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REG CPA Review VC > Corporate Tax VC > Flashcards

Corporate Tax VC Flashcards

1
Q

Section 351 shareholder Basis in stock received

\_\_\_\_\_\_\_\_\_ (what value) of property transferred
\+ \_\_\_\_\_\_\_\_\_\_ gain in property
\+ \_\_\_\_\_\_\_\_\_\_\_ paid by transforor
\+\_\_\_\_\_\_\_\_\_\_\_ assumed by transforor
\+ transaction costs & fees
- cash \_\_\_\_\_\_\_\_ by transforor
- FMV of property \_\_\_\_\_\_\_\_\_\_ 
- \_\_\_\_\_\_\_\_\_ transferred
A 
Adjusted basis of property transferred 12000
\+ recognized gain  3000
\+ cash paid 
\+ liabilities assumed
\+ transaction fees
- cash received from corp  3000
-FMV of property received  
- liabilities transferred
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2
Q

Sec 351
Liabilities not treated as boot unless
1)
2)

A

1)liability not for a business purpose
boot = entire liability…recognize as gain

2) liability is greater than adj basis.
Liab - Adj Basis = recognized gain
Adj basis will be 0

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3
Q

Basis in assets transferred 100000

FMV stock received + Liabilities transferred = Amt realized

1) 70000 + business use 80000 = 150000
2) 30000 + business use 120000 = 150000
3) 30000+ no business use 120000 =150000

Figure shareholder basis

Remember, gain is lesser of realized gain or boot when boot is in play. All scenarios have realized gain 150000 - 100000basis = 50000.

A

basis + gain recognized - liabilities transferred = shareholder basis

1) 100000+ 0 b/c liab

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4
Q

how soon do accrued items have to be paid after year end to be deductible in prior year

A

2 1/2 months…. march 15
bonuses
vacation pay
wages

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5
Q

business has $52000 startup costs. How to deduct?

Same with organization costs

A

Must elect to deduct or amortize in period of startup or costs will be capitalized and not used until corporation dissolution.

Can deduct from ordinary income $5000. Reduced for costs over 50000.
55000-52000= 3000 deduct
Remaining 52000 amortize over 180 months = 15years

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6
Q

costs of printing stock organizational?

A

NO. Reduces additional paid in capital…value you record for amt. you got from stock sale

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7
Q

In section 351 exchange, if shareholder receives consideration that is not stock, what happens?

A

It is boot = cash or property (incl securities that aren’t the company’s stock)

Boot is taxed at FMV. Recognize gain

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8
Q

qualifies for section 351
contributes property adj basis 12000
In addition to stock, receives $3000 cash

What will be shareholder & corp basis?

A

shareholder:
adj basis contributed + recognized gain - cash received
12000+3000-3000 = 12000

corp:
adj basis contributed + recognized gain
12000+3000= 15000

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9
Q

What level of ownership is required to report an investee co. on a consolidated TAX return?

A

Parent must own 80% of subsidiary.

Not 50% as in FAR consolidated financial state

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10
Q

Can deduct how much for each of top 5 executives in public company?

A

$1 mill

entertainment expenses for officer, directors, 10% owners only deductible if included in their income

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11
Q

How much can corporation deduct for employee expenses for….

Meals, entertainment reimbursement
travel costs
luxury skybox
local lodging for employees

A

Normally, 50% meals, entertainment
Unless… if employer reimburses employee for the expense by including it in his income, the employer will deduct all via the wage. The employee will get to deduct 50% of cost on schedule A.

All travel

limited to most expensive nonluxury seat
unless a 1 time event

lodging that’s for employee convenience is deductible by corp and taxable to employee

If lodging required by employer, doesn’t exceed 5 days, not extravagent, it’s deductible to corp and not taxable to employee

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12
Q

Are corporation casualty losses limited

A

NO.

Loss is lesser of adj basis before loss OR decline in value

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13
Q

Goodwill, franchise, trademark. How long amortized for tax

A

15 years

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14
Q

R&D. When to deduct for tax?

