R3, M1-M8 Flashcards
(179 cards)
1
Q
For a corporation, what types of income received in advance are treated as taxable income in the year received, and not the year earned?
A
rent, royalties, and interest
2
Q
When the corporation is the beneficiary of a key person life insurance policy, what is the tax treatement of the proceeds paid out?
A
not taxable
3
Q
The accrual basis of accounting is required at what quantitative threshold?
A
The average annual gross receipts are greater than $30M for the prior three years.
4
Q
The accrual basis of accounting is required for what types of entities (4)?
A
- selling inventory (30M test)
- tax shelters
- farming corporations (30M test)
- C corps (30M test)
5
Q
What is the definition of “ordinary and necessary” business expenses?
A
- common in the particular business/profession, and
- relate to the production of current year’s income
6
Q
What is the limitation on excessive executive compensation?
A
may not deduct more than 1,000,000 in compensation paid to the 5 most highly compensated officers
7
Q
What is the tax treatment of entertainment expenses for officers, directors, and over 10% shareholders in a C-corp?
A
Only deductible to the extent the value is included in their gross income.
8
Q
If the IRS determines that part of a shareholder’s salary is unreasonable, what is it reclassified as?
A
a dividend
9
Q
Bonuses must be paid by what date to be deductible in tax year?
A
must be paid within 2.5 months after the taxpayer’s year end
10
Q
How does the deduction for bad debt expense work for an accrual basis taxpayer?
A
You can only deduct when the bad debt is written off, not when it is estimated.
11
Q
How does the deduction for bad debt expense work for a cash basis taxpayer?
A
There is no deduction (even with a W/O), because no A/R is recognized for cash basis taxpayers.
12
Q
What is an exception to the bad debt expense rule for cash basis taxpayers?
A
You receive a check, record income, but when you deposit it, the check bounces back (reduce your income).
13
Q
What is the maximum charitable contribution deduction for a C corp?
A
10% of Taxable Income before the CC deduction, DRD, and capital loss carryback.
14
Q
Disallowed charitable contributions have what CB/CF provisions (C-corp)?
A
CF 5 years
15
Q
In order to be deductible in the current year, any accrued charitable contribution must be paid by what date?
A
within 3.5 months of the taxable year end (before April 15 for calendar year)
16
Q
For business losses or casualty losses related to a business, what is the first step to determine the amount of loss?
A
Determine wher the property is partially destroyed or fully destroyed.
17
Q
For business losses or casualty losses related to a business, what is the loss recognized if the property is partially destroyed?
A
(Lesser of Change in FMV and NBV) - Insurance Reimbursement
18
Q
For business losses or casualty losses related to a business, what is the loss recognized if the property is fully destroyed?
A
NBV - Insurance Reimbursement
19
Q
What is the difference in the treatment of purchased goodwill (2002+) for tax and GAAP?
A
Tax: Amortized over 15 years
GAAP: Not amortized, test for impairment
20
Q
What is the tax treatment of life insurance premiums paid by the corporation when the employee is the beneficiary?
A
deductible as an employee benefit
21
Q
Business gifts given by the corporation to others have what tax treatment?
A
deductible up to a maximum of $25 per recipient per year
22
Q
If you and a client go out for dinner, your plate was $20 and the client’s was $30, what is the business meal deduction allowed?
A
$25 (50% of the total meal)
23
Q
What is the tax treatement of settlement, payment, or attorney fees related to sexual harrassement or sexual abuse (C corp)?
A
Not deductible if the settlement/payment is subject to a non-disclosure agreement.
24
Q
What is the limitation on deductibility of state and local taxes for a C-corporation?
A
There is no limit.
25
Are federal payroll taxes deductible by a C-corp?
Yes.
26
Are lobbying expenses to influence local, state, or federal legislation deductible by a C-corp?
No.
27
Are political contributions deductible by a C-corp?
No.
28
What is the purpose of the dividends received deduction?
to prevent triple taxation of earnings
29
In what time period do you need to own the stock to be eligible for the DRD?
own for at least 46 days in the 91-day time period around the ex-dividend date (45 before, 46 after)
30
What is the ex-dividend date?
the cutoff date that if you buy the stock, the buyer is not entitled to the upcoming dividend
31
What is the DRD % and percentage ownership amounts?
0 to less than 20% ownership -> 50% DRD
20% to less than 80% ownership -> 65% DRD
80%+ ownership -> 100% DRD
32
Is the DRD computed before or after the CC deduction?
after
33
Generally, the DRD is the lesser of what two calculations?
