Advanced Tax discussion 3
12.6 In what circumstances would a business be subject to income taxes in more than one state?
Anytime a business conducts its trade or business in a manner exceeding the nexus standard in more than one state (which chooses to assert its sovereign right to tax) the business will be subject to business taxes in multiple states. However, businesses subject to tax in more than one state have the ability to apportion or divide their income between or among the states in which they have income tax nexus to mitigate the consequences of taxing the same income more than once.
11.22 Can a shareholder's basis in S corp stock ever be adjusted to a negative number? Why or why not?
Basis can never be negative. (powerpoint slide 11) shareholder's basis in S corp stock represents shareholder's investment in S corp and an investment can never be negative
11.36 When is an S corporation required to pay a built-in gains tax?
Built-In Gains Tax (BIG Tax)—To prevent a C corporation from avoiding corporate taxes on sales of appreciated property—if it's sold within 5 years, BIG Tax at 35%. (powerpoint slide 22)
11.18 How do S corporations report dividends they receive? Are they entitled to a dividends received deduction? Why or why not?
Dividends received by S corps flow directly through the company to the owner. Therefore, S corp is not required to pay tax on the div received and does not qualify for the dividends received deduction.
11.37 When is an S corp required to pay the excess net passive income tax?
Excess Net Passive Investment Income (PII)Tax—To encourage S corporations to distribute their accumulated E&P from prior C corp years (as a dividend), an S corporation may have to pay a tax on its excess net passive income. (powerpoint slide 22) excess net passive income tax is applicable only to those S corps that at any point in time operated as C corp and has some accumulated E&P from the period in which it operated as C corp. When an S corp's passive investment income surpasses 25% of the total proceeds or receipts, it is considered excess passive income and subjected to excess net passive income tax
13.8 Natasha is not a citizen of the United States, but she spends 200 days per year in the United States on business. She does not have a green card. True or False: Natasha will always be considered a resident of the United States for U.S. tax purposes because of her physical presence in the United States. SKIP
False
13.5 Henri is a resident of the United States for U.S. tax purposes and earns $10,000 from an investment in a French company. Will Henri be subject to U.S. tax under a residence-based approach to taxation? A source-based approach?
Henri earned $10,000 from an investment in a French company, it cannot be said to have earned from U.S. sources, therefore, Henri cannot be taxed under source-based approach. BUT Henri is a resident of the U.S. and will be taxed under residence-based approach(worldwide income)
14.13 List the conditions for making an election to split gifts
In order to utilize gift splitting, each spouse must be a citizen or resident of the U.S., be married at the time of the gift and not remarry during the remainder of the calendar year. In addition, both spouses must consent to the election by filing a timely gift tax return
12.16 Lars operates Keep Flying, Incorporated, a used airplane parts business, in Laramie, Wyoming. Lars employs sales agents that visit mechanics in all 50 states to solicit orders. All orders are sent to Wyoming for approval, and all parts are shipped via common carrier. The sales agents are always on the lookout for wrecked, abandoned, or salvaged aircraft with rare parts because they receive substantial bonuses for removing these parts and shipping them to Wyoming. Discuss the states where Keep Flying has income tax nexus.
Keep Flying has nexus in all 50 states (assuming they salvage parts in every state). While Keep Flying sells tangible personal property and is protected by Public Law 86-272, its sales personnel violate this by salvaging parts off planes during their travels.
11.38 Is the LIFO recapture tax a C Corporation tax or an S corporation tax?
LIFO Recapture Tax—To prevent former C corporations from avoiding built-in gains tax by using the LIFO method of accounting for their inventories, an S corp may have to pay tax on the excess of LIFO over FIFO gains when S elected. (powerpoint slide 22) *can be taxes as an entity not a pass through but only on these exceptions*
11.17 Why must an S corp report separately stated items to its shareholders? how is the character of a separately stated item determined? How does the S corporation report this information to each shareholder?
Like partnerships--> pass through entity. Reported to shareholders on 1120S, Schedule K-1. Ordinary (bottom line) income also reported on K-1 and is taxed as ordinary income on individual's return. Ordinary income is eligible for 20% deduction on bottom line income. Same as partnership or sole proprietorship.
