2020 national income tax workbook...•money distributed • adjusted basis property distributed...
TRANSCRIPT
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2020 NATIONAL INCOME TAX WORKBOOK
CHAPTER 6: BUSINESS ENTITY ISSUES
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BUSINESS ENTITY ISSUES & LEARNING OBJECTIVES
1.Partnership Reporting Requirements
2.Social Clubs
3.Fraternal Societies
4.Tax-Exempt Entities Update
PP. 193
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PARTNERSHIP REPORTING REQUIREMENTSP. 194
2004
2,500,000 2017
4,000,000
Partnership returns
59%
Corporate returns
14%
increaseVS
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PARTNERSHIP REPORTING REQUIREMENTSP. 194
2019 1065 & K-1s 2019 8865 & K-1s
New reporting requirements
Deferred from 2019 to 2020
Notice
2019-66
1. Built in Gains
2. Capital accounts on tax basis
3. Multiple 465 at risk activities
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CAPITAL ACCOUNTSP. 194
Capital Accounts options:Book Value
FMV
Tax Basis
Must maintain for “special
allocations”
If required to report
capital accounts, must
use on Form 1065 after
1/1/20
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BOOK VALUE CAPITAL ACCOUNTSP. 194
• Money
contributed
• FMV property
contributed
• Allocations of
income/gain
• Money
distributed
• FMV property
distributed
• Allocations of
losses/deductions
• Non-deductible
expenditures
+ -
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FMV CAPITAL ACCOUNTSP. 195
• Money
contributed
• FMV property
contributed
• Allocations of
income/gain
• Increase in
FMV assets
• Money
distributed
• FMV property
distributed
• Allocations of
losses/deductions
• Non-deductible
expenditures
• Decrease in
FMV assets
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TAX BASIS CAPITAL ACCOUNTP. 195
= Equity using “tax principles”
NOT GAAP, FMV, 704(b), etc..
May be needed for 2020 1065
returns!!
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INCREASES TO TAX BASIS CAPITAL ACCOUNTP. 195
• Money contributed
• Adjusted basis property contributed
• Distributive share income/gain
• Excess % depletion over basis in
property subject to depletion
• Liabilities distributed to the partner
• Increases in tax basis under IRC 734(b)
or 743(b)
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DECREASES TO TAX BASIS CAPITAL ACCOUNT P. 195
• Money distributed
• Adjusted basis property distributed (less liabilities)
• Distributive share losses/ deductions
• Oil and gas depletion, to extent does not
exceed adjusted basis
• Basis charitable property contributed & foreign
taxes
• Partners liabilities assumed by partnership
• Decrease in tax basis for 734(b) & 743(b)
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EX. 6.1 – THREE CAPITAL ACCOUNT “FLAVORS”PP. 195-196
Each partner’s Beginning Capital Accounts
Tax Basis Book FMV
Equipment 150,000 200,000 200,000
Debt (50,000) (50,000) (50,000)
Capital Account 100,000 150,000 150,000
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EX. 6.2 CAPITAL ACCOUNT UPDATEP. 196
Beginning Capital Account (tax basis) 100,000
2020 Income 570,000 / 3 +190,000
Distribution to each partner - 100,000
Ending Capital Account 190,000
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PRACTITIONER NOTE – BASIS OF PARTNERSHIP INTERESTP. 196
Tax basis
Capital Accounts Partner’s basis in
the partnership
Increased by
partner’s share of
partnership liabilities
under 752
NOT
May be negative May not be negative
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SAFE HARBORP. 196
Can use outside basis to calculate partner’s
capital account to see if partnership must
report negative basis capital account info:
If elected, attach statement
Partner’s outside basis xxx,xxx
Partner’s share of liabilities (xx,xxx)
Partner’s tax basis capital account xxx,xxx
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NOTICE 2020 - 43P. 196
Seeks public comments on a proposed
requirement for partnerships to use only one of
two alternative methods to satisfy the tax
capital reporting requirement after 12/31/20:
1. Modified outside basis method
2. Modified previously taxed capital account
method
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BUILT-IN GAINS AND LOSSES- 704(C)P. 197
Partner Partnership
FMV xxx,xxx
Adjusted tax basis (xx,xxx)
Built in gains xx,xxx
Property contributed
Special allocations to eliminate
any book-tax differences
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P. 197
MyrtleGet Away
LLC
EX. 6.3 ALLOCATE GAINS TO MYRTLE
Joshua
Property
FMV 1,000,000
Tax basis 400,000
Property
FMV 500,000
Tax basis 500,000
&
Cash 500,000Special allocation
of 600,000 in gains
contributed
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POLLING QUESTION #1
A partner’s tax basis capital account always equals the partner’s outside
basis in the partnership.TrueFalse
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POLLING QUESTION #1
A partner’s tax basis capital account always equals the partner’s outside
basis in the partnership.TrueFalse
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2020 REPORTING REQUIREMENTSP. 197
May have to report:
1. Partner’s share of partnership capital on the tax
basis method – item L, schedule K-1
2. Negative tax basis capital account
Must report:
1. Unrecognized 704(c) gain (built in gains)
2. Multiple Section 465 at-risk activities
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EXCEPTION TO ITEM L 1065 REPORTINGP. 197
K-1
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EXCEPTION TO ITEM L 1065 REPORTINGP. 197
All 4!Schedule B, 1065 Question #4
Next slide!
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EXCEPTION TO ITEM L 1065 REPORTINGP. 197
Any one Must file M-3
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2020 REPORTING REQUIREMENTSP. 199
May have to report:
1. Partner’s share of partnership capital on the tax
basis method – item L, schedule K-1
2. Negative tax basis capital account
Must report:
1. Unrecognized 704(c) gain (built in gains)
2. Section 465 at-risk activities
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REPORTING NEGATIVE TAX BASIS CAPITAL ACCOUNTSP. 199
2019 2020
Negative at beginning or
end of year:
• Report tax basis
capital in item L (if
required)
• No reporting on line
20, with code AH
If reported other than tax
basis capital accounts in
item L, and tax basis
capital would be
negative, must report on
line 20, code AH,
beginning and ending
tax basis capital
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2020 REPORTING REQUIREMENTSP. 199
May have to report:
1. Partner’s share of partnership capital on the tax
basis method – item L, schedule K-1
2. Negative tax basis capital account
Must report:
1. Unrecognized 704(c) gain (built in gains)
2. Section 465 at-risk activities
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REPORTING BUILT-IN GAINP. 199
Fill out
Fill out
IRS can now track
K-1:
DescriptionDate
Amount gain
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PP. 197
2020 REPORTING REQUIREMENTS
May have to report:
1. Partner’s share of partnership capital on the tax
basis method – item L, schedule K-1
2. Negative tax basis capital account
Must report:
1. Unrecognized 704(c) (built in gains)
2. Section 465 at-risk activities
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AT-RISK ACTIVITY REPORTINGPP. 199-200
Details of each activity:
• Income, loss, deduction
• Liabilities
• Distributions and partner loans
Plus give details to partners for Form 6198
K-1
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P. 200
MyrtleGet Away
LLC
EX. 6.4 GAIN ON CONTRIBUTED PROPERTY
Joshua
Property
FMV 1,000,000
Tax basis 400,000
Property
FMV 500,000
Tax basis 500,000
&
Cash 500,000
Remember?
Subdivided & sold a
lot for 50,000, with
basis of 20,000
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EX. 6.4 GAIN ON CONTRIBUTED PROPERTYPP. 200-201
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PENALTIESP. 202
Failure to
provide K-1Partnership Partner
IRSFailure to file
completed 1065
Failure to file
completed K-1
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ISSUE 2: SOCIAL CLUBSPP. 202
501c(1)…………..
