3
Q
How do you determine a shareholder’s basis in a corporation when transferring property?
A
Add the adjusted basis of transferred property to any recognized gain, subtract any boot received to find the shareholder’s basis.
If shareholders possess 80% control post-transfer, no taxable event occurs; gains are acknowledged if liabilities surpass the basis.
4
Q
What is the formula for calculating a transferor’s basis in a corporate interest?
A
Transferor’s basis plus recognized gain equals the basis, or subtract the adjusted property basis from the FMV of the corporate interest to determine gain.
5
Q
Which basis do shareholders and corporations apply to property transactions?
A
Both utilize the adjusted basis instead of the fair market value (FMV).
6
Q
How does a corporation handle gains and losses from its own stock transactions?
A
Corporations neither recognize gains nor losses from transactions involving their own stock, including Treasury Stock. No gain/loss occurs when exchanging stock for property.
7
Q
What happens to losses from selling to a corporation when owning 50% or more in a C-Corporation?
A
Losses from such sales are disallowed.
8
Q
How are capital losses treated in a C-Corporation?
A
Capital losses are only deductible against capital gains.
9
Q
At what rate are net short-term capital gains taxed in a C-Corporation?
A
They are taxed at ordinary income rates.
10
Q
How are corporate Net Operating Losses (NOLs) managed under TCJA?
A
Corporations cannot carry back NOLs but can carry them forward indefinitely, with an 80% limit on taxable income.
11
Q
List the criteria for maintaining S-Corporation status.
A
- Only individuals, estates, and trusts as shareholders
- Domestic entities only
- Maximum of 100 shareholders
- Single class of stock
- Must use a calendar tax year
12
Q
What is the process for electing S-Corporation status?
A
The election must be filed by March 15 to be effective for the year, requiring unanimous shareholder consent.
13
Q
How can an S-Corporation election be terminated?
A
- Requires 50% shareholder consent
- Prohibited from re-electing for 5 years
- Termination effective immediately after the terminating act
14
Q
Which items are excluded from an S-Corporation’s ordinary income calculation?
A
- Foreign taxes paid
- Investment interest expense
- Section 179 deduction
- 1231 gains or losses
- Charitable contributions
- Portfolio income (e.g., dividends, interest)
15
Q
How is the shareholder basis in an S-Corporation computed?
A
Beginning basis
+ Share of income items (including non-taxable income)
- Distributions (cash or property)
- Non-deductible expenses
- Ordinary losses (not below zero)
= Ending basis
16
Q
What is the formula for calculating an S-Corporation’s Built-in Gains Tax?
A
FMV of assets at the election date
- Adjusted basis of assets
= Built-in gain
x 21% corporate tax rate
17
Q
Identify the basic features of a complex trust.
A
- Optional income distributions
- Income accumulation allowed
- Charitable contributions permitted
- Tax-exempt income contributions not deductible
- $100 personal exemption
Key Point: Distribution of trust corpus (principal) is permitted.
18
Q
Describe the main characteristics of a simple trust.
A
- Mandatory income distributions
- Income accumulation not allowed
- No charitable contributions
- Distribution of trust corpus disallowed
- $300 personal exemption
19
Q
How are Net Operating Losses (NOLs) treated in a trust?
A
Trusts can incur NOLs, which pass through to beneficiaries if unused.
20
Q
What is the rule for deducting expenses and fees related to tax-exempt income in a trust?
A
Such expenses and fees are not deductible for both complex and simple trusts.
21
Q
True or False: Are partnerships considered a taxable entity?
A
FALSE
Income and expenses flow through to partners, taxed via Form K-1.
22
Q
How is gain or loss treated when property is exchanged for a partnership stake?
A
No gain or loss is recognized in this exchange, making it a non-taxable event.
23
Q
What determines a partner’s initial basis in partnership assets?
A
The starting basis is the same as the basis of the property contributed or exchanged for the partnership interest.
24
Q
How are services exchanged for a partnership interest viewed for tax purposes?
