Section 4B, D, E, F,G,H Flashcards
(106 cards)
PASSTHROUGH
An S corporation has two shareholders who are also employees of the corporation. Shareholder A owns 20 shares and shareholder B owns 90 shares. The total number of shares issued and outstanding is 2,000. The corporation pays the health insurance premiums for all its employees and families. The cost of family coverage is $5,300. The corporation pays for family coverage for both shareholders. Because the company paid for health insurance, which of the following amounts would be reported to shareholder A as his income?
$0 .. .WHY
If the shareholder owns less than 2% of the company, none of the premiums would be taxable. If they own more than 2%, then insurance premiums paid by the S corporation are fully taxable. Shareholder A owns 1% (20 ÷ 2,000) and therefore has zero income. Note that shareholder B owns 4.5% (90 ÷ 2,000) and would have to declare the premium as income if the question had asked about shareholder B.
PASSTHROUGH
Sarah, an individual taxpayer, is the sole shareholder in an S corporation. The S corporation has taxable income of $15,000 for the current year and also paid Sarah $20,000 in salary. What is the gross amount of income that Sarah must report as taxable income in the current year?
The net income reported on line 1 of the Schedule K-1 of the S corporation plus the salary
Only the income from the salary
As the sole shareholder, Sarah must report the salary and the earnings of the S corporation on her personal return.
S corporation status usually avoids the ___ tax and that corporate losses can be claimed by the ___. The entity must start as a ___and then, with the unanimous vote of the stockholders, must apply to the IRS for S corporation status.
S corp is a ____ ___ entity
corporate income , shareholders, C Corp,
Pass Through
The S corporation taxable year is the ___unless IRS approval is obtained for a ___
S corporations report their income and other tax attributes to their shareholders on ____of IRS Form ___
calendar year , fiscal year
Schedule K-1 , 1120S
QUALIFIED BUSINESS INCOME
The QBIA offers taxpayers other than corporations a deduction of __% of qualified business income (QBI),
Qualified Business Income is known as the ____ deduction
20%
Section 199a
____ is the net amount of income, gain, deduction, and loss from the operation of a business, excluding investment income
Qualified business income (QBI)
Distributions from an S corporation come from the following sources in the order listed:
1 Distributions are first considered to come from an “___” (AAA). (((distributions from AAA are taxable/nontaxable))))
- When AAA is exhausted, distributions are ___to the extent of any accumulated earnings and profits
- When E&P is exhausted, distributions are a ____to the extent of the shareholder’s stock basis, and then ___
accumulated adjustments account, nontaxable
dividends
return of capital , capital gain.
If an S corporation distributes appreciated property to a shareholder, the transfer is treated as if the property had been sold to the shareholder at ____
(1) A ___is recognized at the corporate level.
(2) The gain is subsequently reported to the shareholders ___based on their share ownership.
fair market value.
gain
pro-rata
Loss pass-throughs in excess of a shareholder’s stock basis may be carried forward ___
indefinitely
If a taxpayer materially participates in a trade or business on a regular, continuous, and substantial basis, the income or loss resulting is ___.
If the taxpayer does not materially participate in trade or business, the income or loss resulting is ___
active
passive
An individual taxpayer reports the following items for the current year:
Ordinary income from Partnership A, operating a movie theater in which the taxpayer materially participates: $70,000
Net loss from Partnership B, operating an equipment rental business in which the taxpayer does not materially participate: (9,000)
Rental income from building rented to a third party: 7,000
Short-term capital gain from sale of stock: 4,000
What is the taxpayer’s adjusted gross income for the year?
$74,000
Items included in AGI: Ordinary income from Partnership A ($70,000) + Short-term capital gain from sale of stock ($4,000) = $74,000 AGI.
The passive activity amounts of $(9,000) and $7,000 are netted for a result of $(2,000). There can be no deduction for losses as a result of passive activities.
QUALIFIED BUSINESS INCOME
The deduction is claimed on the individual IRS Form 1040 of a taxpayer with qualifying income from a (5)
sole proprietorship, partnership, S corporation, trust, or estate.
