Business Entity Issues Chapter 6 pp National Income Tax Workbook

Transcription

1 Business Entity Issues Chapter 6 pp National Income Tax Workbook

2 Business Entity Issues p. 171 Homeowners Associations Tax-Exempt Entities Update Proposed Partnership Audit Regulations Partnership Ownership Changes

3 Homeowners Associations (HOA) p. 172 An HOA may: 1. Be tax-exempt 501(c)(4) or (c)(7) 2. Elect tax rules under 528 or 3. Be taxed under 277

4 Homeowners Associations (HOA) 501(c)(4) Exemption pp Must serve the community, not HOA No activities directed to maintenance of private residences Allow public use/enjoyment of common areas or facilities the HOA owns

5 Homeowners Associations (HOA) 501(c)(7) Exemption pp Primary function must be to own/maintain recreational facilities Requirements to qualify: 1. Membership must be limited 2. Supported by member dues, fees, etc 3. Earnings may not benefit individual 4. No goods/services to public

6 Applying for Exempt Status pp Application generally not required File Form 1024 if want determination letter Form 8976 needed if operating as (c)(4) File within 60 days of formation Notifies IRS of operation under (c)(4) Required even if F1024 filed

7 Reporting/Paying Tax p. 175

8 Paying Taxes p. 175 Taxed on $1,000 or more of UBTI UBTI = income not substantially related to exempt purpose or function Form 990-T due 15 th day of 5 th month

9 Homeowners Associations qualifying under 528 pp Under 528 an HOA is 1. Condo management association 2. Residential real estate mgmt. assoc. 3. Timeshare association Substantiality test - 85% residential Gross Income test - 60% exempt function inc. Expenditure test - 90% exp. related to association property

10 Substantiality Test p. 176 Only applies to: 1. Condo management association 2. Residential real estate mgmt. assoc. Requires 85% of the HOA units, lots or building are used for residential purposes Condo based on square footage Residential R.E. based on zoning

11 60% Income Test pp Exempt-function income: Dues, fees, or assessments of owners Nonexempt function income: Tax-exempt income, $ from nonmembers, interest on capital fund, $ from members for specific purposes Assessments for capital improvements not treated as gross income

12 90% Expenditure Test p. 177 Qualifying expenditures 90% test For management, acquisition, construction, maintenance & care Current & capital exp. on assoc. prop Allocate association/nonassoc. prop

13 528 Tax Election pp Elect 528 by filing Form 1120-H File by due date or within 12 months 15 th day/4 th month if not 6/30 15 th day/3 rd month if 6/30 year end Election made each year

14 Reporting and Paying 528 Tax p. 178 Flat rates: 30% (32% if timeshare) Taxed on nonfunction income less directly connected deductions (includes depreciation) $100 specific deduction allowed No NOLD allowed No special corporate deductions

15 Homeowners Associations qualifying under 277 pp File 1120 regular corp rates 15 th day of 4 th month unless 6/30 year end Deductions to extent of income Carryforward excess to next year Inc > exp not taxed if refunded/credited Must elect - Rev. Rul

16 Capital Contributions p contributions to corporate capital are not gross income N/A to unincorporated association

17 Tax-Exempt Entities Information Document Request (IDR) p. 183 New process as of 4/1/2017 Intended to accelerate exam resolutions Initial research/review by examiner Initial consideration of alternative sources of information

18 Tax-Exempt Entities Update pp Information Document Request (IDR) Initial Letter Phone contact after 10 business days Call TP - discuss issues & items needed Establish reasonable response date Modify items based on discussion One IDR per issue Response acknowledgemt date on IDR

19 IDR Extensions p. 184 TP responds: Review by date on IDR and notify TP of results No TP response or response incomplete: 5 days to decide on extension May grant two 15-day extensions send extension approval letter Review provided info w/in 10 days

