2018 National Income Tax Workbook Business Entity Issues p 445 TaxExempt Entities Update Choice of Entity under the TCJA Opting Out of the Centralized Partnership Audit Regime ID: 718712
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Slide1
Business Entity Issues
Chapter 12 pp. 445-485
2018 National Income
Tax Workbook™Slide2
Business Entity Issues
p. 445Tax-Exempt Entities UpdateChoice of Entity under the TCJAOpting Out of the Centralized Partnership Audit RegimeSlide3
Tax-Exempt Entities Update
pp. 446-457Guidance for DAFsCalculation of UBTIWritten advice that grantee is qualifyingChanges to 1023-EZNew Form 1024-AProcedures for Form 1024-AGuidance for change in place/form Slide4
Guidance for DAFs
p. 446Donor-advised fund (DAF)Sponsoring organization controls fundSeparately identified donor contributionsDonor advises distributionsExcise tax if donor (or related persons) advises distribution and receives more than incidental benefit Slide5
Notice 2017-73
p. 447Can donor/adviser advise DAF to pay for donor’s participation in charity event?Can donor/adviser advise DAF to satisfy a charitable pledge?Use of DAF to avoid public support limits Slide6
Charity Sponsored Events
p. 447DAF distribution that subsidizes attendance at charity event – NODAF distribution for membership fee – NODonor/adviser should pay directly Slide7
Charitable Pledges
p. 447DAF distribution to satisfy donor/adviser’s charitable pledge – OK if:No reference to pledge when making distributionNo other benefitDonor/adviser doesn’t claim deduction for distribution Slide8
Ex. 12.1
p. 447Brent promises 1K to food bankBrent advises DAF to distribute 1K to food bankDAF distributes, identifies Brent as adviserPublic recognitionNot more than incidental benefit Slide9
Public Support
pp. 447- 448Public Support TestSubstantial support from the publicGrants from individual >2% don’t countDoesn’t apply to grants from DAFWorkaround – donor contributes to DAF then DAF contributes to charity Slide10
Public Support Con’t
p. 448Regs would treat contribution from DAF as contribution from donorAnonymous contributions all oneDistributions from supporting org. OK if specify not from DAF Slide11
UBTI
pp. 448-450Unrelated Business Taxable Income (UBTI)Tax on T or B income unrelated to exempt activities$1,000 or more report on 990-TExcluded: by volunteers, sale donated goods, for convenience of members, etc. Slide12
Calculating UBTI
pp. 449-450$1,000 deductionSubtract deductions from unrelated T or BPre-2018 aggregated Ts or BsAfter 12/31/17 calculate separately for each T or BCan’t use deduction from one T or B to offset income from another T or BUBTI includes non-deductible fringe benefits Slide13
Written Advice
pp. 450-452Rev. Proc. 2017-53Foreign charity = 501(c)(3) charityPrivate foundation has to make minimum distributions - grant to public charity countsPrivate foundation no expenditure responsibility for distribution to public charity Slide14
Written Advice Con’t
pp. 450-451Foreign charity (no US determination letter)Make equivalency determinationSafe harbor written advice guidelinesReasonable factual/legal assumptionsIdentify/consider all fact/circumstancesNo unreasonable relianceRelate applicable law/authoritiesDon’t consider audit possibility Slide15
Written Advice, Cont.
pp. 451-452Advice must include:English translation of formation docsExempt purposeDistribution provisionsNo ownershipDon’t influence legislationControlled orgsList of activities, etc.Slide16
Form 1023-EZ
pp. 452-454Form 1023-EZ Streamlined Application for Recognition of Exemption under 501(c)(3)Use if:Annual gross receipts 50K or less 3 yrs. (past, current, future)FMV assets not more than 250K Slide17
Form 1023-EZ Con’t
pp. 452-453 Can’t use if:Foreign/no US mailing addressTerrorist orgsLLCs or for-profit entitiesRevoked (other than non-filers)Churches, schools, hospitals, etc.Community foundationsPrivate foundationsSlide18
1023-EZ Updates
pp. 453-454 Part III description of activitiesVerify annual gross receipts/assetsQuestion re public charity statusAuto-revoked must be same classificationChurch, school, or hospital? Slide19
1023-EZ
p. 454 Processing Reject if auto-revoke and seeking different classificationRefer if private foundation seeking reinstatement as public charityRefer if contrary narrativeReject or refer if incomplete narrativeReject if not eligible Slide20
New Form 1024-A
