Tax Characteristics of Entities Flashcards
1
Q
Pros and cons of sole proprietorship
A
-Ease of formation, no double taxation, autonomy vs full responsibility for all debts and liabilities, no continuity
2
Q
Tax treatment
A
-Net income and loss are reported on 1040 Schedule C (max rate: 37%), also subject to self-employment tax on net earnings
-May deduct 20% qualified business income for income tax purposes, applies to $182,100 for single and $364,200 for MFJ
If there are are employees or is required to pay federal taxes, then must obtain EIN
3
Q
independent contractor
A
If the person for whom the services are performed has the right to control or direct only the result of the work and not the means and methods of accomplishing the result.
4
Q
common-law employee
A
If someone can control what services will be performed and how it will be done, even if the employee has freedom of action.
5
Q
A statutory employee
A
- driver who is paid on commission or is your agent,
- life insurance sales agent,
- person who works at home on materials or goods that you supply, or
- salesperson who turns in orders for resale from wholesalers, retailers, contractors, or hotel or restaurant establishments. (Social Security and Medicare taxes are withheld if these services are performed on a continuous basis for the same payer and if the worker does not have a substantial investment in the equipment and property used to perform these services.)
6
Q
statutory nonemployee
A
If all payments for their services are derived from direct sales rather than from the number of hours worked. An example is a licensed real estate agent.
7
Q
corporation
A
owned by one or more shareholders and is a separate legal entity apart from its owners, formed under rules of state incorporated under
8
Q
Required submissions by corporation to state
A
-statement listing name and purpose, with directors and organizers
-filing fee
-articles of incorporation
-info on stock to be issued
9
Q
Advantages and disadvantages of C-Corporations
A
-Shareholders have limited liability, easier to raise additional capital by issuing new stock, special shareholder and employee tax rules, and no restrictions on number/types of shareholders
vs
-creditors may seek payment from shareholders if not properly formed, income is taxed twice, complex computations required for filing consolidated taxablle income
10
Q
Special C-corporation types:
A
Personal service corporations
Personal holding companies
Professional corporations
11
Q
Personal Service Corporation (PSC)
A
business that provides personal services toc customers
12
Q
Advantages and disadvantages of PSC
A
- QSPC is exempt from accrual method of accounting and must use the 21% (2023) max corp rate to calculate liability
vs.
Must use calendar year as tax year
13
Q
Personal Holding Companies (PHCs)
A
-C-Corporations with certain percentage of income from investments ie interest, dividends and real estate rents
14
Q
PHC tax
A
Triple taxation:
- Corporate income paid by corporation
-PHC tax paid by corporation
-income tax paid by shareholders when dividend is eventually paid
Purpose is to prevent corporations from accumulating earnings and not distributing them as taxable dividends (which are taxed to noncorporate shareholders at max of 20% + 3.8% NIIT if applicable)
15
Q
Professional corporation/association
A
Closely held corporation formed by licensed doctors, lawyers, accountants and engineers- provides retirement and other tax advantages available to corporate employees but not self-employed proprietors and partners (although federal tax law now provides similar benefits under both self-employment and corporate retirement plans)
16
Q
Tax-exempt organizations
A
entity that is “organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition or for the prevention of cruelty to children or animals.”
Eg civic leagues, chambers of commerce, real estate boards, and pension funds.
17
Q
T/F: All tax-exempt organizations are non-profit organizations.
A
False. Non-profit status is a state law concept. Non-profit may make an organization eligible for certain benefits such as state sales, property, and income tax exemptions. Although most federal tax-exempt organizations are non-profit organizations, organizing as a non-profit organization at the state level does not automatically grant the organization exemption from federal income tax.
