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REG > R5 - Entity > Flashcards

R5 - Entity Flashcards

1
Q

In general, how are contributions treated for tax purposes to an S-Corp?

A

General Rule = Nontaxable (record @ NBV)

  • shareholder or group of shareholders must control 80% or more (need 80% to be tax free)
  • services still taxable (like you earned the money first, then taxed, then contributed)
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2
Q

What is the shareholder limit for S-corps?

A

100 U.S people/estates/certain trusts (no corps)

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3
Q

What are the S-corp rules regarding common stock?

A

Can only be 1 class of stock (common stock).

The voting rights are allowed to be different, but only one class of stock allowed.

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4
Q

What are the potential taxes that an S-corp can be subject to?

A

S-corps are passthrough entities (tax paid by shareholders, not entity).

However, there are a few taxes that an S-corp can be exposed to:

  1. ) LIFO Recapture
  2. ) Built in Gains tax
  3. ) Passive investment income tax
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5
Q

What is “built in gains tax”?

A

When a C-corp has assets that have a FMV greater than their NBV, and then the entity changes to an S-corp, the difference between the FMV & NBV of those assets must be taxed when the asset is sold. Normally, an S-corp has no tax and all tax flows to shareholder. The built in gains tax is taxed at the entity level.

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6
Q

How can “built in gains tax” be avoided?

A

Can be avoided by:

  1. ) S-corp was never a C-corp
  2. ) Sale/transfer of the asset does not occur within 10 years of the first year S election is made
  3. ) Appreciation of assets occurred after S election
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7
Q

When would an S-corp be subject to tax on passive investment income?

A
  1. ) Must have C-corp accumulated earnings & profits

2. ) Passive income exceeds 25% of gross receipts

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8
Q

How are pass-through losses treated from an S-corp?

A

Able to deduct your “at-risk” amount.

At risk = Basis + Direct loans made to S-corp

*losses are limited to at-risk amount. Any disallowed losses are carried forward indefinitely.

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9
Q

What would increase a shareholders “at-risk basis” in an S-corp?

A
  1. ) Contributions
  2. ) Loans made to S-corp
  3. ) Allocable share of income
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10
Q

What would decrease a shareholders “at-risk basis” in an S-corp?

A
  1. ) Distributions

2. ) Allocable share of losses

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11
Q

How does a nonrecourse loan affect a shareholders basis?

A

Nonrecourse = shareholder no personally liable

*will add to a shareholders basis, but not their at-risk basis.

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12
Q

How does a recourse loan affect a shareholders basis?

A

Recourse = shareholder is personally liable

*will add to both shareholder basis and at-risk basis

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13
Q

When are shareholders of an S-corp taxed? (distributed, earned, received)

A

Taxed when EARNED, regardless if distributed or not

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14
Q

Does tax-exempt interest add to a shareholders basis?

A

Yes, even though nontaxable income, tax-exempt interest adds to a shareholders basis in an S-corp

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15
Q

How are fringe benefits treated in an S-corp?

A

Deductible = non-shareholder employee (own 2% or less)

Nondeductible = shareholder owning 2% or more (unless shareholder picks up fringe benefit income on W-2)

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16
Q

What is the AAA of an S-corp?

A

Accumulated Adjustments Account (accumulated earnings & profits since inception)

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17
Q

What can increase the AAA of an S-corp?

A

Separately and non-separately stated income & gains

*NOTE - tax-exempt income adds to shareholder basis, but does not add to AAA of an S-corp

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18
Q

What can decrease the AAA of an S-corp?

A

Corp. distributions & sep. / non-sep. stated losses

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19
Q

Where do individuals report S-corp income on their 1040?

A

They receive a K-1 and report income on schedule E

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20
Q

What is the loss limitation for an S-corp shareholder?

A

At risk basis = Basis + Direct loans - Distributions

*cannot deduct more than at risk basis, excess carry forward forever

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21
Q

Are distributions from an S-corp taxable to the shareholders?

