Notes Flash Cards Part-2

4/20/22, 11:28 AM Notes
BUSINESS ENTITY OVERVIEW
Recordkeeping
A taxpayer cannot approximate or estimate deductions, and generally must have documentary evidence,
such as receipts, canceled checks, or bills, to support expenses. Documentary evidence should show the
amount, date, place, and essential character of the expense. Documentary evidence is not needed if the
expense, other than lodging, is less than $75 or for a transportation expense for which a receipt is not
readily available.
Period of limitations
1. Owe additional tax and (2), (3), and (4) do not apply 3 years
2. Do not report income and it is more than 25% of the gross income shown on return 6 years
3. File a fraudulent return No limit
4. Do not file a return No limit
5. File a claim for credit or refund after filing return Later of 3 years or 2 years after tax was paid
6. File a claim for a loss from worthless securities 7 years
Partnership
Pass-through entity. Ordinary business income (loss) and separately stated items on partner's K-1.
Must have at least 2 partners.
Partners can be individuals, corporations, trusts, estates, or other partnerships.
S corporation
Pass-through entity. Ordinary business income (loss) and separately stated items on shareholder K-1.
100 shareholder limit (no partnership, corporation, or nonresident alien shareholders).
1 class of stock.
S-election made no more than two months and 15 days after the beginning of the tax year the
election is to take effect, or in the year prior.
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4/20/22, 11:28 AM Notes
C Corporation
C Corporation pays a flat 21% tax at the entity level. Shareholders pay tax on dividends (double taxation)
at the individual level.
Closely held if at any time during the last half of the tax year, more than 50% of the value of its
outstanding stock is, directly or indirectly, owned by or for five or fewer individuals, including
certain trusts and private foundations.
Affiliated group - Parent corporation has at least 80% of the total voting power and the total value
of the stock of such corporation.
Limited liability company (LLC)
Default tax treatment is disregarded entity (single member) and partnership (multi-member)
Can elect to be treated as a corporation (including S corporation) no more than two months and 15
days after the beginning of the tax year the election is to take effect, or anytime in the preceding
tax year.
Cannot change entity type for 60-months (without IRS permission).
Qualified joint venture (QJV)
An unincorporated business jointly owned by a married couple
The only members are a married couple who file a joint return
Each spouse is treated as a sole proprietor and claims a share of the income and expenses on
Schedule C based on their respective interest in the business, with the combined interest on the
two Schedule Cs totaling 100%
The business is co-owned by both spouses and both spouses materially participate in business
(mere joint ownership of property is not enough)
EMPLOYEES
4/20/22, 11:28 AM Notes
Statutory nonemployee
Similar to independent contractor, considered self-employed; subject to SE tax. Includes:
Direct sellers/Real estate agents – paid by sales, not by hours worked
Companion sitters – unless employed by agency
Statutory employee
Subject to social security and Medicare (FICA), and FUTA tax
Not subject to federal income tax (unless backup WH applies)
Examples: commissioned delivery drivers (not milk); full-time life insurance agent for one agency;
full-time traveling sales agent (wholesaler/retailer)
Common law employees

Anyone performing services for an employer and employer controls how and what will be done.
Employer generally has:
Behavioral control – directs the what, where and how
Financial control – directs financial decisions
Employment relationship – benefits, contract, permanency
Independent contractor
Self-employed; subject to SE tax
Independent profession offering services to general public
Employer controls only the result of the work, not the means and methods to complete
TAX WITHHOLDING AND REPORTING
4/20/22, 11:28 AM Notes
Employing a spouse or parent
Subject to federal income and FICA taxes
Not subject to FUTA tax
Child employed by parents
Not subject to FICA if under 18
Not subject to FUTA if under 21
Subject to federal income tax, regardless of age
Business must be a sole proprietor or partnership with both parents as partners
Trust fund recovery penalty
A responsible party who willfully fails to properly withhold, account for, deposit or pay employment
taxes may be held personally liable for a penalty equal to the full amount of the unpaid trust fund tax,
plus interest.
Electronic Federal Tax Payment System (EFTPS)
System for making electronic transfers to pay federal tax deposits (employment, excise, corporate
income tax)
The penalty for failure to use EFTPS when required is 10% of the amount not deposited using
EFTPS.
Monthly deposit schedule if tax liability is $50,000 or less.
Semi-weekly deposit schedule if tax liability is more than $50,000
4/20/22, 11:28 AM Notes
Federal Unemployment Tax Act (FUTA)
FUTA is a federal tax to fund unemployment compensation
The employer must pay FUTA if it pays $1,500 or more in wages in any quarter, or employs one or
more employees in any 20 or more weeks during the year
Report federal unemployment tax on Form 940
SUTA is the state equivalent and also reported and paid by employer
Federal Insurance Contributions Act (FICA)
FICA consists of social security tax (6.2%), and Medicare tax (1.45%) tax
7.65% withheld from employee wages; 7.65% paid in by employer
Wages above $200,000 are subject to 0.9% additional Medicare tax (withheld from employee)
Self-Employed Contributions Act (SECA)
SECA covers the social security and Medicare tax owed by self-employed individuals
Must pay 15.3% SE tax and file Schedule SE if net earnings from self-employment is $400 or more
or church employee income is $108.28 or more
INFORMATIONAL RETURNS
1099-NEC - Nonemployee Compensation
Report nonemployee compensation of $600 or more made to other persons, vendors,

subcontractors, and independent contractors in the course of a trade or business.
Generally, payments to a corporation (including a limited liability company (LLC) that is treated as a
C or S corporation) are excluded from the reporting requirement.
Must report payments for legal services (even if paid to a corporation).
Personal payments are not reportable.
Due date to IRS and recipient January 31.
4/20/22, 11:28 AM Notes
Regular gambling withholding
24% gambling withholding applies when winnings exceed $5,000 for sweepstakes, wagering pools
(includes poker), and lotteries.
Withholding does not apply unless winnings are at least $600 and 300 times the amount wagered
for other transactions, like blackjack or similar table games.
Backup withholding
24% backup withholding from payments subject to 1099 reporting if:
TIN not provided
TIN incorrect
Notified payee underreporting or certification failure
Information return due dates
Due date for filing most 1099 information returns to IRS is by Feb 28 or Mar 31 if filed electronically
(exception 1099-NEC due by Jan 31)
Due date to provide a copy to recipient for most 1099 information returns is by Jan 31 (exception
1099-B due by Feb 15)
W-2 due to Social Security Administration and recipient by Jan 31
1099-MISC
Report payments of $600 or more to each person for rents, prizes and awards, other income
payments, medical and health care payments, crop insurance proceeds, 409(A) deferrals, gross
proceeds paid to attorneys, fishing boat proceeds, etc.
$10 or more in royalties or broker payments in lieu of dividends, tax-exempt interest
Backup withholding is 24% if correct taxpayer identification number not provided
Generally, must provide to the recipient by Jan 31 and to the IRS by Feb 28 (March 31 if filed
electronically)
No longer used to report nonemployee compensation. Use 1099-NEC for that purpose
4/20/22, 11:28 AM Notes
ACCOUNTING PERIODS AND METHODS
All events test (accrual)

