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REG 1 - Tax > Corporate Taxation > Flashcards

Corporate Taxation Flashcards

1
Q

How is shareholder basis calculated for a new interest in a Corporation?

A

Adjusted basis of property transferred
+ Gain recognized (if less than 80% ownership)
- Boot received
= Shareholder basis.

If shareholders have 80% control after a property transfer, no taxable event occurs. If liabilities exceed basis on contributed property to a Corporation, a gain is recognized.

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2
Q

How is shareholder basis calculated for a TRANSFEROR of an interest in a Corporation?

A

Transferor’s basis
+ Gain recognized by shareholder
= Basis

OR

FMV of Corporate Interest
- Adjusted basis of property
= Gain

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3
Q

What basis do shareholders and Corporations use for property?

A

They both use ADJUSTED BASIS, NOT FMV of property.

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4
Q

Describe how loss is taken on Section 1244 small business Corporation stock?

A

A loss on worthless stock is an ordinary loss.

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5
Q

What are the requirements for taking an ordinary loss on Section 1244 small business Corporation stock?

A
  1. Taxpayer must be original stock owner, and either an individual or partnership
  2. $50k (single) or $100k (MFJ) limit - remainder is a capital loss
  3. Must have been issued in exchange for money or property (not exchanged for services)
  4. Shareholder equity must not be in excess of $1 million
  5. Both common and preferred stock is allowed
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6
Q

What are the basic rules for filing a form 1120?

A

Return is due regardless of income level

Return is due 3/15 if on a calendar year basis, or 2 1/2 months after end of fiscal year

An automatic six-month extension is available

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7
Q

When are Corporate federal tax estimated payments required, and how are they calculated?

A

Required if more than $500 in tax liability expected, or

100% current year liability

100% previous year liability

Note: If Corporation had more than $1 Million in revenue the previous year, the first estimated payment must be based on the previous year and the remainder based on the current year.

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8
Q

Describe the AMT calculation for C-Corporations

A

Taxable Income
+Tax Preference Items
+/- Adjustments
= Pre-ACE (Unadjusted AMTI)
+/- ACE Adjustments ((ACE - Pre-ACE) x 75%)
= AMTI
- (40,000 - (25% of AMTI over 150k)
= Alternative Minimum Tax Base
x 20%
= Gross Alternative Minimum Tax
- Foreign Tax Credit
= Tentative Minimum Tax
- Regular Tax Liability
= AMT

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9
Q

What are the pre-ACE adjustments for C-Corporation tax AMT calculations?

A

Long term contracts - Use percentage completion, add difference from completed contract method

Installment Sales dealer - Add difference from full accrual of revenue and installments.

Depreciation :

  1. Property put into service b/w 1986 - 1999 use difference from straight line 40 years.
  2. Personal property 1999 - beyond that used 200%, use MACRS 150 for difference.
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10
Q

What are the ACE adjustments in the C-Corporation AMT tax calculation?

A

Municipal Bond Interest

Organizational Expenditures must be capitalized, not amortized

Life Insurance Proceeds on key employee

Depreciation difference b/w AMT & ACE

70% Dividends Received Deduction

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11
Q

When are C-Corporations exempt from AMT?

A

In year one

In year two, if year one gross receipts were less than $5 Million

In year three, if the average gross receipts for years 1 and 2 were less than $7.5 Million

In year four and beyond, if the average from the previous 3 years is less than $7.5 Million

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12
Q

How are gains and losses handled with respect to a Corporation’s transactions involving its own stock?

A

Corporations have no gain/(loss) from transactions involving their own stock, including Treasury Stock.

If Corporation gets property in exchange for stock, there is no gain/(loss) on the transaction.

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13
Q

How are Corporate organization costs handled?

A

Amortization of costs begin the month the Corporation commences business activity

$5000 max deduction each for Organization and Startup Costs, amortize the rest 180 months. For tax year, deduction is 5000 + amortized

If the Corporation doesn’t amortize organization costs in year one, they can never be amortized

Costs associated with offerings are neither deductible nor amortized

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14
Q

How are a C-Corporation’s deductible charitable contributions calculated?

