REG 5 - S Corps, Partnerships, etc

Question 1

S-Corp election due dates

Answer 1

March 15. When making original election to become an S Corp, if done by March 15th the year in consideration counts, if after it begins Jan 1 of the following year

Question 2

S Corp property contribution rules

Answer 2

Same as C Corp. Nontaxable if:

1) a contribution of property (not services)
2) solely in exchange for stock
3) after the transfer, the shareholder (or group of shareholders) has control of the corporation through 80% stock ownership

Question 3

S Corp Eligibility rules

Answer 3

1) Must be in the US or citizen of US
2) No more than 100 shareholders
3) One class of common stock only
4) Corporations or partnerships may NOT be shareholders

Question 4

S Corp tax year

Answer 4

Dec 31 is required year end

Question 5

S Corp paying tax exceptions

Answer 5

1) LIFO Recapture tax
2) Built-in gains tax
3) Tax on passive investment income

Question 6

Built-in gain tax occurs when

Answer 6

A distrbution or sale of an S Corps assets and:

1) A C Corp elects S Corp status and
2) the FMV of the assets exceeds the adjusted basis (Appreciated assets)

Question 7

Exemptions to the built-in gain tax

Answer 7

• S corp was never a C corp
• the sale or transfer does not occur within 5 years of the first day the S election is effective
• The appreciation of assets being sold occurred after the S election
• Assets were acquired after the S election
• The unrealized built-in gain has been completely recognized in prior tax years

Question 8

Calculation of built-in gain tax

Answer 8

21% of the lesser of:

1) Recognized built in gain for the current year or
2) The taxable income of the S corp if it were a C corp

Question 9

Tax on passive investment income occurs when

Answer 9

1) The S corp has accumulated C corp earnings and profits and
2) Passive investment income exceeds 25% of total gross receipts

[Hoarding dividends and passively investing them]

Question 10

Separately stated S corp items not included in ordinary business income

Answer 10

• Rental real estate income or loss
• Interest & Dividend income
• Royalties
• Net short & long term capital gains/losses
• Charitable contributions

Question 11

Deductible Fringe benefits

Answer 11

Fringe benefits for non-shareholder employees or shareholders owning 2% or less of the S corp are deductible by the S corp in calculating ordinary business income. Over 2% is included in that shareholders income and reported on K-1

Question 12

S Corp taxation key points

Answer 12

1) Shareholders must include on their individual tax return their share of each “pass through” item
- Shareholders are taxed on these items, regardless of whether or not the items have been distributed (withdrawn) to them during the year

Question 13

Accumulated adjustments account (AAA)

Answer 13

Prior S corp income which can be withdrawn tax free. Acts a bit like retained earnings

Question 14

Taxability of S corp distributions with NO C corp E&P

Answer 14

1st) to the extent of the stock basis, non taxable

2nd) in excess of the stock basis, taxed as long-term capital gain

Question 15

Taxability of S corp distributions WITH C corp E&P

Answer 15

1st) to the extent of S corp AAA balnce, non taxable
2nd) to the extent of C corp E&P, taxed as dividend
3rd) to the extent of the stock basis, non taxable
4th) in excess of the stock basis, taxed as long-term capital gain

Question 16

Terminating events of an S corp

Answer 16

1) Shareholders holding more than 50% of the stock consent to a voluntary revocation
2) The corporation fails to meet any of the eligibility rules
3) Excess passive investment income is more than 25% of the corporations gross receipts for 3 consecutive years (must have prior C corp E&P)

Question 17

Short Tax years

Answer 17

S corp can specify an effective date in which the revocation occurs, or the corp can fail to meet a requirement. Either way, the corporation will be required to split the tax year into two and either allocate based on the relative number of days or close the books on the date of conversion

Question 18

Reelecting S status

Answer 18

• Must wait 5 years or ask IRS for permission

Question 19

Liquidation of an S corp: consequences to S corp

Answer 19

Recognized gain or loss on distribution of property as if it was sold at FMV

FMV of assets distributed
(Basis in assets)
=Taxable gain/loss

Question 20

Liquidation of an S corp: consequences to shareholders

Answer 20

Cash received
\+FMV of property received
(Liabilities assumed)
=Amount realized
(Basis in stock)
=Taxable gain/loss

*The shareholders stock basis is determined after all other activities for the year have been taken into account (share of income, etc). The portion of taxable gain/loss calculated from liquidation of S corp (previous flashcard) will be included in basis in stock calculation.