Record income when all events occur that fix the right to receive the income, which is the earliest of the
date when:
The required performance takes place
Payment is due
Payment is received and the amount can be determined with reasonable accuracy
Deduct expenses when all events that determine the liability have occurred.
The amount of the liability can be figured with reasonable accuracy.
The economic performance takes place with respect to the expense.
Gross receipts test
Taxpayers with annual average gross receipts that do not exceed $26 million (for 2021) for the three
prior taxable-year periods may use the cash method, are not required to keep an inventory, and are
exempted from the application of section 263A (uniform capitalization rules).
12-month rule
A cash basis taxpayer is not required to capitalize amounts paid to create certain rights or benefits for
the taxpayer that do not extend beyond the earlier of:
Twelve months after the right or benefit begins, or
The end of the tax year following the tax year in which payment occurred
Constructive receipt
Constructive receipt occurs when an amount is credited to an account or made available to the taxpayer
without restriction. Possession is not a requirement. If an agent of the taxpayer receives income, the
taxpayer is considered to receive it when the agent receives it. The taxpayer does not constructively
receive income if control of its receipt is subject to substantial restrictions or limitations.
4/20/22, 11:28 AM Notes
Cash method
Recognize income and expenses on actual or constructive receipt.
The following cannot use the cash method:
A corporation (not SCORP or qualified PSC) with average annual gross receipts more than
$26 million
A partnership with a corporation (other than SCORP) as a partner, and with the partnership
having average annual gross receipts exceeding $26 million
A tax shelter
Fiscal year
A fiscal year is 12 consecutive months ending on the last day of any month except December 31
A trust generally cannot use a fiscal year.
INVENTORY
Accounting for inventory
Businesses with more than $26 million average annual gross receipts in the prior 3 years must
use accrual method to account for inventory
To figure taxable income, inventory must be valued at the beginning and end of each tax year
EXPENSES AND DEDUCTIONS
4/20/22, 11:28 AM Notes
Entertainment
Taxpayers may no longer deduct entertainment expenses, even if directly related to the active conduct of
a trade or business. EXCEPTION: Expenses for recreational, social or similar activities primarily for the
benefit of all employees (not just highly compensated) remain deductible (holiday parties, company
picnics, etc.).
Deductible business meals

Deduct 50% of the cost of business meals that meet the following criteria:
Ordinary and necessary business meals (not lavish or extravagant)
Taxpayer (or employee) must be present
Provided to a current or potential customer, client, or similar business contact
If provided in connection with entertainment the meals must be purchased or stated separately on
the receipt
Travel expenses
A taxpayer may deduct business-related travel expenses incurred while away from a tax home (location
of main workplace, not personal residence) for periods requiring rest that last substantially longer than
an ordinary days work.
Business bad debts
Debt becomes totally worthless when there is no longer a chance the debtor will pay
Taxpayer does not have to wait until a debt is due before it is determined to be totally worthless
A deduction may be claimed only if the amount owed was previously included in gross income
Must include amounts later collected (up to the previous bad debt deduction that reduced tax) in
gross income
4/20/22, 11:28 AM Notes
Business casualty and theft loss
Must be business or income-producing property.
Loss = adjusted basis – combined salvage value, insurance, or other reimbursements. FMV is not
considered.
Not subject to the same limitations as loss on personal-use property.
If federally declared disaster may deduct in current or preceding tax year.
Self-Employed health insurance deduction

Premiums for medical, dental and long-term care for taxpayer, spouse and dependents are deductible if
the taxpayer is:
Self-employed with a net profit (Schedule C or F)
A partner with net earnings (Schedule K-1)
A more-than-2% S corp shareholder with wages (W2)
Plans must be established under the business but the policy may be in name of business or individual.
Report premiums as guaranteed payment/wages and reimburse any premiums paid by the individual.
Capitalized interest
Interest on debt to produce real property or certain tangible personal property is added to basis and
deducted ratably over the life of the loan. For this purpose, tangible personal property includes:
Class life of 20 years or more
Estimated production period of more than 2 years (1 year if cost of production exceeds $1 million)
TCJA: Limitations apply to taxpayers with more than $26 million of average gross annual receipts.
4/20/22, 11:28 AM Notes
Deductible interest
Interest paid or accrued on business related debt is deductible as a business expense if all 3
requirements are met:
1. Taxpayer is legally liable for debt
2. Both parties intend the debt to be repaid
3. Debtor-creditor relationship exists
Rental expenses
Deduct rent paid for the use of property in the taxpayer’s business in the year paid or accrued. Rent not
deductible:
If the taxpayer will receive equity in the property
If the rent is unreasonable (related party)
In the current year if paid more than 12 months in advance (12-month rule)
Gift expenses
Cannot deduct business gifts made in excess of $25 to a person during the tax year.
Gifts to a customer's family members are considered a gift to the customer (unless there is a bona
fide business connection with the family member).
The $25 cap may not be avoided by spouses giving separate gifts.
Incidental costs (engraving, wrapping, mailing) are not included in the total gift cost.
Promotional materials (less than $4) are not considered gifts subject to the limitation.
4/20/22, 11:28 AM Notes
Organizational costs
Includes costs to create a corporation or partnership such as:
Legal fees
State incorporation fees
Costs for organizational meetings or temporary directors
Does not include costs for issuing stock, securities or interests, or costs associated with asset transfer.
These nondeductible costs are added to basis and not amortized.
Start-up costs
Includes costs in connection with creating or investigating the creation or acquisition of a business:
Market surveys
Ads for business opening
Wages for training (employees and trainers)
Travel to secure vendors or customers
Salaries for executives and consultants
Deducting start-up and organizational costs
Amortize business start-up and organizational costs over 180 months beginning with the initial
month of operation.
May elect to deduct up to $5,000 of start-up costs and $5,000 of organizational costs in year the
business begins. Reduce by costs that exceed $50,000 in each category. Costs not deducted may
be amortized.
Costs a cash-basis taxpayer cannot deduct because payment is not made by the end of the year,
can be deducted in the year of payment.
EMPLOYEE COMPENSATION
4/20/22, 11:28 AM Notes
Achievement award – tangible personal property

An employee achievement award must be tangible personal property which does not include cash, cash
equivalents, gift cards, gift coupons or gift certificates (other than arrangements to receive tangible
personal property), or vacations, meals, lodging, tickets to theater or sporting events, stocks, bonds,
other securities, and other similar items.
Achievement award – types
Length of service – no earlier than the 5th anniversary; no more frequently than every 5 years
Safety achievement – managers, clerical and professional employees excluded; no more than
10% of employees may be awarded per year
Achievement award – income exclusion
Can exclude up to $1,600 annually per employee ($400 for nonqualified awards)
Award must be tangible personal property (not cash or cash equivalents).
Given for length of service or safety achievements; cannot be disguised pay
Section 125 cafeteria plan
Employees choose between certain qualified benefits on a pre-tax basis (not wages and not subject to
employment taxes or withholding) and cash or other taxable benefits. Examples of qualified benefits
include:
Accident and health benefit plans
Adoption assistance
Dependent care assistance
Group term life insurance
Health savings accounts
4/20/22, 11:28 AM Notes
Meals excluded from wages
De minimis meals such as doughnuts, coffee, employee picnics, etc.
Meals on business premises (for employer’s convenience) are excluded from employee's wages
and 50% deductible by the employer.
Nonaccountable plan
Payments to an employee for travel and other necessary expenses of the business under a
nonaccountable plan are treated as supplemental wages and subject to the withholding and payment
of FICA, FUTA, and income taxes.
No substantiation of expenses required
Return of payments in excess of expense not required
Advances made whether expenses are expected to be incurred or not
Payment could otherwise be treated as wages
Accountable plan
Amounts paid to reimburse employees for out of pocket business expenses under an accountable plan
are not wages and are not subject to the withholding and payment of FICA, FUTA, and income taxes.
Must be a business expense paid while performing services as an employee
Must be substantiated in a reasonable period of time
Unsubstantiated amounts must be returned to employer
Fixed allowances like per diem and standard mileage are tax-free reimbursements when they do not
exceed federal rates.
4/20/22, 11:28 AM Notes
Covered employee compensation limit

