CPA REG 3 Flashcards
1
Q
C-Corps - Formation
What is the tax consequence when a corporation forms?
A
No gain or loss recognized.
2
Q
C-Corps - Formation
What is the basis of property that the corporation receives from shareholder/transferor?
A
Greater of:
- adjusted basis (NBV) of SH/Transferor
- Debt assumed by the corporation
3
Q
C-Corps - Formation
What is the tax consequence for the shareholder when a corporation is formed?
A
No gain or loss is recognized if the two conditions are met:
1) 80% voting stock
2) Boot not involved
4
Q
C-Corps - Formation
What are some situations when boot is involved?
A
1) Cash withdrawn and
2) Receipt of debt securities
* For cancellation of debt, if liabilities assumed>basis it is NOT boot but still a gain
5
Q
C-Corps - Formation
What is the basis of common stock that the sh receives when a corporation is formed?
A
- Cash = amount contributed
- Property = Adjusted basis
> Adj basis reduced by any debt on property assumed by corp
> Gain rec. by SH is added to stock basis
6
Q
C-Corps - Operations
When is cash income taxed?
A
When received in advance, such as interest income, rental income and royalty income (all TEMPORARY differences)
7
Q
C-Corps - Operations
What is excluded from taxable income?
A
- interest income from muni/state bonds
- certain proceeds from life insurance on life of an officer where corp is the beneficiary
- Fed inc taxes is NOT deductible
PERM diffeences
8
Q
C-Corps - Operations
Are trade and business expenses deductible?
A
Yes
9
Q
C-Corps - Operations
What is the Domestic production deduction?
A
- Incentive to be made in america.
- deduction = 9% of lesser of
1) Qualified production activities income (QPAI)
2) Taxable income
10
Q
C-Corps - Operations
How do you calculate QPAI (Qualified production activities income?)
A
Domestic Production Gross Receipts
= QPAI
11
Q
C-Corps - Operations
How much does a corp get to deduct for executives?
A
Limited to $1M paid to the CEO or the 4 other most highly compensated officers
12
Q
C-Corps - Operations
When are bonus accruals deductible?
A
bonuses paid by accrual basis deductible in tax year when all events occured that establish a liability and paid within 2.5 months after year end.
13
Q
C-Corps - Operations
When are bad debts deducted?
A
- On the accrual basis, use specific charge off method, deduct when A/R written off
- On cash basis - no deduction
14
Q
C-Corps - Operations
How is prepaid interst expense treated for deduction?
A
Allocated to proper period it is related. (Incurred and paid)
15
Q
C-Corps - Operations
How are chartiable contributions treated for deductions?
A
max deduction of 10% of TI. Accruals must be paid with wintin 2.5 months of year end
16
Q
C-Corps - Operations
How are business losses/casualty losses treated for deductions?
A
100% deductible
17
Q
C-Corps - Operations
How are org expenses and start up costs treated for deductions?
A
Deduction of $5,000 each for start up costs and org expesnses.
Excess org exp/start up amortized over 180 months
18
Q
C-Corps - Operations
What costs are not included in organization expenditures and start up costs?
A
Selling the stock, commissions, underwriter’s fees
Basically cost of raising money
19
Q
C-Corps - Operations
What is the tax rule for goodwill, covenants not to compete, franchises, trademarks, trade names?
A
Amortized on SL basis over 15 years
20
Q
C-Corps - Operations
How are life insurance premiums treated for deductions?
A
Corporation named as beneficiary = NOT deductible
Insured employee named as beneficiary = Tax dedutible
21
Q
C-Corps - Operations
Business gifts?
M& E?
A
$25/ per person
50% deduction for M& E
22
Q
C-Corps - Operations
When are taxces deductible?
A
state and local taxes and fed payroll taxes deductible
23
Q
C-Corps - Operations
Capital gains and losses?
A
Cap loss deduction not allowed. Cap losses used to offset cap gains (whereas ind gets Max $3k)
cap gains are taxed at ord rate
24
Q
C-Corps - Operations
What is the carry period for cap losses?
A
back 4 years, forward 5 years
25
C-Corps - Operations
How do you treat net operating losses?
back 2 years, 20 forward (same as individuals)
26
C-Corps - Operations
What method are tps with inventory suppose to use?
```
- Accrual
> Cost method
> Lower of cost or Market
> Rolling-average
> Retail
```
27
C-Corps - Operations
What is the Uniform capitalization rule?
Capitalize raw material, direct labor and factory over heard.
28
C-Corps - Operations
What is the formula for general business credits?
May not exceed net income tax less the greater of:
1) 25% of regular tax liability above $25k
2) Tentative min tax for the year
29
C-Corps - Operations
What is the dividends received deduction?