501c(2)…………..
501c(3)…………..
501c(4)…………..
501c(5)…………..
501c(6)…………..
501c(7) - clubs organized for pleasure, recreation
and other non-profitable purposes
Files Form 1024 to apply
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SOCIAL CLUBSPP. 202
Social
Clubs
Hobby Clubs
Fraternities and
sororities
Country Clubs
Dinner Clubs
Alumni
Associations
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SOCIAL CLUBSPP. 202
Social
Clubs
Cannot inure
benefit to
shareholder
Must Limit their
earnings from non-
members
May not pursue an
activity for profit
Social or recreation must be substantial purpose
Substantially all
activities for
nonprofitable
purpose
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SOCIAL CLUBSPP. 203 & 204
Social
Clubs
Any other member services
must be incidental
Must promote
commingling
and fellowship
No discrimination based
on race, color, or
religion
No benefits of
earnings from the
public to the
owners
Membership must be limited.
(not corporate)
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SOCIAL CLUBS – SAFE HARBORPP. 204
Social
ClubsMembers
Fees, dues &
assessments
Outside
Members
Other Sources65% 35%
Use of the clubs facilities, services by
nonmembers, other activities that do not
further social or recreational purposes
within 35%, < 15% from:
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EXAMPLE 6.6 EXEMPT NONMEMBER INCOMEPP. 204
The Goodtime
Neighborhood
Social Club
Dining room
Meeting room
Library
Non
membersmembers
10%
Day passes90%
Membership
fees
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DISALLOWANCE OF DEDUCTIONPP. 204
member Social clubDues or fees
Tax
deductionIRC 274(a)(2)
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TAXATION OF SOCIAL CLUBSPP. 204
Generally, exempt from tax
Not Exempt from Tax – Unrelated business income:
1. Income from non-members
2. Income from a trade or business regularly
conducted, not substantially related to tax
exempt purpose
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EXEMPT VERSUS NONEXEMPT INCOMEPP. 205 & 206
Exempt Nonexempt
Dues
Fees
Charges paid by
members
Investment income
set aside for
charitable purposes
Nonmember income
Investment income
Income from nonexempt
purpose, even if from members
Sales of property, unless
proceeds reinvested for tax
exempt purposes
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POLLING QUESTION #2
To be exempt from federal income tax, a social club must not receive more
than 35% of it’s gross income from
sources outside it’s membership.
True
False
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POLLING QUESTION #2
To be exempt from federal income tax, a social club must not receive more
than 35% of it’s gross income from
sources outside it’s membership.
True
False
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UNRELATED BUSINESS EXPENSESP. 206
Expenses
Against
UBTI
Not Against
UBTIDirect
allocable
Examples 6.8 and 6.9
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ISSUE 3: FRATERNAL SOCIETIESP. 207
Fraternal benefit societies under lodges:
1. 501(c)8 - Provide life, sick, accident benefits
2. 501(c)10 – Domestic Fraternal Societies &
do not provide life, sick, accident benefits
Lodge
File Form 1024 to apply for tax exempt status
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FRATERNAL PURPOSEP. 207
Fraternal
Purpose
Common Tie
Pursuit of common
object
Substantial program of
activities
Not social alone
Civic, benevolent or
charitable
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LODGE SYSTEMP. 207
Parent
Organization
Branch
Self governing
Must have
both, and
both active
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LODGE SYSTEMP. 207
Fraternal
beneficiary
society
Domestic
fraternal society
Provide life,
sick accident,
etc.. benefits
to it’s members
Devote it’s net earnings to
religious, charitable, scientific
literary, educational and
fraternal purpose
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UNRELATED BUSINESS INCOME IS TAXABLEPP. 208-209
UBTI
Bar and
Restaurant
Rental of
Facilities
Gaming
Activities
Advertising
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CONTRIBUTIONS TO FRATERNAL SOCIETIESP. 209
Donor$
Deductible?
