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Which of the following conditions will prevent a corporation from qualifying as an S corporation?
Eligibility requirements for S corps include limitations on who may be a shareholder (such as individuals, estates, trusts, and charitable organizations); the number of shareholders (no more than 100); and only one class of common stock (preferred stock is not permitted). However, differences in common stock voting rights are allowed.
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A company terminated its S corporation status for the current tax year. When can the company reelect S status?
Once an S corporation has elected to terminate its status, the corporation must wait until the beginning of the fifth year after the year of termination before it can reelect S status.
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Assuming all other requirements are met, a corporation may elect to be treated as an S corporation under the Internal Revenue Code if it has:
Election for S corporation status requires the agreement of all voting and nonvoting shareholders. Additionally, eligibility for election to S status is the same as eligibility for S corporations themselves: only certain persons may be a shareholder (such as individuals, estates, trusts, and charitable organizations – corporations and partnerships are not allowed); there may no more than 100 shareholders; and there may be only one class of common stock (preferred stock is not permitted).
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The tax on built-in gains is a corporate level tax on S corps that dispose of assets that:
An S corp may have to pay a corporate level built in gains tax when it disposes of assets that were appreciated in value at the time the company converted from a C corp to an S corp.
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If an S corporation has no accumulated earnings and profits, the amount distributed to a shareholder:
If an S corporation has no accumulated earnings and profits, the amount distributed to a stockholder decreases the basis for the stock. The distribution is nontaxable to the extent of the shareholder’s basis.
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A corporation may elect to be treated as an S corporation under the IRC if:
Of the following, only having 100 or fewer shareholders would allow the corporation to elect an S corp election. The other criteria negate this.
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Anne and Bart formed AB, LLC, a limited liability company, and elected to treat it as a partnership for tax purposes. Anne contributed $10,000 cash, and Bart contributed $5,000 cash, but Bart had a special skill that the partnership needed to be successful. The partnership agreement stated that Anne and Bart would both have a 50% interest in the LLC and that all profits and losses would be divided evenly between them. The LLC paid Bart $5,000 in year 1 for Bart's services to the partnership. The $5,000 would generally be reported to Bart as which of the following?
When a capital interest is acquired for services provided to a partnership, the interest is treated as ordinary income to the partner. Ordinary income to a partner is classified as guaranteed payments.
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A partner sold a 25% interest in a partnership for $400,000 cash plus assumption of the partner's share of the partnership liabilities. The following additional information relates to the partnership activities:
How much gain is recognized by the partner upon the sale of the partnership interest?
To determine the gain on the sale of the interest, the partner’s basis in the interest must first be determined:
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Taryn, Rose, and Summer are equal partners in TRS partnership. Taryn contributed land with an adjusted basis of $20,000 and a fair market value (FMV) of $50,000. Rose contributed equipment with an adjusted basis of $40,000 and an FMV of $50,000. Summer provided services worth $50,000. What amount of income is recognized as a result of the transfers?
In formation of a partnership, the only two instances in which a gain (income) is recognized is when a partner contributes services in exchange for capital interest, or when property contributed is subject to a liability in excess of the property’s adjusted basis. Here, Summer provided services and so would recognize $50,000 of income. The other two partners would recognize no gain on their contribution of property.
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Payments from a partnership to a partner for services or the use of capital without regard to partnership income are:
Guaranteed payments are essentially salary payments to a partner in the practice, however, they are treated differently as it is a payment to an owner of the entity.
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In the absence of an election to adopt an annual accounting period, the required tax year for a partnership is:
In the absence of election to adopt an annual accounting period, the required tax year for a partnership is the tax year of one or more partners who have more than 50% interest in aggregate of profits and capital, per the majority interest rule
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Andrew contributed the following assets to a partnership in exchange for a 50% interest in the partnership’s capital and profits: Cash of $50,000, Equipment with a FMV of $35,000 and Carrying amount of $25,000. Andrew’s basis in the partnership is:
The basis of the partner’s interest in the partnership is calculated as $50,000 + $25,000 = $75,000.
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A partner’s basis in a partnership will increase by his or her share of liabilities assumed by the partnership.
This statement is true and has no correlation with the TCJA or any other tax reform.
