[Music]
welcome to instruction to s corporations
and LLC's part 1 this is a two-part
class we really do intend that the class
be taken in its entirety part 1 followed
by part 2 there's nothing to prevent a
person from doing only one or the other
but today's class is laying the
foundation for the class that you will
hold on Thursday which is part two my
name is a pocket Harris I am your
instructor for today's class and pretty
much all the classes here at Pacific
Northwest tech school I wrote this
course out of necessity S corporations
are a fairly common small business
entity type and we do lots of them in
our own practice and I was getting a lot
of requests from students for more
classes that would cover as corporations
and so I created this course and over
the years it's really rounded out to the
point where it is that now there's been
very few updates to the class this year
because not much has changed from last
year but this of course I've been
teaching it for over a decade and just
refining it as I go each year and we're
going to really in today's class start
at the very very very beginning we're
assuming that you have some
understanding of tax law in other words
you understand what it is to have a
profit and loss for a business the types
of income and types of expense items
that are common to businesses so we're
assuming you have that kind of a
background but beyond that we're
assuming you know very little about
preparation of form 1065 or form 1120s
or if you know somewhat about it but
you're not real clear on it we're
basically going to be taking you from
the very beginning today so we're gonna
start with a description of the various
entity types and if you flip in the
manual to page 4 you'll be where I'm at
now and business entity types are
important because depending on the type
of entity you are that's really gonna
dictate how the IRS taxes you so we're
going to talk about the different entity
types how they're formed how they're
changed how they end and then we'll move
on to a discussion of how each of these
entity types is taxed then we're going
to move on to a closer in-depth look at
the preparation of
form 1065 and the reason we're going to
be looking at 1065 is that most limited
liability companies are going to default
to form 1065 unless action is taken to
become an S corporation or make that F
corporation taxation election so we're
gonna look first at the default form of
how a limited liability company is taxed
and then we're gonna go to the next
level in part two of this course where
we look at how F corporations are taxed
and how to prepare form 1120s so
beginning up at the top of page page
four with business entity types there
are a number of different organizational
structures that are available to
business owners and each type of
business structure has its advantages
and disadvantages one of the key things
that I say to my clients is there's no
one best entity type it really depends
on your business and your ability to
manage your business size of your
business who else you're working with
that's going to determine what is the
best entity type for you and it could be
easy to just make this general blanket
statement OS corporations are the best
everyone should be enough corporation
but that would not be true everyone
shouldn't see an S corporation and is it
really necessary to form an LLC does
everyone have to have an LLC because
they're in business some of these are
getting into legal questions that are
best left in the hands of attorneys but
when it comes to the actual preparation
of a tax return I find things are a
little bit clearer what decisions should
you make for taxes can be clearer than
what decision should you make for
liability protection say but let's look
first at the different types of entity
types that are out there we have the
sole proprietor which is typically a
business that is owned by one person
there's also a general partnership that
is owned by two or more entities it
could be persons or entities other than
persons or a separate legal entity that
operates as a corporation a limited
liability company a limited liability
partnership or a limited partnership the
sole proprietorship is the simplest form
of business and if you're working as a
tax preparer and you've had no education
and S corporations up until now odds are
that you you're experienced with the
preparation of business returns is going
to be limited to Schedule C with the
Schedule C you have an individual
person who conducts business and his or
her name or under an assumed business
name and unless the business owner files
Articles of Incorporation with the
Secretary of State's office and his or
her state his or her business is gonna
be automatically classified as a sole
proprietorship a very active operating a
for-profit business turns you into sole
proprietorship unless you're a
partnership right so you don't have to
do anything others and just decide to
engage in an activity with a profit
motive the sole proprietorship is a
simple and informal structure that is
inexpensive to form in fact it's so
inexpensive to form you can have one
when you don't even know it
it is usually owned by a single person
or a marital community and the sole
proprietor business owner is personally
liable for the obligations of the
business except in certain situations
where he or she has filed or articles of
organization with the Secretary of
State's office to form a limited
liability company a sole proprietor can
freely transfer all or part of the
business and reports business profit or
loss on a personal income tax return by
filing Schedule C or F F would of course
be if there are farmers let's talk now
about an assumed business name because
generally as sole proprietor does not
have to be registered with his or her
State's business registry unless he or
she is using an assumed business name if
the name of the business does not
include the full legal name of the
business owner the business name must
generally be registered as an assumed
business name with the business registry
of the state in which that proprietor is
operating his or her business the
registration allows the public to
identify who is transacting business
under that business name so let's just
suppose we've got a pocket ears I'm an
enrolled agent if I decide to do
business as April gutierrez enrolled
agent there's nothing i need to do to
register that business name i.e a is
merely my title and a pocket teres is my
name so i'm really good to go but if i
want to run a business that's called
april 15th tax service day and there was
attack sirs here in portland called
April 15th tax service for a while many
years ago they're gone out of it April
15 tax service that might be cute name
it might be relevant to my name but it
obviously isn't my name and there's no
way for people to really Coral
April 15 tack service with charities and
so as such I would need to register that
business name with the state am I
allowed to do so well that would depend
on whether anyone else has already
registered that name and where they've
registered that name if it's established
that that business name is available
then I can register it the importance of
registering that name is that if someone
wants to know who's doing business is
April 15 check service they're gonna be
able to go to the business registry for
the state and establish who that
business owner is so anonymity I guess
you could say is what is being avoided
with this registration of business names
the government doesn't want people to be
able to just operate businesses
anonymously they want to be able to hold
people accountable so how do you go
about registering a business name well
to check a name for availability prior
to submitting an application which is a
good idea you may check the website of
the appropriate secretary of state
office for the state in which you want
to register your business the specifics
of business name registration are going
to vary by state and a name availability
check does not guarantee that the name
will still be available when that
state's business registry receives the
application now things have gotten a lot
simpler I've been around long enough and
I remember when there was no internet
and that if he wanted to register a
business name the starting point was to
call up the secretaries feed on the
phone up that office speak to someone
over the phone you know offer up some
proposed names and they would let you
know if that name had was available and
then you could fill out a manual form
submit a fee and register your business
with the internet things are much easier
I mean you really can these days go onto
the internet do a search for business
name see if anything pops up see if
anything is similar or different enough
and then fill out an online application
pretty much on the spot and get your
business registered so it's much much
easier these days to do that now how do
you do it in your state well you're
gonna scratch figure that out here in
Oregon we have a website called filing
in Oregon comm and it makes it super
simple to determine if a business name
is available you can also use it to
search who owns business names who's the
registered agent of a business name the
type of business that has been
registered under your name is it a is it
a corporate
is that a limited liability company is
it a DBA all of those things can be
determined very readily in in just a
couple of minutes over the Internet so
I'm sure that your state has something
similar to filing in Oregon comm and it
wouldn't hurt to just on your own time
go and explore that and figure out how
it all works the next pattern we're
going to talk about is the general
partnership partnerships are a little
bit like sole proprietorships and that
they automatically happen even though
the business owners may not
intentionally have been creating them
because a partnership is automatically
formed when two or more persons or
business entities agree to jointly own
and operate a business profit loss and
managerial duties are shared among the
partners and each partner is personally
liable for the partnership debts
partnerships are an inexpensive to form
and a formal organizational agreement is
not required it's simply enough to shake
hands let's go do this together
let's buy this car and fix it up
together and sell it that would be a you
know it could be it could be deemed to
be a hobby but if the object of
purchasing that car fixing up and
selling it was to make a profit then
you'd probably just treated the
partnership and maybe it wasn't quite
intentional now partnerships do not pay
income taxes directly however an
informational return form 1065 must be
filed to report business income and
expenses of the partnership and
individual partners report their share
of profits and losses on their personal
return a joint undertaking nearly though
to share expenses is not a partnership
miracle ownership the property that is
maintained and leased or rented is not a
partnership however if the co-owners
provide services to the tenants a
partnership exists so what this is
saying is that if you and another person
agree to purchase a vacant lot together
for investment purposes that is not
creating a partnership just the mere
co-ownership of it it even goes to one
step further and say if you and another
individual decide to purchase the rental
property in each of you on 5050 and it's
done as a passive activity odds are you
don't have a partnership there either
you can just each report your individual
share of income expenses but there are
certain actions that can occur that
would turn what would otherwise not be a
partnership into a part
we're going to now look at what makes
the partnership work who comprises the
partnership and a first item we're gonna
look at is a general partner a general
partner is a partner who is personally
liable for the partnership depth a
general partnership is composed only of
general partners a limited partner is a
partner in a partnership undeformed
under state limited partnership laws
whose personal liability for partnership
debts is limited to the amount of money
or other property that the partner is
required to contribute to the
partnership and a limited partnership is
formed under state limited partnership
laws and is composed of at least one
general partner and one or more limited
partners we then have a limited
liability partnership and a limited
liability partnership or LLP is formed
under state limited liability
partnership laws and generally a partner
in an LLP is not personally liable for
the debts of the LLP or any other
partner nor is a partner liable for the
acts or emissions of any other partner
solely by reason of being a partner now
one of the things to be aware of with
these LLP s
is that the shape and nature of an LLP
is really gonna vary by state I can't
give you a blanket terminology of all
the rules that apply to an LLP because
those are really set at the state level
at which that LLP is formed and they do
vary by stage non-recourse lows are
those liabilities of a partnership for
which no partner bears economic risk of
loss let's talk now about a qualified
joint venture or qjd under the default
rules a business that is owned by two or
more individuals is automatically
classified as a partnership and this is
true even if the owners of the
partnership are spouses who file a joint
return since 2007 the IRS rules have
permitted a married couple to elect to
file as a qualified joint venture rather
than as a partnership a qjd is a joint
venture that conducts a trader business
where the only members of that joint
venture are a married couple who file a
joint return both spouses materially
participate
paid in the trader business and both
spouses elect not to be treated as a
partnership a qjv includes only
businesses that are owned and operated
by the spouses as co-owners and not in
the name of a state law entity including
a limited partnership or an LLC but
there is an exception to this rule
if the spouses reside in a community
property stage and I just wanted to
point out here there's a little asterisk
up here and it says note that the
instructions for form 1065 have replaced
the phrase husband and wife with either
a married couple or spouses and you
should refer to the following URL for
more information on that you can also
learn more about qualified joint
ventures by visiting this URL where the
IRS talks more about qualified joint
ventures so let's continue on though
with a little bit more on qualified
joint ventures they're a rather
interesting concept because remember
when two individuals agreed to go into a
profit-making venture together a
business venture together they
automatically form a partnership and Ira
says it doesn't matter if they're
married or even filing a joint return
the partnership really is a default
mechanism you've got two individuals
have gone into business together but
there is a relatively new rule that the
IRS says even though we consider you to
be a partnership we're going to allow
you to avoid filing form 1065 so long as
you are married and filing a joint
return and instead of filing form 1065
you can file to schedule fees with your
individual return so what would be the
motive for avoiding the 1065 and filing
to schedule seeds instead and the answer
is just because then you don't have to
do a 1065 you could say that there's
more complexity to the 1065 it's a more
difficult tax return to complete it
might be that a husband and wife who are
in business together might be able to
repair their own schedule sees that
going over the 1065 is more complex so
that would be I my guests for the
motives that iris has and allowing a
qualified joint venture so how do you go
about making this qualified joint
venture the spouse is electing qjv
status are treated as sole proprietors
for federal tax purposes the spouses
must share the business's items of
income gain lost deduction and credit
and under these reporting procedures
must take into account the items in
accordance with each spouse's interest
in the business as follows each spouse
must file a separate Schedule C or
schedule F to report profits and losses
and if otherwise required a separate
schedule SC to report self-employment
tax for each spouse spouses with a
rental real estate business can now be
reported on Schedule E by checking the
cute
jay-z box on line 2 and you should refer
to the Schedule E instructions for pages
a 1 and E 2 on that particular topic if
the election is made for a farm rental
business that is not included in
self-employment you would file 2 forms
4835 instead of a Schedule F and here is
an illustration of how a qjv would
report income and expenses on a tax
return Lucy and Ricky are a married
couple Lucy and Ricky own and operate a
business called Lucy's boutique in 2010
they made an election to file as a
qualified joint venture as a qualified
joint venture they report the income and
expenses of Lucy's boutique on their
jointly filed Form 1040 return by
dividing income and expenses between the
two schedules fees Lucy reports her
share of income and expenses on her
Schedule C and Ricky reports his share
of income and expenses on his Schedule C
limited liability company is the next
item we're gonna be looking at so we
studied the concept of a Phillip Ryder a
partnership a qualified joint venture
now we're moving on to something else
against a limited liability company a
limited liability company is an entity
or association that is formed under
state law by filing articles of
organization as an LLC unlike a
partnership none of the members of the
LLC are personally liable for its death
I was a little bit interested in an LLC
the LLC and where they came from I've
been doing taxes since the early 1990s
and I can remember in those early years
people were coming in and saying they'd
formed LLC's and I would go to quick
finder and open it up and quick finder
would say ok I'll see you I'll a
partnership return and I go hot dog and
prepare a partnership return but it
wasn't always possible to file a
partnership return because in order to
have a partnership you have to have two
or more members and
and so this was a topic of discussion
and I look back on it and how silly and
ignorant I was back then but the reality
is most people were trying to figure out
LLC's at that time so actually this
morning as I was preparing for a class
okay well I keep reading these things
that say that the limited liability
company is a relatively new business
structure and I certainly know back in
the mid nineties it seemed really new
and the reason for that is that
according to Wikipedia the very earliest
limited liability company was formed
back in 1977 and it was in one state
only and then subsequent to that another
state came up with it
and sometime around the early 90s there
seemed to be a uniformity where most
states were now allowing limited
liability companies and there was
confusion and then sometime in the mid
90s when the IRS really started to
create regulations to help guide the
principles behind LLC's so when we talk
about an LLC being a new type of
business structure it really is new only
in the last 20 years or so and we
compare that to corporations now one of
the corporations I remember very vividly
he cooked out in terms of age is the
Hudson's Bay Company and it's because
I'm Canadian Hudson's Bay Company owns
the bay and the bay is everywhere in
Canada he's a shopping there's always
going to be bay department store
somewhere like Macy's here we have the
bay in Canada but the bay is really old
the Hudson's Bay Company was formed back
in 1670 so it's a it's over 300 years
old and I can remember my father worked
for the bay when I was a little girl and
he came home with some balloons because
they were celebrating their 300th
birthday so we compared the concept of
the corporation which is centuries old
with these new limited liability rules
that's why people are still figuring
LLC's out there just isn't the case
history or the case history that we have
is much much more recent so back to the
top here limited liability company in
order to be an LLC you have to obviously
make a decision to be an LLC and then
you file articles of organization to
form that LLC and you file those
articles with the state that you're
doing business center that you want to
do business then typically but you don't
have to you can actually fire our
articles of the organization with any
state and do business
in another state that is possible and it
is done but typically when I see LLC's
form they want to do business in their
home state that's where they form them
now unlike a partnership none of the
members of an LLC are personally liable
for its deaths so what does that
sentence me well when you form a
partnership this is a pretty interesting
concept and I can't remember in the very
basic basic classes that are taking in
college like 30 years ago there was this
concept that if we were told that if you
form a partnership with someone
handshake partnership to do business
together and one partner goes off and
makes a deal with a vendor you're
automatically liable for that so that's
a pretty risky thing to just form a
general partnership like that you can be
held liable for all of the partnerships
of debt even if you didn't agree to be a
part of that debt you're automatically
going to be liable for it so that is a
key reason why an LLP is going to be an
attractive entity type for people who
want to go into business together
because it's going to help protect them
from personal liability for the
business's debt the LC can be operated
by managers or members and managers can
be but are not required to be members it
must be stated in the articles of
organization if the LLC is to be managed
by a manager the LLC is a relatively new
business structure as I have been
explaining and it is allowed by state
statute LLC's are popular because they
offer a sort of hybrid business type
which combines certain features of both
corporations and partnerships and now
LLC may be classified for federal income
tax purposes as a partnership a
corporation or this is a confusing one
for a lot of people an entity
disregarded as an entity separate from
its owner by applying rules in the
regulations section 3 0 1 . 7 7 0 1-3 so
what that is saying the sentences you've
formed an entity but we're working a
pretended entity doesn't exist in other
words we're not going to recognize the
entity as being separate from you all we
do is see you so IRS says that an LLC
when it is formed is either going to be
formed as a partnership or it Krispies
taxed as a corporation or it's neither
of those things because it's a
disregarded entity and
and in the case of a disregarded entity
iris doesn't even recognize that any
entity was formed it's just gonna look
strictly at the owner you should note
that atomistic LLC with at least two
members that does not file form 8832 is
classified as a partnership for federal
income tax purposes so let's look at how
the LLC has similarities to a
corporation and also to a partnership so
corporate similarity first and LLC is
similar to a corporation in that the
owners have limited personal liability
for the debts and actions of the LLC
partnerships similarity operationally
LLC's are more like a partnership
because they allow management
flexibility and the benefit of passed
through taxation owners of an LLC are
called members as a member your
liability for LLC death is limited by
state law however you may be held
personally liable in situations
involving unpaid employee with holdings
if you are found to be the person who
was responsible for making the payments
in other words iris says whoever is is
the person or persons in a business
charged with making sure that payroll
withholdings actually make it to the
treasury you're not going to use the LLC
to escape that obligation so if you've
been paying employees you've been
withholding taxes from their pay you've
been supposedly filing the 941 reports
as you were required to do so and then
you don't send that money on to the
Treasury as you were supposed to don't
expect the LLC to protect you because it
won't so who can own an LLC most states
do not restrict LLC ownership therefore
members may include individuals
corporations other limited liability
companies and foreign entities also
there is no maximum number of members
most states also permit single member
LLC's which have only one owner a few
types of businesses generally cannot be
LLC's though and these include banks
insurance companies and nonprofit
organizations so what are the advantages
of an LLC well they all LC is generally
considered to be advantageous for small
businesses because it combines the
limited personal liability benefit of
corporation with the tax advantages of a
partnership and sole proprietorship
profits and losses can be
through to the company are passed
through the company to its members or
the LLC can elect to be taxed to the
corporation
LLC's do not have stock and are not
required to observe corporate
formalities
the owners are called members in the LLC
is managed by these members or by
appointed managers so are there
disadvantages to LLC's well yeah there
are some disadvantages
well LLC's continue to be a popular
business model and they are often
preferred by attorneys who recommend
them to individuals who are starting up
new businesses there are certain
disadvantages to be aware of including
LLC managers must pay taxes on their
distributive share of the profits of the
company even if they've not received a