Evan, an individual, has a 40% interest in EF, an S corporation. At the beginning of the year, Evan’s basis in EF was $2,000. During the year, EF distributed $100,000 and reported operating income of $200,000. What amount should Evan include in gross income?
$80,000
$118,000
$80,000
Shareholders of an S corporation include a pro rata share of the corporation’s nonseparately and separately stated items of income or expense on their personal tax return.
Evan includes 40% of EF’s operating income or $80,000 ($200,000 × 0.40 = $80,000) on his personal tax return. None of Evan’s $40,000 share of distributions ($100,000 × 0.40 = $40,000) would be taxable since his distributions did not exceed his new basis.
Beginning basis $ 2,000
Share of operating income 80,000
Share of distributions (40,000)
--------
Ending (new) basis $42,000
Bearing is an individual taxpayer who uses the filing status of single. A review of Bearing’s Year 2 records disclosed the following tax information:
Wages $ 18,000
Taxable interest and qualifying dividends 4,000
Schedule C trucking business net income 32,000
Rental (loss) from residential property (35,000)
Limited partnership (loss) (5,000)
Bearing actively participated in the rental property and was a limited partner in the partnership. Bearing had sufficient amounts at risk for the rental property and the partnership. What is Bearing’s Year 2 adjusted gross income?
$29,000
tems included in AGI: Wages ($18,000) + Taxable interest and qualified dividends ($4,000) + Schedule C income from business ($32,000) - Maximum allowed deduction for residential rental property ($25,000) = $29,000 AGI.
The limited partnership loss is not deductible as it is a passive activity. The rental loss may be deducted up to a maximum of $25,000 for a single taxpayer. All other income items are taxable.
Losses and credits from passive activities
Generally, losses from passive activities may only be used to offset ___from passive activities.
Unused passive losses ___to offset passive income in future years
Any tax credits related to passive activities can only be used to offset taxes attributable to \_\_\_(((excess credits \_\_\_ to offset future taxes on passive income)))
income
carry forward
passive income , carry forward
Passive activities include the following:
(1) Trade or business in which the taxpayer does not ____participate
(2) ___activities
(3) ___partnership activity
materially
Rental
Limited
The rental loss may be deducted up to a maximum of $____for a single taxpayer
25,000
Stone owns 100% of an S corporation and materially participates in its operations. The stock basis at the beginning of the year is $5,000. During the year, the corporation makes a distribution of $3,500 and passes through a loss from operations of $2,000 for the year. What loss can Stone deduct on Stone’s personal tax return?
1500
A taxpayer’s loss deduction from an S corporation is limited to amounts “at risk” in a trade or business or income-producing activity under IRC Section 465 losses. The amount at risk is the total of the taxpayer’s basis in the S corporation plus any loans that the taxpayer has made to the S corporation. In this case, the basis begins as $5,000. The basis is reduced by the $3,500 distribution, leaving a final basis of $1,500. Therefore, the allowed loss is $1,500.
egardless of the distributions received by a partner, a partner must report the taxable income reflected on the ____provided by the partnership.
Schedule K-1
A partner’s share of ordinary income from an investment in a limited partnership reported in Form __, Schedule K-1 should be reported in ___, Supplemental Income and Loss
Schedule E
A single taxpayer may enjoy the benefit of IRC Section 199A without limitation if she does not have taxable income in excess of what amount?
$157,500… WHY
The Tax Cuts and Jobs Act of 2017 (TCJA) created IRC Section 199A, which allows owners of pass-through entities to deduct 20% of their qualified business income, with certain limitations being phased in for taxpayers with taxable income exceeding $315,000 (joint filers) or $157,500 (other filers).
In general, passive activity losses in excess of passive activity income are not allowed. There is an exception to the rule for ____; if an individual actively participated in a ____, they may be able to deduct up to $___of passive activity loss from nonpassive income.
rental real estate activities, rental real estate activity, 25,000
Participation in management decisions such as new tenant approval, rental terms, repairs, and capital expenditures is sufficient to meet the “___” definition.
active participation
The passive activity rules apply to individuals, estates, trusts, personal service corporations, and closely held C corporations.
The passive activity loss rules do not apply to ____
partnerships, widely held C corporations, or S corporations.
