Section 4B, D, E, F,G,H Flashcards
PASSTHROUGH
An S corporation has two shareholders who are also employees of the corporation. Shareholder A owns 20 shares and shareholder B owns 90 shares. The total number of shares issued and outstanding is 2,000. The corporation pays the health insurance premiums for all its employees and families. The cost of family coverage is $5,300. The corporation pays for family coverage for both shareholders. Because the company paid for health insurance, which of the following amounts would be reported to shareholder A as his income?
$0 .. .WHY
If the shareholder owns less than 2% of the company, none of the premiums would be taxable. If they own more than 2%, then insurance premiums paid by the S corporation are fully taxable. Shareholder A owns 1% (20 ÷ 2,000) and therefore has zero income. Note that shareholder B owns 4.5% (90 ÷ 2,000) and would have to declare the premium as income if the question had asked about shareholder B.
PASSTHROUGH
Sarah, an individual taxpayer, is the sole shareholder in an S corporation. The S corporation has taxable income of $15,000 for the current year and also paid Sarah $20,000 in salary. What is the gross amount of income that Sarah must report as taxable income in the current year?
The net income reported on line 1 of the Schedule K-1 of the S corporation plus the salary
Only the income from the salary
As the sole shareholder, Sarah must report the salary and the earnings of the S corporation on her personal return.
S corporation status usually avoids the ___ tax and that corporate losses can be claimed by the ___. The entity must start as a ___and then, with the unanimous vote of the stockholders, must apply to the IRS for S corporation status.
S corp is a ____ ___ entity
corporate income , shareholders, C Corp,
Pass Through
The S corporation taxable year is the ___unless IRS approval is obtained for a ___
S corporations report their income and other tax attributes to their shareholders on ____of IRS Form ___
calendar year , fiscal year
Schedule K-1 , 1120S
QUALIFIED BUSINESS INCOME
The QBIA offers taxpayers other than corporations a deduction of __% of qualified business income (QBI),
Qualified Business Income is known as the ____ deduction
20%
Section 199a
____ is the net amount of income, gain, deduction, and loss from the operation of a business, excluding investment income
Qualified business income (QBI)
Distributions from an S corporation come from the following sources in the order listed:
1 Distributions are first considered to come from an “___” (AAA). (((distributions from AAA are taxable/nontaxable))))
- When AAA is exhausted, distributions are ___to the extent of any accumulated earnings and profits
- When E&P is exhausted, distributions are a ____to the extent of the shareholder’s stock basis, and then ___
accumulated adjustments account, nontaxable
dividends
return of capital , capital gain.
If an S corporation distributes appreciated property to a shareholder, the transfer is treated as if the property had been sold to the shareholder at ____
(1) A ___is recognized at the corporate level.
(2) The gain is subsequently reported to the shareholders ___based on their share ownership.
fair market value.
gain
pro-rata
Loss pass-throughs in excess of a shareholder’s stock basis may be carried forward ___
indefinitely
If a taxpayer materially participates in a trade or business on a regular, continuous, and substantial basis, the income or loss resulting is ___.
If the taxpayer does not materially participate in trade or business, the income or loss resulting is ___
active
passive
An individual taxpayer reports the following items for the current year:
Ordinary income from Partnership A, operating a movie theater in which the taxpayer materially participates: $70,000
Net loss from Partnership B, operating an equipment rental business in which the taxpayer does not materially participate: (9,000)
Rental income from building rented to a third party: 7,000
Short-term capital gain from sale of stock: 4,000
What is the taxpayer’s adjusted gross income for the year?
$74,000
Items included in AGI: Ordinary income from Partnership A ($70,000) + Short-term capital gain from sale of stock ($4,000) = $74,000 AGI.
The passive activity amounts of $(9,000) and $7,000 are netted for a result of $(2,000). There can be no deduction for losses as a result of passive activities.
QUALIFIED BUSINESS INCOME
The deduction is claimed on the individual IRS Form 1040 of a taxpayer with qualifying income from a (5)
sole proprietorship, partnership, S corporation, trust, or estate.
