Part 5: Entities - Federal Taxation Flashcards
What kind of entities are eligible to be shareholders of an S Corporation?
Individuals, estates, certain trusts, banks, and certain exempt organizations
individuals MUST be citizens or permanent residents
can NOT be LLC, Corporation, or partnership
“Hot Assets” of partnerships
Unrealized receivables and inventory - items that generate ordinary income
Simple Trust
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
What items of income increase accumulated adjustment accounts of S Corps?
Interest and dividends
To what extent is the fee paid to a trustee of a trust deductible?
Deductible to the extent of ration of taxable income to total income
If not expressly granted, what implied powers does a trustee have?
Lease trust property, sell trust property, pay trust expenses
Can NOT unless expressly granted
- Borrow from trust
- Distribute principal to income beneficiaries
What are the requirements for a corporation to be a personal holding company?
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
When can a taxpayer use the cash basis as its accounting method?
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
Gross Receipts Test
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
Non-liquidating distributions of a partnership
Taxed as capital gain to the partner ONLY on the excess over a partners basis
Result in the reduction in the partners capital account
What types of property are subject to a personal property tax?
Automobiles, stocks and bonds, tangible business property (Inventory, equipment, machinery)
Shareholders basis in property received in a non-liquidating distribution - Corporation
FMV on the date of distribution
What is the personal exemption amount for a simple trust/complex trust?
Simple - $300
Complex - $100
Treatment of non-liquidating distributions of appreciated property - Corporation
Taxable gain = FMV (or property liability if greater) less adjusted basis
Losses are NOT deductible
What is the basis of property transferred to a corporation?
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
What does a corporation recognize in a liquidating distribution of property?
Gain or loss as if the property were sold at its FMV
What is the general carryback and carryforward period for corporations NOL generated in
A. 2018-2020
B. 2021
A. Back 5 years, forward indefinitely; no income limitation
B. Back 0 years, forward indefinitely; 80% of taxable income
A partner who receives property in a liquidation of partnership interest will recognize what amount of gain or loss?
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
Insurance premiums paid by an S Corp are included in the shareholders employee’s Form W-2 if
They own more than 2% of the corporation
What qualifies as PHC income?
Dividends, annuities, mineral, oil, and gas royalties
NOT capital gains
When will a corporation be required to file Form 1120, Schedule M-3?
If total assets = $10 million or more
Shareholder Basis - S Corp
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
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
$75,000 gain
Nonliquidating distributions of appreciated property generate gain to the corporation. Losses are not deductible.
What does an S Corp recognize on the distribution of appreciated property?
The transaction is treated as a “sale” of the property to the shareholder at FMV - gain is passed through to the shareholders
Partner’s tax treatment of partnership losses
Deductible by a partner up to the amount of the partner’s basis in the partnership interest
The sale or exchange of a partnership interest is generally treated as
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”
S Corp distributions are
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
Partnership Definition
- 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
Limited Partnership
- 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
Limited Liability Company
- 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
Contributions of Property in Exchange for Partnership Interest
Generally -
No gain or loss recognized
Basis = Carryover basis
When a partner transfers property to a partnership that is subject to liabilities which the partnership assumes
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
When a partner performs services in exchange for a partnership interest
Partner recognizes ordinary income to the extent of the FMV of the interest received
Partner’s basis in partnership = Amount of income recognized
Schedule K-1 (Separately Stated Items for Partners)
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
Allocation of partnership income - Relationship to partner’s basis
Income - Increases basis
Deductions/Losses - Reduce basis
Basis can NEVER go below zero
Allocation of partnership losses/deductions - Relationship to partner’s basis
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
Partnership Guaranteed Payments
Made to a partner without regard to partnership income
Subject to self-employment tax as is a general partner’s share of ordinary income
Partnership Liabilities
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
Partnership withdrawals
Partner is taxed on their share of the partnership income, not on what is withdrawn.
Withdrawals - reduce basis of the partner’s interest
Sale/Exchange of a Partnership Interest
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
Tax treatment - Nonliquidating Partnership Distributions
Taxed ONLY if cash distributed exceeds partner’s basis (capital gain)
Basis is reduced by the cash and/or adjusted basis of property receieved
Partners basis of property distributed in a nonliquidating partnership distribution
= Adjusted basis in the hands of the partnership OR partners remaining basis whichever is lower
Tax treatment - Liquidating Partnership Distributions
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
General Partnership
A partnership is an association of two or more co-owners of a business for profit
Partner’s Rights in a Partnership
Each partner has an equal right to participate in the management of business, unless the partners specifically agree otherwise
Corporation
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
