R3 Flashcards
S-CORP TERMINATIONS HAPPENS WHEN:
If Shareholders exceed 100
Ineligible Shareholders own shares:
NO Corp, NO Partnership, or non-resident alien
Family members can count as 1 shareholder
Inds, Certain Trusts, and Estates can own shares (Considered Eligible Shareholders)
Corps, Partnerships, and non-resident aliens cannot
Must be US Citizenship or Resident
TAX BASIS IN A PARTNERSHIP
It’s their investment into the Partnership (broken down)
Tax Basis does NOT include Guaranteed Payments bc it has already been subtracted from Ordinary Business Income
Purchase of an Asset (ex: Land) has NO effect on income of the Partnership and has NO effect on a partner’s basis
TAX FORM 1120
S for S Corp
C for C Corp
1120-S or 1120-C
C-Corp
Taxable Income or Loss
What’s deductible and How to apply Charitable Contributions and Dividends Deduction
Charitable Contribution is Deducted BEFORE:
Charitable Contribution Deduction (Lesser of 10% Taxable Income) - if they have a NOL do NOT deduct
Dividend Received Deduction (DRD) - if at a loss take reduction then add to loss
ANY Capital Loss Carryback
DRD - DIVIDEND RECEIVED DEDUCTION
Lesser of DRD or Taxable income computed
50% IF ownership is less than 20% (use of words “Unrelated)
65% IF ownership is 20%-80%
100% IF ownership is 80% or more (“consolidated)
Income Limitation does NOT apply - when taking full DRD results in a Loss.
NOL for Corporations
Can only offset 80% of future year’s taxable income
DRD does not apply IF after taking into account full DRD results in NOL
Partnership Loss
Cannot surpass - 0 -
Get that already!!
If it is over the basis then that loss is “suspended loss”
Apply it to future years!!
Under LIFO Method
Inventory on Hand at the end of the year is treated as being composed of the earliest acquired goods
Corporations may NOT deduct any Capital Losses in excess
Capital Gains in a year
The excess gets to be carried back 3 years and can ONLY be offset against Capital Gains and carried forward 5 years
Debt Basis
Only Direct Loans to the Corporation create Debt Basis
Guarantee of Debt Basis does NOT create Debt Basis
All Corp Shareholders must consent to
Make an election for the Corp to be treated as an S-Corp (Fed Law)
S-ELECTION made by the 15th day of the 3rd Month of the taxable year
Is retroactively effective on the first day of the taxable year
S-CORP
Rule: The election for an S corporation is revoked on the date when over 50% of the shareholders elect to revoke.
GAAP (Allowance Method):
Bad debts are estimated and recorded as an expense in the same period as the related sales.
An allowance for doubtful accounts is created to reflect the expected uncollectible amounts.
This method matches expenses to revenues but does not align with tax rules.
Tax (Direct Write-Off Method):
Bad debts are only deductible when they are specifically identified as uncollectible and written off.
No estimation is allowed; deductions occur in the year the debt becomes worthless.
This method is required for most corporations, except small banks or thrift institutions, which may use the reserve method.
Recourse Debt:
Personally Liable for the Debt ( Usually Gen Partner )
Allocated to the Partners who bear the economic risk of Loss
Increases basis for partners personally Liable
Limited Partner are not liable for debt BUT are liable for personally guaranteed debt
Non-Recourse Debt:
Liability Limited to the collateral
Allocated to all partners based on Ownership %’s
Increases Basis for all partners proportionately
Organizational and Start-Up Costs
(Watch for dates)
Expenses incurred BEFORE the business began normal operations.
Organizational Costs
Costs to form / org a Corp / Partnership
Costs are required to be capitalized and amortized
Business can expense up to $5k of org cots
There is a dollar-for-dollar phase-out if > $50k
SL over 180 months
Costs that deal with the sale & issuance of Corp own stock are NOT Organizational Costs (ex: Underwriting Fees)
S-CORP FRINGE BENEFITS
Paid by an S-Corp are deductible by the S-Corp ONLY for NON-Shareholder employees & those employee-shareholders owning 2% or less of the S-Corp
If Shareholders greater than 2% the Insurance Premiums are included in Gross Income
Who can use Cash Method of Accounting
RULE: Accrual Method of accounting will be required for:
Tax Shelters
Large C Corps (Avg Gross Receipts over 3 yr period of $30 Million)
Manufacturers’
Personal Service Corps are permitted the use of Cash Method
S-Corp
Shareholder’s Salary DOES NOT affect their BASIS!
