[jeff]

Welcome to the Q4 2017 CPA Exam Study Group for REG. 🙂

Introduce yourselves and let your fellow NINJAs know when you plan to take your REG exam.

The Five Steps (NINJA Framework): https://www.another71.com/pass-the-cpa-exam/

[joonpark1212]

@pcunniff Thanks for your input.

Regarding S corp 2% employees.
I wasn't able to find anything yet that explains pension/retirement distribution getting passed down to K-1. I AGREE that shareholders owning LESS than 2% have fringe benefits as DEDUCTIBLE by the S-corp.

Regarding Partners,
Yes, since health insurance and life insurance are considered GP wouldn't it go to Schedule E first then end up on line 17 of form 1040?
For Pension/Retirement plans I googled and was able to find a site that explains partnership passing down the distributions to K-1. Line 18 on 1065 i assume it is for regular employees of the partnership.

[joonpark1212]

@Sophie
Thanks for sharing. I believe u are right.
“the health and insurance premiums and other fringe benefits paid by S corp on behalf of a more than 2% shareholder employee are deductible by the S corp as compensation and included on the shareholder's gross income on Form-W2. ”

It seems similar to how partners treat it as guaranteed payments.

[C Dubs]

Hi, guys. I have a question about REG simulation #19, about Alex and Phyllis. The solution states that the Series EE bond interest is excludable, but the fact pattern states that the bonds were issued 23 years ago. The taxpayer is now 30, so that means the bonds were issued when she was a child. Wouldn't that cause the bond interest to be includable? Thanks in advance.

[pcunniff]

@joonpark1212 – I may have looked into this in too much detail to be honest and probably confused myself more than I needed to. However, they would not flow through schedule E, but would flow through schedule A (health insurance premiums would be considered a medical misc itemized deduction).

To further state my understanding with some questionable items on S-corps and P-ships (stated below). Again, correct me if I am wrong.

Partnerships

Form 1065 – salary and wages on BOX 9 (INCLUDE contributions paid on behalf of the p-ship to employees). I think of this as a company match so they get the deduction here.
Box 10 – Guarenteed Payments to partners – Include health insurance as the partner picks this up on K-1 then flows through to Schedule A as a misc. itemized deduction under medical expenses.

Box 18 – Do not deduct IRA PAYMENTS or PAYMENTS to retirement plans as these are on the K-1 to individual partner. Use Box 13 on K-1 Code R and deduct on OWN returns. However, you deduct CONTRIBUTIONS in qualified pension or profit sharing, simple IRA, SEP, for common law EMPLOYEES!! NOT TO THE PARTNERS. Keep in mind partnerships can have employees (not just a firm with 200 partners only).

Box 19 – Employee benefit programs – more like fringe benefits for insurance and welfare programs. However, no profit sharing here. Similar to box 18 in that they are for CONTRIBUTIONS to employee benefit programs as a deduction.

K-1 for Partners

Guaranteed payments, which are also separately stated, are on Box 4 and do no affect basis. However, it is treated like salary in that it is taxed as ordinary income (premiums deducted by partnership for health mean the partner picks it up as a guaranteed payment). According to the IRS website, this is also listed under BOX 13 of the K-1 using Box M on each partner whose behalf the amounts were paid. This is confusing in a sense that they are reporting the GP as income and then get to deduct it as well on the K-1. Can you help clarify this? Seems like a wash between realizing income and then deducting after the fact.

Employee benefits – I don't think they show up on the K-1 for partners. Can you confirm?
Retirement Plans – This would get passed down to the partner on their K-1. However, the amounts paid by each partner would go on their applicable 1040 (adjustment to AGI or “above the line” for traditional contributions, and not any for Roth). This also applies to the SEP plans and Pension plans, which would flow to page 1 of the 1040 on boxes 15a and 16a. Further, contributions made on behalf of employees are deductible on 1065 and not reported on schedules K & K-1. Contributions for partners are not deducted on 1065, but are reported on K & K-1.

