Corp. Income Taxes: Expenses and Deductions

Question 1

How long is the amortization period for Section 197 Property?

Answer 1

15 years.

Question 2

How are Section 197 property transactions handled?

Answer 2

1. Take regular amortization (240/40 = 6) and compare it to Section 197 amortization (240/15 = 16).
2. The difference btwn. the two (16 - 6 = 10) is subtracted from NI for F/R purposes to arrive at book tax income (600 - 10 = 590).

Question 3

For bad debt transactions, what amount is deducted?

Answer 3

The accounts judged as worthless throughout the year.

Question 4

For warranty transactions, what amount is deducted?

Answer 4

Amount spent on warranty repairs.

Question 5

How are estimated expenses handled for tax purposes?

Answer 5

Est. expenses must be incurred before deduction is allowed.

Question 6

For charitable transactions, what amount is deducted?

Answer 6

Up to 10% of income before DRD.

Question 7

How are pledges for charitable transactions handled for tax purposes?

Answer 7

1. As long as a formal pledge is made during the tax yr., the deduction can be taken if payment was made in the first 2 1/2 mos. of subsequent yr.
2. Any amount pledged over the 10% of NI figure can be carried forward for up to 5 yrs.

Question 8

What is the amount of bad debt expense a cash basis taxpayer can deduct when a company goes bankrupt? Nothing? The amount of the note? The amount of interest as of the date the company went bankrupt? Or the amount of the note plus full interest?

Answer 8

Nothing. A cash basis taxpayer recognizes no income or expenses unless they are paid or received.

Question 9

What is the amount of bad debt expense an accrual basis taxpayer can deduct when a company goes bankrupt?

Answer 9

Amount actually written off, not including interest,

Question 10

How is residual value handled under MACRS?

Answer 10

Residual value is ignored.

Question 11

How is equipment classified as having a life of 10 yrs. or less depreciated under MACRS?

Answer 11

Double-declining (200%) balance.

Question 12

How is residential rental property depreciated under MACRS?

Answer 12

Over a life of 27 1/2 yrs.

Question 13

Under MACRS, does used equipment follow the same rules as new equipment?

Answer 13

Yes. MACRS wants all businesses to follow the same depr. classifications for tax purposes.
Each classification has a specified life and specified depr. method to maximize the deduction.

Question 14

Section 179 Expense

Answer 14

cost expensed immediately rather than capitalized

Question 15

What type of property qualifies for the Section 179 expense? What property type does not qualify?

Answer 15

Tangible personal property qualifies. Real property does not.

Question 16

Can off-the-shelf computer software qualify as a Section 179 expense?

Answer 16

Yes, as long as it has a useful life of > 1 yr.

Question 17

Is there a maximum amount of expense that can be taken as a Section 179 expense?

Answer 17

Yes.

Question 18

If a company buys a large quantity of property qualifying as a Section 179 expense, what happens to the immediate expense?

Answer 18

It begins to be lost dollar-for-dollar after a limit is reached.

Question 19

For an expense to be deductible, it must be…

Answer 19

ordinary, necessary, and reasonable in amount.

Question 20

How are organizational costs handled for tax purposes?

Answer 20

1. Org. costs up to $5,000 can be expensed immediately.

2. Remaining org. costs are amortized over subsequent 180 months (15 yrs.).

Question 21

How is a portion of a person’s salary considered to be unreasonable by the IRS classified?

Answer 21

The unreasonable salary portion is reclassified as dividend income. If this portion is $50,000, then…

1. $50,000 less is taxed at income tax rate.
2. $50,000 more is taxed at qualified dividend rate.
3. Tax saved is difference between original tax and new tax.

Question 22

How is a portion of a person’s salary considered to be unreasonable by the IRS deducted by the corporation?

Answer 22

It isn’t deducted. This change raises TI and, therefore, IT exp., for the corp.

Question 23

What value for stock can be deducted by someone who donates it?

Answer 23

FV.

Question 24

What value for inventory can be deducted by someone who donates it?

Answer 24

LCM.

Question 25

DRD for company that owns 80+% of another company?

Answer 25

100% of dividends received.

Question 26

DRD for company that owns 20+% of another company?

Answer 26

80% of dividends received.

Question 27

DRD for company that owns less than 20% of a company?

Answer 27

70% of dividends received.

Question 28

Business gifts of up to what amount per person per year can be deducted?

Answer 28

$25 per person per year.

Question 29

Can penalties be deducted?

Answer 29

No.

Question 30

Can political contributions be deducted?

Answer 30

No.

Question 31

Can meals and entertainment be deducted?

Answer 31

Half of it can.

Question 32

half-year convention

Answer 32

According to MACRS rules, personal property is treated as placed in service or disposed of at the midpoint of the year, resulting in 1/2 yr. depreciation w/in yr. bought, regardless of # of months owned.

Question 33

How are G/L on treasury stock handled for tax purposes?

Answer 33

Ignored.