1 / 91

Business Entity Issues Chapter 12 pp. 399-444

Business Entity Issues Chapter 12 pp. 399-444. 2016 National Income Tax Workbook™. p. 399 Business Entity Issues . S Corporation fringe benefits S Corporation built-in gains tax S Corporation issues – Death of a SH S Corporation elections Partnership § 751(b) regulations

dmccallister
Download Presentation

Business Entity Issues Chapter 12 pp. 399-444

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Business Entity IssuesChapter 12 pp. 399-444 2016 National Income Tax Workbook™

  2. p. 399 Business Entity Issues • S Corporation fringe benefits • S Corporation built-in gains tax • S Corporation issues – Death of a SH • S Corporation elections • Partnership § 751(b) regulations • New partnership audit rules • SE tax for limited owners

  3. p. 399 Business Entity Issues • Partnerships owning disregarded entities • Partnership § 754 basis adjustments • Tax-exempt organization update

  4. Issue 1 p. 400S Corporation Fringe Benefits • Health or accident insurance • HSA contributions • Disability insurance • Group term life insurance • Meals & lodging – employer convenience • Cafeteria plans • Educational assistance • Dependent care assistance

  5. Issue 1 p. 400S Corporation Fringe Benefits • Generally excludable by employee • May be taxable to 2% shareholder ( > 2%) • If treated as self-employed, not an employee • Stock owned directly or indirectly through: • Spouse, children parents, grandchildren • Stock held by estate or trust

  6. Issue 1 pp. 400-401Health and Accident Insurance • Employer pays and deducts premiums • Employee excludes premiums & benefits • 2% SH includes in income • No withholding or FICA if plan for employees • Include in W-2 Box 1 and Box 14 • Example 12.1 – 2% shareholder • $86,400 wages, $9,600 premiums • W-2 in Figure 12.1

  7. Issue 1 p. 4022% Shareholder • Self-employed health insurance deduction • Not eligible for other ER subsidized plan • Limited to wages from S corporation • Claim in year premiums in W-2 income • S corp must make payments directly or SH pays and proves for reimbursement • S corp must include in SH W-2 wages

  8. Issue 1 p. 4032% Shareholder • Uninsured or self-insured plan • 2% not considered an employee • All reimbursements tax – income, FICA, FUTA

  9. Issue 1 p. 403Health Savings Account • Contributions deductible (with limit) • Distributions nontaxable if for medical • Must have HDHP • Employer or employee contributes • 2016 max total: Family - $6,750, Self - $3,350 • Over 55 – additional $1,000 per year • EE: Nontaxable, W-2 Box 12, Code W, no FICA • 2% SH: Taxable, no FICA/FUTA, may deduct

  10. Issue 1 p. 403Disability Insurance • S corp deducts – short or long term • Employee – Generally nontaxable • 2% SH • Taxable • No deduction for premiums in income

  11. Issue 1 pp. 403-404Life Insurance • Employer as owner • Employer gets proceeds or names beneficiary • No taxable income to employee • No employer deduction for premiums • Employee as owner • Premiums = compensation, fully taxable • Group term life – exclude up to $50,000 • No exclusion for 2% SH

  12. Issue 1 p. 404Meals and Lodging - § 119 • Employee – excludable if • Meals for employer benefit served on employer’s premises • Lodging for employer benefit, on employer’s premises and is a condition of employment • 2% SH – both taxable • Meals/lodging for business travel with accountable plan not taxable

  13. Issue 1 p. 404Cafeteria Plan - § 125 • Employee chooses fringe benefit or cash • No constructive receipt of foregone cash • 2% SH cannot participate • 2% SH participation disqualifies plan • Remove 2% SH from plan if C to elect S

  14. Issue 1 p. 404Educational Assistance - § 127 • Employer contributions deductible • Distributions tax free to employee • Maximum benefit: $5,250/year • 2% SH = employee, exclude benefits • No discrimination – highly compensated • 5% shareholder or compensation > $120,000 • Cannot receive > 5% total benefits/year

