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Flashcards in R3- Corporate Taxation Deck (107)
1

How is shareholder basis calculated for a new interest in a Corporation?

Adjusted basis of property transferred
+ Gain recognized (if less than 80% ownership)
- Boot received
= Shareholder basis.

2

How is shareholder basis calculated for a TRANSFEROR of an interest in a Corporation?

Transferor's basis
+ Gain recognized by shareholder
= Basis

OR

FMV of Corporate Interest
- Adjusted basis of property
= Gain

3

What basis do shareholders and Corporations use for property?

They both use ADJUSTED BASIS, NOT FMV of property.

4

What are the basic rules for filing a form 1120?

Return is due regardless of income level

Return is due 3/15 if on a calendar year basis, or 2 1/2 months after end of fiscal year

An automatic six-month extension is available

5

When are Corporation with LESS then $10Mil Corp. federal tax estimated payments required, and how are they calculated?

- Required if more than $500 in tax liability expected

- Lessor of :
100% current year liability
100% previous year liability

6

Describe the AMT calculation for C-Corporations

Taxable Income
+Tax Preference Items
+/- Adjustments
= Pre-ACE
+/- ACE Adjustments
= AMTI
- 40,000 Exemption
= Tax Base
x 20% (Tax Rate)
= Tentative Minimum Tax
- Regular Tax Liability
= AMT

7

What are the pre-ACE adjustments for C-Corporation tax AMT calculations?

Real Estate purchased between 1986 and 1999 using Straight Line Depreciation must depreciate over a useful life of 40 years

Personal Property - use 150% MACRS, not 200%

Construction must use % completion method

8

What are the ACE adjustments in the C-Corporation AMT tax calculation?

- Municipal Bond Interest
- Organizational Expenditures must be capitalized, not amortized
- Life Insurance Proceeds (key employees)
- Difference betwn AMT & ACE Depreciation
- Dividends Received Deduction
(under 20% ownership/ 70% unrelated)
'MOLDD"

9

When are C-Corporations exempt from AMT?

In year one

In year two, if year one gross receipts were less than $5 Million

In year three, if the average gross receipts for years 1 and 2 were less than $7.5 Million

In year four and beyond, if the average from the previous 3 years is less than $7.5 Million

10

How are gains and losses handled with respect to a Corporation's transactions involving its own stock?

Corporations have no gain/(loss) from transactions involving their own stock, including Treasury Stock.

If Corporation gets property in exchange for stock, there is no gain/(loss) on the transaction.

11

How are Corporate organization costs handled?

Amortization of costs begin the month the Corporation commences business activity

If the Corporation doesn't amortize organization costs in year one, they can never be amortized

Costs associated with offerings are neither deductible nor amortized

12

How are excess charitable contributions treated in a C-Corporations?

Carried forward 5 consecutive years
(No Carryback)

13

When can a board of directors authorize charitable contributions for a tax year?

The Board of Directors can authorized charitable contributions up to 3/15 and have them count in the previous tax year

14

How is the dividends received deduction (DRD) calculated?

80% Interest ownership = 100% DRD

20-79% = 80% DRD

less than 20% = 70% DRD

15

What is the Dividends Received Deduction (DRD) calculation when there is a loss from operations?

Only take DRD % x Taxable Income

Note: If DRD brings a loss situation, then you can take the full DRD

If Taxable Income remains after DRD, only a partial DRD (T.I.. x DRD %) is allowed

16

How are Corporate losses on a sale to a Corporation where a taxpayer owns a 50% or more interest handled in a C-Corporation?

A loss on a sale to a Corporation where taxpayer owns a 50% or more interest is disallowed

17

How are capital losses deductible in a C-Corporation?

Capital Losses are deductible only to the extent of Capital Gains

18

How are net short term capital gains taxed in a C-Corporation?

Net Short Term Capital Gains are taxed at ordinary income rates

19

How are Corporate losses carried back/forward?

- Carry back losses 3 years
- Carry forward losses 5 years
(as a Short Term Capital Loss)

20

How are bad debt losses Classified in a Corporation?

Bad debt losses are classified as ordinary

21

What is the casualty loss floor for a C-Corporation?

No floor on Corporate casualty loss like there is with an individual taxpayer

If destroyed, the loss is the property's basis (minus proceeds)

Calculation: Adjusted basis - Proceeds from Insurance = Loss

22

How are net operating losses handled in a C-Corporation?

If loss includes NOL Carryforward, reduce the loss (add back the amount) to get the loss without the Carryforward

Then, carry back the NOL 2 years starting with the earliest year and reduce the taxable income there and then move to the most recent year

Any leftover NOL = This year's NOL

23

What is the purpose of Schedule M-1 on a Corporate tax return?

