Part XII: Corporate Taxes

Question 1

control club

Answer 1

The people who have contributed property and are in control of the corp. immediately after corp. formation.

Question 2

To be part of the control club, you have to…

Answer 2

1. contribute property (money or property of value) to the corp.
2. Property must be exchanged solely for corp. stock.

Question 3

control

Answer 3

1. owning 80+% of voting and nonvoting stock.

2. Can bee owned by one person or a group.

Question 4

boot

Answer 4

anything received other than stock (cash, inv., etc.) for contributing property to the corp.

Ex) Contribute $100k of inventory to the corp and receive $80k of stock nad $20k of cash- the $20k is boot and triggers a gain of $20k.

Question 5

If boot is received, the gain recognized by the shareholder is the lower of the…

Answer 5

1. realized gain

2. OR, the FMV of boot received.

Question 6

corp’s basis in property contributed

Answer 6

basis of transferor
+ gain recognized by transferor
= corp’s basis

Question 7

What basis of accounting are corps required to use?

Answer 7

Accrual, unless:

1. Avg. gross receipts

Question 8

Can corps choose when their fiscal yr. begins and ends?

Answer 8

Yes, unless it is an S-corp or personal service corp., which must use a calendar-year end.

Question 9

M-1 Schedule

Answer 9

1. Used by corps. to reconcile book income (BI) to taxable income (TI).
2. Any non-deductible expenses would be added to BI to arrive at
   TI.
3. Any non-taxable income is subtracted from BI to arrive at TI.
4. TI not included in BI is added to BI.

Question 10

NOL carryback/carryforward

Answer 10

Negative TI can be carried back 2 yrs. and carried forward 20 yrs. to offset future or past TI.

Question 11

dividends received deduction (DRD)

Answer 11

1. Occurs when a corp owns stock in another company that pays dividends.
2. The corp gets to deduct a portion of the DI based on % of stock it owns in the other company.

Question 12

If the corp owns less than 20% of dividend-paying corp’s stock, the DRD is…

Answer 12

70%.

Question 13

If the corp owns 20-79% of dividend-paying corp’s stock, the DRD is…

Answer 13

80%.

Question 14

If the corp owns less than 80+% of dividend-paying corp’s stock, the DRD is…

Answer 14

100%.

Question 15

If the corp has TI less than the DI…

Answer 15

the DRD is limited to the TI amount.

Question 16

organizational and startup cost deduction

Answer 16

1. $5k of org. costs to form a corp. can be deducted from TI.
2. The $5k is reduced dollar-for-dollar by amount of expenses over $50k.

Question 17

How are org. costs remaining after the deduction treated?

Answer 17

Capitalized and amortized over 180 months.

Question 18

Are stock issuance costs deductible?

Answer 18

No, they are syndication costs.

Question 19

charitable contributions deduction & dividends

Answer 19

When computing the 10% allowed for charitable contributions , any DRD is left out; the full amount of income is used for the 10% calculation.

Question 20

corporate AMT

Answer 20

A corp must pay the AMT tax amount in excess of the regular tax liability.

Question 21

corporate AMT exemption formula

Answer 21

$40k - 25% of AMT taxable income in excess of $150k.

Ex) Exemption for corp w/AMT TI of $160k.
 40k - [(160k - 150k) * .25] 
= 40k - [10k * .25] 
= 40k - 2.5k
= 37.5k

Question 22

corp AMT limit & gross receipts test

Answer 22

1. If avg. annual gross receipts do not exceed $7.5 million, then the corp is not subject to AMT.
2. Then, for the first 3 yrs. of the corp’s existence, the gross receipts is $5 mil instead of $7.5 mil.
3. Once this gross receipts test is failed for 1 yr., AMT applies to the corp in all future yrs.

Question 23

accumulated earnings tax

Answer 23

1. A penalty tax when a corp. accumulates earnings and profits for the purpose of avoiding tax for its shareholders.
2. Tax is 20% of corp’s accum. TI.
3. Any DRDs received are added back to the income number as part of accum. earnings.

