R5 Flashcards
Where do capital losses and other items of income and loss go?
they flow through to the tax returns of the shareholders
Who would not be eligible to be a shareholder in an S Corp?
LLCs with more than one owner (aka partnerships)
T/F: An S Corp can only have one class of stock outstanding.
true - ex. they can’t have both common and preferred stock
Who would be considered eligible S Corp shareholders?
individuals, estates, grantor trust created by a U.S. citizen
A corporation can be treated as an S Corp if it has _____ or fewer stockholders.
100
When would an S Corp have to pay a built-in gains tax (fair market value - adjusted basis)?
when it disposes of assets that were appreciated in value at the time the Company converted from a C to an S Corp
note: the S Corp would not have a built-in gain if they were an S Corp from incorporation
T/F: In order for an S Corp election to be valid, it must be agreed upon in writing by ALL shareholders.
true
How would you calculate the tax liability as a result of a sale?
(FMV - adjusted basis) x 21%
When does an S Corp election become effective?
to be retroactively effective for the current taxable year (as of Jan. 1), the S Corp election needs to be made by the 15th day of the third month (March 15)
if the election is made after that date, it becomes effective on the first day of the next taxable year (Jan. 1)
Reminder: charitable contributions are limited to 10% of taxable income before charitable contributions
noted
Would long-term capital losses and charitable contributions be included in taxable income?
no
T/F: Dividend income is included in net business income.
false - it’s not (it’s a separately stated item)
What would be included as separately stated items on Schedule K-1?
-long-term capital losses
-charitable contributions
-interest income (NOT expense)
-dividend income
-Section 179 expense
T/F: The value of fringe benefits such as health insurance is includable in the gross income of S Corporation shareholders who own more than 2% of the S Corp’s stock.
true
T/F: Both tax-exempt and taxable interest income increase a shareholder’s basis in S Corp stock.
true
Reminder: the bank loans won’t affect the tax basis but loans provided by the corporation will affect the tax basis; loans from corporations will also need to be reduced by any amount that was repaid
noted
What’s an example of how you would calculate the ending tax basis when given the beginning tax basis with various transactions?
beg. tax basis
+ ordinary income (the shareholder’s share from the corporation)
(OR subtract ordinary loss)
+ capital gains
+ additional contributions (for property, initial investment in the corporation, etc.)
- distributions received from the corporation
- capital contributions
- net operating loss incurred by the corporation
= ending tax basis
*note: wages are NOT included here
Where is tax-exempt income reported?
Schedule K-1
T/F: The “at-risk” rules applicable to losses limit the amount of loss that can be flowed through from the S Corp to the shareholder to the amount the shareholder is “at-risk” (shareholder’s risk of financial loss).
true
What is the accumulated adjustments account (AAA) and what would increase/decrease it?
it’s the accumulated earnings and profits for the S Corp
it’s increased by ordinary income and separately stated income and gains (such as taxable interest income, interest, and dividends)
it’s decreased by ordinary business losses, separately stated losses and deductions, nondeductible expenses, and distributions
note: tax-exempt income would be on an other adjustments account (OAA)
note: the AAA gets subtracted from the corporate distribution and the stock basis
T/F: If distributions are made in excess of the shareholder’s basis (after considering all potential activity such as ordinary income), the excess amount is taxed as a capital gain.
true
T/F: If an S Corp acquires 100% of the stock of an active C Corp, this will NOT terminate the election as an S Corp.
true
T/F: If an S Corp was terminated during the year, you should prorate the income to be allocated to the S Corp for the part of the year where it was still an S Corp.
true
What would cause an S Corp to terminate?
if the S Corp was a former C Corp, has undistributed earnings and profits, and has passive investment income exceeding 25% of gross receipts in each consecutive year
T/F: An S Corp status can be revoked if shareholders owning more than 50% of the total number of issued and outstanding shares consent (across both voting and non-voting stock).
true
T/F: An S Corp that terminates cannot reelect S status until the fifth year from the current year.
true
T/F: There is no gain or loss recognized for partnerships when a partner contributes property to a partnership in exchange for a partnership interest (stock invested into the partnership).
true
How would you calculate a gain (ordinary income) for partnership contributions?