Evan, an individual, has a 40% interest in EF, an S corporation. At the beginning of the year, Evan’s basis in EF was $2,000. During the year, EF distributed $100,000 and reported operating income of $200,000. What amount should Evan include in gross income?
$80,000
$118,000
$80,000
Shareholders of an S corporation include a pro rata share of the corporation’s nonseparately and separately stated items of income or expense on their personal tax return.
Evan includes 40% of EF’s operating income or $80,000 ($200,000 × 0.40 = $80,000) on his personal tax return. None of Evan’s $40,000 share of distributions ($100,000 × 0.40 = $40,000) would be taxable since his distributions did not exceed his new basis.
Beginning basis $ 2,000
Share of operating income 80,000
Share of distributions (40,000)
--------
Ending (new) basis $42,000
Bearing is an individual taxpayer who uses the filing status of single. A review of Bearing’s Year 2 records disclosed the following tax information:
Wages $ 18,000
Taxable interest and qualifying dividends 4,000
Schedule C trucking business net income 32,000
Rental (loss) from residential property (35,000)
Limited partnership (loss) (5,000)
Bearing actively participated in the rental property and was a limited partner in the partnership. Bearing had sufficient amounts at risk for the rental property and the partnership. What is Bearing’s Year 2 adjusted gross income?
$29,000
tems included in AGI: Wages ($18,000) + Taxable interest and qualified dividends ($4,000) + Schedule C income from business ($32,000) - Maximum allowed deduction for residential rental property ($25,000) = $29,000 AGI.
The limited partnership loss is not deductible as it is a passive activity. The rental loss may be deducted up to a maximum of $25,000 for a single taxpayer. All other income items are taxable.
Losses and credits from passive activities
Generally, losses from passive activities may only be used to offset ___from passive activities.
Unused passive losses ___to offset passive income in future years
Any tax credits related to passive activities can only be used to offset taxes attributable to \_\_\_(((excess credits \_\_\_ to offset future taxes on passive income)))
income
carry forward
passive income , carry forward
Passive activities include the following:
(1) Trade or business in which the taxpayer does not ____participate
(2) ___activities
(3) ___partnership activity
materially
Rental
Limited
The rental loss may be deducted up to a maximum of $____for a single taxpayer
25,000
Stone owns 100% of an S corporation and materially participates in its operations. The stock basis at the beginning of the year is $5,000. During the year, the corporation makes a distribution of $3,500 and passes through a loss from operations of $2,000 for the year. What loss can Stone deduct on Stone’s personal tax return?
1500
A taxpayer’s loss deduction from an S corporation is limited to amounts “at risk” in a trade or business or income-producing activity under IRC Section 465 losses. The amount at risk is the total of the taxpayer’s basis in the S corporation plus any loans that the taxpayer has made to the S corporation. In this case, the basis begins as $5,000. The basis is reduced by the $3,500 distribution, leaving a final basis of $1,500. Therefore, the allowed loss is $1,500.
egardless of the distributions received by a partner, a partner must report the taxable income reflected on the ____provided by the partnership.
Schedule K-1
A partner’s share of ordinary income from an investment in a limited partnership reported in Form __, Schedule K-1 should be reported in ___, Supplemental Income and Loss
Schedule E
A single taxpayer may enjoy the benefit of IRC Section 199A without limitation if she does not have taxable income in excess of what amount?
$157,500… WHY
The Tax Cuts and Jobs Act of 2017 (TCJA) created IRC Section 199A, which allows owners of pass-through entities to deduct 20% of their qualified business income, with certain limitations being phased in for taxpayers with taxable income exceeding $315,000 (joint filers) or $157,500 (other filers).
In general, passive activity losses in excess of passive activity income are not allowed. There is an exception to the rule for ____; if an individual actively participated in a ____, they may be able to deduct up to $___of passive activity loss from nonpassive income.
rental real estate activities, rental real estate activity, 25,000
Participation in management decisions such as new tenant approval, rental terms, repairs, and capital expenditures is sufficient to meet the “___” definition.
active participation
The passive activity rules apply to individuals, estates, trusts, personal service corporations, and closely held C corporations.
