REG 5

USE CARD!!! Sourcing of Income: Sourcing Rules for Gross Income and Deductions - sourcing rules determine whether income and deductions are generated from ___ or ___ the IRC identifies nine items of income that should be treated as resources of income from within the US: 1. 2. 3. 4. 5. 6. 7. 8. 9. - after the determination of the source of income (US or foreign), a taxpayer may be required to ___ and ___ to determine ___ and ___ the ___ will be used to calculate the foreign tax credit limitation

Sourcing of Income: Sourcing Rules for Gross Income and Deductions - sourcing rules determine whether income and deductions are generated from WITHIN or OUTSIDE THE US the IRC identifies nine items of income that should be treated as resources of income from within the US: 1. INTEREST 2. DIVIDENDS 3. PERSONAL SERVICES 4. RENT AND ROYALTIES 5. DISPOSITION OF US REAL PROPERTY INTEREST 6. SALE OR EXCHANGE OF INVENTORY PROPERTY 7. UNDERWRITING INCOME 8. SOCIAL SECURITY BENEFITS 9. GUARANTEES - after the determination of the source of income (US or foreign), a taxpayer may be required to ALLOCATE and APPORTION to determine US TAXABLE INCOME and FOREIGN SOURCE TAXABLE INCOME the FOREIGN SOURCE TAXABLE INCOME will be used to calculate the foreign tax credit limitation

Sourcing of Income: 1. Interest - interest income from ___ or ___ Sourcing of Income: 2. Dividends - the source of dividends is generally determined by ___ Sourcing of Income: 3. Personal Services - compensation for ___ or ___; there is a special exception for ____. they must meet the following requirements: PROBABLY DO NOT NEED TO KNOW 1. performed by a ___ temporarily present in the US for a period not exceeding a total of ___ 2. such compensation does not exceed ___ in the aggregate, and 3. the compensation is for labor and services performed as an employee of or under a contract with: - ___, ___, or ___, not engaged in trade or business within the US - an individual who is a ___, a __, or a ___, if such labor or services are performed for an __ or ___ maintained in ___ by such __, __, or ___

Sourcing of Income: 1. Interest - interest income from THE US or DISTRICT OF COLUMBIA Sourcing of Income: 2. Dividends - the source of dividends is generally determined by RESIDENCE OF THE OCRPORATION PAYING THE DIVIDEND Sourcing of Income: 3. Personal Services - compensation for LABOR or PERSONAL SERVICES PERFORMED IN THE US; there is a special exception for INDIVIDUALS TEMPORARILY PERFORMING SERVICES IN THE US. they must meet the following requirements: PROBABLY DO NOT NEED TO KNOW 1. performed by a NONRESIDENT ALIEN INDIVIDUAL temporarily present in the US for a period not exceeding a total of 90 DAYS DURING THE TAXABLE YEAR 2. such compensation does not exceed 3,000 in the aggregate, and 3. the compensation is for labor and services performed as an employee of or under a contract with: - A NONRESDIENT ALIEN, FOREIGN PARTNERSHIP, or FOREIGN CORPORATION, not engaged in trade or business within the US - an individual who is a A CIRTIZEN OR RESIDENT OF THE US, a DOMESTIC PARTNERSHIP, or a DOMESTIC CORPORATION, if such labor or services are performed for an OFFICE or PLACE OF BUSINESS maintained in A FOREIGN COUNTRY by such INDIVIDUAL, PARTNERSHIP, OR CORPORATION

Sourcing of Income: 4. Rents and royalties - rentals or royalties from ___ or ____ Sourcing of Income: 5. Disposition of US Real Property Interest: - ___, ___, and ___ from the disposition of a US property interest Sourcing of Income: 6. Sale or Exchange of Inventory Property: - __, __, and ___ derived from the purchase of inventory property ___ (other than within a possession of the US) and its ___ or ___ Sourcing of Income: 7. Underwriting Income Sourcing of Income 8. Social Security Benefits Sourcing of Income 9. Guarantees

Sourcing of Income: 4. Rents and royalties - rentals or royalties from PROPERTY LOCATED IN THE US or FROM ANY INTEREST IN SUCH PROEPRTY Sourcing of Income: 5. Disposition of US Real Property Interest: - GAINS, PROFITS, and INCOME from the disposition of a US property interest Sourcing of Income: 6. Sale or Exchange of Inventory Property: - GAINS, PROFITS, and INCOME derived from the purchase of inventory property OUTSIDE THE US (other than within a possession of the US) and its SALE or EXCHANGE WITHIN THE US Sourcing of Income: 7. Underwriting Income Sourcing of Income 8. Social Security Benefits Sourcing of Income 9. Guarantees: amounts received, directly or indirectly from

Special Allocation: Built-in Gain or Loss on Contributed Property when a partner contributes property with a FMV that is higher or lower than the property's adjusted basis, a ___ exists at the date ___ upon the ___ of that property, the ___ that existed at the date ___ must be specially allocated to the ___ *** note that any post-contribution gains or losses are allocated ___ ***

Special Allocation: Built-in Gain or Loss on Contributed Property when a partner contributes property with a FMV that is higher or lower than the property's adjusted basis, a BUILT-IN GAIN OR LOSS exists at the date OF CONTRIUBTION upon the SALE of that property, the BUILT-IN GAIN OR LOSS that existed at the date OF CONTRIUBTION must be specially allocated to the CONTRIUBTING PARTNER *** note that any post-contribution gains or losses are allocated AMOUNG ALL THE PARTNERS IN THE PARTNERSHIP ***

State Income Taxes and Controlled Taxpayers - most states do not have a statute similar to the IRCs statue authorizing the IRS to make ___ with respect to ___ - however, many states do have a statue allowing the state taxing authority to require ____ if such ___ will better reflect the ___

State Income Taxes and Controlled Taxpayers - most states do not have a statute similar to the IRCs statue authorizing the IRS to make CONTROLLED TAXPAYER ADJUSTEMENTS with respect to TRANSFER PRICING ISSUES - however, many states do have a statue allowing the state taxing authority to require A COMBINATION OF INCOME OF RELATED MEMBERS if such COMBINATION will better reflect the EXTENT OF BUSINESS DONE WITHIN THE STATE

State allocation and apportionment of Federal Taxable Income - once nexus established, net step is for company to determine how much of its total ___ should be taxable by each state - this is accomplished through the rules of __ and ___, which each are different things - generally most states require that corporations and sometimes partnerships use taxable income before ___ and before ___ as the starting point for allocation and apportionment calculations

State allocation and apportionment of Federal Taxable Income - once nexus established, net step is for company to determine how much of its total FEDERAL INCOME OR LOSS should be taxable by each state - this is accomplished through the rules of ALLOCATION and APPORTIONMENT, which each are different things - generally most states require that corporations and sometimes partnerships use FEDERAL taxable income before THE NOL DEDUCTION and before DRD DEDUCTION as the starting point for allocation and apportionment calculations

Subpart F Income the benefits of __ and ____ create opportunities for ___ to low-tax jurisdictions to avoid US taxes. The ___ rules (Subpart F) are intended to curb this behavior. the rules include the following: - a foreign corp is considered a Controlled Foreign Corp CFC if __ - a US shareholder is any ___ owning at least ___ of the foreign corp's stock (vote or value), and __ apply - subpart F only applies to to a foreign corp that qualifies as a ___ - when both the __ rules and __ rules apply, the __ rules supersede the __ rules

Subpart F Income the benefits of DEFERRAL and EXEMPTION of foreign source dividends create opportunities for SHIFTING INCOME to low-tax jurisdictions to avoid US taxes. The CONTROLED FOREIGN CORPORATION rules (Subpart F) are intended to curb this behavior. the rules include the following: - a foreign corp is considered a Controlled Foreign Corp CFC if MORE THAN 50% OF ITS STOCK IS OWNED BY US SHARHOLDERS - a US shareholder is any US PERSON owning at least 10% of the foreign corp's stock (vote or value), and CONSTRUCTIVE RULES apply - subpart F only applies to to a foreign corp that qualifies as a CFC - when both the PFIC rules and SUBPART F rules apply, the SUBPART F rules supersede the PFIC rules

Subsequent Adjustments to Basis in Partnership Interest a partner's basis in his or her partnership interest is adjusted each year for the partner's share of the following items: increase basis: - - - decrease basis: - - -

Subsequent Adjustments to Basis in Partnership Interest a partner's basis in his or her partnership interest is adjusted each year for the partner's share of the following items: increase basis: - ADDITIONAL CONTRIUBTIONS - INCOME AND GAIN ITEMS - INCREASES IN PARTNERSHIP DEBT decrease basis: - DISTRIUBTIONS - LOSS AND DEDUCTION ITEMS - DECREASES IN PARTNERSHIP DEBT

Tax Basis Limitation a loss can only be flowed through to a partner's individual income tax return to the extent of the partner's ___ a loss in excess of the partner's ___ is ___ until basis is ___ basis can be reinstated by any of the items that increase a partner's basis in a partnership interest. This includes the partner's share of: - - - - a suspended loss due to insufficient tax basis can be ___ however, any suspended loss due to insufficient tax basis remaining when the partner disposes of his partnership interest ___

Tax Basis Limitation a loss can only be flowed through to a partner's individual income tax return to the extent of the partner's TAX BASIS IN HIS OR HER PARTNERSHIP INTEREST a loss in excess of the partner's TAX BASIS IN HIS OR HER PARTNERSHIP INTEREST is SUSPENDED until basis is REINSTATED IN FUTURE YEARS basis can be reinstated by any of the items that increase a partner's basis in a partnership interest. This includes the partner's share of: - ORDINARY BUSINESS INCOME - SEPARATELY STATED INCOME AND GAINS - ADDITIONAL CONTRIUBTIONS - INCREASE IN PARTNERSHIP DEBT a suspended loss due to insufficient tax basis can be CARRIED FORWARD INDEFINENTLY however, any suspended loss due to insufficient tax basis remaining when the partner disposes of his partnership interest ARE LOST

Tax Business Limitation - S Corps: TAX BASIS LIMITATION a loss can only be flowed through to an S corp's shareholder's individual income tax return to the extent of the ___ this includes the shareholders ___ and ____ a loss in excess of ____ is suspended until tax basis is reinstated in future years tax basis can be reinstated by any of the items that ___: - - - any increases in future years reinstate the ___ basis first, then the ___ basis a suspended loss due to insufficient tax basis can be ___ however, any suspended losses due to insufficient tax basis remaining when the shareholder disposes of his s corp stock are ___ Formula for Tax Basis of S Crop = __ + __ + ___ - __ - __ + ___

Tax Business Limitation - S Corps: TAX BASIS LIMITATION a loss can only be flowed through to an S corp's shareholder's individual income tax return to the extent of the SHAREHOLDER'S TAX BASIS this includes the shareholders STOCK BASIS and ANY DIRECT LOANS FROM THE SHAREHOLDER TO THE S CORPORATION a loss in excess of THE SHAREHOLDER'S TAX BASIS is suspended until tax basis is reinstated in future years tax basis can be reinstated by any of the items that INCREASE STOCK BASIS: - INCOME - GAINS - ADDITIONAL CONTRIUBTIONS any increases in future years reinstate the DEBT basis first, then the STOCK basis a suspended loss due to insufficient tax basis can be CARRIED FORWARD INDEFINITELY however, any suspended losses due to insufficient tax basis remaining when the shareholder disposes of his s corp stock are LOST Formula for Tax Basis of S Crop = INVESTMENT IN THE OWNERSHIP INTEREST + INCOME + CONTRIBUTIONS - DEDUCTIONS - DISTRIBUTIONS + DIRECT DEBT FROM SHAREHOLDER TO S CORP

Tax Elections *** ___ decides, not ___ *** most elections that affect the calculation of taxable income are made by ___. Some of these elections are: - - - - - - what election is not made by the partnership, but is made by the partner instead?

Tax Elections *** PARTNERSHIP DECIDES decides, not THE PARTNER *** most elections that affect the calculation of taxable income are made by THE PARTNERSHIP. Some of these elections are: - ORGANIZATIONAL AND START-UP COSTS - ACCOUNTING METHODS (CASH OR ACCRUAL) - DEPREICATION METHODS (MACRS, STRAIGHT-LINE) - TAX YEAR (FISCAL, IF NOT CALENDAR, GENERALLY DEC 31) - ELECTIONS OUT OF INSTALLMENT SALE TREATMENT - SECTION 754 ELECTION FOR OPTIONAL BASIS ADJUSTEMENT OF PARTNERSHIP ASSETS what election is not made by the partnership, but is made by the partner instead? - WHETHER TO TAKE A DEDUCTION OR CREDIT FOR TAXES PAID TO FOREIGN COUNTRIES

Ex: Tax Basis, Calculation of At-Risk Amount, and Loss Limitations with Active Participation in Business Rachel, a single taxpayer, created a LLC in which she elected to have taxed as a partnership. initial cash contribution 20,000 allocated 5,000 recourse debt she had personally guaranteed 8,000 nonrecourse debt allocated 35,000 business loss REQUIRED: calculate Rachel's tax basis and at-risk amount in the LLC. Calculate how much of the loss from the LLC she can deduct on her individual income tax return, considering all four business loss limitations

Tax basis: 33,000 cash contriubtion 20,000 recourse debt 5,000 nonrecourse debt 8,000 At risk amount: 25,000 20,000 cash 5,000 recourse debt *** exclude nonrecourse debt *** Rachel's loss is limited to her tax basis in LLC of 33,000 Rachel's loss is limited to her at-risk amount 25,000 so Rachel may pass through for deduction 25,000 of the 35,000 loss the 2000 loss suspended by the tax basis limitation (35,000-33,000) is carried forward and only can be used when tax basis is reinstated the 8,000 loss limited by the at-risk criteria is carried forward until the partner generates additional at-risk amounts to utilize the loss

Tax treaties ***** tax treaties are ___ entered into by ___ and ___: - ***** tax treaties carry the same weight as ___ and often modify otherwise applicable US tax rules - tax treaties modify the rules for ___ by reducing the ___ - tax treaties also modify statutory rules related to __, __ and ___ - ***** the US treaty network includes income tax conventions with approx ___. Most of these countries have a ___ in place

Tax treaties ***** tax treaties are BILATERAL INCOME TAX CONVENTIONS entered into by THE US and A FOREIGN COUNTRY : - ***** tax treaties carry the same weight as DOMESTIC LAW and often modify otherwise applicable US tax rules - tax treaties modify the rules for INVESTMENT-TYPE INCOME by reducing the withholding rate below 30% - tax treaties also modify statutory rules related to BUSINESS INCOME, RESIDENCY, and SOURCE OF INCOME RULES - ***** the US treaty network includes income tax conventions with approx 60 COUNTRIES. Most of these countries have a COMPREHENSIVE INCOME TAX SYSTEM IN PLACE in place

Termination of S Election - Effective Date of Termination when a majority of the shareholders ___, the S cop can specify an effective date when the revocation is ___ if no date is specified and the revocation is filed by ___, the revocation is effective ___ if the revocation is filed after ___, the effective date is ___ if the corporation fails to meet any of the requirements, the ___ with excess passive income, s cop status is determined at the beginning of the ___ year

Termination of S Election - Effective Date of Termination when a majority of the shareholders ELECT TO TERMINATE THE S ELECTION, the S cop can specify an effective date when the revocation is IS FILED WITH THE IRS if no date is specified and the revocation is filed by MARCH 15, the revocation is effective JAN 1 OF THE CURRENT YEAR if the revocation is filed after MARCH 15, the effective date is JAN 1 OF THE FOLLOWING YEAR if the corporation fails to meet any of the requirements, the S CORP STATUS IS TERMINATED IMMEDIATELY with excess passive income, s cop status is determined at the beginning of the FOURTH year

Termination of S Election - Reelecting S status once an s corp election has been terminated the corporation must wait until the beginning of the ___ year after the year of termination before it can elect s corp status again they must ask ___ permission

Termination of S Election - Reelecting S status once an s corp election has been terminated the corporation must wait until the beginning of the FIFTH year after the year of termination before it can elect s corp status again they must ask IRS permission

Termination of S Election - Short Tax Years termination of an S corp election can result in ___, where the corp is an S corp for part of the year and a C corp for part of the year this can occur if the corporation ___ and ___, or if the corporation ___. the corporation must ___ the income for the current year between the S corp and the C corp in one of two ways: 1. 2.

Termination of S Election - Short Tax Years termination of an S corp election can result in TWO SHORT TAX YEARS, where the corp is an S corp for part of the year and a C corp for part of the year this can occur if the corporation REVOKES THE ELECTION and SPECIFIES AN EFFECTIVE DATE, or if the corporation FAILS TO MEET ONE OF THE REQUIREMENTS FOR S STATUS . the corporation must ALLOCATE the income for the current year between the S corp and the C corp in one of two ways: 1. ALLOCATE BASED ON THE RELATIVE NUMBER OF DAYS 2. CLOSE THE BOOKS ON THE DATE OF THE CONVERSION

Termination of S Election - Terminating Event s corporation status will terminate as a result of any of the following: - shareholders hold more than 50% of the stock (voting and nonvoting) ___ - the corporation fails to meet ___ 1. 2. 3. - excess ___: more than ___ of the corporation's gross receipts are from ___ for ___ consecutive years (but only if the corp has ___) *** ___ ***

Termination of S Election - Terminating Event s corporation status will terminate as a result of any of the following: - shareholders hold more than 50% of the stock (voting and nonvoting) CONSENT TO A VOLUNTARY REVOCATION - the corporation fails to meet ANY OF THE QUALIFICATIONS FOR S STATUS 1. CORP OR PARTNERSHIP OWNER 2. FOREIGN OWNER 3. MORE THAN 100 OWNERS - excess PASSIVE INVESTMENT INCOME: more than 25% of the corporation's gross receipts are from PASSIVE INVESTMENT INCOME for 3 consecutive years (but only if the corp has PRIOR C CORP E&P) *** C --> S AND 3 STRIKES AND YOU ARE OUT! ***

Authority of the IRS to Make Adjustments The IRS's authority to make these adjustments extends to any case in which, either by inadvertence or design, the taxable income of a controlled taxpayer is other than what the taxable income would have been if the taxpayer ___ this authority is not limited cases of ___ or other circumstances designed to reduce or avoid tax by shifting or distorting ___, __, __, or ___ - however, the courts will reverse such adjustments if the controlled taxpayer shows that the results of its transactions are ____ established by ___ uncontrolled comparable transactions based upon ___

The IRS's authority to make these adjustments extends to any case in which, either by inadvertence or design, the taxable income of a controlled taxpayer is other than what the taxable income would have been if the taxpayer HAD BEEN DEALING AT ARM'S LENGTH WITH AN UNCONTROLLED TAXPAYER this authority is not limited to cases of FRUAD or other circumstances designed to reduce or avoid tax by shifting or distorting INCOME, DEDUCTIONS, CREDITS, OR ALLOWANCES - however, the courts will reverse such adjustments if the controlled taxpayer shows that the results of its transactions are WITHIN AN ARM'S LENGTH RANGE established by TWO OR MORE uncontrolled comparable transactions based upon A SINGLE PRICING METHOD

Diane owns 25% of the parntership. Jack owns 75% of the partnership. The partnership sells property to diane at a loss of 4,000. The parntership sells property to jack at a loss of 5000 What happens

The loss is not disallowed from the tax return for the sale to Diane, and the loss will flow through to the partners' basis' according to their %s Diane (1000) Jack (3000) the loss is disallowed from the tax return for the sale to Jack (more than 50% owner), but the loss will still flow through to the partners' basis' according to their %s Diane (1250) and Jack (3750)

*** NOT REALLY NECESSARY *** Advance Pricing Agreement Program APA: ___ the IRS website states: The APA mission is to resolve ___ An APA normally requires agreement on the following issues: 1. 2. 3. 4. 5. 6. 7. Often two or more approaches to certain issues are possible, and there may be no clear basis for preferring one approach over the other. In such situations, the IRS may give the taxpayer the taxpayer's ___ of some issues if the taxpayer agrees to the IRS using its ___

*** NOT REALLY NECESSARY *** Advance Pricing Agreement Program APA: BINDING AGREEMENT WITH IRS the IRS website states: The APA mission is to resolve ACTUAL OR POTENTIAL TRANSFER PRICING DISPUTES IN A TIMELY, PRINCIPLED, AND COOPERATIVE MANNER An APA normally requires agreement on the following issues: 1. CHOOSING A TRANSFER PRICING METHOD TPM 2. SELECTION COMPARABLE UNCONTOLLED COMPANIES OR TRANSACTIONS (COMPARABLES) 3. DECIDING ON THE YEARS OVER WHICH COMPARABLES' RESULTS ARE ANALYZED 4. ADJUSTING THE COMPARABLES' RESULTS BECAUSE OF DIFFERENCES WITH THE TESTED PARTY 5. CONSTRUCTING A RANGE OF ARM'S LENGTH RESULTS 6. TESTING THE RESULTS DURING THE APA PERIOD 7. AGREEING ON CIRTICAL ASSUMPTIONS Often two or more approaches to certain issues are possible, and there may be no clear basis for preferring one approach over the other. In such situations, the IRS may give the taxpayer the taxpayer's PREFERENTAIL TREATMENT of some issues if the taxpayer agrees to the IRS using its PREFERRED TREATMENT OF OTHER ISSUES

Federal Limitations on a State's Right to Impose Income Tax - federal law prohibits a state and its political subdivisions (counties, cities, etc) from imposing a ___ on a person's net income derived from ___ occurring within the state's boarders when the following three circumstances are present: 1. the only business activity of the person within the state consists of the ___ 2. those orders are ____ 3. if those orders are accepted, they are ___ "person" includes: - - - - the prohibition against the state's imposing a net income tax does not apply to the following: - individuals who are __ the state; and - corporations which are ___ (note that the "prohibition-does-not-apply" portion of this federal law does not address either ____ or ____) - companies that are soliciting sales of services or other products that __ the federal law applies only to prohibit a state from imposing a ___ if the three circumstances above are present. This law does not apply to: - - -

- federal law prohibits a state and its political subdivisions (counties, cities, etc) from imposing a NET INCOME TAX on a person's net income derived from INTERSTATE COMMERCE occurring within the state's boarders when the following three circumstances are present: 1. the only business activity of the person within the state consists of the SOLICITATION OF ORDERS/SALES OF TANGIBLE PERSONAL PROPERTY 2. those orders are SENT OUTSIDE THE STATE FOR ACCEPTANCE OR REJECTION, and 3. if those orders are accepted, they are FILLED BY SHIPMENT FROM A POINT OUTSIDE THE STATE "person" includes: - INDIVIDUALS - CORPORATIONS - PARTNERSHIPS - LIMITED LIABILITY COMPANIES the prohibition against the state's imposing a net income tax does not apply to the following: - individuals who are RESIDENTS OF the state; and - corporations which are INCPORATED UNDER THE LAWS OF THAT STATE (note that the "prohibition-does-not-apply" portion of this federal law does not address either PARTNERSHIPS ORGANIZED UNDER THE LAWS OF THE STATE or LIMITED LIAIBLITY COMPANIES ORGANIZED UNDER THE LAWS OF THAT STATE) - companies that are soliciting sales of services or other products that DO NOT QUALIFY AS TANGIBLE PERSONAL PROPERTY the federal law applies only to prohibit a state from imposing a NET INCOME TAX if the three circumstances above are present. This law does not apply to: - FRANCHISE TAXES - GROSS RECEIPTS TAXES - SALES AND USE TAXES

- guaranteed payments for services are not included in ___ for purposes of ____ for flow through business entities

- guaranteed payments for services are NOT INCLUDED IN QBI for purposes of THE SECTION 199A QBI DEDUCTION for flow through business entities

The CSU partnership distributed to each partner cash of 4,000, inventory with basis of 4,000 and fmv 6,000, and land with an adjusted basis of 5,000 and an FMV of 3,000 in a liquidating distribution. Partner Chang had an outside basis in Chang's partnership interest of 12,000. In the second year after receiving the liquidating distribution, Change sold the inventory for 5,000 and the land for 3,000. What income must Chang report upon the sale of these assets

1,000 ordinary gain and 1,000 capital loss 12,000 basis - 4,000 cash - 4,000 inventory (hot asset) - 4,000 left over to land basis inventory 4,000 sod for 5,000 = 1,000 ordinary gain basis 4,000 land sold for 3,000 = 1,000 capital loss

Describe the tax treatment of the following items: 1. Partnership received municipal bond interest income 2. Partnership sold an investment held for more than one year at a gain 3. Partnership sold equipment to Partner A at a 6,000 loss 4. Partnership paid fines and penalties 5. Partnership received dividends from domestic corporations 6. partnership made a cash distribution to partner C 7. partnership paid employee salaries and wages 8. partnership incurred interest expense on partnership investment indebtedness

1. Partners do not include the income, but increase their basis in the partnership 2. Treated as separately stated income by the partnership, taxable to the partner 3. Related party rules result in current nonrecognition of transaction 4. Partners are not entitled to a deduction and decrease their basis in the partnership 5. Treated as separately stated income by the partnership, taxable to the partner 6. Partners do not include the cash as income, but must reduce their basis in the partnership 7. Deductible by the partnership in arriving at partnership ordinary business income 8. Treated as a separately stated deduction by the partnership and potentially deductible by the partners. Investment interest expense is a separately stated item that flows through to the partners. Based upon investment income limitations at the partner level, this may be deductible by the partner.

Illustration 1: Stock Basis and At-Risk Amount Gearty is a shareholder in an S corp. He contributed 12,000 cash, land with basis 25,000 and FMV of 100,000. He also loaned the S corporation 15,000, which Gearty borrowed from another source on a nonrecourse basis. Gearty has 10,000 as his pro rate share of S corp income that was not distributed Gearty's stock basis:

12,000 cash contributed 25,000 basis in land contributed NBV 10,000 undistributed share of income = 47,000 stock basis Gearty has a debt basis of 15,000 for the loan to the S corporation, so his total tax basis is 62,000 (47,000 stock basis +15,000 debt basis) however the loan to the S corp is not included in his at-risk amount, because he obtained the funds through a nonrecourse loan and is not personally liable, he is not at risk of financial loss Geary's at-risk amount is 47,000 the amount of his stock basis only

White has a one-third interest in the profits and losses of Rapid Partnership. Rapid's ordinary income for the 2017 calendar year is $30,000, after a $3,000 deduction for a guaranteed payment made to White for services rendered. None of the $30,000 ordinary income was distributed to the partners. What is the total amount that White must include from Rapid as taxable income in his 2017 tax return? Random but Important Things to know - ordinary dividends include ___ - accounts payable is ___ - nonliquidating dividends 1. for an S corp, use ___ 2. for a Partnership nontaxable, use ___

13,000 Random but Important Things to know - ordinary dividends include BOTH QUALIFIED AND NONQUALIFIED DIVIDENDS - accounts payable is RECOURSE DEBT - nonliquidating dividends 1. for an S corp, use FMV 2. for a Partnership nontaxable, use NBV

A partner receives the following as part of a liquidating distribution: cash: 12,000 basis -- 12,000 fmv AR: 0 basis -- 4,000 fmv land: 8,000 basis -- 3,000 fmv the partner's basis in the partnership immediately prior to the distribution is 25,000. What is the partner's basis in the AR and the land immediately after the liquidating distribution?

