Income Tax - Administrative _ Depreciation, Amortization and Depletion _ Entities

Question 1

What are the sources of tax law?

Answer 1

First primary source = IRC

Second primary source = Administrative law sources

Third primary source = Judicial sources

Question 2

What are Administrative Source Regulations?

• who issues regs?
• what type of authority do they have?
• what are the 3 types?

Answer 2

issued by the US Treasury Dept and are interpretations of the IRC

have the full force and effect of law and are the 2nd highest authority of tax law

3 types of regulations:
1. Proposed = preview of final regs, no legal precedence
2. Temporary = issued when quick guidance needed, same authoritative value as final regs
3. Final = have full force and effect of law

3 types of Final Regs
1. Procedural = housekeeping instructions
2. Interpretive = implement the intent of committee reports and the IRC
3. Legislative = allows the Treasury to determine law details; Congress must delegate this authority

Question 3

What are Revenue Rulings?

Answer 3

INTERPRETATIONS of tax laws issued by the IRS

provided in response to a TAXPAYER REQUEST, based on facts common to many taxpayers

DO NOT have the full force and effect of law, BINDING on IRS OFFICIALS

Taxpayers can rely upon rulings on challenge in court

May be cited as precedent. Courts are not bound by them.

Published weekly in Internal Revenue Bulletin

Question 4

What are Revenue Procedures?

Answer 4

describe internal practices and procedures within the IRS

published in the Internal Revenue Bulletin

state changes in techniques and administrative procedures used by the IRS

Question 5

What are Private Letter Rulings?

Answer 5

issued by the IRS at TAXPAYER’S REQUEST

IRS IS BOUND by its determination in the ruling

made available to the public after deletion of certain materials and CAN BE USED BY OTHER TAXPAYERS AS GUIDANCE regarding the described transaction

CANNOT BE RELIED UPON AS PRECEDENT

Question 6

What are Determination Letters?

Answer 6

issued by District Directors for returns that will be filed in their respective districts

only issued with regard to COMPLETED TRANSACTIONS

issued only if the ANSWER IS SPECIFICALLY COVERED BY:
- STATUTE
- TREASURY DECISION OR REGULATION, OR
- RULING OPINION OR COURT DECISION published in the Internal Revenue Bulletin

Question 7

What is a Technical Advice Memorandum?

Answer 7

issued by the national IRS office

issued in response to a REQUEST BY AN AGENT PERFORMING AN AUDIT

provide clarification that cannot be provided by the local IRS office

deal with COMPLETED TRANSACTIONS

ONLY APPLY TO TAXPAYERS INVOLVED IN THE AUDIT

Question 8

What is the statute of limitations to claim a tax refund?

Answer 8

3 years

no return filed to claim, money becomes US Treasury property
** also prevents application of any credits including overpayments to other underpaid tax years

NO STATUTE OF LIMITATIONS FOR ASSESSING OR COLLECTING TAX IF NO RETURN HAS BEEN FILED

IRS LIMITS ON FILED RETURNS
** 10 years = IRS COLLECTING TAX ON A FILED RETURN

** 6 years = OMITTED GROSS INCOME > 25% OF STATED GROSS INCOME

Question 9

How is interest accrued on taxes owed?

Answer 9

Compounds daily

Interest = Federal short-term rate + 3% (rate determined every 3M)

Interest paid on refunds if not received with 45 days of taxpayer filing a refund claim

Question 10

What is the Failure to File and Failure to Pay Penalty?

Answer 10

Failure to FILE = FIVE (5%)
- accrues monthly, up to 25%
- fraudulent failure to file = 15% per month up to 75%
- if filing > 60 days late, minimum failure to file penalty is $485 or amount of tax due

Failure to PAY = POINT FIVE% (0.5%)
- accrues monthly, up to 25%
- IF BOTH failure to file and pay: FAILURE TO FILE REDUCED BY FAILURE TO PAY

Question 11

When are estimated tax payments required?

