Federal Taxation of entities Flashcards
Temporary Differences
Temporary Differences arise because of the differences in timing and recogition between book and tax
They are temporary because in th end they match up.
some common temporary differences would be depreciation, bad debt expense, rental income and warranty expesense.
Temporary differences are tracked on M-3
Permanent Differences
Permanent differences are reported on sch M-3. Permanent differences are will never be reversed even with time.
Municipal bonds and any tax-exempt interest is a permanent difference that will be taken out of taxable income.
Fines, Penalties and fees are not deductible.
Life insurance premiums on behalf of officers are also not deductable.
C Corp Estimated tax calc
For C corp to avoid underpayment penalties, they must make estimated tax payments based on the lesser of
100% of the previous year tax liability or
100% of the current year tax liability
if the corp is considered a Large corporation then they have to pay 100% of the current year tax liability
C corp can also choose to take foreign income taxes paid and use them as a deduction or the foreign income tax credit.
Personal Holdings companies
C corporation is considered a Personal Holding Company if
1) More than 50% of it is owned by 5 individuals or less
AND
2) 60% or more of it’s gross income is passive (Interest, dividends, non-active, rent, etc)
Any net income that is not distributed as dividends to it’s shareholders is taxed at an additional 20%
That gives an incentive to take advantage of the dividends distributed deduction to avoid this additional tax liability
Net Operating Loss and Net capital Loss
Net operating losses can now only be carried forward indefinitely, and can only offset up to 80% of taxable income.
They used to be carries back 2 years forward 20 years,
During 2018, 2019, and 2020 NOLs could be carried back 5 years and the 80% rule was lifted.
NET Capital losses can only offset Capital Gains and are carried back 3 years or Forward 5 years for C Crop.
S Corporation Status Termination and Revocation
S Corporation status, once elected has to maintain certain qualifications or else the status is terminated. The S corporation Must have 100 valid shareholders or less, have one class of stock, and all shareholders have to elect the status.
S corporation status can voluntarily be revoked if more than 50% of the shareholders elect to do so.
Partnerships, C corporation, non residents, and some trusts CANNOT be shareholders in an S Corp.
IF an S corporation was originally a C corporation and it has passive income of 25% of greater of total earnings for the past three consecutive years, the S status can be terminated.
S Corporation Ordinary Income and Separately Stated Items
S Corporation are considered Pass Through Entitles, these means that income expenses are passed through to the shareholders to be taxed.
Certain income and expenses are added together to get total ordinary income(loss) and this total amount if passed through to each shareholder based on shares held.
Other items called separately stated items are not included in ordinary income and are each separately listed on the Shareholder’s K-1 this is because certain items are taxed differently or have different consequences so they need to be separated from the ordinary income. these typically include.
1) Passive income (rental income, int income, dividends, royalties)
2) Capital gains and losses
3) Charitable contribution
4) Special Depreciation Deductions (like the Section 179 Deduction)
S Corporation AAA
The Accumulated Adj account is essentially to keep track of earnings and Profits through the years to know what income has already been taxed to shareholders so they are not taxed again.
Things that increases AAA would be Ordinary business income and separately stated items.
Things that decreases AAA would be Ordinary Business Loss Separately stated losses and deductions, nondeductible expenses and distributions.
Remember distributions are the last part of AAA calculation each year and they cannot reduce it below zero )though businesses losses can reduce it below zero)
Tax exempt income and the expenses related to it do not affect AAA
S Corporation Debt Basis and Stock Basis
Debt Basis is Different from Stock Basis.
Debt Basis is essentially when a Shareholder loans money to the S corporation. It is decreased when the S corporation makes payment on the debt.
Stock Basis is more typically what we think of it’s when a shareholder buys in to the corporation. It is increased and decreased by normal business activities of the S corporation and also distributions.
Debt Basis and Stock basis together make up tax basis. If distributions to a shareholder are greater than their tax basis, then the amount that was greater can be taxed as a Capital Gain.
Partnership Ordinary Income and Separately Stated Items
Partnerships, just like S corporation, Pass through income and losses to the partners.
Partnership Ordinary Income is basically just normal business operations (Revenue, expenses, depreciation etc)
However just like with S corporations’ certain items are considered separately sated items and so are not included in the calculation of ordinary income(loss).
These would include things like interest or dividend income, Capital Gains or losses, Charitable contributions etc.
Unlike S corporations, Partnerships have something called guaranteed payments.
These are amounts paid to partners, regardless of the income of the partnership. in the context of the partnership itself, these guaranteed payments are deducted from ordinary income.
Calculating Partner Basis
A partner’s basis or outside basis in a partnership is affected by multiple things.
It increases or decreases based off the parner’s share of income(loss).
Seperately stated items contribuitons and distributions, tax exempt income and non dedcutible expenses. and last by the partner’s share of liabilites.
Technically everything before the share of liabilities is the partner’s capital account and including the liabilities is the whole tax basis.
If a partner contributes an asset but the partnership takes on a liability that comes with the asset the amount of the liability taken on by the partnership reduces the partner’s basis gained from the asset.