25,000 basis - 12,000 bash = 13,000 --> land ANSWER: AR 0 land 13,000 BC AR HAD A 0 BASIS TO BEGIN WITH

Paige, a 25% shareholder in an S corporation, had a stock basis of $10,000 at the beginning of the year. The corporation had ordinary income of $200,000 for the year. There were no separately stated items. Paige received wages from the corporation of $25,000 and a distribution of $30,000. What was Paige's basis in the stock at year end?

30,000 Why? beg = 10,000 + 20,000 * .25 = 50,000 - 30,000 distribution = 30,000 stock basis you do not include the received wages from the corporation

As a general partner in Greenland Associates, an individual's share of partnership income for the current tax year is $25,000 ordinary business income and a $10,000 guaranteed payment. The individual also received $5,000 in cash distributions from the partnership. What income should the individual report from the interest in Greenland?

35,000 (10,000 guaranteed payment + 25,000 ordinary income) withdrawals/distributions are not a taxable event, yet will decrease the partner's basis. They were already taxed when they were taxed as the partner's share of ordinary income when earned (whether distributed or not)

As of Jan 1 of the current year, Kane owned all 100 issued shares of Manning Corp, a calendar year S corp. On the 41st day of the year, Kane sold 25 of the manning shares to rodgers for the current year ended dec 31 (365 calendar year), Manning had 73,000 in nonseparaetly stated income and made no distributions to its shareholders. What amount of nonseparaetly stated income from Manning should be reported on Kane's current year tax return

40/365 * 73,000 = 8,000 + 325/365 * .75 * 73,000 = 48750 Total = 56,750

Tap, a calendar-year S corporation, reported the following items of income and expense in the current year: Revenue $44,000 Operating expenses 20,000 Long-term capital loss 6,000 Charitable contributions 1,000 Interest expense 4,000 What is the amount of Tap's ordinary income?

44,000 rev - operating expenses 20,000 - interest expense 4,000 = 20,000 long-term capital loss and charitable contributions are separately stated, as is interest income - but NOT interest expense, which is why it is included in the calculation of Tap's ordinary income!

Jody's basis in her partnership interest was 50,000 immediately before she received a current (nonliquidating, or operating) distribution of 20,000 cash and property with an adjusted basis of 40,000 and FMV 35,000. What is Jody's basis in the distributed property?

50,000 - 20,000 = 30,000 - 30,000 = 0 limited to 30,000, not 40,000 so capital account does not go under 0

Lane, Inc., an S corporation, pays single coverage health insurance premiums of $4,800 per year and family coverage premiums of $7,200 per year. Mill is a 10% shareholder-employee in Lane. On Mill's behalf, Lane pays Mill's family coverage under the health insurance plan. What amount of insurance premiums is includible in Mill's gross income?

7200 why? because Mill is over a 2% owner, so he must include the whole thing in his income and report on K-1 --> can try take an itemized deduction in his return

The adjusted basis of Vance's partnership interest in Lex associates was 180,000 immediately before receiving the following distribution in complete liquidation of Lex: cash: basis 100,000, FMV 100,000 real estate: basis: 70,000, FMV 96,000

80,000 basis: 180,000 - cash 100,000 = remaining 80,000

Frank is a 1/3 shareholder in an S corp. At the beginning of the year, Frank's basis in his S corp stock was 10,000. Frank's share of the S corp items of income included 35,000 income from operations; 1,000 of charitable contributions, and 1,000 of capital gains. During the year, Frank also contributed 15,000 of additional capital and received a 3,000 distribution from the s corporation. what is Frank's basis at the end of the tax year?

= beginning basis 10,000 + 35,000 income + 15,000 additional capital - 3,000 distribution = 57,000 ending basis

Partnership Basis Formula:

= cash YOU put in + adjusted basis of property YOU put in + services provided (% of FMV, if capital interest) - % loan on property YOU put in assumed by OTHER partners + % of nonrecourse debt of partnership YOU are assuming

A partnership is a ___ entity, which means that the income is taxed ____. Unincorporated business entities such as __, ___, and ___ are generally treated as ___ under the Subchapter __ rules of the Internal Revenue Code

A partnership is a FLOW-THROUGH ENTITIY entity, which means that the income is taxed ONLY ONCE WHEN IT "FLOWS THROUGH" TO THE PARTNER. Unincorporated business entities such as GENERAL PARTNERSHIPS, LIMITED PARTNERSHIPS, and LIMITED LIABILITY COMPANIES LLCS are generally treated as PARTNERSHIPS under the Subchapter K rules of the Internal Revenue Code

A taxpayer owns 50% of the stock of an S corporation and materially participated in the corporation's activities. At the beginning of the year, the taxpayer had an adjusted basis in the stock of $25,000 and made a loan to the corporation of $13,000. During the year, $3,000 of the loan was repaid, and the taxpayer's share of the corporation's loss for the year was $40,000. What is the amount of the loss that may be deducted on the taxpayer's tax return?

ANSWER: 35,000 why? RULE: A taxpayer can deduct loss from an S corp equal to the taxpayer's stock basis and debt basis in the s corporation at the end of the year, the taxpayer's stock basis is 25,000 and the debt basis is 10,000 (13,000 - 3,000 repaid) the taxpayer can deduct 35,000 (25,000 + 10,000) of the 40,000 loss

The two equal shareholders of a C corporation are thinking of filing an election to have the company treated as an S corporation. Which of the following consequences is an advantage of this election? a. the shareholders will be taxed only on distributions from the corporation b. the corporation's tax free fringe benefits for the shareholders will be deductible by the corporation c. the corporation's capital losses can be claimed on the tax returns of the shareholders d. the corporations NOL carryovers from prior years are immediately deductible by the shareholders

ANSWER: c. the corporation's capital losses can be claimed on the tax returns of the shareholders --> CAPITAL LOSSES AND ALL OTHER ITEMS OF INCOME AND LOSS FLOW THROUGH TO THE TAX RETURNS OF THE SHAREHOLDERS a. the shareholders will be taxed only on distributions from the corporation --> NO --> SHAREHOLDERS OF S CORPS ARE TAXED ON THEIR PRORATED SHARE OF ALL INCOME AND LOSSES, NOT JUST WHAT WAS DISTRIUBTED b. the corporation's tax free fringe benefits for the shareholders will be deductible by the corporation --> NO --> THE TAX FREE FRINGE BENEFITS OF MORE-THAN-2% SHAREHOLDERS ARE NOT DEDUCTIBLE BY THE CORPORATION d. the corporations NOL carryovers from prior years are immediately deductible by the shareholders --> NO --> THE NOL CARRYOVERS ARE NOT IMMEDIATELY DEDUCTIBLE BY SHAREHOLDERS

Accounting Periods of the Partnership Adoption of Partnership Tax Year - ___ is generally required. A partnership return is due on ___ - ___: allowed if consistent with tax year of ___ - what is the deferral period? __ When Partnership Terminates: a partnership terminates when: - - --> partnership ends on that date

Accounting Periods of the Partnership Adoption of Partnership Tax Year - CALENDAR YEAR is generally required. A partnership return is due on MARCH 15 - FISCAL YEAR: allowed if consistent with tax year of MAJORITY OF PARTNERS - what is the deferral period? # OF MONTHS FROM END OF PROPOSED NEW TAX YEAR TO END OF REQUIRED TAX YEAR When Partnership Terminates: a partnership terminates when: - OPERATIONS CEASE - THERE ARE FEWER THAN TWO PARTNERS (IE: THE PARTNERSHIP BECOMES A SOLE PROP) --> partnership ends on that date

Accumulated Adjustments Account AAA *** ___ *** the accumulated adjustments account AAA is the accumulated ___ and ___ during the years the corporation is an ___ Distributions may or may not reduce AAA below zero? Can AAA be negative? Increases to AAA - - Decreases to AAA - - - -

Accumulated Adjustments Account AAA *** PRIOR S CORP INCOME, WHICH CAN BE WITHDRAWN TAX-FREE (FRIST) *** the accumulated adjustments account AAA is the accumulated EARNINGS and PROFITS during the years the corporation is an S CORPORATION Distributions may or may not reduce AAA below zero? DISTRIUBTIONS MAY NOT REDUCE AAA BELOW ZERO Can AAA be negative? AAA CAN BE NEGATIVE DUE TO S CORPORATION LOSSES AND DEDUCTIONS Increases to AAA - ORDINARY BUSINESS INCOME - SEPARATELY STATED INCOME AND GAIN ITEMS (OTHER THAN TAX-EXEMPT INCOME) Decreases to AAA - ORDINARY BUSINESS LOSSES - SEPARATELY STATED LOSSES AND DEDUCTIONS - NONDEDUCTIBLE EXPENSES (OTHER THAN EXPENSES RELATED TO TAX-EXEMPT INCOME) - DISTRIUBTIONS (MAY NOT REDUCE AAA BELOW ZERO

Allocation of ___ Income: Allocate it to ___ - this includes __ and __ - what is nonbusiness income? income that does not relate to __ Apportionment of Business Income: Apportion business income ___ - the portions of line ___ income which are not allocated entirely to one state are apportioned to ____ - generally apportionable items of income are "___", which means the income ____ - Income Apportioned to State = __ * __, where the __ is based on __, __, and __ in the state

Allocation of NONBUSINESS Income: Allocate it to HOME STATE - this includes INTEREST and DIVIDENDS - what is nonbusiness income? income that does not relate to THE PRIMARY BUSINESS ACTIVITIES OF THE CORPORATION WITHIN THE STATE Apportionment of Business Income: Apportion business income AMONG STATES - the portions of line 28 income which are not allocated entirely to one state are apportioned to ALL OF THE STATES IN WHICH THE CORPORATION DOES BUSINESS - generally apportionable items of income are "BUSINESS INCOME", which means the income DOES RELATE TO THE PRIMARY BUSINESS ACTIVITIES OF THE CORPORATION WITHIN THE STATE - Income Apportioned to State = APPORTIONMENT FACTOR * BUSINESS INCOME, where the APPORTIONMENT FACTOR is based on PROPERTY, PAYROLL, and SALES in the state

Allocation of Partnership / LLC Debt a partner's share of partnership debt is included in his basis in the ___ how partnership or LLC debt is allocated to partners or LLC members depends on two things: - - Recourse debts: - debts for which a partner ___, which means that ___ if the debt is not satisified by the partnership - a general partner is ___ - a limited partner or LLC member has ___, so they are generally ___, unless they ___ - recourse debts are only allocated to partners or LLC members who have ___ = only ___ share Nonrecourse debts: - typically secured by ___ - the creditor only has the right to take the ___, not the ___, if the partnership defaults on the debt - nonrecourse debts are allocated to ____ based on their ___ *** ___ ***

Allocation of Partnership / LLC Debt a partner's share of partnership debt is included in his basis in the PARTNERSHIP INTEREST how partnership or LLC debt is allocated to partners or LLC members depends on two things: - THE TYPE OF THE DEBT - THE TYPE OF OWNER Recourse debts: - debts for which a partner HAS PERSONAL LIABILITY, which means that THE CREDITOR CAN GO AFTER THE PARTNER'S PERSONAL ASSETS if the debt is not satisified by the partnership - a general partner is PERSONALLY LIABILE FOR THE RECOURSE DEBTS OF THE PARTNERSHIP - a limited partner or LLC member has LIMITED LIAIBLITY, so they are generally NOT PERSONALLY LIAIBLE FOR THE DEBTS OF THE PARTNERSHIP, unless they PERSONALLY GUARANTEE THE DEBT - recourse debts are only allocated to partners or LLC members who have PERSONAL LIABILITY FOR THE DEBT = only GENERAL PARTNER'S share Nonrecourse debts: - typically secured by PROPERTY - the creditor only has the right to take the SECURED PROPERTY, not the PERSONAL ASSETS OF THE PARTNERS OR LLC MEMBERS, if the partnership defaults on the debt - nonrecourse debts are allocated to ALL PARTNERS OR LLC MEMBERS based on their RELATIVE PROFIT-SHARING RATIO *** GENERAL AND LIMITED PARTNERS SHARE ***

Village Corp., a calendar year corporation, began business in year 1. Village made a valid S corporation election on December 5, year 4, with the unanimous consent of its shareholders. The eligibility requirements for S status continued to be met throughout year 5. On what date did Village's S status become effective?

Answer: Jan 1, Year 5 in order to be effective for the current taxable year, the s corp election must be made by the 15th day of the third month of the taxable year if the election is made after that date, it becomes effective on the first day of the next tabel year, Jan 1 Year 5 in this case

Partnership Abel, Benz, Clark & Day is in the real estate and insurance business. Abel owns a 40% interest in the capital and profits of the partnership, while Benz, Clark, and Day each owns a 20% interest. All use a calendar year. At November 1, 2010, the real estate and insurance business is separated, and two partnerships are formed: Partnership Abel & Benz takes over the real estate business, and Partnership Clark & Day takes over the insurance business. Which one of the following statements is correct for tax purposes? a) Partnership Abel & Benz is considered to be a continuation of Partnership Abel, Benz, Clark & Day. b) In forming Partnership Clark & Day, partners Clark and Day are subject to a penalty surtax if they contribute their entire distributions from Partnership Abel, Benz, Clark & Day. c) Before separating the two businesses into two distinct entities, the partners must obtain approval from the IRS. d) Before separating the two businesses into two distinct entities, Partnership Abel, Benz, Clark & Day must file a formal dissolution with the IRS on the prescribed form.

Answer: a) Partnership Abel & Benz is considered to be a continuation of Partnership Abel, Benz, Clark & Day. WHY? because Abel 40% and Benz 20% constitute more than 50% of the old partnership

Arm's Length Standard - the IRS adjustments, necessary to determine "___" , apply to __ and ___ - however, court will reverse adjustments if the controlled taxpayer shows that the transaction ___ - the purpose of these adjustments is to assure that ___ that one affiliate ("___") charges to another affiliate yield results that are consistent with the results that would have been realized if uncontrolled taxpayers had engaged in the same transaction under the same circumstances (the "___" standard) - a controlled transaction or controlled transfer meets the arm's length standard if the results of the transaction or transfer are __ with the results that would have been realized if ___ *** applies to ___. Comparable Transactions and Standards of Comparability - identical transactions can ___, thus whether a transaction produces an arm's length result generally will be determined by ____ - various standards of comparability (___) are allowable and set forth in ___ - The most common pricing methods are: 1. 2. 3. 4. 5.

Arm's Length Standard - the IRS adjustments, necessary to determine "TRUE TAXABLE INCOME" , apply to CONTROLLED TRANSACTIONS and CONTROLLED TRANSFERS - however, court will reverse adjustments if the controlled taxpayer shows that the transaction ___ - the purpose of these adjustments is to assure that REPORTED PRICES that one affiliate ("CONTROLLED TAXPAYER") charges to another affiliate yield results that are consistent with the results that would have been realized if uncontrolled taxpayers had engaged in the same transaction under the same circumstances (the "ARMS-LENGTH" standard) - a controlled transaction or controlled transfer meets the arm's length standard if the results of the transaction or transfer are CONSISTENT with the results that would have been realized if UNCONTROLLED TAXPAYERS HAD ENGAGED IN THE SAME TRANSACTION OR TRANSFER UNDER THE SAME CIRCUMSTANCES *** applies to RELATED PARTY TRANSACTIONS Comparable Transactions and Standards of Comparability - identical transactions can RARELY BE LOCATED, thus whether a transaction produces an arm's length result generally will be determined by REFERENCE TO THE RESULTS OF COMPARABLE TRANSACTIONS - various standards of comparability (APPLICABLE PRICING METHODOLOGIES ) are allowable and set forth in US TREASURY REGULATIONS - The most common pricing methods are: 1. CUP - tangible property based on published market data 2. CUT - intangible property 3. RESALE PRICE - tangible property 4. COST PLUS - tangible property 5. COMPARABLE PROFITS METHOD - based on - operating margin - gross margin - return on assets - return on capital

At risk limitation - S corps an s corporation shareholder's ability to flow through losses may be further limited by the amount of the shareholder's ____ the at-risk amount is typically the same as the shareholder's ___ and ___ a shareholder's at-risk amount may be ___ than his or her stock and debt basis if the taxpayer takes out a ____ (where the ___ is not personally liable) to make a contribution or to make a direct loan to the s corporation the contribution or loan would be included in the shareholder's ___, but not the shareholder's ____ a loss in excess of a shareholder's ___ is suspended until the at-risk basis is reinstated in future years, and is ___ any suspended loss due to insufficient at-risk basis remaining when the shareholder disposes of his or her stock can be ____ Formula for At Risk Amount of S Crop = __ - ___

At risk limitation - S corps an s corporation shareholder's ability to flow through losses may be further limited by the amount of the shareholder's RISK OF FINANCIAL LOSS IN THE BUSINESS the at-risk amount is typically the same as the shareholder's SOTCK BASIS and DEBT BASIS a shareholder's at-risk amount may be LOWER than his or her stock and debt basis if the taxpayer takes out a NONRECOURSE LOAN (where the SHAREHOLDER is not personally liable) to make a contribution or to make a direct loan to the s corporation the contribution or loan would be included in the shareholder's TAX BASIS, but not the shareholder's AT-RISK AMOUNT (AT-RISK BASIS) a loss in excess of a shareholder's AT-RISK BASIS is suspended until the at-risk basis is reinstated in future years, and is CARRIED FORWARD INDEFINENTLY any suspended loss due to insufficient at-risk basis remaining when the shareholder disposes of his or her stock can be OFFSET AGAINST ANY GAIN FROM SELLING THE STOCK Formula for At Risk Amount of S Crop = TAX BASIS - SHAREHOLDER'S NONRECOURSE DEBT (SHAREHOLDER NOT PERSONALLY LIABILE

At-Risk Limitation a partner's ability to flow through losses may be further limited by the amount of the partner's ___ ******* the at-risk amount (at-risk basis) is the same as ___, with the exception of certain ___ that is included in ___ but not in ___ ******* at-risk basis includes a partner's allocable share of ___ and ___ that qualifies as qualified ___ ******* ___ is a real estate mortgage obtained from an ___ ******* other nonrecourse debt is ___ ******* Partnership Debt included in Partner's Tax Basis and At-Risk Basis: Type of Partnership Debt --> Tax Basis --> At-Risk Basis - Recourse debt --> Tax Basis? --> At-Risk Basis? - Qualified Nonrecourse Financing --> Tax Basis? --> At-Risk Basis? - Other nonrecourse debt --> Tax Basis? --> At-Risk Basis? a loss in excess of a partner's at-risk basis is ___, and is ___ any suspended losses due to insufficient at-risk basis remaining when the partner disposes of the partnership interest can be ___ (meaning the loss is ___)

At-Risk Limitation a partner's ability to flow through losses may be further limited by the amount of the partner's AT-RISK LIMITATION ******* the at-risk amount (at-risk basis) is the same as THE PARTNER'S TAX BASIS IN HIS OR HER PARNTERSHIP INTEREST, with the exception of certain NONRECOURSE DEBT that is included in TAX BASIS but not in AT-RISK BASIS ******* at-risk basis includes a partner's allocable share of RECOURSE DEBT and NONRECOURSE DEBT that qualifies as QUALIFIED NONRECOURSE FINANCING QNF ******* QUALIFIED NONRECOURSE FINANCING is a real estate mortgage obtained from an UNRELATED COMMERCIAL LENDER ******* other nonrecourse debt is NOT INCLUDED IN AT-RISK BASIS (but it is included in tax basis) ******* Partnership Debt included in Partner's Tax Basis and At-Risk Basis: Type of Partnership Debt --> Tax Basis --> At-Risk Basis - 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 a loss in excess of a partner's at-risk basis is SUSPENDED UNTIL THE AT-RISK BASIS IS REINSTATED IN FUTURE YEARS, and is CARRIED FORWARD INDEFINENTLY any suspended losses due to insufficient at-risk basis remaining when the partner disposes of the partnership interest can be OFFSET AGAINST ANY GAIN FROM SELLING THE PARNTERSHIP INTEREST (meaning the loss is ALLOWED WHEN SOLD)

Avoidance of Penalties - Section 482 Study Based on Allowable Pricing Methods the taxpayer may prepare and document a section 482 study based upon ___ set forth in the ___ - the taxpayer must determine that the prices for controller transactions are __ and that the taxpayer's __ - the documented study must be completed no later than ___

Avoidance of Penalties - Section 482 Study Based on Allowable Pricing Methods the taxpayer may prepare and document a section 482 study based upon ALLOWABLE PRICING METHODS set forth in the US TREASURY REGULATIONS - the taxpayer must determine that the prices for controller transactions are IN ACCORDANCE WITH ALLOWABLE PRICING METHODS and that the taxpayer's USE OF SUCH METHOD WAS REASONABLE - the documented study must be completed no later than THE DATE THE TAXPAYER FILES THE FEDERAL INCOME TAX REFUND

Avoidance of Penalties - general a taxpayer may owe additional federal income tax due to IRS adjustments with respect to ___ the taxpayer can generally avoid the penalty if any one or more of the following circumstances apply: 1. ___ 2. ___ 3. ___ --> in which case ___

Avoidance of Penalties - general a taxpayer may owe additional federal income tax due to IRS adjustments with respect to CONTROLLED TRANSACTIONS the taxpayer can generally avoid the penalty if any one or more of the following circumstances apply: 1. SECTION 482 STUDY BASED ON ALLOWABLE PRICING METHODS 2. SECTION 482 STUDY NOT BASED ON ALLOWABLE PRICING METHODS 3. TRANSACTIONS ARE ONLY BETWEEN FOREIGN CORPORATIONS --> in which case ALL TAXES ARE IN FOREIGN COUNTRY

Base Erosion and Anti-Abuse Tax (BEAT) the TCJA created the base erosion and anti-abuse tax BEAT to impose a ___ on ___ (average annual gross receipts of ___ for the ___ period ending with the preceding taxable year) with a significant amount of ___ to related foreign affiliates because such deductions reduce the ___ the BEAT is effective for taxable years beginning after ___ and is imposed on a US corporation's ___ the following rules may also apply - the tax rate is ___ for taxable years beginning in ___, ___ for taxable years beginning in ___, and ___ for years beginning in ___ - in general, the ___% BEAT tax will begin to apply when ____ by more than __. the BEAT applies to the extent that it exceeds the ___ (reduced by ___)

Base Erosion and Anti-Abuse Tax (BEAT) the TCJA created the base erosion and anti-abuse tax BEAT to impose a MINIMUM TAX on LARGE US CORPORATIONS (average annual gross receipts of AT LEAST $500 MILLION for the THREE YEAR period ending with the preceding taxable year) with a significant amount of DEDUCTIBLE PAYMENTS to related foreign affiliates because such deductions reduce the US TAX BASE the BEAT is effective for taxable years beginning after DECEMER 31, 2017 and is imposed on a US corporation's MODIFIED TAXABLE INCOME the following rules may also apply - the tax rate is 5% for taxable years beginning in 2018, 10% for taxable years beginning in 2019-2025, and 12.5% for years beginning in 2026 OR LATER - in general, the 10% BEAT tax will begin to apply when PAYMENTS TO FOREIGN AFFILIATES EXCEED TAXABLE INCOME by more than 10%. the BEAT applies to the extent that it exceeds the REGULAR TAX LIABILITY (reduced by MOST CREDITS)

Thompson's basis in Starlight Partnership was 60,000 at the beginning of the year. Thompson materially participates in the partnership's business Thompson received 20,000 in cash distributions during the year. Thompson's share of Starlight's current operations was a 65,000 ordinary loss and a 15,000 net long term capital gain. What is the amount of Thompson's deductible loss for the period?