Answer 11

AGI > $150,000 (MFJ), $75,000 (MFS):
= 110% of prior year OR 90% of current year by JAN 15TH OF THE FOLLOWING YEAR

** NO ESTIMATED TAX DUE IF NO TAX LIABILITY FOR PREVIOUS YEAR, US RESIDENT ENTIRE YEAR, AND YEAR COVERED A 12-MONTH PERIOD

Due dates of estimated payments = 15TH OF APRIL, JUNE, SEPTEMBER, JANUARY

Question 12

When is income tax considered to be substantially understated?

Answer 12

Understatement of tax exceeds either the greater of 10% of the correct tax or $5,000

Accuracy-related penalty of 20% applies to any underpayment due to negligence or disregard of rules/regs or substantial understatement
** not imposed if reasonable cause accompanied by good faith

Question 13

Who may represent a taxpayer during an IRS audit?

Answer 13

Attorney

CPA

Enrolled Agent
- someone who has passed comprehensive 3-part IRS test covering individual and business tax returns
- experienced former IRS employee
- highest credential the IRS awards

Question 14

How is the Federal Judicial System structured and what are their abilities?

Answer 14

US Tax Court
- no tax payment required to bring claim
- Small Tax Case Division < $50,000 at taxpayer’s request
- informal, no appeal rights
- appeals to US Court of Appeals

US Court of Federal Claims
- only in Washington, DC
- tax deficiencies must be paid first
- appeals to US Court of Appeals

US District Court
- tax deficiencies must be paid first
- ONLY TRIAL BY JURY OPTION
- BOUND BY DECISIONS OF APPEALS COURT & US SUPREME COURT

US Court of Appeals
- 12 circuit courts throughout US
- handles appeals of Tax Court & District Court
- region by region, no binding of decisions region to region

US Supreme Court
- BINDING FOR ALL TAYPAYERS & THE IRS
- Reviews cases if:
- CONFLICT BETWEEN CIRCUIT COURTS
- INVOLVES TAX LAW ADMINISTRATION
- MANY TAXPAYERS INVOLVED
- LOWER COURT CONFLICTING DECISION WITH REGS OR LONG-STANDING PRACTICES

Question 15

What intangible property is depreciable?

Answer 15

patents

copyrights

computer software

land preparation costs (e.g., landscaping in preparing for business use)

Question 16

When does depreciation begin on property?

Answer 16

when you place the depreciable property in service for use in your trade or business or for the production of income

For example, a rental property available for rent on July 5th starts on that date even if you do not have a renter.

Question 17

What is considered property eligible for Accelerated Cost Recovery System (ACRS) an Modified Accelerated Cost Recovery System (MACRS) depreciation?

Answer 17

placed in service after 1980

subject to wear and tear, obsolescence, etc.

have a determinable useful life

tangible personalty or realty

** MACRS must be used to depreciate most property

Question 18

What is Straight Line Depreciation and how is it calculated?

Answer 18

deduct same amount every year over property useful life

Adjusted Basis
Less: Salvage Value
Equals: Depreciable Amount
Divided By: Estimated Useful Life
Equals: Annual Depreciation Deduction

** you must prorate deduction for number of months in use for the 1st year

Question 19

When can computer software be depreciated?

Answer 19

Even when acquired in connection with the acquisition of a business if:

• it is readily available for purchase by the general public,
• it is subject to a nonexclusive license, AND
• it has not been substantially modified

** use straight-line method over a useful life of 36 months

Question 20

What are the 9 property classifications under the General Depreciation System (GDS) and example of the types of property by class?

