REG 6 Flashcards
(150 cards)
1
Q
No general offerings or solicitation is permitted within a 12-month period : which rules is applied?
A
Rule 505D
2
Q
The issuer must restrict the purchasers Eright to resell the securities : which rules is applied?
A
Rules 505 and 506 D
3
Q
What is the amount of contribution for appreciated property?
A
The amount of contribution for appreciated property is generally the property’s FMV if the property would result in a long-term capital gain if sold. If not, the amount of contribution for appreciated property is generally limited to the property’s basis.
4
Q
what types of penalty maybe assessed against employers for OSHA violations?
A
OSHA penalties may be both civil and criminal. Civil penalties are as much as $1,000 per violation per day. Criminal penalties are imposed for certain willful violations, and may include fines as high as $10,000 or imprisonment.
5
Q
When is security interest enforceable?
A
If attachment took place.
6
Q
When are security interest not perfected effective agiands thir parties?
A
If the security interest is not perfected, it is not effective against third parties unless they were aware of it
7
Q
How is computed a corporation’s tentative minimum tax?
A
Alternative minimum taxable income (after exemption) *20% ((?) AMT foreign tax credit and (?) Regular income tax (less regular tax foreign tax credit) = Alternative minimum tax (if positive))
8
Q
Exaplin the contributions to an Individual Retirement Account (IRA)
A
Contributions to an Individual Retirement Account (IRA) a. If neither the taxpayer nor the taxpayer’s spouse is an active participant in an employer-sponsored retirement plan or a Keogh plan, there is no phase out of IRA deductions. (1) For 2014, the maximum deduction for an individual’s contributions to an IRA is the lesser of (a) $5,500, or(b) 100% of compensation (including alimony) (2) For married taxpayers filing a joint return, up to $5,500 can be deducted for contributions to the IRA of each spouse (even if one spouse is not working), provided that the combined earned income of both spouses is at least equal to the amounts contributed to the IRAs.\
9
Q
When can a seller stop the delivery of goods in the hands of a carrier?
A
A seller is entitled to stop the delivery of goods in the hands of a carrier if an insolvent buyer who is not in possession of the document of title refuses to pay cash.
10
Q
To who is taxed the income of a trust when the grantor of a trust retains substantial control over the trust>
A
When the grantor of a trust retains substantial control over the trust, such as the power to revoke the trust or a discretionary power to have trust income distributed to the grantor or grantor’s spouse, the income from the trust will be taxed to the grantor
11
Q
Are Tax-exempt interest, dividends, and net rental income included in the computation of ordinary income?
A
Tax-exempt interest, dividends, and net rental income must be separately stated and allocated to the partners and are thus excluded from the computation of ordinary income.
12
Q
When does Purchase money security interest (PMSI) in consummer goods occur?
A
Purchase money security interest (PMSI) in consummer goods occurs in two important cases 1] Seller retains security interest in same item sold on credit to secure payment2] Another party such as bank provides loan for and retains security interest in same item purchased by debtor
13
Q
What means “consummer goods”?
A
“In consumer goods Emeans that goods are bought primarily for personal, family, or household purposes
14
Q
Does ERISA require employers to institute a pension plan?
A
ERISA does not require employers to institute a pension plan.
15
Q
The federal estate tax may be reduced by which credit for foreign?
A
The federal estate tax may be reduced by a credit for foreign death taxes. However, no federal estate tax credit is available for foreign gift taxes, foreign income taxes, or foreign intangible property taxes.
16
Q
What is the status of a new tenant when rights in property held in joint tenancy are conveyed to him without the consent of the other joint tenant?
A
When rights in property held in joint tenancy are conveyed without the consent of the other joint tenants, the new owner becomes a tenant in common with the remaining joint tenants.
17
Q
How is the basis of stock received as dividend treated?
A
The basis of stock received as a dividend depends upon whether it was included in income when received. (1) If included in income, basis is its FMV at date of distribution. (2) If nontaxable when received, the basis of shareholder’s original stock is allocated between the dividend stock and the original stock in proportion to their relative FMVs. The holding period of the dividend stock includes the holding period of the original stock.
18
Q
What are the holdings requirement to be an affiliated group is a parent-subsidiary chain of corporations?
A
An affiliated group is a parent-subsidiary chain of corporations in which at least 80% of the combined voting power and total value of all stock (except nonvoting preferred) are owned by includible corporations.
19
Q
Of what is A partner’s basis for a partnership interest consisting?
A
A partner’s basis for a partnership interest consists of the partner’s capital account plus the partner’s share of partnership liabilities. A decrease in the partner’s share of partnership liabilities is considered to be a deemed distribution of money and reduces a partner’s basis for the partnership interest.
20
Q
Explain partnership distribution
A
Partnership distributions are categorized as either liquidating distributions or current (nonliquidating) distributions. A liquidating distribution completely terminates a partner’s entire interest. All other distributions are current (nonliquidating) distributions. When a partnership makes a current distribution, the distribution is generally nontaxable to the partners because it generally represents the distribution of earnings that have already been taxed to partners and have already increased the basis for the partners’ partnership interests.
21
Q
How are treated gain or loss if a person engages in a transaction with a partnership other than as a partner of such partnership?
A
If a person engages in a transaction with a partnership other than as a partner of such partnership, any resulting gain or loss is generally recognized just as if the transaction had occurred with a nonpartner
22
Q
Can losses be recognized on nonliquidating corporate distributions to shareholders?
A
Although a gain would be recognized if the property had been appreciated, no loss can be recognized on nonliquidating corporate distributions to shareholders.
23
Q
What is the maximum amount that is taxable to trust beneficiaries?
A
The maximum amount that is taxable to trust beneficiaries is limited to a trust’s distributable net income (DNI). When distributions to multiple beneficiaries exceed DNI, the trust’s DNI must be prorated to the distributions to determine the portion of each distribution that must be included in gross income
24
Q
What is the proper treatment for qualifying research and experimentation expenditures?
A
A taxpayer can elect to deduct qualifying research and experimentation expenditures as a current expense if the taxpayer so elects for the first taxable year in which the expenditures are incurred. Otherwise, the taxpayer must capitalize the expenditures. Then, if the capitalized costs are not subject to depreciation (because there is no determinable life), the taxpayer can amortize them over a period of 60 months or longer beginning with the month in which benefits from the expenditures are first realized.
25
How are life insurance proceeds treated?
Life insurance proceeds paid by reason of death are excluded from income if paid in a lump sum or in installments. If the payments are received in installments, the principal amount of the policy divided by the number of payments is excluded each year.
26
Is is necessary to notify the issuer in order to perfect a security interest in securities?
There is no need to notify the issuer in order to perfect a security interest in securities
27
Who owns dividends and interest earned during a secured transaction?
Dividends and interest earned during the secured transaction are the property of the debtor.
28
How can a perfected security interest in certified securities be obtained?
A perfected security interest in certified securities can only be obtained by possession, control, or filing.
29
Is gain recognized when appreciated property is transferred to a partnership in exchange for a partnership interest?