A
This is a taxable event. It’s treated like compensation for services, and the taxable income is the fair market value of the partnership interest received.
25
Q
What is the basis in a partnership interest when services are provided in exchange?
A
The basis is equal to the value of the taxable service revenue provided by the service provider.
26
Q
What is the holding period for an asset contributed to a partnership?
A
The partnership inherits the holding period of the contributed asset, except for inventory, where it starts anew upon contribution.
27
How are startup costs treated for a partnership in terms of tax?
Startup costs are treated like those of an individual, but syndication fees cannot be deducted or amortized.
28
List the deductions taken from gross revenues to calculate partnership income.
- COGS
- Wages (excluding partners)
- Guaranteed payments to partners
- Business bad debt (accrual basis)
- Interest paid
- Depreciation (excluding section 179)
- Amortization (e.g., startup costs, goodwill)
29
What is the rule for taking partnership losses on an individual's tax return?
Losses cannot be claimed beyond a partner's basis. Any excess is carried forward until additional basis is available.
30
When are guaranteed payments to partners included in taxable income?
They are included in the partner's taxable income in the year the partnership's fiscal year **ends**.
31
How are benefits paid by a partnership for a partner treated?
Benefits like health and life insurance are treated as **guaranteed payments** and are included as self-employment income.
32
How do you calculate net self-employment income from a partnership?
Partner's share of ordinary income from K-1
**+** Guaranteed payments
**-** Partner's share of section 179 expense from K-1
**=** Self-employment income (subject to SE tax)
33
What determines a partner's basis in partnership property when purchased?
The basis is the purchase price minus any liabilities incurred. For gifts, apply gift basis rules.
34
Which items are not deductible on Schedule K of form 1065?
Mnemonic: **IFC179**
- Foreign tax paid
- Investment interest expense
- Section 179 expense
- Charitable contributions
35
Which items are excluded from income on Schedule K of form 1065?
Mnemonic: **PP1231**
- Passive Income
- Portfolio Income
- 1231 Gain or Loss
36
How is adjusted partnership basis determined?
Beginning basis
**+** Capital contributions
**+** Share of ordinary income
**+** Capital gains
**+** Tax-exempt income
**=** Ending basis
37
What factors reduce partnership basis?
- Money distributions
- Adjusted property basis distributed
- Share of ordinary losses
- Relief from liabilities (considered a distribution)
38
What factors increase a partner's basis in a partnership?
- Partnership loans
- Capital contributions
- Ordinary income
- Capital gains
- Tax-exempt income
39
How do liabilities impact a partner's basis when incurred or relieved?
Incurred liabilities **increase** basis, while relieved liabilities **decrease** basis.
40
Do guaranteed payments affect a partner's basis directly?
They do **not** directly affect basis; they are part of ordinary income, which impacts basis.
41
In what sequence is a partner's basis adjusted?
1. Increase basis (including tax-exempt income)
2. Distributions
3. Losses (limited to basis)
42
How is a partnership's fiscal year chosen?
The fiscal year must align with the tax year of partners holding over 50% interest, and once chosen, it should be consistent for three years.
43
What happens to the partnership's fiscal year when a partner dies?
The fiscal year closes solely for the deceased partner's share and interest in the partnership.
44
What revenue condition allows a partnership to use cash basis accounting?
A partnership can adopt cash basis accounting if its average revenue over three years is under $25 million.
45
Under what circumstances does a partnership cease to exist?
A partnership ends when it has fewer than two partners (only one remaining) or when business operations stop.
46
How do you calculate gain or loss from selling a partnership interest?
Gain or Loss = Amount Realized - Basis in Partnership Interest
47
What determines the new basis for a purchased partnership interest?
New Basis = Capital Account + Assumed Liabilities
48
How is the sale of non-capital partnership assets categorized?
Such sales are recognized as ordinary gain or loss, including items like unrealized receivables and appreciated inventory.
49
How is a partner's portion of an ordinary gain determined?
Ordinary Gain = (FMV of Assets - Adjusted Basis of Assets) x Partner's Percentage Interest
## Footnote
No gain or loss is recognized by a partnership upon property distribution.
