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Corporate Tax > Ch. 5 - Corporate Operations > Flashcards

Ch. 5 - Corporate Operations Flashcards

1
Q

Corporate tax formula

A 
Gross income - deductions
= taxable income
x tax rates
= reg income tax liability
\+ other taxes 
= total tax
-credits
-prepayments
= taxes due (or refund)
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2
Q

Accounting methods for corporations

A

Generally must use accrual
Corporations with average gross receipts of $5 million or less for the three years prior to the current tax year may use the cash method

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3
Q

book-tax differences

A

When items of income and expense are accounted for differently for book and tax purposes

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4
Q

unfavorable book-tax difference

A

requires an add back to book income to compute taxable income b/c increases taxable income (and taxes payable) relative to book income

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5
Q

favorable book-tax difference

A

requires corp to subtract difference from book income in computing taxable income b/c decreases taxable income (and taxes payable) relative to book income

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6
Q

permanent book-tax difference

A
  • Arise from items that are income or deductions during the year for book or tax purposes, but not both
  • Do not reverse over time
  • Long-run effect is that total amount of income or deductions for the items is different for book and tax purposes
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7
Q

temporary book-tax difference

A
  • income or deduction items are included in book income in one year and taxable income in a different year
  • Reverse over time
  • temporary differences that are initially favorable will become unfavorable when they reverse and vice versa
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8
Q

Why is distinguishing between permanent and temporary book-tax differences important?

A
  1. large corps are required to disclose their permanent and temp book-tax differences on their tax returns
  2. it is useful for those responsible for computing and tracking book-tax differences. For temporary book-tax differences it is important to understand how the items were accounted for in previous years to appropriately account for current year reversals
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9
Q

Interest income from muni bonds

A

Permanent favorable

Income included in book income, excluded from taxable income

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10
Q

Death benefit from life insurance on key employees

A

Permanent favorable

Income included in book income, excluded from taxable income

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11
Q

Interest expense on loans to acquire investments generating tax exempt income

A

Permanent unfavorable

deductible for books, but expenses incurred to generate tax-exempt income are not deductible for tax

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12
Q

Life insurance premiums for which corporation is beneficiary

A

Permanent unfavorable
deductible for books, but expenses incurred to generate tax-exempt income (life insurance death benefit) are not deductible for tax

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13
Q

Meals and entertainment expenses

A

Permanent unfavorable

fully deductible for books, but only 50% deductible for tax

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14
Q

Fines and penalties and political contributions

A

Permanent unfavorable

deductible for books, but not for tax

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15
Q

Domestic production activities deduction (DPAD)

A

Permanent favorable
deduction for businesses involved in manufacturing activities in the US equal to the lesser of 9% of the company’s qualified production activities income (QPAI) or taxable income computed without the DPAD (ie the DPAD cannot create a NOL)
Cannot exceed 50% of wages

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16
Q

Federal income tax expense

A

Corporations deduct federal income tax expense in determining book income, but are not allowed to deduct federal income tax expense for tax purposes. The book-tax provision acts as a permanent difference if the corp is reconciling after-tax book income with taxable income

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17
Q

Depreciation expense

A

Temporary favorable
Difference between accelerated depreciation expense for tax purposes and straight-line depreciation expense for book purposes

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18
Q

Gain or loss on disposition of depreciable assets

A

Temporary unfavorable
Difference between gain or loss for tax and book purposes when corp sells or disposes of depreciable property. Difference generally arises because depreciation expense, and thus the adjusted basis of the asset is different for tax and book purposes. This difference is essentially the reversal of the book-tax difference for the depreciation expense on the asset sold or disposed of.

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19
Q

Bad debt expense

A

Temporary unfavorable

Direct write-off method for tax, allowance method for books

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20
Q

Unearned rent revenue

A

Temporary unfavorable

Taxable on receipt but recognized when earned on books

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21
Q

Deferred compensation

A

Temporary unfavorable
Deductible when accrued for books, but deductible when paid for tax if accrued but not paid with 2.5 months after year-end. Also, accrued compensation to shareholders owning more than 50 percent of the corp is not deductible until paid

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22
Q

Organizational expenses and start-up costs

A

Temporary unfavorable

Immediately deducted for books, but capitalized and amortized for tax (limited immediate expensing allowed for tax)

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23
Q

Warranty expense and other estimated expenses

A

Temporary unfavorable

Estimated expenses deducted for books, but actual expenses deducted for tax

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24
Q

UNICAP

A

Temporary unfavorable
Certain expenditures deducted for books, but capitalized to inventory for tax. Difference reverses when inventory is sold

