Corporate Taxation Flashcards
The sole shareholder of an S corporation contributed equipment with a fair market value of $20,000 and a basis of $6,000 subject to $12,000 liability. What amount is the gain, if any, that the shareholder must recognize? A. $0 B. $6,000 C. $8,000 D. $12,000
B - On a corporate formation, gain is recognized to the extent that the liabilities assumed by the corporation exceed the basis in the assets contributed by the shareholder. The gain for this shareholder is $6,000 ($12,000 debt less $6,000 basis)
Do you recognize a gain when you contribute services to corporation formation?
Yes, fmv of services is recognized income, and your basis in the company
Which of the following items should be included on the Schedule M-1, Reconciliation of Income (Loss) per Books With Income per Return, of Form 1120, U.S. Corporation Income Tax Return to reconcile book income to taxable income?
A. Cash distributions to shareholders.
B. Premiums paid on key-person life insurance policy.
C. Corporate bond interest.
D. Ending balance of retained earnings
B - Premiums paid on key-person life insurance policies reduce book income but not taxable income, so this is a reconciling item for Schedule M-1
For the year ended December 31, 2015, Kelly Corp. had net income per books of $300,000 before the provision for Federal income taxes. Included in the net income were the following items:
Dividend income from an unaffiliated domestic taxable corporation (taxable income limitation does not apply and there is no portfolio indebtedness) $50,000
Bad debt expense (represents the increase in the allowance for doubtful accounts) 80,000
Assuming no bad debt was written off, what is Kelly’s taxable income for the year ended December 31, 2015?
$345,000 - If a C corporation owns less than 20 percent of a domestic corporation, 70 percent of dividends received or accrued from corporation may be deducted. A C corporation owning 20 percent or more but less than 80 percent of a domestic corporation may deduct 80 percent of the dividends received or accrued from the corporation. Similarly, C corporation owning 80 percent or more of a domestic corporation may deduct 100 percent of the dividends received or accrued from the corporation. However, the dividend received deduction is limited to a percentage of the taxable income of the corporation, unless the corporation sustains a net operating loss. If the corporation has a net operating loss, the dividend received deduction may be taken without limiting the deduction to a percentage of the corporation’s taxable income.
Since Kelly Corp. is not affiliated with the corporation paying the dividends, it owns less than 20 percent of the corporation paying the dividends and, as a result, may take a 70 percent (or $35,000) dividend received deduction. Bad debts are deductible with no percentage limitation. However, Kelly Corp. cannot take a deduction for its bad debt expense because no bad debt was actually incurred. Instead, the expense represents an increase in allowances for doubtful accounts. The corporation’s bad debt expense must be added back to net income.
Hence, Kelly Corp.’s taxable income is $345,000 - net income of $300,000 minus dividend received deduction of $35,000 and plus the bad debts expense of $80,000.
On January 2 of this year, BIG, an accrual basis, calendar-year C corporation, purchased all of the assets of a sole proprietorship, including $300,000 of goodwill. Current-year federal income tax expense of $110,100 and $7,500 for goodwill amortization (based upon 40 year amortization period) were deducted to arrive at Big’s book income of $239,200. What is Big’s current-year taxable income (as reconciled on Schedule M-1)?
$336,800 - The purpose of Schedule M-1 of Form 1120, U.S. Corporation Income Tax Return is to reconcile book income (loss) with income per the return. Federal income tax is not deductible for tax purposes so it must be added back to book income, giving $349,300 ($239,200 + $110,100). The goodwill is amortized over 15 years for tax purposes, or $20,000 per year ($300,000/15 years). Thus, the book goodwill amortization is added back and the tax good will is deducted. This results in taxable income of $336,800 ($349,300 + $7,500 - $20,000)
Would the following expense items be reported on Schedule M-1 of the corporation income tax return showing the reconciliation of income per books with income per return?
- Interest incurred on loan to carry U.S. obligations
- Provision for state corporation income tax
neither - The purpose of Schedule M-1 of Form 1120, U.S. Corporation Income Tax Return is to reconcile book income (loss) with income per the return. Certain items need to be added to and subtracted from book income to reconcile with income per the tax return. Federal income taxes; excess capital losses over capital gains; income subject to tax not recorded on the books; and expenses recorded on the books not deducted on the return must be added to book income. Income recorded on the books but not included on the return, including tax-exempt interest, and deductions on the return not charged against the books must be subtracted from book income.
Both the interest incurred on loan to carry U.S. obligations and the provision for state corporation income tax are deductible for GAAP. and for income tax purposes. Hence, since both of the expenses would be included in book income and in income per the return, there is no difference to reconcile and, as a result, neither expense would appear on the Schedule M-1 of Form 1120, U.S. Corporation Income Tax Return.