A

No, taxed when earned not when distributed.

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22
Q

If an S-corp shareholder receives a distribution less than their basis, how is this distributions treated for tax purposes?

A

Return of capital (not taxed)

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23
Q

If an S-corp shareholder receives a distribution more than their basis, how is this distribution treated for tax purposes?

A

Capital gain distribution (taxed as either short term or long term)

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24
Q

If old C-corp E&P is distributed out from an S-corp, how is this treated for tax purposes?

A

That income has already been taxed by the C-corp, and is now going to be taxed to the shareholder as a dividend (double tax)

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25
Q

If your S-election gets terminated, what are the rules to re-elect?

A

1.) Wait 5 years
OR
2.) Ask IRS permission

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26
Q

How would your S-corp status be terminated?

A
  1. ) Voluntary revocation
  2. ) Fails to meet eligibility requirements (add foreign shareholder, create 2 classes of stock, etc)
  3. ) More than 25% of corp gross receipts are passive investment income for three consecutive years (3 strikes and you’re out)
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27
Q

If an incoming partner contributes services to a partnership in exchange for a profit interest, what are the tax implications to the partner and pship?

A

Partner = No income (a profit interest has no liquidation value)

Pship = No gain/loss, adds FMV of services rendered

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28
Q

If an incoming partner contributes services to a pship in exchange for a capital interest, what are the tax implications to the partner and pship?

A

Partner = Recognize value of interest in pship received as ordinary income

Pship = Either deduct as an expense or capitalize value of the capital interest, depending on the type

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29
Q

What is unique about determining a partners pship basis as opposed to all other entities?

A

The partners share of liabilities is included in their basis

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30
Q

If a partner contributes property to a pship with excess liabilities, what are the tax implications to the partner?

A

Partner = Excess of liabilities taken on by other partners is boot/GAIN to partner

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31
Q

If a partner adds liabilities to a pship, how does this affect other partners basis in the pship?

A

Increases their basis by their share of the new liability

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32
Q

How are liabilties treated in regards to basis in a corp verse pship?

A

Corp = liabilities decrease basis by 100% of liability put in

Pship = liabilities decrease basis ONLY by the amount assumed by other partners (not the entire liability)

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33
Q

If a partner adds excess liabilities to a pship, what does this do to his/her basis?

A

Partner would need to recognize gain for amount of excess liabilities they are entitled to (other partners take on some and add to their basis). After they recognize the gain, their basis would not change at all

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34
Q

After initial formation, what would make a partners basis increase / decrease?

A

Increase = share of income and new pship liabilities

Decrease = share of losses and decrease in pship liabs

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35
Q

What are the allocations rules that exist for pships regarding built in gains/losses for contributed property?

A

If a partner contributed property with a FMV above or below the NBV, a built in gain/loss exists (bc the pship will use the NBV as its basis in the asset). Special allocation rules exist that state that when that asset is eventually sold for a gain/loss, the built in portion is fully allocated back to the contributing partner. Any gains/losses that occur after the contribution date can be allocated equally to all partners

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36
Q

How do you determine a pships basis in property contributed?

A

Use GREATER of NBV or debt assumed

37
Q

What is “inside basis”?

A

Inside basis is the basis that the pship has in the assets and liabilities it has

38
Q

What is “outside basis”?

A

Outside basis is the basis that the partners have in the partnerships assets and liabilities

39
Q

What is the difference between inside basis and outside basis?

A

Inside = pship basis in assets/liabs

Outside = partner basis in pship

40
Q

What is the difference between a partners capital account and their basis in a pship?

A

Capital account = contributions, income/losses, distributions

Basis = capital account + share of pship liabs (recourse and nonrecourse)

41
Q

What is the difference in treating nonrecourse/recourse liab’s between S-corps and Pships?

A

S-corps = liabilities do not add to shareholder basis (at risk)

Pship = liabilities (both recourse and nonrecourse) add to partner basis

42
Q

When is a pship tax return due?

