Exam Cheat Sheet Flashcards
What constitutes as “Qualified Business Income” (QBI)?
QBI is defined as the ordinary income less ordinary deductions a taxpayer earns from a “qualified trade or business” conducted in the United States by the taxpayer.
What is a “Qualified Trade or Business”?
Includes any trade or business other than providing services as an employee.
How is a QBI Deduction (generally) claimed?
In general, the deduction for qualified business income is the lesser of:
• 20% of qualified business income (QBI), or
• 20% of modified taxable income.
What is the “Corporate Tax Rate”?
21%
————————– BACKGROUND ——————————–
Ted, a married sole proprietor, has $210,000 of qualified business income and a modified taxable income of $250,000.
- ————————- QUESTION ——————————–
(1) What is his QBI deduction?
(2) What is his final taxable income?
QBI deduction is the lesser of:
[A] 20% of qualified business income = $210,000 x 20% = $42,000
AND
[B] 20% of modified taxable income = $250,000 x 20% = $50,000
——————————— THEREFORE——————————
(1) QBI Deduction is $42,000
————————– Final Taxable Income————————–(2) Final taxable income is:
• $250,000 modified taxable income - $42,000 QBI deduction = $208,000
————————– BACKGROUND ——————————–
(A) Higgins, a married sole proprietor, has one employee, who he paid $160,000 this year, and the business has no significant qualified property.
(B) Qualified business income of $500,000
(C) Modified taxable income of $600,000.
- ————————- QUESTION ——————————–
(1) What is his QBI deduction?
(2) What is his taxable income?
QBI deduction is the lesser of:
[A] 20% of qualified business income = $500,000 x 20% = $100,000
[B] 50% of W2 Wages = 50% of $160,000 = $80,000
AND CANNOT EXCEED:
[C] 20% of modified taxable income = $600,000 x 20% = $120,000
——————————— THEREFORE—————————-
(1) QBI Deduction is $80,000
————————– Final Taxable Income————————–(2) Final taxable income is:
• $600,000 modified taxable income - $80,000 QBI deduction = $520,000
————————– BACKGROUND ——————————–
Rupert, a married sole proprietor:
(A) Qualified Business Income of $400,000;
(B) Modified Taxable Income of $500,000;
(C) W-2 wages = $150,000;
(D) Property worth $600k (land value is $100k)
- ————————- QUESTION ——————————–
(1) What is his QBI deduction?
(2) What is his taxable income?
QBI deduction is the lesser of:
[A] 20% of qualified business income = $500,000 x 20% = $100,000
VS. The GREATER OF:
[B] 50% of W2 Wages = 50% of $150,000 = $75,000
[C] 25% of W2 Wages + 2.5% of Depreciable Property
= 25% of $150,000 + 2.5% of $500k = $50,000
AND CANNOT EXCEED:
[D] 20% of modified taxable income = $500,000 x 20% = $100,000
——————————— THEREFORE—————————-
(1) QBI Deduction is $75,000
————————– Final Taxable Income————————–(2) Final taxable income is:
• $500,000 modified taxable income - $75,000 QBI deduction = $475,000
Who can be partners in a partnership?
A “person” can be: • Individual. • Trust. • Estate. • Corporation. • Association. • Another partnership.
- —————-Partnerships vs. C corporations————
(1) How are partnership income taxed?
(2) How are C Corp’s income taxed?
(1) Partnership: No separate entity-level income; Income flows through to partners.
(2) C Corp: Corporate income tax applies.
- —————-Partnerships vs. C corporations————
(1) How are partnership distributions taxed?
(2) How are C Corp’s distributions taxed?
(1) Partnership:
Distributions generally not subject to a separate tax
(2) C Corp:
Distributions generally taxed as dividend income
- —————-Partnerships vs. C corporations————
(1) Describe partnership employment taxes
(2) Describe C Corp employment taxes
(1) Partnership:
Some allocations are subject to employment tax
(2) C Corp:
Compensation to employees always subject to payroll tax
- —————-Partnerships vs. C corporations————
(1) What is partnership liability like?
(2) What is C Corp liability like?
(1) Partnership:
Shareholder liability depends on type of partner but can be unlimited.
(2) C Corp:
Shareholder liability is limited.
- —————-Partnerships vs. C corporations————
(1) What is partnership formation like?
(2) What is C Corp formation like?
(1) Partnership:
Partnerships are easier and less expensive to form. Partners register the business with the state and obtain any required business licenses and permits.
(2) C Corp:
It’s more complicated and expensive to form a corporation. You’ll have many complex legal and tax requirements, as well as many administrative fees. You’ll file an Articles of Incorporation to form a corporation. You must also obtain the necessary licenses and permits. In most cases, corporation founders hire lawyers to help with the process due to the complexity.
- —————-Partnerships vs. C corporations————
(1) What is the partnership entity return form?
(2) What is the corporate return form?
(1) Partnership:
Form 1065
(2) C Corp:
Form 1120
- —————-Partnerships vs. C corporations————
(1) How do partnerships raise capital?
(2) How do c corps raise capital?
(1) Partnership:
Partner’s bringing in own money or collectively acquiring a loan.
(2) C Corp:
Equity capital may be raised by selling stock to investors
———————–Forming a Partnership———————
When a partner contributes capital or property, how is a gain or less recognized?
[1] As a general rule, NO GAIN OR LOSS IS RECOGNIZED by a partner or partnership on the contribution of money or property.
[2] Gain (loss) DEFERRED UNTIL TAXABLE DISPOSITION of property by the partnership or partnership interest by the partner.
When a partner contributes capital or property, what is the partnerships basis in the property?
The partnership takes a carryover basis in the contributed assets it receives (i.e., the partner’s basis in the asset carries over to become the partnership’s inside basis in the asset).
