R5

Question 1

Where do capital losses and other items of income and loss go?

Answer 1

they flow through to the tax returns of the shareholders

Question 2

Who would not be eligible to be a shareholder in an S Corp?

Answer 2

LLCs with more than one owner (aka partnerships)

Question 3

T/F: An S Corp can only have one class of stock outstanding.

Answer 3

true - ex. they can’t have both common and preferred stock

Question 4

Who would be considered eligible S Corp shareholders?

Answer 4

individuals, estates, grantor trust created by a U.S. citizen

Question 5

A corporation can be treated as an S Corp if it has _____ or fewer stockholders.

Answer 5

100

Question 6

When would an S Corp have to pay a built-in gains tax (fair market value - adjusted basis)?

Answer 6

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

Question 7

T/F: In order for an S Corp election to be valid, it must be agreed upon in writing by ALL shareholders.

Answer 7

true

Question 8

How would you calculate the tax liability as a result of a sale?

Answer 8

(FMV - adjusted basis) x 21%

Question 9

When does an S Corp election become effective?

Answer 9

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)

Question 10

Reminder: charitable contributions are limited to 10% of taxable income before charitable contributions

Answer 10

noted

Question 11

Would long-term capital losses and charitable contributions be included in taxable income?

Answer 11

no

Question 12

T/F: Dividend income is included in net business income.

Answer 12

false - it’s not (it’s a separately stated item)

Question 13

What would be included as separately stated items on Schedule K-1?

Answer 13

-long-term capital losses
-charitable contributions
-interest income (NOT expense)
-dividend income
-Section 179 expense

Question 14

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.

Answer 14

true

Question 15

T/F: Both tax-exempt and taxable interest income increase a shareholder’s basis in S Corp stock.

Answer 15

true

Question 16

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

Answer 16

noted

Question 17

What’s an example of how you would calculate the ending tax basis when given the beginning tax basis with various transactions?

Answer 17

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

Question 18

Where is tax-exempt income reported?

Answer 18

Schedule K-1

Question 19

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).

Answer 19

true

Question 20

What is the accumulated adjustments account (AAA) and what would increase/decrease it?

Answer 20

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

Question 21

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.

Answer 21

true

Question 22

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.

Answer 22

true

Question 23

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.

Answer 23

true

Question 24

What would cause an S Corp to terminate?

Answer 24

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

Question 25

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).

Answer 25

true

Question 26

T/F: An S Corp that terminates cannot reelect S status until the fifth year from the current year.

Answer 26

true

Question 27

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).

Answer 27

true

Question 28

How would you calculate a gain (ordinary income) for partnership contributions?

Answer 28

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

Question 29

How would you determine a partner's basis in PARTNERSHIP INTEREST when a liability is assumed by the partnership?

Answer 29

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

Question 30

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.

Answer 30

true

Question 31

T/F: If a partner acquired services (as opposed to property), this full amount would be considered ordinary income.

Answer 31

true

Question 32

How does an increase in partnership liabilities affect the partners?

Answer 32

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)

Question 33

How would you calculate a partner's basis at year-end?

Answer 33

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

Question 34

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).

Answer 34

true *note: if asked what the basis is for just the asset, the answer would just be the adjusted basis

Question 35

How would you calculate a partner's initial basis in the partnership interest?

Answer 35

adjusted basis of cash and/or property contributed - share of liability assumed (debt x % of other partners) = initial basis

Question 36

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.

Answer 36

true

Question 37

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.

Answer 37

true initial basis + share in increase of liabilities

Question 38

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?

Answer 38

1. FMV - tax basis = gain #1 2. (sale price - tax basis - gain #1) x % ownership 3. #1 + #2

Question 39

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.

Answer 39

true

Question 40

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).

Answer 40

true

Question 41

What would be items that are not separately stated on tax returns for partnerships?

Answer 41

revenues - salaries - guaranteed payments - rent expense - depreciation expense (and any other I/S expenses) = total nonseparately stated income (aka ordinary income)

Question 42

What are items that would be separately stated?

Answer 42

interest income (not expense) gain on sale of securities charitable contributions

Question 43

What amount of partnership income is taxable?