12.3 Describe briefly the nexus concept and explain its importance to state and local taxation
Nexus is the sufficient connection between a taxpayer and a state that allows the imposition of a tax. The level of connection varies based on the type of tax. For example, any physical presence in a state will create nexus for sales tax while the nexus standard for income taxes is generally higher.
11.4 How do the tax laws treat family members for purposes of limiting the number of owners an S corporation may have?
Not more than 100 shareholders, but husband and wife counted as one shareholders as are family members in a 6 generation range. powerpoint slide 3
13.23 What is a permanent establishment, and why is it an important part of most income tax treaties?SKIP
Permanent establishment is a fixed place where business has its office, factory or employees. It is important part of most income tax treaties because only that business profit is taxes in host country which is earned through business that is, permanently established in that country
11.2 What are the limitations on the number and type of shareholders an S corporation may have? How are these limitations different from restrictions on the number and type of shareholders corporations or partnerships may have?
S corp Shareholder limitations: -Each shareholder must be an individual, an estate, a single-member LLC, or a qualified trust. -Can have tax exempt organizations. -No partnerships! -No nonresident aliens. -Not more than 100 shareholders, but husband and wife counted as one shareholders as are family members in a 6 generation range. C corp and Partnership no limitations on type/number of shareholders powerpoint slide 3
11.11 Describe the circumstance in which an S election may be involuntarily terminated
S election automatically terminated if any of the requirements to qualify as S corp is not fulfilled. (# S Corp shareholder >100, ownership by ineligible shareholders corp,partnership, or nonresident alien) passive investment income for more than three consecutive years that is greater than 25% of gross receipts(PII consists of receipts from dividends, interest, rents, royalties, and annuities, but not including interest on accounts receivable or active rental activities.)
12.11 Renée operates Scandinavian Imports, a furniture shop in Olney, Maryland that ships goods to customers in all 50 states. Scandinavian Imports also appraises antique furniture and has recently conducted in-home appraisals in the District of Columbia, Maryland, Pennsylvania, and Virginia. Online appraisals have been done for customers in California, Minnesota, New Mexico, and Texas. Determine where Scandinavian Imports has sales and use tax nexus.
Scandinavian Imports has nexus in Maryland--its state of commercial domicile. It also has nexus in the District of Columbia, Pennsylvania, and Virginia because it has physical presence that is created through personnel performing appraisals. The online appraisals do not create nexus because they lack physical presence that creates sales and use tax nexus.
12.18 Climb Higher is a distributor of high-end climbing gear located in Paradise, Washington. Its sales personnel regularly perform the following activities in an effort to maximize sales: Carry swag (free samples) for distribution to climbing shop employees. Perform credit checks of new customers to reduce delivery time of first order of merchandise. Check customer inventory for proper display and proper quantities. Accept returns of defective goods. Identify which of Climb Higher's sales activities are protected and unprotected from nexus under the Wrigley Supreme Court decision.
Selling activities or solicitation are not well defined by P.L. 86-272. The Wrigley decision defines what activities are considered solicitation (protected) and which activities exceed solicitation. Distribution of free samples and checking inventory for display and quantity are considered solicitation. Performing credit checks and accepting returns exceed solicitation and create nexus for Climb Higher.
11.16 Compare and contrast the method of allocating income or loss to owners for partnerships and for S corporations.
Simpler than partnerships because there are no special allocations( so long as allocation has substantial economic effect). Profit and loss must be allocated equally to all shares. S corp must allocate profits and losses pro rate, based on number of outstanding shares each shareholder owns on each day of the tax year. *per share powerpoint slide 9
11.9 Theodore, Alvin, and Simon are equal shareholders of Timeless Corp. (an S Corporation) Simon wants to terminate the S election, but Theodore and Alvin disagree. Can simon unilaterally elect to have the S election terminated? If not, what would Simon need to do to have the S election terminated?
