Federal Taxation of Entities

Question 1

What is the deduction amount for organizational and start-up expenditures and its limitations?

Answer 1

$5,000
reduced by the amount of expenditures incurred that exceeds $50,000.

Expenses not deducted must be capitalized

Question 2

What are syndication expenses and how are they treated?

Answer 2

cost of reissuing and selling stock

capitalized

Question 3

How do you calculate dividend received deduction (DRD)?

Answer 3

1) Multiply dividends received by %
2) Multiply taxable income before DRD %
3) Subtract step 1 from taxable income
4) If step 3 is negative use Step 1
5) If step 3 is positive; DRD is the lower of Step 1 and 2

Question 4

What are the DRD deduction %?

Answer 4

< 20% = 70%
>20%<80% = 80%
>80% = 100%

Question 5

How is casualty losses treated for corporations?

Answer 5

Same as individual but without floor

Question 6

How is R&D expenditures treated?

Answer 6

a. Currently expenses in year paid or incurred
b. Amortized over a period of 60 months
c. Capitalized and depreciated over determinable life

Question 7

What type of insurance premiums can a corporation deduct?

Answer 7

a. casualty insurance
b. employee health or accident insurance

c. life insurance coverage for its employees and their beneficiaries

Question 8

What is the Corporate Tax Formula?

Answer 8

1) Gross Income
2) Less Deductions (except charitable, DRD, DPD, NOL carryback, capital loss carryback)
3) Equals TI before Charity
4) Less Charitable (10% of TI)
5) Less DRD
6) Less DPD, NOL and STCL carryback

Question 9

What is the small corporation exemption?

Answer 9

AMT does not apply to small corporations meeting a gross receipts test.

The tentative minimum tax is 0 if the corporation’s average annual gross receipts for all 3 previous years do not exceed $7,500,000

The first year the limit is $5,000,000

Question 10

How to calculate AMT?

Answer 10

Regular TI before NOL + Tac preferences +(-) adjustments other than ACE and NOL +(-) ACE adjustment (75% of difference between pre-ACE AMTI and CE) - AMT NOL deduction (limited to 90% or pre NOL) - Exemptions($40,000 less 25% of AMTI over $150,000) * 20% - AMT foreign tax credit - regular income tax

Question 11

What are AMT preferences?

Answer 11

Tax-exempt interest
Excess of % depletion
Excess of intangible drilling costs using a 10 year amortization over 65%

Question 12

What are AMT Adjustments?

Answer 12

MACRS property
Differences in gains and losses between tax and AMT

Difference in % of completion over completed contract

Question 13

What is NOL limited to?

Answer 13

90% of AMTI

Question 14

What is AMT exemption?

Answer 14

$40,000

phased out > $150,000 by 25%

Question 15

What is Accumulate Earnings Tax?

Answer 15

20& imposed on undistributed accumulate taxable income

Question 16

What is the Accumulated Earnings Tax Formula?

Answer 16

T.I + DRD + NOL deduction - Federal and foreign income taxes - excess charitable contributions - Net Capital Loss - STCG - LTCG/STCL - Dividends paid - consent dividends - Accumulated earnings credit * 20%

Question 17

What is the Accumulated Earnings Credit?

Answer 17

> of:

1) amount of current earnings needed for reasonable needs of business
2) $250,000 less accumulated earnings and profits

Question 18

When does an affiliated group exist?

Answer 18

When a corporation owns at least 80% of the voting power of another corporation

Question 19

How does cash distributions effect Earnings and Profit?

Answer 19

Reduces E&P

Question 20

How does distribution of property effect E&P?

Answer 20

reduces by the > of

1) value of property
2) adjusted basis

Question 21

How is dividend income treated for E&P?

Answer 21

1) taxable as dividend income to the extent of the shareholders’ pro-rata of E&P
2) excess is tax free to the extent of basis
3) remaining is capital gain

Question 22

How to calculate distributions from corporation?

Answer 22

Earnings and Profit + municipal interest & life ins proceeds + DRD + Deductions for carryovers+Domestic production + proceeds from corporate life insurance - federal income tax - related party losses - penalties, fines, lobbying, life insurance premiums

Question 23

When does a redemption of stock occurs?

