REG: Chapter 13 Flashcards
S Corporations: Eligibility and Election
What type of trusts can become an S Corp?
- Wholly-owned guarantor trusts
- Nonguarantor Administrative Trusts (i.e. Qualified retirement plan trust)
- Testamentary Trusts
- Voting Trusts
- ESBT
- QSST
S Corporations: Eligibility and Election
Is passive investment income allowed when a corporation becomes an S Corp?
There are no limits to passive investment income
The S Corporation will terminate if:
* The C corp has earnings and profits for three consecutive years after filing S Corp status
* During the 3 years, over 25% of gross receipts of the S corp is due to passive income
S Corporations: Eligibility and Election
How many shareholders are needed to revoke the S Corp status?
Shareholders that own more than 50% of stock of the S Corp can elect to revoke
S Corporations: Eligibility and Election
Why can’t a corporation become an S Corp?
Because the corporation is subject to federal income tax, while an S corp does not pay a federal income tax
S Corporations: Eligibility and Election
If a corporation loses its S Corp status, how long do they have to wait until the can reapply?
They can reapply 5 years after the tax year in which the termination was made
Example:
* Status was revoked on 12/31/23
* Eligible for reelection is 1/1/29
S Corporations: Eligibility and Election
What is the timeline for a Corporation to file as an S Corp?
- Form 2553 must be filed either within the preceding tax year or within 2 1/2 months of the current tax year
- The IRS may allow late filing if a reasonable cause existed
- All shareholders must provide written consent at the time the election is made
- Anyone who was a shareholder at any time during the election year, including former shareholders, must consent.
S Corporations: Eligibility and Election
What companies can elect S Corp status?
- Domestic building and loan associations
- Mutual savings banks
- Cooperative banks, as long as they have no capital stock and operate without profit
DISCs are not allowed to elect S Corp Status
S Corporations: Operations
What are separately stated items?
Items not related to the business
* Income
* Gains
* Losses
S Corporations: Operations
What is included as nonseparately stated income?
Items related to the business:
* Gross income
* COGS
* Sales expense
* Interest Expense on business loans
* Corporation Organizational Costs
* Guaranteed Payments are subtracted
* Bad Debt Expenses
* Compensation paid to the shareholder
* Section 1245 Gain or Loss
S Corporations: Operations
When would distributions be reported as tax-exempt from shareholder’s income?
Any distribution that is not more than the shareholder’s basis will be treated as tax-exempt return of capital
S Corporations: Operations
What increases are made to the basis of a shareholder’s S corporation stock?
Increases
* Ordinary Income
* Tax-Exempt Income
* The amount of the deduction for the depletion is more than the basis of the property
* Loan payments made by the shareholder
* Share of liabilites that are assumed from the partnership
S Corporations: Operations
What decreases are made to the basis of a shareholder’s S corporation stock?
- Distribution
- Losses
- Reimbursements to shareholder’s expenses (including entertainment expense)
- Separately and Nonseparately stated deductions
- The amount of deduction for the depletion that is exceeds the property basis, but does not decrease the Shareholder’s basis
S Corporations: Operations
What is the difference between separately stated and nonseparately stated?
- Nonseparately stated items occur in the normal course of business
- Separately stated items are not reported on the shareholder’s tax return, but they are reported on the shareholders K-1
S Corporations: Operations
What is the maximum deduction that can be taken on Sec. 179 deduction?
$1,160,000
S Corporations: Operations
How is a guarenteed loan from a shareholder in an S Corporation reported?
- A guranteed loan is not included in the calculation of the shareholder’s basis because it does not increase the basis
- The payments that shareholder makes on the guaranteed loan increase the shareholder’s basis
S Corporations: Operations
What is included in the calculation of income for income tax reporting?
- Ordinary Income
- L/T Capital Gains/(Losses)
- S/T Capital Gains/(Losses)
S Corporations: Operations
How are future earnings allocated between stock basis and debt basis?
Future earnings will be applied to debt basis first, and then to stock basis
S Corporations: Operations
How can one determine if a shareholder is also an employee?
- The shareholder owns less than 2% of the S Corporation’s outstanding stock
- The employee will not be eligible for additional coverage that non-employee shareholders received (i.e. Insurance)
Partnership: Basis of Partner’s Interest
When does the holding period begin for a partnership interest that is acquired in exchange for a contributed capital asset?
- When the holding period the day after the exchange of the capital asset began
- It includes the period that the property was held by the contributing partner
- No gain or loss is recognized when property is contributed
Partnership: Basis of Partner’s Interest
What type of assets can be classified as contributed capital asset when it comes to an exchange for a partnership?
- Money
- Ordinary Income Property
- Services
- Stock
Partnership: Basis of Partner’s Interest
What is the basis when services are exchanged for a partnership interest?