distribution of those profits by
comparison the owners of the C
corporation do not pay taxes on profits
unless they are distributed usually in
the form of dividends so let's just
think about this a minute you are an
owner of stock in a C corporation I'm
just gonna pick a company out there I
went to Disneyland recently so let's
make it Disney you want Disney stock and
the Disney stock over time goes up in
value it also in a good year so
hopefully most 50 years or good years
it's going to be issuing dividends to
the shareholders but the dividends that
are issued to the shareholders are the
only form of income that that schorl
holder ever needs to recognize Disney
itself could be highly profitable file a
corporate tax return pay taxes on its
corporate profits and not distribute any
of those profits to its shareholders in
theory there's going to be rules that
prescribe when and how much they do need
to distribute but let's just suppose
Disney filed a return and decided not to
do any corporate distributions that year
the shareholders would not be on the
hook for reporting any kind of income
from Disney stock because they didn't
receive any distributions but with an
LLC things are very different if we take
a business entity and say instead of
being a corporation now you're now I'll
see that LLC can turn a profit and the
LLC if it is not made a corporate
election is going to be taxed typically
as a partnership and if that LLC makes a
decision not to distribute any income to
its member
those members are going to have to pay
tax on money they have not received so
that can be a distinct disadvantage and
I have a client mm-hmm
this wasn't happening with an LLC was
actually happening with or not with a
partnership it was happening with an S
corporation and they're very similar
where every year he was getting this
phantom income off of the entity he's
getting a k1 every year showing his
distributive share of income from the
business but he wasn't ever actually
being given an e that income and so
every year he was having to report and
pay tax on money he didn't receive so
LLC owners must pay taxes on their
distributive share of the profit of the
company even if they have not received a
distribution of those profits and this
contrasts with the corporation where
with a C corporation you pay tax only if
you actually receive a dividend LLC
owners who perform services for the LLC
must pay self-employment taxes including
Social Security and Medicare tax on all
income and profits unless the LLC elects
to be taxed as a corporation and for a
single-member LLC the formation of an
LLC may impose certain filing
requirements at the state level minimum
registration fees and/or taxes can be
imposed on the LLC that would not be
imposed on a sole proprietorship and
here's an example of what I mean I can't
really say that this is in every state I
just know that this is a thing that is
very specific to California the state of
California imposes a mandatory filing
requirement of all LLC's registered or
conducting business within the state of
California the minimum annual filing fee
of $800 must be paid whether or not the
business had California income for the
year the sole proprietorship operating
in California may benefit by not forming
an LLC because the non LLC sole
proprietorship is not subject to that
minimum $800 tax so if you've got a
client in California who's operating
their own little business and it's not
much of a business forming an LLC might
be very very expensive decision not only
are they gonna have to file the articles
of organization and renew those each
year with California be paying those
minimum fees every year but on top of
that they're gonna have to file an LLC
return California doesn't accept a
Schedule C from a single-member LLC
is a specific LLC return be filed and
then it wants that minimum $800 fee
every year so that would be another
disadvantages another disadvantage LLC
organizational structure and now LC
operates in a manner similar to a
corporation however the controlling
parties have different titles as follows
LLC managers can be compared to the
board of directors of a corporation and
LLC members can be compared to the
shareholders of the corporation in order
to be a member of an LLC a contribution
such as cash property or services
rendered must be made next up we have
the operating agreement and the internal
affairs of the LLC are governed by
operating agreements which may be oral
or written these operating agreements
are comparable to the bylaws of a
corporation and the internal affairs are
managed by the members unless the
articles of organization specifically
state that they shall be managed by one
or more managers now it isn't necessary
for every LLC to have an operating
agreement and many don'ts in Oregon for
example you go to filing in Oregon comm
and you file articles of organization
with the Secretary of State here in
Oregon and you're done you're now LC
there's no requirement that you actually
go and form an operating agreement but
an operating agreement is a pretty good
idea especially if you've got more than
one owner in that business because that
is really the agreement between the
owners on how they're going to run that
business and any type of decision made
by two or more people on how to run a
business should really be in writing and
the operating agreement is typically
where an attorney is going to come in to
play a good attorney is going to sit
down with thee they propose partners in
a limited liability company or even in a
general partnership and work out hash
out the details of how they wish to run
that business together who's going to do
what what the responsibilities are going
to be how profits are going to be
distributed what kind of tax election if
any is going to be made that is what the
purpose of the operating agreement is
registered agent and they all LC must
generally have a registered agent in the
state where the registered office is
located as well as in other states where
the LLC conducts business when an LLC is
food the legal papers are
served on that registered agent it is
required that the registered office is a
street address a registered agent can be
an individual or a legal entity so the
bottom line is when you do business in
any state people who do business with
you need to be able to identify who you
are and how to get hold of you
physically in person and if you are it
for example are running your business
from your home and you do not want
people to be able to come to your home
cause you want to have a sense of
privacy there you could employ a
registered agent and use the services of
that registered agent and so if someone
decides that they want to sue your
business or serve papers on your
business they can instead give those to
the registered agent and you will have
been considered served if your
registered agent receives that paperwork
and then obviously the registration
needs to know how to get hold of you
domestic versus foreign LLC LLC is
organized under a particular state
statute are referred to in that state as
domestic limited liability companies
when operating in states other than
those in which they were formed LLC's
are referred to as foreign limited
liability companies so let's just
suppose you decide to form an LLC in the
state of Washington you form your LLC in
Washington and as far as Washington is
concerned you are a domestic LLC but if
you cross over and decide to do business
in Idaho or Montana both those states
would consider your LLC to be foreign
because your LLC was not formed in those
states now to form a domestic LLC the
usual procedure is to file articles of
organization and pay a non-refundable
processing fee to the business registry
of the state in which the LLC is being
formed before filing articles of
organization the desired name should be
checked for availability the name must
be distinguishable from other active
names on the business registry records
and in addition the name of the LLC must
contain the word limited liability
company or the abbreviation LLC with
little decimal points or LLC without
them in other words if you're
registering your business as an LLC it
needs to be a parent and obvious to
anyone who does business with the LLP
that you are an LLC
if the business name is distinguishable
and the articles conform to state
statutes the business registry of the
applicable state will process the
document in return and acknowledgement
to the filer let's compare that with a
for now I'll see excuse me
and now LC formed in a state other than
that in which it is operating is a
foreign ll see if the LLC wants to
conduct business in a state others that
suspend the state in which it was formed
it may be required to obtain permission
from the other state or states in which
it wishes to conduct business most
states require that the LLC submit an
application of authority which includes
the name and the address of the local
registered agent as well as a processing
fee which must be submitted to the state
business registry a certificate of
existence or a similar document from the
jurisdiction where the LLC was organized
must be submitted with the application
form before an application of authority
is filed the name should be checked for
availability and although the register
although registered in another state the
name must again be distinguishable from
other active names in the new state's
business registry records so for example
let's just suppose you've been running
your business in the state that you're
in under a particular assumes business
name and now you decide you want to
expand and add an office in another
state well you're gonna need to check
with that state's business registry to
see if the name you've been using is
even available because it could be that
another business there is already using
that name and if another business is
already using that name and you're
probably going to need to come up with a
new name for your business in that state
so your business might have one name in
one state and another name in another
state and there really wouldn't be much
that you could do about that in that
situation the other part that goes on is
that you are typically gonna have to
prove that your business exists or that
your entity exists to this new state so
if you cross from Washington in to say
opening of another location in Montana
you're gonna need to show the Montana
Secretary of State office that your LLC
actually does exist in Washington State
so that would require submitting a form
to Washington to state to ask them to
show that you really do exist and this
is through something called a
certificate of existence you ask your
home state for the certificate of
existence
then you send that certificate of
existence to the new state that you want
to do business in and pay all their fees
and you're up and running so let's now
look at a corporation a corporation is a
legal entity created under state statute
by submitting Articles of Incorporation
with the state business registry a
corporation is owned by its shareholders
and the names and number of shares
issued to each shareholder are
registered in the records of the
corporation the Articles of
Incorporation must state how many shares
the corporation has the authority to
issue and there are three main types of
corporations including business
corporations nonprofit corporations and
professional corporations businesses and
professional corporations are for-profit
corporations and a nonprofit corporation
is formed for any lawful purpose other
than financial profit a professional
corporation is a for-profit corporation
formed for the purpose of providing one
or more specific types of professional
service many states require that all
shareholders of the professional
corporation must be licensed to render
the professional services offered
through the corporation and I'll give
you an example with what is meant by
this I had a client one year who who
came to me and he wanted to form an S
corporation for his chiropractic
business oddly enough he was an attorney
seems to me that as an attorney he could
have done that on his own but apparently
he wasn't that kind of attorney he was
an attorney he wanted to be a
chiropractor and he was hiring me to
help him form an S corporation and I
said he was talking about professional
corporation he was talking about making
an S election he was talking about who
could be owners and I said well there's
nothing at the IRS level that would
preclude your non chiropractic spouse
your wife from being an owner in the
corporation but I would check with the
state of Oregon because there could be
something at the state level so off he
went he came back and he said yeah I
checked and there was nothing to
preclude it so he we firm to the
corporation made his wife as a 50%
shareholder got all the letterhead
printed he got signage made and then lo
and behold he learned that the board of
chiropractic medicine here in Oregon did
not allow that so it had nothing to do
at all with the Secretary of State
Office or
Oregon Department of Revenue it came
right down to the board level about
whether or not a corporation in this
state that is a professional corporation
for a chiropractic business could have
owners that are not chiropractors and so
the caution is that when you're dealing
with people who are professionals
including CPAs or attorneys or
chiropractors or veterinarians most of
those fields of occupation have state
boards that govern their conduct and you
should be examining what those board
requirements are at the time a
corporation is being formed now a
corporation is a separate entity from
its owners a corporation acts as a
single entity it exists separately from
its owners and continues to exist even
though the shareholders may change as
the separate entity a corporation must
file federal and most often state income
tax returns it may own property it can
sue and it can be sued let's talk now
about the ownership and management
structure of a corporation a corporation
is owned by its shareholders and managed
by the board of directors the
shareholders appoint the members to the
board of directors and except for the
initial board the shareholders generally
select the directors the number of
directors is determined by the Articles
of Incorporation or by the bylaws of the
corporation election and appointment of
officers every corporation must have a
president and a secretary and some
states require that corporations also
have a treasurer the authority and
responsibilities of each officer is
described in the corporate bylaws and
may be further defined by an employment
contract or a job description some
states allow a single person to hold all
three titles within a corporation the
president the first and we think of as
the head of the company has the overall
executive responsibility for the
management of the corporation and is
directly responsible for carrying out
the orders of the board of directors he
or she is usually elected by the board
of directors the secretary is typically
responsible for maintaining the
corporate records and the treasurer is
the chief financial officer of the
corporation and is responsible for
controlling the and recording its
finances including maintaining corporate
bank accounts
fiscal policy of the corporation may
rest with the Board of Directors and be
largely controlled by the president on a
day to day basis though the Board of
Directors elects the president and the
secretary and adopts bylaws of the
corporation the board may elect or
appoint other offices or the bylaws may
prescribe how these officers are
selected the same person can hold two or
more offices so it's possible of what
the small corporation this is very often
the case that a single person is going
to be the president the secretary and if
necessary the treasurer all at one time
and they're also going to be the board
of directors so a single person can be
all of those things obviously in big
corporations things are very different
that you're going to have a dedicated
board the board is going to be formally
deciding key strategies for the
corporation and then getting the
president and other key vice president
type personnel to follow through with
their vision for small business I'm just
gonna run my own business do my own
thing make my day-to-day decisions and
I'm everything all at one time
registered agent a corporation must have
a registered agent with the street
address being the registered office when
a corporation is sued the legal papers
are served on that registered agent this
is why there has to be a street address
a registered agent can be an individual
or a legal entity so foreign or domestic
under state law well similar to the LLC
a corporation formed on the laws of any
state is a domestic corporation in the
state of incorporation and a foreign
corporation in all other states in which
it conducts business whether a foreign
corporation must register to do business
in any state and maintain a registered
agent within any state is determined by
the laws of each individual state as a
general rule a corporation will be
required to register in a state if it
maintains an office in the state has
employees working in the stage or
performs services in the state to
determine if a corporation is required
to register and/or maintain a registered
agent within a particular state and to
determine the filing requirements for
that state you should contact the
secretary of state office for that
particular state so one of the things I
commonly see many small business owners
have a difficult time grasping and a lot
of tax professionals too
is that you've formed your business
you've been doing your business in your
home state for a period of time and now
you decide to cross state line to
conduct business and in another state
now if you're just crossing the state
line to sell your product and then you
return to your state and carry on the
other business activities and the only
reason you passed into a particular
state was to sell your product you're
probably not gonna have to worry about
registering in that state but if you
hire someone to perform services for you
in another state odds are you are going
to have to take some action or if you
yourself perform services in another
state so let's just suppose try to think
of a good example you are a software
engineer you've been working from your
home office in your home state let's
make that home state I don't know
Colorado so you're a software engineer
you've been working from your home
office in Colorado and all of a sudden
you come up with this a great
opportunity to go work in Alabama for
six months on a big project and you go
well that's an offer I can't refuse and
so you move temporarily to Alabama to do
your work there well you're not giving
up your home in Colorado when you're
doing it your intention is to return to
Colorado and you maintain your home in
Colorado so as far as Colorado is
concerned you're still going to be a
resident of Colorado your business is
still going to need to report income and
expenses for Colorado you're still have
to file all of your Colorado returns so
what about Alabama
well Alabama it's going to depend on
what kind of business you are if you're
nothing more than a sole proprietor you
probably just gonna need to file an
Alabama return and report whatever
income Alabama wants but if you are
actually a corporation or a limited
liability company and you then do
business in Alabama and I know nothing
about Alabama it could be that there's
all kinds of special rules I should know
that I don't but you would need as a
preparer to look up those rules for
Alabama does Alabama tax corporations
does Alabama tax small businesses what
are the filing requirements Alabama
these are all questions that need to be
answered does the business need to
register to even run in Alabama and if
so how is that done so these are
sensible questions that every preparer
needs to be asking and every small
business owner needs to be asking but
frequently they are not asked and it's
basically blinkers on and pretend it
never has
and to go back to Colorado refil return
and hope no no no one notices one of the
other things to be concerned about is
that certain types of business
activities performed in a state can be
subjected to things other than income
tax for example Washington State has no
income tax but it does have a business
occupation tax so if you go into
Washington State to perform services
odds are you need to be filing a piano
returned and paying a gross receipts tax
to Washington State so these types of
things are often neglected simply
because people don't understand that
they exist or how to go about figuring
it so foreign or domestic preparation
under federal law though we talked about
a foreign corporation under state law
but what does it mean at the federal
level well the IRS considers a
corporation formed outside of the United
States to be a foreign corporation and
all corporations formed within the
United States are domestic corporations
as far as the IRS is concerned so what
are the organizational procedures for
forming a corporation well once the
existence of a corporation is
established an organizational meeting of
the Board of Directors is generally held
to adopt bylaws and to elect the
officers in forming a domestic
corporation articles of or incorporation
and a non-refundable processing fee must
generally be submitted to the business
registrar of the state in which the
corporation is formed before articles of
corporation are filed the name should be
checked for availability and just as
with LLC's and DBAs the name must be
distinguishable from the other active
names in that state's business registry
records if the name is distinguishable
and the articles conform to that state's
statutes the business registry will
process the document and return an
acknowledgement to the filer bylaws the
bylaws of the corporation must contain
provisions to regulate and manage the
affairs of the corporation that are
consistent with the statutes of the
Articles of Incorporation
so there what are the advantages of a
corporation why would someone decide to
form a corporation versus an LLC are the
reasons for doing so well a corporation
is a legal entity that is separate from
its owners who own shares of stock in
the company so the shareholders are not
personally liable for corporate
obligations unless corporate formalities
have not been observed and one of the
things that happens when a corporation
is sued especially a closely held
corporation
as there can be an effort made to do
what is called pierce the corporate veil
piercing the corporate veil means
basically showing that the corporation
was a sham that these four corporate
formalities were not followed therefore
really there was no corporation and it
was just the individuals operating in
their own name it is important that if
you formed a corporation specifically
for limited liability protection for the
owners that the corporate formalities
are properly observed now if you have
got a corporation where the property
formalities are properly observed one of
the benefits of that will be limited
liability one of the key reasons to form
a corporation is the limited liability
protection provided to its owners
because the corporation is considered a
separate legal entity the shareholders
have limited liability for the
corporations debts and the personal
assets of the shareholders are not at
risk to satisfy debts or liabilities of
the corporation corporate tax treatment
since the corporation is a separate
legal entity it pays taxes separate and
apart from its owners the owners of a
corporation only pay taxes on corporate
profits that are paid to them in the
form of wages salaries bonuses and
dividends the corporation pays taxes at
the corporate rate on any of its profits
attractive investment the built in
structure of a corporation makes it
attractive to investors capital
incentive the stock structure also
allows the corporation to attract key
and talented employees by offering them
an ownership interest in the form of
stock options or stock owner employee a
business owner who works for his or her
own business may become an employee and
thus be eligible for reimbursement or
deduction of many types of expenses
including health and life insurance
another benefit for an owner employee of
a corporation is that if the corporation
folds they can go and apply for
unemployment insurance which is
something the sole proprietor is not
able to do operational structure
corporations have a set management
structure the owners of a corporation
are shareholders who elect a board of
directors the board of directors have
then elects the officers other than the
election of directors shareholders do
not participate in the operations of the
corporation and then finally perpetual
existence a corporation continues to
exist until the show holders decide to
dissolve or merge it with another
business and during today's class I'm
going to give you a series of three
passwords but I'm not going to give you
one on this first break so do stay tuned
for throughout today's class for more
for passwords but right now I'm not
going to give you passwords so we're
just going to resume class at the top of
the hour
all right everyone welcome to back to
class the camera should be unfrozen for
you and you should have had a chance to
get yourself awake okay walking around
for 10 minutes this part of the class is
difficult to be exciting when you're
talking about terminology but I feel the