Schedule M-1 Reconciles:

- Book to Tax Income before Net Operating Loss/Dividend Received Deduction

- Ex: Premiums paid on key-person life insurance

24

What is the purpose of Schedule M-2 on a Corporate tax return?

Reconciles beginning to ending retained earnings

25

What is the purpose of Schedule M-3 on a Corporate tax return?

Like M1, but for Corporations with $10M+ in assets

26

How are affiliated (80%) Corporation tax returns handled?

Consolidation election is binding going forward

Dividends between them are eliminated

One AMT exemption

One accumulated earnings tax allowed

27

How are Corporate distributions to shareholders handled?

Distribution is a dividend to the extent of Current Accumulated E&P (ordinary income)

Then, remainder (if any) is a return of basis.
Then, add'l remainder (if any) is a Capital Gain

28

What is the order of treatment in a Corporation's distribution to a shareholder?

1. Distribution is a dividend to the extent of current and accumulated earnings and profits

2. Shareholder basis is then exhausted

3. Remainder, if any, is a Capital Gain

29

What is the basic calculation for accumulated earnings and profits in a Corporation?

Beginning Accumulated Earnings and Profits
+ Net Income
+ Gain on Distribution (if not already in book income)
- Distribution (but cannot create a deficit)
- NOL of prior years
= Ending Accumulated Earnings and Profits

30

What is the treatment of a gain in a complete Corporate liquidation?

If Capital Property, then Capital Gain

If Non-Capital Property, then Ordinary Income

Gain characterization is the same for both the Corporation and the shareholder

31

What is the treatment of a loss in a complete Corporate liquidation?

Corporation: Depends on if property is capital in nature, otherwise ordinary loss

Individual: capital loss only

32

What is the treatment of the liquidation of a subsidiary?

No G/L to parent company

33

What is a consent dividend? How is it treated?

Consented by the Board of Directors but not yet paid

Treat as if distributed by the end of the year

34

Describe the requirements for a Personal Holding Company.

Not Subject to the Acc. Earnings Tax

No banks or financial institutions can be PHCs

5 or fewer individuals own more than 50% of the stock

60% of the PHC's income must be from passive means

PHC tax is self-assessing - 20% tax rate on undistributed PHC Income

35

How is Corporate accumulated earnings tax (AET) different from Personal Holding Company taxation?

- Not Self-Assessing like a PHC

- Flat 20% additional tax rate

36

How is the Accumulated Earnings credit calculated for a Corporation?

-Take greater of $250,000
($150,000 for Service Corps)
OR
- The legitimate balance based on future needs (i.e. purchasing a building)

37

What business gift amounts are deductible on Schedule C of form 1040? What amount for service awards?

$25 per person for gifts

Service awards up to $400

38

What income can business losses offset on a 1040?

They may only offset active business income.

Note: W2 wages are considered active business income.

39

How is non-business bad debt deducted on a 1040?

It is treated as a STCL

40

What are the Transactions that there is NO G/L for issuing stock?

- Formation- Issuance of Stock

- Reacquisition- Purchase of Treasury Stock

- Resale- Sale of Treasury Stock

41

If shareholders have 80% control after a property transfer then what taxable event occurs?

- No taxable event occurs.

If liabilities exceed basis on contributed property to a Corporation, a gain is recognized.

42

If liabilities exceed basis on contributed property to a Corporation then?

- A Gain is Recognized.

43

When a Corporation receives Property, the Basis used is the Greater of:

- Adjusted Basis (Net Book Value)
OR
- Debt assumed by Corporation

44

What are the Advantages & Disadvantages for affiliated Corporate tax returns?

Advantage- Gains are deferred

Disadvantage- losses are deferred.

45

In order to Consolidate What % of Ownership does the Parent need?

- 80% voting power
&
- Own 80% of the stock value

46

The Basis of Common Stock to the Shareholder when Property is Received is?

- Net Book Value

- Basis is reduced by any debt assumed by the Corp

- Gain Recognized by shareholder is added to bring basis to Zero.

47

What is the Basis & Taxable Events for a Corporation receiving Services in exchange for Common Stock?

-Ordinary Income Recognized at FMV
&
-Taxable

48

Included in Gross Income; Cash received in advance of Accrual GAAP is Taxed such as:

Temporary Differences:

- Interest Income
- Rental Income
- Royalty Income

49

GAAP Income items that are NOT Included in Gross Income:

- Interest Income from Municipal & State Bonds

- Proceeds from Life Insurance of a "key officer"

- Fed. Income Taxes- NOT deductible

50

What is the Maximum Deduction for a Corporation's qualified Domestic production activities?

