Table of Contents. Business Entities Partnerships... 41

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1 Table of Contents Business Entities... 1 General Information....1 Sole Proprietorship....1 Partnership....1 Corporation....4 S Corporation....5 Farmers....5 Exempt Organizations....6 Limited Liability Company....7 Employer Identification Number....9 Employee or Independent Contractor Books and Records...13 Accounting Periods...14 Calendar Year Fiscal Year...15 Short Tax Year...15 Accounting Methods Cash Method...16 Accrual Method Hybrid Method...22 Inventories Wage Reporting Requirements Form W-2, Wage and Tax Statement Form W-4, Employee s Withholding Allowance Certificate Form 1099-MISC, Miscellaneous Income Hobby vs. Business Determination Reporting...29 Business Entities Review Questions...31 Business Entities Review Answers Partnerships Definitions Income, Expenses, Distributions, and Flow-through Separately Stated Partnership Choices NATP xi

2 Partnership Passive Activity Portfolio Income...45 Uniform Capitalization Distributive Share...47 Schedules L, M-1, M-2, and M Self-employment Income Family Partnerships Spousal Business Partnership Distributions Partner s Gain or Loss Partner s Basis for Distributed Property Partner s Dealings with Partnership Sale or Exchange of Property...63 Guaranteed Payments Contributions of Property...65 Basis of Partner s Interest Adjusted Basis...67 Effect of Partnership Liabilities Limits on Losses Partner s Exclusion and Deductions Disposition of a Partner s Interest...72 Sale, Exchange, or Other Transfer Liquidation of Partner s Interest Forming a Partnership Partnership Agreement Terminating a Partnership Converting to LLC Form 1065, U.S. Return of Partnership Income Penalties Tax Year...79 Electronic Filing Contribution of Services...85 Debt Discharge Partnership Review Questions Partnership Review Answers xii NATP

3 Corporation Operations Filing Requirements Penalties Final Return Accounting Methods and Periods Recordkeeping Corporate Earnings and Profits Schedule M Distributions Money or Property Distribution Distribution of Stock or Stock Rights Constructive Distribution Reporting Dividends and Other Distributions Income, Deductions, and Special Provisions Cost of Getting Started Related Persons Below-market Loans Charitable Contributions Dividends-received Deduction Credits Losses Capital Losses Net Operating Loss Passive Losses At-risk Limits Liquidation Redemption Distributions to Related Parties Taxable Income Corporate Tax Accumulated Earnings Tax Estimated Tax Alternative Minimum Tax Corporation Operations Review Questions Corporation Operations Review Answers NATP xiii

4 Forming a Corporation Transfers to a Corporation Stock for Services Exchange of Property for Stock Shareholder Basis Corporation Basis Capital Contributions Nonshareholder Contributions Bond Premiums Controlled Groups Parent-Subsidiary Group Brother-Sister Group Combined Group Apportionment Closely Held Corporations Personal Service Corporation Forming a Corporation Review Questions Forming a Corporation Review Answers S Corporations Requirements for S Corporation Status Ineligible Corporations Other Shareholder Options Electing S Corporation Status Pass-through Entity Form 1120S General Instructions Penalties Electronic Filing Accounting Passive Activity Limitations Income and Expense Items Separately Stated Items S Corporation Taxes Accumulated Adjustments Account Distributions xiv NATP

5 Shareholder Provisions Allocation of Income, Loss, Expense, and Credit Basis Termination of S Status Revocation Ceasing to Qualify Passive Investment Income Reinstatement Termination of a Shareholder s Interest Debt Discharge Noncash Distributions S Corporation Review Questions S Corporation Review Answers Business Financial Information Business Income Bartering Income Rental Income Interest Income Dividends Miscellaneous Income Prepaid Income Items Not Considered Income Cost of Goods Sold Loss Limitations Reporting Gains and Losses Canceled Debt Business Expenses and Deductions Employees Pay Rent Expense Depreciation, 179 Deduction, Amortization, and Depletion Business Bad Debts Travel, Meals, and Entertainment Interest Insurance Taxes NATP xv

6 Employment Taxes Federal Excise Tax Involuntary Conversion Other Expenses and Deductions Business Credits Net Operating Loss Business Use of Residence Business Assets Cost Basis Adjusted Basis Like-kind Exchange Other Nontaxable Exchanges Other Transfers Basis Other Than Cost Additions and Improvements Basis Reference Chart Sales Self-employment Tax Self-employment Income Reportable Transactions Analysis of Financial Records Business Activity Classification Income Statement Balance Sheet Change in Accounting Method Recapture Pass-through Activity Reconciliation of Book Income to Tax Income Related Party Advising the Business Taxpayer Filing Obligations Deposit Obligations Reporting Obligations for Businesses Recordkeeping Selection of Entity Comingling xvi NATP

7 Advice on Accounting Method Affordable Care Act Compliance Small Employer Large Employer Business Financial Information Review Questions Business Financial Information Review Answers Specialized Returns and Taxpayers Form General Trust Information Distributable Net Income Income Distribution Deduction Exemption and Deductions Abusive Trusts Income in Respect of a Decedent Allocations Separately Stated Items Filing Exempt Organizations Exemption Filing Tax 452 Contributions Retirement Plans Available Plans Retirement Savings Contributions Credit Retirement Plan Reporting Nonqualified Plans Penalties Nondiscrimination Rules Special Rules for Farming and Fishing Farm Income Farm Inventory Depreciation Disaster Area Losses Farm Expenses NATP xvii

8 Employment Tax Responsibilities Tax Computation Specialized Returns and Taxpayers Review Questions Specialized Returns and Taxpayers Review Answers Appendix Adjusted Basis of Property Like-kind Exchange Realized and Recognized Gain Like-kind Exchange Basis Transfer: Formula to Determine Gain Basis of Stock in a 351 Transfer Excess Net Passive Income S Corporation Stock Basis Appendix C: Partner Basis Appendix D: Shareholder Basis Appendix E: Form Appendix F: Form xviii NATP