Start up expenses
Similar to organization expenses. They are necessary business expenses that cannot be deducted regularly because the business is not yet open (ex. old navy training before store actually opens for business)
Automatic $5,000 deduction is reduced by amount of expense exceeding $50,000. The remainder is amortized over 180 months
Rona Corp.’s 2015 alternative minimum taxable income was $200,000.
The exempt portion of Rona’s 2015 alternative minimum taxable income was
$27,500 - When computing alternative minimum taxable income, corporations may take an exemption of $40,000 minus 25 percent of alternative minimum taxable income exceeding $150,000.
Thus, this exemption is equal to zero when alternative minimum taxable income is equal to or exceeds $310,000.
Rona Corp.’s exempt portion of its 2015 alternative minimum taxable income was $27,500 = $40,000 − [25 percent * ($200,000 − $150,000)].
The accumulated earnings tax can be imposed
A. Regardless of the number of stockholders of a corporation.
B. On personal holding companies.
C. On companies that make distributions in excess of accumulated earnings.
D. On both partnerships and corporations
A - The accumulated earnings tax is a tax imposed on corporations that accumulate earnings beyond reasonable amount. This tax was imposed to prevent corporations from accumulating earnings and profits with the purpose of avoiding income tax on its shareholders.
Any corporation accumulating earnings beyond the point of reasonable needs of the business is considered to have accumulated the earnings for the tax benefit of its shareholders, unless a preponderance of the evidence indicates otherwise. Only the shareholders of closely-held corporations would tend to have the power to retain corporate earnings for their benefit. As a result, the accumulated earnings tax tends to be applied more often to closely-held corporations.
However, the number of shareholders in a corporation is not a determining factor in imposing the tax. Hence, the accumulated earnings tax may be applied regardless of the number of shareholders in a corporation
Edge Corp. met the stock ownership requirements of a personal holding company. What sources of income must Edge consider to determine if the income requirements for a personal holding company have been met?
I. Interest earned on tax-exempt obligations.
II. Dividends received from an unrelated domestic corporation.
II only
For the personal holding company (PHC) tests, interest earned on tax-exempt obligations is excluded from PHC income. PHC income consists of: dividends; interest; annuities; rents; mineral, oil and gas royalties; copyright and patent royalties; produced film rents; compensation for more than 25 percent use of corporate property by shareholders; amounts received under personal services contracts; and amounts received from estates and trusts.
Since only the dividends should be included, this response is correct.
Kari Corp., a manufacturing company, was organized on January 2, 2015. Its 2015 federal taxable income was $400,000 and its federal income tax was $100,000.
What is the maximum amount of accumulated taxable income that may be subject to the accumulated earnings tax for 2015 if Kari takes only the minimum accumulated earnings credit?
$50,000 - The accumulated earnings tax is a penalty tax imposed on corporations that accumulates earnings and profits for the purpose of avoiding income tax for its shareholders. The accumulated earnings tax is equivalent to 20 percent of the corporation’s accumulated taxable income.
Accumulated taxable income is composed of taxable income adjusted downward for federal income and excess profits taxes, charitable deduction in excess of the ceiling, net capital gains and losses, and taxes of foreign countries and U.S. possessions and upward for certain corporate deductions, net operating loss deduction and capital loss carryback or carryover.
When calculating the accumulated earnings tax, corporations are given a credit, the accumulated earnings credit, of $250,000 ($150,000 for certain service corporations) plus dividends paid within the first 2 1/2 months of the corporation’s tax year less accumulated earnings and profits at the end of the preceding tax year.
Hence, the maximum amount of accumulated taxable income that may be subject to the accumulated earnings tax for 2015 if Kari Corp. takes only the minimum accumulated earnings credit is $50,000. This amount is composed of $400,000 in taxable income less both a downward adjustment of $100,000 for federal income taxes and the $250,000 accumulated earnings credit.
Zero Corp. is an investment company authorized to issue only common stock.
During the last half of 2015, Edwards owned 450 of the 1,000 outstanding shares of stock in Zero. Another 350 shares of stock outstanding were owned, 10 shares each, by 35 shareholders who are neither related to each other nor to Edwards.
Zero could be a personal holding company if the remaining 200 shares of common stock were owned by
A. An estate where Edwards is the beneficiary.
B. Edwards’ brother-in-law.
C. A partnership where Edwards is not a partner.
D. Edwards’ cousin.
A - Domestic and foreign corporations satisfying the personal holding company stock ownership and income tests are personal holding companies. As such, the corporation will be subject a 15 percent penalty tax on undistributed personal holding company income. The stock ownership test is satisfied if, at some time during the corporation’s tax year, 50 percent or more of the corporation’s stock was directly or indirectly owned by five or fewer individuals.
