Taxes & Tax Shelters - Tax Advantaged Investments

Question 1

A corporation is a _____ entity

Answer 1

taxable

Question 2

A partnership is _____ a taxable entity

Answer 2

not

Question 3

Tax losses from a partnership can be used to offset other _____ income

Answer 3

passive; although cannot offset earned income or portfolio income

Question 4

A certificate of limited partnership includes:

Answer 4

• partnership name, type of business, and mailing address
• life of partnership
• each partner’s name, address, and % ownership
• when the partnership is to be terminated, the priority of distributions

Question 5

LP certificates are typically amended ______

Answer 5

annually

Question 6

Rights of the general partner include:

Answer 6

• right to charge a management fee and make all business decisions
• power to bind the partnership into contracts
• decide which LPs are allowed in
• whether cash distributions will be made to the partners
• approve transfers of interest between LPs
• entitled to a yearly share of partnership income and loss, as well as share of net partnership assets upon dissolution

Question 7

Obligations of the gp are:

Answer 7

• fiduciary responsibility
• cannot compete with the partnership
• must have at least a 1% interest in gain or loss
• if he dies and there are other GPs, then must form a new LP
• cannot consent to a judgement against the LP without the other LPs approval

Question 8

Rights of the LP:

Answer 8

• right to inspect the books and records
• right to yearly pro-rata share of income and loss, as well as net assets on dissolution
• can sue GP for damages if GP does not abide by agreement
• vote on admission of new GP or on sale of partnership assets “partnership democracy”

Question 9

Obligations of the LP:

Answer 9

• pay in initial capital contribution
• is liable for any “recourse” notes
• pay any additional assessments as determined by the GP

Question 10

Usual priority of how net assets will be distributed on dissolution is:

Answer 10

• secured creditors
• general creditors
• limited partners
• general partners

Question 11

The 2 corporate characteristics that are not considered when evaluating tax status are:

Answer 11

• business intent

- association of owners

Question 12

4 corporate characteristics are (and must have 3 of the four to qualify as a corporation):

Answer 12

• continuity of life (corps have indefinite life)
• free transferability of shares (shares must be negotiable)
• limited liability (corp liability is limited to loss of their investment)
• centralization of management

Question 13

GPs file a _____ tax return and attaches ____ for each LP

Answer 13

files an “informational” tax return (form 1065) and then attaches K-1s for each LP

Question 14

An LP establishes a basis when they make a _____ to the partnership

Answer 14

contribution

Question 15

Contributions that establish a basis for an LP are:

Answer 15

• cash
• property
• assuming recourse debt for all partnerships
• assuming non-recourse debt for real estate partnerships ONLY

Question 16

To adjust an LPs basis at year-end, you add:

Answer 16

• additional contributions of cash/property
• additional recourse debt
• additional non-recourse debt for real estate partnerships ONLY
• the distributive share of net income allocated to you

Question 17

To adjust an LP basis at year-end, you deduct:

Answer 17

• distributions of cash or property
• repayment of recourse debt
• repayment of non-recourse debt for real estate ONLY
• distributive share of net losses allocated to you

Question 18

If an investor sells his tax shelter unit but the basis is 0 and he has unused losses, the losses are _____ to the basis (effectively increasing the loss on sale)

Answer 18

added to the basis

Question 19

Phantom income is when ____

Answer 19

an LP abandons a tax shelter unit but a lender (to whom they owed some amount of money) sells a secured asset and forgives the rest of the loan. The amount forgiven is considered income and the LP will get a tax bill (even after they are gone)

Question 20

“Recapture” is when you give back up tax breaks you got on an asset when you ____ that asset

Answer 20

sell that asset

Question 21

Costs that are immediately deductible are:

Answer 21

• ordinary and necessary business expenses
• interest expense on loans
• salaries and wages
• taxes paid
• intangible drilling costs (IDCs) in oil exploration programs
• management fees

Question 22

Costs recovered over a period of years are:

Answer 22

• purchases of equipment
• depreciation on an accelerated basis
• purchase of real estate “real property” (straight line basis)
• all construction related costs for a real estate project (including interest on construction loans)- then straight line for 27.5 years
• mineral rights costs by depleting the mine or well
• prepayment of insurance, rent, interest, etc.
• partnership organization fees amortized over 5 years

Question 23

Costs that cannot be recovered are:

Answer 23

• land purchases are held at cost and cannot be depreciated

- syndication costs (fees to the underwriter to sell the LP units)

Question 24

Tax credits are available for _____ of existing low income housing and _____

Answer 24

rehabilitation of low income housing (4%) and certified historic structures (20%)

Question 25

The major benefits of real estate programs are:

Answer 25

• straight line 27.5 year depreciation of the property
• non-recourse loans is included in the basis
• interest on the mortgage is deductible in full
• tax credits are available for low income and historic rehab projects

Question 26

Construction costs have to be capitalized and then cannot be recovered until the building is ______

Answer 26

ready for occupancy

Question 27

Raw land programs _____

Answer 27

buy land as an investment and hope to realize future gains on sale (often cash flow negative since you have to pay interest and property taxes while you hold it)

Question 28

Percentage depletion for oil wells is an extra tax incentive where depletion is set an an arbitraty % (15%) and for each barrel of oil sold you get a depletion allowance =

Answer 28

15% x price per barrel

Question 29

Three types of oil and gas direct participation programs are:

Answer 29

• exploratory
• developmental
• income

Question 30

The types of carried interest in oil & gas direct participation programs are:

Answer 30

• overriding royalty interest (% of revenue from each barrel sold)
• subordinated royalty interest (GP doesn’t get anything until all LP costs are recovered)
• net profits interest (GP gets % of net profits)
• working interest (GP takes on some of the costs and gets bigger share of the pie in return)

Question 31

Two types of working interest for O&G:

Answer 31

• disproportionate sharing arrangement (GP takes on a little cost for much more gain)
• functional allocation (GP takes on costs that cannot be immediately deducted - gives LPs biggest first year deduction)

Question 32

Taxpayers must compute the AMT (alternative minimum tax) and whichever is _______ he pays

Answer 32

whichever is greater

Question 33

The AMT is ____ on first ____, then _____

Answer 33

26% on first $175,000, then 28% on the rest

Question 34

The main “tax preference” items to reduce regular tax liability are:

Answer 34

• accelerated depreciation amounts in excess of straight line
• excess intangible drilling cost deductions
• excess percentage depletion deductions
• municipal interest income from bonds that are “qualified private activity” bonds and limited dollar amounts of “non-essential use, private activity” bonds

Question 35

Typical conflicts of interest for LPs are:

Answer 35

• GP is permitted to take loans from the partnership
• GP is allowed to commingle funds of one partnership with another he is running
• adjacent leases in O&G programs

Question 36

Subscription agreements for LPs will include:

Answer 36

• investor name and address
• investor net worth and annual income
• investor tax bracket
• ability of investor to commit funds for long periods
• ability of investor to commit funds if assessed by the GP

Question 37

Tax sheltered investments do not typically qualify for _______ provisions

Answer 37

safe harbor

Question 38

LPs are ______ offerings and spread is generally capped at ____

Answer 38

prospectus offerings and generally capped at 10%

Question 39

“Managed” offerings use a ______ to offer the LP to the public, “non-managed” use a ______

Answer 39

managed use an underwriter, non-managed use a wholesaler

Question 40

Master LPs are ______ and trade on the _____

Answer 40

are negotiable and trade on the exchanges