S Corp & Partnership Flashcards
What are the requirements for holding S-Corporation status?
Only individuals, estates and trusts can be shareholders
Domestic only, no international S-corps or foreign shareholders
Up to 100 shareholders allowed, and only one class of stock allowed
Calendar tax year only
How is an S-Corporation election made?
Election for S Corp status must be made by 2 1/2 months and counts as being an S Corp since the beginning of the year
To make election, 100% of the shareholders must consent
How is an S-Corporation terminated?
- 50% of the shareholders must consent
- Eligibility requirement not met
- Passive Investment Income (PII) - 3 yr of Sub-chapter C EandP and PII >25% of gross reciepts
No S Corp election allowed for 5 years after termination
What items are not included in calculating an S-Corporation’s ordinary income?
Included on Schedule K-1, not in ordinary income (per day, per share):
Foreign Taxes paid deduction No Investment Interest expense Section 179 Deduction Gains or Losses Charitable Contributions Portfolio Income (dividends or interest)
How is S-Corporation shareholder basis calculated?
Pro-rata share
Beginning Basis
+Share of Income Items (including non-taxable income!)
-Distributions (cash or property)
-Non-deductible expenses
-Ordinary Losses (but don’t take income below zero)
= Ending basis
What is the formula for an S-Corp Built-in Gains (BIG) Tax?
Only when C-Corp becomes S-Corp
No tax after 5 years
FMV of Assets @ S-Corp Election Date
- Adjust. Basis of Assets
= Built-in Gain
x 35% Corporate Rate
How are retained earnings reduced in and S-Corp?
- AAA (Accumulated Adjustments Account)
- PTI (Previously Taxed Income)
- AEandP
- OAA (Other Adj Account)
- Stock basis
What is the Passive Investment Income Tax (PII)
Sub-chapter C EandP (earning and proffits) and PII >25% of gross reciepts
35% tax on excess net passive income
What amount of losses in an S-Corp can a shareholder deduct?
Only up to the shareholders adjusted basis.
Example: S-Corp loss $50, shareholder basis $40. Only deduct $40
Are Partnerships a taxable entity?
No. Income and expenses flow through to the partner to be taxed via a Form K-1.
When exchanging property for a partnership interest, how is gain or loss recognized?
No gain nor loss is recognized in an exchange of property for a partnership interest.
It is a non-taxable event.
What is a partner’s basis in partnership property?
Initial basis for partnership property is the basis of the property that was contributed or exchanged for the partnership interest.
When services are exchanged for a partnership interest, how is this treated for tax purposes?
Taxable event; treated the same as compensation for the services.
The taxable income equals the % of partnership interest received times the FMV of the partnership.
i.e. the FMV of the interest received is the taxable income for the service provider.
What is the partner’s basis in a partnership when they provide a service in exchange for the interest?
The basis in the partnership interest is the amount of taxable service revenue provided by service provider.
What is the holding period of an asset that has been contributed to a partnership?
The partnership inherits the holding period of the asset contributed.
The exception of inventory, the holding period begins when contributed.
What is the tax treatment of startup costs for a partnership?
Tax treatment is the same as that of an individual taxpayer.
However syndication fees are not deductible or amortized.
What deductions are subtracted from gross revenues to arrive at partnership income?
COGS Wages - except for partners Guaranteed payments to partners Business bad debt (if on accrual basis) Interest paid Depreciation (except section 179) Amortization (Startup costs; goodwill; etc)
How are partnership losses taken on an individual’s return?
- Basis - Deduct loss to extent of basis
Carried forward until Basis > Loss - At Risk Rules - deduct to extent of risk in partnership (non-recourse liabilities)
- Passive Activity Loss Rules - deduct to extent of gains
When are guaranteed payments to a partner includable in taxable income?
They appear in partner’s income during the year in which the partnership’s fiscal year CLOSES.
How are partner benefits paid by the partnership treated?
Health insurance, life insurance, and other benefits paid on behalf of the partner are treated as guaranteed payments and are includable as self-employment income.
How is net self-employment income from a partnership interest calculated?
Partner’s % share of ordinary income from partner’s K-1
+ Guaranteed payments
- Partner’s % share of section 179 expense from K-1
= Self-employment income (subject to SE tax)
In general, what is a partner’s basis in partnership property purchased?
If exchanged: Basis = FMV of partnership interest received.
If purchased: (purchase price - liabilities incurred = basis)
If gifted: gift basis rules apply.
Which items are not deductible on Schedule K of form 1065?
Investment interest expense
Foreign tax paid
Charitable contributions
Section 179 expense
Mnemonic: IFC179
Which items are not counted as income on Schedule K of form 1065?
Passive Income
Portfolio Income
1231 Gain or Loss
Mnemonic: PP1231
How is adjusted partnership basis calculated?
Beginning partnership basis \+ Capital contributions \+ Share of ordinary partnership income \+ Capital gains \+ Tax-exempt partnership income (DON'T FORGET!) = Ending partnership basis
What items DECREASE partnership basis?
Money distributed
Adjusted basis of property distributed
Partners’s share of ordinary losses
Partnership is relieved of a liability (considered a distribution)
What INCREASES partnership basis?
Partnership getting a loan Capital contributions Ordinary income Capital gains Tax-exempt income
How do liabilities either INCURRED or RELIEVED affect a partner’s basis in a partnership?
If the partnership gets a loan, this INCREASES basis.
If partnership is relieved of a liability; this DECREASES basis.
How do guaranteed payments affect partnership basis?
They do not affect basis, they are already included in ordinary income; which affects basis.
What is the order in which basis is adjusted in a partnership?
- Increase basis (all items; including tax-exempt income)
- Distributions
- Losses (limited to basis)
Basis never be below ZERO.
How is the taxable year of a partnership determined?
Earliest of:
- Majority interest tax year
- Principle partner tax year
- Last aggregate deferral year
Must use the same tax year for 3 years once adopted.
How does death of a partner affect the partnership’s taxable year?
The taxable year closes with respect to the decedent partner’s interest ONLY.
When CAN’T a partnership use cash basis?
- They have inventories
- Partnership is a tax shelter
- Has a corporate partner
- Gross receipts are $5 Million or more
Exception: If gross receipts are $1 Million or LESS and Partnership maintains inventories, Cash method is ok.
When does a partnership terminate?
When there is less than 2 partners (only one partner) When 50% of the partnership interests sell within a 12 month period, partnership IMMEDIATELY terminates.
How is gain or loss on sale of a partnership interest calculated?
Gain or Loss = Amount realized on sale - basis in partnership interest
What is the new basis of a partnership interest sold?
Basis = Capital account + partner share of Liabilities assumed
How is the sale of non-capital partnership property treated?
As ordinary gain/loss.
Items that fall into non-capital category would be unrealized receivables, appreciated inventory, and similar.
How is a partner’s share of an ordinary gain calculated?
FMV of Assets (non-capital) - Adjusted basis of assets = Ordinary gain x Partner's % interest = Partner's share of gain
Note: No gain or loss will be recognized by a partnership upon distribution of property.
What is the order of basis reductions for distributions from a partnership?
- Money distributed
- Adjusted basis of unrealized receivables and inventory
- Adjusted basis of other property
Note: Only MONEY distributions will trigger a gain in a partnership distribution.
When can a LOSS occur in a partnership distribution?
Only in a liquidating distribution.
What are the requirements for recognizing a gain in a partnership liquidating distribution?
- Money was distributed
- Unrealized receivables were distributed
- Appreciated inventories were distributed
Otherwise, no loss recognized.
