a537 - corporate & partnership tax instructor: dwight drake llm corporate tax instructor: dwight...

A537 - Corporate & Partnership Tax Instructor: Dwight Drake

LLM Corporate Tax Instructor: Dwight Drake

Calculating the Entity’s Taxable Income

Taxable Income = Gross income - Allowable Deductions Section 63

Gross Income = “all income from whatever source”. Section 61

Deductions = “all ordinary and necessary expenses paid or incurred in carrying on any trade or business” + Special Deductions Section 162



• No personal expenses.

• No exemptions.

• Capital losses only to extent of capital gains.

• 10% charitable contribution limitation vs. 50% for personal

• Any tax year, except for “personal service C corps” and S corp.

• Must use accrual accounting method unless farm, personal service corps or gross receipts under 5 mill.

• Deductions and loss limits on transactions between C Corp and more-than-50% owner per 267.

Compared to Personal Income Taxes…



• Section 162(m) $1 mill executive comp limit for public C corps

• Section 243 Dividend Deduction - 70%, 80%, or 100%

• Section 199 Domestic Production Deduction - % of lesser of taxable income or “qualified production income”. - 6% 2007-09, 9% after 09. - Key limitation: 50% of w-2 wages. - Key definitions related to “qualified production income” from FSC and DISC regs. - With repeal of Extraterritorial income (ETI) rules, real winners are manufactures who sell in U.S.

Select Corp Deduction Provisions


C Corp Alternative Minimum Tax

Good News! Not apply in first year of corp, not apply in first three years if average gross receipts under 5 mill, not apply if annual gross receipts in preceding three years under 7.5 mill. Bottom line: All small C corps safe.

AMT burden:

1. Add back Section 56 adjustments

2. Add back 75% of Adjusted Current Earnings account

3. AMT rate is 20%

The “Push to Kill It” is on!


C Corp Penalty Taxes

Good News: They have been de-fanged (temporarily?) with 15% rate.

Section 531 Accumulated Earnings Tax - 15% tax on excess accumulating earnings in C corp. Minimum of 250k each year (150k for professionals. The game is justifying accumulations.

Section 541 Personal Holding Company Tax – 15% tax on undistributed personal holding company income. 50% or more of stock owned by five or fewer and 60% or more of income from dividends, interest, rents, capital gains and certain personal service income. Rescue dividends permitted

to avoid tax.


Partnerships - Entity vs. Aggregate Theories

Aggregate:

1. Partnership pays no taxes 2. Income and losses pass thru to partners Entity:

1. Partnership files information return 2. Partnership determines its own income or loss, except for designated “separately-stated items” 3. Character of income item and holding period determined at entity level

4. Accounting method and tax year set at entity level



S Corp, Partnership, LLC Income

Copyright 2005 Dwight Drake. All Rights Reserved.Business Planning: Closely Held Enterpriseswww. drake-business-planning.com

Income

S Corp

Owners

Pass Thru

Impacts:

• No entity level tax

• 1366(a) separately stated items

• Entity level accounting period & elections

• Generally calendar year



S Corp, Partnership, LLC Loss

Copyright 2005 Dwight Drake. All Rights Reserved.Business Planning: Closely Held Enterpriseswww. drake-business-planning.com

Loss

S Corp

Owners

Pass Thru

Hurdles:

• Basis limitations (704(d) and 1366(d))

• At-risk limitations (465)

• Passive activity limitations (469)


Most Common Separately-Stated Items

• Charitable contributions

• Capital gains and losses

• Section 1231 gains and losses (business assets)

• Interest income

• Investment interest expense

• Dividends

• Foreign taxes

• Income and losses from passive activities

• AMT preference items


Revenue Ruling 68-79

Timing:

1. Partnership formed and buys stock 6/1/66 2. Partner C sells partnership interest to D on 2/1/67 3. Partnership sells stock at gain 5/1/67 4. Hence, partnership held 11 months; D held 3 months.

Issue: What impact to D if CG period 6 months? Ruling: Holding period determined at entity level per 702(b). Hence, D gets long-term capital gain treatment.

Query: Can entity level determination ever hurt? See Demirjian v. Comm’r (page 80) – 1033 non-recognition election must be made at entity, not partner, level.


