Unit 1

Question 1

What percentage of businesses are sole proprietor ships?

Answer 1

70%

Question 2

Is a sole proprietorship a legal entity?

Answer 2

No – a sole proprietorship is not a separate legal entity

It is an unincorporated business that is owned and controlled by one person

It may be a single person business or have several employees, but there is only one owner who accepts all the risk and liability of the business

Question 3

A sole proprietorship – passing onto a new owner

Answer 3

It cannot be passed on to a new owner as the same business entity

Sole proprietorship is sold – it must be operated by the new owner as either

1. A different proprietorship.

Or

2. A different type of business entity through a sale of assets of the business.

Question 4

An activity qualifies as a business if…

Answer 4

It’s primary purpose is for profit

And if the taxpayer is involved in the activity with continuity and regularity

Question 5

So proprietors are required to report on schedule C with a net earnings of

Answer 5

$400

Question 6

Partnerships

Answer 6

A relationship that exists between two or more taxpayers who join together to carry on a trader business

Each taxpayer contributes money, property, labor, or skill, and expects to share in the profits and losses of the business

Question 7

Partnerships – filing requirements, paying taxes

Answer 7

Must file an annual information return to report the income, deductions, gains, and losses from its operations

But the partnership itself does not pay income tax

Profits or losses pass through to its partners on a K – one, who are then responsible for reporting their respective shares of the partnerships, income or loss on their own returns

Question 8

Where is partnership income reported on a 1040

Answer 8

Page 2 of schedule E, supplemental income and loss

Question 9

CPAR

What does it stand for, what does it mean?

Answer 9

Centralized partnership audit regime

In the event, a partnership tax return is audited – the partnership itself will be subjected to pay income tax if it is determined that it had originally under reported it’s taxable income on the return

A partnership can elect out of CPAR on the 1065 on schedule B-2

Question 10

CPAR - electing out

Answer 10

A partnership can elect out of the CPAR if it meets all the following requirements

1. Must have 100 or fewer partners during the year.
2. Has only eligible partners which include:

• Individuals (not LLC’s or trusts)
• C corporations, or foreign entities classified as corporations
• S corporations
• estates of deceased partners, but not bankruptcy estates

Partnerships with just one nonqualified partner cannot opt out of the CPAR

Question 11

CPAR - partnership representative

Answer 11

The CPAR requires partnerships to designate a partnership representative with the filing of their tax return

Representative is not required to be a partner

Can be an individual or a business entity and must have a substantial presence in the US

Representative has the authority to make decisions for the partnership during the course of an audit

Question 12

Partnership – how many partners can there be?

Answer 12

A partnership can have an unlimited number of partners

Partners can be foreign or domestic

Must always have at least one general partner, whose actions legally bind the business and who is legally responsible for a partnerships, debts and liabilities

Can be a small business run by a married couple

Can be a complex business organization with thousands of general partners and limited partners

Question 13

The default legal classification for a partnership

Answer 13

The default is a general partnership where all partners are general partners with each partner, jointly and severally liable for the debts and obligations of the partnership

Question 14

Joint undertaking or coownership

Answer 14

Not automatically a partnership

Co-owners of a rental property is usually not considered a formal partnership unless the co-owners provide substantial services to the tenants

Question 15

Are partners employees of the business

Answer 15

No – they should not be issued a form W –2

They would receive a copy of schedule K – 1

The 1065 return must show the name and address of each partner and the partners share of taxable income

The 1065 must be signed by a partner or member

Question 16

LP - what is it?

Answer 16

A limited partnership

A partnership that has at least one limited partner in addition to its general partner or multiple general partners

A limited partnership allows an investor (the limited partner) to own an interest in a business without assuming personal liability or risk beyond the amount of their investment

Question 17

LP - application requirement

Answer 17

A limited partnership is a state level entity

In order to form an LP - a certificate of limited partnership or certificate of formation must be filed with the secretary of state where the partnership chooses to do business

Question 18

LLP - what is it?