FMV of property x % interest in capital
- adj. basis; stock purchased at the beginning (to get into the partnership)
= gain realized
*if this is positive, no gain is recognized
*it would be ordinary income b/c the partner provided services for the partnership interest
How would you determine a partner’s basis in PARTNERSHIP INTEREST when a liability is assumed by the partnership?
cash basis of cash contributed (if any)
+ basis of property contributed (not FMV)
+ their share of taxable income
- cash received
- liability assumed by the OTHER PARTNERS (total liability x total % of ownership for other partners)
+ FMV of services rendered
+ recourse liabilities assumed based on their % of ownership
= partnership basis
T/F: As long as the liability (per above) does NOT exceed the basis of the property contributed (there’s a positive amount leftover), the contributing partner will not have to recognize a gain at the time of contribution.
true
T/F: If a partner acquired services (as opposed to property), this full amount would be considered ordinary income.
true
How does an increase in partnership liabilities affect the partners?
it increases each partner’s basis in proportion to their ownership if the liability is nonrecourse (the partner has personal liability/economic risk which would happen if the partner is a general partner or if they personally guarantee the debt)
How would you calculate a partner’s basis at year-end?
initial contribution at formation
+ net TAXABLE income * %
+ tax-exempt income * %
+ portfolio income * %
+ municipal bond interest income * %
- distribution to each partner
+ share of partnership debt (debt * %)
- share of decrease in partnership debt (if any)
= basis at year-end
*do not worry about purchases or cash received
T/F: A partner’s basis in a partnership interest is the cash they contributed (if any) + adjusted tax basis (if the property is not subject to excess liability).
true
*note: if asked what the basis is for just the asset, the answer would just be the adjusted basis
How would you calculate a partner’s initial basis in the partnership interest?
adjusted basis of cash and/or property contributed
- share of liability assumed (debt x % of other partners)
= initial basis
T/F: The holding period of a partnership interest acquired in exchange for a contributed capital asset begins on the date the partner’s holding period of the capital asset began.
true
T/F: When a partner’s share of partnership liabilities increases, that partner’s basis in the partnership increases by their share of the increase.
true
initial basis
+ share in increase of liabilities
How would you calculate the gain from a sale of an asset to be allocated to the partner who contributed the asset to the partnership?
- FMV - tax basis = gain #1
- (sale price - tax basis - gain #1) x % ownership
- # 1 + #2
T/F: A partnership may elect to have a tax year other than the generally required tax year (the year that the partnership with the highest % of ownership uses) if the deferral period for the tax year elected does not exceed 3 months.
true
T/F: Losses between a controlling partner and his controlled partnership from the sale or exchange of property are NOT allowed to be recognized, but they would be realized (sale price - cost basis).
true
What would be items that are not separately stated on tax returns for partnerships?
revenues
- salaries
- guaranteed payments
- rent expense
- depreciation expense
(and any other I/S expenses)
= total nonseparately stated income (aka ordinary income)
What are items that would be separately stated?
interest income (not expense)
gain on sale of securities
charitable contributions
What amount of partnership income is taxable?
his/her distributive (allocated) share of partnership income (even if not received in cash)
ex.
partnership income before guaranteed pmt
- guaranteed payment
= net taxable partnership income
* the partner’s % share
= partner’s share of partnership income
+ (net long-term capital gains * partner’s % share)
+ guaranteed payment
= total income reportable on the partner’s tax return
What is included in AGI for partnership income?
ordinary income
+ interest income
- net section 1231 loss
= total from partnership included in AGI
ordinary income + separately stated items
cash distribution is included on Schedule K-1
T/F: Guaranteed payments increase the partner’s ordinary income but NOT the tax basis.
true
formula:
partner’s share of ordinary income (after guaranteed payment deduction) + guaranteed deduction that belongs to that partner
T/F: Partnership income is taxable to a partner regardless if it’s distributed.
true
How do you calculate the amortized costs for organizational costs when creating a partnership?
add all the relevant costs (ex. filing fees)
- 5,000 (b/c you can deduct up to 5k, after 5k you have to start amortizing)
/ 180 months
x # of months in the year
+ 5,000
How much of an ordinary loss can a partner deduct?
beginning balance
- pro rate distribution
= amount of ordinary loss that’s deductible to that partner
How would you calculate the adjusted tax basis for a partnership at the end of each year?
beginning basis: contribution * partner’s %
+ net L-T capital gain
- cash distribution (received by that partner)
+ ordinary income/loss * % – if loss, you can only include up to the amount of the beginning basis
+ U.S. treasury interest * %
+ total debt * %
repeat for each year; keep track of suspended losses (ordinary losses that went beyond 0)
T/F: The partner’s deduction is based on the year-end adjusted basis and limited to the at-risk basis or the partnership interest amount.
true
T/F: A nonliquidating dividend is not taxable to the partners as long as it’s less than the partnership interest.
true
How would you calculate a partner’s adjusted basis?
beginning basis
+ share of ordinary income
- nonliquidating cash distribution
= new basis of the property received
T/F: A partner who receives a distribution from a partnership recognizes a gain only to the extent that he receives cash in excess of the adjusted basis of his interest in the partnership immediately before the distribution.
true
What is the amount of capital gain realized and recognized from a nonliquidating cash distribution?
nonliquidating cash distribution - (beg. basis + share of ordinary income + etc.)