Basis: starting point 60,000 - 20,000 cash distribution + 15,000 net long-term capital gain = 55,000 loss of 65,000 limited to 55,000 answer: 55,000

On December 31 of the current year, after the receipt of his share of partnership income Clark sold his interest in a limited partnership for 30,000 and relief of all partnership liabilities. On that date, the adjusted basis of Clark's partnership interest was 40,000, consisting of his capital account of 15,000 and his share of the partnership liabilities of 25,000. The partnership has no unrealized receivables or substantially appreciated inventory. What is Clark's gain or loss on the sale of his partnership interest ordinary loss of 10,000 ordinary gain of 10,000 capital loss of 10,000 capital gain of 15,000

Basis: 40,000 Received: 25,000 in debt takeover and 30,000 cash ANSWER: Capital gain of 15,000

Basis: Partner's Basis in Partnership Interest ("___") Partner's initial Basis in Partnership Interest: a partner's initial basis in the partnership interest is the same as ____ initial stock basis with one exception: ___ a partner includes in the basis of his or her partnership interest the partner's ____ Formula: + + + <> + =

Basis: Partner's Basis in Partnership Interest ("OUTSIDE BASIS") Partner's initial Basis in Partnership Interest: a partner's initial basis in the partnership interest is the same as AN S CORPORATION SHAREHOLDER'S initial stock basis with one exception: DEBT a partner includes in the basis of his or her partnership interest the partner's SHARE OF PARTNERSHIP LIABILITIES Formula: + CASH CONTRIBUTED + PROPERTY CONTRIUBTED (ADJUSTED BASIS) + SERVICES PROVIDED (FMV, IF CAPIAL INTEREST) <LIABILITIES TRANSFERRED TO PARTNERHIPS, ASSUMED BY OTHER PARTNERS> + PARTNER'S SHARE OF PARTNERSHIP LIABILITIES (existing liabilities that were in the partnership and a new partner will take on) = PARNTER'S INITAIBL BASIS IN THE PARTNERSHIP INTEREST

Ex: S Corporation Termination FACTS: small corporation is a calendar year S corporation, which has maintained a valid S election since the corporation was formed 10 years ago. On Feb 1 of the current year, Small admists Large Corp, a C crop, as a 40% shareholder. Determine the impact of small corp's admittance of large as a shareholder on the S election

Because large corp is a c corp, small would no longer meet the requirements of an s corp, and its s election would be terminated on feb 1, the date large corp admitted as a shareholder. Small cop's income in the year of termination must be allocated between a short s corp tax year and a short c corp tax year

Example: Tax Basis Loss Limitation FACT: On Jan 1, year 1, Becker and Conviser formed a partnership with each contributing the following property: Becker: property with 30,000 basis and 30,000 FMV Conviser: property with 6,000 basis and 30,000 FMV the partners have agreed to share profits and losses equally. during Year 1, each partner withdrew 3,000 and for the year ended December 31, Year 1, the partnership's ordinary business loss was 8,000 REQUIRED: determine how much of the ordinary business loss each partner can flow through to their individual income tax returns for deduction in year 1

Becker: original contribution NBV 30,000 - less distributions - 3,000 = basis at end of tax year before loss pass through = 27,000 - each partner's share of 8,000 ordinary business loss - 4,000 = basis in partnership interest at end of year = 23,000 Convisor: original contribution NBV 6,000 - less distributions - 3,000 = basis at end of tax year before loss pass through = 3,000 - each partner's share of 8,000 ordinary business loss - 4,000 BUT limited to basis - 3,000 = basis in partnership interest at end of year = 0 suspended loss due to insufficient tax basis carried forward until basis is reinstated (4,000 - 3,000) = 1,000

Partnership's Tax Basis in Partnership Interest: MEMORIZE THIS:

Beginning Capital Account: Cash FMV services NBV assets < liability transferred to partnership > (% assumed by others) + % All Income: Ordinary business income Separately stated income and gains Tax-exempt income --> increases basis < % All Losses and Deductions > * Ordinary business loss Separately stated losses and deductions Nondeductible expenses (up to zeroing out partner basis) < Distributions > Cash Property: adjusted basis NBV (like a bank account, withdrawals = nontaxable = NBV) = Ending Capital Account + % Partnership Liabilities (recourse and nonrecourse) --> your share of liabilities increases your "basis". Note: S corp nonrecourse liabilities do not increase shareholder basis (at-risk) = Ending Tax Basis in Partnership Interest *** tax basis cannot be reduced below zero ***

Business Income - taxed on a __ BASIS - a foreign person engaged in a ___ is subject to ___ on income effectively connected with the ___ business income is taxed on a ___ (gross income less ___ and__) at US ___ rates as a __ - if a US branch, must file Form __ and be taxed on a __ basis at __ rates - if a US sub, must file Form __ and taxed as __

Business Income - taxed on a NET BASIS - a foreign person engaged in a US TRADE OR BUSINESS is subject to US TAXATION on income effectively connected with the US TRADE OR BUSINESS business income is taxed on a NET BASIS (gross income less ALLOWED DEDUCTIONS and EXPENSES) at US GRADUATED rates as a US CORPORATION - if a US branch, must file Form 1120-F and be taxed on a NET basis at US GRADUATED rates - if a US sub, must file Form 1120-F and taxed as US CORPORATION

a sold proprietor wants to incorporate and has requested a projection of the first-year tax results as a C corp and as an S corp. Taxable income from ordinary operations is projected to be 100,000. The company expects to make a 20,000 charitable contribution and projects a long-term capital loss on stock of 7,000. Which of the following projections is correct:

C corp: 90,000 - includes 100,000 taxable income, and reduced by 10,000 charitable contributions, resulting in 90,000 taxable income - the other 10,000 of charitable contribution sis not deductible because the charitable contribution deduction is limited to 10% of the corp's taxable income before charitable contributions (100,000 *.10) - the c corp cannot deduct the capital loss against taxable income but instead must carry it back 3 years or forward five to be deducted against capital gains in those years S corp: 100,000 taxable income - the s corp would report 100,000 of income from operations as ordinary business income while the charitable contributions and capital losses would be reported separately

A partnership's basis in contributed property is the same as

CARRYOVER BASIS OF SH + GAIN RECOGNIZED BY PARTNER (ignore the loan)

Calculation of Apportionment Factor: - ___ dictates exactly how the apportionment factor should be determined in that state, and the method vary slight from ___ - however, the standard apportionment factor formula that is used by many states is calculated in the following manner: 1. ___ / ____ plus 2. ___ / ____ plus 3. ___ / ____ all divided by ___ = ___

Calculation of Apportionment Factor: - EACH STATE dictates exactly how the apportionment factor should be determined in that state, and the method vary slight from STATE TO STATE - however, the standard apportionment factor formula that is used by many states is calculated in the following manner: 1. PROPERTY AND RENT EXPENSE LOCATED WITHIN THE STATE / TOTAL PROPERTY; plus 2. PAYROLL PAID TO EMPLOYEES WITHIN THE STATE / TOTAL PAYROLL; plus 3. SALES FROM SOURCES WITHIN THE STATE / TOTAL SALES all divided by 3 = INCOME TO THAT STATES

Illustration 2: Taxability of Distributions with No C Corporation E&P Feline Corp, a calendar year S corp since formation in year 1, has two equal shareholders, C and R. During Year 5, Carlin received distributions from Feline Corp of 22,000. At December 31, Year 5, after all adjustments to stock basis had been made except for distributions, Carlin's basis in his Feline stock was 18,000. How will Carlin treat this 22,000 distribution?

Carlin will treat 18,000 of the distribution as nontaxable return of capital (reduction of basis of stock) and 4,000 in excess of his stock basis as long-term capital gain

Cash Distribution *** what is the formula? *** if a partner receives a cash distribution that is greater than the partner's basis in his or her partnership interest, the partner recognizes ___ remember the rule that a distribution cannot reduce the basis in the partnership interest ___ - for a property distribution, the partner can take ___ to prevent the partnership basis from being reduced below zero - however, the basis in cash cannot be reduced, so ____ to prevent the partnership basis from being reduced ___

Cash Distribution *** what is the formula? *** CASH <BASIS> = EXCESS = GAIN if a partner receives a cash distribution that is greater than the partner's basis in his or her partnership interest, the partner recognizes A CAPITAL GAIN FOR THE EXCESS remember the rule that a distribution cannot reduce the basis in the partnership interest BELOW ZERO? - for a property distribution, the partner can take LOWER BASIS IN THE PROPERTY DISTRIBUTED to prevent the partnership basis from being reduced below zero - however, the basis in cash cannot be reduced, so A GAIN MUST BE RECOGNIZED BY THE PARTERN to prevent the partnership basis from being reduced BELOW ZERO

Chart --> Allocation of Partnership Debt to Partners General Partner - Recourse debt? - Nonrecourse debt? Limited Partner - Recourse debt? - Nonrecourse debt? LLC Member - Recourse debt? - Nonrecourse debt?

Chart --> Allocation of Partnership Debt to Partners General Partner - Recourse debt? YES (PERSONAL LIABILITY) - Nonrecourse debt? BASED ON PROFIT-SHARING RATIO Limited Partner - Recourse debt? ONLY IF PERSONAL GUARANTEE - Nonrecourse debt? BASED ON PROFIT-SHARING RATIO LLC Member - Recourse debt? ONLY IF PERSONAL GUARANTEE - Nonrecourse debt? BASED ON PROFIT-SHARING RATIO

Chris owns 25%, Tracy owns 25% and Sam owns 50% of a business that has always been treated as an S corp. during the current year, 500,000 of taxable income is generated. Who is responsible for claiming the taxable income?

Chris, Tracy, and Sam, according to their PERCENTAGE OF OWERNSHIP *** recall, only partnerships, and not s corps, have profit distribution agreements ***

Classification of Untaxed Earnings: the CFC's untaxed earnings are divided into two groups: 1. ___, which are taxed at ___ = ___ 2. ___, which are taxed at ___ = ____ Tax Payments - US shareholders can elect to pay the transition tax in ____ over ___ pursuant to a specific schedule: - - - - - - - -

Classification of Untaxed Earnings: the CFC's untaxed earnings are divided into two groups: 1. CASH/CASH EQUIVALENTS, which are taxed at 15.5% = THE PROFITS THEY NEVER REINVESTED 2. ALL OTHER EARNINGS, which are taxed at 8.0% = THE PROFITS THAT WERE REINVESTED Tax Payments - US shareholders can elect to pay the transition tax in 8 INSTALLMENTS over 8 YEARS pursuant to a specific schedule: - YEAR 1 = 8% - YEAR 2 = 8% - YEAR 3 = 8% - YEAR 4 = 8% - YEAR 5 = 8% - YEAR 6 = 15% - YEAR 7 = 20% - YEAR 8 = 25%

Competent Authority ***advanced ruling: gets IRS to ___*** - the taxpayer can request that the IRS and taxing officials in other country or countries together ascertain the ___ so that the taxpayer group is ___ --> this is called a __ - the taxpayer may make this request when? - This results in a binding agreement with IRS under the ___, which resolves transfer pricing disputes - the IRS agrees not to seek a pricing adjustment if taxpayer files its return consistent with __

Competent Authority *** ADVANCED RULING: GET IRS TO APPROVE BEFORE TRANSACTION IS DONE *** - the taxpayer can request that the IRS and taxing officials in other country or countries together ascertain the APPROPRIATE TRANSFER PRICE so that the taxpayer group is NOT TAXED TWICE ON THE SAME INCOME --> this is called a " REQUEST FOR COMPETENT AUTHORITY " - the taxpayer may made this request ANY TIME AFTER AN IRS ACTION RESULTS IN TAXATION THAT IS INCONCISTENT WITH THE PROVSIONS OF ANY APPLICABLE TREATY - This results in a binding agreement with IRS under the ADVANCE PRICING AGREEMENT PROGRAM (APA), which resolves transfer pricing disputes - the IRS agrees not to seek a pricing adjustment if taxpayer files its return consistent with THE AGREED TRANSFER PRICING METHOD

Complete Withdrawal (___) - in a complete liquidation, the partner's basis for the distributed property is ___, reduced by ___ - the adjusted basis need to be determined ____, after ____ Nontaxable Liquidation Formula: - - - - - - - ***RULE: ___*** Gain or Loss Recognition Gain Recognized = ___ = ___ > ___ - the partner recognizes gain only to the extent that ____ exceeds ___ Loss Recognized = ___ = ___ < ___, ___ - the partner recognizes loss if __, ___ (for cash basis taxpayers), or ___ are the only assets received and if the partner's basis in the partnership interest is ____

Complete Withdrawal (LIQUIDATING DISTRIUBTION) - in a complete liquidation, the partner's basis for the distributed property is THE SAME AS THE ADJUSTED BASIS OF THE PARNTER'S PARTNERSHIP INTEREST, reduced by ANY CASH OR CASH EQUIVALENTS RECEIVED - the adjusted basis need to be determined IMMEDIATELY BEFORE THE PARNTER'S LIQUIDATION, after ALL OTHER ITEMS OF PARTNERSHIP INCOME/LOSS AND LIABILITIES ASSUMED HAVE BEEN TAKEN INTO ACCOUNT FOR THE YEAR Nontaxable Liquidation Formula: BEGINNING CAPITAL ACCOUNT + PARTNER'S SHARE OF INCOME < LOSS> UP TO WITHDRAWAL = PARTNER'S CAPITAL ACCOUNT + PARTNER'S SHARE OF PARTNERSHIP LIAIBLITIES = ADJUSTED BASIS IN PARTNERSHIP INTEREST AT DATE OF WITHDRAWAL - <CASH DISTRIUBTION> = REMAINING BASIS TO BE ALLOCATED TO ASSETS DISTRIBUTED ***RULE: ZERO OUT TO GET OUT*** Gain or Loss Recognition Gain Recognized = EXCEPTION = CASH > BASIS - the partner recognizes gain only to the extent that MONEY RECEIVED exceeds THE PARTNER'S BASIS IN THE PARTNERSHIP INTEREST Loss Recognized = EXCEPTION = ONLY CASH < BASIS - the partner recognizes loss if MONEY, UNREALIZED RECEIVALBES (for cash basis taxpayers), or INVENTORY (HOT ASSETS) are the only assets received and if the partner's basis in the partnership interest is MORE THAN THE PARTNERSHIP'S BASIS IN THE ASSETS RECEIVED

Consequences to a Partnership as a result of liquidation, the partnership itself ___ on the distribution of assets any gain or loss recognition on liquidating distributions are made ___ in addition, because a partnership itself is not subject to income taxes and is a flow-through entity, all effects of winding-up the affairs' and liquidating the partnership are ___ this includes any ____, and ___, etc. all of these items will be included in the partner's' ___ immediately before their ___

Consequences to a Partnership as a result of liquidation, the partnership itself DOES NOT RECOGNIZE ANY ENTITY LEVEL GAIN OR LOSS on the distribution of assets any gain or loss recognition on liquidating distributions are made AT THE PARTNER LEVEL in addition, because a partnership itself is not subject to income taxes and is a flow-through entity, all effects of winding-up the affairs' and liquidating the partnership are PASSED ON TO THE PARTNERS this includes any GAIN OR LOSS ON SALE OF ANY ASSETS, and EXPENSES OF LIQUIDATING THE PARTNERSHIP, etc. all of these items will be included in the partner's' ADJUSTED BASIS immediately before their LIQUIDATING DISTRIUBTIONS

DON'T NEED TO KNOW

DON'T NEED TO KNOW

@@@ Deduction Amount for __-__, the deduction amount is ___ of ___ (___ for ___ and later). Inclusion Amount the GILTI inclusion is equal to the US shareholder's share of the CFC's ___, reduced by the excess of (i) ___ of the CFC's aggregate adjusted basis in depreciable tangible property used in its trade or business, over (ii) ____ The CFC's aggregate adjusted basis in depreciable, tangible property is measured using ____

Deduction Amount for 2018-2025, the deduction amount is 50% of GILTI (37.5% for 2026 and later). Inclusion Amount = % SHARE * [CFC INCOME - (10% CFC average amount of depreciable tangible property - CFC net interest expense)] The CFC's aggregate adjusted basis in depreciable, tangible property is measured using THE AVERAGE AMOUNT DETERMINED AT THE CLOSE OF EACH QUARTER

Definitions: 1. A "controlled taxpayer" is any ___ owned or controlled directly or indirectly by ___ = ___ 2. An "uncontrolled taxpayer" means any one of two or more taxpayers ____ 3. "Controlled" includes any kind of control, ___, whether ___ or ___, including control resulting from the actions of two or more taxpayers acting ___ or with a ____ A presumption of control arises if ____ 4. "taxpayer" means any __, __, or ___, whether or not ___ 5. "Controlled Transaction" or "Controlled transfer" means any transaction between ____ = ___ 6. "Uncontrolled transaction" means any transaction between two or more taxpayers that are ___ = ___ 7. "Uncontrolled comparable" means the uncontrolled transaction or uncontrolled taxpayer that is __, under any applicable ___, with a ___ or with a ___

Definitions: 1. A "controlled taxpayer" is any TWO OR MORE TAXPAYERS owned or controlled directly or indirectly by THE SAME INTERESTS = SUBSIDIARY 2. An "uncontrolled taxpayer" means any one of two or more taxpayers NOT OWNED OR CONTROLLED DIRECTLY OR INDIRECTLY BY THE SAME INTERESTS 3. "Controlled" includes any kind of control, DIRECT OR INDIRECT, whether LEGALLY ENFORCEABLE or NOT, including control resulting from the actions of two or more taxpayers acting IN CONCERT or with a COMMON GOAL OR PURPOSE A presumption of control arises if INCOME OR DEDUCTIONS HAVE BEEN ARBITRARILY SHIFTED 4. "taxpayer" means any PERSON, ORGANZATION, OR BUSINESS whether or not SUBJECT TO ANY TAX IMPOSED BY THE IRS 5. "Controlled Transaction" or "Controlled transfer" means any transaction between TWO OR MORE MEMBERS OF THE SAME GROUP OF CONTROLLED TAXPAYERS = PARENT <--> SUB = SUB <--> SUB 6. "Uncontrolled transaction" means any transaction between two or more taxpayers that are NOT MEMBERS OF THE SAME GROUP OF CONTROLLED TAXPAYERS = COMPANY <--> OUTSIDE CUSTOMER 7. "Uncontrolled comparable" means the uncontrolled transaction or uncontrolled taxpayer that is COMPARED, under any applicable PRICING METHODOLOGY, with a CONTROLLED TRANSACTION or with a CONTROLLED TAXPAYER

Determination of Partner's Share of Income, Credits, and Deductions Reporting Partnership Income (Schedule K-1) *** __ *** a partner must include on an individual income tax return the partner's ____ and each ___

Determination of Partner's Share of Income, Credits, and Deductions Reporting Partnership Income (Schedule K-1) *** EACH PARTNER GETS ONE *** a partner must include on an individual income tax return the partner's DISTRIBUTIVE SHARE OF ORDINARY BUSINESS INCOME OR LOSS and each SEPARATELY STATED ITEM OF INCOME, GAIN, LOSS, AND DEDUCTION

what if both partners are general partners, Jack and Diane, and Diane is lending 12000 recourse debt to Jack?

Diane gets 12,000 added to her basis, because she is the one at risk with this unsecured loan she is giving out

LIQDUIATING DISTRIUBTION Liquidating distribution of land to a shareholder, 160,000 FMV and 85,000 basis - what will be the shareholder's basis in the land? - Liquidating distribution of inventory to a shareholder. 100,000 FMV and 190,000 S corp's basis. What will be the shareholder's basis in the inventory? - How do you determine the shareholder's gain or loss? -

Distributing land to a shareholder, 160,000 FMV and 85,000 S corp's basis - what will be the shareholder's basis in the land? - 160,000 FMV (that 75,000 gain will flow through to all of the shareholders Distributing inventory to a shareholder. 100,000 FMV and 190,000 S corp's basis. What will be the shareholder's basis in the inventory? - 100,000 FMV (that loss of 90,000 will flow through to all of the shareholders) net 15,000 loss - each of the three shareholders get 5,000 loss the corporation shows a net 15,000 loss How do you determine the shareholder's gain or loss? - FMV - Adjusted Basis = gain or loss recognized by SH

Distribution of Multiple Assets - when multiple assets are distributed to a partner and the partner's basis in his or her partnership interest is less than the adjusted basis of the assets distributed, the partner's remaining basis in his or her partnership interest ____ - this prevents the partner's basis in the partnership interest from ___ - basis is assigned first to ___, then ___, then ___ - ___ are assets that result in ___ when sold, including ___ and ___ (for cash basis taxpayers)

Distribution of Multiple Assets - when multiple assets are distributed to a partner and the partner's basis in his or her partnership interest is less than the adjusted basis of the assets distributed, the partner's remaining basis in his or her partnership interest MUST BE ALLOCATED AMONG THE ASSETS DISTRIUBTED - this prevents the partner's basis in the partnership interest from BEING REDUCED BELOW ZERO - basis is assigned first to CASH, then HOT ASSETS, then OTHER PROPERTY - HOT ASSETS are assets that result in ORDINARY INCOME when sold, including INVENTORY and UNREALIZED RECEIVABLES (for cash basis taxpayers)

Distribution of Multiple Assets: General: - when multiple assets are distributed to a partner in a liquidation, the remaining basis in the partner's partnership interest must be ___ - basis is assigned first to ___, then ___, then ___ - if multiple assets are distributed within a property category (hot assets and/or other property), the basis is allocated ____ - the ___ used depends on whether the partner's basis in the partnership interest ___ is less than, or more than, the partnership's ___ (___)

Distribution of Multiple Assets: General: - when multiple assets are distributed to a partner in a liquidation, the remaining basis in the partner's partnership interest must be ALLOCATED AMONG THE ASSETS DISTRIBUTED - basis is assigned first to CASH, then HOT ASSETS, then OTHER PROPERTY - if multiple assets are distributed within a property category (hot assets and/or other property), the basis is allocated AMONG THE ASSETS USING A THREE-STEP PROCESS - the THREE-STEP PROCESS used depends on whether the partner's basis in the partnership interest (OUTSIDE BASIS) is less than, or more than, the partnership's BASIS IN THE ASSETS DISTRIBUTED (INSIDE BASIS)

Distributions to Shareholders Because S corporations are only subject to a ___, distributions from an S corporation are generally ___ to the shareholders, as the shareholders have already been ____ however, if an S corporation has prior C corporation earnings and profits from before the S selection was made, distributions ___ the rules for determining the taxability of distributions are as follows, if the corporation has always been an S corp: 1st: to extent of stock basis: - tax result: - treatment: 2nd: in excess of stock basis: - tax result: - treatment: In what order do S Corp distributions come from? - first, __ - second, __ - third, __

Distributions to Shareholders Because S corporations are only subject to a SINGLE LEVEL OF TAX, distributions from an S corporation are generally NONTAXABLE to the shareholders, as the shareholders have already been TAXED ON THE INCOME WHEN IT PASSES THROUGH ON THE SHAREHOLDER'S K-1 EACH YEAR however, if an S corporation has prior C corporation earnings and profits from before the S selection was made, distributions MAY BE TAXABLE the rules for determining the taxability of distributions are as follows, if the corporation has always been an S corp: 1st: to extent of stock basis: - tax result: NOT SUBJECT TO TAX, REDUCES BASIS IN STOCK - treatment: RETURN OF CAPITAL 2nd: in excess of stock basis: - tax result: TAXED AS LONG-TERM CAPITAL GAIN (IF STOCK HELD FOR > ONE YEAR) - treatment: CAPITAL GAIN DISTRIUBTION In what order do S Corp distributions come from? - first, AAA, nontaxable, decreases basis - second, Prior C Corp accumulated E&P, taxable dividend - third, OAA, nontaxable, decrease basis

Each partner reports their share of net income/loss on ___ What is the formula? --> --> --> -->

Each partner reports their share of net income/loss on SCHEDULE E What is the formula? --> BUSINESS INCOME --> <BUSINESS EXPENSES> --> <GUARANTEED PAYMENTS> --> allowed as deduction by business, expense to partnership --> = ORDINARY BUSIENSS INCOME OR LOSS

Earnings Invested in US property each US shareholder of a CFC must include in income their pro rata share of: 1. 2. this rule is in an effort to deter __ in a __ manner the calculation compares average adjusted basis of property for the tax year with __ and uses the close of __ as a measuring date see two examples below

Earnings Invested in US property each US shareholder of a CFC must include in income their pro rata share of: 1. SUBPART F INCOME 2. INCREASE IN EARNINGS INVESTED IN US PROPERTY this rule is in an effort to deter REPATRIATING THROUGH LOANS in a TAX-FREE manner the calculation compares average adjusted basis of property for the tax year with ADJUSTED BASIS AT THE END OF THE PREVIOUS YEAR and uses the close of EACH QUARTER as a measuring date

Effect of S Corp Election on Shareholders: Section 199A Qualified Business Income QBI Deduction: - a ___ deduction of ___ of QBI may be available on ___ flowed through from an S corp

Effect of S Corp Election on Shareholders: Section 199A Qualified Business Income QBI Deduction: - a BELOW-THE-LINE deduction of 20% of QBI may be available on ORDINARY BUSINESS INCOME flowed through from an S corp

Effect of S Corp Election on Shareholders: Separately Stated Items the following S corp items flow through separately to the shareholder in a manner similar to a ___, and the list is on a ___ to each shareholder 1. 2. 3. 4. 5. 6. 7. 8. 9. *** shareholder is taxed when ___, not when ___ ***

Effect of S Corp Election on Shareholders: Separately Stated Items the following S corp items flow through separately to the shareholder in a manner similar to a PARTNERSHIP, and the list is on a SCHEDULE K-1 to each shareholder 1. RENTAL REAL ESTATE INCOME OR LOSS (SCHEDULE E) 2. INTEREST INCOME (SCHEDULE B) 3. DIVIDEND INCOME (SCHEDULE B) 4. ROYALITIES (SCHEDULE E) 5. NET SHORT-TERM CAPITAL GIAN OR LOSS (SCHEDULE D) 6. NET LONG-TERM CAPITAL GAIN OR LOSS (SCHEDULE D) 7. NET SECTION 1231 GAIN OR LOSS (SCHEDULE D) 8. CHARITABLE CONTRIUBTIONS (SCHEDULE A) 9. SECTION 179 EXPENSE DEDUCTION *** shareholder is taxed when EARNED/REPORTED, not when DISTRIUBTED TO THEM OR RECEIVED ***

Effect of S Corporation Election on a Corporation 1. S CORPORATION TAX YEAR *** ___ *** - s corps file Form ___ and must adopt ___, unless a ___ is established

Effect of S Corporation Election on a Corporation 1. S CORPORATION TAX YEAR *** GENERAL RULE: DEC 31 IS REQUIRED YEAR-END *** - s corps file Form 1120S and must adopt THE CALENDAR YEAR, unless a VALID BUSINESS PURPOSE is established

Effect of S Corporation Election on a Corporation 1. 2. 3. - - -

Effect of S Corporation Election on a Corporation 1. S CORPORATION TAX YEAR 2. NO TAX ON CORPORATION 3. CERTAIN CORPORATION-LEVEL TAXES - LIFO RECAPTURE TAX - BUILT-IN GAINS TAX - TAX ON PASSIVE INVESTMENT INCOME

Effect of S Corporation Election on a Corporation 2. NO TAX ON CORPORATION *** __ *** - generally there is ___ at the corporation level; ___ - there are ___

Effect of S Corporation Election on a Corporation 2. NO TAX ON CORPORATION *** EACH SHARHEOLDER REPORTS INCOME AND PAYS TAX ON THE K-1 *** - generally there is NON TAX at the corporation level; ALL EARNINGS ARE PASSED THROUGH TO SHAREHOLDERS AND TAXED AT THE INDIVIDUAL SHAREHOLDER LEVEL - there are CERTAIN EXCEPTIONS

Effect of S Corporation Election on a Corporation 3. CERTAIN CORPORATION-LEVEL TAXES BUILT-IN GAINS TAX OVERVIEW - a distribution or sale of an s cop's assets may result in ___ on any ___ - an unrealized built in gain results when the following two conditions occur together : 1. 2. - when those assets are later disposed, the s corp may have to ____ - the amount of built-in gain recognized in any one year is limited to ____ less ____ EXEMPTIONS FROM RECOGNITION OF BUILT-IN GAIN - an S corp is exempt from a tax on built-in gains under any of the following circumstances: 1. 2. 3. 4. 5. CALCULATION OF TAX - the tax is ___ (the c corp tax rate) of the lesser of: 1. 2.

