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Flashcards in REG 20 Deck (20):

S Corp with E and P looks like order is?
See next card for example
You are calculating basis and characterizing distribution concurrently

AAA - distribution of Earnings non taxable if basis is sufficient
E and P - Distributions of accululated E and P as dividend
Return of capital - up to basis
Capital Gains


90,000 S corp ordinary income
12,000 tax exempt income
30,000 e and p from when c corp
25,000 basis each partner, 50/50 split

80,000 distribution to each partner
What's taxable now as income, taxable as a dividend and not taxable at all (e.g. return of capital plus tax free distribution)

Two Question here of the 80K: What's taxable now (AAA) are regular income, What as a dividend and What's Not at All
Plus which of all the three of those effects basis
The AAA is taxable reported on the K 1, adds to basis 25+45=70
The tax exempt income is not taxable, but adds to basis 70+6 =76
So now we have $45,000 ordinary income
Then the next is the distribution of the E and P, that's 15,000 and it's classified as a dividend
No impact on basis
So what's left - the 20,000 and that's a distribution of the separately stated 6K in tax exempt
31-6 = 25 basis
income and 14K from other AAA from prior years, so this 20k isn't a gain or loss it's just a return of taxable, non taxable although it does reduce basis
25-14 - 11 basis


Built In Gains Qusetons
I know if you sell it within ____ years who has to recognize the gain?

The C corp, I think I've gotten this question wrong about 10 times,

They are taxed at the top rate of 35% and I believe it's on the appreciation at the date of transfer


What is the amount subject to the built-in gains tax? Who is it levied on? What rate?

The gain on the date you transferred when C corp becomes an S corp
If Scorp sells asset within 10 years, the S corp pays tax at the 35% rate


What is the tax rate on an S corps earned passive net income and when does it kick in.

The rate is 35%
It's when more than 25% of GROSS RECEIPTS from passive incme
Has to formerly have been a C corp with accumulated E and P
Section 1375 - Subchapter S "Special Rules"


If a subchapter S corporation has never been a c corp is it subject to the ____% tax on passive net income.

35% rate
No if it's never been a C no passive income penalty.


What is the rate on the built in gains tax?
What is the rate on the passive income tax?

Built in gain tax is 35%
Passive Income is 35%.


I'm confused by this, I can see why the built in gains tax is 35% of the appreciation the conversion date, but wouldn't they own tax on the other gain as well?

S Corp. Converts, Asset with basis of 40, FMV 85 date of transfer. Later sell during the year for 95K. Asks for "tax liability as a result of the sale"

Answer is only the 35% of the 45 gain on the date of conversion, what about the other 10.

Oh I get it --- the question is talking about the S corp's tax that it has to pay itself. Normally the gain would be distributed to the owners for cap gain tax treatment (which the 10 is)

The built in gains tax is a tax that the S corp has to pay itself, not pass through, like the 35% tax on passive income that Has to be paid (two taxes apply only to S corps that become C corps.)


Elections LLC
What's the form number
Can it elect to make that change

To be treated as a corporation - if an LLC does this then it's treated as a sole proprietorship or partnership
To be taxed as an S corp have to file form 2553, otherwise 8832
They can do it once every 60 months (5 years)


LLC Notes
State rules
Can elect to be treated as an S corp
Treated as partner or sole proprietorship
They are all pass throughs so what's the advantage
Limits liability to investment in LLC

Advantage - LLC easier to operate and administer, flexibility in how distribute earnings amount owners, the S corp is in percentage of ownership/basis

Disadvantage - The S corp has that pass through as wages or distributions feature, with the sole or partnership u r going to be paying Self employment tax on all the earnings,


How many shareholders can an S corp have?
How do families or spouses Count?
What kind of entities can't be shareholders in a corp?
How many classes of stock can an S corp have?

No more than 100, not 101
Families spouses, count as 1
No shareholders that are partnerships, corps or non-resident alients (trusts and estates are OK)
No foreign S corps
1 class, but it can be combination of voting and non-voting


What is the default classification for an LLC and what are it's owners called?

If one person it's a sole proprietorship (entity disregarded as separate from it's owner)
It it's more than one it's a partnership


Can a LLC elect to be treated as a C corp?

Yes, both C Corp or an S corp.
Form 8832 for the C Corp
Form 2553 for the S Corp


What if LLC is filing as a partnership and one member buys the others interest.
It looks like the selling partner recognizes gain or loss.

Have to value assets and treat it as a distribution to the selling partner. How that effects the assets IDK or what it does to the remaining partners basis.

Need more research.


What forms do you use to report if your LLC is classified as a sole proprietorship and what is it called.

Schedule C. It's called a "disregarded entity.".


Guaranteed Payments
Well you think they are an expense of the partnership, but what if the guaranteed payment is "30% of income but a minimum of $5,000", and corp only has $10K of income then what - is it a distributive share or a guaranteed payment, can the corp. deduct the whole thing.

F**** them honestly,

Answer says you do the 30% that's the "other distributive share" , added to basis
the other $2,000 is a guaranteed payment and is not added to basis and is deducted from corps ordinary income - really?

The question refers to the whole $5,000 as the "distributive share of income" that is reported on the tax return


What are hot assets and why does it matter.

Money you make on hot assets (inventory/AR) when you sell a partnership interest are ordinary income, not capita gain.


Do Guaranteed Payments decrease the partners basis in the partnership?

No - they don't. They are ordinary income (so are regular distributions), but they don't increase basis. The partnership deducts them from income before the distribution.


There's all kinds of ways you can do this. Meaning liabilities are included in a partners basis, but if you sell them you get out of paying them so it's like

I don't get this either Guy has a 20K partnership interest, 15 of it is liabilities, he sells it for 10.
I was thinking he has a basis of 5, which he sells for 10 and the gain is 5. I just ignored the liabilities, but this is a gain in away isn't it? Guess not. See back

The solutions approach is to add the liabilities into what he got for the partnership. So the guy paid ten cash plus 15 liabiliteis = 25K received less 20K basis = 5K gain.


Sell Partnership Step Wise
Must consider how much of what you received is ordinary income on hot assets
Rest is capital gain or loss

1. Compute the gross gain Cash Received - Basis with no adjustments = Gross Profit
Now this may be not enough to cover what you got for the hot assets

2. Figure out the appreciation on the hot assets (they will give you a chart with the basis and the FMV of the partnerhships assets) the hot assets are the receivables and the inventory, ignore everything else.

3. Compute the appreciation on the receivables and inventory and multiply it by the parnters ownership interest. This is the ordinary income your going to recognize on hot assets even if the gross profit is less than that.

4. Compare it to the gross profit if it's under than you have a capital loss on your interest, if it's over capital gain