Corporate Tax- C corps- Section 2

Question 1

Things to know

Answer 1

10% of ATI for charitable contributions

Dividends received deduction drd 70% 89% 100%

Question 2

Tax form for c Corp

Answer 2

1120

Due 4/15 3/15???

If calendar year a 5 month extension

If fiscal year a 6 m .. fiscal is any 12m- 52-53 weeks, ends on the same day but does not have to end on the last day of the month* asked

A lot will be accrual- when rev when earned and expenses when incurred

Limited liability for members

Tax paying entity-

Article of Corp filed for it

Question 3

Special deductions- love to test them

Answer 3

Charitable contributions - 10% of ATI

Drd- dividends received deduction : government loves to tax , dividends aren’t deductible but dividend income is taxable. Depending on how much stock of the Corp you own they will give you a 70% dividends received deduction an 80% or 100% if control . So all tax free at 100% .

Question 4

Phc

Answer 4

Personal holding company tax
Tried to get taxed as Corp instead of individual bc rate is lower

Kinda penalty tax like accumulated

Question 5

Accumulated earnings tax

Answer 5

Government limits what Corp accumulates

Corp wants to accumulate bc paying out means double taxes as dividends since income is taxed . They want to invest and make more money instead of having it taxed

Make money , pay tax then pay a dividend which gets tax too

So it is penalized- then amt

Question 6

Formation of c Corp / CONTROL

Answer 6

Shareholder transfers in to get stock
Roger cpa formation example- it is an extension of him bc he put in his money to create and wasn’t taxed. Therefore has CONTROL.

No gain or loss reported if transfer causes transferor to be in control - tax free exchange. Non event
Transfer in at carryover basis and carryover period

If cash given 70%, property 20%, services 10%.. the two with cash and property is 90% so they have control so non taxable

Greater or equal to 80% is control

Services aren’t property, not cash, like bartering, so taxable

So if person still gets like 20% of stock others wouldn’t have 80% so theirs would be taxable since no control

Question 7

Non event

Answer 7

Not taxable. For carryover basis and carry over holding period.

Ex held prop for 10y and transferred, for stock and Corp has asset that has long term for 10y and a day. Basis is 10$ so still basis but can be sold for fmv

Question 8

Wage transaction

Answer 8

Services

Taxable for fmv of stock

Or if no control less than 80% of stock, it is also a wage expense to Corp

Question 9

Services

Answer 9

Taxable

Subject to SE and SSI tax depending on if employee or independent contractor

Question 10

Property

Answer 10

Tax basis : if in control or part of in control

Or

Fmv: if their share percentage for cash and property is less than 80% then taxable which leads to everything at FMV

Question 11

Non recognition of gain

Answer 11

Applies to amounts transferred solely in exchange for stock , if shareholder receives chase or property with stock then gain is recognized up to amount of cash or fair value of other property received. Includes securities. Boot.

Corp gain is carryover basis plus gain recognized . They recognize the portion of the gain for boot.

Question 12

Shareholder contributes liability

Answer 12

The basis is reduced by liability relief

If liability is greater than basis then gain is recognized.

When they sell the stock, it’ll be a bigger gain, basically balancing off with the Corp

Question 13

Revenues

Answer 13

Recognizes at the earlier of when earned or collected

Cash xxxx
Revenue xxxx

Question 14

M1 reconciliation

Answer 14

Between income per books and income per tax

Question 15

Life insurance

Answer 15

If Corp is the beneficiary, can’t take the deduction since premiums are not taxable .

If premiums are for the families , then payments are deductible . Fringe benefit

Question 16

Organizational expenses

Answer 16

Up to 5k

Phases it after 50k dollar for dollar
The rest amortizable 180 months. Must start that month or they are capitalized until the entity is liquidated
Brain expenses.

Question 17

Additional paid in capital

Answer 17

For stock- cost of issuing.

