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Taxation > Unit 9 > Flashcards

Unit 9 Flashcards

1
Q

What is the simplest business form

A

Sole proprietorship - no paperwork to start or dissolve

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2
Q

How does sole proprietorship report tax

A

Schedule C with Form 1040, it’s the business income statement.

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3
Q

What part of self employment tax do sole props. pay?

A

Sole proprietors pay self-employment tax, covering both employer’s and employee’s shares of Social Security and Medicare tax.

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4
Q

What is the default business type for someone starting a business w/o choosing an entity?

A

Sole prop.

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5
Q

What is a major disadvantage of sole proprietorship?

A

Unlimited liability for the owner. Personal and business assets at risk for owner’s or family’s wrongdoing.

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6
Q

How would you lower your liability as a sole proprietor?

A

Liability can be lessened with business liability insurance and personal liability protection.

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7
Q

A partnership is formed when?

A

Formed when two or more individuals do business together without choosing a formal business structure.

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8
Q

Qualifying non-recourse financing means

A

Qualifying non-recourse financing means debt issued by a bank, pension fund, or governmental agency.

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9
Q

Partnership special allocations

A

the partners can agree to split items of revenue and expense something other than pro rata ownership percentages.

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10
Q

What can a partner include in their basis?

A

Partnership debt can be included in partners basis, including recourse or qualifying non-recourse financing.

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11
Q

Special allocations allowed in partnership accounting, as long as

A

as long as substantial economic effect is maintained.

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12
Q

Partner’s basis benefits from partnership debt in what structure?

A

Partner’s basis benefits from partnership debt only in a partnership, not in an S-corporation.

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13
Q

Special Economic Effect in partnership

A

each partner’s capital account and tax basis must reflect these special allocations

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14
Q

How do partnerships compensate partners?

A

through guaranteed payments, not salaries

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15
Q

Partners pay self employment taxes on what income?

A

Guaranteed payments, not salary

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16
Q

General Partnership

A
  • Involves two or more partners.
  • All partners have unlimited liability for the business.
  • Each partner is personally liable for the actions of the other partners.
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17
Q

General Partnership partner liability

A

Each partner is personally liable for the actions of the other partners.

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18
Q

Partnerships file what form

A

All partnerships file IRS Form 1065

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19
Q

Individual partners receive what form?

A

K1 - detailing revenue and expense items for personal Form 1040 reporting

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20
Q

An LLC can choose to be taxed how?

A

sole proprietor (if single-member), partnership, or corporation.

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21
Q

What taxation method would an LLC typically choose due to favorable accounting features?

A

Partnership has favorable accounting features

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22
Q

LLC offers liability protection similar to what

A

similar to corporations

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23
Q

Are all laws the same regarding LLC taxation and liability protection?

A

No state laws vary

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24
Q

LLCs taxed as partnerships

A

Face similar tax issues as partnerships, including special allocations with substantial economic effect.

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25
Q

General partners in an LLC taxed as partnerships incur what

A

General partners Incur guaranteed payments AND self-employment taxes

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26
Q

How does recourse and nonrecourse debt work with an llc taxed as a partnership

A

Partners Benefit from recourse and qualifying non-recourse debt, enhancing basis in the entity for partners.

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27
Q

LLCs taxed as partnership use what forms

A

File IRS Form 1065, with individual members receiving Form K-1 detailing revenue and expense items for personal Form 1040 reporting.

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28
Q

C corps file what form

A

IRS Form 1120

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29
Q

C corp officers, shareholders and directors have liability limited to their what

A

limited to their investment in the corp

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30
Q

Dividend deduction for C corps

A

dividend deduction for dividends from investments in other corporations.

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31
Q

C corp Dividend taxation varies based on ownership stake

A

-Less than 20% ownership: 50% of dividends not taxed.
-20%-80% ownership: 65% of dividends not taxed.
-80% or more ownership: 100% of dividends not taxed, treating the investee as a wholly-owned subsidiary.

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32
Q

What is the biggest drawback of a C corp?

A

Double taxation: Dividends taxed at entity and individual levels, but recent rate reductions lessen this.

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33
Q

What is the most expensive business form?

A

C Corp is the most expensive business form, requiring extensive legal documentation.

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34
Q

What does S corp have in common with partnerships and LLCs?

