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Regulation > S Corp & Partnership > Flashcards

S Corp & Partnership Flashcards

1
Q

What are the requirements for holding S-Corporation status?

A

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

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2
Q

How is an S-Corporation election made?

A

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

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3
Q

How is an S-Corporation terminated?

A
  1. 50% of the shareholders must consent
  2. Eligibility requirement not met
  3. 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

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4
Q

What items are not included in calculating an S-Corporation’s ordinary income?

A

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)
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5
Q

How is S-Corporation shareholder basis calculated?

A

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

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6
Q

What is the formula for an S-Corp Built-in Gains (BIG) Tax?

A

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

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7
Q

How are retained earnings reduced in and S-Corp?

A
  1. AAA (Accumulated Adjustments Account)
  2. PTI (Previously Taxed Income)
  3. AEandP
  4. OAA (Other Adj Account)
  5. Stock basis
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8
Q

What is the Passive Investment Income Tax (PII)

A

Sub-chapter C EandP (earning and proffits) and PII >25% of gross reciepts
35% tax on excess net passive income

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9
Q

What amount of losses in an S-Corp can a shareholder deduct?

A

Only up to the shareholders adjusted basis.

Example: S-Corp loss $50, shareholder basis $40. Only deduct $40

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10
Q

Are Partnerships a taxable entity?

A

No. Income and expenses flow through to the partner to be taxed via a Form K-1.

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11
Q

When exchanging property for a partnership interest, how is gain or loss recognized?

A

No gain nor loss is recognized in an exchange of property for a partnership interest.

It is a non-taxable event.

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12
Q

What is a partner’s basis in partnership property?

A

Initial basis for partnership property is the basis of the property that was contributed or exchanged for the partnership interest.

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13
Q

When services are exchanged for a partnership interest, how is this treated for tax purposes?

A

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.

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14
Q

What is the partner’s basis in a partnership when they provide a service in exchange for the interest?

A

The basis in the partnership interest is the amount of taxable service revenue provided by service provider.

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15
Q

What is the holding period of an asset that has been contributed to a partnership?

A

The partnership inherits the holding period of the asset contributed.

The exception of inventory, the holding period begins when contributed.

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16
Q

What is the tax treatment of startup costs for a partnership?

A

Tax treatment is the same as that of an individual taxpayer.

However syndication fees are not deductible or amortized.

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17
Q

What deductions are subtracted from gross revenues to arrive at partnership income?

A 
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)
18
Q

How are partnership losses taken on an individual’s return?

A
  1. Basis - Deduct loss to extent of basis
    Carried forward until Basis > Loss
  2. At Risk Rules - deduct to extent of risk in partnership (non-recourse liabilities)
  3. Passive Activity Loss Rules - deduct to extent of gains
19
Q

When are guaranteed payments to a partner includable in taxable income?

A

They appear in partner’s income during the year in which the partnership’s fiscal year CLOSES.

20
Q

How are partner benefits paid by the partnership treated?

A

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.

21
Q

How is net self-employment income from a partnership interest calculated?

A

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)

22
Q

In general, what is a partner’s basis in partnership property purchased?

A

If exchanged: Basis = FMV of partnership interest received.

If purchased: (purchase price - liabilities incurred = basis)

If gifted: gift basis rules apply.

23
Q

Which items are not deductible on Schedule K of form 1065?

A

Investment interest expense
Foreign tax paid
Charitable contributions
Section 179 expense

Mnemonic: IFC179

24
Q

Which items are not counted as income on Schedule K of form 1065?

A

Passive Income
Portfolio Income
1231 Gain or Loss

Mnemonic: PP1231

25
Q

How is adjusted partnership basis calculated?

A 
Beginning partnership basis 
\+ Capital contributions 
\+ Share of ordinary partnership income 
\+ Capital gains 
\+ Tax-exempt partnership income (DON'T FORGET!) 
= Ending partnership basis
26
Q

What items DECREASE partnership basis?

A

Money distributed
Adjusted basis of property distributed
Partners’s share of ordinary losses
Partnership is relieved of a liability (considered a distribution)

27
Q

What INCREASES partnership basis?

A 
Partnership getting a loan 
Capital contributions 
Ordinary income 
Capital gains 
Tax-exempt income
28
Q

How do liabilities either INCURRED or RELIEVED affect a partner’s basis in a partnership?

A

If the partnership gets a loan, this INCREASES basis.

If partnership is relieved of a liability; this DECREASES basis.

29
Q

How do guaranteed payments affect partnership basis?

A

They do not affect basis, they are already included in ordinary income; which affects basis.

30
Q

What is the order in which basis is adjusted in a partnership?

A
  1. Increase basis (all items; including tax-exempt income)
  2. Distributions
  3. Losses (limited to basis)

Basis never be below ZERO.

31
Q

How is the taxable year of a partnership determined?

A

Earliest of:

  1. Majority interest tax year
  2. Principle partner tax year
  3. Last aggregate deferral year

Must use the same tax year for 3 years once adopted.

32
Q

How does death of a partner affect the partnership’s taxable year?

A

The taxable year closes with respect to the decedent partner’s interest ONLY.

33
Q

When CAN’T a partnership use cash basis?

A
  1. They have inventories
  2. Partnership is a tax shelter
  3. Has a corporate partner
  4. Gross receipts are $5 Million or more

Exception: If gross receipts are $1 Million or LESS and Partnership maintains inventories, Cash method is ok.

34
Q

When does a partnership terminate?

A

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.

35
Q

How is gain or loss on sale of a partnership interest calculated?

A

Gain or Loss = Amount realized on sale - basis in partnership interest

36
Q

What is the new basis of a partnership interest sold?

A

Basis = Capital account + partner share of Liabilities assumed

37
Q

How is the sale of non-capital partnership property treated?

A

As ordinary gain/loss.

Items that fall into non-capital category would be unrealized receivables, appreciated inventory, and similar.

38
Q

How is a partner’s share of an ordinary gain calculated?

A 
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.

39
Q

What is the order of basis reductions for distributions from a partnership?

A
  1. Money distributed
  2. Adjusted basis of unrealized receivables and inventory
  3. Adjusted basis of other property

Note: Only MONEY distributions will trigger a gain in a partnership distribution.

40
Q

When can a LOSS occur in a partnership distribution?

A

Only in a liquidating distribution.

41
Q

What are the requirements for recognizing a gain in a partnership liquidating distribution?

A
  1. Money was distributed
  2. Unrealized receivables were distributed
  3. Appreciated inventories were distributed

Otherwise, no loss recognized.

Regulation (14 decks)

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