R5

Question 1

How do you calc a partners basis for distributed prop in a liquidating distribution?

When would the partner rec a gain on distribution?

Answer 1

Partner basis in distributed prop is the same as the adj basis as their pship interest LESS any money rec

Gain is recognized only to the extent that money rec > partners basis in pship

Question 2

If a partner sells interest in partnership - how would they recognize a G/L ?

How are partners share of liab incorpated in sale?

When would it be capital vs ordinary G/L?

Answer 2

G/L = Amount realized(Cash Rec + Debt Relief) LESS Adj basis

Pship liabs that current partners holds is transferred to buyer –> ADD to Amount realized as debt relief

IF there are Hot assets –> ord G/L, IF NOT hot assets –> Capital G/L

Question 3

How do you calc G/L rec when partner contributes property to a partnership in exchange for pship interest?

Answer 3

NO G/L REC When partner contributes property to a pship in exchange for interest

Question 4

When is a C corp that makes election to S corp exempt from BIG tax?

Answer 4

IF sale of assets does not occur witin 5 years of the S election

Question 5

If taxpayer makes a loan to the S corporation - how does that impact the taxpayers basis?

Answer 5

It increases taxpayers basis to their respective % (i.e 50% ownership –> 10K loan will increase 5k basis to basis of taxpayer)

Question 6

In a liquidating distribution - what is the taxable effect on the partnership, partner, and is there a gain/loss recorded?

Answer 6

Partnership records NO taxable effect on distributions
Partner removes entire investment in pship balance (ZERO OUT)

Partner can rec gain IF cash received exceeds basis
Partner can rec loss If cash received was less than basis –> CL (LT if pship int > 1 yr)

Question 7

In a liquidating distribution - what is the taxpayer basis in prop

I.e basis of 60K, Liquidating distribution of $35k cash and land w/ Basis = $30k and FMV = 40k

Answer 7

Basis = 60
- CASH FIRST 35k
————————–
25k

Have to zero out to get out
Land basis = $25k
No g/l

Question 8

What is a nonliquidating distribution?

When are G/L recognized?

What is basis of assets transferred in distribution?

Answer 8

When assets are distributed from partnership to partner (not in liquidation of pship) –> dont have to zero out basis

NO LOSS REC (basis can never go below zero)
Gain can be recognized ONLY when Cash received > Basis

When assets are distributed –> valued @ Basis NOT FMV

Question 9

What increases and decreases S Corp Shareholders Basis? (3 each)

Answer 9

Decreases: Withdrawals and Distributions, losses, stockholder paid back for loan

Increase: Invest into S Corp, income earned (taxable/TE), Stockholder loans made to S corp

Question 10

What is Subpart F income?

Answer 10

Taxable income includable a US taxpayer from a controlled foreign corporation

no economic connection to the country of origin

Question 11

How do you calc the G/L on the sale of partnership interest? How is this gain classified as?

Answer 11

Beg capital account
LESS: Share of income (up to sale)
____________________________________
Capital account at sale date
+Share of pship liabs
________________________________
Adj basis in pship interest
LESS: Amt realized (Cash rec/FMV prop rec/Relief of share of pship liab)
____________________________________________________
G/L (Capital if no Hot assets)

Question 12

Who conducts an IRS field Audit and where is it done?

Answer 12

conducted by IRS rep at the taxpayer’s home or office of taxpayers rep

Question 13

If a partner contributes property to a partnership in formation of partnership - how is the contributing partners basis calculated?

Answer 13

Contributing partner basis = basis of property contributed

NO GAIN

Question 14

In formation of a partnership - a partner contributes land that has a mortgage, how is the basis of the contributing partner calculated?

Answer 14

Land at adj basis
- mortgage
+Partners share of the mortgage
_______________________________________
Partner contributing basis

Question 15

In formation of a partnership - if a partner contributes services? what is their value of interest to the partnership - is there anything else recognized at this time?

Answer 15

Partners basis in pship = FMV of services

Ordinary income is also recognized

Question 16

In a partnership -

What do partners pay tax on?

how are profit distributions taxed?

Answer 16

Partners pay tax on the income/profits from pship –> whether or not distributed

profit distributions are tax free bc the partner already paid tax on the income (so not taxed on distribution as well)

Question 17

What is a guaranteed pmt to a partner and how is it different than a profit distribution?

How is this reported at partner level and pship level

Answer 17

Guaranteed pmt is set payment made for work done

This is different than profit distribution bc this is paid regardless of whether the business is profitable or not

Partner reports this as income and pship reports as operating expense

Question 18

What is the At risk basis in a partnership?

Answer 18

this is equal to the partners basis in the partnership - the max amt of deductible loss limited to this amount

Question 19

what items increase/decrease partners basis in a partnership?

Answer 19

Increase: Investment in pship, all income earned (Taxable AND non taxable) , Cap gains included, loans made to pship, ownership % of pship debt

Decreases: Withdrawals/distributions, losses (are taken to the amount that 0 out partner basis –> losses are taken after distribution) , repayment of loans

Question 20

Calc the basis in the partnership ex

D = 75% partner

Contribution = $50
Pship borrowed = $30
Pship ord income = $40
TE income = $3
Distribution = $15
Reduction in pship debt = $3

Answer 20

Contribution = $50
+%share of Pship liab = $30 .75%
+ %share of pship income = (40 +3).75
- Distribution = $15
- % share of reduction of debt = 3*.75
___________________________________________
$87.5 basis in pship

Question 21

What is the result of partner who sells their partnership interest?