18
Q
Rules for capital gain and loss taxation
A
-LTCG vs LTCL
-STCG vs STCL
-NLTCP vs NSTCL
-NLTCL vs NSTCG
-If there’s NLTCG and NSTCG, then taxed as ordinary income
-If there’s NLTCL and NSTCL, can only deduct up to $3,000
19
Q
Dividends-Received deduction
A
- Deduct 50% if own <20%
- Deduct 65% if own 20-79.99%
- Deduct 100% if own >80%
20
Q
current corporate tax rate
A
flat 21%
21
Q
Corporate Penalty taxes
A
-accumulated earnings tax
-personal holding company (PHC) tax
22
Q
Accumulated Earnings Tax
A
Usually imposed on closely held corporations, on accumulated taxable income (above threshold of $250k/$150k if personal service corporation), to discourage individual taxpayers from using the corporate entity for tax avoidance
20%
23
Q
Personal Holding Company Tax
A
PHC that passes ownership test (>50% of the value of the outstanding stock is owned by five or fewer individuals during the last half year) and passive income test (at least 60% of adjusted ordinary gross income is personal holding company income/passive income including dividends, interest, and, under certain circumstances, rental income)
Calculated by multiplying undistributed personal holding company income by applicable PHC tax rate of 20%
24
Q
Capitalization of a Corporation
A
With equity securities (common/preferred stock) and LT debt-issued to shareholders (which is advantageous since interest payments are deductible as opposed to dividends, and repayment of debt is a tax-free return of capital to shareholders as opposed to dividend income treatment of stock redemptions); however can’t be too thinly capitalized or else IRS may recharacterize debt as equity
25
Earnings and profits (E&P)
operating surplus on its capital, distribution would be considered taxable dividend
26
Current year and accumulated earnings and profits (E&P)
distribution to shareholders is deemed to be made first out of current E&P and therefore results in a taxable dividend even if accumulated E&P at the beginning of the year is negative. Accumulated E&P represents the total of all prior years' undistributed E&P amounts as of the first day of the tax year.
27
Stock Redemption
Treated as:
-A taxable dividend (to the extent of E&P)
-An exchange of the stock, generally resulting in capital gain or loss treatment by the shareholder (subject to 20% max tax rate)
Depends on whether :
-substantially disproportionate to the shareholder's interest(<80% interest in former common/voting stock).
- equivalent to a dividend (Voting Power, Participation in E&P, Share of Net Assets upon Liquidation)
-a complete termination of the shareholder's interest (constructive ownership rules waived).
28
Which type of treatment prevents corporations from paying disguised dividends in the form of a stock redemption, taxable as a capital gain?
Taxable dividend treatment prevents corporations from paying disguised dividends in the form of a stock redemption, taxable as a capital gain.
29
What does a complete termination of a shareholder’s stock interest qualify for?
capital gain or loss treatment
30
Special situations for redemption rules
-exchange (rather than dividend) treatment for noncorporate shareholder redemptions in a partial liquidation of the distributing corporation. The distribution must be made pursuant to the termination of an active trade or business of the distributing corporation or be considered not essentially equivalent to a dividend at the corporate level.
-executor of an estate or a beneficiary to have stock in a closely held corporation redeemed, whereby the redemption is treated as an exchange (rather than as a dividend) provided certain conditions are met. The redemption amount is limited to the death taxes imposed and the amount of deductible funeral and administration expenses incurred.
31
Corporate distributions in complete liquidation
- Shareholders decide to terminate corporation's existence
-Assets are distributed in kind or sold and converted to cash
-Once assets are distributed, the liquidated corporation is dissolved under state law
32
Distribution of assets
Liquidation of corporation is treated as if sold at FMV (in case of liability, then the FMV is the greater of the actual FMV or amount of liability)
33
Exception to G/L recognized in a liquidation (IRC 332)
neither the parent nor the subsidiary recognizes gain or loss if a parent corporation liquidates an 80%-owned subsidiary corporation, the subsidiary corporation must do either of the following:
Distribute all its property to the parent corporation in complete liquidation of its stock within a single tax year.
Make a series of liquidating distributions resulting in a complete liquidation over a 3-year period that commences with the close of the tax year in which the first liquidating distribution is made.
34
Tax planning considerations for corporations
Capital structure and Section 1244,
Dividend policy,
Use of losses,
Charitable contributions, and
Dividend-received deduction
35
Non business bad debts
deductible as STCL, $3,000 per year limitation; alternatively shareholders can capitalize the corporation using small business corporation stock, and can deduct up to $50k/$100k joint as ordinary loss
36
Taxation of dividends from E&P
fully taxable to shareholders and are not deductible by the corporation.
37
Use of losses as a tax planning consideration
A corporation should plan to use its net operating loss and capital loss carryovers
38
Charitable Contributions
Owners of closely held corporations prefer to make charitable donations through their controlled corporations since corporations can deduct contributions
39
Dividends-Received Deduction
Corporate shareholders may deduct the dividends received from other corporations in which there is ownership interest.
40
In computing corporate net operating loss (NOL), which of the following is taken into consideration?