The passive activity loss rules do not apply to ____
partnerships, widely held C corporations, or S corporations.
Smith (single filing status) has an adjusted gross income (AGI) of $120,000 without taking into consideration $40,000 of losses from rental real estate activities. Smith actively participates in the rental real estate activities. What amount of the rental losses may Smith deduct in determining taxable income?
$0
$15,000
Individuals (and married taxpayers filing jointly) may offset up to $25,000 of ordinary income with losses from rental real estate activities. This exemption is reduced (but not below zero) by 50% of the amount by which the adjusted gross income (AGI) of the taxpayer for the year exceeds $100,000. (Note that married taxpayers filing separately may each offset $12,500, reduced (but not below zero) by 50% of the amount by which the AGI of each taxpayer exceeds $50,000.)
Therefore, $25,000 − (($120,000 − $100,000) × 0.50) = $15,000 deduction allowed.
Bartlet owns a manufacturing business and participates in the business. Which of the following conditions would cause the business to be considered a nonpassive activity for Bartlet?
Bartlet participates in the business for more than 500 hours during a year.
The business made a profit in any three of the last five years that preceded the current year.
The business has at least 10 employees who, individually or collectively, work for the business more than 1,000 hours in a year.
Bartlet files an election with the IRS postponing nonpassive activity classification.
Bartlet participates in the business for more than 500 hours during a year.
Nonpassive activities include businesses in which the taxpayer materially participates; they typically generate salaries, guaranteed payments, 1099 commission income, and portfolio or investment income. A trade or business activity isn’t a passive activity if you materially participated in the activity (i.e., you participated for more than 500 hours).
Nonpassive activities include businesses in which the taxpayer ____participates; they typically generate ___, ___payments, 1099 ___income, and portfolio or ___income. A trade or business activity isn’t a passive activity if you materially participated in the activity (i.e., you participated for more than _hours).
materially salaries guaranteed commission investment 500
The application of passive activity loss limitations to personal service corporations is intended to prevent taxpayers from sheltering personal service income by creating personal service corporations. T/F
True
Passive activity loss limitation rules apply to the following:
(1) Individuals
(2) Estates
(3) Trusts
(4) Any closely held C corporation
(5) Any personal service corporation
lll
ietz is a passive investor in three activities which have been profitable in previous years. The profit and losses for the current year are as follows:
Gain (Loss) Activity X $(30,000) Activity Y (50,000) Activity Z 20,000 Total $(60,000) What amount of suspended loss should Dietz allocate to Activity X?
$22,500
The general rule is that if all or any portion of the taxpayer’s passive activity loss is disallowed for the taxable year, a ratable portion of the loss from each passive activity of the taxpayer is disallowed. For purposes of the preceding sentence, the ratable portion of a loss from an activity is computed by multiplying the passive activity loss that is disallowed for the taxable year by the fraction obtained by dividing:
the loss from the activity for the taxable year by
the sum of the losses for the taxable year from all
activities having losses for such year.
(Activity X loss of $30,000 ÷ Total loss of $80,000) × Current net passive investment loss of $60,000 = $22,500
Don Wolf became a general partner in Gata Associates on January 1, Year 1, with a 5% interest in Gata’s profits, losses, and capital. Gata is a distributor of auto parts. Wolf does not materially participate in the partnership business. For Year 1, Gata had an operating loss of $100,000. In addition, Gata earned interest of $20,000 on a temporary investment. Gata has kept the principal temporarily invested while awaiting delivery of equipment that is presently on order. The principal will be used to pay for this equipment. Wolf’s passive loss for Year 1 is:
$5K
Don Wolf’s passive loss is $5,000, or 5% of Gata Associates’ $100,000 loss. Interest earned on the temporary investment is not considered in determining Gata Associates’ passive loss.
Which of the following statements regarding an individual’s suspended passive activity losses is correct?
Suspended losses of $3,000 can be utilized each year against portfolio income.
Suspended losses can be carried forward, but not back, until utilized.
