C and S Corp. Taxation / Exempt Organizations (III)

Question 1

Accumulated Earnings Tax? (When and for who)

Answer 1

When: imposed on corps. who’s accumulated Retained Earnings are in excess of $250K (Less for personal service corps) and for which no justified reason for retention exists.

WHO:
On all regular corporations not classified as Personal Holding Companies (PHC’s)

Question 2

Do charitable contributions come out before total taxable income?

Answer 2

No

Question 3

Gain that corps. must recognize in Liquidation? Shareholders?

Answer 3

Corps must recognize gain/loss as though selling an asset at FMV.

Shareholders recognize gain/loss determined by the difference in FMV and their OWN adj. basis in the stock

Question 4

IRC Setion 351, taxation of transfers to control corps? When does it apply and when does it not?

Answer 4

1) it applies when there I 80% control by a group immediately following the exchange.

Question 5

should you calculate Corp. Charitable Contributions Deduction WIth or Without the DRD?

Answer 5

Calculate it without the DRD.

If DRD was already taken out, add back in.

Question 6

How to you calculate the tax of a corp. for a short period (Process?)

Answer 6

1) Annualize income
2) Calc. tax on annualized income
3) Multiply this by # months in short period, divided by 12

Unequal quarterlies can be made using annualized income method

Question 7

What gets amortized over 15 years (180 months) for tax purposes?

Answer 7

goodwill, covenants not to compete, franchises, trademarks, trade names - all the Intangibles.

Question 8

Section 1244 stock - when in excess of $X, gain/(loss) counts as what?

Answer 8

Up to $50,000 for original owner is Ordinary loss.

Excess is capital loss.

Question 9

What statement is true about LIFO?

Answer 9

In periods of rising prices, LIFO can result in HIGHER Cost of Sales and thus LOWER taxable income when compared to FIFO method.

Question 10

Which insurance proceeds are taxable?

Answer 10

Any amount in excess of adjusted basis.

Question 11

What fields are Personal Service Corporations comprised of?

Answer 11

Accounting, law, consulting, engineering, architecture, health, actuarial science

Question 12

When 80% control test is not met, what happens?

Answer 12

1) Gain is taxable to smaller % contributor

2) Corp’s basis in property received becomes FMV, instead of adj. basis

Question 13

What can S-Corp shareholder deduct on their personal tax return?

Answer 13

Pro-rata share of S-Corp loss, subject to following limitation –

loss limitation = Basis + Direct shareholder loans - Distributions

Question 14

Rules for shareholder basis in S-corp (generally the same as for partnerships?)

BASE

Answer 14

B- Initial basis
A- +additional sh investments and income items
S- -shareholder dists / losses/expenses – includes Net Capital Losses
E- Ending Basis

Question 15

For S-Corps, stock basis is adjusted annually on the last day of the S-Corp year. What’s the order of adj.?

Answer 15

1) Increase for income items and excess depletion
2) Decrease for Distributions
3) Decrease for non-deductible, non-capital expenditures and depletion
4) Decrease for items of loss and deduction

Question 16

Ordinary gains. Vs. Capital Gains in an S-Corp

Answer 16

Ordinary income (gains) earned from S-Corp operations (i.e. income earned after all expenses for providing services or selling products) is passed through to the owners/shareholders and taxed at the owner’s personal tax rate.

Separately, if an S-Corp earns capital gains (i.e. the S-Corp buys and sells stock, earns dividends from investments, etc), those gains are passed through to the owners and taxed at a capital gains rate Capital gains are not the same as ordinary income (gains). Don’t get the two confused, they are as different for S-Corp taxation as they are for personal taxation.

Question 17

If S-corps distribute an amount above their basis after calc. YE basis, what is the excess?

Answer 17

Taxable to shareholder!

Question 18

What is the rule about Fringe Benefits paid by an S-Corp (in relation to shareholders?)

Answer 18

Fringe Benefits paid by an S-Corp are deductible by the S-corp only for non-shareholder employees, as well as shareholder employees owning 2% or Less of S-corp.

Fringe benefits basically have to be incl. on an employee’s w2 to be deductible to the S corp.

Question 19

What will undistributed earnings (or tax-exempt income) do to an adjusted basis of S-corp stock?

Answer 19

It adds to it.

Question 20

When must an S-corp election be made in order to be effective for a taxable year?

Answer 20

a) By the 15th day of the 3rd month of the taxable year

(IE maybe 3/15) .. or else it activates the first day of the next calendar year.