Section 5 Flashcards
What is the corporate flat tax rate?
21%
BONUS DEPRECIATION
Bonus depreciation now applies to Qualified Improvement Property (QIP)
QIP is any improvement to any interior part of building if placed in service ___
QIP does NOT include any improvement attributable to the ___
after the date the building was fist placed in service
Not include any improvement attributable to the enlargement of the building
Section 179 Expensing
A TP can elect to __ the cost of the qualifying property rather than recover through ___
deduct, depreciation.
How long is the recovery period (depreciation period) for QIP?
15 yrs
Can tax shelters use the cash method?
nope
What is the requirement to use the cash method for TPs?
have less than
What 2 corporations can use the cash method of accounting regardlses of the receipt test?
PSC & C Corps
TP that meet the $25M gross receipt test are not requried to account for inventories, but can use a method of accounting that either (2)
Treats inventories as non-incidental materials or conforms to the TP financial accounting treatment
Busiensses w/ avg gross receipt of $25M or less are ___ from the UNICAP
exempt
COMPLETED - CONTRACT METHOD OF ACCTING
The TCJA expands the exception for _____ from the requirement to use the % of completion method
Contracts within this exception are the contracts for construction/improvement of real property IF (2)
- Expecte to be completed within 2 years of commencement of contract &&&&&
- Performed by a taxpayer that meets the $25M gross receipt test (for the year the contract was entered into.)
S CORP CONVERSIONS
An eligible S Corp can change from cash method to accrual method
What makes an S Corp eligble (3)
- An existing S corp before the law (T2. CJA)
- Revoked its S corp election
- All owners are the same (w/ same ownership %) when they revoked their S Corp election
BUSINESS INTEREST
The deduction for business interest is limited to ___% of the ____ of the taxpayer for the tax year
Business interest can mean any interest paid or accrued from debt. It does not include ___
30% , adjusted taxable income
doesn’t include investment interest / investment income
BUSINESS INTEREST
Adjusted taxable income means the income computed BEFORE (4)
Gains or any item of income
Business income/interest
Any amt of net operating loss deduction
Qualified business income of a pass-through entity
BUSINESS INTEREST
The amount of any business interest not allowed as a deduction for any tax year may be _____ ….for how long?
carried forward INDEFINITELY
When do the rules regarding business interest NOT apply?
If taxpayer’s avg annual receipts of the past 3 years do NOT exceed $25M — THEN, the 30% limitation rule of adjusted gross income would NOT apply
EMPLOYEE ACHIEVEMENT AWARD
An employee achievement award is a ____ given to the employee in recognition of length of service or safety achievement
tangible personal property
EMPLOYEE ACHIEVEMENT AWARD
Employee achievement awards that are deductible by the employer are ___ from the employee’s gross income and from wages
What does personal property NOT Include?
excluded
cash/gift card/ vacation/meal/stock/bond
Gain/loss on self-created property (patent/inventions/etc) will receive capital gain treatment
T/F
False - no it wont
For NOL in tax years AFTER 12/31/2017, the law repeals the ____
NOL can be carried forward ____ (how long), but are limited to 80% of taxable income
2 year carry back
Carried forward indefintiely
After 2021, companies will no longer be able to immediately expense costs that are treated as section 174 research expense, INSTEAD, they will be required to charge research expense to a ____ account and educt them over a ____ year period
How long if incurred outside of the U.S?
capital account, 5 year period
If outside of U.S, then 15 years
ENTERTAINMENT EXPENSE
How much is the deduction?
There is no deduction – this was repealed
Any deduction for employee expense?
Deduction for Sexual Harrassment settlements?
Nope
Taxpayers may still generally deduct __% of the food and beverage expenses associated with operating their trade or business
50%
EMPLOYER-PAID LEAVE
The law allows businesses a general business credit of 12.5% of the amount of wages paid to qualifying employees on _____ if the rate of payment is __% of the wages normally paid to the employee.
