Tax Final Exam ACTG 4462
"True" or "False" regarding the principal legal and tax forms for conducting a business. From a Federal income tax perspective, the corporate form can be divided into two types, S corporation and C or regular corporation.
True
"True" or "False" regarding the principal legal and tax forms for conducting a business. The taxpayer generally is bound for tax purposes by the legal form that is selected.
True
"True" or "False" regarding employment taxes and the various types of entities. A shareholder who works for the C corporation is not considered an employee of the corporation.
False
"True" or "False" regarding employment taxes and the various types of entities. A shareholder's share of the net earnings of an S corporation is considered self-employment income.
False
"True" or "False" regarding the effect on results of operations of the conduit and entity concepts. The conduit concept is responsible for producing potential double taxation for the C corporation form.
False
"True" or "False" regarding the nontax factors in making business entity decisions. The limited partnership form provides limited liability to all partners.
False
Indicate whether the following items "Increase" or "Decrease" a partner's basis in the partnership. A partner's proportionate share of any increase in partnership liabilities.
Increase
Indicate whether the following items "Increase" or "Decrease" a partner's basis in the partnership. A partner's proportionate share of partnership income.
Increase
Indicate whether the following items are treated as "Separately stated item" or "Nonseparately stated item" stated item for a S corporation. Depreciation recapture
Nonseparately stated item
Indicate whether the following items are treated as "Separately stated item" or "Nonseparately stated item" stated item for a S corporation. Ordinary income
Nonseparately stated item
Indicate whether the following items are treated as "Separately stated item" or "Nonseparately stated item" stated item for a S corporation. Trade or business expenses
Nonseparately stated item
self-employment income
Partner's distributive share of partnership income from its trade or business plus guaranteed payments for services
distributive share
Partner's or S-Corp shareholder's allocation of entity's income/loss items, in general
economic effect
Partners should bear the economic consequences from partnership allocations of income/gain/loss/deductions.
guaranteed payment
Payment from a partnership to a partner for services performed or for use of capital
loss limitations
Restrictricts on an owners deductions of their distributive share of entity losses
bypass election
S corp chooses to make distributions from accumulated earnings and profits before accumulated adjustments account
Indicate whether the following items are treated as "Separately stated item" or "Nonseparately stated item" stated item for a S corporation. Charitable contributions
Separately stated item
Indicate whether the following items are treated as "Separately stated item" or "Nonseparately stated item" stated item for a S corporation. Long-term and short-term capital gains and losses
Separately stated item
Indicate whether the following items are treated as "Separately stated item" or "Nonseparately stated item" stated item for a S corporation. Tax-exempt income
Separately stated item
self-employment tax
Social security and medicare taxes assessed on self-employment income
special allocation
Tax-sensitive items the partnership does not allocate using the profits or loss interests
substantial economic effect
The allocation of partnership items to partners must have a permanent economic impact beyond tax consequences
loss interest
The extent of a partner's entitlement to an allocation of the partnership's operating losses
Profits interest
The extent of a partner's entitlement to an allocation of the partnership's operating profits
"True" or "False" regarding the tax techniques that are available for eliminating or at least reducing the second layer of taxation. Making distributions that qualify for return of capital treatment at the shareholder level.
True
"True" or "False" regarding the tax techniques that are available for eliminating or at least reducing the second layer of taxation. Making the S corporation election.
True
"True" or "False" regarding the tax techniques that are available for eliminating or at least reducing the second layer of taxation. Not making distributions to the shareholders.