Since dividends can possibly be taxed three times, a corp can get a edcution. Percentage allowed is 70%, 80%, or 100%
30
C-Corps - Operations
What are the requirements for the dividends recvd deduction?
1) First corporation is taxed
| 2) owed 45 days before or after
31
C-Corps - Operations
What is the amount of the dividends received deduction?
100% for owning 80-100%
80% for owning 20-80%
70% for owning under 20% (nrelated)
You either get the lower of the approriate percentage of TI or the dividend. Unless you get pushed into a loss.
32
C-Corps - Operations
What entities can't used the dividend received deduction?
personal service companies
personal holding companies
s- corps
33
C-Corps - Operations
Who gets 100% of DRD?
affiliated corporations becuase they consolidated
34
C-Corps - Operations: Depreciation
What are the 2 conventions that machinery and equipment uses?
Half year convention - treated as if it was PIS at midpoint of year
Mid quarter convetion - if more tha 40% of assets PIS in last quarter, mid quarter used
35
C-Corps - Operations: Depreciation
What are the MACRS rule for buildings?
- Salvage value ignored
- Subtract land cost
- Residental property = 27.5 year SL
- Non-residential = 39 year SL
- Mid Month = 1/2 taken in month PIS
36
C-Corps - Operations: Depreciation
What is Section 179?
TP may deduct an expense instead of drepreciation, a fixed amount of depreciable property. NOT FOR BUILDINGS
cannot used when net loss exists or if deduction creates a net loss
37
C-Corps - Operations: Depreciation
What is 179 deduction for SUVs?
Expensed to $25,000
38
C-Corps - Operations: Depletion
What is GAAP rule for depeletion?
remaining basis divided by remaining number of recoverable units = unit depletion rate.
Rate c number of units sold = deduction
39
C-Corps - Operations: Depreciation
What is the tax rule for depletion?
deduction limited to 50% of TI from well/mine.
Allowable %ages range from 5%- 22%
Depletion may be taken even after costs have been completely recovered
40
C-Corps - Operations: 1231
What are 1231 assets?
depreciable personal and real property used in business held over 12 months
41
C-Corps - Operations: 1231
How are 1231 assets treated as a gain?
Ordinary income = all gain to the extent of Acc deprec
Long term Gain (You get a tax of 0%-15%) = gain > NBV and Acc Deprec
42
C-Corps - Operations: 1231
How are net 1231 losses treated?
ordinary losses
43
C-Corps - Taxation
When is the accrual basis required for tax purposes?
- Accounting for purchases and sales of inventory
- Tax shelters
- Certain farming corporations
- Corps with >$5M of average annual gross receipts for the 3 yr periond ending with the tax year
44
C-Corps - Taxation
How much are small corps suppose to pay for estimated taxes?
Lesser of:
1) 100% of tax for current year
2) 100% tax on PY return
45
C-Corps - Taxation
How much are large corps suppose to pay for estimated taxes?
- Must pay 100% of tax for current year
| - No second option with PY return
46
C-Corps - Taxation
What can affiliated group of corps do?
elect to be taxed as a singl eunit
47
C-Corps - Taxation
What is an affiliated group?
Common parent owns:
- 80% of voting power AND
- 80% of all outstanding stock
48
C-Corps - Taxation
what is a brother and sister group?
- they cannot file consolidated returns
| - where an indivdual (not corp) owns >80% of stock of two or more corps.
49
C-Corps - Taxation
| How do you calculate AMT?
```
Regular Taxable income
+/- Adjustments
+ Preferences
+/- Adj Current Earnings
- AMT NOL Deduction
= Min. Taxable inc
```
50
C-Corps - Taxation
What are the adjustments for AMT?
Long term contracts
Installment sales
Excess of depreciation of tan prop PIS after 1986
51
C-Corps - Taxation
What are the perference items for AMT?
Percentage depletion
Private Activity bonds
Pre-1987 ACRS Deprection
52
C-Corps - Taxation
What are the element for Adjusted current earnings (ACE)?
Municipal bond interest
Increase life insurance cash surrender value
Non-SL Depreciation after 1989
Dividends received deduction (20%<)
53
C-Corps - Taxation
What is the AMT exemption amount for corps?
$40,000 less 25% of AMTI in excess of $150k
54
C-Corps - Taxation
what is the tax rate for amt?
20%
55
C-Corps - Taxation
What credit reduces AMT?
foreign
56
C-Corps - Taxation
What is the minimum tax credit?
You credit it against future REGULAR tax and carryFORWARD indefinitely.
57
C-Corps - Taxation
What is Accumulated earnings tax?
