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CPA: REG > Chapter 3 Section 1: C Corporations > Flashcards

Chapter 3 Section 1: C Corporations Flashcards

1
Q

What is the only entity whose earnings are subject to double taxation?
Explain

A

C Corps

There’s income tax at the corporate level, and then distributions are taxed at the individual level

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2
Q

Does the corporation recognize gain or loss in general upon formation?

A

No.

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3
Q

At what basis does the corporation record property received at formation?

A

Greater of NBV or debt assumed by corporation

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4
Q

What is the one time a corporation may recognize a gain or loss upon formation?

A

To prevent a negative basis when property is received and debt is assumed.

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5
Q

What if the aggregate NBV of property contributed at formation exceeds aggregate FMV of the property? (corporation side)

A

Record at FMV to avoid built-in-losses

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6
Q

What conditions must be present for a shareholder to avoid tax consequences when contributing to the formation of a C Corp?

A
  1. Those transferring the property must have at least 80% control
  2. Boot is not received (in the form of either cash withdrawn or receipt of debt securities)
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7
Q

How does a shareholder handle cancellation of debt in regards to boot received when donating property at C Corp formation?

A

Any liabilities assumed that exceed the NBV of assets contributed is treated like boot, thereby creating a gain.

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8
Q

At what basis does the shareholder record shares of common stock received in the following circumstances?
Cash given
Property given
Services given

A

Cash - amount contributed
Property - NBV, reduced by debt assumed by corp and increased by gain recognized by shareholder
Services - FMV (taxable as ordinary income)

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9
Q

When the shareholder contributes property, what is the basis of the stock, and when is there a gain?

A

Basis of the stock is the NBV less liabilities, but never negative (can only be zero)
Gain is the excess liability assumed over the NBV

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10
Q

What is Schedule M-1 used for?

What does it include?

A

To reconcile book income to taxable income

Permanent and temporary differences, with no distinction

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11
Q

For tax purposes, when is interest income received in advance, rental income received in advance, and royalty income received in advance taxed?

A

When received, resulting in a temporary difference

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12
Q

List three permanent differences between taxable income and book income

A

Interest in come from municipal or state obligations/bonds
Proceeds from life insurance on key person policies where corporation is the beneficiary
Federal income taxes - not deductible

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13
Q

What is the difference between an M-1 and M-3?

A

M-3 is for corporations with total assets of $10 million or more

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14
Q

What types of expenses qualify for trade or business deductions?

A

Ordinary and necessary expenses

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15
Q

Explain the Domestic Production Deduction
What percent?
What is the percentage applied to?

A

It allows a business to deduct a percentage of their qualified production activities income
9%
Lesser of Qualified Production Activities Income (QPAI) or Taxable Income (disregarding the deduction)

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16
Q

What is the formula for QPAI?

A 
Domestic production gross receipts
- COGS
- Other directly allocable expenses or losses
- Proper share of other deductions
= QPAI
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17
Q

What executive compensations cannot be deducted?

A

Expenses in excess of $1m paid to the CEO or the four other most highly compensated officers

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18
Q

How are bonus accruals handled?

A

If they are paid by March 15, they’re deductible

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19
Q

How are bad debts handled?

A

For accrual basis, use the specific charge-off method (similar to direct write-off). Deductible when the specific A/R is written off.
For cash basis, it was never income, so it can’t be deducted

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20
Q

When is business interest expense deductible?
What amount of investment interest expenses is deductible?
When is prepaid interest expense deductible?

A

Business: when paid and incurred
Investment: only up to taxable investment interest income
Prepaid: deduct later, when incurred

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21
Q

What is the limit for charitable contribution deductions?

How do you handle accruals?

A

10% of adjusted taxable income

If it is paid by March 15, it counts for the prior year’s return

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22
Q

What portion of business losses or casualty losses related to a business is deductible?

A

100% (no $100 or 10% of AGI reductions)

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23
Q

What amount of loss do you deduct when property is only partially destroyed?

A

Lesser of the change in FMV or the NBV immediately before casualty

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24
Q

What amount of loss do you deduct when property is fully destroyed?

A

NBV before the casualty

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25
Q

What amount of organizational expenditures and start-up costs is deductible?
What do you do with the remainder?

A

$5,000 for each category

The remainder is amortized over 15 years (180 months), including this year. So this year you have $5,000 + amortization

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26
Q

What costs are included in organizational expenditures and start-up costs?
What is excluded?