Gain will be recognized if the transferred property is encumbered by a mortgage, and the partnership’s assumption of the mortgage results in a net decrease in the transferor’s individual liabilities that exceeds the basis of the property transferred.
30
Under Regulation D, does an issuer of up to $5 million in securities issued within a 12-month period need not provide any specified information if the issuance is offered solely to accredited investors?
Under Regulation D, an issuer of up to $5 million in securities issued within a 12-month period need not provide any specified information if the issuance is offered solely to accredited investors. If any unaccredited investors purchase the securities (up to 35 are allowed) the issuer must provide audited financial statements.
31
When is a subchapter S election that is filed on or before the 15th day of the third month of a corporation’s taxable year generally effective?
A subchapter S election that is filed on or before the 15th day of the third month of a corporation’s taxable year is generally effective as of the beginning of the taxable year in which filed. If the S election is filed after the 15th day of the third month, the election is generally effective as of the first day of the corporation’s next taxable year.
32
What is the amount of a distribution?
The amount of a distribution is the amount of cash plus the fair value of other property distributed.
33
When is compensation (ordinary) income recognized?
Compensation (ordinary) income is recognized if services are transferred in exchange for an interest in partnership capital. The amount recognized %of interests * the FMV of partnership net assets.
34
What does happen if an issuer fails to meet the disclosure requirements of the Securities Act of 1933?
If an issuer fails to meet the disclosure requirements of the Securities Act of 1933, the buyer may ask for rescission of the sale.
35
To who can a donee beneficiary bring ation against?
the donee beneficiary can bring an action against the promisor
36
What is the process to avoid a penalty for the underpayment of estimated tax?
Generally, to avoid a penalty for the underpayment of estimated taxes, a corporation’s quarterly estimated payments must be at least equal to the least of (1) 100% of the tax shown on the current year’s tax return, (2) 100% of the tax that would be due by placing income for specified monthly periods on an annualized basis, or (3) 100% of the tax shown on the corporation’s return for the preceding year, provided the preceding year showed a positive tax liability and consisted of 12 months
37
What is the amoubt of a personnal casualty loss?
The amount of a personal casualty loss is the lesser of (1) the adjusted basis of the property ($150,000), or (2) the decline in the property’s fair market value resulting from the casualty
38
under a Chapter 11 reorganization, when is a debtor allowed to remain in possession of its business?
under a Chapter 11 reorganization, a debtor is allowed to remain in possession of its business unless the court upon request by a party in interest appoints a trustee to take over management of the debtor’s business. The court will approve such a request when it appears gross mismanagement of the business has occurred, or that the takeover by a trustee would be in the best interest of the debtor’s estate.
39
How is the cost of group-term life insurance provided by an employe treated?
The cost of group-term life insurance provided by an employer must be included in an employee’s income to the extent of the cost of life insurance coverage in excess of $50,000.
40
if a corporate officer makes a judgment in good faith, is he or she liable for a mistake?
if a corporate officer makes a judgment in good faith, he or she is not liable for a mistake
41
What are Form S-2 and S-3 advantage over form S-1?
The SEC adopted Forms S-2 and S-3 to reduce the burden of disclosure over Form S-1 which is the standard long form.
42
Who The Securities Act of 1933 specifically exempts from registration?
There is a broad specific exemption for securities offered by any person other than an issuer, underwriter, or dealer. Thus under the Act, public offerings of securities are regulated, but private offerings are exempted. This exemption permits most investors to sell their own securities without registration, prospectus, or other regulations except the antifraud provisions
43
What is schedule C?
All trade or business income and deductions of a self-employed individual are reported on Schedule C?Profit or Loss from Business. Retainer fees received from clients is reported in Schedule C as trade or business income.
44
What is schedule E?
Income derived from royalties is reported in Schedule E?Supplemental Income and Loss. Schedule E also is used to report the income or loss from rental real estate, partnerships, S corporations, estates, and trusts.
45
How are Interest from general obligation state and local government bonds treated?
Interest from general obligation state and local government bonds is tax-exempt and is excluded from gross income.
46
How are the interest income on a refund of federal income taxes treated?
The interest income on a refund of federal income taxes must be included in gross income and is reported in Schedule B?Interest and Dividend Income. The actual refund of federal income taxes itself is excluded from gross income.
47
How are Life insurance proceeds paid by reason of death treated?
Life insurance proceeds paid by reason of death are generally excluded from gross income. Here, the death benefits received by Green from a term life insurance policy on the life of Green's parent are not taxable.
48
How are Interest income from U.S. Treasury bonds and treasury bills treated?
Interest income from U.S. Treasury bonds and treasury bills must be included in gross income and is reported in Schedule B?Interest and Dividend Income.
49
How is a partner's share of a partnership's ordinary income that is reported to the partner on Form 1065, Schedule K-1treated?
A partner's share of a partnership's ordinary income that is reported to the partner on Form 1065, Schedule K-1 must be included in the partner's gross income and is reported in Schedule E?Supplemental Income and Loss.
50
How are the taxable income from the rental of a townhouse treated?
The taxable income from the rental of a townhouse owned by Green must be included in gross income and is reported in Schedule E?Supplemental Income and Loss.
51
How is A prize won as a contestant on a TV quiz show treated?
A prize won as a contestant on a TV quiz show must be included in gross income. Since there is no separate line on Form 1040 for prizes, they are taxable as other income on Form 1040.
52
How is Fees received for jury duty treated?
Fees received for jury duty represent compensation for services and must be included in gross income. Since there is no separate line for jury duty fees, they are taxable as other income on Form 1040.
53
What are the criteria for a mutual fund to pay tax-exempt interest dividends to its shareholders?
An investor in a mutual fund may receive several different kinds of distributions including ordinary dividends, capital gain distributions, tax-exempt interest dividends, and return of capital distributions. A mutual fund may pay tax-exempt interest dividends to its shareholders if it meets certain requirements. These dividends are paid from the tax-exempt state and local obligation interest earned by the fund and retain their tax-exempt character when reported by the shareholder. Thus, Green's dividends received from mutual funds that invest in tax-free government obligations are not taxable.
54
How are Qualifying medical expenses not reimbursed by insurance treated?
Qualifying medical expenses not reimbursed by insurance are deductible in Schedule A as an itemized deduction to the extent in excess of 10% of adjusted gross income.
55
How are Personal life insurance premiums paid on inuree's life treated?
Personal life insurance premiums paid on Green's life are classified as a personal expense and not deductible
56
How are all trade or business expenses of a self-employed individual treated?
All trade or business expenses of a self-employed individual are deductible on Schedule C?Profit or Loss from Business. However, only 50% of the cost of business meals and entertainment is deductible. Therefore, Green's expenses for business-related meals where clients were present are partially deductible in Schedule C.
57
Where is the deduction for depreciation on listed property (e.g., automobiles, computers, and property used for entertainment etc.) computed?
The deduction for depreciation on listed property (e.g., automobiles, computers, and property used for entertainment etc.) is computed on Form 4562?Depreciation and Amortization. Since Green's personal computer was used in his business as a self-employed consultant, the amount of depreciation computed on Form 4562 is then deductible in Schedule C?Profit or Loss from Business.
