R4 - Corporate Taxation

Question 1

How is taxable income computed to determine the charitable contribution deduction?

Answer 1

Charitable contribution deduction is 10% of taxable income. Taxable income for purposes of the charitable contribution limit is calculated before the deduction of:
- Any charitable contribution deduction
- The dividends-received deduction
- Any capital loss carryback

Excess charitable contributions not allowed as a deduction due to the 10% limitation may be carried forward up to 5 years. The charitable contribution is limited to the amount paid + carryover to calculate the total allowable deduction. If this amount is less than the 10% base, this is the amount deductible in the return.

Question 2

What is the criteria to qualify for a Personal Holding Company?

Answer 2

1. Small C Corps: Few owners: 5 or less owners hold 50% or more of the stock at any time in the last half of the year
2. Passive and portfolio income: 60% or more of the ordinary gross income from dividends, interest, rents, royalties, etc.

Question 3

How are net operating losses (NOL) treated and what dates should apply the NOL?

Answer 3

1. Before December 31, 2017 - The NOL can be carried back 2 years and forward 20 years. NOL can be deducted 100% of taxable income
2. Beginning Dec 31, 2017 and before Jan 1, 2021 - NOLs can be carried back 5 years and forward indefinitely
   - NOL can be deducted 100% in 2018, 2020, and 2021
   - NOL can be deducted 80% of taxable income in 2018, 2020, and 2021 after taking into consideration the prior 2017 NOL deductions.
3. After Jan 1, 2021 - NOLs cannot be carried back but can be carried forward indefinitely.
   - NOL can be deducted 80% of taxable income.
   A NOL is carried back to the oldest year in the carryback period first

Question 4

When can NOL carryforwards be offset at 100% of future taxable income?

Answer 4

1. Pre-2018 tax years, NOL carryforward can offset 100% of future taxable income
2. Post-2017, NOL carryforward can offset 100% of future taxable income in 2018, 2019, and 2020.

Question 5

When can NOL carryforwards be offset at 80% of future taxable income?

Answer 5

Starting in 2021, any NOL carryforward from post-2017 tax years can only offset 80% of the future year’s taxable income after deducting any pre-2018 NOL carryforwards.

Question 6

What are the ownership % and dividend-received-deduction (DRD) % to calculate the DRD deduction?

Answer 6

% ownership DRD %
0% < 20% 50%
20% < 80% 65%
80% or more 100%

Question 7

Can the organization deduct organizational and start-up costs?

Answer 7

Yes, organizations can deduct up to $5,000 of organizational costs and $5,000 of start-up costs.
- Any excess organizational or start-up costs are amortized over 180 months (beginning with the month in which active trade or business begins).

Question 8

What is the formula to compute organization or start-up costs?

Answer 8

organizational cost
< $5,000>
= excess amount
divided: 180 days amortization period
= monthly amortization
* 12 months (depending on the company’s start date)
= Amortization amount
+ $5,000 deduction
= Total deductible amount

Question 9

What are the costs included as organizational or start-up costs?

Answer 9

• Fees paid for legal services in drafting the corporate charter, bylaws, minutes of organization meetings
• Fees paid for accounting services
• Fees paid to the state of incorporation

Question 10

What are the costs excluded from organizational or start-up costs?

Answer 10

• Costs of issuing and selling stock
• commissions
• underwriter’s fees
• costs incurred in the transfer of assets to a corporation

Question 11

What is the definition of an affiliated group?

Answer 11

An affiliated group means that a common parent directly owns:
1. 80% or more of the voting power of all outstanding stock
2. 80% or more of the value of all outstanding stock of each corporation.

Question 12

What items are removed from each member’s taxable income when a consolidated tax return is filed?

Answer 12

Gains, losses, and deductions that are required to be determined at the consolidated level:
- Capital gains and losses
- Section 1231 gains and losses
- Net operating losses (NOL)
- Charitable contribution deductions
- Dividend-received deductions

Question 13

How is dividend income determined when a corporation distributes cash and property as dividends?

Answer 13

Dividend income = cash distributed + FMV of property at the date of distribution

Question 14

How are expenses recorded in book income but not in the tax return?

Answer 14

Expenses are recorded in book income but not recorded in the tax return, are added to net income to determine taxable income (e.g., book depreciation > tax depreciation)

Question 15

How are deductions recorded in the tax return but not in book income treated to determine taxable income?

Answer 15

Deductions recorded in the tax return but not in book income are subtracted from book income (e.g., tax depreciation > book depreciation).

Question 16

How is income subject to tax but not recorded in income in the current year treated to determine taxable income?

Answer 16

Income subject to tax is added to book income to determine taxable income (e.g., installment sale income or rent received in advance. Tax income > book income)

Question 17

How are excess capital losses over gains recorded to determine taxable income?

