Final review and SE Flashcards
Withdrawals or distributions are not a taxable event for partners and will only __________basis
*Just a simple handshake can form GENERAL partnership
RUPA
both the partnership assets as well as the assets of the general partners are subject to creditor attachment to satisfy liabilities of the partnership.
decrease
IRA Phase out limits
- Traditional Deductible IRA =
Single $77000-$87000
MFJ =$123,000-143,000
No participating spouse - MFJ = 230,000 - 240,000
- Roth = Single 146,000 -161,000
MFJ = 230,000 - 240,000
Syndication costs e.g. offering costs is not amortized
not deductible
Tax exempt
501(c) Organizations
Religious
CHaritable
Scientific
Testing for public safety
Literary
Educational
Prevention of cruelty/Animals
Tax exempt org qualifies as publicly supported if _____________
At least 1/3rd from general public and govt units
When a C Corporation comes out of bankruptcy, it can have several significant effects on its assets, transactions, and financial position. Understanding these effects is important for the REG CPA exam, particularly in relation to the tax implications and accounting treatment. Here are some key points regarding the effects on assets and transactions:
- Asset Revaluation
Fresh Start Accounting: Under the “fresh start” accounting rules (typically for companies emerging from Chapter 11 bankruptcy), a C Corporation may have to revalue its assets and liabilities. This means that the corporation will adjust the book value of its assets to their fair market value (FMV) as of the bankruptcy emergence date.
Impairment of Assets: Any impairment in the value of assets during bankruptcy may be recognized upon exit. This could involve reducing the carrying value of property, plant, equipment, and intangible assets to reflect their market value.
- Debt Cancellation and Debt Restructuring
Cancellation of Debt (COD) Income: When a C corporation exits bankruptcy, it often involves the cancellation or restructuring of debt. Debt forgiveness may result in Cancellation of Debt (COD) income, which is generally taxable. However, under Section 108 of the Internal Revenue Code, COD income may be excluded from taxation if the corporation is in bankruptcy or is insolvent.
Tax Attribute Reduction: If COD income is excluded under Section 108, the corporation may need to reduce certain tax attributes (e.g., net operating losses, tax credits, and capital losses) to offset the COD income exclusion. This can have an impact on future tax filings. - Tax Losses and Carryforwards
Net Operating Losses (NOLs): A C corporation emerging from bankruptcy may still have the ability to carry forward losses to offset future taxable income, subject to certain limitations. However, there are special rules for the treatment of NOLs when a company undergoes significant ownership changes under Section 382 of the Internal Revenue Code.
Section 382 Limitations: If a change in ownership occurs during or after bankruptcy, Section 382 imposes limits on the use of NOLs going forward. These limitations can significantly reduce the ability to offset future taxable income. - Ownership Changes
Change of Control and Tax Consequences: Emerging from bankruptcy may involve a change of control or a shift in the ownership structure. If this happens, the tax rules governing corporate ownership changes under Section 382 could restrict the ability to utilize pre-bankruptcy tax attributes like NOLs and tax credits.
Debt to Equity Swaps: Often, creditors may convert their debt into equity as part of the bankruptcy exit plan. This transaction has several effects:
Equity Issuance: The issuance of new shares may dilute existing shareholders, and this could trigger changes in the ownership structure.
Debt to Equity Conversion: This can result in a capital contribution, which may affect the balance sheet and the corporation’s ability to utilize certain tax benefits. - New Financing and Transactions
New Debt Issuance: Upon emerging from bankruptcy, the company might need to raise new capital through issuing debt or equity. This new financing could be used to fund operations, pay creditors, or satisfy other bankruptcy-related obligations. The issuance of new debt could lead to interest expense deductions, but these would be subject to limitations in the post-bankruptcy period.
Impact on Contracts and Agreements: The company may renegotiate contracts and agreements with suppliers, customers, and employees. The bankruptcy exit plan could also involve restructuring or canceling certain agreements. These changes will need to be reflected in the financial statements.
- Changes in Capital Structure
Increased Equity Base: If the company converts debt into equity, it may result in a significantly stronger equity base, although the pre-existing shareholders may see a dilution of their ownership.
