TAX 9866 Lecture 39: salt31

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31 Mar 2020

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Document Summary

The cares act (the law enacted by congress a few days ago) modifies irc section. 163(j), which affects many types of businesses, including corporations, and was substantially modified by the tcja in 2017. For the years in question, ati may be roughly analogized to the financial concept of earnings before interest, taxes, depreciation and amortization (ebitda). The cares act changes the ati limitation, increasing it from 30% to 50%, but only for tax years that begin in 2019 or 2020. An election contemplated by the legislation would permit a taxpayer to opt out of the 50% limitation. Moreover, another special election permits a taxpayer to use its 2019 ati in lieu of 2020 ati, with a pro- ration mechanism for short tax years. Thus, corporations that otherwise would have disallowed business interest expense (the amount in excess of 30% of ati, up to 50%) may be able to deduct more business interest expense in 2019 and 2020.

Related Questions

During the current year, Marlene, Nancy and Olive formed a new SCorporation. Solely in exchange for stock, Marlene and Nancycontributed appreciated property, while Olive contributed services.The exchanges of Marlene and Nancy will be nontaxable if:

		Olive receives 30% of the stock
		Olive receives 80% of the stock
		Olive receives 15% of the stock
		Marlene and Nancy together receive 50% of the stock

In June of 2018, Alice acquired heronly machine for $30,000 to use in her business. The machine isclassified as 5-year property. Aliceâs maximum depreciation(including bonus) on the machine this year is:

		$30,000
		$12,000
		$6,000
		$18,000

Cactus Corporation, an S Corporation, had accumulated earningsand profits of $200,000 at the beginning of the tax year. Tex andShirley each own 50% of the stock. During the current year Cactushad $100,000 of ordinary income and distributed $10,000 to Tex and$10,000 to Shirley. What is Tex's taxable income for the currentyear?

		$10,000
		$0
		$100,000
		$50,000

Bristol Corporation was formed as an S Corporation on January 1,2014 and elected S corporation status at that date. Bristol has hadthe same 25 shareholders throughout its existence and has one classof stock. Bristol's S election will terminate if it:

		10% of the shareholders vote to revoke the election
		to purchase 10 shares
		Allows a variation in the voting rights of the stock
		Increases the number of shareholders to 125

On February 10, 2018, Ace Corporation, a new calendar yearcorporation, elected S corporation status and all shareholdersconsented to the election. There was no change in its shareholdersduring the current year. Ace met all eligibility requirements foran S corporation during the preelection portion of the year. Whatis the earliest date on which Ace can be recognized as an Scorporation?

		February 10, 2018
		January 1, 2019
		February 10, 2019
		January 1, 2018

In March of 2017 Frederick acquired an passenger automobile for$45,000 and used the automobile 85% for business. Themaximum depreciation deduction for 2017 is:

		$3,160
		$11,160
		$8,928
		$9,486

In August of 2017, Joseph acquires andplaces into services business equipment costing $300,000. Theequipment is classified as 5-year recovery property. No otheracquisitions are made during the year. Joseph elects to expense themaximum amount under Sec. 179. Josephâs total deductions for theyear are

		$60,000
		$500,000
		$100,000
		$300,000

For the current tax year, VBN, an S Corporation distributes$100,000 to its sole shareholder, Raymond. His basis in the stockwas $140,000 before the distribution. VBN had once been a regular CCorporation and had remaining accumulated earnings and profits(E&P) from those years of $70,000. However, VBN has no balancein its accumulated adjustment account. How should the distributionof $100,000 be handled?

$100,000 as a taxable distribution

$70,000 as a taxable dividend, and $30,000 has a non taxablereturn of capital

$50,000 as a taxable dividend, and $100,000 as a non taxablereturn of capital

$70,000 as a taxable dividend; and $30,000 as a capital gain

Stahl, an individual who owns 100% of Talon, an S corporation,had a basis of $50,000 at the first of the year. During the yearTalon reported the following: Ordinary Loss of $10,000; Municipalinterest income of $8,000, Long term capital gain of $4,000; andLong term capital loss of $9,000. What was Stahl's basis in Talonat year end?

		$56,000
		$65,000
		$53,000
		$43,000

Gross Receipts of $70,000; Tax Exempt Interest Income of $4,000;Dividends of $10,000; Supplies Expense of $3,000; and UtilitiesExpense of $1,500. What amount is the S Corporation's ordinarytaxable income?

		$75,500
		$79,500
		$70,000
		$65,500

Bob and Sam each owned 50% of Lostalot, an S Corporation. Bob'sbasis is $30,000 and Sam's basis is $15,000. The corporation hasoperating loss for the current year of $50,000. Howmuch loss can each shareholder deduct in the current year assumingthey materially participate in the business:

		Bob: $25,000; Sam: $15,000
		Bob: $0; Sam: $0
		Bob: $25,000; Sam: $25,000
		Bob: $30,000; Sam: $15,000

Terra Corporation, a calendar-yeartaxpayer, purchases and places into service in 2017 machinery witha 7-year life that cost $650,000. The mid-quarter convention doesnot apply. Terraâs taxable income for the year before the Sec. 179deduction is $700,000. What is Terraâs total maximum depreciationdeduction related to this property?

		$585,718
		$521,345
		$92,885
		$500,000

Identify which of the following statements is false.

