CPA- C-corp

Question 1

Corporation Formation

Tax Consequences

Answer 1

General Rule: Formation is non-taxable event

Formation: Issuance of Common Stock

Reacquistion: Purchase of Treasury Stock

Resale: Sale of Treasury Stock

Apart of HIDE IT (transactions of corporations)

Question 2

Corporation Formation

Basis of Property Received

Answer 2

General Rule: Basis of property received is the greater of:

Adjusted NBV of shareholder PLUS any gain recognized by shareholder

OR

Debt assumed by corporation (shareholder may recognize a gain to prevent negative basis)

Question 3

Corporation Formation

Shareholder Tax Consequences

Answer 3

No gain or loss recognized if:

immediately after shareholders own at least 80% of voting stock & at least 80% of non-voting stock

AND

NO BOOT RECEIVED (cash or bonds)

Question 4

Corporation Formation

Basis of Common Stock

Answer 4

Cash: amount contributed

Property: NBV. Adjusted basis of property is reduced by any debt on property assumed by corp

Services: FMV of services rendered

(shareholder must recognize as ordinary income)

Question 5

Corporation Formation

Basis Formula

Answer 5

NBV + FMV of services + Gain recognized by shareholder - Cash Received - Liabilities assumed - FMV of non money boot received =

Basis of common stock

Question 6

Book Income vs Taxable Income

What’s a Schedule M-1 used for?

Answer 6

Reconciliation between tax return and financial statements appear on M-1

Both permanent & temporary differences

Question 7

Gross Income for Corporations

Answer 7

Cash received in advance of accrual, GAAP income is taxed.

temporary differences:

interest income received in advance

rental income received in advance

royalty income in advance

permanent (not taxable):

income interest from muni or state bonds

proceeds from life insurance of an officer

federal taxes paid

Question 8

Trade or Business Deductions

Answer 8

All oridnary and necessary expenses paid or incurred during the year

Question 9

Trade or Business Deductions

Domestic Production Deduction:

Qualified Production Activities Income

Answer 9

9% of the lesser of QPAI

OR

Taxable Income (disregarding QPAI formula)

Domestic Production Gross Receipts

______________________________

QPAI

Question 10

Trade or Business Deductions

Executive Compensation

Answer 10

Executive compensations in excess of $1,000,000 cannot be deducted for the top 5 employees.

Question 11

Trade or Business Deductions

Bonus Accruals

Answer 11

Bonuses paid by an accrual basis taxpayer are deductible in the tax year when all events have occurred; provided they are paid within 2 1/2 months after year end.

Non-shareholder employees only.

Question 12

Trade or Business Deductions

Bad Debts

Answer 12

Accrual Basis: deduct when specific A/R written off

Cash Basis: NOT allowed a tax deduction

*income never reported

Question 13

Trade or Business Deductions

Business Interest Expense

Answer 13

All interest paid or incurred during the taxable year on indebtedness incurred for business purposes is deductible
Interest expense on loans for investment. Limited to the net investment income
Prepaid interest: Must allocate to correct period (incurred and paid)
General business interest:deductible

Question 14

Trade or Business Deductions

Charitable Contributions

Answer 14

Maximum deduction of 10% of taxable income. Calculated before NOL, DRD, Cap. Loss, Production activities deduction
May be carryfoward 5 years
Accruals must be paid within 2 1/2 months of year end

Question 15

Trade or Business Deductions

Business Losses or Casualty Losses

Related to Business

Answer 15

100% deductible

Partially destroyed: limited to lesser of: decline in the value of the property or,adjusted basis of property before casualty

Fully destroyed: NBV for the property

Question 16

Trade or Business Deductions

Organizing and Startup Cost

Answer 16

Deduct up to $10,000 or organizational costs and $5,000 of startup costs.

Any excess amortized over 180 months

*Look for month business started

Excluded: costs of raising capital

Question 17

Trade or Business Deductions

Amortization, Depreciation, and Depletion

Answer 17

Goodwill, convenants not to compete, franchise, trademarks, and trade names must be amortized over a 15 years straight line basis

Question 18

Trade or Business Deductions

Life Insurance Premiums

Answer 18

If corporation is beneficiary NOT tax deductible

Employee/family is beneficiary IS deductible.