Deductible compensation for a covered employee of a publicly held corporation may not exceed $1
million per year.
Principal Executive Officer (PEO)
Principal Financial Officer (PFO)
3 highest compensated officers for the taxable year
GENERAL BUSINESS CREDITS
General business credit
Reported on Form 3800
Not refundable (can only be subtracted from tax liability)
Cannot reduce tax liability below the tentative minimum tax or 25% of the regular tax in excess of
$25,000, whichever is greater
Carryback unused credit to 1 prior year or carryforward up to 20 years
LOSS LIMITATIONS
At-risk
A taxpayer is not at risk for amounts such as the following:
Nonrecourse loans that are not secured by the taxpayer’s own property.
Cash, property, or borrowed amounts used in the activity that are protected against loss by a
guarantee, stop-loss agreement, or other similar arrangements (excluding casualty insurance and
insurance against tort liability).
Amounts borrowed for use in the activity from a person (or relative of that person) that has an
interest in the activity, other than as a creditor.
4/20/22, 11:28 AM Notes
Not-for-profit activity
Certain taxpayers cannot use a loss from a not-for-profit activity to offset other income.
Limit applies to individuals, partnerships, estates, trusts, and S corporations. It does not apply to
corporations other than S corporations.
Presumption of profit motive if the activity produces profit in at least 3 of the last 5 tax years
including the current year (2 of the last 7 if primarily breeding, training, showing or racing horses).
Rental real estate professional exception

A loss from rental real estate may offset ordinary income if:
More than 750 hours of material participation in real property trade or business makes up more
than half of the taxpayer’s work, or
Rental losses are not more than $25,000 and taxpayer or spouse actively participates. Subject to
phase-out of 50% of amount above $100,000.
Passive activity
Passive loss offsets income from other passive activities.
Generally, unable to deduct a loss from a passive activity. Carry forward any excess passive activity
loss (PAL) to the next tax year.
There are two types:
1. Business activities and taxpayer does not materially participate.
2. Rental activities, even with material participation, unless taxpayer is real estate professional.
Material participation
Participation is material if meeting any of the following tests:
More than 500 hours of participation in the activity.
More than 100 hours and at least as much as any other participant.
Taxpayer provides substantially all of the participation in the activity.
4/20/22, 11:28 AM Notes
Nonrecourse liabilities of partnership
No partner bears the economic risk of loss (e.g., secured by asset).
Increase partner’s basis for distributions, but not at-risk rules.
EXCEPTION – Qualified nonrecourse financing can increase at-risk basis.
Recourse liabilities of partnership
Any partner bears the economic risk of loss.
Increase partner’s basis for distributions and at-risk rules.
S corporation and partnership loss limitations

There are four potential limitations on S corporation and partnership losses. These limitations (in the
order in which they apply) include:
1. Outside basis (can carry forward indefinitely)
2. Amount at-risk (includes recourse liability)
3. Passive activity losses that exceed passive activity income
4. Excess business loss
AFFORDABLE CARE ACT
Employer shared responsibility provisions
Applicable large employers (avg. 50 full-time employees working at least 30 hours per week) are
subject to an employer shared responsibility payment if at least one full-time employee receives
the premium tax credit for purchasing health insurance through the Marketplace.
The amount of the payment increases if the employer does not offer minimum essential coverage
to at least 95 percent of its full-time employees.
4/20/22, 11:28 AM Notes
Form 1095-C
Filed by employers with more than 50 full-time employees, regardless of the duration of
employment, to evidence the offer (and coverage if applicable) of employer-provided health
insurance.
Provide to all full-time employees by January 31 and file with the IRS by February 28 if filing on
paper (or March 31 if filing electronically) of the year following the calendar year to which the
return relates.
PROPERTY TYPES
Section 1245 and 1250 recapture provisions
In addition to having the character of §1231, any gain on depreciable business property may also
be subject to the recapture provisions of §1245 or §1250.
§1245 (depreciable property other than real property) – Recapture the portion of gain due to
depreciation as ordinary income.
§1250 (real property) – 25% rate applies to a portion of gain up to the amount of straight-line
depreciation. Additional depreciation is taxed as ordinary income (§1250 gain).
Sections 1231 property
Property held more than 1 year that is used in the trade or business and is either depreciable
property or real property (including land) is classified as §1231 property.
Net §1231 gain is taxed at long-term capital gain rates while a loss is an ordinary loss.
A taxpayer with current year net §1231 gain must recapture §1231 losses claimed in the five prior
years as ordinary gain before the capital gain rates apply.
4/20/22, 11:28 AM Notes
Capital assets
Rather than defining capital assets, the law provides a list of properties that are not capital assets:
Intangibles (self-created or with a transferred basis from creator).
Supplies used in business.
Accounts or notes receivable.
Inventory.
Depreciable property and real property used in business.
DEPRECIATION
Special depreciation allowance (bonus depreciation)
Qualified property includes tangible property (not real estate) depreciated in 20 years or less under
MACRS.
A business taxpayer may take an additional 100% special depreciation allowance.
Applies to both new and used property only for the first year the property is in service
The allowance is an additional deduction taken after any Section 179 expense deduction.
A taxpayer may elect out of additional first-year depreciation deduction with respect to any class of
property.
4/20/22, 11:28 AM Notes
Section 179 deduction
The maximum deduction under Section 179 is $1,050,000 in 2021
If the cost of Section 179 property placed in service in 2021 is more than $2,620,000, reduce the
dollar limit (but not below zero) by the amount of cost more than $2,620,000
If the cost of Section 179 property placed in service in 2021 is $3,670,000 or more, cannot take
Section 179 deduction
Must use the property more than 50% for business in the year placed in service. The personal use
portion does not qualify for the Section 179 deduction
If business use falls below 50% a portion of the Section 179 deduction is subject to recapture
Cannot claim Section 179 deduction of more than $26,200 for an SUV placed in service during 2021
Improvements – routine maintenance safe harbor
A small taxpayer may deduct expenditures expected to be required more than once during an
asset’s class life (or over 10 years in the case of buildings).
Does not apply to amounts paid for betterments, amounts paid to adapt a unit of property to a
new or different use, and most restorations.
Improvements – safe harbor for small taxpayers