- The deduction may NOT exceed 50% of the W-2 wages paid

51

The Domestic Production Deduction is 9% of the lessor of:

- Qualified Production Activities Income

-Taxable Income (not including above number)

52

When are deductible Bonus Acurrals must be paid by?

- March 15th

- 2 1/2 Months after year end.

53

In handling Bad Debts, ACCRUAL Basis taxpayers must use what Method? Is it Tax Deductible?

- Specific Charge-Off Method

- Tax Deduction when Specific A/R is written off

54

Are Bad Debts in CASH Basis Method Tax Deductible?

- Was never Income so Tax Deductible

- Has not included amount in Gross Income

55

Prepaid Business Interest Expense; Deductible when & must be allocated to the?

- Proper period to which it is related

- Deduct when Incurred

56

Business Interest Expense is Deductible when?

- Incurred & Paid

57

Investment Interest Expense is deductible up to what amount?

- Investment Income

- Investment interest on tax-free investments are NOT deductible.

58

What Maximum % of AGI can Charitable Contributions be deductible & Within how many months?

- 10% of AGI

- Any Accrual must be paid within 2 1/2 months of year end

59

The casualty loss for a Partially Destroyed C-Corporation is limited to the lesser:

- FMV
OR
-Adjusted Basis Reduction
(minus proceeds)

60

Corporations may elect to deduct up to how much of Start Up Costs & Organization Expenditures?

- Up tp $5,000

- Amount exceeds $50,000 is then Amortized over 180 Months

61

What are the Allowable Organizational Expenditures & Start- Up Costs?

- Legal Services

- Accounting Services

- Fees paid to the State of Incorp.

62

What are the Excludable Organizational Expenditures & Start- Up Costs?

- Costs of Issuing & Selling the Stock
- Commissions
- Underwriter Fees
- Costs incurred in transfer of assets to a Corporation

63

What is the Tax Rule for Amortization of Depreciation, Goodwill, Intangibles, Depletion?

- Amortized on a Straight-line basis over 15 Years

64

When the Corp. OWNS the Life Insurance Policy, are the Premiums paid tax Deductible?

- Not Tax Deductible

65

When an Insured Employee is the Beneficiary of the Life Insurance Policy, is the Premiums paid tax deductible?

- Yes, Tax Deductible

66

What are the Taxes that are Deductible?

- State income taxes
- Local/City Taxes
- Federal Payroll Tax

67

What Tax isn't tax deductible?

- Federal Income Tax

- Added back to Book Income

68

What are the Rules for Net Operating Losses Carry-back & Forward in a C-Corporation?

- Carry Back: 2 Years

- Carry Forward: 20 Years

69

What method of accounting must be used for Inventory Valuation

- Accrual Basis for Purchases & Sales.

70

What are the Valuation Methods for Inventory?

- Cost Method
- Lower of Cost or Market Method
- Rolling-Avg Method
- Retail Method
- FIFO
- LIFO

71

The General Business Credit may not exceed 'Net Income Tax'" Less the Greater of:

- 25% of regular tax Liability above $25,000
OR
- 'Tentative Minimum tax' for the year

72

What are the limitations of dividends received deduction (DRD) ?

- Only allowed if no consolidated return is filed.

- Qualified dividends from domestic Corporations only.

73

Entities for which the Dividends Received Deduction does NOT apply?

- Personal Service Corporations

- Personal Holding Companies

- (Personally taxed) S Corps.

74

The Accrual Basis Method for tax purposes is required for?

- Accounting for Purchases & Sales
- Tax Shelters
- Certain Farming Corps
- Business with C Corps with greater then $5Mil gross receipts

75

If Corporation had more than $1 Million in revenue the previous year, the first estimated payment must be based on

-The previous year & the remainder based on the current year.

- Must pay 100% of tax of Current Yr Return
- 4 equal payments

76

AMT Paid for Corporations; Carryfwd/back rules:

- Never carried back

- Carried forward indefinitely

77

What are Preferences for C- Corps Alt. Min. Tax purposes?

- Items that are typically not taxed for regular tax purposes

- BUT are added back for AMT purposes

78

What are the 3 Items in C-Corps Preferences?

- Percentage Depletion

- Private Activity Bonds (After 1986)

- Pre-1987 ACRS Depreciation

79

What is the Exemption amount for Alt. Min. Tax Calc. ?

- $40,000
- Less 25% of AMTI in Excess of $150,000

80

What Credit is used for Corp. Alt. Min. Tax ?

- Foreign Tax Credit

81

What are are the Carry Fwd/Back Rules for Minimum Tax Credit?

