Class 1-4 Notes Flashcards
3 factors for income recognition
1 economic benefit
2 recognized
3 realized
Results of tax court cases provide…
Legal precedent
Realized: when cash is obtained…
Earnings process is complete
Circular 230
Code of conduct for corporations to submit taxes to IRS
Location of where businesses are incorporated, significance?
Must adhere to state statutes and taxes where incorporated
Partnership, what kind of entity is it? Where is its income recognized?
Flow through entity
Income recognized on individual return
Removal of an existing partner, how does this effect the partnership?
It dissolves the partnership
and a legal document is required to form a new partnership
How are capital assets used in an ordinary trade or business taxed?
What are examples of capital assets?
Taxed as ordinary income
Ex. Inventory, A/R, Property, Plant, Equipment
Capitalizing
Put money into a business
When you decrease all of a company’s retained earnings, what account can you take money out of?
Can take money from additional paid in capital
What 2 tax forms does an LLC have a choice of filing
Form 1040 Schedule C
Form 1120 (filed by corporations)
S-Corporation
Tax election to be a flow through corporation
What is the big advantage of an LLC filing as a corporation?
Shareholder employee can receive a paycheck
Can you get a paycheck as a sole proprietorship?
No
Form 11205, is for what kind of entities?
Flow throw entities
What is the business structure of most CPA firms?
Mostly LLPs
How does an S-Corporation file?
What does its business structure look like?
Files like a corporation
Looks like a partnership
Where do S-Corporations and partnerships file deductions
On individual returns
3 differences each between Book GAAP and Tax IRC
Book GAAP: 1 Accrual, 2 meals and entertainment = 100% expense,
3 straight line depreciation (depends on election)
Tax IRC: 1 Accrual or Cash with limitations, 2 meals and
Entertainment = 50% expense, MACRS depreciation
Accountants record events in terms of transactions with what goal?
Trying to deduct as much as possible while stating revenue
accurately
The purpose of dealing with reconciling records is to…
Minimize taxes
Closely held
Private company
Can be family owned business
Corporations: charitable contribution limit
What is the limit on a charitable carry forward
Corporations limited to 10% ATI
Charitable carry forward has a 5 year limit
Controlled groups
One or more subsidiaries under ownership
Brother sister
Common owners in controlled group
Shareholders of both companies
How are personal service corporations taxed?
Examples of personal service organizations?
Flat rate of 35% no matter the amount
Ex. Health, law, accounting, actuaries
How often must corporations make estimated payments?
Must make estimated quarterly payments
Nonliquidating distribution
Company still exists after distribution is paid
If 2 or more people are working together it is automatically characterized as…
A partnership
Section 351
Defers gain on noncash items in exchange for stock
If you avoid section 351
You can tax a capital loss
But you must pay higher taxes later because stock basis
Is 0
When can corporations use cash accounting instead of accrual when preparing taxes?
When they have under $5 million in income
Cash sales equation
Cash sales = accrual sales - current A/R + A/R from prior year
Cash Expenses equation
Cash expense = expenses - current A/P + A/P from prior year
How do corporations treat net capital gains?
Taxed at ordinary income rates
Corporations: Net capital losses, what can’t they be used for?
Can’t be used against ordinary income gains
Organization expenditures include 2 things?
What is their amortization period?
Legal fees, lisences
Amortized over 180 months
How long can a NOL go forward?
20 years
Sequencing
Order of calculation
In a closely held corporation, when a shareholder owns over 50%, what kind of tax treatment will they get?
They will never get capital gains treatment
Section 267
Losses of an over 50% shareholder are disallowed from sale
Between related parties
Accumulated
Retained earnings from prior years
What account is any dividend deducted from?
Retained earnings
Right of first refusal
Current investors of company see if they want more shares
Section 318
Attribution rules
Treatment of stock dividends 2 examples covered in class
1 if cash is an option in dividend it is taxable
2 if cash is not an option in the dividend, you must recalculate the
Stock’s basis
When is the best time to pay tax?
When there is the wherewithal to pay
How are capital gains and losses treated for corporations? 4
1 Capital gains are treated as ordinary income
2 don’t get $3,000 deduction on capital losses
3 can carry capital losses back 3 years (go back and amend past returns) and forward 20 years
4 can’t use capital losses to offset ordinary gains
Recapture depreciation
Potential to be treated as gain by corporation
How is the timeframe of an NOL carryover different from a capital loss?
NOL can be carried back 2 years and forward 20 years
Can skip going back
Organizational deduction examples?, what is madatory?
Legal and professional fees
Mandatory to capitalize and amortize over 180 months
How long is a startup deduction amortized over?
60 months
Corporations don’t use FMV on charitable contribution of…
Capital gains
How much of a dividends received deduction does an 80% owner of a company get?
100% dividends received deduction
Corporations don’t get a dividends received dedication if…
They hold the company for less than 45 days of when the dividend
Is received
Domicile
Cut out of paying US taxes
Production activities deduction, what are its limitations?2
Expenses related to US production activities (manufacturing)
Limited to 50% wages of production activity
Getting a distribution from the paid in capital account, how is the distribution treated?
No longer a dividend but a return of capital
Nonliquidating payout
Everything distributed but paid in capital and capital of common
Stock
Taxes are considered what kind of expense?
Operating expenses
When a transferor transfers both assets and services, how is the stock treated?
All stock counts towards ownership,
but portion allocated to services is considered income
Par value
Allocate value of stock between common stock and additional
Paid in capital
