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92 Cards in this Set

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a business owned by one individual
sole proprietorship
from a tax and legal standpoint, a sople proprietorship is ____
not a separate legal entitiy
the owner of a sole proprietorship reports his income where
on his individual tax return
schedule c
tax advantages of a sole proprietorship
-the sole proprietorship is not subject to taxation
-the proprietors tax rate may be lower than the corporation tax rate
-the owner may contribute cash to, or from the business w/o tax consequences
-even though separate accounts are maintained, the money belongs to the owner
-the owner may contribute property to or from w/o recognizing gain or loss
-business losses may offset non buisness income
tax disadvantages of a sole proprietorship
-profits are taxed to owner, whether or not they are retained in the business
-sometimes corporate tax rates are lower
-owner must pay the full amount of social security taxes
-may not deduct compensation paid to owner-employees, but corporations can
-certain tax exempt benefits availabel to shareholder employees are not available to owner employees
-a sole proprietor must use same accounting period for business and personal
-
an unincorporated business carried on by two or more individuals
partnership
when a partnership return is filed, the preparer must send each partner a schedule
k-1 form 1065
a k-1 1065 is
a form that states each partners allocable share of partnership
____ partners may not generally participate in the management of the partnership
limited
tax advantages of partnership
-partnership as an entity pays no tax
-partners tax rate may be lower than corporate
-not subject to double taxation
-additional taxes gernerally are not imposed on distributions to the partners
-a partners gain is offset by the amount of income partner receives
tax disadvantages of a partnership
-all profits are taxed when earned, even when reinvested in business
-partners tax rate may be higher than corporate
-a partner is not an employee
-is generally not able to choose fiscal year
corporations can be divided into two categories
c corporations
s corporations
a c corporation is subject to
double taxation