58
How are Lodging expenses while out of town on business treated?
Lodging expenses while out of town on business are an ordinary and necessary business expense and are fully deductible by a self-employed individual in Schedule C?Profit or Loss from Business.
59
How are The cost of subscriptions to professional journals used for business are an ordinary and necessary business expense treated?
The cost of subscriptions to professional journals used for business are an ordinary and necessary business expense and are fully deductible by a self-employed individual in Schedule C?Profit or Loss from Business.
60
How is An individual's self-employment tax treated?
An individual's self-employment tax is computed in Schedule SE and is added as an additional tax in arriving at the individual's total tax liability. A portion of the computed self-employment tax is then allowed as a deduction on Form 1040 in arriving at adjusted gross income.
61
How are Qualifying contributions to a self-employed individual's simplified employee pension plan treated?
Qualifying contributions to a self-employed individual's simplified employee pension plan are deductible on page 1 of Form 1040 to arrive at adjusted gross income.
62
How are the cost of qualifying depreciable personal business property treated?
For 2013, Sec. 179 permits a taxpayer to elect to treat up to $500,000 of the cost of qualifying depreciable personal business property as an expense rather than as a capital expenditure. In this case, Green's election to expense business equipment would be computed on Form 4562?Depreciation and Amortization, and then would be deductible in Schedule C?Profit or Loss from Business.
63
How are qualifying alimony payments made to a former spouse treated?
Qualifying alimony payments made by Green to a former spouse are fully deductible on Form 1040 to arrive at adjusted gross income.
64
How are The costs of subscriptions for investment publications treated?
The costs of subscriptions for investment publications are not related to Green's trade or business, but instead are considered expenses incurred in the production of portfolio income and are reported as miscellaneous itemized deductions in Schedule A?Itemized Deductions. These investment expenses are deductible to the extent that the aggregate of expenses in this category exceed 2% of adjusted gross income.
65
How is the nature of interest expense determined?
The nature of interest expense is determined by using a tracing approach (i.e., the nature depends upon how the loan proceeds were used). Since the interest expense on Green's home-equity line of credit was for a loan to finance Green's business, the best answer is to treat the interest as a business expense fully deductible in Schedule C?Profit or Loss from Business.
66
How is the interest expense on a loan for an auto used by a self-employed individual in a trade or business treated?
The interest expense on a loan for an auto used by a self-employed individual in a trade or business is deductible as a business expense. Since Green's auto was used 75% for business, only 75% of the interest expense is deductible in Schedule C?Profit or Loss from Business. The remaining 25% is considered personal interest expense and is not deductible.
67
How is the loss resulting from the sale of personal residence treated?
The loss resulting from the sale of Green's personal residence is not deductible because the property was held for personal use. Only losses due to casualty or theft are deductible for personal use property.
68
How to compute amount of net operating loss will be available taking into account NOL?
Take NOL - sum of taxable income (sum within NOL amount). Example NOL = 10 and Taxable income is 8 (2010), 5 (2011), 4 (2012), you take 2012 and 2011 (9) so Amount of net income for 2013 is 1
69
How are an individual's losses on transactions entered into for personal purposes treated?
An individual's losses on transactions entered into for personal purposes are only deductible if the losses qualify as casualty or theft losses. If the losses originated due to a trade or business, individuals also may deduct losses originating from transactions entered into for profit.
70
How is net operating loss available for carry forward or carry back computed?
TAXABLE LOSS (Income -deductions) +Personal exemption+ Adjustment for deductions that are not connected to a trade or business or employment + Short term capital loss as adjusted by business capital gains and losses
71
Explaincharge-off method?
Corporations other than certain financial institutions are required to use the direct charge-off method in accounting for bad debts. Certain financial institutions are allowed to use the reserve method. Under the direct charge-off method, corporations may claim a deduction once a specific business debt becomes partially or wholly worthless and a specific nonbusiness debt becomes wholly worthless
72
Smith has an adjusted gross income (AGI) of $120,000 without taking into consideration $40,000 of losses from rental real estate activities. Smith actively participates in the rental real estate activities. What amount of the rental losses may Smith deduc
1-identified amount above 100'000 and compute half of the excess. 2- Make difference between 25'000 and computed amountSince Smith actively participates in the rental real estate activity he can deduct up to $25,000 of rental losses. However, this deduction is reduced once modified AGI exceeds $100,000. Smith has $20,000 of excess AGI ($120,000 ? $100,000) so he loses $10,000 ($20,000 ÁE50%) of the deduction. Of the $40,000 of losses, he can deduct $15,000 ($25,000 ? $10,000). The remaining $25,000 of losses is suspended.
73
Are Rental activities considered passive activities?
Passive activity losses normally only may be used to offset passive activity income. Rental activities are considered passive activities, regardless of the level of participation by the taxpayer.
74
How are the suspended passive losses treated In the year that a passive activity is sold?
In the year that a passive activity is sold the suspended passive losses are released and can offset all types of income1- Take the income and deduct passive loss as well as loss carry over
75
Can Suspended passive losses be carried back?
Suspended passive losses can be carried forward indefinitely, but they cannot be carried back.
76
How are Wages, interest, dividends, and Schedule C treated?
Wages, interest, dividends, and Schedule C income are all taxable
77
How much is allowed for reduction in case of active participation in the rental real estate activity and modified AGI does not exceed $100,00?
If active participation in the rental real estate activity and modified AGI does not exceed $100,000, $25,000 of rental loss is allowed for deduction
78
What can Passive losses offset?
Passive losses can only offset passive losses
79
How is considered a property with number of rental days less than 14?
Special rules apply to realty that is used for both personal and rental purposes. If the number of rental days is less than 14 then the property is treated as if it was used 100% for personal use. In that case, the rental revenue is ignored (i.e., does not have to be recognized). The only items that can be deducted are real estate taxes and mortgage and these items must be reported on Schedule A.
80
How is income from a hobby reported?
Income from a hobby is reported as other income on the front page of Form 1040. Deductions such as travel expenses are 2% miscellaneous itemized deductions, and expenses can be deducted only to the extent of revenues.
81
In 2014, Mr. Trader had a net long-term capital loss of $13,000 and a net short-term capital gain of $5,000. What are his 2014 capital loss deduction and carryover to 2015 respectively?
the net long-term capital loss (LTCL) ($13,000) is netted against the net short-term capital gain ($5,000) resulting in an $8,000 net LTCL. A net LTCL is deducted dollar for dollar, the same as a net STCL. A maximum of $3,000 of capital loss may be taken in any one year. The result of taking a $3,000 loss deduction is that the net LTCL is reduced by $3,000 and $5,000 of LTCL ($8,000 ? $3,000) will be available for carryover to the next taxable year.
82
How is treated A loss resulting from a nonbusiness deposit in an insolvent financial institution?
A loss resulting from a nonbusiness deposit in an insolvent financial institution is generally treated as a nonbusiness bad debt deductible as a short-term capital loss. However, subject to certain limitations, an individual may elect to treat the loss as a casualty loss or as a miscellaneous itemized deduction.