A

immediately or elect to amortize over MIN 5yr

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15
Q

Corp. should include all div. in gross income. They get deduction based on control they have over paying company

ownership:
<20%
>-20% to 80%
>-80%

A

DRD
<20% unaffiliated 70%
-80% Control 100%

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16
Q

investor doesn’t qualify for DRD if

dividends are from ________

Deducting interest expense on money borrowed to buy the investment

received from ___-____ organization (organization didn’t pay tax)

owned for less then ____days

A

foreign corporations (since IRS didn’t tax them)

tax exempt

46

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17
Q

DRD 70 < TI 80 (that’s normal)

TI 80 < Dividend 100 hmmm

In this case,,,

70% (100) = 70

A

reduce DRD
70% (TI 80) = 56

Do this when…

Div > Income before DRD > DRD

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18
Q

Corporate charitable contribution limit

A

10% ATI =income-ordinary deductions. No charity or DRD taken out yet

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19
Q

Noncurrent assets used in trade or business… when sold. How are gains and losses treated?

held 1 yr or less:
held more than 1 yr

A

<=1yr ordinary income/loss

> =1yr ordinary losses
gains–long term capital gains
1231 assets

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20
Q

Do corporations get preferential cap gain rate?

What happens to their cap losses

A

NO… taxed at corporate rate

cap losses can only be applied against cap gain.
Unused carried back 3 forward 5 (short term)

Individuals carry unused cap loss forward indefinitely and get to apply 3000 cap loss against ordinary income

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21
Q

NOL carry back carry forward

corp and individual the same

A

back 2 forward 20

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22
Q

foreign tax credit formula

20000 * (30000/100000) = 6000

6000 credit to take this year, but foreign taxes were actually 8000. What to do about the 2000??

A

US tax liability * % of income that’s foreign

US tax * (foreign income/worldwide income)

credit can’t exceed actual foreign taxes paid

The 2000 left is carried back 1 year and forward 10 years.

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23
Q

Accumulated earnings tax rate on undistributed income====>

Safe harbor… amts that can be retained
For manufacturing
For Personal Service Corps

A

20%

250000
150000
Plus federal income tax accrual amt for both types

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24
Q

What are the special deductions you have to add back to Net Income to get Income before special deductions (the number you need to multiply by 10% to get charitable deduction amt)

A

DRD
charity
NOL
capital loss

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25
Q

Taxable portion of dividends?
Current E&P + - + -
Accum E&P - + + -
Dividend Taxed

A

Div Taxed + net ++ 0

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26
Q

Corp gives property distribution to shareholder

How doews it affect taxable portion of dividend?

A

FMV prop - basis = gain added to current EP

FMV of property is dividend to shareholder

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27
Q

Nonliquidating property distribution. How are the following taxed?

Corporate gain on property

Corporate loss on property

shareholder gain

A

Treated like normal distribution

Capital gain

Can’t deduct loss

dividend income up to E/P (Ordinary)

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28
Q

liquidating property distribution. How are the following taxed?

Corporate gain on property

Corporate loss on property

shareholder gain

A

Ordinary gain (capital if stock)

Ordinary loss

Cap gain/Cap loss…..treat like you’re selling stock

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29
Q

1244 stock…gives best of both worlds to original purchaser

Gains treated as…

Losses up to ________ treated as…

A

Cap gains

50000 (100000 MFJ) Ordinary Losses.
Remaining losses treated as capital loss $3000/yr limit

30
Q

To qualify as 1244 stock

Only applies to first $____ of stock
Must be sold by ________ purchaser
Must be from US company. Sold to _____ or ______

A

$1mill
original purchaser
individual or partnerhship

31
Q

Corporate AMT adjustments/preferences +-

P
I
L
E

A
  • Private activity muni bond interest
  • Installment sales of inventory…recognize revenue when earned (accrual)
  • Longterm construction contracts. Use percentage of completion
  • Excess depreciation on personal property (not real estate) USE 150% declining bal. instead of the normal 200% declining bal
32
Q

Corporate AMT – ACE adjustment (adjusted current earnings)

S

L

I

M

A

75% * Seventy percent DRD– add back.

75% * Life

       Insurance proceeds

75% * Municipal Bond Interest

33
Q

Corporate AMT

Regular Taxable Income
\+- Adjustments &amp; Preferences ( PILE)
= AMTI before ACE adjustments
\+- ACE adjustments (SLIM)
=AMT before exemption
- exemption  HOW MUCH???
= AMTI
X tax rate 20%
=tentative minimum tax
- Regular tax
= AMT
A

Exemption = $40000 - 25%(AMTI before exempt - 150000)

the most you can get is 40000

34
Q

An affiliated group of corporations may consolidate tax return if parent owns at least ______% and subs are what entity type? _______

A

80%
corporations

S-corp can’t file with C-corp

35
Q

Business gifts are deductible to max of $_____

How much can you deduct
$12 gift
$30 gift

A

$25 max

$12+$25= $37

36
Q

how to calculate tax for a short period?

