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CPA- C-corp > CPA- C-corp > Flashcards

CPA- C-corp Flashcards

1
Q

Corporation Formation

Tax Consequences

A

General Rule: Formation is non-taxable event

Formation: Issuance of Common Stock

Reacquistion: Purchase of Treasury Stock

Resale: Sale of Treasury Stock

Apart of HIDE IT (transactions of corporations)

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2
Q

Corporation Formation

Basis of Property Received

A

General Rule: Basis of property received is the greater of:

Adjusted NBV of shareholder PLUS any gain recognized by shareholder

OR

Debt assumed by corporation (shareholder may recognize a gain to prevent negative basis)

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3
Q

Corporation Formation

Shareholder Tax Consequences

A

No gain or loss recognized if:

immediately after shareholders own at least 80% of voting stock & at least 80% of non-voting stock

AND

NO BOOT RECEIVED (cash or bonds)

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4
Q

Corporation Formation

Basis of Common Stock

A

Cash: amount contributed

Property: NBV. Adjusted basis of property is reduced by any debt on property assumed by corp

Services: FMV of services rendered

(shareholder must recognize as ordinary income)

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5
Q

Corporation Formation

Basis Formula

A

NBV + FMV of services + Gain recognized by shareholder - Cash Received - Liabilities assumed - FMV of non money boot received =

Basis of common stock

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6
Q

Book Income vs Taxable Income

What’s a Schedule M-1 used for?

A

Reconciliation between tax return and financial statements appear on M-1

Both permanent & temporary differences

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7
Q

Gross Income for Corporations

A

Cash received in advance of accrual, GAAP income is taxed.

temporary differences:

interest income received in advance

rental income received in advance

royalty income in advance

permanent (not taxable):

income interest from muni or state bonds

proceeds from life insurance of an officer

federal taxes paid

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8
Q

Trade or Business Deductions

A

All oridnary and necessary expenses paid or incurred during the year

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9
Q

Trade or Business Deductions

Domestic Production Deduction:

Qualified Production Activities Income

A

9% of the lesser of QPAI

OR

Taxable Income (disregarding QPAI formula)

Domestic Production Gross Receipts

______________________________

QPAI

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10
Q

Trade or Business Deductions

Executive Compensation

A

Executive compensations in excess of $1,000,000 cannot be deducted for the top 5 employees.

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11
Q

Trade or Business Deductions

Bonus Accruals

A

Bonuses paid by an accrual basis taxpayer are deductible in the tax year when all events have occurred; provided they are paid within 2 1/2 months after year end.

Non-shareholder employees only.

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12
Q

Trade or Business Deductions

Bad Debts

A

Accrual Basis: deduct when specific A/R written off

Cash Basis: NOT allowed a tax deduction

*income never reported

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13
Q

Trade or Business Deductions

Business Interest Expense

A

All interest paid or incurred during the taxable year on indebtedness incurred for business purposes is deductible
Interest expense on loans for investment. Limited to the net investment income
Prepaid interest: Must allocate to correct period (incurred and paid)
General business interest:deductible

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14
Q

Trade or Business Deductions

Charitable Contributions

A

Maximum deduction of 10% of taxable income. Calculated before NOL, DRD, Cap. Loss, Production activities deduction
May be carryfoward 5 years
Accruals must be paid within 2 1/2 months of year end

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15
Q

Trade or Business Deductions

Business Losses or Casualty Losses

Related to Business

A

100% deductible

Partially destroyed: limited to lesser of: decline in the value of the property or,adjusted basis of property before casualty

Fully destroyed: NBV for the property

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16
Q

Trade or Business Deductions

Organizing and Startup Cost

A

Deduct up to $10,000 or organizational costs and $5,000 of startup costs.

Any excess amortized over 180 months

*Look for month business started

Excluded: costs of raising capital

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17
Q

Trade or Business Deductions

Amortization, Depreciation, and Depletion

A

Goodwill, convenants not to compete, franchise, trademarks, and trade names must be amortized over a 15 years straight line basis

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18
Q

Trade or Business Deductions

Life Insurance Premiums

A

If corporation is beneficiary NOT tax deductible

Employee/family is beneficiary IS deductible.