An individual indirectly owns stock if it is owned by the individual’s family or partner. Family includes the individual’s brothers, sisters, spouse and lineal descendants and ancestors. An individual will not be considered to be the constructive owner of the stock owned by nephews, cousins, uncles, aunts, and any of his/hers spouses relatives. Constructive ownership also may exist if the individual is a partner in a partnership or the beneficiary of an estate that is a shareholder. The income test is satisfied if 60 percent or more of the corporation’s adjusted ordinary gross income is personal holding company income.
With 450 shares, Edwards already directly owns 45 percent of Zero Corp.’s outstanding stock. If an estate where Edwards is the beneficiary owns the remainder of the corporation’s 200 shares of stock, Edwards would directly or indirectly own 65 percent of the corporation. An ownership exceeding the 50 percent direct or indirect ownership percentage is needed to satisfy the stock ownership test.
Hence, Zero Corp. could be a personal holding company if the remaining 200 shares were owned by an estate where Edwards is the beneficiary. Each response given to this question satisfies the stock ownership test for a personal holding company because, in each response, 5 or fewer individuals would own more than 50 percent of the corporation’s stock. However, this response is the best as it concentrates over 50 percent ownership under the control of one individual
Kane Corp. is a calendar year domestic personal holding company. Which deduction(s) must Kane make from 2015 taxable income to determine undistributed personal holding company income prior to the dividend-paid deduction?
- Federal income taxes
- Net long-term capital gain less related federal income taxes
Both - Personal holding companies are required to pay taxes on their undistributed personal holding company income. Personal holding company income and undistributed personal holding company income differ. Undistributed personal holding company income is computed by adjusting taxable income, then subtracting the dividends paid deduction. Deductions are made from taxable income for federal and foreign taxes; charitable contributions (based on a higher percentage limitation than the 10 percent of income limitation imposed on corporations); and excess capital gains (i.e., any excess net long-term capital gain over net short-term capital loss for the tax year).
Corporate deductions for dividends received and any net operating loss deduction must be added back, and business expenses and depreciation exceeding rental income may have to be added back. Hence, both the federal income taxes and the net long-term capital gain should be deducted from taxable income by Kane in determining undistributed personal holding company income prior to the dividend-paid deduction
Dahl Corp. was organized and commenced operations in 1930. At December 31, 2015, Dahl had accumulated earnings and profits of $9,000 before dividend declaration and distribution.
On December 31, 2015 Dahl distributed cash of $9,000 and a vacant parcel of land to Green, Dahl’s only stockholder. At the date of distribution, the land had a basis of $5,000 and a fair market value of $40,000.
What was Green’s taxable dividend income in 2015 from these distributions?
$44,000 - Corporate distributions to shareholders are taxed to shareholders as dividend income to the extent that the distribution does not exceed current and accumulated earnings and profits. Distributions in excess of current and accumulated earnings and profits are treated as returns of capital. The distribution of appreciated property increases a corporation’s earnings and profits increase by the amount of the difference between the distributed property’s fair market value and the corporation’s adjusted basis in the distributed property.
Thus, while Dahl Corp. had earnings and profits totaling $9,000 before the dividend declaration and distribution, the corporation’s earnings and profits increased by $35,000, the land’s $40,000 fair market value less its adjusted basis of $5,000, to $44,000 due to the distribution of the land.
Green received $49,000 of property in the distribution - $9,000 in cash and land with a fair market value of $40,000. The amount of the distribution classified as dividend income is limited to the corporation’s earnings and profits. Thus, Green would report $44,000 of dividend income from the distribution.
Fox, the sole shareholder in Fall, a C corporation, has a tax basis of $60,000. Fall has $40,000 of accumulated positive earnings and profits at the beginning of the year and $10,000 of current positive earnings and profits for the current year. At year end, Fall distributed land with an adjusted basis of $30,000 and a fair market value (FMV) of $38,000 to Fox. The land has an outstanding mortgage of $3,000 that Fox must assume. What is Fox's tax basis in the land? A. $38,000 B. $35,000 C. $30,000 D. $27,000
A - For dividends, the amount distributed is the fair market value of the property received less any liabilities assumed by the shareholder, or $35,000 ($38,000 − $3,000). Fox would have $35,000 of dividend income since earnings and profits is at least this amount. However, the basis in the property received as a taxable dividend is always the fair market value of the property, or $38,000.
