McGraw Hill’s Taxation of Individuals and Business Entities 2025
Table of Contents
1 An Introduction to Tax
Who Cares about Taxes and Why? 1-2
What Qualifies as a Tax? 1-4
How to Calculate a Tax 1-5
Different Ways to Measure Tax Rates 1-5
Tax Rate Structures 1-8
Proportional Tax Rate Structure 1-9
Progressive Tax Rate Structure 1-9
Regressive Tax Rate Structure 1-10
Types of Taxes 1-11
Federal Taxes 1-11
Income Tax 1-12
Employment and Unemployment Taxes 1-12
Excise Taxes 1-13
Transfer Taxes 1-13
State and Local Taxes 1-14
Income Taxes 1-14
Sales and Use Taxes 1-14
Property Taxes 1-15
Excise Taxes 1-15
Implicit Taxes 1-16
Evaluating Alternative Tax Systems 1-17
Sufficiency 1-18
Static versus Dynamic Forecasting 1-18
Income versus Substitution Effects 1-19
Equity 1-20
Horizontal versus Vertical Equity 1-21
Certainty 1-22
Convenience 1-22
Economy 1-22
Evaluating Tax Systems—The Trade-Offs 1-23
Conclusion 1-23
2 Tax Compliance, the IRS, and Tax Authorities
Taxpayer Filing Requirements 2-2
Tax Return Due Date and Extensions 2-3
Statute of Limitations 2-3
IRS Audit Selection 2-4
Types of Audits 2-6
After the Audit 2-6
Tax Law Sources 2-9
Legislative Sources: Congress and the Constitution 2-11
Internal Revenue Code 2-11
The Legislative Process for Tax Laws 2-12
Basic Organization of the Code 2-13
Tax Treaties 2-14
Judicial Sources: The Courts 2-14
Administrative Sources: The U.S. Treasury 2-15
Regulations, Revenue Rulings, and Revenue Procedures 2-15
Letter Rulings 2-16
Tax Research 2-17
Step 1: Understand Facts 2-17
Step 2: Identify Issues 2-17
Step 3: Locate Relevant Authorities 2-18
Step 4: Analyze Tax Authorities 2-19
Step 5: Document and Communicate the Results 2-21
Facts 2-21
Issues 2-21
Authorities 2-22
Conclusion 2-22
Analysis 2-22
Client Letters 2-22
Tax Professional Responsibilities 2-23
Taxpayer and Tax Return Preparer Penalties 2-26
Conclusion 2-28
3 Tax Planning Strategies and Related Limitations
Basic Tax Planning Overview 3-2
Timing Strategies 3-2
Present Value of Money 3-3
The Timing Strategy When Tax Rates Are Constant 3-4
The Timing Strategy When Tax Rates Change 3-7
Limitations to Timing Strategies 3-9
Income-Shifting Strategies 3-11
Transactions between Family Members and Limitations 3-11 Page xxviii
Transactions between Owners and Their Businesses and Limitations 3-12
Income Shifting across Jurisdictions and Limitations 3-15
Conversion Strategies 3-15
Limitations of Conversion Strategies 3-18
Additional Limitations to Tax Planning Strategies: Judicially Based Doctrines 3-18
Tax Avoidance versus Tax Evasion 3-19
Conclusion 3-21
4 Individual Income Tax Overview, Dependents, and Filing Status
The Individual Income Tax Formula 4-2
Gross Income 4-2
Character of Income 4-5
Deductions 4-8
For AGI Deductions 4-9
From AGI Deductions 4-9
Income Tax Calculation 4-11
Other Taxes 4-11
Tax Credits 4-12
Tax Prepayments 4-12
Dependents of the Taxpayer 4-13
Dependency Requirements 4-13
Qualifying Child 4-13
Qualifying Relative 4-15
Filing Status 4-19
Married Filing Jointly and Married Filing Separately 4-19
Married Individuals Treated as Unmarried (Abandoned Spouse) 4-21
Qualifying Surviving Spouse 4-22
Single 4-22
Head of Household 4-22
Summary of Income Tax Formula 4-25
Conclusion 4-28
5 Gross Income and Exclusions
Realization and Recognition of Income 5-2
What Is Included in Gross Income? 5-2
Economic Benefit 5-3
Realization Principle 5-3
Recognition 5-4
Other Income Concepts 5-4
Form of Receipt 5-4
Return of Capital Principle 5-4
Recovery of Amounts Previously Deducted 5-5
When Do Taxpayers Recognize Income? 5-6
Accounting Methods 5-7
Constructive Receipt 5-7
Claim of Right 5-7
Who Recognizes the Income? 5-8
Assignment of Income 5-8