Debt Covenants: New debt agreements may include covenants that restrict the corporation’s actions (e.g., limitations on further debt issuance or dividend payments). These restrictions could impact future financial decisions and transactions. - Accounting for Post-Bankruptcy Transactions
Income Statement Impact: Transactions associated with emerging from bankruptcy, such as debt forgiveness, asset revaluations, and gains from debt discharge, will impact the income statement. These may lead to nonrecurring gains or losses, which need to be disclosed in the financial statements.
Tax Adjustments: Adjustments to tax attributes and NOLs, as well as potential exclusions of COD income, must be reflected in the corporation’s tax filings. The company will need to assess the impact on its tax liability and report any required changes. - Disclosures in Financial Statements
Disclosure Requirements: The company will need to provide detailed disclosures in its financial statements regarding the bankruptcy proceedings, including the effects on assets, liabilities, and equity. These disclosures may include the nature of the bankruptcy, the restructuring plan, and the financial effects on the company.
Post-Bankruptcy Reporting: After emerging from bankruptcy, the company must continue to provide updates on its financial position, including the treatment of any debt restructuring, new financing, and changes to the balance sheet.
BECKER - S CORP from Inception
A corporation that has always been an S corporation may have both “passive income” and “nonpassive income.”
Shareholders of an S corporation must be individuals, estates (including a bankruptcy estate), a voting trust, or a grantor trust.
CHatGPT
When an S Corporation (S Corp) emerges from bankruptcy, there are several key tax and accounting implications that can affect its assets, transactions, and overall financial situation. The effects on an S Corp’s assets and transactions when it comes out of bankruptcy are similar in some ways to those of a C Corporation, but there are some important differences, especially in terms of taxation. Below are the main points to consider for the REG CPA exam:
- Asset Revaluation (Fresh Start Accounting)
Fresh Start Accounting: Similar to a C Corporation, an S Corp emerging from bankruptcy might need to apply fresh start accounting, where the assets are revalued to their fair market value (FMV). However, unlike C Corporations, the S Corp’s tax treatment may differ due to the pass-through nature of S Corps.
Impairment of Assets: The S Corp will need to assess whether any of its assets (such as property, equipment, or intangible assets) are impaired. If so, the assets may be written down to reflect their market value as part of the bankruptcy exit plan. - Debt Cancellation and Debt Restructuring
Cancellation of Debt (COD) Income: A significant aspect of an S Corp emerging from bankruptcy is the potential for Cancellation of Debt (COD) income. If debt is forgiven or restructured as part of the bankruptcy, the S Corp might recognize COD income.
Pass-Through Taxation: Since an S Corp is a pass-through entity, the COD income is passed through to the shareholders, who must report it on their individual returns. This is different from a C Corporation, where the corporation itself pays the tax on COD income.
Exclusion of COD Income: Under Section 108, COD income may be excluded from taxation if the S Corp is in bankruptcy or is insolvent. However, this exclusion may trigger a reduction in the S Corp’s tax attributes (such as net operating losses (NOLs), capital losses, or tax credits) similar to what happens with a C Corporation.
Tax Attribute Reduction: If COD income is excluded under Section 108, the S Corp must reduce certain tax attributes to offset the COD income exclusion. This includes reducing the shareholders’ basis in S Corp stock and possibly reducing carryforwards of NOLs and other credits, which could affect future tax filings for the S Corp and its shareholders. - Changes in Ownership and Losses
Losses and Carryforwards: S Corps may have significant NOLs or other tax attributes (such as credits) before bankruptcy. These NOLs may still be used to offset future income, but there are some key considerations:
Shareholder Basis: For an S Corp, losses are passed through to shareholders based on their stock basis. If the debt is canceled or restructured, it may affect the shareholders’ stock basis. If the stock basis is insufficient to absorb the loss, the shareholder cannot deduct the full loss.
Section 108 Considerations: As with C Corporations, Section 108’s exclusion of COD income may require reductions in tax attributes like NOLs. However, the application of these reductions differs because the tax treatment of S Corps is tied to the individual shareholders’ tax returns.
Impact on NOL Carryforwards: The NOL carryforwards that the S Corp had prior to bankruptcy may be subject to restrictions after the bankruptcy exit, especially if there is a significant change in the ownership structure of the S Corp. Under Section 382, if there is a change of ownership, the S Corp may face limitations on its ability to use pre-bankruptcy NOLs to offset future income. However, the rules for S Corps and NOL carryforwards can be complex, and it’s important to consider the specific ownership changes and related tax consequences.