A small taxpayer may elect to treat all expenditures with respect to buildings as deductible repairs,
regardless of nature if:
Average annual gross receipts in the prior 3-year period not more than $10 million.
The unadjusted basis of the building is $1 million or less.
The total amount expended during the year does not exceed the lesser of $10,000 or 2% of the
unadjusted basis of the building.
Improvements – de minimis safe harbor election
Annual election to deduct improvements, rather than capitalize, $5,000 per invoice (or per item
substantiated by invoice) if the taxpayer has an Applicable Financial Statement ($2,500 for
taxpayers that do not have an AFS).
Must capitalize the entire amount if the cost exceeds threshold amount (cannot deduct a portion).
4/20/22, 11:28 AM Notes
Business property depreciation using MACRS (GDS)
Depreciable property (not real estate):
5-year property – Computers and peripheral equipment, office machinery (typewriters,

calculators, copiers, etc.), automobiles, light trucks, appliances, carpeting, furniture, etc., used in a
residential rental real estate activity. Depreciation on automobiles is limited.
7-year property – Office furniture and equipment (desks, file cabinets, etc.). This class also
includes any property that does not have a class life and that has not been designated by law as
being in any other class.
Real estate depreciation using MACRS (GDS)
Residential rental property (27.5-year property) – Rental real estate. Depreciate additions or
improvements to the structure over the same period. Use the straight-line method and mid-month
convention.
Non-residential real property (39-year property) – Commercial buildings and structures. Use
straight-line method and mid-month convention.
For the first year, take depreciation only for the number of months the property was in use.
Improvements to property
Treat an improvement to depreciable property as separate depreciable property. Improvement means
an addition to, or partial replacement of, property that adds to its value, appreciably lengthens its useful
lifetime or adapts it to a different use. If a repair or replacement increases the value of the property,
makes it more useful, or lengthens its life, it is an improvement and is added to capital and depreciated.
Property that cannot be depreciated
Land, property placed in service and disposed of in the same year, equipment used to build capital
improvements, and Section 197 intangibles (goodwill, patent, copyright, etc. maybe amortizable).
Deduct depreciation only on the part of the property used for a business or income-producing
activity. Cannot depreciate personal-use property.
4/20/22, 11:28 AM Notes
Depreciation
A taxpayer may depreciate property he owns and uses in a business or income-producing activity. The
property must have a determinable useful life of more than one year.
BASIS OF PROPERTY
Decreases to basis
Non-taxable corporate distributions
Casualty and theft losses.
Depreciation and Section 179 deduction
Easements
Credits for alternative vehicles, fuel, and residential energy efficient property
Increases to basis
Capital Improvements having a useful life of more than 1 year, that increase the property value,
lengthen its life, or adapt it to a different use.
Assessments for Local Improvements that increase the value of the property (roads, sidewalks,
utilities).
Basis of business property
Basis represents the taxpayer’s total investment in the property.
Basis is the amount paid in money, property, debt, and services to obtain the property.
Basis includes settlement fees and closing costs (including exchange expenses) paid by the
taxpayer that directly relate to the sale or exchange.
Basis does not include security deposits, accrued interest, costs of getting a loan, prepaid rent,
insurance escrows, etc.
4/20/22, 11:28 AM Notes
LIKE-KIND EXCHANGES OF REAL PROPERTY
Related parties – like-kind exchange

Cannot deduct a loss (other than complete corporate liquidation) if the transaction is with a related
party:
Family members – only brothers or sisters (including half), spouse, ancestors (parents,
grandparents, etc.), and lineal descendants (children, grandchildren, etc.).
More than 50% owned partnership or corporation.
Exempt charitable or educational organization controlled by taxpayer or family member.
Recognize gain or loss from original transaction if property is sold within 2 years of related party
exchange.
Basis of new like-kind property

Basis of like property given up
+/- Net boot (money, other property*, liabilities) (+ if paid, – if received)
+/- Gain (loss) (+ if gain, – if loss)
+ Exchange expenses (+ if paid)
= Basis of new like-kind property received
*In determining net boot, use basis of other property transferred and FMV of other property received.
Recognized gain on exchange
The taxpayer shall recognize gain up to the amount of boot received or the amount of realized
gain, whichever is less.
If the taxpayer realizes a loss on the like-kind exchange, no loss is recognized. A taxpayer may
recognize a loss only on transfers of unlike property.
Boot
Cash + FMV of unlike property + net liabilities assumed = boot
For purposes of realized gain and recognized gain, reduce boot (but not below zero) by taxpayer's
exchange expenses.
4/20/22, 11:28 AM Notes
PROPERTY EXCHANGED FOR STOCK
Section 351 – corporation's basis of property
A corporation's basis of property transferred in exchange for its stock is the same as the basis the
shareholder had in the property increased by any gain the shareholder recognized on the
exchange.
Basis steps down to FMV of property immediately after the exchange if lower than the
shareholder's basis in the property. Election by both parties under §362(e)(2)(C) applies the
decrease to shareholder stock rather than property received by the corporation.
Section 351 – shareholder basis of other property received

If non-like-kind property is received in a Section 351 exchange, the basis is generally the FMV on the date
of the trade
Section 351 – shareholder basis of stock

Basis of stock is generally the adjusted basis of property transferred:
Increased by any amount treated as a dividend, and any gain recognized
Decreased by cash and FMV of other property received, any loss recognized, and liabilities
assumed by others
Section 351 exchange
Transfer of property to a corporation is generally treated as a sale between shareholder and

corporation. The shareholder recognizes gain or loss.
80% rule. The transfer of property is not taxable if immediately afterward the taxpayer is in
control of the corporation.
50% rule. A shareholder that directly or indirectly owns more than 50% of the corporation’s stock
cannot deduct a loss.
4/20/22, 11:28 AM Notes
FILING AND PAYING INCOME TAXES
C Corporate filing penalties
Failure-to-file – 5% of the unpaid tax, up to a maximum of 25% of the unpaid tax. For returns
required to be filed in 2022 (generally 2021 tax returns filed in 2022) the minimum penalty if more
than 60 days late is smaller of tax due or $435.
Failure-to-pay – one-half of 1% (.005) of the unpaid tax, up to a maximum of 25% of the unpaid
tax. No failure-to-pay penalty is charged if at least 90% of tax shown is paid by original due date
and balance is paid by extended due date.
Trust fund recovery penalty

The person responsible for withholding, accounting for, or depositing or paying specified taxes including
NRA withholding and employment taxes, and willfully fail to do so, can be held personally liable for a
penalty equal to the full amount of the unpaid trust fund tax, plus interest.
Estimated Taxes
Sole proprietor, partner, and S corporation shareholders expecting to owe more than $1,000.
Corporations expecting to owe more than $500.
Tax return due dates and extensions

15th day of 3rd month (i.e., March 15)
Partnership (Form 1065) 6 month extension
S corporation (Form 1120S) 6 month extension
15th day of 4th month (i.e., April 15)
Corporation (Form 1120) 6 month extension (7 month extension if tax year ends June 30)
Trust and Estate (Form 1041) 5 ½ month extension
Decedent’s Final Return (Form 1040) 6 month extension
4/20/22, 11:28 AM Notes
Form 1120 Schedules L, M-1, M-2, and M-3
A corporation with total receipts for the tax year and total assets at the end of the tax year of less
than $250,000 is not required to complete Schedules L (balance sheet), M-1 (reconciliation of tax
and book income), and M-2 (retained earnings). All others must report.
A business with total assets of $10 million or more on the last day of the tax year must complete
Schedule M-3 instead of Schedule M-1.
SPECIAL PROVISIONS
Net Operating Loss (NOL)

