1Unrelated business income (UBI):
This is income from a business that's not related to its tax-exempt purpose. Several activities are exluded from this, however;
-Income from research by a college or hospital
-Work performed by volunteers
-Sales of merchandise received as gifts or contributions
-Bingo for not-for-profit organizations
-Rents from real property where no personal services are provided
-Activities conducted for the convenience of members, students, patients, or employees
2Section 501(c)(3) exempt purposes include
-National amateur sports competitions (no athletic facilities nor equipment provided)
3Partnerships
-As long as the owners have sufficient basis in their ownership interests, losses flow through to owners in the year the losses occur, and the owner can offset the losses against other sources of income.
-Active owners will owe self-employment tax
-Nonliquidating distributions of property, no gain is recognized by the partner or the partnership. The distribution is nontaxable to the extent of the partner's basis in the partnership interest
-LIMITED partnerships can only be created by statute
-LIMITED partnerships must file a copy of its certificate with the state
4C Corporations
-Have the most flexibility in choosing an accounting period, similar to individual taxpayers.
-Best option for a single, non-US citizen
-Sec 351 applies to contributions from shareholders
-Property comes out of a corporation at FMV
5S Corporation
-As long as the owners have sufficient basis in their ownership interests, losses flow through to owners in the year the losses occur, and the owner can offset the losses against other sources of income.
-No owners owe self-employment tax
-Sec 351 applies to contributions from shareholders
-Shareholders do not have basis in the debts of the corporation
-Property comes out of an S corp at FMV
6How to calculate gain realized for S Corp shareholders contributions
FMV property contributed
- debt assumed by corporation
+ relief from debt
- adjusted basis of property contributed
7How to calculate gain recognized for S Corp shareholders upon liquidation
Calculate basis as normal
FMV of property
- total basis
+ gain on distribution (washes out so it isn't counted twice)
8Determining AAA and OAA
1. Separately stated items that are taxable effect AAA
-(sec 179 expense, investment income, investment expense)
2. Separately stated items that are nontaxable affect OAA
-(federal built-in gains, municipal bonds, municipal expense)
9How to calculate S corp stock and debt basis
Debt basis is only increased when the shareholder makes a loan to the corporation. Excessive losses can reduce debt basis. If the debt basis is less than the loans outstanding, income will increase the debt basis back to normal FIRST before touching stock basis.
When calculating stock basis, allocate the losses LAST. Excess over stock basis will come out of debt basis.