A

Annualize income (estimated based on what you’ve already done) and figure tax on it

Multiply annualized tax by (months in short period/12)

37
Q

When parent- subsidiary companies use different methods (cash & accrual), intercompany transactions must match.

The accrual based company records $10000 expense 12/1/x1. Will be paid out in intallments starting 1/1/x2

The cash based company recognizes NO income 1/1/x1

Can these companies consolidate this transaction on their tax return?

A

NO. The accrual company cant’ take the expense without the matching income from the other company. Wait until next year to show transaction

38
Q

Basis 350000. Insurance proceeds 500000.

What gain is recognized?

A

Ins. proceeds - basis

150000

39
Q

Corporation distributes land to shareholder. FMV 38000 with 3000 liability to pass to shareholder.

Assuming E/P is 100000, what will shareholder’s taxable distribution be?

What will share holder basis in land be?

A

38000-3000= 35000

Shareholder basis = 38000
Corp will recognize gain on land. So shareholder will take FMV of land as basis. Assuming liability doesn’t affect basis in property received.

40
Q

100% owner transferred building FMV 100000, basis 35000 to his corporation. In exchange he got 40000 cash and stock worth 60000. What gain does he recognize?

What if he got cash 70000 and stock 30000?

A

recognize lesser of “gain realized” or “boot received”
gain realized (tot trx) 100000 received - 35000 gave =
65000
OR
boot received
40000 (yes b/c lower)

gain realized 100000-35000=
65000 (yes b/c lower)
OR 
boot received
70000

basis + gain recognized - liabilities transferred = shareholder basis

1) 35000+40000=75000
2) 35000+65000=100000 (all gain recognized)

41
Q

What convention must Bent use to determine the depreciation deduction for the alternative mini Forum tax? For real property

A

For Alt Min Tax —– MID MONTH

All RE bought in a month is treated as being bought in the middle of the month

42
Q

For a redemption of stock, is any of it treated as a dividend if…
All of shareholders stock is redeemed
Other shareholders aren’t related

Corp pays 250000 for all of C’s stock (basis 150000). How does C treat this? Distribution subject to Earnings and profits

A

No…not if qualifications met as full redemption

Treat as capital gain 250-150 = 100000 capgain

43
Q

what entities aren’t allowed to take div received deduction?

Corporation
Personal Holding Co.
Professional Service Corp

A

PHC & PSC

44
Q

Can personal holding company tax be assessed against an S Corp?

A

NO. S-Corp is pass thru

45
Q

How does one avoid personal holding company tax?

A

paying an actual dividend or as a result of a consent dividend, which is a hypothetical dividend the corporation pays taxes on but does not actually distribute to shareholders. Since the purpose of the PHC tax is to prevent taxpayers from being able to pay tax on investment income at a lower corporate rate than if taxed individually, it does not apply to interest income on municipal bonds, which is tax exempt. The PHC tax is a self-assessed penalty tax and does not require an IRS assessment.

46
Q

When corporations consolidate tax return, what happens to intercompany profits and sales of property?

A

Intercompany profits eliminated

Property retains its basis. Gain is reported when it’s finally sold to a third party

47
Q 
Corporate reorganization types
F
A
B
C
F
A

F = name change
A= statutory merger or consolidation
B = uses voting stock to gain at least 80% voting power & 80% of each nonvoting stock
C = uses voting stock to gain substantially all of target co’s assets
F=recapitalization to change the capital structure of a single corporation
D=transfer of assets to gain controlling interest
E= bankruptcy

48
Q

Corp is going to distribute 25000. 20000 to preferred and 5000 to common. Corp has 20000 E&P. Who will pay taxable divs and who will pay capital gains/

A

Corp has to pay preferred SH first, so they’ll pay for divs (up to the co’s E&P 20000).
Common shareholders will have capital gains

49
Q

What div received deduction does a 20% ownded company get?

80% owned?

50% owned

A

20% owned —-> 80% DRD. NOT 70% which goes to LESS than 20%

80% owned —–> 100% DRD

50% owned —> 80% DRD

50
Q

When a shareholder contributes property to obtain stock, what will determine the valuation of the investment, when the total shares owned by contributors of cash and property is greater than 80%?

