2020 NATIONAL INCOME TAX WORKBOOK CHAPTER 6 BUSINESS
2020 NATIONAL INCOME TAX WORKBOOK CHAPTER 6: BUSINESS ENTITY ISSUES
BUSINESS ENTITY ISSUES 1. Partnership Reporting Requirements 2. Social Clubs 3. Fraternal Societies 4. Tax-Exempt Entities Update PP. 193217
PARTNERSHIP REPORTING REQUIREMENTS P. 194 §Number of partnership returns filed has increased by 59% from 2004 to 2017 §Corporation filings up only 14% §IRS adding information reporting to review returns for compliance
CAPITAL ACCOUNTS § Book value, FMV, or tax basis accounts are allowed § However, tax basis must be reported on Form 1065 P. 194
BOOK CAPITAL ACCOUNTS P. 194 §I. R. C. § 704 (b) explains calculation § Required in order to meet a safe harbor for special allocations v Special allocation - an allocation made other than according to overall profit and loss sharing percentages
INCREASES TO BOOK CAPITAL ACCOUNTS P. 194 1. Money contributed 2. FMV of property contributed (reduced by debt assumed) 3. Allocations of income and gain
DECREASES TO BOOK CAPITAL ACCOUNTS PP. 194195 1. Money distributed 2. FMV of property distributed (reduced by debt assumed by partner) 3. Allocations of losses and deductions
FMV CAPITAL ACCOUNT P. 195 §Like book value accounts except: Ø Adjustment made for changes in the FMV of partnership assets § Represent each partner’s share of the partnership’s FMV net worth
TAX BASIS CAPITAL ACCOUNT §Tax capital §Not GAAP, book, etc. P. 195
INCREASES TO TAX BASIS CAPITAL ACCOUNT P. 195 §Money contributed §ATB of property (less debt) contributed §Allocated share of P/S income or gain §Depletion deduction in excess of depletion property basis
INCREASES TO TAX BASIS CAPITAL ACCOUNT §Partnership liabilities distributed to partner §Partner’s share of any increase in P/S tax basis under I. R. C. §§ 734(b) or 743(b) P. 195
DECREASES TO TAX BASIS CAPITAL ACCOUNT P. 195 §Money distributed §ATB of property (less debt) distributed §Allocated share of P/S losses and deductions §Depletion deduction not in excess of depletion property basis
DECREASES TO TAX BASIS CAPITAL ACCOUNT P. 195 §Partner liabilities contributed to partnership §Partner’s share of any decrease in P/S tax basis under I. R. C. §§ 734(b) or 743(b)
PP. 195196 EX. 6. 1 – 3 CAPITAL ACCOUNT “FLAVORS” Sam’s Beginning Capital Accounts Tax Basis Book FMV Equipment 150, 000 200, 000 Debt (50, 000) Capital Account 100, 000 150, 000
P. 196 EX. 6. 2 CAPITAL ACCOUNT UPDATE Beginning capital account Income (loss) Contributions (distributions) Ending capital account Tax Basis 100, 000 190, 000 (100, 000) 190, 000
PRACTITIONER NOTE – BASIS OF PARTNERSHIP INTEREST P. 196 § Basis of partnership interest includes partner’s share of P/S debts (I. R. C. § 752) § Basis of the interest cannot be negative § But capital accounts can be negative
FURTHER IRS CAPITAL ACCOUNT GUIDANCE P. 196 ØSafe harbor – determine tax capital account by subtracting partner’s share of debt from partner’s basis in interest ØNotice 2020 -43 § Open for public comment § Two alternatives for reporting capital
BUILT-IN GAINS AND LOSSES P. 197 §I. R. C. § 704(c) § Difference between FMV and ATB of contributed property § Required special allocation to eliminate the differences among partners
P. 197 EX. 6. 3 ALLOCATE GAINS TO MYRTLE Book Value Tax Basis Built-in Gain Myrtle Land 1, 000 400, 000 600, 000 Joshua Land Cash Ken’s Total 500, 000 1, 000, 000 0 0 0 LLC Total $2, 000 $1, 400, 000 $ 600, 000
2020 REPORTING REQUIREMENTS P. 197 §Tax basis capital accounts for all partners, not just partners with negative accounts (if required to report) §Built-in gains and losses §Information for separate at-risk activities
EXCEPTION TO ITEM L REPORTING P. 197 Partnership must 1. have total receipts < $250, 000 2. have total assets < $1 M 3. file timely Sch. K-1 s with return & to partners 4. not be required to file Sch. M-3
