R3 Entity Taxation

Question 1

M1 Corporation Overview

What is the dividend received deductions limits on taxable income?

Answer 1

1.100% for stocks (related entity) owned 80% - 100%.
2. 65% for stocks own from 20% - 80%
2. 50% for stocks own < 20%

Question 2

M1 Corporation Overview

When does A C corporation must use the accrual method of accounting?

Answer 2

1. When average gross receipts exceed $31m over 3 year period (Large C Corporation) .
2. If the Corporation purchases and sell inventory
3. The entity is tax shelter
4. The entity is a manufacturer.

Question 3

M1 Corporation Overview

How is life insurance proceeds and premiums on the life of an officer who is the owner of the corporation and beneficiary be treated for tax purposes?

Answer 3

1. Life insurance premiums are non deductible
2. Life insurance proceeds are non taxable

Question 4

M1 Corporation Overview

How is rent received in advance, non-refundable rent deposits and lease cancellations payments treated for tax purposes for a C Corporation?

Answer 4

Taxable income (Government wants to collect the taxes while the taxpayer still has the cash to pay)

Question 5

M1 Corporation Overview

What is the method allowed by the IRS that allows a Corporation to deduct bad debts?

Answer 5

The direct charge off method (not applicable to small banks or thrift institutions i.e credit unions, loan associations)

Question 6

M1 Corporation Overview

What is the allowable time frame for an accrued compensations expenses (bonus) to be deducted in the current year tax return?

Answer 6

Compensation expenses must be paid within 2.5 months after the end of the year (March 15) to be fully deductible in the current year tax return.

Question 7

M1 Corporation Overview

Question 8

M1 Corporation Overview

How are organizational expenses treated for tax purposes?

Answer 8

Organizational costs are expensable/amortizable.
1. Organizational expenses are expense immediately for the first $5,000 and
2. Remaining amount is amortized over a period of no less than 180 months (15 years)

Question 9

M1 Corporation Overview

What are example of organizational expenses?

Answer 9

1. Legal fees for drafting the corporate charter and bylaws
2. Fees for incorporation of documents
3. Cost of organizational meetings
4. State filing fees

Question 10

M1 Corporation Overview

For a C corporation what is the charitable contribution deduction limit %?

Answer 10

10% of taxable income that addbacks
1. (+) Contributions deduction
2. (+) Dividends received
3. (+) Net operating loss carryback
4. (+) Capital loss carryback

Question 11

M1 Corporation Overview

How should accrued charitable contribution for a C Corporation be treated for tax purposes?

Answer 11

If the Corporation pays the accrued amount by 3.5 months following the end of the year tax (March 15), the contribution is fully deductible in the year the contribution was accrued.

Question 12

M1 Corporation Overview

What is the maximum amount per gift that is deductible for tax purposes?

Answer 12

$25 per recipient per year.

Question 13

M1 Corporation Overview

How are capital losses from C Corporations treated for tax purposes?

Answer 13

Capital losses are offset against capital gains carried back 3 years and carried forward 5 years. These capital losses are not deducted in the current year/

Question 14

M1 Corporation Overview

What is the minimum period a corporation must own the investments to deduct a dividend received?

Answer 14

45 days.

Question 15

M1 Corporation Overview

Which corporations are not entitled to the deduction of dividends received (DRDA) rule and must considered dividends as 100% taxable?

Answer 15

1. Personal service corporation (PSCs) (i.e. Law, consulting and accounting firms)
2. Personal holding companies (PHCS)

Question 16

M2 Differences between Book and Tax

What are typical permanent differences reported in the
M1/M3 Schedule?

Answer 16

1. Interest income/expense from State/Municipal Bonds
2. Non deductible business entertainment expenses
3. Penalties & Fines
   4.Non deductible portion of business meal
4. Life insurance premiums on corporate officers where the corporation is both the owner and beneficiary of the policy. (if the fact patter does not indicate that the corporations is both the owner and beneficiary of the policy for the exam assume it is so the expense is non deductible and it becomes a permanent difference)

Question 17

M2 Differences between Book and Tax

What are typical temporary differences reported in the
M1/M3 Schedule?

Answer 17

1. Tax depreciation > Book depreciation
2. Warranty expense incurred
3. Direct method write off for uncollectible receivables
   4.

Question 18

M2 Differences between Book and Tax

For Corporations and individuals how is state income taxes treated for tax purposes?

Answer 18

State income taxes are deductible for income tax purposes.

Question 19

M3 C Corporation Tax Computation and Credits

What is the General Business Credit Limit?

Answer 19

The limitation is based on tax Liability whichever is greater of:
1. 25% of the net regular tax liability that exceeds $25,000 or
2. The tentative minimum tax

Question 20

M3 C Corporation Tax Computation and Credits

What is the GBC carryback and carryforward limit?

Answer 20

1. Carried back 1 year
2. Carried forward 20 years

Question 21

M3 C Corporation Tax Computation and Credits

What is the foreign tax credit limitation formula?

Answer 21

FTC= Tax liability x Foreign source taxable income/total taxable income

Question 22

M3 C Corporation Tax Computation and Credits

What is the carryover rule for FTC?

Answer 22

1. Carryback 1 year
2. Carried forward 10 years

Question 23

M3 C Corporation Tax Computation and Credits

How a US corporation should claimed a paid foreign income tax?

Answer 23

1. Claim as a deduction on taxable income or
2. Claim as a credit towards your tax liability (more beneficial as it reduces the tax liability dollar for dollar)

Question 24

M3 C Corporation Tax Computation and Credits

What is the accumulated earning tax?

Answer 24

is a penalty tax imposed on corporations for accumulating earnings in a corporation and not distributing earning to shareholders to avoid shareholder taxes. This tax is imposed regardless of the numbers of stockholders in a corporation.

