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partnership taxation Flashcards

1
Q

What is the basic calculation for basis in property?

A

Cost of property + Purchase expenses + Debt assumed + Back taxes and interest paid = Basis. Note: taxes and interest related to time when a taxpayer did not own the property are not deductible - they are added to basis.

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2
Q

What is the recipient or donee’s basis on gifted property?

A

Sold at a gain: use donor’s basis

Sold at a loss: use lesser of donor’s basis or FMV at time of distribution

Sold in between donor’s basis and FMV: No gain or loss

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3
Q

What is the basis and holding period of inherited property?

A

FMV at date of death or alternate valuation date (6 months later)

If alternate date is elected by property is sold before 6 month window; use FMV at date of death.

Property inherited is LTCG property regardless of how long it is held by the recipient.

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4
Q

What is the holding period on a stock dividend?

A

Holding period of new stock received from a dividend takes on the holding period of the original stock

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5
Q

What property is eligible for like-kind exchange treatment?

A

Real for real or personal for personal business property only

US property only

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6
Q

What is BOOT in a like-kind exchange?

A

Cash received + unlike property received + liability passed to other party

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7
Q

In a like-kind exchange; how is it handled if a netting of mortgages results in net boot paid?

A

DO NOT subtract the boot paid amount from the cash received

Ignore the boot paid amount from the mortgage completely

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8
Q

What is an involuntary conversion? When does it not result in a gain?

A

Occurs when you receive money for a property involuntarily converted

There is no gain if you reinvest the proceeds completely

If proceeds not completely reinvested; gain is LESSER of realized gain or amount not reinvested.

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9
Q

What are the requirements for exclusion of gain on a primary residence? How are losses treated?

A

Must live there 2 out of 5 years

Loss on sale of home is NOT deductible

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10
Q

What is a wash sale?

A

30 Day rule applies

Disallowed loss adds to basis of new stock

New stock takes on date of acquisition of old stock

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11
Q

Who is considered a related party in a property transaction? How does it affect the transaction?

A

Ancestors; siblings; spouse; descendants; corporation or partnership where you’re a 50% shareholder

Seller cannot take a loss on sale to a related party; but gain is always recognized.

Related party gets to use the disallowed loss when they sell.

Related party’s holding period begins when they acquire the property.

In-laws are NOT related parties.

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12
Q

How are capital losses taken in a corporation?

A

capital losses only offset capital gains

Carryback 3 years - if you elect NOT to carryback; you lost the option in the future

Carry forward 5 years - only as STCL

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13
Q

What assets are NOT capital assets?

A

Inventory; Business interest; Accounts Receivable; Covenant not to compete

Goodwill IS a capital asset

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14
Q

What are the steps in applying a capital gain or loss?

A

Net all STCG and STCL

Net all LTCG and LTCL

Add together

Deduct $3;000

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15
Q

How much ordinary income can be offset by an INDIVIDUAL’s capital losses?

A

$3;000 per year. Unused is carried forward and taken $3;000 each year.

No carryback is allowed.

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16
Q

Which property is governed by section 1231?

A

Real or Personal Business Property held more than a year

Inventory is never 1231 Property

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17
Q

How are section 1231 gains and losses handled?

A

Casualty Losses on 1231 Property - Net the losses

  • Net Loss = Ordinary Loss
  • Net Gain = Combine with other 1231 Gains

1231 Net Loss - If 1231 Losses exceed gains; treat as Ordinary Loss

1231 Net Gain - If 1231 Gains exceed losses; treat at LTCG

1231 Gain = LTCG

1231 Loss = Ordinary Loss

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18
Q

How is section 1245 depreciation recapture handled; and when does it apply?

A

To the extent of depreciation; treat as ordinary gain
Remainder is 1231 gain; which is LTCG - There are no 1245 Losses

1231 Gain = LTCG
1245 Gain = Ordinary
Casualty Gain = LTCG

1231 Loss = Ordinary
1245 Loss = N/A
Casualty Loss = Ordinary

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19
Q

What property qualifies for section 1250 treatment; and how are gains/losses handled?