50
List the sequence of basis reductions for partnership distributions.
- Cash distributed
- Adjusted basis of unrealized receivables and inventory
- Adjusted basis of other property
## Footnote
Cash distributions can trigger a gain in partnership distributions.
51
When can a partnership distribution result in a loss?
A loss can only occur during a liquidating distribution.
52
What must happen for a gain to be recognized in a partnership liquidating distribution?
- Distribution of cash
- Distribution of unrealized receivables
- Distribution of appreciated inventories
## Footnote
*No loss is recognized otherwise.*
53
When is the deadline for filing a Partnership Return for a calendar year-end?
The return is due by March 15, with an option for a six-month extension.
54
What is the carryforward period for net operating losses (NOLs)?
Net operating losses can be carried forward indefinitely.
## Footnote
Under the Tax Cuts and Jobs Act (TCJA) of 2017, NOLs arising in tax years ending after December 31, 2017, can be carried forward indefinitely but are limited to offsetting 80% of taxable income in future years.
55
# Fill in the blank:
Capital losses are first used to offset \_\_\_\_\_\_.
Capital gains.
## Footnote
Capital losses must first offset capital gains. If capital losses exceed capital gains, up to $3,000 ($1,500 if married filing separately) of the excess loss can be deducted against other income.
56
# True or False:
Net operating losses can be carried back to previous tax years.
False.
## Footnote
The TCJA eliminated the carryback of NOLs for most taxpayers, except for certain farming losses and insurance companies other than life insurance companies. Prior to this change, NOLs could typically be carried back two years.
57
What are the rules for using capital loss carryovers?
* Capital losses offset capital gains first.
* Up to $3,000 ($1,500 if married filing separately) can offset ordinary income annually.
* Excess losses are carried forward to future tax years indefinitely.
## Footnote
Capital loss carryovers can be used to offset future gains and a limited amount of ordinary income. The carryover is useful for taxpayers with significant capital losses that exceed their current year's capital gains.
58
What is a dividend?
A payment made by a corporation to its shareholders, usually in the form of cash or additional shares.
## Footnote
Dividends are typically declared by a company's board of directors and can be issued quarterly, yearly, or at other intervals. They are a way for companies to distribute profits back to shareholders.
59
# True or False:
Stock splits increase a company's total market capitalization.
FALSE
## Footnote
A stock split increases the number of shares outstanding but does not affect the company's total market capitalization. The split adjusts the stock's price while maintaining the same overall value for shareholders.
60
# Fill in the blank:
A \_\_\_\_\_\_ is when a shareholder pays money to a corporation in exchange for additional shares.
capital contribution
## Footnote
Capital contributions can occur when a company seeks additional financing and offers new shares to existing or new shareholders. This increases the company's equity capital.
61
List two common types of stock buybacks.
* Open market repurchase
* Tender offer
## Footnote
In an open market repurchase, a company buys back its shares from the open market over time. In a tender offer, the company offers to purchase a specific number of shares at a set price, typically above the current market price, within a limited time frame.
62
What is the primary purpose of filing a consolidated tax return?
To report the combined tax liability of an affiliated group of corporations.
## Footnote
Filing a consolidated tax return allows affiliated groups to offset profits and losses among the group, potentially reducing the overall tax liability.
63
# True or False:
All domestic corporations are eligible to file a consolidated tax return.
FALSE
## Footnote
Only an affiliated group of corporations that includes a common parent and meets specific ownership requirements can file a consolidated tax return.
64
# Fill in the blank:
The common parent in a consolidated tax return must own at least \_\_\_\_\_\_% of the voting power of each includible corporation.
0.8
## Footnote
The common parent must directly own at least 80% of the voting power and value of the stock of each corporation in the group to be eligible for consolidation.
65
List two advantages of filing a consolidated tax return.
* Offset losses of one group member against the profits of another
* Simplified reporting of intercompany transactions
## Footnote
Consolidated tax returns can also allow for deferral of intercompany profits and simplify the administration of certain tax attributes like net operating losses.