Community Property Systems 5-8
Types of Income 5-10
Income from Services 5-10
Income from Property 5-10
Annuities 5-11
Property Dispositions 5-13
Other Sources of Gross Income 5-14
Income from Flow-Through Entities 5-14
Alimony 5-14
Prizes, Awards, and Gambling Winnings 5-16
Social Security Benefits 5-17
Imputed Income 5-19
Discharge of Indebtedness 5-20
Exclusion Provisions 5-21
Common Exclusions 5-21
Municipal Bond Interest 5-21
Gains on the Sale of Personal Residence 5-22
Fringe Benefits 5-23
Education-Related Exclusions 5-25
Scholarships 5-25
Other Educational Subsidies 5-26
U.S. Series EE Bonds 5-27
Exclusions That Mitigate Double Taxation 5-27
Gifts and Inheritances 5-27
Life Insurance Proceeds 5-27
Foreign-Earned Income 5-28
Sickness and Injury-Related Exclusions 5-30
Workers’ Compensation 5-30
Payments Associated with Personal Injury 5-30
Health Care Reimbursement 5-30
Disability Insurance 5-31
Deferral Provisions 5-31
Income Summary 5-32
Conclusion 5-33
6 Individual Deductions
Deductions for AGI 6-2
Deductions Directly Related to Business Activities 6-2
Trade or Business Expenses 6-3 Page xxix
Rental and Royalty Expenses 6-5
Losses on Dispositions 6-6
Flow-Through Entities 6-6
Excess Business Loss Limitation 6-6
Deductions Indirectly Related to Business Activities 6-7
Moving Expenses 6-7
Health Insurance Deduction by Self-Employed Taxpayers 6-7
Self-Employment Tax Deduction 6-8
Deductions for Individual Retirement Accounts (IRAs) 6-8
Deductions for Health Savings Accounts 6-8
Penalty for Early Withdrawal of Savings 6-9
Deductions Subsidizing Specific Activities 6-10
Deduction for Interest on Qualified Education Loans 6-10
Summary: Deductions for AGI 6-11
Deductions from AGI: Itemized Deductions 6-13
Medical Expenses 6-14
Transportation and Travel for Medical Purposes 6-15
Hospitals and Long-Term Care Facilities 6-15
Medical Expense Deduction Limitation 6-16
Taxes 6-16
Interest 6-18
Charitable Contributions 6-19
Contributions of Money 6-20
Contributions of Property Other Than Money 6-20
Charitable Contribution Deduction Limitations 6-22
Casualty and Theft Losses on Personal-Use Assets 6-25
Other Itemized Deductions 6-25
Summary of Itemized Deductions 6-25
The Standard Deduction 6-27
Standard Deduction 6-27
Bunching Itemized Deductions 6-28
Deduction for Qualified Business Income 6-29
Deduction for Qualified Business Income 6-29
Limitations 6-31
Taxable Income Summary 6-34
Conclusion 6-35
7 Investments
Investments Overview 7-2
Portfolio Income: Interest and Dividends 7-2
Interest 7-3
Corporate and U.S. Treasury Bonds 7-3
U.S. Savings Bonds 7-4
Dividends 7-6
Portfolio Income: Capital Gains and Losses 7-7
Types of Capital Gains and Losses 7-10
25 Percent Gains 7-11
28 Percent Gains 7-12
Netting Process for Gains and Losses 7-13
Calculating Tax Liability on Net Capital Gains 7-17
Limits for Capital Loss Deductions 7-22
Losses on the Sale of Personal-Use Assets 7-22
Capital Losses on Sales to Related Persons 7-23
Wash Sales 7-23
Balancing Tax Planning Strategies for Capital Assets with Other Goals 7-24
Portfolio Income Summary 7-25
Investment Interest Expense and Net Investment Income Tax 7-26
Net Investment Income Tax 7-28
Passive Activity Income and Losses 7-29
Passive Activity Definition 7-30
Income and Loss Categories 7-30
Rental Real Estate Exception to the Passive Activity Loss Rules 7-33
Net Investment Income Tax on Net Passive Income 7-33
Conclusion 7-34
8 Individual Income Tax Computation and Tax Credits
Regular Federal Income Tax Computation 8-2
Tax Rate Schedules 8-2
Marriage Penalty or Benefit 8-3
Exceptions to the Basic Tax Computation 8-3
Preferential Tax Rates for Capital Gains and Dividends 8-4
Kiddie Tax 8-5
Alternative Minimum Tax 8-7