- Ownership Changes
Shareholder Changes: Like a C Corporation, an S Corp may undergo a change in ownership when emerging from bankruptcy. This could happen if creditors convert debt into equity or if new shareholders are introduced. A change in ownership can impact the ability of the S Corp to utilize pre-bankruptcy tax attributes such as NOLs, as well as potentially subject shareholders to new tax rules.
Section 382 Limitations: If the bankruptcy leads to a change in control (usually defined as a 50% change in ownership), the S Corp could be subject to Section 382 limitations, which limit the amount of NOLs and other tax attributes that can be used after an ownership change. These limitations apply to S Corps just as they do to C Corps but affect the individual shareholders’ ability to use the NOLs.
Debt-for-Equity Transactions: In bankruptcy, creditors may agree to exchange their debt for equity in the company. This process of “debt-for-equity swap” can significantly alter the ownership structure of the S Corp. The IRS treats these exchanges as taxable events, which can have significant tax implications for both the S Corp and the shareholders, particularly in terms of the tax treatment of the cancellation of debt and changes in stock basis.
- New Financing and Transactions
New Debt or Equity Issuance: After emerging from bankruptcy, the S Corp may need to raise capital through new debt or equity financing. This new financing may provide the company with working capital to continue operations or pay off remaining creditors.
If new debt is issued, the S Corp can typically deduct interest payments on this debt as an expense, reducing taxable income.
If new equity is issued, this will affect the S Corp’s ownership structure and the shareholders’ basis in their stock.
Post-Bankruptcy Transactions: Transactions following bankruptcy, such as sales of assets or new contracts, will be accounted for as part of the S Corp’s financial operations. These transactions will need to be carefully monitored for tax implications, including potential depreciation or amortization deductions on newly acquired assets.
- Tax Impact on Shareholders
Pass-Through Taxation: The primary difference between S Corps and C Corps is the pass-through taxation of S Corps. When the S Corp comes out of bankruptcy, any COD income, gains from debt forgiveness, or other tax items are passed through to the shareholders. This could result in an unexpected tax liability for shareholders, even if they don’t receive any cash or other distributions from the S Corp.
Basis Adjustments: Shareholders’ basis in their S Corp stock will be adjusted to reflect debt cancellation, new capital infusions, or other changes in the financial structure. If the stock basis is low or zero, shareholders may not be able to take full advantage of losses or credits. - Disclosures in Financial Statements
Bankruptcy Disclosures: An S Corp that is emerging from bankruptcy must provide detailed disclosures about the bankruptcy proceedings, the impact on its financial position, and the specific effects on assets, liabilities, and equity. These disclosures should also include any restructuring efforts and significant changes to the corporation’s operations or financial situation.
Post-Bankruptcy Reporting: The S Corp will need to account for any changes in assets, liabilities, and equity, and disclose the financial effects of the bankruptcy in its financial statements. This includes detailing how debt cancellation, asset revaluation, and ownership changes have affected its financial position.
CONSTRUCTIVE FRAUD does not require intent . It only requires reckless disregrad for truth or falsity.
ACTUAL FRAUD require intent in making a material mstatement
Ranking of unsecured debt
- SAGWEGCTI
S-Support Obligations
A-Administrative claims
G-Gap claims
W-wages for employees within 6 months
E- Employee benefits within 6 months
G-Grain farmers and fishermen-$6,725
C-COnsumer Deposits - $3,025
T-Tax claims
I-Injuries from DWI/DUI (Driving under influence or Driving while Intoxicated)
FUTA - FEDERAL UNEMPLOYMENT TAX ACT
Self-employed persons do not pay into FUTA. (coz you can’t fire yourself)
Employers who meet a minimum quarterly payroll OR who employ at least 1 person for 20 weeks in a year must participate.
Employer paid $1500 in wages in a quarter.
Employer payments into FUTA are deductible as an ordinary business expense.
If an Employer’s claim rate is LOW, the employer may get a DEDUCTION/CREDIT for state unemployment tax.
The liability is the responsibility of the employer, not the employees.
EMPLOYEE DOES NOT PAY, employee cannot deduct.
RESTATEMENT RULE
Rule followed by a majority of juris providing if a CPA negligently performs an audit, the CPA is liable to the client and to any foreseeable class of persons whom CPA knows will be relying on the audit.