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19
Q

Trade or Business Deductions

Business Gifts, Meals & Entertainment,

Penalties & Illegal Activities

A

Business gifts limited to $25 per person per year

 Meals & Entertainment are 50% deductible

Penalties & Illegal Activities are NOT Deductible
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20
Q

Trade or Business Deductions

Taxes

A

State, City and Federal Payroll taxes are all deductible

Federal Income Taxes are NOT deductib

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21
Q

Lobbying & Political Expenditures

A

Lobbying expenses and political

contributions are NOT deductible

22
Q

Business Capital Gains and Losses

A

Capital losses are NOT tax deductible. Can only offset capital gains
Carryback 3 years. Carryforward 5 years.
Taxed at corporate tax rate, same as ordinary income.

23
Q

Business Net Operating Losses

A

Carryback 2 years. Carryforward 20 years.
In calculating NOL: No charitable contribution deduction is allowed.
DRD is allowed to be deducted BEFORE calculating NOL

24
Q

Inventory Valuation Methods

A

In general, the tax method used for accounting purposes can be used for income tax purposes.

Expense inventory when sold.

25
Q

Dividends Received Deduction

% Tiers and Limits

A

1st corp must be taxed &stock owned for 45 days

% Owned DRD

0% < 20% 70%

20% < 80% 80%

80% or more 100%

Limited to the lesser of: % of dividend received or

% of taxable income w/o regard to the DRD, NOL or capital loss carryback

26
Q

What types of companies are excluded?

“Don’t take DRD’s personally”

A

Personal Services Corporations

Personal Holdings Companies

(Personally taxed) S Corp

27
Q

Dividends Received Deduction

Who can get 100%?

A

Affiliated corporations (80% ownership) who file consolidated returns qualifies for 100% deduction

Small business investment companies

28
Q

Depreciation

Half Year Convention

A

Applies to personal property

(Machinery & Equip)

Treated as having been in placed in service/disposed of at the midpoint of the year

29
Q

Depreciation

Mid Quarter Convention

A

If more than 40% of depreciable property is placed in service during the last quarter of the year, the mid-quarter convention must be used.

30
Q

Depreciation

Real Estate

A

Residential rental property 27.5 years S/L

Non-residential (office, warehouse) 39 years S/L

One 1/2 month is taken in the month

the property is placed in service

31
Q

Depreciation

Section 179

A

Equip can b expensed in the year put into service

Max: $500,000. Reduced $ for $ after

$2,000,000 worth of property.

Not permitted when loss exists or created.

Max on SUVs $25,000

32
Q

Amortization

Intagibles

A

Intagiblies such as goodwill, lienses, franchises, and trademarks may be amortized using S/L over a period of 15 years.

Tax= 15 years

GAAP= impairment test/not amortized

33
Q

Amortization of Startup and Organizing Costs

A

Startup in excess of ($5,000) and organization costs in excess of ($10,000) are amortized over 180 months.

Tax= $5,000/$10,000 + amortized amount

GAAP= Expense

34
Q

Section 1231

A

Depreciable personal and real property used in trade or business and held for at least 12 months

Applies to involuntary conversions.

Gains are treated as Capital Gains

Losses are treated ordinary losses.

*Losses cannot not be deducted in excess of Capital Gains except for the $3,000 allowance for individuals

35
Q

Taxation of Corporation

Consolidated Tax Returns

A

An affilitated corporation may elect to file as a single entity. Affiliated company must own 80% of outstanding AND voting stock.

Intercompany gains/losses are eliminated.

Brother/Sister corporations MAY NOT

file consolidated return

Consolidate GAAP = 50%

Consolidate Tax = 80% - 100%

36
Q

Taxation of Corporation

Estimated Tax Payments

A

Small corps must pay 100% of current tax or 100% of prior year tax if present.

Large corps must pay 100% of current years tax

37
Q

Taxation of a Corporation

Accumulated Earnnings Tax

A

Imposed on a regular C corporation whose retained earnings are in excess of $250,000 if improperly held instead of being distrubted as dividends.

