Asset Bk. Val. FMV Equity Bk. Val. Cash $20,000 $20,000 Stock $30,000 Land 60,000 160,000 Ret. Earn. 50,000 Totals $80,000 $180,000 Totals $80,000 $15,000 $40,000 301 311(a), (b) 301(d) Carl's Stock Basis Corporate Property Distribution Carl owns 100% of the stock (basis: $30,000). Carl received distribution of 25% of land. Corp. basis in land distributed FMV of land distributed Carl's income Corporation's Gain Carl's Land Basis
Passive Activity Losses (slide 1 of 2) • Loss limits apply to owners of partnerships, LLCs, and S corps – Passive losses are separately stated items that flow through to owners – Passive loss rules apply at the owner level
Passive Activity Losses (slide 2 of 2) • For corporations, only apply if a closely held corp or a personal service corp – Closely held corp—more than 50% of value of stock at any time during last half of year is owned by 5 or less individuals • Passive losses can offset active income but not portfolio income – Personal service corp—principal activity is performance of personal services by owner-employees who own more than 10% in value of corp’s stock • General passive loss rules apply
At-Risk Rules • At-risk rules apply to: – Partnerships – LLCs – S corps – Closely held C corps • May be more troublesome for partnerships and LLCs since liabilities are included in partner’s basis in partnership interest
Special Allocations • Partnership and LLCs have many opportunities to use special allocations – Not generally available in C corps and S corps • May be able to achieve the same results using payments to owners for services, rents and interest
Redemption of ownership interest by the entity • May generate no income for owner. • May generate ordinary income for owner. • May generate capital gain for owner.
Book Val. Book Val. Cash $40,000 Stock $30,000 Land 60,000 Ret. Earn. 70,000 Totals $100,000 Totals 100,000 Ed owns 25% of stock (basis: $10,000). Redeem all of Ed's stock for cash of $25,000. Case A Case B Cash distributed $25,000 $25,000 Ed's dividend income Ed's capital gain Ed's ending stock basis Case B. Ed owned 100% of stock (basis $40,000). Corp. redeemed 25% of his stock for $25,000. Corporate Stock Redemption
Jan and Joe each own 50% of a business. Each has a basisof $20,000. There is no debt. They each take a distribution of half of the land and half of after-tax cash balance. Basis FMV This isthe only Cash $10,000 $10,000 transaction on Jan. 1 Land $20,000 $60,000 $30,000 $70,000 C Corp S Corp Ptship Entity Gain on sale Entity Tax Paid Flow-through gain to Joe Joe'srevised stock basis Assets distributed to Joe Joe'sGain on dist. Joe'sbasis in land
Disposition of a Business or an Ownership Interest • Disposing of a business may be viewed as either: – A sale of an ownership interest, or – A sale of assets • Tax consequences are, in general, more favorable for a sale of an ownership interest
Sale of Assets by Entity —Seller’s Issues (slide 1 of 3) • Sole Proprietorship – Treated as a sale of separate assets – Gain or loss is calculated for each asset • Character of income or loss depends on nature of asset
Sale of Assets by Entity —Seller’s Issues (slide 2 of 3) • Partnership, LLC, or S Corp—Same as proprietorship – Gain/loss flows through to shareholders or partners •
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- Spring '08
- Accounting, Corporation, Taxation in the United States, Limited Liability Company, S Corp, alternative minimum tax, C Corp