In computing a corporation's NOL, the full dividends-received deduction is allowed. However, no deduction is permitted for an NOL carryover or carryback from a preceding or succeeding year.
41
For purposes of the accumulated earnings tax, what are reasonable needs of the business
reasonably anticipated expansion of the business and plant replacement, acquiring the assets or stock of another business, providing working capital for the business, establishing a sinking fund to retire corporate debt, and making investments or loans to suppliers and customers, not stockholders
42
Partnerships
legal entity owned by two/+ people to operate a business for profit, partners have unlimited personal liability incurred by business and the degree is proportionate to the amount of control a partner has in the partnership
43
Pros/Cons of partnerships
-No restrictions on number/types of partners and not subject to double taxation
vs
GPs do not have LL, cannot choose tax year, and may be altered or destroyed upon death/withdrawal of a partner/transfer of interest
44
General partnership
simplest form of a business organization: each partner has unlimited liability for partnership debts. Thus, these partners are at risk for more than their investment in the partnership.
45
Limited Partnership
Permitted in most states and requires registration: at least one partner must be a limited partner. The general partners are liable for all partnership debts and the limited partners are liable only to the extent of their investment plus any amount they commit to contributing to the partnership if called upon. LPs act more like investors
46
LLPs
registered under the law of one/+ states, attractive to professional service partnerships. Although partners are not considered employees, GPs are subject to self employment tax on share of partnership income
47
Family Limited Partnerships (FLPs)
enables a family to hold and manage its wealth, including the family business, with several generations of family members as partners, can be an effective business entity for estate planning purposes, allowing families to retain control, develop succession plan, transfer assets at lowest cost, reduce income tax liability
48
S Corporations
special corporation treated as flow-through entities, less flexibility than partnerships:
Have no more than 100 shareholders,
Be a domestic corporation,
Have no shareholder who is a nonresident alien, and
Have only one class of stock (S corporations cannot have common and preferred shares, but shares can be voting and non-voting stock).
49
Pros/Cons of S Corporation
-Not subject to double taxation and shareholders have limited liability
vs
-Restrictions on #/types of shareholders, must use calendar year, shareholders owning >2% of stock are not eligible for tax-free fringe employment benefits
50
LLC
Combines the advantages of a C corporation with those of a partnership. All owners called "members" enjoy limited liability, although in some states they are not shielded from liabilities stemming from personal negligence. Unlike an S corporation, an LLC can have an unlimited number of members who can be individuals, corporations, estates, or trusts.
Formed by state registration process similar to corporations.
LLC with 2/+ owners may elect to be taxed as corporation or partnership and must be made within 1st tax year
51
Pros/Cons of LLC
LLCs have a liability advantage similar to corporations and a tax advantage like partnerships. The creation of the entity is more complex and formal than general partnerships. Unlike S Corporations, LLCs do not have limited number of partners.
When taxed as partnership:
Special allocations with the concept of substantial economic effect,
Guaranteed payments,
Self-employment taxes owed by the general partners, and
Recourse and qualifying non-recourse debt for partners as it relates to their basis in the entity.
Members of an LLC that meet the federal income tax definition of a partnership are subject to self-employment tax and can deduct health insurance premiums. An LLC is liable for payroll and excise taxes but avoids double taxation on income.
52
features of a partnership
- no restrictions on the number/ types of partners in a partnership.
- can be created informally and profits and losses are divided according to the partnership agreement.
-defined as a syndicate, group, pool, joint venture or unincorporated organization that carries on any business, financial operation or venture, and a partner is a member who can be an individual, corporation, trust or estate.
53
Dean Accounting did not want to be liable for each partners' conduct, so it converted to a different flow-through business entity. Identify the most suitable form of flow-through entity for Dean Accounting.
The LLP form limits legal liability. Under state LLP laws, partners are liable for their own acts and the acts of individuals under their direction. LLP partners are not liable for the negligence or misconduct of other partners. This entity is attractive to professional service partnerships, such as public accounting firms.