Personal service corporations limited to $150,000

Additional tax rate of 15% on

accumulated earnings

38
Q

Corporation Distributions

A

Distributions are taxable when defined as dividends

Current E&P –> Taxable

Accum E&P –> Taxable

Return of Capital –> Tax free, reduces basis

Capital gain distribution –> Taxable as capital gain

39
Q

Corporation Distributions

Corp Paying Dividend, Taxable Amount

A

General Rule: Payment of a dividend does not create a taxable event for corp. A dividend is a reduction of E&P.

If accum. property is distributed treat as being sold (FMV - Adjusted Basis)

Gain increases corp current E&P which means the dividend is not taxable to receipt like a dividend

40
Q

Corporation Distribution

Liquidation

A

Transaction is subject to double taxation.

1st when corp sells assets

2nd shareholder recognizes proceeds received

If distributing property assets directly, gain is recognized. Shareholder recognizes excess over basis (FMV- Stock Basis)

41
Q

Tax Free Reorganizations

A

Reorganizations are tax free event due to continuation of the business in a modified form

42
Q

Worthless Stock

Section 1244 Stock (small business stock)

A

When corp stock is sold or becomes worthless, stockholder can treat as an ordinary loss up to $50,000/$100,000.

Any excess treated at capital loss

If held for more than 5 years, shareholder can exclude up to 50% of the gain or exchange.

75% if held between 2/18/09 and 12/31/10

43
Q

Small Business Corporation (S Corp)

100 USA people are common

A

Limited to 100 shareholders.
One class of stock (i.e. no preferred stock)
Shareholders must be individual, estate, or trusts
Made retroactive to Jan 1 if selected by March 15
Calendar tax year

44
Q

Small Business Corporation (S Corp)

Effect on S Corp when elected

A

S Corp MUST adopt calendar tax year unless valid business purpose exists

Tax return due March 15th

General Rule: No tax on corp level

45
Q

Small Business Corporation (S Corp)

Effect on shareholder when elected

A

Pass-through income/loss to shareholder (K-1)
Allocations made per share/per day
Losses limited to adj basis plus loans provided
Any disallowed loss carryfoward indefinitely

46
Q

Small Business Corporation (S Corp)

Exception(s) to no taxation rule

A

LIFO Recapture Tax
Built-in Gains Tax (when C Corp elects S corp status and FMV of assets exceeds adjusted basis)
Passive investment income

Exception to Built In Gains Tax

S corp was never a C corp
Sale or transfers occurs after 10 years
C corp can prove appreciation of property occured after S corp election
47
Q

Small Business Corporation (S Corp)

Computing Shareholder Basis

B.A.S.E.

A

Initial Basis

Add income items

Add shareholder investments in corp

Subtract distributions to Shareholders

Subtract loss or expense items

Ending Basis

48
Q

Small Business Corporation (S Corp)

Tax treatment of Distributions

A

Generally not subject to tax

with no C Corp E&P

Within stock basis- No taxable. ROC

In excess of stock basis- Taxed as Capital Gain

w/ C Corp E&P

To the extent of AAA-non taxable, reduce basis
To the extent of C corp E&P-taxed as div, does not reduce basis. 
To the extent stock basis- no tax, reduce basis. ROC
In excess of stock basis- LTCG. Capital gain dist
49
Q

Small Business Corporation (S Corp)

How is election terminated

A

Holders of a majority of the corp stock mus consent
S corp fails to meet elibility requirements
More than 25% of gross receipts come from passive investment income for 3 straight years “3 strikes and you’re out

50
Q

Exempt Organizations

Unrelated Business Income

A

Derived froman acivity that constititua a trade or buinsess
Regularly carried on
Not substantially related to org tax exempt purpose

51
Q

Exempt Organizations

Unrelated Business Income
Tax Exemptions

A

Regular tax payments should be made
$1,000 max UBI allowed
Royalties, dividends, interest, annuities excluded
Rental income excluded
Gains & Losses on sale of property
Income from research of a college or hospital
Income of labor unions used to establish a retirement home, or hospital
Acitivities limited to exempt organizations (bingo)

CPA- C-corp (1 decks)

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