Alternative Minimum Tax Formula 8-7
Alternative Minimum Taxable Income 8-8
AMT Exemption 8-11
Tentative Minimum Tax and AMT Computation 8-12 Page xxx
Additional Taxes 8-13
Net Investment Income Tax 8-13
Employment and Self-Employment Taxes 8-14
Employee FICA Taxes Payable 8-14
Self-Employment Taxes 8-16
Employee vs. Self-Employed (Independent Contractor) 8-21
Tax Credits 8-23
Nonrefundable Personal Credits 8-24
Child Tax Credit 8-24
Child and Dependent Care Credit 8-25
Education Credits 8-27
Refundable Personal Credits 8-29
Earned Income Credit 8-29
Other Refundable Personal Credits 8-31
Business Tax Credits 8-31
Foreign Tax Credit 8-32
Tax Credit Summary 8-32
Credit Application Sequence 8-32
Taxpayer Prepayments and Filing Requirements 8-34
Prepayments 8-34
Underpayment Penalties 8-35
Filing Requirements 8-36
Late Filing Penalty 8-37
Late Payment Penalty 8-37
Tax Summary 8-37
Conclusion 8-39
9 Business Income, Deductions, and Accounting Methods
Business Gross Income 9-2
Gross Receipts Test for Identifying Small Businesses 9-2
Business Deductions 9-3
Ordinary and Necessary 9-4
Reasonable in Amount 9-5
Limitations on Business Deductions 9-5
Expenditures against Public Policy 9-6
Political Contributions and Lobbying Costs 9-6
Capital Expenditures 9-6
Expenses Associated with the Production of Tax-Exempt Income 9-7
Personal Expenditures 9-7
Mixed-Motive Expenditures 9-8
Entertainment Expenses 9-9
Business Meals 9-9
Travel and Transportation 9-9
Property Use 9-11
Record Keeping and Other Requirements 9-12
Limitation on Business Interest Deductions 9-12
Calculating the Interest Limitation 9-12
Losses on Dispositions of Business Property 9-13
Business Casualty Losses 9-13
Accounting Periods 9-14
Accounting Methods 9-15
Financial and Tax Accounting Methods 9-15
Overall Accounting Method 9-16
Cash Method 9-16
Accrual Method 9-18
Accrual Income 9-18
All-Events Test for Income 9-18
Taxation of Advance Payments of Income (Unearned Income) 9-18
Inventories 9-19
Uniform Capitalization 9-20
Inventory Cost-Flow Methods 9-21
Accrual Deductions 9-22
Economic Performance 9-23
Bad Debt Expense 9-27
Limitations on Accruals 9-27
Comparison of Accrual and Cash Methods 9-28
Adopting an Accounting Method 9-30
Changing Accounting Methods 9-32
Tax Consequences of Changing Accounting Methods 9-32
Conclusion 9-33
10 Property Acquisition and Cost Recovery
Cost Recovery and Tax Basis for Cost Recovery 10-2
Basis for Cost Recovery 10-3
Depreciation 10-6
Personal Property Depreciation 10-7
Depreciation Method 10-7
Depreciation Recovery Period 10-8
Depreciation Conventions 10-9
Calculating Depreciation for Personal Property 10-10
Applying the Half-Year Convention 10-11
Applying the Mid-Quarter Convention 10-13
Real Property 10-14
Applicable Method 10-15
Applicable Convention 10-15
Depreciation Tables 10-15 Page xxxi
Special Rules Relating to Cost Recovery 10-17
Immediate Expensing (§179) 10-17
Bonus Depreciation 10-20
Listed Property 10-22
Luxury Automobiles 10-25
Depreciation for the Alternative Minimum Tax 10-29
Depreciation Summary 10-29
Amortization 10-31
Section 197 Intangibles 10-31
Organizational Expenditures and Start-Up Costs 10-32
Research and Experimentation Expenditures 10-35
Patents and Copyrights 10-36
Amortizable Intangible Asset Summary 10-36
Depletion 10-37
Conclusion 10-40
11 Property Dispositions
Dispositions 11-2
Amount Realized 11-2
Determination of Adjusted Basis 11-3
Gifts 11-3
Inherited Property 11-3
Property Converted from Personal Use to Business Use 11-3
Realized Gain or Loss on Disposition 11-5
Recognized Gain or Loss on Disposition 11-6
Character of Gain or Loss 11-7
Ordinary Assets 11-7
Capital Assets 11-8
Section 1231 Assets 11-8
