Corp Tax SIM 2 Flashcards
Effect?
Reliant used the 70% dividends received deduction for regular tax purposes.
No effect on Reliant’s 20X2 AMTI AMTI before the ACE adjustment is equal to regular taxable income plus adjustments and preferences, which include interest on private activity bonds, deferred profit on current period installment sales, income on long-term construction contracts in excess of amounts recognized, and depreciation on personal property in excess of 150% DB. The dividends received deduction affects the ACE adjustment.
Effect?
Reliant received interest from a state’s general obligation bonds.
No effect on Reliant’s 20X2 AMTI AMTI before the ACE adjustment is equal to regular taxable income plus adjustments and preferences, which include interest on private activity bonds, deferred profit on current period installment sales, income on long-term construction contracts in excess of amounts recognized, and depreciation on personal property in excess of 150% DB. Nontaxable interest received on state bonds affects the ACE adjustment.
Effect? Reliant used MACRS depreciation on seven-year personal property placed into service January 3, 20x2, for regular tax purposes. No expense election was made, and Reliant elected not to use bonus depreciation.
Increases Reliant’s 20X2 AMTI AMTI before the ACE adjustment is equal to regular taxable income plus adjustments and preferences, which include interest on private activity bonds, deferred profit on current period installment sales, income on long-term construction contracts in excess of amounts recognized, and depreciation on personal property in excess of 150% DB. MACRS applies the DDB (Double declining balance) approach and the difference between that and the amount that would have been charged using 150% DB is a preference item added to taxable income in calculating AMTI.
Effect?
Depreciation on nonresidential real property placed into service on January 3, 20X2, was under the general MACRS depreciation system for regular tax purposes
No effect on Reliant’s 20X2 AMTI AMTI before the ACE adjustment is equal to regular taxable income plus adjustments and preferences, which include interest on private activity bonds, deferred profit on current period installment sales, income on long-term construction contracts in excess of amounts recognized, and depreciation on personal property in excess of 150% DB. Depreciation on real property is not an adjustment item for calculating AMTI.
Effect? Reliant had only cash charitable contributions for 20X2.
No effect on Reliant’s 20X2 AMTI AMTI before the ACE adjustment is equal to regular taxable income plus adjustments and preferences, which include interest on private activity bonds, deferred profit on current period installment sales, income on long-term construction contracts in excess of amounts recognized, and depreciation on personal property in excess of 150% DB. Cash charitable contributions do not affect the calculation of AMTI.
For regular tax purposes, Gelco deducted the maximum MACRS depreciation on seven-year personal property placed in service on January 1, Year 6. Gelco made no Internal Revenue Code Section 179 election to expense the property in Year 6.
The excess of accelerated depreciation on personal property for regular tax purposes (MACRS) over the amount determined using the 150% declining balance method for AMTI will be an addition to regular taxable income in arriving at AMTI (before the ACE adjustment).
For regular income tax purposes, Gelco depreciated nonresidential real property placed in service on January 1, Year 6, under the general MACRS depreciation system for a 39-year depreciable life.
There is generally no AMT depreciation adjustment for real property placed into service after 1998, since the straight-line method is used for both regular and alternative minimum tax purposes.
Gelco excluded state highway construction general obligation bond interest income earned in Year 6 for regular income tax and alternative minimum tax (AMT) purposes.
Correctly stating Gelco’s Year 6 AMTI prior to the ACE.
While certain private activity bond interest must be added to regular taxable income in arriving at AMTI, municipal bond interest from bonds used strictly for government/public purposes is deductible for both regular and alternative minimum tax purposes.
In 20X6, Sunco received dividend income from a 35%-owned domestic corporation. The dividends were not from debt-financed portfolio stock, and the taxable income limitation did not apply.
Partially taxable for regular income tax purposes on Sunco’s 20X6 federal income tax return.
Partially taxable for regular income tax purposes on Sunco’s 20X6 federal income tax return. An 80% Dividend Received Deduction (DRD) is allowed for qualified dividends from a taxable domestic unaffiliated corporation where the ownership percentage is at least 20% and less than 80%. Here, because the exceptions related to debt-financed portfolio stock and the taxable income limitations do not apply, the 80% DRD would apply and only 20% of the dividend received would be taxable. Therefore, the dividend would only be partially taxable for tax purposes.
In 20X6, Sunco received a $2,800 lease cancellation payment from a three-year lease tenant.
Fully taxable for regular income tax purposes on Sunco’s 20X6 federal income tax return. An amount received by a lessor for cancellation of a lease is treated as received in exchange for the lease. The entire amount will be included in income and will be fully taxable for tax purposes.
Quest’s 20X6 taxable income before charitable contributions and dividends-received deduction was $200,000. Quest’s Board of Directors authorized a $38,000 contribution to a qualified charity on December 1, 20X6. The payment was made on February 1, 20X7. All charitable contributions were properly substantiated.
Partially deductible for regular income tax purposes on Quest’s 20X6 federal income tax return. The deduction for charitable contributions is limited to 10% of taxable income before the charitable contribution deduction, the dividend received deduction, and any net operating loss carryback or capital loss carryback. 10% of $200,000 is $20,000 in charitable contributions that can be deducted in the current year, while the remaining amount must be carried forward for a maximum of 5 years.
During 20X6 Quest was assessed and paid a $300 uncontested penalty for failure to pay its 20X5 federal income taxes on time.
Nondeductible for regular income tax purposes on Quest’s 20X6 federal income tax return. Fines and penalties are not deductible for tax purposes.
$20,000 in cash; property worth $60,000 ($40,000 basis)
Clay – No gain or loss is generally recognized when property is transferred to a corporation solely in exchange for stock, provided the transferors are in control of the corporation (i.e., they have an 80% or greater interest) after the transfer. Since Clay is transferring appreciated property (worth $60,000) with a basis of $40,000 and cash of $20,000, Clay’s basis in the stock will be the total of $60,000 ($40,000 basis + $20,000 cash) and Clay will recognize no gain or loss (even though he has realized a gain of $20,000 ($60,000 FMV - $40,000 basis in the property).
$10,000 in cash; property worth $50,000 ($30,000 basis), with related assumed recourse liability of $20,000
Since Finch is transferring appreciated property with a basis of $30,000 and cash of $10,000, Finch’s basis in the stock will be $40,000 reduced by the $20,000 liability assumed by the corporation, resulting in a net amount of $20,000. The corporation’s basis in the property will be the same as Finch’s, $30,000.
$10,000 in cash; property worth $50,000 ($30,000 basis), with related assumed recourse liability of $20,000
Since Lark is transferring appreciated property with a basis of $50,000 for stock worth $50,000 and cash of $10,000, there is a gain realized of $10,000, which is taxable to the extent of the cash received (i.e., $10,000 boot). Therefore, Lark’s basis in the stock would be $50,000 (i.e., $50,000 basis in property contributed – $10,000 cash received + $10,000 gain recognized. The corporation’s basis in the property will be the same as Lark’s basis prior to the transfer plus the $10,000 cash paid, for a total of $60,000.