Family and medical leave, 50%
Partnerships are treated as continuing even if more than 50% of the total capital and profits interests of the partnership is ____ or ___
sold or exchanged
SUBSTANTIAL BUILT-IN LOSS
Exists if transferee is allocated a net loss in excess of $250K upon a ____ by the partnership
hypothetical disposition
Determining Share of Loss (Partnership)
The basis limitation on partner losses take into account a partner’s: (2)
Share of partnership charitable contributions & taxes paid
QUALIFIED BUSINESS INCOME
Qualified business income is reduced by federal income taxes, but not ___
Alternative minimum tax or self employment tax
QUALIFIED TRADE OR BUSINESS
A qualified trade or business means any trade or business OTHER THAN: (2)
Specified service trade/business OR trade/business of being an employee
What is a specified service trade/business?
performance of services and the principal asset is the reputation/skill of an employee
Corporations are divided into 2 categories:
What is their main distinction (what sets them apart)
Subchapter S (S Corp) Subchapter C (C corp)
Main distinction is their tax treatment
What are the three advantages of corporate structure?
Shareholders shave limited liability for corp. debts
Continuous life until dissolved (not terminated by death of shareholder)
Shares can be purchased/sold/assigned
CORPORATION DEFINITIONS
Domestic –
Foreign –
C Corporations –
Domestic: Does business in the state it incorporates
Foreign - does business in any state except the 1 its incorporated
C Corp - Formed under state corp law and taxed as a a corporation for federal tax purposes
STATUTORY CLOSE CORPORATIONS (C Corp)
What are Statutory close corporations also called?
How many shareholders?
For approvals, what must be achieved?
Can it function w/o BOD and shareholder meetings?
Also called: Closely held or closed corporation
Shareholders: 50 or less
For Approvals: must get 2/3rd vote
It can function w/o BOD & Shareholder meetings
S Corporations Classified as a corporation, taxed as a \_\_\_\_\_ How many shareholders? How many classes of stock? Who can NOT be shareholders?
Taxed as a partnership
100 or less shareholders
1 class of stock
Cant be shareholder: Nonresident aliens, corporations, foreign trusts
CORPORATION - PROMOTERS
Promoters may act on behalf of the corporation (T/F)
Promoters are: (T/F)
- Agents of the corporation
- Contracts bind promoters
- BOD may adopt/reject contracts made by promoter
- Promoter is not liable unless granted a novation
T
Promoters are (t/F)
- F - Not Agents
- T
- T
- F - Promoters are liable unless granted novation
Incorporation
Corporations are regulated by ____ laws that allow their formation to carry on lawful activity
Who signs the articles of incorporation?
Regulated by state laws
Incorporators sign the articles of incorporation
What must the articles of incorporation include (7)
- Name of corp
- Corp purpose
- Capital stock authorized
- Location of principal office
- # of directors
- Name/address of registered agent
7 Capital structure and duration
BYLAWS
What are bylaws?
Bylaws are the rules/regulations that govern the internal management of a corporation
What are the three doctrines that deal with defects in the incorporation process? include definition
De Jure Corp: any corp that complies w/ the mandatory statutory requirements of incorporation
De Facto Corp: If fail to comply w/ mandatory requirements, courts recognize as de facto.
Corporation by Estoppel: in absence of a de facto
What does De Facto Corporation force and shield?
What does Corporation by Estoppel really mean?
De Facto: Forces 3rd parties to perform on corporate contracts & Shields shareholders from direct liability
Corporation by Estoppel: Doesn’t force 3rd parties to act on contracts & shields shareholders from direct liability
BUSINESS JUDGMENT RULE
Business judgment rule protects ___ from personal liability for acts performed in good faith on behalf of the corp
Directors
PIERCE THE CORPORATE VEIL
When will courts hold stockholders personally liable? (2)
When corporation assets are used for owner’s personal purposes OR when corporation is used to commit fraud
SHAREHOLDER & DIRECTORS
Who approves dissolution?
Who Elects officers?
Shareholders approve dissolution
Directors elect officers (shareholders elect directors)
SHAREHOLDER RIGHTS (share holders are AVID-P)
Shareholders have the following rights: (AVID-P)
Asset share on dissolution - pro-rate shares of
remaining assets
Voting Rights - right to vote
Inspect books - right to inspect books
Derivative - right to sue
P - Preemptive right - right to first refusal
SHAREHOLDER CONTROL DEVICE
Shareholders can vote their stock in a particular way to maximize their effect on ___
What is a Voting Trust? What do you need?
