Section 5A - Tax Treatment of Formation & Liquidation of Entities Flashcards
How is a joint venture taxed and treated for liability purposes?
As a limited partnership
As a general partnership
As a C corporation
As an S corporation
General Partnership - Joint ventures are similar to general partnerships in that they involve the co-ownership of a business for profit
JOINT VENTURES (JV) Typically, joint ventures are established for conducting a \_\_\_enterprise or transaction and usually continue for a \_\_\_duration than most general partnerships.
Do JV owe a fiduciary duty?
What type of liability do JV have? Limited,etc?
JV have ___ to manage the biz
T/F - Death dissolves the JV
single ,shorter
Yes
Unlimited
equal rights (they can delegate this power to 1 participant)
False - it does not dissolve b/c of death
Under the uniform capitalization rules applicable to property acquired for resale, which of the following costs should be capitalized with respect to inventory if no exceptions are met?
Marketing costs
Off-site storage costs
Both marketing costs and off-site storage costs
Neither marketing costs nor off-site storage costs
Off-site Storage Cost
Under the uniform capitalization rules, the following costs must be included in inventory:
All direct cost of the property Indirect costs (such as off-site storage costs)
The following costs are never capitalized to inventory: selling, marketing, advertising, and distribution expenses.
Under the uniform capitalization rules, the following costs must be included in inventory:
All ___& ___costs
Four costs are NEVER capitalized to inventory: Selling, marketing, advertising, distribution T/F
Partnership Agreements state: limited partners can be held liable for losses in excess of their capital contributions. T/F
Direct & Indirect
True
False - they can not be held liable of any lossesss that exceed their cap. contribution
Which form of business entity has the following attributes?
- Limited liability for all its owners
- Can permit all its owners to participate in management and control of the entity
- The consent of all the owners
A limited liability company
A limited partnership
A corporation
A general partnership
LLC
LLC
An LLC is generally created under state law by filing ___with the secretary of state’s office
articles of organization
What is the name given to ownership of property by partners?
Unilaterally shared property
Tenancy in partnership
Joint ownership
Tenancy by the entirety
Tenancy In Partnership
___is the term given to the ownership by partners of the partnership’s property.
All partners have ___to use partnership property for partnership purposes.
A partner has ___transferable rights in specific partnership property.
___consists of money and fair market value of property contributed by partners for permanent use by the partnership.
Tenancy in partnership
equal rights
no
Partnership capital
Tax-free distributions and contributions Yes
Earnings accumulate tax-free Yes; passed
through to
individuals but no
entity tax
Not subject to personal holding tax Yes
No double taxation of income Yes
Single individual as management Yes
Corporation as member/multiple
members allowed No
PROPRIETORSHIP:
Tax-free distributions and contributions Yes, under
certain circumstances
Earnings accumulate tax-free Yes; passed through to individuals but no entity tax
Not subject to personal holding tax Yes
No double taxation of income Yes
Single individual as management Yes
Corporation as member/multiple
members allowed No
S CORPORATION
Tax-free distributions and contributions No
Earnings accumulate tax-free No
Not subject to personal holding tax No
No double taxation of income No
Single individual as management No
Corporation as member/multiple
members allowed Yes
C CORPORATION:
Tax-free distributions and contributions Yes
Earnings accumulate tax-free Yes; passed through to indiv. but no entity tax
Not subject to personal holding tax Yes
No double taxation of income Yes
Single individual as management Yes
Corporation as member/multiple
members allowed Yes
LIMITED LIABILITY PARTNERSHIP:
A limited partnership is a partnership created by ___ consisting of at least one___ and one or more special or limited partners.
It is regulated by the Uniform Limited Partnership Act (ULPA) in most states. In most states the limited partnership must be registered with the state in order to operate and sell limited partnership interests in the state. T/F
statute , general partner
True
The maximum deduction that the partnership can take on its current-year return is $3,600 or 100% of the organization costs up to $5,000. T/F
True
Basic Partnership, a cash-basis calendar-year entity, began business on February 1 of the current year. Basic incurred and paid the following in the current year, prior to February 1:
Filing fees incident to the creation of the
partnership $ 3,600
Accounting fees to prepare the representations
in offering materials 12,000
Basic elected to amortize costs. What was the maximum amount that Basic could deduct on the current-year partnership return?
Accounting fees to prepare the representations in offering materials and other costs incurred to sell or promote the sale of the partnership are required to be capitalized as syndication costs. Syndication costs are not eligible for amortization.
Filing fees and other costs incident to the creation of the partnership are required to be capitalized as organization costs.
The maximum deduction that the partnership can take on its current-year return is $3,600 or 100% of the organization costs up to $5,000.
