Section 5B-D-F-G--H Flashcards
Schedule M-3 of the Form 1120 has checkboxes for disclosures related to:
consolidated versus nonconsolidated ___.
whether certified audited versus nontax basis was used for the ___.
whether or not the income statement had been ___in the previous five years (___).
returns
income statement
restated
(not seven years)
Birch Corp. is an accrual-basis, calendar-year C corporation. Its reported book income before federal income taxes was $250,000, which included $46,000 in municipal bond interest income. Birch’s book expenses included $4,000 of interest incurred on indebtedness used to carry the municipal bonds. What should be the amount of Birch’s taxable income, as reconciled on Birch’s Schedule M-1, Reconciliation of Income (Loss) per Books With Income per Return, of Form 1120, U.S. Corporation Income Tax Return?
$208K
Taxable income is computed as follows:
Net income per books $250,000
Plus: Nondeductible interest expense 4,000
Less: Tax-exempt municipal bond
interest income 46,000
Taxable income $208,000
As part of the corporate tax return, corporations must reconcile the difference between ____on Schedule M-1
Corporations, and related groups of corporations, with total assets between $___ and __are allowed to file Schedule M-1
Corporate taxpayers must also reconcile the \_\_\_balances in retained earnings on Schedule M-2.
Schedule M-1 of IRS Form 1120 is required to be filed when a corporation has both total assets and total receipts between ___
taxable income and accounting income
10 million and $50
opening and closing
$250,000 or more.
Media Corp. is an accrual-basis, calendar-year C corporation. Its reported book income included $6,000 in municipal bond interest income. Its expenses included $1,500 of interest incurred on indebtedness used to carry municipal bonds and $8,000 in advertising expense. What is Media’s net M-1 adjustment on its Form 1120, U.S. Corporation Income Tax Return, to reconcile to its taxable income?
The M-1 reconciles book to tax income. Of the following:
($6,000) municipal bond interest income
1,500 interest expense
8,000 advertising expense
Only the first two ($6,000 − $1,500 = $4,500) are nontaxable.
Which of the following corporations are required to file Form 1120, Schedule M-3?
Corporations with net income of $10 million or more
Corporations with total assets of $10 million or more
Corporations with taxable income of $10 million or more
Corporations with retained earnings of $10 million or more
Corporations with total assets of $10 million or more
Corporations and related groups of corporations with more than $___ in assets must reconcile financial statement net income to the net income or loss of the corporation reported for U.S. taxable income using Schedule M-3.
50 million
An accrual-basis C corporation that prepared its financial statements based on GAAP recorded $800,000 of bad debt expense. The total amount of bad debts that actually became worthless was $930,000. In respect to bad debt expense, what type of disclosure should the corporation show on Schedule M-3?
A permanent bad debt expense difference of $130,000
A temporary difference in which book deductions exceed tax deductions by $130,000
A temporary difference in which tax deductions exceed book deductions by $130,000
No difference between bad debt expense per income statement and deduction per tax return
A temporary difference in which tax deductions exceed book deductions by $130,000
Only actual bad debt expense of $930,000 is allowed for tax purposes, so there would be a temporary timing difference of $130,000 on Schedule M-3 ($930,000 − $800,000 per GAAP).
For the current year, Kelly Corp. had net income per books of $300,000 before the provision for federal income taxes. Included in the net income were the following items:
Dividend income from an unaffiliated domestic taxable
corporation (taxable income limitation does not apply
and there is no portfolio indebtedness) $50,000
Bad debt expense (represents the increase in the
allowance for doubtful accounts) 80,000
Assuming that no bad debt was written off, what is Kelly’s taxable income for the current year?
Taxable income is $355,000:
$300,000 Net Income per Books - 25,000 Dividends-Received Deduction (50% x $50,000)* \+ 80,000 Bad Debts Expense** $355,000 Taxable Income
A corporation is entitled to a special deduction from gross income for dividends received from a domestic corporation. Since this dividend was from an unaffiliated Domestic corporation (this means less than 20% of the company was owned) 50% of the dividends received are not taxable.
A corporation is entitled to a special deduction from gross income for dividends received from a domestic corporation. The special deduction is 50% of the dividends received are ___
Unafilliated dividends mean what?
not taxable.
Unaffiliated means that less than 20% of the company is owned by the company receiving the dividend.
The corporate limit for charitable contributions is ___%
Contributions in excess of the 10% limit may be ___ years
Accrual-basis corporations may accrue contributions if the commitment was made ___and the contribution is paid within 2-1/2 months after the close of the tax year.
10%
Carried forward 5 years
Before year end
Ownership Deduction Percentage
Less than 20% __
20% or more, but less than 80%)) __
80% or more _
50%
65%
100%
Banks Corp., a calendar-year corporation, reimburses employees for properly substantiated qualifying business meal expenses. The employees are present at the meals, which are neither lavish nor extravagant, and the reimbursement is not treated as wages subject to withholdings. What percentage of the meal expense may Banks Corp. deduct?
50%
For tax years beginning after 1993, only 50% of business meals are deductible provided business is discussed.
Corporate capital losses carry back three years and forward five years as ___.
Net operating loss is calculated the same way as taxable income. T/F
short-term capital losses
A deduction for compensation paid or accrued with respect to a “covered employee” of a publicly held corporation is limited to no more than $___
For tax years beginning after 2017, no deduction is allowed for “___” expenses, and while 50% of business meals are deductible, that cost should be clearly separated from entertainment.
1 million per year.
entertainment
Starke Corp., an accrual-basis calendar-year corporation, reported book income of $380,000. Included in that amount was $50,000 municipal bond interest income, $170,000 for federal income tax expense, and $2,000 interest expense on the debt incurred to carry the municipal bonds. What amount should Starke’s taxable income be as reconciled on Starke’s Schedule M-1 of Form 1120, U.S. Corporation Income Tax Return?
Book income $380,000
Less:
1. Municipal bond interest income - 50,000
$330,000
Add:
2. Federal income tax expense + 170,000
3. Interest expense on the debt
incurred to carry tax-exempt bonds 2,000
Taxable income $502,000
A corporation’s Schedule M-1 (Form 1120) reconciles book income to taxable income.
__bond interest is not taxable income.
___income taxes are not deductible in determining taxable income.
No deduction is allowed for interest paid on a ___or continued in order to purchase or carry tax-exempt bonds.
Municipal
Federal
debt incurred
The purpose of Schedule M-1 is to reconcile the differences between book and tax income. For book purposes, interest earned on municipal bonds is included in revenue. For tax income, what amount is included in income?
0%
Interest on municipal bonds is not taxable; therefore, it is a reconciling item on the Schedule M-1.
For the current year, Oaktree Corporation’s books and records reflect the following:
Net income per books (after tax) $52,800
Tax-exempt interest 500
Excess book depreciation 7,222
Capital losses 3,000
Federal income tax 8,478
Excess contributions 1,710
Premiums on officer life insurance (payable to corp.) 1,500
Meals in excess of 50% limitation 400
What is the amount of Oaktree’s taxable income as it would be shown on Schedule M-1 of its corporate income tax return?
Net income per books $52,800
Add back:
Federal income tax + 8,478
Capital losses + 3,000
Depreciation + 7,222
Officer life insurance + 1,500
Meals in excess of 50% limitation + 400
Excess contributions + 1,710
Total $75,110
Deduct: Nontaxable interest 500
Taxable income $74,610
Corporations are not allowed a deduction for capital losses. Corporate capital losses are only deductible against capital gains.
Contributions are limited to 10% of taxable income.
