See 2 Flashcards
What method of accounting are tax shelters required to use?
Accrual method of accounting.
What is the maximum number of shareholders that an S corporation can have?
100 shareholders, although related family members count as a single shareholder for purposes of the 100 shareholder limit.
How can a tax-exempt entity be organized?
A tax-exempt entity can be organized as a corporation, unincorporated association or a trust. An exempt entity cannot be classified as a partnership or a sole proprietorship.
A general partner in a partnership is considered to be:
Self-employed. Partners are not considered employees and should not be issued a Form W-2. Instead, they are issued a Schedule K-1, and each partner includes his share of the partnership’s income on his/her individual tax return.
If a sole proprietor removes items from inventory for his/her own personal use, what is the correct way to account for this transaction?
Goods that are withdrawn from the business and taken by the owner for personal use should be subtracted from the inventory of the business. It is not treated as a business expense.
How long should a business retain employment tax records?
At least four years (examples: form I-9, forms 940, 941, forms w-2).
What annual information return must qualified retirement plans file?
Qualified retirement plans (such as 401k plans, must file a form 5500, annual return/report of employee benefit plan, every single year.
Define Section 197 assets, and give some examples of what they are.
Section 197 assets are intangible assets held by a businesss. They include: trademarks, trade names, copyrights, goodwill, franchisee and covenants not to compete. These assets are amortized over 15 years.
If an employee-shareholder of a c corporation uses the business’s bank account to pay personal expenses, how is this treated for tax purposes?
The payments for personal expenses of an employee-shareholder would be treated as a constructive distribution, which is taxable to the employee as a dividend, and not deductible by the C corporation.
Which business entities are subject to the NIiT (Net investment Income Tax)?
Estates, trusts, and individuals can be subject to the nIiT on net investment income over certain thresholds.
When is a s/e taxpayer’s first estimated tax payment due?
April 15th.
When an S Corporation makes charitable contributions, how is this treated on the business return?
Charitable contributions made by an S corporation are a flow-through item. The contributions are reported to the shareholders on Schedule k-1. The contributions are not a business expense or an s corporation and do not affect the business’s income and loss.
If an employee of a business is reimbursed for mileage and other out-of-pocket expenses, do the reimbursements have to be reported on the employee’s form w-2?
No, reimbursements made to an employee under an accountable plan do not have to be reported and are not included in an employee’s form w-2.
How many years May a C corporation carryover unused charitable contributions?
C corporations are permitted a tax deduction for charitable gifts, subject to certain income limits. The corporation can carry over unused charitable contributions for five years.
What is the deadline for a business to set up a Simple retirement plan?
To make a simple plan effective for a year, it must be set up by October 1 of that year. A later effective date is allowed only when the business is started after October 1.
What is the accumulated earnings tax?
The accumulated earnings tax is a 20% tax assessed on the excess accumulated earrings and profits of a C corporation. This tax is usually assessed under audit and is not automatic.
What types of entities are permitted to own stock in an s corporation?
Estates, certain trusts, individuals and 501c3 entities are permitted to own stock in an S corporation. Partnerships and c corporations cannot own stock in an S corporation.
When does the BIG Tax (Built-in Gains tax) apply to an s corporation?
The built-in gains tax (also called the “BIG tax”) applied to the sale of an asset by an S corporation that was previously a C corporation or if the S corporation acquires assets from a C corporation a tax free transition.
What type of trust can accumulate income from one year to the next?
A complex trust may accumulate income. A simple trust may not.
A corporation whose S election is revoked or terminated must generally wait how many months before making an S election again?
A corporation whose S election is revoked or terminated must generally wait 60 months (5 years) before making an S election again.
What type of property can be exchanged in a like-kind exchange (a Section 1031 exchange)?
In order for a section 1031 like-kind exchange to be valid, both properties must be real property (real estate) and used in a business or held for investment.
What is the IRS safe harbor, with regard to whether or not a business activity is engaged in with the intent to make a profit?
Safe harbor: an activity is presumed to be “for profit” if it makes a profit at least 3 out of the last 5 years, including the current year.
How do distributions affect a C corporation’s E&p (earnings and profits).
