Becker REG 3

Corporations, Partnerships, and Tax-exempt Organziations

Describe the limitation on the deduction of business interest expense.

• Limited to the sum of:

  • Business Interest Income

  • 30% of ATI (Business income - interest income and expenses)

  • Floor plan financing interest expense

• Disallowed can be carried forward indefinitely.

• Limit does not apply if average gross receipts are $31M or less for prior 3 taxable years

How are charitable contributions treated by corporations?

• Maximum deduction is up to 10% of taxable income before the following deductions:

  • Charitable contribution

  • Dividends-received deduction

  • Any capital loss carryback

When are life insurance premiums paid by a corporation deductible?

Policies on key employees are not deductible by the corporation when the corporations is directly or indirectly the beneficiary.

What are the three levels for the dividends received deductions?

1. Less than 20% ownership - 50% of dividends received are deducted from taxable income, up to a limit of 50% of taxable income

2. 20%-80% ownership - 65% of dividends received are deducted from taxable income, up to a limit of 65% of taxable income

3. 80% or more (affiliates) - 100%

What is the maximum amount that a corporation can deduct for organizational costs and start-up costs in the tax year the costs are incurred?

• Immediately expense $5,000 or each

• Phased out dollar-for-dollar exceeding $50k

• Costs in excess are amortized SL over 15 years (180 months) beginning the month the business starts

What is the accumulated earnings tax rate? What is the personal holding company tax rate?

1. 20% of the unreasonable accumulated earnings

2. 20% of the undistributed net personal holding company income

What is reasonable accumulated earnings for corporations and personal service corporations?

Corporations - $250,000

Personal Service Corporations - $150,000

What is a personal holding company?

Must meet both of the following requirements:

1. At any time during the last half of the taxable year, more than 50% of the value of the corporatins outstanding stock is owned by 5 or fewer individuals; and

2. At least 60% of the corporations AGI consists of personal holding company income

What are the sources of personal holding company income?

• “NIRD”

  • Net rent (if less than 50% of ordinary gross income)

  • Interest (taxable)

  • Royalties (other than mineral, oil, gas, or copyrights)

  • Dividends from unrelated domestic corporations

What is the corporate tax treatment of capital gains/losses?

• Net together with no distinction between short and long term

  • Net capital gain: taxed at corporate tax rate

  • Net capital loss: CF 3 years, CB 5 years

What are the requirements for election of S Corporation status?

ALL shareholders must consent

• Election filed by 3/15 Year 1: Effective January Y1

• Election filed AFTER 3/15 Year 1: Effective January Y2

How can S Corporation status be terminated?

1. Holders of a majority of the stock consent to a voluntary termination.

2. Corporation fails to meet any or all eligibility requirements.

3. More than 25% of the corporations gross receipts come from passive activities for 3 consecutive years and the corporation had C corporation earnings and profits at the end of each year.

What items are separately stated on Sch. K of the S corporation tax return?

• Rental real estate income/loss

• Portfolio income (interest, dividends, royalties, all capital gains/losses)

• Net Section 1231 gain/loss

• Charitable contributions

• Section 179 expense deduction

What is the formula for a shareholder’s basis in S Corporation stock?

Initial stock basis (contributions)

+Additional contributions

+Income/gain items (includes tax-exempt income)

-Distributions to shareholders

-Nondeductible expenses

-Loss/deduction items

What is a S Corporation shareholder’s tax basis?

= shareholder’s basis in stock + direct loans to the S Corporation

What is an S Corporation’s AAA?

• The retained earnings during the years the corporation is an S Corp.

• Distributions may not reduce AAA below 0, however AAA may be negative due to S corporations losses and deductions.

What items increase and decrease AAA?

Increase:

• Ordinary business income

• Separately state taxable income and gains

Decrease:

• Ordinary business losses

• Separately state losses and deductions

• Nondeductible expenses (but NOT tax-exempt)

• Distributions (may not reduce AAA below 0)

How are partnership income and losses reported?

1. Ordinary business income or loss

2. Guaranteed payments to partners

3. Net rental real estate income or loss

4. Interest income

5. Dividend income

6. Capital gains and losses

7. Net Section 1231 gain or loss

8. Charitable contributions

9. Section 179 expense deduction

10. Investment interest expense

11. Partner’s health insurance premiums

12. Retirement plan contributions for partners

13. Tax credits

What is the default tax treatment for an LLC that has two members and has not elected to be taxed as a corporation?

a partnership

What are the four categories of Section 501©(3) tax-exempt organizations that are classified as public charities, rather than Section 509 private charities?

1. Churches, schools, colleges, universities, and hospitals or qualified medical research organizations that are publicly supported

2. Other broadly based, publicly supported organizations with limited investment income and unrelated business income

3. Not-for-profit organization that support public charities

4. Organizations that test products for public safety

Organizations must be organized and operated for what exempt purposes to qualify as Section 501©(3) tax exempt organizations?

• Religious

• Charitable

• Scientific

• Public safety testing

• Literary

• Educational

• Fostering national or international amateur sports competitions

• Prevention of cruelty to children or animals

What elements usually make up an apportionment factor used to apportion income to a state?

The percentage of the corporation’s property, payroll, and sales in the state