54
Nonrecognition rule of partnership
Gain/loss upon transfer of property in exchange for partnership interest or subsequent transfers not recognized since change in ownership form; also depreciation recapture rules do not apply; unless partner acts in capacity other than partner/contributes services instead of property/recognizes gain if liabillities transferred exceed basis, or treated as investment company
55
Basis of Partnership Interest
the sum of money contributed plus the adjusted basis of other property transferred to the partnership. services rendered are at FMV
56
Section 752 Adjustment
a partner's basis in the partnership interest increases by the partner's share of any changes in the partnership's liabilities during the year. Made for recourse liabilities and qualifying non-recourse liabilities
57
Items affecting basis of partnership
Items Basis Change
Pass-through of ordinary net income Increase
Pass-through of ordinary loss Decrease
Cash contributions from partners Increase
Cash distribution to partners Decrease
Partnership increases liabilities* Increase
Partnership decreases liabilities* Decrease
Partnership makes charitable contribution Decrease
Partnership has Section 179 expenses Decrease
Pass-through of capital gain Increase
Pass-through of capital loss Decrease
Pass-through of dividend and interest income Increase
Partnership has tax-exempt income Increase
Partnership has nondeductible expenses Decrease
58
Negative Basis Rule
The basis of a partnership interest cannot be negative. Therefore, Section 731 requires recognition of a gain in situations where a negative basis would otherwise occur.
59
Holding Period for Partnership Interest
If a partner contributes only cash to the partnership in exchange for a partnership interest, the holding period begins on the date that the interest is acquired.
If the partner contributes property, the holding period for the partnership interest generally includes the holding period of the contributed property.
If the contributed property is other than a capital asset or Section 1231 property, the holding period begins on the date that the partnership interest is acquired.
60
Erica contributes cash to the XYZ partnership in exchange for a partnership interest. When does the holding period begin for Erica?
If a partner contributes only cash to the partnership in exchange for a partnership interest, the holding period begins on the date the interest is acquired.
61
Basis of Partnership Assets
IRC Section 723 provides a carryover basis rule for property contributed to the partnership.
Partners increase the basis of their partnership interests by their share of tax-exempt income because it ensures that the income will retain its tax-free character when the income is subsequently distributed in the form of cash or the partner’s interest in the partnership is sold or exchanged.
62
Financial Accounting Considerations
Under Generally Accepted Accounting Principles (GAAP), the carryover basis and nonrecognition rules used in taxation do not apply.
63
Organizational and Syndication Fees
partnership can deduct up to $5,000 of the costs of organizing the partnership in the year the partnership begins business, limited to the lesser of (1) the amount of organizational expenditures or (2) $5,000, reduced by the amount by which such organizational expenditures exceed $50,000.
Organizational expenditures: attorney's fees for drafting the partnership agreement, the accountant's fees for setting up the financial record system, and filing fees.
Syndication fees: need to capitalize but not amortize expenses to promote and market partnership interests (usually associated with tax-sheltered limited partnership interests). Examples of nondeductible syndication fees include brokerage and registration fees, legal fees of the underwriter and issuer, and printing costs associated with the prospectus and promotional materials.
64
Partnership Operations
Certain items like capital gains/losses, charitable contributions and Section 1231 gains/losses are segregated and passed through to partners since tax effects depend on partner's tax situation
Partnership ordinary income: gross profit, salaries, tax, bad debt/repair expenses, Section 1245 & 1250 depreciation recapture
65
Special allocations
permits partners some latitude to decide how income, deductions, losses, and credits are to be allocated among the individual partners, but also restrict the partners' freedom to shift tax benefits among individual partners
66
Partnership Allocations
All partners must determine their share of income, deductions, losses and credits if any partner's interest in partnership changes. Retroactive allocations may not be made to new partners admitted during tax year
67
Basis Adjustments for partnerships
Adjustments are made to original cost basis for ordinary income (or loss) and separately stated items that flow through to the shareholders, as well as additional capital contributions by shareholders and distributions to shareholders.
68
Loss limitations
deductibility of the losses to the partner's adjusted basis in his or her partnership interest as determined at the end of the partnership's tax year is limited and carries forward once basis is reduced to 0
69
Passive Activity Loss Limitation
partner may not deduct passive loss against earned or portfolio income, but may deduct the loss only against other passive income.
70
Transactions between Partner and Partnership
-Losses are not allowed on sales/exchanges between a partner and the partnership, or between two partnerships where the partner owns more than a 50% interest
-Gains are treated as ordinary income instead of capital gain if the partner owns more than s 50% interest in the partnership and if the exchanged asset is not a capital asset
71
Partnership Distributions
A distribution of cash or property from the partnership to a partner is generally treated as a tax-free return of capital:
-Liquidating distribution: The partnership may desire to liquidate a partner's entire interest due to retirement, death or other business reasons. In such cases, the liquidating distribution is treated as a sale or exchange of the partnership interest.