Answer 18

A limited liability partnership

An entity that is formed to understate law and generally used for specific professional services such as a law firm or a CPA firm

An LLP allows each partner to actively participate in management affairs, but still provide limited liability protection to each partner

A partner would only be at risk for their own malpractice and or their own interest in the partnerships assets – not for the other partners

Question 19

Why would a business choose to form an LLP instead of an LLC?

Answer 19

Some states prohibit the formation of an LLC for certain business types

For example, – California and New York – LLC’s cannot provide certain professional services like doctors, CPAs, attorneys, veterinarians, and other license professionals

Question 20

Married couple businesses and qualified joint ventures – what are they considered?

Answer 20

Often a small business is operated by spouses without incorporating or creating a formal partnership agreement

But the business is still considered a partnership, whether or not there is a formal partnership agreement

Question 21

QJV - what is it, filing

Answer 21

Qualified joint venture

A business owned by a married couple who both materially participate, and they are the only members

Allows the couple to avoid filing a partnership return

Each spouse would still file their own schedule C and separate schedules SE

Only available to married couples who filed joint tax returns

Only available to businesses owned and operated by spouses as co-owners and not in the name of a state law entity (LLC and LP do not qualify)

Question 22

MMLLC

Answer 22

Multi member limited liability company

If it is treated as a partnership for tax purposes, must file form 1065

Question 23

Community property state – qualified joint venture – LLC

Answer 23

If a couple owns a business that they run as a qualified joint venture

And decide to form an LLC for liability protection

As long as they live in a community property state

They can continue to report their income and loss on schedule Cs by making an election to be treated as a qualified joint venture

If they do not live in a community property state – must file form 1065

There are currently nine community property states

Question 24

C Corporations - what is it, how is it formed, filing?

Answer 24

When forming a corporation – prospective shareholders, provide money, property, or both in exchange for the issuance of stock

A corporation is considered an entity separate from its shareholders and must elect a board of directors responsible for the oversight

Most major companies are organized as C corporations

Can have an unlimited number of shareholders, and maybe either foreign or domestic

Annual tax return on form 1120

After tax profits distributed to shareholders through dividends – resulting in double taxation

Question 25

C Corporation tax rate

Answer 25

All C corporations are taxed a 21% flat rate, regardless of their size or business activity

Question 26

S corporation - how is it formed, tax and filing?

Answer 26

It is a distinct form of entity, organized as a corporation for legal purposes But elected with the IRS for tax purposes Corporation is generally not subject to tax – it’s income, losses, deductions, and credits are passed through directly to its shareholders, similar to a partnership On rare occasions, the corporation may be responsible for income tax on certain built-in gains and passive investment income Required to file an annual income tax return – 1120-S Reports each shareholders share of income or losses on schedules K – 1

Question 27

S-corporations must meet the following following requirements

Answer 27

1. Be a domestic corporation with 100 or fewer permitted shareholders (partnerships, corporations, and non-resident aliens are not eligible) 2. Have only one class of stock – voting and non-voting stock are not considered to be separate classes of stock as long as they have identical rights to distribution and liquidation proceeds. 3. Not an eligible type of corporation – certain financial institutions, insurance companies, and domestic international sales corporations are not eligible for S corporation status.

Question 28

PLLC

Answer 28

Professional service limited liability company

Question 29

LLCs -

Answer 29

Formed under state law by filing articles of organization Depending upon whether it has a single owner or multiple owners, an LLC will be treated for federal tax purposes as : 1. A disregarded entity. 2. A partnership. 3. A corporation if the entity elect to be treated as a corporation. Most LLCs are taxed as partnerships

Question 30

The benefit of an LLC

Answer 30

An LLC can provide the liability protection of a corporation With the tax benefits of a partnership Unlike a partnership, none of the members of an LLC are personally liable for its debts

Question 31

What determines whether a business qualifies as a farming business

Answer 31

It is based on the nature of the activity Not the entity type Includes crop production, animal, production, forestry, and logging, fishing

Question 32

Tax exempt organizations- nonprofits - what type of entity can they be and NOT be?

