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CPA REG 2 > CPA REG 3 > Flashcards

CPA REG 3 Flashcards

1
Q

C-Corps - Formation

What is the tax consequence when a corporation forms?

A

No gain or loss recognized.

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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
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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

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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1) Cash withdrawn and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

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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
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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)

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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

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8
Q

C-Corps - Operations

Are trade and business expenses deductible?

A

Yes

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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
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10
Q

C-Corps - Operations

How do you calculate QPAI (Qualified production activities income?)

A

Domestic Production Gross Receipts

= QPAI

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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

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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.

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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
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14
Q

C-Corps - Operations

How is prepaid interst expense treated for deduction?

A

Allocated to proper period it is related. (Incurred and paid)

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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

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16
Q

C-Corps - Operations

How are business losses/casualty losses treated for deductions?

A

100% deductible

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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

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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

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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

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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

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21
Q

C-Corps - Operations

Business gifts?
M& E?

A

$25/ per person

50% deduction for M& E

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22
Q

C-Corps - Operations

When are taxces deductible?

A

state and local taxes and fed payroll taxes deductible

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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

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24
Q

C-Corps - Operations

What is the carry period for cap losses?

A

back 4 years, forward 5 years

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25
Q

C-Corps - Operations

How do you treat net operating losses?

A

back 2 years, 20 forward (same as individuals)

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26
Q

C-Corps - Operations

What method are tps with inventory suppose to use?

A 
- Accrual 
  > Cost method
  > Lower of cost or Market
  > Rolling-average
  > Retail
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27
Q

C-Corps - Operations

What is the Uniform capitalization rule?

A

Capitalize raw material, direct labor and factory over heard.

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28
Q

C-Corps - Operations

What is the formula for general business credits?

A

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

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29
Q

C-Corps - Operations

What is the dividends received deduction?

A

Since dividends can possibly be taxed three times, a corp can get a edcution. Percentage allowed is 70%, 80%, or 100%

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30
Q

C-Corps - Operations

What are the requirements for the dividends recvd deduction?

A

1) First corporation is taxed

2) owed 45 days before or after

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31
Q

C-Corps - Operations

What is the amount of the dividends received deduction?

A

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.

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32
Q

C-Corps - Operations

What entities can’t used the dividend received deduction?

A

personal service companies
personal holding companies
s- corps

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33
Q

C-Corps - Operations

Who gets 100% of DRD?

A

affiliated corporations becuase they consolidated

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34
Q

C-Corps - Operations: Depreciation

What are the 2 conventions that machinery and equipment uses?

A

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

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35
Q

C-Corps - Operations: Depreciation

What are the MACRS rule for buildings?

A
  • 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
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36
Q

C-Corps - Operations: Depreciation

What is Section 179?

A

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

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37
Q

C-Corps - Operations: Depreciation

What is 179 deduction for SUVs?

A

Expensed to $25,000

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38
Q

C-Corps - Operations: Depletion

What is GAAP rule for depeletion?

A

remaining basis divided by remaining number of recoverable units = unit depletion rate.

Rate c number of units sold = deduction

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39
Q

C-Corps - Operations: Depreciation

What is the tax rule for depletion?

A

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

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40
Q

C-Corps - Operations: 1231

What are 1231 assets?

A

depreciable personal and real property used in business held over 12 months

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41
Q

C-Corps - Operations: 1231

How are 1231 assets treated as a gain?

A

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

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42
Q

C-Corps - Operations: 1231

How are net 1231 losses treated?

A

ordinary losses

43
Q

C-Corps - Taxation

When is the accrual basis required for tax purposes?

A
  • 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
Q

C-Corps - Taxation

How much are small corps suppose to pay for estimated taxes?

A

Lesser of:

1) 100% of tax for current year
2) 100% tax on PY return

45
Q

C-Corps - Taxation

How much are large corps suppose to pay for estimated taxes?

A
  • Must pay 100% of tax for current year

- No second option with PY return

46
Q

C-Corps - Taxation

What can affiliated group of corps do?

A

elect to be taxed as a singl eunit

47
Q

C-Corps - Taxation

What is an affiliated group?

