2020 NATIONAL INCOME TAX WORKBOOK...•Money distributed • Adjusted basis property distributed...

2020 NATIONAL INCOME TAX WORKBOOK

CHAPTER 6: BUSINESS ENTITY ISSUES

BUSINESS ENTITY ISSUES & LEARNING OBJECTIVES

1.Partnership Reporting Requirements

2.Social Clubs

3.Fraternal Societies

4.Tax-Exempt Entities Update

PP. 193

PARTNERSHIP REPORTING REQUIREMENTSP. 194

2004

2,500,000 2017

4,000,000

Partnership returns

59%

Corporate returns

14%

increaseVS

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

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

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

+ -

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

TAX BASIS CAPITAL ACCOUNTP. 195

= Equity using “tax principles”

NOT GAAP, FMV, 704(b), etc..

May be needed for 2020 1065

returns!!

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)

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)

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

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

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

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

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

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

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

POLLING QUESTION #1

A partner’s tax basis capital account always equals the partner’s outside

basis in the partnership.TrueFalse

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

EXCEPTION TO ITEM L 1065 REPORTINGP. 197

K-1


All 4!Schedule B, 1065 Question #4

Next slide!


Any one Must file M-3


May have to report:




Must report:


2. Section 465 at-risk activities

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


May have to report:




Must report:



REPORTING BUILT-IN GAINP. 199

Fill out

Fill out

IRS can now track

K-1:

DescriptionDate

Amount gain

PP. 197

2020 REPORTING REQUIREMENTS

May have to report:




Must report:

1. Unrecognized 704(c) (built in gains)


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

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

EX. 6.4 GAIN ON CONTRIBUTED PROPERTYPP. 200-201

PENALTIESP. 202

Failure to

provide K-1Partnership Partner

IRSFailure to file

completed 1065

Failure to file

completed K-1

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

SOCIAL CLUBSPP. 202

Social

Clubs

Hobby Clubs

Fraternities and

sororities

Country Clubs

Dinner Clubs

Alumni

Associations

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

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)

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:

EXAMPLE 6.6 EXEMPT NONMEMBER INCOMEPP. 204

The Goodtime

Neighborhood

Social Club

Dining room

Meeting room

Library

Non

membersmembers

10%

Day passes90%

Membership

fees

DISALLOWANCE OF DEDUCTIONPP. 204

member Social clubDues or fees

Tax

deductionIRC 274(a)(2)

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

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

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

UNRELATED BUSINESS EXPENSESP. 206

Expenses

Against

UBTI

Not Against

UBTIDirect

allocable

Examples 6.8 and 6.9

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

FRATERNAL PURPOSEP. 207

Fraternal

Purpose

Common Tie

Pursuit of common

object

Substantial program of

activities

Not social alone

Civic, benevolent or

charitable

LODGE SYSTEMP. 207

Parent

Organization

Branch

Self governing

Must have

both, and

both active

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

UNRELATED BUSINESS INCOME IS TAXABLEPP. 208-209

UBTI

Bar and

Restaurant

Rental of

Facilities

Gaming

Activities

Advertising

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!

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

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

POLLING QUESTION #3

Contributions to a fraternal society are never deductible charitable

contributions.

True

False

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)

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)

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

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.

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

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

REQUESTING EARLIER TAX-EXEMPT EFFECTIVE DATEP. 216

Legally

formed

27 months

File 1023

or

1023-EZIRS approves

Effective date of exempt status retroactive

before

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

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

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%

GUIDANCE FOR HOMEOWNERS ASSOCIATIONSP. 217

Homeowner

Associations IRS - issue snapshot on website:

• Resources

• Analysis

• Issue indicators

• Audit tips

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

2020 NATIONAL INCOME TAX WORKBOOK...•Money distributed • Adjusted basis property distributed...

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