1) The adjusted basis of the property.
2) The fair market value of the property.

A

ONLY 1 Adj Basis of property will be value of shares received even if FMV of property is less than basis

give basis 30000 fmv 20000
shareholder basis in stock 30000
If you sell your stock FMV 20000, you’ll recognize that 10000 loss

It is the corporation who will take the lower of SH basis or FMV for its basis in the property
(unless you both elect otherwise)
corporation basis in property 20000
If corp sells property immediately, they’ll have no gain

Only 1 party gets the loss.

51
Q

figure the tax on $63000

up to 50000 15%
over 50000-100000 25%

A

50000*.15= 7500

13000*.25= 3250

tax 10750

52
Q

20X3 federal taxable income was $400,000 (mfg co) and its federal income tax was $100,000. What is the maximum amount of accumulated taxable income that may be subject to the accumulated earnings

A

mfg co. gets 250000 allowance for working capital
personal service corp gets 150000
All get to reduce by income tax owed

Accum Earnings tax on undistributed income above these limits is 20%. Assessed by IRS AUDIT

400000-250000-100000= 50000
Min. accum earnings credit 350000
Max income subject to tax = 50000

In this case, AET 50000*20% = 10000

53
Q

When must c corp use accrual

When must personal service corp use accrual?

A

average annual gross RECEIPTS (not assets) have exceeded $5million for the last 3 years

Service biz with gross receipts over $10million must use accrual

54
Q

When must a corp use M-3?

Can it elect to use M-3 if not required?

A

A corporation with total assets (NOT RECEIPTS) of $10 million or more is required to file a schedule M-3

Yes, can elect

Note. ASSETS used for M-1/M-3. Gross receipts used to determine cash or accrual

55
Q

A redemption of shares, which is a repurchase of shares from the shareholder, is treated as a sale or exchange by the shareholder and generally results in a capital gain as long as the redemption is not essentially equivalent to a dividend

Capital gain to shareholder if redemption Meets one of the following..

A

is substantially disproportionate;

involves redemption of all of the shareholders’ stock, provided other shareholders are not related;

is from a non-corporate shareholder in partial liquidation;

or is a redemption of stock to pay death taxes under section 303

56
Q

accrual-basis taxpayer, reported rent receivable of $35,000 and $25,000 in its year 2 and year 1 balance sheets, respectively. During year 2, Ace received $50,000 in rent payments and $5,000 in nonrefundable rent deposits. In Ace’s year 2 corporate income tax return, what amount should Ace include as rent revenue?

A

since Ace had a $10,000 increase in rents receivable, rental income must be $10,000 more than the $50,000 in rents received, or $60,000. Plus 5000 deposit === 65000

57
Q

May a shareholder take a capital loss from a redemption. Basis in stock 150000. Receives 100000 for it… 50000 loss

A

Shareholders owning more than 50% can’t take a loss on redemption…why? because they had the power to create a loss

58
Q

In a reorganization, if one of the parties receives boot (unrelated party cash or securities), what must they do to NOT have to report gain?

A

Distribute it to their shareholders.

If Raisin Corp receives related party stock valued at 700000 and nonrelated party stock valued at 50000 in exchange for 600000(raisin basis) of raisin assets, what will make raisin have to recognize gain?

They keep the unrelated stock instead of distributing it to shareholders. They’ll have to report FMV gain of 50000 because it’s boot.

59
Q

For a redemption to qualify as tax free exchange, the redemption must be big enough to qaulify as disproportionate. How much should ownership change to qualify?

A

Shareholder’s ownership must no greater than 80% of what it was before the redemption.

60
Q

Calliope Corp. has outstanding 400 shares of common stock of which Yak, So, Day, and Ren each own 100 shares or 25 percent. No stock is considered constructively owned by any of the shareholders under section 318. Calliope redeems 34 shares from Yak, 24 shares from So, and 42 shares from Day. Which shareholder(s) qualify for exchange treatment on this redemption

A

80% * 25% = 20%
For exchange to be tax free, ownership after redemption must be no greater than 80% of previous ownership = 20%. So it can be 20% or less

After redemption ownership
Y (100-34)/(400-100) = 22%
S (100-24)/(400-100)= 25%
D(100-42)/(400-100)= 19%

Only Day will qualify for tax free redemption

61
Q

Figure corporate tax depreciation. Company policy is half year

Furniture and fixtures costing $56,000 were placed in service on January 1, 20X3

A

SL 56000*1/7 (because 7 year property)

Tax DDB doubles SL
560001/72=16000

halfyear says only take half a years depreciation in the first and last year.