A

Sales -COGS= Gross Profit
Gross Profit + Rent, Royalties, Gross Dividends, Capital Gains
=Total Income
Total Income - Deductions (No charitable contributions, Dividends
Received Deductions (DRD), or NOL Carrybacks allowed)
- NOL Carryforwards
=Taxable Income before charitable contributions, DRD, NOL Carrybacks
x 10%
=Deductible Charitable Contributions

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15
Q

How are excess charitable contributions treated in a C-Corporations?

A

Excess charitable contributions get carried forward 5 consecutive years (No Carryback)

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16
Q

When can a board of directors authorize charitable contributions for a tax year?

A

The Board of Directors can authorized charitable contributions up to 3/15 and have them count in the previous tax year

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17
Q

How is the dividends received deduction (DRD) calculated, and what are the limitations?

A

80% Interest = 100% DRD

20-79% = 80% DRD

less than 20% = 70% DRD

  1. Only allowed if no consolidated return is filed (1st corp is taxed).
  2. Qualified dividends from domestic Corporations only.
  3. Owned 45 days before or after
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18
Q

What is the Dividends Received Deduction (DRD) calculation when there is a loss from operations?

A

Only take DRD % x Taxable Income

Note: If DRD brings a loss situation, then you can take the full DRD

If Taxable Income remains after DRD, only a partial DRD (T.I.. x DRD %) is allowed

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19
Q

How are Corporate losses on a sale to a Corporation where a taxpayer owns a 50% or more interest handled in a C-Corporation?

A

A loss on a sale to a Corporation where taxpayer owns a 50% or more interest is disallowed

20
Q

How are capital losses handled in a C-Corporation?

A

Capital Losses are deductible only to the extent of Capital Gains

21
Q

How are net short term capital gains taxed in a C-Corporation?

A

Net Short Term Capital Gains are taxed at ordinary income rates

22
Q

How are Corporate losses carried back/forward?

A

Corporations can carry back losses 3 years and carry forward losses 5 years as a Short Term Capital Loss

23
Q

How are bad debt losses handled in a Corporation?

A

Bad debt losses are classified as ordinary

24
Q

What is the casualty loss floor for a C-Corporation and how is it calculated?

A

No floor on Corporate casualty loss like there is with an individual taxpayer

If destroyed, the loss is the property’s basis (minus proceeds)

Calculation: Adjusted basis - Proceeds from Insurance = Loss

If partially destroyed, take the lesser of FMV or adjusted basis reduction (minus proceeds)

25
Q

How are net operating losses handled in a C-Corporation?

A

If loss includes NOL Carryforward, reduce the loss (add back the amount) to get the loss without the Carryforward

Then, carry back the NOL 2 years starting with the earliest year and reduce the taxable income there and then move to the most recent year

Any leftover NOL = This year’s NOL

26
Q

How is investment interest expense handled in a C-Corporation?

A

Unlike individual taxation, investment interest expense is not limited to investment income.

Investment interest on tax-free investments are NOT deductible.

27
Q

What is the purpose of Schedule M-1 on a Corporate tax return? Which items are included?

A

Schedule M-1 reconciles book to tax income before Net Operating Loss/Dividend Received Deduction

Includes permanent differences (such as tax-exempt interest and non-deductible expenses) and temporary differences (accelerated depreciated tax depreciation, straight-line, etc.)

28
Q

What is the purpose of Schedule M-2 on a Corporate tax return? How is it calculated?

A

Reconciles beginning to ending retained earnings

Beginning Unappropriated Retained Earnings
+ Net Income
+ Other Increases
- Dividends paid
- Other decreases
= Ending Unappropriated Retained Earnings

29
Q

What is the purpose of Schedule M-3 on a Corporate tax return?

A

Like M1, but for Corporations with $10M+ in assets

30
Q

How are affiliated (80%) Corporation tax returns handled?

A

Consolidation election is binding going forward

Dividends between them are eliminated, Advantage- Gains are deferred, Disadvantage- losses are deferred.

