Chapter 13 Federal Taxation

The Net investment income tax applies to net investment income. High income is considered more than ______________________. For this purpose, income for most individuals equals:

$200,000; AGI plus any foreign income exclusion, or modified AGI

Explain how a combination of entity/conduit concept works and who it applies to

- applies to NONCASH distributions to s shareholders (remember, s can use both entity and conduit) - appreciated property=gain is recgonized as corporate level (ENTITY) -then CONDUIT concept is applied as a passthrough of gain to shareholders

If self-employment income is negative/loss, it is treated as ___________ in computing the additional medicare tax

0

A _______% additional medicare tax is imposed on all wages in excess of 200000

0.9

What does application of the entity concept result in?

1. Results in earnings components losing their identity when passed through to shareholders in the form of dividends, and means that they cant be used to offset capital losses at the shareholder level 2. excludible interest income is converted into taxable dividend

The partnership and LLC have many opportunities to use special allocations, including the following:

1. The ability to share profits and losses differently from the share in capital. 2. The special allocation required for the built-in gain/loss of contributed property. 3. The special allocation of any item permitted if the substantial economic effect rule is satisfied. 4. The optional adjustment to basis that results from distributions. 5. The optional adjustment to basis that results from an acquisition by purchase, taxable exchange, or inheritance.

What 2 tax concepts are illustrated below? Hawk Corporation has been operating as an S corporation since it began its business two years ago. For both of the prior years, Hawk incurred a tax loss. Hawk reports taxable income of $75,000 this year and expects that its earnings will increase in the foreseeable future. Part of this earnings increase will result from Hawk's expansion into other communities in the state. Because most of this expansion will be financed internally, no dividend distributions will be made to the shareholders. Assuming that all of Hawk's shareholders are in the 24% tax bracket, their combined tax liability for this year will be $18,000 ($75,000 × 24%). Although the S corporation election will avoid double taxation, the shareholders may have a cash flow problem (i.e., they owe tax on their share of Hawk's income even though they did not receive any cash distribution from Hawk). In addition, the actual tax liability for this year would have been less if Hawk had not been an S corporation (75000*.21)=15750

1. The cash flow issue could be resolved by terminating the S corporation election. A tax liability then would be imposed at the corporate level. Because the corporation did not intend to make any dividend distributions, current double taxation of entity income would be avoided. Terminating the election also reduces the overall shareholder-corporation tax liability by 2250 (18000-15750) 2. Tax decisions on the form of business organization should consider more than the current taxable year. If the s election is terminated, another election will not be avaliable for 5 years. If the earnings exceed the expansion needs, hawk could incur an additional tax. Thus, the decision to revoke the election should be made using at leas a 5 year time frame. A better solution would be to retain the election and distribute enough dividends to the s corporation shareholders to enable them to pay the shareholder tax liability

Classification of an owner as a nonemployee produces 2 negative results

1. The deduction for the cost of the fringe benefit to the entity is disallowed at the entity level 2. The owner whose fringe benefit has been paid for by the entity must include the cost of the fringe benefit in gross income

Typical forms of transfer that will result in a deduction to the corporation are

1. salary payments to shareholder employees 2. lease payments to shareholder-lessors 3. interest payments to shareholder creditors *all three are evaluated in terms of reasonableness

For an asset sale, the seller of the business can be either the _______________ or ___________________. if corporation: if shareholders:

1. sells business (assets) 2. pays debts not transferred 3. makes liquidating distribution to the shareholders 1. pays debts that will not be transffered 2. makes liquidating dist 3. sells C-SPM, S-PMS

Why is an asset sale of a c corp subject to double taxation?

1. taxed on actual sale of assets 2. taxed on liquidating dist of assets to shareholders, who sell the assets. (shs are taxed when they receive the assets)

Payroll (employment) taxes can be a significant cost for a business and its owners, with a combined tax rate of _________% Such costs can be classified into two categories.