Corporate dividends and distributions will decrease corporate e&p (earnings and profits).
If a business receives an assessment for local improvements (such as sidewalks or streets) how is this expenditure treated by the business?
Assessments for local improvements increase the value of property, and are generally added to the basis of the property.
What form must a business use in order to request a change in accounting method?
A business must file form 3115, application for Change in Accounting method, to request a change in accounting method.
If a farmer rents farmland for a percentage of the crop, (rather than cash) how should this activity be reported?
Farmers who rent their farmland for a percentage of the crop should use form 4835, Farm Rental Income and Expenses, to report this activity (this is called a sharecropping activity).
What are the two methods of depletion?
(1) cost depletion and (2) percentage depletion. A business may choose the method which results in the greater tax deduction.
Define section 1259 property.
Section 1259 property is real property. It includes buildings (including thru structural components, like elevators) and permanent land improvements (ex. Concrete fencing, walkways, irrigation).
If a non-profit organization has unrelated business income, which form is the entity required to file?
An exempt organization that has $1,000 or more of gross income from an unrelated business activity must file
Form 990-t.
If an individual partner in a partnership receives guaranteed payments, how are these payments reported by the partner?
An individual partner reports guaranteed payments on schedule e (form 1040) as ordinary income, along with his or her distributive share of the partnership’s other ordinary income.
A liquidating distribution of cash for a partner’s entire interest in a partnership usually results in:
A capital gain (or loss) for the partner.
If a business purchases a building, and then pays to demolish it, how are the costs of demolition treated?
Costs incurred to demolish a building are added to the basis of the land on which the demolished building was located. The demolition costs cannot be expensed or claimed as a current deduction.
An LLC with at least two members will be automatically taxed as a _______ by default.
An llc with at least two members will be automatically taxes as a partnership. An MMLLC can also elect to be taxed as a corporation.
What are the 4 shareholder loss limitations for an S corporation?
There are four shareholder loss limitations: 1) stock and debt basis limitation 2) at-risk
Limitation 3) passive activity loss limitation 4) excessive business loss limitation
When a corporation initially forms, how are the costs of incorporation classified?
State corporation costs are classified as organizational costs. A business may be able to claim an immediate deduction of up to $5k of qualifying organizational costs in the first year it commenced business.
An exempt entity that is classified as a private foundation is required to file which annual information return?
Private foundations file form 990-PF. A private foundation is required to file an annual information return every year, regardless of incomes
When does a business adopt its accounting method?
Any business (including a corporation) adopts irs accounting method when it files its first income tax return.
What is the flat tax rate that applies to C corporations?
A flat tax of 21% applies to C corporations.
What is a 52/53 week tax year?
A 52/53 -week tax year is a fiscal tax year that varies from 52 to 53 weeks but does not have to end in the last day of a month.
What is a short tax year?
A short tax year is a tax year if less than 12 months. A short period tax return often occurs in the first year of a business’s formation, as well as the year of dissolution.
What is a foreign partnership?
A partnership not created or organized in the US or under the law of the US or of any state. Foreign partnerships have additional filing requirements.
What is the adjusted gross estate of a decedent?
The adjusted gross estate refers to total value of a decedent’s property after deducting allowable expenses such as: administration expenses, funeral expenses and charitable gifts.
Which type of corporation is subject to double taxation?
A C corporation is subject to double taxation; taxed on the corporation’s net income, and then on the shareholders when dividends are distributed.
Which type of corporation is a pass-through entity?
An s corporation is a ‘pass-through’ entity. It only has one level of taxation; all income is allocated to the shareholders according to ownership stake.
Define leasehold improvements.
An improvement made to a leased building by a tenant that has the right to use this leasehold improvement over the term of the lease. Examples may include exterior fencing or interior partitions.
Define royalties.
Royalties represent payments to another party for the use of their property. Royalties are typically reported on schedule e.
What is the self-employment (se tax) tax rate that applies to taxpayers who are self-employed?
The self-employment tax rate is 15.3%. The rate consists of two parts: 13.4% for social security and 2.9% for Medicare.
Can a self-employed taxpayer deduct their social security and
Medicare taxes?