What is a pooling agreement? (Oral or written?)
corp policy
Voting Trust: shareholder turn their voting right to a trustee for a period NTE 10 yrs…you need a certificate from the trustee
Pooling Agreement: 2 or more shareholders vote their shares in a given way….it is written and signed
SHAREHOLDER CONTROL DEVICE
Proxy - definiton
General Proxy allows an agent ot vote the shares only as directed by the shareholder (T/F)
Proxy - authorization to vote for another
True
PARTNERSHIPS
- What type of liability?
- Partnership written or oral?
- What if no agreement? (profits/losses related)
- How do they pay income tax?
- File w/ state for the formation & dissolution?
- Inactive partners have the right to inspect book?
- General -unlimited liability
- Can be written or oral
- If no agreement, split profit/loss equally
- Dont pay income tax - they pass through
- Dont file w/ the state for formation or dissolution (only file if performing under a fictitious name)
- Inactive partners have the right to inspect books
PARTNERSHIP
Partnership at will = what type of duration
After dissociation, do liabilities continue?
Do partnerships always eventually dissolve?
Continuing partners can purchase the partner’s ____
Partnership @ will: indefinite duration
After dissociation, liabilities still continue to exist
Partnerships do NOT always eventually dissolve
Continuing partners can purchase another partner’s interest
JOIN VENTURE
Joint ventures is a special form of ____ thats formed only for ____ or a series of ____ rather than a general purpose
special form of partnership, formed only for 1 transaction or a series of transactions
PARTNERSHIPS
What is RUPA? (Revised Uniform Partnership Act)
its what defines a partnership
A limited partner is someone who contributes capital to the partnership but doesn’t have ___
The limited partner’s liability is limited to the amount of ___
any authority or voice in the management of the business
limited to the amount of capital contributed
LIMITED LIABILITY PARTNERSHIP (LLP)
- LLP offers liability protection to ___
- An LLP is a GENERAL PARTNERSHIP that elects to invoke the limited liability protection (T/F)
- For LLP, regulations require specified amounts of ___
- Partners/Supervisors of negligent partners retain full unlimited liability for ____
- Protection to general partners
- True
- malpractice insurance
- negligent acts
PARTNERSHIP CLASSIFICATIONS Definitions Silent Partner Nominal Partner Dorman Partner Secret Partner
Silent - unlimited liability, but doesn’t share in the management
Nominal - not actually a partner, but may become a partner by estoppel
Dormant - partner w/ the right of management rights, but they are undisclosed and deemed inactive
Secret - participates in management, but is undisclosed
Note: for those undisclosed….if disclosed, they have unlimited liability now
PARTNERSHIP AGREEMENTS
Partnership agreements must include: (9)
- name & address of partners
- Date partnership became effective
- Purpose of partnership
- Procedure for admission of new partners
- computation of interest on partnership capital
- Computation of profits/losses for each partner
- Powers and duties of partners
- dissolution procedures/rights
- tbh idk how to describe this
RELATION OF PARTNERS
Fiduciary - duty of loyalty & duty of care
This is true
Authority to Bind Partnership Contracts
- Every partner is an ____ for the partnership and for every other partner
- The act of a partner that is committed within the scope of the partnerships purpose will bind the partnership (TF)
- Agent.
2. True
LIMITED LIABILITY COMPANY (LLC)
An LLC is a hybrid company of ___ and ___ law
- Must be created in accordance with ___
- LLC is a company formed by __ or more members
- Owners in LLC are referred to as what?
- Members are equivalent to ____
- Members manage the company unless agreed otherwise (TF)
Hybrid company of corporation and partnership law
- accordance w/ state statute
- 1 or more members
- referred to as members
- Equivalent to partners in general partnership
- True
LIMITED LIABILITY COMPANY( (LLC) Definitons 1. Individual Owner 2. Manager 3. Liability Shield
- Single individual formed the LLC
- Manager - equivalent to the president of a corporation
- Liability Shield: No restriction on members of LLC like on limited partners (members can be fully involved and not lose liability shield)
LIMITED LIABILITY COMPANY( (LLC)
Do managers have to be a member of the LLC?
