REG TAX R1-R5
What is the definition of controlled?
"Controlled" includes any kind of control, direct or indirect, including control resulting from the actions of two or more taxpayers acting together. A presumption of control arises if income or deductions have been arbitrarily shifted.
What is an uncontrolled comparable?
"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.
State the general NOL carryforward/carryback rules
(b4 2018)Net operating losses can be carried back 2 years and/or forward 20 years. (18,19,20) can be carried back five years and forward indefinitely NOL 2021 and after 2021 indenfitfly NOLs after 2017 can only offset 80% of 2018.
What is the Advance Pricing Agreement program?
-A program to resolve actual or potential transfer pricing disputes prior to examination (audit) -Agreement is a binding contract between IRS and taxpayer by which the IRS agrees not to seek a transfer pricing adjustment for a covered transaction if the taxpayer files its return consistent with the agreed transfer pricing method set forth in the contract
What is the tax treatment of a C Corporation distribution of appreciated noncash property to a shareholder?
-Corps recognized a taxable gain as if property has been sold -Recipient Shareholder includes the FMV of the property in taxable income as dividend income -The recipient shareholder's basis in the property distributed is its FMV at the date of distribution.
Name some nondeductible trade or business expenses
-business meals and expenses (50%) -political contributions -executive compensation in excess of $1 million per year unless compensation is performance based -federal income taxes -penalties -estimated liabilities for contingencies (ie warranties)
Provide examples of constructive dividends
-excessive salaries paid to shareholder employees -excessive rents and royalties -"loans" to shareholders where there is no intent to repay -sale of assets below FMV
When are life insurance premiums deductible?
-key employ policies not deductible -if fringe benefit, premiums are deductible. -if life insurance coverage exceeds $50,000 payment of premiums by employers may represent income to the employees
What is accumulated earnings tax?
-tax on accumulated earnings beyond reasonable needs of business -corporations have $250,000 without penalty lifetime exclusion -personal service corporations amount is $150,000 -tax is a flat 20% of unreasonable accumulated earnings
What considerations should be made before forming 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 a partnership . 2.LLC members generally have the right to amend the LLC operating agreements, provide input, and manage LLCs, yet corp shareholder generally do not have these same rights. 3.an LLC cannot become a public company 4.LLC does not have the same restrictions with regards to members as a S corp have with regards to S/H. 5.A sole proprietorship may become a single-member LLC if it files articles of organization with a state.
In a liquidating distribution, what is the three-step process for allocating a partner's basis in the partnership interest if it is less than the partnership's basis in the assets distributed?
1. Assign a basis to all assets equal to the partnerships basis in the assets. 2 Adjust the basis of any assets in last property category that have depreciated to fmv 3. Allocate any basis remaining among all the assets in the last property category based on relative adjusted basis of the asset.
In a liquidating distribution, what is the three-step process for allocating a partner's basis in the partnership interest if it is more than the partnership's basis in the assets distributed?
1. Assign a basis to all assets equal to the partnerships basis in the assets. 2 Adjust the basis of any assets in last property category that up to fmv 3. Allocate any basis remaining among all the assets in the last property category based on relative adjusted basis of the asset.
What is the tax treatment of shareholder distributions from an S corp with no prior C corp e &p?
1.To extent of stock basis Nontaxable return of capital Reduces basis in stock (not below 0) 2.In excess of stock basis Taxable capital gain distribution Taxed as long-term capital gain in stock held > one year
Identify the five steps in calculating consolidated taxable income.
1.calculate stand alone 2.make adjustments to remove effects of transactions between group members. 3.remove from each members Taxable income all gains, losses, and deductions that are required to be determined at the consolidated level. 4 Combine each member's resulting taxable income from steps 1 -3 to create the group taxable income. 5 adjust the groups combined taxable income for items that are required to be determined at the consolidated level.
What is the tax treatment to the shareholder on the sale of qualified small business stock?
100% nontaxable gain if stock held more than five years Maximum exclusion per qualifying S/H is limited to 100% or greater of 10 times shareholder stock basis 10 million Any taxable gain in excess of exclusion taxed at regular rates?
What is the tax treatment of shareholder distributions from an S corp with prior C corp earnings and profits?
