R1-M4 Items from Other Entities

Question 1

what are rules about guaranteed payment in partnership?

Answer 1

a guaranteed payment is a salary or other payment to a partner that is not calculated with respect to the partnership income. ex: 20% of partnership profit payment is NOT a guaranteed payment

• an ordinary business expense at partnership level
• Also taxable income to the partner who received the payments

Question 2

what are common fringe benefits on partnership?

Answer 2

• partner’s health insurance premium ( included as part of guaranteed payments)
• retirement plan contributions for partners

These two are “adjustments”

Question 3

what are characteristics of S corp?

Answer 3

• allocations to shareholders are made on a per-share, per-day basis (Kate shareholder sold 100% of her share to David shareholder on Feb. 01, Kate (31/365 x her original share amount); David (334/365 x her original share amount)
• shareholder can be an employee, so the shareholder-employee would receive a salary, not a guaranteed payment -> salary expense for the business -> NOT subject to self-employment tax

Question 4

what are characteristics of partnership?

Answer 4

• allocable share of partnership or LLC ordinary business income is self-employment income and subject to self-employment tax if the partner is actively involved in the operations of the business. If NOT actively participate, it’s NOT self-employment income

Question 5

what are section 199A Qualified business income deduction for flow-through business entities?

Answer 5

• Section 199A deduction is available to all taxpayers other than a regular C corp. This includes individuals, trusts, and estates
• Deduction is up to 20% of qualified business income (QBI) for eligible entities
• 2 tests:
  + test 1: the GREATER of W-2 wage and property limitation: 50% of W2 wages; or 25% of W2 + 2.5% of unadjusted basis immediately after acquisition (UBIA) for all PP&E
  + test 2: the LESSER of combined QBI deduction of all qualifying business; or 20% of the taxable income (before QBI deduction) in excess of net capital gain
• 3 categories of taxpayers:
  + category 1: income at or below $182,100 single or $364,200 MFJ => full 20% for QTB and SSTB
  + category 2: income above $232,100 for single or $464,200 MFJ. If QTB => full W2 wage and property limitation applies; if SSTB => NO QBI deduction allowed
  + category 3: income between $182,100-$232,100 ($50k phase-out) for single and $364,200-$464,200 (100k phase-put) for MFJ. complex and beyond the scope of the exam
• Negative QBI amount:
  + multiple businesses and one with a loss: losses are allocated pro rata among the positive QBI
  + all businesses are at net loss: QBI deduction for the tax year is zero. the QBI loss is carried forward as a separate business in future year

Question 6

what are aggregation rules?

Answer 6

An individual taxpayer may aggregate QTB businesses if:
- same person, or group of persons, owns at least 50% of each business; and
- the businesses to be aggregated satisfy at least two of the following:
+ provide products/services that are the same
+ share facilities
+ operated in coordination

Note: aggregate seems to get more deduction on section 199A QBI deduction, so try to aggregate if eligible