Depreciation Recapture 11-10
Section 1245 Property 11-10
Scenario 1: Gain Created Solely through Cost Recovery Deductions 11-11
Scenario 2: Gain Due to Both Cost Recovery Deductions and Asset Appreciation
11-12
Scenario 3: Asset Sold at a Loss 11-12
Section 1250 Depreciation Recapture for Real Property 11-14
Other Provisions Affecting the Rate at Which Gains Are Taxed 11-15
Unrecaptured §1250 Gain for Individuals 11-15
Characterizing Gains on the Sale of Depreciable Property to Related Persons 11-16
Calculating Net §1231 Gains or Losses 11-17
Section 1231 Look-Back Rule 11-17
Gain or Loss Summary 11-20
Tax-Deferred Transactions 11-24
Like-Kind Exchanges 11-24
Definition of Like-Kind Property 11-24
Property Use 11-25
Timing Requirements for a Like-Kind Exchange 11-25
Tax Consequences When Like-Kind Property Is Exchanged Solely for Like-Kind Property
11-26
Tax Consequences of Transfers Involving Like-Kind and Non-Like-Kind Property (Boot)
11-27
Reporting Like-Kind Exchanges 11-29
Involuntary Conversions 11-29
Installment Sales 11-31
Gains Ineligible for Installment Reporting 11-33
Other Tax-Deferred Provisions 11-34
Related-Person Loss Disallowance Rules 11-34
Conclusion 11-35
12 Compensation
Salary and Wages 12-2
Employee Considerations for Salary and Wages 12-2
Tax Withholding 12-2
Employer Considerations for Salary and Wages 12-2
Deductibility of Salary and Wage Payments 12-2
Equity-Based Compensation 12-7
Stock Options 12-9
Employee Tax Considerations for Stock Options 12-10
Employer Tax Considerations for Stock Options 12-14
Restricted Stock 12-16
Employee Tax Considerations for Restricted Stock 12-17
Employer Tax Considerations for Restricted Stock 12-19
Qualified Equity Grants 12-20
Equity-Based Compensation Summary 12-20
Fringe Benefits 12-21
Page xxxii
Taxable Fringe Benefits 12-21
Employee Considerations for Taxable Fringe Benefits 12-22
Employer Considerations for Taxable Fringe Benefits 12-24
Nontaxable Fringe Benefits 12-25
Group-Term Life Insurance 12-26
Health and Accident Insurance and Benefits 12-27
Meals 12-27
Employee Educational Assistance 12-28
Dependent-Care Benefits 12-28
No-Additional-Cost Services 12-28
Qualified Employee Discounts 12-29
Working Condition Fringe Benefits 12-30
De Minimis Fringe Benefits 12-30
Qualified Transportation Fringe Benefits 12-30
Cafeteria Plans and Flexible Spending Accounts 12-31
Employee and Employer Considerations for Nontaxable Fringe Benefits 12-31
Tax Planning with Fringe Benefits 12-31
Fringe Benefits Summary 12-33
Conclusion 12-34
13 Retirement Savings and Deferred Compensation
Employer-Provided Qualified Plans 13-3
Defined Benefit Plans 13-3
Vesting 13-4
Distributions 13-5
Nontax Considerations 13-5
Defined Contribution Plans 13-6
Employer Matching 13-7
Contribution Limits 13-7
Vesting 13-8
After-Tax Cost of Contributions to Traditional (non-Roth) Defined Contribution Plans 13-9
Distributions from Traditional Defined Contribution Plans 13-9
After-Tax Rates of Return for Traditional Defined Contribution Plans 13-12
Roth 401(k) Plans 13-13
Comparing Traditional Defined Contribution Plans and Roth 401(k) Plans 13-15
Nonqualified Deferred Compensation Plans 13-15
Nonqualified Plans versus Qualified Defined Contribution Plans 13-16
Employee Considerations 13-16
Employer Considerations 13-18
Individually Managed Qualified Retirement Plans 13-19
Individual Retirement Accounts 13-19
Traditional IRAs 13-19
Deductible Contributions 13-19
Nondeductible Contributions 13-22
Distributions 13-22
Roth IRAs 13-23
Contributions 13-23
Distributions 13-24
Converting a Traditional IRA to a Roth IRA 13-25
Comparing Traditional and Roth IRAs 13-27
Self-Employed Retirement Accounts 13-28
Simplified Employee Pension (SEP) IRA 13-29