Answer 21

General rule –> partner will have CG/CL = Amt realized for sale (plus any relief of liab) - adj basis in pship interest

Exception –> hot assets –> any gain from hot asset = ord income of hot asset ONLY (rest is CG)

Question 22

What are hot assets?

Answer 22

Unrealized receivables
Appreciated inv

Question 23

When is a partnership considered terminated?

Answer 23

Considered terminated when ceases to operate as a partnership (discontinues ops for a 12 month period) or it no longer has 2 partners

Question 24

What is the form that an S corp files and when is it due?

Answer 24

File 1120S for scorp and then K-1 to shareholder for their 1040

Due 3/15 –> one month earlier than 1040

Question 25

What is the process on how S corp is formed?

Answer 25

All corporations formed start as C Corp C Corp would need to file as an S corp as soon as they incorporate --> ALL shareholders must consent to change IF filed 2.5 months after incorporation date -> election reverts back to first day --> " S corp from inception"

Question 26

What are the requirements of a S corp to form?

Answer 26

1. no more than 100 shareholders 2. Shareholders = Trusts, individuals, estates 3. Pshsips/corpos/aliens NOT ALLOWED TO be shareholders 4. one class of stock (can vary in voting rights)

Question 27

How does S corp terminate election ?

Answer 27

By failing eligibility Revocation of S election filed by shareholders owning more than 50% of S corp o/s stock... does NOT need unanimous consent

Question 28

What is included in S corp ord income? HOw are charitable contributions and capital losses treated?

Answer 28

Sales less ord biz expenses Charitable contributions and capital losses would pass through separately on K-1

Question 29

How are tax credits reported for S corporations?

Answer 29

As separately stated items

Question 30

What is the difference between S corp and Pship basis when the entity borrows money?

Answer 30

In a pship --> partners will be liable for debts S corp --> does not increase basis of shareholder

Question 31

In an S corporation - how much of a distribution is taxable to shareholder?

Answer 31

Up to the amount of stock basis of the shareholder any excess in distribution is capital gain

Question 32

If an S corp has a loss, how do you calc the deductible amount of the loss to the shareholder?

Answer 32

Loss is deductible up to Stock + debt basis of shareholder

Question 33

If S corp has E&P, how are distributions taxed? (in what order) and what is the impact of basis?

Answer 33

1. Tax free to extent of Accumulated Adjustment account (reduction of basis) 2. Ord dividend to extent of Accum E&P from C Corp days (no reduction of basis) 3. ROC Tax free to extent of basis 4. Excess of basis --> Capital Gain

Question 34

When will federal law prohibit a state from imposing an income tax on Net income of a business?

Answer 34

When there is no physical presence in the state I.e. If orders are taken within the state and accepted at corporate headquarters outside of the state and shipped from a location outside of state

Question 35

If a S corp transferred from a C corp - where does muni bond int income reported?

Answer 35

Reported on OAA as nontaxable income

Question 36

What are 5 activities that may trigger nexus? What is 1 that will not trigger?

Answer 36

Activities that trigger nexus: 1. Owning/leasing real/tangible prop 2. Sending employees into state for training/work 3.Soliciting sales in a state 4. Providing installation, maintenance to customers 5. Accepting or rejecting sales orders within state Activity that does not 1. Delivery of common carrier

Question 37

What are the 5 steps to adjust S corp basis at the end of the year?

Answer 37

1. Increase for income items 2. Decrease for distributions 3.decrease for non-deductible expenses 4. decreased for items of loss and deduction

Question 38

What corporations may be subject to the Base erosion and anti-abuse tax (BEAT)?

Answer 38

Corporations with average annual gross receipts of $500M+ for 3 preceding years Corp must make deductible payments to non-US person who are Related parties NOT S CORP

Question 39

What is the substantial presence test?

Answer 39

Foreign person present in the US for at least 31 days during the current year and at least 183 days for a three year period

Question 40

If a dividend to a nonresident alien, how is the dividend paid?

Answer 40

Dividend paid with 30% withhold US tax

Question 41

Which of these items are ord income vs what is separately stated: Sales COGS Rent exp CC Int exp (biz related) Officer exp MACRS DEpreciation 179 Depreciation LTCG Dividend income 1245 gain 1231 gain

Answer 41

Ord income: Sales COGS Rent Int exp Officer exp MACRS Depreciation 1245 gain Sep Stated: CC 179 Depreciation LTCG Dividend income 1231 gain

Question 42

If a partner makes a loan to the partnership and the pship does NOT secure it - how much is allocated to partner?

Answer 42

FULL LOAN to partner that made loan bc not secured by pship --> not shared

Question 43

Who does the GIlti tax apply to?

Answer 43

Applies to US shareholders of CFC and is intended to reduce the incentive to relocate CFCs to low tax jurisidctions

Question 44

If a partnership converted to an LLC that is taxed as a partnership - how is the conversion treated?

Answer 44

Nontaxable event without an interim closing