So debit apic
Cash xxxx

Question 18

Salaries wages fringe benefits and payroll taxes

Answer 18

Deduct up to 1M for too 5 executive officers of Corp - form 11-25E

This is apart from employees

Question 19

Entertainment expenses for officers, directors 10% plus owners

Answer 19

Deducted to extent that included in individual gross income. return

Salaries and wages. Can accrue as long as paid within 2.5 months of year end. Same with vacay

Question 20

Estimated loss

Answer 20

Not deductible until actual loss

Direct write off for tax, for book its allowance

Question 21

Interest expense

Answer 21

Not deductible if loan proceeds are to buy tax exempt expenses

Question 22

Casualty, reimbursed employee expenses

Answer 22

50% meals and entertainment

For casualty losses there’s no floor or agi percentage?

Question 23

Goodwill franchise trademarks

Answer 23

Amortized over 15 years

Question 24

Fees fines penalties

Answer 24

Never deductible

Question 25

Federal and state taxes deductible?

Answer 25

Only state and local

Question 26

R&D

Answer 26

Expense immediately or over a minimum of 60m Usually 60 m bc no rev to offset

Question 27

Dividends * DRD Special deduction .

Answer 27

Government loves double taxation and triple To minimize multi tax problem, government created the DRD Dividends received deduction depends on how much you own- First, if you own Greater or equal to 20% but less than 80% we’ll give you and 80% DRD - of 100$ dividend, 80 will not be taxed but 20 will be taxed Investor doesn’t qualify if from foreign Corp, borrowed money, received from tax exempt bond, and if you held it less than holding period. Rare exception: to 70 and 80 percent rule, if drd is less than taxable income and that is less than dividend, then you only get 80% of dividend, not taxable income. See example “when it falls in the middle Then drd of 70% for people who owe less than 20% of the stock If 80% or more which is control, you can consolidate,

Question 28

Charitable contributions

Answer 28

Limited to 10%of income before deductions- ATI Carry forward 5 years

Question 29

ATI-

Answer 29

Net income, adjusted by charity , drd, nol-capital loss Income before special deductions Not net income,

Question 30

Ordinary asset

Answer 30

Current asset 35%

Question 31

1231 asset

Answer 31

Non current, over a year Gain - capital gain Loss : ordinary loss

Question 32

Capital

Answer 32

Not ordinary and not 1231. Not business asset Always Short term Zero net capital loss - offset against capital gains , not deductible Cap- back 3 years Gains - 5 years forward

Question 33

NOL

Answer 33

Expenses exceeded revenue Sideways NOL. Back 2 forward 20 Amend return for past 2 years to offset Carry forward 20

Question 34

Deduction vs credit

Answer 34

Deduction is before tax- can lead to liability Credit is after tax- can lead to no liability - dollar per dollar deduction

Question 35

Foreign tax credits

Answer 35

Us tax liability x foreign income/total income = tax credit Example was 6$ credit and foreign tax as 8$ so the remaining 2$ is what is carried forward or back

Question 36

Charitable contributions

Answer 36

Limited to 10%of income before deductions- ATI Carry forward 5 years

Question 37

ATI-

Answer 37

Net income, adjusted by charity , drd, nol-capital loss Income before special deductions Not net income,

Question 38

Ordinary asset

Answer 38

Current asset 35%

Question 39

1231 asset

Answer 39

Non current, over a year Gain - capital gain Loss : ordinary loss

Question 40

Capital

Answer 40

Not ordinary and not 1231. Not business asset Always Short term Zero net capital loss - offset against capital gains , not deductible Cap- back 3 years Gains - 5 years forward

Question 41

NOL

Answer 41

Expenses exceeded revenue Sideways NOL. Back 2 forward 20 Amend return for past 2 years to offset Carry forward 20

Question 42

Deduction vs credit

Answer 42

Deduction is before tax- can lead to liability Credit is after tax- can lead to no liability - dollar per dollar deduction

Question 43

Foreign tax credits

Answer 43

Us tax liability x foreign income/total income = tax credit Example was 6$ credit and foreign tax as 8$ so the remaining 2$ is what is carried forward or back

Question 44

Accumulated earnings tax

Answer 44

Corp- holds money, so government doesn’t have taxable income they can get income tax from - 20% If Corp accumulates too much, then the Corp gets penalized . Can accumulate for expansion and debt hurt not to avoid taxes, or loans to shareholders Comes from audits . Appropriated in a schedule, u appropriated amount is checked agains allowed amount Shareholder can pay the consent divided , tax as if they got the dividend. They’re willing to bc basis in the co goes up Or if phc is paid . Not self assessed Penalty tax

