Exam Cheat Sheet Flashcards
What constitutes as “Qualified Business Income” (QBI)?
QBI is defined as the ordinary income less ordinary deductions a taxpayer earns from a “qualified trade or business” conducted in the United States by the taxpayer.
What is a “Qualified Trade or Business”?
Includes any trade or business other than providing services as an employee.
How is a QBI Deduction (generally) claimed?
In general, the deduction for qualified business income is the lesser of:
• 20% of qualified business income (QBI), or
• 20% of modified taxable income.
What is the “Corporate Tax Rate”?
21%
————————– BACKGROUND ——————————–
Ted, a married sole proprietor, has $210,000 of qualified business income and a modified taxable income of $250,000.
- ————————- QUESTION ——————————–
(1) What is his QBI deduction?
(2) What is his final taxable income?
QBI deduction is the lesser of:
[A] 20% of qualified business income = $210,000 x 20% = $42,000
AND
[B] 20% of modified taxable income = $250,000 x 20% = $50,000
——————————— THEREFORE——————————
(1) QBI Deduction is $42,000
————————– Final Taxable Income————————–(2) Final taxable income is:
• $250,000 modified taxable income - $42,000 QBI deduction = $208,000
————————– BACKGROUND ——————————–
(A) Higgins, a married sole proprietor, has one employee, who he paid $160,000 this year, and the business has no significant qualified property.
(B) Qualified business income of $500,000
(C) Modified taxable income of $600,000.
- ————————- QUESTION ——————————–
(1) What is his QBI deduction?
(2) What is his taxable income?
QBI deduction is the lesser of:
[A] 20% of qualified business income = $500,000 x 20% = $100,000
[B] 50% of W2 Wages = 50% of $160,000 = $80,000
AND CANNOT EXCEED:
[C] 20% of modified taxable income = $600,000 x 20% = $120,000
——————————— THEREFORE—————————-
(1) QBI Deduction is $80,000
————————– Final Taxable Income————————–(2) Final taxable income is:
• $600,000 modified taxable income - $80,000 QBI deduction = $520,000
————————– BACKGROUND ——————————–
Rupert, a married sole proprietor:
(A) Qualified Business Income of $400,000;
(B) Modified Taxable Income of $500,000;
(C) W-2 wages = $150,000;
(D) Property worth $600k (land value is $100k)
- ————————- QUESTION ——————————–
(1) What is his QBI deduction?
(2) What is his taxable income?
QBI deduction is the lesser of:
[A] 20% of qualified business income = $500,000 x 20% = $100,000
VS. The GREATER OF:
[B] 50% of W2 Wages = 50% of $150,000 = $75,000
[C] 25% of W2 Wages + 2.5% of Depreciable Property
= 25% of $150,000 + 2.5% of $500k = $50,000
AND CANNOT EXCEED:
[D] 20% of modified taxable income = $500,000 x 20% = $100,000
——————————— THEREFORE—————————-
(1) QBI Deduction is $75,000
————————– Final Taxable Income————————–(2) Final taxable income is:
• $500,000 modified taxable income - $75,000 QBI deduction = $475,000
Who can be partners in a partnership?
A “person” can be: • Individual. • Trust. • Estate. • Corporation. • Association. • Another partnership.
- —————-Partnerships vs. C corporations————
(1) How are partnership income taxed?
(2) How are C Corp’s income taxed?
(1) Partnership: No separate entity-level income; Income flows through to partners.
(2) C Corp: Corporate income tax applies.
- —————-Partnerships vs. C corporations————
(1) How are partnership distributions taxed?
(2) How are C Corp’s distributions taxed?
(1) Partnership:
Distributions generally not subject to a separate tax
(2) C Corp:
Distributions generally taxed as dividend income
- —————-Partnerships vs. C corporations————
(1) Describe partnership employment taxes
(2) Describe C Corp employment taxes
(1) Partnership:
Some allocations are subject to employment tax
(2) C Corp:
Compensation to employees always subject to payroll tax
- —————-Partnerships vs. C corporations————
(1) What is partnership liability like?