REPORTING NEGATIVE TAX BASIS CAPITAL ACCOUNTS P. 199 Negative tax basis capital accounts must be reported: §Item L completed on tax basis and §Pre-2020 non-tax basis provided on line 20, code AH
REPORTING BUILT-IN GAIN §Complete Item M for contributed property §Attach schedule §Aggregate gain properties if > 10 §Complete Item N – beginning and end of tax year P. 199
PRACTITIONER NOTE P. 199 §IRS can now track I. R. C. 704(c) progress §I. R. C. § 737 requires recognition of built-in gain to contributing partner if. within 7 years of contribution: §the contributed property is distributed to another partner, or §contributing partner receives a distribution of other property
AT-RISK ACTIVITY REPORTING §Complete line 21, Sch. K-1 §Attach details for each activity §Income, loss, deduction §Liabilities §Distributions and partner loans §Details to partners also for Form 6198 PP. 199 -200
EX. 6. 4 GAIN ON CONTRIBUTED PROPERTY PP. 200 -201
PENALTIES §I. R. C. § 6722 failure to provide K-1 to partner §I. R. C. § 6698 failure to file complete Form 1065 §I. R. C. § 6038 failure to file complete Sch. K-1 P. 202
ISSUE 2: SOCIAL CLUBS PP. 202 -206 §I. R. C. § 501(c)(7) provides tax exemption § Pleasure, recreation, other nonprofit purposes § Earnings cannot provide private benefit § File Form 1024 for exemption
FOR-PROFIT ACTIVITIES P. 202 §May disqualify if substantial §Example – renting facilities, office space, parking nonmembers to
SUBSTANTIAL PURPOSE PP. 202 -203 § Social or recreation must be substantial purpose § Any other member service must be incidental §Not car repair, not business growth
OTHER REQUIREMENTS P. 203 § Must promote commingling and fellowship § No discrimination based on race, color, or religion (see text) § No benefit of earnings from the public to the owners
MEMBERSHIP ISSUES §Membership must be limited P. 204 §Corporate memberships a problem §Open to members, spouse, dependents, and guests would be okay §Membership must be primary support §Safe harbor thresholds based on gross receipts (Ex. 6. 6) §Otherwise facts and circumstances
TAXATION OF SOCIAL CLUBS PP. 204 -206 §Taxed on unrelated business income §Income from general public is not exempt §Rev. Proc 71 -17 provides guest safe-harbor §Recordkeeping for guests and other nonmember use is crucial
EXEMPT VERSUS NONEXEMPT INCOME PP. 205 -206 §Exempt income ü Dues, fees, charges paid by members ü Investment income set aside for religious, charitable, etc. under I. R. C. § 170(c)(4) §Nonexempt Income ü Nonmember income ü Investment income ü Income from nonexempt purposes even if from members ü Sales of property unless proceeds are reinvested for tax exempt purposes
UNRELATED BUSINESS EXPENSES ØExpenses directly attributable to unrelated business activity ØAllocable expenses • Ex. 6. 8 and 6. 9 • Allocations: • across services offered by club, then • between services used by members versus nonmember P. 206
OTHER TAX ISSUES §Estimated tax payments if tax >$500 §Employment tax exemption: §domestic service by students in college clubs, fraternities, sororities P. 206
ISSUE 3: FRATERNAL SOCIETIES §Two exemptions: 1. I. R. C. § 501(c)(8) Society provides life, sick, accident benefits to members 2. I. R. C. § 501(c)(10) Other domestics §File Form 1024 for exemption P. 207
EXEMPTION REQUIREMENTS §Fraternal society, order, or association §Fraternal purpose §Operate under the lodge system §§ 501(c)(8) – provide benefits to members §§ 501(c)(10) – domestic, all earnings to its exempt purpose P. 207
FRATERNAL PURPOSE §Membership based on §Common tie, or §Pursuit of a common object §Substantial fraternal activities ØCivic, benevolent, charitable P. 207
LODGE SYSTEM Minimum of two active entities: 1. Parent organization 2. Subordinate lodge or branch § Chartered by parent § Mostly self-governing P. 207
