R5 - Entity Taxation Flashcards
1
Q
S-Corps: Computing Shareholder’s Basis
A
Initial Basis
+Income Items (both tax-exempt and taxable)
+Additional Shareholder
investments in corp stock
- Distribution to shareholders
- Loss or expense items
+/- Net Capital Gains
=Basis in S-Corp
2
Q
S-Corp: If the corp has no “accumulated earnings” what happens to SH basis?
A
The amount distributed to the SH “decreases” the SH’s basis in the corp. (Non-taxable to the extent of the SH’s basis)
3
Q
S-Corp: S-Corp Election
A
For S-corp election to be effective for the taxable year, it must be made by the 15th day of the 3rd month of the year. If after, it becomes effective Jan 1 of the next year
4
Q
S-Corp: Going from S-Corp Status to C-Corp
A
Pro-rate the income while the company was still an S-Corp based on how many months it was before the S-Corp status was terminated.
5
Q
S-Corp: Mid-Year change of ownership (adding a shareholder)
A
Allocate the income on a “per-share per day” basis to each shareholder.
Calculation:
-Part of year with one shareholder (100%):
- (Income/365)*# of days
before shares are sold to
new owner
+
-Rest of the year:
-New ownership % (based
on shares sold to new
owner)remaining days in
year(income/365)
=Income to one shareholder
6
Q
S-Corp: Revocation
A
Election can be revoked if shareholders owning more than 50% of the total number of issued and o/s shares consent.
Holders of more than 25,000 total shares must approve revocation.
7
Q
S-Corp: Qualifications
A
- One class of stock
- No more than 100 shareholders
- SHs must be an individual, estate or certain type of trusts
- Must be domestic corporation
- Can own any % in a C-Corp but cannot file a consolidated tax return with the C-Corp
8
Q
S-Corp: Income Items
A
-Separately stated (dividend income)
-Pass through to
shareholders and retain
their tax attributes to the
shareholders
-Non-separately (business income) stated items of income.
9
Q
S-Corp: Built in Gain
A
HAS TO BE C–CORP AT SOME POINT!!
- C-Corp electing S-Corp Status and selling an item with a FMV exceeding the corporations basis in the asset at date of S-Corp Election.
=Excess of FMV of corporate asset over Adjusted Basis of corporate assets at BOY
Taxed at 35% (highest corporate rate)
10
Q
S-Corp: Distributions > Tax Basis
A
Taxed as capital gains
11
Q
S-Corp: Losses
A
Limited to shareholder’s adjusted basis
12
Q
S-Corps: Termination
A
- Voluntary revocation by shareholders
- Corporation fails to meet any or all eligibility requirements
- > 25% of corp’s gross receipts come from passive investment income for 3 consecutive years and the corporation had C-Corp earnings and profits at the end of each year.
13
Q
S-Corp: AAA (Accumulated Adjustments Account)
A
Increases:
- Separately and Non-
Separately stated income
items
Decreases: - contributions (can't reduce below zero), expenses, losses and non-deductible expenses (except life- insurance proceeds where corp is beneficiary)
14
Q
S-Corps: Re-Electing Status
A
5 years
15
Q
S-Corps: Separately Stated Items
A
Include:
- Interest income
- Section 179
- Charitable contributions
Not included in ordinary income
16
Q
S-Corps: Allowed Deductions
A
Non-Separately Stated Items like:
- compensation of officers
- business expenses
17
Q
S-Corps: From Inception Rule
A
- Can have passive income in excessive of 25% of gross receipts for 3 consecutive years
18
Q
S-Corps: Fringe Benefits
A
- Deductible for employees who own <2% or corp
- To be deductible expenses must be included in employee’s W2
19
Q
Partnerships: Contributing Partner Basis
A
+Cash
+Property (adjusted basis)
-Liabilities (assumed by other partners) ((1 - own%)* mortgage amount)
+Services (FMV)
=Basis
20
Q
Partnerships: Contributing Encumbered Property
A
If liability associated with property is greater than the partner’s basis. The partnership would recognize a gain (the excess).
