Part 5: Entities - Federal Taxation

Question 1

What kind of entities are eligible to be shareholders of an S Corporation?

Answer 1

Individuals, estates, certain trusts, banks, and certain exempt organizations

individuals MUST be citizens or permanent residents

can NOT be LLC, Corporation, or partnership

Question 2

“Hot Assets” of partnerships

Answer 2

Unrealized receivables and inventory - items that generate ordinary income

Question 3

Simple Trust

Answer 3

Distributes ALL annual income to beneficiaries - income of the trust is taxable to the recipient
-Beneficiaries can NOT be charitable

Does NOT

• Distribute trust corpus (principal)
• Deduct charitable contributions

Exemption amount: $300

Question 4

What items of income increase accumulated adjustment accounts of S Corps?

Answer 4

Interest and dividends

Question 5

To what extent is the fee paid to a trustee of a trust deductible?

Answer 5

Deductible to the extent of ration of taxable income to total income

Question 6

If not expressly granted, what implied powers does a trustee have?

Answer 6

Lease trust property, sell trust property, pay trust expenses

Can NOT unless expressly granted

• Borrow from trust
• Distribute principal to income beneficiaries

Question 7

What are the requirements for a corporation to be a personal holding company?

Answer 7

60%/50%/5 or fewer

PHC Income Test: at least 60% of the corporations adjusted ordinary gross income for the tax year is PHC income

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

Question 8

When can a taxpayer use the cash basis as its accounting method?

Answer 8

Taxpayers, other than tax shelters, that satisfy the gross receipts test, regardless or whether the purchase, production, or sale of merchandise is an income-producing factor

Question 9

Gross Receipts Test

Answer 9

Annual gross receipts do NOT exceed $26 million for three-prior taxable years

-Add gross receipts for the past three years and divide by three

Question 10

Non-liquidating distributions of a partnership

Answer 10

Taxed as capital gain to the partner ONLY on the excess over a partners basis

Result in the reduction in the partners capital account

Question 11

What types of property are subject to a personal property tax?

Answer 11

Automobiles, stocks and bonds, tangible business property (Inventory, equipment, machinery)

Question 12

Shareholders basis in property received in a non-liquidating distribution - Corporation

Answer 12

FMV on the date of distribution

Question 13

What is the personal exemption amount for a simple trust/complex trust?

Answer 13

Simple - $300
Complex - $100

Question 14

Treatment of non-liquidating distributions of appreciated property - Corporation

Answer 14

Taxable gain = FMV (or property liability if greater) less adjusted basis

Losses are NOT deductible

Question 15

What is the basis of property transferred to a corporation?

Answer 15

FMV at time of transfer

UNLESS it qualifies for IRC Section 351 Treatment wherein an investor receives control of the corporation under the 80% rule - if true then corp basis = shareholder basis i.e. carryover

Question 16

What does a corporation recognize in a liquidating distribution of property?

Answer 16

Gain or loss as if the property were sold at its FMV

Question 17

What is the general carryback and carryforward period for corporations NOL generated in

A. 2018-2020
B. 2021

Answer 17

A. Back 5 years, forward indefinitely; no income limitation

B. Back 0 years, forward indefinitely; 80% of taxable income

Question 18

A partner who receives property in a liquidation of partnership interest will recognize what amount of gain or loss?

Answer 18

Generally no gain or loss recognized upon liquidation of a partnership interest

UNLESS

• Cash distributed > partner’s basis = Gain
• If no property other than cash, unrealized receivables, and inventory is distributed and the cash, basis of unrealized receivables and inventory is LESS than partner’s basis = Loss

Question 19

Insurance premiums paid by an S Corp are included in the shareholders employee’s Form W-2 if

Answer 19

They own more than 2% of the corporation

Question 20

What qualifies as PHC income?

Answer 20

Dividends, annuities, mineral, oil, and gas royalties

NOT capital gains

Question 21

When will a corporation be required to file Form 1120, Schedule M-3?

Answer 21

If total assets = $10 million or more

Question 22

Shareholder Basis - S Corp

Answer 22

Beginning Basis
+ Income included on the K-1
+ Excess deductions for depletion
- Property/Cash distributions
- Amt of distributions in excess of basis
- Nondeductible expenses
- Deductible losses
- Deductions reported on K-1
= Ending Basis

Question 23

What amount of gain or loss should a corporation recognize in a nonliquidating distribution below?

Land Patent Building
FMV 100,000 25,000 50,000
Adjusted Basis 50,000 0 150,000

Answer 23

$75,000 gain

Nonliquidating distributions of appreciated property generate gain to the corporation. Losses are not deductible.

Question 24

What does an S Corp recognize on the distribution of appreciated property?