the earning s are taxed first at the corporate level when earned, then again at the shareholer level when distributed as dividends
C corporations are
-a separate entity taxed on income at rates ranging from 15 to 35%
-Must report all its income and expenses and compute its tax liability on form 1120
Shareholders are not taxed on the corporations earnings unless the earnings are distrubuted as dividends
-dividends recieved by a noncoporate shareholdera are taxed at the same rate tha tapplies to net capital gains
-even when a corporation does not distrubute its profits double taxation may result. T
TAX ADVANTAGES OF THE C CORPORATION
-AN ENTIY SEPARATE AND DISTINGCT FROM ITS OWNERS, ITS MARGINAL TAX RATE MAY BE LWOER THAN ITS OWNERS' MARGINAL RATES
-EARNINGS MAY BE USED FOR REINVESTMENT AND THE REITREMENT OF DEBT.
-SHAREHOLDERS EMPLEOYED BY THE CORPORATION ARE CONSIDERED TO BE EMPLYEES FOR TAX PURPOSES, AND LIABLE FOR HALF SOCIAL SECURITY TAXES
-ENTITLED TO TAX FREE FRINGE BENEFITS
-A CORPORATION MAY DEDUCT AS AN ORDINARY BUSINESS EXPENSE COMPENSATION PAID TO SHAREHOLDER EMPLOYEES
-CAN USE A FISCAL YEAR INSTEAD OF A CALENDAR YEAR
-ALLOW SHAREHLEDER TO EXLUDE 50% OF THE GAIN REALICED ON THE SALE OR EXCHANGE OF STOCK HELD FOR MORE THAN FIVE YEARS
TAX DISADVANTAGES OF A C CORPORATION
-DOUBLE TAXATION RESULTS
-SHAREHOLDERS GENERALLY CANNOT WITHDRAW MOENY OR PROPERTY FROM THE CORPORATION WITHOUT RECOGNIZING INCOME
-NET OPERATING LOSS PROVIDE NO TAX BENEFIT TO OWNERS IN THE YEAR THE CORPORATION INCURS THEM
-CAPITAL LOSSES PROVIDE NO TAX BENEFIT TO THE OWNERS IN THE YEAR THE CORPORATION INCURS THEM THEY CANNOT OFFSET ORDINARY INCOME OF EITHER THE CORPORATION OR ITS SHAREHOLDERS
PASS THROUGH ENTITIES INCLUDE
PARTNERSHIPS AND S CORPORATION
__ ___ ___AND ___ ARE ACCOUTED FOR BY THE S CORPORATION
INCOME, DEDUCITONS, LOSSES, AND CREDITS
A S COPORATION OR C CORPORATION IS MORE FLEXIBLE?
S CORPORATION
TAX ADVANTAGES OF A C CORPORATION
PAY NO TAX
SHAREHOLDERS MARGINAL TAX RATES MAY BE LOWER
CORPORATE LOSSES FLOW THROUGH TO THE SEPARATE RETURNS OF TEH SHAREHOLDERS
BECAUSE CAPITAL GAINS RETAIN THEIR CHARACHTER THE SHAREHOLDERS ARE TAXED ON THESE GAINS
SHAREHLERS GENERALLY CAN CONTRIBUTE MONEY TO OR WITHDRAW MONEY FROM SCORP W/O RECOGNIZING GAIN
CORPORATE PROFITS ARE TAXED ONLY AT THE SHAREHOLDER LEVEL IN THE YEAR EARNED
A SHAREHOLDERS BASIN IN S COPORATION STOCK IS INCREASED BY HIS OR HER SHARE OF CORPORATE INCOME THIS REDUCES THE SHAREHODERS GAIN WHEN HE OR SHE LATER SELLS THE SCORP STOCK, THEREFORE AVOIDING DOUBLE TAXATION
TAX DISADVANTEGES OF DOING BUISNESS AS AN S CORPORATION ARE
SHAREHOLDERS ARE TAXED ON ALL OF AN S CORPORATION'S CURRENT YEAR PROFITS WHETHER OR NOT THESE PROFITS ARE DISTRIBUTED
IF THE SHAREHOLDERS MARGINAL TAX RATES EXCEED THOSE FOR A C CORPORATION THE OVERALL TAX BURDEN MAY BE HEAVIER AND THE AFTER TAX EARNINGS AVAILABE FOR REINVESTMENT AND DEBT RETIREMENT MAY BE REDUCED
NONTAXABLE FRINGE BENEFITS ARE GENERALLY NOT AVAILABLE TO S CORP
FRINGE BENFITS PROVIDED ARE DEDCUTIBLE BY THE CORP AND TAXABLE TO THE SHAREHOLDER
S CORP EMPLOYEES PAY HALF OF SOCIAL SECURITY TAXES WHILE THE SCORP EMPLOYER PAYS THE OTHER HALF
S COPR GENERALLY CANNOT DEFER INCOME BY CHOOSING A FISCAL YEAR OTHER THAN A CALENDAR YEAR UNLESS THE S CORP CAN ESTABLISH A LEGITAMATE BUSINESS PURPOSE FOR A FISCAL YEAR OR UNLESS IT MAKES A SPECIAL ELECTION
LLP has the following liabilities
llp parnters are not liable for the negligence of miscoundut of the other partners

LLP parnters are liable for their own acts and ommisions as well as the acts of his agents
an eligible entity may elect its classification by filling out form
8832
if an entity elects to change its tax classification it cannot make another election
until 60 months following the effective date of the initial election
Some requirements for forming a corporation are
investing a minimum amount of capital
filing articles of incorporation
issuing stock
paying state incorporation fees
In determining the tax consequences of incorporation, the following questions must be answered
What property should be transferred to the corporation
what services should the transferors or the third parties provide for the corporation
What liablities in addition to property should be transferred
how should the property be transferred
in corporate formation if the transferors realized gain is taxable property the transfer is the
FMV of stock received
Money received
FMV of nonmoney boot property (including securities) received
Amount of liabilities assumed by transferee corporation
minus: adjusted basis of property transferred
realized gain
in corporate formation if the transferors realized gain is nontaxable property the transfer is the
FMV of stock received
Money received
FMV of nonmoney boot property (including securities) received
Amount of liabilities assumed by transferee corporation
minus: adjusted basis of property transferred
realized gain
in corporate formation if the transferors recognized gain in taxable property transfer
Transferors recognize the entire amount of realized gain
losses may be disallowed under related party rules
installment sale rules may apply to the realized gain
in corporate formation if the transferors recognized gain in nontaxable property transfer
Transferors recognize non of the realized gain unless one of the following exceptions applies
-Boot property is recieved
-Liabilities are transferred to the corporation for a nonbusiness or tax avoidance purpose
-liabilites exceeding basis are transferred to the corporation
-services, certain corporate indebtedness, and interest claims are transferred to the corporation