Terminating event— -Revocation by the majority of shareholders -An eligibility requirement being broken, e.g. sell a share to a nonresident alien. - passive investment income for more than three consecutive years that is greater than 25% of gross receipts (PII Termination). (PII consists of receipts from dividends, interest, rents, royalties, and annuities, but not including interest on accounts receivable or active rental activities.) powerpoint slide 6 Simon must own more than 50% of T Corp to terminate. Since he only owns 1/3 he cannot terminate T Corp. BUT can make an "involuntary" termination of T Corp by transferring shares to an ineligible shareholder(corporation, partnership, or nonresident alien) *termination of S corp can't reelect for 5 years
12.12 Web Music, located in Gardnerville, Nevada, is a new online music service that allows inexpensive legal music downloads. Web Music prides itself on having the fastest download times in the industry. It achieved this speed by leasing server space from 10 regional servers dispersed across the country. Discuss where Web Music has sales and use tax nexus.
Web Music has nexus in Nevada because of its commercial domicile. Because Web sells music in an intangible form, some states may not try to tax the transaction. An important question is whether a leased server is the same as having property within a state. Most states would argue that renting the property creates nexus within the states where the server is located. Web's business model creates problems in applying the historical sales and use tax nexus rules
12.19 Describe a situation in which it would be advantageous for a business to establish income tax nexus in a state.
While nexus creates a potential income tax liability, it can be advantageous in two ways. First, creating nexus in a state that chooses not to tax a business can create nowhere income (income that will go untaxed). Second, creating nexus in a state with a lower effective tax rate than the business' current effective tax rate can lower the total state taxes paid.
13.4 How does a residence-based approach to taxing worldwide income differ from a source-based approach to taxing the same income?
residence based approach(worldwide) states that worldwide income of taxpayer can be taxed by country where the taxpayer has citizenship. source based approach(where its earned) is only the portion of income which is earned from the sources within its country's boundaries can be taxed
13.7 Maria is not a citizen of the United States, but she spends 180 days per year in the U.S. on business-related activities. Under what conditions will Maria be considered a resident of the U.S. for tax purposes?SKIP
she should possess a long-lasting resident visa/Green card or she should be substantially present in U.S. If maria satisfies any of the above conditions, she can be treated as occupant for U.S. purpose
11.23 Describe the three hurdles a taxpayer must pass if he wants to deduct a loss from his share in an S corporation
tax basis, at risk, and passive activity loss limits apply. Basis and at-risk amounts include direct loans to the corporation. Passive activity losses are same rules as elsewhere. (powerpoint slide 12)
14.12 Describe the conditions for using the annual exclusion to offset an otherwise taxable transfer
the annual exclusion can only offset a gift of present interest. A gift of a future interest is not eligible for an annual exclusion. The only exception is a transfer in trust for a minor (under 21) where the property can be used to support the minor and any remaining property is distributed once the child reaches age 21
14.16 Explain why the gross estate includes the value of certain property transferred by the decedent at death, such as property held in joint tenancy with the right of survivorship, even though property is not subject to probate
the gross estate includes testamentary transfers even though this property is transferred outside of the probate court( automatically through operation of law) while he didn't "own" the property at death, the decedent had control of the ultimate disposition of the property
14.28 list two questions you might pose to a client to find out whether a program of serial gifts would be an advantageous wealth transfer plan
the most obvious question would be whether the client could afford to make gifts given the level of income expected to be necessary to support the client in the future. Another important question involves the health/age of the client and the past and expected rate of appreciation for the proposed gift property. Serial giving is less beneficial for clients who might be expected to die soon and for property that has substantially appreciated in the past.