15.3% FICA taxes (Social Security and Medicare). Self-employment tax.

Usually, transfer of property to a corp is taxable unless the code ______ control requirement of ____% is satisfied.

351, 80%

Special allocations are not permitted for the

C corporation

A partnership or an LLC can convert to either of the following entity forms, which permit having multiple owners.

C corporation. S corporation.

Although the S corporation is a conduit, it is treated more like a ____________________________ than a partnership or an LLC with respect to special allocations. This treatment results from the application of the per-share and per-day rule. Although the S corporation is limited to one class of stock, it still can make ____________________ payments to its shareholders. However, the IRS can _________________________income among members of a family if fair returns are not provided for services rendered or capital invested

C corporation; dividend; redistribute

Individuals are subject to the alternative minimum tax but _____ ___________________ are not. For the sole proprietorship, the effect is _______________. For the partnership, LLC, and S corporation, the effect is _______________. Why?

C corporations; direct (sole prop- amt liability calc is included with tax form); indirect (parnership, llc, s corp); bc the tax preferences and adjustements are passed through from the entity to the entity's owners and the AMT liability calculation is not attacged to the tax form that reports the entity's taxable income)

Techniques that can be used to minimize the current period tax liability include the following:

Distribution policy. Recognition of the interaction between the regular tax liability and the AMT liability. Utilization of special allocations. Favorable treatment of certain fringe benefits. Minimization of double taxation. Consideration of the qualified business income deduction.

A corporation's EP affects whether a distribution is treated as a dividend vs return of capital vs capital gain if distributions are made in years where EP is less than the distribution, the tax effect to the shareholder is

EP<distributions= tax effect reduced EP>distributions=tax effect increased

T/F All favorably taxed fringe benefits receive exclusion treatment.

False, not all. Income inclusion for some benefits can be deferred

The tax rate of 3.8% applies to the lesser of

NII or MAGI in excess of the threshold amount

the election of S status produces the following tax consequences.

No recognition of gain or loss. Carryover basis for the shareholders' stock. Carryover basis for the assets of the corporation.

The passive activity loss rules are effective for the partnership, LLC, and S corporation, but only apply to

PSCs and closely held corps

What does code 721 do?

Provides for no recognition of gain or loss on the contribution of property to the partnership or llc in exchange for an ownership interest

Depending on the type of tax entity, FICA and self emp taxes have different effects on the entity and its owners as follows: Sole proprietorship: Partnership: Limited partnership: C corporation: S corporation: LLC:

Sole prop: Wages of emps are subject to FICA, which must be matched by sole prop; schedule C income is subject to self emp tax Partnership: wages of emps-fica, must be matched by partnership. partner is not emp. but guaranteed payments made by the partnership to a partner are treated as self-employment income subject to self-emp tax; partner's distributive share of net earnings of partnership also subject to self-emp tax Limited partnership: wages of emps-fica, must be mached. limited partner not emp but guaranteed payments to partners are subject to self emp. distributive shares not subject to self emp tax c corp: wages of emps- fica, matched. shareholder who works for corp is emp and subject to fica; net earnings of the corporation have no effect on shareholder's self-employment income s corp: wages-fica, matched. shareholder who works for corp is emp and subject to fica shareholder's share of net earnings not self-emp income, although the sh is subject to income tax on such earnings. (therefore, the shareholder of an s corporation receives more beneficial treatment than a sole proprietor or partner whose share is subject to self emp tax) llc: emp wages- fica, matched. if llc owner is limited partner, share is not subject to self emp tax. if not limited partner, then it is taxed

A C corporation can convert to any of the following entity forms.

Sole proprietorship (if only one owner). Partnership (if more than one owner). LLC. S corporation.

What is the advantage of the conduit concept over the entity concept?

The ability to make special allocations

Assuming that the § 351 requirements for nonrecognition are satisfied:

The basis of the stock to the shareholders is a carryover basis. The basis of the assets to the corporation is a carryover basis.