S-CORPS
On 1120S enter amounts for fringe benefits paid on behalf of employees owning 2% or less on box 18. For example, employer contributions to certain accident and health plans or the cost up to 50k of group term life insurance or meals and lodging for employer's convenience. This is a deductible fringe benefit and is deducted on the 1120S. However, this is to be reported on the K-1 of the shareholder. Question – Where will this show up on the K-1? I can't find the appropriate box. Would the shareholder still need to include this as ordinary income? Perhaps on box 10 as other income?

The cost of fringe benefits for shareholders owning OVER 2% is not deductible to the S-Corp, unless the corp includes the benefits in the employee/shareholder's W-2. My thought process for this is it is not deductible, therefore the shareholder does not pick up the benefit on his or her K-1. However, if this is included in his or her wages (on box 1 of the K-1), I would think this would then be deductible on page 1 of the 1120S under Box 18.

Lastly, a few thoughts pertaining to Retirement/Pension on line 17 of page 1 of the 1120S. I think it is similar to partnership rules in that it is deductible on line 17 if contributions are on behalf of employees in a qualified pension plan. This will then need to be picked up as income on the K-1. Individual contributions on behalf of the shareholders, though, would be on their respective K-1s and are NOT DEDUCTIBLE on page 1 of the 1120S. Can you confirm?

[CPADream]

Anyone can help with the Estate question I posted earlier? I got different result between Becker and Wiley.

Wiley:
Interest: Final 1040 include accrual interest up to date of death.
Dividend: Final 1040 include the dividend declared and decedent was a shareholder on record before death.

Becker: use cash basis. Anything not receive as of date of death should be included into form 1041.

Thanks,

[pcunniff]

@CPADream – Wiley is correct. Think about it, IRD is income earned AFTER date of death (which is on your 1041). Anything NOT RECEIVED as of date of death should be on the 1040. Why would it be on the 1041 if this individual hasn't passed yet? In that case, you wouldn't have to file the 1041. Hopefully this helps.

Perhaps you can help with some of my pship questions above? 🙂
I'd worry more about Pships and less about estates as an FYI. You'll thank me on exam day..

[TiredofCoffee]

Hi all,

I'm starting my REG adventure and have my test Jan 22nd. I'm excited to learn about taxes (crazy, I know) I'm wondering if anyone uses the blueprints as their table of contents to study by task and not go beginning to end on their review system. I'm using Gleim and Ninja and it seems Gleim has extra stuff in there.

[CPADream]

@pcunniff – Thank you for the answer. I am not very familiar with all those forms, I am more focus on concepts and practice on MCQs.

Guaranteed payments – box 4 is fill when partnership paid for the premium and the partnership deducted it as a business expense. Therefore, the partner has to pick it up as income.
Guaranteed payments – box 13 is fill when a partner use his/her own distribution to pay for the premium, the partner can deduct the payment on his/her own K-1 under box 13.

Employee benefit – it is deducted by the partnership. so it's not on k-1.

Not sure if my understanding it correct 🙂

[pcunniff]

Absent to any agreement, how do you split profits and losses for Limited Liability Partnerships?

General: split equally
LLC: split according to amount contributed
LPs: split according to amount contributed

Just can't find LLPs. Can someone help with this?

[joonpark1212]

I mostly agree with you. My replies follow each paragraph.

I may have looked into this in too much detail to be honest and probably confused myself more than I needed to. However, they would not flow through schedule E, but would flow through schedule A (health insurance premiums would be considered a medical misc itemized deduction).
AGREED, BUT I BELIEVE THERE AREN'T ANYWHERE LIFE INSURANCE PREMIUMS CAN FLOW THROUGH.

<Partnerships>
Form 1065 – salary and wages on BOX 9 (INCLUDE contributions paid on behalf of the p-ship to employees). I think of this as a company match so they get the deduction here.
WHICH CONTRIBUTIONS ARE YOUR REFERRING?
Box 10 – Guarenteed Payments to partners – Include health insurance as the partner picks this up on K-1 then flows through to Schedule A as a misc. itemized deduction under medical expenses.
AGREED. SHOULD ALSO INCLUDE LIFE INSURANCE PREMIUMS. AS YOU SAID HEALTH INSURANCE WILL FLOW THROUGH BUT LIFE INSURANCE WONT.