66
What is the purpose of a Double Taxation Agreement (DTA)?
To prevent the same income from being taxed in two different countries.
## Footnote
DTAs are treaties between two countries that aim to avoid double taxation on the same income, which can promote cross-border trade and investment by clarifying tax obligations.
67
# True or False:
Transfer pricing rules are designed to prevent tax evasion through manipulation of intra-company prices.
TRUE
## Footnote
Transfer pricing rules ensure that transactions between related entities are conducted at arm's length, meaning the prices are consistent with those charged between unrelated parties, thereby preventing tax base erosion.
68
# Fill in the blank:
The \_\_\_\_\_\_ tax credit allows U.S. taxpayers to reduce their federal income tax liability by the amount of foreign taxes paid.
foreign
## Footnote
The foreign tax credit is intended to mitigate double taxation by allowing taxpayers to credit foreign taxes paid against their U.S. tax liability, up to certain limits.
69
List three key factors that determine tax residency for individuals.
* Physical presence
* Permanent home
* Center of vital interests
## Footnote
Tax residency is crucial in determining tax obligations. Different countries have varying criteria, but these factors are commonly used to assess an individual's ties to a country for tax purposes.
70
What is the initial basis of a shareholder's interest in a corporation?
The initial basis is the amount of money and fair market value of property contributed by the shareholder.
## Footnote
The initial basis is crucial for determining gain or loss on future transactions involving the stock. It includes both cash contributions and the fair market value of any non-cash property contributed.
71
How does the receipt of a stock dividend affect a shareholder's basis in the corporation?
The basis per share decreases as the total basis is allocated among more shares.
## Footnote
Stock dividends are not taxable, but they require an adjustment in the per-share basis, which is important for calculating gain or loss upon sale of the shares.
72
# True or False:
A shareholder's basis increases with the corporation's income.
False.
## Footnote
A shareholder's basis in a corporation is not directly affected by the corporation's income or earnings. Basis adjustments occur due to additional contributions or distributions, not income.
73
# Fill in the blank:
A shareholder's basis is decreased by any \_\_\_\_\_\_ received from the corporation.
distributions
## Footnote
Distributions reduce a shareholder's basis. If distributions exceed the basis, it may result in a taxable gain for the shareholder.
74
What is a dividend?
A dividend is a distribution of a portion of a company's earnings to its shareholders.
## Footnote
Dividends can be issued as cash payments, shares of stock, or other property, and are typically decided by the company's board of directors.
75
# True or False:
Stock splits increase the market value of a company.
FALSE
## Footnote
Stock splits increase the number of shares outstanding but do not change the company's market value. They usually make shares more affordable for investors and increase liquidity.
76
# Fill in the blank:
A \_\_\_\_\_\_ dividend is paid when a company issues additional shares to shareholders instead of cash.
stock
## Footnote
A stock dividend increases the number of shares, which decreases the value of each share. It is often used by companies that wish to reward shareholders but want to retain cash.
77
List the three key dates involved in the dividend payment process.
* Declaration date
* Record date
* Payment date
## Footnote
The declaration date is when the board of directors announces the dividend. The record date determines which shareholders are eligible to receive the dividend. The payment date is when the dividend is actually paid out.
78
What determines the initial basis of a partner's interest in a partnership?
The initial basis is determined by the partner's contribution, including:
* Cash
* Property (adjusted basis)
* Assumption of liabilities
## Footnote
The initial basis is crucial as it affects future gain or loss calculations for the partner's share of the partnership.
79
# True or False:
A partner's basis in the partnership is adjusted for the partner's share of the partnership's income and losses.
TRUE
## Footnote
A partner's basis increases with the partner's share of income and decreases with the partner's share of losses, distributions, and nondeductible expenses.
80
# Fill in the blank:
A partner's basis is increased by additional \_\_\_\_\_\_ made to the partnership.
contributions
## Footnote
Contributions can be in the form of cash or property, and they directly increase the partner's basis, impacting their tax obligations and rights within the partnership.