Imposed on C corps with acc RE > $250k if there were no dividend distrubtions
Taxed at 15%
58
C-Corps - Taxation
How to you calculate accumulated earnings tax?
1) Beg E&P - Corp Needs = Beg Excess EP
2) Lifetime credit - $250k - Beg Excess EP = Remaining Credit
3) TI - (Charity, Cap losses, taxes, div paid) = Acc TI - Remaining Lifetime Credit = Current Acc TI
x 15%
= Acc. Earnings Tax
59
C-Corps - Taxation
what is the personal holding company tax?
personal holding corps = more than 50% owned by 5 or fewer individuals AND having 60% of adj ord income consisting of:
- net rent
- taxable interest
- royalties (but not natural and copyright)
- dividends from unrelated domestic corp
60
C-Corps - Taxation
What are the negative adjustments (reducments) to arrive at current earnings and profit?
Federal income tax expense
Nondeductible penalties, fines, politcal contri
Officer life insurance (Corp as beneficiary)
Expense for production of tax ecempt inc
Non deductible chartiable contributions
non deduction cap losses
61
C-Corps - Taxation
what are the postivie adjudstments to arrive a current E&P?
```
Refunds of fed inc tax
tax exemp income
refunds of iterms not subject to reg tax
NOL deductions
Life insurance process where corp = beneficary
DRD
Carryover of cap losses
Carryover of CC
Non tacable cancellation of debt
```
62
C-Corps - Taxation
What are some positive or negative adjustments?
```
Losses/gains
Changes in cash surrender value of life ins.
excess deprec for EP vs. reg inc tax
differences in org and start up costs
installment income method
completed contract vs. % of completion
Amortization of drilling costs
Section 179 vs. ratable deprection
```
63
C-Corps - Taxation
How are corporate distributions applied?
First - Current EP
Second - Accumulated EP
Third - Return of capital
Excess - capital gain distributions
64
C-Corps - Distributions
When is there a dividend and is it taxable?
Current E&P (by yr end) = taxable divident
Accumulated E&P (dist. date) = taxable
Return of capital (no E&P) = tax free, reduces basis of common stock
captil gain distribution (no E&P, no basis) = taxable income as cap gain
65
C-Corps - Distributions
How are cash dividends matched to it source?
For current EP, allocated on a prorate basis to each distribution
For acc. EP, applied in chronological order, beg with earliest distribution
66
C-Corps - Distributions
| How are stock dividends taxed?
Generally, not taxable unless shareholder had a CHOICE of cash or other property
67
C-Corps - Distributions
What is the taxable amount when a corp pays a divident?
PAyment of dividend does not create a taxable event. It reduces E&P
68
C-Corps - Distributions
What happens when a compay pays a property dividend?
Corp recognizes a gain as if property was sold Gain increases E & P
69
C-Corps - Distributions
What happens when a corp buys back stock form stockholders? (Stock redemption)
- If proportional = taxable dividend income
| - if disproportional - subject to taxable cap g/l to shareholder
70
C-Corps - Liquidation
What happens in a liquidation
Double taxation at the corp and shareholder level.
Corps generally deduct liquidation expenses
71
C-Corps - Liquidation
What happens when the corp sells assets and distributes cash to SH?
Corp recognizes G/L on sale of asset
| Shareholder recognized g/l to extent cash exceedes adj basis
72
C-Corps - Liquidation
What happens when the corp distribute assets?
Corp recognizes g/l as if assets were sold for FMV
Shareholder recognizes g/l to extend FMV exceeds adj basis of stock
73
C-Corps - Liquidation
What happens when there is a parent/sub liquiadation?
No gain/loss recognized by either
74
C-Corps - Liquidation
What happens when a corp reoganizes?
Nontaxable.
All tax attributes remain
75
C-Corps - Liquidation
What happens to the shareholder when a corp reorganizes?
nontacable.
SH continues to retain original basis
Gain rec to extent of boot received
76
C-Corps - Liquidation
What is the definition of reorganization?
it is a continuation of a business in modified form
77
C-Corps - Liquidation
What happens with worthless stock for a shareholder?
Treated as an ordinary loss (fully tax deductible) with $50k max
Excess loss = capital loss --> offset cap gains at a max of $3k for deduction
78
C-Corps - Liquidation
What happens when a shareholder holds a small business stock?
- must hold for more than 5 years
| - can exclude 50% of gain from sale or exchange from stock
79
S-corps
What are S-corps?
small closely held corporations may elect to be have all earnings/losses of the corporation be passed through to the shareholders. Thus, no tax at the corporate level but the individual level.
80
S-corps
Who are eligible shareholders to qualify as a small business corporation?
- must be an individual, estate or certain types of trusts
- may not be a nonresident alien
- corps and partnerships are NOT eligible
81
S-corps
How many shareholders can there be for a corp to be considered a small corp?