Answer 17

Excess capital losses over gains are added to book income to determine taxable income

Question 18

How is federal income tax recorded in book income to determine taxable income?

Answer 18

federal income tax is not deductible, as such, it is added to book income

Question 19

How is income recorded in the books but not included in tax income recorded to determine taxable income?

Answer 19

Income recorded in the books such as tax-exempt interest is excluded from computation of taxable income

Question 20

Are state franchise tax refunds included in the computation of taxable income?

Answer 20

No, they are not added to book income because they’re already included in taxable income

Question 21

How is the basis of a property contributed by a transferor/shareholder to a C corporation determined?

Answer 21

The basis of the property by a corporation from the transferor/shareholder is the greater of:
1. The transferor/shareholder’s adjusted basis (net book value) of the property (plus any gain recognized by the transferor/shareholder), or
Formula to compute the basis:
Basis = asset’s basis + cash paid by the corporation

2. The debt assumed by a corporation (however, the transferor may recognize gain to prevent a negative basis in stock received in exchange for the property.

Question 22

What is unrelated business income?

Answer 22

Unrelated business income is derived from the following:
1. An activity that constitutes a trade or business
2. Is regularly carried on, and
3. Is not substantially related to the organization’s tax-exempt purpose.

An unrelated business does not include any activity where all the work is performed for the organization by unpaid volunteers. Thus, using unpaid volunteers makes that business activity “related.”

Question 23

What type of entity can be imposed the accumulated earnings tax?

Answer 23

The accumulated earnings tax can be imposed on C corporations regardless of the number of shareholders.

Question 24

Why would S corporations or partnerships not be subject to the accumulated earnings tax?

Answer 24

S corps or partnerships would never be subject to the accumulated earnings tax since those entities pay no tax and there is no double taxation.

Question 25

Does a shareholder of a C corp have a capital gain when it transfers property in exchange for a % of ownership at the inception of the corporation?

Answer 25

No, when a stockholder contributes property to a corporation and receives stock in return for the contribution, the basis of the stock is the greater of:
1. Basis of the property distributed.
2. Debt assumed by a corporation

If the property contributed includes a mortgage, and the mortgage is given up and brings the basis of the property below zero, then that’s a taxable gain to the shareholder.

Question 26

Can the corporation deduct the life insurance policy for a key person if the company is the beneficiary?

Answer 26

The company does not get to deduct the life insurance premium

Question 27

What is the formula to compute the accumulated earnings credit?

Answer 27

Formula to compute accumulated earnings credit:
Taxable income (before dividend received deduction, NOL, charitable contribution deduction, capital loss carryover)
Less: all charity
Less: All capital losses
Less: Taxes
Less: dividend paid (during tax year, within 3 & 1/2 months, consent dividends)
= Accumulated taxable income
Less: Remaining credit
= Current accumulated taxable income
* 20%
= Accumulated earnings credit

Question 28

How to compute the lifetime credit?

Answer 28

the lifetime credit is computed as follows:
$250,000 regular corp, or
$150,000 (service corp)
Less: Beg. excess (Beg. E&P - Corp needs)
=Remaining Credit

The remaining credit reduces accumulated taxable income to determine the current taxable income under the accumulated earnings credit.

Question 29

How is the business need computed?

Answer 29

The formula to compute the business need is as follows:
Beg. E&P
Less: Corp Needs
= Beg. excess

The beg. excess reduces the $150,000 from the service corp used in the lifetime credit.

Question 30

Are insurance premiums included in book income to determine taxable income?

Answer 30

Yes, insurance premiums may have to be added back to book income if the company is the beneficiary.

Question 31

How is the amount of a life insurance policy for a key-person treated to determine taxable income?

Answer 31

If the company is the beneficiary in a life insurance policy for a key-person, the company does not get to deduct the life insurance premium. Therefore, you have to add it back to taxable income.

Question 32

Wha is a dividend payment?

Answer 32

• A distribution of earnings to shareholders. For tax purposes, a dividend payment is not deductible expense to the corporation, but it is taxable to the recipient.
• It is reported in schedule M-2 (Analysis of unappropriate Retained Earnings per books)
• Do not generate a book/tax difference

Question 33

When is the basis of the property transferred from a shareholder to a C corp used?

Answer 33

The basis of the property transferred by the shareholder when the shareholder is exchanging property in exchange for common stock. These transactions include:
1. Formation - issuance of C/S
2. Reacquisition - purchase of treasury stock
3. Resale - Sale of treasury stock.

Question 34

Are penalties for underpayment of federal income taxes deductible?

Answer 34

No, penalties for underpayment of federal income taxes are not deductible.

Question 35

Are penalties and illegal activities deductible?

Answer 35

No, bribes, kickbacks, fines, penalties, and other payments that are illegal under federal law or under generally enfoced state law are not deductible.