Shareholder Salary is part of a deductible expense
When forming a Corporation and giving Contributions
Its a NO TAX Situation, which means use the Net Book Value of item being contributed
IF it is a taxable situation use FMV
In a Partnership
Losses between related parties are disallowed, to prevent tax avoidance
When Loss is disallowed because of a related party transaction then it is Debited to partners equity account - Brings down partner’s basis
Investment Interest Expense:
A separately Stated Item
Subject to Investment Income Limitations
Each partner determines its deductibility based on their individual investment income
C-Corp
Business Interest Expense
What is it Limited to?
ATI or Annual Business income for the year excluding all interest Income and interest expense
Business Interest Income
30% of adjusted taxable Income (ATI)
Floor Plan Financing Interest Expense
Disallowed business interest expense can be carried forward indefinitely
Annual Gross receipts of $30 million (for prior 3 years) - Limitation does apply
To qualify as Publicly Supported
At least 1/3 of the tax-exempt organization’s support
comes from
Governmental Units and the General Public
There is an income limitation
on the Dividends-Received Deduction
Corporations that are NOT small banks or thrift institutions
Are required to use the direct charge-off method rather than the reserve method
Apportionment of Income
Interest Income is nonoperating Income
It will be taxed only but the home state
Personal Holding Company
If 60% of Adjusted Ordinary Income is:
1. Dividends
2. Taxable Interest
3. Royalties, but not mineral or oil, gas or copyright royalties
4. Net Rent, if less than 50% of ordinary gross income
Can deduct:
Federal Income Taxes
Net LTCG - Federal Income Taxes
Determining S-Corp Basis
Separately and Non-Separately Stated Items affect basis
Remember that Salary does not effect basis of a shareholder bc Salary is a deductible expense
A Campaign Committee for a candidate for federal, state, or local public office is
A type of Section 527 Tax-Exempt Political Organization
C - Corp with
Accounting Methods
Greater than $30 Million average annual gross receipts must use the Accrual Basis of accounting
NEXUS
Minimum level of Contact a taxpayer (business or individual) must have with a state to be taxed
Creating NEXUS
Physical Presence: Owning or leasing prop, having employees, or maintaining office or warehouse in the state
Economic Presence: Meeting Certain sales or transaction thresholds in a state, even without a physical presence
Other Activities: Sending employees into the state for work or training
Soliciting sales in the state
Providing services like installation, maintenance etc
FLOOR PLAN FINANCING INTEREST EXPENSE
Debt used to acquire motor vehicles held for sale or lease where the debt is secured by the acquired inventory
A Corp is considered PHC Personal Holding Company if 60% of adjusted ordinary gross income consists of:
- Dividends
- Taxable Interest
- Royalties, but not mineral, oil, gas or copyright royalties
- Net rent, if less than 50% of ordinary gross income
S-Corp
(Health Insurance for Shareholders and Treatment)
The S-Corp can deduct Health Insurance Premiums paid for Shareholders if its on the W-2 as Taxable Income
The shareholder must own more than 2% and the Shareholder in turn can deduct the premiums paid on as Self-Employed Health Insurance deduction
If 2% or less then it would be considered a Deductible Fringe Benefit AND NOT included in Taxable income for the 2% Shareholder
In Partnerships, Retirement Plan Contributions are NOT deductible for partnership level
Separately Stated in Sch K-1 and can be deducted on the Partners ind tax return
BUT
FOR S-Corps
Retirement plan contributions can be deducted as ordinary business expenses
Deductible at the corporate level - They do not need to be included in the Shareholder’s W-2 income
Minimum Accumulated Earnings Credit
For Manufacturing Companies
Minimum of $250,000
The credit is used to reduce the amount of accumulated taxable income that is subject to the accumulated earnings tax.
Taxable Income - Federal Income Taxes = X , then subtract $250,000
Then what’s left is taxable income that is subject to Accumulated Earnings Tax
Before computing the Charitable Contribution Deduction for a CORP
Referring to DRD
You must include the Dividend received before calculating your Contribution Deduction
What does NOT create Nexus in
Delivery by a common carrier, does not create Nexus