Effect of S Corporation Election on a Corporation 3. CERTAIN CORPORATION-LEVEL TAXES BUILT-IN GAINS TAX OVERVIEW - a distribution or sale of an s cop's assets may result in CORPORATE-LEVEL TAX on any BUILT-IN GAIN - an unrealized built in gain results when the following two conditions occur together : 1. A C CORP ELECTS S CORP STATUS and 2. THE FMV OF THE CORPORATE ASSETS EXCEEDS THE ADJUSTED BASIS OF CORPORATE ASSETS ON THE ELECTIO DATE - when those assets are later disposed, the s corp may have to PAY TAX ON THE BUILT-IN GAIN - the amount of built-in gain recognized in any one year is limited to THE TOTAL NET UNREALIZED BUILT-IN GAIN less ANY BUILT-IN GAIN PREVIOUSLY RECOGNIZED EXEMPTIONS FROM RECOGNITION OF BUILT-IN GAIN - an S corp is exempt from a tax on built-in gains under any of the following circumstances: 1. THE S CORP WAS NEVER A C CORP 2. THE SALE OR TRANSFER DOES NOT OCCUR WITHIN 5 YEARS OF THE FIRST DAY THAT THE S ELECTION IS EFFECTIVE 3. THE S CORP CAN DEMONSTRATE THAT THE APPRECIATION IN THE ASSET BEING SOLD OR TRANSFERRED OCCURED AFTER THE S ELECTION 4. THE S CORPORATION CAN DEMONSTRATE THAT THE DISTRIUBTED ASSET WAS ACQUIRED AFTER THE S ELECTION 5. THE TOTAL NET UNREALIZED BUILT-IN GAIN HAS BEEN COMPLETELY RECOGNIZED IN PRIOR TAX YEARS CALCULATION OF TAX - the tax is 21% (the c corp tax rate) of the lesser of: 1. RECOGNIZED BUILT-IN GAIN FOR THE CURRENT YEAR; or 2. THE TAXABLE INCOME OF THE S CORP IF THERE WERE A C CORP

Effect of S Corporation Election on a Corporation 3. CERTAIN CORPORATION-LEVEL TAXES LIFO RECAPTURE TAX - c corps that elect s status must include in taxable income for the last c corp year the ____ - the resulting tax on the c corp may be paid in ___, the first of which is due with ___ - the remaining installments are ___

Effect of S Corporation Election on a Corporation 3. CERTAIN CORPORATION-LEVEL TAXES LIFO RECAPTURE TAX - c corps that elect s status must include in taxable income for the last c corp year the EXCESS OF INVENTORY COMPUTED USING FIFO OVER THE INVENTORY COMPUTED USING LIFO - the resulting tax on the c corp may be paid in 4 EQUAL ANNUAL INSTALLMENTS, the first of which is due with THE FINAL C CORP RETURN - the remaining installments are PAID BY THE S CORP

Effect of S Corporation Election on a Corporation 3. CERTAIN CORPORATION-LEVEL TAXES TAX ON PASSIVE INVESTMENT INCOME an s corp is subject to a current income tax imposed at the ____ on the lesser of ___ or ___ if the following two tests are met: 1 2.

Effect of S Corporation Election on a Corporation 3. CERTAIN CORPORATION-LEVEL TAXES TAX ON PASSIVE INVESTMENT INCOME an s corp is subject to a current income tax imposed at the CORPORATE RATE 21% on the lesser of NET INCOME or EXCESS PASSIVE INVESTMENT INCOME if the following two tests are met: 1 THE S CORP HAS ACC C CORP EARNINGS AND PROFITS FROM PRIOR YEARS AS A C CORP, and 2. PASSIVE INVESTMENT INCOME (EX: royalties, dividends, interest, rents, and annuities but not gains on sales of securities) EXCEEDS 25% OF TOTAL GROSS RECEIPTS

Effect of S corp Election on Shareholders Pass through of Income and or Losses to Shareholder/K-1 - like ___, s corps flow through ordinary business income or loss and separately stated items of income, gain, loss, and deductions to the ___ - allocations to ___ are made on a __, __ basis (and loss is ____) *** - unlike ___, an s corp shareholder's share of ordinary business income is ___, even if the shareholder is ___

Effect of S corp Election on Shareholders Pass through of Income and or Losses to Shareholder/K-1 - like PARTNERSHIPS, s corps flow through ordinary business income or loss and separately stated items of income, gain, loss, and deductions to the SHAREHOLDERS - allocations to SHAREHOLDERS are made on a PER-SHARE, PER-DAY basis (and loss is LIMITED TO BASIS) *** - unlike PARTNERSHIPS, an s corp shareholder's share of ordinary business income is NOT SUBJECT TO SELF-EMPLOYMENT TAX, even if the shareholder is ACTIVELY INVOVLED INT HE OPERATIONS OF THE BUSINESS

Electing S Corporation Status When election Takes Effect - all shareholders (__ and __) must consent to a valid election on Form ___, which the company files with ___ - for a calendar year corporation, an S election filed by ___ is effective on ___ - if the election is filed after ___, it is effective on ___ New Shareholders - after the election is in effect, the ____ is not required - the S corp status continues until there is ___

Electing S Corporation Status When election Takes Effect - all shareholders (VOTING and NONVOTING) must consent to a valid election on Form 2553, which the company files with THE IRS - for a calendar year corporation, an S election filed by MARCH 15TH is effective on JAN 1 - if the election is filed after MARCH 15, it is effective on JAN 1 OF THE FOLLOWING YEAR New Shareholders - after the election is in effect, the CONSENT OF A NEW SHAREHOLDER is not required - the S corp status continues until there is A VOLUNTARY OR INVOLUNTARY TERMINATION

Eligibility to qualify as an S corporation, the following requirements must be met: 1. 2. 3. 4.

Eligibility to qualify as an S corporation, the following requirements must be met: 1. QUALIFIED CORPORATION 2. ELIGIBILE SHAREHOLDERS 3. SHAREHOLDER LIMIT 4. ONE CLASS OF STOCK

Eligibility: to qualify as an S corporation, the following requirements must be met: 1. Qualified Corporation - the corporation must be a ___ - an s corp may own any interest in a ___ (even __), but the S corp may not ____

Eligibility: to qualify as an S corporation, the following requirements must be met: 1. Qualified Corporation - the corporation must be a DOMESTIC CORPORATION - an s corp may own any interest in a C CORPOTION (even 100%), but the S corp may not FILE A CONSOLIDATED TAX RETURN WITH THE C CORP

Eligibility: to qualify as an S corporation, the following requirements must be met: 2. Eligible Shareholders - eligible shareholders must be __, ___, or ___ - an individual shareholder may not be a ___, but may be a ___ - ___ and ___ may be shareholders - neither __ nor ___ are eligible shareholders

Eligibility: to qualify as an S corporation, the following requirements must be met: 2. Eligible Shareholders - eligible shareholders must be US INDIVIDUALS, ESTATES, or CERTAIN TYPES OF TRUSTS - an individual shareholder may not be a NONRESIDENT ALIENT, but may be a RESIDENT ALIENT - QUALIFIED RETIREMENT PLANS and 501(C)3 CHARITABLE ORGS may be shareholders - neither CORPORATIONS nor PARTNERSHIPS are eligible shareholders

Eligibility: to qualify as an S corporation, the following requirements must be met: 3. Shareholder Limit - there may be no more than ___ - family members may elect to be treated as ___ - family members include ___

Eligibility: to qualify as an S corporation, the following requirements must be met: 3. Shareholder Limit - there may be no more than 100 SHAREHOLDERS - family members may elect to be treated as ONE SHAREHOLDER - family members include COMMON ANCESTORS, LINEAL DESCENDANTS OF COMMON ANCESTORS, AND THEIR CURRENT OR FORMER SPOUSES

Eligibility: to qualify as an S corporation, the following requirements must be met: 4. One Class of Stock - there may be no more than ___ - however, differences in ____ - ___ is not permitted

Eligibility: to qualify as an S corporation, the following requirements must be met: 4. One Class of Stock - there may be no more than ONE CLASS OF COMMON STOCK - however, differences in SOMMON STOCK VOTING RIGHTS ARE ALLOWED - PREFERRED STOCK is not permitted

Entity Classification of Sourcing of Income Entity Classifications: a foreign entity is generally classified as either a ___ or a ___:

Entity Classification of Sourcing of Income Entity Classifications: a foreign entity is generally classified as either a FOREIGN BRANCH or a FOREIGN SUBSIDIARY:

Entity Classification of Sourcing of Income Foreign Branch: (___) this is an ____ that is viewed as an ____ it is not ___; however, earnings from the branch are generally taxed by ___ *** ___ *** federal tax consequences related to a foreign branch are: - profits or losses earned by the branch are treated as being earned ____ and are accordingly taxed ___. This allows any losses incurred by the foreign branch to ____ - option of __ is available - foreign tax credit is equal to the __ of: 1. 2. - remittance of profit back to domestic corp are or are not taxable? __

Entity Classification of Sourcing of Income Foreign Branch: (UNINCORPORATED EXTENSION) this is an UNINCORPORATED FOREIGN ENTITIY that is viewed as an EXTENSION OF THE DOMESTIC CORPORATION it is not A SEPARATE LEGAL ENTITIY; however, earnings from the branch are generally taxed by THE FORIEGN COUNRTY AND THE US *** FOREIGN TAXED NOW and US TAXED NOW *** federal tax consequences related to a foreign branch are: - profits or losses earned by the branch are treated as being earned DIRECTLY BY THE DOMESTIC CORPORATION and are accordingly taxed IN FULL WHEN EARNED. This allows any losses incurred by the foreign branch to OFFSET DOMESTIC INCOME EANRED BY THE US COMPANY - option of FOREIGN TAX DEDUCTION OR CREDIT is available - foreign tax credit is equal to the LESSER of: 1. FOREIGN TAX PAID 2. FOREIGN TAX CREDIT LIMITATION - remittance of profit back to domestic corp are or are not taxable? ARE NOT TAXABLE

Entity Classification of Sourcing of Income Foreign Subsidiary: this is a ___, incorporated under the laws of the ___ accordingly, the subsidiary profits are ___ *** ___ *** federal tax consequences related to the foreign subsidiary are: - income earned by the sub is ____ in the form of ___. In this way, the US company has ___ over when ___ - ___ income is subject to immediate tax in the US and cannot be deferred - because the foreign sub is a ___ and taxation on profits may be __, it is important that transactions between the US parent and foreign sub follow the rules of ___, or ____

Entity Classification of Sourcing of Income Foreign Subsidiary: this is a SEPARATE LEGAL ENTITIY, incorporated under the laws of the FOREIGN HOST COUNTRY accordingly, the subsidiary profits are TAXED BY THE FOREIGN COUNTRY *** FOREIGN TAXED NOW and US TAXED LATER*** federal tax consequences related to the foreign subsidiary are: - income earned by the sub is NOT TAXED UNTIL THE EARNINGS ARE BROUGHT BACK TO THE us in the form of A DIVIDEND. In this way, the US company has CONTROL over when FOREIGN PROFITS ARE RECOGNIZED - PASSIVE INVESTMENT income is subject to immediate tax in the US and cannot be deferred - because the foreign sub is a SEPARATEL LEGAL ENTITY and taxation on profits may be DEFERRED, it is important that transactions between the US parent and foreign sub follow the rules of TRANSFER PRICING, or PENALTIES WILL BE IMPOSED

Exceptions to Nonrecognition of Gain (Taxable Events for Partners) 1. 2.

Exceptions to Nonrecognition of Gain (Taxable Events for Partners) 1. CAPITAL INTEREST ACQUIRED FOR SERVICES PROVIDED 2. PROPERTY SUBJECT TO AN (EXCESS) LIABILITY

Exceptions to Nonrecognition of Gain (Taxable Events for Partners) 1. Capital Interest Acquired for Services Provided *** ___ *** when a partner provides services to a partnership in exchange for a capital interest, the compensation he receives for the services provided is the ___, which is the amount the contributing partner would receive if ___ the liquidation value of the capital interest is included in the partner's ___ the partnership either __ or __, depending on the nature of the services provided, the amount ___, which is the ____. The deduction is allocated among the partners ___

Exceptions to Nonrecognition of Gain (Taxable Events for Partners) 1. Capital Interest Acquired for Services Provided *** TAXABLE --> FMV *** when a partner provides services to a partnership in exchange for a capital interest, the compensation he receives for the services provided is the LIQUIDATION VALUE OF THE CAPITAL INTEREST, which is the amount the contributing partner would receive if THE PARTNERSHIP WERE TO LIQUIDATE the liquidation value of the capital interest is included in the partner's TAXABLE ORDINARY INCOME the partnership either DEDUCTS or CAPITALIZES, depending on the nature of the services provided, the amount PAID FOR THE SERVICES, which is the LIQUIDATION VALUE OF THE CAPITAL INTEREST PROVIDED IN EXCHANGE FOR THE SERVICE . The deduction is allocated among the partners THAT EXISTED BEFORE THE NEW SERIVCE PARTNER

Exceptions to Nonrecognition of Gain (Taxable Events for Partners) 2. Property Subject to (Excess) Liability when property is contributed that is subject to ___ (____), the excess of the ___ over the ___ is treated as ___ and ___ to the partner

Exceptions to Nonrecognition of Gain (Taxable Events for Partners) 2. Property Subject to (Excess) Liability when property is contributed that is subject to A LIABILITY (NONRECOURSE SECURED DEBT), the excess of the LIABILITIES ASSUMED BY THE OTHER PARTNERS over the CONTRIUBTED BASIS is treated as BOOT and IS A GAIN to the partner

Excess business Loss Limitation even if a loss clears the ___, ___, and ___ hurdles, deduction may still be limited by the ___ under the excess business loss limitation, a taxpayer __ the maximum net business loss that may be deducted is ___ for MFJ taxpayers and ___ for all other taxpayers. Any excess business loss is ___ as a ___ and is subject to the --_ limitation for ___

Excess business Loss Limitation even if a loss clears the TAX BASIS, AT-RISK, and PAL hurdles, deduction may still be limited by the EXCESS BUSINESS LOSS LIMITATION under the excess business loss limitation, a taxpayer COMBINES ALL BUSINESS INCOME AND LOSSES (ACTIVE AND PASSIVE) the maximum net business loss that may be deducted is 540,000 for MFJ taxpayers and 270,000 for all other taxpayers. Any excess business loss is CARRIED FORWARD as a NET OPERATING LOSS NOL and is subject to the 80% PERCENT OF TAXABLE INCOME limitation for NOLs

Expatriated Entity Rules for Corporations when a US company decides to reorganize its operations under a foreign parent to reduce its US tax obligations, it is considered an ___ ___ fall into one of two categories for US tax purposes: 1. continue to be treated as US corporations if ____, or 2. denied certain tax attributes (___ and ___) if former US shareholders owns ____ but less than ___ of interests in the new foreign parent the TCJA also includes provisions to reduce a ____: - dividends received by a US corporation from a ___ are not eligible for the ___ - any individual shareholder who receives a dividend from a corporation that is a ___ is _____

Expatriated Entity Rules for Corporations when a US company decides to reorganize its operations under a foreign parent to reduce its US tax obligations, it is considered an EXPATRIATED ENTITIY EXPATRIATED ENTITIES fall into one of two categories for US tax purposes: 1. continue to be treated as US corporations if FORMER US SHAREHOLDERS OWN 80% OR MORE OF INTERESTS IN THE NEW FOREIGN PARENT, or 2. denied certain tax attributes (NOLs and FOREING TAX CREDITS) if former US shareholders owns 60% but less than 80% of interests in the new foreign parent the TCJA also includes provisions to reduce a US COMPANY'S INCENTIVE TO EXPATRIATE: - dividends received by a US corporation from a SURROGATE FOREIGN CORPORATION are not eligible for the 100% DRD - any individual shareholder who receives a dividend from a corporation that is a SURROGATE FOREIGN CORPORATION is NOT ENTITLED TO THE LOWER RATES ON QUALIFIED DIVIDENDS

Expatriation: Mark to Market Regime for Individuals (move from US to Foreign Country) the mark-to-market tax regime is imposed on ___ who ___ and satisfy one of the following three tests: 1. 2. 3. Calculation of tax - all property of the ___ is treated as ___ on the day before the ___, and ___ - a ___ exclusion is allowed - a taxpayer may elect to defer payment of tax attributable to property deemed ___

Expatriation: Mark to Market Regime for Individuals (move from US to Foreign Country) the mark-to-market tax regime is imposed on COVERED EXPATRIATES who RENOUNCE THEIR US CITIZENSHIP and satisfy one of the following three tests: 1. TAX LIABILITY TEST 2. NET WORTH TEST 3. COMPLIANCE TEST Calculation of tax: - all property of the COVERED EXPATRAITE is treated as SOLD on the day before the EXPATRIATION DATE, and GAIN IS RECONGIZED - a 767,000 exclusion is allowed - a taxpayer may elect to defer payment of tax attributable to property deemed SOLD

Federal Affiliated Groups and Transfer Pricing - an affiliated group of businesses having operations in several countries and conducting sales between affiliates could have a pricing structure that 1. intentionally or unintentionally ___ 2. results in some countries ___

Federal Affiliated Groups and Transfer Pricing - an affiliated group of businesses having operations in several countries and conducting sales between affiliates could have a pricing structure that 1. intentionally or unintentionally UNDERSTATES INCOME IN SOME OR ALL OF THOSE COUNTRIES 2. results in some countries NOT RECEIVING AS MUCH INCOME TAX

For an S corp, the owner's basis is increased by the owners ___ and decreased by the owner's ___, and is ___ by the entity's bank loan increases or decreases

For an S corp, the owner's basis is increased by the owners SHARE OF PROFITS and decreased by the owner's SHARE OF LOSSES, and is NOT EFFECTED by the entity's bank loan increases or decreases

Foreign Activities of US Persons (outbound transactions) when a US person invests abroad, it is considered ___ the income earned outside US Boarders is generally referred to as ___ the definition of a US person includes: - - - - - US persons can generally ___ until such income is ___ (ex: in the form of a dividend) The benefit of ___ usually applies to income earned abroad through ___

Foreign Activities of US Persons (outbound transactions) when a US person invests abroad, it is considered AN OUTBOUND TRANSACTION the income earned outside US Boarders is generally referred to as FOREIGN-SOURCE INCOME the definition of a US person includes: - US CITIZEN - US RESIDENT ALIEN - US PARTNERSHIP - US CORPORATION - US TRUSTS AND ESTATES US persons can generally DEFER US TAXES ON FOREIGN-SOURCE INCOME until such income is REPATRIATED TO THE US (ex: in the form of a dividend) The benefit of DEFERRAL usually applies to income earned abroad through ACTIVE OPERATIONS

Foreign Activities of US Persons (outbound transactions) - Anti-Deferral Rules which result in Taxation Now the US has two anti-deferral regimes that result in the current taxation of foreign-source income: - -

Foreign Activities of US Persons (outbound transactions) - Anti-Deferral Rules which result in Taxation Now the US has two anti-deferral regimes that result in the current taxation of foreign-source income: - PASSIVE FOREIGN INVESTMENT COMPANY REGIME (PFIC) - CONTROLLED FOREIGN CORPORATION (CFC) RULES/SUBPART F REGIME

Foreign Base Company Income the main purpose of Subpart F is to discourage taxpayers from using foreign corporations to ____ by ___ in ___. the rules define this "___" as ___. foreign base company income includes ___ or ___ tied to a __ foreign base company income is taxed ____ (no __ and no ___ allowed)

Foreign Base Company Income the main purpose of Subpart F is to discourage taxpayers from using foreign corporations to DEFER US TAXES by ACCUMULATING INCOME in FOREING "BASE" COMPANIES LOCATED IN LOW-TAX JURISDICTIONS. the rules define this "BAD INCOME" as FOREIGN BASE COMPANY INCOME. foreign base company income includes PASSIVE INCOME or ACTIVE INCOME tied to a RELATED PARTY foreign base company income is taxed ON A CURRENT BASES (no DEFERRAL and no DRD allowed)

Foreign Person Treated as US Resident foreign persons are usually only taxed on their ___ income however, a foreign individual may be treated as a ___, which means the individual is subject to US taxation on ___ income a person is a US Resident if: - they have__ - they are __: 1. __ 2. __ - __ * __ - __ * __ - __ * __ Fist-Year Election: a foreign person is considered a resident of the US if the individual elects to be treated as a US Resident and meets the following requirements: - - - the election is made by filing ___ or by filing ___

Foreign Person Treated as US Resident foreign persons are usually only taxed on their US SOURCE income however, a foreign individual may be treated as a US RESIDENT, which means the individual is subject to US taxation on WORLDWIDE income a person is a US Resident if: - they have A GREEN CARD - they are SUBSTANTIALLY PRESENT IN US FOR AT LEAST: 1. 31 days during CY 2. 183 days for a 3 year period, applying a Weighted Average - days in CY * 1 - days in last year * 1/3 - days in last 2 years * 1/6 Fist-Year Election: a foreign person is considered a resident of the US if the individual elects to be treated as a US Resident and meets the following requirements: - present for 31 consecutive days in CY - present for 75% of the days in CY (BEGINNING DAY 1 OF THE 31 CONSECUTIVE DAYS) and - meets the substantial presence test for the succeeding year the election is made by filing AN EXTENSION FOR THE FIRST YEAR or by filing AN AMENDED RETURN FOR THE FIRST YEAR

Foreign Tax Credit: **** under a worldwide tax system, the primary mechanism for mitigating double taxation is ___ the US allows ___ taxpayers to take ___ for income taxes paid ___ Foreign Tax Credit Limitation - if a US taxpayer earns income in a foreign jurisdiction with a higher tax rate than the US, ____, but the foreign tax credit will be limited to the amount of ___ - this helps ensure that the US tax liability tied to income earned in the US is not offset by ___ The limitation calculation: *** ___ ***

Foreign Tax Credit: **** under a worldwide tax system, the primary mechanism for mitigating double taxation is THE FOREIGN TAX CREDIT the US allows US taxpayers to take A FOREIGN TAX CREDIT for income taxes paid TO A FOREIGN GOVERNMENT Foreign Tax Credit Limitation - if a US taxpayer earns income in a foreign jurisdiction with a higher tax rate than the US, NO RESIDUAL TAXES WILL BE PAID TO THE US GOVERNMENT, but the foreign tax credit will be limited to the amount of US TAXES ATTRIBUTABLE TO THE FOREIGN-SOURCE INCOME - this helps ensure that the US tax liability tied to income earned in the US is not offset by AN UNLIMITED FOREIGN TAX CREDIT The limitation calculation: THE LESSER OF: - FOREIGN TAX PAID or - (FOREIGN TAXABLE INCOME / WORLDWIDE TAXABLE INCOME) * US TAX where US TAX = 21% * WORLDWIDE TAXABLE INCOME *** TOTAL TAXABLE INCOME INCLUDES BOTH FOREIGN SOURCE INCOME AND ALL OTHER TAXALB EINCOME, INCLUDING DOMESTIC INCOME ***

Foreign Tax Credit: Calculating the Foreign Tax Credit Limitation by Category once the income is sourced, the company applies a ___ to each category of income the formula for computing the __ is the same as that for computing the overall limitation, except the numerator is now ___: formula: *** ___ *** Tips: - the foreign tax credit is allowed for a foreign tax that the US Deems to be ___; this does not include __, __, __ or ___ - the credit allowed for that category is the ___ of the ___ or ___. The total FTC is then the ___ - a corporation calculates and reports its foreign tax credit on Form ___, and individuals, estates, and trusts use Form ___ - taxpayers can elect to deduct foreign taxes rather than claim the credit, which can be a good decision if the taxpayer does not expect to utilize the credit in the ___

Foreign Tax Credit: Calculating the Foreign Tax Credit Limitation by Category once the income is sourced, the company applies a SEPARATE FOREIGN TAX CREDIT (FTC) to each category of income the formula for computing the SEPARATE CATEGORY LIMITATIONS is the same as that for computing the overall limitation, except the numerator is now THE SEPARATE CATEGORY OF INCOME: formula: THE LESSER OF FOREING TAX PAID or = PRE-CREDIT US TAX ON TOTAL TAXABLE INCOME * (SEPARATE CATEGORY FOREIGN INCOME / TOTAL TAXABLE INCOME) *** TOTAL TAXABL EINCOME INCLUDES ALL TAXABLE INCOEM FROM ALL FOREIGN CATEOGRIES AS WELL AS ALL OTHER TAXABLE INCOME, INCLUDING DOMESTIC INCOME *** Tips: - the foreign tax credit is allowed for a foreign tax that the US deems to be AN INCOME TAX; this does not include SALES TAXES, VALUE ADDED TAXES, PROPERTY TAXES, OR CUSTOMS TAXES - the credit allowed for that category is the LESSER of the LIMITATION FOR THAT CATEGORY or THE FOREIGN TAXES RELATED TO THAT CATEGORY. The total FTC is then the SUM OF THE CREDITS ALLOWED FOR ALL CATEGORIES - a corporation calculates and reports its foreign tax credit on Form 1118 FOREIGN TAX CREDIT - CORPORATIONS, and individuals, estates, and trusts use Form 1116 FOREIGN TAX CREDIT (INDIVIDUAL, ESTATE, AND TRUST) - taxpayers can elect to deduct foreign taxes rather than claim the credit, which can be a good decision if the taxpayer does not expect to utilize the credit in the 10-YEAR CARRYFORWARD PERIOD

Foreign Tax Credit: Separate Limitation Calculation foreign income is sourced into ___ to prevent a company from using excess credits from ___ to offset ___ the foreign tax credit limit must be applied to each of the following categories of income: - - - -

Foreign Tax Credit: Separate Limitation Calculation foreign income is sourced into SEPARATE CATEGORIES to prevent a company from using excess credits from HIGH TAX FOREIGN BUSINESS PROFITS to offset LOW-TAXED PASSIVE INVESTMENT INCOME the foreign tax credit limit must be applied to each of the following categories of income: - PASSIVE CATEGORY INCOME (DIVIDENDS, INTEREST, RENTS, ROYALTIES) - GENERAL CATEGORY INCOME (ACTIVE BUSINESS INCOME) - FOREIGN BRANCH INCOME - GLOBAL INTANGIBLE LOW-TAXED INCOME

Foreign-Derived Intangible Income Deduction (___ income) the TCJA created a new deduction for certain ___ under the new provision, a ___ can get a deduction for a portion of its ____ (___) __ is income from transactions involving __, __, located __ (export activities) the deduction amount is ___ the deduction for FDII is available only to ___ that are not __ or __

Foreign-Derived Intangible Income Deduction (EXPORT income) the TCJA created a new deduction for certain EXPORT ACTIVITIES under the new provision, a US CORPORATION can get a deduction for a portion of its FOREIGN-DERIVED INTANGIBLE INCOME (FDII) FDII is income from transactions involving NON-US PERSONS, NOT REALTED, located OUTSIDE THE US (export activities) *** NONE OF THESE CAN BE RELATED! *** the deduction amount is 37.5% the deduction for FDII is available only to C CORPORATIONS that are not RICs or REITs

