Corporation taxation

Question 1

Basis of Common stock to shareholders FOMULA

Answer 1

Adjusted basis of transferred property
\+FMV of service rendered
\+ Gain recognized by shareholder
- Cash received
- Liability assumed by corp
- FMV of non-money boot received
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
Basis of common stk

If basis below zero –> gain to shareholder. basis of asset in Corp = 0.

Question 2

Domestic production deduction

Answer 2

9% lesser of Qualified production activity income (QPAI) or Taxable income

Question 3

How to calculate Qualified production activity income (QPAI)

Answer 3

Domestic production gross receipt
(COGS)
(Other directly allocable expense or losses)
(Proper share of other deduction)
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
Qualified production activity income

Question 4

Dividends Received Deduction do not apply to what kind of company?

Answer 4

personal service corp
personal holding company
(personally taxed) S corp
“ Don’t take it personally”

Question 5

DRD limitation? What happen wen NOL created?

Answer 5

Lesser of 70% or 80% of dividend received
Or 70% or 80% of taxable income computed without DRD or NOL

When subtract 80% of DRD & NOL created, 80% of Taxable Income limitation doesn’t apply. Use 80% dividend received.

Question 6

Amortization for Intangible; Business Start-up; Research

Answer 6

• Intangible (Goodwill, licenses, franchises): amortize 15 year S/L
• business start-up exp : expense $5000 and remainder amortize S/L 180months
• Research exp : Amortize S/L 60months

Question 7

Entities required to use accrual basis

Answer 7

• accounting for purchases and sales of inventory (manufacture)
• Tax shelter
• Certain farming corp
• C-corp with more than 5million avg. gross received in the past 3 yrs

Question 8

Corporation AMT Adjustment LIE

Answer 8

L - Long term contracts
I - Installment sale dealer
E - Excess Depreciation

Question 9

Corporation AMT Preference PPP

Answer 9

P - Percentage depletion
P - Private Activity
P - Pre ‘87 ACRS excess depr Tax exempt interest income

Preference always add back

Question 10

Corporation AMT Adjusted current earning “MIND is your ACE”

Answer 10

M - Municipal interest income
I - Incerase CSV life insurance
N - Non S/L depreciation
D- Divident rec. deduction

Question 11

AMT Exemption

Answer 11

= $40,000 - (25% AMTI in excess of $150K)

Example: 
Exemption                    40,000
Min Tax. Inc   210,000
Allowable     (150,000)
Excess =        60,000
                  x  25%
Disallowed         (15,000)         
Exemption allowed       25,000

Question 12

Life time credit Limit

Answer 12

Regular C corp = 250,000

Service Corp = 150,000

Question 13

Corp Earning & Profit Negative Adjustments

Answer 13

• Federal income tax expense
• Non-deductible penalties, fines, political contribution, M&E
• Officer life insurance premiums (Beneficiary = Corp)
• Expenses for production of tax exempt Income
• Non-deductible charitable contribution
• Non-deductible capital losses

Question 14

Corp Earning & Profit Positive Adjustments

Answer 14

+ Refunds of Fed Income tax paid
+ Tax Exempt income
+ Refunds of items that not subject to regular tax
+ NOL deduction
+ Life insurance proceeds where corp is beneficiary
+ Dividends Received Deduction
+ Carryovers of capital losses
+Carryovers of charitable contribution
+ Non-taxable cancellation of debt not used to reduce basis of property

Question 15

C Corporation’s Net Capital Losses are

Answer 15

Carried back 3 yrs and forward 5yrs.
Expired after 5 years
Can not deduct capital losses from ordinary income

Question 16

How gain and deduction from Illegal business activity treated?