1st To extent of S corp AAA- nontax; reduced basis in stock 2nd To extent of C corp E&P - taxable dividend dist; does not reduce basis in stock 3rd To extent of S corp OAA - nontax; reduces basis in stock 4th To extent of stock basis- nontaxable return of capital 5th- In excess of stock basis - taxed as long term capital gain
How is the built-in gain tax calculated?
21 % lesser of Net recognized built-in gains for current year Taxable income of S corp as if the corp were a C corp.
Name some adjustments that are made to each member's taxable income to remove effects of transactions between members of a group when calculating consolidated taxable income.
Gain and losses that are deferred on intercompany sales between group members Inventory adjustments for intercompany sales. Exclusion of dividends received by one member from another member of the group.
What are the tax ramifications when a shareholder transfers to a corporation liabilities that exceed the adjusted basis of property transferred to the corporation
Gain recognized by SH Lib assumed by corp - adjusted basis of proeprty to the corp SH basis in stock Adjusted Basis of Property Contributed + gain recognized by SH -Liab assumed by corporation Corps basis in property contributed Adjusted basis of prop contributed + gain recognized by shareholder
What is the tax treatment of a partnership liquidating distribution?
Generally non taxable to both. Gain is recognized by a a partner only if $$$ exceeds partners basis Loss if partners basis > everything received
What is the tax treatment of a nonliquidating distribution of partnership property?
Generally nontaxable to both partner and partnership In general, distribution of cash or property to a partner reduce the partner basis in the partnership interest by the cash of adjusted basis of the property distributed
How can an S Corporation be terminated?
Holders of majority of stock consent to voluntary termination Corporations fails to meet any or all of the eligibility requirements. More than 25% of corp gross receipts come from passive activities for three consecutive years.
What is the maximum amount that a corp can deduct for organization cost and start up cost in the tax year the cost are incurred?
Immediately expense 5000 each. Each expense allowance in phased out after 5000. Amortize over 180 months.
How does a worldwide tax system differ from a territorial tax system?
In a worldwide tax systems, a nation taxes its residents and citizens on total worldwide income. In a territorial tax system, a nation taxes its residents and citizens only on income earned inside its borders.
In general, how is the donee's basis of a gift determined? How is the holding period determined?
In general donee's bais of a gift is the same as the donor basis. Carryover basis may be increased for gift tax paid on appreciate of gift. Holding period includes donors holding period unless basis become FMV, then the holding period starts at date of gift.
What items increase and decrease AAA?
Increase to AAA Ordinary Business income Separately Stated Taxable Income and Gains Decreases to AAA Ordinary Business losses Separately Stated Losses and Deductions Nondeductible expenses Distributions
What items increase and decrease OAA?
Increase to OAA Tax exempt muni bond interest income Tax exempt life insurance proceeds? Decrease to OAA Nondeductible expense related to tax exempt interest. Nondeductible life insurance premiums Nondeductible federal taxes paid of accrued in a an S corp that related to C years
What is the difference between inside basis and outside basis?
Inside basis---> partnership Outside basis ----> ownership interest in the partnership
What are permeant book/tax differences? Name some temporary differences between financial (book) net income and taxable income.
Interest income from muni bonds life insurance on key emplo (non tax) DRD (tax only)
How is an LLC treated for federal income tax purposes?
LLC taxed as partnership, unless they want to be treated as corporation. a single-member LLC is treated as a sole proprietorship if the owner in an individual and is included in the corps taxable income if the owner is a c corp
What is the requirements for QSBS?
Less than 50 mill after august 10, 1993
What are the four limitations on the deductibility of a partnership loss to a partner?
Limits at entity level tax basis at risk Limits applied at individual tax return level passive activity loss excess business loss limit
Identify the disadvantages of filing a consolidated return.
Mandatory compliance with complex regulations Double counting on inventory can occur initial year Losses may be deferred Change tax year tax credit may be limited by operating loss
Name the types of corporate tax-free reorganizations.
Merger/consolidation stock for stock stock for assets division of corporation change in identiy
Which sources of income are included in personal holding company income?
Net Rent (less than 50% or ordinary income) I nterest (taxable) R oyalties D ividends
What is the tax treatment of a nonliquid ting distribution of partnership cash?
Non taxable. When reduced by cash distributed (but not below) Zero. If more than basis then recognize capital gain for cash distribution in excess of the partner's basis.
How does partnership nonrecourse debt affect general partners and limited partners basis in their partnership interest?