83
What does the Model Business Corporation Act provides regarding preincorporation stock subscriptions
the Model Business Corporation Act provides that preincorporation stock subscriptions are deemed to be continuing offers which are irrevocable for a period of 6 months. Therefore, the subscribers are bound by their subscriptions for this 6-month period.
84
Is it possible to ratify only parts of a contract performed by an agent?
the contract made by an agent must be ratified in its entirety so that a party is not able to pick and choose only the beneficial portions.
85
To what extents are deductibility of partnership losses?
A partner’s distributive share of partnership losses is generally deductible by the partner to the extent of the partner’s basis in the partnership at the end of the taxable year. Additionally, the deductibility of partnership losses is limited to the amount of the partner’s at-risk basis, and will also be subject to the passive activity loss limitations if they are applicable. Note that the at-risk and passive activity loss limitations apply at the partner level, rather than at the partnership level.
86
What are the tests to qualify for dependency?
qualifying relative tests are met (gross income (dependent's gross income must be less than gross exemption amount of the year), joint return (if married can't claim dependent to another), citizen (US, canada or mexico) + 10% or more of support in multiple support agreement
87
What are the requirements for the qualifying relative rule to be met?
The Age Test applies to the qualifying child rule but not the qualifying relative rule. The gross income, support, and citizenship/residency tests must all be met for the qualifying relative rule to be met.
88
Under which circumstances can the qualifying widow continue to file as married filing joint?
For the two years after the year of death, the qualifying widow can continue to file as married filing joint if the taxpayer provides more than half of the cost of maintaining the household (rent, mortgage interest, taxes, home insurance, repairs, food, utilities, etc.) for a dependent child (step, adopted, foster also).
89
Can Taxpayers who were married but lived apart during the year file married filing joint?
Whether taxpayers live together does not impact filing status. Marital status is determined on the last day of the tax year. Since the taxpayers were married as of the end of the tax year they may file married filing joint (note that they could also file married filing separately).
90
For head of household filing status, which costs are considered in determining whether the taxpayer has contributed more than one-half the cost of maintaining the household?
For head of household filing status, the following costs are considered in determining whether the taxpayer has contributed more than one-half the cost of maintaining the household: rent; mortgage interest; taxes; insurance on the home; repairs; utilities; and food eaten in the home. The following costs may not be considered: clothing; education; medical treatment; vacations; life insurance; transportation; rental value of home owned by taxpayer; and the value of services provided by the taxpayer or a member of the taxpayer's household.
91
On their joint tax return, Sam and Joann had adjusted gross income (AGI) of $150,000 and claimed the following itemized deductions:
Interest of $15,000 on a $100,000 home equity loan to purchase a motor home
Real estate tax and state income taxes of $18,000
Unreimbursed medical expenses of $15,000 (prior to AGI limitation)
Miscellaneous itemized deductions of $5,000 (prior to AGI limitation).
Both Sam and Joann are less than 65 years old. Based on these deductions, what would be the amount of AMT add-back adjustment in computing alternative minimum taxable income?
The following amounts are added back to taxable income to compute AMT income:
Interest because proceeds were not used for principal residence $15,000
Taxes 18,000
Medical expenses (no adjustment since 10% of AGI threshold applies for regular tax also) -0-
2% miscellaneous itemized deductions (deducted $5,000 - (2% x $150,000) for regular tax) 2,000
Total add-back $35,000
92
How The credit for prior year alternative minimum tax liability may be carried ?
To allow for timing differences resulting in adjustments to the taxpayer's minimum tax basis, the alternative minimum tax credit may be claimed to reduce a taxpayer's regular tax liability to account for the timing differences.
The credit is given only for adjustments resulting from timing differences.
This credit may be carried forward indefinitely.
93
What is included in AMT preference?
The alternative minimum tax ensures that all taxpayers share the tax burden fairly by preventing taxpayers with substantial income from avoiding significant tax liability. The alternative minimum tax equals the excess (if any) of the tentative minimum tax over the regular tax. In computing a taxpayer's alternative minimum taxable income, several adjustments and preferences are made to a taxpayer's taxable income before personal exemptions.
Adjustments are a substitution of an amount used in computing alternative minimum tax for an amount used computing regular tax. Preferences involve the addition of the difference between alternative minimum tax and regular tax treatments. There are numerous adjustments and preferences, including depreciation adjustments and preferences. Charitable contributions of appreciated capital gain property are not preference items.
94
What can do An employee who has social security tax withheld in an amount greater than the maximum for a particular year?
An employee who has social security tax withheld in an amount greater than the maximum for a particular year, may claim the excess as a credit against income tax, if that excess resulted from correct withholding by two or more employers. An employee who had excess social security tax withheld from one employer should be reimbursed by the employer.
95
To what equals AMT?
The alternative minimum tax (AMT) ensures that all taxpayers share the tax burden fairly by preventing taxpayers with substantial income from avoiding significant tax liability. The AMT equals the excess of the tentative AMT tax over the regular tax.
96
In 2014, Don Mills, a single taxpayer, had $70,000 in taxable income before personal exemptions. Mills had no tax preferences. His itemized deductions were as follows:
State and local income taxes $5,000
Home mortgage interest on loan to acquire residence 6,000
Miscellaneous deductions that exceed 2% of adjusted gross income 2,000
What amount did Mills report as alternative minimum taxable income before the AMT exemption?
The alternative minimum tax ensures that all taxpayers share the tax burden fairly by preventing taxpayers with substantial income from avoiding significant tax liability. The alternative minimum tax equals the excess (if any) of the tentative minimum tax over the regular tax. In computing a taxpayer's alternative minimum taxable income, several adjustments and preferences are made to a taxpayer's taxable income before personal exemptions. Adjustments are a substitution of an amount used in computing alternative minimum tax for an amount used computing regular tax. Preferences involve the addition of the difference between alternative minimum tax and regular tax treatments. Included in the preferences are those stipulating that state and local income taxes and miscellaneous itemized deductions are not deductible for alternative minimum tax purposes. Home mortgage interest on loan to acquire residence is deductible under both the regular tax and the alternative minimum tax.
Thus, Mills must add back his state and local income taxes of $5,000 and miscellaneous deductions that exceed 2% of adjusted gross income of $2,000 to his $70,000 of taxable income before personal exemptions, putting his alternative minimum taxable income at $77,000.
97
Can personal exemptions reduce AMT?
Personal exemptions cannot decrease AMT income.
98
Can IRA contributions reduce AMT?
IRA contributions can reduce AMT income for an individual.
99
CanOne-half of the self-employment taxes reduce AMT?
One-half of the self-employment taxes can reduce AMT income for an individual
100
CanCharitable contributions reduce AMT?
Charitable contributions can reduce AMT income for an individual.
101
Farr, an unmarried taxpayer, had $70,000 of adjusted gross income and the following deductions for regular income tax purposes:
Home mortgage interest on a loan to acquire a principal residence $11,000
Miscellaneous itemized deductions above the threshold limitation $ 2,000
What are Farr's total allowable itemized deductions for computing alternative minimum taxable income?
