R5 - Flow Through Entity Taxation (S Corps, Partnerships) Flashcards
What is the S Corp Eligibility
- Domestic Corp, may not file consolidated return with C Corp
- Eligigble SH’s: individual, estate, or certain trusts. Nonresident alien. Neither corps nor partnerships.
- SH limit 100 SH’s (200 if ANY family member)
- One class of stock
S Corp - Pass through of losses
- Losses limited to a SH’s adj basis in S Corp stock + direct SH loans to the corp. Any losses disallowed may be CF forever. Losses limited to at risk amount (stock & debt basis + recourse loan)
- income allocated to SH’s on per-share, per-day basis
S Corp - At risk amt for SH
SH contribution of cash or other property
+ recourse loans to corp
+allocable share of income undistributed
(allocable share of losses)
(distributions of cash or other property)
= At risk amount
Partnership - Partnership basis for contributed property
- Greater of:
1. NBV of partner + any gain recognized by partner
2. Debt assumed by partnership - HP: for property is the time held by the partner. Regardless of the character of contributed property
Partnership - Net business income/loss
Business Income
(Business Expenses)
(Guaranteed payments)
= Net business income/loss
Partnership - Formation G/L
GR: SH does not recognize G/L on contributed of property to partnership in return for partnership interest
Exception: property subject to excess liability over contributed basis is boot & gain to partner
S Corp - SH’s basis in S corp stock
Initial basis
+ income items (separate & non-separate stated items)
+ Additional SH investments in corporate stock
(Distributions)
(loss or expense items)
= Ending basis
- S Corp SH is permitted to deduct the pro rata share of S Corp loss subject to limit: Basis + direct SH loans - distributions
Partnership - Partners Basis in Partnership Interest
Cash
+Adj Basis in Property
+FMV services (taxable to partner if capital interest)
+Other partners’ liabilities assumed by incoming partner
(Incoming partner’s liabilities assumed by other partners)
= Ending initial basis
+ subsequent contributions
+ pro rata share of income (ordinary, capital, tax free)
+ increase in partnership liabilities
(pro rata share of losses (up to partner basis)
(decrease in partnership liabilities)
(subsequent withdrawals)
= basis
- Keep HP from partner for partnership interest if property contributed was a capital or 1231 asset. If property was ordinary asset (inventory) the HP begins on the date the property was contributed
**Basis = capital account + partner’s share of liabilities
S Corporation - subject to corporate tax (21%) in 3 situations
- LIFO recapture tax
- Built-in-Gains tax: A dsitribution or sale of S corp’s assets subject to built-in gains tax when:
A. C Corp elects S Corp status, and
B. FMV of coporate assets exceeds adj basis on election dat
- Tax is calculated as 21% of the lesser of:
A. Recognized built-in gain for the CY
B. taxable income of the S corp if it were a C Corp - Tax on passive investment income, if following two tests met:
A. S Corp has accumulated C Corp E&P, and
B. Passive investment income (interest, rent, divs, annuities, royalties) exceeds 25% of total gross receipts
- 21% tax on lesser of NI or excess passive investment income
Partnership - Liquidation
- Three ways in which a partner may liquidate partnership interest:
1. Complete withdrawal –> nontaxable liquidation
Beginning capital account
+% of income (loss) up to withdrawal
= partner’s capital account
+% of liabilities
= Adj basis as of date of withdrawal
(cash withdrawn)
= Remaining basis to be allocated to assets withdrawan - Gain recognized when cash received > basis
- Loss recognized when cash received < basis & no other items received (if only cash, unrealized receivables, or inventory)
2. Sale of partnership interest. GR: partner has capital G/L
Adjusted basis as of date of withdrawal
(amount received) (cash, assumption of liabilities, FMV property)
= Capital gain or loss (b/c partnership interest is capital asset)
Exception: any gain that represents a partner’s basis of ‘hot assets’is treated as ordinary income (unrealized AR, appreciated inventory, recapture inc)
3. Retirement or death of partner - (Partnership itself does not recognize G/L 1-3)
Partnership - tax losses must jump four hurdles
- Tax basis: capital account + % liabilities
- At-risk basis: does not include nonrecourse liabilities
- Passive loss limits: can’t use ordinary loss on passive activity
- Excess Bus loss limity: max deduction is 250K S or 500 MFJ
* * Any excess loss can be CF forever (1-3), 4 CF as part of NOL, 80% limit
Partnership - Non liquidating distributions - not taxable to both
- Gain recognized by partner only if cash exceeds basis. If NBV of any asset exceeds basis, partners basis will be 0 in partnership.
- Partners basis in the property will be the lesser of:
1. PArtnerships basis in property
2. partner’s adj basis immediately before property distribution, but after any cash distribution - Partners basis in partnership will be Basis - Cash - Adj basis property
- (stop at 0 basis)
Apportionment Factor
(property & rent exp w/i state)/ total property
+(payroll paid w/i state)/total payroll
+(sales from sources w/i state) / total sales
All divided by 3
= Total apportionment Factor * apportional business income
