R5 Flashcards
Shareholder’s basis is affected by
Both separately and non separately stated items on the K1
Adjusted in the following order:
- increased for income items and excessive depletion
- decreased by distributions
- decrease for nondeductible,non-capital expenses and depletion
- decreased for items of loss and deduction
Election for S Corp status:
- All shareholders must consent (unanimous not majority)
- to be valid for entire current yr, election must be made on/ before March 15th or will not be considered S corp until 1/1 of following yr
S corp income is allocated among shareholder’s:
On a per day, per share basis
S Corp status will terminate when:
- Holders of a majority of the stock consent to voluntary termination
- Corporation fails to meet any of the eligibility requirements
- More than 25% of the corp’s gross receipts come from passive activities for 3 consecutive yrs
Eligibility requirements of an S Corp:
- Domestic Corp
- One class of stock (differences in voting rights allowed)
- Shareholders must be individuals, estates or trusts
- 100 shareholder limit
Items separately listed on Schedule K:
- Ordinary income (=nonseparately stated income)
- Rental income/loss {not rent exp}
- Portfolio income
- Section 1231 G/L
- Charitable contributions
- Section 179 deduction
- Foreign taxes
- Tax-exempt interest
Net business income
Non-separately stated- Ordinary income
Unrealized built-in gain:
When a C corp becomes an S corp & FMV of assets exceeds the adj basis of assets @ election date
**Only if originally held C corp status
How much loss can shareholder deduct on personal return?
-Limited to shareholder’s basis in Corp plus direct shareholder loans to the corp
Accumulated adjustments account is increased by:
Separately and non-separately stated income
-NOT affected by contributions from shareholders
When can a terminated S Corp reelect the status:
Fifth yr from current tax yr
Value of fringe benefits (health insurance) is included in income when:
-S corp shareholder owns >2% of S corp stock
not deductible by S Corp
Initial basis of a partner’s interest:
Cash
+Property (adj basis)
-Liabilities (assumed by other partners)
+Services (FMV)
+Liabilities (assumed by incoming partner)
=Beginning Capital Account
Initial basis of a partner’s interest:
Cash
+Property (adj basis{increased by any gain recognized})
-Liabilities (assumed by other partners)
+Services (FMV)
+Liabilities (assumed by incoming partner)
=Beginning Capital Account
*For Liabilities- remember to multiply by % ownership
Shareholder recognizes a gain on property contributed when:
Liabilities contributed are greater than the adj basis of the property contributed
Partnership terminates when:
- 50% or more of interest changes hands within one yr
- when there are fewer than 2 partners
- when operations cease
When remaining partners carry on business after termination of partnership:
- deemed distribution of assets to remaining partners and purchaser
- hypothetical redistribution of assets to new partnership
Income recognized by shareholder contributing services:
- Ordinary Income
- Amt = % interest * FMV of corp net assets
Holding period for a partner’s interest:
=partner holding period of property contributed when capital asset or section 1231
=date of contribution if property is an ordinary income asset (inventory)
Required tax yr for a partnership:
-Tax yr of one of more partners with more than 50% interests in profits and capital
When a corp sells property contributed by a shareholder:
- Shareholder gain = difference in adj basis and FMV
- Remaining gain is allocated equally among ALL partners
Partnership organizational costs & start up costs:
- $5,000 deductible in currents yr, rest is amortized over 180 months
- only fees to prepare partnership are includable
Method used to depreciate partnership is elected by:
- the partnership
- may use any method approved by the IRS
Individual partner (not partnership) makes election for:
-deduction or credit for taxes paid to foreign countries
Limit on deductibility of a partnership loss to a partner:
- limited to adj basis in partnership
- then, “at-risk” amt
- then, passive activity loss limitations
Guaranteed payments to a partner
- does not affect adj basis
- increases partner ordinary income
- deduction on partnership return
Treatment of losses between controlling partner (over 50% interest) and partnership:
-disallowed and added back to ordinary income
General rules about non liquidating distributions to a partner:
- not taxable
- basis of property received will be the carryover basis from the partnership
- reduce partner’s basis by the cash the partner receives and by the partnership’s adjusted basis in property in which the partner receives
- *No gain unless cash exceeds partner’s basis
Partnership losses:
Deductible on individual partner’s income tax return up to amt of basis
-partner loss in excess of basis will carryforward indefinitely until basis is available or partner disposes of interest
Tax treatment of a single-member LLC:
Disregarded entity
-treated as a sole proprietorship
LLC
-No double taxation (as in corps) [also applies to normal partnerships]
-Appreciated property can be distributed tax free to owner
-
Amt realized by a partner on sale of interest=
Cash received + share of liabilities assumed by purchaser
Income reported by partner upon sale of interest:
-Gain is treated as ordinary income (to extent of unrealized receivables)
=Amt realized - capital interest - liabilities =total gain realized
Hot assets=
Unrealized receivables & appreciated inventory
-gain treated as ordinary income
Transfer pricing issues exists when US taxpayer shares costs with:
Affliliate is either:
1) not subject to U.S. Income tax
2) does not file a consolidated income tax return with a U.S. based taxpayer
Advanced pricing agreement program=
- Contract btw IRS and taxpayer
- IRS agrees not to seek a transfer pricing adjustment
Controlled foreign corporation (CFC):
- 50% or more of stock is owned by a US shareholder
- subpart F income is subject to immediate taxation (through a dividend)
Nexus
- minimum level of contact a taxpayer can have with a jurisdiction to be subject to its tax
- delivery does NOT cause a nexus
Apportionment factor calculation:
% of the corp’s average property, payroll and sales in the state
A corporation will allocate:
Nonbusiness income to relevant state
A corporation will apportion:
Business Income to appropriate state
Foreign Branch=
- unincorporated foreign entity (extension of domestic corp)
- not a separate legal entity
- earnings are taxed by foreign host country also
Foreign subsidiary=
- separate legal entity (incorporated)
- subsidiary profits are taxed by host country
- not subject to current US taxation (subject to tax when earnings are paid through dividends to US shareholder)
Distributable Net Income (DNI)
\+ Estate (trust) gross income (including capital gains) - Estate (trust) deductions = Adjusted total income \+Adjusted tax-exempt interest - Capital gains (allocated to Corpus) = DNI *Distributions do not affect DNI
Amt of distribution taxable to beneficiary=
- limited by estate’s DNI
- rest of distribution is treated as a nontaxable distribution of the principal
Simple trust
- distribution is made out of current income only
- income is taxable to beneficiary
- all income must be distributed
- no deduction for charity
- Exemption = $300
Complex trust
- distributions may be made out of principal (corpus)
- income may be accumulated within the trust
- deductions permitted for charitable contributions
- Exemption = $100
Income distribution deduction=
Lesser of:
-Total distributions (including income required to be distributed currently) to beneficiary less tax-exempt income {proportionate share }
OR
-DNI (less adjusted tax-exempt interest)
Executor of an estate must file fiduciary tax return (Form 1041) when:
- Annual income is $600 or more
- none of the beneficiaries are nonresident aliens
Standard deduction for trust or estate:
-$0, not allowed
Trust filing requirements:
Year End (‘I trust” you will remember yr end)
Estate filing requirements:
Anytime (you can die “anytime”)
-calendar yr or fiscal yr beginning on date of decedents death
Administration expenses paid by the fiduciary of an estate are deductible:
On fiduciary income tax return only if estate tax deduction is waived for these expenses
Accounting income of a trust=
All items not specifically allocated to the corpus
Grantor trust
Creator of the trust is the owner
Revocable trust
-completed gift has not taken place so, included in gross estate of grantor