Why is this allocation not available for the S corp?

The recognized gain or loss will be reported by the shareholders based on their stock ownership.

What is the purpose of the self-employment tax? This requires the self-employed taxpayer to pay both the _________________ and ___________________ shares of the social security and medicare tax Write: self emp tax=15.3% up to 142800 and 2.9% of self-emp income in excess of 142800; additional medicare tax in excess of $200,000

To provide social security and medicare benefits for self-employed individuals; employer and employee

T/F In selecting a form for doing business, the determination of the tax consequences should not be limited to federal income taxes. Consideration should also be given to state and local income taxes.

True

T/F In most instances, the legal form and the tax form are the same

True, but in some cases, the IRS may attempt to tax a business entity as a form different from its legal form

For the closely held corporation, passive activity losses cannot be offset against portfolio income but they can be offset against:

active income

General partnership

all partners are liable for partnership obligations

An S corporation is generally treated as a conduit with respect to its operations except when

an entity level tax applies

Under the conduit concept, the entity is viewed as Under entity concept, The sole prop is seen as the same with the owner, so recognition of realized gain or loss does not occur when owner contributes asset to sole prop. Instead, the basis is a ___________________ ____________. If an asset, such as a car, is converted from personal to business use, its basis is the lower of the

an extension of owners entity is separate and distinct from owners carryover basis owners basis at date of conversion or fmv

To what does code 721 apply to?

applies to contributions associated with the ormation of the partnership or llc and later contributions

The sale of the business held by a C corporation can be structured as either an _________ _______ or __________ ________

asset sale; stock sale

Both the _______________ and ___________________ _________________ ______________ provisions restrict the tax attrativeness of investments in real estate, particularly in the limited partnership form. In most cases, the tax consequences have a critical effect on the economic results.

at-risk, passive activity loss

For a partnership or LLC, profits and losses of the entity affect the owner's _____________ in the entity interest. Likewise, the owner's basis is increased by the share of entity liability _________________ and decreased by the share of entity liability _________________

basis; basis is increased by liability increases and decreasdd by liability decreases

structuring the sale of the business as a STOCK SALE may produce detrimental tax results or the purchase. The _________ of the corporation's assets is not affected by the stock sale. If the _______ of the stock exceeds the corporation's _________________ ___________- for its assets, the purchaser is denied the opportunity to ___________ _________ the basis of the assets to reflect the amount in effect paid for them through the _______________ _________________

basis; fmv>adjusted basis=denied opp to step up the basis of assets to reflect the amount paid for them through the stock acquisition

Why is this allocation not available for the C corp? Or the S corp? For the S corporation, no special allocation is available. The recognized gain or loss will be reported by the shareholders based on their stock ownership.

because the gain or loss is recognized at the corporation level rather than at the shareholder level.

From the perspective of the owner, when the entity provides such favorably taxed fringe benefits to an owner, the benefits are paid for with

before tax dollars

A policy of no distributions to shareholders can avoid the second taxation. This will occur if the shares of stock are bequeathed to the taxpayer's _________________ As a result of the step-up in basis rules for inherited property, the basis of the stock for the beneficiaries become the ____________ _________________ __________ at the date of the decedent's death rather than the decedent's basis

beneficiaries; fair market value

Nontax factors to consider when making a business decision:

capital formation (ability of entity to raise capital), limited liability (how much liability you want), estimated life of business, number of owners and role, freedom to choose methods of transferring ownership interests, organizational formaility, ease of increasing equity by admitting new owners

Under code 721, the partnership or llc takes a ________________________ ______________ for the contributed property, and the owners take a _______________________ ___________ for their ownership interests

carryover basis; carryover basis

This code provides for no recognition of gain or loss on the contribution of property to the partnership or llc in exchange for ownership interest

code 721

The additional medicare tax is imposed on the taxpayer's

combined wages and self-employment income

What are some techniques for getting cash out of the corp to shareholders without incurring double taxation?