		The PTI (previously taxed income) represents the balance ofundistributed net income which were already taxed.
		The AAA balance can be negative, but the shareholder's basis inthe S corporation stock cannot be less than zero.
		Tax exempt income increase the AAA and the basis of the Scorporation stock.
		An S Corporation may or may not have accumulated Earnings andProfits Elaine owns an unincorporated manufacturing business. In 2017,she purchases and places in service $600,000 of qualifying fiveyear equipment for use in her business. Her taxable income from thebusiness before any section 179 deduction is $100,000. Which of thefollowing statements is true?

Elaine cannot deduct any Section 179 deduction for 2017

Elaine can deduct $100,000 as a Section 179 deduction in 2017with a $400,000 carryover to next year.

Elaine can deduct $100,000 as a Section 179 deduction in 2017with a $500,000 carryover to the next year

Elaine can deduct $500,000 as a section 179 deduction in2017

Charles, an individual, owned 100% of the Alpha, an Scorporation. At the first of the year, Charles' basis in Alpha was$25,000. In the current year, Alpha realized ordinary income of$1,000; and a long term capital gain of $3,000. Alpha distributed$25,000 to Charles at the end of the year. What amount of the$25,000 is taxable to Charles?

		$0
		$7,000
		$1,000
		$25,000

Regulations are

	A. equal in authorityto legislation if statutory
	B. equal in authorityto legislation
	C. presumed to bevalid and to have almost the same weight as the IRC
	D. equal in authorityto legislation if interpretative

2) Which of the followingstatements regarding proposed regulations is not correct?

	A. Practitioners andother interested parties may comment on proposed regulations.
	B. Proposedregulations expire after 3 years.
	C. Proposed andtemporary regulations are generally issued simultaneously.
	D. Proposedregulations do not provide any insight into the IRS'sinterpretation of the tax law.

3) Identify which of thefollowing statements is false.

	A. Members from boththe House and the Senate are on the Conference Committee.
	B. When tax advisorsspeak of the tax law, they usually have in mind just the InternalRevenue Code.
	C. Records ofcommittee hearings are helpful in determining Congressionalintent.
	D. All arefalse.

4) Which of the followingstatements about a partnership is true?

	A. Partners are taxedon distributions from a partnership.
	B. A partnership is ataxpaying entity.
	C. Partners are taxedon their allocable share of income whether it is distributed ornot.
	D. Partners areconsidered employees of the partnership.

5) Which of the followingstatements is incorrect?

	A. The number of Scorporation shareholders is unlimited.
	B. S corporationsmust allocate income and expenses to their shareholders based ontheir proportionate ownership interest.
	C. S corporationincome is taxed to shareholders when earned.
	D. S corporationlosses can offset shareholder income from other sources.

6) Which of the followingstatements is incorrect?

	A. Limited partners'liability for partnership debt is limited to their amount ofinvestment.
	B. In a generalpartnership, all partners have unlimited liability for partnershipdebts.
	C. In a limitedpartnership, all partners participate in managerialdecision-making.
	D. All of thestatements are correct.

7) Three members form an LLC inthe current year. Which of the following statements is incorrect?

	A. The LLC can electto have its default classification ignored.
	B. The LLC's defaultclassification under the check-the-box rules is as apartnership.
	C. The LLC can electto be taxed as a C corporation with no special taxconsequences.
	D. If the LLC electsto use its default classification, it can elect to change itsstatus to being taxed as a C corporation beginning with the thirdtax year after the initial classification.

8) Identify which of thefollowing statements is false.

	A. Under thecheck-the-box regulations, an LLC that has only two members(owners) must be taxed as a partnership.
	B. The check-the-boxregulations permit an LLC to be taxed as a C corporation.
	C. A business neednot be incorporated under state or federal law to be taxed as acorporation.
	D. Once an electionis made to change its classification, an entity cannot change againfor 60 months.

9) Identify which of thefollowing statements is true.

	A. The check-the-boxregulations permit an LLC to be taxed as a C corporation.
	B. Under thecheck-the-box regulations, an LLC that has only two members(owners) default classification is as a partnership.
	C. Once an electionis made to change its classification, an entity cannot change againfor 60 months.
	D. All of thestatements are true.

10) For Sec. 351 purposes theterm property does not include

	A. accountsreceivable
	B. cash
	C. inventory
	D. servicesrendered

11) Identify which of thefollowing statements is true.

	A. The exchange ofstock for services rendered is not a taxable transaction.
	B. The repeal of Sec.351 would result in more existing businesses beingincorporated.
	C. Section 351 wasenacted to allow taxpayers to incorporate without incurring adversetax consequences.
	D. All arefalse.

12) Barry, Dan, and Edithtogether form a new corporation; Barry and Dan each contributeproperty in exchange for stock. Within 2 weeks after the formation,the corporation issues additional stock to Edith in exchange forproperty. Barry and Dan each hold 10,000 shares and Edith willreceive 9,000 shares. Which transactions will qualify fornonrecognition?

	A. Only the secondtransaction will qualify for nonrecognition.
	B. Only the firsttransaction will qualify for nonrecognition.
	C. Because of thestep transaction doctrine neither transaction will qualify.
	D. Both transactionswill qualify under Sec. 351 if they are part of the same plan ofincorporation.