What is the tax treatment for start-up expenses?
Not deductible
Deduct up to $5,000; amortize the excess over 60 months
Deduct up to $5,000; amortize the excess over 180 months
Current deduction for all start-up expenses
Deduct up to $5,000; amortize the excess over 180 months
taxpayers may deduct up to $5,000 in the taxable year in which the business begins. The $5,000 amount is reduced by the amount by which the cumulative cost of start-up expenditures exceeds $50,000. Any remaining start-up expenditures not deducted are amortized over a 15-year period (180 months).
taxpayers may deduct up to $___ in the taxable year in which the business begins. The $___amount is reduced by the amount by which the cumulative cost of start-up expenditures exceeds $50,000.
Any remaining start-up expenditures not deducted are amortized over a____ period
5,000, 5,000
15-year period (180 months).
In tax decision-making, which of the following should be a factor?
Tax considerations only
Nontax considerations only
Both tax and nontax considerations
Neither tax considerations nor nontax considerations
Both tax & Nontax considerations
In tax decision-making, tax considerations should be the main factor. However, there should also be consideration to nontax matters. These nontax considerations may affect the end decision(s).
Leslie, Kelly, and Blair wanted to form a business. Which of the following business entities does not require the filing of organization documents with the state?
Limited partnership
Joint venture
Limited liability company
Subchapter S corporation
JV
A joint venture is like a partnership
Haze Corp., an accrual-basis, calendar-year C corporation, began business on January 1 of the current year and incurred the following costs:
Underwriting fees to issue corporate stock $ 2,000
Legal fees to draft the corporate charter $16,000
Haze elected to amortize its organization costs. What is the maximum amount of the costs that Haze could deduct on its current-year income tax return?
Underwriting fees are not organizational expenses; rather, they are a cost of (and netted against the proceeds of) stock issued. Legal fees to draft the corporate charter are organizational expenses. Total organization expense is under $50,000, so the first $5,000 is deductible and the rest is amortized over 180 months.
$5,000 + (($16,000 − $5,000) × (12 months ÷ 180 months)) = $5,733
For which of the following entities is the owner’s basis increased by the owner’s share of profits and decreased by the owner’s share of losses but is not affected by the entity’s bank loan increases or decreases?
S Corp
The owner’s adjusted basis in a ___is increased by the owner’s share of profits and decreased by the owner’s share of losses, and is also increased for the ___share of ___debt.
The owner’s adjusted basis in a___ stock is not adjusted for income or loss of the___
The members of a ___ do not bear personal liability for its debts.
partnership , partner, partnership
C corporation’s
limited liability company
A personal services corporation may deduct payments made to owner-employees only in the year in which the:
corporation is formed.
expense is accrued on the books and records of the corporation.
corporation makes a valid S election.
owner-employee includes it in income.
owner-employee includes it in income.
PERSONAL SERVICE CORPORATIONS
A personal service corporation (PSC) is a corporation in which shareholder-employees provide ___in the area of health, law, accounting, actuarial science, consulting, engineering, architecture, or performing arts
Generally, a personal service corporation is required to use a __year
PSC’s can elect a fiscal year IF ALL HAPPEN:
1. Biz __exists for fiscal tax year
2. Results in a deferral of no more than __ months of income
3. PSC pays shareholder-employee’s __
4. Salary is proportionate to the salary for the __
If the salary tests above are not satisfied, the personal service corporation can still retain its fiscal year. However, the corporation’s deduction for the salary paid to the shareholder-employee for the fiscal year will be __
personal services
calendar
Purpose
3 months
Salary
PY
limited.
S CORP
n order to elect S corporation status, the corporation must be a ____. This means that:
- the entity must be a ___corporation
- the corporation must have only individuals, estates, certain trusts, banks, and certain exempt organizations as shareholders, T/F
- the shareholders must be citizens or __residents of the United States,
- How many classes of stock?
- How many shareholders?
- S corp pays ___ tax when applicable
- State law provides special treatment T/F
small business corporation
domestic
T
permanent
1 class
100 or less (married couple can count as 1 shareholder)
Built in gain tax
False - Federal Law provides special treatment
TREASURY SHARES
These shares are NOT reacquired T/F
They are considered to be authorized and issued but ___
Treasury shares are often held to give stock options to ___
The number of treasury shares must be less than the total number of outstanding shares of the corporation. T/F
False -they are reacquired
Not outstanding
key officers and employees.
True
Which of the following taxpayers may use the cash basis as its method of accounting for tax purposes?