Nope
C CORPORATION - DIVIDEND RECEIVED DEDUCTION
A corporation is permitted a dividend-received deduction (DRD)
Yes
NO DRD Deduction
No DRD deduction is allowed if dividends are received from: (4)
Real estate investment Trust
Corporations exempt from Section 501 or 521
Held less than 45 days
Related party
CORPORATIONS
Generally, a corp must use the ___ method of accounting if avg. annual gross receipts exceed $5M
Selection of method of accounting is made on its ____
After selecting method of accounting, if they want to change, they must get approval from _
accrual method of account
Initial Tax Return
Approval from IRS
ACCRUED EXPENSES - CORPORATION
A corp can deduct accrued expenses in the tax year when: (3)
- all events that determine the liability occurred
- Amt of liability determined w/ reasonable accuracy
- Economic performance took replace with respect w/ expense
CORPORATIONS - BAD DEBT
- Take a deduction w/ bad debt?
- What method should you use to deduct?
- When can you not deduct bad debt?
- What accounting basis can you use?
- Yes
- Direct-write off method
- Cant deduct when you sue AFDA method
- Accrual basis - not cash basis
CORPORATION
What taxes are NOT deductible>
Federal
SCHEDULE M-!
Schedule M-1 is part of the corporate tax return and it reconciles ____ to ___
book income to taxable income
SCHEDULE M-2
Schedule M02 is a part of a corporate tax return and analyzes ____
unappropriated retained earnings
When will corporations have to present a Schedule M-3??
If assets exceed $10M or more
S CORP
S corps is an eligible domestic corporation that avoids ___
On the shareholder’s tax returns, shareholders include their shares of the corp’s income/deduction/loss (T)F
Double Taxation
True
S CORP - ELIGIBLITY
A corp can elect to be an S corp ONLY if it meets ALLLL of the following:
- Domestic orp
- 100 or less shareholders
- No foreign trust shareholders/non resident alien
- 1 class of stock
- Not an insurance company, a bank, (and others? tf)
- has a permitted tax year
- S Corp can have a C Corp or S Corp subsidiary
S CORP - ELECTION
What form must a corp use to elect to be an S Corp?
Who must consent to elect as s corp?
Form 2553
All shareholders must elect
S Corporations do not pay tax on its ____ and it is passed through to its shareholders
Income
When would an S corp pay taxes on income (4)
- Previously a C corp
- Has passive investment income that exceeds 25% of gross receipts
- May be liable due to LIFO for the last year of C Corp
- Built-in gains
DISTRIBUTION TO SHAREHOLDER
If balance of distribution is less than adjusted basis of stock, the shareholder has no ____
If distribution exceeds adjusted basis of stock , then you have a gain from the ____ or ___ of property
gain or loss
Sale or exchange
ACCUMULATED ADJUSTMENT ACCOUNT (AAA)
AAA of the s corp reflects the accumulated undistributed net income of the corp after 1982
S corp with accumulated earnings and profits must maintain the AAA to determine the ____ of distributions
tax effect
PARTNERSHIP
What form does a partnership file?
1065
Neither the partner nor the partnership recognize a gain or loss when ___ is contributed to the partnership in exchange for a partnership interest
property
If the partnership sells contributed property and recognizes again/loss, then ____ is allocated to the contributing partner
built-in gain/loss
LLC
A domestic LLC w/ at least 2 members that do not make an election on how to be classified for federal tax purposes will be classified as ____
a partnership
GUARANTEED PAYMENTS
Guaranteed payments are those made by a partnership to a partner that are determined without regard to the ____
A partnership treats guaranteed payments for services as if they were made to a person who is ___
partnership’s income
Not a partner
GUARANTEED PAYMENTS
The FMV of interest received by a partner as compensation for services must be included in the partner’s ____
tax return
PARTNERSHIP
Partnership taxable income is reported on the form ____
1065
PARTNERSHIP
The due date for filing form 1065 is generally ____
For Fiscal year partnerships, they must file on the ____
March 15th
15th day of the 3rd month.