Question 19

Trade or Business Deductions

Business Gifts, Meals & Entertainment,

Penalties & Illegal Activities

Answer 19

Business gifts limited to $25 per person per year

 Meals & Entertainment are 50% deductible

Penalties & Illegal Activities are NOT Deductible

Question 20

Trade or Business Deductions

Taxes

Answer 20

State, City and Federal Payroll taxes are all deductible

Federal Income Taxes are NOT deductib

Question 21

Lobbying & Political Expenditures

Answer 21

Lobbying expenses and political

contributions are NOT deductible

Question 22

Business Capital Gains and Losses

Answer 22

Capital losses are NOT tax deductible. Can only offset capital gains
Carryback 3 years. Carryforward 5 years.
Taxed at corporate tax rate, same as ordinary income.

Question 23

Business Net Operating Losses

Answer 23

Carryback 2 years. Carryforward 20 years.
In calculating NOL: No charitable contribution deduction is allowed.
DRD is allowed to be deducted BEFORE calculating NOL

Question 24

Inventory Valuation Methods

Answer 24

In general, the tax method used for accounting purposes can be used for income tax purposes.

Expense inventory when sold.

Question 25

Dividends Received Deduction % Tiers and Limits

Answer 25

1st corp must be taxed &stock owned for 45 days % Owned DRD 0% < 20% 70% 20% < 80% 80% 80% or more 100% Limited to the lesser of: % of dividend received or % of taxable income w/o regard to the DRD, NOL or capital loss carryback

Question 26

What types of companies are excluded? | "Don't take DRD's personally"

Answer 26

Personal Services Corporations Personal Holdings Companies (Personally taxed) S Corp

Question 27

Dividends Received Deduction Who can get 100%?

Answer 27

Affiliated corporations (80% ownership) who file consolidated returns qualifies for 100% deduction Small business investment companies

Question 28

Depreciation Half Year Convention

Answer 28

Applies to personal property (Machinery & Equip) Treated as having been in placed in service/disposed of at the midpoint of the year

Question 29

Depreciation Mid Quarter Convention

Answer 29

If more than 40% of depreciable property is placed in service during the last quarter of the year, the mid-quarter convention must be used.

Question 30

Depreciation Real Estate

Answer 30

Residential rental property 27.5 years S/L Non-residential (office, warehouse) 39 years S/L One 1/2 month is taken in the month the property is placed in service

Question 31

Depreciation Section 179

Answer 31

Equip can b expensed in the year put into service Max: $500,000. Reduced $ for $ after $2,000,000 worth of property. Not permitted when loss exists or created. Max on SUVs $25,000

Question 32

Amortization Intagibles

Answer 32

Intagiblies such as goodwill, lienses, franchises, and trademarks may be amortized using S/L over a period of 15 years. Tax= 15 years GAAP= impairment test/not amortized

Question 33

Amortization of Startup and Organizing Costs

Answer 33

Startup in excess of ($5,000) and organization costs in excess of ($10,000) are amortized over 180 months. Tax= $5,000/$10,000 + amortized amount GAAP= Expense

Question 34

Section 1231

Answer 34

Depreciable personal and real property used in trade or business and held for at least 12 months Applies to involuntary conversions. Gains are treated as Capital Gains Losses are treated ordinary losses. *Losses cannot not be deducted in excess of Capital Gains except for the $3,000 allowance for individuals

Question 35

Taxation of Corporation Consolidated Tax Returns

Answer 35

An affilitated corporation may elect to file as a single entity. Affiliated company must own 80% of outstanding AND voting stock. Intercompany gains/losses are eliminated. Brother/Sister corporations MAY NOT file consolidated return Consolidate GAAP = 50% Consolidate Tax = 80% - 100%

Question 36

Taxation of Corporation Estimated Tax Payments

Answer 36

Small corps must pay 100% of current tax or 100% of prior year tax if present. Large corps must pay 100% of current years tax

