Ch 3 part 1

Question 0

Who can use fiscal year tax reporting?

Answer 0

Only C Corporations

Usually Not S Corporations or personal service corporations,
Must establish business purpose to adopt fiscal year

Question 1

Short-period tax return

Answer 1

Corporation must file a short period tax return if its filing for under
A 12 month period

Question 2

Personal Service Corporation

Answer 2

Corporation whose principal activity I’d performance of personal
Services by its employee owners who own over 10% of stock

Question 3

General Equation for determining: corporate income tax

Answer 3

Gross income - deductions and losses
= taxable income before special deductions
- special deductions
= taxable income
X corporate tax rate
= regular tax before credits and other taxes
- (foreign tax credit and possessions tax credit)
= regular tax
- other tax credits
+ recapture of previously claimed tax credits
= income (regular) tax liability

Question 4

Alternative minimum tax (AMT)

Answer 4

Taxable income before NOL deduction
\+/- adjustments to taxable income
\+ tax preference items
- alternative tax NOL deduction
= alternative minimum taxable income
- statutory exemption
= tax base
X 20% tax rate
= tentative minimum tax before credits
- AMT foreign tax credit
= tentative minimum tax
- regular income tax
= alternative minimum tax (if greater than 0)

Question 5

Accrual tax method

Answer 5

Corporation reports income in year it earns it and reports

expenses in year it incurs the expenses

Question 6

4 exceptions that allow corporation to use the cash method

Answer 6

1 qualifies as family farming corporation
2 qualifies as personal service corporation (health, law, accounting)
3 avg. 3 year receipts was under $5 million
4 has elected S corporation status

Question 7

Cash method accounting for taxes

Answer 7

Corporation reports income when it actually or constructively
Receives income and reports expenses when it pays them

Question 8

Difference of Corporations vs. Individuals: Gross Income

Answer 8

Exclusions for fringe benefits available only to individuals

Exclusions for capital contributions available only to corporations

Question 9

Difference of Corporations vs. Individuals: Deductions 4

Answer 9

Individuals have for AGI deductions, from AGI deductions
And personal exemptions

Corporations don’t compute AGI: their deductions are presumed
Ordinary and necessary business expenses

Question 10

Difference of Corporations vs. Individuals: Charitable Contributions 2

Answer 10

Individuals limited to 50% AGI (30% for capital gain property)

Corporations limited to 10% of taxable income without Dividends received deduction, US production activities deduction, NOL
and capital loss carry backs and contribution itself

Question 11

Difference of Corporations vs. Individuals: Depreciation on Sec. 1250 property 3

Answer 11

1 individuals generally don’t recapture depreciation
2 individuals subject to 25% to 28.8% tax rate on unrecapture
Sec. 1250 gains
3 corporations must recapture 20% of amount that would be
Recaptured under sec. 1245

Question 12

Difference of Corporations vs. Individuals: net Capital gains

Answer 12

1 individuals get favorable rates

2 corporations taxed at corporate tax rates

Question 13

Difference of Corporations vs. Individuals: capital losses

Answer 13

Individuals get $3000/ year deduction and can carry forward indefinitely

Corporations can carry back capital losses 3 years
and forward 5 yrs.

Question 14

Difference of Corporations vs. Individuals: dividends received deduction

Answer 14

70%, 80% or 100% only available to corporations

Question 15

Difference of Corporations vs. Individuals: NOL

Answer 15

Complex for individuals to realize a NOL, they are allowed to
Carry back or forward

corporations NOL is excess of deductions over income for year
Can elect to carry back two years or carry forward 20 years

Question 16

Difference of Corporations vs. Individuals: production activities deduction 2

Answer 16

For individuals it’s based on lesser of qualified production
Activities income or AGI

for corporations it’s based on lesser of qualified production
Activities income or taxable income

Question 17

Difference of Corporations vs. Individuals: tax rates

Answer 17

Individual rates are 10% to 39.6%

Corporate rates are 15% to 39%

Question 18

Difference of Corporations vs. Individuals: Alternative Minimum Tax 3

Answer 18

1 individual AMT rates are 26% or 28%
2 corporate AMT rate is 20%
3 corporations subject to AMTI adjustment called adjusted current earnings (ACE)

