporation?

A

Net Short Term Capital Gains are taxed at ordinary income rates

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22
Q

How are Corporate losses carried back/forward?

A

Corporations can carry back losses 3 years and carry forward losses 5 years as a Short Term Capital Loss

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23
Q

How are bad debt losses handled in a Corporation?

A

Bad debt losses are classified as ordinary

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24
Q

What is the casualty loss floor for a C-Corporation?

A

No floor on Corporate casualty loss like there is with an individual taxpayer

If destroyed, the loss is the property’s basis (minus proceeds)

Calculation: Adjusted basis - Proceeds from Insurance = Loss

If partially destroyed, take the lesser of FMV or adjusted basis reduction (minus proceeds)

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25
How are net operating losses handled in a C-Corporation?
If loss includes NOL Carryforward, reduce the loss (add back the amount) to get the loss without the Carryforward Then, carry back the NOL 2 years starting with the earliest year and reduce the taxable income there and then move to the most recent year Any leftover NOL = This year's NOL
26
How is investment interest expense handled in a C-Corporation?
Unlike individual taxation, investment interest expense is not limited to investment income. Investment interest on tax-free investments are NOT deductible.
27
What is the purpose of Schedule M-1 on a Corporate tax return? Which items are included?
Schedule M-1 reconciles book to tax income before Net Operating Loss/Dividend Received Deduction Includes permanent differences (such as tax-exempt interest and non-deductible expenses) and temporary differences (accelerated depreciated tax depreciation, straight-line, etc.)
28
What is the purpose of Schedule M-2 on a Corporate tax return? How is it calculated?
Reconciles beginning to ending retained earnings Beginning Unappropriated Retained Earnings + Net Income + Other Increases - Dividends paid - Other decreases = Ending Unappropriated Retained Earnings
29
What is the purpose of Schedule M-3 on a Corporate tax return?
Like M1, but for Corporations with $10M+ in assets
30
How are affiliated (80%) Corporation tax returns handled?
Consolidation election is binding going forward Dividends between them are eliminated, Advantage- Gains are deferred, Disadvantage- losses are deferred. One AMT exemption One accumulated earnings tax allowed Note: In order to consolidate, the parent must have 80% voting power and own 80% of the stock value
31
How are Corporate distributions to shareholders handled?
Distribution is a dividend to the extent of current accumulated earnings and profits (ordinary income) Then, remainder (if any) is a return of basis. Then, add'l remainder (if any) is a Capital Gain Distribution amount = FMV of Property + Cash - Liability Assumed Shareholder basis = FMV of Property + Cash received (basis not reduced by the attached liability)
32
What is the order of treatment in a Corporation's distribution to a shareholder?
1. Distribution is a dividend to the extent of current and accumulated earnings and profits 2. Shareholder basis is then exhausted 3. Remainder, if any, is a Capital Gain
33
What is the basic calculation for accumulated earnings and profits in a Corporation?
Beginning Accumulated Earnings and Profits + Net Income + Gain on Distribution (if not already in book income) - Distribution (but cannot create a deficit) - NOL of prior years = Ending Accumulated Earnings and Profits
34
What is the treatment of a gain in a complete Corporate liquidation?
If Capital Property, then Capital Gain If Non-Capital Property, then Ordinary Income Gain characterization is the same for both the Corporation and the shareholder
35
What is the treatment of a loss in a complete Corporate liquidation?
Corporation: Depends on if property is capital in nature, otherwise ordinary loss Individual: capital loss only
36
What is the treatment of the liquidation of a subsidiary?
No G/L to parent company
37
What is a consent dividend? How is it treated?
Consented by the Board of Directors but not yet paid Treat as if distributed by the end of the year
38
Describe the requirements for a personal holding company.
No banks or financial institutions can be PHCs 5 or fewer individuals own more than 50% of the stock 60% of the PHC's income must be from passive means PHC tax is self-assessing - 20% tax rate on undistributed PHC Income
39
How is Corporate accumulated earnings tax (AET) different from PHC taxation?
Not Self-Assessing like a PHC
40
How is the accumulated earnings credit calculated for a Corporation?
Take greater of $250,000 ($150,000 for Service Corps) or the legitimate balance based on future needs (i.e. purchasing a building)
41
What are the requirements for holding S-Corporation status?
Only individuals, estates and trusts can be shareholders Domestic only, no international S-corps or foreign shareholders Up to 100 shareholders allowed, and only one class of stock allowed Calendar tax year only
42
How is an S-Corporation election made?
Election for S Corp status must be made by 3/15 and counts as being an S Corp since the beginning of the year To make election, 100% of the shareholders must consent
43
How is an S-Corporation terminated?
To terminate election, 50% of the shareholders must consent No S Corp election allowed for 5 years after termination S Corp termination effective immediately following an act that terminates status
44
What items are not included in calculating an S-Corporation's ordinary income?