  15. Issue 1 p. 405Educational Assistance - § 127 • Example 12.2 • Herb owns 100% Treeco • Rose, Herb’s wife, is employee • Rose constructively owns 100% • Studying for degree • For max exclusion for Rose, Treeco must pay out total of $105,000 (105,000 x 5% = $5,250)

  16. Issue 1 p. 405Dependent Care - § 129 • Employee excludes $5,000/yr (MFS 2,500) • 2% SH may exclude • Limit on benefits to principal SH • Principal SH owns > 5% • Benefits to 5% cannot exceed 25% total paid • Example 12.3 • $5,000 exclusion to sole SH if $20,000 for all

  17. Issue 2 p. 406S Corporation Built-in Gains Tax • Corporate level tax on sale of assets • Applies if • Previously a C corporation • Received assets from C in tax-free reorg, subsidiary liquidation or Qsub election • 5-year recognition period (See note, p. 407) • Tax on gains accrued in C corp • Tax at flat 35% rate

  18. Issue 2 p. 406Net Unrealized Built-in Gain • NUBIG = net gain if liquidated on day of S election (built-in gain net of built-in loss) • FMV of all assets less adjusted basis • Allowable deductions (e.g. cash A/P) • May include items not on balance sheet • Reported annually on Form 1120S • Limits built-in gain for recognition period

  19. Issue 2 pp. 406-407Net Unrealized Built-in Gain • Example 12.4 LGU Corporation • Cash basis professional C corporation • $5,000 investment by each SH • Double tax if sell as C corporation • Elects S status as of 1/1/2017 • Figure 12.2 – Balance Sheet at 1/1/2017 • Figure 12.3 – NUBIG calculation

  20. Issue 2 pp. 407-408Net Recognized Built-in Gain • Net Recognized BIG = Base for tax = Lowest of: • Prelimitation amount (PLA) • Taxable income limitation (TIL) • Net unrealized built-in gain limitation (NUL) • Prelimitation amount • C taxable income with current year recognized built-in gains/losses only

  21. Issue 2 p. 408Prelimitation Amount • Example 12.5 LGU of Example 12.4 • Collects $124,000 receivables • Pays $49,000 accounts payable • Pays SH $21,000 bonuses by March 15 • Figure 12.4 - Prelimitation Amount $54,000 • $54,000 to F1120S, Sch D, Part III, line 6

  22. Issue 2 p. 408Taxable Income Limitation • Complete pro-forma Form 1120 as if a C • Example 12.6 LGU of Ex. 12.4, 12.5 • Figure 12.5 – Income and Expenses • Prepares dummy 1120, lines 1-28, all items • $15,000 to F1120S, Sch D, Part III, line 17 • Determine base for tax • Lowest of the PLA, TIL, or NUL

  23. Issue 2 p. 408Net Unrealized Built-in Gain Limitation • Net unrealized built-in gain determined for first day of S election (conversion date) • If net unrealized BIG is less than PLA or TIL, it limits the BIG tax • After first year of S election, NUL reduced by prior S election year net recognized BIG

  24. Issue 2 pp. 408-409Calculating Built-in Gains Tax • Apply highest corporate rate • Example 12.7 LGU of Ex. 12.4, 12.5, 12.6 • No unused NOL carryforward • Compute on lowest of PLA, TIL and NUL • Figure 12.6 • Tax = $15,000 x 35% or $5,250 • Can offset with C corp credit carryovers

  25. Issue 2 p. 409BIG Tax Effect on SHs and AAA • SH share of income reduced by BIG tax • Treated as loss corresponding to taxed gain • Ordinary income → taxes and licenses • Capital gain → loss of same character • Example 12.8 LGU Corp. • Figure 12.7 $9,750 total income for the year • AAA increased by $9,750

  26. Issue 2 pp. 409-410Year-End Calculations • NUL for following year = Current year beginning balance less current year net recognized BIG • If TIL used for BIG tax comp, lesser of PLA or NUL less TIL = BIG carryforward • Treated as part of next year’s PLA • Unused C corp NOL or capital loss carryforwards offset net recognized BIG