Partnership Assignment of Income v. Section 704

Types of assigned income:

1. Fully earned, waiting to be collected 2. Right to receive, but not fully earned, same type of business 3. Right to receive, but not fully earned, different type of business.

Schneer v. Comm’r Majority: #2 assignment works. Other two will trigger assignment of income doctrine.

Halpren Dissent: No conflict in assignment of income and 704 – issue is resolved by agency law


Partner’s Outside Basis Formula (705)

Contributions to partnership:

Plus: 1. Taxable income allocated to partner 2. Tax-exempt income allocable to partner 3. Excess depletion deductions over basis

Less: 1. Losses allocable to partner 2. Distributions to partner 3. Expenditures not deductible and not capitalized 4. Oil and gas depletion deduction to extend not exceed allocable basis.

Plus: The Section 752 liability twist – Up or down


Law T510 - Estate and Gift Tax-Instructor: Dwight Drake

Problem P. 111

(a) Partnership year – all partners calendar year? Under “majority rule”, partnership must have calendar year. Would prefer 1/31 partnership year with big income to maximize deferral. Would prefer 12/31 year if expect losses.

(b) Partnership year – 20% July corporate partner and 20 4% individual calendar year partners? Per 706(b), partnership must have calendar year because over 50% capital and profits partners are calendar year.

(c) Partnership year – 20% July corporate partner, 10 4% 9/30 partners, 10 4% calendar year? No majority. Corp only “principle partner”(5% or more) per 706(b)(3). Hence, partnership must have 7/31 year .

(d) Under 706, partnership can’t use 9/30 year to get info to partners. Must use calendar year. May elect 3 month deferral under 444(b)(2) if make payment required by 7519 – payment on deposit equal to partners deferral benefit.

(e) Partnership has 30% sales in Dec & Jan and wants to switch to 1/31? Since over 25% sales in last two months, business purposetest met, 1/31 year OK and no need for 444 election or 7519 payment.



Problem P. 111

(e) Partnership has 30% sales in Dec & Jan and wants to switch to 1/31? Since over 25% sales in last two months, business purposetest met, 1/31 year OK and no need for 444 election or 7519 payment.



Problem P. 114 (a) A & B non-corporate 50% partners of AB Partnership with 7/31 business

purpose taxable year. Partnership return due 11/15, A & B each report 1/2 items on their 12/31 years, with returns due 4/15. A and B liable for all taxes. Separately stated items include:

Margin interest – 6k Dividends - 7k1231 gain – 2kSTCG - 6kNet LTCG – 2k1231 casualty gain – 1k

Charitable deduction passed through to partners.Other items netted to report income of 48k, as follows:

Gross receipts: 100,000.Cost of sales (30,000)Salaries (10,000)Depreciation (12,000)Advertising (8,000)1245 Gain 8,000

Total 48,000.



Problem P. 114

Going in basis: A – 70k; B – 40k. Basis effect of first year operations per 705 for each partner:

705(a)(1)(A) All items except interest, tax exempt, contributions

Net Income from (a) above 48,0001231 Machinery gain 2,000Dividends 7,000STCG 6,000LTCG (Net) 2,0001231 casualty gain 1,000

Total Income 66,000.One half per partner 33,000

705(a)(1)(B) ½ Tax-exempt income share 250705(a)(2)(B) ½ charitable cont. (400)705(a)(2)(A) ½ inv. interest (3,000)

Net outside basis effect: 29,850

Thus, A basis goes to $99,850 and B’s goes to $69,850.

(c) If 20k distributed to each partner, outside basis of each partner would be reduced by 20k – A to $79,850, B to $49,850.

(d) No difference if 1231 gain on machine sale would have been ordinary income if A sold individually. Gain is characterized at partnership level. 702(b)



Problem P. 114

(c) If 20k distributed to each partner, outside basis of each partner would be reduced by 20k – A to $79,850, B to $49,850.

(c) No difference if 1231 gain on machine sale would have been ordinary income if A sold individually. Gain is characterized at partnership level. 702(b)

a537 - corporate & partnership tax instructor: dwight drake llm corporate tax instructor: dwight...

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