4.2 - Corporate Taxable Income

Question 1

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?

Answer 1

Taxed

Question 2

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?

Answer 2

Not taxed

Question 3

Who uses the cash basis of accounting for tax purposes?

Answer 3

Taxpayers whose average annual gross receipts do not exceed $27 million

Question 4

Who uses the accrual basis of accounting or tax purposes?

Answer 4

Those who have greater than $27 million annual gross receipts
Tax shelters

Question 5

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?

Answer 5

$1,000,000

Question 6

How are entertainment expenses for officers, directors, and10% or greater shareholders treated?

Answer 6

They are deductible only to the extent that they are included in the individuals gross income

Question 7

How are bonus accruals for non shareholders and employees treated?

Answer 7

They are deductible provided they are paid by march 15th

Question 8

How is bad debt treated under the accrual method and under the cash method?

Answer 8

Accrual: taxpayers must use the specific charge off method
Cash: bad debt is not deductible because it has not been included in gross income

Question 9

The deduction for business interest expense is limited to:

Answer 9

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

Question 10

Corporations who make charitable contributions are allowed what maximum deduction?

Answer 10

10% of taxable income
Any disallowed deduction may be carried forward for 5 years

Question 11

What amount of business losses or casualty losses related to business are deductible?

Answer 11

100%

Question 12

For property only partially destroyed, the loss is limited to:

Answer 12

The lesser of:
The decline in value of the property
OR
The adjusted basis of the property immediately before the casualty

Question 13

For property that has been fully destroyed, the loss is:

Answer 13

The adjusted basis of the property

Question 14

A corporation may elect to deduct how much of organizational and start up costs?

Answer 14

Organizational: $5,000 + excess over 180 months
Start-up: $5,000 + excess over 180 months

Question 15

What are allowable costs to be included in organizational and start up costs?

Answer 15

Fees paid for legal services, accounting services, and to the state of incorporation

Question 16

What are excluded costs that are not allowable in organizational or start-up costs?

Answer 16

Costs in raising capital such as:
Issuing and selling the stock, commissions, underwrites fees, costs incurred in the transfer of assets to a corporation.

Question 17

What’s the difference between tax and GAAP for organizational and start-up costs?

Answer 17

Tax: $5,000 expense maximum + excess over 180 months
GAAP: expense

Question 18

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.

Answer 18

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

Question 19

Goodwill, covenanted not to compete ,franchises, trademarks, and trade names must be amortized how under tax rules? How under GAAP?

Answer 19

Tax: Straight line basis over 15 years
GAAP: not amortized, tested for impairment

Question 20

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?

Answer 20

1. Not dedutible
2. Deductible

Question 21

What amounts of business gifts, business meals, and business entertainment expense are deductible?

Answer 21

Gifts = $25 per person per year
Meals = 50%
Entertainment = $0

Question 22

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

Answer 22

Deductible: state income and payroll, city income and payroll and real estate taxes, and federal payroll taxes
Not deductible: federal income taxes

Question 23

How are capital losses treated for corporations?

Answer 23

Corporations can only use capital losses to offset capital gains. Excess must be carried back 3 years or forward 5 years

Question 24

This is a deduction used to prevent triple taxation of earnings

Answer 24

Dividend received deduction (DRD)

Question 25

What are the percentage deductions based upon stock ownership for the dividend received deduction (DRD)?

Answer 25

0% - 20% = 50% (unrelated)
21% - 79% = 65%
80% - 100% = 100% (consolidating)

Question 26

The dividends received deduction (DRD) is equal to the lesser of:

Answer 26

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

Question 27

What entities are no eligible for the DRD deduction?

Answer 27

Personal service corporations
Personal holding companies
Personally taxed S corporations