Answer 20

3-Year = Tractors, rent-to-own property, race horse over 2 y/o

• 5-Year = Autos, computers, office equipment, breeding cattle and dairy cattle, residential real estate items, environmental energy property
• 7-Year = Office furniture and fixtures (desks, files, safes), agricultural machinery and equipment, property w/ no class life and not designated by law to be in any other class, certain motorsports entertainment complex property, natural gas gathering line in service after April 11, 2005

27.5 Year = Rental home

39 Year = Office building

• MOST LIKELY TESTED

** Nonresidential real property and residential rental property use the mid-month convention (both for service placement and disposal)

** MACRS charts will likely be provided on exam

Question 21

What are the general rules to expense assets using Section 179?

Answer 21

can immediately expense up to $1,160,000 (2023) of business tangible property placed in service during the year

CANNOT USE for REALTY OR PRODUCTION OF INCOME PROPERTY

amount expensed reduces depreciable basis

cost recovery available on remaining basis

INCOME TAX DEDUCTION THE LESSER OF:
- property placed in service
- taxable income
- threshold of $1,160,000 phased out for PPS > $2,890,000

Question 22

What certain assets intangible are amortized over 15 years?

Answer 22

goodwill

trademarks

covenants not to compete

copyrights and patents used in a trade or business

Question 23

What are the two depletion methods for natural resources?

Answer 23

1. Cost

= [Asset Basis / Estimated Total Number of Recoverable Units] X Number of Units Sold

2. Percentage

a statutory percentage is applied to the gross income from the property (limited to 50% of the gross income)

Question 24

What are the selection process considerations for business entity formation?

Answer 24

ease and cost of formation

complexity of management and governance

how transferability and dissolution are achieved

liability protection for owners’ personal assets

reporting requirements and taxation

Question 25

What does “piercing the veil” mean?

Answer 25

disregarding the legal status of the entity that gives owners limited liability

occurs when there is a failure to maintain the proper business identity in contracts and correspondence

could result in personal liability for owners

Question 26

What are features of a Sole Proprietorship?

Answer 26

can operate under the name of the owner or a trade/fictitious name (e.g., “The Corner Pocket”)

no filings required w/ Secretary of State, no annual filing fees required

may be required to obtain local business license

if collecting sales taxes, MUST REGISTER w/ state or local taxing authority

PROPRIETOR IS PERSONALLY LEGALLY LIABLE FOR DEBTS & TORTS

Uses 1040 Schedule C

Does not have to pay unemployment on himself, must pay for employees

Pays self-employment tax on his earnings, 1/2 for employees

Can deduct all ordinary and necessary business expenses from gross income

Question 27

How do you calculate Sole Proprietorship Self-Employment for a Keogh Plan?

Answer 27

1. Calculate Self-Employment Tax (individual’s contribution rate)…SE is Self-Employment

Net SE Income
Times: 92.35% (100% - 6.2% - 1.45%)
Equals: Net Earnings Subject to SE Tax
Times: 12.4% up to $160,200 (6.2% X 2 = 12.4%)
Plus: 2.9% on Net Earnings Subject to SE Tax (1.45% X 2 = 2.9%)
Equals: SE Tax

SE Contribution Rate = Contribute Rate to Other Participants / [1 + Contribution Rate to Other Participants]

2. Calculate the self-employed individual’s contribution:
   Net-SE Income
   Less: 1/2 of SE Taxes
   Equals: Adjusted Net SE Income (Earned Income)
   Times: SE Contribution Rate
   Equals: SE Individual’s Qualified Plan Contribution

** 25% is the maximum SE Individual Compensation Limit, 20% is the maximum SE Individual Contribution Rate

Question 28

What are features of a Partnership?