Question 36

What are the requirements for an affiliated group of corporations to file a consolidated return?

Answer 36

All the corporations in the group:
1. Must have been members of an afficiliated group at some time during the tax year
2. Must have filed a consent (the act of filing a consolidated return qualifies as consent)

Question 37

What is an affiliated group?

Answer 37

An affiliated group means that a common parent owns:
1. 80% or more of the voting power of all outstanding stock, and
2. 80% or more of the value of all outstanding stock of each corporation.

Question 38

What corporations are not allowed to file a consolidated return?

Answer 38

1. S corporations
2. foreign corporations
3. most real estate investment trusts (REITS)
4. Some insurance companies
5. Brother-sister corporations in which an individual (not a corporation) owns 80% or more of the stock of two or more corporations
6. Most exempt organizations.

Question 39

When is corporate distribution a taxable dividend?

Answer 39

Corporate distributions to shareholders are taxable to the extent of current and accumulated earnings and profits (E&P).

Question 40

What is the general netting rules related to the current and accumulated E&P?

Answer 40

1. Both current and accumulated E&P are positive; there are no issues. Distributions are dividends to the extent of the current and accumulated E&P.
2. Both current and accumulated E&P are negative; distributions are not dividends.
3. Current E&P is positive and accumulated E&P is negative: disstributions are dividends to the extent of current E&P only.
4. Current E&P is negative and accumulated E&P is positive: the two amounts are netted, and distributions are dividends if the net amount is positive.

Question 41

What is the treatment of capital losses from a sale of a section 1244 stock (worthless) corporate stock?

Answer 41

The capital loss is deductible as an ordinary loss up to $50,000 for single individual and $100,000 for MFJ. The excess is treated as a capital loss.

Sect. 1244 capital loss - ordinary loss deduction ($50K or $100K) = Capital loss

Question 42

Can a corporation recognize a loss when property is distributed to shareholders?

Answer 42

No, the corporation cannot recognize a loss when the adjusted basis of the property is greater than the FMV at the date of distribution.

Question 43

Can a corporation recognize a loss when property is sold to the shareholders?

Answer 43

Yes, the corporation can recognize a loss when the property is sold to the shareholder when the shareholder has less than 50% ownership in the corporation. If the shareholder has more than 50% ownership in the corporation, it is treated as related party transaction, and the loss cannot be recognized.

Question 44

Can the corporation recognize a gain when the property is distributed to the shareholder?

Answer 44

Yes, the corporation recognizes a gain on the distributed property when the FMV at the date of distribution is greater than the adjusted basis.

Question 45

Can a parent corporation recognize gain or loss when liquidating an 80% owned subsidiary?

Answer 45

No, when the parent corporation disposes of the subsidiary and owns 80% of it, it does not recognize a gain or loss when the assets and liabilities are assumed. The parent assumes the following:
1. basis of the sub’s assets
2. Any unused NOL
3. Capital loss
4. Charitable contribution carryovers.

Question 46

How are current and accumulated E&Ps treated when there is more than 1 distribution in a Year?

Answer 46

The current E&P is allocated in a pro-rata basis by determining the ratio of each distribution to the total distribution. The accumulated E&P is then allocated based on the excess of the distribution and the current E&P allocation.

Question 47

What are the adjustments to transactions when members of a consolidated group are presenting a consolidated tax return?

Answer 47

1. Gains and losses that are deferred on intercompany sales between group members. In the year the asset is sold outside the group.
2. Inventory adjustments may be required for intercompany sales.
3. Dividends received by one member from another member are excluded.

Question 48

What is a personal holding company?

Answer 48

Personal holding companies are certain corporations that meet some “closely-held” criteria, and have over 60% of adjusted gross income (more than 50% owned by 5 or fewer individuals either directly or indirectly at any time during the last half of the tax year.

Question 49

What is the income included in adjusted gross income of a personal holding company?

Answer 49

Net rent (less than 50% of ordinary gross income), taxable interest, most royalties, and dividends from an unrelated domestic corporation.

Question 50

How are capital losses reported in the current year?

Answer 50

Capital losses are carried back 3 years and forward 5 years, but they’re not included as part of the corporation’s ordinary losses (net loss).

Question 51

What entities are required to use the accrual-method of accounting?

Answer 51

1. C corporation with average annual gross receipts over 3-year period greater than $27 million.
2. Manufacturers
3. Tax shelters

Question 52

What amount is deductible as business gifts?

Answer 52

Business gifts are deductible up to a maximum of $25 per recipient per year

Question 53

How often are corporations required to pay estimated taxes?

Answer 53

1. Estimated taxes are paid on the 15th day of the 4th, 6th, 9th, and 12th months of their tax year.
2. 1/4 of the estimated tax is due with each payment.
3. Unequal quarterly payments may be made using the annualized income method

Question 54

What method is used when unequal estimated payments are made by the corporation?