Workers’ compensation laws - TAX FREE or TAX EXEMPT or NOT TAXABLE
- Workers compensation programs are STATE-run, designed to enable employees to recover for accident that took place while on the job. EMployers pay for it by purchasing insurance from the state or from a private carrier.
- An employee CANNOT recover for injuries if the employee was intoxicated, fighting or self-inflicted wounds.
- Premiums are odrinary business expenses deductible by the employer, not the employee.
4.Employee can collect workerss comp even if he was negligent or grossly negligent or assumed the risk.
LLC
Unless agreed otherwise, all LLC members have no liability beyond their investment. Thus, an LLC can be formed with limited liability for all members, unlike a limited partnership.
Choice “A” is incorrect. Unless otherwise agreed, an LLC is taxed like a partnership, not a corporation.
Choice “B” is incorrect. The articles of organization are filed with the state, not the operating agreement.
Choice “C” is incorrect. Virtually every state permits a one person LLC.
LIMITED PARTNERSHIP AGREEMENT - A general partner may be a limited partner in the same partnership at the same time.
Choice “A” is incorrect. Changes in limited partners do not cause dissolution.
Choice “B” is incorrect. To form a limited partnership, there must be at least one general partner and one limited partner. General partners have unlimited liability.
Choice “D” is incorrect. The assignee does not become a substituted partner without the unanimous consent of all general and limited partners.
GENERAL PARTNERSHIP
UNANIMOUS consent is required:
- Admitting new partners
- Confessing a judgement (admitting liability ina lawsuit)
- Making a fundamental change in the partnership business.
A partner can impose contract liability on the partnership and fellow partners when acting with apparent authority. It would be reasonable for a third party to believe that a partner could renew an existing lease.
Choice “A” is incorrect. A person is liable for his own torts and can be sued for them, regardless of whether the torts were committed on behalf of some business entity.
Choice “B” is incorrect. Apparent authority depends on how things appear to third parties. It does not depend on a written partnership agreement.
Choice “D” is incorrect because a partner has no apparent authority to admit liability in a lawsuit.
Partnership Hold Harmless - Internal matter only (amongst the partners)
A HOLD HARMLESS agreement does not prevent creditors from holding an outgoing partner liable.
- Allows a partner to recover from other partners any amounts he is required to pay to creditors
- Does not change creditor rights (internal only)
Stockholders have the right to
- elect directors
- Vote on fundamental changes (DAMS)
D - Dissolutions
A-Amending the articles of incorporation
M-Mergers, Consolidations and compulsory share exchanges
S - Sale of substantially all of the corp’
s assets
Partners - Guaranteed payments + health insurance premiums (add together as guaranteed payment) include in their ___________
K-1 (all items should be reported as positive except for losses)
GP = Positiive (GP includes health insurance premium as well)
*withdrawals from partnership by partners to be reported as POSITIVE number for DISTRIBUTIONS
Uncollected rents are___________
NOT deductible on Sch E
***Only income in lieu of rents is taxable
DIVIDENDS from
1. Life insurance policy__________
- Non-taxable
Meals
Only 50% deductible
SE tax - not deductible on SCH C
SCH C = Zero
SE Tax is calc on 92.35% of SE income
SE income e.g. 14000
SE tax = 1400092.35%15.3%
$168,600 limit
SE tax on
12.4% FICA or SS tax
2.9% Medicare tax
ADJ on Form 1040
- It’s an adjustment (Above the line) on Form 1040 for 50% SE tax
- SE health insurance is fully deductible as an above the line deduction on Form 1040 as an adjustment. SE health insurance premiums are 100% FULLY DEDCUTIBLE as an above the line adjustment to arrive at AGI for the SE taxpayer, their spouse and their children (SELF AND FAMILY = FULLY DEDUCTIBLE FOR SE)
6.2% FICA
1.45% Medicare tax
SCH E , in case of cash basis taxpayers uncollected rents _______________
cannot be deducted as uncollected rents were never included in income (for cash basis TPs)
- 179 Qualified propertY expense DEDUCTION means NO REAL PROPERTY (not allowed for real property)
- BONUS DEPRECIATION - not allowed for real property
179 DEDUCTION cannot create a loss, therefore cannot go beyond taxable income. Remaining will be carried forward.
It appears taxable income limitation will only apply to MACRS