A

1250 property is Real Estate that is not 1231 Property
Use 1250 for Gain only. For losses; use 1231

Individuals: Post-1986 property with a gain is 1231 LTCG

If Straight Line depreciation is used; don’t use 1250 - Entire gain is 1231

Corps: Section 291 requires 20% of depreciation classified as ordinary gain
Remainder is 1231 LTCG

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20
Q

When are 1231; 1245 and 1250 gains or losses always ordinary?

A

When the asset is held less than one year.

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21
Q

What is the Interstate Income Act of 1959?

A

Restricts a state’s authority to tax interstate commerce

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22
Q

What are the principles of the Interstate Income Act of 1959?

A

A state can’t collect income tax on sales within its borders as long as the orders are filled and shipped outside of the state

Applies to tangible property only

Does not protect a Corporation in the state where incorporated

Does not protect from taxes using metrics other than income (Ex: Sales Tax)

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23
Q

What is the Uniform Division of Income for Tax Purposes Act (UDITPA)?

A

Uniform criteria for determining taxable income of multi-state corporations

Also known as the Multi-State Tax Compact

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24
Q

What are the basic principles of UDITPA?

A

Designed to ensure a company is not taxed more than once on its income

Forces a corporation to segregate Business Income from Non-Business Income

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25
Q

What is considered Business Income?

A

Part of the corporation’s regular course of business

Includes acquisition of tangible and intangible property if such activities are part of the regular trade or business

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26
Q

Under what accounting basis are individual tax returns prepared?

A

Cash Basis. Note: This basis is NOT allowed for Corporations, Partnerships with a C-Corp partner, or for inventories.

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27
Q

What are the deductions to arrive at Adjusted Gross Income (AGI) for individuals?

A

*MSA/HSA contributions
*Investment penalties for early withdrawal
*Self-employed medical insurance premiums
*Self-Employment Tax (approx. 50%)
*IRA Contributions
*Student loan interest (can’t be another taxpayer’s dependent)
*Moving expenses
*Alimony
*Tuition - can’t take AOC/Lifetime Learning Credit for same expense
*Teacher expenses
*Attorney fees in discrimination lawsuit

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28
Q

Which items can be carried over to future years on an individual tax return?

A

Investment interest expense in excess of investment income
Charitable contributions
Excess Section 179
Capital losses
AMT Paid
Passive Activity Losses

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29
Q

Characterize the following carryover: Passive Activity Loss

A

No carryback

Can carry forward indefinitely

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30
Q

How is excess 179 expense carried forward?

A

Carry forward to next year.

Use in any year is limited to taxable income.

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31
Q

How long can investment interest expense in excess of investment income be carried forward?

A

Indefinitely.

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32
Q

How long is the carry forward for charitable contributions?

A

Can be carried forward 5 years.

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33
Q

How long is AMT paid carried forward, and how is it applied?

A

It can be carried forward indefinitely.

It may be applied against future regular income tax, but not against future AMT tax liability.

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34
Q

How are capital losses applied in individual taxes?

A

$3,000 net capital loss can be taken in each year, the rest is carried forward indefinitely.

The loss retains its character (STCL or LTCL).

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35
Q

How does an individual capital loss carryover differ from a corporate capital loss carryover?

A

Corporate capital loss carryovers may be carried back 3 years and forward 5 years. Individual capital losses are carried forward indefinitely.

Individual capital loss carryovers retain their character (STCL or LTCL). Corporate loss carryovers are carried forward as STCL only.

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36
Q

What ratio is applied to principle payments in an installment sale to determine the gain in a given year?

A

Gross Profit / Contract Price

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37
Q

What is the contract price in an installment sale for income tax purposes?

A

Contract Price = Sales Price - Liability assumed by buyer

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38
Q

On an individual return, regular mortgage interest on what loan amount is deductible?

A

$1,000,000

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39
Q

Interest on home equity loans up to what amount are deductible on an individual tax return?

A

$100,000

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40
Q

What business gift amounts are deductible on Schedule C of form 1040? What amount for service awards?

