Corporate Taxation

Question 1

accumulated adjustments account

Answer 1

S-corp account that reflects the cumulative total of undistributed net income previously taxed to shareholders. Distributions are generally treated as nontaxable and are a return of a shareholder’s stock basis

Question 2

Accumulated earnings tax

Answer 2

penalty tax imposed on a corporation (in addition to regular income tax) if it accumulates earnings in excess of reasonable business needs in order to avoid a shareholder tax on dividend distributions. Does not apply to personal holding companies

Question 3

Affiliated corporations

Answer 3

parent-subsidiary chain of corporations in which at least 80% of the voting power (and total value) of stock is owned by includable corporations. Affiliated group may elect to file a consolidated tax return.

Question 4

Controlled group

Answer 4

two or more corporations owned by the same individuals or entities. (parent-subsidiary corporations, brother-sister corporations, and combined groups) corporations in a control group are in the aggregate limited to the tax benefits available to a single corporation.

Question 5

Dividend

Answer 5

corporate distribution of property to shareholders on their stock that is made from the corporation’s current or accumulated earnings and profits.

Question 6

Dividends received deduction

Answer 6

deduction allowed to a corporation for dividends received from other taxable domestic corporations (if held for more than 45 days). If ownership is less than 20%, DRD = 70% ownership 20 - 80%, DRD = 80% over 80%, DRD = 100%

Question 7

Organizational expenditures

Answer 7

expenses of temporary directors and organizational meetings, state fees for incorporation, and accounting and legal service costs incident to incorporation. $5,000 may be immediately expensed, remaining is amortized over 180 months

$5,000 is reduced by any amount which organizational expenditures exceeded $50,000

Question 8

Personal holding company tax

Answer 8

penalty tax imposed on personal holding company (in addition to regular income tax) to discourage individuals from placing investment property in a corporation in order to have investment income taxed at lower corporate rates. (self-assessing)

Question 9

S corporation

Answer 9

qualifying small business corporation, generally pays no corporate income tax and is treated as a passthrough entity.

Eligibility: 100 shareholders, domestic corporation, one class of stock, shareholders are restricted to individuals, estates and certain trusts

Question 10

Sec 1244 stock

Answer 10

stock issued by a qualifying small business corporation that entitles original holder to deduct an ordinary loss (rather than capital) if the stock is disposed of at a loss or becomes worthless. (annual ceiling on ordinary loss is $50,000 or $100,00 for MFJ) -stock cannot have been issued in exchange for other stock or services

Question 11

Transfers to controlled corporation

Answer 11

no gain or loss recognized for exchange for stock if immediately following transaction, transferors own in aggregate 80% or more Boot will cause a gain but not a loss -corporation’s assumption of liabilities will create a gain if the liabilities exceed the basis of the property

Question 12

Corporate tax rates

Answer 12

Income $0-$50,000, 15% Income $50,001 - 75,000, 25% Income $75,001 - $10 mill, 34% Income over $10 mill, 35%

Question 13

Adjusted Current Earnings (ACE) Adjustment

Answer 13

75% of ACE - PreACE AMTI

Question 14

AMT Calc

Answer 14

Regular income

+tax preferences (tax-exempt interest on private activity bonds, Pre 1987 accelerated depreciation)

+- adjustments (1996 - 1999 accelerated depreciation on 40 year real property, post 1986 accelerated dep)

Pre-ACE AMTI

+- ACE Adjustment (75% ACE - Pre-ACE AMTI)

- AMT NOL (limited to 90% of pre-NOL AMTI)

AMTI

- Exemption ($40,000 less 25% of AMTI over $150,000

Alternative miminum tax base

x 20% rate

Tentative AMT before foregin tax credit

- AMT foreign tax credit

Tentative minimum tax (TMT)

- Regular income tax (less regular tax foreign tax credit)

Alternative minimum tax (if positive)

Question 15

Book to Tax Income

Answer 15

Book Income

+ Federal income tax

+ Excess capital loss over capital gains

+ Income items on tax return not on book (prepaid rents, etc)

+ Charitable contributions in excess of the 10% limitation

+ Expenses deductived on books not on the teax return (business gifts in excess of $25, nondeductible life insurance premiums, 50% of business meals)

• Income reported on books but not on tax return (tax-exempt income, life insurance proceeds)
• Expenses deductied on tax return not on the books (MACRS depreciation over straight line, charitiable contribution carryforward, etc)
• Dividends received deduction
• Domestic production activities deduction

Question 16

Termination of an S-corp

Answer 16

through revocation: requires approval from 50% of shareholders

failing eligibility requirements: domestic, one class of stock, shareholders must be individuals, estates or trusts, no resident alien shareholders, shareholders cannot exceed 100

has passive investment income exceeding 25% of gross receipts for three consecutive taxable years, if it also has subchapter C earnings and profits at the end of those years.