terminology is apartment so we're going
to continue on we started the break
after we finished talking about some of
the benefits of corporations and now I'm
going to talk about some of the
disadvantages of corporations the legal
rules and laws that affect corporations
can mean that they are not the best
entity choice for many small business
owners disadvantages of the corporate
entity status can include complexity a
corporation is a complex business
structure that can be costly to start-up
and to maintain fees are assessed for
various government filings including
annual report feeds that are payable to
the secretary of state minimum filing
aspies are assessed by state governments
on corporate tax returns for example
Massachusetts minimum filing fee is 456
dollars California has a minimum filing
fee of $800 even Oregon has a minimum
filing fee of 150 dollars many other
states also impose minimum filing fees
and it should be noted that many states
also impose similar filing fees though
on LLC's and partnerships double
taxation of profits profits are taxed at
both the corporate level and again when
they are distributed to shareholders so
when a corporation files a tax return it
files form 1120 it figures its income it
figures is expenses that come to a
bottom-line profit and pays tax on that
profit to the IRS if it then distributes
any of those profits to shareholders in
the form of dividends the shareholders
now have to report and pay tax on the
dividends that they've received as well
and that creates the double taxation
corporate roma formalities must be filed
to provide evidence that the corporation
is a separate legal entity from its
shareholders and failure to do so may
open the shareholders to liabilities for
the corporation's debts corporate
formalities include issuing stock
certificates holding annual meetings
recording the minutes of the meetings
and electing directors or ratifying the
status of existing directors so all of
that takes time if you're a small
business you know with two or three
employees do you really need to be going
through all of those corporate
formalities every year do you even stop
what you're doing to think about the
corporate formalities probably not and
so the day comes where legally you need
to prove that you are a corporation that
has perfected these corporate
formalities and you cannot do so maybe
you didn't even know how to paperwork
paperwork is a huge component of the
corporate formalities that have to be
followed reports and tax returns must be
compiled and filed in a timely manner
business bank accounts and records must
be maintained and kept separate from
personal accounts in assets records must
be kept of corporate actions including
meetings of shareholders and board of
directors and licenses must be
maintained so that's the C corporation
now let's talk about the F corporation
and an S corporation is an interesting
animal it is everything and nothing at
the same time it's really interesting
where we've gotten with those
corporations over the last 20 years when
I got into this business of taxes back
in the early 90s the the steps to
becoming a S corporation where you a
became a corporation and then B you made
the subchapter F election and over the
years it's become quite apparent that
you don't have to do those two things
that you can become an S corporation
without ever having formed a corporation
so an S corporation is a very
interesting animal or entity type as
we're about to see the S corporation
structure is identical to a C
corporation structure in many ways that
offers the avoidance of double taxation
profits and losses of an S corporation
flow through to shareholders to report
profit and loss sharing items on their
individual returns an S corporation is
initially formed in the same
a c-corporation which had just described
you form the c-corporation then he make
an S election by filing incorporation
documents with the state of
incorporation
but once the business has incorporated
the owners may decide to elect S
corporation status the election must
generally be made within the first 75
days of the year for which the S
election is to become effective so what
are advantages of the S corporation S
corporations are a popular choice for
many small businesses S corporations
provide the following legal and tax
advantages for owners corporate losses
can be passed through to the
shareholders who may be able to use the
losses to offset their income or their
income on their personal return limited
liability for texture holders from
personal liability for corporation debts
without requiring a CS corporation to
pay corporate taxes it is possible to
minimize self-employment tax and FICA
taxes because the shareholder profits
are not generally subjected to these
taxes so this is a difference from the
partnership with a partnership return
the partnership reports income and
expenses on 1065 it flows through the
profits to the partners and the profs
and the partners if they are active
participants in that partnership are
typically going to be subjected to
income tax as well as self-employment
tax but at the F corporation level no
self-employment tax is assessed on those
corporate distributions so are there
disadvantages to S corporations well yes
there are of course although S
corporations provide an attractive
business model there are certain
disadvantages which should be considered
including regulations and requirements
imposed on C corporations must be held
up by an S corporation there is a limit
on the number of shareholders like a C
corporation it can be costly to set up
and follow the corporate formalities in
fact if you are a C corporation who has
made an S election all of the corporate
formalities remain unchanged and so an S
corporation is merely a tax election it
is not a change in the type of entity
that you are so if you formed the
corporation you have to abide by all of
the rules that are imposed on
corporations and the only difference
between a regular corporation and an S
corporation is how they're taxed all of
the other rules that are imposed on
are basically going to be the same the
IRS closely scrutinizes payments of an S
corporation or by an S corporation to a
shareholder employee who must receive
reasonable compensation that is subject
to employment taxes before any non wage
distributions can be made to that
shareholder employee all shareholders in
addition must be US citizens or
residents of the United States all
shareholders must be must vote in favor
of F corporation status before the
election can become effective and
benefits such as health or accident
insurance for employees shareholders
with at least a 2 percent shareholder
holder ownership must be treated as
wages paid to the shareholder before
they can be deducted by the corporation
so that concludes the the overall look
at the different types of business
entities and now we're going to look at
how they get taxed businesses are
generally taxed under default rules
applied by the IRS and state governments
however it is possible for business to
elect other tax treatments as allowed by
federal and state laws for the sole
proprietorship that entity files a form
1040 is your an individual he file a
1040 intuit you attach either Schedule C
or C ez unless you're a farmer in which
case you'll attach Schedule F and you do
so to meet your federal income tax
obligations net profits from a sole
proprietorship business generally make
the proprietor liable for
self-employment as Social Security and
Medicare taxes Schedule SV must be filed
with the 1040 return to calculate and
report to these taxes with respect to
the sole proprietor business the filing
deadline for Schedule C or Schedule F is
going to be the same as the filing
deadline for the individual return and
for most the filing deadline is the 15th
day of the fourth month following the
end of the tax year and if you are an
individual filer we're on a calendar
year that means your filing deadline
will be April 15th but if that April 15
deadline falls on a weekend or national
holiday then the filing deadline will
move to the next business days an
individual can file for an extension of
time to file by submitting form 4868 to
the IRS and it has to be done of course
by the original D Day
the return and once that return and that
form is filed the filer has an
additional six months to file typically
taking them to October what are the
fight late filing penalties if you fail
to file on time as a sole proprietor
well failure to file and late filing
penalties are assessed based upon rules
that apply to individuals so there's no
special tax or late filing penalty
imposed on the Schedule C rather it's
imposed on the individual filer that
attaches the Schedule C to their return
and so if you're trying to figure out
what the late filing penalty is for a
business owner who filed Schedule C it's
going to be all the rules that apply to
individuals but let's compare those
rules to the partnership the partnership
is the relationship between two or more
persons or entities who join to carry on
a trade or business with each person or
entity contributing money property or
labor or skill and each expecting to
share in the profits and losses of the
business whether or not a formal
partnership agreement is made at the
simplest level a partnership occurs when
two or more individuals agree to work
together in the active conduct of a
trade or business individual partners
are personally liable for the debts and
other obligations of the partnership and
partnerships generally file IRS form
1065 net profits of the business are
generally not taxed at the partnership
level but instead flow through to
individual partners who must include
their respective profit share an income
reported on their individual 1040 return
and conversely if the partnership runs a
loss the partnership will flow that loss
3 to the partners who will claim if they
are eligible to claim that loss against
other income on the return generally
partners who are active participants in
their partnerships must pay
self-employment tax on their share of
partnership earnings and many cities
require that businesses apply for it and
maintain a current business license and
partners must comply with other state
and local laws as well for domestic
partnerships except as provided below
every domestic partnership must file
form 1065 unless it neither received
income nor encourage any expenditures
treated as deductions or credits for
federal income tax purposes entities
formed as LLC
that are classified as partnerships for
federal income tax purposes also must
file form 1065 for foreign partnerships
generally a foreign partnership that has
growth income effectively connected with
the conduct of a trade or business
within the United States or has gross
income derived from sources in the
United States must file form 1065 even
if its principal place of business is
outside of the United States or all of
its members are foreign persons a
foreign partnership required to file a
return generally must report all of its
foreign as well as its us source income
partnership filing deadlines and
penalties these are quite a bit
different than we see for the sole
proprietor every partnership engaged in
a trade or a business must file a return
the filing deadline extension and
penalty rules for partnerships are
described next first we have the form
1065 filing deadline for form 1065 your
filing deadline is the 15th day of the
fourth month which is actually the same
as for individuals so for partnerships
that are calendar year partnerships the
filing deadline is going to be April
15th but again accept falls on a weekend
or national holiday then it's going to
move to the next business day
now if the partnership is unable to file
a timely return it can request an
extension by filing form 7 zero zero for
applications for automatic extension of
time to file certain business income tax
information and other returns to extend
the filing deadline by five months for
calendar year partnerships a timely
filed form seven zero zero four will
extend the filing deadline to September
15 so for individuals a six month
extension takes you to October 15th but
for partnerships it's a five month
extension that will take you until
September 15th which is a full month
earlier there are penalties for failure
to file a return and there are a hundred
and ninety five dollars per month per
partner for each month where part of a
month up to a maximum of 12 months well
that can get pretty spendy the penalties
assessed against the partnership and an
additional hundred dollar penalty may be
imposed with respect to each schedule
k-1 that the partnership fails to
provide to each partner on time so now
you're up to two hundred ninety five
dollars per month per partner $100
penalty also applies as
failed to correctly include all required
information on each partners k1 now
there are some rules that will waive the
penalty for small partnerships the
penalty will be abated if the
partnership can show reasonable cause
for its late filing domestic
partnerships with 10 or fewer partners
will generally qualify for the
reasonable cause exception if all
partners have fully reported their
shares of income deductions and credits
on their own time we filed returns and
each partner is an individual a/c
corporation or an estate of a deceased
taxpayer or deceased partner to request
a waiver of penalty for late follow at
filing you should follow revenue
procedure 84 - 3 5 as it was amended in
1997 for corporations a domestic US
corporation is formed when Articles of
Incorporation are filed with the
secretary of state office of any state
unless exempt under Section 5 0 1 all
domestic corporations including
corporations in bankruptcy must file an
income tax return whether or not they
have taxable income domestic
corporations must file form 1120 unless
they are required to file a special
return you should see special returns
for certain organizations which are
shown in this chart below and unless the
corporation elects to be taxed as an S
corporation by timely filing form 2553
most US corporations are going to be
filing form 1120 now there are some
special returns for certain types of
organizations and instead of filing 1120
those organizations will file a
different alternative type of form that
you see here for example if you are an
exempt organization with unrelated trade
or business or income in other words
you're a nonprofit organization you
would file Form 990 you can see here
that obviously if you're now LC then you
would typically be filing form 1065 your
subchapter t Cooperative Association
including a farmers co-op then you would
file 1120 C if you are a condominium
management or residential real estate
management or timeshare Association you
typically file form 1120 H and they are
also political organizations that would
file 1120 pol and so forth
let's talk now about the taxation of the
limited liability company the formation
of a corporation under the laws of any
state is the formation of a corporate
entity under the rules of the Internal
Revenue Code in other words the IRS
recognizes the formation of a
corporation as the formation of a
specific entity type that it will tax in
a very specific way all corporations are
required to file form 1120 no similar
guidance however applies to limited
liability companies because the
formation of an LLC does not create a
single kind of taxable entity instead
the makeup of the ownership of an LLC
will determine what kind of tax return
that LLC needs to file depending on the
number of members now LLC has the IRS
will automatically classify the LLC is
either a sole proprietorship or a
partnership if the only member of an LLC
is a single individual the LLC is
treated as a disregarded entity for tax
purposes income and expenses are going
to be reported on Form 1040 Schedule C E
or F so here's one of the real common
things I guess actually one of the most
common reasons we will be contacted by a
prospective new client and sometimes
even by existing clients is they've
decided to go into business or maybe
they were already in business this is
another one I have a client who's
already in business I've been preparing
their tax returns for years by Elango
proprietor business income and expenses
on Schedule C the big day has come and
they formed an LLC and they're the only
member of the LLC and so they call me
they're all excited because everything
has probably changed now that they're
now LC and the answer is nothing changed
as far as the IRS is concerned for tax
purposes now if they have employees and
they're filing payroll reports there are
some changes we need to be concerned
with there but if it's just you know an
independent contractor that was doing
business as a handyman for the last ten
years and now he's decided to form an
LLC and it's still his handyman business
and nothing else has changed then as far
as IRS is concerned that new entity that
formation of the LLC they couldn't care
less about it the entity is disregarded
a disregarded entity is an eligible
entity
that is treated as not being separate
from its single owner its separate
existence is ignored for federal tax
purposes unless it elects corporate tax
treatment if the LLC has only one owner
it will automatically be considered to
be a sole proprietorship for income tax
purposes a sole proprietorship is
referred to as an entity to be
disregarded as separate from its owner
unless an election is made to be treated
as a corporation if you prefer to be
treated as a corporation instead of as a
disregarded entity form 8832 must be
submitted to make that entity
classification election single member
LLC's may not file a partnership return
so what if the single member of the LLC
is a corporation because that could
happen you could have a corporation that
decides to form an LLC and the
corporation is the sole owner of that
LLC a liar says if the only member of
the LLC is a corporation then the LLC
income and expenses are reported on the
corporations tax return which is usually
form 1120 or it could be 11 20s if the
single-member LLC is owned by a
corporation or a partnership the LLC
should be reflected on its owners
federal tax return as a division of the
corporation or partnership multi-member
LLC most LLC's with more than one member
are going to file form 1065 partnership
return but if you would rather file as a
corporation form 8832 must be submitted
you don't need to file form 8832 if you
want to be filing as a partnership and
now I'll see with two or more members
files the same tax forms as a
partnership self-employment taxes for
members of LLC's filing form 1065
generally a partnership LLC is taxed in
the same manner as an ordinary
partnership however there is a
difference in the treatment regarding
self-employment tax in bet active
members pay self-employment tax on their
share of the LLC partnership earnings
but inactive members who are the
equivalent of limited partners do not
pay self-employment tax on their
earnings unless the LLC pays them for
services joint ownership of LLC by
spouse in a community property state in
revenue procedure 2002 - 69 and there's
a link here that you can click on if you
want to read more
address the issue of classification for
an entity that is solely owned by a
husband and wife as community property
under the laws of a state a foreign
country or a possession of the United
States now most states in the United
States are not community property States
I happen to sit in Oregon we are a non
community property state and so these
rules would not apply to businesses or
individuals residing in the state of
Oregon but we're surrounded by community
property states that is organisms we've
got Washington to the North Idaho to the
East California to the south there's a
number of other community property
states as well as when you go into the
southern United States I don't have them
all on my head but there's a roughly
around ten community property States
which is a significant number but even
more significant is the fact that most
states are not community property States
so if you're in a community property
state it would behoove you to be
familiar with the rules that affect
individuals in community property States
and these rules apply only to
individuals through our residents of
community property States if there is a
qualified entity owned by a husband and
wife as community property owners and
they treat that entity as a disregarded
entity for federal tax purposes the
Internal Revenue Service will accept the
position that the entity is a
disregarded entity for federal tax
purposes and if they decide to treat
that entity as a partnership for federal
tax purposes and the IRS will accept the
position that the entity is a
partnership for federal tax purposes a
change in the reporting position will be
treated for federal purposes as a
conversion of the entity a business
entity is a qualified entity if the
business entity is wholly owned by a
husband and wife and this actually would
be OSes as community property under the
laws of a state a foreign country or a
possession of the United States
no person other than one or both spouses
would be considered an owner for federal
tax purposes and the business entity is
not treated as a corporation under IRC
section code 310 - 7 7 0 1 - 2 now joint
ownership of an LLC by a spouse in a non
community property state if an LLC is
owned by a married couple in a non
community property state which is most
of the country the owl the LLC should
file as a partnership
LLC is owned by a married couple are not
eligible to be qualified joint ventures
which can elect not to be treated as
partnerships because these are state law
entities so this is one of the
interesting things we say that IRS says
well the formation of an LLC is really
not necessarily going to be recognized
by us or by the IRS but in fact they
there is something very significant
going on here and I had to deal with
this a few years ago had a client
husband and wife they are graphic
designers I've been doing their tax
returns for years to schedule see see
how he was actually she was a graphic
designer and he was a writer so they
complemented each other but they each
had their own clients and sometimes they
work together but often they didn't and
one day they contacted me very excited
to let me know that they'd formed an LLC
and the sad part about that was that
they were pretty nickel-and-dime very
very careful with their money and the
formation of the LLC meant that I had to
prepare a partnership return for them
the Schedule C days were over and they
were pretty unhappy with that position
that all of a sudden their tax
preparation feed balloons because they
had decided to form this LLC and I
really highly questioned whether or not
L C was even necessary in fact what they
could have done is each of them could
have formed two separate Ella
he's each in their own name a continued
filing Schedule C as they always have
done but instead they formed one LLC
with both of them as members of the LLC
because Oregon is a non community
property state it automatically forced
them into filing a partnership return
taxation elections so we've been talking
about how the various entity types are
taxed and now I'm going to tell you that
they don't have to be taxed that way
that they can actually choose to be
taxed in a way other than what we would
call the default way the Internal
Revenue Code provides automatic tax
classification to businesses and under
the default rules businesses will
automatically be required to file as
follows they'll file the Schedule C or F
if they are a sole proprietor or a
single-member LLC they'll file form 1065
if they are a partnership or
multi-member LLC they'll file form 1120
if they are a C corporation and they'll
file form 1120s if they are an S
corporation well that all seems
perfectly
except now we're gonna muddy the water
certain types of business entities can
change their classification for tax
purposes by filing form 8832 entity
classification election with the IRS so
what is this entity classification
what's essentially saying even though I
am this I'm gonna pretend I'm that and
the IRS is going to allow that if you go
through the procedures an entity may be
recognized under the federal or state
laws as an individual a partnership or a
corporation and an entity designated as
a corporation under state law must file
a corporate tax return using either form
1120 or 1120 F as applicable but a
domestic entity that is not a
corporation is going to automatically be
classified as either a sole
proprietorship if they are owned by a
single individual or as a partnership if
the business has two or more owners and
the table that I'm going to show you on
the next page provides a useful
reference for determining the default
tax treatments that is given to sole
proprietorships partnerships LLC's and
corporations an entity is automatically
taxed under the default rules by the IRS
unless it decides to be taxed in a way
other than the default rules and it does
this through entity classification
election and the filing of form 8832 so
let's take a look at this chart I'm
going to zoom in on it a little make it
a little bit bigger and we can see that
we have the domestic entity type and
then how it is automatically going to be
taxed under the default rules by the IRS
but a choice can be made to be taxed in
another way by file a form 8832 or form
2553 or combination of the two and in
the final column we can see the choice
that would never be available to that