Question 25

M3 C Corporation Tax Computation and Credits What are the methods used for calculating estimated tax payments for corporations?

Answer 25

1. Preceding year method (Method can be used if there was a positive tax liability in the prior year) 2. Current year method (estimated current year tax) 3. Annualized income method (Useful for fluctuating or seasonal income and is the preferred method when there is no tax liability in the prior year)

Question 26

M3 C Corporation Tax Computation and Credits What is the minimum accumulated earning credits for a corporation?

Answer 26

$250,0000

Question 27

M3 C Corporation Tax Computation and Credits How is the excess of accumulated earnings calculated that is is subject to a tax penalty?

Answer 27

Taxable income (-) Federal income tax paid (-) Minimum accumulated credit ($250k) (=) Excess of accumulated earnings

Question 28

M3 C Corporation Tax Computation and Credits What is a personal holding company?

Answer 28

A corporation that meets 2 main criteria: 1. 50% of the corporation stock is owned directly or indirectly by 5 or less individuals during the second half of the tax year. 2. 60% of the adjusted ordinary gross income derives from dividends, taxable interest, royalties, and passive investment income (Personal holding company income)

Question 29

M4 Calculating loss limitations for C Corporations What is the carryback and carryforward rule for NOLs generated before 2017, 2018 to 2020 and 2021 onwards?

Answer 29

1. NOLs before 2017 carryforward for 20 years. 2. NOLs in Tax year 2018 to 2020 carryforward indefinitely and carried back 5 years to offset 100% of taxable income 3. NOLs in 2021 and onwards carryforward indefinitely up to 80% of Taxable income.

Question 30

M4 Calculating loss limitations for C Corporations What is the carryback and carried forward rule for capital losses.

Answer 30

Capital losses only offset capital gains and these losses can: Carried Back: 3 years Carried Forward: 5 years

Question 31

M5 S Corporation Overview What are the reason an S Corporation status could be terminated?

Answer 31

1. Ownership exceeds 100 shareholders. 2. The corporation has ineligible shareholder such as: Corporation, a partnerships, or a non resident alien becomes a shareholder. 3. A second class of stock is issued (Only one class stock must be issued) 4. Excessive passive income for the 3 consecutive years greater than 25% a year for corporations that have converted from a C Corp to S corp with accumulated earning and profits carried over from their C Corp. 5. Failure to adopt a calendar year as its fiscal year (December 31).

Question 32

M5 S Corporation Overview How are insurance premiums paid by an S Corp on behalf of the stockholder treated for tax purposes?

Answer 32

For S Corp stockholders who own more than 2% of the Company stocks insurance premiums are included as gross income and is a tax deductible expense for the S Corp. Owner with less than 2% ownership on the insurance premiums are Non taxable.

Question 33

M5 S Corporation Overview What is the eligibility criteria that must be meet to have an S Corp?

Answer 33

1. Less < 100 Shareholders (Family members can elect to be treated as one shareholder). 2. Us citizens, resident Aliens, grantor and estate owners only. (No C Corps, Partnerships, IRAs, or non resident alien). 3. One type of share class is issued. 4. Must no have more than 25% of passive income in the next 3 years of becoming an S Corp. 5. Adopt a calendar year.

Question 34

M5 S Corporation Overview What is the rule to determine the date in which a Corporation elected to become an S Corporation.

Answer 34

1. If the election date was made before March 15, the S Corporation election date is Jan 1 of the current year. 2. If the election date was made after March 15, the election date will be Jan 1 of the following year.

Question 35

M5 S Corporation Overview What is the % of shareholders that have to approve on the consent to revoke the election of an S Corporation?

Answer 35

Over 50% of the stockholder must agree on the revocation of the S Corp.

Question 36

M5 S Corporation Overview In the election to become an S Corporation what is the minimum of the shareholder that have to agree?

Answer 36

All Shareholder have approve (100% of all shareholders)

Question 37

M5 S Corporation Overview Once a corporation terminates its S corporations status when can it be reelect the S status again?

Answer 37

The beginning of the 5 year.

Question 38

M5 S Corporation Overview What items are added or deducted to the cost basis of an S Corporation stockholder?

Answer 38

To the extent the % proportion own in the business: Added: 1. Ordinary Income 2. Tax exempt income 3. Loans 4. Short/term capital gain (Separately stated in K1 schedule) Subtracted: 1. Distributions 2. Losses (Limited to the shareholders cost basis) 3. Short/long term capital loss (Separately stated in K1 schedule)

Question 39

M5 S Corporation Overview How is ordinary business income calculated for an S Corporation?

Answer 39

Gross receipt (-) Operating expenses 1. Wages (Mandatory to pay wages to owner) 2. Rent, utilities, depreciations etc.. (-) Interest expense (If related to the business) (=) Ordinary Business income Do not include in the determination of ordinary business income 1. Dividend income 2. Charitable contributions 3. Long term capital losses 4. Section 179 expense (Accelerated depreciation) 5. Interest income 6. Entertainment expenses (Non deductible)

Question 40

M5 S Corporation Overview How is the stock basis of shareholder calculated?

Answer 40

Beg Basis (+) Ordinary business income (+) ST/LT Capital gains (+) Non taxable interest income (-) Non deductible expenses (-) Distributions (Dividends) (-) ST/LT Capital losses (=) Stockholder basis Additions and subtractions on the stock basis is based on the % the stockholder has in the S Corporation.

Question 41

M5 S Corporation Overview How should a tax payer of an S Corporations the deduct a loss?

Answer 41

1. The deduction of the loss can not be greater than the Stockholder basis + Debt basis (Loan outstanding net of current year payments).