Essentials of Business Entity Taxation Flashcards
What is the cash method type of tax accounting?
A taxpayer generally reports income when any cash is collected (or constructive receipt) and reports expenses when any cash payment is made.
This method may be used by taxpayers whose annual average gross receipts do not exceed $27M for the three prior tax years.
What is the accrual method of tax accounting?
It requires recognition of income and expenses in the years earned or incurred regardless of whether or not cash exchanged hands. Simply, if the business has the right to that income, they can claim it. Same for expenses - the mere obligation to pay is enough to claim the deduction.
It is required for any business that maintains inventory with the exception being if that business has annual average gross receipts of $27M or less or is a service business.
What is the hybrid method of tax accounting?
A mix of cash and accrual. Example being a car dealer that may use accrual to report income for new car sales, but cash accounting for service related transactions involving car maintenance and service.
When is the FY established for a small business?
Upon the initial tax return for that business.
What is a net operating loss and what business entities can claim one?
This is a benefit for small business, self-employed individuals, regular corporations, and estate/trust entities which allows a business to write off losses from previous year(s) onto current tax year gains. The carry forward period is indefinite, but only up to 80% of a businesses income per year, can be written off by a NOL.
What are the pros and cons of a C-Corp?
Pros: growth opportunity through endless investors, business is separate entity,
Cons: double taxation (business and dividends)
What is a dividends received deduction?
A deduction from business income, the dividends it recieved from another related entity. The amount deducted is dependent on the percentage of ownership of the investing company. Under 20%, the business can deduct 50% of the dividends. Over 20% and the business can deduct 65% of the dividends.
What is the accumulated earnings tax?
It is a tax assessed when a small business accumulates more than $250k in retained earnings without an IRS-deemed “reasonable business need.” This forces a small business to hand out dividends.
What defines a personal service corporation (PSC)
A PSC is a regular or C corp operating in the fields of…
H-ealth
A-ccounting, architecture, and actuarial science
L-aw
E-ngineering & Consulting
AND
At least 95% of the stock, by value, must be owned by the employees performing the services.
How is a Personal Services Corporation (PSC) taxed?
A PSC is taxed at the entity level and at the 21% corporate rate.
What is 1244 stock?
If upon forming a C corp, total capital contributions do not exceed $1M, the stock issued is 1244. 1244 stock has favorable tax benefits, particularly with losses; $100k ordinary income for married, $50k for single. 1244 is still eligible for capital gains.
What is qualified small business stock (QSBS) or 1202?
1202 stock, if held for more than 5 years, can exclude 100% of the gains from the sale if purchased after Sept 2010.
What is the tax rate for a C corp with the TCJA 2018?
21%
What are the advantages and disadvantages to a sole proprietorship?
Advantages:
super simple to setup (no paperwork) or to cease.
Disadvantages:
The owner is personal liable for all debts and claims against the business
The business owner is limited in raising capital to personal and bank loans
The business will die with the owner
What are the tax characteristics of a general partnership?
Pass through. General partners have joint and several liability and income/losses are reported on the general partners individual tax filings.
Partners are self-employed and pay self-employment taxes
What is a limited liability partnership?
Similar to a general partnership except one partner is not liable for the acts of another partner.
What is an S Corp?
A type of regular corp which makes a special election to be taxed as a general partnership (flow through). All items of income and loss are reported based on the ownership percentage of each shareholder.
What is the percentage allowed to a non-corporate taxpayer, who has a qualified business income from a partnership, S corp, or sole proprietorship?
20%
What is built-in gains tax?
Tax from when the S corp disposes of an asset it held when it was a C corp. The tax applies to any unrealized gain attributable to the appreciation in the value of an asset while held by the C corp.
What is the QBI (pass-through business) deduction?
The TCJA provides an overall tax deduction on business income of 20% for all taxpayers other than C corp (21% tax rate). This means only 80% of business income is taxed.
Must be a Section 162 trade or business.
What makes up QBI?
QBI is defined as the net amount of income, gain, deduction, and loss.
Other deductions include 1/2 self employment tax, self-employment health insurance, the Keogh deduction.
What is the the basic rule for QBI deduction under the phaseout threshold?
The lesser of:
20% of the QBI
20% of the taxable income in excess of net capital gains
The Personal Holding Company (PHC) tax is only applicable to which corp?
C corp - in order to prevent closely held corporate owners from using the separate corporate entity as an investment shell
What is the self employment tax and what is it’s break-down?
- 4% for social security
- 9% for Medicare
Business pays half, but under self-employment, owner pays all, but can deduct half from tax liability.
