R3 - Entity Taxation Flashcards
Taxable Income for Corp
Do not include:
Municipal Bond Interest
Federal Income Tax Expense
Can’t Expense Interest Expense to carry the bond
Only investment interest expense is a separately stated item.
For Partnership
When getting Taxable Income for Partner
On the Partner side:
Must include income from Partnership, even if not received
AND
Income includes guaranteed payments
Withdrawals/distributions are not a taxable event, yet will decrease partner’s basis
No Penalty will be imposed on a CORP
If the total underpayment of tax for the year is less than $500
Public Law No. 86-272
Federal Law offers protection
Is a federal law that prohibits a state from imposing a net income tax on a taxpayer’s net income derived from interstate commerce when certain circumstances apply
This provides protection against Nexus
In other words, the taxpayer can conduct certain business in the state without triggering nexus
Regular MACRS depreciation
For Schedule K-1
Is Part of Ordinary Business Income
It is not a separately stated item on Schedule K-1
For Partnership
Only retirement plan contributions for employees are included in ordinary business income
Retirement plan contributions for partners are included on Schedule K of the partnership income tax return as a separately stated item.
Partners’ Health Insurance Premiums are included as part of Guaranteed payments
Recourse Debt
Recourse Debt favors the lender bc it provides more avenues for debt recovery
General Partner is responsible
Accounts payable is considered Recourse Debt
Limited Partner is ONLY/Solley responsible for his or her loan to partnership
Non-Recourse Debt
Borrower is not personally liable for the debt
Borrower defaults, the lender can only get the collateral’s value and does NOT cover the full debt
Allocated to all partners, both general & limited, based on their profit-sharing ratios.
Qualified Non-Recourse Debt
Type of Non-Recourse Debt that is secured by real property used in the activity of holding real property, like rental properties
It CAN increase a partner’s basis for distribution purposes w/o affecting the at-risk rules for loss deductions
Recourse Debt
Is allocated to partners who bear the ECONOMIC RISK OF LOSS
In other words the partners who are personally liable for the debt will have their basis in the partnership increased by their share of the recourse debt
Tax Shelters
Strategies or Investments that Ind or Corps use to reduce their taxable income and tax liability
Purpose: Defer or reduce taxes
Types: IRA or 401 (k), real estate investments, certain trusts and or partnerships
Reg: IRC requires certain entities, including tax shelters to USE ACCRUAL METHOD of accounting
IF IRS Determines that part of a shareholder’s salary is unreasonable
IT MAY RECLASSIFY part of the salary as a dividend
Doing this decreases the Corps deductible salary expense and increases the corporation’s nondeductible dividends
Reclassified portion of the salary is then taxed to the shareholder as a dividend, which is taxed at preferential tax rate, rather than as salary, which is taxed at ordinary tax rates
Rent expense is often
Included in a state’s property apportionment factor
Consent Dividends
(weird)
Agreed upon dividend (but not actually distributed out)
Shareholders report it on their tax return as though they received it
Its so that the Corporation can claim a deduction for dividends paid
IN DRD
Limitation is ignored when there is a loss caused by a full DRD
When this happens the FULL DRD is allowed
Criteria for PHC
Personal Holding Company
- More than 50% of the stock must be owned by 5 or fewer individuals
- At least 60% of the adjusted ordinary gross income must be certain investment income (int, div, etc.)
Stock Ownership Test 50%
Income Test 60%
S-CORPORATION
An S-Corporation Shareholder does not include any S-Corp Debt in Stock Basis
BC the debt is considered a liability of the Corporation itself
The Basis is the shareholder’s investment in the corporation
For a shareholder to have a debt basis, they must make a direct loan to the S-Corp, it can be used to absorb losses once the stock basis is exhausted
Loans from 3rd parties, like banks, do not create a debt basis for shareholders bc shareholders are not personally liable for these debts unless they have personally guaranteed them
To qualify as publicly supported
At least 1/3 of the organization’s total support must come from governmental units and the general public
A PHC - Personal Holding Company
Deduct Federal Income Taxes to compute undistributed personal holding company income
Net Long Term Capital Gain - Federal Income Taxes in computing undistributed personal holding company income
Allocation of nonbusiness income
Involves assigning the entirety of income items like investment income to one state
The amounts not allocated entirely to one state are apportioned to the states in which the company does business
Foreign income taxes paid by a Domestic Corp
May be claimed either as a deduction or as a credit, at the option of the Corp
MINIMUM ACCUMULATED EARNINGS CREDIT
C - Corps Are allowed to retain up to $250,000
Personal Service Corporations - have a lower threshold
They can retain up to $150,000 of earnings w/o inc
You get:
Taxable Income
- Minus
Federal Income Tax
- Minus
Minimum Accumulated Earnings Credit ($250,000) for Manufacturing Companies
Illegal Business
Gain from illegal activity is includible in income
BUT
To determine the gain - a deduction is permitted for cost of merchandise ( even if it is illegal )
In S-Corps
Amount for Federal Income Tax
- Includes all income and deductions
Items Included:
Int Income
Dividends
Cap Gains
Charitable Contributions
Amount for Federal Income Tax is used to determine the total taxable income of the Corp
Ordinary Business Income
Focuses only on:
- Income and Expenses related to Corps regular business activities
Items NOT included:
Int Income
Dividends
Cap Gains
Charitable Contributions
Ordinary Business Income is used to assess the profitability of the Corp’s CORE operations
