Taxation of Income from Business Entities Flashcards
Dividends on Stock
Generally, distributions of cash or property to shareholders is taxed as dividend income if the distribution is made from the corporation’s retained earnings (called earnings and profits (E&P) for tax purposes)
Dividends received by a TP are taxed in the following order:
- Div Income to extent of earnings & profits
- Reduction of basis in stock
- Capital gain
What is the difference between common vs preferred stock dividends
Stock dividends on common stock are not taxable, preferred stocks are taxable
Qualified Business Income Deduction applies to
Ex. Manufacturing
A qualified trade or business for the QBI deduction does not include specified service trades or businesses. These are defined as performance in the services of health, law, accounting, actuarial sciences, performing arts, consulting, athletics, financial services, brokerage services, or any business where the principal asset is the reputation of an employee or owner.
The QBI deduction is computed separately for each trade or business and is 20% of the qualified business income
The QBI deduction cannot exceed the greater of:
50% of the taxpayer’s share of the W-2 wages paid by the business, or
25% of the taxpayer’s share of the W-2 wages paid by the business, plus 2.5% of the unadjusted basis of qualified property.
What amount of preferred stock is included in income?
The amount to be included in the shareholder’s income is the stock’s fair market value on date of distribution. Similarly, the shareholder’s basis for the dividend shares will be equal to their fair market value on date of distribution (10 × $60 = $600).
When does the holding period for preferred stock start?
Since the tax basis of the preferred stock is determined in part by the basis of the common stock, the holding period of the preferred stock includes the holding period of the common stock (i.e., the holding period of the common stock tacks on to the preferred stock).
On July 1, Year 3, Lila Perl paid $90,000 for 450 shares of Janis Corp. common stock. Lila received a nontaxable stock dividend of 50 new common shares in August, Year 9. On December 20, Year 9, Lila sold the 50 new shares for $11,000. How much should Lila report in her Year 9 return as long-term capital gain?
After the stock dividend, the basis of each share would be determined as follows:
$90,000 / 450 + 50 = $180 per share
Since the holding period of the new shares includes the holding period of the old shares, the sale of the 50 new shares for $11,000 results in a LTCG of $2,000 [$11,000 − (50 shares × $180)].
