[jeff]

Welcome to the Q4 2016 CPA Exam Study Group for REG.

If this is your first post in the study group – please post your target exam date (just the time frame to preserve your anonymity), and your past history with this exam (optional, of course).

[demarcon]

I can officially say I am done studying before my exam tomorrow morning. Time to relax and answer some questions if they come up in this topic. I am close to burning out. I have this exam tomorrow and am closing on my house on Thursday. What a stressful week

[HoosierCPA]

@demarcon congrats on the new house and good luck tomorrow! I'm pulling for you! Once again I appreciate all the help.

FAR - 78
REG - 72,74,71...please just go away REG nobody likes you!
BEC - 82
AUD - Aug 16

[Namstut]

@demarcon good luck tomorrow and congrats on the new house!

AUD 7/6/16 Passed
BEC 9/3/16
FAR TBD
REG TBD

[539Mayor]

Queestion. Tevi? An employeer gives an employee 2 tickets to a baseball game that the co. Got for free. Is that income to me?

[HoosierCPA]

For some reason anytime I see distribution I always revert back to thinking of the partnership rules. Can someone refresh me on distribution of property for a Corporation.

Here's the question that made me think of it but what are the rules for the “sole shareholder”. I know we talked about this earlier for the formation of a corp but not the distributions:

Kent Corp. is a calendar-year, accrual-basis, C corporation. In the current year, Kent made a nonliquidating distribution of property with an adjusted basis of $150,000 and a fair market value of $200,000 to Reed, its sole shareholder. The following information pertains to Kent:

Reed's basis in Kent stock at January 1 $500,000
Accumulated earnings and profits at
January 1 125,000
Current earnings and profits, including
the effects of this distribution 60,000

What was taxable as dividend income to Reed for the current year?

A.$60,000

B.$150,000

C.$185,000 — CORRECT

D.$200,000

For some reason I wanted to say it was distributed at the basis and not the fair value because it wasn't a liquidating distribution–however that must be partnership rules that I am thinking of! All are corp distributions at the FMV? If there are other rules I should know please let me know those as well so I can update my notes!

FAR - 78
REG - 72,74,71...please just go away REG nobody likes you!
BEC - 82
AUD - Aug 16

[demarcon]

All corp distributions are treated as if the asset were sold. Also, a trick is that the capital gain adds to Current E&P. Making it a dividend up to the gain at least.

[HoosierCPA]

@demarcon that's what I was hoping to hear. Easy to remember when there aren't a ton of different exceptions. Corp Distribution = FMV!

FAR - 78
REG - 72,74,71...please just go away REG nobody likes you!
BEC - 82
AUD - Aug 16

[Anonymous]

@demarcon Quick question: Are guaranteed payments to partners in a partnership subject to income tax? I know that they are subject to SE tax. Aren't they technically lowering taxable income as they decrease the partnership share of the income reported on K-1? I appreciate any guidance anyone can give me on this

[539Mayor]

@demarcon

What's the general rule fr property distributions under an S Corp. I see we just went over C corp.

[demarcon]

@jcberthoud S-corp is the same as C-corp, it's treated as if it's sold. It has to be reported as income to each shareholder on their K-1 depending if it's a 1245 recapture or a capital gain.

@carinita Guaranteed payments are treated as an ordinary income expense to the partnership, so for example:

I have a partnership with $100,000 of income and a $30,000 guaranteed payment to partner B. The ordinary income that gets split between A&B would be $35,000 each (total of $70,000). The difference is, partner B will also have income of $30,000+$35,000 = $65,000 subject to self employment tax on his K-1. Partner A wouldn't have to pay taxes on that guaranteed payment, he would only have $35,000 subject to SE tax. A partnership doesn't pay tax, so it's not taxable to the partnership.

[Anonymous]

@demarcon thank you for that explanation and example. I do have one follow-up question. You spoke about the $65,000 and $35,000 that would be subject to SE tax on both partners returns. Would these amounts both be subject to income tax as well, as it is the pass through income? Perhaps I am not understanding correctly

[demarcon]

Yes, they are both taxed as ordinary income and are both subject to self employment tax as well.

[Anonymous]

@demarcon perfect, that makes sense. So technically, for the partner that reports the $30,000 guaranteed payment as income in addition to partnership income isn't the tax on the guaranteed payment a wash? It is deducted as business expense and then added on partner return.

[demarcon]

The partner who receives the guaranteed payment is taxed on the guaranteed payment in full. The other partner doesn't have to pay tax on the guaranteed payment since he's not receiving it.

Partner A – $35,000 in income subject to tax
Partner B – $65,000 in income subject to tax

It would be totally unfair to tax partner A on money he's never going to see.

[HoosierCPA]

Baker, an individual, owned 100% of Alpha, an S corporation. At the beginning of the year, Baker's basis in Alpha Corp. was $25,000. Alpha realized ordinary income during the year in the amount of $1,000 and a long-term capital loss in the amount of $3,000 for this year. Alpha distributed $30,000 in cash to Baker during the year. What amount of the $30,000 cash distribution is taxable to Baker?

A.$0

B.$5,000

C.$4,000 — CORRECT

D.$7,000

So for S-Corps the capital loss isn't included because it's a separately stated item. Shareholders basis is added/deducted from Distributions and ORDINARY INCOME/LOSS? I just want to make sure its not subject to the carryback carryforward 3-5 rule that C-Corps have?

FAR - 78
REG - 72,74,71...please just go away REG nobody likes you!
BEC - 82
AUD - Aug 16

[Author]

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