These items are included on Schedule K, not in ordinary income: ``` Foreign Taxes paid deduction No Investment Interest expense Section 179 Deduction 1231 Gain or Loss Charitable Contributions Portfolio Income (dividends or interest) ```
45
How is S-Corporation shareholder basis calculated?
Beginning Basis +Share of Income Items (including non-taxable income!) -Distributions (cash or property) -Non-deductible expenses -Ordinary Losses (but don't take income below zero) = Ending basis
46
What is the formula for an S-Corp Built-in Gains Tax?
FMV of Assets @ S-Corp Election Date - Adjust. Basis of Assets = Built-in Gain x 35% Corporate Rate
47
How is Gift taxation different from Estate taxation?
Property transferred while taxpayer is living
48
What is the annual exclusion amount for a taxpayer's Gift taxation? What is required to get the exclusion?
$14,000 per year per spouse to each individual In order to get the exclusion, the recipient must immediately acquire a present interest in the property and get unrestricted access to the property and all of its benefits
49
If a Gift is an annuity, what value is used for the Gift?
If the Gift is an annuity, use Present Value to determine the gross Gift
50
What is the basic Gift tax calculation?
Gross Gifts - 1/2 of Gifts (treated as given by spouse) - Total # of donees x $14,000 exclusion = Taxable Gift
51
How is a Gift taxed if a recipient gains a future ownership in the Gifted property?
Recipient must gain ownership and all rights to property to get the annual exclusion. If recipient merely gains a future ownership, then the present value of the Gift is 100% taxable to donor and cannot exclude from Gift tax calc
52
What are the deductions for Gift tax, besides the annual exclusion?
Tuition and medical expenses paid directly to the provider organization (note: NOT books or dorm fees) Political contributions Charitable Gifts Unlimited Gifts to spouse
53
What is the basis of Gifted property for the recipient?
If a loss on sale, basis is FMV on the date of the Gift If a gain on sale, basis is same as donor's basis No G/L if donor basis is less than sales price, and sales price is less than FMV @ Gift date
54
How/when are Gift tax returns filed?
Calendar-year basis only Due April 15
55
What are the basic characteristics of complex Trust?
Income distributions are optional Accumulation of income ok Charitable contributions ok Contributions using tax-exempt income are not deductible Allowed personal exemption of $100 Key Point: Distribution of Trust corpus (principal) ok
56
What are the basic characteristics of a Simple Trust?
Income distributions mandatory Accumulation of income disallowed No charitable contributions Distribution of Trust corpus DISALLOWED Allowed personal exemption of $300
57
How are Net Operating Losses handled in a Trust?
Trusts can have a Net Operating Loss Any unused NOL flows through to the beneficiaries
58
How are expenses and fees related to tax-exempt income handled in a Trust?
Expenses and fees from tax-exempt income are not deductible for either a Complex or Simple Trust
59
When is property transferred in an Estate?
After the death of the donor
60
What amount of a decedent's Estate is exempt from Estate Tax?
The First $5,430,000 is exempt with a 40% tax on amount above that
61
How are a decedent's medical expenses handled with respect to an Estate?
Medical expenses paid after death, but incurred within 1 year of death go on decedents personal tax return
62
How is an Estate's NOL handled?
Estates can have a Net Operating Loss Any unused NOL flows through to the beneficiaries
63
What does a gross Estate consist of?
Cash and Property FMV at death, or alternate valuation.
64
What is joint tenancy with respect to an Estate? How is it calculated?
When two non-spouses jointly own property FMV at death X % Ownership = Amount in Estate
65
What is tenancy by entirety?
1/2 of marital assets go to deceased spouses Estate
66
What is tenancy in common in an Estate?
A, B, and C own property If A dies, FMV of As share goes to heirs
67
How is Estate tax handled with respect to a beneficiary?
Property received through inheritance not income to recipient Property value is FMV at date of death or 6 months later If property is sold prior to 6 month date and the alternative date is used, FMV at date of sale is used to value property Basis in property automatically assumes LT holding period
68
What is distributable net income (DNI)?
DNI = Taxable Income Expenses (from income production) Trust beneficiaries only pay tax if earnings are distributed Estate beneficiaries pay tax on DNI, regardless if distributed
69
When must a tax exempt organization file a 990-T for Unrelated Business Income?
If a tax exempt organization has more than $1,000 of UBI, it must file a Form 990-T
70
What are the requirements for a 501(c)3 organization?
Organized and Operated exclusively for exempt purposes No earnings can benefit an individual or private shareholder Cant attempt to influence legislation as a major part of its activities Cant campaign politically
71
True or false? Partnerships are a taxable entity.
False. Income and expenses flow through to the partner to be taxed via a Form K-1.
72
When exchanging property for a partnership interest; how is gain or loss recognized?
Neither gain nor loss is recognized in an exchange of property for a partnership interest. It is a non-taxable event.
73
What is a partner's basis in partnership property?
Initial basis for partnership property is the basis of the property that was contributed or exchanged for the partnership interest.
74
When services are exchanged for a partnership interest; how is this treated for tax purposes?
It is a taxable event; treated the same as compensation for the services. The taxable income equals the % of partnership interest received times the FMV of the partnership. i.e. the FMV of the interest received is the taxable income for the service provider.