(1) DRD % times Dividends Received, or
(2) DRD % times TI before DRD, NOL CF, or CLCB
34
What is the exception to the general rule for the DRD?
If the full DRD (Calculation 1, DRD % times Dividends Received) results in an NOL, then you can take the full DRD.
35
The DRD is not available to what three types of corporations?
- personal service corps
- personal holding companies
- S corps
36
What is the easy way to remember which entities are *not eligible* for the DRD?
"Don't take it personally."
37
What is the DRD % for dividends received by a small business investment corporation?
100%
38
What two schedules on the C-corp tax return describe book-tax differences?
M-1 and M-3
39
Which schedule(s) distinguish between temporary and permanent differences?
M-3, Part II (not M-1!!)
40
When is a corporation required to complete a Schedule M-3?
if corp's assets are $10M or more
41
What is the difference in tax treatment of warranty costs for book and for tax?
Book: Record estimated warranty cost with each sale (full %).
Tax: Only deduct expenses for warranty costs actually incurred (actual claims).
42
What is the due date for a C corp's tax return (general rule and calendar year assumption)?
3.5 months after year end; April 15 if calendar year
43
What is the exception to the general rule for C-corp tax return due dates?
If fiscal year ends on June 30, then tax return due date is Septembre 15.
44
What happens if this due date falls on a legal holiday or weekend?
the due date is the next business day (M-F)
45
What is the period of the extension allowed for C-corp tax return (general and special rule)?
General Rule: 6 months
Special Rule: If June 30 year end, 7 month extension.
46
In what months (use numbers, because FY ends are different) are the four quarterly payments of a C-corp's tax liability due?
4, 6, 9, and 12th months
47
How much of the estimated tax is due with each quarterly payment? Is there an exception to this?
1/4 of the total estimated tax is due with each quarterly payment.
Unequal payments can be made if you use the annualized income method.
48
What does the annualized income method allow you to do?
pay taxes based on your actual income for specific periods (if you earn less money in a given period, you owe less tax in that period)
49
An underpayment penalty is assessed on a corporation if these two criteria are met:
- payments are not made on a timely basis, AND
- amount owed (remaining tax liability) is $500 or more
50
How is a large corporation defined for the purpose of estimated tax payments?
Corporation does NOT have *taxable income* >=$1M in *any* of the three preceding tax years.
51
What is the safe-harbor test for C-corps that are not large corporations?
Pay the lesser of:
- 100% of current year tax, or
- 100% of last-year tax
52
What is the safe-harbor test for C-corps that are large corporations?
There is no safe harbor test, pay 100% of current year tax.
53
When does the 100% of last-year tax part of the safe-harbor test not apply (3)?
- Large corporation (TI of $1M or more in any of the three preceding tax years)
- Owed no tax in the prior year
- Preceding tax year was less than 12 months
54
What is the C-corp tax rate?
21% flat tax (not progressive)
55
Generally, how is the research and development tax credit calculated?
*20% of the change* in qualified research expenditures over the base amount
56
How do you calculate the foreign tax credit (simple form) for a C-corporation?
The lesser of:
- qualified foreign income taxes paid
- foreign income times 21% (U.S. tax rate)
57
In addition to the regular tax, C corporations may have to pay what two other taxes?
- Accumulated Earnings tax, or
- Personal Holding Company tax
58
Could a C-corp have to pay both Accumulated Earnings tax andPersonal Holding Company tax?
No, they could only pay one or the other, or neither.
59
When is the accumulated earnings tax imposed (2 AND)?
- accumulated earnings and profits (RE) is *over $250K*, and
- earnings are considered to be *improperly retained instead of being distributed*
60
What is the tax rate and tax base of the accumulated earnings tax?
20% (same as highest qualified dividend rate) on excess AE&P *over $250K*
61
What amount of accumulated earnings are personal service corporations entitled to?
only $150K, not $250K
62
The accumulated earnings tax is not imposed on what three types of companies?
- personal holding companies,
- tax-exempt corporations,
- passive foreign investment corporations
63
Does the C-corp have to determine and assess accumulated earnings tax themselves?
No, it is assessed by the IRS.
64
What are two valid defenses to maintaining AE&P over 250K to avoid the accumulated earnings tax?
- specific plan and reason that you are holding onto the money (reasonable needs), or
- need to redeem corporate stock of a large SH that died
65
What is a personal holding company (generally)?
corporation set up by high-bracket taxpayers to shelter their investment income to get a lower tax rate
66
What is a personal holding company (tax law criteria, 2 AND)?
