Corporate Taxation

Question 1

T or F, the rules for the formation of an S corp are the same as for a C corp.

Answer 1

T

Question 2

is the penalty for underpayment of federal estimated taxes deductible?

Answer 2

Hell NO

Question 3

what is the key indicator that a business must use the accrual method of accounting?

Answer 3

business has greater than 25,000,000 of avg annual gross receipts for the preceding 3 years

Question 4

how are organization costs (e.g., legal fees) of a corporation treated?

Answer 4

amortized over a period of not less than 180 months beginning in month business begins. TP may elect to deduct up to 5,000 immediately, subject to limitations (50,000 total expenditure, deduction reduced dollar for dollar over the 50,000)

*this rule also applies to partnerships

Question 5

can corporations deduct any capital losses in excess of capital gains in a year?

Answer 5

NO

Question 6

which entities are required to use the accrual method of accounting?

Answer 6

tax shelters, large C corps, and manufacturers

Question 7

what are the corporate dividend-received deductions?

Answer 7

80% owned sub in a consolidated return = 100% deduction

less than 20% owned (unrelated) = 50% deduction

all other = 65% deduction

*S corps cannot take this deduction

Question 8

what is the charitable contribution deduction of a corp limited to?

Answer 8

10% of taxable income without regard to:

contribution deduction
dividends received deduction
NOL carryback
capital loss carryback

Question 9

T or F, a corp can only use net capital losses to offset net capital gains.

*net capital g/l are short term and long term netted together

Answer 9

T

3 year carryback and 5 year carryforward

Question 10

when are accrued charitable contributions not paid by the end of the year deductible in the year of accrual?

Answer 10

BOD authorizes the contribution during the tax year AND the accrual-basis corp pays the accrued amount within 3 and 1/2 months following the end of the year

Question 11

when is rental revenue received in advance taxable?

Answer 11

in the year of receipt

Question 12

are business gifts deductible?

Answer 12

Yes, up to 25 per recipient per year

Question 13

the dividends-received deduction equals the lesser of:

Answer 13

50% or 65% of dividends received
OR
50% or 65% of taxable income without regard to:
the DRD
any NOL carryforwad
any capital loss carryback

*limitation does not apply if taking the full DRD deduction (% x dividends received) results in a NOL

Question 14

to find taxable income, what do you do with this situation: tax depreciation > book depreciation?

Answer 14

subtract the difference from book income

Question 15

is interest expense to carry municipal bonds tax deductible?

Answer 15

NO. deduction per book, but not tax

Question 16

is the book/tax difference in the bad debt deduction considered a temporary or permanent difference?

Answer 16

temporary

Question 17

when are expenses owed by an accrual-basis corporation to a cash-basis shareholder who owns at least 50% of the corporation’s stock deductible by the corporation?

Answer 17

when the corporation actually pays the shareholder cash

Question 18

what type of business can the accumulated earnings tax be imposed on?

Answer 18

regular corporations (acc RE in excess of 250,000) and personal service corporations (acc RE in excess of 150,000)

Question 19

when does the personal holding company status apply?

Answer 19

if a corporation is owned more than 50% by 5 or fewer individuals at any time during the last half of the tax year and if at least 60% of adjusted ordinary gross income for the tax year is personal holding company income

*stock ownership 50% ; income 60%

PHC is not subject to accumulated earnings tax, but is subject to regular tax on corporate income and 20% tax on its undistributed PHC income

Question 20

what sources of income must be considered to determine if the income requirements for a personal holding company have been met?

Answer 20

dividends (no DRD allowed)
taxable interest
royalties, but not mineral, oil, gas, or copyright royalties
net rent, if less than 50% of ordinary gross income

Question 21

what are some examples of a personal service corporation?

Answer 21

accounting, law, consulting, engineering, architecture, health, and actuarial science

Question 22

how do you determine the required estimated tax payments for a C corp?

Answer 22

just remember least of 100% off prior liability (preceding year method), current liability, estimated current liability (annualized income method)

Question 23

when will no penalty be imposed on a corp for underpayment of estimated tax?

Answer 23

underpayment is less than $500

Question 24

what 2 things must be deducted from a PHC’s taxable income to determine undistributed PHC income prior to the dividend-paid deduction?

Answer 24

federal income taxes AND net LT capital gain (net of tax)

Question 25

which corporations are not allowed to file a consolidated return?

Answer 25

S corps, foreign corps, most REITs, some insurance companies, brother-sister corps (individual owns 80% or more of the stock of two or more corps)

Question 26

when a consolidated return is filed, what happens to intercompany gains and losses?

Answer 26

they are eliminated

Question 27

a corporation’s capital loss carryback or carryover is…

Answer 27

always treated as a ST capital loss

Question 28

what are the characteristics of a Type B reorganization?

Answer 28

the target is acquired using the stock of the acquiring corp or the acquiring corp’s parent
AND
the acquiring corp must be in control of the target immediately after acquisition

Question 29

when a C corp liquidates, how is the recognized G/L of the corp on the property distributed to the shareholders calculated?

Answer 29

FMV of property - adj basis of the property

*treated as a sale

Question 30

what is the special rule that applies to section 1244 small business stock regarding a loss?

Answer 30

when the stock is sold or becomes worthless, an ORIGINAL SHAREHOLDER can be treated as having an ordinary loss (fully deductible), instead of a capital loss, up to 50,000 (100,000 MFJ). Any excess is a capital loss.

Question 31

when a parent, who owns at least 80% of the stock, liquidates its subsidiary, who recognizes a G/L?

Answer 31

neither parent nor sub recognizes a G/L.

parent assumes the basis of the sub’s assets as well as any unused NOL carryover, capital loss carryover, or charitable contribution carryover

Question 32

when a corporation distributes appreciated property to its shareholders (nonliquidating dividend), does the corporation recognize a gain?

Answer 32

yes.

FMV - adj basis

Question 33

when a corp makes multiple distributions to shareholders, how are current and acc E and P allocated?

Answer 33

current: pro rata (distribution/total distribution x current E and P)

acc E and P: first come first serve

Question 34

how is a proportional stock redemption treated?

Answer 34

as a dividend

Question 35

what is a guaranteed payment?

Answer 35

payment to partner for services provided to partnership without regard to partnership income or partner’s profit and loss-sharing ratio

Question 36

can an S corp distribute appreciated property to its shareholders without gain?

Answer 36

NO, neither can a C corp. It is treated as the sale of an asset.

*generally, a partnership can though

Question 37

what assets are considered hot assets?

Answer 37

unrealized receivables and appreciated inventory