Non-liquidating distribution: Distribution may result in reduction of partner's capital interest in partnership. Does not result in a taxable gain/loss to partner unless the distribution includes cash/marketable securities in excess of partner's basis in the partnership interest
-
72
S Corporation requirements
- domestic corporation
- max of 100 shareholders
-only citizens/resident aliens, estates, certain trusts and certain tax-exempt organizations can be shareholders (cannot be C corporation)
- Only one class of stock may be issued and outstanding. Multiple classes may only be used if the only difference is voting rights
-cannot maintain special tax statuses
- if it has an 80%/+ owned subsidiary, it cannot file a consolidated tax return with that subsidiary as there are special rules for a QSSS (Qualified subchapter S Subsidiary)
73
S Corporation Election requirements
All shareholders on the S election date must consent and the corporation must file Form 2553. To be effective for the election year, the S election and consent form must be filed on or before the fifteenth day of the third month of the election year.
-IRS can waive the election deadline/grant relief for improper elections if reasonable cause/inadvertent
74
S Corporation Termination Rules
- for voluntary revocation, need consent from shareholders owning >50% of S Corporation's stock: revocation is effective for the entire year if made on or before the 15th day of the 3rd month of the tax year; otherwise, the termination is effective the 1st day of the next tax year unless a prospective termination date is specified.
- involuntary revocation if S Corporation fails to meet its qualifications or has excessive passive investment income (>25% of gross receipts) in a 3 year period
-may not re-elect S-Corporations status for 5 yrs
75
S Corporation operating rule with regards to spouses
- Husband and wife are treated as one shareholder, so problematic if there's a divorce or death and the stock is separated or goes to heirs who do not already own stock
76
Subsidiaries of S Corporations
If stock ownership of C Corporation exceeds 80%, S (parent) and C (Subsidiary) corporation are considered an affiliate group. May not file consolidated return.
-QSSS if S Coporation owns 100% of QSSS stock and all assets, liabilities, income, deductions, and credits of the QSSS are treated as those of the parent S corporation.
77
One class of stock for S Corporation
Safe harbor rule provides that straight debt shall not be treated as a second class of stock if interest rate isn't contingent on profits, debt cannot be convertible to stock and creditor must be either person eligible to be S corporation shareholder or person actively in business of lending.
Treasury: only one class of stock if all outstanding shares of stock confer identical rights to distribution and liquidation proceeds
78
S Corporation Operations
Income, gains, losses, deductions, and credits pass through to the S corporation's shareholders similar to partnership and allocated on a per-share per day basis:
-ST< CG/L
-Section 1231 G/L
-charitable contributions
-credits
-interest on investment indebtedness
-AMT adjustments and tax preference items
-foreign taxes paid/accrued
-dividends and other portfolio income
-organizational expenditures can be amortized over a period of at least 60 months under the general corporate taxation rule; however not entitled to other corporate deductions
79
Basis adjustments for S Corporations
basis for S corporation stock is either the amount paid for the stock or a substituted basis from a nontaxable transaction (e.g., a Sec. 351 tax-free corporate formation transaction). Adjustments are subsequently made for ordinary income (or loss) and separately stated items that flow through to the shareholders, as well as additional capital contributions by shareholders and distributions to shareholders.
80
Passive Activity Loss Limitation for S Corporations
passive losses can only offset other passive activity income. S corporation shareholders who materially participate (that is, participate on a regular, continuous and substantial basis) can avoid the passive activity loss limitations.
81
Losses and Limitations for S Corporations
ordinary loss and any separately stated loss and deduction items of an S corporation are allocated among the shareholders based on the number of shares of stock owned on each day of the S corporation's tax year.
82
Restoration of Basis for S Corporations
If shareholder's debt basis in a loan is reduced by a loss deductions, subsequent increases in basis from S Corporation income in a future year increases/restores the debt basis. Excess positive adjustment increases stock basis.
If the debt basis is not fully restored, gain results when loan is repaid: if in the form of a note, then results in a capital gain; if an unsecured advance, then income
83
Other S Corporation Considerations
- LIFO recapture: If a C corporation converts to an S corporation, and had used the LIFO (Last-in-first-out) method of accounting for its inventories while a C corporation, the firm must recapture the LIFO reserve. If the FIFO (First-in-first-out) method of accounting for inventory is higher (usually it would be), the firm must pay tax on this LIFO recapture (the entire reserve) in four annual installments (the first installment is due the last year as a C corporation, and the remaining three as an S corporation).