Nonrecourse debt is allocated to all partners based on their relative profit-sharing ratio
What are the key tax characteristics of a qualified corporate reorganization?
Nontaxable transaction Continuity Requirement Control Requirement 80%
What is an S corporation's other adjustment account (OAA)?
OAA is an account that is designed to keep a cumulative record of items that affect S corp S/H stock basis but do not affect AAA.
What is the tax treatment of guaranteed payments to a a partner?
Ordinary business expense guaranteed payment is a deduction on the partnership tax return Must be included as self-employment income on partners return.
What is the tax treatment of a partnership liquidating distribution consisting of multiple "hot assets" and cash only?
Partner Basis < you got = basis allocated to assets and is 0 Partner Basis > you got = loss and same basis
What is the default tax treatment for an LLC that has two members and has not elected to be taxed as a corporation?
Partnership
What is the formula for the fx tax credit limit?
Pre- credit tax on total T.I. X FX source income/Total taxable income
What is qualified nonrecourse financing?
QNF is a real estate mortgage obtained from an unrelated commercial lender. Only type of partnership nonrecourse debt included in partners at risk basis.
What items are separately stated on an S corp tax return?
Schedule K Items Rental Real estate income/loss portfolio income net section 1231 gain/loss charitable contribution section 179 expense deduction
What is Section 1244 Stock, and what is the tax treatment to the shareholder when section 1244 stock is sold or becomes worthless?
Section 1244 stock: Cash or property paid to the corporation By individual shareholder In exchange for the corporation's first 1 million of capital stock Tax treatment when original stock is sold or becomes worthless Ordinary loss up to 50000 Capital loss for any loss in excess of this amount.
In a liquidating distribution, what is the three-step process for allocating a partnership basis in the partnership interest if it is less that the partnerhsip basis in the assets distributed?
Step 1: Assign a basis to all assets equal to the partnership basis in the assets. Step 2: Adjust the basis of any assets in the last property category (other prop, hot prop) that have depreciated in value down to fair market value. Step 3: Allocate any basis remaining among all the assets in the last property category based on relative adjusted basis of the asset.
What is the tax treatment of stock dividends?
Stock dividends are generally not taxable unless the shareholder has a choice of receiving cash or other property it taxable, value of stock dividend is FMV on date of distribution. If nontaxable, basis of old stock is allocated among the old and new shares.
Describe the difference between a partner's tax basis and at-risk basis in partnership interests
Tax Basis Includes partners share of all partnership recourse and non recourse debt. At risk- includes partners share of recourse debt and qualified non recourse debt.
What are temporary book/tax differences? Name some temporary differences between financial (book) net income and taxable income.
Temp book/tax differences are income/expense items that are same over time but are recognized in different periods for financial (book) and taxable income. Examples: Deprecation Expense Gain/Loss on sale of depreciable assets Bad Debt Expense Business interest expense Charitable contributions Underearned rent/royalty income.
Under what circumstances will the courts not support the IRS making transfer pricing adjustments?
The courts will reverse the IRS's adjustment if the controlled taxpayer shows that the results of its transaction are within an arm's length range established by two or more uncontrolled comparable transactions based on a single pricing method.
When does a shareholder contributing property in exchange for corporate common stock have no gain or loss recognized?
The following two conditions must be met: Transfer/shareholders own at least 80% of the voting and nonvoting stock Boot (cash receipt of debt securities) or cancellation of debt is not involved.
How are charitable contributions treated by corporations?
The maximum deduction is up to 10% (25% in 2021) of taxable income before the following deductions, and any capital loss carryback.
What elements usually make up an apportionment factor used to apportion income to a state?
The percentage of corps property payroll and sales in state.
When is an S corporation exempt from a tax on built-in gains?
The sale of transfer does not occur within first five years S corp was never a C corp S corp can demonstrate the distributed asste was aquired after the S election S corp can demonstrate that the appreciate in the asset being sold occurred after the S election The total net unrealized bulit-in gain has been completly recognized in prior tax years.
What is the substantial presence test?
This is a test to find whether a foreign individual is taxed as a U.S. resident. A foreign individual is considered a resident of the United States if he or she is substantially present in the United States for at least 31 days during the current year and at least 183 days for a three-year period, applying a weighted average: -Days in current year x 1 -Days in immediate preceding year x (1/3) -Days in next preceding year x (1/6)
What is the purpose of the IRS making transfer pricing adjustments?