Question 37

Taxation of a Corporation Accumulated Earnnings Tax

Answer 37

Imposed on a regular C corporation whose retained earnings are in excess of $250,000 if improperly held instead of being distrubted as dividends. Personal service corporations limited to $150,000 Additional tax rate of 15% on accumulated earnings

Question 38

Corporation Distributions

Answer 38

Distributions are taxable when defined as dividends Current E&P --> Taxable Accum E&P --> Taxable Return of Capital --> Tax free, reduces basis Capital gain distribution --> Taxable as capital gain

Question 39

Corporation Distributions Corp Paying Dividend, Taxable Amount

Answer 39

General Rule: Payment of a dividend does not create a taxable event for corp. A dividend is a reduction of E&P. If accum. property is distributed treat as being sold (FMV - Adjusted Basis) Gain increases corp current E&P which means the dividend is not taxable to receipt like a dividend

Question 40

Corporation Distribution Liquidation

Answer 40

Transaction is subject to double taxation. 1st when corp sells assets 2nd shareholder recognizes proceeds received If distributing property assets directly, gain is recognized. Shareholder recognizes excess over basis (FMV- Stock Basis)

Question 41

Tax Free Reorganizations

Answer 41

Reorganizations are tax free event due to continuation of the business in a modified form

Question 42

Worthless Stock Section 1244 Stock (small business stock)

Answer 42

When corp stock is sold or becomes worthless, stockholder can treat as an ordinary loss up to $50,000/$100,000. Any excess treated at capital loss If held for more than 5 years, shareholder can exclude up to 50% of the gain or exchange. 75% if held between 2/18/09 and 12/31/10

Question 43

Small Business Corporation (S Corp) 100 USA people are common

Answer 43

Limited to 100 shareholders. One class of stock (i.e. no preferred stock) Shareholders must be individual, estate, or trusts Made retroactive to Jan 1 if selected by March 15 Calendar tax year

Question 44

Small Business Corporation (S Corp) Effect on S Corp when elected

Answer 44

S Corp MUST adopt calendar tax year unless valid business purpose exists Tax return due March 15th General Rule: No tax on corp level

Question 45

Small Business Corporation (S Corp) Effect on shareholder when elected

Answer 45

Pass-through income/loss to shareholder (K-1) Allocations made per share/per day Losses limited to adj basis plus loans provided Any disallowed loss carryfoward indefinitely

Question 46

Small Business Corporation (S Corp) Exception(s) to no taxation rule

Answer 46

LIFO Recapture Tax Built-in Gains Tax (when C Corp elects S corp status and FMV of assets exceeds adjusted basis) Passive investment income Exception to Built In Gains Tax S corp was never a C corp Sale or transfers occurs after 10 years C corp can prove appreciation of property occured after S corp election

Question 47

Small Business Corporation (S Corp) Computing Shareholder Basis B.A.S.E.

Answer 47

Initial Basis Add income items Add shareholder investments in corp Subtract distributions to Shareholders Subtract loss or expense items Ending Basis

Question 48

Small Business Corporation (S Corp) Tax treatment of Distributions

Answer 48

Generally not subject to tax with no C Corp E&P Within stock basis- No taxable. ROC In excess of stock basis- Taxed as Capital Gain w/ C Corp E&P To the extent of AAA-non taxable, reduce basis To the extent of C corp E&P-taxed as div, does not reduce basis. To the extent stock basis- no tax, reduce basis. ROC In excess of stock basis- LTCG. Capital gain dist

Question 49

Small Business Corporation (S Corp) How is election terminated

Answer 49

Holders of a majority of the corp stock mus consent S corp fails to meet elibility requirements More than 25% of gross receipts come from passive investment income for 3 straight years "3 strikes and you're out

Question 50

Exempt Organizations Unrelated Business Income

Answer 50

Derived froman acivity that constititua a trade or buinsess Regularly carried on Not substantially related to org tax exempt purpose

Question 51

Exempt Organizations Unrelated Business Income Tax Exemptions

Answer 51

Regular tax payments should be made $1,000 max UBI allowed Royalties, dividends, interest, annuities excluded Rental income excluded Gains & Losses on sale of property Income from research of a college or hospital Income of labor unions used to establish a retirement home, or hospital Acitivities limited to exempt organizations (bingo)