-Distributions of cash and property to shareholders treated a return of capital is S corporation has no accumulated earnings and profits. The S corporation recognizes gain (but not loss) if it distributes nonmoney property to its shareholders.
-Tax year restrictions,
Treatment of fringe benefits,
Corporate tax on built-in gains, and
Tax on excess net passive income.
84
Tax year restrictions
S corporations must use a calendar year unless a business purpose can be established for choosing a fiscal year-end. Like a partnership, an S corporation may elect a maximum three-month deferral if it agrees to make a special tax payment each year that approximates the deferral benefit.
85
Treatment of Fringe Benefits for S Corporation shareholders
S corporation shareholders who own >2% of the outstanding stock are not eligible for tax-free corporate employee fringe benefits for the following statutory fringe benefits since they are included in the gross income as a guaranteed payment:
The group term life insurance exclusion under Section 79 for premiums paid for a coverage of up to $50,000.
The exclusion from income for premiums paid for accident and health insurance and medical reimbursement plans under Section 105 and Section 106.
The exclusion for cafeteria plan benefits under Section 125.
Employer-provided fringe benefits under Section 132.
Meals and lodging furnished for the convenience of the employer under Section 119.
<2% excluded by shareholder and deductible by corporation
Fringe benefits not subject to a special treatment for >2% shareholder:
Stock options
Qualified fringe benefits
Nonqualified fringe benefits
Compensation for injuries and sickness
Educational assistance programs
Dependent care assistance programs
No additional-cost fringe benefits, qualified employee discounts, working condition fringe benefits, de minimis fringe benefits, and on-premises athletic facilities.
86
Corporate Tax on Built-In Gains
A 21% corporate tax on built-in gains applies if a corporation that previously was a C corporation elects to be an S corporation (if the FMV exceeds it adjusted basis on the first day s election is effective). If the corporation sells an asset with a built-in gain within the five-year period beginning on the effective date for the election, the S corporation is taxed on the built-in gain. Built in losses can be used to reduce built in gains
87
Tax on Excess Net Passive Income
A 21% excess net passive income tax applies when an S corporation has passive investment income for the tax year that exceeds 25% of its gross receipts and, at the close of the tax year, the S corporation has accumulated Subchapter C E&P. Subchapter C E&P is the earnings and profits the corporation earned when it was taxed as a C corporation.
88
Tax Planning Considerations
decision select business organization depends on tax and nontax issues, eg:
-non-tax: corporate may be preferred for limited liability, freedom to transfer ownership interests/ability to raise outside equity capital
-tax issues: partnership/S Corp may be preferred with double taxation. closely held C corporation, payment of compensation or rent by the corporation to the shareholders may reduce or eliminate the double taxation issue
89
Use of Operating Losses
May prefer partnership if expecting operating losses in the initial years of operation (no benefit for C Corporations if it can't generate enough profits to offset loss carryovers). S corporation's ability to pass through losses is limited to shareholder's basis in stock and any shareholder loans. S corporation liabilities such as loans to the corporation are not included in determining shareholder's loss limitation since shareholders are not liable for such loans.
Partnership may provide >opportunity to deduct losses than S Corporation
90
Optional Basis Adjustment
usually desirable for an incoming partner whose partnership interest costs more than the tax basis of his or her share of the partnership's assets- all partners must agree
91
What is the basis of each partnership interest adjusted to reflect
partner's share of income and deduction items.
92
Carl, partner with a $10,000 basis in the ABC Partnership, receives property having a FMV of $20,000 and a basis of $8,000 in a non-liquidating distribution. How much gain does Carl recognize?
0: A partner recognizes gain only when the amount of cash distributed exceeds the basis of the partnership interest.
93
Net Operating Losses (NOLs) generated in 2023 may be carried back ____ years and carried forward _______ years.
You cannot carry back your NOL, but you can carry it forward an indefinite number of years, and NOL can offset only up to 80 percent of your taxable income before your 20 percent Section 199A deduction
94
If a worker is hired for a job and the employer has the right to control or direct only the result of the work and not the means and methods of accomplishing the result, the worker is BEST categorized as a(n)
An independent contractor: If the person for whom the services are performed has the right to control or direct only the result of the work and not the means and methods of accomplishing the result.
