Taxation of Income from Business Entities Flashcards
(38 cards)
Dividends: What is the tax treatment for TPs in the 10-15% bracket? Higher bracket?
10-15: Not taxed.
Higher: Taxed at 15 or 20%. The 3.8% net investment income tax could also apply (above $200,000 for individuals, $250,000 for married jointly).
What is the criteria for dividends to qualify for the lower rate?
- They must be received from a domestic corporation or a foreign corporation whose stock is tradable on an established US securities market.
- Shareholders must own the stock for a reasonable amount of time (60days before and after the dividend date).
If dividends don’t qualify for the lower rate, how is it taxed?
As ordinary income as high as 39%.
What are 3 steps of dividends being taxed?
- Classified as dividend income to the extent of TP’s E and P (earnings and profits).
- Reduction of basis in stock when E and P is reduced to 0 (not taxed, but has tax implication).
- If any remaining, it will be a capital gain.
Dividends taxed ex: How much income does the TP have?
Distribution: $10,000. E and P: $4,000. Stock basis: $5,000.
10,000 - 4,000 (taxed as dividend income) = 6,000.
6,000 - 5,000 (now the basis is reduced to 0 by applying this here) = 1,000 = Capital gain (LT or ST depends on how long the stock was owned).
Are stock dividends to common stock holders taxable? When preferred stocks are given to those holders?
No.
No.
Are stock dividends to preferred stock holders taxable? When common stocks are given to those holders?
Yes.
Yes.
Stock dividend: How is the TP’s basis in the stock determined after stock dividend is given?
Spread over all shares owned.
The total basis will be the same, but the basis per share will be reduced.
Dividend income: what are 2 cases STOCK dividend is taxable? When taxed, what amount is used?
- If the dividend is not proportionate (not everyone received the same %).
- Taxable for everyone If one shareholder has the option of receiving some in cash even if he declines.
Taxed at FMV.
Rents and royalties: Are there any deductions?
Yes. Depreciation, taxes, insurance, and other ordinary and necessary expenses.
Rents and royalties deductions: what to do when the TP also occupies the rental?
Only % of rental to other people can be deducted.
Rents and royalties deductions: what happens to the portion of expenses that are due to TP’s personal use? Where would it be reported?
Not deductible as rental expenses, but may qualify as itemized deductions.
Reported on Schedule E, page 1.
Where does a partner’s share of income from a partnership is reported on? What about the partner’s share of ordinary income? Who reports that?
Form K-1.
Reported by the partner on Schedule E, page 2 of Form 1040.
Partnership/LLC: does the character of income such as ordinary, capital, deductions, credits change when they flow through to the partner (owner)?
No, stay the same.
Where does a shareholder’s share of income from S corporation is reported on? What about t of his ordinary income? Who reports that? What about the characters of items?
All same as partnership.
Sole Proprietorship: What are 2 major types of business income?
- Gross profit (gross sales receipts - COGS).
2. Professional fees such as a CPA or an attorney performing professional services.
What’s the classification of board of directors’ fees? Where is it reported on?
Self-employment income (reported on Schedule C).
What reduces business income? Where is business income reported on?
Business expenses and expenses for business use of home. Schedule C (Form 1040).
Which form is Farming income reported on?
Schedule F and Schedule SE. Generally rule are the same.
Farming tax rules: What is the classification for all harvested products held for resale, feed, or seed? How does this classification impact the expense?
Inventory.
The timing of reporting as expense on Schedule F is impacted.
Farming tax rules: Classification of livestock held for resale? For breeding or dairy?
Inventory. Business assets (Sec. 1231 assets - can be depreciated).
Farming tax rules: how is the cost computed?
Unit-livestock-price method (animals are grouped based on type and/or age).
Farming tax rules: Classification for growing crops?
Not included in inventory.
Farming tax rules: what’s an option to report tax?
A TP can elect to determine current year tax liability by averaging, over the previous 3 years, all or part current year income.