True
A partner who owns a majority of the partnership generally should not sell property at a loss to the partnership because the loss is disallowed. T/F
True
A partner's basis is not reflected anywhere on the Schedule K-1. T/F
True
A partner's tax basis in the partnership interest can never be negative. T/F
True
A partnership is governed by a partnership agreement whereas the governing agreement of an LLC is known as an operating agreement. T/F
True
A shareholder's basis is increased by nonseparately computed income and separately stated income items. T/F
True
An allocation of income or gain to a partner must increase the partner's capital account, and an allocation of deduction or loss must decrease the partner's capital account. T/F
True
Any partner can make a tax-deferred contribution of assets to the entity either at the inception of the partnership or later. T/F
True
Capital interest is measured by a partner's capital sharing ratio, which is the partner's percentage ownership of the capital of the partnership. T/F
True
Corporate borrowing has no effect on S corporation shareholder basis. T/F
True
For Federal income tax purposes, the taxation of S corporations resembles that of partnerships. T/F
True
If a partnership incurs a loss for the taxable year, careful planning will help ensure that the partners can claim the deduction, such as an additional contribution to the partnership before the end of the tax year. T/F
True
Inside basis refers to the partnership's adjusted tax basis for each asset it owns. T/F
True
Nonresident alien shareholders are not allowed for S corporations. T/F
True
Once stock basis is zero, any additional basis reductions from losses or deductions, but not distributions, decrease (but not below zero) the shareholder's basis in loans made to the S corporation. T/F
True
Outside basis is increased and decreased for the partner's share of each partnership operating item, whether taxable or tax-exempt. T/F
True
Outside basis represents each partner's basis in the partnership interest. T/F
True
Payments to S shareholders by the corporation are distributed tax-free to the extent the distributed earnings were previously taxed. T/F
True
S corporations are limited to a theoretical maximum of 100 shareholders. T/F
True
S corporations may only issue one class of stock. T/F
True
S corporations shareholders may only be individuals, estates, and certain trusts and exempt organizations. T/F
True
other adjustments account
record of an S corporation's exempt income net of related nondeductible expenses, reduced by distributions
accumulated adjustments account
record of an S corporation's income, loss, and deductions, reduced by distributions
_________________ reconciles partners' beginning and ending capital accounts and _________________ reconciles net income (loss) per the books with net income (loss) per the tax return. When reconciling partners' capital accounts, cash and property contributed is ______________, guaranteed payments are _______________ and cash and property distributed is _______________. When reconciling net income (loss), tax-exempt interest is ________________, guaranteed payments are _______________ and partners' contribution of cash and property are ____________________. .
...Schedule M-2...Schedule M-1...added...ignored...deducted...deducted...added...ignored
A qualifying election requires the consent of ________________ of the corporation's shareholders. The election is made on _______________. For S corporation status to apply in the current tax year, the election must be filed either ________________ or on or before the fifteenth day of the _____________ month of the current year.
...all...Form 2553...in the previous year...third...
The _________________ concept treats partners and partnerships as separate units and gives the partnership its own tax "personality" by (1) requiring a partnership to file an information tax return and (2) treating partners as separate and distinct from the partnership in certain transactions between a partner and the partnership. The _________________ concept treats the partnership as a channel through which income, credits, deductions, and other items flow to the partners.
...entity...aggregate
A voluntary revocation of the S election requires the consent of ________________ on the day the revocation is to be made. A revocation that designates a future effective date _______________. If an S corporation fails to qualify as a small business corporation at any time after the election has become effective, its status as an S corporation ends ______________ the corporation ceases to be a small business corporation. If an S corporation has C corporation E & P and passive income in excess of ______________ of its gross receipts for three consecutive taxable years, the S election is terminated as of the beginning of the _______________ year. Usually, after an S election has been terminated, the corporation must wait fill in the ____________ years before reelecting S corporation status.
...shareholders owning a majority of shares...splits the corporation's tax year into a short S corporation year and a short C corporation year...on the day...25 percent...fourth...5...
For S corporations, the at-risk rules apply to the ______________ therefore, an amount at-risk ______________ determined separately for each shareholder. The amount of the corporate losses that are passed through and deductible by the shareholders ______________ affected by the amount the corporation has at-risk. S corporations ______________ directly subject to the limits of § 469, but corporate rental activities _____________ inherently passive. However, other activities of an S corporation may be passive unless the ________________ materially participate(s) in operating the business.
...shareholders...is...is not...are not...are...shareholder(s)...
Qualified business income deduction
A deduction allowed for noncorporate taxpayers based on the qualified business income of a qualified trade or business. In general, the deduction is limited to the lesser of 20 percent of qualified business income, or 20 percent of taxable income before the qualified business income deduction less any net capital gain. There are three limitations on the deduction—an overall limitation (based on modified taxable income), another that applies to high-income taxpayers, and a third that applies to certain types of services businesses.
pass through aka flow through entity
A form of business for which US federal income tax items are attributed directly to owners
inside basis
A partnership's basis in the assets it owns.
