TCP Module

Scenario

Tax Basis

1.1

Non-statutory stock option with readily determinable value

• Exercise price plus any amount previously taxed on the date of grant
• No taxation on date of exercise, taxed on value of the option in year granted

1.1

Non-statutory stock option with no readily determinable value

• FMV of stock when option was exercised
• Taxable event is the exercise date

1.1

Statutory stock options (ISO and ESPP)

• Exercise price plus any amount paid for the option

1.3

Gifted property with FMV less than donor’s rollover basis

• Decided at date of sale, middle number between rollover basis, FMV at date of gift, and donee’s selling price

1.3

Inherited property

• FMV at date of death or AVD

2.2

Common stock received by shareholder

• Cash – amount contributed
• Property contributed at adjusted NBV
• Services – fair value

• + any gain received by shareholder

3.1

Initial S corporation stock basis

• Cash – amount contributed
• Property contributed at adjusted NBV
• Services – fair value
• No S corp debt added to stock basis, but debt basis in loans from the shareholder to the S corp

3.1

S corporation distributions to shareholders

• Not subject to tax unless distribution is in excess of stock basis, then taxed as LTCG

3.1

S corporation non-liquidating property distributions

• Shareholder’s basis in property distributed in FMV of property distribution
• S corp recognizes gain on distribution of appreciated property as if sold at FMV, but cannot recognize loss otherwise

3.2

Contribution of property to a partnership in return for a partnership interest

• Non-taxable event, partnership basis is rollover from partner

3.2

Contribution of services for partnership interest

• Taxable event, FMV of services provided, included in partner’s taxable ordinary income

3.2

Partnership outside basis

• Partner’s basis in partnership basis
• Partner’s share of partnership debt included in their basis in partnership recourse – nonrecourse debt allocated to all partners/LLC members based on profit sharing ratio

3.2

Built in gain/loss on contributed property

• Partner contributes property with FMV +/- property’s adjusted basis on day of contribution
• Built in gain/loss existing on date of contribution must be specifically allocated to contributing partner, with excess post-contribution allocated among all partners

3.2

Partnership inside basis

• Partnership’s basis in contributed property – contributor’s (carryover) basis

3.2

Partnership non-liquidating distributions

• Nontaxable to partner and partnership
• Reduces partner’s basis in partnership interest by adjusted basis (NBV) of property distributed

3.4

Section 351 transfer for C and S corporations

• No gain/loss recognized by either shareholder or corporation
• Shareholder basis in stock is adjusted basis in contributed property – any liabilities assumed by corporation
• Corporation basis in contributed property is NBV of property contributed

3.4

Partnership property transfer for partnership interest

• Automatically nontaxable
• Basis in partnership interest is adjusted basis of contributing property, adjusted for liabilities assumed by other partners

4.1

Nontaxable dispositions relating to homeowner’s exclusions, involuntary conversion, divorce property settlement, exchange of like-kind property, installment sale, treasury stock

• Rollover basis in most occasions
• If boot received: FMV of property received – deferred gain + deferred loss

4.3

Related party transactions – purchasing relative basis

• Same as gift tax rules

Distribution of Assets

Gain/Loss Recognized by Company

Gain/Loss Recognized by Taxpayer

Taxpayer’s Basis in Asset Distributed

C Corporation

FMV – Basis

Stock basis - FMV

FMV of property

S Corporation

FMV - Basis

Stock basis - FMV

FMV of property

Partnership

No G/L

• Nonliquidating distribution = normally not taxable unless cash distributed > stock basis
• Liquidating distribution = basis is adjusted basis of partnership interest – cash/cash equivalents

Loss if money, unrealized receivables, or inventory are only assets received and if partnership basis is more than basis in assets received

LLC

No G/L

Stock Options

Type

Grant Date

Exercise Date

Nonstatutory – RDV

• Recognize ordinary income = value of option - cost

• No taxation
• Basis = exercise price + any amount previously taxed on date of grant

Nonstatutory - NRDV

• Nontaxable event

• Ordinary compensation income = bargain element
• Bargain element = FMV – option exercise price
• Basis = FMV of stock on exercise date

ISO

• No taxation

• Basis = exercise price + any amount paid for option

ESPP

• No taxation
• If option exercise price is less than FMV of stock on grant date, ordinary income recognized when sold

• Basis = exercise price + any amount paid for option

Restricted Stock Unit

• Ordinary compensation for FMV of stock on vesting date

Income Types

Active

Passive

Portfolio

• Salaries and wages
• Guaranteed payments
• Business income/loss with material participation
• other income that is not passive or portfolio

• Business income/loss without material participation
• Rental real estate
• Income/loss for a limited partner from a limited partnership interest

• Interest
• Dividends
• Annuities
• Royalties
• Capital gains/losses

**Mom and pop exception to passive activity loss limitation: may deduct up to $25,000 of net passive activity losses if AGI is below $100,000, $12,500 if AGI between $100,000-$150,000, phased out after

**Excess business loss limit $305,000 (S), $610,000 (MFJ)

Tax Code Sections and Definitions

Module

Section

Definition

Formula

2.1

§382

• Limits NOL carryfowrward following an ownership change
• When one or more 5% shareholder raise their aggregate ownership by >50%
• Testing period is 3 year period ending on but including date of change in ownership

Section 382 limitation amount = FMV of loss corporation’s stock immediately before ownership change * federal long term, tax-exempt rate

2.2

§351

• No G/L on shareholder contributing property in exchange for corporation common stock if:
• Transferors contributing property have 80% voting control immediately after transaction and no boot received

N/A

2.2

§1244

• Corporation’s stock is sold/becomes worthless, taxpayer can treat loss as a ordinary loss instead of capital loss, up to $50,000 (S)/$100,000 (MFJ)

N/A

2.4

§482 Study

• Taxpayer prepared document that determines that prices for controlled transactions/transfers are made in accordance with allowable pricing methods set forth by US treasury regulations

N/A

3.1

§199A QBI Deduction

• Below the line deduction of 20% of QBI allowed on flow through income from S corp

REG equation

3.3

§ 754 Election

• Can be made when transfer of partnership interest by sale/exchange, or death

Difference between partner’s inside basis in assets and outside basis in partnership interest 🡪743(b) adjustment

3.3

§743(b) Basis Adjustment

• Can be positive or negative
• Required when substantial built in loss – inside exceeds outside basis by $250,000

Purchase price to transferee partner – partner’s share of partnership’s inside basis

4.2

§1231 Property

• Assets used in taxpayer trade/business held more than 12 months
• §1231 tax treatment for fains and losses depends on whether there is a net 1231 gain/loss for year

Net 1231 loss treated as ordinary loss, net 1231 gain treated as capital gain, subject to §1231 5 year lookback rule , where any net 1231 losses deducted as ordinary in past 5 years must be recaptured as ordinary income from current net 1231 gain

4.2

§1245 Property

• Depreciable trade/business personal property held for more than 12 months

Upon sale, lesser of recognized gain or accumulated depreciation taken recaptured as ordinary income, and remaining is §1231 gain

4.2

§1250 property

• Depreciable trade/business real property held for more than 12 months
• Buildings but not land

Recapture only includes portion of depreciation on real property in excess of straight line

4.2

§291

• §1250 assets held by C corporation sold for a gain

Recapture is 20% of lessor of recognized gain or accumulated straight line depreciation, with remaining as 1231 gain

4.2

§1250 for individuals

• For individual taxpayers selling 1250 property at a gain, all gain characterized as §1231 gain

All characterized as §1231 gain and netted with other 1231 G/L to determine §1231 G/L for year

4.3

§267

• Related party transactions

N/A