compensation payments to shareholder-employees, lease rental payments to shareholder lessors, and interest payments to shareholder-creditors (these payments are deductible- do not incur double taxation, reduce corporate taxable income)

A distinction must be made between distributions of earnings and other distributions for the S corporation. The S corporation is generally treated as a _______________ with respect to its operations, except when an entity-level tax applies.

conduit

The partnership, LLC, and S corp use the _______________ concept in reporting the results of operations. Any item that is subject to special treatment on the taxpayer owners' tax return is reported _______________ to the owners. Other items are reported as ordinary income

conduit; separately

Under this code 721, partnership/llc takes carryover basis in ____________________ _______________ and owners take a carryover basis in ________________ ___________

contributed property; ownership interests

$721 provides for no recognition of gain or loss on the

contribution of property to the partnership or llc in exchange for ownership interest

Due to the entity concept, tax exempt is excluded in calculating: but included in calculating: Therefore, excludible interest income is converted into a _________________ ______________

corporate taxable income; current earnings and profit; taxable dividend

Of the different forms of business entities, which form offers the greatest ease and potential for obtaining financing and why?

corporate; it can issue additional shares of stock

Entity approach- Conduit approach-

corporation (bc it is separate); partnership and llc bc passthrogugh

Only the _____________________ is potentially subject to double taxation. Some techniques are available for eliminating second taxation:

corporation: 1. transferring funds to the shareholders in a manner that is deductible to the corporation 2. not making distributions to the shareholders (double taxation cant occur if you dont make dividend payments. they are not mandatory and are discretionary to the BoD) 3. making distributions that qualify for return of capital treatment at the shareholder level 4. making the s election

The IRS defines the term employee restrively. For the owner of a business entity to be treated as an employee, the entity must be a _______________ For fringe benefit purposes, an S corporation is treated as a ____________________, and a greater than 2% shareholder is treated as a ________________

corporation; partner

Which entities have double taxation?

corporation; taxed on earnings of corp and owners are then taxed on distributions

Ideally, a fringe benefit produces the following tax consequences:

deductible by the entity (employer) that provides the fringe benefit excludible from the gross income of the taxpayer (employee) who receives the fringe benefit

What qualifies for return of capital treatment?

distributions in EXCESS of EP

One area of difference among business entity types is that one is subject to _________________ taxation and others are _____________-______________.

double;pass throughs

Why is the stock sale more advantageous

dual advantage to the seller of being less complex as legal transaction and tax transaction; advantage of a way to avoiding double taxation; tax favored capital gain or loss to shareholder

Check the box regulations have greatly simplified the determination of ________________ _______________________ and are most used by

entity classification; multinational taxpayers

The _______________ ______________ is the source of double taxation for the c corporation form, so it only seems to be a disadvantage. However, whether the entity concept actually generates disadvantegous results depends on the (1) and (2) and (3)

entity concept; relative tax rates and owners and the nature of the income/loss

Individual tax rates often exceed the 21% corp tax rate. In such cases, the use of a __________-________________ entity may be unattractive

flow-through

If the amount realized exceeds the fair market value of the identifiable assets, the excess is attributed to _______________, which produces _____________ __________ for the seller. If the excess payment is attributed to a covenant not to compete, the related gain is __________________ ______________. Thus, the seller prefers the excess to be attributed to ________________.

goodwill; capital gain; ordinary income; goodwill

Limited liability company

hybrid business form that combines corporate characteristic of limited liability or the owners with the tax characteristics of a partnership; taxed as partnerships

Application of the entity concept results in the earnings components losing their ___________ when they are passed through to shareholders in the form of dividends. Because capital gains lose their identity when passed through in the form of dividends, they cannot be used to offset ________________ ______________ at the shareholder level

identity; capital losses

For an ongoing corporation, the stock redemption provisions offer an opportunity to reduce The corporate liquidation provisions can be used if the business entity will

includible gross income at the shareholder level cease to operate in corporate form