An NOL exists when annual business deductions exceed annual business income.
NOL may be carried forward indefinitely (no NOL carryback)
Carryforward NOL deduction in future years limited to 80% of taxable income
NOLs arising in taxable years beginning before 2018 are not subject to the 80% of taxable income
limitation and are subject to the generally 2-year carryback rules and the 20-year carryover
limitation
Capital loss for corporation
Cannot deduct capital losses in excess of capital gains.
Excess capital losses are carried to other years as short-term capital loss.
Carry capital loss back 3 years, then forward 5 years. If unused after 5 years the deduction is lost.
Cannot carry a capital loss to an S corporation year other than as a deduction against net
recognized built-in gain.
SPECIAL DEDUCTIONS
4/20/22, 11:28 AM Notes
Charitable contributions
A corporation cannot deduct cash contributions that exceed 25% of taxable income and non-cash
contributions that exceed 10% of taxable income for the tax year. May carry forward 5 years any
charitable contributions made that exceed the limits for the tax year.
The CARES Act temporarily increases the limit up to 25% of taxable income (normally 10% of taxable
income) for cash contributions made in 2020 and the Consolidated Appropriations Act, 2021 extended
this relief for cash contributions made in 2021. Contributions of non-cash property do not qualify for this
relief.
Dividends received deduction (DRD)
50% deduction if < 20% of stock owned.
65% deduction if 20% or more of stock owned.
100% deduction if 80% or more stock owned (affiliated group).
Generally limited to 65% (or 50%) of taxable income. If taxable income is less than the amount of
dividends received, use taxable income to calculate the deduction.
Taxable income limit does not apply if corporation has NOL for the tax year. To determine whether
a corporation has an NOL, figure the dividends-received deduction without the 65% (or 50%)
taxable income limit.
FIGURING TAX
Personal holding company tax

20% tax on undistributed personal holding company income (dividends, interest, rents, and certain
royalties). A PHC is a corporation that meets both the following requirements:
At any time during the last half of the tax year, more than 50% in value of the corporation’s stock is
owned—directly or indirectly—by five or fewer individuals.
At least 60% of the corporation’s adjusted ordinary gross income for the tax year is PHC income.
4/20/22, 11:28 AM Notes
Accumulated earnings tax (AET)
20% tax on earnings accumulated beyond reasonable needs of the business.
An accumulation of $250,000 or less ($150,000 for PSC) is generally considered reasonable.
Reasonable also includes funds with specific, definite, and feasible plans for use or the amount
necessary to redeem stock of deceased shareholder.
Corporate income tax rate
Flat 21% corporate tax rate on income and gains.
Personal service corporations are taxed at the same rate.
TCJA repealed the corporate alternative minimum tax (AMT).
SHAREHOLDER EARNINGS AND PROFITS (E&P)
C corporation Earnings and Profits (E&P)
A distribution of current or accumulated E&P from a corporation is taxable as a dividend.
If the corporation has no E&P, the distribution is not a dividend and may be a tax-free return of
capital or a capital gain.
DISTRIBUTIONS
4/20/22, 11:28 AM Notes
Form 1099-DIV
Corporate distributions are reported to the shareholder (and the IRS) on Form 1099-DIV, when:
Dividends paid of $10 or more
Withheld and paid foreign tax dividends
Withheld federal income tax under backup withholding
Paid $600 or more as part of a liquidation
Deemed distributions
Below-market loans – low or no interest loans
Shareholder’s debt canceled
Property transfers for less than FMV
Unreasonable rents – corporation pays rents above market
Unreasonable salaries
Distributions of stock or stock rights

Distributions of a corporation's own stock (stock dividends) or the right to acquire its stock (stock rights)
are generally tax-free to shareholders. Taxable in any of the following circumstances:
Any shareholder has the choice to receive property instead of stock or stock rights.
Some receive property and others receive an increase in the corporation’s assets or E&P.
The distribution is convertible preferred stock, or to owners of preferred stock.
Some receive preferred stock and others receive common.
Gain from property distributions
A corporation will recognize a gain on the distribution of property to a shareholder if the FMV of
the property is more than its adjusted basis.
For this purpose, FMV is the greater of actual FMV or liabilities assumed by the shareholder.
4/20/22, 11:28 AM Notes
Property distributions to shareholder
The amount of distribution of property (other than stock dividends or rights) is generally the
amount of any money paid to the shareholder plus the FMV of the property, reduced by any
liabilities assumed.
The basis of the property to the shareholder is the FMV of the property.
In general, distributions are taxable as dividends to the extent of E&P.
Corporate distributions to shareholder
Dividends – if from current year or accumulated E&P
Non-dividend distribution – not from E&P; reduces adjusted basis of stock
Gain – when the distribution exceeds adjusted basis of stock; usually capital gain from sale or
exchange of property.
REDEMPTION OF STOCK
Substantially disproportionate distribution
Immediately after the redemption, the shareholder owns less than 50% of the total combined
voting power of all classes of stock entitled to vote, and
The ratio of ownership is less than 80% of the ratio of ownership prior to the redemption.
Liquidating distribution to shareholder
Distributions received during a partial or complete liquidation of a corporation are not taxable until the
shareholder recovers the basis of the stock. After the basis of the stock is reduced to $0, the
liquidating distribution is a capital gain, either long-term or short-term depending on how long the
taxpayer held the stock.
4/20/22, 11:28 AM Notes
Stock redemption
Treat a redemption as the sale or trade of stock in exchange for money or property (subject to capital
gain or loss), if any of the following apply:
Redemption is not essentially equivalent to a dividend
All of the stock owned by the shareholder is redeemed
Redemption is substantially disproportionate and in partial liquidation
S CORPORATIONS (FORM 1120S)
S election eligibility
Must be a small business corporation:
Only one class of stock
No more than 100 shareholders
All shareholders are individuals, estates, exempt organizations, or certain trusts
No partnership and corporation shareholders
No nonresident alien shareholders (but can be beneficiary of ESBT)
S election process
File Form 2553.
Must be signed by all shareholders (and former shareholders) from the election year.
Must be made within 2 months and 15 days of the beginning of the tax year, or in the prior year.
Late election relief with reasonable cause under Revenue Procedure 2013-30 within 3 years 75
days.
S election it remains in effect until terminated.
4/20/22, 11:28 AM Notes
S Corporation filing penalties

For any return required to be filed or furnished in 2022 (generally 2021 tax returns filed in 2022), an S
corporation without reasonable cause is subject to penalties for:
Late or incomplete filing – $210 for each month (or part of a month) the failure continues (up to
12 months) multiplied by the total number of shareholders in the S Corporation (during any
part of the tax year)
Failure to furnish K-1 to shareholder – $280 for each failure (if intentional, penalty increases to
$570 or 10% of the amount required to be reported, whichever is greater)
S corp decreases to basis

Shareholder basis is decreased by:
Distributions by the corporation not includible in the income of the shareholder
Separately stated loss items
Non-separately computed loss
Non-deductible expenses that are not capitalized
The shareholder’s deduction for depletion for any oil and gas property held by the S corporation
S corp increases to basis

