Corporate Taxation

Question 1

How is the shareholder basis calculated for a new interest in a corporation?

Answer 1

FMV of Services
\+ Cash contributed by SH
\+Adjusted basis of property transferred 
\+ Gain recognized by SH
- liabilities assumed by Corp 
- Cash received from Corp
- FMV of non-money boot received
= Shareholder basis

If shareholders have 80% control after a property transfer and no boot is involved; no taxable event occurs.

If liabilities exceed basis on contributed property to a corporation; a gain is recognized.

Question 2

How is the corporation basis calculated?

Answer 2

Transferor's basis
\+ Gain recognized by shareholder
= Basis
OR
COD if amount exceeds all SH transfers.

Question 3

What basis do shareholders and corporations use for property?

Answer 3

They both use ADJUSTED BASIS; NOT FMV of property.

Question 5

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

Answer 5

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 6

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

Answer 6

A loss on worthless stock is an ordinary loss.

Question 7

When are corporate federal tax estimated payments required; and how are they calculated?

Answer 7

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 8

Describe the AMT calculation for C-Corporations

Answer 8

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 9

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

Answer 9

> 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 10

What are the basic rules for filing a form 1120?

Answer 10

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

Question 11

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

Answer 11

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 12

When are C-corporations exempt from AMT?

Answer 12

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 13

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

Answer 13

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 14

How are corporate organization costs handled?

Answer 14

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 15

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

Answer 15

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 16

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

Answer 16

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

Question 17

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

Answer 17

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

Question 18

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

Answer 18

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 19

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

Answer 19

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 20

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 20

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

Question 21

How are capital losses handled in a C-corporation?

Answer 21

Capital Losses are deductible only to the extent of Capital Gains

Question 22

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

Answer 22

Net Short Term Capital Gains are taxed at ordinary income rates

Question 23

How are corporate losses carried back/forward?

Answer 23

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

Question 24

How are bad debt losses handled in a corporation?

Answer 24

Bad debt losses are classified as ordinary

Question 25

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

Answer 25

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 26

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

Answer 26

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 27

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

Answer 27

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

Investment interest on tax-free investments are NOT deductible.

Question 28

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

Answer 28

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 29

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

Answer 29

Reconciles beginning to ending retained earnings

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

Question 30

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

Answer 30

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

Question 31

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

Answer 31

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 32

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

Answer 32

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 33

How are corporate distributions to shareholders handled?

Answer 33

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 34

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

Answer 34

> 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 35

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

Answer 35

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 36

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

Answer 36

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

Individual: capital loss only

Question 37

What is the treatment of the liquidation of a subsidiary?

Answer 37

No G/L to parent company

Question 38

Describe the requirements for a personal holding company.

Answer 38

> 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 - 15% tax rate on undistributed PHC Income

Question 39

What is a consent dividend? How is it treated?

Answer 39

Consented by the Board of Directors but not yet paid

Treat as if distributed by the end of the year

Question 40

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

Answer 40

Not Self-Assessing like a PHC

Question 41

What are the requirements for holding S-corporation status?

Answer 41

> 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 42

How is the accumulated earnings credit calculated for a corporation?

Answer 42

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

Question 43

How is an S-corporation election made?

Answer 43

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 44

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

Answer 44

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 45

How is an S-corporation terminated?

Answer 45

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 46

How is S-corporation shareholder basis calculated?

Answer 46

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 47

What is the failure to pay penalty?

Answer 47

If less than 90% of liability is paid, there is a penalty of 1/2% on the underpayment amount for each fraction of a month (max 25%)

Question 48

What is the interest charged on underpayment amount?

Answer 48

1% for each fraction of a month

Question 49

How is the normal AMTI exemption exemption calculated?

Answer 49

The normal AMTI exemption amount for corporation is $40,000, but it must be reduced by 25% of the amount by which AMTI exceeds $150,000. So it is completely phased out at $310,000.

Question 50

At the formation of a corporation, how do you calculate the realized gain?

Answer 50

FMV of asset - Basis = Realized Gain

Question 51

What is included on line 26 of 1120

Answer 51

Include all the expenses that were not given its own line.

office supplies, utilities, organization expenses