From the buyers' perspective, the form of the transaction changes the federal ____________ _____ consequences. If the event is an asset purchase, the basis for the assets= Assuming that the buyers intend to continue to operate in the partnership or llc form, the assets can be contributed to the entity ______-____________ and the owner's basis is equal to the= entity's basis=

income tax; amount paid or them; tax free; owner's basis is the purchase price ; entity's basis= also purchase price

The treatment of an S shareholder falls between that of the owner of a partnership or LLC and C corporation. It is ________________ by profits and _________________ by losses, but not affected by liability increases or decreases

increased; decreased

Limited partnership:

limited partners do not participate in management and their liability is limited to their investment in the entity; must have at least one general partner

The _______________ partnership offers greater potential than the _________________ partnership because it can secure funds from _________________ (limited partners)

limited>general, investors

The purpose of the qualified business income deduction is to

lower the tax rate applicable to the owner to compensate for how tax reform lowered the rate for C corps from a max of 35% to 21%

For the partnership or LLC, this special allocation treatment is ___________________.

mandatory

All of the wages of an employee are subject to ________________ taxes. However, FICA ___________________for the social security taxes is applied only to the first $142800 of an employee's earned wages. In addition, the employer must pay to the IRS an amount ____________ to the FICA tax normally withheld from employee wages

medicare; withholding; equal

closely held corporation

more than 50% of value is owned by not more than 5 individuals

Under code 351, the control requirement makes it ___________ likely that the shareholders who contribute _______________ property to the corporation after the _________________ of the corporation will _____________________ gain

more; appreciated; formation; recognize

Classification as capital gain or ordinary income depends on the _____________ and __________________ _________________ of each individual asset. Ordnary income property= Code $1231 property such as land, buildings, and machinery used in the business will produce= Capital assets such as investment land and stocks=

nature and holding period; ordinary income=ordinary gains and losses capital 1231= 1231 gains and losses capital assets=capital gains or losses

Unless the legal protection provided by a covenant not to compete is needed, the buyer is _____________ as to whether the excess is attributed to a goodwill or a covenant. Both goodwill and a covenant are amortized over a ______-year statutory period

neutral; 15

If the code 351 control requirement of 80% is satisified,

no gain or loss is recognized and corporate property and shareholder stock take carryover basis

A combination of entity/conduit concept applies to ___________ distributions to S shareholders. If the property distributed has _________________ in value, the realized gain is recognized at the _________________ level. Then the conduit concept is applied as a __________________ of the gain to shareholders.

noncash; appreciated; corporate; passthroguh

Fringe benefits can be used to benefit the owner of an entity and at the same time have a beneficial effect on the combined tax liability of the entity and owner. Because this structure is generous to taxpayers, congress has enacted various _______________________ provisions that negate favorable tax treatment if the fringe benefit program is discriminatory. In addition, the code includes several statutory provisions that make the favorably taxed fringe benefit treatment available only to _________________.

nondiscrimination; employees

For the C corporation, the shareholder's basis for the stock is _____ affected by corporate profits and losses or corporate liability increases or decreases

not

For a closely held corporation, what can passive activity losses be offset against?

not against portfolio, yes against active income

The application of the conduit concept results in distributions: The application of the entity concept produces the opposite result. Therefore, distributions can be made to partners, LLC owners, or S corp shareholders ______-__________, whereas the same distribution would produce ______________ ______________ treatment for C corp shareholders

not being taxed to owners; tax free, dividend income

Although the NIIT does _______ apply to partnerships and s corps, it can apply to their ______________. these pass through entities report pertinent information to the owners so that they can apply to the niit correctly.

not; owners

Individuals may deduct _____________ of the self-employment tax paid for AGI. No portion of the additional Medicare tax is ________________

one half, deductible

The application of the at-risk rules can produce a harsher result for the ________________ and the ___________ than for the _____________________

partnership and LLC , more than s corp

Which entity form does the conduit apply to?