75
What is the partner's basis in a partnership when they provide a service in exchange for the interest?
The basis in the partnership interest is the amount of taxable service revenue provided by service provider.
76
What is the holding period of an asset that has been contributed to a partnership?
The partnership inherits the holding period of the asset contributed. The exception of inventory- the holding period begins when contributed.
77
What is the tax treatment of startup costs for a partnership?
Tax treatment is the same as that of an individual taxpayer. However syndication fees are not deductible or amortized.
78
What deductions are subtracted from gross revenues to arrive at partnership income?
COGS Wages - except for partners Guaranteed payments to partners Business bad debt (if on accrual basis) Interest paid Depreciation (except section 179) Amortization (Startup costs; goodwill; etc)
79
How are partnership losses taken on an individual's return?
Losses cannot be taken beyond a partner's basis in the partnership Losses in excess of basis are carried forward until basis is available
80
When are guaranteed payments to a partner includable in taxable income?
They appear in partner's income during the year in which the partnership's fiscal year CLOSES.
81
How are partner benefits paid by the partnership treated?
Health insurance; life insurance and other benefits paid on behalf of the partner are treated as guaranteed payments and are includable as self-employment income.
82
How is net self-employment income from a partnership interest calculated?
Partner's % share of ordinary income from partner's K-1 + Guaranteed payments - Partner's % share of section 179 expense from K-1 = Self-employment income (subject to SE tax)
83
In general; what is a partner's basis in partnership property purchased?
Partner's basis is basis of goods exchanged or for services exchanged is FMV of partnership interest received. If purchased; purchase price less liabilities incurred = basis. For a gifted interest in a partnership; gift basis rules apply.
84
Which items are not deductible on Schedule K of form 1065?
Foreign tax paid Investment interest expense Section 179 expense Charitable contributions Mnemonic: IFC179
85
Which items are not counted as income on Schedule K of form 1065?
Passive Income Portfolio Income 1231 Gain or Loss Mnemonic: PP1231
86
How is adjusted partnership basis calculated?
Beginning partnership basis + Capital contributions + Share of ordinary partnership income + Capital gains + Tax-exempt partnership income (DON'T FORGET!) = Ending partnership basis
87
What items DECREASE partnership basis?
Money distributed Adjusted basis of property distributed Partners's share of ordinary losses Partnership is relieved of a liability (considered a distribution)
88
What INCREASES partnership basis?
Partnership getting a loan Capital contributions Ordinary income Capital gains Tax-exempt income
89
How do liabilities either INCURRED or RELIEVED affect a partner's basis in a partnership?
If the partnership gets a loan; this INCREASES basis. If partnership is relieved of a liability; this DECREASES basis.
90
How do guaranteed payments affect partnership basis?
They do not affect basis- they are already included in ordinary income; which affects basis.
91
What is the order in which basis is adjusted in a partnership?
1. Increase basis (all items; including tax-exempt income) 2. Distributions 3. Losses (limited to basis)
92
How is the taxable year of a partnership determined?
It must be the same as 50% of the partners and use the same tax year for 3 years once adopted.
93
How does death of a partner affect the partnership's taxable year?
The taxable year closes with respect to the decedent partner's interest ONLY.
94
When CAN'T a partnership use cash basis?
1. They have inventories 2. Partnership is a tax shelter 3. Has a corporate partner 4. Gross receipts are $5 Million or more Exception: If gross receipts are $1 Million or LESS and Partnership maintains inventories; Cash method is ok.
95
When does a partnership terminate?
When there is less than 2 partners (only one partner) When 50% of the partnership interests sell within a 12 month period- partnership IMMEDIATELY terminates.
96
How is gain or loss on sale of a partnership interest calculated?
Gain or Loss = Amount realized on sale - basis in partnership interest
97
What is the new basis of a partnership interest sold?
Basis = Capital account + Liabilities assumed
98
How is the sale of non-capital partnership property treated?
As ordinary gain/loss. Items that fall into non-capital category would be unrealized receivables; appreciated inventory; and similar.
99
How is a partner's share of an ordinary gain calculated?
FMV of Assets (non-capital) - Adjusted basis of assets = Ordinary gain x Partner's % interest = Partner's share of gain Note: No gain or loss will be recognized by a partnership upon distribution of property.
100
What is the order of basis reductions for distributions from a partnership?
1. Money distributed 2. Adjusted basis of unrealized receivables and inventory 3. Adjusted basis of other property Note: Only MONEY distributions will trigger a gain in a partnership distribution.
101
When can a LOSS occur in a partnership distribution?
Only in a liquidating distribution.
102
What are the requirements for recognizing a gain in a partnership liquidating distribution?
1. Money was distributed 2. Unrealized receivables were distributed 3. Appreciated inventories were distributed Otherwise; no loss recognized.

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