Answer 28

automatically created when 2+ individuals conduct business for a profit

Secretary of State Registration REQUIRED: GENERAL = NO, LIMITED = YES
- both required to obtain FEIN because a legal entity
- can deduct all “ordinary and necessary” expenses from income
- can deduct losses against other ordinary income up to as-risk amount
- MUST FILE FORM 1065 (information return for Schedule K-1)
- withdrawals = return of a capital reducing basis and then capital gain thereafter

general partnership ownership may be in form of units, shares or percentages

written agreement should exist to clarify partnership interest

personal assets can be seized for debts and obligations

partners are not considered employees for fringe benefit purposes

same limitations as sole proprietors for retirement plan contribution calculations

all business net income is subject to SE tax

must recognize ordinary compensation income for value of services contributed, becomes part of partner’s basis in partnership interest

Question 29

What are the Advantages & Disadvantages of Partnerships?

Answer 29

Advantages
- More sources of initial capital than proprietorships
- Usually have more mgmt resources available than proprietorships
- Have fewer administrative burdens than corporations
- Income and losses are generally passed through to the partners for tax purposes

Disadvantages
- Transfer of interests is more difficult than for proprietorships
- Unlimited liability (each partner is liable for business debts and obligations)
- Partnership income tax and basis adjustment rules can be complex
- Business net income is subject to self-employment tax
- Partners are entitled to a few tax-free fringe benefits that are generally available to employees

Question 30

What are features of a Limited Partnership?

Answer 30

2+ persons as co-owners, one or more have limited participation in mgmt and limited risk exposure

become general partners for liability purposes when in mgmt of business, at least one general partner

generally required to file a partnership agreement w/ state

limited liability might attract more buyers, transfer difficult due to inability of limited partners to have say in daily operations

limited partnerships have more difficulty obtaining outside financing

general partners have unlimited liability for debts & obligations

limited partners not usually subject to SE tax (passive investors) because no mgmt participation

general partners have SE tax

Question 31

What are features of a Limited Partnership?

Answer 31

2+ persons as co-owners, one or more have limited participation in mgmt and limited risk exposure

become general partners for liability purposes when in mgmt of business, at least one general partner

generally required to file a partnership agreement w/ state

limited liability might attract more buyers, transfer difficult due to inability of limited partners to have say in daily operations

limited partnerships have more difficulty obtaining outside financing

general partners have unlimited liability for debts & obligations

limited partners not usually subject to SE tax (passive investors) because no mgmt participation

general partners have SE tax

Question 32

What are the Advantages & Disadvantages of Limited Partnerships?

Answer 32

Advantages
- Favorable pass-through partnership taxation status
- Flexibility in structuring ownership interests
- Limited not personally liable as long as they don’t have mgmt engagement

Disadvantages
- Must file with the state to register
- In most states, general partners are liable
- Losses for limited partners are generally passive losses

Question 33

What are features of a Limited Liability Partnerships (LLP)?

Answer 33

hybrid entity providing partial liability protection to members

generally comprised of LICENSED PROFESSIONALS (accountants, attorneys, doctors); each partner personally liable for their actions w/ respect to malpractice

generally required to file w/ state

dissolution & transfer generally same as for general partnerships; must transfer to similar licensed professional

all general partners subject to joint and several liability for debts & obligations

general partners can insulate themselves from acts of other partners

mgmt is generally same as for any general partnership

LLPs treated as a partnership for federal income tax purposes

Question 34

What are features of a Limited Liability Partnerships (LLP)?

Answer 34

hybrid entity providing partial liability protection to members

generally comprised of LICENSED PROFESSIONALS (accountants, attorneys, doctors); each partner personally liable for their actions w/ respect to malpractice

generally required to file w/ state

dissolution & transfer generally same as for general partnerships; must transfer to similar licensed professional

all general partners subject to joint and several liability for debts & obligations

general partners can insulate themselves from acts of other partners

mgmt is generally same as for any general partnership

LLPs treated as a partnership for federal income tax purposes

Question 35

What are the Advantages & Disadvantages of Limited Liability Partnerships (LLP)?

Answer 35

Advantages
- Favorable pass-through partnership taxation status available
- Flexibility in structuring ownership interests
- Partners can insulate themselves from acts of other partners

Disadvantages
- Required to file w/ state
- Unlimited liability for own acts of malpractice

Question 36

What are features of a Family Limited Partnership (FLP)?

