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....11 Books and Records...13 Accounting Periods...14 Calendar Year....14 Fiscal Year...15 Short Tax Year...15 Accounting Methods....16 Cash Method...16 Accrual Method....19 Hybrid Method...22 Inventories....23 Wage Reporting Requirements....25 Form W-2, Wage and Tax Statement....25 Form W-4, Employee s Withholding Allowance Certificate....26 Form 1099-MISC, Miscellaneous Income....26 Hobby vs. Business... 28 Determination....28 Reporting...29 Business Entities Review Questions...31 Business Entities Review Answers....35 Partnerships.... 41 Definitions....41 Income, Expenses, Distributions, and Flow-through... 42 Separately Stated....42 Partnership Choices....43 NATP xi
Partnership Passive Activity....44 Portfolio Income...45 Uniform Capitalization....46 Distributive Share...47 Schedules L, M-1, M-2, and M-3...53 Self-employment Income....54 Family Partnerships....56 Spousal Business....57 Partnership Distributions....58 Partner s Gain or Loss....59 Partner s Basis for Distributed Property....60 Partner s Dealings with Partnership....62 Sale or Exchange of Property...63 Guaranteed Payments....64 Contributions of Property...65 Basis of Partner s Interest....66 Adjusted Basis...67 Effect of Partnership Liabilities....68 Limits on Losses....69 Partner s Exclusion and Deductions....71 Disposition of a Partner s Interest...72 Sale, Exchange, or Other Transfer.... 72 Liquidation of Partner s Interest....73 Forming a Partnership....75 Partnership Agreement....75 Terminating a Partnership....76 Converting to LLC....76 Form 1065, U.S. Return of Partnership Income.... 77 Penalties....78 Tax Year...79 Electronic Filing....84 Contribution of Services...85 Debt Discharge....85 Partnership Review Questions....87 Partnership Review Answers....91 xii NATP
Corporation Operations.... 97 Filing Requirements....97 Penalties....98 Final Return....98 Accounting Methods and Periods....99 Recordkeeping....100 Corporate Earnings and Profits...100 Schedule M-3....102 Distributions....102 Money or Property Distribution...102 Distribution of Stock or Stock Rights....103 Constructive Distribution....104 Reporting Dividends and Other Distributions....104 Income, Deductions, and Special Provisions... 109 Cost of Getting Started....109 Related Persons....112 Below-market Loans....115 Charitable Contributions....115 Dividends-received Deduction....118 Credits...120 Losses...121 Capital Losses....121 Net Operating Loss....122 Passive Losses....123 At-risk Limits....123 Liquidation...124 Redemption...126 Distributions to Related Parties....128 Taxable Income...129 Corporate Tax...130 Accumulated Earnings Tax...130 Estimated Tax....132 Alternative Minimum Tax....133 Corporation Operations Review Questions...137 Corporation Operations Review Answers...141 NATP xiii
Forming a Corporation.... 147 Transfers to a Corporation....147 Stock for Services....147 Exchange of Property for Stock....148 Shareholder Basis....152 Corporation Basis....153 Capital Contributions....154 Nonshareholder Contributions....154 Bond Premiums...154 Controlled Groups....155 Parent-Subsidiary Group....155 Brother-Sister Group....156 Combined Group...156 Apportionment...157 Closely Held Corporations....158 Personal Service Corporation...159 Forming a Corporation Review Questions....161 Forming a Corporation Review Answers....165 S Corporations.... 171 Requirements for S Corporation Status....171 Ineligible Corporations....172 Other Shareholder Options....173 Electing S Corporation Status....175 Pass-through Entity....179 Form 1120S....180 General Instructions...180 Penalties....181 Electronic Filing....182 Accounting....182 Passive Activity Limitations....183 Income and Expense Items....186 Separately Stated Items...188 S Corporation Taxes....189 Accumulated Adjustments Account....193 Distributions...194 xiv NATP
Shareholder Provisions....196 Allocation of Income, Loss, Expense, and Credit.... 196 Basis....198 Termination of S Status....202 Revocation....203 Ceasing to Qualify....203 Passive Investment Income....204 Reinstatement....204 Termination of a Shareholder s Interest...205 Debt Discharge....205 Noncash Distributions....206 S Corporation Review Questions....207 S Corporation Review Answers....213 Business Financial Information... 219 Business Income....219 Bartering Income....220 Rental Income....220 Interest Income....221 Dividends...222 Miscellaneous Income....222 Prepaid Income...224 Items Not Considered Income...225 Cost of Goods Sold....227 Loss Limitations...234 Reporting Gains and Losses....240 Canceled Debt...251 Business Expenses and Deductions....252 Employees Pay...253 Rent Expense....271 Depreciation, 179 Deduction, Amortization, and Depletion... 273 Business Bad Debts....298 Travel, Meals, and Entertainment.... 300 Interest....307 Insurance...311 Taxes...313 NATP xv
Employment Taxes...314 Federal Excise Tax....316 Involuntary Conversion...317 Other Expenses and Deductions....319 Business Credits....323 Net Operating Loss....335 Business Use of Residence....341 Business Assets....343 Cost Basis....343 Adjusted Basis...344 Like-kind Exchange....346 Other Nontaxable Exchanges....353 Other Transfers....354 Basis Other Than Cost...358 Additions and Improvements....360 Basis Reference Chart....364 Sales....365 Self-employment Tax....366 Self-employment Income....367 Reportable Transactions....371 Analysis of Financial Records...371 Business Activity Classification...371 Income Statement....372 Balance Sheet....372 Change in Accounting Method...373 Recapture....374 Pass-through Activity...375 Reconciliation of Book Income to Tax Income....376 Related Party...381 Advising the Business Taxpayer....388 Filing Obligations....388 Deposit Obligations....392 Reporting Obligations for Businesses...393 Recordkeeping....397 Selection of Entity....398 Comingling....400 xvi NATP
Advice on Accounting Method...401 Affordable Care Act Compliance....403 Small Employer....403 Large Employer....404 Business Financial Information Review Questions....409 Business Financial Information Review Answers....421 Specialized Returns and Taxpayers.... 435 Form 1041...435 General Trust Information...436 Distributable Net Income....439 Income Distribution Deduction....441 Exemption and Deductions....441 Abusive Trusts....442 Income in Respect of a Decedent....443 Allocations................................................ 444 Separately Stated Items...446 Filing....446 Exempt Organizations....448 Exemption....448 Filing....450 Tax 452 Contributions....453 Retirement Plans....456 Available Plans...456 Retirement Savings Contributions Credit....469 Retirement Plan Reporting....470 Nonqualified Plans....472 Penalties...473 Nondiscrimination Rules....475 Special Rules for Farming and Fishing....476 Farm Income....477 Farm Inventory...481 Depreciation....482 Disaster Area Losses....482 Farm Expenses....483 NATP xvii
Employment Tax Responsibilities....486 Tax Computation....487 Specialized Returns and Taxpayers Review Questions...489 Specialized Returns and Taxpayers Review Answers....495 Appendix... 501 Adjusted Basis of Property...502 Like-kind Exchange Realized and Recognized Gain...502 Like-kind Exchange Basis....503 351 Transfer: Formula to Determine Gain... 503 Basis of Stock in a 351 Transfer...504 Excess Net Passive Income...504 S Corporation Stock Basis...504 Appendix C: Partner Basis... 509 Appendix D: Shareholder Basis.... 511 Appendix E: Form 4797... 515 Appendix F: Form 1041........................................ 517 xviii NATP