Answer 24

The transaction is treated as a “sale” of the property to the shareholder at FMV - gain is passed through to the shareholders

Question 25

Partner’s tax treatment of partnership losses

Answer 25

Deductible by a partner up to the amount of the partner’s basis in the partnership interest

Question 26

The sale or exchange of a partnership interest is generally treated as

Answer 26

The sale or exchange of a capital asset.

Beginning basis
+ Pship share of income/loss
= Capital acct at date of sale
+ Share of partnership liabilities
= Adjusted basis
+ Cash received
+ FMV of any other property received
+ Liability relief
= Capital/gain loss*

*Ordinary gain if “Hot Assets”

Question 27

S Corp distributions are

Answer 27

1) tax-free to the extent of the AAA
2) taxable to the extent of accumulated E&P (C corporation earnings)
3) any remaining distributions are a return of capital

Question 28

Partnership Definition

Answer 28

• Unincorporated organization with two or more members
• Generally do not pay any income tax but act as a conduit to pass through items to the partners
• General partners have UNLIMITED liability
• Must conduct a business for a profit

Question 29

Limited Partnership

Answer 29

• At least ONE general partner
• Limited partners’ exposure to partnership debt is limited to their capital account
• Limited partners usually have little to say in the running of the partnership operations

Question 30

Limited Liability Company

Answer 30

• Taxed as a partnership
• Owner’s may participate in management while limiting their personal liability
• LLC may be classified as a partnership, corporation, or DRE (if only one owner) for tax purposes

Question 31

Contributions of Property in Exchange for Partnership Interest

Answer 31

Generally -

No gain or loss recognized
Basis = Carryover basis

Question 32

When a partner transfers property to a partnership that is subject to liabilities which the partnership assumes

Answer 32

Generally -

No gain or loss recognized

The amount of liabilities assumed by the other partners as a result of the transfer reduces the tax basis of the contributing partner

Question 33

When a partner performs services in exchange for a partnership interest

Answer 33

Partner recognizes ordinary income to the extent of the FMV of the interest received

Partner’s basis in partnership = Amount of income recognized

Question 34

Schedule K-1 (Separately Stated Items for Partners)

Answer 34

Those items which, when treated at the partner’s level, could have a special tax treatment or limitation.

Ex: capital gains/losses, section 1231 gains/losses, charitable contributions, interest income, dividend income, tax-exempt income

Question 35

Allocation of partnership income - Relationship to partner’s basis

Answer 35

Income - Increases basis
Deductions/Losses - Reduce basis

Basis can NEVER go below zero

Question 36

Allocation of partnership losses/deductions - Relationship to partner’s basis

Answer 36

Since a partner’s basis cannot be reduced below zero, it may be necessary to pro-rate items of losses/deductions until sufficient basis exists

Question 37

Partnership Guaranteed Payments

Answer 37

Made to a partner without regard to partnership income

Subject to self-employment tax as is a general partner’s share of ordinary income

Question 38

Partnership Liabilities

Answer 38

Because partner’s are at-risk, the tax code allows an increase in the basis of a partner’s interest for their proportionate share of debt

Nonrecourse debt (holder of debt has no recourse against the partners) will NOT increase basis

Question 39

Partnership withdrawals

Answer 39

Partner is taxed on their share of the partnership income, not on what is withdrawn.

Withdrawals - reduce basis of the partner’s interest

Question 40

Sale/Exchange of a Partnership Interest

Answer 40

Beginning capital account

+ Share of income (loss)

Capital account @ date of sale

+ Share of partnership liabilities

Adjusted basis in partnership interest

+ Amount realized [Cash received + FMV of any other property received + Liability relief]

Capital gain/loss

Question 41

Tax treatment - Nonliquidating Partnership Distributions

Answer 41

Taxed ONLY if cash distributed exceeds partner’s basis (capital gain)

Basis is reduced by the cash and/or adjusted basis of property receieved

Question 42

Partners basis of property distributed in a nonliquidating partnership distribution

Answer 42

= Adjusted basis in the hands of the partnership OR partners remaining basis whichever is lower

Question 43

Tax treatment - Liquidating Partnership Distributions

Answer 43

Gain: Cash > Basis*

Loss: Cash, unrealized receivables, and/or inventory are the only assets received and partners basis exceeds those asset

*Unrealized receivables/inventory in excess of basis = Ordinary income

Question 44

General Partnership

Answer 44

A partnership is an association of two or more co-owners of a business for profit

Question 45

Partner’s Rights in a Partnership

Answer 45

Each partner has an equal right to participate in the management of business, unless the partners specifically agree otherwise

Question 46

Corporation

Answer 46

Separate taxpaying entity

Shareholders contribute assets/services in exchange for stock which represents the ownership of the corporation

Files its own return, makes its own election, own rate structure