Chapter 2 - Corp tax

Question 1

Corporate Income Tax Return (1120)

Answer 1

Gross income (worldwide)

(ordinary ded.)

income before special deductions

(charitable contribution)

(DRD)

(NOL/ cap. loss carrybacks)

Taxable income

x Tax rate

Gross tax liab.

(Foreign tax credit)

Net regular tax liab.

+ personal holding company tax (PHC)

+ Accumulated earnings tax

+ AMT

Total tax liab.

Question 2

Organizational expenses

Answer 2

• Organizational expense: sstate incorporation fees (including legal and accounting fees related to incorporation)
  
  • can deduct $5000 of organization expenditures and start up costs
    
    • 5000 - (total expeditures - $50K)
    • any costs not deductible amortized over 180 months (5 years)
  • costs not included:
    
    • issuing, printing, and selling stock (including legal and accounting fees related to offering of securities.
  • must elect to amortize in the period of organizations
    
    • if not, then costs are capitalized and remain until liquidated

Question 3

Deductibility of Salaries, wages, and fringe benefits

Answer 3

• can only deduct up to $1M of compensation expense for each of the highest paid executve officers of a public corp.
• Entertainment for officers or 10% or more owner be deductible to extent that it is gross income for them.

Question 4

Casualty losses

Answer 4

business property adjusted basis immediately before casualty

Question 5

Research and Dev. costs

Answer 5

Immediately or over a minimum of 60 months.

Question 6

Dividends from other taxable domestic corp

Answer 6

• reported fully in gross income
• DRD:
  
  • < 20% - 70% ded. - unaffiliated co.
  • >/= 20% to 80% - 80% ded.
  • >/= 80% - 100% - control
• Exception: for ex. ) 70% case: where DRD $70<income>
  <li>limited to $80 x 70%</li>
  </income>

Question 7

Charitable contributions

Answer 7

• limited to 10% of ATI
  
  • ATI is net income adjusted for:
    
    • charity
    • DRD
    • NOL carryforward
    • capital loss carryback
• carried forward 5 years
• ded. if paid within 2.5 months after year end.

Question 8

Foreign Tax credit

Answer 8

• lessor of:
  
  • actual foreign tax paid or
  • US tax liab. X (foreign income/total worldwide income) = foreign tax credit

Question 9

Accumulated Earnings Tax (AET)

Answer 9

• to penalize corps that accumulate earnings beyond the reasonable needs for expansion, retirement of debt and working capital needs.
• not self assessed
• tax on undistributed income (20%)
  
  • reduce or eliminate if: acutal div. or consent div.
  • or already paid PHC tax
• safe harbor:
  
  • 250K for manufacturing co (only 150K for personal service co)
  • additional sums retained for purpose of paying federal income taxes owed.​

Question 10

Personal holding Company (PHC)

Answer 10

to discourage the sheltering of certain types of passive income in corps.

• IF BOTH:
  
  • 5 or fewer ind. own more than 50% stock
  • 60% or more of rev. from passive sources (taxable interest, div., rental and royalty income)
    
    • tax on undistributed (20%)
      
      • can avoid if pay or consent div.
• self assessed
• undistributed income is determined by:
  
  • taxable income reduced by federal income taxes and net long-term capital gain (net of tax)

Question 11

Corporate Distributions

Answer 11

• Distributions made by corp are taxable to extent of E&P.
  
  • Current (CEP)
    
    • add to NI, tax exempt income, DRD
    • Subtract federal taxes, net capital loss
  • Accumulated (AEP) - the sum of all previous years E&P, similar to RE at beg of year.
    
    • div income is higher of:
      
      • CEP or
      • CEP + AEP
  • Propery distributions as div.
    
    • Corp:
      
      • FMV - basis = gain (increase corp. E&P)
    • shareholder: taxed at FMV of property received

Question 12

Non liquidating distribution

Answer 12

• Corp:
  
  • taxed on gain (cap. gain)
  • cannot deduct loss
• shareholder:
  
  • ordinary income (up to E&P)

Question 13

Liquidating distribution

Answer 13

• Corp.
  
  • ordinary gain (capital if stock)
  • ordinary loss (as if sold)
• shareholders:
  
  • capital gain
  • capital loss

Question 14

Section 1244 stock

Answer 14

• bc most start ups fail. allows losses from sale of small domestic corps stock that was sold directly to ind. shareholders
  
  • if FMV- basis = capital gain (Sch. d)
  • value declines is considered ordinary loss
  • up to 50K ordinary loss (100K MFJ), rest is capital loss
  • only to first 1M of stock
  • must be sold by original purchaser

Question 15

Corp AMT equation

Answer 15

Regular Taxable income

+/- adjustments and preferences

=AMTI before ACE adjustment

+/- adjusted current earnings (ACE) adjustment

=AMTI before exemption

- Exemption

AMTI

x tax rate (20%)

= tentative min. tax

- regular tax

=AMT

Question 16

adjustments and preferences for corp AMT

Answer 16

PILE:

• Private activity bonds: interest income
• Installment sales of inventory
  
  • diff. between accrual and installment method
• Long term contract income
  
  • must be calculated using percentage of completion method
• Excess dep. on personal property
  
  • over 150% declining balance when double declining was used for regular tax
    *

Question 17

ACE (adjusted current earnings) adjustment for corp AMT

Answer 17

• 75% of ACE is added or subtracted
• SLIM:
  
  • Seventy percent DRD from unrelated corp
    
    • not 80 or 100
  • Life insurance proceeds on the death of a key employee
  • Muni bond interest from all such bonds
    
    • except private activity bonds, which are already in PILE)

Question 18

Exemption for corp AMT

Answer 18

• $40K - 25% (AMTI before exemption - $150)

Question 19

Stock redemptions

Answer 19

• redemptions (repurchase of shares from a shareholder) are treated as exchanges, generally resulting in cap. gain or loss treatment to the shareholder if at least one of the following apply:
  
  • redemption is not essentially equal to div.
  • redemption is substantially disproportianate (really reduces ownership percentage)
  • redemption is from a non-corp shareholder in a partial liquidation
  • dist. is a redemption of stock to pay death taxes.

Question 20

Penalties and Illegal Activities

Answer 20

• bribes, kickbacks, fines, penalties, and other payments that are illegal under federal law or under a generally enforeced state law are not deductible.
  
  • A gain from an illegal activity is includible in income. To determine the gain, a deduction is permitted for cost of merchandise. Business expenses for operating an illegal business, other than the cost of merchandise, are not permitted as deduction.

Question 21

Goodwill, franchises & trademarks

Answer 21

• amortize over 15 years
• for book, test annually for impairment

Question 22

Corporate liquidation

Answer 22

• Corp sells assets and distributes cash to shareholders
  
  • corp:
    
    • sales price
    • (basis)
    • taxable gain/loss
  • shareholders:
    
    • proceeds
    • (stock basis)
    • taxable gain/loss
• Corp distributes assets to shareholders:
  
  • corp:
    
    • FMV
    • (basis)
    • taxable gain/loss
  • shareholder:
    
    • sales price
    • (stock basis)
    • taxable gain/loss

Question 23

Undistributed income for PHC

Answer 23

taxable income

(federal income taxes)

(net long term gains

= UPHCI