pp. 454-455 Form 1024-A – application for 501(c)(4) status4 pages (Form 1024 is 19)Civic leagues, social welfare, employee association1024-A is optional – Form 8976 is not Slide21
Procedures
pp. 455-456 Rev. Proc. 2018-5Procedure to request exempt statusNo determination for marijuana bus.No determination to relinquish statusRev. Proc. 2018-10Submit 1024-A for (c)(4), 1024 for othersAuthorized representative must signTP must sign under penalty of perjurySlide22
Change in Place/Form
pp. 456-457 Rev. Proc. 2018-15, no new app if change in:IncorporationReincorporation in a diff. stateStatutory mergerSurviving org. is domestic bus. entity, corp., same purpose Slide23
Issue 2:
p. 458 Choice of Entity under TCJA Corp. rate 21% - change to corp.?QBI deduction – change entity to maximize? Slide24
Check the Box
p. 458 Regs Unincorp. w/ > 1 owner = partnershipSingle-member LLC = disregarded entityMulti-member LLC = partnershipCan each elect to be taxed as corp.Figure 12.3 p. 459 Slide25
Doing Business as
p. 459 C Corp. Change to C Corp.? Consider:Tax rate/amount of incomeIncome subject to SE tax% income retained/distributedIncome subject to NIITTax consequences of conversionQBI deductionOther factors (PN p. 60)Slide26
p. 460Tax Rates Individual 10%-37%C corp. 21%MFJ marginal rate less at or below $77,400MFJ average rate less below $332,921 Slide27
pp. 460-461SE Tax If all income subj. to SE tax, incorporated business is betterFigure 12.4 – average rate of tax on income subj. to SE tax exceeds 21%About 23% on 10K Slide28
p. 461Retained Income Business that retains income less tax as C unless owner in 10% or 12% bracketBusiness that distributes income less tax as disregarded or pass through b/c:Second level of taxNet investment income tax (NIIT)Slide29
p. 461Ex. 12.7 Quinn’s C corporation $126,410 incomePays $36,117 salaryNo distributionsCorp. pays $18,381 federal taxQuinn pays $5,467 total tax (income + FICA)Combined $99,799 after tax income Slide30
p. 461 Ex. 12.8 Quinn’s business is S corp.No tax at corp. levelQuinn’s total tax is $23,848After tax income is $99,799Same as C corp. w/no distributionsSlide31
pp. 461-463 Ex. 12.9 Quinn’s business is disregarded entity$19,604 federal income tax$17,861 SE tax$88,945 after tax income$10,854 less than S or C (no distributions)Figure 12.5 compares C, S, disregardedSlide32
C Corp. Comparison
pp. 462-463 Figure 12.6 Above $126,410 C w/no distributions generates less taxIf C distributes 50% S corporation is better up to $202,600 Slide33
Ex. 12.10
p. 463 Hailey’s C corp. $202,600 income$57,886 salary$38,469 distributionHailey pays $16,233 federal tax (income + FICA)Corp. pays $29,460 income tax + $4,428 FICA$152,479 combined after tax income Slide34
Ex. 12.11
p. 464 Hailey’s business is an S corp.$57,886 salaryCorp. pays $4,428 FICA (no income tax)Hailey pays $45,693 total taxAfter tax income is $152,479Same as C corp. Slide35
Ex. 12.12
p. 464Hailey’s business is disregarded entityAll income reported to Hailey$39,266 federal income tax$141,986 after tax income$10,493 less than C or S Slide36
Figures
pp. 465-467Fig 12.7 $202,600 income w/ 50% after tax distribution from C, S corp. = C. corp., rates and both are better than disregardedFigure 12.8 above $202,600, C rate is betterFigure 12.9 if C distributes 100%, S and disregarded rates are better Slide37
NIIT
p. 4673.8% on unearned incomeOver threshold amountPassive income (including dividends)No C distributions/ No NIIT Slide38
Ex. 12.13
p. 467John Edwards C Corp. $10,910,000 profit, $360,000 salaryCorp. pays $2,212,732 taxNo distributions – no NIITJohn pays $70,899 taxCombined income after tax $8,599,017 Slide39
Ex. 12.14
p. 468John’s business is S corporationS. corp. pays no income taxTotal tax is $3,989,674After tax income is $6,920,326Less than C w/ no distributionsSlide40
Ex. 12.15
p. 468
John’s business is disregarded entityJohn reports all incomeTotal tax is $4,306,735After tax income is $6,603,265Less than S or C w/no distributionsFigure 12.10 (p. 469) comparesSlide41
Ex. 12.16
p. 469C corp. distributions – dividend and NIITJohn’s C corp. distributed all incomeJohn taxed on dividends$390,899 NIITFigure 12.11 (p. 470) C corp. lowest after-tax incomeSlide42
Tax to Convert to C
p. 470Partnership or multi-member LLC can do transfer, merger, electionS corporation can revoke or terminate electionPN if converting p’ship doesn’t qualify or elect S it will be a CSlide43
Multi-Member
LLC to Corp.
