BUSINESS - CALCULATIONS

Question 1

The amortization of a bond premium should be calculated using the CONSTANT YIELD TO MATURITY METHOD, and can be used as an offset to interest income.

Answer 1

Using the Constant yield method:

Purchase Price
x 
Yield To Maturity (YTM) at issuance
-
Subtract the Coupon Interest.

As the bond reaches maturity, the premium with be amortized over time, eventually reaching $0 on the exact date of maturity.

(Good to know. Not core test material)

Question 2

CHARITABLE CONTRIBUTIONS DEDUCTIONS

Answer 2

A corporation’s allowed deduction for charitable contributions is 10% of taxable income.

The taxable income calculation is done WITHOUT taking into account the CHARITABLE DEDUCTION and DIVIDEND RECEIVED DEDUCTIONS and any net operating losses or capital loss carrybacks.

Any contribution that is not currently deductible because of the 10% limit can be carried forward for a period of up to 5 years.

The 10% is based on income, so it’s variable. As income changes, the deductible amount is adjusted.

Question 3

Calculating NOL

Answer 3

The net operating loss is essentially the net loss for the company.

CASUALTY OR THEFT LOSSES may be included as part of the net operating loss.

The DIVIDENDS RECEIVED DEDUCTION is calculated without the limitations to a percent of taxable income.

The corporation may NOT deduct any carryovers from other years.

CAPITAL LOSS CARRYOVERS may NOT be used in year with a net operating loss.

The same is true of CHARITABLE CONTRIBUTIONS CARRYOVERS.

Normally no deduction for charitable contributions is allowed in a loss year because charitable contributions are limited to a percentage of net income.

Question 4

NET OPERATING LOSS - Example

Answer 4

In 2019, Marcus Corp. had $250,000 of gross income from business operations and $310,000 of allowable business expenses. Marcus Corp. also received $100,000 in dividends from a U.S. corporation. Marcus Corp. is able to take a 65% dividend received deduction, which would normally be limited to 65% of its taxable income before the deduction.

Marcus Corp. calculates its NOL as follows:

Gross Income = $350K (Business Income + Dividends)

Minus Expenses ($310K)

Minus Dividend Rec’d Deduction ($65K) - there is no limitation for the NOL calculation

= NOL ($25K)

Question 5

What form is the credit for Prior Year Minimum Tax calculated on?

Answer 5

Form 8801

Question 6

Special Depreciation Allowance (also called Bonus Depreciation)

Answer 6

The Tax Code provides a special depreciation allowance for qualified taxpayers and qualified assets.

For 2019, the special depreciation allowance is 100% of the first year’s regular depreciation calculated after subtracting the 179 deduction and certain deductions and credits.

This special depreciation allowance is calculated after the Section 179 deduction and before regular depreciation.

Question 7

How do you calculate gain or loss?

Answer 7

Gain or loss is the difference between the fair value of what you receive and adjusted basis of the property given up.

Keep in mind, debt assumed or transferred needs to be considered as well

Question 8

How do you determine if the sale of a business asset is a gain or loss?

Answer 8

In order to determine whether the sale of a business asset resulted in a gain or loss, the seller must calculate whether the amount realized from the sale is greater or less than his adjusted basis in the asset sold. ADJUSTED BASIS is the original basis plus any additions and minus any deductions such as depreciation. In order to determine depreciation, it is necessary to know both the PROPERTY TYPE and the HOLDING PERIOD.

Note: Replacement Cost is not relevant.

Question 9

Realized Gain Calculation

Answer 9

FMV received

Minus Basis Given Up

= Gain Realized

Question 10

Recognized Gain

Answer 10

The LESSER of:

Realized gain, or

Amount of boot received.

Question 11

How to calculate the adjusted basis of a new building received in a like-kind exchange.

Answer 11

EXPLANATION
If a taxpayer trades business or investment property for other business or investment property of a like kind, the taxpayer does not pay tax on any gain or deduct any loss until he sells or disposes of the property received. If a taxpayer acquires property in a like-kind exchange, the basis of that property is generally the same as the basis of the property transferred. With the following adjustments:

INCREASE BASIS by the total amount of:

• Additional money paid, including exchange expenses
• FMV of any non-like kind property transferred to other party
• Net liabilities assumed by the taxpayer
• Any gain recognized on the exchange

DECREASE BASIS by the amount of:

• Boot received (ie. money, FMV of non-like kind property, net liabilities other party assumes)
• Any loss recognized on the exchange

Question 12

Basis of New Like-Kind Asset (Formula)

KNOW THIS!!!!

Answer 12

Basis of Old Property Exchanged

+ Basis of any BOOT given

+ Gain Recognized

• FMV of BOOT Received

= Basis in the Newly Acquired Property

(NOTE: The basis of the boot received will be its FMV.)

Question 13

AE&P

Answer 13

Accumulated Earnings and Profit.

All the undistributed E & P from all previous years. This is calculated on the first day of each Year.

The dividends that are distributed from CEP or AEP are taxable.

Dividends that are not from E & P are considered a Return Of Capital, and is therefore not taxable and reduces the basis of the shareholder.

Question 14

Form 8801

Answer 14

Form used to calculate the credit for PRIOR YEAR MINIMUM TAX.

NOTE:
For a given tax year, if a taxpayer is not required to pay Alternative Minimum Tax (AMT) but did pay AMT in a previous year, they may be able to claim a minimum tax credit against their current year taxes.