A

$25 per person for gifts

Service awards up to $400

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41
Q

What income can business losses offset on a 1040?

A

They may only offset active business income.

Note: W2 wages are considered active business income.

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42
Q

What income can passive losses offset on a 1040?

A

Only passive income such as rental income or limited partnership income.

Note: Wages are ACTIVE (cannot be offset by passive) and Interest/Dividends are PORTFOLIO (cannot be offset by passive)

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43
Q

Are interest and dividends active or passive income?

A

Neither. They are portfolio income.

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44
Q

What is (are) the depreciation convention(s) for personal property?

A

Mid-year/Mid-quarter

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45
Q

When is the mid-quarter convention used?

A

For depreciation when 40% or more of all purchases occur in 4th quarter.

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46
Q

What depreciation convention is used for real property?

A

Mid-month

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47
Q

What depreciation life and convention are used for leasehold improvements?

A

15 year straight line (S/L)

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48
Q

What amount of business start-up costs can be deducted? How is it expensed?

A

Up to $5,000

Amortized over 180 months

Reduced dollar-for-dollar by amount over $50,000

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49
Q

How are medical expenses deducted on a 1040?

A

On Schedule A:

Amounts in excess of 10% of AGI may be deducted

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50
Q

Which personal insurance premiums are not deductible as medical expenses on Schedule A?

A

Accident or disability insurance premiums are not deductible.

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51
Q

Under what circumstances can medical expenses paid on behalf of another be deducted on someone’s Schedule A?

A

Must be a citizen of North America

Must live with you, or if they do not, must be mother/father or a relative closer than a cousin.

Benefactor must provide more than 50% support to the beneficiary.

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52
Q

Which foreign taxes are deductible?

A

Foreign INCOME and REAL ESTATE taxes are deductible.

Foreign personal property taxes are NOT deductible.

Foreign tax assessments are not deductible- they are added to the basis.

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53
Q

How is net investment income calculated, for the purpose of deducting excess investment interest expense?

A

Gross investment income - investment expense in excess of 2% of AGI = net investment income

Investment interest expense in excess of net investment income is deductible.

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54
Q

What investment interest is never deductible?

A

Investment interest expense on tax-free securities is not deductible.

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55
Q

When are mortgage points deductible and how are they deducted?

A

They are deductible if they represent prepaid interest on purchase of a new home or improving a home.

Refinance points are amortized over the life of the mortgage.

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56
Q

How are charitable contributions of LTCG property and property related to a charity’s function deducted?

A

Deducted at fair market value (FMV), up to 30% of AGI

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57
Q

How are charitable donations for STCG property and property not related to the charity’s function deducted on Schedule A?

A

Deduction is taken for adjusted basis in the property, up to 50% of AGI.

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58
Q

Does a casualty loss affect the basis of property?

A

No. It decreases the fair market value (FMV) of the property.

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59
Q

How is the deductible portion of a casualty loss calculated?

A

Take the lower of either A) Decrease in FMV or B) Basis in property (call this number GROSS LOSS)

GROSS LOSS - insurance proceeds received - $100 - 10% of AGI = Deductible casualty loss

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60
Q

What are the miscellaneous deductions on Schedule A, and how are they deducted?

A

Deductible in excess of 2% of AGI

Continuing Education - if required to keep your job
Business travel
50% Meals and entertainment
Union Dues
Tax prep fees
Legal fees to collect alimony
Appraisal fees to value casualty loss of charitable contributions

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61
Q

Which itemized deductions are not subject to phaseout based on income or other factors?

A

Medical
Casualty
Gambling
Investment Interest Expense

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62
Q

Define qualifying child for most individual tax factors.

A

Must be resident of North America

Under age 19, or under age 24 if a student

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63
Q

Define qualifying relative for most individual tax factors?

A

Must be citizen of North America

Must live with you, unless mother/father or relative closer than a cousin

You must provide more than 50% support to the individual

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64
Q

How is minor income taxed at a parent’s rate calculated (AKA kiddie tax)?

