M2 Corporate Taxable Income

Question 1

Gross Income. Treatment of cash received in advanced of accrual GAAP income

Answer 1

TAXABLE
(i.e. Prepaid interest, prepaid rent, prepaid royalty income)

*GR = Income is recognized when received for TAX purposes (NOT GAAP)

Question 2

Two examples of permanent differences (book income not taxable)

Answer 2

1) Municipal bond interest income

2) Life insurance proceeds (life of an officer “key person” policy)

Question 3

How are federal income taxes treated for tax purposes?

Answer 3

NOT deductible (M1 adjustment - book expenses not deductible for tax purposes)

Question 4

Domestic Production Activities Deduction. The deduction may NOT exceed what?

Answer 4

50% of the W-2 wages

Question 5

Domestic Production Activities Deduction. Equal to __% of the LESSER OF (2)

Answer 5

9% of the lesser of:
1) Qualified production activities income (SEE CALC)
OR
2) Taxable income (disregarding the QPAI deduction)

Question 6

Domestic Production Activities Deduction. QPAI Calculation

Answer 6

Domestic production gross receipts

-----------------------------------------------
Qualified production activities income (QPAI)

Question 7

Executive compensation deduction maximum amount?

Answer 7

1,000,000

Question 8

Bonus accrual - bonuses must be paid by when in order to get the deduction?

Answer 8

2.5 months of taxpayer’s year-end

Question 9

Bad Debt Expense. Which method must be used in order to get the deduction?

Answer 9

Accrual method taxpayers must use the charge/direct write-off method

• NOT ESTIMATED
• NOT CASH BASIS (it was never income)

Question 10

Charitable contributions deduction. Limited to what amount?

Answer 10

10% of adjusted taxable income

Question 11

Charitable contributions. The taxable income 10% limitation does not include which deductions? (5)

Answer 11

• Charitable contribution
• Dividends-received
• NOL
• Capital Loss carryback
• Domestic Production activties

Question 12

Business Casualty Losses. Deduction limit?

Answer 12

GENERAL RULE = 100% deductible

Question 13

Business Casualty Losses - amount of deduction if PARTIALLY destroyed (LESSER OF)
Fully destroyed?

Answer 13

PARTIALLY DESTROYED = LESSER of:

1) FMV decline in value of the property
2) Adjusted basis (NBV) of the property immediately before the casualty

FULLY DESTROYED:
Adjusted Basis (NBV) of the property

Question 14

Organizational Expenditures and Start-Up Costs. Deduction amount? Limited to? Excess over limitation?

Answer 14

ELECT up to $5,000 of organizational expenditures and $5,000 of start-up costs
Up to $50,000
Any amount over 50,000, amortize over 180 months beginning with business start date (PAY ATTENTION TO DATES)

Question 15

Organizational Expenditures and Start-Up Costs. EXCLUDABLE costs examples

Answer 15

Issuing and selling the stock
Commissions
Underwriter fees
Costs incurred in transfer of assets to a corp

Question 16

How is goodwill treated?

Answer 16

Amortized straight-line over 15 years beginning with business start date

*INCLUDES not-to-compete covenants, franchises, trademarks and names

Question 17

Life Insurance Premiums Deduction. How treated if corporation is named as the beneficiary (Corporation owns the policy)?

Answer 17

NOT tax deductible

Question 18

Life Insurance Premiums Deduction. How treated if Insured Employee is named as the beneficiary (Employee owns the policy-fringe benefit)?

Answer 18

TAX deductible

Question 19

Business gift expense amount

Answer 19

$25 per year per recipient

Question 20

Business meals and entertainment deduction amount

Answer 20

50%

Question 21

Penalties and illegal activities deduction amount.

Answer 21

NOT DEDUCTIBLE

Question 22

Taxes deduction amount

Answer 22

Deductible:

• State and local
• City
• Federal payroll

NOT DEDUCTIBLE
-Federal income taxes

Question 23

Lobbying and Political expenditures deduction amount

Answer 23

NOT DEDUCTIBLE

Question 24

Capital Losses deduction amount.

Answer 24

NOT DEDUCTIBLE - only to offset CAPITAL GAINS

*NOTE difference to individuals who are allowed $3,000 per year

Question 25

Inventory Valuation Methods. How would a corp deal with a change in method?

Answer 25

Considered a change in accounting method and must be approved by the IRS (Form 3115)

Question 26

Inventory Valuation Methods. What is the most common method used?
-If LIFO is used, what are the specifications?

Answer 26

FIFO most common

LIFO must be elected in first year it is used and the taxpayer must use the same method for its financial statements

Question 27

Uniform Capitalization Rules (IRC Section 263A) what three costs are included (expensed when sold)

Answer 27

RM = Raw Materials
DL = Direct Labor
FOH = Factor Overhead

Question 28

Dividends Received Deduction. What are the deduction amounts (three tiers based on ownership percentages)

Answer 28

0% to < 20% (“UNRELATED”, “UNAFFILIATED”) 70% Deduction

20% to < 80% 80% Deduction

80% or more (Consolidated Return) 100% deduction

Question 29

Dividends Received Deduction taxable income limitation (equals the LESSER OF)

Answer 29

LESSER OF:
70% or 80% dividends received OR
70% or 80% taxable income WITHOUT regard to DRD, NOL, capital loss carryback or domestic production activities deduction

Question 30

Dividends Received Deduction. EXCEPTION to the taxable income limitation rule

Answer 30

If the company is in an NOL situation AFTER taking the full DRD amount, there is NO taxable income limitation (the deduction amount would just be the 70% or 80% of the dividends received)