Partnership that is designated as a tax shelter
Retail store with gross receipts of $18 million and $26 million for the past two years, respectively
An international accounting firm with gross receipts averaging $6 million a year
Incorporated office cleaning business with average annual income of $50 million
An international accounting firm with gross receipts averaging $6 million a year
The Tax Cuts and Jobs Act of 2017 (TCJA) allows the cash method of accounting to be used by taxpayers, other than tax shelters, that satisfy the gross receipts test, regardless of whether the purchase, production, or sale of merchandise is an income-producing factor. The new gross receipts test allows taxpayers with annual gross receipts that do not exceed $25 million for the three-prior taxable-year period to use the cash method. The $25 million amount is indexed for inflation for taxable years beginning in 2018.
Which of the following cannot be amortized for tax purposes?
Incorporation costs
Temporary directors’ fees
Stock issuance costs
Organizational meeting costs
Stock issuance
The expenses of issuing stock are not amortizable; they must be charged against paid-in capital. These expenses include printing costs, professional fees, commissions, and charges for listing the stock on an exchange.
Brown Corp., a calendar-year taxpayer, was organized and actively began operations on July 1 of the current year, and incurred the following costs:
Legal fees to obtain corporate charter $45,000
State incorporation fees 5,000
Temporary director expenses 2,000
Commission paid to underwriter 25,000
Other stock issue costs 10,000
Brown elects to deduct its organizational costs. For the current year, what is the maximum amount of organizational costs that Brown can deduct?
The organizational expense deduction will be:
Legal fees to obtain corporate charter $45,000
State incorporation fees 5,000
Temporary director expenses 2,000
Total $52,000
Since total costs are $2,000 greater than $50,000, the $5,000 portion of the deduction is reduced by $2,000 and the balance of the costs are capitalized and amortized over 180 months.
($5,000 − 2,000) + (($52,000 − 3,000) × (6 months ÷ 180 months)) = $4,633
Brand New, Inc., was organized and began active business on January 2, Year 2. Brand New incurred the following expenses in connection with creating the business:
State incorporation fees $ 2,000 Legal fees for drafting the charter 6,000 Printing costs for stock certificates 1,500 Professional fees for issuance of stock 4,000 Broker's commission on sale of stock 7,000 Expense for the temporary directors 5,000 Total $25,500 What is the maximum amount of organization expense that Brand New may deduct on its tax return?
Expenses of temporary directors $ 5,000
Fees paid to a state for incorporation 2,000
Accounting and legal fees incident to organization
6,000
Total $13,000
=======
Total organization expense is under $50,000, so the first $5,000 is deductible and the rest is amortized over 180 months.
$5,000 + (($13,000 − 5,000) × (12 ÷ 180)) = $5,533
Under a ___, the taxpayer is required to recalculate the annual profit reported on a contract. In other words, it requires the taxpayer to substitute the actual costs and revenues for the estimated revenues and costs
lookback rule
In calculating the tax of a corporation for a short period, which of the following processes is correct?
Divide current-year income by prior-year income, then multiply the result by prior-year tax.
Compute tax on short-period income, then multiply the result by 12 divided by the number of months in the short period.
Determine the average taxable income for the past 3 years, then multiply the result by the number of months in the short period divided by 12.
Annualize income and calculate the tax on annualized income, then multiply the computed tax by the number of months in the short period divided by 12.
Annualize income and calculate the tax on annualized income, then multiply the computed tax by the number of months in the short period divided by 12.
There are three times when a short-period tax return is required:
When a corporation starts up and does not start in the __of its adopted tax year
When a corporation is dissolved and does not end on the __of tax year
When a corporation changes __in the middle of a tax year
first month
last month
accounting policies
Eaton is the sole owner of a construction company. Eaton is concerned about personal liability. Which of the following entities will best allow Eaton to limit personal liability?
Sole proprietorship
C corporation
General partnership
Limited partnership
C Corp
Unlike sole proprietorships, general partnerships, and general partners of limited partnerships, corporation shareholders are not liable for actions and obligations of the company. A shareholder’s liability is generally limited to the amount the individual has invested in the company.
CLASSIFICATION OF CORPS
De jure. A corporation that has generally __with all the statutory regulations
De facto. A corporation that has __to comply with some provision of the incorporation law.
___An organization representing itself to be a corporation or a person contracting with an organization as if it were a corporation is estopped from later denying the corporate existence
complied
failed
Corporation by estoppel.
What should be the main goal of tax planning?
Maximizing the taxpayer’s tax liability
Optimizing the taxpayer’s after-tax result
Optimizing the taxpayer’s before-tax result
Minimizing the taxpayer’s tax liability
Optimizing the taxpayer’s after-tax result
Dove and Eagle formed a business entity in which they are equal owners. Dove contributed cash of $100,000, and Eagle contributed land with a basis of $40,000 and fair market value of $100,000. For its first year of operations, the entity had taxable income of $60,000 and made no distributions. At year-end it had outstanding recourse liabilities to third parties of $10,000. Eagle had a basis of $70,000 in the entity at the end of the first year of operations. What type of entity was formed?
