19 C Corporations Flashcards
Most revenues earned by a corporation are fully taxable. What types of income are tax-free for corporations?
In general, income that is tax-free for individuals is also tax-free for corporations. This includes the following:
Interest income on state bonds
Interest income on municipal bonds
Life insurance proceeds
What expenses are deductible by a corporation?
A corporation can deduct any expenses that are viewed as ordinary, necessary, and reasonable. Fines and penalties, for example, are usually not deductible because they don’t meet these criteria.
Are charitable contributions deductible expenses of a corporation?
Charitable contributions are not ordinary and necessary business expenses and, therefore, cannot be deducted as expenses.
Instead, a special deduction is allowed for a limited amount of charitable contributions if given to a qualified charitable organization (limited to 10% of taxable income before charitable contribution), which is taxable income before:
1. Charitable contribution deduction.
2. Capital loss carryback.
3. Dividends received deduction.
Excess contributions—carryforward for five years. If not fully used up after five years, the remaining charitable contributions are lost forever. Apply current year contributions first before utilizing carryforward charitable contributions subject to the same 10% limitation.
A company borrows $400,000 and buys municipal bonds. During Year 1, interest expense on the debt is $11,000. What is the tax effect of this interest?
Because the income to be earned from the borrowed money is not taxable, the related expense is not deductible.
How are bad debt expenses handled for corporate tax purposes?
For bad debt expenses, the direct write-off method is allowed, but no allowance method is permitted. Thus, only accounts that are actually written off as uncollectible are deductible for tax purposes. Business bad debts can be fully deducted in the year of partial or total worthlessness (ordinary loss—no limit to its deductibility).
List the characteristics of a net operating loss.
Negative taxable income is created by business losses and casualty.
NOLs are carried forward indefinitely, and they can offset only 80% of taxable income for the year it is used.
Carryovers from previous years are not included in calculating current-year net operating loss.
What year-end can a corporation choose?
Corporations can choose a fiscal year unless the corporation makes an “S” election or qualifies as a “personal service corporation.”
List the characteristics of charitable contributions for corporations.
Corporations can deduct accrued contributions if paid within 3½ months following year-end.
The limit is 10% of taxable income.
Excess is carried forward for five years.
Define “nexus.”
The degree of the relationship that must exist between a state and a foreign corporation for the state to have the right to impose a tax.
What activities are sufficient to establish a nexus?
Approving/accepting orders
Hiring/supervising employees other than sales staff
Installation
Maintaining an office
Providing maintenance or engineering services
How is business income apportioned among the states in which it is earned?
Business income is apportioned among the states in which it is earned based on apportionment factors, such as sales, property, and payroll.
How is the apportionment sales factor calculated?
Total sales in state / Total sales
True or False: A business incorporated under state law must file as a C corporation.
False. Businesses incorporated under state law can file as either C or S corporations.
What is the dividends-received deduction when a corporations owns 20% to 79% of stock?
The deduction is 65% of dividends received.
What is the dividends-received deduction when a corporation owns less than 20% of stock?
The deduction is 50% of dividends received.
