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    Introductory Questions Regarding Tax Accounting

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    I've been having a hard time with tax accounting and the following questions:

    1. What are the major advantages of bona fide loans from shareholders and other debt instruments over stock?
    2. What conditions need to be met to avoid IRS classification of loans from shareholders as equity (contributions to capital)?
    3. What is the tax treatment of losses from worthless stock or securities?
    4. What is the tax consequence if an eligible entity elects to change from being treated as a corporation to being treated as a partnership or proprietorship?
    5. What IRS form needs to be prepared for an eligible entity to elect to be taxed as a corporation?
    6. When does a partner recognize gain on a contribution of property to a partnership?
    7. What is the partnership's basis in property contributed to the partnership by a partner?
    8. When is a partnership considered terminated?
    9. What are the IRS rules for determining the tax year of a partnership?
    10. How are start-up expenses and organization expenses handled for a new partnership?

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    Solution Preview

    (1) The advantage of Bona fide loans and other debt instruments over stock is that in case of the company becoming insolvent, those loans are qualified as bad debt losses and therefore tax deductible.

    (2) Those conditions are:
    1. Whether and how the transaction was accounted for on the corporation's books.
    2. Whether the taxpayer and the corporation executed a written agreement.
    3. Whether the corporation paid or accrued interest on the loan and whether the taxpayer reported interest income from it.

    (3) As a general rule, you can't claim a loss on a stock investment until you sell the shares. ...

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