Question 21

Types of partnership interest

Answer 21

1) Capital interest - a right to share in net assets when liquidation occurs
2) Profit interest - a right to share in future profits or losses of the partnership

Question 22

Profits interest acquired for services provided

Answer 22

Will not have to recognize income at the time of exchange

Question 23

Capital interest acquired for services provided

Answer 23

The liquidation value of the capital interest is included in the partner’s taxable ordinary income.
*Taxable so FMV.

Question 24

Allocation of partnership debt to partners: recourse debt

Answer 24

Only general partners share

Question 25

Allocation of partnership debt to partners: nonrecourse debt

Answer 25

General & limited partners share based on profit sharing ratio

Question 26

Holding period of partnership interest

Answer 26

Use "old" contributed property holding period for PP&E | **Exception, use the date the property was contributed for inventory

Question 27

Allocation of built-in gain or loss on contributed property in a partnership

Answer 27

The built in gain or loss calculated at the time of contribution is fully allocated to the contributing partner at the time of sale. If there is additional gain or loss post-contribution, it is allocated among all partners

Question 28

Partnership's Basis in contributed property (inside basis)

Answer 28

Greater of NBV and debt assumed

Question 29

Partners tax basis in partnership interest

Answer 29

Beg Capital account +% of all income (% of all losses and deductions) (distributions) =Ending capital account +%partnership liabilities *recourse and nonrecourse* =Ending tax basis in partnership interest **your share of liabilities in a partnership increase your basis, while S corp nonrecourse liabilities do not increase shareholder basis

Question 30

Timing of taxable income to the partner

Answer 30

*Treat like a bank account* Income - Taxable and increases basis Withdrawal - Nontaxable and decreases basis

Question 31

Guaranteed payments to partners

Answer 31

Partner - taxable income on K-1 Partnership - expense which is deductible to the partnership *Does not change basis

Question 32

Partnership debt included in partners tax basis and at risk basis

Answer 32

Recourse debt: Tax basis - Yes (if general partner or personal guarantee) At risk basis - Yes (if general partner or personal guarantee) Qualified nonrecourse financing: Tax basis - Yes At risk basis - Yes Other nonrecourse debt: Tax basis - Yes At risk basis - NO

Question 33

Nonliquidating distributions to a partner

Answer 33

Nontaxable, treated like a bank account withdrawal. Cash and NBV of property reduces basis

Question 34

When basis in partnership interest is less than distributions:

Answer 34

1) If its just property distributed - reduce partnership interest basis to 0 (can't go below), the partners basis in the property is amount just used to get to 0 2) If its just cash distributed - Excess cash is a capital gain 3) If both cash and property - Cash is used up first, then property 4) If cash and multiple assets - Cash, hot assets, then rest of property

Question 35

Hot assets

Answer 35

Inventory, unrealized receivables for cash basis taxpayers

Question 36

When does loss get recognized in a complete withdrawal from a partnership

Answer 36

When ONLY cash is received and that cash is less than your adjusted basis or multiple hot assets have a greater partner basis vs partnership basis (R5-40)

Question 37

Partners basis in partnership interest is LESS than partnerships basis in assets distributed (liquidating)

Answer 37

Step 1: Assign the basis to the assets that the partnership has Step 2: Write down property in the last category (other property, or hot assets if no other property) if their FMV is below their NBV Step 3: Allocate any basis remaining to the last property category based on relative adjusted basis of the assets after step 2 (R5-41)

Question 38

Partners basis in partnership interest is MORE than partnerships basis in assets distributed (liquidating)

Answer 38

Step 1: Assign the basis to the assets that the partnership has Step 2: Write up property in the last category (other property, or hot assets if no other property) if their FMV is above their NBV Step 3: Allocate any basis remaining to the last property category based on relative adjusted basis of the assets after step 2

Question 39

Sale of partnership interest

Answer 39

Capital gain or loss * Exception: the partners share of hot assets is considered ordinary income * *Must allocate income or loss based on number of days old and new partners were in