On January 2, Year 1, Shaw Corp., an accrual-basis, calendar-year C corporation, purchased all the assets of a sole proprietorship, including $300,000 in goodwill. Federal income tax expense of $110,100 and $7,500 for impairment of goodwill were deducted to arrive at Shaw’s reported book income of $239,200. What should be the amount of Shaw’s Year 1 taxable income, as reconciled on Shaw’s Schedule M-1 of Form 1120, U.S. Corporation Income Tax Return?
Shaw’s Year 1 taxable income will be $336,800, as computed below:
Book income $239,200
\+ Federal income tax 110,100
\+ Goodwill impairment 7,500
- Amortization of goodwill
($300,000 ÷ 15) (20,000)
Taxable income $336,800
The federal income tax is not deductible on the corporate tax return. The carrying value of goodwill is only adjusted for impairment on the books, while on the tax return goodwill is amortized over 15 years, beginning in the month the goodwill is acquired.
When reconciling Book to net…
Adding to taxable income means
Subtracting from Taxable income means…
it’s not deductible
Its not taxable
Which of the following expenses incurred by a C corporation are not deductible and therefore must be reported as an M-1 adjustment on the corporate income tax return?
$1,000 of in-house lobbying expense
$3,000 paid to a professional lobbyist to lobby Congress
$500 local lobbying expenses
$5,000 travel expense incurred by a professional lobbyist to lobby Congress
$3,000 paid to a professional lobbyist to lobby Congress
Generally, lobbying expenses are not deductible. However, there is a limited exception which allows a deduction for local lobbying expenses and up to $2,000 of in-house lobbying expenses. Expenses incurred by a taxpayer engaged in the business of providing lobbying services are deductible by that taxpayer.
Dues paid to a tax-exempt organization are generally not deductible to the extent they are used to fund lobbying activities.
Jagdon Corp.’s book income was $150,000 for the current year, including interest income from municipal bonds of $5,000 and excess capital losses over capital gains of $10,000. Federal income tax expense of $50,000 was also included in Jagdon’s books. What amount represents Jagdon’s taxable income for the current year?
$205K
ook income $150,000
Less: Municipal bond interest (5,000)
Add: Nondeductible capital losses 10,000
Add: Federal income tax expense 50,000
Taxable income $205,000
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Premiums paid on life insurance are not deductible by any person that is directly or indirectly a beneficiary under the policy. T/F
True
Azure, a C corporation, reports the following:
Pretax book income is $543,000.
Depreciation on the tax return is $20,000 greater than depreciation on the financial statements.
Rent income reportable on the tax return is $36,000 greater than rent income per the financial statements.
Fines for pollution appear as a $10,000 expense in the financial statements.
Interest earned on municipal bonds is $25,000.
What is Azure’s taxable income?
Azure’s taxable income is $544,000, calculated as follows:
Pretax book income $543,000
Less: Additional tax depreciation (20,000)
Add: Additional rent income 36,000
Add: Nondeductible fines 10,000
Less: Nontaxable municipal bond interest (25,000)
———
Taxable income $544,000
Carol Calloway purchased a business with four assets and paid $210,000. The tangible assets acquired are as follows:
Equipment $ 10,000 FMV Land $50,000 FMV
Building $100,000 FMV Inventory $30,000 FMV
What is the amount that must be allocated to goodwill at the time of purchase?
$20k
Any difference between the fair market value of assets transferred to a corporation ($190,000) and the amount paid ($210,000) must be recorded as goodwill.
Cash Paid $210,000
FMV Equipment - 10,000
FMV Land - 50,000
FMV Building - 100,000
FMV Inventory - 30,000
Goodwill $ 20,000
=========
Which of the following can be an advantage of a limited liability company over an S corporation?
Double taxation of profits is avoided.
Owners receive limited liability protection.
Appreciated property can be distributed tax-free to an owner.
Incentive stock options can be used to compensate owners.
Appreciated property can be distributed tax-free to an owner.
An S corporation recognizes a gain on the distribution of appreciated property to a shareholder. The transaction is treated as a “__” of the property to the shareholder at fair market value (FMV).
sale
An LLC is generally created under state law by filing ___with the secretary of state’s office.
Articles of Organization includes: __ of LLC, __ of its existence, name and address of LLC ____
The LLC’s name must generally include the words “limited liability company” or similar words that indicate to third parties that the owners of the entity have limited liability. T/F
Owners of the interests in an LLC are referred to as \_\_ Most statutes require an LLC to have \_\_\_ members
articles of organization
Name of LLC, Duration of existence, name & Address of LLC’s Agent
TRue
members.
2 or more
. Generally, members of an LLC can be individuals, partnerships, corporations, or other LLCs. T/F
The members of an LLC have a right to manage that which is proportionate to their __
Members who actually engage in management owe __to the LLC
An LLC will generally dissolve upon the death, retirement, bankruptcy, or dissolution of a member. T/F
True
capital contributions
fiduciary duties
True
In year 1, a domestic LLC with two members elected classification as a corporation. In year 2, one of the members withdrew from the LLC. What is the LLC’s tax classification for year 2 immediately after the member withdrew?
Corporation
For income tax purposes, a single-member LLC is a sole proprietorship with the reporting of income or loss on Schedule C of IRS Form 1040, unless the single member elects to be treated as a corporation
For income tax purposes, a single-member LLC is a sole proprietorship with the reporting of income or loss on Schedule C of IRS Form 1040, unless the single member elects to be treated as a __
Liquidation of an LLC, however, can generally be avoided by ___of the remaining member(s) to continue the LLC’s business.
For LLCs, he owner may participate in management while limiting personal liability. T/F
corporation
unanimous consent
True
A newly formed single member domestic limited liability company is eligible to file an election to be taxed as a:
An election is required to receive the default tax treatment.
Under the “check the box” regulations, an entity is given a ___
corporation or a disregarded entity.
False -no election is required
default tax treatment
T/F
LLCs have complete pass-through of tax attributes generated by operations.
Every member is allowed to participate in an LLC.
Every member of an LLC has liability protection.
All True
If the entity does not file IRS Form 8832 and is a domestic LLC with at least two members, the entity will be classified as a __
partnership.
If the organization’s UBI is taxed, ___rates apply if it is a trust and ___rates apply if it is a corporation.
Unrelated business income (UBI) is net income derived from: the regular operation of a business activity that is unrelated to the organization's exempt \_\_\_ or \_\_\_property. The first $\_\_\_of UBI is exempt from tax
UBI: The tax does not apply to dividends, interest, royalties, capital gains, most rents, and similar items that are accepted as proper sources of income for a charity or trust. Income from debt-financed investments will be taxed, however. T/F
trust., corporate
purpose, debt-financed
1,000
The tax does not apply to dividends, interest, royalties, capital gains, most rents, and similar items that are accepted as proper sources of income for a charity or trust. Income from debt-financed investments will be taxed, however.
Help, Inc., an exempt organization, derived income of $15,000 from conducting bingo games. Conducting bingo games is legal in Help’s locality and is confined to exempt organizations in Help’s state. Which of the following statements is true regarding this income?
The entire $15,000 is exempt from tax on unrelated business income…..WHY
the bingo game is legal in both the state and the locality. and
commercial bingo games are not permitted in the locality.
The income from “qualified” bingo games is exempt from tax if the following three requirements are met:
- The bingo game is legal in the __.
- The bingo game is legal in the __.
- Commercial bingo games are not allowed in the ___
state
locality
locality.
To qualify as an exempt organization, the applicant:
must not be a private foundation organized and operated exclusively to influence legislation pertaining to protection of the environment.
may be organized and operated for the primary purpose of carrying on a business for profit, provided that all of the organization’s net earnings are turned over to one or more tax-exempt organizations.
must not be a private foundation organized and operated exclusively to influence legislation pertaining to protection of the environment.