One AMT exemption

One accumulated earnings tax allowed

Note: In order to consolidate, the parent must have 80% voting power and own 80% of the stock value

31
Q

How are Corporate distributions to shareholders handled and what are the calculations for distribution amount and basis?

A

Distribution is a dividend to the extent of current accumulated earnings and profits (ordinary income)

Then, remainder (if any) is a return of basis. Then, add’l remainder (if any) is a Capital Gain

Distribution amount = FMV of Property + Cash - Liability Assumed

Shareholder basis = FMV of Property + Cash received (basis not reduced by the attached liability)

32
Q

What is the order of treatment in a Corporation’s distribution to a shareholder?

A
  1. Distribution is a dividend to the extent of current and accumulated earnings and profits
  2. Shareholder basis is then exhausted
  3. Remainder, if any, is a Capital Gain
33
Q

What is the basic calculation for accumulated earnings and profits in a Corporation?

A

Beginning Accumulated Earnings and Profits
+ Net Income
+ Gain on Distribution (if not already in book income)
- Distribution (but cannot create a deficit)
- NOL of prior years
= Ending Accumulated Earnings and Profits

34
Q

What is the treatment of a gain in a complete Corporate liquidation?

A

If Capital Property, then Capital Gain

If Non-Capital Property, then Ordinary Income

Gain characterization is the same for both the Corporation and the shareholder

35
Q

What is the treatment of a loss in a complete Corporate liquidation?

A

Corporation: Depends on if property is capital in nature, otherwise ordinary loss

Individual: capital loss only

36
Q

What is the treatment of the liquidation of a subsidiary?

A

No G/L to parent company

37
Q

What is a consent dividend? How is it treated?

A

Consented by the Board of Directors but not yet paid

Treat as if distributed by the end of the year

38
Q

Describe the requirements for a personal holding company.

A

No banks or financial institutions can be PHCs

5 or fewer individuals own more than 50% of the stock

60% of the PHC’s income must be from passive means

PHC tax is self-assessing - 20% tax rate on undistributed PHC Income

39
Q

How is Corporate accumulated earnings tax (AET) different from PHC taxation?

A

Not Self-Assessing like a PHC

40
Q

How is the accumulated earnings credit calculated for a Corporation?

A

Take greater of

$250,000 ($150,000 for Service Corps) - Unneeded E&P

or the legitimate balance based on future needs (i.e. purchasing a building)

41
Q

What are the requirements for holding S-Corporation status?

A
  1. Only individuals, estates and trusts can be shareholders
  2. Domestic only, no international S-corps or foreign shareholders
  3. Up to 100 shareholders allowed, and
  4. only one class of stock allowed
  5. Calendar tax year only
42
Q

How is an S-Corporation election made?

A

Election for S Corp status must be made by 3/15 and counts as being an S Corp since the beginning of the year

To make election, 100% of the shareholders must consent

43
Q

How is an S-Corporation terminated?

A

To terminate election, 50% of the shareholders must consent

No S Corp election allowed for 5 years after termination

S Corp termination effective immediately following an act that terminates status

44
Q

What items are not included in calculating an S-Corporation’s ordinary income?

A

These items are included on Schedule K, not in ordinary income:

  1. Foreign Taxes paid deduction
  2. No Investment Interest expense
  3. Section 179 Deduction
  4. 1231 Gain or Loss
  5. Charitable Contributions
  6. Portfolio Income (dividends or interest)
45
Q

How is S-Corporation shareholder basis calculated?

A

Beginning Basis
+Share of Income Items (including non-taxable income!)
-Non-deductible expenses
-Ordinary Losses (but don’t take income below zero)
-Distributions (cash or property)
= Ending basis

46
Q

What is the formula for an S-Corp Built-in Gains Tax?

A

FMV of Assets @ S-Corp Election Date - Adjust. Basis of Assets = Built-in Gain x 35% Corporate Rate

47
Q

How is AMT paid carried foward/backward?

A

AMT paid gets carried forward indefinitely, but never carried back

REG 1 - Tax (9 decks)

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