A

Legal services, accounting services, and fees paid to the state
Issuing and selling stock, commissions, underwriter fees, and transferring assets to a corporation

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27
Q

How do you handle amortization, depreciation, and depletion of goodwill, covenants not-to-compete, franchises, trademarks, and trade names?

A

Amortize straight-line over 15 years (no impairment)

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28
Q

What do you do with life insurance premiums when the corporation is named as the beneficiary? When it is not?

A

Named: not tax deductible
Not: is tax deductible (fringe benefit)

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29
Q

What is the deduction for business gifts?

A

$25/person/day

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30
Q

What amount of business meals and entertainment is deductible?

A

50%

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31
Q

What portion of penalties and illegal activities is deductible?

A

0%

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32
Q

What taxes are deductible? What is not?

A

State income, city income, and federal payroll are deductible
Federal income tax is not deductible

33
Q

What portion of lobbying and political expenditures is deductible?

A

0%

34
Q

What amount of capital gains and losses are allowed?

A

Capital losses can only offset capital gains. Any excess can be carried back 3 years and forward 5 to offset those capital gains.
Capital gains are taxed as ordinary income.

35
Q

How are NOLs handled?

A

Same as individuals - back 2, forward 20, using form 1120x

36
Q

What basis must be used for taxpayers with inventory?

A

Accrual

37
Q

What types of expenses are impacted by Uniform Capitalization Rules?

A

Raw materials
Direct labor
Factory overhead

38
Q

What is the formula for the general business credit? What is the limitation?

A

It cannot exceed net income tax less the greater of:
25% of regular tax liability over $25,000 OR
Tentative minimum tax for the year

39
Q

Explain the dividends received deduction
What are the deduction percentages for the different ownership percentages?
What is the purpose?

A

0-20% owner = 70% deduction
20-80% owner = 80% deduction
80-100% owner = 100% deduction
The purpose is to prevent triple taxation when one corporation invests in another.

40
Q

What is the formula for taxable income or loss?

A 
Gross income (including div inc)
- deductions (excluding charity and div rec'd ded)
= A
- Charity 
= B
- Div Rec'd Ded (limited to % of B)
= Taxable income or loss
41
Q

What is the exception to the limitation of dividends received deduction?

A

When taking the full percent of dividend income creates or adds to corporate loss. Then you take the percent of dividend income, even if it’s greater than taxable income

42
Q

What is the dividends received deduction limitation?

A

Lesser of % of div received or income before DRD or NOL deduction

43
Q

What types of entities cannot take the DRD?

A

Personal service corporations
Personal holding companies
Personally taxed S Corporations

44
Q

What is the outline for schedule M-1?

A 
Net income per books
\+ federal income tax (per books)
\+ Excess cap loss over cap gains
\+ Income subject to tax not recorded on books
\+ Expenses recorded on book not on tax return
- Income on books not on return
- Deductions on return not on books
= Taxable income
45
Q

When does a C Corp need to file by?

A

March 15

46
Q

When is the accrual basis method of accounting for tax purposes required?

A

Inventory
Tax shelters
Certain farming corporations
>$5m avg annual gross receipts for last 3 years

47
Q

What do small corporations need to pay for estimated taxes?

A

Lesser of:
100% of current year tax
100% of prior year tax (as long as it was greater than zero)

48
Q

When do large corporations need to pay for estimated taxes?

A

100% of current year tax

49
Q

When can consolidated returns be used?

A

For an affiliated group of corporations who can then eliminate intercompany gains and losses

50
Q

Define affiliated group

A

A common parent directly owns 80% of the voting power and 80% of the value of all outstanding stock

51
Q

Define brother/sister corporations

Can the file consolidated returns?

A

A parent owns 80% of two organizations

No

52
Q

What is the formula for corporate AMT?

A 
Regular taxable income
\+/- adjustments
\+ preferences
\+/- Adjusted current earnings
- AMT NOL deduction
= AMTI
- AMT Exemption
= AMT base
x 20%
= Gross AMT
- Foreign tax credit
= Tentative minimum tax
- Regular tax liability
= AMT
53
Q

What is the AMT exemption amount?

A

$40,000 less 25% of MTI over $150,000

54
Q

What are the adjustment items?

LID

A

Long-term contracts
Installment sales
Depreciation adjustments

55
Q

What are the preference items?

