Corp. Income Taxes: Expenses and Deductions Flashcards
How long is the amortization period for Section 197 Property?
15 years.
How are Section 197 property transactions handled?
- Take regular amortization (240/40 = 6) and compare it to Section 197 amortization (240/15 = 16).
- 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).
For bad debt transactions, what amount is deducted?
The accounts judged as worthless throughout the year.
For warranty transactions, what amount is deducted?
Amount spent on warranty repairs.
How are estimated expenses handled for tax purposes?
Est. expenses must be incurred before deduction is allowed.
For charitable transactions, what amount is deducted?
Up to 10% of income before DRD.
How are pledges for charitable transactions handled for tax purposes?
- 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.
- Any amount pledged over the 10% of NI figure can be carried forward for up to 5 yrs.
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?
Nothing. A cash basis taxpayer recognizes no income or expenses unless they are paid or received.
What is the amount of bad debt expense an accrual basis taxpayer can deduct when a company goes bankrupt?
Amount actually written off, not including interest,
How is residual value handled under MACRS?
Residual value is ignored.
How is equipment classified as having a life of 10 yrs. or less depreciated under MACRS?
Double-declining (200%) balance.
How is residential rental property depreciated under MACRS?
Over a life of 27 1/2 yrs.
Under MACRS, does used equipment follow the same rules as new equipment?
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.
Section 179 Expense
cost expensed immediately rather than capitalized
What type of property qualifies for the Section 179 expense? What property type does not qualify?
Tangible personal property qualifies. Real property does not.
Can off-the-shelf computer software qualify as a Section 179 expense?
Yes, as long as it has a useful life of > 1 yr.
Is there a maximum amount of expense that can be taken as a Section 179 expense?
Yes.
If a company buys a large quantity of property qualifying as a Section 179 expense, what happens to the immediate expense?
It begins to be lost dollar-for-dollar after a limit is reached.
For an expense to be deductible, it must be…
ordinary, necessary, and reasonable in amount.
How are organizational costs handled for tax purposes?
- Org. costs up to $5,000 can be expensed immediately.
2. Remaining org. costs are amortized over subsequent 180 months (15 yrs.).
How is a portion of a person’s salary considered to be unreasonable by the IRS classified?
The unreasonable salary portion is reclassified as dividend income. If this portion is $50,000, then…
- $50,000 less is taxed at income tax rate.
- $50,000 more is taxed at qualified dividend rate.
- Tax saved is difference between original tax and new tax.
How is a portion of a person’s salary considered to be unreasonable by the IRS deducted by the corporation?
It isn’t deducted. This change raises TI and, therefore, IT exp., for the corp.
What value for stock can be deducted by someone who donates it?
FV.
What value for inventory can be deducted by someone who donates it?
LCM.
DRD for company that owns 80+% of another company?
100% of dividends received.
DRD for company that owns 20+% of another company?
80% of dividends received.
DRD for company that owns less than 20% of a company?
70% of dividends received.
Business gifts of up to what amount per person per year can be deducted?
$25 per person per year.
Can penalties be deducted?
No.
Can political contributions be deducted?
No.
Can meals and entertainment be deducted?
Half of it can.
half-year convention
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.
How are G/L on treasury stock handled for tax purposes?
Ignored.
