Business Taxation

What must a corporation file to form it?

Articles of Incorporation

What is required to be filed for an LLC to be formed?

Certificate/Article of Organization

What must be filed for a partnership?

A partnership agreement, either formal or informal

What is a separate tax paying entity?

The business is treated as its own tax paying, responsible for its income taxes

What is a flow through entity?

The income passes to the owners who pay the taxes individually

What do C corps report income on?

Form 1120

What does a partnership report income on?

Form 1065

What does a sole proprietor report income on?

1040 Schedule C

What is an S corp?

It is basically a c corp but is taxed as a flow through entity. The income flows through to the owner and is claimed on their 1040.

Are S corp distribution subject to FICA tax? What is?

No, distributions are no subject to FICA to the extent of their basis. but the “reasonable salary” paid to owners is.

What forms are required to file as an s-corp?

1120-S, K-1, and W-2

What is an owners basis in a business?

The running total of how much the owner has invested in the business. It represents the owner’s true financial stake

Do corporations adjust owners basis due to corporate income or distributions?

No, income is taxed at the corporate level. Shareholders are taxed when dividends are distributed but it does not reduce their basis

Why is the basis adjusted for an S-corp?

The S-corp itself pays no taxes so when it earns income, the owners pay taxes on their share. Because they paid tax on that income, the IRS treats it as if the owner “reinvested” that amount into the business.

So Allocated income → increases basis

What is a distribution?

A distribution is simply the business giving the owner cash. Since the owner already paid tax on the income, distributions are usually nontaxable return of capital and reduces the basis

What is the qualified business income deduction? (QBI)

It is a federal tax deduction that lets many small‑business owners deduct up to 20% of their qualified business income from their taxable income

What kind of deduction is QBI?

It is a FROM AGI deduction and can be taken even if standard deduction is taken

What reduces the net income when applied to QBI?

• self‑employment tax deduction

• self‑employed health insurance deduction

• self‑employed retirement plan contributions.

How does a taxpayers taxable income affect QBI?

The deduction cannot exceed 20% of taxable income that is taxed at ordinary rates.

Capital gains and qualified dividends are taxed at preferential rates, so they are excluded from this taxable‑income limit.

What is a SSTB

It is any business that performs services in certain professional fields where the business’s main asset is the skill or reputation of its owners or employees.

What are examples of SSTB?

health, law, accounting, consulting, athletics, financial services, investing, and performing arts.

How does the SSTB affect the deduction?

If your business is an SSTB:

Below the income threshold → You get the full 20% QBI deduction.

• Within the phase‑in range → You get a partial deduction.

• Above the upper limit → You get no QBI deduction at all.

What is the De Minimis rule?

If your business has both SSTB and non‑SSTB activities, the IRS allows a “de minimis” exception:

• If gross receipts ≤ $25M → SSTB portion must be <10%

• If gross receipts > $25M → SSTB portion must be <5%

If you stay under these percentages, the business is not treated as an SSTB.

What is the wage-based limitation?

an additional cap on the QBI deduction that applies only to higher‑income taxpayers.

How does the wage-based limitation work?

Once a taxpayer’s taxable income exceeds a certain amount, the QBI deduction becomes limited to the greater of:

(1) 50% of the W‑2 wages paid by the business

(2) 25% of those W‑2 wages plus 2.5% of the unadjusted basis of qualified property used in the business (generally depreciable property)

What are Charitable contribution limit modified taxable income

taxable income that the IRS uses only to calculate how much of a corporation’s charitable contributions it is allowed to deduct. It is a temporary, adjusted number.

What is Net Investment Income Tax?

It is an extra 3.8 tax on

• interest

• dividends

• capital gains

• passive business income

• etc

It does not apply to wages or income.

Who pays NIIT?

Taxpayers are ho have an AGI over 200,000 for MFJ, 125,000 for all other types

How is NIIT calculated?

3.8% on the lesser of

1. net investment income

2. The MAGI above the threshold

What is MAGI for NIIT? How is it calculated?

AGI + Foreign earned income exclusion

How is goodwill treated for book purposes? Is it amortized or deductible or impairment?

There’s is no amortization, the only expense is if it is impaired (the value drops)

How is goodwill treated for tax purposes?

Goodwill is amortized over 15 years (180 months) and there is no impairment deduction.

How if FIT treated for book purposes?

It is reported on the income statement

How is FIT treated for tax purposes?

It is not deductible

What type of book tax difference is that? Why?

An unfavorable permanent difference

Tax law NEVER allows a deduction for FIT

How is capital gains treated for book purposes?

All capital gains and losses are recognized immediately

How is capital gains treated for tax purposes?

What is the carry forward and carry back rules?

Capital losses are only deductible against capital gains.

Carryback is 3 years, carry forward is 5 years

Can you deduct a net capital loss in the year it occurs?

No

What type of book-tax difference does this create?

An unfavorable temporary difference in loss year

How are NOLs treated for book purposes? What is the carry forward rules?

Losses are reported immediately and create a deffered tax asset.

Losses cannot be carried forward

How are NOLs treated for tax purposes? What is the carry forward rules?

NOLs can offset up to 80% of future taxable income

carryforward is indefinite

What is the book-tax difference in the loss year and the future profitable years?

There is not difference in the loss year but temporary favorable difference in future profitable years.

What is an NSO? Is it qualified or non qualified?

An NSO gives employees the right to buy stock at a fixed exercise price. It is nonqualified.

How are NSOs treated for book purposes?

The fair value is used at grant date and the expense is recognized over the vesting period. No adjustment when it is exercised (redeemed) or for an actual tax deduction

How are NSOs treated for tax purposes?

Tax ignores grant date and vesting. The deduction only occurs at exercise.

How is the deduction calculated?

(FMV at exercise- Exercise price) x shares

What kind of book tax difference does this make?

Both:

Temporary differences occur when book expense is recognized during vesting and the tax deduction at exercise

Permanent differences occur when total book expense does not equal total tax deduction.

When a corporation distributes property to a shareholder, what is the gain/loss recognized and the reduction in E&P?

E&P gets reduced by the FMV of the property distributed

When a shareholder receives boot in a 351 property transfer, how is the tax basis calculated?

Cash contributed

+Adjusted tax basis of other property contributed

+ Gain recognized on the transfer

-FMV of boot

-liabilities assumed by the corporation

How is the corporation tax basis in property transferred calculated?

Carryover tax basis from transferor

+Boot given

+Liabilities exceeding basis