REG - Taxation and Business Law
Entity taxation is basis-driven
Partnership and S corporation formation is generally tax-free, and the shareholder/partner takes a carryover basis increased by any gain recognized. S corporation eligibility: no more than 100 shareholders, eligible shareholders only (individuals, estates, certain trusts - not partnerships or corporations), one class of stock, and a domestic entity. S corporation distributions follow a strict ordering: AAA, then accumulated E&P, then basis, and only the excess is capital gain. Partnership current distributions are tax-free to the extent of outside basis; cash in excess of basis is gain.
Property transactions
Gain is capital only if the asset is a capital asset under §1221 and held more than one year. §1231 gains receive favorable treatment after netting. Recapture comes first: §1245 recapture is the lesser of gain recognized or depreciation taken, taxed as ordinary income; unrecaptured §1250 gain on real property is taxed at a maximum 25%. Like-kind exchange treatment post-TCJA applies to real property only.
Practice and business law
Circular 230 governs practice before the IRS - due diligence, reliance on client information, and standards for written advice. Preparer penalties under §6694 turn on whether the position had substantial authority or adequate disclosure with a reasonable basis. Business law favorites: contract formation and the statute of frauds, UCC Article 2 for goods, agency duties, surety arrangements, and bankruptcy chapters.
Traps: recapture is computed before applying capital gain rates; the 25% rate applies only to the unrecaptured portion, not the whole gain; a shareholder's debt basis is restored by later income before losses can again be deducted.
Worked example: Equipment costing $50,000, depreciation taken $30,000 (basis $20,000), sold for $55,000. Total gain $35,000 = §1245 ordinary income of $30,000 (lesser of $35,000 gain or $30,000 depreciation) plus $5,000 §1231 gain.