Enrolled Agent Bova Books LLC 200 questions - Exam 2 - Businesses - Notes

Net Operating Losses (NOLs)

• NOLs can be carried forward indefinitely in the U.S., but are limited to 80% of taxable income.
• Different carryback/carryforward rules apply depending on the year the NOL arose (2017 and earlier, 2018-2020, and 2021 and later).

Corporate Structure Requirements

• A Board of Directors is required for S Corporations and C Corporations but not for other entities.

Partnership Elections and Restrictions

• A partnership can make an election on Form 8832 (Entity Classification Election).
• A new election cannot be made after a five-year waiting period following the initial election.
• Certain entities (e.g., insurance companies, nonprofits) cannot be classified as partnerships.

Corporate Filing Deadlines

• C Corporations generally file by the fourth month after the end of the year, but fiscal year-end June 30th requires filing by the third month.

Partnership Tax Year Elections

• Partnerships can adopt a natural tax year if the last two months of the year generate at least 25% of annual revenue for each of the preceding three years.

Section 444 Election Restrictions

• Section 444 election for S Corporations or Partnerships requires a deferral period of less than 3 months. A zero deferral period prohibits the election.

Partnership Return Deadlines and Penalties

• Partnership returns are due by the 15th day of the third month following the tax year's close.
• Penalties are $210 per month per partner.

Capital-Intensive vs. Service-Based Businesses

• Businesses where capital is not a material income factor (e.g., cleaning services) differ from those requiring substantial capital investments (e.g., food production, toy production).

Partnership Basis Calculation

• Partnership basis is calculated as the adjusted basis of contributed property minus the percentage of any existing mortgage relieved.

Partnership Interest Basis Restrictions

• The basis of a partnership interest cannot be negative.
• If a partnership acquires a loan, it's treated as a capital gain equal to the basis plus the amount assumed by other partners.

Corporation Estimated Payment Due Dates

• Estimated tax payments for corporations are due on April 15, June 15, September 15, and December 15.

Taxable Income for Corporate DRD Calculations

• Taxable income for a corporation (in DRD calculations) excludes the DRD itself, NOL deduction, Domestic Production Activities deduction, capital loss carryback, and adjustments to the non-taxable portion of an extraordinary dividend.

Amount at Risk (AAR) Calculation

• AAR is calculated as cash plus the difference between fair market value and the loan amount for property used as collateral.

BEAT Tax Rates

• BEAT rates vary by tax year: 5% (2018), 10% (2019-2025), and 12.5% (2026 and beyond).

S Corporation Election Requirements

• All shareholders must consent for a business to elect S Corporation status.

S Corporation E-filing Requirements

• S corporations that file 10 or more returns annually are required to e-file Form 1120-S, starting January 1, 2024.

Passive Activities and Rental Real Estate

• Rental real estate is considered a passive activity.

Cancelled Debt and Insolvency

• Cancelled debt for an insolvent company is excluded from taxable income up to the extent of insolvency.

Uniform Capitalization Rules (UNICAP) and Rental Property

• UNICAP rules do not apply to the acquisition of property for rental activities.

Business Start-up and Organizational Costs

• Start-up and organizational costs can be deducted as a maximum of $5,000, reduced by the amount exceeding $50,000, with any remaining amount amortized.

Failed Attempt Loss Limitation

• The limitation for failed attempt loss is $3,000 per year.

Health and Accident Insurance Premiums for S Corporations

• Premiums paid for health and accident insurance of S corporation shareholder-employees (above the 2% threshold) are deductible by the S corporation; this is not covered in Gleim.

Business Interest Expense Limitation

• Business interest expense is limited to the taxpayer's business interest income plus 30% of their adjusted taxable income (ATI).

Sole Proprietorship/Self-Employment Deduction Limitations

• For sole proprietors/self-employed, only meal and incidental expenses can use the per diem rate; lodging expenses require the actual expense method.
• Gifts are limited to $25 per gift; associated costs can be deducted separately.
• Hours limitations do not qualify for an employer to deduct an employee's compensation.

Healthcare Benefits and Employee Ownership

• Healthcare benefits are typically non-taxable unless the employee owns more than 2% of the company; then it's reported as non-cash taxable wages.

Casualty Insurance Premiums and Property Basis

• Casualty insurance premiums are not added to the adjusted basis of a purchased property.

Functional Appliances and Tangible Property Regulations

• Functional appliances are not a separate unit of property under IRS Tangible Property Regulations.

De Minimis Safe Harbor Election 1

• Businesses with applicable financial statements can deduct up to $5,000 per invoice or item for tangible property (De Minimis Safe Harbor Election #1).