21
Q
Partnerships: Termination/Technical Termination
A
When: - Operations cease - 50% of more sold withing 12 month period - Fewer than 2 partners
Technical:
- Deemed distribution to remaining partners
- Hypothetical re-contribution of assets to new partnership
22
Q
Partnerships: Services Rendered for Partnership Interest
A
Recognize at FMV and included as ordinary income to recipient and basis in partnership
23
Q
Partnership: Non-Liquidating Contributing Property (Gains/Losses)
A
No Gain/Loss is recognized when a partner contributes property for partnership interest. Rollover basis rule applies
24
Q
Partnerships: Partnership Splitting Up
A
As long as 2 or more of the partners splitting “stay together” in a partnership and they had 50% or more of the stock in the original one, they are considered to be continuing the older partnership.
25
Partnerships: Holding Period for Capital Assets
- Capital Asset: includes holding period of partnership contributing the property
- Normal Asset: when the partner contributes it
26
Partnerships: Tax Year
-"Majority Tax Year"
or
-Tax year with the least amount of deferral income
27
Built-In Gain: RULE
Once the property is sold to unrelated party, the original gain (realized) by the contributing partner would be allocated to that partner for tax purposes and the remaining would be divided up evenally between the other partners for tax purposes.
28
Partnership: Non-Liquidation Property Distributions to Shareholders
-Reduce original basis by amount of cash received.
THEN
-Basis = "lesser of" basis of partnership in property or remaining basis of shareholder
=Basis in land of shareholder
(no gain/loss is recognized)
29
Partnerships: Deduction of Org Expenses
-Can deduct up to $5,000 in
org expenses, decreased
by amounts that exceeds
$50,000.
-Amortize over 180 months,
make sure to deduct
$5,000 from expenses
before amortizing!!!
30
Partnerships: Distributions vs Taxable Income
Partners are taxed on "their share of taxable income made by partnership" not distributions made
31
Partnerships: Depreciation of Partnership Property
Election is made by:
-Partnership and can be any
approved by the IRS
32
Partnerships: Deductions to Arrive at Partnership Ordinary Income
Deductions:
- Guaranteed payments to
partners
"Ordinary Income" is the taxable income to the partnership excluding all items separately stated like:
- Charity contributions
- Dividend income
- capital losses
33
Partnerships: Partner's Deduction for Share of Partnership Income
-Partner's tax deduction for his/her distributive share of partnership losses is limited to their "at-risk" amount which is their share of liabilities in the company. Any excess can be carried-forward when basis becomes available.
DON'T FORGET UNPAID DEBT AT YE (this is basis)
-Also limited to passive loss limit which is considered after "tax basis and at-risk limitations"
34
Partnerships: Elections Made by Partnership
-Org expenditures
-Accounting method
-Tax year
-Depreciation
-Elections out of installment
sale treatment
-Section 754 (optional basis
adjustment)
35
Partnerships: Taxable Income (NOTE)
Partner must include in his tax return, his share of partnership income, whether he received it or not.
36
Partnerships: Guaranteed Payments DEFINITION
Payments to partners for "services rendered or the use of capital" without regard to partnership income
37
Partnerships: Losses NOTE
Losses from controlling partner (50% or more) and partnership from the sale of land are not allowed.
Add back losses to income before calculating ordinary income for partner.
38
Partnerships: Non-Separately Stated Items
- Revenues
- Salaries
- Guaranteed payments
- Rent Expense
- Depreciation
39
Partnerships: Distribution Gains
Only time gain is recognized is when cash received is > than adjusted basis immediately before the property distribution
40
LLC: Benefits
Avoid double taxation by being able to choose how they are taxed.
- Partnership
- Proprietorship
- Corporation
At least 2 owners, they have to choose between partnership or corporation.