BENEFITS P. 207 § Required to be provided to most members under § 501(c)(8) § Domestic fraternal society may arrange optional insurance under § 501(c)(10)
NET EARNINGS P. 207 Only the domestic fraternal society must devote its earnings exclusively to religious, charitable, scientific, literary, educational, or fraternal purposes
UNRELATED BUSINESS INCOME IS TAXABLE PP. 208 -209 §Bar and restaurant sales to nonmembers §Same definition as with social clubs §But no % limitation or required records §Hall rental without services may be exempt §But, rental income from debt-financed property is taxable (see exceptions)
CONTRIBUTIONS TO FRATERNAL SOCIETIES §Allowable charitable contribution deduction if used for charitable purpose §No deduction if used for fraternal or social purposes §Organization should keep funds separate P. 208
ISSUE 4: TAX-EXEMPT ENTITIES UPDATE PP. 209 -210 Notification of Formation: § 501(c)(4)Civic leagues, social welfare, certain local employee associations 1. Notify within 60 days of formation 2. Submit Form 8976 electronically 3. $50 fee 4. IRS response within 60 days 5. $20 per day penalty for failure to notify
SEPARATE FILING FOR TAX-EXEMPT STATUS 1. File Form 1024 -A too 2. Filing will be open to the public PP. 209 -210
ELECTRONIC FILING OF ANNUAL RETURNS P. 211 § Most tax-exempts must file annually § Churches and other religious organizations: § No filing if ≤ $5, 000 gross receipts § Form 990 -N if ≤ $50, 000 gross receipts § Tax years after 7/1/19 - electronically
OTHER UPDATES PP. 211 -212 § Regulations updated information reporting requirements § IRS notice before revocation of status § No record of returns for 2 years § IRS intent to revoke tax-exempt status
UBTI FOR TRANSPORTATION FRINGES – GONE!! PP. 212 -213 1. Disaster Act of 2019 repealed this provision 2. Retroactive – amend 2017 and 2018 3. Specific instructions for amending (P. 213)
P. 213 PRIVATE FOUNDATION TAX RATE ON NET INVESTMENT INCOME J Tax rate reduced from 2% to 1. 39% (Disaster Act) Repealed prior 1% rate where certain charitable distributions had been made Ø Reported on Form 990 -PF
GRANTS TO CERTAIN COOPERATIVES 1. 2. 3. 4. PP. 213 -214 Coops exempt under § 501(c)(12) ≥ 85% of income must come from members TCJA made certain grants income Disaster Act exempts grants from 85% test
ELECTRONIC FILING OF FORM 1023 PP. 214 -215 §Mandatory after January 1, 2020 §Mandate also applies to 1023 -EZ §$600 user fee for 2020 §Same supporting documents but must be scanned and submitted as one file
FORM 1023 CHANGES P. 215 1. Required NTEE code 2. Questions for the OFAC 3. No longer allows § 501(h) election regarding expenses to influence legislation (separate filing Form 5768) 4. Scanned electronic signature details
REQUESTING EARLIER TAX-EXEMPT EFFECTIVE DATE P. 216 Rev. Proc. 2020 -8 §Okay if Form 1023 or 1023 -A is filed within 27 months of formation §Otherwise, must file Form 1023 §Organization acted reasonably, good faith §Government interest not harmed
OTHER TAX-EXEMPT ENTITY CHANGES P. 216 § Notice 2020 -36 updates process for group exemption for subordinate organizations § CARES Act provides reimbursement of payments to unemployment fund
CHARITABLE CONTRIBUTIONS P. 217 CARES Act (see New & Expiring Legislation) § $300 above the line deduction § Suspends 60% limit for individuals § Increases corporation limit from 10% to 25%
GUIDANCE FOR HOMEOWNERS ASSOCIATIONS P. 217 § 501(c)(4) homeowners associations must promote common good and general welfare of the general public § Unrestricted access to common areas § No exterior maintenance of private dwellings § Could operate in tandem with social/ recreational § 501(c)(7) organization
QUESTIONS?
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