Answer 36

primary purpose of TRANSFERRING ASSETS to YOUNGER GENERATIONS using ANNUAL EXCLUSIONS AND VALUATION DISCOUNTS for MINORITY INTERESTS and LACK OF MARKETABILITY

one or more members transfer highly appreciated property expected to continue to appreciate in return for a small general and a larger limited partnership interest

no income or gift tax consequences at creation, valuation discount ranges typically 20-40%

grantor keeps control, receives reasonable compensation, fringe benefits, and executive perks (NEEDS TO BE FINANCIALLY SECURE WITHOUT THE TRANSFERRED PROPERTY)

limited members have creditor protection

FLP should have its own bank accounts, tax ID, payroll; no personal expenses to owners

taxed as a partnership, uses Form 1065 and K-1, general partner can be a corporation or an individual (determines payroll taxes)

Question 37

What are features of a Family Limited Partnership (FLP)?

Answer 37

primary purpose of TRANSFERRING ASSETS to YOUNGER GENERATIONS using ANNUAL EXCLUSIONS AND VALUATION DISCOUNTS for MINORITY INTERESTS and LACK OF MARKETABILITY

one or more members transfer highly appreciated property expected to continue to appreciate in return for a small general and a larger limited partnership interest

no income or gift tax consequences at creation, valuation discount ranges typically 20-40%

grantor keeps control, receives reasonable compensation, fringe benefits, and executive perks (NEEDS TO BE FINANCIALLY SECURE WITHOUT THE TRANSFERRED PROPERTY)

limited members have creditor protection

FLP should have its own bank accounts, tax ID, payroll; no personal expenses to owners

taxed as a partnership, uses Form 1065 and K-1, general partner can be a corporation or an individual (determines payroll taxes)

Question 38

What are the Advantages & Disadvantages of a Family Limited Partnership (FLP)?

Answer 38

Advantages
- Control retained by senior family member
- Valuation discounts available for minority interests
- Annual exclusion gifts are generally used to transfer interests to family members
- Some creditor protection
- Restrictions can be placed on transferability of limited partnership interests of junior family members
- Commonly used as an estate planning strategy

Disadvantages
- Attorney set up fees and costs
- Periodic valuation costs
- Operational requirements
- Potential IRS challenges regarding valuations and discounts

Question 39

What are features of a Limited Liability Company (LLC)?

Answer 39

separate legal entities meeting state statutory requirements
- Articles of Organization, state requires a resident agent, annual filings required

transferability and disposal restrictions per operating agreement (not filed w/ state)
- may allocate items of income and gains
- can create different ownership classes with different rights

individual owners protected form personal liability unless a personal guarantee in place
- piercing the veil is possible

Single member owner must file Schedule C

can be taxed as partnership (K-1), S-Corp(1120S w/ K1), or C-Corp (1120 w/ W-2 for owners)

pass-through entity, members taxed at their personal rates

no gain or loss recognized on distribution of appreciated property member to member; gain only recognized above member adjusted basis

Question 40

What are the exceptions to SE tax for LLCs?

Answer 40

1. For LLC income derived from rental real estate
2. For LLC members who are not the managing member and are the equivalent of limited partners

Question 41

What are the Advantages & Disadvantages of a Limited Liability Company (LLC)?

Answer 41

Advantages
- Members have limited liability
- Unlimited number of members but single member LLC is a disregarded entity for tax purposes (File Form 1040 Schedule C)
- Members may be individuals, corporations, trusts, estate, other LLCs, and other entities
- Income is passed through to members, usually on Schedule K-1
- Double taxation affecting most C-Corporations is avoided if partnership tax status is elected
- Members can participate in managing the LLC
- Distributions to members do not have to be directly proportional to the members’ ownership interests like S-Corporations
- Can have multiple classes of ownership
- Entity may elect to be taxed as partnership, S-Corp, or C-Corp

Disadvantages
- May have limited life
- Transfer of interests difficult and sometimes limited by operating agreement
- Some industries or professions may not be permitted to use LLC status
- Laws vary from state to state
- Laws relatively new for LLCs, precedent from prior court cases are limited
- For tax purposes, the complex partnership rules generally apply
- Members not meeting exceptions are subject to SE tax on all earned income if partnership status is elected

Question 42

What are features of C Corporations?