Not more than 100
82
S-corps
What is the other criteria to be qualified as a small corp?
There can only be one type of stock outstanding and preferred stock is not permitted.
83
S-corps
When does the election to be an S-corp takes place?
When all shareholders elect to do so and must do so by March 15th (in order to be an S corp for the current year)
84
S-corps
What happens when you become a S-corp?
- Must adopt 12/31 year end
| - No tax on corporation
85
S-corps
What is the exception to having no corporate tax? (AKA, when does a s-corp get corporate tax?)
S-corp gets a corporate tax when there is built in gain. the two conditions have been met:
1) C corp elects S corp status AND
2) FMV of assets > adj basis ON Election date
86
S-corps
What is the exception the exception for being corporately taxed?
1) S corp was never a C corp
2) Sale or transfer does not occur within 10 years on first day of first year S-election made
3) Demonstrate appreciation of asset occured AFTER election.
87
S-corps
What is the effect of electing S-corp status on the shareholderse?
- S corps report both separately state items of income and deduction and non-separately state items of business or loss
- allocations to SH made per-share, per day basis
- losses are limited to SH adj basis in Scorp stock + direct SH loans to corp. SH guarantees do not increase basis.
88
S-corps
What is the calculation for computing SH basis in S corp stock?
```
Initial Basis
+ INcome items
+ Additional SH investment in corp. stock
- Distribution to SH
- Loss/expense items
= Ending basis
```
89
S-corps
What amount is a SH allowed to deduct on their personal income tax return?
The pro-rata share of S-corp loss subject to the following limitation:
Loss Limitation = Basis + Direct SH Loans - Distributions
90
S-corps
How are distributions made by an S-corp with no C corp E& P taxed?
To the extent of stock basis = no tax, return of capital
Excess of stock basis = taxed as LTCG, cap gain distribution
91
S-corps
How are distributions made by an S-corp with C corp E& P taxed?
To the extent of AAA (Accumulated adjustment account) = no tax, reduces stock basis
To the extent of c-corp E&P = taxed as dividend, no reduction in stock basis
To the extent of stock basis: No tax, reducts stock basis, return of capital
Excess of stock basis: taxed as LTCG
92
How will an S-corp status terminate?
- Majority of SH consent to revocation
- Corp fails to meet eligibility req. for S corp status
- +25% of gross receipts come from passive income for 3 consecutive years and corp has C corp E&P at end of each year.
93
Exempt Organizations
What are the types of exempt organization allowed under the IRC?
- Section 501(c)(1) - organized under an act of Congress as a US instrumentality
- All other exempt orgs needs an application approved by IRS
- Section 501(c)(2)
- Section 501(c)(3) must apply and be approved by IRS
94
Exempt Organizations
What are the prohibited actions of exempt organizations (501(c)(3))?
- Influencing legislation
- Directly participating or intervening ina political campaign
> Endorsing a candidate
> Engaging in fundraising
95
Exempt Organizations
What is the required return for exempt organizations?
Form 990-PF which discloses contributors and amounts of contributions received
96
Exempt Organizations
When is an exempt organization terminated from its exempt status?
- Involuntary termination: private terminates when becoming public
- Voluntary termination: notify the IRS
97
Exempt Organizations
What is unrelated business income?
It is the gross income unrelated to the tax exempt org.
- Derived from an activity that constitutes trade/business
- Regularly carried on AND
- Not substantially related to org's purpose
98
Exempt Organizations
What happens if unpaid workers carry out the unrelated business?
Not taxable. For example, using diabled people to make things
99
Exempt Organizations
What happens when UBI (unrelated business income) is identified?
Taxed for corporate income tax
Need to file tax return and estimated taxes
Allowed $1,000 deduction from UBI
100
Exempt Organizations
What types of income is excluded from UBI?
- royalties, dividends, interest and annuities
- rents from real property and rents from personal property leased with real property
- G/L on sale/exchange of property not helt for sale to customers
- income from research of college/hospital
- income from labor unions used to establish retirement homes, hospital
- Bingo games
- Value of securities loaned to a broker and the income received by lender of securities to broker,
- income from exchange/rental of membership list
101
Exempt Organizations
When is the annual return due?
Due May 15th, open to public inspection . Corps need to include Sch A.
102
Exempt Organizations
Who doesn't need to file a return?
- Religious/internal support org
| - certain orgs that have <$50,000 GR
103
Exempt Organizations
Who doesn't need to file a return?
CHRIST
```
Churches
High school - religious
Religious orders
Internal support auxiliaries
Societies - missonary related
Tax exempt orgs - organized by Congress
```