Suspended losses must be carried back three years and forward seven years.
A maximum of 50% of the suspended losses can be used each year when an election is made to forgo the carryback period.
Suspended losses can be carried forward, but not back, until utilized.
Passive activity losses not deductible in the current year can only be carried forward. The $3,000 per year utilization rule applies only to capital losses, not to passive activity losses.
Dr. Merry, a self-employed dentist, incurred the following expenses:
Investment expenses $ 700
Custodial fees related to Dr. Merry’s Keogh plan 40
Work uniforms for Dr. Merry and Dr. Merry’s employees 320
Subscriptions for periodicals used in the waiting room 110
Dental education seminar 1,300
What is the amount of expenses the doctor can deduct as business expenses on Schedule C, Profit or Loss from Business?
$1730
The cost of attending a dental seminar and subscriptions for the office are business expenses. The cost of uniforms is deductible if they must be worn as a condition of employment and the clothes are not suitable for everyday wear. Investment expenses, including custodial fees, are not a business expense.
To be deductible, a business expense must be both __ and __
An ___ expense is one that is common and accepted in the taxpayer’s industry.
A ___ expense is one that is helpful and appropriate for the trade or business.
An expense does not have to be ___ to be considered necessary.
ordinary and necessary.
ordinary
necessary
indispensable
Owners of at least 10% of a residential rental unit who actively participate in the rental can deduct losses up to $25,000 a year. However, a phaseout of the deduction begins at $100,000 of adjusted gross income. The deduction of the rental loss is completely phased out at what level?
$150K
For every $2 of adjusted gross income (AGI) over the $100,000 level, one dollar of that real estate loss is phased out, so that at $150,000 in AGI, the full deduction is phased out.
(150k-100k) * .5 = $25k - $25k = 0
Rental losses of up to $25,000 annually may be deducted to arrive at AGI of the individuals who own at least ___% of the property.
10
In the current year, a taxpayer reports the following items:
Salary $50,000
Income from Partnership A, in which the taxpayer materially participates 20,000
Passive activity loss from Partnership B (40,000)
During the year, the taxpayer disposed of the interest in Partnership B, which had a suspended loss carryover of $10,000 from prior years. What is the taxpayer’s adjusted gross income for the current year?
$20K
Adjusted gross income is calculated by subtracting business expenses and other deductions from gross income. The adjusted gross income is $20,000, calculated as follows:
Salary $50,000
Income from partnership 20,000
Passive loss from Partnership B (40,000)
Suspended loss carryover (10,000)
——–
Adjusted gross income $20,000
Because the taxpayer disposed of ownership in Partnership B during the year, he may take all of the loss up to the amount of his basis in the partnership.
If an individual taxpayer’s passive losses in rental real estate cannot be used in the current year, then:
Carried forward indefintiely
Unless proven otherwise, rental real estate activities are defined as passive activities. In general, passive activity losses can only be used to offset passive activity gains. If the losses cannot be used by passive activity gains, these losses can be carried forward indefinitely or until the property is disposed of in a taxable transaction.
The partnership of R and S had an ordinary loss during the current year of $10,000. R and S are general partners who actively and materially participate in the daily operations of the partnership. R and S share profits and losses equally. R had an adjusted basis of $4,000 for his interest before taking into account the current-year loss. On his personal tax return R may deduct:
$4,000 ordinary loss and $1,000 capital loss.
$4,000 ordinary loss.
$4,000 ordinary loss
A partner’s share of a partnership loss is limited to the partner’s basis in the partnership….excess loss is carried forward
A partner’s share of a partnership loss is limited to the partner’s ____in the partnership….excess loss is ___
basis , carried forward
A partner’s basis is increased by the investment of __ or __
The increase in a partner’s basis for contributed property is limited to the ___in that property,
A partner’s basis is decreased by the partner’s withdrawals of money and by the adjusted basis of all other property distributed to the partner. T/F
property or cash
basis
What do these do regarding partnership basis? Partnership losses (including capital losses) (Nondeductible partnership expenditures
Decrease