Question 15

Form 461

Answer 15

Form 461 is used by non-corporate TPs to calculate the amount of Excess Business Loss to report.

NOTE:
Form 461 does not exist for 2020, but will be issued beginning with 2021

Question 16

DNI

Answer 16

Distributable Net Income

Trusts and Estates MUST calculate DNI each year to determine the maximum amount of income distributions for which a distribution deduction is available. A trust may NOT deduct distributions in excess of the taxable amount of DNI.

Question 17

What is the formula to determine one’s contribution percentage for his SEP?

Retirement Q

Answer 17

Rate/ (1+rate)

So a 10% rate contribution percentage would be:

10/ (10 + 1)
= .090909

Question 18

Shareholder’s Basis in Stock

Answer 18

Add the Adjusted Basis of the property transferred

+ Any gain recognized (only if boot was received)

• Any boot received

= Shareholder Basis in Shares Acquired

Question 19

Corporation’s Basis in Property

Answer 19

Transferor’s adjusted basis

+ Any gain recognized by the transferor

= Corp’s Basis in Property

Question 20

PHC Tax Calculation to get Adjusted Taxable Income (ATI)

Answer 20

Taxable Income
\+
Dividend Received Deduction
\+ 
NOL Deduction
-
Federal and Foreign Income Taxes
- 
Charitable Cont. in excess of 10% limit
-
Net Capital Loss
-
Net LT capital gain over net ST capital loss

=
Adjusted Taxable Income

Question 21

How do you calculate a Corporation’s basis in property contributed by a shareholder?

Answer 21

A corporation’s basis of property contributed by a shareholder is the same as the basis the shareholder had in the property, increased by any gain the shareholder recognized on the exchange.

NOTE: If by the exchange the Shareholder is in control of the corporation (owns 80% of stock) following the exchange, the basis of the stock received by the shareholder would equal their basis in the property exchanged.

Question 22

Calculating CEP

Answer 22

CEP is calculated by making some adjustments to taxable income.

This is not a detailed calculation that you will need to make on the exam, but it is presented here to outline the differences between E&P and retained earnings.

Question 23

Structure of a Corporate Return (Calculation)

Answer 23

Total Gross Income
Minus Deductions
_________________
= TAXABLE INCOME

Taxable Income
Multiplied by Tax Rate
_________________
= TOTAL TAX DUE

Total Tax Due
Minus Payments and Credits
_________________
= AMOUNT OVERPAID or AMOUNT DUE

Question 24

Dividend Received Deduction: 3-Step Calculation

Answer 24

1. Calculate the MAXIMUM Amount of Dividends that MIGHT NOT BE TAXABLE
2. Calculate a LIMIT on the Amount that is NOT TAXABLE
3. Consider EXCEPTIONS to the Limit

Question 25

Accumulated Earnings Calculation

Answer 25

To calculate an Accumulated Taxable Income (ATI), corporations are given two deductions from taxable income after federal income tax before the calculation of the penalty tax.

The greater of:

a $250,000 credit ($150,000 for certain types of personal service companies), or

an amount accumulated to meet the reasonable needs of the business, and

A deduction for any dividends paid during the first 2 1/2 months of the next tax year minus the accumulated E&P at the close of the preceding tax year.

The excess of accumulated earnings over these two deductions is taxed at a 20% rate.

Question 26

Calculating the Entering Partner’s Basis in the Partnership.

Answer 26

Money contributed
+
The adjusted basis of any property contributed
−
Any of the new partner’s personal liabilities assumed by the partnership
+
The new partner’s share of any partnership liabilities. (ie. a portion of the liability the new Partner gave to the Partnership)
+
Gain recognized by the entering partner (ONLY if they are relieved of liabilities greater than their basis in the contributed property)
=
Partner’s basis in the partnership

Question 27

Calculation of Gain or Loss of the outgoing Owner

During an Ownership Change of a Partnership.

Answer 27

Total of cash, or other property received
+
Partnership liabilities assumed by new partner
-
Old Partner’s basis in the Partnership Interest
=
Total Gain or Loss.

How is this classified? It is based on the sale of Cold and Hot assets.

Question 28

Self-Employed Compensation - Special Computation

Answer 28

The deduction for contributions to the SEP-IRA and net earnings depend on each other.

The deduction for contributions to the TPs SEP-IRA is determined by reducing the contribution rate called for by the plan.

The formula to determine Contribution Percentage is rate/(1+rate).

Question 29

Calculate Net Earnings for SEP and qualified plans

Answer 29

Net Earnings from SE is:

Gross Income from business (provided personal services are a material income-producing factor)

MINUS - allowable business deductions (including contributions to SEP for common law employees)

MINUS - the deduction allowed for the deductible part of S-E tax.

Net Earnings do include Foreign Earned Income and Foreign Housing Costs, which are included in Gross Income as well.

Net Earnings include a partner’s distributive share of partnership Income/Loss.

It does NOT include pass-through income to shareholders of S Corps.

Guaranteed Payments to limited partners are NET EARNINGS from S-E if they are paid for services to or for the partnership.

However, distributions of other income or loss to limited partners are NOT earnings from S-E.

Question 30

Qualified Childcare Facility Credit:

Qualified Childcare Resource Credit:

Answer 30

Qualified Childcare Facility Credit: 25%

Qualified Childcare Resource Credit: 10%

There is a$150,000/yr. cap on the credit.