PARTNERSHIP LOSS LIMITATIONS
A partner’s loss is allowed to the extent of the adjusted basis of the partner’s partnership interest
If loss is more than adjusted basis of partnership’s interest, the excess is NOT deductible for the current year, BUT it is a deducted for any year after the current year
memorize
PARTNERSHIP LOSS LIMITATION
A partner is not considered at risk for amts protected against loss through nonrecourse financing/guarantees/ stop loss agreements, etc……which it is NOT deductible
Memorize
A partnership genreally does not recognize gain/losses due to the ___
distributions to partners
PARTNER DISTRIBUTIONS
Certain distributions are treated as as ale/exchange:
Unrealized receivables or appreciated inventory items are distributed in exchange for partner’s interest
Other property (including money) is distributed in exchange for partner’s interest in unrealized receivables or appreciated inventory
Memorize
The sale of partnership interest usually results in a __ or ___
If the selling partner is relieved of any partnership liabilities, that partner must include the liability relief as part of the amount realized for his interest (T)F
gain or loss
True
ESTATE TAX
- An estate is created when someone ___
- Estate files an estate tax return (form __) if gross estate exceeds $11,180,000
- Form ___ is due ___ months after death (can file a __ month extension)
- If all property is not distributed immediately/estate continues as a going concern, a form ___ must be filed if gross income for the tax year exceeds $600
- Dies
- 706
- 706, 9 months, 9 month extension
- 1041
ESTATE
Gross estate is cash plus FMV of ___ at date of death
Gross estate includes: (TF) Life insurance proceeds Anything payable to estate Income Jointly held property (spouse has 50/50 split)
FMV or property
True to all
ESTATE
TF – the following are estate deductions
Funeral expense admin expense debt of property Claims against estate Medical expense
True to all
TRUST
A trust is a legal/taxable entity created by a grantor for the benefit of a ____
designated beneficiary
TRUST
- Testamentary trusts are trusts created by __
- Inter vivos Trusts are trusts created during ___
- Qualifeid disability trust are trusts created for the benefit of a ____
- Will (death)
- During Life
- disabled person
TRUST
What requirements must a simple trust satisfy (3)
What is a complex trust?
What is a grantor trust?
Distribute all income to beneficiaries each year
Cant make/set aside for charitable purposes
Doesn’t distribute amounts allocated
Complex trust - any trust other than simple
Grantor trust - grantor retains substantial control. Income is taxed to the grantor and not the trustee/beneficiary
SIMPLE TRUST
Income earned by trusts are taxed to ___
Beneficiaries are taxed on income required to be ___ , regardless if it is ___ or not
Income passes through to ___
Distributed Net Income is prorated if the trust has multiple ____
Beneficiaries
distributed, not distributed
beneficiaries
beneficiaries
COMPLEX TRUST
Beneficiary trust must include in gross income the sum of:
- Amount of income requried to be distributed
- All other amounts paid/credited/required to be paid
memorize
TAX EXEMPT ORGANIZATIONS
An organization may qualify for exemption from federal income tax if its for the following purpose:
Scientific Testing for public Safety Literay Educational Prevention of curelty to kids/animals
Memorize
FILING REQUIREMENT - TAX EXEMPT ORG
Exempt organizations must file the form ___ or form ___EZ
990 or 990 EZ
What does the form 990 provide? (4)
info on organizations activities
substantial contributors and amounts
Managers/highly compensated employees w/ salaries
Report of gross income & Expense
EXEMPT ORG BUSINESS INCOME TAX RETURN
Exempt organizations w/ unrelated business income must file the form ____
Must pay tax on ___-
Filing date requirement?
An exempt organization that fails to file a return for ___ consecutive years will lose its tax exempt status
990-T
pay tax on unrelated business income
Filing date: May 15th
3 consecutive years
FORM 990-N TAX EXEMPT ORG
This form is filed if gross receipts are less than or equal to $___
Required to ___ file the form 990-N
$50,000
Electronically File
TAX RATE - TAX EXEMPT ORG
Tax rate for exempt org depends on whether it is a: (2)
Corporation or Trust