Answer 16

Gain from illegal activity is includible in income. Deduction for cost of merchandise are allowable. Other business expenses other than cost of merchandise are not allowed

Question 17

What condition must be satisfied to expense, under IRC Section 179, the cost of new or tangible depreciable personal property

Answer 17

Property must be purchased in use of the active conduct of a trade or business
Property must be purchased from an unrelated party

Question 18

What is consider capital assets

Answer 18

Real and personal property held by taxpayer:

• Personal automobile of taxpayer
• Furnitures and fixtures in the home of the tax payer
• stocks and securities of all types (except those held by dealers
• personal property of taxpayer NOT used in a trade or business
• Real property NOT used in trade or business
• Interest in a partnership
• Goodwill in a corp
• copyrights, literary, musical that was PURCHASED
• Other assets held for investment

Question 19

What is consider non-capital assets

Answer 19

• Property normally included in inventory or held for sale to customer in the ordinary course of business
• Depreciable personal property and Real estate used in a trade ( section 1231)
• Accounts and note receivable
• copyrights, literary, musical that was held by the ORIGINAL artists
• Treasury stock.

Question 20

What’s real property?

Answer 20

Land and all items permanently affixed to the land (building, paving..

Question 21

What’s personal property?

Answer 21

Machinery and equipment

- all property not classified as real property

Question 22

What is Section 1231 property?

Answer 22

Machinery and equipment

Land and building

Question 23

What is the characteristic of Treasury Stock

Answer 23

• Non- capital asset

- Not an ordinary asset and not subject to capital gain treatment.

Question 24

Depreciation of Machinery and Equipment

Answer 24

• Salvage value ignored
• Half year convention
• Mid-quarter convention (40% or more of its serive in the last quarter)

Question 25

Depreciation of Building

Answer 25

- Residential rental property : 27.5 year S/L - Non-residential real property : 39 yrs S/L - Midmonth convention: Half month is taken in the month in services, half mont is taken in the month of disposal

Question 26

What is the usual result of shareholders of a distribution in complete liquidation of a corp?

Answer 26

Capital gain or loss. Shareholders treat property received in a company liquidation as full payment of their stock. therefore shareholders must recognize capital gain or loss equal to the different btw FMV of property received and Basis of the stock surrendered.

Question 27

How does Corporate Liquidation - Sell Asset and distribute cash to shareholder - work?

Answer 27

``` + Corp recognize G/L on sale of assets Sale price (- Basis) __________ taxable G/L ``` ``` +Shareholder recognize G/L to extend of cash excess adjusted basis Proceed (- Stock Basis) ______________ Taxable G/ L (Capital) ```

Question 28

How does Corporate Liquidation - distribute assets to shareholder - work?

Answer 28

+ Corp recognize G/L at FMV as if it had sold the asset Amount realized ( Greater of FMV or liability assumed by shareholder) Less: Basis _______________________________ Taxable G/L ``` +Shareholder recognize G/L FMV Less: Stock basis _________________ Taxable G/L (Capital) ```

Question 29

What entities entitle to Net operating Loss deduction?

Answer 29

Individual (Form 1040) Estate and Trust (Form 1041) Taxable C corp (1120)

Question 30

MARCS 5-year property include?

Answer 30

Automobile, light trucks, computers, typewriters, copiers, duplicating equipment, ect.

Question 31

MARCS 7-year properties include?

Answer 31

Office furnitures and fixtures, equipment and property with no ADR midpoint.

Question 32

Gain from sale of depreciable property recaptured under Section 1245 ?

Answer 32

Section 21245 require the lesser of the accumulated depreciation taken or the gain recognized to be recaptured as ordinary income. Remaining gain is section 1231 Long term capital gain.

Question 33

Compute shareholder basis in a S-corporation

Answer 33

Intial basis Add: Income items (include tax free income) Add: Add'l shareholder investment in corp stocks Less: Distribution to Shareholders Less: Loss or exempt items = Ending balance. ** Loss limitation = Basis + direct loan - distribution

Question 34

Corp capital Gain/Loss treatment?

Answer 34

Capital Gain is taxed at ordinary income | Capital loss can only be used to offset capital gain. No deduction allowed. Carried back 3 and fwd 5 years