Question 24

accumulated earnings credit

Answer 24

Greater of:

1. Amount of current earnings and profits reasonably needed for the business,
2. OR, $250k ($150k for nonmfg. businesses) less than accum. earnings & profits at end of preceding yr.

Question 25

personal holding company (PHC) tax

Answer 25

1. Penalizes a corp. that seems to hold a high level of stock investments for the DRD. 2. 20% tax imposed.

Question 26

2 tests to determine if a corp is a PHC (both tests must be passed):

Answer 26

1. Income test | 2. Ownership test

Question 27

income test (PHC)

Answer 27

If passive income is 60+% or more of AGI.

Question 28

ownership test (PHC)

Answer 28

If 50+% of the corp's stock is owned directly or indirectly by 5 or less people during the last half of the year.

Question 29

adjustments that either increase or decrease TI when assessing a PHC penalty:

Answer 29

1. Accrued income tax reduces TI. 2. Excess charitable contributions reduce TI. 3. After-tax NCG reduces TI. 4. Pro-rata dividends reduce TI. 5. Deficiency dividends reduce TI. 5. Adding back DRDs increases TI. 6. Carryover from NOLs increase TI.

Question 30

deficiency dividend

Answer 30

1. dividend paid w/in 90 days after a PHC penalty has been imposed. 2. Deficiency dividends reduce TI.

Question 31

affiliate group

Answer 31

1. When one C corp owns 80+% of the voting power of another C corp or multiple C corps. 2. An affiliate group can file one consolidated tax return.

Question 32

Can an S corp be a member of an affiliate group?

Answer 32

No.

Question 33

3 main advantages to filing a consolidated return in an affiliate group setting:

Answer 33

1. Intercompany dividends are excluded from TI. 2. Losses from one member corp offset gain of another member. 3. Intercompany profits are deferred until realized.

Question 34

What matters when considering the tax effects of distributions?

Answer 34

Accum. earnings and profits. (E&P)

Question 35

1. A distribution that is larger than a corp's accum. E&P is considered a... 2. Is such a distribution taxable?

Answer 35

1. return of capital. | 2. No.

Question 36

How do corp gains on appreciated property affect a shareholder's taxable dividend?

Answer 36

A corp's gains on appreciated property are deferred, so when property gets distributed, that can add to a shareholder's taxable dividend.

Question 37

When accum. E&P is neg. and current-yr E&P is positive, any distributions are...

Answer 37

1. treated as dividends to the extent of current E&P. | 2. Anything above that is a return of capital.

Question 38

redemption

Answer 38

when a corp. buys back its stock form shareholders

Question 39

When a corp. is completed liquidated, the distribution to shareholders is...

Answer 39

considered a cap gain, NOT an ordinary gain.

Question 40

Expenses related to a liquidation are...

Answer 40

deductible by the liquidating corp.

Question 41

How are corp reorganizations treated for tax purposes?

Answer 41

Generally tax-free to both the shareholders and the corp.

Question 42

4 main types of corp reorganizations:

Answer 42

1. A 2. B 3. C 4 D

Question 43

A

Answer 43

1. Asset exchange for stock | 2. Most assets of target firm are exchanged for stock in the acquiring firm.

Question 44

B

Answer 44

1. Only stock for stock. 2. Acquiring firm exchanges its stock for stock of the target and the acquiring firm must own 80% of the target stock after the acquisition.

Question 45

C

Answer 45

1. Acquiring firm acquires 90% of net asset value of target's assets in exchange for voting stock. 2. Target firm distributes stock to its shareholders.

Question 46

D

Answer 46

1. Divisive. | 2. One corp. divides by transferring assets to a sub in exchange for stock in the sub.

Question 47

use tax

Answer 47

When property is purchased in state A but used in state B, state B will probably impose a use tax.

Question 48

Nexus

Answer 48

a business has a relationship w/another state to the point that the state has the right to impose taxes on the bus.

Question 49

Nexus & sales factor

Answer 49

When a business has sales among multiple states they also have nexus in, the sales factor each state is determined on a %-of-sales basis.

Question 50

A tax-exempt entity must file an information return if gross receipts exceed...

Answer 50

$50k.