A

Common parent owns:

  • 80% of voting power AND
  • 80% of all outstanding stock
48
Q

C-Corps - Taxation

what is a brother and sister group?

A
  • they cannot file consolidated returns

- where an indivdual (not corp) owns >80% of stock of two or more corps.

49
Q

C-Corps - Taxation

How do you calculate AMT?

A 
Regular Taxable income
\+/- Adjustments
\+  Preferences
\+/- Adj Current Earnings
- AMT NOL Deduction
= Min. Taxable inc
50
Q

C-Corps - Taxation

What are the adjustments for AMT?

A

Long term contracts
Installment sales
Excess of depreciation of tan prop PIS after 1986

51
Q

C-Corps - Taxation

What are the perference items for AMT?

A

Percentage depletion
Private Activity bonds
Pre-1987 ACRS Deprection

52
Q

C-Corps - Taxation

What are the element for Adjusted current earnings (ACE)?

A

Municipal bond interest
Increase life insurance cash surrender value
Non-SL Depreciation after 1989
Dividends received deduction (20%<)

53
Q

C-Corps - Taxation

What is the AMT exemption amount for corps?

A

$40,000 less 25% of AMTI in excess of $150k

54
Q

C-Corps - Taxation

what is the tax rate for amt?

A

20%

55
Q

C-Corps - Taxation

What credit reduces AMT?

A

foreign

56
Q

C-Corps - Taxation

What is the minimum tax credit?

A

You credit it against future REGULAR tax and carryFORWARD indefinitely.

57
Q

C-Corps - Taxation

What is Accumulated earnings tax?

A

Imposed on C corps with acc RE > $250k if there were no dividend distrubtions

Taxed at 15%

58
Q

C-Corps - Taxation

How to you calculate accumulated earnings tax?

A

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
Q

C-Corps - Taxation

what is the personal holding company tax?

A

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
Q

C-Corps - Taxation

What are the negative adjustments (reducments) to arrive at current earnings and profit?

A

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
Q

C-Corps - Taxation

what are the postivie adjudstments to arrive a current E&P?

A 
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
Q

C-Corps - Taxation

What are some positive or negative adjustments?

A 
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
Q

C-Corps - Taxation

How are corporate distributions applied?

A

First - Current EP
Second - Accumulated EP
Third - Return of capital
Excess - capital gain distributions

64
Q

C-Corps - Distributions

When is there a dividend and is it taxable?

A

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
Q

C-Corps - Distributions

How are cash dividends matched to it source?

A

For current EP, allocated on a prorate basis to each distribution

For acc. EP, applied in chronological order, beg with earliest distribution

66
Q

C-Corps - Distributions

How are stock dividends taxed?

A

Generally, not taxable unless shareholder had a CHOICE of cash or other property

67
Q

C-Corps - Distributions

What is the taxable amount when a corp pays a divident?

A

PAyment of dividend does not create a taxable event. It reduces E&P

68
Q

C-Corps - Distributions

What happens when a compay pays a property dividend?

A

Corp recognizes a gain as if property was sold Gain increases E & P

69
Q

C-Corps - Distributions

What happens when a corp buys back stock form stockholders? (Stock redemption)

A
  • If proportional = taxable dividend income

- if disproportional - subject to taxable cap g/l to shareholder

70
Q

C-Corps - Liquidation

What happens in a liquidation

A

Double taxation at the corp and shareholder level.

Corps generally deduct liquidation expenses

71
Q

C-Corps - Liquidation

What happens when the corp sells assets and distributes cash to SH?

A

Corp recognizes G/L on sale of asset

Shareholder recognized g/l to extent cash exceedes adj basis

72
Q

C-Corps - Liquidation

What happens when the corp distribute assets?

A

Corp recognizes g/l as if assets were sold for FMV

Shareholder recognizes g/l to extend FMV exceeds adj basis of stock

73
Q

C-Corps - Liquidation

What happens when there is a parent/sub liquiadation?

A

No gain/loss recognized by either

74
Q

C-Corps - Liquidation

What happens when a corp reoganizes?

