Corporate Tax-1 Flashcards
What types of tax years must the following companies adopt? 1. Corporations 2. S Corps 3. LLC 4. Trust
- Any tax year 2. Calendar 3. what more than 50% of owners adopt 4. Calendar
How do you treat the commissions paid on stock issuance? Is it deductible
No, not deductible. Treated as a reduction of paid-in-capital
What type company does the built-in gains tax apply to? What is the tax rate?
Corp changing to an S Corp. Tax rate-35%
What deductible limits are there with corporate charitable donations?
Limited to 10% of charitable income before charitable deduction, dividends received deduction, NOL carryback (but not carryover), and capital loss carryback (but after carryover).
What is the accumulated earnings tax?
Tax rendered when retained earnings exceeds reasonable business needs.
What can be used to reduce or eliminate the accumulated earnings tax?
Sufficient dividend distributions.
What is a personal holding company?
A C corp that gets at least 60% of its income from passive sources, and that at least 50% of its stock is owned by 5 or fewer people.
Personal holding tax:
What is it?
Amount?
Test to determine if you need to pay it?
The PHC tax is a tax leveid to personal holding companies that fail to distribute enough of its earnings through dividends.
20% is the tax rate.
Self-assessed through a stock ownership test on a separte schedule along with tax return
Can be avoided through payout of sufficent dividends.
What are the limits for the dividends received deduction?
< 20% - 70% Deduction unaffiliated
> 20%-80% - 80% deduction
> 80% - 100% CONTROL!!!!!!!
Define Section 1244 stock
- Stock purchased from startup that has failed
- Allows up to $50,000 per person ($100,000 MFJ) deduction of worthless tsock as ordinary loss
- Must be original purchaserl CORPS NOT ALLOWED
- Issued by domestic corp to individual or partnership NOT in exchange for services.
- 5 most recent tax years before loss entity earned less than 50% revenue fromroyalties, rents, dividends, interest, annuities and sales or exchag=nges of stock or securities.
- Aggregate capital of corporation must not exceed $1,000,000 dollars.
How capital losses utilized?What are their carryback and carry forward limits?
- Used to offset capital gains.
- Carryback and carry forward limits are 3 years and 5 years, respectively.
What is the ACE (Adjusted Current Earnings) adjustment limited to? And h ow is it determined?
Limited to 75% of the diffefrence between the Adjusted Current Earnings and the Pre-ACE AMTI.
Can accumulated earnings and profits be taken to a negative balance? If so, how?
Yes it can. If the ACE (as presented on exam) is smaller than Pre-ACE adjustment AMTI, then the ACE Adjustment will be a negative amount.
Negative amounts are only allowed to the extent that positive ACE existed in prior years.
What is a brother-sister controlled group?
Group of two or more corps with 5 or fewer owners have 50% or more ownership of each group
What is a parent-subsidiary ctrolled group?
Parent owns at least 80% of voting stock of subsidiary
What are the carryback and carryforward limits of net operating loss?
2 years back
20 years forward
What income limits will keep a corporation from paying AMT??
- First year in business, they are exempt
- 2nd year in business, 1st year gross receipts less than $5 million.
- 3rd year business, 1st and 2nd years average $7.5 million or less.
- All subsequent years, average of all prior years must be $7.5 million or less
Define Unappropriated Retained Earnings
The balance of retained earnings fromt he prior year/starting balance of present year.
Which side of the ledger is the normal side for retained earnings?
Same as any earnings - the credit side
How do you calculate the DRD deduction?
Gross Business income
+ Dividend Income
Total
- Business deductions
Taxable Income before DRD deduction
x applicable DRD % (70, 80 or 100%)
Taxable Income
List adjustments and preference for AMT computation
Mneumonic - A SLIM PILE
A SLIM is used in determining ACE, PILE used in arriving at pre-ACE adjustment AMTI
- Amortization of business expenses
- Seventy percent dividends received deduction
- Life Insurance proceeds
- Municipal Bond Interest
- Private activity bond interest
- Installment sales of inventory-difference between accrual and installment method when installment method used for tax purposes
- Long term construction contract method used must be %-of-completion
- Excess depreciation on personal property - when DDB (200%) was used, use 150% DB
How does one compute Corporate AMT?
Regular Taxable income
+/- adjustments and preferences
= AMTI before ACE adjustment
+/- Adjusted Current Earnings (ACE) adjustment( SLIM x 75%)
=AMTI before exemption
- AMT Exemption($40,000 - 25%(AMTI before exemption-$150,000))
AMTI
x Tax Rate (20%)
= Tentative Minimum tax
- Regular tax
AMT
What is the ACE adjustment actually comprised of?
ACE adjustent is comrsied of the following 4 items
Mneumonic - SLIM
- Seventy-five percent DRD deduction on dividends from unrelated companies(70% only)
- Life Insurance proceeds from death of key employee
- Municipal bond interest
75% of all these values comprise the ACE Adjustment. Or you can add all three values, then take 75% and that will be your ACE adjustment.
How does one compute corporate tax?
Show the procedure as outlined on the corporate return.
Corporate Income Tax Return 1120
Gross Income (worldwide)
(ordinary deductions)
Income before “special deductions
(Charitable Contribution)
(Div Received Deduction) (DRD)
Taxable Income
x Tax Rate
Gross tax liability
(Foreign tax credit)
Net regular tax liability
+ Personal Holding Company Tax (PHC)
+ Accumulated Earnings Tax (ACE)
+ Alternative Minimum Tax (AMT)
Total Tax Liability