The installment method may defer recognition of the gain when a shareholder receives a corporate note as boot
in corporate formation the tax treatment for the transferors for the basis of taxable property recieved
is FMV
in corporate formation the tax treatment for the transferors for the basis of nontaxable property recieved is
Basis of property transferred to the corporation
Plus: Gain recognized
Minus: money received (including liabilities treated as money)and FMV of nonmoney boot property

total basis of stock received
allocation of total stock basisi is based on relative FMVs
Basis of nonmoney boot proptery is its FMV
in corporate formation the tax treatment for the transferors for the holding period of taxable property recieved of taxable property recieved
day after the exchange date
in corporate formation the tax treatment for the transferors for the holding period of nontaxable property recieved
Holding period of stock received includes holding period of sec 1231 property or capital assets tranferred; otherwise it begins the day after the exchange date
in corporate formation the tax treatment for the transferee corporation for the gain recognized of taxable property transferred
the corporation recognizes no gain or loss on th ereceipt of money for other property in exchange for its stock
in corporate formation the tax treatment for the transferee corporation for the gain recognized of nontaxable property transferred
Same as taxable transaction except the corporation may recognize gain under sec 311 if it transfers appreciated nonmoney boot property
in corporate formation the tax treatment for the transferee corporation for the basis of taxable property transferred
FMV
in corporate formation the tax treatment for the transferee corporation for the basis of nontaxable property transferred
Generally, same as in transferor's hands plus any gain recognized by transferor
If the total adjusted basis for all transferred property exceeds the FMV of the property, the total basis to the transferor is lijmited to the property's total FMV
in corporate formation the tax treatment for the transferee corporation for the holding period of taxable property
day after the exchange date
in corporate formation the tax treatment for the transferee corporation for the holding period of nontaxable property transferred
Transferor's carryover holing period for the property transferred regardless of the property's character
Day after the exchange date if basis is reduced to FMV
Section 351
deferring gain or loss upon incorporation
A transferors realized no gain or loss when incoporating the stock basis equals
the basisi of property transferred less liabilities assumed by the corporation
the specific requiremets for deferral gain or loss under sec 351 are
the transferors must transfer property to the corporation

the transferors must recieve stock of the transferee corporation in exchange for their property

the transferors of the property must be in control of the corporation immediately after the exchange
excluded from the statutory definition of property are
services rendered to the corporation in exchange for its stock

