Chapter 12 – Corporations & Corporate Income Tax

Question 1

The transfer of property to a corporation will not be taxed under what 2 conditions.

Answer 1

1. It’s transferred for stock

2. Immediate control of company after the transfer.

Question 2

If you transfer property/cash to a corporation and they give you stock in exchange, how much will your basis be in the stock?

Answer 2

The basis in the stock is equal to the basis in the property transfer.

Question 3

What is the formula to determine the taxable income for a corporation?

Answer 3

gross Income – deductions = taxable income

Question 4

If a corporation has an ordinary loss, that loss can be carried backwards up to ____ years and carried forward up to ____ years.

Answer 4

2 years

20 years

Question 5

For corporations, are losses carried backward or forward first?

Answer 5

Carried backward first.

Question 6

Can a corporation choose not to carry a loss backward?

Answer 6

Yes

Question 7

Corporations can “only” use capital losses to offset…

Answer 7

capital gains.

Question 8

Unused capital losses can be carried back up to ____ years and carry forward up to ____ years.

Answer 8

3

5

Question 9

Charitable donations corporations are limited to…

Answer 9

10%.

Question 10

If a corporation receives a dividend from another company, who gets the deduction?

Answer 10

The corporation receiving the deduction.

Question 11

“Start-up cost” or organization expenditures are deductible up to $______.

Answer 11

$5,000

Question 12

Excess start-up cost expenditures over $5,000 must be capitalized and amortized over a ___ month period.

Answer 12

180

Question 13

What are 3 start-up cost expenditures?

Answer 13

legal fees
accounting fees
administrative fees

Question 14

Personal service corporations are taxed at what rate?

Answer 14

flat 35% rate.

Question 15

Personal service corporations are corporations that 95% of their stock is held by…

Answer 15

active or retired employees

Question 16

Personal service positions are:

Answer 16

Health
Engineering
Architecture
Law

Accounting
Performing arts
Actuarial science
Consulting

Question 17

This type of company derives at least 60% of their income from investments.

Answer 17

personal holding company

Question 18

A personal holding company is used to place income with a corporation to prevent shareholders from being…

Answer 18

taxed on a personal level.

Question 19

There’s double taxing! Not only does a personal holding company have to pay regular income tax, but an additional tax is imposed at a flat ____% rate.

Answer 19

20%

Question 20

A personal holding company’s flat 20% additional tax rate applies if more than 50% of the stock is…

Answer 20

held by five or fewer individuals.

Question 21

What type of organization is exempt from the personal holding company additional tax rules?

Answer 21

life insurance companies

Question 22

A penalty that is imposed on a business earnings that accumulate beyond their reasonable needs. This tax is to prevent shareholders from accumulating earnings within the company to avoid taxation resulting from dividend distributions. This is also used to avoid double taxation of dividends.

Answer 22

Accumulated Earnings Tax

Question 23

What is the maximum amount a company can accumulate without getting an Accumulative Earnings Tax penalty?

Answer 23

$250,000

Question 24

What can a company do to prevent getting the Accumulated Earnings Tax?

Answer 24

Show a legitimate reason for the accumulation with their records

(key person life insurance, business expansion, and retirement is not a good reason)

Question 25

What is the Accumulated Earnings Tax design to enforce?

Answer 25

The distribution of retained earnings at the point where they no longer serve a legitimate business purpose.

Question 26

This type of corporation allows income and losses to flow through the company directly to the shareholders.

Answer 26

S-Corporation

Question 27

What are the three advantages of a S-Corporation?

Answer 27

1. Limited liability
2. double taxation
3. No Accumulated Earnings Tax and Personal Holding Company Tax

Question 28

How would a corporation become an “S”?

Answer 28

when the company is set up elect to be taxed as a “S” with the IRS.

Question 29

A “S” corporation, once elected, is effective…

Answer 29

indefinitely (forever).

Question 30

A “S” corporation election is a good way to allow for deduction of start up losses on the tax returns of…

Answer 30

individual shareholders.

Question 31

A requirement to become an S corporation is that the company has to be ___________ based.

Answer 31

domestically

Question 32

A requirement to become an S corporation is that the company has to be limited to…

Answer 32

100 shareholders.

Family members represent 1 shareholder

Question 33

A requirement to become an S corporation is that the company can only have ______ class of stock outstanding.

Answer 33

1

Question 34

A requirement to become an S corporation is that only certain types of shareholders are allowed. Who “are” the three?

Answer 34

1. Individuals
2. Estates
3. Certain Trust (grantor, voting, qualified subchapter S trust)

Question 35

Based on the S corporation requirements who are 3 types of shareholders that are “not” considered shareholders?

Answer 35

1. Nonresident aliens
2. Partnerships
3. Corporations