Answer 23

When a corporation repurchases stock from a shareholder. The redemption is treated by the shareholder as a sale of stock that will trigger recognition of gain or loss

Question 24

What three methods must be met to qualify in order for a redemption to be taxed as a sale?

Answer 24

1) If distribution is not essentially equivalent to a dividend

2) substantially disproportionate redemption:
a. control test: own < 50% of voting shares after redemption
b. own < 80% of the shares that were own prior to redemption

3) a complete termination of shareholder’s interest

Question 25

When is gain recognized in current distributions?

Answer 25

When cash, receivable or land is greater than original basis

Question 26

When is loss recognized in current distributions?

Answer 26

Never

Question 27

What is the order of current distributions?

Answer 27

Cash Inventory Receivable Land

Question 28

What are the elements of a liquidating distribution?

Answer 28

1. Basis always has to be 0 2. Loss can be recognized if there is only cash, inventory and receivables 3. Can't recognized loss if land was received.

Question 29

What are the types of reorganizations?

Answer 29

Type A - merger or consolidation Type B - target owned by 80% after acquiring Type C - assets exchanged for stock Type D - parent and subsidiary

Question 30

How is Net Operating Loss treated?

Answer 30

Carried back 2 years forward 20 years

Question 31

What is included in M-1 reconciliation?

Answer 31

(1) Added to Book Income: a. federal tax expense b. net capital loss c. expenses in excess of limits d. prepaid income (2) Subtract from Book Income: a. municipal interest b. life insurance proceeds c. DRD d. election to expense

Question 32

What are the requirements for Tax Exempt Organizations?

Answer 32

1. Must file 990 if gross receipts > $50,000 (churches do not have to file) 2. an excise tax of 5% for lobbying (can't exceed $1 mil) 3. Unrelated Business income taxed if > $1,000

Question 33

What is check the box?

Answer 33

unincorporated entities may elect to taxed as an association or a partnership. Election must be filed within 75 days

Question 34

What is the computation for Basis of Partnership interest?

Answer 34

Increases: a. contribution of property b. income c. increases in liabilities Decreases: a. distributions b. expenses Cash + Land- Debt relief + New Debt (% of partnership)

Question 35

What are the elements of partnership losses?

Answer 35

1. only deduct loss to the extent of basis 2. At risk amount = passive loss - @ risk amount difference suspended 3. limited to passive income

Question 36

What are guaranteed payments?

Answer 36

1. made to partners without regard to partnership income 2. are ordinary income 3. reduces partnership income

Question 37

What is the character of built in gains?

Answer 37

1. limited to 5 years - ordinary or capital | 2. 7 years - distribute built in gains to partners

Question 38

When does a partnership recognize gain or loss on a distribution?

Answer 38

when cash is distributed

Question 39

What are hot assets?

Answer 39

a. Unrealized receivables b. Inventory If the partnership has hot assets at the time a partnership interest is sold, the selling partner must allocate a portion of the sale proceeds to these assets and recognize ordinary income

Question 40

What are the requirements for an S Corporation?

Answer 40

1. Have no more than 100 shareholders 2. Issue only one class of stock 3. Shareholder is a resident of the U.S. 4. Shareholders have limited liability

Question 41

When can an S Corporation be elected?

Answer 41

If filed 2 1/2 months from the start of the tax year

Question 42

How to calculate the shareholder's basis in an S Corporation?

Answer 42

Initial basis + Shareholder's share of corporate income + exempt income - Cash, Inventory and Receivables, other property, non-deductible expenses, corporate losses

Question 43

When does an S Corporation generate gain?

Answer 43

by distributing appreciated property

Question 44

How is income determined in distribution of S Corporation?

Answer 44

Deduct from: | 1) AAA (2) E&P Account (amount deducted is dividend income (3) reduce stock basis (4) capital gain

Question 45

How does S Corporation treat built in gains?

Answer 45

If item is held for 5 years S- election made where gain is not taxed (35%)