= capital gain
*if the nonliquidating cash distribution is LESS than the partner’s basis in the partnership interest, it’s non-taxable to the partner
T/F: A single-member LLC (owned entirely by one individual) is a disregarded entity unless they elect the classification as a corporation.
true - both LLCs and Corporations can have a single-owner
T/F: LLCs can select whether to be taxed as a partnership, corporation, or sole proprietorship.
true
What’s an advantage of being taxed as an S Corporation?
appreciated property can be distributed tax-free to an owner
note: this is true for C Corps as well
T/F: Double taxation only affects C Corps.
true
How do you know when to calculate an ordinary gain/loss or a capital gain/loss and for how much?
when there are no Section 751 assets (unrealized receivables or substantially appreciated inventory) – capital gain or loss
(cash received + relief of liability) - basis in partnership interest = gain/loss
T/F: In a complete liquidation, the partner’s basis for distributed property is the SAME as the adjusted basis of his/her partnership interest, reduced by any money actually received (liquidated distribution of cash).
true
note: if there was no liquidating cash distribution, there would be no gain or loss either
How would you calculate ordinary income on the sale of a partner’s partnership interest?
amount realized (cash received + share of total liabilities)
- (initial cash contribution + share of capital or partnership income + share of total liabilities - partnership distributions)
= total gain/loss realized
T/F: Foreign income taxes may be claimed either as a deduction or as a credit (the corporation gets to decide).
true
When would transfer pricing issues arise?
when a U.S.-based taxpayer shares costs with an affiliate that either is not subject to the U.S. income tax OR does not file a consolidated income tax return with the U.S.-based taxpayer
What things would trigger nexus (border control program)?
-providing installation services with a purchase of tangible personal property
-acceptance of an order within the state
-collection of delinquent accounts
T/F: The corporation will allocate its nonbusiness income to the state where it should be taxed and will apportion its (primary) business income within a state.
true
note: you would apportion various taxes by adding together the %s and dividing by the # of types of taxes (basically averaging them)
What are categories of income for foreign tax credit limitation purposes?
-general category income
-passive category income
-foreign branch income
-global intangible low-tax income
T/F: A 100% dividends-received deduction for foreign source dividends is available only to corporate shareholders who own at least 10% of the foreign corporation (stock value OR voting stock).
true
T/F: The base erosion and anti-abuse tax (BEAT) may apply to corporations with average annual gross receipts of $500M or more for the three preceding tax years.
true
When will a foreign person not be treated as a U.S. resident?
when they’re not present in the U.S. for at least 31 days during the current year AND at least 183 days for a three-year period
if they fail to meet this substantial presence test and do not hold a permanent resident visa (“green card”), they will not be treated as a U.S. resident
T/F: Income earned by a U.S. branch is reported on Form 1120-F (U.S. Income Tax Return of a Foreign Corporation).
true
Reminder: when partnership interests are transferred to partners, they are transferred at the FMV as ordinary income
noted
Reminder: partnership interests – capital asset; gain on unrealized receivables or inventory – ordinary income
noted
How do distributions, return of capital, and capital gains relate to each other?
the basis prior to any distribution must be reduced to zero as a nontaxable return of capital, then any excess of the distribution after that is considered a capital gain (and it would be long-term if the stock was held for longer than a year)
T/F: A partner will only recognize a gain to the extent that any cash received exceeds their basis in the partnership.
true
T/F: A nonresident is subject to a 30% U.S. tax withholding.
(# of shares * price per share) - (dividend * 30%)
of shares * price per share = dividend
After a corporation’s status as an S Corporation is revoked or terminated, how many years is the corporation required to wait before making a new S election?
5 years
In a nonliquidating distribution, should you use the FMV or adjusted basis for the basis in an asset contributed?
adjusted (partnership) basis
note: cannot exceed the partner’s partnership interest basis