To qualify as an exempt organization, the applicant:::::
may not be organized and operated for the primary purpose of carrying on a business for __
An exempt organization must not be a private foundation organized and operated exclusively to influence ___pertaining to protection of the environment.
profit,
legislation
f an exempt organization engages in a prohibited transaction, part or all of its income will be subject to ____It may also lose its ___
Prohibited Transactions
- Failure to maintain ___requirements
- Attempting to influence legislation and participating in political campaigns T/F
- ) No part of the organization’s net earnings will inure to the benefit of any private ___or ___.
tax, exempt status
qualification
True
shareholder or individual
___are organizations that carry on a trade or business and turn over all of their profits to an exempt
Private foundations may be partially subject to tax.organization. T/F
Private foundations are exempt organizations that are not broadly supported by the ___. They’re supported by ___
Private foundations must file annual __returns.
If other exempt organizations exceed gross receipts of $50k, they must file a ____…who can avoid this?
Feeder organizations
True
general public, donors
information
Information return, churches can avoid
Title holding companies organized as a corporation will qualify for exemption from federal income tax if it is organized for the following activities:
(1) holding title to __,
(2) collecting ___from such property,
(3) turning over the ___, less expenses, to an organization that itself is exempt under Section 501(a).
property
income
entire amount collected
Charitable organizations are generally either public charities or private foundations. Therefore, when an exempt organization becomes a public charity, it can no longer be a private foundation (terminates the private foundation). T/F
A 501(c)(3) organization is a corporation, trust, community chest, fund, or foundation. T/F
Truee to both
An ___for exemption must be filed with the Internal Revenue Service (IRS) because exemption from taxation is not automatic.
An entity may not operate as a tax exempt organization while it is waiting for their application to be approved by the IRS, which may take up to 12 months. T/F
when churches own and operate separate businesses that are not part of their religious function, they can be subject to various federal and state taxes on that income. T/F
application
False -t hey can operate as a tax exempt org
True
An incorporated exempt organization must make ___estimated tax payments on any taxable unrelated business income.
Quarterly installments
Under IRC Section 501(c)(10), domestic fraternal societies must operate under the ___to be exempt from federal income taxation.
a political organization is considered a tax-exempt organization T/F
A social or recreation club under IRC Section 501(c)(7) is allowed to receive up to ___% of its gross receipts from sources outside of its membership without losing its status as a tax-exempt organization.
lodge system
True
35
Unrelated business income of an exempt organization does not include an activity where all the work is performed for the organization by ___
unpaid volunteers.
Tax-exempt organizations are not taxed on investment income derived from investments that are accepted as proper sources of income for a charity or trust. Which of the following types of income would be taxable income for a nonprofit?
Dividends and interest
Rent from a debt-financed building
Royalties and capital gains
Other rents not using debt financing
come from a debt-financed property is included in the same category as the regular operation of a business that is unrelated to the organization’s exempt purpose. Income from both of these activities is taxed as unrelated business income (UBI).
Nontaxable income includes dividends and interest, royalties and capital gains, and other rental income (not financed by debt).
Private foundations are not subject to an accumulated earnings tax, but may be subject to the following taxes:
Tax on ___income
Tax on self-___
Tax on failure to ___income for exempt purposes
Tax on excess business ___
Tax on speculative ___that jeopardize the foundation’s assets
Tax on ___that should not be made by private foundations
investment dealing distribute holdings investments expenditures
The organizational test to qualify a public service charitable entity as tax exempt requires the ___to limit the purpose of the entity to the charitable purpose.
articles of organization
Maple Avenue Assembly, a tax-exempt religious organization, operates an outreach program for the poor in its community. A candidate for the local city council has endorsed Maple’s anti-poverty program. Which of the following activities is (are) consistent with Maple’s tax-exempt status?
Endorsing the candidate to members
Collecting contributions from members for the candidate
Neither
IRC 501(c)(3) organizations are prohibited from participating in or intervening in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office. This strict prohibition is one of the basic requirements for qualification under IRC Section 501(c)(3).
They are also prohibited from engaging in more than an insubstantial amount of lobbying and grass roots activities to influence legislation.
A loss from an unrelated trade or business is taken into account and may create a net operating loss. (IRC Section 512(b)(6)) T/F
Salud Welfare Associates is an exempt organization that operates under a corporate charter granted by the state in which Salud’s principal office is located. Salud’s tax on unrelated business taxable income is:
computed at corporate income tax rates….WHY
True
Because Salud Welfare Associates operates under a corporate charter, then any unrelated business income will be taxed at corporate rates. If the company was organized as a trust, then the trust tax rates would apply.
___is income from the regular operation of a business activity unrelated to the organization’s exempt purpose.
UBI
An organization that operates for the prevention of cruelty to animals will fail to meet the operational test to qualify as an exempt organization if:
the organization engages in insubstantial nonexempt activities.
the organization directly participates in any political campaign
II only
An organization which engages in insubstantial nonexempt activities will not lose its tax-exempt organization status, but it will be taxed on its unrelated business income.
The sole shareholder of an S corporation had a basis for her stock of $30,000 and a basis for a loan to the S corporation of $15,000. In Year 6, the S corporation operated at a loss of $39,000. What is the shareholder’s basis in the stock and loan on December 31, Year 6?
The loss reduces the shareholder’s stock basis first. The remaining loss ($39,000 − $30,000) of $9,000 is deducted from the loan basis.
Stock Loan Total Beg. Basis $30,000 $15,000 $45,000 Less: Loss ( 30,000) ( 9,000) ( 39,000) Ending Basis: $ 0 $ 6,000 $ 6,000
A shareholder’s tax basis in an S corporation is increased by any stock purchases and capital contributions. T/F
Basis can below zero
Increase Basis: Taxable ___, Separately stated ___ items, _– in excess of property’s basis
Decrease basis: Loss from operations, separately stated loss items, nontax distributions, nondeductible loss items T/F
The qualified business income deduction (IRC Section 199A) does not affect the basis of a shareholder’s interest. T/F
True
False - never below 0
Income, income items, Depletion
True
True
Bern Corp., an S corporation, had an ordinary loss of $36,500 for the year ended December 31, Year 0. At January 1, Year 0, Meyer owned 50% of Bern’s stock. Meyer held the stock for 40 days in Year 0 before selling the entire 50% interest to an unrelated third party. Meyer’s basis for the stock was $10,000. Meyer was a full-time employee of Bern until the stock was sold. Meyer’s share of Bern’s Year 0 loss was:
$2k
Meyer owned 50% of Bern Corp for 40 days during Year 0. Therefore, Meyer will include in his Year 0 tax return a loss of $2,000 from Bern Corporation, as computed below:
$36,500 × 0.50 × 40/365 = $2,000
Each shareholder of an S corporation will include in his taxable income his pro rata share of corporate items of income, deduction, loss, and credit in his tax year in which the corporation’s tax year ends.
S CORP
Certain domestic corporations may elect not to be taxed. Instead, the income is passed through to the ___, who are taxed on their share of the corporation’s earnings.
Shareholders are taxed on their share of the earnings even though the earnings are not distributed. T/F
S corporations must file IRS Form 1120S each year before ___following the close of the taxable year.
S corporations may be part of an affiliated group, but a ___return is prohibited.
shareholders
March 15th
consolidated
A sole proprietorship incorporated on January 1 and elected S corporation status. The owner contributed the following assets to the S corporation:
Basis Fair Market Value
------- ----------------- Machinery $ 7,000 $ 8,000 Building 11,000 100,000 Cash 1,000 1,000 Two years later, the corporation sold the machinery for $4,000 and the building for $110,000. The machinery had accumulated depreciation of $2,000, and the building had accumulated depreciation of $1,000. What is the built-in gain recognized on the sale?