95
A qualified personal service corporation (QPSC/accounting, law, health, architecture, and consulting) must use the _____ rate to calculate its tax liability.
21%
May use cash method of accounting, cannot elect alt tax year
96
If a tax-exempt organization has unrelated business taxable income (UBTI) exceeding ______ in 2023, it must pay income tax on that income.
$1,000
97
Each of the following facts provides evidence of the degree of control and independence of a hired worker EXCEPT:
Form of Compensation
Evidence of degree of control and independence fall under:
-Behavioral: Does the company have the right to control what the worker does and how the worker does his job?
-Financial: Are the business aspects of the worker’s job controlled by the payer?
-Type of Relationship: Are there written contracts or employee benefits? Will the relationship continue and is the work performed a key aspect of the business?
98
The accumulated earnings tax rate is ____ on excess accumulated earnings above a specified threshold.
The accumulated earnings tax rate is 20% on excess accumulated earnings above a specified threshold of $250,000 ($150,000 for a personal service corporation)
99
Under IRC Section 731 basis of a partnership interest
cannot be negative
100
Each of the following facts provides evidence of the degree of control and independence of a hired worker:
-Behavioral: Does the company have the right to control what the worker does and how the worker does his job?
-Financial: Are the business aspects of the worker’s job controlled by the payer?
-Type of Relationship: Are there written contracts or employee benefits? Will the relationship continue and is the work performed a key aspect of the business?
101
If a tax-exempt organization has unrelated business taxable income (UBTI) exceeding ______ in 2023, it must pay income tax on that income.
$1,000
102
Net Operating Losses (NOLs) generated in 2023 may be carried back ____ years and carried forward _______ years.
You cannot carry back your NOL, but you can carry it forward an indefinite number of years, and
Your NOL can offset only up to 80 percent of your taxable income before your 20 percent Section 199A deduction.
103
In the current year, B and C form BC Partnership. The partners will each own 50% of the partnership capital, profits, and losses. B contributes $140,000 and C contributes property with a FMV of $140,000 and an adjusted basis of $60,000. This year, the partnership generates $200,000 of taxable losses.
Calculate the losses that Partner C can take this year.
Losses are deductible for members of a partnership to the extent of their tax basis in the partnership. Partner B has a beginning basis of $140,000 and Partner C has a beginning basis of $60,000.
Since the capital, profits, and losses are split 50% / 50%, Partner B would be able to fully deduct the $100,000 of allocated losses while Partner C would only be able to deduct $60,000, with the additional $40,000 of loss suspended to a future year in which his basis becomes positive again.
At the end of the first year of operations, Partner B’s basis has been reduced to $40,000 and Partner C’s basis has been reduced to $0.
104
The accumulated earnings tax rate is ____ on excess accumulated earnings above a specified threshold.
The accumulated earnings tax is imposed on a corporation's accumulated taxable income for a particular year. The accumulated earnings tax rate is 20% on excess accumulated earnings above a specified threshold of $250,000 ($150,000 for a personal service corporation).
105
In a liquidation of an S Corporation, the event is taxable at
corporate level and taxable at the shareholder level through a passthrough of corporate tax items.
106
Dean Accounting did not want to be liable for each partners' conduct, so it converted to a different flow-through business entity. Identify the most suitable form of flow-through entity for Dean Accounting.
The Limited Liability Partnership (LLP) entity limits legal liability. Under state LLP laws, partners are liable for their own acts and the acts of individuals under their direction. LLP partners are not liable for the negligence or misconduct of other partners. This entity is attractive to professional service partnerships, such as public accounting firms.
107
In a liquidation of a C Corporation, the event is taxable to __
both the corporation and the shareholders.
108
Which of the following MUST have restrictions on participation in management within the tax entity?
S Corporation shareholders
General Partners in a partnership
Limited Partners in a partnership
Members of a Limited Liability Corporation
Limited Partners in a partnership:
Within a partnership, generally, there are no restrictions on management participation, except participation by limited partners must be restricted in order to preserve limited liability.
109
Each of the following permits the deduction of the tax entity’s losses to the extent of their tax bases, including their allocable share of debt for which they are liable, EXCEPT:
C Corporation shareholders may not deduct any of the corporation’s losses.