Box 18 – Do not deduct IRA PAYMENTS or PAYMENTS to retirement plans as these are on the K-1 to individual partner. Use Box 13 on K-1 Code R and deduct on OWN returns. However, you deduct CONTRIBUTIONS in qualified pension or profit sharing, simple IRA, SEP, for common law EMPLOYEES!! NOT TO THE PARTNERS. Keep in mind partnerships can have employees (not just a firm with 200 partners only).
AGREED

Box 19 – Employee benefit programs – more like fringe benefits for insurance and welfare programs. However, no profit sharing here. Similar to box 18 in that they are for CONTRIBUTIONS to employee benefit programs as a deduction.
AGREED

Guaranteed payments, which are also separately stated, are on Box 4 and do no affect basis. However, it is treated like salary in that it is taxed as ordinary income (premiums deducted by partnership for health mean the partner picks it up as a guaranteed payment). According to the IRS website, this is also listed under BOX 13 of the K-1 using Box M on each partner whose behalf the amounts were paid. This is confusing in a sense that they are reporting the GP as income and then get to deduct it as well on the K-1. Can you help clarify this? Seems like a wash between realizing income and then deducting after the fact.
THIS IS WHY I HAVE SAID IN THE OLD POST OF MINE THAT HEALTH INSURANCE AND LIFE INSURANCE CONSIDERED AS GP TO BE INCLUDED IN SCHEDULE E OF THE PARTNER RATHER THAN HEALTH INSURANCE PREMIUMS FLOWING THROUGH TO SCHEDULE A.

Employee benefits – I don't think they show up on the K-1 for partners. Can you confirm?
I DON'T THINK IT SHOWS UP. ONLY APPLIES TO 2% SCORP SHAREHOLDERS. I GUESS EMPLOYEE BENEFITS ARE NOT PROVIDED TO PARTNERS PERIOD.

Retirement Plans – This would get passed down to the partner on their K-1. However, the amounts paid by each partner would go on their applicable 1040 (adjustment to AGI or “above the line” for traditional contributions, and not any for Roth). This also applies to the SEP plans and Pension plans, which would flow to page 1 of the 1040 on boxes 15a and 16a. Further, contributions made on behalf of employees are deductible on 1065 and not reported on schedules K & K-1. Contributions for partners are not deducted on 1065, but are reported on K & K-1.
AGREED

<SCORP>
On 1120S enter amounts for fringe benefits paid on behalf of employees owning 2% or less on box 18. For example, employer contributions to certain accident and health plans or the cost up to 50k of group term life insurance or meals and lodging for employer's convenience. This is a deductible fringe benefit and is deducted on the 1120S. However, this is to be reported on the K-1 of the shareholder. Question – Where will this show up on the K-1? I can't find the appropriate box. Would the shareholder still need to include this as ordinary income? Perhaps on box 10 as other income?
FRINGE BENEFITS ARE CONSIDERED TAXABLE INCOME FOR 2% SCORP SHAREHOLDERS, SO I BELIEVE IT SHOULD BE ON LINE 10 OTHER INCOME ON K-1. BUT INSTRUCTIONS FOR FORM 1120S K-1 DIDN'T MENTION IT SMH.

