Flashcards in Chapter 3 Section 1: C Corporations Deck (79)
What is the only entity whose earnings are subject to double taxation?
There's income tax at the corporate level, and then distributions are taxed at the individual level
Does the corporation recognize gain or loss in general upon formation?
At what basis does the corporation record property received at formation?
Greater of NBV or debt assumed by corporation
What is the one time a corporation may recognize a gain or loss upon formation?
To prevent a negative basis when property is received and debt is assumed.
What if the aggregate NBV of property contributed at formation exceeds aggregate FMV of the property? (corporation side)
Record at FMV to avoid built-in-losses
What conditions must be present for a shareholder to avoid tax consequences when contributing to the formation of a C Corp?
1. Those transferring the property must have at least 80% control
2. Boot is not received (in the form of either cash withdrawn or receipt of debt securities)
How does a shareholder handle cancellation of debt in regards to boot received when donating property at C Corp formation?
Any liabilities assumed that exceed the NBV of assets contributed is treated like boot, thereby creating a gain.
At what basis does the shareholder record shares of common stock received in the following circumstances?
Cash - amount contributed
Property - NBV, reduced by debt assumed by corp and increased by gain recognized by shareholder
Services - FMV (taxable as ordinary income)
When the shareholder contributes property, what is the basis of the stock, and when is there a gain?
Basis of the stock is the NBV less liabilities, but never negative (can only be zero)
Gain is the excess liability assumed over the NBV
What is Schedule M-1 used for?
What does it include?
To reconcile book income to taxable income
Permanent and temporary differences, with no distinction
For tax purposes, when is interest income received in advance, rental income received in advance, and royalty income received in advance taxed?
When received, resulting in a temporary difference
List three permanent differences between taxable income and book income
Interest in come from municipal or state obligations/bonds
Proceeds from life insurance on key person policies where corporation is the beneficiary
Federal income taxes - not deductible
What is the difference between an M-1 and M-3?
M-3 is for corporations with total assets of $10 million or more
What types of expenses qualify for trade or business deductions?
Ordinary and necessary expenses
Explain the Domestic Production Deduction
What is the percentage applied to?
It allows a business to deduct a percentage of their qualified production activities income
Lesser of Qualified Production Activities Income (QPAI) or Taxable Income (disregarding the deduction)
What is the formula for QPAI?
Domestic production gross receipts
- Other directly allocable expenses or losses
- Proper share of other deductions
What executive compensations cannot be deducted?
Expenses in excess of $1m paid to the CEO or the four other most highly compensated officers
How are bonus accruals handled?
If they are paid by March 15, they're deductible
How are bad debts handled?
For accrual basis, use the specific charge-off method (similar to direct write-off). Deductible when the specific A/R is written off.
For cash basis, it was never income, so it can't be deducted
When is business interest expense deductible?
What amount of investment interest expenses is deductible?
When is prepaid interest expense deductible?
Business: when paid and incurred
Investment: only up to taxable investment interest income
Prepaid: deduct later, when incurred
What is the limit for charitable contribution deductions?
How do you handle accruals?
10% of adjusted taxable income
If it is paid by March 15, it counts for the prior year's return
What portion of business losses or casualty losses related to a business is deductible?
100% (no $100 or 10% of AGI reductions)
What amount of loss do you deduct when property is only partially destroyed?
Lesser of the change in FMV or the NBV immediately before casualty
What amount of loss do you deduct when property is fully destroyed?
NBV before the casualty
What amount of organizational expenditures and start-up costs is deductible?
What do you do with the remainder?
$5,000 for each category
The remainder is amortized over 15 years (180 months), including this year. So this year you have $5,000 + amortization
What costs are included in organizational expenditures and start-up costs?
What is excluded?
Legal services, accounting services, and fees paid to the state
Issuing and selling stock, commissions, underwriter fees, and transferring assets to a corporation
How do you handle amortization, depreciation, and depletion of goodwill, covenants not-to-compete, franchises, trademarks, and trade names?
Amortize straight-line over 15 years (no impairment)
What do you do with life insurance premiums when the corporation is named as the beneficiary? When it is not?
Named: not tax deductible
Not: is tax deductible (fringe benefit)
What is the deduction for business gifts?