- more than 50% owned by 5 or fewer individuals, AND
- 60% of adjusted ordinary gross income consists of passive income
67
What acronym is used to remember the passive income included for determining whether a company is a PHC?
NIRD
68
What does each letter in NIRD stand for?
Net rent
Interest
Royalties
Dividends
69
Net rent is only included in passive income for a PHC if ...
less than 50% of ordinary gross income
70
Interest is only included in passive income for a PHC if ...
it is taxable interest.
71
Royalties from ... are not included in passive income for a PHC.
mineral, oil, gas, or copyright royalties
72
Dividends are only included in passive income for a PHC if ...
from an unrelated domestic corporation
73
What is the additional tax assessed on a PHC (rate and base)?
20% on PHC net income *not distributed*
74
Does the C-corp have to determine and assess PHC tax themselves?
Yes.
75
What is a consent dividend?
when the SH includes dividend income in their return, even though the money is not distributed to them
76
What is the calculation to determine the PHC tax?
Total Taxable Income
Less: Federal Income Tax
Less: Net LTCG (net of tax)
= TI before Dividends Distributed
Less: Dividends Paid
Less: Consent Dividends
= Undistributed Income
Times 20% = PHC Tax
77
How do NOL rules differ for C-corps and individuals?
They do not.
78
Can a charitable contribution deduction create or increase an NOL?
No.
79
A capital loss carryover is treated as a (short-term/long-term) capital loss.
short-term
80
Does taxable income before special deductions include or exclude the DRD deduction?
Exclude, because the DRD is a special deduction.
81
Does paying dividends by the tax return due date reduce the amount subject to the accumulated earnings tax?
Yes.
82
S corporations can have no more than ___ shareholders.
100
83
Can a S corporation have 100 shareholders exactly?
Yes.
84
Family members can elect to be counted as one shareholder. How broad/narrow is the definition of a family member for an S corporation?
It is very broad, including all lineal descendants and spouses.
85
Can a cousin be considered a family member for the purposes of being counted as 1 S corporation shareholder?
Yes.
86
What are three types of non-eligible shareholders?
- corporations
- partnerships
- non-resident aliens
87
T/F: A S corporation can have foreign shareholders.
False, they must all be domestic (citizens).
88
Can a charitable organization be an S corporation shareholder?
Yes.
89
Can a qualified retirement plan trust be an S corporation shareholder?
Yes.
90
How many classes of stock can an S corporation have? What type?
only one (common stock, not preferred stock)
91
Can S corporation shareholders have different common stock voting rights within the one class of stock?
Yes.
92
Can S corporation own a share in a C corporation?
Yes, but a C corporation cannot own a share in a S corporation.
93
If an S corporation owns 100% of another S corporation, what must they do?
File as 1 consolidated entity for tax purposes.
94
If an existing calendar year corporation wants to elect S corporation status, what date do they need to elect by for the S corporation election to be valid as of Jan 1 that year?
March 15
95
If you fail to elect S corporation status before March 15, when is your S corp status effective?
Jan 1 of the next year
96
If you are a fiscal year (not calendar year) corporation, by what day and month of the fiscal year do you need to elect S corp status for it to be effective that year?
15th day of the third month (same concept as for calendar year)
97
How long does a newly formed (not existing) corporation have to elect S corporation status? What happens if they do not elect in this time period?
2 months from incorporation; If not elected, follow rules of existing corporations (15th day of 3rd month).
98
How do you elect S corporation status (level of agreement)?
All voting and nonvoting shareholders need to consent to the election.
99
How do you voluntarily terminate S corporation status (level of agreement)?
A *majority of all shares* (voting and nonvoting) need to consent to termination.
100
Once the S corporation election is in effect, do you need the consent of new shareholders to remain an S corporation?
No.
101
What is the tax year for an S corporation (default and exception)?
Calendar year, unless a valid business purpose for a different year is established.
102
What is the return due date for an S corporation?
March 15 (if calendar year), 15th day of the 3rd month
103
How are S corporations taxed?
like a partnership (flow-through entity)
104
What are the two broad reasons a S corporation status could terminate *involuntarily*?
- qualifications for S corp status are violated (over 100 shareholders, foreign or corporation owner, etc.)
- excessive passive investment income
105
What does S corp termination through excessive passive investment income entail (2 AND)?
- more than 25% of gross receipts are from passive investment income for three consecutive years, and
- corporation has prior C-corp E&P
106
On what date is a S election considered terminated if terminated voluntarily, and termination specifies a date?
If a date is specified, use that date.
107
On what date is a S election considered terminated if terminated voluntarily, and termination does not specify a date?