Depends
Fraternal Benefit Society
Yes No
Fraternal or
social
purposes
Religious
Charitable
Scientific
Literary
Educational
Cruelty –
children/animals
Separate records!
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ISSUE 4: TAX-EXEMPT ENTITIES UPDATEPP. 209
501(c)4
Civic Leagues
Social Welfare
Employee Assn
IRSNotify, no later than 60 days after their
establishment, of
intent to operate
under 501(c)4
Form 8976 & 50.00
user fee
IRS responds in 60 Days,
not a determination
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OR, DETERMINATION LETTERPP. 210
501(c)4
Civic Leagues
Social welfare
Employee Assn
IRSUpon request, IRS may issue a
determination that it
qualifies.
Open to public
inspection.
May choose to file
a Form 1024-A with
the Form 8976
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POLLING QUESTION #3
Contributions to a fraternal society are never deductible charitable
contributions.
True
False
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POLLING QUESTION #3
Contributions to a fraternal society are never deductible charitable
contributions.
True
False
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ELECTRONIC FILING OF ANNUAL RETURNSP. 211
Tax Exempt
EntityIRS
File 990 annually
Tax years after 7/1/19 electronically
But, gross receipts < 50,000
files 990N (a notice)
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P. 212
Tax Exempt
Entities:
501(c)7
501(c)8
501(c)10
IRS
Do not report names of
substantial contributors
Report names of substantial
contributors
REPORTING NAMES OF CONTRIBUTORS
501(c)(3)
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NOTICE OF REVOCATIONPP. 212
All Tax
Exempt
Entities
IRSFail to file return or notice for 2 consecutive years
Notice that no record
of return or notice
Will revoke tax
exempt status if not
filed by next due date
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UBTI FOR TRANSPORTATION FRINGE BENEFITSPP. 212
The requirement for tax exempt organizations
to increase it’s UBTI by the amount of qualified
transportation-related fringe benefits provided
to employees has been repealed!!
Procedures for amending returns discussed in
detail on page 213.
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PRIVATE FOUNDATION TAX RATE ON NET INVESTMENT INCOMEP. 213
Pic of 990-PF
Tax rate on net investment income –
1.39% (down from 2%)
Repealed 1% rate on net investment
income if certain charitable distributions
had been made
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ELECTRONIC FILING OF FORM 1023 & 1023-EZPP. 214
1/31/20Original date tofile electronically
4/30/20
Must file electronically
Transition period
User Fee $600!!
Certain documents attached as PDF
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REQUESTING EARLIER TAX-EXEMPT EFFECTIVE DATEP. 216
Legally
formed
27 months
File 1023
or
1023-EZIRS approves
Effective date of exempt status retroactive
before
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REQUESTING EARLIER TAX-EXEMPT EFFECTIVE DATEP. 216
Legally
formed
27 months
File 1023
Not
1023-EZIRS approves
Effective date of exempt status, unless good faith and no harm
after
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GROUP EXEMPTIONP. 216
501(c) organization
Subordinate
organization
Subordinate
organization
Under
general
supervision
or control
Notice 2020-21 proposed Revenue Proc: – obtain group exemption- maintain group exemption
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CHARITABLE CONTRIBUTIONSP. 217
CARES Act 1. 300 above the line deduction
2. Suspends 60% limit for individuals for cash
contributions
3. Increase corporation limitation from 10% to 25%
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GUIDANCE FOR HOMEOWNERS ASSOCIATIONSP. 217
Homeowner
Associations IRS - issue snapshot on website:
• Resources
• Analysis
• Issue indicators
• Audit tips
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POLLING QUESTION #4
A tax exempt organization no longer
needs to increase their UBTI by the qualified transportation-related fringe benefits provided to their employees.
True
False
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POLLING QUESTION #4
A tax exempt organization no longer
needs to increase their UBTI by the qualified transportation-related fringe benefits provided to their employees.
True
False