(2) What is C Corp liability like?
(1) Partnership:
Shareholder liability depends on type of partner but can be unlimited.
(2) C Corp:
Shareholder liability is limited.
- —————-Partnerships vs. C corporations————
(1) What is partnership formation like?
(2) What is C Corp formation like?
(1) Partnership:
Partnerships are easier and less expensive to form. Partners register the business with the state and obtain any required business licenses and permits.
(2) C Corp:
It’s more complicated and expensive to form a corporation. You’ll have many complex legal and tax requirements, as well as many administrative fees. You’ll file an Articles of Incorporation to form a corporation. You must also obtain the necessary licenses and permits. In most cases, corporation founders hire lawyers to help with the process due to the complexity.
- —————-Partnerships vs. C corporations————
(1) What is the partnership entity return form?
(2) What is the corporate return form?
(1) Partnership:
Form 1065
(2) C Corp:
Form 1120
- —————-Partnerships vs. C corporations————
(1) How do partnerships raise capital?
(2) How do c corps raise capital?
(1) Partnership:
Partner’s bringing in own money or collectively acquiring a loan.
(2) C Corp:
Equity capital may be raised by selling stock to investors
———————–Forming a Partnership———————
When a partner contributes capital or property, how is a gain or less recognized?
[1] As a general rule, NO GAIN OR LOSS IS RECOGNIZED by a partner or partnership on the contribution of money or property.
[2] Gain (loss) DEFERRED UNTIL TAXABLE DISPOSITION of property by the partnership or partnership interest by the partner.
When a partner contributes capital or property, what is the partnerships basis in the property?
The partnership takes a carryover basis in the contributed assets it receives (i.e., the partner’s basis in the asset carries over to become the partnership’s inside basis in the asset).
When a partner contributes capital or property, what is the partner’s basis in the property?
The partner takes a substituted basis in the partnership interest (i.e., the partner’s basis in the contributed assets transfers over to become the partner’s outside basis in the partnership interest).
When a partner contributes capital or property, what is the partnership’s holding period for the assets?
The partnership’s holding period for the contributed assets includes the period during which the partner owned the assets.
————————– BACKGROUND ——————————–
Roy transfers a capital asset with:
[A] Adjusted basis of $10,000;
[B] Fair Market Value of $30,000.
For a 33% interest in a partnership.
————————– QUESTION ——————————–
[1] What is Roy’s realized and recognized gain
in the transaction?
[2]What is Roy’s outside basis in the partnership?
[3] What is the partnership’s inside basis in the capital asset?
[1a] Realized Gain = $20k (via pre-contribution gain)
[1b] Recognized Gain = $0
[2] Outside Basis Gain = Substituted Basis = $10k
[3] Partnership Basis = Carryover Basis = $10k
————————– BACKGROUND ——————————–
Keeley:
[A] 40% partner
When forming the partnership, contributed land with:
[B] Fair Market Value of $800,000;
[C] Basis of $600,000
[D] Partnership then sells the property for $1,100,000.
————————– QUESTION ——————————–
[1] What is the pre-contribution gain or loss to Keeley?
[2] How much gain or loss does she recognize when West Ham sells the property?
[1] Precontribution gain is $800,000 fair market value - $600,000 basis = $200,000
[2] Keeley’s gain is $200,000 precontribution gain + $120,000 ($300,000 appreciation of land when owned by West Ham x 40% partnership interest) = $320,000
———————Economic Effect Test————————
Why was it put into place?
The economic effect test was put in place to ensure that allocations do not result in undue tax revenue losses to the Treasury.
———————Economic Effect Test————————
What are the three (3) general requirements?
(1) Capital accounts must reflect contributions and distributions at their fair market values.
(2) When a partnership interest is liquidated, a partner with a positive capital account must receive assets with a fair market value equal to the positive balance.
(3) When a partnership interest is liquidated, a partner with a negative capital account must restore that account upon liquidation, generally by contributing cash.
———————– PARTNERSHIP—————————–
How do you calculate inside basis?
The partner’s basis in the asset carries over to become the partnership’s inside basis in the asset