81
List two scenarios that would decrease a partner's basis in the partnership.
* Distributions from the partnership
* Partner's share of partnership losses
## Footnote
Decreases in basis can affect the partner's tax liability and their capital account balance within the partnership.
82
What is a partnership for tax purposes?
A partnership is an association of two or more persons to carry on a trade or business, where each person contributes money, property, labor, or skill, and expects to share in the profits and losses.
## Footnote
For tax purposes, partnerships are considered pass-through entities, meaning the income is taxed at the individual level, not at the business level.
83
# True or False:
A partnership must file Form 1065 annually.
TRUE
## Footnote
Form 1065 is used to report the income, deductions, gains, and losses from the operation of a partnership. It is informational and does not assess tax.
84
# Fill in the blank:
A partner's initial basis in a partnership is the sum of their contributions of \_\_\_\_\_\_ and \_\_\_\_\_\_.
cash; property
## Footnote
A partner's basis is crucial for determining the amount of taxable gain or loss upon the sale or distribution of partnership interest.
85
What is the primary purpose of a partner election in a partnership?
To allow partners to make decisions on certain tax treatments that affect their shares of the partnership's income, deductions, and credits.
## Footnote
These elections can impact individual partners differently, often requiring a unanimous decision or adherence to specific rules as defined by the partnership agreement.
86
What is the general rule for transactions between a partner and a partnership?
Transactions between a partner and a partnership are considered as transactions between the partnership and an outsider.
## Footnote
This general rule ensures that the transactions are treated at arm's length, maintaining fairness and accuracy in the financial statements of the partnership.
87
# True or False:
A partner's contribution of property to a partnership is always recognized as a taxable event.
FALSE
## Footnote
Generally, contributions of property to a partnership in exchange for a partnership interest are not recognized as taxable events, meaning no gain or loss is recognized at the time of the contribution.
88
# Fill in the blank:
A partner selling an asset to a partnership at a price higher than the market value may result in a \_\_\_\_\_\_.
constructive distribution
## Footnote
When a partner sells an asset to a partnership at a price above market value, it can be treated as a constructive distribution, which may have tax implications for both the partner and the partnership.
89
What are the potential tax implications when a partner receives a guaranteed payment from a partnership?
* Taxable income for the partner
* Deductible expense for the partnership
## Footnote
Guaranteed payments to a partner are considered ordinary income for the partner and are deductible by the partnership as a business expense, impacting both their respective taxable incomes.
90
What is the definition of an ownership change for tax purposes?
An ownership change occurs when there is a 50% or more change in stock ownership by 5% shareholders over a three-year testing period.
## Footnote
This definition is crucial for determining the limitations under IRC Section 382, which restricts the use of net operating losses after an ownership change.
91
# True or False:
An ownership change can limit the use of net operating losses (NOLs).
TRUE
## Footnote
Under IRC Section 382, if a corporation undergoes an ownership change, the amount of taxable income that can be offset by NOLs in a given year may be limited.
92
# Fill in the blank:
The Section 382 limitation is calculated by multiplying the value of the loss corporation’s stock by the \_\_\_\_\_\_.
long-term tax-exempt rate
## Footnote
The long-term tax-exempt rate is published monthly by the IRS and is used to determine the annual limitation on the use of pre-change losses.
93
What triggers an ownership change under IRC Section 382?
An ownership change is triggered when one or more 5% shareholders increase their ownership by more than 50% over a three-year period.
## Footnote
The 5% shareholders are tracked to determine shifts in ownership that could trigger an ownership change, impacting the corporation's tax attributes.
94
What is a primary characteristic of a revocable trust?
The grantor retains the ability to modify or terminate the trust during their lifetime.
## Footnote
A revocable trust is often used for estate planning and provides flexibility as the grantor can change beneficiaries or trustees as needed.
95
# True or False:
The assets in an irrevocable trust are considered part of the grantor's taxable estate.
FALSE
## Footnote
Once assets are transferred into an irrevocable trust, they are generally removed from the grantor's taxable estate, providing potential tax benefits.