Fringe Benefits Deductible Fringe Benefits - fringe benefits for ___ and those employee shareholders owning ____ of the s corp are deductible by the S corp in calculating ordinary business income Nondeductible Fringe Benefits - the cost of fringe benefits for shareholders owning ___ is not deductible by the s corp, unless the corp includes the benefits in the ___ *** include in that ___ and report on ___ ***

Fringe Benefits Deductible Fringe Benefits - fringe benefits for NON-SHAREHOLDER EMPLOYEES and those employee shareholders owning 2% OR LESS of the s corp are deductible by the S corp in calculating ordinary business income Nondeductible Fringe Benefits - the cost of fringe benefits for shareholders owning OVER 2% is not deductible by the s corp, unless the corp includes the benefits in the EMPLOYEE/SHAREHOLDER'S W-2 *** include in that SHAREHOLDER'S INCOME and report on K-1 ***

Global Intangible Low Taxed Income Tax = GILTI the TCJA created a new tax on GILTI, and it applies to taxable years ___ the GILTI tax is a ___ imposed on certain low-taxed income that is intended to reduce the incentive to ___ after determining a CFC's Subpart F income, US shareholders must determine whether they are subject to tax on the ___. US shareholders are taxed in a manner similar to ___ and US corporations are allowed a ___

Global Intangible Low Taxed Income Tax = GILTI the TCJA created a new tax on GILTI, and it applies to taxable years BEGINNING AFTER DEC 31, 2017 the GILTI tax is a MINIMUM TAX imposed on certain low-taxed income that is intended to reduce the incentive to RELOCATE CFCS TO LOW-TAX JURISDICTIONS after determining a CFC's Subpart F income, US shareholders must determine whether they are subject to tax on the CFC's GILTI. US shareholders are taxed in a manner similar to SUBPART F INCLUSIONS and US corporations are allowed a SPECIAL DEDUCTON

Guaranteed Payments *** Partner who receives it --> ___ *** *** who expenses it? *** guaranteed payments are ___ paid ___ for ___ or ___ without regard to the partner's profit or loss sharing ratio they are ___ to the partnership and ___ to the partner

Guaranteed Payments *** Partner who receives it --> K-1 INCOME *** *** who expenses it? PARTNERSHIP *** guaranteed payments are REASONABLE COMPENSATION paid TO A PARTNER for SERVIES PROVIDED (GUARANTEED SALARY) or USE OF CAPITAL (GUARANTEED INTEREST) without regard to the partner's profit or loss sharing ratio they are ALLOWABLE TAX DEDUCTIONS to the partnership and TAXABLE INCOME to the partner

Holding Period of a Partnership Interest ***___--> but there is one exception: ___*** if property contributed was previously a __ or ___ in the hands of the partner, the partner's holding period for his partnership interest includes the holding period of the property contributed if the property is ___ (ex: ___), the holding period begins on the date the property is contributed to the partnership (this is the exception to the rule)

Holding Period of a Partnership Interest ***USE OLD CONTRIUBTED PROPERTY HOLDING PERIOD (PPE) --> but there is one exception: INVENTORY *** if property contributed was previously a CAPITAL ASSSET or SECTION 1231 ASSET in the hands of the partner, the partner's holding period for his partnership interest includes the holding period of the property contributed if the property is AN ORDINARY INCOME ASSET (ex: INVENTORY), the holding period begins on the date the property is contributed to the partnership (this is the exception to the rule)

IRS Distribution / Apportionment / Allocation - to prevent the ___ or to clearly ___ of two or more businesses that are directly or indirectly owned by the same interests, the IRC authorizes the IRS to adjust upward or downward the __, ___, __ and ___ between or among such organizations, trades, or businesses - these orgs, trades, or businesses need not be: 1. 2. 3. - the IRS' authority to make these adjustments also extends to members of ____ that file ___

IRS Distribution / Apportionment / Allocation - to prevent the EVASION OF TAXES or to clearly REFLECT THE INCOME of two or more businesses that are directly or indirectly owned by the same interests, the IRC authorizes the IRS to adjust upward or downward the GROSS INCOME, DEDUCTIONS, CREDITS and ALLOWANCES between or among such organizations, trades, or businesses - these orgs, trades, or businesses need not be: 1. INCORPORATED 2. AFFILIATED 3. ORGANIZED IN THE UNITED STATES - the IRS' authority to make these adjustments also extends to members of AN AFFILIATED GROUP that file A CONSOLIDATED US INCOME TAX RETURN

IRS Options - these adjustments include the ability of the IRS to do the following: 1. modify the __ of assets; and 2. require the taxpayer to ___

IRS Options - these adjustments include the ability of the IRS to do the following: 1. modify the BASIS of assets; and 2. require the taxpayer to RECOGNIZE INCOME ON AN OTHERWISE TAX-FREE TRANSACTION

Illustration 1: Liquidating Distributions: Impact on a Partner Tag's basis in his KJT partnership interest was 24,000 Tag received a liquidating distribution of 5,000 in cash and real estate with a FMV of 20,000 and an adjusted basis to the partnership of 10,000 ... Alternative scenario: - if Tag had instead received 25,000 in cash as well as the real estate, Tag would recognize ... Alternative scenario: - if Tag had received 20,000 in cash and no real estate, Tag would recognize ... Alternative scenario: - if the property Tag had received was unrealized receivables or inventory instead of real estate, he would recognize ...

Illustration 1: Liquidating Distributions: Impact on a Partner Tag's basis in his KJT partnership interest was 24,000 Tag received a liquidating distribution of 5,000 in cash and real estate with a FMV of 20,000 and an adjusted basis to the partnership of 10,000 Tag has a basis in the real estate of 19,000 (24,000 basis in his partnership interest less 5,000 cash received) Alternative scenario: - if Tag had instead received 25,000 in cash as well as the real estate, Tag would recognize A 1,000 GAIN (24,000 BASIS IN PARTNERHIP INTEREST LESS 25,000 CASH RECEIVED). THE REAL ESTATE RECEIVED WOULD HAVE ZERO BASIS TO TAG Alternative scenario: - if Tag had received 20,000 in cash and no real estate, Tag would recognize A LOSS OF 4,000 (24,000 BASIS IN HIS PARTNERSHIP INTEREST LESS 20,000 CASH RECEIVED) BECAUSE THERE WERE NO OTHER ASSETS DISTRIUBTED WHICH ALLOCATE HIS REMAINING BASIS IN HIS PARTNERHIP INTEREST Alternative scenario: - if the property Tag had received was unrealized receivables or inventory instead of real estate, he would recognize A 9,000 LOSS (24,000 BASIS IN HIS PROPERTY INTEREST LESS 5,000 CASH RECEIVED LESS 10,000 BASIS OF PROPERTY RECEIVED). TAG WOULD HAVE A BASIS IN THE UNREALIZED RECEIVABLES OR INVENTORY OF 10,000, THE SAME AS THE BASIS IN THE HANDS OF THE PARTNERSHIP

Illustration 2: Contributed Property With Excess Liability Becker and Peter admit Tim to their partnership as a one third partner. Tim contributes a building worth 500,000 but has basis of 100,000. There is a mortgage of 225,000 on the building, assumed by the partnership. original cost: 100,000 today FMV: 500,000 mortgage: 225,000

Illustration 2: Contributed Property With Excess Liability Becker and Peter admit Tim to their partnership as a one third partner. Tim contributes a building worth 500,000 but has basis of100,000. There is a mortgage of 225,000 on the building, assumed by the partnership. original cost: 100,000 today FMV: 500,000 mortgage: 225,000 Basis 100,000 --> rollover cost basis <150,000> --> liabilities assumed by others (225,000 * 2/3) = -50,000 --> "net basis" (if below zero, boot) 50,000 --> gain/boot - taxable gain to Tim 0 --> basis of Tim

Illustration: Allocation of Partnership / LLC Debt Partners / LLC members AB Partnership has two equal partners, General Partner A and Limited Partner B. If AB Partnership takes out a 100,000 loan, how does it impact Partner A and Partner B's basis in their partnership interest? - If loan is recourse? - If loan is nonrecourse? Assume instead that the business is an LLC, with two equal LLC members. - if the loan is recourse? - if the loan is nonrecourse?

Illustration: Allocation of Partnership / LLC Debt Partners / LLC members AB Partnership has two equal partners, General Partner A and Limited Partner B. If AB Partnership takes out a 100,000 loan, how does it impact Partner A and Partner B's basis in their partnership interest? - If loan is recourse? ENTIRE 100,000 LAON ALLOCATED TO PARTNER A AND INCREASES BASIS IN PARTNSHIP INTEREST (GENERAL PARTNER AND HAS PERSONAL LIABILITY) NONE FO RECOURSE LOAN IS ALLOCATED TO PARTNER B BECAUSE LIMITED PARTNER, NO PERSONAL LIABILITY - If loan is nonrecourse? DEBT ALLOCATED BETWEEN THE TWO PARTNERS BASED ON THEIR 50% PROFIT SHARING RATIO. EACH PARTNER INCREASES HER BASIS IN PARTNERHIP INTEREST BY 50,000 Assume instead that the business is an LLC, with two equal LLC members. - if the loan is recourse? NEITHER LLC MEMBER INCREASES HER BASIS IN INTEREST, UNLESS ONE (OR BOTH) PERSONALLY GUARNATEE THE LLC RECOURSE LOAN. LLC MEMBERS, LIKE LIMITED PARTNERS, DO NOT HAVE PERSONAL LIABILITY FOR PARTNERSHIP DEBTS - if the loan is nonrecourse? DEBT ALLOCATED BETWEEN THE TWO LLC MEMBERS, IN SAME MANNER AS A PARTNERSHIP WITH GENERAL OR LIMITED OR BOTH PARTNERS. EACH LLC MEMBER INCREASES HER BASIS IN HER LLC INTEREST BY 50,000

Shareholder Basis in S Corp Stock The calculation of a shareholder's basis in S corp stock is generally the same as partnerships: Initial basis (contributions: cash, adjusted basis of property, FMV of services) + Income items (ordinary business income, separately stated income/gain items, and tax-exempt income, includes tax-exempt income) + Additional contributions - Distributions to shareholders - Loss/deduction items (ordinary business loss, separately stated loss/deduction items, nondeductible expense) expense items = Ending Basis *** S corporations nonrecourse debt ____ shareholder (at-risk basis)

Initial basis (contributions: cash, adjusted basis of property, FMV of services) + Income items (ordinary business income, separately stated income/gain items, and tax-exempt income, includes tax-exempt income) + Additional contributions - Distributions to shareholders - Loss/deduction items (ordinary business loss, separately stated loss/deduction items, nondeductible expense) expense items = Ending Basis *** S corporations nonrecourse debt DOES NOT INCREASE shareholder (at-risk) basis

What is the shareholder's basis in a property taken on that has a liability attached?

Just the FMV of the property - do not net in the liability. You only do that for finding the gain or loss or the post distribution stock basis - NOT for the basis in the property

What is the difference between the K and the K-1

K summarizes everyone's info, all partner's info K-1 is just one partner's info

LLC Formation the business owner files ___ with the state where the LLC is organized, which is similar tot he formation of a ___ the following list summarizes some of the key points a business owner should consider when trying to decide whether or not to organize a business as an LLC: 1. an LLC provides similar protection from liabilities as a ___ but does not have the ___ of a corporation if the LLC is ___ 2. LLC members generally have the right to ___, provide input, and manage LLCs; corporate shareholders generally ___ 3. an LLC ____. It must convert to a ___ before issuing an IPO 4. a sole proprietorship may become a ___ if it files ___ with the state 5. LLCs do not have limits on the __ and __ of shareholders. Unlike an S Corp, they can have __, __, __ and more than __ owners

LLC Formation the business owner files ARTICLES OF ORGANZATION with the state where the LLC is organized, which is similar tot he formation of a CORPORATION the following list summarizes some of the key points a business owner should consider when trying to decide whether or not to organize a business as an LLC: 1. an LLC provides similar protection from liabilities as a CORPORATION but does not have the DOUBLE TAXATION of a corporation if the LLC is TAXED AS A PARTNERSHIP 2. LLC members generally have the right to AMEND THE LLC OPERATING AGREEMENT, provide input, and manage LLCs; corporate shareholders generally DO NOT HAVE THESE SAME RIGHTS 3. an LLC CANNOT BECOME A PUBLIC COMPANY. It must convert to a CORPORATION before issuing an IPO 4. a sole proprietorship may become a SINGLE MEMBER LLC if it files ARITCLES OF ORANGZATION with the state 5. LLCs do not have limits on the TYPE and NUMBER of shareholders. Unlike an S Corp, they can have CORP, PARTNERSHIP, FOREING, and more than 100 owners

LLC Taxation for federal income tax purposes, an LLC is treated as one of the following: - - - the internal revenue code does not specifically address taxation of limited liability companies. a limited liability company with ___ is taxed as ___ unless an election is made to be taxed ___ such an election is made on Form ___, ___ a single member LLC is considered a ___ it is treated as ___ if the owner is an individual, and included in the corporation's ___ if the owner is ___

LLC Taxation for federal income tax purposes, an LLC is treated as one of the following: - A PARTNERSHIP - TWO OR MORE MEMBERS - CORPORATION - ELECT - SOLE PROPIETORSHIP - ONLY ONE OWNER the internal revenue code does not specifically address taxation of limited liability companies. a limited liability company with AT LEAST TWO ONWERS is taxed as A PARNTERSHIP unless an election is made to be taxed AS A CORPORATION such an election is made on Form 8832, ENTITY CLASSIFICATION ELECTION a single member LLC is considered a A DISREGARDED ENTITY FOR FEDERAL INCOME TAX PURPOSES it is treated as A SOLE PROPERIETORSHIP if the owner is an individual, and included in the corporation's TAXABLE INCOME if the owner is A C CORPORATION

Limitations on Pass-Through of Losses *** deduct up to - - For an S corporation shareholder to deduct a loss, the shareholder must clear four hurdles, in this order: 1. 2. 3. 4. The ___ and ___ are applied at the entity level, and limit the ability of S corporation shareholders to ____ the ___ and ___ limitations are applied at the individual tax return level

Limitations on Pass-Through of Losses *** deduct up to BASIS DIRECT LOANS For an S corporation shareholder to deduct a loss, the shareholder must clear four hurdles, in this order: 1. TAX BASIS LIMITATION 2. AT-RISK LIMITATION 3. PASSIVE ACTIVITY LOSS PAL LIMITATION 4. EXCESS BUSINESS LOSS LIMITATION The TAX BASIS and AT-RISK limitations are applied at the entity level, and limit the ability of S corporation shareholders to FLOW THROUGH LOSSES TO INDIVIDUAL INCOME TAX RETURNS the PAL and EXCESS BUSINESS LOSS limitations are applied at the individual tax return level

Limited Liability Companies a limited liability company LLC is ___ as with corporate shareholders, LLC members are ____ for the obligations of the business all members of an LLC have ___, which is different form a ___, where at least one ___ is ___ for all partnership debts

Limited Liability Companies a limited liability company LLC is A SEPARATE LEGAL ENTITY FROM ITS OWNERS as with corporate shareholders, LLC members are NOT PERSONALLY LIABILE for the obligations of the business all members of an LLC have LIMITED LIAIBLITY, which is different from a LIMITED PARTNERSHIP, where at least one GENERAL PARTNER is PERSONALLY LIABLE for all partnership debts an LLC is a CORPORATION for legal purposes (all members have LIMITED LIABILITY) and a PARTNERSHIP for tax purposes (not DOUBLE TAXED)

Limited right of a Controlled Taxpayer to Make Adjustments - if necessary to reflect arm's length pricing, in a timely filed income tax return, a controlled taxpayer may report the result of controlled transactions based upon ___ - the taxpayer cannot make any such adjustments which result in ___

Limited right of a Controlled Taxpayer to Make Adjustments - if necessary to reflect arm's length pricing, in a timely filed income tax return, a controlled taxpayer may report the result of controlled transactions based upon PRICES DIFFERENT FROM THOSE ACTAULLY CHARGED - the taxpayer cannot make any such adjustments which result in DECREASING TAXABLE INCOME

Liquidating Distribution with Multiple Hot Assets Only - if the liquidating distribution includes multiple hot assets, but not ___, the partner's basis in the partnership interest is allocated to the assets only if the basis in the partnership interest (__) is ___ than the partnership's basis in the assets distributed (__) - as noted earlier, if the partner's basis in the partnership interest (___) is ___ than the partnership's basis in the assets distributed (__), the partner recognizes ___ and the partner's basis in the assets are the same as the ____ Partner's Basis in Partnership Interest (___) Less than Partnership's Basis in Assets Distributed (___): Step 1: Step 2: Step 3:

Liquidating Distribution with Multiple Hot Assets Only - if the liquidating distribution includes multiple hot assets, but not ANY OTHER PROPERTY, the partner's basis in the partnership interest is allocated to the assets only if the basis in the partnership interest (OUTSIDE BASIS) is LESS than the partnership's basis in the assets distributed (INSIDE BASIS) - as noted earlier, if the partner's basis in the partnership interest (OUTSIDE BASIS) is MORE than the partnership's basis in the assets distributed (INSIDE BASIS), the partner recognizes A LOSS and the partner's basis in the assets are the same as the BASIS IN THE HANDS OF THE PARTNERHIP Partner's Basis in Partnership Interest (OUTSIDE BASIS) Less than Partnership's Basis in Assets Distributed (INSIDE BASIS): Step 1: ASSIGN A BASIS TO ALL ASSETS EQUAL TO THE PARNTERHIP'S BASIS IN THE ASSETS Step 2: ADJUST THE BASIS OF ANY ASSETS IN THE LAST PROPERTY CATEOGRY (OTHER PROPERTY, OR HOT ASSETS IF NO OTHER PROPERTY) THAT HAVE DEPRECIATED IN VALUE DOWN TO THEIR FMV Step 3: ALLOCATE ANY BASIS IN THE PARNTERSHIP INTEREST REMAINING AFTER STEP 2 AMONG ALL THE ASSETS IN THE LAST PROPERTY CATEOGRY BASED ON RELATIVE ADJUSTED BASIS OF THE ASSETS AFTER THE STEP 2 ADJUSTEMENT

Baker is a partner in BDT with a basis in his partnership interest of 60,000. BDT made a liquidating distribution of land with an adjusted basis of 75,000 and a fair market value of 40,000 to Baker. What amount of gain or loss should Baker report?

Liquidating distribution --> zero out to get out --> no gain or loss! ANSWER: 0

Liquidation of a Partnerships there are three ways in which a partner may liquidate a partnership interest: 1. 2. 3.

Liquidation of a Partnerships there are three ways in which a partner may liquidate a partnership interest: 1. COMPLETE WITHDRAWAL (LIQUIDATING DISTRIUBTION) 2. SALE OF PARTNERSHIP INTEREST 3. RETIREMENT OR DEATH

Liquidation of an S Corp - Consequences to Shareholders distributions for an s corp in complete liquidation of the s corp are treated as ___ the shareholder's adjusted basis in the stock is subtracted from the ___ (cash and FMV of property received from the corp) to calculate gain or loss if the shareholder assumes corporate liabilities, or receives property subject to a liability, the amount realized is ___: formula: the shareholder stock basis in this calculation is determined after ___ the character of the gain or loss recognized to the shareholder will depend on the shareholder's ____ in the ___ and whether the stock is a ___ to the shareholder

Liquidation of an S Corp - Consequences to Shareholders distributions for an s corp in complete liquidation of the s corp are treated as PAYMENTS IN EXCHANGE FOR STOCK the shareholder's adjusted basis in the stock is subtracted from the AMOUNT REALIZED (cash and FMV of property received from the corp) to calculate gain or loss if the shareholder assumes corporate liabilities, or receives property subject to a liability, the amount realized is REDUCED BY THE AMOUNT OF LIABILITIES ASSUMED : formula: CASH RECEIVED + FMV PROPERTY RECEIVED <LIABILITIES ASSUMED> = AMOUNT REALIZED <BASIS IN STOCK> = TAXABLE GAIN/LOSS the shareholder stock basis in this calculation is determined after ALL OTHER ACTIVITY OF THE S CORP FOR THE YEAR HAS BEEN TAKEN INTO ACCOUNT (EX: SHARE OF TAXABLE INCOME) the character of the gain or loss recognized to the shareholder will depend on the shareholder's HOLDING PERIOD in the SS CORP STOCK and whether the stock is a CAPITAL ASSET to the shareholder

Liquidation of an S Corp - Consequences to an S Crop the treatment is the same as the treatment of liquidation of a ___ in a liquidating distribution, the corp will recognize gain or loss on the distribution of property as if the property was ___: Formula: ___ - ___ = ___ *** note: in liquidation, corp can ___ (contrast this to nonliquidating distribution) NOTE: distributions to related parties as defined in IRC Section___, ____ *** ___ ***

Liquidation of an S Corp - Consequences to an S Crop the treatment is the same as the treatment of liquidation of a C CORPORATION in a liquidating distribution, the corp will recognize gain or loss on the distribution of property as if the property was SOLD AT ITS FMV: Formula: FMV OF ASSETS DISTRIBUTED - BASIS IN ASSETS = TAXABLE GAIN/LOSS *** note: in liquidation, corp can RECOGNIZE A LOSS (contrast this to nonliquidating distribution) NOTE: distributions to related parties as defined in IRC Section 267, DO NOT QUALIFY FOR LOSS RECOGNITION *** REPORT ON K-1 TO SHAREHOLDER AND INCREASE THEIR BASIS ***

Loss Carryforward Summary suspended loss due to insufficient tax basis: - - suspended loss due to insufficient at-risk basis: - - suspended passive activity loss: - - excess business loss: - -

Loss Carryforward Summary suspended loss due to insufficient tax basis: - CARRY FORWARD TO OFFSET FUTURE INCOME WHEN TAX BASIS REINSTATED - SUSPENDED LOSSES DISAPPEAR WHEN DISPOSE OF PARTNERSHIP INTEREST suspended loss due to insufficient at-risk basis: - CARRY FORWARD TO OFFSET FUTURE INCOME WHEN AT-RISK BASIS REINSTATED - USE TO REDUCE GAIN FROM SALE WHEN DISPOSE OF PARTNERSHIP INTEREST suspended passive activity loss: - CARRYFORWARD TO OFFSET FUTURE PASSIVE ACTIVITY INCOME - USE TO OFFSET OTHER SOURCES OF INCOME WHEN DISPOSE OF PASSIVE ACTIVITIY excess business loss: - CARRYFORWARD AS AN NOL TO OFFSET FUTURE INCOME - SUBJECT TO 80% OF FUTURE TAXABLE INCOME LIMITATION

Loss Limitations as with an S corp shareholder, a partner in a partnership must clear four hurdles in order to deduct a loss: 1. 2. 3. 4. the tax basis and at risk limitations are applied at the ___, and limit the ability of partners to ___ the PAL and excess business loss limitations are applied ___

Loss Limitations as with an S corp shareholder, a partner in a partnership must clear four hurdles in order to deduct a loss: 1. TAX BASIS LIMIATION - PARTNERSHIP LEVEL ISSUE 2. AT RISK LIMITAITON - PARTNERSHIP LEVEL ISSUE 3. PASSIVE ACTIVITY LOSS PAL LIMITATION - REAL ESTATE LOSSES 4. EXCESS BUSINESS LOSS LIMITATION - NOL the tax basis and at risk limitations are applied at the ENTITIY LEVEL, and limit the ability of partners to FLOW THROUGH LOSSES TO THEIR INIDIVIDUAL INCOME TAX RETURN the PAL and excess business loss limitations are applied AT THE INDIVIDUAL TAX RETURN LEVEL

NOT NECESSARY

NOT NECESSARY

Nonbusiness Income nonbusiness income (___, such as dividends and interest) is taxed on a ___ (meaning ___ are prohibited) at a ___ statutory withholding rate withholding rates may be reduced by ___ a foreign person's nonbusiness income is subject to ___ under one of two regimes US Withholding Tax Regimes for Nonbusiness Income 1. - deals with withholdings on __ which are taxed at __% 2. - deals with withholding tax on __ that do not __ which are taxed at __%

Nonbusiness Income nonbusiness income (INVESTMENT-TYPE INCOME, such as dividends and interest) is taxed on a GROSS BASIS (meaning DEDUCTIONS AND EXPENSES are prohibited) at a 30% statutory withholding rate withholding rates may be reduced by INCOME TAX TREATIES a foreign person's nonbusiness income is subject to US WITHHOLDING TAXES under one of two regimes US Withholding Tax Regimes for Nonbusiness Income 1. FIXED, DETERMINABLE, ANNUAL, OR PERIODIC INCOME (FDAP) - deals with withholdings on FOREIGN PERSON'S INVESTEMNT-TYPE INCOME which are taxed at 30% 2. FOREIGN ACCOUNT TAX COMPLAINCE ACT OF 2010 (FATCA) - deals with withholding tax on FOREIGN ENTITIES that do not PROVIDE INFO ABOUT US PERSONS INVESTING IN FORIEGN ENTITIES which are taxed at 30%

Nonliquidating/Operating Distributions *** like a ___ *** a nonliquidating distribution to a partner (also referred to as a ___, or a ___) is generally ___, both to the partner and the partnership IN CONTRAST: for an S corp, distributions are __ if there is ___ from a C Corp, or if the S corp distributes __ (as if the asset has been ___) GR for Partnership Nonliquidating Distributions: distributions of cash or property to a partner ____ in the partnership interest by the ___ or ___ of the property distributed --> *** the basis in the partnership interest is reduced first by ___ and then by ___

Nonliquidating Distributions *** like a BANK ACCOUNT WITHDRAWAL *** a nonliquidating distribution to a partner (also referred to as a CURRENT DISTRIBUTION, or a OPERATING DISTRIBUTION) is generally NONTAXABLE, both to the partner and the partnership IN CONTRAST: for an S corp, distributions are TAXABLE if there is E&P from a C Corp, or if the S corp distributes APPRECIATED PROPERTY (as if the asset has been SOLD AT FMV) GR for Partnership Nonliquidating Distributions: distributions of cash or property to a partner REDUCE THE PARTNER'S BASIS in the partnership interest by the CASH or ADJUSTED BASIS NBV of the property distributed --> *** the basis in the partnership interest is reduced first by CASH DISTRIBUTIONS and then by PROPERTY DISTRIBUTIONS

Nonliquidating distribution: Nonliquidating distribution of land to a shareholder, 160,000 FMV and 85,000 FMV - what will be the shareholder's basis in the land? - Nonliquidating distribution of inventory to a shareholder. 100,000 FMV and 190,000 S corp's basis. What will be the shareholder's basis in the inventory? - S corporations follow the same rules for property distributions as ___. The corporation recognizes ___ on nonliquidating distributions of appreciated property to shareholders, as if ___. The corporation ___ on nonliquidating distributions of property that has declined in value. How do you calculate the gain or loss recognized for the shareholders? -

Nonliquidating distribution of land to a shareholder, 160,000 FMV and 85,000 FMV - what will be the shareholder's basis in the land? - FMV 160,000 Nonliquidating distribution of inventory to a shareholder. 100,000 FMV and 190,000 S corp's basis. What will be the shareholder's basis in the inventory? - FMV 100,000 How do you calculate the gain or loss recognized for the shareholders? - start with the shareholder's portion of the company's gain recognized (no loss recognized by the corporation in a nonliquidating dividend) - then increase/decrease the pre-distribution stock basis by that amount and then compare it to the amount of the distribution. If the distribution is less, leading to the loss, ignore the loss. If the distribution is more, leading to a gain, add that gain into the gain above Then how do you calculate the post-distribution stock basis? - take pre-distribution stock basis, add in shareholder's share of company gain, then compare that to the net FMV of the property received (taking into account the liabilities assumed by the shareholder). If the distribution is less, then you will have stock basis left over. If the distribution is more, than you will have no stock basis left because it all get distributed

Evan, a 25% partner in Vista Partnership, received a $20,000 guaranteed payment in 2017 for deductible services rendered to the partnership. Guaranteed payments were not made to any other partner. Vista's 2017 partnership income consisted of Net business income before guaranteed payments $80,000 Net long-term capital gains 10,000 What amount of income should Evan report from Vista Partnership on her 2017 tax return?