A

Child’s unearned income
- early withdrawal penalties
- $1,000
- Greater than $1,000 or child’s itemized deduction related to unearned income
= Amount taxed at parents’ rate

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65
Q

Can spouses married filing jointly use different accounting methods?

A

Yes, if they each own a small business. All non-business income is cash basis.

66
Q

At what rate is self-employment tax assessed?

A

15.3% of net earnings from self-employment

(Note: executor of an estate is NOT self-employment income)

67
Q

What is a refundable tax credit? Which individual tax credits are most commonly refunded?

A

A tax credit which takes the taxpayer’s tax owed on the return below zero, resulting in a refund to the taxpayer.

Earned Income Credit (EIC), American Opportunity Credit and the Additional Child Tax credit.

Note: the REGULAR child tax credit is NOT refundable.

68
Q

How many education credits may be taken on a tax return?

A

American Opportunity Credit - per student

Lifetime Learning Credit - per taxpayer

Note: The American Opportunity Credit is refundable.

69
Q

What estimated tax payments must be paid in by an individual taxpayer either via withholding or by quarterly tax payments?

A

The lesser of:

90% of current year’s total tax

100% of prior year’s total tax

110% of prior year’s total tax (if AGI is $150,000 or more)

70
Q

Which farming costs related to land are deductible? Which aren’t?

A

Deductible: Costs incurred to PRESERVE soil/water

Non-deductible: Costs incurred to drain wetlands or prep for irrigation (i.e. improve land)

71
Q

Which depreciation table is used for personal tangible property related to farming?

A

MACRS 150

72
Q

How long does the taxpayer have to petition the court for appeal after an audit?

A

90 days

73
Q

If no petition to appeal is filed, how long does a taxpayer have to pay tax due after an audit?

A

10 days

74
Q

What is the statute of limitations for a tax audit?

A

3 years, generally

6 years if 25% or more of gross income was omitted

The clock starts on the LATER of the due date or the filing date of the return.

There is NO STATUTE OF LIMITATIONS for either fraud or failure to file a required return.

75
Q

How is non-business bad debt deducted on a 1040?

A

It is treated as a STCL

76
Q

How long does an individual taxpayer have to file a claim for refund?

A

Refunds must be claimed within 3 years of the return due date or within 2 years of being paid, whichever is later.

77
Q

When are life insurance premiums of an employee includable in income?

A

Premiums paid by an employer for coverage in excess of $50,000 per employee are includable in income.

78
Q

When are scholarships not taxable?

A

When they are not in return for services rendered,

AND

The money is used only for tuition and books

Note: Scholarships for room and board are includable in income.

79
Q

What interest income is tax free?

A

State & municipal bond interest

US EE Savings Bond interest (note: HH bond interest is taxable)

80
Q

Which dividend income is tax free?

A

S-corporation (actually distributions)

Life insurance

81
Q

How much social security income can be taxed for individuals in higher income brackets?

A

Up to 85%

82
Q

Is unemployment compensation taxable?

A

Yes.

83
Q

Which damages awarded in lawsuits are taxable? Which are not?

A

Payments made to make you whole are NOT taxable (i.e. to pay for losses of property, body parts or earning ability)

Any payments for punitive damages ARE taxable.

84
Q

Are workman’s compensation insurance benefits taxable?

A

No - similar to an award for damage to make a person whole.

85
Q

Which of the following are taxable: Child Support, Divorce Property Settlements, Alimony

A

Alimony IS taxable.

Child support and divorce property settlements are NOT taxable.

86
Q

Adoption expenses - Are they deductible?

A

NO, they are not deductible. However tax benefits are available through the adoption CREDIT.

87
Q

Describe alimony recapture.

A

2nd Year: (3rd year - 2nd year - $15,000)

1st Year:
1st Year Alimony Paid
- Avg alimony paid in 2nd & 3rd years
- $15,000
- Recapture from 2nd year
=1st Year Alimony Recapture

Total Recapture = 1st Year Recapture + 2nd Year
Recapture

88
Q

How are Net Operating Losses (NOLs) utilized?