Nontax Considerations 13-30
Individual 401(k) Plans 13-30
Nontax Considerations 13-30
Saver’s Credit 13-32
Conclusion 13-33
14 Tax Consequences of Home Ownership
Is a Dwelling Unit a Principal Residence, Residence, or Nonresidence? 14-2
Personal Use of the Home 14-4
Exclusion of Gain on Sale of Personal Residence 14-4
Requirements 14-5
Home Mortgage Interest Deduction 14-8
Acquisition Indebtedness 14-9
Limitation on Acquisition Indebtedness 14-10
Points 14-13
Real Property Taxes 14-15
Rental Use of the Home 14-16
Residence with Minimal Rental Use 14-17
Residence with Significant Rental Use (Vacation Home) 14-18
Deducting Rental Expenses of Vacation Home 14-19
Nonresidence (Rental Property) 14-24
Losses on Rental Property 14-24
Business Use of the Home 14-26
Direct versus Indirect Expenses 14-28
Limitations on Deductibility of Expenses 14-29
Conclusion 14-32
15 Business Entities Overview
Business Entity Legal Classification and Nontax Characteristics 15-2
Legal Classification 15-2
Nontax Characteristics 15-2 Page xxxiii
Responsibility for Liabilities 15-3
Rights, Responsibilities, and Legal Arrangements among Owners 15-3
Business Entity Tax Classification 15-5
Business Entity Tax Characteristics 15-7
Taxation of Business Entity Income 15-7
The Taxation of Flow-Through Entity Business Income 15-8
Overall Tax Rate of C Corporation Income 15-18
Owner Compensation 15-23
Deductibility of Entity Losses 15-27
Other Tax Characteristics 15-31
Converting to Other Business Entity Types 15-31
Conclusion 15-35
16 Corporate Operations
Corporate Taxable Income Formula 16-2
Accounting Periods and Methods 16-2
Computing Corporate Taxable Income 16-3
Book–Tax Differences 16-3
Common Permanent Book–Tax Differences 16-4
Common Temporary Book–Tax Differences 16-5
Corporate-Specific Deductions and Associated Book–Tax Differences 16-10
Stock Options 16-10
Net Capital Losses 16-13
Net Operating Losses 16-14
Charitable Contributions 16-16
Dividends-Received Deduction 16-18
Taxable Income Summary 16-22
Corporate Income Tax Liability 16-23
Compliance 16-23
Consolidated Tax Returns 16-26
Corporate Tax Return Due Dates and Estimated Taxes 16-26
Conclusion 16-30
17 Accounting for Income Taxes
Accounting for Income Taxes and the Income Tax Provision Process 17-2
Why Is Accounting for Income Taxes So Complex? 17-3
Objectives of ASC 740 17-3
The Income Tax Provision Process 17-5
Calculating a Company’s Income Tax Provision 17-7
Step 1: Identify All Permanent and Temporary Differences and Tax Carryover Amounts and
Calculate the Current Income Tax Provision (ASC 740 Objective 1) 17-7
Permanent Differences 17-7
Temporary Differences and Tax Carryover Amounts 17-9
Calculate the Current Income Tax Expense or (Benefit) (ASC 740 Objective 1) 17-10
Step 2: Determine the Ending Balances in the Balance Sheet Deferred Tax Asset and
Liability Accounts (ASC 740 Objective 2) 17-12
Identifying Taxable and Deductible Temporary Differences 17-12
Taxable Temporary Difference 17-12
Deductible Temporary Difference 17-12
Step 3: Calculate the Deferred Income Tax Provision and the Total Income Tax Provision
17-17
Deferred Income Tax Provision 17-17
Total Income Tax Provision 17-18
Journal Entries 17-19
Determining Whether a Valuation Allowance Is Needed 17-20
Step 4: Evaluate the Need for a Valuation Allowance for Gross Deferred Tax Assets
17-20
Determining the Need for a Valuation Allowance 17-20
Future Reversals of Existing Taxable Temporary Differences 17-20
Taxable Income in Prior Carryback Year(s) 17-21
Expected Future Taxable Income Exclusive of Reversing Temporary Differences and
Carryovers 17-21
Tax Planning Strategies 17-21
Negative Evidence That a Valuation Allowance Is Needed 17-21