Answer 43

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

Question 44

What is included in AGI for partnership income?

Answer 44

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

Question 45

T/F: Guaranteed payments increase the partner's ordinary income but NOT the tax basis.

Answer 45

true formula: partner's share of ordinary income (after guaranteed payment deduction) + guaranteed deduction that belongs to that partner

Question 46

T/F: Partnership income is taxable to a partner regardless if it's distributed.

Answer 46

true

Question 47

How do you calculate the amortized costs for organizational costs when creating a partnership?

Answer 47

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

Question 48

How much of an ordinary loss can a partner deduct?

Answer 48

beginning balance - pro rate distribution = amount of ordinary loss that's deductible to that partner

Question 49

How would you calculate the adjusted tax basis for a partnership at the end of each year?

Answer 49

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)

Question 50

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.

Answer 50

true

Question 51

T/F: A nonliquidating dividend is not taxable to the partners as long as it's less than the partnership interest.

Answer 51

true

Question 52

How would you calculate a partner's adjusted basis?

Answer 52

beginning basis + share of ordinary income - nonliquidating cash distribution = new basis of the property received

Question 53

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.

Answer 53

true

Question 54

What is the amount of capital gain realized and recognized from a nonliquidating cash distribution?

Answer 54

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

Question 55

T/F: A single-member LLC (owned entirely by one individual) is a disregarded entity unless they elect the classification as a corporation.

Answer 55

true - both LLCs and Corporations can have a single-owner

Question 56

T/F: LLCs can select whether to be taxed as a partnership, corporation, or sole proprietorship.

Answer 56

true

Question 57

What's an advantage of being taxed as an S Corporation?

Answer 57

appreciated property can be distributed tax-free to an owner note: this is true for C Corps as well

Question 58

T/F: Double taxation only affects C Corps.

Answer 58

true

Question 59

How do you know when to calculate an ordinary gain/loss or a capital gain/loss and for how much?

Answer 59

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

Question 60

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).

Answer 60

true note: if there was no liquidating cash distribution, there would be no gain or loss either

Question 61

How would you calculate ordinary income on the sale of a partner's partnership interest?

Answer 61

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

Question 62

T/F: Foreign income taxes may be claimed either as a deduction or as a credit (the corporation gets to decide).

Answer 62

true

Question 63

When would transfer pricing issues arise?

Answer 63

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

Question 64

What things would trigger nexus (border control program)?

Answer 64

-providing installation services with a purchase of tangible personal property -acceptance of an order within the state -collection of delinquent accounts

Question 65

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.

Answer 65

true note: you would apportion various taxes by adding together the %s and dividing by the # of types of taxes (basically averaging them)

Question 66

What are categories of income for foreign tax credit limitation purposes?

Answer 66

-general category income -passive category income -foreign branch income -global intangible low-tax income

Question 67

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).

Answer 67

true

Question 68

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.

Answer 68

true

Question 69

When will a foreign person not be treated as a U.S. resident?

Answer 69

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

Question 70

T/F: Income earned by a U.S. branch is reported on Form 1120-F (U.S. Income Tax Return of a Foreign Corporation).

Answer 70

true

Question 71

Reminder: when partnership interests are transferred to partners, they are transferred at the FMV as ordinary income

Answer 71

noted

Question 72

Reminder: partnership interests -- capital asset; gain on unrealized receivables or inventory -- ordinary income

Answer 72

noted

Question 73

How do distributions, return of capital, and capital gains relate to each other?

Answer 73

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)

Question 74

T/F: A partner will only recognize a gain to the extent that any cash received exceeds their basis in the partnership.

Answer 74

true

Question 75

T/F: A nonresident is subject to a 30% U.S. tax withholding.

Answer 75

(# of shares * price per share) - (dividend * 30%) of shares * price per share = dividend

Question 76

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?

Answer 76

5 years

Question 77

In a nonliquidating distribution, should you use the FMV or adjusted basis for the basis in an asset contributed?

Answer 77

adjusted (partnership) basis note: cannot exceed the partner's partnership interest basis