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Flashcards in R3 - Corporations Deck (109):
0

Corporation basis - general rule and exception?

The basis is the GREATER of:
1. Adjusted basis + gain recognized by the shareholder
2. Debt assumed by the corporation

Exception: total AB > total FMV
then the basis is total FMV

1

When does a shareholder NOT recognize a gain from incorporation?

BOTH conditions are met:

1. Gets 80% control
2. Boot is NOT received by the shareholder

2

What is shareholder's stock basis?

ADD:
Cash contributed
Asset NBV less liabilities assumed by the corp
Any gain recognized

LESS:
cash received
FMV of non-money boot received

3

What happens if the shareholder contributes services to the corporation?

Recognize FMV as ordinary income

If services is the only thing you contributed, you don't count as part of the 80% control group

4

What kind of income is recognized in current year even though it is received in advance of accrual GAAP?

Interest
Rent
Royalty income received in advance

5

How is DPAD calculated?

9% of the lesser of:
1. QPAI
2. Taxable income without DPAD

The end amount is limited to 50% of the wages paid by the corporation for the year

6

What activity or service counts as domestic production gross receipts?

Manufactured, produced, grown
Extracted (natural resources)
Constructed

Services - engineering and architectural

7

How is executive compensation limited?

If publicly held and NOT under qualifying commission or performance based plan (nice loophole)

Then cannot deduct more than 1 million paid to CEO or other four most highly compensated officers

8

How are bonus accruals for employees and officers accounted for?

Officers - temporary M-1
Employees - can deduct if paid within 2.5 months after year end

9

How are bad debts accounted for?

Accrual - direct write-off only

Cash - no bad debt because no AR

10

How is prepaid interest accounted for by an accrual taxpayer? Cash taxpayer?

The same!!!

Prepaid interest expense must be allocated to the period it's related to, whether or not you are cash basis

11

How is charitable contribution limited?

10% of taxable income, which is income before:
Dividends received
DPAD
NOL carryback
Capital loss carryback

Ok to deduct if accrued and paid within 2.5 months of year-end

12

How are business casualty losses accounted forks property is partially destroyed? Fully destroyed?

Partially - the lesser of decline in FMV or adjusted basis
Fully - adjusted basis ONLY

In either case must reduce by the insurance proceeds

13

How are organizational and start up costs accounted for?

Can expense 5,000 immediately.
Reduce 1 for 1 if over 50,000

The rest is amortized over 180 months (5 years) from the moth business started operations

14

What costs are NOT organizational?

Issuing or selling stock
Commissions
Underwriter fees
Costs incurred in the transfer of assets to the corporation

15

How are intangibles amortized?

SL over 15 years

16

When are lobbying expenses deductible?

When it's direct type in connection with LOCAL governmental lobbying

17

How are capital gains accounted for by corporations?

No deduction in current tax year.
Carry back 3 years, carry forward 5

As SHORT TERM ONLY and no special rates for cap gains

18

How is NOL calculated and accounted for?

No charitable contribution is allowed in calculating NOL

carry back 2, carry forward 20

19

Which inventory valuation methods are not allowed for tax purposes?

Prime cost (no overhead)
Direct cost (variable overhead only)
Rolling average under certain circumstances (fluctuation in price)

20

When can LIFO be used for tax purposes?

If elected in the 1st year and the financial are accounted under LIFO as well

21

What if your inventory is unusable or unsellable?

Must be valued at the expected selling price within 30 days
Less the disposition costs

22

What is the time frame to qualify for dividends received deduction?

Must own for at least 46 days
During 91-day period
Beginning on the date 45 days before ex-dividend date

I.e. owned 45 days before or after

23

Dividend received deduction percentage?

0-20% ownership - take 70% Unrelated
21-79% - take 80%
80-100% - take 100%

24

What is taxable income limitation for DivRD?

Limited to the lesser of:
calculated percentage 70/80/100
Corresponding percentage of taxable income before NOL or capital loss

EXCEPTION: if using tentative DRD creates a loss and corresponding amount doesn't - use DRD
be a loser

25

To which entities does DivRD NOT apply?

S corporations
Personal service corporations
Personal holding companies

26

Who is permitted a constant 100% DivRD?

Small business investment corporation

27

What are MACRS percentages in regard to type of property?

3-10 year class - MACRS 200
20 year class - MACRS 150

28

When is mid-quarter convention used?

When 40% or more of DEPRECIABLE property (no land!) is placed in service in the last quarter of the year

29

What are section 179 rules in regard to SUVs?

25,000 limit
SUV is 6,000 - 14,000 gross weight
But not a heavy pickup truck or a van

30

Is the taxpayer limited to MACRS only? Are there other options?