41
LLC: Benefit over S-Corp:
Can distribute appreciated property to owners "tax free"
42
Partnership: Complete Liquidation
- Partner's basis in property received is the same as the adjusted basis of his partnership basis reduced by any monies received and is generally "non-taxable"
- Any excess cash "monies" received is recognized as a gain to the partner
43
Partnership: Liquidation Capital Gain/Loss
Beg Capital Account
% of income (loss) up to sale
=Capital Account at sale date
% of liabilities
=Adjusted Basis
-Amount received (cash, assumption of liabilities, FMV property)
=Gain/Loss
Exception:
-Ordinary Income not
Capital Gain include: ("hot
assets")
- Unrealized receivables (cash basis)
- Appreciated inventory
- Recapture income (depreciable assets)
44
Partnerships: Liquidating w/ Partner Retiring
Partner remains partner until his/her interest has been completely liquidated by partnership distributions.
-Decrease basis until its zero or negative (w/capital gain)
45
Partnership: Liquidating Property Distribution
Basis for partner remains the same but reduced by any "monies" received.
-When receiving cash and land, cash will decrease partner's basis and his remaining basis will be allocated to the land
46
Partnership: Partner Who Sells Their Interest NOTE
Recognizes a gain/loss that is measured by the difference between amount realized for the sale and the adjusted basis of their partnership interest.
Calculation:
+Cash received
+Liabilities relieved
-Basis in partnership
=Capital gain/loss
47
Partnership: Complete Liquidation NOTE
Partner only recognizes a gain to the extent that money received is greater than their basis
48
Transfer Pricing:
Exists when US based tax payer shares costs with an affiliate who is not subject to US income tax and does not file a consolidated income return with a US based taxpayer
49
Foreign Income Taxes: NOTE
May be claimed as credit or deduction at the option of the corporation
50
APA: Advance Pricing Agreement Program
Agreement between IRS and taxpayer that IRS will not seek a transfer pricing adjustment for a covered transaction if taxpayer follows agreed upon transfer pricing method.
51
Nexus:
Minimum level of contact a taxpayer may have with a jurisdiction to be subject to its tax.
52
Foreign Entity Taxation: Classification
Foreign Branch:
- Unincorporated foreign entity that is viewed as extension of parent company (not a separate legal entity) and is taxed in the US. Credit rule applies. (lesser of foreign taxes imposed or foreign tax credit limitation)
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Foreign Subsidiary:
- Separate legal entity and not taxed by us but by host country. Income earned isn't taxed until brought back to US. Some income is subject to immediate taxation (passive investment income)
-CFC: Foreign corporation
is 50% or more owned by
US shareholder.
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53
Apportionment Factor: FORMULA
(Average Property and rent expense within state/Total property) + (Payroll paid to employees within state/Total payroll) + (Sales from sources within the state/Total sales)
NOTE:
- Apportion business income
- Allocate non-business income
54
Foreign Taxation: Dividend Income
Dividend income to a "nonresident alien" is subject to a 30% dividend tax.
55
Trusts and Estates: DNI-Taxable Income Reported
Amount of taxable income an estate beneficiary reports is limited to "estate's distributive income".
Taxable interest
-expenses related to taxable interest
=Taxable income (distributive income)
56
Trusts and Estates: Simple vs Complex Trusts
Simple:
- only makes distributions out of current income
- required to distribute all of its income currently
- no charitable contribution deduction
- $300 exemption to arrive at taxable income
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Complex:
- may accumulate current income
- may distribute principal (corpus)
- may deduct charitable contributions (unlimited if
noted in Will)
- $100 deduction in arriving at taxable
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57
Trusts and Estates: Grantor Trusts
- Grantor (person who established trust) retains control of trust
- Disregarded entity for income taxes (flow to grantor's tax return)
- Grantor can be a qualified shareholder of S-Corp
- Trust is not typically included in taxable estate of grantor upon his/her death.
58
Trusts and Estates: Income Distribution Deduction
-Limited to "lesser of" DNI or Actual amount distributed
to beneficiary.