PPP

A

Percentage depletion
Private activity bonds
Pre ‘87 excess depreciation

56
Q

What are the ACE (adjusted current earnings) items?

MOLDD

A

+ Muni interest income
+ Organizational expense amort
+ Life insurance proceeds on key employees
+/- Difference between AMT and ACE depreciation
+ Div Rec’d Deduction (under 20% owner)

57
Q

How do you calculate the ACE adjustment amount?

A

ACE income
- AMT income
x 75%
If ACE is more, it’s added back

58
Q

What is the tax rate on AMTI?

A

20%

59
Q

What is the only credit that goes into AMTI?

A

Foreign tax credit

60
Q

Explain the minimum tax credit

Can it be carried forward or back?

A

Carry AMT forward forever, never back

61
Q

What is the accumulated earnings tax?

What is the tax rate

A

Imposed on regular C Corps whose accumulated earnings are in excess of $250,000 if improperly retained instead of being distributed
20%

62
Q

How do you calculate the accumulated earnings tax?

A
  1. Beginning E&P
    - Corp needs
    = Beginning excess
  2. 250,000 (regular corp) or 150,000 (service)
    - beginning excess
    = remaining credit
  3. Taxable income
    - all charity
    - all cap losses
    - taxes
    - div paid
    = accumulated taxable income
    - remaining credit (from 2)
    = Current accum. taxable income
    x 20%
    = accumulated earnings tax
63
Q

Define personal holding company.
What does its income consist of?

NIRD

A 
More than 50% owned by 5 or fewer individuals and having 60% of adjusted gross income consisting of
Net rent (if less than 50% of income),
Interest that is taxable,
Royalties, or
Dividends
64
Q

What happens if you are a personal holding company?

A

You have an additional 20% tax

65
Q

What is the formula for E and P carried forward to the tax year after the current year?

A

Beginning Accumulated E and P
+/- Current E and P less dist from current
- Distributions from accumulated
= Ending accumulated

66
Q

Are distributions applied to current or accumulated E and P?
What do you do with excess?

A

First current, then accumulated - DO NOT NET

Excess is called excess distributions, and is reported as capital gain distributions (taxable) by the shareholder

67
Q

How do you classify distributions in the following cases:
Has E and P
No E and P
No basis

A
  1. dividend income
  2. return of capital (not taxed)
  3. capital gain distribution
68
Q

How are current E and P applied to distributions?

Accumulated?

A

Current - pro rata

Accumulated - chronological order

69
Q

Are stock dividends taxable?

A

Usually no, unless the shareholder has a choice of getting cash or other property, in which case you do FMV and it is taxable

70
Q

What is taxable to an individual shareholder when they receive corporate dividends?

  • Cash
  • Property
A

Cash: amount received
Property: FMV

71
Q

What is taxable to a corporate shareholder when they receive corporate dividends?

  • Cash
  • Property
A

Cash: amount received
Property: FMV
** subject to DRD

72
Q

What is taxable to the corporation paying dividends?

A

Usually, nothing.
If they distribute appreciated property, recognize a gain as if the property had been sold. The gain increases E and P, and is taxed

73
Q

Define stock redemption.
Proportional
Disproportional

A

Buying back stock from stockholders
Proportional: taxable dividend income
Disproportional: subject to capital gain/loss to shareholder

74
Q

What are the two taxes when the corporation sells assets in liquidation?

A
  1. Corp: gain or loss on sale of assets

2. Shareholder: gain or loss to the extent that cash exceeds adjusted basis of stock

75
Q

What are the two taxes when the corporation gives away assets in liquidation?

A
  1. Corp: gain or loss as if they sold assets

2. Shareholder: gain or loss to the extent FMV of assets received exceeds adjusted basis of stock

76
Q

Are reorganizations taxed?

A

No

77
Q

Are parent/subsidiary liquidations taxed?

A

No

78
Q

What do you do with worthless stock for section 1244?

A

When the corp’s stock becomes worthless, an original stockholder can be treated as having an ordinary loss (fully deductible) instead of capital for up to $50,000. Any excess is a capital loss, which offsets capital gains. Then a max of $3,000 is deductible

79
Q

What do you do with small business stock?

A

A noncorporate shareholder who has small business stock for over 5 years can exclude 50% of the gain on sale of exchange of the stock.

CPA: REG (35 decks)

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