A

Can be carried back 2 years

If any left, can be carried forward 20 years.

89
Q

Which IRA contributions are deductible?

A

Traditional IRA = deductible

Roth IRA = not deductible

90
Q

When can a couple file married filing jointly?

A

They must be married at the end of the year.

If one spouse dies, they must be married at the end of the year.

91
Q

What are the requirements for filing as Head of Household?

A

Must have a dependent child

Must provide more than 50% of the child’s support

Must live with them more than 50% of the year

92
Q

What are the requirements for filing as qualifying widower?

A

Must have a dependent child.

Essentially gets MFJ status for the year of death + 2 tax years

93
Q

How is Gift taxation different from Estate taxation?

A

Property transferred while taxpayer is living

94
Q

What is the annual exclusion amount for a taxpayer’s Gift taxation? What is required to get the exclusion?

A

$14,000 per year per spouse to each individual

In order to get the exclusion, the recipient must immediately acquire a present interest in the property and get unrestricted access to the property and all of its benefits

95
Q

If a Gift is an annuity, what value is used for the Gift?

A

If the Gift is an annuity, use Present Value to determine the gross Gift

96
Q

What is the basic Gift tax calculation?

A

Gross Gifts
- 1/2 of Gifts (treated as given by spouse)
- Total # of donees x $14,000 exclusion
= Taxable Gift

97
Q

How is a Gift taxed if a recipient gains a future ownership in the Gifted property?

A

Recipient must gain ownership and all rights to property to get the annual exclusion. If recipient merely gains a future ownership, then the present value of the Gift is 100% taxable to donor and cannot exclude from Gift tax calc

98
Q

What are the deductions for Gift tax, besides the annual exclusion?

A

Tuition and medical expenses paid directly to the provider organization (note: NOT books or dorm fees)

Political contributions

Charitable Gifts

Unlimited Gifts to spouse

99
Q

What is the basis of Gifted property for the recipient?

A

If a loss on sale, basis is FMV on the date of the Gift

If a gain on sale, basis is same as donor’s basis

No G/L if donor basis is less than sales price, and sales price is less than FMV @ Gift date

100
Q

How/when are Gift tax returns filed?

A

Calendar-year basis only

Due April 15

101
Q

What are the basic characteristics of complex Trust?

A

Income distributions are optional
Accumulation of income ok
Charitable contributions ok
Contributions using tax-exempt income are not deductible
Allowed personal exemption of $100

Key Point: Distribution of Trust corpus (principal) ok

102
Q

What are the basic characteristics of a Simple Trust?

A

Income distributions mandatory

Accumulation of income disallowed

No charitable contributions

Distribution of Trust corpus DISALLOWED

Allowed personal exemption of $300

103
Q

How are Net Operating Losses handled in a Trust?

A

Trusts can have a Net Operating Loss

Any unused NOL flows through to the beneficiaries

104
Q

How are expenses and fees related to tax-exempt income handled in a Trust?

A

Expenses and fees from tax-exempt income are not deductible for either a Complex or Simple Trust

105
Q

When is property transferred in an Estate?

A

After the death of the donor

106
Q

What amount of a decedent’s Estate is exempt from Estate Tax?

A

The First $5,250,000 is exempt with a 40% tax on amount above that

107
Q

How are a decedent’s medical expenses handled with respect to an Estate?

A

Medical expenses paid after death, but incurred within 1 year of death go on decedents personal tax return

108
Q

How is an Estate’s NOL handled?

A

Estates can have a Net Operating Loss

Any unused NOL flows through to the beneficiaries

109
Q

What does a gross Estate consist of?

A

Cash and Property FMV at death, or alternate valuation.

110
Q

What is joint tenancy with respect to an Estate? How is it calculated?

A

When two non-spouses jointly own property

FMV at death X % Ownership = Amount in Estate

111
Q

What is tenancy by entirety?

A

1/2 of marital assets go to deceased spouses Estate

112
Q

What is tenancy in common in an Estate?