Question 19

Difference of Corporations vs. Individuals: passive losses

Answer 19

Passive losses apply to individuals, partners, s corporations and
Closely held C corporations

They don’t apply to widely held C corporations

Question 20

Difference of Corporations vs. Individuals: casualty losses

Answer 20

Casualty losses are deductible in full by a corporation because
Corporate casualty losses are business related

Individuals reduce casualty losses by $100 and are restricted
To losses exceeding 10% or AGI

Question 21

Corporations: capital gains and losses position

Answer 21

Corporations must net all capital gains and losses

Question 22

Corporation net capital loss, what can it be used to offset

Answer 22

Can only offset capital gains, can’t offset ordinary income

Corporation can carry back as short term capital loss 3 years
And carry forward as ST capital Loss 5 years ( they expire after 5 years)

Question 23

Corporate ordinary business deductions 9

Answer 23

1 salaries of officers and employees
2 rent
3 repairs
4 insurance premiums
5 advertising
6 interest
7 taxes
8 losses on inventory/property, bad debts
9 depreciation

Question 24

What 4 expenses are not allowed to be deducted as ordinary business expenses

Answer 24

1 no deduction on interest borrowed to purchase tax-exempt securities 2 illegal bribes or kickbacks 3 fines or penalties to the government 4 insurance premiums to insure lives of officers and employees Where corporation is the beneficiary

Question 25

Organizational expenditures

Answer 25

Outlays made in forming the corporation legal and accounting fees incurred in the incorporation process Expenditures normally must be capitalized

Question 26

Amortization of organizational expenditures under section 248

Answer 26

Corporation may elect to deduct first $5,000 of organizational expenditures as long as expenditures don't exceed $50,000 Deduction is reduced by amount exceeding $50,000 Amortize over 180 months

Question 27

specific organizational expenditures: legal services incident to corporation's organization 3

Answer 27

1 drafting the corporate charter and bylaws 2 minutes of organizational meetings 3 terms of original stock certificates

Question 28

4 specific organizational expenditures

Answer 28

1 legal services incident to corporations organization 2 accounting services necessary to create corporation 3 expenses of temporary directors and organizational meetings Of directors and stockholders 3 fees paid to state of incorporation

Question 29

Start up expenditures, define

Answer 29

Outlays that would otherwise be considered Ordinary and necessary business expenses paid/incurred by Individual or corporate tax payer Can deduct first $5000 in first year on amount less than 50K Expenditures amortized over 180 month period

Question 30

3 objectives of start up expenditures

Answer 30

1 investigate the creation or acquisition of active trade or business 2 create active trade or business 3 conduct an activity engaged in for profit or production of Income before the time the activity becomes active trade/business