A

Pass thru entities

35
Q

Shareholders, officers, and directors have what liability in an S corp

A

limited

36
Q

Do S corps have double taxation?

A

No - they are pass thrus

37
Q

S-corporations don’t have full tax-deductible benefits or dividend received deductions, what does?

A

C corp

38
Q

In an S corp, who has to vote to elect IRC subsection S treatment? (how many votes)

A

All shareholders (unanimous vote) must agree to elect for IRC subsection S treatment

39
Q

Who needs to vote for a dissolution of an S corp? (how many votes)

A

simple majority

40
Q

To qualify as an S Corp the business must meet the definition of a what?

A

To qualify as an S-corporation, the business must meet the definition of a small business corporation

41
Q

S Corp requirements

A

S-Corporation Requirements:

  • Must be a domestic corporation.
  • Shareholders must be U.S. citizens or resident aliens.
  • Limited to 100 shareholders.
  • Shareholders can be individuals, certain trusts, estates, and specific tax-exempt organizations.
  • Only allowed one class of stock, but different voting rights permitted.
42
Q

If an S corp has 100 shareholders and someone gets divorced what could happen

A

Some shares could go to the spouse so there would now be more than 100 shareholders

43
Q

How many classes of stock in an s corp?

A

Only allowed one class of stock, but different voting rights permitted.

44
Q

The 2004 Job Act Family Election:

A
  • Allows all family members to be treated as one shareholder.
  • Family members include a common ancestor, lineal descendants, and spouses or former spouses of lineal descendants.
  • The common ancestor must be within six generations of the youngest shareholder at the time of the election.
  • The common ancestor doesn’t need to be alive at the time of the election.
45
Q

S-Corporation Debt and Basis:

A
  • Debt in the S-corporation’s name doesn’t increase shareholders’ basis, unlike in partnerships.
  • Direct loans from shareholders to the corporation increase the lender’s basis.
  • Repayment of shareholder loans isn’t taxable but reduces the lender’s basis.
  • All S-corporations file IRS Form 1120S, with individual shareholders receiving Form K-1 detailing revenue and expense items for personal Form 1040 reporting.
46
Q

Does debt in S corp’s name increase shareholder basis?

A

Debt in the S-corporation’s name doesn’t increase shareholders’ basis, but it does in a partnership

47
Q

What form do S Corps file?

A

Form 1120S, with individual shareholders receiving Form K-1 detailing revenue and expense items for personal Form 1040 reporting.

48
Q

What happens with repayment of shareholder loans in an S corp? (taxability and basis)

A

repayment of shareholder loans isn’t taxable but reduces the lender’s basis.

49
Q

Trust Structure (3 parts)

A
  • Grantor: Creator of the trust.
  • Trustee: Holds title to trust assets.
  • Beneficiaries: Benefit from the trust.
50
Q

Association

A
  • Not a legal entity but a group of individuals joined for business or social purposes.
  • Formed by submitting Articles of Association at the state level.
51
Q

Is an association a legal entity?

A

Not a legal entity but a group of individuals joined for business or social purposes.

52
Q

Appreciated Securities Exchange (forming a business)

A
  • When an owner exchanges appreciated securities for ownership in a business, it’s treated as if the securities were sold.
  • Owner is taxed on the gain, calculated as the fair market value (FMV) minus the basis.
53
Q

Debt Relief Taxation (forming a business)

A
  • When an owner’s debt obligation is relieved by the new business entity, the entire debt amount becomes taxable income for the owner.
54
Q

Service Partner Compensation (forming a business)

A
  • When an owner receives an interest in a firm in exchange for services (e.g., building a database), the entire value of the services exchanged is taxed as ordinary income.
55
Q

S-Corporations, partnerships, and entities taxed as partnerships (LLCs, LLPs, FLPs) aren’t taxed at the entity level because why?

A

All income and expenses flow through to individual shareholders, partners, and members via Schedule K-1.

56
Q

Items that flow through from S corps, partnerships and entities taxed as partnerships (LLCs, LLPs, FLPSs) retain what re: their character?

A

Items retain their original character for reporting purposes (e.g., charitable contributions on Schedule A, dividends on Schedule B, capital gains on Schedule D, etc.).

57
Q

Entities taxed as partnerships

A

LLCs, LLPs, FLPs

58
Q

S corps file what vs Partnerships and entities taxed as partnerships file what

A

S-Corporations file Form 1120 S.