partnership and llc

The at-risk rules apply to the

partnership, LLC, S corporation, closely held C corporations

Compared to the sole proprietorship, the _______________ has greater opportunity to raise funds through

partnership; POOLING of owner resorces

Check the box regulations provide an elective procedure that enables certain entities to be classified as ___________________ for federal income tax purposes even though they have corporate characteristics.

partnerships

Special allocatons are not permitted for the C corporation. Indirectly, hwoever, the corp form may be able to achieve results similar to those produced by special allocations through

payments to owners and different classes of stock *however, even in these cases, the breadth of the treatment and flexibility are less than that achievable under the conduit concept

The sale of ownership interest is treated as the sale of a capital asset, subject to ordinary income ________________ for ______________ _________________ and __________________ _______________ ________________

potential; unrealized receivables; substantially appreciated inventory

A c corporation is a PSC if the following apply

principal activity is performance of personal services, services are performed by owner-employees, owner-employees own more than 10% in value of the stock of the corporation

A sole proprietorship is limited to the

proprietor's capital

limited liability partnership

provides all partners with protection from partnership liabilities, but only for the liabilities that arise from acts of fraud; otherwise, they are still liable for contractual liabilities

a closely held C corporation that does not make distributions may eventually encounter an accumulated earnings tax problem unless the ____________________ ____________ requirement is satisfied. The _______________________ ____________ tax rate of 20% is higher than the 15% rate for qualified dividends for most individual taxpayers For certain high income taxpayers, the tax rate for qualified dividends is _____%. In addition, high income individuals may also be subject to the net investment income tax of ________%

reasonable needs, accumulated earnings; 20%, 3.8%

Making an S election eliminates double taxation by making the corporation a tax _____________ rather than a taxpyer. Thereffore, the only income tax liability is at the __________________ level.

reporter;shareholder

Which form of corporation provides a way to avoid double taxation and perhaps to subject the earnings to a lower income tax rate while retaining corporate form? What is the problem?

s corp; (1) s corp ownership strucuture is restricted both in number and types of shareholders (2) sometimes there might be statutory exceptions that cause double taxation (3) distribution policy of s corp may create diffs with the wherewithal to pay concept

The sale of a partnership or an LLC can be structured as the _____________________ or _____________________________. Asset sale- treated the same as for a ___________ _____________________. Sale of ownership interest- treated as the

sale of assets or sale of an ownership interest; sole proprietorship; sale of a capital asset, subject to ordinaryincome potential for unrealized receivables and substantially appreciated inventory

Regardless of the form of the transaction, the sale of a sole proprietorship is treated as the: Thus, gains and losses must be calculated __________________ for each asset sold.

sale of individual assets; separately

If capital gain treatment can produce beneficial results for the taxpayer, which sale is prefereable?

sale of ownership interest

Under the redemption and liquidation rules, a distribution may be treated as a

sale of shareholders' stock, resulting in tax free recovery of basis and capital gain

From the perspective of the seller, the ideal form of the transaction is a __________ ________. from the purchaser's perspective, the ideal form is an _____________ _______________-.

seller:stock sale purchaser: asset sale

Because the conduit concept applies, any passive activity results are _______________ stated at the partnership, LLC, or S corporation level and passed through to the owners to use in preparing their own income tax returns.

separately

The code 351 control requirement makes it more likely that

shareholders who contribute appreciated property to the corporation after the formation of the corporation will recognize gain

FICA (Federal Insurance Contributions Act) taxes are imposed on the wages of employees using the following rates:

social security: 6.2% medicare: 1.45%

Another technique to minimize the tax liability of the business entity is to operate as a

sole prop, partnership, or S corp 9deduction is available for people who own these)

Which entities only have a single level of taxation? Why?

sole proprietorship, partnership, and LLC; occurs bc the owners and entity are not considered separate for income tax purposes. So income tax is at owner level rather than entity level