Valuation Allowance Journal Entries 17-21
Accounting for Uncertainty in Income Tax Positions 17-24
Step 5: Evaluate the Need for an Uncertain Tax Benefit Reserve 17-24
Application of ASC Topic 740 to Uncertain Tax Positions 17-25
Step 1: Recognition 17-25
Step 2: Measurement 17-25
Uncertain Tax Benefit Reserve Journal Entries 17-26
Subsequent Events 17-27
Interest and Penalties 17-28 Page xxxiv
Disclosures of Unrecognized Tax Benefits 17-28
Schedule UTP (Uncertain Tax Position Statement) 17-29
Financial Statement Disclosure and Computing a Corporation’s Effective Tax Rate 17-29
Balance Sheet Classification 17-29
Income Tax Footnote Disclosure 17-29
Computation and Reconciliation of the Income Tax Provision with a Company’s
Hypothetical Tax Provision (Effective Tax Rate Reconciliation) 17-31
Importance of a Corporation’s Effective Tax Rate 17-32
FASB Projects Related to Accounting for Income Taxes 17-33
Interim Period Effective Tax Rates 17-33
Conclusion 17-33
18 Corporate Taxation: Nonliquidating Distributions
Taxation of Property Distributions 18-2
Determining the Dividend Amount from Earnings and Profits 18-2
Overview 18-2
Computing Earnings and Profits 18-3
Nontaxable Income Included in Current E&P 18-4
Deductible Expenses That Do Not Reduce Current E&P 18-4
Nondeductible Expenses That Reduce Current E&P 18-4
Items Requiring Separate Accounting Methods for E&P Purposes 18-5
Ordering of E&P Distributions 18-6
Positive Current E&P and Positive Accumulated E&P 18-7
Positive Current E&P and Negative Accumulated E&P 18-10
Negative Current E&P and Positive Accumulated E&P 18-10
Negative Current E&P and Negative Accumulated E&P 18-11
Distributions of Noncash Property to Shareholders 18-12
Effect of Noncash Property Distributions on Taxable Income 18-13
Liabilities 18-13
Effect of Noncash Property Distributions on E&P 18-14
Stock Distributions 18-16
Tax Consequences to Shareholders Receiving a Stock Distribution 18-17
Nontaxable Stock Distributions 18-17
Taxable Stock Distributions 18-18
Stock Redemptions 18-18
The Form of a Stock Redemption 18-19
Redemptions That Reduce a Shareholder’s Ownership Interest 18-20
Redemptions That Are Substantially Disproportionate 18-20
Complete Redemption of the Stock Owned by a Shareholder 18-23
Redemptions That Are Not Essentially Equivalent to a Dividend 18-24
Tax Consequences to the Distributing Corporation 18-26
Partial Liquidations 18-26
Conclusion 18-27
19 Corporate Formation, Reorganization, and Liquidation
Review of the Taxation of Property Dispositions 19-2
Tax-Deferred Transfers of Property to a Corporation 19-3
Transactions Subject to Tax Deferral 19-4
Meeting the Section 351 Tax Deferral Requirements 19-4
Section 351 Applies Only to Transferors of Property to the Corporation 19-4
The Property Transferred to the Corporation Must Be Exchanged for Stock of the
Corporation 19-5
The Transferor(s) of Property to the Corporation Must Control the Corporation
Immediately after the Transfer 19-5
Tax Consequences When a Shareholder Receives No Boot 19-7
Tax Consequences When a Shareholder Receives Boot 19-9
Assumption of Shareholder Liabilities by the Corporation 19-11
Tax-Avoidance Transactions 19-11
Liabilities in Excess of Basis 19-12
Tax Consequences to the Transferee Corporation 19-13
Other Issues Related to Incorporating an Ongoing Business 19-17
Depreciable Assets Transferred to a Corporation 19-17
Contributions to Capital 19-18
Section 1244 Stock 19-18
Taxable and Tax-Deferred Corporate Acquisitions 19-19
The Acquisition Tax Model 19-20
Tax Consequences to a Corporate Acquisition 19-22 Page xxxv
Taxable Acquisitions 19-22
Tax-Deferred Acquisitions 19-25
Judicial Doctrines That Underlie All Tax-Deferred Reorganizations 19-25
