R3, M5 S Corporation Overview Flashcards
Dreamscape, Inc., a widget retailer, had taxable income of $150,000 from operations during its taxable year. In addition, Dreamscape incurred a $35,000 loss from the sale of investment land, a capital asset. No other gains or losses were generated during the taxable year, nor had been in past years. In Dreamscape’s tax return for that year, what is the proper treatment of the $35,000 loss?
Carry the $35,000 capital loss forward for five years.
Capital gains are taxed at the same rate as ordinary income for a corporation. However, capital losses can only be used to offset capital gains. Any amount not utilized in the year of generation can either be carried back 3 years to offset prior capital gains or carried forward for 5 years.
As a general partner in Greenland Associates, an individual’s share of partnership income for the current tax year is $25,000 ordinary business income and a $10,000 guaranteed payment. The individual also received $5,000 in cash distributions from the partnership. What income should the individual report from the interest in Greenland?
$35,000
A partner must include in income their share of partnership income (even if not received) on their tax return in the taxable year within which the taxable year of the partnership ends. This income includes guaranteed payments. Withdrawals/distributions are not a taxable event, yet will decrease the partner’s basis.
what amount should Kell deduct for life insurance premiums?
Premiums paid for insurance on an officer’s life where the corporation is the owner and beneficiary of the policy are not deductible.
Group-term life insurance premiums paid on employees’ lives, with the employees’ dependents as owners and beneficiaries of the policies are considered to be a fringe benefit and would therefore be deductible by the corporation.
On January 1 of the current year, Kane was a 25% equal partner in Maze general partnership, which had partnership liabilities of $300,000. On January 2, a new partner was admitted and Kane’s interest was reduced to 20%. On April 1, Maze repaid a $100,000 general partnership loan. Ignoring any income, loss, or distributions for the current year, what was the net effect of the two transactions on Kane’s tax basis in Maze partnership interest?
Decrease of $35,000
There would be a $35,000 decrease in Kane’s tax basis in his partnership interest. Basis in a partnership is increased by debt that a partner is personally liable for and decreased by the amount of liabilities a partner is relieved of.
Kane’s 25% of debt ($300,000 × 25%) 75,000
Kane’s 20% of debt ($300,000 × 20%) (60,000)
Reduction of basis due to admission of new partner
15,000 Add: Reduction of basis for the payment of $100,000 general partnership liability ($100,000 × 20%) 20,000
Total reduction in tax basis of Kane’s partnership interest 35,000
Filler-Up is an accrual-basis calendar-year C corporation. Filler-Up uses an allowance method for accounting for bad debts. The allowance for bad debts was $20,000 at the beginning of the year and $30,000 at the end of the year. During the year, Filler-Up wrote off $5,000 of uncollectible receivables and accrued an additional $15,000 of expenses for accounts estimated to be uncollectible. What is the Schedule M-1 adjustment on Filler-Up’s federal income tax return?
$10,000 increase in taxable income.
For tax purposes, Filler-Up may only deduct the amount of uncollectible receivables actually written off during the year, which in this case was $5,000. For financial accounting purposes, Filler-Up recorded $15,000 of expenses for accounts estimated to be uncollectible. So, the amount recorded as an expense for financial accounting purposes was $10,000 more than that allowed to be deducted for tax purposes. On the Schedule M-1 reconciliation, that $10,000 difference must be added back in reconciling financial accounting income to taxable income.
What are the treatment options for a net operating loss occurring in tax years after December 31, 2017, and before January 1, 2021?
Five-year carryback and indefinite carryforward
Net operating losses occurring in tax years 2018, 2019, and 2020 can be carried back five years and carried forward indefinitely to offset taxable income in other years.
Which of the following activities will not trigger nexus in a state in which a company operates?
Delivery by a common carrier.
Collection of delinquent accounts within the state creates nexus.