Ordinary Business Income or Loss: 80,000 business income - deductible guaranteed payment -20,000 = Net taxable partnership income = 60,000 *.25% share = 15,000 net taxable partnership income + guaranteed payment partner received + 20,000 + portion of capital gain + 2,000 = 37,500 What is the formula for Ordinary Business Income or Loss? --> BUSINESS INCOME --> <BUSINESS EXPENSES> --> <GUARANTEED PAYMENTS> --> allowed as deduction by business, expense to partnership --> = ORDINARY BUSIENSS INCOME OR LOSS Formula for Income Tax Return K-1 Partners: What items are reported on the K and K-1 - ORDINARY BUSINESS INCOME OR LOSS (to schedule E) - GUARANTEED PAYMENTS TO PARTNERS (to that partner) - NET RENTAL REAL ESTATE INCOME OR LOSS (schedule E) - INTEREST INCOME (schedule B) - DIVIDEND INCOME (schedule B) - CAPITAL GAINS AND LOSSES (schedule D) - NET SECTION 1231 GAIN/LOSS (schedule D) - CHARITABLE CONTRIUBTIONS (itemized / schedule A) - SECTION 179 EXPENSES DEDUCTION (depreciation) - INVESTMENT INTEREST EXPENSE (allowed, but no greater than investment income) - PARTNER'S HEALTH INSURANCE PREMIUMS (INCLUDED AS PART OF GUARANTEED PAYMENTS) (adjustment on partner's tax return) - RETIREMENT PLAN CONTRIUBTIONS FOR EMPLOYEES --> NO!!!! ODES NOT GO ON K-1, this is included in ordinary business income calculation - RETIREMENT PLAN CONTRIUBTIONS FOR PARTNERS (adjustment on partner's tax return) - TAX CREDITS (REPORTED BY PARTNERSHIP BUT CLAIMED BY PARTNERS) - CASH DISTRIUBTION TO PARTNERS **** also included on k-1

Organizational Expenditures and Start-up Costs MOST EVERYTHING IS THE SAME AS OTHER BUT KNOW THESE FIRST THREE: syndication costs (___) **** - syndication costs are ___ and they include ___ and __ allowable start-up costs include (all the following must be incurred prior to the opening of the business): - - - *** allowable org expenditures include: - - - calculation: - the partnership may elect to deduct up to ___ of each of organizational expenditures and start-up costs - each 5,000 amount is reduced by the amount by which the organizational expenditures or start-up costs ___, respectively - any excess org expenditures or start-up costs are ___ (beginning with the month in which the ___

Organizational Expenditures and Start-up Costs MOST EVERYTHING IS THE SAME AS OTHER BUT KNOW THESE FIRST TWO: syndication costs (NONDEDUCTIBLE) - syndication costs are NONDEDUCTIBLE and they include RAISING CAPITAL and OFFERING MATERIALS allowable start-up costs include (all the following must be incurred prior to the opening of the business): - TRAIING COSTS - ADVERTISING COSTS - TESTING COSTS INCURRED PRIOR TO OPENING OF BUSIENSS **** allowable org expenditures include: - FEES PAID FOR LEGAL SERVICESIN DRAFTING PARTNERSHIP AGREEMENT - FEES PAID FOR ACCOUNTING SERIVCES - FEES PAID FOR PARTNERSHIP FILINGS calculation: - the partnership may elect to deduct up to 5,000 of each of organizational expenditures and start-up costs - each 5,000 amount is reduced by the amount by which the organizational expenditures or start-up costs EXCEED 50,000, respectively - any excess org expenditures or start-up costs are AMORTIZED OVER 180 MONTHS (beginning with the month in which the ACTIVE TRADE OR BUSINESS BEGINS)

Other Adjustments Account This is an account that is designed to keep a cumulative record of items that affect S corporation ___ but do not affect ___. these include: - ___ - ___ - ___ These are all examples of ___

Other Adjustments Account This is an account that is designed to keep a cumulative record of items that affect S corporation SHAREHOLDER'S STOCK BASIS but do not affect AAA. these include: - TAX-EXEMPT INTEREST ON MUNICIPAL BONDS AND REALTED EXPENSES - TAX-EXEMPT LIFE INSURANCE PROCEEDS AND RELATED NONDEDUCTIBLE PREMIUMS - FEDERAL TAXES PAID OR ACCRUED IN AN S CORPORATION YEAR THAT RELATE TO C CORPORATION YEARS These are all examples of PERMANENT DIFFERENCES

PASS KEY a frequently tested concept on the CPA exam is the timing of taxable income to a partner. An easy way to remember the timing of taxable income and basis impact is to associate the partnership interest to a bank account EVENT: --> TAX CONSEQUENCES --> IMPACT ON BASIS Income --> --> Withdrawals --> -->

PASS KEY a frequently tested concept on the CPA exam is the timing of taxable income to a partner. An easy way to remember the timing of taxable income and basis impact is to associate the partnership interest to a bank account EVENT: --> TAX CONSEQUENCES --> IMPACT ON BASIS Income --> TAXABLE --> INCREASE BASIS Withdrawals --> NONTAXABLE --> DECREASE BASIS

PASS KEY it is important to remember the difference between capital account and basis in partnership interest: basis in partnership interest = ___ + ___

PASS KEY it is important to remember the difference between capital account and basis in partnership interest: basis in partnership interest = CAPITAL ACCOUNT + PARTNER'S SHARE OF PARTNERSHIP LIABILITIES

PASS KEY ___ is the basis a partner has in the ownership interest in the partnership. This partnership interest has a tax basis similar to ___ ___ refers to the basis that the partnership itself has in the assets it owns. This basis can come from contributions made by the partners. As a general rule, the basis of an asset contributed by a partner would ___. In addition, ___ can come from ___ the partnership makes with partnership funds

PASS KEY OUTSIDER BASIS is the basis a partner has in the ownership interest in the partnership. This partnership interest has a tax basis similar to OWNERSHIP INTERESTS IN OTHER PROPERTIES INSIDE BASIS refers to the basis that the partnership itself has in the assets it owns. This basis can come from contributions made by the partners. As a general rule, the basis of an asset contributed by a partner would CARRY OVER AND BE THE BASIS OF THE ASSET IN THE HANDS OF THE PARTNERSHIP. In addition, INSIDE BASIS can come from ASSET PURCHASES the partnership makes with partnership funds

PASS KEY a partner's basis in a partnership interest can never begin with ___ (like what would happen when liabilities assumed by partnership are ___) the excess liability is treated as ___, and the recognized gain increases the partner's basis in the partnership interest to a ___ starting point

PASS KEY a partner's basis in a partnership interest can never begin with A NEGATIVE BALANCE (like what would happen when liabilities assumed by partnership are GREATER THAN THE ADJUSTED BASIS NBV OF ASSETS CONTRIUBTED) the excess liability is treated as A TAXABLE BOOT, and the recognized gain increases the partner's basis in the partnership interest to a ZERO starting point

PASS KEY: the CPA Examination will require candidates to understand the difference in basis rules for nonliquidating and liquidating distributions. Distribution --> Basis of Property Received --> Reduction of Basis in Partnership Interest Nonliquidating --> Basis of Property Received ___ --> Reduction of Basis in Partnership Interest ___ Liquidating --> Basis of Property Received ___ --> Reduction of Basis in Partnership Interest ___

PASS KEY: the CPA Examination will require candidates to understand the difference in basis rules for nonliquidating and liquidating distributions. Distribution --> Basis of Property Received --> Reduction of Basis in Partnership Interest Nonliquidating --> Basis of Property Received ADJUSTED BASIS OF PROPERTY --> Reduction of Basis in Partnership Interest ADJUSTED BASIS OF PROPERTY (STOP AT 0) Liquidating --> Basis of Property Received PARTNERSHIP INTEREST --> Reduction of Basis in Partnership Interest MUST "ZERO-OUT" ACCOUNT TO GET OUT

PASS KEY: S corps similar to a ___, shareholders in an S corp must include on their individual income tax return their ____ shareholders are taxed on these items, regardless of whether or not these item shave been ___ *** taxed like a ___ ***

PASS KEY: S corps similar to a PARTNERSHIP, shareholders in an S corp must include on their individual income tax return their DISTRIUBTIVE SHARE OF EACH SEPARATE "PASS-THROUGH" ITEM shareholders are taxed on these items, regardless of whether or not these item shave been DISTRIUBTED (WITHDRAWN) TO THEM DURING THE YEAR *** taxed like a BANK ACCOUNT ***

PASS KEY: in a partnership, it is important to subtract from basis only the liabilities ___ and not the entire liability Corporations however: reduce basis by ___

PASS KEY: in a partnership, it is important to subtract from basis only the liabilities ONLY THE LIABILITIES ASSUMED BY THE OTHER PARTNERS and not the entire liability Corporations however: reduce basis by 100% OF LIABILITY PUT IN

Participation Exemption or DRD - Special Rules - no foreign tax credit or deduction is allowed on dividends that benefit from ___ - the deduction is subject to ___, which requires that the US corporation hold the foreign corporation stock for ____ during the ____ beginning ___ *** ___ *** - certain income is ___ for the 100% DRD 1. 2. 3. 4.

Participation Exemption or DRD - Special Rules - no foreign tax credit or deduction is allowed on dividends that benefit from THE 100% DRD - the deduction is subject to A HOLDING PERIOD REQUIREMENT, which requires that the US corporation hold the foreign corporation stock for MORE THAN 365 DAYS during the 731-DAY PERIOD beginning 365 DAYS BEFORE THE EX-DIVIDEND DATE *** HOLDING PERIOD: 1 YEAR IN LAST 2 YEARS *** - certain income is NOT ELIGIBLE for the 100% DRD 1. SUBPART F INCOME 2. GLOBAL INTANGIBLE LOW-TAXED INCOME GILTI 3. INCOME INVESTED IN US PROPERTY 4. INCOME SUBJECT TO THE TRANSITION TAX

Participation Exemption or Dividends-Received Deduction under a ___, the primary mechanism for mitigating double taxation is a ___ or ___ - a participation exemption allows the taxpayer to ___ - a dividends received deduction DRD allows the taxpayer to ___ a __ is allowed 100% DRD against foreign source dividend income, if it owns ___ - a ___ shareholder that is ___ is not eligible for the DRD

Participation Exemption or Dividends-Received Deduction under a TERRITORIAL TAX SYSTEM, the primary mechanism for mitigating double taxation is a PARTICIPATION EXEMPTION or DIVIDENDS RECEIVED DEDUCTION DRD - a participation exemption allows the taxpayer to EXEMPT FOREIGN INCOME FROM TAXATION - a dividends received deduction DRD allows the taxpayer to OFFSET DIVIDEND INCOME FROM FOREIGN SOURCES WITH A DEDUCTION a US CORPORATION is allowed 100% DRD against foreign source dividend income, if it owns 10% OR MORE OF THE DIVIDEND-PAYING FOREIGN CORPORATION - a 10% shareholder that is NOT A US CORPORATION is not eligible for the DRD

Partner's Basis in Partnership Interest (___) More than Partnership's Basis in Assets distributed (___) step 1: step 2: step 3:

Partner's Basis in Partnership Interest (OUTSIDE BASIS) More than Partnership's Basis in Assets distributed (INSIDE BASIS) step 1: ASSIGN A BASIS TO ALL ASSETS EQUAL TO THE PARTNERSHIP'S BASIS IN THE ASSETS step 2: ADJUST THE BASIS OF ANY ASSETS IN THE LAST PROPERTY CATEOGRY (ALL OTHER PROPERTY, OR HOT ASSETS IF NO OTHER PROPERTY) THAT HAVE APPRECIATED IN VALUE UP TO FMV step 3: ALLOCATE ANY BASIS IN THE PARNTERSHIP INTEREST REAMINING AFTER STEP 2 AMONG ALL THE ASSETS IN THE LAST PROPERTY CATEOGRY BASED ON FMV

Partnership Formation join a partnership or form a partnership by contributing __, ___, or ___ in return for an ___ generally, ___ is recognized on a contribution of property in return for a ___ Example: A taxpayer contributes land in exchange for a partnership interest. The land has an adjusted basis of 30,000 and a FMV of 50,000 at the time of the transfer. Determine the amount of gain or loss recognized by the taxpayer. -

Partnership Formation join a partnership or form a partnership by contributing MONEY, OTHER PROPERTY, or SERVICES in return for an OWNERSHIP INTEREST generally, NO GAIN OR LOSS is recognized on a contribution of property in return for a PARTNERSHIP INTEREST Example: A taxpayer contributes land in exchange for a partnership interest. The land has an adjusted basis of 30,000 and a FMV of 50,000 at the time of the transfer. Determine the amount of gain or loss recognized by the taxpayer. - NO GAIN OR LOSS IS RECONGIZED BY THE TAXPAYER ON THE TRANSFER

Partnership Interest a partnership interest is a(n) ___ in a partnership. It can consist of a ___, a ___, or both - ___ is a right share in the net assets of the partnership when it liquidates - ___ is a right to share in the future profits or losses of the partnership

Partnership Interest a partnership interest is a(n) EQUITY INTEREST in a partnership. It can consist of a CAPITAL INTEREST, a PROFITS INTEREST, or both - CAPITAL INTEREST is a right share in the net assets of the partnership when it liquidates - PROFITS INTEREST is a right to share in the future profits or losses of the partnership

Partnership Tax Returns *** form ___ --> due date ___*** a partnership is not subject to ___, but it still must file a ____ (___). each partner is liable only for taxes due on ___, as reported on Schedule __, regardless of whether ___

Partnership Tax Returns *** 1065 --> DUE MARCH 15 *** a partnership is not subject to INCOME TAXES, but it still must file a TAX FORM (FORM 1065). each partner is liable only for taxes due on HIS DISTRIUBTIVE SHARE OF PARTNERSHIP INCOME, as reported on Schedule K-1, regardless of whether THE DISTRIUBTION IS ACTUALLY MADE TO THE PARTNER

Partnership's Basis in Contributed Property (___) Partnership's basis in contributed property (Inside Basis) = __ + __ the partnership's basis in the contributed property is ___, or ___ (plus any ___, if a special election is made). the partnership's holding period for contributed property includes ___, regardless of the character of the contributed property

Partnership's Basis in Contributed Property (INSIDER BASIS) Partnership's basis in contributed property (Inside Basis) = CARRYOVER BASIS + GAIN RECOGNIZED BY PARTNER the partnership's basis in the contributed property is THE CONTRIBUTOR'S BASIS, or CARRYOVER BASIS (plus any GAIN RECOGNIZED BY THE INCOMEING PARTNER, if a special election is made). the partnership's holding period for contributed property includes THE TIME HELD BY THE PARTNER, regardless of the character of the contributed property

Passive Activity Loss PAL Limitation even if a loss clears the ___ and ___ hurdles and is flowed through to the partner's individual income tax return, deduction may be further limited by the ___ and/or the overall ___ passive activities include ___ (unless an exception is met) and ___ in which the taxpayer does not ____ passive activity losses PALs can only be offset by ___ a net PAL for the year is ___ and ____ to offset ____ any suspended PALs remaining when the owner disposes of the activity can be offset against ___ (___, ___, or ___) *** ___ in year you sell it, against ___ ***

Passive Activity Loss PAL Limitation even if a loss clears the TAX BASIS and AT-RISK HURDLES hurdles and is flowed through to the partner's individual income tax return, deduction may be further limited by the PASSIVE ACTIVITY LOSS PAL LIMITATION and/or the overall EXCESS BUSINESS LOSS LIMIATION passive activities include RENTAL REAL ESTATES (unless an exception is met) and FLOW-THROUGH ENTITIES in which the taxpayer does not MATERIALLY PARTICIPATE passive activity losses PALs can only be offset by PASSIVE ACTIVITY INCOME a net PAL for the year is SUSPENDED and CARRIED FORWARD to offset FUTURE PASSIVE ACTIVITIY INCOME any suspended PALs remaining when the owner disposes of the activity can be offset against ANY OTHER SOURCES OF INCOME (ACTIVE, PASSIVE, or PORTFOLIO *** FULLY DEDUCT in year you sell it, against ANY INCOME ***

Passive Foreign Investment Company PFIC a foreign entity is a PFIC if it meets a ___ or ___: 1. if ___ of the foreign corporation's ___ is passive (Ex: __, __, __, ___) 2. if ___ of the foreign corporation's total assets are ___ (ex: ___)

Passive Foreign Investment Company PFIC a foreign entity is a PFIC if it meets a GROSS INCOME or ASSET TEST: 1. if 75% OR MORE of the foreign corporation's GROSS INCOME is passive (Ex: DIVIDENDS, INTERESTS, RENTS, ROYALTIES) 2. if AT LEAST 50% OR MORE of the foreign corporation's total assets are PASSIVE ASSETS (ex: ASSETS THAT PRODUCE PASSIVE INCOME)

Previously Taxed Income a US shareholder can exclude distributions of a CFC's earnings and profits that were ____ to US shareholders as a result of ___, ___, or an ___

Previously Taxed Income a US shareholder can exclude distributions of a CFC's earnings and profits that were PREVIOUSLY TAXED INCOME PTI to US shareholders as a result of SUBPART F INCLUSION, GUILTI INCLUSION, or an INVESTMENT IN US PROPERTY

Profits Interest Acquired for Services Provided *** ___ *** when a partner receives a profits interest in exchange for services provided, the partner ___ a profits interest is a right to ___, which is not measurable at the time the profits interest is received, and has ___

Profits Interest Acquired for Services Provided *** FMV --> 0 *** when a partner receives a profits interest in exchange for services provided, the partner DOES NOT RECOGNIZE ANY COMPENSATION AS ORDINARY INCOME a profits interest is a right to UNCERTAIN FUTURE PROFITS, which is not measurable at the time the profits interest is received, and has NO LIQUIDATION VALUE

Property Contributions for an S Corporation taxability of shareholder contributions to an S cop are governed under Section ___ (___) the contribution is nontaxable if it is: 1. 2. 3. *** ___ *** a transfer that does not meet these requirements will be taxable as a ___ (gain recognized for ___ over shareholder ____) note that the requirements for Section ___ are fairly easily met upon formation of S corp, but may be harder to meet upon ___ the s corp's basis in any property contributed is the same as ___ the shareholder's initial stock basis is the ___, plus the ___, plus the ____, plus ___

Property Contributions for an S Corporation taxability of shareholder contributions to an S cop are governed under Section 351 (SAME SECTION/RULES FOR C COPRS) the contribution is nontaxable if it is: 1. A CONTRIUBTION OF PROPERTY NBV (NOT SERVICE FMV) 2. SOLELY IN EXCHANGE FOR STOCK 3. AFTER THE TRANSFER, THE SHAREHOLDER (OR GORUP OF SHAREHOLDERS TRANSFERRING AN INTEGRATED TRANSACTION) HAS CONTROL OF THE CORPORATION THROUGH 80% STOCK OWNERSHIP *** IF 80% NOT OWNED AFTER, REALIZED GAIN MUST BE RECOGNIZED *** a transfer that does not meet these requirements will be taxable as a TAXABLE SALE (gain recognized for FMV RECEIVED over shareholder BASIS IN ASSETS CONTRIUBTED) note that the requirements for Section 351 are fairly easily met upon formation of S corp, but may be harder to meet upon SUBSEQUENT CONTRIBUTIONS the s corp's basis in any property contributed is the same as THE CONTRIBUTING SHAREHOLDER'S BASIS the shareholder's initial stock basis is the AMOUNT OF ANY CASH CONTRIUBTED, plus the ADJUSTED BASIS OF ANY PROPERTY CONTRIUBTED, plus the FMV OF ANY SERVICES CONTRIUBTED IN EXCHANGE FOR STOCK, plus ANY GAIN RECOGNIZED

Property Distribution a partner's basis in property distributed is generally the same as ___ however, the basis of the property may be reduced if the partner ____ *** stop at ___ *** If Basis in Partnership Interest Greater than Adjusted Basis of Property Distributed: *** use ___ to reduce basis *** - when a partner's basis in the partnership interest (after ___) is greater than the adjusted basis of the property distributed, the partner's basis in the partnership interest is ____ - the partner's basis in the property distributed is the same as the ___ If Basis in Partnership Interest Less than Adjusted Basis of Property distributed: *** stop at ___ *** - when a partner's basis in the partnership interest (after ___) is less than the adjusted basis of property distributed, the partner's basis in the property distributed is ___ - a distribution cannot reduce the basis in the partnership interest ___ - the partner's basis in the property distributed is ____ (after any ___) - the basis in the partnership interest after the distribution is ___

Property Distribution a partner's basis in property distributed is generally the same as IN THE HANDS OF THE PARTNERSHIP however, the basis of the property may be reduced if the partner DOES NOT HAVE SUFFICIENT BASIS IN HIS OR HER PARTNERSHIP INTEREST *** stop at ZERO. BUT DOESN'T HAVE TO REACH 0 *** If Basis in Partnership Interest Greater than Adjusted Basis of Property Distributed: *** use NBV to reduce basis *** - when a partner's basis in the partnership interest (after ANY CASH DISTRIBUTION) is greater than the adjusted basis of the property distributed, the partner's basis in the partnership interest is REDUCED BY THE ADJSUTED BASIS IN THE PROPERTY - the partner's basis in the property distributed is the same as the AS THE PARTNERSHIP'S BASIS IN THE PROPERTY If Basis in Partnership Interest Less than Adjusted Basis of Property distributed: *** stop at ZERO BASIS IN PARTNERSHIP *** - when a partner's basis in the partnership interest (after ANY CASH DISTRIUBTIONS) is less than the adjusted basis of property distributed, the partner's basis in the property distributed is REDUCED - a distribution cannot reduce the basis in the partnership interest BELOW ZERO - the partner's basis in the property distributed is EQAUL TO THE REMAINING BASIS IN THE PARTNERSHIP INTEREST (after any CASH DISTRIUBTION) - the basis in the partnership interest after the distribution is ZERO

R5 M1 S CORPORATIONS

R5 M1 S CORPORATIONS

R5 M2: PARTNERSHIPS - PART 1

R5 M2: PARTNERSHIPS - PART 1

R5 M3 PARTNERSHIP: PART 2

R5 M3 PARTNERSHIP: PART 2

R5 M4 PARTNERSHIPS: PART 3

R5 M4 PARTNERSHIPS: PART 3

R5 M5 MULTI-JURISDICTIONAL TAX ISSUES

R5 M5 MULTI-JURISDICTIONAL TAX ISSUES

R5 M6 INTERNATIONAL TAX ISSUES

R5 M6 INTERNATIONAL TAX ISSUES

Dixon Corp., a calendar year S corp, has the following capital account balances at the end of the current year, prior to any distributions: AAA 25,000 C corp E&P 20,000 Dixon Corp distributed 60,000 cash to its sole shareholder, Mason. Mason's basis in his stock prior to the distribution was 32,000. What is the federal income tax treatment to Mason of the 60,000 cash distribution?

RULE: 1st: to extent of S corporation AAA - tax result: NOT SUBJECT TO TAX, REDUCES BASIS IN STOCK - treatment: S CORPORATION PROFITS (ALREADY TAXED) 2nd: to extent of c corporation E&P - tax result: TAXED AS DIVIDNEND, DOES NOT REDUCE BASIS IN STOCK - treatment: PRIOR C CORP TAXABLE DIVIDEND DISTRIUBTION 3rd: to extent of s corporation OAA - tax result: NOT SUBJECT TO TAX, REDUCES BASIS IN STOCK - treatment: NONTAXABLE INCOME/RELATED EXPENSES 4th: to extent of stock basis - tax result: NOT SUBJECT TO TAX, REDUCES BASIS IN STOCK - treatment: REUTRN OF CAPITAL 5th: in excess of stock basis - tax result: TAXED AS LONG-TERM CAPITAL GAIN - treatment: CAPITAL GAIN DISTRIUBTION 25,000 up to AAA is nontaxable, reduces basis 20,000 up to E&P is taxed as dividend 7,000 (32,000 basis - 25,000 nontaxable as AAA = 7,000) nontaxable, reduces basis 8,000 in excess of stock basis taxed as long term gain so the 25,000 and 7,000 get combined as 32,000 nontaxable then 20,000 up to E&P is taxed as dividend 8,000 in excess of stock basis taxed as long term gain

XYZ Inc., was a C corporation through the end of year 6. Starting at the beginning of year 7, XYZ elected S corporation status. At the end of year 6, XYZ had accumulated earnings and profits (E & P) of $53,700. At the end of year 7, XYZ had a balance of $32,000 in its accumulated adjustments account (AAA). During year 8, XYZ had ordinary income of $15,300 and made distributions of $100,000. What amount of the distribution will be a nontaxable distribution out of S corporation earnings to the shareholders of XYZ at the end of year 8?