2% miscellaneous itemized deductions are not allowed for AMT purposes. Home mortgage interest is allowed as long as the loan proceeds were used to acquire or make capital improvements to a principal residence. Thus, the correct answer is $11,000.
102
What are the requirement In 2014, to qualify for the child care credit on a joint return? (for at least one spouse)
Individual taxpayers with adjusted gross income of $15,000 or less may claim a child care credit for 35 percent of employment related expenses. The credit is reduced by one percent of the expenses for each $2,000 of adjusted gross income over $15,000, but is not reduced to less than 20 percent of the expenses.
103
Which credits can result in a refund, even if the individual had no income tax liability?
Certain tax credits can result in a refund, even if the individual had no income tax liability. Tax credits resulting in a refund are credits for earned income, tax withheld, excess social security tax withheld, and excise tax for certain nontaxable uses of fuels and light weight diesel vehicles.
104
The taxpayer's qualifying child is a 17-year-old grandchild : disqualifies an individual from the earned income credit?
A qualifying child must be a descendent of the taxpayer under the age of 19 (i.e., the definition of a "qualifying child" for the dependency rules). Therefore, a grandchild meets the definition of a qualifying child and this response is incorrect.
105
The taxpayer has earned income of $5,000 : disqualifies an individual from the earned income credit?
The credit is disallowed if unearned income, such as interest, dividends, tax exempt interest and other investment income exceeds $3,300 (2014). A taxpayer must have earned income to qualify for the earned income credit, so this response is incorrect.
106
The taxpayer's five-year-old child lived in the taxpayer's home for only eight months : disqualifies an individual from the earned income credit?
A child meets the definition of a qualifying child for purposes of the earned income credit as long as the child meets the definition of a "qualifying child" for the dependency rules. Therefore, the child needs to live in the taxpayer's home for more than half of the year. Thus, eight months would not disqualify the taxpayer from meeting the earned income credit rules.
107
The taxpayer has a filing status of married filing separately : disqualifies an individual from the earned income credit?
A married taxpayer must file as married filing jointly to qualify for the earned income credit.
108
Does Expenses paid to a caregiver who is a relative qualify for the child and dependent care credit?
Expenses paid to a caregiver who is a relative qualify for the credit unless the relative is a dependent or child.
109
Give the The credit percentage begins of AGI for child and dependent care credit
The credit percentage begins at 35% if AGI is less than $15,000, and is reduced by 1% for each $2,000 increment (or part) in AGI above $15,000.
110
What is the maximum amount of expense eligible for child and dependent care credit?
The maximum amount of expense eligible for the credit is $3,000 ($6,000 if more than one individual qualifies for care).
111
How is computed American Opportunity Tax Credit ?
The credit is computed as 100% of the first $2,000 and 25% of the next $2,000 of qualified educational expenses, for a total of $2,500. This credit does not begin phasing out in 2014 for married filing joint returns until AGI reaches $160,000. The credit applies only to post-secondary expenses so the tuition for Kaitlin does not qualify.
112
How much is the The work opportunity maximum tax credit?
The work opportunity tax credit is 40% of the first $6,000 of wages per employee, so the maximum credit is $2,400.
113
Are individuals eligible to claim the foreign tax credit?
individuals are eligible to claim the foreign tax credit.
114
How long is The carry back period for the general business credit?
The carry back period as stated is for net operating losses. The carry back period for the general business credit is only one year.
115
How much is the credit % for properties placed in service before 1936?
The percentage for properties placed in service before 1936 is 10% (unless it is a certified historic structure).
116
How is foreign tax credit computed?
The foreign tax credit is the lower of:
1) foreign tax paid or
2) U.S. tax x foreign taxable income / worldwide taxable income
117
Do US income or forign source income impact computation of foreign tax credit?
The income source is important because U.S. source income and foreign source income impact the computation of the foreign tax credit. The foreign tax rate impacts the computation because the foreign tax credit applies when the U.S. tax rate exceeds the foreign tax rate.
118
May Foreign income taxes paid by a corporation be claimed either as a deduction or as a credit?
Foreign income taxes paid by a corporation may be claimed either as a deduction or as a credit, at the option of the corporation. To minimize a corporation's tax liability, it is better to claim the credit for the foreign income taxes than to deduct the taxes.
The foreign tax credit allows for a dollar-for-dollar deduction from the corporation's tax liability, whereas the deduction is from taxable income.
119
What is the general business credit?
The general business credit is a combination of several tax credits that are computed separately under each under its own set of rules. The purpose of the general business credit is to combine these credits into a single amount to provide uniform rules for the current credits that may be taken to offset a taxpayer's tax liability.
In addition, the credit provides uniform rules for carryback-carryover years. The general business credit may be carried back for 1 year, then forward for 20 years. The general business credits are composed of the: investment credit; work opportunity credit; alcohol fuel credit; incremental research credit; low-income housing credit; disabled access credit; credit for producing electricity from specified renewable resources; enhanced oil recovery credit; Indian employment credit; employer Social Security credit; empowerment zone employment credit; orphan drug credit; and excise tax payments to the Trans-Alaska Pipeline Liability Fund credit.
120
What is the foreign Tax credit?
The foreign tax credit is a single tax credit, as opposed to the several credits that compose the general business credit that provides taxpayers credit for income taxes paid to foreign governments. The purpose of the foreign tax credit is to avoid the double taxation of foreign source income.
121
What is the minimum tax credit?
The minimum tax credit is a single tax credit, as opposed to the several credits that compose the general business credit, that provides taxpayers credit for adjusted minimum tax payments made in all years after 1986.
122
What is the enhanced oil recovery credit?
The enhanced oil recovery credit is a single tax credit, as opposed to the several credits that compose the general business credit that provides taxpayers credit a 15 percent credit for a taxpayer's qualified enhanced oil recovery costs for a tax year.
123
In 2014, Roe Corp. purchased and placed in service a used machine to be used in its manufacturing operations. This machine cost $2,200,000. What portion of the cost may Roe elect to treat as an expense rather than as a capital expenditure?
For 2014, Sec. 179 permits a taxpayer to elect to treat up to $500,000 of the cost of qualifying depreciable personal property as an expense rather than as a capital expenditure. However, the $500,000 maximum is reduced dollar-for-dollar by the cost of qualifying property placed in service during the taxable year that exceeds $2 million. Here, the maximum amount that can be expensed is [$500,000 ? ($2,200,000 ? $2,000,000)] = $300,000.
124
Under the Bankruptcy Code, which payments as exempt property has the debtor the right to receive?
under the Bankruptcy Code, the debtor has the right to receive any of the following payments as exempt property: (1) a social security benefit, unemployment benefit, (2) a veteran’s benefit, (3) a disability, illness or unemployment benefit, (4) alimony, support or separate maintenance to the extent reasonably necessary for the support of the debtor and any dependents of the debtor, and (5) a payment under a stock bonus, pension, profit sharing, annuity, or similar plan or contract on account of illness, disability, death, age, or length of service to the extent reasonably necessary for the support of the debtor and any dependents of the debtor.