Shareholder basis is increased by:
Separately stated Items of income (including tax-exempt)
Non-separately computed income
The excess of the deductions for depletion over the basis of the property
S corp distributions
A distribution is generally a return of capital, up to the shareholder’s basis and a capital gain
thereafter.
Distribution of AE&P is a dividend (this is generally only when the S corporation was previously a C
corporation).
4/20/22, 11:28 AM Notes
FORMING A PARTNERSHIP
Limited Liability Company (LLC)
Owners are called members
Members are not personally liable for company debts
Default tax treatment is a disregarded entity (single member) or partnership (multi-member)
May elect alternate tax treatment as a corporation or as an S corp
Limited Partnership (LP)

Has at least one general partner, and one or more limited partners
General partner is personally liable for partnership debts
Limited partner's liability is limited to the amount of money or other property contributed by the
partner
PARTNERSHIP RETURN (FORM 1065)
Partnership filing penalties

For any return required to be filed or furnished in 2022 (generally 2021 tax returns filed in 2022), a
partnership without reasonable cause is subject to penalties for:
Late or incomplete filing – $210 for each month (or part of a month) the failure continues (up to
12 months) multiplied by the total number of partners in the partnership (during any part of
the tax year)
Failure to furnish K-1 to partner – $280 for each failure (if intentional, penalty increases to $570 or
10% of the amount required to be reported, whichever is greater)
4/20/22, 11:28 AM Notes
Partnership return (Form 1065)

A partnership doesn’t pay taxes. Instead, income, gains, losses, deductions and credits pass-through to
the partners.
Partnership files Form 1065 – information return.
Schedule K-1 reports distributive share of parthership items to partner.
Schedule K-1 should include a partner’s share of Qualified Business Income, W-2 wages, and the
unadjusted basis of property for purposes of Section 199A.
TRANSACTIONS BETWEEN PARTNERSHIP AND PARTNERS
Transaction between partnership and related party
Losses are not allowed from the sale or exchange of property directly or indirectly between a
partnership and a person whose direct or indirect interest in the capital or profits of the
partnership is more than 50%.
The basis of each partner’s interest in the partnership is decreased (not below zero) by the
partner’s share of the disallowed loss.
Contribution of property to partnership
Generally, do not recognize gain or loss when a partner contributes property to the partnership in
exchange for a partnership interest.
The basis of the property is the same as the partner’s basis at the time of contribution.
Reduce the basis of contributing partner’s interest by the liability assumed by the other partners.
The contributing partner must recognize a gain for liabilities assumed that exceeds the basis in the
property.
4/20/22, 11:28 AM Notes
Contribution of services to partnership

Include FMV of partnership capital interest received in exchange for services in partners gross income in
the first tax year in which the partner can transfer the interest, or the interest is not subject to a
substantial risk of forfeiture.
Guaranteed payment
If a partner is to receive a minimum payment, the guaranteed payment is equal to the amount the
minimum payment is more than the partner’s distributive share of the partnership income.
BASIS IN PARTNERSHIP
Items that decrease a partner's outside basis

Most relevant items that decrease basis (but never below zero):
The money and the adjusted basis of property distributed to the partner by the partnership.
Decreased share of partnership liabilities or an assumption of the partner’s individual liabilities by

the partnership.
The partner’s distributive share of the partnership losses, including capital losses.
The partner’s share of nondeductible partnership expenses that are not capital expenditures.
Items that increase a partner's outside basis

A partner’s basis is increased by the following items:
Additional contributions to the partnership (includes assumption of partnership liabilities).
The partner’s distributive share of taxable and nontaxable partnership income.
The partner’s distributive share of the excess of the deductions for depletion over the basis of the
property, unless the property is oil or gas wells and the partnership allocates basis to partners.
4/20/22, 11:28 AM Notes
Outside basis in partnership interest
Initially, outside basis is determined by including the amount of the adjusted basis in the property
contributed plus any cash contributed by the partner.
Increase outside basis by any gain partner must recognize gain because of the contribution.
Outside basis includes the partner’s share of all liabilities assumed.
In subsequent years, the outside basis is increased and decreased by partnership operations.
UNREALIZED RECEIVABLES AND INVENTORY
Inventory items
Property on hand at the end of the tax year held primarily for sale to customers.
Property that, if sold, would not be a capital asset or Section 1231 property.
Property that would be considered inventory if held by the partner selling the partnership interest
or receiving the distribution.
Unrealized receivables
Unrealized receivables include the rights to be paid for services or goods which are not capital
assets, and include items of potential gain that would be ordinary income if partnership property
were sold at its fair market value on the date of the payment.
The basis of unrealized receivables is $0 for cash method partnerships.
Accrual basis taxpayers usually don’t have unrealized receivables because they include a receivable
in income as soon as the good or service is provided.
Section 751 hot assets

Unrealized receivables and inventory items are called hot assets (or Section 751 property). Income from
these items is taxed at ordinary rates.
4/20/22, 11:28 AM Notes
PARTNERSHIP DISTRIBUTIONS TO PARTNERS
Partner's gain recognition on liquidating distribution
Payment in exchange for the interest is a distribution. Recognize gain only if any money distributed
is more than the partner’s adjusted basis in the partnership.
Treat payments that include an assumption of partnership liabilities as a distribution of money.
Recognize loss only if distribution is in money, unrealized receivables, or inventory items. Cannot
recognize a loss if any other property received.
Payment not in exchange for the interest is a distributive share of partnership income or
guaranteed payment.
Basis allocation on complete liquidation of partnership interest

On a complete liquidation, allocate basis to property distributed as follows:
First to unrealized receivables and inventory items.
Next, assign basis equal to the partnership’s adjusted basis in each property.
Next, assign basis to the property with unrealized appreciation.
Next, assign basis to the property in proportion to FMV.
Partner's gain recognition on current distribution
A partner recognizes gain (capital gain on sale of partnership interest) only if money included in
the distribution exceeds outside basis.
Amount due to share of partnership unrealized receivables or inventory items results in ordinary
income or loss.
Partner generally does not recognize gain until the sale or disposition of the property.
Do not recognize a loss on a current distribution.
4/20/22, 11:28 AM Notes
Distribution to a partner
A distribution to a partner is generally a tax-free return of capital to the partner and reduces the
partner’s adjusted basis in his partnership interest (but not below zero) by the money and adjusted
basis of property distributed.
Generally, neither the partner nor the partnership recognizes any gain or loss.
Partner's distributive share

A partner reports his distributive share of income, regardless of distributions, and does not recognize
income simply because a distribution occurs.
DISPOSITION OF PARTNER'S INTEREST
Liquidation at death or retirement

A liquidation payment made at death or retirement:
In exchange for a partner’s interest in partnership property is a distribution.
Not in exchange for an interest in partnership property is a distributive share of partnership

income or a guaranteed payment.
Disposition of partner’s interest
Usually capital gain or loss.
Amounts received in exchange for partner’s share of unrealized receivables or inventory (hot
assets) results in ordinary gain or loss.
Amount realized (including any liabilities assumed by buyer) minus adjusted basis = gain or loss on
sale.
OVERVIEW OF RETIREMENT PLANS