  27. Issue 2 p. 410Year-End Calculations • Example 12.9 LGU • Used TIL to calculate BIG in 2017 • Figure 12.8 - $39,000 carryforward • Lower of PLA or NUL less $15,000 (TIL) • Becomes recognized BIG for 2018 (PLA) • Figure 12.9 – NUL Reduction • NUL adjusted for net BIG recognized

  28. Issue 3 p. 411Death of S Corp Shareholder • S eligibility affected by who inherits • Terminates if nonresident alien or corporation • No effect if: • Estate of deceased • Individual who is US citizen or resident • Certain trusts – grantor, beneficiary controlled, testamentary trust, qualified subchapter S trust (QSST), electing small business trust (ESBT)

  29. Issue 3 p. 414Allocations in Year of Death • Decedent’s share up to date of death reported on decedent’s final return • Example 12.13 Fiscal-Year S corporation • 3/31 year end, 4/6 date of death – 6 days • Pro Rata Allocation – per share/per day • Weighted average • Closing of the Books

  30. Issue 3 p. 415Allocations in Year of Death • Closing of the books • Requires consent of all affected SHs • Attach statement to 1120S • Per share/per day within each part of year • Sales, gifts, transfers at death, redemptions, divisive reorgs., conversion of a trust • Transferor treated as owner on day of transfer

  31. Issue 3 pp. 415-416Allocations in Year of Death • Example 12.14 Merle, 100% SH died 4/6/16 • Estate transferred shares to trust 9/23/16 • Figure 12.11 – weighted average • S corporation options (Figure 12.12, p. 416) • Allocate based on % in Figure 12.11 • Close the books at 4/6 • Close the books at 9/23 • Close the books at 4/6 and 9/23

  32. Issue 3 pp. 416-417Basis after Death of Shareholder • Date of death or alternate valuation date FMV • Gift to decedent w/1 year of death, decedent’s basis used if passes to donor/donor’s spouse • Example 12.15 Basis = FMV = $ 6,000,000 • Income in respect of a decedent (IRD) • Successor SH reduces basis to extent value attributable to IRD • Example 12.16 Basis = $4M (6M - 2M IRD)

  33. Issue 4 pp. 417-418S Corporation Election – Form 2553 • Sole Proprietorship cannot make S election • LLC or Partnership (PS) • Form 8832 – corporation first (+ Form 2553) • 12 mos before to 75 days after effective • Must have EIN to file • Form 2553 only if corporate & S for same day • If S terminates, reverts to C, not PS • Note (p. 418) agreement revision necessary

  34. Issue 4 p. 418S Corporation Election • Form 2553 due 15th day of 3rd month of tax year to be in effect – send certified • C corp can file in year before effective date • No electronic option for filing • CP261 sent to confirm acceptance • Retain copy in permanent corporate records • After 60 days, no CP261, contact IRS

  35. Issue 4 pp. 418-419Late or Defective Elections • Inadvertence Relief, timely 2553 - § 1362(f) • Failed to meet eligibility requirements • Met eligibility but misstated info on 2553 • Will be treated as an S corporation • Relief by National Office – Letter Ruling • If Service Center lacks relief jurisdiction • Submit with Power of Attorney + fee

  36. Issue 4 p. 419Inadvertence Requirements • Admission of a problem • Statement about corrective action • Representation: • All affected unaware of defect • Not using as retroactive tax planning • Officer signs – penalties of perjury • SHs sign – penalties of perjury – Agree with statement – have & will file consistently with S

  37. Issue 4 p. 419Reasonable Cause Requirements • Less stringent that inadvertence • Officer & SHs sign – penalties of perjury • Cause: Did not file form 2553 • Cure: File form 2553 and have SH returns consistent with existence of S corporation