C corporation
S corporation
General partnership
Limited liability company (LLC)
S CORP
In this case, Eagle’s basis at the end of the year in the S corporation is $70,000, which is the $40,000 for his basis of the contributed land plus his share of the taxable income for the first year of operations of $30,000 (50% share of the S corporation’s $60,000 income).
If the entity was a general partnership, $5,000 (50% share of the general partnership’s $10,000 of recourse liabilities) would have been added to Eagle’s basis.
Golden Enterprises, Inc., entered into a contract with Hidalgo Corporation for the sale of its mineral holdings. The transaction proved to be ultra vires. Which of the following parties, for the reason stated, may properly assert the ultra vires doctrine?
`Golden Enterprises to avoid performance
A shareholder of Golden Enterprises to enjoin the sale
Hidalgo Corporation to avoid performance
Golden Enterprises to rescind the consummated sale
Shareholder of Golden Enterprise to enjoin the sale
Ultra vires can be used by a shareholder against a corporation to prohibit the corporation from performing a totally executory contract. The proposed transaction is an executory contract. The other answer choices are not allowed under ultra vires.
The ___Act is a doctrine that forbids an act by a corporation that is beyond the scope of its powers as specified in its articles of incorporation and under state law
Ultra Vires
Which of the following statements is correct regarding a limited liability company’s operating agreement?
It must be filed with a central state agency.
It must be in writing.
It is designed to forestall and resolve disputes among the owners.
It is necessary for a limited liability company to exist.
It is designed to forestall and resolve disputes among the owners.
For an LLC (limited liability company), its operating agreement is important in management of the entity. It is designed to spell out the activities of the LLC and assist in resolving disputes among the members.
LLC (LIMITED LIABILITY COMPANY(
The limited liability company (LLC) combines features of both __ and __
Created under state law by filing articles of organization. It must include the Name/Duration/Name & Address of LLC’s Registered Agent… T/F
The LLC's name must generally include the words “limited liability company” T/F Owners of the interests in an LLC are referred to as \_\_ Generally, members of an LLC can NOT be individuals, partnerships, corporations, or other LLCs. T/F
partnerships and corporations. True True members. False
A general partnership must:
pay federal income tax.
have two or more partners.
have written articles of partnership.
provide for apportionment of liability for partnership debts.
Have 2 or more partners
Recall that each partner reports and pays tax on his or her individual share of profits from the partnership. A general partnership is not required to be in writing, nor is there a requirement for written articles of partnership.
GENERAL PARTNERSHIP
A general partnership consists of at least two persons working as co-owners for profit…… T/F
A general partnership is a taxable entity. ….T/F
The partnership files a tax return…. T/F
True
False - it is NOT a taxable entity
False - It files a federal information return, not a tax return.
Which of the following inventory methods is prohibited?
Fair market value for securities dealers
Selling price, less direct cost of disposition for goods unsalable at normal prices
Base-stock
Lower of cost or market
Base-stock
Under the base-stock method, a constant or nominal price is used under the assumption that a “normal quantity” of inventory is on hand. This is not an acceptable method.
Under the ___method, a constant or nominal price is used under the assumption that a “normal quantity” of inventory is on hand. This is not an acceptable method.
base-stock
Sometimes the distribution to a shareholder in a C corporation is a dividend. When is such a distribution a dividend?
Only to the extent of the ___and __ of the corporation
earnings and profits
Which of the following taxpayers may use the cash method of accounting?
A tax shelter
A qualified personal service corporation
A C corporation with annual gross receipts of $50,000,000
A manufacturer
All other C corporations along with manufacturing companies and tax shelters must use the accrual basis of accounting, except to the extent a corporation has an average of $25 million in gross receipts per year for the three years prior to using the cash method of accounting
A general partner may be a secured creditor of the limited partnership. T/F
True
LIMITED PARTNERSHIP
Limited partnerships are governed by the Uniform Limited Partnership Act (ULPA) and the Revised Uniform Limited Partnership Act (RULPA). T/F
The limited partnership must have one or more general partners and \_\_\_ The name of the partnership cannot use the last name of a limited partner unless \_\_\_ A limited partner can be given the right to substitute an assignee in their place with no partnership dissolution if the partnership agreement so provides. T/F One limited partner may be given priority over other limited partners in distributing profits. T/F A limited partner who allows the use of his name in the partnership name or who participates in management is NOT liable as a general partner to the creditors of the partnership. T/F
True
one or more limited partners. a general partner has the same last name. True True False - they are liable
LIMITED PARTNERSHIP
A new general or limited partner cannot be added unless all general and limited partners agree or it is provided for in the -__.
partnership agreement
A general partner has the same rights and responsibilities in a general partnership and a limited partnership. t/f
Limited partners exist only in a limited partnership. Limited partners have limited legal liability. T/F
True
true
The uniform capitalization rules require manufacturers to capitalize:
all direct costs.
all indirect costs.
all direct and indirect costs.
neither direct nor indirect costs.