$0 – BUILT IN GAINS APPLY TO C CORPS CHANGING TO S CORP….. Because this is a sole proprietorship changing to an S corporation, the built-in gains tax does not apply.
When C corps turn into S corps,
The tax is imposed on the S corporation when it disposes of property at a ___within five years after the S election took effect.
gain
What is the nonseparately stated income amount of an accrual-basis calendar-year S corporation with the following items?
Gross receipts $200,000
Rental income 25,000
Interest income 12,000
Cost of goods sold and commissions 127,000
Net long-term capital gain 17,000
Compensation paid to shareholder 10,000
The nonseparately stated income amount is calculated as follows:
Gross receipts $200,000
Less: Cost of goods sold -127,000
Compensation paid to shareholder $ 10,000
--------
Total $ 63,000 All other items are separately stated. Any item of income, loss, deduction, or credit which could affect the tax liability of a shareholder must be separately stated. These items are passed through pro rata to the shareholders with the same character.
Any item of income, loss, deduction, or credit which could affect the tax liability of a shareholder must be ___
separately stated.
The following requirements must be met before a corporation is eligible to elect S corporation status:
S corporations are limited to a maximum of ___shareholders.
___members can elect to be treated as one ____shareholders must agree to the S corporation election.shareholder.
Only ___class(es) of stock may be issued and outstanding.
Only individuals, estates, certain trusts, and charitable organizations may be shareholders. T/F
Nonresident alien are allowed to be shareholders T/F
Generally, the S corporation is not subject to __
100 Family All one True False -no they cant income tax.
Bud Corp. is a calendar-year S corporation. Bud had ordinary income of $50,000 and interest income from a municipal bond of $10,000. During the year, Bud distributed $20,000 to Joe B, a 50% owner. What amount should Joe B include in gross income for the year?
$25k
Shareholders of an S corporation report their share of S corporation income whether distributed or not. Because Joe B is a 50% owner, 50% of the ordinary income of $50,000 is taxable to him.
In Year 8, Clyde formed an S corporation by contributing $5,000 in stock and $10,000 in loans. In Year 8, the corporation had a net loss of $5,000 leaving Clyde with no stock basis and $10,000 in debt basis. Clyde expects the S corporation to have a small loss in Year 9 also. Although Clyde knows he has a debt basis he still decides to take a $3,000 distribution in Year 9. Clyde will have to report:
$3,000 as a dividend.
$3,000 as a capital gain.
$3k as cap gain
Although debt provides basis for the purpose of deducting losses, it is not considered basis for purposes of distributions. The $3,000 will be treated as a capital gain because Clyde had no stock basis. Had the $3,000 been treated as a debt repayment, instead of as a distribution, Clyde would have recognized no income.
If an S corporation distributes appreciated property to its shareholders, the transfer is treated as if the property had been sold to the shareholders at ___
- ) Gain is recognized at the ___ level
2. ) Gain is subsequently reported to the shareholders pro-rate T/F
FMV
True
Beech Corp., an accrual-basis, calendar-year S corporation, has been an S corporation since its inception. At the beginning of the current year, Gold owned 50% of the 100 issued shares of Beech stock, and had a $3,000 tax basis in the Beech stock. During the current year, Beech had $200,000 in net business income and $4,000 in Oak County municipal bond interest income. Beech made no distributions to its shareholders. What was Gold’s tax basis in Beech stock at year-end?
$105k
In this case, Gold’s basis increased by $100,000 (50% share of income) plus $2,000 (50% share of municipal bond interest) for an increase of $102,000. The basis was originally $3,000; adding the $102,000 increase makes Gold’s total basis in Beech Corp. $105,000.
Boles Corp., an accrual-basis, calendar-year S corporation, has been an S corporation since its inception and is not subject to the uniform capitalization rules. In the current year, Boles recorded the following:
Gross receipts $50,000
Dividend income from investments 5,000
Supplies expense 2,000
Utilities expense 1,500
What amount of net business income should Boles report on its Form 1120S, U.S. Income Tax Return for an S Corporation, Schedule K?
$46.5K
Net business income is computed as follows:
Gross receipts $50,000
Less supplies expense (2,000)
Less utilities expense (1,500)
Net business income $46,500
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Net business income is basiscally Gross revenue less COGS / Admin Exp / Operation Exp.
Yuuup
Paul Pappas owns all of the stock of an S corporation which had previously been a C corporation. The S corporation had the following balances at the beginning of its tax year:
Accumulated adjustments account $ 8,000
Accumulated earnings and profits 10,000
Paul’s stock basis was $20,000 at the beginning of the tax year. The S corporation made a distribution of $19,000 to Paul during the year. What is Paul’s stock basis at the end of the year?
$11K
Paul’s basis is reduced by the distribution from accumulated adjustments account, but not by the distribution from accumulated earnings and profits which is taxable income to Paul. The distribution in excess of $18,000 is a tax-free return of capital and reduces Paul’s basis ($20,000 - $8,000 - $1,000 = $11,000).
10k + 8k=18k ….19k-18k=1k as seen abofe
All of the following statements concerning liquidation of an S corporation are T/F
Loss on stock redemption is not recognized until ___is complete.
gain or loss will be recognized on the distribution of property in complete liquidation as if the property were sold at its FMV.
depreciable property under Section 1245 and 1250 is subject to the ordinary income recapture provisions.
the shareholders’ adjusted basis in the stock is subtracted from the FMV of the property received to determine the recognized gain or loss.
liquidation
True
True
True
HDF, a calendar-year corporation, began business in year 1. HDF made a valid S corporation election on December 1, year 2. Assuming the eligibility requirements for S corporation status continued to be met throughout year 3, on which of the following dates did HDF’s S corporation status become effective?
Since HDF did not file for S corporation status by March 15, year 2, their S corporation status will become effective the first day of the following year, or January 1, year 3.
Carson owned 40% of the outstanding stock of a C corporation. During a tax year, the corporation reported $400,000 in taxable income and distributed a total of $70,000 in cash dividends to its shareholders. Carson accurately reported $28,000 in gross income on Carson’s individual tax return. If the corporation had been an S corporation and the distributions to the owners had been proportionate, how much income would Carson have reported on Carson’s individual return?
Shareholders in an S corporation report as income their percentage ownership multiplied by the taxable income and separately stated items for the S corporation. There are no separately stated items, so Carson would report $160,000 ($400,000 × 0.40) as his share of the S corporation’s taxable income.
Shareholders in C corporation stock report as income their percentage ownership multiplied by the ___that are distributed.
dividends
The Tax Cuts and Jobs Act of 2017 (TCJA) includes a special deduction: the IRC Section 199A qualified business income deduction (QBID). The deduction, equal to __% of qualified business income from the S corporation’s trade or business income, is claimed on the individual shareholder’s federal income tax return
20
Baker, an individual, owned 100% of Alpha, an S corporation. At the beginning of the year, Baker’s basis in Alpha Corp. was $25,000. Alpha realized ordinary income during the year in the amount of $1,000 and a long-term capital loss in the amount of $3,000 for this year. Alpha distributed $30,000 in cash to Baker during the year. What amount of the $30,000 cash distribution is taxable to Baker?
$25k
O’Day, an S corporation, had net income per books of $200,000 after deducting $100,000 for compensation to officers. O’Day also had a $10,000 capital loss and a $10,000 charitable contribution on its books for the current year. Depreciation per books was $20,000. MACRS depreciation is used for tax purposes and was $25,000. What is O’Day’s ordinary income for tax purposes?