  38. Issue 4 pp. 419-420Relief Granted by Service Centers • Rev. Proc. 2013-30 • Late S elections • Late entity classification elections • Late QSub elections • Late QSST elections • Late ESBT elections • Grant relief if ≤ 3 years, 75 days from start • Relief not necessarily automatic

  39. Issue 4 p. 420Late Election – Return Not Filed • SHs must have reported S income/loss • Effective date: Intended date • If never filed, attach 2553 to 1st 1120S • Not within 3 years, 75 days → Nat’l Office

  40. Issue 4 p. 420Late Election – Return Filed • All SHs must state they filed consistent with S existence • SH should file before relief request • SH amending could be a problem • Requires IRS acceptance of amended return • Address status of SH returns in relief request

  41. Issue 5 pp. 420-421Partnership Proposed Regs §751(b) • § 751(b) Hot Assets • Unrealized receivables (includes recapture) • Substantially appreciated inventory – FMV exceeds 120% of adjusted basis • Disproportionate Distribution • PN does not receive pro rata share hot assets • Current: Gross value of assets • Proposed (10/31/14): Hypothetical sale

  42. Issue 5 pp. 421-422Partnership Proposed Regs §751(b) • Gross Value – compares PN’s share of PS hot assets before to share after distribution • Hypothetical Sale – compares • Ordinary income of each partner if assets sold for FMV immediately before distribution & • Ordinary income of each partner if assets sold for FMV immediately after distribution (including distributee) • No difference – no § 751(b)

  43. Issue 5 p. 422Partnership Proposed Regs §751(b) • Any reasonable approach to determine adjustment • Gross Value – Hot Asset Sale Approach • Deemed distribution and sale back to PS • Deemed Gain Approach – • PS recognizes income and allocates to PNs with reduced interest in hot assets • Basis in hot assets adjusted for income recognized

  44. Issue 6 p. 422New Partnership Audit Rules • Partnership Audit History • Pre-TEFRA • Changes appealed at partner level • Varying results • Statute of limitations controlled @ PN • TEFRA (1982) • Changes appealed at partnership level • Statute of limitations controlled @ PS

  45. Issue 6 p. 423New Partnership Audit Rules • Small partnership – Pre-TEFRA procedures • 10 or fewer partners, no flow-thru partners • Can elect TEFRA – Form 8893 • TEFRA – Unified Audit Procedures • > 10 partners or any flow-thru partners • Changes made to PNs for year of PS audited • Electing large partnerships • Changes made to PNs in year of the audit

  46. Issue 6 p. 423New Partnership Audit Rules • Bipartisan Budget Act of 2015 (BBA) • Repealed TEFRA audit regime and electing large partnership audit procedures • Amended §§ 6221-6241 • Effective for tax years beginning > 12/31/2017 • Entity level audit rules apply to all PSs • Some qualify to elect out of the BBA rules • May elect BBA provisions to apply earlier

  47. Issue 6 p. 423New Partnership Audit Rules • Entity level audit will always apply to • PS with more than 100 partners • PS with either a trust or partnership as a PN • Counting partners • If S corp is a PN, all shareholders in the count • Example 12.19, Figure 12.14

  48. Issue 6 p. 424New Partnership Audit Rules • PS appoints a Partnership Representative • PR or P.REP • Only person who can represent the PS • Can bind all PNs for tax matters/adjustments at audit level and in judicial matters • Must be individual with substantial presence within the U.S. • Does not have to be a partner

  49. Issue 6 p. 424New Partnership Audit Rules • Notice of Administrative Proceeding to PR & PS • Conduct and complete audit • Notice of Proposed PS Adjustmt (PPA) to PR/PS • PS level assessment • Highest individual rate + • Interest factor (audit year to date of audit) • PR has options to reduce assessment

  50. Issue 6 p. 424New Partnership Audit Rules • PR options to reduce PS assessment – within 270 days of PPA • Request PNs amend, pay, provide proof • Provide summary of tax exempt PNs • Request change: C corp/lower income PNs, cap gain rate

More Related