Taxation of Income from Business Entities

Question 1

Dividends: What is the tax treatment for TPs in the 10-15% bracket? Higher bracket?

Answer 1

10-15: Not taxed.
Higher: Taxed at 15 or 20%. The 3.8% net investment income tax could also apply (above $200,000 for individuals, $250,000 for married jointly).

Question 2

What is the criteria for dividends to qualify for the lower rate?

Answer 2

• They must be received from a domestic corporation or a foreign corporation whose stock is tradable on an established US securities market.
• Shareholders must own the stock for a reasonable amount of time (60days before and after the dividend date).

Question 3

If dividends don’t qualify for the lower rate, how is it taxed?

Answer 3

As ordinary income as high as 39%.

Question 4

What are 3 steps of dividends being taxed?

Answer 4

1. Classified as dividend income to the extent of TP’s E and P (earnings and profits).
2. Reduction of basis in stock when E and P is reduced to 0 (not taxed, but has tax implication).
3. If any remaining, it will be a capital gain.

Question 5

Dividends taxed ex: How much income does the TP have?

Distribution: $10,000. E and P: $4,000. Stock basis: $5,000.

Answer 5

10,000 - 4,000 (taxed as dividend income) = 6,000.
6,000 - 5,000 (now the basis is reduced to 0 by applying this here) = 1,000 = Capital gain (LT or ST depends on how long the stock was owned).

Question 6

Are stock dividends to common stock holders taxable? When preferred stocks are given to those holders?

Answer 6

No.

No.

Question 7

Are stock dividends to preferred stock holders taxable? When common stocks are given to those holders?

Answer 7

Yes.

Yes.

Question 8

Stock dividend: How is the TP’s basis in the stock determined after stock dividend is given?

Answer 8

Spread over all shares owned.

The total basis will be the same, but the basis per share will be reduced.

Question 9

Dividend income: what are 2 cases STOCK dividend is taxable? When taxed, what amount is used?

Answer 9

1. If the dividend is not proportionate (not everyone received the same %).
2. Taxable for everyone If one shareholder has the option of receiving some in cash even if he declines.
   Taxed at FMV.

Question 10

Rents and royalties: Are there any deductions?

Answer 10

Yes. Depreciation, taxes, insurance, and other ordinary and necessary expenses.

Question 11

Rents and royalties deductions: what to do when the TP also occupies the rental?

Answer 11

Only % of rental to other people can be deducted.

Question 12

Rents and royalties deductions: what happens to the portion of expenses that are due to TP’s personal use? Where would it be reported?

Answer 12

Not deductible as rental expenses, but may qualify as itemized deductions.
Reported on Schedule E, page 1.

Question 13

Where does a partner’s share of income from a partnership is reported on? What about the partner’s share of ordinary income? Who reports that?

Answer 13

Form K-1.

Reported by the partner on Schedule E, page 2 of Form 1040.

Question 14

Partnership/LLC: does the character of income such as ordinary, capital, deductions, credits change when they flow through to the partner (owner)?

Answer 14

No, stay the same.

Question 15

Where does a shareholder’s share of income from S corporation is reported on? What about t of his ordinary income? Who reports that? What about the characters of items?

Answer 15

All same as partnership.

Question 16

Sole Proprietorship: What are 2 major types of business income?

Answer 16

1. Gross profit (gross sales receipts - COGS).

2. Professional fees such as a CPA or an attorney performing professional services.

Question 17

What’s the classification of board of directors’ fees? Where is it reported on?

Answer 17

Self-employment income (reported on Schedule C).

Question 18

What reduces business income? Where is business income reported on?

Answer 18

Business expenses and expenses for business use of home.
Schedule C (Form 1040).

Question 19

Which form is Farming income reported on?

Answer 19

Schedule F and Schedule SE. Generally rule are the same.

Question 20

Farming tax rules: What is the classification for all harvested products held for resale, feed, or seed? How does this classification impact the expense?

Answer 20

Inventory.

The timing of reporting as expense on Schedule F is impacted.

Question 21

Farming tax rules: Classification of livestock held for resale? For breeding or dairy?

Answer 21

Inventory.
Business assets (Sec. 1231 assets - can be depreciated).

Question 22

Farming tax rules: how is the cost computed?

Answer 22

Unit-livestock-price method (animals are grouped based on type and/or age).

Question 23

Farming tax rules: Classification for growing crops?

Answer 23

Not included in inventory.

Question 24

Farming tax rules: what’s an option to report tax?

Answer 24

A TP can elect to determine current year tax liability by averaging, over the previous 3 years, all or part current year income.

Question 25

Farming tax rules: When is income from the sale of a crop normally reported? Exception?

Answer 25

In the year of sale.

Exception if insurance proceeds received as a result of the destruction or damage to crops.

Question 26

Farming tax rules: what is the depreciation method and useful life for personal property (anything not realty)?

Answer 26

MACRS 150% declining balance method.

5 years.

Question 27

Farming tax rules: when can cash-basis farmers generally deduct prepaid feed costs? Criteria? Exception?

Answer 27

In the year of pmt if the deduction does not materially distort income.

No deduction is allowed (when paid) for advance pmts for feed, seed, fertilizer, or other supplies to the extent such pmts exceed 50% (distorts income) of total deductible farming expenses (excluding prepaid items). Can be deducted as used.

Question 28

What is Schedule C for?

Answer 28

Sole proprietorship.

Question 29

What is Schedule E for?

Answer 29

Income from rentals and loyalties - Part I.
Income from partnerships and S corporations - Part II.
Income from estate and trust - Part III.

Question 30

What is Schedule F for?

Answer 30

Income from farming operation.

Question 31

What is Schedule K-1 (Form 1065) for?

Answer 31

Partner’s share of income, deductions, credits - this info will transfer to Form 1040, Schedule E of page 2.

Question 32

What is Schedule K-1 (Form 1120S) for?

Answer 32

Shareholder’s share of income, deductions, credits.

Question 33

Form 1099 Div for?

Answer 33

Dividends and distributions.

Question 34

Form 1040A Schedule B for?

Answer 34

Interest and ordinary dividends

Question 35

When corporate dividend is mailed, when should it be reported; time of pmt or time of receipt?

Answer 35

Time of receipt.

Question 36

Net investment income tax: what are investment income?

Answer 36

Taxable interest income, dividends, annuities, certain loyalties, rents.

Question 37

Net investment income tax: how to determine?

Answer 37

3. 8% of the lesser of;
   * Individual’s net investment income or
   * the excess of AGI over the threshold amount ($250,000 married jointly, $200,000 individuals).

Question 38

Interest from federal refund: where must it be reported?

Answer 38

Schedule B - Interest and Dividend income.