14.3 Describe the unified credit and the purpose it serves in the gift and estate tax
unified credit is designed to prevent taxation of all but the largest cumulative transfer. The amount of cumulative taxable transfer a person can make without exceeding unified credit is exemption equivalent
13.25 Why is a treaty important to a nonresident worker in the United States?SKIP
whenever any non-resident visits U.S. temporarily for providing employment related services they will be allowed
14.15 Explain the purpose of adding prior taxable gifts to current taxable gifts and show whether these prior gifts could be taxed multiple times over the years
with a progressive tax rate schedule, adding to the tax base increases the likelihood that a higher marginal tax rate will apply to the latest increment(transfer). To prevent double taxation of prior gifts, the gift tax on prior taxable gifts is then subtracted from the total gift tax
11.28 How does the tax treatment of employee fringe benefits reflect the hybrid nature of the S corporation?
-if a person owns more than 2% of the shares, the corporation gets the deduction for the cost of the fringe benefit, but for some benefits, the individual is taxed on receiving the benefit. That is, the corporation can't take a deduction and pay the owner tax-free income.(partnership tax treatment) -For 2% or less, ordinary rules on deductibility and exclusion apply(c corp tax treatment) (powerpoint slide 15)
14.11 Explain how a purchase of reality could result in a taxable gift
A completed gift results when realty is purchased in the name of a donee as a sole owner of the property, as tenants in common, or as joint tenants with the right of survivorship if the donee does not provide adequate considerations for their ownership interest
11.25 How does a shareholder create debt basis in an S corporation? How is debt basis similar and dissimilar to stock basis?
A debt basis can be created by the shareholder by directly lending money to the S corporation. Debt basis and stock basis are similar because a shareholder can deduct losses against both of them. However, they differ at one point as S corp's distributions are nontaxable only to the extent of stock basis. Shareholders with only debt basis and no stock basis will be required to pay tax distributions received by them
14.10 Under what circumstances will a deposit of cash to a bank account held in joint tenancy be considered a completed gift?
A deposit to a joint account is viewed as an incomplete gift until the donee withdraws cash from the account because the donor (Depositor) can withdraw the deposit at any time
14.6 Describe the requirements for a complete gift, and contrast a gift of a present interest with a gift of a future interest.
A gift is only complete with delivery( control of the gift) and acceptance by the donee. A present interest is one that the donee can enjoy immediately such as an unrestricted use of property or income. In contrast, a future interest is one that cannot be enjoyed immediately-the enjoyment is postpones until someone in the future
12.10 What is the difference between a sales tax and a use tax?
A sales tax liability accrues on the sale of property within the state. A use tax liability accrues in the state purchased property will be used when the seller in one state ships goods to a customer in a different state and the seller is not required to collect the sales tax (the seller does not have sales tax nexus in the state to which the goods are shipped).
11.32 What does the accumulated adjustments account represent? How is it adjusted year by year? Can it have a negative balance?
AAA is like E&P in that reflects the cumulative income or loss for the time the corporation has been a S corporation Beginning of year AAA balance + Separately stated income/gain items (excluding tax exempt income) + Ordinary income − Separately stated losses and deductions − Ordinary losses − Nondeductible expenses that are not capital expenditures (except deductions related to generating tax-exempt income) − Distributions out of AAA = End of year AAA balance Can have negative AAA based on operations, but not on distributions (powerpoint slide 18-19)
11.7 JB corporation is a C corporation owned 80 percent by Jacob and 20 percent by Bauer. Jacob would like JB to make an S election but Bauer is opposed to the idea. Can JB elect to be taxed as an S corporation without Bauer's consent?
All shareholders must make the election powerpoint slide 5 Bauer did not give consent and JB cannot make election
13.22 What is the primary goal of the United States in negotiating income tax treaties with other countries?
An income tax treaty is agreement between two countries in which they agree to change its tax laws for specific type of transactions involving both the countries. The tax laws are changed to allow certain tax exemptions and benefits to taxpayers who enter into cross border transactions involving those two countries general purpose is to eliminate or reduce the impact of double taxation on cross-border transactions. Also, anti-erosion of U.S. tax base
11.20 Why is a shareholder's basis in an S corp stock adjusted annually?
Annual basis adjustments—like partnerships -Increase for contributions and shareholders share of income/gains. -Decreased for distributions. (powerpoint slide 11) ensures income/losses aren't double counted by shareholders at time of selling stock or receiving distributions. also ensures tax-exempt income and non-deductible expenses are not taxed or deducted