- The basis is the FMV of the service plus cash
- The basis would be classified as ordinary income
- Compensation income is the FMV of the partnership interest
- If there was an additional contribution made with the services, then the basis would be the (FMV of the Interest - FMV of the services rendered)
Partnership: Basis of Partner’s Interest
How is property treated when it is part of a partnership?
The transaction is treated as a part sale and part tax-free contribution
Step 1: Determine the net FMV of the property acquired
(FMV at proposal - Interest Received)
Step 2: Calculate the % of property sold
Net FMV of Property/FMV at Proposal
Step 3: Calculate the basis of the property that was sold
% of Property Sold x property basis
Step 4: Calculate gain (Net FMV - Allocated Adjusted Basis)
Partnership: Basis of Partner’s Interest
What is the basis when the partnership interest would be treated as an investment company?
The basis is increased by the amount of gain recognized by the partner
Example
FMV of Stock: $10,000
Basis of Stock: $5,000
Gain of Stock: $5,000 ($10,000 - $5,000)
Partnership Basis: $10,000 ($5,000 + $5,000)
Partner’s Taxable Income
How is a partnership ordinary income calculated?
Taxable Income + Separately Stated Items
Partner’s Taxable Income
What is the calculation to determine a partner’s adjusted gross income?
Ordinary Income + Capital Gains + Dividend Income - Maximum Capital Loss
Tax-exempt income is not included since it’s tax-exempt
Partner’s Taxable Income
What is not included when calculating a partner’s income?
- Guaranteed Payments
- Payments for Services
- Distributions
- Loans
Partner’s Taxable Income
What is the calculation to determine a partner’s taxable income?
Step 1: Calculate the reportable Partnership Income for the Partnership
* Business Income - Guaranteed Payments
Step 2: Determine Reportable income for the partner
* (% of Interest x Partnership Income for the Partnership) + Guaranteed Payment + (% of Interest x Separately Stated Items)
Partner’s Taxable Income
How are loans reportable in a partner’s tax return?
Loans are not included as income to the partner since they will be repaid in future years
Partner’s Taxable Income
How are guaranteed payments reported for a partner?
- They are subtracted as an expense to determine ordinary income
- They are then added back based on the % of interest owned as a separately stated item
Partner’s Taxable Income
How is the sale of contributed property calculated in a partnership?
Step 1: Determine Gain/Loss of property before contribution
(FMV Contribution - Adjusted Basis of property)
Step 2: Calculate Gain/Loss of property after contribution when sold
(FMV Contribution - Sale Price)
Step 3: Allocate Postcontribution Property x % of Partnership Interest
Step 4: Calculate reported amount
Gain/(Loss) Precontribution + Allocated Postcontribution
Partner’s Taxable Income
What is the calculation to determine a distributive share of income when there is a minimum guaranteed payment required?
Step 1: Calculate the Partner’s share of income
* % of Interest x Income
Step 2: Calculate the Partner’s Guaranteed Payment
* Guaranteed payment minimum - Partner’s share of income
Step 3: Calculate distributive Share of Income
* Partner’s share of income - Partner’s Guaranteed Payment
Partner’s Taxable Income
What is the at-risk limitation for computing a partner’s personal income tax liability?
The at-risk limitation is based on a partner’s deduction of their distributive share of partnership losses
Partner’s Taxable Income
How is the basis calculated when the beginning basis includes liabilities and there are additional liabilities at the end of the year?
Net the beginning liability with the ending liability
* Net liability > 0: Decrease the net amount
* Net liability < 0: Increase the amount
Partner’s Taxable Income
How is income calculated in order to report it on Form 1065?
Gross Receipts
(Returns and Allowance)
(COGS)
Ordinary Income from Other Partnerships
Reconciling Book and Taxable Income
How is bad debt recorded for tax purposes?
- The allowance method is not allowed
- If additional debt estimated accounts were added to the allowance, then the difference between what was actually written off and the additional allowance will either be added or subtracted to determine taxable income
- More accrued debt than what was written off: Increase
- Less accrued debt than what was written off: Decrease
Reconciling Book and Taxable Income
What are not included in a schedule M-1
Schedule M-1 reconciles items that are reported on the books but are not reported on the tax return
Items that are included in both the book and tax return
* Interest on Loan to carry U.S. Obligations
* Current State Corporate Income Tax
Reconciling Book and Taxable Income
How is excess expenses reported on the M-1?
Tax expense > book expense: Increase
Tax expense < book expense: Decrease
Reconciling Book and Taxable Income
How is excess income reported on the M-1?
Taxable Income > Book Income: Decrease
Taxable Income < Book Income: Increase
Reconciling Book and Taxable Income
Where is the reconciling of accounting income or loss reported on a corporate tax return?
Schedule M-1
Reconciling Book and Taxable Income
What is included in Schedule M-3?
Part 1
* Financial information and Net Income (Loss) Reconciliation
* Asks certain questions about the financial statements and reconciles book net income to net income for tax purposes
Part 3
* Recording expenses and deduction items