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Strom acquired a 25% interest in Ace Partnership by contributing land having an adjusted basis of $16,000 and a fair market value of $50,000. The land was subject to a $24,000 mortgage, which was assumed by Ace. No other liabilities existed at the time of the contribution. What was Strom's basis in Ace?
Since Strom contributed property subject to a liability, where the value of the liability exceeded the property, Strom begins with a negative basis of $(8,000). Strom’s partnership basis is increased by the assumption of the 25% share of the liability (=$6,000), bringing Strom’s basis up to $(2,000). Since a negative basis is not possible, Strom would have to recognize a gain to bring the partnership basis up to zero.
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Lemon owned 2,000 shares of Spectrol Corp. common stock that were purchased in year 1 at $10.50 per share. In year 4, Lemon received a 5% non-taxable dividend of Spectrol common stock. In year 5, the stock split 2-for-1. In the current year Lemon sold 800 shares. What is Lemon's basis in the 800 shares of stock sold?
The original basis in the stock was $21,000 (2,000 shares at $10.50/share). The stock dividend of 5% increased the number of shares by 100 (2,000 * 5%), bringing the total shares to 2,100, while the basis remained the same ($21,000) and consequently the per share value decreased to $10/share. The stock split doubled the number of shares from 2,100 to 4,200, but the basis remained the same and the per share value was halved (from $10/share to $5/share). As a result, the 800 shares sold had a basis of $4,000 (800 shares * $5/share).
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Mark and Mary formed MM, Inc. as an S corporation. Each contributed $50,000 in exchange for five shares of corporate stock. In addition, MM obtained a $60,000 loan from a local bank that was still outstanding at the end of the year. In MM's first year of operation, it reported a loss of $20,000 and did not make any distributions to the shareholders. What is Mark's basis in his MM shares at the beginning of the second year?
Mark began with a basis of $50,000, which was decreased by his 50% share of the operating loss of $20,000. As a result, his basis was $40,000 at the beginning of the second year. For S corporations, unlike partnerships, liabilities assumed by the corporation do not increase shareholders’ basis in the organization.
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Steve received a one third interest in a partnership by contributing $3,000 in cash, stock with FMV of $5,000 and a basis of $2,000, and a new computer that cost Steve $2,500. Of the following, which amount represents Steve’s basis in the partnership?
Steve’s basis in the partnership is calculated as $3,000 cash + $2,000 stock basis + $2,500 computer basis.
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Gary is a 50% partner in ABC Partnership. Gary’s basis in ABC at the beginning of the year was $5,000. ABC made not distributions to the partners during the year and recorded the following items: $20,000 ordinary income, $8,000 tax exempt income, and $4,000 portfolio income. What is Gary’s tax basis in ABC at the end. Of the year?
A partner’s basis is increased by the partner’s share of partnership ordinary income, separately stated income, and tax exempt income. $5,000 + 50% * ($20,000 + $8,000 + $4,000) = $21,000
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Two individuals are planning to start a business and need advice on selecting the appropriate form of entity. Their long-term business plan contemplates receiving future in-kind property distributions. Which of the following is a pair of business entities each of which can make a distribution of appreciation property to its owners that would not be taxable to the business entity or to its owners?
Property distributions by C corporations that are the result of earnings and profits are treated as taxable distributions to shareholders (as dividends), while distributions by S corporations may be taxable if the basis of the property is in excess of a shareholder’s basis or if the S corporation had undistributed prior C corporation earnings. Only in general partnerships, LLCs, or LLPs would a nonliquidating property distribution not be taxable.
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Partner A’s basis in partnership ABC is $5,000 at the beginning of the year. During the year, Partner A received a nonliquidating distribution of $3,000 cash and property with an adjusted basis of $4,000 and fair market value of $5,000. What was Partner A’s basis in the property received?
For nonliquidating distributions, the basis of the cash and property received cannot exceed the partner’s basis in the partnership, unless cash alone exceeds the partner’s basis. Cash is considered first in reducing the partner’s basis, which would lower the partner’s basis from $5,000 to $2,000. Then, if the partner’s basis is less than the NBV of the property received, the basis in the property is equal to the partner’s remaining basis, bringing the partner’s basis in the entity to zero.
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