A

March 15th

43
Q

What situations would make a pship terminate?

A
  1. ) Operations cease
  2. ) 50% or more of pship interest for both capital and profits is sold or exchanged (close “old”, open “new”)
  3. ) Fewer than two partners
44
Q

When is income from a pship taxable to a partner?

A

In the year earend (regardless of when distributed)

45
Q

How does a distribution affect a partners basis?

A

Decrease

46
Q

How does income from a pship affect a partners basis?

A

Increase

47
Q

What is the difference between a partners tax basis and at risk basis?

A

At risk basis does not include certain nonrecourse liabilities, tax basis includes all liabilities (that partners share of them)

48
Q

How are tax losses of a pship treated by partners?

A

Tax losses can be used to offset other ordinary income , but are limited to three hurdles:

  1. ) tax basis
  2. ) at risk basis
  3. ) passive activity (real estate - see individual rules for passive loss limiations (mom and pop exception)
49
Q

If tax losses are disallowed from a pship for a partner, how are these losses treated?

A

Any unused losses resulting from limitations from either tax basis, at risk basis, or passive activity can be carried forward and used when basis becomes available, or until additional passive income can be generated to absorb the loss/until the taxpayer sells the activity that generates the passive loss

50
Q

What is the difference between recourse and nonrecourse liabilities?

A

Recourse = partners ARE personally liable for debts of pship

Nonrecourse = partners ARE NOT personally liable for debts of pship

51
Q

How do nonrecourse/recourse liabilities affect a partners tax basis and at risk basis?

A

Both nonrecourse and recourse debt adds to a partners tax basis, but only recourse debt adds to a partners at risk basis

52
Q

How do nonrecourse/recourse liabilities affect a limited partners tax basis and at risk basis?

A

Recourse = does not add to tax basis OR at risk basis (limited partners are never liable for debts of pship)

Nonrecourse = adds to limited partners tax basis, but not their at risk basis

53
Q

How are guaranteed payments handled for tax purposes to both partners and pships?

A

Pships = deduction to arrive at ordinary income (like salary expense or interest exp)

Partners = pickup as ordinary income

54
Q

How are payments that are not guaranteed handled for tax purposes to both partners and pships?

A

Pships = cannot take as a deduction (seen as a distribution which are nondeductible)

Partners = not taxable to partner but lowers basis in pship

55
Q

How are organizational and startup costs treated for tax purposes for pships? and how does this differ from the GAAP rules?

A

Tax rule = able to expense $5k for startup and $5k for organizational, and amortize excess for 15 years (180 months)

GAAP rule = expense all in year incurred

56
Q

What are syndication costs and what are the tax rules for handling these costs for pships?

A

Syndication costs are costs or raising capital. They are not included in startup or organizational costs, and are nondeductible.

57
Q

How is a cancellation of debt treated for tax purposes for a pship?

A

Treated as income.

COD income calculation = Debt - FMV of pship interest transferred

58
Q

If property is distributed from a pship to a partner, what are the tax implications to the pship and partner? (if nonliquidating)

A

Pship = nontaxable

Partner = nontaxable, reduce partners basis by NBV of property distributed

59
Q

If property is distributed to a partner with a NBV greater than the partners basis, what does the partner lower their basis by after the distribution?

A

Stop at ZERO basis

60
Q

How many members are allowed in an LLC?

A

Unlimited members allowed, can be U.S people, foreign people, even corps (unlike S-corp rules)

61
Q

Describe a situation where outside basis and inside basis would be different for a pship?

A

If a new partner buys in at an inflated price, their outside basis in the pship will be greater than the inside basis of the pship

62
Q

What is a section 754 election and section 743(b) basis adjustment for pships?

A

If a new partner buys in to a pship and overpays, the outside basis is larger than the inside basis.

The section 743(b) basis adjustment would true up the inside basis of the pship to equal the new larger outside basis.

*NOTE = the basis adjustment adjusts inside basis, not outside basis

63
Q

In a partnership liquidation, a distribution is made to all partners. How is the difference between the distribution and partners basis in the pship treated for tax purposes?