All direct costs
The UNICAP rules require the capitalization of all direct materials and direct labor. Some indirect costs such as indirect labor and handling costs may be capitalized. Some indirect costs are not capitalized such as selling and distribution costs.
Under the Revised Uniform Limited Partnership Act (RULPA), which of the following statements is correct regarding limited partnerships?
Limited partners may lose limited liability if they participate in management activities.
Limited partnerships may legally exist without filing a certificate of limited partnership.
Limited partners have the same rights, responsibilities, and authority as general partners.
Limited partners may contribute cash only and may not contribute services as their capital contributions.
Limited partners may lose limited liability if they participate in management activities.
If a limited partner participates in the general management of the partnership (writing checks, signing contracts, hiring and firing, and making other management decisions) that individual loses the limited partner liability.
Which of the following corporations would be taxed as a personal service corporation?
A real estate brokerage
A catering service
An architecture and engineering firm
A groundskeeping firm
Engineering firm
Incorrect
A personal service corporation is an entity whose principal activities involve performing personal services in the areas of health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting.
Neither the real estate brokerage, the catering service, nor the groundskeeping firm perform personal services in any of the areas listed above.
Which of the following entities may not deduct fringe benefits for the owner/employee?
Sole proprietorship
Partnership
S corporation
C corporation
Sole Prop
Sole proprietors may not deduct the cost of fringe benefits. The entity does not exist separately from the person for taxation purposes.
Partnerships may deduct the benefits but the partners must include the amount in income. A more than 2% shareholder of an S corporation must include the benefits in income.
SOLE PROPRIETOR
How many owners
Is the entity separate identity from the owner
They can NOT do biz under an assumed name
Tax year of the sole prop is restricted to the tax year of the __
Sole proprietorship cost of formation is minimal. Typically, there is no cost unless the name is registered. T/F
only 1 owner
Not separated
They CAN do biz under an assumed name (DBA)
owner
True
COST OF FORMATION
Limited partnership cost of formation rises with an increase in __
LLC and LLP formation costs are affected by the complexity of the __
complexity.
agreement
Juan recently started operating a flower shop as a proprietorship. In its first year of operations, the shop had a taxable income of $60,000. Assuming that Juan had no other employment-related earnings:
the flower shop must withhold FICA taxes from Juan’s earnings.
Juan must pay self-employment tax on the earnings of the business.
Juan must pay self-employment tax on the earnings of the business.
Juan is not considered an employee and the shop does not need to withhold FICA.
s part of a complete liquidation, a C corporation distributed the following assets to unrelated individual shareholders:
Basis FMV Investment land $500,000 $540,000 Inventory 130,000 150,000 Marketable securities 70,000 20,000
What is the amount of capital gain or loss, if any, recognized by the corporation as a result of the liquidation?
$10,000 net capital loss
$40,000 capital gain
$10,000 net capital gain
No capital gain or loss
Inventory is not a capital asset, so it is not part of the computation here. A corporation recognizes gain or loss on the liquidating distribution as if the property were sold at its fair market value. The land would have a capital gain of $40,000 and the securities would have a loss of $50,000, for a net capital loss of $10,000.
Liquidating dividend from a corporation:
a. The corporation (either C or S) recognizes a gain or a loss when a corporation is liquidated. T/F
b. The corporation recognizes gain or loss as if the property were sold at its ___
True
fair market value.
An S corporation must adhere to all of the following conditions except having:
no more than 100 shareholders.
a nonresident alien as a shareholder.
an individual as a shareholder.
one class of stock.
Non-resident alien as a shareholder
a shareholder may not be an illegal alien.
In which type of business entity is the entire ownership interest most freely transferable?
General partnership
Limited partnership
Corporation
Limited liability company
Corporation
A corporation is a legally separate entity distinct from its shareholders. To transfer interest in a corporation, one must simply sell his or her stock.
A partnership, both general and limited, requires the consent of the other partners to transfer interest in the partnership. A limited liability company can follow the partnership or corporation rules, depending on how it is taxed.
Which of the following entities has an unrestricted option in selecting the tax year to be used when filing the first tax return?