Answer 32

Nonprofit organizations may be created as corporations, trusts, or unincorporated associations But never as partnerships or soul proprietorships

Question 33

Tax exempt organizations - requesting status and filing requirements

Answer 33

Most charitable organizations must request tax exempt status by filing form 1023 – application for recognition of exemption Churches are treated as tax exempt by default and do not have to apply for formal exemption Most nonprofits must annually file form 990, return of organization, exempt from income tax to report its income and losses Form 990 is an informational return only, but maybe taxed on unrelated business activities on a separate form (form 990-T) Small organizations can file either a form 990 – EZ or the 990 – N

Question 34

Entity classification election

Answer 34

Certain business entities may choose how they will be classified for tax purposes by filing form 8832 Once a business entity makes an election to change its classification, it cannot change the election again within five years or 60 months

Question 35

How long should businesses keep records?

Answer 35

At least three years from when tax return was due or was filed whichever is later If a business has employees, it must keep all employment tax records for at least four years Records related to property must be kept until the statute of limitations expires for the year in which the property is sold or otherwise disposed of Records related to the basis of property may need to be kept for even longer in determining the basis of replacement property

Question 36

A business must apply for an EIN if any of the following apply

Answer 36

1. The business pays employees. 2. The entity operates as a corporation, exempt organization, trust, estate, or partnership. 3. The business files any of these tax returns (employment, taxes, or payroll, taxes, excise, tax, alcohol, tobacco, and firearms) 4. The business withhold taxes paid to a non-resident alien. 5. The business establishes a pension, profit, sharing, retirement plan.

Question 37

A new EN is required for any of the following changes

Answer 37

1. When a sole proprietor or partnership decides to incorporate, or when a sole proprietor, takes on a partner and becomes a partnership. 2. When a partnership becomes a sole proprietorship – example one partner dies 3. When a sole proprietor files for bankruptcy under chapter 7 or chapter 11. 4. When taxpayer terminates one partnership and begins another partnership. 5. When a business establishes a pension, profit-sharing, or retirement plan. 6. the individual owner dies, and the business is taken over by the estate – the new EIN would be the EIN of the estate

Question 38

A business does not need to apply for a new EN in the following instances

Answer 38

1. Merely to change the name or address of a business. 2. To change the location or add more business locations. 3. If a sole proprietor operates multiple businesses.

Question 39

Applying for an EIN

Answer 39

Most taxpayers can apply for an EIN online or paper file form SS –4, application for employer identification number

Question 40

IRS e-file mandate

Answer 40

Any business filing 10 or more returns or statements will be required to file the forms electronically The mandate includes form 1099 and W – 2

Question 41

If an employee fails to complete a form, W-4…

Answer 41

The employer must withhold federal income taxes from wages as if they were single and taking the standard deduction

Question 42

Businesses need to issue a form 1099 – NEC

Answer 42

Report non-employment compensation of $600 or more paid during the year to certain independent contractors

Question 43

Amounts reported on the 1099 – MISC include

Answer 43

$600 or more for rent, prizes and awards, crop proceeds, and certain medical and healthcare payments Royalties over $10 Gross proceeds paid to an attorneys office, when the total amount is $600 or more

Question 44

Form 1099-k

Answer 44

Payment card and third-party network transactions Like PayPal, square and stripe Reporting requirement is $600 ($5,000 phased in in 2024)

Question 45

Issuing a form 1099 – INT

Answer 45

A business not in a line of a business that pays interest as part of its regular activities – must report interest paid to any single individual taxpayer when the total is $600 or more for the year For banks and similar institutions, the reporting requirement threshold is $10 or more per year

Question 46

Form 8300, report of cash transactions over $10,000

Answer 46

When a business receives a cash payment of more than $10,000 from one transaction, it must file for 8300, report of cash payments over $10,000 received in a trader business, within 15 days after they receive the cash This type of transaction is also called a designated reporting transaction Business must also provide a written statement to each person or customer named on any form 8300 that is filed The statement must be provided to the customer no later than January 31 of the following year Businesses receiving over $10,000 in cash during two or more related transactions must also treat the transactions as a single transaction and file form 8300 cash includes coins and currency, cashiers checks, bank, transfers, travelers checks, as well as cash and a foreign currency Does not include bank wire, transfers, credit card transactions, ACH transactions, or amounts paid with personal checks Purpose of the form 8300 is to assist law-enforcement and its anti-money laundering efforts