RULE: 1st: to extent of S corporation AAA - tax result: NOT SUBJECT TO TAX, REDUCES BASIS IN STOCK - treatment: S CORPORATION PROFITS (ALREADY TAXED) 2nd: to extent of c corporation E&P - tax result: TAXED AS DIVIDNEND, DOES NOT REDUCE BASIS IN STOCK - treatment: PRIOR C CORP TAXABLE DIVIDEND DISTRIUBTION 3rd: to extent of s corporation OAA - tax result: NOT SUBJECT TO TAX, REDUCES BASIS IN STOCK - treatment: NONTAXABLE INCOME/RELATED EXPENSES 4th: to extent of stock basis - tax result: NOT SUBJECT TO TAX, REDUCES BASIS IN STOCK - treatment: REUTRN OF CAPITAL 5th: in excess of stock basis - tax result: TAXED AS LONG-TERM CAPITAL GAIN - treatment: CAPITAL GAIN DISTRIUBTION The distribution is first considered to be a nontaxable S corp distribution to the extent of AAA Total AAA is 47,300 (32,000 + 15,300 ordinary income). The remaining distribution is 52,700 (100,000-47,300). It is taxable dividend to the extent of C corp E&P, which is 53,700, therefore the entire 52,700 is a taxable dividend

XYZ Inc., was a C corporation through the end of year 6. Starting at the beginning of year 7, XYZ elected S corporation status. At the end of year 6, XYZ had accumulated earnings and profits (E & P) of $55,000. At the end of year 7, XYZ had a balance of $40,000 in its accumulated adjustments account (AAA). During year 8, XYZ had ordinary income of $20,000 and made distributions of $100,000. Rob is a 50% shareholder in XYZ Inc. He receives 50,000 one half of the distribution. His basis in the stock at the end of Year 8 is 18,000 before considering the distribution itself. What amount of the distribution to Rob will be a nontaxable distribution out of S corp earnings for Year 8?

RULE: 1st: to extent of S corporation AAA - tax result: NOT SUBJECT TO TAX, REDUCES BASIS IN STOCK (so limited to stock basis) - treatment: S CORPORATION PROFITS (ALREADY TAXED) 2nd: to extent of c corporation E&P - tax result: TAXED AS DIVIDNEND, DOES NOT REDUCE BASIS IN STOCK - treatment: PRIOR C CORP TAXABLE DIVIDEND DISTRIUBTION 3rd: to extent of s corporation OAA - tax result: NOT SUBJECT TO TAX, REDUCES BASIS IN STOCK - treatment: NONTAXABLE INCOME/RELATED EXPENSES 4th: to extent of stock basis - tax result: NOT SUBJECT TO TAX, REDUCES BASIS IN STOCK - treatment: REUTRN OF CAPITAL 5th: in excess of stock basis - tax result: TAXED AS LONG-TERM CAPITAL GAIN - treatment: CAPITAL GAIN DISTRIUBTION The distribution is first considered to be a nontaxable S corp distribution to the extent of AAA. Total AAA is 60,000 (40000 original AAA + 20,000 ordinary income). Rob's portion of this is 30,000 (60,000 * 50%). So generally the first 30,000 distributed to Rob is nontaxable S corp distribution. However, Rob only has a basis of 18,000 before the distribution. Therefore, only 18,000 is a non-taxable distribution of S corp earnings

Retirement Payments payments received by a retired partner that are not ___ (but are merely ___) are treated as follows: - -

Retirement Payments payments received by a retired partner that are not IN LIQUIDATION OF A PARTNERSHIP INTEREST (but are merely RETIREMENT BENEFIT PAYMENTS) are treated as follows: - ORDINARY INCOME TO THE RECIPIENT and - DEDUCTIONS TO THE PARTNERSHIP

Retirement or Death of a Partner payments to a retiring partner (or to the interest successor of a deceased partner) in liquidation of his or her entire partnership interest are allocated between payment for ___ and ___ - payments for ____ result in ___ - if payments are measured by ___, they are treated as ___ regardless of the period over which they are paid. Thus such payments are taxable as ___ to the retired partner as if he or she continued to be a partner

Retirement or Death of a Partner payments to a retiring partner (or to the interest successor of a deceased partner) in liquidation of his or her entire partnership interest are allocated between payment for AN INTEREST IN PARTNERSHIP ASSETS and OTHER PAYMENTS - payments for AN INTEREST IN PARTNERSHIP ASSETS result in CAPTIAL GAIN OR LOSS - if payments are measured by PARTNERSHIP INCOME, they are treated as PARTNERSHIP INCOME regardless of the period over which they are paid. Thus such payments are taxable as ORDINARY INCOME to the retired partner as if he or she continued to be a partner

S Corp Formation - when a corp is formed, it is by default taxed as a ___. it is treated as an ___ for tax purposes if a valid ___ (which is __) - realized and recognized gain/loss to the corporation and shareholders upon ____ in exchange for ___ are computed ___

S Corp Formation - when a corp is formed, it is by default taxed as a C CORP. it is treated as an S CORP for tax purposes if a valid S CORP ELECTION IS FILED (which is FORM 2553) - realized and recognized gain/loss to the corporation and shareholders upon CONTRIUBTION OF ASSETS in exchange for STOCK are computed IN THE SAME MANNER AS FOR A C CORP

S Corporations __, ___ corporations, if eligible, may elect to be taxed as an S corporation - a ___ taxed similar to ___ all the __, __, __ and __ of the corporation are passed through to the __ the individual owners are taxed on their ___ regardless of whether the earnings are ___ ***file form ___ due on ___ *** shareholder pays the tax on ___

S Corporations SMALL, CLOSELY HELD corporations, if eligible, may elect to be taxed as an S corporation - a FLOW-THROUGH ENTITIY taxed similar to PARTNERSHIPS all the INCOME, GAINS, LOSSES and DEDUCTIONS of the corporation are passed through to the SHAREHOLDERS the individual owners are taxed on their PROPORTIONATE SHARE OF THE S CORPORATION EARNINGS, regardless of whether the earnings are DISTRIUBTED TO THEM *** file form 1120-S due on MARCH 15 *** shareholder pays the tax on K-1

S corps federal built-in tax --> not taxable 179 expense --> separately stated interest muni bonds --> not taxable, so expenses not deductible

S corps federal built-in tax --> ___ 179 expense --> ___ interest muni bonds --> ___

ex: Contributions to S Corps FACTS: Ray contributes property with FMV 20,000 and adjusted basis to Ray of 10,000 in exchange for stock in Falcon Corp, an existing S corp. Immediately after transfer, Ray owns 20% of stock REQUIRED: Determine Ray's realized gain or loss on the exchange and his basis in the S corporation stock

SOLUTION: 20,000 FMV given - 10,000 Basis given = 10,000 realized gain because Ray did not have 80% or more ownership in Falcon after exchange, he is required to recognize the gain on the exchange of property for stock (need 80% ownership to be tax free) Ray will have an adjusted basis of the adjusted NBV of property given 10,000 + recognized gain 10,000 = 20,000 basis

ex: Calculation of Inside and Outside Basis in Year 1, Jeff contributes the following items in exchange for a one-third interest in KNC partnership - 10,000 cash - building with FMV 300,000 and adjusted basis to Jeff of 100,000. The building is subject to liability of 90,000 - in year 2, Jeff contributes another building with FMV of 600,000 and adjusted basis to Jeff of 300,000 - the partnership had 150,000 of net income in year 2 REQUIRED: Determine Jeff's initial outside basis in his partnership interest in year 1, and his outside basis in his partnership interest at the end of year 2. Also determine the partnership's inside basis and holding period in Jeff's contributed assets.

SOLUTION: Jeff's initial outside basis in his KNC Partnership interest is 50,000, calculated as follows: - 10,000 cash, plus 100,000 adjusted basis of building, less 60,000 liabilities assumed by other partners (90,000 * 2/3) - KNC's inside basis in the building contributed by Jeff in Year 1 is the adjusted basis in Jeff's hands, 100,000. KNC's holding period in the building will start when the property was initially acquired by Jeff Jeff's outside basis in his partnership interest at the end of Year 2 is 400,000, calculated as follows: - 50,000 beginning basis, plus 300,000 adjusted basis of contributed building, plus 50,000 share of partnership income in Year 2 (150,000 * 1/3) - the partnership will again take a carryover basis of 300,000 and carryover holding period in the new building

Example 4: Proration of Partnership Income FACTS: Partner A, a 20% partner, sells heartnership interest to New Partner B on March 31 of the curren tyear. The partnership reported 80,000 of partnership income for the entire tax year. REQUIRED: Determine A's and B's shares of partnership income for the year

SOLUTION: Partner A: 80,000 * 20% * 90 days / 356 days = 3949 rounded Partner B: 80,000 * 20% * 275 days / 365 days = 12,005 (rounded)

XYZ corp., a calendar year s corp, makes a liquidating distribution of a building with FMV of 100,000 and basis of 60,000 to its sole shareholder, W. ZYX also had ordinary business income for the year of 10,000. W has a basis in his XYZ stock of 30,000 at the beginning of the year required: determine the tax consequences of the liquidating distribution to xyz corp and to its sold shareholder W

SOLUTION: consequences to XYZ: recognizes a gain of 40,000 on the distribution of the building (FMV 100,000 - 60,000 basis), which flows though to shareholder W consequences to W: W recognizes the 40,000 gain that flows though from the s corp. W's basis in his XYZ stock immediately before the distribution is 80,000. Beginning basis: 30,000 + Ordinary business income 10,000 + ZYX gain on distribution of building 40,000 = 80,000 W's gain on the distribution is 20000 (100,000 FMV of building received as distribution less 80,000 stock basis)

Ex: Tax Basis, Calculation of At-Risk Amount and Loss Limitation with Passive Activity FACTS: Rachel created LLC which she elected to have taxed as partnership to sell rental real estate. She is a nonactive participant and has no other active or passive business activities initial cash contribution 100,000 allocated 20,000 recourse debt 30,000 nonrecourse debt 50,000 ordinary business loss REQUIRED: calculate Rachel's tax basis and at-risk amount in the LLC. Calculate how much of the loss from the LLC she can deduct on her individual income tax return considering all four of the business loss limitations

SOLUTION: tax basis: 150,000 cash contributed 100,000 recourse debt 20,000 nonrecourse debt 30,000 at-risk basis: 120,000 cash contributed 100,000 recourse debt 20,000 when considering whether she can deduct her 50,000 loss, she easily clears the tax basis and at-risk basis hurdles. However, because the activity is passive and Rachel has no passive income from other sources, she is not able to deduct any of the 50,000 loss. The passive activity loss is suspended and carried forward until she generates passive income or until she sells the LLC that has generated the loss the excess business loss limitation does not come into play

Ex: Transfer of Partnership Interest FACTS: Oscar purchased Bernice's 25% interest in Partnership for 500,000. At the time of sale, Partnership made a 754 election to adjust the basis of the partnership asset Immediately before the sale, the inside basis in the partnership asset (a building) was 1,200,000 and the FMV was 2,000,000 REQUIRED: calculate the basis adjustment required under Section 743b and describe the consequences of a future sale of the asset

SOLUTION: the 743b basis adjustment is 200,000 (500,000 purchase price of partnership interest less 300,000 which is Oscar's 25% interest in the 1,200,000 inside basis of the partnership assets), allocated entirely to Oscar. The basis adjustment is entirely a tax concept and does impact the book value of the partnership's assets if the building is subsequently sold at FMV of 2,000,000 a tax gain would be recognized in the amount 600,000 (2,000,000 less 1,400,000 adjusted basis with step-up). The 600,000 gain would be allocated to the other partner's besides Oscar, no gain is allocated to Oscar

Ex: Nonliquidating Distribution of Multiple Assets FACTS: Olintos' basis in his partnership interest was 30,000. He received a nonliquidating operating distribution consisting of the following assets: Cash - basis 24,000 FMV 24,000 Inventory - basis 5,000 FMV 6,000 Land - basis 9,000 FMV 12,000 TOTAL - basis 38,000 FMV 42,000 REQUIRED: Determine Olinto's basis in the property distributed and his basis in his partnership interest immediately after the distribution

SOLUTION: the partnership's total basis in the assets distributed of 38,000 is more than Olinto's basis in his partnership interest of 30,000, so Olinto's basis in the property distributed will be reduced the distiurbiton cannot reduce his basis in Olinto's partnership interest below zero the 30,000 basis in his partnership interest is allocated first to CASH, the HOT ASSETS DISTRIBUTED (INVENTORY), then OTHER PROPERTY DISTRIBUTED (LAND) Partner's Basis in Partnership Interest: basis in partnership interest prior to distribution: 30,000 - cash distributed - 24,000 = remaining basis after cash distribution = 6,000 - hot assets distributed: inventory (partnership's basis) - 5,000 = remaining basis after cash and hot asset distribution = 1,000 = Other property distributed: land (partnership's basis is 9,000) - 1,000 LIMITED so as to not reduce Partner's Basis below 0 = basis in partnership interests after distribution = 0 Partner's Basis in Assets Distributed: Cash 24,000 Inventory 5,000 Land 1,000 = 30,000

Ex: Basis Determination for Nonliquidating Distribution FACTS: Olinto's basis in his partnership interest was 30,000. He received a nonliquidating operating distribution of 24,000 cash plus a parcel of land, with a FMV of 12,000 and partnership basis of 9,000 REQUIRED: determine Olinto's basis in the land distributed and his basis in the his partnership interest immediately after the distribution

SOLUTION: Olinto's basis in the land is 6,000 and his basis in his partnership interest after the distribution is zero WHY? the basis of property received in distribution, other than in liquidation of a partner's interest, will typically be the same as the basis in the hands of the partnership immediately prior to distribution. However, in no case may the partner's basis in the property distributed exceed the basis in his partnership interest (after any cash distribution) Basis in partnership interest adjusted prior to distribution = 30,000 - Amount of cash distributed - 24,000 = Remaining basis after cash distribution = 6,000 - Property distributed: land (partnership basis of 9,000) - 6,000 (STOP AT ZERO) = basis in partnership interest after distribution = 0 the basis in the partnership interest may not be reduced below zero therefore, the land has a basis of 6,000 in the hands of the partner, the remaining basis is his partnership interest NOTE: no gain

Ex: earnings invested in US property FACTS: Blue Corp, a CFC with no prior US property investments, makes a $1 million loan to its US parent in the second quarter of Year 1. The loan remains outstanding at the end of Year 1 REQUIRED: determine Blue Corp's increase in earnings invested in US property in year 1:

SOLUTION: Blue Corp has an increase of 750,000 invested in US property 0 million = first quarter 1 million = second quarter 1 million = third quarter 1 million = fourth quarter = 3 million / 4 quarters = 750,000

Ex 2: Allocation on Per-Share, Per-Day Basis FACTS: Duffy corp, an S corp, is owned equally by 3 shareholders, Rick Tim and Peter. The corporation is calendar year basis. On Feb 1, Year 5, Peter sold his 1/3 interest to George. For the year ended Dec 31, Year 5, the corporation had ordinary business income of $120,000 and no separately stated items REQUIRED: Calculate each shareholder's ordinary business income allocation for the year

SOLUTION: for year 5, the income of the corporation should be allocated as follows: rick (120,000 * 1/3) = 40,000 tim (120,000 * 1/3) = 40,000 peter (31 days / 365 days * 40,000) = 3397 (one month * 1/3 of income) george (334 days / 365 days * 40,000) = 36,603) total = 120,000

Ex: Capital Interest Acquired for Services Provided FACTS: a taxpayer receives a 20% partnership capital interest in exchange for services provided. On the day he is admitted ot the partnership, the partnership's assets have a basis of 20,000 and a liquidation value of 80,000 REQUIRED: determine the amount of income, gain, or loss recognized by the taxpayer

SOLUTION: he will recognize ordinary income of 16,000 (20% of 80,000)

Sale of a Partnership Interest: Allocation of Partnership Income or Loss - when a partner sells his or her partnership interest to a new partner during a tax year, the partner's share of partnership income, gains, losses, and deductions must be ___ between the __ and the ___ based on the ___

Sale of a Partnership Interest: Allocation of Partnership Income or Loss - when a partner sells his or her partnership interest to a new partner during a tax year, the partner's share of partnership income, gains, losses, and deductions must be ALLOCATED PRO RATA between the SELLING PARTNER and the BUYING PARTNER based on the NUMBER OF DAYS

Sale of a Partnership Interest: Exception when you would recognize ___ and not ___ - any gain that represents a partner's share of ___ is treated as ___, rather than ___, since the subsequent sale of these assets by the partner will result in ___ - as with partnership distributions, hot assets include __ and __, for cash basis taxpayers - for the sale of a partnership interest, hot assets can also include ___ (as if the asset was sold at a gain based on the asset's FMV when the partnership interest is sold)

Sale of a Partnership Interest: Exception when you would recognize ORDINARY INCOME and not CAPITAL GAIN - any gain that represents a partner's share of HOT ASSETS is treated as ORDINARY INCOME, rather than CAPITAL GAIN, since the subsequent sale of these assets by the partner will result in ORDINARY INCOME - as with partnership distributions, hot assets include INVENTORY and UNREALIZED RECEIVABLES, for cash basis taxpayers - for the sale of a partnership interest, hot assets can also include POTENTIAL DEPRECIATION RECAPTURE FOR PARTNERSHIP DEPRECIALBE ASSETS (as if the asset was sold at a gain based on the asset's FMV when the partnership interest is sold)

Sale of a Partnership Interest: Gain or Loss on Transfer (General Rule: __) a partner who sells or exchanges his interest in the partnership has a ____ the gain or loss is measured by the difference between ____ and the ____ if any partnership liabilities are allocated to the ___ and ___, they are considered ____

Sale of a Partnership Interest: Gain or Loss on Transfer (General Rule: CAPITAL GAIN OR LOSS ) a partner who sells or exchanges his interest in the partnership has a RECOGNIZED GAIN OR LOSS the gain or loss is measured by the difference between THE AMOUNT REALIZED FOR THE SALE and the ADJUSTED BASIS OF THE PARTNERSHIP INTEREST if any partnership liabilities are allocated to the PARTNERSHIP INTEREST and TRANSFERRED TO THE BUYER, they are considered A PART OF THE AMOUNT REALIZED

Sale of a Partnership Interest: General as a general rule, the partner has a ___ when transferring a partnership interest because a partnership interest is a ___ to the partner

Sale of a Partnership Interest: General as a general rule, the partner has a CAPITAL GAIN OR LOSS when transferring a partnership interest because a partnership interest is a CAPITAL ASSET to the partner

Section 199A Qualified Business Income QBI Deduction: below the line deduction of ____ may be available on ___ flowed through from a partnership or LLC

Section 199A Qualified Business Income QBI Deduction: below the line deduction of 20% OF QUALIFIED BUSINESS INCOME may be available on ORDINARY BUSINESS INCOME flowed through from a partnership or LLC

Section 754 Election and Section 743b Basis Adjustment KNOW THIS - ANDREAS, until the stars: - Partnerships have the option to make a Section 754 election when there is a transfer of a partnership interest by __, or __. - Basis of old partner is $500, but new partner pays $800 and wants to have a $800 basis - Can make a ___ when there is a transfer of partnership interest; this election can be made when there is a difference between ___ - If Section 754 is elected, ___ basis adjustment follows Section 743(b) adjustment equal the difference between __ (__) and __ Goal of the adjustment is to make inside basis = OUTSIDE BASIS *** Partnerships have the option to make a Section 754 election when there is a transfer of a partnership interest by ___ or __, or upon ___. This election can be made when there is a ___ Transfer of Partnership Interest - in the case of a Section 754 election being made by reason of sale or exchange, a ___ follows - equals the difference between the ____ (ex: __) and the ___ - this adjustment, which can be either positive or negative, is ____ under the rules set forth in Section ___ - the goal of the adjustment is to make the transferee have ___ equal to ___ - the adjustment is specially allocated only to the ___ and has no effect on the ___ - once the election is made, it remains in effect ___ (being revoked only ___) - alternatively, even in the absence of a Section 754 election, the IRS mandates a 743b adjustment when there is a substantial ___ at the time of purchase (where ____ by ___ or more).

Section 754 Election and Section 743b Basis Adjustment KNOW THIS - ANDREAS, until the stars: - Partnerships have the option to make a Section 754 election when there is a transfer of a partnership interest by SALE or EXCHANGE, or upon THE DEATH OF A PARTNER. - Basis of old partner is $500, but new partner pays $800 and wants to have a $800 basis - Can make a SECTION 754 ELECTION when there is a transfer of partnership interest; this election can be made when there is a difference between INSIDE AND OUTSIDE BASIS - If Section 754 is elected, SECTION 743(b) basis adjustment follows Section 743(b) adjustment equal the difference between OUTSIDE BASIS (PURCHASE PRICE) and INSIDE BASIS Goal of the adjustment is to make inside basis = OUTSIDE BASIS *** Partnerships have the option to make a Section 754 election when there is a transfer of a partnership interest by SALE or EXCHANGE, or upon THE DEATH OF A PARTNER. This election can be made when there is a DIFFERENCE BETWEEN A PARTNER'S SHARE OF INSIDE BASIS IN THE THE PARTNERSHIP ASSETS AND THE PARTNER'S OUTSIDE BASIS IN HIS PARTNERSHIP INTEREST Transfer of Partnership Interest - in the case of a Section 754 election being made by reason of sale or exchange, a SECTION 743B BASIS ADJUSTEMENT follows - equals the difference between the VALUE OF THE OUTSIDE BASIS TO THE TRANSFREE PARTNER (ex: PURCHASE PRICE) and the THE PARTNER'S SHARE OF THE PARTNERSHIP'S INSIDE BASIS OF THE ASSETS - this adjustment, which can be either positive or negative, is PRORATED OVER THE PARTNERSHIP ASSETS under the rules set forth in Section 755 - the goal of the adjustment is to make the transferee have AN INSIDE BASIS IN THE PARTNERSHIP ASSETS equal to HIS OR HER OUTSIDE BASIS - the adjustment is specially allocated only to the THE TRANSFEREE and has no effect on the PARTNERSHIP'S INCOEM OR LOSS - once the election is made, it remains in effect FOR ALL FUTURE TRANSACTIONS (being revoked only WITH PERMISSION FROM THE IRS) - alternatively, even in the absence of a Section 754 election, the IRS mandates a 743b adjustment when there is a substantial BUILT-IN LOSS at the time of purchase (where INSIDE BASIS EXCEEDS OUTSIDE BASIS by 250,000 or more).

The required tax year for a partnership is the same tax year as that of ___ if the partners have different tax years, the required tax year for the partnership is ___ a new partnership can make a ___ election to use a different tax year from its required tax year, but only if the deferral period is no longer than ___ the deferral period is the number of months from ___ to ___ ex: if the 75% owning partner has a tax year end of Dec 31, and the partnership elects to have a nov 30 partnership, this is okay because the deferral period is only 1 month (Nov 30 to Dec 31)

The required tax year for a partnership is the same tax year as that of THE PARTNERS if the partners have different tax years, the required tax year for the partnership is THE TAX YEAR OF THE PARNTER OR PARNTERS WHO OWN MORE THAN 50% OF THE PARNTERSHIP a new partnership can make a SECTION 444 election to use a different tax year from its required tax year, but only if the deferral period is no longer than 3 MONTHS the deferral period is the number of months from THE END OF THE PROPOSED NEW TAX YEAR to THE END OF THE REQUIRED TAX YEAR ex: if the 75% owning partner has a tax year end of Dec 31, and the partnership elects to have a nov 30 partnership, this is okay because the deferral period is only 1 month (Nov 30 to Dec 31)

The value of fringe benefits such as health insurance is includable in the gross income of S corp shareholders who own more than ___ of the s cop's stock - unless the S corp ____

The value of fringe benefits such as health insurance is includable in the gross income of S corp shareholders who own more than 2% of the s cop's stock - unless the S corp DOES NOT DEDUCT THE COST OF SUCH BENEFITS

Thinking about AAA and OAA and AEP for S corps. What do the following do? Ordinary Business Income --> increases ___ separately stated taxable income --> increases ___ (includes ...) nontaxable separately stated income --> increases ___ (includes ...) deductible separately stated losses and expense, including section 179 deduction operating expense and investment expenses related to taxable investment income) --> decreases ___ nondeductible separately stated losses and deductions --> decreases ___ (includes ...) distributions - first s corp distributions come out of s corp ___ - then out of s corp ___ - remainder out of s corp ___

Thinking about AAA and OAA and AEP for S corps. What do the following do? Ordinary Business Income --> only increases S corp AAA equity account separately stated taxable income --> only increases the S corp AAA equity account (like qualified dividends, interest corporate bonds, net short term capital gain, net long term capital gain) nontaxable separately stated income --> goes to OAA equity account (like nontaxable municipal bond interest income deductible separately stated losses and expense, including section 179 deduction operating expense and investment expenses related to taxable investment income) --> decreases AAA nondeductible separately stated losses and deductions --> decreases the OAA equity account, (and includes federal built-in gains tax and investment expenses related to nontaxable municipal bonds interest) distributions - first s corp distributions come out of the AAA account, no tax effect on the shareholder - then out of s corp E&P (will have effect on shareholder because they are c corp distributions and dividends) - remainder out of s corp OAA Account, nontaxable income, so no tax effect on shareholders

Illustration 3: Taxability of Distributions with C corporation E&P the new elect corporation was a c corp until it elected s status on jan 1, year 2 new elect had accumulated c corp E&P of 20,000 at Dec 31, year 1 for the period year 2 to year 8, new elect had ordinary business income of 100,000 and had made shareholder distributions of 60,000. new elect had ordinary business income of 50,000 and made distributions to shareholders of 120,000. The tax result of the year 9 distribution is as follows:

To extent of S corporation AAA --> no taxable, reduces stock basis, s corp profits already taxed --> (40,000 + 50,000 year 9 income = 90,000 nontaxable) To extent of C corporation E&P --> taxed as dividend, does not reduce basis in stock, prior C corp taxable dividend distributions --> 20,000 taxable dividend Excess 10,000 nontaxable reduction in basis of stock, any in excess of stockholder basis is taxable LTCG 120,000

To keep affiliated companies from reporting all their income in the country with the lowest tax rate, Sections __ and ___ provide the IRS with the authority to: 1. adjust the __ and __ (including __) of each company to prevent ___ or to clearly reflect ___ 2. impose ___

To keep affiliated companies from reporting all their income in the country with the lowest tax rate, Sections 482 and 6662(E)(3) provide the IRS with the authority to: 1. adjust the INCOME and DEDUCTIONS (including COGS) of each company to prevent EVASION OF TAXES or to clearly reflect INCOME 2. impose PENALITIES WITH RESPECT TO THOSE ADJUSTEMENTS

an s corporation has income of 72,000 after the following deductions: IRC Section 179 election to expense depreciate property 15,000 Charitable contributions 11,000 Salary to owner who worked as CEO of the corporation 84,000 what is the amount of non-separately stated income shown on the s corp's income tax return?

