R4

Question 1

Expenses deductible for books but not deductible for tax

Answer 1

1. Federal tax expenses are deducted as expense for books but added back for tax
2. 50% of meal expenses are deducted for book and added for tax
3. Excess of capital losses over capital gains should be added back
4. Interest income from Municipal bonds needs to be subtracted as they are not taxable
5. Term life Insurance premiums are added back to book income as they are not deductible for taxable income purpose.
6. Premiums on group-term life insurance covering the lives of employees are deductible by the employer, unless the employer is a direct or indirect beneficiary.
7. Keyman Insurance ==Insurance expense on officers’ lives where the corporation is the owner and beneficiary of the life insurance policy are not deductible.

Question 2

Life Insurance Proceeds

Answer 2

1. LIP on the life of an officer when corporation is the owner and beneficiary are not reported as TI of the corporation.
2. Any expenses related to the premiums – not tax deductible for the corporation

Question 3

Accrual method of accounting

Answer 3

1. The accounting for purchases and sales of inventory provided the business has greater than $29 million of average annual gross receipts for the 3 year period ending with the prior tax year;
2. Tax shelters;
   3.Certain farming corporations, provided the business has greater than $29 million of average annual gross receipts for the three-year period ending with the prior tax year; and
   4.C corporations , trusts with unrelated trade or business income, and partnerships having a C corporation as a partner
   provided the business has greater than$29 million average annual gross receipts for the three-year period ending with the tax year.

Question 4

Taxable income changes for the corporation and the shareholder if land distributed instead of Cash

Answer 4

Payment of dividend does not create a taxable event unless the distribution is appreciated property. If that is the case then the corporation recognizes gain as if the property were sold at FMV.
There is no change to the shareholders TI.

Question 5

NOL - Corporation

Answer 5

1. Capital Losses – Only offset Capital gains
2. Net capital loss- C/B == 3 years ; C/F == 5 years
3. C/B starts from the oldest year first and is limited to the TI amount. For example ,
   year 2 CG = 21,000 and TI is 17,000 THEN 17K will only be deducted as NOL.

Question 6

Bad Debts Write off

Answer 6

A corporation that is not a financial institute like Small banks or thrift institutions are required to use the DIRECT CHARGE -OFF METHOD rather than reserve method.

Question 7

Illegal Activity

Answer 7

1. A gain from an Illegal Activity is includible in income.
2. Cost of Merchandise can be a deductible expenses
3. Business expenses relating to operating illegal business are not allowed deductions.

Question 8

ORGANIZATIONAL EXPENSES

Brown Corp., a calendar-year taxpayer, was organized and actively began operations on July 1, Year 1, and incurred the following costs:
Legal fees to obtain corporate charter : 41,000
Commission paid to underwriter
25,000
Other stock issue costs
10,000
Brown wishes to amortize its organizational costs over the shortest period allowed for tax purposes. In Year 1, what amount should Brown deduct for the organizational expenses?

Answer 8

1. Organizational costs are amortizable over a minimum period of 15years (180 months).
2. Limitation of upto 50K total expense can allow a 5000 deduction in the year 1.
3. Allowable costs in connection with the corporate organization are
   a. legal fees;
   b.necessary accounting services,
   c.expenses of temporary directors, and
   d.incorporation fees paid to the state.
4. Organizational costs exclude
   a.stock issue costs and
   b.commissions paid to underwriters to
   help sell the shares.
5. Total org costs (if limited to 50k) - 5,000
6. Step 5 /180 months
7. Step 6 * Remaining months in the year
8. Step 7 + 5,000 (year 1)

Question 9

Charitable Contribution

Answer 9

1. Deduction == 10% TI
2. Excess Contribution === C/F 5 years
3. Limited to the amount paid during the year or by the 15th day of the 4th month after the taxpayer year ends.

Question 10

Corporation - LIQUIDATION

Answer 10

Upon Liquidation, Corporation recognizes gain or loss on distribution of its assets when sold at FMV

Question 11

REORGANIZATION

Reorganizations are TAX-FREE to all corporations involved and to all their shareholders.

Answer 11

Type A = Mergers or Consolidations

If the parent owns more than 80% of stocks in the subsidiary company then it can file consolidated return

Type B == ACQUIRING STOCK FOR STOCK
1. Target is acquired using the stock of acquired corporations or the acquiring Corp Parent (Triangular Acquisition)
2. Acquiring Corporation must be in control of the target immediately after acquisition.

Type C == ACQUIRING STOCK FOR ASSETS

Type D= Dividing the corporations into separate operating Corporation

Type E == Recapitalization

Type F == A mere change in Identity, form or place of the organization.

Question 12

Lilac Corp., a C corporation with earnings and profits, redeemed shares of stock from
an individual shareholder. The distribution in redemption of stock will likely result in
dividend income treatment to the redeeming shareholder if:

Answer 12

Answer is === A stock redemption that is proportionate with respect to the
shareholder is treated as a dividend to the redeeming shareholder.

