Gleim 5 Flashcards
The private foundation status of an exempt organization will terminate if it
Becomes a public charity
Social club exemption rules
General public can account for up to 15% of total receipts before losing status
Nonmember receipts can account up to 35% of total receipts
WILL LOSE if any net earnings benefit any private shareholder
If an exempt organization is a charitable trust, then unrelated business income is
Subject to tax only for the amount of this income in excess of $1,000
Simple trust rules (3)
CANNOT Distribute Principal
Grantor trust, all income is taxable to the Dad , not the son
(3) Rules
It requires current distribution of all its income
It requires NO distribution of the res (i.e., principal, corpus)
It allows NO charitable contributions
A cash basis taxpayer should report gross income
For the year in which income is either actually or constructively received, whether in cash or property
Tips and its special treatment
Must report by the 10th day of the next month. These tips are treated as paid when the report is made to the employer. So tips in Dec year 1 reported in Jan year 2, the tips are not included in gross income until year 2.
Unrelated business income requires a tax Form 990-T when?
NOT required when less that 1,000 GROSS INCOME used in computer UBI taxable for year
An unrelated business does not include any activity performed for the organization entirely by unpaid volunteers.
Unrelated business income (UBI) over $1,000 of a tax-exempt corporation is subject to tax at the corporate regular income tax rate.
An incorporated exempt organization subject to tax on its current-year unrelated business income (UBI)
Must comply with the Code provisions regarding installment payments of estimated income tax by corporations.
If a trust’s assets earned ordinary dividends and interest income. The tax liability on the income earned will be paid by who?
NOT THE TRUST
Entirely by the individual taxpayer
Fiduciary Fees is part of tax imposed on trust - deductible from trust income
Simple trust can deduct accounting fees allocable to income
Taxpayers that are required to use inventories must use the accrual method to account for purchases and sales. Furthermore, the following taxpayers generally use the ACCRUAL method of accounting as their overall method of accounting for tax purposes:
C corporations,
Partnerships that have a C corporation as a partner,
Trusts that are subject to the tax on unrelated income, and
Tax shelters.
Any entity that is not a tax shelter and has average gross receipts of not more than $27 million may also use the cash method of accounting. An entity meets the $27 million gross receipts test if the annual gross receipts for the 3 tax years ending with the prior tax year do not exceed $27 million. Since the international accounting firm is not required to use inventories, it is not required to use the accrual method.
Complex Trust Rules
Complex trusts can accumulate income, provide for charitable contributions, or distribute amounts other than income. These characteristics distinguish a complex trust from a simple trust.
Can distribute principal
Taxed on income not distributed to beneficiaries
In Year 1, a taxpayer sold real property for $200,000, receiving $100,000 at closing and $100,000 plus accrued interest at the prime rate in the next year. The buyer also assumed a $50,000 mortgage on the property. The taxpayer’s adjusted basis was $75,000, and the taxpayer incurred $10,000 of selling expenses. If this transaction qualifies for installment sale treatment, what is the gross profit on the sale?
Gross profit equals the contract price minus the cost of goods sold. The contract price equals $250,000 ($200,000 for the property + $50,000 assumed mortgage), and the cost of goods sold equals $85,000 ($75,000 adjusted basis + $10,000 selling expenses). Therefore, the gross profit on the installment sale equals $165,000 ($250,000 – $85,000).
Organization exempt from Federal income taxes under subchapter F of IRC Sec 501
Fraternal benefit societies
Labor, agricultural, or horticultural orgs
civics leagues or organizations operated exclusively for the promotion of social welfare
NOT BLUE CROSS AND BLUE SHIELD
What qualify as tax exempt organizations
exempt are corporations, trusts, foundations, funds, and community funds.
NOT an Estate
NOT a partnership
NOT an individual
Superior Construction Co. was contracted to plaster all the buildings of a historical preservation project for $2,500,000 over the next 2 years. Total estimated costs to complete are $2,000,000. Actual costs incurred in Years 1 and 2 were $800,000 and $900,000, respectively. Using the percentage-of-completion method, what amount of gross profit would Superior report in Year 1?
Under the percentage-of-completion method, Superior calculates gross profit based on the ratio of costs for the tax year to total expected costs to complete the project. The ratio of costs is 40% ($800,000 actual costs ÷ $2,000,000 total costs to complete). The cost ratio is multiplied by the total contract for Year 1 gross receipts of $1,000,000 ($2,500,000 contract price × 40%). Year 1 gross receipts less Year 1 actual costs equals total gross profit for Year 1 of $200,000 ($1,000,000 – $800,000).
