Area III: Entity Tax Planning

An S Corporation (formerly a C Corp) sells an asset in Year 1 for a gain of $100,000. The asset was held when the S election was made 3 years ago. At the time of election, the asset had a built-in gain of $80,000. The S Corp's taxable income for Year 1 (calculated as if it were a C Corp) is $60,000. What is the amount of Built-in Gains (BIG) tax liability (assume 21% rate)?

A taxpayer is forming a new entity with two other partners. They want to contribute appreciated property tax-free, have flexible profit-sharing allocations (not strictly based on ownership %), and avoid double taxation. Which entity type is most appropriate?

A taxpayer contributes property (Basis $20,000, FMV $30,000) to a partnership for a 10% interest. Three years later, the partnership distributes this specific property to another partner when its FMV is $35,000. What is the tax consequence to the contributing partner?

A C Corporation incurs $60,000 in organizational expenditures in its first year. What is the maximum deduction in the first year?

A C Corporation makes a charitable contribution of $20,000. Its taxable income before the contribution, dividends received deduction (DRD), and NOL carryback is $100,000. What is the deductible amount in the current year?

A partnership agreement allocates 10% of income to Partner A. However, the partnership agreement states that if the partnership has a loss, 100% of the loss is allocated to Partner A. Partner A has a deficit capital account restoration obligation. Does this allocation have substantial economic effect?

A consultant expects to earn $200,000 net profit. They want to minimize Self-Employment (SE) tax. Which entity structure best achieves this goal?

Two individuals form an entity. A contributes cash. B contributes appreciated property (Basis $10k, FMV $100k) for a 50% interest. B wants to avoid immediate gain recognition but wants the flexibility to distribute the property back to himself tax-free in the future if the business dissolves. Which entity is best?

A C Corporation has accumulated earnings of $300,000. It is a service corporation (law firm). It has no specific business plan for the funds. Assume the accumulated earnings credit for service corps is $150,000. What is the amount subject to Accumulated Earnings Tax?

An S Corporation (formerly C Corp) sells an asset in Year 2 for a $50,000 gain. At the time of S election (Year 1), the asset had a built-in gain of $30,000. The S Corp's taxable income for Year 2 (calculated as if C Corp) is $20,000. What is the Built-in Gains (BIG) Tax base?

Shareholders owning 60% of an S Corporation's stock vote to revoke the S election on March 10, Year 1. They do not specify a date. When is the revocation effective?

An S Corporation has substantial AAA and AEP. The shareholders have high basis. They want to distribute AEP to avoid the passive investment income tax but want to minimize total distributions. What planning tool should they use?

Partner A contributes Land (Basis $60,000, FMV $100,000) to a partnership. Two years later, the partnership sells the land for $120,000. How is the $60,000 gain allocated?

Partner A contributes property (FMV $100,000, Basis $40,000) to a partnership. One month later, the partnership distributes $90,000 cash to Partner A. The cash did not come from a loan. How is this transaction likely treated?

A partnership makes a liquidating payment to a retiring general partner in a service partnership. The payment is for the partner's share of unrealized receivables. How is this payment classified under IRC §736?

Which entity type allows for a tax-free liquidation of the entity itself (assuming no cash > basis issues)?

A corporation operates in State A (tax rate 5%) and State B (tax rate 10%). It has $1,000,000 total income. Apportionment factors allocate 60% to State A and 40% to State B. If the corporation shifts $100,000 of payroll from State B to State A, increasing State A's factor to 70%, what is the state tax savings? (Assume payroll is the only factor for simplicity).

An S Corporation was formerly a C Corporation and has Accumulated Earnings and Profits (AEP) of $20,000. It has an Accumulated Adjustments Account (AAA) of $10,000. In Year 1, it distributes $40,000 cash to its sole shareholder. The shareholder's stock basis is $50,000. What is the tax treatment of the distribution?

Partner A contributes land (Basis $60,000, FMV $100,000) to a partnership in Year 1. In Year 3, the partnership sells the land for $120,000. The partnership has two equal partners, A and B. How is the $60,000 tax gain allocated?