O’Day’s ordinary income for tax purposes (Form 1120S) is as follows:
Book income $200,000
Capital loss 10,000
Charitable contribution 10,000
Additional depreciation (5,000)
Ordinary income $215,000
=========
An S corporation had the following income and expenses:
Sales $240,000
Rent expense 25,000
Business meals 5,000
Interest income 1,500
Contributions to qualifying charities 600
IRC Section 179 expense 3,000
Depreciation expense 1,800
What would be reported as ordinary income on the corporation’s income tax return?
All items of income, gain, deduction, loss, credit, etc. recognized at the corporate level are passed through to the shareholders. The shareholders’ pro rata share of deductible items reported separately on IRS Schedule K-1 includes (but is not limited to) the following items: Interest income
Dividends
Royalties
Charitable contributions
IRC Section 179 deduction
Accordingly, the S corporation’s ordinary income is $210,700, calculated as follows:
Business income $240,000
Rent expense (25,000)
Depreciation (1,800)
Business meals (50% × $5,000) (2,500)
Ordinary income $210,700
S corporation status may be terminated voluntarily or involuntarily.
Voluntary termination may take place if shareholders owning more than 50% of the outstanding shares consent and file ___
If a company has both voting and nonvoting shares of the same type of stock, then more than __% of the total number of outstanding shares is required for voluntary termination.
If the notice is filed on or before the 15th day of the third month of the taxable year, it will be effective for the ___
If filed after this date, the revocation becomes effective the ___
notice of revocation.
50%
Rest of the year
following year.
A new shareholder owning more than 50% of the voting stock may revoke S corporation status within ___ of becoming a shareholder. This termination is effective on the day it occurs.
60 days
Involuntary termination becomes effective on the day in which any of the following events takes place:
(1) The number of stockholders exceeds the limit allowed by law.
(2) More than one class of stock is outstanding.
(3) A corporation, nonpermitted trust, or partnership becomes a shareholder.
(4) A nonresident alien becomes a shareholder.
Yep
if an S corporation has C corporation (regular corporation) earnings and profits and more than __% of its gross receipts for __successive years is from certain forms of passive income, S corporation status will be terminated as of the first day of the __year.
25%, three, fourth
What is the tax rate for an S corporation that pays tax on built-in gains?
An estate and a grantor trust are allowed as shareholders of an S corporation. T/F
Highest Corporate income tax rate
True
Zinco Corp. was a calendar-year S corporation. Zinco’s S status terminated on April 1, when Case Corp. became a shareholder. During the year (365-day calendar year), Zinco had nonseparately computed income of $310,250. If no election was made by Zinco, what amount of the income, if any, was allocated to the S short year?
$76,500
$310,250 × (90 days ÷ 365 days) = $76,500 (rounded up)
Whenever an S corporation terminates its status (and becomes a C corporation), a daily allocation of the income (or loss) must be made.
Whenever an S corporation terminates its status (and becomes a C corporation), a __allocation of the income (or loss) must be made.
When an S corporation terminates, an election can be made (with the consent of ___% of the shareholders) and income or loss can be allocated between the ___based on the books (called “Temporary Closing of the Books”).
daily
100, two years
A corporation elected S corporation status. All shareholders gave their written consent, except for a missing shareholder who owns 1% of the outstanding stock. Which of the following statements about this situation is correct?
The election is valid if the board of directors gives its written consent.
The election is invalid because all shareholders must give their written consent.
The election requires two-thirds of the shareholders’ written consent to be valid.
The election requires 51% of the shareholders to give their written consent to be valid.
The election is invalid because all shareholders must give their written consent.
Packer Corp., an accrual-basis, calendar-year S corporation, has been an S corporation since its inception. Starr was a 50% shareholder in Packer throughout the current year and had a $10,000 tax basis in Packer stock on January 1. During the current year, Packer had a $1,000 net business loss and made an $8,000 cash distribution to each shareholder. What amount of the distribution was includible in Starr’s gross income?
$0
In this case, the $8,000 distribution did not exceed Starr’s basis and, therefore, was not taxable.
Basis on January 1 $10,000
Pro rata share of current loss
(50% x $1,000) (500)
Distribution (8,000)
--------
Basis on December 31 $1,500
The tax on built-in gains is a corporate-level tax on S corporations that dispose of assets that:
appreciated while the company was a C corporation…. WHY
An S corporation is allowed to have one class of stock that has two different voting rights. T/F
he tax is imposed on the S corporation when it disposes of property at a gain within five years after the S election took effect.
True
Graphite Corp. has been a calendar-year S corporation since its inception on January 2, Year 1. On January 1, Year 9, Smith and Tyler each owned 50% of the Graphite stock, in which their respective bases were $12,000 and $9,000. For the year ended December 31, Year 9, Graphite has $80,000 in ordinary business income and $6,000 in tax-exempt income. Graphite made a $53,000 cash distribution to each shareholder on December 31, Year 9. What total amount of income from Graphite is includible in Smith’s Year 9 adjusted gross income?
$40k
$80k/2 ….the $6K is TAX EXEMPT….you dont inlcude it on your taxes so why on your AGI
Under the Subchapter S Revision Act of 1982, an S corporation is a conduit like a partnership. Which of the following items will not retain their character and are not passed on to the shareholder as separately stated items?
Tax-exempt income
Foreign taxes
Charitable contributions
Depreciation expense
Depreciation expense is computed at the corporate level and not passed through separately to the shareholder. (Section 179 deduction is not considered depreciation expense for this purpose.)
Which of the following increases the accumulated adjustments account of an S corporation?
Capital contributions by the shareholders
Distribution to shareholders
Interest and dividends
interest and dividends
Clip-Joint, an S corporation hair salon, distributes land with an adjusted basis of $10,000 and a fair market value of $50,000 to its sole shareholder, Louise. Louise’s basis in the corporate stock before distribution is $90,000. What is Louise’s basis in the land after the distribution?
Louise’s basis in the land is $50,000, its FMV at the time of distribution. A property distribution is treated as if the corporation sold the property to the shareholder at its fair market value. Clip-Joint will recognize a $40,000 gain on the distributions which it will pass to Louise.
An S corporation has 30,000 shares of voting common stock and 20,000 shares of nonvoting common stock issued and outstanding. The S election can be revoked voluntarily with the consent of the shareholders holding, on the day of the revocation:
The rule for voluntarily revoking an S election is more than 50% of the total number of shares of S corporation stock must voluntarily revoke the S election. This S corporation has a total of 50,000 shares of stock outstanding. In order to revoke the S election, a minimum of 25,001 shares must voluntarily revoke the S election. Therefore, in order for the shareholders to revoke the S election, the best answer choice would be the 26,000 total shareholders.
A sole proprietor wants to incorporate and has requested a projection of the first-year tax results as a C corporation and as an S corporation. Taxable income from ordinary operations is projected to be $100,000. The company expects to make a $20,000 charitable contribution and projects a long-term capital loss on stock of $7,000. Which of the following projections is correct?
The correct projection is that the C corporation will have $90,000 taxable income and the S corporation will have $100,000 ordinary business income, with the remaining listed items separately stated.
The corporate limit for charitable contributions is 10% of taxable income computed before the deductions for contributions and the dividends-received deduction. Losses can only be used to offset capital gains in carryover years
Commerce Corp. elects S corporation status as of the beginning of year 20X1. At the time of Commerce’s election, it held a machine with a basis of $20,000 and a fair market value of $30,000. In March 20X1, Commerce sells the machine for $35,000. What would be the amount subject to the built-in gains tax?
The $10,000 is subject to the built-in gains tax since the C corporation basis was $20,000, but fair market value (FMV) was $30,000 at the time of election
What tax year must the S corporation generally adopt?
