Corporate Taxation

Question 1

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

Answer 1

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

Question 2

Describe the requirements for a personal holding company.

Answer 2

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

Question 3

What are the basic rules for filing a form 1120?

Answer 3

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 - S Corp returns are due 3/15 vs 4/15 for C Corps

Question 4

What basis do shareholders and Corporations use for property?

Answer 4

They both use ADJUSTED BASIS, NOT FMV of property.

Question 5

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

Answer 5

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

Question 6

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

Answer 6

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

Question 7

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

Answer 7

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

Investment interest on tax-free investments are NOT deductible.

Question 8

How are Corporate distributions to shareholders handled?

Answer 8

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)

Question 9

How is the accumulated earnings credit calculated for a Corporation?

Answer 9

Take greater of $250,000 ($150,000 for Service Corps) or the legitimate balance based on future needs (i.e. purchasing a building)

Question 10

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

Answer 10

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

Question 11

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

Answer 11

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

Individual: capital loss only

Question 12

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

Answer 12

Not Self-Assessing like a PHC

Question 13

How is S-Corporation shareholder basis calculated?

Answer 13

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

Question 14

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

Answer 14

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

Question 15

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

Answer 15

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

Question 16

Describe the AMT calculation for C-Corporations

Answer 16

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

Question 17

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

Answer 17

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

Question 18

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

Answer 18

Transferor’s basis
+ Gain recognized by shareholder
= Basis

OR

FMV of Corporate Interest
- Adjusted basis of property
= Gain

Question 19

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

Answer 19

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.

Question 20

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

Answer 20

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.

Question 21

What is a consent dividend? How is it treated?

Answer 21

Consented by the Board of Directors but not yet paid

Treat as if distributed by the end of the year

Question 22

What are the requirements for holding S-Corporation status?

Answer 22

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

Question 23

How are bad debt losses handled in a Corporation?

Answer 23

Bad debt losses are classified as ordinary

Question 24

How is an S-Corporation terminated?

Answer 24

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

Question 25

When are C-Corporations exempt from AMT?

Answer 25

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

Question 26

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

Answer 26

A loss on worthless stock is an ordinary loss.

Question 27

How is an S-Corporation election made?

Answer 27

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

Question 28

How are Corporate losses carried back/forward?

Answer 28

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

Question 29

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

Answer 29

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

Question 30

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

Answer 30

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

Question 31

How are Corporate organization costs handled?

Answer 31

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

Question 32

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

Answer 32

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

Question 33

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

Answer 33

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

Question 34

What is the treatment of the liquidation of a subsidiary?

Answer 34

No G/L to parent company

Question 35

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

Answer 35

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.)

Question 36

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

Answer 36

Net Short Term Capital Gains are taxed at ordinary income rates

Question 37

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

Answer 37

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.

Question 38

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

Answer 38

Reconciles beginning to ending retained earnings

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

Question 39

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

Answer 39

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.

Question 40

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

Answer 40

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)

Question 41

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

Answer 41

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

Question 42

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

Answer 42

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

Question 43

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

Answer 43

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

Question 44

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

Answer 44

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

Question 45

What is the casualty loss floor for a C-Corporation?

Answer 45

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)

Question 46

How are capital losses handled in a C-Corporation?

Answer 46

Capital Losses are deductible only to the extent of Capital Gains