REG 5 - S Corps, Partnerships, etc Flashcards

1
Q

S-Corp election due dates

A

March 15. When making original election to become an S Corp, if done by March 15th the year in consideration counts, if after it begins Jan 1 of the following year

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2
Q

S Corp property contribution rules

A

Same as C Corp. Nontaxable if:

1) a contribution of property (not services)
2) solely in exchange for stock
3) after the transfer, the shareholder (or group of shareholders) has control of the corporation through 80% stock ownership

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3
Q

S Corp Eligibility rules

A

1) Must be in the US or citizen of US
2) No more than 100 shareholders
3) One class of common stock only
4) Corporations or partnerships may NOT be shareholders

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4
Q

S Corp tax year

A

Dec 31 is required year end

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5
Q

S Corp paying tax exceptions

A

1) LIFO Recapture tax
2) Built-in gains tax
3) Tax on passive investment income

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6
Q

Built-in gain tax occurs when

A

A distrbution or sale of an S Corps assets and:

1) A C Corp elects S Corp status and
2) the FMV of the assets exceeds the adjusted basis (Appreciated assets)

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7
Q

Exemptions to the built-in gain tax

A
  • S corp was never a C corp
  • the sale or transfer does not occur within 5 years of the first day the S election is effective
  • The appreciation of assets being sold occurred after the S election
  • Assets were acquired after the S election
  • The unrealized built-in gain has been completely recognized in prior tax years
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8
Q

Calculation of built-in gain tax

A

21% of the lesser of:

1) Recognized built in gain for the current year or
2) The taxable income of the S corp if it were a C corp

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9
Q

Tax on passive investment income occurs when

A

1) The S corp has accumulated C corp earnings and profits and
2) Passive investment income exceeds 25% of total gross receipts

[Hoarding dividends and passively investing them]

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10
Q

Separately stated S corp items not included in ordinary business income

A
  • Rental real estate income or loss
  • Interest & Dividend income
  • Royalties
  • Net short & long term capital gains/losses
  • Charitable contributions
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11
Q

Deductible Fringe benefits

A

Fringe benefits for non-shareholder employees or shareholders owning 2% or less of the S corp are deductible by the S corp in calculating ordinary business income. Over 2% is included in that shareholders income and reported on K-1

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12
Q

S Corp taxation key points

A

1) Shareholders must include on their individual tax return their share of each “pass through” item
- Shareholders are taxed on these items, regardless of whether or not the items have been distributed (withdrawn) to them during the year

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13
Q

Accumulated adjustments account (AAA)

A

Prior S corp income which can be withdrawn tax free. Acts a bit like retained earnings

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14
Q

Taxability of S corp distributions with NO C corp E&P

A

1st) to the extent of the stock basis, non taxable

2nd) in excess of the stock basis, taxed as long-term capital gain

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15
Q

Taxability of S corp distributions WITH C corp E&P

A

1st) to the extent of S corp AAA balnce, non taxable
2nd) to the extent of C corp E&P, taxed as dividend
3rd) to the extent of the stock basis, non taxable
4th) in excess of the stock basis, taxed as long-term capital gain

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16
Q

Terminating events of an S corp

A

1) Shareholders holding more than 50% of the stock consent to a voluntary revocation
2) The corporation fails to meet any of the eligibility rules
3) Excess passive investment income is more than 25% of the corporations gross receipts for 3 consecutive years (must have prior C corp E&P)

17
Q

Short Tax years

A

S corp can specify an effective date in which the revocation occurs, or the corp can fail to meet a requirement. Either way, the corporation will be required to split the tax year into two and either allocate based on the relative number of days or close the books on the date of conversion

18
Q

Reelecting S status

A
  • Must wait 5 years or ask IRS for permission
19
Q

Liquidation of an S corp: consequences to S corp

A

Recognized gain or loss on distribution of property as if it was sold at FMV

FMV of assets distributed
(Basis in assets)
=Taxable gain/loss

20
Q

Liquidation of an S corp: consequences to shareholders

A
Cash received
\+FMV of property received
(Liabilities assumed)
=Amount realized
(Basis in stock)
=Taxable gain/loss

*The shareholders stock basis is determined after all other activities for the year have been taken into account (share of income, etc). The portion of taxable gain/loss calculated from liquidation of S corp (previous flashcard) will be included in basis in stock calculation.