particular entity type so firstly let's
look at the sole proprietor who is an
individual owner the default treatment
by the IRS is to file Schedule C or F as
a sole proprietor but that full
proprietor can actually make a corporate
election to be taxed either as a C
corporation or as an S corporation but
the sole proprietor would never be taxed
as a partnership
under the partnership entity type we
have to have at least two or more owners
and when there are two or more owners in
a partnership the default classification
is a partnership in that partnership
files form 1065 but a partnership can
make an election to be taxed as a
corporation it can also make an election
if it qualifies to be taxed as an S
corporation but a partnership would
never file Schedule C to be taxed as a
sole proprietor now C corporation is
pretty straightforward if C corporation
is automatically a corporation that
files form 1120 and if it files 25:53
and is comprised of the proper makeup
and is awarded the S corporation status
it can choose to file as an S
corporation but a C corporation would
never have the option available to it of
filing as a partnership or as a sole
proprietorship for the S corporation an
S corporation is obviously recognized by
the IRS as an S corporation when the
formalities are completed and an arrest
corporation is always going to file as
an S corporation on form 1120s unless it
decides to revoke that s election status
and revert to a C corporation but an S
corporation would never file as a sole
proprietorship or as a partnership for
the LLC we have to look at who makes it
LLC up so C LLC have one owner or more
than one owner it has one owner it is
automatically classified as a sole
proprietor in a file Schedule C or F but
an LLC member can also like the sole
proprietor make an election to be taxed
as a corporation and even as an F
corporation but a single-member LLC
would never get taxed as a partnership
and with a multi-member LLC the
classification is automatically
partnerships but again that multi-member
LLC could choose through election to be
taxed as if it was the corporation or it
could elect to be taxed as an S
corporation but it would never be taxed
as a sole proprietor so what we're
seeing is that out of all of these
different entity types the S corporation
and the C corporation are the ones that
really remain constant there are always
corporations and I that you're making a
tax election to be taxed as an S
corporation or you're not it's gonna be
pretty simple you're filing 1120 or 1120
F but when we're dealing with these in
jewelle business owners partnerships and
limited liability companies we can see
that things are a little more malleable
that we can make some decisions about
how we want to file so in effect a
single-member LLC or a sole proprietor
without actually ever forming a
corporation could decide that it wants
to pay taxes as if it was a corporation
why would they want to do that well
actually there can be some reasons to do
that I kind of like the idea that you
may not have to go through all of those
corporate formalities to prove that your
corporation and still be able to file
the tax return and take some of the tax
advantages that are available to
corporations it's a rather interesting
concept so if you want to make that
election to be taxed as a corporation
you do so by filing form 8832 and that's
what we're going to talk about now
generally an eligible entity that does
not file form 8832 is going to be
classified under the default rules that
we just covered up here unless an
election is made by filing form 8832 a
domestic eligible entity is a
partnership if it has two or more
members or is disregarded as an entity
separate from its owner if it has only
one owner eligible entities including
fil proprietorships partnerships and
most limited liability companies can
elect to change their classification to
be taxed under a different entity status
to make an election to be taxed under
another eligible status an eligible
entity must generally file form 8832 to
elect that different classification the
IRS uses information provided on form
8832 to establish the entity's filing
and reporting requirements for federal
tax purposes so here is form 8832 we're
going to take a look at it now and I've
essentially highlighted the key areas of
the form that I think are relevant I
filed this form a number of times over
the years and kind of plunk it on the
desk in front of you and start trying to
figure it out so I'm gonna help you
along a little bit with that if it's new
to you on the name of the eligible
entity making the election you should
enter the name of the eligible entity
that is electing to be classified so if
it was an LLC you'd put the LLC name
here if it's a sole proprietor you'd put
the sole proprietor name here and then
you enter the identification number
in the area this box fits a little bit
bluish in color for the employer
identification number you should show
the ein of the eligible entity that is
electing to be classified
do not put applied for on this line an
entity that has an e ein will retain
that E is even if it's federal tax
classification changes so if you are an
LLC and you applied for an EIN for that
LLC and now you are making an election
for that LLC to be taxed as a
corporation
you're not going to apply for a new
employer identification number because
the entity itself is still the same it's
still an LLC what's the only thing
that's changing is how that LLC is going
to be taxed by the IRS and Sedaris wants
continuity wants that LLC to retain its
existing employer ID number now if a
disregarded entity x' classification
changes so that becomes recognized as a
partnership or association for federal
tax purposes and that entity had an EIN
then the entity must continue to use
that ein if the entity did not already
own an EIN then the entity must apply
for an EIN and may not use the
identifying number of the single owner
for example Jenny's Cafe LLC is a single
member LLC owned by Jenny Smith which is
a disregarded entity for tax purposes
Jenny's Cafe is making an election to be
taxable as a corporation if Jenny's cafe
has received a federal ein it should
enter that e.i an on the form 8832 but
do not enter the social security number
of the single owner that is Jenny Smith
next we go on to line one where we make
a check box here for the type of
election is this an initial
classification by a newly formed entity
or is this a change in the current
classification of an existing entity if
the entity is choosing a classification
for the first time that is the entity
does not want to be classified under the
applicable default classification do not
file this form if the entity wants to be
classified under the default rules so
let's just suppose you are forming a new
LLC as a single member LLC and from the
get out you know you want to be taxed as
a corporation
and not as a sole proprietor so from the
very first onset of forming your LLC you
file this form you would check box 1a to
say that this is an initial
classification on the other hand if you
don't want to be taxed as a corporation
and you would rather be taxed as a sole
proprietor you don't file the form at
all and for box B you would check this
box if the entity is changing its
current classification so let's just
suppose you've been operating as a
single-member LLC filing Schedule C for
a number of years and you've decided
that without forming a corporation you
would like to be taxed as if you were a
corporation and so you're going to
change your entity classification from
sole proprietor to corporation by
checking box 1b now moving onto lines 2a
has the eligible entity previously filed
an entity election that had an effective
date within the last 16 months that is
five years once an eligible entity makes
an election to change its classification
the entity generally cannot change its
classification by election again during
the 60 months after the effective date
of the election however the IRS may buy
a private letter ruling permit the
entity to change its classification by
election inside of that 60 month period
if more than 50% of the ownership
interest in the entity as of the
effective date of the election are owned
by persons that did not own any interest
in the entity on the effective date of
the entity's prior election so what this
is saying is once you have made an
election for your entity to change its
tax classification
Barriss does not want you to make
another change in under five years I
want you to wait five years before you
change your mind again however if one of
the reasons that you're making a change
in that entity classification is that
more than 50% of the ownership has
changed since that initial election then
the IRS could consider allowing you to
change inside of that 60 month window
but it needs to be done through a
private letter ruling you should note
that the 60 month limitation though does
not apply if the previous election was
made by a newly eligible entity and was
effective from the date of formation so
let's just suppose you've got a newly
formed LLC
with two members and they agree at the
time that they form the LLC that they
don't want to be taxed as a partnership
they want to be taxed as a corporation
so that partnership or that newly formed
LLC would file form 8832 in checkbox 1a
for initial classification an IRS is
saying that because from the very onset
you've been taxed as a corporation that
that 60 month rule would not apply to
you and you could subsequent to that
decide to revert and go to a partnership
and then on line five if the eligible
entity is owned by one or more
affiliated corporations that file a
consolidated return provide the employer
identification number of the parent
corporation and on line four if the
eligible entity has only one owner
provide the following information about
that single owner who is the one person
and who what is the identifying number
of that one person so that is page 1a
form 8832 let's move on now to page 2
and on page 2 we're going to select the
type of entity that is making the
election you can see that we have a
domestic eligible entity electing to be
classified as an association that is
taxable as a corporation so if you're a
sole proprietor or a single-member LLC
then you would check box 6a but if you
are already an LLC that's previously
been taxed as a corporation and you wish
to revert to being taxed as a
partnership then you would check box 6b
if you are a domestic eligible entity
with a single owner electing to be
disregarded as a separate entity then
you would check this box and so on you
check the appropriate box if you were
changing your current classification no
matter how you achieved it or you are
electing out of a default classification
do not file form 8832 if your default
classification is the actual
classification that you want to use for
example jacob's Tree Service LLC is a
newly formed multi-member LLC and it is
a default rule Jacob's Tree Service is
automatically classified as a
partnership Jacobs tree service would
only file form 8832 is it as electing to
be taxed as a corporation in which
checks that in which case it would check
box a
if Jacob Street service wishes to be
taxed as a partnership then form 8832
should not be filed at all
moving on to line 8 election is to be
effective beginning the date and months
the iris actually wants to know what
date you want this election to take
effect if you leave the box of blank or
the line blank they're going to make the
election effective the date they
received the forum but typically you're
going to think this through and make a
decision about what date you want this
entity classification election to take
effect an end to an election specifying
an entity's classification for federal
tax purposes though can not be more than
75 days prior to the date the election
is filed or later than twelve months
after the date on which the election is
filed so if I file this form today and I
want it to take effect for January 1 of
2015 I'm going to have a problem because
that is more than 75 days prior to the
date that the form is being filed also
if I want this entity classification to
take effect as of the first day of 2017
I have a problem because that is more
than 12 months in the future so the IRS
wants to see a date entered on here that
is not more than 75 days earlier than
today's date and not more than 12 months
after today's date and then in this
section right here that you see in
yellow this is the consent statement and
signature section form 8832 must be
signed by each member of the electing
entity who is an owner at the time the
election is filed or any officer manager
or member of the electing entity that is
authorized under local law or the
organizational documents to make the
election and the elector does need to
represent that they have the
authorization under penalties of perjury
if an election is to be effective for
any period of time prior to the time it
is filed then each person who was an
owner between the date of the election
and the date that it becomes effective
must also find if you need a
continuation sheet or a separate
statement attach that to form 8832 and
the separate consent statement must
contain all of the same information
that's contained on the form do not find
the copy that it is attached to your tax
return
then we move on to page 3 of the
document and on page 3 that part 2 where
you can make late election relief so
this is rather interesting because up
here it says do not enter a date earlier
than 75 days prior to today's date are
not more than 12 months after today's
date but then down here we say oh maybe
you can because there are some late
election procedures so if you're going
to use a late election election
procedure you need to explain the reason
for the failure to timely file your
entity election classification and then
finally in the signature section of part
2 this must be signed by an authorized
representative of the eligible entity
and also by each effective person the
individual or individuals who signed the
declaration must have personal knowledge
of the facts and circumstances related
to the election so let's talk a little
bit about these elections and what they
mean next an LLC with a single member is
classified as a disregarded entity
taxable as a sole proprietorship unless
it decides to file form 8832 and a
multi-member LLC will automatically be
classified as a partnership unless it
elects to file form 8832 the following
rules apply to limited liability
companies where there is a change in the
number of members a change in the number
of members in an LLC does not effect the
entity's classification as long as there
are two or more members and now I'll see
that it's classified and taxed as a
partnership so will become a disregarded
entity taxable on form 1040 scheduled
see if the entity's membership is
reduced to only one member and an LLC
that is treated as a disregarded entity
taxable on Form 1040 Schedule C will be
classified and taxed as a partnership if
the entity grows to more than one member
but a change in the number of members in
an LLC that is filed form 8832 to elect
to be taxed either as a C corporation or
perhaps later on as an S corporation
will have no effect on the elected
corporation classification so now I'll
see that as elected corporate
classification will continue to be taxed
as a corporation by the IRS regardless
of the number of members that it has and
here are some examples of what I mean in
this first example we have a
single-member LLC that adds a member
Jenny is the single owner of the LLC
Jenny's cafe and for the past three
years Jenny has reported income and
expenses of the LLC on Schedule C with
her form 1040 return on July 1 of 2014
Jenny decided to bring in a partner Jeff
into her business
Jeff contributed capital of twenty
thousand dollars to the business in
exchange for his 20% share of ownership
then on seven one of fourteen Jenny's
cafe became a partnership because it now
has two or more members
Jenny's cafe will need to file two short
year returns and for the period of
January 1 through June 30th Jenny's cafe
will report income and expenses on
Jenny's personal return with a Schedule
C attached and for the period of July 1
through December 31 and for any future
years Jenny's cafe will file a
partnership return on form 1065 let's
look at the next example where we have a
single member LLC filing as an S
corporation and it adds the member we
have seen the same taxes as the example
we just described except that Jenny's
cafe made an election to tax as an S
corporation in an earlier year and is
reporting income and expenses on form
1120s the addition of Jeff as an
additional member has no effect on the
tax status of Jenny's cafes of the LLC
we'll continue to file form 1120s in
example number 3 we have a multi-member
LLC that adds a member assume the same
facts is an example one except that
Jenny's cafe was originally formed by
Jenni and Jeff three years ago and on
July 1st of 2014 they decide to bring in
a third member Jessica because Jenny's
cafe had two or more members in the
earlier years it has been required to
file form 1065 and the addition of
Jessica as a third member does not
change the entity status as such it will
continue to file form 1065 until the
number of partners reduces down to one
or it makes an S election or C
corporation elections so let's now look
at the definition of Association for
purposes of form 8832 an association is
an eligible entity that is taxable as a
corporation by election the federal tax
treatment of elective changes in
classification as described in
regulations is some
as follows if an eligible entity
classified as a partnership elects to be
classified as an association it is
deemed that the partnership contributes
all of its assets and liabilities to the
Association in exchange for stock in the
Association and immediately thereafter
the partnership will liquidate by
distributing the stock of the
Association to its partners if an
eligible entity that is disregarded as
an entity separate from its owner elects
to be classified as an association then
the owner of the eligible entity is
deemed to have contributed all of the
assets and liabilities of the entities
to the Association in exchange for stock
in the Association so what the iris is
simply saying is that even though you're
not a corporation you're going to be
deemed to be treated as a corporation
you're going to be deemed to have stock
in the corporation and so all of the
normal treatment that would be awarded
in a situation for a stock owner is
going to apply employer ID numbers with
respect to employer identification
numbers there is a difference in this
disregarded entity treatment disregarded
entities that is a single member LLC's
are not disregarded for pre-employment
tax and excise tax purposes beginning in
2008 disregarded entities including
single-member limited liability
companies that are disregarded as
separate from their owner as well as
qualified subchapter S subsidiaries are
required to file excise returns using
the disregarded entity's name and ein
rather than its owner's name Andy I M so
what does the thing is if you are an
individual that formed an LLC the LLC is
not recognized for tax purposes unless
you file form 8832 and so you would file
typically Schedule C but if you hire
employees for your business the
employment situation is going to be
treated as a separate entity and so for
employment purposes the LLC does need to
apply for an EIN and you should use the
ein of the LLC for filing payroll
reports but the ein of the LLC is not
entered anywhere on the personal return
it is only entered on the payroll
reports now this filing requirement for
disregarded entity is also applies to
employment tax returns effective
for we just paid on or after January 1
2009 disregarded entities not previously
needing an EIN may now need to apply for
an EIN for the payment and reporting of
these taxes so where do you file form
8832 well it depends on where in the
country or in the world you are if you
are in any of the states listed in this
top box then you file form 8832 with the
Cincinnati office of the IRS if you are
living in any of the states shown here
then you would file in Ogden Utah and if
you are in a foreign country or a US
possession you also file with Ogden Utah
but you have that little suffix on the
end you should also attach a copy of
form 8832 to the entity's federal income
tax or information return for the tax
year of the election if the entity is
not required to file a return for that
year a copy of its form 8832 must be
attached to the federal income tax or
information return for all direct or
indirect owners of the entity for the
tax year that includes the date on which
that election took effect although
failure to attach a copy of form 8832
will not invalidate an otherwise valid
election each member of the entity is
required to file returns that are
consistent with the entity's election
penalties may be assessed against
persons who are required to but do not
attach form 8832 to their return and
other penalties may apply for filing
federal income tax or information
returns that are inconsistent with the
entity's election for more information
on how to make an entity classification
you can of course refer to the form 8832
instructions and now we're going to talk
about the due date for filing form 8832
and also what to do if you find out that
the window of time for filing the form
has passed what do you do can you file
late and it's so how do you go about
doing that well form 8832 can generally
be filed at any time
the iris will begin recognizing the
selected entity classification as
follows
generally the election will take effect
on the date that is entered on line 8 of
form 8832
or on the date form 8832 is filed if no
date is entered on line 8
however IRS recognition of the
classification can begin no later than
75 days prior to the date the election
is file
or 12 months after the date on which the
election is filed
now if line 8 of form 8832 shows a date
that is more than 17 I have five days
prior to the date on which the election
is filed then the election will take
effect 75 days before the date it is
filed so let's just suppose you're
filing the the form on August 1st 2015
and you want it to take effect January
1st 2015 the IRS is automatically going
to process that and apply it 75 days
earlier it's not gonna give you that
January 1 date we've just talked about
the filing deadlines for form 8832 and
what we'll do is we'll take another
break rest your mind and I'll get the
camera unlocked for you but after the
break we're going to come back and talk
about late election relief and what you
do if you want to make an entity
classification that is outside that
window of time password number one is
Scotia SC ot I a Scotia
all right everyone welcome back from
break hopefully you've got your
computers are able to see and you're
able to see your manual we're going to
be getting into form 1065 during this
next segment as well and so if you've
not already printed out a copy of form
1065 you probably should it's just going
to make it easier for you to follow
along with me because I'll be talking
about a particular line of the form and
it's nice if you have that line of the
form right in front of you at the time
so we were talking about how an entity
can decide to be taxed in a way other
than its default status and that that is
typically done by filing form 8832 and
that there are time frames by which 8832
must be filed the IRS also have
procedures in place though for late
election called a late election relief
and an eligible entity may be eligible
for late election relief under Internal
Revenue Code procedure 2009 - for one as
well as 2009 - 3 9 if each of the
following requirements is met number one
the entity's failed to obtain its
requested classification as of the date
of its formation or upon the entity's
classification becoming relevant or
failed to obtain its requested change in
classification solely because the form
was not filed on time
and either the entity has not filed a
federal return or the for the first year
for which the election was intended
because the due date for that year has
not yet passed or the entity has timely
filed all of the required federal tax
returns and information returns or if
not timely filed at least within six
months after the due date excluding
extensions consistent with its requested
classification for all of the years that
the entity intended the requested
election to be effective and no
inconsistent tax or information returns
have been filed by or with respect to
the entity during any of those years now
if the eligible entity is not required
to file a federal return or information
return then each affected person who is
required to file a federal tax return or
information return must have finally
filed all such returns consistent with
the entities requested flat
classification for all of the years that
the entity
intended the requested election to be
effective and no inconsistent tax or
information returns have been filed
during any of the years so essentially
what this is saying is you are supposed
to have this return this form 8832 filed
within 75 days prior to the date you
want it to take effect but if you file
it late you can still be treated as have
being given an earlier classification
date if the filing deadline for the
return to which it applies has not yet
passed or even if that deadline has