A

A, B, and C own property

If A dies, FMV of As share goes to heirs

113
Q

How is Estate tax handled with respect to a beneficiary?

A

Property received through inheritance not income to recipient

Property value is FMV at date of death or 6 months later

If property is sold prior to 6 month date and the alternative date is used, FMV at date of sale is used to value property

Basis in property automatically assumes LT holding period

114
Q

What is distributable net income (DNI)?

A

DNI = Taxable Income Expenses (from income production)

Trust beneficiaries only pay tax if earnings are distributed

Estate beneficiaries pay tax on DNI, regardless if distributed

115
Q

When must a tax exempt organization file a 990-T for Unrelated Business Income?

A

If a tax exempt organization has more than $1,000 of UBI, it must file a Form 990-T

116
Q

What are the requirements for a 501(c)3 organization?

A

Organized and Operated exclusively for exempt purposes

No earnings can benefit an individual or private shareholder

Cant attempt to influence legislation as a major part of its activities

Cant campaign politically

117
Q

How is shareholder basis calculated for a new interest in a Corporation?

A

Adjusted basis of property transferred + Gain recognized (if less than 80% ownership) - Boot received = Shareholder basis. If shareholders have 80% control after a property transfer, no taxable event occurs. If liabilities exceed basis on contributed property to a Corporation, a gain is recognized.

118
Q

How is shareholder basis calculated for a TRANSFEROR of an interest in a Corporation?

A

Transferor’s basis
+ Gain recognized by shareholder
= Basis

OR

FMV of Corporate Interest
- Adjusted basis of property
= Gain

119
Q

What basis do shareholders and Corporations use for property?

A

They both use ADJUSTED BASIS, NOT FMV of property.

120
Q

Describe how loss is taken on Section 1244 small business Corporation stock?

A

A loss on worthless stock is an ordinary loss.

121
Q

What are the requirements for taking an ordinary loss on Section 1244 small business Corporation stock?

A

Taxpayer must be original stock owner, and either an individual or partnership

$50k (single) or $100k (MFJ) limit - remainder is a capital loss

Must have been issued in exchange for money or property (not exchanged for services)

Shareholder equity must not be in excess of $1 million

Both common and preferred stock is allowed

122
Q

What are the basic rules for filing a form 1120?

A

Return is due regardless of income level

Return is due 3/15 if on a calendar year basis, or 2 1/2 months after end of fiscal year

An automatic six-month extension is available

123
Q

When are Corporate federal tax estimated payments required, and how are they calculated?

A

Required if more than $500 in tax liability expected, or

100% current year liability

100% previous year liability

Note: If Corporation had more than $1 Million in revenue the previous year, the first estimated payment must be based on the previous year and the remainder based on the current year.

124
Q

Describe the AMT calculation for C-Corporations

A 
Taxable Income
\+Tax Preference Items
\+/- Adjustments
= Pre-ACE
\+/- ACE Adjustments
= AMTI
- 40,000 Exemption
= Tax Base
x 20%
= Tentative Minimum Tax
- Regular Tax Liability
= AMT
125
Q

What are the pre-ACE adjustments for C-Corporation tax AMT calculations?

A

Real Estate purchased between 1986 and 1999 using Straight Line Depreciation must depreciate over a useful life of 40 years

Personal Property - use 150% MACRS, not 200%

Construction must use % completion method

126
Q

What are the ACE adjustments in the C-Corporation AMT tax calculation?

A

Municipal Bond Interest
Life Insurance Proceeds
70% Dividends Received Deduction
Organizational Expenditures must be capitalized, not amortized

Note: AMT paid gets carried forward indefinitely, but never carried back

127
Q

When are C-Corporations exempt from AMT?

A

In year one

In year two, if year one gross receipts were less than $5 Million

In year three, if the average gross receipts for years 1 and 2 were less than $7.5 Million

In year four and beyond, if the average from the previous 3 years is less than $7.5 Million

128
Q

How are gains and losses handled with respect to a Corporation’s transactions involving its own stock?