21
Q

Types of partnership interest

A

1) Capital interest - a right to share in net assets when liquidation occurs
2) Profit interest - a right to share in future profits or losses of the partnership

22
Q

Profits interest acquired for services provided

A

Will not have to recognize income at the time of exchange

23
Q

Capital interest acquired for services provided

A

The liquidation value of the capital interest is included in the partner’s taxable ordinary income.
*Taxable so FMV.

24
Q

Allocation of partnership debt to partners: recourse debt

A

Only general partners share

25
Q

Allocation of partnership debt to partners: nonrecourse debt

A

General & limited partners share based on profit sharing ratio

26
Q

Holding period of partnership interest

A

Use “old” contributed property holding period for PP&E

**Exception, use the date the property was contributed for inventory

27
Q

Allocation of built-in gain or loss on contributed property in a partnership

A

The built in gain or loss calculated at the time of contribution is fully allocated to the contributing partner at the time of sale. If there is additional gain or loss post-contribution, it is allocated among all partners

28
Q

Partnership’s Basis in contributed property (inside basis)

A

Greater of NBV and debt assumed

29
Q

Partners tax basis in partnership interest

A

Beg Capital account
+% of all income
(% of all losses and deductions)
(distributions)
=Ending capital account
+%partnership liabilities recourse and nonrecourse
=Ending tax basis in partnership interest

**your share of liabilities in a partnership increase your basis, while S corp nonrecourse liabilities do not increase shareholder basis

30
Q

Timing of taxable income to the partner

A

Treat like a bank account
Income - Taxable and increases basis
Withdrawal - Nontaxable and decreases basis

31
Q

Guaranteed payments to partners

A

Partner - taxable income on K-1
Partnership - expense which is deductible to the partnership
*Does not change basis

32
Q

Partnership debt included in partners tax basis and at risk basis

A

Recourse debt:
Tax basis - Yes (if general partner or personal guarantee)
At risk basis - Yes (if general partner or personal guarantee)

Qualified nonrecourse financing:
Tax basis - Yes
At risk basis - Yes

Other nonrecourse debt:
Tax basis - Yes
At risk basis - NO

33
Q

Nonliquidating distributions to a partner

A

Nontaxable, treated like a bank account withdrawal. Cash and NBV of property reduces basis

34
Q

When basis in partnership interest is less than distributions:

A

1) If its just property distributed
- reduce partnership interest basis to 0 (can’t go below), the partners basis in the property is amount just used to get to 0
2) If its just cash distributed
- Excess cash is a capital gain
3) If both cash and property
- Cash is used up first, then property
4) If cash and multiple assets
- Cash, hot assets, then rest of property

35
Q

Hot assets

A

Inventory, unrealized receivables for cash basis taxpayers

36
Q

When does loss get recognized in a complete withdrawal from a partnership

A

When ONLY cash is received and that cash is less than your adjusted basis or multiple hot assets have a greater partner basis vs partnership basis (R5-40)

37
Q

Partners basis in partnership interest is LESS than partnerships basis in assets distributed (liquidating)

A

Step 1: Assign the basis to the assets that the partnership has
Step 2: Write down property in the last category (other property, or hot assets if no other property) if their FMV is below their NBV
Step 3: Allocate any basis remaining to the last property category based on relative adjusted basis of the assets after step 2
(R5-41)

38
Q

Partners basis in partnership interest is MORE than partnerships basis in assets distributed (liquidating)

A

Step 1: Assign the basis to the assets that the partnership has
Step 2: Write up property in the last category (other property, or hot assets if no other property) if their FMV is above their NBV
Step 3: Allocate any basis remaining to the last property category based on relative adjusted basis of the assets after step 2

39
Q

Sale of partnership interest

A

Capital gain or loss

  • Exception: the partners share of hot assets is considered ordinary income
  • *Must allocate income or loss based on number of days old and new partners were in