To assume that reported prices (as adjusted by the IRS) that one affiliate charged 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 ( arm's length)
What is the treatment of a single-member LLC for federal income tax purposes?
Treated as a sole proprietorship
When a partnership is terminated, what basis does the partner assume for distributed property?
Upon termination of a partnership, a partner's basis in the property distributed from the partnership is equaled to the partners basis in the partnership interest reduced by any money received. The holding period of the property includes the partnerships holding period.
When does an unrealized built-in gain result?
When a c-corporation elects s-corporation status and the FMV of corporate assets exceeds Adjusted Basis at election date
When does a partnership cease to exist, for tax purposes?
When ops are done when their are fewer that two partners
For corporations, are bad debts deductible?
for accrual method- deductible when actually written off for cash basis- not deductible
Describe the difference between a fx branch and fx sub.
fx branch- unincorporated fx entity that is viewed as an extension of the domestic corp. Not separte legal entity earnings genrally taxed by fx host.
Define a personal holding company.
must meet both -any time during the last half of the taxable year, more than 50% of the value of the corps outstanding stock is owned by 5 or less individuals and -at least 60% of the corporation's adjusted ordinary gross income consists of personal holding company income -penalty tax is 20% of undistributed personal holding company income
Describe the requirements for election of S corp status?
All S/H must consent is before march 15 then effective jan 1, yr 1 if after march 15 then effective jan 1, yr 2
What are the requirements to file a consolidated return?
All corps in a group: Must have been members of affiliated group at some time during year. Each ember must file a consent Common parent owns 80% of more of voting power and 80% of value of all outstanding stock of each corporation.
What tax year must an S corp adopt?
An S corp must adopt a calendar year unless a valid business purpose for a different tax year is established
What is a uncontrolled taxpayer?
Any one of two more taxpayers not owned or controlled directly or indirectly be the same interest.
What is a controlled taxpayer?
Any one of two or more taxpayers owned or controlled directly or indirectly by the same interests, and includes the taxpayer that owns or controls the other taxpayers
What is an uncontrolled transaction?
Any transaction between two or more taxpayers that are not members of the same group of controlled taxpayers.
What is a controlled transaction or a controlled transfer?
Any transaction or transfer between two or more members of the same group of controlled taxpayers.
Describe the tax basis limitation?
Applied at entity level and limits ability of S corp S/H to flow through losses to the individual tax return to extent of tax basis. Tax basis = S/H basis in stock + direct loan to S Corp Loss in excess of tax basis is suspended until tax basis in reinstated (increased) in future years; can be carried forward indefinitely
Describe at-risk limitation
At-risk amount is typically the same as tax basis but does not include contributions or direct loans to S corp where S/H took out a nonrecourse loans for those funds. Additionally loss in excess of at-risk amount in suspended until at-risk amount in reinstated in future years; carried forward indefinitely
What is the formula for a partner's basis in a partnership interest?
BASE Beg capital account Additions Subtractions Ending Capital account
What is the formula for a shareholder's basis in S corporation stock?
BB: contribution (cash, adjusted basis of property, FMV of services) + income gain items + Additional contributions - Distributions - Loss/deductions Ending Basis
What does BEAT stand for, and how is it applied?
BEAT stands for the base erosion and anti-abuse tax. It is a minimum tax on large U.S. Corps
Generally, what is the basis of common stock received by shareholders?
Basis of common stock received: Cash Property Services
Describe the limitation on the deduction of business interest expense.
Business interest Expense debt is limited to 30% of the adjusted basis Disallowed business interest expense can be carried forward indenfitly Limit does not apply if average gross receipts for prior three years is less than 27 million.
Describe the circumstances that will allow the taxpayer to avoid penalties with respect to IRS- imposed transfer pricing adjustments.
By the date the taxpayer files the return, the taxpayer has completed a "482 study", which establishes that the prices charged to affiliates were reasonable and compile with U.S. Treasury regulations.
What is a partnership Section 754 election?
Can be made after transfer or a partnership by sale of exchange or death of a partner. Allows for basis adjustment to make a partner's inside basis and outside basis equal.
Name some gain, losses, and deductions that are made to each member's taxable income to remove effects of transactions between members of a group when calculating consolidated taxable income.