A

Corporations have no gain/(loss) from transactions involving their own stock, including Treasury Stock.

If Corporation gets property in exchange for stock, there is no gain/(loss) on the transaction.

129
Q

How are Corporate organization costs handled?

A

Amortization of costs begin the month the Corporation commences business activity

If the Corporation doesn’t amortize organization costs in year one, they can never be amortized

Costs associated with offerings are neither deductible nor amortized

130
Q

How are a C-Corporation’s deductible charitable contributions calculated?

A

Sales -COGS= Gross Profit
Gross Profit + Rent, Royalties, Gross Dividends, Capital Gains
=Total Income
Total Income - Deductions (No charitable contributions, Dividends
Received Deductions (DRD), or NOL Carrybacks allowed)
- NOL Carryforwards
=Taxable Income before charitable contributions, DRD, NOL Carrybacks
x 10%
=Deductible Charitable Contributions

131
Q

How are excess charitable contributions treated in a C-Corporations?

A

Excess charitable contributions get carried forward 5 consecutive years (No Carryback)

132
Q

When can a board of directors authorize charitable contributions for a tax year?

A

The Board of Directors can authorized charitable contributions up to 3/15 and have them count in the previous tax year

133
Q

How is the dividends received deduction (DRD) calculated, and what are the limitations?

A

80% Interest = 100% DRD

20-79% = 80% DRD

less than 20% = 70% DRD

Only allowed if no consolidated return is filed. Qualified dividends from domestic Corporations only.

134
Q

What is the Dividends Received Deduction (DRD) calculation when there is a loss from operations?

A

Only take DRD % x Taxable Income

Note: If DRD brings a loss situation, then you can take the full DRD

If Taxable Income remains after DRD, only a partial DRD (T.I.. x DRD %) is allowed

135
Q

How are Corporate losses on a sale to a Corporation where a taxpayer owns a 50% or more interest handled in a C-Corporation?

A

A loss on a sale to a Corporation where taxpayer owns a 50% or more interest is disallowed

136
Q

How are capital losses handled in a C-Corporation?

A

Capital Losses are deductible only to the extent of Capital Gains

137
Q

How are net short term capital gains taxed in a C-Corporation?

A

Net Short Term Capital Gains are taxed at ordinary income rates

138
Q

How are Corporate losses carried back/forward?

A

Corporations can carry back losses 3 years and carry forward losses 5 years as a Short Term Capital Loss

139
Q

How are bad debt losses handled in a Corporation?

A

Bad debt losses are classified as ordinary

140
Q

What is the casualty loss floor for a C-Corporation?

A

No floor on Corporate casualty loss like there is with an individual taxpayer

If destroyed, the loss is the property’s basis (minus proceeds)

Calculation: Adjusted basis - Proceeds from Insurance = Loss

If partially destroyed, take the lesser of FMV or adjusted basis reduction (minus proceeds)

141
Q

How are net operating losses handled in a C-Corporation?

A

If loss includes NOL Carryforward, reduce the loss (add back the amount) to get the loss without the Carryforward

Then, carry back the NOL 2 years starting with the earliest year and reduce the taxable income there and then move to the most recent year

Any leftover NOL = This year’s NOL

142
Q

How is investment interest expense handled in a C-Corporation?

A

Unlike individual taxation, investment interest expense is not limited to investment income.

Investment interest on tax-free investments are NOT deductible.

143
Q

What is the purpose of Schedule M-1 on a Corporate tax return? Which items are included?

A

Schedule M-1 reconciles book to tax income before Net Operating Loss/Dividend Received Deduction

Includes permanent differences (such as tax-exempt interest and non-deductible expenses) and temporary differences (accelerated depreciated tax depreciation, straight-line, etc.)

144
Q

What is the purpose of Schedule M-2 on a Corporate tax return? How is it calculated?

A

Reconciles beginning to ending retained earnings

Beginning Unappropriated Retained Earnings
+ Net Income
+ Other Increases
- Dividends paid
- Other decreases
= Ending Unappropriated Retained Earnings

145
Q

What is the purpose of Schedule M-3 on a Corporate tax return?