For year 1, tax depreciation is 8000

62
Q

For tax depreciation,

What are the conventions for

Real property?

Personal property?

A

Real property – mid month because usually larger amount of money

Personal property – half year

63
Q

Hubert Hanson owns 40% of Calico Corp.’s outstanding shares; Hanson’s spouse owns 20%. In a qualifying stock redemption Calico exchanges $100,000 cash for half of Hubert Hanson’s stock. At the time of the redemption, Hubert’s adjusted basis in all of his Calico stock was $300,000. Additionally, just prior to the redemption, Calico Corp. had accumulated earnings and profits (E&P) of ($20,000) and current E&P of $25,000. What amount of income, gain or loss will Hanson recognize as a result of the redemption?

A

NO GAIN OR LOSS

Including the stock owned by Hubert’s wife, which is considered to be indirectly owned by Hubert, Hanson owns 60% of Calico. Although the sale of half of his interest, which has a basis of $150,000 (i.e., 50% × $300,000), for $100,000 results in a loss of $50,000. However, when a shareholder directly or indirectly owns more than 50% at the time of the redemption, losses are disallowed.

64
Q

Big corp absorbs Little Corp through a qualified reorganization. Big gives stock to Little for its assets. If it only gives stock, no taxable gain/loss recognition. What if Big gives cash, marketable securities, or property to Little in the exchange? Under what circumstances will Little have to recognize gain?

A

If Little keeps the boot (exchange consideration that’s not Big Stock), they will recognize gain. If they distribute boot to Little shareholders, they will not recognize gain.

65
Q

In April, A and B formed X Corp. A contributed $50,000 cash, and B contributed land worth $70,000 (with an adjusted basis of $40,000). B also received $20,000 cash from the corporation. A and B each receives 50% of the corporation’s stock. What is the tax basis of the land to X Corp

A

When a corporation receives property in a Section 351 exchange, it assumes a carryover basis from the shareholder. If the shareholder recognizes gain, the corporation adds that gain to its basis in the property. B receives $20,000 of cash as part of the transaction, which means that it is classified as boot. When a shareholder receives boot, he or she must recognize gain to the extent of boot received. Thus, B recognizes $20,000 of gain. X Corp. assumes a carryover basis of $40,000 and adds the $20,000 gain recognized by B to its basis. X Corp’s tax basis in the land is $60,000.

66
Q 
Who is entitled to NOL deduction (as an entity)?
Partnership 
S Corp
C Corp
Trust
A

Trust and C Corp

Pass throughs – No. But the individual can use entity losses for their own NOL

67
Q

In a Section 351 transaction, a corporation’s basis in the property received equals the adjusted basis of the property in the hands of the transferor plus

A

any gain recognized by the transferor

68
Q

Which are permanent differences in income M1,M3?

The Domestic Activities Production Activities Deduction (DPAD)
Section 179 bonus depreciation
Tax credits

A

DPAD only.
This would include the DPAD, which is deductible for tax purposes but is not an expense for financial reporting purposes. Tax credits reduce total tax liability but are not a reduction of taxable income.

69
Q

The personal holding company income test requires the company’s income for a given taxable year to be at least

A

60% of adjusted gross ordinary income

A “personal holding company” is defined as a corporation where at least 60% of its adjusted ordinary income is personal holding company income and more than 50% of its outstanding stock is owned by or for no more than 5 individuals.

70
Q

A married individual invested in Section 1244 small business stock in year 1. In year 7, the individual sold the stock at a loss of $157,000. There were no other stock transactions during year 7. If the taxpayer files a joint return, how much loss can the taxpayer deduct in year 7?

A
  1. IRC §1244 allows losses from the sale of small, domestic corporate stock, that was sold directly to individual shareholders, to be deducted as ordinary losses up to $50,000, or $100,000 on a joint return. The remaining loss will be treated as a capital loss subject to the $3,000 per year limit.
71
Q

For corporate shareholders entering with 80% or more ownership (control), are dividends subtracted from their beginning basis?

A

NO! Only return of capital is subtracted from basis. Corporations pay tax on their income. Shareholders do not get a pass thru amount that increases basis as they do in s-corp and partnership

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