If filed by March 15, effective for that year.
If filed after March 15, effective for next year.
This is the same rule as for electing the S corporation status.
108
On what date is a S election considered terminated if terminated involuntarily?
It is terminated immediately, creating one short S corporation tax year and one short C corporation tax year.
109
On what date is a S election considered terminated if terminated involuntarily (due to excessive passive income)?
as of the beginning of the fourth year (after three years of consecutive GR where >25% passive)
110
After terminating an S election, how many years does the S-corp have to wait before electing S corporation status again?
5 years
111
What are two options to split the income between an S corporation and C corp if you have two short tax years?
- relative number of days in each business form, or
- close books on day of conversion
112
How does the amount of the income allocated to S corporation shareholders differ from partnerships?
There is less flexibility, because it has to be allocated per-share, per-day.
113
What amounts of income from an S corporation are subject to the QBI deduction?
Only Box 1 - Ordinary Business Income
114
Is MACRS depreciation a separately stated item?
No!
115
Is Section 179 depreciation a separately stated item?
Yes.
116
Is bonus depreciation a separately stated item?
No.
117
Which fringe benefits are deduction in an S-corporation?
- paid to non-shareholder employees
- paid to shareholder-employees owning 2% or less of the S-corp
118
Which fringe benefits are *not deductible* in an S-corporation? Is there an exception to this rule?
paid to shareholder-employees owning more than 2% of the S-corp
This may be deductible if the SH-employee includes the amount in their W-2 income.
119
Can tax-exempt income and deductions increase and decrease basis in an S corp shareholder's stock?
Yes.
120
How does basis of an S corporation shareholder differ from partnerships (broadly)?
S Corp: Do not include debt in basis.
Partnership: Include debt in basis.
121
What types of debt can create basis for an S corporation shareholder?
direct loans from the SH to the corporation
122
Stock basis and debt basis are tracked (separately/together) in an S corporation. Stock basis and debt basis are tracked (separately/together) in a partnership.
S Corp: Separate
Pship: Together
123
In what order are losses deducted from basis in an S-corp? In what order is basis reinstated?
Deduct first from stock basis, then debt basis.
Reinstate debt basis first, then stock basis.
124
Basis can never be reduced below what value?
0
125
What is the accumulated adjustments account (AAA) for an S corp?
account to hold earnings and profit (like RE) of the S corporation
126
Can the AAA become negative?
Yes.
127
What items can reduce the AAA to negative? What cannot?
Can: Losses and deductions
Cannot: Distributions
128
Do non-taxable income items increase the AAA account?
No, they are not added.
129
Do non-deductible items decrease the AAA account?
Yes, they are still subtracted.
130
What is the name of the informational return for an S-corp?
1120-S
131
What is the name of the informational return for a partnership?
1065
132
The 1065 includes what two schedules?
Schedule K and K-1s for all partners
133
What is included in the Schedule K?
all (total) separately stated items of the partnership, before splitting it up by partner
134
Which items relating to the partnership are recorded on the 1065, K, and K-1 (3)?
- ordinary business income or loss
- guaranteed payments to partners
- partner health insurance premiums (b/c included as part of guaranteed payments)
135
What items appear on the 1065 only (3)?
- gross business income
- business expenses
- retirement plan contributions for employees (business expense)
136
Is investment interest expense a separately stated item?
Yes.
137
What is the tax treatment for health insurance premiums of partners (impact on ordinary business income, K-1s, etc.)?
Health insurance premiums are treated as guaranteed payments. Taxable to the partners and treated as business expense in arriving at ordinary business income.
138
Where do guaranteed payments show up on a partner's individual tax return (1040)?
reported on schedule E and flows through to the line item called "Rental real estate, royalties, partnerships, S corporations, trusts, etc."
139
How are retirement plan contributions for employees treated in a partnership (ordinary business income, separately stated item, etc.)?
Deductible by the partnership in arriving at ordinary business income (treated as a business expense).
140
How are retirement plan contributions for partners treated in a partnership (ordinary business income, separately stated item, etc.)? How do they show up on the partner's return?
separately stated item on the K-1 (not deductible for ordinary business income)
For the partner, reported on Schedule 1 (line 16) to Form 1040 as *self-employed retirement plan contributions.*
141
Are guaranteed payments to partners included in their QBI for purposes of the QBI deduction?
No!
142
What is recourse debt?
The partner can be personally liable for the debt.
143
What is nonrecourse debt?
The creditor can only collect the collateral attached to the debt, the partner has no further liability.