Any year it wants to
Fiscal year ending in June
Calendar year
Fiscal year ending in September
CY
Paul Pappas owns all of the stock of an S corporation which had previously been a C corporation. The S corporation had the following balances at the beginning of its tax year:
Accumulated adjustments account $ 8,000
Accumulated earnings and profits 10,000
Paul’s stock basis was $20,000 at the beginning of the tax year. The S corporation made a distribution of $19,000 to Paul during the year. What amount of the distribution is taxable to Paul?
S corporation distributions are (1) tax-free to the extent of the accumulated adjustments account (previously taxed to Paul), (2) taxable to the extent of accumulated earnings and profits (C corporation earnings), (3) any remaining distributions are a return of capital.
1) tax-free to the extent of the accumulated adjustments account (previously taxed to Paul), $10k
Stone Corp. has been an S corporation since inception. In each of Year 1, Year 2, and Year 3, Stone made distributions in excess of each shareholder’s basis. Which of the following statements is correct concerning these three years?
In Year 1 and Year 2 only, the excess distributions are taxed as capital gain.
In Year 1 only, the excess distributions are tax-free.
In Year 3 only, the excess distributions are taxed as capital gain.
In all three years, the excess distributions are taxed as capital gains.
When there is no C corporation accumulated E&P, all cash distributions are considered a return of capital until adjusted basis is reduced to zero, and then any excess is capital gain to the shareholder.
A shareholder’s basis in the stock of an S corporation is increased by the shareholder’s pro rata share of income from:
both tax-exempt and taxable interest….WHY
T/F: A general partnership may be a shareholder. SCORP
because
False
If an S corporation has no accumulated earnings and profits, the amount distributed to a shareholder:
must be returned to the S corporation.
increases the shareholder’s basis for the stock.
decreases the shareholder’s basis for the stock.
has no effect on the shareholder’s basis for the stock.
decreases the shareholder’s basis for the stock.
When an S corporation has income, the income passes through to the shareholder on a Form 1120S, K-1. The shareholder pays the taxes on the income. When this happens, the shareholder increases the basis of his or her stock. That income creates an accumulated adjustment account (AAA) in the S corporation. When the S corporation makes a distribution, the basis of the stock and the AAA goes down.
Distributions are first considered to come from an “____” (AAA).
Distributions from the AAA are ___
Distributions are then considered as ___to the extent of any accumulated earnings and profits (E&P)
Beyond accumulated E&P, distributions represent a return of capital and then a ___
accumulated adjustments account
nontaxable.
dividends
capital gain.
An S corporation has income of $72,000 after the following deductions:
IRC Section 179 election to expense depreciable property $15,000
Charitable contributions 11,000
Salary to owner who worked as CEO of corporation 84,000
What is the amount of nonseparately stated income shown on the S corporation’s income tax return?
The charitable contributions of $11,000 and the IRC Section 179 expense deduction of $15,000 are separately stated items and should be added back to income of $72,000, for a total of nonseparately stated income of $98,000.
After an S corporation elects to revoke its status as an S corporation, it must:
always wait five years before making a new election.
wait five years, but can apply to the IRS for an earlier reelection.
wait five years, but can apply to the IRS for an earlier reelection.
On August 15, year 1, Dryco Corp., a calendar-year S corporation, acquired 100% of the stock of an active C corporation. As a result of the acquisition, as of what date will Dryco’s S election terminate?
January 1, year 1
August 15, year 1
December 31, year 1
The election will not terminate.
doesn’t terminate
An S corporation’s status will involuntarily terminate if a corporation becomes a shareholder. However, if an S corporation acquires a C corporation, the S corporation election does not terminate.
An S corporation’s status will involuntarily terminate if a corporation becomes a shareholder. T/F
Are the two items that follow used in the computation of the built-in gains tax liability for an S corporation?
Flat 21% tax rate: Yes; Deduct unexpired NOLs and C corporation capital losses: No
Flat 21% tax rate: No; Deduct unexpired NOLs and C corporation capital losses: Yes
Flat 21% tax rate: Yes; Deduct unexpired NOLs and C corporation capital losses: Yes
Flat 21% tax rate: No; Deduct unexpired NOLs and C corporation capital losses: No
True
Flat 21% tax rate: Yes; Deduct unexpired NOLs and C corporation capital losses: Yes
Both of the items are used. The maximum corporate rate is used to prevent tax avoidance by converting C corporation income to S corporation income. Unexpired benefits of the C corporation are deducted (NOLs, capital losses, AMT credits, and business credit carryforwards).
Tap, a calendar-year S corporation, reported the following items of income and expense in the current year:
Revenue $44,000 Operating expenses 20,000 Long-term capital loss 6,000 Charitable contributions 1,000 Interest expense 4,000 What is the amount of Tap's ordinary income?
$20k
Tap’s ordinary income is $20,000, calculated as follows:
Revenue $44,000
Less: Operating expenses (20,000)
Less: Interest expense (4,000)
--------
Ordinary income $20,000
………………Separately stated items…………….
Tax-exempt income
IRC Section 1231 gains and losses
Long-term and short-term capital gains and losses
Charitable contributions
Passive income (loss)
Portfolio income (loss)
IRC Section 179 expense deduction
Nonbusiness income or loss
Intangible drilling costs
Mining exploration expenditures
Depletion
Amortization of reforestation expenditures
Discharge of indebtedness
Investment income and expenses
Recoveries of prior taxes, bad debts, and delinquency amounts
Wagering gains or losses
Gain or loss on sale of collectibles
IRC Section 199A income (income from any and/or each qualified trade or business (QTB))
IRC Section 199A W-2 wages (wages paid to persons working in a QTB)
IRC Section 199A unadjusted basis (original cost of tangible property used in a QTB)
IRC Section 199A REIT dividends (any ordinary dividends received from a real estate investment trust)
IRC Section 199A PTP income (any item of income from a publicly traded partnership)
memorize
All of the following statements are correct about an S corporation except:
an election to terminate requires the consent of all shareholders.
once an S corporation election is made, it stays in effect until it is terminated.
an election to terminate requires the consent of all shareholders.
A taxpayer owns 50% of the stock of an S corporation and materially participated in the corporation’s activities. At the beginning of the year, the taxpayer had an adjusted basis in the stock of $25,000 and made a loan to the corporation of $13,000. During the year, $3,000 of the loan was repaid, and the taxpayer’s share of the corporation’s loss for the year was $40,000. What is the amount of the loss that may be deducted on the taxpayer’s tax return?
$35k
Loans to an S corporation increase a shareholder’s basis, and repayments of that loan reduce basis. The taxpayer had a basis of $35,000 ($25,000 + $13,000 − $3,000) at year-end; therefore, the maximum amount of the loss that can be deducted is $35,000, since the taxpayer’s basis cannot go below $0. In other words, the deductibility of losses is limited to the shareholder’s basis in stock plus loans to the compa
Tracy, an owner of an S corporation, has beginning basis of $13,000 in stock of the S corporation. During the year, Tracy contributed an additional $4,000 to partially offset the share of the S corporation’s net operating loss, which was $7,000 for this year. At the beginning of the year, Tracy received a $1,000 distribution from the S corporation. What was Tracy’s basis at year end in the S corporation stock?
Tracy’s basis is $9,000 (beginning $13,000 + $4,000 contribution − $1,000 distribution − $7,000 operating loss).
Living (inter vivos) versus testamentary trust:
Living (inter vivos) trust: A trust created by a grantor who is ___at the time the trust is created
Testamentary trust: A trust created by an individual’s will at or following the date of the ___
still alive
grantor’s death
Revocable versus irrevocable trust:
__trust: A trust that may be amended, altered, or revoked by its grantor at any time, provided the grantor is not mentally incapacitated
___trust: A trust that may not be amended, altered, or revoked by its grantor at any time until the terms or purposes of the trust have been completed
revocable
irrevocable
Simple versus complex trust:
____trust: All net income must be distributed on an annual basis, does not distribute from corpus, and does not have a charitable deduction. The exemption amount for a ___trust is $300.
