Topic 3 Multijurisdictional Tax Issues Flashcards
For the following non-tax characteristic of an entity, state whether it is required for each entity type: "Must formally organize with state" Corporation LLC General Partnership Limited Partnership Sole Proprietorship
Y - Corporation Y - LLC N - General Partnership Y - Limited Partnership N - Sole Proprietorship
For the following non-tax characteristic of an entity, list the responsible party for each entity type:
“Responsibility for liabilities of business”
Corporation
LLC
General Partnership
Limited Partnership
Sole Proprietorship
ENTITY - Corporation ENTITY - LLC GENERAL PARTNERS - General Partnership GENERAL PARTNERS - Limited Partnership OWNER - Sole Proprietorship
For the following non-tax characteristic of an entity, state the flexibility for each entity type: "Legal arrangement among owners" Corporation LLC General Partnership Limited Partnership Sole Proprietorship
NOT FLEXIBLE- Corporation FLEXIBLE- LLC FLEXIBLE - General Partnership FLEXIBLE - Limited Partnership N/A - Sole Proprietorship
For the following non-tax characteristic of an entity, state yes or no for each entity type: "Suitable for initial public offering" Corporation LLC General Partnership Limited Partnership Sole Proprietorship
Y - Corporation N - LLC N - General Partnership N - Limited Partnership N - Sole Proprietorship
What tax form is is used for each type of entity?.
C Corp
S Corp
Partnership
Sole Proprietor
C Corp - Form 1120
S Corp - Form 1120S
Partnership - Form 1165
Sole Proprietor - Form 1040, Sch C
What is the tax rate of a C Corp?
21% flat rate
The second level of tax on a C Corp depends on the shareholder type. Individual? C Corp?
Individual - dividends 0/15/20% depending on income level, and may 3.8% Net Investment Income Tax (NIIT)
C Corp - taxed at 21%, same as ordinary income, Dividends Received Deduction (DRD) reduced to 50/65/100% (double taxed!)
What is the Dividends Received Deduction (DRD)?
own less than 20% DRD = 50%
own 20%-80% DRD = 65%
own over 80% DRD = 100%
For each entity type, how are owners compensated? C Corp S Corp Partnership Sole Proprietor
C Corp - paid as wages; incentive to pay lower wages due to lower corporate rate
S Corp - paid as wages; incentive to pay lower wages with distributions not subject to payroll taxes; required to pay a reasonable compensation as defined in treasury regulations
Partnership - guaranteed payment; no issue-all subject to payroll taxes
Sole Proprietor - no compensation payment, but all subject to payroll tax through SE tax
Which entity can carry forward net operating losses indefinitely and limited to __% of taxable income before the NOL deduction?
C Corp
80% (cannot reduce taxable income to zero)
Which entity’s net operating losses have at risk/passive activity limitations?
Flow-Throughs
pass through to the partner/shareholder
Which entity is not allowed to deduct “excess business losses”? How to calculate excess business losses?
Individuals
Excess business losses = aggregate business deductions over aggregate gross income/gain + threshold amount
Threshold = $500k MFJ/$250 all other taxpayers
When is a company subject to state taxation?
commercial domicile or nexus
both, either/or
Where a business HQ and directs it operations is know as what?
Commercial Domicile
Sufficient/minimum connection between a business and state to require filing of a tax return
Nexus
What is Sales Tax Nexus?
- sale of tangible personal property
- possibly tax on installation or other ancillary services
What is the physical presence test for sales tax Nexus?
- salespeople enter the state to obtain sale
- tangible property located in state
What is the Supreme Court criteria for state taxation of income (Income Tax Nexus)?
- Sufficient connection or nexus exists between state and business;
- State may only tax a “fair portion” of income;
- Tax cannot be constructed to discriminate against non-resident businesses;
- Taxes paid must be fairly related to the service the state provides.
Physical Presence (does/does not) create _____ for service providers, sellers of real property, and businesses licensing intangibles for income based taxes and non-income based taxes.
does; nexus
Physical Presence (does/does not) create _____ for sellers of tangible personal property if their activities in the state are limited to “protected” activities as described by P_____ L__ __-___.
does not; nexus
Public Law 86-272
________ tax return states - only the businesses with income tax nexus in the state file a tax return
Separate
_______ tax return states - businesses must file one tax return with other businesses if considered “_______” group of entities
Unitary; unitary
What is the Supreme Court test to determine in unitary (mobil)?
- functional integration
- centralization of management
- economies of scale
Non-business income is (allocated/apportioned) to a specific state
allocated
Business income is (allocated/apportioned) among the states in which have nexus
apportioned
What are the factors to determine nexus for business income apportionment?
- sales factor
- payroll factor
- property factor
The tax rate on dividends to individual taxpayers depends on the individual’s taxable income. High-income taxpayers are taxed on dividends at a __% rate, low-income taxpayers are taxed at a __% rate, and others are taxed on dividends at a __% rate.
20%
0%
15%
Taxpayers with (modified) ___ in excess of a threshold amount pay an additional __% net investment income tax on dividends.
AGI
3.8%
Corporations that receive dividends are taxed at the ________ rate of __%.
ordinary
21%
Penisons (are/are not) subject to shareholder-level taxes on dividends.
are NOT
Losses from C corporations (are/are not) available to offset shareholders’ personal income.
are NOT
Which entity types can generally use either the cash or accrual method of accounting for tax purposes?
sole proprietorship
partnership
S corporation
NOT C corporation
Businesses must file income tax returns in states where they have ______ ___ _____.
income tax nexus
The determination of whether the business has established income tax nexus within a state depends on the _______ __ __ _________ in the state.
nature of its activities
The rules for determining income tax nexus (are/are not) the same as those for determining sales tax nexus.
are not
All state taxable income is taxed in the state of __________ _______ unless the business is taxable in more than one state.
commercial domicile
Commercial domicile is the state where a business is ____________ and _____ ___ __________; this location may be different from the _____ __ ____________
headquartered
directs its operations
place of incorporation
Business activities that create sales tax nexus include: (6 things)
- Having an office, store or other location in a state (even a home office)
- Having an employee, salesperson, contractor, etc. in a state
- Owning a warehouse or storage facility in a state
- Storing inventory in a state (such as in an Amazon FBA warehouses or other 3rd party fulfillment center)
- Having a 3rd party affiliate in a state
- Temporarily doing physical business in a state for a limited amount of time, such as at a trade show or craft fair
In Quill, the U.S. Supreme Court reaffirmed that out-of-state (nondomiciliary) businesses must have a ________ ________ in the state before the state may require a business to collect sales tax from in-state customers.
physical presence