pp. 470-471Transfer assets to new corp.Merger or formless conversionEx. 12.17 Bigfix, LLC does formless conversion to corp. No gain or loss. Corp. has carryover basis in assets.Entity classification electionForm 8832Slide44
Liabilities on Incorporation
pp. 471-473Incorporation of multi-member LLC can generate gain if contributes liabilitiesContributed liabilities for tax avoidance or no bus. PurposeBasis in assets transferred less than liabilities assumed by corp. excess is bootEx. 12.18 Small Spuds, LLC converts to S. Transfers assets 5M basis and 15M liabilities. 10M income passed through.Ex. 12.19 Small Spuds first transfers assets and liabilities to members, who then contribute to corp. Deemed contribution increases basis. No gain or loss on distribution from LLC or contribution to corp. Slide45
S Conversion to C
p. 473Revoke electionFile statement to revokeMore than 50% consentCan be retroactive or prospectiveTerminate electionToo many shareholders, ineligible shareholder, second class of stock, etc.Slide46
S Termination
pp. 473-474Two returns: beginning of tax year through date of termination & day after termination to end of the yearNo reelection for 5 yearsReduce to 1 year if change in ownership and termination beyond control Slide47
QBI Deduction p. 474
Reduces individual income tax rate by 20% (not SE tax)C corporation doesn’t qualifyFigure 12.12 (p. 475) QBI deduction increases income level where individual tax rate > corp. tax rateSlide48
S Corp. vs. SMLLC p. 475
Both pass throughS corp. and owner pay FICA on wagesSMLLC owner pays SE on all incomePN S corp. must pay reasonable compensationSlide49
S Corp. vs. SMLLC p. 475
+ S decreases SE tax- S wages reduce QBI BENEFIT OF 1 ALWAYS OFFSETS DETRIMENT OF 2Income above phasein, S wages prevent application of W-2 wage limitSlide50
S Corp. vs. SMLLC
pp. 475-476S wages have 3 effects:Corp. and shareholder pay FICAConverts to income that is not QBIAbove threshold, TP can claim higher QBI deductionSlide51
Figure 12.13 p. 476
SMLLC QBI deduction and income taxQBI deduction increases below threshold Begins to decrease in phasein rangeNo QBI above phaseinSlide52
Figure 12.14 p. 477
S corporation (2/7 salary) QBI deduction and taxPayment of wages prevents application of W-2 wage limitSlide53
Figure 12.15 p. 478
S Corp. pays 75% salaryPrevents application of W-2 wage limitReduces QBISlide54
Figure 12.16 p. 479
Compares S corp. (2/7 salary), S corp. (75% salary), and SMLLCQBI deduction for SMLLC higher than S w/75% salary (but generally higher tax)QBI deduction for SMLLC higher than S w/ 2/7 salary 60K to 90KOver phasein range, no QBI deduction for SMLLCSlide55
Figure 12.17 p. 480
Compares S corp. and SMLLC total taxS corp. w/ 2/7 salary pays leastS corp. w/ 75% salary 2nd bestDifferences level off when reach contribution base ($128,400)Slide56
Combining/Separating Entities
p. 481Compute QBI for each separate T or BGroup to use wages of one T or B to increase QBI for secondSeparate if one T or B doesn’t qualify for QBI deductionSlide57
Grouping Businesses p. 481
Prop. Treas. Reg. 1.199A-4Same person owns majority interest in each T or B Majority ownership for majority of tax yearAll items reported on returns w/ same tax yearNone are specified service T or B (SSTB)Meet 2 of three factorsSlide58
Grouping Cont. p. 481
5. Meet 2 of 3 factors:Products/services are the same or customarily provided togetherShare facilities or centralized business elementOperated in coordination w/ or reliance on othersSlide59
Separating Businesses
p. 481Prop. Treas. Reg. 1.199A-5SSTB includes T or B that provides 80% or more property or services to SSTB if 50% or more common ownershipLess than 80% include portionSlide60
Separating Businesses p. 482
T or B 50% or more common ownership w/ SSTB, and shared expenses, T or B is part of SSTB if gross receipts not more than 5% of combined receiptsSlide61
Separating Businesses p. 482
Partnership distribute line of business and contribute to newCorp. Type D spin-off, split-off, split-upNeed active conduct of T or B, transfer one complete T or B, retain one complete T or B, and not a device to distribute E&PSlide62
Issue 3: Opting out of the Centralized Partnership Audit Regime p. 483
Final regulationsEligibility to opt out100 or fewer k-1sNo partners that are partnerships, trusts, disregarded entities, etc.Opt out election on timely filed return Slide63
Opting Out p. 483
Effect – audits conducted under pre-TEFRA rulesExam at partnership levelAgreement or disagreement w/ adjustments at partner levelSlide64
Deciding to
Opt Out pp. 483-484Pros:Partners keep control of decisionsNo one person makes decisions for allAdjustments only for partners of reviewed yearAudit adjustments in audit yearNo partnership role after examEach partner gets computation of adjustmentEach partner makes his/her own decisionDiffering results on appealSlide65
Opting Out Cont. p. 484
Pros cont.:SOL determined at partner levelAdjustments for smaller partners may be below tolerance levelTakes more IRS resources to audit large partnershipAggregate liability is more realisticSlide66
Opting Out Cont. p. 484
Pros cont.:Adjustments more straight forwardNo need for partnership representative (PR)All regulations are not finalSlide67
Opting Out Cont.
pp. 484-485Cons:Closer scrutiny of individual returnsAll partners need SSN ITIN EINOpt-out is limited by type and # of partnersHigher cost per partner for appealDifferent results on appeal may be unfairPartnership has to collect info IRS can later determine election invalidRevocation of election only w/ IRS consentSlide68
Questions?