____trust: All income does not have to be distributed on an annual basis. The exemption amount for a ___trust is $100.
Simple
Complex
____trust: When the first spouse dies, the will of the decedent provides that a portion of the estate remainder (after estate taxes) is paid into a bypass trust for the surviving spouse.
If the surviving spouse follows the rules provided by the IRS, estate tax will not be paid again on those funds. T/F The surviving spouse must have only general power to access the trust while alive. The surviving spouse must not have an \_\_\_right to withdraw principal from the trust.
The surviving spouse can be given the right to withdraw principal for health, education, maintenance, or support. T/F
Bypass
True
False – limited
unrestricted
True
BYPASS TRUSTS
The spouse may also be given the right to withdraw all of the interest and dividends each year earned by the trust.
The ___of the trust can name the person to receive the trust after the death of the spouse, or give the survivor a list of persons such as family members to choose to receive the assets.
___remainder trust: Irrevocable trusts established by a donor to provide an income stream to the income beneficiary, while the public charity or private foundation receives the remainder value when the trust terminates
True
settlor
Charitable
Qualified terminable interest property trust (QTIP):
The surviving spouse will receive a stream of income for 5 years T/F
Income must be distributed at least bi-monthly
Income may be paid only to the surviving spouse T/F
At the death of the second spouse, the property in the trust passes to a different heir.
The heir was chosen by ___
False - for life.
False - annually
True
the first spouse.
___ trust: A trust agreement in which the contributed assets are passed directly to the grantor’s grandchildren, not the grantor’s children.
____ trust: A trust in which the grantor retains control over the income and/or corpus and is treated as the owner of the property and its income for tax purposes.
\_\_\_trust: A trust created for a person who cannot control their spending; or, a trust created so the creditors of the beneficiary cannot get to the trust assets. The independent trustee is to make decisions that are in the best interest of the beneficiary.
Generation-skipping
Grantor
Spendthrift
To which of the following trusts would the rule against perpetuities not apply?
Charitable
Spendthrift
Totten
Constructive
Charitable
The rule against perpetuities does not apply to charitable trusts.
The rule against ____was created to restrict the trustor’s power to perpetually control the funds or property in the trust after death plus 21 years and to ensure transferability of the funds or property.
perpetuities
When a trust instrument is silent regarding a trustee’s powers, which of the following implied powers does a trustee generally have?
The power to make distributions of principal to income beneficiaries
The power to lease trust property to third parties
When a trust instrument is silent regarding a trustee’s powers, the trustee has the implied power to lease trust property to third parties, but does not have the implied power to make distributions of principal to income beneficiaries.
An implied power is the power a trustee needs to perform such acts as are necessary to achieve the objectives of the trust.
The standard deduction for a trust or an estate in the fiduciary income tax return is:
$0
There is no standard deduction for a trust or an estate (IRC Section 63(c)(6)(D)).
Instead, the personal exemption for an estate is $__
An estate may not elect to claim administration expenses and casualty losses as either an estate tax deduction or as an income tax deduction . These expenses cannot be claimed on both returns.
An unlimited charitable contribution deduction is allowed to an estate or complex trust if the contribution is paid out of \_\_\_. What is the deduction for tax-exempt income? Simple trust?
600,
False - they can elect
gross income – no deduction for tax exempt income or simple trusts
Distributions of income to beneficiaries are allowed as a deduction to both estates and trusts. This deduction, however, cannot exceed ___(DNI).
A capital loss or a business loss sustained by a decedent may be carried forward and deducted on the estate’s income tax return.
Trust payments normally allocated to principal would be monthly ___payments
distributable net income
False - no they cant
mortgage principal
Lyon, a cash-basis taxpayer, died on January 15, Year 15. In Year 15, the estate executor made the required periodic distribution of $9,000 from estate income to Lyon’s sole heir. The following pertains to the estate’s income and disbursements in Year 15:
Year 15 Estate Income
$20,000 Taxable interest
10,000 Net long-term capital gains
allocable to corpus
Year 15 Estate Disbursements
$5,000 Administrative expenses
attributable to taxable income
For the Year 15 calendar year, what was the estate’s distributable net income (DNI)?
$15K
The estate’s distributable net income (DNI) is calculated as follows:
Taxable interest $20,000
Less administrative expenses
attributable to taxable income 5,000
DNI $15,000
=======
Distributable net income is an amount that sets the limit on the deduction of a domestic estate or trust for distributions to beneficiaries. The net long-term capital gains of $10,000 allocable to corpus are not part of “DNI.”
At the close of the prior year, an individual taxpayer transferred assets into an irrevocable trust, retaining the right to the income from the trust for life. During the year, the assets earned ordinary dividends and interest income. The tax liability on the income earned will be paid:
entirely by the individual taxpayer….WHY
A grantor trust (whether revocable or not) is one in which the grantor retains control over the income and/or corpus. The taxpayer is treated as the owner of the property and its income for tax purposes
Cox transferred assets into a trust under which Smart is entitled to receive the income for life. After Smart’s death, the remaining assets are to be given to Mix. In Year 1, the trust received rent of $1,000, stock dividends of $6,000, interest on certificates of deposit of $3,000, municipal bond interest of $4,000, and proceeds of $7,000 from the sale of bonds. Both Smart and Mix are still alive. What amount of the Year 1 receipts should be allocated to trust principal?
$13,000
The amount of the Year 1 receipts that should be allocated to trust principal will include the following:
$6,000 of stock dividends; no cash was received, only more shares of stock to add to the principal
$7,000 proceeds from sale of bonds, which were part of the principal of the trust
The rent and interest will both be allocated to income.
IRS Form 1041 (U.S. Income Tax Return for Estates and Trusts) must generally be filed if an ___gross income is $600 or more. However, a __files when it has either $600 of gross income or any amount of taxable income.
\_\_must use the calendar year as their tax year. \_\_\_may use either a fiscal or a calendar year. Estates may be exempt from making such payments during its first two tax years. T/F
estate’s , trust
Trusts , Estate
True
Gains and losses will be recognized by estates and trusts when property is transferred to a beneficiary in instead of ___to satisfy a specific cash bequest.
No gain or loss will be recognized when specified \_\_\_is transferred to a beneficiary under a specific beques
cash
property
Income in respect of a decedent (IRD) is included in the ___of the trust or estate. IRD is income that was earned by the decedent at the time of death but was not reportable on the decedent’s final income tax return because of the accounting method utilized.
gross income
Trust receipts that are normally allocated to principal would be any receipts that are one-time in nature, such as stock splits, stock dividends, and settlement of claims on property damage T/f
Trust receipts that are normally allocated to income would be any receipts that are routine in nature and usually received on an annual basis, such as cash dividends, royalties, rents, and interest.
true to both
Which of the following types of entities is entitled to the net operating loss deduction?
Partnerships
S corporations
Trusts and estates
Not-for-profit organizations
Trust/estate
As pass-through (conduit) entities, both partnerships and S corporations are denied a net operating loss deduction in determination of taxable income. Trusts and estates are allowed a net operating loss deduction under Treasury Regulations. Not-for-profit organizations are generally denied net-operating-loss deductions except in calculating any unrelated business income tax.
Arno plans to establish a spendthrift trust naming Ford and Sims as life income beneficiaries, Trip as residuary beneficiary, and Bing as trustee. Arno plans to fund the trust with an office building.