passed you actually filed a form that is
consistent with the entity
classification you're selecting so let's
just suppose you are an LLC that decided
that you wanted to be taxed as a
corporation and so you filed form 1120
as a corporation you send it off and the
IRS sent it back thing but you're not a
corporation well you could at that point
say oh well we thought we were a
corporation we're going to attach this
ad 832 to make sure that election is
accepted and because you file to the
corporation even though you weren't and
now you're submitting this ad 832 and
resubmitting it again that would be a
situation where the IRS is going to
accept it even though it's late now the
entity must have reasonable cause for
failure to timely make the entity
classification and also there is a limit
on how far late election can be granted
and that is three years and seventy-five
days from the requested effective date
of the eligible entities classification
election has not passed an effective
person referred to in the requirement to
be our 2a above includes any direct or
indirect owner of the element electing
entity that would have been required to
attach a copy of the form 8832 to their
federal income tax return for the year
so how do you obtain relief well form
8832 contains a checkbox and a
description area that I showed you
earlier for making the election you need
to file form 8832 with the applicable
IRS office within three years and
seventy-five days from the date the
requested effective date of the entity's
classification election and then on page
one of the form put a check in the box
late classification relief sought under
Internal Revenue procedure
2009 - for one you then complete part
two a form 88
- which is page three and on line eleven
you explained the reason for the failure
to timely file an entity classification
election parts you must be signed by an
authorized representative of the
eligible entity as well as each affected
person the individual or individuals who
signed the Act declaration must have
personal knowledge of the facts and
circumstances that are relating to the
election and an additional copy form
8832 must be attached to either the
eligible entities or the affected
persons return if revenue procedure 2009
- for one does not apply an entity may
seek relief for a late election by
requesting a private letter ruling and
paying a user fee so let's talk about
the effective entity classification and
F election on the tax year now formation
of a new partnership or multi-member LLC
or a corporation can occur on the first
day of the year more often however a
partnership or corporation will be
formed at another time during the year
similarly the dissolution of a
partnership LLC or corporation can occur
on a day other than the last day of the
year and when that happens a short year
return is often filed by partnerships
and corporations on the first and last
year of business in addition to the
formation or dissolution of a
partnership multi-member LLC or
corporation either of the following
events can trigger a short year firstly
form 8832 entity classification election
is filed by an entity electing to begin
or end corporate tax treatment if the
election occurs on a date other than
January 1 there will generally need to
be two short year returns filed or form
2553 election by a small corporation is
filed or revoked in the year corporation
begins or ends its s election status
that the corporation may need to file a
short year 1120 and an 1120 F tax return
and here is an example where an entity
change has created two short year
returns on August 1 2014
tribbles LLC a multi-member LLC filed
IRS form 2553
to elect S corporation status tribbles
LLC is a calendar year filer for tax
year 2014 tribbles LLC will
while two short year returns as follows
form 1065 with the short tax year of
January 1 through July 31 and form 1120s
with a short tax year of August 1
through December 31
tribbles LLC members will then receive
to schedule k1 for tax year 2014 and 1
k1 will report income from the 1065
election north from the 1065 filing and
the second k1 will report income from
the 1120s filing thereby reflecting
income earned by tribbles LLC under each
of its entity statuses you should note
that the due date for partnership
returns is the 15th day of the fourth
month following the end of the
partnerships year and for partnerships
that are filing calendar year returns
and that filing deadline would be April
15th but for triples LLC with that short
year return that means that the
partnerships final 1065 has a year end
of July 31 and that means that it's a
15th day of the fourth month would put
you on November 15th of the same year
the same calendar year that is or if an
extension is filed it would give another
5 months to timely file that return so
that's one of the other things to be
making note of if you have a client make
an entity classification choice you
should be really aware of what time in
the year you've done that if it's made
an entity classification choice it takes
part place midway through a year you
have to be aware of we now have a short
year and what the filing deadline is for
that short year not kind of just forget
about it until they come in at filing
time because by then it could be too
late in other words a late filing that
could be objected to some penalties so
this is the point where we are getting
on with looking at the 1065 form now
there are a lot of similarities and a
number of differences between form 1065
and form 1120s if you're trying to file
like a 2015 tax return and the 2015
forms aren't out yet
the iris actually that's what you have
up here you see at the top of the form
I'll just do a minute so you can see it
oops she's far as zoom I'm just seeing a
chat in the chat box so the question is
what if the forms aren't available to
file and you're partway through the year
that's why you see for calendar year
test 2014 or tax year beginning or
ending
in 2014 and ending on a different date
and I've also seen people actually draw
a line through 2014 and handwrite 2015
on there those are the methods that I've
seen done to deal with that alright so
here we are now on form 1065 and we're
gonna spend a good part of the day
looking at 1065 when we come back to
class for a part 2 of this course we're
going to begin that class by comparing
1065 to 1120 F and then we're gonna
really get into depth into 1120s but
today because we're talking about I'll
seas and because the default
classification of a multi-member LLC is
a partnership I felt that we should
start with the partnership return and
then in our next class we'll look at
what happens if an LLC makes an S
corporation election or whether you have
a corporation that makes an S
corporation election how is that handled
in terms of how do we prepare that F
that S corporation return so to start
with I'm a very form based person I like
IRS form to be forums help clarify the
tax law if I don't understand a form and
how to fill it out it's probably because
I don't understand the tax law
surrounding it the form is being used to
apply the tax law so when I'm studying a
form and trying to understand it what
I'm really trying to do is understand
the law that applies to the forum and
why are they filling the form out in the
way that they are why is this piece of
information requested on the forum
there's a rhyme and a reason behind all
of it
IRS employees people who sit in rooms
for weeks and months at a time designing
and redesigning these forums as they're
trying to apply certain aspects of tax
law and so I figure I'm gonna take all
of that effort they put and take that to
my advantage a by understanding the
forum and B by reading the instructions
that help me interpret the form and then
if the instructions aren't enough then I
may go farther into it and start reading
code god forbid reading code is very
boring but sometimes necessary and then
of course the iris publications can be a
little bit more entertaining and finally
if I'm still not understanding something
I can just do general internet searches
and end up on websites of law firms and
so forth reading opinions that they have
but I always prefer to start with the
form itself and work outwards from there
so when we're looking at the 1065 the
first thing to be aware of is that it is
a five-page form and I'm showing you
page one and further than breaking the
1065 into five pages I'm going to take
each page you divided into its component
parts and I'll Co those component parts
sections now these sections are not
described in the IRS instructions these
are my instructions essentially I look
at the form and I can see these sections
and and that's how we're going to take
it and the first section you can see is
the identification information in this
top section in yellow you're going to
provide the IRS with information that
identifies your partnership and the type
of Elections and so forth that might
apply to that partnership there's some
specific information that we're lifting
up here and I'm going to get into that
in a minute we then move on down the
form to the business income section and
I'm calling a business income although
it says income we have to be very
specific that it R if it references
business income IRS hasn't said business
income here but that's what it means and
I'll show you why and then we see
business deductions and it doesn't say
business deductions but again only
business deductions are allowed here
other deductions are not allowed here
and are entered in other parts of the
form and then in the final section we
have signatures this is where the tax
return gets the signs so let's take a
look first at page 1 and we're going to
begin with that first top section which
is where we enter identification
information the top section of page 1 is
used to provide information about the
business that is filing the tax return
and care should be taken to properly
provide all of the information that is
requested in this section now one of the
things our firm does and every firm
really should have procedures in place
to do this and that is review tax
returns whoever did that a tax return
someone else needs to be reviewing that
tax return and whoever is reviewing that
tax return should be looking for the
types of things that are easy to miss it
can be all-encompassing or the focus of
preparing a tax return is I got all the
numbers right am i balancing to the
profit in law
have I put income and expenses on the
correct lines am i doing all of those
things correctly and the focus is all on
that and there's like a brow weight when
I'm all done oh I got it at balances
yeehaw I'm done when in fact there's a
lot of work that still needs to be done
and it's easy to miss and that's why I
have another person review the work can
be found official firstly they can make
sure that you are in fact balancing as
you think you are but secondly to just
look for all of those mundane little
boxes and information fields that need
to be filled in that quite frankly often
just don't get filled in embarrassingly
so and what happens is when the client
picks up this tax return that they just
paid you a bunch of money to prepare and
they sit down and look at it and you
haven't entered any information that is
requested in these boxes up here it just
makes you look really bad so we're gonna
talk about the identification
information section and I just don't
want you to discount it or there should
always be a priority that you can get
this part right and again you should
have some kind of a double-check
procedure in place to catch errors
specifically omissions where these
fields are just entirely left blank and
it is possible when these fields are
left blank to still electronically
submit a return they're not necessarily
going to cause the return to reject but
they certainly are errors and when
they're not filled in so we're gonna
take a look firstly up at the top here
zoom in again and you can see that on
1065 the first box is box a and it asks
for the principal business activity of
the business and the principal product
or service and the iris wants you to
enter a description for each of these we
then go on to business code number and
the appropriate activity code for a
principal type of business of an S
corporation or partnership can be
obtained from the instructions for those
forms and so you just simply go under
the instructions for either form 1065 or
form 1120s and look up the code that is
appropriate for the type of business
that you are operating and then enter
that code in here whether you're an S
corporation or a partnership the code is
identical then we move on to a box d
employer identification number you
should enter the ein of the partnership
in this space and if the partnership
does not have an EIN then it must be
applied for online box he you enter the
day
that the business started and then on
box F you enter total assets and then it
has note there to see the instructions
well the reason it's so see instructions
is you may or may not have to enter a
number there partnerships who answer yes
to question six on form 1065 Section B
our Schedule B do not need to complete
box F a partnership must answer no
however to question six and then would
be required to make an entry in box F if
any of the following is true one the
gross receipts of the business are equal
to or greater than 250,000 or the total
assets of the partnership are equal to
or greater than a million or schedule
k-1 was not timely provided to all
partners by the due date of the return
including extension in other words this
is a late return or the partnership is
required to complete schedule m3 item
number G check applicable boxes so let's
go up and take a look at these
applicable boxes we've got check
applicable boxes initial return final
return name change address change
amended return technical termination but
if this is a technical termination also
check either box one for an initial
return or technical termination plus box
to you for a final return so let's talk
a little bit about that you check the
applicable box as appropriate for the
form 1065 that is being filed you should
check the technical termination box if
there has been a technical termination
of the partnership a technical
termination occurs if any one of the
following is true all operations are
discontinued and no part of any business
financial or operation or ventures is
continued by any of its partners in a
partnership or at least 50% of the total
interest in partnership capital and
profits is sold or exchanged within a
12-month period including a sale or
exchange to another partner the
partnership year ends on the date of
termination and in the case of one above
the date of termination is the date that
all operations cease and the business
winds up its affairs or in the case of
two above the date of transfer of 50% or
more interest in the partnership capital
and profit
with respect to attack of technical
termination section 7:08 b provides the
determination occurs where within a
12-month period there is a sale or
exchange of fifty percent or more of the
total interest in the partnership
capital and profits this is known as a
type b termination or technical
termination if a technical termination
has occurred you will need to prepare
two returns for the year of termination
on the final return of the old
partnership you will check out the g2
final return as well as vox g6 technical
termination and then on the initial
return of the new partnership you will
check Vox g1 initial return and box g6
technical termination a new ein is not
needed in a technical termination the
new partnership will continue to use the
ein of the terminated partnership you
should prepare your returns for the
appropriate tax period reflected in the
respective partnership interests during
that time and for more information you
should see item G on the front page of
form 1065 and the instruction accounting
method is an Xbox box H every taxpayer
whether an individual or a business
entity must figure taxable income on an
annual accounting period that is called
a tax year the calendar year is the most
common tax years that other tax years
are a fiscal year or a short tax year
and each taxpayer must also use a
consistent accounting method an
accounting method is a set of rules for
determining when to report income and
expenses the most commonly used
accounting methods are the cash method
and the accrual method under the cash
method you generally report income in
the tax year in which you receive it and
you deduct expenses in the tax year in
which you pay them under the accrual
method you generally report income in
the tax year in which you earn it
regardless of when payment is received
and you deduct expenses in the tax year
you incur them regardless of when
payment is made there's also something
called a combination or a hybrid method
and generally and except as otherwise
required you can use any combination of
cash accrual and special methods of
accounting if the combination clearly
reflects your income and you use it
consistently however
there are the following restrictions
that apply firstly if an inventory is
necessary to account for your income you
must use an accrual method for purchases
and sales generally you can use the cash
method for all other items of income and
expense but if you use one method for
reporting your income you must use the
same method for reporting your expenses
and any combination that includes the
cash method is treated as a cash method
for purposes of section 448 next up we
have box I enter the number of Schedule
K ones that are attached the partnership
must issue a schedule k-1 to each
partner who had an ownership interest in
the partnership during the year so it's
possible at the beginning and ending
number of partners in a partnership is
going to be smaller than the number of
partners who owned interest in the
partnership for the year and there needs
to be a k1 for every person or entity
that had an interest in that partnership
during the year and the iris wants to
know how many K ones are supposed to be
attached to the return item number J
check if schedules C and m3 are attached
a partnership must complete schedule m3
net income loss reconciliation instead
of schedule m1 if any of the following
applies the amount of total assets at
the end of the year is 10 million
dollars or more the amount of adjusted
total assets for the tax year is 10
million dollars or more the amount of
total receipts for the tax year is 35
million dollars or more or an entity
that is a reportable entity partner
owned or is deemed to own directly or
indirectly 50% or more of the
partnerships capital profit or loss on
any day during the year a partnership
not required to file Schedule m3 can
voluntarily choose to file Schedule m3
instead of Schedule m1 and a partnership
that files Schedule m3 must also file
form 1065 Schedule C additional
information for Schedule and three
filers so that's the tub that's the end
of what we're going to talk about with
the information section of the 1065 and
now we're going to move on to that
second piece of the form where we hat
reports income and remember earlier I
said you report business income in
section and here it says caution only
trade or business income and expenses
are entered on lines 1a through 22 below
see the instructions for more
information you should report only gross
income from the business activity minus
cost of goods sold in this section if
cost of goods sold is shown online to
complete form 1125 a four form 1065 do
not include portfolio income or income
from rental property in this income
section portfolio income includes
interest dividend and capital gain
income that is earned from bank account
holdings and stock holdings that are
owned by the partnership on line 1a you
will enter the gross receipts or sales
gross receipts or sales come from trades
or business activities of the
partnership on line 1b you will enter
cash and credit refunds the partnership
made to customers or returned
merchandise as well as rebates and other
allowances that are made on gross
receipts or sales then on line 2 you
enter cost of goods sold and if you are
entering an expense for cost of goods
sold you need to complete in a chat form
88 35 a and once you've completed that
form you will then carry the total from
that form over to line 2 of 10 55 on
line 4 you will enter the ordinary
income or loss from other partnerships
estates and trusts if the partnership
owns an interest in another partnership
or Trust and received a k1 enter the
amount of ordinary income or loss from
that other partnership or trust on line
4 you should attach a statement to the
tax return that shows the name address
and employer identification number of
the partnership or trust that issued
that k1 but do not include the following
kinds of income from that partnership or
trust on this line portfolio income
rental income or lost or publicly traded
partnership income if you're reporting
income from a publicly traded
partnership also called a PPP you
include that income on schedule K line
11 and on schedule k-1 in box 11 using a
code F and if the amount included on
line 4 is a loss from another
partnership the amount of the loss that
can be claimed may be subject to at risk
and basis limitations as
is appropriate moving on to line five
this is where net profit or loss from
farming is entered you would enter the
partnerships net profit or loss from
farming and if you are reporting farming
income and expenses you attach a
Schedule F and it's the same Schedule F
that you would use and attach to form
1040 if you were filing for a sole
proprietor do not include though on this
line any farm profit or loss from other
partnerships and also do not include any
section 179 deduction on this line line
six net gain or loss from form forty
seven ninety seven you report on this
line the gain are lost from the sale
exchange or involuntary conversion of
assets used by the partnership in a
trade or business activity do not
include on this line the sale of assets
that are used in a rental activity of
the partnership also do not use this
line to report a recapture of the
section 179 expensing that was
previously passed through to partners
instead report any recapture on schedule
k-1 box twenty with a code l line seven
other income or loss enter any other
trade or business income not included on
lines one A through six examples of
other incomes reported on this line
include interest income charged on
receivable balances recoveries of bad
debts deducted in prior years taxable
income from insurance proceeds the
recapture amount under Section two eight
zero F if the business use of listed
property drops to 50 percent or less if
this happens you complete and attach
from forty seven ninety seven part four
to show how that recapture amount is
figured and finally five income
adjustments resulting from a change in
accounting method all right so that's
the income section what you would report
there now let's look at deduction and
you're going to use the deductions
section to report operational expenses
of the business activity allowable
expenses of the business activities
should be entered on lines nine through
twenty one according to the categories
that are provided for on these lines and
then all other deductible expenses of
the partnerships business activity not
including rental real estate expenses
reportable on eighty eight twenty five
and other rental expenses reported on
Schedule K line three which we're going
to discuss a little bit later in today's
class
these are
together as a total amount on line 20
and the statement should be attached to
the return describing each expense
category and the amount that is included
on line 20 so the deductions are then
entered on line 21 and a net ordinary
business income or loss is shown on line
22 the amount from line 22 will then
carry over to line 1 of Schedule K which
is located on page 4 of form 1065 now
let's talk about the types of deductions
that you would not enter on line 9 at
3:20 you do not report it's the
following expenses anywhere on page 1 of
form 1065 rental activities expenses
rental activity expenses are reported on
Form 88 25 or on line 3b of Schedule K
or deductions that are allocable to
portfolio income you report these
deductions on line 13 D of Schedule K
and in box 13 of schedule k-1 using
codes I K or L do not enter non
deductible expenses for example expenses
connected with the production of tax
exempt income or the non-deductible part
of the meal or entertainment expenses
report non deductible expenses on line
18 C of Schedule K and in box 18 of
schedule k-1 using a code c qualified
expenditures to which an election under
section 59 a may apply including
circulation expenses research and
experimental expenditures intangible
drilling and development costs or mining
exploration and development costs and
finally do not enter as an expense on
page 1 of 10 65 items that the
partnership must state separately that
require separate computations by the
partners examples of these types of
separately stated items include expenses
incurred for the production of income
instead of in a trade or business
charitable contributions foreign taxes
paid or accrued intangible drilling and
development costs soil and water
conservation expenditures an amortizable
basis of reforestation expenditures and
exploration expenditures the
distributive shares of these expenses
are reported separately to each partner
on schedule k-1 also there are some
limitations