The cost of fringe benefits for shareholders owning OVER 2% is not deductible to the S-Corp, unless the corp includes the benefits in the employee/shareholder's W-2. My thought process for this is it is not deductible, therefore the shareholder does not pick up the benefit on his or her K-1. However, if this is included in his or her wages (on box 1 of the K-1), I would think this would then be deductible on page 1 of the 1120S under Box 18.
THE COST OF FRINGE BENEFITS FOR 2% SCORP SHAREHOLDERS ARE INCLUDED ON LINE 18 FORM 1120S. BE AWARE THAT LIFE INSURANCE PREMIUMS PAID AND HEALTH INSURANCE TO REGULAR EMPLOYEES ARE CONSIDERED EMPLOYEE BENEFIT PROGRAMS, WHILE THEY ARE CONSIDERED OFFICER COMPENSATION FOR 2% SCORP SHAREHOLDER. THIS DEFINITION WHICH I FOUND FROM GLEIM PUT ME IN THIS MESS. BELOW IS A ANSWER KEY TO A GLEIM QUESTION ON THIS.
• ✓ Correct: Of the $62,500 of expected employee benefits, $51,700 will be deductible as employee benefit programs and $10,800 will be deductible as officer compensation paid to Genevieve. Genevieve may take an $8,000 deduction on her personal return for self-employed health insurance premiums paid. A person who directly or by attribution owns more than 2% of the stock of an S corporation (voting power or amount) on any day during its tax year is treated as being an employee-owner [i.e., (s)he is a shareholder, not an employee]. Employee-owners are not entitled to employee benefits. The S corporation must treat an amount paid to employee-owners for fringe benefits as deductible compensation, and the employee-owner must include the amount in gross income. This rule does not apply to pension and profit-sharing plans.

Lastly, a few thoughts pertaining to Retirement/Pension on line 17 of page 1 of the 1120S. I think it is similar to partnership rules in that it is deductible on line 17 if contributions are on behalf of employees in a qualified pension plan. This will then need to be picked up as income on the K-1. Individual contributions on behalf of the shareholders, though, would be on their respective K-1s and are NOT DEDUCTIBLE on page 1 of the 1120S. Can you confirm?
BELOW IS WHAT THE INSTRUCTIONS SAY ON FORM 1120S on Line 17
Line 17. Pension,
Profit­Sharing, etc., Plans
Enter the deductible contributions not
claimed elsewhere on the return made by
the corporation for its employees under a
qualified pension, profit-sharing, annuity,
or simplified employee pension (SEP) or
SIMPLE IRA plan, or any other deferred
compensation plan.

Maybe we are getting in too deep, but hope it will help us on exam day! Mine is next week.

[joonpark1212]

@ pcunniff

General: split equally
LLC: split according to amount contributed
LPs: split according to amount contributed
LLP: Similar to a general partnership in most respects(sharing of profit or loss)

Found it from becker/bisk based material of mine.

[mardybum13]

a) I perform repairs for John worth $1000 for free. Will John be taxed on this?

b) I performed the same repairs for John in exchange for an iPhone. Does John include the FMV of the repairs to calculate the gain realized on the iPhone?

[pcunniff]

@joonpark1212 I agree. I would look more into it, but my exam is on thursday and I dont want to spend more time than i already have. I think we have A LOT of it down.

@mardybum13 – a) sounds like a gift. There was an example that mentions an individual mowed their neighbors lawn out of good faith. That neighbor was pleased and paid the individual mentioning he would not take the money back. This is more of a gift exchange. If he did it out of affection – this wont be taxed to John. This one is tough though… maybe someone else can help with this.

b) this isnt a non monetary exchange so i would think yes he would include the FMV to calculate the gain realized. Where are you getting these problems? They arent easy.

Does anyone know the NOL carryback rules if there are multiple losses? I'll post an example below.

Taxable income/(Loss)
Year 1: 5000
Year 2: 4000
Year 3: (60,000)
Year 4: 10,000
Year 5: 10,000
CY/YR 6: (30,000)

If year 3 is carrying forward the 60,000 loss – how will that mesh when I carry back the 30,000 NOL from year 6?

[Anonymous]

@mardybum213

a) This is a gift of services. I'm gonna guess that common sense dictates that this not taxable. If I mow my neighbors lawn or shovel his driveway, he doesn't have to put it on his 1040. Even if I give him a gift, I'm responsible for the gift tax, not him.

b) This is an exchange of property for services. The recipient of the phone recognizes income equal to the FMV of the phone and takes an equivalent basis in it. Therefore, the person owning the phone recognizes gain of the FMV over his basis in it.

Good questions, not very involved but make you think…

[CPADream]

@pcunniff I believe it depends on how the question constructed. If the company had used the year 3 ($60,000 loss) to offset year 4 and 5 Income. Then year 4 and 5 should have shown zero. There's no income to carry backward.

Just my guess 🙂

[Author]

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