R3 M1 - C Corporation Overview Flashcards
(11 cards)
Accrual method for C corporation
- Tax Shelters
- Accounting purchase / sale of inventory is greater than $30 million of average annual gross receipts for the 3-year period.
- C corporation, trusts with unrelated trade or business income, and partnerships have a C corporation as a partner provided the business has greater than $ 30 million of average annual gross receipts for the 3-year period.
Farming Corporation > $ 30 million
Manufacturing co >$30 million
Personal Service Corporation are permitted to use the cash method
Proceeds from insurance on the death of an officer where the corporation is the owner and beneficiary are *not includable **in the taxable income of a corporation.
Corporations that are not small banks or thrift institutions are required to use the (specific charge off method) direct charge-off method rather than the reserve method.
As the result of an IRS audit of a C corporation and its sole shareholder, the IRS agent proposes that a portion of the shareholder’s salary is unreasonable. Because the corporation has significant earnings and profits, the agent has determined that the unreasonable portion of the salary is a dividend. Which of the following is correct regarding the impact of the proposed adjustment to both the corporation and its shareholder?
A.
Full disallowance of salary expense, a corresponding increase in nondeductible dividends to the corporation, and no effect on the shareholder since both salaries and dividends are taxable income.
B.
Partial disallowance of salary expense, a corresponding increase in nondeductible dividends to the corporation, and reclassification of the shareholder’s salary to dividend treatment.
C.
Allowance of the full amount as salary expense to the corporation and reclassification of the unreasonable portion of the shareholder’s salary to dividend treatment.
D.
Partial disallowance of salary expense, a corresponding increase in deductible dividends to the corporation, and no effect on the shareholder’s return since both salaries and dividends are taxable income.
Explanation
Choice “B” is correct. Corporations are allowed to deduct reasonable compensation paid to shareholder-employees. If the IRS determines that part of a shareholder’s salary is unreasonable, it may reclassify part of the salary as a dividend. This decreases the corporation’s deductible salary expense and increases the corporation’s nondeductible dividends. The reclassified portion of the shareholder’s salary is taxed to the shareholder as a dividend, which is taxed at preferential tax rates, rather than as salary, which is taxed at ordinary tax rates.
Choice “A” is incorrect. The corporation’s deductible salary expense is only decreased, and the nondeductible dividends increased, by the unreasonable portion of the shareholder’s salary. Although both a salary and dividends are taxable income to the shareholder, they receive different tax treatment.
Choice “C” is incorrect. The unreasonable portion of the shareholder’s salary is reclassified to dividend treatment. The corporation’s deductible salary expense is only decreased by the unreasonable portion of the shareholder’s salary.
Choice “D” is incorrect. Partial disallowance of salary expense, with a corresponding increase in deductible dividends, to the corporation is correct. Although both a salary and dividends are taxable income to the shareholder, they receive different tax treatment.
In Year 2, Garland Corp. contributed $40,000 to a qualified charitable organization. Garland’s Year 2 taxable income before the deduction for charitable contributions was $410,000. Included in that amount is a $20,000 dividends received deduction. Garland also had carryover contributions of $5,000 from the prior year. In Year 2, what amount can Garland deduct as charitable contributions?
A. $40,000 B. $41,000 C. $43,000 D. $45,000
Explanation
Choice “C” is correct. The charitable contribution deduction is limited to 10% of taxable income before the dividends-received deduction and the charitable contribution deduction. 10% ($410,000 + $20,000) = $43,000. The deduction consists of $40,000 from the current year and $3,000 from the prior year contribution carryover. That leaves a $2,000 carryover from Year 1 to Year 3.
Business gifts are deductible up to a maximum deduction of $25 per recipient per year.
Computation:
Premiums paid for insurance on an officer’s life where the corporation is the owner and beneficiary of the policy are not deductible.
Group-term life insurance premiums paid on employees’ lives, with the employees’ dependents as owners and beneficiaries of the policies are considered to be a fringe benefit and would therefore be deductible by the corporation.
Roger Corp. had operating income of $300,000 after deducting $12,000 for charitable contributions made during the fiscal year, but not including dividends of $10,000 received from a 10 percent-owned domestic taxable corporation. How much is the base amount to which the percentage limitation should be applied in computing the maximum deduction for the charitable contribution?
A. $312,000 B. $300,000 C. $322,000 D. $317,000
Choice “C” is correct. The percentage threshold limit for charitable contributions for a corporation is 10 percent of adjusted taxable income. Total taxable income is calculated before the deduction of any charitable contributions, the dividends-received deduction, or any capital loss carryback. Thus, the $300,000 must be adjusted to add back the charitable contribution deduction of $12,000 plus the $10,000 of dividend income not included in the $300,000. The base equals $322,000.
Choice “A” is incorrect. This answer does not take into account the dividend income not included in the $300,000.
Choice “B” is incorrect. This answer considers operating income without adjustments.
Choice “D” is incorrect. This answer reduced the $322,000 for the $5,000 dividends-received deduction that Roger Corp. is entitled to, but this should not go into the calculation of the allowable charitable contribution deduction.
The corporate dividends-received deduction is affected by a requirement that the investor corporation must own the investee’s stock for a specified minimum holding period of more than 45 days.
Parent Corp. owns 15% of Sub Corp. Parent has gross income of $43,000 and allowable deductions of $40,000 before considering any dividends-received deduction (DRD). Included in the $43,000 gross income is $8,000 in dividends from Sub.
What is the maximum DRD available to Parent?
A. $1,500 B. $1,950 C. $4,000 D. $8,000
Choice “C” is correct. Based on the small ownership percentage, which is below 20%, the applicable DRD rate is 50%. The total dividend is $8,000, and 50% of that is $4,000. This is normally limited to 50% of taxable income before the DRD. Taxable income before DRD is $3,000 ($43,000 − $40,000), and the full DRD of $4,000 will create a loss. Therefore, the income limitation does not apply, and the full DRD of $4,000 is allowed.
Choice “A” is incorrect. $1,500 is 50% of the taxable income before the DRD of $3,000. This would be correct if the income limitation applied. But due to the resulting loss, it does not apply.
Choice “B” is incorrect. $1,950 is the income limitation if we use 65% of $3,000. But the correct limitation percentage is 50% because the ownership is less than 20%
Choice “D” is incorrect. $8,000 is the total dividend. Only 50% is allowed as a DRD.