deductions rebate leading to cogs do not
include as expenses on lines 9 through
21 any cost of goods sold expenses that
have already been included on Form 1125
a that seems self-evident if the
partnership is an eligible small
business it may be able to claim certain
cost of goods sold expenses as the cost
of supplies or materials and I'm going
to talk about that a little bit more
later in today's class when we get to
page 64 of the manual reporting trade or
business activity deductions you report
only trade or business activity
deductions on lines 9 through 20 as
described next on line 9 you will enter
salaries and wages deduct only salaries
and wages paid to employees of the
partnership do not include any payments
that are made made to independent
contractors or partners of the
partnership on this line and this seems
like a pretty mundane line but it's
actually the point where I'm gonna stop
and divert your attention for a little
bit because what happens with small
business owners who form LLC's or just
decide to form a partnership together
they don't know any better
they think that they formed a business
and they're paying all their employees
and they need to pay themselves too and
they'll go off and hire ATP or paychecks
or some other payroll company a
salesperson will come down ask them
scripts to fill out w-4 is for all of
the employees have them fill out some
forms and they'll do all of that and
then they'll start submitting their
payroll each a week or every two weeks
to the payroll service that they're
using and the payroll reports get filed
and at the end of the year they get
these W shoes and as far as these small
business owners are concerned they've
done everything correctly they think
that they followed through with all of
their legal obligations and they've done
things right until they come in to get
their taxes done now when they come in
and get their taxes done they may or may
not find out that they've made a mistake
that would depend on the competence of
the tax professional that they're
working with but if the tax professional
understands the rules relating to
partnerships then the tax professional
is going to say wait stop because if you
did payroll on your spouse as an owner
of your partnership or as a member of
your LLC you cannot be yourself on a w-2
the line instructions are very specific
doctor only salaries and wages paid from
of the partnership and do not include
payments made to partners of the
partnership on this line in effect a
partner in a partnership is never an
employee of the partnership and this is
where clients of mine more often than I
would like to see happen this happens
that they've engaged in all of these
procedures to do payroll on themselves
and now I get to tell them but wait you
shouldn't have done that you're kind of
in a pickle math line 10 is actually
where compensation to partners is
entered as an expense and this is the
guaranteed payment line the partnership
may claim a deduction for payments made
to a partner in exchange for services
provided to the partnership medical
insurance premiums paid on behalf of
partners partners spouses or partners
dependents are also included on this
line so let's just go back up and take a
look at this 1065 lines 9 and 10 again
if the partnership has employees then it
needs to pay those employees on a w-2
and the amount of wage paid to those
employees is entered as an expense on
the line 9 if the partnership made
payments to any of the partners for
services those partners rendered to the
partnership then those would be entered
on line 10 now it's possible for
partners in a partnership not to receive
guaranteed payments and not to have
received payroll it's possible that
they've taken profit shares from the
partnership just throughout the year
when money seemed available but there
was no you know direct allocation that
this profit share is awarded to you
based on services provided it's just
we've gotten to the midpoint of the year
we have this much money we're gonna give
you this amount instead of partnership
are the partners take their distributive
share of the partnership income at that
point in a year it could be as if that
is considered to be a guaranteed payment
if it was a payment for services but it
doesn't necessarily need to be a
guaranteed payment but if it was payroll
that went to the partner then we're
gonna get you into a little bit later
what needs to be done when payroll was
paid when it shouldn't have been but
this is the line line 10 where payments
to partners are entered and it should
not have been through payroll okay
so passing on the guaranteed payments
were now onto line 11 repairs
maintenance include on this line the
cost of repairs and maintenance that are
incidental to the cost of owning
property used for income production and
do not add to its value or prolong its
useful life on line 12 you enter bad
debts if the partnership has included in
income and amount which is fully or
partially uncollectible include an
expense for the amount of bad debt that
was previously included in income on
this line so a cash basis partnership
will never have a bad debt bad debts are
only going to apply when you have an
accrual filing partnership that's using
the accrual method of accounting and
then in line 13 rents include on this
line the amount the partnership paid in
rents for the year do not include any
rent paid by the partnership for a
dwelling unit that is occupied by a
partner in the partnership if the
partnership leaves the vehicle an
inclusion amount may need to be included
on this line and you can refer to IRS
Publication 463 for information on how
to figure the inclusion amount also
complete form 4562 part 5 to report
business use of vehicle information we
actually briefly talk about inclusion
amounts and of course I teach called
depreciation made easy that's the one
place I can tell you to go that IRS
Publication 463 also provides
information on inclusions line 14 taxes
and license to enter the amount paid for
taxes and licenses in the trade or
business that have not been detected
elsewhere on this line examples of taxes
and licenses would be payroll taxes but
do not include payroll taxes that were
withheld from employee pay for example
if you're paying an employee a gross
wage for the month of $1,000 but their
net check is only $800 because you
withheld payroll taxes from their pay
you would enter $1,000 as wage income on
the wage line you would not enter any of
the amount withheld from that employees
pay as a tax if that tax is not your tax
but if you make a matching tax which
most employers are required to do you're
required to make a matching tax payment
on your employees wage then the employer
match amount is an amount that you would
enter on line 14 as well as any other
license amounts or taxes that you paid
line 15 interest include interest
incurred in the trade or business
activities of the partnership that has
not claimed elsewhere on the return but
do not include the following interest
expense amounts on this line debt used
to purchase rental
property this type of interest expense
is claimed on Form 88 25 debt used to
buy investment property debt required to
be allocated to the production of
property this kind of debt must
generally be allocated to the cost of
producing the property under cost of
goods sold prepaid interest which can
generally only be deducted over the life
of the loans interest paid to a partner
in the partnership for the use of
capital this type of interest payment
should be treated as a guaranteed
payment to the partner line 16
depreciation do not include on line 16
any section 179 expense if you're filing
a sole proprietor return with a Schedule
C you use form 4562 to figure and claim
the section 179 deduction in that
seventh of section 179 deduction flows
through to the Schedule C and is entered
on the depreciation line of the Schedule
C but partnerships are not allowed to
claim a section 179 deduction the
section 179 deduction is going to flow
through to the individual partners and
they will claim that deduction on their
own individual returns line 17 depletion
if the partnership is claiming a
deduction for timber depletion you would
complete form P for timber and then
enter as a deduction here do not include
a deduction for depletion on oil and gas
properties on this line deductions for
oil and gas properties are separately
reported on Schedule K 1 line 18
retirement plans enter amounts
contributed by the partnership to the
retirement plans of common law employees
of the partnership employers who
maintain a pension profit sharing or
other federal funded deferred
compensation plan other than a step or
simple ira must generally file one of
the following forms form 5500 annual
return or report of employee benefit
plan or form 550 SF which is the short
form or form 5500 easy annual return of
a one participant plan do not include
however on this line amounts that the
partnership contributed to the
retirement plans of partners these
amounts are reported on Schedule k1 in
box 13 using code R and are deducted by
the partners on their individual return
payments made to retire
accounts on behalf of employees under a
salary reduction plan instead the
partners should claim a deduction for
salaries or wages paid to the employees
on form 1065 line 9 so again this is
similar to payroll tax if you have a
monthly wage that you're paying to
employee of a thousand dollars and that
employee decides to divert a hundred
dollars to their 401k plan that's their
money it's not a deduction you claim you
claim the thousand dollars you paid them
as a wage and it doesn't matter whether
the wage you paid was divided between
taxes take-home and contributions to
their 401k plan you're going to claim
that flat gross wage as your expense I'm
the only time you would claim a
deduction for contributions made to an
employee retirement plan is if you are
making a matching contribution out of
your business pocket to that employees
account and it's not a reduction to
their wage line 19 employee benefit
programs enter the partnerships
contributions to the employee benefit
program not claimed elsewhere on the
return an example of an expense to
include on this line is employee health
insurance
do not include though health insurance
payments for any partner or for us both
or a dependents of any partner health
insurance expenses of partners are
reported on line 10 as a guaranteed
payment and finally line 20 other
deductions you enter a total of all
other allowable trade or business
expenses of the partnership on this line
then attach a statement to the return
that describes the type and amount of
each expense and examples of expenses
that can be included on this line our
amortization allow the deductions for
business startup and organizational cost
reduction for certain energy efficient
commercial building property gifts
insurance premiums legal and
professional fees meals and
entertainment expenses membership dues
supplies used and consumed in the
business travel and utilities so we're
not going to spend a lot of time talking
about these but I will talk about a
couple of items one of these is the
business and startup organizational cost
because it typically will cost some
money to form your partnership generally
a partnership can elect to deduct up to
five thousand dollars of business
startup
and organizational cost paid or incurred
after October 22 2004 and these are
separate amounts up to $5,000 a startup
up to $5,000 of organizational any
remaining costs are capitalized and then
amortized over a 15-year period
the $5,000 deduction is reduced but not
below zero by the amount of total costs
that exceed $50,000 if the Pella costs
are fifty five thousand dollars or more
than the deduction is reduced to zero
and anything the costs not deduct must
be amortized the partnership generally
elected a tech startup costs by claiming
the deduction on its return filed by the
due date including extensions for the
year in which the active trade or our
business begins under gifts the
deduction for gift expenses is generally
limited to $25 per person per year and
for purposes of the gift rule a family
member of a person is considered to be
the person so you can't get around the
gift rule by giving a business client a
$25 gift and then giving their spouse
another $25 gift that would be deemed to
be a $50 gift amounts treated as
compensation generally the partnership
may be able to deduct otherwise
non-deductible entertainment amusement
or recreational expenses if the amounts
are treated as compensation to the
recipient and reported on Form w2 for an
employee or on form 1099 miscellaneous
for an independent contractor so the
outright deduction for a gift is limited
to $25 a year but let's just suppose
that really the gift is a form of
compensation you would then deduct that
gift not as a gift expense but as the
actual expense that it is deemed to be
so for example if you give an employee a
five thousand dollar reward for years of
service then that five thousand dollar
reward would actually need to be gross
stuff and claims as a payroll expense
Neal and entertainment expenses
generally the partnership can deduct
only 50% of the amount otherwise
allowable for meals and entertainment
expenses paid or incurred in its trade
or business
in addition subject to exceptions under
Section 274 the meals must not be lavish
or extravagant and a bona fide business
discussion must occur during immediately
before or immediately after the meal and
a partner or employee of the partnership
must be present at the meal 80% of meal
expenses allocable to travel away from
home may be deducted if the meals are
consumed by individual subject to the
hours of service limits of the
Department of Transportation membership
dues the partnership may deduct amounts
paid or incurred for membership dues in
the following kinds of organizations
civic or public service organizations
professional organizations such as bar
and medical associations business
leagues
trade associations chambers of commerce
boards of trade and real estate boards
however no deduction is allowed if the
principal purpose of the organization is
to entertain or provide entertainment
facilities for members or their deaths
so we could say say a golf club
membership or a health club membership
or the dues are for membership in any
club organized for business pleasure
recreation or other social purpose this
includes country clubs golf and athletic
clubs airline and hotel clubs and clubs
operated to provide meals under
conditions favorable to a business
discussion travel the partnership cannot
deduct travel expenses of any individual
accompanying a partner or partnership
employee including a spouse or a
dependent of the partner or employee
unless that individual is an employee of
the partnership and his or her travel is
for a bona fide business purpose and
would otherwise be deductible by that
individual expenses not reported on line
20 do not include the following types of
expenses on line 20 you can see that
there's a limited number of lines we
just go back up here there's really not
a lot of lines here for entering
deductions salaries guaranteed payments
repairs bad debts rent taxes licenses
interest appreciate depreciation
depletion retirement plans to ploy
benefit programs and then everything
else there's not a lot of description
left there so it stands to reason that
there's a lot of things that you would
automatically think are going to go on
the other deduction line and so it's
important to pay attention to what you
do not enter on that other deduction
line do not enter as an expense on line
20 items that must be separately stated
on schedules K&K one real estate
expenses fines or penalties
to a government for violating any law
for example parking tickets expenses
allocable to tax exempt income report
these expenses on Schedule K line 18 see
net operating losses only individuals
and corporations can claim in NOL amount
paid to political candidates parties or
campaigns to influence the public
regarding legislative matters elections
or referendum report these amounts on
Schedule K line 18 C amount paid or
incurred to influence federal or state
legislation or to influence actions or
positions of certain federal executive
branch officials however certain
in-house lobbying expenditures that do
not exceed $2,000 may be deductible also
do not enter charitable contributions
anywhere as an expense or the cost of
entertainment facilities regarding
entertainment facilities the partnership
cannot deduct an expense paid or
incurred for facilities such as a
yachting or hunting lodge used for an
activity usually considered to be
entertainment amusement or recreation
and finally section 4 where we enter
signatures form 1065 must be signed by a
General Partner or LLC member to be
valid in certain situations where a
return is filed for a partnership by a
receiver or trustee the fiduciary must
sign the return also a paid tax return
preparer other than employee of the
partnership is required to sign the
return all right so we are at the top of
the hour due for a final break of the
day I'm going to give you a password
again and when we come back from that
break the course is actually going to
move much more quickly and in the final
hour of the course we're going to be
continuing with the discussion of the
1065 return but we're also going to be
looking at how to complete each section
of the form so we've just finished
talking about page one of the form and
when we come back from our break we're
going to take a look at how to take a
sample illustration and take numbers
from that illustration and put them on
the form so I'm going to give you your
second password of the day password
number two is computer C o MP u ter
computer okay everyone welcome back to
class
we're going to now take a look at an
illustration where we're going to use
this illustration to complete form 1065
and the characters in this story are
Kira and Jadzia who are 50/50 partners
in Dax LLC Dax LLC is a consulting
business in which Kira and as Jadzia
participated equally their P&L is shown
below and Dax LLC will claim a section
179 deduction for assets that were
purchased during the year what we'd like
to do now is prepare page 1a form 1065
for decks LLC and we're going to do it
as shown next so here we've got the P&L
for Dax LLC and we've kept it pretty
simple and it basically highlighted in
various colors the things that should
leap out you at you as being relevant
firstly we can see that total income for
the year is one hundred and ten thousand
and fifty dollars but of that one
hundred and ten thousand and fifty $50
is checking account interest and we've
already learned in the class that you
don't enter portfolio income as income
on the front page of the tax return and
so that means that on the align one of
the tax return we're going to enter one
hundred and ten thousand instead of one
hundred and ten thousand and fifty
dollars now we know under expenses that
charitable donations are not deductible
to the partnership and are not included
on page one so even though we've listed
an expense here of five hundred dollars
for charity we know we need to leave
that off of page one all of the computer
and office equipment purchases since
I've told you in the wording of the
problem that Dax LLC is going to be
claiming as section 179 deduction for
these expenses we know that we're not
going to enter a depreciation deduction
on the front page of 1040 or not on the
front page 140 but on the front page of
1065 for the computer equipment so
that's another ten thousand dollar
difference between the profit and loss
and the return and then finally meals
and entertainment 50% of meals and
entertainment expense is not deductible
for tax purposes and so although the P&L
shows that meal expenses were a thousand
dollars we know that five hundred
dollars is going to be the amount of the
deduction that can be claimed so form
1065 provides dedicated lines for only
of the few of the expenses shown here
including repairs in the amount of $300
rent in the amount of $5,000 and
interest in the amount of $100 so these
expenses do you have dedicated lines on
form 1065 but all of the other expenses
shown here that are included on page 1
of 1065 these are going to have to be
included on a separate statement finally
the net profit Pradaxa LLC ebooks as you
can see right here is seventy nine
thousand and fifty dollars however fifty
dollars of interest income is not
reportable on page one a form 1065 also
the following expenses are not
deductible on page one the charity the
section 179 deduction and fifty percent
of meals so the total amount of non
deductible expenses is eleven thousand
and the total amount of non includable
income is fifty dollars therefore the
net ordinary business of DAX
LLC that is going to be entered on line
22 1065 is ninety thousand dollars
rather than the seventy nine thousand
and fifty that we see on the P&L so
moving over to the 1065 we begin by
entering one hundred and ten thousand on
the line one a remembering to leave the
fifty dollars out we even enter the
repair rent and interest expenses from
the P&L and then we move on to line
twenty and on line twenty we're going to
prepare a statement on on this statement
we list all of the other allowable
expenses including meals and
entertainment after subjecting that
expense to the fifty percent limit we
total those expenses up and we get
fourteen thousand six hundred dollars
and entered that on line 20 we then add
up the total the deductions and they
come to twenty thousand dollars for the
year we subtract 20 from 110 and we get
ninety thousand dollars so let's now
move on to page two Schedule B on page
two you can see right here called
Schedule B this schedule is used to
report information that must be
disclosed to the IRS about the
partnership and you use Schedule B to
report the method of accounting the
business activities description and
other questions relating to the
partnership Schedule B was result
revised for tax years after 2007 to
provide space to enter information
identifying ownership relationships
between the partnership and other
entities then in 2009 it was revised
again to add line three
in 3d and if the yes box is checked on
these lines then scheduled b1 also needs
to be filled out I'm not going to read
through all of the lines here but if we
go up to line one it says what type of
entity is filing this at return this is
the point where you actually tell the
IRS whether this is a general
partnership a domestic limited liability
company a foreign partnership etc and
then over here you can see line three at
the end of the year did any foreign or
domestic corporation partnership trust
or tax-exempt organization or any
foreign government own directly or
indirectly an interest of 50% or more in
the profit loss or capital of the
partnership and then on line 3b it says
did any individual or state directly or
indirectly own an interest of 50% or
more if you answer yes to either of
these questions then you have to
complete the additional Schedule B one
then down at the bottom it says does the
partnership satisfy all of the following
conditions this is literally the place
where we keep referring did the
partnership answer yes or no to question
six this is question six I'll just zoom
in a little so you can see it does the
partnership satisfy all four of the
following conditions a the partnership
total receipts for the year were less
than 250 the partnerships total assets
for the year were less than a million
Schedule K ones were filed with the
partnership return and furnished to all
partners honor before the due date of
the return and is the partnership is not
filing and is not required to file
Schedule m3 if you're able to answer yes
then this is deemed to be a more simple
return and you don't have to complete
schedule L m1 or m2 or answer item F on
page one of the form we'll see that I'm
going to prepare those schedules for Dax
LLC anyway I prefer to do those
schedules because I find that they help
improve the accuracy of the tax return
and help me determine whether my client
is missing money which any IRS auditor
that's going to be the first thing they
zero in on is where has the money gone
is all of the money being accounted for
and those schedules really help you to
balance the return to the income and
expense activity of the bank account
the business now on line one you should
indicate the type of entities that is
filing the return and if this is a
general partnership checkbox a and if
it's an LLC checkbox C binds to two for
answer all questions yes or no and if
you answer yes to question 3a or three
be attached Schedule B and this is it
right here if you are dealing with a
partnership that is owned only by
individuals or estates you would
typically move down to part two and you
would list the name social security
number country of citizenship and the
percentage that partner owned in the
partnership if they owned 50% or more of
the partnership then we move on to page
three page three is a continuation of
Schedule B you answer yes or no to each
question listed beginning in tax your
2008 Schedule B was expanded to include
questions relating to cancelled debt
prior year distributions and
contributions to other entities of
properties that are received in like 10
exchanges then for 2011 and later years
new questions 18 a and B were added that
require the partnership to disclose
whether or not it made payments that are
required to be reported on form 1099 and
