Business Taxation Flashcards

A business pays $50,000 for a 5-year covenant not to compete when acquiring another business. How is this amount treated for tax purposes?

Answer: Capitalized and amortized over 15 years under IRC §197

A covenant not to compete acquired in connection with a business acquisition is an IRC §197 intangible and must be amortized over 15 years, regardless of the covenant's actual term.

Which of the following triggers ordinary income recognition under IRC §1245 depreciation recapture?

Answer: Sale of depreciable personal property at a gain to the extent of depreciation previously taken

IRC §1245 recaptures depreciation previously deducted on personal property as ordinary income to the extent of the gain, overriding the more favorable §1231 treatment.

An employer provides an employee with a company car for both business and personal use. How is the personal use value treated?

Answer: Included in the employee's gross income as a taxable fringe benefit

The fair market value of personal use of an employer-provided vehicle must be included in the employee's gross income as a taxable fringe benefit.

What is the tax treatment of organizational costs (e.g., legal fees to incorporate) under IRC §248?

Answer: Deduct up to $5,000 in the first year; amortize the remainder over 180 months

Under IRC §248, corporations may immediately deduct up to $5,000 of organizational costs (phased out dollar-for-dollar over $50,000), with remaining costs amortized over 180 months.

A partnership makes a guaranteed payment to a partner for services rendered. How is this payment treated by the receiving partner?

Answer: As ordinary income subject to self-employment tax

Guaranteed payments to partners for services are treated as ordinary income to the recipient and are generally subject to self-employment tax.

Under the uniform capitalization rules (UNICAP) of IRC §263A, which businesses are generally required to capitalize direct and indirect costs into inventory?

Answer: Resellers with average annual gross receipts exceeding $29 million and all producers

IRC §263A generally requires producers of real or personal property and resellers with gross receipts exceeding the small business threshold to capitalize costs into inventory.

When a shareholder's S corporation stock basis is reduced to zero by losses, what happens to any additional losses?

Answer: They reduce the shareholder's basis in any loans made to the S corporation

After stock basis is reduced to zero, additional S corporation losses reduce the shareholder's basis in any direct loans made to the corporation, but not below zero.