Sole proprietor
Limited liability company
S corporation
C corporation
C corp
Sole proprietors, partnerships, and limited liability entities are restricted to the tax year of the owner. S corporations are restricted to a calendar year unless IRS approval is obtained.
Only a C corporation can select any month for the close of the tax year.
In a general partnership, a partner’s interest in specific partnership property is:
transferable to a partner’s individual creditors.
subject to a partner’s liability for alimony.
transferable to a partner’s estate upon death.
subject to a surviving partner’s right of survivorship.
In a general partnership, a partner’s interest in specific partnership property is subject to a surviving partner’s right of survivorship. In the event a partner dies, his partnership interest becomes part of his estate.
The two equal shareholders of a C corporation are thinking of filing an election to have the company treated as an S corporation. Which of the following consequences is an advantage of this election?
The corporation’s net operating loss carryovers from prior years are immediately deductible by the shareholders.
The corporation’s tax-free fringe benefits for the shareholders will be deductible by the corporation.
The shareholders of the S corporation will be taxed only on distributions from the corporation.
The corporation’s capital losses can be claimed on the tax returns of the shareholders.
The corporation’s capital losses can be claimed on the tax returns of the shareholders.
Which of the following statements regarding nonliquidating distributions of a corporation is true?
Nonliquidating distributions of a corporation are not taxable as dividends to the shareholder if earnings and profits exist.
Nonliquidating distributions of a corporation reduce the retained earnings of the corporation.
Nonliquidating distributions of a corporation are taxable as dividends to the shareholder if earnings and profits do not exist.
Nonliquidating distributions of a corporation have no effect on the retained earnings of a corporation.
Nonliquidating distributions of a corporation reduce the retained earnings of the corporation.
Nonliquidating distributions of a corporation will reduce the retained earnings of the corporation and are taxable as a dividend to the shareholder if earnings and profits exist. The journal entry to record the distribution is generally a debit to Retained Earnings and a credit to the asset that is distributed.
Nonliquidating distributions of a corporation:
reduce the ___ of the corporation.
are taxable as __to the shareholder if E&P is present.
earnings and profits (E&P)
dividends
What is the result if an S corporation distributes appreciated property to a shareholder?
Nothing
Gain to the shareholder
Gain to the corporation on the difference between the basis of the S corporation in the asset and its fair market value at the time of distribution
Gain to the S corporation
Gain to the corporation on the difference between the basis of the S corporation in the asset and its fair market value at the time of distribution
When an S corporation distributes appreciated property, it also triggers a gain recognition at the corporate level. Gain to the corporation on the difference between the basis of the S corporation in the asset and its fair market value at the time of distribution is passed through to shareholders to be taxed at that level.
Which of the following partners of a limited liability partnership (LLP) may avoid personal liability when a partner commits a negligent act?
All of the partners
The supervisor of the negligent partner
All of the partners other than the negligent partner
All of the partners other than the supervisor of the negligent partner and the negligent partner
All of the partners other than the supervisor of the negligent partner and the negligent partner
Borasco Corp. owns land with a fair market value of $200,000. Borasco purchased the land 10 years ago for $65,000 and owes a liability of $50,000 as of August 2 of the current year. Alvo Corp. owns 100% of Borasco. Borasco is completely liquidated on August 2 of the current year, according to a plan adopted on June 18 of the current year. As a result, the land is transferred to Alvo in complete cancellation of Borasco’s stock. What basis does Alvo have in the land it receives?
$65k
Borasco Corp. owns land with a fair market value of $200,000. Borasco purchased the land 10 years ago for $65,000 and owes a liability of $50,000 as of August 2 of the current year. Alvo Corp. owns 100% of Borasco. Borasco is completely liquidated on August 2 of the current year, according to a plan adopted on June 18 of the current year. As a result, the land is transferred to Alvo in complete cancellation of Borasco’s stock. What basis does Alvo have in the land it receives?
$65K
Corporate liquidations of property generally are treated as a sale or exchange. Gain or loss generally is recognized by the corporation on a liquidating sale of its assets. Gain or loss generally is recognized also on a liquidating distribution of assets as if the corporation sold the assets to the distributee at fair market value.
As a result, Alvo has a basis in the received property of $65,000 because the land was not sold and Alvo did not receive $200,000. Alvo no longer owns stock in Borasco, but has the land.
CONSTITUTIONAL RIGHTS OF A CORP
A corporation has the following constitutional rights:
- To be secure from unreasonable searches and seizures
- Not to be deprived of life, liberty, or property without due process of law
- Not to be tried twice for the same criminal offense (called double jeopardy)
- Not to be denied equal protection of the laws
- First Amendment right of freedom of speech
5A))) A corporation does not have the constitutional right against self-incrimination. This right applies only to real persons.