if so required did the partnership
actually issue those forms spaces then
provided at the bottom of page 3 to
enter information identifying the
designated tax matters partner a tax
matters partner should be indicated if
the partnership is subjected to rules
for consolidated audit of proceeding and
then form 1065 page for Schedule K so
page 1 of the 1065 is where we enter the
business income and expenses of the
business activity of the partnership but
there are other types of income and
expenses that are not entered on page 1
what do you do with those will they get
entered here on Schedule K Schedule K is
used to report certain net income and
deduction items as they must be
allocated to the partners Schedule K
reports the combined total of each
reportable item that will flow through
to all the partners the sum of the
combined amounts for each line number on
all partners schedule k-1 should match
the corresponding line amounts that are
shown on Schedule K and Schedule K can
be divided into the seven sections that
you see here in section one we are and
income and loss amounts in section two
were entering deduction amounts in
section three were entering information
relating to self-employment line our
section four is for credits section five
is for foreign transactions section six
is for alternative minimum tax items and
section seven is for other information
so we're gonna take each of these
sections in turn beginning with section
one on income or loss on line one you
will enter net income from the
partnerships business activity after you
finish completing page one you will have
a number on line 22 of page one whatever
that number is you're going to carry it
over and entered on line one of schedule
K you then move on to line two and this
is the line used to report income from
rental real estate activities if the
partnership engaged in a rental real
estate activity it's going to attach
form eighty-eight 2588 twenty five is
very similar to Schedule E in its
function and purpose Schedule E that is
attached to the individual returns is
used to report income and expenses from
rental properties and so if the
partnership owns rental properties it's
going to prepare the equivalent form
eighty eight twenty five whatever amount
of net income or loss that is figured on
eighty eight twenty five you're going to
enter that on line two of the schedule k
then on line three you are entering
other gross rental income enter gross
income from rental activities other than
real estate activities that are reported
on Form eighty eight twenty five you
should also attach a statement to
describe the expenses that are reported
on line three B Line for guaranteed
payments report guaranteed payments
remade made to the partners or LLC
members here so on 1065 on line 22 you
figure a net income or a loss amount
that carries to line one and on line ten
of the page one of the ten sixty five
that's where you list guaranteed
payments whatever amount you've listed
on page one line ten as a guaranteed
payment you're gonna carry and enter
that again on line four actually there
is a an adjustment to that line then on
line five you're gonna enter interest
income that comes from portfolio income
you would not enter interest that as
received and accounts receivable but if
you have bank account Holdings you know
money in the bank and it earned interest
that is where you enter that interest
income and on line ten then you're going
to enter the net section
12:31 gain or loss report gains or
losses from the sale disposition or
involuntary conversion of section 12:30
at that are held for income production
on this line we're not going to get into
completion of form forty seven ninety
seven in this course at all I have
another course that we discussed that
it's called sale of business assets
where we look in-depth at form forty
seven ninety seven but not more than
that today and then online eleven other
income or loss is not reported on lines
one through ten those are entered here
next we're going to look at section two
of Schedule K which is the partners
distributive share of deductions certain
expenses such as the section 179
deduction investment interest expense
and charitable deductions or
contributions are not deductible
directly by the partnership and are not
reflected in the net income that is
shown on line 22 of form 1065 instead
these deductions flow through to the tax
returns of the individual partners or
members you claim each deduction on a
pro-rata basis for charitable
contributions cash contributions of any
amount must be supported by a date a
dated bank record or receipt enter
charitable contributions made during the
tax year on line 13 a then attach a
statement to form 1065 that separately
identifies the partnerships contribution
for each of the following categories the
following codes should be used to report
charitable contributions that are
entered on schedule k-1 you need to
identify the contribution as a cash
contribution or a non-cash contribution
and then is the cash contribution a
fifty percent limit organization or was
it made to a thirty percent limit
organization that will dictate how much
deduction the individual partner is
allowed to claim on their individual
schedule a so this is information that
the partner uses in preparation of their
personal return then we move on to
section 3 which is the partners
distributive share of self-employment
earnings generally the profits from the
business activity of the partnership
that are reported on line 22 of form
1065 are subject to self-employment tax
when they are passed through to the
general partners or active LLC members
so on line 14 a of Schedule K you're
going to enter the net earnings or lost
from self-employment but this is also
going to include any guaranteed payments
made to the partners preparers should
make
note of the following income items or of
how the following income items are
treated for self-employment tax purposes
though a limited partner share of income
is not self-employment income unless it
is considered to be a guaranteed payment
for services rendered to the partnership
portfolio income and rental real estate
income are generally not subject to
self-employment tax unless obtained in
the ordinary course of a business
activity guaranteed payments that are
shown on form 1065 line 10 and on
Schedule K line for are subject to efi
tax the portion of income reported on
line 22 of form 1065 that is due to
ordinary gain from form 47 97 is
reported on line 6 the form 1065 and is
not subject to SE tax and the
instructions for form 1065 provide the
following worksheet which can be used to
determine the amount to enter on line 14
a i've slapped it in here for you but
let's see how we would fill that form
out for Dax LLC we're gonna figure the
amount of stuff employment income that
was earned by the active partners in Dax
LLC is shown below and remember when we
prepared page 1 of the 1065 for Dax LLC
we arrived at a net profit of $90,000
and that is the amount that is going to
be carried here ordinary business income
are lost from Schedule K line 1 there
are actually no other addition amounts
on here we didn't have any guaranteed
payments made to the partners it's
possible we could have and if we had had
a guaranteed payment we would enter that
amount on line for a but there were no
guaranteed payments so it's 90 thousand
all the way down and that 90 thousand
then we'll carry down to line 14 a of
the schedule K and then you can see it
says not growth non-farm income this is
the gross receipts of Dax LLC prior to
any expenses being claimed that's the
equivalent of what we entered on line
one of the 1065 in this case 110
thousand next step is the section for
the partner's distributive share of
credits net income of the partnership
from line 22 of form 1065 does not
reflect adjustments for tax credits if
the business activity and expenses of
the partnership our LLC are eligible for
any tax credits these credits are
reported on line 15 a through 15 F of
the schedule K so let's just look at an
example of a credit if you have a
restaurant activity where the servers
are received
the tip income of the server's there is
a credit that an employer can claim for
the employers share a pack speed on
reported tips of an employee and that
credit is not claimable by the
partnership the partnership would
actually have to reduce its expense
deductions for payroll by any amount of
credit claims but the credit claimed
does not benefit the partnership because
it can't claim a credit it isn't taxed
so that credit is going to be put in the
credit section of the schedule K and it
will carry to the K one of the partners
and the partners will individually claim
any benefit from that credit on lines 15
H or 15 D enter credits relating to
rental real estate activities online 15
e enter credits related to rental
activities other than rental real estate
activities and use line 15 asked to
report all other credits that are not
include Alliance 15 a through E identify
the type of credit in the space provided
if there is more than one type of credit
or if there are any credits that are
subject to recapture attach a statement
to form 1065 that separately identifies
each type and amount of credit and the
credit recapture information for each
category you can see the instructions
for form 1065 for a description of the
available credits and their codes and
the net affection then is foreign
transactions the partners distributive
share of foreign transactions you're
going to use line 16 a through n if the
partnership has foreign income
deductions or losses or has paid or
accrued foreign taxes then in Section 6
this section has to do with alternative
minimum tax again a partnership doesn't
pay a tax or alternative minimum tax but
it could be that certain income or
expense items may have impact on
calculations of alternative minimum tax
at the partner level and sense net
income of the 1065 may come from sources
that have an impact under alternative
minimum tax this is the section of the
forum where you identify those items and
then these items are reflected on the
individuals return and then the
individual is going to make adjustments
typically on Form 6251 for alternative
minimum tax computations in section 7
this is the partners distributive share
of other information
this section of the schedule K is used
to report tax-exempt interest income non
deductible expenses distributions
investment income and expenses and
dividend distributions of the
partnership next page we're actually
going to take the information for Dax
LLC and prepare schedule case for Dax
LLC we're continuing with the same
information that we provided on the
earlier pages but in addition to that
earlier information I'm going to tell
you that Dax LLC made a profit shared
distribution to its partners in the
amount of $80,000 the partnership
distribution went out equally with
$40,000 each so let's take a look at how
this information is going to get
reflected on Schedule K we begin on line
1 by entering $90,000 this was the net
ordinary business income from line 22 of
the form 1065 remember that line 22 does
not account for the $50 of interest the
$500 of meal and entertainment expense
$500 of charity or that $10,000 section
179 deduction then on line 5 12 and 13
we entered the separately stated income
and deduction items including $50 of
interest and $10,000 of section 179
deduction and $500 of charitable
contribution then on line 14 a $90,000
is entered as the net amount of income
subject to self-employment tax and line
14 B is where we enter the gross
non-farm income of Docs LLC we then
scoot all the way down to the bottom of
the form and in the other information
section we're going to enter $500 of non
deductible expense that's the 50% of the
non-deductible meal and entertainment
expense on line 19 we're going to enter
that $80,000 of distribution that went
out to the partners and then on line 20
we're going to enter investment income
of $50 investment income of $50 is
relevant to the partner on the partners
return they're going to report that as a
form of investment income and ultimately
can affect how much they are allowed to
deduct on Schedule A as an investment by
completing form 49 52
alright then we move on to form 1065
page 5 page 5 is probably the page that
intimidates people the most it's the
most confusing part and for that reason
small partnerships are actually not
required to fill this form out the whole
point of that question 6 on the Schedule
B is if you answer yes to all the
questions you don't have to do page 5
but if you answer yes to any of the
questions on a question 6 then you have
to do page 5 and as you will see I'm
gonna do page 5 for Dax LLC anyway
because I personally find it is a way or
a vehicle that I can use to make sure
that I have not missed any income or
deduction items for my clients return
and in fact very often after completing
the balance sheet or in the process of
attempting to complete this balance
sheet I determined that the client has
way underreported income or way over
reported expenses or way under reported
expenses just noting AB is balancing at
all and so I use this schedule to help
me determine where my clients
bookkeeping is falling short and more
often than not their bookkeeping is
really really inadequate and therefore
not accurate so page 5 of form 1065 is
comprised of a section that is used to
report an analysis of net income loss
and as well 3 separate schedules
including schedule L + 1 and M 2 and you
can see I've broken the form up into
these component parts part one is
analysis of net income or loss part two
is schedule L which is the balance sheet
per book
schedule M one is a reconciliation of
income or loss per company books with
the profit or loss on the tax return and
in part four we have scheduled M 2 which
is an analysis of the partners capital
account so we're going to take each of
these sections in turn again beginning
with Part one analysis of net income or
loss the analysis of net income or loss
section of page 5 of form 1065 is used
to classify and allocate income of the
partnership between general and limited
partners and to identify income as
either active or passive how income is
classified is going to affect the tax
treatment that is given to each
individual partners share of income loss
and deduction items that are shown on
the form 1065 return on line one we
combine the amounts that are shown on
Schedule K lines 1 through 11 we then
subtract out the amount shown on lines
12 through 13 D also line 16 L as well
then on line 2 we have an analysis by
partner type we either have general
partners or limited partners and for
each category of general or limited we
need to identify who that empathy is is
the general partner or corporation an
individual and if that it is an
individual is that individual active if
it is not an active individuals at the
passive individual and so forth so for
line two for each type of partner shown
and two the portion of the amount shown
on line one that was allocated to that
type of partner foreign government
partners are treated as corporate
partners report all amounts for LLC
members on the line for limited partners
that would be line to be the sum shown
on line two must equal the amount shown
on line 1 the M in addition the amount
on line 1 must equal the amount on line
9 of Schedule M one if the partnership
is required to file Schedule M 1 and if
the partnership file Schedule M 3 the
amount on line 1 must equal the amount
in column D of line 26 parts choose
passive or active income or loss
partners who are individuals must be
classified as either active or passive a
partnership should classify each partner
to the best of its knowledge and belief
and it is assumed that in most cases the
level of a particular partners
participation in an activity will be
apparent and obvious however if the
following rules the following rules can
be applied when classifying partners
if the partnerships principal activity
is a trade or business a general partner
is classified as active if the partner
materially participated in all
partnership trade or business activities
and a general partner will be classified
as passive if the partner did not
materially participate in all
partnership trade or business activities
if the interest is a working interest in
a gas or oil well classify a general
partner as active even if they are
passive because oil well activities are
always considered active
rental real estate activity classify a
general partner as active if the partner
actively participated in all of the
partnerships rental real estate
activities otherwise classify a general
partner as passive for rental activity
other than real estate classify as
passive all partners in a partnership
whose principal activity is a rental
activity other than a rental real estate
activity and portfolio activity if the
partnerships principal activity is
portfolio income classify the partners
as active you should classify as passive
all limited partners in a partnership
whose principal activity is the trait is
a trade or business or rental activity
and if the partnership cannot make a
reasonable determination whether a
partner's participation in the trade or
business activity is material or whether
a partner's participation in a rental
real estate activity is active you
should classify that partner as passive
so the whole point of this section is a
lot of rambling to get down to a very
important bottom line the bottom line is
that the IRS wants to know whether a
partner's distributive share of income
or loss from an activity is active or
passive because you cannot use passive
activity losses to offset non passive
income so this income or loss from a
partnership is going to flow through to
the individual return where other things
are going on and you cannot take a
passive involvement in a particular
partnership activity to offset say
investment income or wage income that
the partner has on their individual
return so this section is used to
determine whether the income is passive
or non passive active is the same as non
passive and IRS never uses the word
active it uses the word non passive so
it can be confusing when you're hearing
it so at any rate let's take a look at
the analysis of net income that we would
prepare for Docs LLC Kira and jizya are
active 50 5050 partners in Dax LLC and
because Dax LLC is an LLC they are
automatically deemed to be limited
partners also we're going to be looking
at the net income of the business
including how things were reported on
Schedule K so remember when we looked at
the front page of 10
sixty-five we came up with a profit of
90,000 why isn't that number the number
that's here because when we get to line
one we are going to factor in those
other pass-through items such as the
charitable contributions the interest
income but we are going to still
disallow about 50% of meals and
entertainment so ultimately the profit
per book is seventy nine thousand and
fifty and the profit per the return
overall is seventy nine thousand five
fifty and so seventy nine thousand five
fifty s they not entered on line one and
the amount entered on line one is going
to need to equal another line that we're
going to enter a little bit farther down
the return you'll see how this line one
is going to match up with another line
on the return in just a minute and then
because their own LLC they're
automatically deemed to be limited
partners but they both actively
participate in their partnership and so
we're going to say that their individual
active not individual passes and again
how we arrive at this number that we've
entered here we take the ninety thousand
dollars of income from page one we add
in the interest we subtract out the
section 179 deduction and we subtract
out the charitable contributions let's
move on now to the schedule L which is
the balance sheet per book schedule L is
used to show the balance sheet of the
partnership or LLC books the balance
sheet is divided into four separate
columns showing beginning and ending
balances for the year and you should
note that schedule L is optional and
does not need to be completed if you
answered yes to all four of the
following questions on line six of
Schedule B that the partnership total
receipts were less than two hundred and
fifty thousand that the partnership
assets were less than a million that the
K ones were filed and issued to the
partners on time and the partnership is
not filing and is not required to file
Schedule M 3 so let's take a look at the
balance sheet for DAX LLC we have a
balance sheet as the of the end of 2013
and we have another balance sheet for
the end of 2014 and we're gonna transfer
these balance sheets which are per
company books over to the schedule L and
you can see that we have cash on hand at
the end of the year was eleven thousand
for 2013 and by the end of 2014 it was
nine
50 and we're gonna show that the assets
at the beginning of 2013 in the end of
2013 the assets were twenty thousand
dollars the the appreciable assets were
twenty but they were fully depreciated
and for 2014 we added ten thousand
dollars at their peaceable assets
we're claiming a section 179 deduction
on them and so they are fully
depreciated as well we then show total
assets for each of the the end of 2013
in the end of 2014
we can see that at the end of 2013 there
was a liability of a thousand dollars
that's been cleaned off the books for
2014 and so we end up with total
liabilities and capital at the end of
2013 that were eleven thousand at the
end of 2014 there were nine thousand and
fifty dollars next step is to do the
schedule m1 and this is a reconciliation
of income or loss per books with the
income or loss per the return now in
most instances the net income or loss of
the partnership or LLC will be different
than the net income per books the
difference comes from a variety of
expense items that are not deductible by
the partnership schedule m1 is used to
explain these differences and common
items appearing are reported in this
section include 50% of meals
entertainment as well as differences in
depreciation frankly Mitchell am-1 is
where I usually find my mistakes I've
got the P&L that I'm working on from the
the partnership and when I'm done with
the partnership return this schedule m1
should balance and if it doesn't balance
it's because I have an error somewhere
and this is where I find it so a line
one should equal the net income per book
and line nine should equal that analysis
of net income or loss from the top of
the form so let's go back here right
here this is a lot this line one that
should equal line nine of schedule m1
and so ultimately schedule m1 align nine
represents the profit or loss per the
return and the line 1 represents the
profit or loss per book and the lines in
between are used to explain or describe
why they are different because they
would almost never be the same
usually the profit per
turn is gonna be different than the
profit for books and why is there a
difference we're gonna use these lines
to explain that let's look at an
illustration here for Dax LLC income
Products LLC books is seventy nine
thousand and fifty dollars but the
income per the tax return from line one
of the analysis of net income is seventy
nine thousand five hundred and fifty and
the five hundred dollar difference is
attributable to the non-deductible meal
and entertainment expense so we're gonna
show the profit for books is seventy
nine thousand and fifty we're gonna show
the profit for the return of seventy
nine thousand five fifty and the
difference of five hundred dollars is
explained right here on line four B
travel and entertainment five hundred
dollars next we're going to move on to
schedule MT which is the analysis of the
partners capital account if question six
has been answered no then the
partnership is required to complete
schedule m2 if the question is answered
yes you're not required to prepare it
but again I prefer to do it
the amounts shown on schedule m2 should
equal the total amounts reported on all
of the partners schedule k-1 the capital
account is used to track partners basis
amounts in the partnership or LLC and
basis and the partnership is increased
by capital contributions and taxable net
earnings of the partnership basis is
reduced by distributions to partners and
by deductible losses of the partnership
so let's take a look at how we would use
this for Keira and Jadzia was showing on
the balance sheet that they had an
opening equity of ten thousand dollars
their net income for the year with
seventy nine thousand and fifty they
took distributions of eighty thousand
dollars for the year and their ending
balance is shown on the balance sheet of
9,000 at fifty at the end of the year so
we're gonna complete schedule m2 for
them as follows the beginning of the
year balance ten thousand net income per
book seventy nine thousand and fifty
we're gonna add those lines up and we
get eighty nine thousand and fifty we
then showed distributions going out to
the partners in the form of cash and
that leaves us with a year-end balance
of nine thousand and fifty dollars cost
of goods sold once we're finished
preparing all of the other forms where
we actually finished everything we can
do for Jadzia and Kyra in tax LLC but
there is still some additional
discussions to give you and one of those
is cost of goods sold I have
really put an illustration in here that
involves cost of goods sold but we
should still talk about this form a
little bit form 1125 a replaces Schedule
