Flow-Through Entity Taxation and Multi-jurisdictional Tax Issues

Question 1

T or F, foreign income taxes paid by a domestic corporation may be claimed as a deduction or a credit, at the option of the corporation.

Answer 1

T

Question 2

how are the following sourced:

sale of inventory
compensation for personal services

Answer 2

where title passes

where service is performed

Question 3

when is a foreign corporation considered a controlled foreign corporation (CFC)?

Answer 3

when more than 50% of its stock is owned by a US shareholder on any day of the year

Question 4

transfer pricing issues exist when a US-based TP shares costs, transfers, sells, purchases, leases, enters into a contract with an affiliate that either…

*hint: 2 things

Answer 4

is not subject to US income tax

OR

does not file a consolidated return with the US-based TP

Question 5

what factor allows a state to impose an income tax on net income of a company?

Answer 5

physical presence (Nexus) within the state

Question 6

which states can tax a company’s nonoperating income?

Answer 6

only the company’s home state

Question 7

what is the apportionment % based on?

Answer 7

property, payroll, and sales.

*remember that operating income is apportioned between states

Question 8

what is a controlled taxpayer?

Answer 8

any one of two or more taxpayers owned or controlled directly or INDIRECTLY by the same interest

Question 9

if there is a mid-year change of ownership in an S corp, how is income allocated between the shareholders?

Answer 9

on a per share, per day basis

Question 10

T or F, the value of fringe benefits such as health insurance is includable in the gross income of S corp. shareholders who own more than 2% of the S corp’s stock (unless the S corp does not deduct the cost of such benefits).

Answer 10

T

Question 11

when is an S corp subject to the “built-in gains” tax?

Answer 11

only when the S corp was previously a C corp

FMV at election - adj basis at election = built-in gain when asset is sold

Question 12

can an S corp be a shareholder in a C corp?

Answer 12

yes, but a C corp cannot be a shareholder in an S corp

Question 13

is Section 179 expense a separately stated or non-separately stated item? How about interest income and LT capital G/L?

Answer 13

separately stated (aka not included in the calculation of ordinary income)

Question 14

what is the tax rate for the built-in gains tax?

Answer 14

21%

Question 15

do capital contributions by shareholders increase the accumulated adjustments account (AAA)?

Answer 15

NO

Question 16

what would cause an S corp to be terminated?

Answer 16

passive investment income greater than 25% of gross receipts for 3 consecutive years

Question 17

does a guarantee of corporate debt create a debt basis?

Answer 17

NO, only direct loans to the corporation create debt basis

Question 18

when would a partnership actually be terminated for income tax purposes?

Answer 18

when the partnership’s business and financial operations are discontinued and/or only one partner remains

Question 19

can a partnership elect to have a tax year other than the generally required tax year?

Answer 19

yes, but only if the deferral period for the tax year elected does not exceed 3 MONTHS

Question 20

if an LLC does not elect to be treated as a corporation, how will it be treated for tax purposes?

Answer 20

a partnership

Question 21

the base erosion and anti-abuse tax (BEAT) may apply to corporations with…

Answer 21

avg annual gross receipts of 500 million or more for the 3 preceding tax years

Question 22

what type of situation increases a corp’s foreign-derived intangible income?

Answer 22

sales to non-US persons of property for use outside the US

Question 23

income that is considered fixed, determinable, annual, or period (FDAP) is subject to what?

Answer 23

US withholding tax requirements

Question 24

who/what is a 100% DRD for foreign source dividends available to?

Answer 24

only to corporate shareholders who own at least 10% of the foreign corp

Question 25

when will a foreign person be treated as a US resident?

Answer 25

if present in US for at least 31 days in current year and at least 183 days for a 3 year period

*current year days + (immediate preceding year days x 1/3) + (second preceding year days x 1/6)

Question 26

income earned by a US branch of a foreign corporation must file which form?

Answer 26

Form 1120F

Question 27

how are LLCs taxed?

Answer 27

as a partnership, corp, or sole proprietorship

*two or more owners = partnership is the default, corp status can be elected

Question 28

which elections are made by the partnership rather than an individual partner?

Answer 28

method of accounting, method of depreciation and Section 179

Question 29

what is a single member LLC considered?

Answer 29

a disregarded entity and taxed as a sole proprietorship (income and deductions reported on schedule C of form 1040)

*unless owner elects corp status