A

Nontaxable.

All tax attributes remain

75
Q

C-Corps - Liquidation

What happens to the shareholder when a corp reorganizes?

A

nontacable.
SH continues to retain original basis
Gain rec to extent of boot received

76
Q

C-Corps - Liquidation

What is the definition of reorganization?

A

it is a continuation of a business in modified form

77
Q

C-Corps - Liquidation

What happens with worthless stock for a shareholder?

A

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
Q

C-Corps - Liquidation

What happens when a shareholder holds a small business stock?

A
  • must hold for more than 5 years

- can exclude 50% of gain from sale or exchange from stock

79
Q

S-corps

What are S-corps?

A

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
Q

S-corps

Who are eligible shareholders to qualify as a small business corporation?

A
  • must be an individual, estate or certain types of trusts
  • may not be a nonresident alien
  • corps and partnerships are NOT eligible
81
Q

S-corps

How many shareholders can there be for a corp to be considered a small corp?

A

Not more than 100

82
Q

S-corps

What is the other criteria to be qualified as a small corp?

A

There can only be one type of stock outstanding and preferred stock is not permitted.

83
Q

S-corps

When does the election to be an S-corp takes place?

A

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
Q

S-corps

What happens when you become a S-corp?

A
  • Must adopt 12/31 year end

- No tax on corporation

85
Q

S-corps

What is the exception to having no corporate tax? (AKA, when does a s-corp get corporate tax?)

A

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
Q

S-corps

What is the exception the exception for being corporately taxed?

A

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
Q

S-corps

What is the effect of electing S-corp status on the shareholderse?

A
  • 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
Q

S-corps

What is the calculation for computing SH basis in S corp stock?

A 
Initial Basis
\+ INcome items
\+ Additional SH investment in corp. stock
- Distribution to SH
- Loss/expense items
= Ending basis
89
Q

S-corps

What amount is a SH allowed to deduct on their personal income tax return?

A

The pro-rata share of S-corp loss subject to the following limitation:

Loss Limitation = Basis + Direct SH Loans - Distributions

90
Q

S-corps

How are distributions made by an S-corp with no C corp E& P taxed?

A

To the extent of stock basis = no tax, return of capital

Excess of stock basis = taxed as LTCG, cap gain distribution

91
Q

S-corps

How are distributions made by an S-corp with C corp E& P taxed?

A

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
Q

How will an S-corp status terminate?

A
  • 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
Q

Exempt Organizations

What are the types of exempt organization allowed under the IRC?

A
  • 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
Q

Exempt Organizations

What are the prohibited actions of exempt organizations (501(c)(3))?

A
  • Influencing legislation
  • Directly participating or intervening ina political campaign
    > Endorsing a candidate
    > Engaging in fundraising
95
Q

Exempt Organizations

What is the required return for exempt organizations?

A

Form 990-PF which discloses contributors and amounts of contributions received

96
Q

Exempt Organizations

When is an exempt organization terminated from its exempt status?

A
  • Involuntary termination: private terminates when becoming public
  • Voluntary termination: notify the IRS
97
Q

Exempt Organizations

What is unrelated business income?

A

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
Q

Exempt Organizations

What happens if unpaid workers carry out the unrelated business?

A

Not taxable. For example, using diabled people to make things

99
Q

Exempt Organizations

What happens when UBI (unrelated business income) is identified?

A

Taxed for corporate income tax
Need to file tax return and estimated taxes
Allowed $1,000 deduction from UBI

100
Q

Exempt Organizations

What types of income is excluded from UBI?

A
  • 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
Q

Exempt Organizations

When is the annual return due?

A

Due May 15th, open to public inspection . Corps need to include Sch A.

102
Q

Exempt Organizations

Who doesn’t need to file a return?

A
  • Religious/internal support org

- certain orgs that have <$50,000 GR

103
Q

Exempt Organizations

Who doesn’t need to file a return?

A

CHRIST

Churches
High school - religious
Religious orders
Internal support auxiliaries
Societies - missonary related
Tax exempt orgs - organized by Congress

CPA REG 2 (3 decks)

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