Answer 42

only created by filing articles of incorporation with the state
- requires disclosure of name, number of shares, purpose of the corporation (can be broad or specific), and naming a registered agent listed in the state of incorporation

shares (shareholders) determine ownership interests
- may have different share classes w/ different values and voting rights

limited liability status appeals to outside non-employee owner/investors
- limited to invested capital

officers appointed by board of directors (governing body)
- act in a very formal way
- required to meet and follow certain formalities per corporate charter

taxed as a C-Corp unless election of S-Corp status
- must file Form 1120, pay taxes on their own income on a calendar or fiscal year basis
- owner/employees treated as employees for payroll tax purposes, no SE income
- tax deduction disallowed for dividends distributed to shareholders
- shareholders must include dividends in gross income == DOUBLE taxation (15% FOR INDIVIDUALS)

Question 43

What are the dividend-received deductions based on ownership percentages?

Answer 43

50%: < 20% ownership
65%: 20% to less than 80% ownership
100%: >= 80% ownership (affiliated corporations)

Question 44

What is a Personal Service Corporation (PSC)?

Answer 44

a C-Corp in which substantially all of the activities involve the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, or consulting

AND

substantially all of the stock is owned by employees

21% TAXABLE INCOME TAX FLAT RATE

Question 45

What are the Advantages & Disadvantages of a C-Corporation?

Answer 45

Advantages
- Relative ease of raising capital
- Limited liability of shareholders
- Unlimited life of entity
- Ease of transfer of ownership interests
- Generally more management resources
- Shareholder/employees may receive the full array of employer-provided tax-free fringe benefits

Disadvantages
- Potential for double taxation due to entity level taxation
- Administrative burdens (e.g., filings)
- More difficult to form and dissolution can cause taxable gains
- Borrowing may be difficult without stockholder personal guarantees, which negates part of the advantage of limited liability
- Requires a registered agent
- Requires a federal tax ID number

Question 46

What are features of S Corporations?

Answer 46

created under state law by first forming a C-Corp and then filing an “S” election with the IRS

must meet these requirements at ALL TIMES to be initially and continually valid:
- cannot have more than 100 eligible shareholders
- stock ownership is restricted to individuals who are US citizens or US residents, estates, certain trusts, and charitable organizations
- an ESBT (Electing Small Business Trust) is one of the trusts that can own an S-Corp
- must be an eligible corporation created under the laws of the US or of any state
- insurance companies, Domestic International Sales Corporations (DISCs), and certain financial institutions are not eligible for S-Corp status
- corporation is allowed only one class of outstanding stock (may have shares with and without voting rights)

Question 47

When are S-Corp shareholders personally liable for corporation debts?

Answer 47

a lender to a closely held corporation requires the primary shareholders guarantee the loan to the corporation
- shareholders liable to the extent of their guarantees, in addition to their capital contribution

a court may ignore the legal fiction of the corporation as an entity (pierce the corporate veil) when the corporation has been used to perpetuate fraud, circumvent law, accomplish an illegal purpose, or otherwise evade law

Question 48

How are S-Corporations taxed?