Exchange of Stock not as a dividend. ==
1. A Stock redemption that results in a complete termination of the
redeeming shareholder’s interest in the corporation
2. A stock redemption that is due to a complete liquidation of a
corporation
3. A stock redemption that is due to a partial liquidation of a
corporation

Question 13

ESTIMATED TAX

Answer 13

1. No penalty for underpayment of estimated tax id the tax for the year is less than $500
2. Regular Corporate income tax is required in determining the amount of installment and not the accumulated earnings tax
3. Personal Holding company PHC are subject to underpayment of estimated tax penalty provision.
4. No Underpayment penalty if estimated tax payments are equal to the current year taxes shown in the return.

Question 14

DIVIDEND RECEIVED DEDUCTION

Answer 14

OWNERSHIP DRD
0-20% 50%
20-80% 65%
80% OR MORE 100%

Question 15

what is the tax effect of the liquidation of an 80% or more owned subsidiary

Answer 15

1. In a tax - free liquidation of an 80% or more owned subsidiary, the parent corp takes a carryover basis in the assets it received from the subsidiary.
2. The corporation cannot deduct a loss on distribution of property to shareholders in a complete liquidation of the corp in a tax-free liquidation of a corp 80% or more owned by other corp.
3. Subsidiary cannot recognize gain or loss on distribution of assets to the parent corp in a tax-free liquidation of a corp 80% or more owned by other corp.

Question 16

ParentCo, SubOne, and SubTwo have filed consolidated returns since their inception.
The members reported the following taxable incomes (losses) for the year:
ParentCo 50,000
SubOne (60,000)
SubTwo (40,000)
No member reported a capital gain or loss or charitable contributions. What is the
amount of the consolidated net operating loss?

The income from ParentCo ($50,000) is netted with the losses from the subsidiaries ($100,000) to arrive at the consolidated net operating loss of
$50,000.

Answer 16

1.Net capital losses are not allowable deductions for corporations.
2. A corporation can only use capital losses to offset capital gains.
3. Further, the deduction
for charitable contributions may be limited in some cases, and no charitable
contribution deduction is allowed in calculating the NOL.
4. The facts of this question indicate that there are no reported capital gains or losses or charitable contributions for any of the consolidated entities; therefore, we know that we are able to use the total
income (loss) identified in the facts to calculate the net operating loss.

5. When entities file consolidated income tax returns, 100 percent of their net income (losses) is consolidated. The facts do not indicate that any intercompany transactions exist; therefore, there are no elimination entries to make before consolidating the net income (loss).
6. The consolidated net operating loss is calculated as follows:
   ParentCo. 50,000
   SubOne (60,000)
   SubTwo (40,000)
   NOL === (50,000)

Question 17

Distributions reported to Shareholders steps

Answer 17

1. Preferred Shareholders
2. Common Stockholders
3. Excess goes to Return of Capital

Question 18

Type of entities that include in gross income 100% of dividends received from Unrelated taxable domestic corp in computing regular taxable income

Answer 18

1. Personal Service Corporations
2. Personal Holding Companies

Question 19

which credit is a combination of several tax credits to provide uniform rules for the current and carryback - Carryover years?

Answer 19

GENERAL BUSINESS CREDIT combines several nonrefundable tax credits and provides rules or their absorption against the taxpayer’s liability.

Question 20

CHARITABLE CONTRIBUTIONS

In Year 2, Cable Corp., a calendar year C corporation, contributed $80,000 to a
qualified charitable organization.

Cable’s Year 2 taxable income before the deduction for charitable contributions was $820,000 after a $40,000 dividends received deduction.

Cable also had carryover contributions of $10,000 from Year 1.

In Year 2,
what amount can Cable deduct as charitable contributions?

Answer 20

A C corporation can deduct charitable contributions up to 10% of its taxable income after adding back the dividends-received deduction;
$820,000 Taxable income +
$40,000 dividends-received deduction
= $860,000.
10% × $860,000 =$86,000,

The maximum allowable charitable contribution deduction. $4,000 is carried forward to Year 3.

A corporate charitable deduction that exceeds the limit for deduction in one year can be carried over to the succeeding five tax years. It cannot be carried back.

Question 21

A corporation distributed land with a
basis of $20,000 and
a fair market value of $60,000,
but was subject to a nonrecourse liability of $70,000 to its sole shareholder.

What amount represents the corporation’s recognized gain?

Answer 21

1.If a property’s FMV is less than the amount of the liability assumed, the property’s FMV is assumed to be the amount of the liability assumed by the shareholder, so in this case the fair market value is assumed to
be $70,000.

FMV- BASIS = RECOGNIZED GAIN
70,000 - 20,000 = 50,000