indebtedness of the transferee corporation not evidenced by a security

interest on transferee corporation debt that accruedon or after the beginning of the transferors holding period for the debt
section 351 requires that the transferors as a group to be
in control of the transferee corporation immediately after the exchange
A transferor's realized gain or loss that is unrecognized for tax purposes under 351, is/is not exempt from taxation
is not exempt, it is only deferred
the basis of the stock received equals the
basis of property transferred less liabilities assumed by the corporation or FMV -deferred gain or + any deferred loss
property does not include
services
indebtedness of the transferree not evidenced by a security
interest on trenasferee corporation debt that accrued on or after the beginning of the transferors holding period for the debt
control is defined as
ownership of at least 80% of the total combined voting power of all classes of stock entitled to vote and at least 80% of the total number of shares of all other classes of stock
when a person transfers both property and services in exchange for stock, the IRS generally requires that the FMV of the stock received for transferred property be at least ___% of the value of the stock RECEIVED FOR THE SERVICES PROVIDED
10
When a person transfers both property and services in exchange for stock the property must have ________. The IRS generally requires that the FMV of the stock received for the property be at least ________.
more than nominal value for that person's stock to count toward the 80% control threshold.
10% of the value of the stock received for services provided
If an exisiting shareholder exchanges property for additional stock to enable another shareholder to qualify for tax free treatment the stock received must be
of more than nominal value. The IRS requires that this value be at least 10% of the value of the stock already owned
________ stock received in exchange for property is treated as boot
nonqualified preferred stock
nonqualifued stoick is considered nonqualified if
the shareholder can require the corporation to redeem it
the corporation is either required to redeem the stock or is likely to excercise the right to redeem it
the dividend rate on the stock varies iwth interest rates, commoodity prices or other similar indices
Upon receiving boot, the transferor recognizes gain to the extent of _______.
the lesser of the tranferor's realized gain or the FMV of the boot property received
A transferor never recognizes ______ in an exchange qualifying under sec 351.
a loss
If the shareholder transfers a capital asset such as stock in another corporation, the recognized gain is
capital in charachter
if the shareholder transfers sec 1231 property such as equipment equipment or a building the recognized gain is
ordinary in charachter to the extent of any deprecation recaptured under sec 1245 or 1250. Thus depreiciation is not recaptured unles the transferor receives boot and recognizes gain
if the sharehoder transfers inventory the recognized gain is
ordinary in character
in computing a shareholder's basis in the stock received he must minus:
+FMV of the boot recieved from the corporation
+Money received from the corporation
+Liabilities assumed by the transferee corporation
if a transferor receives more than one class of qualified stock, his or her basis must be
alocated among all the classes of stock according to their relative FMV
the transferor's holding period for any stock recieved in exchange for a capital asset or 1231 property
includes the holing period of the property transferred
corporations recognize ____when they exchange their own debt instruments for property or services
no gain or loss
corporations recognized ____ when they exchange appreciated property to a tranferor as part of a sec 351 exchange
gain but no loss, the amount and charachter of the gain are determined as though the property had been sold by the corporation immediately before the transfer
A corporation that acquires property in exchange for its stock in a transaction that is taxable to the to the transferor takes a ____ basis in the property
cost
if a corporation acquires property in exchange for its stock in a transaction that qualifies for nonrecognition treatment the corporation's basis for the property is compted:
Tranferors adjusted basis
plus: gain recognized by the transferor
minus: reduction for loss property
the transferee corporation's holing period for property acquired in a transaction satisfying sec 351 requirements include
the period during which the property was held by the transferor
If a corporation's total adjusted basis for all properties transferred by a shareholder exceeds their total FMV the basis to the corporation is
limited to their total FMV
For the purpose of determining gain recognition, the transferee corporation's assumption of liabilities qualifying under section 351 is ____.
not considered equivalent to cash The tranferee corporation assumption of liabilities does not result in the transferor's recognizing part or all of his realized gain, for the purpose of calculating BASIS, the assuption of liabilities is treated as money received and decreases the transferors stock basis, for calculating the transferors REALIZED gain, the transferee corporation's assumption of liabilities is treated as part of the transferor's amount realized
when a transferee corporation assumes liabilites in a property transfer, the transferee corporation's assumption of liabilities is treated
as part of the transferor's amount realized
the exception to 357, the rule determining gain recognition in regard to the assumption of liabilities, the two exceptions are
tranfers for the purpose of tax avoidance or without a bonafide business purpose

and

tranfers where the liabilities assumed exceed the total basis of the property transferred
The special liability rule will prohibit
the acquisition of cash through liabilities on property tranferred to a controlled corporation. This cash MUST be recognized as BOOT
If the total amount of liabilities under section 357 exceed the total adjusted basis of all property tranferred the excess liability is
taxed as gain to the transferor