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25
Q

Accounting for corp receiving dividends

A

Included in gross income for tax. For books, accounting for dividends depends on the level of ownership in the distributing corp

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26
Q

Accounting for dividends if receiving corp owns less than 20% of the stock of distributing corp

A

receiving corp includes the dividend in income; same as for tax so no book-tax difference

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27
Q

Accounting for dividends if receiving corp owns at least 20% of the stock of distributing corp, but not more than 50%

A

receiving corp includes a pro rata portion of the distributing corp’s earnings in its income under the equity method of accounting and does not include the dividend in its income (temp favorable or unfavorable BTD for the difference between pro rata share of income and the amount of the dividend)

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28
Q

Accounting for dividends if receiving corp owns more than 50% of the stock of distributing corp

A

the receiving corp and distributing corp consolidate their financial reporting and the intercompany dividend is eliminated

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29
Q

Goodwill acquired in an asset acquisition

A

for tax - amortized on a straight line basis over 180 months
for books - corp acquiring assets allocate part of purchase price to goodwill
book and tax amount can be the same or different
Cost of goodwill is recovered only when and only to the extent goodwill is impaired

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30
Q

Temp BTD for goodwill is computed by

A

comparing amount of goodwill amortized for tax with amount of goodwill impairment expensed on books
If tax amortization > book impairment exp, BTD is favorable
If book impairment exp > tax amortization, BTD is unfavorable

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31
Q

stock options

A

execs and employees often compensated by corp with stock options
allow recipients to acquire stock in corps issuing the options by exercising options and paying exercise price

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32
Q

exercise price

A

usually the stock price on the day the options are issued to the employee
usually must wait a certain period of time (until the options vest) before they can exercise the options. they forfeit the options if they leave the company before the options vest

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33
Q

tax treatment of stock options depends on

A

whether the options are ISOs (incentive stock options) or NQOs (non-qualified stock options

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34
Q

tax treatment of stock options, ISOs

A

corps never deduct any compensation expense associated with the options for tax purposes

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35
Q

bargain element

A

difference b/w the FMV of stock and the exercise price of the option

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36
Q

stock options granted before 2006

A

corps were not required to expense stock options until 2006 so:
Do not report BTD for ISOs granted before 2006

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37
Q

Stock options granted after 2005

A

required to recognize book exp for stock options granted after 2005
required to estimate the value of the options at the time of issuance
they deduct estimated value of options over the option vesting period as they vest

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38
Q

BTD for stock options granted after 2005, ISOs

A

Amount of perm difference is the estimated value of the stock that vests during the year
BTD is always unfavorable

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39
Q

If the tax deduction exceeds the previously recorded book deduction…

A

the tax benefit from the excess deduction (called a windfall benefit) is recorded in shareholders equity as an addition to paid in capital

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40
Q

If the tax deduction is less than the previously recorded book deduction…

A

the tax detriment from the excess book deduction (known as a shortfall) reduces the existing windfall tax benefit pool in Addl PIC with any excess charged to the income statement

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41
Q

Book and tax deductions and BTD for:

Pre ASC 718 ISO

A

Book: no deduction
Tax: no deduction
BTD: none

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42
Q

Book and tax deductions and BTD for:

Under ASC 718 ISO

A

Book: initial estimated value of stock options x % of options that vest during the year
Tax: no deduction
BTD: unfavorable, permanent

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43
Q

For corps, net capital gains (lond and short term) are taxed at

A

ordinary income rates

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44
Q

Capital gains are preferred to ordinary income because

A

corps can only deduct capital losses to the extent they recognize capital gains in a particular year

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45
Q

when corp recognizes NCL for a year

A

they are permitted to carry the capital losses back 3 years (NCL carryback) and forward 5 years (NCL carryover) to offset NCG

46
Q

Corps may not carryback a capital loss to a year if doing so

A

creates or increases the NOL of the corp (excess of deductions over income) in the year to which it is carried back

47
Q

For books, corps deduct NCLs

A

in the year they sell the property

48
Q

BTD for NCL

A

unfavorable in the year they recognize the losses and favorable in the year they use capital loss carrybacks or carryovers

49
Q

Purpose of NOL deductions

A

to ease tax burden on corps that aren’t consistently profitable

50
Q

Net operating loss (NOL)

A

excess of deductions over gross income with the following adjustments:

  • cannot deduct a NOL generated in another year in determining its current year NOL
  • my deduct a capital loss carryover against a net capital gain arising in the current year in determining its NOL but it may not deduct a capital loss carryback against a net capital gain in determining its NOL
  • does not deduct the domestic production activities deduction in determining its NOL
51
Q

