4.2 - Corporate Taxable Income Flashcards
Cash received in advance (accrual GAAP) such as interest income received in advance, rental income received in advance, and royalty income received in advance are taxed or not taxed?
Taxed
Some GAAP income items such as interest income from municipal or state obligations/bonds, proceeds from life insurance on the life of a corporate officer when the corporation is the beneficiary, and federal income taxes are taxed or not taxed?
Not taxed
Who uses the cash basis of accounting for tax purposes?
Taxpayers whose average annual gross receipts do not exceed $27 million
Who uses the accrual basis of accounting or tax purposes?
Those who have greater than $27 million annual gross receipts
Tax shelters
A publicly held corporation may not deduct compensation expenses in excess of what amount for CEO, CFO and the 3 other most highly compensated officials?
$1,000,000
How are entertainment expenses for officers, directors, and10% or greater shareholders treated?
They are deductible only to the extent that they are included in the individuals gross income
How are bonus accruals for non shareholders and employees treated?
They are deductible provided they are paid by march 15th
How is bad debt treated under the accrual method and under the cash method?
Accrual: taxpayers must use the specific charge off method
Cash: bad debt is not deductible because it has not been included in gross income
The deduction for business interest expense is limited to:
30% of business income if annual gross receipts are $27 million or greater
Limitation does not apply to companies under the $27 million gross receipts
Disallowed interest expense can be carried forward indefinitely
Corporations who make charitable contributions are allowed what maximum deduction?
10% of taxable income
Any disallowed deduction may be carried forward for 5 years
What amount of business losses or casualty losses related to business are deductible?
100%
For property only partially destroyed, the loss is limited to:
The lesser of:
The decline in value of the property
OR
The adjusted basis of the property immediately before the casualty
For property that has been fully destroyed, the loss is:
The adjusted basis of the property
A corporation may elect to deduct how much of organizational and start up costs?
Organizational: $5,000 + excess over 180 months
Start-up: $5,000 + excess over 180 months
What are allowable costs to be included in organizational and start up costs?
Fees paid for legal services, accounting services, and to the state of incorporation
What are excluded costs that are not allowable in organizational or start-up costs?
Costs in raising capital such as:
Issuing and selling the stock, commissions, underwrites fees, costs incurred in the transfer of assets to a corporation.
What’s the difference between tax and GAAP for organizational and start-up costs?
Tax: $5,000 expense maximum + excess over 180 months
GAAP: expense
Kristi co formed on June 30, year 1 and began doing business on July 1, year 1. The corporation will have a 12/31 year end. Kristi co incurred the following expenses in organizing the business:
Legal fees for drafting the corporate charter = 15,000
Fees paid for accounting services = 5,000
Fees paid to state of incorporation = 3,000
Costs of selling shares of stock = 10,000
Determine the deduction for organizational costs.
15,000 + 5,000 + 3,000 = 23,000
23,000 - 5,000 = 18,000 / 180 = 100 per month
100 X 6 months = 600 + 5,000 = 5,600 deduction
Goodwill, covenanted not to compete ,franchises, trademarks, and trade names must be amortized how under tax rules? How under GAAP?
Tax: Straight line basis over 15 years
GAAP: not amortized, tested for impairment
How are premiums paid by the corporation for life insurance policy’s on key employees when the corporation is the direct/indirect beneficiary treated? How are premiums paid on insurance policies where the beneficiary is named by the insured employee treated?
- Not dedutible
- Deductible
What amounts of business gifts, business meals, and business entertainment expense are deductible?
Gifts = $25 per person per year
Meals = 50%
Entertainment = $0
What of the below are deductible? What are not deductible?
State income and payroll taxes
City income and payroll and real estate taxes
Federal payroll taxes
Federal income taxes
Deductible: state income and payroll, city income and payroll and real estate taxes, and federal payroll taxes
Not deductible: federal income taxes
How are capital losses treated for corporations?
Corporations can only use capital losses to offset capital gains. Excess must be carried back 3 years or forward 5 years
This is a deduction used to prevent triple taxation of earnings
Dividend received deduction (DRD)
What are the percentage deductions based upon stock ownership for the dividend received deduction (DRD)?
0% - 20% = 50% (unrelated)
21% - 79% = 65%
80% - 100% = 100% (consolidating)
The dividends received deduction (DRD) is equal to the lesser of:
50% (or 65%) dividends received
OR
50% (or 65%) of taxable income computed
HOWEVER, the above does not apply if taking the full eduction results in a NOL, use the 50% or 65% of dividends
What entities are no eligible for the DRD deduction?
Personal service corporations
Personal holding companies
Personally taxed S corporations