May elect to depreciate on SL basis

In this case may choose between regular recovery period or ADS (alternative depreciation system)

31

How can depletion be accounted for?

1. Cost depletion
2. Percentage depletion (5-22%) - limited to 50% of taxable income unless oil or gas property - then no limit

32

How are research expenses amortized?

Over 60 months

as opposed to all other intangibles amortization of 180 months

33

What is sec 1231 property and what is its treatment?

Depreciable personal and real property held for over a year

LTCG treatment (0-15%) but ordinary loss (no netting)
Best of both worlds

34

What is sec 1245? How are gains and losses accounted for under it?

Upon sale - the lesser of gain recognized OR!!! accumulated depreciation is recaptured as ordinary income, the rest is 1231

No losses under 1245

35

What is sec 1250? What is the general rule for recapture under this section?

Real property only, gains only

Recaptures only part of depreciation taken IN EXCESS of straight line
Generally applies to assets placed in service before 1987 because now real property must be SL

36

What is the amount of total taxable recapture as ordinary income under sec 1259 for corporations?

Ordinary income under 1250 + 20% of SL depreciation

Limited to recognized gain
The remainder is taxed at 25% maximum

37

Who is required to use accrual basis of accounting?

Inventory
Tax shelters
Certain farming corporations
If 5,000,000 of average gross receipts in 3 years and you are:
a corporation
a partnership with a C corp as a partner
a trust with unrelated business income

38

When is a corporation required to make estimates? Is there a penalty?

Always
May be unequal payments if using annualized income method

Underpayment penalty is assessed if the amount owed in over $500

39

What is a large corporation? How does being a small corp affect you?

Large - had taxable income of 1,000,000 or more in any 3 prior years
Must pay 100% of CURRENT year tax - the only option

Small has a choice of paying 100% of prior year tax
But NOT when prior year was a short year or there was no tax

40

Which entities are NOT allowed to file a consolidated return?

S corporations
Foreign corporations
Real estate investment trusts - most of them
Exempt organizations - most of them
Insurance companies - some of them

41

What is corporate AMT rate?

20% of (AMTI - exemption)

42

What is the very first starting point for calculating AMT?

Taxable income before NOL

43

What are the corporate AMT adjustments?

PIE/LIE

P - percentage of completion VS completed contract
I - installment sales
E - excess depreciation of property in service after 1986 over
SL-40 for real and 150DB for personal

44

What are corporate AMT preferences?

Same as individuals

P - private activity bonds
P - percentage depletion over adjusted basis
P - pre-1876 over SL

45

What goes into ACE adjustment?

M - muni interest
I - increase in CSV of life insurance
N - non-SL depreciation after 1989 vs ADS
D - DivRD if 70%

46

How is ACE adjustment for AMT calculated?

75% of (AMTI before AMT NOL - less ACE)

Can be positive or negative

47

What is corporate AMT exemption?

40,000 - 25%(AMTI - 150,000)

Almost the same as MFJ (45,000)

48

What is the only credit allowable for corporate AMT?

Foreign tax credit

49

How can AMT be used in future years?

As a credit against minimum tax

Carry forward indefinitely

50

What is accumulated earnings tax? How is it calcuted?

15% on accumulated retained earnings over 250,000

Lifetime amount

IRS assessed!!! As a result of audit

51

What is the accumulated earnings amount that a personal service corporation won't get taxed on?

150,000 as opposed to 250,000

52

Who is exempt from accumulated earnings tax?

Personal holding companies
Tax-exempt corporations
Passive foreign investment corporations

53

How can a corporation avoid accumulated earnings tax?

Demonstrate reasonable needs for earnings accumulation
Need to redeem corporate stock included in deceased shareholder's estate

54

What are the qualification criteria for personal holding company?

1. Corporation, more than 50% owned - directly or indirectly - by 5 people or less during the last 6 months of taxable year
2. 60% or more of adjusted ordinary gross income comes from:
- net rent
- taxable interest
- royalties other than mineral, oil, gas or copyright
- dividends from unrelated corporation

55

What are tax rates for personal holding corporation?

15-25%

Additional 15% tax on net income not distributed - self-assessed!

56

What is the taxable base for additional tax for PHC?

Taxable income
Less: federal income tax
Less: net long-term capital gain, net of tax

57

What is a personal service corporation and what are its tax rates?