De Minimis Election for Materials and Supplies

• $200 De Minimis Election for materials and supplies is waived if the unit of property has a less than one-year useful life, are spare parts, or incidental materials. Total cost per invoice is deductible without financial statements.

Total Revenue Calculation

• Total revenue is the sum of operating and non-operating expenses.

Realized Gain vs. Depreciation Recapture

• If realized gain is less than depreciation subject to recapture, the entire gain is treated as ordinary income.

IRS Drought Extension for Livestock Replacement

• The replacement period for sold or exchanged livestock due to drought can be extended by the IRS. Farmers/ranchers have four years from the first drought-free year to replace the livestock.

Schedule M-3 (Form 1120)

• Schedule M-3 (Form 1120) reconciles net income for corporations with over $10 million in assets.

Form 8300 Filing Requirements

• Form 8300 (Statement of Cash Payments Over $10,000) requires a written statement to all parties by the end of January the following year. Cash payments are generally reportable within 15 days of receipt

Statutory Non-Employees (e.g., Real Estate Agents)

• Payments to statutory non-employees (e.g., real estate agents) are dependent on sales/output (under contract) and are not treated as employees for federal tax purposes.

Excise Tax Deductibility

• 7.5% excise tax on specific goods (e.g., guns) is deductible.

Qualified Business Income (QBI) Deduction Disallowance

• QBI or 199A deduction is disallowed for Specified Service Trade or Business (SSTB) above a certain threshold.

Employer Shared Responsibility

• Employer Shared Responsibility applies to companies with over 50 full-time employees.

Trust Filing Requirements

• Trusts with gross income over $600, non-resident beneficiaries, or any taxable income must file Form 1041.

SEP-IRA Participation Requirements

• Part-time, seasonal, or opted-out employees may be required to participate in a Simplified Employee Pension (SEP)-IRA.

SIMPLE IRA and 401k Similarities and Differences

• SIMPLE IRA and 401(k) have similarities, but SIMPLE 401(k) requires filing.

Form 5500 Filing Requirements (Employee Benefit Plans)

• Form 5500 applies to most public and private sector businesses providing plans to 100 or more participants and must be filed electronically.

Form 990 Filing Requirements(Exempt Organizations)

• Form 990 is filed for exempt organizations with gross receipts of $250,000 and assets of $600,000.

Farming Income and Expenses Reporting (Form 4835)

• If the owner only owns farmland and does not partake in farming activities, income is reported on Form 4835 (Farm Rental Income and Expenses).

Farmer Tax Payment Deadline

• March 1 is the latest date for farmer tax payments without penalty.

Section 1231 Transactions (Property Held Over 1 Year)

• Section 1231 transactions relate to sales and exchanges of real or depreciable property held over one year. The sale of held hogs for four years is NOT a Sec. 1231 transaction.

Estate Income Reporting (Forms 1040 and 1041)

• If an estate generates $400 or less in income, it doesn't require filing Form 1041. It files as if the individual were alive.

Joint Venture (JV) Requirements

• For family-owned JVs, filing as Married Filing Jointly (MFJ) is required, all members must materially contribute, and a joint election not to be treated as a partnership must be made.

Professional Limited Liability Company (PLLC) Eligibility

• PLLCs are for licensed professionals forming a business entity.

Default Business Entity Classification

• The default classification for a business entity is a disregarded entity. A business with five members defaults to a partnership.

Farming Business Ineligibility

• A dog breeder is not eligible for classification as a farming business.

Cash Method Accounting Threshold

• Average gross receipts for the last three years below $26 million allow the use of the cash method of accounting.

Qualified PSC (Professional Service Corporation) Cash Method

• A qualified PSC meets a function test to use the cash method if at least 95% of the activities are related.

Capital Non-Material Income Producing Factor for Family Businesses

• When a family runs a business where capital isn't material, all family members must contribute vital services in good faith.

Contribution of Property to a Partnership

• Contribution of property to a partnership sets the partnership interest basis equal to the adjusted basis of the property.

Electronic Filing Requirements for C Corporations

• Electronic filing for C corporations is required if assets exceed $10 Million or it has 250 or more returns.

Base Erosion and Anti-Abuse Tax (BEAT)

• BEAT is a minimum tax for large multinational corporations with gross receipts exceeding $500 million (averaged over the past three years) and more than 3% of deductible payments to foreign affiliates.

Global Intangible Low-Taxed Income (GILTI) Tax Rates

• GILTI tax rates are generally between 10.5% and 13.125%. Foreign tax credits can significantly affect final GILTI rates.