Continuity of Interest 19-25
Continuity of Business Enterprise 19-25
Business Purpose Test 19-25
Type A Asset Acquisitions 19-25
Forward Triangular Merger 19-28
Reverse Triangular Merger 19-29
Type B Stock-for-Stock Reorganizations 19-30
Complete Liquidation of a Corporation 19-32
Tax Consequences to the Shareholders in a Complete Liquidation 19-33
Tax Consequences to the Liquidating Corporation in a Complete Liquidation 19-34
Liquidating Distributions of Loss Property 19-34
Liquidating Distributions by a Controlled Subsidiary 19-37
Conclusion 19-37
20 Forming and Operating Partnerships
Flow-Through Entities Overview 20-2
Aggregate and Entity Concepts 20-2
Partnership Formations and Acquisitions of Partnership Interests 20-3
Acquiring Partnership Interests When Partnerships Are Formed 20-3
Contributions of Property 20-3
Contribution of Services 20-10
Organizational Expenditures, Start-Up Costs, and Syndication Costs 20-12
Acquisitions of Partnership Interests after Formation 20-13
Partnership Accounting: Tax Elections, Accounting Periods, and Accounting Methods
20-13
Tax Elections 20-14
Accounting Periods 20-14
Required Year-Ends 20-14
Accounting Methods 20-16
Reporting the Results of Partnership Operations 20-17
Ordinary Business Income (Loss) and Separately Stated Items 20-17
Guaranteed Payments 20-19
Self-Employment Tax 20-20
Limitation on Business Interest Expense 20-22
Deduction for Qualified Business Income 20-22
Page xxxvi
Net Investment Income Tax 20-23
Allocating Partners’ Shares of Income and Loss 20-23
Partnership Compliance Issues 20-24
Adjusting a Partner’s Tax Basis in Partnership Interest 20-28
Cash Distributions in Operating Partnerships 20-30
Loss Limitations 20-30
Tax-Basis Limitation 20-30
At-Risk Amount Limitation 20-31
Passive Activity Loss Limitation 20-32
Passive Activity Defined 20-32
Income and Loss Baskets 20-33
Excess Business Loss Limitation 20-35
Conclusion 20-36
21 Dispositions of Partnership Interests and Partnership Distributions
Basics of Sales of Partnership Interests 21-2
Seller Issues 21-2
Hot Assets 21-3
Buyer and Partnership Issues 21-7
Varying Interest Rule 21-8
Basics of Partnership Distributions 21-9
Operating Distributions 21-9
Operating Distributions of Money Only 21-9
Operating Distributions That Include Property Other Than Money 21-10
Liquidating Distributions 21-12
Gain or Loss Recognition in Liquidating Distributions 21-13
Basis in Distributed Property 21-13
Partner’s Outside Basis in an Interest Is Greater Than Inside Bases of Distributed Assets
21-14
Partner’s Outside Basis in an Interest Is Less Than Inside Bases of Distributed Assets
21-17
Character and Holding Period of Distributed Assets 21-21
Disproportionate Distributions 21-24
Special Basis Adjustments 21-26
Special Basis Adjustments for Dispositions 21-27
Special Basis Adjustments for Distributions 21-29
Conclusion 21-30
22 S Corporations
S Corporation Elections 22-2
Formations 22-2
S Corporation Qualification Requirements 22-2
S Corporation Election 22-3
S Corporation Terminations 22-5
Voluntary Terminations 22-5
Involuntary Terminations 22-6
Failure to Meet Requirements 22-6
Excess of Passive Investment Income 22-6
Short Tax Years 22-7
S Corporation Reelections 22-8
Operating Issues 22-8
Accounting Methods and Periods 22-8
Income and Loss Allocations 22-9
Separately Stated Items 22-10
Shareholder’s Basis 22-12
Initial Basis 22-12
Annual Basis Adjustments 22-13
Loss Limitations 22-14
Tax-Basis Limitation 22-14
At-Risk Amount Limitation 22-15
Post-Termination Transition Period Loss Limitation 22-15
Passive Activity Loss Limitation 22-16
Excess Business Loss Limitation 22-17
Self-Employment Income 22-17