Question 31

Common startup expenditures 6

Answer 31

``` 1 costs to survey potential markets 2 analysis of available facilities 3 advertisements relating to opening the business 4 training of the employees 5 hiring of management personnel 6 outside consultants ```

Question 32

Startup expenditures and organizational expenditures: what can be elected instead of amortizing over 180 month period?

Answer 32

The corporation can elect to capitalize the expenditures without Any amortization

Question 33

3 ways that treatment of charitable contributions by individuals and corporate tax payers differ

Answer 33

1 timing of deduction 2 amount of deduction permitted for contribution of certain No cash property 3 maximum deduction permitted in any given year

Question 34

Timing of corporate charitable deductions, what is the general rule?

Answer 34

Contribution must be paid during the year of deduction Not just pledged

Question 35

Timing of corporate charitable deductions: what is the special rule for corporations that use accrual accounting method? 2 conditions

Answer 35

These corporations may elect to have part or all of charitable Contribution having been made in year accrued instead of paid 1 Board of directors authorizes contribution in year accrued 2 corporation pays contribution by March 15th of following year

Question 36

Corporate charitable deductions of non monetary property

Answer 36

Charitable deduction equals donated property's FMV

Question 37

Ordinary income property

Answer 37

Property whose sale resulted in ordinary income or short term Capital gain Ex. Investment property held less than 1 year, inventory property, Property subject to depreciation recapture under sec. 1245 and 1250

Question 38

Charitable deduction limitation for ordinary income property

Answer 38

Limited to: Charitable deduction = property's FMV - (ordinary income or short term capital gain)

Question 39

Special case for inventory, scientific research, college fund, equation for charitable deduction

Answer 39

Charitable deduction = | adjusted basis + 1/2 x (FMV - adjusted basis) this cannot exceed twice the adjusted basis)

Question 40

When a corporation donates appreciated property whose sale would result in a long term capital gain, what is the contribution deduction?

Answer 40

The contribution deduction equals the property's FMV

Question 41

When is capital gain property restricted to the property's: FMV - Longterm capital gain related to the property's sale? 3 situations

Answer 41

1 corporation donates an intangible asset 2 tangible property donated and organization uses it for different Purpose 3 corporation donates appreciated property to certain private No operating foundations

Question 42

Substantiation requirements for donations 3, note 2nd and 3rd requirements don't apply to cash, publicly traded securities, vehicles

Answer 42

1 donations over $500, corporation must include its description On tax return of property 2 donations over $5,000 corporation must obtain qualified appraisal and include in tax return 3 donations over $500,000 must attach qualified appraisal to Tax return

Question 43

Corporate limitation on charitable deduction, what 5 items are not included in the limitation?

Answer 43

10% of adjusted taxable income, ``` 1 charitable contribution deduction 2 NOL carry back 3 capital loss carry back 4 dividends received deduction 5 US production activities deduction ```

Question 44

How long does a corporation have to use charitable contribution carry forwards?

Answer 44

5 years

Question 45

What 3 special deductions are C corporations allowed?

Answer 45

1 US production activities deduction 2 dividends received deduction 3 NOL deduction

Question 46

US Production Activities Deduction equation

Answer 46

9% x lesser of: qualified production activities income Or Taxable income before US production activities deduction

Question 47

What is a main limitation on the US production activities deduction?

Answer 47

Deduction can't exceed 50% of corporation's W2 wages allocable To US production activities

Question 48

Dividends received deduction, financial reporting

Answer 48

Not reported deduction not included in financial accounting | income, dividends are included

Question 49

Dividends received deduction rules

Answer 49

Corporations that own less than 20% can deduct 70% dividends Corporations that own over 20% can deduct 80% of dividends Corporations that own 80% with voting power can deduct 100% of dividends

Question 50

Limitation on dividends received deduction (for less than 20% owners)

Answer 50

Limited to lesser of 70% of dividends received Or 70% of taxable income computed without regard to NOL Deduction, capital loss carry back, dividends received deduction Itself

Question 51

Dividends received deduction and net operating loss

Answer 51

If a net operating loss occurs, you can take the full deduction Of 70% x dividends received You can also take the dividends received deduction if the taxable Income is less than 70% x dividends received

Question 52

Members of affiliated groups of corporations

Answer 52

Group of corporations is affiliated if parent corporation owns At least 80% of stock of at least one subsidiary corporation And at least 80% of other corporation is owned by other Group members

Question 53

Foreign corporate dividends

Answer 53

The dividends received deduction doesn't apply to dividends | From foreign corporations

Question 54

Dividends received deduction: when stock is held less than 46 days

Answer 54

Can't take deduction

Question 55

Debt financed stock regulation

Answer 55

Dividends received deduction isn't allowed for stock bought | With borrowed money

Question 56

What deduction is disallowed when a company experiences a NOL?

Answer 56

US production activities deduction is disallowed

Question 57

Sequencing of deduction calculations 5

Answer 57

``` 1 all deductions other than charitable contributions, dividends Received, NOL, US production activities 2 charitable contributions deduction 3 Dividends received deduction 4 NOL deduction 5 US production activities deduction ```

Question 58

NOL Carry back: charitable deduction

Answer 58

NOL carry back from a later year won't affect a charitable deduction from a previous year A carryover from a previous year will reduce the charitable Contribution deduction