Corporate Tax-1

Question 1

What types of tax years must the following companies adopt? 1. Corporations 2. S Corps 3. LLC 4. Trust

Answer 1

1. Any tax year 2. Calendar 3. what more than 50% of owners adopt 4. Calendar

Question 2

How do you treat the commissions paid on stock issuance? Is it deductible

Answer 2

No, not deductible. Treated as a reduction of paid-in-capital

Question 3

What type company does the built-in gains tax apply to? What is the tax rate?

Answer 3

Corp changing to an S Corp. Tax rate-35%

Question 4

What deductible limits are there with corporate charitable donations?

Answer 4

Limited to 10% of charitable income before charitable deduction, dividends received deduction, NOL carryback (but not carryover), and capital loss carryback (but after carryover).

Question 5

What is the accumulated earnings tax?

Answer 5

Tax rendered when retained earnings exceeds reasonable business needs.

Question 6

What can be used to reduce or eliminate the accumulated earnings tax?

Answer 6

Sufficient dividend distributions.

Question 7

What is a personal holding company?

Answer 7

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.

Question 8

Personal holding tax:

What is it?

Amount?

Test to determine if you need to pay it?

Answer 8

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.

Question 9

What are the limits for the dividends received deduction?

Answer 9

< 20% - 70% Deduction unaffiliated

> 20%-80% - 80% deduction

> 80% - 100% CONTROL!!!!!!!

Question 10

Define Section 1244 stock

Answer 10

1. Stock purchased from startup that has failed
2. Allows up to $50,000 per person ($100,000 MFJ) deduction of worthless tsock as ordinary loss
3. Must be original purchaserl CORPS NOT ALLOWED
4. Issued by domestic corp to individual or partnership NOT in exchange for services.
5. 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.
6. Aggregate capital of corporation must not exceed $1,000,000 dollars.

Question 11

How capital losses utilized?What are their carryback and carry forward limits?

Answer 11

1. Used to offset capital gains.
2. Carryback and carry forward limits are 3 years and 5 years, respectively.

Question 12

What is the ACE (Adjusted Current Earnings) adjustment limited to? And h ow is it determined?

Answer 12

Limited to 75% of the diffefrence between the Adjusted Current Earnings and the Pre-ACE AMTI.

Question 13

Can accumulated earnings and profits be taken to a negative balance? If so, how?

Answer 13

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.

Question 14

What is a brother-sister controlled group?

Answer 14

Group of two or more corps with 5 or fewer owners have 50% or more ownership of each group

Question 15

What is a parent-subsidiary ctrolled group?

Answer 15

Parent owns at least 80% of voting stock of subsidiary

Question 16

What are the carryback and carryforward limits of net operating loss?

Answer 16

2 years back

20 years forward

Question 17

What income limits will keep a corporation from paying AMT??

Answer 17

• 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

Question 18

Define Unappropriated Retained Earnings

Answer 18

The balance of retained earnings fromt he prior year/starting balance of present year.

Question 19

Which side of the ledger is the normal side for retained earnings?

Answer 19

Same as any earnings - the credit side

Question 20

How do you calculate the DRD deduction?

Answer 20

Gross Business income

+ Dividend Income

Total

- Business deductions

Taxable Income before DRD deduction

x applicable DRD % (70, 80 or 100%)

Taxable Income

Question 21

List adjustments and preference for AMT computation

Answer 21

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

Question 22

How does one compute Corporate AMT?

Answer 22

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

Question 23

What is the ACE adjustment actually comprised of?

Answer 23

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.

Question 24

How does one compute corporate tax?

Show the procedure as outlined on the corporate return.

Answer 24

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

Question 25

What is the Adjusted Current Earnings (ACE) comprised of?

Answer 25

The total of AMTI before the ACE adjustment, and the items that comprise the adjustment itself (SLIM)

Question 26

Conditions required to avoid gain or loss when property is transferred to a C Corp

Answer 26

• Property transferred solely in exchange for stock
• Persons transferring property immediately take control (80%) of corp
• Property means anything except service

Question 27

Under which circumstances can gain be recognized during a proerty transfer to a C corp?

Answer 27

• Receipt of boot (cash, notes securities) causes gain for C corp
• Gain reconized by shareholder if liabilites attached to transferred property exceed total basis of property

Question 28

If a $30,000 distributions to stockholders was greater than earnings and profits of $24,000 what amount would the dividends be?

Answer 28

Dividends are never more than E & P, so the amount of dividends would be $24,000