Capital Gain and loss Section 1231 gain and loss Net Operating Loss (NOL) Charitable contributions deductions DRD
Identify the corporate tax treatment of gains /losses.
Capital gains and losses for the year are netted together. Net Capital gain: taxed at regular corporate tax rate. Net capital loss: Carry back three years; forward five years Can only offset net capital gains within carryback/carryforwad.
Identify the advantages of filing a consolidated return.
Capital losses of one corp offset capital gains of another corp. Operating Losses of one corp offset profits of another corp. A corps NOL carryover may be applied against the income of the consolidate group. Income from certain intercompany sales Certain tax deductions and credits may be better utilized when subject to the limitation of overall consolidated group. Dividends received are 100% eliminated in consolidation because they are intercompany dividends.
What is a partner's initial basis in a partnership interest?
Cash + property (nbv) -Liabilities (assumed by other partners) +services +liabilities -------- Final Basis
What is the partnership's basis in property contributed to the partnership?
Contributed property at NBV.
What is the tax treatment of a Corporation liquidation when corp sells the assets and dist cash to sh.
Corp recg G or L on sale of asset Sp (adjsuted basis) ----- taxable g/l SH recognize gain or loss for difference between cash and adjusted basis o stock. Cash (stock basis) --------- taxable g/l
What is the tax treatment of a Corporation liquidation when corp distributed the assets to share holder..
Corp recg G or L on sale of asset as if it is sold FMV of asset (adjsuted basis) ----- taxable g/l SH recognize gain or loss for difference between FMV and adjusted basis o stock. Cash (stock basis) --------- taxable g/l
What are the key differences between a corporate liquidation and corporate reorganization?
Corporate liquidation Business Activity complete ceases taxable tran for corp tax transaction for SH Corporate Regorg Business activity contains in a different form Nontaxable transaction for corp Nontaxable transaction for SH
State the holding period for a partner's partnership interest
Depends of property Capital of 1231 assets: includes holding period of asset contributed. Ordinary Income asset: holding period begins date property contributed to partnership
What are the ordering rules for allocation of cash distributions from a corporation?
Distribution are deemed to come from current E&P first and then from accumulated E&P. Any distr in excess of both current and accumulated E&P is tread as a nontaxable return of capital that reduces the shareholder basis in the stock.
What are the eligibility requirements for an S corporation election?
Domestic Corp One class of stock (can have different voting rights) Eligible S/H must be individuals (no resident alien), estates, or certain types of trusts One hundred limit
What is FDII?
FDII refers to Foreign-Derived Intangible Income. Which comes from transaction involving non-U.S> persons located outside the U.S.
What is the GILTI tax?
GILTI is a tax on global intangible low taxed income.
What is the formula for calculating a partner's gain or loss on the sale of partnership interest?
GR: partner has a capital gain/loss when transferring a partnership interest. Gain of loss realized = amount realized for the sale - Adjusted basis in the partnership interest. Any gain that represents a partner's share of hot assets is treated as ordinary income, rather than capital gain
How does partnership recourse debt affect general partners' and limited partners basis in their partnership interest?
A partner's basis in his or her partnership interest includes that partners' share of partnership liabilities. Recourse (unsecured debt) is only allocated to partners with personal liabilities for the debt. General partners are personally liable for partnership recourse debt. Limited partners are only personally liable for partnership debt if they personally guarantee debt.
When is a stock redemption treated as a sale of exchange?
A stock redemption is treated as a sale of exchange of stock by shareholders in the following situations: -Sub disproportionate redemption -Partial liquidation of stock -Complete redemption of stock owned -Redemption not essentially equivalent to dividend -Redemption to pay estate taxes
What is an S corporation's accumulated adjustments account (AAA)?
AAA is the accumulated earnings and profits (R.E.) during the years the corp is an S corp. Distributions may not reduced AAA below zero. However, AAA may be negative due to S crop loss and deductions.
How are partnership losses treated at the partner level?
A partner reports losses on the partner's income tax return to the extent the partner has basis. Partner loss in excess of the partners basis, and any loss not allowed on account of the "at risk" rules passive activity rules will carryforward indefinitely
Identify the three levels of the dividend-received deduction.
50% Less than 20% ownership 65% 20-80% 100% 80 +
What is the "arms length standard"?
A controlled transaction or controlled transfer meets the arm's length standard if the results of the transaction or the 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.
