Partnerships, S Corps and Other Taxation Areas CRFF MCQ Flashcards
(33 cards)
To determine the amount of a taxable estate, certain deductions are allowed for costs such as
ESTATE TAX RETURN
funeral expenses, debts, administrative expenses, debts at death, and charitable bequests bequests to a spouse
no other personal bequests (even to a son or daughter) can be used as a deduction
no personal exemption
Unrelated business income over a set limit is normally taxable to a tax-exempt organization, but a number of exceptions are available:
not taxed if
generated entirely by the work of volunteers
sales of donated merchandise,
rental of real property,
interest and dividend revenues (unless the result of investments obtained through debt financing), and
business carried on for the convenience of the organization (e.g.a student bookstore)
Regardless of their mission and intent, an organization cannot simply assume that it has tax-exempt status unless
it is a church or very small organization with gross annual receipts not more than $5,000
Form 1023 by the end of 15 months from the end of the month of the organization’s inception to gain status
File an annual form (Form 990) to provide ongoing information.
Being tax-exempt does not keep the organization from having to pay income taxes if
it generates unrelated business income over a maximum dollar limit (1,000 in recent years).
Being tax-exempt allows donors to take a gift as tax deduction but only in certain cases.
a Section 501 (c)(3) tax-exempt organization (created for charitable, educational, or scientific purposes) offers this benefit
a Section 501 (c)(4) tax-exempt organization (an advocacy group) cannot be claimed by the donor as an itemized deduction
amount can be deducted on estate income tax return as a personal exemption
ESTATE INCOME TAX RETURN
$600
Treasury Circular 230 limits the authority of a RTRP to practice before the IRS, restricting such authority to
preparation and signing of returns and claims for refunds
representation of clients before IRS revenue agents or customer service agents for periods for which she has signed a tax return or claim for refund.
January 2013, the IRS suspended the RTRP program subject to appeal of a Federal court ruling.
Under Circular 230, a RTRP may not represent clients
before IRS revenue officers,
appeals officers or
counsel,
January 2013, the IRS suspended the RTRP program subject to appeal of a Federal court ruling.
Enrolled agents (EAs)
are granted the same privileges to practice before the IRS as CPAs and attorneys (although they cannot claim certification or an employee relationship with the IRS),
required to register with the IRS and obtain a PTIN
paid preparers
may sign a return if there is a reasonable basis of tax positions contained therein (defined as at least 20% probability of the position being upheld under examination),
must advise his clients as to any penalties that could result if the uncertain positions are not upheld.
must advise the client of disclosures that could help avoid penalty and what these disclosures should include, but he is not required to write them into the return,
prohibited from signing a return with a frivolous position as well as advising clients as to how to impede IRS or federal tax law administration.
covered a opinion
1) the primary purpose is tax avoidance,
2) tax avoidance is a significant purpose and the advise if considered a reliance opinion or other specified item, or
3) if it involves a so-called listed transaction that has been specifically identified by the IRS as being driven by tax avoidance
reliance opinion (which concludes a greater than 50% probability of a favorable client outcome in tax avoidance) is considered a covered opinion UNLESS the practitioner clearly states that it should not be used to avoid tax or tax penalties
all other advice (not covered opinions)
other written tax advice subject to looser requirements
standard of reasonableness still applies
practitioner may not base advice on assumptions or client representations that are unreasonable
Consideration in one client’s tax return of information obtained in preparation of another client’s return
responsibility under AICPA standards and Treasury Circular 230 to follow up on any information on a return that one has reason to believe is incomplete or incorrect
The Internal Revenue Code contains detailed information for preparer penalties related to uncertain tax positions. The penalties are, in more detail,
the greater of dollar amounts listed or 50% of the preparer’s income obtained from preparation of the return or claim for refund in question.
An uncertain tax position lacking substantial authority (40% or higher probability of being upheld), but not undertaken with willful or reckless disregard for laws and regulations, may be subject to the lesser penalty unless
1) it is disclosed adequately,
2) has a reasonable basis (20% chance of being upheld), or
3) there was a reasonable cause for any understatement of tax liability.
“more likely than not” (50% or greater probability of being upheld) threshold applies to
certain so-called “tax shelters” specifically identified by the IRS.
Gramm-Leach Bliley (Financial Modernization) Act
protection of client information.
Tax return preparers included under the jurisdiction of the Federal Trade Commission (FTC).
FTC regulations require the development of a plan to safeguard client information.
Moreover, a financial institution maintains responsibility for the confidentiality of client information when services are outsourced.
If a net loss results from the operations of the S corporation,
the owner can use that the appropriate portion of that loss to reduce taxable income up to the capital basis invested
Partnerships can change small amounts of ownership without any tax impact. However, if too much of the ownership is changed, (sale or exchange of at least 50% of total interest in partnership income and capital in a 12-month period)
termination
assets are assumed to be distributed and then contributed back to the new partnership.
No tax effect UNLESS significant amounts of cash and distribution creates tax effects for partners
Debts and at-risk basis for a partnership or S corporation
Partnership - increase at-risk basis because patners are ultimately responsible for the debts that are incurred. -
S corporation - do not increase at-risk basis
P/S
if the basis to company of property distributed exceeds owner’s basis in the business,
basis of items received must be reduced to the owner’s basis
no gain is recorded UNLESS cash received exceeded owner’s basis – recognize gain for the excess and any additional property is recorded with a zero basis
Basis to partner when basis of the property received is larger than the basis reported by the partner for the partnership as a whole. No cash is received.
No gain or loss is reported
Property moves from partnership to partner and the upper limit of recognition for the partner is the basis in the partnership.
Carryover basis.
In a nonliquidating distribution from a partnership, the tax basis of the property
is normally retained and the partner’s basis in the partnership is reduced by the same amount so that no gain or loss is recognized.
A gain is only possible if the cash received exceeds the tax basis of the partnership.
In a liquidating distribution, the tax basis of the partnership
is first removed from the records of the partner and the received property is then recorded at this same amount.
Cash received is recorded for at value to liquidated partner.
A gain is only possible if the cash received exceeds the tax basis of the partnership
Liquidated partner’s remaining basis in the partnership is recorded as the basis for the property received.
No gain or loss is recorded.
Taxable income to C Corp s/h
% ownership x total distributions to the extent of net income (dividend income)