Answer 48

Income passed through to shareholders and is not taxed at the corporation level
(NO DOUBLE TAXATION)

Owner/employees are employees for payroll tax purposes
- entity withholds 7.65% for Social Security taxes and matches such withholding for Social Security taxes
- owner/employee compensation is not considered SE income
- DISTRIBUTIONS TO SHAREHOLDERS BEYOND REASONABLE COMPENSATION ARE TREATED AS DIVIDENDS NOT SUBJECT TO PAYROLL TAX
- in-kind distributions of appreciated assets treated as a deemed sale generating capital gains in proportion to their ownership even if only distributed to one shareholder
- File Form 1120S on a calendar year basis and provide each shareholder with a Form 1120S Schedule K-1
- shareholder’s taxable basis in company stock must be adjusted annually to reflect allocated items of income and expense
** adjusted basis is increased by a shareholder’s distributive share of both taxable and nontaxable S-Corp income and is decreased by shareholder’s share of S-Corp losses, nondeductible expenses, and distributions

Question 49

How are S-Corporations taxed?

Answer 49

Income passed through to shareholders and is not taxed at the corporation level
(NO DOUBLE TAXATION)

Owner/employees are employees for payroll tax purposes
- entity withholds 7.65% for Social Security taxes and matches such withholding for Social Security taxes
- owner/employee compensation is not considered SE income
- DISTRIBUTIONS TO SHAREHOLDERS BEYOND REASONABLE COMPENSATION ARE TREATED AS DIVIDENDS NOT SUBJECT TO PAYROLL TAX
- in-kind distributions of appreciated assets treated as a deemed sale generating capital gains in proportion to their ownership even if only distributed to one shareholder
- File Form 1120S on a calendar year basis and provide each shareholder with a Form 1120S Schedule K-1
- shareholder’s taxable basis in company stock must be adjusted annually to reflect allocated items of income and expense
** adjusted basis is increased by a shareholder’s distributive share of both taxable and nontaxable S-Corp income and is decreased by shareholder’s share of S-Corp losses, nondeductible expenses, and distributions

Question 50

What are the Advantages & Disadvantages of a S-Corporation?

Answer 50

Advantages
- Income passed through to shareholders for federal income tax purposes
- Income taxed at individual level which may be a lower tax rate than the applicable corporate rate
- Shareholders have limited liability
- Distributions from S-Corporations are exempt from the payroll tax system, assuming the corporation provides adequate compensation to those shareholders who are employees of the corporation

Disadvantages
- Limited to 100 shareholders
- Only one class of stock is permitted
- Cannot have corporate, partnership, certain trust, or nonresident alien shareholders
- Shareholder employees owning more than 2% of the company must pay taxes on a range of employee fringe benefits that would be tax-free to a shareholder/employee of a C-Corporation
- The tax rate of the individual shareholder may be higher than the corporate tax rate
- Borrowing may be difficult without stockholder personal guarantees, which negates part of the advantage of limited liability

Question 51

What is a Personal Holding Company?

Answer 51

a corporation with the following requirements being met:

1. Personal Holding Company Income Test

at least 60% of the corporation’s adjusted ordinary gross income for the tax year is from dividends, interest, rent, and royalties

2. Stock Ownership Requirement

at any time during the last half of the tax year, more than 50% in value of the corporation’s outstanding stock is owned, directly or indirectly, by 5 or fewer individuals

Question 52

Selecting the Proper Business Legal Form 1

Answer 52

Question 53

Selecting the Proper Business Legal Form 2

Answer 53

Entity Column Headings

Proprietorship
General Partnership
Limited Partnership
LLP
FLP
LLC
S Corp
C Corp

Question 54

Given the following information, select or avoid these entities.

Answer 54

Significant personal income and you expect the business to have losses, consider flow-through entities

If you want to be able to allocate income/losses in percentages different than ownership, select an LLC taxed as a partnership.

If you are concerned about liability, avoid sole proprietorships and general partnerships.

If significant income is expected from the business, then consider a C corporation.

Question 55

What entities allow for the 20% QBI deduction?

Answer 55

Sole Proprietorship
Partnership
S-Corp

** only allowed as a deduction reducing taxable income