M2: Corporate Taxable Income

Question 1

Accrual method of accounting

Answer 1

General rule: required by tax shelters, large C corporations, and manufactures, trust with unrelated trade or business income, and partnerships having a C corporation as a partner PROVIDED the business has Greater than $5 million of average annual gross receipts for three-year period ending with the prior year

Question 2

Purchase of Goodwill

Answer 2

Tax rule: amortize on a straight line basis over 15 years

GAAP rule: not amortized; test for impairment

Question 3

Charitable contributions (10 % of adjusted taxable income limitation)

contributions exceed the limitation: carried forward to maximum of 5 succeeding years

Answer 3

total taxable income is calculated before the deduction of:
any charitable contribution deduction
the dividends received deduction
any net operating loss carryback
any capital loss carryback or 
US production activities deduction

Question 4

Business casualty/losses related to Business = 100 % deductible

Answer 4

No $100 reduction

No 10 percent of AGI reduction

Question 5

Business meals and entertainment

Answer 5

50 % is deductible

Question 6

Organizational expenditures and start up costs

Answer 6

Included costs: legal services in drafting the corporate charger, bylaws, minutes of organization, fees paid for accounting services, and fees paid to the sate of incorporation

Excluded costs: issuing and selling the stock, commissions, underwriters fees, and costs incurred in the transfer of assets to a corporation

Tax rule: 5,000 expense maximum/180 months of amortization of remainder
GAAP rule: Expense

Question 7

Purchased Good will

Answer 7

Tax rule: Amortized straight line basis over 15 years

GAAP: not amortized; test for impairment

Question 8

Taxes: (State, City, Federal payroll) are tax deductible

Answer 8

Federal income taxes are not deductible (Add back to book/GAAP income

Answer 9

• 100% (own 80%-100%) (consolidate)
• 80 (own 20%- under 80%) (large investment)**
• 70% (own under 20%) (small investment)**
• Limited to lesser of the % of dividends received deduction modified taxable income or dividends received
• Exception: If DRD creates or adds to Corp. NOL, the DRD is limited to % of Taxable income
• DRD modified taxable income is calculated as taxable income before the dividends received deduction, and NOL carryover or carryback deduction, capital loss deduction, and the domestic production activates deduction

Question 10

Entities for Which the DRD Does not Apply

Answer 10

Personal service corps
Personal Holding companies(
Personally) taxed S corps

Question 11

Cash basis of accounting

Answer 11

used for most individuals, qualified personal service corporations, and taxpayers whose average annual gross receipts do not exceed $1 million.

Question 12

Capital losses deductions not allowed = Only offset capital gains

Answer 12

excess capital losses may be carried back 3 years or carried forward five years

Question 13

Not Taxable Income

Answer 13

• Interest from municipal or state obligations/bonus

- Life insurance on the life of an officer