A

Like M1, but for Corporations with $10M+ in assets

146
Q

How are affiliated (80%) Corporation tax returns handled?

A

Consolidation election is binding going forward

Dividends between them are eliminated, Advantage- Gains are deferred, Disadvantage- losses are deferred.

One AMT exemption

One accumulated earnings tax allowed

Note: In order to consolidate, the parent must have 80% voting power and own 80% of the stock value

147
Q

How are Corporate distributions to shareholders handled?

A

Distribution is a dividend to the extent of current accumulated earnings and profits (ordinary income)

Then, remainder (if any) is a return of basis. Then, add’l remainder (if any) is a Capital Gain

Distribution amount = FMV of Property + Cash - Liability Assumed

Shareholder basis = FMV of Property + Cash received (basis not reduced by the attached liability)

148
Q

What is the order of treatment in a Corporation’s distribution to a shareholder?

A
  1. Distribution is a dividend to the extent of current and accumulated earnings and profits
  2. Shareholder basis is then exhausted
  3. Remainder, if any, is a Capital Gain
149
Q

What is the basic calculation for accumulated earnings and profits in a Corporation?

A

Beginning Accumulated Earnings and Profits
+ Net Income
+ Gain on Distribution (if not already in book income)
- Distribution (but cannot create a deficit)
- NOL of prior years
= Ending Accumulated Earnings and Profits

150
Q

What is the treatment of a gain in a complete Corporate liquidation?

A

If Capital Property, then Capital Gain

If Non-Capital Property, then Ordinary Income

Gain characterization is the same for both the Corporation and the shareholder

151
Q

What is the treatment of a loss in a complete Corporate liquidation?

A

Corporation: Depends on if property is capital in nature, otherwise ordinary loss

Individual: capital loss only

152
Q

What is the treatment of the liquidation of a subsidiary?

A

No G/L to parent company

153
Q

What is a consent dividend? How is it treated?

A

Consented by the Board of Directors but not yet paid

Treat as if distributed by the end of the year

154
Q

Describe the requirements for a personal holding company.

A

No banks or financial institutions can be PHCs

5 or fewer individuals own more than 50% of the stock

60% of the PHC’s income must be from passive means

PHC tax is self-assessing - 20% tax rate on undistributed PHC Income

155
Q

How is Corporate accumulated earnings tax (AET) different from PHC taxation?

A

Not Self-Assessing like a PHC

156
Q

How is the accumulated earnings credit calculated for a Corporation?

A

Take greater of $250,000 ($150,000 for Service Corps) or the legitimate balance based on future needs (i.e. purchasing a building)

157
Q

What are the requirements for holding S-Corporation status?

A

Only individuals, estates and trusts can be shareholders

Domestic only, no international S-corps or foreign shareholders

Up to 100 shareholders allowed, and only one class of stock allowed

Calendar tax year only

158
Q

How is an S-Corporation election made?

A

Election for S Corp status must be made by 3/15 and counts as being an S Corp since the beginning of the year

To make election, 100% of the shareholders must consent

159
Q

How is an S-Corporation terminated?

A

To terminate election, 50% of the shareholders must consent

No S Corp election allowed for 5 years after termination

S Corp termination effective immediately following an act that terminates status

160
Q

What items are not included in calculating an S-Corporation’s ordinary income?

A

These items are included on Schedule K, not in ordinary income:

Foreign Taxes paid deduction
No Investment Interest expense
Section 179 Deduction 
1231 Gain or Loss
Charitable Contributions
Portfolio Income (dividends or interest)
161
Q

How is S-Corporation shareholder basis calculated?

A

Beginning Basis
+Share of Income Items (including non-taxable income!)
-Distributions (cash or property)
-Non-deductible expenses
-Ordinary Losses (but don’t take income below zero)
= Ending basis

162
Q

What is the formula for an S-Corp Built-in Gains Tax?

A

FMV of Assets @ S-Corp Election Date - Adjust. Basis of Assets = Built-in Gain x 35% Corporate Rate

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