Answer 54

The annualized income method is used when unequal estimated payments are made.

Question 55

What penalty is charged to the corporation if estimated payments are not made on a timely basis and amount owed is more than $500?

Answer 55

The underpayment penalty will be assessed if these payments are nto made on a timely basis and amount in the returns is $500 or more.

Question 56

What are the requirements for corporations not classified as large to pay the estimated payments?

Answer 56

The corporation has to pay the lesser of:
1. 100% of the tax shown on the return for the current year; or
2. 100% of the tax shown on the return for the preceding year.
- This alternative is not applicable if the corporation owed no tax for the preceding year or the preceding tax year was less than 12 months (Preceding Year Method)

Question 57

What are the requirements for a large corporation to pay estimated tax payments?

Answer 57

Large corporation (taxable income of $1million or more in any of the preceding tax years) must pay 100% of the tax shown in the current year tax return.

Question 58

How is the dividend calculated for a personal holding company?

Answer 58

The dividends of a personal holding company are calculated as follows:
Dividends paid during the current year
+ Consent dividends reported in the current year
= Personal Holding company dividends

Question 59

When does a shareholder contributing property does not recognize a gain or loss in the exchange for common stock?

Answer 59

Two conditions under IRC section 351 need to be met:
1. 80% control: Immediately after the transaction, those transferors/shareholders contributing property must own at least 80% of the voting stock and at least 80% of the nonvoting stock.
2. No receipt of boot: transfer of property must be solely in exchange for stock.

If shareholders don’t own 80%, the property is recognized at FMV and a gain is recognized in the transfer (FMV - adjusted basis).

Question 60

How is a shareholders’s rendering of service in exchange for common stock recognized by the shareholder?

Answer 60

When a shareholder renders services in exchange for common stock, it is recognized as income by the shareholder and at the FMV of the stock. If there is no FMV available from the stock, the FMV of the services provided.

Question 61

How is the exchange of cash for common stock recorded by the shareholder?

Answer 61

The shareholder purchased shares. Therefore, no income recognized by the shareholder.

Question 62

For personal holding company rules, what would be considered a family member of a shareholder to be included to the total count of shares of stock?

Answer 62

A family member of a shareholder would inclue a brother, sisters, ancestors, and lineal descendants. Neither in-laws nor unclues, aunts or cousins are not considered family members.

Question 63

How does the shareholder’s records the basis of the common stock when transferring cash, property or services to the corporation?

Answer 63

The shareholder’s basis in common stock received from the corporation will be as follows:
1. Cash: Amount contributed
2. Property: Adjusted Basis (NBV): Adjusted basis is reduced by cash and FMV (boot) received by shareholder and debt of property assumed by the corporation.
- Gains are recognized by the shareholder to the extent of boot received or contributed liability in excess of basis.
3. Services: Fair Market Value (Taxable): The shareholder receiving stock for services must recognize the FMV for services rendered as ordinary income.

Question 64

How is interest income from US savings bonds reported for book income and taxable income purposes?

Answer 64

Interest income from US savings bonds is treated the same for both book income and taxable income. Therefore, it is not included in the reconciliation (no change).

Question 65

How does the company treat interest expensed on loan to carry US savings bonds for book income and taxable income?

Answer 65

For book income it’s already expensed and for taxable income is already deductible, so you leave it alone. No change.

Question 66

How is a provision for state income taxes treated for book income and taxable income?

Answer 66

A state tax provision it’s not added back because that’s an expense on the books and a deduction on the tax return. No change needed.

Question 67

What is a stock dividend?

Answer 67

1. A stock dividend is a distribution by a corporation of its own stock to its shareholders.
2. The value of the stock dividend is the fair market value on the distribution date.
3. Stock dividends are not taxable unless shareholder has a choice of receiving cash or other property.

Question 68

How is the basis of a stock dividend computed?

Answer 68

The basis of a nontaxable stock dividend, where old and new shares are identical, is determined by dividing the basis of the old stock by the number of old and new shares.

Question 69

When are expenses owed from an accrual-basis C corp to a cash-basis shareholder deductible?

Answer 69

Expenses owed by an accrual-basis corporation to a cash-basis shareholder who owns at least 50% of the corporation’s stock are not deductible by the corporation until the expense is paid in cash to the shareholder (e.g., rent expense).

Question 70

What is the dividend-received deduction (DRD) taxable income limitation?

Answer 70

The DRD is equals the lesser of:
1. 50% (65%) of the dividend received, or
2. 50% (65%) of taxable income computed without regard to the DRD, any NOL carryforward, or any capital loss carryback.

This limitation does not apply if taking the full DRD results in a net operating loss (NOL).