125
How can be NOL of group members treated when filing a consolidated tax return?
One advantage of filing a consolidated tax return is the ability of an affiliated group to offset one member’s current NOL against the taxable income of other group members. If these losses cause the affiliated group to report a consolidated NOL, the NOL may be carried back or forward to other consolidated return years of the affiliated group.
126
At December 31, 2014, Lincoln and Ebert were equal partners in a partnership with net assets having a tax basis and fair market value of $150,000. On January 2, 2015, Gregory contributed securities with a fair market value of $75,000 (purchased in 2011 at a cost of $51,000) to become an equal partner in the new firm of Lincoln, Ebert, and Gregory. The securities were sold on July 1, 2015, for $78,000. How much of the partnership’s capital gain from the sale of these securities should be allocated to Gregory?
If property is contributed by a partner to a partnership, related items of income, deduction, gain, or loss must be allocated among partners in a manner that reflects the difference between the property’s tax basis and its fair market value at the time of contribution. Since the securities were sold for more than their fair market value on the date of contribution, the entire precontribution gain of $24,000 ($75,000 ? $51,000) would be allocated to Gregory. In addition, Gregory would be allocated 1/3 of the postcontribution gain from the securities, which is $1,000 [($78,000 ? $75,000) × 1/3]. Gregory should therefore be allocated $25,000 ($24,000 + $1,000) of the partnership’s capital gain.
127
Under the modified accelerated cost recovery system (MACRS) when does the mid-quarter convention applies?
The general rule is that personal property is treated as placed in service or disposed of at the midpoint of the taxable year, resulting in a half-year of depreciation for the year in which the property is placed in service or disposed of. A mid-quarter convention applies if more than 40% of all personal property is placed in service during the last quarter of the taxpayer’s year. Under this convention, property is treated as placed in service (or disposed of) in the middle of the quarter in which placed in service (or disposed of).
128
After foreclosure of the mortgage, what are the mortgagor options?
After foreclosure of the mortgage, the mortgagor has several options. The mortgagor may redeem the property until the foreclosure sale by use of the equitable right of redemption. After the foreclosure sale, the mortgagor may pay off the loan within a statutory period. If these remedies are not used, the mortgagee must return any excess proceeds from the sale. The mortgagor, however, does not otherwise have the right to keep possession of the property after a foreclosure sale whether or not the equity exceeds the amount due on the mortgage.
129
Imposition of the tax depends on a stock ownership test specified in the statute : does ir pertain to the accumulated earnings tax
A stock ownership test applies to the PHC tax.
130
Imposition of the tax can be mitigated by sufficient dividend distributions : does it pertain to the accumulated earnings tax
The imposition of the accumulated earnings tax (AET) does not depend on a stock ownership test, nor is the tax self-assessing. The AET is imposed on a corporation’s retention of earnings in excess of reasonable business needs, but may be mitigated by sufficient dividend distributions.
131
The tax should be self-assessed by filing a separate schedule along with the regular tax return : does it pertain to the accumulated earnings tax?
Only the PHC tax is self-assessing.
132
The sole shareholder of an S corporation contributed equipment with a fair market value of $20,000 and a basis of $6,000 subject to $12,000 liability. What amount is the gain, if any, that the shareholder must recognize?
On a corporate formation, gain is recognized to the extent that the liabilities assumed by the corporation exceed the basis in the assets contributed by the shareholder. The gain for this shareholder is $6,000 ($12,000 debt less $6,000 basis).
133
In April, A and B formed X Corp. A contributed $50,000 cash, and B contributed land worth $70,000 (with an adjusted basis of $40,000). B also received $20,000 cash from the corporation. A and B each receives 50% of the corporation's stock. What is the tax basis of the land to X Corp.?
X Corp's basis in the land is B's basis in the land ($40,000) plus any gain recognized by B. B's recognized gain is the lower of 1) the realized gain, or 2) the boot received. The realized gain is $30,000 ($70,000 - $40,000). The boot received is the cash of $20,000. Thus, the gain recognized is $20,000. X Corp's basis in the land is $60,000 ($40,000 + $20,000).
B's amount realized is computed as follows: The corporation received cash of $50,000 and land of $70,000 for a total of $120,000. But it also gave $20,000 cash back to B as part of the formation. This is subtracted from above - - so the net value of what the corporation received is $100,000. $100,000 x 50% = $50,000, so that is the value of the stock received by B. His amount realized is $50,000 + cash received of $20,000 = $70,000.
134
Ames and Roth form Homerun, a C corporation. Ames contributes several autographed baseballs to Homerun. Ames purchased the baseballs for $500, and they have a total fair market value of $1,000. Roth contributes several autographed baseball bats to Homerun. Roth purchased the bats for $5,000, and they have a fair market value of $7,000. What is Homerun's basis in the contributed bats and balls?
When property is contributed to a corporation in exchange for stock, the corporation takes the same basis in the property that the shareholder had, increased by any gain recognized by the shareholder. Ames had a cost basis in the balls of $500 and Roth had a basis of $5,000 in the bats, so the total basis for Homerun is $5,500.
135
In 2014, Stone, a cash basis taxpayer, incorporated her CPA practice. No liabilities were transferred. The following assets were transferred to the corporation:
Cash (checking account) $ 500
Computer equipment Adjusted basis 30,000
Fair market value 34,000
Cost 40,000
Immediately after the transfer, Stone owned 100% of the corporation's stock. The corporation's total basis for the transferred assets is
When a shareholder transfers property to a corporation, the corporation takes the shareholders basis in the property.
Stone's basis of the property transferred into the corporation was $30,500, the adjusted basis of the computer equipment ($30,000) plus the cash ($500).
Hence, the corporation's basis in the property also would be $30,500.
136
Feld, the sole stockholder of Maki Corp., paid $50,000 for Maki's stock in 2007. In 2014, Feld contributed a parcel of land to Maki but was not given any additional stock for this contribution.
Feld's basis for the land was $10,000, and its fair market value was $18,000 on the date of the transfer of title.
What is Feld's adjusted basis for the Maki stock?
A shareholder's initial basis in the stock of a corporation is the amount the shareholder paid for the stock.
Thus, Feld's initial basis in the Maki Corp.'s stock is $50,000, the amount that Feld paid for the stock. Contributions of property to corporations results in the contributing shareholder's basis for the corporation's stock to increase by the amount of the shareholder's adjusted basis in the property. Thus, Feld's basis in the Maki Corp.'s stock increased by $10,000 due to Feld's property contribution.
Hence, Feld's adjusted basis for the Maki Corp. stock is $60,000, the sum of his initial $50,000 basis and the $10,000 adjusted basis of the contributed property.
137
Azure, a C corporation, reports the following:
Pretax book income of $543,000.
Depreciation on the tax return is $20,000 greater than depreciationon the financial statements.
Rent income reportable on the tax return is $36,000 greater than rent income per the financial statements.
Fines for pollution appear as a $10,000 expense in the financial statements.
Interest earned on municipal bonds is $25,000.
