Corporate Income

Question 1

What can deductible capital loss offset?

Answer 1

Only capital gain. No deduction.

Question 2

What happens to net capital loss in excess of capital gain?

Answer 2

Carry back 3 years and carry forward 5 yrs to offset against capital gains in other years.

Question 3

What is a personal service corporation? Example?

Answer 3

A corporation whose principal activity is the performance of personal services performed by employees who own substantially all stock.
Engineering firm, accounting, law firm etc.

Question 4

What is a closely held corporation?

Answer 4

At any time during the last half of the taxable year, more than 50% in value of its outstanding stock is owned, directly or indirectly, by or for not more than 5 individuals.

Question 5

Can corporations use passive losses to offset active or portfolio income?

Answer 5

Yes.
But a closely held corporation can offset against active income, but NOT portfolio income.
Personal service corporations cannot offset either active or portfolio income.

Question 6

What does Schedule M-1 do? What does it show?

Answer 6

Reconcile book income to taxable income.

Question 7

Book/Tax income reconciliation: What is the treatment of non-deductible expenses? Examples?

Answer 7

Add back to the book income.

Federal tax expense, net capital loss, expenses in excess of limits, key man life insurance premiums etc.

Question 8

Book/Tax income reconciliation: What is the treatment of income that is taxable but not included in book income? Examples?

Answer 8

Added to book income.

Prepaid income.

Question 9

Book/Tax income reconciliation: What is the treatment of nontaxable income that is included in book income? Examples?

Answer 9

Subtracted from book income.

Municipal interest, life insurance proceeds etc.

Question 10

Book/Tax income reconciliation: What is the treatment of deductions not expensed from book income? Examples?

Answer 10

Subtracted from tax income.
Dividends received deduction (federal tax deduction applicable to certain corporations that receive dividends from related entities), Sec.179 election to expense, etc.

Question 11

Which corporations must complete Schedule M-3 instead of M-1?

Answer 11

Corporations that report total assets of $10 million or more. M-3 provides much more details.

Question 12

What happens to unused net operating losses?

Answer 12

Carry back 2 yrs, carry forward 20 yrs.

Can elect to waive carry back.

Question 13

What are only 2 items that create NOL?

Answer 13

Casualty losses and business losses.

Question 14

Which form can be used to report NOL carrybacks? Due date for filing?

Answer 14

Amended return (Form 1120X) or Form 1139 (Corporation Application for Tentative Refund). 
By the end of the tax year following the year of loss.

Question 15

What is the dividend received deductible?

Answer 15

• the DRD is equal to 70% of the dividend received.
• If the company receiving the dividend owns more than 20% but less than 80% of the company paying the dividend, the DRD is 80% of the dividend received.
• if the company receiving the dividend owns more than 80% of the company paying the dividend, the DRD is 100% of the dividend.

Question 16

When does the liability to pay the deferred compensation becomes fixed (included in current year)?

Answer 16

1) all events have occurred to establish the liability to pay the compensation
2) economic performance has occurred with respect to the liability; and
3) the amount can be determined with reasonable accuracy.
In addition, accrual−basis taxpayers must pay the deferred compensation within the first 2 1/2 months of a tax year to deduct the compensation in the preceding year.

Question 17

What is the amortization period of goodwill for tax purpose?

Answer 17

15 yrs.