NOL carryback/carryover rules

A
  • can carry current year NOL back 2 years and forward 20 years to offset taxable income and reduce taxes payable in those years
  • can file for and receive an immediate refund when carrying back
  • When carrying back must start with year 2 years prior
  • Can forego carryback and only carryfoward
  • reports NOL carryforwards on Schedule K to Form 1120
52
Q

BTD for NOLs

A
  • report unfavorable temp BTD in the year NOL is generated

- report favorable temp BTD in years they deduct the NOL carrybacks or carryforwards

53
Q

Charitable contributions

A
  • can deduct charitable contributions to qualified charitable organizations
  • allowed to deduct the amount of money they contribute, the FMV of capital gain property they donate and the adjusted basis of ordinary income property they donate
  • deducted at the time payment is made
54
Q

Accrual method corps can deduct the charitable contributions

A

in the year before they actually pay the contribution when

(1) their board of directors approves the payment
(2) they actually pay the contributions within two and one-half months of their tax year

55
Q

A corp’s deductible charitable contributions for the year may not exceed what % of its charitable contribution limit modified taxable income?

A

10%

56
Q

what is its charitable contribution limit modified taxable income?

A

its taxable income before deducting the following:

  1. any charitable contributions
  2. the dividends received deduction (DRD)
  3. NOL carrybacks
  4. The domestic production activities deduction (DPAD)
  5. Capital loss carrybacks
57
Q

Capital loss and NOL carrybacks vs. carryovers in terms of charitable contribution limit modified taxable income

A
  • Capital loss and NOL carryovers are deductible
  • Capital loss and NOL carrybacks are not deductible for charitable contribution limitation purposes b/c they are unknown when corps must determine the limitation (they arise in future years)
58
Q

Due to the 10% limitation, a corps charitable contribution deduction for the year is..

A

the lesser of (1) the amount of charitable contributions to qualifying charities (including charitable contribution carryovers) or
(2) 10% of charitable contribution limit modified taxable income

59
Q

Corps making current year contributions in excess of the 10% modified taxable limitation

A
  • may carry forward the excess for up to 5 years after the year in which the carryover arises
  • they may deduct the carryover in future years to the extent the 10% limitation does not restrict deductions for charitable contributions corps actually make in those years
60
Q

Carryforwards are absorbed on a _____ basis and are applied when?

A

FIFO; after the current year contribution deduction

61
Q

When do unused carryovers expire with respect to charitable contributions?

A

after 5 years

62
Q

BTD for charitable contribution carryovers and carrybacks

A
  • unfavorable temp BTD in the amount of carryover for the year (aka to the extent the 10% modified taxable income limitation restricts the amount of their tax charitable contribution deduction)
  • favorable temp BTD when they deduct carryovers because they deduct carryovers for tax but not books
63
Q

Purpose of dividends received deduction

A
  • corps receiving dividends from other corps are taxed at ordinary rate (not preferential 20% rate like individuals)
  • DRD reduces the actual tax they pay on dividends received
  • designed to mitigate the extent to which corps earnings are subject to 3 or more levels of taxation
64
Q

Corp taxable income is subject to triple taxation when

A

a corp pays taxes on its income (1st level)
then distributes its after tax income to corp shareholder who pay the next level of tax (2nd level)
then corp shareholders distribute their after tax earnings from the dividends to their shareholders who pay tax on it (3rd level)

65
Q

How do corps compute their DRD?

A

by multiplying the dividend amount by 70%, 80% or 100% depending on their level of ownership in the distributing corps stock:

  • Less than 20% ownership = 70% DRD
  • at least 20%, but less than 80% ownership = 80% DRD
  • 80% or more ownership = 100% DRD
66
Q

Only dividends received from _______ corps are eligible for the DRD

A

domestic

67
Q

The DRD is limited to:

A

the product of the applicable DRD % and DRD modified taxable income

68
Q

DRD modified taxable income

A

the dividend receiving corps taxable income before deducting the following:

  1. The DRD
  2. Any NOL deduction (carryover or carryback)
  3. Capital loss carrybacks
  4. The DPAD
69
Q

The modified taxable income limitation does not apply when

A

after deducting the full DRD (dividend x DRD%) a corp reports a current year NOL, That is if, after deducting the full DRD , the corp has a NOL, the corp is allowed to deduct the full DRD no matter what the modified taxable income limitation is

70
Q

BTD for DRD

A

any DRD creates a favorable permanent difference b/c the DRD is strictly a tax deduction and not a book deduction