Net Investment Income Tax 22-18
Fringe Benefits 22-18
Distributions 22-19
Operating Distributions 22-19
S Corporation with No C Corporation Accumulated Earnings and Profits 22-19
S Corporation with C Corporation Accumulated Earnings and Profits 22-20
Property Distributions 22-22
Post-Termination Transition Period Distributions 22-22
Liquidating Distributions 22-23
S Corporation Taxes and Filing Requirements 22-24
Built-in Gains Tax 22-24
Excess Net Passive Income Tax 22-26
LIFO Recapture Tax 22-27
Estimated Taxes 22-28
Filing Requirements 22-28
Comparing C and S Corporations and Partnerships 22-31
Conclusion 22-32
23 State and Local Taxes
State and Local Taxes 23-2
Sales and Use Taxes 23-5
Sales Tax Nexus 23-5
Sales Tax Liability 23-7
Income Taxes 23-9
Income Tax Nexus 23-10
Economic Presence 23-11
Protection under Public Law 86-272 23-11
Entities Included on Income Tax Return 23-15
Separate Tax Returns 23-15
Unitary Tax Returns 23-16
State Taxable Income 23-17
Dividing State Tax Base among States 23-19
Business Income 23-20
Nonbusiness Income 23-25
State Income Tax Liability 23-25
Nonincome-Based Taxes 23-26
Conclusion 23-27
24 The U.S. Taxation of Multinational Transactions
The U.S. Framework for Taxing Multinational Transactions 24-2
U.S. Taxation of a Nonresident 24-3
Definition of a Resident for U.S. Tax Purposes 24-4
Overview of the U.S. Foreign Tax Credit System 24-5
U.S. Source Rules for Gross Income and Deductions 24-6
Source-of-Income Rules 24-7
Interest 24-7
Dividends 24-8
Compensation for Services 24-8
Rents and Royalties 24-9
Gain or Loss from Sale of Real Property 24-9
Gain or Loss from Sale of Purchased Personal Property 24-10
Gross Income from Sale of Manufactured Inventory 24-10
Source-of-Deduction Rules 24-10
General Principles of Allocation and Apportionment 24-10
Special Apportionment Rules 24-11
Operating Abroad through a Foreign Corporation 24-15
Foreign-Derived Intangible Income 24-16
Treaties 24-16 Page xxxvii
Foreign Tax Credits 24-19
FTC Limitation Categories of Taxable Income 24-19
Passive Category Income 24-19
Foreign Branch Income 24-19
GILTI Income 24-19
General Category Income 24-19
Creditable Foreign Taxes 24-20
Direct Taxes 24-20
In Lieu of Taxes 24-20
Planning for International Operations 24-21
Check-the-Box Hybrid Entities 24-22
U.S. Anti-Deferral Rules 24-24
Definition of a Controlled Foreign Corporation 24-24
Definition of Subpart F Income 24-25
Planning to Avoid Subpart F Income 24-27
Global Intangible Low-Taxed Income 24-29
Base Erosion and Profit-Shifting Initiatives around the World 24-30
Conclusion 24-31
25 Transfer Taxes and Wealth Planning
Introduction to Federal Transfer Taxes 25-2
Beginnings 25-2
Common Features of Integrated Transfer Taxes 25-2
The Federal Gift Tax 25-4
Transfers Subject to Gift Tax 25-5
Valuation 25-7
The Annual Exclusion 25-9
Taxable Gifts 25-10
Gift-Splitting Election 25-10
Marital Deduction 25-10
Charitable Deduction 25-12
Computation of the Gift Tax 25-12
Tax on Current Taxable Gifts 25-13
Applicable Credit 25-14
The Federal Estate Tax 25-17
The Gross Estate 25-17
Specific Inclusions 25-19
Valuation 25-21
Gross Estate Summary 25-22
The Taxable Estate 25-23
Administrative Expenses, Debts, Losses, and State Death Taxes 25-23
Marital and Charitable Deductions 25-24
Computation of the Estate Tax 25-25
Adjusted Taxable Gifts 25-25
Applicable Credit 25-27
Wealth Planning Concepts 25-30
The Generation-Skipping Tax 25-30
Income Tax Considerations 25-30
Transfer Tax Planning Techniques 25-31
Serial Gifts 25-31
Step-Up in Tax Basis 25-31
Integrated Wealth Plans 25-33
Conclusion 25-34
Appendix A Tax Forms A-1
Appendix B Tax Terms Glossary B-1
Appendix C Tax Rates C-1
Code Index CI-1
Subject Index SI-1