Question 47

The IRS evaluates three primary characteristics to determine the relationship between a business and workers it pays for services

Answer 47

1. Behavioral control – covers whether the business has a right to direct or control. However, the work is done. 2. Financial control whether the business has a right to direct or control the financial and business aspect of the workers job. Factors include how the worker is paid whether expenses are reimbursed, and whether tools and supplies are provided. 3. type of relationship – the worker and the business owner perceive their relationship, such as whether there are written contracts or employee type benefits, such as vacation pay or a retirement plan

Question 48

Form SS-8

Answer 48

Determination of worker status for purposes of federal, employment, taxes, and income tax withholding Maybe filed by either of the business or the worker The IRS will review the case to officially determine the worker status

Question 49

Back Up withholding

Answer 49

If a business does not request a SSN or taxpayer identification number for a payee It must withhold federal income taxes, 24% rate For nonresident aliens, they are subject to withholding rate of 30% unless they lower tax trading rate applies

Question 50

Statutory Employees

Answer 50

Issued a w-2, but report wages on schedule C Statutory employee in box 13 on form W – two is checked Statutory employees are usually sales people or other employees who work on commission Not required to pay self-employment tax, because their employers must treat them as employees for Social Security tax purposes

Question 51

Statutory non-employees

Answer 51

Direct sellers Licensed real estate agents Certain companion sitters Treated as self-employed for federal tax purposes If: 1. Payments for services are directly related to sales rather than the number of hours worked 2. Services performed under a written contract, providing that they will not be treated as an employee for federal tax purposes. 3. Companion sitters, not employees of a companion sitting placement service treated as self-employed. Compensation reported on form 1099 – NEC Taxpayer reports income on schedule, see and pay self-employment tax

Question 52

Employing family members – a child working for a parent

Answer 52

If the parents business is a sole proprietorship or a spousal partnership… So if the child is under 18, wages are not subject to Social Security and Medicare taxes If the child is under 21 payments are not subject to FUTA tax All payments are subject to income tax withholding These special rules for children do not apply if the business is organized as either a C corporation or an S corporation… would be required to pay Social Security tax, Medicare tax, and FUTA tax

Question 53

Spouse employed by a spouse

Answer 53

Wages are not subject to FUTA tax if the business is a sole proprietorship But does not apply for a corporation or partnership

Question 54

Social Security wage limit in 2024

Answer 54

168,600

Question 55

FUTA tax rate

Answer 55

6% for up to 7,000 for EACH employee

Question 56

Self-employment tax for general partners versus limited partners

Answer 56

General partners report their income on schedule, C and our subject to self-employment tax and additional Medicare tax Limited partners considered passive activity income and is generally not subject to self-employment tax or the additional Medicare tax

Question 57

TFRP

Answer 57

Trust fund recovery penalty Trust fund taxes, referred to amounts withheld from employees wages (Social Security, Medicare, and income tax) by employers and held in trust until they are remitted to the treasury This penalty is also called the 100% penalty If a business does not deposit it trust fund taxes in a timely manner, the IRS may assess a trust fund recovery penalty The amount of the penalty is equal to the unpaid balance of the taxes The TRP may be assessed against any person who 1. is responsible for collecting or pain, withheld income and employment taxes, or for paying collected, excise taxes, and 2. Will fully fails to collect or pay them.

Question 58

How many shareholders can an S corporation have?

Answer 58

And S corporation cannot have an unlimited number of shareholders. Only a C corporation can. NS corporation is generally limited to know more than 100 shareholders

Question 59

Self-employment – when are you required to file an income tax return and a schedule SE

Answer 59

When net earnings from self-employment are $400 or more Net earnings not gross profit