What is Azure's taxable income?
```
Taxable income is computed as follows:
Pretax book income $543,000
Excess depreciation (20,000)
Prepaid rental income 36,000
Fines 10,000
Municipal interest income (25,000)
Taxable income $544,000
```
138
Are Premiums paid on key-person life insurance policies a reconciling item for Schedule M-1?
Premiums paid on key-person life insurance policies reduce book income but not taxable income, so this is a reconciling item for Schedule M-1.
139
In 2014, Starke Corp., an accrual-basis calendar year corporation, reported book income of $380,000. Included in that amount was $50,000 municipal bond interest income, $170,000 for federal income tax expense, and $2,000 interest expense on the debt incurred to carry the municipal bonds.
What amount should Starke's taxable income be as reconciled on Starke's Schedule M-1 of Form 1120, U.S. Corporation Income Tax Return?
The purpose of Schedule M-1 of Form 1120, U.S. Corporation Income Tax Return is to reconcile book income (loss) with income per the return. Certain items need to be added to and subtracted from book income to reconcile with income per the tax return.
Federal income taxes; excess capital losses over capital gains; income subject to tax not recorded on the books; and expenses recorded on the books not deducted on the return must be added to book income. Income recorded on the books but not included on the return, including tax-exempt interest, and deductions on the return not charged against the books must be subtracted from book income.
This response (502'000) correctly subtracts the tax-exempt municipal bond interest from and adds federal income tax and interest expense on the debt to carry the municipal bonds to book income.
140
For the year ended December 31, 2014, Kelly Corp. had net income per books of $300,000 before the provision for Federal income taxes. Included in the net income were the following items:
Dividend income from an unaffiliated domestic taxable corporation (taxable income limitation does not apply and there is no portfolio indebtedness) $50,000
Bad debt expense (represents the increase in the allowance for doubtful accounts) 80,000
Assuming no bad debt was written off, what is Kelly's taxable income for the year ended December 31, 2014?
If a C corporation owns less than 20 percent of a domestic corporation, 70 percent of dividends received or accrued from corporation may be deducted. A C corporation owning 20 percent or more but less than 80 percent of a domestic corporation may deduct 80 percent of the dividends received or accrued from the corporation. Similarly, C corporation owning 80 percent or more of a domestic corporation may deduct 100 percent of the dividends received or accrued from the corporation. However, the dividend received deduction is limited to a percentage of the taxable income of the corporation, unless the corporation sustains a net operating loss. If the corporation has a net operating loss, the dividend received deduction may be taken without limiting the deduction to a percentage of the corporation's taxable income.
Since Kelly Corp. is not affiliated with the corporation paying the dividends, it owns less than 20 percent of the corporation paying the dividends and, as a result, may take a 70 percent (or $35,000) dividend received deduction. Bad debts are deductible with no percentage limitation. However, Kelly Corp. cannot take a deduction for its bad debt expense because no bad debt was actually incurred. Instead, the expense represents an increase in allowances for doubtful accounts. The corporation's bad debt expense must be added back to net income.
Hence, Kelly Corp.'s taxable income is $345,000 - net income of $300,000 minus dividend received deduction of $35,000 and plus the bad debts expense of $80,000.
141
Soma Corp. had $600,000 in compensation expense for book purposes in 2013
Included in this amount was a $50,000 accrual for 2013 nonshareholder bonuses. Soma paid the actual 2013 bonus of $60,000 on March 1, 2014.
In its 2013 tax return, what amount should Soma deduct as compensation expense?
While cash based taxpayers deduct deferred compensation in the tax year that the compensation is actually paid to employees, accrual basis taxpayers deduct deferred compensation in the tax year that the liability to pay the compensation becomes fixed. The liability to pay the deferred compensation becomes fixed when: 1) all events have occurred to establish the liability to pay the compensation; 2) economic performance has occurred with respect to the liability; and 3) the amount can be determined with reasonable accuracy. In addition, accrual based taxpayers must pay the deferred compensation within the first 2 1/2 months of a tax year to deduct the compensation in the preceding year.
Assuming Soma Corp. fixed the liability to pay the compensation in 2013, the corporation may deduct all of the nonshareholder bonuses ($60,000) on its 2013 tax return because the bonuses were paid within the first 2 1/2 months of the end of its 2013 tax year. Since an additional $10,000 of bonuses were paid than accrued, this amount may be added to the corporation's compensation expense, putting that expense at $610,000.
142
Axis Corp. is an accrual basis calendar year corporation.
On December 13, 2014, the Board of Directors declared a two percent of profits bonus to all employees for services rendered during 2014 and notified them in writing. None of the employees own stock in Axis.
The amount represents reasonable compensation for services rendered and was paid on March 13, 2015. Axis' bonus expense may
While cash based taxpayers deduct deferred compensation in the tax year that the compensation is actually paid to employees, accrual basis taxpayers deduct deferred compensation in the tax year that the liability to pay the compensation becomes fixed. The liability to pay the deferred compensation becomes fixed when:
1) all events have occurred to establish the liability to pay the compensation;
2) economic performance has occurred with respect to the liability; and
3) the amount can be determined with reasonable accuracy. In addition, accrual based taxpayers must pay the deferred compensation within the first 2 1/2 months of a tax year to deduct the compensation in the preceding year.
This response correctly indicates that Axis' bonus expense would be deducted on the corporation's 2014. All the events occurred to establish the liability for the bonuses when the corporation declared the dividends and notified the employees. The bonuses are for services rendered in 2014, indicating that economic performance has occurred with respect to the liability, and the amount of the bonuses can be determined with reasonable accuracy. Paying the dividends on March 13, 2015 is within the first 2 1/2 months of the close of Axis' 2014 tax year. Hence, the liability to pay the dividends became fixed in 2014 and they were paid within the first 2 1/2 months of the 2015 tax year.
143
```
For the year ended December 31, 2014, Taylor Corp. (not an eligible small business) had a net operating loss of $200,000.
Taxable income for the earlier years of corporate existence, computed without reference to the net operating loss, was as follows:
Taxable Income
2009 $ 5,000
2010 $10,000
2011 $20,000
2012 $30,000
2013 $40,000
```
If Taylor makes no special election to waive the net operating loss carryback, what amount of net operating loss will be available to Taylor for the year ended December 31, 2015?
Net operating losses (NOL) are defined as an excess of deduction over gross income for a particular tax year. The NOL for one year may be carried back or over to another tax year to lower a corporation's tax liability for that year. The NOL first must be carried back for two years, then carried forward for 20 years. Taxpayers may elect not to use the carryback period.
Of Taylor Corp.'s $200,000 net operating loss, $70,000 would be carried back to the preceding two years - $30,000 to 2012 and $40,000 to 2013.
Hence, the corporation would have $130,000 of the net operating loss available for the year ended December 31, 2015.
144
On January 2 of this year, BIG, an accrual basis, calendar-year C corporation, purchased all of the assets of a sole proprietorship, including $300,000 of goodwill. Current-year federal income tax expense of $110,100 and $7,500 for goodwill amortization (based upon 40 year amortization period) were deducted to arrive at Big's book income of $239,200. What is Big's current-year taxable income (as reconciled on Schedule M-1)?