A self-employed taxpayer can deduct 1/2 of their self-employment tax. The deduction is an adjustment to income on form 1040 and is not reported on schedule c. Wage earners cannot deduct social security taxes.
What is a ‘parent-subsidiary’ controlled group?
When a single corporation (the ‘parent’) owns 80% or more of another corporation.
What is an FSA or a flexible spending arrangement?
A fsa is a tax-advantaged health care savings plan that an employer sponsors for their employees. An fsa is not the same thing as an hsa.
What information form is a corporation required to file when it issued more than $10 in dividends to a shareholder?
Form 1099-div, dividends and distributions.
On a corporate tax return, what is the purpose of the schedule m-1?
The purpose of the schedule m-1 is to reconcile the entity’s accounting income (‘book income’) with its taxable income. Differences exist because of the difference in accounting principles and tax law.
Can a corporation change its accounting period after it has filed its first tax return?
A change in accounting period or method requires an IrS consent. Form 1128, application to adopt, change or retain a tax year, is used to request consent.
How are payroll taxes used by the government?
Payroll taxes (also called fica taxes) taxes are used to provide for retired workers, disabled workers and their dependents.
With regards to retirement plan contributions, what is an elective deferral?
An amount elected by a participant to be contributed to a plan, thereby deferring the receipt of the cash as income. Elective deferrals can be either pre-tax elective deferrals or designated Roth contributions.
What are allocated tips?
Allocated tips are tips an employer assigns to an employee. They are in addition to the tips the employee reports to the employer. Employers report allocated tips on the employee’s w-2.
How much does a taxpayer need to receive in net earnings from s/e before having to pay s/e tax?
$400 or more.
What is inventory, and how does it differ from cost of goods sold?
Inventory is products that a business buys or provided for resale to customers. The cost of goods sold is the cost of the products (or services) that have already been sold to customers.
When is an employer required to provide minimum essential coverage (MEC) to its employees?
Under the AcA’s employer-shared responsibility provisions, an applicable large employer (ale) must either offer affordable minimum essential coverage or owe a shared responsibility payment to the IrS. Ale’s
Are defined as having 50 employees or more.
What is a 401k plan?
A 401k is a defined contribution plan. The employee and employer can make contributions to the account, 401k plans have an annual filing requirement form 5500.
What is a ‘brother-sister’ controlled group?
A ‘brother-sister’ controlled group is a group of corporations owned by the same five or fewer individuals.
What is a direct rollover?
A rollover made from one retirement plan to another plan without being distributed to the participant. This is also called a trustee to trustee transfer.
What is the difference between wages and salary?
Usually, wages are computed by multiplying an hourly pay rate by the number of hours worked. A salary is a fixed sum paid for a specific period of time worked, such as weekly or monthly.
What are the advantages of a sole proprietorship?
A sole proprietorship is the easiest business type to form and requires no paperwork. The proprietor receives all of the profits and controls the business.
What is a limited partner?
A limited partner is an investor. They invest capital and share profits, but do not participate in management and are not personally liable for partnership debts beyond their investment in the business.
With regard to retirement plans, what is a hardship distribution?
A distribution from a retirement plan which is made because the participant has suffered severe financial difficulty or an extraordinary event as defined by the plan document. Hardship distributions are generally taxable and can be subject to penalties, as well.
What are retained earnings of a corporation?
Retained earnings are corporate profits that are not distributed to shareholders.
With regards to retirement accounts, what does the term vesting mean?
Vesting refers to the degree to which a participant is entitled to a portion of his or her retirement account balance. Some retirement plans allow gradual vesting schedules, and thus helps reduce employee turnover.
With regards to trusts, what is the Income distribution deduction?
The Income Distribution Deduction (IDD) is a deduction allowed to a trust for distributions to beneficiaries. It is limited to distributable net income and is designed to avoid double taxation on income flowing from the trust to its beneficiaries.
What is probate?
Probate is generally used to refer to the entire process of administration and distribution of a decedent’s estate. Legal processes for probating an estate vary from state to state.
With regards to the formation of a trust, what is a grantor?
A grantor is the person who creates and initially funds a trust, by contributing money or property. Also called a settlor.