Assume that an enforceable trust was formed. Sims has the following personal creditors:
Bank holding a home mortgage note deficiency judgment
Judgment creditor as a result of an automobile accident
To which of these creditors can Bing pay Sims’s share of trust income?
A spendthrift trust is created for a beneficiary that is wasteful with money. The trust prevents the beneficiary from selling the funds or property and bars seizure from creditors of the beneficiary.
Bing cannot pay Sims’s share of trust income to either the bank holding a home mortgage note deficiency judgment or the judgment creditor as a result of an automobile accident. This trust is being funded with an office building, making it an express trust of real property; it must be in writing under the statute of frauds.
Raff died in Year 14, leaving her entire estate to her only child. Raff’s will gave full discretion to the estate’s executor with regard to distributions of income. For Year 15, the estate’s distributable net income was $15,000, of which $9,000 was paid to the beneficiary. None of the income was tax exempt. What amount can be claimed on the estate’s Year 15 fiduciary income tax return for the distributions deduction?
$9k
Distributable net income (DNI) is an amount that sets the limit on the deduction of an estate for distributions to beneficiaries. Since Raff’s estate had DNI of $15,000 and $9,000 was paid to the beneficiary, the estate is allowed a $9,000 deduction. ($15k is max deduction)
The DNI amount serves several roles:
DNI sets the limit on the amount of the distribution that is ___by the estate or trust for the tax year.
DNI also determines the ___and character of the income to be reported by the beneficiaries.
The DNI amount is basically the entity’s __before the distribution deduction
deductible
amount
taxable income
An irrevocable trust that contains no provision for change or termination can be changed or terminated only by the:
courts
An irrevocable trust is a trust that is set up and the funds or property are transferred to a trustee. Once the person signs the trust, he or she has surrendered his or her control over the funds or property. Since the trust is conclusive, it cannot be changed except by the courts.
Frost’s will created a testamentary trust naming Hill as life income beneficiary, with the principal to Brown when Hill dies. The trust was silent on allocation of principal and income. The trust’s sole asset was a commercial office building originally valued at $100,000 and having a current market value of $200,000. If the building was sold, which of the following statements would be correct concerning the allocation of the proceeds?
The entire proceeds would be allocated to principal and retained.
The entire proceeds would be allocated to income and distributed to Hill.
One-half of the proceeds would be allocated to principal and one-half to income.
One-half of the proceeds would be allocated to principal and one-half distributed to Brown.
The entire proceeds would be allocated to principal and retained.
Since the trust’s only asset was the commercial office building and it was sold, then it is reasonable that the entire proceeds from the sale of the office building be allocated to the trust principal.
A Trust had rental income of $20,000 and taxable interest income of $10,000. The rents constituted 60% of DNI and taxable interest 40% of DNI. The trust distributed $6,000 of DNI to its sole beneficiary, Carl. What amount should Carl report as rental and interest income from the trust?
Rental: $3,600; Interest: $2,400
Carl is deemed to have received partly rental income and partly interest income. The allocation of the $6,000 is based on the percentage of DNI (distributable net income) from rentals and interest. Beneficiaries are taxed on their share of the trusts income distributed to them, but not more than their share of DNI of the trust.
Beneficiaries are generally taxed on income distributions that they receive. T/F
In a simple trust, beneficiaries are taxed on the income that is required to be distributed to them, whether or not it is actually distributed during the taxable year. T/F
The amount that is taxable for simple trusts, however, is limited to the trust’s distributable net income (DNI). T/F
True to all
Gardner, a U.S. citizen and the sole income beneficiary of a simple trust, is entitled to receive current distributions of the trust income. During the year, the trust reported:
Interest income from corporate bonds $5,000
Fiduciary fees allocable to income 750
Net long-term capital gain allocable to corpus 2,000
What amount of the trust income is includible in Gardner’s gross income?
The full amount of a simple trust’s distributable net income (DNI) is includible in the beneficiary’s income for the year whether distributed or not. DNI does not include the net capital gains allocable to corpus. In this case, DNI equals the interest income less the fiduciary fees allocable to income ($5,000 − $750 = $4,250).
During the current year, a trust reports the following information:
Dividends $10,000
Interest from corporate bonds 12,000
Tax-exempt interest from state bonds 4,000
Capital gain (allocated to corpus) 2,000
Trustee fee (allocated to corpus) 6,000
What is the trust’s accounting income?
The accounting income of a trust is the amount an income beneficiary is entitled to receive from the trust. Accounting income includes both taxable and nontaxable items of income.
Dividends $10,000
Interest from corporate bonds 12,000
Tax-exempt interest from state bonds 4,000
Capital gain allocated to corpus 0
Trustee fee allocated to corpus 0
Trust’s accounting income $26,000
The accounting income of a trust is the amount an income beneficiary is entitled to receive from the trust.
T/F
Accounting income includes both taxable and nontaxable items of income. T/F
True to both
A complex trust is any trust that does not qualify as a ___trust.
simple
A simple trust is defined by IRC Section 651 as one that meets three conditions during a year:
The trust instrument requires that all ___must be distributed currently.
The trust instrument does not provide that any amounts are to be paid, permanently set aside, or used for ___purposes.
The trust does not distribute amounts allocated to the ___of the trust.
income
charitable
corpus
___is the assets or the principal (usually money, securities, and other assets) of a trust or estate as distinguished from interest or profits.
Corpus
Mason’s will created a testamentary trust for the benefit of Mason’s spouse. Mason’s sister and Mason’s spouse were named as co-trustees of the trust. The trust provided for discretionary principal distributions to Mason’s spouse. It also provided that, on the death of Mason’s spouse, any remaining trust property was to be distributed to Mason’s children. Part of the trust property consisted of a very valuable coin collection. After Mason’s death, which of the following statements would be correct?
Mason’s spouse may not be a co-trustee because the spouse is also a beneficiary of the trust.
Mason’s sister may delegate her duties as co-trustee to the spouse and thereby not be liable for the administration of the trust.
Under no circumstances could the spouse purchase the coin collection from the trust without breaching fiduciary duties owed to the trust and Mason’s children.
The co-trustees must use the same degree of skill, judgment, and care in managing the trust assets as reasonably prudent persons would exercise in managing their own affairs.
The co-trustees must use the same degree of skill, judgment, and care in managing the trust assets as reasonably prudent persons would exercise in managing their own affairs.
Any trustee must use at least the same degree of skill, judgment, and care in managing the trust assets as reasonably prudent persons would exercise in managing their own affairs. Trustees have a fiduciary duty to the trust regardless if they are beneficiaries or not.
Which of the following would ordinarily be distributed to a trust income beneficiary?
Royalties
Stock received in a stock split
Cash dividends
Settlements of claims for damages to trust property
Royalties and cash dividends would be received on an annual basis and would be allocated to trust income.
Andi Corp. issued $1,000,000 face amount of bonds in Year 1 and established a sinking fund to pay the debt at maturity. The bondholders appointed an independent trustee to invest the sinking fund contributions and to administer the trust. In Year 6, the sinking fund earned $60,000 in interest on bank deposits and $8,000 in net long-term capital gains. All of the trust income is accumulated with Andi’s periodic contributions so that the aggregate amount will be sufficient to pay the bonds when they mature. What amount of trust income was taxable to Andi in Year 6?
$68k
The $60,000 in interest on bank deposits and $8,000 in net long-term capital gains are considered trust income to Andi in Year 6. Funds included in a sinking fund or trust are considered assets of the entity.
Ordinary and necessary administration expenses paid by the fiduciary of an estate are deductible:
on the ___income tax return only if the ___tax deduction is waived for these expenses.
fiduciary , estate
Ordinary and necessary administration expenses are deductible on either the fiduciary income tax return (Form 1041) or the federal estate tax return (Form 706), but not ___
both.