71
Q

The corporate tax rate schedule is different than the individual tax rate schedule in that:

A
  • the corporate schedule is not indexed for inflation

- the corporate tax rate schedule does not change every year

72
Q

Marginal corporate tax rate brackets range from

A

15% - 39%

73
Q

Corporations with over $________ of taxable income pay a flat _____

A

18,333,333; 35%

74
Q

controlled groups

A

a group of corporations that is controlled or owned by the same taxpayer or group of taxpayers
May use only one 15% or 25% tax bracket amongst all the corps in the group

75
Q

parent-sub controlled group

A

one corp (parent) owns at least 80% of the voting power or stock value of another corp (sub) on the last day of the year

76
Q

brother-sister controlled group

A

2 or more corps of which five or fewer individuals collectively own more than 50% of the voting power or stock value of each corp on the last day of the year, taking into account each individual’s minimum ownership in each corp in the group

77
Q

combined controlled group

A

3 or more corps, each of which is a member of either a parent-sub or brother-sister controlled group and one of the corps is the parent in the parent-sub CG and also is in a brother-sister CG

78
Q

Schedule M-3

A

corps with total assets of $10 mil or greater use schedule M-3 to report BTDs and reconcile book and taxable income

79
Q

Schedule M-1 and M-3 reconcile to taxable income,

A

before the NOL deduction and the DRD so to fully reconcile book and tax income, corps must deduct NOL carryovers and DRDs from line 10 on schedule M-1 or the amount on line 30d on Schedule M-3

80
Q

Schedule M-1

A

corps with total assets of less than $10 mil use schedule M-1 to report BTDs and reconcile book and taxable income

81
Q

Schedule M-2

A

reconciliation of the corp’s beginning and ending balance in its unappropriated RE from its financial accounting balance sheet.

82
Q

Corps with_______ are not required to complete ______

A

Corps with total receipts and total assets less than $250,000 are not required to complete schedules L, M1 and M2

83
Q

Details of Schedule M-1

A

Line 1 starts with book income after taxes
Left hand column is all unfavorable BTDs (add backs to book income to arrive at taxable income)
Top of left hand column is generally for income items and the bottom part is for expense items
Right hand column is all favorable BTDs.
Top of right hand column is income and bottom is for expense items

84
Q

corporate tax return due date

A

C corp: 2 and 1/2 months after the corps’ year end (March 15th for calendar year corporations)

85
Q

Corps requesting an extension

A

can extend the due date for filing their tax return (not for paying tax) for 6 months (8 1/2 months after year end) by filing Form 7004

86
Q

Quarterly estimated installments

A

corps with a federal income tax liability of $500 or more (inc the AMT) are required to pay their tax liability for the year in quarterly estimated installments due on the 15th of the 4th, 6th, 9th and 12th months of their tax year

87
Q

Estimated tax underpayment penalties

A

When corps file their tax returns, they determine whether they must pay estimated tax underpayment penalties
Generally subject to penalties if they did not pay 25%, 50%, 75% and 100% of their required annual payment for their 1st, 2nd, 3rd and 4th installment payments, respectively

88
Q

The required annual payment is:

A

The least of:

  1. 100% of the tax liablity on the prior years return, but only if there was a positive tax liability on the return and the prior year return covered a 12 month period
  2. 100% of the current year tax liability (corps usually dont rely on this method to determine the required payment b/c they won’t know what this is until they’ve completed their tax returns - after the estimated tax due dates)
  3. 100% of the estimated current year tax liability using the annualized income method
89
Q

Alternative Minimum Tax

A

part of the Tax Reform Act of 1986
a tax on a base broader than the regular tax base
designed to require corps to pay some minimum level of tax even when they have low or no regular taxable income due to certain tax breaks they gain from the tax code

90
Q

What corporations are exempt from AMT?

A

Small corps - average annual gross receipts less than $7.5mil
New corps are exempt from AMT in their 1st year automatically and remain exempt for their first 3 years as long as their average annual gross receipts are below $5mil for the 3 year period
Once they fail the gross receipts test, they are no longer exempt from AMT

91
Q

How do corps calculate AMT?

A

by multiplying their AMT base by the 20% AMT rate and then subtracting their regular tax liability
If reg tax liability > TMT, do not owe AMT
If TMT > reg tax liability, owe reg tax liability AND the excess of the TMT over reg tax liability
This excess is the AMT
Corps are not allowed to reduce the gross AMT by any foreign credits they have for reg tax purposes

92
Q

How to corps determine their AMT base?