Controlled Group Ownership

• A controlled group exists when a parent company owns at least 80 percent of the voting power in another corporation.

Health Insurance Premium Deductions (S/C Corporations)

• S Corporations require a minimum shareholder percentage of 2% for deductible health insurance premiums. C corporations can deduct all premiums.

Cancellation of Debt (COD) Income Recognition

• COD is typically reportable income, with exceptions for cash basis businesses using the debt for deductible expenses, bankruptcies/insolvencies, or debt forgiveness from a property seller.

Uniform Capitalization Rules (UNICAP) and Advertising Costs

• Advertising costs do not need to be capitalized during the construction of additional office buildings (UNICAP rules).

Legal Fees and Start-up Costs

• Legal fees are not start-up costs. Costs such as business market analysis, advertising, and client travel are considered start-up costs.

Sales and Use Tax Deductibility

• Sales/use taxes are deductible only when imposed on the seller, treated as income to the seller (who pays the tax to the state and deducts from income).

C Corporation Shareholder Meeting Requirements

• A C Corporation must have at least one shareholders' meeting per year.

Business Meal Deduction Eligibility

• Interstate trucking, pilots, railroad employees, and mariners qualify for a 80% business meal deduction under DOT guidelines. Farmers are not eligible.

Double-Declining Balance Depreciation

• Double-declining balance depreciation method deducts a larger percentage of depreciation in the earlier years of an asset's life. For example, with a 10-year asset, the deduction in the first year might be 20%.

Cost Depletion Method

• Cost depletion calculates a rate per unit by dividing the asset's adjusted basis by the total estimated recoverable units. This rate is then multiplied by the number of units extracted to determine the depletion deduction.

Percentage Depletion Deduction Applicability

• Percentage depletion is applicable to oil, gas, and uranium but NOT timber.

Related Parties for Like-Kind Exchange Transactions

• Related parties for like-kind exchange transactions include half-siblings but not step-parents, siblings, uncles, aunts, nieces, cousins, or in-laws.

Depreciation and Property Sale Income Characterization

• Depreciation claimed is considered ordinary income when property is sold. The rest of the realized gain is categorized as capital gain.

Schedule M-1 Filing Requirement

• Schedule M-1 is not required if book income and tax income are the same.

FUTA Tax Rates and Credits

• FUTA tax is a federal tax on employers with a state UI program. The standard FUTA tax rate is 6.0% on the first $7,000 of wages, offering a 5.4% credit, for a net FUTA tax rate of 0.6%.

Additional Medicare Tax Withholding

• Additional Medicare Tax is withheld from employees earning over $200,000 whether or not the employee will owe taxes.

Trust Fund Recovery Penalty

• The trust fund recovery penalty is 100% of the unpaid trust fund tax.

Excise Taxes

• Excise taxes are assessed as a percentage or set amounts. Cigarette/tobacco taxes are set amounts.

Social Security Tax Limitation

• Social Security tax applies only up to a maximum limit on employee earnings.

QBI Deduction Eligibility (Architecture and Engineering)

• Architecture and engineering are not specified fields for QBI deduction.

Simple Trust Annual Exemption

• The annual exemption for a simple trust is $300.

Exempt Organization Penalty Maximums

• Maximum penalty for any return is the lesser of $10,500 or 5% of gross receipts for the year. For returns filed in 2021, organizations with gross receipts over $1,084,000 have a daily penalty of $105, up to a maximum of $54,000, while exempt organizations face $20 daily.

Defined Benefit Plan Annual Benefit Limit

• The 2024 annual benefit limit for defined benefit plans is either $275,000 or the average salary from the last three years (whichever is lower).

Form 990-T Filing Requirement (Unrelated Business Income)

• Form 990-T is required for unrelated business income of $1,000 or more.

Farmer Crop Method of Accounting

• Farmers can use the crop method of accounting (with IRS approval) if a crop isn't harvested/disposed of during the same tax year as planting. The entire cost of producing the crop is deductible in the year income is realized.

Livestock Depreciation

• Livestock can be depreciated, except for resale.

C Corporation Income, Loss, and Deduction Pass-Through

• Income, losses, and deductions are not passed through to members or shareholders in a C Corporation.

Accumulated Earnings Tax

• The accumulated earnings tax is a 20% tax on corporations with excessive earnings retention.

This quiz covers various aspects of taxation relevant to corporations and partnerships, including filing requirements, tax return deadlines, net operating losses (NOL), and specific tax forms. Test your knowledge and understanding of the tax implications for different business entities.