4/20/22, 11:28 AM Notes
Compensation for self-employed
Self-employed compensation for retirement plan contributions is net earnings from self-
employment, reduced by the deduction for 1/2 self-employment tax and contributions on his
behalf to the plan.
The formula to determine the contribution percentage is rate/(1+rate). Use the contribution
percentage to determine the contribution after subtracting 1/2 SE tax.
Keogh Plan
A qualified plan for a self-employed taxpayer is called a Keogh plan, and generally follows the same rules
for contributions and benefits. A Keogh can be set up as a defined contribution plan, and the limit is
effectively the same. For 2021, a defined contribution plan’s annual contributions and other additions
(excluding earnings) to the account of a participant can’t exceed the lesser of the following amounts:
100% of the participant’s compensation (use net earnings from self-employment if owner’s
contribution)
$58,000
Tax on early distributions

10% tax on early distributions until age 59.5 (age 55 and separated for service for qualified plans).
Retirement plan annual compensation limit

The maximum amount of compensation the employer may consider when determining contributions
and benefits for an employee is $290,000 for 2021.
Defined contribution plan catch-up contribution

Catch-up contribution – A plan can permit participants who are age 50 or older at the end of the
calendar year to make catch-up contributions in addition to elective deferrals and SIMPLE plan salary
reduction contributions. The catch-up contribution limit for 2021 is:
$6,500 for defined contribution plans other than SIMPLE plans
$3,000 for SIMPLE plans
4/20/22, 11:28 AM Notes
QUALIFIED PLANS
Form 5500 due date

Form 5500 (annual return/report of employee benefit plan) is due by last day of the 7th month after
the plan year ends. EXAMPLE: If plan year ends December 31 the due date is July 31.
Prohibited transactions tax
A tax charged on a transaction between the plan and a disqualified person that is prohibited by
law.
Initial tax is 15% of the amount involved for each year (or part of a year) in the taxable period.
If not corrected, the IRS will impose an additional 100% tax on the amount involved.
Qualified plan loans
Can be allowed by a provision in the plan document, but not required
Non-taxable distributions (unless terms are violated)
Maximum loan amount is the greater of $10,000 or 50% of the vested account balance (loan not to
exceed $50,000)
CARES ACT: The loan amount for certain qualified plans has increased to the lesser of $100,000 or 100%
of the participant's account balance (from $50,000 / 50% previously).
Rollover distribution
The recipient of an eligible rollover distribution from a qualified plan can defer the tax on it by
rolling it over into a traditional IRA or another eligible retirement plan within 60 days.
Cannot rollover RMD, hardship distributions, loans treated as distributions, nondeductible

contributions, or distributions under SOSEPP.
4/20/22, 11:28 AM Notes
Defined benefit plan
When to establish plan – By end of tax year.
Contribution deadline – Quarterly installments due 15 days after the end of each quarter.
Maximum 2021 contribution – Amount needed to provide benefits, no greater than smaller of
$230,000 or 100% of the participant’s average compensation for their highest 3 consecutive
calendar years.
Maximum deduction – Based on actuarial assumptions and computations.
Defined contribution plan
When to establish plan – By end of tax year.
Contribution deadline – Employee's return due date (including extension) for elective deferrals.
Employer's return due date (including extension) for employer contributions.
Maximum 2021 contribution – Elective deferrals up to $19,500 plus $6,500 if age 50 or older
(employee). Total annual contributions and other additions (excluding earnings) cannot exceed
the smaller of 100% of compensation or $58,000 (employee and employer).
Maximum deduction – 25% of all participants’ compensation (compensation includes elective

deferrals). The maximum compensation taken into account for each employee in 2021 is $290,000.
403(B) PLANS
403(b) contribution limits

The maximum annual contribution limits to a 403(b) account for 2021 is:
Elective Deferral Limit – Employee can contribute up to $19,500 plus $3,000 with at least 15
years of service plus $6,500 if age 50 or older, or 100% of compensation (whichever is less).
Annual Additions Limit – $58,000 or 100% of compensation (whichever is less). This is the limit on
total contributions (elective deferrals, nonelective contributions, and after-tax contributions).
4/20/22, 11:28 AM Notes
What is a 403(b) Plan?

Often called a Tax-Sheltered Annuity (TSA), this retirement plan is for certain:
Public school employees
Tax-exempt organizations under 501(c)(3)
Ministers
SIMPLE PLANS
SIMPLE plan employee eligibility
Any employee who received at least $5,000 in compensation during any two years preceding the
current calendar year and who can reasonably expect to receive at least $5,000 during the current
calendar year is eligible to participate.
Employers may reduce the compensation requirements to participate, but cannot increase the
requirements.
SIMPLE IRA and SIMPLE 401(k)
When to establish plan – Anytime between 1/1 and 10/1 of the calendar year. For a new
employer coming into existence after 10/1, as soon as administratively feasible.
Contribution deadline – 30 days after end of contribution month (employee). Due date including
extensions for filing the employer’s income tax return for the year (employer).
Maximum 2021 contribution – Salary reductions up to $13,500, plus $3,000 catch-up contribution
for participants who are age 50 or older (employee). Matching up to 3% or 2% nonelective
(employer).
Maximum deduction – Same as maximum contribution.
SEP-IRAS
4/20/22, 11:28 AM Notes
SEP IRA employee eligibility

The requirements may be less restrictive, but not more than the following:
Age 21 or older.
Works for employer in at least 3 of the last 5 years.
Received at least $650 in compensation during the year.
SEP IRA
When to establish plan – Any time up to the due date of employer’s return (including extensions)
Contribution deadline – Due date of employer’s return (including extensions)
Maximum 2021 contribution – Smaller of $58,000 or 25% of participant’s compensation

(employer contributions only)
Maximum deduction – 25% of all participants’ compensation
DECEDENT'S FINAL INCOME TAX RETURN
Income in Respect of a Decedent (IRD)
All income the decedent would have received had death not occurred (and not properly includible
on the final return) is taxable to the recipient. The recipient is generally the decedent's estate or a
beneficiary.
The character of the income is the same as decedent’s (i.e, capital gain, ordinary income, interest,
etc.).
Examples include tax-deferred appreciation in retirement accounts, and certain payments not
received prior to death such as —payment for services, dividends, partnership guaranteed
payments, etc.).
ESTATE INCOME TAX
4/20/22, 11:28 AM Notes
Form 1041 estate income tax return
Must file an income tax return (Form 1041) if gross income is $600 or more (the exemption
amount) during its tax year or any beneficiary is a nonresident alien.
Due date is the 15th day of the fourth month after the end of the tax year (April 15th for calendar
year taxpayers).
5 1/2 month extension by filing Form 7004
Estate tax year
The estate tax year begins the day after the date of death and ends on the date elected by the
personal representative (as long as the tax year duration doesn’t exceed 12 months).
The estate's first tax year may be any period of 12 months or less that ends on the last day of a
month.
What is an estate?
A taxable entity that comes into being upon the taxpayer’s death.
Pays tax on income and assets after the death of the taxpayer (Form 1041).
Exists until final distribution of the deceased taxpayer’s assets.
TRUSTS
Exemption amount for trusts and estates

