Agenda 5/3 BA 128A-1

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Agenda 5/3 BA 128A-1

• Questions from lecture
• Review Chapter 9,10,11,12
• Assignment C9-27,35
• Additional C10-29,11-47, 12-32,50

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Ch 9 - recap partnership profits and losses

• Partners Basis
• contribution increase a partners basis in the
  partnership
• liability assumed by the partner also increase
  his/her basis
• gain increase partners basis
• loss decrease partners basis until the basis 0
• partners personal liabilities assumed by
  partnership decreases the partners basis
• partnership distributions are tax free

3
Contribution of property to partnerships

• No gain or loss recognized for the partner and
  partnership if property is cash, tangible and
  intangible property, services - need to
  recognized gain
• if personal liabilities assumed by partnership
  exceed basis in partnership, recognize gain
• partnership basis of property contributed
  partners basis before the transfer
• Unrealized receivables, basis 0
• holding period includes the transferors holding
  period
• character of gain also transfers over
• depreciation recapture also transfers over
• apply the same rules after formation of
  partnership

4
Chapter 11 S-corp

• Shareholder-related requirements
• no more than 75 shareholders
• eligible shareholders, no C-corp and
  partnerships, 7 types of trust, tax-exempt public
  charity or private foundation OK
• US citizens and residents
• Corporation-related requirements
• domestic corp
• must not be ineligible corp - corp with special
  federal income tax status
• one class of stock

5
Adv. and Disadv. of S-corp

• Adv
• Exempt from corporate income tax
• Pass through losses to SH to offset other types
  of inceom
• Earnings not subject to self-employment tax
• Distributed income are not subsequently taxed
• Disadv.
• Corporate tax rates may be lower
• S-corp tax SHs income, not distributions
• Not eligible for dividends-received deductions
• Special allocation not allowed
• restricted to calendar year and other loss
  limitations

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Allocation of gains and losses

• Per day, per share basis - equal portion of
  stock held and days held
• Special allocation not allowed
• Allocation of loss
• NOL allowed
• loss limited to the sum of the adjusted basis for
  the SHs S corp stock plus the adjusted basis of
  any indebtedness owed directly by the S-corp to
  the SH
• S corp SH cannot increase his/her basis by
  liabilities assumed in the corp
• losses and deductions are deducted from the basis
  in the following sequence
• Distributions
• nondeductible and noncapital expenditures
• ordinary loss and deduction items
• unlimited carryover of loss or deduction item
• Special SH loss and deduction limitations
• At-risk rules
• Passive Activity limitation
• Hobby Loss

7
Chapter 11 Gift Tax

• Gift and Transfer Tax - Unified Transfer Tax
  system
• Gift tax served as
• Backstop to estate tax
• redistribute wealth
• Gift exclusion to recipient, taxable only to
  donor
• Unified rate scheme for both taxes
• maximum 55

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Gift Tax

• Subject to phase out, benefit of lower rates
  phased out until avg rate is 55, phase-out also
  apply to unified credit after gift gt 10m
• Gift valued at FMV at date of gift
• Post appreciation of gift does not matter
• Unified credit - reduced for of tax computed
  for gifts and estates

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Gift tax formula

• Aggregate amount of gifts for
  individuals
• minus 1/2 of gift splitting for the
  individual
• plus 1/2 of gift splitting from spouse
• minus annual exclusions
• minus marital deductions
• minus charitable deductions
• taxable gifts of current period
• plus taxable gifts for all prior periods
• cumulative taxable gifts
• tax on cumulative gifts of prior periods (current
  rates)
• minus tax on taxable gifts of prior periods
  (current rates)
• tax on taxable gifts of current period
• minus unified credit for the period - unified
  credit used in prior periods
• tax payable for current period (not
  less than 0)

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Exlusions and Deductions

• Exclusions
• 10,000 per donee
• unlimited donees
• indexed after 1998
• Deductions
• Marital deduction in excess of exclusions
• Charitable deduction

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Gift splitting

• Automatic for community property
• Election for common property
• enable gifts to be taxed at lower marginal rates
• only applied to gifts made in the portion of year
  of marriage