Partnerships and entities taxed as partnerships file Form 1065.

59
Q

Pass-through income or loss treatment depends on material participation standards meaning

A

If one of the 7 material participation standards is met, income is considered active and not subject to passive activity rules.

60
Q

If an S corp borrows funds in its name, what happens to shareholder basis?

A

If the S-Corporation borrows funds in its name, shareholder(s) basis remains unchanged.

61
Q

If a shareholder loans directly to the S corp, what happens?

A

it increases the SHAREHOLDER’s basis.

62
Q

Special Allocations in Partnerships

A
  • Permit partnerships to allocate income and expenses as desired.
  • Subject to substantial economic effect, ensuring proper accounting in partners’ capital accounts.
63
Q

Partnership borrowing does what re: partner basis?

A

Partnership borrowing (recourse or qualifying nonrecourse) increases partner basis.

64
Q

Retiring debt does what re: partner basis?

A

Retiring debt reduces partner basis.

65
Q

Partnership liabilities affect partner’s what

A

partner’s basis accounts

66
Q

In flow thru entities positive income does what re:basis?

A

increases basis for partners, members and shareholders

67
Q

losses and distributions does what in a flow thru entity?

A

reduces basis

68
Q

In a pass thru entity partnership and LLC debt at entity level does what re:basis

A

Partnership and LLC debt at entity level increases owners’ basis; repayment reduces basis.

69
Q

In S corps, direct shareholder loans do what and debt payment does what re: basis?

A

direct shareholder loans increase basis; debt payment reduces basis.

70
Q

Can an owner in a pass thru entity use pass thru losses once basis is reduced to zero?

A

At-risk rules prevent owners from using pass-through losses once basis is reduced to zero.

71
Q

S corp special taxes only apply when?

A

S corps that were once C corps - these taxes ARE paid at the entity level

72
Q

Built in gains tax occurs when a C corp does what

A

when a C Corporation with appreciated assets converts to an S Corporation.

73
Q

What is the tax when a C Corp with an appreciated asset converts to an S corp?

A

IRS imposes a 21% tax on gains from these assets for the first 5 years after the conversion

74
Q

What is the point of the built in gains tax?

A

Aimed at preventing tax avoidance by converting to S Corporation for more favorable capital gains rates.

75
Q

When does LIFO recapture occur?

A

when a C Corporation using LIFO method switches to S Corporation.

76
Q

LIFO Recapture

A
  • Occurs when a C Corporation using LIFO method switches to S Corporation.
  • In the last year as a C Corporation, the firm must recapture the LIFO reserve.
  • If FIFO inventory value is higher, the firm pays tax (21%) on this LIFO recapture in four annual installments.
  • First installment due in the last year as a C Corporation; remaining three years as an S Corporation.
77
Q

Excess Net Passive Income Tax:

A
  • Applies to S Corporations with Accumulated Earnings and Profits (AEP) from C Corporation years.
  • If passive investment income exceeds 25% of total receipts, a special tax of 21% (known as “sting tax”) is imposed.
  • Passive investment income includes rents, royalties, dividends, interest, annuities, and sales/exchanges of securities.
78
Q

Does a distribution always reduce an owners basis in an entity?

A

Yes

79
Q

Do you pay self employment tax on distributions from S Corps?

A

No

80
Q

When might an owner of a partnership or an entity taxed like a partnership such as an LLC owe self employment tax?

A

Owners of partnerships and entities taxed as partnerships, like LLCs, may owe self-employment taxes if classified as material participants.

81
Q

Passive activity in a business means what re: distributions, taxable or nontaxable as self employment income?

A

passive activity in the business means distributions aren’t taxable as self-employment income.

82
Q

S Corporations and Liquidating Gains

A
  • Gains recognized by the S Corporation from liquidating appreciated property are passed through to shareholders.
  • This increases their basis, reducing the taxable gain upon receipt of liquidating dividends in exchange for their stock.
83
Q

Partnerships and Entities Taxed as Partnerships

A
  • When a partnership is sold or liquidated, the difference between the sales price and partner’s basis is taxed as capital gain.
  • Hot assets like disproportionate unrealized receivables, appreciated inventory, and 1245 property subject to recapture are taxed to selling partner(s) as ordinary income.

Taxation (14 decks)

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