Approval or acceptance of orders within the state creates nexus
Installing or supervising the installation of property for a customer within a state creates nexus.
A sales tax nexus is created when a business has a sufficient connection to or presence in a state or jurisdiction, such as a physical presence or economic
You may create nexus through renting or owning property, employing remote workers, or storing goods in a fulfillment center or warehouse.
Which of the following shareholders is ineligible to own the stock of an S corporation?
Domestic C corporation
Partnership
S corporation cannot have a C corporation shareholder, there is no restriction on an S corporation being a shareholder in a C corporation.
Who are the 100 shareholders (shares owned directly and constructively)
Brothers/sisters, parents, spouse. (Lineal ancestor) child and grand child
For which of the following entities is the owner’s basis increased by the owner’s share of profits and decreased by the owner’s share of losses but is not affected by the entity’s bank loan increases or decreases?
S corporation.
The owner’s basis in an S Corporation is increased by the owner’s share of profits and decreased by the owner’s share of losses. It is not affected by any bank loans increased or decreased by the corporation. The S corporation shareholder only has debt basis in direct loans made to the corporation by the owner.
Quail, Inc. manufactures consumer products and sells them to distributors. Quail advertises its products to increase sales and enhance the value of its trade name. What is the appropriate tax treatment for the advertising costs?
Deduct the costs currently as ordinary and necessary business expenses.
Advertising costs which are in the nature of selling expenses (which these expenses appear to be) are deductible if they are reasonable and are related to the taxpayer’s business activities.
Melanie is the sole stockholder of Machine Inc., an S corporation. Her basis in the stock as of the end of Year 4 is $43,400. During Year 5, Machine reported a loss of $19,000. During Year 5, Melanie received a distribution of $38,000 from Machine and loaned $11,000 directly to Machine. What amount of the loss is passed through to Melanie’s individual income tax return for Year 5?
$16,400
Before consideration of the loss limitation, the stock basis is $5,400 ($43,400 –$38,000 distribution). The basis in the loan of $11,000 increases the total tax basis amount to $16,400. The loss of $19,000 is allowed up to this amount and reduces first stock basis, then debt basis, to zero.
$5,400 is the loss limitation just based on the stock basis. But the $11,000 basis in the debt is also included in tax basis.
Melanie is the sole stockholder of Machine Inc., an S corporation. Her basis in the stock as of the end of Year 4 is $43,400. During Year 5, Machine reported a loss of $19,000. During Year 5, Melanie received a distribution of $38,000 from Machine and guaranteed $11,000 of Machine’s corporate debt. What amount of the loss is passed through to Melanie’s individual income tax return for Year 5?
$5,400
Before consideration of the loss limitation, the stock basis is $5,400 ($43,400 – $38,000 distribution). There is no debt basis because the guarantee of corporate debt does not create debt basis. Only direct loans to the corporation create debt basis. The loss of $19,000 is allowed up to the $5,400 stock basis and reduces total tax basis to zero.
Edge Corp. met the stock ownership requirements of a personal holding company. What sources of income must Edge consider to determine if the income requirements for a personal holding company have been met?
I.
Interest earned on tax-exempt obligations.
II.
Dividends received from an unrelated domestic corporation.
II only.
Personal holding company income consists of dividends received from an unrelated domestic corporation. It does not include interest earned on tax-exempt obligations which are not a part of adjusted ordinary gross income.
A corporation is a 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.
The dividends received from an unrelated domestic corporation are considered in determining if the requirements for a personal holding company have been met.
Ati Corp. has two common stockholders. Ati derives all of its income from investments in stocks and securities, and it regularly distributes 51% of its taxable income as dividends to its stockholders. Ati is a:
Personal holding company.
Personal holding company status applies if a corporation is owned more than 50% by five or fewer individuals at any time during the last half of the tax year and if at least 60% of adjusted ordinary gross income for the tax year is personal holding company income (which would include income from investments in stocks and securities).