-If distributed to 2 different people, take proportionate
share of distribution and compare it to DNI. Whatever
is lesser, is the allowed deduction
59
Trusts and Estates: Executor Issuing a Fiduciary Tax Return NOTE
If estate's gross income is at least $600
60
Trusts and Estates: Tax Years
Trusts: Year end (December 31st)
Estates: Anytime
61
Trusts and Estates: Administration Expenses
-When the fiduciary pays for the administration expenses, they are deductible on the the fiduciary tax return but only if they are waived for the estate's tax return
62
Trusts and Estates: Accounting Income (Sub chapter J)
If expenses/capital gains are allocated to corpus, than they aren't included in accounting income.
63
Trusts and Estates: Revocable Trusts
Means no gift has taken place and trust is included in estate of grantor.
64
Gifts: Exclusions
If donor decides to make the gift "half by each" (married couple) they are eligible for a $14,000 exclusion each to be deducted from the total gift given.
65
Gifts and Estates: If maximum Estate and Gift Credit taken what amount of an estate is tax free pursuant to a death?
$5,450,000
-Unified Estate and Gift Tax Credit is $2,125,000 for 2016
66
Gifts and Estates: Unlimited Exclusion
- Payments made to university (tuition but not room and board)
- Payments made to health care provider for medical care
- Charitable contributions
- Marital deduction (as long as the property isn't QTIP
67
Gift and Estates: Transfer of Gifts
Marital transfers are non-taxable and excluded from gift-tax.
Gifts between are completely deductible.
68
Gift and Estates: Income in Respect of a decedent
Covers income earned before decedents death but not collected until after.
69
Gift and Estates: Estate Deductions
- Medical Expenses
- paid within one year of death
- not deducted on form 706
- executor files appropriate waiver
- Administrative expenses
- funeral
- outstanding debt
- claims against estate
- certain taxes
- Unlimited charitable deduction
- Unlimited marital deduction
70
Gifts and Estates: Not Excludable Gifts
An amount will not be considered a gift if the governing instrument is to be paid "only from the estate/trust".
Example:
Father getting a 20,000 bond that will be given to his daughter once she turns 21 and the trust will be liquidated at that time.
71
Gifts and Estates: GSTT
This is a separate tax on top of gift/federal tax that is imposed on individuals who transfer property to a person who is 2 or more generations younger than them. The exclusion is equal to $5,450,000 for single and double for married and the tax rate is the highest one in effect.
72
Gifts and Estates: Alternative Valuation Date and Estates
Estate assets would be valued at the earlier of the distribution date (sold) or 6 months.
73
Gifts and Estates: Marital Deductions NOTE
When an estate is owned jointly and one of the spouses dies, make sure to only take half the marital deduction for the estate.
74
Tax Exempt Organizations: NOTE
- $1,000 deduction is available
-Items excluded from tax:
Royalties, dividends, interest and annuities (except
those derived from controlled organizations)
-Rents from real property and rents from personal property leased with real property (if less than 50% is attributable to the personal property), other than income property debt-financed property
75
Tax Exempt Organizations: 509 Private Foundations
Excluded:
- 50% charitable deduction donees.
- Organizations receiving more than 1/3 of their annual revenue from public company
- Supporting organizations
- Public safety organizations
Termination:
-Involuntary:
-Becoming public
-Voluntary;
-choosing not be private, subject to tax payback of
the value of its aggregate tax benefits.
76
Tax Exempt Organizations: NOTE
May not be formed to influence legislation (tree-huggers)
Have to file an application with the IRS.
77
Tax Exempt Organizations: UBI (Unrelated Business Income)
- Income from organizations that are unrelated to their "tax exempt purpose".
- Taxed at the corporate rate, unless they are a trust
78
Tax Exempt Organizations: Annual Information Returns
Private foundations have to file these each year (section 501)
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Exemptions:
-Churchs
-Exclusively religious organizations
-Exempt organizations with annual gross receipts of
$50,000 or less
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