TAX: Taxation of Income from Business Entities

Question 1

What are the rules for a dividend to be “qualified”

Answer 1

To qualify for the lower rates, the dividends must be received from:

• A domestic corporation
• A foreign corporation (tradeable on US securities market)

Question 2

What is the holding period to qualify as a qualified dividend?

Answer 2

The holder has to hold the stock for 60 days

Question 3

For a corporation, how do you determine dividend income?

Answer 3

Dividend income to the extent of Earnings and Profits

Question 4

Once a shareholder has exhausted E&P in a distribution, what are the next layers?

Answer 4

Reduction in basis

Capital gain

Question 5

What are the difference between stock dividends on common stock and stock dividends on preferred stock?

Answer 5

Common Stock- Not taxable

Preferred Stock- Taxable

Question 6

How does a taxpayers basis in the stock change when they receive a stock dividend?

Answer 6

Spread the dividend to the shares

Question 7

If a stock dividend is not proportionate, what is the impact?

Answer 7

Taxable

Question 8

If the shareholder has the option to receive some cash, what is the impact?

Answer 8

Taxable

Question 9

Income from rent and royalties will be reported where?

If the taxpayer occupies a portion of the rental property?

Answer 9

Page 1 / Schedule E

Deduction expenses (utilities, taxes, mortgage interest etc) based off portion of the home

Question 10

Qualified Business Income (Important/New Topic), what is it? Where is it on the tax formula?

Answer 10

Individuals can deduce 20% of QBI that is received from partnerships, S Corporations, or Sole Proprietorships

It comes after AGI but separate from itemized deduction

Question 11

QBI is reduced by 50% of what three items?

Answer 11

1) Self-Employment Tax
2) Self-Employed health insurance deduction
3) Retirement plan contribution

Question 12

If a taxpayer has more than one QBI activity, how is that handled?

Answer 12

All of the deductions from the QBI deductions are added together. If there is a loss activity, which will create a negative QBI which will reduce the total deduction.

Question 13

The QBI deduction is the lower of:

Answer 13

1) The sum of the QBI from all activities or
2) 20% x the taxpayers modified taxable income (taxable income before QBI deduction)

Other limitations is limited to the greater of:

1) 50% of the w-2 wages related to the qualified trade or business
2) the sum of
a) 25% of the W-2 Wages related to the business
b) 2.5% of the unadjusted basis immediately after acquisition of all qualified property