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CPA Flashcards > 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

Taxpayer must be original stock owner, and either an individual or partnership

$50k (single) or $100k (MFJ) limit - remainder is a capital loss

Must have been issued in exchange for money or property (not exchanged for services)

Shareholder equity must not be in excess of $1 million

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 4/15 if on a calendar year basis, or 3 1/2 months after end of fiscal year

An automatic five-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
\+/- ACE Adjustments
= AMTI
- 40,000 Exemption
= Tax Base
x 20%
= 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

Real Estate purchased between 1986 and 1999 using Straight Line Depreciation must depreciate over a useful life of 40 years

Personal Property - use 150% MACRS, not 200%

Construction must use % completion method

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10
Q

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

A

Municipal Bond Interest
Life Insurance Proceeds
70% Dividends Received Deduction
Organizational Expenditures must be capitalized, not amortized

Note: AMT paid gets carried forward indefinitely, but never carried back

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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

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

Only allowed if no consolidated return is filed. Qualified dividends from domestic Corporations only.

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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?

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?

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) 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

Only individuals, estates and trusts can be shareholders

Domestic only, no international S-corps or foreign shareholders

Up to 100 shareholders allowed, and only one class of stock allowed

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:

Foreign Taxes paid deduction
No Investment Interest expense
Section 179 Deduction 
1231 Gain or Loss
Charitable Contributions
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!)
-Distributions (cash or property)
-Non-deductible expenses
-Ordinary Losses (but don’t take income below zero)
= 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

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