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Agenda 5/3 BA 128A-1

Agenda 5/3 BA 128A-1. Questions from lecture Review Chapter 9,10,11,12 Assignment C9-27,35 Additional C10-29,11-47, 12-32,50. Ch 9 - recap partnership profits and losses. Partner’s Basis contribution increase a partner’s basis in the partnership

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Agenda 5/3 BA 128A-1

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  1. Agenda 5/3 BA 128A-1 • Questions from lecture • Review Chapter 9,10,11,12 • Assignment C9-27,35 • Additional C10-29,11-47, 12-32,50

  2. Ch 9 - recap partnership profits and losses • Partner’s Basis • contribution increase a partner’s basis in the partnership • liability assumed by the partner also increase his/her basis • gain increase partner’s basis • loss decrease partner’s basis until the basis =0 • partner’s personal liabilities assumed by partnership decreases the partner’s basis • partnership distributions are tax free

  3. Contribution of property to partnerships • No gain or loss recognized for the partner and partnership if property is cash, tangible and intangible property, services - need to recognized gain • if personal liabilities assumed by partnership exceed basis in partnership, recognize gain • partnership basis of property contributed = partner’s basis before the transfer • Unrealized receivables, basis = 0 • holding period includes the transferor’s holding period • character of gain also transfers over • depreciation recapture also transfers over • apply the same rules after formation of partnership

  4. Chapter 11 S-corp • Shareholder-related requirements • no more than 75 shareholders • eligible shareholders, no C-corp and partnerships, 7 types of trust, tax-exempt public charity or private foundation OK • US citizens and residents • Corporation-related requirements • domestic corp • must not be ‘ineligible’ corp - corp with special federal income tax status • one class of stock

  5. Adv. and Disadv. of S-corp • Adv • Exempt from corporate income tax • Pass through losses to SH to offset other types of inceom • Earnings not subject to self-employment tax • Distributed income are not subsequently taxed • Disadv. • Corporate tax rates may be lower • S-corp tax SH’s income, not distributions • Not eligible for dividends-received deductions • Special allocation not allowed • restricted to calendar year and other loss limitations

  6. Allocation of gains and losses • “Per day, per share” basis - equal portion of % stock held and days held • Special allocation not allowed • Allocation of loss • NOL allowed • loss limited to the sum of the adjusted basis for the SH’s S corp stock plus the adjusted basis of any indebtedness owed directly by the S-corp to the SH • S corp SH cannot increase his/her basis by liabilities assumed in the corp • losses and deductions are deducted from the basis in the following sequence • Distributions • nondeductible and noncapital expenditures • ordinary loss and deduction items • unlimited carryover of loss or deduction item • Special SH loss and deduction limitations • At-risk rules • Passive Activity limitation • Hobby Loss

  7. Chapter 11 Gift Tax • Gift and Transfer Tax - Unified Transfer Tax system • Gift tax served as • Backstop to estate tax • redistribute wealth • Gift exclusion to recipient, taxable only to donor • Unified rate scheme for both taxes • maximum 55%

  8. Gift Tax • Subject to phase out, benefit of lower rates phased out until avg rate is 55%, phase-out also apply to unified credit after gift > $10m • Gift valued at FMV at date of gift • Post appreciation of gift does not matter • Unified credit - reduced $ for $ of tax computed for gifts and estates

  9. Gift tax formula Aggregate amount of gifts for individuals minus 1/2 of gift splitting for the individual plus 1/2 of gift splitting from spouse minus annual exclusions minus marital deductions minus charitable deductions = taxable gifts of current period plus taxable gifts for all prior periods = cumulative taxable gifts tax on cumulative gifts of prior periods (current rates) minus tax on taxable gifts of prior periods (current rates) = tax on taxable gifts of current period minus unified credit for the period - unified credit used in prior periods = tax payable for current period (not less than 0)

  10. Exlusions and Deductions • Exclusions • $10,000 per donee • unlimited donees • indexed after 1998 • Deductions • Marital deduction in excess of exclusions • Charitable deduction

  11. Gift splitting • Automatic for community property • Election for common property • enable gifts to be taxed at lower marginal rates • only applied to gifts made in the portion of year of marriage

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