A which was previously included on page
2 of form 1120s
and 1065 four years prior to 2011 in
those earlier years both form 1065 and
1120s were actually four-page forms and
they increased the forms to be 5 pages
so that they could actually include
additional Schedule B questionnaire
information and then they took the cogs
off and stuck it on its own forum form
1125 a business is involved in the
manufacture or sale of goods must
generally keep track of inventory
purchases labor and other costs relating
to cost of goods sold examples of
businesses that should track cogs
include restaurant and food service
businesses retail stores wholesalers and
manufacturing businesses cogs do not
apply to certain service oriented
businesses though cost of goods sold
does not generally include supplies and
materials that are used by service
oriented businesses like medical offices
lawyers and accountants also contractors
who purchase materials to provide
construction construction services and
are not otherwise manufacturing a
product or holding inventory for sale
will generally not need to track cogs or
complete form 1125 a generally
inventories are required at the
beginning and end of each tax year if
the production purchase or sale of
merchandise is an income producing
factors but certain small businesses are
allowed to treat cogs as a supply
expense if a partnership is a qualifying
taxpayer or a qualifying small business
taxpayer it may adopt or a changes
accounting method to account for
inventory items in the same manner as
materials and supplies that are not
incidental a qualifying small business
tax payer is a tax payer that for each
prior year ending on or after December
31 of 2000
danuel gross receipts of 10 million
dollars or less for the 3 year period
ending with that prior year and whose
principal business activity is not an
ineligible activity under this
accounting method inventory cost for raw
materials purchased for use in producing
finished goods and merchandise purchase
for resale are deductible in the year
that
goods or merchandise are sold but not
before the end of the year that the
business paid for the raw materials or a
merchandise if it was also using the
cash method for additional guidance on
this method of accounting for inventory
items you can refer to IRS Publication
538 accounting periods and methods now
let's take a look at schedule k-1 we
finished the 1065 including the schedule
k as a 1065 but we still need to take
the information from the schedule k if
at 1065 and divide it between the
partners and we do that with schedule
k-1 schedule k-1 is given to each
partnership partner or LLC member and
information reported on schedule k of
form 1065 flows through to each partner
on his or her k-1 income is divided
according to each partner share of
income or loss items and generally you
must report partnership income items
shown on Schedule K in the same way that
the partnership treated the items on its
return and you can refer to the
instructions for schedule k-1 for
certain exceptions to that general rule
page 1 of schedule k1 is used to report
each partners share of the partnership
income loss deduction and credit items
it also reports items that affect
partnership basis such as tax exempt
income investment income and expenses
distributions of cash into the property
contributions of cash or other property
and non deductible expenses page 2 of
schedule k-1 contains a summary of codes
and descriptions which are used to
interpret information that is reported
on page 1 including where on the
personal return each partner should
report items shown on page 1 so let's
look at the schedule k-1 and you know
even if you've not ever prepared a
partnership return you've probably seen
lots of k1 because your clients bring
moves in and so understanding how to
complete a schedule of k1 can certainly
help you determine how to take
information from that k1 and put it on
the personal return but we're not going
to be using today's class to in any way
talk about the personal return we're
using today's class to show how to
prepare the schedule k-1 for the
partnership that the partnership will
then issue to each partner so we're
going to take a look at schedule k-1 for
dax LLC in just a minute
that you can see that the lines on the
schedule k-1 pretty much coincide with
the lines appearing on schedule k but
there's not a perfection of the
reporting in other words there are some
differences in addition you can see that
there's space that is where we provide
information about the partner we
describe the type of partner that we
have the partners share profit loss and
capital the partner share of liabilities
whether those liabilities are recourse
non-recourse qualified non-recourse also
the partners capital account analysis
there's space for that and then there
are instructions or brief instruction
codes for the schedule k-1 and i'm not
going to read these to you go nuts
listening to me talk about them but i
have highlighted the ones that are
relevant to today's illustration because
these are the lines where we're going to
be entering a code or a number relating
to dax LLC you can see that we're going
to be reporting an amount on line one
ordinary business income or loss also
that's going to be a non passive form of
income we're going to show information
relating to interest income I didn't
give them any guaranteed payments but if
they had a guaranteed payment that would
be on line four section 179 deduction
and other deductions such as the cash
contribution the self-employment
earnings then we've got other non
deductible expenses we also have line 19
distributions and finally line 20 other
information so these are the lines or
the codes that are really relevant to
Jax LLC and on the next page I've got
the completed K ones for Dax LLC this is
a relatively simple division because I
decided to make both these partners
50/50 so all of the numbers on the
schedule K are going to divide 50/50
between the partners the scheduled cash
of business income of $90,000 so the
50-50 split will be 45 thousand dollars
each to Judd Xia and to Kira
then the $50 of interest income will be
divided 50/50 twenty-five dollars to
each we can see that the section 179
deduction is ten thousand dollars it's
going to be divided 50/50 to each the
other deduction which would be
charitable contributions is five hundred
dollars and that will be the
250 between each of them also I told you
that they took a distribution of 80
thousand dollars from the partnership
and I I just explained it that was an
even distribution so each of them is
going to show 40 thousand dollars as
their respective share the other persons
of interest is this part to information
about the partner and we've entered the
partners identifying information we
should have an address in here as well
I've just simply described it as jazia
or Kiera
but you are supposed to enter their full
name and address and then we describe
the type of partner this is Jadzia is a
general partner or LLC member manager
she is also a domestic partner she is an
individual she was and is 50% ownership
in profits loss and capital and then we
go down to the partners capital account
this is going to correspond to
information that was reported on
Schedule L and it should be that the sum
totals of the hey ones should coincide
to the totals entered on schedule L and
can see right here the ending capital
account of the partner should equal the
amount shown on line 9 of schedule M 2
and if we take schedule M 2 and show
that it's 9000 and $50 this is where we
get 5050 to each of them in this
particular case but there's no rule that
says they're going to be 50/50 on their
schedule L on their k1 so it just
happens to be in this illustration that
they are that takes us in the next topic
which is adjusted basis in the
partnership a partnership interest is an
item of property and like any other form
of property it has a basis for tax
purposes a partner's basis and his or
her partnership interest is referred to
as outside basis initial basis and a
partnership can be established in the
following ways upon formation of the
partnership a partner's initial outside
basis will generally equal the amount of
money and the adjusted basis of property
contributed if the partner purchases his
or her partnership interest and the
outside basis will equal the purchase
price a partnership interest may be
acquired by means of an inheritance or a
gift outside basis is made up of two
components tax capital accounts and the
partner share of partnership liabilities
generally the sum of the partners
outside basis will be equal to the
partnerships inside basis in its asset
on a balance sheet asked
equal liabilities plus owner's equity
and in the partnership assets equal
liabilities plus the partnerships tax
capital accounts inside basis although
inside basis generally equals total
outside basis some distributions of
property from the partnership or
transfers of partnership interest can
disrupt this equality and by applying
procedures provided for under Internal
Revenue Code section 754 the partnership
can make upward or downward adjustments
to the basis of its assets in order to
restore normal equality in the balance
sheet and thus recreate the equality
between inside and outside total basis
adjustments to basis a partner must
report his or her tribute of share a
partnership income in his or her taxable
year in which or with which the
partnership taxable year ends that may
or may not be the same year in which he
or she receives a distribution of cash
or property in other words a partner
must report his or her distributive
share of partnership income regardless
of whether that income is actually
distributed now as a general rule when a
partner transfers property to a
partnership gain or loss is not
recognized additionally a partner does
not generally recognize gain or loss
upon receiving distributions from a
partnership unless the distribution is a
cash distribution that is in excess of
the partners basis in his or her
partnership interest also called the
outside basis it is considered to be the
responsibility of each partner to
maintain records which show his or her
basis in the partnership however the
partnership also can track the
partnership basis and this is where
things can get complicated for the tax
preparer because if we're not preparing
the partnership return we don't know if
the partnership has been accurately
tracking that partners basis and the
odds are that the partner doesn't know
either so there should be some
discussion going on about the
partnership basis how a partner acquired
an interest in a partnership and you
really need to be hearing from the
partner that they contributing to toxa
belabor to the partnership for which
they were paid but the money stayed in
the partnership and we wouldn't have
been paid but at any rate they were
given an interest in the partnership in
exchange for their work the partnership
kept the money and gave him the interest
and then that would have been treated as
payments to them those are things that
would increase their basis
so a partners basis is increased by the
following items the partners additional
contributions to the partnership
including an increased share or
assumption of partnership liabilities
the partners distributed share of
taxable and non-taxable partnership
income the partners distributive share
of the excess of deductions for
depletion over the basis of the
depletable property unless the property
is an oil or gas well whose basis has
been allocated to the partners and a
partner's basis in the partnership will
be decreased but never below zero by the
following items the money including the
decreased share of partnership
liabilities or an assumption of the
partners individual liabilities by the
partnership and adjusted basis of
property distributed to the partner by
the partnership the partners
distributive share of the partnership
losses including capital losses the
partners distributive share of
non-deductible partnership expenses that
are not capital expenditures this
includes the partner share of any
section 179 expenses even if the partner
cannot deduct the entire amount on his
or her individual tax return and finally
the partners deduction for depletion of
any partnership oil and gas wells up to
the proportionate share of the adjusted
basis of the wells that are allocated to
that partner now the IRS does provide a
worksheet for figuring the adjusted
basis of a partner's interest in the
partnership and there are some basis
rules that I will leave you to read on
your own but if you're trying to
determine a partner's basis in a
partnership this worksheet is provided
for helping you to do that and then
there are some rules and explanations on
how to do the worksheet and I've done a
worksheet for Jadzia
and Kyra each of them and we're going to
determine the basis that each of them
has index LLC as we see here you can see
I've listed the name of the partner and
I begin by showing that partners
adjusted basis at the end of 2013 and
for Kyra that was $5000 then on line
three through five I show Kira's 50%
share of amounts that are flowing
through to her on Schedule K firstly her
share of the business income her share
of the portfolio in
can we add those amounts to her opening
basis and were left with 50,000 and $25
we then subtract out distributions she
received during the year of 40,000 we
also subtract out her 50% share of non
deductible expenses and when we do that
we're left with ninety seven hundred and
seventy-five dollars and and down here
at the bottom of line ten we enter on
line ten H $250 which is her 50% share
of the amount contributed to charity as
well as five thousand dollars which is
her fifty percent share of the section
179 deduction these further reduced her
basis in the partnership because they
are going to be allowed as deductions
where should be allowed as deductions on
her return and so they further reduced
her basis in the partnership down to
forty five hundred and twenty five
dollars we have a similar worksheet
following all of the similar line of
reasoning for Jadzia and then down at
the bottom the software that we use
Drake software actually produces a
reconciliation worksheet and you just
want to see that the amount showing for
each partners basis actually equally not
shown on the tax return and then
partnership portfolio income and rental
income we're really at the end of
today's class but I've got to two
additional items that I wanted to talk
to you about briefly before we wrap it
up and I think with ten minutes we
actually have enough time for that which
is good on portfolio income and rental
income as you recall I told you the page
one of form 1120s and 1065 these are
used to report income from the business
activity of the S corporation or
partnership and in most interest
instances the business activity will not
include income from rental real estate
activities or from portfolio income each
of these items are treated and reported
separately on the S corporation and
partnership returns so what is portfolio
income well generally portfolio income
includes all income other than income
derived in the ordinary course of a
trade or a business that is attributable
to interest dividends royalties income
from a real estate investment trusts a
regulated investment company a real
estate mortgage investment conduit a
common trust fund a controlled foreign
corporation or a qualified electing fund
or
furtive or income from disposition of
property that produces income of a type
that is defined as portfolio income and
income from the disposition of property
that is held for investment so how do
you report portfolio income will you
report portfolio income on form 1065
page for Schedule K on lines 5 through
10 and on form 1120s you reported on
page 2 of Schedule K lines four through
nine
do not include portfolio income on page
1 of either form 1065 or 1120s
if the corporation or partnership sold
capital gain or lost property during the
year you should attach Schedule D and/or
form 47 97 as required net income from
capital gains is not included in the
ordinary income of the business and do
not include capital gain income on page
1 a form 1065
or 1120s reporting rental income and
expenses of an LLC or S corporation in
most cases rental income is a passive
activity not included in an ordinary
income of the business rental income and
expenses are therefore not reported on
page 1 instead follow these instructions
to report rental income and expenses of
a partnership or S corporation in step 1
you will attach Form 88 25 to the S
corporation or partnership return 2
separately report income and deductible
expenses from rental real estate
activities and the net income or loss
from rental real estate activities that
flow through from partnerships estates
or trusts you will report net rental
real estate income on form 1065 or 1120s
on schedule K line 2 then in step 2 you
will report on form 1065 or 1120s
schedule K line 3 see the net income or
loss from rental activities other than
those reported on Form 88 25 and this
includes the gain or loss from line 17
of formed 47 97 that is attributable to
the sale exchange where involuntary
conversion of an asset that was used in
rental activity other than a rental real
estate activity you would need to attach
a statement passive activity lost rules
passive activity loss rules apply to
rental losses of S corporations and
partnerships and those shareholders or
partners who actively participate in a
rental realistic
tivity may be able to deduct part or all
of their rental real estate losses and
the deduction equivalent of rental real
estate credits against income or tax
from non passive activities net income
or loss from rental activities of an S
corporation are reported on form 1120s
schedule K lines 2 through 3c and net
income or loss from rental activities of
a partnership are reported on 1065
schedule k also on lines 2 through 3c
net income or loss from rental
activities then flows through on a
pro-rata basis to form 1120s schedule
k-1 or 1065 schedule k-1 and then on to
each partner or shareholder and
generally the combined amount of rental
real estate losses and the deduction
equivalent of rental real estate credits
from all sources of each individual
partner or shareholder are going to be
subject to the rules affecting passive
activity lost income that is that
passive activity losses must be offset
by passive activity income but in
certain situations individual partners
and shareholders may be able to select
up to 25,000 the rental real estate
activities on their individual returns
and we get into passive activity loss of
limits and another course that I teach
called at-risk limits and passive
activity loss limits I also have another
course I teach on rental property so
those are the courses where I really
talk about these types of activity lost
rules you can take those courses you can
read up on them on your own but the
bottom line is the reason that the IRS
has you divide out and separately report
rental real estate income is because
that income is automatically deemed to
be passive income or loss and as such it
can only be used to offset other passive
activity income or loss unless that
partner is deemed to be an active
participant in a rental real estate
activities and their income is low
enough that they qualify to deduct
certain amounts with a maximum of 25,000
per year now if you are reporting rental
real estate income you're going to need
to complete form 88 25 you can see it's
rising up here at the bottom of the
screen net income or loss from form 88
25 is shown on line 2 of the schedule K
you report credits related to rental
real estate activities on line 15 C and
15 D of Schedule K you report low in
come housing credits online 15 D of
schedule K and K 1 and online 13 B 13 C
and 13 D if the k1 is for an S
corporation rather than a partnership so
let's take a look at a late 25 if you're
thinking and you have an image in your
head of Schedule E which is used on
individual returns you'll recollect that
Schedule E actually has room to enter
three separate properties that 88 25
actually has room for eight properties
there are four on each of its two pages
so page one has room for four properties
and then page two has room for more
properties and then forum 88 25 if you
run out of space you just keep adding
additional forms now there are some
other rules to be aware of the number of
columns to be used for reporting income
and expenses on this form can differ
from the number of rental real estate
activities the partnership or S
corporation has for purposes of passive
activity limitations for example a
partnership owns two apartment buildings
and each is located in a different City
for purposes of passive activity
limitations the partnership grouped both
buildings into a single activity
although the partnership has only one
rental real estate activity for purposes
of the passive activity limitations it
must report the income and deductions
for each building in separate columns of
form 88 25 you should see passive
activity reporting requirements in the
instructions for form 1065 form 1065 b
or form 1120s for more information you
should complete lines 1 through 17 for
each property but complete lines 18 a
true 21 only on one form 88 25 because
these figures should be the combined
totals for all of the forms do not
report on Form 88 25 any income or
deductions from a trade or business
activity or rental activity other than a
rental real estate activity cuz V diet
these items are reported elsewhere also
do not report portfolio income or
deductions the section 179 deduction
other items that must be reported
separately to the partners or
shareholders or commercial
revitalization deductions and finally
we're going to close out this lecture
with a discussion of the grouping of
activities when you are preparing a
partnership return you should be aware
that you are allowed in certain
situations to group activities
but only if the grouping of those
activities does not in any way disguise
or hide passive activities inside a non
passive activity or vice-versa
so generally one or more trader business
activities or rental activities may be
treated as a single activity if the
activities make up an appropriate
economic unit for measurement of gain or
loss under the passive activity rules
whether activities make up an
appropriate economic unit depends on all
of the relevant facts and circumstances
the factors given the greatest weight in
determining whether activities make up
an appropriate economic unit are the
similarities and differences in the
types of the trades or businesses the
extent of common control the extent of
common ownership the geographical
location and the reliance between or
among the activities for example
ten-forward LLC owns a hotel and a
restaurant in Eugene Oregon and a hotel
or end restaurant in Vancouver
Washington ten-forward might group the
business activities in any of the
following ways a single activity a hotel
activity and a restaurant activity a
Eugene activity and event Coover
activity or four separate activities
ten-forward LLC can select any grouping
that accurately reflects income and
expenses of his business activities once
it chooses a grouping it must continue
using that grouping in later tax years
unless a material change in the facts
and circumstances makes it clear that a
change in grouping is appropriate
the IRS make regroup the Corporations
activities if ten forwards grouping
fails to reflect one or more appropriate
economic unit and one of the primary
purposes of the grouping is to avoid the
passive activity limitations the
limitation on there is a limitation on
the grouping of certain activities
though the following activities may
never be grouped together a rental
activity with a trade or business
activity or an activity involving rental
of real property with an activity
involving the rental of personal
property and that's it for today's class
I'm going to put up the final password
I'm going to put a link in the chat box
so that you can go take the password
test because you do need to take the
password test now as I'm signing off
with you today I did want to point
a classic assignment and this classic
assignment is going to be how we open
the second part of this course when we
get into introduction to F corporations
and LLC's part two I'm gonna open that
session by completing this classic
assignment with you so if you're gonna
be coming back for part two of this
course that is where we're going to do a
review of this assignment and the answer
key for this assignment can be found
inside the LMS but you will learn more
if you work your way through it
so I encourage you to use the time
between this class and the next class to
read through this classwork assignment
and then prepare a tax return for then
Foley LLC part two of this class is
going to be all about the S corporation
return but we are going to open up part
two with a review of a 1065 return
because that is the return that you're
going to prepare for then Foley LLC as a
part of this class work assignment and
then after we've done the then Foley
exercise we're gonna do the comparison
of 1065 to 1120 F and then we're gonna
burrow into 11 20s and do a whole bunch
of illustrations of how to complete form
1120s all right thank you for
participating in today's class and I
hope to see you again soon bye bye
password number 3 is Android a and D are
o ID Android
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