An entrepreneur plans to form a business that will incur losses for the first 3 years. They want to deduct these losses against their other active income. They also want limited liability. Which entity structure is most appropriate?

A taxpayer contributes services worth $50,000 in exchange for a 20% capital interest in a new partnership. The partnership has no assets other than the cash contributed by other partners. What is the tax consequence?

Compare the liquidation of a C Corporation vs. a Partnership. Both entities distribute appreciated property to their owners. Which statement is true?

A C Corporation expects a significant increase in state income tax rates in Year 2. It uses the accrual method. It has a state income tax liability for Year 1 that is paid in Year 2. To maximize tax savings, what should the corporation do regarding the timing of the deduction?

A C Corporation has a net capital loss of $20,000 in Year 4. It had capital gains of $5,000 in Year 1, $8,000 in Year 2, and $2,000 in Year 3. What is the optimal use of the loss?

A C Corporation is subject to the accumulated earnings tax. It has Accumulated Taxable Income of $200,000. It pays a dividend of $50,000 on March 1 of the following year. Can this dividend reduce the accumulated earnings tax liability for the prior year?

An S Corporation (former C Corp) sells an asset in Year 1 for a gain of $100,000. The asset was held when the S election was made. At the time of election, the asset had a built-in gain of $80,000. The S Corp's taxable income for Year 1 (calculated as if it were a C Corp) is $60,000. What is the amount of Built-in Gains (BIG) Tax?

Shareholders of an S Corporation want to revoke the S election. Shareholder A owns 40%, Shareholder B owns 20%, and Shareholder C owns 40%. Who must consent to the revocation?

An S Corporation with AEP wants to distribute cash to shareholders but avoid dividend treatment. It has no AAA. What planning strategy could create AAA to allow tax-free distributions?

A partner plans to sell their partnership interest. They have a suspended passive loss of $10,000 from the partnership. They sell the interest to an unrelated party for a $15,000 gain. What is the tax result?

Partnership AB distributes Property X (Basis $10,000, FMV $15,000) to Partner A. Partner A contributed Property Y (Basis $10,000, FMV $15,000) 2 years ago. Property Y is still held by the partnership. Does this trigger any gain?

A taxpayer is forming a new business and expects losses for the first 3 years, followed by significant profits. The taxpayer wants to use the losses to offset their high personal income from other sources during the start-up years. Which entity type is most appropriate to achieve this tax goal?

A C Corporation is subject to the Accumulated Earnings Tax (AET). Its taxable income is $500,000. Federal income taxes paid are $105,000. It paid $50,000 in dividends. The accumulated earnings credit is $250,000. What is the Accumulated Taxable Income?

An S Corporation was formerly a C Corporation. At the time of conversion, it had $100,000 of Net Unrealized Built-in Gains (NUBIG). In Year 3 (within the 5-year recognition period), the S Corp sells an asset with a basis of $20,000 and FMV of $50,000. The asset was held at conversion with a built-in gain of $25,000. The S Corp's taxable income for Year 3 (calculated as if it were a C Corp) is $15,000. What is the amount of Built-in Gains (BIG) Tax liability (assume 21% rate)?

An S Corporation has Accumulated Earnings and Profits (AEP) of $20,000 from C Corp years. The Accumulated Adjustments Account (AAA) balance is $10,000. The shareholder has a stock basis of $50,000. The corporation distributes $40,000 cash. What is the tax treatment for the shareholder?

A taxpayer is a general partner in a partnership that operates a trade or business. The partnership income is $100,000. The taxpayer performs services for the partnership. Is the income subject to Self-Employment (SE) Tax?

A partnership has two partners, A and B. Partner A contributes Property X (Basis $10,000, FMV $20,000). Partner B contributes Cash of $20,000. Three years later, the partnership sells Property X for $24,000. How is the $14,000 tax gain allocated?

An S Corporation elects to treat a distribution as coming from Accumulated E&P rather than the Accumulated Adjustments Account (AAA). Why might a shareholder want this?