A

start with reg income tax, add preference items, add or subtract certain adjustments, and then subtract an exemption amount

93
Q

Preference items

A
  • Always added when computing AMT

- represent tax breaks that corps received for regular tax purposes but Congress chose to eliminate for AMT purposes

94
Q

Common preference items

A
  • % depletion in excess of cost basis
  • TE interest income from a private activity bond
  • TE interest on PABs issued in 2009 or 2010 is not an AMT tax preference item
95
Q

Private Activity Bond

A

a muni bond used to fund a nonpublic activity

96
Q

Most common AMT adjustments for corps

A
  1. Depreciation
  2. Gain or loss on sale of depreciable assets
  3. ACE (adjusted current earnings)
97
Q

Adjustments

A

corps may add or subtract AMT adjustments to regular taxable income in computing AMTI
Whether the adjustment is positive (unfavorable) or negative (favorable) for a particular item depends on the way the corp accounts for the item for regular taxable income purposes and the way it accounts for the item for AMT purposes

98
Q

Depreciation adjustments

A

corps with fixed assets may benefit from the highly accelerated depreciation methods allowed under the regular taxable income system
For AMT purposes, assets arent depreciated as quickly
In the early years of an assets depreciable life, regular tax depreciation exceeds AMT depreciation, and corps must make positive adjustments to regular taxable income to compute the AMT base
After corps fully depreciate assets for regular tax purposes, they may still have basis left to depreciate for AMT purposes
In these situations, corps make negative AMT depreciation adjustments to regular taxable income to compute the AMT base

99
Q

Gain or loss on disposition of depreciable assets

A

Depreciation differences for reg tax and amt purposes cause differences in the adjusted basis for reg tax and amt
when corps sell or dispose of depreciable assets before they completely depreciate them, they will likely recognize a different gain or loss for reg tax purposes than they do for amt
If reg tax gain > AMT gain, due to accelerated depreciation, corps make negative adjustments to reg taxable income to compute the AMT base

100
Q

ACE adjustments

A

Adjusted current earnings
designed to capture various sources of economic income not otherwise included in the AMT base
Unlike other adjustments, ACE is not tied to any one item

101
Q

Calculate ACE adjustments

A

must first compute its adjusted current earnings
then they subtract AMTI (before the ACE adjustment) from ACE and multiplying the difference by 75%
(ACE-AMTI) x 75%

102
Q

Compute adjusted current earnings

A

certain modifications are made to AMTI (designed to reflect economic income)

103
Q

Negative ACE adjustments

A

if the sum of the modifications if negative, the ace adjustment may also be negative
negative ace adjustments in excess of cumulative positive prior year ACE adjustments are not allowed

104
Q

Common modifications to AMTI to determine ACE

A
  1. TE interest income from TE bond that funds a public activity (as opposed to private). If a bond was issued in 2009 or 2010 it is not a modification. (+)
  2. Diff between AMT dep and ACE dep (+ or -)
  3. Diff between AMT and ACE gain or loss on asset disposition (+ or -)
  4. Death benefit from life insurance contracts (+)
  5. 70% DRD (not 80% or 100%) (+)
  6. Org expenditures that were expensed during the year (+)
  7. Difference between gain reported under the installment method and gain otherwise reported (installment method not allowed for ACE purposes)(+ or -)
105
Q

AMT NOL Deduction

A

if the deductions allowed in computing AMTI > the income included in AMTI, the excess becomes an AMT net operating loss (ATNOL)
Limited to 90% of the AMTI computed without regard to the ATNOLD and DPAD

106
Q

ATNOL carryback rules

A

The ATNOL can be carried back 2 years ( elective) and carried forward 20 years, similar to reg tax NOL

107
Q

AMTI

A

corps compute AMTI by adding preference items and adding or subtracting their adjustments from reg taxable income
AMTI is important because corps use it to determine the amount of the AMT exemption they are allowed to deduct to compute their AMT base

108
Q

Minimum tax credit

A

when corps owe the AMT, they generate a min tax credit that they can carry forward indefinitely to offset their reg tax liability down to their tentative min tax in years when their reg tax > the tmt
- use credit in years when they do not owe the amt

109
Q

AMT exemption

A

corps are allowed to deduct a certain exemption amount in computing their AMT base
The exemption is subject to an AMTI-based phase-out
The full exemption amount is $40,000
It is phased out by 25% of the amount that AMTI exceeds $150,000 and is completely phased out for corps with AMTI of at least $310,000
Fully phased out for only moderately profitable large corps
Protects many small corps from paying the AMT

110
Q

Tentative Minimum tax

A

AMT base (AMTI - exemption amount) x flat 20% rate

Corporate Tax (3 decks)

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