20 IDR Enforcement pp After 2 extensions - enforcement begins Enforcement examiner must: Inform manager Prepare delinquency notice Call TP due date and info needed Mail delinquency notice w/due date Mgr app needed if due > 10 days

21 Updated Form 990-EZ pp Developed based on paper filing errors 29 separate interactive icons Information to help complete the field Can be filed electronically or by paper

22 990-EZ Pointers & Filing Tips p Be aware of definition of gross receipts, filing threshold for Form 990 series for each type of organization 2. Sponsoring & controlling organization requirements Form 990 rather than EZ 3. Double check EIN 4. Officer signature (authorized trustee/trust) 5. Parts I-V of EZ must be fully completed

23 6. 501(c)(3) & nonexempt charitable trusts must complete entire Part VI of EZ 7. All required schedules for EZ must be completed and attached (c)(3) or 4979(a)(1) orgs must complete appropriate Sch A for tax period 9. Must file Sch B or certify not required to in Box H of EZ (contributions schedule)

24 (c)(3) & 527 orgs must complete Sch C (political/lobbying) 11.Orgs that are schools under 170(b)(1)(A)(ii) must complete Sch E 12.Orgs required to report excess benefit transactions or loans required to complete Sch L (transactions w/interested persons)

25 Proposed Partnership Audit Regulations p.190 Applies to Tax years after 12/31/2017 Can elect for years after 11/2/15 Covers all adjustments and items relating to the partnership (includes penalties) Any additional tax is assessed and collected at the PS level

26 Electing Out p. 191 May elect out of new regime if eligible Eligible partnership 100 or fewer partners during the year Based on required # of K-1s If H & W both partners = 2 S corp = number of S SH s + S corp

27 Eligible Partners p. 192 Eligible partner includes: Individual C corporation Eligible foreign entity S corporation Estate of deceased partner

28 Non-eligible Partners p. 192 Eligible partner does not include: Partnerships Trusts Foreign entities that are not eligible Disregarded entities Nominees Estates

29 How to Elect Out p. 192 Elects on timely filed return (w/extensions) Election revocable only with IRS consent Must disclose name, correct TIN, federal tax classification of all partners (includes S SHs if an S corp is a partner) Each partner must be notified w/in 30 days of election

30 Consistent Treatment p. 192 Treatment of ALL items must be consistent on partner & partnership returns If PS does not file PN considered inconsistent unless PN notifies IRS If not consistent & no notice given, adjustment made at partner level

31 Partnership Representative pp Rep has sole authority to act for PS: Must have substantial presence in US Can be anyone If entity, must identify and appoint individual to act on behalf of entity Designation made on return each year

32 Partnership Fails to Designate Representative p. 193 IRS chooses based on: Views of majority partners Knowledge both of tax and of PS Access to books and records A US presence

33 Imputed Underpayment p.193 Any adjustments causing an imputed underpayment must be paid by the partnership Paid in the adjustment year May elect to push-out adjustments to the reviewed year partners

34 Change in Tax Classification pp Multi-owner partnership to single owner PS terminates if one owner General sole prop, LLC SMLLC Deemed liquidating distribution Gain if money > basis Loss if just cash & 751 assets

35 Example 6.8 p. 195 Lynn & Frank LLC as PS Lynn sells 50% interest to Frank - $20,000 Deemed distribution ½ asset to each PN Frank could have gain on distribution Lynn: Sale of PS interest for $20,000 Frank: SMLLC with basis in assets of: ½ each asset purchased - $20,000 ½ each asset - PS distribution rules

36 Example 6.9 pp members LLC as PS Greg and Georgia sell to unrelated, Ian PS terminates only one owner Greg and Georgia: Sale of PS interest Deemed liquidating distribution to PNs Ian: Purchased assets for $20,000 New holding period

37 Change to/from Corporation p. 196 Change from Partnership to Corporation PS assets & liabilities to corp for stock PS liquidates stock distributed to PNs Change from Corporation to Partnership Taxable liquidation of corp SHs contribute all to partnership

