Corporate Taxation Part 2

Question 1

When forming a corporation, what 2 things have to occur for a shareholder have no tax consequences when forming a company?

Answer 1

1. 80% control of voting stock

2. No Boot involved

Question 2

How is the maximum charitable deduction calculated for a company?

Answer 2

10% of Taxable Income
Carry forward = 5 years

Taxable Income is before deduction from:

1. Charitable Contributions
2. Dividend Received Deductions
3. Net Operating Loss
4. Capital Deductions

Question 3

What are business casualty losses deducted?

Answer 3

100% deductible
No $100 deduction and the 10% AGI

The losses can be ordinary or capital losses depending on the type of asset

Question 4

How are organizational start up costs deducted?

Answer 4

$5,000 expensed immediately.

The remainder is amortized over 180 months.

Every dollar spent over $50k for start up cost will reduce the $5k immediate expense

Question 5

How is corporate goodwill expensed?

Answer 5

Amortized straight line over 15 years.

Question 6

How is depreciation for Machinery & Equipment calculated?

Answer 6

Salvage value is ignored for depreciation.

1. Half year convention
2. Mid quarter convention when 40% of the equipment is placed into service during the last quarter.

Question 7

How is depreciation for residential and commercial property calculated?

Answer 7

Real Property uses Mid-Month Convention

Residential = 27.5 years straight line

Commercial = 39 years straight line

Question 8

What are the requirements and benefits of a consolidated tax return?

Answer 8

Requirement = a corporation must own 80% of the voting stock of another company.

Advantages =
Capital Gains offset
Operating Losses offset
100% Dividend Received Deduction

Question 9

How are gains/losses calculated in a liquidation where a parent company owns at least 80% of the subsidiary?

Answer 9

When the parent owns at least 80% of the subsidiary, there are no gains and losses.

Question 10

What is the calculation for Dividend Received Deductions?

Answer 10

70% or 80% of the LESSER of:

1. Dividends Received
2. Taxable Income

Question 11

Corporate Liquidation

How are gains/losses calculated when a corporation:

1. Distributes Assets
2. Sells Assets and distributes proceeds

Answer 11

1. Asset Liquidation:
   FMV of Asset
   - Stock Basis
   = Gain/Loss
2. Sells Assets distributes proceeds:
   Proceeds
   - Stock Basis
   = Gain/Loss

Question 12

True or False:

A partner’s basis of an S corporation will increase if he/she takes on more liability.

Answer 12

False:

Shareholder’s guarantee does not increase basis.

Question 13

How is the built-in gains tax for S corporation calculated?

Answer 13

FMV
- Adjusted Basis
= Figure for Built-in Gains Calculation

NOTE: FMV is used, not actual selling price to compute the gain.

Question 14

True or False:

An S corporation can distribute assets to shareholders tax free?

Answer 14

False: S corporation are subject to built-in gains tax.

Question 15

For S corporations, when are fringe benefits deductible?

Answer 15

Fringe benefits are only deductible for:

1. Non-shareholder employees
2. Shareholder employees that own less than 2% of the company

Question 16

What is the maximum Unrelated Business Income an exempt organization can earn before being taxed?

Answer 16

Maximum UBI = $1,000

Question 17

What is the purpose of a Schedule M1?

When is the Schedule M3 used?

Answer 17

A Schedule M1 shows how much of a company’s BOOK earnings are taxable on its tax return.

Schedule M1 = Book –> Tax

Schedule M3 = for Corporations and Partnerships with $10-$50MM in assets

Question 18

Define: Section 179 Deduction and its limitations

Answer 18

Section 179 Deduction is an incentive to encourage companies to buy equipment, triggering growth.

Limitation = $500k per year
Every dollar a company spends over $2mm will cause a dollar for dollar reduction in the $500k deduction.

Section 179 = equipment only has to be “new to you”
Bonus Depreciation = brand new equipment only
Calculation = (Purchase Price - $500k) x 50%

Question 19

Schedule M1:

Explain the importance of Earnings & Profits and how it relates to Schedule M1.

Answer 19

Corporate Earnings & Profits are used to determine how much dividends can be paid to shareholders.

E&P = determined via Federal Taxation
Retained Earnings = determined via GAAP

Question 20

What falls into:

MACRS 5 Year Property

MACRS 7 Year Property

Answer 20

MACRS 5 Year Property = Auto/Taxi/Light and Heavy Purpose Trucks/Calculators/Copiers/Computers/Peripheral Equipment

MACRS 7 Year Property = Furniture/Fixtures/Agricultural Equipment

Question 21

Corporate Alternative Minimum Tax:

What is the small corporation exemption?

Answer 21

Small corporation exemption = average annual gross receipts (3 years) are below $7.5 million.

The 1st year a corporation is in business limit = $5 million

Question 22

What is the Accumulated Earnings Tax amount?

Answer 22

$250k for Manufacturers

$150k for Service Corporations

Make sure to add back DRD and NOL deductions since a corporation can pay them out as dividends.

Question 23

What are Affiliated Groups, and how is that status attained?

Answer 23

Affiliated groups = requirement one corp needs to own 80% voting stock AND 80% stock total value

Benefits = intercompany profits and losses can be eliminated

Question 24

What are Controlled Groups?

Answer 24

2 types of controlled groups:

Parent subsidiary: 80% voting power OR 80% stock value control

Brother/Sister: 5 or fewer persons owning more than 50% of voting powers.

Controlled Groups are limited to 1 Accumulated Earnings Deductions and 1 Section 179 Deduction

Question 25

# Define: Section 1245 Recapture Section 1250 Recapture

Answer 25

Section 1245 Recapture (for Equipment): Ordinary income = extent of accumulated depreciation Excess gain = treated as 1231 gain Section 1250 Recapture (for Buildings): Accumulated depreciation amount = taxed @ 25% Remaining = taxed at lower 15% rate