Entity Taxation Flashcards
How is dividend-received deduction calculated?
Dividend-received deduction is the lesser of:
(1) Calculate the deduction limitation - 50% (or 65%) of modified taxable income
*modified taxable income is taxable income BEFORE dividend-received deduction, any NOL carryover, capital loss carry-over
(2) Multiply the dividend received based on the holdings as follows:
- 80%+ owned subsidiary - 100% DRD
- other corporation (unless less than 20% owned) - 65% DRD
- less than 20% owned - 50% DRD
*The deduction limit doesn’t apply to the 80%+ owned subsidiary.
*Taxable income limitation does NOT apply if taking the full dividends-received deduction results in a NOL.
What are dividends subject to dividend-received deduction?
*Investor corporation MUST of the investee’s stock for a specified holding period of more than 45 days.
*S corporations CANNOT take the DRD
When can a corporation MUST use the accrual-basis method?
- $30 million of average annual gross receipts for the 3-year period ending with the prior tax year.
- tax shelters
- manufacturers
What are allowed charitable contributions?
Charitable contribution (that does not exceed the deduction ceiling) is limited to:
- amount paid during the year; or
- 15th day of the fourth month.
The deduction ceiling (allowed) deductible amount is:
_ Allowed 10% Taxable income before dividend received deduction, contribution deduction, net operating loss carryback, capital loss carry back
What is the maximum deduction of charitable contributions?
Corporations are allowed a maximum deduction of 10% of their adjusted taxable income.
Adjusted taxable income is calculated as follows:
Taxable Income before the following:
- any charitable contributions
- dividends-received deduction
- capital loss carryback
excess is carryforward for 5 years
What is Schedule M-1 of Form 1120 (for corporation)?
Schedule M-1 of Form 1120 is used to reconcile the differences between book income and taxable income.
What amount of underpayment of tax will NOT result to penalty?
No underpayment of estimated tax penalty will be imposed if the total underpayment of tax for the year is less than $500.
What are the characteristics of Personal Holding Company (PHC)?
*Corporation is owned more than 50% by five or fewer individuals at any time during the last half of the tax year; and
*if at least 60% of adjusted ordinary gross income for the tax year is personal holding income (which includes income from investments in stocks and securities) personal holding income - 60% of adjusted ordinary gross income
- dividends
- taxable interest
- royalties, but not mineral, oil, gas or copyright royalties
- net rent, if less than 50% of ordinary gross income
What is the Personal Holding Company test?
50% - ownership test
60% - income test
What is accumulated earnings tax and how do you calculate the accumulated taxable income?
For the accumulated earnings tax, in this case, accumulated taxable income would equal taxable income ($400,000) minus federal income taxes ($100,000) minus the minimum
accumulated earnings credit ($250,000) for manufacturing companies or $50,000.
*additional accumulated earnings tax rate is 20%.
What are the requirements that must be met to qualify as an S corporation?
- Must be a domestic corporation (NOT a foreign entity)
- All shareholders (voting and nonvoting) MUST consent to a valid election
- NO more than 100 shareholders (family members may elect to be treated as ONE shareholder, FAMILY MEMBERS may elect to be treated as one shareholder. Includes common ancestors, lineal descendants of common ancestors, and their current or former spouses.)
- Eligible shareholders MUST be individuals, estate, or certain types of trust, qualified retirement plans and 501 (c) (3) charitable organizations
- corporations and partnerships CANNOT be shareholders
*NONresident aliens CANNOT be shareholders
*NO more than one class of stock outstanding
*NOT PERMITTED - preferred stock
When does S Corporation election takes effect?
In order to be effective for the current taxable year, the S corporation election must be made by the 15th day of the third month of the taxable year. If the election is made after that date, it becomes effective on the first day of the next taxable year, January 1, Year 4, in this case.
An S election made by the 15th day of the third month of the taxable year is retroactively effective on the first day of the taxable year.
For existing calendar year corporations:
*S election filed by March 15 becomes effective as of January 1 of that year
*S election filed after March 15, becomes effective as of January 1 of the following year.
Will the acquisition of C corporation stock terminate the S corporation election?
An acquisition of C corporation stock will not terminate its S corporation election. Although an S corporation cannot have a C corporation shareholder, there is no restriction on an S corporation being a shareholder in a C corporation.
If an S election has been terminated, when can the corporation elect an S election again?
After an S corporation election has been terminated, the corporation must wait until the beginning of the fifth year after the year of termination before it can elect S corporation status again.
Will excessive passive investment income terminate the election of S corporation?
Excess passive investment income: More than 25 percent of the corporation’s gross receipts
are from passive investment income for 3 consecutive years (but ONLY if the corporation has prior C corporation earnings from profit and loss) . S corporation status is terminated at the beginning of the fourth year.
For S corporation, what are the separately stated items?
RID R C2S2
- Rental real estate income or loss
- Interest income
- Dividend income
- Royalties
- Capital gain or loss (net short-term, net long-term)
- Charitable contributions
- Section 179 expense deduction
- Section 1231 gain or loss
How are fringe benefits treated?
Deductible - fringe benefits are deductible by an S corporation for:
- non-shareholder employees and
- employee shareholders owning <= 2% of the S corporation
Nondeductible - fringe benefits for shareholders owning over 2 % is nondeductible by S corporation unless the corporation includes the benefits in the employee/shareholder’s W-2 income.
How are partners taxed on their share of partnership income?
Partners are taxed on their share of partnership income whether distributed or not.
In partnership, what are the items included in the separately stated (ie not considered part of partnership’s ordinary income?
Partnership’s ordinary income calculation does not include items that are separately-stated. The items that are separately-stated includes:
- Charitable contributions
- Long-term capital gain
- Gain on sale of securities
- Interest income
- Investment interest expense
- Net Section 1231 loss
What is the treatment of the following in terms of partner’s taxable income and partner’s tax basis?
- life insurance premium;
- penalties paid on late payment of payroll taxes;
- guaranteed payments;
- purchase of land for investments
Are the following items included in the partner’s Schedule K-1?
- Ordinary dividends
- Tax-exempt
- Net section 1231 gain (loss)
Ordinary Dividends - includes qualified and non-qualified dividends to be reflected in Schedule K-1
Tax-exempt income - eventhough this is not taxable, this is still included in the partner’s Schedule K-1
Net Section 1231 gain (loss)
The asset used in the regular course of business was acquired three years ago so it is a long-term business-use asset, which is a Section 1231 asset or sources.
Section 1231 gains and losses for the year are netted together. This is the only Section 1231 gain or loss for the year so there is a net Section 1231 loss for the year.
The partner’s distributive share of the partnership’s net Section 1231 loss on his Schedule K-1 is netted with any other Section 1231 gains (losses) that he has for the year from oth
What are the most common types Section 501(c)(3) organization exempt organization?
Section 501(c)(3) Organization
Most common type of exempt organization :
- community chest
- community fund
- foundation organized and operated exclusively for religious, chartiable, scientific, public safety testing, literary, or educational purpose
- foundation organized for foster national or international amateur sports competition
What is Nexus?
Nexus - minimum level of exposure of the taxpayer in a jurisdiction that will trigger taxation on that juirsdiction.
What is required to qualify as publicly supported?
To qualify as publicly supported, at least one-third of the organization’s total support must come from governmental units and the general public.