Question 45

Safe Harbor Reduces or eliminates penalty

Answer 45

250k + federal taxes due - manufacturing 150k for service company for personal services

Question 46

Phc

Answer 46

Personal holding company tax- penalty tax Individuals would incorporate to avoid tax rates , would take out stock , would get taxed at 35% instead of 39.5% for individual. Phc if: Gross income test : greater or equal to 60% is from passive activity- taxable, so wouldn’t include muni bonds. Includes like rental etc Alter ego test : number of people , if less or equal to 5 own greater than 50% of the stock and 60% of the revenue from passive sources like taxable interest, dividends, rental, royalty,then tax in uphci is gonna be taxed at 20%. Self assed on form 1120 phc Avoided by actual dividend or consent divided

Question 47

Penalty taxes

Answer 47

Phc & accumulated earnings tax

Question 48

M1 reconciliation

Answer 48

Reconcile between book income and taxable income. Temporary and permanent adjustments Reconciaking to income before special deductions - DRD NOL Purpose is to identify for Irs amounts reported differently between GAAP and for tax . Calculation begins with book, then increased and decreased by items that cause taxable income to be higher or lower both temporary and permanent. Temp, bad debt, warranty, depreciation.

Question 49

Temporary

Answer 49

Timing or temporary difference

Question 50

Permanent

Answer 50

Never taxable or never tax deductible Like expenses for Corp beneficiary life insurance

Question 51

M2

Answer 51

Basically a recon of inappropriate data retained earnings Retained earnings plus or minus prior period adjustments equals adjusted beginning plus net income minus dividends equals retained earnings Statement of retained earnings Government wants to squeeze more money

Question 52

M3

Answer 52

Temporary and permanent differences Companies with assets of 10m or more So they look at details Depletion Depreciation Own line items

Question 53

Corporate distributions****

Answer 53

When you receive you want to call it return of capital- Irs wants to call it dividend EARNINGS- taxable Current CEP : Accumulated AEP RETURN OF BASIS/capital- not taxable Go over section Tricky with property :

Question 54

Stock redemptions

Answer 54

Repurchase of shares from a shareholder treated as exchanges resulting in cap gain or loss treatment to the shareholder

Question 55

Non liequdated

Answer 55

Just making distribution: taxed on gain but no loss deduction For shareholder ordinary income- gain or loss . Up to e&p Rest is return of basis

Question 56

Liquidating

Answer 56

Closing up Ordinary gain or loss for Corp For shareholder is capital gain or loss Proceeds minus basis is cap gain or loss

Question 57

Exception to liquidating distribution

Answer 57

When subsidiary To parent then no gain or loss , tax free exchange . Everything carryover basis

Question 58

Corp reorganization

Answer 58

Tax redetermination Carryover basis

Question 59

Mergers and acquisitions

Answer 59

Carryover no gain or loss unless boot

Question 60

Consolidate

Answer 60

Inter company transactions are consolidated Get rid of drd

Question 61

Section 1244 stock

Answer 61

To encourage businesses Most start ups fail. If you are part of the first million of stock then if well capital gain, if bad 50k ordinary loss . The rest you carry as capital loss 3000 indefinitely Only applies to first 1M sold by original investor

Question 62

AMT

Answer 62

4 adjustments that show you Start with taxable income Plus or minus preferences or adjustments : Lupe Usually and increase of taxable income , amti before ace ``` Plus ACE : slim about 75% Equals amti before exception - exemption Amti X rate lower bc they took some benefits ``` Gives alternative minimum tax

Question 63

PILE

Answer 63

Preferences and adjustments Private activity bond interest : type of mini bond but is private. To finance non govt or student loans etc Installment sales of inventory : accrual, installment sales vs accrual Long term construction contract : calculated using percentage of completion Excess depreciation on personal property : excess over 150 declining when double was used

Question 64

SLIM

Answer 64

Adjusted current earnings 75% S is 70% DRD , they add it back , not all 3/4 of the 70% Life Insurance proceeds - Muni bond interest - municipality ,

Question 65

Exemption

Answer 65

400k Reduces by 25% of amti before exemption minus 150k So if 200k, it loses 25% of 50k