Built in gains tax
A penalty tax designed to discourage a shift of the incidence of taxation on unrealized gains from a C corporation to its shareholders, via an S election. Under this provision, any recognized gain during the first five years of S status generates a corporate-level tax on a base not to exceed the aggregate untaxed built-in gains brought into the S corporation upon its election from C corporation taxable years.
Conduit concept
A perspective taken toward a venture that regards the venture as an aggregation of its owners joined together in an agency relationship rather than as a separate entity. For tax purposes, this results in the income of the venture being taxable directly to its owners. For example, items of income and expense, capital gains and losses, tax credits, etc., realized by a partnership pass through the partnership (a conduit) and are subject to taxation at the partner level. Also, in an S corporation, certain items pass through and are reported on the returns of the shareholders.
Schedule K-1
A tax information form prepared for each partner in a partnership, each shareholder of an S corporation, and some beneficiaries of certain trusts. The Schedule K-1 reports the owner's share of the entity's ordinary income or loss from operations as well as the owner's share of separately stated items, along with any other information the partner, shareholder, or beneficiary needs to prepare the return.
AAA
Accumulated Adjustment Account; An account that aggregates an S corporation's post-1982 income, loss, and deductions for the tax year (including nontaxable income and nondeductible losses and expenses). After the year-end income and expense adjustments are made, the account is reduced by distributions made during the tax year.
AEP
Accumulated Earnings & Profits; S corp used to be a C corp and distributions are considered dividends
capital account
An interest in net assets of a partnership
Separately Stated Items
Any item of a partnership or an S corporation that might be taxed differently to any two owners of the entity. These amounts are not included in the ordinary income of the entity, but are instead reported separately to the owners; tax consequences are determined at the owner level.
separately stated items
Any tax sensitive item of a partnershipor S-Corp that might be taxed differently by any two owners
Nonrecourse debt
Debt for which no owner is personally liable. May be secured by collateral owned by the entity
Recourse debt
Debt for which the entity is liable OR which at least one owner has personally guaranteed
Indicate whether the following items "Increase" or "Decrease" a partner's basis in the partnership. A partner's proportionate share of any reduction in partnership liabilities.
Decrease
Indicate whether the following items "Increase" or "Decrease" a partner's basis in the partnership. A partner's proportionate share of nondeductible expenses.
Decrease
"True" or "False" regarding the principal legal and tax forms for conducting a business. A limited liability company (LLC) is a hybrid business form that combines the sole proprietorship characteristic of limited liability for the owners with the tax characteristics of a partnership.
False
"True" or "False" regarding the tax techniques that are available for eliminating or at least reducing the second layer of taxation. Transferring funds to the shareholders that are not deductible to the corporation.
False
A nonseparately stated item is any item with tax attributes that could affect partners differently. T/F
False
A partner with a negative capital account is not required to restore that account upon liquidation of the interest. T/F
False
A partnership is allowed to claim a deduction for net operating losses. T/F
False
A special allocation of various items to specified partners may not allocate items in a different proportion from the general profit and loss sharing ratios. T/F
False
All partnership liabilities are allocated among the partners but are excluded in their outside bases. T/F
False
For K-1 reporting, the capital account analysis can be prepared using any of several methods, including the tax basis, GAAP, or the § 704(b) book method. T/F
False
For partnerships, income or loss allocations or distributions are required to be proportionate to the ownership interest of each partner. T/F
False
If a loss and a distribution occur in the same year, the distribution reduces the stock basis last, after the loss. T/F
False
S corporations are subject to sales and capitalization restrictions. T/F
False
S corporations are treated as partnerships under state law. T/F
False
S corporations may be U.S. (domestic) or non-U.S. corporations. T/F
False
The partner's guaranteed payment is reported on a form W-2 or 1099 instead of the Schedule K-1. T/F
False
The partnership is a taxable entity.
False
The partnership is not required to file a tax return.