Accounting, law, consulting, engineering, architecture, health and actuarial science

Flat rate of 35%

58

Name always negative E&P adjustments (7)

All non-deductible items:

Federal income tax
Non-deductible penalties, fines, political contributions etc
Meals and entertainment
Officer's life insurance premiums
Expenses for producing tax exempt income
Non deductible charity
Non deductible capital losses

59

Name always positive adjustments to E&P

Refunds of federal income tax paid
Tax exempt income
Refunds of items not subject to regular tax under tax benefit rule
NOLs
Capital loss carryover
Charitable contribution carryover
Life insurance PROCEEDS
Increase in CSV of life insurance
Non taxable cancellation of debt
DivRD

60

Name 4 general dividend categories

Current E&P - taxable dividend
Accumulated E&P - taxable dividend
Return of capital (no E&P) - reduction of basis
Capital gain distribution (no E&P and no basis)

61

What are dividend categories for preferred shareholders?

None. It's always a taxable dividend no matter what

62

If you have dividends from both current and accumulated E&P, how are they allocated?

Current - pro rata
Accumulated - chronological order

63

Give examples (4) if constructive dividends

Excessive salaries to shareholders
Excessive rents and royalties
Loans to shareholder with no intent to repay
Sale of assets below FMV

64

Are stock dividends taxable?

Generally not, unless given a choice of cash or property

In which case it's FMV at distribution date

65

What happens if the corporation distributes appreciated property as a dividend?

It recognizes gain as if the property has been sold (FMV - adjusted basis)

The corporation cannot recognize a loss though

66

How is stock redemption accounted for by the shareholder?

If proportional - taxable income
If disproportional - capital gain. Basically a sale of stock initiated by the shareholder. Other shareholders didn't sell

Less than 50% after redemption and new ownership is less than 80% of old ownership

67

Name reorganization types by letter

A - merger/consolidation
B - stock for stock
C - stock for assets
D - division into separate operating corporations
E - recapitalization
F - mere change in identity, form or place

68

Are reorganizations taxable?

If shareholder recognizes gain from boot - yes

Otherwise generally non taxable

69

What are the requirements for nontaxability of reorganizations?

Continuity of business - acquiring corporation must continue the business of the old entity or use a significant portion of its assets

Control requirement - 80% of voting and other classes of stock

70

What happens if a corporation's stock becomes worthless (from the shareholder's perspective)? Qualifications?

Must be an ORIGINAL shareholder of up to $1 million worth
Purchased for cash or property, NOT services rendered!
Ordinary loss up to 50,000 (100,000 MFJ), everything over is capital
Shareholder can be an individual or a partnership

71

What makes small corporation stock qualified for gain exclusion?

C corp only
Stock acquired in original issuance after August 10, 1993
Corporation had less than 50 million in assets at the time of issuance
80% or more of assets is used in active trade or business

72

Name eligible shareholders of S corporation

Individual, estate, grantor or voting trusts, 501(c)(3), qualified retirement plans
US residents only
100 shareholders (lineal + spouses = 1)
Only ONE class of stock - different voting rights OK

73

How to become an S corp?

ALL shareholders consent, whether voting or non voting

If elected by March 15 or 2.5 months after FYE - applies retroactive to the beginning of the year

74

What are three corporate-level tax that an S corp is subject to?

LIFO recapture
Built-in gains
Tax on passive investment income

75

How is LIFO recapture calculated and when is it applicable?

Changing from C to S
Excess of inventory under FIFO over LIFO

C corp pays the 1st installment with the final return
S corp pays the other 3

76

How can an S corp avoid built-in gains tax?

If it was never a C corp
Or doesn't sell the asset within 10 years (7 for 09-10) of S election
Or the appreciation/acquisition occurred after S election
Net gain was recognized in prior years

77

How is built in tax calculated?

35% on the lesser of:

UNREALIZED built-in gain. FMV - adjusted basis
Taxable income if it were a C Corp

78

When and how is an S corp taxed on passive investment income?

35% on the lesser of:

Accumulated C corporation earnings
Passive investment income, if it exceeds 25% or gross receipts

PII does not include gain on sale of securities

79

What makes small corporation stock qualified for gain exclusion?

C corp only
Stock acquired in original issuance after August 10, 1993
Corporation had less than 50 million in assets at the time of issuance
80% or more of assets is used in active trade or business

80

Name eligible shareholders of S corporation

Individual, estate, grantor or voting trusts, 501(c)(3), qualified retirement plans
US residents only
100 shareholders (lineal + spouses = 1)
Only ONE class of stock - different voting rights OK

81

How to become an S corp?

ALL shareholders consent, whether voting or non voting

If elected by March 15 or 2.5 months after FYE - applies retroactive to the beginning of the year

82

What are three corporate-level tax that an S corp is subject to?

LIFO recapture
Built-in gains
Tax on passive investment income

83

How is LIFO recapture calculated and when is it applicable?