The transferor's basis in any stock received is zero
if the transering of liabilities would result in a deduction to the transferree they are treated how under 351
they would not be considered liabilities for the purpose of determining the shareholder's basis
if a sec 351 exchange is completely nontaxable, i.e. the transferor receives no boot, depreciation is
not recaptured, the corporation inherits the entire amount of the the transferor's recapture potential
if a sec 351 exchange is divided where teh transfror recognizes some depriciation recapture as ordinary income, and
the transferee inherits the remaining recapture potiential

if the transferee corporaiton disposes of the depreciated property, the coproraiton is subject to recapture rulse on depreciation it climed subsequent to the transfer, plus the recapture potential it inherited from the transferor
When selling depreciated property, the recaptured deprication is treated as ____ and the other gain is treated as ____.
sec 1245 ordinary income
sec 1231 gain
the ______ is assumed to have held the property for the entire month in which the property was transferred when calculating depriciation
transferee corporation
if the transferee corporations basis in the depriciable propery exceeds the transferor's vasis, as a result of an upward adjustment to reflect gain recognized by the transferor, thecorporation treats the excess amount as
newly purchased MACRS property and uses the recovery period and method applicable to the class of the property transferred
sec 385 was created to
establish a workable standard for determining whether an obligation is debt or equity
the following factors will determine whether obligations are debt or equity
written unconditional promise to pay
whether debt is subordinate to or preferred
ratio of debt to equity
whether debt is convertible to stock
relationship between holdings
interest paid on indebtedness is treated as ___- inderiving taxable income
deductable
advantages in useing debt in a corporations capital structure
a corporaiton can deduct interest paid on debt obligation
shareholders do not recognize income when they receive a debt repayment as they would in a stock redemption
tax disadvantages in using debt in a corporations capital structure
if at the time the corporation is formed or later when a sharehlder makes a capital contribution, the shareholder receives a debt instrument in exchange for property the debt is treated as boot
if debgt bcomes worthless or is sold at less than face value the loss is generally nonbusiness bad debt and is treated as a short term capital loss or a captial loss
ADVANTAGES OF USING EQUITY IN A CORPORATIONS CAPITAL STRUCTURE
a 70 80 or 100% dividends received deduction is available to a corporate shareholder
can receive common and preferred stock tax free under 351
common or preferred stock can be distributed tax-free to the corporations shareholders as a stock dividend
common or preferred stock that the shareholder sells or exchanges or that becomes worthless is eligible for limited ordinary loss treatment
section 1202 permits a 50% captial gains exclusion on the sale of qualified small business corporation stock that has been held for more than five years
for 2003-2020, qualified dividends are taxed at a max 15% rate
DIsADVANTAGES OF USING EQUITY IN A CORPORATIONS CAPITAL STRUCTURE
dividends are not dedcutible in determining a corporations taxable income
redemption of common or preferred stock is generally taxable to shareholders as a dividend
preferred stock recieved by a shareholder as a nontaxable stock dividend may be treated as sec 306 stock
a debt or a security that becomes worthless results in a capital loss for the investor when?
as of the last day of the tax year in which the security becomes worthless
Ordinary losses that generate an NOL are deductilbe how?
carried back two years or forward up to 20 years
ordinary loss treatment of worthless securities is available in what circumstances
when a security that is a noncapital asset is sold or exchanged or becomes totally worthless
any security of an affilitated corporation that becomes worthless
qulafiyin stock issued by small business corporation is sold exchanged or becomes worthless. Must have been issued the stock, not purchased from another shareholder or received as a gift
qualifications for 1244 is
issuing corporation must receive $1mil or less in exchange for its stock
the issuing corporation must have received over 50% of its reciepts from "active sources" other than royaltyies, rents, dividends, etc
non business bad debts are deductible
as short term capital losses up to the 3,000 annual limit for net capital losses
a tranferor who dos not wish to recognize gain on the transfer of property to a corporation can avoid 351 treatment with these stragegies
can sell the property to the controlled corporation for cash or for cash and debt
(in the latter may be treated as nontaxable exchange if the IRS recharacterizes the debt as equity)
can sell to a 3rd party for cash and have teh 3rd party contribute the property to the corporation for stock
can have the coporation distribute sufficeint boot property so that transerors do not own 80% immediately
can transfer debt that exceeds basis of property transferred or debt that lacks a bsinss purpose