The purpose of Schedule M-1 of Form 1120, U.S. Corporation Income Tax Return is to reconcile book income (loss) with income per the return. Federal income tax is not deductible for tax purposes so it must be added back to book income, giving $349,300 ($239,200 + $110,100). The goodwill is amortized over 15 years for tax purposes, or $20,000 per year ($300,000/15 years). Thus, the book goodwill amortization is added back and the tax good will is deducted. This results in taxable income of $336,800 ($349,300 + $7,500 - $20,000).
145
Kisco Corp.'s taxable income for 2014 before taking the dividends received deduction was $70,000. This includes $10,000 in dividends from an unrelated taxable domestic corporation.
Given the following tax rates, what would Kisco's income tax be before any credits?
Partial rate table /Tax rate
Up to $50,000 /15%
Over $50,000 but not over $75,000 /25%
If a C corporation owns less than 20 percent of a domestic corporation, 70 percent of dividends received or accrued from corporation may be deducted. A C corporation owning 20 percent or more but less than 80 percent of a domestic corporation may deduct 80 percent of the dividends received or accrued from the corporation. Similarly, C corporation owning 80 percent or more of a domestic corporation may deduct 100 percent of the dividends received or accrued from the corporation. However, the dividend received deduction is limited to a percentage of the taxable income of the corporation, unless the corporation sustains a net operating loss. If the corporation has a net operating loss, the dividend received deduction may be taken without limiting the deduction to a percentage of the corporation's taxable income.
Since it is not otherwise noted, it is assumed that Kisco Corp. owns less than 20 percent of the domestic corporation. Hence, Kisco may deduct 70 percent (or $7,000) of the dividends received, giving taxable income of $63,000. Kisco's income tax on that amount of income is $10,750 - the sum of multiplying the first $50,000 of income by the tax rate of 15 percent and the remaining $13,000 of income by 25 percent.
146
In the current year, Brown, a C corporation has gross income (before dividends) of $900,000 and deductions of $1,100,000 (excluding the dividends-received deduction). Brown received dividends of $100,000 from a Fortune 500 corporation during the current year.
What is Brown's net operating loss?
Ignoring the dividend, Brown has a net operating loss (NOL) of $200,000. Brown must also include the $100,000 of dividends in income, reducing the NOL to $100,000. Brown also is permitted to take the dividends received deduction.
Since the dividend is received from a Fortune 500 corporation it is reasonable to assume that Brown owns less than 20% of the corporation, so the dividends received deduction is 70% of the dividends received, or $70,000. This increases the NOL to $170,000.
Note that the dividends received deduction is not limited to the taxable income of Brown since Brown has a loss before the dividends received deduction
147
Are Stock issuance costs deductible?
Stock issuance costs are a syndication cost. Therefore, they are not deductible.
148
During 2014, Nale Corp. received dividends of $1,000 from a 10%-owned taxable domestic corporation.
When Nale computes the maximum allowable deduction for contributions in its 2014 return, the amount of dividends to be included in the computation of taxable income is
A corporation's charitable contributions are subject to a 10 percent of taxable income limitation. For the charitable contributions deduction, taxable income is calculated without deductions for dividends received, charitable contributions, net operating losses and capital loss carrybacks.
When calculating taxable income for regular tax purposes, Nale Corp. may deduct 70 percent of the dividends received from the 10 percent owned domestic corporation. However, when computing taxable income for Nale Corp.'s charitable contributions, there is no deduction for dividends received.
Hence, when Nale Corp. computes the maximum allowable deduction for contributions in its 2014 return, the amount of dividends to be included in the computation of taxable income is $1,000.
149
John Budd is the sole stockholder of Ral Corp., an accrual basis taxpayer engaged in wholesaling operations. Ral's retained earnings at January 1, 2014 amounted to $1,000,000.
For the year ended December 31, 2014, Ral's book income, before federal income tax, was $300,000. Included in the computation of this $300,000 were the following:
Dividends received on 500 shares of stock of a taxable domestic corporation that had 1,000,000 shares of stock outstanding (Ral had no portfolio indebtedness) $ 1,000
Loss on sale of investment in stock of unaffiliated corporation (this stock had been held for two years; Ral had no other capital gains or losses) (5,000)
Keyman insurance premiums paid on Budd's life (Ral is the beneficiary of this policy) 3,000
Group term insurance premiums paid on $10,000 life insurance policies for each of Ral's four employees (the employees' spouses are the beneficiaries) 4,000
Amortization of cost of acquiring a perpetual dealer's franchise (Ral paid $48,000 for this franchise on July 1, 2013, and is amortizing it over a 48-month period) 6,000
Contribution to a recognized, qualified charity (this contribution was authorized by Ral's board of directors in December 2014, to be paid on January 31, 2015) 75,000
On December 1, 2013, Ral received advance rental of $27,000 from a tenant for a three-year lease commencing January 1, 2015 to cover rents for the years 2015, 2016, and 2017. In conformity with GAAP, Ral did not include any part of this rental in its income statement for the year ended December 31, 2014.
With regard to Ral's contribution to the recognized, qualified charity, Ral
Accrual based corporations may deduct all or part of a charitable contribution paid after the end of its tax year, if its board authorized the contribution prior to the end of its tax year and the contribution is paid within the first 2 1/2 months after the end of its tax year. A corporation elects to use the deduction by including it on their tax return and attaching a copy of the Board of Directors' resolution to the return. Since Ral Corp.'s board authorized the contribution in December 2014 and the dividends were to be paid on January 31, 2015 (within the first 2 1/2 months after the end of the corporation's tax year), the corporation can elect to deduct in 2014 any portion of the $75,000 that does not exceed the deduction ceiling for 2014.
150
Brown Corp., a calendar-year taxpayer, was organized and actively began operations on July 1, 2014, and incurred the following costs:
Legal fees to obtain corporate charter $40,000
Commission paid to underwriter 25,000
Other stock issue costs 10,000
Brown wishes to deduct and amortize its organizational costs over the shortest period allowed for tax purposes. In 2014, what amount should Brown deduct (ignoring amortization expenses) for the organizational expenses?
$5,000 of organizational expenses may be deducted, but the $5,000 is reduced by the amount of expenditures incurred that exceed $50,000. Expenses not deducted must be capitalized and amortized over 180 months, beginning with the month that the corporation begins its business operations. Organizational expenditures qualifying for the election are: 1.Legal expenditures incurred by the corporation;
2. necessary accounting services;
3. expenditures of temporary directors and of organizational meeting directors and shareholders; and
4. fees paid to the state of incorporation. Expenditures for issuing or selling shares of stock and for transferring the assets to the corporation do not qualify for the election.
Hence, only the $40,000 in legal fees expended to obtain the corporate charter qualified as an organizational expense. Commission paid to an underwriter and other stock issue costs do not qualify for the election as they are syndication costs. Ignoring amortization, $5,000 of the costs may be deducted this year.