Both trusts and estates are allowed an exemption deduction in figuring taxable income. The exemption
amounts are:
$300 simple trust
$100 complex trust
$600 estate.
4/20/22, 11:28 AM Notes
Distributable Net Income (DNI)
DNI is the amount of income available to distribute to income beneficiaries.
Direct expenses attributable to one class of income must reduce that class.
Indirect expenses allocate pro rata to any item of income included in computing DNI (including tax-
exempt).
Expenses allocated to tax-exempt income are not deductible.
Depreciation does not impact DNI.
Fiduciary may claim income distribution deduction on Form 1041 up to the amount of DNI actually
(or required to be) distributed.
Principal or income
The character of distributions from a trust may be either principal or income, or both. For trust
accounting purposes, such factors as income type, the trust document, and local law determine this
classification. This classification is important because it can determine who is entitled to the income and
the distribution amount. A fiduciary has the discretion to make the determination when local law (and
the trust document) allows it.
Total income of trust or estate
Total income of trusts and estates includes interest, dividends, business income, rents, capital gains,
farm income, ordinary gain, and other income.
Grantor trust
The person who creates the trust (the "grantor") retains control and is usually the beneficiary of
trust income and principal.
Income from a grantor trust is taxed to the grantor as if no trust existed. No Form 1041.
4/20/22, 11:28 AM Notes
Simple trust or complex trust
A simple trust must distribute all income currently.
A simple trust may not use any amount of trust assets for charitable purposes.
A simple trust may not distribute amounts in excess of the fiduciary accounting income (FAI) as
determined by applicable law (i.e., a simple trust may not distribute amounts allocated to
principal).
Any trust that does not meet the definition of a simple trust is a complex trust.
FARMERS
Estimated taxes for farmers

A taxpayer with at least two-thirds of gross income from farming who pays the entire tax liability by
March 1 following the tax year does not need to make estimated tax payments. Otherwise, to avoid a
penalty, he must make one estimated tax payment by January 15 (following the tax year) equaling the
lesser of 66 2/3% of the tax due, or 100% of the prior year tax liability.
Farm income averaging
An individual, partner in a partnership, or S corporation shareholder engaged in a farming

business may be able to average all or some of their farm income by allocating it to the three prior
years.
Corporations, partnerships, S corporations, estates, and trusts cannot use income averaging.
Crop insurance proceeds

Cash (not accrual) method farmers can postpone reporting crop insurance proceeds as income until the
year following the year the damage.
4/20/22, 11:28 AM Notes
75% business use of farm vehicle

Can claim 75% business use wihout records if using the vehicle in farming business most of the normal
business day. Elect method first-year vehicle placed in service.
Basis of raised livestock

Livestock that the farmer raises usually has no depreciable basis because the costs of raising them are
deducted and not added to basis.
Accrual method for farmers

For 2021, farm corporations or partnerships that have average annual gross receipts of $26 million or
less for the 3 preceding tax years and are not tax shelters can use the cash method instead of the accrual
method. This number is indexed for inflation.
Farm inventory
Farm inventory includes—
Livestock and other products held primarily for sale. Livestock held for draft, breeding, or dairy
purposes can either be depreciated or included in inventory.
Harvested and purchased farm products held for sale (or for feed or seed). Generally, growing
crops are not required to be included in inventory.
Supplies acquired for sale or that become a physical part of items held for sale.
Farm income does NOT include

Farm income does not include any of the following:
Wages as a farm employee.
Income from contract grain harvesting and hauling with workers and machines you furnish.
Gains from the sale of farmland and depreciable farm equipment.
4/20/22, 11:28 AM Notes
Gross farm income
Schedule F – income and expenses from farm operations. Report the sale of farm products raised
(or purchased) for sale, including crops and livestock.
Form 4797 – sale of livestock used in business. Includes working animals, breeding, dairy, or
sporting use. Depreciable.
Schedule E – farm rental income based on crops or livestock produced by the tenant if the
landowner (or sub-lessor) and did not materially participate (for SE tax purposes) in the operation
or management of the farm. Use Schedule F if participation is material.
EXEMPT ORGANIZATIONS
Form 990 penalties

For any return required to be filed in 2022 (generally 2021 tax returns filed in 2022):
Failure-to-file penalty is $20 a day for each day the failure continues
Maximum penalty for any single return is smaller of $10,500 or 5% of gross receipts for the year
Penalty increase if gross receipts are more than $1,094,500, the penalty is $105 a day up to a
maximum of $54,500 for any single return
Form 990 due dates

Information return to report gross annual income, receipts and disbursements
forms include 990, 990-EZ, 990-N and 990-PF; determined by factors including gross receipts and
assets
Due the 15th day of the fifth month after the end of the accounting period (May 15th for calendar
year)
Form 8868 to request 6-month extension (November 15th for calendar year)
4/20/22, 11:28 AM Notes
Exempt entity requirements
Must be organized as a corporation, community chest, fund, foundation, or trust. An individual or a

partnership will not qualify.
Must file Form 1023 unless a church, or any organization (other than a private foundation) having
annual gross receipts of less than $5,000.
File within 27 months of formation and tax-exempt status is effective from the date of formation. If
filing after 27 months, the tax-exempt status will start from the filing date.

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4/20/22, 11:28 AM Notes

BUSINESS ENTITY OVERVIEW

3. File a fraudulent return No limit

4. Do not file a return No limit

6. File a claim for a loss from worthless securities 7 years

Must have at least 2 partners.

Partners can be individuals, corporations, trusts, estates, or other partnerships.

100 shareholder limit (no partnership, corporation, or nonresident alien shareholders).

Limited liability company (LLC)

Cannot change entity type for 60-months (without IRS permission).

Qualified joint venture (QJV)

An unincorporated business jointly owned by a married couple

Similar to independent contractor, considered self-employed; subject to SE tax. Includes:

Direct sellers/Real estate agents – paid by sales, not by hours worked

Companion sitters – unless employed by agency

Subject to social security and Medicare (FICA), and FUTA tax

Not subject to federal income tax (unless backup WH applies)

Common law employees

Behavioral control – directs the what, where and how

Financial control – directs financial decisions

Employment relationship – benefits, contract, permanency

Self-employed; subject to SE tax

Independent profession offering services to general public

TAX WITHHOLDING AND REPORTING

Employing a spouse or parent

Subject to federal income and FICA taxes

Not subject to FUTA tax

Child employed by parents

Not subject to FICA if under 18

Not subject to FUTA if under 21

Subject to federal income tax, regardless of age

Business must be a sole proprietor or partnership with both parents as partners

Trust fund recovery penalty

Electronic Federal Tax Payment System (EFTPS)

Monthly deposit schedule if tax liability is $50,000 or less.

Semi-weekly deposit schedule if tax liability is more than $50,000

Federal Unemployment Tax Act (FUTA)

FUTA is a federal tax to fund unemployment compensation

Report federal unemployment tax on Form 940

Federal Insurance Contributions Act (FICA)

7.65% withheld from employee wages; 7.65% paid in by employer

Self-Employed Contributions Act (SECA)

1099-NEC - Nonemployee Compensation

Report nonemployee compensation of $600 or more made to other persons, vendors,

Must report payments for legal services (even if paid to a corporation).

Personal payments are not reportable.

Due date to IRS and recipient January 31.

Regular gambling withholding

24% backup withholding from payments subject to 1099 reporting if:

TIN not provided

Notified payee underreporting or certification failure

Information return due dates

W-2 due to Social Security Administration and recipient by Jan 31

$10 or more in royalties or broker payments in lieu of dividends, tax-exempt interest

Backup withholding is 24% if correct taxpayer identification number not provided

ACCOUNTING PERIODS AND METHODS

All events test (accrual)

The required performance takes place

The amount of the liability can be figured with reasonable accuracy.