Changing from C to S
Excess of inventory under FIFO over LIFO

C corp pays the 1st installment with the final return
S corp pays the other 3

84

How can an S corp avoid built-in gains tax?

If it was never a C corp
Or doesn't sell the asset within 10 years (7 for 09-10) of S election
Or the appreciation/acquisition occurred after S election
Net gain was recognized in prior years

85

What makes small corporation stock qualified for gain exclusion?

C corp only
Stock acquired in original issuance after August 10, 1993
Corporation had less than 50 million in assets at the time of issuance
80% or more of assets is used in active trade or business

86

Name eligible shareholders of S corporation

Individual, estate, grantor or voting trusts, 501(c)(3), qualified retirement plans
US residents only
100 shareholders (lineal + spouses = 1)
Only ONE class of stock - different voting rights OK

87

How to become an S corp?

ALL shareholders consent, whether voting or non voting

If elected by March 15 or 2.5 months after FYE - applies retroactive to the beginning of the year

88

What are three corporate-level tax that an S corp is subject to?

LIFO recapture
Built-in gains
Tax on passive investment income

89

How is LIFO recapture calculated and when is it applicable?

Changing from C to S
Excess of inventory under FIFO over LIFO

C corp pays the 1st installment with the final return
S corp pays the other 3

90

How can an S corp avoid built-in gains tax?

If it was never a C corp
Or doesn't sell the asset within 10 years (7 for 09-10) of S election
Or the appreciation/acquisition occurred after S election
Net gain was recognized in prior years

91

When and how is an S corp taxed on passive investment income?

35% on the lesser of:

Accumulated C corporation earnings
Passive investment income, if it exceeds 25% or gross receipts

PII does not include gain on sale of securities

92

What is the basis limitation for an S corp shareholder?

Adjusted basis of stock
Add: direct loans TO corporation
Subtract: distributions

+/- current income or loss

93

Does tax exempt interest increase S corp shareholder basis?

Yes!

94

Are fringe benefits deductible?

Employees - yes

More than 2% shareholders - no, UNLESS included in W-2

95

What increases and decreases AAA?

Increase:
Income and gains - EXCEPT tax-exempt income and life insurance proceeds

Decrease:
Expenses and losses
Non-deductible expenses - EXCEPT life insurance premiums
Distributions - not below $0

96

How are distributions treated if an S corp has former C corp E&P?

1. First to the extent of AAA - non taxable
2. Second to the extent of E&P - dividend
3. Third to the extent of stock basis - reduction
4. Over basis - capital gain

97

How can an S corp status be terminated?

Majority vote
Getting a corporate and/or foreign shareholder
Have more than 25% of gross receipt come from passive investment income while the corporation had C corp E&P all along

A re-election only in 5 years

98

What is a 501(c)(1)?

US Instrumentality --> does NOT need an application

Federal credit union

99

What is a 591(c)(2)?

A corporation organized solely to hold title to property, collect income from it and turn it over to an exempt organization.
Issues capital stock

Files Form 1024

100

What is a 501(c)(3)?

Are there any prohibited transactions?

Plain vanilla nonprofit

Cannot:
Influence legislation
Political campaigns

101

What is a section 509?
What isn't a section 509?

Private foundation

NOT a PF:
1. Most charitable donees
2. Publicly supported organizations
More than third from members and public
Less than third from investment and UBI
3. Supporting organizations
4. Public safety testing organizations

102

What if a 509 voluntarily terminates?

Subject to a termination tax payback of the lesser of:
Aggregate tax benefits
Net assets

OR distribute all assets to a 50% charity

OR operate as a charity for at least 5 years

103

What it UBI?

Activity from trade or business
Regularly conducted
Not substantially related to exempt purposes

104

What are the ownership rules in regard to UBI?

The foundation may own up to 20% of business enterprise

If there are third parties - may go up to 35%

105

What is generally excluded from UBI?

Interest, dividends, royalties, annuities from noncontrolled organizations
Rents, if the property is OWNED (not debt-financed)
Gains and losses
Income from research
Allowed by state law - bingo!

106

How to qualify for 990-EZ?

Total receipts less than 200K
Total assets less than 500K

107

Who is not required to file 990?

CHRIST 5000! Or CRIMC
5,000 or less gross receipts
Church
High school - religious
Religious orders
Internal support auxiliaries
Societies that are missionary related
Tax exempt by Congress


108

When and how is an S corp taxed on passive investment income?

35% on the lesser of:

Accumulated C corporation earnings
Passive investment income, if it exceeds 25% or gross receipts

PII does not include gain on sale of securities