YEPPP
Brand New, Inc., was organized and began active business on January 2, Year 5. Brand New incurred the following expenses in connection with creating the business:
State incorporation fees $ 5,000
Legal fees for drafting the charter 35,000
Printing costs for stock certificates 10,000
Professional fees for issuance of stock 15,000
Broker's commission on sale of stock 25,000
Expense for the temporary directors 20,000
--------
Total $110,000 What is the maximum amount of organization expense that Brand New may deduct on its Year 5 tax return?
Expenses of temporary directors $20,000
Fees paid to a state for incorporation 5,000
Accounting and legal fees incident to organization
35,000
Total $60,000
Taxpayers may deduct up to $5,000 in the taxable year in which the business begins; however, the $5,000 amount is reduced by the amount by which the cumulative cost of organizational expenditures exceeds $50,000. Since the amount over $50,000 is $10,000, the $5,000 would be reduced to $0.
The selection of an accounting method for tax purposes by a newly incorporated C corporation:
is made on the initial tax return by using the chosen method.
is made by filing a request for a private letter ruling from the IRS.
must first be approved by the company’s board of directors.
must be disclosed in the company’s organizing documents.
is made on the initial tax return by using the chosen method.
Net operating losses (NOLs) can only be used to the extent that there are net operating gains; unused NOLs can be carried forward to future years, but there are loss limitations. What percentage of taxable income can the NOL carryforward offset each year?
80%
The Tax Cuts and Jobs Act of 2017 (TCJA) revised the rules related to net operating losses (NOLs) such that only 80% of taxable income can be offset with a net operating loss carryforward; unused amounts can continue to carry forward indefinitely.
A corporation’s NOL is the excess of ___over gross income
Schedule C is filed with Form 1040 for a ___
deductions
sole proprietorship.
Limited liability partnership (LLP), new entity format
a. An LLP is a general partnership. T/F
b. Partners may be protected from tort liabilities of other partners. T/F
c. An LLP is now used often for legal, accounting, and other professional partnerships. T/F
d. There is uniformity among states. T/F
T
T
T
F - there is NOT uniformity among states
THIS DESCRIBES WHAT TYPE OF ENTITY
A certificate of incorporation is issued by the state.
Regular __corporations are taxed under Subchapter C of the IRC.
The tax year of a regular corporation is generally unrestricted.
C Corp
What is one of the most important considerations when choosing the type of entity for the operation of a business?
The need to limit the liability of the owners
The need to limit the number of owners
The need to limit the investment of the owners
The need to limit the type of entity that can be an owner
The need to limit the liability of the owners
The objective of choosing a type of entity for operating a business is the ability to reduce or eliminate the exposure to personal liability for torts and claims against the entity.
A corporation would be subject to the ____
produce real or tangible personal property for use in the business activity.
produce real or tangible personal property for sale to customers.
acquire property for resale (exception to this rule is if you have gross receipts that have averaged $10 million or less for the proceeding three tax years).
uniform capitalization rules
ABC Corporation distributes land with a fair market value (FMV) of $100,000 (adjusted basis of $75,000) to Anna when the corporation’s E&P is $350,000. Anna is the sole shareholder. What basis does Anna take in the land and what amount of gain does ABC Corporation recognize, respectively, as a result of this nonliquidating property distribution?
$100,000; $25,000
The shareholder’s basis in property received as a result of a nonliquidating property dividend is the fair market value (FMV) on the date of the distribution.
The corporation will recognize a gain for the difference between the FMV on the date of the distribution and the adjusted basis of the property at the date of the distribution.
Corporations will not recognize a loss on a nonliquidating property dividend.
In which type of business organization are income taxes always required to be paid by the entity on profits earned as well as by the owners upon distribution thereof?
Subchapter C corporation
A subchapter C corporation pays taxes on profits at the entity level and cannot deduct dividends paid (distributions to shareholders) before calculating the taxable income. Shareholders then pay tax again on those dividends.
Under UNICAP, indirect costs that are not capitalized are nonmanufacturing costs such as selling, research, and product liability.
Generally, manufacturing overhead costs, such as indirect material, indirect labor, purchasing costs, cost recovery, rent, insurance, and utilities, as well as depletion, quality control, and storage are ___
Capitalized
LIFO treats the last items added to inventory as being the first ones charged to cost of goods sold. In a period of rising prices, this would result in a higher ___sold compared to FIFO.
With a higher cost of goods sold, current taxable income would be ___resulting in a __current tax liability
cost of goods , reduced , lower
When comparing liquidating distributions of different entities, which of the following statements is incorrect?
