Business Entity Issues Chapter 12 pp. 445-485 - PowerPoint Presentation

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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?