Business Entities
Which of the of following entities are not considered flow-through entities?
- Sole Proprietorship
- Partnership
- LLC
- S Corp
- C Corp
C Corp is the only one that is not a flow-through entity.
GLD, LLC provides consulting services and was formed in 2005. If GLD averages $32,000,000 in annual gross receipts over the last three years, what accounting method can GLD use for the current year?
only Accrual
In what order are the loss limitations applied for partnerships?
(for S Corps?)
tax basis, at-risk basis, passive activity loss, excess business loss
(remember, you can only take passive loss against passive income; s corps are the same but the tax basis is split between stock basis and debt basis)
What if Ginger, Taylor, and Josh recruit 97 US residents to become shareholders of GLD. Meanwhile, Ginger gave several of her GLD shares to her father-in-law and his spouse as a wedding gift, and to her first cousin as an MBA graduation gift. After the transfer, according to S Corporation shareholder limit rules how many shareholders does GLD Incorporated have?
97
You sell 25% of your interest is GLD S Corp to me on January 15th. If the S Corp made $10,000 January 1st through 15th and $365,000 for the entire year, how much income would you recognize under the daily allocation method?
(also know the specific identification method)
$365,000 / 365 days = $1,000/day
$1,000/day * 15 days = $15,000
$15,000 * 25% ownership = $3,750
(under specific identification it would be $10,000 * 25% = $2,500)
What's the maximum number of shareholders an each entity have?
- sole proprietor
- partnership
- S Corp
- C Corp
1
no limit
100
no limit
For the year, GLD (a C Corp) reported taxable income of $200,000. At the end of the year, GLD distributes all of its after-tax earnings to Ginger, GLD's sole owner. Ginger's marginal tax rate is 37% and her marginal tax rate on dividends is 23.8%. What is the overall tax rate on GLD's pretax income?
200,000 * 21% = 42,000 corporate taxes
200,000 - 42,000 = 158,000 dividend to Ginger
158,000 * 23.8% = 37,604 Ginger's taxes
37,604 + 42,000 = 79,604 total taxes paid
79,604 / 200,000 = 39.8%
Ginger and Brian from BRD general partnership. Ginger contributes $10,000 of cash and land with a FMV of $50,000. Her basis in the land is $15,000. Brian contributes $25,000 cash. How much gain must BRD general partnership recognize on the transfer of assets?
Nothing. Partnerships do not recognize gain - their basis in the property will be the contributing partner's basis.
Suppose in 2023 Ginger formed GLD as a C corporation (calendar tax year) with Brian, Taylor, and JT Inc (a C corp shareholder) as shareholders. On January 5, 2024, JT Inc sold all its shares to Joshua. On January 31, 2024, CCS filed for S corp status. When is the earliest effective date of the S Election?
What if they terminate their S Corp Status April 1st of 2025, what is the effective date?
What will be the earliest they can re-elect S Corp status (under normal circumstances)?
(Would anything change if they terminated their S Corp status on March 1st instead?)
January 1, 2025 b/c JT Inc was not a qualified owner for S Corp status
It was done after 2.5 months from year-end so Jan 1, 2026
Jan 1, 2031 (5th year after it has become effective)
(it would then go into effect Jan 1, 2025 and could be re-elected Jan 1, 2030)
What is the main difference between temporary and permanent book-tax differences?
What form does each entity file?
- Sole Proprietor
- Partnership
- S Corp
- C Corp
Schedule C (Form 1040)
Form 1065
Form 1120-S
Form 1120
You have a net capital loss of 2024 of $10,000. Last year, you had a net capital gain of $3,000. In 2025, you had a net capital gain of $2,500. What is the amount and nature of your book-tax difference in 2025?
$2,500 Favorable
traditional jeopardy style question....limited partners, a partner in a property rental company, and LLC members not involved with the daily management of an LLC are all examples of what?
Who are people who are not material participants in the organization.
You are a shareholder in an S Corp with no Earnings and Profits. Your basis in the S Corp is $10,000 and you were allocated $2,500 in ordinary income this year. How much capital gain do you recognize on a $16,000 distribution?
10,000 + 2,500 - 16,000 = $3,500 in long-term capital gain
Why do we adjust a partner's basis?
To make sure tax-exempt income is not taxed
To maker sure nondeductible expenses are never deducted
To prevent double taxation - when partners sell their interest or when distributions are made.
When are tax returns due for:
- Partnerships
- S Corps
- C Corps
March 15th
March 15th
April 15th
Last year there was an unfavorable book-tax difference; this year it is favorable (temporary in both years).
You started with $10,000 in partnership interest. The current year K-1 reflects a $4,000 cash contribution, long-term capital gains of $500, qualified dividends of $1,000, ordinary loss of $3,000, $200 in non-deductible expenses, and a reduction of $900 in your share of partnership debt. What is your adjusted basis in the partnership?
What if your ordinary loss was $15,000?
10,000 + 4,000 + 500 + 1,000 - 3,000 - 200 - 900 = $11,400
under second scenario, basis would be $0
You are a shareholder in an S Corp with no Earnings and Profits. Your basis in the S Corp is $20,000 and you were allocated $2,500 in ordinary income this year. You receive a $16,000 distribution. What is your new basis after all of these transactions?
20,000 + 2,500 - 16,000 = $6,500
Distributions from an S Corp that used to be a C Corp are paid out in what order?
the AAA account, E&P, then shareholder's remaining stock basis.
Can the following entities pay their owners compensation?
- Sole proprietorship
- Partnership
- S Corp
- C Corp
Sole proprietorships do not pay their owners. Partnerships can pay their owners guaranteed payments. S Corps and C Corps can both pay their employees salary.
BRD Corp own 40% of GLD Corp and receives a $25,000 dividend from GLD Corp. Before the dividend, GLD had $100,000 in taxable income. What amount is BRD Corp's dividend received deduction?
25,000 * 65% = $16,250
(because BRD owns more than 20% and less than 80%)
How do the following items impact a partner's basis and in what order would you apply them?
Cash contributions
Cash distributions
Decrease in partnership debt
Partner's share of ordinary income and separately stated income items
Partner's share of ordinary loss and separately stated expense/loss items
partner's share of tax-exempt income
Increased by cash contributions
Increased by ordinary/separately stated items
Increased by partner's share of tax-exempt income
Decreased by partnership debt
Decreased by distributions
Decreased by ordinary/separately stated loss items
Your stock and debt basis are both $0. You previously lent your S crop $10,000. You have a suspended loss of $2,500. This year you contributed $6,000 and the S Corp made $12,000. You own 40% of the company. How much net income or loss do you report this year?
What if the company had a $12,000 loss this year, how much could you take?
Your contribution raised your debt basis to $6,000.
Your share of the profits (12,000 * 40% = 4,800) increases your debt basis to 10,000 and your stock basis to $800.
You recognized 4,800 of income but can reduce it by $2,500 of suspended losses for a total of $2,300. (stock basis would then be reduced to 0 and debt basis 8,300 (10,000-1,700)
If the company lost $12,000 this year, then your share would be $4,800. Your debt basis would be $6,000. You would take all $4,800 loss plus $1,200 suspended loss for a total of $6,000 loss. Basis would be zero.
Taylor and Josh are equal partners and start a tennis camp but realize they need more tennis experts. They bring in Femke for a one-third capital interest in the partnership. If the Partnership's capital equals $90,000 when Femke receives her 1/3 capital interest, what is the tax consequence for Taylor, Josh, and Femke?
Taylor and Josh would both get an ordinary deduction of $15,000. Femke would recognize ordinary income of $30,000.