144
How do GPs and LPs share in the *recourse liabilities* of a partnership (in terms of amounts added to their basis)?
GPs: Allocate between GPs based on their distributive share.
LPs: No debt basis for recourse liabilities.
145
How do GPs and LPs share in the *nonrecourse liabilities* of a partnership (in terms of amounts added to their basis)?
Allocate the liability among all partners (GPs and LPs) in accordance with their distributive share.
146
What is at-risk basis (calculation)?
Total Basis - Nonrecourse Liabiltiies (because this is *not at risk*)
147
How do increases in partnership debt affect basis (increase or decrease)? What about a decrease in debt?
Increase in debt increases basis.
Decrease in debt decreases basis.
(direct relationship)
148
What is the name for the owner of a corporation?
shareholder
149
What is the name for the owner of a partnership?
partner
150
What is the name for the owner of an LLC?
member
151
What is a big difference between an LLC and a limited partnership?
In an LLC, all members get limited liability.
In a limited pship, at least 1 partner has to be a general partner with unlimited liability.
152
What is the most common type of tax-exempt organization?
501(c)(3)
152
Section 501(c)(3) organizations are broken out into what two types?
- private foundations
- public charities
152
A 501(c)(3) organization must be organized for 1+ of the following purposes:
- religious
- charitable
- scientific
- testing for public safety
- literary
- educational
- fostering national or international amateur sports competition
- prevention of cruelty to children or animals
153
For a *private foundation* to be tax exempt and for contributions to be deductible CCs, the governing instrument of the organization should contain these two provisions:
- *distribute income* each year as required under tax law, and
- will not engage in any act of *self-dealing* or retain excess business holdings
154
How does a private foundation usually get its funding?
a single major source (like a family or corporation)
155
What is the primary activity of a private foundation?
making grants to other charitable organizations and individuals
156
To qualify as a public charity, at least ___ of its support must come from (2 sources)...
1/3; governmental units and the general public
157
Income from contributions, membership dues, political fundraising events, and sale of campaign material only if ...
if it set aside or spent to influence an election to office
157
What does a political organization that qualified under Section 527 do?
(1) collect contributions and make expenditures for
(2) influencing or attempting to influence an election to office
158
Contributions to which types of organizations are deductible under the charitable contribution deduction? (3, general rule and 2 exceptions)
- 501(c)(3) organiztaions
- contributions to a U.S. instrumentality (Fannie Mae)
- volunteer fire department
159
In which state is a business always subject to state income tax?
the state of residence of the business
159
Nexus is typically caused by a company having ____, ____, or ____ within a state?
property, payroll, or sales
159
What is nexus?
the *minimum* level of contact a taxpayer may have with a jurisdiction *to be subject to its tax*
160
Federal law prevents a state from charging you income tax if these three criteria are met:
- the only business activity in the state is *soliciting orders for tangible personal property*, AND
- orders are sent *outside of the state* for acceptance/rejection, AND
- accepted orders are fulfilled by *shipment or delivery from outside the state*
161
The federal law protecting businesses from state income tax does not apply if (3) ..
- state of domicile
- incorporated under the laws of that state
- soliciting sales of something *other than tangible personal property*
162
Which taxes are not protected by federal law (3)?
- sales and use taxes
- franchise taxes
- gross receipts taxes
163
If a company provides installation or maintenance to customers (via a 3rd party) in a state, does the company have nexus?
Yes.
164
If a company sends employees into a state for training or work, does the company have nexus?
Yes.
165
If a company owns or leases tangible personal or real property in a state, does the company have nexus?
Yes.
166
After determining the states you have nexus in, what is the natural second step?
Determine what amount of your total income should be taxable in each state.
167
What two phrases are used to describe the process of determining the amount of income taxable in each state?
allocation and apportionment
168
What is allocation?
*Remove non-business income* and allocate it to the right state.
169
Investment income (interest, dividends, capital gains from sales of stock) are allocated to which state?
the taxpayer's state of domicile or residence
170
Rental income and capital gains from sales of rental property are allocated to which state?
the state that the property is located in
171
What question should you ask yourself in determining whether an item is nonbusiness income or business income?
Does it relate to the primary business activities of the corporation?
172
What is apportionment?
Dividing business income amongst the states that the company does business in.
173
How do you calculate the apportionment factor for a state?
[(Property and Rent Expense in State/Total Property) + (Payroll Paid to Employees in State/Total Payroll) + (Sales within State/Total Sales)] / 3
174
What do you multiply the apportionment factor by to get to the amount of taxable income by state?
the total apportionable business income (all income less nonbusiness income)