38 Change to/from Disregarded Entity p. 196 Change from Corp to Disregarded Entity Taxable liquidation of corporation Change from Disregarded Entity to Corp Owner of DE contributes assets & liabilities to corp in exchange for stock

39 Changing from SMLLC to PS p. 196 Generally no gain/loss to PS/PN Basis in PS = basis contributed + cash + gain recognized New PN contributes $ to SMLLC interest Basis in LLC = contribution to LLC Old member contributed assets to LLC Basis in LLC = asset basis

40 Example 6.10 pp SMLLC owned by Allen Bridget pays Allen $5,000 for ½ interest Bridget: Buying ½ of each asset Allen & Bridget contribute assets to LLC Bridget basis: $5,000, new holding pd. Allen basis: ½ asset basis, c/o hold g pd

41 Example 6.11 p. 197 SMLLC owned by Alvin Barbara contributes $10,000 for interest Basis = $10,000, new holding pd. Alvin contributes all SMLLC assets Basis = basis in assets, c/o holding No gain or loss recognized

42 Partnership Changes to LLC p. 198 Revenue Ruling No gain or loss recognized Tax year does not close New EIN is not needed

43 EIN Issues Need new EIN if: Sole prop to PS or 1120 Sole prop to SMLLC w/ employees p. 198 PS that: Incorporates, Becomes sole prop

44 EIN Issues p. 198 LLC needs new EIN if: New LLC formed with > one owner New LLC formed (chooses 1120 or S) SMLLC becomes multimember LLC New SMLLC with either Excise tax on/after 1/1/2008, or Employment tax on/after 1/1/2009

45 Complete Partnership Termination p. 199 All distributed to PNs & no operations after No gain or loss unless Money > basis in PS interest (money = cash, liability dec., marketable sec.) or Disproportionate distribution 751 assets Unrealized receivables Substantially appreciated inventory

46 Complete Termination Proportionate distribution p. 199 Basis in assets received = basis in PS interest allocated as follows: 1. Cash, marketable securities 2. PS basis in unrealized receivables/inventory 3. PS basis in all other assets 4. Outside basis to appreciated assets 5. Any remaining basis in proportion to FMV

47 Technical Termination pp Sale of 50% of total interest in PS profits and capital within 12-month period No sale if: gift, bequest, inheritance, liquidation of a PS interest Old: short-year Check tech term & final return boxes New: Same EIN - Check tech term & initial return

48 Sale of Partnership Interest pp Capital gain except ordinary income assets Amount realized = cash + FMV assets received + PS liabilities buyer assumes Basis in PS includes share of PS liabilities

49 Example 6.12 p. 201 Basis: $55,000 (includes $25,000 liab) Sells interest for $150,000 cash Computation of Gain/Loss: Cash $150,000 Debt relief + $25,000 Tax Basis - $55,000 GAIN $120,000

50 Retirement/Death of Partner p. 201 General: PS distribution rules apply If general PN & capital not material income-producing factor: Amount for unrealized receivables & goodwill = distributive share of PS income or guaranteed payment Capital intensive: general distribution rules

51 Example 6.13 pp

52 Example 6.13 pp

53 Retirement/Death of Partner Timing Issues p. 203 Retired PN or deceased PN s successor is PN until interest completely liquidated 2-person PS continues until then Liability share of PN remains in basis unless contract says otherwise

54 Retirement/Death of Partner Allocation of Payments p. 203 Fixed amount for fixed # of years: pro rata portion of each to 736(a) and 736(b) Varied payments, allocate first to 736(b) PNs can set allocation, 736(b) not > FMV Allocation of 736(b) payments Pro rata except 100% to 1245 recap until fully taxed

55 Death of Partner Inherited Interest pp Basis in inherited interest = FMV of deceased partner s interest on date of death Plus deceased partners share of liabilities Less any items of Income in Respect of a Decedent (IRD)

56 Thank You