96
# Fill in the blank:
A \_\_\_\_\_\_ trust is created to provide income to a beneficiary for a certain period, with the remainder going to another beneficiary.
split-interest
## Footnote
A split-interest trust, such as a charitable remainder trust, involves multiple beneficiaries with different interests in the trust assets over time.
97
List two types of special-purpose trusts.
* Charitable trust
* Spendthrift trust
## Footnote
Special-purpose trusts serve specific objectives, such as supporting a charitable cause or protecting a beneficiary from creditors.
98
What is the difference between gross income and taxable income?
Gross income is the total income earned before any deductions or taxes, while taxable income is the amount of income subject to tax after deductions and exemptions.
## Footnote
Gross income includes all sources of income, such as wages, dividends, and interest. Taxable income is calculated by subtracting deductions like standard or itemized deductions from gross income.
99
# True or False:
All medical expenses are deductible from gross income.
False.
## Footnote
Only medical expenses that exceed 7.5% of adjusted gross income (AGI) can be deducted. This threshold must be met in order to itemize these costs on a tax return.
100
List the types of deductions available to taxpayers.
* Standard deduction
* Itemized deductions
* Above-the-line deductions
## Footnote
Standard deductions are fixed amounts based on filing status. Itemized deductions include specific expenses like mortgage interest and charitable contributions. Above-the-line deductions are subtracted from gross income to arrive at AGI.
101
# Fill in the blank:
The maximum deduction limit for state and local taxes is $\_\_\_\_\_\_ per year.
10000
## Footnote
The Tax Cuts and Jobs Act of 2017 set a cap on the deduction for state and local taxes (SALT), which includes property, income, and sales taxes, at $10,000 for both single and married filers.
102
What is the primary requirement for an organization to qualify for tax-exempt status under Section 501(c)(3)?
The organization must be organized and operated exclusively for exempt purposes.
## Footnote
Exempt purposes include charitable, religious, educational, scientific, and literary activities. Organizations must also ensure that no part of their net earnings inures to the benefit of any private shareholder or individual.
103
# True or False:
A tax-exempt organization must file Form 990 annually.
TRUE
## Footnote
Most tax-exempt organizations are required to file some version of Form 990 to provide the IRS with information about their activities, governance, and finances, except for certain religious organizations and smaller nonprofits.
104
# Fill in the blank:
To maintain tax-exempt status, an organization must avoid \_\_\_\_\_\_.
engaging in substantial lobbying activities
## Footnote
While some lobbying is permissible, it cannot constitute a substantial part of the organization's activities. Excessive lobbying could jeopardize the tax-exempt status.
105
List two consequences a tax-exempt organization might face if it fails to comply with IRS regulations.
* Revocation of tax-exempt status
* Imposition of fines or penalties
## Footnote
Loss of tax-exempt status can lead to the organization's income being subject to federal income tax, and penalties may be imposed for failure to file required IRS forms.
106
What is unrelated business income (UBI)?
Income from a trade or business that is regularly carried on and not substantially related to the organization's exempt purpose.
## Footnote
UBI applies to tax-exempt organizations and is subject to taxation to prevent unfair competition with for-profit businesses.
107
# True or False:
All income from a tax-exempt organization is considered unrelated business income.
FALSE
## Footnote
Only income from activities unrelated to the organization's exempt purpose is considered UBI. Income directly related to the exempt purpose is not subject to UBI tax.
108
Name three conditions that must be met for income to be classified as unrelated business income.
* It must be a trade or business
* Regularly carried on
* Not substantially related to the organization's exempt purpose
## Footnote
These conditions ensure that only income from activities not aligned with the exempt purpose is taxed, maintaining the integrity of the nonprofit status.
109
# Fill in the blank:
Income from a regularly conducted \_\_\_\_\_\_ that is not related to an organization's exempt purpose is taxable as unrelated business income.
trade or business
## Footnote
The focus is on activities that mimic for-profit businesses, ensuring tax-exempt organizations do not have an unfair advantage.