Total s corp taxable income 72,000 + add back separately stated items: + section 179 expense 15,000 + charitable contributions 11,000 = S corp non-separately stated income = 98,000 *** the shareholder-employee salary expense is a deduction in calculating the s corp's ordinary business income (non-separately stated income)

Transactions Between Partner and Partnership a transaction between a partner and a partnership is deemed __, subject to the following limitations (where a related party is ___) 1. Related Party Loss (WRaP) is ___ 2. Related Party Gains are __

Transactions Between Partner and Partnership a transaction between a partner and a partnership is deemed AN UNRELATED PARTY TRANSACTION, subject to the following limitations (where a related party is controlling partner with OVER 50% interest) 1. Related Party Loss (WRaP) is DISALLOWED 2. Related Party Gains are ORDINARY INCOME

Transfer Pricing Issues exist under the following circumstances: A US TAXPAYER... 1. 2. 3. AN AFFILIAE THAT EITHER... - ___ OR - ___

Transfer Pricing Issues exist under the following circumstances: A US TAXPAYER... 1. Transfers, sells, purchases, or leases property to/from 2. Enters into loan agreement or service contracts 3. Shares costs with AN AFFILIAE THAT EITHER... - is not subject to US income tax OR - does not file a consolidated income tax return with the US taxpayer

Transition Tax the TCJA created a ____ (__) for certain US corporations by allowing a ___ for foreign-source dividends from ___ - the transition to this new system requires all US shareholders to pay a ____ - for the last taxable year beginning before __, a one-time deemed ___ is imposed on ___, ____ of ___ and is taken into account by all ____

Transition Tax the TCJA created a TERRITORIAL-STYLE SYSTEM (USA) for certain US corporations by allowing a 100% DRD for foreign-source dividends from CONTROLLED FOREIGN CORPORATIONS CFCs - the transition to this new system requires all US shareholders to pay a ONE-TIME TAX ON THE CFC'S PREVIOUSLY UNTAXED FOREIGN EARNINGS - for the last taxable year beginning before JAN 1 2018, a one-time deemed REPATRIATION TAX is imposed on ACCUMULATED, UNTAXED EARNINGS of FOREIGN CORPORATIONS and is taken into account by all US SHAREHOLDERS WHO OWN 10% OR MORE OF THE CFC

US Activities for Foreign Persons (Inbound Transactions) a foreign person's investment in the US is considered an ___ the US taxes foreign persons on income ___, which is referred to as ___ income the definition of a foreign person includes: - - - - - - a foreign person's US-source income falls into one of two categories - __ or __

US Activities for Foreign Persons (Inbound Transactions) a foreign person's investment in the US is considered an INBOUND TRANSACTION the US taxes foreign persons on income DERIVED IN THE US, which is referred to as US-SOURCE income the definition of a foreign person includes: - NONRESIDENT ALIEN INDIVIDUALS - FOREIGN CORPORATIONS - FOREIGN PARTNERSHIPS - FOREIGN TRUSTS - FOREIGN ESTATES - ANY OTHER PERSON WHO DOES NOT MEET THE DEFINITION OF A US PERSON a foreign person's US-source income falls into one of two categories - BUSINESS INCOME or NONBUSINESS INCOME

US taxation of Foreign Transactions: Taxation of noncitizens and nonresidents - taxation of noncitizens and nonresidents generally requires a __ or ___ to the country - most nations have rules that define "___" within the country and rules that determine when income is treated as "___" to the country - the rules provide ___ for triggering the taxation of foreign persons

US taxation of Foreign Transactions: Taxation of noncitizens and nonresidents - taxation of noncitizens and nonresidents generally requires a CONNECTION or NEXUS to the country - most nations have rules that define "SUBSTANTIAL PRESENCE" within the country and rules that determine when income is treated as "EFFECTIVELY CONNECTED" to the country - the rules provide THRESHOLDS for triggering the taxation of foreign persons

US taxation of Foreign Transactions: Territorial Tax System - under a territorial tax system, a nation only taxes its citizens and residents on income earned ___ - taxation is based on whether a person ___ and ___ - this is referred to as ___ - most countries that are members of the ___ employ a territorial-style tax system

US taxation of Foreign Transactions: Territorial Tax System - under a territorial tax system, a nation only taxes its citizens and residents on income earned INSIDE ITS BORDERS - taxation is based on whether a person IS PRESENT IN THE COUNTRY and DERIVING INCOME FROM WITHIN ITS BOARDERS - this is referred to as SOURCE-COUNTRY TAXATION - most countries that are members of the ORGANIZATION FOR ECONOMIC COOPERATION AND DEVELOPMENT (OECD) employ a territorial-style tax system

US taxation of Foreign Transactions: Worldwide Tax System - the US tax system is classified as ___ because citizens and residents are generally subject to tax on ____ - some provisions, however, allow for exemption of ___, which instead follows a ____ approach

US taxation of Foreign Transactions: Worldwide Tax System - the US tax system is classified as A WORLDWIDE TAX SYSTEM because citizens and residents are generally subject to tax on THEIR WORLDWIDE INCOME - some provisions, however, allow for exemption of CERTAIN FOREIN INCOME, which instead follows a TERRITORIAL-STYLE approach

Unlike partnerships, S corporations shareholders do not includes any ___ in their stock basis However, an S corp shareholder does have separate ___ in loans from the shareholder ____ = include (debt basis)

Unlike partnerships, S corporations shareholders do not includes any S CORPORATION DEBT in their stock basis However, an S corp shareholder does have separate DEBT BASIS in loans from the shareholder TO THE S CORPORATION = include (debt basis)

On January 1 of the current year, Kane was a 25% equal partner in Maze general partnership, which had partnership liabilities of 300,000. On Jan 2, a new partner was admitted and Kane's interest was reduced to 20%. On April 1, Maze repaid a 100,000 general partnership loan. Ignoring any income, loss, or distributions for the current year, what was the net effect of the two transactions on Kane's tax basis in Maze partnership interest?

Well, partnership interest basis started at .25 * 300,000 = 75,000 When the partnership interest decreased to 20%, that basis also decreased from by 15,000 from 75,000 to 60,000 (300,000 *.20) Then when the partnership repaid part of their loan, the interest decreased a further 20,000 (-.20 * 100000) So total decrease is 35,000

Sale of a Partnership Interest: Capital Gain or Loss Calculation What is the Capital Gain or Loss Calculation for the Sale of a Partnership Interest? What is the amount realized? What nets to zero?

What is the Capital Gain or Loss Calculation for the Sale of a Partnership Interest? Beginning capital account + share of income <loss> up to sale = capital account at sale date + share of partnership liabilities = adjusted basis in partnership interest < amount realized> = capital gain or loss What is the amount realized? - cash received - FMV of property received - relief from share of partnership liabilities What nets to zero? - share of partnership liabilities - relief from share of partnership liabilities

What items are reported on the 1065? - - - - - -

What items are reported on the 1065? - BUSINESS INCOME - BUSINESS EXPENSE (like salary expense, rent expense, depreciation expense macrs) - ORDINARY BUSINESS INCOME OR LOSS - PARTNER'S HELATH INSURANCE PREMIUMS (INCLUDED AS PART OF GUARANTEED PAYMENTS) - RETIREMENT PLAN CONTRIUBTIONS FOR EMPLOYEES - RETIREMENT PLAN CONTRIUBTIONS FOR PARTNERS

What items are reported on the K and K-1 - - - - - - - - - - - - - -

What items are reported on the K and K-1 - ORDINARY BUSINESS INCOME OR LOSS (to schedule E) - GUARANTEED PAYMENTS TO PARTNERS (to that partner) - NET RENTAL REAL ESTATE INCOME OR LOSS (schedule E) - INTEREST INCOME (schedule B) - DIVIDEND INCOME (schedule B) - CAPITAL GAINS AND LOSSES (schedule D) - NET SECTION 1231 GAIN/LOSS (schedule D) - CHARITABLE CONTRIUBTIONS (itemized / schedule A) - SECTION 179 EXPENSES DEDUCTION (depreciation) - INVESTMENT INTEREST EXPENSE (allowed, but no greater than investment income) - PARTNER'S HEALTH INSURANCE PREMIUMS (INCLUDED AS PART OF GUARANTEED PAYMENTS) (adjustment on partner's tax return) - RETIREMENT PLAN CONTRIUBTIONS FOR EMPLOYEES - RETIREMENT PLAN CONTRIUBTIONS FOR PARTNERS (adjustment on partner's tax return) - TAX CREDITS (REPORTED BY PARTNERSHIP BUT CLAIMED BY PARTNERS)

In year 1, Joan contributed property with adjusted basis of 100,000 and FMV 150,000 to partnership in exchange for 20% partnership interest. In year 3, partnership sold the property to unrelated party for 180,000 REQUIRED: Calculate amount of gain recognized by Joan in Year 1 and Year 3 related to the contributed property

YEAR 1: Joan doesn't recognize any gain for difference between FMV and adjusted basis of property contribution. HOWEVER - the 50,000 built in gain (150,000 FMV - 100,000 adjusted basis) will be specially allocated to Joan when the property is subsequently sold. The partnership's basis in the property is Joan's adjusted basis of 100,000. YEAR 2: The total gain allocated to Joan is 56,000 Sales price 180,000 - adjusted basis - 100,000 = gain realized = 80,000 - pre-contribution built-in gain - 50,000 = post-contribution gain = 30,000 pre-contribution built-in gain * 100% ownership 50,000 post-contribution gain * 20% ownership 6,000 TOTAL GAIN ALLOCATED TO JOAN = 56,000

Gavin, a 50% partner in the ABC Partnership, had a $4,000 basis at the beginning of the preceding year. During the preceding year, ABC incurred a $12,000 loss. In the current year, ABC reported $7,000 of ordinary income and made a $1,000 pro rata distribution. What is Gavin's basis at the end of the current year?

Year 1, Gavin's share of loss is 6,000 (12,000*.5). He can deduct the loss (which will reduce taxable income and decrease his basis), up to his basis. So Gavin deducts 4,000 and reduces his basis to 0, and carries forward a loss of 2,000 (6,000-4,000), which can only be used in the future when his basis is reinstated. In Year 2, Gavin's share of income is 3,500 (7,000*.5), which increases his basis to 3,500. Gavin's share of the cash distribution is 500 (1000*.5), which reduces his basis to 3,000. Basis has been reinstated, so Gavin can deduct the 2,000 loss carryforward, leaving Gavin with a basis of 1,000 (3,000-2,000 loss carryforward)

In year 1, a domestic LLC with two members elected classification as a corp in year 2, one of the members withdrew from the LLC. What is the LLC's tax classification for year 2 immediately after the member withdrew?

a corporation a change in the number of members of an LLC that has elected classification as a corporation does not effect the entity's classification. Both LLCs and corporations can have a single owner

although an S corp cannot have a ___ shareholder, there is no restriction on an S corporation being a ___

although an S corp cannot have a C CORPORTATION shareholder, there is no restriction on an S corporation being a SHAREHOLDER IN A C CORPORATION

PASS KEY: an S corp shareholder is permitted to pass through for deduction on the shareholder's individual income tax return the pro rata share of the S corp's loss subject to the following limitation: ___ unlike partnerships, S corp nonrecourse debt does not increase ___ how is a guarantee of debt treated? only ___ increase debt basis only distributions from ___ reduce stock basis, not ___ from ___ (which is C corp accumulated E&P)

an S corp shareholder is permitted to pass through for deduction on the shareholder's individual income tax return the pro rata share of the S corp's loss subject to the following limitation: STOCK BASIS (reduced by any distributions) + DEBT BASIS (direct shareholder loans to S corporation) unlike partnerships, S corp nonrecourse debt does not increase AT RISK BASIS how is a guarantee of debt treated? IT DOES NOT IMPACT A SHAREHOLDER'S BASIS only DIRECT LOANS increase debt basis only distributions from AAA reduce stock basis, not DIVIDEND DISTRIUBTIONS from AEP (which is C corp accumulated E&P)

Which of the following can be an advantage of a LLC taxed as a partnership ever a LLC taxed as an s corp? owners receive limited liability protection? appreciated property can be distributed tax-free to an owner? double taxation of profits is avoided? incentive stock options can be used to compensate owners?

appreciated property can be distributed tax-free to an owner? YES!!! Why? a s corp and a c corp recognizes a gain on any distribution of appreciated property (a property dividend) in the same manner as if the asset had been sold to the shareholder at its fair market value

Losses between a controlling partner (over 50%) and his controlled partnership from sale and exchange of property

are disallowed. If the parnter ownes less than 50% or 50%, the losses are okay

A shareholder's basis in the stock of an S corp is increased by the shareholder's pro rata share of income from which of the following, if any? tax exempt interest? taxable interest?

both! both tax-exempt and taxable interest income increase a shareholder's basis in S corp stock a shareholder's basis in s corp is increased by his or her proportionate share of all income, including tax-free income

If an s corp has no accumulated earnings and profits, the amount distributed to a shareholder

decreases the shareholder's basis for the stock why? if an S corp has no accumulated earnings and profits, the amount distributed to a shareholder decreases the shareholder's basis for the stock. The distribution is nontaxable to the extent of the shareholder's basis

a domestic LLC not classified as a corporation under IRS regulations is owned entirely by one individual taxpayer. Unless the taxpayer elects otherwise, the company will be taxed as a:

disregarded entity a sinlge member LLC is a disregarded entity that is considered to be the same entity as the own if the owner is an individual, the LLC is taxed as a sole prop and the income and deductions are reported on Schedule C of the individuals Form 1040 federal income tax return

distributions come out of corporations (C or S) at ___ if there is earnings and profits in a c corp, then it will come out as a ___ distributions come out of partnerships at ___

distributions come out of corporations (C or S) at FMV, AND THEY GENERALLY WILL HAVE GAIN OR LOSS ON DISTRIUBTION if there is earnings and profits in a c corp, then it will come out as a DIVIDEND distributions come out of partnerships at ADJUSTED BASIS, AND THEY GERNALLY WONT HAVE A GAIN OR LOSS ON DISTRIUBTION

Jody's basis in her partnership interest was 50,000 immediately before she received a current (nonliquidating, or operating) distribution of 20,000 cash and property with an adjusted basis of 40,000 and FMV 35,000. What amount of taxable gain must Jody report as a result of this distribution?

general rule: nonliquidating distribution is a nontaxable event, so the taxable gain would be zero the only time there would be a gain is if she had taken out all cash, more than 50,000

Able corp does business in several states. the corporation also receives interest income from excess cash invested in an account at an institution in its home state. Which states will tax the interest income?

generally interest income is nonoperating income, so it will be taxed only by the home state

in addition to federal income tax, a company is also subject to tax in its __, as well as in any state in which it has ___ Definition of Nexus: - nexus is defined as ____ - this is typically caused by a company having __, __, or ___ within a state, and is determined under the laws of ___, which may vary - however, federal law offers some protection

in addition to federal income tax, a company is also subject to tax in its STATE OF RESIDENCE, as well as in any state in which it has NEXUS Definition of Nexus: - nexus is defined as THE MINIMUM LEVEL OF CONTACT A TAXPAYER MUST HAVE WITH A JURISDICTION TO BE SUBJECT TO ITS TAX - this is typically caused by a company having PROPERTY, PAYROLL, or SALES within a state, and is determined under the laws of EACH STATE, which may vary - however, federal law offers some protection to companies

income from compensation for personal services is sourced ___ income from the sale of purchased inventory is sourced ___

income from compensation for personal services is sourced WHERE THE SERVICE IS PERFORMED income from the sale of purchased inventory is sourced WHERE TITLE PASSES

the rules for determining a shareholder's basis in S cop stock follow:

initial basis (or beginning of year) + income items (separately and non-separately stated items) + additional shareholder investments in corporation stock - distributions to shareholder - loss or expense item s = Ending basis Stock basis is adjusted annually, as of the last day of the S corp year, in the following order: 1. increase for income items and excess depletion 2. decrease for distributions 3. decrease for non-deductible, non-capital expenses and depletion; 4. decrease for items of loss and deduction When determining the taxability of non-dividend distribution, the shareholder looks solely to his or her stock basis (debt basis is not considered)

Dean is a 25% partner in Target Partnership. Dean's tax basis in Target on January 1, Year 1, was $20,000. At the end of Year 1, Dean received a nonliquidating cash distribution of $8,000 from Target. Target's Year 1 accounts recorded the following items: Municipal bond interest income $12,000 Ordinary income 40,000 What was Dean's tax basis in Target on December 31, Year 1?

initial basis : 20000 nonliquidating dividend : - FMV of 8,000 share of municipal interest income : 3000 share of ordinary income : 10000 TOTAL : 25,000

inside basis is the basis of ___ and is equal to the basis of ____

inside basis is the basis of ASSETS IN THE HANDS OF THE PARTNERSHIP and is equal to the basis of THE ASSETS IN THE HANS OF THE CONTRIUTING PARTER + ANY GAINS RECOGNIZED BY THE PARTNER

Fern received $30,000 in cash and an automobile with an adjusted basis and market value of $20,000 in a proportionate liquidating distribution from EF Partnership. Fern's basis in the partnership interest was $60,000 before the distribution. What is Fern's basis in the automobile received in the liquidation?

liquidation --> zero out to get out Fern's basis in partnership interest = 60,000 - cash received - 30,000 = 30,000 left over for the basis of the automobile

ordinary business income is or is not subject to self employment for s corps?

not! it was for partnerships, but not for s corps

What is a partner's AGI made up of on Form 1040? would a cash distribution be included?

only the partner's share of partnership ordinary business income and the separately stated items from the Schedule K-1 no, a cash distribution is not included in the partner's adjusted gross income, is is a NONseparately stated item on the Schedule K-1

outside basis is a partner's basis in the ___. Such basis will increase by liabilities ___ or decrease by liabilities ___

outside basis is a partner's basis in the PARTNERSHIP INTEREST. Such basis will increase by liabilities ASSUMED BY THE PARNTER or decrease by liabilities ASSUMED BY OTHER PARTNERS

definition of a Guaranteed Payment do guaranteed payments increase a partner's tax basis? increase their ordinary income?

payments to the partners for services or the use of capital without regard to partnership income guaranteed payments do increase a partner's ordinary income, but not their tax basis. They would not increase a partner's tax basis in the partnership because the payment has been distributed to the partner

Avoidance of Penalties - Transactions Solely Between Foreign Corporations (ALL TAXES ARE IN FOREIGN COUNTRY) penalties may be avoided if any portion of such net increase in federal income tax is attributable to any transaction unless, in the case of any such corporations, the treatment of such transaction affects the determination of income from ___ or taxable income effectively connected with a ____

penalties may be avoided if any portion of such net increase in federal income tax is attributable to any transaction unless, in the case of any such corporations, the treatment of such transaction affects the determination of income from SOURCES WITHIN THE UNITED STATE or taxable income effectively connected with a TRADE OR BUSINES WIHTIN THE UNITED STATES

Commerce Corp. elects S corporation status as of the beginning of 2019. At the time of Commerce's election, it held a machine with a basis of $20,000 and a fair market value of $30,000. In March of 2019, Commerce sells the machine for $35,000. What would be the amount subject to the built-in gains tax?

the built in gain for the machine is 10,000 --> the difference on the date of the election of s status, between the 20,000 adjusted basis of the machine to the c corp and the 30,000 fair market value that is the amount of gain that occurred while the corporation was a c corp and it is also that amount that is subject to the built in gains tax

Olinto Inc. has taxable income (before special deductions and NOL deduction) of 92,000. Included in that amount is 12,000 interest and dividend income. 40% of Olinto's property, payroll, and sales are in its home state. What amount of this taxable income will be taxed in Olinto Inc's home state?

the entire 12,000 is nonoperating income and thus is taxed by the home state. This leaves 80,000 (92,000 - 12,000) of income to be apportioned between states the home stat is apportioned 40% of this amounts, which is 32,000 (80,000 * .40) the entire amount is taxed by the home state: 12,000 + 32,000 = 44,000

the following are examples of activities that may trigger nexus in a state in which a company operates: - - - - *** that would mean you are __ *** ex: hundley corp sells computers and is incorporated and resides in CA. In addition, Hundley solicits sales in OR, AR, and CO. It provides installation services to its customers in AR, and it conducts employee training at a facility in CO. Determine in which states Hundley has nexus.

the following are examples of activities that may trigger nexus in a state in which a company operates: - OWNING OR LEASING PROPERTY THERE - SENDING EMPLOYEES INTO THE STATE FOR TRAINING OR WORK - PROVIDING SERVICES TO CUSTOMERS IN A STATE - ACCEPTING OR REJECTING SALES ORDERS WITHIN THE ESTATE, OR RETURNS *** that would mean you are SUBJECT TO STATE INCOME TAX *** ex: hundley corp sells computers and is incorporated and resides in CA. In addition, Hundley solicits sales in OR, AR, and CO. It provides installation services to its customers in AR, and it conducts employee training at a facility in CO. Determine in which states Hundley has nexus. --> all except OR because in Oregon it only solicits sales, so probably would be protected from nexus

what is the tax rate for an s corp that pays tax on built-in gains?

the highest corporate income tax rate - 21%

okay lets say you have a partnership and the limited partner gave a loan to the partnership. Who is liable for the loan okay lets say you have a 50/50 general/limited partners split for a partnership (general partner gets 50% and limited partner gets 50%). You have accounts payable of 50,000. how much do each of them get? you have secured debt and you have unsecured debt - which is recourse and which is nonrecourse?

the limited partner is 100% liable for the loan, the general partner is 0% liable or NOT liable Accounts payable is considered RECOURSE debt! so the general partner gets all of it and the limited partner gets none! secured debt - nonrecourse unsecured debt - recourse

Liquidation of an LLC the liquidation of an LLC and the consequences to its members will be treated the same as either a __ or a __, whichever form the LLC elected to take for federal income tax purposes on formation

the liquidation of an LLC and the consequences to its members will be treated the same as either a CORPORATION or a PARTNERSHIP, whichever form the LLC elected to take for federal income tax purposes on formation

the mark-to-market tax regime is imposed on COVERED EXPATRIATES who RENOUNCE THEIR US CITIZENSHIP and satisfy one of the following three tests: 1. TAX LIABILITY TEST - ___ 2. NET WORTH TEST - ___ 3. COMPLIANCE TEST - ___

the mark-to-market tax regime is imposed on COVERED EXPATRIATES who RENOUNCE THEIR US CITIZENSHIP and satisfy one of the following three tests: 1. TAX LIABILITY TEST - average income tax liability for last 5 years exceeds threshold (178,000) 2. NET WORTH TEST - net worth of $2 million or more on date of expatriation 3. COMPLIANCE TEST - the individual failed to comply with US federal tax obligations for 5 preceding years

the rules for determining the taxability of distributions are as follows, if the s corporation used to be a c corp with E&P *** 1ST DISTIRUBTION DEEMED FROM ___/ ALREADY TAXED TO ___ *** 1st: to extent of S corporation AAA - tax result: - treatment: 2nd: to extent of c corporation E&P - tax result: - treatment: 3rd: to extent of s corporation OAA - tax result: - treatment: 4th: to extent of stock basis - tax result: - treatment: 5th: in excess of stock basis - tax result: - treatment:

the rules for determining the taxability of distributions are as follows, if the s corporation used to be a c corp with E&P *** 1ST DISTIRUBTION DEEMED FROM S CORP. EARNINGS / ALREADY TAXED TO TAKED TO SHAREHOLDLER ON 10-k*** 1st: to extent of S corporation AAA - tax result: NOT SUBJECT TO TAX, REDUCES BASIS IN STOCK - treatment: S CORPORATION PROFITS (ALREADY TAXED) 2nd: to extent of c corporation E&P - tax result: TAXED AS DIVIDNEND, DOES NOT REDUCE BASIS IN STOCK - treatment: PRIOR C CORP TAXABLE DIVIDEND DISTRIUBTION 3rd: to extent of s corporation OAA - tax result: NOT SUBJECT TO TAX, REDUCES BASIS IN STOCK - treatment: NONTAXABLE INCOME/RELATED EXPENSES 4th: to extent of stock basis - tax result: NOT SUBJECT TO TAX, REDUCES BASIS IN STOCK - treatment: REUTRN OF CAPITAL 5th: in excess of stock basis - tax result: TAXED AS LONG-TERM CAPITAL GAIN - treatment: CAPITAL GAIN DISTRIUBTION

a shareholder of a controlled foreign corporation is considered a US shareholder if:

the shareholder is a US person who owns at least 10% of of the stock value OR voting stock

Avoidance of Penalties - Section 482 Study Not Based on Allowable Pricing Methods the taxpayer may prepare and document a "section 482 study" that is not based upon allowable pricing methods set forth in the US Treasury regulations - the taxpayer must establish that: 1. 2. 3. - the documented study must be completed no later than the date ___

the taxpayer may prepare and document a "section 482 study" that is not based upon allowable pricing methods set forth in the US Treasury regulations - the taxpayer must establish that: 1. none of the pricing methods would clearly reflect income 2. the taxpayer used another such pricing method to determine the price 3. this other pricing method was reasonable in reflecting income - the documented study must be completed no later than the date THE TAXPAYER FILES THE FEDERAL INCOME TAX RETURN

the election of s corporation status must be made by what?

the unanimous consent of all shareholders - cant be the consent of a majority of the shareholders

on April 30, Year 2, Daisy Corp (a CFC) purchases 750,000 of CS in Richie Corporation (a US corporation). Prior to this purchase, Daisy Corp's US property investments total 1,200,000. What is Daisy Corporation's increase in earnings invested in US property for Year 2?

to calculate the increase in earnings invested in US property, the average adjusted basis of the CFC's US property for the tax year (calculated at the close of each quarter) is compared with the adjusted basis at the end of the preceding tax year: 1,200,000 = first quarter 1,950,000 = second quarter 1,950,000 = third quarter 1,950,000 = fourth quarter = 7,050,000 / 4 quarters = 1,762,500 - 1,200,000 adjusted basis at end of preceding tax year = 562,500

Property Subject to an Excess Liability = ___/___ when property that is subject to a liability (nonrecourse secured debt) is contributed to a partnership and the subsequent decrease in the partner's individual liability exceeds his or her partnership basis, the excess amount is treated like ___, which means there is a ___

when property that is subject to a liability (nonrecourse secured debt) is contributed to a partnership and the subsequent decrease in the partner's individual liability exceeds his or her partnership basis, the excess amount is treated like BOOT/LOOT, which means there is a TAXABLE GAIN TO THE PARTNER