False
Aggregate concept
For some purposes partnerships and S-Corps behave as a group of persons
entity concept
For some purposes partnerships and S-Corps behaves as a unit separate from their owners
Distributive share
In partnership or S corporation taxation, the distributive share is the amount of income, gain, deduction, loss, or credit allocated to a given partner or shareholder. The distributive share is the amount reported on a given line of the owner's Schedule K-1. For example, a partner's distributive share of ordinary income is the amount of income shown on that partner's Schedule K-1, Part III, line 1. For S corporations, the distributive share must be determined based on the shareholder's ownership percentage. For partnerships, the distributive share is generally determined in accordance with the partnership agreement. For both types of entities, amounts can be prorated if the ownership interest is transferred during the tax year.
Bypass election
In the context of a distribution by an S corporation, an election made by the entity to designate that the distribution is first from accumulated earnings and profits and only then from the accumulated adjustments account (AAA).
Partnership agreement
The governing document of a partnership. A partnership agreement should describe the rights and obligations of the partners; the allocation of entity income, deductions, and cash flows; initial and future capital contribution requirements; conditions for terminating the partnership; and other matters.
Voluntary revocation
The owners of a majority of shares in an S corporation elect to terminate the S status of the entity as of a specified date. The day on which the revocation is effective is the first day of the C corporation's tax year.
"True" or "False" regarding the nontax factors in making business entity decisions. Of the different forms of business entities, the corporate form offers the greatest ease and potential for obtaining owner financing because it can issue additional shares of stock.
True
"True" or "False" regarding employment taxes and the various types of entities. A partner in a partnership is not considered to be an employee.
True
"True" or "False" regarding employment taxes and the various types of entities. The wages of employees of the limited partnership are subject to FICA taxes, which must be matched by the limited partnership.
True
"True" or "False" regarding employment taxes and the various types of entities. The wages of employees of the sole proprietorship are subject to FICA taxes, which must be matched by the sole proprietorship.
True
"True" or "False" regarding the effect on results of operations of the conduit and entity concepts. Application of the entity concept results in the earnings components losing their identity when they are passed through to shareholders in the form of dividends.
True
"True" or "False" regarding the effect on results of operations of the conduit and entity concepts. The conduit concept allows any item that is subject to special treatment on the taxpayer-owners' tax return to be reported separately to the owners.
True
"True" or "False" regarding the nontax factors in making business entity decisions. A corporation offers its owners limited liability under state law.
True
Schedule K-1 includes information about the partner, including the partner's profit, loss and capital-sharing percentages; share of partnership liabilities at the beginning and end of the year; and changes in the partner's capital account during the year. T/F
True
Schedule K-1 summarizes the tax-related items for each partner after considering the allocation conventions outlined in the partnership agreement or required under the Code. T/F
True
The capital account analysis (sometimes called a "roll forward" or "reconciliation") is shown on the partner's Schedule K-1. T/F
True
The partner's ending capital account balance is rarely the same amount as the partner's tax basis. T/F
True
The partnership's Form 1065 organizes and reports the transactions of the entity for the tax year. Each of the partnership's tax items is reported on Schedule K of that return. T/F
True
When the partner's interest is liquidated, the partner must receive net assets that have a fair market value equal to the positive balance in the capital account. T/F
True
Thin capitalization
When debt owed by a corporation to the shareholders becomes too large in relation to the corporation's capital structure (i.e., stock and shareholder equity), the IRS may contend that the corporation is thinly capitalized. In effect, some or all of the debt is reclassified as equity. The immediate result is to disallow any interest deduction to the corporation on the reclassified debt. To the extent of the corporation's earnings and profits, interest payments and loan repayments on the reclassified debt are treated as dividends to the shareholders.
accumulated earnings and profits
a record of C-corp earnings and profits at the time an S election was made
A partnership that is treated similarly to a general partnership in most states. The primary difference is that the partner is not personally liable for any malpractice committed by other partners.
limited liability partnership
substituted basis
basis determined by reference to the property given up
carryover basis
basis determined by reference to the property in the hands of the transferor
A partnership that combines the corporate benefit of limited liability for the owners with the benefits of partnership taxation, including the single level of tax and special allocations of income, losses, and cash flows.
limited liability company
A partnership with at least one general partner and one or more limited partners.
limited partnership
outside basis
each partner's basis in their partnership interest
deferral of gain or loss
gain is realized in a transaction but not recognized at the time of the transaction
A partnership consisting of two or more partners who are general partners and who may participate in management of the entity; there are no limited partners.
general partnership