Entities - C Corporations - Computations of taxable income, tax liability and allowable credits

Question 1

How is a company’s tax liability calculated?

Answer 1

Business income

= Gross income

= taxable income before special deductions

= taxable income
x 21%
= gross tax

= Net tax

Question 2

How are charitable contributions handled?

Answer 2

• charitable contributions are a deduction

- limited to 10% of taxable income before the contribution

Question 3

How are net capital losses handled?

Answer 3

capital losses cannot offset income

• Capital losses can only offset capital gains
• a net capital loss can be carried back 3 years and forward 5 to offset capital gains

Question 4

what is the rule for capital losses

Answer 4

carry back 3 years, carry forward 5

Question 5

How are damages from patent infringement handled?

Answer 5

They are deductible

included in both book and taxable income

Question 6

How are insurance premiums for key executives handled?

Answer 6

• premiums paid are not tax deductible
• if the person dies the proceeds are not taxable
• These are a valid book expense but are added back in to get to taxable income

Question 7

How are organizational start-up costs treated

Answer 7

5,000 can be deducted from taxable income

• the 5k is reduced by the amount of expenses incurred above 50k
• all remaining organizational costs must be capitalized and amortized over 180 months

Question 8

How are stock issuance costs treated

Answer 8

Syndication costs - not deductible

Question 9

What is accumulated earnings tax and how is it handled

Answer 9

It is a penalty tax

• a penalty when a corporation accumulates earnings and profits for the purpose of avoiding income tax for it’s shareholders
• the tax is 20% of the corporation’s accumulated taxable income.
• any dividends received deductions are added back to the income number for the purpose of evaluating “accumulated earnings”

Question 10

What is the accumulated earnings credit

Answer 10

This is given to corporations when they are subject to the accumulated earnings tax
- the credit is the greater of the amount of current earnings and profits “reasonably needed” for the business OR 250K (150K for service business) less than the accumulated earnings and profits at the end of the preceding year

Question 11

What is the personal holding company tax

Answer 11

This tax penalized corporations that seem to hold a high level of stock investment since corporations receive the dividends received deduction

Question 12

What is the tax if a corporation is a personal holding company

Answer 12

20% on top of tax

Question 13

How is it determined that a company is a PHC

Answer 13

1) income test - if passive income is 60% or more of adjusted ordinary gross income
2) ownership test: if more than 50% of the corporations stock is owned directly or indirectly by 5 or less people during the last half of the year