If a partner receives cash in excess of the partner’s adjusted basis, then gain is recognized on the excess.
A C corporation will recognize a gain or loss when the corporation is liquidated.
An S corporation will not recognize a gain or loss when the corporation is liquidated.
In a partnership, if no cash equivalents are distributed, no gain is recognized.
Both C corporations and S corporations will recognize a gain or loss when the corporation is liquidated.
Which of the following forms of business generally provides all owners with limited liability while avoiding federal taxation of income at the entity level?
Subchapter C corporation
Subchapter S corporation
Partnership
Limited partnership
S Corp
A subchapter S corporation is like a subchapter C corporation in that all owners have limited liability; however, the double taxation of C corporations is avoided.
Answer choices “partnership” and “limited partnership” are incorrect because general partners in both general partnerships and limited partnerships have unlimited liability.
Uniform capitalization rules apply to:
real property produced by the taxpayer.
tangible personal property produced by the taxpay
Both
____rules apply to all real and tangible personal property produced by the taxpayer for use in a trade or business or in an activity engaged in for profit, such as property produced for sale to customers.
Uniform capitalization (UNICAP)
Pursuant to a plan of corporate reorganization adopted in July of Year 1, Gow exchanged 500 shares of Lad Corp. common stock that he had bought in January of Year 1 at a cost of $5,000 for 100 shares of Rook Corp. common stock having a fair market value of $6,000. Gow’s recognized gain on this exchange was:
$0
There are seven types of tax-free reorganizations. This problem reflects the tax-free nature of a reorganization. The gain Gow realizes on his stock is $1,000 (FMV of $6,000 less basis of $5,000). None of this gain is recognized, so there is a postponed gain of $1,000.
Gow’s basis in the new stock of Rook Corporation is computed to be $5,000 (FMV of Rook stock $6,000 less postponed gain of $1,000).
The rule limiting the allowability of passive activity losses and credits applies to:
partnerships.
personal service corporations.
widely held C corporations.
S corporations.
PSC
The passive activity loss rules are applicable to individuals, estates, trusts, closely held C corporations, and personal service corporations.
The passive activity loss rules are not applicable to partnerships, widely held C corporations, or S corporations. For partnerships and S corporations, the passive activity loss rules apply at the partner/shareholder level.
For partnerships and S corporations, the passive activity loss rules apply at the ____
partner/shareholder level.
When parties intend to create a partnership that will be recognized under the Uniform Partnership Act, they must agree to:
conduct a business for profit.
share gross receipts from a business.
both conduct a business for profit and share gross receipts from a business.
neither conduct a business for profit nor share gross receipts from a business.
Conduct a business for profit.
Section 6(1) of the Uniform Partnership Act defines a partnership as “an association of two or more persons to carry on as co-owners a business for profit
THEY DONT HAVE TO SHARE
Toby invested $25,000 in a limited partnership with Connor and Blair. Toby was a general partner in the limited partnership. The partnership failed to pay Kelly $45,000 for services on behalf of the partnership. Which of the following statements is generally correct regarding Toby’s liability under the Revised Uniform Limited Partnership Act?
Toby was liable for $25,000 because this was a limited partnership.
Toby was liable for zero because this was a partnership debt, not a personal debt.
Toby was liable for $45,000 because Toby was a general partner.
Toby was liable for $15,000 because this was a limited partnership.
Toby was liable for $45,000 because Toby was a general partner.`
A limited partner’s maximum potential for loss is the partner’s investment in the partnership: $25,000. A general partner has unlimited liability and would be liable for the entire debt: $45,000.
Eller, Fort, and Owens do business as Venture Associates, a general partnership. Trent Corp. brought a breach of contract suit against Venture and Eller individually. Trent won the suit and filed a judgment against both Venture and Eller. Trent will generally be able to collect the judgment from:
partnership assets only.
the personal assets of Eller, Fort, and Owens only.
Eller’s personal assets only after partnership assets are exhausted.
Eller’s personal assets only.
Eller’s personal assets only after partnership assets are exhausted.
General partners have unlimited liability. When the assets of the partnership are not sufficient, the assets of the partners may be used to satisfy the liability.
A ___partner is personally liable for recourse partnership debts when the partnership cannot pay.
b. A ___partner is not liable for debts of the partnership beyond his or her partnership investment. This amount is increased by any future contributions the partner has agreed to.
General
Limited
GENERAL PARTNERSHIP
A general partnership is a taxable entity; tax attributes are passed through to the partners.
General Partnership can be a NPO
False -it is NOT a taxable entity
False -they need to be for profit
Do c corps pay fed income taxes?
Is a C corps tax year restricted?
Yeah
No - they can pick whatever tax year they want
