Entity Taxation

Question 1

Requirements of a Personal Holding Company (PHC)

Answer 1

1. Owned by more than 50% by 5 or fewer individiduals at any time during the last half of the tax year
2. 60% of adjusted gross income is PHC income

Question 2

What is a personal holding company (PHC)?

Answer 2

A corporation that primarily generates passive income rather than actively conducting a business, therefore a PHC is subject to additional tax if income is not distributed

Question 3

A Personal Holding Company’s adjusted gross income includes NIRD which is…

Think “passive” income

Answer 3

N - Net Rent (if less that 50% of ordinary gross income)
I - Interest that is taxable (nontaxable is included)
R - Royalties (not mineral, oil, gas, or copyright)
D - Dividends from an unrelated domestic corporation

Royalties is compensation for allowing someone else to use your property or idea

Question 4

What additional percentage are PHCs subject to if income is not distributed

Answer 4

An additonal 20%

Question 5

How much is the minimum accumulated earnings credit for corporations? personal service corporations?

Answer 5

Corporations - $250,000
Personal Service Corporations - $150,000

Accumulated Taxable Income = Taxable Income - Federal Income Taxes - Accumulated Earnings Credit

Question 6

Accumulated earnings tax are imposed on which business structures?

Answer 6

Corporations not classified as PHC, unless PHC accumulates earning in excess of $250,000

Question 7

Capital losses starting in 2021 and forward may be carried back _ years or forward _ years

Answer 7

Carried back 3 years
Carried forward 5 years

Question 8

By what day of what month can a taxpayer deduct a charitable contribution?

Answer 8

15th day of the 4th month

Question 9

True or False

Charitable contribitons are limited to taxable income before DRD

Answer 9

True

Question 10

What taxpayers can use the cash basis method of accounting?

Answer 10

1.Tax Shelters, Certain Farming Corps, and Large C Corps with > $30M average annual gross receipts over 3-year period
2. Personal Service Corporations

Question 11

Differences between Book vs. Tax

Permanent Differences include:

Answer 11

1. Nondeductible expense
2. Tax-exempt or nontaxable income

Question 12

Differences between Book vs. Tax

Temporary Differences include:

Answer 12

1. Depreciation
2. Revenue
3. Allowance for doubtful accounts or write off
4. Warranty expenses

Question 13

Differences between Book vs. Tax

What is the typical calculation to arrive at book income (i.e. TI to Book Income)

Answer 13

Taxable Income
(-) Nondeductible expenses
(+) Tax-exempt Income
( +/-) Temporary Differences

Remember taxable income includes state and federal taxes

Question 14

Differences between Book vs. Tax

What is the typical calculation to arrive at taxable income (i.e. Book income to TI)

Answer 14

Book Income
(+) Nondeductible expenses
(-) Tax-exempt Income
(+/-) Temporary Differences

Question 15

Net Operating Loss (NOL) carryback and forward rules if occured before 2017

Answer 15

Carryback 2 years
Carryforward 20 years
(offsets 100% through 2020 and 80% after 2020)

Question 16

Net Operating Loss (NOL) carryback and forward rules if occured between 2018 - 2020

Answer 16

Carryback 5 years
Carryforward indefinitely
(offsets 100% through 2020 and 80% after 2020)

Question 17

Net Operating Loss (NOL) carryback and forward rules if occured 2021 to present

Answer 17

No Carryback
Carryfoward indefinitely
(offsets 80% of future income)

Question 18

What is the difference between NCLs and NOLs?

Answer 18

• NCLs arise from capital losses that can only offset capital gains and is subject to a 3 year carryback and 5 year carryforward rule
• NOLs arise from business or other ordinary losses and subject to certain carryback/carryforward rule (depending on year)

Question 19

True or False

An owner’s basis in an S Corporation is increased by the owner’s share of profits, decreased by the owner’s share of losses, and is affected by any bank loans increased or decreased by the corporation

Answer 19

False, their basis is not affected by any bank loans increased or decreased by the corporation, unless they (owners) make direct loans to the corporation (which is considered their debt basis)

Question 20

True or False

A shareholder in a S Corporation AGI includes taxable and nontaxable items

Answer 20

False, nontaxable items are reportable, but are not subject to tax

Question 21

When are shareholders’ fringe benefits paid by an S Corp deductible?

Answer 21

1. Non-shareholder employees
2. Employee shareholders owning 2% or less of S corp
3. If already included as part of gross income from the S Corp

Question 22

True or False

An S corporation will terminate if it has passive investment income greater than 25% of gross receipts for 3 consecutive years

Answer 22

True