- No Carryback

- Carry Forward Indefinitely

82

Personal Holding Companies as Corps with Ordinary Gross Income consisting of:

- Net Rent ( less then 50% of O.G. Inc)

- Interest- Taxable (nontax~ excluded)

- Royalties (not minerals/oil)

- Dividends from Unrelated Domestic Corp.

"NIRD"

83

Are Current E&P by year-end Dividends taxable?

- Taxable Dividend

- Do not Net with Acc. E&P

84

Is Accumulated E&P (Distribution date) Dividends Taxable?

- Taxable Dividend

- Do NOT Net with Current E&P

85

Is Return of Capital (No E&P) Dividends Taxable?

- Tax Free
&
- Reduces Basis of Common Stock

86

Capital Gain Distribution (No E&P/Basis) Dividends Taxable?

- Taxable Income as a Capital Gain

87

Current E&P are allocated on a?

- Pro Rata Basis to each distribution

88

Accumulated Earnings & Profits are applied in?

- Chronological Order

- Beginning with the earliest distribution

89

Stock Dividends are generally not taxable Unless?

- The shareholder has a choice of receiving cash or other property

- Taxable at FMV

90

Individual Shareholder Taxable amount when Cash/Property Dividends are received?

- Cash Dividend: Amount Received

- Property Dividends: FMV of property received

91

Corporate Shareholder Taxable amount when Cash/Property Dividends are received?

Both Subject to Dividends Received Deduction:

- Cash Dividend: Amount Received

- Property Dividends: FMV of property received

92

The payment of a dividend from a Corp. is not a taxable event but is ?

- A reduction of Earnings & Profits (R/E)

93

If a Corporation distributes Appreciated property, the Tax Results are?

- Recognizes Gain (as if was sold)

- Gain increases E&P
~ FMV - NBV = Corp. Gain/ E&P

94

Proportional Stock Redemption is?

- Redeems or Cancels the stock pro rata for all shareholders

- Taxable Dividend Income

95

Disproportional Stock Redemption is?

- Sale by Shareholder subject to:
~ Taxable Capital G/L to shareholder

96

How are a C-Corporation's deductible charitable contributions calculated?

Sales -COGS= Gross Profit
Gross Profit + Rent, Royalties, Gross Dividends, Capital Gains
=Total Income
Total Income - Deductions (No charitable contributions, Dividends
Received Deductions (DRD), or NOL Carrybacks allowed)
- NOL Carryforwards
=Taxable Income before charitable contributions, DRD, NOL Carrybacks
x 10%
=Deductible Charitable Contributions

97

Which items are included in Schedule M-1?

Includes permanent differences:
- Tax-exempt interest & non-deductible expenses

Temporary Differences:
- Accelerated tax depreciation, straight-line, etc.

98

How is the Schedule on a Corp. tax return calculated?

Beginning Unappropriated R/E
+ Net Income
+ Other Increases
- Dividends paid
- Other decreases
= Ending Unappropriated R/E

99

How is the Distribution Amount for Corporate distributions to shareholders Calc?

FMV of Property
+ Cash
- Liability Assumed

= Distribution amount

100

How is the Shareholder Basis for Corporate distributions to shareholders Calc?

FMV of Property

+ Cash received
(basis not reduced by the attached liability)

= Shareholder Basis

101

When there is both S.T. Capital G/L & L.T. Capital G/L; what is the amount added or subtract from Reg. Taxable income?

- Net together first then add or subtract from reg. taxable income

102

What is a deduction from illegal activity?

- Cost of Merchandise

103

A Personal Holding Company deducts from Taxable income to compute: Undistributed Personal Holding Company Income?

- Federal Income Taxes

- Net Long-Term Capital Gain
LESS Related Fed. Income Taxes

104

What 2 requirements qualify as a Type B Reorganization?

- Target Corp is acquired solely for voting stock of acquiring corp or parent

- Acq. Corp. must have control of the target corp. immediately after the acquisition

105

For a Liquidating Corp, Fees incurred in connection with the liquidation are?

- Deductible in full by the Dissolved Corp.

- Fees: Professional, Filings, etc

106

What are the requirements for taking an ordinary loss on Section 1244 small business Corporation stock?

Taxpayer must be original stock owner, and either an individual or partnership
$50k (single) or $100k (MFJ) limit - remainder is a capital loss

Must have been issued in exchange for money or property (not exchanged for services)

Shareholder equity must not be in excess of $1 million

Both common and preferred stock is allowed

107

Describe how loss is taken on Section 1244 small business Corporation stock?

A loss on worthless stock is an ordinary loss.