A

If distribution > basis = GAIN

If distribution < basis = LOSS

64
Q

What are the tax consequences for a pship for liquidating distributions?

A

Pship itself does not recognize any entity level gain / loss since the gain/loss is taken at the partner level

65
Q

If a partner sells their pship interest in a liquidation, how is the difference between what they receive and their basis treated for tax purposes?

A

Capital gain/loss

66
Q

What are “hot assets”?

A

Hot assets are receivables, inventory, and recapture of income. Essentially, there are what is ordinary in business operations (non-capital)

67
Q

What is the difference between a corp distributing appreciated property to shareholders, and a pship distributing appreciated property to partners?

A

Corp = act is if you sold (FMV-NBV = Gain)

Pship = Defer gain, basis rolls to partner and gain will ultimately be recognized when partner sells

68
Q

What kinds of taxes are estates subject to?

A
  1. ) Income tax

2. ) Estate tax

69
Q

What is the “estate tax”?

A

Estate tax is a one time only transfer tax based on the value of the decedent’s estate

70
Q

What is DNI conceptually speaking?

A

Distributed net income (DNI) is the limitation on the amount the trust/estate can deduct with respect to distributions to beneficiaries.

71
Q

What are capital gains attributable to corpus?

A

Reinvested into something

72
Q

What is the income distribution deduction for estates and trusts?

A

LESSER of:

  1. ) Actual distribution to beneficiary
  2. ) DNI (less tax exempt interest)
73
Q

What is the exemption amount for an estate to not file a return?

A

$600

74
Q

What is a grantor trust?

A

the individual who established the trust retains control of its assets

75
Q

What is the difference between a simple and complex trust?

A

Simple:

  1. ) required to distribute all income currently
  2. ) can not make charitable contributions
  3. ) does not make distributions from principal

Complex: if breaks any of the “simple” rules

76
Q

Is it possible for a trust to be simple in one year, and complex in the next?

A

Yes, just needs to break on of the simple rules

77
Q

What is the amount of the estate tax credit?

A

$2,141,800 (wipes out first $5m of estate value)

78
Q

What is an alternative valuation date?

A

Instead of date of death, estate is able value its assets for the estate tax return the earlier of 6 months after death or date of distribution of assets

79
Q

What is the tax form for estates?

A

Form 706

80
Q

Are insurance proceeds included in an estate?

A

Yes if the deceased is the beneficiary OR had incidence of ownership (was able to say where the money was going) (you controlled at death)

81
Q

When is an estate tax return due?

A

9 months after date of death

82
Q

Is there any carry over rules for unused unified credit for estates?

A

If the spouse who dies first does not use all of their unified credit, the surviving spouse can use it (add it to their credit)

83
Q

What are the unlimited deductions for estates?

A
  1. ) Unlimited charitable deduction (able to give as much as you want)
  2. ) Unlimited marital deduction (able to give as much as you want)
84
Q

Are future interests considered gifts?

A

No, not a gift until concrete transfer of value is established

85
Q

What is an example of a future interest?

A
  1. ) reversions (rentals)
  2. ) remainders (distributed in future)
  3. ) no ascertainable value
  4. ) accumulation of income (some point in future)

NOT TAXABLE TO RECEIVER UNTIL PRESENT INTEREST GIFT

86
Q

How does a gift qualify for the annual gift exclusion?

A

Must be:

  1. ) Complete (not incomplete)
  2. ) Present interest (not future interest)
  3. ) Under $14k/$28k MFJ per donee
87
Q

What are the requirements to maintain tax exempt status?

A
  1. ) No earnings going to private shareholders/individuals
  2. ) No nonexempt activities
  3. ) No directly participating in politics
88
Q

What is the exemption of UBI?

A

$1,000 (no tax on first $1k of UBI)

89
Q

Who does not have to file a form 990?

A

Organizations with $50k or less in gross receipts

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