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REG 4, REG410604, REG410486, REG410495, REG410543, REG410544, REG410546,…

- - - - The Tax Cuts and Jobs Act of 2017 (TCJA) has introduced a one-time transition tax on a U.S. shareholder’s (owns 10% or more stake) pro-rata share of the foreign corporation’s accumulated post-1986 deferred foreign income. The prior law allowed deferral of US tax on foreign active business income earned by foreign corporate subsidiaries until repatriated, leading to the accumulation of untaxed foreign earnings. For S-Corporations and partnerships, this transition tax is a pass-through to the shareholders / partners. Special election rules are available for S corporation shareholders wherein each S corporation shareholder can elect to defer the payment of the net tax liability until the tax year in which any of the following triggering event occurs:
      - Corporation ceases to be a S corporation.
      - S corporation liquidates or sells substantially all of its assets, ceases its business, ceases to exist or any similar circumstance.
      - The shareholder transfers shares in the S corporation; transfers of less than all of the stock in an S corporation are a triggering event only with respect to the transferred shares.
      - 10% stake is relevant for applicability of transition tax to the S corporation and a member holding less than 10% in the S corporation will also be liable for the transition tax applicable to the S corporation.
- - - - Non-corporate taxpayers are allowed to offset business losses up to $262,000 ($524,000 for joint filers) – 2021 limits from other sources of taxable income, the remaining are ‘excess business losses’ that can be carried forward to the future years indefinitely [carry back not allowed] and are subject to the 80 percent taxable income limitation [exception is NOL created from farming losses that can still be carried back 2 years].
      - Before calculating the excess business loss, the at-risk limitations and passive activity limits are applied. The at-risk rules relate to the investments in an activity while passive rules relate to the taxpayer’s participation in the activity. To determine the maximum amount of loss allowed for a year, an at-risk limitation is applied first to each activity and then passive loss limitation is applied to all losses from all passive activities to determine the amount of loss deductible for the year.
      - In the given case, net business losses are $400,000 and pass-thru losses from S Corp are $1,350,000. Unless indicated otherwise, losses from S Corp are passive. Further, as no information is provided with respect to the taxpayer’s basis in an S Corp, we assume the basis is large enough to cover the losses, however, as there is no other passive income, the entire $1,350,000 loss from S Corp would be carried forward to the future years to be offset against the passive income only. $400,000 (<$524,000 limit for MFJ for 2021) of business losses on the other hand can offset taxable salary leaving the taxable income as $500,000 ($900,000 - $400,000).
      - Accordingly, the total amount of loss that Frank will carry forward to the future years would be $1,350,000.
- - - - When a partner sells an interest in partnership and the remaining members plan to continue the business:
      - (1) The new business with continuing partners gets a different tax identification number.
      - (2) The existing assets are distributed to the remaining partners and the assets of the terminated partnership are treated as contributions to the new business.
      - Therefore, both I and II are correct.
- - - - However, the negative balance in Grant's account of $9,000 must be allocated among the remaining partners as no partner's capital account can go below zero. The deficit of $9,000 is allocated based on the profit sharing % of the remaining partners as follows:
      - Upon allocation of losses, Elgar who had a capital contribution of $100,000 for 30% interest, has a balance of $40,000.