What are the principal legal forms for conducting a business entity?

sole proprietorship, partnership, limited liability company, corporation (this is the same for the tac forms, except corp is divided into S and C or regular)

To the extent the fair market value of property contributed to the entity at the time of formation is not equal to the property's adjusted basis, it may be desirable to make a ___________________ ___________________ associated with the ______________________sale of the contributed property by the entity. With a special allocation, the owner contributing the property receives the ____________ tax benefit or detriment for any recognized gain or loss that subsequently results because of the initial difference between the:

special allocation; subsequent; entire; adjuste basis and fair value

The taxpayer is generally bound for tax purposes by the legal form that is selected. 1. A special _____________________ rule, however, may allow owners of certain corporations to elect to treat the entity as an ____ corporation to receive tax treatment similar to that of a ___________________. 2. In addition, taxpayers can control which set of _____ ___________ will apply to their business operations. (check the box procedures)

statutory; S; partnership tax rules

Another approach to controlling the entity tax is through: Double taxation can be reduced if the corporate distributions to the shareholders can qualify for :

stock redemption or liquidation return of capital rather than dividend treatment

Earnings distributions are subject to conduit treatment and are generally ________-__________. A few S corporations have C corporation earnings and profits and may create ______________ _________________. Distributions in excess of E &P qualify for:

tax free, dividend income; return of capital treatment

An even more negative result is produced when dividends are paid out of __________-________________ income. Tax-exempt income is excluded in calculating __________________ _________________ _________________, but is included in calculating ___________________ ________________ and _______________. Thus, excludible interest income is converted into a taxable dividend because of the entity concept.

tax-exempt; corporate taxable income; current earnings and profits

Because the entity approach applies to the corporation, the transfer of property to a corporation in exchange for its stock is a

taxable event

remember- cannot step up basis of assets in stock sale but the asset sale resolves the purchaser's problem of not being able to step up the basis of the assets to their fair market value. How?

the basis for each asset is the amount paid for it. to operate in corporate form, the purchaser then needs to transfer the property to a corporation in a $351 transaction

Since limited liability is not available to shareholders of small corporations, such a corporation may be unable to obtain external financing unless

the shareholders can guarantee the loan

Interest payments to shareholder-creditors may result in the IRS raising the _________ _______________ issue and reclassifying some or all of debt as equity.

thin capitalization

2 variables that relate to the adverse effect of double taxation are the

timing and form of corporate distributions timing: if no distributions are made in the short run, then only single taxation occurs form: in the form of dividend or return of capital? (stock redemption or complete liquidation?)

NII includes ___________________ forms of investment income, as well as rents and income from _______________ activities. For planning activities, tps subject to the niit must consider the effect of ________________ on nii and magi. High-income taxpayers may want to consider investments in ________-________________ bonds and use other planning strategies to reduce ___________________ to the niit.

traditional; passive; tax-exempt; exposure

T/F Limited liability is not available to all corporations, such as individual professionals and shareholders of small corps.

true

T/F Regardless of the approach used for an asset sale in c corp, double taxation will occur. Why?

true; the corporation is taxed on the actual sale of the assets and as taxed as if it had sold the assets when it makes the liquidating distribution of the assets to the shareholders who then sell the assets. the shareholders are taxed when they receive cash or assets distributed by the corp

Another additional medicare tax applies on the _________________ __________________ of ______________ ________________ individuals, trusts, and estates. Although this is not a payroll tax, its rate of 3.8% is tied to to payroll tax rates

unearned income; high bracket

What is a key factor in evaluating the tax consequences of disposing of a business?

whether the disposition is viewed as the sale of an ownership interest or as a sale of assets (tax treatment is more favorable if the transaction is treated as a sale of ownership)

Because these payments are deductible to the corporation, they reduce corporate taxable income. If the payments can be used to reduce corporate taxable income to zero, the corporation incurs a:

zero current tax liability